How deep America’s fiscal hole is

Victor Joecks

Have you ever seen a child try and escape an uncomfortable situation by closing his eyes and pretending he’s not there? When I read honest and stark descriptions of how perilous America’s fiscal situation is, like this one penned by five senior fellows from Stanford University’s Hoover Institution, I feel like that kid.

I just want to close my eyes and make it all go away.

Did you know that annual spending by the federal government now exceeds the 2007 level by about $1 trillion? With a slow economy, revenues are little changed. The result is an unprecedented string of federal budget deficits, $1.4 trillion in 2009, $1.3 trillion in 2010, $1.3 trillion in 2011, and another $1.2 trillion on the way this year. The four-year increase in borrowing amounts to $55,000 per U.S. household. …

This is all bad enough, but where we are headed is even worse.

President Obama’s budget will raise the federal debt-to-GDP ratio to 80.4% in two years, about double its level at the end of 2008, and a larger percentage point increase than Greece from the end of 2008 to the beginning of this year.

Under the president’s budget, for example, the debt expands rapidly to $18.8 trillion from $10.8 trillion in 10 years. The interest costs alone will reach $743 billion a year, more than we are currently spending on Social Security, Medicare or national defense, even under the benign assumption of no inflationary increase or adverse bond-market reaction. For every one percentage point increase in interest rates above this projection, interest costs rise by more than $100 billion, more than current spending on veterans’ health and the National Institutes of Health combined.

Worse, the unfunded long-run liabilities of Social Security, Medicare and Medicaid add tens of trillions of dollars to the debt, mostly due to rising real benefits per beneficiary. Before long, all the government will be able to do is finance the debt and pay pension and medical benefits. This spending will crowd out all other necessary government functions.

Think raising taxes on those oh-so-terrible rich people is going to solve this problem? In a great column yesterday, the Review-Journal’s Glenn Cook destroys that notion.

The Whopper to End All Whoppers is President Obama’s claim that his tax plan will pay down the country’s staggering $16 trillion national debt. …

Obama says we can get there by making the wealthy “pay a little more.” “Millionaires and billionaires” will cover the bill, he says. But his plan, as represented, doesn’t even come close.

The president wants to sunset the Bush tax cuts for individuals earning at least $200,000 and households earning at least $250,000, but keep the lower rates for everyone else. He also wants to reduce the deductions available to those households, raising their income taxes even higher. He proposes increases in the capital gains and dividends tax rates on top of the 3.8 percent Medicare tax on investment income that’s part of ObamaCare.

All those tax increases combined will yield an estimated $140 billion per year in new federal revenue, getting the president almost 13 percent toward a balanced budget.

Cook also details how the Buffet Rule is nothing more than cynical “political gimmick.”

So is there a way out or should we just curl up into the fetal position as we await the seemingly inevitable? Fortunately, the aforementioned “senior fellows” have the solution.

The fixes are blindingly obvious. Economic theory, empirical studies and historical experience teach that the solutions are the lowest possible tax rates on the broadest base, sufficient to fund the necessary functions of government on balance over the business cycle; sound monetary policy; trade liberalization; spending control and entitlement reform; and regulatory, litigation and education reform. The need is clear. Why wait for disaster? The future is now.

As F.A. Hayek says in round two of his epic rap battle vs. John Maynard Keynes, “Friend, the party is over. The long run is here. It’s time to get sober!”