The Six Daunting Financial Problems Facing America

Solutions to the economic problems that the U.S. faces are unpalatable, and there's a dangerous temptation to avoid dealing with fundamental issues.

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The choice of Paul Ryan as the presumptive Republican candidate for Vice President has ensured that budgetary arithmetic will be a central issue in the election campaign. But it’s important to remember, as the Mock Turtle says in Alice in Wonderland, that arithmetic consists of four basic operations – Ambition, Distraction, Uglification and Derision. Of these, Distraction is likely to be the tactic employed most frequently this election season. The economic problems that America faces are fairly clear, but all the possible solutions are unpalatable. So the candidates will probably try to avoid getting too specific or, alternatively, divert discussions into debates over technicalities. But even where technical questions are important, basic decisions about policy — and values — have to be made first. To see this in practical terms, it’s worth taking a quick look at six of the most daunting financial issues that need to be dealt with.

The National Debt. Federal government debt now stands at 73% of annual GDP, not counting money the government owes to itself, such as the Social Security Trust Fund. If current spending and tax rates (including the Bush tax cuts) are extended, debt will reach 93% within a decade, and will go into the danger zone in 15 years, according to the Congressional Budget Office. In 25 years, it will reach nearly 200%, at which point the Federal debt will be insupportable, unless it is devalued significantly through inflation.

(MORE: Junk Bonds: Wall Street’s Newest Bubble?)

Taxes. Total federal taxes are around 18% of GDP today, roughly what they’ve been since the 1950s. State and local taxes, however, have increased substantially over that period. Total taxes from all sources are now a bit more than 34% of GDP, up from a low of 26% in the mid-1950s, but below highs of more than 36% reached several times in the past 15 years. So by historical standards, total taxes are not especially low. On the other hand, there is room to raise taxes a bit without going into unprecedented territory. To have a substantial impact, however, tax increases would have to fall on the middle class as well as the affluent. Extending the Bush tax cuts for the middle class and allowing taxes to rise to Clinton-era levels only for households with incomes over $250,000 (and singles over $200,000) would raise enough money to cut the deficit by just around 10% over the coming decade.

Social Security. Benefits are paid mostly from current Social Security payroll taxes. The Trust Fund is largely an accounting device of money the government owes to itself. In any event, the Trust Fund will be exhausted in less than 25 years, well before today’s youngest workers retire. Eventually taxes will be sufficient to pay only 75% of the benefits that are currently promised. Either benefits have to be cut, Social Security taxes have to be raised, or the growing gap between the two has to be paid for with revenue from other taxes. By tinkering with various formulas, the 25% gap could be closed without too much pain. But the burden will still have to be spread between more and less affluent people, current and future retirees, and taxpayers in general.

(MORE: Why We Must Change the Way We Police Banks)

Pension Funds. Everyone knows that many pension funds for public-sector employees are in trouble. The shortfall between the amount that should have been saved to pay for future benefits and the amount that actually has been saved totals hundreds of billions of dollars. But even that is a massively understated figure – the real shortfall is probably more than five times as big, or more than $4 trillion. The reason: Pension funds are greatly overestimating their likely future investment returns. Many funds assume a 7% to 8% compound annual return, when in fact 5% to 6% would be more realistic.

Medicare. The cost of Medicare and Medicaid is projected to rise from 5.4% of GDP to 7.2% in a decade and to at least 9.6% of GDP in 25 years. The Affordable Care Act tries to prevent even faster growth partly by trying to make the American health-care system more efficient. But it also shifts some costs to the states, which will not reduce the total tax burden over the long term. And it reduces payments to doctors and hospitals, which could lead to fewer doctors, longer waiting times or a two-tier system in which people who can pay cash receive significantly better care. Even if the positive aspects of the new health-care law succeed in containing costs as planned, Medicare and Medicaid are projected to consume more than 40% of Federal revenues in 25 years, substantially outpacing the growth of tax receipts even if all of the Bush tax cuts are allowed to expire — including those for the middle class.

Defense. Military spending was more than 10% of GDP in the 1950s and hit a low of 3.7% in 2000 before the 9/11 attack on the World Trade Center. Since then, the figure has more than doubled in dollar terms, after adjustment for inflation, and now accounts for more than 5.5% of U.S. GDP. At $900 billion a year, defense is a huge chunk of the Federal budget, and trimming it could lessen the need to raise taxes or cut social programs. But any consequential cuts to the defense budget would require a broad consensus for a significantly paired down U.S. defense mission, and such consensus does not exist right now.

(MORE: Gadgets Go to Class)

While any of these specific figures can be debated, collectively they make three things clear, in my view. First, America’s biggest challenges are not solely financial – they include the lack of clear objectives that are broadly supported by the electorate. Second, there are powerful political incentives to avoid facing the most fundamental problems – or to evade them with endless debates over minor policy changes. Third, if these problems are not dealt with seriously, the U.S. economy will slide along for a while with below-average growth and above-average unemployment until debt and other financial problems become insupportable. In the end, no amount of denial and evasion can overcome the power of basic arithmetic.

54 comments
DraimanForMayor
DraimanForMayor

The fluctuating costof gasolineOne cansympathize with consumers feeling the pain of higher gas prices. But thefundamental truth is that those prices are tied to the price of oil, set byworld markets. There are peaks and valleys, but their causes — a worldwiderecession, an embargo or conflict in the MiddleEast — are beyond the control of any one country. Gasolineprices rise and fall in the same pattern throughout the world. Americanshistorically pay much less at the pump because they pay lower taxes; when theprice of a gallon spikes at $3.70 in the United States, it is closer to $8 in,say, Germany and $9.50 in Italy.Because oilis a global commodity, increasing domestic production will do very little tobring down retail prices, although it does help narrow the trade deficit asAmerica spends less onimports.Buildingnew refineries and pipelines will reduce the cost of gasoline in theUnitedStates. A new refinery has not been built inthe UnitedStates for over 40 years.We can alsoconvert more vehicles to natural gas. The cost per gallon is under$2.YJDraiman

Leftcoastrocky
Leftcoastrocky

The most daunting financial issue is the reduced revenue received by the federal government, caused by reduced incomes of the employed and the under-employed.

Scotty_A
Scotty_A

Keynesian and trickle down theories do not work. Just like the current crop of Democrat and Republican politicians do not work. We are in a new era of ineffective big government due to the policies of Bush and Obama. Sadly, Romney brings nothing new to the table. Romney is a pathetic candidate in my opinion because of this. I won't vote for him. Obama at least was able to take down Osama bin Laden and I will vote for him just for that reason alone. Regardless of who wins, neither Obama nor Romney will have much of a mandate because they are both unwilling to provide honest leadership.

Dylan Sides
Dylan Sides

We aren't spending $900 Billion on defense--it stands right around $667 Billion. Quite the difference and if the U.S. were to close most of it's overseas bases and bring the troops home to state-side ones, re-open recently closed ones, you can cut defense spending and not even touch troop strength. AND, all the troops coming home would circulate money in the local economies, increasing sales tax revenue, add jobs and thus income tax revenue.

Gary McCray
Gary McCray

There is no possibility that any of these problems will be addressed in a significant fashion.

These problems plus a host of others must inevitably result in the collapse of our economy and eventually the failure of our government.

It is going to be extremely painful.

But afterwards, the lessons learned may be sufficient to permit wiser policies to produce a better future.

Chhajuram Induscharwak
Chhajuram Induscharwak

Defense spending tripled with in 10 years that is 9/11. It is just example of Parasitic Nature of State.  

Firozali A.Mulla
Firozali A.Mulla

The long term solution is to wind down euro zone ina planned manner so that each member country will go back to its currency and will be able to chart its own course for economic growth. It is stupid to insist on keeping the euro zone running at any cost. This is not only harmfull to the members but to the entire world economy. Every member nation is different with diff. growth rate, diff. demography, diff. cultural back grounds and diff. aspirations. What is point in binding them together artificially? I thank you Firozali A.Mulla DBA.

geoffrobinson
geoffrobinson

" they include the lack of clear objectives that are broadly supported by the electorate."

I think that's the key right there. We should have and should now handle almost everything at the state level that isn't specifically specified in the Constitution. For these purposes, that leaves national defense and that's about it.

There will be no national consensus on all these topics in a country as large, diverse, and with as many viewpoints as we have. Nor should we expect any.

I'm not sure what the way out is but maybe we can avoid big national programs in the future.

vstillwell
vstillwell

Well it would be nice if we talked about the wholesale offshoring of our economy. A few companies, including Bain Capital, make billions off of currency exchanges and subsidies from foreign governments, including the Communist government in China, to take our jobs and move them overseas. Do you think this might be impacting our country and our national debt? 

geoffrobinson
geoffrobinson

 I worked for companies that got most of its sales overseas. People work for companies that are foreign. If you are going to complain about offshoring are you going to complain about inshorting?

Your time is better spent trying to figure out how to make America a more hospitable  home for capital.

vstillwell
vstillwell

OK. Fine. Name those companies.

geoffrobinson
geoffrobinson

 Nissan, Toyota, BMW, off the top of my head.

JB Shreve
JB Shreve

Bold article time. Way to state the obvious. Perhaps next week you identify how a candidate will win the election...i.e. by getting more votes than the other one. 

CatholicMinnesotan
CatholicMinnesotan

you know, if we all voted on logic instead of emotion, then stating the obvious would be a futile excercise that no one would do.  However, as it is, some people are made millionaires by stating the obvious...

Mary Waterton
Mary Waterton

2nd paragraph: Federal government debt now stands at 73% of annual GDP, not counting money the government owes to itself, such as the Social Security Trust Fund.

No sir, it's 100%! Not counting money that the government claims it "owes to itself" is the same thing as a corporation stating on its 10K that pension fund money it owes to its workers does not count as debt because it's money that the corporation "owes to itself". To say otherwise is insanely ludicrous.

geoffrobinson
geoffrobinson

 From an accounting perspective, we're better off assuming that money is gone, because that's the truth.

rampantlion
rampantlion

Absolutely agreed, Mary! Even using the US Treasury's own reports (Daily Treasury Statement), as of 4-30-12, US federal debt was $15.692 Trillion, with an approximate GDP of $15.488 T, coming to a debt to GDP ratio of 101.3%.

Ronald Pires
Ronald Pires

 "In 25 years, [the national debt] will reach nearly 200%, at which point the Federal debt will be insupportable, unless it is devalued significantly through inflation."

 

One word: JAPAN.

 

Nothing in the neoliberal model can explain Japan.

frank1569
frank1569

 Here's the real dilemma:

Back in the 1920s-30s, the majority literally had nothing - no cars, no TVs, no refrigerators, etc. The goal of Modern Capitalism was 'a chicken in every pot, a car in every driveway, and robots and 'others' doing the hard labor so we could enjoy 'the easy life.'

By the 1950s, the needs of the majority were met, and The Age of Over-Consumption began. Advertising focused on convincing us that the road to happiness was trying to sate a perpetual want of more and better stuff, still in pursuit of 'the easy life.'

Well, it worked - for the first time in our history, the majority is fat, both physically and materialistically. There's a chicken in every pot, 2 cars in every driveway, a big TV in every room, and robots and 'others' are doing most of the hard labor. We all have tons of stuff, and any desire can be fulfilled with a click of a mouse.

In other words, The Age of Over-Consumption is ending. And without perpetual over-consumption, Modern Capitalism can't survive. Of course, this was never supposed to happen, so we never came up with an After-Capitalism plan. Instead, the only thing all the 'experts' offer are 'fixes' - but there's nothing to fix, because 'the system' isn't broken - it has simply run it's course.

It's time for the next system. Period.

TimothyLoftin
TimothyLoftin

I think the article overlooks the most profound problem with America's economy - the carefully cultivated climate of fear. 

There is no economic decision, made by any human being at any level of the economy, that is not a balancing of competing options, ranked by order of fear for the future.  When all options lead to disaster, the best option is to do nothing. 

Fear is the fundamental implement  in the current political toolbox.  Fear of the consequences, fear of unintended consequences, fear of the future if the President is re-elected, fear of the future if the President is not re-elected, fear of the future if Romney is not elected, fear of the future if Romney is not defeated, fear of the future if the budget is not balanced, fear of the future if it is balanced incorrectly; the list is endless.

When all options lead to disaster, the best option is to do nothing - don't buy that car yet, don't buy that house yet, don't expand that production line, don't open that new store, don't hire those new people; keep whatever money you have at hand in your pocket.  

Nothing promotes nor prolongs economic contraction like cultivating fear. 

Those who do so deliberately should be shamed and ostracized.   

Heterotic
Heterotic

One other major factor has not been included. In the past 19 years the US population has increased by 23.7%, mostly from third world countries. This adds an unsustainable burden to the system as these people will require more in services than they will ever contribute in tax revenues. We are importing poverty at an unsustainable rate.

Brooke314
Brooke314

The book This Time Is Different, by Reinhart and Rogoff shows that the US is on the path to enormous trouble if it does not get its financial house in order.  Post WWII, the US also had enormous debt (although, amazingly, public plus private debt is larger today, which is a clear indication of the government's egregious mishandling of finances).  After WWII, the government cut spending (by a lot) and cut taxes -- and it worked very well.  We should take a lesson from that history and do the same today before it is too late.

If you vote for and elect politicians who are *not* in favor of doing the above, then you are directly to blame for the horrible disaster that will follow.

FrithMountain
FrithMountain

 The government cut spending after WWII on defense, since, obviously, the war was over.  Taxes were very high, especially on top earners, and remained that way for decades.   Taxes only started getting cut dramatically in the 1980s, during the "Reagan Revolution," which was actually a period of *increased* spending and *decreased* taxation, which inflated the national debt and set a precedent for spending without new revenues.  Which is what has led us to the huge national debt today.

So if you want to stop the madness, rational people would embrace the bipartisan conclusions of the Simpson-Bowles commission, which recommended a combination of tax increases and targeted cuts.

h rutner
h rutner

Re our current financial crisis, the underlying reason is simply an uncontrolled pandemic of a unique mental illness, mega greed- genus homo americanus. Symptoms include recent and ongoing enormous handouts of Fed dollars and tax revenue to a few privileged individuals and too big to fail financial institutions, meaning shielded from all risks. But a far larger segment among us get an even larger aggregate of largely undeserved freebies as entitlements, excessive health care costs, high pension benefits to select groups, fake disabilities, excessive insurance awards, ad nauseum, on an endless list of common greed and rewards for laziness or unhealthy life styles. And this mental illness is going viral globally and appears incurable with predictable outcome of worldwide chaos already evident in the some EU nations, fixable only with an imminent world government under a dictator.

David O'Keefe
David O'Keefe

Ed Rector below is very right about the importance of economic growth to increase tax receipts. Federal revenue fell 15% each year in 2008, 2009 and 2010 and still has not recovered. Economic recovery will eventually fix the revenue side, assuming it's not all thrown away in poorly targeted tax breaks.

The Clinton surpluses can be achieved again by returning military spending to <3.7% of GPD ($300+ billion per year saved) and raising taxes back to Clinton-era levels (another $350 billion per year paid in). 

The GOP may be mortally opposed to the above formula for ideological reasons, but it led to prosperity and fiscal responsibility before and will again. Rockefeller Republicans would have supported it.  

joukot
joukot

Many people seem to forget that increasing debt is equivalent to tax increase. They are not alternatives, but  the same thing, except for a bit different timing. Thus George W. Bush increased taxes a lot - to be collected by his successors.

Chris Opp
Chris Opp

We need people to help us get access to the data. Then we'll need people to help us make sense of what it means and provide recommendations for solutions.

Chris Opp
Chris Opp

Dear Ladies and Gentlemen:

I believe that this conversation needs to be had with the American public. In my head I see this as a series of conversations around the kitchen table over a cup of coffee, or in a series of town hall meetings. However in order to have meaningful dialogue we need some basic unbiased information.

Below are some basic questions to start the conversation.

1.) Can the American public get a detailed holistic view of the current problem?

2.) What are the detailed variables for each topic?

3.) What's the future projection if we don't make any changes?

4.) What are the options?

5.) What are the pros and cons for each option?

6.) What's best for our country and the future generations?

7.) How can we affect real change?  

8.) How can we get Washington to follow the will of the people?

Thank you,

Fellow Citizen

Geonew
Geonew

 Things will get much worse because of the paralysis of national politics and it is the result of political theatrics by politicians, by the media, enjoyed by the public, at least a significant section.  Like every social malady you can see it individuals.  I observe how people view politics like sports teams, my side wins, your side loses, do anything to win, my guy lies it's OK, your guy lies it's not OK.   The quality of a democracy is only as good as the smallest unit, the voter.  If people are not willing to be open minded, willing to listen to a variety of viewpoints, be intolerant of demonization and misinformation, and refuse to view the world in black and white shades then the country will continue to decline.  Each of us has a responsibility to be well informed. 

rampantlion
rampantlion

Dear Chris:

A great set of questions. Unfortunately, for question 1, we will NOT get this from ANY of our politicians or the MSM--even statistics from our federal government from (supposedly) unbiased sources (CBO, etc.). For example, inflation and unemployment statistics used to be fairly reliable statistics that showed significant correlation to economic changes. Now, they have been modified to the extent that they are quite unhelpful, if not irrelevant.

As to question 3, allow me to address an aspect or two:

 

Here are the results of the federal stimulus over the last few years:

GDP – US$

2007: 14,028.7 B

2008: 14,369.1 B

2009: 13,939.0 B

2010: 14,526.5 B

2011: 15,094.0 B

2012: 15,601.5 B (US budget)

Annual federal deficit in US$:

2008:    458.55 B

2009: 1,412.69 B

2010: 1,293.49 B

2011: 1,299.59 B

2012: 1,326.95 B (US budget)

%GDP Increase (annual):

2008: +2.43%

2009: -2.99%

2010: +4.21%

2011: +3.91%

2012: +3.36%

%GDP Stimulus (annual; federal deficit $/avg. GDP):

2008: +3.23%

2009: +9.98%

2010: +9.09%

2011: +8.77%

2012: +8.65%

%GDP Net ‘Growth’ (%GDP increase - %GDP Stimulus):

2008: -0.80%

2009: -12.97%

2010: -4.88%

2011: -4.86%

2012: -5.29%

The above Net GDP ‘Growth’ assumes zero growth from the private sector. Our stimulus ‘investment’ has earned us a negative return.

The implied multiplier effect is as follows (assuming 0% private sector growth is ‘best case’ for stimulus):

2008: +0.75

2009: -0.29

2010: +0.46

2011: +0.45

2012: +0.39

So much for the 'wisdom' of deficit spending and the mythology of Keynesianism (a Keynesian multiplier of at least 1.0X%, where X is the interest rate on borrowed debt, would be necessary for break-even).

As to our federal debt, we will be where Italy is at today (123% debt to GDP) in 2 to 5 years, depending on your growth and federal deficit assumptions (with 2% growth and $1.0 Trillion federal deficits, 5 years; at 1% growth and $1.0T deficits, 4 years; 1% growth and $1.3T deficits, 3 years; if we go back in recession, we could be there in just over 2 years). I consider this November's election critical in electing fiscally-responsible politicians. If we fail, America is financially doomed to either default or, more likely, Helicopter Ben will effectively print so much money that he'll debase our currency and lower our standard of living substantially. Vote wisely.

Chris, if you are ever in the Twin Cities, I would enjoy conversing with you about all your questions. Be warned, however, that we're talking about at least a pot of coffee, not just a cup...

Chris Opp
Chris Opp

Thank you for your comment and providing some details in your reply.

George Orwell said of himself that he had an uncanny ability to face unpleasant facts. This was the title of a collection of narrative essays he wrote about life and politics from 1930s and post-war Europe. To borrow this title the American people, Legislative branch, Executive branch need to face the "Unpleasant Facts".

oldprofessor
oldprofessor

Good question but there will be no answers from politicians and the news media find it hard to focus on facts.  Facts evidently are not considered news.

Frederickgyn
Frederickgyn

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Johnny
Johnny

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Ernestpxj
Ernestpxj

Diana responded I'm startled that a stay at home mom able to make $6455 in 4 weeks on the network. did you see this (Click on menu Home)

Bijdehans
Bijdehans

From a European point of view this is a great article. I was amazed the author managed to avoid phrases like "European crisis" and "Socialist welfare state" altogether. It's time the entire world starts writing the reality check and act in a well-behaved and responsable manner in order to solve our collective financial problems. Europe has already started...

e2u
e2u

Air head comments based on sentiment without any intelligent facts are just that. Empty rhetoric insulated with an abundance of empty sentimental rhetoric. All opinions are not equal, some are more unequal than others.

oldprofessor
oldprofessor

A major problem with a rational discussion of relevant issues is...they are complex and we have to rely on others to make them understandable.  Here is an example:

http://zfacts.com/p/318.html

It looks bad for Republicans.  Are there Republican alternatives to this presentation?

Barry Shook
Barry Shook

Our President, and members of the U.S. House of Representatives, and the U.S. Senate, have made it perfectly clear that their preferred method of dealing with important things is to continue to evade or deny the issues.  Their ONLY objective is to do what's good for their party; not what's good for their country. 

Terry
Terry

Obama has been such a success in fixing these big problems....NOT!   He has gone out of his way to not fix any of them, not even tried.  Playing golf and taking vacations are more important to him.  What a failure he is.   Fortunately, he will be gone in 2013!

Trajan Saldana
Trajan Saldana

which president has gone out of his way to do anything once elected? other than war

Darrel K.Ratliff
Darrel K.Ratliff

If you had a whinny congress that the vocabulary was so limited that NO is the only word that they can muster  then you'd have the same progress that the current administration has had.  If the congress could work together as they are supposed to do  then Jobs would be much more prevalent since they set the budget they fund it or defund it at their whim or motive that is why congress is under 10% in popularity today  they don't do what they're paid to do in place of representing the constituents  they tend to work for special interest groups that are NOT in the best interest of the general public  so Jobs are not so easy to get. 

iamsosure
iamsosure

Obama inherited the Bush recession, the worst economy since the great depression. In 2010 the tea party helped to elect Republicans to control the House. Boenner said his focus would be on jobs. If you check their voting record their focus has been on defunding Planned Parenthood, PBS, and waging war on women and their reproductive rights. For crying out loud, they voted 33 times to repeal the ACA. You wonder why a progressive like Jesse Jackson Jr. is suffering from depression after working with bozos like Todd Akin ? Myself I'd probably be ready for a padded cell if I had to spend hours each day with such elected morons.  What we need to do is purge the tea party nut cases from the Congress so Obama can continue to fix Bush's mess.

peteshelly
peteshelly

 Let's see... Congress (both houses) were controlled by Dems for the last two years of Bush and for the first two of BHO. What did they get done to help the problems? Nothing. That's right.

CatholicMinnesotan
CatholicMinnesotan

It is undenieable fact that what Obama was handed was horrendous.  However, what he hands on to the next occupant (even if it is himself) will be worse.  And I am not talking, like the difference between a 63-99 rcord vs. a 62-100 record, more like a 63 -99 and a 22-140 record.  By the way, in the MLB, if the manager is not causing a quick enough turn around, he is likelly to get fired midseason, even if he has only managed that singular season. And yet politicians who make the same errors have a chance to get rellected if they can blame their predecessors...