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Financial death by government

Mark Poyar | Wednesday, April 16, 2008

&tThis is the last column for the Observer that I will ever write. Seeing as how I often get e-mails suggesting that I eat babies and hate poor people, I can say with a reasonable amount of confidence that I probably just made your day. In return for making your day, I would like you to actually finish this column, for it deals with the most important political issue facing the country: the impending financial demise of the US Federal Government.

The nonpartisan Congressional Budget Office’s 2007 ;Long-Term Budget Outlook” begins with this seemingly innocuous statement: “Significant uncertainty surrounds long-term fiscal projections, but under any plausible scenario, the federal budget is on an unsustainable path-that is, federal debt will grow much faster than the economy over the long run.” The last time I heard an understatement of this magnitude was when I told my friend that licking the Backer pole “isn’t a very good idea.”

The main reason for the coming financial meltdown of the US government will be its rising spending on Social Security, Medicare, and Medicaid, particularly the last two. There are two major drivers of increased spending. First, costs per Medicare enrollee have increased 2.4 percentage points faster than per capita GDP over the last 30 years, meaning the percentage of GDP spent on health care will continue to increase. Secondly, the baby boomers are nearly eligible for Medicare which will dramatically increase Medicare and Social Security spending. Four months ago, the first baby boomers claimed Social Security benefits and they will be eligible for Medicare in less than three years. The proportion of the US population over 65 will grow from 12 percent to 19 percent by 2030, while the proportion of adults from 20 to 64 will fall from 60 percent to 56 percent.

Currently, Medicaid and Medicare spending accounts for 4.1 percent of US GDP and makes up about 20 percent of the federal budget. The CBO projects that this will increase to 12.5 percent of GDP in 2050 and 19 percent of GDP in 2082. 19 percent of GDP is roughly equivalent to the amount that the entire federal government will spend this year. Assuming that federal government revenue maintains its historical average of 20 percent of GDP and discretionary spending maintains its average of just under 10 percent, there would be a deficit of 22.5 percent of GDP in 2050 and 54.5 percent in 2082. To put this in perspective, the US’s current record setting deficit of about $400 billion is less than 3 percent of GDP. Interest payments alone on the national debt would consume 13.6 percent of GDP by 2050. A vicious cycle would result in which the government would issue ever larger amounts of debt to meet its ever higher interest payments. But what would large persistent deficits mean to the US economy?

Consistent budget deficits adversely affect the economy because they absorb the nation’s savings and reduce capital investment, thus making US workers less productive. Real wages, which typically follow productivity, would stagnate or fall. Capital would become scarce and interest rates would rise. The CBO estimates that the reduction in the capital stock would reduce real GNP in 2040 by 13 percent and 25 percent by 2050 compared to what it would have been. In short, the US would enter another Great Depression caused entirely by excess government spending.

The CBO says that this bleak scenario probably understates the risk to economic growth because this model assumes people do not anticipate future changes in debt. Consequently, the United States’ destruction would unfold much quicker. If investors expected a crisis, they would pull their money out of US securities, causing the exchange rate of the dollar to plummet, interest rates to climb, and inflation to increase dramatically. The stock market would likely collapse amid the uncertainty, domestic spending would dry up, and the US’s economic woes would spill over to the rest of the world just as it did in the last Great Depression.

The CBO uses the term “fiscal gap” – a measure of federal shortfalls over a given period – to help assess the long-term fiscal challenge. The fiscal gap represents the amount of spending reduction or tax increases needed to keep debt as a share of GDP at or below the current ratio, essentially balancing the budget over a long period of time. However, this measure does not take into account the adverse impact of higher taxes. If the federal government wanted to close the fiscal gap today, it would need to reduce spending by 6.9 percent of GDP immediately and permanently. This would be a 35 percent permanent reduction in federal spending. If the government waits until 2020 or 2030 to close the gap, a decrease of 9 percent or 11.5 percent of GDP would be necessary, respectively.

These estimates do not even include the possibility of expanding medical coverage to every American – it merely is an estimate of the federal government’s current obligations. It is obvious that the federal government can’t even meet these obligations; any talk of new obligations, whether in the form of Hillarycare, Obamacare, or continuing President Bush’s $1 trillion prescription drug bill, is both na’ve and dangerous. The only debate should be about how to phase out these federal programs as they threaten to ruin America financially.

This should not be a partisan question. Whether or not you agree with the libertarian views I espouse, the fact remains that providing such care is financially impossible. Certainly, the US could increase taxes dramatically to pay for such boondoggles, but even closing the current fiscal gap would require an 82.5 percent increase in individual income taxes. Such taxes would wreak economic havoc on the US economy.

We have a choice: we can either be equally poor and miserable, or we could let people keep their own money and make their own choices. I choose the latter and so should you.

Mark Poyar is a senior finance major and vice president of the College Libertarians. Their Web site is http://ndlibertarians.blogspot.com. He can be contacted at [email protected]

The views expressed in this column are those of the author and not necessarily those of The Observer.