Don’t Fall Over The Fiscal Cliff – JUMP!

• August 23, 2012 • Uncategorized

Don’t Fall Over The Fiscal Cliff – JUMP!
By Doug Lord

As the end of the year draws ever closer – we are going to hear (read) more and more campaign rhetoric about the dreaded “fiscal cliff” – what will happen if the government doesn’t kick the can down the road just one more year, and more importantly – who to blame if bad things happen. I expect this from liberals and the main stream media – they never want to make hard choices. But this morning I received an email from the normally solid Heritage Foundation calling on Congress to not only extend every tax cut, but to renege on its pledges to cut spending through sequestration.

Have we lost our minds? Have Republicans forgotten that betraying our belief in small government and fiscal discipline is what gave us Barak Obama, a Democratic House and Senate, and $16 trillion of debt? Is no one paying attention to what is happening in Greece? Do we not understand the consequences of failing to take bold action TODAY? We should not fall over the fiscal cliff – we should JUMP!

There is no doubt that jumping off the fiscal cliff will require sacrifice. The CBO recently estimated GDP growth in 2013 could fall to -0.5% and unemployment could rise to 9.1%. But what will happen if we fail to take bold action today? When exactly will the economy be strong enough for us to wean ourselves off $2 trillion deficits? And can our sick patient actually live long enough to get there?

Not only can we not afford to compromise on the fiscal cliff, we need to double down on the proposed cuts. While liberals whine and moan about the Ryan plan, and Republicans praise it as the solution to all of our problems, it is actually TOO TIMID and far too slow. The patient is far sicker than anyone admits. The consequences of failing to act are far more grave then anyone is willing to consider. And the amount of time we have left is much shorter than anyone knows.

Mr. Romney needs to recapture the optimism of his book No Apology and release a simple, concise and courageous plan for balancing the budget and getting America back on track. Unfortunately the Ryan plan is not enough. By my estimates we have at most until the end of his first term to get our budget deficits as close to $0 as possible. The Tea Party needs to recapture the energy and strength they demonstrated during the 2010 elections and the 2011 debt ceiling fight. They must hold Republican feet to the fire and vow to launch primary fights against any Republican that even discusses reneging on their promise to cut spending by reducing sequestration cuts.

The Consequence Of Failing To Act

Before analyzing how severe the cuts to government spending REALLY need to be – we need to understand the consequences of failure. On August 14th Greece announced its GDP declined 6.2% year-over-year. Things are so screwed up over there – THAT WAS GOOD NEWS! Let that sink in for a minute. Greek GDP declined by 6.9% in 2011. In fact, Greek GDP has been declining since Q1 of 2009 and is down more than 17% since Q2 2008! And GDP is expected to decline further in 2013, 2014 and 2015. Unemployment is 22.5% and GETTING WORSE! It was 16.2% one year ago. Youth unemployment is 55% – meaning there are more young men throwing fire bombs in the streets then working. The Greek stock market has declined from around 5,300 to 640! Everyone’s savings have been wiped out. I think we can all agree Greeks are in a Great Depression.

The Path To Downfall – How Close We Are

What got Greece to this point, and more importantly how close is America to the same result? Greek government debt is currently 133% of GDP. This is AFTER they defaulted on half of their debt in 2011! The Greek government ran a budget deficit of 9.1% in 2011 and they have to beg Germany for the money to fund their deficits because Greek 10 year bonds yield 23.85%. Since businesses have to pay even higher rates – their economy is dead.

How does this compare to the US? US government debt is weeks away from topping $16 trillion ($15.98 right now). That’s over $50,000 per person. By comparison Greece’s debt is below $40,000 per person. Even worse, about HALF of the 117.6 million households in the US PAY VIRTUALLY NO TAXES. So if you are a member of a tax paying household – you owe a little over $270,000. At $16 trillion the national debt is now more then 100% of our roughly $15.3 trillion of GDP. Not as bad as Greece’s 133%, but well above the 90% that Reinhart and Rogoff describe as hindering economic growth. And it gets better. Total state and local government debt adds another $2.8 trillion. And if the government did its accounting the same way the SEC makes corporations report you’d add $9.2 trillion of debt for Social Security and $24.6 trillion for Medicare. In fact, TREASURY admits its total debt is $51.3 trillion (they just don’t say it very loud).

What about the rate of change? Greece ran a budget deficit of 10.3% of GDP in 2010. That fell to 9.1% in 2011 and is so far ahead of its target to fall to 6.7% in 2012. Greece has pledged to reduce its budget deficit to less then 2% in 2014 – although they are begging for a 2 year extension. Before we can see how the US compares, we have to remember that the US government lies to us when it reports deficit numbers. Not only does it not use accrual accounting for Social Security and Medicare, but in years where those programs have taken in more money than they have paid out, the government STEALS the excess and pretends it spent less on the military. To get back to reality you need to look at the change in year end debt balances.

 

Debt

Change

% GDP

2000

5,629

2001

5,770

141

1.4%

2002

6,198

429

4.0%

2003

6,760

562

5.0%

2004

7,355

595

5.0%

2005

7,905

551

4.4%

2006

8,451

546

4.1%

2007

8,951

499

3.6%

2008

9,986

1,035

7.2%

2009

11,876

1,890

13.6%

2010

13,529

1,653

11.4%

2011

14,764

1,235

8.2%

Today

15,981

1,217

2012

16,654

1,890

12.1%

Houston – we have a problem. 10.3%, 9.1% and 6.7% is A LOT BETTER then 11.4%, 8.2% and 12.1%. And imagine how tough the Ryan plan would have to be to get US deficits under 2% in 2014!

Whether you look at debt per tax payer, debt to GDP or the rate of change in debt to GDP – the US is, or will shortly be, in the same condition as Greece. If we do not do something meaningful during Mitt Romney’s first presidential term – we could be staring at 20%+ unemployment, a 20% decline in GDP and 20%+ interest rates. The ONLY thing preventing this from happening right now is the USD’s status as a reserve currency and the fact that Ben Bernake is aiding and abetting Comrade O’s rape and pillage of US tax payers by buying 61% of the Treasuries that are issued by Timmy G. The second Helicopter Ben stops buying treasuries – no one is going to step in and replace that demand, meaning a sudden and dramatic increase in interest rates is possible any day.

The Fiscal Cliff

Now that we have established the potential costs of failing to act (a 2nd Great Depression) – let’s examine the dreaded “Fiscal Cliff” everyone is so desperate to avoid.

Taxes

Billion $

% GDP

Bush Tax Cuts – Over $250k Income

135

0.9%

Bush Tax Cuts – Under $250k Income

50

0.3%

Obama Payroll Tax Reduction

125

0.8%

Alternative Minimum Tax

115

0.8%

Obama Care Taxes

20

0.1%

Other Taxes

85

0.6%

Total Taxes

530

3.5%

Spending
Sequestration

85

0.6%

End Of Extended UE Benefits

35

0.2%

End Of Doc Fix

10

0.1%

Total Spending

130

0.8%

Other

105

0.7%

Total

765

5.0%

Source: http://www.voyagercapitalmgt.com/images/uploads/documents/temp_file_fiscal_clff_(3)1.pdf

Spending & Sequestration

One of the items everyone wants to “compromise” on are the automatic spending cuts to Medicare and Military spending that Congress agreed to in return for the American people raising Congress’ credit card limit. While the spending “cuts” are a small number compared to potential tax increases – they are critical to establishing Congress’ credibility on cutting spending. I understand Nancy Pelosi and Harry Reid weaseling out of their commitments – Democrats did the same thing to Reagan for 8 years. But when I hear Republicans talk about compromising to avoid cutting their pork barrel military spending – I am outraged. These fake “fiscal conservatives” allowed George W Bush to make a mockery of the ideals we claimed to support during the Republican Revolution. The betrayal of our small government roots is why Americans voted for Obama and gave him control of both houses of Congress. If Republicans go back on their word to cut spending this time, I hope the Tea Party throws everyone of them out of office.

These “cuts” were agreed to by Congress in return for the AMERICAN TAXPAYER agreeing to raise their credit card limit to $16.4 trillion – a number that was supposed to last till mid-2013 – but will likely be breached before the election. If you want to go back on your word – we want the debt ceiling reduced back to $15.5 trillion.

Secondly, let’s not forget that these “cuts” were already DRAMATICALLY diluted in a “compromise” with Nancy Pelosi and Harry Reid. They were the BARE MINIMUM we were willing to agree to. They aren’t even “cuts” outside of the bizarre world of baseline budgeting. Please someone show me the draconian spending “cuts”!

2012

2013

2014

2015

2016

2017

Pensions

820

878

926

979

1,037

1,092

Health Care

846

916

1,039

1,116

1,215

1,255

Education

153

136

121

120

117

120

Defense

902

901

800

778

795

808

Welfare

452

422

403

397

399

394

Protection

62

63

57

57

59

58

Transportation

103

114

108

106

109

113

General Government

34

28

28

29

31

33

Other

200

96

70

55

49

93

Interest

225

248

309

390

483

565

Total Spending

3,796

3,803

3,860

4,028

4,294

4,532

Change

8

57

168

266

238

% Change

0.2%

1.5%

4.4%

6.6%

5.5%

We need to get real. The consequences of “becoming Greece” are far too horrible to risk, and the timeline we have to avoid it is far smaller than people like Bernake are pretending. We have at most 2-4 years to get our deficit to as close to $0 as possible. And this year we will be lucky to bring in $2.5 trillion of revenue. Furthermore, while making these cuts, we cannot afford to rely on fantasy growth rates to boost revenue. Making these cuts will likely cause us to go into another recession. Assuming 3% revenue growth over 4 years, we can basically count on just $2.8 trillion of revenue at the end of Romney’s first term. Cutting spending from $3.8 trillion to $2.8 trillion (~25%) is a MASSIVE challenge that requires a plan that goes FAR beyond the already agreed to spending “cuts” and “Ryan Plan” – which keeps FY 2017 spending around $3.8 trillion. This is not the time to go back on sequestration.

Taxes

The far larger part of the “fiscal cliff”, and one where I am going to break with traditional Republican Orthodoxy is the expiration of tax cuts. We should let every single one of the tax cuts expire. We certainly can’t afford Obama’s Social Security robbing, vote buying, payroll tax reduction. And frankly I don’t want my Bush tax cut either. I don’t want anything with Bush’s name on it. I would prefer to wipe the Bush name off the Republican record. I want a totally new Romney tax plan. We should take a year, discuss what we want the government to do for us, how much we are willing to pay for it, and the most efficient way to collect those revenues without hurting economic growth.

Allowing all of the tax cuts to expire would take 2013 revenues to approximately $3.0 trillion and cut our deficit dramatically. The pain from this should motivate Congress to come up with a new tax system as quickly as possible. Personally I can’t imagine us cutting 2017 spending to $2.8 trillion, so I could imagine a system that collects a few hundred billion more – hopefully by closing loopholes like the mortgage deduction, lowering corporate and individual tax rates (particularly reducing the cost of repatriating foreign earnings), and introducing consumption taxes to offset some of the lost revenue.

But let’s be honest, even if we design a system that takes in $3.0 trillion of revenue in 2017 instead of $2.8 trillion ($2.5 trillion grown by 3% for 4 years), we still need to cut spending by $1 trillion more than the Ryan plan calls for.

Where to Get Extra Cuts

Medicare & Social Security
The highlight of the Ryan plan are his changes to Medicare, but given he plans on running deficits of 2%-4% for as far as the eye can see (despite far too optimistic GDP growth rates), I feel comfortable saying it doesn’t go nearly far enough. We need to do something equally ambitious with Social Security. The traditional Republican ideal has been to turn the defined benefit system into a defined contribution system, but I highly doubt we could do that without such massive welfare subsidies as to make it pointless. After all the Dems plan since the inception of Social Security was to turn it into a massive vote buying welfare program that collects taxes only from the upper class and distributes payments only to the lower class. To prevent Dems from turning Social Security into just another Welfare program we need to take revenues AND costs completely off the Federal books. In fact, Social Security should become an independent company that reports to taxpayers using accrual accounting like any other firm. As part of this transfer, Congress should limit the payroll tax rate to current levels, limit the increase in income limits to inflation and prohibit taxing unearned income unless changed by a super majority vote in Congress. Then the fiduciary could focus on changing the retirement age to whatever level is necessary to manage its obligations.

Welfare
A second source of significant savings is to significantly increase the requirements for receiving welfare such that only the truly destitute qualify and to aggressively pursue abuse. Since Obama took office the number of people receiving food stamps has grown 64% from 28 million to 46 million. Spending on food stamps has grown 122% from $40 billion to $89 billion. The number of people receiving Social Security Disability payments has increased 72% from 5 million to 8.6 million. That cost us $115 billion in 2011. In total 107 million people are currently receiving some form of welfare – about 1/3rd of the population. And nearly half of the population receives some sort of payment from the government – probably the same half that doesn’t pay any taxes.

Corporate Welfare
The definition of welfare and fraud must be expanded beyond just individuals. Corporate welfare and fraud should be looked on with the same level of disgust and disdain. While Republicans gladly criticize our Venture Capitalist In Chief for losing taxpayer money “investing” in solar companies run by campaign donors, they are oddly quite when Frank Lucas (R-OK) defends the $20 billion of welfare Farmers receive every year via direct payments, crop insurance, loan assistance and conservation programs. To be clear, when I talk about corporate welfare I am talking about direct expenditures, not the so called “tax breaks“ or accounting changes that Democrats claim prevent them from stealing as much money as they should be able to. According to the Cato institute these totaled $97.6 billion in 2012 (http://www.cato.org/pubs/pas/PA703.pdf). Unlike individual welfare, where probably just 50% is corrupt and indefensible, I would cut 100% of corporate welfare.

Not only does the government need to stop deciding which companies will be given tax payer money, the government needs to stop running corporations inside the government. If a product or service can be provided by a private company or a state / local government – it should be. Privatizing the post office would save $15 billion, Amtrak would add another $500 million. The Highway Trust Fund is supposed to be financed from Federal gas taxes but it has received $35 billion of transfers from the general fund since 2008 and runs a $10 billion annual loss. If the fund invested only in multi-state infrastructure and left all state and city roads (and bridges to nowhere) to states and cities– then the fund would spend far less then the $53 billion expected in 2012.
The more controversial line item is education. Because education is best handled at the local level, I can’t imagine what legitimate function the Federal government could possibly be involved in.

Defense & Protection
This is another area where I deviate significantly from the Republican script. Defense spending should not only be cut, it should be cut far more aggressively than the automatic spending cuts call for. Mr Romney has pledged to keep military spending at a minimum of 4% of GDP – citing historical precedent. Problem is – his data set is VERY skewed. It’s funny how Republicans refer to the Founding Fathers on so many topics, but suddenly fall quiet when it comes to the military. To the Founding Fathers a standing army was a threat to Democracy. To me it’s just a waste of money. From 1800 to 1940 military spending averaged 1.25% of GDP excluding the periods of 1862-1866 and 1917-1921 (where it averaged 8%-10%). Then came WW2 which spiked spending to roughly 40% of GDP for 3 years and kept it close to 10% until 1972. Since 1990 it has averaged 4.6%. I don’t have a specific level in mind, instead I have a list of priorities.

Pensions, retraining expenses and medical insurance for veterans is the only thing I would never cut. The roughly $45 billion of economic and military aid we send abroad should be cut to almost $0. The roughly 1,100 military bases we have around the world should be cut to a dozen or so. And while everyone would like the hundreds of thousands of troops in Iraq and Afghanistan to come home, I’m looking for significant structural cuts to the 20,000 troops we have in the Middle East outside of Iraq, the 65,000 we have in Asia outside of Afghanistan and the 80,000 we have in Europe.

Government Employees, Salaries and Pensions
Smaller government obviously means less government employees. Furthermore, it means an end to paying government employees higher salaries and pensions then the tax payers that pay them. It is a national disgrace that the 3 richest counties in the US are Loudoun, Falls Church and Fairfax counties in Virginia (5 of the top 10 are in Virginia or Maryland).

We should start by breaking every union contract. FDR (the father of big government) warned us about unionizing government employees. Particularly when those unions can use dues to donate to campaigns and elect politicians that will give the unions even more taxpayer money. We can use the bankruptcy court, since that’s basically where Comrade O will have left us. Layoff at least 20% of the 1.9 million federal employees and cut the pay ($74,403 on avg) and benefits (~$35,000 on avg) of the ones that stay by at least 20% (which simply gets them to private sector levels). That saves roughly $75 billion a year. We can probably cut much deeper than this without impacting services based on the number of reports I’ve read about government employees surfing porn sites all day. And we will need far less bureaucrats if Mr. Romney implements a pro-growth regulatory system. A simple exercise that should take him back to his days at BCG and Bain.

 

Conclusion

• Greece is the example of what will happen to the US economy should we continue down our current path. -20% GDP, 20%+ unemployment and 20% interest rates are in our future if we do not change our ways.
• We are far closer to becoming Greece then any politician will admit.
• To avoid this Mr Romney should release a clear, concise and courageous plan that would get US deficits to as close to $0 as possible by the end of his first term.
• We should not rely on overly optimistic growth assumptions to balance the budget. GDP growth is likely to be subdued by large spending cuts and higher taxes.
• The cuts to spending that will be required are FAR larger and more near-term then envisioned by current “sequestration” and the “Ryan Plan”. Therefore now is not the time to “kick the can” down the road one more year.
• Republicans that go back on their word on “sequestration” and spending cuts must be thrown out of office by the Tea Party.
• We should accept the expiration of all tax cuts to increase revenue from roughly $2.5 trillion today to approximately $3.0 trillion in 2013 – while Mr Romney and the new Congress/Senate come up with a completely new tax code that raises slightly more revenue in a far more efficient manner.
• Mr Romney should be bold in his plans to reduce government spending. Despite the protests of Democrats – there are plenty of places to generate hundreds of billions of savings – although they will require us to go against traditional Republican orthodoxy and fake “fiscal conservatives” that are beholden to corporate subsidies and the military economy.

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Comments

One Response to “Don’t Fall Over The Fiscal Cliff – JUMP!”

  1. Jason on August 24th, 2012 5:57 pm

    Nice article, but I’m guessing that regardless of who gets elected this can is getting kicked further down the road (unless GOP makes a clean sweep and even then you have the risk of Bush era tax cuts combined with increased spending). They’ll compromise on something incremental rather than structural.

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