www.vteh.org 1 The State Of Our Nation “Arguably, the biggest threat facing the U.S. today is our own Fiscal Irresponsibility… Continuing on this unsustainable path will gradually erode, if not suddenly damage, our economy, our standard of living, and ultimately our domestic tranquility and national security.” David Walker, former Comptroller General of the U.S; President, Peter G. Peterson Foundation

www.vteh.org 2 12/09 2 Who Are Vermonters For Economic Health? VEH is a grassroots, citizen-led organization, founded in 2007. Our Mission is simple: To Promote Economic Health and Fiscal Responsibility in Vermont

www.vteh.org 3 This Presentation Will Cover: An Overview of our Recession Employment Demographics Deficits and Debt Structural and Policy Risks and Exposures Note: Within this presentation includes one presented to the Vermont House Ways and Means Committee on January 6, 2010

www.vteh.org 4 An Overview: Why This Recession Is Different “Balance-sheet recession”: Deleveraging of historic levels of public (government) and private debt Long-term structural U.S. fiscal deficits (entitlements) Disrepair of Municipal and State finances Historic Housing & Commercial real estate losses Uncertainty: Taxes, regulations, health-care and credit Monetary crisis and competitive currency devaluations Global competition for capital, trade, productivity & mfg. Geo-political risk; social unrest; & long-term unemployed

Employment

www.vteh.org 6 The state of U.S. Jobs America has added no private sector jobs for the past 10 years There are 6 applicants for every 1 job available Between 2001-2007, 40% of jobs created were tied to the housing sector. These jobs aren’t coming back. Household debt service to disposable income reached 130% in 2008, straining an economy whose GDP is 70% driven by consumer spending Manufacturing capacity utilization is at a low of 67%

1981 vs. 2007 Recessions: U.S. Monthly Employment Declines www.vteh.org 7 After 28 months, employment back to pre- recession levels 1981 Recession 2007 Recession Approaching 28 months & we haven’t even turned upward on employment - Months into Recession - 1 4 8 12 16 20 24 28 Source: NBC Meet the Press, 12/13/09

A Different U.S. Recession; A Different Employment Recovery www.vteh.org 8 8.4M jobs lost since recession began; 1M discouraged workers; U6 rate = 16.5% 125,000 jobs per month needed just for population growth Projected U.S. unemployment rates Source: John Mauldin, The Mother of All Jobless Recoveries, 12/14/09 10/09 2009 2011 2015 2020

Innovation, Productivity & its Job Market Impacts www.vteh.org 9 U.S Manufacturing Employment (as a % of U.S. work force) U.S. Manufacturing Output (as a % of GDP) Source: Bureau of Economic Analysis; Bureau of Labor Statistics.

www.vteh.org 10 A (Scary) Employment Picture Today’s employment, at 129.5 million, is the same level as in 1999. During this 11-year span, the working-age population has risen 29 million. Contemplate that for a moment; fully 29 million people competing for the same number of jobs that existed more than a decade ago. "Not only that, but consideration must be taken that in 2009, we had a zero policy rate, a $2.2 trillion Fed balance sheet and an epic 10% deficit-to-GDP ratio. You could not have asked for more government stimulus. Yet employment tumbled nearly 5 million in 2009." John Mauldin, 2/5/10

Job Growth this past decade: Private-Sector: 0% Federal Government: 18% www.vteh.org 24% Increase 9% Increase U.S. Private-sector job growth 2000 - 2009 : 0% Increase Total Federal Employees Civilian Agencies (Ag., Justice, Treasury, Edu. etc) Defense 2000 2010 2005 OMB; Bureau of Labor Statistics (Gov’t: Full-time equivalent employees; Excludes Postal Service & uniformed military) (Millions)

www.vteh.org 12 12/08 12 Source: Vt Dept of Labor (In thousands) Between 2000 – 2007 (just prior to our recession), Vermont had no private-sector job growth No Vermont Private Sector Job Growth

www.vteh.org 13 Vermont’s Private vs. Public Sector Dilemma

www.vteh.org 14 12/09 14 Student Enrollment Down - Employment and Costs Up Source: Summary of the Annual Statistical Report of Schools (SASR) FY 1997 - 2008 Student s = -9.1%; Teacher and Staff Growth = +20.8% Students Teachers And Staff 2008

Demographics

16 The Baby Boomer Tsunami At nearly 30% of total U.S. population, Baby Boomers, born between 1946 & 1964 and now age 42 to 60, totaled an estimated 78.0 million. Boomers began collecting Social Security Benefits in 2008. Social Security is now paying out more in benefits than collecting in revenues The first of these nearly 80 million Boomers will begin collecting Medicare Benefits in January, 2011 Source: U.S. Census Bureau, Population Estimates as of July 1, 2006 www.vteh.org

17 U.S. Age Distribution: 2006 Source: U.S. Census Bureau, Population Estimates as of July 1, 2006 www.vteh.org

Government will account for more than half of all U.S. Health-Care spending in 2011 www.vteh.org 18 2011: The 1st of 80M baby boomers turn 65. About 10,000/day thereafter. % Private spending % Public (Medicare, Medicaid, Veterans, States, etc) Source: Centers for Medicare & Medicaid 7.2% GDP 17.3% GDP

19 Top Five States by Percent Baby Boomer Population: 2006 Source: U.S. Census Bureau, Population Estimates as of July 1, 2006 www.vteh.org

www.vteh.org 20 VT’s Population Growth Is Less Than Half of the National Average

www.vteh.org 21 VT Retirees Double In 25 Years While The Work Force Shrinks Over 65, (Retirees) Age 6-18, (school age) Total Population Age 20-65, (working age) Source: Center for Research on Vermont, Art Woolf. (Indexed to 2000 = 100)

Deficits and Debts

www.vteh.org 23 An Explosion of World Debt vs. GDP “Financial Deepening” ($Trillions) $12 $10 $195 $55 Financial Assets Include: 119% % of GDP 356% Source: Harvard Business Review, Sept. 2008 1980 2007

The President’s 2011 Budget $2 Trillion of Tax Increases www.vteh.org 24 $250K+ of Income: $380 Billion 28% Deductions: $291B Limits on $200K+ of Income: $209B Capital Gains Rate: $105B Source: 2010 White House Office of Management and Budget

The President’s 2011 Budget: U.S. Budget Deficits: A National Security Threat? www.vteh.org 25 1990 2010 2018 -$1.6T Source: 2010 White House Office of Management & Budget; Peterson-Pew Commission; (years 2016 – 2018) (In Billions) Despite $2 Trillion in added tax increases, the President’s budget still calls for $5 Trillion in added debt over the next 5 years (2010-2015)

www.vteh.org 26 Federal Spending & Revenue as a % of GDP (% of GDP) WW II Spending Revenue - Projected - 2010 Public; Total Debt to GDP = 55%; 85% 2020 = 90%; 120% (Historic Avg. +/- 40%) Source: Office of Mgt & Budget, May 2009; Peterson-Pew Commission, 2009 - Deficit - 2010 Historic avg. +/- 20% Historic avg. +/- 18%

www.vteh.org 27 “Off Balance-Sheet” U.S. Indebtedness $12 trillion *Medicare becomes insolvent in approx. 6 years; Jan. 2010, S.S. now cash negative Source: Bloomberg, 9/25/09, Peter G. Peterson Foundation ($Trillions) $12 trillion $10 trillion Medicare, Medicaid, & Social Security (Excludes State, Local Gov’t & Fannie Mae, Freddie Mac Liabilities)

www.vteh.org 28 Enormous Overhangs & Risks $1.25 trillion in monetized Fannie Mae/Freddie Mac home mortgage debt by the Federal Reserve Bank (printing of money to purchase debt) Realized Fan/Fred Losses: Proj. Fan/Fred Losses: $400B $112B Proj. FDIC Losses:$100B ($Trillions) Monetized Treasury debt: $300B Source: WSJ 12/24/09

www.vteh.org 29 29 The State of Vermont’s Indebtedness $1.6B (teacher & state employees) $466M $470M $400M $300M $70M ($40M to stimulus) (Net of Stimulus $) (Champlain Bridge, VT State Hosp. & other road/bridge costs not included)

Structural and Policy Risks and Exposures

www.vteh.org 31 U.S. Interest Rate Risk ($Billions) (5) U.S. debt payments due within a year; currently financed at a rate of 1% or less $40B $80B $221B (1) Increase in borrowing costs with removal of Fed. purchases of mortgages; equal to one-half percentage point (2) Combined budgets of the Dept. of Education & Energy (3) Est. add’l cost of 2009 debt service with 2008 int. rates (4) Est. debt service cost in 2019; WSJ 12/16 (1) (2) (3) (4) (5) $774B $1.9T Source: NYT, E.L Andrews 11/23/09

www.vteh.org 32 Sovereign Debt Levels of Advanced Countries Source: International Monetary Fund, WSJ 12/10/09 [Projected] (% of GDP)

www.vteh.org 33 The Debt Binge will continue: Global Supply of Government Bonds will break records in 2010 Morgan Stanley est. net issuance will equal 16% of overall government-bond market in the U.S., 11% in the euro zone and 26% in the U.K. Greece, Italy & Belgium already have debts of more than 100% of GDP. Many others will follow in 2010. Japan’s Debt/GDP ratio is roughly 200% % Net Issuance of overall Bond Market

www.vteh.org 34 How the $27 trillion U.S. Debt Markets have changed since 2007 “Securitization” or repackaged loans were hardest-hit & (once) accounted for about 50% of consumer lending. Consumer & corporate credit markets have shrunk about $1.5 trillion since 2007. In 2005, over 6 billion credit-card offers were made. This year, just 1.4 billion. The result of tighter lending: Consumers spend less; businesses hire & invest less. U.S. Treasurys Gov’t Mortgages Credit cards Auto loans Home equity loans % Change in lending since 2007 Sources: Federal Reserve; Industry & Financial Mkts Assoc.; Dealogic; FTN; WSJ 12/8/09

www.vteh.org 35 Commercial Real Estate Next ‘shoe to drop’ “100’s of billions in losses” $534 billion of the $800 billion in commercial real-estate loans maturing between now & 2014 are “underwater.” $1.4 trillion in (weaker) corporate bonds & loans mature between now & 2015. Richard Lefrak estimates we’re only in the “2nd inning of a commercial real-estate storm.” ($Billions) *Capital markets & interest rates will be pressured

www.vteh.org 36 The state of Housing In 2010, 2.4 million more U.S. homes could be lost to foreclosures, while prices drop 10% 1 in 4 U.S. home mortgages are underwater If one in five of these households defaults, losses to banks and investors could exceed $400 billion. An equivalent loss as that suffered in the savings and loan debacle in the late 80’s. WSJ: 12/10/09

www.vteh.org 37 The state of our States & Municipalities Net of stimulus funds, the Center on Budget & Policy Priorities estimates total state deficits of $255 billion through fiscal 2011. An average of $5 billion per state. Without more federal aid, state budget cuts will shave nearly 1% point off U.S. GDP; eliminating almost 1 million jobs through 2011. Of the $787 billion stimulus package, states were allotted about $250 billion of this total. Municipalities & state’s tax-capacities & debt levels have hit or nearly hit saturation while safety net, infrastructure, and unfunded pension costs rise.

www.vteh.org 38 Composition of Federal Spending Defense 46% All Else 31% SS 13% 6% 4% 1968 2008 All Else 29% Defense 21% Med. 21% SS 21% 8%

www.vteh.org 39 Mandatory vs. Discretionary Spending 1965 2008 Mandatory 34% Discretionary 66% Mandatory 62% Discretionary 38% Mandatory spending is authorized by law rather than annual appropriations.

www.vteh.org 40 Foreign Holdings of U.S. Debt to the Public 50% 2009 1990 19% 81% 50%

www.vteh.org 41 Triffin’s Dilemma China’s Foreign Exchange Reserves Approx. 75% Dollar-Denominated ($ Trillions) $2.4 Trillion Source: People’s Bank of China, WSJ 12/5/09 $400 Billion "One of the challenges that we've got to address internationally is currency rates and how they match up to make sure that our ... goods are not artificially inflated in price and their goods are artificially deflated in price. That puts us at a huge competitive disadvantage.“ - President Obama, February 3, 2010

www.vteh.org 42 Vermont’s Dangerous Reliance On An Ailing Federal Government 01/10 42 Source: VT CAFR -2009 $ in Billions 34% 33% 32%

www.VermontersForEconomicHealth.org 43 Vermont’s Progressive (and highly risky) Income Tax Structure 26% of Taxes Paid, 2,113 Tax Filers; 0.69% of Filers 38% Paid, 6,970 Filers; 2.29% 49% 15,200; 4.99% 98% 185,534; 61% 60% 27,632; 9.08% 75% Paid 58,415; 19.20% 91% Paid 121,827; 40.04% 100% 304,254; 100% Source: Vt. Comprehensive Annual Financial Report, 2007 Top 1% pay about 1/3 of taxes Start here, move clockwise… Top 5% pays about 50%

Losses in income and tax-revenues are accounted from Vermont’s top 1% of earners www.vteh.org 44 $598M decline in total Adjusted Gross income by all Vermonters (B) $36M decline in total net income taxes paid by all Vermonters (Millions) 2007-2008 2007-2008 (A) (B) (C) (D) $614M decline in total Adjusted Gross Income by Vermonters earning $200K+ (about 1% of all taxpayers) $37M decline in total net income taxes paid by Vermonters earning $200K+ VT Dept. of Taxes; VT Economy Newsletter

Current Use Program: (88% reduced assessments) Opportunity Costs Explode www.vteh.org 45 (Millions) (B) $37.4M in foregone education property taxes (C) $49M in total Vermont opportunity costs Opportunity Costs 2008 Source: VT Dept. of Taxes (PVR) (A) (B) (C) (D) (E) (D) 2.2M acres of enrolled land in Current Use Program (E) 6.6M acres of total land in Vermont; 1/3 of all Vermont land is enrolled in Current Use, as it grew 3.3% in 2009 and continues to grow. To what end? At what cost? In lieu of what development, and decided by whom?

Private vs. Public Sector Share of Union Workforce; A Political Exploitation? www.vteh.org 46 Source: Bureau of Labor Statistics Public: 2009 51.4%; 7.91M workers; 37.4% of total public-sector Private: 2009 48.6%; 7.49M workers; 7.2% of total private-sector CA, NY, MI, NJ, IL & PA account for 50% of the 15.3M union workforce vs. having 1/3 of total workforce. VT union membership jumped 21% in 2009

www.vteh.org 47 A Society Cannot Consume and not Produce Vermont government payroll and employee benefit costs grew 70% between 2000 – 2007 Vermont school spending grew 60%, from $813 million to $1.3 billion between 1999 – 2007 Public-sector unions represent both entities Vermont per-capita income and inflation grew +/- 25% & Vermont’s private-sector job growth grew 0%, during these periods; 1/3 of Vermont land is enrolled in Current Use = No development. Source: Burl. Free Press, 3/10/08; Rut. Herald 2/1/07

www.vteh.org 48 Life Cycle of a Superpower Competition: Share of World GDP 33% China 65% Other 1820 2020 - 2025 18% U.S. 64% Other 1950 27% U.S. 68% Other 2009 24% U.S. 68% Other U.S. = 2% China = 5% China = 8% 8% 5% 18% China Sources: IMF; Maddison; US Census Bureau; Financial Times 10/11/09

“Blood, Toil, Tears and Sweat” “The multitudes remained plunged in ignorance of the simplest economic facts, and their leaders, seeking their votes, did not dare to undeceive them.” - Winston Churchill, 1940 For a copy of this presentation: tomlicata2@comcast.net “A Society Cannot Consume and not Produce”