Democrats and Republicans Alike Have Failed the Nation

It's sad, but some people seem to believe that fiscal responsibility is a partisan issue.

The reasoning goes something like this: Since those on the left favor bigger government and increased public spending while those on the right (apparently) don't, the black hole that is our nation's finances is obviously the fault of the Democrats.

Of course, that perspective is clearly wrong in light of the damage that has been done to our long-term fiscal health over the course of the past eight years. From what I can tell, the Republicans have proved beyond a shadow of a doubt that Democrats don't have a lock on profligacy or bad policies.

In reality, both sides are to blame. We are in this mess because Democrats and Republicans alike have failed the nation. They have allowed self-interest and corrupt politics to overshadow their duty as elected representatives -- their duty to taxpayers.

And that is why, as the following San Francisco Chronicle article, "Concern Grows Over a Fiscal Crisis for U.S.," seems to make clear, concerned citizens of all political persuasions are raising the alarm. 

As the Bush administration proposes backstopping mortgage giants Fannie Mae and Freddie Mac with a $300 billion line of credit and Congress contemplates another economic stimulus, the question is who will bail out the government?

"People seem to think the government has money," said former U.S. Comptroller General David Walker. "The government doesn't have any money."

A rare consensus has developed across the political spectrum that the government's own fiscal affairs are precarious, with an astonishing $53 trillion in long-term liabilities, according to the Government Accountability Office.

To put that number in human terms, the debt has reached $455,000 per U.S. household. As that debt grows, the United States increasingly relies on foreigners, including China and Middle East oil producers, for financing.

"The factors that contributed to our mortgage-based subprime crisis exist with regard to our federal government's finances," said Walker, now head of the Peter G. Peterson Foundation, a group established to raise alarms about the nation's budget. "The difference is that the magnitude of the federal government's financial situation is at least 25 times greater."

Baby Boomers

This year's presidential election coincides with the first retirements of the 78 million people born between 1946 and 1964. The first of this Baby Boom generation may now collect Social Security. In three years, they will join Medicare, the giant health care program whose finances are commonly described as out of control. Medicare accounts for the bulk of the nation's long-term liabilities.

The presidential candidates, Republican John McCain and Democrat Barack Obama, have not addressed what the aging of the Baby Boom generation means for the federal government. Their brief forays - Obama's suggestions to raise the payroll tax on high-income earners to buttress Social Security and McCain's description of Social Security's financing as a disgrace - have been met with furious attacks.

Both promise to spend hundreds of billions of dollars on new tax cuts and spending programs. Their health care proposals concentrate more on expanding access than controlling the soaring costs that are driving the federal budget problems and squeezing workers and businesses.

Health care costs

"Health care costs are just amazing," said John Shoven, director of Stanford University's Institute for Economic Policy Research. Total health care costs now consume 16 percent of the economy and are headed quickly toward 30 percent, Shoven said. "Social Security is a big problem, but it's dwarfed by health care. Even the housing problem is dwarfed by health care."

Just the built-in rise in spending on programs for the elderly will cost about 25 percent of workers' payrolls over the next generation, said Richard Jackson, director of the Global Aging Initiative at the Center for Strategic and International Studies.

Robert Greenstein, director of the liberal Center on Budget and Policy Priorities, agreed that "the nation faces large, persistent, long-term deficits that ultimately risk damage to the economy. We agree that policymakers have to make tough choices soon."

There is consensus, too, on what needs to be done: Cut spending and raise taxes. A bigger problem is how to contain health care costs, but some form of rationing is necessary, experts said.

Only disagreement

The only real disagreement is whether the government's fiscal condition will lead to a financial meltdown, or whether the U.S. economy is strong enough to right itself without a sudden loss of confidence and a flight of foreign capital.

"People on Wall Street think I'm Dr. Doom & Gloom," said Kent Smetters, an economist at the Wharton School of Business at the University of Pennsylvania and a former Bush Treasury official. "I believe we could have a financial crisis like we've seen in South America or Asia. It could easily happen, and under current policy will happen in the United States. People say, 'Gee, give me a date.' Obviously, that's impossible, but the longer we wait, the higher the probability. Could it happen in the next decade? Absolutely."

Alice Rivlin, budget chief in the Clinton administration, discounts the possibility.

"We're a much stronger economy than Argentina," Rivlin said. The government "can handle borrowing in the range that would be necessary in a recession," she said. "What we can't handle is the cumulative long-run obligation."

Financial markets are often fixated on the short-run, and the government's finances are far from transparent. Unlike corporations, the government is not required to state its long-term obligations. Crises of confidence, like today's banking problems, strike suddenly when a tipping point is reached and investors decide to flee.

The government's fiscal problems are "like termites in the house," said Jackson. "You don't notice it until foundations are eroded."

"I had such a frustrating meeting the other day on the Hill, where one staffer said, 'We don't have a problem until Wall Street tells us we have a problem,' " said Maya MacGuineas, head of fiscal policy at the nonpartisan New America Foundation. "By the time the financial markets tell us we've gone too far, it will be too late to fix this in any rational way. We are the toad in boiling water, where it's getting hotter and hotter and nobody's really noticing."

Will they still buy?

The key is whether foreigners will continue to buy U.S. debt. They now hold 45 percent of U.S. Treasury securities, and in all about $11.5 trillion of U.S. public and private debt, say UC Berkeley economists Ashok Bardhan and Dwight Jaffee.

Chinese entities, including sovereign wealth funds that invest government savings overseas, own about 10 percent of U.S. Treasury securities. Even a minor change in China's investment policy could have a major effect on the dollar's value and cause "a sizable increase in interest rates," the economists said.

Still, because of a shortage of creditworthy debt instruments worldwide, and the large role of U.S. institutions in global credit markets, foreigners have little choice but to invest in the United States, they said, predicting "slim chances of abrupt change."

Action needed soon

Whoever's right, all agree that the sooner the problem is tackled, the better. "Like almost any financial problem, if you don't work on it, what happens is it compounds with interest," Shoven said. "There are lots of ways to fix it, and what we pick is none of the above."

The staggering U.S. debt

The federal government's finances are in worse shape than its annual budgets show, because the government is not required to state its long-term obligations, which work out be about $455,000 for every household in the nation.

Breaking down the numbers

Current liability:

Social Security: $6.7 trillion

Medicare: $34.1 trillion

Total long-term government liability: $53 trillion

Source: Government Accountability Office, Long-term Fiscal Outlook, Jan. 2008

Where it goes
U.S. debt held by foreigners as of mid-2007:

-- Foreign holdings of U.S. equities: $5 trillion

-- Foreign holdings of U.S. corporate bonds: $3 trillion

-- Foreign holdings of U.S. Treasury securities: $2 trillion

-- Foreign share of U.S. Treasury securities: 45 percent.

Source: UC Berkeley economists Ashok Bardhan and Dwight Jaffee, YaleGlobal online, April 2008

Comments

[tranchefoot]

I never understood this pussyfooting around. It's like people want to somehow be above it all when they say, "Oh, it's the fault of BOTH Republicans and Democrats!"

But the fact is, if we never had the GOP Bush tax cuts and the GOP Iraq War, we'd never have stopped running the surpluses that started under Clinton.

[RJ]

I agree with tranchefoot. This is nowhere near a bi-partisan issue. My problem with the democrats in congress is their refusal to stand up to the criminals running the show. Then again, if you look at the anthrax scare from the early years of this scam, you'll realize just how psychopathic these players are.

[Rocky]

The big elephant in the room is Medicare. It makes the tax cuts and the war in Iraq pale by comparison.

[Kit Burns]

For our "debt obligations" Social Security and Medicare is always listed. Why?
Their cost is small compared to the military welfare program. Why not "de-list" them when discussing obligations.
Instead list the cost of the Military Industrial Complex, the CIA, et al. Welfare for the really rich and connected.

Perhaps we should really consider the "cost to wage Peace" and ensure a sustainable planet.

[dearieme]

The notion that that chump Bush is the main problem is plain foolish. Much of the problem goes back to LBJ and Nixon's decision to accomodate LBJ's follies, rather than attempt to reverse them. Other aspects reach back to FDR.

[R0h1tp]

You guys are falling hook line and sinker for the politicians giving you a false sense of choice. Entitlement programs DWARF any other expense and have a fixed growth rate that is unsustainable. You simply cannot tax the "rich" to pay for it - there is not enough money to feed the monster. Here is a good article and remember both Repubs and Democrats are doing the same thing. The Clinton argument does not hold water either. It was the Republican revolution (Gingrich) plan that Clinton signed into law which reduced deficits. It curtailed some entitlements. And then we got Bush to f everything up again.

Read this - as long as they give you false choices, they can keep screwing the sheeple:
http://financialsense.com/editorials/loeffler/2008/0718.html

[roger]

For inquiring minds only: The worst market crisis in 60 years

By George Soros

Originally published on FT.com January 23 2008 02:00

[eric20008]

I do not disagree with the general conclusion that both parties bear responsibility for the fiscal irresponsibility of the last decades but that should not obscure the greater truths that the deficit position of the US worsened significantly after Reagan's win in 1980. Clinton left Bush43 a large budget surplus that he promptly turned into a huge deficit - with a wink and a nod from Alan Greenspan. It is Bush also who engaged this country into a ruinous war that will cost the country trillions of dollars in direct and indirect long-term costs. By every measure, the Republicans bear far more responsibility for the ruinous condition of US fiscal condition than the Democrats.

[Greystone]

A pox on both political parties. There was NO surplus under Clinton just creative accounting which is still being used today under Bush. Any non government enity would be put out of business (think Enron) and their schemers jailed for fraud.

Government schools along with the main stream media for the most part have dumbed down the American Public to accept without questioning the financial lies from both parties.

As the election approaches I only hear politicians "tickling the ears of the voters" from both major parties.

GS

[eric20008]

Commenter Dearieme seriously distorts the history of the Gingrich regime. House Republicans resisted to a man the attempts by Clinton to raise taxes to balance the budget. Earlier House Republicans opposed their own president, Bush41, who agreed with Congressional Democrats to raise taxes to narrow the budget deficit. The record of Congressional Republicans vis-a-vis responsible tax policies is sorry indeed.

[jlounsbury59@hotmail.com]

This is an outstanding article. What I would like to see is a full balance sheet analysis so we could see an estimated net worth of the U.S.A. Does anyone know a good resource for that?

[Aaron Krowne]

Most of the medicare costs are fictitious... though real enough that the health care sector would collect them if it could! Basically, these are inflated prices. If there is "gouging" anywhere in the economy, it is in health care.

But the health care complex is already collapsing under the same sort of financial exhaustion that finally killed subprime lending, and ultimately the numbers will come down to far less than that $34 trillion.

I agree with the article above in that some form of "rationing" is needed. In fact it is inevitable. But that rationing would be best in the form of prices, a long lost technique to our system.

I am optimistic. I am noticing more walk-in clinics cropping up and I've started making use of them. It is not only more convenient but is the start of a transition away from a system dominated by large impersonal health care bureaucracies with a dramatically overpriced cost structure.

In my view high-deductible *insurance* (not managed care) plans are the only sensible sort of health plans for the majority of the middle class. These plans are already dramatically cheaper than typical employer-linked plans -- one-fourth the cost, in my case (though I could only "unlock" this money by quitting my job, thanks to the tax code).

Someone once pointed out to me that we started off on our course of a worst-of-both-worlds health care system when Nixon instituted wage controls and employers had to resort to benefits instead of take-home pay to attract talent. That would not surprise me at all.

Anyway, we will be on the road to reducing the horribly inflated health care sector and the concomitant public liabilities when you start hearing about massive layoffs and downsizing in that industry. Watch for it soon.

[cklimen]

Fire 'um all!! every last one of them
Give the power back to the people!
The fallacy that our politicians must be "experienced" only serves to keep the privileged few in power most of whom are completely out of touch with 98% of Americans. This is not to say that they are intentionally ignoring the voice of the people, it's just that I often notice that many folks take what they have for granted and in turn fail to see the forest for the trees.
Washington is in desperate need of a COMPLETE transfusion