Public Debt, part two

Yesterday I encouraged y’all to watch the videos that David Walker made while Comptroller General, discussing the signficance and urgency of our national fiscal crisis.  As hard as it may seem to believe, the situation is actually worse than David Walker described it.

Richard Fisher is President of the Federal Reserve Bank of Dallas.  Mr. Fisher has often seemed to be the only voice of reason at the Fed, voting against the most recent rate cuts and trying hard to draw attention to the inflationary effects of the Fed’s actions in bailing out malinvestment and propping up over-valued assets (although he’s a lot more diplomatic in how he puts it).

On May 28, Mr. Fisher gave a speech in San Francisco to the Commonwealth Club of California, that he entitled “Storms on the Horizon.”  The entire speech is well worth reading, and I’ll link it below, but the part that is the most chilling is this:

Add together the unfunded liabilities from Medicare and Social Security, and it comes to $99.2 trillion over the infinite horizon. Traditional Medicare composes about 69 percent, the new drug benefit roughly 17 percent and Social Security the remaining 14 percent.

I want to remind you that I am only talking about the unfunded portions of Social Security and Medicare. It is what the current payment scheme of Social Security payroll taxes, Medicare payroll taxes, membership fees for Medicare B, copays, deductibles and all other revenue currently channeled to our entitlement system will not cover under current rules. These existing revenue streams must remain in place in perpetuity to handle the “funded” entitlement liabilities. Reduce or eliminate this income and the unfunded liability grows. Increase benefits and the liability grows as well.

Let’s say you and I and Bruce Ericson and every U.S. citizen who is alive today decided to fully address this unfunded liability through lump-sum payments from our own pocketbooks, so that all of us and all future generations could be secure in the knowledge that we and they would receive promised benefits in perpetuity. How much would we have to pay if we split the tab? Again, the math is painful. With a total population of 304 million, from infants to the elderly, the per-person payment to the federal treasury would come to $330,000. This comes to $1.3 million per family of four—over 25 times the average household’s income.

Clearly, once-and-for-all contributions would be an unbearable burden. Alternatively, we could address the entitlement shortfall through policy changes that would affect ourselves and future generations. For example, a permanent 68 percent increase in federal income tax revenue—from individual and corporate taxpayers—would suffice to fully fund our entitlement programs. Or we could instead divert 68 percent of current income-tax revenues from their intended uses to the entitlement system, which would accomplish the same thing.

Suppose we decided to tackle the issue solely on the spending side. It turns out that total discretionary spending in the federal budget, if maintained at its current share of GDP in perpetuity, is 3 percent larger than the entitlement shortfall. So all we would have to do to fully fund our nation’s entitlement programs would be to cut discretionary spending by 97 percent. But hold on. That discretionary spending includes defense and national security, education, the environment and many other areas, not just those controversial earmarks that make the evening news. All of them would have to be cut—almost eliminated, really—to tackle this problem through discretionary spending.

I hope that gives you some idea of just how large the problem is. And just to drive an important point home, these spending cuts or tax increases would need to be made immediately and maintained in perpetuity to solve the entitlement deficit problem. Discretionary spending would have to be reduced by 97 percent not only for our generation, but for our children and their children and every generation of children to come. And similarly on the taxation side, income tax revenue would have to rise 68 percent and remain that high forever. Remember, though, I said tax revenue, not tax rates. Who knows how much individual and corporate tax rates would have to change to increase revenue by 68 percent?
If these possible solutions to the unfunded-liability problem seem draconian, it’s because they are draconian. But they do serve to give you a sense of the severity of the problem. To be sure, there are ways to lessen the reliance on any single policy and the burden borne by any particular set of citizens. Most proposals to address long-term entitlement debt, for example, rely on a combination of tax increases, benefit reductions and eligibility changes to find the trillions necessary to safeguard the system over the long term.

No combination of tax hikes and spending cuts, though, will change the total burden borne by current and future generations. For the existing unfunded liabilities to be covered in the end, someone must pay $99.2 trillion more or receive $99.2 trillion less than they have been currently promised. This is a cold, hard fact. The decision we must make is whether to shoulder a substantial portion of that burden today or compel future generations to bear its full weight.

$330,000 from every man, woman and child in America?  A sixty-eight percent tax increase?  A complete abolition of all federal spending other than entitlements?  If that doesn’t get your attention, I can’t imagine what would.  Keep in mind that it is not a question of whether to enact these programs or not.  That decision has already been made.  In some cases the blunders were made many decades ago.  In the case of the Medicare Prescription Drug Bill, the irresponsibility was much more recent.  Regardless, the public has already incurred the debt.   The question is what to do about it.

Here I must take issue with Mr. Fisher, with whom I generally agree.  He correctly identifies the way governments have historically reacted to this issue:

It is only natural to cast about for a solution—any solution—to avoid the fiscal pain we know is necessary because we succumbed to complacency and put off dealing with this looming fiscal disaster. Throughout history, many nations, when confronted by sizable debts they were unable or unwilling to repay, have seized upon an apparently painless solution to this dilemma: monetization. Just have the monetary authority run cash off the printing presses until the debt is repaid, the story goes, then promise to be responsible from that point on and hope your sins will be forgiven by God and Milton Friedman and everyone else.

We know from centuries of evidence in countless economies, from ancient Rome to today’s Zimbabwe, that running the printing press to pay off today’s bills leads to much worse problems later on. The inflation that results from the flood of money into the economy turns out to be far worse than the fiscal pain those countries hoped to avoid.

So far, he is dead-on accurate.  But I’m sorry to say that I don’t think he’s correct when he insists:

Even the perception that the Fed is pursuing a cheap-money strategy to accommodate fiscal burdens, should it take root, is a paramount risk to the long-term welfare of the U.S. economy. The Federal Reserve will never let this happen. It is not an option. Ever. Period.

That monetizing the debt would devastate the United States economy is beyond doubt.  But he is wrong to say it will never happen.  It can, and will, unless we confront this crisis now, and aggressively. 

And how should we confront it?  As Mr. Fisher puts it:

This situation is of your own creation. When you berate your representatives or senators or presidents for the mess we are in, you are really berating yourself. You elect them. You are the ones who let them get away with burdening your children and grandchildren rather than yourselves with the bill for your entitlement programs….Right now, we—you and I—are launching fiscal bombs against ourselves. You have it in your power as the electors of our fiscal authorities to prevent this destruction. Please do so.

Overcoming these problems will be difficult and painful.  But the solution to stopping them from getting any worse is pretty simple really.  We must refuse to elect politicians who are selling the same fiscal baloney that got us into this mess.  I mean really REFUSE.  If forced to choose between two fiscally irresponsible candidates, choose neither.  Demand a real choice.  This may well be the greatest crisis our country has ever known.  We cannot afford to ignore it.

Here’s the full text of the speech:

If the magnitude of the public debt crisis doesn’t worry you, tune in tomorrow for the stunning corollary…

Grace and Peace.