VEH Economic Presentation 0710

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www.vteh.org 1 12/09 1 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 Sign our Petition: www.vteh.org

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www.vteh.org 2 Political Deficit Inertia In the summer of 2009, Washington Post columnist Fred Hiatt asked President Obama how to overcome the political inertia of deficit control. President Obama suggested that events might jump-start the politics, when lenders start to fret about the creditworthiness even of the United States: "I actually think that, sadly, decisions are going to be forced upon us," he said. "I mean, I think that if we don't show that we're serious in some fashion, then I think you're going to see a reluctance on the part of people who've been snapping up Treasurys to keep doing so. . . “

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www.vteh.org 3 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) Municipal & State (FY11/12 of $255B in deficits) finances Housing (1 in 4 underwater) & Commercial real estate Uncertainty: Taxes, banking, health-care & energy regs. Monetary crisis and competitive currency devaluations Global competition for capital, trade, productivity & mfg. Geo-political risk; social unrest; & long-term unemployed

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Employment

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www.vteh.org 5 1981 vs. 2007 Recessions: U.S. Monthly Employment Declines Source: NBC Meet the Press, 12/13/09 - Months into Recession - It took 28 months for the 1981 recession to regain all its recession job losses It took 27 months before the 2007 recession saw its first positive monthly job gain 2007 Recession (10.8% unemployed) (10.2% unemployed)

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www.vteh.org 6 A (Frightening) Employment Picture No U.S. private sector job growth this past decade Today’s roughly 130 million employment level equals that of 1999; while working-age population has risen some 29M About 125,000 jobs per month are required just to accommodate new entrants into the labor force. There are about 5.5 applicants for every 1 job available Between 2001-2007, 40% of jobs created were tied to the housing sector. Most aren’t coming back.

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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)

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www.vteh.org 8 Job gains/losses since Recession (12/07-03/10) 119,000 Public sector job gains 732,600 Health care job gains (of 15.6M or 4.7%) 26,000 State Gov’t job gains (of 5.1M or .5%) 63,000 Local job losses (of 14.5M or .43%) 156,000 Federal job losses (of 2.8M or 5.6%) 8.32 million Private sector job losses 2.1 million Mfg. job losses (of 13.7M or 15.3%) 1.9 million Construction job losses (of 7.5M or 25%) 628,000 Finance job losses (of 8.2M or 7.7%) 519,900 Temporary job losses (of 2.6M or 20%) 494,000 Tourism job losses (of 13.5M or 3.7%) Source: U.S. Dept. of Labor, WSJ, 4/3/10

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www.vteh.org 9 Innovation, Productivity & its Job Market Impacts 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.

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www.vteh.org 10 12/08 10 Source: Vt Dept of Labor (In thousands) (Between 2000 – 2007, Vermont government payroll & employee benefit costs grew 70%) 2000-2007: Nil Vermont Private Sector Job Growth

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www.vteh.org 11 Vermont’s Private vs. Public Sector Dilemma

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Demographics

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13 10,000 Boomers per day retire! Boomers: nearly 30% of population Source: U.S. Census Bureau, Population Estimates as of July 1, 2006 www.vteh.org (Boomers) (Boomer’s parents)

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Government will account for more than half of all U.S. Health-Care spending in 2011 www.vteh.org 14 % Private spending % Public (Medicare, Medicaid, Veterans, States, etc) Source: Centers for Medicare & Medicaid (7.2% GDP) (17.3% GDP) (Social Security & Medicare now paying out more in benefits than tax collections)

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

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www.vteh.org 16 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)

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Deficits and Debts: U.S. and Vermont

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It’s the Spending, America! Growth in Spending & Income www.vteh.org 18 Total Federal Spending Median household Income (In inflation-adjusted 2009 dollars) 1970 1980 1990 2000 2008 In 1970 total federal spending was $883 billion and median household Income was $39,403 2008: $3.02 trillion; +242% $50,893; 29% Sources: U.S. Census Bureau; OMB; Heritage Foundation

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Debt Growth Exceeds GDP; Living Beyond our Means www.vteh.org 19 (In inflation-adjusted 2009 dollars) In 1990 total federal debt was $5.3 trillion and GDP was $9.5 trillion 2010 Federal Debt: $13.5 trillion; +155% 2010 GDP: $14.6 trillion; +54% Sources: Bureau of Labor Statistics; U.S. Census Bureau 1990 2010 Est. 1995 2000 2005

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www.vteh.org 20 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

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The President’s 2011 Budget: U.S. Budget Deficits: A National Security Threat? www.vteh.org 21 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)

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www.vteh.org 22 Federal Spending & Revenue as a % of GDP (% of GDP) WW II Spending Revenue - Projected - 2010 Public; Total Debt to GDP = 64%; 92% 2020 = 90%; 120% (Historic Avg. +/- 40%) Source: Office of Mgt & Budget, May 2009; Peterson-Pew Commission, 2009 - Deficit - ($10 Trillion over 10 yrs) 2010 Historic avg. +/- 20% Historic avg. +/- 18%

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www.vteh.org 23 “Off Balance-Sheet” U.S. Indebtedness $13 trillion *Medicare becomes insolvent in approx. 6 years; Jan. 2010, S.S. now cash negative Source: Bloomberg, 9/25/09, Peter G. Peterson Foundation ($Trillions) $12 trillion $10 trillion Medicare, Medicaid, & Social Security (Excludes State, Local Gov’t & Fannie Mae, Freddie Mac Liabilities)

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www.vteh.org 24 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 $146B Proj. FDIC Losses:$100B ($Trillions) Monetized Treasury debt: $300B Source: WSJ 12/24/09

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www.vteh.org 25 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%

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www.vteh.org 26 Mandatory vs. Discretionary Spending 1965 2008 Mandatory 34% Discretionary 66% Mandatory 62% Discretionary 38% Mandatory spending is authorized by law rather than annual appropriations.

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www.vteh.org 27 Foreign Holdings of U.S. Debt to the Public 50% 2009 1990 19% 81% 50%

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www.vteh.org 28 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

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www.vteh.org 29 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

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www.vteh.org 30 30 The State of Vermont’s Indebtedness $1.6B (teacher & state employees) $466M $848M $400M $300M $70M ($40M to stimulus) (Net of Stimulus $) (Champlain Bridge, VT State Hosp. & other road/bridge costs not included)

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It’s the Spending, Vermont! Growth in Spending & Income www.vteh.org 31 Total Vermont Spending Median household Income (In inflation-adjusted 2007 dollars) In 1990 total Vermont spending was $1.77 billion and median household income was $47,212 2007: $4.1 billion; +131% 2007: $51,809; +9.7% Sources: www.vttransparency.org; Bureau of Labor Statistics; U.S. Census Bureau 1990 1997 2002 2007 1997: Act 60

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Vermont General Fund ($848M Deficit: FY11-FY14) www.vteh.org 32 Source: VT Legislative Joint Fiscal Office, Feb. 2010 GF Available GF Uses @3.5% off FY10 (ARRA funds used to support GF Base: FY09=$76M; FY10=$192M; FY11=$113; FY12=$0) (-$154M) (-$254) (-$223) (-$217) (Millions)

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Vermont General Fund ($313M Deficit: FY12-FY14) www.vteh.org 33 Source: VT Legislative Joint Fiscal Office, 2010 GF Available GF Uses @3.5% off FY10 (Doesn’t include VSH, Fed HC impact or Tobacco impact which increase Deficits by up to $22M; assumes 3.5% budget growth rate & current 5 year Rev. forecast; FY12 Gap solutions That are ongoing Will reduce out-year Deficits) (-$122M) (-$100M) (-$91M) (Millions)

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Vermont Education Fund Revenue Sources www.vteh.org 34 Homestead Property Tax: 26% General Fund Transfer: 22% Sales&Use Tax: 9% Misc: 5% Source: JFO 1/8/10 (FY08 data); Crisis on the Horizon Report Feb. 2010

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Vermont Property Tax Income Sensitivity Payments www.vteh.org 35 $109M $111M $118M $120M $142 $168M $183M (Millions) (Est.) (Est.) Sources: Kavet & Rockler, Nov. ‘09 Eco. Rev. & Rev. Forecast Update; Crisis on the Horizon Report + $26M + $15M + $22M (FY12 will show a contraction in the statewide grand list for the 1st time since Act 60’s passage)

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Vt. Education Fund Balance www.vteh.org 36 (Est.) (Est.) -$59.3M JFO Edu. Fund Outlook, 1/8/10; Crisis on the Horizon Report, 2010 $41.5M (Millions) $25.9M

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www.vteh.org 37 12/09 37 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

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www.vteh.org 38 Vermont’s Dangerous Reliance On An Ailing Federal Government 01/10 38 Source: VT CAFR -2009 $ in Billions 34% 33% 32%

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www.VermontersForEconomicHealth.org 39 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%

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Losses in income and tax-revenues are accounted from Vermont’s top 1% of earners www.vteh.org 40 $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

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Current Use Program: (88% reduced assessments) Opportunity Costs Explode www.vteh.org 41 (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 job creation?

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A World View

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www.vteh.org 43 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

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www.vteh.org 44 Sovereign Debt Levels of Advanced Countries Source: International Monetary Fund, WSJ 12/10/09 [Projected] (% of GDP)

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www.vteh.org 45 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

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“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 Sign our Petition at www.vteh.org

Summary: Vermonters for Economic Health July 2010 presentation delivered at several Vermont venues in conjunction with the VEH/Vermont Campaign for Liberty tour "We Can't Afford It.".

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