Most Americans have no idea how perilous the times we live in have become. They know the economy is in bad shape. They know the yearly deficits are significant. Americans are war-weary even though they have been largely shielded from the consequences of a decade of constant war and broken promises. The more perceptive critics even realize that the culture itself has become stagnant. This is all true, but the reality of the situation is far more severe than even the more attentive realize. Please give me your patience while I explain.
Government spending is exploding at an incredible rate and it will get worse as time goes on. Take medical care for example. Ever since 1980, the cost to the Federal government for health care has increased by an average 9 percent every single year. In 1980 we spent $55 billion on health care. Today we spend $866 billion. Pull out a compound interest calculator like this one and you’ll see its exactly 9 percent every year for the last 32 years!
You must understand, this is not linear growth but exponential growth. If it were linear growth, it would take another 30 years to add another $750 billion, but exponents work differently. The numbers get bigger faster the longer you extend the trend. It took us 30 years to add $750 billion to our yearly cost, but the next $750 billion will take only 6 more years at these rates. In other words, at this rate we will double the amount we spend on health care by 2018.
“Government spending for Medicare, Medicaid and other healthcare programs will more than double over the next decade to $1.8 trillion… [T]he non-partisan Congressional Budget Office said that even under its most conservative projections, healthcare spending would rise by 8 percent a year from 2012 to 2022.”
Just to put these numbers into perspective, the entire Federal Budget for 2012 is only $3.7 trillion. Even if all other spending and revenue stays the same, healthcare spending would make up more than 40 percent of the entire budget in 7 years. In addition, the CBO projects that healthcare spending will surpass defense spending this year and will be more than double defense spending by 2020.
None of this will come to pass because the system as it now exist will collapse far sooner than 2022. The government’s own deficit reduction committee agrees with me and says the fiscal crisis may hit within the next two years! From the Wall Street Journal:
“‘This problem is going to happen long before my grandchildren grow up,’ said Mr. Bowles, who was White House chief of staff during the Clinton administration. ‘This is a problem we are going to have to face up to it maybe two years, maybe a little less, maybe a little more.’
He said the crisis is ‘predictable’ and will take place when ‘our bankers over there in Asia begin to believe we are not going to be solid on our debt, that we are not going to be able to meet our obligations.’
‘Just stop and think a minute what happens if they stop buying our debt. What happens to interest rates? What happens to the U.S. economy? The markets will absolutely devastate us if we don’t step up to this problem. The problem is real. The solutions are painful, and we have to act.’”
But the government has proven repeatedly that it cannot act. Federal Reserve Chairman Ben Bernanke practically begged congress to get its fiscal situation under control last week.
“Even the prospect of unsustainable deficits has costs, including an increased possibility of a sudden fiscal crisis. As we have seen in a number of countries recently, interest rates can soar quickly if investors lose confidence in the ability of a government to manage its fiscal policy. Although historical experience and economic theory do not indicate the exact threshold at which the perceived risks associated with the U.S. public debt would increase markedly, we can be sure that, without corrective action, our fiscal trajectory will move the nation ever closer to that point.”
All of the solutions currently being considered by Washington are farcical. Democrats call for an end to the Bush era tax cuts for Americans making over $250,000 a year. The New York Times notes this will provide $700 billion in additional revenue over 10 years. The Republicans want to make the cuts permanent in hopes of stirring economic growth. The rhetoric on this topic is heated, but when put in the context of the nation’s problems, it’s nothing but a drop in a very large bucket.
Taxing the rich $700 billion over 10 years is just $70 billion a year. Even if all the Bush tax cuts were removed, it would only generate an estimated $380 billion a year. It wouldn’t even buy us one additional year of time. When you actually do the math, you see that this is more than just a political problem. The money to pay for what is currently promised just isn’t there. Growth can’t fix it and neither can tax increases.
Market pressure could begin to build at any time, although most analysts think it will not happen until after Europe and Japan have stabilized. In a worst case scenario there would be a series of crisis points, each becoming increasingly serious. While the government can print the money it needs, significant inflation would result. A bond crisis will become increasingly likely and you would see a crisis similar to the one now facing Greece.
The financial crisis would likely be used as an excuse to slash Medicare and social services. Public property like parks, roads, bridges, open land, buildings, beaches and waterways could be privatized for a fraction of their actual worth the same way that is now happening in Greece. If cuts are deep enough, the US military or private security firms like Blackwater could be deployed in American cities to maintain order. The authority to implement these changes are already claimed by the president (scroll to the bottom) and the congress would be powerless to stop it.
The truth is that there is no solution to these problems. Printing the money would devastate the dollar and have international consequences for creditor nations. Cutting spending by a sufficient magnitude to avert the bond crisis like some hard core Republicans want would cause a worldwide depression. At this point, the only thing we can be sure of is the promises made to the Baby Boomers will not be kept. We’ve been repeatedly assured by politicians that benefit cuts for current recipients are off the table, but look at the numbers again and tell me you believe them.
For more on exponential growth, click here.