Remember when Newt Gingrich’s crew of newly-minted Republican Congressmen, flush with a big victory in mid-term elections during Clinton’s first term, threatened and then carried through with a so-called “government shutdown”? It went over like a fart in church. It was nothing more or less than political theater for the masses, but it backfired, and the Gingrich crowd had to restore the government to normal functioning in short order. Personally, I could never tell any difference between whether the government was shut down or operating normally.
Here we are again, with a different crew of newly-minted Republican Congressmen battling for power against a Democratic President, threatening that a government “shut down” looms, whatever that means, unless the Senate and the President agree to $40 billion worth of cuts to the budget, instead of just $33 billion. Obviously, nobody thinks much of keeping the government continuously operating if the two sides are willing to undertake the risk of a shutdown over a measly $7 billion. The Federal government budget deficit alone is projected to be well over a trillion (roughly $1.6 trillion in 2011) more than the amount which is in dispute. The Federal Reserve Bank is holding crappy assets on its balance sheet that nobody voted to allow them to purchase (yet that represent a claim against taxpayer’s future earnings in so far as they are crappy) that exceeds the total expected annual deficit by at least two or three times.
Medicare and Medicaid spiral out of fiscal control, yet the argument coalesces around whether to reduce discretionary spending by $40 or $33 billion. The difference will buy about five days of Medicare entitlement spending, substantially less over the course of the next decade as the program nearly doubles its expenditures, according to the Kaiser Family Foundation Medicare Fact Sheet. 47 million people, out of a population of a little more than 300 million, are currently beneficiaries under the program, which is expected to rise to 80 million over the course of the next two decades. Medicare is nominally solvent about now, but is expected to reach a point of insolvency in about a decade if projected trends obtain.
Social Security is in better shape fiscally, but also has roughly 50 million participants. Imagine that for a moment. Assuming that the set of Social Security recipients and Medicare recipients is nearly perfectly matched, roughly sixteen percent of the population is receiving some sort of entitlement check or benefit from the government, and as baby boomers retire (yet continue to live long after retirement), the numbers, and percentage of covered beneficiaries, will only dramatically increase, especially if today’s population growth rates persist into the future.
The fiscal deficits, of whatever source, continue to add to the national debt load at a pace not seen since World War Two. Last year’s budget deficit was nearly $1.3 trillion dollars. For 2011, it is expected to climb to $1.6 trillion, according to the US Treasury Department, after which point it is expected to decline to about $1.0 trillion in fiscal 2012. Each trillion dollars of new debt equates to about 7% of the annual gross domestic product. Here’s what the total debt of the United States looks like relative to gross annual output (the difference between gross debt and public debt is intragovernmental debt, i.e., debt the government owes to itself, such as in the Social Security Trust Fund, so the relevant line is the red one):
Now there is no magical number or ratio as to what the correct amount of debt ought to be. Obviously, during World War Two, the correct amount, if we assume victory in the war stands as evidence of its correctness, was quite high as a ratio of the total wealth produced during those years. The question to ask is not what is the correct amount of debt, but whether the burden of the debt is worth its costs. In other words, are the restrictions on individual freedoms that debt entails (i.e., the higher taxation) more than offset by the benefits returned to the individuals tasked with paying it? The relevant question resolves to the individual, not the government, if we are to assume that the state exists in the service of individuals, as the US government’s founding documents proclaim.
The reason things are getting so nasty in this budget debate, and will likely continue in acrimony for a number of years to come, is the generational and cultural differences from which it arises. To greatly simplify, the freedom of young Americans, mostly Hispanic and recent immigrants or first-generation, will necessarily be impaired, and at an increasing rate, if the government is to keep the promises it has made to its elderly, who are overwhelmingly white. Will the benefits to the young exceed the restrictions on freedom that will be required in order to keep these promises to the elderly? Notwithstanding the silly dispute over $7 billion of discretionary spending, the only spending that really matters is mandatory spending, which by its nature, can’t be changed without changing the laws providing for it, and essentially, that’s the reality over which the politicians are threatening shut down.
If it is assumed that some level of spending on defense is mandatory–perhaps half of that spent last year–then fully 70% of spending is mandatory, with Medicare, Medicaid and Social Security making up over well over half of the mandatory allotment. Roughly a third of the $3.5 trillion spent last year was borrowed.
There are ways around the massively growing pile of debt, of which about $9 trillion is privately held, not including the roughly $5 trillion of debt Fannie and Freddie owe or insure, both now under government conservatorship. First, and most obviously, is by devaluing the currency, a strategy, if for differently stated reasons, the Fed is already pursuing. Another is by simply reducing government expenditures to a level where fiscal budgets balance, but that would entail massive reform of entitlement programs, particularly Medicare and Medicaid, and reduction in Defense and discretionary expenditures by equally massive amounts. Tax increases alone won’t get the job done. The problem the US faces arises from its own success. The US has grown so rich in such a relatively short amount of time that any retrenchment, any austerity imposed by politicians, is likely to be met with howls of derision by those affected, and politicians did not get where they are by imposing austerity on their constituents. So the pain gets delayed. The government suffers a meaningless shut down while real problems fester. Pain delayed, however, is not pain denied. My guess is that the only way out of this mess will be default by inflation. The Federal Reserve will one day be the most hated political entity in the history of mankind (if it isn’t already), but only because it will be left to do the wet work that the politicians on Capitol Hill didn’t have the stomach for.
The US still has a phenomenal store of wealth generated by years of wealth creation, but has been spending it lately like a spoiled trust-fund baby. At some point, the amount of wealth consumed has to balance with that which is created. The cupboard does not magically replenish itself. Deficit spending can not endure to infinity. Austerity awaits, the only questions that remain are how severe will be the pain, and for whom it will be most intensely felt.