This is the first in a multi-part series of posts that comprise Future 500 founder Bill Shireman's insightful essay, The Two Deficits, from the book Towards a New Agenda for America: Ideas To Bridge the Left and Right and Move the Nation Forward (Future 500, 2012).
Conservatives are right: As a nation, we are out of money and deep in debt. Progressives are also right: We can’t pay off our debt by extracting it from the poor, the middle class or the environment. But many right and left leaders are wrong about the solution.
To reduce the outflow of wealth, some on the right would radically cut government spending now. To increase the inflow of wealth, many would drill, baby, drill the nation’s resources, as fast as we can. To reduce the concentration of wealth, some on the left would tax prosperity, or simply redistribute it, now. To increase the inflow of wealth, many would spend, baby, spend — and pay off our debts by printing more money, as fast as we can.
The right and left often overlook a simple fact: There is a difference between spending money and earning money. Yes, it is time to reduce the concentration of money and power. Too much is wielded by overgrown government bureaucracies, corporate crony capitalists and value-consuming financiers. Rather than feeding at the troughs where money happens to flow, they need to add value commensurate with their take. But to just cut spending, tax prosperity or deplete our economic or ecological resources would bankrupt us. These are false panaceas. The real solution to our problem is not to consume value — it is to create it, by tapping the power of people to innovate.
Economist Bruce Bartlett, a senior policy advisor to the Reagan and George H. W. Bush administrations, has grown weary of the false debate. In his book, The Benefit and the Burden: Tax Reform — Why We Need It and What It Will Take, he describes the futility of massive cuts in federal spending, and proposes a better alternative. The national debt, Bartlett says, is like a bank loan — it must be paid off in installments, out of current income. It is a part of our government debt, but only a small part. The vast majority comes in the form of political commitments we have made to important constituencies: future benefits to retired federal employees, veterans, and Social Security and Medicare beneficiaries. These must be paid only when they come due, so they don’t show up in the federal budget and aren’t usually counted when we measure the government debt. That is because the government does its accounting on a cash basis, not an accrual basis, the way corporations do. That way, they don’t have to book the full cost of their programs annually.
Instead, the government publishes a separate, obscure financial statement, now called the Financial Report of the United States Government. The Obama administration published the fiscal 2011 version on December 23, two days before Christmas, while reporters were too busy preparing for the holidays to read a complex 254-page financial document. Neither The New York Times nor Fox News seemed to notice it. But Bartlett did. Altogether, he found, the Treasury reported the government’s total indebtedness at $51.3 trillion. The national debt made up a fifth of this — $10.2 trillion. Veterans and federal employees were owed $5.8 trillion. Social Security’s unfunded liability — promised benefits over expected Social Security revenues — was $9.2 trillion over the next 75 years. And Medicare’s unfunded liability was $24.6 trillion. It would be impossible to cut spending enough for a single generation of Americans to pay off this debt — it totals nearly the entire net worth of American households.
Unless our productivity and output grows, the Treasury projects that within a generation the federal debt will rise to 100 percent of GDP, as our future commitments come due, and suddenly become part of the nation’s acknowledged debt. This would be financing devastating to the nation. Balancing the federal budget would not be nearly enough, as Bartlett and other economists document. The federal government would need to run a surplus continuously for 75 years to prevent the debt/GDP ratio from rising.
If we can’t cut spending enough to erase the deficit, what can we do? The right’s first instinct has been to do what worked during our last period of continuous growth: consume more fossil fuel energy. But that path is well worn. It has been about 40 years since the first global energy crisis in 1973. Since that time, rather than innovating beyond our dependence on fossil fuels, the right has focused on building our military power, enabling us to intervene, to prevent any supply disruptions. We have, as a consequence, sacrificed $7 trillion in domestic growth to fund our foreign oil habit. We have transferred over $1.2 trillion to nations that are
either unstable or antithetical to our interests. Those dollars financed the Baathist terrorists under Saddam Hussein in Iraq, the radical Mullahs under the Ayatollah in Iran, and of course Al Qaeda, with its roots in Saudi Arabia. In Saudi Arabia, the first Al Qaeda terrorists were so infuriated by the presence of U.S. military on Saudi soil that they focused their oil-financed operation on throwing the infidels off their soil. Then, failing that, they came to our soil. They used a few of their oil dollars to buy airline tickets in 2001 and took out the World Trade Center, and along with it 3,000 lives.
The other panacea of some on the right is to drill our way out of debt. In this view, the U.S. can simply embark on massive and permanently increasing extraction of fossil fuels, all from within our borders. To intellectually clear the way, advocates of this path simply define political, military and environmental realities out of existence. Unfortunately, physical resources are as limited as economic ones, and as unequally distributed. Of the trillion barrels of estimated oil reserves, 6% are in North America, 9% in Central and Latin America, 2% in Europe, 4% in Asia Pacific, 7% in Africa and 6% in the Former Soviet Union. Today, 66% of global oil reserves are in the hands of Middle Eastern regimes: Saudi Arabia (25%), Iraq (11%), Iran (8%), UAE (9%), Kuwait (9%) and Libya (2%). Because reserves in non-Middle East countries are being depleted more rapidly than those of Middle East producers, many of the largest producers in 2002 (Russia, Mexico, U.S., Norway, China and Brazil) will cease to be relevant players in the oil market in less than two decades. At that point, the Middle East will be the only major reservoir of abundant crude oil. In fact, Middle Eastern producers will have a much bigger piece of the pie than ever before.
The U.S. may not be rich in oil, but it does have vast holdings of gas — enough to largely replace our highly polluting stocks of coal, which are being depleted more quickly than once thought. But gas is no permanent panacea either; natural gas producers need to be held to
high standards of performance, to protect water and the environment. With these in place, natural gas can help build a bridge to move toward the next energy economy — one where whole new sources of low-carbon energy can emerge.
A low-carbon, low-pollution economy is important. But strident true believers on the right and left advance simplistic solutions. On the right, some expect Americans to swallow the idea that transferring billions of tons of carbon from the earth to the atmosphere has zero impact on the environment. But even scientists who are skeptical about the severity of global warming conclude that it is a real threat. On the left, some expect Americans to believe that only government ownership and control of the energy sector can prevent climate calamity.
Neither of these ideological extremes advance genuine solutions. The fiction that dependence on finite physical resources has no cost worth worrying about has undermined the very interests the right holds most important: the nation’s prosperity, security, and freedom. The fiction that massive government spending and power is a solution places the left’s most cherished objectives at risk: economic fairness, social justice and individual freedom.
Much as the right might hope, we can’t cut or drill enough to pay our debt. Our politicians, in order to serve federal employees, veterans, retirees, and other interest groups, have leveraged the whole economy, placing us at the mercy of some of the world’s most threatening nations. Most future spending won’t be for programs, but for interest on debt. The costs won’t just be economic.
Much as the left might hope, we can’t just print more money and erase the paper debt as it comes due. Flooding the world economy with dollars that have not been earned creates no real value. It doesn’t actually put food on the table or a roof over our heads. Instead, it spurs more spending, both economic and environmental. Genuine prosperity would dissipate, either through inflation, new debt, or ecological exploitation.
The reality that neither the left nor right want to face is this: We can’t spend our way to prosperity. We can’t live off subsidies forever. Eventually, someone has to create real value. But who? And how?
Part two ...