The Arrow Crests

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Posted by Travis on August 7, 2011 at 9:10 pm

First, let me apologize for being delinquent posting on this website.  It’s not that I don’t have a lot to say or that I haven’t been paying attention, it’s just difficult to convey my full thoughts and feelings properly on this forum.  I also believe my time spent typing and your time spent reading could probably be spent more effectively to other ends, particularly when I repeat myself.  I don’t pretend to have all the answers, but I do want to voice some of my concerns and apprehensions in this post, and promise more analysis as time ticks on.

I watched the debt ceiling debate that ended last week and was, in the end, disappointed with all parties involved: the President, the Republicans, the Democrats, the pundits, and the American people.  Everyone believes that certain stalwarts of America are “guaranteed,” and we collectively are “too big to fail,” when indeed, we are not.

We continue to be duped by optical games in Washington; I believe the debt ceiling debacle and “negotiations” were merely a well-choreographed sequence of events, designed to ingratiate both parties.  Suffice it to say, their efforts failed, considering our recent downgrade from AAA to AA+ by Standard&Poor’s for the first time in our nation’s history, and our continuing descent into a Double Dip Recession, which may someday be referred to as a Depression.

Looking Back

Since 1950, revenues have averaged 18% of the annual Gross Domestic Product, while spending has been 20%.  This 2% gap is the annual deficit, which, through the years, has added to a $14.6 trillion debt, the largest in the history of mankind.  This week, our public debt grew to equal 100% of annual GDP, something we have not seen since 1947.  Also this week, our government increase our debt limit by $2.2 trillion, a larger amount than the entire public debt in 1982.  While it is true both President Obama and George W. Bush are to blame, keep in mind that Obama’s monthly deficits are exceeding Dubya’s annual deficits, and that Obama’s annual deficits are exceeding Bill Clinton’s annual budgets.

Some suggest revenues are the problem.  Indeed, Obama’s only solution throughout the debt crisis was a tax hike on the wealthiest Americans.  So let’s explore that.  According to IRS figures, a 45% rate on incomes of more than $1 million would generate $31 billion, while an even more progressive tax, with rates of 50%, 60%, 70% on incomes of $500,000, $5 million, $10 million respectively would generate an added $133 billion.  That is roughly 10% of  the current annual budget deficit.  Revenues are, therefore, not the problem; our addiction to spending is.

If none of the above makes any sense to you, let me put it to you in layman’s terms:  assume you have a $15,000 debt. You go to the bank and get a $2,200 extension by promising to cut a mere $20 bucks a month from your planned spending spree, and promising to find $20 more a month six months down the road.  You promise to cut $3,500 from your spending over the next ten years.  The problem is, you plan to increase your spending by 7% annually for the next ten years, which means you’ll come back, begging for more in 18 short months.

This lifestyle was determined to be unsustainable by Standard&Poor’s, who wanted to see a $4,000 (or $4T in real terms) decrease in debt, by any means necessary.  We could not deliver it.  We, therefore, deserve what we are getting.

Points of Contention

The buzz word during the debate was “compromise,” a lovely idea.  On certain issues, however, there is no room for compromise.  The Left has a pro-growth agenda for government.  They regard the American economy as the supplier of government revenue, not as the supplier of American prosperity, and therefore want the economy to grow, but not more than enough to fund their government programs.  This is echoed among the Left in their calls for “shared sacrifice.”  They ask not for contributions to society – not for innovation and investment in the marketplace – but for sacrifice, for government revenue.

The Left points out repeatedly that the top 1% of wage earners control 21% of wealth.  The top 1% of wage earners also pay 40% of our nation’s taxes.  For the Left, this 2-to-1 ratio is not enough.  Class warfare is the fallback answer for the Left, who are rooted in the politics of greed and envy.  They insist on a “corporate jet tax,” rolling back the tax break that was part of Obama’s stimulus plan, to raise revenues.  Of note, it would take 5,000 years for the corporate jet tax to pay off one year of current deficit.

The psyche of the Left believes every problem this nation faces requires a government solution, which requires more spending, which requires more revenue.  In search for more revenue, they insist on ignoring facts.  There is a direct inverse correlation between federal spending and federal revenues, relative to GDP:

When spending increases, revenues decrease, due to government action in the middle of a poor economy.  This doubles down on our debt problem.  So what levels of each are prudent in cutting deficits?  A 2009 Harvard case study shows the best way to slash deficits, according to the 107 instances studied, is to CUT both spending AND taxes. What’s more, their findings suggest that tax cuts are more expansionary than spending increases in the cases of a fiscal stimulus.  The Left still refuses to believe this, insisting the government did not do enough, and is now calling for a federal “infrastructure bank,” a la Latin America, to fund the creation of jobs.

Which brings us to yet another fallacy: the Left believes the government can create jobs, truly the a product of a creative imagination.  In answering the question, “What can government do to create jobs?” the Left give one of two answers:  1) create federally funded stimulus projects; or 2) give companies incentives to invest in Research & Development.  According to a recent White House report, every 2009 Stimulus job cost taxpayers $278,000 a piece.  This added cost is actually causing the private sector to shed jobs.  So stimulus is rendered a useless waste of taxpayer funds.

Secondly, giving companies “incentives” to create jobs is often achieved with “loopholes,” that often go to promising “millionaires and billionaires,” something Obama and the Left just spent the better part of our Summer crying about.  The Left, therefore, proposes closing loopholes in order to open others, to reward their friends.  It should be noted the Right is guilty of this as well.

In the past, I have supported incentive-based infrastructure spending, albeit on a smaller scale, for natural gas development and the like.  At this point, we simply cannot afford anything of the sort.  The culmination of these types of demand-side programs have distorted the marketplace long enough, and have created a crisis of confidence in the American economy, which is precisely why our federal government was downgraded.

The solutions are two-fold.  First, and most obviously, we need to slash spending: Medicare/Medicaid comprise the largest portion of federal spending, at 23%; Social Security and Defense spending are tied for second at 20% of federal spending a piece.  Among these programs, nothing is safe.

Secondly, we need to normalize the tax code to restore economic reality to the marketplace.  Call it corporatism, crony capitalism, or a social market: the stock market should not depend on public policy nearly as much as it does.  We need to roll back Leviathan’s tentacles by closing the loopholes, lowering the corporate tax, and setting a flat income tax rate.  Such actions would restore confidence in the marketplace by instilling some predictability in the public environment, and inevitably, raise revenues.

Looking Ahead

I feel at this moment I am living life in slow-motion, reading the news like I’m sifting through a history book.  What does the end of our fiscal illusion mean for the future of our country?  I want to see the next page; I want to see what happens next, and I can’t turn the page fast enough.

I have this sickening feeling that I’m watching my country that, not long ago, faced a crossroads, and decided to start down a road it no longer has the capacity to turn away from.  Instead of dealing with our simultaneous economic, fiscal, and leadership crises, our nation diverts attention.  That is why I am disappointed with the American people; we are collectively ruining this country’s global standing, and, eventually, our heightened standard of living.

I believe, at best, we may be entering our own “Lost Decade.”  Obama and I agree on that point, although we disagree on solutions.  For the immediate future, our AAA credit rating is gone; based on the five countries that have faced the same fate, it will take anywhere from 9 to 18 years to gain the AAA rating back.  What generations before us have enjoyed, generations to come may not.  The prospect that our nation’s best years are behind us, that our arrow has crested, is frightening to say the least.  The poor choices we make now leave our children picking up the pieces of a broken economy.

Our cultural outlook is equally bleak.  Like Greece, a statist, entitlement mindset has settled over our sardonic nation, and while this is easily associated with the Left and their party, the Right has stood idly by, allowing it to happen. I therefore associate myself less with a political party now that I ever have, and instead associate with ideas and philosophies.  You can call it libertarianism, or austerity, or whatever:  it’s time to starve the beast.  Although that would directly impact my current income, I’d rather protect my country and my children from inevitable collapse.  Cutting government to its rightful size will take immense courage; sitting by and watching a train run off the tracks does not.

I believe, ultimately, our nation’s individual rights are at stake.  As Ronald Reagan said in his 1961 gubernatorial inauguration, “Freedom is a fragile thing and is never more than one generation away from extinction. It is not ours by inheritance; it must be fought for and defended constantly by each generation, for it comes only once to a people. Those who have known freedom and then lost it have never known it again.”  To quote the philosopher Jim Morrison, “The future’s uncertain and the end is always near.”

It doesn’t matter anymore if I agree with what people do with their liberty.  As long as freedoms do not infringe on the freedoms of another, in accordance with the oft-cited-herein Harm Principle, a positive step for individual rights of any sort is one I will celebrate.

Our debt problem infringes upon these rights in ways other than economic.  Chairman of the Joint Chiefs of Staff, Admiral Mike Mullen, stated that, despite the debt ceiling deal, the greatest threat to our long term national security is still our public debt, the majority owner of which is China.  Their purchase of U.S. Treasury bonds enabled our reckless spending, and the illusion of a strong economy, which we no longer have.

Facing down a dire situation, individual rights are the only thing our government should protect.  Any programs not protected by Article 1, Section 8 should be immediately voted on by the Congress, and any offices in the Executive Branch outside the parameters of Article 2 should be immediately challenged by the Congress.

Albeit drastic, the numbers don’t lie.  There is no middle ground to be reached between facts and otherwise, between sanity and the alternative.  As far as I’m concerned, there is no negotiation over America’s future, and there are no guarantees.  The most likely scenario we face is a two-fold rise in interest rates, as the Federal Reserve has been the majority purchaser of America’s bad financial debts, which we gleefully passed onto China.  We therefore face a period of inflation unseen in decades.  The worst case scenario we face is China calling our debt, followed by our subsequent default, whereby America undergoes an involuntary return to anarcho-libertarianism, without capitalism, with the American people too ignorant and hubristic to believe it’s happening to us.

I hope I’m wrong, because we are better than this.  I hope we have received the wake up call necessary to change direction.  I’ll be watching to see what happens, of course.  Regarding freedom and finance, we are still the greatest country in the world.  We have faced down worse perils, and the words of Abe Lincoln in 1861 ring true today:  ”We shall nobly save, or meanly lose, the last best hope of earth.”  My optimism is couched in Benjamin Franklin’s earlier warning, in 1787: that we have a Republic, “If we can keep it.”

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1 Comment

  • On August 13, 2011 at 8:47 am Chaz Jackson said

    The statistic cited on share of taxes paid by top income earners is very deceiving, as it leaves out most taxes and ignores the enormous income disparity particularly the top 1/10 of that 1% — Warren Buffet frequently describes this problem. (See for example him and Gates arguing for higher rates on super rich and why flat tax is a bad idea). http://www.youtube.com/watch?v=iVOwaMWewGY. For full picture of the taxes paid, scroll down to figure 6 on this link: http://sociology.ucsc.edu/whorulesamerica/power/wealth.html. For an excellent presentation on super rich getting richer while rest of incomes decline, see for example, http://motherjones.com/politics/2011/02/income-inequality-in-america-chart-graph. Your graphs do show the decline in Federal taxes over years, primarily on super rich. The failure to compromise in fact hurt our credit rating and the recovery and that is horrendous. Further draconian cuts at this juncture are ill advised as just about any economist knows. These are decade long problems that need comprehensive solutions and compromises, not misleading facts, extremism and ideology.

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