Washington Times – BURMAN: Catastrophic budget failure
With Congress going back to Washington and continuing the debate over the Cap and Trade Bill and Health Care Reform we the people need to be reminded of why we had the Tea Party rallies and Townhall revolts and we certainly need to keep the pressure on so this Congress DOES NOT PASS EITHER ONE OF THESE BILLS. AND WHILE THEY ARE AT IT THEY SHOULD TAKE BACK THE STIMULUS AND TARP MONEY NOT ALREADY SPENT SINCE BOTH PROGRAMS HAVE PROVED A FAILURE.
With this in mind I copied most of this article right here because I want you to read it carefully. Then keep sending emails, making phone calls and going to any rallies anywhere near you. The Democrats are running scared but their leadership is in a defiant mode and just may sway those more moderate Democrats if we let them forget how we the people feel.
The Congressional Budget Office (CBO) , famous for understatement, concludes that “current policies are unsustainable.” This is true whether it looks at the Obama administration’s official budget or a future in which all of the Bush tax cuts expire and the middle class gets swallowed by the alternative minimum tax. What CBO means is, either way, we are doomed.
Here’s what CBO predicts will happen if we continue current policies:
Next year, our debt will exceed 60 percent of our total economic output, or gross domestic product (GDP). We would not meet the standards Poland and Estonia needed to qualify for admission into the European Union.
In 2023, our debt will exceed 100 percent of GDP – the highest level since World War II ended.
By 2076, debt will be more than 6.5 times GDP. Put differently, with current policies, there’s no chance that children born today will get much of their promised Social Security and Medicare benefits.
The really bad news? This bleak scenario is wildly over-optimistic. It assumes that the economy keeps growing at historical rates, and interest rates on government bonds stay low.
But neither is likely to happen. As CBO says, parenthetically, “Starting in the 2060s, projected deficits become so large and unsustainable that CBO’s textbook growth model cannot calculate their effects.”
Translation: We’re heading over a cliff!
CBO’s projections assume that interest rates will stay low. But with these massive deficits, rates will eventually rise to reflect the growing riskiness of government bonds. Berkeley economist David Romer has shown that investors may, overnight, go from being willing to lend to the government at low rates to being afraid to hold T-bills at any price. If this happens, the rise in rates could be extreme – not just a percentage point or two.
Can’t happen? It was just a few months ago when exactly the same fate befell highly rated corporate bonds. Suppose the Treasury held an auction and nobody came?
Ideally, this dismal situation will be averted. Investors should look at the CBO report and demand higher interest rates right now, and progressively steeper rates in the future if our fiscal house is not put in order. This would put pressure on policymakers to cut deficits.
Unfortunately, there are two problems with this self-correcting scenario. First, it might choke off a nascent recovery. Second, it assumes financial markets are rational and foresighted. Yeah, right. And remember much of our debt is held by foreigners whose cash fuels our purchases of their oil and consumer goods. They’ll keep lending – at least for a while – to prop up their own economies.
When the bubble bursts, two things could happen, both bad. One is that the U.S. defaults on its bonds. This would cripple financial institutions that are legally required to hold government securities and create a foreign policy fiasco since other governments hold so much of our debt.
Or, we could print money to pay back the bonds coming due. This creates inflation - a lot of inflation. Think Weimar Republic or Argentina. (CBO helpfully points out that hyperinflation is economically inefficient since it drives people to barter.)
At the same time, the government would have no choice but to slash spending and raise taxes. This, plus very high interest rates, would drive the U.S. and world economies into a depression that could span decades – dwarfing today’s painful downturn.
Taxes would rise to levels that would make a Scandinavian revolt. And the government would not be able to provide anything but the most basic public services. We would no longer be a great power (or even a mediocre one), and the social safety net would evaporate.
We can still avoid this disaster, but we need to act quickly. The sooner we move to reduce our deficits, the smaller the required tax increases and/or spending cuts will be. The reason is straightforward: The less debt we accumulate, the smaller our interest payments. On our current trajectory, CBO projects that by 2031, interest on the debt will cost more than Social Security. And, again, that assumes implausibly low interest rates.
So, after Mr. Elmendorf finishes explaining why our current policies are disastrous,. I’d like all of the Senate Budget Committee members to say what they plan to do about it If they answer “cut wasteful government spending” or “tax people making over $250,000,” (THAT WON’T DO IT! BB) Mr. Elmendorf should remind them that we’d have to cut government spending or increase taxes by an average of 8.2 percent of GDP over the next 75 years to prevent the debt from increasing – and more if we continue to defer action. That sum equals all discretionary spending, including national defense, or all income tax collections in 2008. Cutting waste or taxing rich people alone isn’t enough.
It’s time to make some hard choices. Or we’re doomed.
• Leonard Burman is an Institute Fellow at the Urban Institute and director of the Tax Policy Center.
I simply can not understand how anyone can look at the figures and continue to insist on more government programs! I am totally baffled by the attitude of the Democrats in
Congress. These are not stupid people so how can they continue on the course they are taking when every economist in the country is telling them we can not sustain the debt. Pass an enormously expensive health care bill in 2009 so that the entire country will go bankrupt and lose everything before 2040. And I do mean EVERYTHING. The government will be busted and the people will all be on their own with nothing: no Social Security, no Medicare or Medicaid, no welfare programs to help the needy, no pension plans from companies because companies will have already gone bankrupt or fled the country, no federal pension insurance for these companies because the companies have never put in the money required by the program and the government has not enforced the rules and made the companies pay into the guaranteed pension plan, no federal employees pensions. No jobs, no food, nothing at all. The country stopped dead.
We have seen this happen to other countries, the most notable being the Soviet Union. Anarchy ruled and the criminals ran wild. Russia has always been a secretive country so little information got out as to how the people survived this period. The rest of the world governments helped the Soviet government and the discovery of the huge oil deposits finally pulled the country out of the depths of depression. But since the United States is the largest and strongest economy in the world when we go under there won’t be anyone to help us recover. For decades now the countries of the world have held up the dollar and our economy so we would buy their products and build their economy. However at a certain point our debt to these countries will be so great that we will no longer be able to pay the interest on our indebtedness (we never pay anything but the interest on our loans!) And when we stop paying the interest on our debts the countries who depend on money from the United States will also fail. If we are fortunate it will only be decades of suffering under a desperate depression; an entire generation of our grandchildren will be left to suffer for our folly today.
There is one other possible solution: it’s called war. A nice long war will jump start the economy. Instead of cars the companies will produce tanks and planes and ammunition. In fact all business will go into hyper drive to supply the war effort. Jobs will be plentiful and money will flow into people pockets and into the Treasury. Governments have used war to cover for their mistakes as long as there have been governments. Either way the people, you and I, pay the price. Not the elected representatives of the people, never them. Because they and theirs never go to war and they have been amassing wealth for the decades the leaders who are spearheading this stampede over the cliff have been in congress. Rep. Barney Frank who as Chairman of the House Finance committee is the most powerful man in Washington today because he controls the purse strings will probably suffer too since all the young men will be in uniform fighting the war he helped bring about. BB
