Before we try to understand why the Washington political class is so clueless about the gathering budget and debt storm clouds that are fast approaching, it might be a good idea to review the latest estimates from the Congressional Budget Office (CBO) relative to the country’s financial shape, estimates that are very scary:
– Within a few months, our national debt will have escalated to $14 TRILLION or the equivalent of $121,739 per United States household.
– At an average household income of about $60,000 a year (pre-tax), each American household would have to go without food, shelter, clothes, or anything else for over two years to pay off their portion of the national debt as it stands now.
– If the government and the political class that runs it do not change their spending habits immediately, another $7 TRILLION will be added to the nation’s debt over the next ten years. At that time, $21 TRILLION in debt will come out to about $136,000 a year per household if you assume the number of households grows at a rather robust 3% a year.
– However, to hit that $7 TRILLION number, the political class would have to allow all of the newly renewed tax cuts to expire in two years, they would not make any further adjustments to the Alternative Minimum Tax snafu and they would have to actually implement the draconian Medicare cuts they are supposed to do. These three steps are probably unlikely, given the spineless nature of our politicians, which means that it is not an additional $7 TRILLION but a more realistic $13.6 TRILLION. This would put the overall debt at almost $28 TRILLION and the equivalent household responsibility at $179,000.
– The CBO report goes on to estimate that interest on that debt over the next ten years would be around $5.4 TRILLION. Since the Obama administration has proposed cutting spending by only $478 billion over ten years and the Republicans have targeted $2.5 TRILLION in budget cuts, neither party’s half hearted efforts at fiscal restraint will come close to just paying off the interest on our debt. In this reality, the United States will never pay off its ever increasing debt load. This is like someone’s personal finances who constantly spend 70% more than what they earn and who only pays off a fraction of that 70% amount every month. The simple math will eventually crush them.
– By the year 2021, the CBO estimates that the country would be paying more than a TRILLION a year just in interest payments on the debt. For comparison purposes, understand that today the Federal government collects only a little more than $2 TRILLION a year in revenue. Thus, by 2021, about half of what we would pay in taxes today would be solely for interest payments.
– In 2011, given the newly estimated and higher 2011 deficit, the annual deficit will be equal to about 9.8% of the country’s GDP, about a percentage point higher than it was in 2010 and almost as bad as the 10% incurred in 2009. That 10% was the highest deficit to GDP ratio in 65 years. The general consensus is that a country’s deficit number should be no more than 3% of its GDP and in 2011 the United States will exceed that threshold maximum by three fold.
– According to the CBO report, mandatory government spending (which I am assuming is Medicare, Medicaid, and Social Security) will rise an average of 5.6% a year for the next ten years. Since the U.S. economy rarely grows more than 3-4% a year, in good times, unless changes are made to the mandatory spending levels, more and more taxes will have to be collected to make up the shortfall. More and more taxes going to the government means less and less spending on growing the economy which reduces the tax stream which requires higher taxes, etc., etc. Its called a death spiral.
– Although not in the CBO report, a Fortune magaizine article last summer estimated the total wealth, not income, of the four hundred richest Americans. If you add up that wealth you see that these 400 Americans control about $2.7 TRILLION of wealth. Theoretically, if the government was to confiscate everything these Americans owned, sold it and applied what they received to the almost $28 TRILLION national debt we will have in about ten years, the rest of America would still owe our debtors about $25 TRILLION. The lesson: you cannot solve this impending disaster by taxing the rich more since even if you took everything they owned, it would reduce the national debt by less than 10%.
A lot of numbers but the message is so clear: we are about to do a Thelma and Louise off of the financial cliff and the Democrats are steering the car and the Republicans are not working the breaks. But this does not have to be the case. Consider what some other, smarter Americans are doing relative to the ballooning national debt:
– The CATO Institute is going through the last Federal budget, line by line, program by program, and identifying ways to cut and save taxpayer money. I will go into their findings in detail in the near future but they are easily finding hundreds of billions of dollars in either wasteful, useless, or redundant government operations that need to be terminated immediately.
– The President instituted his own Deficit Reduction Commission to look into ways to curb Federal spending and get the debt under control. As predicted, he gave it no support from start to finish and despite the excellent bipartisan recommendations they came up with, Obama, Pelosi, and Reid effectively neutered any action before it even got started. I feel sorry for those that worked and succeeded in implementing the charter of the commission, the political class never wanted them to succeed in the first place.
– Nicole Tichon of the U.S. Public Interest Research Group, (liberal leaning) and Andrew Moylan of the National Taxpayers Union (conservative leaning) developed and reported on a joint analysis of government spending entitled, “Toward Common Ground: Bridging The Political Divide To Reduce Spending.” They also easily found hundreds of billions of dollars a year that could be cut out of the Federal budget with minimal impact on most Americans, projects that they list (much like the CATO analysis) in their report. Many of these savings are not just straight budget cuts but straight forward, logical cost efficiencies that our political class should have been pursuing for decades. If you look at their list of cuts, the average American would have not problems with their recommendations since they are unaffected by the wasteful spending.
– The Bipartisan Policy Center, which is headed by former Democratic and Republican majority leaders, has been meeting on a regular basis in Washington to also come up with an approach to saving the country from its debt. The members on the panel addressing the issue within the Center include both Republicans and Democrats, most have extensive government budgeting experience, and they are addressing EVERY government expenditure including Social Security and Medicare.
– The Concord Coalition is headed up by an ex-Republican Senator, Warren Rudman, and an ex-Democratic Senator, Bob Kerry, and they and their coalition have also done extensive work in examining ways to reducing our out of control spending.
– In an AP/NBC poll that was reviewed in The Week magazine issue from December 10, 2010, the results showed that Americans favored government spending cuts over tax increases by a two to one margin.
So let’s review. The country is heading for insolvency by just about any way you measure reality. Republicans and Democrats, progressive think tanks and conservative think tanks, sometimes working together, have come up with drastic, viable and necessary approaches to avoiding sovereign insolvency. Ordinary Americans have voted do cut unnecessary government expenses via the AP pol, and in the November elections when dozens of Tea Party endorsed candidates were elected to curb spending.
It appears that the only people in the country that have not gotten the message are the long term, established political careerists in Washington. Their cuts, regardless of who is recommending them are minuscule compared to the overall budget. They sabotage their own deficit reduction commissions. The take the Bush tax cut debate issue, which revolved around whether or not to receive an additional $70 billion a year in taxes from the richest Americans and they manage to turn that into a one year additional deficit of over $400 billion, according to the CBO. Unbelievable.
If everyone else in the country sees the problem, why don’t our politicians? Probably because they are afraid to take an unpopular stand since it might cost them some votes in their re-election campaign even though their lack of courage is killing the financial viability of the nation. Very, very selfish and short term thinking.
The only other possible reason for their inaction and sabotage of reduction efforts is that they truly do not understand the basics of government finances. In either case, selfishness or ignorance, we are in for a Thelma and Louise ending unless changes are made.
The following steps might be a got start to getting our fiscal house in order in Washington:
– Step 1 – reduce government spending by 10% a year for five years using the spending reduction road maps that many of the above efforts have come up with.
– Step 2 – increase law enforcement efforts to crack down and eliminate fraud and criminal activity that robs the government of untold billions of dollars every year.
– Step 3 – bring back almost all of the deployed U.S. troops around the world who are stationed to fight potential conflicts that no longer exist (e.g. why does the U.S. still have over 50,000 troops stationed in Germany?). We no longer can afford to garrison the world with our troops.
– Step 4 – hold Congressional committee members accountable for their areas of responsibility and remove them from those Committee post for dereliction of duty. If this rule was in effect, committees with Medicare oversight responsibilities would be re-staffed, given that Medicare loses almost $100 billion a year through fraud and criminal activity.
– Step 5 – require all politicians to take and pass a course in basic economic theory so that they have at least a fighting chance of understanding how their excessive spending could destroy the country.
– Step 6 – the most important step, impose strict term limits on politicians in office. If you have no chance of getting re-elected as a politician, then selling your soul for a few votes is no longer an option, freeing you up to make the hard decisions for the benefit of America. Janis Joplin once sang that “freedom is just another word for nothing else to lose.” If you have nothing else to lose, i.e. you cannot get re-elected due to term limits, you now have the freedom to vote on what is best for the nation.
Americans have to understand that nothing else matters if the country goes bankrupt. Gay rights, education, clean energy, high speed rail, retirement funding, national security, police and fire protection, immigration reform, energy policy, medical costs and care, freedom, gun control, any issue that is important to you goes out the window if the economy collapses. Because if that happens you are left with only two choices: anarchy or martial law, neither of which would be pleasant and leave you living in a free, safe, and vibrant society. The only solution is to take our sour tasting, vomit inducing financial medicine by reducing spending on EVERY service the government provides, doing it in the least painful way possible, but understanding it will be painful.
CATO gets it, the Public Interest Research Group gets it, the National Taxpayer Foundation gets it, Obama’s Deficit Reduction Commission gets it, the bipartisan Policy Center gets it, and those Americans that got polled by AP/NBC and voted for tea Party candidates get it, why don’t the politicians get it? Oh, that’s right. They are already making plans for the 2012 elections. Two years away and they are already more concerned about getting re-elected in 2012 then saving the country. Shameful.