What You’re Not Being Told
About America’s Economic Deficits
Part One
Greg's Corner
by Greg Petty
May 2009
America is in deep economic trouble… I know this is not a news flash. But it is not the economic crisis that has occupied our government since 2008, the bursting of the housing bubble and the collapse of our financial institutions requiring government bailout to the tune of trillions of dollars. The current crisis is but a symptom of the deeper economic conditions and fiscal direction that we have allowed our political and business leaders to take us. But it is also the story of what financial condition we as individuals have allowed our economy and personal finances to become mired in. Think quicksand. Here are a few other descriptions of our collective economic condition: delusional spending, fiscally bankrupt, morally indefensible debt inheritance.
With few exceptions the media, economists, politicians and business people are not telling Americans the unvarnished (and extremely scary) truth of our long-term financial condition. It is akin to being a patient in the emergency room after a horrendous car wreck and no one wants to tell the family what condition you are in because the news is so bad. No one is going to come to America’s rescue for very much longer. There are many things at stake starting with our retirement, the future of our children and our grandchildren, and ultimately the stability of the global economy. The U.S. dollar is the world’s reserve currency but it may not continue to be so if we do not get our house in order.
The Current Situation
Unfortunately the current economic situation calls for our newly elected government to be the spender of last resort to help restore our economic activity. It has added huge amounts of debt to an already substantial national deficit but is a necessary evil. We cannot allow the crisis to cascade into a true depression.
Here’s the trick though. Congress and the Obama administration have to stop this stimulative spending as soon as we are certain the economy has righted itself. Americans need to monitor the following three actions over the course of the next few years:
- How our money is being spent and returned to us.
- Demand that a new financial regulatory system be installed that directly addresses the myriad causes that brought us here. Consider reinstating Glass-Steagall in a modern form and eliminate the concept of "too big to fail."
- Congress, with bi-partisan support, must reinstate "pay-go" spending rules that previously stopped annual budget deficits and that Congress conveniently allowed to expire in 2002. As soon as the economy recovers, every expenditure must be paid for or another expenditure dropped.
If we do not stop printing and distributing money through the Federal Reserve, and we allow annual budget deficits to continue, we will add another crisis, the spectre of inflation, to our table already overflowing with crises.
One Deficit, Two Deficits, Three Deficits, Four
The painful truth is that our nation faces multiple deficits that are only going to worsen with time. Strangely enough the time to act is now while we are in a crisis. The average person is now more aware than ever that we have difficult economic issues that are seriously off-track. Action now is important for a whole variety of reasons not the least of which is the moral descriptor I mentioned in the opening paragraph. It is morally indefensible for the current generations to refuse to live within our means, pile up national debt and leave the bill to our children, grandchildren and their children. As former Treasury Secretary Robert Rubin put it simply, "Economics is not that complicated… There is no free lunch."
Number 1. Budget Deficits
Here are the facts. They are not Democratic facts or Republican facts but the cold hard truth. Our political leadership, Congress and Executive, have only passed five budgets that resulted in surpluses in 40 years. They have fallen back on taking money from the Social Security Trust Fund. Guess what? By the year 2017 Social Security will not have a surplus because the boomers will begin to draw down more funds than are generated.
Our cumulative national debt now exceeds 10 trillion dollars and has been significantly escalated by the current crisis.
If we do not reform health care, and its attendant ever-increasing costs, (1) and adjust the entitlement programs of Medicare, Medicaid and Social Security these programs will take up the entire federal budget. To quote former Comptroller of the U.S. David Walker, "By the time today’s college graduates are ready to retire forty years from now, the only things our government will be able to pay for are the interest on the federal debt and some of the Social Security, Medicare and Medicaid benefits. All other parts of the federal government will be closed and out of business."
Our budget deficits are financed by other nations the largest of whom is China. ($1.3 trillion) This restricts our economic and political alternatives at home and abroad.
Washington is broken. After our immediate crisis is over we need to decide what we want our government to do and then have the fiscal discipline to enforce the mandate to pay down our debt. The pressure has to come from the American people. No politician will do it on their own and not without being pushed. We need a political paradigm shift… and soon.
Part Two will appear in the June Issue.