The Greatest Threat to National Security: Long Term, Systemic Fiscal Challenges

1. The Yearly Deficit Problem

About a year ago, the Center on Budget and Policy Priorities (a think tank in Washington) produced a report which included the chart to the left. It should be noted that this is a rough approximation.

For example, the 2011 Federal Budget is actually a deeper deficit than depicted at left: the US intends on spending roughly $3.8 trillion, and expects to take in about $2.2 trillion ~ a deficit of $1.6 trillion. What’s shown at left is a little less than that.

What matters is really the parts or segments or events that have driven the yearly deficit. One can see at left that the wars in Iraq and Afghanistan are contributing, the 4% economic downturn/recession, the recovery stimulus, Bush administration tax cuts, and TARP/Freddie/Fannie May bailouts.

2. Make Everybody Hurt and the Surprising Economic Weight of the Upper Middle Class

When one looks at these issues in the breakdown above, there is only one that is not linked to a genuine crisis/challenge ~ the tax cuts. I certainly am not an economist, and I know that I tread on thin ice in this field…but I doubt that even the most sensible explanation for maintaining these tax cuts could persuade me of the general notion that we must start with a balanced approach to raising taxes. As David Brooks of the NY Times put it so eloquently in a recent article, “Make Everybody Hurt.”
One way to do that is to look to the upper middle class ~ the chart at left is a depiction from a National Review article ~ it displays the relative levels of aggregate wealth in the US in several income categories. What is resoundingly clear is that it is insufficient to merely tax the super rich and consider that enough. Again, Make Everybody Hurt, while keeping in mind that the chart at left suggests a good place to start might be the upper middle class (which I’d have to call myself a part of, so one could say that I’m not exactly helping myself with giving voice to this opinion).

If we’re to get serious about what Chairman of the Joint Chiefs of Staff Admiral Mullen has correctly called “our biggest national security threat,” we have to face the facts that we’re all about to take a haircut, whether we like it or not.

3. The Aggregate National Debt and Fears of Foreign Investment
The aggregate US national debt is about $14 trillion. The Chinese government holds about $1.14 trillion of that total debt, the Japanese government holds about $800 billion, and overall, foreign holdings of US debt totals a little over $4.5 trillion (the chart below is just a few months old).
We can deduce that foreign governments hold about 1/3 of US debt, while domestic sources hold 2/3.

There has been a huge amount of speculation that, specifically, the Chinese government now “owns” the US as it “owns” US debt. But the real, fact based picture is much less scary. China is a major source of stability for the US, without which the US could not, for example, fight the wars in Iraq and Afghanistan. Chinese lending (~$400 billion from 2005-2008) was one major factor that enabled the Bush administration to keep taxes low and, indeed, extend tax cuts, amid two ongoing wars (unprecedented in American history, I think).

The lesson is this: there is no foreign government that “owns” the US via our national debt. One can see, however, that the Chinese economic rise is enabling it to buy a greater stake in American debt, which is certainly an unfavorable long term trend that must be mitigated and eventually ameliorated.

Author: ML Cavanaugh

Unequal parts strategist, assistant professor, wordsmith, runner, wine-o, reader, philosopher of firepower, and hopeless lover of three ladies named Rachel, Grace, and Georgie.

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