Earth to Senator Harkin: We're broke

Senator Harkin says we're not broke. Certainly, spending more will help get us there. Photo: Associated Press

WASHINGTON, D.C., February 16, 2013 — As most Democrats run behind President Obama’s state of the Union address, the message begins to coalesce. As Iowa Senator Tom Harkin says, “Everyone keeps saying we have a spending problem. And when they talk about that, it’s like there’s an assumption that somehow we as a nation are broke. We can’t afford these things any longer. We’re too broke to invest in education and housing and things like that. Well, look at it this way: we’re the richest nation in the history of the world … We have the highest per capita income of any major nation. That kind of begs the question, doesn’t it? If we’re so rich, why are we so broke? Is it a spending problem? No.”  

The senator’s comment begs the questions, “what is ‘rich,’” and “what is a ‘major nation’”? We are undeniably a major nation and have an undeniably enormous gross national income, but income is not wealth.

We are not the richest nation in the history of the world. We may have the highest collective income of any nation, but you and your colleagues, Senator, have indebted us for multiples of our income. We are, thanks to your actions, the most-indebted nation in the history of the world. Debt is not wealth. Debt merely gives the impression of wealth; debt destroys wealth.

So, it depends on what your definition of “broke” is. If you mean that we’re not “broke” because no one is calling our note, you are right. But let’s be clear: If that is your idea of “broke,” should we keep spending until we are broke?

If on the other hand your definition of “broke” is that we are more in debt than any nation in the history of the planet, and that we have no plan – and possibly no way – to pay off our debt, then we are most surely “broke.”

Which is it, and what’s the solution?

If we’re not broke yet because we can spend $2 trillion and still borrow another trillion dollars each year, is it wise to do that until we are broke? Is there some compelling reason why we should continue down a destructive path until we actually reach that destruction?

No one is insisting that we pay back our debt, but we are officially in debt to the tune of more than $16 trillion. If we follow proper accounting procedures and add unfunded liabilities to our debt, then the federal debt alone exceeds $87 trillion. Our unfunded Social Security liabilities now exceed $20 trillion, and unfunded Medicare debt exceeds $42 trillion. More than 100 percent of the payroll taxes dedicated to those programs goes to pay current liabilities, with none left to fund the future.

There’s a trust fund, you say? The Social Security trust fund recieved nonmarketable securities in exchange for tax revenues in excess of benefits paid to current retirees. But as baby-boomers hit the Social Security system like an actuarial tidal wave, the government has had to trade nonmarketable securities for marketable Treasury debt, which the Treasury must sell, and then some, to pay benefits as they come due. Unless China is prepared to absorb those securities, it will be hard to pay out benefits.

It gets better. According to Bill Archer, a former chairman of the House Ways and Means Committee, in order to avoid going further into debt on the accrued expenses of all entitlement programs, the Treasury would have to collect $8 trillion in taxes per year, the average accrued annual liabilities plus the annual cash deficit. 

That doesn’t take into account state and local unfunded liabilities, which add tens of trillions more to the total.

There is no way to deal with this problem by raising taxes. If we confiscated every penny earned by everyone who makes above $60,000 per year and all corporate income, we wouldn’t be able to fund the growth of U.S. liabilities. Should we keep digging this hole, under the assumption that we’ll never have to pay it back because we can’t possibly pay it back? Then we operate under the assumption that we can remain wealthy while our debt tends to infinity.

If we don’t have to pay it back, there is no reason to limit the debt, and if there is no limit to the debt, there is no reason to worry about how much government pays for anything. Carrying this argument further, prices and markets are irrelevant, and in the limit, everything must be made and allocated by decree. That, as the Soviet experiment showed us, is a recipe for endless shortages and a decline into poverty.

It’s important that we change the way that our government does business. It isn’t enough to raise taxes. We must have a plan, and we must want badly to pay our debts. We are broke. Delusion is not a plan. And spending more and borrowing more is not a plan, either.

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Tim Kern

Tim Kern taught economics for fifteen years, and discovered that understanding life is easy; it’s recognizing reality that takes practice. He holds a music degree, and later earned an MBA in finance from Northwestern University. He has lived across the US, and now makes his home in Anderson, Indiana.

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