Fiscal Blues: Bleeding Red

I agree with Joe (More Fiscal Responsibility Blues, 1/8/04) that the fiscal status of the United States is currently our biggest crisis and one that needs to be addressed quickly. The IMF released a report this week (the overview can be read here) outlining the current fiscal problems that the U.S faces and the implications of not addressing these problems. Some interesting excerpts from the overview of the paper:

"The major tax cuts (as well as some spending measures) enacted in 2001 and 2003 have been estimated to have cost roughly $1.7 trillion over FY2002-FY2011.

There is little doubt that significant macroeconomic gains could be reaped from reforms of the U.S. tax code, with the Council of Economic Advisers (CEA, 2003) citing estimates of potential gains in the range of 2-6 percent of GDP.

As noted in CEA (2003), taxpayers are required to spend roughly 3 billion hours a year dealing with federal tax matters, and overall compliance costs are estimated at around 10 percent of total federal tax revenues.

Simulations reported in Section II suggest that a 15 percentage point increase in the U.S. public debt ratio projected over the next decade would eventually raise real interest rates in industrial countries by an average of ??1 percentage point.

The United States is on course to increase its net external liabilities to around 40 percent of GDP within the next few years?an unprecedented level of external debt for a large industrial country (IMF, 2003b).

The results suggest that the fiscal imbalance [for SS, Medicare] is as high as $47 trillion, nearly 500 percent of current GDP, and that closing this fiscal gap would require an immediate and permanent 60 percent hike in the federal income tax yield, or a 50 percent cut in Social Security and Medicare benefits."

The IMF overview gives a fairly clear summary of the problems we face. Our government has drastically increased spending in recent years, partly in response to terrorism. At the same time, it has decreased its revenue in the form of tax cuts in an attempt to stimulate the economy. While this has likely provided a short-term stimulus, it has also increased our debt and the likelihood of major programs (SS, Medicare) becoming insolvent in the next decade or two. Furthermore, the report states (above) that U.S. debt is projected to raise interest rates globally, which is likely to hinder or depress the global economy. In short, the perfect storm for fiscal disaster is arising.

Our government should be ashamed. These are major issues that need to be brought to the attention of the public (and the public needs to be convinced to care). Conversely, the voters should be holding representatives accountable for such poor fiscal management. We need to immediately begin balancing our budget, likely through a combination of tax revenue increases and spending cuts (for starters, get rid of missle defense). From reading the IMF paper, this should be complemented by reform of the tax system to make it more efficient and consumption based. Furthermore, I see no reason for the estate tax to be phased out. Finally, the paper calls for reinstating and reinforcing the Budget Enforcement Act to ensure long-term fiscal stability and goals.

In the end, our politicians need to be forced to make the tough decisions that individual tax payers make every day. If we want to cut taxes to stimulate the economy, then services or programs will have to be cut to account for it. Or, if one actually thinks long term, one establishes a "rainy day fund" to tap into while enacting tax cuts. As Joe pointed out, none of the presidential candidates (including the current president) seems intent on tackling this problem. Take, for example, our current president: In creating our current record federal budget deficit, the Bush administration has undertaken an arguably unnecessary war and subsequent reconstruction; it (with Congress) has enacted enormous Medicare drug coverage. These are but the biggest items among numerous other spending increases. But wait, there's more! We will now establish a human settlement on the moon and send a manned mission to Mars. I leave you with a quote from the Wash. Post article:

"Officials were unwilling to provide cost figures or details and would say only that Bush will direct the government to immediately begin research and development to establish a human presence or base on the moon, with the goal of having that lead to a manned mission to Mars."