The Money Hole

The Money Hole

John Stossel
June 15, 2011

America is falling deeper into debt. We're long past the point where drastic action is needed. We're near Greek levels of debt. What's going to happen?

Maybe riots -- like we've seen in Greece?

We need to make cuts now.

Some governors have shown the way. You know about Chris Christie, Scott Walker, Rick Scott, John Kasich, etc. But you probably don't know about Luis Fortuno.

Fortuno is governor of Puerto Rico. Two years ago, he fired 17,000 government workers. No state governor did anything like that. He cut spending much more than Walker did in Wisconsin. In return, thousands of union members demonstrated against Fortuno for days. They clashed with police. They called him a fascist

Fortuno said he had to make the cuts because Puerto Rico's economy was a mess.

"Not just a mess. We didn't have enough money to meet our first payroll."

Fortuno's predecessors had grown Puerto Rico's government to the point that the state employed one out of every three workers. By the time he was elected, Puerto Rico was broke. So the new conservative majority, the first in Puerto Rico in 40 years, shrank the government.

What was cut?

"Everything. I started with my own salary."

The protesters said he should raise taxes instead of cutting spending.

"Our taxes were as high as they could be, actually much higher than most of the country. So what we've done is the opposite." Fortuno reduced corporate taxes from 35 percent to 25 percent. He reduced individual income taxes. He privatized entire government agencies.

"Bring in the private sector," Fortuno said. "They will do a better job. They will do it cheaper."

Fortuno's advice for leaders who want to shrink the state: "Do what you need to do quickly, swiftly, like when you take off a Band-Aid. Just do it. And move on to better things."

Canada did that years ago.

When I think Canada, I think big government. I'm embarrassed that I didn't know that in the mid-'90s, Canada shrank its government. It had to. Its debt level was as bad as ours is today, almost 70 percent of the economy. Canada's finance minister said: "We are in debt up to our eyeballs. That can't be sustained."

Economist David Henderson, a Canadian who left Canada for the United States, remembers when The Wall Street Journal called the Canadian dollar "the peso of the north." It was worth just 72 American cents. "Moody's put the Canadian federal debt on a credit watch," Henderson said.

The problem, he added, was that Canada had a government safety net that was more like a hammock.

"When I was growing up in Canada, people who went on unemployment insurance were said to go in the 'pogie.' You could work as little as eight weeks, taking the rest of the year off."

So in 1995 Canadian leaders cut unemployment benefits and other programs. It happened quietly because it was a liberal government, and liberals didn't want to criticize their own. The result was that Canada's debt stopped increasing. As the government ran budget surpluses, the debt went down.

"The economy boomed," Henderson said. "Think about what government does. Government wastes most of what it spends, and so just cutting government and having that money in the hands of people means it's going to be used more valuably."

Canada fired government workers, but unemployment didn't increase. In fact, it fell from 12 percent to 6 percent. Canadian unemployment is still well below ours. And the Canadian dollar rose from just 72 American cents to $1.02 today.

Canada also raised some taxes. But the spending cuts were much bigger, six to one: agriculture was cut 22 percent; fisheries, 27 percent; natural resources, almost 50 percent.

"We should learn from Canada's experience that you can cut government substantially," Henderson said. "It is so wasteful. There's so much to cut, without causing much real pain -- not causing pain, but helping your economy grow, helping people become better off."

Henderson added, "We need to move more quickly than the Canadians did. Unfortunately, we're moving more slowly than the Canadians did."

If we're moving at all.

While Canada thrives, we pour more money down the hole.

TexasBlue wrote:We're near Greek levels of debt.

I'd like to see figures for that claim to see whether it is actual or relative.

If it is actual then you don't have much to be concerned about. That would be like comparing two people with the same level of debt (let's take an arbitrary figure of $50,000). For somebody who earns $90,000 a year that is going to be less of a problem than for a man with an income of $15,000 a year.

If it is relative then it is concerning but hardly anything to get so worked up about and warn of impending collapse. You have a much stronger commercial and industrial structure to get you out of this shit a lot sooner. You also have much larger geographical area and a much bigger population with greater tax income overall.

The_Amber_Spyglass wrote:

TexasBlue wrote:We're near Greek levels of debt.

I'd like to see figures for that claim to see whether it is actual or relative.

If it is actual then you don't have much to be concerned about. That would be like comparing two people with the same level of debt (let's take an arbitrary figure of $50,000). For somebody who earns $90,000 a year that is going to be less of a problem than for a man with an income of $15,000 a year.

If it is relative then it is concerning but hardly anything to get so worked up about and warn of impending collapse. You have a much stronger commercial and industrial structure to get you out of this shit a lot sooner. You also have much larger geographical area and a much bigger population with greater tax income overall.

Yeah, I wish he would've included a chart with his column. Stossel is usually pretty good and not just a typical scare monger.

All the same, the debt isn't anything to shrug off.

No of course not but the key thing in the difference between you and Greece is infrastructure. And it is a big issue.

The_Amber_Spyglass wrote:No of course not but the key thing in the difference between you and Greece is infrastructure. And it is a big issue.

Also, Greece has the EU to help, we don't.

The_Amber_Spyglass wrote:

TexasBlue wrote:We're near Greek levels of debt.

I'd like to see figures for that claim to see whether it is actual or relative.

If it is actual then you don't have much to be concerned about. That would be like comparing two people with the same level of debt (let's take an arbitrary figure of $50,000). For somebody who earns $90,000 a year that is going to be less of a problem than for a man with an income of $15,000 a year.

If it is relative then it is concerning but hardly anything to get so worked up about and warn of impending collapse. You have a much stronger commercial and industrial structure to get you out of this shit a lot sooner. You also have much larger geographical area and a much bigger population with greater tax income overall.

It's got to be relative, because if we're just comparing absolute numbers, our debt dwarfs Greece's. As a percentage of GDP, though, they're well above us.

Greek GDP: $310.365 billion.
Greek public debt: $443.201 billion (my calculation)
Greek public debt as a percentage of GDP: 142.8%

US GDP: $14.66 trillion.
US public debt: $14 trillion
US public debt as a percentage of GDP: 93%

I think Stossel's comparison is slightly hyperbolic--93% isn't really that close to 142.8%; Greece's relative debt is more than 50% greater than ours.

Still, we should set our standards a little higher than being in better shape than Greece.

kronos wrote:

The_Amber_Spyglass wrote:

TexasBlue wrote:We're near Greek levels of debt.

I'd like to see figures for that claim to see whether it is actual or relative.

If it is actual then you don't have much to be concerned about. That would be like comparing two people with the same level of debt (let's take an arbitrary figure of $50,000). For somebody who earns $90,000 a year that is going to be less of a problem than for a man with an income of $15,000 a year.

If it is relative then it is concerning but hardly anything to get so worked up about and warn of impending collapse. You have a much stronger commercial and industrial structure to get you out of this shit a lot sooner. You also have much larger geographical area and a much bigger population with greater tax income overall.

It's got to be relative, because comparing if we're just comparing absolute numbers, our debt dwarfs Greece's. As a percentage of GDP, though, they're well above us.

Greek GDP: $310.365 billion.
Greek public debt: $443.20122 (my calculation)
Greek public debt as a percentage of GDP: 142.8%

US GDP: $14.66 trillion.
US public debt: $14 trillion
US public debt as a percentage of GDP: 93%

I think Stossel's comparison is slightly hyperbolic--93% isn't really that close to 142.8%; Greece's relative debt is more than 50% greater than ours.

Still, we should set our standards a little higher than being in better shape than Greece.

What is missing here are the US's unfunded liabilities in Medicare and Social Security - estimated to be about $61.6 trillion.

This is not a trivial figure, particularly when you consider that the largest generation in US history, the baby boomers are already starting to retire and will be doing so in increasing numbers for many years to come.

dblboggie wrote:What is missing here are the US's unfunded liabilities in Medicare and Social Security - estimated to be about $61.6 trillion.

This is not a trivial figure, particularly when you consider that the largest generation in US history, the baby boomers are already starting to retire and will be doing so in increasing numbers for many years to come.

What's the pay in-pay out ratio? If I remember, it was one worker for 3 retirees..... this is social security, btw.

It's a low number. That much I remember. As such, it's not boding well for anyone. Heck, younger guys at work say things about social security. They say, "If it's even there when I retire in 30+ years."

TexasBlue wrote:

dblboggie wrote:What is missing here are the US's unfunded liabilities in Medicare and Social Security - estimated to be about $61.6 trillion.

This is not a trivial figure, particularly when you consider that the largest generation in US history, the baby boomers are already starting to retire and will be doing so in increasing numbers for many years to come.

What's the pay in-pay out ratio? If I remember, it was one worker for 3 retirees..... this is social security, btw.

It's a low number. That much I remember. As such, it's not boding well for anyone. Heck, younger guys at work say things about social security. They say, "If it's even there when I retire in 30+ years."

Actually it's the other way around - 3 employees for every retiree... if it's actually still that much - that was a 2005 figure. But there is no question that that ratio will be shrinking considerably in the years to come as the baby boomers continue to retire. As the referenced article points out, 80% of American families pay more in Social Security taxes than they do in income taxes. And if something isn't done soon that amount is going to increase significantly.

Yeah, that was the figure I was trying to remember.

Plus, Medicare and S.S. eat up more of our budget than even defense spending. It's the largest chunk of the US budget. Unreal.

TexasBlue wrote:The Money Hole

John Stossel
June 15, 2011

America is falling deeper into debt. We're long past the point where drastic action is needed. We're near Greek levels of debt. What's going to happen?

Maybe riots -- like we've seen in Greece?

We need to make cuts now.

Some governors have shown the way. You know about Chris Christie, Scott Walker, Rick Scott, John Kasich, etc. But you probably don't know about Luis Fortuno.

Fortuno is governor of Puerto Rico. Two years ago, he fired 17,000 government workers. No state governor did anything like that. He cut spending much more than Walker did in Wisconsin. In return, thousands of union members demonstrated against Fortuno for days. They clashed with police. They called him a fascist

Fortuno said he had to make the cuts because Puerto Rico's economy was a mess.

"Not just a mess. We didn't have enough money to meet our first payroll."

Fortuno's predecessors had grown Puerto Rico's government to the point that the state employed one out of every three workers. By the time he was elected, Puerto Rico was broke. So the new conservative majority, the first in Puerto Rico in 40 years, shrank the government.

What was cut?

"Everything. I started with my own salary."

The protesters said he should raise taxes instead of cutting spending.

"Our taxes were as high as they could be, actually much higher than most of the country. So what we've done is the opposite." Fortuno reduced corporate taxes from 35 percent to 25 percent. He reduced individual income taxes. He privatized entire government agencies.

"Bring in the private sector," Fortuno said. "They will do a better job. They will do it cheaper."

Fortuno's advice for leaders who want to shrink the state: "Do what you need to do quickly, swiftly, like when you take off a Band-Aid. Just do it. And move on to better things."

Canada did that years ago.

When I think Canada, I think big government. I'm embarrassed that I didn't know that in the mid-'90s, Canada shrank its government. It had to. Its debt level was as bad as ours is today, almost 70 percent of the economy. Canada's finance minister said: "We are in debt up to our eyeballs. That can't be sustained."

Economist David Henderson, a Canadian who left Canada for the United States, remembers when The Wall Street Journal called the Canadian dollar "the peso of the north." It was worth just 72 American cents. "Moody's put the Canadian federal debt on a credit watch," Henderson said.

The problem, he added, was that Canada had a government safety net that was more like a hammock.

"When I was growing up in Canada, people who went on unemployment insurance were said to go in the 'pogie.' You could work as little as eight weeks, taking the rest of the year off."

So in 1995 Canadian leaders cut unemployment benefits and other programs. It happened quietly because it was a liberal government, and liberals didn't want to criticize their own. The result was that Canada's debt stopped increasing. As the government ran budget surpluses, the debt went down.

"The economy boomed," Henderson said. "Think about what government does. Government wastes most of what it spends, and so just cutting government and having that money in the hands of people means it's going to be used more valuably."

Canada fired government workers, but unemployment didn't increase. In fact, it fell from 12 percent to 6 percent. Canadian unemployment is still well below ours. And the Canadian dollar rose from just 72 American cents to $1.02 today.

Canada also raised some taxes. But the spending cuts were much bigger, six to one: agriculture was cut 22 percent; fisheries, 27 percent; natural resources, almost 50 percent.

"We should learn from Canada's experience that you can cut government substantially," Henderson said. "It is so wasteful. There's so much to cut, without causing much real pain -- not causing pain, but helping your economy grow, helping people become better off."

Henderson added, "We need to move more quickly than the Canadians did. Unfortunately, we're moving more slowly than the Canadians did."

If we're moving at all.

While Canada thrives, we pour more money down the hole.

Canada is yet another example of how a combination of capitalism and social benefits can be achieved without affecting the country in a negative way.

TexasBlue wrote:Yeah, that was the figure I was trying to remember.

Plus, Medicare and S.S. eat up more of our budget than even defense spending. It's the largest chunk of the US budget. Unreal.

Spending on Social Security, Medicare and Medicaid accounted for 43% of the federal budget last year while the defense budget accounted for 20%, and that was with two wars being waged! And those three entitlement programs are not the only entitlement spending the federal government is involved in - we haven't even touched welfare, subsidized housing, food stamps, and the many other welfare programs that fall under non-defense discretionary spending. And lest we forget, there are also all those wonderful federal retirement pensions and health care programs whose costs are mostly born by private sector taxpayers. Yeah... we are in a real pickle here if we don't get serious about reforming our entitlement programs and doing something to turn the economy around.

dblboggie wrote:

TexasBlue wrote:Yeah, that was the figure I was trying to remember.

Plus, Medicare and S.S. eat up more of our budget than even defense spending. It's the largest chunk of the US budget. Unreal.

Spending on Social Security, Medicare and Medicaid accounted for 43% of the federal budget last year while the defense budget accounted for 20%, and that was with two wars being waged! And those three entitlement programs are not the only entitlement spending the federal government is involved in - we haven't even touched welfare, subsidized housing, food stamps, and the many other welfare programs that fall under non-defense discretionary spending. And lest we forget, there are also all those wonderful federal retirement pensions and health care programs whose costs are mostly born by private sector taxpayers. Yeah... we are in a real pickle here if we don't get serious about reforming our entitlement programs and doing something to turn the economy around.

I'll make a prediction. It's going to sink our economy in due time (a few years). I'll blame the Democrats for not taking the problem seriously. I'll blame the Republicans for not having the fuqqing balls to set the record straight and do something about it. Yeah, some are taking it seriously in both parties but they are a very small minority. The GOP is (again) too scared to take it on head first. That is, until the shit finally hits the fan in the next 10 years.