The growing federal debt and the fiscal health of the country

[06/25/2012] The growing federal debt and the fiscal health of the country

The problem of mounting national debt is worse than it has been ever before. The soaring national debt has passed a symbolic point, which is now as big as the entire U.S. economy (GDP). While much attention has been focused on the government’s deficit-spending surge during the recession, and last year’s debt-ceiling debate, no permanent strategy or solution is in place to reduce our debt. While it may seem like a mountainous problem to fix, in its actuality, it is not. The solutions are simple. All we need is our Congress to come forward and take decisive action, if they really want to reduce our debt. Both parties must come together to balance the federal budget, and find fiscally responsible solutions to the challenges facing our country.

First, let us be clear on “deficit” and “federal debt” terminology. When the government spends more than it collects in revenue and runs a deficit, it needs to make up the difference through borrowing. The sum of all that borrowing is the national debt (although there are some complicating factors, such as “off-budget expenditures” and how certain kinds of spending are counted for deficits). In other words, the deficit is the yearly shortfall, and the debt is the total amount that the government owes to its creditors from whom it borrowed to make up those shortfalls. It is a really common-sense that if the government cannon raise enough revenue as much as it spends, it will run into debt. That common sense view is not always a common sense to everyone, especially, for the right-wing Republicans. However, by passing a few common-sense policies- ideas that President Obama announced over and over, Congress really can make a difference to bring down our debt tremendously.

For far too long our government has failed to rein in spending that continues to increase the national debt. Tea Party has demanded that deficits be eliminated by “severe cuts at all levels of government in spending” that either supports the poor and the middle class or funds crucial public investment. It also demands tax “cuts for the rich and for business.”[1] However, keeping taxes low for the corporates and the rich, cutting for healthcare, social security, education, and government spending is not the solution to our deficit crisis as the conservatives thinks. We simply cannot do both. President Obama also asked multiple times, “Do we want to keep [Bush] tax cuts for the wealthiest Americans or do we want to keep our investments in everything else.?.?.? Because if we’re serious about paying down our debt, we can’t do both.” That is exactly right; in that case, if the government is really serious about paying down the debt, then they have to do a lot more than this to achieve a large reduction in deficit over the long-term.

The fiscal health of our nation is a growing concern. Currently, the outstanding U.S. national public debt is $15.7 trillion, roughly 102% of current dollar GDP (Gross Domestic Product). Surprisingly, the major holder is the U.S. government (about $6.3 trillion) itself. Basically, we owe about 40% of the debt to ourselves. This means that $9.4 trillion is the real outstanding national debt, not the $15.7 so widely quoted.[2] All of this is not to say that there are not some serious financial concerns and an economic crisis is looming on the horizon, however, they are all solvable. The challenge is to do so in a way that does not affect our social and economic programs (the ones New Deal enacted during the Great Depression by the Franklin D. Roosevelt Administration) and investments toward education, alternative energy, infrastructure improvements, research, and innovation.

Our President does not have much control when it comes to setting up a realistic plan on how to control the growing federal debt, if you remember from last year’s debt-ceiling debate. The Congress has the “power of the purse”- its ability to set the spending and taxing policies of the nation, ultimately, it has to tackle our debt crisis in a bipartisan way. So how Congress should reduce the deficit? Since deficits are the gap between spending and income, they can be reduced by decreasing spending, increasing income, or both. Deficits can also be reduced through robust economic growth since a rather large portion of the federal government’s budget is determined by the economy. For instance, total individual income tax receipts are very responsive to ups and downs in the economy. During good economic times tax revenues rise as incomes go up. Moreover, fewer people require government services to get by when the economy is expanding and that means lower spending. Even if economic growth did not produce higher revenues or lower spending, it would still reduce the relative size of the deficit and the risks associated with fiscal gaps. If the deficit stays at the same dollar amount from one year to the next but the economy grows, then the deficit actually shrinks as a share of GDP. Because of these two phenomena, “income rises and spending declines during good economic times” and that “deficits can shrink as a share of GDP even if their absolute dollar size remains the same the budget deficit” can often be reduced simply by strong economic growth, without changing any policies.[3]

I think first and foremost, without drastic cuts, a simple solution for Congress is to raise government revenue. America excessively depends on payroll and income taxes, on both people and corporations. This could provide a catalyst for more fundamental tax reform. In order to achieve that, the solution is even simpler than we think. Congress needs to end extending George Bush’s tax cuts for the wealthiest (the one percent) and implement President Obamas “Buffet Rule”- a minimum tax rate of 30 percent on individuals making more than a million dollars a year. Congress also needs to end exemptions, credits and loopholes worth $1 trillion a year, and these loopholes largely favor the rich, making the tax system less progressive, and encourage rampant tax avoidance. Progressive economists have also been supporting these for long-term debt reduction.

Robert Kuttner, for example, has proposed a series of tax changes that could bring in an additional $800 billion a year.[4] Proposals like cracking down on off-shore tax havens (estimated to bring in at least $100 billion a year); ending the deferral on foreign source dividend income, which would discourage shifting jobs overseas, President Obama also promised to close this loophole; raising taxes on short-term capital gains. These gains should be treated as ordinary income, as they were before the Reagan era. More importantly, none of these additional revenue sources would have much of an effect on 90% of Americans and it would enable the government to stabilize its budget deficits. This kind of money would go a long way toward solving our fiscal problems. In addition, one Economist article explains about an alternative, most economically efficient approach to raise revenue, which is to tax on carbon emissions. I think it is a great idea because this would raise revenue, penalize consumption and encourage energy efficiency.[5]

On the other hand, some conservatives go further, advocating a single “flat” tax bracket above a basic personal exemption. But that would make our tax system much less progressive. Conservatives like to claim that our budget deficits are purely a “spending problem.” For example, Senate Minority Leader Mitch McConnell said, “We don’t have this problem because we tax too little. We have it because we spent too much.”[6] This is simply not true. The fact is that deficits do not stem from spending levels alone; they are the product of a mismatch between spending and revenue. And when revenue is as low as ours is, we end up with more and more deficits.

Medicare and Medicaid is the second big chunk of the federal budget (22% in 2012). Without any reforms, Medicare (covers almost everyone 65 or older) will go into deficit by 2020, and benefits will have to be reduced significantly. This is due to the fact that the health care costs in this country are already high and rising even further, and because we have one of the most inefficient health care systems in the world. Although “Obamacare,” passed back in 2010 supposed to bring down that inefficiency significantly, it is also now under threat on Constitutional grounds at the Supreme Court. In reality, Obama Administration’s health care reform has some promise to slow down growing costs. According to the Congressional Budget Office (CBO), Obamacare would actually reduce federal deficits by $127 billion over the next decade. Then again, if the law is repealed as the Republicans want, it would increase the deficit by $147 billion.[7] Hence, Obamacare is a great solution and the right approach for now, by no means it is the best solution, but it stabilizes our poor health care system. Many analysts believe that additional major reforms must take place if we are truly to rein in rising medical costs. As Dean Baker, one of the most thoughtful economists analyzing government debt has explained it, the best way to address our debt is to “fix health care, fix health care, fix health care.”[8] Our health care system still remains the hostage of the private, profit-making, health care industry.

Currently the federal government pays for 50 to 83 percent of Medicaid (covers low-income and financially needy people, including those over 65 who are also on Medicare), and states pay the rest. This encourages states to expand coverage and benefits because they pay only a portion of the extra cost. Switching Medicaid to a block grant, indexed to inflation and population, and requiring wealthy states to pay most of their share, would encourage states to control costs. According to the Economist article, the model would be the 1996 welfare reform, which shifted funding to block grants; in exchange, states gained flexibility in designing their programs.[9] Given that, this approach is ideal and should be under consideration by the Congress. In the long run, then, solving our financial problems of Medicare and Medicaid require some of these basic reforms in our health care system, and it should be a priority.

Other analysts have argued that much of the needed money for social programs and public investments could easily come out of the defense budget. Our defense spending is at historic highs (24% of 2012 budget) after healthcare, though this spending has been pretty much the same throughout American history. U.S. military spending is inefficient but can be cut without jeopardizing our security, and there is a lot of room to downsize. A bipartisan group, the Project on Defense Alternatives, has done an analysis that found we could cut a trillion dollars out the defense budget in the next ten years without compromising our military superiority.[10] This could be another biggest source of revenue toward solving our fiscal problems.

Lastly, Social Security (22% of 2012 budget) can also be reformed, though it is funded by the people, it is more straightforward. Because Americans live longer and healthier lives than a generation ago, the age of eligibility could be raised to 70 from 65 years, and be linked to life expectancy thereafter. Medicare’s eligible age, now 65, could also be raised, the Economist article argues.[11] This simple reform could drastically help federal government not to go under debt for paying Social Security, and undermining senior’s security.

All things considered, Congress needs to act immediately. Why? It is because government debt could make every day Americans’ savings worth less, which fuels the risk of inflation. Higher interest rates would make it harder for consumers and businesses to borrow. Economic forecasters say future generations of Americans could have a substantially lower standard of living than their predecessors’ for the first time in the country’s history if the debt is not brought under control and lowered. Thereupon, no one will “bail out” America, so we must solve our own problems.

If our government does not tackle its debt problem, everything else is at risk. Over time, and without action, Social Security, Medicare, Medicaid, and other related social insurance program challenges will grow. Based on reasonable and sustainable assumptions, Social Security and Medicare alone are underfunded by approximately $46 trillion, according to the 2011 Social Security and Medicare Trustees’ Report.[12] These obligations grow faster than inflation and our economy. In addition, due to our delay in acting, the power of compounding is now working against us rather than for us. In a recent ABC News poll, 87 percent of Americans said they are concerned about the federal budget deficit and national debt, and most strongly disapprove of how their political leaders are handling the situation.[13] Now, the horizon is the November election, and the moment is supposedly the lame-duck session afterward or the beginning of the next administration. But if the candidates cannot level with us now, they will have no mandate then, and the horizon will continue to recede.[14]

As shown above, we literally cannot afford to ignore the fact that unless Congress brings debt under control, we are heading for a mountainous federal debt and a fiscal crisis. After all, our growing debt crisis is a demand crisis. America is a two-third consumer driven economy. Companies are making record profits and operating much more efficiently than before the crisis. They do not need tax cuts. They need customers who have money and confidence to spend that money. In essence, when people have a job and a house that is what they do; they spend money. Businesses hire more employees when they have demanding consumers; not because they have more capital on hand.