Government Spending and America’s Future
2008-04-R10
(Copyrighted 2008
by Don M. Tow)
Some Statistics Regarding Government Spending
In Fiscal Year 2007, the U.S.
federal government’s revenue was $2.57 trillion, but it spent $2.73
trillion.
This means that the federal government had to go into
a debt of $160 billion just for 2007.
Now, spending more than taking in is not a new
phenomenon with our federal government, this has been going on for many,
many years.
If we look at the Gross Federal Debt (or
National Debt), we see that except for a few minor exceptions, it has
continued to grow every year since 1940.[1]
The exception years were 1947, 1948, 1951, 1956, 1957,
and 1969.
Taking on more debt every year is not necessarily a
problem if the
U.S.’s
economy is growing faster than the rate of rise of the debt, because a
rapidly growing economy can absorb or pay back the debt as long as the debt
is not growing too fast.
Therefore, a better measure is the Gross
Federal Debt as a percentage of the Gross Domestic Product (GDP).
Indeed, the problem is not necessarily that
bad.
Since 1940, there were 35 years (about half of the
time) in which the ratio of (Debt/GDP) actually decreased.
Unfortunately, most of those years occurred
before 1980.
As a matter of fact, only six of those 35 years
occurred since 1980.
They were 1981, 1997, 1998, 1999, 2000, and
2001.
There was none after 2001.
The ratio (Debt/GDP) reached a low of 32.6% in
1981, and gradually rose to about 65-70% in recent years.
How significant are these numbers?
In absolute terms, the U.S.
government’s National Debt today is around $9.3 trillion.
With a population of about 304 million, each
person’s share is about $30,600!
The National Debt
is increasing an average of
$1.46
billion per day since September 29, 2006!
In Fiscal Year 2007, the federal government spent
$2.73 trillion.
More than 52% (or $1.427 trillion) of this
spending was for mandatory spending, primarily Social Security, Medicare,
and Medicaid payments.
Almost nine percent (or $238 billion) of this
spending was to pay for the interest associated with the National Debt!
This means that only about 39% (or $1.065
trillion) remained for discretionary spending.
Of this $1.065 trillion of discretionary
spending, about 53.5% (or $570 billion) was directed to defense spending.
That left only $495 billion for non-defense
discretionary spending.
This means that our interest payment of $238
billion was almost half of the total federal government’s non-defense
discretionary spending!
If the above trend (rising debt and huge defense
spending) continues, there surely will not be enough to fund all the
necessary domestic programs.
Before we continue to discuss the implications
of this rising huge National Debt on America’s
future, I want to sidetrack and point out that a similar situation is also
occurring with many state governments.
In March 2008, the
Asbury Park
Press (APP) ran a series of four weekly
articles on the
New Jersey
state government spending.
The APP pointed out that the state debt
increased from $13 Billion in 1997 to $38 billion in 2007.
The debt as a percentage of personal income
doubled in 10 years, from 3.8% in 1997 to 7.6% in 2007.
Compounding the problem was two additional
major unfunded or under-funded obligations.
From fiscal 1997 to 2005, no state money was
put into the state’s Public Employees’ Retirement System, and from fiscal
2000 through 2005, no state money were provided to the Teachers’ Pension and
Annuity Fund, which is the second-largest pension system in NJ.
This means that when more and more public
employees and teachers retire, more and more money will be needed from the
state budget to pay for these under-funded obligations, and therefore less
and less money will be available to pay for all the other needed state
programs. Taking
these two under-funded programs into account, the APP estimated that the
long-term obligations of NJ is about $121 billion, or more than three times
larger than the state debt of $38 billion as of 2007!
How did this happen and how could this happen?
Politicians
are notoriously short-sighted.
They are short-sighted not because they cannot
see the long-term consequences, but because it is good near-term politics.
Politicians prefer to take the easy way out and
protect or enhance their near-term political positions by over-promising or
over-giving.
For over a decade, NJ’s government from both
sides of the political aisle has borrowed money to boost pensions, pay for
tax cuts, and in at least one instance, balance the state budget, all
without asking voters to pay higher taxes.
One could also argue that President Bush’s tax
rebate in 2008 is also an action to gain near-term political advantage for
his party, but has long-term adverse consequences since it just adds to the
debt of the federal government.
That was why Mayor Bloomberg of New York
criticized this action with the remark “that is like giving an alcoholic
another drink.”
Implications for America’s Future
We will now return to discuss the economic
implications for
America’s
future from the huge and rising National Debt of the federal government
(actually most of the implications are also applicable for the state
government).
There are at least four major economic
implications.
-
Continued rising interest payments:
As the debt rises, the interest of course also rises.
As previously mentioned, in 2007 the federal
government was already spending $238 billion (or almost nine percent) of its
2007 revenue of $2.73 trillion to pay for the interest from the National
Debt.
As also previously mentioned, the ratio (Debt/GDP) has
also continued to increase.
This means that the amount of adverse economic
impact from the rising interest payments will continue to increase.
The problem of rising National Debt is compounded when
the federal government creates programs that are under-funded and sometimes
even worse when they are unfunded.
In the discussion of the NJ government, we
already mentioned some NJ state programs in this category.
For the federal government, I think the War in
Iraq
can be considered to be such an example, in the sense that money to support
the war is taken from money to support other foreign and domestic programs.
-
Poorer credit:
When the federal government is borrowing more and more
money at a rate that is increasing faster than the GDP, it means that it
will take longer and be much more difficult for the government to pay back
the debt.
When this continues for a while, the financial credit
of the
U.S.
will decrease.
This means that the lenders will charge higher
and higher interest rates, thus making a bad problem even worse.
-
Devaluation of the U.S. dollar:
For the same reason that the financial credit of the
U.S. government decreases as its (Debt/GDP) continues to rise, the value of
the U.S. dollar will continue to devaluate, because the U.S. no longer has
enough produced products or precious commodities (such as gold) to pay back
the lenders.
An analogy is that if A borrows money from B.
At first B is willing to lend the money to A
because A owns a house, one or more cars, furniture and appliances in the
house, some money or equity investments, and perhaps even a business, i.e.,
A has collaterals that B can take if A forfeits the loan.
If A borrows more and more money from B, after
a while, when the amount of money owed is larger than A’s collaterals, then
B will not want to continue lending money to A.
In the case of federal governments, another way of
saying this is that the U.S.
is just printing more and more paper money when it issues more and more
IOUs.
When the
U.S.
economy is strong and there are enough collaterals to back up the loans, the
paper money is worth its face value.
When there are no longer sufficient collaterals
to back up the paper money, the U.S. dollar will be devaluated.
This is because if our collaterals are only
worth x dollar bills, and now we have 2x dollar bills because we printed
more dollar bills, then each dollar now is equivalent in worth to the
previous 50 cents.
The consequence is that lenders will not be
willing to lend the U.S.
more money, unless the interest rate is very large.
-
No more lenders and existent lenders dumping the U.S.
dollars:
When the excessive money-borrowing trend continues,
lenders will no longer be willing to purchase newly-issued IOUs from the
U.S.
government, existing lenders may terminate current loans, and foreign
countries may just dump their holdings in U.S. dollars.
This will force further devaluation of the
dollar and the U.S.
economy may just collapse.
Additional Comments
The just discussed adverse economic impacts on the
U.S.
will of course have adverse political and social impacts.
America
as a political power will diminish.
Many domestic programs will have to be
curtailed or eliminated, leading to public dissatisfaction and social
unrest.
There may be a brain drain to more prosperous foreign
countries, resulting in a further deterioration of
America’s
creativity, productivity, and competitiveness.
This is not such a far-fetched scenario./span>
As a matter of fact, one could say that the
handwriting is already on the wall.
To overcome this decline of America
as an economic and political power, the mind set of the American political
leaders and its citizens must make significant changes and sacrifices.
We must responsibly manage our budgets.
We must not ignore the long-term consequences
and mortgage our future by taking actions that result in only short-term
political advantages.[2]
We must be courageous to be willing to make the tough
and perhaps even unpopular decisions.
We must get rid of corruption and political
patronages.
Our political and business leaders must not
allow big businesses and their executives from getting filthy rich on the
backs of the ordinary workers.
Our labor union leaders must not make
unreasonable demands that could bring down the whole company or industry.
We must figure out ways to increase our
competitive productivity and decrease our trade deficits.
In increasing our competitive productivity, it
is not sufficient to increase it only on the creative phase, but also on the
product development or manufacturing phase.
WWe must pay more attention to “we-ism” and less
attention to “me-ism.”
Summary
For many years our government (both federal and state)
has been spending beyond its means./span>
The debt that is being accumulated is getting
too large and increasing at a rate faster than the growth of our GDP.
We are already at a point where almost half of
our non-defense discretionary spending is spent on paying interest on our
National Debt.
If such a trend continues, our debt will
increase to an unmanageable level, our financial credit will decrease
leading to higher interest rate for our loans, our U.S. dollar will get
devaluated, resulting in a vicious cycle and ultimately no one being willing
to lend us any more money and countries dumping the U.S. dollar.
This will lead to dire economic, political, and
social consequences for our country as a whole.&
Americans are smart and hard-working people./span>
We must attack the problems at their roots, and
not try to divert people’s attention by creating scapegoats, or take actions
that result in only short-term gains, while mortgaging our future.
WWe must act courageously and unselfishly, and
we must act quickly.
I am not an economist, and I am not an expert on the
subject of this article./span>
If the explanation can be made clearer or if
there are inaccuracies in this article, I would appreciate getting that
feedback.
[1]
“Historical
Tables of Budget of the United States Government – Fiscal
Year 2006,” from the Office of Management and Budget.
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