Monday, 14 November 2011

What About the US?

With Europe heading for massive defaults and economic contraction, what is the future for the US?

Weakness in Europe will not be a plus, but more fundamental problems await the US. Our debt situation is worse than the situation currently plaguing the Eurozone. Yes, our situation is worse.

The various "states" of Europe have unsustainable levels of debt, just as most of the larger states in the US have unsustainable levels of debt (Illinois, California, New York, New Jersey, etc.). But Europe does not have a federal debt problem. The Eurozone does not issue it's own debt. The US does. So, the US has sovereign debt at two levels -- the federal level and the state level, while the Eurozone has sovereign debt only at the "state" level.

No amount of cuts and tax increases will have any impact whatever on the dynamics of US debt. Thus, the current discussion about the Supercommittee is largely irrelevant. (Democrats have pretty much admitted that by listing as $ 1 Trillion in cuts the cuts from "not fighting future undeclared wars!)"

The problem of US federal debt is an entitlement problem and has an easy solution -- a very easy solution, an almost trivial solution. Moving the age of eligibility out a few years for both social security and medicare is the one and only solution that will have any impact whatsoever on our national debt problems (and scaling back medicaid). Nothing else really moves the (long term) needle at all.

As for the states, the states' problem is a problem of the benefits or "entitlements" that they provide for their public employees. Moving the age of "eligibility" out and substantially reducing the benefits for those not currently retired is the only way of moving the needle for the problems of the states (and municipalities). Nothing else really matters at all.

All the talk about tax increases and reducing (discretionary) spending is largely beside the point. Whatever virtues or vices there may be in altering the tax system and reducing the levels of discretionary spending, such tinkering does not make any difference at all in the long run debt dynamics of the US.

The numbers are the numbers.

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