It doesn’t take a certified accountant or an MIT graduate to tell you the U.S. balance sheet isn’t looking too pretty these days.
The Congressional Budget Office claims the U.S. national debt is hovering just over $13.5 trillion, about 91 percent of Gross Domestic Product. That’s more than $120,000 per taxpayer and roughly $44,000 per citizen.
Moreover, the U.S. is projected to run a record $1.3 trillion budget deficit this fiscal year. Even by the rosiest projections imaginable, the national debt will continue escalating into the foreseeable future.
So given the drastic increases in the size of our federal government, what do these gigantic numbers actually mean?
Well, it’s complicated.
Economists have been arguing about the effects of ramping up government spending and running massive deficits since World War II, when the U.S. debt reached a record 120 percent of GDP.
Sixty years later, the two sides’ policy suggestions are as divided as ever.
Economists on the left argue government spending is necessary to stimulate spending and investment and help lift the economy out of recession.
Economists on the right, however, are quick to point out the drawbacks of siphoning credit away from the private sector to support unsustainable budget deficits.
Nevertheless, nearly all economists point back to the massive debt America accumulated during World War II as proof it’s possible for an economy to grow its way out of massive debt.
But does the same logic apply for today’s debt crisis?
Let’s take a short field trip to metaphor land to find out.
Suppose your uncle — let’s call him Uncle Sam — is a spry young entrepreneur who decides to take out a large one-time investment loan to fund the expansion of his up-and-coming investment firm.
In the short run, Uncle Sam’s debt burden will certainly be substantial. But in the long haul, he can conceivably pay his debts off with his company’s future earnings.
Now fast-forward 60 years. Good old Uncle Sam is no longer an ambitious young financial guru with a hard work ethic and high savings. He’s a drunken stock-swindler with a crumbling Ponzi scheme and an endless stream of unpaid gambling debt.
Stuck between converging walls of depression and debt, Uncle Sam’s economic advisers use their twisted logic to convince him the only way he can escape his malaise is to incur more debt and spend his way back to prosperity.
What’s their justification for this seemingly ass-backward proposal? The fact that he outgrew a similar deficit 60 years earlier.
But can he really outgrow his debt this time? Well, it’s not very likely. Why? Because this time, it isn’t so much about the size of his debt. It’s about the structure of his debt.
Similarly, American debt today isn’t the same as American debt of the 1940s.
During World War II, the vast majority of U.S. debt consisted of short-term war financing, most of which was contracted immediately after the war.
Today, the story is vastly different. America is no longer a productive creditor nation. And more importantly, our debt is no longer temporary and retractable.
Government sanctioned Ponzi schemes — euphemistically called “entitlement programs” — now take up the lion’s share of our unfunded debts.
The 2009 Social Security and Medicare Trustees Reports show these programs’ combined unfunded liability — the difference between the benefits that have been promised to current and future retirees and what will be collected — has reached nearly $107 trillion. That’s nearly twice the entire world’s GDP.
John C. Goodman, president of the National Center for Policy Analysis, claims, “By 2030, the midpoint of the Baby Boomer retirement years, [Social Security and Medicare] will require one of every two income tax dollars.”
The moral of this story is simple: This time really is different. Our government has promised far beyond what it can ever deliver. As the economy continues to founder, the only weapons the government has in its arsenal — borrowing, taxing and printing money — will become increasingly impotent.
Warren Buffett once said, “You only find out who is swimming naked when the tide goes out.”
Right now, Uncle Sam is standing butt naked in the ocean with his dingleberries dangling in the wind. And this time, there’s nothing he can do about it.
Scott Burns is a 21-year-old economics and history senior from Baton Rouge. Follow him on Twitter @TDR_sburns.
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Contact Scott Burns at [email protected]