Eve Of (Financial) Destruction Follow Up

A few articles have popped up in the past few days that are a good follow up to the Eve Of (Financial) Destruction posts we did a little while ago. An Associated Press article today reviewed how President Obama has declared that a new budget bill he signed recently will require the political class and the government to totally balance spending increases with concurrent spending cuts in order to force Congress to "pay for what it spends, just like everybody else."

According to the article, these "pay as you go" constraints were in place in the 1990s and helped to curb the rise in the deficit at that time. (Note: it helped curb the rise, it did not reduce the overall deficit, just made it grow slower.) However, since then, the constraints had been removed and Obama blamed this removal for the deficit levels he inherited and the additional debt of over $8 trillion that will be added to the deficit in the next ten years. At the same time he signed this bill, he also raised the U.S. debt limit by $1.9 TRILLION, from $12.4 TRILLION to $14.3 TRILLION.

I have a few serious problems with this half-hearted approach to solving this nation's dire financial condition:

• Less than a year ago Obama pledged to start getting the Federal deficit under control by asking his Cabinet to find $100 million in total savings across the entire Federal bureaucracy. At that time we blogged that this feeble target of $100 million (on a $3.5 TRILLION budget) would reduce the current year's budget by .003%. If an average U.S. household making about $60,000 a year reduced their budget by .003%, the net result would be an annual savings of $1.71. In other words, the initial Obama attempt at cutting the budget was about equivalent to one Sunday newspaper for an American family, a trifling amount. Thus, I am not still not sure that he understands how bad our financial condition is when just a handful of months ago he came up with this non-starter from a deficit reduction perspective.
• This latest proposal from the President is also kind of feeble. He apparently wants to freeze spending at current levels and make sure that new, future government programs are paid for by reducing costs in other, existing programs. My big problem with this approach is that the deficit will continue to grow and grow at a very fast rate since the expenses in the current Federal budget are about $1.4 TRILLION more than the expected revenue from taxes and other secondary sources. Thus, even if the politicians have enough discipline to obey this new edict, the deficit will continue to grow, perhaps by a smaller rate, but it will grow. The need is not to FREEZE spending at current levels, as he proposes, but to REDUCE spending. If you do not reduce current expenditures the deficit will continue to expand. And this assumption assumes that the political class can hold to this principle, something I find doubtful. My conclusion is that he still does not get how bad things are.
• Another disturbing trend I continue see with this President is that nothing is his fault. Congress will "have to pay what it spends" and the elimination of the pay as you go rules from the 1990s resulted in the bad situation he inherited ($1.3 TRILLION annual deficit) and the new debt of $8 TRILLION over the next decade. Let us not forget that the $8 TRILLION in proposed debt is in the budget that he proposed just a few weeks ago. He did not inherit that number, he created that number. Also, please remember that under the Constitution, final budgets are created in the Congress, a Congress that has been under the control and run by the Democrats for the past three years. Thus, while Bush was President in two of the past three years, the Democrats could have gotten those deficits down if they wanted since they controlled Congress. Not that I am letting Bush off of the hook, he still signed those huge deficit budgets into law. The entire political class is to blame. I just wish Obama would stand up and take responsibility once in a while.
• The article also reviewed how Obama was going to form a panel, by executive order, containing both Republicans and Democrats whose job would be to come up with suggestions on how to close the deficit spending gap. However, this panel would only be able to advise and Congress would not even be required to vote on any of its recommendations. Again, a very feeble gesture. How hard will this panel work at identifying real ways to close the gap if it knows that the Congress is highly likely to ignore their work? If Obama was really serious about this effort, and given the support he would likely get from most Americans, he should have taken the issue directly to the Congress and said he wanted a panel with real power and teeth and that the Congress would adopt the panel's findings. Instead, this panel will go off and probably take many months to come up with some weak recommendations (while the deficit continues to grow), nothing will be done with those findings and recommendations, and Obama can play the blame game again without doing anything serious about fixing the nation's financials.

Consider a few numbers if you still think that this nation's financial situation is not dire:

• The recently proposed Obama budgets for the next ten years will add $8.5 TRILLION to the deficit, his numbers, not mine or the Republicans. I did a little research and found the net worth estimates of the richest 400 Americans in a summer Forbes magazine online article. The article estimated that the total net wealth, not income, of those richest four hundred Americans was about $2.4 TRILLION. Thus, if the government confiscated the total wealth of those four hundred and used it to offset just the additional deficit spending Obama has proposed, there would still be $6.1 TRILLION that the rest of us would have to pay off. If you assume that each household had to pay the same amount to get the country back to zero from an incremental debt perspective, then each U.S. household would have to kick in about $47,000 ($6.1 TRILLION/130 million households). In this view, Obama could not "tax the rich" to pay for his deficits since he would have already confiscated their total wealth which would account for only 28% of the additional deficit spending he is proposing. Thus, whether he will admit it or not, or even if he understands it, he has already significantly raised the tax levels for EVERY American with his deficit laden budget proposal. In fact, he probably has already raised the taxes for a few generations of Americans to come.
• However, it gets worse. He has just raised the Federal government debt level to $14.3 TRILLION. Thus, by confiscating the wealth of the richest four hundred Americans, that wealth would cover only about 17% ($2.4 TRILLION/$14.3 TRILLION) of the government debt obligations. The other 83% would have to be paid by the rest of us, resulting in an additional tax burden of $91,500 per household to cover the deficit. And remember, this is just to pay off the debt, additional taxes would be needed just to pay for government services.
• A recent Business Week column by Peter Coy, "U.S/. Debt: It's Not dark Yet, But It's Getting There" gave another, still pessimistic view, about our national debt situation. In a nutshell, our total debt will be about equal to our annual GDP in the next year or two. This is a so-called tipping point where international investors will start to worry about the U.S. ability to repay it's debt instruments since it's total debt is bigger than its annual economy. This situation would require us to pay higher interest rates to cover the higher risk of default, further spiraling us deeper and deeper into debt, requiring us to pay higher interest rates, etc. According to Mr. Coy national economic growth begins to slow significantly once a country's debt to GDP ratio gets above 90% (we are currently at 94% and heading higher). The example cited is the serious economic condition of Greece whose excessive government spending has resulted in a ratio well above one and the potential for the Greek government defaulting on its debt instruments. The U.S. trend is similar to what happened to Greece.

Given the dire consequences and the alarming trend of this nation's financials, the President does not want to reduce our national debt, he just does not want it to grow as fast. He proposes no concrete steps to get the situation under control, he just wants a toothless commission to examine the problem without Congressional mandates to follow through. Maybe he should finally read the copy of "Love My Country, Loathe My Government" that I sent to him. He could implement the following steps:

• Step 1 - tell his Cabinet heads that they will have to reduce their total expenditures 10% a year for five years in order to wring out inefficiencies and redundancies from their operations. Finding $100 million is a joke, 10% a year for five years is real costs savings.
• Step 5 - significantly increase enforcement efforts to stamp out fraud in waste in Social Security, Medicare, and IRS operations.
• Step 30 - bring back all non-essential military troops we have deployed around the world including the tens of thousands of troops we have stationed in Japan, Korea, and Germany.
• Step 6 - allow only individual citizens to contribute to election and re-election campaigns, effectively eliminating wasteful earmark spending from the budget.
• Step 44 - operate no Federal program unless it materially affects a significant portion of citizens in at least fives states. If a program does not fulfill those requirements, then terminate it or let the affected state governments pay for it.

These are just a handful of steps that the book proposes. They certainly have more teeth and make more sense than blaming others and proposing do nothing panels. They are the only way to avoid the Eve Of Destruction.


Our new book, "Love My Country, Loathe My Government - Fifty First Steps To Restoring Our Freedom and Destroying The American Political Class" is now available at our website, www.loathemygovernment.com . It is also available online at Amazon and Barnes and Noble.