Assessing the disease by the wrong symptoms
I’ve seen the advertising for this documentary but today I finally had a chance to sit down and watch a 30-minute condensed version of a movie that claims to make our national debt and unfunded liabilities more understandable. It’s called I.O.U.S.A. and was bankrolled by a fairly new group called the Peter G. Peterson Foundation. Peterson is a longtime fixture in both the financial and political worlds whose most public role was as Secretary of Commerce in the Nixon Administration.
This half-hour snippet does a good job of explaining where the liabilities come from but maybe suffers from a bit of amnesiac history. If you have the time, check it out and I’ll tell you what I think.
Oh come on. You should have known by now that I was going to tell you what I thought regardless of whether you watched or not. I’m sure the Peterson Foundation people would have enjoyed your viewership though because they do address a serious and growing problem.
However, I take exception to where much of their blame is affixed. In this segment they blame both the Reagan and Bush 43 tax cuts for rapidly growing the debt, while praising President Clinton for balancing the budget. Perhaps that’s not completely a surprise given Peterson’s work for a relatively moderate Republican President (those my age may recall the wage and price freeze Nixon implemented in an unsuccessful attempt to address inflation) and his bipartisan political donation pattern, which tends to favor the most centrist of Republicans.
My contention though is that, because these tax cuts actually increased revenue, the problem doesn’t lie with that aspect of federal finances. It’s glossed over somewhat in the short version of the movie (perhaps the full version takes a longer look at the issue) but entitlements are already accounting for a full third of our current budget and it’s claimed by 2030 the entire budget could be swallowed up by entitlements and debt service unless the revenue stream is increased. I.O.U.S.A. also states that the tax burden we face would need to double to account for the $53 trillion in unfunded liabilities we owe, most of which lies in Social Security and Medicare.
We’ve had numerous warnings about the fate of Social Security stretching back decades. Many are the Congresses who say they’ve come up with a “fix” to the problem, generally through increasing the FICA tax bite, extending the age of eligibility for full benefits, or a combination of both. The reality is that as people live longer they extend their period of receiving those checks each month, and what was originally billed as old age insurance will within a decade put out more in benefits than is taken in through payroll taxes. Needless to say, however, Social Security still is a “third rail” of politics – witness the outcry by the Democrats and their allies at the AARP earlier this decade when privatizing a small portion of worker contributions was placed on the table for discussion.
Similarly, Medicare has a large voter base who shrieks anytime they perceive a threat to the entitlements they believe are owed to them. It’s my contention that one major mistake the outgoing Bush Administration made was adding the Part D benefits to Medicare – it’s another pot of money which isn’t infinite but those who receive the benefits generally think of as something else they’re owed. With both Medicare and Social Security, the federal treasury is looted in ways the Founders would have thought to be quite unseemly. On the other hand, those who have come to depend on these programs have a point that they trusted Washington to provide these services in their old age as they’ve been promised since the day they began working and contributing.
The movie is somewhat better on issues of trade and a lack of personal savings but spends too little time in this version talking about them. The producers correctly note that much of our trade deficit comes with countries who also hold a large portion of our debt, making financial warfare a possibility. (Most noteworthy is that these creditor nations produce the oil we use and manufacture the goods we buy. Both of these were once achieved on our own shores not all that long ago, and can still be if we put our minds and policies to it.) And as we’ve all come to find out, the lack of savings and a overly consumption-based way of life may have placed Americans in an unsustainable long-term position insofar as growing the economy goes. Unfortunately, it’s quite possible that those who most benefit from the recently-passed federal bailout on a personal level are the ones who need most to learn the lessons about savings and not living beyond their means. Instead they’ll be granted yet another chance to live high on the hog by an entity who has managed to do so for most of the last several decades, one which refuses to learn that lesson itself but has the huge advantage of being able to print money.
While I.O.U.S.A. has a very valid point, its flaw comes in analyzing the root causes incorrectly. The federal government is shouldering its debt because those in charge of it lost sight of the proper, Constitutional role of government and decided instead to lubricate the gears of perpetual re-election and political power by taking from those who produce and giving to those who don’t. It’s not the President who creates the budget and authorizes appropriations, but Congress. Part of what irked me about their presentation of the debt in recent years is that they castigated President Reagan’s tax cuts for adding to the deficit when the Democrats in Congress wrote Reagan-era budgets, but praised Clinton’s balancing the budget when it was the most conservative series of Congresses in the last 50 years (with Newt Gingrich as Speaker) who put together those budgets.
What frightens me most about the doomsday scenario of this movie most is that those who America recently put in charge will likely do little or nothing about the root causes of the problem but instead patch it up with another Band-Aid solution, or worse yet go about business as if nothing’s wrong.
The trick for those of us on the conservative side who wish to actually reduce the size of government and tackle this ticking financial time bomb is to do so in a manner which doesn’t affect the benefits of those who receive them but slowly weans those in my generation (I’m 44) and beyond away from the line of thinking that the federal government can be a cradle-to-grave provider. Personally I’d like to see the two largest entitlement programs sunsetted but I know it’s not a political possibility until the necessary change in attitude among the public at-large occurs, a change that may not occur for another generation or two.
But change it must, otherwise the financial pain our grandchildren face may be too enormous to bear in a free society.
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