Tag Archive for S&P downgrade

Entitlement nation and spending cuts

“I place economy among the first and most important republican virtues, and public debt as the greatest of the dangers to be feared. To preserve our independence, we must not let our rulers load us with perpetual debt.” (Thomas Jefferson)

I was reluctant to waste time commenting on the debt ceiling and ‘spending cuts’ farce, but here it goes anyway…

Washington provided us with quite a spectacle this summer; first the tantrums in the debt ceiling debate, followed by the finger pointing and blame shifting in the aftermath of the Standard & Poor’s downgrade of long term US credit rating from AAA to AA+.

Regardless of how much – or rather little – credibility the S&P has left, the downgrade should not have surprised anyone, nor was it unjustified. Sure, the US is unlikely to default on its debt (after all, it can count on the printing press magic), but nobody seriously believes it will pay its creditors the $14.6 trillion (and counting) in anything but devalued currency.

Instead of confronting the problems, politicians aim at postponing any painful remedies ad infinitum, while debts continue to snowball. According to recent Congressional Budget Office projections (based on unrealistically rosy GDP growth forecasts) the national debt will grow by $9.5 trillion over the next 10 years. Even if the reductions proposed in the debt ceiling deal were to be implemented, the US would still accumulate $7.1 trillion in new debt by 2021!

The debt ceiling deal (allowing Obama to borrow a further $2.4 trillion – just enough to carry him to the end of his first term) and fight about a meager $2.4 trillion in “spending cuts” over a decade denounce an inability or unwillingness to face reality.

Does anyone truly think that $2.4 trillion “spending cuts” spread over 10 years will do anything to solve the problem when US federal debt stands at some $100 trillion, including the unfunded entitlement liabilities that lurk beneath the debt ocean?

(Not to mention, even the $2.4 trillion are heavily back-loaded, so the vast majority of these cuts won’t be implemented by the current Congress. The deal calls for a laughable $25 billion of savings in 2012 – in a $3.8 trillion budget! – and some $47 billion in 2013.)

Only politicians, intellectuals and academics would want to fix a debt crisis by issuing yet more debt. The problem wasn’t too low a debt ceiling but too high a debt. Yet far from attempting to remedy that… what Washington spent months arguing about are not even actual spending cuts – they are cuts in the rate of increase in spending. For anyone with half a functioning brain cell, cutting the projected rate of spending growth does not equal a spending cut!

It is also rather disingenuous of the politicians and media to talk about a $14.6 trillion national debt, when the true figure – including unfunded liabilities (Medicare, Medicaid and Social Security) – stands somewhere between $80 and 100 trillion (depending on estimates). While it’s true that people have been making payments for Social Security and Medicare, those earmarked funds have over the decades been plundered by both parties to pay for wasteful, vote-grabbing spending.

The reality nobody wants to acknowledge is that the US government has been on a historically unprecedented spending binge, accumulating debts for seven decades, and that the welfare state – enthusiastically embraced by Americans since the 1960s – has bankrupted the country just as European welfare states have bankrupted most of the old continent.

The truth is, neither party wants to do much to cut public spending. Laughably, Obama and the Democrats found the scapegoat for their failure to meaningfully cut spending (and the subsequent ratings downgrade) in the Tea Party, when Tea Party politicians have been the only ones taking the debt problem seriously.

If one wanted to cast blame, it would appear we mostly have the Democrats to thank for the gigantic entitlement liabilities of a welfare state that has created mass dependency on the government and destroyed the values that made America strong (self-reliance, industriousness, family, traditional morality): FDR’s Social Security, LBJ’s Medicare and Medicaid. (You can also include Obamacare – yet another under-funded, dependence-creating monstrosity.)

Entitlement reform (i.e. large-scale entitlement cuts) is absolutely essential if the US is ever to get its debt and deficit crisis under control. The Congressional Budget Office estimated that by 2025 all of the government’s income will go to entitlement spending and interest payments, leaving nothing for any other expenditures.

Debt reduction and balancing the budget can not be done without significant pain. The problem is, Americans (government and citizens) have lived so far above their means for so long that meaningful belt tightening holds little appeal. Hence poll after poll has shown people’s theoretical support for the idea of balancing the budget and cutting spending – provided they don’t have to bear the consequences. (Everyone agrees with spending cuts as long as their own programs and entitlements are not touched, and the 51% of Americans who pay no income taxes gladly approve of a higher-still tax burden for the ‘rich’ but not a much needed broadening of the tax base.)

The chances of the US voluntarily making a dent in that $100 or so trillion debt mountain are precisely zero. The government will do whatever it takes to keep the party going, which most likely means borrowing, printing, inflating and shifting debts onto future generations. Eventually, and quite inevitably, the country will default on its internal obligations to its citizens (i.e. Social Security, Medicare promises).

In the meantime, the massive $1 trillion+ annual deficits are here to stay for years to come. Borrow, tax and spend is what politicians do. More spending means more votes, especially once more than half the population has become reliant on government largesse. Federal government is now a giant wealth-transfer machine, taking money from a shrinking number of taxpayers and handing it out to a growing list of dependents.


“Payments to individuals” (Social Security, Medicare, Medicaid, public assistance, food assistance, housing assistance, unemployment assistance and student assistance) account for nearly 70% of total federal spending – the highest rate in history. The US now pays out more in benefits than it collects in taxes. More than half of Americans (59%) receive a Government payout in one form or another. Government transfer payments account for 18.4% of personal income.

National debt – at $14.6 trillion – has now surpassed 100% of GDP. The government currently borrows about 43 cents for every dollar it spends.  In 192 years – from George Washington to Ronald Reagan – US government accumulated only $1 trillion of debt. In the last 30 years it has added $13.6 trillion in additional debt. (When G.W. Bush took office the debt was just under $5.8 trillion. By the time he left office, it had nearly doubled, to $10.6 trillion. Under Obama it’s already at $14.6 trillion – a staggering $4 trillion increase in just two and a half years.)

The government has, in the last few decades, been piling up debts at an unprecedented speed, creating more and more bureaucracy, employing ever larger percentage of American workers and ensnaring countless millions into welfare dependency. More recently, it spent trillions of dollars on stimulus and QE I + II, with the sole result of greatly increasing the levels of debt.

The problem is relatively easy to grasp – the US spends vastly more than it earns. As such, the solution is simple as well, at least theoretically. All we’d need are enlightened voters willing to accept short term suffering for the sake of their (and their children’s) long term prosperity, and principled politicians willing to do the right thing even if it was to cost them reelection. Well, I did say theoretically simple.

Thanks to a huge expansion of entitlement spending over the decades, the debt the US has piled up is too large for the country to be able to grow or tax its way out of it. The focus has to be on massive spending cuts. Paring back entitlement programs should be accompanied by scaling down of the public sector, as well as a tax reform. The tax code should be simplified, loopholes, exemptions and deductions eliminated, the tax base broadened and tax rates cut for individuals and corporations alike. (A flat tax would be better still.) Lifting some of the crushing burden of bureaucracy, regulation, counterproductive taxation and immoral, dependency-creating entitlements would revive the growth-generating dynamism and industriousness the US used to be known for.

Unfortunately mass democracy doesn’t lend itself to doing unpleasant things for the sake of a better future.

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It is not just the US. The entitlement nations of Europe have too, for decades, been spending more than they earned. And, much like in the US, the so-called spending cuts are, more often than not, merely cuts in the rate of spending increase. Welfare is still booming, and politicians – while paying lip service to slashing spending – are as set on voter-pleasing as ever.