Friday, September 4, 2009

National Debt: non-sustainable political promises

Government deficits over the next 10 years were recently revised by the Obama Administration to $9 Trillion Dollars from the $7 Trillion Dollars estimate the Obama Administration made only a few months ago. Amazing! In a matter of months the Deficit has increased by 28%! How in the world did the US Government Deficit arrive at $9 Trillion Dollars?

Further, the National Debt stands at $11 Trillion Dollars with the daily increase in debt currently at $3 Billion Dollars.

A better question is what is the US Government going to do about the approximately $62 Trillion, at present value, of unfunded obligations in the areas of Medicare, Medicaid, Social Security and Military Pensions?

How did all this debt pile up? Why is the debt still piling up? How was all this debt allowed to pile up?

In a very broad Marco Economic sense, and in a very broad Political-Economy sense, one clearly needs to examine the inter-relationship between the Political Class, the Producer Class, and the Recipient Class.

The Political Class has been making an argument since the 1930's that the Producer Class has a "moral obligation" to transfer income and wealth to the Recipient Class.

The Recipient Class comes in several varieties. In some instances the Recipient Class collects Welfare, Food Stamps, Tax Credits, Medicaid. In other cases the Recipient Class collects Social Security and Medicare. In other cases the Recipient Class is the Military receiving deferred compensation regarding Military Service Pay. There are also Temporary Recipient Class members such as those receiving Unemployment Insurance.

Its important to point out that the Recipient Class members are in many cases past Producer Class members. That is, a worker or military personnel are within the Producer Class for many years then end up in the Recipient Class in retirement.

Its also important to point out that some Recipient Class members are permanent Recipient Class members such as the extremely unskilled worker and the Welfare Class (those constantly on Welfare through out their working years).

The "wealth" of the Political Class is a factor in this discussion. The wealth of Political Class generally comes in several varieties and needs examined. There are the inherited wealth types such as Rockefeller, Kennedy and Kerry. You have life long Politicians such as Byrd, Rangle and Dodd who accumulate wealth during their extended terms as Politicians. Further, new money wealth Politicians such as Barack Obama and John Edwards exist. The point being, and made by many over the years, is that wealthy Politicians have no financial obligations. They are so wealthy that paying taxes, paying bills, putting children through college, etc., are minor inconveniences.

The wealth of many in the Political Class puts them in a position that money is of no matter and they move into the altruistic/moralization area. It could be argued in the assent to self actualization in the realm of financial resources an additional step exists beyond self actualization regarding finance, which is: the moralistic/altruistic stage.

The wealthy Political Class (sometimes referred to as the Political Elite or Elitists) then begin to moralize to the Producer Class. That the Producer Class must, by moral reasoning, subsidize the Recipient Class.

The wealthy Political Class then enlists other Politicians that have moral/altruistic/collectivism on their agenda.

The Political Class then saddles the Producer Class with obligations to the Recipient Class. The "moral obligations" of the Producer Class to the Recipient Class translate into income and wealth transfers to the Recipient Class. In other words, these supposed moral obligations have a price tag.

At this point there becomes a disconnect.

The Political Class wants to promise so much to the Recipient Class that economic activity of the Producer Class would be so depressed, the economy would constantly be in recession. Taxes would be so high that incentives for the Producer Class would be so low, economic activity would fall. A constantly depressed economy would threaten the electability of the Political Class.

What kind of tax increases would be required to sustain such past and future promises? How about 50%. (1) A 50% tax increase would send the economy into a major tail spin now and in the long run.

Therefore, all of the past and future Moral Obligations that the Political Class has saddled the Producer Class with, as transfers to the Recipient Class, have been "financed". In other words, the wealth and income transfers from the Producer Class to the Recipient Class were promises that were not economically sustainable on a current account basis, hence the obligations were financed.

Its highly likely the financed promises were in fact financed to extend the political careers of the Political Class.

There is an unknown, yet certain point, where the financed promises accumulate to a level that is not sustainable. The unknown, yet certain point of non-sustainable financed promises, that began in the 1930's, has arrived.

Think of this argument for a moment. The argument by Pro Health Care Reform proponents is that Health Care costs are rising too quickly and need reined in via reform. Health Care costs are not rising any faster than Government Debt. However, the Government Debt increase is never mentioned in the same breath as Health Care Cost increases.

The bottom line is that the promises of Politicians to the Recipient Class do not match the ability of the economy and the Producer Class to pay for such promises. Since prior promises are not affordable, and given the unsustainable debt level, future promises have to go on hiatus for years and years to come. Sorry, no more promises. In effect the size and scope of Government needs reversed. Prior promises need reduced to match what is affordable. In the mean time the smaller government and smaller promises yield savings that need directed to reduction in Debt. It may take 20 or 30 years to reduce debt to levels that make financial sense.


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