Standard & Poor’s recently issued a warning saying that the U.S. debt rating could be downgraded due to excessive spending, debt and deficits. The investment community is questioning our government’s ability to maintain sound fiscal and monetary policy and is warning that our long-term rating will be reduced. How has it come to this?
In 2008, our gross public debt over 230-plus years was about $10 trillion. Over the three years (fiscal year 2009-11), our country will amass new debt of about $4.5 trillion. For context, all of World War II cost our country about $4 trillion in 2009 dollars.
We borrow about 40 cents of every dollar we spend, and our Federal Reserve has been purchasing more than 70 percent of our newly issued bonds with newly printed dollars. Printing money to buy one’s own debt is unlikely to end well and is endangering our status as the world’s reserve currency.
Our gross national debt now is approaching our Gross Domestic Product (GDP), a historical point of decline. We have a GDP of about $15 trillion and a national debt of about $14 trillion.The share of the debt for each person in the United States is $45,000.
The primary reason countries collapse or have revolutions is debt. A 90 percent debt-to-GDP ratio is the historical tipping point, and we are there. Greece collapsed at a 113 percent debt load and now pays nearly 20 percent interest on its bonds. The debt is an existential threat to our nation.
We simply can’t continue spending money we don’t have and printing money and buying our own debt. We are on the fast track to a very predictable fiscal train wreck if we don’t make significant changes in our budget — and soon. We have a chronic spending problem.
Another key issue facing us that also must be addressed is the gargantuan unfunded entitlement liabilities we face. With Medicare, Medicaid and Social Security, our country faces about $100 trillion in unfunded liabilities. There is zero chance that can be paid.
Our government has made promises that can’t be kept and most people now understand that. The Medicare chief actuary has told Congress the system is unsustainable. Almost nobody younger than age 50 believes they will get Social Security or Medicare in its current form. They are correct.
The recently passed House budget framework attempts to address the issue for Medicare and Medicaid, the most problematic programs. Unfortunately, the predictable “throw grandma under the bus” charges are being recklessly trotted out. Don’t buy it. In the plan, people in the system now and age 55 or older will face no changes.
The reality is that our entitlement programs are guaranteed to fail if we continue on our current path. The proposed budget tries to save Medicare, not destroy it. If our politicians continue to demagogue the issue, try to scare seniors and kick the proverbial can down the road, the fixes will be far more drastic and much more painful. But they will come.
We need to refocus our behemoth federal government on things they are constitutionally required to do and start divesting other functions that are no longer affordable or that the states or private sector can do. We simply can’t afford the government we have. It will destroy us on our current path.
President Barack Obama and others want to raise taxes on the “rich” and make them pay their “fair” share — “rich” being defined as a couple making $250,000 a year; hardly wealthy in California. It‘s an easy soundbite for politicians, but the reality is that the United States already has one of the most progressive tax systems on the planet.
According to 2008 IRS data, the top 1 percent ($380,000-plus) of taxpayers pay roughly 40 percent of all income taxes while earning 20 percent of the income. The top 10 percent ($113,000-plus) of taxpayers pay about 70 percent of the income tax while earning 46 percent of the income. And 47 percent pay zero income tax. How much more should the “rich” pay?
The government could tax all income over $250,000 at 100 percent and it still would not close this year’s deficit and would destroy our economy in the process. We have historically captured about 19 percent of GDP in tax revenues while we are spending about 25 percent of GDP. Whether rates were at 90 percent or 28 percent, the tax revenue still averages 19 percent of GDP. Raising taxes won’t significantly change that historical dynamic.
More importantly, how does taking money out of the private economy through higher taxes help that private economy grow? It won’t. Raising taxes would impede economic growth, not promote it. Spending is the core problem we have to face.
Private-sector growth would both reduce welfare-related expenditures and expand the tax base and increase revenues much more effectively than penalizing people making more than $250,000. The focus should be on cutting spending, reducing the size and burden of government, and implementing policies that would encourage our economy to grow.
The good news is this situation is within our control to correct, if we muster the political will. The House budget isn’t perfect, but it is a good start toward dealing with our chronic deficits and long-term fiscal health; at least it has a template for balancing the budget. President Obama’s budget does not.
It is time to get serious about spending. Either we enforce our own spending discipline, or the bond markets will enforce it for us — as the warning shot from S&P demonstrated.
Investors will not continue to fund our debt if they think we will just devalue their bonds by printing money. We simply cannot tax, spend, borrow and print our way to prosperity.
Our wounds are self-inflicted and can be fixed. This is, after all, America — the most innovative, free and productive nation in the history of mankind. Failure is antithetical to the American character.
We’ve successfully faced great challenges in our history, and we will sort this out and regain our collective footing and prosperity. As the political processes works itself out, keep that in mind. But one way or another, the spending party is over.
— Tom Watson is a Santa Barbara businessman and was the 2010 Republican nominee for the 23rd Congressional District.