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Charade Perpetuated With Illusions

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By Lowell L. Kalapa
(Released on 7/25/10)

As this commentary noted last week, the federal government has used a slight of hand to fool Americans into believing that future retirement benefits are safe and secure all the while spending workers’ contributions on totally unrelated federal programs and services.

As the commentary also noted, this has allowed the federal government to contain public borrowing allowing it to keep interest rates down as the federal government tries to stimulate economic activity. Unfortunately, that is not the only reason federal officials have been trying to avoid borrowing even more and that is because more than half of our nation’s debt is held by non-domestic investors and countries. Who are these foreign investors and countries? Among our nation’s top lenders are countries who don’t necessarily see the world the way we do. Our top lenders are China and Japan, followed by Russia and oil mogul countries like Venezuela, Saudi Arabia, Nigeria and Iran.

Obviously, these countries don’t necessarily have our country’s best interests in mind, making our out-standing debt a subtle tool in the world of global diplomacy. Thus, as long as America continues to spend as freely as it has and to make unfunded promises under the Social Security, Medicare/Medicaid programs, we will be vulnerable to policy changes by these governments. So, for example, China decides to stimulate its economic output by investing in companies based in China taking funds either out of U.S. bonds or just buying less federal debt. With U.S. bonds wanting for investors, that debt will demand higher interest rates which, in turn, would make it more difficult for consumers to buy anything that needs credit, from automobiles to a new house.

Again, using China as an example, America can’t really push the issue of human rights in China or for that matter go to the mat in defending Taiwan’s independence, when China could call in its loans to the United States at any time. Thus, with so much of America’s debt held by foreign countries, it is increasingly difficult for the most powerful nation on earth to call the shots.

Prior to the credit meltdown of the “bubble bursting” sub-prime mortgage crisis, much of which was held by Fannie Mae and Freddie Mac, many foreign investors assumed that because these financial giants were sponsored by the federal government that the loans were guaranteed. But, as we all learned, the debt of the behemoth mortgage companies is not guaranteed by the federal government.

However, when our largest lenders – the Chinese and Japanese – discovered this “oversight” after the financial meltdown, they demanded that the federal government guarantee this debt to which the federal government complied and guaranteed Freddie’s and Fannie’s debt. What other demands or policy changes our foreign debt holders will demand in the future, only time will tell.

What it does underscore is the fact that not only does the federal government have unfunded future obligations to the beneficiaries of the Social Security and Medicare/Medicaid systems, but the overall spending on federal programs is completely out of control as we continue to rack up more and more debt while spending the Social Security contributions that are supposed to be invested for the benefit of workers and current retirees.

Readers reacted with horror when we suggested that the solution must be a combination of the two extremes – cutting spending on one hand and raising taxes on the other. Raise taxes? How could we suggest that? Well, the financial crisis that faces us now and in the future is the product of what all current politicians have resorted to, adding more programs and, therefore, more spending while keeping the taxpayer happy by cutting taxes. They have broken the accountability relationship by putting the day of doom off into the future. They have accomplished this by stealing money from the Social Security system to pay for current programs and have created the illusion that the American people can have everything without having to pay a single dime more.

This is exactly what local lawmakers did during the past couple of sessions, when they just couldn’t bring themselves to cut state spending. Not wanting to incur the wrath of the taxpayers by adopting an across-the-board increase in the personal income tax or the general excise tax, they adopted tax increases here and there that would affect only select groups of taxpayers or they adopted additional or increased fees like those for insurance professionals or drivers’ abstracts in order to refill the state coffers.

Next week we will take another look at what needs to be done to right the fiscal future of our country.

Lowell L. Kalapa is the president of the Tax Foundation of Hawaii. Mr. Kalapa’s commentary is printed each week in the Maui News, West Hawaii Today, Garden Isle News, and the HawaiiReporter.com.


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