Friday, April 11, 2014

Even Republicans Won't Deal With Debt

Republican politicians like to rant against taxes and blame all taxation on Democratic politicians. So you would think that Republicans in the federal House of Representatives would present a balanced budget.

Why did the House Republicans pass a budget this week, written by Paul Ryan, that would not balance the budget (barring an economic miracle) until 2024, a decade from now?

It is not just politics as usual, even though everyone knew this budget bill, which passed 219 to 205, won't become law. It will die in the Democrat-controlled Senate, and in any case President Barack Obama won't sign it.

Take a step back and look at the bigger picture, both economic and historical. Deficit financing did not become a regular part of the American economy until the Great Depression. In 1933 progressives of both parties (Democrat and Republican), led by Franklin Delano Roosevelt, tried "pump priming," getting the economy headed back to normal by government deficit spending. Soon income tax rates were raised too. But what really ran up a deficit, and revitalized the economy, was World War II.

After World War II the U.S. had an unprecedented amount of debt, but we were the only industrialized nation that had not been devastated by the war. More important, both parties had seen what a little economic heroin could do for politicians. So while conservatives talked of balanced budgets, they became rare even in years when the economy was booming.

Now tax rates are far lower than they were from 1935 until 1980. Republicans can take most, but not all, of the credit for that. But if anything Republicans have been worse than Democrats about spending taxpayer dollars.

Ryan's budget advocates cutting back on payments for food stamps, health care, education and transportation. But it does not cut back on military and homeland security spending, or on subsidies and tax breaks for corporations and the rich. It does not prioritize dealing with the national debt. The Democrats will say its domestic spending cuts amputate important programs, but in fact Ryan's cuts are band-aid sized cuts. They are meant not to antagonize too many senior voters, just mostly the type of people who vote Democrat, if they can get a valid voter ID card.

Ryan's budget tries to please Tea Party Republicans with the smell of budget cuts without alienating the big defense corporations or too many middle class voters.

And in his heart-of-hearts, Ryan may worry that without the deficit spending his plan envisions, the economy might stall, which would reduce tax collections, increase the deficit, and make it harder for him to reward his sponsors with government contracts.

Then there is the over $17 trillion dollars of federal debt. Currently the Treasury and the Federal Reserve are pretending they are keeping interest rates low to stimulate the economy, but the rates are way under what they have been historically in a growing economy with well less than 7% unemployment and no overall inflation. The main result of the low interest rates is that the government can finance its debt cheaply. Since that is the main result, that is the real purpose.

Normal interest rates are about 5%. 10% of $17 trillion is $1.7 trillion. 5% is half of that, so $0.85 trillion. Per year, in interest alone. A trillion is a thousand billions, and a billion is a thousand millions. So take my word for it, as valueless as the dollar has become since the Great Depression, and as large a the economy has become, we are talking a high-magnitude earthquake-like impact on the federal budget and on the economy if interest rates normalize. If we actually had an old-fashioned strong economy interest rates could easily climb above 5%, if we had free markets or the Fed were to do its job of keeping inflation under control.

Folly begets folly, and investors around the world see U.S. debt as a safe thing right now. Just a switch in that attitude, which would result in investors refusing to buy bonds until interest rates were higher (like 5% on 10 year bonds), would throw the U.S. into bankruptcy.

Its kind of like global warming. You have politicians who are in denial, and you have politicians who see the problem, but are not willing to act on something decades away. Only the debt crisis is probably well less than a decade away. It could start any time, and the longer it takes, the worse it will be.

The problem may be fixable. Democrats and Republicans alike would have to give up quite a bit. Each party uses federal money, or exemptions from taxes, to buy campaign donations and votes. Each party would have to give up much of its gravy train. And each could do that, without harming the economy overall.

Homeland security spending is nearly a complete waste. Cut that budget by 90%. Cut the military budget by 50%. And yes, it would take toughter-than-Ryan cuts in food stamps and education subsidies. Cut payments to health-care organizations and doctors, focusing on high-cost low-benefit drugs, diagnostic procedures, and surgeries. Raise the IRS budget, double it, and have them go after tax shirkers at all levels.

What, cut education subsidies? Yes, cut them. I support public schools, and I served on a public school board for 8 years, and I was the most liberal member of a liberal board. But I also saw the details of how federal money is doled out. Cut the money in half, remove the red tape by 100%, and let the school boards micromanage how to best educate their pupils. Some will screw up, many will be mired in mediocrity, but most will do better with half the money.

Alternatively taxes on the rich, and in fact on individuals making $50,000 a year or more, will soon need to be doubled. That is right, doubled. Read my lips: doubled. With no exemptions for capital gains, dividends, or inheritances. Even small inheritances.

Or we could do some combination of severe spending cuts and severe tax increases.

I imagine I have alienated just about everyone by pointing out the problem and the only ways it can be solved. I know plenty of people who get food stamps and never worry about how that food is really being paid for. I know soldiers and veterans, and I know people who make plenty of money and consider themselves over-taxed even after they take their tax breaks. No one likes to hear the nation is sick, and they all have to take some medicine.

So as an analyst, my prediction is the federal government is not going to act any better than heroin addicts would act (I've known some of them too). It will continue to borrow money until no one will lend it money.

Then it will either collapse in agony or go out and hit someone over the head and take the money it needs for its addiction. And blow off its creditors. Federal bonds will be payable only in more federal bonds.

Disclaimer: I am registered to vote in California, but with no political party.