Friday, May 20, 2011
America's Revenue to Debt Problem
The Congressional Budget Office projects total federal revenues for fiscal 2011 at $2.23 trillion.
Federal revenues for this fiscal year will be the lowest intake relative to GDP since 1951, at 14.8%. Yes, the US has a revenue problem in addition to its spending problem.
As a result, the national debt has ballooned to $14.3 trillion. This has raised the concern that the US can't afford, and won't be able to pay, its bills.
Much has been made of the US debt-to-GDP ratio, since the national debt now matches — or perhaps even exceeds — the size of the US economy.
However, the debt-to-GDP ratio is not really the concern. The issue is revenues vs. GDP.
The $2.23 trillion in federal revenues are dwarfed by the $14.3 trillion national debt. The US government does not pay its bills with the entire US economy. It pays them with federal revenues.
And as the US government has grown, the economy has grown with it. In fact, our economy is now totally reliant on federal spending.
The 78% increase in government debt since the second quarter of 2008 has created $4.1 trillion of fake growth. Needless to say, this is substantial in a $13.5 trillion economy.
Unless the unemployment problem improves, government revenues won't improve. And if government revenues don't improve, annual deficits will continue adding to the massive debt.
And that's the rub. There are absolutely no reasonable indications that unemployment will improve any time soon. There are 7 million fewer workers today than just four years ago. The number of unemployed Americans has roughly doubled.
Job growth in the last decade was negative. While the number of new workers entering the workforce swelled during that period, just 1.7 million new jobs were created.
Job creation is barely keeping up with all of the new workers entering the jobs market for the first time.
When Congress finally gets down to the difficult business of trimming the federal budget, the result won't just be a smaller government; it will also mean a smaller economy. That will result in a larger debt-to-GDP ratio, which will rattle the bond markets.
But the real issue for the US is its shrunken revenues. While raising taxes on millionaires and billionaires will help, it won't solve the problem. To do that, the US needs to grow its economy and create employment opportunities for the roughly 24 million Americans who are presently unemployed or under-employed.
As of now, no one has figured out how to do either. And it's reasonable to conclude that this won't change any time soon.