Archive for July, 2011

Moody’s Joins the Fun

Saturday, July 30th, 2011

Moody'sJust a quick post this morning. As a follow up to the news from S&P’s on Thursday, Moody’s joined the discussion yesterday with a few comments of its own.

“Reductions of the magnitude now being proposed, if adopted, would likely lead Moody’s to adopt a negative outlook on the AAA rating,” the credit rating agency said in a new report. “The chances of a significant improvement in the long-term credit profile of the government coming from deficit reductions of the magnitude proposed in either plan are not high.”

Much like S&P’s comments that I posted yesterday, Moody’s is looking for a more substantial plan that will honesty tackle our long-term deficits.

Moody’s went on to clarify that as far as it is concerned, the nation will only default if it misses an interest or principal payment on U.S. debt, not if it misses payments on other obligations like federal employee salaries or Social Security benefits.

“If the debt limit is not raised before August 2, we believe that the Treasury would give priority to debt service payments and could thus postpone a potential debt default for a number of days,” it said. “Revenues would be more than adequate for some period of time to meet those payments, although other outlays would be severely reduced as a result.”

This is a point I made recently here. And if you’re paying attention, you might have noticed that the White House has changed it’s rhetoric from “defaulting on our debt” to “defaulting on our obligations”. We have enough money coming into the Treasury to pay our debt service, social security, Medicare, Medicaid, our military and more without interruption. At some point the federal government will have to shut down less essential services until the debt limit is raised, but this is a far cry from “defaulting on our debt”, and as far as I’m concerned, “defaulting on our obligations”.

Read more here from The Hill.

The Tea Party Gamble
The Tea Party continues to be painted as “economic terrorists” by the left, Democrats and the media. Even some Republicans have jumped on the bandwagon to chastise House members who side with the Tea Party cause. But what’s lost in this message? The Tea Party has been talking about the need for serious deficit reductions for months. And now both Moody’s and S&P’s have confirmed that in order to retain our AAA credit rating and stabilize our debt-to-GDP ratio, we need a long-term plan to bring our fiscal house in order much larger than any of the recent packages that have been discussed. In the words of S&P’s, a $4 trillion plan is only a “good down payment” and doesn’t solve our problems. It appears that the Tea Party has gotten it right from the beginning.

Now the Tea Party is gambling that it’s more important for them to be principled than to vote to pass a bill that doesn’t solve our problems. Moody’s says that the Reid plan and the recent Boehner plan do not qualify as a serious plans because of their magnitude — they’re too small. The Tea Party agrees.

The gamble is what happens after August 2nd if the debt ceiling is not raised? As Moody’s has confirmed, we will not default on our debt despite earlier comments made by the administration. But what will happen to the markets and to the economy?

My Prediction
The Harry Reid bill in its current form has no chance to pass the Senate. I think it’s likely we’ll get a new bill from Reid and Mitch McConnell soon. They will incorporate some of the spending cuts from the Boehner bill to pull in some Republican votes in the Senate and send it back to the House. And from there the Democrats and a handful of Republicans will pass the bill to raise the debt ceiling. The Tea Party Republicans will vote against it. How long will this take? It certainly won’t get done by August 2nd.

S&Ps Sets Expectations for Deficit Reduction

Friday, July 29th, 2011

Standard & Poor'sJohn Chambers, the chairman of Standard & Poor’s sovereign ratings committee, spoke yesterday about a potential downgrade of our country’s credit rating. The quote that will get the most coverage was when he said that a deficit reduction plan that promises $4 trillion in savings over time would be a “good down payment” on getting the country’s strained public finances under control.

The media coverage will likely focus on the debt ceiling debate and remind us that President Obama pushed for a $4 trillion package of cuts and revenues. But to do so would be to miss the larger picture painted by Chambers. Here’s the exchange that proceeded his quote about the $4 trillion being a “good down payment”.

Q: “There’s been a figure of $4 trillion dollars circulating as an example of the scope of fiscal consolidation measures that could work to stabilize the U.S. debt-gdp ratios. Could you explain how that figure was arrived at since it was mentioned in S&P’s reports and where it figures in S&P analysis?”

A: “First of all, that figure comes initially from the Bowles-Simpson fiscal commission, and it was embraced by President Obama in his April 13 speech and Paul Ryan in his counter-budget proposal. And so you had policy makers converging around the amount. Now actually the $4 trillion, depending on whether it is front-loaded or back-loaded, is not going to do the trick in terms of stabilizing U.S. government debt-to GDP ratios. But it takes you pretty far along. And I think a grand bargain of that nature would signal, you know, the seriousness of policy makers to address the fiscal issues of the United States, to actually stabilize the debt-to-GDP. The IMF says it takes 7.5% of GDP consolidation. I think we have more than that.”

Then Chambers added, “But $4 trillion would be a good down payment. We thought that..if policy makers could deliver the goods on that, then that would be a strong sign on our political scores and eventually on our projections on the fiscal side.”

So if $4 trillion is only a good start, then what is actually a good plan? Something closer to $8 trillion if you read between the lines. The Paul Ryan budget, which was vilified by many on the left as “draconian”, isn’t even this big.

How Did We Get Here?
When you listen to the talking heads criticizing the President, the Democrats, and the Republicans, remember this: If Congress had passed a serious budget and a long-term plan to tackle our deficits this spring along the lines of either the Bowles-Simpson recommendations OR the Paul Ryan proposal, we would not be facing this debt ceiling crisis or a potential downgrade of our country’s credit rating. The real blame? Democrats in the Senate have not created a budget proposal in more than 800 days. While they voted down the Ryan budget 40-57, they never countered with one of their own. You feel like blaming somebody? Blame the Senate.

What’s Next?
Hard to say. It appears more and more likely that our credit rating will be lowered even when we raise the debt ceiling. The credit agencies want to see something serious. Would John Boehner’s new plan be considered serious? If you add in the second stage of the plan, he’s calling for about $2.7 trillion in cuts to spending. What about Harry Reid’s plan that only cuts spending by about $2.2 trillion (according to the CBO) over ten years? These could barely be considered a “down payment”.

I’ve said it before, and I’ll say it again. The only path towards fiscal stability includes overhauling our tax code, entitlement reform (social security, Medicare and Medicaid), regulation reform, cuts in spending including defense, the repeal of Obamacare, and hopefully a balanced budget amendment. You can’t reach $8 trillion in deficit reduction without tackling all of these problems.

Channeling Reagan

Saturday, July 23rd, 2011

“Congress consistently brings the Government to the edge of default before facing its responsibility. This brinkmanship threatens the holders of government bonds and those who rely on Social Security and veterans benefits. Interest rates would skyrocket, instability would occur in financial markets, and the Federal deficit would soar. The United States has a special responsibility to itself and the world to meet its obligations. It means we have a well-earned reputation for reliability and credibility – two things that set us apart from much of the world.” — Ronald Reagan warned Congress of the possible repercussions for failing to raise the debt limit in a 1987 radio address.

President Ronald ReaganIt has been interesting to watch the media and liberals find a common brethren in their warnings about the consequences or not raising the debt ceiling in Ronald Reagan. Here are just a few examples (there are many available):

Rep. John Larson, chairman of the Democratic Caucus: “It could not be put more bluntly or more articulately than [how] Ronald Reagan laid it out.” Larson added that the debt ceiling was raised in the Reagan administration 17 times “without the taking of any hostages.”

Thomas Roberts from MSNBC: “Alright, so there we have it. President Reagan tying this up in a nutshell. For current day Republicans that evoke President Reagan’s name so much, why don’t Republicans listen to that message from the icon that they have in Ronald Reagan and move off of some of the far-right rhetoric that we’ve been hearing over the last weeks and months?”

Lawrence O’Donnell from MSNBC: “Somewhat to my surprise, that lesson that Ronald Reagan was trying to teach about the debt ceiling, what it actually means, what happens if you wouldn’t raise it. He said that in the context of having to sign a debt ceiling increase that included pieces that he did not like, that he was absolutely opposed to, but he said I got to sign it because if I don’t, look what happens.”

Peter Fenn from US News: “The point is that Republicans should shelve using the debt ceiling vote as a means of negotiation. This is not a negotiable item. Should they take this right up until the 11th hour and refuse to fund the government not only will Reagan’s admonitions come true but the Republicans will seal their fate as an irresponsible, minority party–a pariah for years to come.”

Chris Matthews on MSNBC: “There [Reagan] is saying this brinksmanship, this trickery, around the time of a deadline just to get your way is sort of economic terrorism.”

The media and liberals have one goal here — to paint fiscal conservatives as extremists. I’ve seen repeated use of phrases including “economic terrorism”, “hostage takers” and that they’re “holding a gun to the head of the economy”. And the left is now attempting to use the words of President Reagan against fiscal conservatives to paint them as extremists.

But if you listen to the rest of the radio address from Reagan, you end up with a different picture all together.

“You don’t need more taxes to balance the budget. Congress needs the discipline to stop spending more, and that can be done with the passage of a constitutional amendment to balance the budget,” explained Reagan.

That sounds more like Paul Ryan than President Obama to me.

A Final Point
I think ultimately we will need to increase tax revenues to solve our long-term problems, but this needs to be accomplished in a complete overhaul of our tax code. Not by cherry picking a few political points such as the depreciation of corporate jets and oil subsidies. And I despise the tactics of painting fiscal conservatives as extremists. From the recent CNN poll, 74% favor a constitutional amendment for a balanced budget, and 34% favor tackling our deficits without raising any new tax revenues. And Gallup, who typically polls a bit to the left, found that 50% favor tackling our deficits either “only with spending cuts” or “mostly with spending cuts”.

I guess there are a lot of extremists out there.

Americans Overwhelmingly Favor Balanced Budget Amendment

Friday, July 22nd, 2011

According to a new CNN poll, 74% of those polled favor a constitutional amendment to require a balanced federal budget.

Some politicians oppose a balanced budget amendment. Why? It’s simple. Power. Without a balanced budget amendment, politicians are allowed to spend our money without limits, and typically without repercussions.  A balanced budget amendment would force Congress and the White House to set fiscal priorities, and to live within our means.

Forty-nine states have balanced budget amendments. It’s time for our federal government to follow suit.

President ObamaPresident Obama
The President was asked about a balanced budget amendment in one of his recent press conferences. After a lengthy explanation as to why, in his opinion, we need to increase tax revenues, he finally commented on the balanced budget amendment: “I think it’s important for everybody to understand that all of us believe that we need to get to a point where eventually we can balance the budget. We don’t need a constitutional amendment to do that; what we need to do is to do our jobs.”

In theory, the President is correct. But in reality, this hasn’t work. Over the last 50 years, we have only had a budget surplus five times. That means that in 45 of the last 50 years (90% of the time), the federal government has spent more money than it has received in tax revenues. Congress has no real incentive to run a balanced budget. They can talk about it’s importance, but they are unwilling to set fiscal priorities that will allow it to happen.

Congress has tried to impose “caps” in the past. They don’t work. Only a balanced budget amendment will force Congress to run a balanced budget. How much more evidence do we need that Congress won’t run a balanced budget unless forced to by the Constitution?

Cut, Cap and Balance
This week the House has passed a bill conservatives have come to call Cut, Cap and Balance. It includes a balanced budget amendment, but it also includes spending cuts and spending caps. This will never pass the Senate. Harry Reid has already called the bill “weak and senseless” and “perhaps some of the worst legislation in the history of this country.” He is unlikely to even allow debate on the bill.

By the way, Americans support Cut, Cap and Balance as well. In the same CNN poll, 66% of respondents favor the idea that “Congress would raise the debt ceiling only if a balanced budget amendment were passed by both houses of Congress and substantial spending cuts and caps on future spending were approved.” Where Americans continue to differ is in the approach to getting to a balanced budget. Similar to other recent polls, CNN found that 34% favor spending cuts only, and 64% favor some combination of cuts and increased taxes to resolve our budget problems. CNN did not attempt to break down those who favor mostly spending cuts from those who favor mostly tax increases. Here’s a Gallup poll where they did break down these numbers.

Critics of a BBA
In the past I have heard two basic arguments against a balanced budget amendment, ignoring the President’s criticism that we just need Congress to do its job. Both are solvable.

1. What if we have a national emergency?
This is extremely easy to solve. Build in a $20 billion fund into the federal budget for national emergencies. Each year, the unused portion of this fund can go to help pay off the national debt. If more than $20 billion is needed in any calendar year, Congress should be allowed to vote on emergency spending beyond the $20 billion, though a two-thirds majority should be required to do so. And if necessary, we should be allowed to borrow the money to make this happen. Borrowing a couple billion to help victims from the next Hurricane Katrina is the right thing to do.

2. We would have to cut services during a recession.
This is a legitimate criticism, and has been my criticism for years on a balanced budget amendment. But this is again solvable. I don’t have a problem with a small amount of deficit spending when times are bad. My bigger problem is that we run deficits in good times and bad times. We can setup a few triggers that allow us to engage in some deficit spending during bad economic times. For instance if unemployment exceeds 8% or when the growth of GDP falls under 2% for two consecutive quarters, we would be allowed to borrow some money to extend emergency services such as unemployment. Though we should also include caps on how much and for how long this can continue before the budget must be fixed to put us back in balance.

Other criticisms? Let me know. I bet there’s a solution just around the corner.

Still Need to Raise the Debt Ceiling
Is Congress and the President any closer to a deal to raise the debt ceiling? I have no idea. Since the Senate is unlikely to even discuss the latest bill from the House, and the President is unwilling to put a specific plan on the table, here’s my suggestion for the House. Craft two separate pieces of legislation, pass them, and send them to the Senate:

One, raise the debt ceiling by $500 billion to $1 trillion, with matching spending cuts. Do not include entitlement reform. Focus on real spending cuts to discretionary programs. Live to fight over entitlements another day.

And two, create a separate bill to pass a balanced budget amendment. The Senate may not take up this bill until after the debt ceiling issue is resolved, but with such overwhelming voter support, they would almost have to take up the bill eventually.

The President has said he will veto any short-term bill to raise the debt limit, but the clock is ticking. Time will run out very soon. And the President won’t be the one to block an increase in the debt ceiling.

A Balanced Budget Amendment

Monday, July 18th, 2011

I do some writing for other websites, and I don’t always post the articles here. Last February I wrote an article about a possible federal balanced budget amendment. The primary reason I didn’t post the article on my personal blog is because I don’t think there’s a chance that it will ever pass. It seemed like a moot point, but since the Republicans seem determined to at least give it a go, then maybe it’s worth posting now. (I did make a few minor updates compared to my original article.)

*****

Federal Balanced Budget Amendment: Theory vs Reality
February 7, 2011
By Lee Eldridge

Federal Expenses and RevenuesI’ve long made a joke that credit cards are evil. But that’s not true. When a person uses a credit card responsibly, credit cards are not evil at all. Try renting a car or making a hotel reservation without one. Credit cards also offer a level of protection when you make purchases. For instance, if you buy something online, and you’re unhappy with it, you have the option of disputing the charges. It can protect you from many of the possible dangers of purchasing something from an unknown company.

The problem is that many of us do not use credit cards responsibly. When my wife went back to school to finish her degree, we were making very little money. We were partially living off student loans and credit cards. By the time she got out of school, we had racked up thousands in debt. We were buried with it, and we considered bankruptcy.

We went to a credit counseling service instead, chopped up our cards, and made monthly payments until we were out of debt. It’s a liberating feeling to make that final payment. We never looked back. We no longer use credit cards. If we can’t afford it, we don’t buy it. We have learned the hard way that we’re better off without them.

Many have had similar problems with credit cards and the accumulation of debt. It doesn’t mean credit cards evil. It just means that we’re not always responsible enough to use them properly. Because of our access to “money” on our credit cards, we were spending more money than we were making. We were running a budget deficit every year.

Does this remind you of our federal government at all?

Since 1961, our federal government has run budget deficits every year except for five: 1969, 1998, 1999, 2000 and 2001. They spend more money than they receive in tax revenues almost every year.

Some have brought up the idea of a balanced budget amendment. This would force the federal government to balance their budget every year, and eliminate budget deficits.

In theory, I disagree with this approach. But in reality, it needs to be considered.

Why? It’s kind of like credit cards. In theory, credit cards are useful and offer purchasing protections for consumers. But in reality, many consumers use them to buy products they cannot afford.

In theory I oppose a balance budget amendment. In times like these when our country is in a recession, or is coming out of a recession, tax revenues to the federal government are down. A balanced budget amendment would force the federal government to reduce services during a time we need them the most.

But reality shows us a different picture. If the federal government ran budget surpluses during the good times, we could trust them to make good decisions and allow them to run budget deficits during the bad times. The problem is that our government seldom runs budget surpluses, even during the good times. They just continue to increase spending in good times and bad.

They are not responsible with our money, and it’s time to chop up their credit cards. It’s time for a balanced budget amendment.

Common Sense from the Huffington Post

Monday, July 18th, 2011

Alan Schram from the Huffington Post has written an interesting article explaining how the debt ceiling worries are overblown. Here’s a segment of the article:

But the disaster scenario — default on US debt — is still unlikely. First, because a compromise that involves deficit reduction along with a debt ceiling increase is still the most likely outcome, as it is the most sensible, even for our politicians with their polarizing agendas.

And second, because the US government collects much more in taxes than the amount necessary to service the debt. So even in the unlikely event that the debt limit is not increased, the coupons on US treasuries will still be paid and Treasury will prioritize other government expenditures, even if it has to shut down non essential government services.

More importantly, the debt levels are not the main concern. The real threat to the country’s long term financial health is the ongoing deficit. US revenues were about $2.2 trillion last year. Expenditures were $3.5 trillion. Interest payments were only about 6% of that. Entitlements — Medicare, Social Security and unemployment insurance — accounted for roughly 58% of total expenditures. And defense was another 20% (it seems strange that any country would dare to have 150 military bases around the world and be involved in three wars while running a deficit of over $1 trillion a year, but, that is a whole other topic).

Such perennial deficits are obviously untenable. It is the one issue we simply must deal with, and it is certainly not impossible. If we limit government spending to the level it was in 2007, not exactly the age of austerity, we will have a balanced budget within three years. If we than keep it at that level for ten years, we will also substantially reduce our debt levels. This will return the country to very solid financial footing.

The Art of (No)Compromise

Sunday, July 17th, 2011

Hopefully this will be the last time I feel compelled to write about the debt ceiling for a while. There are other subjects I want to tackle, but this issue remains front and center in the news. Just a few thoughts.

President ObamaDefault and Economic Armageddon
The administration has repeatedly talked about how if we don’t raise the debt ceiling, it will cause the U.S. to default on its obligations and cause economic Armageddon that could push us into another recession. They use these two points interchangeably, often mixing them within the same quote. But they’re not the same point at all.

Credit rating services have warned that if we go into default, they will lower our credit score. They have also warned that if we do not come up with a long-term plan to tackle our deficits and debt that we risk hurting our credit rating.

The deceitful portion of this entire conversation by our politicians and media pundits is the assertion that we’ll go into default at all.

The federal government is expected to collect more than $170 billion in revenues in August. That’s more than enough money to service our debt (avoiding default), make social security payments, Medicare payments, Medicaid payments, pay the military, and more. Other government agencies would have to be temporarily shut down until money became available. But there’s absolutely no chance that we would actually go into default in the foreseeable future. And there’s no chance that we wouldn’t be able to make social security payments to our seniors. At least in the short-term.

Now the administration’s second point about economic Armageddon is a much trickier issue to predict. And I’m not sure who to believe on this one. From President Obama to Paul Ryan, politicians from both sides have warned about the dire consequences of not raising the debt ceiling. Though this could easily be “cover your ass” mode for our politicians. It’s better politically to predict doom and be wrong, than to predict that everything will be fine and we end up with economic Armageddon.

I tend to have more faith in the market than this. Business leaders understand what’s at stake here — the long-term financial health of our government and our economy. I suspect that there’s a good chance that the markets will give Congress time to resolve this issue beyond August 2nd before it reacts. But the market can spook, and it’s a legitimate risk.

I’m not advocating anything in particular with these comments. I’d like to see a reasonable deal get done by August 2nd. More on that in a moment.

Compromise
Sometimes it’s all in your point of view. What is compromise? The Democrats tell us that compromise is raising taxes by $1 trillion, and offering spending cuts that may or may not result in around $3 trillion is savings over the next ten years. The Republicans, many who do not want to raise the debt ceiling at all, tell us that compromise is requiring trillions in real cuts to federal spending and entitlement reform in exchange for raising the debt ceiling.

The Democrats have refused to proceed without tax increases. The Republicans have refused to proceed with tax increases. Everything else is spin.

Do you remember the last negotiation over the budget? The two sides agreed upon $30 billion in spending cuts. But when the actual cuts were scored, it was really only about $300 million in savings. So excuse me for being skeptical over the Democrats’ spending cuts. Word has it that the Democrats have only targeted around $1.5 trillion in cuts to accompany their $1 trillion in tax increases. There is no “grand plan” for a $4 trillion deal. It will never happen.

The Polls
I watch the polls because I find them interesting. But they should always be taken with a grain of salt. And I would never advocate that we should govern through polls.

Last week, President Obama cited a poll and said that “80% want higher taxes” as part of a deal to slash the deficit. His point is that reasonable people understand that we need to increase tax revenues as part of the negotiation, and that the Republicans are not reasonable. “The American people are sold,” he said. “The problem is members of Congress are dug in ideologically.”

But to me, this is a misrepresentation of the Gallup poll he uses to reach this conclusion. According to Gallup, 50% of those polled said that we should fight the deficit with spending cuts only (20%) or mostly with spending cuts (30%). The poll also shows that 11% favor tackling the deficit with only tax increases (4%) or mostly tax increases (7%). That leaves 32% who said that we should fight the deficit equally with cuts and increased taxes.

Since 20% said “spending cuts only”, the President has concluded that 80% “want” tax increases, and agree with him on how to fight the deficit.

In my opinion, the “plan” proposed by the administration does not reach the level of “mostly spending cuts”. Matter of fact, has anyone actually seen a plan from the administration or from Democrats? I didn’t think so. All of this is a far cry from “80% want higher taxes”.

I will also tell you that Gallup often tracks more favorably towards liberal issues than many other polling services. In a recent poll from Rasmussen, their results show that “Just 34% think a tax hike should be included in any legislation to raise the debt ceiling. A new Rasmussen Reports national telephone survey finds that 55% disagree and say it should not.”

The Politics
Let me be clear, President Obama has no interest in reducing the size of government. Our current spending levels are where they are because that’s where the Democrats set them. The only reason that the President is discussing a “big” deal is because he needs to push this conversation out beyond the 2012 election. He needs to increase the debt limit by at least $2.4 trillion to guarantee that this conversation doesn’t come up during the election.

When you’re in the middle of a negotiation, you always ask for more than you want. That’s how it works. Does the President really want a $4 trillion deal? If so, he should have asked for $6 trillion. He asked for $4 trillion because what he really wants is at least a $2.4 trillion increase in the debt limit. The number is arbitrary so long as we don’t have to have this discussion again for the next 18 months.

What Needs To Be Done
It’s still my opinion that this negotiation should only include spending cuts (as I stated here). We need real tax reform, not just closing a few loopholes to generate more tax revenues. And we certainly cannot negotiate real tax reform in the next week.

If I was in Congress (it would likely have to start in the House but it would be better from the Senate), I would propose a $1 trillion deal for real spending cuts and an equal increase in the debt limit. Certainly moderates and conservatives can find $1 trillion in cuts to agree upon over the next five years. This deal wouldn’t push us out beyond the next election, but it buys us more time to continue the conversation. The President has said he will not sign a shorter term deal, but is he really ready to accept the responsibility for not raising the debt ceiling? I doubt it.

Krauthammer on President’s Desire for Debt Reduction

Friday, July 8th, 2011

When the President scolded Congress for kicking the can down the road on our deficits and debt reduction, I just about keeled over with laughter. Portraying himself as the adult among unruly children is so disingenuous that it’s laughable. Charles Krauthammer has penned an excellent article worth the read in IBD. Here are a couple excerpts:

First, a list of how Obama has been kicking the can down the road:

This from the man who:

• Ignored the debt problem for two years by kicking the can to a commission.

• Promptly ignored the commission’s December 2010 report.

• Delivered a State of the Union address in January that failed to even mention the word “debt” until 35 minutes in.

• Delivered in February a budget so embarrassing — it actually increased the deficit — that the Democratic-controlled Senate rejected it 97-0.

• Took a budget mulligan with his April 13 debt-plan speech. Asked in Congress how this new “budget framework” would affect the actual federal budget, Congressional Budget Office Director Doug Elmendorf replied with a devastating, “We don’t estimate speeches.” You can’t assign numbers to air.

And Krauthammer’s comments about the President’s attacks on jet owners and the oil companies:

And what have been Obama’s own debt-reduction ideas? In last week’s news conference, he railed against the tax break for corporate jet owners — six times.

I did the math. If you collect that tax for the next 5,000 years — that is not a typo — it would equal the new debt Obama racked up last year alone. To put it another way, if we had levied this tax at the time of John the Baptist and collected it every year since — first in shekels, then in dollars — we would have 500 years to go before we could offset half of the debt added by Obama last year alone.

Obama’s other favorite debt-reduction refrain is canceling an oil-company tax break. Well, if you collect that oil tax and the corporate jet tax for the next 50 years — you will not yet have offset Obama’s deficit spending for February 2011.

The hypocrisy on vilifying the jet class is hysterical. Included in the Democrat’s stimulus package was an incentive for corporations to purchase private jets. The incentive allows corporations to depreciate the purchase of these planes over five years instead of the standard seven. Why did they do this? Because they believed that this would stimulate the industry. It has been estimated that this “tax break” amounts to $300 million per year. That’s $3 billion over ten years when we’re running an annual deficit of about $1.5 trillion. But now this becomes the symbol of corporate greed and favors to big business. A symbol that the rich are not paying their fair share.

How many Republicans voted for the Obama stimulus that included this tax incentive? Zero.

This is all political theater. The Democrats do not want to lower spending. How do we know this? Easy. Show me a budget where they have developed a plan for tackling our deficits and the debt. You can’t, because they don’t have one. Remember, before the President said we must tackle our debt, he wanted a “clean” bill to raise the debt ceiling with “no strings attached”. Yet now he’s the adult in the room. The great compromiser. Don’t make me laugh.

It’s Time For Tax Reform — Tomorrow

Friday, July 1st, 2011

Uncle Sam is in debt, who will bail him out?If you know me by now, you know that I’m an advocate for tax reform. We need to overhaul our tax code. Not just overhaul it, we need to dump it in the trash and start over. And I have ideas for how to start.

However, that can wait till tomorrow.

Today, the Republicans and the Democrats are stalled as they attempt to work towards some type of compromise on raising the debt ceiling. This is the problem we need to solve today.

Raising the Debt Ceiling
Some people have expressed concern by what will happen if Congress fails to raise the debt ceiling in a timely manner. Democrats like to cite examples of organizations who have said that it will hurt America’s credit rating if we default on our debt and fail to raise the debt ceiling. And they are correct. Though it’s selective representation of the facts when they ignore that these same organizations have also warned that it will hurt America’s credit rating if we fail to implement an intelligent strategy for dealing with our deficits and our national debt.

But let me be clear (I love that phrase), we will not default on our debt. And we will raise the debt ceiling, despite all of the political posturing by both parties. And like most negotiations, it won’t happen until late in the game.

The Polls
What’s impressive to me is that the American people get it, even when politicians don’t. According to Gallup:

By a 47% to 19% margin, Americans say they would want their member of Congress to vote against raising the U.S. debt ceiling, while 34% don’t know enough to say. Republicans oppose raising the debt ceiling by 70% to 8% and independents by 46% to 15%. Democrats favor raising the ceiling by 33% to 26%.

This poll is a couple months old. More recent polls have shown some shift as voters become more aware of the negative ramifications of not raising the debt ceiling. But what is consistent through virtually every poll is that Americans only want the debt ceiling raised if it is accompanied by significant spending cuts. The American people get it.

What Economists Want
The President likes to talk about a “balanced approach” to these negotiations. What this means is that the President wants increased tax revenues as part of the deal to raise the debt ceiling. The President likes to say that this is what fair minded people believe needs to happen. Yet what do economists say? Did you know that 150 economists got together and sent a letter to the President urging him to rein in spending and to avoid tax hikes? Here’s the letter:

The national unemployment rate in our country remains unacceptably high, well above the levels promised to the American people when the 2009 ‘stimulus’ spending bill was signed into law.  Efforts to spark private-sector job creation through government ‘stimulus’ spending have been unsuccessful.

As economists deeply concerned about our nation’s future, we urge a change in direction.  To support real economic growth and support the creation of private-sector jobs, immediate action is needed to rein in federal spending.  The need for such action is particularly acute in light of your request for Congress to pass legislation in the coming weeks to increase the national debt limit, and the increased burden small businesses face as a result of the new health care law and other regulatory challenges that create uncertainty for private-sector job-creators.

Action is needed now to begin to slow government spending, reduce uncertainty and support the creation of new private-sector jobs.  For the sake of millions of Americans who remain out of work – and future generations of Americans, who will carry the debt burden we are accumulating today – we respectfully urge that the leaders of both parties take action immediately to eliminate unnecessary federal spending, prevent tax hikes, stop regulatory threats to job creation, and enact reforms to put our nation back on a true path to prosperity.

Non-Keynesian economists get it. (I added the bold copy to emphasize my points.)

Why Wait on Tax Reform?
The big picture is that we need significant tax reform, and this cannot be negotiated in the next couple of weeks. Obama’s own debt commission has explained the need to overhaul our tax system. While I don’t believe their recommendations go far enough, they’re on the right track with many of their suggestions. And trying to tweak a bad system by closing a couple tax loop holes or adjusting tax rates does nothing to solve the long-term problems with the tax code. This debt ceiling negotiation needs to focus on spending cuts, not tax increases. The American people get it. And non-Keynesian economists get it.

It’s a Spending Problem
If you follow politics, you’ve likely heard this mantra from the right. We have a spending problem, not a revenue problem. I have detailed in past articles some facts that support this position. What’s important to remember is that over the last 60 years we have had periods with much higher tax rates than we have today, and periods where we’ve had lower tax rates than we have today. And historically, we still collect LESS than 20% of GDP in taxes. It’s the economy that drives tax revenues, not tax rates. So to me, there’s a significant amount of logic in holding government expenditures to less than 20% of GDP. Yet according to the CBO, by 2021 we will be spending 25.9% of GDP, and by 2035, we’ll be spending 33.9% of GDP. That’s a spending problem.

James Pethokoukis from Reuters has written a powerful article detailing why we should not raise taxes:

It’s up to House Speaker John Boehner now. Democrats, the media and Wall Street will be pounding him to agree to raise taxes as part of a debt ceiling deal. But now is no time for Republicans to go wobbly. Here’s why the GOP should stick to its guns until Aug. 2 – and beyond if necessary:

1. The last thing the economy needs is a tax hike.
If the economy was too weak to absorb a tax hike last December – when the White House and Congress agreed to extend all the Bush tax cuts for two more years – its health is even worse today. The economy grew at just a 1.9 percent pace in the first quarter, and many economists now think it might grow just 2.0 percent in the second quarter – or even less. This should be a red flag to Washington. New research from the Federal Reserve finds that that since 1947, when two-quarter annualized real GDP growth falls below 2 percent, recession follows within a year 48 percent of the time. (And when year-over-year real GDP growth falls below 2 percent, recession follows within a year 70 percent of the time.)

In other words, the economic recovery is sputtering with stall speed fast approaching. Now would be a terrible time to penalize investors and business, both big and small, with new taxes.

2. Tax revenue isn’t the problem. Spending is.
The recent Congressional Budget Office budget outlook was illustrative. The CBO forecast to note is its “alternative fiscal scenario” which “incorporates several changes to current law that are widely expected to occur or that would modify some provisions that might be difficult to sustain for a long period.”

By 2021, the the CBO says, the annual budget deficit would be 7.5 percent of GDP and by 2035 a truly monstrous 15.5 percent. Throughout this period, tax revenue would be 18.4 percent, right around the historical average. But spending would be 25.9 percent in 2021, 33.9 percent in 2035 vs. an average of roughly 21 percent. It’s spending that’s way out of whack, not revenue.

But let’s say all the Bush tax cuts were left to expire, as was AMT relief. Assuming no economic fallout, according to the CBO, revenue would be 23.2 percent of GDP by 2035. Three problems here: a) even with all those tax increases, the annual budget deficit would still be nearly an unsustainable 10.7 percent of GDP in 2035; b) the U.S. tax code has never generated that level of revenue and almost certainly can’t without a value-added tax; and c) there would be tremendous economic fallout. Axing all the Bush tax cuts would chop three percentage points off GDP growth, according to Goldman Sachs, certainly sending America back into recession. Tax revenue would again plummet.

And as bad as those numbers are, they don’t fully take into account the economic impact of all that debt. When the CBO does makes those calculations, total debt as a share of output is not 187 percent of GDP – the number you frequently see in media accounts – but rather 250 percent of GDP since economic growth would slow sharply due to debt overload. And more than likely the economy would suffer a debt crisis long before 2035 came around.

3. The key to boosting tax revenue is faster economic growth.
A team of economists from the American Enterprise Institute recently fashioned a debt-reduction plan that would raise tax revenue to a long-term level of 19.9 percent of GDP. That’s pretty high when you consider there have only been three years in U.S. history that have seen a higher tax burden. Its tax plan:

“To achieve this goal, the income tax system would be replaced by a progressive consumption tax, in the form of a Bradford X tax. To address environmental externalities in a more cost-effective and market-based manner, energy subsidies, tax credits, and regulations would be replaced by a carbon tax.”

But the AEI team also notes that such a tax plan would more than likely boost growth:

“Economic simulations have repeatedly indicated that replacing the income tax system with a consumption tax can boost economic growth, although the magnitude of the gains depends on the assumptions that are made and on the detailed provisions of the consumption tax. One widely cited study estimates a 6.4 percent gain in long-run output from the adoption of an X tax.

“Our plan also reduces transfer payments to the elderly, which should further increase private saving and long-run growth. These growth effects have not been taken into account in the estimation of our plan. Accounting for them suggests that actual revenue requirements are lower than those stated above. For example, if our plan increases long-run output by even 5 percent and if government spending does not increase in response to the expansion of output, then the actual long-run revenue requirement will be 19.0, rather than 19.9, percent of GDP.”

Revenue of 19.0 percent of GDP happens to be the same revenue requirement of Rep. Paul Ryan’s Path to Prosperity debt-reduction plan. And tax reform isn’t the only thing that can boost economic growth. Increasing high-skill immigration, implementing regulatory reform, and raising productivity in education, government and healthcare could pump up economy-wide GDP growth by at least a full percentage point, according to McKinsey Global Insitute.

Bottom line: Higher taxes would hurt the economy, wouldn’t solve the debt problem and aren’t really needed anyway.

Double Dip is Looming
We are on the verge of a double dip recession. If we have a second consecutive quarter of economic growth of less than 2%, which appears very possible, history tells us that it’s nearly a 50% chance that we’ll experience a recession within the next year. We must get our spending under control, we must rein in government, and we must create a pro-business environment, or we’re all in trouble.