Prudence

I’ve been planting all day and I’m tired.  I have to be up early to pick tomorrow’s CSA share before I take goats the market and hopefully get back in time to do the delivery at noon.  I’m very tempted to just post a picture of our new kids, or something equally easy.

But against my better judgment I’ve decided to offer few thoughts inspired by a post by Sandy Leeds (http://leedsonfinance.com/) on some of the fallout over a controversial paper by a couple of Harvard economists.  The post has put a few things on my mind about sustainability.  The italicized content is from his post.

If debt-to-GDP = 100%, that means debt is the same as GDP. If interest rates return to their 30-year average (prior to the Fed’s zero interest rate policy), that would put rates around 5.7%. That would mean our interest would equal 5.7% of GDP each year. Our tax revenue has averaged 18% of GDP for the past 60+ years. So, if interest is eating up approximately 1/3 of our tax revenue, we’re not in a sustainable position.

Debt is crippling our country and this level of debt is unsustainable.

3. The real problem (that much of the historical data misses because this problem didn’t exist in many of the past years) is that we have huge unfunded liabilities. If they’re not changed, we will always be running a deficit. If we’re running a deficit (and the “primary deficit” that we all discuss does not even include our interest expense!), when you add in our interest, we will have huge problems. As our baby boomers start to retire in force, we’ll see this get worse.

It drives me nuts that so few people are talking about this, even though the viability of our society may well depend upon how we respond to it.  While we are overconsuming in nearly all areas of government, the principal problem is with so-called entitlement programs (primarily Social Security and Medicare).  They are actuarilly unsound and would bankrupt us if we didn’t spend a dime on anything else.

4. To me, these numbers are pretty simple and pretty obvious. But, just as simple and obvious is that we can’t just cut everyone’s Social Security and Medicare and think that it won’t affect anything. First, we need to give people time to plan (and change the amount they save – and this will impact consumer spending). Second, we need to recognize that this will impact retirement for millions of people. 

The Social Security Administration says that among Social Security beneficiaries, 53% of married couples and 74% of unmarried persons receive 50% or more of the income from Social Security. Among elderly Social Security beneficiaries, 23% of married couples and about 46% of unmarried persons rely on Social Security for 90% or more of their income.

Health care is unaffordable (I would argue in large part because of third party payors like Medicare–but that’s a different post) and many of our citizens are now dependent upon Social Security to live.  So we can’t just shut down these programs without causing a lot of suffering.

Of course there is no immediate danger of that happening.  Neither of the dominant political parties would dare call for any reduction in these benefits.  That would be political suicide.  In fact, it is standard practice for both parties to accuse each other of planning to “cut” Social Security and Medicare.  Unfortunately, it seems we just cannot expect any grown-up conversation on this subject from the politicians.

So we’re in quite a pickle, aren’t we?  We can’t afford the programs, a very high percentage of senior citizens are utterly dependent upon them, and there is no political will to try to solve the problem (as opposed to using it as a political scare tactic).

Obviously this is a scenario that will take a lot of wisdom, political courage and public sacrifice to solve.  Equally obviously, those are very rare commodities these days.

So the easy solution will be to kick the can down the road and rely on the Fed’s printing press to magically erase excess debt and create “money” to pay for things our society cannot afford.  That is a recipe for collapse.

As always the first and best solution is to start taking action ourselves.  We ought not wait for the government to fix our problems for us.

In the aftermath of the last financial meltdown consumer debt has decreased and savings have increased–despite unprecedented governmental and quasi-governmental pressure to borrow and spend.  I’m encouraged by that.

There are other important ways we can start freeing ourselves from the risks of relying on (generally) shortsighted and/or stupid politicans.

Among the most obvious, we should protect and preserve our health, save what we can, grow as much of our own food as possible, develop and participate in local economies, and consume less– no matter how much Washington tries to motivate us to consume more.

May we all resolve to break the cycle of dependency.

There.  I feel better now.

We now resume our regulary scheduled programming.