Running on Fumes: a Bankrupt Nation

This is the country that I love. Here I have been enabled to enrich my life in many ways, not the least of which is wealth. However, today it is not the same country it used to be. It is not the same country as it was in 1949 when I immigrated here. I am told it is not the country it was in the year 1900. It is not like the gleam in the eyes of the Founders or the country described in the U.S. Constitution.

I no longer wonder what they are smoking in DC. Whatever it is, I do not see them exhaling. Something is burning, and you may be hearing fiddling. Officials and politicians now in power, together with decades of others before them, have spent more than they have, and are committed to continue spending.

Are we waiting for a miracle? Are we looking for a leader of incredible stature and influence? That may be what it will take. A president who thinks the way Ron Paul or Steven Kubby could turn things around, shrink government and stave off financial collapse. We need a Moses, an Alexander the Great, another George Washington.

So how bad is it?

The Fiscal Year Deficit and the National Debt

The total future obligations of this government now total more than $59 trillion. USA Today published that number in May 2007. See below for the source of another estimate in a 2006 article at the Federal Reserve, which is $ 65.9 trillion (5 times GDP).

A figure already known and growing every minute, the national debt now tops $9.3 trillion, the current year's deficit is $250 billion and the economic stimulus bill is likely to add another $168 billion. The freshly announced federal budget for next year again promises to spend more than the revenue coming in. That could add another $418 billion.

In a matter of months, in other words, we will see the national debt reach as high as $10 trillion.

The Eventual Result

The government eventually has to tax us enough or print enough dollars to pay that off. It is doable, based on how we wiped out the national debt in the nineties. But that is not enough.

In addition to the $10 trillion, there is also a commitment to keep Social Security, Medicare and Medicaid going.

Off-budget costs of war keep piling up, threatening to top $1 trillion plus billions in damage to our economy. Moreover, the even greater annual increases in corporate and individual welfare piles on an even greater burden. Can taxpayers keep up? No, there will be too few working contributors and too many retired beneficiaries. The work force grows at 0.92 percent per year, and retiring Americans increase at 2.8 percent (both rates were close to 2.25 percent thirty years ago), how can funding of Social Security and Medicare keep up?

In a speech about Social Security, President George W. Bush said:

“In 1950, there were 16 workers per one [retiree] putting money into the system—which means that when somebody retired, there's 16 workers contributing to that person's retirement. Today there's 3.3 workers contributing for each beneficiary. And when youngsters retire, it's going to be 2.1—two workers per beneficiary. In other words, the burden of paying for retirees is increasing on workers…

“To make matters worse, as more baby boomers retire, as people live longer, as more benefits kick in, the cash deficit increases. So, for example, in 2027, the government is going to have to come up $200 billion more to meet the promises that we've made, above and beyond payroll taxes. Every year from 2018 to when the system goes broke in 2042, the cash deficits required to meet promises increase. That says to me we've got a problem.”

— President Bush, February 10, 2024

Can a Tax Increase or Benefit Cuts be Made?

Within 20 years, the effect of these trends will be impossible to miss. The weight of the interest payments on the national debt will force spending cuts or tax increases.

The weight of Social Security payments to Boomers will amount to an obligation that will lead to a transfer of funds from the budget of the government's regular budget to the SS Trust Fund, resulting in other government program cuts or tax increases.

The weight of Medicare to retired and poor people will cause further cuts in other government programs or tax increases.

The weight of “universal health care” promised by Democrats will cause more cuts in other government programs or tax increases.

Of course, the government could start the printing presses. However, as it spends this money, the greater amount of money chasing scarce goods will cause inflation to rear its ugly head. That will shrink the value of the dollar. Investors at home and abroad will start dumping government bonds. The credit rating of the U.S. government would soon be downgraded.

These Forces Will Not Cause Budget Cuts

Budgets will increase, but only to the extent that legislators dare to take them. The federal budget will go on rising, while funding fails to keep up. Continuing to increase taxes will cause taxpayer revolt. That means massive voting against incumbents. What will they try next?

They will resort to hidden taxation. Increased fines and penalties for regulation infractions will hit corporations. Various fees will increase. New fees will appear. Other taxes on business will go unnoticed by most people. Moreover, increased government borrowing will go unnoticed for a time. We might begin to scratch our heads wondering why our paychecks do not cover our expenses. But most people will blame business. We will learn to do without. Yesterday's necessities become tomorrow's luxuries.

The Chickens Come Home

However, eventually the money machine will fail. It is not the farmers or the oil producers or the labor unions who are causing inflation, it is the government. Heavy increases of the money supply is what does it. It is caused by more dollars chasing scarce resources. No private individuals, groups or corporations can cause that.

Only the government printing presses can do that. The government borrows more, fearing to increase revenue by taxation. The Federal Reserve buys government bonds. The checks have to be cashed eventually by banks which clear through the Federal Reserve. The “cash” has to come from the printing presses.

The government should know that it has to stop doing this. The right thing is to stop the deficit spending. In fact, spending has to be drastically cut rather than increased. The debt has to be reduced to avoid disaster. The problem is extremely urgent. Why cannot the government get this done?

Congress is too scared of voters turning against them if they do the courageous thing, the right thing. Constituents are calling for more dole-outs, which they are afraid to deny. They all think they will be out of office and retired when the goose dies.

I cannot tell if they have their heads in the sand or in some other dark place.

At some point, the money printing will drive the dollar down so far that government bonds will be suspect. The “good faith and credit” of the United States will evaporate. No more can be borrowed. Holders of government bonds will in turn lose their credit ratings. General economic collapse follows.

In an astounding paper posted at the Federal Reserve of St. Louis by Boston University economics professor Laurence J. Kotlikoff, it is revealed in blunt, powerful language that the era of borrowing and spending without consequence is coming to a close. The paper, entitled Is the United States Bankrupt? may not remain posted for very long once the public gets word of what it actually says. Download your copy now! Spread the word!

And what does it say? Kotlikoff explains, "Unless the United States moves quickly to fundamentally change and restrain its fiscal behavior, its bankruptcy will become a foregone conclusion."

The country is going bankrupt

He goes on to explain that with total future obligations of $ 65.9 trillion , "the United States is going broke, . . . that radical reform of U.S. fiscal institutions is essential to secure the nation's economic future."

Failure to engage in these massive reforms will inevitably result in the financial demise of the United States , Kotlikoff says: "[W]e have a country at the end of its resources. It's exhausted, stripped bear, destitute, bereft, wanting in property, and wrecked (at least in terms of its consumption and borrowing capacity) in consequence of failure to pay its creditors. In short, the country is bankrupt and is forced to reorganize its operations by paying its creditors (the oldsters) less than they were promised."

Kotlikoff is not just a complainer. He tried to offer solutions, among them, a version of the “FairTax” plan (replace all federal taxation with a 33% sales tax), start private investment accounts to replace Social Security and replace Medicare and Medicaid with vouchers for private medical insurance.

His plans would increase our tax burden, with the federal government taking 21% of GDP rather than the current 16% (which sounds low even for 2006). I am not convinced that those proposals would work. Moreover, it takes us in the wrong direction, toward bigger government and more taxation. He ignores the total burden of government, which is greater than the visible load of taxes. The cruelty of the burden of government and the threat of national bankruptcy calls for solutions that are more radical.

The 5 Percent Solution

Ron Paul once proposed that we reduce federal spending to the level it was at in 1995, which would let us repeal the Sixteenth Amendment (income tax). That is a start. For a libertarian, that is not going far enough. The goal must be to eliminate taxes!

However, we may not be able to do that immediately. It may have to be a painful two-step process.

I would go all the way to just before that amendment was enacted. In 1913, the federal budget was about $700 billion. This would be adequate for all of the legitimate functions of government.

If the federal taxes continued 15 years while spending only $700 billion per year, an endowment could be built up. If that were invested sensibly, the earnings could then be used to cover federal spending and all taxation could be ended (repeal the sixteenth amendment). James Rolph Edwards, Professor of Economics at Montana State University-Northern wrote an article proposing this, Financing Government Without Taxation .

In response to an inquiry by me, he indicated that the federal budget ought to be 5 to 10 percent of GDP, and that the endowment would be able to throw off earnings to cover that reduced budget in 3 years. However, current taxation should continue 15 years to cover all federal obligations. My own research indicates this could be accelerated by 2 to 3 years if most government assets, enterprises, buildings and land were sold off.

I am looking for a way to implement that. I wander the land holding a lantern looking for an honest person, the right person who can lead the people to a way out of our current dilemma. We need a Moses, an Alexander the Great, another George Washington.