DEBT: Coming to a Generation Near You!

I write this blog after reading the TIME magazine article “How to Tame the Deficit” by Jeffrey D. Sachs. Many of the statistics used in this blog come directly from his article and my opinions and ideas were heavily shaped by reading it. Here is the link to the original article.

The American economy is on the brink of ruin. A demographic tsunami of retired baby boomers supported by a smaller workforce, a second housing crisis set to detonate in 2011-2012 (altay and option-arm loans set to cause 8 million defaults), a huge trade imbalance with countries like China, and a debt that takes up 60% of the U.S. GDP have formed into a large freight train ready to cream Uncle Sam as he attempts to pick himself up. What do the politicians of America say to do? The same two things as always: cut taxes and spend more. The ironic thing is this is exactly what Congress and President Obama have done. The Republicans got their tax cuts and the Democrats got more spending, so who’s mad? The American people should be. How is it possible to reduce government income and increase government expenditures and expect anything but debt? The answer is: you can’t.

Ask a Republican about debt and they’ll say it’s the Democrats’ fault for increasing social expenditures. Ask a Democrat and they’ll say it’s the Republicans’ fault for cutting taxes on wealthy individuals and corporate profits (in addition to spending on the Iraq war). Yet both are at fault. Currently the United States government collects only 17% of GDP through taxes. That accounts for spending on four government programs. 5% of GDP goes to military, 5% goes to health (Medicare and Medicaid), 5% goes to Social Security, and 2% goes to paying interest on the national debt. There goes your 17%.

Now here is a list of programs that need are not paid for at current tax levels:

· Homeland Security

· Unemployment Compensation

· Job Training

· Support for State and Local governments

· Federal higher-education outlays

· Satellites

· Manned Space Missions

· The National Science Foundation

· The National Institutes of Health

· The National Oceanic and Atmospheric Administration

· Community Development

· Food Stamps

· Low-costing Housing

· Roads and Bridges

· Environmental Protection and Conservation

· Emergency Relief and Reconstruction (like Hurricane Katrina aid)

· Judicial and Penal systems

· International Diplomacy

· Poverty Reduction

· Renewable Energy

These are fundamental services provided by the government: a judicial system, border-patrol, environmental clean-up, food stamps, and unemployment aid. These fundamental services are being paid for by loans from China; this is not really a good government policy. So now, there is no question as to why America is in debt up to our eye-balls and sinking rapidly: we spend too much and tax too little. It is true that the United States has been more indebted in the past, during the mid-1940s debt exceeded 100% of GDP, the difference is we were in a world war and eliminated the debt by way of American tanks and American taxes. Now, American tanks no longer seem a viable option. Nevertheless, American taxes are part of the solution that will end our spiraling deficits and spiraling debt.

Some would argue that we need only to cut spending and wasteful earmarks to solve our problems. Look at long list above and pick what to cut first; not too many good options. It is true that government can spend less on certain programs and spend more efficiently on others. Military spending can be reduced by eliminating wasteful defense projects, like Post Cold-War Top Gun fighter jets, and slashing pay to overpriced defense contractors. Yet government outlay on military spending remains 6 times larger than the outlay on education. Earmarks are great campaign scapegoats, labeled as “wasteful government spending”, but only account for less than 1% of the annual national deficit.

The solution to America’s national debt is either reduce government spending on entitlements or increase taxes. Frankly, someone needs to bite the bullet and tell the American people the way it is: taxes need to be higher, way higher, or entitlements must be reduced. As for entitlements, Americans must learn to live with smaller social security checks or hope that my generation makes a lot of money to support the baby boomers. It seems unlikely that major cuts in entitlements are means justified by their ends: less funding for troops, the poor, and the elderly seem like bad ideas that will reduce the debt at the cost of making the nation as a whole worse off. As for taxes, the total take of American governmental revenue (federal, local, and state) accounts to 28%-30% of GDP; this is 10% less than the average European total revenue. The programs listed earlier in this blog post need to be funded. They account for 11% of GDP, a percentage we currently borrow from China only to pay interest on later. The United States government could at least increase taxes on all but the extremely poor, by an extra 10% of GDP.

Bottom line: The U.S. Government needs to become more efficient with its spending, but TAXES MUST BE HIGHER TO PROVIDE 330 MILLION PEOPLE WITH THE FUNDAMENTAL SERVICES PROVIDED BY A GOOD GOVERNMENT.

But the real question is: who in their right mind would use this as a campaign slogan?