THINKING OUTSIDE THE BOX
By: Dr. Charles Ormsby – January, 2011
Our current national debt exceeds $13.9 trillion and is increasing at nearly $2 million per minute. We are headed straight for the cliff at high speed. Life seems fairly normal now and it will continue to feel normal until we go over the edge. And then all hell will break loose.
The International Monetary Fund can save third world countries … although their medicine is often worse than the disease. The European Union can prop up the PIIGS (Portugal, Ireland, Italy, Greece and Spain). But when the bottom falls out of the U.S. economy, there is no one around who will be able to save us.
When the long shadow of doubt falls on the good faith and credit of the U.S., the collapse will be swift and catastrophic.
Only a dramatic change in our government’s financial habits will save us from such a fate.
Let’s review the historical record (all data in this article was taken directly from the U.S. Office of Management and Budget). First, let’s look at our federal government’s expenditures (see Figure 1) as a percentage of Gross Domestic Product since 1950. Normalizing by the annual GDP eliminates any effects of inflation and provides a measure of real affordability.
For the first 58 years of this 60 year period, the average deficit was less than 2% of GDP. This level of deficit spending, while higher than desirable, can probably be sustained for many years if our economy maintains a healthy growth rate.
In both 2009 and 2010 the deficit was over five times the historical average. In two years we’ve spent 11 years of sustainable deficits.
The current deficit costs us over $200 billion annually in interest, an amount that will rise as the deficit grows and interest rates rise. But an unmanageable debt service is just the beginning. Every dollar the government spends diverts resources from more productive uses. If that isn’t bad enough, those dollars fund regulators and bureaucrats who actively undermine the efforts of our productive citizens.
Let’s compare the government’s expenditures today (averaging 2009 and 2010) to what they were in 1950. To be fair, we will denominate the expenditures in both cases as a percentage of GDP (the 1950’s expenditures against the 1950 GDP and the 2009/10 expenditures against the average GDP in those years).
In the aggregate, government expenditures rose from 15.6% of GDP in 1950 to approximately 25% of GDP in 2009/10. While this growth is alarming – especially the additional 5% which ballooned in just these last two years – the more interesting insights are gained when we look at expenditures by function, i.e., what percentage of our GDP did the government spend on each major category of expenditure and how much has it increased since 1950 (see nearby table). Let’s go down the list starting with National defense.
In 1950 we were in the Korean War and faced with a growing nuclear threat from the USSR and China. Devoting 5% of a much smaller GDP to national defense was surely warranted.
Today we are engaged in a war against a motley crew of Muslim extremists and a growing military threat from Iran, North Korea and, regrettably, China. The former is expensive because we insist on fighting a “politically correct” war. The latter threat must be taken very seriously given the developing nuclear capabilities of North Korea and Iran and the growing military muscle (conventional and nuclear) of China. In any case, our percentage of GDP spent for defense has remained stagnant and is not a primary cause of our looming economic catastrophe. Eliminate waste, but don’t cut the muscle.
The other functions listed aptly illustrate where the problems lie. Putting defense expenditures aside, the other activities of our government – almost all social welfare programs – absorb an extra 13.5% of our GDP. Since GDP is currently estimated to be approximately $14.75 trillion, this 13.5% represents expenditures totaling nearly $2 trillion!!
When government spending is criticized, the discussion usually centers on waste, fraud and/or abuse. This is a mistake. The discussion should focus on inappropriate functions and especially on unsustainable inappropriate functions. Let’s tackle each of the remaining function in the table.
The entire Education, training, employment and social services line item is largely, if not wholly, inappropriate for the federal government under our Constitution. These are functions/services that are primarily individual responsibilities, possibly aided by local or state governments. At a minimum, expenditures in this area should revert to the GDP percentages that prevailed in 1950 for a savings of 0.68% of GDP, or $100 Billion.
The federal government’s legitimate role in Health should be reduced to the functions of the Centers for Disease Control and providing health care services to our soldiers and veterans. These functions could easily be funded with the 0.1% of GDP allocated for this in 1950. This would save $345 billion.
Next on the list is Income security. We currently support an obscene 99 weeks of unemployment insurance. The major effect of this policy is to ensure that we get as high a rate of unemployment as possible. Regardless of the perceived merits of the unemployment insurance system, there is no article or section or clause or phrase in the Constitution that justifies any federal program in this area. At best this is a state responsibility. Even better, this should be viewed as an opportunity for individuals to exercise personal responsibility and protect themselves through savings. Eliminating this expenditure completely saves 4.21% of GDP or $621 billion.
Social Security is also extra-constitutional and should be eliminated over time. Unfortunately, the Progressives who stuck us with this tar baby made it particularly difficult to eliminate. People have paid into the system and now they are dependant on the income they expect it to provide.
The only reasonable option is to slowly transition the Social Security system to a program based on private savings accounts with as much individual autonomy as possible. In the process those who are retired and those close to retirement should be substantially protected.
That being said, the current schedule of payments cannot be sustained and maintaining these promises is a prescription for collapse. Retirees have a choice: accept reasonable reductions in benefits now and have them secured, or demand the current benefit schedules and prepare for the system to collapse entirely. As a pending retiree, I’d be happy to delay availability of benefits for 2-3 years and accept 10% less if that is what is required to ensure solvency and let the country slowly move to a private investment model for younger workers like my children and grandchildren.
Based on this prescription for Social Security, I won’t claim current savings, but you can rest assured that such changes would avoid a future financial collapse with very painful consequences for retirees dependent on Social Security payments.
Medicare and Medicaid currently consume $800 billion per year or 5.5% of GDP – the 3.06% in the table for Medicare and over 2% for Medicaid that is hidden under Social Security. Combined, these two programs are growing at 7% per year. This is the gorilla that is consuming the federal budget and the economy at large … and it is 100% unconstitutional.
The new Congress should ratchet down eligibility and benefits with the goal of eliminating these programs over the next 10 years. A target should be set to reduce expenditures on these programs by 0.5% of GDP each year for the next eleven years until these programs are eliminated. The budget savings in the first year would amount to $75 billion with $5 trillion dollars saved over the next decade – an average of $500 billion each year.
Assuming that space and technology programs are not defense related, they should be eliminated along with the Community and regional development programs for another 0.4% of GDP saved (approx. $60 billion).
Adding up these savings yields a reduction in the federal budget of $1.2 trillion in the first year with substantially greater savings in future years as the Medicare/Medicaid fiasco is eliminated.
A $1.2 trillion savings represents over 8% of our $14.75 trillion GDP, thus reducing our federal budget from 25% of GDP to 17% immediately. Over ten years the federal budget would drop to less than 12% of GDP … possibly less than 10% given the economic growth that would ensue.
This proposal is a prescription for an unprecedented expansion of our economy. Unemployment rates would rapidly drop to 4% with average unemployment spans dropping to under ten weeks. Real wages would grow as capital investments drove productivity higher and available labor became scarcer. U.S. exports would rise as American manufacturing recovered. Our trade balance would remain in a deficit, but a healthy deficit driven by the dramatic increase in America’s prosperity.
Where did we begin this narrative? Oh yes, with the cliff rapidly approaching and economic doom staring us in the face.
Now we see that the doom and gloom can be erased. Replaced with a confident, self-reliant America standing tall and strong and free.
Free at last. Free at last. Thank God Almighty, we can be Free at last.
Our fate is in the hands of the new Tea Party inspired Congress. It’s time to start swinging the meat cleaver!