“Our practical choice is not between a tax-cut deficit and budgetary surplus. It is between two kinds of deficits: a chronic deficit of inertia, as the unwanted result of inadequate revenues and a restricted economy; or a temporary deficit of transition, resulting from a tax cut designed to boost the economy, increase tax revenues, and achieve . . . a budget surplus.” John F. Kennedy


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Dec 10 2012

“The Age of the Unserious”

C.M. Phippen

Our president claims that he is making an honest effort to negotiate with Republicans to avoid the fiscal cliff. He wants us to believe that they are the ones who simply won’t budge on their positions and won’t allow him to fix the horrific fiscal issues we face.

This is the president whom Tim Geithner claims is willing to go off the fiscal cliff if the Republicans don’t agree to his plan to raise taxes on the richest 2% because, in Geithner’s words, “remember, it’s only the top two percent.” Doesn’t unequal treatment under the law become a civil rights issue at some point!? Anyway . . .

This is the same president who has had his past two budgets shot down in Senate votes of 99-0 and 97-0, one of which looked an awful lot like Obama’s current proposal from which he is negotiating. He apparently expects Republicans to support the plan that his Democrat allies in the Senate refused to support?

In addition to major entitlement spending cuts, the greatest priority our government should have is that of allowing/encouraging/stimulating economic growth, which will in and of itself lead to the President’s desired revenue increases.

In fact, Bill Whittle recently made the point that “if you destroyed the entire government, burned every [public] building, fired every government worker, sank every aircraft carrier, even with no government to pay for – none – we’d still pay the same taxes that we’re paying today and still have to borrow or print money just to pay for entitlements.”

I would argue that if we do indeed have a shortage of money for schools, teachers, police and other government services, it is entitlement spending that is draining those resources, not tax cuts or wars.

Even Austin Goolsbee, former president of Obama’s Council on Economic Advisers, recently stated that any solution to America’s economic ills “cuts on discretionary and entitlement spending.”

In addition, Peter Orszag, former OMB director, recently came out urging his fellow Democrats to support reforming entitlements and putting “crucial programs on a sounder footing.”

I must assume that our president is well aware of the fact that nothing in his rejected budget plans or spending priorities will stimulate growth. And he has made it very clear that, despite his repeated declarations to the contrary, he is never going to cut any real spending.

Thus, his only plan to decrease the rate of growth of our historically unprecedented federal deficit seems to be an increase in revenue coming from the already over-burdened taxpayer. Unfortunately, the proposal on which he is willing to risk our entire economy, that of increased taxes on the top 2%, leads to enough revenue to cover expenses for about eight days! Brilliant!

Even the Obama-touted Buffet Rule, if implemented, would pay for about 28 hours of government spending. If you want to close the deficit through increased taxes on the two highest tax brackets – 33% ($178,650 – $388,350) and 35% (over $388,350) – it would be necessary to hike those rates to 159% and 166% respectively. I’m assuming most liberals would tell us that such rates would have absolutely no impact on economic growth or the willingness of those individuals to work!

AEI economists recently looked at the effect of tax increases v. entitlement reforms on fiscal crises management over the nearly three-decade period of 1970-2007. They found that countries that were able to successfully reform did so mainly with spending cuts; in fact, on average 85% of their budget gaps were closed this way. On the other hand, those with failed reforms were the countries that, on average, relied at least 50% on tax increases.

Just ask Jim Sinegal, co-founder of Costco, if those tax increases will most likely lead to greater or reduced revenue next year. He’s a supporter of Obama who preached the moral imperative of Obama’s tax plan, and of businesses large and small all “following the same set of rules . . .” while risking Costco’s credit rating to take on an additional $3.5 billion in debt in order to pay out dividends this year before Obama’s tax hikes kick in. Oh, and he is apparently the biggest beneficiary of this move.

Or ask Great Britain how a plan of tax increases worked for them last year when they raised rates on those making over £1 million (about $1.6 million) to 50%. The result was that they saw a £7 billion treasury loss as nearly two-thirds of the high earners were suddenly missing from the country or finding ways to shelter income.

Funny though, that even after the manifestation of the result of such policies, political supporters of the increased tax are now calling any reduction a “tax cut for millionaires,” as though resentment toward the wealthy is more important than the amount of money the government actually has for programs which benefit the less well-off.

Yes, Mr. Whittle, I think you’re right; this truly is “The Age of the Unserious.”

Jun 15 2012

Austerity: A Balanced Approach?

C.M. Phippen

Concerns are spreading that Germany is on the verge of losing its safe-haven status for investors. According to Bill Blain, co-head of the special situations group at Newedge Group Ltd, “[Germany] isn’t a pure safe haven anymore.” As it finds itself potentially on the hook for an additional 100 billion euros ($125 billion) after the EU bailout of Spanish banks earlier this month, investors are starting to see the cracks in the foundation of what has been a star in the EU economies.

Not only does the most recent bailout scare off private investors from Spain, who know they will be the last in line if the country does eventually default, but most analysts fear this bailout is only one of many. Estimates of future liquidity injections in Spain alone are as high as 700 billion euros, which would decimate the EU rescue funds.

Despite German fiscal restraint, high worker productivity and relatively low levels of unemployment, apparently a system where a minority put in the serious work and everybody else lives off of their largess while sipping margaritas, is an unsustainable system.

As Angela Merkel recently stated, “Germany’s powers are not unlimited,” and “All the (aid) packages will ring hollow if you overestimate Germany’s strength.” Even the German economy can be dragged down by too many dependents pulling at it for too long.

It’s time for the rest of the European countries to start playing by the rules of success, the rules of true austerity.

In Britain, promises to reform social programs and cut taxes and spending were made by Gordon Brown just before leaving office, but instead he increased the top marginal income tax rate. In 2011-2012, spending increased, the public pension system is still not reformed and “the government increased the capital gains tax, national insurance tax and value-added tax along with other fees and duties.”

In Spain, while the retirement age was increased from 65 to 67, no structural reforms have been made to entitlements. Additionally, myriad tax rates have been increased, from income and property taxes to tobacco taxes (up 28 percent). While the current budget calls for spending cuts as well as tax increases, there is little chance that the tax increases will bring in the expected revenue because of a lack of economic growth. With entitlement spending unchecked, deficits are projected to continue rising.

France’s spending increased $33.4 billion between 2009 and 2010, and $29.5 billion in 2011. The Socialist government there also plans to implement a new 75% top marginal income tax rate for anyone earning over $1.3 million, in addition to an increase in the corporate income tax rate. At the same time, they are promising significant public sector hiring, a decrease in the retirement age and an increase in the minimum wage, which has been shown to price the least skilled workers out of the labor market.

According to recent research, a “balanced approach” to austerity (isn’t that the new progressive catch phrase?) doesn’t end well. An austerity program that involves both tax increases and spending cuts does not successfully stabilize debt and leads to economic contractions in the marketplace.

Harvard economists Alberto Alesina and Silvia Ardagna looked at 107 examples of austerity in developed countries over a period of 30 years and found that spending cuts without tax increases were the key to significant debt to GDP ratio reductions. They also discovered that when those spending cuts were accompanied by structural reforms, easy monetary policy and a liberalization of markets, economic expansion was most often the result.

Across the ocean here at home, the story is, unfortunately, much the same. While we could continue down our current path of demonizing the rich and blaming them for not paying their fair share (who can possibly believe that the top 5 percent paying 59 percent of federal income taxes while earning only 35 percent of total national income is somehow not their “fair share”?!), all the while threatening onerous taxes and regulations, we wonder why corporations are sitting on massive amounts of cash and refusing to hire new workers.

President Obama’s claim that his policies would “have this done” (fixing the economy) within three years and Clinton’s encouragement in 2010 to “vote ‘em out” if the economy weren’t fixed in two years lead me to think that this administration is honestly and genuinely surprised that their understanding of the economy just isn’t reality.

Welcome to the world the rest of us live in . . .

Aug 6 2011

Household Debt, Washington Debt

Here’s the explanation of Dave Ramsey – the guy who’s built a business helping people get their finances under control – putting the Washington debt debate in terms the average guy can understand:

If their household income was $55,000 per year, they’d actually be spending $96,500—$41,500 more than they made! That means they’re spending 175% of their annual income! So, in 2011 they’d add $41,500 of debt to their current credit card debt of $366,000!

And S&P was the only one of the three rating agencies to downgrade our debt?

May 23 2011

The Debt Ceiling and Fiscal Responsibility

What is with the hysteria surrounding the debt limit? Why are the Democrats refusing to have a discussion regarding the issues surrounding the debt ceiling and fiscal austerity?

It is a fact that all things being equal, a growing economy brings in more taxes than a stagnant or shrinking one. It is a fact that reducing tax rates stimulates growth and leads to greater tax receipts (courtesy John F. Kennedy). It is a fact that we cannot continue on the current path of fiscal irresponsibility (courtesy Barack Obama).

If we want our federal government to have access to more money (I’m not sure I do), then reducing taxes to a point where optimum growth will occur is the best way to achieve that goal, not raising the debt ceiling so we can borrow more every time we max out the national credit card. I concur with John F. Kennedy,

Our practical choice is not between a tax-cut deficit and budgetary surplus. It is between two kinds of deficits: a chronic deficit of inertia, as the unwanted result of inadequate revenues and a restricted economy; or a temporary deficit of transition, resulting from a tax cut designed to boost the economy, increase tax revenues, and achieve . . . a budget surplus.

The next step would be to get spending in line. We all know that no matter how much money the treasury has, it spends more. Tax rates could be raised to 90%, 100% even, and not only would our federal government spend every dime of it, but they would certainly borrow against it to finance even more great projects to buy votes . . . ah, rather, to serve the people. I recently wrote about the idiocy of such a plan, entitled The Rich, Taxes, and Government Debt.

The most powerful tool of the politician has become our tax dollars. Our money, taken by the force of law, is spent to buy votes and power, and often in ways that work against the interests of those paying the bill. It only seems fair (the President’s ears should perk right up now) that those who are going to be on the line for this new spending (taxpayers) have the right to require some fiscal responsibility from those doing the spending.

President Barack Obama, in May of 2009, warned that the current level of deficit spending was unsustainable and would lead to skyrocketing interest rates for Americans and have a “dampening effect on our economy.” Of course, that was when it was George Bush’s spending.

Thank goodness we (or some of you, rather) elected a fiscally responsible president; one who did more deficit spending in his first three years in office than all presidents before him combined; one whose budget proposals will not only double our national debt within the next decade, but quadruple the net interest costs of carrying that debt (as a result of those increased interest rates, coupled with increased debt); one whose tax and spend philosophy will cause us to spend more money on interest payments than on “education, roads and all other nondefense discretionary spending combined” within eight years. Yet each year in office he has preached the virtues and necessity of decreased federal spending – 2009, 2010, and again in 2011 – and despite the soothing words, reality bears out a less than soothing picture.

According to budget analysis, “90 percent of the rising long-term budget deficits are driven by rising spending, and just 10 percent of the rising deficits are caused by falling revenues” and our President has admitted that our federal government has a spending problem, yet he is asking Congress for an increased ability to borrow without any limitations on their (and his) ability to continue spending recklessly.

How about this:

In the 1980s and 1990s, Washington consistently spent $21,000 per household (adjusted for inflation). Simply returning to that level would balance the budget by 2012 without any tax hikes. Alternatively, returning to the $25,000 per household level (adjusted for inflation) that Washington spent before the current recession would likely balance the budget by 2019 without any tax hikes.

Simple, really, and the easy part is the President claims to already agree with me.

Aug 6 2010

Unemployment, With or Without the Stimulus

C.M. Phippen

While listening to an interview with Joe Biden’s chief economic advisor, Jared Bernstein, I heard what sounded like an admission that the White House hadn’t necessarily expected the stimulus bill to hold unemployment at a rate any lower than was already the “consensus” estimated rate.  Larry Kudlow, on The Kudlow Report, asked Bernstein about the promise made by the White House that if the stimulus bill were passed quickly, the unemployment rate would not exceed 8%;  it currently stands around 9.6%.

Mr. Bernstein responded by saying that during the fourth quarter of 2008, the consensus was that 8% would be the height of unemployment in this country.  He went on to say, “We were right with the central forecast.  We did not know that the, nor did any other, hardly any other economists, that the unemployment rate was headed up so quickly, that the economy was headed off a cliff . . .”

Okay, I get it.  You spoke before you realized the extent of the recession, and hey, who knew a consensus could be wrong, right?

But wait, Obama wasn’t yet in office in the fourth quarter of 2008.  The president had not at that time even submitted a stimulus plan to be considered by those formulating the “consensus,” had he?

I’ve attempted to contact the White House to for clarification; I’ve rewound my TiVo and watched it again; I’ve emailed The Kudlow Report to see if they can get clarification.  If this administration made a promise to us that unemployment wouldn’t exceed the level they now claim was the “consensus”  maximum even before a stimulus bill, if we would only spend over $800 billion, then we all just got shafted.

Not only did unemployment far exceed the promised 8% maximum, but I can only assume the administration didn’t  have much confidence in the effectiveness of their own bill, the one that just had to be passed right now!  If they did believe it would actually “create or save” a significant number of jobs, it only makes sense that they would have taken the consensus peak unemployment rate and reduced it by the percentage of jobs they planned on saving or creating.  I understand, though, not wanting to overpromise.

On the other hand, the fact that they took the consensus peak and assured us their $860 billion bill to reduce unemployment would keep us below that already assumed high, and then it still didn’t, doesn’t bode well for all of us who weren’t close enough to the administration to get our own big fat stimulus check.  Nor does it bode well for our children and grandchildren, who will be paying for those checks for years to come.

Watch the video here (the portion I reference starts right around 6:10 if you don’t want to watch the full 12 minutes):

Jul 29 2010

70/30 Nation

C.M. Phippen

So, 36% of the American public thinks Obama is doing a good job on the deficit. In fact, 23% didn’t think the stimulus package added to the deficit at all. That level of miseducation is astounding to anyone even the slightest bit economically informed. The federal deficit for the 2010 budget is projected to be 10.6% of GDP, with an expected increase even higher next year. This, even though according to our President, we’re in the middle of recovery.

Federal discretionary spending increased over 80% from 2008 to 2010, thus resetting the baseline at an extraordinarily high level. Every new budget going forward starts at that point and goes upward from there; any reductions are considered cuts – something that almost never happens in Washington. What does tend to happen is that spending will increase each year, thus ensuring greater and greater deficits, and an exploding national debt as far as the eye can see.

Deficits under George W. Bush were in the 1-3.5% range until 2009, for which President Bush and President Obama were both responsible. Most of us believed spending was out of control under Bush, only exacerbated by the $800 billion (ten year) price tag on Medicare Part D.

President Clinton was elected to his first term in office with a minority of the popular vote, which had been split by Ross Perot with 19%. What was the issue that so divided fiscal conservatives and was the basis of Perot’s campaign? Concern over a deficit of approximately 4% of GDP.

A quick review of articles written during the Bush administration attests to the fact that liberals have been consistently concerned with out-of-control deficits during periods of time when they’ve been a fraction of what they currently are. I certainly hope this concern is genuine rather than political and we’ll soon see wide-ranging support for massive spending cuts in order to meet the historically consistent level of spending at 18-20% of GDP.

Politicians from both parties have been selling out the future of our country in order to buy votes in the here and now, and the rest of us just can’t afford this party any more.

In The Battle, Arthur C. Brooks outlines a consistent 70/30 split among the American population. That is pretty much what we see in this support for current policies dealing with budget and spending issues.

Nearly 70% of Americans agree that they’re better off in a free market economy than not, “despite its severe ups and downs.” Fifty-six percent of Americans believe their income taxes are too high, while 33% believe they’re just right. Astoundingly, while many Americans believe that the rich should pay more taxes, 69% believe that the top tax rate should be 20% or lower! Seventy-six percent believe the strength of America is based on the success of American business and 66% believe that when “big business” earns a profit it helps the economy; alternately, 18% believe it hurts (where did they go to school?) When asked if they would prefer larger government with more services and higher taxes or smaller government with fewer services and lower taxes, only 21% of Americans chose larger, more expensive government while 69% preferred smaller.*

There is a minority of the population, the 30%, who will, due to lack of understanding or pure ideological drive, charge ahead in attempts to completely redefine and transform this nation of freedom and wealth which was unimaginable in the world just a few centuries ago. It is the rest of us, the 70%, the mainstream of America, who stand in their way. It’s time for the politicians to represent us.

(Polling data excerpted from The Battle by Arthur C. Brooks, Basic Books, 2010, pp. 3-12)

Jul 20 2010

Blame and Discipline

C.M. Phippen

I heard our president today, complaining that the Republicans are standing in the way of the Democrats’ desire to extend unemployment benefits without paying for it through spending reductions elsewhere or by diverting unused money already set aside for the stimulus. Democrats are refusing; they only want to pass a benefit extension bill that is paid for with newly borrowed funds. In fact, Obama today said, “It’s time to stop holding workers laid off in this recession hostage to Washington politics.” Nice . . .

Am I the only one who remembers 1995? The Republicans controlled Congress for the first time in 40 years and true to the conservative principle of fiscal responsibility (which they adhered to for at least a couple of years), refused to accept the Clinton budget. The Republicans wanted to see more spending cuts, and forced Clinton into a battle of frugality which eventually ended when the administration finally submitted a budget that proposed to eliminate the federal deficit within seven years.

The ensuing firestorm in the media, which blamed the Republicans for victimizing the government workers who were temporarily out of work, never gave them credit for the result of that shutdown – a balanced budget. In fact, most liberals I know love to use that very budget as their greatest (and only) example of fiscal restraint.

Now we have a president who wants to play the same little game, accusing those who are listening to the voice of the people crying out for fiscal responsibility of “holding hostage” the American people. This, from the party which clamored for spending restraints under George W. Bush (most conservatives did, as well) but which has been more than willing to triple our federal deficit, as a percent of GDP, to nearly 11%.

Unless we stop calling names and start controlling the checkbook, we’re going to have a whole lot more to worry about than not being able to pay multi-year unemployment benefits.

May 8 2010

Greece, US, and Economic Reality

C.M. Phippen

Among weeks of civil unrest that included at least three deaths, numerous injuries, and widespread property damage, the Greek government has agreed to major economic adjustments in exchange for an IMF rescue. Among the measures required is the opening up of private markets in crucial areas of the economy, namely health care, transportation, and energy.

These steps will be taken in conjunction with tax increases and public sector pay freezes. The ability of the government to lay off public sector workers, whose “low levels of productivity and high wages are a big contributor to Greece’s debt problems,” should also substantially assist the country’s recovery.

It seems like the only part of this equation proposed here in the US, with our debt load ever closely mirroring that of Greece, is the tax increases. According to Art Laffer, our entire federal revenue could be replaced with a flat tax of 11% on individual gross income and 11% on net business income, even without accounting for the greater economic growth and increased revenue which would certainly follow. That solution would be much too simple and would decrease the power of politicians in Washington. It’s much simpler to talk about wealth redistribution and increase the taxes on the already over-taxed, even if it means stunting the longer-term economic growth of our economy.

The greater question is why we’re currently headed in the very direction Greece is being forced to leave because of the structure’s inherent unsustainability. If government-run health care, transportation, and energy are bad for an economy, why are we instituting such systems in our country in the midst of the greatest economic downturn in 80 years? If public sector workers, supported by unions who negotiate with government officials not representing the interests of taxpayers, end up with higher than average pay and benefits ($79,197 for federal workers v. $50,028 for private sector employees; with benefits, $119,982 federal v. $59,909 private) and their ranks are increasing faster than the ranks of those footing the bill, how do we grow ourselves out of a Greek-like mess?

In 1988, the debt was 51% of GDP and by 2020, it’s projected to hit 90%. Either we follow Greece now, before it becomes too late for us, or we just unite as a country, hold hands and chant, “Hope and change.” Surely that will save us.

Mar 30 2010

Deficits and the Road Ahead

C.M. Phippen

In the shadow of the recently passed healthcare bill, the news that the administration made a $1.2 trillion “mistake” in deficit projections over the next ten years should do nothing to reassure us regarding our country’s fiscal future. Last Thursday, the CBO, after analyzing the Obama 2011 budget, declared that the $8.53 trillion 10-year deficit projection was off by $1.2 trillion.

Now, for many of us, who’ve heard billion and trillion bantered about in Washington recently as though these are pretty standard monetary denominations, let’s be clear about what $1.2 trillion means in real terms, for real people. The GDP (gross domestic product) of the entire country of the US was $14.2 trillion in 2009; a trillion seconds is the equivalent of about 32,000 years; and if you were to have spent $1 million every day since the day Christ was born, you still wouldn’t have spent $1 trillion (only about $750 billion, or 3/4 of $1 trillion).

That additional $1 trillion means another $10,000 per US household is now owed to investors. When President Obama took office, the public debt was approximately $56,000 per household, a total of $6.3 trillion. Today, based on the most recent budget, that amount has jumped to $72,000 per household, or $8.2 trillion, and will reach over $170,000 per household by 2020 (based on the administrations own numbers), for a whopping $20.3 trillion in federal public debt.

Such an astronomical accumulation of debt is completely unsustainable. In the Bush years, through 2008, $2.5 trillion was added to the public debt. In the six years from 2010-2016 (2009 belongs to both Bush and Obama, so isn’t included but amounts to $2.6 trillion), President Obama’s budget would add $4.9 trillion to that debt.

Currently the US has a AAA bond rating, enabling our federal government to borrow money at extremely favorable rates. By 2020, the cost of major federal entitlements in conjunction with servicing the debt will be equivalent to 100% of federal tax revenue, and this is if our credit rating remains stellar. No one believes it will, without major fiscal discipline never before seen in a politician.

If the rate at which our government is able to borrow money were to increase, we would find ourselves in the non-enviable position of Greece in recent months: Unaffordable and unsustainable rates of government entitlement spending, sluggish economic growth, and increasing interest rates as investors decide the risk of default on government bonds is real.

Just this past month, the rating agency Moody’s issued a stern warning to the US and other major Western nations with regard to the unseemly levels of debt currently being amassed.

Growth alone will not resolve an increasingly complicated debt equation,” Moody’s said. “Preserving debt affordability” — the ratio of interest payments to government revenue — “at levels consistent with Aaa ratings will invariably require fiscal adjustments of a magnitude that, in some cases, will test social cohesion.”

While Moody’s said the US credit rating is not currently threatened, it relies on the ability of our leaders “to repair the damage caused by the crisis on public finances.”

We have been warned – budgets must be cut, and in a serious and substantive way, which may cause social cohesion to be threatened. Politicians will certainly use this to their advantage as they try to turn us against each other by encouraging disparate groups to push for the preservation of their favorite entitlement. We can’t allow that to happen.

Our elected leaders, who certainly understand the serious fiscal crisis awaiting us, will most likely do what they’ve always done – put aside the good of the country in order to score cheap political points that in the long run will cost us all far more than we ever imagined. We must work together, “cohesively,” to defeat any who choose to put their personal interest ahead of the interests of this country.