Monday, February 28, 2011

The Definitive Guide To The American Public Debt Crisis

I came across this analysis on the financial condition of the US. government prepared by Mary Meeker of Kleiner Perkins.  Kleiner Perkins is a venture capital firm in Silicon Valley.  Meeker has prepared the most comprehensive and understandable report I have seen on the subject.  She has written it with the perspective of looking at the financial statements as if the federal government was a business.  She refers to it as USA Inc. and looks at it in the same way as a turnaround expert might look at it.  The full analysis is 460 PowerPoint slides.  She leaves no stone unturned.  I have not seen any better summary of all the relevant issues and policy options in one place.

If you think this was prepared by some right-wing Tea Party activist, think again.  Meeker cites Al Gore, Peter Orszag (Obama's former OMB chief) and Laura Tyson (Clinton's former Chair of the Council of Economic Advisors).  If you want to understand the very serious situation we are in this is the source document for you.

If you don't want to wade through 460 slides, you can view this 15 slide summary prepared by Henry Blodget for Business Insider.  Here are a couple of the more important slides from that summary.

The sizes of the circles represent the relative sizes of revenues and expenses.  Note that in 2010 we spent $1.3 trillion in excess of what we took in.  In 2011, this number is projected to be in excess of $1.5 trillion.  You will also see that entitlement spending is approximately $2 trillion of the $3.5 trillion is spending.

How did we get here?  This chart shows it pretty clearly.  Entitlement spending has increased 10.6X in real terms over the past 45 years but real GDP has increased 2.7X.

This is a very telling slide if you are concerned about the costs of the health care reform bill.  In 1965, when Medicare was passed, it was estimated the program would cost $12 billion in 1990.  The actual cost was $110 billion, 10x higher than estimates.  

The policy options that Meeker lays out are sobering.  For example, to bring Medicare into financial sustainability here are two stark choices, 
  • Cut Medicare by 53% to address the shortfall of Medicare funding, or
  • Increase the Medicare tax rate by 3.9% (from 2.9% to 6.8%) on both employees and employers.  That is close to an 8% tax on payroll.  
Take your choice or a combination of the two.  Either way it is not going to be pretty.  The bigger problem is that the longer we wait to deal with the issues, the harder it is going to be and the more people will suffer.  

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