That Used to Be Us_ How America Fell Behind in thted and How We Can Come Back - Friedman, Thomas L. & Mandelbaum, Michael [89]
“Read my future for me,” Welles says.
“You haven’t got any,” she replies. “Your future is all used up.”
If we don’t reshape our budgets properly, reducing our soaring deficits but also reinvesting in our formula for greatness, that will be us: a country with its future all used up.
The rest of this chapter is about how we got into this situation and how we get out of it—with a future.
Paint by Numbers
Beginning in the late 1960s, the United States got out of the habit of paying for what the federal government spends with money the government collected through taxes. Year after year, the government ran a deficit. As the annual deficits accumulated, the total national debt grew, although its proportion of the growing American economy did not increase rapidly. It stood at $5.6 trillion in 2001, but over the next nine years it increased dramatically. By 2011, it had reached $14 trillion—the equivalent of the country’s GDP—with the prospect of increasing to $16 trillion by 2012 without countervailing steps.
“Total American general government debt today is at a phenomenal level,” said Kenneth Rogoff, a professor of economics and public policy at Harvard University and formerly the chief economist at the International Monetary Fund. Rogoff is also the co-author with Carmen Reinhart of This Time Is Different: Eight Centuries of Financial Folly, which surveys the history of debt and financial crises. “By our benchmark,” Rogoff added, “when you take local, state, and federal government debt together we are at our all-time high—above 119 percent of GDP. That is even higher than at the end of World War II, which is the only time before now that we have ever been that high … We are at the outer edge of the envelope of the last two hundred years of experience. We look at sixty-six countries in our book, going back over two hundred years, and find that debt levels over 120 percent of GDP are quite exceptional.
And soon it will get worse. The retirement of seventy-eight million baby boomers—Americans born between 1946 and 1964—will cause the costs of the two main entitlement programs, Social Security and Medicare, to skyrocket. Between 2010 and 2020 they are scheduled to rise by 70 and 79 percent, respectively. By 2050, paying for both, plus Medicaid, could take a full 18 percent of everything the United States produces in a year. The actual size of the gap between what the country is pledged to pay out to the boomers over the decades of their retirement and the amount of money the government can expect to collect at current tax rates is a matter of debate, but there is no doubt that that gap, if left untended, is very, very large. Estimates of the gap run as high as a staggering $50 trillion to $75 trillion. (Again, the total GDP of the United States in 2010 was about $14 trillion.)
That’s a lot of money to borrow. To be sure, borrowing money, for an individual, a firm, or a country, is not always a mistake. Indeed, it is justified, even necessary, when the money borrowed is needed to cope with an emergency, such as the economic crisis of 2008. “In the midst of the global financial crisis,” remarked Mohamed El-Erian, the co-CIO of PIMCO, a global investment management firm and one of the world’s largest bond investors, “policymakers took the right decision in using public balance sheets to offset the massive disorderly de-leveraging of private balance sheets—those of banks, companies, and households. To use the phrase of my good friend Paul McCulley, the responsible thing was to be irresponsible.” Borrowing money also makes sense to enhance a nation’s long-term productive capacity because the debt can easily be paid back out of a growing income. A person is well advised to borrow to get an education, a firm to modernize its plant, a country to import cutting-edge technology.
The United States, however, has been borrowing not for investments