The New Economy
Crowd-sourced rating service Yelp is wowing the investment community on its first day as a publicly traded company.
Before Friday’s initial public offering (IPO), analysts estimated it would fetch between $12 to $14 a share. However, trading in Yelp stock opened at $22 and as of midafternoon Friday, it was trading at $24.72, some 60 percent above its opening price and virtually double the consensus estimates.
Why is Yelp doing this well? Its restaurant, shopping, and night-life reviews are popular, growing, and influential. It comes in ahead of the most anticipated IPO in years, Facebook’s, which some believe will wind up being the biggest in history. There is still money to be made in high-tech IPOs.
But the more important question is: Can Yelp sustain its unexpected surge?
Tech IPOs in the past six months have proved disappointing, occasionally awful. Of the 33 high-tech IPOs launched in the past 12 months, only 14 are now above the closing price of their first day of trading, according to IPO Scoop.com.
For example: Groupon, the group coupon website, closed above $26 a share on its first day but now sits below its original asking price of $20.
Yelp gets its revenue from advertising, mostly from the local businesses its users review. Last year saw about $83 million from ads, up almost 75 percent from 2010. But it has yet to make a profit and that fact is hardly a confidence builder. Last month, blogger Simit Patel on investing website Seeking Alpha headlined his take on the company: “Yelp: Another Overvalued IPO from Bubble 2.0.”
Will Yelp keep its lead and build on it? Stranger things have happened, of course. But if the last year of technology IPOs is any indication, the odds are not in its favor.
Millionaires should pay more in taxes. As a group, they've weathered the stormy economy better than most of us. And given the need to find ways to reduce the federal deficit, sooner rather than later, taxing millionaires sure seems a lot better than most other options – certainly to those who are not millionaires, but even to some millionaires, too.
Billionaire Warren Buffett alerted the public that his average income tax rate is lower than his secretary's. Multimillionaire presidential candidate Mitt Romney revealed that his average tax rate is only 15 percent – the same marginal tax rate that a typical household earning $40,000 to $50,000 per year would pay (although their average tax would still be smaller than the GOP candidate's). [Editor's note: This sentence was changed to clarify the distinction between the marginal and the average tax rate for households.]
These well-publicized examples have led many policy leaders, including President Obama, to call for changes to the federal tax system to honor the so-called Buffett rule, which in its most basic form says that millionaires and billionaires should face higher effective tax rates than middle-income households do.
One way to do this is through a "millionaire surtax."
This may be politically appealing because it explicitly targets the richest households, but it's economically unsophisticated. This amounts to raising tax rates above the $1 million gross income threshold without doing anything to reform the "Swiss cheese" of tax breaks, which allowed Mr. Buffett's and Mr. Romney's tax rates to fall so low in the first place.
Instead, the surtax would slap on through brute force an extra penalty tax rate on millionaires.
One bill from Sen. Sheldon Whitehouse (D) of Rhode Island, for example, would effectively double that 15 percent rate by adding another alternative minimum tax. (The one we already have, ironically, burdens the upper middle class more than millionaires.)
The idea appeals to politicians because it's simple: If a millionaire's ordinary income tax liability amounts to less than 30 percent of his income, the surtax would make up the difference.
It also avoids getting bogged down in drawn-out tax-reform battles in Congress.
This lack of reform to the existing tax system, however, is one of two big weaknesses in the surtax strategy.
Without eliminating some tax breaks and broadening the tax base, Congress will have to make effective tax rates much higher to gain significant revenue. This would worsen the economic distortions created when some activities are less taxed than others.
The other problem with an alternative millionaire's tax is that it probably won't raise much revenue, says the Tax Policy Center. That's because the vast majority of millionaires already pay an average tax rate above 30 percent.
The economically smarter way to raise millionaires' taxes would be to raise taxes more broadly but more evenly – such as by taxing capital gains and dividends at the same rate as labor income, or limiting itemized deductions so that the rich do not receive higher subsidies than middle-income households.
We could start by letting all of the Bush tax cuts expire, as already scheduled under current law. That would raise far more additional tax dollars from millionaires and billionaires than all the add-on proposals.
Raising taxes is hard enough, politically. Limiting tax increases to such a tiny fraction of the population under our much-too-narrow current definition of taxable income makes the effort almost fruitless.
– Diane Lim Rogers is chief economist of The Concord Coalition, a nonpartisan group advocating fiscal responsibility.
[Editor's note: This story was corrected and changed to make clear that the projected $1 trillion in increased revenues would come from scheduled new taxes as well as the end of tax cuts.]
It's a shame that can-kicking isn't an Olympic sport. Imagine America's elected leaders facing off against their European counterparts in a contest to see who can avoid difficult decisions the longest.
My money would be on the Americans. Our team has taken the game to a new level in recent years and is ready to shine on this year's Olympic stage. At home, however, it's not clear whether that can-kicking prowess will end in gold or tears.
Despite its bad reputation, can-kicking is sometimes the best we can do. Putting off long-term decisions makes sense, for example, when the world is riven with uncertainty. If you aren't careful, however, you will find your path littered with unresolved issues.
That's where we are on fiscal issues today. Start with our tattered tax code, which now contains a six-pack of temporary tax cuts. The largest are the Bush-era cuts originally enacted in 2001 and 2003 that were scheduled to expire in 2010. Rather than decide their fate, President Obama and Congress extended them another two years.
That legislation also included additional tax cuts championed by Mr. Obama and an estate tax compromise, all of which expire – along with the original tax cuts – at the end of 2012.
Then there's the dreaded alternative minimum tax. It expired Dec. 31, but Congress for years has passed an annual "patch" preventing the AMT from hitting more middle-class families. A hodgepodge of temporary tax breaks known, tellingly, as the "extenders," also expired at the end of last year, but many lawmakers and beneficiaries want to bring them back. Various stimulus measures, including the payroll tax holiday and corporate investment incentives, are set to lapse soon, too.
The expiration of those six packages of tax cuts, plus the arrival of some new taxes created in the health reform legislation, would boost tax revenues sharply in the next few years. The Congressional Budget Office projects that tax revenues will increase from $2.3 trillion in fiscal 2011 to $3.3 trillion in 2014 if all these scheduled changes occur. That trillion-dollar increase, a 44 percent gain, would far outstrip the expected 11 percent growth of the economy.
It's hard to imagine that lawmakers will actually let that happen. As the CBO itself notes, such a sharp increase would weaken the economy at a time when it's struggling to recover from the Great Recession.
On the spending side of the ledger, the most egregious example of can-kicking is the formula by which Medicare sets payments for doctors. That formula has called for dramatic cuts for years. But every time those cuts come near, Congress overrides them temporarily, and often "pays for" that by scheduling even bigger cuts in the future. That's why doctors face a 27 percent cut in payment rates at the end of March and more in years ahead.
And then there are across-the-board spending cuts, spread over nine years, that are scheduled to begin next January. Congress didn't really intend those cuts to happen; instead, they were meant to pressure last year's "super committee" to find real budget savings. That didn't occur, and now Washington is rife with speculation that policymakers will flinch from letting the cuts go through, at least until the economy strengthens.
Lawmakers will thus face a tempting lineup of cans later this year. But preventing any of the scheduled tax increases and spending cuts will require new legislative action at a time when the two parties find it hard to agree on almost anything.
Years of can-kicking have set the stage for a dramatic fiscal showdown after the elections or early in the new year. Lawmakers could take this opportunity to shape a tax code and federal spending that make sense for 21st-century America. Or they can settle for more clank-clank-clank.
– Donald Marron is director of the Urban-Brookings Tax Policy Center.
While the gains so far may be modest, evidence suggests the US recovery is gathering strength and could finally be on track to regaining its old form. Unemployment is at a three-year low and consumer spending is slowly starting to rise. But there are concerns that two events outside the United States could put an end to the recovery before it can get truly established.
Of the two external threats, the growing risk of recession in the eurozone is garnering the most attention. However, the possibility of a slowdown in China is equally capable of sending the US economy into another tailspin.
Earlier this week, and in the midst of some of the most violent demonstrations of the past two years, the Greek parliament passed a series of new austerity measures under pressure from the “troika” of lenders – comprising the European Central Bank, the European Union, and the International Monetary Fund, So far, Greece’s efforts to deal with a widening deficit gap have been underwhelming. Spending continues, for the most part, unabated.
The government also promised to raise funds by selling roughly €50 billion ($65.8 billion) worth of government assets. The reality, however, is that in the past two years, the government has raised only €1.7 billion through asset sales. It now appears efforts to sell additional properties have been abandoned.
Understandably, certain eurozone members – the ones footing the lion’s share of the rescue package – are rapidly losing patience. Several eurozone officials over the past few days have demanded that Greece demonstrate fiscal responsibility before it receives another 130 billion in emergency funding. Tough talk aside, however, it is difficult to imagine that European officials will force Greece into a disorderly default.
Unfortunately, even if eurozone officials contain the Greek crisis, a slowing Chinese economy could still put the US recovery in jeopardy.
For the first time in two years, monthly exports fell in China this past January. Certainly, the situation in Europe played a part in this as weaker sales to Europe were largely responsible for the 0.5 percent decline for the month. Initially, a decrease of just half a percent may appear insignificant, but a closer look at the trade result also includes a sharp 15.3 percent decline in imports in January.
This shows that consumer spending in China is on the decline and a continuation of the trend would be very bad news for the global economy indeed.
Thirty years ago, China kick-started its economic revolution by positioning itself as a low-cost manufacturing center. As more and more companies took advantage of the labor savings, many new jobs were created in China. This helped convince millions of farm workers to leave the countryside to take manufacturing jobs in the cities, and in 2011, China’s urban population outnumbered its rural population for the first time in history.
This growing number of new wage earners, together with the potential for many more yet to leave the farms to relocate in the city, means that China retains a huge, untapped pool of consumers. The potential of the Chinese consumer is considered by many to be the driving force for the global economy and the best defense against a return to recession.
However, if consumers in China fail to live up to this billing, China’s anticipated role as the “engine” of the world economy may fall short. This is why China’s export and import totals are a closely-watched barometer for the health of the global economy. And right now, things appear a bit weak.
If China is entering a slower period, this, together with the situation in Europe, could stop the US recovery in its tracks. Worse, it could be the prelude to a wider calamity that ultimately brings down all the major economies.
A board member of a Fortune 100 company told me recently that he wouldn't "spend a cent on Facebook." I asked if he meant he wouldn't buy something via social media. "No," he said. "I wouldn't support my company making investments to use such websites to advance our business."
I didn't break it to him that Facebook is free of charge. I did confirm that I did not own any of his company's stock. Corporate boards are imperiling profits by ignoring social media, and ignoring social trends.
Maximizing shareholder value has been the mantra of corporate boards for at least the last two decades. But the ways to boost profit have changed dramatically in that time, and boards are struggling to keep up.
In search of growth, businesses have gone global, leading to greater involvement with local communities and thorny questions of fairness and responsibility. Evidence of a link between climate change and human activity continues to mount. Citizens worldwide are demanding change from regimes in both the public and private sectors. Today, corporate boards should represent the best interests of all these stakeholders, not just shareholders. There's a moral reason to do this: Global society loses by not having its environmental challenges and social equity problems addressed by one of its most dynamic instruments for change. But there's also a financial imperative.
Embracing sustainability is linked to higher profits. Instead of viewing environmental and social challenges as costs, companies need to view them as markets with unmet needs. Smart boards see that now is the time to modernize in order to lead their companies to new heights of prosperity.
How can boards modernize their thinking? Here are three recommendations:
1. Prepare to create value for stakeholders. The most important step toward change is first accepting the premise that change is needed. Some boards point out that they have a public-issues or public-policy subcommittee that reports to the board. That's great if the subcommittee regularly assesses the company's environmental, social equity, and social media stances, and acts on the insights garnered. My experience, coupled with experts' observations, suggests subcommittees that do this are the exception rather than the rule.
2. Change the board's alchemy. One way to shake up a myopic board is to change its composition. Several small and mid-size companies are adding seasoned executives who are savvy about sustainability and/or social media. Boards should resist the temptation to "balance" these new members by adding more risk-averse directors. That will frustrate board advocates for change. It also will appear superficial to stakeholders.
3. Let stakeholders audit the board. A growing number of prominent companies are seeking out feedback from nongovernmental organizations to evaluate their environmental and social equity performance. This feedback is then discussed during recurring stakeholder meetings with senior executives. With certain provisos in place, boards could engage the groups to audit them, which also would go a long way toward re-earning society's trust.
It's time for corporate boards to adjust in order to guide and oversee their companies' efforts to deliver value to stakeholders worldwide. Global society will be better off – and probably wealthier – as a result.
– Eric Lowitt is a research fellow at the RoseMont Institute for Transformational Leadership and author of "The Future of Value."
Many pointed out the potential conflict of interest: Ms. Orman is offering a self-branded financial product while also positioning herself as a consumer advocate on national television. (Orman has vowed not to discuss prepaid cards on air and says that financial gain was not behind her decision to offer the card.) Others have noted that while the Approved Card has some good features, it’s being marketed in a misleading fashion by creating the false expectation that it will affect consumers’ credit scores.
Here’s Orman’s pitch: “Currently, if you spend money on a debit card or just in cash, it does not report to a credit bureau. Therefore, it does not give you a FICO score,” she told Arianna Huffington in an interview shortly following her card’s launch. “I wanted to change that. I wanted to create it where the people who paid in debit cards and in cash were rewarded and people who were paying the minimum payment due on credit cards really had algorithms that applied to them.”
She also noted that credit card users who only make minimum monthly payments and rack up credit card debt should not be unduly penalized, but not be overly rewarded either. This, Orman said, would “keep them out of trouble.”
Orman’s desire to change the system stems from her belief that it is fundamentally flawed, in the sense that it unfairly prevents those who prefer not to use a credit card from building the credit necessary to garner lower insurance premiums, take out a loan, get a job, etc.
So, is Orman right? Is our credit reporting system in need of an overhaul? Will a company get a better gauge of customers’ creditworthiness if their cash and debit card payments are included on credit reports?
Hardly. How you spend your own money doesn't say much about your creditworthiness, which gauges how you handle other people's money (from a credit card company or bank, for example).. Not only is there nothing to gauge if you don’t have any credit at your disposal, but being unwilling to even have credit suggests an implicit admission that you cannot handle the responsibility – quite worrisome from a lender’s perspective.
This is especially true since you don’t actually need to make purchases with a credit card to build credit. One alternative that we all have at our disposal is simply having an open credit card that is in good standing. Even if it’s locked in a drawer, you’ll still see positive information flowing into your credit reports on a monthly basis simply because you are not abusing the credit at your disposal.
While there is clearly no fundamental credit scoring issue at hand, let’s assume for a moment that there is. How would Orman’s prepaid card address it?
“This is the first prepaid card in history, in history everybody, that will be sharing aggregate anonymous information with TransUnion, one of the three credit bureaus,” Orman told Ms. Huffington in the interview. “Now, I am hoping that Equifax and Experian join this experiment. It will take 18 to 24 months of TransUnion looking at this data to decide can it predict future behavior.”
That's a problem. Orman's card will not help anybody build their credit score for at least the next 18 months – and perhaps for much longer, unless TransUnion finds a reason to include debit payments in their credit-score calculations. Yet Orman markets this TransUnion reporting project as one of the nine primary reasons to use The Approved Card.
In her defense, Orman says near the bottom of her website's explanation of the TransUnion reporting project that "The Approved Card is not designed to improve your credit record, history, or rating. Use of The Approved Card will not and cannot improve or fix your credit score or rating."
Still, if the entire buzz around this debit card is centered on a supposed benefit that will not occur before 18 months (and may not occur at all), it seems a little disingenuous to collect fees and make money from customers without being upfront with them: They're guinea pigs for a dubious experiment. There is no prepaid card that will help you build or rebuild your credit history. Secured credit cards are best suited for this task.
– Odysseas Papadimitriou is chief executive officer of Card Hub, a leading online marketplace for comparing prepaid debit cards and credit cards.
What's the deal with oil prices?
Most commodity prices are collapsing. Copper is down 18 percent from its February 2011 peak. Corn prices are off by a quarter since last summer. Natural-gas prices are half the level of six months ago. Yet crude oil, down from its April peak of $114 per barrel, has risen by a third from its October low of $76 to again flirt with the $100 mark.
On Monday, they dropped below $97 on concerns about the lack of a deal on Greek debt.
Some of the recent increase may stem from tensions with Iran. But much of it seems to be a general view that crude oil is a different kind of commodity that is in perpetual danger of being in short supply, given its essential nature in modern economies; the chronic instability of oil-producing countries in the Middle East, Africa, and South America; and the peak-oil thesis, first predicted by M. King Hubbert in 1956, that global oil production inevitably will dwindle.
I don't buy it. In fact, I think that human ingenuity, constantly improving recovery technology, and higher prices (if needed) probably make any current estimate of recoverable oil far too low – and too static. Actually, global production capacity will rise from 92 million barrels a day in 2010 to 110 million in 2030, forecasts Daniel Yergin of IHS CERA, a forecasting firm in Cambridge, Mass.
That 20 percent jump would more than cover the global rise in demand. Hubbert's peak oil followers tend to discount the idea that reserves are usually underestimated. The US Geological Survey says that 86 percent of US proven reserves are additions to original estimates.
Add in some significant new finds, including Petrobras's huge field off Brazil's coast, a large discovery off French Guyana, and Statoil's potential 1.5 billion-barrel oil field in the North Sea. Then there's the oil boom in North Dakota, which now produces more oil than OPEC member Ecuador.
Besides crude oil, a vast array of alternative energy sources are likely to substitute for petroleum, something the Hubbert's peak devotees seem blind to. Natural gas from shale is now being produced in such tremendous quantities by hydraulic fracturing ("fracking") that natural-gas supplies have leaped and prices have collapsed.
A year after the Japan earthquake and meltdown, nuclear power may not be in favor, but I think this is temporary. The Three Mile Island facility mishap in 1979 and the Chernobyl disaster in 1986 caused temporary but not permanent restraints on nuclear power. Canadian oil sands can be turned into petroleum. While the process is expensive, production is nonetheless forecast to double to 3 million barrels a day by 2020. Coal is plentiful in the United States and its dirty image may be lessened by new emission-cutting technologies.
I'm skeptical about renewable energy, such as ethanol, wind, and solar, mainly because they require so much government subsidy, especially problematic in an era of trillion-dollar deficits.
On the consumption side, increased mileage standards and higher prices encourage conservation. And with an increasingly service-oriented global economy, the amount of oil needed to produce a unit of global economic output fell 41 percent between 1980 and 2010.
I'm forecasting a serious recession in Europe as the eurozone financial crisis spills into the economy, a hard landing in China due to earlier economic restraint and weakening exports, and a mild recession in the US as consumers cut spending to adjust to their falling real incomes. With a sagging global economy, crude oil prices will fall, meaning Hubbert's peak is a long, long way off.
– A. Gary Shilling heads an economic consulting firm in Springfield, N.J. His latest book is "The Age of Deleveraging."
We're all living longer these days. So does it make sense that we still retire at 65?
Raising the retirement age would involve some sacrifices, requiring people to work longer in order to receive their full benefits from government programs for retirees. But it would also help shore up America's shaky finances.
If the eligibility age for Medicare were gradually increased from 65 to 67, for example, annual Medicare spending would decline by 5 percent, according to a recent report by the nonpartisan Congressional Budget Office (CBO). If the eligibility age for full Social Security benefits gradually rose to 70 (from its current 65 to 67 depending on birth year), Social Security outlays would ultimately fall by 13 percent.
Not only would a higher retirement age reduce budget deficits, the CBO says, it would encourage people to work longer careers, increasing the economy's total labor supply and income.
Of course, budget math doesn't measure social well-being very well. Would raising the retirement age really benefit Americans' own bottom line?
I have my own take on the issue: This is the first year my dad will not be going to work every weekday, and he's turning 80 this year! He chose to work until now not because he needed the money, but because he wanted to keep his job. For my dad, 80 is the new 65.
As a chemistry professor, a profession that is much more mental than physical, he found it possible to remain productive at an older age. It's also likely that staying on the job keeps a person "young."
I, too, have a full-time job that is much more mental than physical, and I plan to work until well past today's normal retirement age. People like me and my dad might actually keep working, even if there were no economic benefits, because we love our jobs.
For others, however, working is physically strenuous, and so working beyond one's mid-60s is not so easy, not so enjoyable, and perhaps not even safe. For workers with those kinds of jobs, increasing the eligibility ages for Medicare and Social Security could more likely result in lower well-being by reducing incomes and physical health.
Is it fair to raise the retirement age and in effect cut benefits for this group even if it helps other Americans stay active and helps cut the deficit?
The CBO acknowledges this dilemma. Its report suggests that savings from a higher eligibility age for Medicare and Social Security could be used to strengthen the safety-net features of both programs, which serve a "social insurance" role. That could make each program more progressive at both ends of the income distribution. Those less fortunate would receive more benefits and those more fortunate would get fewer.
Just as with any federal budget issue, this is a hard choice. If lawmakers are going to cut spending and deficits, they will have to cut overall benefits on average. There's no way around that.
But cutting benefits for those who can afford to work longer, both financially and physically, can spare – and perhaps even strengthen – the benefits for those who cannot easily work longer.
And those fortunate enough to be the ones who can "afford it," like me and my dad, may hardly be upset about this common-sense policy change. That's because we are also the ones most likely to choose to work longer for reasons that have little to do with money.
– Diane Lim Rogers is chief economist of The Concord Coalition, a nonpartisan group advocating fiscal responsibility.
If the annual gathering of world leaders, corporate chieftains, and economists in secluded Davos in the Swiss Alps is a good barometer of the global economic outlook, then the reading this year is gloomy.
The European debt crisis dominates the conversation, of course. But the outlook everywhere seems to suggest a global slowdown. "The global recovery is threatened by intensifying stains in the euro area and fragilities elsewhere,” concluded a report from the International Monetary Fund, which cut its 2012 forecast of world growth from 4 percent to 3.25 percent.
Beneath the gloom lies a broader worry among many participants that capitalism is failing to provide the widespread economic benefits that it used to.
"Capitalism, in its current form, has no place in the world around us," Al Jazeera quoted economist Klaus Schwab as saying. Mr. Schwab is founder of the World Economic Forum. The WEF's theme this year – The Great Transformation: Shaping New Models – may be adding to the angst.
"I think we have three to four years in the West to improve the economic model that we have," said David Rubenstein, billionaire and co-founder of The Carlyle Group, according to the AFP news agency. "If we don't do that soon, I think we've lost the game."
From Jan. 25 to 29, more than 1,600 chief executive officers, 40 world leaders, and others will talk and meet to explore potential solutions to this systemic crisis.
"We must redesign the model. We must reset it. Stop the greed," Sharan Burrow, general secretary of the International Trade Union Confederation, AFP reports. "Unless employers and workers sit down with governments, the system will continue to fail." Burrow said,
Traditionally, the remote alpine ski resort keeps away voices of dissent. Not this year. For a few days, the luxurious hotel complexes that stretch the picturesque Landwasser high valley, will have to coexist with the igloos that a small number of Occupy protesters have constructed.
"In the last 42 years, I've never seen so much snow in Davos," WEF founder Klaus Schwab tweeted.
"Perfect snow to build igloos!" Occupy Davos protesters tweeted back, according to The Huffington Post.
"We believe that the leaders at World Economic Forum are just trying to implement new systems to maximize their profits, not to help the world," Amadeus Thiemann, a Zurich engineer who traveled to Davos to protest corporate greed, told USA Today.
The protest is resonating with some of the billionaires attending Davos. Bloomberg reports that a half-dozen of the approximately 70 billionaire attendees, interviewed before the conference, underlined the need to tackle the problem.
“Many who will be in Davos are the people being blamed for economic inequalities,” Vikas Oberoi, director of one of India’s biggest real estate developers, told Bloomberg. “I hope it’s not just about glamour and people having a big party.”
George Soros also “recognizes that income inequality is a problem” and is supportive of tax increases for the wealthy, said his spokesman, Michael Vachon.
Launched in 1971, the WEF is "committed to improving the state of the world" by engaging politicians, businesspeople, academics and other prominent international figures to address pressing global issues like terrorism, water supply, HIV/AIDS, as well as furthering dialogue between the West and Islam.
America is deep in debt. But how deep?
That question seems simple, yet analysts and pundits give answers that differ by trillions of dollars. Sometimes tens of trillions. That confusion arises because there are various ways to tote up America's debts.
Many observers often focus on the publicly held debt – the bonds that the Treasury has sold into financial markets. By that measure, the federal government owed a bit more than $10 trillion at the end of last fiscal year.
That figure is important because it measures how much the federal government has had to rely on outside investors. For that reason, it does not include the special Treasury bonds in the Social Security Trust Fund and similar accounts owned by the federal government itself. From an accounting perspective, those bonds net to zero – a part of the government owes money to another part. But they are important to Social Security legally and politically. Some analysts use a measure that includes the trust funds, bringing the federal debt to more than $14 trillion.
That's not the only measurement disagreement. Social Security and Medicare reflect a major commitment to seniors in the years ahead, but the government hasn't identified enough dedicated financing to pay for them. Some analysts believe these unfunded amounts should be viewed as debts as well. Their size depends on technical factors like the future growth rate of health spending and how far you look into the future. Depending on their choices, analysts can get huge measures of indebtedness: $50 trillion or more.
This range of figures – $10 trillion, $14 trillion, $50 trillion – sows confusion about how indebted the United States is. Yet none of them captures all of America's debts. The government has a host of other obligations that often get overlooked.
These other liabilities appear in the government's little-known financial statements. Those statements use concepts familiar to anyone who has worked with a corporate balance sheet listing assets and liabilities. The government's liabilities include more than $7 trillion in obligations that don't appear in standard budget measures.
That's real money, even in Washington.
The largest are commitments to federal employees, retirees, and veterans, including pensions and postretirement health benefits. Those commitments, which get surprisingly little attention, now stand at almost $6 trillion.
Another $1 trillion in liabilities includes obligations for environmental cleanup, government insurance payouts, and ongoing commitments to Fannie Mae and Freddie Mac. Add in publicly held debt, and the government owes more than $17 trillion, before accounting for future commitments to Social Security or Medicare.
Of course, the government has assets: buildings, aircraft carriers, and a sizable portfolio of financial assets. Federal accountants tally those as worth a bit less than $3 trillion. The government's net liabilities round out to nearly $15 trillion, 50 percent larger than the public debt alone and comparable to the value of all goods and services produced by the US economy each year.
The US is thus in debt to the tune of roughly 100 percent of gross domestic product. That's daunting, but it need not be fatal. As the economy recovers, our obligations – both past and future – should be manageable if policymakers overcome our greatest liability: a political system that addresses short-term crises rather than long-term challenges.
– Donald Marron, director of the Urban-Brookings Tax Policy Center, previously served on the board that establishes accounting standards for the federal government.