16 March 2005

Come Play The "Fiscal Responsibility" Shell Game

If you say fiscal responsibility three times fast...
It still will not amount to "cutting the deficit in half".

We are being deliberately distracted by pictures of a bankrupt Social Security "trust" fund. It is only natural that the masses will stop and take notice when powerful voices are saying "back me up here, I am going to save you from a diet of cat food when you reach 65" This piece addresses a broader issue but I will touch briefly on Social Security so that I am not misunderstood. Based on speculative numbers, Social Security reaches a break even point in roughly 13 years and begins operating at a deficit in roughly 35 years. I say speculative for a very real reason. These projections are based on an economic growth rate of 1.8%. Under different leadership, our country has had an economic growth rate of 2.8% plus. As a matter of fact, this country has not had an economic growth rate as low as 1.8% in more than 50 years. Now, why does the President want to use such a pessimistic number for economic growth? Because it gives the illusion of a crisis. Small changes in these numbers could amount to enormous changes in the current projections. I do agree with reform of some kind. The sooner we address the problem the less traumatic the reforms will be to American retirees. Privatization is simply a part of this shell game. Here are three concise reasons I say that. (1) Privatization puts us further in debt. (2) Privatization takes a current benefit that is guaranteed and turns it into a gamble. (3) Privatization takes our Social Security surplus (OUR money) and dumps it into the stock market, resulting in completely false market growth and (again) over feeding gluttonous friends of this administration. I won't continue on this avenue because, as I said, that is not the real purpose of this piece. Even if, for purposes of this argument, we accept the current data supporting the projections, Social Security begins to operate in the red in 35 years. Not bankrupt now, not bankrupt in 13 years, not bankrupt in 35 years. This leads me to my broader argument.

Look at the country as a whole. Everything being a piece of our economic structure. Currently, as we speak, our country is bankrupt - 7.5 trillion dollars in debt. I wonder if we have heard that so often that it has lost some of its punch. If you look at this country's accounting ledger in full, how can we justify singularly devoting our attention to a program (that has an approximate 1.5% operating cost) that MIGHT be in serious fiscal trouble in 35 years? I quote one Senator who said "we are missing the elephant in the room". Consider that if the US had or put into practice real economic and fiscal responsibility, the projected problem with Social Security would disappear.

Let's say we put the past behind us. Let us just start fresh from here with the promise from our President to cut our deficit in half and the promise of the new, crisp Fiscal Year 2006 budget proposal from him.

Or not. Read it. Line for line, read it. It is a shocking document to say the least. As you read it, imagine a budget you might have if you are John Q American, earning an upper-middle class living. You are $200,000 in debt (given LTV or loan to value on your home, revolving debt, personal loans, etc). And imagine your first run at a budget for the year to be something like this:

1. Take a second mortgage to buy plasma TVs for every room of the house.
2. Omit the first mortgage payment from the budget all together (because you only have that expense for two more years - it is no longer considered an ongoing expense)
3. Cancel your catastrophic illness insurance (because that is $3,000 per year that you can now put toward a T1 server that will give you lightning internet speed)
4. Reduce your education costs by moving your son from private school to public school (hey, that is $6,000 per year you can add to discretionary spending)

This analogy is not at all far off (relatively speaking) from the budget this president (and even the revised republican proposal) puts forth.

Consider these facts from the FY06 Budget Proposal:

1. The War (or wars) Iraqi Freedom and Enduring Freedom are not included at all in the budget. Not one dollar. (the republican reasoning being - these are one time line items, not ongoing expenses). Meanwhile, this administration has just put forth another request for 80 billion dollars in emergency funding for the war in Iraq. (Pubs say - "Well you see, we might only spend billions per year for 2006 and part of 2007 so we don't need to add ANY monies for this into a 5 year budget)
2. The budget slashes funding to programs for Veterans, Education, Agriculture, etc, etc. Interesting that the republicans deliver a barrage of guilt trips to democrats for not supporting troops in Iraqi Freedom while cutting them off from the proper funding to fight that war as well as denying any given war veteran a new wheelchair.
3. While cutting those benefits to our veterans, the budget allows for 32 BILLION DOLLARS in tax relief for those Americans earning more than a MILLION dollars per year. Tax relief for the top earners in our country. Republicans scare Americans by screaming "all "they" want to do is raise taxes!!" You better believe we do. We support a heavier tax burden for our top earners. Guilty. The second wealthiest person in our country spoke on this. Warren Buffett (who stands to gain a LOT from the proposed tax structure) says it is outrageous that his front office receptionist would have a heavier tax burden than he would have.
4. This administration would have a ban on capital gains tax made permanent. Really, look at this. All of us could benefit in some small degree (if we sell our modest home). But this administration will propose the increase of payroll taxes while having no capital gains tax. So...if you work 40-50-60 hours a week, they will tax that to death but if you have substantial gains from investments...that is exempt. Tax the work, exempt the investments. Who really benefits from that? Again, the top earners...those Americans who earn enough to make substantial investments.
5. I have reviewed many of the "smaller line items" but after watching a budget hearing, a real doozie was pointed out to me. We have been spending 10 million per year to send a television signal to Cuba (this signal is sent from 3am - 8 am to promote how wonderful America is.) It has always been blocked by Castro, so the Cuban people never, have never, and will never see it. The FY06 budget proposes to double the money spent on this (to 20 million per year). We will cut education and veteran programs but we can DOUBLE the money spent to send a television signal to Cuba that is never seen by the Cuban people.

A Bottom Line You Need To Pay Attention To:

The FY06 Budget proposed by this President (as well as the revised proposal from the republicans) INCREASES the deficit by approximately 600 BILLION dollars per year. This brings the US deficit in 2009 to 11.9 TRILLION dollars. THESE ARE THE PRESIDENT'S NUMBERS. The Republican's numbers. NOT a spin number from the democrats. You can read it right in THEIR budget proposal. The deficit at the end of the budget proposal is elevated to 11.9 TRILLION DOLLARS.

But we are meant to believe this budget represents fiscal responsibility. We are meant to believe this President submits a proposal that will reduce the deficit. That is an outrageous lie. It relies on a belief that we will not actually read it...that we will not actually understand it. I still believe we want to be more aware than that...no matter what side of the aisle we are on.

Prove them wrong. Read it and understand it. Know it like the back of your hand. Force your government to be responsible with our limited resources. You want to talk about what we will have in 35 years? Will we be able to retire with benefits? Will we be able to thrive economically? Will we be able to do something about the rapidly declining value of our dollar? Then force them to stop playing this shell game and take a path of REAL fiscal responsibly!

Other Points To Consider:

1. Last year 90% of our borrowing was from foreign lenders. What does it say that we can no longer borrow from our own interests? And how long will those foreign lenders hold out with the declining value of the US economy and the US dollar?

2. Social Security - Privatization will cost approximately 1.5 trillion dollars. This WILL be a new expense that will only be recovered (years from now) IF the gains on investments exceeds the payout commitment PLUS that 1.5 trillion and its interest payments (because of course, we have to borrow to accomplish privatization).
3. By the time "they" say Social Security will be in trouble (2042) our ENTIRE national revenue (EVERY DOLLAR THIS COUNTRY BRINGS IN - 100%) will be spent on THE INTEREST PAYMENT of our national debt. We will have NO spendable revenue (given our current path).

Oh yes my friends...a very large dancing elephant in the room.

You can review the entire FY06 Budget here:



Ken Grandlund said...

Great article regarding the shell game that has come to stand for budgetary restraint in the nation's capitol. Of course, the ruse is furthered in each of our state legislatures also.

The problem is that so many citizens have become accostomed to their own "deficit budgeting" that they lose any sense of trouble as the numbers get so big...

I hate to even think it because of the widespread problems it could wreak, but perhaps a big financial meltdown is the only thing that will make people take notice to the fact that we have let our government destroy our prosperity. Once we start losing the services and infrastructure that we expect from government, the vocal displeasure is sure to rise. But we, the people, have to take responsibility for letting things go too far because it is we, the people who allow the politicians to continue.

Sapphoria / Megan said...

Thank you Ken. I was so pleased to see that one of my most respected readers took the time to work through a piece that I think makes some important points, but is dreadfully long and not exactly an easy read. Thank you.

You are so right that the problem is in large part, a natural inablility to wrap our minds around numbers we cannot practically apply to our every day lives.

A "financial meltdown". What a great way to put it. We are surely headed there. These are times when we are holding our leaders to a frightening low level of accountability. We have a couple of choices...wait for and watch that meltdown or the many can try to remember the power of one voice and toss their voice into the ring.

Eye Doc said...

I agree with your comments about the lack of bugetary restraint in DC. Your comments regarding Social Security partial privatization however are off the mark.

The only benefits anyone can ever be guaranteed to receive are what would be in a private account. Your promised benefits under the existing system can be cut at the government's discretion, or even eliminated altogether. And they will be cut for sure in the future because the tax increases that would be needed to sustain them are huge and will not be tolerated by future taxpayers.

Actually, your only realistic chance of receiving anything close to what you're supposed to receive would be a private account, because even a conservatively invested account would have a return many times greater than the approximately 0.5% a year the existing system pays.

If you get a chance, read about the Galveston Texas experience over the past 25 years with private accounts.

Eye Doc said...

Sorry, I forgot to mention the so called "transition costs." These are not actually costs, because all that's happening is money that would have been spent years down the road is spent now instead. There is no new cost. That money does need to come from somewhere, but it would've had to come from somewhere anyway, just a little further down the road.

I say, it's my money, let me invest it as I choose. And at least I know it'll actually be there when it's time.

Eye Doc said...

Actually, a few other points. Capital gains taxes should be zero, and the US actually has higher capital gains taxes than much of the world. You already paid income tax on the money you invested and you shouldn't have to pay tax again on your investment.

Most people in this country have investments, and benefit from a low capital gains tax. It's not a small minority of "wealthy" people. Besides, if you want people to be upwardly mobile lower capital gains taxes are important.

But back to fiscal restraint and the budget. As bad as the budget is, our big problem in the US are the unfunded liabilitiees in Medicare and Social Security. That's what's going to kill us. The budget deficit is absolutely trivial compared to what our entitlement programs are going to do to us.

Anonymous said...

Your household budget analogy is completely false and unfortunately one made by too many people who should know better.
The federal govenment no longer operates under a gold standard. We have a fiat currency - one that is convertible only into itself, and a floating exchange rate. The federal government is the "provider" of the currency. When the federal government spends money it debits the Treasury's account at the fed and credits a private sector banks reserve account. The Treasury then issues bonds which act to drain reserves, enabling the fed to maintain a non 0 funds rate.
The public sector defecit is equal, down to the penny to the privae sector surplus. This is an accounting identity.
There is absolutely no such thing as the federal gov't becoming insolvent. The notion is rediculous, as is comparing the issuer of the currency to a household that requires it to pay taxes.
When the gov't runs a surplus it reduces net private sector savings by exactly that much. This was a large contributing factor to the rise of the dollar and the recession in the last years of the Clinton administration. You can't have continued economic expansion and ever increasing private sector debt levels. You get to a point where the private sector begins to rebuild their balance sheet. The result is an increase in the output gap that can only be addressed by larger gov't defecits.
The notion that social security can be insolvent is obviously false as well.
The public needs to have a much better understanding of how our financial system works.

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