The United States crises

The United States, though being the wealthiest, most influential and most powerful country in the world, for all its strengths, has its weaknesses as well. Being an economist, I want to discuss three points in particular that I’m worried about concerning the U.S’s future and status as a superpower. In this article, I argue that if the U.S government keeps on maintaining the same policies as the last 20 years, it will gradually wane and may even go bankrupt.

1) Medicare, Social security, and healthcare expenditure: Right now, it is projected that over 77 million baby boomers will retire within the next 2 decades. This will have a dramatic affect on the cost of Medicare and Social security. The congressional budget office predicts that if we maintain the same level of health care benefits, health care costs will soar to about 40% of government spending in 2020 and gradually cause the U.S debt level to be 100% of its GDP, if we extend it to 2085, the projection is that debt will reach 600% (!) of U.S GDP. That is truly a scary number. It is directly a result of a pay-as-you go system, where seniors retire and push the costs of their retirement to future generations. To close the fiscal gap, the solution is to cut medicare benefits by 2/3s (a scary thought), double income taxes (another scary thought) or cut government spending by 134% (not feasible nor possible). Another solution is to privatize social security and medicare entirely, or to raise retirement age to around 70. Either way, something has to be done in the near future.

2) Taxes: Despite Americans thinking that they pay too much tax, actually from an economists point of view, they don’t pay enough. The optimal amount of marginal tax rate in the highest bracket is determined to be about 40-50% (where marginal revenue is equal to marginal benefit). Right now, with the Bush tax cuts, they are about 35%. When you compare taxes in the U.S to that of Canada or Europe, Americans actually pay much less tax. Another thing is that the U.S has no VAT (value added tax) at the federal level. Some states have no income tax, no sales tax, or both. The US provides farm and gas subsidies that are much higher than other developed countries (which is same thing as not getting enough tax). All these low taxes have the effect of not producing enough revenue for the government. As a result, we run into the same problems as in 1), how can the federal government or state government pay for retirement and healthcare benefits without having enough tax revenue. At current levels, clearly it’s unsustainable, and its clear that eventually taxes will have to be raised.

3) Pensions: State governments are in crisis right now, not only is the country in a recession, but they have to pay large amounts of pension benefits to many people, part of this is due to a loophole where the highest salaried government job determines what pension you get. As a result, people can ‘double dip’ and earn six figures while also receiving six figure pensions. Clearly this is unsustainable, and the reason why many states are on the brink of defaulting. California for example, has already had to slash its budget on many expenditures such as education, raise tuition levels, etc, and it’s still in a big hole. Again, mostly because of unsustainable pension payouts. New Jersey is predicted to be the first state to default, according to its expenditures, in the next decade, pension payouts will constitute 100% of the state expenditure (!).

All of these points raise truly terrifying prospects for the future generation of Americans. The situation in the U.S is bleaker than that of many other developing countries, because of the way Americans have been living on a life of low taxes, a pay as you go health care system, and broken pension costs. Eventually these issues will have to be dealt with, if politics prevent any of these solutions that I mentioned, then the U.S will be on its way to bankruptcy, and having unimaginable debt levels. Truly, something will have to give eventually, it’s only a matter of time. Let us hope that politicians will (eventually) put country ahead of politics, and aim to reform the broken pension, health care, and tax systems.

Edit: Now that it’s certain that current tax rates will continue (actually lower because of the 2% reduction in payroll taxes), the projected deficit with current spending levels and tax rates is projected to be $55 trillion by the time that a person my age will retire (around 2050).

L.J. Kotlikoff, 2006, “Is the United States bankrupt?” Federal Reserve Bank of St. Louis Review, 235-250.
Alan Auerbach, “Deja vu all over again: On the dismal prospects for the federal budget”, NTJ 2010.


7 responses to “The United States crises”

  1. Stephanie Avatar

    As a voting American, I totally agree with you. The country is quite in trouble, and sometimes I wish that I could storm into Washington, yell at Congress, and strangle each and every one that’s spewing bullshit everywhere.

    And the problem is, if you follow the news with some logic and reason in your head, the politicians are playing politics and not doing much else. The ones that are trying to do good things are being shut out by louder people who renounce them. The country’s millionaires have been telling the politicians that they (the millionaires) should be paying much higher taxes. However, with the Republicans wanting to extend the Bush tax cuts for the wealthiest class, who knows what will happen? I’ll just be glad that I didn’t vote for any of them.

    But if we look at the profile of the country, with 50% pretty poorly educated, with people who want instant change (which never happens), I’m not surprised that any of this has happened. Yeah, I’m bitter. But there’s not much I can do now. Starting my own political movement? I’d rather build robots.

  2. Tong Zou Avatar

    All goes to show it really doesn’t matter who’s in office or which party you vote for. Republican, Democrat, Obama, Bush, doesn’t matter, because the problems are going to be the same either way. The solutions are going to be different, but with Republicans so unwilling to raise taxes and Democrats so unwilling to cut spending, who knows when a true solution will ever come up.

  3. Stephanie Avatar

    Finally found this link after a few days. I think that you’d be interested. Fixing the deficit would be easy if people weren’t as silly:

  4. Tong Zou Avatar

    Wow, thanks for that link! Yes, now only if Congress can actually get their act together and do some of that… but with Republicans blocking any legislation until tax breaks are extended for rich people, I don’t know how that’s ever gonna happen…

  5. Vera Avatar

    I wish I could contribute something intelligent to this, but… my own country is in such deep… um malarkey, that whenever I see problems like these I always feel like saying “if only I had such issues” 😛

    I’m a bit confused about the medical care expenditure. Granted most of my knowledge comes from watching Michael Moore’s Sicko (hides from rotten tomatoes), but I was under the impression that US medical care was already owned by the private sector? And that the Obama administration was doing something to fix this? Or did I get this wrong? Heh, probably… >_>

  6. Tong Zou Avatar

    Hey thanks for responding. The US health care insurance is mostly provided by private companies except for poor people and people over age 65, which the government provides health care programs called Medicaid and Medicare, respectively. Contrary to what most people believe, if the US switches to a single payer system like Canada, they will actually be saving more money in the long run than with privatized health care.

  7. Emily Avatar

    I believe that no matter what, we’re screwed. It just doesn’t feel like any solutions will have a good effect on people because there will always be problems. To me, people can come up to solutions, but nothing seems to get done because people can’t agree on anything and there’s always the issues with funding or other issues that may arise.

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