Thursday, July 22, 2010

The Massive Compromise of 2011 We Need

 "But with respect to future debt; would it not be wise and just for that nation to declare in the constitution they are forming that neither the legislature, nor the nation itself can validly contract more debt, than they may pay within their own age, or within the term of 19 years?"  -Thomas Jefferson, September 6, 1789

Maybe we should listen to Mr. Jefferson, don't you think?

Don’t read this post if you are not completely serious about reducing these gargantuan federal budget deficits and the national debt for us and our children before they do irreparable harm to our economy and nation.

Don't read this if you still believe that Santa Claus drops presents down the chimney at Christmastime; the Easter Bunny really lays Easter eggs or that we can: A) cut taxes a lot more AND B) not reduce spending or make major reforms to our entitlement programs and come out of this all right. 

And please don’t read this if you think we can just spend whatever we want whenever we want without incurring some big-time consequences down the road as a nation.

Now that we have winnowed the audience down to perhaps a handful of responsible adults out there, let’s think honestly and openly about how we can get this thing solved once and for all.  Then we can all go on about the rest of our lives without ever hearing anyone talk about the ‘federal budget deficit’ again. (Lord! Let It Be So!)

Just one final reminder of just how seriously incompetent we have been as a nation over the past 30 years:

We are the very first generation of American citizens (‘We’re #1!’ ‘We’re #1!) who have rung up such an enormous debt without fighting a major war to:  gain our  independence (1776-1781); keep our nation intact (1861-1865) or save the world from megalomaniacal madmen like Hitler (1941-45).

Even during the Great Depression, we ‘only’ ran up the national debt to 35% of a crashing GDP.  We now have a debt load at 80%+ of GDP…and still growing .

Here are some over-arching principles we would like to see going forward:

  1. Let’s take corrective actions today in one fell swoop and correct our fiscal imbalances…before the Chinese and Japanese stop buying our debt and force us to make these same decisions we need to make on our own without any foreign country dictating to us what to do.
  2. Let’s set a course of fiscal sanity that will last us not through the end of the next fiscal year, but through the whole century so our kids and grandkids can get a chance to ‘secure the blessings of liberty’ as promised to them in the Constitution.
  3. Let’s adopt an attitude that the federal government should be limited in scope and allow state and local governments to fund and administer programs tailored to their specific needs.
  4. Let’s return to the concept that federal assistance, in any form or manner, should be reserved to very narrow dictates of providing for the common defense; providing for some semblance of the common welfare for the nation as a whole, and helping to provide for people who really can not provide for their own selves or families for whatever physical, mental or sociological reason there might be.
  5. People who have the means and wherewithal to provide for themselves will not be included in any federal entitlement program going forward.  The Founders never envisioned billionaires such as Warren Buffett or Bill Gates drawing a ‘measly’ $3000/month from Social Security or being subsidized to the tune of $12-15,000 per year for ‘mandatory’ Medicare Part B coverage like the average senior.
  6. Use the tax code to raise funds solely for the purpose of paying for federal programs we approve of and have in law, not to punish or advantage any one group of people versus another.

Actions to Take:

  1. Establish a target of 19% of GDP for federal tax receipt in total (since that is what is has been close to for the past 30 years anyway)
  2. Delay the expiration of the Bush tax cuts under current law for one year.  (Obama is going to veto any complete repeal of these tax cut expirations anyway so why not use it in some form of a deal?)
  3. Raise the eligibility age of SS and Medicare to 70 in 3-month increments starting in 2011. We could have SS at 70 by 2023 and Medicare at the same threshold by 2026. (if you don't let the Bush Tax Cuts expire, you might as well advocate raising both threshold ages to 80 tomorrow morning because you would have $3 Trillion more to cut in spending over the next decade)
  4. Transition to a consumption tax to replace, not augment, the current failed income/corporate/payroll/estate and excise tax system starting in 2016. (no income tax/no tax loopholes or deductions to protect.  Pay taxes on what you buy and consume/No hindrance to saving and investing)
  5. Restore PAYGO; entitlement spending increases have to be offset by entitlement spending decreases elsewhere or tax hikes somewhere; tax cuts have to be offset by entitlement spending cuts and discretionary cuts for the duration of the tax cuts and their effect on baseline projections; discretionary spending hikes have to be offset by discretionary spending cuts elsewhere.
  6. Establish a hard cap on all discretionary spending, including defense and homeland security, for the next 5 years almost as if a CR (continuing resolution) were passed at the end of each fiscal year to keep funding at the previous year's levels.
  7. Get Congress take one 2-year session to analyze and evaluate every single federal program and decide which are working and which are not.  And then produce a bill to eliminate all programs that are not working and fund the ones that are working at their minimum effective level.
  8. Pass a balanced budget amendment (with war/economic hardship exceptions) to the Constitution as Mr. Jefferson suggests above.
We don't like higher taxes any more than you do.  But we fear continued accumulation of  humongous and dangerous levels of national debt much more.  Particularly when the real danger is compounding interest payments on the national debt when we know that the only direction for interest rates to go is 'up' from their near-zero levels of today.  We are now spending close to 12% of our budget on net interest, or $400 billion in FY 2010. 

What happens 'when', not 'if', interest rates go to 5%, 7%, or 10%+?  We will be looking at net interest payments of over $1 trillion...per year...forever.

Here's what we know about taxes: they can be raised or lowered by the legislative process in a new Congress every two years.  So if they go up as a result of the Bush tax cuts expiring, they can be reduced one day when the deficits look like they are under control again.

But paying ever-escalating amounts of interest payments on a continually expanding debt can not be changed by legislative fiat.  Once interest payments hit the 'tipping point' of out-running a nation's (or a business or an individual for that matter) ability to make the debt service payments, 'that is all she wrote'  if you look at history even in a passing manner.

And we think that is a devastating possibility no one wants to even come close to messing with.

We didn't say this 'Compromise' was going to be 'easy' or 'a marginal step' or 'an iteration'; we said it was going to be 'massive' and it is.  But it would have the greatest chance of returning our federal budget to balance in the shortest amount of time and prevent our children from desecrating our tombstones after we slip these mortal coils of earth.

Because if we don't do this, they will...and it will be deserved.

      Thursday, July 15, 2010

      What Is Needed Is ‘The Massive Compromise of 2011’

      “Some men dream things as they wish they were and ask ‘Why not?’. Others see things as they are….and do something about it.”

      (with sincere apologies to George Bernard Shaw via Robert F. Kennedy)

      Here’s what we Americans seem to forget from time to time:

      It is far better to get things done than to just talk about how great it would be ‘if’ things were perfect and ‘if’ we could get our way 100% of the time.

      That is called 'fanciful thinking' and we have had loads of it for decades now. Tractor-trailer loads of it.

      Especially now that political ideologists and dogmatists on both sides of the aisle have combined to help produce a $13 trillion national debt baby, soon to be weighing in at $20 trillion, that no one wants to discipline or even put diapers on.

      Things are never ‘perfect’ and in a messy democracy like ours, we should be thankful no one gets away with doing whatever they want 100% of the time, for the most part.

      (Except somehow the Obama White House has gotten pretty much every single thing they wanted over the past 18 months. Would maybe even a teensy, tiny bit of compromising and leavening the legislative loaf with some free-market principles from the other side have helped even a little bit by now?)

      If nothing else will change your mind, take a good look at the past decade of unified government in Washington and see what total control of the government by either the Demopublicans or Republocrats has done for you. 

      Give us ‘compromise’ and ‘gridlock stalemate’ every time from here on out.

      American politicians have been talking (and talking) and posturing (and posturing) about balancing the budget for so long that it is really difficult to believe we haven’t been able to do it other than 1998-2000.  And a lot of that was by ‘sheer luck’ when the geniuses behind the internet boom went public and made billions on IPOs, exercised all their warrants and options and paid immense amounts of capital gains taxes way beyond what any CBO estimator ever dreamed of estimating.

      The only reason why we have taxes in the first place is to pay for the government services our Forefathers delegated to the federal and state and local government they thought we all wanted.  Like to be defended from foreign attack or to build canals and roads and such….it is all in the Constitution, you can look it up and see for yourself.

      We have to have taxes if we are going to have a civilized society.  We just happen to prefer that taxes be at a far lower rate.  Which, by definition, means that anyone who agrees with us that lower taxes are good for individuals, the nation and the economy, has to also support decisions and votes to lower the overall level of government spending, regardless of what program is involved.

      We can not and should not let this debt go on unabated forever.  Erskine Bowles, co-chair of the National Debt Commission set up by President Obama, called it 'a cancer that will kill us from within' if we don't take dramatic actions now, today, not next year or in 2020....but today.

      Here’s a sad ‘truth’ we have gleaned over 30 years in-and-out of politics and government:  We have never seen a zealous ‘tax-cutter/supply-sider’ who was equally adamant about reducing spending.  Ever. 

      Everyone likes to cut taxes for everyone…that is the easy part.  But tax cutters/supply siders always take the ‘easy way out’ and swear on a stack of Bibles that ‘if we cut taxes far enough, and fast enough, we can out-grow all of the spending growth in these exploding entitlement programs and balance the budget, honest to God!’. 

      And it never happens.  Didn’t happen under Reagan in the ‘80’s or Bush 41 up to 1992.  The economy exploded in the internet boom in the 90’s…and that was after President Clinton and a Democratic Congress raised taxes in 1993!  What in the world happened there if higher taxes were supposed to completely kill economic growth?

      Let’s be grownups and face the truth of the matter: Based on the last decade of predominantly single-party rule by either the Democrats or the Republicans, our fiscal picture is an out-and-out disaster and embarrassment to any reasonable person on the face of this planet.

      Extended periods of reckless spending and accumulation of debt over history since before the birth of Christ have always led to inflation, devalued currencies, higher interest rates and a general slowdown of economic activities over the ages until: 1) the country is conquered by a rival; or 2) it just slips away into the trash-heap of history cause it can’t pay its bills.

      Maybe we can avoid that fate….and then maybe not.  Why take the chance when we know what we need to do to correct everything anyway?

      When Republicans were in control of Washington from 2002-2006, they did not cut any spending or even try to make the federal government any smaller and less expansive, despite wanting to posture themselves as the supposedly ‘small government’ party.

      The Democrats have shown they have absolutely no shame when it comes to spending money we don’t have on programs that don’t work (i.e. the ‘stimulus’ package). They then have the unmitigated gall to try to sell the snake oil that ‘all we gotta do, people, is make those gosh-darned rich multimillionaires pay their ‘fair share’ of the taxes and we will have all our favorite programs paid for!’

      There ain’t enough millionaires to skin alive to pay these enormous bills we are ringing up.  Besides, they are smart enough and wealthy enough to hire the best tax accountants and lawyers to figure out how to pay what they want to pay the federal government each year in taxes, not what some politician in Washington or the White House ‘thinks’ they should be paying.

      So what are the ‘adults’ out in the country supposed to do about it, now that the children have messed up the sandbox in Washington over the past 10, but really for most of the past 20-30 years on the federal budget?

      We think we collectively, as a nation, all of the responsible adults remaining out there need to push the reset button today and bite the bullet and make a massive decision as American citizens first and foremost to set us on a course that will allow prosperity and growth to return with a vengeance in the near future. 

      It might seem painful at first glance, but it might be the only way out of this mess.

      (to be continued)

      RFK courtesy of
      GBS courtesy of

      Tuesday, July 13, 2010

      Did You Know We Are Already ‘Redeeming’ The ‘Social Security Trust Fund Bonds’ Now That There Is A Shortfall…Today?

      Here’s what happened the last time there was a Social Security ‘crisis’ in 1983 when incoming payroll tax receipts were just about to go below the amount of expected benefit payments going out:
      • Alan Greenspan was appointed to chair an august national commission to ‘Save Social Security!’.
      • Your payroll taxes went up. Way up if you were self-employed.
      • The legislation started to push the retirement age for SS up to 66 from age 65 in two-month increments effective in 2003.  You now have to be age 66 to receive full SS benefits. (Did you know that?)

      Here’s what is going on when the very same thing, payroll tax revenues are less than SS payments going out, in Social Security today:

      Nothing.  Absolutely nothing.

      And here’s our rhetorical question:  ‘Why aren’t people going nuts because we are ‘redeeming’ the so-called precious and sacrosanct ‘Social Security Trust Fund Bonds’ that are sitting around in a vault in Parkersburg, West Virginia (seriously, that is were they are) to pay the shortfall we have now?’

      The answer to the Jeopardy question in the category, ‘Great Political Acts of Prestidigitation’, Alex, is:  “There is no ‘true’ SS Trust Fund or bond to redeem!  Anywhere in the world!   Including Parkersburg, West Virginia!’

      It struck us when a recent CBO report came out detailing the myriad of steps that can be taken to shore up the Social Security system (click and see for yourself) so it can be in ‘actuarial balance’ in the year 2085.  Some good that will do for us, huh?  We are out of cash today in 2010, the 'surplus' will be exhausted in 2039 and in 2085, we will be around 130 years old due to amazing new advances in American medicine.

      ‘Actuarial balance’ is an entirely different thing than ‘reality’ so suspend your belief in ‘trust funds’ and ‘SS surpluses’ when you read this chilling report.

      Here is what is going on today, in the ‘real-world’ as we continue to pay out SS benefits, even though there is far less money coming in from payroll taxes due to this nasty recession the Obama White House and Congress said was going to be ‘fixed’ by the massive stimulus bills they passed early in 2009.

      The SS checks are still being paid in full to every beneficiary…almost entirely because of continued borrowing from the Chinese and other sovereign nations overseas.  Don’t look at the most recently published cash-flows or balance sheets of the Social Security Administration because it will shock you……and we are still paying out full payments each and every month as if everything is just peachy keen and rosy.

      ‘If’ there was a real trust fund, and ‘if’ there were any real bonds to redeem to pay these commitments to SS recipients, the government would be cashing them in and putting that money in a checking account…and then writing the checks to all the seniors.  After all, true bonds are assets that can be cashed-in when you need the money to pay your bills and commitments when you are short on income and cash, like during this god-forsaken recession, aren’t they?

      Well, in this case, they are not….not by a long-shot.  What is going on right now is precisely what is going to happen when the so-called ‘actuarial balance’ is reached in a number of years.  The ‘fake’ bonds are going to be ‘redeemed’ just like they are today…an accounting entry is made to debit the SS account for the amount of the shortfall and that is it.

      The actual money that is being used to pay the SS commitments is borrowed from someone like the Chinese to pay the SS benefits.  Congress could say that every other federal program is going to be reduced to pay the shortfall in these current SS benefits, but it won’t.  Congress could raise taxes to pay for this shortfall in SS benefits, but they aren’t.  Or Congress could pass some combination of spending cuts/tax hikes to pay for this shortfall, but they will not.

      The same thing is going to happen in 2039 when the SS ‘surplus’ runs out and payments to seniors still need to be made.  We are most likely going to continue to borrow these funds from the Chinese and Japanese…until they decide they are not going to loan us any more of their money.

      The only way to correct the problem is to reduce benefits in some fashion beginning now for all future retirees, like all you Boomers out there, such as raising the retirement age or means-testing among other options in the Social Security Options paper noted above.

      (But not on any currently retired person over the age of 66…you are ‘olly-olly-oxen home free’ so this debate is of no concern to you going forward)

      The resistance to raising taxes on anyone nowadays, especially in the worst recession since the 1930’s, is so overwhelming that the only place to reduce the stress on the entire system is to make the logical changes to bring SS (and Medicare while we are at it) into more balance with the realities of longer life expectancies and improved health outcomes.

      There is no other way around it.  The time has come to pay the piper since all the chickens have come home to roost, to mix a few metaphors if you don’t mind.  We might as well start doing it today and save our kids a lot of money and headaches down the road.

      courtesy of