Look at the Gross

I’ve always been told “never to look at the gross” on my paychecks. By the time that taxes from local, state, and federal government come out I’ll be left with a (more) paltry net sum. But it turns out that the same complex accounting that makes me look only at the net should increase my attention to the government’s gross. According to recent presentations to the President’s Fiscal Responsibility Commission, the US now carries a debt burden in excess of 80 percent of GDP. Yet many experts continue to quote the more reasonable-sounding “debt held by the public”, which produces a debt to GDP ratio closer to 60 percent.

The net value on a paycheck on a government budget or debt level measures only the value of transactions today. For an individual worker this makes since, I expect to receive payments tomorrow but only if I keep working. Yet the government obligates itself to make payments to long-standing programs like Social Security and Medicare well into the future. These future obligations generate massive differences between gross and net debt levels.

As the figure below shows, the United States resembles other advanced economies in hidden gross debt.

Emerging economies have a lesser wedge between net and gross debt primarily because they have weaker social safety nets. Of course, the United States created it's safety nets in punctuated phases. Take for instance, the first Social Security beneficiaries who got very large benefits relative to their contributions. If an emerging market economy were to start such a program immediately it would of course radically alter the gross/net wedge

What separates the United States from both advanced and emerging markets is the sheer size of all debt. Within the IMF data, the United States ranks only behind Greece, Italy, Japan, and Belgium in its level of overall debt. In fact in 2010, IMF estimates show the US crossing the 90 percent threshold cited by Reinhart and Rogoff as a trigger for debt crises.

Swapping Risk

I promised more on Greece and that it wouldn't involve Greek drama. I'm following through on that below.

European leaders, especially in Germany, resisted initial clamor that they would bailout Greece before coordinated a 750 billion euro bailout plan. Now several Republican Congressmen are fighting against using IMF money funded by the United States to aid Greece.

The move puts them at odd with actions already being taken by the Federal Reserve. Just last week the Fed restarted swap lines with major central banks that allow them to access dollars. Of course the size of these swaps is miniscule. Total outstanding swaps were valued at less than $10 billion. Yet recognizing the chance of global contagion the move opens swap options to banks outside Europe, such as the Bank of Canada and Bank of Japan.

From swap size alone, Greece looks much more like Bear Stearns than Lehman or AIG, when swap lines grew to over $500 billion.

But looking simply at the size of the swaps is misguided. Before responding last week to the Greek crisis, swaps had been out of use since February. The haste by American officials to respond signaled a willingness to forestall a crisis, or more accurately to stand ready should the crisis spread. Lawmakers have both derided the Fed for acting with little authority and benefited by not having to approve any funding the Fed did provide. Moves to reduce American involvement in IMF plans are more likely to drive American involvement to places like the Fed, and outside of Congressional oversight, rather than reducing the overall burden.

Mourning Becomes Debt

So far this blog has been silent on the Greek debt. This first foray into the crisis let's me put the part of me that remains a disaffected English major to use. More rigorous analysis will appear in forthcoming posts.

In the heart of the Great Depression, there was a brief resurgence in American interest in Greek tragedy. Unhappy to simply play out classical drama Americans instead made the classics our own, such as the epic reimagining of the Oresteia set in the Civil War. The Americanized version is unsurprisingly bloodier, rougher, and much, much longer (running at over four hours, even after significant cuts). As Greece now plays out a debt tragedy, America is on course to repeat it’s Depression era mimicry by laying the groundwork (as I've written about previously) for its own debt crisis: one, like it’s theatrics, sure to prove more grueling and protracted than Greece’s.

Keeping Granny Working and Thinking

“Keeping Granny on the Job” is just mean and unfair.

Or so I was told at least a half dozen times while planning a conference of the same name late last year. As the recession displayed evidence that some seniors were in fact delaying retirement, scholars at the event explored the ways that public policy encourages workers to retire as soon as they can, with unfortunate financial consequences.

Yet, with all the attention on granny’s finances, nothing was presented to other aspects of granny’s wellbeing. In a new research paper that appeared at almost same time as the conference, and that I’ve just discovered, researchers from the Rand Corporation, indicate that seniors who work have much better cognitive skills. They examine retirement trends internationally and find that people who work longer score better on cognitive tests.

Maybe our conference was wrong, there’s no need to keep seniors on the job. They should want to stay.

Enterprise: CRA awarded WaMu and Other Failures

I've got a post over at the Enterprise blog today about awards given by compliance agents for the Community Reinvestment Act. In several instances the awards went to firms who have since failed. Most notably 2003 winner Washington Mutual produced the largest bank failure in American history.

This morinng I attended a Congressional subcommittee hearing where the many benefits of CRA were extolled. CRA, according Chairman Gutierrez (D-IL), several expert witnesses, and most members of the majority, had no role in the financial crisis. I don't argue about the role that CRA played other than to say that CRA regulators were just as blind as many other private and government actors to the coming financial crisis during the boom years. Just as private players congratulated their "quants" for banishing risk and creating complex deviates with little thought to the long-term consequences, CRA officials gave the improper of government endorsement to "innovate" programs only to have to watch the managing firms falter.

Enterprise: Bernanke's Room is Ready

I've got a post this afternoon over at The Enterprise blog on the Fed's release of financial data from all three Maiden Lane facilities.

I've already been told it's outrageous that the regional Fed banks spend all this taxpayer money on conferences. The cost maybe outrageous but it's not technically taxpayer money. The regional Fed banks are not actually government agencies. The Federal Reserve Board is but the banks are funded by commercial banks in their districts. We could call the fees that commerical banks pay an indirect tax on consumers but they are not directly your money. Plus the commerical banks get to sit on the Regional Feds' boards in exchange for their fees.

A bit of this could change under Charmain Dodd's bill. More on that later.

CBO Bullish on TARP and Autos

I never thought that I’d be calling the Congressional Budget Office (CBO) a hidden bullpen. In large part because the CBO doesn’t typically analyze investments and it definitely doesn’t give advice to investors on where their money should be. The TARP and other components of the 2008 bailout have changed the workings of CBO a bit. Now that the US government owns shares (or the right to buy shares through warrants) in many companies, CBO’s reports now include a bit of corporate forecasting.

In its latest report, CBO estimates that TARP will cost taxpayers less than predicted by the White House’s Office of Management and Budget.

CBO estimates the program will cost $109 billion. That figure is $18 billion less than the $127 billion predicted by OMB. CBO gets the lower cost in two ways, first by estimating that the government will recover an additional $14 billion form its loans to AIG. Given that only a small portion of AIG’s business (and not a part of its namesake insurance business) was the hardest hit by the crisis it’s encouraging that the firm may be better able than expected to repay.

CBO’s second “savings” is more normatively ambiguous. CBO predicts that the Home Affordable Modification Program, which gives direct grants to homeowners will cost less than OMB predicts. CBO admits that these grants were never meant to be repaid. So the only way that CBO obtains a lower cost is by assuming that Treasury doesn’t spend all the money allocated to the program. If the government spent less because no one was losing their home, we’d cheer but numerous reports have shown that the program can be too slow to help homeowners, or just deny them help outright. So the Treasury spends less outright but it’s not clear the economy gets in better shape.

Lastly, yesterday’s report takes a buoyant view of the auto company loans. I’ve been crucial of these loans several times in the past. In an early auto loans report, CBO predicted a subsidy rate (the amount of money that will not be paid back) at 64 cents on the dollar. That figure has declined over time, even though little money has yet to be paid back. In the most recent report CBO expects the taxpayers will only lose 41 cents on the dollar. GM’s CFO Chris Liddell must share CBO’s improved outlook, saying that GM could profit as early as this year. I’m not surprised there but I am that CBO beat him to showing optimism. Although I must admit, I'm glad for it.