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Stephen Kershnar
The Breaking Point
Dunkirk-Fredonia Observer
March 28, 2010

The U.S. is rapidly approaching a breaking point when it will have to do one of three: lose a significant amount of wealth, cut government benefits or workers, or eliminate its foreign empire. It is not even clear that the third option is enough to eliminate the bloodletting. One thing is for sure, the solution will be painful.

The U.S. has spent itself into a hole. The government at all three levels (federal, state, and local) now spends more than 40 cents of every dollar produced in this country. According to www.usgovernmentspending.com, total spending is at a postwar high of 43% of the economy (gross domestic product) in 2009. The Heritage Foundation analyses show just how much spending is out of control. In 2008, the government at all levels spent $41,219 per household. This crazy level occurred because federal spending grew nearly seven times faster than people’s average (median) income from 1970-2008. In recent years, the problem has continued. Between 2002 and 2008, the federal government increased spending by roughly 7% per year (2 ½ times the inflation rate). Has your income increased at this clip?

This spending explosion has not been matched by an increase in revenue. The federal deficit was roughly 9.9% of the GDP in 2009 ($1.4 trillion) and is estimated to be 10.6% in 2010. The debt (sum of past and present deficits) is now enormous. The total federal debt was 86% of GDP in 2009 and is estimated to be 98% in 2010. Government projections show gargantuan deficits continuing into the next few years. To see the problem, consider what you would tell someone who makes $100,000 a year, owes $100,000, and plans to continue borrowing money to support his profligate lifestyle. Because 44% of the debt is owed to people and institutions in foreign countries, the debtors can’t easily be stiffed without a sharp increase in interest rates or painful cutoff of credit. The interest on the debt is 8% of the budget (2008 figure). As a result, the debt will feed on itself.

Given that the middle class and rich already pay so much of the revenue, this problem cannot be avoided by further soaking the rich. Already the top 50% of income earners pay 97% of the income-tax revenue (2007 National Taxpayers Foundation figure). That is, the bottom half of earners pay next to nothing (less than 3%) of income-tax revenue. Because the income taxes, corporate taxes, and estate and gift taxes constitute 59% of federal revenue, the upper classes already carry too much of the government weight.

Here’s the rub. To cut the spending, a powerful constituency or the U.S. foreign empire will have to take a hit. First, consider entitlement programs (Social Security, Medicare, and Medicaid). They constitute 66% of federal spending. Medicare (Hospital Insurance program) and Social Security will be in the red by 2011, if they are not already. Any attempt to cut Social Security and Medicare (or Medicare patients in Obamacare) will run into a political buzz saw as the numerous and well organized older voters clamor to get what they were promised.

Second, consider government workers. According to a Cato Institute scholar Chris Edwards, government workers are well paid relative to private workers. Specifically, they make 34% more in wages and 70% more in benefits. This gaps shrinks but does not go away once you control for skills. They also have more secure jobs. Private workers are three times more likely to be discharged than government ones. Politically, government workers are a potent army. They are five times more likely to be unionized and constitute over half of total union membership. Their power can be seen in that even with anger at government at a fevered pitch, no national figure is calling for deep cuts to their ranks. It can also be seen in that fixing even the most obvious problem, incarceration (the U.S. has 5% of the world’s population but 25% of its prisoners), runs into strong union opposition.

Third, consider the U.S. foreign empire. Consider work done by columnist Pat Buchanan citing research by Arthur Vance and Chalmers Johnson. The U.S spends more on defense than the next 10 nations combined and has more firepower than the next 13 navies combined. U.S. troops are stationed in 148 countries and 11 territories, including 100,000 in Iraq, 100,000 in or headed to Afghanistan, 50,000 in Germany, 35,000 in Japan, and 28,000 in Korea. When the budgets for the Pentagon, two wars, foreign aid, intelligence agencies, contractors in Iraq and Afghanistan, and new embassies are added up, it is roughly $1 trillion per year. Even if we were to cut all of this spending to $0, this would still not balance the budget. And even a 50% cut would produce overwhelming opposition from the wealthy and powerful defense lobby.

Because of the hole the U.S. is in and because government spending is backed by some of the most powerful constituencies, the U.S. is unlikely to climb out of the financial hole by cutting spending. Nor can it tax its way out of the hole. But debts must sooner or later be paid. With total government spending at record levels and the rich and middle class already shouldering a heavy load, it simply is not possible to transfer more money from the private sector without keeping the economy in the doldrums, if not tanking it, and making us poorer. As it is, the increasing transfer of resources from the more efficient private sector to the less efficient government acts as a brake on economic progress.

Economic growth is further threatened by the specter of inflation. In recent years, the Federal Reserve has exploded the money supply. In the waning years of the Bush administration, it shot up the monetary base (a key part of the money supply) up by more than 100%. Such an increase has not been seen in 50 years. The coming inflation will not only make us poorer, but will also produce uncertainty that that businesses hate, thereby slowing business growth.

Something has to break. U.S. citizens will have to choose between a significant loss of wealth, serious cuts to entitlements or government workers, or losing their empire. Even the loss of the empire is probably not enough by itself. A breaking point is coming and someone is going to get pounded.