The International Writers Magazine: US Debt

ASSESSING  THE U. S.  SOVEREIGN  DEBT  CRISIS • Barry Mayhew Between 1962 and 2011 Congress increased the debt ceiling an incredible 74 times to the point where today the sovereign debt is a staggering $15 trillion , a sum about equal to the U.S. GDP and, incidentally, close to the current level of consumer debt.

Prologue: The following article is not a statistical analysis of the American debt crisis. That task I will leave to an ivory tower academic or someone on the payroll of  some think tank. This article is rather designed for non academics who are interested in understanding the evolution of  America’s crippling sovereign debt and, more importantly, suggesting several policies and legislative changes that could alleviate the nation’s financial crisis.

It was 1917, the year the U.S. became involved in World War One, that the U.S. Congress introduced debt ceiling legislation. Successive Congresses voted to increase the ceiling, which by the end of World War One, had reached $275 billion. The situation did not become problematic, however, until the Russians launched “Sputnik” in 1957. This event was the stimulus for the so-called “space race” and the U.S. Congress was determined not to allow the Soviet Union to surpass the U.S. in space age technology.

As previously stated between 1962 and 2011 Congress increased the debt ceiling an incredible 74 times to the point where today the sovereign debt is a staggering $15 trillion , a sum about equal to the U.S. GDP and, incidentally, close to the current level of consumer debt.

This is the first time in the history of the world that these three variables have converged. It is now estimated that for every dollar expended by the U.S. government, about 40 cents is borrowed money.
America’s largest creditor nations are China and Japan at slightly more than one trillion dollars each. Should the U.S. ever default on any of its foreign debt, the event would cause unprecedented chaos throughout the global financial community. Such an event is  not expected to occur in the foreseeable future but clearly the point has been reached when America must undertake a plan of action to reduce its present precarious position.

The American people must face the unpleasant prospect that living beyond their means is  not an option that can continue unabated. What then can the federal government do to stem the flow of “red ink” and begin a process to reverse the trend of ever increasing debt?

Clearly, the solution must involve an increase in government revenues, a decrease in government spending or some combination of these two approaches. First lets consider some policies that would result in greater revenues.

An increase in taxation is anathema to a large segment of the American populace. As
the American political scientist Fareed Zakaria stated recently, “Americans have an appetite for entitlements that greatly exceeds their appetite for taxation.” Some new forms of taxation are, however, necessary and could include the following.

1: A general sales tax; much like Canada’s Goods and Services Tax and the Value added (VAT) tax levied by most western European nations would, I believe, be appropriate and reasonable. A rate of five or six percent would not be excessive with exemptions for food and medical related expenses. As someone who has travelled the industrialized world quite extensively I am always surprised (and secretly delighted) at the cost of alcoholic beverages as well as tobacco products in virtually every American state compared with prices in Canada and western Europe. One could expect howls of protest from lobby groups representing distillers, brewers, vintners and tobacco manufacturers but a modest tax (5%) on all retail sales of  liquor, wine, beer and tobacco products would have little if any reduction in aggregate consumer demand and would generate hundreds of billions of  additional tax revenues. 

Implementation of the so-called “Tobin Tax.” Before he passed away in 2002, Yale University economist and Nobel Laureate James Tobin proposed a minimal tax of one per cent (later reduced to 0.5 per cent) on all international currency transactions. Currency trading, the majority of which is undertaken by speculators, accounts for billions of dollars daily and even a minimal percentage tax would generate billions of dollars in additional revenue for the federal government each year. I am of the view, however, that non-speculative currency transactions (i.e. payments for merchandise trade transactions and “invisibles” as well as direct capital investments) should be exempted so as not to discourage legitimate international trade. A small but easily implemented change would involve hedge funds where managers usually receive a commission of two per cent of the total amount invested in the fund, plus 20 per cent of any profits generated in the fund. The often obscene level of income paid to these hedge fund managers are taxed as capital gains; about half  the rate they would pay if their incomes were taxed as regular income. Congress could easily alter the income tax act to bring about this change. Many working class Americans believe that the “super rich” are not contributing their fair share to the tax burden. Once one reaches a certain income level, it is unlikely any incremental increase is going to have any impact on their standard of living. It could be argued that a surtax of perhaps 10 per cent on all annual income over $1,000,000 would not create any hardship on this relatively small group.

Next the Federal government should consider policies and programs that would result in a reduction in government spending.

First, however, let’s examine federal government expenditures as they were in 2010.
Social Security       28%
Interest on the debt 28%
Medicare                 21%
Medicaid                 15%
Remainder                 8%


2: For many years there have been proponents of a more simplified personal income tax model. Not surprising, however, is the opposition to such change from accountants, tax lawyers, financial planners and others who have a vested interest in maintaining the status quo. A simplified income tax system would eliminate the need for thousands of federal bureaucrats now employed by the I.R.S., thereby saving billions of dollars in salaries and employee benefits. In addition, a simplified tax code that eliminated the dozens of “loopholes” for the wealthy, would increase compliance and less cheating that clearly is responsible for billions of dollars in lost government revenues.

Every society has its “sacred cows” and for most Americans, few if any, are more sacred than Social Security. The Social Security Act encompasses a number of individual programs that collectively contribute to the nation’s social safely net but the largest component is the pension provided to many seniors. Clearly, a large proportion of recipients would be in dire financial straits if  this benefit was eliminated. There are, however, hundreds of thousands, probably several million, Americans who amassed a significant  net worth during their working life and for whom a government sponsored pension would be unnecessary. It would be contentious as to what the cut-off point for the elimination of  this benefit should be, but I would support  the proposition whereby a couple with a gross income of $75,000 per annum and a single person receiving $55,000 would be ineligible.

Medical expense entitlements are another, if not a sacred cow, could certainly qualify as a “sacred calf.” Only the most mean spirited individuals would advocate the elimination or even a reduction in the “Medicaid” entitlement. American citizens receiving this benefit are low income folks who would be seriously affected if this benefit were to be reduced. “Medicare,” however, might be worthy of a review. It could be argued that family units with a net worth of say more than five million dollars or an annual income in excess of perhaps $500,000, could have all, or at least a portion of, their entitlement clawed back.

Another issue that has often been raised involves American foreign policy. In addition to the enormous amounts of money involved in military operations abroad, both combat operations and the thousands of troops stationed in overseas locations like S. Korea,  Japan and Europe, there is the perception in the minds of many Americans that the way things are done and the values held within American society should be a model for the rest of the world to emulate. During the past couple of decades, however, this model has been challenged by other political and economic systems. One could also challenge both
the wisdom and the morality of the estimated three trillion dollars spent on the wars in Iraq and Afghanistan.

In summary, there are many American citizens (not to mention the millions of illegal immigrants) receiving a variety of entitlements they really don’t need (or to which they are not legally entitled).  America has a long history of generosity in the area of foreign aid. This generosity is commendable but this may well be the time to re-assess the whole issue of foreign aid.

I’m quite certain there are other policies and legislative changes that could contribute to resolving the American sovereign debt problem. If any readers would like to pass their ideas along to me I would be pleased. Similarly, if you disagree with the ideas put forward in this piece I would welcome your comments.
© Barry Mayhew, Ph.D. July 1st 2012
(barrymayhew@shaw.ca)

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