Truly Scary

By David Strom
Friday, March 28, 2008

Americans are justly worried about the long-term economic effects of the current mortgage crisis and the credit crunch that has resulted from it. Politicians are scrambling to reassure voters that everything is under control, or that at least they have a plan to deal with the crisis.

Yet the size of the current economic problems we face is dwarfed by the coming disaster that politicians of all stripes are ignoring. Barring any serious shocks to the financial system, the tools that the Federal Reserve is using (and inventing) will likely mitigate the harm to the overall economy. Unfortunately the looming fiscal crisis we face will not be so easily dealt with.

You can get a good sense of the scale of the crisis by visiting the Heritage Foundation’s 2008 Federal Revenue and Spending Book of Charts. The name implies that the book will put you to sleep, but trust me, it is more likely to keep you up at night.

A quick scan of the Heritage report will turn any true conservative’s stomach. It turns out that the Federal Government is far better at creating crises thanthe private sector. However irresponsible people in the private sector have been at times, our fearless government leaders have beat them by a mile in that department. After all, as the executives at Bear Stearns found out, the consequences for failure can be dire. In government, it is not always so.

Federal Spending is on an unsustainable path. And it’s not earmarks, silly spending projects, or even welfare that is going to do us in. It’s the entitlement programs and the growing national debt that are on track to destroy the American economy and the American way of life unless we do something about the problem. Yet while we have heard from each of the major party candidates about schemes to deal with the current economic mess, none of them has seriously addressed this larger looming crisis.

Medicare, Medicaid, and Social Security are already eating up an enormous fraction of the Federal Budget. In fact, over the past 40 or so years Federal discretionary spending has risen by 152% in real dollars, while mandatory entitlement spending has increased by 759%. Mandatory (entitlement) spending now makes up 58% of the Federal budget—twice as much as in 1965—and because it’s on autopilot it is going to eat up more and more of the budget unless politicians make the necessary changes.

What are the consequences of not facing up to the growing entitlement problems? According to the Congressional Budget Office entitlement spending and paying interest on the debt could drive federal spending to almost 80% of the American economy in coming decades. And that is without any significant growth in discretionary federal spending. Spending on interest alone could account for up to 40% of our economy because of the deficits we will wrack up if we don’t reign in entitlement spending.

The American economy would collapse long before we reach that point. As more and more of our economic resources are diverted to federal spending on entitlements, investment will dry up and economic growth will slow to a crawl. America’s economy already depends upon huge inflows of capital from abroad. How many dollars do you think the Chinese will want to sink into an American economy that is dominated by government spending on entitlements? Europe and Canada have their own entitlement problems, so don’t expect any help there.

Politicians have been eager to take credit for innovative ideas to address the current credit crunch, all the while ignoring the fact that they are the true authors of the greatest economic crisis our country could ever face. Without real action soon, government policy will have undermined our economy’s ability to even maintain our current quality of life, no less grow and prosper.

We are all expected to cheer as the politicians bash the “greedy” corporate leaders who are blamed for getting us into the current financial mess, but what about the responsibility of politicians for putting America on the path to financial disaster in the coming decades? Nobody believes that we can keep things as they are, but nobody wants to talk about what it would take to reform entitlements to make them sustainable.

It is ironic to think that Americans are being sold on the idea that only government can save our economy from the recklessness of the financial industry. However mistaken, reckless, or even irresponsible private citizens have been in recent years, the scale of the problem is nothing compared to the one consciously created by our political leadership. Think about that as you listen to politicians’ promises.