We’d like to introduce “State” readers to Dr. Bill Barack. Bill is President of NAAIM (National Association of Active Investment Managers) and proprietor of Lindisfarne Investments, located in Cleveland, Ohio. Dr. Barack has been kind enough to share his views on the current debt situation in Washington. So without further ado, here are Bill's thoughts...
There has been a lot of perceptual damage to the reputation of the U.S. over the last several weeks. From the haggling over the debt ceiling to the downgrade of the U.S.’s debt, our global pedigree is looking tattered around the edges.
First, we appear politically inept. The inability of Congress to easily come to an agreement over raising the debt ceiling was closely watched throughout the world. If we in fact are a nation composed of two such irreconcilable governing philosophies as we have seen in this debate, counting on any future agreements to find a way forward out of our problems seems at best naïve. Brinksmanship is no way to run a country.
In fact this apparent political ineptness was one of the main reasons that Standard and Poor’s downgraded our debt to AA+ from AAA (the highest, safest rating available). The other reason was the focus of the debate. As the chart below shows (from Business Week), the discussion was poorly focused.
The left hand column shows where the government spends our money while the right hand column shows where the money comes from. As you can see, our debt ceiling discussion centered on the $11 trillion dollars in red at the top of the left column. Our real issue is the $211 trillion fiscal gap at the top of the right hand column.
From Business Week: “For all the obsessing about it, the national debt is a singularly bad way of measuring the nations’ financial condition … it’s focused on the past. An honest assessment of the country’s projected revenue and expenses over the next generation would show a reality different from the apocalyptic visions conjured by both Democrats and Republicans during the debt-ceiling debate. IT WOULD BE MUCH WORSE (emphasis mine).”
You be the “decider” here. What do you cut on the left column to bring income down to outgo? Can you do it?
What if we cut Social Security in half; we save $55 trillion. Cut Medicare, etc. in half and gain $140 trillion. We are now at $195 trillion. Take the last $16 trillion out of defense, agriculture, etc. and we have balanced the budget. Is any of this truly feasible?
If we just raised taxes, it would take a tax increase of 64% across the board of all taxes currently collected to cover the $211 trillion shortfall. (If you pay 30% in taxes currently, your new bill would be 50%.)
There are many possible in between solutions that involve both cutting programs and raising taxes. But until we face the real longer term problem here, we have no hope of solving it.
And the problem only gets worse. If you add in the committed future spending that is already on the books, the $211 shortfall grows every year.
It has been said that the government is “kicking the can down the road”, leaving the solution to some future Congress. However, I heard a better analogy last week. What we have is a “snowball” at the top of the hill. As it rolls down hill, it gets bigger and bigger and bigger while the can stays the same size. You can stop the can at any time with the same effort (pain). The “snowball” though becomes more and more difficult to stop until at some point, it becomes impossible (disaster).
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Comments
I would get rid of Medicare and Medicaid and replace it with proper health education, and allow people to take responsibility for their own health.
Steve makes a good point. As a society, personall responsibility seems to be waning. Not only being responsible for your own health, but in almost all ares. It's too easy to cast blame now rather than accept responsibility. Hence lawsuits, etc. Another point I'd like to make pertains to the comment in the article about revenue increases as a result of raising taxes. It's not simple math. A $1 increase in taxes may not result in $1 increase in revenues. If that $1 is spent on consumables or reinvested in a business instead then it can result in more than $1 in revenues down the road. Most of us know there is incredible waste in our bureaucratic government. That's where we need to focus. Not on increasing taxes on the 50% of us who actually pay taxes. Or the fortunate top 1% who already pay more in taxes than 95% of us. It's not rocket science.
Mike - Excellent points. Thank you for your input...
The root of the problem is not only federal government spending, it is the accounting gimmickry of "baseline" budgeting. In a world where up is down and 1 + 1 = 3, this trickery hoisted upon citizens by politicians and the drive by media allows claimed budget "cuts" to actually become increases in spending. Until ethical accounting practices replace the current farce of a budgeting system, the problem will never be solved.