Gold CoinWhen you look at the demographics, economics and budget of the US, it's hard not to come to the conclusion that the great political battle of the next generation can be summed up very simply - it's going to be about "who pays, who wins... and who takes it on the chin."

The US has a number of entitlements. Typically they're considered to be Social Security, Healthcare (Medicare, Medicaid and government employee health care), and the debt servicing charges. To that I would add an entitlement everyone pretends isn't one - military spending.

Now from a political point of view the problem with all of these things is that the cost for them is rising and with the expected retirement of the baby boomers, they're going to rise faster than revenues will - at least under the current style of taxation in the US.

In a sense the numbers and even the trend lines don't have to matter. Under other circumstances (say the US was actually in World War III these numbers wouldn't matter in the least. If the US was running large trade and current account surpluses and had a demographic profile like it did in the 1950's (a baby boom at the beginning of its life cycle), it would be cause for concern, but not really that big a deal. But unfortunately the US is at the end of a baby boom, it's not in a war, and it's running huge trade, account surplus and even savings deficits. The US is not socking away more money than it needs - the US is borrowing huge amounts of money from the rest of the world (indeed, some numbers come in that the US is borrowing over 80% of all the money available to be borrowed in the world. On occasion that number comes in over 100%, meaning (as one friend quipped) all the legal money, and a lot of the black market money too).

2007 estimated Tax ExpendituresBut, as it happens the numbers do matter, so let's run through them.

Health spending (read: Medicaid, subsidies and government employee health care) and Medicare costs are both rising faster than inflation. Without radical reform (i.e. single payer) that isn't going to change. Cutting back on Medicare is one of the US's 3rd rails. So that's 24% of the budget which is only going to increase in size. Current estimates are that Medicare spending will about triple by 2030 (that won't happen, because it's impossible, but that leads to the question of "what gives?")

The size of the debt financing, currently at 9% will continue to rise as the size of the debt rises. Generational low interests rates are over, as well, so it'll rise even faster than the debt. The deficit is dropping slightly right now, but it's still a deficit (and you need a surplus to actually shrink the debt). While in theory this is fixable (Clinton did turn it around) demographic realities and political realities make it very difficult. (Clinton fixed it by reducing debt servicing charges and by reducing military costs.)

So we're up to 33% of the budget that won't be getting reduced. Social Security comes next, clocking in at 21%. There's a reason Republicans are desperate to "privatize" SS - that's where their solution is - cutting that percentage is where they want to find their savings (and privatizing allows them to create another stock market bubble and make their friends on Wall Street rich from all the management fees and the rising market). Absent doing so, while SS isn't in a "crisis", contra the propaganda, it's also true that SS costs are going to do nothing but rise.

No we're at 54% of the budget. Next we have military spending. Call it 22% though that's an understatement given how much money is hidden elsewhere or more or less off the books (you don't think the Department of energy insisted on more expensive plutonium enrichment reactors for "energy" do you?)

The US needs to do a research and buy up to its next generation of military hardware. Here's how it works - when you start using military hardware in combat, over time your enemies figure out how to beat them. When the Abrams was first deployed it was considered essentially unrepeatable, now the insurgents know how to use four infantrymen to take one out (two of them will die, but that's a fair trade for a tank). Military equipment design always involves trade offs, and once your enemies figure out what they are, and what the weaknesses are, the effectiveness goes down a great deal (you can ask Israeli Merkava commanders about that.) So, to maintain its conventional military superiority, the US needs another big R&D and purchasing push. Add to that all the expenses to fix the military's readiness (which has been shattered by the wars) and the budget's fantasy that the military budget is going to go down over the next few years is simply that. The natural trend line is up, not down. And politically, both Democrats and Republicans are falling over themselves to affirm how much they want to spend on the military - you can ask Hilary Clinton and Barack Obama (92K new troops) about that, if you don't believe me. It's worth emphasizing in particular that politicians learned the cost of crossing the military in the 90's. The military openly disrespected Clinton throughout his tenure, they allowed troops to campaign in uniform against Gore in 2000 and they effectively helped throw the election to Bush in the 2000 Florida recount.

So, with fairly minimal numbers we're at 76% of the budget for the main entitlements - health care, SS, debt financing and the military. Everything else comes in at 24%. None of the 4 entitlements are likely to decrease in cost - SS and Healthcare due to demographics and cost trendlines (health care costs have been rising faster than inflation for some time with only a small speed-bump in the nineties for the introduction of HMOs.) The remaining 24% pays for all your federal courts, the department of agriculture, the department of education, the FBI, salaries for government employees, agricultural subsidies, the department of energy, the Parks system, etc... There's probably some room here for cutting out BS port and so on - let's say an aggressive President with a compliant Congress willing to give up earmarks and other pork (hah) could cut out 5% - which is, oh, 1.2% of the overall budget. No, cost cutting outside the main entitlements isn't going to be enough.

With the exception of the deficit, every one of the main entitlements is a third rail. Old folks are one of the best organized lobbies in the US and they vote. Gutting SS or Medicare is quite rightly seen as political suicide. The military is considered unassailable - you can't close bases, you can't cut it back, or your not patriotic. And as noted above, the military is not above intervening in politics despite its oaths to the contrary. Pissing off people with guns and an attitude of entitlement is a bad idea. With costs in everything else rising, debt financing isn't likely to go down either, and in fact US financing costs are likely to keep going up as its credit worthiness goes down.

The obvious thing to do, then, would be to raise taxes. But you can't raise taxes in the US. The lesson of the last thirty years is that you can't say "I'm going to raise taxes" and expect to win. This was recently reconfirmed in California where they decided that taking on further huge debts was preferable to more taxes.

The Clinton method of dealing with it is dead - the military won't be cut and manipulation of the bond market to reduce borrowing costs isn't likely to work with the US in its current fiscal shape.

So the US is in a classic bind. Every single obvious option is unacceptable to a powerful interest group. No one wants taxes raised on them. The military doesn't want cuts. The old people don't want to lose their benefits. The obvious reforms (for example you could save a lot of money going to single payor by reducing overall costs to the economy of healthcare by about a third and taxing the surplus) are opposed by extremely powerful industry lobbies.

Everyone has got theirs, and no one is either willing to give some of it up, or is willing to pay more for it.

But someone's going to have to and so the battle of the next generation will be who gets it in the neck - either by losing some valuable benefit (the way health care is slowly being taken away from so many Americans) or by being forced to pay more. A lot of conservatives would like private accounts for SS, for example. Or they want increased payroll taxes. Or they want a flat income tax (and I am here to tell you that if you are not earning high six figures a flat tax is always going to be bad for you). They've got their plan and it's basically this - all the tax cuts they've gotten in the last thirty years, which have made the US the modern country with the highest income inequality in the world, they aren't giving up. If the peons (that's you) want your services, you're going to have to pay for them. The poor can look after each other, because the rich don't see why they should be required to do so.

Corporate Tax Receipts As a Share of GDPThe populist, liberal, answer to this, of course, would be to look at charts like the one on the left and go back to strong taxation on corporations, to go back to heavy progressive taxation and to ramp the estate tax back up (because a couple million is enough of a head start for anyone.)

But the rich don't think you'll get it together enough to fight back. They figure they managed to sheer you with lines like "if we decrease tax rates we'll get more tax money in" (supply side economics) and "if the rich get really rich they'll hire some of you and you'll be better off too" (trickle down economics, which, really, was only half a lie. They did say they would trickle on the rest of us, and they did.) They figure Americans will keep mistaking what's good for the rich, with what's good for Americans. Will keep thinking that they're "pre-rich" and therefore vote not to tax the rich, but instead vote to tax themselves.

I really wonder if they're right. It's worked for over 30 years now. Normal Americans haven't seen a wage increase in that long.

We'll see. Unlike the middle class the rich don't fool themselves about these things. They know that someone pays. And they intend that it not be them. The big fight of the next generation is whether or not they get their way. If they do, it won't just be the lower classes (and you're all lower classes to the real rich) who get it in the neck, it will be the end of America as a hegemonic power, because the base of power of such powers is always a prosperous and large middle class - not a bunch of debt slaves.