The next great crisis: America's debt

[BrownIndian]

(Fortune Magazine) -- Normally Paul Krugman, the liberal pundit and Nobel laureate in economics, and Paul Ryan, a conservative Republican congressman from Wisconsin, share little in common except their first names and a scorching passion for views they champion from opposite political poles. So when the two combatants agree on a fundamental threat to the U.S. economy, Americans should heed this alarm as the real thing. What's worrying both Krugman and Ryan is the rapid increase in the federal debt - not so much the stimulus-driven rise to mountainous levels in the next few years, but the huge structural deficits that, under all projections, keep building the burden far into the future to unsustainable, ruinous heights.

 

The bill is far too big for only the rich to pick up. There aren't enough of them. America will have to lean on citizens far below the $250,000 income threshold: nurses, electricians, secretaries, and factory workers. Within a decade the average household that pays income tax will owe the equivalent of $155,000 in federal debt, about $90,000 more than last year. What the Obama administration isn't telling Americans is that the only practical solution is a giant tax increase aimed squarely at the middle class. The alternative, big cuts in spending, aren't part of the President's agenda. To keep the debt from wrecking the economy, the U.S. would need to raise annual federal income taxes an average of $11,000 in 2019 for all families that pay them, an increase of about 55%. "The revenues needed are far too big to raise from high earners," says Alan Auerbach, an economist at the University of California at Berkeley. "The government will have to go where the money is, to the middle class." The most likely levy: a European-style value-added tax (VAT) that would substantially raise the price of everything from autos to restaurant meals.

 

As Krugman and Ryan point out, the problem isn't so much the big budget gaps for this year and next, though their scale is shocking. It's the policies that will allow the trend to become far worse in the future. After the stimulus spending winds down and the economy recovers, our spending will still far exceed our revenues. In 2009 the U.S. will post a deficit of $1.8 trillion, or 13.1% of GDP, according to the nonpartisan Congressional Budget Office, twice the post-World War II record of 6% in 1983 under Ronald Reagan. Now let's look forward to 2019, the final year for the budget projections for the administration and the CBO. Even in a scenario that assumes healthy economic growth, the CBO puts the 2019 deficit at $1.2 trillion, or 5.7% of GDP. "That wouldn't be a huge number for an economic downturn, but it's extremely high in a full-employment period," says William Gale, an economist at the centrist Brookings Institution. It gets worse from there. Around 2020 the cost of the big entitlements, Social Security and Medicare, soar as the peak wave of baby boomers retire.

[BrownIndian]

To understand why a massive tax increase, probably a VAT, is the mostly likely outcome, it's crucial to look at what's driving the long-term, widening gap between revenues and spending. Put simply, spending is following a steep upward curve, while revenues are basically fixed as a portion of GDP. Why? Because future spending is driven mostly by entitlements, which are programmed to rise far faster than national income, while revenues depend heavily on the personal income tax, which yields receipts that typically rise or fall with GDP. Under George W. Bush, the U.S. experienced a prelude to the crisis before us: Spending rose rapidly, while revenues remained reasonably flat. Bush created an expensive new entitlement, the Medicare drug benefit (cost this year: $63 billion), and let spending on domestic programs from education to veterans' benefits run wild. Over seven years the wars in Afghanistan and Iraq added a total of some $900 billion to the budget. All told, Bush raised spending from 18.5% to 21% of GDP, setting in motion a chronic budget gap by piling on new spending without paying for it.

 

Under Obama the Bush trend keeps going, but this time on steroids. It's important to see the Obama budget projections as two phases, the crisis period of astronomical spending in 2009 and 2010, and the normal phase, from 2011 to 2019. Most of his stimulus and other big programs are designed to give the economy a jolt in 2009 and 2010 and then largely disappear or be offset by tax increases - at least that's the plan. Then the surge in outlays comes from two forces that would wreak budget havoc for any President: the relentless rise in entitlements and the surge in debt interest.

 

Making the challenge far greater: Obama's budget is packed with a wish list of expensive new programs, led by a giant health-care-reform plan. He promises to pay for them mainly with higher taxes. But if extra revenues don't materialize - and most that he's proposed now look unlikely - will he abandon many of his cherished priorities or push them through without full funding, substantially deepening the debt crisis? The answer could determine how fast America reaches the hour of reckoning that could usher in a VAT.

[Mr. T]

Thats why Obama is wanting the carbon credit tax, which will raise gas 60cents a gallon let alone what will our utilities cost?

 

 

They are not stopping there either Obama is proposing to increase taxes on businesses, who most are trying to stay a float as it is.

 

 

What do you think that will do to the unemployment numbers let alone businesses will have to increase prices to recover their losses. I dont know when hyper inflation is going to hit the fan but its coming soon.

[calfoxwc]

I say again, there are legit economic experts that are saying we are facing the probability

 

of hyperinflation.

 

That will be a disaster for our country.