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Five Budget Realities No Politician Will Talk About

Ron Paul deserves credit for making the boldest proposals of any candidate in the presidential race. The astonishing reality of the federal government’s budget situation, however, is so that even his plans might not be enough to keep Uncle Sam out of bankruptcy. While President Obama offers a $3.8 trillion budget that optimistically might cut the federal deficit to $575 billion by 2018, federal data suggest the United States is already broke. The Federal Reserve estimates that the net value of all private assets, including real estate, stocks, bonds, businesses, cash, etc., is $57 trillion. But the Treasury Department estimates the federal government’s net worth is a negative $61 trillion. Here are five budget realities that no candidate wants to acknowledge: 1. Medicare is America's largest budget burden Through Medicare, the federal government has promised to pay our medical bills when we retire. In return, we pay 1.45 percent of our wages, and employers pay another 1.45 percent. When economists add up expected tax revenue and subtract promised benefits over the next 75 years, discounting future amounts by an assumed interest rate, they find that the government is short by $37 trillion. Federal spending on medical care is the biggest contributor to the government’s budget problems, and many economists believe that even this figure understates the true problem. In Mr. Paul’s economic plan, Medicare spending increases by 20 percent from 2013 to 2016, the same as Mr. Obama proposes. Paul says that his plan “honors our promise to our seniors.” It does, but the promise will be difficult to keep, since Paul also proposes allowing younger workers to opt out of Medicare, which would cut revenue coming into the program. GOP presidential candidate Mitt Romney also promises to “honor our commitments to our seniors” and attacks Obama for cutting Medicare. Romney has made vague promises to save money by raising eligibility ages, but these promises will be difficult to keep after attacking Obama for his own supposed cuts. Democrats are often thought of as the tax-and-spend party as opposed to budget-cutting Republicans, but party affiliation is not a good predictor of the behavior of elected officials. For example, $7 trillion of the $37 trillion Medicare shortfall comes from an initiative of President George W. Bush, Medicare Part D, and under President Obama, the payroll taxes that fund Medicare have been cut. 2. Social Security is fixable, but ignored The gap between promised benefits and expected revenue of Social Security is $9 trillion. In principal, the program could be made solvent with a combination of raising the retirement age, changing the formula for raising benefits over time, and raising payroll taxes. Candidates for president, however, prefer to avoid the issue. Paul promises to “preserve Social Security for those elderly retirees who have come to depend on it.” Mr. Romney also emphasizes that if he is elected there will be “no change for retirees or those near retirement.” Last summer, the president reportedly proposed linking future Social Security benefits to a slower-growing index than the one currently in use, which would have resulted in major savings. The idea went nowhere. Romney now proposes the same thing, but only for wealthy recipients. But since the wealthy receive roughly the same benefits as the middle class from entitlement programs, changing their benefits will save very small amounts of money. In short, no candidate currently offers a specific plan that would significantly reform Social Security. 3. Other government spending: Cuts? Yes. Eliminate deficit? Er... An individual or business with spectacularly negative net worth will be forced to cut spending to match income – once the credit cards run out. The same is true of the US government, but its credit card has a very large limit. Investors around the world appear to be content to loan huge amounts at very low interest rates to fund spending that is currently 56 percent higher than revenue. It seems reasonable to assume that this cannot continue forever, and spending will eventually have to adjust to reality. In this area, Ron Paul is far bolder and more specific than any of his opponents. He proposes large cuts to defense and discretionary spending. But other spending such as Medicare, Social Security, and interest would continue to grow. Paul estimates total federal spending under his plan would be just over $3 trillion in 2016 compared to the $3.6 trillion that was spent in 2011. The Congressional Budget Office projects federal spending of $4.5 trillion in 2016 under Obama’s budget. Whether Paul’s cuts would be enough to avoid deficits and begin to pay down debt, of course, depends on what is collected in taxes. 4. Low taxes: Is the boon overstated? Federal tax revenue today as a percentage of gross domestic product (GDP) is 20 percent below the post-World War II average, while spending is 27 percent above the postwar average. Low taxes certainly boost the economy, but the time will come when bills need to be paid. Every Republican candidate for president proposes lower tax rates. Some, including Romney, have made vague promises to “broaden the base,” meaning that they would close loopholes. At the same time, they propose new tax rules that could open up more loopholes. New plans always carry the risk that clever lawyers and accountants will find ways to use the new rules to pay far less tax than is expected. Lowering tax rates and closing loopholes might promote long-term growth, but closing loopholes will cause short-term pain to formerly protected industries. These industries will fight back, and history suggests that many loopholes will quietly find their way back into the tax code. The result could be a combination of tax preferences and lower rates, meaning much lower revenue. The key to each candidate’s tax plan is what is called “dynamic scoring”: the idea that a streamlined tax code will promote economic growth, which will bring in more revenue. Paul, for example, assumes that revenue under his tax plan will grow at a rate of 7 percent per year. It is certainly true that high tax rates discourage investment, reducing future growth, but the size of this effect is unknown. Economic growth is unpredictable, and if candidates’ rosy assumptions turn out to be wrong, their tax plans will result in much bigger deficits. 5. Growth: If it slows, there's no plan B The biggest elephant in the room that no one wants to acknowledge is the possibility that future economic growth will not be as rapid as it has been in the past. Every candidate makes optimistic assumptions about future growth because they allow candidates to predict balanced budgets with fewer spending cuts. Average real annual GDP growth per capita was nearly 3 percent during the 1960s, just over 2 percent during the 1970s, ’80s, and ’90s, and has been less than 1 percent during the most recent decade. Perhaps we will return to higher growth rates, but there is no guarantee that we will. Perhaps we have already consumed the low-hanging fruit of technological progress, and the pace of innovation will slow. Maybe our older, wealthier population has become less ambitious and less hard-working. The slogan “It’s morning in America” wins elections, but what if it is mid-afternoon? Permanently lower growth rates would require permanently reduced government spending and benefits. As bad as this sounds, slow growth combined with unaffordable government programs would be worse. Rapid, dramatic cuts and tax increases now, with the unemployment rate above 8 percent, would be unwise, but budgetary realities will assert themselves whether we plan for them or not. Committing to a plan now would at least reduce the uncertainty investors feel about how the situation will be resolved, and might even soften the blows that are coming. The country needs a long-term plan that will generate surpluses to pay down debt, even if economic growth turns out to be permanently weaker than it has been. Don’t expect to find such a plan on any candidate’s website. _________________________________ David Barker, "Five Budget Realities No Politician Will Talk About (Even Ron Paul), The Christian Science Monitor, http://www.csmonitor.com/Business/2012/0214/Five-budget-realities-no-politician-will-talk-about-not-even-Ron-Paul/Medicare-is-America-s-largest-budget-burden.
well, I guess that the health care problem is a very serious one! I was expecting something more to be done towards this, but I believe that it will take more time :(
the problem with politicians, no matter the party, is not that they do not know all this, but that they know their public doesn't want to hear it. They want to win an election more than reveal the bitter truth that will have lobbies and opponents both clamoring for their heads
From listening to Ron Paul's older speeches, well before he was elected in a republic candidacy, I agree with Paul in the fact that the U.S. could be spending money in different areas that would eliminate some huge deficits in medicare, especially in the way the U.S. is finally starting to show signs of decreased unemployment rates. I've heard that Obama has spent billions and yet still, we have no real tangible result of eliminating our global debt.
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