The Tipping Point

The passage of the Healthcare Reform bill has accelerated the country down the road to financial disaster. By 2018 (if we don’t get there sooner) we will arrive at the tipping point. Here are the facts:

  • The President’s 2011 budget will generate nearly $10 trillion in cumulative budget deficits over the next 10 years
  • This is $1.2 trillion more than the administration projected. The White House Office of Management and Budget (OMB) originally projected a 10-year deficit total of $8.53 trillion.
  • The federal public debt was $6.3 trillion ($56,000 per household) when Obama took office. Today it stands at $8.2 trillion ($72,000 per household). Based on the new projections it will reach $20.3 trillion (more than $170,000 per household) by 2020, according to the CBO.
  • This will raise the federal debt to 90 percent of the nation’s economic output by 2020 according to the Congressional Budget Office. This is up from 40 percent at the end of fiscal 2008.
  • This means we are following in the foot prints of Greece. Their socialist and labor dominated government is on the verge of economic collapse with a debt to GDP ratio of 115%.
  • Typically in countries with debt-to-GDP ratios “above 90 percent, median growth rates fall by 1% and average growth falls considerably more,” according economists Kenneth S. Rogoff of Harvard and Carmen M. Reinhart of the University of Maryland.
  • The slower the job growth, the more the administration wants to spend “to stimulate the economy”. Yet spending is exactly what we must avoid according to Moody’s who says continued government spending could cause the U.S. to lose our AAA credit rating.
  • The loss of our AAA credit rating would result in higher interest rates on government borrowing that funds our spending deficits. This of course increases the deficit, creating the proverbial ‘vicious circle”.

 So what is the “tipping point” that could happen in 2018? The term “tipping point” can be applied to any process in which, beyond a certain point, the rate at which the process evolves (for better or worse) increases dramatically. United States is on the verge of reaching its’ tipping point (and not for the better) as it applies to the federal budget.

The event that may have marked the approaching tipping point may have recently occurred. The first Baby Boomer—born January 1, 1946—has applied for early retirement at age 62 and received her first Social Security check. An upturn in the Medicare growth rate is expected to begin in 2011 when the first Baby Boomers begin turning 65. From that point on, the number of retirees will continue to increase while at the same time, the number of workers per retiree will more rapidly start to decrease. This will result in the inevitable collapse of the Medicare & Social Security pyramid scheme.

Look at the chart below which shows the current distribution of funds taken in by the government.

Three Categories of Spending: Mandatory Spending, Interest on the National Debt and Discretionary Spending

Categories of Federal Spending for Selected=

Note: The percentage of the budget devoted to interest on the national debt was abnormally high in 1985 (14%) due to higher interest rates that were prevalent during the 1980s. Also in 2008, the  ratio of workers to retirees declined to 3.3 to 1. In 1945 it was 41.9 to 1. Simply put we have been burning up the reserves for years and judgment day is coming.

The other big factor affecting the federal budget is tax revenues which decline in a down economy. We have lost millions of jobs which will come back very slowly, if at all. So far this has been a jobless recovery. Yet the government must find ways to generate revenue to keep up with its’ obligations – not the least of which is all the entitlements owed to citizens who were forced to fund Social Security and Medicare throughout their work lives. Couple this with interest on the debt, the new healthcare reform and the results will be disastrous.

Indicative of the economy’s ongoing labor problems, is the fact that first-time claims for unemployment benefits remain relatively high at 442,000 last week. The number was a decline of only 14,000 over the previous week’s seasonally adjusted number.

“That level of debt (the deficit in the 2011 federal budget) is extremely problematic, particularly given the upward debt path beyond the 10-year budget window,” said Maya MacGuineas, president of the bipartisan Committee for a Responsible Federal Budget.

According to James R. Horney, a federal-budget analyst at the liberal Center on Budget and Policy Priorities, “The biggest part of the deficit difference (between the CBO and the OMB projections) is lower tax revenue due to the different economic assumptions. The administration assumes GDP and incomes will be higher, and that translates into higher revenues than CBO expects. Relatively small differences in economic assumptions can add up to big differences over 10 years.”

Ms. MacGuineas also added, “The proposed budget is woefully insufficient to achieve the president’s goal or the important fiscal goal of stabilizing the debt at a reasonable level in the medium and long term.” 

So here is the problem in a nutshell; many economists agree that the economy might get a short term bounce from all the corrective actions/interventions that the government has enacted. They project that it should result in a short downturn in the acceleration of the budget deficit but… they continue to fear the prospect of rising deficits later this decade, even after steady economic growth has returned and unemployment has declined. The CBO estimates that deficits will average more than 5% of GDP between 2016 -2020, even though they also project that the economy will be return to an average jobless rate of 5% during the same period.

Even Obama’s Director of the Office of Management and Budget, Peter Orszag, told reporters in March 2009, “Deficits in the, let’s say, 5 percent of GDP range would lead to rising debt-to-GDP ratios in a manner that would ultimately not be sustainable.”

The Spending Trend is not Sustainable

So who is going to pay for all this spending… if the administration has its’ way the “wealthy” and corporations are going to foot the bill. The question is how much more of the load can this group carry? Below is a table showing the current distribution of taxpayer burden. As you can see it is already disproportionate. 

Comparison of Share of Income to Income Taxes Paid in 2007

As this table clearly shows the top 10% of wage earners are now shouldering 61% of the total income tax load. Under a variety of ideas being discussed by the administration this imbalance will only get worse. To crack the top 10% you must have taxable income of just over $100K per year.

Wake up America! Many economists now say that the tipping point is in sight, with some saying that it could be as early as 2018. This means that there is still a small chance we can avert disaster… but time is running out. We must stop the spending and reduce taxes to stimulate the economy. A stimulated economy will result in government income growth but that alone will not fix the problem. Government can not be the sole guardian of the public. We must return to the model of government established by our founders. The federal government must let states and individuals become responsible for themselves. The federal government must focus on its’ enumerated constitutional powers. The states and local communities must take responsibility for everything else.

Healthcare Reform, rescue bills and all the entitlements are the straws that will break the camel’s back! The only way out of the mess we are in is to cut – spending and taxes – a lot! We have built a model that is unsustainable. We have to come to grips with the idea that big government is not the answer – it is the problem. The federal government must reduce its’ services to only those which are essential – national defense, infra structure and basic services. Social programs and luxury pork barrel spending must be eliminated. We ALL must sacrifice to fix this problem. Each citizen must be allowed to keep as much as possible so they can reinvest in their savings, in their communities or build businesses that will jump start the economy. If we don’t stop the wasteful spending now, we are headed for some form of socialistic government where we can all live together as peasants. 

Restore the Republic, Reject the Agenda of the Progressive Left, Stop Federal Spending! There is no other answer – Keynesian Economics do not work! We can not SPEND our way to prosperity! 

“Government’s view of the economy could be summed up in a few short phrases: If it moves, tax it. If it keeps moving, regulate it. And if it stops moving, subsidize it.” – Ronald Reagan  

“Entrepreneurs and their small enterprises are responsible for almost all the economic growth in the United States.” – Ronald Reagan

“The inherent vice of capitalism is the unequal sharing of blessings; the inherent virtue of socialism is the equal sharing of miseries.” – Winston Churchill

 

One response to “The Tipping Point

  1. There us no tipping point when a Ponzi scheme is involved. The economic system installed by Congress in 1913, called the Federal Reserve System, is a Ponzi scheme that is self-destructive. It is only a matter of time until no new debt can be sold. The system will then collapse. Search for INHERENT NATIONAL BANKRUPTCY on the internet for a detailed analysis.

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