Overdrawn

Hardly noticed, and buried deep in the hundred pages of bailout legislation, is a provision that would raise the statutory ceiling on the national debt to an eye-popping $11.315 trillion dollars. In part, it includes the $700 billion bailout money, the $85 billion the U.S. government is lending to save the insurance company AIG, and the $200 billion it put up for mortgage giants Fannie Mae and Freddie Mac.

It will even affect the iconic National Debt Clock in New York that now sits above the entrance of an Internal Revenue Service office in midtown Manhattan. It will need to be reprogrammed to handle the extra digit!

Why do I care? Why should you? Well, I have three children and promised their life would be better than my own. We should not hand my kids or yours a debt payment that is the greatest in the history of the world. With each year, government spending rises and the budget deficit gets bigger. As Steve Chapman, a columnist and editorial writer for the Chicago Tribune writes “As the Baby Boom generation retires, the gap will grow. Given current trends, federal outlays stand to double between now and 2050, while revenues remain roughly stable.”

He continues to write, “By then, two programs — Medicare and Medicaid — will cost as much as the entire federal budget does today. Which means that, essentially, we’ll be financing two federal governments. If you dislike carrying a defensive end on your back, wait till his twin climbs aboard.”

Wikipedia concisely states, “The Government Accountability Office (GAO), Office of Management and Budget (OMB) and the U.S. Treasury Department have warned that debt levels will increase dramatically relative to historical levels, due primarily to mandatory expenditures for programs such as Medicare, Medicaid, Social Security and interest. Mandatory expenditures are projected to exceed federal tax revenues sometime between 2030 and 2040 if reforms are not undertaken. Further, benefits under entitlement programs will exceed government income by more than $40 trillion over the next 75 years. The severity of the measures necessary to address this challenge increases the longer such changes are delayed. These organizations have stated that the government’s current fiscal path is “unsustainable”.”

In Congressional testimony, Peter Orszag, Director of the Congressional Budget Office said that “substantial increases in revenues,” perhaps even in tax increases, will be necessary in the short term to cover the initial infusion of hundreds of billions in borrowed dollars into the private sector, especially given the already record budget deficits and federal debt levels the government is currently running.”

He also said “that the combination of high budget deficits and record expenditures on bailouts — including the proposal now before Congress — has significantly hampered the government’s ability to respond further to any economic crises.”

On his blog site Orszag states, “How Would Rising Budget Deficits Affect the Economy? Sustained and rising budget deficits would affect the economy by absorbing funds from the nation’s pool of savings and reducing investment in the domestic capital stock and in foreign assets. As capital investment dwindled, the growth of workers’ productivity and of real (inflation-adjusted) wages would gradually slow and begin to stagnate. As capital became scarce relative to labor, real interest rates would rise. In the near term, foreign investors would probably increase their financing of investment in the United States, but such borrowing would involve costs over time, as foreign investors would claim larger and larger shares of the nation’s output and fewer resources would be available for domestic consumption.”

He continued to state, ”According to CBO’s simulations using that model, the rising federal budget deficits under this scenario would cause real gross national product (GNP) per person to stop growing and then to begin to contract in the late 2040s. By 2060, real GNP per person would be about 17 percent below its peak in the late 2040s and would be declining at a rapid pace. Beyond 2060, projected deficits would become so large and unsustainable that the model cannot calculate their effects. Despite the substantial economic costs generated by deficits under this model, such estimates greatly understate the potential loss to economic growth because the effects of rapidly growing debt would probably be much more disorderly and could occur well before the time frame indicated in the scenario.”

The growth of the federal debt is the emergency we face. It is unsustainable and unfairly burdens future generations. We’ve seen the enemy; it is our appetite for spending.

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One response to “Overdrawn

  1. David Treadwell

    You’re definitely right that we need to rein in spending on givernment entitlement programs.

    The question is, do we have the political will to do it? Does any politician dare touch the third rail of American politics?

    Unfortunately in this dimension, the trend is toward more entitlements, e.g. “health care is a right.”

    Perhaps the economic crisis that we face right now will provide the impetus and air cover to do what needs to be done with respect to entitlements.

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