Friday, August 17, 2012

A Simple Solution

“No question is so difficult to answer as that to which the answer is obvious.” – George Bernard Shaw

In the past I’ve written about our nation’s debt crisis and the inability of our so-called leaders to do anything about it. One side doesn’t want to pay more taxes and the other side doesn’t want to cut spending. Both sides better get ready to be unhappy because we need to do both and we need to do it quickly. Doing something quickly is yet another issue. When the politicians talk about doing something, it’s reforming the tax code or drastically reducing one program, but not another one…gore his ox, not mine. Nothing gets done. Even when they put a gun to their own heads, no one can pull the trigger. (Does anyone really think that $109 billion mandated sequester cuts will happen in January 2013? Or that the Bush tax cuts will not be extended?)

Paul Ryan, the newly announced Republican VP candidate, has published his “Path To Prosperity” budget and it contains some worthwhile proposals. But, it’s overly ambitious and too partisan. Regardless of who gets elected, we’ll be debating someone’s “path” for the next four years. And we’ll just keep on digging the hole as long as the Chinese and others are willing to finance the shovels.

So I say let’s keep it simple and get things moving in the right direction, right now. It doesn’t have to be perfect and it doesn’t have to be the ultimate, end-all program. Here are three of the biggest issues:

1) Our cumulative National Debt is equal to and about to surpass our annual GDP. And most of the growth has occurred over the past 10 years due to increased spending, lower tax rates and a floundering economy. We are at a tipping point and on a trajectory that is unsustainable.
2) Each year we spend more than we take in. In recent years annual tax revenues have been over $1 trillion less than expenditures. But with the soft economy it is very risky to balance the budget immediately. Even if the economy were stronger, extreme increases in taxes or extreme cuts in federal spending would put us at risk of recession.
3) We have a huge unfunded liability associated with Social Security and essentially what amounts to the same thing with Medicare.

I’m not even going to get into the actual numbers…I’ve done that before and it makes my head hurt. I’m just going to layout a basic framework for addressing these problems.

Let’s admit it. We are addicted to over-spending and will need years to wean off of it and get to a balanced budget. Once we get to a balanced budget, we must start chipping away at the national debt. We have to get it down to a more reasonable level, such as no more than 40% of GDP (as a point of reference we’re about $10 Trillion over that today). It may take years to get it done, but getting started now is critical.

We have got a big mountain to climb because once we get the National Debt down to a manageable level we must address funding for Social Security and Medicare. I propose that we take the money we were using to pay down the debt plus some portion of any surplus and begin providing for the unfunded liabilities of Social Security and Medicare. We’re in big trouble on this one and probably too far in the hole to get out of it within the lifetime of anyone born prior to 2000. But we can make a dent in it and hang on until demographics, policy changes and economic growth catch up.

What are the specifics?

1) Immediately impose a debt reduction tax surcharge across the board on all individuals and corporations. Don’t change the tax codes and go through all of that crap. Just whatever your tax burden is, it goes up by X-percent. This addresses the need for more revenue. We can rewrite the tax code later when we have more time and more fiscal breathing room. (I recommend that the X-percent be applied to taxable income and the adjusted total is then taxed accordingly. No one will be happy which tends to make it very fair IMHO).

2) We start cutting federal spending across the board by X-percent. This means that every program and every federal government paycheck takes a haircut (with the exceptions of social security payments, government pension checks, veteran's quote MC Hammer…”can’t touch this”). If a program ends up truly under-funded, we’ll fix it. There is still enough money in this bloated system to cover real needs. But it starts with across the board cuts. And with the increased revenue from the “debt reduction” charge, the cuts required to balance the budget will be very manageable. (Other than the above noted exceptions, everyone and everything takes a hit. And as noted above, I tend to think that makes it all the more fair).

3) Debt reduction becomes part of the budget. So going forward with our new balanced budget, it should include a line item for reducing the national debt (at least $100 billion annually). If we have a surplus in some years, half of that goes toward paying off the debt and the other half to a “rainy day fund”. At some point (which may be 10 or even 15 years from now) we’ll have the debt down to less than 40% of GDP. Then we can start putting the $100 billion along with one half of the surplus toward unfunded liabilities.

4) The law we pass balancing the budget and capping federal debt as a % of GDP should include “kickers” for extreme circumstances, i.e. war or a severe economic depression. These overspend “kickers” must be passed by a 2/3 majority in both the House and Senate. Annual budgets, by law, must be balanced. If during war or a down economic cycle, there is not enough in the “rainy day fund” and we need to overspend; it is treated as borrowed funds and the principle and interest payments go into future budgets. And remember, it must be approved by a 2/3 majority. And it’s only good for one year. Need to do it again next year? Vote on it. No longer do we just casually pass “spending programs” to stimulate the economy or do anything without paying for it today or within a reasonable period of time.

5) Push back the age at which people become eligible for Social Security and Medicare. It has to be done. So just do it. If no one wants to pick the “born after” date that will determine who is impacted, then have a drawing. There is a birth year window of 10 or 15 years that probably makes sense. For example, how about 1965-1975? Let’s say that the luck of the draw turns up so that those born in 1970 or later have to wait 5 years longer to get their benefits. Good for those born in 1969 or earlier, tough luck for everyone else. But we have to take the step.

How much is enough? How much is the X-percent debt reduction charge and how much is the X-percent spending cut? To avoid quibbling about it, I suggest that we get equal amounts from revenue increases and spending decreases. The maximum for both combined is probably around 3% of GDP, or about $500 billion based on our current GDP. But we cannot start out too aggressively. It would take tax increases and spending cuts in the 7-8% range to hit $500 billion. We will have to settle for much less for now. Major tax increases and/or major spending cuts would cripple the economy. Start with baby steps. Increase taxes by 2% and cut spending by 2% in 2013. Then keep ratcheting up the tax increases and spending cuts annually until we get our fiscal house in order.

Establishing a long-term, legislated program to reduce our debt and address the eligibility age for and funding of Social Security and Medicare would actually jump-start our economy. I think it is likely that we could achieve 4-6% annual growth in GDP once we’ve made the commitment to stop digging the fiscal hole. With strong GDP growth we could hit our debt reduction goals even faster, much faster. Growth covers a multitude of problems. Add $10 trillion to our GDP along with a balanced budget and our national debt/unfunded liability burdens become much more manageable.

Washington has become too dysfunctional and our government too large and too complex. Even if members of Congress were willing to work together, I don’t think we have time for them to untangle this mess and try to fix it one program, or one agency, or one department at a time. No question that, at some point, we need to put every program under the microscope. No question that we need to simplify our tax code. But, today our Rome is burning and the fiddle is already in the fire. We need to act now with a relatively simple program that is easily understood and can be quickly implemented. The pain will be shared by all. We need to lose a lot of weight and a strict diet is required, but it can still be a healthy diet. We just need to get started on it sooner rather than later.

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