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Kelvin Tong
SYNOPSIS
THESIS: In the absence of significant policy changes, the United States will face a financial crisis as
a result of runaway military expenditures, the rising cost of entitlements, and foreign ownership of
the national debt.
ARGUMENT 1: The escalation of defense spending has pushed the American government further
in debt and puts a strain on the American economy.
The United States government has to borrow a lot of money to finance their increasing military
expenditures.
- The Department of Defense budget in 2000 was $272 billion. i That figure had increased
every year and in 2006, it was $499 billion. ii
- Economist Robert Higgs added up other defense related costs in the 2006 budget, such as
Department of Homeland Security budget. He determined that the total national security
outlays in fiscal year 2006 were $934.9.iii
- The public debt at the end of fiscal year 2000 was $5.7 trillion. It was $8.5 trillion at the end
of fiscal year 2006.iv
Having such a strong military allows American leaders to use force without seriously considering the
consequences. This has lead to costly military ventures like Iraq.
- Ever since World War II, all the major wars that the United States was involved in, from the
Korean War to the Iraq War, were wars of choice, in which none of the countries attacked by
the U.S. had directly attacked the U.S. v
- According to the non-partisan congressional budget office, “The war in Iraq could ultimately
cost well over a trillion dollars,” and, “American taxpayers will feel the financial consequences
of the war for at least a decade.”vi
Counter argument: The United States, with their enormous defense industry, would benefit economically
from higher defense spending.
- Higher defense spending actually has a detrimental effect on the American economy. A
research conducted by the Center for Economic and Policy Research titled, The Economic
Impact of the Iraq War and Higher Military Spending determined that an increase in military
expenditures of 1% of GDP would “lead to slower economic growth, less investment, higher
trade deficits, and fewer jobs”.vii
ARGUMENT 2: America’s ageing demographics would cause Social Security and Medicare to
become unaffordable.
Social Security, as a pay-as-you-go retirement system, would have gradually less workers paying into the
system and more retirees receiving benefits as the population ages.
- This year, there are 3.3 workers for every beneficiary of Social Security. By 2032, it is
estimated that there will only be 2.1 workers per beneficiary.viii
The Social Security Trust Fund is projected to be exhausted by 2041. ix
Medicare, which provides health insurance to seniors, will also be affected by the demographic trends. It is
also having financial difficulties with inflating healthcare costs.
- According the Social Security and Medicare Boards of Trustees’ 2007 report, underlying
health care costs per enrollee are projected to rise faster than the wages per worker on which
payroll taxes are based. x
Counter argument: The Social Security and Medicare financial difficulties are long term problems that can
easily be solved though smart policies.
- According to Comptroller General David Walker, unfunded entitlement payments in the
future would amount to over $47 trillion. That is a burden of over $145,000 for every
American.xi Paying for these huge sums would take tremendous amounts of sacrifice.
ARGUMENT 3: The U.S. government relies heavily on foreign capital, but the foreigners are
becoming less inclined to lend to the U.S.
Foreign central bank had been lending cash to the U.S. government by purchasing large amounts of U.S.
treasury securities.
- At the end of fiscal year 2007, foreign central banks held $2.247 trillion in U.S. treasury
securities. Almost half of all U.S. treasury notes are owned by foreign central banks, and that is
increasing due to the U.S. federal deficits. xii
With the U.S. dollar falling in value, the foreign central banks are losing a lot of value in their U.S. assets.
Foreign lenders are expressing their desires to stop investing in more.
- The Dollar Index, which tracks the greenback against the currencies of the United States' 6
largest trading partners, recently, hit a new low of 75.985 earlier in the session. At that point, the
index had lost 5.3 percent over the past 3 months, and 9.2 percent since the end of 2006. xiii
- Chinese economist Fan Gang, director of the state-owned National Economic Research
Institute in Beijing said: "The U.S. dollar is no longer, in our opinion is no longer, (seen) as a
stable currency and is devaluating all the time, and that's putting troubles all the time. So the
real issue is how to change the regime from a U.S. dollar pegging to a more manageable
reference, say euros, yen, dollars -- those kind of more diversified systems." xiv
With U.S. assets becoming less attractive, the U.S. government will be forced to raise interest rates to
attract foreign capital.xv This would cause a number of negative effects in the economy.
- Debt-service charges are very sensitive to increases in interest rates. $211 billion was paid in
2006.xvi
- Many economists, including Peter G. Peterson, former Chairman of the Council on Foreign
Relations, are worried of sudden lost of confidence in the United States and a run on the dollar.
xvii
The effects of this would be “inflation and interest rates could well jump substantially and
financial markets could ratchet downward.” xviii
Counter argument: Many would argue that the central banks of East Asian countries like China, Japan and
Korea must continue to invest in the U.S. and prop up the American economy. Their export sectors need a
strong American economy.
- Brad Setser, former director of the U.S. Treasury's Office of International Monetary and
Financial Policy, points out that “foreign central banks with large dollar holdings are facing the
prospect of huge losses as a result of the dollar's decline. A 20 percent increase in the value of
the yuan against the dollar would reduce the value of China's roughly $450 billion in dollar
reserves by about $100 billion - 6 percent of China's GDP.”xix
- Peterson believes that “foreign governments might lose their nerve sooner than place vast
sums of their own taxpayers' money into declining dollar-denominated assets. And once the
mood of private investors worldwide changed decisively, there would be little that governments
could do, even if they had nerves of steel.” xx
i
Eric Rosenberg, Bush Pushes to Increase Defense Spending,
http://sfgate.com/cgi-bin/article.cgi?f=/c/a/2006/02/12/MNG41H78RK1.DTL (Feb. 2006).
ii
Eric Rosenberg, Bush Pushes to Increase Defense Spending,
http://sfgate.com/cgi-bin/article.cgi?f=/c/a/2006/02/12/MNG41H78RK1.DTL (Feb. 2006).
iii
Higgs, Robert. The Trillion-Dollar Defense Budget Is Already Here. 15 Mar. 2007. 3 Oct. 2007
<http://www.independent.org/newsroom/article.asp?id=1941>.
iv
Treasury Direct, Historical Debt Outstanding - Annual 2000 – 2006,
http://www.treasurydirect.gov/govt/reports/pd/histdebt/histdebt_histo5.htm (Nov. 2007).
v
William Nordhaus, The Problem of Excessive Military Spending in The United States,
http://www.aeaweb.org/annual_mtg_papers/2006/0108_0800_0302.pdf (Jan. 2005).
vi
Jamie Wilson, Iraq War Could Cost US over $2 Trillion, Says Nobel Prize-winning Economist,
http://www.guardian.co.uk/Iraq/Story/0,2763,1681119,00.html (Jan. 2006).
vii
Center for Economic and Policy Research. Report Shows Increased U.S. Military Spending Slows
Economy. 1 May 2007. 3 Oct. 2007
<http://www.cepr.net/index.php?option=com_content&task=view&id=1157&Itemid=77>.
viii
Social Security Online, The Future of Social Security, http://www.ssa.gov/pubs/10055.html#security
(May 2007).
ix
Social Security and Medicare Boards of Trustees, Status of the Social Security and Medicare Programs,
http://www.ssa.gov/OACT/TRSUM/trsummary.html (Nov. 2007).
x
Social Security and Medicare Boards of Trustees, Status of the Social Security and Medicare Programs,
http://www.ssa.gov/OACT/TRSUM/trsummary.html (Nov. 2007).
xi
David M. Walker, Saving Our Future Requires Tough Choices Today,
http://www.gao.gov/cghome/2005/hrfn20050210/hrfn20050210.pdf (Feb. 2005).
xii
United States Department of Treasury, Major Foreign Holders of Treasury Securities,
http://www.treas.gov/tic/mfh.txt (Nov. 2007).
xiii
Tomi Kilgore, U.S. Dollar Index Slides to All-time Low,
http://www.forbes.com/afxnewslimited/feeds/afx/2007/11/06/afx4306263.html (Nov. 2007).
xiv
William Pesck, If China Shuns Dollar, Look Out U.S. Bonds,
http://www.copvcia.com/free/ww3/012805_china_shuns.shtml (Jan. 2007).
xv
Peter G. Peterson, "Riding for a Fall." Foreign Affairs 83.5 (2004): 111-125.
xvi
Executive Office of the President of the United States, Budget of the United States Government, FY
2008, http://www.whitehouse.gov/omb/budget/fy2008/budget.html (Feb. 2007).
xvii
Peter G. Peterson, "Riding for a Fall." Foreign Affairs 83.5 (2004): 111-125.
xviii
Peter G. Peterson, "Riding for a Fall." Foreign Affairs 83.5 (2004): 111-125.
xix
Brad Setser and Nouriel Roubini, "How Scary Is the Deficit?" Foreign Affairs 84.7 (2005).
xx
Peter G. Peterson, "Riding for a Fall." Foreign Affairs 83.5 (2004): 111-125.