ObamaCare and our Debt Death Spiral
The first euthanasia patient under the new health care program is apt to be the federal government itself.
March 28, 2010 - 12:34 am
In an article in the Atlantic entitled “My Inflation Nightmare,” Michael Kinsley worries about the future of the economy. He fears that inflation, perhaps hyperinflation, is a likely next stage in the economic crisis. His fears contradict the respected liberal economists Paul Krugman and Larry Summers. They argue that deflation is the likely outcome.
Mr. Kinsley defers to their expertise and exhibits proper liberal loyalty by modulating his position. He apparently trusts these economists more than his own intellect and instincts. He remembers being stigmatized as a “fiscal sado-conservative” (whatever that means) when he strayed from the liberal position once before.
Mr. Kinsley should realize that it was these and similar experts that got us into this mess. Neither of these experts ever saw it coming, despite their expertise and mathematical Keynesian models. One is an ideologue and the other an employee of the administration. Does Mr. Kinsley believe they could publicly speak out against inflation, even if they believed it to be a certainty?
Kinsley’s intuitive conclusion is grounded in “the realm of psychology.” If, by that, he means human behavior and motives, he is on sounder ground than most so-called economists. Proper economics always has been the study of human action. Abstract mathematical models, introduced in the “Keynesian revolution,” banished human and political motivations from consideration. Economics was then reduced to a sterile black-box contraption, at least in the minds of “sophisticated” Keynesians.
The key insight and worry in Kinsley’s article is that “no one in a position to act has proposed a realistic way out of this debt.” Is it possible no one understands the problem? Perhaps they have been too busy to deal with it. He muses about this issue in a way that suggests he may know the answer but not want to reveal it. Quite simply, the issue is ignored because there is no politically palatable solution! It is impossible for the U.S. government to honor its obligations.
To understand the predicament, numbers are necessary. The federal debt, approximately $12.5 trillion, represents funded debt. The unfunded promises associated with Social Security, Medicare, and Medicaid represent an additional liability of $106 trillion, according to trustee estimates.
A $106 trillion cash infusion is required today to make these programs solvent. But the entire net worth of the entire country is only about $55 trillion. If the U.S. government confiscated every single asset in this country, these programs would still be insolvent. And so would every citizen and corporation in the country. Quite simply, these programs promise twice what the country is worth!
In my post “Spiraling to Bankruptcy,” various methodologies were used to illustrate federal insolvency. Because large numbers are incomprehensible, they were translated into everyday examples. One example used the analogy of a family:
The federal government collects about $2.5 trillion in total revenues a year. That is from all sources of taxes and fees. Think of that as an individual’s annual gross salary. The debt owed by the government can be looked at as a great big mortgage. Thus, we have a family that has a mortgage 44.8 times greater than gross salary. That would be the equivalent of a man earning $50,000 gross salary having a mortgage of $2,240,000! An interest-only mortgage at 6% would require the family to pay annual interest of $134,000 per year. A conventional mortgage would be much higher. The example becomes even more ludicrous when one recognizes that taxes, food, clothing, savings, etc. all have to be subtracted from gross pay to determine what is left for debt service.
When we shift back to the federal government, the family analogy becomes even more absurd. The federal government has nothing left from their “gross pay.” Their “living expenses” actually exceeded their gross pay by $1.2 trillion last fiscal year. That is, they spent almost 50% more than they made. Comparable behavior is budgeted for the next ten years.
Mr. Kinsley’s formal training in economics may be limited, but his instincts are sound. None of the above is economics; it is simple math and the math is irrefutable. That is, the reason that “no one in a position to act has proposed a realistic way out of this debt … ”
Other than default, there is no way out.
The government is in what is known as a “debt death spiral.” They are unable to pay the actual and implied interest on their debt. Each year the unpaid balance is added back to the amount owed, making the problem worse next year. This debt spiral grows exponentially. There is no way to escape the certain mathematical end.
Jose Pinera described the problem and the solution:
The welfare state has really become an arbitrary “entitlement state,” where everyone uses the state to rob someone else, and politicians from the right and the left play the transfer game to win elections. This crisis may serve to reveal the true nature and enormous flaws of the welfare state. Sooner or later, [states] will have to dismantle it and move toward a paradigm of personal responsibility — that is, a system of personal accounts for pensions, health and unemployment benefits.
The political class is unwilling to accept the Pinera solution. They consider the Ponzi-scheme social programs sacrosanct. “Vote for me and I will take benefits away from you” has never been a winning political strategy.
Mr. Kinsley’s fears that government will resort to inflation to mitigate the problem are correct. Bernanke must continue quantitative easing (“printing money”) because not doing so would shut the government down. Inflation will occur, but it is no solution. It is merely a holding-action charade, a “pretend and extend” strategy that markets will eventually disrupt.
Ultimately Pinera’s solution will be imposed here and in Europe where conditions are just as perilous. It will be painful for Mr. Kinsley and those of the liberal persuasion. But unless someone repeals the laws of mathematics, it is the only solution. No sane economist can argue against mathematics.
While President Obama inherited a mess, he has done yeoman’s work in worsening matters. To think that we can add another massive entitlement on top of this situation is utter madness. The first euthanasia patient under the new health care program is apt to be the federal government itself.
When the history books are written a century or so from now, it is likely that the twentieth century will be referenced as “the myth of government.” Hopefully the Ponzi nature of government is understood in time to return government to the role intended by our Founding Fathers.
The fate of civilization depends upon such a correction.