Forget Obamacare. Forget stimulus plans, government bailouts, cap-and-tax or any other recent or imminent spending legislation. The current level of government involvement in pensions (Social Security) and health care (Medicare, Medicaid) alone could soon bankrupt this country. General Motors and Chrysler provide the lesson here.
General Motors' and Chrysler's obligation to nearly 700,000 retired employees' health care and pension funds was the most significant contributing factor to their bankruptcy earlier this year. Do you think this conclusion is far reaching? Roger Lowenstein, columnist for Bloomberg News and author of the 2008 book While America Aged, doesn't think so, at least when it comes to GM.
The thesis of Lowenstein's book was that "many decades of inflated pension and health care benefits forced the company to redirect its free cash flow to retired workers. As a result, there was little or nothing left for the shareholders."
Lowenstein notes that, "In 2003, GM sold $13.5 billion in bonds-one of the biggest debt offerings ever-and plowed the money into its pension fund. Then in 2007, after the UAW went on strike, GM agreed to funnel more than $30 billion into a special trust for retiree health care."
He concludes, "It was as if the company had secretly been sold and now belonged to the retired workers and their dependents." Of course, with the Obama administration's takeover of Chrysler and GM, Lowenstein's "as if" proved all too literal. With the companies restructuring, the UAW now owns 17.5 percent of GM and 55 percent of Chrysler.
With its current level of indebtedness (and the prospect of even more), the dilemma that faces the U.S. government is very similar to what broke Chrysler and GM. The former GM was roughly a microcosm of the U.S. government: large, powerful, wealthy, leader of its industry, and so on.
For 77 consecutive years, from 1931 to 2007, GM led the world in sales of automobiles. This streak, of course, is by far longer than any other automaker in history. If there ever was a company that was "too big to fail," it was GM.
The 20th century saw the U.S. flex its industrial, technological, military and economic might to the extent that, with the fall of the Soviet Union, America now stands as the world's lone military and economic super-power. With only 4.5 percent of the world's population, the U.S. represents 23.6 percent of world gross domestic product.
However, like GM and Chrysler, but to an even greater extent, the U.S. is staring at an economic reckoning unlike anything the world has ever known. Before its bankruptcy, GM lost money on every car it made. Currently, the U.S. spends $2 for every $1 it takes in. GM's losses weren't nearly this drastic.
Also, according to the 2009 Social Security and Medicare Trustees Report, the combined unfunded liability of these two programs has reached nearly $107 trillion in today's dollars. Medicare and Social Security trust funds will be exhausted in 2017 and 2037, respectively.
Is the United States "too big to fail?" Some think so. Certainly most of the world shares an interest in not seeing economic ruin come to the U.S. However, unlike GM and Chrysler, there will be no bailout for the U.S. No one could afford it.
As with the U.S., the automakers were warned before disaster struck. For example, an Institutional Risk Analytics column from 2005 concluded that, "Even (if) GM and Ford (were) to suddenly produce products that were superior to those of the various foreign competitors, and at a lower price, the accumulated retirement and health care liabilities to current and retired workers would still threaten their solvency."
Moody's has warned the U.S. that if it doesn't clean up its act, it stands to lose its triple-A credit rating (first issued in 1917). In other words, the U.S. would be downgraded like a bad company.
America literally cannot afford its current level of federal spending, and it especially cannot afford the spending increases the Obama administration seeks. Unlike the automakers, congress and the president must heed the many warning bells being sounded by the experts and by everyday common-sense citizens all over the country.
From Moody's to the TEA parties to the town halls, Americans are saying, "Enough! Stop this spending madness!"
Will Congress and the president listen? Time will tell, but time is running out.
Trevor Thomas is a Gainesville resident and regular columnist.