that the rise in government spending and debt is a ticking time bomb. What contributes to the debt explosion is the rise in entitlement programs.

From Disciplined Approach To Investing, one view of the US Debt/Deficit :

"U.S. Government Debt/Deficit A Disaster In The Making?

For the U.S. government's fiscal year ending September 30, 2008 the total federal debt level reached $10 trillion. Michael Pakko, an economist with the Federal Reserve Bank of St. Louis, notes in a recent article that the rise in government spending and debt is a ticking time bomb. What contributes to the debt explosion is the rise in entitlement programs.

All told, the shortfall for government social insurance programs (Social Security, unfunded obligations of Medicare Part A & B and Medicare Part D-prescription drug coverage) comes to a present value of $40.9 trillion. This is the government’s official estimate—some private sector economists suggest that the total burden is even greater. Economist Lawrence Kotlikoff has recently estimated the total unfunded liabilities of current federal programs at $70 trillion.

Recent bailout actions are also contributing to the rise in obligations that will need to be repaid by U.S. taxpayers. Forecasts from the Government Accountability Office show the growth of the debt obligations if entitlement reforms are note undertaken. The below graph depicts the growth in expenses compared to total revenue as a percent of GDP out to 2080.

(click to enlarge)

and the resulting growth in the government's debt:

(click to enlarge)

The ballooning deficits and debt levels are issues that will need to be addressed sooner versus later in order to ensure healthy economic growth in the long run. Michael Pakko concludes:

Current measures of the federal deficit and the national debt, as dismal as they might appear, fail to reflect full consequences of current-law fiscal policy. The unfunded future liabilities of government entitlement programs imply rising deficits and a ballooning public debt far larger than today’s shortfalls. And debates about the immediate economic impact of government deficits on private savings and interest rates, while of academic interest, fail to address the full importance of these long-run consequences. Fundamental reform of entitlement programs is critical for putting U.S. fiscal policy on a long-run sustainable path.

Take the Fed's Flash Poll:

• What would you do to trim the debt and deficit?

Source:

Deficits, Debt and Looming Disaster: Reform of Entitlement Programs May Be the Only Hope
The Regional Economist
By: Michael Pakko
January 2009
http://www.stlouisfed.org/publications/re/2009/a/pages/debts.html
Sphere: Related Content

Posted by David Templeton, CFA at 9:30 PM

"This leads me to wonder how we should view the Bush Administration's stewardship of the economy."

Menzie Chinn on econbrowser scores the Bush Economic Disaster. As you know, I believe that the causes of this crisis are:
1) Effects on Investors of the Implicit and Explicit Government Guarantees to intervene in a financial crisis. This allowed much of the excessive risk. I also include here the lack of clarity as to what the government will or won't do.
2) Fraud, Negligence, Fiduciary Mismanagement, and Collusion. I include here lack of enforcement by the government.
3) The perceived incompetence of the Bush Administration. In my view, when this crisis hit, expectations were that the Bush Administration would make things far worse.
Now, let me add:
4) The budget deficit and debt run up in the last eight years. Truly speaking, this should be 3, but, in this crisis, I think that 4 added with other Bush disasters to push the total Bush Disaster Effect higher.

Here's the post:

"Stuff Happens": the Bush Administration's Economic Stewardship

As we near the end of the year, and the end of eight years of Bush economic policy, I think it's useful( BUT NOT PLEASANT ) to look back. The White House has recently tangled with the NYT regarding what got us into the current economic crisis [0] (see also [1]). This comes on the heels of the Paulson argument that he would not have done anything different( SO ASININE ), had he known the full extent of the looming crisis. This leads me to wonder( I DON'T ) how we should view the Bush Administration's stewardship of the economy.

Figure 1: IMF, Global Financial Stability Report (Oct. 2008), Box 1.3.

Candidate Explanations

In particular, when one examines the mixture of policies and events that have led us to the brink of possibly the deepest and most persistent downturn since the Great Depression, one can see several suspects listed.

• Fannie and Freddie( A BIT )
  
• Community Reinvestment Act( A BIT )
  
• CDO's and CDS's( NO. THE MISUSE OF THESE WAS FRAUD, ETC. )
  
• Global saving glut( NO )
  
• Monetary policy( A BIT )
  
• Deregulation( A BIT )
  
• Criminal activity and regulatory disarmament( 2nd MAJOR CAUSE )
  
• Tax cuts and fiscal profligacy( 4 MAJOR CAUSE )
  
• Tax policy( A BIT )
  

Red Herrings

I've already dealt with the first two "betes noire" -- favorite villains in the fevered commentary of certain noneconomists -- in this post, so we can dispense with these as key drivers (Jim attributes some blame, here, although I don't think he attributes central blame here either). I don't think CDO's and CDS's in and of themselves caused the crisis( I AGREE ), although they certainly obscured the primary problem of overleveraging (CDO's) and lack of transparency (CDS's). And the saving glut -- well, the saving glut was a worldwide phenomenon, but I think it safe to say the countries that did and didn't borrow from the Chinese have suffered in the current crisis( I AGREE ) (here is my critique from 2005; CFR report [pdf]).

Synergy

So what I want to think about is the toxic mixture of the last five items, which interacted in a synergistic manner to place us in the situation we are now in.

First, monetary policy. While there seems to be a widespread consensus that it was too lax in 2002-04, this is a viewpoint made with the benefit of hindsight. As Orphanides and Wieland (2007) [pdf] have pointed out, according to the Greenbook forecasts, monetary policy was not -- according to a Taylor rule framework -- overly lax.( I AGREE )

Second, deregulation. On this front, I think it's important to not indict all deregulation (eliminating the Glass-Steagall barriers makes sense to me, while the Phil Gramm-sponsored Commodity Futures Modernization Act exemption of regulation of CDS's does not( A FAIR POINT). I outline some empirical research on what factors were important in this crisis in this post.

Third, regulatory disarmament/nonenforcement and "criminal activity". I would have discounted this item in the absence of clear evidence, but now that we know about how the OTS "helped out" IndyMac [2] [3], I think we can be reasonably confident that we'll hear a lot more about how deregulatory zeal [4] [5] metastatized over into criminal activities on the part of regulators and the regulated.( 2nd MAJOR CAUSE )

Fourth, fiscal profligacy via tax cuts. I think it's important to focus on profligacy (because it pushed the economy more into a boom exactly at a time when not needed) and on tax cuts (because it made people feel like they had more discretionary income than reasonable), thereby pushing the asset boom. ( 4th MAJOR CAUSE )

Fifth, tax policy. In particular, I have been thinking about the tax deductibility on second homes, a provision dating back to 1997 [6] [7] [8]. (I've been thinking about this in part because mortgage deductibility on a second home never made sense to me, let alone on a first home). Capital Games and Gains has pointed out this provision, citing a NYT article. But even this last article doesn't locate primary blame here; rather it's cited as a contributing factor. I suspect that on its own, this provision wouldn't had a big impact, but in combination, it might have. My caveat here is that I haven't found much empirical work backing a big role for this factor.( MINOR )

Typically, in my academic work, I would think of these factors adding up in a linear fashion, so that each of the impulses would sum to the total effect. But (departing from a model, and with no econometric work to back up the hypothesis interactive effects), I think it's worthwhile to think about lax monetary policy, deregulatory zeal and criminal activity/regulatory disarmament, and tax cuts and tax policy changes, all combining to lead to the "bubble" (in a nontechnical sense) we've witnessed, the deflation of which has been associated with the ongoing financial crisis.

Consider one example of a pernicious synergy: the 2001 and 2003 tax cuts were aimed at higher income households, while the second home mortgage deductibility benefited mostly higher income households [7]; with regulatory oversight absent, and low interest rates, well the stage was set.

Prescient, or Not

I won't claim to have foreseen the full enormity of the crisis we're now undergoing. As I indicated when I posted my first blogpost some three years ago, I thought the sheer irresponsibility of the fiscal policy being pursued( TRUE ), against a backdrop of overconfidence in largely nontraded derivatives, would lead to grief in the form of a "sudden stop" of net capital flows to the US. In this respect, I was wrong -- what we've achieved instead is a sort of "global sudden stop" where the process of deleveraging proceeded in a discrete (and "disorderly") fashion( TRUE. DUE TO THE FEAR AND AVERSION TO RISK AND THE ACCOMPANYING FLIGHT TO SAFETY ). So, unlike some, I was only partially -- not completely -- blindsided. (And, I'm sure Akerlof and Romer were completely aware of what was coming...)

I believe history will look critically on the Bush Administration's economic stewardship, in particular how the policies propelled an unsustainable bubble, and tied our hands in the use of fiscal policy tools. In sum, I think Kevin (Dow 36,000) Hassett's view "Bush's Legacy May End Up Better Than You Think" will not prove true."

You are thinking very clearly. I believe that her Synergy is equivalent to my Bush Disaster Effect. Only she fails to see how the Wars, Katrina, etc., can effect economic behavior. For me, Economics only exists in the context and presuppositions of its time.

"Everyone is facing a deterioration in wealth – home and equity owners alike – and this time around, consumption is bound to decline…further."

I liked Rebecca Wilder's summation of the numbers that came out from the Fed this week on News N Economics:

"Households debt falls for the first time...ever (at least since 1952)!

The Federal Reserve released its third quarter flow of funds account. I have never been so anxious to get a release as I was today for the flow of funds account. Third quarter highlights GO something like this:

• Household net worth declined 4.7%
• Household debt decreased an annualized 0.8% - a sign of real delevering, given that the 0.8% contraction is in nominal terms and prices rose 1.6% over the same quarter.
• Total business debt decelerated to a 2.94% pace (down from 5.6%).
• Federal debt grew an annualized 39% in the third quarter, which is 33.5% above the average 5.5% quarterly debt growth from q2 2007 to q2 2008. This is the biggest surge since 1952.

But there is also a very troubling effect that may emerge, and that is the wealth effect.

The chart illustrates the ratio of household net worth to disposable personal income spanning 1952:Q1 to 2008:Q3. In the third quarter, the share of net worth fell to 5.3% times current disposable income, driven by falling equity and home values. Consumer wealth is falling, and unless housing and equity markets stabilize and grow SOON, wealth will likely fall for two more quarters…at least.

The continuous decline in net worth is likely to hammer consumption, and with that, GDP. It seems like the wealth effect – which is previously questionable as an empirical determinant of consumption – is now quite strong.

Households are watching their stock of housing wealth fall when they return home from work, when they turn on the TV, and when they sit down for dinner. Everyone is facing a deterioration in wealth – home and equity owners alike – and this time around, consumption is bound to decline…further.

There is some serious slack building in this economy. Go Policymakers~!"

I've questioned the Wealth Effect in the following way:

I believe that there is one, but it's based on perception by individuals. I don't see it correlating exactly with any set of numbers. However, Rebecca makes a good point, that this graph does suggest a general correlation that is much closer than I'd assumed. This goes back to my talking about people's perception of the value of their homes being higher than the market warranted. I'd like to know more about those perceptions before I accept a graphic way to determine the Wealth Effect.

The falling household debt does suggest a general aversion and fear of risk and flight to safety, which will have to be addressed at the level of households.