Yesterday, in my post Vampire Economics, we explored the outlandish spending, and resultant debt, that Congress and the Administration have racked up the past few months. If all the commitments recently made by the Democrat controlled Federal Government were actually executed with Treasury dollars, the taxpayer liability would be roughly $15 Trillion. Current projections of Gross Domestic Product (GDP) of the US are $14.5 Trillion. The committed spending exceeds by about $500 Billion the entire US GDP amount, one-fifth of the annual spending of the entire world.
One part of those $15 Trillion in commitments is the Obama budget of $3.5 Trillion dollars. Yesterday, the Administration issued a statement saying that tax revenues to the US Treasury are expected to be much less than Obama originally estimated. This $1.8 Trillion shortfall means that for every single dollar spent by the Federal Government on budgeted items (which do not include bailout or stimulus packages), about 50 cents will be borrowed. And all of the remaining commitments of about $11.5 Trillion will need to be borrowed.
Now sit down, because that is just chump change.
There are other promises by the Federal Government that we haven’t yet discussed. Ready? Medicare and Social security requires an additional commitment of roughly $105 Trillion (about seven times GDP).
Where in the world does the Obama Administration and the Congress think they are going to get sufficient money to pay for all of this spending?
There are only a limited number of places that the Federal Government can fund programs:
Increase Revenue/Decrease Spending
Growing the economy increases GDP, in effect making the pie bigger. Economic growth increases real wages, which increases the tax revenues collected by the Treasury. This is one of the underpinning tenants of supply-side economics (which says that if taxes are cut, the economy grows because people have more real wealth). Thirty years of relatively sustained economic growth is explained by restrained spending and low taxes (hat tip to Art Laffer, Jack Kemp, Ronald Reagan, Bill Clinton and the Republicans in the Congress in the 1990’s).
Obama and the Democrats in Congress propose to pay for their profligate spending by spurred economic growth. However, most of the assumptions being used appear overly optimistic. The assumptions are not called overly optimistic just by conservative economists, but also by liberal economists and economists from the Congressional Budget Office and Obama’s own White House advisors.
Government spending takes money from the private sector, where investment can be efficiently used by businesses to increase real wealth, and channels money to public programs that are, at best, inefficient at adding to the wealth of the country. And we all know there is no such thing of a collectivist Government program the Democrats and the Obama Administration do not like.
There are no serious spending cuts being proposed by this Democrat Congress and Administration That is, except for spending on military programs such as missile defense and other weapon systems. It is especially ironic that Obama pulls the plug on military spending. What is more “shovel ready” than a currently operating production line? Think about that next time you hear about a road construction or other infrastructure project being held up by the EPA permitting process.
To increase Government revenue, Obama has proposed to “tax the rich.” Above, I mentioned the increasing budget deficit because of decreasing tax revenues during this economic downturn. If Obama were to take every dollar from the “rich” he would not even make a dent in the indebtedness of the US. How long do you think Obama will keep the rich floor at $250,000 as he scrambles to pay for his collectivist agenda? Pretty soon, he may even have to tax the roughly 41% of the population that pay no taxes whatsoever, let alone the “rich.”
Head to the Bank
You borrow money all the time. When you buy a house or a car. When you use a credit card. Intelligent and responsible use of debt is beneficial to the individual, and also to the Government. However, you know that if you borrow too much money you can be quickly overwhelmed by your debt.
The cost of servicing just the debt incurred from US spending will rise from about $200 Billion per year now to over $725 Billion per year in 2019. This is just the INTEREST on borrowed money to cover budgetary spending, and not the actually spending itself.
Take your seats again folks. This three-quarters of a trillion dollars in interest cost DOES NOT INCLUDE THE SPENDING FOR ENTITLEMENTS LIKE SOCIAL SECURITY AND MEDICARE.
Far too many of our current spending plans and commitments are based on borrowed money. Not only will economic growth be stifled by the spending itself, but by the increased debt load of the interest on the borrowing.
We can already see the effects of our planned increased borrowing. China is already balking at buying our Treasuries as we begin printing more money and issuing more debt. Printing additional money dilutes the value our currency, and as investors no longer want our devalued currency, the US is forced to increase the interest rates offered on our Treasury bonds. Increased interest rates cause the US to pay even more money to service the debt that these securities have been offered to cover.
The cycle feeds on itself and more and more of the world’s investors will lose faith in the US.
Is it any wonder that other nations have joined China’s call to move the standard international currency from the US dollar to another instrument?
It looks like the Obama and Democrat plan is to pay for that burger on Tuesday. In the year 2050. Or beyond. Do you think you will even be able to afford a burger today with Obama and a Democratic Congress?