Beyond Stage One Politics

See my article about the national debt published in August 2011’s edition of Smart Girl Nation, entitled President Obama’s Bank of China.

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?

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.

Carolyn Day

As I’ve tried to better understand the events leading up to the financial crisis of 2007-2008, I’m haunted by a comment made by Charles Gasparino in The Sellout. He stated that as corporate bond prices lost value in the rapidly declining market of June 2007, there was a dramatic “flight to quality of investors selling corporate bonds and snapping up supersafe Treasuries” (Gasparino, p 265), the bonds considered the safest available.

At about the same time, in June of 2007, the rating agencies (Standard and Poor’s, Moody’s) began downgrading mortgage-backed securities, despite the fact that they had been showing signs of deterioration for a year or two prior while still maintaining consistent AAA ratings.

One-and-a-half years earlier, in late 2005, AIG made the decision to no longer insure CDOs underwritten by US financial institutions because of the lax standards in US subprime lending (Gasparino, p 226). At about the same time, Bill Gross of PIMCO was warning about falling housing prices and defaults.

Now let’s jump to 2011. Over the past two years, the Fed has pumped nearly $3 trillion into the economy by purchasing US treasuries (QE1, QE2, and reinvestment of maturing treasuries). This in addition to all those purchased by private investors fleeing toxic CDOs.

In February, Bill Gross of PIMCO, “one of the largest investors in the Treasury market,” announced that he would be selling Treasuries and just one month later, with no holdings of US government debt, began shorting them.

In a major shift, China has begun pouring money into hard assets and away from US government debt.

A former advisor to China’s central bank, Yu Yongding, recently “likened the U.S. Treasury market to a ‘giant Ponzi scheme,’ arguing that Federal Reserve buying of Treasuries has artificially kept bond prices high, but that they would eventually fall to levels which reflected fundamentals of the U.S. economy.”

S&P just lowered the outlook on US debt from stable to negative, signaling the potential eventual loss of the AAA credit rating and “a sign that the ratings agency has doubts about prospects for taking effective action to curb deficits and debt.”

To argue that deficits and debt can be reduced by raising taxes as opposed to cutting spending would be to ignore the realities of history. Regardless of marginal federal tax rates, revenue raised has always remained fairly consistent, at about 18% of GDP. In fact, raising capital gains rates could likely have the opposite effect, as more people have historically sold more assets during lower-rate periods than higher-rate, when taxes collected on gains have historically plummeted. Interestingly, lowering capital gains tax rates in a high-growth business environment has been one of the only ways shown to actually create outliers in this equation – increased percentages of revenue above the 18% norm.

All the while, President Obama’s budget would add $9.5 trillion to the debt from 2011-2021, a near doubling in just 10 years! Just as many of the major players on Wall Street spent the years leading up to their firms’ meltdowns playing golf and entertaining, we seem to have a president equally oblivious to the eventual destruction being sown all around him. While it looks like many of the American people have learned from the mistakes of the past decade and are willing to accept the changes that entails, the lack of foresight and leadership emanating from the capitol is the very essence of Nero fiddling while Rome burns.

This cartoon was originally published in the Chicago Tribune in 1934.

David Horowitz succinctly summed up this seemingly never-ending battle when he explained that our history is one of two “distinct revolutionary traditions,” as opposed to the idea of an old order (conservatism) and a new revolution (progressivism). Our two-hundred year history, that which has shaped our nation, is a history of two disparate revolutionary paths to the modern world, “two different paradigms of the European Enlightenment that took root, respectively, in America and France.”

He goes on to say that, “the radical ethos of the French Revolution became the wellspring of a socialist revolt against bourgeois order that culminated in the creation of the Soviet empire. On the other hand, the libertarian ethos of the American Revolution inspired the conservative opponents of the Soviet tyranny, a counterrevolution based on individual rights, free markets and democratic constitutions.”*

You’d think once the battle had been won by the historic experiences of the past century, the debate would be over; that, unfortunately, would be asking too much. So the same arguments must be won, the same battles must be fought, and the same truths must continuously be told.

*The Politics of Bad Faith, David Horowitz, The Free Press, 1998, p. 142.

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):

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)

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.

Carolyn Day

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.

by Carolyn Day

Last week, the issue of Sen. Bunning singlehandedly holding up a bill that would extend jobless benefits and “hurt millions of Americans” was all over the news. The Senator was refusing to budge because Congress had just passed a paygo rule, which would require that any new spending be offset by cuts elsewhere. The very individuals taking credit for passing the rule weren’t supporting Bunning’s stance, and apparently aren’t willing to apply it to any spending programs they happen to like.

According to Senator Bunning, “When 100 senators are for a bill, and we can’t find $10 billion to pay for it, there’s something the matter, seriously the matter, with this body.” Could it be that they aren’t at all interested in actually finding a way to pay for their “gifts” to the American people (taken directly from other Americans, by the way)? Could it be that this paygo rule was just an opportunity for photo ops, creating the illusion of fiscal responsibility while spitting in its face?

In fact, in the midst of the opposition to Senator Bunning’s position, President Obama held a reception at the White House to celebrate paygo. Huh?

Today, the news is out that Louise Slaughter, House Rules Chairwoman, is considering a move to usher the Senate healthcare bill through the House without requiring an actual vote on the bill itself. She knows that the current Senate bill is so unpopular with the American people that there’s a good possibility that even using reconciliation, it may be dead.

The move under consideration would require only a vote on changes to the Senate bill and would presume the Senate version passed if this rule change bill passes, without actually voting on it. This is an absolute end-run around reconciliation, (as well as the Constitution) which requires that any bill using reconciliation be passed in its original form. Once that is done, changes can be made and voted on by both houses of Congress.

Just as with the paygo rule, too many in Congress want to have it both ways. They know the American people are overwhelming against the Senate healthcare proposal. No one in the House wants to be maligned for voting yes on a piece of legislation so poorly pieced together and so widely known to contain outright payoffs to Senators in exchange for their votes.

The supposed solution: Vote for the bill without voting for the bill. This way, as with paygo and jobless benefits, you can pose for the cameras saying one thing while actually doing another. Brilliant way to manipulate, obfuscate, and possibly save your job. Horrendous way to “serve” the American people and our republic.