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The 2018 Social Security Trustees Report

June 21, 2018 Leave a comment

The Trustees for the Social Security program recently issued a report on its financial condition (here is a summary of the report), getting substantial media attention. I thought it might be useful here to discuss for readers the report’s statements about the trust fund. Warning: equations lurk below.

An Accounting Constraint

The assets in the Social Security trust fund obey the relationship

End of Period Assets = Assets at the End of Last Period + Interest Earnings + Social Security Payments from Workers – Social Security Payments to the Public

which describes how assets rise or fall over time. So the equation states that assets at the end of, say, 2018 will be assets at the end of 2017 plus interest received on assets plus funds received from workers paying into the Social Security system less any payments made to people by the Social Security system. The last three items are all for 2018. It is true that in the past Read more…

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Financing Government Deficits with Money

May 10, 2018 6 comments

In an earlier post, I described the budget constraint faced by the federal government. Here I want to point out how a deficit can lead to inflation. I will also indicate how the European Union (EU) and Greece are related to this discussion since there is an interesting difference between the U.S. and Greece regarding deficits and inflation.

Financing Deficits by the Central Bank

Suppose that the government has a deficit meaning that its spending for all purposes exceeds its tax revenue and that the government is unwilling to raise tax rates and/or cut spending. Now imagine that lenders will not lend to the government by buying the bonds that the government has tried to sell. In this situation, one financing option (bond sales to the public) for deficits is unavailable.  If nothing else is done to deal with the deficit, the government simply runs out of money and must shut down its operations until new tax money arises. But there is another option in the U.S. and many other countries; the central bank (the Federal Reserve in the U.S.) can buy the bonds sold by the government.

To see how this works, consider what the Fed can do. The government sells the bonds sold by the government and creates bank reserves as a result. Bank reserves would just be deposits at the Fed owned by banks. Those bank reserves will expand the money stock and so we have the Fed “printing” money to finance the government’s deficit. But to paraphrase the late Milton Friedman, inflation is a monetary phenomenon. Thus the government’s deficit can be accompanied by inflation. This appears to be happening now in the socialist paradise of Venezuela. But for Greece the situation is different because of its membership in the European Union (EU). Read more…

The Government Budget Constraint

May 3, 2018 1 comment

My last post reported on the latest Congressional Budget Office (CBO) analysis of the federal government budget showing unprecedented increases in the ratio of government debt to GDP. That ratio emerges from the government’s budget constraint which is the topic addressed here.

The Government Budget Constraint

The government’s sources and uses of funds are collected together into one expression, known as the Government Budget Constraint, which states that the sources of funds must equal the uses of funds by the government. The table below lists these items.

Uses of Funds Sources of Funds
Spending on Goods and Services Tax Revenue
Interest Payments Government Bond Issue
Net Transfer Payments

The uses of funds include spending on goods and services, interest payments, and net transfer payments to the public. This latter category includes, among other things, the Social Security and Medicare programs. So Net Transfer Payments rise as the entitlements crisis unfolds. If interest rates on government debt rise, interest payments by the government must rise as well.

On the sources side of the ledger, the government gets tax revenue which it uses to pay for its spending and/or it may issue government bonds to pay for spending if its spending exceeds its tax revenue. So the CBO report said that the government will be running deficits increasing in size into the future and thus will have to issue increasing amounts of government debt to finance its spending.

But this table does not include the role of the Federal Reserve which is included in a related concept which we discuss now. Read more…

The Latest CBO Long-Term Budget Outlook

The Congressional Budget Office (CBO) is the research shop for Congress. It is their job to provide an analysis of many economic issues and one such task is the budget outlook. Their latest report on the budget contains a picture which speaks volumes about the fiscal position of the federal government. That picture is given below.

This picture is the ratio of the stock of government debt to GDP which the CBO expects to arise given their latest projections for the U.S. economy and the laws on the books which dictate government spending by the federal government. Note that the CBO expectation is that the debt/GDP ratio will rise to levels never before seen in the history of the U.S., even during wars. This picture concisely states the nature of the emerging entitlements crisis. Absent any changes in fiscal policy, there will be historically unprecedented levels of government deficits and spending that are implied by current laws.

But there is one hidden aspect of this picture which the CBO is making. The CBO is assuming that it will be possible to finance the deficits implied by this picture but there is no economist that is able to guarantee such a position. The reason is that deficits of the sizes implied here would be well above the trillion dollar range which would be completely outside our history of experience. Thus there is no way to know, since we have never seen these deficits, that a debt crisis would not emerge (the situation with Greece is instructive on this point). Put differently, we cannot guarantee that the federal government would be able to borrow the funds necessary to achieve the debt/GDP ratios in the graph above.

If the government cannot borrow all that is needed, then what? I will write about this in a follow-up post soon.

Incentives Matter

January 20, 2018 1 comment

I have stated on this blog that if the social science of economics is about anything, it is about the powerful economic effects of incentives. The recent media reports about Apple and other firms building new plants in the U.S., raising money wage rates, and increasing employment, are extraordinary examples of how powerful incentives can be in changing economic behavior. All of these stories stem from the tax reform recently passed.

  1. Real Wages. I stated that reducing the corporate tax rate would increase the demand for labor and cause real wages to rise. We have already had announcements about higher money, and thus real, wages paid by firms.
  2. New Plant and Equipment. Apple announed that it will build new plant in the U.S. as other firms have stated as a result of the tax reform.
  3. Tax Revenue. Much has been written about the fact that firms refused to bring money back to the U.S. to avoid double taxation of their income. Apple will pay $38 Billion in taxes once it returns funds to the U.S. so the federal government gets a one-time windfall of revenue due to the tax reform from Apple.
  4. Employment. Apple and other firms are planning to increase employment, with Apple stating that it will hire 20,000 people.

There are other examples (yes they are anecdotes) that I can give but those above make the point. What is most entertaining is to watch Democratic politicians pretend that these effects are nonexistent when, in fact, they should set off a growth boom of the sort that we have not seen in many years. First quarter GDP numbers should be most interesting when they are released. Stay tuned.

But another lesson from these events is how easy it is for government to reduce economic activity or economic growth when it imposes its policies.

All of this provides a wonderful set of examples of economics in action. This is why I got interested in economics when I was a student because it has so much to offer for understanding the world around us.

Who Pays U.S. Income Taxes?

December 4, 2017 Leave a comment

My last post used 2015 tax return data from the IRS to see if “Bernie Care” could be financed using the tax payments of the “rich.”  Using that tax return data, it is also instructive to see just who is paying the income taxes collected in the U.S. The table below is constructed to show how much rich people pay into the income tax system and, obviously, people may differ regarding the definition of a rich person. So I picked out an Adjusted Gross Income (AGI) of $200K and above as an arbitrary, but not unreasonable, definition of the rich for use in the table. For each class of AGI, entries in the table are the ratio of taxes paid to total taxes collected (called the Tax Share) and the ratio of the number of returns to the total number of returns (called the Return Share). Regarding the return shares, the zero entries mean that, rounding up to two digits, the calculated ratio is much less than one percent.

Adjusted Gross Income Tax Share Return Share
$200,000 under $500,000 0.21 0.036
$500,000 under $1,000,000 0.11 0.01
$1,000,000 under $1,500,000 0.05 0
$1,500,000 under $2,000,000 0.03 0
$2,000,000 under $5,000,000 0.07 0
$5,000,000 under $10,000,000 0.04 0
$10,000,000 or more 0.10 0
Total 0.59 0.05

The table reveals that about 60 percent of the taxes paid are coming from those with an AGI of $200K and above. Only about 5 percent of the returns being filed in 2016 for the 2015 tax year provided this tax revenue. Thus a small number of returns provided more than half of the U.S. income tax revenue on returns filed in 2016 for 2015 AGI.

Since the personal income tax system provides the lion’s share of federal government tax revenue, this table provides one possible basis for the claims, often found in the media, that the rich pay the lion’s share of the funds used to finance the activities of government.

Can the Rich Pay for “Bernie-Care?”

November 2, 2017 Leave a comment

In an earlier post, I reported the results of an Urban Institute study which attempted to estimate the cost of Medicare-for-All or “Bernie-Care,” the latter name given by some people to a Medicare-for-All system because Senator Bernie Sanders has advocated this plan. The Urban Institute study estimated the cost of such a plan to be between $2.0 Trillion and $2.5 Trillion. Here I ask if the rich, however defined, can pay for such a new medical insurance system.

Before going further, it should be recognized that a definition of the rich is inherently arbitrary and so the only sensible way to address this issue is to report a range of income classes and let the reader decide which one is relevant. That is what I will do in what follows below. The data comes from Table 3 of the IRS tables reporting statistics on the U.S. income tax and I will confine the results to the latest year available from the IRS, 2014. Read more…

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