The US Comptroller General, David Walker, is currently on a “Fiscal Wake-up Tour” to alert the population about the impending US fiscal crisis. I encourage everyone, including non-Americans, to go to one of these events or at least to the Government Accountability Office website at www.gao.gov. In essence, current US fiscal policy is unsustainable. Promised obligations such as Medicare, Medicaid and Social Security as well as servicing the interest of the debt will be 40% of GDP by 2040. Currently, revenue coming mostly form taxes is less than 20% GDP. Hence, either revenues must increase or spending must be cut. Whatever choice is made could lead to dire consequences.
Raising taxes is one solution but that could have adverse effects on the economy. I think the US could sustain some tax increases, especially on the rich, without bad effects but not enough to cover the deficit spending. Much of the current economy is geared towards providing services and goods to the well heeled. If disposable income starts to go down the first purchases to go will be luxury items like yachts, expensive restaurants, ski vacations, and so forth. People in these professions and industries will then lose their jobs putting more strain on social services. The very rich will be insulated from tax increases but the upper middle class, from which most of the tax revenue is extracted, would have to cut down on consumption. Additionally, with the real estate bubble of the past five years, many people are stuck with mortgages that they can barely sustain. Any increase in taxes could push them over the edge. So while taxes can be increased, it really can’t be increased too much.
The other option is to cut spending. The retirement age can be raised to reduce the social security obligation. However, social security is actually in pretty good shape compared to medicare and medicaid. Something eventually will be done about these two programs. Hence, medical services and reimbursements to health care professionals will both likely be reduced. Basically, the US could end up being a nation where the poor and elderly will not receive first world medical care. This may be one other reason a complete overhaul of the health care system may be necessary.