Brian Gongol
Following are five items from a non-exhaustive list of economic threats to the United States. The purpose of such a list is to help offer perspective on the relative magnitudes of different economic problems and to suggest solutions that may be alternatives to the same old ways of doing things that often led to these very problems in the first place. Comments, counter-arguments, and questions are gladly welcomed. Other threats and analyses can be found on the rest of the list, which is an ongoing effort.
| Problem | Size | Likely Outcome | Alternative Solution |
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Pension Underfunding
Many companies that have offered defined-benefit pension plans have failed to adequately fund those plans, using the money that should have been invested for other business purposes instead. The scope of the problem is considerable, especially since the burden falls on the quasi-governmental Pension Benefit Guaranty Corporation. Literally thousands of plans are underfunded. |
The federal Pension Benefit Guaranty Corporation is already $23 billion in the hole; bailout plans if nothing else changes could top $30 billion, or top $100 billion if, for example, several major airlines fail
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The situation is looking increasingly like it will become a candidate for a Federal bailout, much like the FDIC in the 1980s during the savings and loan crisis. | A Federal bailout may be the only viable option at this stage, but unless it comes with a permanent structural change to the administration and guarantee of existing and future programs, a bailout would only invite future defaults. Clearly the premium contributions by participating pension plans have been inadequate to properly fund the guarantee, and the accounting/auditing oversight of existing programs has been insufficient. When business managers can burn through half a billion dollars in company assets that had been contractually promised to pensioners, some laws of transparency are being violated. |
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Public Debt
The Federal government's inability to keep spending under control has led to an enormous debt burden, about a quarter of which ($1.9 trillion) has been funded by investors outside the United States. The ongoing accrual of further debt caused by deficit spending is a tax shift from current generations to future generations, especially when it's used for ongoing operational expenses rather than to finance public works projects. |
The public debt is greater than $7 trillion, and the Congressional Budget Office forecasts hundreds of billions of dollars in further annual deficit spending through 2011. While a great deal of concern is expressed about China's hold on US debt (mainland China's share was about $230 billion in April 2005), the proportion of foreign holdings is really just a minor issue compared to the sheer imprudence of spending so far beyond the nation's means.
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Politicians have a built-in incentive to spend recklessly: Many costly government programs have concentrated benefits and diffuse costs -- the people who benefit end up much better off, while the costs are spread out over a large number of taxpayers. As a result, fiscal discipline can only be imposed by contrarian behavior -- voters and politicians who are willing to give up their pork-barrel spending in the interest of the larger benefit of sound financial management. | Voters have to become outraged enough at government's lack of thrift that they act on their anger and force a political response. The worse the government's debt problem grows, the greater the risk that they will turn to the old habit of pressuring the central bank to increase the money supply. That itself is the eternal danger of allowing politicians anywhere near the people with the power to print money: They sometimes succumb to the temptation to finance their irresponsible spending with an inflation tax, rather than learning fiscal discipline. The extraordinary danger here is that high inflation rates discourage personal savings, which are themselves a high-risk economic problem for the United States. |
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Overbuilding in Fault Zones, Floodplains, and Coastal Areas
Florida, California, and Texas are growing more than any other states. California is well-known for its earthquake susceptibility, and Florida is in a category unto itself for hurricane damage. The government expects 75% of the entire country to live in coastal counties in 20 years. While coastal regions are aesthetically pleasing, they are especially at risk for major property damage due to storms and flooding. |
Property damage from hurricanes alone in 2004 totaled more than $22 billion. Damage projections for a major hurricane or earthquake in New York City (and one or the other is bound to happen) could be from $20 to $45 billion in a single event, just in that city.
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The rush to the coasts is already on, and as the nation's median age continues to rise, a larger share of the population is likely to move to warm, sunny locations. The more those populations increase, the higher land and property prices will rise, compounding the damage likely from natural disasters. | The Federal government can reduce the distortions it causes to the natural market by offering fewer subsidies for construction and insurance in disaster-prone regions. As people learn to bear more of their own costs for these hazards, they are less likely to move there without the necessary understanding of and preparation for the risks involved. Government can also offer less implicit and explicit support for further population concentration (road funding, for instance). Simultaneously, regions outside these high-risk zones need to take it upon themselves to promote the advantages they have in the absence of these risks. Places like Minnesota and Wisconsin may not have as much sunshine as Florida, but they also don't sit in the crosshairs of Category 4 hurricanes. |
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Retirement Savings and Social Security
Quite simply, Americans aren't saving enough for retirement on their own, and Social Security (on which many rely for future income) is in financial trouble. Because of the risk that Social Security benefits may be reduced in the future, low savings rates may present a particular hazard. |
Social Security's trustees forecast a current-dollar shortfall of $4 trillion, with the program falling into red ink by 2017
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Political pressure from powerful entrenched interests -- especially the AARP -- will probably bury any chance of reform in the intermediate future, until it's well too late to solve the financial problem with moderate changes; instead, any real institutional reform is likely to be put off for at least another five or ten years or longer, limiting the potential outcomes to more extraordinary measures like much higher taxes or much lower benefits. | Some form of private accounts are the only long-term solution to the problem of a pay-as-you-go retirement scheme. The best way to handle the long-term funding problem today is to introduce a small (2% to 3%) increase in Federal employment taxes, and to place those funds into private accounts for individuals. The objective should be to continue funding the Social Security program as presently promised, but to initiate a long-term transition to a sustainable system of old-age savings. Over time, the personal accounts can displace future liabilities for the traditional Social Security plan, and the percentage of the contribution made to personal accounts can increase as the percentage made to the traditional pay-as-you-go program can be reduced or eliminated. There are simply no two ways around the facts that the pay-as-you-go system is unsustainable in the long term, and that any transition to a sustainable system of private accounts will require dual funding, as was the case in Chile's transition of the same type. |
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Energy
Increasing use of computers and electronic technology exacerbate the impact of increasing prosperity (which tends to increase energy use), while efficiency takes a back-seat to luxury uses of energy. |
Current energy spending is estimated at around $755 billion a year, but that figure is expected to grow 1.6% a year above inflation for the next twenty years
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Energy supplies are never going to run out completely -- even nonrenewable resources like oil don't simply "run out," they just become marginally more expensive over time, until they become uneconomical for most uses. However, as energy inputs become more expensive, they can displace spending and investment on other, more productive activities. Despite lots of talk about energy bills in Congress and plans for more Federal funding for research and development of new energy supplies, the prospects for a real legislative solution are bleak, since the very same promises have been made since the 1970s. | If total domestic energy spending is $755 billion a year and rising at more than 1% a year, then the annual increase in real spending on energy is about $12 billion a year. The budget for the Department of Energy is $23.4 billion a year. Surely an inducement prize could be offered for less than either figure that would be vastly more effective and efficient at improving the nation's energy use than what's been done for the last 30 years with no meritable outcome. Surely someone could be induced to find a true "killer application" for energy use or conservation for a prize of less than $12 billion. In fact, it's an absolute certainty that if the government were to completely cease funding the Department of Energy and instead offer twelve $1 billion prizes for such outcomes as a highly efficient mass-production solar cell, a substitute for conventional petroleum, and an electric motor design that reduced consumption by 5% over conventional designs, that we could swiftly solve the "energy problem" at a discount to what we presently spend -- without increasing regulations or government spending. |