A Day Of Reckoning: The US Budget And The States Of This Union

Mar 5th, 2011 | By | Category: Politics & Current Events

The proverbial day of reckoning for the United States, both at the national level and in most of the respective states of this union, has arrived.  In this Perspective, I want to defend that proposition.

  • First, a few thoughts about the budget President Obama just presented to the Congress.  (Overall, he basically ignored virtually all of the recommendations of the deficit reduction commission that he appointed.  As columnist David Brooks observes, ?The message of the president?s 2012 budget is:  Not yet.  We?ll get serious tomorrow.?)  But his budget does reflect one brutal reality:  Interest payments on the national debt will quadruple in the next decade.  Beginning in 2014, net interest payments will surpass the amount spent on education, transportation, energy and all other discretionary programs outside defense.  In 2018, they will outstrip Medicare spending.  Only the amounts spent on defense and Social Security will remain larger.  These soaring interest payments will remain the major obstacle to balancing the federal budget.  There is no other alternative than major cuts at all levels of spending within the budget.  The nation?s debt is growing faster than the economy, and interest rates are rising.  Over the next decade, according to Steven Mufson of the Washington Post, net interest payments will amount to nearly 80% of the debt added.  In other words, our borrowing as a nation is forcing the nation deeper into debt!  This is unsustainable!  Interest rates are relatively low now but no one expects that to remain the case.  Obama?s budget predicts that the interest rate on 10-year Treasury notes will climb from 3% to 5% and then 5.3% by the end of the decade.  What compounds this situation is that a huge portion of interest payments are flowing out of the US economy to other nations.  There has never been anything like this in America, even during the record high post-World War II years.  How did we get into this mess?  The American political culture is uncomfortable with austerity.  America?s fiscal policy has alternated between ?giveaway? and ?takeaway.?  From 1946 to 1981 was an era of giveaway?entitlement programs expanded, especially Medicare and Medicaid (1965), and taxes were cut by President Reagan in 1981.  In 1982, fiscal policy flipped to takeaway.  Taxes were raised in 1982, 1983, 1984, 1987, 1990 and 1993.  In 1983, a bipartisan deal led to cuts in future Social Security benefits, a gradual increase in the retirement age and a higher payroll tax.  In 1996, welfare was restructured as well.  In 1997, American?s fiscal policy shifted back to giveaway.  A generous tax cut was initiated, along with a new child tax credit and a cut in the capital-gains tax.  A surge in tax revenue, pushed by the stock market bubble, then pushed the budget into surplus in 1998, four years ahead of schedule.  With that, the culture of austerity died.  Congress has regularly overridden the 1997 tax cuts in Medicare payments; President Bush cut taxes in 2001 and on capital gains and dividends in 2003.  In 2003 he signed into law the expansion of the entitlement culture with the prescription drug benefit, funded totally by debt.  In 2002, the Paygo rule, passed in 1990, stipulating that any tax cut had to be offset by a spending cut and any expansion of entitlements with a tax increase, lapsed!  Hence, structural deficits of unsustainable amounts are now the reality.
  • Second, what is occurring in Wisconsin, as I am writing this, is a metaphor for tomorrow.  Wisconsin, like almost all of the states, is facing a horrific and unmanageable budget deficit.  Governor Scott Walker, recently elected, joined with a Republican majority in the Wisconsin legislature, in proposing a resolution to the budget crisis.  Facing an immediate $137 million budget deficit and a larger $3.6 billion deficit over the next two years, Walker determined to bring some of the entitlement obligations of Wisconsin under control.  He proposed that the public employees of Wisconsin contribute 5.5% of their income towards their pensions and 12.6% towards their health insurance.  That is roughly the national average for public pension payments and is less than half the national average of what government workers contribute to health care.  He also wants to limit the power of public employee unions to negotiate contracts and work rules (not wages)–something that 24 states already limit or ban.  His proposals are hardly radical nor abnormal.  What is really at stake here is political power:  The public employee unions are virtually 100% committed to the Democratic Party and its candidates.  Should they lose the power to negotiate benefits via collective bargaining, they will lose power gained under Democratic administrations.  Much is at stake in Wisconsin.  This power struggle is also of special symbolic importance because the American Federation of State, County and Municipal Employees union was founded in Madison in 1936.  This union is powerful and has contributed in no small way to the significant increase in labor costs, especially pension and health care benefits, which are now bankrupting state and local governments.  These benefits are unsustainable, unless the employees begin contributing toward significant portions of the cost, which is the norm now in the private sector of the economy.  So, what is occurring in Wisconsin is a battle that will be played out in virtually all the states.  State and local governments simply cannot afford to pay these lucrative benefits negotiated during the giveaway years mentioned above.  The US government and the state and local governments are on a path of insolvency.  As I am writing this, the Wisconsin situation is not resolved.  It is highly political and rife with tension and bitterness.  But the brutal reality is simple:  Things must change and the lucrative benefits of public employees are a major portion of the budgetary woes of state and local governments.  The giveaway years? day of reckoning has arrived.  America faces, in the words of Governor Mitch Daniels of Indiana, ?a survival-level threat.?  [No enterprise, public or private] ?can remain self-governing, let alone successful, so deeply in hock to others as we are about to be.?  There is no other choice for this nation?at the national and state levels?than significant reform of our entitlement programs.  The battle in Wisconsin is a sign of how potentially ugly this could become.  America needs a strong leader who will lay out the facts very carefully to the American people and then call the nation to sacrifice.  President Obama?s budget did not do that.  What Governor Walker is doing in Wisconsin is an example of what will need to occur in each locality, each state and in the nation.  The giveaway years are over.  The age of austerity has dawned.  If we do not accept that, we are doomed as a nation.

See George Will in the Washington Post (17 February 2011); John Fund in the Wall Street Journal (19-20 February 2011); David Brooks in the New York Times (18 February 2011); The Economist (20 November 2010), pp. 29-31; and Steven Mufson in the Washington Post (17 February 2011).

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