8th

Can’t Last Forever

January 2011

By

I hope somebody in Washington paid attention to Greece, Ireland, Portugal, and Spain finally succumbing to deficit spending. We’re no better, those nations just fell faster.

In the past ten years, our nation’s debt as a percentage of GDP has risen from 32% to 66%. Even worse by 2020 the Congressional Budget Office’s “most politically likely scenario” predicts the debt to GDP ratio to rise to 90% by 2020, and to 233% by 2040. These figures don’t include promised medicare and social security payments. In comparison, during the Second World War this ratio was 106%.

Something’s gotta give. In 2009, the U.S. spent $187 billion (more than China’s defense budget) paying off interest on government debt. More debt equals more interest payments, Eventually the U.S. will have to implement “austerity measures.” What will it be… medicare? Social security? According to Harvard historian Niall Ferguson, a declining power cuts military spending first. With interest payments on the national debt infringing on government spending, voters want their entitlement payments over a new EFV for the Marines.

Congress does not want to cut military spending during wartime- as we are seeing with the current resistance to the modest cuts offered by the SecDef (even though the defense budget will still increase). But basic arithmetic will force the U.S. to downsize its military. At least the Pentagon is getting a head start.




Posted by jjames in Uncategorized


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  • Charley

    We are a comparatively low taxed state – that is what will have to change if the populace demands healthcare beyond retirement age.

  • Aaron L. Connelly

    Er, I agree with you that we need to get our deficit under control. But you’re wrong in saying we’re “no better” than the European countries and predicting the same path for us.

    The critical difference between us and the European monetary system is our ability to borrow in our own currency from other countries. So long as the dollar remains the world’s reserve currency, and the Federal Reserve can manage the value of the reserve currency to meet our economic needs, we have a tremendous advantage over all other countries.

  • http://cdrsalamander.blogspot.com CDR Salamander

    The answer goes way beyond the defense budget. That is where the real battle will take place.

    The era of Pax America is over though….and we did it to ourselves.

  • UltimaRatioReg

    The Defense budget comprises just 22% of the budget and only 3.8% of GDP. Even under the wildly optimistic USG estimates of $2.59 trillion in accrued deficit between 2011 and 2015, the $100 billion cuts by 2015 represent about 3.8% of that deficit, well within the margin of error for the predictors.

    While DoD could certainly cull unnecessary spending (eliminating the Diversity Directorate, reducing bloated senior ranks in USN especially, getting away from NAVSEA’s “tiffany ships”), please don’t represent the proposed DoD budget cuts as anything other than symbolic. Even with the $100 billion cut, 96.2% of the budget deficit remains, and if those cuts to DoD cripple America’s preparedness and defense posture, they certainly aren’t worth the gesture.

  • Gundog15

    We are a nation at war and yet the first target for budget cuts to reduce the federal deficit is the DoD. What about the hundreds upon hundreds of federal agencies, departments and other federally funded fluff organizations? Are ALL of these critical to maintaining U.S. infrastructure? Can some be eliminated, combined, or funding reduced? Here’s the list:

    http://www.usa.gov/Agencies/Federal/All_Agencies/index.shtml

    …and let’s not forget earmarks

  • Derrick

    I can see deep cuts being made in weapons systems and senior ranks, but in terms of personnel, I doubt President Obama would do it. With a good chunk of the military staffed by minorities, which form a core constituency for President Obama, he is unlikely to let staff go before his next election.

    I agree with the first post about taxes and social benefits. Taxes have to go up and benefits have to be reduced in order to produce a realistic deficit reduction plan. As I’ve suggested before, first raise taxes on actors, athletes, musicians, entertainment professionals because their activities are not essential to national security and since they usually support Republicans, it’s probably one tax hike that’s likely to make it through the Republican House of Representatives.

  • RickWilmes

    Here is something to consider when it comes to economics and out elected officials.

    “One recurring point throughout the book is that an economy doesn’t grow because people spend; rather, people spend—or are able to spend—because the economy grows. This is basically Say’s Law, the idea that supply or production constitutes demand or wealth. Why is it that so few people, especially politicians and economists today, grasp this fairly elementary point?

    AS: I’m glad you asked about that because, if you had to underline the thesis sentence of this entire book, I think that’s it. As we put it somewhere in the third or fourth chapter, the economy didn’t grow because the islanders consumed more; they consumed more because the economy grew.

    This is easy to understand when it’s laid out in stark terms, as it is in the book. But when you turn on the television today, or pick up a newspaper, or listen to the Council of Economic Advisors speak, you will see near unanimity in the belief that economies grow because people spend. The idea is that if the government can stimulate spending, or somehow figure out how to make people spend more, then businesses will sell more goods, and that money will trickle through to their employees, who will spend it, and so on, making the economy grow.

    You can see how that could seem to make sense to people. Some Americans never see a production line or the inside of a factory. But they all see the inside of a retail store, and they say, in effect, “Yeah, if I’m spending more money, then the stores can stay open, the lights stay on, people have jobs, everyone’s busy, and that’s good.” But the question remains: Where does this stuff come from? Many people don’t really have any tangible connection with the fact that things have to be made. So they never grasp that production is what makes spending possible.

    CB: Do you think that part of the problem is poor education? I can see how some people could fail to grasp the relationship of production to consumption on their own. But shouldn’t economics classes be able to clear up the confusion pretty quickly? How has economic education gone so far afoul that even people who have studied economics don’t understand this relatively straightforward point?

    AS: The academic underpinning for all this confusion is called Keynesianism. [John Maynard] Keynes came up with the idea of a demand-driven economy, an economy that grows by means of spending. One of the things we point out in the book is that Keynesian economics was a Christmas gift for politicians, because it told them that they could make the economy better simply by spending money. It told them that the government could print money, increase the budget, not raise taxes, and thereby make the economy grow. This idea enabled politicians to say, “You don’t need to suffer at all in order to fix the economy. Just elect me. I won’t raise your taxes, but I’ll make the economy better. It won’t cost you a dime.””

    http://www.theobjectivestandard.com/issues/2010-winter/andrew-schiff.asp

  • UltimaRatioReg

    “hey usually support Republicans”

    Only in Bizarro World…

  • Wharf Rat

    Derrick:

    You serious? ‘As I’ve suggested before, first raise taxes on actors, athletes, musicians, entertainment professionals because their activities are not essential to national security and since they usually support Republicans, it’s probably one tax hike that’s likely to make it through the Republican House of Representatives.’

    I assume that you mean those people you mention ususually support Democrats, not Republicans. That said – unless you’re willing to go after specific industries, rather than income levels, even this isn’t likely. Please remember, the professions you list tend to be high income earners, and they already pay a higher percentage of their incomes that the rest of us, regardless of what their political affiliation is. If you support tax increases, it’s got to come from the 50% of the population that doesn’t pay Federal income taxes – and politically that won’t fly either. Those people tend to have gross incomes at $50,000 or less for a family of 4. And you have to drop the Earned Income Tax credit. You can’t pay more out than what has been withheld.

    The bottom line is this is a freak show. Who in their right mind thinks it’s okay to spend $1.4 trillion annually more than we take in in the last two budget cycles. That’s exactly why 67 Republicans were just elected to the US House of Representatives.

    That freak show Minority Leader Nancy P stated that it was George W and his tax policies that caused the problems that the Dem’s were trying to fix, and got blamed for. And she’s passing off health care repeal as balloning the national debt, when ANYONE with a right mind knows that she is LYING and it’s the opposite, as well as a power grab by the Federal Government that is unconstitutional.

  • Wharf Rat

    URR:

    As usual – outstanding post.

  • Wharf Rat

    URR:

    Quick question – with Gates likely leaving this year, is the reason he’s pursuing these defense cuts based on political calculations, he truly believes it’s the right thing to do, or a combination?

    I know he’s well thought of, so I know he probably can’t stomach bloated, unecessary spending. But he seems to be much quicker on the draw than other cabinent members, and I would rather have other cabinent members stand up first in their areas of influence.

  • UltimaRatioReg

    Wharf,

    I dunno if Gates exiting the scene is his reason for looking for the cuts. There are areas in the defense budget that should be closely scrutinized, and some hard decisions made, but I am not convinced that $100 billion can be squeezed out without some necessary and valuable programs being discarded. That said, some real cost-saving measures such as the thinning of bloated command structures, reduction in GOFO strength (How does 25% sound? Let the 0-6 jobs be manned by 0-6s!), and bringing shipbuilding costs in particular under control, those and others are all necessary and prudent.

  • Grandpa Bluewater

    What gets cut this year doesn’t really matter. What is important is that this is just the beginning, and this is the thin edge of the wedge.

    Mishandled, all too easily, this can end with the nation forced into a war…with an inadequate navy, inadequate industrial base, too few, too old ships and planes, and too little ammunition. The crews will be unrealistically trained, but very politically correct.

    The Spanish-American War redux…the USN gets the role of the Spanish.

    Not today, not tomorrow, but sooner than anyone imagines.

    Perhaps we will get lucky (again) and suffer a humiliating but strategically insignificant defeat to reverse the swing of the pendulum.

    Political parties…really not even worth worrying about. The die is cast or very soon will be.

    All that the junior people, who will lead in the coming ordeal, can do is prepare themselves, for the day when they will be “the few” whose fidelity, bravery, competence and zeal will be what we will rely on.

    How soon? Unknowable. When have we gone 30 years without a war?

  • Wharf Rat

    I’m frusterated, like a lot of you, that the Pentagon seems to always be attacked for a bloated budget. Yet when there is a Haiti, Indonesia, Katrina problem – who comes in and saves the day each time? Our guys/gals do. Nothing better than the proof of American exceptionalism than the sight of an LHD (LPD & LCAC’s) and carrier offshore, C-17’s and C-130’s landing, and crew members with their helmuts and sun visors still on getting in lines passing supplies with natives.

    I suspect the truth is that other departments and cabinets are much more bloated with unecessary (sp?) spending and yet can’t produce the results of our military.

  • Wharf Rat

    Last post:

    My church supports missionaries (school/orphanage) in Haiti who were in country when the quake occured. They briefed us a couple months later on the situation.

    I was the only member of the congregation to ask on the role of the military. Of course one funny story came out that they had to help a couple Marines with a broken down Humvee, but the meat of the conversation stated that without the USAF at the airport, without USNS Comfort, and the other US Navy warships and Marines more lives would have been lost. Whatever the MSM properly reported on the military, the effectiveness of the US Military was 10 to 100 times times that in helping this country.

  • milprof

    Gundog asked: “What about the hundreds upon hundreds of federal agencies, departments and other federally funded fluff organizations? Are ALL of these critical to maintaining U.S. infrastructure? ”

    The problem is that those other agencies are generally tiny in terms of spending.

    To a rough approximation, the federal budget consists of five items:

    1. Social Security
    2. Medicare
    3. Defense
    4. Interest Payments
    5. Everything else combined

    Everything else combined is about the same size as Defense — and about 10% smaller than defense if you consider veteran’s benefits as part of defense spending instead of ‘everything else’. Another 10% or so of ‘everything else’ covers border security, including USCG, and federal law enforcement.

    Whacking dozens of obscure agencies at a time doesn’t get you very far relative to the size of the deficit. You can’t get there from here without cutting Social Security/Medicare, or cutting Defense, or raising taxes.

  • UltimaRatioReg

    “cutting Social Security/Medicare, or cutting Defense”

    See above. The Defense cuts forecast will encompass less than 4% of the deficit 2011-2015.

    The Department of Education, Department of Energy, and Homeland Security aren’t “obscure” and severe reductions in their bloat and mission creep would impact spending far more than the contemplated DoD reductions.

  • http://CGblog.org Chuck Hill

    Think the first step is a simple listing of where the money in the federal budget goes. It ought to be included in all IRS tax forms. “This is what you are buying.”

    The public perception of where the money goes is badly skewed.

  • Derrick

    Sorry…meant to type “usually support Democrats”. But I think you all figured that one out. LOL

    True…the majority of money in the US goes to social benefits…particularly social security and medicare. Painful cuts will have to be made to those in order to balance out the budget.

  • Wharf Rat

    URR:

    Another great response. My wife is a public school teacher, and we provide an estimated $700 annually to the teachers unions and we can’t get out of it. Think about the tens of thousands of teachers doing this to combine into the hundreds of millions of dollars.

    So – tax dollars which pay my wife’s salary, is then turned around to a union (both state and federal), which then says we aren’t providing enough taxes dollars to fund education. When education policy should stay at the state and local level, please explain to me why there is a Department of Education sucking up tax dollars at all.

    I suspect that the unions need another voice at the federal level to keep up their funding mantra, while if we dropped that department and moved that cash locally, we wouldn’t have a funding problem. Especially getting rid of the bloat.

  • Matt Yankee

    Unions should be banned from all govt. period. Unions allied with govt. are an unholy alliance and a threat to national security when they rape the taxpayers and bankrupt the system as they have.

    Mexico is yet another time bomb for the debt. We will be forced to either put up a very expensive barrier or intervene directly with nation building efforts both of which will cost dearly. I wish everyone was aware of how illegals work the system for all kinds of govt. subsidies. The difference btw. Mexico and the US is great and unless we want to keep it that way we must protect our wealth, our lives, and our land from corrupt Mexico and corrupt, lying, stealing Mexicans who envy the land we took from them and THEY never forgot.

    To be honest I don’t think the govt. has any hope of undoing their mess and probably needs to go bankrupt for any real change to take place. In fact the only chance for govt. to get out from under all the insane pensions negotiated btw. the govt. and the unions is for a bankrupty court to do the deed. When your average govt. salary is more than the average private sector salary (google it) you know something is horribly wrong. California will pave the way as they continue to bleed out quicker than anywhere else even Greece.

  • Grandpa Bluewater

    The first step in getting out of the hole is stop digging. When the tax law favors outsourcing industry overseas and the answer to the lost tax revenue from lost industry and the unemployment resulting has been borrow from the main competitor, the right answer might not be to skimp on or flatline maintenence (of a Navy, as an example).

    One might consider shifting the tax code a bit, to favor those companies who build up the USA and hire its citizens. That way the profits stay here to be taxed, as do the wages. Imports pay duty which goes straight to paying off debt.

    The old paradigm was to import only what your must, favor the development of natural resources and manufactures, keep energy costs low by maximizing the use of the supply within our borders and borrow as seldom and as little as possible.

    It worked fairly well. The new one seemed to work better. Until the limit was reached. This has been coming for a long time. Likely we will make it worse before we let it get better.

  • UltimaRatioReg

    And Grandpa, don’t forget the crushing environmental costs. Companies that manufactured saw the cost of environmental regulation skyrocket, with increasing fines and capricious regulations that looked for all the world as if they had been designed by anti-business environmental radicals. That, with all the other things you name, drive the machine tool industry out of my state.

    There were several large machine shops/gear cutters that brought in a great deal of tax revenue and employed tens of thousands of people in a state of under a million. They are all gone, now. And the machinists who were employed there who saw their livelihoods driven out to southern states and then foreign shores chose to retire rather than learn a new trade in their 50s and 60s.

    So we are left with an aging population, virtually no industry, a shrinking tax base, and an exploding number of people drawing from rather than contributing to the state coffers. Sound familiar?

  • UltimaRatioReg

    Burma Shave,

    “drove the machine tool industry”…

  • http://CGblog.org Chuck Hill

    Apply VAT instead of Income Tax. Credit the Vat back on exports. It would make a huge difference.

  • RickWilmes

    “So we are left with an aging population, virtually no industry, a shrinking tax base, and an exploding number of people drawing from rather than contributing to the state coffers. Sound familiar?”

    Sounds like Starnsville without the 20th Century Motor Company!!!

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