Tuesday, August 25, 2009


A Friggin' Huge Number
Nine trillion dollars. That's how much the government will spend that it doesn't have over the next ten years. $30,000 for every man, woman and child in the United States. This, which we had all suspected but was confirmed by the White House Office of Management and Budget today. I couldn't have fathomed in the heady days of the late 1990s when we were running surpluses and talking about having the federal debt paid off by about now, but here we are. It is sobering and very concerning. Debt levels this high suck financial capital out of our economy and create a very real risk of rising inflation and ballooning interest rates as we print money to continue to service our debt. A financial collapse could loom if our creditors in China and Saudi Arabia decide to stop gobbling up our debt. It is an untenable, unsustainable situation. Our debt, already 70% of our GDP, could balloon to over 100% of our GDP.

How Did We Get Here?
How did this incredible crash from better than balanced budgets to eye-popping deficits happen? There were several contributing factors....

(1) The Bush Tax Cuts
Quote me Laffer curves all you want. Laffer may have been right that beyond a point, tax increases no longer increase government revenues -- surely if a government is taxing 90% of income and it hikes it to 100%, it won't see an increase -- but we were not at that point. The proof is in the revenue explosion that occurred in the 1990s after the Clinton tax hikes that led to a balanced budget. The Bush tax cuts cost us $150 billion per year.

(2) The Iraq and Afghanistan Wars
The wars have been phenomenally expensive as we have had the costs not only of deployed troops but of hundred of thousands of private contractors from Blackwater, Halliburton and others. Annual cost: close to $200 billion

(3) Medicare Perscription Drugs
An amazingly quiet bill in retrospect, President George W. Bush signed into law early in his Presidency a perscription drug benefit as part of Medicare. Liberals panned it as a give-away to big pharma. Conservatives shunned it as an exploding entitlement. Yet the broad bi-partisan middle passed it. Whoever was right it costs about $150 billion / year.

(4) Entitlement Explosion
Health care spending is rising at double the rate of inflation....and the number of people on the Medicare roles is rising even more rapidly as the retirement-age population grows and life expectancy extends.

Social Security is rising in cost too, due to life expectancy and population demographics but at a less alarming rate.

So where are we?

Today 2019
Entitlements 2.0 trillion 3.0 trillion
Defense 0.7 trillion 0.9 trillion
Interest 0.3 trillion 0.8 trillion
TARP* 0.3 trillion none
Domestic Discretionary 0.6 trillion 0.7 trillion
Total Spending 3.8 trillion 5.4 trillion
Revenues 2.2 trillion 4.3 trillion
Deficit 1.6 trillion 1.1 trillion

* TARP expenditures were close to $0.7 trillion but are estimated at $0.3 trillion because the government received tangible assets in return for the money -- losses under the program are estimated at $0.3 trillion

What Do We Do?
As you can see from the spending above, any discussion of domestic discretionary spending is largely irrelevant. Yes, there is waste in earmarks, as Sen. John McCain (R-AZ) and others have often pointed out. But the spending, in total budget terms is a pittance at 16% of the current budget and 13% of the 2019 budget. We can get more efficient, but we aren't going to wholesale eliminate government departments...at least not yet.

Interest is an output...an output of our debt level and current interest rates. The only way to control it is to reduce other spending and thereby reduce debt.

This leaves us with the three whoppers: taxes, entitlements and defense spending. Taxes will HAVE ot go up. Entitlements will HAVE to be reformed -- higher retirement ages, lower benefits, etc. Defense will have to be reduced.

So what to do specifically?
(1) Defense
* Find a way out of Iraq (yes, we still have lots of troops there) and Afghanistan
* Cancel all the Military-Industrial giveways like next-generation fighter plans and nuclear subs
* Increase the number of reservists and decrease the number of active-duty troops
No other country on earth spends on defense like we do. Can we really afford to keep being the global police force?

(2) Taxes
* Let the Bush tax cuts expire...all of them
* Enact real cap and trade where ALL carbon is auctioned and there are no give-aways to big coal
* Hike gas taxes by $1/gallon
* Raise capital gains tax to coincide with income taxes
* Phase-out 401K deductibility for high-income individuals

(3) Entitlements
* Move to a cash-balance program for Social Security that automatically adjusts as life-expectancy changes or move the retirement age to 70 and index to life expectancy
* Require Canada-equivalen tpricing for Medicare perscription drug benefits, ban pharma ads while we are at it
* Move Medicare eligibility to 70
* Comprehensively fix health care inflation and confront rationing questions head on

None of these are pleasant solutions and many are probably politically infeasible today. There are many other good ideas that could be used as substitutes. But the notion that we can fix this without making tough and painful choices is just wrong. The longer we wait to act, the worse it will get. And if we pass the brink and T-bill rates spike and we are forced to print money to service the debt, the recession of 2008/2009 will seem like the good old days.

Mr. President, I know Health Care Reform is a part of the solution, but let's be honest, you haven't provided us with a real, candid assessment of what you intend to do about the deficit. Ignoring it won't make it go away. And it will mar your presidency if you don't take it head on.

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