U.S. Fiscal Responsibility – An Assessment of Growing U.S. Deficits and Debt Obligations
Fiscal responsibility is rapidly becoming one of the most important issues facing the United States. Debt is growing at an unsustainable rate and unless decisive action is taken soon time may be running out to voluntarily change the financial course of our future. Failure to reign in debt could lead to a fiscal crisis where investors, both foreign and domestic, lose confidence in the U.S. ability to manage its budget. This in turn, would decrease the value of the U.S. debt financing instruments, i.e. Treasury Bonds, affecting the U.S. ability to borrow at affordable rates and driving up interest rates resulting in either severe inflation or deflation and high unemployment. Without strict adherence to fiscal responsibility, which at this point equates to cuts in both discretionary and non-discretionary spending and increases in tax revenues, these outcomes may be unavoidable.
One of the main factors for the increasing U.S. debt is our political leaders. The decline of moral and ethical values combined with a lack of fiscal responsibility has produced a decade of unrestrained spending by both parties of congress. Special interest group’s driven primarily by large Multi National Corporations (MNC’s), their associated industries, wealthy investment groups, and a myriad of other interests have purchased and influenced legislation via campaign contributions and lobbying. The result has been a congress more interested in providing for the needs of financial contributors than for the interests of the country at large. This level of corruption has resulted in laws that benefit the short term profitability of these special interests at the expense of the citizenry, which was demonstrated with the inappropriate deregulation of the financial sector which required hundreds of billions in bailouts for irresponsible bankers.
Political maneuvering that catered to special interests, generated years of reckless spending, and resulted in a disregard for fiscal responsibility has, according to the U.S. National Debt clock, raised the current level of debt (as of October 2010) to $13.5 trillion up from $5.6 trillion a decade ago. Our debt is increasing at a rate of $4.14 billion per day. The U.S. Gross Domestic Product (GDP) the measure of the U.S. overall economic output in 2009 was $14.25 trillion, expecting to increase to $14.7 trillion in 2010. At projected 2010 levels, the U.S. debt will reached 91% of GDP, an already alarming amount that is expected to increase further.
War is another factor that has increased U.S. debt. Wars prior to the Vietnam era were all repaid within a few decades. Vietnam however, saw a change to this practice and “The War on Terror” now called “Overseas Contingency Operations” was the first war in history largely financed through debt while accompanied by a cut in taxes. Combined, the War in Iraq and Afghanistan have already cost over $780 billion to over $1 trillion dollars (depending on the data source). It remains a significant contributor to the increase in debt and despite a troop scale down in Iraq, Afghanistan is ramping up forces and neither war appears to have a realistic end date.
U.S. military expenditures remain the largest source of discretionary spending at $662 billion for 2009 ($782 billion when military related national security costs are included). This expense exceeds the combined military expenditures of the top 15 countries which stand at a total of $611 billion. Cost of “Overseas Contingencies Operations” in both Iraq and Afghanistan for 2009 was $136 billion. There are also additional costs associated with the rapidly increasing use of independent contractors for troop support, logistics, and privatized security forces. These costs are already in the tens of billions and are expected to continue to grow. The U.S. is also overextending foreign operations abroad. The U.S. currently maintains 30 U.S. Air Force Bases or joint Air Bases in 15 different countries, 97 Army bases, command centers, and training facilities in 15 different countries, 16 Marine Corps camps, air stations, and training facilities in 5 different countries, and 16 naval bases, naval air stations, and command centers in 10 different countries.
The third factor contributing to debt is that the U.S. is consuming much more than it produces. This is leading to a massive trade deficit. This deficit increase has gone from 5% of GDP to 17% of GDP in the past 30 years. In our attempts to globalize and ensure free trade many of our largest companies seek access to cheaper labor and resources overseas which limits internal production. The result is that we are not producing at the levels needed to sustain our consumerism while allowing cheap products from abroad to flood our markets. Compounding the problem is the increasing trade imbalance with China, which is concentrating incredible wealth within the Chinese government and is creating a Chinese middle class largely from U.S. dollars, thus transferring wealth away from the U.S. middle class. The results of such imbalances are losses in U.S. jobs and subsequent tax revenues. It is also enabling China, our largest trading partner, the revenue to purchase a greater level of U.S. debt instruments. Almost half of our debt is now foreign owned, and China, owns most of the foreign debt. If we do not change these policies we could become increasingly dependent on other countries, namely China to keep purchasing our debt. When the trade imbalances reach a level where they represent too much risk, a real threat exists that those countries purchasing U.S. debt instruments would stop resulting in a potential devaluation of U.S. Treasury Bonds followed by a rapid drop in the value of the dollar.
There are other factors on the horizon whose long term potential may be as equally devastating as those afore mentioned. Social security surpluses have been used to help decrease the deficit each year, but within the next decade these surpluses will end and instead become possibly one of the largest contributors to the debt. This would be driven by increasing numbers of retiring baby boomers drawing upon their retirement benefits. Equally alarming are long term Medicare cost which are forecasted to dramatically increase due to rising health care costs caused by an aging population, increasing chronic illnesses, and obesity related diseases. If left on its current course, the potential increases in debt could become so deep that our children will experience tax levels prevalent in socialist countries (50% to 60% or more) and the U.S. will be forced into major fiscal reform requiring strict budget controls instead of a planned reform.
There is not going to be an easy or painless fix for the debt despite what congress is trying to portray. Political arguments such as “lowering taxes in the U.S. will lead to an increase in revenues” are unfortunately not a viable solution. Cutting taxes in some sectors such as capital gains and dividends has resulted in additional investing and increased higher tax revenues over the long run. However, the Bush Tax cuts of 2001 and 2003 generated tax revenue decreases from 2001 to 2004 totaling $591 billion when compared to year 2000. The $1,663 billion ($1.66 trillion) tax revenue increases from 2005 to 2009 were barely enough to return to the 40 year national average of recorded increasing tax revenues. This also does take into account the losses on revenue, if the tax cuts had never been implemented, which were $599 billion in only 2004 to 2006. In fact, supply side economics, prevalent in the Reagan and Bush era’s, which has been accurately associated with increasing GDP, tax revenues, corporate profits, and individual wealth has also during those same periods drastically increased the U.S. debt, and for the first time in U.S. history those increases came during peacetime.
The debt problem has become deeper than what the media and pundits are claiming. Many think that if The U.S. can stop wasteful spending, repeal pork barrel projects and earmarks, do away with the Bush tax cuts, and even end the wars in Iraq and Afghanistan, the U.S. should be well on its way to stopping a future potential debt crisis. That ship may have already sailed, and much more may be required. The true debt is in reality much higher than the $14.5 trillion dollars that has been disclosed on the world debt clock. If one considers the off balance sheet figures, there already exists at this point $7 trillion in unfunded obligations for Social Security, $26 trillion in unfunded Medicare promises, $8 trillion yet to be paid for the new prescription drug program and another trillion in miscellaneously unfunded items. This equates to over $55 trillion in real debt.
Under the current spending practices, even with the Obama stimulus programs removed from the equation, within 40 years (2050) this country may be barely able to pay the interest on its debt and only a small percentage of social security and Medicare. By 2040 the debt to GDP will be over 200%. Unfortunately, The U.S. would probably have declined into severe inflation before then. The U.S. congress must act now, it can no longer afford either runaway spending to accommodate the needs of special interests or indefinite and costly wars if there hope to reign in fiscal deficits and stop a potentially looming fiscal crisis. In addition, the U.S. should not continue the trade imbalances of the past. There may come a time of reckoning and a point when carrying to much debt and spending too much of GDP on interest payments could force foreign lenders to look for safer investments.
To reestablish fiscal responsibility would require cutting programs across the board, even in the politically unpopular areas like military spending, Social Security and Medicare. And equally important, reign in the increasing costs of health care. The ineffective “do nothing” plan of the past decade must be thrown out or the next generation of U.S. citizens could experience a lower standard of living as compared to what we currently enjoy today. Politician’s can no longer demand lower taxes while both political parties massively expanded government and increase spending. The recent recession has taught American consumers to finally begin to save more and it is now time that government officials follow suit. The U.S. should not continue to print money and issue treasuries without legitimate concerns about devaluating the dollar and experiencing high rates of inflation, or a potentially worse scenario such as deflation. Either outcome generally results in increased interest rates, less borrowing, and rising unemployment.
Congress needs to step away from practices that disproportionately benefit financial contributors and constituents and start doing what is right for the country. Since it appears unlikely that Congress, being so beholden to special interests and to concerned with reelections will be able to make the necessary politically painful decisions, it will be up to the American public to stop listening to pundits and talking points designed to keep the status quo in place and become the ones responsible for demanding fiscally appropriate action out of congress.
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