One Person’s Ceiling is Another Person’s Basement
It’s a warm and humid day; not one that lends itself to writing about economics, which I had no intention of doing until, well, maybe a minute ago. When the muse beckons, one must obediently answer its summons. The elevated mercury of our thermometers does not make the task any breezier. Hot climates and productivity rarely result in wedded bliss, although complaints about the heat are deservingly dismissed with, “Well, what did you expect — it’s summer.” An irrefutable argument if there ever was one. Similarly, complaints about our nation’s reckless spending habits are subject to the same pointed joust: Well, what did you expect —it’s the government. Like the scorpion in the old Aesop fable that must sting even though it means its own demise, our government must spend even when it’s broke and impotent.
America now borrows an unprecedented 43 cents for every dollar it spends. This abnormality, once considered deviant, is the new normal. When Barack Obama was elected President of the United States, spending was already unsustainable. Nevertheless, Obama proceeded, in the spirit of the “Great Society,” to spend even more of our tax dollars, tightening the economic noose around the lovely, delicate neck of fiscal sanity. The difference is that in the 1960s, the economy was exploding while today’s economy more resembles an asthmatic running the Boston Marathon.
In 1917, as the U.S. entered WWI, Congress authorized the Federal Treasury to issue long-term bonds to finance the war, but placed a limit (the debt ceiling) on the amount of debt the government can issue. Right now the U.S. debt is nearly 100 percent of the Gross Domestic Product. Only during WWII has the debt been higher. If Congress does not raise the debt ceiling again, the Treasury cannot borrow more money. Because tax collections are less than government obligations, sometime in August the government will not legally be able to pay its bills. If the government defaults, borrowing money at very low interest rates will no longer be possible since U.S. Government securities would no longer be seen by the world as a safe place to put their money. Money, like everything in the economic sphere, is subject to supply and demand. Because of the increased risk, those who buy bonds will demand higher interest rates negatively affecting mortgages, credit cards, student loans and much more. Hence the apocalyptic scenarios of what will happen if the debt ceiling is not raised. But as the boom of thunder and the flashes of lightning blindingly rocks the political firmament we might ask, as a gentleman farmer once did when beseeching the heavens, “Lord, can we have a little more light please and a little less noise?”
It’s inexcusable for the United States to default on obligations already incurred; but not one tribute should be expended for future spending unless permanent structural changes are made on how America does business — primarily the way it spends not only our money but our descendents’. It is the latter that fills me with such dread and consternation. It’s a moral axiom, seared in the very nature of man, that one generation has no right to strap another especially for reasons of selfishness and shortsightedness. When we are old, and they are still young, they will have every right to string up us old-timers for the inexcusable malfeasance that mortgaged their future.
We have a $14 trillion deficit; the interest of which is consuming our wealth as if it were feeding time at the zoo. In order for the U.S. government to meet its financial obligations, it has to raise the debt limit. The president, when he was senator, used to oppose this measure but that was then and this is now. “Now,” is in the vicinity of the 2012 elections when politicians smell fear. In return for raising the debt limit, the president is making bold asseverations about cutting 10 trillion from the federal budget over X number of years in return for tax increases. Now that’s a lot of cash, but as an old political campaign commercial once said: “Where’s the beef?”
The president has been rich in rhetoric but bankrupt in detailing what these Draconian cuts include. Not that Republicans have been terribly revealing about what they will cut, especially when it comes to the major entitlement programs that are fueling our “Big Bang” expansion deficit. The reason for this reticence is that politicians want to be popular with their constituencies and the road to popularity is generosity and liberality. Unfortunately, the munificence of politicians is put on the tab of the taxpayers of the United States.
The cognitive dissonance in this debate is so preposterous that most of the debt paid by the U.S. Treasury this year has been borrowed from the Federal Reserve: Two government entities actually negotiating with one another to see whether it’s arrogance or stupidity that gets the upper hand. In the midst of this tortuous miasma, here are some practical suggestions:
1. While the U.S. must not default on its debts, the debt ceiling should only be increased to the point where obligations now due are paid while the Treasury withholds all future spending until a debt reduction plan is concurrent with specific increases in the debt ceiling. This will require a bit of economizing as spending items are prioritized so as to not threaten Social Security payments or financing our troops.
2. The recommendations of the bipartisan commission chaired by Democrat Erskine Bowles and Republican Alan Simpson whose urgings, while not perfect, were nonetheless surprisingly substantial as a means to get a grip on a spending rollercoaster that has skidded off the tracks. The president shied away from commissions fixes for fear of alienating the Left — which is one of the occupational hazards when you govern from the Left.
3. Do some horse trading by agreeing to close corporate loopholes while reducing the corporate tax rate to a level that is both compatible and competitive with other industrial nations. Raising taxes during a recession adversely affects incentives of workers, savers and investors, and thus undermines the economic growth so desperately needed. At a 35 percent top rate the wealthiest paid in taxes (even when compensated for inflation) 3x what they paid in 1980 when the top rate was 70 percent. The reason: People really do change their behavior to shelter their money once tax rates are altered to their disadvantage.
4. Because the modern two-party system has made cutting big entitlements nearly impossible, enacting a balanced budget amendment is tempting. But it’s too risky in terms of national security and politically it won’t pass. It’s better to restore the presidential impoundment power taken away during the Nixon years that served as a brake on Congressional overspending. The reform should include removing baseline budgeting, which automatically increased spending from year to year, as well as requiring a two-thirds majority for tax increases.
Let’s not lose sight that we are the author of the omniprovident Leviathan devouring any semblance of fiscal integrity. The nanny state is a plague parading as philosophy. Moreover, it is a belief system that is ultimately unaffordable, morally crippling and self-defeating in that it vitiates the character of self-reliance. Civilized nations should support the idea of a basic provision for the indigent, a safety net for the unemployed, succor for the superannuated, but not an ever burgeoning entitlement culture where expectations of benevolent solicitude are forged at the expense of uprooting autonomy, self-sufficiency and robust individualism, the very building blocks of a stronger community, society and nation.