Downsizing America's Economy

You can thank President Obama for the lower standard of living coming your way. The numbers tell the story.

The electorate in the United States is presently being bombarded from all sides with financial and economic statistics on health care and budget deficits. The scale and magnitude of the sums are incomprehensible. A calculation containing twelve or thirteen zeros causes the eye to glaze over. However, in their gut, the American people know that something is amiss and that the future very much in jeopardy.

The bleak tomorrows are no longer twenty-five, thirty, or fifty years out; in the next five to nine years, we will be noticeably poorer and on our way to third-world status. We will be like Brazil, only without the hope of wealth from vast offshore oil resources.

Ongoing annual budget shortfalls in the trillions of dollars will, by 2019, cause publicly held federal debt to exceed 100% of the gross domestic product. Together with all the trillions of dollars in unfunded liabilities, the United States will be, in essence, a bankrupt nation.

Deficit spending (program expenses exceeding dedicated revenue) began on Medicare (2008) and Social Security (2010). Social Security cash surpluses, which have been used to help finance other government activity, will no longer be available to supplement the rest of the federal budget. By 2019, these programs will require at least $160 to $200 billion a year in borrowing to keep up with promised benefits. 

As a result of all the massive borrowing, the annual interest liability by 2019 will approach $900 billion annually. (2009: $187 billion.) Within nine years, spending on Medicare, Social Security, and interest will account for 97% of all federal revenue. 

The quick and glib answer to all this is to reduce spending to cover the deficit expenditures. However, total spending between 2010 and 2019 will be $8.5 trillion (27%) more than revenues. Will the majority of the public stand for reducing a monthly social security check by 27% or cutting Medicare reimbursements, defense spending, welfare, and unemployment, et al by a similar 27%?

The obvious answer is no. There will have to be a combination of revenue growth to the government, which can only come from dramatically increased economic activity coupled with far-reaching elimination of agencies (and public-sector unions), cancellation of outdated programs, and slower growth and restructuring of the major entitlement programs. 

However, the Obama administration's solution is to focus solely on raising taxes while proposing ever-expanding government spending. Beyond allowing the Bush tax cuts to expire in 2011, the double-edged purpose of the Cap-and-Trade, Health Care Reform, and Financial Reform bills is to raise taxes and fees while  furthering government interference into the day-to-day lives of all Americans. The end result of the current policy by this White House and the Democrats in Congress will be to stifle economic activity, further reducing revenues to the government and exacerbating the very real possibility of national bankruptcy.

The last period of major economic downturn in the United States was 1979-1982. Thanks to Ronald Reagan and policies the polar opposite of those being pursued by President Obama, the country made a dramatic recovery which lasted for nearly 25 years. However, there is a major factor that exists today that was not in play in 1980.

In 1980, the United States, Japan, and Western Europe (the United Kingdom, France, Germany, Italy and Spain) dominated the world economy accounting for 64% of the global Gross Domestic Product. By comparison, China, India, and South Korea accounted for 4% of the world GDP at the time. The relative lack of competition made it easier for those nations to more easily survive and come through a recessionary period.

By 2014, The United States, Japan, and Western Europe are projected to account for 36% of the global GDP (a decline of 44%). (In 1980, the United States was at 27%, by 2014 18% or less, a decline of 40%.) Meanwhile, China, India, and South Korea are estimated to control 24% of world GDP (China 16%), or an overall increase of 500%.  

This is now a true global market in which the United States must be competitive. The ideal of a world economy is now a reality. Countries such as China and India have begun to develop a middle class and raise the overall standard of living for their populations. In order to compete and continue this growth, these nations must attract intellectual and investment capital to their shores. They can do so with lower taxes, fewer regulations, a benign legal environment, and lower labor costs.

Thanks to new technology and global communication, major financial firms and their activities can now headquarter in Shanghai, Singapore, or Dubai rather than New York and still serve their worldwide clients. Manufacturing companies can seek out the country with the most advantageous business factors and get their products to a global market as a result of the enormous advances in shipping capacities.

With the rise of the middle class in these once-third-world countries, the populace is better-educated and technologically savvy. Research and development, a United States strength, will accelerate its shift overseas.

By raising taxes, increasing regulations, giving unions (public and private) more power, passing more mandates onto business, and dramatically increasing spending and the power of bureaucrats, this administration will ensure a lack of competitiveness for American business and achieve more equal income distribution by making certain that the standard of living declines for everyone.

The consensus of economic forecasters reveals what may be an overly optimistic average GDP growth rate of 3.1% for the years 2010 to 2015. However, spending by government at all levels (federal, state, and local) will increase an average of 6% per year during this same period, resulting in government spending, for the first time since World War II, being 50% of GDP.

Factoring in the projected growth in population the net per person GDP (total GDP less all government spending) in 2009 made $26,537.00, by 2015 (in 2009 dollars), the net per person GDP will be $23,700.00. The American people will be worse off thanks to the Obama policies.

The United States can never solve its fiscal problems and make certain that the standard of living increases for future generations unless it undertakes to become the foremost haven for investment capital and business activity in the world.

Today, this country is still living off the residue of the economic tidal wave that was the Reagan revolution. But that wave will soon dissipate. Unless policies are put in place that will create the next wave of long-term, high economic growth, the bleak future so many fear will become a reality.