The Federal Debt Bomb

Can you imagine what wonderful projects could be undertaken if the United States today had $20 trillion dollars to spend for the betterment of society? This denominational figure represents our federal debt; every dime of which was over and above government revenues! Most depressing is not the enormity of the debt, but that most of the money spent was either allocated to or influenced by special-interests; meaning that these politically connected groups benefited at the expense of our country at large. Today, we still have huge unmet needs in this country, and $20 trillion dollars of debt!

The relationship between our federal revenue and public debt can be compared to a family with an annual income of $40,000 taking out a mortgage for $256,000. With no other debt, the maximum amount that a bank might qualify this family for a loan is under $200,000. Financially speaking, you might say they are pretty stretched and so is our federal government; but that’s not the end of the story. What I did not mention is that the unfunded liabilities of the United States Government are approximately $100 trillion and growing! This is mostly for federal retirement, Social Security and Medicare, which if combined with our public debt is over 40 times the federal government’s gross income. These programs are called “Entitlements” or “Transfer Payments”, because as tax revenues are received by the federal government they are simply transferred to the recipients of these programs. In fact, a large share of every dollar that the federal government receives in revenue goes directly to one of these many entitlement programs. Most of the remaining budget is added to the deficit and included in our federal debt.

Going back to our family earning $40,000 per year and multiplying it by 40, we have a comparable family debt of $1,600,000. Wow! The obvious question is: how can a family with a total annual income of $40,000 ever pay back $1.6 million? Or put another way: how can a government with total annual revenues of $3.5 trillion ever pay back $120 trillion? And if that’s not bad enough according to the Congressional Budget Office there is no end in sight to our annual budget deficits, which means that the federal debt will also continue to grow, as will our unfunded liabilities. Just look at the growth trajectory of our federal debt over the past 25 years.

· 1992 Federal Debt: $4 trillion

· 2002 Federal Debt: $6.2 trillion

· 2012 Federal Debt: $16 trillion

· 2018 Federal Debt $20 trillion

I want to emphasize that every dime the government spends has to eventually be paid for in taxes, including the national debt.

When President Obama sent all taxpayers a 2009 stimulus check, the $600.00 that I received (along with the money received by every other taxpayer) will eventually have to be paid back to the government, plus interest: so, it wasn’t really a gift, it was more like a loan that will affect future taxpayers. In the long run, stimulus plans, boondoggle projects, make-work programs and all forms of frivolous government spending are bad for the economy and bad for the wealth of the nation.

Zero Sum Gain

A common argument used to oppose the expansion of government programs is that they represent a Zero-sum gain (or game) to society. Some zero-sum examples from our federal government include:

· Loan guarantees: $535 million went to the bankrupt Solyndra Corporation.

· Crop subsidies: The 2014 farm bill budgeted subsidies to be $90 billion over ten years.

· Most foreign aid projects: the Obama Administration spent $20 million to help Indonesian students obtain masters degrees.

· Federal grants: $615,000 to digitalize memorabilia from the drug-obsessed, counterculture band, Grateful Dead; and $103,000 to find out if sunfish that drink tequila are more aggressive than sunfish that drink gin.

· Military cost overruns: The F-35 Joint Strike Fighter Jet is $163 billion over-budget.

· Every omnibus spending bill is burdened with billions of dollars in congressional pork barrel spending.

These are all examples of direct costs to United States taxpayers that benefit politically-connected individuals, organizations, corporations, and nations, which result in a net gain to our economy and society of zero.

To further illustrate the point: if you hand over a $100 bill to a thief at gunpoint, then you are $100 poorer and the thief is $100 richer, the net gain in wealth is zero. On the other hand, if you purchase $100 worth of groceries at the supermarket, then in aggregate the items in your shopping cart are more valuable to you than the $100 that you give to the cashier. The economy and society gain from the excess value over cost because, not only did you gain from the transaction, but so did the growers, the manufacturers, the distributors, and the retail store.

Deficit Spending is Cumulative

Remember that deficit spending is cumulative and that, with only minor exceptions, since the 1930’s, the federal government has never actually paid off any of its loans. When a federal bond comes due, the treasury writes a check to the bond holder with money that it borrowed from the sale of a new bond. Therefore, money borrowed by FDR during the new deal and World War II are still buried in our $20 trillion debt.

Finally, interest rates could be kept stable and predictable. At the same time, the Federal Reserve could provide ample increases in the money supply to fuel a true economic expansion. This would consequently keep unemployment low, tax rates low and more tax revenues to pay for our necessary government services.

The federal government wants us to pretend that in 2017 it was acceptable to spend $4 trillion, even though revenues were only $3.3 trillion (And the proposed 2018 budget predicts a deficit of $1 trillion). We are supposed to forget that the $700 billion difference is piling-on to our national debt. In other words, Congress will spend whatever it wants and leave the $700 billion for our children, grandchildren, or future international bail-out funds to worry about.

(From the Book Greed, Power and Politics, the Dismal History of Economics and the Forgotten Path To Prosperity, by Daniel Cameron)

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