Do huge deficits matter? Does having an enormous national debt impact us? Will another large entitlement program change our defense spending? The latest estimate is now out from the CBO and the deficit number keeps getting bigger. President Obama's fiscal 2011 budget will generate nearly $10 trillion in cumulative budget deficits over the next 10 years, $1.2 trillion more than the administration projected, and raise the federal debt to 90 percent of the nation's economic output by 2020, the Congressional Budget Office reported Thursday – and this does not take into account healthcare.
I know that we are told this recent healthcare bill will actually reduce the deficit over the next 20 years, but our current president is not the first to tell us this. In the 1930’s Franklin Roosevelt promised us that the new Social Security system would not be a problem and in the 60’s, Lyndon Johnson assured us that the financial impact of Medicare would be minimal.
The reality is these two social programs are bankrupt. The 2009 Social Security and Medicare Trustees Reports show the combined unfunded liability of these two programs has reached nearly $107 trillion. That is approximately 7 times the size of the U.S. economy and 10 times the size of the outstanding national debt.
This was also the first year that cash disbursements for Social Security actually exceeded cash receipts. Now that the intersection of those lines has crossed over, we will never look back. Now, does anyone actually believe that this new massive health care entitlement program will do anything but increase deficits? If the government was run like a business this unfunded liability would need to be recorded on the books. But it is actually off the balance sheet – much like Enron was (I think they went bankrupt).
Check out this graph. It shows that both programs now require about 14 percent of general income tax revenues. As baby boomers begin to retire, that number will soar.
This year it is estimated that the U.S. government will borrow one of every three dollars it spends and a large portion of that money will be coming from foreign countries. As Max Boot recently wrote in the Wall Street Journal, this will have the following negative effects:
1. It will weaken America’s standing and its freedom to act.
2. It will strengthen China and other world powers including cash-rich oil countries.
3. It will put long-term defense spending at risk.
4. It will undermine the power of the American system as a model for developing countries.
5. It will reduce the aura of power that has been a great asset for presidents for more than a century.
In considering the implications for defense, bear in mind that last year government spending in the 27 European nations hit 52% of GDP. However, most of these countries struggle to devote even 2% of GDP to defense, compared to more than 4% in the U.S.
A look at Europe’s defense spending gives us an insight to what could happen if the U.S. switches spending from defense to social welfare. Presently, America protects the “Free World” – what nation will step up to the plate to police the sea lanes, stop the proliferation of weapons of mass destruction, combat terrorism, respond to genocide and other human rights violations? These are all duties currently being performed by the United States. But, this will be increasingly hard to do if entitlement programs continue to flourish in the U.S.
We currently owe nearly $4 trillion to foreign investors like China, Japan, and Brazil. The result of these foreign holdings could be that the central bank of one of these governments could put pressure on the U.S. in ways that its military never could. I think of the phrase “the borrower is a slave to the lender.” A debt ridden U.S. is vulnerable to a run on the American dollar that begins abroad. This issue is even more poignant as it relates to China. The U.S. is slowly losing leverage over the Chinese government and leverage is something we may need as it relates to some of our allies in that part of the world and some crazy regimes such as North Korea.
Another area of concern is that we are currently in an interest rate environment where our costs of borrowed money, as a country, are at an all time low, but as interest rates rise in the coming years, a greater portion of our budget will need to go to pay interest payments on our rising debt. Added to the ever increasing entitlement spending, it is easy to see that military expenditures can only go in one direction – down.
If a simple accountant sitting in central Pennsylvania knows this, imagine what our enemies in Iran, Iraq, North Korea…think. They must take great satisfaction knowing that current U.S. fiscal policy is putting us on a path to reduce the resources available for all military operations in the years ahead.