Last week, the Obama Administration released its Friday afternoon surprise: another $1.47 trillion in debt for the year of 2010. The news comes in the context of imminent tax increases due to occur on January 1st, 2011 as the Bush tax cuts expire.
As reported by Art Laffer in the Wall Street Journal, “the highest federal personal income tax rate will go 39.6% from 35%, the highest federal dividend tax rate pops up to 39.6% from 15%, the capital gains tax rate to 20% from 15%, and the estate tax rate to 55% from zero.”
The Obama Administration is okay with that. So are Nancy Pelosi and Harry Reid, who have no plans to make the Bush tax cuts permanent. Democrats are telling the American people that rather than cutting unsustainable spending and balancing the budget the way families balance theirs, that instead they want taxpayers to finance Washington’s increasingly indefensible spending habits.
Today, spending reflects revenues as the political class wishes them to be, not as they actually are.
If the $1.47 trillion budget deficit were closed solely with tax increases, ignoring the flight of capital overseas that would occur because of the tax increases, the effect would logically have to be to shrink the private sector by $1.47 trillion. Taking into account that flight of capital, the effect will be much more costly.
These impending tax increases are jobs killers, as are the anticipated accelerating costs of government and debt financing. Interest owed alone on the debt today is $188 billion annual, but by 2020 it will be $912 billion, according to the White House Office of Budget and Management (OMB). The budget itself will grow from $3.643 trillion to $5.746 trillion. Interest will therefore go from constituting 5.1 percent of the budget to 15.8 percent.
Overall, the debt will grow on average $1.092 trillion every year from 2010 until 2020, when it will total $25.777 trillion. But the economy will only grow an average of $868 billion annually during that same period, if the White House’s rosy projections come true. If the OMB is wrong, it will be much, much worse.
But even if they are right, the expiration of the Bush tax cuts, which the OMB factors in, will not at all pay for the unbridled growth of government that Obama plans over this coming decade — by the government’s own estimates.
Therefore, the built-in, accelerating costs of government will outpace any growth (i.e. our ability to pay for it all). If that doesn’t change, we are doomed to a future of less growth, less jobs, higher taxes, higher interest rates, and eventual inflation.
Currently, annual deficits require the Treasury to perpetually go around the world and beg for money to borrow, and the Federal Reserve to print whatever the Treasury fails to raise via debt auctions. Already, the Fed owns $777 billion of U.S. treasuries, calling into question the nation’s ability to finance its obligations.
There is another way.
Government can be scaled down to eliminate this structural deficit. The federal government must begin to divest itself of things that rightly and provably can be provided for by the private sector, and use that money for debt reduction while the economy recovers and can grow at a faster pace than the debt.
Examples of things that can be done immediately include:
1) selling off and opening up the 650 million acres of federal land for extraction and development by the private sector,
2) unwinding the $5 trillion Government Sponsored Enterprises Fannie Mae and Freddie Mac and bringing an end to government-induced housing finance,
3) selling off the shares of bailed-out companies like GM and Chrysler,
4) eliminating whole departments and agencies that are unproductive,
5) scaling back the federal workforce by 50 percent as the Baby Boomer generation retires,
6) ending worthless “stimulus” programs,
7) abolishing federal subsidies of sectors like agriculture,
8 ) bringing an end to the bailouts once and for all, and
9) repealing government takeovers like ObamaCare and the Dodd-Frank financial legislation.
That’s just for starters. Structurally, the greatest problem the nation faces fiscally is the unchecked growth of entitlement spending. These programs need to be phased out over time by allowing younger workers to invest in their own retirements and health savings, while guaranteeing the obligations of the Baby Boomers. This would automatically limit the universe of liabilities owed to these programs.
On the other hand, allowing these programs — and the government as a whole — to continue to grow unabated will only leave a much greater problem down the road in the not-so-distant future.
Taxing and thus shrinking the private sector will not make this problem go away. The only solution to the sovereign debt crisis is to grow the private sector economy and to scale back the government. That cannot occur while government plans to increasingly impose itself on future potential growth with higher taxes and gargantuan spending.
Instead, Congress should leave tax rates where they are by making the Bush tax cuts permanent, and commit itself to mandatory spending reductions. That would immediately restore confidence to markets, and help create jobs.
An alternative is to ignore the problem, and to allow these events, with the rapid growth of government and increased taxes, to play out. But don’t be surprised, however, as to what transpires as a result. That giant sucking sound you hear will be your job being eliminated, and your wealth being confiscated by a debt that can never, ever be paid back.
Robert Romano is the Senior Editor of Americans for Limited Government (ALG) News Bureau.
