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Brooks Wilson's Economics Blog: Growing Deficits

Thursday, April 8, 2010

Growing Deficits

As is often the case, the financial crisis is morphing into a government debt crisis which is made worse by America's aging population.  At both the federal and state level, our elected officials have enticed our votes by making promises of services that they cannot deliver.  A study commissioned by Governor Arnold Schwarzenegger and prepared by graduate students at Stanford University estimates that California's public pension funds are underfunded by more than $500 billion ("Study: California Public Pensions Underfunded by Over $500B").  The 2009 Social Security and Medicare Trustees Reports show combined unfunded liability of almost $107 trillion dollars ("Social Security and Medicare Projections: 2009").  General revenue transfers to Social Security and Medicare were projected to rise from 13% of tax revenues in 2010 to 27% in 2020 before health care reform. 

Federal Reserve Chairman Ben Bernanke said that voters faced a choice between higher taxes or lower services ("US faces 'difficult' tax choices: Bernanke").
"Inevitably, addressing the fiscal challenges posed by an aging population will require a willingness to make difficult choices,"

"To avoid large and unsustainable budget deficits, the nation will ultimately have to choose among higher taxes, modifications to entitlement programs such as Social Security and Medicare, less spending on everything else from education to defense, or some combination of the above."
Solutions that introduce strong market elements such as medical savings accounts and a private retirement option funded from social security payments are the only type of options that can both reduce costs and improve products.  Markets produce better products at a lower cost over time.  Compare mp3 players to a transistor radio, or a 1985 Ford to a 2010 Ford as examples.  Solutions that rely on government directed programs will either reduce services by political choice or, given the reluctance of elected representatives to cut services, increase government deficits.  Higher taxes combined with bigger deficits will limit economic growth. 
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