02/01/10 New York, New York – Those of you who are parents (and I’m a parent) may want to reject out of hand the idea that we are in effect stealing from our children’s future and bequeathing to them a far less prosperous life. But if we don’t begin to address our fiscal challenges soon, it’s only a matter of time before the consequences begin to show up, most likely starting with higher interest rates. As things get worse, our children will slowly see their living standards decline. We can still prevent these things from happening. The ultimate goal of cleaning up our fiscal policy is not to avoid a recession or even to balance the budget per se – it’s to pass on the kind of healthy, vibrant nation that we inherited.
It’s easy to fall back on generalities – that America is a great country, and that we always rise to great challenges and will do so again. True, but we can only succeed by taking action, and we have a lot of action to take. Let’s say we do take only small steps to address our fiscal crisis. Let’s say we stop cutting taxes, but we don’t increase them radically either. Let’s say our government continues to take in about the same level of historical revenues, but we hold discretionary spending to 2008 levels as a percentage of the economy, and we don’t expand health care or other entitlements any further. That sounds pretty benign, but it’s actually a disaster scenario for our children.
Let’s take the example of kids born in early 2000, when our national budget was in balance and the technology-powered future seemed bright.
During the first eight years of their lives, we have learned, the nation’s financial hole grew by 176 percent to $56.4 trillion. And the number is not standing still. That was its size as of September 30, 2008 – before the official declaration of a recession, before the significant market declines of October 2008, and before the big stimulus and bailout bills designed to jump-start the economy and address our immediate financial crisis. In fiscal 2007, recall, our budget deficit was $161 billion, or 1.2 percent of the economy. By 2009, the deficit soared to $1.42 trillion, which is about 9.9 percent of the economy. Just think about that for a second. Our federal deficit grew by almost nine times in the past two fiscal years!
Given our scenario – no benefit cuts, no tax hikes – the government would have to finance this gaping hole mainly by borrowing money from domestic and foreign investors, with interest. Don’t forget, according to the GAO’s latest long-range budget simulation, even without an increase in overall interest rates, our interest payments would become the largest single expenditure in the federal budget in about twelve years. And what do we get for that interest?
Nothing!
Of course, something will have to give before we get to that point. However, the government has overpromised and underdelivered for far too long. How can we fix things? Will we cut benefits, those mandatory payments that are chiseled into law? Or will we raise taxes to onerous levels? We will probably have to do some combination of both. That is, we will have to renegotiate the social contract with our fellow citizens and raise taxes. However we do that, our kids will pay the price. And the bigger the bill we pass on to them, the bleaker the future we will bequeath to them.
Let’s assume that Washington policy makers continue to punt on making tough spending choices and ultimately raise taxes to address the growing deficits. Nobody will reach in our kids’ pockets and take their money because the government will take it before it even reaches their pockets. What will that mean for their after-tax income? Right now, on average, Americans pay about 21percent of their income in federal taxes and another 10 percent to state and local governments. By 2030, to pay our rising bills, that amount could be at least 45 percent – higher even than the average 42 percent that most Europeans pay. By 2040, it would be at least 53 percent and climbing. In reality, total taxes in 2030 and 2040 would be even higher than these estimates because of the fiscal challenges facing state and local governments – such as Medicaid costs, unfunded retiree health care promises, underfunded pension plans, deferred maintenance and other critical infrastructure needs, and higher education funding.
With reductions in disposable income like that, the children of 2000 will inherit a much different kind of America in 2030. That’s when they will be turning thirty, entering their most productive years.
So much of their money will be devoted to keeping the government afloat that they’ll have relatively little for everything else in life. Their homes will be smaller and drabber. There will be less to spend for cars, vacations, dinners out, and big TV sets, all of which their parents took for granted. They’ll still read about the consumer society and conspicuous consumption, but mainly in history texts. Maybe it’s a good idea for America to become less materialistic – but the idea should be to give our children that choice, not to impoverish them.
Regards,
David Walker,
for The Daily Reckoning
Sign Up for The Daily Reckoning e-letter and receive a copy of Bill Bonner's The Trade of The Decade report… at NO CHARGE.
We Value Your Privacy.
ShareThis
Yeah maybe, but I have been reading this same article since about 1980 and guess what, here it is 30 years later and really nothing has changed. Why should I believe it’s going to get worse down the road, when all the predictions of gloom and doom and leaving behind a failing legacy to our children, have turned out to be wrong?
Huh. This same article has actually been true for that long, too. We’ve been running on credit, which is in the process of being cut off. Older folks are starting to cash in on their government promises. This will end at some point, with a collapse, a major war, or both. It might take another 20 or 30 years…but the point here is that it will happen within the life spans of our kids. What a great legacy.
All this forgets one thing. What do we owe to our seniors.
Since Social Security’s inception, seniors have paid in about $7 trillion more than has been paid out. There was supposed to be a trust fund where the excess was put in government bonds to earn interest. Instead the government stole it. Now seniors are supposed to get less because there is no money left. In fact this year and next social security recipients get no increase to offset inflation while government employees get their raises.
If the government can give $ trillions to the New York banks it can replace the $trillions (plus interest) it stole from seniors so the trust fund can be earning interest and eliminate the problems with social security.
For the entire first sentence I thought he was suggesting that we reject the idea that we are stealing from our children’s future. To the author, you should never use ‘but’ to negate the meaning of an entire sentence. It is just not clear in writing or any other communication. Get rid of the buts. I call it ‘but-speak’. Think like a parent listening to a kid making excuses, it’s always “but.. but… but.. but… but”. Every annoyed parent knows, “here comes the but”.
The real source of the problem is representative government. The people themselves would have never voted such financial insanity, but representatives would and did. Lets face reality here. There is no way our debt is going to be paid back ever. Representative government is going to crash and burn. Governments come and go, but the people will still be here. Better learn to hide your cash from well intentioned representatives, as one thing is clear. They will want it. Gold is easy to hide and can survive even representative governments crashing.