THE FINANCIAL TSUNAMI

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Contents

Introduction........................................................................................................................................1The Financial Tsunami We need to act before it's too late!.........................................................................................3Fuzzy Math Is it fuzzy or deceptive?...............................................................................................................9Fiscal Responsibility What does it look like?......................................................................................................15Fiscal Responsibility Has Disappeared Where did it go?.............................................................................................21Recessions Are Inevitable They will happen again and again and again...............................................................................27Affordable Housing and the Housing Crisis A failed government mandate..............................................................................33Cash for Clunkers Was the money well spent?........................................................................................................39The Evolution of Taxes Do higher taxes lead to government expansion, or does government expansion lead to higher taxes?............................43Sources of Revenue Is there really a money tree?...................................................................................................47Who Pays and How Much If 47 million filers didn't pay any taxes in 2007, then who did?.............................................................51Taxes and the Deficit Will increasing taxes eliminate the deficit?.................................................................................57Outlays and Their Impact on the National Debt The government loves to spend our money..............................................................63A Need for Balance and Priority Have we failed to invest, or have we just spent unwisely?..........................................................69On-Budget/Off-Budget Deficits and Surpluses Now you see it; now you don't..........................................................................73Intergovernmental Debt is Really Public Debt You can ignore it, but it is not going away...........................................................77Where Does the Money Go? Our nation has a spending problem!........................................................................................85Social Security Trust Fund The good news is that the SSTF has $27 trillion. The bad news is it is invested in government IOUs......................91Medicare It is in very poor health. Don't call the doctor, because we can't afford one.............................................................97It's Time to Sink or Swim We have the ability to stay afloat, but it will require change and sacrifice.............................................103Appendixes..........................................................................................................................................113Notes...............................................................................................................................................121

Chapter One

WE NEED TO ACT BEFORE IT'S TOO LATE!

The following chart illustrates that national debt was practically nonexistent prior to 1970. In 2010, it is projected to be $13,786,615,000,000. In five years, it is expected to increase by 43 percent, to almost $20 trillion.

Decades of fiscal irresponsibility due to excessive spending, inconsistent and irrational tax policies, growth in entitlement programs, government intervention into free markets, and inadequate accounting practices threaten to drown our nation's economy under a wave of debt. While the government has failed to take any meaningful actions to address our mounting debt, the magnitude of the problem has been recognized by the U.S. Government Accountability Office (GAO). The following quote from GAO document GAO-09-405SP, Long-Term Fiscal Outlook March 2009, references long-term simulations that show:

Absent policy actions aimed at reforming the key drivers of our structural deficits-health care spending and social security-the federal government faces unsustainable growth in debt. The longer that action to deal with the federal government's long-term fiscal outlook is delayed, the greater the risk that the eventual changes will be disruptive and destabilizing.

"Disruptive and destabilizing"-how much stronger can the statement be? In addition to alerting us to the potential risk, they also identified the key drivers of the problem as health care and Social Security spending. This is not some historical quote taken out of context; it is both current and relevant and is unfortunately being ignored. Certainly no government agency would make such an alarming statement if they did not believe it to be true. This is not a lone department making this comment. Similar comments have been made by other agencies and in other Trustees Reports, including the Social Security Trustees Report. It is unimaginable that more attention isn't being directed toward these issues.

The wave of debt can be as intimidating as the thousands of line items in the federal budget and the amount of dollars the government is forecasting that it will spend. Gaining a basic understanding of the budget process and government accounting is an arduous task. While the full budget detail may be interesting, the simple fact is that Social Security, Medicare and Medicaid, net interest, and defense spending typically account for approximately 65 percent of all federal spending. These four accounts are the focus of this book, as they represent the greatest risk to the future of the nation's economy. An understanding of the current and future spending in these accounts, along with knowledge of government accounting practices and tax policy, is necessary to comprehend just how ominous the nation's financial outlook really is.

2009 Ranking of National Debt-Top Ten Countries

Country National Debt

United States $13,450,000,000,000 United Kingdom $9,088,000,000,000 Germany $5,208,000,000,000 France $5,021,000,000,000 Netherlands $3,733,000,000,000 Spain $2,410,000,000,000 Italy $2,403,500,000,000 Ireland $2,287,000,000,000 Japan $2,132,000,000,000 Luxembourg $1,994,000,000,000

Since the late 1960s, the United States has been a global leader in fiscal irresponsibility as national debt grew from billions to hundreds of billions. In 1982, a new era of debt was ushered in as we crossed the trillion-dollar debt threshold for the first time. In 1986, only four years later, our national debt surpassed the $2 trillion mark. By 1992 it had exceeded $4 trillion; in 2006 it had grown to $8 trillion; and today it is in excess of $13 trillion.

It doesn't stop there. According to President Obama's 2011 budget, released in February 2010, the national debt is expected to be $24.4 trillion by 2019. As a point of reference, the 2010 budget projected the national debt...