Over the last fifty years, the federal government has run budget deficits exactly 90 percent of the time. The American people, however, never seemed very concerned about it. But with the advent of the Great Recession and a quantum jump in the size of the deficits, folks have become truly alarmed. In fact, the federal deficit is one of the main concerns of the Tea Party movement.
One reason debt is such a serious threat is because it can ruin a currency. One man who understands this threat is Vasko Kohlmayer, whose articles have appeared both here at American Thinker and at FrontPageMag. Kohlmayer is a latter-day Cassandra, warning America of imminent doom. And in his August 6 article, "The Death of the Dollar," he again tolls the bell for America's currency. But despite his sound insights, Kohlmayer's conclusion that it's too late to save the dollar is too dire.
So if it's not too late, how would we save the dollar?
If America miraculously were to arrive at a grand consensus that adding more to the federal debt is, say, a mortal danger and that the deficit must be eliminated immediately, it would mean that Congress would need to address a shortfall of $1.471 trillion ASAP. That's the size of this year's federal deficit according to the Mid-Session Review (Table S-1, page 20) put out by the Office of Management and Budget on July 23, 2010. Congress could deal with its huge deficit by cutting spending, raising revenue, or both. But if taking on more debt were seen as a truly existential threat, then Congress should be prepared to erase the deficit by spending cuts alone, if that's what it took. This would mean that Congress would have to operate on current 2010 receipts that total $2.132 trillion. The last year the Feds spent less than that was 2002, when total outlays were $2.010 trillion (Table 1.1).
Congress is spending $3.603 trillion in 2010. So balancing the budget through spending cuts alone would mean Congress would need to cut spending by more than 40 percent. A cut of 41 percent would provide a razor-thin surplus.
A 41-percent cut in spending may seem daunting. But one must appreciate how far we've come since Democrats took over Congress in 2007. If the Mid-Session Review's estimate for this year's deficit holds, then the federal deficit for 2010 will be more than nine times greater than what the Democrats inherited in 2007.
So how would Congress immediately cut spending by 41 percent?
The first place to cut spending is new spending. Congress would summarily cut all the stimulus and initiatives that have started up since January 2007. The unspent stimulus appropriations would remain unspent. ObamaCare would be put on hold. Corporations, pension funds, unions, state and local governments, etc. receiving bailouts would be cut off and have to start living within their means. All pork and earmarks would be quashed. There would be no more giveaways to get folks to buy cars or homes. And any move to bail out homeowners who are underwater would be nipped in the bud.
But cutting new spending wouldn't be enough to get us to balance; we'd need to cut more. So everything must be on the table, including so-called mandatory spending, like entitlements. (If we can't cut entitlements, then the dollar [and America] is indeed doomed, just like Kohlmayer says.)
On the so-called discretionary side of the budget, we would eliminate programs and even entire departments. To keep layoffs at a minimum, there would need to be across-the-board cuts in federal salaries and benefits. (To see what the Feds were spending in 2002, when spending was about equal to 2010's revenue, go here.)
But the Feds have no intention of cutting spending. Indeed, the Mid-Session Review projects that spending for next year will be $3.842 trillion, an increase of $239 billion. (The hits just keep coming.) The Feds think they can balance the budget with tax hikes. Treasury Secretary Geithner wants to let the Bush tax rates for the top two percent expire. But letting the tax rates for the top five percent expire won't add even $83B to next year's receipts. That's assuming the top five percent stay in America.
These dodos in Washington actually think that they can manage the American economy. But they haven't been able to predict squat. None of them saw the housing implosion coming, even though some outside D.C., like Peter Schiff, warned about it. So there's little reason to credit their rosy projections about future government revenue. One hears a lot about shared sacrifice nowadays. But the government is the last to share in the sacrifice. The only thing that's growing now is government. But how many of the "saved" government jobs involve employees taking a pay cut? Some are doing all the sacrificing, losing their jobs, while others are retaining their jobs at full pay, at taxpayer expense. Government wages and benefits are higher than in the private sector, even though the private sector finances government.
Kohlmayer warns of the moment of truth, when "the inflow from abroad will stop." That's when foreigners stop buying American treasuries. At that point, the Feds will have two options. They could create more dollars, in which case soaring inflation would kill the dollar (move over, Zimbabwe). Or Congress could balance the budget -- match spending with revenue and run no deficit. Rather than wait for financial Armageddon, what we're suggesting here is that Congress take that second option now. Would it really be so unthinkable to go back to 2002 spending levels?
The obstacles to initiating serious spending cuts in the federal budget are enormous. Even getting the deficit down to twelve digits would be difficult. (That's one trillion dollars minus a dollar.) But the first order of business is new leadership. We can make a down payment on that in November by electing a new Congress. But even if "spending cutters" won every race, there would still not be enough of them in the Senate to override a presidential veto.
Assuming that the electorate can someday get a decent government in D.C., there would remain another formidable obstacle -- us.
The American people are increasingly dependent on government. And not only that, they expect someone else to pay for their government goodies. About half are net tax-users. That is, they get more back from government than they put in paying taxes. So those who will have their entitlements cut the most will be the very ones who have paid the most into them. We're talking about means testing. Social Security and Medicare need to become more like welfare if we are to cut spending.
Social Security's top monthly benefit is $2,346. America can no longer afford to send $28,152 per year to well-off retirees. These checks need to be pared back. It's unfair, but the budget must be balanced on the backs of the top half.
The blowback from retirees, special interests, government employees, and unions in balancing the budget will be fierce. That's why we stipulated a grand consensus above. But a consensus is often arrived at too late, after catastrophe.
The Congress that balances the budget may well end up being a sacrificial Congress, in that they could lose their jobs. But we must all share in the sacrifice if we are to bring solvency back to federal ledgers and save our currency.