The tyranny of numbers (Updated)
Let me see if I can quantify the current and future budget situation. It’s actually quite simple, and doesn’t require knowledge of anything other than elementary mathematics. The most recent analysis of the Federal government’s unfunded liabilities, to include the national debt, debt financing, Social Security, and Medicare, showed total unfunded liabilities of $61.6 trillion. I’ve seen substantially higher numbers in other analyses—up to $75 trillion, depending on how you score it—but let’s take this fairly conservative one. What are the practical implications of this number?
Let’s see what we’d have to do to pay all that back in 30 years. I picked that length of time because a) it covers the entire span of Baby Boomer retirements, and b) it equals the longest maturity of any Federal debt instrument, the 30-Year Note.
Let’s look at the rounded numbers, derived from the Statistical Abstract of the United States. In fiscal 2010, GDP was $14.63 trillion. Of that $2.165 trillion was collected in Federal revenue, or 14.8% of GDP. $61.6 trillion, paid over 30 years, will require equal installments of $2.05 trillion every year.
Now we’ll make some assumptions. Let’s assume that we get 2% growth this year, and that for the next 29 years, we get an average of 3% growth in both GDP and in tax revenues collected. We also have to assume that the US Government doesn’t run a deficit, or add and more to the national debt between now and 2041. And let’s even assume that the current 14.8% of GDP we’re currently collecting in revenues doesn’t rise to the the historical 17.8% average, and that we can fund the government on just revenues of 14.8% of GDP.
Finally, let’s remember that most revenue that has ever been collected in all of American history, as a percentage of GDP, was 20.6% in 1999, after a substantial economic boom. Prior to that was 1945’s 20.4%.
In order to pay off this year’s share of the $61.6 trillion in unfunded liabilities, the government will have to collect $4.261 trillion in revenues. With an estimated 2011 GDP of $14.922 trillion, that comes to 28.6% of GDP. If we assume government revenues rise to the historical average, the we’ll need the government to take 31.6% of GDP in tax revenues. Happily, because we’re assuming a 3% rise in GDP and revenues for every year over the next 30 years, that percentage will decline slightly every year, until, in 2041, we’ll only need to collect 20.5% of GDP in tax revenues to pay off the last installment, assuming, again, 14.8% of GDP covers the operation of government. If we go back to the 17.8% figure, then we’ll have to collect 23.5% of GDP in revenues.
Either way, for the next 30 years, we need to collect substantially higher tax revenues than we have collected at any time in the nation’s history, and we have to do it every year for 30 years.
Quite frankly, I doubt that this is even physically possible, much less politically possible. Quite apart from anything else, I have no confidence whatsoever that we will even have 3% GDP growth under a regime where more than one-quarter of national income is given to the government for the next decade.
If you want to see the year-by-year numbers, my Excel worksheet is here.
UPDATE: A commenter points out that http://www.usdebtclock.org/ shows a total unfunded liability of $114 trillion. I believe that figure goes out to the year 2087, however. But, those calculations wouldn’t look that much different for individual years. We’d just have to support unsustainable taxes for 70 years instead of 30. Not that it matters, ‘cause we won’t do it anyway.
BTW, keep in mind that these numbers are just a simple back-of-the-envelope calculation to wrap our heads around the basic scope of the problem, not a precise model of government expenditures and revenues for the next 30 years. I wasn’t really interested in doing 20 hours of math for a 15-paragraph blog post, after all.