The failures of federal, state and local officials of both major parties - over many years - have primed a ticking bankruptcy bomb for the United States that will explode the American Dream if we don’t disarm it.
But it’s not too late to reverse course and avert the coming national bankruptcy. That will require fundamental structural reforms of all levels of government and our most politically sensitive entitlement programs. If we do this right, thoroughly modernized entitlements will serve the poor and most vulnerable among us far better, and a new economic boom will restore America’s traditional, world-leading prosperity.
During George W. Bush’s eight years as president, the federal government grew by one-seventh as a share of the economy after Republican congressional majorities had so promisingly reduced it by that much from 1994 to 2000. When President Obama got behind the steering wheel in 2009, he accelerated into hyperdrive in all the wrong directions, doggedly pursuing the opposite of Reaganomics in every detail.
Federal spending under Mr. Obama already has soared by another one-fourth as a share of the economy, to the highest in history except during World War II. The national debt, now rocketing toward $20 trillion by 2020, is already the highest in history relative to gross domestic product except for World War II, and on its current course, it will go well past that record. Under current policies, more debt will be run up in one term under Mr. Obama than under all other presidents in history - from George Washington to George W. Bush - combined, according to Mr. Obama’s own 2012 budget.
On our current course, our national debt as a percent of GDP will pass the level that triggered bankruptcy for Greece, when the financial markets refused to lend that government enough to cover its enormous annual deficit. The European Union tried to end that crisis with a trillion-dollar bailout financed by its taxpayers. But who will bail out America? Who even could?
Even worse, the national debt does not nearly encompass everything the government owes or for which it is liable. Besides the unfunded liabilities for Social Security and Medicare, which our government today cannot even validly calculate, usually overlooked are the unfunded liabilities for military pensions, veterans’ benefits and federal civil service pensions. Then there are the Federal Deposit Insurance Corp.’s guarantees for bank deposits, the Federal Housing Administration’s home-mortgage guarantees and trillions more in mortgage-backed securities and federal guarantees of those securities held by the Federal Reserve, Fannie Mae, Freddie Mac and the FHA. None of this is counted in the national debt.
Mr. Obama insisted that it was a good idea to add all of the entitlement promises of Obamacare on top of these obligations. Obamacare added a costly new entitlement program to provide federal welfare subsidies for health insurance for families making as much as $88,000 per year, soon climbing to more than $100,000. Woefully overpromised Medicaid, the health care program for the poor, was sharply expanded to cover nearly 100 million Americans by 2021 according to the Congressional Budget Office. Although Mr. Obama won passage of Obamacare by promising that it would reduce deficits, it will actually add another $4 trillion to $6 trillion to the nation’s deficits and debt in the first 20 years alone.
State and local governments add even more to the problem. People use the term “failed state” to refer to Somalia, with its disintegrated government. That term may increasingly be applied to California, New York and Illinois, with their out-of-control budgets and deficits, runaway government pensions, dysfunctional education bureaucracies and increasingly belligerent public-sector unions.
These states already resemble Greece with our federal government bailing them out at taxpayer expense, starting with Mr. Obama’s first stimulus bill in 2009. State and local government debt has risen toward a projected $4 trillion, or another 24 percent of GDP, by 2012. The unfunded liabilities of state and local pensions total $3.8 trillion, with state and local promises to pay retired employee health benefits adding further unfunded liabilities of $1.4 trillion. None of this is counted in the national debt, either.
Adding still more to these troubles is the extended weakness and instability of the economy. With this year’s federal deficit already projected at $1.65 trillion, another recession now would threaten precisely the same national bankruptcy as suffered by Greece.
The solution lies first in restoring a boom in economic growth, which requires returning to the principles of Reaganomics. Then we must modernize all of our nation’s entitlement programs to rely on modern capital, labor and insurance markets, with transformed incentives that would further contribute to economic growth.
With such reforms, we can achieve all of the social goals of those programs far more effectively, better serving seniors and the poor, at just a fraction of the costs of our current tax and redistribution programs. Further liberating, pro-growth reforms are necessary at the state and local levels as well.
Peter Ferrara is senior fellow at the Heartland Institute and director of policy for the Carleson Center for Public Policy. He served in the White House under President Ronald Reagan and in the Department of Justice under President George H.W. Bush. He is author of “America’s Ticking Bankruptcy Bomb” (HarperCollins, 2011).