Recently Standard & Poor’s issued a warning 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 next three years, our country will amass a new debt of about $4.5 trillion. World War II cost our country about $4 trillion in 2009 dollars. Our gross national debt is now approaching our gross domestic product which signals a historical turning point of economic and social decline.
The present generation borrows about 40 cents of every dollar spent by the government from its children, and our Federal Reserve has been purchasing over 70 percent of our newly issued bonds with newly printed dollars. The resulting inflation that results from this expansion of the money supply will dramatically reduce the value of savings for the young, poor and aged.
It’s now clear that we cannot continue spending money that we don’t have and printing money to buy (“monetize”) our own debt. We are on the fast track to a very predictable fiscal trainwreck if we do not make significant changes in our budget, and soon.
We have a chronic spending problem. We simply can’t afford the government we have, and it will destroy our society if we remain on this present course. Worst of all, young people — college students who are the next generation — will bear the brunt of our government’s irresponsible spending.
It’s their future earnings we are spending today, and it is simply immoral.
But it gets worse — our government has made promises that cannot be kept. Between Medicare, Medicaid and Social Security, our country faces about $100 trillion in unfunded liabilities. There is zero chance those commitments can be met, and most people intuitively know this. Almost nobody under the age of 50 believes they will get Social Security or Medicare in its current form.
The recently passed House budget framework attempts to address the issue for Medicare and Medicaid, the most problematic programs. But Democrats have responded with the predictable “throw grandma under the bus” charges. Don’t buy into it: In Paul Ryan’s budget plan, people in the system now and 55 or older will face no changes to their entitlements.
The reality is 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, 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.
Allow me to dispel another myth that is impeding our escape from the fiscal abyss: This problem cannot be solved on the back of the “rich.” The President’s solution is to raise taxes on couples making over $250 thousand a year, and make them pay their “fair” share. The reality is that the U.S. already has one of the most progressive tax systems on the planet.
According to 2008 IRS data, the top 2 percent ($250 thousand and over) of taxpayers pay roughly 50 percent of all income taxes while earning 25 percent of U.S. income. Forty-seven percent of Americans pay zero income tax.
The government could tax all income over $250 thousand at 100 percent and it still would not close this year’s deficit — in fact, it would destroy our economy in the process. Regardless of top marginal tax rates, we have historically captured about 19 percent of GDP in tax revenues while we are currently spending about 25 percent of GDP.
More importantly, how does taking money out of the private economy through higher taxes help that private economy grow? It won’t. Spending is the primary impediment to economic recovery that we face today.
The House budget isn’t perfect, but it is a good start towards dealing with our chronic deficits and long-term fiscal health; at least it has a template for balancing the budget. The President’s budget doesn’t come close.
It is time to get serious about spending. 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: Either we enforce our own spending discipline or the bond markets will enforce it for us, as the warning shot from S&P demonstrated.
One way or another, the spending party is over. Young Americans should be jumping for joy — you’ll be much better off.
Tom Watson is a local entrepreneur and former Congressional candidate for the 23rd district.