1/24/2013 12:30 AM ET|
Why Washington can't fix the budget
Americans want low taxes and government largesse, and are ready to punish anyone who says that's not possible. Is it any wonder politicians are afraid of hard choices?
Now that the inaugural balls are over and the speeches and celebrations are finished, Washington returns to the task it's been struggling with for years amid partisan rancor and brinkmanship: how to solve the budget mess.
Our leaders have had little success in addressing the problem, so the debt load is now larger than the economy's annual output, at roughly $52,000 for every man, woman, and child in America.
There's a reason that the problem seems never-ending. And President BarackObama touched on it in his inauguration speech when he said that he rejected "the belief that America must choose between caring for the generation that built this country and investing in the generation that will build its future."
The problem is, we can't do both. Not so long as we hitch the government's finances -- via Obamacare, Medicare and Medicaid -- to a bloated and inefficient health care system. Not while making needed investments in education and infrastructure, and providing for the national defense. And it can't be done while keeping taxes reasonable.
Thus, the bickering. The deficit commission. The congressional deficit committee. The fiscal cliff. The debt ceiling. The fact that the government hasn't operated under an actual budget since 2009. The recent flirtation with the "trillion dollar coin" idea. There is a real and growing threat that our fiscal procrastination will damage an already fragile economic recovery via a government shutdown, a debt default or a credit-rating downgrade.
So now, with the economy faltering again, continental Europe and Japan in new recessions and the United Kingdom slipping into one, too, we have politicians focused not on making hard choices to solve the problem but on finding ways to pin the blame on the other side. And it's going to get worse before it gets better.
A tough nut to crack
The political reality is that no one wants to be the bearer of bad news. No one wants to spell out the cuts that are needed. Part of the reason the Republicans lost the presidential race was because of their plan for Medicare vouchers and deep spending cuts. Even though the GOP approach would have taken a decade to balance the budget, even this fiscal tonic was too harsh for the electorate. Voters instead preferred Obama and his call that the rich "pay their fair share."
Americans want to believe that the days of ample spending, low taxes and easy credit can continue -- and they will punish anyone who tells them otherwise.
While Obama talked in his inauguration of making the "hard choices to reduce the cost of health care and the size of our deficit" -- which has been $1 trillion or larger for the past four years and likely will be for at least two more years -- no one wants to put pen to paper to outline the reforms that are needed.
Obama's 2013 budget proposal, the only working budget document we have from the Democrats, did nothing to address the long-term debt, as the chart below, lifted from that proposal, shows. That's because it doesn't propose the structural reforms that are needed to control costs associated with the aging of baby boomers.
In 2011, the three major entitlement programs -- Medicare, Medicaid and Social Security -- accounted for 44% of non-interest government spending, up from 30% in 1980. According to Credit Suisse estimates, the way things are going, by 2025, spending on these programs, plus interest on the debt, will take up 100% of tax revenues.
Mostly, it's health care. Over the past two decades, annual health care cost inflation has been running at 150% of the underlying inflation rate. Asa result, despite mediocre scores on measures of the quality of care (such as infant mortality), we pay far more per capita than anyother developed country.
What's really scary is that the chart above assumes the economy will grow at a 3.7% average annual pace through 2018 (which is doubtful), interest rates will remain near zero and that the cost-control efforts in the Obamacare legislation -- such as the tax on low-deductible health care plans and the Medicare payment advisory board that opponents have dubbed "death panels" -- will actually work as planned.
If any of these assumptions is incorrect, the long-term outlook will be even worse.
What will it take?
To really wrap your head around the scale of the problem, I recommend trying the Committee for a Responsible Federal Budget's budget simulator tool, which allows you to pick and choose ways to close the deficit and stabilize the country's debt load by 2021.
The tool was designed before the fiscal cliff deal -- which the Congressional Budget Office says will increase the deficit by $4.6 trillion over the next 10 years -- was done. So be sure to factor that in.
It also doesn't account for the impact on growth of things like tax hikes (negative) or short-term stimulus (positive). Indeed, Merrill Lynch believes the various tax hikes associated with the fiscal cliff deal will reduce disposable income by 2.1% this quarter and will drag down first-quarter growth of gross domestic product. Consumers are already expressing displeasure, with the Consumer Sentiment Index recently falling from a post-recession high all the way down to levels not seen since late 2011.
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Wake up America!
Now Congress wants to wait until May to increase the Debt ceiling! We think the president has tried very hard to put strong effort to preserved our nation dignity and glory by telling “Congress pay the bills, the increase of the ceiling is not a bartering for cuts, but a time to pay the nation expenses” Obama trying to put common sense in their ignorant heads, there is no negotiation possible, not when extending the Debt Ceiling, if Congress gave Bush a very free hand to make increases to the debt ceiling any time he wanted for the wrong purpose, then Mr. Obama has the same right with a better motive, and to keep feeding the people of America, knowing that the steps he’s presently taken will eventually clean the deficit produced by Bush with his massive quest in expending the American tax dollars with no looking back to the future damaged he was doing to our country!! Obama is much concerned to prevent the stupidity of the the Tae Party and the Republicans exposing our country to shame and discord in a futile atempt to black mail the president to make massive cuts by bartering with Obama. We back-up president Obama 100% against the stupidity of the Congress! Congress increase the Debt ceiling now, do not wait until May! If not, we get them in May after their presentation of the a killing Budget designed by the worthless Paul Ryan to cut all peoples money, and increase the money gift to the rich, including the Oil Companies.
It would be a waste of time to delve into all the reasons why we're in the situation we are. Suffice it to say that it's time to start preparing for a catastrophe the likes of which we have never seen. Stock up on food, water and weapons, because when this debt bubble bursts, it will make the housing bubble burst in 2008 look like a barely noticeable blip on the economic radar. There will be widespread chaos and unrest.
Heed my words.........SHTF is coming, and our politicians know it.
The problem is mostly us. We have gotten used to government (especially in DC) doing for us, and not paying a lot of attention, taking without thinking about the consequences. That is both major political parties, and the vast majority of both voters and non-voters. We like the goodies (take your pick of what Uncle pays for) and especially not paying for them. So we have allowed the government to grow, while being unwilling to pay for the growth. And we are busy allowing each to complain about some aspect of government give-aways that we don't like but meanwhile do not want to give up those we like. The problems started roughly when the Income Tax was instituted and have progressed to today where about 50% of tax filers pay no income tax, and that does not take into account the value of any benefits received.
So here we are with a government spending at about 25% of GDP while historically we have been only able to raise about 18% for the federal government. This difference is the cause of the deficit, the rising debt, and the oncoming problems. And the big problem with the tool is that there are many, many possible changes not included. For example, what about eliminating the income tax--thus the IRS--and replacing it with a VAT? What about moving a ton of expenses to the private sector and state governments where money will be spent more efficiently?
As a global economist, the problem has to be identified and addressed... no matter how distasteful that is to do. The real issue here is the idea of "globalization" in all of our concepts of a positive economical tool. All the promises of globalization all lie in the concept of inequality and the abuses implemented on those from the lower tier by those on the higher one.
Our concept in the US has been to build products for as little expense as possible (made in china), and bring them to the US for sale at the normal price as products (made in USA) so that the profit margins are extraordinarily high. The backbone of this concept lies in the idea that Americans will always have money (from jobs building stuff) and the chinese will work for peanuts. This model worked for a long time, but has come into a couple of problems: The chinese want to be paid more money and americans can not find jobs (building stuff). In the end the whole situation is a spiral to the lowest common denominator, which is slave labor in china: the current situation which we find ourselves in today.
The solution... well, the solution is (believe it or not) isolationism. This is not because of protection of markets as in the last couple of centuries, but as a tool to force all entities to complete and sell on an even playing field. The promotion of equality promotes competition as well as opening larger markets to the corporations.
This global crisis was formed on the concepts of inequality to be exploited while ignoring the local work force: We kill off our buying public while lowering our production expenses. The time lag for the previous to occur follows the exploitation of the cheaper labor source... well, it is catching up to us now.
The blame can not only lie on the greed of corporations though solely. We have unions as well which literally drain the life from business, also leading to the loss of the job market.
So, what is the solution you ask me? It is really not that difficult to resolve, but nobody wants to suffer to the point of doing it:
Eliminate unions... especially government unions, and form legislation to protect workers if that is a real issue
Isolate the production and markets to countries which are equal in their policies of international and internal work relations. (make a tarrif to tax job exportation to the point equating to the loss of the jobs to make domestic and exported labor equal). penalties for companies which do not follow the rules.
Eliminate illegal aliens at all cost. They have to go to get life normalized for people and business.
Isolate company business to the country they are based in. This means jobs and products.
This concept is what made the US great after WWII since there were no external entities to build off of because they were destroyed. Our jobs were here and we sold to us so our workers were the consumers... circle concept in business.
Remove everyone from welfare, and let everyone explain why they need to be back on with proof and make these individuals provide for the government in some form or other. (all the entitlements need to follow suite in reality).
It is just that simple! It is how the US was before, and we can do it again. There is not many people that want to give up that free ride though and focus internally on our own work force as consumers and workers.
Over and over I have said that what the government does with the money should have equal weight in budget, tax, and defeceit considerations If we could stop Washington waste,fraud, energy scams, coddling special interest groups, subsidies for friends and hundreds of vote buying schemes, if not thousands, we would not have a budget, tax or defecit problem. This would be by far the richest and most wealth accumulating country in the world and our future generations could look ahead with confidence.
Right now, each person in this country owes $56,000 and if you add unfunded liabilities it rises to $146,000 person, calculated VERY conservativly. That worries me for my children and grandchildren, but apparently doesnt worry enough people to change Washington. My son, his wife and two children are on the hook for an estimated $1.2 million and rising..
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