Centerblue.org

Little noticed in the cacophony of Christmas, celebrating Democrats, and a wardrum-beating President was this report from the United States Treasury. Its conclusions summed up in one sentence: America is insolvent, bankrupt, unable to meet its obligations. Yes, America–the most powerful empire in the history of the world, stands to go bankrupt trying to make good on its promises and yet the band plays on, blithely unaware.

The report doesn’t mince words, with language readily available for anyone to see if they cared.

Despite improvement in both the fiscal year 2006 reported net operating cost and the cash-based budget deficit, the U.S. government’s total reported liabilities, net social insurance commitments, and other fiscal exposures continue to grow and now total approximately $50 trillion, representing approximately four times the Nation’s total output (GDP) in fiscal year 2006, up from about $20 trillion, or two times GDP in fiscal year 2000.

As this long-term fiscal imbalance continues to grow, the retirement of the “baby boom” generation is closer to becoming a reality with the first wave of boomers eligible for early retirement under Social Security in 2008.

Given these and other factors, it seems clear that the nation’s current fiscal path is unsustainable and that tough choices by the President and the Congress are necessary in order to address the nation’s large and growing long-term fiscal imbalance. (emphasis added)

Do you know how much $50 trillion is? If you sold every piece of property in America, every house, every skyscraper, every factory, every highway, every power plant–and left the land in the pristine condition discovered by Christopher Columbus, you would generate approximately $50 trillion. That is the magnitude of the hole in which the country finds itself in.

With regards to the federal entitlement programs of Social Security, Medicare, and Medicaid:

The net social insurance responsibilities scheduled benefits in excess of estimated revenues indicate that those programs are on an unsustainable fiscal path and difficult choices will be necessary in order to address their large and growing long-term fiscal imbalance.

Delay is costly and choices will be more difficult as the retirement of the ‘baby boom’ gets closer to becoming a reality with the first wave of boomers eligible for retirement under Social Security in 2008. (emphasis added)

There is no way to just “grow” out of this problem. As Dr. Chris Martenson over at Financial Sense University points out, the report’s statement of liability is assuming a steady 5% growth in the economy each year through at least 2011. That assumes there will be no recession during that time period–and even this year’s sub-par growth alone shows that 5% is not sustainable. Furthermore, the country’s liabilities more than doubled between 2000 and 2006, from $20 trillion to $50+ trillion. No amount of growth can overcome such a gargantuan increase in such a short time.

The net result of all this is that our national wealth and standard of living is set to take a precipitous decline in the years ahead. Let’s face it–the government is not going to default…it’s going to have to make some painful choices at some point. Someday some hapless president is going to sit before the cameras and tell the American people that he’s very sorry, but the country has promised far more than it can deliver, and that Medicare/Medicaid/Social Security are from now on either cancelled entirely, or severely pared back along with a drastic tax increase.

Those of you not saving up for retirement, hoping that these programs will carry you through old age: prepare to live under a bridge, because that’s about all the government will be able to afford for you unless it does something pretty drastic very soon.

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This massive problem is why, despite the opposition of my friends on the Left, I actually favored exploring Bush’s plan to create private spending accounts for Social Security (they’d do nothing for Medicare and Medicaid, but let’s solve one problem at a time)–accompanied by removing the $94,200 cap on yearly income subject to federal entitlement withholding (which he did not propose and should have). We have to do something, and the approach taken by the Democrats during that debate–the “do nothing” approach–is simply not acceptable.

Bush’s plan would have given everyone the option (not the obligation) to have their own withholdings diverted to a private account they could then manage through investments in the stock or bond markets. People who opted to do that would then be entitled to either draw less or not at all from the government upon retirement. Anyone who opted to keep paying to the government would be guaranteed his entitlement in full upon retirement.

Personally I’d love to manage that money myself; I’m confident I could earn a better return than the government could. Nevertheless, liberals came up with some very bad excuses as to why this wouldn’t work:

1) It’s risky to invest in the stock market given its ups and downs. Yea well it’s risky to promise everyone a retirement safety net that the government simply can’t afford. The risk of that is that you’ll get little or nothing. How does that compare to the risk of investing in the stock market, where for every 30 year period in the past the market has been higher than it was 30 years prior regardless of wars, deficits, and other problems?

2) If you invest unwisely, you’ll be stuck/starve. OH WELL, too bad. That’s the risk I took, fully aware of the consequences. I’ll starve just as much if we do nothing and the government can’t pay…so I might as well try to do something about it.

3) If too many people leave the system, there won’t be enough to pay those who don’t. This may have a grain of truth to it, but it’s addressable. I would want to see a study done on this, but it’s certainly possible that the higher income earners are the ones most likely to leave the system and invest privately, leaving less money from lower income earners in the pool to distribute among those who remain. This is easily addressable, however: set a sliding scale such as the higher your income, the less you can funnel to a private account..until that amount eventually dwindles to zero and goes entirely into the federal system. Those CEO’s making $40 million bonuses don’t need social security anyway…and neither does anyone with a substantial income that is better able to save for retirement himself….so say that anyone who makes more than $200,000, for example, has all his social security tax diverted to the government instead of to private accounts (this assumes the lifting of the $94,200 cap). Problem solved.

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We need some bold ideas to deal with some drastic problems–and we have yet to hear of a plan for Medicare/Medicaid. Democrats either need to come up with a better plan for social security, or they need to shut up. Doing nothing is just not acceptable and is a disservice to our country’s future. Let’s leave the “do nothing” label to the Republicans, under whose watch all the nation’s liabilities more than doubled in just six years.

The Dow Jones Industrial Average is hitting record highs. Gas/oil prices have retreated somewhat. Unemployment is at a historically low 4.6%. Inflation remains under 3%. Interest rates have receded.

By these and other measures such as GDP, the economy is doing well. Why, then, are voters angry about the economy, with a majority saying they disapprove of Bush’s/Republicans’ handling of the economy?

Alan Murray hits the nail on the head with his commentary in today’s Wall Street Journal:

Large numbers of Americans seem to have lost their belief in John F. Kennedy’s famous aphorism that a rising tide lifts all boats. “They know the economy is white hot,” says political analyst Charlie Cook, “but they also know they aren’t in it….There’s a feeling that some people are getting theirs, but we aren’t getting ours.”

There’s a well-known litany of reasons for that. Median earnings have been growing at a disturbingly slow pace, even as profits and high-end pay have soared. Health-care costs are not only increasing, they increasingly are being paid by consumers, not by employers or the government. Pensions are disappearing, as is job security — and any sense of long-term loyalty from employers. As pollster Peter Hart puts it, “there’s no gold watch” waiting at the end of a career these days. He cites a cartoon in which the boss says: “Mr. Jones, the reason we are letting you go is because you’ve given us the best years of your life.”

Meanwhile, a thin slice of America is enjoying unprecedented prosperity. CEO pay is one of the most visible manifestations, rising in the past decade at triple the rate of the median worker’s pay. In…Greenwich, Conn., skilled financiers bring home eight- and nine-digit paychecks, unimaginable in the not-so-distant past. Americans have never been big on the politics of envy, in part because they hoped someday they would join those at the top. But increasingly, they wonder whether the economic game is rigged, and whether all these riches are the result of backdated options or insider trading or some other trickery that doesn’t benefit them.

He goes on to note that the disconnect occurring between the upper class and everyone else may result in the demise of the pro-business, free-market platform popular in Washington for the last quarter century. Increasingly, Democratic challengers like Senatorial contender Sharrod Brown of Ohio are adopting a populist, anti-trade, anti-globalization, anti-immigration, anti-big big business message that is bound to appeal to the struggling and rapidly disappearing American middle class.

I have mixed feelings about this. Obviously the sources of increasing inequality are glaringly obvious and real as described in the article…but I’m concerned about tossing the baby out with the bathwater. America is really feeling the negative effects of globalization (which powers a lot of the deleterious changes being seen in American industry), because our standard of living has been so much higher compared to the rest of the world. Globalization evens the scales, and while that means an improvement to everyone else it means pain for us. Can we really avoid this, though..or should we?

The rest of the world has the same right to a higher standard of living as Americans do. But even if we disagree on this point, it’s hard to see how we could get America to “opt out” of the globalization taking place everywhere else without being left woefully behind. For all its drawbacks, globalization does increase trade, wealth, and access to technology..to the ultimate betterment of all. Can we really afford to build a virtual wall around us, and would such a wall succeed? It never has before.

There’s a lot wrong with globalization that is hurting Americans, and these things must be fixed. A glaringly obvious example is other countries’ disregard for health, labor, and environmental standards for their workers–which allows them to milk their workers for pennies on the dollar while American industry is “saddled” with these obligations. We have to exert strong pressure on our trading partners to adopt similar standards so that all wealth is created fairly without placing unjustifiable burdens on workers or the environment. Another example of globalization gone wrong is countries like China manipulating their currencies to maximize their exports, keeping them cheap regardless of true fundamental supply and demand. This too must stop.

There are also problems with American business itself. Why do CEO’s make ridiculous salaries (more than 42 times that of the average worker) without such pay being tied to solid performance? Why is there so much crookedness surrounding stock option grants? Why are prescription drug prices so out of control when compared to the rest of the world? Why are companies allowed to fund worker retirement plans with risky company stock instead of cash to be invested as the worker wishes? Why are we failing to address the looming crises of social security and medicare, those safety nets for Americans most in need? Why do we keep cutting taxes on those who need it the least instead of those who need it the most? Government has a duty to answer these questions for the sake of the middle class, and my personal belief is that these questions of fair trade and fair business are where Democrats should focus their attention instead of appealing to people’s xenophobia.

Fixing problems like this won’t cure all the pain, but will minimize it while allowing America to reap the longer-term benefits of globalization–improved living standards elsewhere create larger markets for our products. Americans have a long history of believing they live in a meritocracy–a society where anyone who works hard enough can climb the upper rungs of the ladder of success. Globalization and a broken American system of business are increasingly rigging the game against most Americans while letting the upper class elite reap wealth beyond the imagination of most people.

This disparity has to end, and Democrats would do well to address it without digging their heads in the sand against the rest of the world. God knows we’ve done enough of that under the Republicans.

The US could go bankrupt, according to research that Boston University Professor Laurence Kotlikoff has conducted for the Federal Reserve Bank of St. Louis, a leading part of the Federal Reserve system.

“[T]he US government is, indeed, bankrupt, insofar as it will be unable to pay its creditors, who, in this context, are current and future generations to whom it has explicitly or implicitly promised future net payments of various kinds.

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“The proper way to consider a country’s solvency is to examine the lifetime fiscal burdens facing current and future generations. If these burdens exceed the resources of those generations, get close to doing so, or simply get so high as to preclude their full collection, the country’s policy will be unsustainable and can constitute or lead to national bankruptcy.

“Does the United States fit this bill? No one knows for sure, but there are strong reasons to believe the United States may be going broke.”

He estimates the sum of all implied or actual obligations to present and future generations to be an impossible $65.9 trillion.

The longer the government waits to address this major problem, the more painful the solutions will become.