February 16, 2013

Living Off Our Children - Lying To Ourselves

I was recently asked to review the President's "State of the Union Address" (SOTU) for any specific implications for the U.S. Defense budget. I'd intentionally avoided watching it during the live broadcast because I knew I could skim all the news/commentary that would follow to gather the salient points and I had better things to do with my time than watch the political theater that is the SOTU. Given my task, however, I had to actually read the speech which only served to validate my decision to skip the live broadcast. That said, my project served as a useful mechanism to assemble a variety of budget-related items I've been tracking for some time. Most recently, of course, has been the flood of materials focused on the pending sequester. It seems more likely than ever that sequestration will occur, so the Defense Department has sent all the military Service Chiefs and various Defense officials to Capitol Hill to regale Members with their assessments of the effect sequestration will have on military readiness and national security. Short story - we're in for some very lean years, reduced military readiness, and a steep hill to climb should we ever need to mobilize forces in large numbers. (I'll work on a future post that gets into some of the detail on this subject.) 

All this aside, the SOTU address did underscore (unintentionally) why we have arrived at sequestration in the first place, why it is a relatively minor plot point in a much larger saga, and why commentators of various sorts have a rather dim view of our future days. It really comes down to this: our collective unwillingness to be honest with ourselves is sowing the seeds of our destruction. Our national budget, flights of fancy like the SOTU, Congressional ineptitude in matters of fiscal responsibility, the corrosive effect of hyper-partisan bickering, and the complicity of the American public in the massive fraud being perpetrated against future generations combine to make 'solutions' unlikely. Am I without hope? Of course not. Anything is possible and America has shown an amazing ability to overcome extraordinary challenges. But we are caught in a terrific current that is sweeping us to a very bad place and we seem unable to commit ourselves to the effort necessary to escape.

As part of my little project, I put together the above graphic to illustrate aspects of our budget situation and the relative amounts of various elements associated with the budget that hopefully provide perspective. The rancorous debate over "cuts" mandated by the sequester are the fiscal equivalent to arguing over who gets the bigger deck chair in which to relax while the ship is sinking under you. As written, the sequester requires a reduction in federal spending of $1 trillion over a ten year period, meaning $100M per year each year for the next decade. As written, 50% of the reductions are levied against Defense spending (with military personnel accounts exempted) while the other 50% is applied to all other spending. Consider, however, that our federal spending outpaces revenue by 50%, meaning we take in only two-thirds of what we spend (roughly: income=$2.3T, spending=$3.4T) so we go $1T further into debt every year. With this in mind, sequestration would lower the amount of money we're spending that we don't actually have from $1,000,000,000,000 to $900,000,000,000 per year.

Hmmm...I think that means we're still accumulating massive new debt each year. 

It also means the amount of money we have to spend to service that debt -- the interest paid on the debt -- increases over time. Add to this all the new promises we're making: health insurance coverage for pre-existing medical conditions; adding 11-15 million previously-illegal-immigrants to the pool of people eligible for government benefits; federal subsidies to 'green' industries; opting for more expensive energy technologies (wind, solar, biofuel, etc.) over less expensive coal and nuclear; funding 'high-speed rail' at phenomenal costs in dollar-per-passenger-mile...the list is quite long...and you quickly outpace the rate of anemic growth the commercial sector is experiencing. Not a pretty picture.

What should catch your eye, however, is the big arrow in the background showing 'total unfunded obligations.' This is the reality that things like sequester, policy speeches, federal budgets, and public demands completely ignore. The $80 trillion I used is a rough average of many estimates available for review ($62T, $84T, $100T, $144T to cite just a very, very few). Variations in estimates result from what one considers an 'unfunded liability." Most estimates center on the ever-increasing cost of health care insurance coverage. But as one includes deferred maintenance of national infrastructure, obligations associated with public sector pension plans, assumptions of future deficit spending, the cumulative effects of inflation and compounded interest on debt, etc. you can quickly reach extraordinary levels of debt that are implicit in our current spending patterns.

My favorite estimate comes from Niall Ferguson, a British economic historian who takes the same approach to analysis/commentary of economic policy that Victor Davis Hanson does with his commentary on socio-cultural and foreign-military affairs...approaches rooted in the lessons of history. Ferguson estimates that the total of 'unfunded liabilities' facing the U.S. amounts to a staggering $238 Trillion, basing his conclusion on the "difference between the net present value of federal government liabilities and the net present value of future federal revenues" plus the "unfunded liabilities of state and local governments". In an article of his entitled "Why the young should welcome austerity," published last summer, Ferguson makes some trenchant observations: 
     "These mind-boggling numbers represent nothing less than a vast claim by the generation currently retired or about to retire on their children and grandchildren, who are obligated by current law to find the money in the future, by submitting either to substantial increases in taxation or to drastic cuts in other forms of public expenditure.
     "In his Reflections on the Revolution in France, published in 1790, Edmund Burke wrote that the real social contract is not Rousseau's contract between the sovereign and the people or "general will", but the "partnership" between the generations.
     "Society," says Burke, "is indeed a contract. The state is a partnership not only between those who are living, but between those who are living, those who are dead, and those who are to be born."
     "In the enormous inter-generational transfers implied by current fiscal policies we see a shocking and perhaps unparalleled breach of precisely that partnership.
     "We blame the politicians whose hard lot it is to bring public finances under control, but we also like to blame bankers and financial markets, as if their reckless lending was to blame for our reckless borrowing.
     "We bay for tougher regulation, though not of ourselves."

Put another way, our inability to discipline our current 'wants' will not only bankrupt us in our present time, it will consign our children and their children, for generations to come, to lives lived in austerity...and it just doesn't have to be that way. We are methodically and relentlessly breaking faith within our generation, with those who preceded us (who built the wealth and opportunities implicit in our system that we are now squandering), and with those to come. The consequences will be much greater, more deeply penetrating and far broader in their scope than the price of gas at the pump or the availability of a doctor to tend an illness. They will include damage to the mutual trust and relationships, the implied societal framework of unspoken agreements, that undergird the success of a nation. Our government is incapable of addressing this problem. It will be up to the People. Do we have it within us?

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