Search This Blog

Saturday, October 30, 2010

Debt or Deficit, Take Your Pick

Elections should be held on April 16th- the day after we pay our income taxes. That is one of the few things that might discourage politicians from being big spenders. — Thomas Sowell

The National Debt is the total amount of money owed by the government; the federal budget deficit is the yearly amount by which spending exceeds revenue. Add up all the deficits (and subtract those few budget surpluses we've had) for the past 200+ years and you'll get the current National Debt.

Politicians love to crow "The deficit is down! The deficit is down!" like it's a great accomplishment. Don't be fooled. Reducing the deficit just means we're adding less to the Debt this year than we did last year. Big deal — we're still adding to the Debt. When are we going to start seeing the Debt actually go down? For a breakdown on the national debt please click here.

The national debt at the time of this witting is $13,663,331, 501, 266, ops, by the time I finished typing this enormous number it had risen to 13,663,334,895,700 and rising at $4.13 billion dollars per day. IF you wish to watch your money sail out the window click here to see a dynamic version of the national debt clock.

Now that you are getting dizzy watching our money fly out of the window you should consider a few things about the debt and deficit. In my last blog post I wrote about the deficit and how the coalition of government, public sector unions and social activist groups have continued to pile on debt by spending more money than we take in.

To simplify (because I am a simple person) the deficit-debt situation lets use this example. Assume you take $5,000 per month after all takes and health insurance. You have a Visa card balance of $1,000 from last Christmas with 18% APR. This means that each month you will add about $15 dollars to the balance if it remains at $1,000. Due to your spending habits and desires you are spending $6,000 per month. You have three choices: Get a higher paying job, get a second job or use the Visa card to cover your spending habits.

Your skills are limited and the competition is tough so a higher paying job is not an option. Due the recession and the high unemployment rate you cannot find a second job and you don’t want one anyway. You elect the third option and use the Visa card — it’s just like the U.S. government borrowing from China and its own citizens. With one year of using he Visa and making minimum payments your balance could reach $11,000 to $12,000 dollars. Now the interest would be $165 to $180 per month. This is probably more than the minimum payment required by the credit card company.

He sounds pretty simple and easy to understand so why do our politicians fail to see what they are doing? They have sores of academics on their payroll all giving hem convoluted advice as to how the debt doesn’t matter because we have assets to cover the debt. What assents do we have? We have federal land we could sell just as you could pawn your Rolex or sell your BMW to pat down your debt. We also have something else called or Gross Domestic Product (GDP).

The GDP is based on the value of the goods and service we create or supply. The GDP is also greatly affected by something called productivity. As productivity goes up so does the GDP and tax revenues, it’s like getting that second job. When productivity goes down so does the GDP and taxes and unless spending is reduced the deficit and debt goes up.

Productivity is greatly influenced by investment from large and small business. They invest more money in research and development, implement new technology and hire more people. More profits are created and more people are working so tax revenues go up. Higher taxes, more regulations and increased social services deter business from investing and hiring more people so tax revenues go down. The governments answer is not to cut spending, it’s to raise taxes and fees. The environmentalist and social engineers want more regulations. For an example of the regulations imposed on a small business click here. As a previous small business owner I would not have business of over 15 employees today. To see the effect of the environmentalists on small business click here.

From time to time you will politicians say; “We have to reduce government and government spending.”  What this means in government speak is this. If the annual increase in government spending is 7% the politicians will cut that, after much acrimonious debate and pressure from the special interest groups, mainly public sector unions, to 3%. This means that if your wife want to increase your Visa card borrowing each year by 7% and after you threaten to leave her she will settle for 3% or $1,030 per month rather than $1,070 per month. I am sure the late Milton Freidman or Thomas Sowell could find fault with my comparisons, but to my simple mind this is how I see our government working and why that debt clock looks like Ferrari running at Le Mans.

Let’s take a step back in our time machine for a minute. In 1919, after World War I ended, there was a recession. Woodrow Wilson had run up a national debt of $18 billion dollars and the top tax rate was 73%. Wilson needed this money to pay for his war and the growth in government that resulted from it.

In the 1920 election, Warren G. Harding ran against Democratic Ohio Governor James M. Cox, whose running-mate was Assistant Secretary of the Navy  Franklin D. Roosevelt. The election was seen in part as a referendum on whether to continue with the "progressive" work of the Woodrow Wilson Administration or to revert to the "laissez-faire" approach of the William McKinley era.

Harding ran on a promise to "Return to Normalcy", a seldom-used term he popularized. The slogan called an end to the abnormal era of the Great War, along with a call to reflect three trends of his time: a renewed isolationism in reaction to the War, a resurgence of nativism, and a turning away from the government activism of the reform era.

One of the first things the Harding administration did was to cut the top tax rate to 57% and reduce the bottom rate from Wilson’s 8% to 4%. The country immediately entered a period of economic expansion and growth. Historian John Dean's reassessment of Harding claims his accomplishments included income tax and federal spending reductions, economic policies that reduced "stagflation", a reduction of unemployment by 10%, and a bold foreign policy that created peace with Germany, Japan, and Central America. After Harding 23 months Harding died of a massive heart attack while in San Francisco with his wife. He was succeeded by his vice president Calvin Coolidge.

Today Harding is much maligned by progressives for his numerous scandals, but nevertheless by the time of his death his administration had reduced the national debt to $75 million dollars and the roaring 20’s had begun.  His lowering the taxes and cutting government spending had brought the nation out of the depression following WWI and fueled massive economic growth.

In 1946, after WWII, President Harry Truman, a Democrat, cut government spending by two-thirds. The economy boomed. As the soldiers retuned from the war and the multitude of civilian government workers were cut lose they needed jobs and the people needed housing and consumer goods. This was a perfect match and the manufacturers who were so expert at building tanks, guns, ships and plane were now converting their plants to build automobiles, refrigerators, radios and eventually TVs and washing machines.

All across the nation the housing industry boomed. On the East coast it was Levitt Town and in California it was the San Fernando Valley, Lakewood, Downey and Torrance. Houses weren’t built by the tens and twenties; they were built by the thousands. Families were started and the American optimism was the highest it ever has been. All of this came about by cutting taxes and reducing government spending.

Today, after the War on Poverty and the Great Society, we have 41 million people on food stamps. We have millions of long-term unemployed. Business is stagnant and the housing industry is bust. States are facing bankruptcy due to their bloated entitlement programs and massive amounts of unfunded liabilities due to unrealistic pension guarantees demanded by the public sector and teachers unions. Optimism is at an all time low and 70% of Americans believe the country is going in the wrong direction.

We have had over twenty years of progressive thinking in government. Politicians are attempting to recreate the failed alphabet programs of the New Deal; AAA, NRA, PWA and WPA. None of these programs worked and the National Recover Act was declared unconstitutional by Roosevelt’s own Supreme Court. Seven after the inauguration of the New Deal Henry Morgenthau, Roosevelt’s Secretary of the Treasury, declared the entire seven years a failure. He said that after all of the money the federal government plowed into these nothing had changed and the economy was worse that when Roosevelt took office in 1933. It finally took the Japanese attack on Pearl Harbor and Hitler declaring war on the United States to bring an end to unemployment — everyone went to work for the government. To read more about Roosevelt’s failed economic programs click here for an article by Amity Shlaes, author of; The Forgotten Man: A New History of the Great Depression

So, how can we get out of this mess? To decrease unemployment and right the economy we need to bring down the national debt and to do this we must cut the deficit by cutting the size of government and reducing spending. I know you have heard this before and it sounds good, but how is it done. I don’t have all the answers but her are few thoughts on what we can do in the short term.

We must cut the public payroll at all levels of government. This includes federal, state, county and city. Great Britain, with a population of about one-fifth the size of the United States is proposing to cut their public payroll by 500,000. Using this ration we could shoot for 2.5 million for starters. This would include teachers, health care workers, DMV staff, fire departments, police departments, and all federal agencies. Employees with less than five years on the job will just be let go. Those of longer term will be given options for buy outs and those close to retirement will take early retirement at a reduces pension.

Public employee pension plans have to be renegotiated. The guarantees have to be removed and portions of the pensions have turned into 401k type plans with both employee and employer contributions.

All federal agencies have to be cut and some combined. We do not need a Department of Education, Environmental Protection agency or Housing and Urban Development. The departments of Agriculture, Energy, Commerce and Health and Human Services can be greatly reduced. Most of the programs they administer can be done away with.

Social Security must be reformed. You won’t be able to take it away from seniors who have a pain in contract with the government, but you can do several things as starters. First we can raise the age to 68 or 70. Second we need to wean people in the middle of life away by allowing for portions of their investment to go to private accounts under their control. Chile has done this with good success. Third we need to take younger workers off the program all together and have a mandatory policy of employer/employee contributions to 401k programs. This may be in violation of Constitution and have to be worked out. The cost to the federal government will increase in the short term as contributions to FICA will reduce, but as older people die out these cost will decrease each year.

Medicare can be dealt with in a similar manner. By allowing health savings accounts there will be more options by insurance companies and less fraud. Older people on the program will continue until they die.

Medicare should be the total responsibility of the state. If a state can afford it fine, if they can’t they can deal with it. If you don’t like what your state is doing you have the option of relocating to another state with lower taxes and less entitlements.

Dramatically cut all foreign aid and contributions to the United Nations. Most of the money we contribute is wasted or ends up in the pocket of corrupt leaders.

And now for the sacred of all cows, defense. We have one-fifth of the world’s population yet we spend more on defense than the combined nations of the world. Why is this? There are several reasons for this. First is that we pay for the defense of many nations so they can invest in their social programs and point fingers at us, like Norway. We should end NATO and let the Europeans take care of their own defense. We can participate in exercises and strategy sessions on case by case basis.

Second, there has never been a weapons system the DOD did not like. We need to cut back on costly weapons systems that will not be used for our immediate defense. I am sure there are many that can be cut.

Third, we must get out of Afghanistan now. We are spending billions of dollars building roads, buildings, sewer lines, schools hospitals and other items of infrastructure. It is estimated for every dollar that goes into Afghanistan seventy cents goes to the Taliban or corrupt political or tribal leaders. In the end we will accomplish nothing and spend billions of dollars. I have not addressed the loss of American and NATO member lives as this is a given. I have no problems killing every terrorist out there but we have some very cost-effective way of doing that without nation building. Special operations forces and predator drones seem to work well.

These may sound like draconian measures but we need to do some things quickly. With the cuts in public sector employees the governments can buy what the need, when the need it off the commercial market without paying health and welfare benefits. You don’t hire a live-in gardener to cut your lawn once a week.

We need to cut the true amount of government spending by selecting a baseline and reducing the government budget by a fixed percent each year. In our Visa card example if we take that $1,000 dollar increase and reduce it by 7% each year we will reach $483.98 in ten years. This would cut our federal (and state spending) by 50% in ten years, Just think what that would do to the tax rate and mean to business growth.

I realize that this will take a great deal of political will to fight off the various special interest groups. Some politicians will not be able to do this and maintain their seats in the legislatures. It will require a great deal of debate and good will between the political parties, something I cannot see on the horizon. If we want to maintain our standard of living we need to take some very large budget cutting actions very soon, time is running out. Remember that the longest journey begins with the first step and that first step is your vote.

No comments:

Post a Comment