We need to step back from the abyss and do it now!

We are at the edge of an abyss and we’re close to being irrevocably lost. (David Brower)

“The U.S. government fell deeper into the red in fiscal 2010 with net liabilities swelling more than $2 trillion as commitments on government debt and federal benefits rose, a U.S. Treasury report showed on Tuesday.”  http://www.reuters.com/article/idUSTRE6BK6WC20101221

Over the last two years, the net liabilities of the country grew almost 30%.   Federal spending increased 16% this year.  The largest since WWII.

Just this year’s increased debt translates into roughly $6,500 per person in the country.  The per capita income in the U.S. is $33,000.  In other words, the government borrowed 20% of the Gross National Income to finance government.   How long do you think as a household (appropriate as a nation) go to our bank “I need to borrow 20%-30% more money than I take in and by the way I want to roll over the interest too?”  Before long our bank would own us.  So it is with our nation.  Like Greece and Ireland, we are on the verge of losing our sovreignty to our banker (which happens to be China).  Do you really think they are going to keep saying “No problem” and add to our debt?

So, let’s put this all in perspective (using 2010 inflationary adjusted dollars throughout unless otherwise noted).  The Federal Government spent approximately $3.6 Trillion in 2010.  Its total revenue was approximately $2.1 trillion (you will note a $1.5 Trillion deficit and a $2 Trillion increase in net liabilities.  The difference is increased liabilities that were accrued to be paid in the future).   When you look at the deficit, it has two components:

Annual Spending has increased 30% or about $800 Billion since 2007 (FYI:  2010 Spending was almost 70% higher than Clinton’s last budget so if we reduced the scope of the Federal Govt. to Clinton’s levels, we’d have a deficit of under $200B or a surplus of almost $400B with 2007 federal revenues).  Annual Federal Revenue has declined about 20% or $500 Billion since 2007 (2007 was up about 5% from Clinton’s last year even after the Bush Tax Cuts).  This revenue drop from 2007 was not because tax rates were dropped but economic activity, corporate profits and income dropped.   In 2007, the Deficit was $170 Billion.  Too much but it seems small considering what has occurred the last three years ($500B in 2008, $1.4T in 2009, $1.5T in 2010).

To eliminate the deficit by tax increases, we’d have to increase federal revenues (via tax rates increases) about 80% (YES 80%) from current levels (keep in mind, the US already leads the world in its corporate tax rate as well as personal tax rates on the rich).  To eliminate it by spending reductions, we have to return to spending levels in 2006. 

People can clamor for tax increases all they want but it won’t solve the problem. 

1)  Raising taxes on corporations and those making over $250,000 a year which encompasses S-Corp. privately owned businesses who employ 85% of Americans will only accelerate job loss in America and decrease long-term federal revenues.   Put the total magnitude of the problem in contrast to the “cost” of retaining the current tax rates (known as renewing the Bush Tax Cuts).  Using a static score analysis (which assumes behavior and economic activity isn’t affected by changes in tax policy which nearly everyone concedes isn’t true), the total reduction in federal revenue for FY 2011  by keeping the Bush Tax levels is $238 Billion (those who make over $250K a year impact federal revenues $36 Billion).  http://www.washingtonpost.com/wp-dyn/content/article/2010/08/11/AR2010081105864.html

2)  We could implement possibly a national sales or VAT tax of about 20% on all Americans and eliminate the deficit. 

My guess is few would argue such a tax increase wouldn’t significantly reduce economic activity, jobs and federal revenues.  You think we have a jobs problem and them moving overseas, tax businesses almost double what other nations charge and see what happens. 

The problem is essentially spending.  And the sooner we come to that realization, we might step back from the abyss.

The financial condition of California, Illinois and New York is worse than Greece, Ireland, Spain and Portugal which have been subjected to or are on the verge of having significant economic reforms crammed down on them.  Britain, most of Scandanavia, France and Italy too are undergoing signficant financial reforms.  By almost all financial measures when you add in the financial problems of our states, the US collective governmental problem is worse than all these nations. 

My suggestion:

We institute a four year budget plan to return spending to 2006 levels.  We are four years removed from 2006 so let’s take the same amount of time to get back to those spending levels.  As I said above, this requires a 30% spending reduction over the four next years. 

We have two choices: 

1)  Starting this year, we cut all programs 7.5%.  If Congress wants to increase an area, they have to cut another program by a like amount. or enact a tax increase.  If federal revenues increase from increased economic activity, the increase in revenue is spread out over the remaining years in the plan requiring less of an spending cut going forward.

2)  We baseline all programs to 2006 levels of spending and add the lower of 22.5% (30% minus 7.5%) or current spending levels.  Each year we cut the addition from 2006 levels 7.5% until we reach balance.

Some specific reductions to target the cuts prior to implementing of across the board cuts.

1)  The largest single expenditure is federal salaries.  Most Americans have suffered decreases in income over the last four years.  Yet federal salaries have grown faster than inflation.  I tried to find the level but couldn’t.  Anyway, all federal salaries are frozen until private sector wages have caught up with federal sector wages.  I can’t find any justification for federal employees experiencing increased wages while those in the private sector are experiencing reduced wages.

2)  We couldn’t afford nation building in Iraq and we can’t afford it in Afghanistan.  Its time to pull out of Afghanistan with the promise they become a cell for terrorism, we’ll carpet bomb where the terrorists are located.  The military needs a signficant reorganization.   In 2000, National Defense cost $400B (FYI, I couldn’t find this information in inflation adjusted dollars so there needs to be some modification of these numbers).  In 2005, it cost $600B.  In 2008, it cost $7ooB.  In 2010, it cost $900B.  While a return to 2000 (pre-9/11) level of $400B might be unrealistic, so is $900B unsustainable.  But applying the 30% cut applied to all of government over four years does seem very reasonable and appropriate.

3)  Eliminate federal oversight of state and local governments.  For instance, No Child Left Behind.  It is ludicrous to me we have to have Washington regulate our local elected officials. and programs.  If we want to elect and keep in office vilage idiots, what concern is that of Washington.  I trust my local leadership here in Sioux Falls (Dem. Mike Huether), Lincoln County, Harrisburg School District and Pierre (Republican Dennis Daugaard) more than I do any federal employee in Washington.  Congress just passed a $1 Billion bill to increase federal regulation of school lunches.  Why do we need Washington to tell the Harrisburg school district and parents how to feed their students?

4)  All new regulations proposed by an agency has to include two items:  Future cost to enforce and impact on economic activity.   Either House of Congress will have sixty days prior to implementation to veto the regulation, sending the agency back to the drawing board.

I could probably come up with more with some thought.  But that isn’t the point.  Members of Congress and the President are elected to make the hard decisions.  Let’s demand our elected representatives (House, Senate, and White House) be accountable.  Right now, we expend money for every good cause and idea because we don’t demand accountability from allocating spending within a maximum federal expenditure budget.  Every household, business, local government, most state governments do this.  The federal government shouldn’t be exempt from this basic principle.  In fact, to exempt the federal government is a formula for financial ruin and ultimately loss of our soveriegnty.  This will force Congress and the White House to pick and choose the most effective programs relative to other programs using cost/benefit analysis.  Lewis and Clark or Mni Wiconi doesn’t stack up, so be it.  If we want to give $7.4B to people affected by 9/11, cut something else.

In the big picture, unless America gets its financial house in order, within a few years, we will be unable to satisfy the most basic needs of our nation.  No longer will be be able to debate our “wants” for government funding.  We will be debating what “needs” must be cut.

19 Replies to “We need to step back from the abyss and do it now!”

  1. William

    The abyss was open long before 2001, it’s gotten deeper and wider in the past decade but it’s been visible for far longer than that.

  2. Troy Jones Post author

    Zephram,

    If you note, I referenced the Bush deficits to some degree and am not happy with the Bush performance. I think this is part of the reason and maybe the entire reason the GOP lost control of Congress in 2006 and Obama got elected in 2008.

    But to be specific on the Bush deficit (adjusted to 2010 dollars): $2.8 Trillion (plus TARP which I think should be fairly attributed to both Bush and Obama, Republicans and Democrats which they both supported). 2/3rds of it was during the years the GOP also controlled Congress. 1/3 when Dems did. Both parties should be ashamed for this disaster but especially the GOP.

    Obama Deficit in his first full year as controlling the Budget: $1.5 Trillion. His request for 2011 is $1.1 Trillion. Even with my plan outlined above, Obama’s four year deficit will be over $3 Trillion ($5 Trillion without what I outline above).

    Zephram, I’m not throwing any more stones at Obama than I’m throwing at Bush unless Obama chooses to ignore this problem. Fortunately, the Congress rejected the “deal” struck with the White House for the $1.1 Trillion deficit this year.

    In fact, if we just worry about who is responsible, use it as an excuse to do nothing, we will fall into the abyss. The challenge is great. The question is: Are American’s up to it? Or, have we become so pessimistic and cynical this quote by Faubert describes our destiny: “One mustn’t look at the abyss, because there is at the bottom an inexpressible charm which attracts us.”

  3. zefram cochrane

    Mr. Jones, consider that China, India, and Brazil are emerging at rates exceeding that of the US.

    What if Mexico were to dissolve its constitution and petition for Statehood instantly adding 1.3 trillion to GDP, about that of California.

    If the megastate is untenable, have you phoned Beijing to remind them?

    1. Troy Jones Post author

      I know. It needs to be a hard freeze. Period.

      Here are the facts:

      Federal Employment is up 10% (182,000 jobs) in the last two years. Private Employment down.

      AVERAGE (50% make more and 50% make less) Salary of all Federal Employees: $79,000 (only about 3% of state employees make more than this).

      Federal Employees have gotten pay raises the last two years. State Employee’s wages have been frozen. Private sector wages have dropped.

      Federal Retirement is among the best in the world. Significantly better than state employees and private employees.

      Working conditions are the best of virtually any sector of society, vacation benefits are as good as any, job security second to none, and seldom is more than 40 hours required.

      Listen, I’m not ganging up on federal employees. Most are good honest hardworking civil servants. Many might have better private sector opportunities but stay because they want to serve. But, when every other sector of the economy is suffering, I don’t believe those who serve us should be exempt for they cease to be servants but the served.

      1. William

        Troy,

        Just to mention that the current Federal Employee Retirement System implemented in 1984, is much less generous than the Civil Service Retirement System that many people believe is still available (as many current retiring are on CSRS). The Federal Employee Retirement System is more similar to what private sector retirement plans are still available (1% per year of service, a 403B (similar to 401K) and Social Security). Many state governments, particularly those in financial trouble have much more generous plans (CA, IL, NY, MI, etc).

  4. William

    dragonfly.blue,

    It’s true that many, if not most, Federal employees will likely receive “step-increases”, promotions or bonuses during the next 2 years. That’s not to say than there will be no impact and by the freeze. Unfortunately, the burden will fall more on long term lower to mid-level employees that have reached the top of the pay scale for their positions.

    A better and more lasting impact would be for Congress to actually use their oversight to examine the “Org Charts” of the Federal agencies and focus on what I call “the muddle in the middle” of offices and positions between the agencies central office and the field. Most of those positions are GS-13 and Senior Executive Service (non-union) and include associated office and support staff. Eliminating duplication, overlap and and unnecessary positions in this area could provide permanent cuts that would also make the agencies more efficient.

    Most agencies post their Org Charts online and I think most people would be amazed at the number of “Vice”, “Under”, “Regional”, “Associate”, “Secretary”, “Deputy”, “Director” levels of “boxes” in the hierarchy between Washington and the field operations.

  5. zefram cochrane

    Les Horswill in the Canadian quarterly Maisonneuve proposes that Canada dissolve their constitution and petition for Statehood.

    You are proposing capitulation from the very corporations you hope to enrich, Mr. Jones, at the expense of the Peoples’ oversight of public resources.

    Legislation is the weapon of choice for the earth haters the GOP appoints. May the foundation with the best lawyer win in court.

    1. William

      Some of the high paying jobs in the USA Today article are likely to include physicians, scientists, etc, however many of the jobs that I referred to as the “muddle in the middle” in my post above are GS-13/15 and Senior Executive service, which are the higher level pay grades for Federal employees. Geography plays a role in the salaries, as well. It’s typical for Federal employees in high-cost urban areas to be “grade inflated” in order to provide additional compensation above the official cost of living ranges, therefore a Federal employee in Sioux Falls graded at GS-9 may be doing the same level work as a GS-11 in Chicago.

  6. J Rae

    Sounds good, but what will this sacrifice entail? The devil’s in the details and quite frankly I don’t see the sacrifice as being shared equally by everyone.

  7. William

    J Rae,

    The way I view this is simple, we will either willingly determine what sacrifices must be made, or ultimately economic reality will force those sacrifices on us. I expect some states to face default on their bonds within the next 2 years and perhaps that will be the tipping point.

    As “Herbert Stein’s Law” states “If something cannot go on forever, it will stop.”

    As in all things, in the real world, the sacrifices will NOT be shared equally by everyone.

    1. J Rae

      Don’t disagree William, except maybe that you are talking about states and I’m talking about the personalizing those cuts to actual people who live there…and here. Nice and easy in theory, but hell on the people it affects.

      My guess is that Wall Street, the big banks, big business that can afford a lobby and politicians will not make any sacrifices at all…none, zip, nada. Guess who else won’t sacrifice? What kind of a sacrifice do you think the politicians will make? That’s what I thought.

      The cut backs that are being proposed affect the middle class the hardest and the poor maybe even more. My guess is that none of those advocating the cuts will look anyone that is being hurt in the eye…and justify their choice based on where they choose not to cut. Cutting when it doesn’t hurt you personally takes no courage and borders on cowardice.

      1. William

        If the US finds itself where no one will or can loan any more money, than we have two choices. We print more money (hello inflation/hyper inflation), or we go bankrupt and learn to live off what we bring in revenue wise. Either way will be VERY painful and will change how we all live.