Northern Light: Lessons for America from Canada's Fiscal Fix. Robert P. Murphy

acknowledge that the debt owed by the government to the public – in this case, future Social Security beneficiaries – suddenly becomes $2.7 trillion higher.

      From a unified budgetary perspective (disregarding IOUs issued by the Treasury to other parts of the US government), the latest Trustees Report estimates that the Hospital Insurance (HI), Supplemental Medical Insurance (SMI), and Old Age, Survivors, and Disability Insurance (OASDI) programs – constituting what the public knows as Medicare and Social Security – over the next 75 years will have a massive shortfall in anticipated payroll contributions relative to expected beneficiary payments. The present discounted value of these combined shortfalls is a staggering $38.6 trillion. ¹³

      What this figure means is that if the US government wanted to set aside a pile of money earning interest so that it could have a fund on which to draw whenever it had to pay out more in Social Security and Medicare claims than it collected in payroll contributions, then the government today would need a pile of $38.6 trillion, in order to satisfy current benefits scales for the next 75 years. Keep in mind that this figure assumes workers and employers would still have the standard amounts deducted from each paycheck over the next 75 years. The problem is that changing demographics will make the promised benefit payments rise so much faster, such that a fund of $38.6 trillion today, rolling over at the discount rate used in the projections, would be necessary to augment the shortfall each year and get through the 75-year forecast horizon. Note that the magnitude of these unfunded entitlement liabilities is more than double the total US GDP in 2011.

      It should be noted that the unfunded entitlement obligations, though liabilities of the federal government in an accounting sense, are not counted in the official measures of gross government debt. In other words, the government’s $39 trillion debt that has currently accrued vis-à-vis Medicare and Social Security is in addition to the outstanding $10 trillion in Treasury securities held by the public. As time passes, and the Treasury must meet Medicare and Social Security cash flow shortfalls through the drawing down of Trust Fund holdings, the implicit entitlement debt will become explicit debt obligations owed to outside holders of Treasury securities. The point, however, is that current estimates of “the federal debt” typically focus only on outstanding Treasury securities, a practice that grossly understates the true fiscal crisis facing the US government.

      The Centralization of Federal Power

      Earlier we showed the general increase in federal spending, tax collection, and debt issuance over the 20th and 21st centuries. However, not only has the federal government grown faster than the private sector, it has also grown relative to state and local governments. In other words, the US trend toward bigger government has gone hand in hand with a trend toward more centralized government in Washington, D.C.

      As with spending, on the taxation side the federal government has grown relative to state and local governments. In 1929, the federal government collected 35 percent of all receipts, while in 2011 the figure was 54 percent.

      For instance, federal spending has gradually consumed a larger share of total government spending in the United States, even disregarding the temporary surge in federal spending during World War II. In 1929, federal spending constituted only 26 percent of total government spending, whereas by 2011 it constituted 63 percent.

      As with spending, on the taxation side the federal government has also grown relative to state and local governments. In 1929, the federal government collected 35 percent of all receipts, while in 2011 the figure was 54 percent. If revenue and spending are measures of power and influence, then clearly Washington has gathered more power to itself in recent decades, whether it is relative to the private economy or to state and local governments.

      Summary

      In the first chapter, we have summarized the fiscal hole into which the United States government has dug itself. Unless something is done – and soon – the federal government will be trapped in a runaway cycle of mushrooming debt, as interest costs and entitlement spending grow faster than what the taxpayers can support.

      Fortunately, there is a way out of this crisis. Smart reforms can turn the fiscal crisis around with remarkable speed, and without harming economic growth or worsening the plight of the unemployed. Canada in the mid-1990s faced a fiscal crisis in many respects worse than that of the United States today, and yet it managed to escape from the debt spiral. In Part II of the book we explain the Canadian success story.