As presented in InvestorsInsight.com

 

One of the great privileges of traveling and speaking as I do is getting to
meet a wide variety of very interesting people. Of late, I have become friends
with David Walker, former Comptroller General of the US, who is now
crisscrossing the country warning of the deficit crisis. It is a message that my
book Endgame resonates with. If we do not bring the deficit down below
the growth rate of nominal GDP, we become Greece. We hit an economic wall and
everything collapses. It will be a real and true Depression 2.0. Fixing this is
the single most important topic and task of our generation. If we do not,
worrying about P/E ratios, moving averages, long-term investments – anything
else, in fact – is secondary. Solve this and we can go back to the usual
issues.

This week’s Outside the Box is a presentation that David made recently.
Powerful stuff. I urge you to forward this on. The message must be heard so that
we can as a nation get this right. The world does not need a crippled USA.

David released a short statement about the Navy Seals getting Osama
(finally!). It echoes my own thoughts.

“All Americans should come together in appreciation for the work of America’s
intelligence agencies and special forces who planned and executed yesterday’s
Osama Bin Laden operation. While his death is a key milestone in the fight
against terrorism, the battle is far from over. More importantly, as I said in a
CBS 60 Minutes segment in 2007, ‘The greatest threat to America is not a
person hiding in a cave in Afghanistan or Pakistan, it is our own fiscal
irresponsibility.’ That statement was true then and it is even more true now.
It’s now time for the President and the Congress to work together and address
the fiscal debt bomb that represents a much greater threat to our country’s and
families futures.”

My flight was cancelled, so I am in Toronto for one more night. The folks at
Horizon Funds have graciously offered to take me to an early dinner and a
private wine cellar, as I have a 4:30 AM (ugh) wake-up call and will turn in
early. I hate 4:30 AM. That is not a civilized time of day. If I wanted to live
like Dennis Gartman I could learn to deal with it, but I guess occasionally one
does what one must.

One final thought. While getting OBL is a wonderful thing, it does little to
change the reality of the Middle East, and may even finally create a true martyr
(albeit one who was living well, and not in a cave). The world remains
unsettled. Every speaker at my recent conference was asked what keeps them up at
night. Every speaker mentioned the Middle East, some rather pointedly. It is a
true wild card. But let us enjoy for the moment some token of pleasure for the
just end of the planner of the 9/11 tragedy.

I will report more about the conference in future letters.

Your having a lot to think about analyst,

John Mauldin, Editor
Outside the Box


Restoring Fiscal
Sanity in the United States: A Way Forward

By: Hon. David M. Walker, Founder and CEO of the Comeback
America Initiative and Former Comptroller General of the United States
(1998-2008)

Two hundred and twenty two years ago, the American Republic was founded. The
United States had defeated the world’s most powerful military force to win
independence, and over a several year period, went about creating a federal
government based on certain key principles, including limited government,
individual liberty, and fiscal responsibility. That government was established
by what is arguably the world’s greatest political document – the United States
Constitution.

Our nation’s founders understood the difference between opportunity and
entitlement. They believed in certain key values including the prudence of
thrift, savings and limited debt. They took seriously their stewardship
obligation to the country and future generations of Americans.

The truth is, we have strayed from these key, time-tested principles and
values in recent decades. We must return to them if we want to keep America
great and help to ensure that our future is better than our past.

Believe it or not, to win our independence and achieve ratification of the
U.S. Constitution, the U.S. only had to go into total federal and state debt
equal to 40 percent of the size of its then fledgling economy. Fast forward to
today, when the U.S. is the largest economy on earth and a global superpower –
but total federal debt alone is almost 100 percent of the economy and growing
rapidly. Add in state and local debt, and the total number is about three times
as much as the total debt we held at the beginning of our Republic – and it is
headed up rapidly. As the below graphic shows, our total federal debt has more
than doubled in just the past ten and a half years.

America has gone from the world’s leading creditor nation to the world’s
largest debtor nation. We have also become unduly dependent on foreign nations
to finance our excess consumption. Many of these foreign investors have shunned
our long-term debt due to concerns over future interest rates and the
longer-term value of the dollar. And PIMCO, the largest Treasury bond manager in
the U.S., also recently sold their Treasury security holdings due to a lack of
adequate return for the related interest rate risk.

And who is now the largest holder of Treasury securities? It’s the Federal
Reserve. I call that self-dealing. The Fed may be able to hold down interest
rates for a period of time; however, they cannot hold them down forever. The
Fed’s debt purchase actions are just another example of how Washington
policymakers take steps to provide short-term gain while failing to take steps
to avoid the longer-term pain that will surely come if we fail to put our
nation’s fiscal and monetary policies in order.

The Fiscal Fitness Index

In March 2011 the Comeback America Initiative (CAI) and Stanford University
released a new Sovereign Fiscal Responsibility Index (SFRI) – or as my wife Mary
refers to it, a Fiscal Fitness Index. We calculated each country’s SFRI based on
three factors – fiscal space, fiscal path, and fiscal governance.

Fiscal space represents the amount of additional debt a country could
theoretically issue before a fiscal crisis is imminent. Fiscal path is an
estimate of the number of years before a country will hit its theoretical
maximum debt capacity. (The U.S. will hit its maximum within16 years, but will
enter a “fiscal danger zone” within 2-3 years). Fiscal governance is a value
based on the strength of a government’s institutions, as well as its
transparency and accountability to its citizens. Unfortunately, the U.S. ranks
far below the average in all three of these categories – in particular, the
fiscal governance category.

The overall SFRI index showed that the U.S. ranked 28 out of 34 nations in
the area of fiscal responsibility and sustainability. And when you see which
countries rank around us, it’s clear that we’re in a bad neighborhood. We’re
only a few notches above countries like Greece, Ireland, and Portugal, all of
which have recently suffered severe debt crises. That report also showed that
the U.S. could face a debt crisis as soon as two to three years from now, given
our present path and interest rate risk. Below is the full list of rankings.

On the positive side, the CAI and Stanford report showed that if Congress and
the President were able to work together to pass fiscal reforms that were the
“bottom line” fiscal equivalent of those recommended by the National Fiscal
Responsibility and Reform Commission last year, our nation’s ranking would
improve dramatically, to number 8 out of 34 nations. In addition, we would
achieve fiscal sustainability for over 40 years!

So what are our elected officials waiting for? Do they want a debt crisis to
force them to make very sudden and possibly draconian changes? If not, they need
to wake up and work together to make tough choices. That’s what New Zealand did
in the early 1990s, when that country faced a currency crisis. Due to tough
choices then and persistence over time, New Zealand now ranks number 2 in the
SFRI – second only to Australia, which the Kiwis are not happy about! If New
Zealand can do it, America can too!

The Recent Budget Policy Proposals

In order for us to begin to restore fiscal sanity to this country, President
Obama has to discharge his leadership responsibilities as CEO of the United
States Government. He got into the game with his fiscal speech on April 13, in
which he largely embraced the work of his National Fiscal Responsibility and
Reform Commission, although with a longer timeframe for implementation and less
specifics on entitlement reforms. The President also endorsed the debt/GDP
trigger and automatic enforcement concept that CAI had been advocating. Under
this concept, Congress could agree on a set of statutory budget controls that
would come into effect in fiscal 2013. Such controls should include specific
annual debt/GDP targets with automatic spending cuts and temporary revenue
increases in the event the annual target is not met. In my view, a ratio of
three parts spending cuts, excluding interest savings, to one part revenue would
make sense.

House Budget Committee Chairman Paul Ryan recently demonstrated the political
courage to lead in connection with our nation’s huge deficit and debt
challenges. His budget proposal recognizes that restoring fiscal sustainability
will require tough transformational changes in many areas, including spending
programs and tax policies. Chairman Ryan’s proposal includes several major
reform proposals, especially in the area of health care. For example, he
proposes to convert Medicare to a premium support model that will provide more
individual choice, limit the government’s long-term financial commitment and
focus government support more on those who truly need it. He also proposed to
employ a block grant approach to Medicaid in order to provide more flexibility
to the states and limit the governments’ financial exposure. These concepts have
varying degrees of merit; however, how they are designed and implemented involve
key questions of social equity that need to be carefully explored. And contrary
to Chairman Ryan’s proposal, additional defense and other security cuts that do
not compromise national security and comprehensive tax reform that raises more
revenue as compared to historical levels of GDP also need to be on the table in
order to help ensure bipartisan support for any comprehensive fiscal reform
proposal.

The President and Congressional leaders should be commended for reaching an
agreement that averted a partial shutdown of the federal government and resolved
funding levels for fiscal 2011. While it took way too much time and effort, this
compromise involved real concessions from both sides and represents a small yet
positive step towards restoring fiscal responsibility. But this action is far
from the most important fiscal challenge facing both the Congress and the
President. After all, Washington policymakers took about 88 percent of federal
spending, along with much-needed federal tax reforms, “off the table” during the
recent debate over the 2011 budget. In essence, they have been arguing over the
bar tab on the Titanic when we can see the huge iceberg that lies ahead. The ice
that is below the surface is comprised of tens of trillions of dollars in
unfunded Medicare, Social Security and other off-balance sheet obligations along
with other commitments and contingencies that could sink our “Ship of State”. It
is, therefore, critically important that we change course before we experience a
collision that could have catastrophic consequences. As you can see in the
series of pie charts below, mandatory programs like Social Security and Medicare
already take up the largest share of the federal budget and, absent a change in
course, will continue to do so in increasing amounts in the next several
decades.

The Federal Debt Ceiling Limit

Now that the level of federal funding for the 2011 fiscal year has been
resolved, there has been an increasing amount of attention on Congress’ upcoming
vote to increase the federal debt ceiling limit. As is evident by the chart
below detailing the debt ceiling limit per capita adjusted for inflation since
1940, the U.S. started losing its way in the early 1980s. Fiscal responsibility
was temporarily restored during the 1990s, when statutory budget controls were
in place, but things went out of control again in 2003, the year after those
budget controls expired.

In essence, raising the debt ceiling is simply recognizing the federal
government’s past fiscally irresponsible practices. But while federal law
provides for the continuation of essential government operations even if the
government has not decided on a budget or funding levels for a fiscal year, such
a provision does not exist in connection with the debt ceiling. Therefore, if
the federal government hits the debt ceiling during a time of large deficits,
which is the case today, dramatic and draconian actions will have to be taken to
ensure that additional debt is not incurred. This would likely include a
suspension of payments to government contractors, delays in tax refunds, and
massive furloughs of government employees. In addition, since Social Security is
now paying out more in benefits than it receives in taxes, the monthly payments
may not go out on time if we hit the debt ceiling limit. That would clearly get
the attention of tens of millions of Americans, including elected officials.

However, although failure to raise the debt ceiling is not a viable option
given our current fiscal state, we must take concrete steps to address the
government’s lack of fiscal responsibility. We must also do so in a manner that
avoids triggering a massive disruption and a possible loss of confidence by
investors in the ability of the federal government to manage its own finances.
Such a loss of confidence could spur a dramatic rise in interest rates that
would further increase our nation’s fiscal, economic, unemployment and other
challenges.

In order to begin to restore fiscal sanity, Congress could increase the debt
ceiling limit in exchange for one or more specific steps designed to send a
signal to the markets, and the American people, that a new day in federal
finance is dawning. To be credible, any such action must go beyond short-term
spending cuts for the 2012 fiscal year. The debt/GDP trigger and automatic
enforcement concepts I advocate above are one specific step Congress could take.

The S&P’s revised outlook on the long-term rating for U.S. sovereign debt
should be yet another wake-up call for elected officials and other policymakers
in Washington. S&P’s action serves as a market-based signal that independent
ratings agencies believe the U.S. is on an imprudent and unsustainable fiscal
path and that action is needed in order to maintain investor confidence. In my
view, this action should have been taken place some time ago; however, it is now
likely that other rating agencies will reconsider their ratings positions on
U.S. Sovereign debt.

Moving Past Partisan Politics

The American people need to understand that doing nothing to address our
deteriorating financial condition and huge structural deficits is simply not an
option. Failure to act will serve to threaten America’s future position in the
world and our standard of living at home. Therefore, both major political
parties must come to the table and put aside their sacred cows and unrealistic
expectations. As John F. Kennedy said, “The great enemy of the truth is very
often not the lie — deliberate, contrived and dishonest — but the myth —
persistent, persuasive, and unrealistic.”

Given President Kennedy’s admonition, liberals need to acknowledge that we
need to renegotiate the current social insurance contract. For example, contrary
to assertions by some, Social Security is now adding to the federal deficit and
is underfunded by about $8 trillion. As you can see below, it will face
escalating annual deficits beginning in 2015.

There is no debate that last year’s health care reform legislation will
result in higher federal health care costs as a percentage of the economy. (See
the chart below). In addition, according to Medicare’s independent Chief
Actuary, based on reasonable and sustainable assumptions, last year’s health
care reform legislation will end up exacerbating our deficit and debt challenges
rather than helping to lessen them. He estimated that the cost of the health
care law to the Medicare program could be over $12 trillion in current dollars
more than advertised.

Conservatives need to acknowledge that we can’t just grow our way out of our
fiscal hole. They need to admit that all tax cuts are not equal and there is
plenty of room to cut defense and other security spending without compromising
our national security. And while conservatives are correct to say that our
nation’s fiscal challenge is primarily a spending problem, they must recognize
that some additional revenues will be needed to restore fiscal sanity. The math
just doesn’t work otherwise.

All parties must acknowledge that we can’t inflate our way out of our problem
and that we must take steps to improve our nation’s competitive posture. This
means that some properly targeted and effectively implemented critical
infrastructure and other investments may be both needed and appropriate even if
they exacerbate our short-term fiscal challenge.

Washington policymakers need to understand that the same four factors that
caused the recent financial crisis exist for the federal government’s own
finances. And what are those factors?

First, a disconnect between those who benefit from prevailing policies and
practices and those who will pay the price and bear the burden if and when the
bubble bursts. Second, a lack of adequate transparency and accountability in
connection with the true financial risks that we face. Third, too much debt, not
enough focus on cash flow, and an over-reliance on narrow and myopic credit
ratings. Finally, a failure of responsible parties to act until a crisis was at
the doorstep.

There is growing agreement that the greatest threat to our nation’s future is
our own fiscal irresponsibility. In fact, as I noted in 2007 and Joint Chiefs
Chairman Admiral Mullin stated last year, our fiscal irresponsibility and
resulting debt is a national security issue. After all, if you don’t keep your
economy strong for both today and tomorrow, America’s standing in the world and
standard of living at home will both suffer over time – and waiting for a crisis
before we act could also undermine our domestic tranquility.

So where should Washington go from here?

First, Congress and the President should reach a compromise agreement on an
appropriate level of spending cuts in 2012 while also providing for some
additional properly designed and effectively implemented critical infrastructure
investments. Second, they should agree to re-impose tough statutory budget
controls that will force much tougher choices on both the spending and tax side
of the ledger beginning no later than 2013. Third, they should authorize and
fund a national citizen education and engagement effort to help prepare the
American people for the needed actions and to facilitate elected officials
taking them without losing their jobs. Fourth, they should create a credible and
independent process that will provide for a baseline review of major federal
organizational structures, operational practices, policies and programs in order
to make a range a transformational recommendations that will make the federal
government more future focused, results oriented, successful and sustainable.

Spending levels certainly need to be cut. After all, the base levels of
federal discretionary spending increased by over 30 percent between 2007 and
2010 during a time of low inflation. At the same time, all parties must be
realistic regarding how much should be cut and how quickly it can be achieved.
In my view, we should be targeting greater cuts than have been recently
considered, but over a longer period of time: for example, real spending cuts of
$125-$150 billion over several years. If we did so, the related savings would be
significant and would compound over time.

As the National Fiscal Responsibility and Reform Commission, CAI, The No
Labels political movement (of which I am a co-founder), and others have noted,
everything must be on the table – and all political leaders need to be at the
table – in order to put our nation on a more prudent and sustainable fiscal
path. This includes a range of social insurance program reforms, defense and
other spending cuts, and comprehensive tax reform that generates additional
revenues, including both individual and corporate tax reform. We must keep in
mind that the private sector is the engine of innovation, growth, and jobs. In
addition, many businesses are taxed at the individual, rather than the
corporate, level.

Realistically, it will take us a number of years to get back into fiscal
shape. And while it would be great if we could do a “grand bargain” and enact a
broad range of transformational reforms in one step, that just isn’t realistic
in today’s world. Therefore, what is a reasonable order of battle to win the war
for our fiscal future?

First and foremost we need to enact budget process reforms, re-impose the
type of budget controls and engage in the fact-based citizen education and
engagement effort referred to previously. The next order of battle items should
be corporate tax reform and Social Security reform. Why corporate tax reform?
Because it can help to improve our competitiveness, enhance economic growth and
generate jobs.

And why Social Security reform? Because we have a chance to make this
important social insurance program solvent, sustainable and secure for both
current and future generations. We can also exceed the expectations of all
generations and demonstrate to both the markets and the American people that
Washington can act before a crisis forces it too.

The above efforts should be followed by broader tax reform and
Medicare/Medicaid reforms. We will then need to rationalize our health care
promises and focus more on reducing health care costs in another round of health
care legislation. We must also begin a multi-year effort to re-baseline the
federal government’s organizations, operations, programs and policies to make
them more future focused, results oriented, affordable and sustainable.

In summary, the truth is that the government has grown too big, promised too
much and waited too long to restructure. Our fiscal clock is ticking and time is
not working in our favor. The Moment of Truth is rapidly approaching. As it
does, let us hope that our elected officials must keep the words of Theodore
Roosevelt in mind: “In any moment of decision the best thing you can do is the
right thing, the next best thing is the wrong thing, and the worst thing you can
do is nothing.” And “We the People” must do our part by insisting on action and
by making the price of doing nothing greater than the price of doing something
We must insist that our legislators offer specific solutions to defuse our
ticking debt bomb in a manner that is economically sensible, socially equitable,
culturally acceptable, and politically feasible We need to recognize that
improving our fiscal health, just like our physical health, will require some
short-term pain for greater long-term gain. The same is true for state and local
governments.

We’ll soon know whether Washington policymakers are up to the challenge and
whether they will start focusing more of doing their job than keeping their job.
They need to focus first on their country rather than their party. And yes, the
President and Congressional leaders from both political parties need to be at
the table and everything must be on the table in order to achieve sustainable
success. Let’s hope they make the right choice this time!

All of us who are involved with the Comeback America Initiative (CAI) will do
our part. All that we ask is that you do yours. The future of our country,
communities and families depends on it.

For more information about the Comeback America Initiative and No Labels,
check out www.tcaii.org and www.nolabels.org.

Deficitation

July 27, 2011

I thought I would only write 1 newsletter this week.

 

You know….

 

Keep it light…

 

Talk about the summer fun

 

 

As much as I am trying to enjoy this summer

 

I am finding that I once again have to speak up

 

 

 

I wrote several newsletters in the past

 

Discussing the deficit and government spending

 

 

It just amazes me that Washington

 

Is going out of their way

 

Not to bring a serious resolve to the issue

 

 

Short term……Long term

 

 

What steps must be taken?

 

 

Putting party politics aside

 

 

That will send a message to the financial world

 

That we are done drinking the kool aid

 

 

The US will take responsible steps

 

To control our cost

 

And bring our economy in line

 

 

We can no longer continue to borrow $.43 cent of every
dollar

 

To support our economy

 

 

The chart below shows the growth of government

Over the past 40 years

 

 

TotReceipt     Tot Expense  Surplus/Deficit

 

1970      $192B          $195B              $2.8B

 

1980      $517B        $590B               -$73B

 

1990      $1.031T     $1.253T         -$221B

 

2000      $2.025T   $1.788T        +$236B

 

2010      $2.165T   $3.833T     – $1.555T

 

 

They are talking of doing a short term deal

 

 

Cutting spending by $1.2T over the next 10 years

 

 

That’s about $120B a year

 

Although they say most of it is on the back end

 

 

Smoke and Mirrors….

 

 

Every family has to deal with budget issues

 

 

We are all held to responsible spending

 

 

Even when we borrow money

 

 

Banks look at acceptable levels of

 

Debt to Income

 

 

 

We are a great nation…

 

Difficult decisions have been made in the past

 

To bring us to where we are today

 

 

Let Washington send a strong message

 

 

That we are back…

 

 

And ready to do business responsibly.

By  Bruce Bartlett, Published: July 7

 

In recent months, the federal debt ceiling — last increased in February 2010 and now standing at $14.3 trillion — has become a matter of national debate and political hysteria. The ceiling must be raised by Aug. 2, Treasury says, or the government will run out of cash. Congressional Republicans counter that they won’t raise the debt limit unless Democrats agree to large budget cuts with no tax increases. President Obama insists that closing tax loopholes must be part of the package. Whom and what to believe in the great debt-limit debate? Here are some misconceptions that get to the heart of the battle.

1. The debt limit is an effective way to control spending and deficits.

Not at all. In 2003, Brian Roseboro, assistant secretary of the Treasury for financial markets, explained it best: “The plain truth is that the debt limit does not affect the deficits or surpluses. The critical revenue and spending decisions are made during the congressional budget process.”

The debt ceiling is a cap on the amount of securities the Treasury can issue, something it does to raise money to pay for government expenses. These expenses, and the deficit they’ve wrought, are a result of past actions by Congress to create entitlement programs, make appropriations and cut taxes. In that sense, raising the debt limit is about paying for past expenses, not controlling future ones. For Congress to refuse to let Treasury raise the cash to pay the bills that Congress itself has run up simply makes no sense.

Some supporters of the debt limit respond that there is virtue in forcing Congress to debate the national debt from time to time. This may have been true in the past, but the Budget Act of 1974 created a process that requires Congress to vote on aggregate levels of spending, revenue and deficits every year, thus making the debt limit redundant.

 

2. Opposition to raising the debt limit is a partisan issue.

Republicans are doing the squawking now because there is a Democrat in the White House. But back when there was a Republican president, Democrats did the squawking. On March 16, 2006, one Democratic senator in particular denounced George W. Bush’s request to raise the debt limit. “The fact that we are here today to debate raising America’s debt limit is a sign of leadership failure,” the senator thundered. “Increasing America’s debt weakens us domestically and internationally. . . . Washington is shifting the burden of bad choices today onto the backs of our children and grandchildren.”

That senator was Barack Obama, and he, along with most Democrats, voted against a higher limit that day. It passed only because almost every Republican voted for it, including many who are now among the strongest opponents of a debt-limit increase.

 

3. Financial markets won’t care much if interest payments are just a few days late — a “technical default.”

Some Republicansbelieve that bondholders know they will get their money eventually and will understand that a brief default — just a few days — might be necessary to reduce future deficits. “If a bondholder misses a payment for a day or two or three or four,” Rep. Paul Ryan (R-Wis.) told CNBC in May, “what is more important [is] that you’re putting the government in a materially better position to be able to pay their bonds later on.”

 

This is nothing but wishful thinking. The bond-rating agencies have repeatedly warned that any failure to pay interest or principal on a Treasury security exactly when due could cause the U.S. credit rating to be downgraded, which would push interest rates up as investors demand higher rates to compensate for the increased risk.

J.P. Morgan recently surveyed its clients and asked how much rates would rise if there was a delay in payments, even a very brief one. Domestic investors thought they would go up by 0.37 percentage points, but foreign buyers — who own close to half the publicly held debt — predicted an increase of more than half a percentage point. Any increase in this range would raise Treasury’s borrowing costs by tens of billions of dollars per year.

Some may think that a rise in rates would be temporary. But there was a case back in 1979 when a combination of a failure to increase the debt limit in time and a breakdown of Treasury’s machines for printing checks caused a two-week default. A 1989 academic study found that it raised interest rates by six-tenths of a percentage point for years afterward.

 

4. It’s worth risking default on the debt to prevent a tax increase, given the weak economy.

While Republicans’ concerns about higher taxes are not unreasonable, most economists believe that any fiscal contraction at this time would be dangerous. They note that a large cut in spending back in 1937 brought on a sharp recession, which undermined the recovery the country was making after the Great Depression.

Republicans respond that tax increases are especially harmful to growth. However, they made the same argument in 1982, when Ronald Reagan requested the largest peacetime tax increase in American history, and again in 1993, when Bill Clinton also asked for a large tax boost for deficit reduction. In both cases, conservative economists’ predictions of economic disaster were completely wrong, and strong economic growth followed.

 

5. Obama must accept GOP budget demands because he needs Republican support to raise the debt limit.

Republicans believe they have the president over a barrel. But their hand may be weaker than they think. A number of legal scholars point to Section 4of the 14th Amendment, which says, “The validity of the public debt of the United States . . . shall not be questioned.”

Some scholars, including Michael Abramowicz of George Washington University Law Schooland Garrett Epps of the University of Baltimore Law School, think this passage may make the debt limit unconstitutional because by definition, the limit calls into question the validity of the public debt. Thus Treasury may be able to just ignore the debt limit.

Other scholars, such as Michael McConnell of Stanford Law School, say the 14th Amendment will force Obama to prioritize debt payments and unilaterally slash spending to pay bondholders. But this would involve the violation of laws requiring government spending.

Either way, a failure to raise the debt limit would force the president to break the law. The only question is which one.

 

Bruce Bartlett, a former adviser to President Ronald Reagan and a Treasury official in the George W. Bush administration, is the author of “The New American Economy: The Failure of Reaganomics and a New Way Forward.” He will be online at 11 a.m. on Monday, July 11, to chat. Submit your questions and comments now.

Want to challenge everything you know? Visit our “Five myths” archive, including “Five myths about interest rates,” “Five myths about the Bush tax cuts,” “Five myths about defense spending,” and “Five myths about the deficit.”

Deficitly

May 25, 2011

With all the commotion going on around us

Osama…..tornadoes….floods

The public has been spared the talk on the debt ceiling

Did you hear the gang of six talks fell apart?

They were seen as representing the best hope

For a bipartisan deal to reduce the deficit

Senator Tom Coburn dropped out

Citing differences over entitlement spending,

Saying the 3 Republicans and 3 Democrats were

Unable to bridge differences over Medicare and Social Security

The clock is ticking,

We already exceeded the debt limit.

Now we are just shuffling payments

While waiting for a resolve.

How did we get to
this point?

There is some great information on the internet about this
subject.

Stephen Bloch did some extensive research on the deficit

And how it relates to each President

His report is titled:

US Federal Deficits, Presidents and Congress

Below are some of the facts I found interesting

  • First data he found showing
    a deficit was traced back to 1910
  • The single best predictors
    of deficits for most of the century have been war.
  • Starting in the 1970’s, it
    became harder to see a connection between war and deficits:
    • Permanent deficits became
      a way of life, regardless of whether there was a war going on.
  • The Deficit did not break
    the $1 trillion mark until 1981
  • The Deficit did not break
    the $5 trillion mark until 1995
  • During the first seven
    years of G W Bush presidency, the deficit was increased by almost twice
    the dollar amount as it had been for 32 years. (Running from JFK through
    GHW Bush).
  • When GW Bush entered
    office the deficit was $5.807 trillion
    • When GW Bush left office
      the deficit ballooned to $11,909 trillion.
    • The deficit increased
      $6,102 trillion
  • Since Obama entered office
    the deficit has grown to $14,268 trillion
    • That an additional $2,359
      trillion

Some other interesting facts:

  • Military spending has
    increased 81% since the year 2000
  • Fraud constitutes at least
    ten percent ($100 billion) of the nearly one trillion in taxpayer dollars
    that Medicare and Medicaid will spend this year.
  • The current tax system of
    the United States will collect about 18% of the GDP(Gross Domestic
    Product)
  • Spending needs are much
    higher, currently around 24% of GDP.

What makes up the 24%?

I referred to an article by Jeffrey Sachs (Economist and
Director of Earth Institute, Columbia University)

Focusing on best estimates for 2021, a decade from now

  • Social Security outlays
    will total around 5.2% of GDP
    • As Americans age and as
      health care cost have multiplied, The cost of Social Security and
      Medicare have risen from 1.7% of GDP in 1980 to 5.1% of GDP in 2011
  • Medicare will total around
    3.6% of GDP
  • Medicaid, assuming no
    drastic cuts, will total around 2.9% of GDP
  • Other mandatory programs
    for the poor, such as food stamps, will total 2.1% of GDP
  • Total defense spending is
    around 5% of GDP, most agree that defense should be cut and be around 3% of
    GDP
  • Most projections put
    interest cost on debt around 2.7% of GDP
  • Discretionary spending
    (cost used on public goods and services that cannot be provided
    efficiently by the private economy alone) will be around 4.5% of GDP

Now if you go and add up all these categories,

You will see that cost will total around 24% of GDP

In Paul Ryan’s plan, taxes would be kept at 18% of GDP and
spending would be cut to 19% of GDP.
However the deficit is still expected to grow to $16 trillion by 2021.

The Obama plan would have a slightly higher tax collection,
around 19% of GDP (by allowing Bush tax cuts expire for those making over
$250,000), while allowing the deficit to grow to $19 trillion by 2021.

Guess what!!!!!

 

They are still going
the wrong way!!!!!

Many experts feel that both of these current plans, as
presented seem practically impossible.

In several opinion surveys,

The public has spoken clearly about what to do:

  • Do not balance the budget
    by slashing Medicare, Social Security, or programs for the poor;
  • Increase spending on
    education and infrastructure;
  • Tax the rich and giant
    corporations.

This is not a practical solution either…….

It is our responsibility to stop the bleeding

Everyone will have to proportionally share in the sacrifice

Will someone step forward and have the vision and leadership,

To usher in this era……….

Will the public be accepting to the reality of their
resolution….

Or will we continue to allow our excesses to undermine us.

Let us know your thoughts…… email george@hbsadvantage.com

Economic View

 

 

BY the time President Obama gave his State of the Union address last year, the speech felt like an old friend. It had been part of my life — from the brainstorming sessions in late November 2009 to the last minute fact-checking. I knew when all of my favorite lines were coming. That led to an awkward moment during the address when I sprang to my feet, applauding the president’s tacit endorsement of the free-trade agreement with South Korea, before noticing that the only other person cheering seemed to be Ron Kirk, the special trade representative.

David G. Klein

 

This year, instead of being on the floor of Congress with the rest of the cabinet, I will be watching on television with the rest of the country. Instead of knowing what is coming, I can write about what I hope the president will say. My hope is that the centerpiece of the speech will be a comprehensive plan for dealing with the long-run budget deficit.

I am not talking about two paragraphs lamenting the problem and vowing to fix it. I am looking for pages and pages of concrete proposals that the administration is ready to fight for. The recommendations of the bipartisan National Commission on Fiscal Responsibility and Reform that the president created are a very good place to start.

The need for such a bold plan is urgent — both politically and economically. Voters made it clear last November that they were fed up with red ink. President Obama should embrace the reality that his re-election may depend on facing up to the budget problem.

The economic need is also pressing. The extreme deficits of the last few years are largely a consequence of the terrible state of the economy and the actions needed to stem the downturn. But even with a strong recovery, under current policy the deficit is projected to be more than 6 percent of gross domestic product in 2020. By 2035, if the twin tsunami of rising health care costs and the retirement of the baby boomers hits with full force, we will be looking at deficits of at least 15 percent of G.D.P.

Such deficits are not sustainable. At some point — likely well before 2035 — investors would revolt and the United States would be unable to borrow. We would become the Argentina of the 21st century.

So what should the president say and do? First, he should make clear that the issue is spending and taxes over the coming decades, not spending in 2011. Republicans in Congress have pledged to cut nonmilitary, non-entitlement spending in 2011 by $100 billion (less if recent reports are correct). Such a step would do nothing to address the fundamental drivers of the budget problem, and would weaken the economy when we are only beginning to recover.

Instead, the president should outline major cuts in spending that would go into effect over the next few decades, and that he wants to sign into law in 2011.

Respected analysts across the ideological spectrum agree that rising health care spending is the biggest source of the frightening long-run deficit projections. That is why the president made cost control central to health reform legislation. He should vow not just to veto a repeal of the legislation, but to fight to strengthen its cost-containment mechanisms.

One important provision of the law was the creation of the Independent Payment Advisory Board, which must propose reforms if Medicare spending exceeds the target rate of growth. But the legislation exempted some providers and much government health spending from the board’s purview. The president should work to give the board a broader mandate for cost control.

The fiscal commission recommended that military spending — which has risen by more than 50 percent in real terms since 2001 — grow much more slowly in the future. It also proposed thoughtful ways to slow the growth of Social Security spending while protecting the disabled and the poor. And it recommended caps on nonmilitary, non-entitlement spending.

President Obama needs to explain that while these cuts will be painful, there is no way to solve our budget problem without shared sacrifice. At the same time, he should give a ringing endorsement of government investment in infrastructure, research and education, which increases productivity and thus improves both our standard of living and the budget situation over time. And, following the fiscal commission, he should ensure that spending cuts not fall on the disadvantaged.

Finally, the president has to be frank about the need for more tax revenue. Even with bold spending cuts, there will still be a large deficit. The only realistic way to close the gap is by raising revenue. Some of it can and should come from higher taxes on the rich. But because there are far more middle-class families than wealthy ones, much of the additional money will have to come from ordinary people. Since any agreement will have to be bipartisan, Congressional Republicans will have to come to terms with this fact as well.

AGAIN, the fiscal commission has made sensible proposals. It recommended broad tax reform that lowers marginal tax rates and cuts tax expenditures — deductions and exemptions for mortgage interest, employer-provided benefits, charitable giving, and so on. Such tax reform cannot be revenue-neutral — it needs to increase tax receipts. But it can make the system simpler, fairer and more efficient while doing so.

Limiting the exemption of employer-provided health benefits would have the further advantage of making companies and workers more cost-conscious about health care.

Another revenue measure should be a tax on polluting energy. Basic economics says that something that has widespread adverse effects should be taxed. A gradual increase in the gasoline tax would raise revenue and encourage the development of cleaner energy sources. A broader carbon tax would be even better.

None of these changes should be immediate. With unemployment at 9.4 percent and the economy constrained by lack of demand, it would be heartless and counterproductive to move to fiscal austerity in 2011. Indeed, the additional fiscal stimulus passed in the lame-duck session — particularly the payroll tax cut and the unemployment insurance extension — is the right policy for now. But legislation that gradually and persistently trims the deficit would not harm the economy today. Indeed, it could increase demand by raising confidence and certainty.

The president has a monumental task. It’s extremely hard to build consensus around a deficit reduction plan that will be painful and unpopular with powerful interest groups. The only way to do so is to marshal the good sense and patriotism of the American people. That process should start with the State of the Union.

Christina D. Romer is an economics professor at the University of California, Berkeley, and was the chairwoman of President Obama’s Council of Economic Advisers.