We're not in Kansas anymore: US National Debt and the Fiscal Cliff

I saw this in my inbox this morning. Combined with Jeff Opdyke's commentary about the difference between a real social safety net and the Social Security system the United States (and virtually every other western country) has today, and Laurence Kotlikoff and Scott Burns's The Clash of Generations, and I think my own views concerning the current so-called "debate" between Democrats and Republicans are coming into sharp focus.

I see so many of my Democratic friends touting the "compassion" and "love" being shown by their favorite politicians, and I think: "Really?"

It's all well and good to speak of compassion. But who can pay for this so-called compassion--much less who is willing to pay for it (with their own money)? Please don't talk to me about your great compassion when you are willing to saddle future (not-yet-able-to-vote and/or not-yet-aware-enough-to-vote) generations with massive debt that they will never be able to repay [that's the message I get from Kotlikoff and Burns; good summary of their book here]. And please don't talk about compassion when the supposed social safety net is being used, today (and for the foreseeable future--unless Congress decides to change the system) as a primary vehicle of retirement funding [the message I get from Jeff Opdyke's article].

The following, by Alexander Green of InvestmentU in last Friday's Investment U Plus newsletter, provides further perspective, I think:

Imagine that your 18-year-old son goes off to college for the first term of his freshman year. You are happy to pay for his education costs - room, board, tuition, books, etc. - but you also give him a credit card "in case of emergencies."

When he comes home for Christmas, you discover that he has run up $70,000 on his MasterCard. You hit the roof and demand an explanation.

"Now hold on, Dad," he says. "Before we start talking about how much less I might spend, let's talk about how much more money you [really ought to be giving] me."

Consider your response - and whether it would be printable in a family paper. Yet Congress makes our hypothetical spendthrift look like a piker.

Most reasonably well-informed Americans know that our $16.1-trillion federal budget deficit is now larger than the nation's GDP. But what most don't realize is this figure doesn't include the unfunded liabilities for Medicare, Medicaid, Social Security and the Prescription Drug Benefit. That's another $121.6 trillion. [According to Kotlikoff and Burns, it's actually more than $200 trillion. But what is $80, $90, or $100 trillion between friends? --JAH] Combine the federal budget deficit with the unfunded liabilities for current entitlement programs (excluding ObamaCare) and it comes to a mindboggling $1.2 million per taxpayer.

Some will argue that this is exactly why we need to stick it to the ultra-rich, an approach that has clear populist appeal. But here's a bit of perspective. Less than a hundred years ago, the nation's richest man, John D. Rockefeller, could have written a personal check and paid off the entire national debt, every penny accumulated since 1776. Today the government could confiscate the entire net worth of the nation's wealthiest man, Bill Gates, and it wouldn't pay six weeks' interest [NOTE: That's interest! --JAH] on the national debt. . . .

Writing in The Wall Street Journal this week, former Congressional Committee Chairmen Chris Cox and Bill Archer note that even if the government confiscated the entire adjusted gross income of every individual and corporation in America, it still wouldn't cover U.S. entitlement obligations. Yet the first order of business according to President Obama, Senator Reid and Mr. Buffett is not to reform entitlements or rein in spending but to raise tax rates? You might as well try bailing out the Pacific Ocean with a teaspoon.

Congress has a world-class spending addiction, but then so do most other Western democracies, including Canada, Britain, Western Europe and Japan. In every case, politicians on both sides of the aisle have learned that promising lush government benefits paid for by "someone else" is a big winner at the polls.

As for the current fiscal cliff negotiations, the Congressional Budget Office estimates that raising the top marginal tax rate to 39.6% - as Obama proposes - would generate approximately $70 billion a year. That's not an inconsequential sum. But it won't come close to fixing this year's $1.1-trillion federal budget deficit. Where would we get the other $1.03 trillion?

And why did I title this post "We're not in Kansas anymore"? 

Because I get the impression that the American empire has run its course. It can no longer maintain the illusion. Reality is beginning to set in. The U.S. cannot continue to inflate away its debt problems and expect its citizens not to feel the impact. We all--wealthy and poor--are going to experience the results of almost  three decades of spending beyond our ability to pay.

The difference between debt and deficit

I have been observing with ongoing horror at what our nation's political "leaders" are doing with respect to the onrushing fiscal crisis.

I finally decided, on Thursday, to take the time to write them. Not that I expect they really care that much what I have to say!

I wrote first to my congressman, who is a Republican, then to my two senators, who are both Democrats. I wrote much the same to each one. Except for the last one. Senator Mark Udall has the beginning of a statement on his homepage that directly addresses the situation: "Letter to Congress on the Debt." He offers only the first few sentences, before hitting a link to Continue Reading. I realized I needed to Continue Reading if I was to write him. So I clicked the link.

And the first thing I saw on the new page, was a statement he makes on the side of the page: "Add your name to my letter to Congress and send the message: we need a sensible, bipartisan debt plan -- now."

And, of course, my first thought was--and still is--"Oh, yes! We do!" And, boy! If his plan is sensible, I absolutely do want to sign it.

So what was (or is) Senator Udall's sensible, bipartisan debt plan?

Here's what he wrote:

Letter to Congress on the Debt

Dear Members of Congress,

Today, I delivered remarks on the Senate floor about our government's inability to come together to address our looming national debt and its fast-approaching limit. The clock is running out, and Americans are calling for a comprehensive, bipartisan solution. Yet once again negotiations are at an impasse. Our escalating national debt stands at over $46,000 per citizen - that's an outrageous number that is weighing down our economic recovery, jeopardizing our status as the world's economic leader and threatening our national security.

There's a growing disconnect between what most Americans want - quality roads, a safety net for the sick and elderly, and strong investments in education and research that will develop the well-paying jobs of tomorrow - and our country's ability to pay for them. But I believe we have to be realistic and make tough decisions - on both sides. For example, spending cuts alone won't reduce our deficit. And if those cuts are too deep they will hurt the middle class and prevent us from creating the jobs we need for a full economic recovery. So I believe generating more revenue must at least be part of the solution. There are plenty of wasteful tax loopholes - not tax rate increases, but corporate giveaways through the tax code - that can be closed. Our economic future rests on the fulcrum of this balance: both sides have to come to the negotiating table with skin in the game and agree that nothing is off limits.

If we continue arguing over whether to use the right or left paddle, we'll just keep going in circles until we careen over the edge together. I'm willing to stay in Washington as long as it takes to achieve a sensible, bipartisan plan that puts our country back on track. We already have a template: The President's National Commission on Fiscal Responsibility and Reform, chaired by Erskine Bowles and Alan Simpson, came up with a set of recommendations that would reduce the debt by over $4 trillion over the next decade, including spending cuts, reasonable entitlement reform and revenues generated from closing special interest tax expenditures. Now let's start paddling in unison.

Respectfully,

Senator Mark Udall and co-signers

It was that penultimate sentence that put me over the top: "The President's National Commission on Fiscal Responsibility and Reform . . . came up with a set of recommendations that would reduce the debt by over $4 trillion over the next decade."

Though I should have been ready for it based on what he wrote in the middle of his second paragraph: "spending cuts alone won't reduce our deficit. . . . I believe generating more revenue must at least be part of the solution. There are plenty of wasteful tax loopholes - not tax rate increases, but corporate giveaways through the tax code - that can be closed."

In case the problems with Udall's letter aren't immediately obvious, please permit me to point them out.

1. The President's National Commission on Fiscal Responsibility and Reform came up with no suggestions on how to reduce the federal debt, as Udall claims. All they proposed was means by which, maybe (if Congress could possibly allow itself to do nothing to alter the situation over the course of 10 years! --Ha ha!), . . . --They proposed means by which maybe they would spend $400 billion less each year, for ten years, than they were otherwise planning to spend. They would continue to spend in deficit--$1.2 trillion more than they bring in in taxes. The debt would continue to increase at a pace of $1.2 trillion a year (again, assuming no one got any ideas over the course of 10 years concerning how to spend more money than they did in 2011--a far-fetched idea if I ever heard of one).

So Udall's comment about "reducing debt" is total hogwash.

But his first comment about "spending cuts alone [not being able to] reduce our deficit" is also hogwash.

2. Look, I'm all for closing wasteful tax loopholes. Or even non-wasteful tax loopholes. If the government would treat everyone with greater equality, that would be fine with me: The tax code that impacts one person should be the tax code that hits the next.

But if you're spending more than you can afford, then if you cut spending--any spending at all--you will reduce your deficit. You won't be spending quite as much beyond your means.

Clearly, either Udall doesn't understand the difference between a deficit and a debt, or he is cynically playing upon the lazy thinking of his constituents to try to woo them with his nonsense.

I decided to write him much the same letter I wrote to his colleagues--with just some minor modifications that directly address his letter:

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--Oh! . . . And I was sure I had saved a copy. I planned to share it here. But it seems to have disappeared from my computer.

So summary: Basically: Hey, I'm one of the people whom you want to tax more. I am more than happy to pay more taxes . . . under one condition, and one condition only: That you-all come up with a reasonable plan actually to stop the bleeding, stop the deficit, balance the budget and, eventually, actually pay off the debt.

My problem: I have seen no one in Congress--or the White House--at any time during my adult years make any serious attempt to pay down the debt, even at the best of times. Even when the economy was screaming along, the government was wracking up more debt, more unfunded future obligations.

Until our supposed "leaders" in Washington actually lead and come up with a real plan to stop borrowing more and, at some point, actually pay off what they have already borrowed, I don't want to throw any more of my somewhat-good money after bad.

That, more or less, is what I wrote.

But there is more.

The government talks about the $14-point-some-odd trillion debt. But that's only what they are willing to acknowledge. Our federal government has obligated itself for far more. At this point, well over $100 trillion--most of it, obviously, "off book."

I mean, we're talking about Medicare and Medicaid and Social Security and all the retirement funds for all the federal retirees, not to mention the unlimited obligations they have signed up for with respect to Fannie Mae and Freddie Mac. They never reference those obligations. (Oh, yes, they reference them: that they contribute--or will, at some day in the future, contribute--to the federal deficit.) But they don't acknowledge that the funds supposedly set aside to pay off these obligations don't exist; that all the Social Security taxes you and your employer pay (or used to pay) go (or went) directly into paying the current expenses of the federal government. There is absolutely nothing there--or anywhere--to pay you what the government has promised to pay you . . . other than the "full faith and credit of the U.S. government"--which means the tax generating and paying ability of those Americans who will be paying taxes at the time you try to draw upon the program that the federal government has set up supposedly to meet your needs.

Put another way: The acknowledged debt of the federal government is "only" the debt upon which it is actually paying interest at the moment. It is not the future debt--the contracted obligation--for which any normal business would be investing in anticipation of having to pay.

All those tens or hundreds of thousands of dollars you hope to draw upon from Social Security? They don't exist. And the federal government has no plans for how they are supposed to come into existence . . . except somehow, miraculously, that taxpayers will show up in the future to give up the funds they need to live a modest (hopefully non-dismal) life so you can enjoy the benefits you believe you are entitled to (because the federal government made some promises to you: that if you paid in your Social Security taxes now--which would go to pay off those who had come before you--they would ensure that they fleeced future taxpayers to cover what they have been promising you).

[By the way, if you would like to read a very clear summary article about the on-going frauds involved in the Social Security system, read this from Merrill Matthews at Forbes.]

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When my family was all together a week ago, I got talking with my sister and brother-in-law from Germany. They are the ones who are being directly impacted by the Greek government's fiscal irresponsibility as they are being taxed to pay for their Euro-using cousins down in Greece. In Greece, I read, the average retirement age (and, therefore, the average age for receiving government funds), is 61! In Germany--where they are having to pay for the Greek government's largesse--the retirement age was recently increased from 65 to 67.

It strikes me: When Social Security was first created, the average lifespan of Americans who hit adulthood was significantly shorter than it is today. According to the Social Security administration, the numbers look like this:

Table 1: Life Expectancy for Social Security
Year Cohort Turned 65	Percentage of Population Surviving from Age 21 to Age 65		Average Remaining Life Expectancy for Those Surviving to Age 65
	Male	Female	Male	Female
1940 1950 1960 1970 1980 1990	53.9 56.2 60.1 63.7 67.8 72.3	60.6 65.5 71.3 76.9 80.9 83.6	12.7 13.1 13.2 13.8 14.6 15.3	14.7 16.2 17.4 18.6 19.1 19.6

"As Table 1 indicates," writes the author of the article in which I found the above table, "the average life expectancy at age 65 (i.e., the number of years a person could be expected to receive unreduced Social Security retirement benefits) has increased a modest 5 years (on average) since 1940."

Okay. But/and/so why hasn't the retirement age been raised to match? And considering the fact that our government has obviously over-promised on its ability to deliver, why isn't the retirement age raised a little bit more than a mere match to the obviously erroneous earliest assumptions? Put another way, why aren't we looking at full Social Security benefits beginning only for those who refuse to accept them until age 70? And significantly reduced benefits for those who take early retirement at 62 or 65 or any other age before that?

That kind of change might actually be real "reasonable entitlement reform," to borrow a phrase from Senator Udall!

Let's stop offering false hope to Americans that they (we!) can continue to retire in our 60s and expect to receive the kinds of Social Security benefits our parents or grandparents did. It's not going to happen.

One way or another, our system is collapsing. Let's acknowledge the collapse and make solid plans to move forward.