Friday, November 30, 2012

I Say "Pedal to the Metal" As We Approach the Fiscal Cliff


In my previous post, I looked at the astronomical debt ($700,000 per taxpaying family) America has accumulated right now, with millions more in entitlement obligations per family coming.  If we are going to survive this fiscal crisis, we have to do three things and do them fast:
1.       Balance the budget TODAY and stop the bleeding.  It is insanity to keep piling on to a problem that is about to get away from us in the form of obligated payments alone.  We have to stop the interest growth, and running budget deficits for one more day is ludicrous.  If you don't hear the word "trillion" in a budget reduction plan, you're not hearing a serious plan!

2.       We have to pay down our $16 trillion national debt.  That means we really aren’t looking for a balanced budget, but rather a budget with a revenue surplus.  We need to do better than balancing the budget!

3.       Get focused again on being an innovative nation that produces things of value which other countries want to buy.

From the figures in the previous post, it’s obvious to me that we can’t tax our way out of this mess, though that is what our President will push for.  It is also clear that it is not true that the rich do not pay as much as the poor, either on a percentage of income or an absolute dollar basis.  These figures also ignore the corporate income taxes the rich pay through their businesses which are the highest in the industrialized world.  Do the rich pay enough?  I guess that question is always open for debate, but driving the businesses of the wealthy to foreign soil through taxation (the end result) does not seem wise to me. 
We have already seen that there is no way to predict when an economy will start to grow again nor at what rate.  We can never bank on future growth to solve our debt problems.  An analogy is the person who buys a home they cannot afford hoping to get a ridiculously large raise to pay for it when their peers aren’t getting any raises at all.  Foolish!  All we can deal with is the GDP as it is, not as we hope it will be.  The best way to promote a healthy economy is with a healthy federal government and free and self-reliant citizens.  Stimulus won't do it.
What is glaringly obvious from the data is that we must cut spending.  How?  We can quibble about whether more should come from defense versus Social Security, Medicare or social welfare, but the bottom line is that everything needs a sizeable roll-back.  I would approach it in standard corporate fashion as shown in the chart below.  Taking the reductions shown would still leave the budget at higher levels than when George W. Bush took office in 2004, but it would eliminate the deficit.  This is step one. 



How do we roll back Medicare or Social Security when the trajectory is shown to be exponentially high?  I can tell you from the corporate world that you don’t ask what each department believes is the minimum budget they can operate under and then cut to that level – it never works.  No one will ever voluntarily offer real reductions.  You determine what your income is going to be and you cut spending to that level.  You divide the cuts proportionally and put your best people to work minimizing the negative impact while guaranteeing you hit your reductions.  There are no easy answers here.  The will to cut always comes before the specifics of what will be cut – it’s the decision to cut that surfaces the opportunities.
With drastic cuts, we could consider phasing them in to minimize the shock, but as a country we are well past that approach.  We are going to have financial shock one way or another.  The question is this:  will we choose to have the shock on our own terms with a plan that has a chance of addressing the problem, or will we just close our eyes, hope for the best and allow the shock to come at a time that will destroy us?
Whether we like it or not, financial and societal shock is coming.  I, for one, prefer to admit it for what it is and deal with it now.  It IS going to be ugly – there’s no way around that.  It is going to be painful to deal with.  There will be upheaval and unrest.  This will require more than just eliminating the study of beetle mating habits or omitting turtle tunnels under highways.  Things will only get worse the longer we delay.  It’s time to act.
Look at the growth in the interest on our debt – it has nearly doubled since 2008 and now makes up over 10% of our total budget, and we can’t touch it.  Its current trajectory is exponential.  As we rack up trillion-plus dollar deficits year over year, it must only get worse.  Perhaps we could renegotiate with our creditors, or more likely yet, we could try to inflate our way out of the problem with more quantitative easing.  All that does is cause those who would normally loan to us to turn away and drive up inflation, forcing us into an even worse position.  Look at Greece and Spain – the two industrial countries whose debt to GDP ratio most closely matches the US.  If they had addressed their issues when they had the chance to control their own destinies, the EU would not be dictating austerity measures to them now.  The borrower truly is the slave to the lender.
So what do we do? 
1.       Don’t worry about the fiscal cliff.  Press down the gas pedal and go headlong off into the fiscal cliff.  Agree to no budget that isn’t balanced - we have to have a forcing function to get any action in Congress.  Let the tax cuts expire.  Trigger the spending cuts as well.  I think we probably need as much of both of these as we can stand to get out of this mess.  Do I want taxes raised?  No, I don’t, but unless we are willing to start backpedaling on obligations for government retirements, Social Security, Medicare and the military (I’m willing to put them all on the table), we won’t be able to cut enough spending to stop this mess.  I would see the fiscal cliff as a stop-gap to shock our sensibilities into doing steps 2 and 3 below.  The fiscal cliff won’t fix the problem, but it might get our attention.

2.       We implement Draconian – yes, I said Draconian – spending cuts by department as outlined above.  It will mean fewer government services, lower government salaries and benefits (already out of step with the rest of the country), potential loss of government jobs, chaos and strife, at least in the short term.  But it’s coming anyway – if we choose the field of our own battle, maybe we can make some rational preparations for it.  We will have to find more efficient ways to deliver government services to lower the costs while still doing what is absolutely necessary.  We will have to give up some regulatory organizations wholesale.  We’ll have to get out of the business of doing anything that is not nation critical.

3.       Completely rewrite the tax code.  Go to either a flat tax or better yet in my mind, a national sales or consumption tax.  A national sales tax catches the underground economy when those illegal profits are spent.  I would exempt the staples of living (articles of clothing under $50, unprocessed foods, etc.) so that the tax would not be regressive upon the poor.  Simplifying the tax code would also free up the throngs of tax accountants and attorneys to do work that is more productive for the nation.  Don’t hear me say that these professions aren't honorable; I’m just saying that time spent explaining tax codes and writing letters to the IRS could be better spent innovating advances in other fields.
It’s time to get fanatical as Dave Ramsey urges his listeners to do with personal financial issues.  It’s time to go “lunatic fringe” on stopping spending and paying down debt.  It’s time to force those who can be but are not to be productive.  It’s time to cut federal waste.  The crisis is as at our door, but we have yet to really recognize it for what it is.  The time is now.  I don’t want inaction on my conscience – hence this post.
Will all of this work?  I don’t know.  Pundits are already arguing that embracing the fiscal cliff plays right into President Obama's hands politically, giving him the opportunity to lower middle-class tax rates next year.  I am so past worrying about the politics of this that it is irrelevant to me.  We must stop the spending.  I also realize that we have much greater problems of character that are at the heart of our problems in government and society.  Fixing the economy doesn't fix the human heart.  More on that in a future post.  One thing of which I am convinced is that doing nothing or taking small incremental steps is a guaranteed financial disaster.  Does anyone have the will to change?

1 comment:

  1. Amen Brother! Our government does not have a revenue problem it has a spending problem. My concern is we have enter an era where more than 50% of the voting public do not agree.

    Your old friend,
    Ron Arnold

    ReplyDelete

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