Health care costs are 17% of our Gross Domestic Product, and growing at 12% per year. At this rate, in 10 years, health care will be 50% of our GDP. No health care legislation on the horizon.
The biggest contraction of GDP since the Great Depression just took place, and caused a worldwide recession. No financial reform legislation on the horizon.
This is the story that may be bigger than either of those.
I. National Debt in Perspective
You'd have to be a recluse not to have heard the Tea Party movement raving about government spending. Do they have a point?
According to the latest Congressional Budget Office report, the US will spend $1.35 trillion more than its revenues this year, slightly less than the $1.4 trillion deficit in 2009. Our accumulated deficits (plus interest), or our National Debt is $12.38 trillion.
US debt is currently 86.7% of our Gross Domestic Production, and is projected to be 94.27% by the end of this year. How does that compare to our historic levels of Debt/ GDP?
A. Post-War Years
Since 1792, our average level ratio of Debt/GDP was 28.32.
Our lowest levels were from 1835 - 1842 (less than 1%), and our highest were 1945 - 1947 (averaging 114.34%), and 1948 - 1950 (averaging just under 92%). Note that the highest years were post World War II, when fears that military spending decreases would cause another Depression subsided, as growth in housing, cold war military spending and industrial production in automobiles, aviation and electronics increased throughout the 1950s.
B. The 1960s and 1970s
In the 1960s, the Kennedy Administration increased government spending and cut taxes, but the level of Debt/GDP dropped from 67.9% in the 1950s to 45.3%.
In the 1970s, a combination of increased inflation and a stagnant economy (coined "stagflation") resulted in high unemployment, and Debt/GDP dropped to 33.7% during that decade.
C. The 1980s
Beginning the decade with a brutal recession, the Reagan Administration responded with tax cuts and spending increases, much like the 1960s. The difference was government spending for social programs was slashed, and military spending increased dramatically. During this decade, Debt/GDP rose to 42.2%.
D. The 1990s and beyond
Economic growth brought deficits down to zero in the 1990s, but a growing debt primarily due Social Security and other social programs increased Debt/GDP to 63.7%. Continued growth in social programs (including the Medicare Drug Program), the Afghanistan and Iraq wars, and the housing bubble (with its ensuing world-wide financial crisis) increased the Debt/ GDP ratio to 64.6% during the decade ended 2009.
II. US Spending by Category
National Defense 19.9%
Human Resources (Including education, training, employment, social and veteran's services) 65.2%
Physical Resources (Including energy, environment, commerce, housing, transportation and community/regional development) 8%
Net interest on National Debt 3.8%
Other Functions (Including international, science, space and technology, agriculture, justice and general government) 5.6%
Undistributed Offsetting Receipts -2.3%
Clearly, the vast majority of US spending are in Human Services (65.2%), and almost half of that spending is Medicare and Social Security. Social Security spending alone is about equal to National Defense.
Spending on Health Care, as mentioned earlier, is 17% of GDP, and is growing at 12% per year. Left unabated it will be half of our GDP in 10 years.
III. The Big Untold Story
China is no longer the largest foreign holder of US debt, having recently reduced their holdings by $34.2 billion. Japan, who now holds more of our debt than any foreign holder, also reduced their holdings by $11.5 billion. Overall, foreign holders of our debt dropped by $53 billion, the largest drop in history.
With our debt increasing, and foreign lenders less willing to buy it, the Treasury Department will now have to attract investors with higher rates of interest.
The 3.8% of our budget we use to pay interest on our debt will increase. While $136 billion may seem a paltry amount in today's vernacular, we derive absolutely no benefit from it, and it is now equal to the amount we spend on education.
With foreign governments finding our debt less attractive, the amount we spend on interest will surely increase to attract other borrowers.
We haven't had the will to fix health care costs that will be 1/2 of our total output in a short 10 years if we do nothing.
We haven't the will to enact financial reforms after the biggest recession since the Great Depression.
Will we find the will to make the sacrifices necessary to cut spending?
Warren Buffett suggested that he will pay higher taxes and forego Social Security payments, regardless of the fact that he's paid into the system all his life. Admittedly, he's a lot weathier than we are.
Nevertheless, maybe he's on to something.