But it is not too late to reverse course and avert the coming bankruptcy of America. 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.
As I discuss in my new book, America's Ticking Bankruptcy Bomb, during George Bush's eight years as president, the federal government grew by one-seventh relative to the economy, after Republican congressional majorities had so promisingly reduced it by that much from 1994 to 2000. But when President Obama got behind the steering wheel in 2009, he accelerated into hyperdrive even more so in all the wrong directions, doggedly pursuing the opposite of Reaganomics in every detail.
Federal spending under President Obama has already soared by another fourth relative to the economy, to the highest in history except during World War II. The national debt, now rocketing towards $20 trillion by 2020, is already the highest in history relative to GDP except for World War II, and on its current course will soar well past that record. Indeed, the national debt has been rocketing upwards so fast that under current policies more debt will be run up in one term under President Obama than under all other Presidents in history – from George Washington to George Bush – combined, according to President Obama’s own 2012 budget.
Under present policies, our national debt as a percent of GDP will soar past the level that triggered bankruptcy for Greece, when the financial markets refused to lend the 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 on which it is subject to liability. Besides the unfunded liabilities for Social Security and Medicare, which our government today cannot even validly calculate, usually overlooked as well are the unfunded liabilities for federal military pensions, veterans benefits, and federal civil service pensions. Then there are the FDIC’s guarantees for bank deposits, the FHA’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.
Somehow, President 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 over $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 CBO. While President Obama won enactment of Obamacare promising it would reduce deficits, as I again show in my new book, it will actually add another $4 to $6 trillion to the nation’s deficits and debt over the first 20 years alone.
State and local governments add even further to the problem. People use the term “failed state” to refer to Somalia, with its disintegrated government. But that term may increasingly be applied to California, New York, Michigan and Illinois, with their out of control state budgets and deficits, runaway government pensions, dysfunctional education bureaucracies, and increasingly belligerent public sector unions.
These states already resemble Greece, with our federal government already bailing them out at taxpayer expense, which started in President Obama’s first stimulus bill in 2009. State and local government debt has soared toward a projected $4 trillion, or another 24% 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 booming economic growth, which requires restoring 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 liberal social goals of those programs far more effectively, serving seniors and the poor actually better, at just a fraction of the costs of the current tax and redistribution programs. Further liberating, pro-growth reforms are necessary at the state and local levels as well.
Peter Ferrara is Director of Policy for the Carleson Center for Public Policy, and Senior Fellow for Entitlement and Budget Policy at the Heartland Institute. He served in the White House Office of Policy Development under President Reagan, and as Associate Deputy Attorney General of the United States under the first President Bush. He is the author of America's Ticking Bankruptcy Bomb, now available from HarperCollins.