I Still Think We Need a Grand Bargain

The bar chart presented on the National Debt A...

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It has been an interesting few days in our political economy.  I call it that because, as almost any economist will tell you there is a lot of politics in economic decisions.  We have seen that on vivid display the past few weeks.

After watching the carnage like a slow motion train wreck before our eyes there are a few key take aways we should reflect upon as we wait for the Super Committee Congress created to act:

  1. Debt levels and deficits matter.  Our politicians have evaded and pontificated but produced very little progress in slowing let alone reducing Federal spending.  They have done nothing that will reduce the levels of debt which threaten our political and economic future.
  2. Downgrades are political statements not just economic ones.  S&P is being pilloried by the political class and their media mouthpieces for the temerity to actually cut the US AAA credit rating one notch to AA+.  I say BRAVO S&P!  If business as usual is unhealthy, then standing idly by why we dig ourselves deeper in the hole by political business as usual is not prudent.  S&P is stating the obvious. We should welcome their help.
  3. Warren Buffett says he’d give the US a AAAA rating.  Buffett reminds us that credit ratings are relative.  While getting cut from AAA to AA+ is political punishment for ignoring the debt and spending issue.  The dirty little secret of the past two weeks is that when it got ugly, the world fled NOT to China or the EU but into the arms of US Treasuries.  Even at AA+ the world still sees the US as the most secure place on earth.  This is instructive and it should be confidence building. While we have problems to fix, serious problems.  We still would not trade our position with any other country would we?  Buffett is right that America is still exceptional and we should both celebrate that reality and work even harder to protect it from deadbeat politicians.
  4. China lectures us on debt.  This really is irritating and motivating at the same time.  While there is much to admire in China’s meteoric growth and they have every right to celebrate it, let’s be clear about something.  We are in a co-dependent relationship with China where we buy their exports and they buy our debt.  Neither of us can stop that right now because it would crater both our economies.  But America’s economy while weakened by debt is still fundamentally strong.  China’s economy is growing but not yet sustainable without enormous continuing export growth because domestic consumption is not sufficient to support its production. Which nation has the bigger risk?
  5. What goes down will come back up—don’t panic!  The stock market is in full correction mode because the government’s economic policies are not working to restore confidence, reduce uncertainty and stimulate growth.  The president is in both political and economic denial.  The Democrats are looking for anyone else to blame.  The Republicans keep negotiating with themselves.  The TEA Party movement is screaming the emperor has no clothes and being called terrorists as a result. The Fed tells us what we already know—the economy is weakening again.  The market is down because it reflects our lack of confidence in our political leadership not because our economic fundamentals are bad.  When common sense and leadership appears again the stock market will go back up.
  6. When will we get some common sense solutions we can believe in?  Soon we hope, but the President says he will make recommendations soon!  What?  Is he in a malaise or something? The president’s recommendation to date has been to spend more, stimulate more and invest more—that’s code for raise taxes.  Maybe he is just waiting for the economy to go back into recession so he has a legitimate excuse to spend more.

So what should the Super Committee do?

They are expected to produce spending cuts totaling $1.5 trillion over the next ten years.  Anything less than that will be considered ‘wimping out’, but given the downgrade and stock market reaction that $1.5 seems more like a down payment than end result.  The super committee has an opportunity for a grand bargain that has enough WOW effect to turn around our confidence and set a new course toward growth and recovery.  It’s not a time to be timid.  What should they do?

SPENDING REDUCTION

  • Freeze Spending at 2008 levels.  Let’s start with freezing Federal spending at 2008 levels.  This has the effect of stripping out of the base budget all the stimulus increases that got larded into Federal agencies over the past two years.  Rolling back to the base budget to 2008 spending levels provides a sizable down payment on reduced spending. Some will worry that that much spending reduction up front will hurt the economy, but we want to push spending into the private sector so just do it.
  • Reduce Federal spending 1% per year from the 2008 base until it reaches 18.5% of GDP.  That should be our goal and we should modify our tax structure to produce that 18.5 % level of Federal revenue and no more by taking the following tax simplification actions.

TAX REFORM

  • Eliminate corporate income taxes and the tax on repatriated earnings permanently.  We want American business to bring both jobs and earning home.  We want business to quit spending millions to hire lobbyists to lobby for more tax breaks so just eliminate all the breaks and the tax too.  Shifting income to individuals is cleaner, fairer and less evadable.
  • Eliminate capital gains taxes, estate taxes and taxes on interest and dividends.  We want people to save money, invest money in America and keep it here.  This will do it.
  • Replace the current individual income tax system with a fair, flat tax system with few deductions and reduce the rates.  We want to end the complexity of the tax code, make the tax system fairer and broaden the base of tax payers with EVERYONE over the poverty level in income paying something.
  • Impose a broad base national consumption tax.  We want every American to pay something and have a vested interest in the fairness of the system. Splitting federal revenue raising between income and consumption taxes that are easy to administer is the way to restore growth and confidence.
  • Revenue Cap and Refund.  The goal of the tax system should be to produce 18.5% of GDP in total tax revenue.  If growth creates more revenue than that in any given year, the government must use it to pay down debt first.  If it does not pay down debt it must refund the excess revenue to income tax payers as a credit on the next year taxes.

ENTITLEMENT REFORM

  • Means Test Social Security and Medicare.  Citizens should be able to recover in benefits the amounts they contributed to the systems over the years.  Benefits paid out in excess of contributions should be means tested to reduce benefits to those with incomes able to replace the benefit levels.
  • Adjust Inflation rates.  Change the inflation rates used for benefits from income to CPI to reduce the hockey stick effect.
  • Raise Retirement and Entitlement Eligibility Ages.  As we live longer the eligibility dates for full benefits should be adjusted each year to reflect the increase.  Start making that adjustment now for those 50 and below.
  • Repeal ObamaCare and authorize competitive bidding by Medicare and all Federal health programs for benefits, prescription drugs and other services to use competition to drive down cost.  Allow interstate competition for individual health care plans not subject to state regulation, with no Federal mandates on coverage so that individuals and insurers can fashion plans that flexibly meet the health needs and affordability for consumers.
  • Ban Cost Shifting.  Hospitals, insurance companies and other health providers should be prohibited from cost shifting so they cannot allocate someone else’s costs to captive ratepayers.
  • Employer payments for health care insurance benefits should be taxable.  We must create a level playing field where individuals have a competitive opportunity to buy insurance from a market for services and progressively shift more personal responsibility back where it belongs to each of us to manage our health care coverage, cost and service providers.  Make employer paid health insurance premiums paid taxable and then allow every taxpayer to deduct a set amount or % of income for health costs or make none of it tax deductible and reduce tax rates further.

POLICY REFORM

  • Domestic Energy Production. It should be the policy of the US to encourage the maximum feasible domestic energy production.  Congress should assign to FERC the responsibility and regulatory authority over all offshore, onshore domestic energy production and control of siting, permitting and leasing of energy production on Federal lands.   Existing regulations or laws in conflict should give way to FERC jurisdiction and the authority of EPA, Interior, and all other federal agencies over energy regulation, energy production and land use be subject to FERC.
  • Environmental Regulation.  Congress should require that all existing and proposed environmental regulations must balance their environmental objectives and actions reasonably against the economic and competitive impacts they cause.  Environmental rules must be reasonable and business has the same right as environmental groups to intervene or go to court to enforce an equitable balancing of interests.
  • Education is a State and Local Responsibility.  The Federal government should turn over to the states and local governments all its responsibilities for education and make no federal rules concerning education that supersede those of any state.
  • Dodd-Frank and Sarbanes Oxley are repealed; Fannie Mae and Freddie Mac are eliminated.  These laws have driven up the cost without appreciable benefits and created a government intrusion into business not warranted or needed.  Fannie Mae and Freddie Mac should be eliminated with their assets sold to private companies.  Liabilities should be written off by the Federal Government as part of the process of reducing the Federal debt.

There ends the rant!

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