Excessive Spending on the Public Sector and Entitlements Explode Debt to Unsustainable Levels

Posted by PITHOCRATES - January 12th, 2011

Our Debt as a Percentage of GDP Growing to almost ‘Greece’ Levels

US Federal Debt As Percent Of GDP ranged from about 32% to 52% during Ronald Reagan‘s 2 terms.  It ranged from about 56% to 67% during Bill Clinton‘s 2 terms.  It ranged from about 56% to 69% during George W. Bush‘s 2 terms.  After Barack Obama‘s first year in office it jumped to about 83%.  After his second year, it jumped to about 94%.  Our federal debt almost equals our Gross Domestic Product.  And President Obama wants to raise our debt ceiling so they can borrow more.  So they can spend more.  So how do these numbers compare to other nations?  Not good (see Same as the Old Boss? by John Stossel posted 1/12/2011 on Creators.com).

Last year, I reported that the United States fell from sixth to eighth place — behind Canada — in the Heritage Foundation/Wall Street Journal’s 2010 Index of Economic Freedom. Now, we’ve fallen further. In the just-released 2011 Index, the United States is in ninth place. That’s behind Hong Kong, Singapore, Australia, New Zealand, Switzerland, Canada, Ireland and Denmark.

The biggest reason for the continued slide? Spending as a percentage of gross domestic product. (State and local spending is not counted.)

The debt picture is dismal, too. We are heading into Greece’s territory.

And we all know what happened in Greece.  They had a debt crisis in 2010.  They tried to cut spending.  Cut government benefits.  And the people rioted.  So, is it too late for us?  Perhaps not.  Because Canada pulled themselves back from the brink.  And if they can, can’t we?

Economist David R. Henderson points out that our neighbors to the north faced a similar crisis. In 1994, the debt that Canada owed to investors was 67 percent of GDP. Today, it’s less than 30 percent.

What did Canada do? It cut spending from 17.5 percent of GDP to 11.3 percent.

This wasn’t merely a cut in the growth of spending, a favorite trick of congressional committees. These were actual reductions in absolute spending.

“If a cabinet minister wanted a smaller cut in one program, he had to come up with a bigger cut in another program,” writes Henderson in “Canada’s Budget Triumph,” published by the Mercatus Center. All but one of Canada’s 22 federal departments experienced real cuts in spending. While Canada raised taxes slightly, spending was cut six to seven times more.

These supposedly painful cuts didn’t cause terrible pain. In fact, there was much more gain than pain. Unemployment dropped, the economy boomed, and the Canadian dollar — then worth about 71 cents U.S. — today is about equal to the American dollar.

Real spending cuts, eh?  Who are we kidding?  We can’t do that.  It just may be that Canada is more fiscally responsible than us.  And, dare I say, more capitalistic?

Debt Crises Hit Greece, Ireland and now Portugal

So how are things over there in Europe?  Everything hunky-dory now that the European Central Bank bailed out Greece and Ireland, saving them from their financial crises?  Well, they were talking about another EU nation that was in danger of following them.  Portugal.  So far, though, they’re still treading water.  They pulled themselves back from the brink of bankruptcy with a successful bond auction.  Unfortunately, the interest they have to pay on those bonds may bankrupt them (see This little piggy went to market posted 1/12/2011 by The Economist online).

But it is unsustainably high for a country with such so much public debt relative to its GDP. If Portugal is to remain solvent, its borrowing costs will have to fall much further. It is hard to imagine what might push its bond yields down other than concerted buying by the ECB, a de facto bail-out. It therefore seems likely that Portugal will eventually have to seek rescue funds from its euro-zone partners and the IMF, as Greece and Ireland have had to.

Yeah, it doesn’t look good for Portugal.  Or the European Union.  It’s kind of ironic.  The EU and the common currency, the Euro, were supposed to unite Europe and make it an economic superpower to compete against the United States.  But, instead, that noble idea is its own worst enemy.  Because of the common currency, one member’s fiscal mismanagement is a problem for all members in the union.  And social democracies just don’t give up those fat government benefits.  They spend until they can borrow no more.  Then they let the more fiscally responsible members bail them out.

Some of the EU members could learn a lesson from Canada.

New Jersey, New York, California and Illinois Having their own Debt Crises

And the U.S. could learn a lesson from Canada.  Because we just don’t know how to cut spending.  Illinois is “swimming in debt” and ranks 48th in job creation (see Illinois: Thank Goodness For Michigan… Or We’d Be Last In Everything by Tabitha Hale posted 1/12/2011 on RedState.com).  And what are they doing?  Cutting spending?  No.  They’re raising taxes.

In California, Jerry Brown will cut entitlements and raise taxes (see Jerry Brown’s Budget Gambit by Allysia Finley posted 1/12/2011 on The Wall Street Journal).  California, like Illinois, is sucking air.  And you need a supermajority to raise taxes in California.  And how does he plan to persuade the good people of California to agree to the tax hike?  By threatening to cut education if they don’t approve it.

Dick Morris writes that public sector unions are bankrupting New Jersey, New York, California and Illinois (see TO SAVE THE STATES: LET ‘EM DECLARE BANKRUPTCY posted 1/12/2011 on DickMorris.com).  He argues they should go bankrupt to break those unsustainable public sector union contracts.

Debt Crises the Norm unless Government takes on the Public Sector and Entitlements

Excessive spending leads to debt crises.  We all know this.  And yet no one wants to cut spending.  Except Canada (go figure).  Even though everyone knows this, no state will go up against the public sector.  Or entitlements.  For two reasons.  First, they just don’t have the stones.  Second, these are the most important demographics that keep these politicians in office.

So if you’re wondering what our future will be like just take a look at what happened to Greece in 2010.  For that may very well be our future.  Or it can be worse.  It can be like New Jersey, New York, California or Illinois.

www.PITHOCRATES.com

Share

Tags: , , , , , , , , , , , , , , , , , , , ,