PrintFebruary 16, 2010
A Trying Time of Year
This time of year, which C. S. Lewis (at least in William Nicholson's portrayal) called a "trying time," seems depressing enough already, but for those who wish to be further disheartened, the U. S. Treasury Department maintains a National Debt Clock. The Debt Clock is racing at an astonishing speed right now, spurred along by what the Congressional Budget Office charily calls new "outlays": "spending from last year's stimulus legislation and outlays for income support programs, health care programs, Social Security, and net interest."
President Obama has submitted a federal budget for FY2011 with a price tag of $3.8 trillion. Most Americans, I suspect, are not aware of how many digits are required to denote a trillion. Webster's Collegiate Dictionary does not even attempt to define the number in exact terms. As a primary definition, it simply refers the reader to the number table. Otherwise, it defines a "trillion," in what seems quite an understatement, as "a very large number."
A trillion is a number followed by twelve zeros, as in 14 trillion: 14,000,000,000,000. That number, in fact, is close to the current debt ceiling of the United States: $14.3 trillion.
Lest the public experience sticker shock, government economists are quick to point out that $14.3 trillion, a debt "ceiling" that by some odd chance may not be exceeded until just after the November elections, is "only" about $46,000 for every man, woman, and child in the United States. The moment you are born, in other words, you will be in the hole by forty-six grand. The same economists will tell you that the cost of servicing that amount of debt, at the current average of 2.6%, is about $1,200, or $4,800 for a family of four. If the national debt were eliminated, or even cut to within reason, that family would have a lot more money to spend as it wished.
Unfortunately, the cost of servicing the national debt is going up. Forty percent of the debt will be "turned over" this year alone, and sooner or later it will be turning over at higher rates. The CBO estimates that "government's annual spending on net interest will more than triple between 2010 and 2020 in nominal terms." If the interest rate on treasury bonds goes up to 4%, then that family of four has $7,360 less to spend. If rates go up to 6%, that figure becomes $11,040. None of these figures takes into consideration future increases in the debt ceiling, estimated in the Obama budget itself as $20 trillion by the end of the decade. Nor do these numbers account for state and local taxes.
By 2020, based upon an estimate of a 4% cost of servicing federal debt, the average family of four will be paying $9,969 to service the cover the federal debt, even if one factors in an expected population increase of 10%. But there are some serious problems with this estimate.
First, it is impossible to estimate future interest rates correctly. Over the past fifty years, interest on long-term treasury debt has ranged from about 3% to 14%. The future cost of servicing the national debt could be less than what it is today (unlikely, given current low rates) or considerably more. It is extremely likely that larger deficits will lead creditors to demand higher rates. And it is certain that a higher level of debt relative to GDP places the country at greater risk in facing future unforeseen challenges. A higher debt level lessens our ability to withstand fiscal crises and weakens our ability to pay for national defense.
A second problem is that the example of the "average family of four" masks a serious shortcoming in the structure of our tax system: the reality that over half of Americans pay no meaningful federal tax at all. Increasing numbers, in fact, benefit from reverse taxation via earned income credits, child credits, and other refundable credits. These families receive a nice check every time they file.
Among those who actually pay taxes, the burden is grossly imbalanced, and so much so that the upper 2% of earners pays half of all federal income taxes. This may seem heartening to those receiving refundable credits, and even to the rest of us who pay somewhat less than Melinda and Bill. But perhaps we should not be so quick to celebrate.
As government spending continues to increase, taxing the rich is not going to be enough. Since the poor pay nothing, and the rich, who are few, can pay only so much, the burden of future taxes will fall on the middle class. Peter Orszag, director of the White House Office of Management and Budget, offers some insight as to what form those taxes might take. In the last six years, before he occupied a position requiring a more closed-lip approach, Orszag has advocated increasing tax rates on the rich and the middle class, eliminating tax deductions such as mortgage interest, instituting a value added tax, taxing carbon emissions, and cutting Social Security benefits. Contemplate a future with a higher tax bill, higher energy costs, a VAT on everything purchased, and lower retirement income, and you begin to see where we are headed.
As its total national debt rises from the current 60% to 100% of GDP in 2020, America will enter the less creditworthy zone now occupied by Portugal, Italy, Greece, and Spain -- those fiscally improvident EU members so rudely referred to by the acronym "PIGS." There is no reason to imagine that our standard of living might not someday decline to the level of these PIGS. Lacking the implicit support that the European PIGS obtain from stronger economies within the EU, the U.S. might just fall farther.
Liberals do not seem overly concerned about the possibility of such a decline in our nation's living standards. They have a remarkably callous propensity to disregard the suffering that results when government confiscates the incomes and property of individual citizens, either through taxation or via fiscal policy. Nor do they consider the demoralization and hopelessness that arises when a people see their living standards decline decade after decade. Living within an abstract realm of utopian planning, all they see are pretty pictures of universal daycare, government health care, and openhanded tax credits. They can't see the clouds of perpetual high unemployment, inflation, and economic insecurity.
Yes, February is a "trying time of year," and the National Debt Clock, coupled with recent CBO projections, is enough to make it worse. Fortunately, it is also time for Girl Scout cookies. They are delicious, and most of us can still afford a few boxes. Enjoy them while you may.
Dr. Jeffrey Folks taught for thirty years in universities in Europe, America, and Japan. He has published many books and articles on American culture and politics.
