Saturday, December 22, 2012

18, 24, and 15. Three numbers you must know.

So, let me lay out the ground rules here. I'm going to gore some oxes on both sides of the isle. I hope you can keep your mind open for a few minutes, and not start running the endless loop of talking points in your head. Okay, ready? Here we go.

America is has become that dysfunctional family everyone knows. The couple who spends way more than they should, to the point where they are in danger of losing everything. I'm going to stop you right here, and go back to the ground rules. Conservatives; stop yelling "That's right, all the money we spend on welfare, food stamps and big government is killing us." Liberals; stop yelling "That's right, all the money we spend on wars, defense and corporate bailouts is killing us." We need to get past these talking points to understand where we are, and where we must go to save our nation for the next generation.

If we go back to that dysfunctional couple, we see they recently had their hours cut back at work, they used to get a lot of overtime pay, but that isn't coming in any longer, so they really need to make some changes to their spending. They may need to find some part time work also. However, being dysfunctional, this is what happens.

The wife really wants to go on that weekend getaway with her girlfriends to the Napa Valley, so she puts it on the credit card. When the husband sees this, he goes out and buys that new set of golf clubs he had been wanting. When the Visa bill comes, they point fingers at each other and yell about who is spending all the money. The wife wants the husband to get a second job, but the husband says he likes the extra time off.

The next month, the wife trades in her three year old Honda Accord for a new Lexus, after all, the payment is only two hundred dollars more per month, for 72 months that is. The husband goes out and remodels the garage with new cabinets, a work bench, and that granite-looking floor finish stuff they use in NASCAR shops.They also upgrade the kids phones to the new iPhone 5 because they just 'had to have them'. Meanwhile, when they max out their credit cards, they apply for new ones with higher limits and use them to pay off the first ones. I mean, why not? They have good credit right? After all, they just paid off their credit cards. And so it goes for a few years until they finally get the foreclosure notice, and they have to sit down in their beautiful home, surrounded by all their wonderfully expensive stuff, and sign the bankruptcy papers.

Now, the conservatives will say, "That's right, that is just what the Democrats are doing, they are going to spend us right into bankruptcy." Meanwhile, the liberals will say, "That's right, the Republicans won't go out and get a second job to get more money." Back to the ground rules again, calm down and listen for a minute, you need to know this, and more importantly, you need to understand this.

I will now invoke the name of William Jefferson Clinton so we can really have some fun. All I heard from my friends back in the 2000's was Clinton had a surplus and now Bush is giving us deficits. I heard all about the Bush tax cuts helping only the rich, and the poor and middle class people were now getting screwed. Let's look closely at what happened the last few years of President Clinton's second term to see what really happened.

President Clinton had raised taxes back in 1993, lost control of congress in 1994, and now had to find some middle ground with the American people and Republicans. He did.

In his second inaugural address he said, "We will meet these challenges, not through big government. The era of big government is over, but we can't go back to a time when our citizens were just left to fend for themselves" Both the House and the Senate were controlled by Republicans, but they did not have a super majority in Senate, so they still had to work with the Democrats to get anything done.

This was also special time in America. Maybe a once in a lifetime set of circumstances.The cold war had been won, we were the lone super power, and America was going into the dot-com boom period. I was working in the high tech field in the late '90s and it was like the gold rush. Millionaires were popping up all over like gophers after a spring rain.

Clinton worked out a deal with Republicans together they cut spending, yes you heard that right, they cut spending and reformed welfare. While the deal they reached called for a balanced budget within seven years, with all the profits and extra taxes rolling in from the new tech industries and dot-com millionaires, the budget was balanced in just three years. Not a bad plan. Cut spending, turn lose the private sector, and stay out of the way; good times.

Now here is the first number I want you to memorize; 18%.

In the year 2000, one of the last times we had a balanced budget, government spending was 18% of our gross domestic product or GDP (the size of our economy). With the roaring economy, our tax revenue was over 19 % of GDP. Hence, we even had a small surplus.  All my Democrat friends want to return to the Clinton tax rates, but what about the Clinton spending rates? The forty-year historical average for tax revenue is 18.1% of GDP. The forty year historical average for government spending 20.8% of GDP. If you look at these numbers, you can see why we have a national debt.

Historically, we spend about 12% more than we take in every year. Each year we have a deficit, it adds to our national debt. Our nation debt is now greater than the size of our entire economy. Did you hear that? Our 16 trillion dollar national debt is now larger than our GDP. If that doesn't frighten you, go back to watching Judge Judy and Dancing With The Stars, you will figure this out when the riots come.

Here is the second number I need you memorize; 24.1%
In 2011, President Obama's third year in office, federal spending had grown to 24.1 of GDP.

So what happened after Clinton? These numbers started moving in different directions. No one remembers, but the last year of President Clinton's term, the dot-com bubble burst. I know, I was there. All those crazy start-ups to buy gourmet cat food online or to have your refrigerator order food from the store as it scanned its own inventory went belly up, and so did the flood of tax revenue to the treasury. People also don't remember President Bush inherited a mild, little recession when he took office. A few months into his term was the terrorist attacks of 9/11, and that didn't help the economy at all. Tax revenue fell. At the same time, as we geared up for the invasion of Afghanistan, and ultimately Iraq, defense spending started to grow, up from almost sixteen percent of the federal budget in 1999, to twenty percent at the height of the surge in Iraq. In 2012, it is still at twenty percent.

However, as much as Democrats, and a few Republicans, love to say that defense spending (the two unpaid for wars, etc) is why we are in this mess; the numbers don't back that up. Not at all.

While defense spending did go up, so did all other spending, in a big way. Democrats are not alone in the rush to spend more. Republicans took a page from the Democrats and started to give away free stuff to woo voters. Remember Medicare Part D? Yea, those free prescription drugs are not "free", they are just unpaid for by the end user, so the government needs to borrow more money to pay for all these free programs. The Republicans under House Speaker John Boehner and Senate Majority Leader Trent Lott and later Bill Frist, grew spending as a percentage of GDP from that magic18% range to 19.85 in 2006, the last year Republicans had control of both houses of Congress and the presidency.

It doesn't seem like a lot, but we went from small surpluses in our budget from 1999-2001 to a deficit of 246 billion dollars in 2006. In no way do I want to diminish the fact that 246 billion is a lot of money, however in 2011, President Obama's third year in office, the budget deficit had grown to a mind boggling 1.48 Trilion dollars. That is One thousand, Four hundred, Eighty billion dollars. It makes a person long for the years with a pidlly 246 billion dollar deficit.

What about the Bush tax cuts? All those fat cats getting all the tax breaks, what about that?

Okay, here is where the Republicans backs get stiff. Our overall tax revenue is down. Down from the 19 -20% in the dot-com boom times of the late '90s and early 2000s, to just over to its historical average of 18.5 in 2006, the last year Republicans controlled the house, senate and the Presidency. In 2007, the Democrats took control of both houses of congress and the spending started to soar. Then came the housing bubble crash in late 2008, which led to the stock market crash, which led to a huge drop in tax revenue. In 2009, tax revenue was down to around 15% of GDP. Since the crash, it has stayed within a narrow range between 15-16%. Mostly because when you don't have a job, you don't pay much income tax. That and all the government spending for stimulas moves money out of the private sector. In my opinion, you simply cannot spend your way to prosperity, despite what President Obama and Paul Krugman from the New York says. (hey, they both have Nobel Prizes, and I don't, but I'm still right)

But didn't the Bush tax cuts go all to the rich? No, they didn't. I know you have been told for a decade by the media that the rich were the big beneficiaries of the Bush tax cuts, but look at the numbers for yourself. If you were a low income wage earner, the ten-twelve dollar an hour worker, your tax rate was cut from 15% to 10%. That is a 33% tax cut; not too shabby. What about the CEO of ACME Rocket Co. the guy who sells the rocket skates to Wile E. Coyote, he payed the top rate of 43.7% under Clinton. The 2003 Bush tax cuts brought his rate down to 39%. That's about a 10% tax cut. Everyone in the middle received about a 10-15% tax rate cut.

But what about Capital Gains taxes, the kind Warren Buffett and Mitt Romney pay? Ok, lets talk about those too. Now you Democrats had better sit down for this, I don't want you to get dizzy and faint. In 1997, President Bill Clinton cut the Capital Gains tax rate from 28% to 20%. Yep, you read that right, Clinton cut Capital Gains tax rates 8%, and you know what, tax revenue from Capital Gains income went up! Okay, take a deep breath, you were probably never told that, but it's true. So when Bush cut the Capital Gains rate from 20% to15%, he was treated as a crazy person. Well, if you say so.

With all that background, what do we do now?

First, we have to throw out all the rhetoric from both sides and focus on these numbers. Just to refresh, The latest numbers from the CBO I can find for fiscal 2011 are these.

Our spending was 24.1% of GDP.

The last number you need to remember is tax revenue was at 15.4% of GDP.

Those two numbers are way off their historical averages. At this point, you might say let's jack up the tax rates on the rich. Okay, but then what? If you raise the tax rates on everyone making over $250,000, you will move that revenue number up to, are you still sitting down, about 15.9% of GDP. Making the rich pay their "fair share" will bring in about 90 billion dollars a year. At this point you have to start asking yourself, is raising tax rates in a sputtering economy going to create jobs or make business owners less likely to hire new workers?

What about spending? The Democrats are always talking about cutting military spending, so lets just eliminate it.  Let's say that tomorrow morning President Obama finds a magic wand filled with fairy dust and waives it over the world. Everyone puts down all their weapons everywhere, and we no longer even need a military. Yep, let's push all the tanks, planes, trucks, guns, helmets and footlockers into a giant pile and make a climbing structure for disadvantaged youths. Let's sink all the ships, submarines, discharge every soldier, sailor, airman and marine, and turn the Pentagon into the world's largest Chuck E Cheese. If we eliminate the entire defense budget, we move the spending number down to 20.2% of GDP. That is still above the historical average and leaves us with nothing but strongly worded letters from the State Department for our defense. No thanks.

The spending cuts will have come from the fastest growing segment of the budget; Medicare, Medicaid and Social Security. But not only those programs, but the entire size and scope of the federal government needs to be trimmed. Yes, even defense. Every program must be reduced to get back down towards that 18-19% of GDP. My first proposal would be to just freeze spending until that spending number gets down below 20%. That, and we need to grow the economy in a big way, and that will not happen by giving billions to subsidize "green energy" or any other stimulas. If spending did work to stimulate the economy, it would be roaring right now. It isn't.

With all the talk about the "fiscal cliff" the rhetoric is coming fast and furious.  Politicians are talking about raising 1.6 Trillion with tax increases or cutting 1.2 Trillion in spending, all these numbers mean nothing; zero. Most of the time when they want to make the number seem big, they use the "over ten years" number. When they want to make the number seem smaller, they use single year numbers. It's all a load of rubbish.

If we had a media in the country that really wanted to inform the nation about what is really going on, they would ask every politician this one question. "How does that move the spending number, and the tax revenue number for this upcoming fiscal year, not over ten years, but next year?"  Wouldn't it be refreshing if the media, and the public knew these numbers by heart? When President Obama says raising taxes on the rich will bring in almost a trillion dollars, what if a reporter asked him, "That is only 90 billion a year, Mr. President this year's deficit is 1.1 trillion, how are you going to close the rest of the 1 trillion dollar shortfall?" Or when the Republican Speaker of the House, John Boehner says he is going to sign a deal with 1 trillion dollars in spending cuts, what if a reporter asked, "That is over ten years Mr. Speaker, what about the other trillion dollars of deficit spending this year?" Oh how refreshing it would be.

What if every time someone threw out some tax increase number, or some spending cut number, a reporter or constituent asked, "How does that get us closer to 19% of GDP?" Yea, I know I said 18 was the historical average, but we do have to deal with the current number of baby boomers, and seniors are expensive, so I raised it to 19% of GDP.

This solution has to have two parts, spending cuts and revenue increases. The good news for Republicans is they only have to increase revenue to the tune of 3% of GDP. It can be done by eliminating deductions, raising tax rates just a percentage here or there, but it can be done. It can also be done by growing the economy; more people working, and paying taxes.  It won't be easy, every dollar in the budget is fought over tooth and nail by lobbyists and interest groups, but it can be done.

The bad news for Democrats is they have to cut spending by 6% of GDP. Again, every dollar has a voter behind it, so it's a harder row to hoe. Again, it is easier to do this with a vibrant economy, something we have not had in a while.

Will this be the approach the President and Republican take as they try to avert the fiscal cliff?
Nope, not even close.

My best guess is whatever happens January first, the deal they reach will have higher taxes on the wealthy and a promise of a spending cuts in three, four or five years that will never come to fruition.
The deal will look something like this; Tax revenue moves to the 17% range and spending will stay around 23-24% of GDP for the next ten years or so. That is not a plan to fix anything, and its not serious. Just wait until interest rates start to raise and all that debt starts costing us more and more to finance.

By the end of President Obama's next term, our national debt will be over 20 trillion dollars and the amount we spend on interest, not paying the debt down, but just the interest on that debt will soon be more than we spend on Medicaid. The more debt we rack up, the more of the budget will go to pay the interest on that debt, and leave less money for the actual programs people use.

It's like the dysfunctional family who pays for their family pizza dinners with their credit card and just makes the minimum payment. In a few years, each $25 dinner will have cost upwards of $100. Pretty soon, they can't pay the car insurance and the light bill, but they will have the satisfaction of remembering how tasty that pizza was a few years ago.

Bon app├ętit America.