Sunday, June 5, 2011

debts and interest ..... a new way of looking at old things

There may be nothing new in the world except the history we have yet to learn, as President Truman said.
Still, I've been trying to look at our national debt and deficits in a new way, and it is this spirit that this "new" way of looking at this old problem is submitted for your thoughtful consideration.
Here's the sad but true situation. We're digging the tax burden hole deeper, because while we're not "officially" raising taxes, we are in effect increasing our national "tax" (state and local, too) burden each day as additional debt and the interest thereon accrues. And that's each day of every year.
Even worse, the added borrowings aren't going into investments that will improve the productive outputs of the economy. Accordingly, payrolls aren't being helped at all by these expenditures. Economic growth not only isn't being assisted; it's being restrained instead.
To repeat, the ever increasing debt and interest charges act as taxes. They are the result of unproductive spending as opposed to private sector investment.
In essence, and although well intentioned, we are borrowing this money and incurring these interest charges, at least indirectly, to provide benefits to the elderly through the medicare, medicaid (nursing home) and social security programs.
While we have always been, and will always be, a compassionate society, the type of compassion we Americans like to practice requires wealth to support it. Although we may well not be more compassionate than the citizens of many other countries, we are wealthier than most and therefore can afford to provide a degree of comfort to the elderly that many societies simply can't afford. That's being jeopardized by our actions.
In other words, we are in the midst of a goose and golden egg dilemma. That is, we have forgotten the main idea that a free and prosperous society is, is a foundation from which we can provide aid and an abundance of material comfort to the afflicted, the poor and the elderly.
An economically vibrant society is indeed the enabling the goose that lays the golden eggs. And without the eggs first being laid, borrowing to spend on compassionate and worthy matters will only exacerbate the ever growing problem of too much debt and too little economic growth. That means more unemployment and more pain for a long time to come.
Every economist, left or right, acknowledges that taxes impede growth. And that impeded growth results in fewer jobs. And fewer jobs means fewer government revenues in the form of income and payroll taxes.
Personal income and related payroll taxes amount to more than two thirds of federal taxes paid or inflows. On the other side of the ledger, more than one half of our federal spending goes for medicare, medicaid, social security and interest on the national debt. The inflows must necessarily precede the outflows. That means economic growth is essential or we're going off the national debt cliff down the line.
As we all know, the official national debt chart shows pretty much an upward sloping straight line since 1981. It has grown from ~$1 trillion to more than $14 trillion. Interest (tax) on that debt will be more than $400 billion in 2011.) Our national debt for years has been growing consistently at a compound annual rate of nearly 10%. Thus, it doubles every seven years. And now it's growing faster each year as the government programs and related interest charges pile up to "fix" or "stimulate" our way back to prosperity.
We are spending money as a federal government which we don't have. In fact, we now borrow 40 cents of each dollar we spend as a country.
But that's not even the half of it. We have created additional unfunded liabilities which are several times greater than the $14 trillion national debt. In fact, the unfunded medicare/medicaid and social security liabilities combined are substantially more than $50 trillion.
Then there are the unfunded state and local pension and medical benefits, debt on public and quasi public structures and I don't know what else.
When times are tough, Keynesian economics emphasizes demand and increasing the propensity to consume, which will in turn create additional supply. Keynesianism' opposing view, supply side economics, emphasizes supply and posits that increased supply will generate additional demand. Both theories are about creating economic growth, employment and a prosperous society. But they simply don't address our "new" problem.
To wit, economic growth won't be sufficient to put a dent in our "balance-sheet" and related issues unless and until we stop the deficits. The deficits can't stop until we stop creating funded or unfunded liabilities for the non investment, non wealth creating, non productive segments of our society. And, finally, we can't begin to repay debt until we stop the ongoing deficits.
No matter what it's called, the spending of today isn't investment in future growth. It's largely generational transfer payments.
Demographics also play a huge, if usually ignored or at least undiscussed, role as well. We are getting older. Also, we are retiring about five years earlier than we used to, and we are living about five years longer. That means ten more years of retirement pay, excluding medicare and medicaid (nursing home portion) payments, all of which contribute to the tax burden and transfer payment dilemma.
It's time that we emphasize debt and how our future is imperiled as a result of our actions over the past many decades. It's not a demand or supply side problem. It's a living within our means problem. And borrowing doesn't do anything except defer the day of reckoning.
Of our estimated 2011 federal budget deficit of ~$1.7 trillion, more than $400 billion is interest on the debt. It's not hard to envision that $400 billion becoming $1 trillion in less than a decade as deficits continue, the debt compounds and interest rates rise. And that doesn't include any amount .... not one cent .... for debt repayment either.
Spending $1 trillion on interest will further inhibit economic growth. Slower growth will reduce hiring and increase unemployment, which is turn will makes the problem even worse. This vicious spiral is in effect now and, absent effective remedial action, will accelerate over time.
Please consider a few more "offensive" facts to contemplate while pondering why we continue to elect not to tell ourselves the truth. Or more importantly, fail to do anything about it.

We say that our state's budgets are in balance as required by state law. Yet we are able to balance those budgets only because ~30% of state spending comes from the federal government, which doesn't have any money of it own.

And our average state spends close to 50% of its budget on medicaid and education. The medicaid expense is "shared" with the federal government, and education is "shared" with the local school districts.

Local school districts support less than 50% of what they spend with local property taxes. They get the rest of the money for schools from the states. In fact, on average they tend to look to the states for more than 75% of their school operating funds, including teacher salaries, pensions, health care benefits and such. The local districts don't have enough money, the states don't have enough money, and the feds don't have enough money. We pretend otherwise. So we borrow some more, build some more school buildings and the problem grows.

This local/state/federal spend money we don't have game reminds me of what happened in World War I when we loaned money to England to help them fight Germany. After the war ended England agreed to pay us back with payments/reparations from Germany, who had no money to pay England, so we loaned Germany money, so they could pay England, so they could pay us, and so forth. The same U.S. dollar passed around and around until the passing stopped when the Great Depression happened in the 1930s. The charade then ended.

That's how I see it, and I wanted to share what I'm seeing with you.
Thanks. Bob.

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