Upon taking the oath of office, however, President Obama abandoned all pretense of opposing massive deficits, debt, and borrowing. In a series of moves that stunned and rattled the nation, President Obama nearly tripled the national debt in just his first three years in office.
• The federal debt stood at $5.8 trillion at the end of 2008.[210]
• The federal debt hit a record $15.11 trillion on December 1, 2011.[211]
• In 2011, our debt-to-GDP ratio was a staggering 100 percent—that is, in 2011 the United States owed as much money as our entire national economic output was in 2010.[212]
• The national debt grew about $3 million a minute in 2011.[213]
How Much Is a Trillion?
The concept of going more than $15 trillion—that’s trillion, with a t—into debt with no end in sight is hard for most Americans to grasp. It is certainly hard for me to get my mind around.
Maybe this will help. According to an interesting website called DefeatTheDebt.com:
• If we were to pay one dollar every second of every hour of every day of every month to pay down our national debt, it would take us almost 32,000 years just to pay off $1 trillion; to pay off $14 trillion would take more than 443,000 years.[214]
• If we were to spend $10 million a day to pay down our national debt, it would take us about 273 years to get to $1 trillion—so it would take us about 3,822 years to pay off $14 trillion.[215]
• One trillion is more than the number of stars in the Milky Way.[216]
• It would take more than ten thousand 18-wheelers to transport one trillion $1 bills. Our national debt today would fill up 30 of the largest container ships ever constructed, each holding more than 4,100 containers full of cash.[217]
• Fifteen trillion $1 bills, laid end to end and side to side, would pave every interstate, highway, and country road in America—twice—with a good amount left over.[218]
America’s Debt Crisis: Going from Bad to Worse
President Obama, his senior advisors, and his allies in Congress argued that all their spending and borrowing would stimulate the economy, create new jobs, and drive down the unemployment rate. Obama increased discretionary federal spending—that is, nonessential government spending, not including Social Security, Medicare, Medicaid, or defense spending—by 84 percent with just his first two budgets and his “stimulus” spending bill. The Environmental Protection Agency budget, for example, rose 131 percent in the first two years of the Obama administration. The Department of Energy budget rose 170 percent. The Department of Commerce budget rose 219 percent. The Transportation Department budget rose a stunning 547 percent.[219]
Unfortunately, despite good intentions to get the private economy growing again and to create millions of new private-sector jobs, the Obama administration’s efforts accomplished neither of these goals. Rather, unemployment stayed painfully high. Bankruptcies continued at record rates, as did foreclosures. Economic growth sputtered. The markets around the world were rattled by Washington’s runaway spending and borrowing train. Then, in August 2011, Standard & Poor’s credit rating agency announced that it was downgrading the U.S. credit rating from a triple-A score to a double-A score for the first time since America was given the highest possible credit ranking in 1917.[220] The Washington Post reported that the move dealt “a symbolic blow to the world’s economic superpower in what was a sharply worded critique of the American political system.”[221]
The Moody’s credit rating agency did not choose to downgrade the U.S. credit rating at the time. However, the agency sent a strong signal that the federal government would have to drive the debt-to-GDP ratio down to 73 percent by 2015 in order to maintain America’s triple-A credit rating.[222]
It is going to be very difficult, however, to bring the debt-to-GDP ratio down without dramatic changes to the way Washington does business. If we stay on the current spending and borrowing path, the Congressional Budget Office projects the total U.S. national debt will explode to nearly $25 trillion by 2020.[223]
Twenty-five trillion dollars of debt is beyond most people’s comprehension. Yet as horrifying as that number is, it may actually be too conservative an estimate of the catastrophic level of debt that is coming our way.
Why? Two words: Unfunded liabilities.
The Threat Ahead
Over the years, politicians in Washington have made promises to pay the American people certain benefits when they retire or become too sick or disabled to work. Other politicians have then come along and promised to be even more generous than those who made the original promises. It all might have seemed like a good idea decades ago when America’s economy was booming and there were more than enough able-bodied workers paying small amounts of taxes to cover the promises the government made to their parents and grandparents.
Now the bills are rapidly coming due, and the fact is we don’t have nearly enough money to keep the lavish promises made by politicians who have long since retired or passed away. The term unfunded liability refers to financial promises made by politicians who never actually set aside any money to pay those bills.
Congressman Paul Ryan has described just how enormous these unfunded liabilities really are. “Medicare faces the daunting demographic challenge of supporting the baby boomers as they retire. But its much larger problem is that of medical costs, which are rising at roughly double the rate of growth in the economy,” Ryan warned. “Today Medicare has an unfunded liability of $38 trillion over the next seventy-five years. This means that the federal government would have to set aside $38 trillion today to cover future benefits for the three generations of Americans: retirees, workers, and children. This translates to a burden of about $335,350 per U.S. household. Moreover, the problem worsens rapidly. . . . By 2014, Medicare’s unfunded liability is projected to grow to $52 trillion—or about $458,900 per household.”[224]
Take a moment to consider the magnitude of those facts:
• At the moment, Medicare has made promises to the American people that cost $38 trillion—more than politicians have set aside to pay for those promises.
• But because some 80 million baby boomers will soon begin to retire, in less than five years Medicare will cost American taxpayers $52 trillion.
• To put it another way, each and every American household would have to pay the federal government more than $450,000 to cover our Medicare promises.
If you’re thinking, “That’s impossible!” you’re right.
Unfortunately, it gets worse. These, after all, are “only” the coming costs of Medicare. We haven’t even talked about Social Security yet. “When Social Security and Medicare are taken together,” Congressman Ryan warned, “the total unfunded liability . . . will grow to $57 trillion, or $500,414 per household.”[225]
Social Security was originally created in the 1930s with the idea that many workers would help pay for relatively few retirees, but that is no longer the case. In 1945, an average of 41.9 workers paid taxes to cover the benefits of every retiree. By 1980, there was an average of only 3.2 workers paying taxes to cover the benefits of every retiree. By 2020, only 2.4 workers will be paying payroll taxes to cover the benefits of each retiree.[226]
How did this happen? The architects of Social Security did not foresee two critical developments. First, as Americans became wealthier, they generally stopped having as many children as they did in the early- to mid-1900s. This meant that there were now fewer children growing up, becoming educated, and becoming productive workers who were able to pay taxes to adequately cover the benefits of their parents and grandparents. Second, Americans have aborted more than 53 million children since 1973.[227] As morally unconscionable as abortion is in its own right—something we will discuss in an upcoming chapter precisely because it is a terrible national failure—the abortion issue is also coming back to haunt the economy in ways its proponents likely did not anticipate. Those 53 million murdered American citizens are not working. They are not paying taxes. They are not h
elping to care for their parents and grandparents in their retirement years, and the day of reckoning—fiscally speaking, at least—is quickly approaching.
For years Washington has been collecting a bit more Social Security payroll tax revenues than it needed to pay out in benefits. But rather than putting those surpluses in an interest-bearing account from which funds could be withdrawn when those estimated 80 million baby boomers began to retire, Washington has been spending (some would say wasting) those surpluses, throwing the equivalent of IOUs into the proverbial piggy bank. Now time has run out. The baby boomers are starting to retire. In 2010, Social Security began paying out more in benefits than it collected in taxes, and this will accelerate as these unfunded liabilities come due.[228]
A Cruel Choice: Raising Taxes or Slashing Benefits
The truth is painful, but here it is: there is absolutely no way Washington can keep these promises without raising taxes beyond what we could bear.
Let’s be specific. The Heritage Foundation, one of the leading public-policy think tanks in Washington, published a study in 2010 analyzing how these government promises would have to be kept if the politicians decided to raise taxes. The results were chilling. To pay for all of Social Security and Medicare’s unfunded liabilities alone (not to mention covering the cost of Medicaid, national defense, and the rest of the government), the federal corporate tax rate would have to be raised from 35 percent today to 88 percent. Considering that many American businesses are already gasping for economic oxygen, such a massive tax increase would amount to financial suicide. Top marginal federal tax rates on the wealthiest Americans would also have to be raised from 35 percent to 88 percent. Nor would middle-income Americans escape a massive tax increase. Rather, they would see their federal tax rates skyrocket from 25 percent to 63 percent.[229]
America could never remain the world’s economic leader with federal tax rates this high. Our economy is already struggling with the current level of taxes, spending, and debt. To double or triple tax rates would cause an already-sputtering economy to stall and then implode.
Of course, rather than raise taxes sky-high, Washington could slash benefits. Yet a Heritage Foundation study found that by 2037, presumably even with some modest tax increases, Social Security benefits would have to be gutted by some 22 percent in order for Washington to be able to cover its costs.[230] Given that Social Security payments are difficult to live on to begin with, these would be extremely painful cuts and unlikely to pass a future Congress.
What other options would Washington have besides raising taxes or slashing benefits? Politicians could print or borrow the money. These, too, would have disastrous results, however. Printing more money would devalue each dollar currently in circulation. This would create inflation. Prices for food, housing, energy, and other staples of American society would skyrocket, further harming American families and suffocating the American economy. Borrowing trillions of dollars would deeply exacerbate the debt crisis and put America’s standard of living and our national security in increasing jeopardy, as Washington would no longer be able to afford the size and sophistication of a military capable of defending our interests at home or our values overseas. One also has to consider whether other nations would actually lend us so many trillions, or whether they would conclude that America is no longer a good credit risk and allow us to implode.
As Congressman Ryan noted in his report, “The effect on personal standards of living will be devastating, and it will be felt as those born today are completing college and beginning their careers. By 2050, workers and families will begin seeing the growth in their wages and incomes erode. Standards of living will begin to stagnate and then decline in real terms. By 2058, the economy enters a free fall, beyond which the catastrophe cannot be measured: CBO cannot model the impact because debt rises to levels the economy cannot support.”[231]
The Road to Reform . . . ?
Some experts and think tanks believe there is still time to turn things around. At least two have laid out detailed reform plans worth considering.
Congressman Paul Ryan has developed his “Roadmap for America’s Future.” This detailed legislative proposal cuts tax rates and simplifies the tax code to reignite economic growth. It cuts and restrains federal spending. It reforms Social Security and Medicare in ways that protect the existing system for current retirees and those close to retirement while also improving the system for younger workers. For example, Ryan proposes the retirement age be gradually and incrementally increased from sixty-five years old to seventy years old, since people are living and working longer. He also proposes that younger workers can invest some of their current payroll taxes into tax-free personal retirement accounts that permit low-risk investments in mutual funds and annuities. The Ryan plan also includes specific details to balance the budget and reduce federal debt—all, presumably, before an implosion of the American economy occurs.[232]
The Heritage Foundation has also released a very detailed reform plan. It’s called “Saving the American Dream: The Heritage Plan to Fix the Debt, Cut Spending, and Restore Prosperity.” While the principles are similar to Congressman Ryan’s plan, some of the specifics are different. Both plans call for fully repealing “ObamaCare,” and both create personal retirement accounts within the Social Security system for younger workers. However, while the Ryan plan calls for simplifying the federal tax code from its current six marginal tax brackets down to just two (a 10 percent rate and a 25 percent rate), the Heritage plan calls for a single flat tax rate (not yet determined). Whereas the Ryan plan would hold spending at 19 percent of GDP, the Heritage plan would restrain spending to 18.5 percent of GDP.
The Heritage plan was designed to balance the federal budget by 2021 and reduce the national debt to 30 percent of GDP by 2035. By contrast, because the Ryan plan phases in some of the reforms more gradually than the Heritage plan does, the “Roadmap” does not bring the federal budget into balance until after 2055. That may seem like a long time—and it is—but the Ryan plan should be compared not only with the Heritage plan but more importantly with the fact that President Obama has not laid out a reform plan of his own. Under the current trajectory, the Congressional Budget Office projects deficits as far as the eye can see through the twenty-first century. Without significant changes, the budget will never be balanced in our lifetimes. Worse, the CBO indicates that the national debt will hit a horrifying 185 percent of GDP by 2035.[233]
Overall, the Heritage plan is much bolder than the Ryan plan, but there are various policy and political challenges to both. What remains to be seen is whether the American people have the stomach for either plan or a variation of one of them. The point is not that one plan is necessarily better than the other. The point I want to make here is that there are at least two serious, credible plans on the table right now that show us in specific ways how we can boost economic growth, create more jobs, reform our entitlement systems, and get ourselves back on the road to fiscal sanity before we implode. Perhaps others will develop bold, creative, and compassionate plans that will improve upon what Congressman Ryan and the Heritage Foundation have offered. I hope so. The more serious ideas in the mix, the better. There is still a way out of this mess, and that is good news, but the window to get started on such reforms is rapidly closing.
. . . Or the Road to Ruin?
If we don’t make desperately needed reforms, then we are most certainly on the path to ruin. Indeed, we could be on the road to Greece.
“America is on the road to re-creating Greece’s recent debt crisis,” noted business magazine Barron’s in a 2011 issue. “If a country as small and removed as Greece could generate the tremors that it did in the past year, how much worse would a national debt crisis be in the world’s largest economy?”[234]
The article notes that “Greece, the world’s 27th-largest economy, is a minor player, even in the European Union. Yet a budget deficit of 13.6 percent of gross domestic product spiked its overall debt to 115 percent o
f GDP. Its debt fell to junk status, and it stood on the edge of bankruptcy. Only the massive May 2010 bailout by the European Union and the International Monetary Fund pulled it back from the brink.”[235]
Citing sobering data from the Congressional Budget Office, Barron’s warned, “If you think debt problems like Greece’s can’t happen here, think again. . . . [Soon], U.S. debt will hit 132 percent of GDP—well above Greece’s 115 percent. Government spending will consume almost one-third of everything America produces—a level only reached at the height of World War II. Even raising taxes to their greatest ratio to the economy in America’s history wouldn’t offset the automatic spending machine. . . . Washington is on the road to Greece.”[236]
Bottom Line
America in 2012 owes more than $15 trillion to a range of creditors, many in foreign countries, including Communist China.
That’s bad enough, but it gets worse.
Most Americans don’t even realize that we owe another $57 trillion to cover a range of “unfunded liabilities,” including Social Security, Medicare, and Medicaid benefits. America’s most respected financial experts—both Republicans and Democrats—are warning us that such staggering levels of current and coming debt could trigger an economic implosion unless we rapidly and courageously make fundamental and sweeping reforms. The good news is that at least two detailed and compelling reforms have been proposed.
Implosion: Can America Recover From Its Economic and Spiritual Challenges in Time? Page 14
