Surprising Causes of Our Budget Crisis
As I have watched America’s deficits swell since the beginning of this Great Recession, the numbers haven’t added up for me. How could our country’s budget swing from a surplus of $300 billion in 2000 to a deficit of 1.4 trillion dollars in 2011? I searched for straight answers, and found some surprising conclusions.
As the banking fiasco rapidly created a crisis that crushed millions of American families, I first imagined it was the huge bailouts so pilloried by the media that must has caused the deficits. It turns out the bailouts have little to do with our current deficits. Even though our debt has ballooned from $5.7 trillion to $14.7 trillion since 2000, short term interest rates have fallen due to the worldwide recession, resulting in only a minor increase in interest payments of $11 billion. Frighteningly, the impact of Wall Street’s misdeeds has not even begun to directly affect the budget yet. When the effects of Wall Street finally hit Main Street, we may likely see the deficit double!
Of course, I thought the horrific loss of jobs resulting from the collapse of credit in the banking debacle must be a major cause of our deficit. Certainly, it has significantly harmed our country, not only financially but psychologically as well. However, the combined costs of $74 billion to fund unemployment and housing along with the additional $70 billion in federal income taxes lost from reduced employment would only place a sizable dent in the $1.4 trillion dollar deficit.
As the recession slowly dragged on without a Congressional focus on jobs, I like many Americans, frustratingly tried to follow the partisan bickering regarding extending the Bush tax cuts for the wealthy. While letting them expire would have helped the deficit, all that political maneuvering for votes would have forced the wealthy to contribute a mere $31 billion more, certainly not attacking the root cause of our country’s predicament. And the recent Congressional compromise on cutting $38 billion in discretionary spending, well it cut into a portion of the budget that had only climbed $18 billion over the ten years.
No it turns out that these more publicly scrutinized areas of debate are not where America should focus its attention if we are to solve our dilemma. While this debt crisis has given cover for political maneuvering inside the beltway, our deficit is largely the victim of four deadly horsemen that have trodden upon America with combined and simultaneous force; military escalation, demographic shifts, healthcare inflation, and the expansion of the Great Society.
With the addition of the Iraq and Afghanistan wars, our military budget surged from $378 billion to $730 billion, representing over half our discretionary spending and dwarfing our next largest discretionary budget line item cost of $107 billion for education. Our nation spends more on military than all other nations on Earth combined. We have over 700 bases actively policing the world, some in regions that are no longer at risk of attack post cold war. We have over three hundred U.S. bases and numerous weapons development projects, many that have been criticized for expending budget purely for the benefit of propping up local economies. With our budget crisis threatening to take down America’s hegemony, our military should now propose more than its minimally stated goals of budget reduction.
Over the last several years, a major cost driver has been the shifting of our baby boomers from wage earners to retirees. From 2000 to the present, the ranks of the over 65 population have grown 15% compared to a population increase of 9%. During that same time period, social security payments increased 46% and Medicare increased 96%, both increasing at rates that are severely unsustainable. The combined cost to support our seniors has grown from $806 billion to $1289 billion, a 60 % increase. Over the next 12 years, the senior baby boomer population will bulge another 30% while the working population to support them will drop 10%, significantly exacerbating an exponentially growing problem. Our under 13 year old population has actually decreased in the past ten years. Without an aggressive immigration policy that brings the best and brightest into America, our Ponzi system of entitlements will ultimately fail at a point in the not too distant future.
Our aging population is right to be concerned for their security as they retire. They have partially contributed to their entitlements and should expect to benefit from years of contributions. However, America cannot sustain current projections of costs to maintain our aging population. Having failed to save for this known event, our federal government must collectively approach our seniors with hat in hand to apologize. However, if we fail to significantly and quickly reform Medicare and Social Security, we do so at our nation’s peril.
Whether it involves taking care of our elderly through Medicare, our less fortunate through Medicaid, or our returning veterans, health care costs are our single largest budget item and they are escalating out of control. We all have experienced inordinately inflating health care premiums and this segment of our public trust is no different, with costs surging from $486 billion to $943 billion since 2000.
Congress was right to attempt to solve the single line item that most threatens to bankrupt our country as baby boomers race toward retirement. However, many Americans have questioned whether Congress lost its way. With over half our nation’s debt now held by foreign countries, it seems to many Americans that Congress is gambling with America’s sovereignty while attempting to simultaneously and rapidly expand coverage to all Americans.
Expansion of the Great Society:
Since the 1970’s, nearly half of our nation’s $15 trillion debt has been incurred to fund an expansion of programs to help our fellow citizens. I was surprised to see that recent expansion of programs greatly expanded our deficits at a time that our debt is reaching crisis proportions. Including means testing entitlements, food and nutrition assistance, housing assistance, community development, earned income transfers, and Medicaid, assistance has grown from $283 billion in 2000 to $568 billion in the 2012 budget.
In addition, while important elements to rebuild America’s future competitiveness, budget items such as education, science, energy and environment, justice, and international affairs have grown from $161 billion to $267 billion. Increasing these budget items by $381 billion at a time when our financial ability to support change has dwindled has created an unrealizable goal when added to our other three horsemen.
Together, these four deadly horsemen have added more to America’s budget in the last ten years than President Clinton’s entire budget. America has now a short window of time to decide how to confront these apocalyptic purveyors of decay. I fear that our representatives will continue to hide in the dark crevices of our severe budget crisis instead of confronting these four horsemen head on and defeating them for America. Now is the time for bold action from our leaders and for support from the American people for what must come.
while I imagine some group members will appreciate your disquisition on the budget crisis, you need to do two things to prevent me from deleting this discussion: 1) Write a prescription–we are all too familiar with the budgetary factors, but calling for “bold action” is the worst kind of editorial pablum. 2) Relate this topic to FX. We are not an opinion forum, we are the FX and Currency Markets group. Our rules clearly require that discussion topics be germane to the group. I don’t mean “the dollar will weaken if we don’t reduce the budget” either. Your thesis needs to be at least as developed as this chapter and verse recitation of budgetary items. You could have posted your essay to just about any Linked In group (for all I know, you have) and claimed equal relevance in each case. It’s not relevant here.
From a Linked In groupNOTE I now post my TRADING ALERTS into my personal FACEBOOK ACCOUNT and TWITTER. Don't worry as I don't post stupid cat videos or what I eat!