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Thursday, February 4, 2010

The Fiscal Crisis

It used to be that describing Democrats as addicted to 'taxing and spending' was an accurate epithet. Then the Republicans, obsessed with low taxes but seeing the electoral benefits of spending, became the party of 'borrow and spend'. Now Democrats, using a variety of dubious excuses, are copying Republicans.

On February 2, President Obama sent the FY2011 budget message to Congress. A common characteristic of the President's message, and almost all of the media reports, is to minimize the really serious situation into which we have put ourselves. The President, living in fantasy land, promises to freeze - not cut - $477 billion in discretionary spending. He also seems to think that the budget deficit can be cut in half by 2013 when the real need is for a budget surplus to repay debt.

The overall spending request is $3.833 trillion dollars but that is matched by only $2.576 in taxes leaving a deficit of $1.266 trillion. All of these numbers look pretty small - as they are intended to do - until a little elementary analysis is performed.

First, what is a trillion anyway. A trillion is a thousand billions or a million millions. So, line up a million millionaires and take away all of their money. That raises an extra trillion dollars in tax but still does not eliminate the deficit.

Perhaps, then, we should consider punishing those at the other end of the financial spectrum. Take 17.6 million full time workers, each making the Federal Minimum Wage of $7.25 per hour and working 2080 hours (40 hours per week for 52 weeks) each year. Confiscate all of their earnings and that will eliminate the remaining $266 billion of the deficit.

Next, consider the overall numbers: the Federal Government is planning to spend nearly 48% more than it takes in. Were a fairly average family, earning - for example - $67,500 a year to spend $100,000, it would soon be in deep financial trouble. That is where the United States is now.

Third, think about how the money is being spent. The really big items are Defense $749.5 billion (19.55%) and Veterans Benefits $124.5 billion (3.25%), Interest on the National Debt $250 billion (6.52%), Social Security $721.5 billion (18.82%) and Medicare $497 billion (12.97%).

The total of these five line items consumes more than all of the taxes to be raised so everything else to be spent, including $400 billion for Medicaid and other Health Spending, must be borrowed.

What then is the solution? Given the aging of the population, Social Security payments are projected to grow and grow and grow. In addition, given the rate at which health care costs (quantity and price) are increasing, it will not take long, unless radical action is taken, for a major crisis to occur in that sector alone. Other transfer payments - Medicaid, Food Stamps, Farm Subsidies and the like - are not likely to be reduced.

The time is soon coming when it will no longer be possible to use today's tactic of irresponsible borrowing to unload the problem onto our children and grandchildren. Growing our way out of the problem just won't happen either. We have to face the ugly reality of major spending cuts in our favorite programs and, without a doubt, tax increases.

And even if we were able to inflict the pain on succeeding generations, we take a major strategic risk by allowing China to own so much of our debt.

Will there be action in time. Only if we, the People, demand it. Unfortunately, a majority of voters are takers from, rather than contributors to, the public treasury. They can be relied upon to make their voices heard in favor of more spending. Most of those who are contributors will be equally vocal in favor of lower taxes.

If politicians, responding to the noise, are unable to see beyond re-election, then a disaster is inevitable. Whether the disaster is Weimar Republic style inflation, just a major reduction in national income and welfare, tyranny, or all of these is not yet certain. What is certain is that we need to act now to minimize the danger.

Do elected politicians have the courage to act? Do they have the will to risk the wrath of the electorate because they have done the right thing?

I doubt it but it would be a pleasant surprise if they did.

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