Who Will Pay the US Debt
Wednesday, 27 September 2006
By Dr.
Abbas Bakhtiar
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 [1 ].
Of this over amount, $2.2 trillion dollars is held by foreigners [2 ].
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 [3 ]. 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. [4 ]
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 [5 ]. 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. [6 ]
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 candidates for 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.”[7 ]
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 for quintiles (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.
a. 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 [8 ];
of which 36% or over 13 million were children [9 ].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” [10 ].
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” [11 ].
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.
b. The Second Quintile
The working poor families are those families
that earn $34000 per year. According to a 2005 report by the Urban Institute,
over 13 million families including 26.5 million children are living at the edge
of the poverty (median income = $38000). According to this study “many children
today are growing up in families with low incomes and with a parent working a
substantial amount. The picture we have drawn here is one of low-income
families with relatively high work effort at low wages, with jobs that often do
not provide basic benefits, and with expenses roughly in line with their
incomes. A subset of these families is experiencing material hardships related
to food, housing, and health care, and many children in these families are not
doing well on a range of measures. The economic circumstances of low-income
families in part reflect their lower levels of educational attainment and
poorer health (which could itself be a consequence of economic circumstances)
than those families on the next rung up the economic ladder” [12 ].
Any increases in taxes or reduction in
services will push (in reality) most of these people into the first quintile.
c. The Middle and Fourth
Quintile
There is no agreed upon definition of Middle
Class. Some such as Washington post consider those that earn from $40000 to
$90000 [13 ] to belong to the middle
class, while others consider any family that have an income of $20000 to $90000
as middle class. Here since we use the Congressional Budget Office’s quintile
system, we combine the middle and fourth quintile to define our middle class
group. Then according to this classification a middle class family is a family
whose income is between $51900 and $77300 per year.
The middle class is considered the backbone
of the consumer society. Their health and wealth is extremely important to the
economy. They tend to be better educated than the lower quintiles, healthier
and more politically engaged. Their size and economic health determines the
prosperity of the nation.
When one looks at the income of a middle
class family one would expect that at least this group would be in a good
financial position. But all the reports point to the contrary.
The middle class is squeezed
from all sides. The costs of housing, healthcare, transportation and education
for the kids, have skyrocketed; making it exceedingly difficult to make ends
meet.
According to the Department of Housing and
Urban Development (HUD), "affordable housing" should cost less than
30% of a family's income, either in rent or a monthly mortgage. Yet many middle
class families have to pay much more of their disposable income for housing. “From
the end of 1994 to the end of 2004, housing prices rose 46 percent faster than
overall inflation. In the period of a weak labor market, from March 2001
through the end of 2004, housing prices outpaced overall inflation by 25
percent” [14 ]. Many people own only the
home that they live in. The rising house prices don’t really help these people,
except in allowing them to re-mortgage their homes to raise extra loans; which
eventually they have to pay back. If they sell their homes and move to a
cheaper neighborhood, they can earn a good profit, but almost no-one does that.
So if majority of the middle class only own the homes that they live in, the
rising house prices do not really help them. On the contrary it creates the
illusion of wealth, encouraging these people to borrow more and spend more. Eventually
these loans have to be paid back, and when that time comes, most people find it
hard to manage.
Do the middle class families face more
hardship now that they did before? According to Harvard Law School Professor
Elizabeth Warren they do. According to her “more and more families today are
sending both parents into the workforce – it has become the norm, it is what we
now expect. The overwhelming majority of us do it because we think it will make
our families more secure. But that's not how things have worked out. By the end
of this decade, one in seven families with children will go bankrupt. Having a
child is now the single best predictor of bankruptcy, and this holds true even
for families with two incomes.
So we looked at the data for two-income
families today earning an average income. What we found was that, while those
families certainly make more money than a one-income family did a generation
ago, by the time they pay for the basics -- an average home, a health insurance
policy, a second car to get Mom to work, child care, and taxes -- that family
actually has less money left over at the end of the month to show for it. We
tend to assume with two incomes you're doubly secure. But if you count on every
penny of both of those incomes, which most families today do, then you're in
big trouble if either income goes away. And obviously, if you have two people
in the workforce, you have double the chance that someone will get laid off, or
double the chance that someone could get too sick to work. When that happens,
two-income families really get into trouble, and that's how a lot of families
quickly go bankrupt” [15 ].
This group (i.e. the middle class) will be
the one that will be the hardest hit of all groups. They will see their
disposable income reduced substantially. On one side they will have to pay
higher taxes, while they have to pay more for government services that were
previously either free or subsidized. Many will have difficulty paying their
debts (mortgages, etc) and will have to reduce their living standard
substantially to stay solvent.
d. The Highest Quintile
The highest quintile represents the top
earners of the society. But it would be wrong to look at the average income of
this group as the representative income for the whole group, because, unlike
the other quintile, there is a very large difference between the top 1% and the
rest of the group. According to the Congressional Budget Office (CBI), in 2003,
the top 1% had an average income of $1,022,400 while the top 10% earned a
quarter of the top earners or $260,000. In any other quintile, if you divide
the average by 4, the resulting figure would be in a lower quintile. So here we
shall look at the data provided by CBI for the top 16%.
In the past few decades we have seen a huge
increase in inequality in America. According to the Economic Policy Institute,
a Washington think-tank, between 1979 and 2000 the real income of households
in the lowest fifth (the bottom 20% of earners) grew by 6.4%, while that of
households in the top fifth grew by 70%. The family income of the top 1% grew
by 184%—and that of the top 0.1% or 0.01% grew even faster. Back in 1979
the average income of the top 1% was 133 times that of the bottom 20%; by 2000
the income of the top 1% had risen to 189 times that of the bottom fifth. “Once all income sources are taken into
account, including capital gains, the extent of income concentration at the end
of the last business cycle was remarkably high by historical standards. Using
newly available income data that goes all the way back to 1913, income in 2000
was only slightly less concentrated among the top 1% of households than
during the run-up to the Great Depression, which was the worst period of uneven
income concentration in the last century. In 2000, the top 1% held 21.7% of
total income, compared to 22.5% in 1929” [16 ].
Since 2000 the inequality has only increased. According to Center on Budget and
Policy Priorities (CBPP), the after-tax income of the rich has been increasing
at an alarming rate. From 1979 to 2002 the after-tax income of the top 1%
increased by 111% while 96% saw a very modest increase; with the poor and the
working poor seeing only 5% and 12% increase in their disposable income.
The inequality in income has been made worse
by President Bush’s tax-cuts for the rich. Gene Sperling the former President
Bill Clinton's top economic adviser, in an article in Bloomberg, condemned the
tax cuts, arguing that:
“While some middle-class tax relief -- and
additional temporary tax cuts to stimulate the economy after the recession of
2001 -- was warranted, it is hard to justify the enormous windfall that
President George W. Bush is seeking to bestow permanently on the very Americans
who have been doing so much better than 99 percent of the rest of the populace.
Analysis of new Internal Revenue Service data
by New York Times tax reporter David Cay Johnston found that those making $1
million a year collect 43 percent of all the new investment tax cuts. Those
making more than $10 million have collected about $500,000 in tax relief -- a
take he says will likely climb in the years to come.
The fiscal impact is just as striking. If the
president's tax cuts are made permanent in the next decade, the top 1 percent
of earners (who make about $400,000 today) will collect more than $1 trillion
in new tax cuts. Those making more than $200,000 in today's dollars will take
in a whopping 40 percent of all the recent tax relief during the next decade” [17 ].
Who Will Pay the Piper
It is said that if you owe the bank $1000
dollars you are in trouble, but if you owe the bank $10 million dollar, the
bank is trouble. Some politicians and economists like to use this example to
brush-off this enormous problem. Their argument is to a certain extend valid.
China and other emerging countries need US market for their goods; but how long
will they continue financing a mushrooming trade and budget deficit. Somewhere
along the way they would want their money back.
How about the pensioners? Who is going to pay
for their pensions? Who is going to pay for health care, social security,
unemployment benefits, maintenance of the infrastructure such as roads and
bridges? We can argue that Chinese, Arabs, and others are willing to finance
the trade deficit; but we can not expect them to pay for the American pensions
or maintenance of the US infrastructure. According to the latest report (2005)
by the American Society of Civil Engineers, US government needs to invest $1.6
trillion dollars to keep the system from falling apart[18 ].
This figure excludes the security costs. The truth is that at the end of the
day it is the American people that have to pay. This will be in the form of
higher taxes and reduced governmental services. In other words lower living
standards.
The poor and the working poor do not have
anything to give. Their contribution will be in form of statistics. The number
of people living bellow poverty line will increase. They will suffer because
they rely on many services that will be cut or reduced. The rich will always
find some loop-hole to avoid paying the major part their share. Even if their
wealth is reduced by 10%, they will see no hardship. This leaves us with the
Middle class. This group will be hit the hardest. They will see their taxes and
expenses increase simultaneously. A good portion will have to live on far less
than they are used to. Many will work longer hours just to stay solvent. Many
may also join the working poor. It all may sound rather apocalyptic but the
numbers do not lie. Politicians may avoid this problem for now, but sooner or
later someone has to pay the piper.
FOOTNOTES:
1. Bureau of the Public Debt, “The Debt To the Penny”
2.
Hodges Michael, Grand
Father Economic Report Series
3. CIA
Word Factbook, “Rank Order - Public debt”, 16 May,
2006
4. USA
Today, “The looming national benefit crisis”,
5 October 2004
5.
Bilms Linda, and Stiglitz Joseph E., “The Economic Costs of the Iraq War: An Appraisal Three Years
After The Beginning of The Conflict”, Harvard University
6.
Opensecrets.org: The Center for Responsive Politics, “MONEY IS THE VICTOR IN 2002 MIDTERM ELECTIONS”
November 6, 2002
7.
USINFO.STATE.GOV: International Information Program, “FINANCING PRESIDENTIAL ELECTION CAMPAIGNS”,
USIA Electronic Journals, Vol. 1, No. 13, September 1996
8. US
Census Bureau,2005 Annual Social and Economic Supplement
(ASEC), the source of official poverty estimates.
9.
National Coalition for the Homeless, “Why people are homeless”, 2201 P. St.
NW ❜ Washington, DC 20037, June
2006.
10.
Arizona Republic, “300,000 more must work under welfare plan”,
Jun. 28, 2006
11.
Economic Policy Institute, “Minimum Wage- Facts at a glance”, July
2006
12.
Gregory Acs and Pamela Loprest, “Low-Income Working Families”, The Urban
Institute, 2100 M Street, NW ,Washington, DC 20037. September 2005
13.
Washington Post, “What is middle class? ”, November 30,
2003
14.
Christian Weller, “For Middle-Class Families, Dream of Own House Drowns in a
Sea of Debt”, Centre for American Progress, May 2005
15.
Mother Jones, “The Two-Income Trap”, November 08 ,
2004
16.
Economic Policy Institute, “The State of Working America 2004-05”, Cornell
University Press edition , January 31, 2005
17.
Bloomberg.com, “A Disappointing Decade for Reducing Inequality: Gene
Sperling”, April 12, 2006
18.
American Society of Civil Engineers, “Report
Card for America’s Infrastructure” 2005
*************
Dr. Abbas Bakhtiar lives
in Norway. He is a consultant and a contributing writer for many online
journals. He's a former associate professor of Nordland University, Norway.