ThoughtNGine

The Power of Ideas

An Unbearable Burden

To the “average” person who pays attention to the fiscal situation in this country, they are used to seeing stories about annual deficits of a few hundred billion dollars.  Bad as they are, these numbers represent only a fraction of the total liability that this country has amassed.  If you looked hard enough, you would find that when properly accounted for, the US government is really in the RED.  For example, in 2006, the Treasury reported an annual deficit of approximately $250 Billion, but the actual number is closer to $2.5 Trillion.  As of the fiscal year 2006, the government’s total indebtedness was a staggering $64 Trillion.

 

Why is there such a large discrepancy between perception and reality?  The government reports its financial results on a cash basis.  They do not have to include future obligations in these reports.  It’s sort of like borrowing a million dollars today, and claiming you are a millionaire because you don’t have to tell people you have to pay the money back tomorrow. The demographics of the baby-boom generation work in the same way.  Benefit programs like Social Security and Medicare (the main culprits) have been cash-flow positive for years.  However, with retirement looming, these programs will soon go from being a cash contributor to a cash drain; and the government will soon be bleeding red ink.

 

It is hard, but let me try to put numbers of this size in perspective.  First, annual Gross Domestic Product in nominal dollars is only $13.7 Trillion, one fifth the amount of the actuarial value of the liability stream.  Think about it, if the government could take every penny of value we now produce as a nation (including food, gas, Viagra and MTV), it would take five years to pay off this debt.  Never mind that we couldn’t eat.  If this is a bit too esoteric, think about it this way.  If you wanted to pay off the debt over 50 years, every current tax-paying household would have to ante up $40,000 per annum.  That is just slightly less than current per capita income.  To net this amount from the tax base, the average household would need to earn about $200,000 more per annum.  If you aren’t frightened, you should be.

 

Furthermore, if you don’t feel guilty, you should.  What we have done over time is to systematically impose a terrible burden on the future for our own benefit.  If we were the victims, we would call it highway robbery and scream for blood.  Come to think of it we once did.  This country owes its existence to the inequity of taxation without representation.  We thought it so unfair that we went to war with the British.  And yet, we just do not have the political courage to admit that our behavior amounts to the same thing.  We don’t even think twice about the tax liability we are passing on to our children.  We certainly don’t have the political will to bear any of the costs of solving this problem.

 

While I am not going to suggest solutions here, I would suggest one way of approaching government expenditure.  Next time a politician proposes a new program or initiative, you should ask two questions.  First, you should insist on knowing how the program will be paid for.  Second, ask yourself if you would vote for the program if you actually bore the cost of paying for it.

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October 4, 2007 - Posted by | Economics, Finance, General Interest, Politics

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