Wednesday, June 09, 2010

The European Debt Crisis Should Be A Warning To The U.S.

However, two-thirds of federal budget is non-discretionary. That will impose some very difficult political and social choices.

The Greek debt crisis is emblematic of the larger debt problems spreading across the European continent. According to the World Bank, of the nations with the largest external debts (money owed to other nations), the top-10 are all European, and 17 of the top-20 are also European.

However, the US is #20, and has a deficit that is 10.6 percent of GDP for FY 2010, and will be 11 percent of GDP in FY 2011. As a consequence of years of continuous deficits, the national debt has now exploded to 89 percent of GDP.

Obviously, something's got to give. This sort of deficit spending simply cannot continue. It is likely that revenues (taxes) will have to increase and expenditures will have to decrease — substantially. The question is where those budget cuts will come from, and that will surely result in a major political battle.

The term “discretionary spending" refers to those parts of the federal budget over which Congress has the discretion to spend. These are the items that must be appropriated annually in order to receive government funding. In essence, the spending on these items is controllable.

However, most of the federal budget is non-discretionary spending, meaning it is mandatory. These expenditures — consisting of things like Social Security, Medicare and interest on the national debt — are automatic unless Congress acts to change them. The categories known as "entitlements" are often viewed as uncontrollable — politically at least — because Congress won't make the unpopular decisions to trim spending in these areas.

Due to the size of the Baby Boom generation (76 million strong), the number of people receiving entitlement benefits continues to grow. By 2030, 1 in 5 Americans will be 65 or over. This means that 20 percent of Americans will collecting Social Security and Medicare. We can expect the retirement age of 66 to be pushed back, and the enactment of higher payroll taxes (FICA).

Incredibly, agricultural subsidies also fall into the category of non-discretionary spending. That's right, Congress doesn’t have to budget that money each year either—it’s automatic. This is due to the enormous political power of the giant Agri-Business and it's ability to manipulate the $286 billion Farm Bill, which has resulted in an array of loans, price supports, subsidized insurance, disaster aid and money-for-nothing handouts.

However, the largest mandatory items are the entitlements and interest on the national debt. If you include payments to veterans, these items collectively account for about two-thirds of the federal budget.

That's worth repeating; two-thirds of the Federal Budget is comprised of mandatory spending.

Yet, these are the areas that need to be trimmed to truly have an impact. Eliminating things like the National Endowment for the Arts ($161.3 million), NASA ($18.4 billion), and even foreign aid ($36.7 billion — less than 1% of budget) is just tinkering at the margins and won't make any meaningful difference to our long term fiscal position.

The largest single portion of discretionary spending in the federal budget is in the defense budget. In fact, about 58 percent of all discretionary funding is defense related, according to Donald M. Snow, Professor Emeritus at the University of Alabama.

What this means is that non-defense discretionary spending is less than half of the discretionary category, which is itself only one-third of the total federal budget. In other words, non-defense discretionary funding makes up only 15 percent of this year’s federal budget.

It's clear that if discretionary spending is to be cut in any meaningful way, it will have to come from military spending.

Officially, spending on veteran’s medical care and pensions are classified as an entitlement expenditure, as opposed to part of the defense budget. As a result, that spending does not show up in defense outlays.

As a whole, the Veteran’s Health Administration delivers free and low-cost health care to more than 8 million veterans.

And the outlays will only grow; the Department of Veterans' Affairs reports a proposed, and unprecedented, 27 percent increase in benefits funding. It will be needed. The department broke the 1 million mark in benefits claims in 2009 and that is expected to increase by 13 percent this year and 11 percent in 2011.

For the next fiscal year, official estimates put defense spending at about $650 billion, plus an additional $200 billion or so for Iraq and Afghanistan. That's a total of $850 billion, yet not all defense spending is officially reported or budgeted.

Money for the Energy Department to work on the nation’s nuclear arsenal, the Selective Service, Homeland Security, and other defense-related spending pushes the number even higher.

According to an analysis of the 2011 Federal Budget by the War Resister's League (an annual project), when the cost of two concurrent wars, veterans benefits and the interest on the debt created by military spending are added to the current military budget, overall defense spending equals 48 percent of the total Federal Budget.

That's truly stunning.

Trimming the Federal Budget to get spending under control has to begin with the military. Consider this: more than 60 years after the end of WWII, the US still has more than 50,000 troops in Germany and 30,000 in Japan.

In fact, the US has over 1.4 million active duty military personnel — 500,000 of whom are deployed on over 700 bases in more than 150 countries and territories, including 37 European nations.

The stunning reality is that US military spending exceeds the combined total of every other country in the world. To put it another way, the spending amounts to $1.2 million per minute, or $1.7 billion per day.

Consider this; if the Pentagon were an independent country, it would be the 10th richest in the world.

Last week, the cost of the wars in Iraq and Afghanistan surpassed $1 Trillion. Yet, each and every month, the war in Iraq costs our nation an additional $5.5 billion, while Afghanistan drains $6.7 billion from US taxpayers. That amounts to more than $12 billion each and every month.

The nation simply does not have the resources to continue paying for these unyielding war costs, or the sheer weight of our bloated military budget.

Estimated federal revenues for fiscal year 2010 are $2.381 trillion, an estimated decrease of 11% from 2009. Meanwhile, the budget for 2010 totals $3.55 trillion, resulting in a deficit of $1.17 trillion. That's on top of the $1.42 trillion deficit for fiscal year 2009.

Last week, the national debt breached $13 trillion, and it is projected to reach $20 trillion by 2015. This path is simply unsustainable.

The US won't solve is severe debt problem unless is trims the two-thirds of the budget that it non-discretionary. Reducing deficits and debt will have to come through a number of means, from raising the retirement age to increasing payroll and income taxes (which will be painful and hurt GDP).

But, most especially, the outsized military budget — still geared toward fighting the Cold War — needs to be trimmed considerably.

All of these moves require great political courage, which is almost non-existent in Washington these days. That's why it is difficult to be optimistic about the process, not to mention our long term economic and fiscal prospects.

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