It’s the Entitlements, Stupid!

November 29, 2012

G’Day!

With apologies to President Clinton for modifying his famous phrase, this time “It’s the Entitlements, Stupid!” Virtually everyone with a functioning brain knows that our exploding National Debt and $1 trillion annual Federal Deficits are unsustainable. Without a solution to this government-imposed national crisis, the American economy will continue to stagnate, unemployment will be high, job opportunities low, and the country may ultimately decline into bankruptcy. Also, anyone with a functioning brain knows that the solution to this problem must involve compromise and agreement among the three (3) fundamental contributors to the problem; “Entitlements,” “Discretionary Spending,” and “Tax Revenues.” By listening to the Media, President Obama, and the Democrats, you would conclude that the sole cause of our country’s fiscal and debt crisis is insufficient “Taxes on Rich.” Nothing could be further from the truth. This is like trying to stand on a 3-legged stool with two of the legs removed.

Let’s analyze President Obama’s only publicly proposed solution, “Tax the Rich.” Our annual federal deficit is currently $1.3 trillion. Obama’s proposal with possible outcomes is presented below:

Obama “Tax the Rich” Proposal

Possible Annual Revenue (billions)

% Deficit Solved

Raise top 2 rates on Incomes above $200-250,000 from 33 to 35% & 36 to 39.6%

$44.2

3.7%

Raise Dividend tax from 15% to Ordinary Income Rate

$20.6

1.7%

Raise Capital Gains tax fro 15% to 20%

$3.6

0.3%

Reinstate the Pease limit on Itemized Deduction

$12.3

1.0%

Reinstate the Personal Exemption Phase-out (PEP)

$4.2

0.4%

Subtotal Tax increase for Upper-income

$84.9

7.1%

Restore Estate & Gift Tax to 2009 levels

$11.9

1.0%

Total Government Tax Revenue

$96.8

8.1%

 

The above result is a static analysis and assumes no income or behavioral change by taxpayers (highly unlikely). In total, Obama’s “Tax the Rich” solution would potentially generate $96.8 billion per year and solve a mere 8.1% of our annual fiscal deficit problem. Since neither Obama nor the Democrat leaders have publicly suggested any change in either “Discretionary Spending” or “Entitlements,” this would leave a continuing federal deficit of approximately $1 trillion per year or 92% of the fiscal problem unresolved. (Interestingly, a $1 trillion annual deficit is the amount in Obama’s currently proposed budget for the next four (4) years.) This is blind insanity and “Ostrich Management.”

“Entitlement” reform for Medicare, Medicaid, and Social Security combined with growth oriented “Tax Reform” and “Discretionary Spending” cuts are the only ways we can avoid the trap that Greece and other European socialist countries have created for themselves. By insisting ONLY on “Taxing the Rich” with no consideration for “Discretionary Spending” cuts or “Entitlement” reform, Obama appears to be more interested in political ideology than in solving our nation’s economic problems. Without correction, we will create a European slow growth dependent society for America and potentially financial collapse. We must demand a better and more comprehensive performance from our government. I believe the Republicans are correct in demanding that any agreement on additional tax revenues must be accompanied by significant cuts in federal spending.

Let’s review some fundamental facts about our unsustainable National Debt and continuing Fiscal Deficits. The table below summarizes the major items in our national economy and Obama’s 2012 enacted budget.

Item

2012 Budget Amount (Billions)

Total Current National Debt

$16,200

Estimated Gross Domestic Product (GDP)

$15,797

Total Federal Government Receipts (Tax, etc.)

$2,469

Total Federal Government Outlays

$3,796

Annual Federal Surplus (Deficit)

($1,327)

Total Mandatory “Entitlement” Outlays

$2,252

Health (Medicaid, etc.)

$361

Medicare

$484

Social Security

$818

Income Security (Food Stamps, Unemployment, Housing, etc.)

$580

Net Interest on Debt

$225

Total “Discretionary” Outlays

$1338

National Defense

$702

Education

$79

 

Federal outlays in 2012 are expected to be $3.8 trillion (24% of GDP) with a $1.3 trillion deficit after government revenues of $2.5 trillion. Mandatory “Entitlements” total $2.3 trillion, (60% of federal outlays and approximately 15% of GDP), AND are growing at an alarming and unsustainable rate. Discretionary federal outlays (including National Defense) are $1.3 trillion. Simple math indicates that to balance the budget without “Entitlement” reform, the entire Federal Government “Discretionary Spending” (including National Defense) must be eliminated or tax revenues increased across-the-board by approximately 50% to eliminate the deficit. Neither of these alternatives individually or in combination is feasible or desirable. Currently the largest federal “Entitlement” outlays are: Health (Medicaid) & Medicare $845 billion, Social Security $818 billion, Income Security $580 billion, and Interest on Debt $225 billion. (Please note that “Interest on Debt” is unusually small based on an artificially low interest rate (approximately 1-1.5%) resulting from global economic problems and monetary support by the FRS. When interest rates return to normal levels the $225 billion could easily double or more in a very short period of time. Remember, interest rates were in the double digits in the late 1970s and early 1980s. Just look at the recent government borrowing rates in the troubled countries in Europe.)

While the mandatory “Entitlement” programs have good intent and are desirable, they are not sustainable and are inconsistent with economic growth policies. “Entitlements” are where the big federal outlays reside and must be part of a major solution to our fiscal and debt crisis. “Entitlement” reform is the most significant fiscal spending problem we face. Fortunately, we have excellent proposals from Conservatives and bipartisan groups available on how to fix “Entitlements” (see Bowles-Simpson, “The Moment of Truth,” Domenici-Rivlin, “Restoring America’s Future,” and The Heritage Foundation, “Saving the American Dream”). It would be helpful if Obama and the Democrats would acknowledge these or offer proposals of their own. It won’t be easy but as I said in the title, “It’s the Entitlements, Stupid!”

Let’s get to work and save our country!

The Old Guy PhD


Has American Decided Its Future?

November 7, 2012

G’Day!

No, there is still the opportunity to influence our future! While it is not possible for me to adequately describe my disappointment, disbelief, and initial unhappiness with the results in this election, a free people in a free society expressed their current desire for a popular President to continue to transform our country into a centrally controlled socialist welfare state. If this new nation evolves, our country will be very different from the America in which I have long lived, long enjoyed, and hoped to endow to my children. Fortunately, we live in a country where it is possible for an election as divisive is this one to take place peacefully and without violence and there will be another Congressional election in only two years. We now know (or should know) exactly what the next four years are likely to bring unless we strive to change it.

On its current track America faces a looming financial & economic collapse, unsustainable deficits & National Debt, higher taxes and healthcare costs, the ultimate failure of our important social safety nets, continued energy dependence on nations that do not like us, and a Foreign Policy of appeasement, apology, & withdrawal that has encouraged terrorists & enemies of the US and our allies. If Iran does create a nuclear weapon and the “Arab Spring” continues to deteriorate, it is unlikely that our best ally in the Middle East, Israel, will survive without resolute US support. Without a course correction, the America and freedoms I know and love are probably doomed. In my opinion, our only hope is that Obama reverses nearly all of his policies (unlikely) or the Republicans and Democrats in Congress can find a bipartisan way to resolve our country’s multiple crises quickly (possible). It is now time for all of us on both sides of the issues to work together to save our country. It can be done!

John F. Kennedy at his inauguration said, “My fellow Americans, ask not what your country can do for you, ask what you can do for your country!” This was not only inspirational but an accurate indication of our country’s culture of independence, freedom, and opportunity at the time. Since those words were spoken, our nation has experienced a gradual erosion of our freedoms, a huge increase in the size of our government, and increased welfare and dependency by citizens on government. We must regain our spirit of personal responsibility, mutual cooperation, and independence from a government that increasingly seems to believe (with apologies to JFK), “My fellow dependents, ask not what you can do for yourselves; ask what your government can do for you!” Let’s all endeavor to reestablish a culture of unity not divisiveness, compromise not partisanship, progress not gridlock, and independence not welfare. We are all Americans!

I believe the Republicans can and should take the lead in proposing new solutions to the major crisis of our time: the impending financial collapse of our federal government and our economy. My two principal suggestions for initial Congressional action are: 1) In the lame duck session extend the “Bush Tax Cuts” for 6-12 months to avoid the “Fiscal Cliff” and give Congress a reasonable opportunity to properly deal with the real reforms necessary and 2) As the first priority in 2013 pass the Bowles-Simpson proposal in the House with added entitlement reform as the appropriate framework for a permanent solution and submit this to the Senate for review and actual vote. (see “Bowles & Simpson Have it Right!” “Obama Ignores Bowles-Simpson Debt Reduction Commission-Again!” “Debt Reduction: Bowles & Simpson Have it Right-Redux!” “Debt Crisis-Whatever happened to Bowles-Simpson?”) Simply “Taxing the Rich” cannot work. If the “Rich” were taxed at 100% and paid it (unlikely), there is not enough tax revenue available to pay for and sustain our government for the future. What is required is renewing the growing private-sector economy necessary to create the jobs needed to move individuals from permanent dependency to employment and personal independence. In other words, “Save the American Dream!”

Longer term Republicans need to properly and practically address with positive programs the issue of Latinos in America (+40% voting edge for Obama), Women’s issues (+11% voting edge for Obama), and the lack of under age 30 youth support (+20% voting edge for Obama). Without broadening the party’s appeal to these constituencies, it will become increasingly difficult for Republicans to win future elections.

The challenge facing our future is getting our government to work together to correct its self-inflicted path of fiscal insanity, unsupportable debt, unsustainable entitlements, and individual dependency on government by a combination of economic growth policies, major business and individual tax reform to increase tax revenues, cuts in unnecessary federal discretionary spending, and reforms required to make our social safety nets and entitlement programs sustainable for future generations. We can do this! Let’s get to work!

The Old Guy PhD