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Running on Empty
The gray tidal wave
By Steven Martinovich
Americans might be forgiven if, in this election year, their attention was telescoped on a few relatively short-term problems. Neither politicians nor the media has devoted much attention to the challenges America faces in coming decades, some that make most of what Americans face today seem mild by comparison. Not many are aware that in just few decades time, the American economy could collapse under the weight of debt.
Peter G. Peterson, former secretary of commerce under Richard Nixon, has spent much of his time in the past decade sounding that particular alarm. Running on Empty: How the Democratic and Republican Parties are Bankrupting Our Future and What Americans Can Do About It is his latest attempt to warn Americans that a perfect storm of an aging population and mounting public debt threaten to shatter the economy.
According to Peterson, the ground was laid decades ago with the creation of the entitlement society. Programs celebrated by Democrats like Social Security rest on the assumption that the next generation will pay for the benefits of the current one. Unfortunately the impending retirement of the Baby Boom generation threatens to swamp future generations with a tidal wave of debt as demand for benefits far outstrips the money available to pay for them. Even more problematic are the inevitable increased Medicare and Medicaid costs, which when combined with Social Security, will lead to tens of trillions of dollars in unfunded liabilities.
Unfortunately the self-described party of small government has also played a role in this drama. Although supply-side economics as been promoted by many Republicans with an almost religious fervor, Peterson argues that irresponsible tax cuts have exacerbated the situation. Rather than pursue a path of surpluses that could be put towards paying down the national debt and those impending liabilities, Republicans have elected to cut revenues while spending continues to rise inexorably. Although tax cuts are popular with the electorate, Peterson charges that they have done little to promote the economy and have essentially transferred costs to future generations.
It's an enormously unpleasant picture when one puts it all together. "In January 2004 the staff of the International Monetary Fund, who normally worry about profligate nations like Argentina, took direct aim at the United States, warning the world that we are careening towards insolvency. They point to a huge and growing imbalance between what the federal government has promised to pay in future benefits and what it can reasonably expect to collect in future taxes. Its long-term structural deficit now exceeds 500 per cent of gross domestic product. Closing that gap, the IMF calculated, 'would require an immediate and permanent 60 per cent hike in the federal income tax, or a 50 per cent cut in Social Security and Medicare benefits.'"
Peterson argues that unfortunately the window for opportunity to avoid a $40 trillion to $70 trillion unfunded budget gap is rapidly closing. Americans can't rely on foreign capital to rescue it from its predicament because many countries are facing the same dilemma. Unless action is taken within the next few years our children and grandchildren can look forward to a future where they will be measurably poorer than their parents, the first time that will happen in American history. Indeed, the entire global economy is at risk given how important the American economy is to it.
To that end Peterson proposes a number of reforms including the indexing of new benefits to prices and not wages, mandatory personal retirement accounts, global caps on public health care spending, the use of modern accounting standards by the federal government and a number of political reforms, among others. Though Peterson could be accused of tacking on some unrelated items on his wish list, such as House of Representatives district reform, it's harder to argue that his proposals for entitlement reform wouldn't have a beneficial impact.
It's doubtless that people on either side of the political divide will have plenty to argue with in Running on Empty. Republicans will say that it was the entitlement happy days of the 1960s and 70s that have provoked this approaching disaster and that over-taxation is immoral. Democrats will likely respond that a government is a social contract among people, which exists to serve the common good. Peterson, and anyone concerned about public debt, would respond that in a few short years it won't matter who was responsible. America's demographic future, and the accompanying costs, are all but set in stone and the only thing left to argue about is who will pay the price: the people responsible or their children and grandchildren.
Steven Martinovich is a freelance writer in Sudbury, Ontario, Canada.
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