But there’s a problem. [Charles] Lindblom’s common-sense insight has a giant exception: crises. Change, forced by outside events, then happens by “leaps and bounds.” The recent financial crisis caused Congress and two presidents to embrace measures (the rescue of big banks, General Motors and Chrysler) that were unthinkable a few months earlier. In the 1960s, civil rights demonstrations pushed Congress to pass the Civil Rights Act of 1964 that, in outlawing most public racial discrimination, wasn’t “incremental.” History offers other examples, including the Civil War, the New Deal and both World Wars. Small changes won’t suffice when big changes are required.

On the budget, muddling through comes with a crucial assumption. It is that continuous deficits won’t provoke a crisis that compels political leaders to take harsh steps that they would otherwise not take. This optimism may be justified. For decades, “experts” have warned of the dire consequences of unchecked deficits. Yet no great crisis has occurred. But this conviction also could be complacency. Government debt is in territory that, except for wartime debt, is unprecedented. We don’t know the consequences. Someday, we may no longer have the luxury of muddling through.

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No one wants to be against Grandma, who ”” as portrayed in the media ”” is kindly, often suffering from some condition, usually financially precarious and somehow needy. But projecting this sympathetic portrait onto the entire 65-plus population is an exercise in make-believe and, frequently, political propaganda. The St. Louis Fed study refutes the stereotype. Examining different age groups, it found that since the financial crisis, incomes have risen for the elderly while they’ve dropped for the young and middle-aged.

The numbers are instructive. From 2007, the year before the financial crisis, to 2010, median income for the families under 40 dropped 12.4 percent to $39,644. For the middle-aged from 40 to 61, the comparable decline was 11.9 percent to $56,924. Meanwhile, those aged 62 to 69 gained 12.3 percent to $50,825. For Americans 70-plus, the increase was 15.6 percent to $31,512. (All figures adjust for inflation and are in 2010 “constant” dollars. The “median income” is the midpoint of incomes and is often considered “typical.”)

There has been a historic shift in favor of today’s elderly. To put this in perspective, recall that many family expenses drop with age. Mortgages are paid off; work costs vanish; children leave. Recall also that incomes typically follow a “life cycle”: They start low in workers’ 20s, peak in their 50s, and then decline in retirement, as wages give way to government transfers and savings. Against these realities, the long-term gains of the elderly and losses of the young are astonishing. From 1989 to 2010, median income increased 60 percent for those aged 62 to 69 while falling 6”‰percent for those under 40 and 2”‰percent for those 40 to 61.

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The bishops might have been promoting a strictly Democratic line, but U.S. Senate Chaplain Barry Black was more ecumenical. Amid the shutdown, Rev. Black offered a daily prayer in the Senate chamber asking God to “save us from the madness. We acknowledge our transgressions, our shortcomings, our smugness, our selfishness, and our pride.” Later he condemned the “hypocrisy of attempting to sound reasonable while being unreasonable.” His listeners in one party no doubt assumed he was talking about the other side.

It is one thing to spiritually shame politicians, as Rev. Black did. Trying to do their jobs is another. The bishops and other clergy in the Circle of Protection go well beyond their competencies when they make such policy prescriptions. Speaking about the moral issues of the day is certainly within their pastoral purview, but the bishops’ calls to raise revenues (aka taxes), for instance, or eliminate “unnecessary” military spending are not.

Bishops routinely assert their authority as “pastors and teachers,” as Bishops Blaire, Gomez and Pates did, but according to the tradition of their own church, they have no teaching authority when it comes to politics.

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Clearly this payout trend is unsustainable, but what politician dare touch it?

Social Security is not that difficult a problem in theory (at least in comparison to Medicare), except for the politics of it all. Numerous things could be done to put the system in the green.

Possible Ways to Make Social Security Actuarially Sound

Raise retirement age
Raise or eliminate the cap on payroll taxes
Cut benefits
Collect Social Security on personal income
Implement a Tiered Cap structure
Means Testing

Democrats would oppose 1 and 3. Republicans might oppose all but 3. So, how does this mess end if politicians won’t touch it?

Read it all and make sure to take a careful look at the charts.

2–At its root Social Security is, and always has been, an inter-generational transfer of wealth….

4–…since 2010 Social Security’s cash expenses have exceeded its cash receipts; negative cash flow last year was about $55 billion, according to the latest report from the system’s trustees. While credited interest is still more than enough to cover the deficit, that will only be true until 2020. After that, Social Security will begin redeeming its hoard of Treasuries for cash to continue paying benefits ”” as was the plan all along.

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Stan Druckenmiller makes an unlikely class warrior. He’s a member of the 1%””make that the 0.001%””one of the most successful money managers of all time, and 60 years old to boot. But lately he has been touring college campuses promoting a message of income redistribution you don’t hear out of Washington. It’s how federal entitlements like Medicare and Social Security are letting Mr. Druckenmiller’s generation rip off all those doting Barack Obama voters in Generation X, Y and Z.

“I have been shocked at the reception. I had planned to only visit Bowdoin, ” his alma mater in Maine, he says. But he has since been invited to multiple campuses, and even the kids at Stanford and Berkeley have welcomed his theme of generational theft. Harlem Children’s Zone President Geoffrey Canada and former Federal Reserve Governor Kevin Warsh have joined him at stops along the tour.

Mr. Druckenmiller describes the reaction of students: “The biggest question I got was, ‘How do we start a movement?’ And my answer was ‘I’m a 60-year-old washed-up money manager. I don’t know how to start a movement. That’s your job. But we did it in Vietnam without Twitter and without Facebook and without any social media. That’s your job.’ But the enthusiasm””they get it.”

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Standard & Poor’s is only raising half a cheer at the deal:

“We believe that to date, the shutdown has shaved at least 0.6 per cent off of annualised fourth-quarter 2013 GDP growth, or taken $24bn out of the economy.

“The short turnround for politicians to negotiate some sort of lasting deal will probably weigh on consumer confidence, especially among government workers that were furloughed. If people are afraid that the government policy brinkmanship will resurface again, and with it the risk of another shutdown or worse, they’ll remain afraid to open up their cheque books. That points to another Humbug holiday season.”

Read it all (if necessary another link is there).

Top Senate leaders on Monday said they were within striking distance of a deal to sidestep a looming debt crisis and reopen the federal government two weeks after a partisan deadlock forced it to close.

Fourteen days after a partial government shutdown began, senators signaled a bipartisan resolution could come soon.

“I’m very optimistic we will reach an agreement that’s reasonable in nature this week to reopen the government, pay the nation’s bills and begin long-term negotiations to put our country on sound fiscal footing,” Senate Majority Leader Harry Reid (D., Nev.) said on the Senate floor.

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….the Federal Disability Insurance Program…serves nearly 12 million people — up 20 percent in the last six years — and has a budget of $135 billion. That’s more than the government spent last year on the Department of Homeland Security, the Justice Department, and the Labor Department combined. It’s been called a “secret welfare system” with it’s own “disability industrial complex,” a system ravaged by waste and fraud. A lot of people want to know what’s going on. Especially Sen. Tom Coburn of Oklahoma.

Tom Coburn: Go read the statute. If there’s any job in the economy you can perform, you are not eligible for disability. That’s pretty clear. So, where’d all those disabled people come from?

The Social Security Administration, which runs the disability program says the explosive surge is due to aging baby boomers and the lingering effects of a bad economy. But Sen. Tom Coburn of Oklahoma, the ranking Republican on the Senate Subcommittee for Investigations — who’s also a physician — says it’s more complicated than that. Last year, his staff randomly selected hundreds of disability files and found that 25 percent of them should never have been approved — another 20 percent, he said, were highly questionable.

Read it all or better still watch the video.

The federal government moved closer to a partial shutdown Sunday as Republican and Democratic lawmakers showed no signs of negotiating through a standoff over the implementation of President Barack Obama’s health law.

The standoff left little prospect that Congress could reach agreement on terms for funding the government by midnight Monday, when the current fiscal year expires. A shutdown would leave essential services operating but prompt federal agencies to suspend many functions and furlough hundreds of thousands of workers.

Early Sunday morning, after a late night of votes, the House passed a bill delaying the health law by one year and attached it to a plan to fund the government through Dec. 15. It also includes a provision repealing a tax on medical devices that is intended to help finance the health law. That legislation now goes back to the Senate.

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The federal government on Sunday morning barreled toward its first shutdown in 17 years after the Republican-run House, choosing a hard line, voted to attach a one-year delay of President Obama’s health care law and a repeal of a tax to pay for it to legislation to keep the government running.

The votes, just past midnight, followed an often-angry debate, with members shouting one another down on the House floor. Democrats insisted that Republicans refused to accept their losses in 2012, were putting contempt for the president over the good of the country and would bear responsibility for a shutdown. Republicans said they had the public on their side and were acting to protect Americans from a harmful and unpopular law that had already proved a failure.

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Between 2000 and 2012, the number of people in Penobscot County [Maine] receiving Social Security disability benefits skyrocketed, rising from 4,475 to 7,955 ”” or nearly one in 12 of the county’s adults between the ages of 18 and 64, according to Social Security statistics.

The fast expansion of disability here is part of a national trend that has seen the number of former workers receiving benefits soar from just over 5 million to 8.8 million between 2000 and 2012. An additional 2.1 million dependent children and spouses also receive benefits.

The crush of new recipients is putting unsustainable financial pressure on the program. Federal officials project that the program will exhaust its trust fund by 2016 ”” 20 years before the trust fund that supports Social Security’s old-age benefits is projected to run dry.

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There’s plenty of fodder for deficit hawks in a new report from the nonpartisan Congressional Budget Office. In short, the future looks grim….

First, the good news: The CBO projects the deficit will shrink to $378 billion in 2015, or 2.1 percent of the size of the overall U.S. economy. Compared with just a few years ago when the budget gap ballooned as a result of the recession, this marks a nearly unprecedented improvement in the deficit picture. It’s a rapid decline in budget shortfalls not seen since the end of World War II. The national debt will bottom out in 2018, at 68 percent of GDP.

The bad news: From there, the picture gets decidedly less rosy. Budget deficits gradually rise, “mainly because of increasing interest costs and growing spending for Social Security and the government’s major health care programs (Medicare, Medicaid, the Children’s Health Insurance Program, and subsidies to be provided through the health insurance exchanges),” says the report. By 2038, the national debt will reach 100 percent of GDP….

Read it all and follow the link to the actual report.

One of America’s chief fiscal burdens is the mounting cost of entitlements (Social Security, Medicare, and Medicaid) ”“ an obligation that will only grow larger as baby boomers age. In tackling this problem, the United States should look to what many might see as an unlikely model ”“ the European welfare state, Sweden.

“Usually, U.S. policymakers look to Europe to determine what not to do when it comes to social-welfare policy,” James C. Capretta, former associate director of the US Office of Management and Budget, wrote a few years ago.

But, he continued: “When you are in a hole, the prudent first step is to stop digging, and the United States can indeed gain insight into how to ”˜stop digging’ the entitlement hole” by studying the reforms that some European countries have implemented. Most notably, he suggested, we should study what Sweden and Germany did to cut their long-term government pension commitments.

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The fact that economics tell us to discount — as in make less of — each dollar owed or received in the distant future, however, doesn’t mean a government can ignore those obligations and receipts, especially if there are loads of future obligations relative to receipts.

Take the just-released 2013 Trustees Report on Social Security’s long-run finances. Table IVB6 shows an infinite horizon fiscal gap of $23.1 trillion separating the Social Security system’s projected costs and taxes after taking into account the several trillion in the Social Security trust fund. To give you a sense of how massive this shortfall is — and it grew by fully 8 percent last year alone — it is 50 percent larger than U.S. GDP and almost twice the size of total federal debt held by the public.

Table IVB6 also reports Social Security’s fiscal gap over the next 75 years. It’s much smaller — only $9.6 trillion, and that’s the number people tend to use in discussion. But that number is only 41 percent of the actual economic gap: $23.1 trillion. Thus, the 75-year fiscal gap hides three fifths of the system’s true long-term shortfall.

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The purpose of Social Security is to help families. It reinforces the intergenerational sharing that families already ”” though imperfectly ”” provide. It helps retirees by stabilizing their income, and it helps their grown children, who are relieved of any excessive burden of supporting them. This purpose strongly suggests that the Social Security benefits should be indexed to some measure of the available, aggregate economic pie. That means a formula that looks completely different from the ones being discussed today.

Clearly, something needs to be done: if nothing changes, and the trust fund runs out in 2033, the system would be able to pay only about 75 percent of promised benefits.

The issues are complex, as economic theorists like Henning Bohn at the University of California, Santa Barbara, have shown. But now that an index change is on the table, we should take this opportunity to get it right.

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Can we get real? For starters, $642 billion is serious money, and despite the modest improvements of the latest CBO report, the basic trends in federal finances remain the same. From 2014 to 2023, the government will spend $6 trillion more than it collects in taxes. The budget never comes close to balancing. Expanding spending on the elderly and health care continues to strangle the rest of government. As a share of the economy (gross domestic product), military and domestic discretionary programs (examples: drug approval, environmental regulation, Head Start, federal courts) drop about 40 percent from 2010 to 2023.

Nothing of consequence has changed. A few numbers have shifted slightly. That’s all. They moved in a favorable direction. Next time, they might go the other way. What’s also constant is the unwillingness of leaders of both parties, beginning with the president, to discuss budget choices candidly. The budget passed by the Democratic Senate barely touches entitlements for the elderly, which constitute the largest chunk of federal spending. The budget passed by the Republican House avoids a large tax increase only by making draconian and unrealistic spending cuts that would never pass Congress or be signed by the president.

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There is a great graphic here and some comment there.

The unexpectedly large number of American workers who piled into the Social Security Administration’s disability program during the recession and its aftermath threatens to cost the economy tens of billions a year in lost wages and diminished tax revenues.

Signs of the problem surfaced Friday, in a dismal jobs report that showed U.S. labor force participation rates falling last month to the lowest levels since 1979, the wrong direction for an economy that instead needs new legions of working men and women to drive growth and sustain a baby boomer generation headed to retirement.

Michael Feroli, chief U.S. economist for J.P. Morgan, estimates that since the recession, the worker flight to the Social Security Disability Insurance program accounts for as much as a quarter of the puzzling drop in participation rates, a labor exodus with far-reaching economic consequences.

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The CBO forecast finds a persistent mismatch between tax revenue and spending over the coming decade. As the economy improves, tax revenue should rise to 19 percent of GDP for the period from 2015 through 2023, up from 15.8 percent in 2012, the report said. But federal spending, after an early-decade dip, will start rising persistently faster than revenues.

“After 2017, if current laws remain in place, outlays will start growing again as a percentage of GDP,” the CBO said. “The aging of the population, increasing health care costs, and a significant expansion of eligibility for federal subsidies for health insurance will substantially boost spending for Social Security and for major health care programs relative to the size of the economy.”

The CBO’s current-law “baseline” calls for spending to reach about 23 percent of GDP in 2023 and, more worrisome, to be “on an upward trajectory.”

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Update: An IBD article is also available on this, entitled “CBO Report Shows We’re Still Headed Toward A Fiscal Cliff” and it may be found there.

…the Labor Department’s latest jobs snapshot and other recent data reports present a strong case for crowning baby boomers as the greatest victims of the recession and its grim aftermath.

These Americans in their 50s and early 60s ”” those near retirement age who do not yet have access to Medicare and Social Security ”” have lost the most earnings power of any age group, with their household incomes 10 percent below what they made when the recovery began three years ago, according to Sentier Research, a data analysis company.

Their retirement savings and home values fell sharply at the worst possible time: just before they needed to cash out. They are supporting both aged parents and unemployed young-adult children, earning them the inauspicious nickname “Generation Squeeze.”

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We agree with Obama that it will take a combination of tax increases and spending cuts to put the government’s fiscal house in order. Republicans swallowed hard and accepted an increase in tax rates for the highest incomes to start the year. It’s the Democrats’ turn to recognize that federal benefit programs, and particularly healthcare entitlements such as Medicare and Medicaid, are on an unsustainable path despite the savings from the 2010 healthcare law.

Obama should lead a Democratic push for reforms that preserve these programs for those who need them, while also reducing the deficit and stopping the federal debt from growing faster than the economy. He’s in the best position to lead on this issue, able to provide political cover for Democrats concerned that their constituents won’t put up with changes to the status quo, while showing Republicans that there are ways to save money without abandoning the government’s commitment to the elderly and poor. To create an opening for the rest of his agenda, he needs to step up to that role.

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A political class that botched the fiscal cliff so badly are not going to be capable of a gigantic deal on complex issues. It’s like going into a day care center and asking a bunch of infants to perform “Swan Lake.”

–David Brooks in a piece on today’s NY Times Op-ed page entitled “The Next Four Years”

Public debt as a percentage of gross domestic product was around 38 percent in 1965. It is around 74 percent now. Debt could approach a ruinous 90 percent of G.D.P. in a decade and a cataclysmic 247 percent of G.D.P. 30 years from now, according to the Congressional Budget Office and JPMorgan.

By 2025, entitlement spending and debt payments are projected to suck up all federal revenue. Obligations to the elderly are already squeezing programs for the young and the needy. Those obligations will lead to gigantic living standard declines for future generations. According to the International Monetary Fund, meeting America’s long-term obligations will require an immediate and permanent 35 percent increase in all taxes and a 35 percent cut in all benefits….

[The final ‘solution didn’t] involve a single hard decision. It did little to control spending. It abandoned all of the entitlement reform ideas that have been thrown around.
Whom should we blame for this? Again, we should not blame Obama and Boehner. In their different ways, they and a number of other people in the Congress are trying to find a politically palatable way to deal with these hard issues. They got what conditions allowed.

Ultimately, we should blame the American voters. The average Medicare couple pays $109,000 into the program and gets $343,000 in benefits out, according to the Urban Institute. This is $234,000 in free money. Many voters have decided they like spending a lot on themselves and pushing costs onto their children and grandchildren. They have decided they like borrowing up to $1 trillion a year for tax credits, disability payments, defense contracts and the rest. They have found that the original Keynesian rationale for these deficits provides a perfect cover for permanent deficit-living. They have made it clear that they will destroy any politician who tries to stop them from cost-shifting in this way.

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In the House, the majority Republican party says it won’t raise the debt limit without spending cuts of equivalent amounts. Mr. Obama has said he won’t negotiate over the matter, saying it is the responsibility of Congress to enable the government to pay bills it has incurred.

The government spends 40% more than it takes in and borrows money to cover the difference. Without an increase in the debt ceiling, the Treasury won’t be able to borrow the additional money needed to pay all its bills.

Failure to make payment on even some of its obligations could wreak havoc in the economy and financial markets and possibly trigger another financial crisis and recession, analysts have warned.

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The Congressional Budget Office projects that over the next decade Social Security’s annual cash deficit will rise by nearly $100 billion, reaching $155 billion a year. The cost of servicing the extra public debt tied to cashing in $1 trillion worth of Social Security’s intragovernmental IOUs over the 10 years would add $40 billion to the deficit in 2022 alone, an IBD analysis finds.

Overall, Social Security would account for nearly $200 billion in annual deficits or nearly 20% of the $1 trillion-plus deficit that would occur under current policies, including fiscal-cliff tax hikes.

Then, over the following decade, the retirement program’s impact on deficits would really balloon.

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For the first time in more than a quarter-century, Social Security ran a deficit in 2010: It spent $49 billion dollars more in benefits than it received in revenues, and drew from its trust funds to cover the shortfall. Those funds ”” a $2.7 trillion buffer built in anticipation of retiring baby boomers ”” will be exhausted by 2033, the government currently projects.

Those facts are widely known. What’s not is that the Social Security Administration underestimates how long Americans will live and how much the trust funds will need to pay out ”” to the tune of $800 billion by 2031, more than the current annual defense budget ”” and that the trust funds will run out, if nothing is done, two years earlier than the government has predicted.

We reached these conclusions, and presented them in an article in the journal Demography, after finding that the government’s methods for forecasting Americans’ longevity were outdated and omitted crucial health and demographic factors. Historic declines in smoking and improvements in the prevention and treatment of cardiovascular disease are adding years of life that the government hasn’t accounted for. …

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While many in Washington are breathing a sigh of relief and some are trying to spin the outcome as a win for the president, those who characterize this bill as a genuine victory for anyone at all have clearly lost perspective. The deal brokered by Vice President Joe Biden and Senate Minority Leader Mitch McConnell does make good on President Obama’s promise to bring a little more equity to the tax code by raising rates on wealthier Americans, and it temporarily averts the most draconian “sequestration” cuts. But the list of what it does not do, and what it does wrong, is long.

By midday Tuesday, the Congressional Budget Office had concluded that the Biden-McConnell package would add nearly $4 trillion to federal deficits over the next 10 years. This was largely because it actually extends and makes permanent more than 80% of the Bush tax cuts. So much for the idea that this whole struggle was supposed to help America get its financial house in order.

Just as bad, or perhaps worse in terms of the day-to-day lives of average people, the bill only postpones the forced cuts of sequestration by two months, to precisely the moment the country will be engaged in another ruinous debate about lifting our national debt ceiling to ensure the country can pay its bills. It thus creates a new, even more dangerous fiscal cliff….

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Update: George Will has also written on this I see–Perils Of The Entitlement State And Our Decadent Democracy.

Congress’ hectic resolution of the “fiscal cliff” crisis is the latest in a long series of decisions by lawmakers and the White House to do less than promised ”” and to ask Americans for little sacrifice ”” in confronting the nation’s burgeoning debt.

The deal will generate $600 billion in new revenue over 10 years, less than half the amount President Barack Obama first called for. It will raise income tax rates only on the very rich, despite Obama’s campaign for broader increases.

It puts off the toughest decisions about spending cuts for military and domestic programs, including Medicare and Social Security. And it does nothing to mitigate the looming partisan showdown on the debt ceiling, which must rise soon to avoid default on U.S. loans.

In short, the deal reached between Obama and congressional Republicans continues to let Americans enjoy relatively high levels of government service at low levels of taxation. The only way that’s possible, of course, is through heavy borrowing, which future generations will inherit.

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The budget deal passed by the U.S. Senate [and House]… would raise taxes on 77.1 percent of U.S. households, mostly because of the expiration of a payroll tax cut, according to preliminary estimates from the nonpartisan Tax Policy Center in Washington.

More than 80 percent of households with incomes between $50,000 and $200,000 would pay higher taxes. Among the households facing higher taxes, the average increase would be $1,635, the policy center said. A 2 percent payroll tax cut, enacted during the economic slowdown, is being allowed to expire as of [December 31]

Read it all.