Does the government have a math problem?
The short answer is yes, but I should probably give you some idea of what I am talking about. President Obama released a budget plan today that insures he will run greater than $1 TRILLION DOLLAR deficits each of his four years in office (Bravo, Mr. President). The most troubling part of this "plan" is the inability to even acknowledge the pair of nooses around the neck of this countries future: Social Security and Medicare spending
So where does this math problem come into play:
From the chart above, you can see the trajectory of deficits over the next 75 years. I used the overly optimistic predictions from the OMB to determine what our spending and revenue is going to look like for our grand kids:
Revenue - 20% of GDP $3 Trillion in today's dollars
Spending - 30% of GDP $4.5 Trillion in today's dollars
Deficit - 10% of GDP $1.5 Trillion in today's dollars
"Wow Andy, that is a lot of money, appears we will need rich people to dig deeper into their pockets and fork over that extra 10% worth of GDP. its only fair, we all know they don't need that money." That sounds like a fantastic idea! Oh wait, I forgot to tell you that since World War II we have had tax rates on the rich of up to 90%, and tax revenues were virtually unchanged and basically always range from 17-20% of GDP:
"You mean that even at 90% tax rates we only collected 18% of GDP in revenue, should we go to 100%? What about a 'giant wealth tax' or a 'pick rich people up by the ankles and shake their pockets clean tax' or could we just imprison the rich and have all that fat undeserved money mailed straight to the government?" The truth is that no matter what tax rates are across a wide variety of options (income, capital gains, death taxes, etc..) we have NEVER collected more than 20.6% of GDP in taxes since WWII. There are a lot of reasons for this, but the reasons do not matter as much as the reality, no matter what the tax structure, we should NOT expect to collect more than 20.6% in taxes. Even Obama's plan with his massive millionaire's tax and Bush tax cut expiration on the rich only claims to confiscate another $1Trillion of revenue over 10 years (that's $150B/year or 1% of GDP).
"OK, so you are telling me that we have already baked in the most optimistic possible assumption for average future revenues. Good thing this will likely be our last recession ever, what about spending?" Glad you asked. Lets look at the spending assumptions above. The projections assume we are on path to reduce discretionary spending (this includes military) to 5% of GDP. Lets forget the fact that discretionary spending has rarely been that low, and just assume our trusted comrades in Washington will make it happen. We will also assume that we can reduce other mandatory spending (like federal pensions and salaries) by 25% to less than 3% of GDP. (Yeah, ok, right). So we are left with 3 things that still drive government deficits:
Social Security: 5% to 6%
Medicare: 3% to 5%
Medicaid: 2% to 3%
These 3 items are predicted to increase federal spending by 4% of GDP. The other 6% long term gap comes from the massive interest build up of running continuous deficits that add to our debt.
THIS IS THE MATH PROBLEM. Obama and company are completely focused on raising taxes, which at a maximum can improve GDP by 1% (and I don't even believe that). Even if they would happen to be right, we still have a 9% long term deficit problem to address. The solution can ONLY come from spending reductions and MUST include entitlement reform. Spending cuts are truly only way.
"So if we need to reduce spending by 10% of GDP, how do we get there? are you sure we can't just make all rich people earn their MD's and force them to donate all of their time to giving free health care to the elderly?"
The key to beating the debt issue is to vote for those who are brave enough to tackle entitlement reform. Please understand that those who are solely focused on the revenue side are failing both basic math and history tests. THAT WILL NOT WORK.
Honestly, we have fairly easy to understand solutions for these issues:
1) Soc Sec - Raise the retirement age to 70 for those under 55, and move to "price indexing" instead of "wage indexing". All price indexing does is insure people get the same benefit in real dollar terms that their parents got. Currently each generation gets a bigger benefit in real dollar terms than their parents. Why?
2) Medicaid: Block grant it to the States. Done. States have a way better chance of figuring this out than Washington.
3) Medicare: More difficult, but moving to higher deductibles and co-pays are a great start. Currently doctors and patients don't give a flip about what procedure to use because they do not pay for it, Joe Taxpayer does. "More Anything? More Everything!" Get them to have more skin in the game and this begins to curb costs.
4) Cap discretionary spending at 5%. What a joke that we assume that this will be 5% in the future when we see in the past it has always been much higher. Force tough choices, and quit mortgaging our futures to pay for stuff now. This is the only way to keep down our future biggest problem: Interest payments.
"OK Andy, I get it, too much spending. But what do I care, can't we just keep printing money to fund our debts. I mean the government must own a huge printing press?" Sure we can keep printing money, and keep printing money, and keep printing money. The result is a worthless dollar, (i.e. $1000/gallon gas kind of worthless). And then you leave your children with a worthless dollar to go along with an oppressive debt obligation, just so you wouldn't have to live with a few dollars less benefits today.
At the end of the day, no matter what your most pressing cause: education, gay rights, the environment, abortion, human rights, etc...how do you think any of this gets any real attention if we can't pay the light bill? It doesn't. The best thing you can do for this country (and your favorite issue) is to vote for those who will put the fiscal house in order. As a family, as an individual, you know that you cannot be free to pursue you interests until you have taken care your obligations. Why would our country be any different?
We are talking about the future of our country. Don't let those who ignore our future to buy votes today lead us into a critical chapter in American history.