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U.S. Budget Woes Not a New Story

Scott Burns

Scott Burns: Is the U.S. the Roman Empire?

Hi, there. I'm Scott Burns, Morningstar's director of fund research. I'm here today with Russ Koesterich, who is BlackRock iShares Global Head of Investment Strategy.

Russ, today you spoke at our ETF Invest Conference and made a really interesting analogy that what we are seeing in the political and economic landscape of the U.S. when it comes to entitlements and things like that isn't really unprecedented in history.

Russ Koesterich: I should certify, just qualify, I wasn’t meant to suggest we are going the way of Rome. I’d hate to see the headline, "BlackRock strategist calls the U.S. Roman Empire," but there are some parallels. And I think the parallels I was trying to really bring out in the discussion--we were talking about politics and the intersection between economics and politics, was that some of the issues that are currently faced in the United States, we've seen this before. We have seen it in many different guises going as far back as ancient Rome.

And in particular, there are two parts of the debate I wanted to illustrate with the Roman example, one of which was this notion that entitlements grow over time. This is very natural. We've seen this in the U.S., and we also saw it in ancient Rome. And they grow in two ways: one of which, they tend to grow larger in terms of the benefits that people receive and also more people tend to get the benefits. So, we've seen that in the U.S., for example, with Medicaid, a system which was introduced back in the 1960s, which was originally intended to cover maybe 2% of the population, and today, if you look at what is intended under the Affordable Care Act, it may cover up to 25% of the population in one form or another. That is a good example of how an entitlement program grows over time and presents a challenge.

Burns: In ancient Rome, as you talked about, I think people bandy around the term bread and circuses, but I don’t think anyone's ever made that connection that bread and circuses was Social Security.

Koesterich: There was real bread and there was real circus. They gave out bread, they gave out olive oil, and what's interesting is they kept growing year after year, and the number of people that could receive it grew year after year.

The other thing which I mentioned during the talk was this notion of, once you've done this and you start to run into a bit of trouble, you try to hide the true cost. The Romans did this in an interesting way. When they gave out the bread, the grain, that actually came from the original off-budget item, which was the Emperor's private plantation in Egypt. Today in the U.S., we do it differently, but one thing we see are some very optimistic numbers baked into the budget. What that means is that if the economy does not grow as fast as those numbers assume, and it's not likely to, then the deficits may turn out to be even worse than we expect.

Burns: So, it's amazing that everyone says, well it’s different. What's happening with the U.S. is unprecedented, but off-budget accounting goes all the way back to 58 BC.

Koesterich: It’s going back some way to Caesar, and where he was getting his grain from. So, we've seen this in the past.

Burns: I think to the extent that people may want to jump to those conclusions that the U.S. is the Roman Empire, I think the timeline you’ve shown at the conference was also very informative. That was 400 years.

Koesterich: It can go on for a long time.

Burns: Going on for a very long time. You think it can go on for 400 years for the U.S.?

Koesterich: I think the U.S. has a very long way to go. And the good news is, you have still tremendous economic resources. These are problems that are fixable. Part of what I was trying to get across was that in some ways that’s a double-edged sword, because you do have time, but what you see is that often without the pressure, either from the bond market or from other sources, you don't deal with these issues until you have a crisis, and obviously, that’s what we would like to avoid, both politically and economically.

Burns: Well, Russ, thanks for that interesting insight of how we can connect these two epochs together, and what seems new has happened before.

Koesterich: It’s happened before.

Burns: I'm Scott Burns with Morningstar. Thanks for watching.