The apparent federal debt, which has been the focus of contentious debates as well as demagoguery, is the amount the federal government owes others from unrestrained, irresponsible government spending … like China, Japan, other foreign countries and even individuals. This is the nearly $15 trillion dollar number bandied about.
It is an incomprehensible number that will be extremely difficult to ultimately pay down completely.
What most Americans are completely unaware of are the unfunded and underfunded liabilities that dwarf this nearly $15 trillion number. This relates to Social Security, Medicare and other entitlements and is estimated to be around $127 trillion which, as noted below, equates to more than 730% of our GDP!
Drowning In Debt
Investor’s Business Daily 04/26/2011
Liabilities: The latest finding that states have underfunded their pension and retiree health plans to the tune of $1.26 trillion is just the leading edge of an overwhelming wave of unfunded government promises.
A new study by the Pew Center on the States finds that the gap between the states' pension and retiree health benefit promises and the money they have to meet them climbed 26% in just one year, hitting $1.26 trillion in fiscal 2009.
Even that alarming figure relies on the states' optimistic assumptions about how much they expect to earn on their investments. Using more realistic assumptions could boost that gap to $2.4 trillion, Pew found.
Bad as it is, this funding gap is a piker compared with the federal government's debt. We're not talking about the $14 trillion in public debt that everyone has been focused on, but the even more massive debt we're piling up in Social Security, Medicare and other entitlements.
According to the Cato Institute's Michael Tanner, we've promised future retirees far more than we can pay at current tax rates. How much more? If these unfunded liabilities were included in our debt figures, it would reach $127 trillion — or more than 730% of gross domestic product. This debt tsunami isn't hitting us by surprise. Indeed, Tanner and others have issued countless warnings that we've been promising future retirees far more than we can deliver, only to be met with indifference or hostility.
At least some state and local governments are starting to take their unfunded liabilities seriously, as we saw in Wisconsin earlier this year, and even now in union strongholds such as Detroit, where the mayor is pushing city employees to pony up more to cover health insurance and pension costs.
At the federal level, it's another story. When President Bush offered up a modest privatization plan to save Social Security for the long haul, he was strung up by Democrats and the media.
Now Rep. Paul Ryan, R-Wis., is stepping up with a proposed fix for Medicare and is getting the same treatment, with Democrats — including President Obama — playing on the public's general lack of understanding of the stakes involved to scare them away from needed reforms.
Like it or not, this entitlement wave is coming, and the only way to avoid catastrophic destruction is to take action now.
Given the intransigence and ideological rigidity of the Democrats, Republicans may be forced to decide between the two calamitous scenarios as regards the US debt. The first would be to give in to the Democrats who oppose even the most minimal spending reduction, raise the debt ceiling and allow the debt to continue to skyrocket to the point of insolvency.
The second option would be to shut down the government until appropriate and effective spending reductions are agreed upon and can be instituted. Any such agreement may take quite a while to reach and, of course, would result in the U.S. defaulting on its obligations which will have quite severe consequences.
Though the Democrats will be the offending and irresponsible party in either of these financial meltdown scenarios, the Republicans will be blamed instead by the news media.
Government: US Default Could Be Doomsday Option For Economy
Scott Baker April 23, 2011
WASHINGTON (AP) — The United States has never defaulted on its debt and Democrats and Republicans say they don’t want it to happen now. But with partisan acrimony running at fever pitch, and Democrats and Republicans so far apart on how to tame the deficit, the unthinkable is suddenly being pondered.
The government now borrows about 42 cents of every dollar it spends. Imagine that one day soon, the borrowing slams up against the current debt limit ceiling of $14.3 trillion and Congress fails to raise it. The damage would ripple across the entire economy, eventually affecting nearly every American, and rocking global markets in the process.
A default would come if the government actually failed to fulfill a financial obligation, including repaying a loan or interest on that loan. The government borrows mostly by selling bonds to individuals and governments, with a promise to pay back the amount of the bond in a certain time period and agreeing to pay regular interest on that bond in the meantime.
Among the first directly affected would likely be money-market funds holding government securities, banks that buy bonds directly from the Federal Reserve and resell them to consumers, including pension and mutual funds; and the foreign investor community, which holds nearly half of all Treasury securities.
If the U.S. starts missing interest or principal payments, borrowers would demand higher and higher rates on new bonds, as they did with Greece, Portugal and other heavily indebted nations. Who wants to keep loaning money to a deadbeat nation that can’t pay its bills?
At some point, the government would have to slash spending in other areas to make room for any further sales of Treasury bills and bonds. That could squeeze payments to federal contractors, and eventually even affect Social Security and other government benefit payments, as well as federal workers’ paychecks.
A default would likely trigger another financial panic like the one in 2008 and plunge an economy still reeling from high joblessness and a battered housing market back into recession. Federal Reserve Chairman Ben Bernanke calls failure to raise the debt limit “a recovery-ending event.” U.S. stock markets would likely tank — devastating roughly half of U.S. households that own stocks, either individually or through 401(k) type retirement programs.
Eventually, the cost of most credit would rise — from business and consumer loans to home mortgages, auto financing and credit cards.
Continued stalemate could also further depress the value of the dollar and challenge the greenback‘s status as the world’s prime “reserve currency.”
China and other countries that now hold about 50 percent of all U.S. Treasury securities could start dumping them, further pushing up interest rates and swelling the national debt. It would be a vicious cycle of higher and higher interest rates and more and more debt.
The U.S. has long been the global standard for financial stability and creditworthiness, with Treasury securities seen as a fail-safe investment. But after the near-shutdown of the U.S. government and a new credit-rating report this week questioning the country’s fiscal health, Treasury bills and bonds are losing luster.
If there is a debt limit deadlock, the government by this summer could find itself legally unable to borrow more money to pay its bills, beginning with interest on its debt and gradually extending to day-to-day federal operations. At some point, the government would have to decide which bills to pay and which to put aside.
The debt ceiling will be hit on or around May 16, the Treasury Department says. Unlike the threatened government shutdown, the impact would start slowly, but then build mightily until the damage would be so dire that few political leaders or economists even want to contemplate it. The day of reckoning could likely be delayed at least until early July with creative bookkeeping.
When the House first rejected the Bush administration’s $600-billion bank bailout in September 2008, the Dow Jones industrials went into a dizzying 778-point tailspin. A whiff of a possible similar stock market collapse came on Monday with a sharp selloff on Wall Street when the Standard & Poors lowered its outlook on U.S. debt to “negative” from “stable,” possibly a first step toward a possible downgrade of America’s coveted AAA credit rating.
“We haven’t downgraded it. We just said, if nothing happens, we may have to,” said S&P chief economist David Wyss. He said a government default remains uncharted territory, “which is one reason why it’s not a good idea to hit the debt ceiling.”
“There’s reason to worry,” said Wyss. “But my best guess is that we sort of muddle through this. Cuts will be made, they’ll be too little too late, but at least they will be enough to maintain a triple-A rating.”
“It’s another game of chicken. And this time there are Mack trucks going at each other, not bumper cars. This is a biggie,” said American University political scientist James Thurber. But he predicted that, as in the past, “there will be an accommodation. They will avoid a crash.”
Investment bank J.P. Morgan Chase recently concluded that any delay in making an interest or principal payments by the Treasury “even for a very short period of time” would have large “long-term adverse consequences for Treasury finances and the U.S. economy.” The analysis is being circulated on Capitol Hill by supporters of raising the debt limit.
“If anyone wants to push that button, which I think would be catastrophic and unpredictable, I think they’re crazy,” JP Morgan CEO Jaime Dimon said recently of those seeking to block raising the debt limit.
House Speaker John Boehner and most other GOP leaders agree on the need to raise the debt limit — and don’t want to be held responsible for a new financial meltdown. Still, they want Obama to make more concessions on spending cuts than he has done thus far. That isn’t sitting well with liberal Democrats, who think Obama has already given too much ground.
One reason the two parties can’t find common ground: they can‘t even agree on what’s causing high deficits. Democrats mostly blame it on policies of George W. Bush: two wars, tax cuts that continue to benefit the wealthy and an expensive prescription drug program. Republicans see government spending as the culprit, particularly on Obama’s watch.
In fact, the main reason is the deep recession, which slashed tax revenues and led to hundreds of billions of dollars in recession-fighting spending by both Bush and Obama. The debt was $9 trillion in late 2007 before the start of the Great Recession, and it’s just a sliver under the $14.3 trillion limit today.
Even though GOP leaders say they want to avoid more economic chaos, there is a large crop of tea-party aligned Republicans threatening to refuse to raise the cap under almost any circumstance. Polls suggest a large percentage of Americans oppose raising the debt limit.
The debt limit has been raised ten times over the past decade. Obama voted against Bush’s debt-limit increase in 2006 as a senator, accusing Bush of “a leadership failure.“ Obama recently apologized for ”making what is a political vote as opposed to doing what was important for the country.”
Rep. Paul Ryan (R.-WI), Chairman of the House Budget Committee, has proposed massive, desperately need federal government spending cuts as well as tax rate reductions in his “Road to Prosperity”. Troves of empirical data support this approach – benefiting all except the demagogic Liberal politicians.
The vast majority of the Democrats still irrationally support continued unrestrained federal spending and high and increasing taxes, tax rates and fees. They never can have enough of other people’s money to spend. A larger, more controlling and intrusive government that knows best is their ideology. Control the masses, engender their dependency and buy votes by wealth transfer from those who work, particularly the higher wage earners.
Cal Vs. Krug
Investor’s Business Daily 04/11/2011
Taxes And Spending: House Budget Committee Chairman Paul Ryan's bold entitlement reform plan goes beyond taming spending. It recognizes that the history of cutting taxes vindicates Calvin Coolidge, not Paul Krugman.
Rep. Ryan has emerged as someone the country has been waiting for: a fearless, energetic politician with the guts to propose a detailed reform of the out-of-control, until-now-untouchable federal mandatory spending programs. Medicare, Medicaid and Social Security, with their annual automatic spending increases, now make up roughly 60% of outlays.
Some might find irony in Ryan ending up as spending hawk-in-chief, since back in the 1990s he was an aide to supply-side icons like Jack Kemp and Bob Kasten. Both were accused of caring too little about spending cuts as they fought for tax cuts to grow the economy and create millions of private jobs.
Today, after years of unchecked Democratic control of Congress and the White House, the problem of untamed government spending has become a runaway locomotive hurtling us toward a fiscal cliff.
The American public has reacted, spawning the populist Tea Party movement. And in this new environment, tax-cutting politicians are also spending-cutters.
But Ryan still recognizes, as did Kemp and Kasten, that low tax rates are key to restoring the greatness and vibrancy of the U.S. economy.
So when the New York Times' spending-addict columnist Paul Krugman launched his error-riddled attack on Ryan's plan last week, his first volley targeted not spending but Ryan's tax cuts. Ryan would bring both the individual top tax rate and the soon-to-be-highest-in-the-world U.S. corporate tax rate down to 25%.
According to Krugman, "Republicans have once again gone all in for voodoo economics — the claim, refuted by experience, that tax cuts pay for themselves" because they "would set off a gigantic boom."
It's so many years after Ronald Reagan's tax cuts produced the longest peacetime economic expansion in history — extending past the brief George H.W. Bush recession to the Internet revolution of the 1990s. One might have hoped that the losers of the tax-cut debate would, by now, have gone the way of the Berlin Wall.
But then, had history been heeded, the Krugmans actually would have been laughed off the political stage long before Reagan. John F. Kennedy knew when he bucked fiscal liberals in his party and pushed hard for cutting tax rates — including those on high incomes — that President Calvin Coolidge had proved tax cuts do exactly what Krugman says they don't: produce new jobs and fill government coffers with new revenues.
As Veronique de Rugy, senior research fellow at George Mason University's Mercatus Center, pointed out in a paper for the Cato Institute, "detailed Internal Revenue Service data show that the across-the-board rate cuts of the early 1920s — including large cuts at the top end — resulted in greater tax payments and a larger tax share paid by those with high incomes."
De Rugy found that as "the marginal tax rate on those high-income earners was cut sharply from 60% or more (to a maximum of 73%) to just 25%, taxes paid by that group soared from roughly $300 million to $700 million per year." From 1922 to 1929, real GNP grew 4.7% a year and unemployment fell from 6.7% to 3.2%.
What Krugman mocks as "trickle-down" was actually a tsunami of prosperity that expanded by 84% those making between $10,000 and $100,000 annually.
Taxes and spending can't be divorced. The Krugman way of big spending and high tax rates condemns future generations to never-ending government dependency.
Ryan's way not only reforms and saves entitlements. It saves us from the left's goal of a Europeanized American economy.
We are nearing the precipice of a financial apocalypse in this country but you would never know it just by listening to the demagoguery of the Democrats. They can’t spend other people’s money fast enough (translated: the taxpayers). No pork project or expenditure to them is frivolous.
Despite massive increases in spending under Obama and Congress when both chambers were controlled by the Democrats, they refuse to agree to even a miniscule 1.7% reduction - $61 billion out of $3.6 trillion. Apparently, this figure has been reduced to about one half in order to avert a government shutdown. That would translate to around a 1.8% reduction in the spending deficit for just this one year!
This is essentially a rounding error – an unacceptable compromise which illustrates their total lack of responsibility and concern for America, our way of life and standard of living. It also confirms that their first interest is getting re-elected.
We should work to make sure that it doesn’t happen at their next election.
Shutdown? Why are we still discussing the 2011 budget?
Greg Richards April 01, 2011
The 2011 budget should have been passed by last year's Congress. The 1974 budget law requires that the budget for this fiscal year be passed by October 1 of last year.
The Democrats were in power last year. The entire government was under the control of the Democrat Party. In the Senate, the Democrats had a supermajority. In the House, the Democrats had a controlling majority. Their guy was in the White House.
Passing a budget could arguably be said to be Congress' primary duty apart from declaring war. But last year, we saw the contempt in which the Democrat Party holds the public. The Democrats ran away from their duty, a duty they accepted - indeed sought - by running for office.
But the Democrats did not want to run in the elections of November 2010 on their record, on their stewardship of the affairs of State. Instead they chose to be derelict in their duty to the country.
Now, under the goad of the Tea Party, the Republicans, having retaken control of the House, are insisting that the government institute a budget for fiscal 2011, which has already half gone. In the face of a $1.6 trillion deficit which is occurring, be it noted, in the absence of a national emergency even if in the context of poor economic performance, the Republicans are seeking to cut $61 billion in spending, a paltry 1.7% of the total budget and 3.8% of the deficit. And what do we find? We find the Democratic Majority Leader of the Senate Harry Reid attempting to marginalize the Tea Party, whose presence is the only reason that he is being forced to do his duty!
1. The Democrats, by abandoning their duty on the budget last year, have already shown that they have no respect for their responsibility to the country.
2. The Democrats certainly have no respect for Republicans and will not act in the interests of collegiality.
3. Therefore, the only thing that motivates Democrats in Congress is access to power. The only force that is going to move them is the fear of losing that power. What we know and they don't is that the citizenry is now aroused. It is fearful for the future of the country under the unmodulated profligacy of the Democrat Party in Washington.
So, let's treat the Harry Reids with the contempt they deserve. Reasonableness is not going to move the needle anyway. Let's do what is necessary to save the country and put the Dems to the test of public obloquy if they choose to continue their irresponsibility from last year and stand in the way of prudence and necessity.