Both blades of the scissors—cost savings and higher revenues—have to be used. We'd get higher revenues on the same tax base from an economic rebound if there was one, but so far the recovery is limp. The country has been dealing with the excessive accumulation of private debt and public debt, and we probably have five or six more years of de-leveraging in store. To date, what we have achieved is to move liabilities from the private sector to the public balance sheet, effectively burdening tomorrow's taxpayers.
Now, this was done to save the financial system at the core of a functioning economy, and it was urgently necessary (if badly applied). But if we do not deal with the issue of excessive debt, it is difficult to project strong, sustainable, organic growth anywhere close to the rates of the past 50 years.
Politicians in Congress talk the talk about putting the United States on a stable fiscal footing. But they must recognize we are just beginning the process of balance-sheet repair. Over the next decade, the administration projects total federal spending of $45.8 trillion and tax revenues of $37.3 trillion, creating an astonishing cumulative deficit of $8.5 trillion. How will we reduce these massive deficits without big cuts in existing government programs or stupendous tax increases?
The forecast shows only the most modest improvement in the deficit over the next five years. Even that will come only if the United States returns to sustained growth in the range of 3 percent annually. But the government will be forced to enter the bond markets to borrow the $8.5 trillion projected deficit. We can only imagine how much higher interest rates will be as a consequence and how much harder it will be for private companies to issue debt of their own, given the crowding-out effect the dominance of the federal government as a borrower can have on financial markets.
The demographics are intimidating. At age 65, Americans will live for an average of another 18 years. The government now subsidizes each person above that age by an average of roughly $25,000 a year, made up of almost $14,000 in Social Security and $11,000 in Medicare. This will simply be unaffordable without major tax increases that would roughly double the tax burden from the average levels of the past several decades. The alternative is draconian cuts in programs.
Some will have to be made. We have drifted into an entitlement society. We will have to review the affordability of the Obama initiative of tax cuts and income transfers to low- and middle-income households. We will surely have to review the tax code and remove many of the special tax breaks that benefit special-interest groups at the expense of the nation's revenues. We will have to gradually raise tax rates for the well-to-do, even for those who earn less than the $250,000 threshold the president established in his political campaign. Given the increasing longevity of the population, we may have to correlate Social Security benefits and Medicare to wealth and change the way doctors are paid by Medicare to discourage them from performing unneeded and expensive procedures. Unnecessary programs will have to be reviewed and some abolished. The level and nature of our military expenditures will have to be reduced.
Without dramatic changes such as these, the cost of government will continue to dwarf revenues by staggering margins. Unless we address these painful issues, we are likely to stumble into yet another financial crisis. Unless we focus on our debts and our deficits, it will be impossible for the United States to achieve the twin goals of full employment and GDP growth while simultaneously reducing deficits to a manageable level. We cannot forget that these deficits are occurring on the eve of the retirement of the baby boomers, which will trigger further trillions of red ink. And that is why so many forecast that GDP growth for the remainder of this decade will be slightly more than 2 percent, by far the lowest in the decades since World War II.