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All Da King's Men

The Debt Bomb

By Da King Published: December 18, 2009

"Without savings, there is no future" - Alan Greenspan

If some of you wonder why I'm obsessed with the rapidly increasing government spending and debt, I'll try to explain it in this post. I'll try to explain what the implications of this unsustainable fiscal irresponsibility will be, what it will mean for the future. There is no bigger long-term threat we face as a country, other than certain national security issues (such as terrorists detonating wmd inside the U.S). Lots of the information contained in this post can be found in The State Of The Union's Finances, A Citizens Guide, put out by the Peter G. Peterson Foundation, whose CEO is former Comptroller General David Walker (who everybody in the country should be listening to. I'd make him the next President if I could).

Let's start by defining our financial problem. The federal government is nearly $12 trillion in debt, which is 85% of our GDP. That's bad enough in itself, but about 50% of our debt is owed to foreign countries. The only other time in American history when our debt was this high was during World War II, when it was 122% of GDP. Back then, however, we didn't owe the money to foreign countries. We owed the money to Americans. We weren't selling our country to China and others, as we are doing now.

What's worse than the debt we're in is where we're heading. The following chart shows the projected federal deficits over the next decade:

At this rate, our debt will be 150% of GDP by 2020, far higher than every before in our history. If we continue on this path, our debt would be 350% of GDP by 2050. Even worse than the our annual deficits are our unfunded entitlement liabilities. These are spending commitments the government has made but does not have the money to pay for. They are growing at a rate between $2-3 trillion per year even if we had a balanced federal budget. Currently, the unfunded liabilities stand at roughly $56.4 trillion. Medicare is $38 trillion of this amount. If we add all the unfunded liabilites and our federal debt together, it comes to a $184,000 debt for every single person in the United States, a $435,000 debt for every fulltime worker, and a $483,000 debt for every household. Don't forget that in 2008, 81% of federal taxes were paid by individuals (45% in individual income tax, 36% in payroll taxes). Taxes will have to go up, WAY up. Because rising tax rates have an economic dampening effect, the revenue return lessens, forcing taxes rates up even more, which dampens the economy even more, which forces tax rates up even more, and so on and so forth. Trying to solve the problem via taxation alone will result in an endless downward economic death spiral.

The debt projections show that by 2028, our historic levels of taxation (about 18% of GDP) will not even be enough to cover interest on the debt, Medicare, Medicaid, Social Security. There won't be any revenue left for education, defense, homeland security, infrastructure, or any other government function. Nada. Interest on the debt will eventually become our single largest government expenditure. That is money flushed down the toilet, providing no government service to any American citizen, and a lot of that interest will go to foreign countries. This is a recipe for certain disaster. If it's not addressed, it will mean the end of our Republic. We will collapse under a mountain of debt. This is not only deeply irresponsible, it's immoral. We are dooming our children's futures. The baby boom generation is on path to leave the country far worse off than they found it, the antithesis of the American dream.

We are showing few signs of reversing the trend of irresponsibility. In the last two years, baseline federal government spending has increased by 20% during a time of no inflation. This is astounding. This number doesn't include TARP or stimulus packages to fight the recesssion. This is just an increase in the annual ongoing cost of the normal operations of the federal government, and it is completely out of control.

There are three primary problems - 1) out of control government, 2) demographics, 3) rising health care costs. Regarding demographics, there are 77 million baby boomers in the country (about 1/4th of the entire population). Over the next decade, those baby boomers will be retiring. On the bright side, all those retiring boomers will take care of our unemployment problem (we will probably need even more workers than are available), but all those retirees will put tremendous pressure on our entitlement programs.

There is no single feasible solution to the problem. We can't grow our way out of it. We can't tax our way out of it. We can't even cut government spending to get out of it. We have to take a synergistic approach. We need to re-prioritize everything from the ground up. We have to cut government spending to the essentials. We have to implement pro-growth business policies. We have to reign in health care costs. We will also have to, as much as I hate to say it, increase levels of taxation to get more revenue. We should restructure our entire tax revenue system so it's the least regressive and the most efficient. I have read that only 76% of our taxes are currently collected. The rest fall through the cracks, via offshore tax havens and various other collection failures.

The other thing that is essential is to forget all about partisan politics, and focus on fixing the problem instead. This is not a partisan issue. It's an American survival issue. We need the President to make this a highest priority (hey, it could happen). The tax cut and spend Republicans have to give it up. The tax and spend even more Democrats have to give it up. Our country is at stake. Yes, it's going to be painful, but we have no other choice. Any political party that stands in the way must be moved out of the way. The American people are catching on. This is also what the Tea Party movement is really about. It's about restoring fiscal sanity to this country before it's too late. The longer we wait, the harder it's going to be to fix this. Where we're at right now with the debt bomb is relative to where we were with the housing bubble six-eight years ago. We don't want to wait until it explodes in our faces before we act. We want to act now, or the next recession will make this one look like a walk in the park.

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