The Future of The American Economy: Staring Into The Abyss

The American economy has some colossal long-term problems.  Media headlines though are focused on near-term growth, which was reported at a 2% annualized growth rate for the 2nd quarter of 2010.  This anemic growth is too weak to create enough new jobs for American population growth, but it is better than nothing or having negative growth.  Near-term growth, the upcoming elections, and likely federal policy changes are not the main issue for the future of the American economy, however.  The main issue is the $75 trillion of unfunded Medicare liability that the U.S. faces in the 30 years.  Social Security by contrast is far more easier problem to solve with only a $14 trillion unfunded liability in the next 30 years.  State and local unfunded pension liabilities are in the trillions as well, but those entities do not have the power to tax all citizens for pay for their reckless unfunded promises and present significantly less risk to the American economy.

The U.S. cannot ignore the problem of Medicare and Social Security because well before those programs swallow up the entire federal budget, something dramatic will happen — the bond market will seize up and no longer be receptive to U.S. government bonds.  The Chinese will realize that the U.S. will not be able to pay its obligations, and bond market participants will simply stop paying money for U.S. bonds.  This happened recently for Greece debt, until the European Union stepped in with a bailout package.  The day of reckoning will approach sooner and require a solution sooner than the ultimate bankruptcy of Medicare.

Reckoning with the bond market is just one issue.  The other issue is what benefit cuts will be politically acceptable.  Think of Greece, Portugal, Spain, and recently France.  In France there were two weeks of public sector strikes because the government raised the retirement age from 60 to 62.  Two years more of work, a very small price to pay.  In the U.S. what will happen with Medicare and Social Security benefit cuts.  Clearly, the sooner those benefits are controlled, the less the pain will be.  If the U.S. waits until the moment of crisis, then there will be dramatic changes with expectations of many up-ended.  Two weeks of strikes may seem like a walk in the park.

The only way to pay even in part for the huge cost of the unfunded liabilities is with new taxes.  New taxes retard and deter growth and investment.  The U.S. could institute massive new taxes — and those taxes will have to hit everyone to get the revenue needed — and then the U.S. will be like Europe, with huge state-sponsored benefits, slow growth, and high unemployment.  The alternative is to radically alter these programs.  The solutions will result in either preserving American freedoms and liberty or joining the Europe that many of our ancestors left because of its ossified, statist societies.  We are indeed staring into the abyss.