This article first appeared at The McAlvany Intelligence Advisor on Wednesday, October 22, 2014:
The Congressional Budget Office’s August update to the federal budget and outlook for the next 10 years released last week was so filled with questionable assumptions as to make their conclusions completely unrealistic. As expected, the mainstream media focused only on the parts of the report that fed and supported their worldview. For instance, the CBO said that revenues were expected to increase by about 8% over last year to a world record $3 trillion, thanks to increases in individual income taxes, payroll taxes, and corporate income taxes.
This was understood by the White House and establishment economists to vindicate the government spending on stimulus programs that were allegedly necessary to rescue the economy from the ravages of the Great Recession. When the CBO further announced that the deficit this year had fallen sharply from $676 billion last year to just $506 billion this year, this was also taken as good news and further proof that the cost of those stimulus programs would ultimately be paid for by economic gains and revenue increases in the future.
Missing from any mainline discussion of the report was the note that those deficits were projected to increase substantially over the next several years, resulting in a national debt of $27 trillion by 2024. Also missing was the reason why: under its baseline projection, the CBO estimates that government spending will outpace the economy’s ability to pay for it. The CBO estimates that government spending will grow by 4.5% a year for the foreseeable future while the economy is likely to continue struggling to grow at 3%.
As questionable as those assumptions may be, however, they fade into relative insignificance when it is realized that the unfunded liabilities for Social Security, Medicare, and Medicaid are missing entirely from the CBO’s calculations. The last time those unfunded liabilities were measured (in 2009), they amounted to $7.7 trillion for Social Security and another $38.2 trillion for Medicare and Medicaid. In other words, the CBO missed the mark by some $45.8 trillion, and those numbers are five years old.
This naturally raises the question of how will they be paid? Terence Jeffrey, writing for CNS News, took the CBO numbers and concluded that the national debt burden borne by each private worker in the economy now exceeds $200,000. This is up from $66,000 in the year 2000, a triple in just 15 years.
The trouble is that since 2003, the average household has seen its net worth decline by more than a third, from $88,000 in 2003 to just $56,000 today. According to the Russell Sage Foundation, most of the damage was done during the Great Recession which pushed millions of homeowners underwater on their mortgages, forcing many of them to walk away from them.
In its report released last week, the Social Security Administration revealed that more than half of American wage earners make less than $30,000 a year, or less than $600 a week. Many of them continue to use food stamps to make ends meet even as the economy slowly recovers. This surprised Robert Doar who wrote at Real Clear Markets that food stamp usage – now called SNAP – actually increased in April and then again in June, exactly the opposite of what has happened in the past. Wrote Doar:
From 1969 until 2003, SNAP has been very responsive to changes in the unemployment rate, with the number of recipients rising as unemployment rises and declining as unemployment declines.
But that seems to have changed. As unemployment declined between 2003 and 2007, the number of SNAP recipients marched steadily higher. Then, as the Great Recession hit, the SNAP caseload went even higher.
As many of these private American workers find it increasingly unable to survive on wages that continue to shrink in real purchasing power, they also aren’t able to save for the future. According to Bankrate.com, some 69% of 18- to 29-year-olds haven’t saved anything, along with 33% of 30- to 49-year-olds, 26% of 50- to 64-year-olds, and 14% of people 65 and older. The inevitable conclusion is this: over a third of all Americans have saved no money for retirement.
If that’s the case, and the average American’s finances are in such dismal condition, how can they be expected to pay off their share of the national debt? The answer is they won’t, because they can’t. And if that is so, then just how will the national debt be paid off? The answer is the same: it won’t be.
As Herb Stein, Chairman of the Council of Economic Advisers under presidents Nixon and Ford, cleverly put it: “If something cannot go on forever, it will stop.” Absent sufficient numbers of politicians in Washington growing a backbone, there is only one answer: default. Robert Romano, a spokesman for Americans for Limited Government, put it this way:
We’re more likely to default than to ever pay it off. The national debt has increased every single year since 1958 to its current level. Who really believes that trend will be reversed?
The question isn’t a matter of whether there will be a default, but when. The best answer is when China and Japan wake up to the fact that the AAA rating on US treasuries is false, fraudulent, and mythical and they then try to unload the more than two trillion dollars of US debt that they currently hold. Only then will the days of profligate spending by politicians skilled at kicking the can end. Only then will they learn the truth of Herbert Stein’s dictum.
The New York Times: The Typical Household, Now Worth a Third Less
Social Security Administration: Wage Statistics for 2012