Boomergeddon Three Years Later: Still Running on Schedule

by James A. Bacon

With the non-stop news coverage about the federal budget and debt-ceiling crisis, I’ve been thinking a lot about the Boomergeddon scenario I wrote about back in 2010. Since I predicted a financial collapse of the federal government within 15 to 20 years, a number of significant developments have occurred. Congress enacted Obamacare, President Obama managed to raise taxes on the Top 1% and partisan deadlock created the blunt expenditure-cutting tool of sequestration. Economic growth has continued at a steady but sub-par pace, and Quantitative Easing has pushed interest rates to almost zero percent.

From a peak of $1,413 billion in 2009, the federal budget deficit has plummeted to $642 billion in 2013 — and the Congressional Budget Office (CBO) forecasts that it could fall as low as $378 billion before embarking upon an rising again as more and more Boomers start drawing Social Security and Medicare.

Was I wrong to expect fiscal disaster? Are we, however noisily and messily, getting our budgetary house in order? I didn’t know the answer when I woke up this morning, so I checked the numbers.

As it turns out, I am no more optimistic than I was three years ago. The chart above tells part of the story. The blue line shows the deficit levels that the Obama administration was expecting back in 2010 when I was writing Boomergeddon. The red line shows the actual deficits (and CBO forecast for Fiscal 2013 and 2014). The numbers haven’t changed much.

The fact that the nation is on nearly the same fiscal trajectory as forecast back in 2010 is remarkable. Think about it. The tax increase on the rich has bolstered tax revenue. Sequestration has constrained spending. And Quantitative Easing has driven down the borrowing costs of government.

Indeed, Federal Reserve Chairman Ben Bernanke deserves credit as the biggest deficit fighter in America. In 2010, the Obama administration anticipated that the country would be paying $510 billion in interest on the national debt in FY 2013. The actual figure: only $215 billion. That’s a $295 billion swing. In other words, roughly 40% of the deficit decline has occurred as a result of monetary stimulus, not fiscal discipline.

Given the higher taxes, reduced spending and monetary stimulus, why isn’t the deficit picture way better? One simple answer: Sub-par economic growth. Economic growth has consistently fallen short of Obama administration forecasts. Lower economic growth translates into lower-than-expected tax revenues and higher-than-expected transfer payments to the poor and unemployed.

So, the big question is this: Will economic growth resume traditional, post-World War II patterns? If so, there is hope. If not, we’re all toast.

On the positive side, the economy has worked its way through most of the damage caused by the 2007 real estate crash. Real estate prices are rising again, consumers are carrying far less indebtedness than they once did, and corporations have rock-solid balance sheets. We should be pulling out of the sluggish-recovery phase and entering the boom-boom phase of the business cycle. Over the longer haul, the economy should benefit from some promising trends — the U.S. energy boom, the re-shoring of American manufacturing and productivity gains from Big Data and the Internet of Things.

But we’re still mired in sub-par growth. The question of why will spark endless partisan disagreement. Democrats blame the uncertainty created by the Republican-caused debt and budget showdown. Republicans blame the Democratic-caused debt and budget showdown. The GOP attributes some of the economic languor to higher taxes on the wealth producers. Dems assert that the effect is negligible. The Donkey Clan implicates the slowdown in the global economy. The elephants indict the burden created by Obamacare, Wall Street regulatory “reform” and hundreds of smaller initiatives.

yield curve

Click for larger image.

Here’s the 500-pound gorilla in the room: the $17 trillion debt. The graph to the left shows nominal interest rates and inflation-adjusted interest rates. Rates on U.S. debt with maturities of five years or less are negative on an inflation-adjusted basis. Even 30-year bonds are paying a real return of only 1.5%. If the U.S. is in slow-growth mode despite one of the most stimulative monetary regimes in its history, the prognosis is grim if interest rates ever move up.

And higher rates are almost inevitable. As soon as economic growth resumes and demand for credit increases, interest rates will rebound. The upward move will be accentuated by Federal Reserve Board promises to back off Quantitative Easement when job creation picks up. Indeed, interest rates shot up this summer when Bernanke merely hinted that he would gently decelerate the bond buying. Investors are hyper-vigilant and ready to unload their bonds at moment’s notice.

We face a predicament in which any sign of economic growth will trigger a rapid increase in interest rates, in effect capping the speed at which the economy can expand. The $17 trillion national debt will exert a severe drag on the economy for years, perhaps generations, to come. I don’t see any painless way out of the fix we have created for ourselves. We can stagger onward like this for another decade and a half, perhaps, but not much longer. I’ve been wrong before, and I could be wrong now. I hope I am. I truly dread the future that I see.

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19 responses to “Boomergeddon Three Years Later: Still Running on Schedule

  1. Social Security does not get paid out of the general revenues. Social Security gets paid from the FICA Tax and the law specifically states that Social Security benefits paid out cannot exceed what FICA generates – without changes from Congress.

    The so-called “trust fund” is really the surplus FICA revenues generated since Ronald Reagan agreed to increase the FICA taxes. The intent was to generate excess FICA revenues that then would provide transition pay-back period over a number of years when the demographics shifted to a net loss – the loss made up by the excess FICA funds built up in prior years.

    but unless or until Congress makes changes, SS cannot pay out more than FICA generates and come 2020 or there about, SS (and Medicare Part A) benefits will automatically reduce – and continue to reduce in the coming decades until it hits about 75% of scheduled benefits.

    It’s the ONLY program in the entire US budget that actually cannot run a deficit and cannot, by law, incur unfunded liabilities.

    FICA/SS is an earmarked fund… separate from the rest of the US budget.

    Including it in revenues or expenses just confuses the picture.

    The reality is seen on page 56 of this:

    not the column that says non-earmarked. That’s the general revenues and we take in – about 1.57T a year in income taxes (corporate and individual).

    that money goes to pay for about a trillion in national defense (DOD plus homeland security, VA, NASA, DOE, etc) and about a trillion in entitlements and the rest of govt to total about 2.4T.

    Medicare is about 300 billion and it can be trimmed substantially by going to a more means-tested regime. Right now – people who make up to 85K in annual retirement income pay $100 a month for guaranteed insurance that cover 80% of costs with the option of getting an additional subsidy to cover the 20% gap.

    that amounts to a subsidy of at least $5000 a year for most seniors, many of whom have substantial retirement income and personal assets.

    so we can and should fix that.

    assume we cut Medicare by 1/2 so we save 150B.

    assume we somehow cut MedicAid by 1/2 , saving another 250B.

    that’s 400B… where is the rest going to come from?

    SS is off budget, you’ve cut the entitlements and you still are about 500B short….

    what’s the point?

    the point is this is NOT about Boomer demographics alone.

    we have a STRUCTURAL deficit that goes beyond just entitlements.

    we current are spending more than a trillion a year on DOD plus National Defense – which includes the VA, Homeland Security, NASA (military satellites), DOE ( nuke weapons and ship reactors), etc…

    ALl of these things are LONG TERM debt because they are government employees who staff these agencies – more than 2 million, and each one will receive – a pension, health care, social security and Medicare… and THAT’s the structural deficit…that we keep pretending is private sector boomer demographics.

  2. Social Security does not get paid out of general revenue, but the excess Social Security cash is invested in government bonds — which DO depend on general revenue. If the US Treasury ever really defaults, I doubt Social Security will be immune. It can’t be set aside and ignored.

    We live beyond our means. Larry would cut defense and perhaps even military retiree benefits, Larry would means test Medicare. (Actually, Larry would raise taxes. too.) I’d go after the remaining Great Society welfare establishment and not raise taxes. But we have to stop living beyond our means.

    I wish I disagreed with Jim and I could believe that the economy could reignite another round for 4-5 percent annual growth. But the heavy hand of regulation and taxation will continue into the Hillary Clinton administration (Ted Cruz has killed any Tea Party backed candidate’s chances for 2016, and if Christie runs the True Believers of the Right Wing will go into a frenzy of circular firing squads.) I have to believe that Hillary is the real deal, unlike her Blue Dog husband.

    So yeah, Jimbo, we’re done for.

    • Uh, oh, I was counting on you to talk me off the ledge!

      • As I walked out of the GOP convention in Richmond earlier this year my parting thought was “Live by the Tea Party, die by the Tea Party.” Man, I didn’t know the half of it at that point….

    • to further elaborate:

      the trust fund (like all 100+ other trust funds including the gas tax) is basically special issue treasury notes – that are redeemed when needed and the cash for them is raised by selling T-notes to the public.

      in a default, SS will NOT be immune because we cannot sell T-notes to to repay the special issue notes.

      but what will happen is that FICA will continue to be collected – and paid out and the shortfall – right now is very small.. pennies on the dollar.

      re: living beyond our means – I agree – but we cannot balance with cuts only to entitlements and our budget problems are more than just boomer demographics.

      I’d not cut military retirement but I would cut National Security spending by prioritizing what we can afford .. like we would with entitlements.

      the problem is we demonize the great society but’s it’s not the great society alone that is killing us on the budget… but we pretend otherwise.

      I just do not buy the “heavy regulation” mantra at all. it’s another excuse.

      no matter what – we have to address our spending – that’s the bottom line.

      there are LOTS of other countries in this world with just as many regulations … look at this one, for instance:

      ” Wal-Mart ends Indian joint venture with Bharti Enterprises”

      regulations are present around the world – and the least regulated countries are 3rd world that do not protect property rights…

      using that as an excuse for not living within our means is … well.. it’s an excuse.

      Breckinridge – the problem with the right is that they really have no practical ideas – they so danged ideological that people are scared of them and for good reason!

      we can balance the budget without making regulations excuses and we can balance the budget without letting wacko birds run amok…

      SS is a gnat on a dogs butt compared to the other expenditures and yet it’s always in the crosshairs – why?

      Medicare consumes about 300 billion of our budget.. yet we act like it will kill us if we don’t cut it and I’m actually in favor of charging more for premiums. HOw in the doodah can we give seniors guaranteed insurance that does not turn down anyone – for 100.00 a month? It’s idiotic.

      but you can fix that – and you’re still not going to fix the budget because we simply spend way more for National Defense than (choose 1):

      1. – than we can afford
      2. than we’re willing to pay for

      which one?

      • You said yourself that SS is an insurance policy. The money received is spent by the government and SS gets an IOU. The IOUs or the money behind them is not an individual’s. They are a 3 trillion dollar liability that would be subject to being wiped out under any default recourse scenario because they are unsecured debt between government agencies instead of separate businesses or individuals. How can a government sue themselves for restitution of transferred assets between agencies in the event that the government is bankrupt?

        • SS is pay-as-you-go insurance like a LOT of private insurance is and you know it is insurance, because it pays you no matter how long you live but if you die your benefits stop. It also covers you if you become disabled and will continue benefits to your family if you die. That’s not only insurance, it’s comprehensive AND it’s indexed to inflation. Try to get that inflation index in a 401K and see how much extra it costs!

          It’s pay as you go because just like you pay your auto insurance premium that money goes to pay claims and they keep it balanced by adjusting premiums. The big difference is the auto insurance folks can adjust premiums as they go to balance revenues with payouts while SS cannot change FICA rates without an act of Congress.

          If FICA could adjust rates on the fly like the Post Office does with stamps – there would be no big issues… it would just add a tenth of a percent every 3 or years and keep “premiums” level with pay outs.

          the trust fund is like a checking account where you would keep your excess funds but most of the collected FICA taxes – week-by-week is spent immediately on benefits in that same week.

          so you collect FICA taxes each week and each week that money is then sent out as benefits. In years past FICA actually generated more money than benefits and that excess accumulated in the “trust fund” with the intent of using it later as a bridge to when FICA rates had to be adjusted per boomer demographics.

          The gas tax, military pensions, civil service pensions, Medicare, etc all work similarly in terms that each of them have their own trust fund where collected funds are put and then “checks” written to pay bills.

          With SS, Money is collected and then sent out as benefits. that’s why it is called pay-as-you-go. The money they collect this week goes out as benefits next week.

          It’s totally true that that with the trust funds, money was spent on other govt bills and SS now only has special issue treasury notes in lieu of the money – that’s also true of the gas tax, the military pensions, etc. All of those funds hold “notes” that would be “redeemed” at the time they need the money to pay bills.

          In a default scenario – it’s also true that these special issue notes could not be redeemed because the govt would be prevented from selling more T-notes to the public to get the money.

          How that would affect these funds – would vary – according to how much money is being collected verses if those revenues covered expenses or not.

          ALL receipts the Feds collect go immediately to the treasury and get spent. The Treasury issues notes to the collecting agency that they can redeem when they want the money – except in a default – when they will redeem the money immediately. Think of it as you getting money out of your checking account the minute your pay check is deposited before any direct withdrawals can get it.

          it’s also true that virtually all of the current social security benefits are covered by the current FICA tax inflows. What’s in the Trust Fund cannot be redeemed during a default but for the most part they don’t need that money anyhow…as long as FICA taxes can cover the benefits. FICA is actually barely covering payouts right now but shortfalls would be pennies on the dollar not huge cuts.

          Overall if nothing is done about FICA/SS, it will GRADUALLY reduce benefits over the next 25-50 years.. there is no “cliff” where people all of a sudden have 1/2 of 3/4 of their benefits cut. The worst case scenario is 25% but that will take decades to reach.

          The right has spent the last decade basically lying and propagandizing how SS works and unfortunately, it has worked. People are either confused or just plain misinformed. The right has been opposed to the CONCEPT of SS from the very first day it started.

          Keep in mind also – that every one of our DOD military and civilians ALSO get social security so their fate is tied up in this also.

          I have several links that objectively explain the truth. Here’s one:

          if you want more I have others that I can feed you one post at a time since BR “sequesters” posts with more than one link.

          In short, SS is promoted by the right to be a BFD … a fiscal meltdown problem and nothing could be further from the truth. It’s a gnat on a dogs butt compared to our deficit and debt of which SS has virtually nothing to do with other than they have loaned the govt their excess FICA revenues.

    • ” But the heavy hand of regulation and taxation will continue into the Hillary Clinton administration (Ted Cruz has killed any Tea Party backed candidate’s chances for 2016, and if Christie runs the True Believers of the Right Wing will go into a frenzy of circular firing squads.) I have to believe that Hillary is the real deal, unlike her Blue Dog husband.”

      jesus. I have to ask: Do you want to win or do you want to blame Hillary?

      what’s with you guys?

      you don’t want to have to appeal to anyone other than hard right types?

      sorry.. there’s a reason why it’s called “governance” and why the country was set up that way to start with.

      I’m reminded of the Rolling Stones: ” You can’t always get what you want”.

      you boys need to deal with the real world! If you really think the great society is wrong you have two choices: 1. “educate” the voters or 2. just assume permanent minority status.

      I have never heard so much whining and excuse making and blame game in my life coming from the right these days.

  3. Boomergeddon was wrong on the deficit and it is probably wrong in inflation. I sense a lot of excuses and revisionism here. Bottom line: one cannot write a definite book in 2010 in such turbulent times and expect it to hold up for the incredible length of 30 years, let alone three.

    Jim needs to rein in and de-dogmatize his perspective. Otherwise, his efforts are pamphlets.He can do it.

  4. Someone said the other day that the biggest problem with the right is that they cannot believe they lost the election and are not in charge… so it’s a non-stop sour-grapes express …. and even things they used to support – they’ll NEVER support if it “helps” this POTUS.

    that’s a pretty awful agenda.

    they claim this POTUS is responsible for the deficit/debt when the fact is that the POTUS cannot spend a penny that Congress does not authorize but that lie continues to come from the right over and over, i.e. “Obama now has more debt than all POTUS before him”, etc.

    they claim they want a budget but refuse to write one, pass it in the House, send it to the Senate then go to conference to hammer it out. It’s gotta be what they want or else they won’t play.

    they want entitlements cut but they’re too feckless to name the cuts themselves, they insist the POTUS needs to name the cuts.

    they refuse to cut National/Defense and DOD and insist that the budget can be balanced by only cutting entitlements – but again – the only budget we ever saw along those lines was from Ryan and exactly 7 – that’s right seven GOP voted for it.

    They hate ObamaCare but it’s fundamentally modelled after a Heritage proposal during Clintons term and Romney’s Massachusetts approach and they have for 2 decades refused to put up an alternative other than rambling on about the “free market”.

    They advocate “revenue neutral” tax cuts but they want to do the cuts first and then argue about what loopholes (like we believe that they’d actually do it given their current track record).

    They have a war against Hispanics and Blacks, gays, lesbians, teachers, unions, etc while having not a problem with overt racists in their own ranks.

    I seriously wonder what their “message” is going to be at the next Presidential election that is going to appeal to people beyond their hard right base.

    I seriously wonder at this point if the GOP could support ANY candidate that tried to appeal to voters – beyond their hard right base.

    You’ve got these fools – folks apparently living in a dream world like Cruz and Rand and Rubio who think they are actually presidential contenders that they could “talk” their way to getting 50% of American voters.

    This is not about Hillary … at all.. this is about a political party that has become mean and ugly, feckless and dsyfunctional and would dismantle and take apart govt if they got the chance rather than try to govern the country – with it’s diverse demographics that are rapidly leaving the old white guy segment in the rear view mirror.

    I can rattle off more than 100 GOP that I have supported and still support from Susan Collins to Jeb Bush to Richard Lugar to Olympia Snow but the folks in charge now are really not about governance or responsible budgeting any more.

    I actually think there is a chance that Hillary would not run and if she did not, the Dems have virtually no one to replace her at this point but I’d also bet the GOP would then run some hard right ideologue and probably lose anyhow to a “nobody” opponent. It’s gotten that bad.

    And if somehow the Dems got Chris Christie to run.. well.. that would be lots of fun for sure!!!!!

  5. The classic error in all economic prediction (including Boomergeddon) is the belief that the US economy will grow at a rate and in a manner that increases the demand for American labor beyond the supply of American labor – thusly raising wages in real terms. This has not happened for some time and will not suddenly start to happen again. A combination of disruptive automation and the stupidity of unbridled immigration have left the United States with too many people and too few jobs. This, in turn, has killed the wage inflation necessary for a middle class to survive, let alone thrive.

    In essence, Boomergeddon was far too narrow in its analysis of the US economy. It relies on a fundamental, if unwritten, assumption that demand for labor will exceed the supply of labor across large swaths of American workers. This is no longer true. We are now in a world where the US economy can grow without generating a sufficient number of jobs to keep America at “full employment” (using the economists’ definition). This is the big economic change that transcends deficits, stimulus, etc.

    The entire fabric of American economic theory and government needs to be rewritten.

  6. A query and a comment:

    Not that there’s no problems, but how can we make sense of deficit/debt figures without comparing them to the (still-growing) size of our economy?

    As for prospects of growth, consider the grim facts about the sad plight of America’s work force. See, “The Stubborn Skills Gap in America’s Work Force,” NYT Oct. 8.

    Then there’s our polarized politics, with no end in sight, with serious impacts on economic policy reform.

    Few reasons for optimism, more cause for reading Gibbon’s vol 5?

  7. I agree. In other threads, we talk with …anticipation… about the day when autonomous cars will be a reality.

    But we somehow miss the bigger is which is, if we can make cars that don’t need drivers, we can make a lot of things that don’t need workers or need far, far fewer.

    More and more factories, instead of having acres and acres of parking for workers – have much smaller parking lots for 20, 30, 100 workers but the produce as much or more than the prior factories with thousands of workers.

    One thing that people may not well understand is that social security is based on how much a worker pays -in – in FICA. If you don’t pay much in – in FICA – you get very minimal payout.. and anyone who does tax preparation will tell you that there are a lot of folks who receive far less than 12K a year in SS benefits..

    so where Medicare is going to kill us is not just the boomer demographics but those who cannot even find work beyond minimum wage their entire life – and don’t have enough in retirement to even pay for Medicare (which is not free and does cost at least 100.00 a month unless you are destitute).

    I see that, as DJ does, a much more serious threat to us than the boomer demographics.

    worse – I see no vision, no recognition of this from the GOP. Their entire agenda now days seems to be – that they will do nothing until the budget or CR expires or the debt needs to be extended and then – only then – will they demand that what they want be accepted or they will shut down govt.

    We need to fix this problem once and for all and force the GOP to negotiate in good faith the other 98% of the time their fat butts are sashaying to and fro.

    • Automated forklifts are already in widespread use. Nationally, the average salary for a forklift operator is $33,000 per year. In Northern Virginia, the average is $40,000 per year. That’s 2 – 3 times the amount that a person with a full time minimum wage job makes. A married couple where both spouses have jobs as forklift operators would out-earn the median family income by $16,000 per year. Of course, once the autonomous forklifts are put in use they have a family income of $0.

  8. of course someone has to build those critters and someone has to know how to fix them when they crap out…

    the other thing… the are not only autonomous forklifts – they are on a network and they talk to each other and coordinate their movements.

    and of course .. _someone_ has to write the software, design the network, etc…

    one think you learn working for DOD weapons is that configuration management is a big deal with any large scale system with moving parts.

    Much like your car except more and bigger.

    think about each part for your car. that part has a number and that part is not just a 2012 part. It may be a part that works for 2008-2013 for several different model cars. or it may be one part for one year for one car.

    How do you manage that?

    how would you manage robots in a warehouse – older ones purchased years ago and newer ones with updated parts and software, etc?

    and take a robot manufacturer – how many spare parts should it carry in inventory for a particular model robot?

    all of these things are jobs.. but they require a much higher level of education than a typical HS grad.

    The Configuration Management system – for instance might be Oracle or it might be Firebird or Google Cloud SQL…. the database likely will have to support images that show blow-up parts schema… etc… it may well have to handle both internet and cellular communications…etc…

    The system may have to operate on a worldwide basis and handled thousands of queries and updates per minute.. etc..

    these are the jobs that are replacing the forklift operator jobs.

    think about our schools – and what their curricula is with respect to producing graduates that must know and understand networked database technology…

    • Yes, a lot of lower middle class jobs as fork lift operators will be replaced by a few upper middle class jobs as automated fork lift repairmen and programmers.

      This is happening throughout the American economy. When was the last time you spoke to a human telephone operator?

      Fixing our broken education system is a 25 year problem – assuming our incompetent political class has the gumption to even take on the problem.

  9. re: “fixing our broken education system”.

    I do not think we are “broken” as much as we are not running on all cylinders for the average parents/kids.

    We ARE – very much broken on the at-risk/disadvantaged kids especially in the urban areas – but let’s be honest here – in much of rural RoVa also.

    There are ample data to show that we have not “broke” as much as we have fallen behind.

    we had an excellent education system for the 20th century but we had no strategic plan to advance education to 21st century standards whereas our competitors – the OECD countries did and have left us in the dust.

    Now, America has lost it’s mojo. We used to roll up our sleeves and tackle challenges like this but now it’s all about blame…. bad teachers.. bad schools… bad NCLB, bad standardized testing… etc…

    and in typical fashion these days – we have a wonderful sound-bite solution – just give parents who themselves have a 5th grade education – thousands of tax dollars and go out and find a nice non-public school to spend that money on – and voila – all will be well…!!!!

    Oh.. and Head-Start and Pre-K education in the public schools? just shoot that liberal doo-gooder stuff in the butt… it’s worthless…

    we’ve gotten plenty of warnings from NAEP to PISA on the failure of our core academic programs – for our regular kids to no avail. The parents are blaming the tests that show these shortfalls. They want to kill the tests.

    More and more, our tech companies are hiring kids with foreign surnames and more and more our kids – with college educations are working at service industry jobs.

    Our schools have two big problems:

    1. – weak core academic curricula for typical average kids that denies them
    the really good global jobs.

    2. – failing programs to deal with at-risk kids – JUST to get them to a workforce level

    two problems – and in both cases – most are in denial…

  10. “we had an excellent education system for the 20th century but we had no strategic plan to advance education to 21st century standards whereas our competitors – the OECD countries did and have left us in the dust.”

    Sounds like the definition of “broken” to me.

  11. well I guess it’s a matter of perspective. It was not broken in the 20th century and it has not change since then.

    so did it go from not-broke to “broke” without anything internally changed but just external things?

    the irony is for the regular kids (not at risk), the problem is one of our own making in that we want all kind of amenity courses – a mile wide and an inch deep and we absolutely fear and loathe the stuff that the OECD countries have embraced.

    we have a pathologically fear of robust academic standards. we want the standards to go away. we don’t want our kids taking “tough” courses because it will mess up their resume for that brand name college they want to attend.

    what’s “broke” is not our education system – it basically reflects us. What’s “broke” is us.. we simply are no longer up to the challenge of dealing with the world, 21st century style. It’s us – not the schools. The schools merely reflect what we want and don’t want.

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