Just how miserably has the stimulus failed?
The next great crisis: America’s debt
At this rate, your share of the load will be $155,000 in a decade. How chronic deficits are putting the country on a path to fiscal collap
Normally Paul Krugman, the liberal pundit and Nobel laureate in economics, and Paul Ryan, a conservative Republican congressman from Wisconsin, share little in common except their first names and a scorching passion for views they champion from opposite political poles. So when the two combatants agree on a fundamental threat to the U.S. economy, Americans should heed this alarm as the real thing. What’s worrying both Krugman and Ryan is the rapid increase in the federal debt – not so much the stimulus-driven rise to mountainous levels in the next few years, but the huge structural deficits that, under all projections, keep building the burden far into the future to unsustainable, ruinous heights. “The long-term outlook remains worrying,” warned Krugman in his New York Times column…
…Ryan flays the administration for piling new spending on top of already enormous deficits. “This isn’t a temporary stimulus but a ramp-up in debt followed by a greater explosion in spending and debt,” he told Fortune, predicting a day when America’s creditors will start viewing the U.S. Treasury as a risky bet. “The bond markets will come after us with a vengeance. We’re playing with fire.” Krugman favors far higher taxes, while Ryan wants to curb spending, but for now what’s so big and so dangerous that it distresses such diverse types as Krugman and Ryan – and should scare all Americans – is the Great Debt Threat.
The bill is far too big for only the rich to pick up. There aren’t enough of them. America will have to lean on citizens far below the $250,000 income threshold: nurses, electricians, secretaries, and factory workers. Within a decade the average household that pays income tax will owe the equivalent of $155,000 in federal debt, about $90,000 more than last year. What the Obama administration isn’t telling Americans is that the only practical solution is a giant tax increase aimed squarely at the middle class. The alternative, big cuts in spending, aren’t part of the President’s agenda. To keep the debt from wrecking the economy, the U.S. would need to raise annual federal income taxes an average of $11,000 in 2019 for all families that pay them, an increase of about 55%…
…It can’t go on forever, and it won’t. What will shock America into action is the prospect of fiscal collapse, which will grow more vivid each year. In 2008 federal borrowing accounted for 41% of GDP, about the postwar average. By 2019 the burden will double to 82% by the CBO’s reckoning, reaching $17.3 trillion, nearly triple last year’s level. By that point $1 of every six the U.S. spends will go to interest, compared with one in 12 last year. The U.S. trajectory points to the area that medieval maps labeled “Here Lie Dragons.” After 2019 the debt rises with no ceiling in sight, according to all major forecasts, driven by the growth of interest and entitlements. The Government Accountability Office estimates that if current policies continue, interest will absorb 30% of all revenues by 2040 and entitlements will consume the rest, leaving nothing for defense, education, or veterans’ benefits…
To understand why a massive tax increase, probably a VAT, is the mostly likely outcome, it’s crucial to look at what’s driving the long-term, widening gap between revenues and spending. Put simply, spending is following a steep upward curve, while revenues are basically fixed as a portion of GDP. Why? Because future spending is driven mostly by entitlements, which are programmed to rise far faster than national income, while revenues depend heavily on the personal income tax, which yields receipts that typically rise or fall with GDP. Under George W. Bush, the U.S. experienced a prelude to the crisis before us: Spending rose rapidly, while revenues remained reasonably flat. Bush created an expensive new entitlement, the Medicare drug benefit (cost this year: $63 billion), and let spending on domestic programs from education to veterans’ benefits run wild. Over seven years the wars in Afghanistan and Iraq added a total of some $900 billion to the budget. All told, Bush raised spending from 18.5% to 21% of GDP, setting in motion a chronic budget gap by piling on new spending without paying for it.
Under Obama the Bush trend keeps going, but this time on steroids. It’s important to see the Obama budget projections as two phases, the crisis period of astronomical spending in 2009 and 2010, and the normal phase, from 2011 to 2019. Most of his stimulus and other big programs are designed to give the economy a jolt in 2009 and 2010 and then largely disappear or be offset by tax increases – at least that’s the plan. Then the surge in outlays comes from two forces that would wreak budget havoc for any President: the relentless rise in entitlements and the surge in debt interest.
Making the challenge far greater: Obama’s budget is packed with a wish list of expensive new programs, led by a giant health-care-reform plan. He promises to pay for them mainly with higher taxes. But if extra revenues don’t materialize – and most that he’s proposed now look unlikely – will he abandon many of his cherished priorities or push them through without full funding, substantially deepening the debt crisis?
June 10, 2009
Tags: Barack Obama, Deficit, Democrat Congress, GDP, National Debt, Socialism Posted in: Economy, Politics, Taxes
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