The Deep Hole

 The Deep Hole

Congratulations USA, Democrats, Republicans, fellow citizens, and to whom it may concern (not sure if anyone is concerned) we're closing out the year $15 trillion ( $15,000,000,000,000) in debt. Not personally, of course, just collectively. That is, it's government debt. Plus we got another trillion coming up for this year. This doesn't include future anticipated liabilities for government pensions, Medicaid, Medicare or Social Security. It doesn't include state and local government debt, nor does it include any personal or business debt. I think that comes out to $50,000 per man, woman and child.

  Oh, about the Social Security. It looks like we've decided to ditch the concept of a trust fund for Social Security. Anyone who thinks that the present two per cent cut in payroll taxes for two months won't be extended for another year is on political pot. Not only is it going to be extended, it is so popular that no politician, Republican nor Democrat, will be able to resist extending the cut year after year. Oh, well, the so-called Social Security Trust Fund is full of government IOUs anyway. Future payments to retirees will come from general revenues, if there's any money left. With a third less money coming into the Fund each year, whatever is in there will be depleted quickly. Might as well get to the general fund quickly.

  By the way, unemployment benefits will also be continued to 99 weeks from 26 weeks. It sounds like a compassionate give-away, but eventually businesses will be taxed to pay for the program. It's borrowed from the unemployment fund that is funded by taxes on employers.

  All this is politically popular. The rich guys are going to pay for it. Right now there'll be a $17 a month tax on any mortgage above $200,000 that is held by Freddie Mac and Fannie Mae (that's most of them) and the idea of putting a 2.1 per cent  or is it 3?) surtax on people earning more than a million dollars a year is very popular. If I recall correctly, it takes 10 years of one of these taxes, one or the other or both, to pay for one year of the payroll tax cut.

  Politicians for both parties are so used to giving away money, that it's not easy to change. Economist Robert J. Samuelson, writing for the Washington Post, pointed out that "taking away" - in the form of taxes or cutting benefits is just not on anyone's political "how-to-do-list". No one can remember doing it. He also points out that rapidly declining military costs and high economic growth, made up the difference in the past. Military spending as a percentage of the federal budget remains flat, but slower economic growth, an aging population, and high health costs are taking away that escape route. In addition, sooner or later we run out of rich people to tax.

  Change can't happen over night. Anyone who's run any size business
(or even your own household) knows that "cuts" don't take effect immediately. It's a slow process like stopping a huge oil tanker. Tax hikes do get immediate results but also tend to do two things: slow growth because people and businesses have less to invest and two, tempt government to spend more.

  Taxing without significant and direct spending cuts won't slow the ship; and, spending cuts without some tax increases won't stop deficit spending. Clearly, the spenders have to quit spending first and the tax cutters need to agree to some tax increases to cover the interim. Tax increases, by the way, include reducing or taking away tax breaks or deductions or preferences or whatever you call them.

  In addition, reforming the system of benefits (instead of expanding the base and lessening limitations) is critical. However, people don't care for change, particularly if it might, even remotely, limit what they see as their "entitlements".

  This isn't going to be a pretty fight. The problem is that this has to be a fight now rather than later when things are in crisis mode.

  Right now, individually national politicians are focused mostly on keeping themselves in office regardless of their age or their length of service. Change, therefore will be slow unless people are thrown out. Not a bad idea, of course, but usually very disruptive. The Tea Party movement is an example. It has been disruptive because the movement is anti-system. However, without that movement we probably wouldn't even be arguing the issue now.

  As for the future, I'm mildly optimistic, or pessimistic, that we will approach a long view solution. I also expect an economic revival, even a boom, centered around energy - if government will permit it. Then the problem will be two fold: preventing inflation and capping a boom which is inevitably followed by a bust.