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Heading Toward National Insolvency

By Doug Bandow on 6.25.12 @ 6:08AM

Welcome to America’s rocky budget horrow show.

Americans don’t need to go to the movies to see a horror picture show. The Congressional Budget Office’s latest report on the federal budget should scare everyone. Not that Washington seems to have noticed.

For the fourth year in a row the federal government is running a deficit in excess of $1 trillion. Yet President Barack Obama is lecturing European governments on how to solve the Eurozone crisis. He should be telling them what not to do: stop running up wild and irresponsible debts.

That’s what the CBO opined in its latest budget report “The 2012 Long-Term Budget Outlook.” The document is a bit dry, but the looming catastrophe it describes could not be more frightening.

Explained CBO: “In the past few years, the federal government has been recording the largest budget deficits since 1945, both in dollar terms and as a share of the economy. Consequently, the amount of federal debt held by the public has surged.”

Uncle Sam’s 40-year average debt to GDP ratio is 38 percent. At the end of 2008 Washington was up to 40 percent. By the end of 2012 that number will be 73 percent, “the highest percentage since shortly after World War II,” said CBO. The recession is responsible for part of this rise but, explained CBO, “the growing debt also reflects an imbalance between spending and revenues that predated the recession.”

These numbers disguise worse news, however. CBO does not count intra-government borrowing as part of the national debt. So when the Treasury Department “borrows” money from Social Security, CBO doesn’t count it, even though cash will have to be procured — through more borrowing — to pay promised benefits to retirees. The full national debt already is 100 percent of GDP, compared to about 84 percent for Europe.

But use CBO’s analysis. The long-term still looks truly ugly. There’s the so-called “baseline scenario,” under which everything goes “right” in the agency’s view. Then debt as a percentage of GDP would fall to 61 percent in 2022 and 53 percent in 2037. That would still be about 30 percent above the 40-year average.

Unfortunately, everything doesn’t often go right in Washington. Of course, what is “right” for the CBO is not necessarily “right” for the American people. Under this analysis the CBO figures that taxes would go up dramatically — as a result of “Taxmageddon,” with the expiration of the Bush tax cuts — which would push the country toward a renewed recession. Even with the tax reductions Americans would be paying a larger share of the GDP to the government than the average over the last four decades. The “baseline scenario” would have Americans turning over a much larger share.

At the same time outlays would fall. A lot. As CBO explained: “under this scenario, government spending on everything other than the major health care programs, Social Security, and interest — activities such as national defense and a wide variety of domestic programs — would decline to the lowest percentage of GDP since before World War II.”

Essentially CBO said: If only the tooth fairy would pay off the national debt, the Easter Bunny would fund Social Security, Santa Claus would take care of Medicare, and the Great Pumpkin would pay for everything else, life would be fine. Unfortunately, all of these are more likely than Washington politicians controlling their appetite for legal plunder.

Yet that’s what would be necessary to save America’s taxpayers. CBO observed: “Whether that debt will continue to grow in coming decades will be affected not only by long-term demographic and economic trends, but also by policymakers’ decisions about taxes and spending.” Social Security, Medicare, Medicaid, and health care expenditures all are expected “to continue rising faster than spending per person on other goods and services for many years.” If that happens, “those factors will boost federal outlays relative to GDP well above their average of the past several decades — a conclusion that holds under any plausible assumptions about future trends in demographics, economic conditions, and health care costs.” What a future.

CBO analysts really aren’t stupid or deluded, so they offer an “extended alternative fiscal scenario,” which from a fiscal perspective is essentially all bad news. Taxes wouldn’t rise dramatically, but still stay above the historical average. Social Security and Medicare expenditures wouldn’t be controlled. Health insurance subsidies wouldn’t be restrained. Other outlays would remain at historic levels, rather than falling dramatically. The result would be not just unpleasant, but truly horrendous.

Explained CBO: “Under those policies, federal debt would grow rapidly from its already high level, exceeding 90 percent of GDP in 2022. After that, the growing imbalance between revenues and spending, combined with spiraling interest payments, would swiftly push debt to higher and higher levels. Debt as a share of GDP would exceed its historical peak of 109 percent by 2026, and would approach 200 percent in 2037.” That’s using the agency’s discounted debt levels. In comparison, Greece peaked at about 163 percent debt to GDP.

Optimists might dream of living under the baseline scenario, but the agency noted that “many budget analysts” believed the extended alternative was much more realistic. Certainly that is what history tells us to expect.

Unfortunately, rising outlays and debt threaten to create an economic death spiral. Obviously, more borrowing means higher interest payments, that is, more government spending. At the same time, more debt is likely to increase interest rates, since lenders will become ever more worried about Uncle Sam’s ability to pay back the loans. Last year Standard & Poors downgraded Washington’s credit rating and in early June threatened to do so again if Congress fails to control spending. The result would be even higher interest payments.

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About the Author

Doug Bandow is a senior fellow at the Cato Institute. A former Special Assistant to President Ronald Reagan, he is the author and editor of several books, including The Politics of Plunder: Misgovernment in Washington (Transaction).

Letter to the Editor View all comments (62) | Leave a comment Leave a comment

Virtue| 6.25.12 @ 6:31AM

Hyperinflation followed by collapse of the currency. We are doomed.

Pecos Pete| 6.25.12 @ 7:31AM

Agreed! The only question is how soon will hyperinflation raise its bloody head.

Brooksifier | 6.25.12 @ 12:12PM

What do you guys think of compassionate conservatism now? Kinda of an oxymoron, eh?

Brooksifier | 6.25.12 @ 12:14PM

btw, whatever happened to a kinda, gentla America?
Did sonny-boy screw it up?

Drunken Sailor| 6.25.12 @ 1:27PM

We agree compassionate conservatism is bad. Now please explian how, if you feel that way, how you also feel the current administration is doing better when they are spending at a min 3x as much?

JD| 6.25.12 @ 4:59PM

"Compassionate conservatism" is a euphemism for liberalism. It always was. And it was always misguided.

Brooksifier | 6.25.12 @ 5:36PM

Better a real liberal than a Bush or Romney. look at the contortions romney is going through on immigration. He can't afford to alienate Latin voters, so he says what everyone wants to hear:
we must not let them in this country, but we must let them in. In other words,
"I, Mitt Romney cannot get elected by advocating stricter border laws, so I will talk out of both sides of my mouth."

Von Mises Jr| 6.25.12 @ 7:58AM

This is what Obama promised: "fundamental transformation" and the "redistribution of wealth." Whoever cannot figure it out by now, is a village idiot.
This is how Soros became a billionaire. Housing crisis devalue your home, financial and environmental regulatory burdens (Sarbanes Oxley, EPA, "Smart Growth," drilling moratorium, Dodd Frank) destroy jobs, increased taxes depletes savings, and presto.....the government owns your property and you are no longer free. Neat trick if you let them get away with it.

TLP| 6.25.12 @ 9:35AM

If you want to Fundamentally Change something in to something else? You pretty much have to OBLITERATE what was there, already.

Think along the lines of Gutting an Old House, before remodeling. Or, breaking Eggs, to make an Omelette.

Personally, I like the analogy of Grinding up STEAK, to make Hamburger, which is, essentially, what this POS in the White House, is attempting to do.

He seeks to turn Shangrallah in to Tiquanna, complete with all the Mexicans that go along with it.

Thank You, Peggy Noonan.

Thank You, Kathleen Parker.

Thank You, Mort Zuckerman.

Thanks to all of you White People who no longer have your White Guilt, or your House, or your Job, or Money to buy Gas for your car, (if you still had it) or buy Groceries for your Family.

Well done.

Congratulations.

Von Mises Jr| 6.25.12 @ 9:54AM

Unfortunately, Loonan, Porker and Suckerman still have their houses and jobs since they are liberals masquerading as people with conservative ideas.
They grabbed a seat at the table while they give away our houses, jobs, money and freedom.

Seek| 6.25.12 @ 6:06PM

Maybe they didn't trust Sarah Palin. A lot of genuine conservatives didn't. They were alarmed that this high school mean girl inside a woman's body would be One Heartbeat Away from the presidency.

Skippy| 6.26.12 @ 5:36PM

A mean girl?
How scary!

Brooksifier | 6.25.12 @ 12:18PM

But there's funds to do upkeep on Confederate monuments glorifying the good ol' days when cotton was King.
Why not sell the monuments to the Chinese? They can re-sell them as souvenirs to the Japanese.

Skippy| 6.26.12 @ 5:37PM

The War of Northern Aggression will never be forgotten.

Prester John| 6.25.12 @ 7:42AM

As so many have said before, this is just about the most predictable crisis in our history, yet our elected officials have done essentially nothing to prevent it.

We have ruled for decades by fools and traitors and have no one to blame but ourselves.

TSIndiana| 6.25.12 @ 12:32PM

Agreed. Read about it in a book first published in 1982 called "Truth in Money".

Solution...a second currency...a US Treasury Dollar, equal by law to a FED Reserve Note. Equity in assets, not debt.

Ken (Old Texican)| 6.25.12 @ 7:55AM

I've said it before.
We may need a national sit down strike to get the politician's attention.

Gary B| 6.25.12 @ 9:26AM

I like it...

Fast and Curious| 6.25.12 @ 8:16AM

Is it just me, or did the author seem to imply that Republicans and Democrats were one and the same? "Regardless of the letter after their name.."

Republicans have compromised too much, spent too much. But the policy differences between the 2 parties have never been greater. This "throw them all out" mentality sounds just fine, but we are in a crisis and do not have the time to screw around. Vote R across the board and then hold their feet to the fire. No other course of action will be effective. A democrat president, or majority for Senate or House will be the final blow to this nation.

Gary B| 6.25.12 @ 9:30AM

Vote Republican, but always remember that their entrenched members are part of the ruling elite. They cry crocodile tears over the economic mess while exercising their own crony capitalism.

TSIndiana| 6.25.12 @ 12:35PM

Yes Gary, both are responsible. Fast is blinded by his republican-ism.

Fast and Curious| 6.25.12 @ 6:14PM

Both are responsible, democrats for idiotic policies, and republicans for compromising too often.

Republicans 10% max responsibility

Democrats. 90% at least.

How's that suit you? You will probably come back with 50/50 which is utter nonsense.

Gary B| 6.25.12 @ 9:06PM

Nope. Your numbers are probably a lot more right than wrong. There is no 50/50. By far, Democrats carry most of the blame for this world class mess.

TrueBlue | 6.26.12 @ 11:57AM

I'd say it's more like 30% for Republicans and 70% for Dems. There are far too many Rs in Congress that talk the talk, but never walk the walk. They like the fact that lobbyists pay them in nice trips and new cars, etc. and have no issues signing away our tax dollars to get more. John McCain and John Boehner anyone?

Even Newt got corrupted (politically) after he lost his Speaker position, advising Freddie/Fannie how to work the system to the detriment of the taxpayer.

Louis Jenkins| 6.25.12 @ 8:37AM

We should all be afraid, very afraid. What will China do with all the US property they get? Will Obama nationalize every US assest to keep them from getting it? The next president will inherit a mess. That is if we have another election.

Most of the posters here have been screaming for our government to do better, curtail spending, to cut back programs. All to no avail. There is serious doubt whether or not a Republican government can do any better, but Obama has only one creed, "Damn the torpedoes, keep spending."

TSIndiana| 6.25.12 @ 12:40PM

If our entire money system was not (FED) debt based, then stopping debt would make sense.

All money is created by debt, with interest paid to banks. It's the FED monopoly of the (debt based)money supply that is the problem...a 100 year old structural issue...not R or D.

TrueBlue | 6.26.12 @ 12:04PM

I'd fix it by passing an Amendment requiring the government to operate on a Zero Budget, with the one exception being in times of war (marked by an actual Declaration of War by Congress, not this half-assed junk they've been doing since WW2). They wouldn't be allowed to spend more than they took in in revenue from the previous year. If they hit the limit, the government shuts down (logical emergencies like attacks against us being the only exception I can think of at that point).

This would mean MASSIVE cuts everywhere, yes, and it would definitely require someone that understands what the Constitution ACTUALLY allows the federal government to be involved in to be the one to right the bill. It would probably suck for a lot of people in the short term too, but in the long term I think it's the right decision. That is one of the biggest issues with the solutions that get proposed to fix our current situation, they are short term fixes. Everyone is so concerned with making the changes as painless as possible they refuse to see that it just prolongs the pain rather than actually solving anything.

MissouriDave| 6.25.12 @ 9:02AM

Find who owns the Federal Reserve, it ain't the U.S. ! Where the Money is the power is and first step in making America a third world nation is to take away Creator who gave us inalienable rights. We need JESUS in our lives, homes and schools for how can democracy work if'n their ain't no morality ? Something our Founding Fathers well knew to be true. Our gov't is millionaire club, just look at their retirement, they voted for themselves! Say and Our Father and pass the Ammunition! Put the remote down and march! Thanks Emmit and Merry Christmas

Bill84728| 6.25.12 @ 9:07AM

Well, this will have to come to a stop sooner or later. The only question is whether we will stop it voluntarily or wait until circumstances force us to stop. If we take some control of this, we have some chance to affect the outcome favorably; if we wait until we're plunged willy-nilly into economic disaster we won't have any control at all and will be throwing ourselves into chaos. In that event, goodbye liberty and equality and hello war.

TSIndiana| 6.25.12 @ 12:47PM

Yes...a second currency that is not part of the FED debt system would be a "peaceful" solution.

Think of the vested interests (financial schemes) that a second currency would bypass, while taking the burden of funding government off of the for-profit FED debt money and IRS system.

This is NOT A FLOOD OF CURRENCY SCHEME.

Who Knows?| 6.25.12 @ 1:33PM

Who is "we", kemo sabe?

Bill84728| 6.25.12 @ 1:49PM

When I say "we," I'm talking about the people of the United States. At first I was going to say the people of the world.

Purp| 6.25.12 @ 9:11AM

Unless we raise taxes and scale back the American Empire, we won't make it.

Gary B| 6.25.12 @ 9:36AM

Scaling back DC is a great idea. Raising taxes isn't. Cutting spending spending and ridiculous regulation will spur the economy and tax revenue will rise. Always does...

TSIndiana| 6.25.12 @ 1:06PM

What regulations do you want to cut...the one that keeps a nuclear power plant from locating in your backyard or perhaps the one that "regulates" strip mining coal next to your house? How about a new oil well in the neighbors back yard.

Perhaps you'll be the first to embrace how well de-regulation will improve your property value.

Gary B| 6.25.12 @ 9:10PM

Get real. No one is mining or pumping oil in residential neighborhoods. How about the middle of nowhere, where no one lives? Get out there on your hands and knees and see if you can discover some endangered insect and sue to stop an international pipeline.

Bill84728| 6.25.12 @ 1:51PM

I think eventually a rise in taxes will have to happen; I don't think it's a good idea to do that as one of the first steps to deal with the problem. First, government at the federal level must be cut back. That will be so painful we will scream in agony because every government program is born out of some need and the best of intentions. But it has to stop, and more than stop, shrink.

JD| 6.25.12 @ 5:07PM

Entitlements are never peacefully scaled back. That's why it's so important to not create them.

Gary B| 6.25.12 @ 9:15PM

The Department of Education could be cut without any consequences except howling from the employees and liberals. Pay them to stay home for two years then turn them loose to find work like the rest of us are doing. Parents of school children across the country would rejoice, as would I.

Compare the cost to "educate" one public school child against the cost and result of a home-schooled kid. The federal government adds nothing to education except indoctrination.

TLP| 6.25.12 @ 9:41AM

Why not just take ALL OF IT?

By your reasoning, that should fix everything.

Just CONFISCATE everybody's Money.

It's not like the Rich can pick up, and Leave, taking everything with them.

Why don't you set the example?

Send all of your money to your Boy.

Then look in the mirror, and ask yourself - WTF did I just do?

You really should think some of this Sh*t through, before you scribble it down, in public.

Peppermint Tea | 6.25.12 @ 10:09AM

Why don't the Democrats do anything about the debt? BECAUSE THEY LIKE IT.
They are following "The Great Depression Checklist"

Ken (Old Texican)| 6.25.12 @ 10:40AM

FDR just never imagined people living past 65 in great numbers...or having smaller families. OOPS!

TSIndiana| 6.25.12 @ 12:54PM

And the persons who made the FED and IRS in 1913 probably didn't project out what compounding interest on the money supply does over 100 years either.

JD| 6.25.12 @ 5:06PM

FDR was a guy who set the price of gold because "three times seven is a lucky number". Let's temper our expectations of foresight.

Joellen| 6.25.12 @ 10:41AM

This is not going away until we get rid of the culprits - that would be all who cannot get it in their heads IT IS NOT THEIR MONEY IT IS THE TAXPAYERS! I dont want my money going to illegal immigrants. I am sorry for their plight, but they need to adhere to the rules as we must. This means no free housing; health care (which you and I carry when paying our health insurance); no free college education; etc. I do not want to finance drug users, alcaholics, lazy folks, etc. If you are taking my tax money, use it wisely, not on junk food, cruise trips, cigs, drugs, etc. No funding for abortion, domestic or international; no contraception (your choice to have sex - deal with it); no sex changes.I dont want any politician to be getting any financial benefit for their job. They are elected to serve a term or two - not a lifetime. They should get no perks, no special health insurance and definately no special retirement perk. Have I missed anything, I am sure someone will point it out; but enough is enough - lets pull this country together again.

Shadow| 6.25.12 @ 11:49AM

It isn't just the debt caused by out of control spending, it is rampant corruption. I don't think we can stop this. Too many evil people control the system. It has become so complex, those who depend on it do not understand it is parasitic and will end up destroying itself from within.

TSIndiana| 6.25.12 @ 12:58PM

The system fosters corruption, even in courts of law.

Graph $1 borrowed in 1913 and compound at 6% interest for 100 years. The "usury" or interest becomes exponential at the end.

You can hide a lot of corruption in that system. Reserve requirements hid it from view for a long time...but no more. Now it's "quantitative easing".

Kwan| 6.25.12 @ 1:49PM

Left-wing economist Paul Krudman tells us that borrowing trillions of dollars to fund an ever expanding underclass will lead to prosperity for the nation. Obama's Marxist economic policies have stalled the economy and reduced tax revenues, forcing the government to borrow more and more from the Chinese. Ultimately proving the point that a left-wing politician's ability to fabricate social spending programs is infinite while the money supply to fund the left-wing insanity is finite.

Gary B| 6.25.12 @ 9:18PM

If he lost his so-called job at the NY Times, he'd starve to death.

merlin| 6.26.12 @ 9:09AM

Right Kwan, except that with a printing press, the money supply is infinite.

Production is wealth. Not borrowed or printed money.

Who Knows?| 6.25.12 @ 1:51PM

The dicks like Obama blame the fat cat banksters, among others.

Actually, in fact, it’s the fat cat LAWYERS who are ruining this country. For decades pubic schools have spit out way more smarty-pants who use their brains to become rent seekers, aka lawyers, than wealth creating scientists and engineers.

With Holder and Obama, we have the epitome of these types.

Their ambition is to get rich and/or famous. So, they study the “Law”, not to be noble attorneys like that Gregory Peck character in “To Kill a Mockingbird”, but so they can best USE and ABUSE it, for themselves.

Narcissus-not the flower- in full bloom.

Yes, as Holder is now showing us all, knowing the “Law” is all about how best to SKIRT it, “legally”.

“You can get it if you really want
You can get it if you really want
You can get it if you really want

But you must try, try and try, try and try
You'll succeed at last

Persecution you must fear
Win or lose you got to get your share
You've got your mind set on a dream
You can get it though hard it may seem now

You can get it if you really want
You can get it if you really want
You can get it if you really want

But you must try, try and try, try and try
You'll succeed at last “

Sing it, Jimmy!

Albertus Magnus| 6.25.12 @ 3:34PM

Obozo and the Democrats are not trying to stimulate the economy through "investments" of taxpayer dollars and trillion dollar deficits. This is vote buying, pure and simple, and it is nothing more. You can't buy enough votes without running up a massive deficit, and if people actually have jobs they don't need to sell their votes to Democrats in exchange for personal subsidies. That people still defend this practice when its inherent corruption is plain for all to see calls into question the honesty of said people. Those who defend Obozo and his trillion dollar deficits are defacto defending corruption and government theft of private property. Barack Obama is the face of greed in America today, the pinnacle of corruption, and the frontman for the destruction of prosperity.

Shadow| 6.25.12 @ 5:45PM

Amen!
The question is "how do we stop this?"
The answer is "we can't."

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