Debt on autopilot

August 28, 2009

At first glance this week’s budget projections paint President Obama as a spendthrift. The White House itself offered a grim glimpse of a future in which U.S. debt more than doubles to $17.5 trillion in a decade — an increase of nearly $10 trillion.

Merely servicing the U.S. debt will cost more than America currently spends on either defense or social security.

But the yawning deficit can’t be blamed on Obama — or for that matter, on Bush or on the financial crisis. Instead the government’s finances are locked on autopilot, with entitlement programs driving the country towards a fiscal crisis.

Spending on three giant programs — Social Security, Medicare and Medicaid — will account for three quarters of the extra borrowing over the coming decade. By 2019, it will more than double to $2.5 trillion — more than the U.S. government expects in total tax revenues for next year.

Washington needs to address the deficit soon. To avoid pointless political wrangling, it is first important to make clear what is not causing the fiscal meltdown — including the economic stimulus.

Even if you add in interest payments from the $789 billion recovery bill, the stimulus accounts for only a tenth of the rise in debt up to 2019, according to calculations by Chris Edwards at the Cato Institute.

Three years of weak tax receipts, courtesy of the recession, will cost the country about $1.3 trillion if interest costs are included. This represents just 15 percent of the borrowing binge.

And there is little the government can do with the other spending it has under its control. Indeed Obama is assuming that he will have little money to play with.

The White House forecasts have discretionary spending falling slightly in real terms from $1.26 trillion to $1.12 trillion. This includes a hefty real cut in defense from $687 billion to $559 billion in 2019. Spending on all other departments, including energy, education, labor and agriculture, is also set on a downward trajectory.

Failure to act could have a number of severe consequences. The first would be that debt servicing will swallow up an ever greater share of tax revenue. By the time current teenagers are working, around 36 cents for every dollar of income tax they pay will go to interest payments, according to White House figures. This compares with about 19 cents now.

Then there is the threat of a buyers strike on U.S. bonds. Berkeley economist David Romer argues that investors can quickly pivot from being eager to lend to governments at low rates of interest to being unwilling to buy Treasuries at any price. This may never happen, but the dangers increase along with the deficits.

Time is running out. Powerful as the United States is, the country continues to accumulate debt at this rate at its peril. The focus must be squarely on the real problems — medical spending and social security.

On healthcare this means ensuring that the costs to Americans are no longer hidden by employer-provided schemes. A more transparent system would put the brakes on rising costs more effectively than any other measure.

On Social Security the United States should gradually start to ratchet up the retirement age until it reaches 70. Social security was not designed to cope with an average retirement that now lasts more than 20 years.

The first step to preventing a looming fiscal disaster is to have a non-partisan discussion about the source of the problem.

The financial crisis has brought forward crunch time. Political procrastination on entitlement reform is now even more dangerous.

10 comments

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the following quote from the article is worthy of comment:

“The first step to preventing a looming fiscal disaster is to have a non-partisan discussion about the source of the problem.”

of course this is true. the solution to any problem begins with knowledge. but the problem with our governmental system is that “non-partisan(s)” don’t make the decisions; “partisans” make the decisions. and as we’ve seen time and time again, our partisans have their hands in the till on every issue and they aren’t willing to take them out!

Posted by grasspress | Report as abusive

This article fails to be politically acceptable because of its misunderstanding of Medicare and Social Security (MASS). These entitlement programs are the foundation of contemporary government and, for the most part, the rest of the government, namely the discretionary spending on defense, is obsolete. As the only black MASS in the federal government, federal spending on social programs is not creating any deficit whatsoever. Persecuting these social programs, as is done in this article is counterproductive and the root cause of the financial and economic crisis of the times.

Now, all is not well with these programs. Social security is good because it efficiently redistributes income from the rich to poor, but it is understaffed and persecuted by Medicare and Medicaid. Medicare and Medicaid are atrocios. Health theologically is not a social good, but a sociopath like law enforcement, ie law breaking. All other industrialized nations have univeral health insurance and many have totally free national health services. In an advanced nation health care is such an ethical dillemma, it is not even something you say thank you for. Cost cutting health care reform needs to take place along the lines of allowing the patient to refuse payment for negligent or abusive care. Tens, even hundreds over time, of billions of dollars would be saved if the quacks were smoked. This is complicated because the trademark infringement of the Democratic and Republic (DR) doctor party constitutes a serious form of conflict of interest whereby the status quo defends their ignorant grip on power, the endless battle between dumb and stupid, with chemical weapons against the wise.

As for the rest of the federal financial mess, the deficit is unsustainable, the fascist corporate and totalitarian bank bailouts building upon the military industrial money laundry, are the cause. If the government does not prioritize a balanced budget its dealings and abuse of power will remain forever in the marginal interest of the financial institutions until the debt burden becomes unsustainable and the economy collapses into high interest rates, high inflation and high unemployment, for a lack of any genuine political participation and truth.

The proper countermeasures against the economic recession are to devaluate the US dollar and Euro against developing nation currencies to stimulate the export market, 2/3 of economic growth, stop and rescind all corporate and bank bailouts. To balance the budget by 2011, or 2010 if the 111th Congress is dissolved, when the bailouts will be over, the US must (1) respondibly reduce military spending with a $400 billion limit and (2) reduce medical spending with socially secured patient refusal free of retaliation and (3) The social security will pick up the rest of a reasonable deficit not exceeding one half of the surplus.

“The first step to preventing a looming fiscal disaster is to have a non-partisan discussion about the source of the problem.”

FOREIGN POLICY

Posted by dvictr | Report as abusive

All these ‘unsustainabilities’ have been going on for decades, sustained by politics of irresponsibility. Despite what has happened in the past 2 years, nothing has fundamentally changed. Because the culture is the same – many call it American Exceptionism. I call it American Triumph, for the 5% who are in charge; and American Suicide for who constitutes the rest. And nothing will change until the 5% is hit.

How large can the debt and deficits get? There is no limit when you are dealing with $10 trillions, $20 trillions, $100 trillions. These are accounting entries of fiat money. They are created by man purely for manipulation. They represent no physical or human reality. But the games, the manipulations of humans, resources, living infrastructures, do have consequences. And one day, the game will be up. This is how revolutions got started. Funny – during revolutions, nobody care about money anymore.

Posted by The Real Deal | Report as abusive

And what happens when interest rates go up, as they MUST!
There are 22.5 million US government employees. There are only about 20 million jobs in the nation’s manufacturing and construction sectors combined. The average annual salary on the federal government payroll is $US 75,419 this year, according to Econwatch. The story is much the same at the state and local levels. In Pennsylvania, the average state employee has an annual salary of about $US 68,000 while the state’s average household income is $US 48,576. The US private sector has a per capita income of $US 39,751 and a per household income of $US 50,740.
The George W. Bush years were very lucrative for federal workers. In 2000, the average compensation (wages and benefits) of federal workers was 66 percent higher than the average compensation in the U.S. private sector. The new data show that average federal compensation is now more than double the average in the private sector.
1) Make all politician’s pay a percentage of the AVERAGE pay of their constituents. That would give them INCENTIVE to get jobs back from China.
2) Make all politician’s retirement plans a percentage of the AVERAGE retirement plan of their constituents, that provides INCENTIVE to work for the PEOPLE.
3) Make all politicians get on SOCIAL SECURITY, like the rest of us, and dissolve their fancy, overpaid plans. All State/Federal workers also.
That will provide INCENTIVE to fix what THEY BROKE.
4) Make all politician’s medical benefits a percentage of the AVERAGE benefits of their constituents, that provides INCENTIVE to work for the PEOPLE .
5) Make all politician’s pensions dependent on the security of their constituent’s pensions.
If the People are losing their pensions due to economic distresses then the politicians should also.

Posted by Milton | Report as abusive

Social Security is NOT an “entitlement”. The WORKERS pay money into Social Security, then, like a Tontine, withdraw it. The Government has been STEALING the SURPLUS for decades. Further, the government has been giving Social Security to UNDESERVING immigrants. Old Russians are brought here by their relatives and “given” the savings of American Workers. G*d D*mn anyone who calls Social Security an entitlement, and G*d D*mn the politicians who have been LOOTING it.

Posted by Wilbur | Report as abusive

Why is no one talking about a MORATORIUM on new debts! Surely, there are ways to control excesses of greed that are causing health care problems, etc. without rewriting and funding the whole system.

MORATORIUM, MORATORIUM, MORATORIUM

Posted by Paullette | Report as abusive

It surprises me that so far only Russia is reducing heavily their U.S. exposure.

considering Iran is part of the Opec block of US investors then no doubt given future economic sanctions theyll most likely cut their contribution completely,or in line with the percentage sanctions effect them – which I estimate is a few billion a year, still a few billion more than we can afford.

Posted by Dan | Report as abusive

In the late 80′s a pie chart in the 1040 instruction book caught my attention. Still there, it describes the sources and expenditures of US Treasury funds including taxes. Not surprising was that Defense was the greatest spending portion.

What I found alarming at that time was that almost as large a piece of the pie went to service the public debt. My reasoning held that this burden would eventually be lifted if the US Treasury would simply STOP selling bonds.

This process never did stop, but during the Clinton administration it did slow down considerably. By the time Bush took office, that piece of the pie had been dramatically reduced along with the debt and deficit.

We now know the result of financing 2 wars to pump up that debt and deficit again. The meltdown on Wall Street last fall has by now been embraced by both Bush and Obama as an excuse to raid the treasury on behalf of the companies which caused the problem. Expect the DEBT piece of the US Expenditures pie to eclipse defense in your next 1040 book.

It has recently been reported that many companies receiving TARP have to paid out total bonus money in excess of their earnings. A substantial tax penalty (70% or better?) on these bonuses would net $Billions which could be used to buy back outstanding debt and discourage future feeding frenzies.

The remaining $Trillions in debt can be dispatched by the first rule of holes…”When you find you\’re in one; stop digging.” Or as previously mentioned; this burden would eventually be lifted if the US Treasury would simply STOP selling bonds.

BTW–The replacement for the US Dollar is already in place. Google “Amero” to find out more. The Amero has been minted in Denver since 2006. And you can expect the day to come when your soon-to-be-worthless Dollars can be traded in for them at say 25%?

The first step to healthcare is to develop healthy lifestyle among the population.
If you look at what people are eating today, you can estimate the cost of healthcare ten years later. They are walking time bombs to blast the budget of national healthcare funds.