Wednesday, February 03, 2010

Federal Budget & Deficits Unsustainable

How ingrained is deficit spending in Congress? Consider this: Over the forty years ending in 2008, federal revenues averaged about 18.3 percent of our economy, while spending averaged over 20.6 percent, resulting in an average deficit of about 2.4 percent.

The federal government's long term “fiscal exposure” — the sum of all the benefits, programs, debt payments, and other expenses — will cost taxpayers huge sums in the future, regardless of whether or not it cuts discretionary spending.

In the first eight years of this century, that fiscal exposure has grown from $20.4 trillion to $56.4 trillion — a 176 percent increase. That is a financial obligation of unimaginable size and scope.

For decades, government revenues have not kept up with spending. Or, perhaps it's best to say that government spending has continually, and significantly, exceeded government revenues. As a result, the government has borrowed vast sums of money — and pays huge sums interest — to make up the difference.

Based on the GAO’s latest long-range alternative budget simulation, within about twelve years, our interest payments will become the largest single expenditure in the federal budget. By 2040, all of our federal tax revenues will add up to cover only our two biggest expenses: interest on our debt plus Medicare and Medicaid. Everything else — Social Security, defense, education, road building, you name it — will fail to be funded.

The Republicans and Democrats are all acting as if they've suddenly found religion as it applies to spending and debt. Last week President Obama proposed freezing one-sixth of the federal budget in order to bring government revenues in line with spending.

While it's a nice gesture, it's largely symbolic and will be ineffectual since it doesn't address the real problems.

We've reached a critical mass where government spending on the military and entitlement programs is literally out of control.

Benefits payments are the biggest chunk of the government’s massive obligation, and total defense spending has increased in recent years as the military fights two foreign wars.

In addition, the government has added new and prodigious resources for homeland security. The U.S. now spends more on its military than all of the other nations on the planet — combined!

Healthcare is one of the biggest drivers of our persistent deficits, since Medicare costs are an enormous piece of the federal budget. At present, healthcare is 18 percent of our GDP, and growing. With an aging, overweight, sick population, there is no end in sight to this problem.

For example, diabetes has become an epidemic, and a very expensive one. The annual cost for treating diabetes now approaches $200 billion.

The U.S. budget deficit is currently 10 percent of GDP. This means that healthcare and deficit spending alone are eating up 28 percent of GDP. And the 2011 budget deficit is projected to be 11 percent.

We will not experience nearly enough economic expansion to grow our way out of this debt problem. Our problems are structural and they run deep.

It is clear that — like it or not — tax increases are coming, as well as cuts to entitlement spending. Means-testing must be introduced, so that richer Americans only get back what they put into the Social Security system, and nothing more.

According to the Social Security Administration, life expectancy at birth in 1930 was just 58 for men and 62 for women, But men who were 65 in 1935 could expect to live another 12 years, while women faced an average 13 more years. Meanwhile, the retirement age was set at 65.

However, life expectancy has now reached an average of 78 years (76 for men; 81 for women). And life expectancy at age 65 is now 17 years for men and 20 years for women. This means that by retirement age, men and women can now expect to live to 82 and 85, respectively.

The Social Security payroll tax and wage base were much lower when most current retirees were working and contributing to the system. For example, back in 1960, the maximum amount of payroll tax for one earner was just $288. In 1972, it was only $419 a year. And as recently as 1975, it had only risen to $1,650, annually.

The reality is that many older people paid in relatively little compared to their current benefits. As a result, most retirees get back significantly more than they contributed. Obviously, the system was not designed to support this burden.

To make matters worse, the government spent the accruing Social Security surplus that had developed over the many years when there was more money coming into the system than going out. That should have been put in a "rainy day" fund for when the system faced growing demands, like right now. It's "raining" pretty hard at the moment, and it's going to get worse.

The Baby Boomers — all 76 million of them, amounting to 25% of our population — begin retiring this year, and will continue to do so for the next 18 years. However, a lot of their contributions have already been spent. Yet, they still expect the government to keep its promises.

From 1937 (when the first payments were made) through 2007, the Social Security program had expended $10.6 trillion. But in that same period, the program program received $13.0 trillion in income. The $2.4 trillion surplus was spent by Congress on other programs.

At best, it was a wildly irresponsible misappropriation. At worst it was a criminal theft from the taxpayers.

It's part of a long term pattern of reckless spending designed to appease special interests and to garner votes. The public hates taxes but loves spending programs. Not enough members of Congress are willing to stand up and speak the truth.

But the jig is up. The old ways will no longer work. The chickens are coming home to roost. Our debt is crippling.

In essence, our government is attempting to borrow its way out of a debt crisis. That is oxymoronic, thus it cannot work. The government cannot continue to borrow beyond its income without eventually going bankrupt. History abounds with examples of such failures.

Our government has been paralyzed by partisanship. Both sides give no quarter. Any success had by one side is viewed as a defeat for the other. All progress is thwarted for political reasons.

Spending benefits both sides. Constituents back home love projects and programs. So, the politicians bring home the bacon. Our leaders are more partisan than patriotic.

Republicans tout their passion for tax cuts. But what they don't admit is that budget cuts — the kind that their constituents feel — are very unpopular. Making deep spending cuts amounts to political suicide. So they ignore the fact that there is not enough revenue collected to pay for these programs.

The Republicans were oddly silent about the debt during the Bush years. Yet, they have suddenly found religion on the issue now that Democrats control the Congress and the White House.

Democrats love the same social programs that their constituents love. But they also understand that tax hikes to pay for these programs would be very unpopular, to the point of political suicide. So they ignore the funding problems.

It's six of one, a half-dozen of the other.

For nearly 30 years, our government has spent too much and collected too little. It's now coming to a head and reaching a crisis point. Both sides lack the political courage to be honest with the American people and to make the tough, uncomfortable decisions that are desperately and immediately needed.

All of this deficit spending has been financed through the sale of Treasuries, which have to be paid back with interest. And the Federal Reserve prints money out of thin air — increasing the money supply and devaluing the currency — to buy those Treasuries when there aren't enough takers on the open market.

The government is simply too big. This level of spending is unsustainable. Entitlements need to be immediately restrained.

The military budget needs to be cut in half. We'll still spend more than any other nation, and still maintain the world's most powerful military. But we need to recall most of the 500,000 military personnel, stationed on over 700 military bases, in more than 150 nations. Our footprint is far too big. We're bleeding ourselves to death.

We need to stop the knee-jerk reaction of calling all military spending "patriotic" and all cuts "unpatriotic." This is nothing more than irresponsible and dangerous rhetoric. We're going broke and we need to act. The Military-Industrial Complex that President Eisenhower so famously warned about has got us in a stranglehold.

The United States' continually weakening financial position is threatening our place in the world. It is threatening the very lifestyle that Americans take for granted. And it will threaten our ability to refinance our perpetually revolving debt in the not-too-distant future.

Right now, the future looks bleak. It will be replete with tax hikes, jarring spending cuts, rising interest rates, and rising inflation. We've been on this course for decades. Some, like David Walker, the nation's former chief accountant, were sounding the alarm. But there weren't enough like him. And no one in government seemed to be listening.

Our alleged leaders are crippled by politics and obsessed with grandstanding and gamesmanship. Each generation of politicians passed the debt problem along to the next, and just kept on spending like drunken sailors.

Now the bills are coming due. The size of our debts are staring us in the face and can no longer be ignored. The future is now, and it is going to be painful.

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