Published by John Lumbard
The federal debt is the money that you and I, as taxpayers, owe to foreigners—and to other Americans who own US Treasury bonds. Our debt is growing rapidly. We refer to the annual increase in the size of the debt as the deficit.
When we launched this blog, litle more than a year ago, the public debt was about $8 trillion; and now it’s at $10 trillion ($126,000 per family). Why does this $10 trillion figure look so much smaller than the $14 trillion figure you see on the national debt clock? The difference is the “money” held in the Social Security and Medicare trust funds. 7.65% of your salary is deducted from each of your paychecks and contributed to these funds (well, you’re putting in less than that this year, but stay with me) and your employer puts in another 7.65% (Self-employed people pay the whole 15.3%, which is one of many reasons why they feel the burden of government more keenly than other Americans).
These “FICA” taxes are used to pay benefits to the elderly, and if there is anything left over (last year for the first time Social Security spent more than it took in!!) the excess goes into the trust funds. The bad news is that the trust funds invest that money in U.S. Treasury bonds, which are simply a loan to the Congress—and Congress goes right out and spends it the cash. In effect there are nothing but “IOUs” in the trust funds, and since early 1968 Congress has been using annual Social Security savings to offset its annual deficits, via a presentation called the Unified Budget.
That’s why we usually ignore the bonds in the trust funds, and talk only about the “public debt” or the “net debt”. This ”public debt” has grown $4 trillion, to $10 trillion, in less than 3 years, and the Congressional Budget Office says that it will grow by $1.5 trillion dollars—$18,987 per American family or $12,820 per household—in 2011. Nearly half of those households pay no federal income tax, and quite a few of them have their FICA payments refunded by the Earned Income Tax Credit; so your share of this year’s deficit is probably three or four times as large.
That’s all very troubling, but the big danger is the interest on the debt. A consumer can happily increase his credit-card balance every year for decades, until one day he notices that he’s now paying quite a lot of interest—that is causing his debt to grow faster than ever before. At about the same time, the bank notices that he’s not as good a credit risk as he used to be—and it pushes up the interest rate he has to pay.
That’s exactly what was happening to Greece before the larger nations of Europe stepped in to bail them out. The interest rate on their debt had hit 11%.
We’re now paying interest on $10 trillion. Half of it is held by foreigners, and if they decide that they want us to pay 11% each year (you know, in March of 1980 Treasury bills were at 16.5%) we will be forced to pay interest of $1.1 trillion every year. Last year Congress paid less than $200 billion in interest, because the Federal Reserve was holding interest rates at an incredibly low level. This year it’s projected that we will raise $2.2 trillion in taxes and spend $3.7 trillion, and every dollar in additional interest will be added onto that spending figure.
We need to show foreign investors, as soon as possible, that we will balance our budgets in the future. To the right of this article you’ll see the pledge that we’d like every candidate to take, promising to establish legislation that would guarantee balanced budgets in the future. Not just the near future, but the future for your grandchildren.
Why don’t we just raise taxes on the rich? The richest 400 Americans—Bill Gates, Warren Buffett, Larry Ellison, the Wal-Mart Waltons, Michael Bloomberg, Michael Dell, the guys from Google, and 389 of their peers—are only worth $1.4 trillion. If you took everything they own they wouldn’t even be able to cover the deficit for this year.
We hope that Americans will also agree to limit the size of the federal government to historic norms, because a larger government means slower growth and less wealth for everybody—including our poorest citizens. Why 20% of GDP? Because the federal government has hardly ever been able to collect more than 20% of GDP in taxes, even when the top tax rate was 70%, or the ninety-one percent of the 1950s and early 60s.
This is no time for partisanship; your country needs you.
Appendix:
http://www.cbo.gov/ftpdocs/120xx/doc12039/01-26_FY2011Outlook.pdf
You’ll find CBO’s Budget Outlook on page 19. Take careful note of the assumptions listed on that page; they include the Doc Fix, which is the congressionally-mandated fantasy that Medicare payments to doctors will be brutally slashed “next year”. It never actually happens, but it’s always “next year” (In Mexico they’d say MAÑANA). There’s also an assumption, not stated in the text but easily deduced from the table, that the interest rate we have to pay on our rapidly-growing federal debt will stay at very low levels far into the future. Behind all the numbers are assumptions of low inflation, and steady growth averaging 3% or so—with no recessions. Not likely . . . .
CBO’s projection of outlays (that is, spending), can be found on page 54 of the CBO document. Note how the growth of Medicare will race past Defense spending and everything else, other than Medicaid and Social Security. It would race even faster without that little lie called the Doc Fix . . . . . In the last 40 years the entitlements have grown from nothing (in Kennedy’s time defense spending was 54% of the entire budget) to become the 900-pound gorilla. The rest of the Federal Government—agriculture, national parks, energy policy, highways, NASA, scientific research, and just about everything else you can think of—is summed up in the category called “Nondefense Discretionary Spending”.