The shadow of crisis has passed President Obama told us on Tuesday night. The State of the Union is strong he added. But is it really?
If you had accumulated a debt that is more than 20 times the size of your household income would you say your household finances were in good shape? Well thats where we are as a country. Under about a dozen federal entitlement spending programs we have made promises that we havent been willing to pay for. In the process we are leaving an enormous financial burden for our children and grandchildren.
So what did the President propose to do about that problem? Basically leave well enough alone and add to it. As David Jackson reported:
Citing the legacy of programs like Social Security Medicare and college aid Obama told the GOP-led Congress that middle-class economics works and these policies will continue to work as long as politics dont get in the way.
The piling on includes:
… new tax breaks for child care and programs that include two free years of community college lower interest rates on mortgage insurance and new requirements for paid sick leave.
There are basically two kinds of debt the kind you hear about and the kind you dont. The first kind is federal debt held by the public in the form of government bonds. At last count these totaled a little over $13 trillion. The second kind is the difference between long term promises we have made for retirement income medical bills disability payments etc. and the income we expect to fund those promise in the form of taxes premium payments etc.
That second kind of debt is huge. Boson university economist Laurence Kotlikoff pegs it at a whopping $210 trillion. Kotlikoff writes:
The fiscal gap the difference between our governments projected financial obligations and the present value of all projected future tax and other receipts is effectively our nations credit card bill. Eliminating it would require an immediate permanent 59 percent increase in federal tax revenue. An immediate permanent 38 percent cut in federal spending would also suffice. The longer we wait the worse the pain. If for example we do nothing for 20 years the requisite federal tax increase would be 70 percent or the requisite spending cut 43 percent.
By the way to solve our fiscal problem the 59 percent increase in taxes has to be put in the bank and invested not spent on other things like community college tuition -- until the day when the bills start coming due. That will require a level of discipline no previous president or congress has been able to muster.
Whats really at issue here is the difference between short term thinking and long term thinking. Take the United States and Italy. On a short term basis our economy is in much better shape than theirs. They have 13 percent unemployment. Ours is less than 6 percent. Their outstanding debt (bonds) is 130 percent of GDP. Ours is 73 percent.
But Prof. Kotlikoff points out that on a long term basis Italy is in much better shape than we are. One way to measure the fiscal gap" is to calculate how much a country needs to tax and save each year (as a percent of its GDP) in order to be able to meet its future spending obligations. By this measure Italys fiscal gap is actually negative. In the future they will be able to lower their taxes. And the Italian figure is the lowest of 24 European nations studied! By contrast the US fiscal gap is 10.5 percent -- higher that any European country and considerably greater the European average of 2.4 percent. (See Table 3.5 of the European Commissions Fiscal Sustainability Report 2012.)
In the light of all this last nights State of the Union address was a huge disappointment.
During the 2008 election I was actually hopeful about Barack Obama. He was the only serious candidate in the Democratic primary who said we need to do something about entitlement spending including Social Security Medicare and Medicaid. For this he took much abuse from the left including scathing condemnation by Paul Krugman in The New York Times. Yet he stood his ground.
After the election I became even more hopeful. When President Obama appointed Alan Simpson and Erskind Bowles to head a commission to tackle the problem of ever escalating federal debt even the Republicans in Congress were opposed. But the president forged ahead despite no congressional support. He met personally with Simpson and Bowles and promised them that he would back their recommendations let the chips fall where they may.
The Simpson/Bowles recommendations were released in December 2010. But there was no meeting at the White House. In fact the president greeted the report with stony silence. In January 2011 there was no mention of the report in his State of the Union speech to Congress.
And there has been no mention of it ever since.
John C. Goodman is Senior Fellow at The Independent Institute and author of the widely acclaimed book Priceless: Curing the Healthcare Crisis. The Wall Street Journal and National Journal among other media have called him the Father of Health Savings Accounts.
The shadow of crisis has passed President Obama told us on Tuesday night. The State of the Union is strong he added. But is it really?
If you had accumulated a debt that is more than 20 times the size of your household income would you say your household finances were in good shape? Well thats where we are as a country. Under about a dozen federal entitlement spending programs we have made promises that we havent been willing to pay for. In the process we are leaving an enormous financial burden for our children and grandchildren.
So what did the President propose to do about that problem? Basically leave well enough alone and add to it. As David Jackson reported:
Citing the legacy of programs like Social Security Medicare and college aid Obama told the GOP-led Congress that middle-class economics works and these policies will continue to work as long as politics dont get in the way.
The piling on includes:
… new tax breaks for child care and programs that include two free years of community college lower interest rates on mortgage insurance and new requirements for paid sick leave.
There are basically two kinds of debt the kind you hear about and the kind you dont. The first kind is federal debt held by the public in the form of government bonds. At last count these totaled a little over $13 trillion. The second kind is the difference between long term promises we have made for retirement income medical bills disability payments etc. and the income we expect to fund those promise in the form of taxes premium payments etc.
That second kind of debt is huge. Boson university economist Laurence Kotlikoff pegs it at a whopping $210 trillion. Kotlikoff writes:
The fiscal gap the difference between our governments projected financial obligations and the present value of all projected future tax and other receipts is effectively our nations credit card bill. Eliminating it would require an immediate permanent 59 percent increase in federal tax revenue. An immediate permanent 38 percent cut in federal spending would also suffice. The longer we wait the worse the pain. If for example we do nothing for 20 years the requisite federal tax increase would be 70 percent or the requisite spending cut 43 percent.
By the way to solve our fiscal problem the 59 percent increase in taxes has to be put in the bank and invested not spent on other things like community college tuition -- until the day when the bills start coming due. That will require a level of discipline no previous president or congress has been able to muster.
Whats really at issue here is the difference between short term thinking and long term thinking. Take the United States and Italy. On a short term basis our economy is in much better shape than theirs. They have 13 percent unemployment. Ours is less than 6 percent. Their outstanding debt (bonds) is 130 percent of GDP. Ours is 73 percent.
But Prof. Kotlikoff points out that on a long term basis Italy is in much better shape than we are. One way to measure the fiscal gap" is to calculate how much a country needs to tax and save each year (as a percent of its GDP) in order to be able to meet its future spending obligations. By this measure Italys fiscal gap is actually negative. In the future they will be able to lower their taxes. And the Italian figure is the lowest of 24 European nations studied! By contrast the US fiscal gap is 10.5 percent -- higher that any European country and considerably greater the European average of 2.4 percent. (See Table 3.5 of the European Commissions Fiscal Sustainability Report 2012.)
In the light of all this last nights State of the Union address was a huge disappointment.
During the 2008 election I was actually hopeful about Barack Obama. He was the only serious candidate in the Democratic primary who said we need to do something about entitlement spending including Social Security Medicare and Medicaid. For this he took much abuse from the left including scathing condemnation by Paul Krugman in The New York Times. Yet he stood his ground.
After the election I became even more hopeful. When President Obama appointed Alan Simpson and Erskind Bowles to head a commission to tackle the problem of ever escalating federal debt even the Republicans in Congress were opposed. But the president forged ahead despite no congressional support. He met personally with Simpson and Bowles and promised them that he would back their recommendations let the chips fall where they may.
The Simpson/Bowles recommendations were released in December 2010. But there was no meeting at the White House. In fact the president greeted the report with stony silence. In January 2011 there was no mention of the report in his State of the Union speech to Congress.
And there has been no mention of it ever since.
John C. Goodman is Senior Fellow at The Independent Institute and author of the widely acclaimed book Priceless: Curing the Healthcare Crisis. The Wall Street Journal and National Journal among other media have called him the Father of Health Savings Accounts.
