It’s Time to Deal With Our Debt and Deficits

We are taking huge risks with our future by not containing entitlement spending.

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We are 50 months into a miserable misnomer – the "recovery." The American economy is still stuck in low gear, in its worst post-recession performance since World War II. Our real GDP growth, at around 1.7 percent, is roughly half what has been normal in previous years. And that is despite unprecedented monetary and fiscal stimulus.

Almost all the numbers suck. Private-sector capital stock such as plant, machinery and equipment has shrunk from 6 percent average annual growth to 2.7 percent today. It's the weakest five-year growth period in the past six decades. Nonfarm labor productivity is down to a growth level of only about 0.7 percent annually, according to a J.P. Morgan study, compared to the decade ending in 2005 when it was growing at 2.9 percent.

Consumer sentiment? No "animal spirits" there either, a reflection in part of the destruction of wealth by the 2008 global financial crisis. That single year destroyed some 20 percent of all accumulated wealth. Seven years later, we are still an estimated 8 percent below the 2006 peak.

In short, we are living through an unprecedented period of uncertainty, in a perennial state of near-stall speed in an economy marked by high unemployment. Yes, a modest improvement in job growth has reaped headlines. But labor force participation has fallen to the lowest rate in 35 years. Some 90 million Americans over the age of 16 are not working, an all-time high, with 10 million of them added since President Obama took office, according to The Wall Street Journal. "For every three Americans over the age of 16 earning a paycheck, there are two who aren't even looking for a job." And many newly created jobs pay less than those lost during the Great Recession. Real wages are stagnant.

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There may now be as many as 27 million people getting by with part-time jobs. That amounts to roughly one-fifth of all employees. And this is before Obamacare's mandate that large employers must pay health insurance for anyone in a full-time job (defined as more than 30 hours). That's an incentive for employers to limit hours, and who can blame them? In short, we seem to have come to the end of a long upward cycle in the U.S. employment market, and it isn't going to get better anytime soon.

All glum enough for now, but there's an even bigger cloud over our future, captured in two words: debts and deficits. The nonpartisan Congressional Budget Office has looked at where we will be in 25 years and, though that may seem a long way ahead, it will come rushing at us as we fail to deal each year with excessive government spending. Millions of retiring baby boomers will bring along with them increased Social Security obligations as well as soaring Medicaid and Medicare costs – not to mention another possible huge burden from Obamacare.

The only cuts to the budget so far have been to discretionary spending, with virtually no cuts to the long-term expenses of the big social safety-net programs. This means that by 2025, tax revenues will be sufficient to finance only interest on our national debt, leaving no room for anything else at all. Everything from national defense to homeland security to education and research will have to be paid for with borrowed money.

Our recent presidents have failed to tackle the looming baby-boom budget crisis. As a recent article in Barron's noted, the one exception was Bill Clinton, who in his January 1999 State of the Union message "urged Congress to seize 'an unsurpassed opportunity to address a remarkable new challenge, the aging of America,' " and "declared that 'now is the moment for this generation to meet our historic responsibility to the 21st century' " by getting our deficits under control. He knew then that we were running out of both time and luck.

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Demographics are the key driver of future spending. Barron's cited a CBO estimate that by 2038 there will be 79.1 million residents at least age 65, compared to 44.7 million now. Meanwhile, "the working-age population, 18 to 64, will grow at a much slower rate, to 214.7 million from 197.8 million" so that the "dependency ratio" of working people to retirees "will plummet to 2.7 working-age people to support each senior in 2038, from 4.4 today."