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Tuesday, April 12, 2011

Here's Today's Take on the Budget/Debt Problem

Belolw is today's Financial Times take on the budget problem and Ryan's folly. But before we get to that there is something else that needs saying, so here goes.

There are three very, very troubling omissions from the endless blah, blah about the budget.

1) The Social Security "problem" can be "solved" forever by simply removing the cap. Period. End of story. But that simple fact is never mentioned.

2) Every other developed country in the WORLD has a self grown system that provides health care for ALL of its citizens, and here is the important part, they do it at half the cost of our troubled system. So instead of denying healthcare to Americans, Ryan et al, should be finding ways to reduce the costs of delivering healthcare. But as far as I can tell nobody is interested in that simple solution.

I strongly recommend that you read T.R. Reid's book "The Healing of America". He does a splendid job of reviewing how the major countries of the world provide first class health care for ALL of their citizens. I personally have had two experiences with the system in France, and both were as good or better, than anything I have encountered in the U.S.

3) Look at how the U.S. spends its income by looking at the graph in the last post. We are wasting an incredibly large amount of money in the defense budget, but nobody ever wants to talk about that.

A bankrupt nation wakes up

By Christopher Caldwell

Published: April 8 2011 21:36 | Last updated: April 8 2011 21:36

The high point in The Gallery of Antiquities, Balzac’s great novel of debt, comes when gendarmes are arresting the young Count d’Esgrignons for a forgery committed to cover his borrowing. The loyal notary Chesnel, attached to the d’Esgrignons family by generations of service, has already spent his own modest fortune to get the young count out of such scrapes, but he is at the end of his resources. “If I don’t manage to smother this story,” he tells the count matter-of-factly, “you’ll have to kill yourself before the indictment is read out.” The count realises in a flash that people have lent him money not because they have more than they know what to do with, or because he’s a nice guy, or because his privileges are the natural order of things. They have lent him money because they have made certain assumptions about his honour – misplaced assumptions, as it turns out.

Americans came face-to-face with their government debt this week and discovered that they are in the position of d’Esgrignons. There are several ways to measure how apocalyptic the situation is. The recent announcement by Pimco bond analyst Bill Gross that he was selling his long-term Treasury holdings has shaken people, and not just those who watch the business channels. In a memo laced with words like “staggering” and “incredible”, Mr Gross described himself as “confident” the US would default on its debt if did not reform its entitlement programmes (pensions and government healthcare). Mr Gross cited an estimate by Mary Meeker, a venture capitalist, that government unfunded liabilities stand at $75,000bn. To spend time with the federal budget is to suspect that the US is the sick man of the global economy.

The budget drama of the week had little to do with the frantic negotiations between congressional leaders and Barack Obama over whether to shut the government down. By week’s end, the two sides were only $7bn apart and were arguing about the finer points of abortion policy. The real drama came from the budget for next year released by House budget committee chairman Paul Ryan. It lays out what the US needs to do over the coming decades to avoid being crushed under the promises its welfare state has made.

Mr Ryan’s recommendations will not be to everyone’s liking. But he is the first politician to take the full measure of the US debt crisis, and his outlook is appropriately Balzacian. Mr Ryan views debt as an “existential threat”, a great drama whose cause is self-indulgence and whose end is enslavement. Mr Ryan writes in his budget document: “We face two dangers: long-term economic decline as the number of makers diminishes and the number of takers grows and, worse, gradual moral-political decline as dependency and passivity weaken the nation’s character.” Americans will have to give up their cushy retirements and a Medicare system that, according to a much quoted Urban Institute study, pays three times in benefits what it collects in revenues.

Any politician who takes such a long view must put his cards on the table, showing where he would raise money and where he would cut costs. A press consensus has formed that Republicans will pay a high political price for Mr Ryan’s forthrightness. But if the numbers are as dire as neutral observers say, then his vindication will not be long in coming. The Ryan budget shows up the president’s inattention to the problem. In control of both branches of the legislature, his Democrats failed to – or chose not to – produce a budget last year, an unprecedented dereliction, and Congress did not pass a single appropriations bill. Mr Obama has no clear plan to reduce the deficit below several hundred billion dollars before 2020. “The government’s failure to prevent this completely preventable crisis,” Mr Ryan writes, “would rank among history’s most infamous episodes of political malpractice.”

A conspicuous omission from Mr Ryan’s plan is tax rises, a big part of covering any big deficit. Indeed, Mr Ryan would cut the top rate from 35 per cent to 25 per cent, in hopes of “broadening the base”. Pessimists will see this faith in tax cuts as a sign that Republicans have learnt nothing from the debacle of George W. Bush’s economic policy. Optimists might see it as a bargaining ploy. Since Mr Obama has withheld specifics about which government services he would cut, Republicans must keep tax rises as a bargaining chip. Assuming they eventually happen, the lack of tax rises at this initial stage may be a sign of Republicans’ seriousness rather than their unseriousness.

One suspects, though, that tax rises are going to be necessary to make any budget politically sustainable. With the acuity that comes from anger, US voters see quite well what “broaden the base” means, and they know why supply-side theory holds that it is good for job creation. It means lowering rates for the richest and increasing the number of people who pay income tax, and it fosters growth because it reallocates capital from the classes that don’t start businesses and invent things to the classes that do. As an economic matter, the supply-siders may be right about this specific point. As a political matter, it will be a hard sell.

And it ought to be. In retrospect, the story of the past half century is that Americans found a way to extract money from future generations and leave them with the bill. What they have been enjoying is not prosperity but luxury. As Mr Ryan sees, they face the serious and open question of whether they are morally capable, over the long term, of living within their means.

The writer is a senior editor at The Weekly Standard

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