Escaping wall-to-wall fiscal cliff headlines is a full-time job. The media constantly tells us we cannot sleep until we solve the crisis, which, of course, puts people to sleep.
If we go over the fiscal cliff, we lose $600 billion in spending we can’t afford and we increase taxes that should have been raised a long time ago. One reason the situation has come to this is that politicians don’t like to talk about taxes, except to use them the way a matador uses a red cape.
The fiscal cliff, while serious, is a short-term problem. The real cliff is America’s addiction to debt. The average American household’s share of the national debt is now about $137,000. This is an epic, generational tale, while the fiscal cliff is a short story.
In fiscal 2012, the federal government spent about $3.5 trillion, or about 23 percent of gross domestic product. It collected revenues of about $2.4 trillion, or 16 percent of GDP. The resulting $1.1 trillion shortfall marked the fourth year in a row the deficit exceeded $1 trillion.
The federal government borrowed about 30 cents of every dollar it spent. As the late U.S. Sen. Everett Dirksen said, “A billion here, a billion there, and pretty soon you’re talking about real money.” Today, substitute trillion.
By the end of fiscal 2012, total government debt was more than $16 trillion and growing feverishly. Our GDP, the value of goods and services produced in the United States each year, is about $15.7 trillion. The ratio of debt to GDP is a measure of our production and ability to service the debt.
The federal debt as a percentage of GDP is at the highest level since the end of World War II. It has increased from 35 percent in the 1990s to over 100 percent, which means our debt is now bigger than the entire economy.
To make matters worse, it is estimated that our total unfunded liabilities are north of $60 trillion. Medicare and Social Security alone make up 75 percent of these liabilities. In the near future Medicare, Medicaid, Social Security, and interest payments will consume all available revenue.
Needless to say, this kind of debt results in some scary interest payments. Despite the lowest interest rates in 200 years, America will spend around $220 billion on net interest on its debt in 2012, money that can’t be spent on other priorities.
If the debt problem is not addressed, annual interest payments are expected to top $1 trillion by 2020. Each point interest rates go up increases the payments by at least $150 billion per year.
If interest rates return to their historic average of about 6 percent, interest on the national debt will likely be the largest line item in the federal budget by 2020. It would slow economic growth, reduce our standard of living, displace other government priorities, require future generations to pay for current government spending and reduce our ability to respond to future crises.
In the long run, a growing federal debt is like driving with the emergency brake on, slowing an economy that already can’t get out of first gear. We will take on the economic profile of a third world country: a few rich folks at the top, scarcely any middle class and a vast peasantry.
With all their posturing, Washington political leaders have spent 90 percent of their time talking about less than 10percent of the real problem: the mounting level of debt. With all the talk about taxes on both sides, the new revenue would only address 5 percent of the problem.
We need comprehensive spending and tax reforms that are crafted to encourage economic growth. To do otherwise is sheer masochism. After all, our economy is what keeps America strong.
We must also keep in mind that leaders don’t lead without the consent of the governed. It may be, as Shakespeare’s Cassius said, that the fault lies not in the stars but in ourselves.
originally published: December 15, 2012