There has been a lot of talk about the impact of various government programs on the future debt that will be passed on to our children and grandchildren. Here are the best figures I could find and some observations about the implications of these debt projections as of Mid September, 2009.

When you add up the roughly $11 trillion of federal debt, the disputed  shortfall in Social Security of as much as $13 trillion, an even larger projected deficit of almost $30 trillion for Medicare and various additional unfunded federal obligations, the total estimates of total federal obligations range from $65 trillion to $100+ trillion.  

Except for the $11 trillion of current federal debt, the remainder is an estimate of  the cost (present value) of  various future entitlements. These debt estimates do not include any of the economic "stimulus" spending, nor any increases in  health care costs or other government programs.  And,  these projections are based on optimistic assumptions about future economic growth, employment and inflation. (See Time Magazine for an explanation of the confusing federal budgeting process.)

As mentioned in an earlier issue of this newsletter, one trillion dollars is about $8,000 per household. So $65 trillion would be $520,000 per household. By contrast, the median household income in the U.S. (in 2007) was a little over $50,000. During a working career of 40 years, the total earnings of the average household would be about $2 million -- in constant dollars and without any productivity gains. If the promised entitlement benefits did not increase and were paid through taxes, it would represent a tax of about 25% -- in addition to the taxes that would be needed for other expenses such as interest on the current debt, national defense and other non-entitlement programs. Current Social Security and Medicare taxes of 15.3% (for the employee and the employer combined) would be part of that 25%, resulting in an increase in the tax burden of about 10% over the current level. (To keep this from turning into a very long essay, I'm  not  trying to be exact.)

There are three ways these projected deficits could be funded. One is with higher taxes. The second is with a decrease in the promised benefits. The third is with newly created money from the Federal Reserve and the banking system. 

Although I suspect that the third option is the most likely to be used, I vividly recall that high levels of inflation during the late seventies were brought under control by then Federal Reserve Chairman Paul Volker with the political support of President Reagan. Might we have a change of direction back to a more conservative fiscal policy? 

It could happen if the voters decide to punish the present administration and Congress because of their attempts to introduce a huge increase in government obligations and control. The harder the liberal politicians push today, the greater the chance for a backlash in the 2010 elections. A change back to a Republican administration and Congress isn't likely to put an end to increasing government programs, but it might slow down the  pace somewhat and might delay the impact of much higher levels of inflation.

The point of this little exercise is simply that predicting the future is a lot of fun but it should not be taken too seriously.

Vern Jacobs