Who will pay the US debt?

Some months back, I wrote an article about the coming financial crisis as a warning to the American people about the US debt, budget and trade deficit. Since then the situation has continued to worsen and no-one it seems is willing to address this important issue.

Photo: Who will pay the US debt?

Who will pay the US debt?

When George W. Bush became president in 2001, the United States' public debt was 5.8 trillion dollars. Today the public debt stands at 8.3 trillion dollars. Of this over amount, $2.2 trillion dollars is held by foreigners. United States has a GDP of 12.4 trillion dollars. This gives U.S. a Debt/GDP ratio of 66%, placing it in 35th place (out of 113) on the ranking of the Debtor Nations. The current account deficit of over 7 per cent has long passed its danger levels of 4-5 per cent. In 2005 the U.S. government paid $325 billion dollars in interest payments.

Added to this are the future obligations such as Medicare $30 Trillion dollars, Social Security: $12.7 Trillion dollars, Federal debt: +$4.3 trillion dollars, Federal and Military pensions $3.9 trillion dollars and other debts of $2.2 trillion dollars. These obligations amount to $53 trillion dollars will become due in 2008 when over 78 million baby boomers begin to retire.

It seems that these astronomical sums worry only a few in the academia for the politicians, the Wall Street experts and the media constantly talk about the continuing good times and/or a controlled cooling down of the economy. This simply doesn't add-up. Who are they fooling and why?

The fact is that those in power do not want to be blamed for this mess. Bush can not in all honesty justify his huge tax-cut to the rich in the face of these economic imbalances, nor can he explain the necessity of spending so much on such things as his elective War in Iraq. The long-term cost of the Iraq war is estimated to be between $1 to $2 trillion dollars. He is also thinking about starting another war with Iran that will be even more costly than the Iraq and Afghanistan wars. How is he going to justify his fiscal irresponsibility if it came out that there was no money for pensioners or social security?

A pertinent question to ask would be why the opposition party is not informing the public about the economic crisis facing the US. The simple answer is that the opposition does not want to ruin it's chances of being elected. It is unlikely that voters would cast their ballot in favour of a candidate/party who is going to increase taxes and cut social spending. Also the current political system is such that anyone that goes against the rich and the special interest groups will not receive the necessary funds for his/her election campaign.

If we look at the election results we see that money plays a central and important role in determining the outcome; in other words, money talks.

Money talked with a roaring voice in the 2002 midterm elections, according to a post-election analysis by the non-partisan Center for Responsive Politics. Just under 95 percent of U.S. House races and 76 percent of Senate races were won by the candidate who spent the most money, the Center found. That translates into 413 of 435 House races and 26 of 34 Senate races. The findings are based on candidates' final reports for the 2002 election cycle filed with the Federal Election Commission. 

Running for a seat in the Senate or the congress is prohibitively expensive. Running for president is even more expensive than the senate or the congress. The actual costs are immense. For example in 1992, the two political parties spent $220 million dollars on behalf of their presidential candidates. The total cost with government's contributions etc, was $550 million dollars.

"The costs of electing a president - some $550 million - represent about one-sixth of the nation's $3.2 billion ($3.200 million) political campaign bill in 1992. The remaining funds were spent to nominate and elect candidatesfor Congress ($678 million), to nominate and elect hundreds of thousands of state and local officials ($865 million), and to pay the costs of state and local ballot issue campaigns and administrative, fund-raising and other expenses of party and non-party political committees."

But where did all this money come from and why? Some money was provided by people like you and me with donations of maximum of $1000. But just to cover the presidential election we would need 200000 people each sending in $1000 to the party headquarters. We know of course that this wasn't the case. It was the special interest groups and the lobbyists that provided a substantial contribution to each candidate's campaign costs. Of course the rich (owners of corporations etc) can not contribute directly, so they contribute to Political Actions Committees (PACs) which in turn make donations directly to candidates.

As can be seen this system is skewed in favour of the candidates with money. Those candidates are in turn beholden to their party and PACs, making them dependent on the rich and powerful for finances. In the end, the candidate has to consider the interest of these powerful groups before making any decision. That is why sometimes one sees different administrations adapting policies that are against the long-term interest of the nation without any meaningful protest by the people's representatives in the congress or the Senate.

The current economic crisis was not created by this administration alone (although they contributed greatly to it) and can not be solved by the next president either. It will require a long and painful change in the spending habits of the people, a marked reduction in their economic expectations, and a better and more equitable distribution of wealth and income. But most importantly, it requires a restructuring of the current election system and it's financing. But until then (if that day ever comes), the government has to somehow pay the debt, reduce its expenditure and substantially increase taxes. No matter how one looks at it, the majority of the people will feel the coming financial hardship.

The Economic Situation of the Americans

For the country the solution is simple enough (on paper): reduce expenditure and increase income. This is usually done by cutting some of social services and benefits on the expense side and increase the income by increasing the taxes. Of course this doesn't have to be simultaneous. But considering the size of the budget deficit, trade deficit and the coming obligations, a combination of both will be necessary.

But we know that any reduction in services will impact the living standard of those relying on those services. A reduction in welfare support will affect not only the recipients but also their dependants. A reduction in healthcare services will affect a large number of people and again their dependants. Of course any reduction in social spending by the governments will have a minimum impact on the wealthy. They seldom use government services such as healthcare or subsidies. Yes they use the courts and roads and the police, etc, but all-in-all the effect of social expenditure cuts on their lives will be minimal.

Furthermore, an increase in taxes will impact various groups differently. For example, any increase in taxes will either not affect or minimally concern those 23 million households that earn close to $15000 dollars per year or less. However the working poor and especially the debt laden middle classes will be hard pressed to cope.

To get a proper understanding of the people's economy and their ability to cope with any reduction in services or a substantial increase in taxes, we shall look at the population as presented by congressional budget office. Please note that the poverty threshold for 2004 was set at $19,307 dollars for a family of 4.

The table above reports values both for the entire population and forquintiles (quintile = 20%) of the income distribution. The Quintiles are supposed to contain equal numbers of people, but because households vary in size, the quintiles provided by the Congressional Budget Office generally contain unequal numbers of households.

According to this table, in 2003, the bottom quintile or 23 million households earned $14800 per year while the top quintile or 22.8 million household had an income of $184500.

The Lowest Quintile

According to the US Census Bureau, from 2000 to 2004 the number of people living in poverty in United States increased by 5.4 million people, going from 31,6 million to 37.0 million; of which 36% or over 13 million were children. According to Martha Burt, principal research associate in the Urban Institute's Center on Labor, Human Services and Population, during a year about 10% of these people or close to 3.7 million people will experience homelessness.

These 37 million people are at the bottom of the society and to a large extent ignored by others, even the government. The government has tried to reduce it's expenditure by restricting access to social benefits and in some cases, by requiring the poor to work.

For example, the new law passed in 2006 requires that welfare recipients work for at least 30 hours per week, 20 hours of which must be in approved activities such as public or private jobs, training related to a job, vocational training, job search, community service, or providing day care for persons performing community service.

This rule and others like it are created to reduce the budget deficit rather than helping the poor. For example this rule was included in a $39 billion budget-cutting bill that Bush signed in February 2006. What Bush and others seem to have forgotten is that if a single parent is forced to go to work, who is going to look after the children. According to the U.S. Census Bureau, in 2005, there were close to 4 million poor Female householders with no husbands present. If these mothers were to go to work, who is going to look after the children? Naturally if the law requires that a welfare recipient should work, the burden of enforcing the rule is put on the state authorities. They are the ones that have to pay for the child care services.

According to Arizona Republic, "State welfare officials are concerned that the new requirements will be costly to the states. The Bush administration provided an additional $500 million for child care over the five-year program, a fraction of the $4 billion that the nonpartisan Congressional Budget Office said was necessary for parents to meet the new work requirements".

The proponents of the work-for-welfare scheme argue that this will help the poor by weaning them off the system and thereby making them more self-reliant. But assuming that it was possible for all these people to find full-time work, they still would be living in poverty, since the actual value (purchasing power) of the minimum wage is at its lowest level since 1955. Two working adults, let alone a single parent, can not afford to pay for housing, child care, health care and transportation with working for minimum wage.

According to Economic Policy Institute "today, the minimum wage is 31% of the average hourly wage of American workers, the lowest level since the end of World War II". It is clear that the poor will have severe problems in alleviating their economic condition by simply working for minimum wage. If they work hard they may be able to join the working poor.

The government can only reduce services to the poor. It can not raise any money in from of taxes from this group.

To be continued

Dr. Abbas Bakhtiar