Is the United States “Broke”? Reintroducing sanity to our budget discussions

It’s fairly common these days to read or hear sometime talking about how bad the deficit is, but “the real situation is far, far worse.”  The discussion then turns from describing a 1.3 trillion dollar deficit and 14 trillion dollar debt, to numbers like 100 trillion worth of “unfunded liabilities.”   The usual point being, of course, that the United States is on the brink of catastrophic fiscal meltdown which — if not fixed by drastic reductions in spending and probably elimination of all pensions and safety nets — will lead to national bankruptcy, hyperinflation, and the specter of authoritarianism and other evils.

It’s a fairly compelling story, and it certainly has managed to scare the living s**t out of many Americans, leading to the rise of the Tea Party movement, attempts to destroy public sector unions, and radical budget cutting fever in Congress.

It’s also a carefully constructed story, which happens to succeed only by comparing apples to oranges.  In other words, while we do have lots of debt and unfunded liabilities, the picture is nowhere near as grim as is being suggested.  I intend to go through some simple numbers below which demonstrate that we can handle both our current deficits, and the larger issue of the social safety net, “within the system,” and that collapse is not inevitable.

Typically, someone reminds us that our 14 trillion dollar debt is comparable in size to our “14 trillion dollar economy,” and then compares the total unfunded liabilities of Social Security and Medicare to this.  And of course, the approximately 100 trillion dollar potential liability sounds like it dwarfs our entire national economy.

The problem, of course, is that this comparison is between ONE YEAR of the United States’s economic output (GDP), versus SEVENTY FIVE years of accumulated underfunding of the social safety net.  Let’s put these into comparable units.

We could either (a) figure out how much the unfunded liabilities amount to, compared to the full 75 years of economic output, or (b) we can determine what the per-year amount of unfunded liability is compared to ONE year of economic output.   Both give one the same answer, of course.

If we assume that today’s GDP represents an average, without systematic long-term growth or decline, and since the unfunded liability is being discussed in “today’s dollars,” then 75 years worth of today’s GDP is 1,050 trillion dollars.  A little over 1 quadrillion dollars.  The entire unfunded liability for the social safety net is thus 9.5% of our economic productivity over the next 75 years.   Breaking that down on a per-year unfunded liability basis gives one about 1.33 trillion in unfunded liabilities per year.  Again, about 9.5% of our economic productivity.

That’s a big drain on our economy, since we also spend a good chunk of our productivity on federal, state, and local spending.

But it’s not unthinkably large, nor catastrophic.  On these scales, the discretionary federal budget doesn’t even show up in our calculations.  So the heroic efforts of the GOP to destroy education funding, regulatory agencies, and assistance for the truly needy isn’t about our long-term fiscal health.  At all.

Despite the fact that our long-term liabilities aren’t truly catastrophic when you look at the true scale of the U.S. economy over the 75 year time horizon, these are big numbers and respond non-linearly to demographic changes in society.

Social Security is the much smaller of the two problems.    The unfunded shortfall is fundamentally caused by the intergenerational transfer of funds — each generation is funded partially by the one that comes after it, and the current generation of workers is smaller than the “Baby Boomer” generation, and the next generation is looking like it’ll be smaller yet.  Birth rates have declined.  This causes a systematic long-term shortfall unless we make changes to retirement age, benefit level, or current FICA tax rates.  Or a little of each, which is what the Trustees of the Social Security System have long advocated.  The 13 trillion dollar unfunded liability (over a 75 year horizon) is eminently fixable by following their recommendations, or some combination of adjustments.  This liability represents only 1.2% of our nation’s projected economic output over 75 years.  That doesn’t sound like an insurmountable problem to me.

Medicare is a much thornier problem.  It’s thornier because the size of unfunded liabilities is only weakly predictable from demographics (as is the case with Social Security).  We can predict how many people of each age bracket we’ll have using Medicare at various points in the future, but we can’t predict what the average health care cost expenditure per-person will be, 10 years from now, let along 40 or 75 years.  So the estimates for unfunded liabilities here are all over the map.  And they relate to the overall problem of “rationing” care and reducing overall health care cost increases in the U.S.

What does this mean for politics in America today?

  1. We’re bullshitting ourselves about the problems, basically, and which ones need to be solved.  We’re focusing on discretionary federal spending instead of entitlement program finances.
  2. Nothing we do on the scale of the current discretionary federal budget will break the bank in the long term.  Education spending and regulation of food safety are not leading the U.S. to the brink of disaster, and we need to call out the folks that claim it is.
  3. We can fix the deficit and whittle down the U.S. federal debt within the framework of existing fiscal policy, without “inflating away” the debt.  Our country has a robust enough economy that we have the resources.
  4. Our efforts need to be focused FIRST on Medicare and health care costs in general, and figuring out a sustainable solution.  SECOND, we should readjust Social Security funding and benefits policy to close the 75 year gap.  The sooner we do it, the less painful the adjustments will need to be.

Americans aren’t accustomed to having the political dialogue in terms of “trillions” of dollars.  So everything about this is scary, and easily borrowed by demagogues to push their own agendas.

It’s time we all got comfortable with these numbers, and realize that over the next two generations, our economy will produce over 1 QUADRILLION dollars in revenue — goods and services — and that we absolutely can handle the liabilities and issues we face.

If we want to.


One Comment so far. Comments are closed.
  1. Elizabeth Jackson,

    Thank you Mark!