PrintJune 21, 2010
Endless Zeros
Twenty trillion dollars. That is the estimate of federal indebtedness by 2020. But that $20 trillion is just the federal debt: it does not include $3.4 trillion in current annual spending, nor does it include state and local obligations.
Government has no intention of paying off this debt -- only of continuing to add to it. What that means is that taxpayers are obligated to service this debt (and whatever is added to it) at prevailing interest rates forever. Those rates could range from 3% on up -- to whatever rate the bond market assigns. Generally speaking, the more debt a nation incurs, the higher the rate over time.
At 3%, the annual cost of servicing a $20-trillion debt is $6,000 per taxpayer (assuming that half of all Americans pay no federal taxes), or $12,000 per middle class couple. This amount is in addition to whatever Congress appropriates each year. By 2020, the annual appropriation (currently at $3.4 trillion) may well reach $5 trillion, which is $50,000 per taxpayer. Assuming that $1 trillion of this amount is passed along annually to the national debt, the immediate obligation would be $40,000 per capita. Add $40,000 to $6,000 and we get $46,000, or $92,000 per taxpaying couple.
The Heritage Foundation provides a similar estimate. Federal spending in 2010 will come to $30,543 per household, at least half of which pay no income taxes. A conservative estimate of a 60% increase in spending by 2020 implies federal spending of nearly $50,000 per household, half of whom pay no taxes.
These figures do not include state and local tax obligations, which consist of future pension liability and bond indebtedness. California, for instance, is in hock by $68 billion (December 31, 2009 figure), or $1,838 per capita. This may seem like a modest figure, but it does not include a 2010 deficit of $19 billion, nor does it account for future pension and benefit obligations.
Some states have begun to face the debt crisis by scaling back pensions and benefits. Conservative governors in Indiana and New Jersey have demanded reductions in spending. In most states, however, the predictable response is to raise taxes, issue more debt, and lobby for more federal assistance. This is certainly the case in Illinois, which faces a current deficit of $13 billion. Rather than enact major cuts in services, Democratic Governor Patrick Quinn has resorted to raising taxes, borrowing more money, and simply not paying his bills.
Meanwhile, Illinois state agencies continue to spend. Illinois's Department of Human Services has been asked to cut $150 million (or 3.75%) from its budget of $4 billion. Members of the department are "outraged," according to reports. Illinois' residents will have to cut back on discretionary spending as a result of tax increases. Shouldn't state agencies cut back as well?
For states like Illinois and California, the plan is to allow things to get bad enough that Congress steps in with another bailout. After all, the federal stimulus bill of 2009 contained huge subsidies for the states. Why shouldn't this largesse continue indefinitely?
That is exactly what Gov. Schwarzenegger seems to be thinking as California faces a $19 billion deficit. Like many high spenders, Schwarzennegger has essentially penciled in another bailout. Now it appears in doubt. Despite the urging of the president, Congress has delayed passage of a bill that would shore up state and local governments. For some inexplicable reason, and for the first time in recent memory, Congress has balked at the prospect of adding another $100 billion or so to the national debt. But with states facing layoffs of hundreds of thousands of union workers -- nearly all of them Democratic voters -- one can be sure that Congress will find a way to overcome its scruples.
...Which brings us back to the endless string of zeros. In addition to its own runaway spending, Congress has taken on a permanent obligation to subsidize state governments. Yet in 2009, over 40% of federal spending was deficit spending. States shifted their debt to the federal government via the stimulus bill, and the federal government shifted its spending to our children and grandchildren. This process will be repeated in 2010 and every year thereafter as long as liberals control Washington.
The problem is that a federal debt of $20 trillion (and more than $20 trillion after 2020) may bring about the economic collapse of the United States. At some point, even after imposing ruinous taxes and seizing retirement accounts, the nation will not be able to service its debt and pay its current obligations. At that point, there will be no International Monetary Fund to bail out the United States. The only alternative will be default.
Though Congress does not seem much concerned, default of sovereign debt is a serious matter. After Argentina defaulted on its sovereign debt in 2001 as a result of debt accumulation stretching back to the 1970s, that nation suffered a decade of economic chaos. The current administration of socialist President Christina Kirchner has seized retirement accounts and snatched the nation's central bank reserves, but this is not nearly enough. Once a nation has defaulted on its debt, it suffers the consequences for decades, if not generations.
The United States is on a similar track to default. In 2011, the U.S. national debt will exceed GDP for the first time in our history. It is at this point that a nation loses control over its finances. Once debt exceeds GDP, it becomes more and more difficult to service the interest on the debt. For politicians, there is the temptation to simply shift interest payments to long-term debt, thus setting off a vicious cycle of ever-rising interest payments. At some point, GDP no longer generates enough wealth to service the debt, and the only option is default. For ordinary citizens, the result of default will be decades of poverty.
Those who understand what is happening have a right to be angry, and their anger should be directed at Congress and the president. We should not sit by and watch as our nation is ruined by frivolous spending. The solution is to toss out the big spenders -- Republicans and Democrats alike -- and to continue tossing them out until they balance budgets and begin paying off the national debt.
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.
