Friday, December 4, 2009

Can the Nation Afford It? - Part II

There are two sides to everything.  Our previous discussion, that compared the US debtor status with other countries, showed that our GDP is nearly a quarter of the world's, and showed our status in numbers with a few less zeroes with the assumption that trillions are not numbers we throw around all that often.
Our example showed a woman earning $134,540 per year, who owes $125,000 mortgage and $1871 on her car.  Doesn't sound so bad, does it?
Sadly, there is no perfect analogy.  For example
  • The woman in our example will own her home outright 30 years from now, after paying her $125,000 mortgage, and that home will likely appreciate in value over that time.  US National Debt will do no such thing.  It is paying for current programs.  Thirty years from now, many of us will be dead, and that debt will continue to be paid by our children.  Therefore, when considering a policy that increases our debt, the first consideration should be whether it is important enough that we encumber our children with its cost.  For example, health care costs are 16% of the total budget, and that cost is rising at 12% per year.  At that rate, in 10 years, health care costs will be 50% of the US budget. This is an unacceptable situation that must be addressed in a way that cuts cost acceleration significantly, or it will bankrupt the next generation.
  • Lowering the level of national debt is a good thing, but it is the goal of no nation to completely pay off the national debt, as was the goal of the woman in our example to pay off her mortgage.  According to Asia Times, even thrify China has $407.5 billion (3.26 trillion yuan) national debt as of 2005, approximately 18% of its GDP.  Therefore, to quote a figure that each US citizen owes just under $40,000 per citizen is incorrect.  Cutting the debt by 25% would be a more reasonable goal, which would require an average of $10,000 in tax increase per citizen - in addition to balancing the budget.  Clearly, expentidures must be cut and taxes, increased.
  • The primary issue is not the deficit per se; rather it is the direction and trajectory of the deficit.  Right now, it's going up - fast.  That's very bad.  Piling on debt when revenue is flat is a terrible idea.  However, we are just coming out of a recession.  When the unemployment situation improves, revenues will increase.  No increase of revenue, however, will address the current rise in the health care portion of the budget.  That must be addressed through cost containment.
Reasonable people disagree about the particulars in the health care debate.  One thing, however, is certain.  The beneficiaries of non-action are health insurers, who are, by the way, the largest contributors to Congress (who have an excellent lifetime health package).  We must be vigilant that the effect of such lobbying not veil the critical nature of taking immediate, effective and long-term steps to stem the rise of health care costs in this country.  To take no action is to assure bankruptcy for the next generation.

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