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OUR GOVERNMENT SPENDING CRISIS

from Oregon Senator Doug Whitsett 1/21/11
 
States, nations and families cannot endure that continue to spend more than they earn. Americans appear to have learned that lesson. The average family’s savings are on the increase in spite of the worst recession since the 1930’s. Sadly, governments have not responded as intelligently

THE STATES

Between 2002 and 2007 the sum of American population plus private sector inflation increased 19%. The total revenue collected and spent by all 50 states grew 81% during that same time period.  Collectively, the states spent more than four times more than was needed to maintain their existing programs at normal population plus inflation cost levels. Keep in mind, this increased spending came during a time of low unemployment and falling social needs.

 Oregon’s general fund and lottery revenue grew 42% from $10.6 billion to $15.1 billion during that period. Our increase in State spending was near the national average when federal funding and revenue from charges, fees, licenses and registrations are included. Many of us argued long and hard that this rate of spending was both unsustainable and counterproductive to our economy. Unfortunately, we were unable to garner enough votes to curtail the spending binge.

 Virtually all of our State reserves and nearly $1 billion in federal grant money were spent during the current budget cycle to maintain and continue to grow the many programs that were created during those boom years. The State has borrowed virtually up to its credit limit. We are now facing a gigantic structural budget deficit because we spent far beyond our means. The $12.5 billion in general fund and lottery revenue that appears to be available to spend in the next budget cycle is about $3.5 billion short of the amount needed to continue all State programs at current service levels. We must reduce State spending about $1,000 per Oregon resident in order to balance out State budget.

 Both Governor Kulongoski and Governor Kitzhaber have now acknowledged the current structural budget deficit. They accept the fact that the deficit will continue at least a decade into the future. They have stated their understanding that both the current size, and the future rate of spending growth, must be sharply reduced.  I share their resolve to reshape Oregon government into a smaller, more focused and more efficient enterprise.

THE NATION

United States sovereign debt passed the fourteen trillion dollar threshold last week. To put that enormous sum of money into perspective, it calculates to $46,000 for each man, women and child living in the United States today….more than $180,000 of debt for each family of four. The interest on that debt alone will exceed $11,000 per each U.S. resident this year. The principle and interest payments required to pay that debt back over the next 20 years exceeds $300,000 for each American family of four. Each family would have to pay $1,300 per month for the next twenty years to retire their share of the debt.

 As recently as 2008, our sovereign debt held at five trillion eight hundred billion dollars, or about 40% of our gross domestic product (GDP). Two years later, at the end of fiscal year 2010, the debt reached nine trillion dollars, or about 62% of GDP. The debt will reach the fourteen trillion three hundred billion dollar federal debt ceiling in early March of this year according to the national debt clock. It is rapidly approaching 100% of our fourteen trillion six hundred billion dollar GDP. Incredibly, the growth of our sovereign debt by $300 billion dollars in only two months calculates to an increase of about $500 in additional debt per person each month.

Recent news reports state that bond rating agencies such as Moodys, Fitch, and Standard and Poors, are seriously contemplating downgrading the rating of U.S. Treasury bonds. The rating agencies recognize that both the total amount, as well as the rate of increase, in our sovereign debt is simply unsustainable. They can calculate that our national debt per capita as well as our national debt to GDP ratios, are substantially worse than those of Portugal, Ireland, Greece, Spain and other European countries, whose economies are on the verge of collapse.

We may expect that the interest rate on U. S. treasury bonds will increase if the bond ratings are downgraded. The increase in the interest rate will be commensurate with the increased risk of default. The U.S. government will pay higher interest rates to borrow money just like families with poor credit histories must pay higher interest rates because they are more likely not to pay their debt.

Much of the U.S. sovereign debt is held in relatively short term treasury bonds. Those short term bonds must be periodically refinanced at the interest rates that are available when the bonds mature and must be repaid. This is very similar to a home mortgage, creatively financed at a very low, short term interest rate. The mortgage must either be paid in full, or it must be refinanced at the market interest rate, when the mortgage term expires. The only alternative is default on the mortgage debt.

The total interest costs on the short term U.S. treasury bonds may be expected to increase significantly as they are refinanced at higher interest rates. Like the home mortgage, the U.S government’s only choices will be to either pay the higher interest rates to refinance the bonds, to pay off the bond principle, or to default on the debt. The rating agencies note that the U.S government continues to borrow nearly $10 billion dollars per day, through issuing short term treasury bonds,  and they rightfully conclude that paying back these vast sums of money, along with increased interest costs, may be problematic.

The rating agencies also recognize that government borrowing and spending is actually a form of taxation that reduces output, employment and production. Our private sector economy is actually being smothered by all that government borrowing and spending.  Moreover, the agencies know that significant private sector economic growth will be required if our nation has any hope of paying the debt service on the more than fourteen trillion dollars that we owe. Unfortunately, the current tax, borrow and spend mentality is preventing that critical growth in GPD.

Recent U.S. history demonstrates that our people prosper, and that GDP grows rapidly, when federal government spending is reduced. For example, at the end of World War II in 1945, federal government spending reached more than thirty percent of gross domestic product. That spending was reduced to about fourteen percent of GDP by 1948.The private sector economy grew at the rate of
seven and one half percent each year during that same period and continued its rapid expansion for more than a decade.

 The ratio of federal government spending to gross domestic product was reduced by four percent between 1992 and 2000. Federal borrowing was curtailed and the expansion of debt slowed. The growth in the private sector economy was second only to the boom years following WWII during that period.

Congress will be voting soon on whether to raise the federal debt ceiling. Default on existing debt will almost certainly occur if Congress refuses to increase that debt limit. Conversely, voting to increase the debt limit will perpetuate the structural deficit that will certainly lead to fiscal collapse.

WHAT WE CAN DO

In my opinion, Congressional leaders must immediately identify and implement significant spending reductions as a prerequisite to any vote to lift the debt limit. Regardless of party affiliations, as concerned citizens we should all encourage our congressional delegation to curtail federal government spending before our economy collapses. Equally important, we can and must reduce Oregon government spending by at least twenty percent.  Moreover we must build a spending formula that will sustain those reductions at least a decade into the future.

Please keep in mind that if we do not stand up for rural Oregon no one will.

Best regards,

Doug

 
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              Page Updated: Saturday January 22, 2011 04:27 AM  Pacific


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