America's Ticking Bankruptcy Bomb

The failures of federal, state and local officials of both major parties, over many years, have primed a ticking bankruptcy bomb for America that will explode the American Dream if we don’t disarm it. But it is not too late to reverse course and avert the coming bankruptcy of America.

Reversing course will require fundamental structural reforms of all levels of government, and our most politically sensitive entitlement programs, including Social Security, Medicare, the continuing empire of dozens of federal/state welfare programs, and now replacement of ObamaCare with Patient Power.

If we do this right, thoroughly modernized entitlements will serve the poor, seniors and most vulnerable among us far better, and a new economic boom will restore America’s traditional, world leading prosperity.

During George Bush’s eight years as president, the federal government grew by one-seventh relative to the economy, after Republican congressional majorities had so promisingly reduced it by that much from 1994 to 2000. But when President Obama got behind the steering wheel in 2009, he accelerated into hyperdrive even more so in all the wrong directions, doggedly pursuing the opposite of Reaganomics in every detail.

Federal spending under President Obama has already soared by another fourth relative to the economy, to the highest in history except during World War II. President Obama’s own 2012 budget projected the federal deficit for 2011 at $1.65 trillion, the highest in world history by far. Already this year, for every dollar of federal spending, 43 cents will be borrowed. Spending for Social Security, Medicare, Medicaid, and the income security programs (mostly welfare), will consume 95 percent of all federal revenues. What is left will not even be enough to pay interest on the national debt, equal to 10 percent of federal revenues.

The national debt, now rocketing toward $20 trillion by 2020, is already the highest in history relative to GDP except for World War II, and on its current course will soar well past that record. Indeed, the national debt has been rocketing upwards so fast that under current policies more debt will be run up in one term under President Obama than under all other presidents in history – from George Washington to George Bush – combined, according to President Obama’s own 2012 budget.

On our current course, indeed, our national debt as a percent of GDP will soar past the level that triggered bankruptcy for Greece, when the financial markets refused to lend the government enough to cover its enormous annual deficit. The European Union tried to end that crisis with a trillion-dollar bailout financed by its taxpayers. But who will bail out America? Who even could?

Even worse, the national debt does not nearly encompass everything the government owes, or on which it is subject to liability. Besides the unfunded liabilities for Social Security and Medicare, which our government today cannot even validly calculate, usually overlooked as well are the unfunded liabilities for federal military pensions, veterans benefits, and federal civil service pensions. Then there are the FDIC’s guarantees for bank deposits, the FHA’s home mortgage guarantees, and trillions more in mortgage-backed securities and federal guarantees of those securities held by the Federal Reserve, Fannie Mae, Freddie Mac and the FHA. None of this is counted in the national debt.

Somehow, President Obama insisted that it was a good idea to add all of the entitlement promises of ObamaCare on top of these obligations. ObamaCare added a costly new entitlement program to provide federal welfare subsidies for health insurance for families making as much as $88,000 per year, soon climbing to more than $100,000. Woefully overpromised Medicaid, the health care program for the poor, was sharply expanded to cover nearly 100 million Americans by 2021 according to CBO. While President Obama won enactment of ObamaCare promising it would reduce deficits, it will actually add another $4 trillion to $6 trillion to the nation’s deficits and debt through the first 20 years alone.

State and local governments add even further to the problem. People use the term “failed state” to refer to Somalia, with its disintegrated government. But that term may increasingly be applied to California, New York, Michigan and Illinois, with their out of control state budgets and deficits, runaway government pensions, dysfunctional education bureaucracies, and increasingly belligerent public sector unions.

These states already resemble Greece, with our federal government already bailing them out at taxpayer expense, which started in President Obama’s first stimulus bill in 2009. State and local government debt has soared toward a projected $4 trillion, or another 24 percent of GDP, by 2012. The unfunded liabilities of state and local pensions total $3.8 trillion, with state and local promises to pay retired employee health benefits adding further unfunded liabilities of $1.4 trillion. None of this is counted in the national debt either.

Adding still more to these troubles is the extended weakness and instability of the economy. With this year’s federal deficit already projected at $1.65 trillion, another recession now would threaten precisely the same national bankruptcy as suffered by Greece.

The solution lies first in restoring booming economic growth, which requires restoring the principles of Reaganomics. Then we must modernize all of our nation’s entitlement programs to rely on modern capital, labor and insurance markets, with transformed incentives that would further contribute to economic growth. With such reforms, we can achieve all of the liberal social goals of those programs far more effectively, serving seniors and the poor actually better, at just a fraction of the costs of the current tax and redistribution programs.

That would include extending the enormously successful 1996 reforms of the old, New Deal era, Aid to Families with Dependent Children program (AFDC) to the remaining 184 federal means-tested welfare programs, sending welfare back to the states. It would include, as well, allowing workers the freedom to eventually choose to substitute personal savings, investment and insurance accounts to finance all of the benefits now financed by the payroll tax, ultimately replacing that tax entirely with a family wealth engine that would feed mighty rivers of savings and investment into a booming economy.

Further liberating, pro-growth reforms are necessary at the state and local levels. That includes using a state spending limit like Colorado’s Taxpayer Bill of Rights to phase out state income taxes in the 41 states that still suffer that job and growth killing burden. Nine states already survive perfectly well without any state income taxes, including big, booming states like Texas and Florida.

Peter Ferrara is Senior Fellow for Entitlement and Budget Policy at the Heartland Institute and Director of Policy for the Carleson Center for Public Policy. He served in the White House Office of Policy Development under President Reagan, and as Associate Deputy Attorney General of the United States under the first President Bush. He is the author of America’s Ticking Bankruptcy Bomb, now available from HarperCollins.