NO ACCOUNTING FOR BENEFITS / BARRON´S MAGAZINE EDITORIAL ( VERY HIGHLY RECOMMENDED READING )

Editorial Commentary

SATURDAY, APRIL 30, 2011

No Accounting for Benefits

By THOMAS G. DONLAN 

Our taxes barely cover our social-welfare programs; everything else is on credit.

Entrepreneurship Is Better Over There

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After months of political argle-bargle about debts and deficits, most Americans still do not understand as much as they should about the finances of the U.S. government. Here's what may be the most important fact—certainly it is one very commonly ignored:

All federal revenues—from income taxes, Social Security and Medicare payroll taxes, corporate taxes, excise taxes, customs duties, estate and gift taxes and user fees—are consumed to pay Americans myriad federal benefits.

These include Social Security, Medicare, Medicaid, veterans' benefits, food stamps, farm subsidies and the many other forms of social insurance and welfare, including economic stimulus and job-creation.

It Doesn't Compute

Federal receipts continue to trail expenditures. Is this any way to run an economy?
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Put another way: The federal government borrows everything it needs to operate what we ought to think of as the government as an institution, such as defense (including the support of troops in Afghanistan and Iraq); highway construction; foreign aid; aid to states and localities; land management and pollution control; regulation of this, that and all the other things; scientific research; payment of federal employees' salaries; and payment of interest on the national debt.
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Name anything that the federal government does or would like to do, other than sending checks to people who need or want some cash, and you will find that it is being done with borrowed money.

Of course, it's a tough year—the third tough year in a row. Federal revenues still haven't recovered from the hit they took in the recent recession, and they are somewhat suppressed by the Obama tax cuts of 2009 and 2010.

Federal revenues are expected to be about $2.17 trillion in the current fiscal year, down about 15% from $2.56 trillion in fiscal 2007.

But economic recovery and the end of the recent tax cuts mean that the revenue picture is looking up. The Office of Management and Budget expects that revenues will be back to the level of 2007 next year.

In 2007, the federal government did pretty well: revenues, $2.568 trillion, against outlays of $2.728 trillion, for a deficit of $160 billion.

Problem solved? Not by a long shot.
Did you imagine that spending would also subside as the recession ends? Most of that economic stimulus and job-creation money did indeed run out. But it was replaced, and more, by other spending. The OMB projection for spending in fiscal 2012 is not $2.728 trillion. Nor is it $2.7 trillion plus an adjustment for inflation—say, a 2% annual adjustment, which would bring spending to $2.952 trillion. No, the OMB projects spending of $3.7 trillion in fiscal 2012.

The chart shows what happened. For more detail, a visit to OMB site www.whitehouse.gov/omb is painfully educational. We suggest starting with the "Historical Tables" appended to the president's 2012 budget, especially table 3.2, "Outlays by Function and Subfunction." Citizens can download Excel spreadsheets and work out the facts for themselves. In brief: Almost every category of government expenditure is up a good deal more than the consumer-price index, which rose 8.8% from March 2007 to March 2011.

For a little more detail, here's what happened to the largest categories in the budget:

• Income Security : including unemployment compensation and food stamps: up $256 billion, or 70% in four years.
• National Defense: up $217 billion, or 40%.
• Social Security : up $162 billion, or 28%.
• Health : including the federal portion of Medicaid: up $121 billion, or 45%.
• Medicare: up $118 billion, or 31%.
• Veterans Benefits and Services : up $68 billion, or 94%.

There is one important category of spending that is running in 2011 at a lower rate than it did in 2007. It's interest on the national debt. Even though the U.S. Treasury owes an ominous 61% more than it did in March 2007—having issued $5.4 trillion in new debt--interest rates are so low that the U.S. is spending about $206 billion on net interest—down from $237 billion in 2007.

Interest rates have no place to go but up, especially since the Federal Reserve is about to end its purchase of new Treasury-debt securities with custom-printed money.

Without very large and very quick fiscal reform, interest charges could turn on us, to become the fastest-growing budget sector. And if that happens, it will snowball. Neither tax increases nor spending cuts will save us. 

Entrepreneurship Is Better Over There

Immigrants see superior opportunities back home.

NOW, FOR SOMETHING COMPLETELY different to worry about: This country has prospered by welcoming—or at least tolerating—new people who came here to seek their fortunes. Maybe not so much anymore.

The Kauffman Foundation of Entrepreneurship recently surveyed a couple of hundred people from India and China who came to the U.S. to study or to work, or both, but who had returned to their home countries to live and start businesses.

"The most significant factors drawing both Indians and Chinese home were economic opportunities, access to local markets, and family ties," the foundation's researchers report. Good news for India and China, but here's the bad news for the U.S.: "72% of Indian and 81% of Chinese returnees said that the opportunities to start their own businesses were better or much better in their home countries. Only 14% of Indians and 5% of Chinese said that opportunities had been better in the U.S."

The U.S. may be losing its true strength and source of wealth. Not technology, not creativity, not ingenuity, but opportunity. 

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