Sunday, February 20, 2011

The U.S. Budget Crisis

by Richard Crews
The U.S. Government owes $14 trillion, roughly equal to our Gross Domestic Product or GDP (the total value of all goods and services produced in the country in one year). This is excessive; most advanced, post-industrial countries have national debts that are much smaller fractions of their GDPs.

Roughly half of this debt is held within the government, owed to the Federal Reserve, the Social Security Trust Fund, and other funds and departments within the vast federal system. About another fourth is also held within the U.S.--by states, mutual funds and insurance companies, and other large private investors. But a significant portion (28%) is held abroad by the governments of many countries including some like China and Iran that do not necessarily have social and political goals similar to those of the U.S.

Foreign countries hold U.S. government debt because it is the most stable and reliable economic resource available in the world. But owing foreign governments a lot of money is worrisome for the U.S. Remember the aphorism: When your banker calls, you listen.

During the last four years of the Clinton administration (1997-2001), the U.S. government balanced its budget; it did not add to the national debt. Moreover, fiscal plans were made projecting revenue surpluses into the foreseeable future. The national debt was scheduled to decline.

These plans were thrown out during the eight years that Bush was in office (2001-2009). Rather than being reduced as planned, the national debt soared--it nearly doubled (from $5.7 trillion to $10.7 trillion).

During the first two years of the Obama administration (2009 and 2010), because it was necessary to rescue the U.S. (and world) economy from a severe recession--the result of years of private greed and inadequate public oversight--it was impossible to have balanced budgets and surpluses that would reduce the national debt.

The economic recovery is now well underway. The time is nigh upon us to balance the federal budget--to reduce government expenses and increase federal revenues.

Can this be accomplished, not with the ideological meat cleavers of traditional Republicans or even Tea Partiers--which cannot, in any event, be politically sustained--but in a responsible and fair way? Perhaps it can, but with difficulty. Economically it is readily feasible. Even the great entitlement programs and military expenditures can be comfortably and safely curtailed. The U.S. spends nearly $700 billion a year on the military--more than the next twenty most heavily funded military governments in the world combined. Obama has proposed cutting $78 billion from the Pentagon's core spending over the next five years. This is a worthy start, but only a start, and even this is subject to political wranglings since every member of Congress has military facilities--bases, storage and waste depots, training and test facilities--as well as companies with production contracts, and other lucrative pieces of the military fiscal pie within his or her state or district.

What about Social Security? Raising the retirement age from 65 to 70 over the next 20 years would go a long way toward solving the Social Security funding problem. Such an increase is very reasonable; the average life expectancy of U.S. workers has increased by about 15 years to about 80 since the 65-year-old age level was established. In addition to this, raising the maximum income contribution level from the current $107,000 per year to $180,000 per year would cost an individual who makes this six-figure income about $6,000 per year, but would render the Social Security system solvent for many decades.

But neither of these eminently fair and reasonable fixes is politically easy. Probably neither can be accomplished within the current big-money-driven Congressional paralysis.

The additional enormous federal costs of Medicaid and Medicare, each more than 1/3 of a trillion dollars a year, could be "fixed" by sensible changes such as limiting tort settlements in medical malpractice cases to $1 million (which would enormously reduce medical malpractice insurance costs), allowing the use of generic drugs throughout the Medicaid and Medicare systems (they are already used in Veterans Administration facilities), and requiring doctors to work on salaried contracts rather than a fee-for-service basis (which would still provide them with incomes several times the national average).

But, again, these changes run counter to entrenched, enormously powerful lobbying--in this case by MDs, pharmaceutical companies, and trial lawyers.

Other moves such as selling off federal lands (the U.S. government owns 30% of the land area of the country, including, for example, 84% of the state of Nevada); streamlining the tax code and plugging loopholes; installing a value added tax (almost every other advanced post-industrial country has a VAT); reducing agricultural and industrial subsidies (which currently cost about $30 billion a year, and support the price of a variety of commodities including cancer-causing tobacco and pollution-causing fossil fuels); all of such moves are politically difficult.

The U.S. budget crisis is severe and urgent. Equitable economic fixes are available, but the political will is probably not.