American Dream, Dismal Science

Economics is sometimes called “The Dismal Science”, and for good reason.  One

president, Harry S Truman, kept getting evasive and contradictory advice from an

Image via Wikipedia

economist who kept offering alternatives with his advice.  After almost every assertion the professor would then say, “On the other hand . . .”.  The President then exclaimed, “This isn’t working.  Will somebody please get me a one-armed economist?”, or words to that effect.

I am the first to admit that I am no expert in such matters, but on the other hand (sorry, couldn’t resist) America is supposed to be a nation governed, at least indirectly, by its people.  So, as I’m sure Thomas Paine would agree, common sense matters.  Therefore I offer here some economic thoughts in a attempt to bring some common sense to the discourse.

I think that economic discussions of millions, or billions or trillions of dollars in the current age are difficult to comprehend.  Instead I suggest looking at budget problems as a percentage of Gross Domestic Product.  This quantifies expense categories as a share of the total value of the nation’s commerce.  In other words, a percent of ALL the business of the nation.  You could look at it as the percentage of your own labor is flowing to the government for distribution toward the various purposes.

Wars can be big ticket items, but their cost as a percent of GDP surprised me.  I went

to this source, a Congressional Research Service paper.  I did a chart of the numbers:

What I perceive from the chart above is that WWII was truly mammoth.  It explains why my parents needed to grow a “victory garden” and why the government rationed gasoline, tires, and butter, why we had a willing draft.  Only a politically cohesive and collectively fearful nation could throw more than a third of all its productive effort into the war.  The chart shows, despite the scary cost figures being tossed around nowadays, that the current war efforts are NOT the budgetary problem they may seem.  The cost of the current wars was running 6.2% of GDP in 2008, certainly not nothing, but small as wars go.

Now, consider this chart from Wikipedia’s page on the Public Debt:

The above chart shows the true economic cliff toward which we are heading, and the culprit is the interest on the big three entitlements, Social Security,

Medicare and Medicaid.  Note that the interest, in RED, is projected to skyrocket.

This is because the cost of entitlements, mainly Medicare and Social Security, exceeds

Image via Wikipedia

the incoming revenue (dotted line).  Now even I can understand what’s going on here.  The nation is embarked on an all-you-can-eat entitlement buffet that we can not afford.

Now, why are even economic novices like myself getting scared?  Note the white top of the bar for 2010  is actually above the dotted revenue line.  This means that we are spending money we don’t have now.  The warning in the dotted block referring to 2030 and 2040 is about MANDATORY spending exceeding all revenues.  In other words, by 2030 entitlements would gobble up the entire revenue, leaving NOTHING for defense or anything else.  That’s imaginary stuff because the crisis is NOW, not in 2030. We are beginning, in the words of the old farmer, to eat our seed corn.

I think it is obvious why Congress doesn’t deal with this problem.  Any politician who

Image by Rep. Virginia Foxx via Flickr

proposes cutting entitlements will be an instant pariah because the public does not understand the problem.  The voting public wants its cake because we think we have paid for it, but we really haven’t.  We haven’t had a meaningful budget for many decades, mainly I think because of mismanaging the Social Security trust fund which is nothing more than an accounting trick that uses IOU’s to defer obligations to future generations.  Congress, in other words, took Social Security revenue, replaced it with IOU’s, and then spent it.  And the public lapped it up – being grass-hoppers and not ants.  Interestingly, for all their disorganization the Tea Party seems to represent a visceral awareness of the problem.

A CRS report,  CRS Report, ‘Tax Expenditures and the Federal Budget’ , agrees.  Here is part of the report’s conclusions:

“Tax expenditures account for a large proportion of the resources the federal government uses to achieve various national goals. By 2007, it was estimated that tax expenditures amounted to about $1 trillion and accounted for about a quarter of total expenditures. When combined with outlays for mandatory spending programs and net interest payments, almost three-quarters of total expenditures are for permanent programs that many claim are more or less on “autopilot.”  [emphasis mine.] The proportion of total expenditures subject to annual review by the Appropriations Committees in the appropriations process has been declining over the past two decades. Given the long-term fiscal imbalances, part of the solution will likely involve tax reform and the limitation or outright elimination of some tax expenditures.”  (Conclusions continue . . . )

Placed in historical perspective I see the period after World War II as one of tumult and adjustment to a new reality, one full of the bounty and efficiency of science and

American Dream, by amanky via Flickr

technology, and a transition to a global economy.  For many Americans it has been the achievement of the American Dream, albeit a dream never quite finished.  Demand for the new prosperity has grown side by side with stark discrepancies between the first and third worlds (as well as classes), stoking tribal envy and the resentments of ethnic contrast and spiced with the existence of WMD’s.

But with the aging of the baby boomers, the American growth cycle appears to be at an end.  Will the result be a maturing of culture or a rebellion?  Can we conclude that happiness is found in deferred gratification, or will denial of excess only breed resentment and political rage?  Is there wisdom in the voting public?  Can wisdom survive in Congress?   Stay tuned.

I hope this exercise helps put the problem in perspective.  Doing it helped me.  I think.  Now, what do we do about it?