The song "Sixteen Tons" sung by Tennessee Ernie Ford reached No. 1 in the Billboard charts in 1955. With apologies, here is my slightly different rendition:
Big budget deficits and what do you get?
Another day older and deeper in debt.
Children, don't you call out, 'cause we don't care;
We'll be long gone and you'll pay our share.
That verse just about sums up the situation here in the United States with our trillion-dollar federal budget deficits and soaring debt. Not so long ago it was joked "a billion here, a billion there; pretty soon you're talking serious money." Now we are into trillions. And Congress is patting itself on the back for cutting a measly $4 billion out of the $3.7 trillion 2011 budget and considering another $60 billion. Come on guys, get real.
Try to get your head around these figures. The Wall Street Journal reports that this year's $1.6 trillion budget deficit will result in government spending at 25.3 percent of GDP, the highest in any year since 1945. Federal debt held by the public will be at 75 percent of GDP, the highest since 1951 and double the 2007 level.
We will soon be bumping up against the national debt ceiling of $14.3 trillion. Since the annual output of the U.S. economy (GDP) was $14.7 trillion in 2010, some of the math wizards out there might think, "Wait a minute, debt ($14.3trillion) divided by GDP ($14.7trillion) is 97 percent, not the 75 percent quoted in the Journal; what gives?"
The Journal and many analysts use "debt held by the public," but that excludes all the debt in the various trust funds like Social Security. I know I'm getting deep in the weeds here, but it's an important distinction. Remember, for years Social Security took in more money than it paid out. The government took that money and spent it and issued debt to these trust funds. That debt is not counted as debt held by the public.
Now Social Security is beginning to run deficits and will have to be redeeming some of these bonds to make payments. Debt is debt and an obligation that must be repaid, whether it is to foreigners or the Social Security Trust Fund.
The point is that by my way of thinking our debt to GDP is 97 percent, not 75 percent. And that is dangerous territory, according to Rogoff and Reinhart, who have written the definitive book on debt crisis called "This Time is Different."
The authors review 800 years of financial crises and find that countries with debt-to-GDP over 90 percent have notably weaker economic growth and experience much higher inflation than countries with smaller debt burdens. Some of them default.
Now maybe "this time is different" (the four most dangerous words in the investment profession) and the U.S. can handle these higher debt levels. But why take the chance?
Some politicians are silently invoking St. Augustine's famous line, "Lord make me chaste, but just not yet." They claim to want to reduce the deficit but the economy is too weak. Wait until next year, they say. They also tend to demonize the other side as budget cutters who lack compassion.
But is it compassionate to spend what we don't have, expecting the next generation to pay for it?
We have to tackle the deficit and especially the entitlement programs like Social Security and Medicare now. President Obama's fiscal commission argued for long-term deficit reduction via one-third tax increases and two-thirds spending cuts. So far the president has preferred to kick the can down the road past the 2012 elections. That's not leadership.
The United States is living beyond its means and paying for it by going deeper in debt. The current generation is living high on the hog at the expense of future generations.
Alaska may be doing the same by essentially living for today off nonrenewable assets. But that is the subject of another essay.
Jeff Pantages is an investment adviser who lives in Anchorage.
By JEFF PANTAGES