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.

Picking Up the War Tab

Who will pick up the tab? On the micro scale, everyone has experienced this question, typically at restaurants. In society, when services are given to the poor, the unfortunate, or even those who competently avoid taking responsibility for themselves, either donors pay or taxpayers pay the tab.

Then there is the War. Mostly in Afghanistan these days, but it could flare up any minute in Iraq, Somalia, Iran, Korea, etc. There are direct costs to the occupation of Afghanistan, and then there is the ongoing, bone-crushing cost of maintaining the U.S. military establishment as a whole. There is no doubt that U.S. taxpayers are picking up this tab. But taxpayers are a varied lot, and pay or evade a wide variety of taxes.

Yesterday's vote in the U.S. Senate on special funding for the occupation of Afghanistan illustrates some interesting shifts in the tab-picking-up dynamic. Some Senators in the Democratic Party and some Senators in the Republican Party voted against the funding. The Democratic Party naysayers want a timetable for withdrawal set. The Republican Party Nays had voted against the amendment to attach a withdrawal timetable for the bill. They voted against the bill itself because no provision was made to raise the money for it; it would add to the deficit. So they want the meal, They are worried about who will pay the tab.

American taxpayers have run up an enormous tab. It is called the National Debt. There is interest on the national debt, which itself makes up a big part of the Federal budget each year.

Back when the Dems were the outs and wanted to be voted in, they opposed the war as pointless. Now the leadership of the Dems, including the President, sound exactly like the leadership of the Republicans did just a few years ago. Only the Republicans, given their self-inflating, gun-toting constituency, can't oppose the war openly. There are no votes there. What they can do is point to the way the Democratic Majority is taking out a mortgage on America, at variable interest rates, with no ability to pay if either interest rates go up or the economy cycles back into recessionary mode.

Who will pay the tab? With the Democrats in power, the Republicans are worried that taxes on the "rich" will be raised. After all, you can't squeeze tax dollars out of income-less people living in Obama-villes. The rich already pay a lot of the tax burden, but they also get some pretty good breaks, like not paying taxes on capital gains until the capital is sold, which is typically only when they die. I would rather be rich and pay at higher tax rates, but once you are rich you get used to spending your money like anyone else. Higher taxes for the rich could mean waiting a year before buying a new Bentley, or taking a few days less vacation on the French Riviera, or having to fire one of the maids. That is the kind of irritant that makes rich people put pressure on their politicians.

You know how it goes. "Sure Bob, last year I raised $100,000 for your campaign, but then you raised taxes and now Sally Sue's vacation budget is $250,000 short."

In case you have not noticed, in Democratic majority districts the rich have to pick up two tabs. One is for the presumed winners, the Democrats, and the other is for the Republican Party candidates, to keep their hopes alive and the pressure on the Democrats.

Talk about a quagmire. The Democrats can't get out of Afghanistan without a "victory" because that would make them vulnerable to the Republicans. The Republicans are really, really worried about the future tax burden (and everyone should be), and the smarter ones are beginning to realize that the military part of the military-industrial complex has gotten to big compared to the industrial part. Too much industry has left the U.S.A., leaving a service-based economy that can't pay for the industrial goods we import.

Once I was working as a waiter in a pizza joint and a table of customers ran out on me. The restaurant owner, chewed me out thoroughly, but did not carry out his threat to take the tab out of my miniscule wages. He had to pick up the tab.

When taxes get high, evasion becomes commonplace. Some blame the Greek crisis on that phenomena.

Before dining out, which I seldom due since my wife and I both prefer cooking ourselves, I like to negotiate who is going to pay the tab. I don't like surprise. I especially don't like heavy drinkers who suggest that the tab be split "evenly." The federal deficit and national debt are one big surprise waiting to happen. There is absolutely nothing in our legal codes about who exactly is going to pay that tab.

The Federal Reserve May Have a Hidden Agenda

If I had a seat on the Federal Reserve, I would have voted for a quarter-point increase in rates at the latest meeting. I believe that the low federal rates are not being passed along to consumers partly because of inflationary expectations. In other words, low rates are not helping as much as they normally would to get the economy back in growth mode because they are fueling short term inflation and long-term inflationary expectations. They are helping to prop up the idiots who run the nations major banks by allowing them to borrow at low rates and lend at high rates, but a quarter-point increase would not have cut into that game substantially.

A quarter point rise would have had an immediate positive impact on the dollar, which would have the effect of decreasing the contract price of oil, which in turn would reduce gasoline prices and give consumers some cash (or credit) to buy other items.

Gradual quarter point rises would not hurt the housing market or dampen the economy in any way. Four quarter point rises over the course of one year would only raise interest rates to 3%, which is still extremely accommodating.

The bankers who have been given seats on the Fed presumably know all this. Do they want to keep gasoline prices high? Are they willing to sacrifice the economic health of the middle class and working class to achieve an extra quarter-point differential in bank profitability? Well, yes, after all they are bankers. But I think there is another item that has been on the agenda for decades now. The Federal Reserve statements don't mention it, and neither does the financial press, at least not in the context of interest rate decisions.

Interest rates have an large long-term impact on the size of the national debt and the annual payments on that debt. This is not a new problem, but the size of the national debt has reached a magnitude that it impacts the Federal Reserve's leeway to raise rates. This is the real reason rates have been kept consistently too low for the last two decades.

The national debt as I write stands near $9.37 trillion [See debt clock]. Interest paid on it is an average over different time terms for the debt and different points where the debt was auctioned off. However, choose a nice round number like 1%. Over the course of 10 years most of the bonds representing the debt are turned over, so if my hypothesis is that the Fed is keeping rates on average 1% lower than would be ideal for their basic mission (economic expansion with minimal inflation), we are talking about saving the federal government 1% a year on debt. In round numbers, that is $94 billion a year. Over ten years, you can round up to a trillion dollars.

Now look at a truly bad scenario. What if, to fight inflation, the base rate was raised from 2% to 5%? Over ten years we are talking $3 trillion.

What should have happened during the late 1990'2 was the Fed should not have accommodated Congress, the President, and stock market speculators. The Fed is accommodating a federal budget that keeps taxes low on rich people and corporations, but spends a lot of money that mostly goes into corporate coffers. The War on Terror is great for defense contractors, but it is killing the economy. And the terrorists know it.

American Seniors pay for all this in another way. They tend to have their liquid capital in CDs. Low interest rates set by the Fed hurt senior retirement income disproportionately.

The war on terror should be handed over to the CIA and military special operations groups. Having a lot of soldiers on the ground, like we do in Iraq, is an ineffective waste of taxpayer money.

I believe we are in a situation where we can have better long term prosperity by raising interest rates modestly, cutting federal spending modestly - mainly in the Defense budget, and raising taxes modestly. But given the control of the Federal Reserve by the self-serving banking industry and the weakness of the current President and both major party Presidential candidates, I am not using that scenario to model the future.

I am modeling an ever-expanding national debt that will at some point hit a tipping point and turn the United States into a 2nd rate economic and military power. It happened to England after World War II, it happened to the USSR in the 1970s, and it is going to happen here, the only question is when.

Which, by the way, does not mean I'm pessimistic about my stock portfolio. Many individual corporations will survive this calamity, if necessary by basing themselves in countries that run their economies on a more rational basis. Owning companies that have strong intellectual property and management teams is the best economic bet Americans can make right now.