Bankrupt by 2020

Obama’s trillion-dollar deficit shows one thing clearly: America’s budget needs a general overhaul – and fast.

When the numbers get so big, people’s imaginations can’t grasp them. President Barack Obama’s budget this year will reach $1.6 trillion. That’s more than 10 percent of America’s annual economic output and roughly equals Mexico’s total GDP. That has never before happened in peacetime. These figures, as frightening as they are, aren’t the real problem. This year’s enormous deficit is largely a product of the past — the great recession and the Bush administration’s fiscal policies.

Measured against these conditions, Obama has actually proposed a reasonable budget. It allows the deficit to continue rising moderately in order to fight unemployment and at the same time it freezes discretionary spending. A bipartisan commission will propose future economies. This is a first step toward fiscal consolidation, but nothing more than that.

The real task starts afterwards and the situation here is far more serious. Obama’s proposed budget reflects the past and the present, but not the future. As far as the future is concerned, we know one thing for sure: It will bring an enormous cost avalanche. As in Germany, the baby-boom generation of the post-war years will begin retiring during this decade, dramatically raising outlays required for Social Security and Medicare. To be more exact, the two most important components of America’s already modest welfare state will go broke in the foreseeable future.

This crisis can only be avoided if spending decreases and taxes go up, but there are no majorities in Washington that favor that approach. The president isn’t the central problem. Congress is to blame, along with the political culture in Washington that makes pragmatic solutions nearly impossible. There is consensus between Republicans and Democrats on just one issue: Everyone wants to keep government services — from the military to social services — but nobody dares ask citizens to pay for them.

Congress’s failure was especially evident on the healthcare issue. Republicans couched their fundamental opposition to it in terms of increased costs while simultaneously mobilizing people’s fears of decreased services. Democrats were happily willing to provide health insurance for everyone but opposed to anything that looked like cost limitation. The result is an ugly legal monster that will, if it’s ever passed, do nothing to halt rising charges by hospitals, physicians and the pharmaceutical industry. What threatens to happen in Washington may already be seen in California: People voted against higher taxes, but the politicians continued spending money they didn’t have. Now the state is, for all intents and purposes, bankrupt.

There are solutions for escaping this budgetary misery; for example, a general value added tax similar to those in Europe or higher fuel taxes paid by all motorists. Both approaches would prove effective and might even produce positive macroeconomic results because they tax consumption and would therefore tend to reduce trade deficits. But since neither approach is considered workable in Washington, they remain only as possibilities to be debated among economic experts.

Even wealthy nations can go bankrupt — that was dramatically shown by the financial crisis. The USA isn’t likely to go bankrupt in the sense that the government would be declared unable to meet financial obligations. But it’s entirely feasible that a situation could develop by the end of this decade that would be nearly as bad for the United States — a mixture of debt crisis, rising interest rates, inflation and further depreciation of the dollar.

The world can only pray that Congress begins taking note of what it’s doing.