The Obama Tsunami
By Randall Holcombe • Monday April 25, 2011 8:29 AM PDT • 3 Comments
Big numbers can be hard to visualize. What’s the difference between a million and a trillion? They both sound like big numbers, but a trillion is 1,000,000 times bigger than a million.
The terrible earthquake and tsunami in Japan last month helps visualize some big numbers. Surely you’ve seen image after image of the terrible destruction the Japanese have suffered. Recent estimates place the damage suffered in Japan as high as $309 billion. Those images give some indication of how massive destruction of that magnitude is.
Meanwhile, the 2011 federal budget deficit in the United States is about $1.5 trillion, or about five times as large as the damages from those natural disasters in Japan. The Japanese have some major work ahead to pay for the damages those natural disasters inflicted on them. Meanwhile, future taxpayers in the United States will be looking at paying for about five times that much due to the federal government’s borrowing this year alone.
The US economy is about 2.8 times as large as the Japanese economy, so one might argue those numbers are not directly comparable. If the US economy were the size of Japan’s economy, the budget deficit would be only $536 billion, or 1.7 times as large as the damage done by those natural disasters in Japan.
Japan will have to pay to rebuild, but the cost imposed on future US taxpayers from just one year’s budget deficit is still substantially larger than the rebuilding cost in Japan. That should help us to visualize the cost the federal government is imposing on the nation through fiscal irresponsibility.
From a financial standpoint, many of the losses suffered in Japan were covered by insurance, while the entire cost of the US budget deficit will be borne by future taxpayers. But the point of the comparison is to try to make those big budget deficit numbers more understandable. Every year, the US government is inflicting a cost on future taxpayers greater than a huge natural disaster.
The way those deficits are looking right now, some observers have said that if we don’t get the budget under control, we’re going to be like Greece. Let’s think about that a bit further. Greece got a bailout from the EU, mostly thanks to Germany, but in return gave up some fiscal autonomy. Greece is now more under the control of other countries, and less of an independent nation. When we run into the same problems, Germany won’t be able to bail us out. Who will? China?
Am I thinking too far ahead to imagine what kinds of concessions we will be making to China to rescue us from our fiscal irresponsibility?
Tags: Budget and Tax Policy, China, Economics, The State 
Here is a summary of Federal 2010 finances and our government’s promises.
$ 2,200 Federal Tax Revenue (billions)
$ 1,300 Borrowing (the deficit)
—————
$ 3,500 Total Spending
$ 0 Total Saving
$14,500 Entire economy (GDP)
15.2% Federal Taxes as % of Economy
9.0% Borrowing as % of Economy
24.2% Total spending as % of Economy
What if (say) Bob’s family budget operated like the government, in proportion? That gives a feeling for our situation:
$50,000 What Bob can spend from his income
$29,900 Bob borrows this
—————
$79,900 Bob’s spends it all
60% more than Bob’s income
$ 1,400 The GOP cut in proportion
The proposed GOP cut in spending of $61 billion is just 1.8%. For Bob, it would be $1,400.
The federal government has made big promises, far above what it will collect in taxes at current rates.
$75,100 billion ($75.1 trillion) is the amount of a fund which would pay for the unfunded part of promised entitlement programs over the next 75 years, if available today and invested at 3% interest. Of course, there is no such fund, so meeting those promises would require immediately increasing tax revenues by 76% to pay off that “mortgage”, or those promises will be broken.
Don’t take comfort from the 75 year time frame. We are already falling short, being made up by huge borrowings (the deficit). The result of the 75 year analysis is that things will steadily become worse.
Collecting 76% more in taxes might cause or deepen unemployment. Or, increasing tax rates might actually decrease tax revenues if people decided to earn less and pay less. Or, it may be impossible to convince younger people to give up their savings in exchange for the right to charge their children high taxes in turn. I think the promises will be broken.
This problem is huge. The retirees of today and in the future have paid into Social Security thinking that their “insurance premium” will fund part of their retirement. Actually, all of the cash (real resources) has been spent. What remains is only the promise to now tax the non-retired to pay for the retired, at much higher rates. That is not what people thought Social Security would deliver to them.
Promises for Medicare and Medicaid are worse; they are bigger and just as unfunded. What is more kind: to face reality now, or to default on these promises at the last minute?
Unfunded Promises (billions)
7,900 Social Security
22,800 Medicare
35,300 Medicaid
9,100 Federal Debt
75,100 Total Unfunded Promises (billions)
above curent tax collections
2,100 Federal Pensions
3,700 Veteran Benefits
1,600 All Other
—————
7,400 In current budgets (billions)
$82,500 Total Promises (billions)
The unfunded promises of $75,100 billion are 34 times the $2,200 billion in taxes estimated to be collected in accounting year 2010 (the year ending Sep 30, 2011). There is nothing saved or set aside to satisfy those promises, and there is no tax revenue now collected or saved to pay those amounts now and during the next 75 years; that is the meaning of “unfunded”.
Bob’s unfunded promises (in proportion) would be $1,736,000 increasing at 3% yearly, to be paid off in 75 years, over and above Bob’s current, spendable (and already spent) income of $50,000 (current tax collections).
EasyOpinions -> Family Budget
Andrew_M_Garland | Apr 25, 2011 | Reply
Greece got a bailout from the EU...
Even though most all of your readers understand the shorthand you are employing here, I still prefer to see it written out in full:
Greece’s creditors got a bailout from the EU...
Tom Harvey | Apr 25, 2011 | Reply
Thanks for the comment, Tom. Many of those creditors were German banks, and it’s interesting to speculate on why the German government decided to aid the country of Greece, rather than just provide a guarantee to their own banks that were holding Greek government bonds.
Randall Holcombe | Apr 27, 2011 | Reply