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Dear Mr. Berko: Two economists with whom my wife and I enjoy a social relationship believe we will have trillion-dollar deficits annually for at least a decade. These fellows believe this is causing serious stress on the economy, and there鈥檚 scant evidence that Congress sees our growing deficits as a problem.

Our two friends have a negative outlook on the economic future of the U.S. They believe high inflation is coming to stay and that Social Security and Medicare benefits must be significantly reduced if we are to remain solvent. They tell us that Obama will renege on his 鈥渘o-tax鈥� pledge, and that double-digit unemployment of 10-percent-plus will become 鈥渄e rigueur,鈥� as it is in Europe. The president鈥檚 Council of Economic Advisers insists real growth of 3.2 percent for 2010 and 4.1 percent for 2011, and our good friends consider this a joke.

What has changed so much since November? Please share your thoughts with me. What should I do to protect my 403(b) and IRA? I鈥檓 just a 50-plus-year-old college professor and don鈥檛 understand this hocus-pocus.

R.S.
Durham, N.C.

Dear R.S.: Thanks for your three-page letter, which, as you can see, I鈥檝e had to shorten a bit. I鈥檒l try to give some 鈥渢o-the-point鈥� answers. First, you need to know that if the bloviating politicians in Congress really want to reduce the deficit, they have the power to do it. But they鈥檇 rather offer excuses that sound good to them or to their special interest groups.

The president鈥檚 Council of Economic Advisers is full of beans and bad gas. This obvious farce is the public relations extension of the president鈥檚 policies, and it reports publicly what it鈥檚 told to report publicly.

Professional and knowledgeable observers scoff, chuckle and dismiss the CEA鈥檚 numbers. Goldman Sachs projects 1.5-percent to 2-percent growth beginning in mid-2010, and believes the deficit will grow by $1 trillion per year through 2019. I trust Goldman Sachs, not those freaks who warm their fannies on the swivel chairs at the CEA. The deficit outlook has changed dramatically in the last nine months for two reasons: the exponential explosion in government spending and the certainty of a weak economic recovery. The latter portends hugely lower tax revenues, the piling of enormous interest costs on the deficit and significantly higher national debt.

Dismiss a 鈥渕odest鈥� business recovery this year, next year or 2011. Consumer households, representing 72 percent of GDP, are flat broke. Household assets have fallen 35 percent since the 2007 peak, and this drop began when household debt reached a lethal 135 percent of income, which is probably close to 150 percent today. Resultantly, households have reduced spending to reduce debt, which translates to less disposable income, lower consumer spending, lower GDP growth and lower corporate profits for years to come. Yes, for years to come.

The administration recognizes that the exploding deficit and debt complicates its universal health care pledge. The Congressional Budget Office suggests that universal health care will cost $100 billion a year (remember what Congress said about Medicare 25 years ago), and this new spending can be offset by reductions in Medicare, large reductions in our monthly Social Security benefits and a big 鈥渂ump鈥� in payroll taxes. But it鈥檚 perverse to destroy the current health insurance system and turn the whole enchilada into universal care because less than 12 percent of Americans lack health insurance.

This reduction in Social Security income will be catastrophic for young Americans. Boston University鈥檚 Larry Kotlikoff, an economist the common man can understand, tells us that a typical male reaching 66 today will get a windfall of $71,000 over his remaining years. However, today鈥檚 25-year-old working stiff can count on paying $322,000 more in payroll taxes than he will get back.

And a 43-year-old self-employed reader wrote: 鈥淚 must be retarded. Six days a week, I drive a truck to my office so I can pay for everyone else鈥檚 medical bills and retirement.鈥� The enormous size of the deficit and national debt cannot be reduced by cuts in defense, Medicaid, Medicare or other federal programs. Obama will go back on his pledge and increase taxes across the board. In fact, I鈥檓 told that Obama is considering a value-added tax that can eventually raise more than a trillion dollars each year. Higher taxes reduce the consumer鈥檚 disposable income. And when consumers have less to spend, that will presage a weak economy, and a weak economy presages lower employment. And the trillions that have been added to the money supply will debase our dollar so it will take more greenbacks to pay for utilities, gasoline, cigarettes, bananas, veterinary care, beer, a car wash and an apartment rental. Get it? Got it? Good!

Address your financial questions to Malcolm Berko, c/o The Daily Journal of Commerce, P.O. Box 8303, Largo, FL 33775, or e-mail him at [email protected].
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