Boomsday: The REAL Economic Crisis
CMM January 27th, 2009
Most of these thoughts were borrowed/inspired from Paul B. Farrell at Wall Street Journal MarketWatch.
At the moment, there are two things that seem to captivate mainstream media– the impeachment hearings of Illinois Gov. Rob Blagojevich and the economic stimulus package. I have no interest in talking about the Blagojevich situation, and I may stop watching morning news if I see him interviewed one more time.
The economic stimulus package is more interesting. If it weren’t for President Obama, I think the Democrats in Congress would have completely shut out the Republicans. I’ve heard a Republican on the appropriations committee say that the first time anyone from his party saw the stimulus bill was the night before the committee voted on it. In the spirit of bi-partisanship, President Obama is now having private meetings with Republicans to allow them input into the bill.
Make no mistake, President Obama is in a challenging situation. Somewhere in the not too distant future, we have a serious economic time bomb waiting to explode. I’m not talking about our government subsidized agricultural economy (although it keeps African economies crippled) or the growing use of pork barrel spending (although I hate that my tax payer dollars go to building a mafia museum in Las Vegas). Those are mere annoying mesquites compared to the vampire I refer to– entitlement programs. Currently, we have approximately $60 trillion– yes, with a “t”– in unfunded liabilities for medicare, social security, etc. The day that we can no longer afford to service those entitlements, and we can no longer supplement servicing by borrowing, the proverbial “boomsday” has occurred. The economy will literally explode as the government goes “bunkrupt” and we can’t meet the financial needs of core government services. One of my favorite authors, Chris Buckley, wrote a political satire on this issue titled “Boomsday.” Very entertaining and a great read.
So, Back to the topic at hand… Let’s do some simple math. We’ve got $60T in unfunded liabilities for entitlement programs, $10T in debt from the Bush administration, and $1T in a forthcoming economic stimulus package. All of which the government can’t afford, so it must be funded by borrowing against the social security trust and issuing additional government bonds. That principal amount borrowed plus accrued interes is paid off by future taxes. Assuming a 30 year repayment period at 4% interest rate (it’s the government, we hope they can get a good rate) you’re looking at $157T in principal and accrued interest. Bottom line, we’re borrowing all of this money to provide stimulation and services for today, but who ends up paying most of the bill? Tax payers 30 years down the road (i.e. me).
Now, I’m not completely opposed to the government using debt to finance certain projects. Infrastructure, national security, and economic stimulus all benefit future generations. As such, it is acceptable to have future generations pay a portion of the costs. Unfortunately, the government rarely considers the “life of a project” when projecting out those costs. Sometimes it is impossible to project that life. For example, when the U.S. sent its military into Afghanistan, it served a national security interest. A successful effort there will keep this country safer and our economy less inhibited. In contrast, it is impossible to project how long the military actions in Afghanistan will be successful. Therefore, do you finance the military campaign along 10, 15 or even 50 years?
The challenge President Obama faces is juggling the current issues against the longer term consequences. 66% of 18-29 years old voted for President Obama, and 52% of 20-44 year olds. Combined, that means that almost 32.4M of Obama’s 66.8M votes came from citizens between the ages of 18 and 44. In other words, President Obama and this Congress plan to write some pretty hefty checks that those 32.4M voters will have to pay for over the next 30 years.
President Obama talks alot about bringing accountability back to the government. While I’m an advocate for less government, I’m cautiously optimistic about his rhetoric to rightsize the government. If he does it correctly, he could cut out the waste and inefficiencey while reallocating assets around the most necessary and productive elements of government. Here Congress is criticizing private industry for all of their frivilous spending, so why don’t we do the same to our elected officials? On top of holding Congress accountable for spending, President Obama could bring spending numbers back in line with financial solvency and burn down the crippling pressure of the debt I metnioned above.
I know… it sound strange saying these things about a Democrat in the White House. I’m not saying I expect him to do these things. I just wish he would.
