In fact there are many possible solutions involving spending cuts, tax increases, and various restructuring measures that can promote efficiency at the margins.  As one panelist said, “We can do it the conservative’s way, we can do it the liberal’s way, or something in between, but we must do it.”  Indeed.

Only one leading American politician today, Republican Congressman Paul Ryan from Wisconsin, has made the national debt his signature issue.  Ryan proposes to balance our books without tax increases.  Few people think this plan is realistic, politically or financially.  But at least Ryan cares and thinks deeply about the subject, which is more than can be said for any of the leading Democrats, who have not even bothered to pass a budget resolution for the fiscal year, let alone design a plan intended to address our long-term structural deficit.  If the Democrats want Americans to take them seriously on the terrible topic of deficits and debt, then they need to put something on the table.  And for that matter, it would be nice to know whether or not the rest of the GOP back Ryan’s plan and  share his sense of urgency.  Addressing entitlement spending is not a significant part of the Republican’s recent “Pledge.”

There were no radicals on today’s panel, unless one believes that compromise is itself a wild-eyed notion. Isabel Sawhill, of the Brookings Institutions and the most liberal member of the panel, lamented the election defeat of Mike Castle at the hands of Tea Party candidate Christine O’Donnell in the Delaware Republican Primary.  Sawhill had worked with Castle and knew him to be a man willing to compromise, probably unlike most members of the Tea Party.  The race to the extremes, Sawhill suggested, was bad for the business of balancing our books.  Maybe she has a point.  But seen from the perspective of an ordinary citizen deeply concerned about debts and deficits, the Tea Party is the only movement or party absolutely dedicated to cutting spending; it is their mission.  Democrats and Republicans alike haven’t given concerned Americans any reason to trust them with making the hard choices.

Even those who agree that tax increases must be part of the solution realize that the majority of the action must come on the spending side.  The United States cannot tax its way out of its fiscal hole because the costs to productivity would be too high and would discourage revenue flows into the Treasury.  Among the  budget wonks thinking about ways to address the growing debt, most advocate a range of 30%/70% to 25%/75% in the ratio of tax increases to spending cuts.

Whatever the economically and ideologically proper ratio may be, nothing can happen without political will.   David Walker understands this. He appreciates the role that the overwhelming desire for reelection plays in Congress’ inability to act to diffuse the fiscal time bomb.    To get our leaders to focus more on the future of their country rather than on their next reelection, Walker supports Congressional term limits and public campaign financing.   “We have something the founding fathers never expected,” explained Walker, ” — career politicians.”

Radical Reform of Social Security requires starting at the root, and that root is its real purpose and goals today, in 2010.  What are we really trying to accomplish with this program?  What are the basic problems for which we should supply social safety nets, and how do we best supply and sustain them?

2010 is more like the 1935 of Social Security’s birth during the Great Depression than any other time in American history so far.  It is a time of Great Recession, when macroeconomic events have created new poverty and exacerbated old.  Unemployment has destroyed wage income, and plummeting stock markets have devastated savings from earlier and other incomes.  Nonetheless, asking this root question of purpose yields distinctly different appropriate approaches from those we’ve been following, only slightly tweaked, for almost 75 years.

In 1935, FDR was responding to the ruination of nest eggs through collapse of the stock market.  He was particularly interested in the suffering of people who were too old to replace these losses through years of extra work and saving.  They had become poor too late to help themselves, and Society stepped in to provide this help.

Today, even as FDR’s Social Security system approaches bankruptcy, it does only a mediocre job providing financial ease in old age.  Even worse, the very structure of social security causes harmful effects to the economy in general and the working poor in particular.

According to the Social Security Administration, Social Security checks only provide 39% of a retiree’s income.  American workers must not only pay their Social Security taxes, but put money away at the same time if they want to avoid poverty in old age.  Needless to say, there is not much “security” in such a system.  Most people will not be able to survive on $1100 or  $1200 per month.  The current Social Security System does not successfully protect against poverty in old age.

Furthermore, Social Security has a number of negative indirect effects. The program may actually make a substantial number of people poorer in many of the years before retirement. “Contributory financing” is attractive to Americans who like to think that other people have paid for what they’re getting from the government.  But in the case of Social Security, this translates into the practice of early forced “saving” through payroll taxes to replace earned income for the elderly after retirement.  The result is more poverty, less employment, and higher underemployment in hopes of less poverty tomorrow — a tomorrow far, far away for many and never reached for those who die early.

Payroll taxes are a noxious form of taxation at all times, but particularly when high rates of unemployment are a national concern, as they are today.  These taxes discourage employment by creating a wedge between what businesses have to pay to hire or keep workers and what workers get to keep.  From 1937 to 1948, this difference was relatively small.  To finance Social Security benefits, employers and employees were each taxed 1.0% of the wages they paid out or took home. Medicare had yet to be invented, so its payroll taxes didn’t add to the total.  Social Security now taxes all workers at a rate of 6.2% of all their earned income up to $106,800, and employers have to match withholding with another 6.2% of their own. (Medicare adds another 1.45% to each side, for a total burden of 15.3%.)

The poor, it is often said, don’t pay income taxes.  The Earned Income Tax Credit has certainly made this true for some.  But the income ceilings for eligibility are pretty low, and everyone with a job paying above that level sends at least 7.65% of his or her earned income to the government.  “At least” because “writing the check” is different from “paying in a true economic sense.”  If businesses can get away with lowering wages in response to payroll taxes, they will.  Their total costs (wages plus their share of taxes) then go up by less than the taxes, and labor’s income (wages minus their share of taxes) go down by more. Business has then shifted some of the tax burden to Labor.  For workers earning minimum wage, the results can be even more draconian.  Employers can’t shift any of the burden to these employees, but they may lower their wage to zero, firing or never hiring people whose productivity is regarded as less than the total of minimum wages plus payroll taxes.

The situation gets even more deplorable.  Social Security may be part of what traps the poor in an even deeper sense.  The payroll tax not only causes poor people to lose income today by reducing employment and after-tax income.  It also causes losses in future income.  Entry-level jobs don’t just provide current income. Part of their rewards are hidden and deferred — on-the-job training, investment in human capital that can lead to better jobs and entry into the middle class.  Investing in human capital doesn’t just occur through formal education.  And it’s every bit as important a source of economic growth and prosperity as investing in machinery.

Growing the economy requires getting out of this Great Recession and increasing investment in equipment as well as in people.  Investment in extra capital tends to increase labor productivity even when the new equipment is just like the old.  The effect is even more positive when new capital embodies new technology.  Unfortunately, Social Security is probably holding back recovery and holding back growth.

To hire new workers, employers have to be very optimistic about economic recovery and not too concerned about future tax increases and other changes in the rules.  Reverse Keynesianism may actually be taking hold today. Deficit spending may actually be holding back private spending. Businesses may be cutting back as all that “job creation spending” previously known as “stimulus spending” raises anxiety about exploding deficits and debt and how they’ll be financed. Social Security plays a negative role here, too. Not only does it require current taxes that discourage employment, it has future unfounded liabilities that reduce entrepreneurial confidence and optimism as we all anticipate future tax hikes.

Few, if any, of these negatives are offset by the salutary effect of all the forced “saving” driven by payroll taxes. More saving, absent recession, means more investment, and more investment means more growth.  But none of that payroll revenue has actually been saved.   Our government is saving nothing for the elderly. It has never saved anything for the elderly.

What we have is a pay-as-we-go program, with a pledge to support today’s and tomorrow’s elderly by imposing payroll taxes on today’s and tomorrow’s workers.  Demographic change has put us on a frightening trajectory of massive and accelerating unfounded liabilities.  In 1950, 16.5 workers supported each retiree. Because of the baby-boomer bulge and increased life expectancy, this number has fallen to 3.1 today, and within 20 years it’s expected to drop to a mere 2.1.

The horror story of unfunded promises has received a lot of publicity of late. Less acknowledged is what has happened to earlier surpluses in the system: they were diverted to the payment of other government programs.  In 2008 alone, the Social Security surplus was $180 million, with a cumulative total of $2.4 trillion.  No wonder Mark Brandly urges us to “[t]hink of it as an exponentially larger version of Bernie Madoff’s Ponzi scheme.”  (See  “The Social Security Scam”.)Trillions of dollars of regressive payroll taxes can’t even be justified as “contributory financing”.  This is shameful diversion and warrants more exposure from the press.

While Social Security has done nothing directly to increase savings, the program has at least two indirect consequences for private savings.  On the one hand, people with jobs and therefore mandatory contributions to Social Security are likely to save less because this program “guarantees” defined benefits for their retirement years.  On the other hand, they may not believe this guarantee and increase savings not just because Social Security is insolvent but also because most efforts to improve its balance sheet are likely to include increased income taxes.  Small solace, this, because the extra savings will go ultimately to debt and deficit reduction, not to new ideas and the equipment that embodies them.

Poverty at all ages is our real problem, and the Social Security program as it exists today should accordingly itself be retired.   It’s certainly old enough, it’s not properly structured, and its goals are insufficiently wide.  Created in a crisis, it’s worsening today’s crisis.  Even in times of prosperity, it has created  poverty in efforts to avoid poverty.  Well intentioned, Social Security deserves a proper memorial service, but buried it definitely should be.

The next column will discuss alternatives to the current social security system.

Government deficits and debt have reached alarming levels today, and the unfunded liabilities of tomorrow are even more staggering.  The key to attaining fiscal sobriety is entitlement reform, and Social Security is as good a place to start as any.

Established in 1935, in the midst of the Great Depression, Social Security was FDR’s strong response to the difficulties experienced by the elderly, who saw most of their nest eggs disappear with Black Tuesday’s precipitous 12% drop in the stock market and continued declines for more than a decade thereafter.  Already retired from work, what could they do to restore their savings, the assets on which they’d counted to fund their golden years?  Nothing besides hoping for economic recovery.  So FDR thought the Government should help, and it did.

The program was, and remains, one based on “contributory financing”.  Payroll taxes force today’s workers to “save” some of their earned income, with the promise that when they reach the age of 62 they become eligible for monthly checks from the Government.  It’s a laudable goal, to insure that some wages be set aside for those days, and years, when retirement ends earned income and retirees must live off their savings.  But three major factors have rendered the American Social Security System untenable.

First, the Government hasn’t put this forced saving into a savings account for citizens. Rather, the program is run on a “pay as you go” basis.  One reason, itself not unreasonable, is that benefits started flowing so soon after participants started earning credits that current workers have basically been supporting current retirees rather than saving through the Government for their own futures.  The first beneficiary of the program, for example, was Cleveland motorman Ernest Ackerman, from whose paycheck 5 cents was withheld the first day Social Security was up and going, and who retired the next day with a lump-sum payment of 17 cents from the program.

Second, expanding Social Security benefits has worsened the real balance sheet.  In 1939, the program include survivor benefits for spouses and dependent children, and in 1956 it added disability benefits recognizing that wages were lost by injury as well as by aging.  These additions increased program outlays more than the tax base and rates that would fund them.

Third, changes in demographics also altered the balance between future benefits and revenues.   In 1935, no one forecast the Baby Boomer dynamic, an enormous bulge in the population due to unusually high births from 1946 to 1964.  This cohort vastly outnumbers the group working to support them. Additionally, life expectancy and therefore benefit claims have risen significantly from the early days of the program.  In 1930, life expectancy was only 58 for men and 62 for women.  At first glance, then, the program looks rather sinister.  Was FDR going to force people to save for a future they’d never reach?  No.  The figures reflect appalling rates of infant mortality.  By 1940, 53.9% of men and 60.6% of women who reached the age of 21 lived until 65, the original starting point for benefits eligibility.  Those men and women who reached 65 could be expected to live an additional 12.7 and 14.7 years, respectively.  By 2005, these numbers had increased to 17.2 and 20.

The unfortunate result of these three factors is an estimated unfounded liability for Social Security of  $17.5 trillion, swelling the already disheartening official national debt figure of $12.3 trillion by 142%. The good news is that reforming Social Security is not rocket science, although it does require strong political will.   Here are 5 reform steps that could put Social Security on the road to solvency.

1.We should raise the age of eligibility for Social Security benefits. Doing so violates expectations, but so does altering regulations and tax codes, something our Government does quite often. 65 may not be the new 55, but irritating and expensive as it may be, healthcare can now promise us a high probability of longer and healthier lives.  We can and should work longer to reduce the unfounded liabilities of a program designed to help people who cannot or should not work due to truly advanced age or disability.

To give people some time to adjust to the new rules, a schedule should be announced as soon as possible, and it should phase in the increases.  Advance notice reduces “fairness” concerns, but no change can truly eliminate them.

2. We should make all Social Security benefits part of taxable income. We’ve already started in this direction; let’s keep going.

3. Cost of Living Adjustments (COLAs) should operate in both directions. Raising real Social Security benefits by keeping nominal payments constant in last year’s period of falling prices was appalling even before each senior received an extra $250 through Obama’s special handout. COLAs were designed to protect beneficiaries from inflation, not reward them for deflation.  The cumulative effect of this asymmetry aggravates the inequity and fiscal irresponsibility of this approach to changing price levels.

4. We should modify the way Social Security is funded. One quick possibility is continuing to raise the Social Security ceiling for taxable earned income. Another is to raise the rate at which this income is taxed.  A third is to introduce progressive rates for this payroll taxation.

5. We should radically change the way Social Security is funded. Our current context of battling high levels of both unemployment and debt highlights just how unattractive payroll taxes really are. They raise revenue by making employment more expensive for employers and less attractive for employees. No tax is worse in its employment consequences than the payroll tax. None.

But even when we exit the recession, Americans should remain uncomfortably aware that Social Security’s payroll taxes are regressive.  Poorer people tend to enter the workforce early, while the more advantaged are still getting advanced degrees.  The less advantaged not only start paying for their benefits early, they also are likely to stop receiving these benefits early, because of lower life expectancies (a problem mitigated but not eliminated by survivor rights).  Further, almost all of the income of the working class will be taxed to raise revenue for today’s Social Security recipients because it’s almost entirely wage income below the tax ceiling of $106,800.  Meantime, the upper classes will be taxed on only some of their wages and none of their interest and dividends. Surely, there’s a better way to run this program.

The third column in this series on Government Debt will accordingly explore different approaches to providing socially secured incomes for people who have left the workforce because of age or disability.  The suggestions are radical, and they should be.  Social Security finances are on a terrifying trajectory.  The program had laudable objectives in 1935, and they remain worthy today.  In the 74 ½ years since FDR signed the Social Security Act, however, the old means to these ends are no longer the best means to these ends.

President Obama is expected to announce today a $3.8 trillion budget with a $1.2 trillion deficit for FY2011.  Here’s the context within which he will reveal his plan.  For decades now, the federal debt acquired through years and years of deficit spending has been the “elephant in the room” – the huge presence nobody talks about but everyone knows is there.  In last week’s State of the Union address, however, debt joined unemployment as the two most urgent issues facing America as Obama enters his second year as our President.

Last year, the White House and Congress went “Keynesian” in a big way as the real-estate bubble popped and started to pull Wall Street and Main Street down with it.  In crisis mode, they quickly passed stimulus bills designed to unfreeze credit and prevent the rate of unemployment from reaching double-digit percentages through a combination of renewed lending and “shovel ready” government spending to increase overall demand.

Last fiscal year, our federal deficit reached a record $1.4 trillion, and it’s projected to total $1.7 trillion this fiscal year, the first quarter of which has already seen spending exceed revenue by $389 billion, a 17% increase over the same period a year before. But as we enter February, unemployment resists declining below 10%, and debt as normally configured has reached almost $12,300,000,000  – or roughly $40,000 for every man, woman and child in America.

On January 12, the Obama Administration announced that its Council of Economic Advisers determined that the $787 billion stimulus program “saved” or “created” between 1.5 and 2 million jobs during 2009. Using the upper bound, that’s $393,500 per job. The “what if” ‘s of history cannot be proved, they can only be stated.  But even if we accept the upper bound as a true of the extra unemployment we’d have suffered if the Administration’s policies had not been implemented, it’s hard to conclude that our money has been well spent.  At best, each job has cost us $393,500, while none is regarded as permanent and the average compensation for comparable work is surely less than $75,000 on an annual basis.

<em>Pace</em> John Maynard Keynes and his new followers, it looks as if new government spending programs and the concomitant deficits are hurting, not helping recovery. Consumers, savers, and businesspeople alike worry about which taxes are going to increase and by how much to avoid continued debt explosion.  We also worry about what’s going to happen to interest rates and their effect on private borrowing expenses and the carrying costs of the national debt.

How, then, should we analyze the debt and its effect on the economy?

First of all, it’s ridiculous and misleading to compare today’s $12 trillion with, say,1950’s  $357 billion because of the cumulative effect of inflation over the last 60 years.   And we should also correct for growth in the economy.  After all, whether a $200,000 private mortgage is extravagant and foolhardy or modest and frugal depends upon the income of the borrower.  The following graph basically makes both of these corrections.

As is the case with most statistics, the tone of the story depends on its starting point.  Begin in 1945 if you want to relax, in 1980 if you’re okay with having your blood pressure soar.

Either way, two other adjustments are also appropriate. We should rework the numbers for automatic stabilizers, and we should separate government spending into consumption and investment categories, just as we do for private spending.

The Beltway doesn’t have to change anything to get some Keynesian stimulus spending going.  As unemployment increases, welfare payments will rise and tax revenues will fall, increasing or creating deficits.  If there’s any validity to Keynesian Economics, these quick developments are appropriate, and fair assessment of deficits should reconfigure the sums with these formulaic changes in mind.  We should find out, in other words, what the difference between spending and taxing would be at a level of employment considered “full”.

Our evaluation of debt should also depend in part on whether it’s being acquired through consumption or investment spending. We should be less concerned about deficit spending that finances investments than we are about deficits fueled by transfer payments properly categorized as consumption. Just as the probity of taking on a $200,000 mortgage depends on income (and its security), so is it sometimes okay and even good to take on some debt when acquiring an asset like a home, but not so good to finance a shopping bender in the Mall of America or a new car (which loses half its value right off the lot).

Unfortunately,“investment” is a malleable term that politicians will use to their advantage and not to ours.  Is the War in Iraq an investment in our future (which includes national security, itself dependent on reliable supplies of oil)?  Is Obama’s likely proposal of a huge increase in spending on education an investment in our youth, the individuals whose payroll taxes will be funding our Social Security checks?  Or, absent reform, is it more like income redistribution and consumption?

The issue of Social Security demands more scrutiny.  It also requires grit.  While insight is gained, the comfort our graph of debt/GDP can provide if we start with the Truman years is trashed.  The US could reduce national debt as a fraction of national income after World War II fairly easily because budgets weren’t encumbered by entitlement programs as they are today.  The value of these programs is not in question.  The problem is their cost, both in dollars and in flexibility and control. Baby-boomer demographics were not in play during the  1940s.

The unfounded future liabilities in entitlement programs like Social Security and Medicare dwarf all other deficit and debt concerns.  Neither has a nest egg adequate to the soaring payouts the formulas predict as baby boomers become eligible for benefits and are expected to live longer than their parents and be supported by taxes on a smaller work force. Last year alone, the combined debt of these two programs rose $5 trillion
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The fiscal health of our federal government is also worse than today’s debt figures would indicate because they fail to include off-budget items like subsidizing Fanny May and Freddie Mac.  Last week, the Congressional Budget Office reduced its guesstimate of another decade of their financial support by a whopping $20 billion. Yea!  But that leaves $79 billion still expected to be expended and begs the question of why these important players in the real-estate bubble remain “outsiders” even though any pretense that they’re run for a profit should long have been abandoned.  Time will tell, but the move to increase their loss limits does not auger well for us taxpayers.  It’s a cheap trick for the government to take quick credit for the positive effects of subsidizing mortgages through Fan and Fred, their cousin Ginnie Mae and uncle FHA, while failing to account for all the default risks accumulating as loss ceilings rise.

And then there are all the times the federal government improves its budget by fobbing off responsibility for funding certain programs to the states.  Medicare mandates are one example of this cost shifting.  In assessing government debt issues, we should be looking at all three levels of government – national, state and local, with an eye not only to their totals but to whose debt is really whose.  Should federal mandates really be paid by the states?  For what government spending should the counties, cities and towns be responsible?

Another matter involves the cost of servicing all this debt.  Like entitlement programs, interest payments are a huge part of overall government spending – indeed, its fourth largest category.

To whom are all these interest payments made? In times past, almost all debt holders were Americans, so we could call these payments mere “transfers” among our citizens.  Increasingly, however, our debt goes overseas, where China, Japan and the UK are currently our largest debtors.  Their holding our debt helps finance our trade imbalances and keeps our interest rates lower than they might otherwise be, but it also makes us vulnerable to outside change and exchange-rate issues.

It’s a good thing that we are now talking about the Elephant of Debt in the room.  The focus for reform, however, should not be debt but rather the growth in government spending, expected to reach 35% of GDP this year.  That’s the real, and even larger elephant whose presence we’ve been ignoring.

In the case of pulling an economy out of recession, it can be argued, although not with complete confidence these days, that additional government spending can actually increase private production.   In the case of full employment, however, all government spending takes the place of private spending.  If it’s funded by debt, interest rates may rise and “crowd out” private investment.  If it’s funded by taxes, the consequent declines in consumer demand and company profits will also cause private investment to decrease.

The key issue then becomes whether diverting resources to government use improves the public weal or not.  The consequences of whether the spending is financed by today’s taxes or by tomorrow’s taxes, for all their importance, remain secondary.  An important difference would involve whether voters respond more strongly to tax or debt increases and through their response can impose adequate spending restraint on politicians approving the programs.

How do we change the current trajectory of the ratio of government spending to GDP?  Given all the worthy entitlements and the difficulty of defining and controlling “waste”, the most attractive option is to grow the economy.  Investment in equipment, technology and people is key.  The question, then, is whether and to what degree the government, rather than the  private sector, should undertake these investments.  We already know that predictability in tax and regulatory legislation is a necessary first step.

I dreamed I was a butterfly

…Now I wonder: Am I a man who dreamt of being  a butterfly, or am I a butterfly dreaming that I am a man?

Barack Obama, our first (soi-disant) Pacific President, has just been lectured by the Premier of  Communist China about the need for fiscal discipline at home.  Earlier in the year, Tim Geithner, our Treasury Secretary, was laughed at when he assured his normally polite Chinese audience that the American dollar is strong and they need not worry about the yuan value of all their investments in America.  Meantime, we accuse China of willfully poisoning our pets as well as our people.  Its exports, we say, rob the United States of jobs, and the government should take steps to restrict them. “There are at least two sides to each story, but no such thing as a free lunch” is the prosaic and American equivalent of Chuang Tzu’s iconic Taoist dream about a butterfly.

Here’s one side of the story, the familiar one that occasions such righteous outrage.  For the first three quarters of 2009, the US balance of trade with China was $165,801 million in the hole.    September was the worst month of the period.  So much for recession at least healing trade-deficit wounds. “But China, too, is experiencing recession – it’s worldwide!” you protest? Think again.  According to today’s TradingEconomics Global Economics Research, China’s economy is growing at an 8.90% clip, with unemployment a mere 4.30% and interest rates a relatively hefty 5.31%.

How many butterflies should we feel fluttering in our tummies here?   Not so very many as regards trade with China.  Very many as regards our domestic situation.

Here’s a second perspective.  What goes out the trade window must be held as cash or returned through the capital account.  It’s great to exchange real goods for paper, and saving and investing in our country help finance our debt and increase labor productivity. By June 2006, Chinese foreign exchange reserves totaled $699 billion, making China second only to Japan as foreign holders of U.S. securities like stocks and Treasury, U.S. agency and corporate debt. This year, China is our government’s largest foreign creditor.  If China didn’t purchase our debt, our interest rates would be much higher, thus increasing the burden of debt finance (already the fourth highest component of federal spending) and decreasing private investment, the source of most gains in productivity. While we worry what would happen if China pulled out, Premier Wen Jiabao has already voiced his country’s concern about what will happen to the dollar and therefore this trillion-dollar investment if we continue feckless government spending.

We’re in this together.  The economic benefits from trade, it seems, are as mutual as the vulnerabilities.  With its high savings rate – an estimated 39.7% of household disposable income for the last full year, China’s domestic prosperity depends on employment and income generated by American demand. America benefits from cheaper products and lower interest rates that make our national debt less expensive to finance and reduce its crowding out of private investment.

We must also be political partners in tackling the threats of North Korea and Iran.   Diversified as it is, US trade with China has created a vested interest in peace and facilitates the unconscious export of American values.   We should not underestimate the potential value of our under-the-radar cultural soft power in the transformation of China away from authoritarianism.  Our surest path to peace and prosperity may just be “Made with China.”

“While we need to do everything in the short term to get our economy moving again, we must recognize that having inherited a trillion dollar deficit, we need to begin restoring fiscal discipline and taming our exploding deficits over the long term.”

But when do we actually begin this process? Since January, we have seen a ballooning of government spending, the stimulus package, health care “reform” and numerous banking and corporate bailouts. Our government, which forecasted 10-year budget deficits of $7 trillion in January, now tells us it is likely more on the order of $9 trillion. The federal deficit for fiscal year 2009 is now estimated at a jaw dropping $1.42 trillion, the highest level since World War II. October’s deficit is estimated at $177.4 billion. Left unchecked, deficit spending and increasing national debt will stifle further economic growth and prosperity.

Deficit spending matters. Here’s why. Not since 1835, under President Andrew Jackson, has the United States government been able to claim both a balanced budget and all national debt paid in full. Each year since, and regardless of whether controlled by Democrats or Republicans, Congress has spent more money than it takes in, resulting in a budget deficit and an addition to the national debt. It has covered the shortfall by borrowing, largely through the sale of various types of government securities (US government debt instruments). The government has to pay interest on this debt. Interest on our national debt is now the fourth largest expenditure in the budget, exceeded only by Defense, Social Security and Medicare spending. In fiscal year 2008, $451 billion went to interest payments on the nation’s debt. Interest payments on debt equate to approximately $40,000 for every man, woman and child in this country.

If these facts weren’t troubling enough, here’s another gem that should cause every American concern. Gross Debt (which is defined as national debt plus all intra-governmental debt such as the Social Security Trust Fund) has increased from 33% in 1980 to 58% in 2000 as a percent of Gross Domestic Product (GDP). The current projection, likely to increase as these things often do, is that Gross Debt will be 98.1 % of GDP in 2010. This is a fiscally unsustainable path. Eventually, we will have to choose between dramatic spending cuts, unprecedented tax increases, or bankruptcy.

These deficits and the growth in national debt harm the economy when they do not stimulate the economy or when they reduce private investment. A “crowding out” effect takes place as private investment spending decreases in response to the increase in government borrowing. This has the obvious effect of stymieing economic growth. Permanent economic growth is only achieved in the private sector. While targeted government spending may stimulate the economy in the short term, it will not result in permanent increases in growth or employment. Take for example the American Recovery and Reinvestment Act (ARRA) of 2009. In testimony to Congress on October 22, 2009, Christine Roemer, Chair of the Council of Economic Advisors, noted that, of the stimulus “spent” through September, 2009, one third of the expenditures was for state fiscal relief ($43.8 billion) and one third was direct government spending ($40.4 billion to directly impacted individuals in the form of unemployment benefits, food stamps and hot-lunch programs). These payments will not result in permanent growth to the economy. These payments, particularly those to “bail out” state government deficits, do not create permanent jobs; they simply stop the hemorrhaging and postpone the program cuts that are likely necessary.

It’s one thing to have our national debt backed or financed by our own citizens; it’s quite another to have it held by foreign governments. Our deficit spending appetites have exploded so dramatically that increasingly the US government has had to look outside our borders for debt financing. Foreign governments, who held 13 % of our total debt in 1998, held 25% of our total debt in 2007. What is most troubling about this development is that foreign (or external) debt represents a net reduction in the resources that are available to grow consumption in the United States, and thus grow the economy. External or foreign debt is expected to grow as long as foreign governments continue to have confidence in the United States economy. Bottom line, as a nation, we are becoming more dependent on foreign governments for our economic welfare, and often these nations neither share our goals nor have our best national interests at heart.

Increasingly, foreign debt-holders, such as China and Japan, are weary of our government’s spending appetite. If these governments feel less secure about our prospects, they will lose faith in our economy and demand higher returns (interest rates) to buy our debt. Higher interest rates mean that we will each have a higher burden to pay off the debt and less money to invest or save in order to achieve future economic growth. Simply stated, more and more of our resources will be directed to pay interest obligations, never mind trying to pay down debt. And what happens if these nations decide that the United States is not a good bet, no matter what the return? They will no longer buy our debt. The result is equivalent to bankruptcy, pure and simple.

Our staggering national debt threatens our standard of living, now and in the future. Not only are we are on the verge of enslaving our own generation, but we also put the economic well being of our children and grandchildren at risk. Moreover, our inability to make hard choices and confront our spending demons, our ballooning deficits, indeed our national debt, makes this not just an American problem but a global problem as well. The United States economy has been the engine driving the prosperity of many other nations. History will not be kind to us unless we recognize the financial peril we face and take resolute action now that is worthy of the great nation we are.