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Wednesday, October 17, 2012

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I'm not so sure our ability to project power will be that hugely affected. The US only spends 4.7% of GDP on the military according to the World Bank. That's not particularly high by historical standards. I've read that the cost of Iraq + Afghanistan was incrementally a trillion dollars or so. Not to excuse misadventures, but that's less than just this year's deficit. Our fiscal issues certainly have implications for the military, but out of control spending on military matters is not the driver of deficits. The leading drivers of increased deficits are unfunded entitlements that represent an income transfer to current and near retirees from younger and future generations. Also the related matter of our healthcare costs being too high by developed world standards, which would seem fixable (even if just by adopting someone another country's more cost effective system) even if the Affordable Care Act actually raises prices. On a normalized near term basis, the biggest driver of the deficit is the national debt itself. The amount we pay annually in interest is basically equal to the entire deficit as of 2007. In other words, we could have been in balanced budget territory if we didn't have all this debt! That by itself helps illustrate the pernicious nature of our current fiscal path.

By avoiding wars, cutting back on the most egregious corporate welfare, some entitlement changes, healthcare cost fixes, and tax reform (which could include increases on high income earners), we should have no trouble financing our military and any necessary uses of it.

As for China, they can't "bankrupt" us as a threat over Taiwan. If war broke out over it and we won, imagine what would happen to China if we decided to repudiate our debt to them as a form of reparations. It's like the old saying, if you own a billion dollars the bank has a problem. China's economy is arguably more dependent on ours than we are on them. If we go broke, they've got big problems on their hands.

I'd refine Aaron's remarks to more precisely point out that it is healthcare entitlements driving the huge structural deficit.

Growth in the healthcare entitlements is driven by four factors: healthcare service and drug prices increase faster than other prices in the economy; increasing lifespans (partly due to advanced medicine) mean that people will collect Medicare longer than in past decades; aging of the very large Baby Boomer cohort (1946-64 births); and general health of the population is declining (partly from old age but mostly from increasing levels of obesity and its related diseases and conditions).

Oddly, when Congress raised the Social Security retirement age for Boomers in the last "fix", it did not also change the Medicare program.

This contains many simplistic assumptions and logical leaps. It is little more than long pessimistic moan of a person without vision or hope. This post is an example of the problem, not the solution.

I've read this series with interest. I don't see where you mention America's post-WWII position as "last man standing", which in my opinion made us rich, i.e. much of the world had to come to us to buy stuff to rebuild themselves, and we profited. Prior to WWII, we were mired in a decade long Depression, and prior to that there was no safety net, no environmental protections, no OSHA, no FDIC, no EEOC, etc etc. All that stuff is expensive too. And people live longer now. Very few want to go back to that time either, so we're stuck with the costs, which means we aren't going to be the low cost producer of much of anything.

And of course the world doesn't have to come to us for a whole bunch of manufactured stuff anymore, and hasn't for some time. The midwestern industrial base started to creak in the 1970's after the western industrialized world had largely rebuilt itself, and has been going down hill since, with occasional little upticks. American companies were "able" to give their workers more benefits back then because they could pass the costs on to others - why have labor strife under those conditions? Just pay the workers off. They haven't been able to do that since the '70's really.

But this seems to me to explain much of the problem - we got too rich off WWII, and people have come to think of that post war era as 'normal'. It was probably the most abnormal period in our economic history, and is unrepeatable. If there's a WWIII, we will get hit.

So the point here is, yes, we are dependent on high value-added goods and services for the near term future (eventually, China and other developing nations will have to implement their own versions of EPA, OSHA, etc, but I'd say it's a ways off). And our workers need to understand that. They need skills and they have to want to acquire them (i.e. they need to be motivated).

You've written some on redesigning the Big Ten universities and using local community colleges as skill builders. I think these kind of ideas hold a lot of promise for "regular" workers, especially the community college bit. Perhaps you could expand on these ideas.

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