On November 24, President Elect Obama announced that it was necessary to “jolt” the economy with large cash infusions. Both government and industry want us to spend more money fast. They also believe the economy will recover relatively quickly, perhaps in less than a year. Here’s why that’s impossible:
Motivated by political pressures and the need to show a sharp increase in securities markets, the government will be inserting trillions of dollars of borrowed money into the economy. Never mind that this will increase the national debt by 20% or so in less than one year or that commitments will be made for increased entitlements which are already far beyond our ability to pay. The combination of national debt and unfunded obligations for Social Security and Medicare now total to almost $200,000 for every man, woman and child in the country. As if that’s not bad enough, that doesn’t count any personal, mortgage, or commercial debt–all of which we must also pay.
The fact is that, as a nation, we have been living far above our incomes and the need to stash some money away for retirement. Even our children and grandchildren will be unable to pay just the ongoing costs of these obligations unless everyone is subject to staggering tax rates. The tax problem will be exacerbated by the demographics leading to the inevitable increase in the aged relative to the working population.
The problem started to be evident in 1985 when the national savings rate started its precipitous drive from the historical 9% to virtually zero in 2005 and has stayed that way ever since. In order to recover those lost savings and get back to what 9% would have provided over the past twenty years, people would have to save over 20% of their income over the next twenty years. The only time our country has saved that much was in World War II when there wasn’t much to buy, even food was rationed, and Rosie the riveter worked in a defense plant. Everyone invested in Savings Bonds, even school children.
The fact is that people should be saving more than 9% today. The reason is that a lower percentage of people are getting pensions. Further, over 40% of pensions are for government employees. The majority of the people don’t work for the government, don’t have a pension, and have fewer health benefits than government employees. Now we’re promising the equivalent of Congress’ health insurance to over 40 million uninsured people even though they now get free medical care, and those of us who pay for our health insurance don’t have benefits as good as Congress.
After the decline in savings became apparent, the financial firms discounted the importance of the national savings rate. One argument was that savings rate wasn’t important because the next generation was going to inherit so much. When people found they wouldn’t get any of Bill Gates or Warren Buffet’s money, financial firms said the value of stocks had increased so much that people didn’t have to save anymore. After the stock boom ended financial firms said that the best investment people had was their house which would provide much of their retirement needs. Right now, the government and industry say what’s important is to preserve jobs and keep spending up so that businesses can thrive. Forget savings.
Come on! At some point we have to take our medicine for such imprudent spending. As individuals we should be living within our income. So should our government. Hasn’t anyone heard about cutting expenses? I’ve gone through a number of Boeing financial crises. You learn that there are many things you really don’t need. Congress recently, and correctly, criticized the auto and union representatives for coming to their hearings in private jets. Yet Congress itself is bloated with all kinds of perks and overmanned with aides. There comes a time when Congress and the Administration must lead by example, then slash the spending of every government department severely. Just like Social Security and Medicare are entitlements, the lavish cost-of-living-adjusted government pensions are entitlements and will last as long as government employees live.
If we want change, let the change come from more prudent spending individually and by the government. Are we ever going to get away from politics where those running for office say they are going to give more benefits if elected? I’d like to see politicians give an honest and verifiable cash statement that would not only end deficits but reduce the horrible obligations that we’ve already left to our children and grandchildren. How about a twenty year plan to pay off the national debt and a fully funded trust for Social Security and Medicare?
The “Jolt” is more of the same shortsighted view that we’ve had for a long time. It may get us to spend more for a short while, but the reckoning will come. My thought is that the reckoning will be led by the baby boomers who have to learn relatively soon that they can’t retire without savings. As that reckoning comes, industry and the government will have to be smaller, but we’ll still be stung with a huge income tax burden because there will be fewer workers, even more people begging for handouts and the need to fund overly generous entitlement programs.
Bud Hebeler
11/25/08
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