Our
Country’s Increasing Economic Vulnerability
Prepared by Dick Westmoreland
Many of us worried about the military vulnerability of our troops in
A.
We anticipate 10% per Year Increases in the National Debt
1.
The current Federal debt held by the public is approximately $4 trillion,
or about $19,100 for each of our 209 million citizens at least 18 years old.
Our Gross Domestic Product is running at an $11 trillion annual rate and
Government expenditures at a $2.2 trillion rate.
2. The 2003
Federal budget included a $304 billion estimated deficit, a new record even
prior to the
3.
The 2004 Federal budget submission calls for a record $307 billion deficit
before added costs of the Iraq war/occupation/rebuilding, increased cost for
dealing with North Korea and other threatening countries, and possible further
costs related to the war on terrorism. Nor
does the budget include the revenue loss of most required reforms to the
alternative minimum tax. In 2004
and beyond the lost revenue of already passed Federal tax cuts increasingly be
felt, with additional tax cuts proposed. “Put
it all together, and you easily have $400 billion deficits until the baby
boomers retire and begin to push it up more” says Robert Reischauer,
former CBO
director
and now president of the Urban Institute.
Minimal, or at Best Uncertain,
Economic Stimulus
4.
The Center on Budget and Policy Priorities on
●
The 2003 “Economic Growth Package will generate a revenue loss of $695 billion
between 2003 and 2013, and will require borrowing costing another $254 in
interest payments. Total cost: $949
billion.
●
Making the 2001 Tax Cuts Permanent will generate a revenue loss of $523 billion
between 2003 and 2013, and will require borrowing costing another $41 billion in
interest payments. Total cost: $564
billion.
●
Other Bush Tax Proposals will generate a revenue loss of $272 billion between
2003 and 2013, and will require borrowing costing another $66 billion in
interest payments. Total cost: $338
billion.
●
Extending Alternative Minimum Tax Relief will generate a revenue loss of $575
billion, and will require borrowing costing another $100 billion in interest
payments. Total cost: $675 billion.
●
The total cost for these tax cuts
amounts to $2.5 trillion just between 2003 and 2013 – and much more beyond
that date. (Including the 2001 tax
cuts that have already been implemented, the total cost of the tax cuts from
2001 to 2013 is $4.4 trillion.)
5.
To what degree will these tax cuts stimulate the economy?
Here is what Federal Reserve
Chairman Alan Greenspan said to the Senate Banking Committee on
●
Hold the stimulus plan until we can make a judgment as to whether there is
underlying deterioration going on – and my own judgment is I suspect not –
then stimulus is actually premature.
●
Eliminate the tax on dividends only if it is paid for by increases in other
taxes.
● Growing budget deficits will cause higher long-term interest rates. And deficits will negatively affect the economy.
●
He spoke of the perils facing government coffers in the coming years,
particularly the prospect of boomer retirement breaking the Social Security and
Medicare banks.
●
Economic growth cannot be safely counted upon to eliminate deficits and there
will be difficult choices required to restore fiscal discipline.
●
He warned against Bush’s plan to make 2001’s $1.35 trillion tax cut
permanent and immediately effective without safeguards to keep them from
wrecking the budget.
6.
Economist Richard Kogan of the Center on Budget and Policy Priorities had
this to say about the 2001 and the 2003 tax cuts: (Will
the Administration’s Tax Cuts Generate Substantial Economic Growth? http://www.cbpp.org/3-3-03tax2.htm
● This analysis finds little support for claims made by Administration officials and other proponents of these tax cuts that either the 2001 tax cut or the new “growth” package would generate substantial improvements in long-term economic growth. The leading studies and analyses in the field suggest the opposite — that these tax cuts would have only a small effect on the economy over the long term and that the effect is as likely to be negative as positive. The studies conclude that the negative effects on economic growth of the enlarged deficits the tax cuts will engender are likely to cancel out most or all of the positive economic effects the tax cuts might otherwise have — and, in fact, may more than outweigh the positive effects, resulting in an overall negative impact on long-term growth.
He also responded to the assertion that the tax cuts would pay for
themselves:
(Will
the Tax Cuts Ultimately Pay For Themselves?
http://www.cbpp.org/3-3-03tax.htm)
● Whether stated directly or indirectly, the proposition that tax cuts can pay for themselves — like most claims of a “free lunch”— is too good to be true. It does not withstand scrutiny. An array of analyses — including analyses conducted within the Administration — produce the same result: the tax cuts are expensive and will add significantly to long-term deficits rather than reduce them.
7.
Here is what economist William G. Gale of the Brookings Institute said
about the 2003 Bush Tax Cut Proposal: (The
Presidents Tax Proposal: First Impressions, January 8, 2003, http://www.taxpolicycenter.org/commentary/taxbreak/pres_proposal.pdf)
●
“President Bush’s new tax plan is an answer in search or a question.
It would provide little short-term stimulus.
It seems unlikely to provide much of a long-term boost to growth or jobs.
It is an incomplete way to reform corporate taxes.
It would not boost investor confidence.
It would provide windfall gains for previous actions, rather than
encouraging new activity. It would
make taxes more complex. It does
not fix the alternative minimum tax. It
does not resolve uncertainty regarding the repeal of EGTRRA at the end of 2010.
It is fiscally irresponsible and unduly weighted toward high-income
households.”
He also commented on the 2001 Bush Tax Cut: (An
Economic Evaluation of the Economic Growth and Tax Relief Reconciliation Act of
2001,
http://www.brook.edu/dybdocroot/views/articles/gale/200203.pdf)
●
The Economic Growth and Tax Relief Reconciliation Act enacted June 7, 2001, is
the biggest tax cut in 20 years, and features income tax rate cuts, new targeted
incentives and
estate
tax repeal. Our central conclusions
are that EGTRRA will reduce the size of the future economy, raise interest
rates, make taxes more regressive, increase tax complexity, and prove fiscally
unsustainable
8.
The Congressional Budget Office in the January 2002 report “Economic
Stimulus: Evaluating Proposed Changes in Tax Policy” said the following:
●
The least effective stimulus proposals are those that would accelerate
reductions in marginal income tax rates, and reduce capital gains tax rates.
●
The type of temporary cut in personal taxes most likely to produce economic
stimulus would be one that put more resources into the hands of lower-income
taxpayers.
9.
The 2003 Bush Tax Cut Plan focuses on tax cuts for stockholders
rather than workers or consumers. Its
cornerstone is repeal of the Federal income tax on shareholder dividends,
accounting for 54.3% of the cuts. (This
would drastically decrease the income tax revenues of financially strapped
states as well.) According to US
News & World Report,
Proponents of eliminating income taxes on dividends attempt to justify this by using “supply-side economics”. The central concept of supply-side economics is that tax cuts cause increased investment in plant, equipment, inventories, etc., thus increasing both the supply of goods and services and productivity, thus allowing prices to drop for a given output level, thus increasing consumer demand for the goods and services. Essentially, supply creates demand, jobs and profits increase, and businesses and their new workers pay even more taxes, even at lower rates.
The supply-side idea is a simple one, and makes a popular political
message. It arose in the early
1980s and its initial application coincided with ballooning deficits of the
Reagan Administration. According to
the American Economics Association, mainstream economists, even conservative
ones, almost universally reject supply-side theory.
Note that “conservative” does not equate to “supply-side”
economics. Most conservative
economists believe that tax cuts should be accompanied by spending cuts to
achieve “fiscal responsibility”.
Supply-side economists believe that taxes should be cut, period.
Spending cuts and deficits, they believe, are not important
considerations.
Would dividend tax cuts be used for investment in plant and equipment and
job creation, or alternatively would the money go into inflated values for
existing stock shares being traded in the market?
What business managers are looking for to justify any further investments
is increased demand for their products and services.
With the economy threatening to slide back into recession and extensive
overcapacity in most industries, and interest rates for businesses already
extremely low, it is improbable that much business expansion will result from
more investment dollars being available. As
John J. Castellani, president of the Business Roundtable, said in the
Unsustainable
Entitlement Programs
10.
The current unfunded benefit obligations of federal entitlement
programs passed along to future generations of workers is a staggering $24.8
trillion, or six times the amount of our Federal debt held by the public.
(Source: Office of Management and Budget and
Medicare $12.5 trillion
Social Security 10.5 trillion
Civil Service & Military Retirement
1.8
trillion
Total
$24.8 trillion
11. Social Security, Medicare, and Civil Service & Military Retirement are pay-as-you go programs with no tangible funds set aside to cover future anticipated payments. Conversely, most private pension programs by federal law must maintain a minimum level of tangible funds (MFR) required to meet their actuarially anticipated liabilities.
Social Security surplus funds, generated temporarily as the baby boom
generation is working, have been promptly spent by the Federal Government and
replaced with special non-marketable, government bonds.
Interest on these bonds is paid to Social Security trust funds in the
form of more such bonds, not in cash.
Many people erroneously think that the Social Security trust funds have
hard assets, which some day can be used to pay benefits.
The “assets” of these trust funds consist of
“special” bonds, which most knowledgeable parties, including
President Bush, equate to Government IOUs.
In other words, there are no tangible assets there from which social
security payments can be made.
12.
Many people erroneously think that the crises caused when our aging
population reaches retirement is a long time off and we don’t need to
worry about it. It starts in
just 5 years at the beginning of 2009, the year after the first baby qualify
for Social Security payments, and continues for the foreseeable future beyond
that. The Social Security cash
surplus that the Federal government has treated as income and spent will begin
to shrink. This will create a
growing annual increase in borrowing from the public to replace those funds.
By 2017 Social Security’s cash flow will turn negative and the program will be unable to pay annual benefits from annual revenues. The Social Security Trustees estimate the Social Security cash deficits from 2017 through 2041 at $5.7 trillion, compared to today’s Federal debt held by the public of $4 trillion.
Social Security’s projected cash shortfall is compounded by shortfalls in other Federal entitlement programs. Between 2002 and 2080, Medicare Part A has a projected $32 trillion cumulative cash deficit, exceeding the $28 trillion cash deficit projected for Social Security. (Source: Social Security Trustees’ Report, March 2002..Intermediate Projections)
13.
Social
Security and Medicare are unsustainable programs in their present forms.
To
maintain the same level of benefits without increasing payroll taxes, the share
of individual and corporate taxes required to pay both Social Security and
Medicare A benefits would have to increase from 0 percent today to 7 percent in
2015, to 35 percent in 2030, and to 44 percent in 2040, according to the Concord
Coalition. Despite our commitment
to help seniors, the government cannot devote that degree of resources to these
two programs at the expense of everything else.
14.
Where will the money for these shortfalls come from?
When these Federal entitlement programs
need more money to pay benefits as benefits exceed contributions, the federal
government will have to do some combination of the following:
a) Increase Federal taxes.
b) Reduce other Federal government spending.
c) Reduce Social Security benefits.
d) Borrow the money, increasing the size of the national debt even further.
e) Just print the money, bringing about hyperinflation.
f) Discontinue Social Security and renege on any outstanding bonds
Solution e) is unacceptable to rational people and goes against everything the Federal Reserve has been doing to control inflation. Likewise, solution f) completely violates our commitment to seniors and would cause economic chaos. Some combination of alternatives a) through d) will be required. Whatever combination of solutions is selected, the primary burden will fall upon our children, grandchildren, and generations beyond. How much more living beyond our means and passing the debt on to them is equitable or tolerable?
To close the Social Security shortfall by any one means alone would be overwhelming. For instance, closing the gap for 2041 by reforms to the program would require a Social Security tax hike of 34% or a 27% cut in benefits.
.
Closing the Social Security gap by spending cuts means that discretionary
non-military spending would have to be reduced by $230 billion per year by 2020,
by $360 billion per year by 2040, and by a half trillion dollars per year by
2060. The President’s
Commission to Strengthen Social Security (using data from the 2002 Trustees
Report) stated:
“In
2016, the first year in which Social Security is projected to run cash deficits,
the program faces a shortfall of $17 billion (in today’s dollars).
Assuming that federal spending maintained its present size relative to
the rest of the economy, making up Social Security’s 2016 deficit by cutting
other spending would require eliminating programs the size of Head Start and the
Supplemental Nutrition Program for Women, Infants and Children (WIC).
By
2020 Social Security deficits will have grown to $99.1 billion, requiring cuts -
in addition to those already listed – equivalent to eliminating the
Departments of Education, Interior and Commerce, as well as the Environmental
Protection Agency.
By
2025 Social Security deficits will reach $194.3 billion in today’s dollars,
requiring cuts equivalent to all the programs mentioned above plus NASA and the
Department of Veterans Affairs. The
$270.8 billion shortfall in 2030 would require eliminating the Departments of
Energy and Housing and Urban Development (HUD) as well.
By 2035, when Social Security faces a $317.6 billion annual shortfall,
the Department of Justice and the National Science Foundation would also have to
be eliminated.”
Relying exclusively on additional Federal borrowing to close the gaps and
maintain the same level of benefits would not be feasible, because added
interest costs would soon consume the available individual and corporate income
tax receipts.
15.
The U.S. is facing record Federal (and State) budget deficits extending
indefinitely, unfunded entitlement programs totaling six times the public
national debt plus a baby boom population nearing retirement, a war with Iraq, a
war on terrorism, and possible other international conflicts.
Additionally, we have a host of expensive special domestic requirements
needing funds including adding Medicare prescription drug coverage initially
costing an additional $100 billion/year, a $50 billion short term aid program
for financially strapped States, and another financial bailout of our airline
industry.
Our economy is weak and could slide back into recession, and unemployment
is rising. We have recently
made a major change in our defense and foreign policies emphasizing
“preemptive” military action if we feel threatened by others, by ourselves
if necessary, rather than our prior “containment” strategy.
Worldwide anti-American sentiment is high and could lead to boycotts of
American goods, a pullout of foreign investments in the
16.
In order to stem the flow of debt, deficits and unfunded entitlement
programs being passed to future generations, and to stop the economic weakening
of our Federal Government, we should demand of Congress and the President
that:
a)
They commit to returning balanced
budgets and conservative fiscal responsibility to the Federal Government.
b)
Reform the Social Security and
Medicare programs to make them sustainable.
Remaining Social security surpluses should be invested within the program
or
used
to reduce the national debt. The
sooner the reforms are made the less drastic they will have to be.
c)
The entire 2003 tax cut proposal not
be approved, not just half of it.
d)
They postpone the remaining 2001
passed tax cuts until the budget is balanced,
and Social Security and Medicare have been made sustainable.
e)
They fulfill the promise of the
President’s words in his State of the Union address:
“This
country has many challenges….we will not pass along our problems to other
Congresses,
to other Presidents, and other generations.”
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