On The Eve Of (Financial ) Destruction - Part 1

One of the great protest songs from the late 1960s was Barry McGuire's "Eve Of Destruction." The song came to mind today while reading an Associated Press (AP) report describing Obama's 2011 Federal budget. His proposed budget calls for a record breaking spending level of $3.8 TRILLION and a one year deficit of $1.56 TRILLION. In other words, his budget will require the Federal government to spend 40% more than the expected tax revenue it will collect. Obviously, the government will have to borrow money from any individual or nation who will lend it to us, sinking the country's financials deeper into debt. Further, he expects the deficit to "shrink" to just under $1.3 TRILLION the next fiscal year.

Let's do some math:

• If each U.S. household had to pay for the $1.56 TRILLION deficit, the cost per household would come to about $12,000 per household. This would be above and beyond the taxes needed to cover the non-deficit portion of the budget.
• If we look at last year's deficit level, this year's deficit level, and the proposed deficit for the next two years, the political class in Washington is expected to overspend its tax collections by about $5.7 TRILLION. On a per household basis, this comes to about $44,000 per household.
• As discussed in previous posts, the Obama administration has proposed to freeze spending levels in some Federal government areas, claiming that this action will save about $250 billion over the next ten years, or about $25 billion per year. If those savings ever materialize, the $100 billion savings over four years would result in each American household theoretically getting back $769 in savings. The $769 in savings represents less than 2% ($769/$44,000) of the additional taxes that are going to be required at some point to pay for the deficit spending of Washington.
• Many U.S. household will not even save this much since Obama's budget proposal calls for letting the so-called Bush tax cuts expire when they come up for renewal.
• The cost over the next decade, according to the proposed budget, would be about $8.5 TRILLION. If you add in the $2.8 TRILLION deficits from the past year and this year. the total deficit spending of the political class could be $11.3 TRILLION or a whopping $87,000 per household. As mentioned in a previous post, the government is notorious for underestimating costs, this $87,000 estimate is probably understated.

Looks like Barry McGuire was right, he just got the cause wrong, we are on the eve of destruction. We are on the eve of destruction from a financial perspective. As the deficit gets bigger and bigger, the available credit and capital required to support that deficit will drain money out of the private credit markets. Businesses will find it harder to get affordable credit and loans to expand, stifling employment growth. As the deficits get larger, those buying the bonds to support the deficit spending will require higher and higher returns as the risk of default accelerates, causing the deficit to get bigger even faster, sucking even more capital out of the private sector. Taxes must go up eventually for everyone, not just the rich, to feed the deficit beast in order to avoid or delay a government default, taking more wealth out of the economy. With less disposable income, households will purchase fewer products and services, further depressing the jobs market.

Apparently, the Obama administration does not get it, even though they received a good kick in the pants a few weeks ago in Massachusetts. When a Republican can take over Ted Kennedy's Senate seat in a state like Massachusetts, you know the ordinary American is not happy. They are not happy about this administration's deficit spending, bailing out of banks, insurance companies and car companies, and the expansion of big government at the expense of freedom and control over their own lives.

In response, this administration continues on a reckless spending spree, still thinking that spending an additional trillion or two on a fatally flawed health care reform plan is a good idea, wasting billions of dollars on earmarks and wasteful pork barrel projects, continuing to expand our military presence around the world, and offering token spending freezes on only a portion of the Federal budget. The proposed $25 billion a year savings is less than 1% of the total $3.8 TRILLION budget. It is less than 2% of the just the deficit amount from this year. Pitiful.

What could be done to help Obama reduce the deficit? There are any number of suggestions listed in "Love My Country, Loathe My Government:"

• As we have stated previous, the U.S. currently has over 50,000 troops stationed in Germany, almost 50,000 troops stationed in Japan, and about 30,000 troops stationed in Korea. These deployments are from another age and time, we can no longer afford to garrison these types of troop levels around the world. In his Afghanistan speech, the President claimed that it costs about a million dollars a year per soldier to deploy them in that country. If we assume that the cost is less than that in non-fighting zones (say we arbitrarily reduce the $1,000,000 cost down to $600,000) then by bringing back the 130,000 troops we have just in Germany, Korea, and Japan, we could save about $78 billion a year, every year going forward. We could reduce the size of our military and focus those remaining forces where they are needed to fight terrorism. Additional savings could be found by reducing the thousands of active troops we have in countries such as Spain, England, and other European countries. (Step 30 in "Love My Country, Loathe My Government").
• One of the primary attractions of voting for Obama the candidate was his promise to get us out of Iraq as soon as possible. That promise has not been fulfilled as of today and worse yet, he has vowed to keep 50,000 troops in that country for the foreseeable future. If we go conservative and use the $600,000 estimate per year per soldier, the savings of getting everyone out of Iraq would be about $30 billion a year. (Step 30)
• We need to review all military costs we are shouldering for other nations and determine if paying all of the costs is worthwhile or cost effective. The perfect example of this type of cost savings was reviewed in an article from the New York Times that was reprinted int he St. Petersburg Times this past Sunday. It described the missile defense system that the Obama administration is deploying in the Persian Gulf to protect the world from the threat of Iranian missiles. If we are protecting the world, specifically oil rich nations in the Persian Gulf, how about we ask those nations to pay for the privilege of being protected by our missle defense system? They can certainly afford the likely billions of dollars it will cost to permanently deploy the system, why shouldn't they pay for it? There are probably hundreds of these types of programs where we pay for everything to the benefit of others. Those times are over, we cannot afford them any more.
• As mentioned in previous posts, Obama the candidate promised to keep wasteful earmarks below 2,000 per year, the same levels as early in the Bush administration. Unfortunately, the current Federal budget, that President Obama signed in the fall, has over 11,000 earmarks, wasting tens of billions of dollars every year. One way to get this problem under control is to institute a rule that no Federal spending, project, or program would be funded unless it materially affected a large number of residents in at least five states. If a program did not meet this criteria, it would not be done or it would be funded by state and local governments in the states where the project would be implemented. In this way, the Federal government would not be building farmers' markets in Kentucky, building bike trails in Michigan, or do any other wasteful programs such as these. (Step 44)
• Social Security will soon not be able to pay its benefits from the taxes it collects. Thus, fair and financially sound actions are required to get this expense stream under control. These actions should include raising the retirement age, changing the funding requirement for the program so that the program is funded as it goes (depriving the political class from raiding the Social Security trusts), and reducing Social Security benefits based on the wealth level of each American. People such as Donald Trump, Bill Gates, and Warren Buffet are too wealthy to receive a monthly Social Security check. In order to keep the system and its financials solvent, benefits for the wealthy should be cut to provide for those that are not wealthy (Steps 10, 11, 12)
• Benefit and retirement perks for future Federal employees need to be reduced. Since most Americans do not currently get both a pension and access to a 401k retirement plan (in fact, many, many Americans have access to neither), it is not fair for future Federal employees to get both. Thus, the Federal employee pension system should be phased out over time with new employees having access only to a fair 401k type retirement option, putting them on a par with most other Americans. (Step 9)
• Every government agency needs to do a ground up review of all of its expense lines and programs. Many Federal programs take on a life of their own even when their original purpose has disappeared. There is great redundancy across multiple Federal entities that could be reduced along with the corresponding budgets. We need to do a basic business and functional analysis of all government functions, giving each department and agency an aggressive budget reduction (say 10% a year for five years) in order for the hard cuts to be made in nonessential expenditures. (Step 1)
• Rather than increase funding by deficit spending, the Federal government needs to self fund itself by wringing fraud out of the big programs such as Social Security and Medicare. If you are losing dollars from fraudulent activities, increasing spending is likely to increase the waste lost to fraud. An investment in additional policing resources for Social Security and Medicare should pay many dividends in government spending savings. (Step 5)
• An independent panel, without politicians and without lobbyists, needs to be formed, and staffed by smart Americans like we did with the Manhattan Project, the Apollo space mission, the military base closing commission, etc., which would take a comprehensive look at how to reduce the escalating health care and Medicare costs, currently about half a trillion dollars a year. The past year has proven that the political class is incapable of creating fair, effective, and cost reduction national health care legislation. (Step 28)

The above nine ideas would go a long way to getting the Federal budget under control. I am sure that other, smarter people could come up with many other smart, insightful ideas for getting the government's growth contained. Unfortunately, no one in the political class has shown the bravery to tackle such a task, leaving us all on the "Eve Of Destruction."

Visit our website at www.loathemygovernment.com to order an autographed copy of the book, "Love My Country, Loathe My Government -Fifty First Steps To Restoring Our Freedom and Destroying The American Political Class" and to sign up for the cause. The book is also available online at Amazon and Barnes And Noble.