Monday, March 30, 2015

The 3% Solution

'Live Long...and Balance the US Budget!'
'The Needs of The Many...Outweigh The Needs of the Few'

For some reason, perhaps because of the recent passing of Leonard Nimoy who became famous as 'Mr. Spock' on Star Trek alongside William Shatner's 'Captain-then Admiral Kirk', this statement of Vulcan logic came to mind as we read the most recent January 2015 CBO publication: The Budget and Economic Outlook 2015-2025.

We read these things so you don't have to. However, we hope you actually do want to read it so click on the link above to download the entire 177-page document so you can become of the truly very few who have ever taken the time and the effort to read one of the most important documents the federal government puts out every year.

Think of it this way: If you don't read it and understand the complexities of the federal government budget, how in the world are you going to be able to tell your elected Member of Congress or US Senator or President what to do...mainly because they have not read it either!

'The Needs of the Many' takes us to a global 100,000-foot view of what deficits can do to a nation...and it ain't pretty if history is any indication. We can talk all we want about not cutting this entitlement program or that one; this defense program or that one, or this domestic program such as housing or environmental protection or raising taxes or not.

The bottom-line is that unless we elect some grown-up adults who will take a sober and serious look at our national debt and annual deficit picture, at some point in the future, we may experience the same things other irresponsible nations have in the form of hyperinflation, depreciated currency, sky-high interest rates and inability to raise debt overseas without substantial strings attached.

Here are a few select quotes from the CBO Outlook mentioned above just to get your mind around the magnitude of the problem we all face together as a nation:
CBO expects that federal debt held by the public will amount to 74 percent of GDP at the end of this fiscal year—more than twice what it was at the end of 2007 and higher than in any year since 1950....
In CBO’s projections, outlays rise from a little more than 20 percent of GDP this year (which is about what federal spending has averaged over the past 50 years) to a little more than 22 percent in 2025 (see Summary Figure 2 on page 4). Four key factors underlie that increase:
  • The retirement of the baby-boom generation,
  • The expansion of federal subsidies for health insurance,
  • Increasing health care costs per beneficiary, and
  • Rising interest rates on federal debt.
Under current law, spending will grow faster than the economy for Social Security; the major health care programs, including Medicare, Medicaid, and subsidies offered through insurance exchanges; and net interest costs. In contrast, mandatory spending other than that for Social Security and health care, as well as both defense and non-defense discretionary spending, will shrink relative to the size of the economy....
By 2019, outlays in those three categories taken together will fall below the percentage of GDP they were from 1998 through 2001, when such spending was the lowest since at least 1940 (the earliest year for which comparable data have been reported).
Revenues are projected to rise significantly by 2016, buoyed by the expiration of several provisions of law that reduced tax liabilities and by the ongoing economic expansion. In CBO’s projections, based on current law, revenues equal about 18½ percent of GDP in 2016 and remain between 18 percent and 18½ percent through 2025.
You can see that what we have is a perpetual structural annual deficit problem that has not been addressed by the past 6 years of President Obama's Administration and Congress under Democrat and Republican control . Nor was it seriously addressed under 8 years of President George W. Bush and Congress either, under Democrat and Republican control.

We have now had 14 full years of not seriously addressing the underlying structural problems in our federal budget under both major political party's control. What is that old adage you see floating around the internet that has been attributed to Albert Einstein, but was never said by him:

'Insanity is doing the same thing over and over again and expecting different results'.

Here's something to consider that may be a little different...and so simple that everyone now elected to Congress and sitting in the White House can easily understand it:

'The 3% Solution'

This is so simplistic that no budget wonk on either extreme of the political divide is going to like it. Which is fine with us. We have been listening to the fringes of both the left and and the right now for the past 14 years and look at where that got us: $18 trillion national debt (about 'only' $13 trillion held by the public or overseas sovereign nations which is an important distinction to make) and still growing, not shrinking long-term.

Here's what we propose to reduce the federal budget deficit to zero in the next 8 years. With no new taxes. With no tax hikes.
  • Set an annual overall cap on federal government spending increases to 'only' 3% per year for the entire federal budget.
Take a look at this chart below:

In an almost ridiculously simple manner, all we did was take the official CBO figure of $3.504 trillion in outlays for last year, 2014, and extrapolated them out at a 3% annual growth rate for the next 10 years.

We held revenues the same as the CBO projections.

All other things being held equal, we can balance the budget by 2022. 7 years from now. With no tax hikes, no tax changes, no tax rate warfare.

Hold every other variable the same and voila! We can achieve budget balance nirvana in the next 7 years and the overall budget would grow by 3% annually, not any sort of absolute or even an inflation-adjusted cut to baseline spending.

What could be wrong with that?

The naysayers from the left will say: 'But you will be cutting off aid to women and children and throwing old people into the street!' Not with 3% annual budget increases across the board.

The naysayers from the right will say: 'You are gutting the national defense at a time we need more spending on defense!' We have been around enough defense budgets to know that there are billions of dollars being spent on out-dated and obsolete military programs and personnel that we could probably freeze the defense budget and still have the world's most dominant and efficient war machine to protect our freedoms and interests around the globe.

Or they will say from the right: 'This doesn't cut government fast enough!' Ok, fine then. Set the annual rate of growth to can balance the budget in just 2 years. Long about April of 2017. Look at the chart and see for yourself.

The problem will come when some bright-eyed and bushy-tailed young activist will point out that this will squeeze the major entitlement programs just at the very same time that millions of baby boomers will be retiring and going on Social Security and Medicare which swells those budgets simply by the sheer number of new applicants. Same thing with Medicaid at the state levels.

Well, you know what? That is the price we are all going to have to pay for not doing anything to reform Social Security and Medicare and Medicaid over the past 30 years when we had time to do it. And we collectively all failed. Miserably.

If you want to know how we think any of these entitlement programs can be reformed in a responsible manner, check any of our previous 529 postings and you will see what we have proposed so far. Or email us and we will point you in the right direction.

If we don't do anything to SS, for example, younger boomers can count on one of 2 things: their SS benefits will be cut by 25-35% or so relative to what they might be expecting to receive in the next 10-20 years while on SS. Or, to the converse, younger workers can expect to see their payroll taxes go up 25-35% to pay for more older people retiring per working taxpayer, heading down to an almost 1-for-1 match between worker and retiree in the not-too-distant future.

Or, and this should get advocates of bigger government particularly riled up, we could do nothing on SS and Medicare and Medicaid ever and keep current laws and eligibility in place...and totally gut the non-defense part of the federal budget that pays for many of the programs advocates of more government like in the first place. Pay the full SS retirement benefits and Medicare for every older American with no changes....and completely destroy the existing budgets for education, environmental protection, science and research and any other social program you may support.

Of course, nothing exists in a vacuum. Politics especially loves a vacuum. You see one that is left open and some political animal or opinion or view will fill it. That is just the law of the jungle.

A simplistic proposal such as The 3% Solution would be creamed in the maelstrom of talk radio from both sides from the beginning. However, our purpose is to show you that it can be done. If we have the collective will to advocate for it, that is, and force our elected representatives to either do this simplistic approach or take legislative actions that will achieve the same results in the same short 7 years.

It is worth thinking about. Because the 'needs of the many' (our future adult children and grandchildren and great-grandchildren) 'outweigh' the needs of us boomers who have spent everything there is to spend and then some and are passing along a huge number of unresolved problems we were either too scared or too dumb to make for this nation as a whole.

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