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President Obama Better Learn From Greece to Fix Federal Deficit

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Let’s face some facts. The United States is a welfare state. It was not always this way as the two charts below point out. shifting priorities

The welfare state, which is what "payments to individuals'' signifies, was at one time modest. The Cold War was in full swing and the popular, though costly, Medicare and Medicaid programs were not created yet. Now everything is reversed. Despite the wars in Iraq and Afghanistan, defense spending was only a fifth of the budget. Entitlement payments to individuals (which included Social Security, Medicare, Medicaid, and other payments to the poor, including the earned income-tax credit and food stamps) totaled almost 60 percent of the budget in 2006. And this happened under the watch of under a so-called conservative President George W. Bush. His tax cuts and the Medicare prescription drug benefit, not only continue to cost the government trillions, but have also increased interest payments on the national debt.

Let’s now look at our current situation. The 2010 federal budget totaled 3.55 trillion dollars, while estimated receipts for fiscal year 2010 are $2.381 trillion. That over 1.2 trillion dollars in debt in one year! People cannot comprehend the magnitude of such numbers; the brain does not seem to be able to adequately process even how much space is needed to hold one trillion dollars. Can you hold one trillion dollars (all in denomination of $100 bills) in one room? Two? Try this; you will be stunned just how wrong you are. Oh, and by the way the federal debt is currently over 12 trillion dollars! That is over $41,000 per every U.S. Citizen.

Before we can address how to tame the national debt, we need to understand the main sources of the federal government’s revenue.

Here is a breakdown showing where the 2.3 trillion dollars in revenue came from according to the New York Times:

policy receipts

Most of our federal funding was not generated through individual income taxes. Heck, only one-half of American households pay any income tax at all in 2009 because either their incomes were too low, or they qualified for enough credits, deductions and exemptions to eliminate their tax liability. Most of our funding came through borrowing—and with borrowing comes interest. When we rack up trillion dollar deficits on a yearly basis, just imagine how much interest has to be paid. This is money that is wasted because it does not directly help any American find a job, fix a failing school, defend our nation’s borders, kill a terrorist, or research cures for cancer. Consider this: in fiscal year 2009, the Department of the Treasury spent 383 billion dollars on interest to the holders of the national debt.

Compare that to NASA at $19 Billion, Education at $53 Billion, and Department of Transportation at $73 Billion. Vital government programs are beginning to get squeezed due to the rising deficit.

If these budget numbers seem bad now, they will only get worse. From 2011 to 2020, the Obama Administration projects total federal spending of $45.8 trillion against taxes and receipts of $37.3 trillion. The $8.5 trillion deficit is almost a fifth of spending! Almost $20 trillion of the $45.8 trillion of spending involves three programs -- Social Security, Medicare (health insurance for those 65 and over) and Medicaid (health insurance for the poor -- two-thirds goes to the elderly and disabled).

The underlying message in this projection is very clear-- the budget has become a vehicle for transferring income to retirees from workers, who pay most taxes. As more Baby Boomers retire in the 2020s, deficits will grow even larger. If entitlement programs are not reformed soon, the federal government won't be able to fund such necessities as defense, transportation, education and infrastructure. We are already seeing signs of such budget shortfalls on a state and local level. In Pennsylvania, school districts are receiving less state funding and are making some serious cuts in staffing and programs. In California, more than one billion dollars will be removed from its higher education funding, resulting in a 30% increase in tuition rates, causing hundreds of students to protest.

Since America is a democracy, we have inherited many of the government traditions from the world’s first democracy, Greece. Hopefully, we do not inherit its current financial crisis, but there are some parallels between our situation and Greece’s. This year, Greece has demonstrated the consequences of having massively unfunded entitlements. Greece's national debt last year reached 113 percent of gross domestic product. The United States will hit that in about 2020, according to the Government Accountability Office. Greece has taken some drastic action and slashed its budget on many social programs, causing riots last month.

Since we do not want to become like Greece, something needs to be done—and done fast to remedy this mess. Both liberals and conservatives, in their own ways, peddle phony solutions. Cut waste, say conservatives. Even if we eliminated all of the pork-barrel spending, it wouldn't even come close to cutting the size of the federal government by even one percent. Liberals have their own solutions. Cut defense, some say. Military spending only accounts for 19% of our total budget in 2010. If it had been cut completely, the savings (663 billion dollars) would have only covered half of the year’s deficit (1.2 trillion dollars). Other liberals want to raise taxes on the richest 1 percent, who currently share the bulk of the tax burden, paying about 40% of all federal income taxes. Even if their tax liability would be doubled, the government would only earn another 450 billion dollars, still well short of the one trillion dollar deficit. Needless to say, neither liberals nor conservatives often have realistic solutions to our budget dilemma.

There are two options that can solve our budget woes—either drastically cut the cost of entitlements (such as raising to age of Social Security and Medicare recipients to 70 or higher) or massively increase tax revenue. Neither option is particularly popular. Social Security and Medicare are the most cherished of all our government’s programs. Heaven forbid if a politician talks about cutting funds from any of these programs. And as I already stated, raising income taxes is not a viable solution. One of President Obama’s economic advisors, Paul Volcker, understands this. That is why Volcker is considering a VAT (value added tax) to fund entitlement spending. The tax could generate one trillion dollars a year in tax revenue, but would be widely unpopular. In Europe, a VAT rate that reaches 20% in some countries applies to countless products and services. So if enacted, the American middle and lower classes would be hit especially hard. Imagine a 20% national sales tax on virtually everything. Ouch.

If America truly wants European style entitlements, including healthcare, it will require European-style taxes. Americans have grown too fond of these (and future) entitlement programs, but will refuse to pay such high taxes required to fund them. With that said, grab your riot gear, because Greece will soon be here.