Beyond The Shutdown: A Little Truth in Everything

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Posted on: 10/20/2013 by Pat O'Brien

The conventional wisdom is that there was no point to the shutdown of the federal government and the near default that we call the debt ceiling. And, from a tactical standpoint, there was no point. The idea that Obamacare was going to be repealed because Americans were going to be inspired by Tea Party politics and rise up against it was delusional.  In fact, the majority of things that the Tea Party advocates fall into that same category - delusional. This was a manufactured political crisis instead of an economic crisis. However, that is not the end of the story. We do have significant future problems and just because the Tea Party is delusional does not make these underlying fiscal issues go away.

Where the Tea Party failed the conservative movement is that they have become bogged down on social issues, Obamacare and the appearance of wanting to move the country backward. There is a little truth in everything, though, and the Tea Party started with a core message that has merit. That message is that federal spending is too high in comparison to what our economy can handle. In that narrow definition of Tea Party ideology, they are actually correct. So, we have flawed messengers delivering a message that is critical to the future fiscal and economic health of our country.

There are two metrics we should be focusing on: 1) Our federal debt as a percentage of our overall Gross Domestic Product; and 2) The future liabilities that have been promised to the American people compared to the ability to pay for those commitments. 

President Obama has little to do with the long term trajectory of the federal debt. Since the outlier of World War II, the federal debt has ebbed and flowed at levels between 30% and 100%. However, that level of fluidity masked the underlying trends. For example, the percentage rose from 32.5% in 1981 to almost 70% in 2008. Then, the Great Recession hit and raised those levels to the 100% range in 2012. The good news is that the percentage is stabilizing again and the Congressional Budget Office is projecting that it will be 76% in 2014. While that is decent news it is not great news. In short, the long term trajectory is too high and it will continue to be a drag on our economic growth if we don't change something.

Why has the percentage of debt relative to GDP been on the rise since 1981? Entitlement growth. Social Security, Medicare, Medicaid and other health care funding accounted for 45% of the federal budget in 2012. Just ten years earlier, those same programs only accounted for 25% of the federal budget. It's just math. Entitlement spending is going to eat the federal budget unless we both raise taxes and curb spending. There is no other logical alternative.

The other metric we need to understand is the level of our unfunded liabilities regarding entitlements. For example, the 2009 Social Security and Medicare Trustees Report shows the combined unfunded liability of these two programs had reached $107 Trillion in 2009 dollars. It's just math. There is no way to pay for these liabilities without raising taxes and curbing spending. That means people retiring in 20 years will not get 100% of the money that they are putting into the Social Security system. And, these projections do not includes pensions.

So, the federal government does have a spending problem. That is a fair statement. It is a reality that needs to be addressed. The government shutdown and the brinksmanship on the debt ceiling has just been a distraction from the main issue.

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