Americaâ€™s federal and state governments are heading for metaphorical reenactments of the final scene from the movie â€œThelma and Louiseâ€ in which the title characters intentionally drive their vehicle off a cliff.
In the case of government, though, the cliff is fiscal, the vehicle is debt, and the engine is unfunded financial liabilities. Some, including New Jersey, Illinois, Connecticut and California, may have passed the point where applying the brakes might save them. Pennsylvania, Kentucky, Mississippi and Louisiana follow closely.
A curated 2014 Forbes article reported that the United States government had unfunded liabilities exceeding $125 trillion, primarily related to Medicare, Medicaid and anticipated Social Security shortfalls, roughly $1.1 million per working taxpayer.
Like the Crash of 1929 preceding the Great Depression, for more than 100 years, stock market bubbles have periodically burst. The 1990s dot.com bubble burst after investors poured money into almost anything â€œweb-relatedâ€ with the unreasonable expectation that equity values and rates of gain would continue indefinitely. Jobs were lost, government tax revenues declined, and holes were blown in personal retirement assets and government pension funds.
In 2008, a real estate bubble burst, affecting families, markets and government tax receipts. The housing bubble was driven by the extension of credit to non-creditworthy buyers and by artificially-increasing housing values. Many people took out loans on what turned out to be ephemeral home equity to fund pleasurable activities. Clearly, it couldnâ€™t last forever, nevertheless many seemed to think it might.
In each case, anyone who thought about it, remembered a little history and could do simple math knew, even as they were inflating, that the bubbles were unsustainable. But, you never know, anything could become the new normal, right? So, no worries, then. Life was good ï¿½" until it wasnâ€™t.
Government debt is an unsustainable bubble, too. But, because government debt is driven primarily by publicly-funded benefits ï¿½" pensions and entitlements ï¿½" few people will discuss, much less address and fix the problems. Government spending keeps increasing, but people approve, especially those living on public benefits and the politicians whose tenures are predicated on handouts. Itâ€™s shocking how many recipients think the government has its own money, and that government services are â€œfree.â€
Taxation has practical limits. Uncontrolled government debt simply cannot climb forever.
Hereâ€™s the dilemma: Elected or unelected, anyone who wonâ€™t face fiscal crises, reduce spending or consider relinquishing marginal benefits now stand to lose far more when debt bubbles burst and national and state governments become insolvent. For example, governments must reform entitlements and police fraud to control spending, or insolvency will most grievously affect the legitimately disadvantaged. It would be less painful for governments to restore pension fund solvency by committing a bit more through spending discipline elsewhere and for public union employees and retirees to sacrifice a little bit in the near term rather than lose far greater amounts following insolvency.
Many, perhaps most of us face a â€œThelma and Louiseâ€ decision on government spending and/or entitlement reform. Whatâ€™s yours — the brake or the throttle?