After three months of deliberation, President Barack Obama (The Decider, v2.0) is surging an additional 30,000 troops into Afghanistan. This was an understandably difficult decision for the most left-wing anti-war President in recent history to make, so I commend him for having the political courage to do so, and I’ll even compliment his due diligence in deciding, because he’s right: strategy comes first, and if we don’t have the right objectives, we shouldn’t be there at all. For all of us, I hope he’s found the right strategy for success.
Shortly after his speech, the President will be whisked away to Copenhagen, Denmark, to champion our global war against global warming, a debate currently embroiled in the controversial deletion of emails. The findings in said correspondence did not support the money-making conclusion that “climate change is real.” I’ll leave the science to another post, but I’ll come back to the green scheme later in this post.
You see, everything at this point in our history comes down to the bottom line. If it did not, then what is Peter Orszag, Director of the Office of Management and Budget, doing in the War Council photo above? This post will address the multiple facets of our debt problem, and my next post will concentrate on more specific solutions to draw down the debt.
In my last post, where I wrote about the Tea Party movement, I quoted Ludwig von Mises, saying you can’t have both capitalism and socialism. I used this premise to support the market over business. Like Ayn Rand, though, I believe America is a mixed economy, and as such, is an ideological battlefield between capitalistic and socialistic policies. Former Chairman of the DNC, Dr. Howard Dean, believes the debate between capitalism and socialism “is over,” and goes so far as to root for the other side while speaking in Paris, of all places. Of all places…
Europeanization of America
So, where are we headed? It seems like we are incrementally shifting towards something unforeseen since our founding. While incrementalism was not a common term in the early 1800′s, it was certainly understood by President Thomas Jefferson, who said, “Experience hath shewn that even under the best forms of government those entrusted with power have, in time, and by slow operations, perverted it into tyranny.”
Dr. Dean and his leftist ilk are deliberately accelerating the Europeanization of our nation. Europeans are quite comfortable with bits (and sometimes chunks) of socialism sprinkled hither and yon. Their collective apathy is indeed the root cause of their lower levels of productivity and lower standards of living compared to the United States. Jefferson also warned about this degraded state of existence, saying, “When we get piled upon one another in large cities, as in Europe, we shall become as corrupt as Europe.”
Consuming an elixir of corruption, apathy, and socialism will have long-term consequences. At best, we are beginning a jobless recovery, due to our lack of Homeland Production. We are still losing more than 100,000 jobs a month; we would have to create 100,000 jobs a month simply to keep up with new entries into the job market. At worst, we are entering a double-dip recession caused by our over-spending, as our President recently warned us. Funny he should bring it up, since he leads the biggest spending Administration in American history. That’s like having your friendly neighborhood drug dealer warn you about your crippling addiction to crack cocaine.
We aren’t Europe, yet. In Europe, locals sit at their coffee shop, in a state of beautiful ruin. The buildings and streets were built centuries ago, and civilization lives on top of ancient achievements. In the United States, so-called “business professionals” walk on fairly-new streets into fairly-new buildings constructed by the toil of workers who earn a fraction of what they do. If the businessman errs, he moves to another management position; if the construction worker makes a mistake, he’s out of a job. I see this disparity and understand how it fuels populist sentiment amongst the left. Their solutions, like those in Europe, however, are government-based. I believe only the private sector, through innovation and production, can save us, and they can only do that if government gets out of the way. Therein lies the rub.
Facing Down the Debt
Our enormous debt is a product of our varying degrees of taxing and spending. Today’s tax-and-spend levels are not equivalent to our new reality. Accounting systems such as mark-to-market, or its zombie equivalent, mark-to-model, created an illusion of vast wealth for the better part of a decade, with deregulation of the Security and Exchange Commission’s (SEC) Generally Accepted Accounting Principles (GAAP) supported by both parties. When the financial sector collapsed last year, exposing our frayed economy for what it is, America faced some harsh choices, and decided to launch a $700 billion Bank Bailout.
This $700-to-800 billion range is a reoccurring dollar amount in current history: The recent Stimulus Package was $787 billion (of additional debt). The amount of American currency in circulation is roughly $800 billion, and according to the Congressional Budget Office (CBO), the Health Care Bill currently up for debate will cost $829 billion over ten years; we’ll see what happens to the final amount after it’s merged in Committee for final scoring.
Two $800 billion figures scare me more than any, though. The CBO states that in ten years, the cost of servicing our debt – that is, the interest on our debt – will be $800 billion a year. Also, as of September 2009, we owe China $798 billion in debt. These two numbers thrust us into insolvency faster than any others. There are only two ways to draw our numbers down: tax more and spend less. Neither of these options are particulary palatable, but our current solution – printing more money – carries it own consequences.
Interest-on-Debt: Entitlement spending drives our debt, plain and simple, and puts American sovereignty at risk; the Social Security and Medicare Trustee Reports show the combined unfunded liabilities of these entitlements has reached $53 trillion, and account for about 5% of GDP and roughly 40% of the Federal Budget. Outyear projections for these programs are frightening.
As the federal government spent $3.5 trillion this year, but only collected $2.1 trillion in revenues, our deficit reached an all-time record of $1.4 trillion, at 11.2% of GDP in 2009. As Niall Ferguson points out, the CBO projects this deficit percentage will decrease to 9.6% in 2010, 6.1% in 2011, 3.7% in 2012, and steady out above 3% for the foreseeable future. But these are just deficit percentages, pushing the total debt amount to unsustainable levels: in dollar terms, the total debt held by the public (which includes foreigners) rises from $5.8 trillion in 2008 to $14.3 trillion in 2019 – that is, from 41 percent of GDP to 68 percent.
These increases put us in a precarious situation, and threatens our AAA Bond rating, which we’ve held since our first scoring in 1917. If Moody’s were to degrade our Bond Rating to AA – which it threatened to do last year – it would cause a devastating run on the market. But some are still buying our debt on the promise we’re good for it…
Our Mandarin Problem: As China holds roughly 6% of our debt (or one-quarter of all foreign owned debt), it’s feared they own us, but there’s an old saying: If you owe the bank $100 thousand, the bank owns you; if you owe the bank $100 million, you own the bank. Ask yourself: why would China buy up so many of our Treasury bonds during an economic crisis? One reason is they seek to dominate us in the long term, but the more likely reason is that we are codependent on each other, as they depend on American businesses for Chinese employment. Also, China accrues roughly $50 billion a year in interest from the United States, according to the Council of Foreign Relations.
Only time will tell what will become of Sino-American relations. It’s interesting, though, to look at history to see that civilizations approaching insolvency usually cut their military budget first, weakening themselves, and eventually allowing themselves to be conquered. The Pentagon’s present Budget slashes defense spending from its current 4.8% of GDP to 3.2% in 2015, and 2.6% by 2028, aligning us more with… Europe, of course. Is America incrementally going the way of the dodo?
Why We Waste
As the Berlin Wall fell in 1989, $22 billion worth of American money for foreign aid flowed freely into Russia, to assist in building the new democracy. A curious thing happened, though: it all disappeared. We knew that a lot of that money went straight into the bank accounts of the oligarchs, and not into its intended institutions, but we turned the other way, assessing it another unforeseen cost of democracy.
How could public officials casually waste so much money? More broadly, why is the public sector so much more inefficient than private industry? The answer is simple: It’s not their money. President Ronald Reagan had a sign on his desk that read: “There is no limit to what a man can do if he doesn’t mind who gets the credit.” Similarly, there is no limit to how much we can collectively waste if we don’t mind which individuals get the bill.
This is how our financial sector bailouts were handled. This is how the Stimulus Bill has been managed, and how the aforementioned global warming scheme was operated. If there is a perceived crisis, our government is willing and able to leverage taxpayer funds in its general direction. Humans, being what they are, see free flowing cash and stand ready to siphon some off the top.
Government interaction will not save us, but their inaction – that is, getting out of the way – could assist recovery by giving the private sector a shot at their goals. As legendary UCLA basketball coach John Wooden once said, ”Never mistake activity for achievement.” Doing more in terms of taxation, legislation, and regulation is not worth the time or the money if it doesn’t actually achieve anything. I’ll offer some real solutions in my next post.Share on Facebook