As we enter the New Year, the financial landscape is littered with essentially bankrupt governments. Governments at every level are in dire financial straits. During the last decade’s governmental spending binge, total state and municipal bond debt has nearly doubled to almost $3 trillion, while federal debt rose over 150 percent from under $6 trillion to almost $14 trillion.
Several dozen cities, including Harrisburg, Los Angeles, and Detroit, teeter on the brink of insolvency. Municipal bonds, once considered ultra-safe, are approaching junk status.
State governments from coast to coast are broke. From Republican Governor Chris Christie’s New Jersey on the east coast to incoming Democratic Governor Jerry Brown’s California on the west coast, the piper wants to be paid for years of fiscal profligacy. Illinois is six months behind in paying its bills. Cash-strapped Arizona sold the state capitol, supreme court, and legislators’ office buildings to private investors. According to “60 Minutes,” since the Great Recession started in 2008, state governments have spent a half-trillion dollars more than their revenues (despite constitutional prohibitions of deficit spending).
The federal government, of course, is the most indebted of all. In addition to the explicit debt of nearly $14 trillion (current figure available at www.usdebtclock.org), Uncle Sam has tens of trillions of dollars in unfunded liabilities. Interest rates on Treasury bonds have risen sharply recently, as investors (most notably the Chinese) have started to dump them.
Given this grim state of affairs, states and cities are looking for ways to tighten their belts. Not Washington, though. Consider the December deal between President Obama and congressional Republicans to prevent tax rates from rising: This bipartisan deal blew a three-quarter-of-a-trillion-dollar hole in the federal budget.
In exchange for keeping personal income-tax rates unchanged for only two years, Republicans assented to an unaffordable spending splurge. Among other concessions, the GOP agreed to over $50 billion for extended unemployment benefits. The deal doles out billions in subsidies to the economically uncompetitive and environmentally harmful ethanol industry at a time when even Al Gore admits that ethanol subsidies are indefensible. (The Obama-GOP coalition also propped up the wind-energy boondoggle.)
Even more shocking, Republicans acquiesced to Obama’s reckless plan to reduce FICA withholding from workers’ paychecks from 6.2 percent to 4.2 percent. Social Security payouts will soon exceed revenues within the next few years; yet, instead of measures to shore up cash flow, we get an agreement that weakens the system. I agree with Representative Earl Pomeroy (D-ND), who warned, “When you start to signal that the [Social Security] tax levels are negotiable, you end up in long-term trouble … in terms of making absolutely certain that the entitlement funding streams are secure.”
It’s easy to understand why progressives (President Obama, ex-Speaker Pelosi, the labor unions, et al.) support reducing workers’ Social Security contributions. Favoring a major redistribution of wealth, they intend to solve Social Security’s inevitable cash crunch by grabbing money from other sectors of society, perhaps even by nationalizing private retirement accounts, as some progressives already have advocated.
Why, though, did Republicans concede to Obama’s unaffordable budget-busting spending wish list? It is because they are mired in the same political mindset that got us into our current bankrupt condition. The Republicans wanted to show that they are willing to give a little to get a little, to prove to critics that they aren’t intransigent or obstructionist. This is a mistake.
With governments going broke, we literally cannot afford politics as usual. We face financial ruin accompanied by some catastrophic mix of monetary breakdown, economic collapse, and social unrest. When a maniac is about to drive the car you are in over a cliff, you don’t make a deal to reduce your speed from 60 mph to 30 mph; you either stop or proceed onward to your doom.
Nobody knows where the point of no return is, or which spending straw will break government’s fiscal back. The only way to find out is by hitting that point and plunging into the resulting vortex. I suspect that most Americans would rather not find out where that breaking point is.
It’s time for a paradigm shift—no more Mr. Nice Guy, no more compromises with bankrupt and bankrupting policies. Reducing government spending before it is too late isn’t a matter of political preference, but of economic imperative.
For decades, the political debate has been between those who want to expand government enormously versus those who wish to increase government moderately. That bankrupt political paradigm has produced bankrupt governments. A new paradigm for fiscal sanity would be a political contest between those who favor cutting government spending a little or a lot. The Tea Party movement notwithstanding, nothing fundamental has changed in Washington. We and our bankrupt governments are due for a day of reckoning.