The Gang Of Six

I was pleased with the Coburn proposal I mentioned here a few days ago. Alas, Coburn has succumbed to the dark side and rejoined the gang of six, which sounds like a title to a bad Kung Fu movie, and their proposal is absolutely terrible. Rather than spend the time to write it up, I thought I would share a very good critique of the plan. 

Here is a summery of Keith Hennessey's critique of the plan:

1. It provides no discretionary spending totals.

2. It cuts defense spending while hiding the ball on nondefense spending.

3. The promised deficit reduction is both overstated and less than is needed.

4. It is a huge net tax increase.

5. It’s a far worse trade than Bowles-Simpson.

6. It trades a permanent tax increase for only a temporary respite on spending.

7. It’s an unfair deal on CPI.

8. It precludes structural reforms to Medicare and Medicaid.

9. It does almost nothing to slow health spending growth, and even the $115 B of additional health savings are bracketed.

10. It leaves the core trillion dollar ObamaCare health entitlement in place..

11. It makes it harder to do Social Security reform, drops the specific Social Security reforms of Bowles-Simpson and increases Social Security spending.

12. It sets the wrong bar for Social Security reform and tilts reform toward tax increases.

13. It locks in the net tax increase, then hopes to deliver on the stated tax reform policies.

14. It undoes most of the benefits of last December’s tax policy battle.

15. It sets up a tradeoff between marginal income rate cuts and capital tax rates.

16. The rate cuts are over promised because the Gang overestimated the revenue that would be raised from reducing tax expenditures.

17. The plan proposes a deficit trigger mechanism that might include automatic tax increases.

Hennessey is quite detailed and is a good read for those interested in the budget crisis. Click here to read. 

Artificial Discipline

Thinking about the chart I posted Monday has led me to rethink the current deficit troubles of the government. If a $2 billion cut in next year’s spending is the most Obama will agree to, then maybe we do need the discipline of a government shutdown. This does not need to lead to default as the government can still borrow money as its various bonds mature in order to replace them. It can also prioritize and make interest payments first. If the government defaults, it is because Obama has chosen to default.

We may discover if the Social Security trust fund really exists as a "lock box." There are government bonds in that lock box. They can be sold back to the government to pay the deficit that occurs right now in the tax receipts the government receives in Social Security taxes versus the amount it sends out. This money could be then be re-borrowed to pay the benefits. If Obama does not send out Social Security checks it will be because he chooses not to do so.

The same situation occurs with Medicare. If medical bills are not paid, it means that Obama chooses not to pay them.

The downside is that this will cause dramatic cuts in all other government programs. Or maybe that is the upside. Interest, medical payments, and pensions are about 50% of our spending. If these parts of the budget can not be touched, and since we are running a 40% deficit, that means a cut of 80% everywhere else if the government is forced to balance the budget by being unable to borrow-note that the military is in this category.  Is this the only way to end our wars? I am overwhelmed by the irony of an anti-war candidate becoming a war president. Military salaries can continue to be paid as the troops are brought home. The ending of our wars is enough by itself for me to want a government shutdown, even though it will hurt me financially as it will make selling houses impossible for a while as the government is providing most financing right now.

Finally, I have heard many times from the administration that the government has never defaulted before. While the government does not need to default now, in fact the government has defaulted many times in the past.  Here is a list:

The Continental Currency Default of 1779
The Default on Continental Domestic Loans
The Greenback Default of 1862
The Liberty Bond Default of 1934
The Momentary Default of 1979

The government also defaulted in 1973 when Nixon closed the gold window. The lack of the discipline that the gold standard brings is one reason we are in this mess. This is because under a gold standard if a country overspends gold leaves that country and the money supply drops. This allows industry to be more competitive as prices drop and deflation sets in. This forces austerity. It is a very painful process. 

We are rapidly approaching the point of no return. Michael Barone in his column had this to say:

In the process, the national debt as a percentage of gross domestic product has increased from a manageable 40 percent in 2008 to 62 percent this year and an estimated 72 percent in 2012. And it's headed to the 90 percent level that economists Kenneth Rogoff and Carmen Reinhart have identified as the danger point, when governments face fiscal collapse.

Eric Anderson at Universe of Lies points out that Barone has underestimated the problem:

Barone is minimizing the problem here, counting only US marketable debt. The bonds issued to government trust funds are just as important, and we can’t ignore unfunded liabilities, either. The unfunded liabilities can be adjusted somewhat by changing the laws governing those entitlements, but the unmarketable Treasury debt is still debt, in precise dollars and cents. 

Current debt is $14.2 Trillion. Estimated 2011 GDP is 15.2 Trillion, so we are already at the 90% critical level.

Barone must read Eric's column as he updated his column and agreed that we were already at the danger level. 

A time will come where the government is unable to "kick the can down the road." Artificial discipline will be forced on the government either by the government reaching the point where it can not sell bonds or by a government shutdown.. A government shutdown is preferable to not being able to sell bonds. I see the tipping point for the government not being able to sell bonds as 3 to 8 years away if current trends continue.

If a government "shutdown" is the only way to introduce fiscal discipline, then bring it on.

The Number No One Will Talk About

 I saw this chart at an NPR blog and thought it worth repeating. 

Here is their comment: 

In the debt-ceiling negotiations, politicians are debating how to reduce the federal deficit by $2 trillion to $4 trillion over the next 10 years.

One number that hasn't been mentioned much: $13 trillion. That's size of the federal deficit over the next 10 years, according to a recent projection from the nonpartisan Congressional Budget Office.

Of course, this is just a projection. And there's always a lot of uncertainty in any economic prediction, particularly one that tries to look a decade into the future.

Still, given that the deficit-reduction plans being hashed out in Washington are supposed to play out over the next decade, $13 trillion seems like a useful bit of context. It suggests the current fight over the deficit is just the beginning.

Yes this is a problem that we have been building up to for at least 40 years. the deficit will get worse and worse as America's baby boomers get older. Since we have a dysfunctional medical system, that is where the focus soon will be. 

Look at the two circles. the problem is huge, but the solutions offered are meager. 

Update on Tuesday, July 19, 2011 at 6:30AM by [Positive Dennis]

Graduation to RealityThere is now the first serious proposal on the table to cut the deficit and balance the budget from Senator Tom Colburn. It balances the budget by combining spending cuts with tax increases. 

A Moment For Meditation

I would urge each of you who have been reading last week's blog posts to reconsider this chart. 

Is a cut of $2 billion that Biden, speaking for the administration, has offered a serious offer? The Republicans must feel like they are playing chicken when the other guy wants to crash. Obama wants to crash to insure his reelection. 

Study this chart. When you understand it, you will understand the crisis. 

Our Humpty Dumpty Government

One of the reasons I titled some of my posts "Government in Wonderland" was this part of the Alice in Wonderland Story:

"There's glory for you!"

"I don't know what you mean by 'glory,' " Alice said.

Humpty Dumpty smiled contemptuously. "Of course you don't—till I tell you. I meant 'there's a nice knock-down argument for you!' "

"But 'glory' doesn't mean 'a nice knock-down argument,' " Alice objected.

"When I use a word," Humpty Dumpty said, in rather a scornful tone, "it means just what I choose it to mean—neither more nor less."

"The question is, " said Alice, "whether you can make words mean so many different things."

"The question is," said Humpty Dumpty, "which is to be master—that's all."

We live in a world where the government decrees that marriage does not have to be between a man and a woman, where the State of New Mexico fines a wedding photographer $6,000 for not taking a lesbian couple as a client, where an increase in government spending is called a cut, where a supposed 2 trillion dollar cut in spending yields $2 billion in cuts the first year, where a president can authorize torture, where a president can declare war in Libya without declaring war, and where an anti-war candidate becomes a war president. In such a world my advice to you is to stay as far away from Humpty Dumpty as you can.

Even as I type Humpty is teetering on the edge. He seems to enjoy it. Sooner or later Humpty will fall. Try not to be under him when he falls. For all the king's horses, and all the king's men, cannot put Humpty together again.