I would like readers to consider two charts.
The first shows the U.S. federal deficit as a percentage of GDP. Please note that the deficit is about 60 percent of GDP now — the highest since World War II — and is scheduled to grow to record levels in 14 years.
The second shows the primary cause of the deficit: Social Security, Medicare and Medicaid. Yes, the wars in Iraq and Afghanistan are expensive. Personally, I’m in favor of cutting defense spending significantly. But there’s only one problem: even if you cut defense spending in half, you still have to deal with the entitlement problem, ie, the uncontrolled growth of Social Security, Medicare and Medicaid.
This post will argue that the tea party movement, with its many defects, is an overwhelmingly positive response to this problem. Let the fun begin.
Any thinking person can acknowledge we have a problem. The problem is that we are spending more — a lot more — than we are bringing in in revenue. The bigger problem is that this deficit is scheduled to get worse unless something is done.
Why is this a problem? We have been running deficits for decades and Ross Perot types have been scaring us about these deficits, and nothing really bad has happened. Here is why this situation is different:
1) The U.S. is running extremely high deficits, by any measure. The total deficit for fiscal 2009 was $1.42 trillion, a $960 billion increase from the 2008 deficit. Estimated tax receipts for fiscal 2010 are $2.3 trillion, spending is $3.5 trillion, for an estimated deficit of $1.2 trillion. The 2009 budget deficit was 12.3% of gross domestic product, the largest share since World War II.
As a percentage of actual revenue, the 2009 deficit was a staggering 42% of all revenues.
2) U.S. external debt is roughly $14 trillion, or about equal to the gross domestic product.
External debt is that part of the total debt in a nation that is owed to creditors outside the country. This is not “debt we owe ourselves,” it’s debt we owe others outside the U.S. The $14 trillion includes both public debt (the debt owed by the federal government), local and state government debt, plus private debt such as corporate loans.
3) The U.S. Treasury divides the public debt into two categories, which can create some confusion about the size of the federal debt. The Treasury calls the federal debt owned by other governments’ central banks, mutual funds and individuals the “debt held by the public.” That is currently about $7.8 trillion.
Another $2.2 trillion is IOUs issued to the Social Security Trust Fund. In essence, the government “borrows” the annual surpluses from Social Security and issues a non-marketable bond to the trust fund as an IOU. But since the security isn’t marketable, it has no real value and is just an accounting placeholder to keep track of how much money the government has transferred of the Social Security surpluses.
4) Of that $7.8 trillion in debt held by the public, about half ($3.95 trillion as of April 2010) is held by foreign central banks. That’s up from $3.3 trillion in May 2009.
5) Nations with high savings rates such as Japan can have a very large national debt, but the amount of that debt held by foreigners is modest (external debt is about 42% of GDP in Japan and a mere 7% of GDP in China, which has a savings rate of 38%).
So far this post has had a lot of numbers. Let me see if I can put this in the simplest terms possible before I lose you.
There are two factors that make this situation extremely dangerous. The first is that we are borrowing from the Social Security trust fund to finance the deficit. Now remember Social Security was intended to be self-financing. People pay into a trust fund (that is the amount that is taken out of your pay for Social Security) and when they retire that trust fund is around to finance your retirement. So, the first point is that we see a real situation where there will be no money in the trust fund.
Let me be very clear: unless something is done urgently there really will not be any money left in Social Security when you retire.
The other problem is related to how we finance our debt. We are spending $1 trillion a year more than we are taking in in tax revenue. Now imagine that your annual after-tax income was $40,000 but you were spending $60,000. How would you come up with the extra $20,000? Well, you’d have to borrow it from someplace. You’d run up credit card debt, borrow from your relatives, take out a second mortgage. Well, the government does this by getting other people to lend us money. About half comes from the domestic market (U.S. investors) and about half comes from overseas. What these investors are doing is buying U.S. bonds. These investors are saying that the yields on these bonds are worth buying because they are safer than other investments.
Now, what happens when these investors decide to stop buying our debt? This is unimaginable, but what if investors can get a better yield buying something else?
We default. We cannot pay off our debts. It is as if, to use the family comparison, we already have maxed out all of our credit cards and run out of people to borrow from. Well, that is what happened to Greece earlier this year, which is one reason the stock market has been flat for months.
The U.S. defaulting on its debt is unimaginable. The repercussions would cause a worldwide Depression that would make the 1930s look like a picnic in comparison. The stock market would collapse. Your 401k would disappear. Companies would retrench and fire most of their workers. If you have a government job, you would almost certainly be fired because the government would no longer have the ability to get any money to pay you. It would take the world years to recover.
So, have I convinced you that you should take the debt situation seriously?
It seems to me there are several different ways that you can respond to this situation.
1)Denial. There is nothing to worry about, we can continue to borrow and nothing very serious will happen. This is basically the position of Paul Krugman and many of the president’s advisors. I completely reject this position, but I’m willing to bet there are many Mormons in the Bloggernacle who feel this way. Let’s hear their arguments.
Before you respond, take a look at this Wikipedia article for some of the counter-responses to Krugman’s position. In addition, you might want to consider the fact that Krugman was very worried about the debt when a Republican president was running up a much smaller debt. Partisanship is Krugman’s middle name.
2)Ignore the problem.
3)Get involved to resolve the problem in one way or another. Now we get to the heart of the matter.
Now, set aside everything you have heard about the tea party. I’m talking to you Mark Brown. Yes, you. What would a movement trying to resolve the deficit look like? Would it be frustrated with both parties, which are both responsible for getting us in this mess? Would this group of citizens spontaneously take to the streets as the deficit exploded in 2008-2010 due to TARP and the stimulus bill?
Now, let’s admit that there are a lot of people in the tea party movement that have weird views. But if we’re going to do that, let’s also discover what is their primary motivation. This CBS poll clearly shows that their primary concerns have to do with the economy and spending.
Alright, let’s take a step back. Most people agree we have a problem with spending. Most people agree something has to be done about it. Is there any evidence that politics as usual will resolve the problem? Have the majority of recently elected Republicans or Democrats shown any real desire to deal with the deficit?
Republicans were in power during the early Bush years. What did they do? They massively increased spending. Democrats have been in power in Congress since 2006 and have had both branches of government since 2008. They doubled down on Republican spending, and the deficit has soared.
So, clearly politics as usual is not getting us anywhere.
I lived through the late-1960s, early 1970s protests against the Vietnam war. The tea party movement reminds me in many ways to the spontaneous uprising against the war. The powers in Washington — both Democrat and Republican — were not responding to the American people, who opposed the war. Yes, there were crazies — and much more violent crazies, by the way — who were part of the anti-war movement. But the mainstream of the movement was nonviolent and, in my opinion, on the right side of history, just as the tea party movement is today.
People in 1969 who concentrated on the SDS and the Weathermen as representative of the larger anti-war movement missed the point. The vast majority of people in the anti-war movement were nonviolent and were loyal Americans trying to save the country from itself. People today who claim tea party supporters are birthers or who spend their time happily replaying youtubes of Christine O’Donnell discussing pornography also miss the point. The vast majority of people in the movement are motivated to cut deficit spending and are trying to save the country from itself.
I therefore argue that the tea party movement is, overall, a healthy response to an intractable problem. I say this as somebody who is pro-immigrant, pro-New York mosque, against the death penalty and against the wars in Iraq and Afghanistan. I say this as somebody who wants defense spending cut in half.
And I leave you with this: if you have a better idea of how to deal with the deficit problem, let’s hear it.
Oh, by the way, raising taxes by doing away with the Bush tax cuts for the wealthy is not a solution. At most, you’re talking about $1 trillion in additional revenue over the next 20 years. That is the size of the annual deficit now, and that deficit is programmed to grow, as detailed in the charts above.