Thursday, July 28, 2011

Cut, Act I - Nowhere Near Enough

In October 2010, I posted a series called Grow, Cut, Print and Default. In that post and a series of follow on posts, I postulated that we would have to do all of Grow, Cut, Print and Default in order to work our way out of our fiscal debauchery.

In it, I pointed out that we will take in $2,318B this year and spend $3,608B. To get to the point where we reduce the deficit, ie spend less than we take in so that we can pay back some of our borrowings, we're looking for more than $1,290B in annual spending reductions.

This is not some 10 year calculation as our politicians are talking about.

Every spending 'cut' package I've heard about recently talks of $2-$4 Trillion. That sounds big right? Well, no. It's over 10 years. $3 Trillion=$3,000 Billion divide by 10 years and annual spending is getting reduced by $300B.

Only another $1 Trillion or $1000 Billion to go. Each and every year. That would require d $13 Trillion package. Before we start paying back any of the debt we owe, which is another $14,500B (or $14.5 Trillion) (see the debt clock). If you wanted to be out of debt in 20 years, we'd need to run a surplus of $700B each and every year.

So, if you want to get somewhere, talk about changing federal spending from $3,608B to around $2,750B each year - less if you want to pay down the debt.

Below are some further thoughts on the sources of cuts and revenues, along with the possible consequences of acting insufficiently.

Accurate Reality: To get out of this mess, we've got to balance annual spending first. This means drastic changes in our expectations of the Federal government and huge cuts in expenditures. What we are seeing today is not even close, despite the media frenzy to what needs to happen. Assuming we balance the budget, then we should be able to avoid default, provided we also print and grow.

In May 2010, Niall Ferguson gave a great speech in which he explored the implications of public debt. He points out that throughout history serious political instability has resulted from public finance crises. Throughout history, national weakness and often fall has accompanied such political instability.

Without further change, it appears we are headed down that path.

We spent $1,421 Billion on Social Security, Medicare and Medicaid. 61% of all federal receipts were spent on these three 'safety net' programs.

Cutting requires electing responsible representatives to our democratic government who are willing to face changing Social Security, Medicare and Medicaid back to safety net programs; willing to reduce significant expenditures of blood and treasure on ill conceived overseas adventures; and remove the federal government from abusing its highly effective taxing capability to tax citizens and then give that money to other government entities, particularly States, to spend on programs and embarking on interceding in all aspects of American life simply because it can. Even with all these things done, cutting to a primary fiscal balance where expenditures are less than receipts probably requires additional taxation - although hopefully at the state level as the federal government exits numerous programs in many departments.

The Cato Institute has published a full page advertisement. In it they outline certain positions on cutting government spending. These positions are further elaborated at their site Downsizing Government. Their positions are a good start. I'll enumerate their positions and add a few.

Eliminate Education Subsidies. $40B. Remove the Federal Government from Education. This is a local matter. Even state intervention in order to promote equality, driven by court rulings, has been a huge mistake in ensuring quality improvement in schools. If the basic need to ensure good education is "hire the best teachers, get the most out of them, and focus hard on students that lag, quickly" then absolutely nothing needs to be done at a Federal or State level. This is all local work. If rural and poor areas have schools that are slightly inferior because they can't attract the best teachers, tough. They'll do better than they are doing now, awash in money and red tape. Quality education is not a money problem, despite what the teacher unions say. Spending has more than doubled since 1980 without effect.

Eliminate Farm Subsidies. $25B.

Reduce Military Overreach. Eliminating unnecessary overseas missions (troops in Germany and Japan?) and ending nation building in Iraq and Afghanistan could yield $225B per year.

Housing. Exiting the Federal Government from the housing business would save $45B.

Federal Worker Pay. Cato says cut 10% for $20B. I say bid all jobs to market rates and save $50B.

Energy. Cato says that ending Energy subsidies would save $20B. I support some Federal help in clearing the way for clean energy - meaning nuclear energy - by eliminating legal and regulatory roadblocks in order to free the United States from dependence on oil imports.

Heath Care. The impression in the United States is that 'Medicaid works.' Little could be further from the Truth. Household budgets work if you ignore income as well. Replacing government bureaucratic control of healthcare with consumer led buying would save $100B. This could be implemented via sending insurance back to the 'insure for catastrophe' place it should be and putting folks on the hook to pay for their own basic care. getting from today's mess to rational price transparency so that people could make informed decisions will take some work. Programs for the poor contained in Medicaid should be reimplemented in a least cost delivery model - think corner clinics, not a middle class - choose your own doctor - model.

Drug war, Privacy and TSA. Cato says returning drug policy to the states and decriminalizing certain things would save $15B. The spending going in to airline safety, monitoring telephone calls and internet messages would probably, likewise add another $15B if reduced.

Social Security. Cato wants private accounts and estimates a savings of $50B in 2020. This program was not intended to be a pension for all citizens, but a safety net for those that could not provide for themselves. This should be recast and implemented as a negative tax. It should be aggressively income controlled against a poverty level that does not include luxury items (by this I mean cable TV, phone service, etc). Living on social security should be two notches above avoiding starvation. I cannot produce an estimate of the savings.

Transportation. There should be no subsidies to states for roads beyond what is needed for national defense. $20B

This sounds pretty drastic. This adds up to almost HALF of what we need to cut, or $550B. This is on our annual spending.

On the 'tax expenditure' side - this is Orwellian political speak for tax breaks which if eliminated raise revenue, we need to just implement the AMT for everyone and create a flat tax through its gradual inflation aided implementation. This would put us on a path toward a two bracket income tax structure with rates of 26% and 28%. It would raise $112B in 2011 according to the Tax Policy Center. Combine that with eliminating the wage cap on social security payroll taxes for another $100B and you're starting to get in the ballpark.

Growth requires the rule of law and not the whim of a government of men that feel they can and should re-write the rules constantly and to the benefit of their political sponsors. A stable and reasonable tax and regulatory environment fosters growth through creating a predictable environment for entrepreneurs to operate within.

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