Things that can't go on forever, don't

Writing in Newsweek, Robert Samuelson draws a common thread between the bankrupt U.S. automakers and the similar legacy costs of the Baby Boomers:

The plight of the U.S. auto industry provides an ominous warning. For years, the Big Three and the United Auto Workers constructed an ever-more-generous system of early retirement and retiree health benefits for their employees. But ultimately, the costs became oppressive. The main victims were younger workers, whose jobs, wages and benefits were squeezed to protect retirees.

Similarly, the promises made to retiring baby boomers may impose crushing costs on society. Taxes may rise, other government programs—from national parks to college grants—may suffer and long-term economic growth may slow. Again, the main victims would be today's young, who would pay higher taxes and receive fewer public services.

Already, the three major programs serving the elderly population - Social Security, Medicare and Medicaid - account for two fifths of federal spending. In fiscal 2008, that was $1.3 trillion out of total spending of $2.98 trillion. By contrast, all defense spending totaled $613 billion.

Samuelson notes that paying for all our promised entitlements would entail a tax increase on the order of 50% which pushes the Laffer curve to a point where revenues can't possibly be collected. The alternative is a lower tax rate coupled with a elimination of everything in the national budget that is not entitlements and interest on the national debt. As Francis Fukuyama writes in today's WSJ (fifth item) it's time to "Get serious about entitlements"

We find ourselves in a pretty dire situation. The baby-boom generation -- of which I'm a member -- has gone through its peak earning years overconsuming, not saving enough, and exempting itself from as much taxation as possible. This could happen only because savers in places like China were willing to hold a seemingly endless number of dollars to finance this binge. We've had a pretty good ride, but things aren't going to continue in this fashion.

What's going to happen when China decides we're no longer a good credit risk or, heaven forbid, starts cashing in the Treasury bonds they've accumulated? It's going to be ugly, seven ways to Sunday.