To Pay the Piper

A series of prodigal Congresses, bingeing on credit for 43 of the 52 years ending in 2002, has set the stage for a federal government fiscal debacle and brought the nation to the brink of financial ruin. The terrorist destruction of the two World Trade Center buildings on September 11, 2001, caused a late awakening in the nation and forced the federal government into taking action and paying the necessary cost, whatever that may be, to improve homeland security and combat terrorism. Unfortunately, this comes at a time when the federal government has already locked itself into retirement and medical programs that have been increasing in cost and, beginning as early as 2008, will increase in earnest as the baby boomers start to retire. As a consequence, the federal government finds itself in a precarious and deteriorating fiscal situation, vulnerable in a number of ways.

The business cycle, a natural phenomenon of the capitalist system, proceeds roughly as a sine wave. The idea of John Maynard Keynes was that government can smooth out these undulations by borrowing and spending as the economy is retreating, thus compensating for reduced spending by other sectors of the economy. Then, when the economy begins moving upward, the theory goes, government revenue increases, the government reduces spending and, with the surpluses thus created, repays the money it borrowed and positions itself to help out again in the next down cycle. Although this scenario is sound as a theory, it does not work in practice for the federal government because it keeps spending more than the revenue it receives both in good times and in bad.

The federal government’s deficit spending did not begin as a regular practice until 1932, and then it continued every year – with few exceptions as noted  below– until 1998 when began the first of four years of surplus (Figure a). 

The deficits in the 43 years from 1950 through 2002 were caused by increased spending year after year, rather than by reduced revenue. Years with surpluses were 1951, 1956, 1957, 1960, and 1969. Then there was not another surplus year until1998, when there were four in a row: 1998, 1999, 2000, and 2001. Surpluses in those four years resulted from the stock market bubble which produced  large capital gains and, in turn, significantly increased federal revenue. Outlays in these four years grew, too, but not as fast. Due to the bursting of the stock market bubble and rising defense and defense-related expenses, deficits began again in the year 2002 and are projected to continue through 2008, the last year that the Office of Management and Budget projects budget data at the time of this writing.

The federal government began its major social programs in 1935 with the Social Security Act as part of President Franklin D. Roosevelt’s New Deal Program. In 1965, its social programs were further expanded in a major way by amendments of the Social Security Act to include Medicare, Medicaid and more as part of President Lyndon B. Johnson’s Great Society Program. When asked during the Viet Nam War whether the nation could afford guns (defense) or butter (social programs), President Johnson’s facile reply was that the nation could afford both guns and butter.

There have been costly wars and police actions during the 52 years ending in 2002, but the primary reason for the federal governments impending fiscal crisis is our flawed electoral system. By the time each of the 535 federal legislators gets through introducing new legislation and adding onto appropriation bills to benefit his campaign contributors in hopes of enhancing his own chances of reelection, their combined efforts are almost bound to result in a budget deficit every year. Reelection campaigns are expensive to run, and incumbent legislators get the money to finance them from contributions of those benefitted. The federal government will extricate itself from the impending fiscal crisis by defaulting on some or all of its debts, but the crisis will recur unless our present flawed electoral system is replaced. See Part III.

Consider this: 1. Nearly constant annual budget deficits for the 52 years ending in 2002; 2. Large projected annual budget deficits for at least the next five years resulting from increased costs of homeland security and the war on terror; 3. The increasing number of baby boomers beginning  retirement with the concomitant increase in the number of eaters and decrease in the number of producers, which means increased government expenses and very likely decreased revenue. (See Part II for definitions of eaters and producers.); and, finally 4. The natural propensity of members of Congress to continue deficit spending to improve their own chances of renomination and reelection, The question now is: Can the nation afford rising costs of both guns and butter? It appears that it cannot afford their rising costs now and, in fact, never was able to afford as many guns and as much butter as we have had in the past 52 years.

B. Federal Government Debt.

The federal government is awash in red ink. The natural result of the federal government living beyond its means for years is a large national debt and one that promises to get entirely out of hand in years to come. The federal government has two kinds of debt: debt-on-the-books and debt-off-the-books. None of the federal government’s debts are collateralized; that is, they represent merely the government’s promise to pay. For example, if the government fails to pay any of its debts, no creditor is entitled to take over Yellowstone National Park. In addition to these two kinds of debt, potential happenings exist that threaten the fiscal stability of the federal government.