The Time Bomb

I wasn't planning to write about the issues with America's debt. Initially I wanted to tell you how excited I got about this book: Losing Control-The Emerging Threats to Western Prosperity by Stephen King (No not THE novelist). Anyway I figured I was not in a position to write a good article as I am only halfway through it. However I would like to note that the author mainly points to the emerging BRICs, and the nature of the West's early developments. (I am so excited I have to remind myself to stop rambling about the book and promise I'd write about it later..)


So I stumbled upon an article, again by Greg Mankiw (Sorry I am obsessed) titled 'It's 2026 and the Debt Is Due', The New York Times, March 27 2011.


This is how he starts off:


The following is a presidential address to the nation- to be delivered in March 2026


The article tells us the obvious: Americans have been living (way) beyond their means. With all their brilliant economists and mathematicians, they have not faced the reality of the concept of budget balancing. Essentially, they have both low taxes albeit a generous social safety net. Honestly, it's not hard to figure out why Europe, specifically Scandinavian countries have fantastic social services- HIGH TAX RATES.


The winners are: 
Belgium- 54%
Finland- 46.6%
Germany- 45%


*Note: The figures mean __% highest marginal tax rate on average income


Guess what, America's is *Drum Roll* 


Anyways, the time bomb originates from previous generations by those with, unmistakably noble aims. Social Security was created as poverty was seen among the elderly. Medicare and Midicaid were to rescue the sick. Americans struggled to afford health insurance so they embraced reform with subsidies for middle-class families. As seen from the above tax rates it is fact that this expansion was costly and Government spending has taken up a fair share of national income. Reality is that the baby-boom generation has become eligible for the many government benefits. (No we should not overwork them like the Japanese do) The main problem in healthcare was the rapid technological advances- though highly desirable, they are expensive essentially. Back in 2008 when I was tuned in the Presidential Elections and Obama was so passionately promoting Healthcare reform, I knew it was going to haunt him. I wanted to tell him, but who cares about a 16 year old kid's pessimism.


In my opinion, if the Americans were sensible enough to tax for these spendings, there would not be a time bomb. But anyway, they simply subscribed to textbook economics. (I know there are many of you who've memorized them)


1. Taxes distort incentives (we love free market, don't we)
2. Taxes reduce economic growth
3. Taxes have high administrative costs
4. Bla bla bla Laffer Curve, regressive, progressive, etc


So, what do we do instead? BORROWWWWW!


Debt does not avoid hard choices. It is the matter of time (Remember the classic economic argument for interest rates? TIME among risk and inflation) Debt only delays the hardship. Borrowing=Bonds. For years the US government borrowed on good terms, investors were confident and thought in due time, spending and taxes would be in line.  However, the ratio of the US' debt to GDP product has been at a record high, naturally investors would be nervous. ahaa! RISK. If your investments were risky and a lot of uncertainty was involved, you would demand higher interest rates. Not only has their debt accumulated but servicing the loan has become even more expensive. 


This is the cycle:


Rising budget deficits --> Lower investor confidence --> Higher cost of borrowing --> Back to square 1!


An interesting excerpt from the article:


As economist often remind us, crises take longer to arrive than you think, but they happen much faster than you could have imagined. Last week, when the Treasury tried to auction its most recent issue of government bonds, almost no one was buying. The private market will lend us no more. Our national credit card has been rejected.


The solution, as structured by Greg Mankiw:


1. Social Security has to be cut immediately, especially for higher income earners and it should be a tool that will still narrowly keep the elderly out of poverty.


2. Health care should be limited to basic healthcare, not expensive treatments.


3. The concept of healthcare as a right of citizenship is flawed: citizens have a responsibility upon their health! 


4. Raise taxes on all but the poorest Americans by broadening the tax base, eliminating deductions for mortgage interest.


5. Raise taxes on fuel. This addresses climate change and local traffic congestion and perhaps they can get in shape and be responsible for their health.


The question is: How many people actually look into the future and take into consideration or even understand the needs of the future generation? Who is willing to give up their social security for a group of people we will never meet (this strictly excludes family)? 


Would I? Erm. Thinking.