Hawaii Tax Foundation: Coping with the Federal Debt

BY LOWELL KALAPA – As we watched that last burst of fireworks this past weekend, the furthest thought from our mind was the growing federal deficit.  Yet we, as Americans, should be scared out of our britches about the growing size of that number and the legacy that we are leaving to future generations.

Before anyone goes off pointing the finger of blame at the seemingly endless conflicts in the Middle East and Afghanistan, readers should take a look at the cold hard facts of federal spending.  In the midst of the Vietnam War defense spending accounted for more than 45% of all federal spending while defense spending accounted for about 20% of federal spending in fiscal year 2007.

What is a growing concern is the portion of the federal spending plan that is eaten up by the entitlement programs of Social Security and Medicare.  Sure, back in 1967 Medicare was just getting off the ground when it accounted for about 2% of federal spending, but a ten-fold increase was recorded in 2007 when Medicare spending accounted for 21% of the federal outlays.  During the same period, Social Security expenditures accounted for 14% in 1967 and by 2007 that spending had increased by 50% to 21% of all federal outlays.

Looking at federal spending lawmakers today have less discretionary spending available to them by comparison to appropriations that have to be made because prior law has locked that spending on a path of explosive growth.  Again, largely for entitlement programs like Social Security and Medicare, mandatory programs took up only 26% of all federal spending in 1967.  But by the year 2008, more than 60% of all federal spending was for mandatory programs.  The amount of discretionary spending has shrunk from 68% to 38% of federal outlays during the same time period.

What are these mandatory programs and just how much does it mean to the average taxpayer?  According to the Government Accounting Office (GAO), mandatory entitlements such as the public debt, military and federal civilian retirement and health costs as well as Social Security and Medicare, otherwise known as major fiscal exposures, amounted to $56.4 trillion in 2008.  For the same year, the Federal Reserve Board estimated that the

total household worth of Americans amounted to $58.6 trillion or a burden to net worth ratio of roughly 90%.

Based on the United State’s population as of October 2007, and the Census Bureau’s estimates of household income and the incomes of workers, this burden of major fiscal exposure amounts to $175,000 per person.  When measured against the workforce, the major fiscal exposure amounted to $410,000 per full-time worker or $483,000 per household.  It becomes even more alarming when this is measured against median household income as reported by the U.S. Census Bureau which for 2007 stood at $48,201 while disposable personal income per capita was $33,353.

With such entitlement spending growing out of control, it is estimated that by the year 2040, the federal debt will rise to as much as 250% of Gross Domestic Product.  This will be the highest debt to GDP ratio the nation has seen since the Post World War II era when federal debt topped out at 125% of GDP.  Although Americans have longed acknowledged the growing deficits and the overall accumulated federal debt, there should be even more alarm about who now owns that debt.

Just a decade and a half ago, 62% of the federal debt was owned by domestic investors, from everyone who owned savings bonds to domestic companies who placed their idle cash in treasury notes.  About 28% of the debt was then owned by foreign and international investors.  Today the pendulum has swung the other way with only 40% of the federal debt held by domestic investors while 45% is now held by foreign and international investors.

So what’s wrong with that picture?  Well, when a foreign country or foreign corporation holds so much of our country’s debt, those foreign investors can wield a mighty big financial club in all sorts of arenas, from international politics to trade agreements and more.  With that imbalance, the United States can no longer call the shots on the world stage in fear that those foreign investors could call for that debt at any time.  Imagine having to pay back the money our nation has borrowed when there is barely enough economic wealth in the nation to cover those IOU’s.

As noted at the beginning of this commentary, the problem is growing and will continue to grow unless our leaders make some very hard decisions to curtail the spending habits we have developed over the years.  In the next few weeks we will look at some alternatives.

LOWELL KALAPA IS THE PRESIDENT OF TAX FOUNDATION OF HAWAII

Comments

comments