According to The New Yorker (September 27), “America did not plunge into an economic abyss” because of the government’s “bold stroke” guaranteeing money-market funds and flipping Goldman Sachs into a bank holding company. “The reprieve bought enough time for the reemergence of reason over unbridled fear.” Massive government spending and guarantees are now propping up the financial market, the housing market, and the economy in general. Washington’s theory is that its “pump-priming” will ignite private spending, but many believe government intervention has achieved nothing but a temporary respite in the economy’s search for its bottom. We have just been kicking the can down the road.
The Office of Management and Budget (OMB) reports the national debt held by the public in 2019 will be $17.5 trillion (OMB Mid-Session Review, August 25). That assumes, of course, that the Chinese (or someone) will lend us another nine trillion dollars over the next ten years. We will need to add another $5.4 trillion to the national debt because the government has taken responsibility for the debt of Fannie Mae and Freddie Mac, giving us a rounded total of $23 trillion—an astonishing number considering that the debt in 2000, when most everyone thought it was very high, was a mere $3.4 trillion. Right now, the Fed itself is buying our long-term Treasuries, but that has to be a practice with a limited future. Does any reasonable person think more and more borrowing is sustainable?
One person does—Paul Krugman, a professor at Princeton and contributor to the New York Times, who cautions against what he calls debt “hysteria.” Yes, the debt outlook is not wonderful, but it’s no worse than what we saw at the end of World War II, or what a number of “advanced” countries are seeing right now. The debt, as he puts it, can be “dealt with”; it’s “manageable.” The public, however, disagrees: A recent poll shows that Americans give a higher priority to reducing the deficit than to reviving the economy.
Professor Krugman’s analysis has problems. The OMB projects that GDP will increase by 50 percent, so that by 2019 tax revenues will be $4.2 trillion, and interest cost will be $722 billion, which would be 17 percent of revenues. These projections may not work out. We may see very little economic growth over the next decade. (U.S. incomes have been flat since 1997.) Interest rates could be much higher. Currently, there are six job-seekers for every opening; Professor Krugman needs to find seven million new jobs to rehire the workers just fired, plus an additional 2.5 million for new workers. After all, a jobless recovery is an economist’s abstraction.
If the OMB is wrong, then our future is black. If it is right, that future is gray. Either way, we will have to learn to live with a huge debt. Our situation may be “manageable” or able to be “dealt with,” but the rest of us may not want to live like that. The basic theory of democracy—which Professor Krugman is forgetting—is that the current majority must have complete freedom of action. As Thomas Jefferson wrote, “the earth belongs to the living.” The present has no right to legislate for the future, to bind those who come after them with debt.
What’s the interest on $23 trillion? That, of course, depends on the interest rate. Assuming the rate is 4.2 percent, the interest is one trillion dollars. Our total revenue in 2009 will be under two trillion. If our tax revenues are flat until 2019, that trillion-dollar interest cost will eat up about half of all tax collections. Currently, interest cost is only $173 billion, or 8.3 percent of revenue. Interest cost has remained low because wary investors have been willing to buy Treasury bonds at rates as low as zero percent. Nonetheless, we can’t go on borrowing 40 cents of every dollar we spend. A family doing that would soon be out on the street.
Assuming things don’t get worse, all we have to do is pay the one trillion dollars in interest. Of course, the $23 trillion principal would remain. It rolls on forever—what the Founding Fathers called a perpetual debt. None of them thought our experiment could succeed with a perpetual debt. Our republic, as Jefferson wrote in the Declaration of Independence, rests on the consent of the governed. The theory fails if half of all tax collections go to pay for past decisions. The governed consent to popular programs by paying taxes to support them; they won’t pay for programs they don’t like. Debt appears when the government goes ahead with programs the people don’t support. During his two terms as president, George W. Bush raised the debt held by the public from $3.4 to $5.2 trillion to pay for one unpopular war and some lame domestic programs. In one year President Obama has added another $1.6 trillion to conduct two unpopular wars and bail out bankers, and he projects another $9 trillion over the next ten years.
We could cut other expenses, but there is not much talk of that. Indeed, huge shortfalls in Medicare, Medicaid, Social Security, etc., are looming, but we are ignoring those for the moment. How about raising government revenues? Well, in 2008, personal-income taxes generated a little over one trillion dollars. We could close the deficit if we double personal-income-tax collections. Someone earning $175,000 of taxable income paid $42,500 in federal taxes in 2008. He would pay $85,000 under the new rules. Someone with $100,000 of taxable income paid $23,000—which would double to $46,000. Most taxpayers believe they are taxed too heavily already, and they are not willing—or able—to see their federal income-tax burden doubled.
If raising personal-income taxes doesn’t work, how about increasing the Social Security tax? It collects almost as much as the personal-income tax—$900 billion in 2008. We could nearly close the deficit by doubling the Social Security tax. The current rate, counting both the employee and the employer shares, is 15.04 percent. Today, for every $100 he earns, a worker gets $85 in his paycheck, and the rest goes to Washington. If the payroll tax were doubled, over 30 percent of a worker’s wages would be withheld, reducing the worker’s take-home pay to $70.
If raising traditional taxes won’t raise what we need, can we invent some new tax? The Obama administration is reportedly considering a European-style value-added tax, which has the advantage of hiding the tax in the final price of the product—a shirt that costs $100 today might cost $120 with the VAT tacked on. The federal government has not imposed a property tax since the War of 1812, and today it would compete directly with towns, cities, and school districts. Our bankers have off-loaded their losses onto the taxpayer and are happily returning to what they call business as usual. A tax on some of their transactions—like derivatives trading—is a good idea, but the Obama administration would not dare to push for it.
Where, then, will the money to pay the interest come from? In 2008 U.S. median household income fell 3.6 percent to $50,323—the sharpest drop since the government started keeping records in 1942. According to a recent Census Bureau Report, in 2009, income is expected to drop five percent. Globalism has been profitable for capital, but it has destroyed American household incomes.
The taxes will have to come out of the upper-middle class. President Obama believes that families making over $250,000 are “rich.” Of the 141 million tax returns filed, the 2.8 million returns that reported incomes of over $250,000 represent the top two percent of taxpayers. When compared with the median income, $50,000, the top two percent who average $1.14 million do seem well off, but let’s look more closely at their situation.
There are great disparities within the top two percent. There are the truly rich—Americans who own yachts, private jets, a vacation home in the Hamptons—who don’t need to work to live an affluent lifestyle. Then there are the families at the lower end, the bottom one-to-two percent of President Obama’s “rich,” who earn $250,000 to $410,000 per year. This sounds like a lot, but these families are probably already paying $100,000 in total taxes, which doesn’t leave a lot left over.
The top ten percent of American families earn good incomes, more than $100,000, but, unlike the top one percent, they don’t have substantial savings. Those who make up the lower end of Obama’s “rich” have more in common with the top ten percent than they have with the truly rich. Any new tax collections would change the way they live.
The bottom 90 percent of American families are in no position to pay more taxes. Their average income is $39,000, and that income has been relatively stagnant since the mid-1970’s. It is hard to see how they are getting by now, let alone what they will do if saddled with part of the new trillion-dollar tax burden. Globalism has hit them hard.
What do we get in return for what is—if we are lucky—a gray future? In September 2008, when Lehman Brothers failed, Ben Bernanke told hesitant congressional leaders that if the government left it alone, things “would be very bad.” Specifically, “You could see a twenty percent decline in the stock market, unemployment at nine to ten percent, the failure of G.M., certainly, and other large corporate failures.” We have seen all of that, along with the mountain of debt spent to avoid it. The Obama administration used to say that things are bad now, but they would be much worse if we had done nothing. Now it has to say that things are as bad as we said they would be if we left it alone, but we were wrong: Things would really have been much worse. Well, someone might say, if you were wrong then . . .
This article first appeared in the November 2009 issue of Chronicles: A Magazine of American Culture.