October 2006 Archives

Federal Finances Hurt

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I grew up in Kansas with the first Governor I can recall being George Docking.  He was a Democrat in a Republican (read “Red” today) state.  He said something that stuck with me:  “Kansans are a frugal lot.  They might pay fifty cents to see a re-enactment of the burning of Rome, but if it cost a buck, they wouldn’t go.”  He reflected the Republican ethic of fiscal responsibility, that I thought that party was for.  The state is still frugal, battling for every last budgeted dollar in the state legislature, the Republicans and Democrats being not far apart in their fiscal conservatism.

But what happened on the Federal level?  For the first time in generations we have Republicans in control of the White House, the House of Representatives, and the Senate.  And what is our fiscal situation?  Absolutely horrendous.  Let’s look.

Federal Budget is Unbalanced

When President Bush took office the annual federal budget totaled $1.7 trillion and he began the year with a budget surplus of $236 billion.  In fiscal 2006 the Bush administration will likely spend, the Wall Street Journal reported on January 28, $2.65 trillion and bring in $2.31 trillion leaving a deficit of $337 billion “BEFORE THE COSTS OF THE IRAQ WAR AND HURRICANE RECOVERY COSTS.” (Emphasis added.)  That’s up quite a bit:  in 2005 the deficit was $318 billion INCLUDING the war costs.  In 2004 the deficit was the highest ever in history at $412 billion.

The $318 billion is the equivalent, the WSJ reported, of spending $10,000 a second for a year, $36 million an hour, or $870 million a day.

Part of the problem is that Social Security, Medicare, and Medicaid will consume 43% of all federal spending, or $1.1 trillion.

Tax Cuts Make U.S. Fiscally Irresponsible

Part of the problem is the Bush tax cuts, which will cost $1.8 trillion over the next 10 years.  Look at those tax cuts.  The Congressional Budget Office projects that if those tax cuts are reversed, by 2012 there is a surplus of $38 billion but if they’re maintained there is a deficit of $312 billion that year.

The rich don’t much care that there is intergenerational disequity, where the current taxpayers and citizens are not paying their way and they’re putting their living expenses on a credit card to be paid by their children and grandchildren.  The rich will pass on their wealth to their children and grandchildren because one of the tax cuts is the estate tax.  It will be OUR Kids the rest of us will be leaving with the bill.

This is the first time in history that one generation has not paid its way.  I remember a movie during the Depression with Humphrey Bogart and Myrna Loy, he a bank robber who is shot in the hand and she a doctor who bandages him.  He asked how much.  She said “No charge.  I didn’t want to do it. As a doctor I just had to.”  He demurs, “No.  I pay my own way.”  Even during the Depression that ethic was ours.  What happened to it?  It’s probably too facile to just say, “The Republicans got in charge of everything.”  But maybe not. 

How Does This Affect Our Debt?

Dramatically, we currently have a national debt of $8.2 trillion.  That debt has to be financed over and again by issuing Treasury bonds and notes and other such securities.  Who buys them?  Foreign governments and investors.

Take a look at the slide show put together by Congressman Jim Cooper of Indiana, a member of the House Budget Committee.  He calls it Budget School.  It shows how desperate we are getting with the deficit-spending, the burgeoning debt, the unfunded liability of Social Security, Medicare, and Medicaid and how dependent we are on foreigners buying our increasing debt.  That doesn’t bode well for the future of jobs in this country.

Look at his slide show here:  http://cooper.house.gov/multimedia/032805_budgetmain.htm

He points out that the Top Ten countries holding our debt are:

  • Japan
  • China
  • UK
  • Caribbean Banking Centers
  • South Korea
  • OPEC
  • Taiwan
  • Germany
  • Switzerland
  • Hong Kong

Every morning, Congressman Cooper points out, we have to hope that foreign nations loan us (by buying treasuries) a billion dollars.

So what happens if they quit buying?  We’re in trouble.  Devaluation of the dollar.  Another Depression, maybe.  Not just a recession.

Interest on the debt is 8% of the current budget and growing.  It’s expected to total $10.2 trillion annually by 2010.

Social Security, Medicare, and Medicaid

These entitlement programs currently eat 43% of the federal spending, but by 2016 they will consume over half the federal budget.    Over the next 75 years (the period that the Congress and Administration need to make projections for), the unfunded liability will grow to $46 trillion.  Other projections double that (see above).

They need to be reformed.  That includes reducing some benefits and increasing some taxes.  At the every least raise over time the amount that the FICA tax applies to.  If it is raised $5,000 a year until it gets to $150,000 the problem is estimated to be solved.

Pensions and Employer Health Care are Going the Way of the Dodo Bird

You saw what happened when all the previously mentioned Corporations joined the club of Bankruptcy, turning pensions over to the Federal Pension Guaranty Corp.  They each said they needed to address their pension cost and health insurance cost.  They’re going to pass those costs on to you.

So is the federal government.

State and Local Governments are also going to cut back.


The Governmental Accounting Standards Board (GASB) issued a directive that all local governments have to calculate their unfunded liability in health insurance and pensions for retirees and include that as a statement in their Official Statements for issuing debt and in their Consolidated Annual Financial Reports.

That will show that most of our governments are in deep financial trouble for these fringe promises.

You Need to Be Prepared For Disaster

The last two Presidents have said that today’s worker will have between 8 and 10 careers in their life.  These financial facts will make many companies outsource to survive and to compete. 

Individuals will need to fend for themselves in order to compete and to survive.  Learning new skills every year is the best way to become the valued employee who’s the last to be thrown off the lifeboat.  And preparing a Fallback Position in case you are is necessary.  That includes the 3 Keys to Taking Control.  See that at www.fallbackpositonbook.com.

The present value of the future obligations of the federal government--including Social Security, farm subsidies, Medicare, and debt--and then figure what current rates of taxation will collect, and you find a number approaching $63 trillion.  That's the gap that has to be filled.  Lawrence Kotlikoff, a professor of economics at Boston University did the number crunching and concluded that would take an immediate increase of 70% of all taxes or a 50% cut in Social Security and Medicare benefits.

Two other economists estimate those numbers are low.  They say the gap could be as high as $97.8 trillion.  They say that would take an immediate increase in governmental revenues of 61%.  A fellow at the Heritage Foundation said it would take a tax hike of $11,000 per household or the elimination of all federal programs to close the gap.

The former Comptroller General of the U.S. and the head of the Government Accountability Office said the U.S. would either need to cut federal spending by 60% or hike taxes to twice their current level.

Some say if we don't do this, then China will eventually own this country by owning all our debt.

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