America’s Ticking Bankruptcy Bomb
This column by ACRU General Counsel and Policy Director for the Carleson Center for Public Policy (CCPP) Peter Ferrara was published June 15, 2011 on The American Spectator website.
My new book, America’s Ticking Bankruptcy Bomb, published by HarperCollins, went on sale this week. The book begins by explaining the overwhelming tidal wave of government spending, taxes, deficits and debt swamping our economy and threatening ultimate bankruptcy for America. But this book is not just about the problems, but also about the solutions.
Defusing the ticking bankruptcy bomb that is threatening to explode American prosperity will require first creating another economic boom to restore traditional American prosperity. Only surging economic growth will produce the booming revenue base essential to avoiding national bankruptcy, and reduce dependency sufficiently to enable the necessary slashing of government spending. The book explains exactly all the specifics of how to create another generation-long, 25-year economic boom, drawing on my background working for President Reagan in the White House Office of Policy Development.
If you want smaller government, then this is the book for you. It provides a thoroughly detailed, specific roadmap for ultimately cutting federal spending in half, or more, over time, drawing on my experience working for virtually every major free market think tank for the last 30 years. That is all accomplished with politically seaworthy reforms. I don’t believe in kamikaze missions.
The top federal income tax rate in this booming future America is 15%. The payroll tax is eventually replaced entirely by personal savings, investment, and insurance accounts ultimately financing all of the benefits financed by the payroll tax today. State income taxes in the 41 states still suffering from that barbarous relic are phased out completely through a Taxpayer Bill of Rights limiting the growth of state spending to the rate of population growth plus inflation. The federal budget is eventually balanced permanently.
Essential to achieving this vision of smaller government is fundamental entitlement reform, also explained in thorough detail in the book. By modernizing our old-fashioned, tax and redistribution entitlement programs to rely on 21st century capital, labor, and insurance markets instead, we can achieve all of the social goals of these entitlement programs far more effectively, serving seniors and the poor far better, at just a fraction of the current cost of those programs. Such reforms would involve powerful market incentives driving the programs to contribute further to booming economic growth and prosperity, rather than detracting from it.
Lighting the Fuse
During George Bush’s eight years as President, the federal government grew by one-seventh relative to the economy, after Republican Congressional majorities had so promisingly reduced it by that amount from 1994 to 2000. But when President Obama got behind the steering wheel in 2009, he accelerated into hyperdrive even more so in all the wrong directions, doggedly pursuing the opposite of Reaganomics in every detail.
Federal spending under President Obama has already soared by another fourth relative to the economy, to the highest in history except during World War II. His own 2012 budget proposes to increase it by another 57% by 2021. That budget projected the federal deficit for 2011 at $1.645 trillion, the highest in world history by far. Already this year, for every dollar of federal spending, 43 cents will be borrowed. Spending for Social Security, Medicare, Medicaid, and the income security programs (mostly welfare) will consume 95% of all federal revenues. What is left will not even be enough to pay interest on the national debt, equal to 10% of federal revenues. All the money for everything else the federal government does, including all of national defense, law enforcement, transportation, agriculture, indeed, for every cabinet department outside of spending for the above entitlements, all will have to be borrowed.
The national debt, now rocketing towards $20 trillion by 2020, is already the highest in history relative to GDP except for World War II, and on its current course will soar well past that record. Indeed, the national debt has been rocketing upwards so fast under current policies that more debt will be run up in one term under President Obama than under all other Presidents in history — from George Washington to George Bush — combined, according to President Obama’s own 2012 budget.
On our current course, indeed, our national debt as a percent of GDP will soar past the level that triggered bankruptcy for Greece, when the financial markets refused to lend the government enough to cover its enormous annual deficit. The European Union tried to end that crisis with a trillion dollar bailout financed by its taxpayers. But who will bail out America? Who even could?
Even worse, the national debt does not nearly encompass everything the government owes, or on which it is subject to liability. The best estimate of the unfunded liabilities for Social Security and Medicare is over $100 trillion. Usually overlooked as well are the unfunded liabilities for federal military pensions ($3.7 trillion), veterans benefits ($1.5 trillion), and federal civil service pensions ($2.1 trillion). Then there are the FDIC’s guarantees for $5.4 trillion in bank deposits, the FHA’s guarantees for $1 trillion in home mortgages, and trillions more in mortgage backed securities and federal guarantees of those securities held by the Federal Reserve, Fannie Mae, Freddie Mac, and the FHA. None of this is counted in the national debt.
For context, our entire economy only produces $15 trillion a year.
Somehow, President Obama insisted that it was a good idea to add all of the entitlement promises of Obamacare on top of these obligations. Obamacare added a costly new entitlement program to provide federal welfare subsidies for health insurance for families making as much as $88,000 per year, soon climbing to over $100,000. Woefully overpromised Medicaid, the health care program for the poor, was sharply expanded to cover nearly 100 million Americans by 2021 according to CBO. While President Obama won enactment of Obamacare promising it would reduce deficits, it will actually add another $4 to $6 trillion to the nation’s deficits and debt over the first 20 years alone, as explained in the book.
State and local governments add even further to the problem. People use the term “failed state” to refer to Somalia, with its disintegrated government. But that term may increasingly be applied to California, New York, Michigan and Illinois, with their out of control state budgets and deficits, runaway government pensions, dysfunctional education bureaucracies, and increasingly belligerent public sector unions.
These states already resemble Greece, with our federal government already bailing them out at taxpayer expense, which started in President Obama’s first stimulus bill in 2009. State and local government debt has soared toward a projected $4 trillion, or another 24% of GDP, by 2012. The unfunded liabilities of state and local pensions total $3.8 trillion, with state and local promises to pay retired employee health benefits adding further unfunded liabilities of $1.4 trillion. None of this is counted in the national debt either.
From the end of World War II until 2008, more than 60 years, federal spending as a percent of GDP hovered around a stable average of 20% of GDP. Under current policies, federal spending will rocket to 40% of GDP by 2040, nearly double the long run historical average. Balancing the budget then would require basically doubling all federal taxes, or cutting all federal spending in half. This is primarily due to the nation’s biggest entitlement programs, Social Security, Medicare and Medicaid, and the federal government’s welfare empire, now including Obamacare.
Adding state and local spending to federal spending would leave total government spending in America over 50% of GDP by 2040. This would fundamentally transform America into a static, low growth, socialist European state. America’s traditional world leading prosperity and opportunity, the American Dream, would be gone.
The Coming Bankruptcy of America
As the book further discusses, adding still more to these troubles is the extended weakness and instability of the economy. With the federal deficit this year already at $1.645 trillion, America is now mortally vulnerable to another recession in the short term. Yet just such another recession is what Obamanomics is brewing up for us, if not an outright depression.
The sad current reality, unprecedented since the Great Depression, is that under Obamanomics America has never actually recovered from the last recession. Even though recessions since World War II previously have lasted an average of 10 months, with the longest previously lasting 16 months, last month’s labor report 41 months after the last recession started showed unemployment rising yet again to 9.1%. America has now suffered unemployment at nearly 9% or above for the longest period since the Great Depression. The U6 unemployment rate, counting those marginally attached to the labor force who have given up looking in the Obama recovery, and those stuck in part time unemployment for economic reasons, persists at nearly 16%.
African-Americans are already suffering their own Depression, with unemployment rising again last month to 16.2%. Hispanics have been suffering a depression as well, with extended, double digit unemployment rising last month to nearly 12%. Teenagers have also been suffering persistent depression level unemployment at 24.2% last month, with black teenagers over 40%.
Meanwhile, with prices for food and gasoline in particular soaring, real wages for working people are falling. Last year, the Census Bureau reported that the total number of Americans in poverty was the highest in the 51 years that Census has been recording the data. A record 44 million Americans are now on food stamps as a result.
Historically, the worse the downturn the stronger the recovery. Based on prior history, America should be enjoying the second year of a roaring economic recovery by now. Instead, while the Reagan recovery averaged 7.1% economic growth over the first 7 quarters, the Obama recovery has produced less than half that at 2.8%, with the last quarter at a dismal 1.8%. While the Reagan recovery produced nearly 20 million new jobs, and civilian employment rose by almost 20%, today America still suffers 6.8 million fewer jobs than when the recession started over 3 years ago. The labor force participation rate has fallen to its lowest level almost since the Reagan recovery started over 25 years ago.
Yet, already scheduled now under current law in 2013 is the expiration of the Bush tax cuts, which President Obama has refused to renew for single workers making over $200,000 a year, and couples making over $250,000. Also scheduled to go into effect in 2013 under current law are all the tax increases of Obamacare. Together, these job killing tax policies would result in a sharp increase in the tax rates on the nation’s small businesses, job creators, and investors for virtually every major federal tax.
They would see their income tax rates jump by nearly 20%, the capital gains tax rate increase by nearly 60%, the total tax rate on corporate dividends increase by nearly three times, their Medicare payroll tax rate increase by 62%, and the death tax rise from the grave with a 55% rate. This would go way beyond Obama’s outdated campaign rhetoric about just returning to the Clinton tax rates, adding up to a top federal tax rate of 44.8% on wage income alone, besides all the tax increases on capital income, on the way up to a 62% top federal tax rate.
Yet President Obama continues to propose still more tax increases on these small businesses, job creators, and investors. He proposed a further $321 billion tax increase on them in his 2012 budget, and another trillion dollar increase in his April 13 national budget address. He called there as well for an automatic tax increase trigger that would raise their taxes still further if “our debt is not projected to fall as a share of the economy.”
Meanwhile, American businesses continue to suffer from virtually the highest corporate tax rates in the industrialized world at nearly 40%, leaving American companies uncompetitive in the global economy. Even in Communist China the corporate tax rate is 25%. In socialist Europe and Canada it is below that, even below 20% in some cases. Yet under President Obama there is no relief in sight. Instead he continually proposes still further tax increases on American business.
But there is more to Obama’s recipe for renewed, double dip recession, or worse. The Competitive Enterprise Institute estimates the total cost of regulation has risen to $1.75 trillion a year, which is close to 10 times the corporate tax burden and double the individual income tax burden. Yet President Obama is furiously reregulating to add still further to these costs. The EPA is moving forward to effectively implement cap and trade, which alone would add well over a trillion in higher energy costs to the economy. Other exploding regulatory restrictions on energy production kill jobs more directly, while adding still more costs to the economy.
Further galloping costs arise from Obamacare’s regulatory takeover of health care, Dodd-Frank’s regulatory domination of American finance, and multiplying regulatory restrictions on manufacturing, mining, oil and gas refineries, chemical plants, communications, utilities, railroads, airlines, diesel transportation, lithium battery production, agriculture, and food labeling and marketing. All these regulatory costs will be building to crescendo in 2013 as well.
The economy is further trapped by Federal Reserve Chairman Ben Bernanke’s thoroughly confused monetary policies, fully supported, indeed demanded, by the Obama Administration. As QE2 winds down, we already see the economy winding down as well. That is because once the Fed artificially pumps up the economy with monetary crack, when it stops the party the underlying weaknesses of the economy are revealed. Because President Obama’s oncoming 2012 campaign can’t bear any renewed economic weakness before the election, expect the Fed to return shortly, either expressly or effectively, to QE3, and continue that through the election. Plus the Federal government can’t finance it’s gargantuan record setting deficits without the Fed printing money and buying much if not most of the new bonds.
Monetary policy will consequently contribute to rising inflation through the election, when the Fed will then try to reverse course to stop or preempt any further inflationary surge. That will again be contractionary, just in time to join with the sweeping across the board tax rate hikes, and the reregulation cost tornado, to create one whopping new recession in 2013.
The already way too high deficit will then soar well over $2 trillion. Without more Fed monetary crack to buy the federal bonds, international financial markets will pull the plug, and the Grecian formula for national bankruptcy will have arrived at these shores.
But as I suggested last week, there is still one more ugly turn of the screw to result. With America already unable to finance its budget, it will be unable to finance a sustained military response to any national defense crisis. America’s enemies will see that, and be encouraged to attack, at the least our allies abroad, from Israel, to South Korea, to Taiwan, possibly even Japan or Europe, particularly Eastern Europe. Just as Reagan brought us Peace through Strength, President Obama, pursuing the opposite of everything Reagan did, will produce War through Weakness, unless he is stopped.
Like the Ghost of Christmas Future produced for the chastened Scrooge, these are visions of what will be, but do not have to be, if we will make the dramatic necessary changes. But the window for that is narrowing rapidly. Next week I will begin explaining those essential policy changes by discussing how to create a renewed economic boom for America.