Bigger Cliffs Await Us And Soon

If we can't honestly solve the mini-cliff we just experienced what hope have we when the real cliffs arrive?

[/i]Discussion of the so-called fiscal cliff has sucked so much air out of the room that many people don't realize it's not the biggest thing we face as a nation. Indeed, many challenges loom. Will we be up to them?

The way the talks surrounding the cliff were handled doesn't inspire confidence. And the "deal" that avoids the cliff — more tax hikes, higher spending, no cuts at all — is the worst possible.

This was entirely a political crisis — not an economic or even fiscal one.

The Democrats created it in 2003 by refusing to make President Bush's tax cuts permanent. Ever since, they have used the threat of tax hikes on a broad swath of Americans as a political bludgeon against the Republicans.

It's worked. Despite being an entirely Democratic contrivance, the fiscal cliff is blamed by a majority of Americans on the GOP — kind of like blaming the firemen who try to put out a fire for starting the blaze in the first place.

Even after resolving the cliff issue, America can't rest easy. Major issues remain outstanding that either must be dealt with in the coming year or at least begin to be addressed. And all have at least one thing in common: They are components of the sustained surge in spending at the federal level that threatens the economic health of our nation for decades to come.

Following are five key challenges that demand our attention in the new year:

• Entitlements. As noted here recently, this is no longer an issue that can be put off — one in which the problems are years in the future. Thanks to the failure of Obamanomics and the stagnation and poor job creation this administration has brought us, Medicare and Social Security are nearing bankruptcy.

After a surplus of more than $50 billion as recently as 2007, Social Security ran a 2012 deficit of $47.8 billion. All told, $2.68 trillion is left in the Social Security "trust fund." Unfortunately, those "funds" aren't real investments; they're IOUs printed by the government.

Successive Congresses and presidents have raided all the money going into Social Security's coffers and used it for other purposes. If the trust fund were in the private sector, those who run it would be arrested for fraud. Think Bernie Madoff managing trillions.

As bad as Social Security is, Medicare is even worse. Its deficits will get downright scary, and soon.

Over the next quarter-century, Medicare will account for more than a quarter of federal spending growth. By that time, according to data from the program's trustees, the average Medicare recipient will have paid out $87,000 in payroll taxes in exchange for $251,000 in medical care.

The $164,000 difference will be dropped on the recipients' children and grandchildren in the form of higher government debt and taxes.

In 2010, some 47 million Americans were on Medicare; by 2030, that climbs to 80 million. Meanwhile, the ratio of workers to beneficiaries will fall from 3.7-to-1 to just 2.4-to-1. As a result, Medicare alone will add nearly $50 trillion to our accumulated deficits over the next 75 years. It threatens financial ruin for the health care sector.

Taken together, the soaring spending of the nation's two largest entitlement programs will lead America to a kind of European-style bankruptcy, in which the government has made promises that its revenues can't possibly fulfill — even by building mountains of debt and by jacking up taxes to sky-high levels.

It's unfortunate that the future deficits built into these programs never officially get recognized. Such "unfunded liabilities," we pretend, just don't exist.

And yet, as recent estimates show, U.S. entitlement spending will leave us $87 trillion in the hole over the next 75 years — an amount so staggering, at almost six times our total current gross domestic product, it's almost impossible to ponder paying it off.

Addressing this explosion of entitlement spending will be the government's No. 1 task in this and coming years.

If the U.S. doesn't address these problems soon, we will be forced by fiscal reality to slash spending indiscriminately later — rather than wisely now.

• Deficits and debt. Tied intimately to the entitlement issue is our annual debate over deficits and debt. Budget deficits are projected to add more than $10 trillion to U.S. debt over the next decade. The speed at which our national debt is building as a result of these deficits is alarming.

This year, total debt hit $16 trillion — well more than our entire $15 trillion or so in gross domestic product.

The most extensive study ever of the impact that debt has on economies was conducted by economists Carmen Reinhart and Kenneth Rogoff.

Their study of 44 countries over 200 years found a rise in debt-to-GDP ratio above 90% correlates with a decline in economic growth of about 1%.

That's relevant, since the U.S. has, in recent years, surged above 100% on that measure — meaning that hundreds of billions of dollars are being channeled to buy government debt that fuels wasteful federal spending instead of private-sector investments that fuel economic growth. By 2022, we'll likely have $25 trillion or more in debt.

What's behind all these deficits and debt? Spending, of course. Obama increased expenditures as part of his failed Keynesian "stimulus" from roughly 20% of GDP to over 24% — for a real increase in spending of 25% relative to the economy.

If given the chance, he'll lift it even higher. Pity. Not only has he not addressed this spending — remember his repeated vows on the campaign trail to make $2.50 of spending cuts for every $1 in tax hikes? — in the recent fiscal cliff talks he has ignored cuts almost entirely.

Our debt and deficit problems will not be solved by "taxing the rich," as Obama has suggested.

As the great economist Walter Williams notes, even if you collected every penny of what those who earn more than $250,000 make, you would bring in only $1.9 trillion — enough to run the country for just 190 days.

Fact is, not enough rich people are in this country to fund our bloated government.

Solving this problem would be simple: Go back to the 2008 baseline and return U.S. spending to that track — not to the swollen one we're on. If that were done, even the meager current 2% annual expansion in the economy would create enough revenue growth to push the U.S. deficit down close to being balanced within a decade.[/i]

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If this issue isn't addressed, Obama and Congress will have taken the U.S. down the road to bankruptcy.

• ObamaCare. It's here. Now. Sure, it doesn't fully go into effect until 2014, but the taxing and state-by-state preparation begin the first day of 2013. The program will cost at least $1.2 trillion over the next decade — and costs will explode from there.

To pay for it, 18 new taxes have been imposed on Americans, including levies on medical device makers and small businesses that decide not to cover their employees. These taxes will total at least $800 billion, a massive tax hike that will hurt businesses and hamper economic growth.

ObamaCare also increases the Medicare tax by nearly 1% — then counts the revenues from that tax hike twice, pretending the whole amount goes to fund Medicare and increase general budget revenues.

Worse, ObamaCare will carve more than $570 billion out of Medicare — meaning that program will go bankrupt a lot sooner.

Perhaps worst of all, the new Independent Payment Advisory Board — an unelected body — will make sweeping decisions about what is covered. In short, the government will replace patients and doctors in deciding who gets care — and what care they get.

This is a law that never should have been passed. A recent Rasmussen poll showed 56% of Americans favor repealing it, and our own IBD/TIPP polls have shown much the same.

• Housing. The post-crisis Dodd-Frank "reforms" were supposed to fix our housing problems, but in fact may have made them worse. That's because, as recent research clearly shows, the problem wasn't Wall Street "greed," as Democrats in Congress would have it.

The problem was and remains government meddling in the housing market, through the Community Reinvestment Act (CRA), Housing and Urban Development, Fannie Mae and Freddie Mac, and the Federal Housing Administration.

Democrats are in massive denial about this.

Americans should understand that the problem hasn't been solved — the federal government caused the problem and continues to distort the market by encouraging those who can't afford homes to buy them and forcing banks to make loans that aren't sound to low-income borrowers.

A new study by the National Bureau of Economic Research, the nation's pre-eminent economic research group, states that the CRA "clearly" had a major impact on the flood of subprime loans made in the late 1990s and early 2000s, which directly led to the housing crisis. And, no, it wasn't greedy bankers.

It was HUD that ordered Fannie and Freddie to back trillions of dollars of subprime loans to minority borrowers. Most of those loans, now owned by American taxpayers, will never be paid back.

And yet Obama persists in this policy madness. The government has continued to use the CRA to justify its perpetual involvement in the mortgage market. Today, taxpayer-backed Fannie Mae and Freddie Mac — which have already stuck taxpayers with $160 billion in costs — still back more than 90% of all new mortgage loans.

• Regulation. If soaring deficits and taxes are the fiscal cliff, then regulation is the silent cliff. Federal rules on businesses and individuals cost the economy nearly $1.8 trillion every year — and yet little is ever done about them.

Total costs have soared under Obama, who has become the most activist president in recent years when it comes to regulations.

A recent study by the Heritage Foundation noted that President Bush added $8.1 billion a year in new regulatory costs during his first three years. Obama? He added $46 billion a year, or nearly six times as much.

As we have noted, the total regulatory toll for small businesses today is $11,000 per employee. Since small businesses account for 80% to 85% of all new hiring and with the regulatory burden growing fast, it's not hard to see why job growth has slowed to a crawl.

Worse, the surge in new regulation hands power to unelected bureaucrats — diminishing our democracy and reducing Americans' faith in their own government.

Those are what we see as the five major challenges facing America as we enter a new year.

To us, the real question behind these challenges isn't whether they can be addressed, but whether the Democrat-dominated Senate and Obama will have the courage to do what's necessary — or whether they'll continue to inhabit that special liberal fantasyland in which economic reality is denied and our nation's history as a constitutional republic is derided.

The signs aren't positive. The Senate under Majority Leader Harry Reid has steadfastly refused to even pass a budget — something that's required by law but which Reid and his Democratic fellows simply won't do.

Nor have they tried in any way to come to bipartisan compromises on the difficult issues that face us.

From ObamaCare to tax policy, the Democratic governing majority has sought to ram things down Americans' throats with little or no input from the political opposition.

Without major change, America is in for a bumpy ride.

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