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Saturday, January 29, 2011

THE STATE OF THE UNION: ALL HOPE; NO CHANGE

Many Americans waited expectantly for the latest version of "hope and change" in the President's State of the Union speech; "hope" for a common sense plan to "change" the path to fiscal ruin on which the nation currently finds itself. None was forthcoming. President Obama's talent for lofty inspiration and soaring rhetoric was a "no show", as were sound ideas and a tough and frank commitment to make the sacrifices necessary to deal with the financial crisis.

Instead, the President resorted to a list of "we have to's" and “we need to‘s“, without explaining "how to”. Generalizations, mostly including an expanded role for government such as "encouraging innovation" through government investment i.e. spending, in the bio-medical area, information technology, and "clean energy" were emphasized.
Apparently believing that citing a laundry list of long term "goals" would give hope to the millions of Americans currently struggling with unemployment or underemployment, Obama went on with such things as "one million electric vehicles by 2050" and assuring that "80% of U.S. electricity is from clean energy sources by 2035". If waiting 25 to 40 years for a new job in these newly invigorated industries failed to excite, then there was always; "hire 100 thousand new science and math teachers". How exactly this boost to education deals with the immediate problems or how bankrupt states and municipalities could pay for these new hires, went unstated.

The president seemed eerily detached from the magnitude of the nation's fiscal crisis. He failed to mention the relevant numbers. The current federal deficit just reached $1.5 trillion. The accumulated annual deficits, the federal debt, is $14.03 trillion and represents 96.5% of Gross Domestic Product (GDP), the value of all domestic goods and services on an annual basis. These are numbers only a cosmologist who deals in light years and the size of galaxies can fully understand. 14.03 trillion is 14.03 thousand billion and one billion is one thousand millions. Interest on this debt for 2010, which is currently held down by very low interest rates still amounted to $197 billion. The Congressional Budget Office has estimated the annual interest payments will increase to $800 billion by the year 2020 but that estimate is based on a projected debt of $16 trillion. With the current debt already at $14 trillion, the figure for 2020 is significantly low and the annual interest on the debt will grow much faster as the debt increases and interest rates rise.

What specific ideas did President Obama offer to address these problems? First, more spending: high speed rail that in 20 yrs. will be accessible by 80% of the American people. This effort has already been commenced by Democratic Senate Majority Leader Harry Reid who put a multi-million dollar grant for a high speed train between Disneyland and Las Vegas into the 800 billion dollar "stimulus fund". Then, the standard refrain about spending millions or billions on "infrastructure" i.e. roads, bridges, water projects etc. Obama's suggestions for reducing spending and thus reducing the deficit and federal debt carefully avoided anything discomforting or effective.

He proposed to "freeze government spending for five years which he claimed would save $400 billion over 10 years. He did not explain how freezing government spending at a level which exceeds government revenues by $1.5 trillion would achieve "savings". He might argue that a "freeze" is a cut because as the population and economy grow the need for expansion of government spending is inevitable. But even though his $400 billion over 10 years figure is pure conjecture, it represents only $40 billion a year which would be savings of only 1.1 percent of the current federal budget.

That was the extent of Obama's specific spending cut suggestions. The rest were generalizations without benefit of "how to" or "how much" in savings would result. He proposed a web site for government expenditures, presumably to expose wasteful spending and he promised to veto appropriations bills that contained "earmarks" or "pork". Other feel good suggestions without details included "simplifying the tax code, and "merging or consolidating" government agencies.

The theme of Obama's address was apparently the slogan "We do big things." But the message was Obama and the Democrats in Congress continue to rely on big government spending to do big government things.
The Republican response delivered by Congressman Paul Ryan , Chairman of the House Budget Committee was different in orientation only. Ryan criticized Obama's "spending spree" and warned of "catastrophic debt in the future" but he also avoided specific areas which would be targeted for cuts. Some Republicans in Congress want to go back to 2008 spending levels when the next budget is passed in the Spring. That figure was $2.9 trillion, or a reduction of $700 billion from current levels. While that is an impressive number on its face, the White House estimate of government receipts for 2011 is $2.567 trillion, thus if Republicans were successful in this reduction, it would still produce a deficit of $333 billion and thus increase the national debt by that much.

 The magnitude of the numbers alone suggest that deficits are years away from disappearing and the $14.03 trillion debt will essentially never be entirely reduced because that requires a budget surplus over many years. Based only on Obama's 2011 estimates, government tax receipts would have to grow by 33% and spending remain the same or spending would have to be cut by 33% to achieve even a balanced budget in fiscal 2011. The last budget surplus which occurred in 2000 was $236.4 billion and was the largest in modern history. If that surplus could be replicated each year, it would take 30 yrs. to reduce the debt by 50%. Of course, the budget does not need to be balanced in one year but it cannot be a long term project as each year it is in deficit, the federal debt grows.

So far, politicians prefer to talk about "slowing the growth" of the deficit and debt but that process must have a medium term end game of reaching budget surpluses or the government is on a path to virtual insolvency which would manifest itself in rapidly rising interest rates necessary to sell government bonds (sovereign debt) to finance expenditures. The rates would increase debt service which would be added to the debt in a never ending spiral of inflation that would filter through the economy as a whole.

Significant spending cuts requiring significant political courage are needed. All government spending benefits some group. Each group will argue that their need for government dollars is more important than others. Attempts to cut the budget will stimulate a deluge of lobbyist advocacy to save particular programs. But across the board spending cuts that are favored by some to avoid singling out specific programs and inviting the ire of their constituencies make little sense since not all agencies and programs have the same value to the nation. Faced with a continuing terrorist threat does it make sense to cut the FBI or Homeland Security Dept. the same percentage as the Dept. of Agriculture with its bloated and outdated agricultural subsidies programs? Is the National Endowment for the Arts as vital as the U.S. Coast Guard?

While it is the responsibility of the President to properly define this enormous problem and exercise the leadership necessary to convince the American public to accept the pain necessary to make progress, he appears to have made the decision not to jeopardize his reelection prospects by alienating any beneficiary of government spending and instead promote the fatuous idea that the economy, with aid of even more government spending, can "grow out of the recession", the chronic deficits and the astronomical federal debt.
As the numbers indicate, even large spending cuts are by themselves inadequate with respect to cutting the national debt and its budget destroying interest payments. Revenues must be significantly increased and that means tax hikes or new taxes. Simply "taxing the rich" will not be enough. The top 1% of income earners already pay 38% of all federal income taxes and the top 10% pay 70% (2008 figures) while almost 49% of American households pay no income tax at all. Ultimately a federal sales tax of some kind will probably be needed. In the mean time narrow minded ideological partisans on both sides will demagogue the issues and seek political advantage by pandering to their constituencies and interest groups. While it is difficult to convince citizens who are already under financial stress that it is important to accept more economic hardship now to prevent a future worse hardship, the problem won't go away and each day's delay makes problem worse.

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