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If We Ever Get Out of the Frying Pan, It’s Straight to the Fire

by on February 26, 2011

Most people are quite aware that we have a debt problem in this country. I don’t mean just private debt (although that is surely a problem), but government debt. Thanks to a profligacy that seems to know no bounds, we have run continual deficits since George W. Bush came into office in 2001. We have repeatedly spent more than we take in and have had to borrow money which, of course, gets added to the federal debt. Taken together, state, local and federal debt is nearly the size of our entire GDP and is at its highest since WWII.[1]

The news that has made the rounds the last month or two is that we are quickly approaching our federal debt ceiling. The debt ceiling was instituted in 1917 to put a cap on the amount of money the Treasury could borrow.[2] The debt ceiling has been raised numerous times throughout the years and could be raised again in the coming weeks. The total debt at the writing of this article sits at $14,119,807,822,019.49.[3] The debt ceiling limits the total outstanding public debt to $14.294 trillion. Clearly, we’re about to hit that limit.

Is this a crisis situation? Probably not yet, but we’re getting there. Japan’s debt is 196% of GDP and they have yet to collapse (which is not nearly the same thing as saying they are doing okay).[4] The debt right now is manageable for the time being. Just like some households are able to take on large amounts of debt and come out okay, so too can countries. It is heavily dependent, though, on a number of variables, such as future expected growth. A country with negative growth and a growing debt is not in a good situation. A country with strong growth and growing debt is, at the very least, in a manageable position in the short run.

The manageability of the U.S. debt will depend on what happens in the next few years and the fiscal decisions made by our elected leaders. As I have explained before[5], the U.S. could freeze spending at 2010 levels and balance the budget by 2015, assuming 3% growth (which isn’t unrealistic, by any means[6]). I’m fairly confident that a strong attempt to get our year-to-year finances under control combined with a credible commitment to fiscal discipline in the future would allow us to bypass this debt nightmare with relative ease. Of course, I say that with the assumption that our politicians won’t act like complete nincompoops going forward, which is entirely naïve because they will and everyone knows it. Still, it’s important to put forth an ideal standard so that we can gauge their shortcomings.

Americans are stereotypically known to be rather shortsighted. Stereotypes, like gossip, usually contain a bit of truth, and this is no exception. Everyone is hysterical about the federal debt, not realizing that our real problems lie in the not-so-distant future and the demographic bombshell that is rapidly creeping up on us. You see, even if we balanced the budget and eliminated the deficit tomorrow, the unfunded liabilities with regards to Social Security and Medicare would quickly erase those fiscal gains.

Consider this: Projecting outwards, the estimated costs of Social Security and Medicare amount to a whopping $112 trillion.[7] Yes, you read that correctly. Those two programs alone will cost us roughly eight times our current GDP. Although it’s true that our economy will grow over the next twenty or thirty or forty years, nobody thinks it will be eight times its current size by 2060, or even 2080.

The obvious question is this: What is driving these costs? The answer mainly comes down to demographics. The plain fact of the matter is that we have an aging population, fertility rates are falling (in America and more dramatically across Europe) and we are living longer. When our government created these entitlement programs, we had a population pyramid with younger people at the base and older generations at the top. But as time goes on that pyramid will begin to turn itself upside down with the younger generation still at the bottom. In other words, they will be supporting an older population more numerous than themselves. In 1960, there were 5.1 taxpayers per retiree. In 2030, there will only be 2.2 taxpayers per retiree, and the numbers only become more depressing as time goes on.[8]

People always want more government services, but they dislike taxation. The way Medicare and Social Security are going, eventually we are going to get to a point where we are spending so much on those programs that there is little to nothing left over for anything else. We will be unable to spend money on roads, defense, and education (and don’t even think about universal health insurance). Some will propose that we tax the rich, as though that is the solution to all of our problems (“The sun is going to explode, destroying everything in the galaxy? Tax the rich!”); in fact, that would simply be a temporary fix to a larger problem, and only a partial one at that. Historically, the revenue the government brings in from taxes tends to hover around 19% of GDP regardless as to the taxation rates.[9]

The government could levy a 100% tax on everyone’s incomes, but it doesn’t mean they would get any more revenue than they do now. Good luck, then, with fixing $112 trillion in unfunded liabilities with higher tax rates. It won’t make a damn bit of difference in the end.

The point of all of this is simply to call attention to the major difficulty we face in the coming decades. The debt as it exists now is a problem; as a matter of fact, if we don’t deal with it now our current and future problems will both eventually hit us at the same time, and at that point it’ll be nearly hopeless. We need to figure out our debt and deficit troubles quickly so that we can focus our attention on the future.

I confess that I am a bit of a pessimist. Keynes once wrote that in the long run, we’re all dead. That is true, of course, but it’s also rather trivial. In the long run, I think we’re all probably screwed.

[1] Steven Mufson (2011), “Federal, state and local debt hits post-WWII levels.”

[2] Robert Murphy (2011), “Should Congress Raise the Debt Ceiling?

[3]See the website of the U.S. Treasury here or the U.S. Debt Clock here.

[5] See here.

[6] Joseph Lazzaro (2010), “Economists lower 2011 U.S. GDP forecasts to 2.5%.”

[7] See a different U.S. debt clock with that figure here. Some will say that number is unrealistically high, but even the Dallas Fed has estimated unfunded liabilities to be around $99 trillion. See here.

[8] Thomas Woods, (2011). “Rollback: Repealing Big Government Before the Coming Fiscal Collapse.” Regnery: New York, pp. 8-10


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