Having now spent almost six months describing the historical cycles and massive debt that surround us, I find myself looking for an “easy” exit. Maybe one exists, but I haven’t found it yet. I think we’re stuck. The building will have to collapse around us before we can leave.

This is obviously not a great situation. For one thing, if we don't plan properly, the building could easily collapse on us instead of around us. Our entrapment may also cause us to neglect other big problems and maybe miss important opportunities.

The sad fact is we have no easy way out of the debt situation. Worse, we are actually choosing this fate. It’s not about individual choices; none of us want the crisis that’s coming. But all the solutions require joint actions we are apparently unable to take. Which means we are, by default, choosing a path which for many will be catastrophe.

We face this not just because of government policy choices but the political process itself. It is a function of the two-party system. Our system has lost the ability to act decisively against big problems we all see coming. We are a nation of deer in the headlights.

But our system won’t stay paralyzed forever. At some point, we’ll see action because the crisis will have become impossible to ignore. Then we’ll respond. It will be a furious, poorly planned response with massive side effects that could have been avoided unless some of us begin thinking about possible solutions in advance.

Melodramatic? Hyperbole? Let's rewind the clock to 2008 when then-Treasury Secretary Hank Paulson literally got on his knees to House Speaker Nancy Pelosi, begging her to authorize the bailout for the banks. The system was getting ready to collapse. The plan was poorly thought out, but that is my point. No one really “war-gamed” the possible solutions and choices in advance. Rather, with leaders on both sides of the aisle staring into the abyss and realizing there was no bottom, they made the best choices they could in a very short time.

Now we have an approaching debt crisis we can actually think about in advance. I believe—and hope it’s not just my naive optimism—we will have some time to consider solutions. And as I have been saying for years, nobody will be happy. We have gone way past the time for relatively easy fixes. Having cut taxes and increased spending, we are running almost $2 trillion deficits annually.

As we will see below, when I suggested part of a future compromise, I got serious pushback from readers on both sides. And the irony is I understand the frustration. Viscerally. I agree that everything that I have suggested in the past few weeks and months are bad choices. But in the future, the worst choice will be doing nothing and letting the economy collapse around our ears. Some might come through it, but the vast, vast majority of us won’t.

That’s not the future I want to predict, but I see no other possibilities. I think we have a few years left but there are already mutterings of stress in the US bond markets.

Then again, perhaps the denouement will take longer than I think (Japan?), but it will arrive. Today we’ll talk about why.

Unbalanced, Imprudent, and Poorly Timed

Mathematically, balancing the budget is no great mystery. We know what to do: cut spending and/or raise revenue until the two sides match. But that’s where it all breaks down. No one wants their favorite spending programs reduced or their taxes raised.

This was evident in my letter last month describing a possible value-added tax (VAT) system. It drew far more responses than I usually get, and they were mostly negative. The very idea of any new tax, even one paired with spending reforms and cuts to other taxes, outraged many readers. These are direct quotes from reader emails:

• “Taxes by our corrupt leaders are NEVER dialed back!! You are dreaming!”

• “We all know that once a tax increase is allowed, the spending reductions would be ignored.”

• “You need to cut spending, not reward incompetence and corruption with more gravy.”

• “Absolutely no VAT. Politicians need to control spending. Live within your means. There is so much waste and fraud.”

• “Worst idea ever. Start by cutting the size of the government.”

• “If you think the US policy makers would stay put with a 5% VAT—I have a bridge to sell you. They’ll just keep increasing it and won’t cut a tinker’s damn from spending.”

• “You have clearly lost your mind. You have bought into WOKE. If you give a politician an opportunity to soak you, he or she will. The party makes very little difference these days.”

• “Another tax? The political class will surely love another source to keep blowing money in newfound ways.”

• What we need is a rational process of balanced, prudent, well-planned privatization, spending cuts, and tax reforms. That is nowhere on the radar right now. When the crisis comes, without some of us thinking about possible solutions, we’ll get the opposite: unbalanced, imprudent, and poorly planned.

And as bad as those changes will be, at that point they’ll be better than the alternatives. Just like 2008.

Crying Wolf

I have been saying this for a distressingly long time, long enough to be labelled “the boy who cried wolf.” And others were saying it years before I did. The coming debt crisis may be the most widely predicted one in history.

This isn’t a random sample of the population, of course, but I think the sentiment is common. Many people simply don’t trust elected officials to do what elected officials are supposed to do. They have good reason to feel that way, too.

Contrary to what a few readers think, I'm not on some ideological campaign to raise taxes. I would actually like to reduce income taxes and replace them with a VAT because consumption taxes are less economically distorting. And also cut a lot of spending. We could even have a higher VAT and eliminate Social Security taxes. There are lots of options and my preferences are just a few of scores of options. That is what compromise will look like.

Many said, in various ways, they would agree to new or higher taxes only after every possible spending cut had been tried. But no one specified what spending they would cut. At most, they alluded to vague “waste and fraud.” What is that? We have been trying to cut out waste and fraud for my entire adult life, and I’m sure we have done so in a few areas, but then we add other spending on top of it.

Worse, our decades of delay mean balancing the budget with spending cuts alone would require draconian cuts that would wreak havoc on the economy.

The experts at the Committee for a Responsible Federal Budget put a pencil to this last year. They found balancing the budget by 2033 with spending cuts alone would require immediately slashing 27% of all federal outlays. That would include defense, Social Security, Medicare, veterans benefits, law enforcement, border protection—everything.

(Click on image to enlarge)

Source: CRFB

That number rises quickly if you start exempting certain categories. Wall off Social Security, Medicare, defense, and veterans programs (plus interest on the debt!) and balancing the budget by 2033 would require 78% cuts to everything else the government does.

I am not here to argue everything the government does is helpful or productive. A great deal of it isn’t. Waste and fraud happen, too. But if you think such giant cuts wouldn’t cause enormous turmoil and side effects, I think you are sadly mistaken. Our entire economy is optimized to the assumption the government will always do certain things.

For example, if you think air travel is miserable now, wait until they fire 8 out of 10 TSA agents and air traffic controllers. Do you really think the air traffic would be safe in today’s environment without TSA? Trust me, after millions of miles in the air, I get the frustration with TSA more than most. Yes, we could raise airline ticket fees to pay for the TSA. Maybe we should. But that’s just one small example. There are literally scores of other things we depend on the government to do effectively. Can the private sector do a lot of them? Sure. And that will almost assuredly be part of the solution. But it’s not something we can set up quickly.

More By This Author: