June 3, 2009

Give up something - America's real choice (Part 1)

[NOTE: This is going to seem like a doomsday post. It's not meant to be - it's meant to be a wake up call.]

America's political landscape is most often divided into two camps - liberal and conservative, with moderates flip-flopping between camps or unable to commit to either one. Liberals of course are interested in social programs, while conservatives tend to favor limited government but a strong military for national defence.

The problem is that in order to please base constituencies, and in order to 'effectively' fight for the middle ground, both Democrats and Republicans tend to favor one area but are generally unwilling to pare back the other area. Fiscal conservatives rightly talk about the Obama deficit levels being unsustainable. But the truth doesn't really end there. America's days as a superpower are in jeopardy because the reality, which is far worse than just Obama's budget, is looming ever closer.

Putting it in context, we'll use President Obama's 2010 fiscal budget as an example. There are two distinct issues to deal with - the deficit and the national debt.

Taming the deficit

As seen in the chart below, the 2010 budget shows just how unsustainable the current situation is. Even President Obama's supposed push towards fiscal responsibility has as a target at 2013 of a budget deficit of over $500 billion. It's probably where he wants to net out with the health care costs tacked on to the current mess. Perhaps the use of this crisis is for the shock value so that the sticker shock for health care and Obama's spending when it falls to $500 billion won't be viewed as being so irresponsible. But it still is.

Nevertheless, this post is not supposed to be about ideology, so I'll stifle it for now. Take a look at the chart and see for yourself how the money the government gets and spends is allocated. Below I'll show you some back of the napkin calculations on the numbers that will hopefully scare the pants off you.

Here's the link.

Some interesting things I noticed;
  • All mandatory spending and defense spending combined equal 119.2% of government revenue. In other words, if every other dollar the government were to spend was cancelled, there would still be a deficit of $466.7 billion dollars in 2010. How the President plans to get to a total deficit of $500 billion is not obvious (or it is if you consider much heavier taxation a realistic probability)
  • In order to balance the 2010 budget by cutting spending evenly, across the board, INCLUDING MANDATORY EXPENDITURES, every cost to the government would need to be cut by 33% (including social security, medicare and medicaid)
  • In order to balance the 2010 budget by raising all taxes equally (including personal, corporate, payroll taxes, duties, etc.), each and every government tax/levy/duty would need to go up by a staggering 49.2%!
  • If we were to cut only discretionary spending to meet the budget gap, all discretionary spending items would need to be cut by a whopping 85.6%!
  • Alternatively to appeal to the moderate view, the government could raise taxes by 25% and cut all spending (including mandatory items) by 16.3%
  • The last option available to the government would be to increase taxes by 14.75% and reduce discretionary spending by 60%
None of those options seem to be the least bit feasible. But what other options are there? Only one other option exists. Lowering taxes, and depend on the validity of the Laffer curve to generate more revenue instead of less revenue.

Depending where you are on the Laffer curve, less tax can definitely increase government revenue. The real question in that regard, is whether there is enough room for it to generate enough additional income to offset those costs. And beyond the 2010 budget, there is a huge storm of additional mandatory spending on social security, medicare and medicaid associated with the aging of the Baby Boomers (see Part 2). So in a static 2010 world, reducing taxes might actually work, depending on how it's done. But in reality, it's not an option either.

So what it comes down to in terms of real choices, is this:

America cannot afford to do everything it wants to do. Some spending items HAVE to be cut or huge tax increases must be made. There is no other way. Since this is not supposed to a specifically partisan post, I'll leave the decision as to what to cut to your own imagination. But clearly the cuts will have to be deep.

Raising taxes, especially by 33% is political suicide. No one will do it. The parties couldn't even do it by mutual agreement. The Tea Parties would be like, well, tea parties, compared to the revolt that would take place on a 33% tax hike across the board. Not to mention the fact that increasing corporate tax rates by that amount would help kill off whatever business still remain based in America after the rest had fled offshore.
Cuts? Cuts do not have to be made across the board. If you aren't worried about China, Russia, Iran, North Korea, terrorism etc., the Department of Defense could conceivably be cut by say $400 billion a year. The consequence - America would not be a military superpower any more. And still, the cuts would not be enough.

Alternately America could cut the biggest mandatory spending items; Privatize Social Security, and Medicare but not Medicaid, perhaps cut it only by 8% or so. That would balance the 2010 budget. But it would mean no health care for the elderly and no social security. At least not as part of the system they paid into. Perhaps instead of packaging and selling off bad debt, Treasury Secretary Timothy Geithner should be packaging off these items. Granted, it's political suicide to cast off the elderly and to alienate the Baby Boomers who are less than a year away from collecting on the systems they've been paying into for their entire working lives.
But those two items - Social Security and Medicare are the two 800 lb. gorillas in the room. They are ready to explode in costs (see Part 2). They have to be addressed one way or another.

America has some really, really hard choices looming. The government is huge. It's too big. Colin Powell and his 'Americans want more government' comment is either blind to, or deliberately ignoring, the fact that the United States cannot support the government it has now, never mind adding more. Unfortunately, most Americans seem to be blind to the same facts.

The breaking point is coming. And it's coming fast. These choices can really no longer be punted down the road to the next group of politicians. America has been living off the industrial era of the past for far too long now. The US government is going to suffer the same fate as GM, and soon. The irony is that while GM promised too much to employees, punted problems down the road, and let the problems it faced accumulate to the breaking point. While the government is busy wagging a stern finger at GM, it's busy itself promising to much, punting problems down the road and allowing the the problems accumulate to the breaking point.

To paraphrase an old saying, What's bad for GM, is bad for America. Hopefully enough people see the parallel to do something about it.

Next in Part 2: Conquering the Debt

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