The unprecedented, improbable, and indeed almost unimaginable global financial crisis has virtually put an end to the comfortable notion that American and Western capitalism would dominate the world economy. In turn, the financial meltdown threatening another Great Depression has been the rationale for a phenomenal expansion of government spending to prop up demand and fend off economic disaster. As a result, the deficit quadrupled from $459 billion in 2008 to $1.85 trillion this year. It has gone from 3.2 percent of gross domestic product to 13.1 percent, twice the post-World War II record of 6 percent in 1983 under Ronald Reagan. What's more, the debt surge is unlike the one that accompanied WWII in that it will not be temporary.
The nonpartisan Congressional Budget Office reckons that the deficit will run for a decade and will still exceed $1.2 trillion in 2019. By that time, the United States will have virtually doubled its national debt, to over $17 trillion. Then, after 2019, we get another turn of the screw as the peak waves of baby boomers move into their retirement years and costs soar for the major entitlements, Social Security and Medicare.
At 41 percent of GDP in 2008, the accumulated federal debt will rise to 82 percent by 2019. One out of every 6 dollars spent then by the feds will go to interest, compared with 1 in 12 dollars last year. These out-year budgets will require an increase in everyone's income taxes, raising federal income taxes an average of $11,000 for families, a hike of 55 percent per household—a political impossibility. The Government Accountability Office estimates that by 2040, interest payments will absorb 30 percent of all revenues and entitlements will consume the rest, leaving nothing for defense, education, or veterans' pensions.
If the economy would grow quickly, we might hope to pay down this debt. No such luck. The GDP trajectory is gloomy, and on top of that, the demands of special interest groups threaten to reduce growth even more. Just look at the medical world, which pushes expensive treatments at government expense for its benefit.
American attitudes and behavior have undergone a substantial change. We are saving more and paying down debt, and we are deeply worried about the deficits. We are transforming our society from a consumer culture to a culture of thrift. In a recent Wall Street Journal/NBC News Poll, Americans were asked which economic issue facing the country concerns them the most. Deficit reduction ruled over healthcare. Half were prepared to defer spending or to spend less, even if it meant extending the recession.
The feeling has grown that the Obama administration is taking on too much, that the president is trying to "boil the ocean." Obama's budget is packed with a wish list of extensive new programs, especially a giant healthcare reform plan whose financing is thinly based. Rather than talking—optimistically!—about a deficit-neutral outcome, the president should be proposing a program that reduces the cost of the most expensive healthcare in the world.
Clearly, spending controls must be given a higher priority across the board. The public still likes Obama and recognizes his talent, but when it comes to deficit financing of programs, we have a country of "born-again budget hawks" who will rise up if taxes are boosted to pay for it all.
Main Street feels it will recover only when American finances are on a sounder footing. It believes that it will never recover if huge new national programs are allowed to create a monstrous structural deficit that will keep building the debt burdens far into the future to unsustainable—perhaps ruinous—heights, while a weak recovery means lower federal revenues, the piling on of more interest obligations, and thus even higher deficits.
The giant tax increase for the impending bill will be too big for "the rich" to pick up, yet ruinous tax increases are inevitable if spending cuts remain outside the president's agenda.
Everybody is dazed and confused by all this talk of additional indebtedness in the trillions of dollars. Our soaring national debt will require cataclysmic adjustments to accomplish the restoration of a balance in our fiscal position. Otherwise, we face a dramatic erosion of U.S. economic and financial standing, raising the risk of skyrocketing interest rates and a crash in the value of the dollar. Americans have run out of borrowing power and are going on a long-term saving spree where savings could reach 10 percent of income. They can no longer rely on their stocks and the soaring value of their homes to put their kids through college and support early retirement. For the first time since the Depression, U.S. companies are not only cutting jobs; they are cutting wages. We are undersaved and underpensioned, and we will have to adjust to a more frugal life.
With too much mortgage debt on their homes, too much credit card debt on their personal income, and too much overall debt, Americans have learned that they cannot continue to be borrowers. Shakespeare had it at least half right when he said, "Neither a borrower nor a lender be." President Obama should heed Polonius.