Mort Zuckerman: Brace For an Avalanche of Unfunded Debt

The United States must make tough choices to avoid getting buried by debt.

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[See 2012: The Year in Cartoons.]

None of these gigantic debts is in plain sight, any more than the unstable overhang of tons and tons of snow is visible from the valley. The full extent of the liabilities won't be realized by the country unless and until the government publishes financial statements in ways the private sector is forced to present them. At the end of 2011, the administration published the financial statements on the web on a Friday before the holiday break, without a press conference, still less a presidential appearance, thereby deliberately attracting a minimum of attention.

Quite simply, the government has grown too big, promised too much, and waited too long to restructure itself. Large and growing deficits represent deferred taxes that will have to be paid. In effect, we have a massive taxation without representation for future generations, the people who are too young to vote.

[See a collection of political cartoons on the fiscal cliff.]

What saves the day for the federal government is that it incurs its debt in the currency that it alone may lawfully print. Of course, this assumes that the world will forever be willing to accept any amount of dollars in payment that the Federal Reserve seems willing to supply.

Merely to avoid going deeper into debt, to cope with the speed at which compound interest is growing the real debt annually, we would have to collect $8 trillion in taxes each year, Cox and Archer point out. And here's the nub of it: All individuals filing tax returns in the country with incomes over $66,198 have a total adjusted gross income of about $5.2 trillion. The total corporate taxable income (at its peak in 2006) amounted to $1.6 trillion. This means that we have a maximum of roughly $7 trillion available if the government confiscated the entire gross income of individuals and corporations—not nearly enough to cover the yearly growth of U.S. liabilities.

[See a collection of political cartoons on the economy.]

We can't escape by using the same thinking as when we created the problems. For example, we might think, "well, we'll just grow the economy." A significant and sustained rise in GDP would help for sure, even given present tax rates, but the speed and scale of debt utterly overwhelms any feasible growth. It is years too late to imagine we can grow the economy fast enough to solve the problem painlessly. The conclusion is unavoidable—but it is avoided year in and year out, from one election cycle to another. We have to get moving fast on reform of entitlements, of all the programs viewed as the third rail of American politics. Why won't our politicians touch it? Because they think our people are themselves unready and unwilling to risk their security, which is precisely what brought us to where we are today. That in part reflects the lack of transparency in government financial statements, by which our insolvent ways have remained hidden from policymakers and the public.

We have yet to learn how to think of the federal deficit in personal terms. If you constantly live beyond your means by increasing your credit card balance and bank borrowing, eventually your debt rises to a level where all you are doing is paying the interest on your credit cards and loans. Sooner or later, your credit will be so bad that no one will lend you any money. Then your standard of living will decline as you try to reduce your expenses dramatically or alternatively file for bankruptcy. This is what is facing the United States. Unless we make changes, by 2055 interest costs will be the only thing that the United States will be able to pay for with available revenues and resources.

The parties have been locked in a dance of death, with Republicans shrinking from raising taxes and Democrats from controlling entitlements. Once we recognize that unsustainable commitments cannot be ducked any longer, we will recognize that we need both correctives: expenditure cuts and higher tax revenues. There are a variety of ways to minimize the downside of raised taxes (discouraging effort and encouraging capital flight). We have not had a rewrite of our tax code in 25 years, leaving us with a tax system that is massively inefficient, leads to gross misallocation of resources, impedes our economic growth, and rewards consumption at the expense of savings and investment.