The simple, brutal, all-but-undeniable fact is that, even before the commitments added in the last few months, the present value of what U.S. governments--federal and state--have promised to pay greatly exceeds the present value of what they, currently, collect. (The GAO's nine-page summary of the future of the federal budget is here. And here's more discouraging news about the states' budgets: "States drain unemployment trust funds" and "There is a two-thirds chance that state pension plans will realize a shortfall in 15 years. The expected conditional shortfall is almost $1.5 trillion in 2005 dollars".)
(There are two possible easy ways out. If we have higher-than-historical economic growth for a long period, we might be O.K. I recommend, again, Arnold Kling's short piece on that possibility, "The Great Race". And while I would never sell short the great entrepreneurial capacity of the U.S., at least in the near term, above-trend growth seems unlikely. For another way out--also doubtful now--see below.)
It seems to me that we will not improve the current economy much until we convince ourselves, and people around the world, that we have seriously addressed this problem.
I think there are five options.
1. In an action prompted by the phrase, "Only Nixon could have gone to China", the new administration convinces Congress to sharply cut future Social Security and Medicare benefits. While I would prefer at least partial privatization of these programs, I understand that that's politically infeasible, especially now. So, instead, we phase in an increase in the eligibility age. Five years, maybe ten. We've done it before--do you know that if you were born in 1960 or later you won't be eligible for full benefits until age 67, not the original age 65?--and we could do it again. Now, I wouldn't bet on this happening, but early in the administration of an especially charismatic president, with one party controlling both houses of Congress, and in the middle of a near- or actual crisis, a rare opportunity presents itself. (And given cover by the federal example, most states would follow suit.)
2. We do what many individuals and firms do when they experience severe financial problems: we sell assets. Financial advisers usually don't recommend this because 1) you can only do it a limited number of times, and 2) selling assets when you're financially distressed is almost guaranteed to result in poor selling prices. But we could try it, given the exceptional circumstances. I know little about what assets our governments hold, but I do know the federal government owns a lot of land. According to a GAO report dated January 2003 (GAO-03-122), the federal government owns about 636 million acres. This includes 56.6% of the continental West and 34.8% of Alaska. (See also this table.) The GAO report also states, "Long-standing problems in the federal real property area include excess and underutilized property, deteriorating facilities, unreliable real property data, and costly space." Selling some of this land wouldn't completely solve our problem, but it would help at least a little. (And yes, environmentalists and conservationists would probably scream, but remember how charismatic our new president is.)
3. We raise taxes. A lot. Mostly on the "rich". While confiscating the wealth of some people who have a lot of it--Paris Hilton comes to mind--to provide food and shelter to unfortunate people and to teach little kids to read seems like a big social improvement, and even if we forget about crusty old American principles like personal liberty and limited government, this won't work well at all. That's because 1) there just aren't that many rich people (or companies); 2) the ones there are can hire really clever lobbyists and lawyers to help write the tax law and then help the rich avoid it, and 3) if all else fails, the rich can leave the country. Of course, we could require them to stay--updated slogan: "Build a wall? Yes, we can!"--but then we'd have a country we'd no longer recognize as American.
4. We raise taxes more broadly but just don't call them taxes. Example: for a few hours this past week, the Office of the President-Elect's website presented a proposal to "require 50 hours of community service in middle and high school and 100 hours of community service in college every year". A fresh, bold idea from 1935! But after being discussed by conservative bloggers, the proposal has been fundamentally changed. (See here, Glenn Reynolds, and here.) I admit to being entertained by thinking about it being enacted. One, the kids affected overwhelmingly supported the president-elect, so there would be some poetic justice. Two, we'd probably have an interesting fight over whether it squares with the Thirteenth Amendment. And three, think of the administrative headaches of enforcing it: would physically handicapped kids be exempt? How about kids with diagnosed ADHD? What if a kid lacked the transportation necessary to go to a place of community service? Would some kids try to establish residency in Canada? Fun all around, I say.
5. Finally, we could try to borrow more, borrow more from the rest of the world. This is, of course, what we have been doing. Economists were sharply divided about how long we could have continued to do it. But given the events of the past year, the jig may be up. (I write "may" because, even now, if you live outside the United States and want to hold financial paper, whose paper would you rather hold? Even now, how many countries' bonds have as much liquidity and security as ours?)
Which brings me, finally, to my prediction: early next year our new president will travel to the Middle East and to China and he, personally, will try to persuade--recall how charismatic he is--Middle Eastern and Chinese governments and private citizens to buy some brand spanking new, freshly minted government IOUs. And we will, at least for a time, go on.