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Tuesday, March 13, 2012

The Truth About Deficit Spending

You hear a great deal these days about the annual USA budget deficit and the long term US debt. My take is a bit different than that of many so I thought that I would try to articulate it. What does this have to do with Media Realism? Well, I do not think the mainstream media really wants to face to up to it so they paint people as Cassandras if they tell the absolute truth about it. Admittedly, it is a hard topic to face head on and still maintain the sense of optimism that many of us still have for the future.

As I write, the US national debt is about $16 trillion and rising fast. Last month alone, our deficit was a record breaking $220 billion. Most project that we will add $1.3-1.6 trillion to the national debt this year and maybe slightly less next year. The gloom and doomers say that we face disaster within 18 months while others say that we have a decade or more to maneuver. Few deny that there really is a problem.

The issue, as it often is in Media Realism posts, is demographics. We have 90+ million baby boomers (born between 1946 and 1964) retiring over the next dozen years. This will put record-breaking strain on government programs such as Social Security, Medicare, and Medicaid. All of these programs need structural reform or they alone will bankrupt the US as some point in the future.

Most people nod and smile when someone raises the issue but not 1 in a 1000 seems to understand the enormity of the problem. Recently, someone whom I had just met was telling me that if we get rid of President Obama and elect any Republican we could get a balanced budget in several years and pay off the national debt in about 15. I kept a straight face and asked how it would work mathematically. His response was that there was so much waste in government that a good manager could right the ship without changing programs or raising taxes.

Okay, think for a moment. Have you ever considered what a trillion is? Do you know what it is? It is 1,000 billion.

Last year, Rep. Paul Ryan of Wisconsin presented a plan to balance the budget and reform Medicare. It left Social Security alone and did not raise income taxes. Ryan stressed that it was just a starting point for discussion. If you read the Ryan plan (few did) you will see that his plan would balance the Federal budget in the year 2041 some thirty years after he presented it. If by some miracle the Ryan plan was passed, how much more water (i.e., additional debt) would we take on over the next 29 years? Would it go from the current $16 trillion to $30 trillion or maybe $40 trillion?

Now, think about that. Let us say that we did balance the budget in 2041 but now had a national debt of $40 trillion. The first year out we would have a surplus of $100 billion. Excellent! But, if we continued to produce surpluses at that pace, we could pay off the debt in 400 years. Not a typo, my friends. Some 400 years. Do you think the world will stand still that long? Do you think politicians would say that “we owe it to ourselves” or get involved in foreign wars or be tempted to deficit spend again in a weak economy to “prime the pump” of economic activity? Of course they would!

So, with all respect to my new acquaintance, the Federal debt WILL NEVER BE REPAID. Never! That is not the end of the world. All countries, even the very solvent ones, have some national debt. What is a government bond except a loan to a sovereign nation? The problem in the US is that we are borrowing 33-40% of every dollar that we spend in recent years. Sooner or later, despite our global stature, we will hit our national credit card limit with international lenders. When that happens, interest rates on US bonds will rise and maybe soar.

That is an issue few Americans have come to grips with at all. Right now, we have artificially low interest rates. America’s shirt is dirty but many other nations, particularly those in the European Union (EU) are filthy. So the US dollar remains a safe haven and the world’s reserve currency. People are willing to park vast amounts of money in US debt, as many other nations look even weaker. The return is at record lows. But, for the moment, it is deemed safe. The majority of our debt is now short term and at low interest rates. What would happen if interest rates rose smartly due to a lack of confidence in the dollar or the global perception that we are unwilling to face our problems with real solutions? Interest rates would jump and the interest on our national debt would make the current huge deficits look mild by comparison.

You have heard the term ad nauseum lately but politicians keep “kicking the can down the road.” Perhaps after the election this fall, whoever wins will put a bi-partisan team of adults together and really address the issue. The longer we wait, the higher taxes will have to go up.

Many now say simply “soak the rich.” And it is true that many who earn fabulous sums of money each year only pay about 15% in Federal income taxes as a percentage of their total income. But, there are not enough of them. If we put a minimum tax of say 25% for those earning over $1.5 million per year, it would raise some revenue and we would all feel that the system was more just. However, it would not put an appreciable dent in the annual deficit. And, if we took all the wealth of American billionaires, we would still not make a meaningful reduction in the $16 trillion dollar national debt.

So, something has to give. The only rational approach appears to be entitlement reform (meaning cutting some benefits), cutting defense spending not defense, and raising taxes. If we do those things we can move to a balanced budget over a period of years.

Even then, we still remain between a rock and a hard place. A couple of years ago, the Simpson-Bowles Commission made recommendations that would trim $4.5 trillion from the deficit over a 10-year period. It was shelved but it would be an excellent starting point for a SERIOUS approach to reining in government spending.

The demographics are really against the status quo. If we want to maintain the social safety net that Social Security, Medicare, and Medicaid provide we need to reform all three systems and do it soon. Also, unless we cut spending and moved toward a balanced budget, interest on the national debt will drown all other line items in the government expenditure.

Years ago, political humorist P.J. O’Roarke wrote that “giving politicians the power to spend money is like giving whiskey and car keys to teen age boys.” I am for giving Congress all the whiskey that its members want. The car keys, however, are not negotiable.

If you would like to contact Don Cole directly, you may reach him at doncolemedia@gmail.com

2 comments:

  1. Don, I think I'm going to have to go back and rewatch "Network." :-)

    Lots of good points. I think Barbara Bush had a great comment last week: "Compromise is not a dirty word." Do _something_, for pete's sake.

    Chip

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    1. Chip--I suppose that we all have a little Howard Beale in us. :) It amazes me how nothing substantive gets done despite the loud talk on both sides. This is simple arithmetic but the debt continues to pile up.

      Don

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