Partisan
Democrats have not got yet that tax and spend isn't a viable fiscal
policy. Partisan Republicans have not realized that "tax less
and spend just as much while blaming 'socialist Democrats' for their
profligacy" makes even less fiscal sense. In other words, we can
thank both parties for the fiscal crash course we are on.
Below
are summarized the conclusions of a very interesting debate on
Facebook. I thank Dale Wettlaufer, Ira Malis, Lindsey Truscott
Breslin and Laura Boydston for making this essay possible. I also
thank my grandfather, Mr. Moisés Capriles, for his helpful
experience, healthy skepticism and detached point of view.
The
blue dogs have shown what is obvious. The 10% of the population that
is the Pelosi left and the 10% of the population that is the loonie
right, are offset by the 80% of voters that fall in between. Why
can't there be a candidate through the primaries that dares to fight
his or her party's fringe? Maybe a third party in the middle is what
is needed.
A
few decades ago most voters were fairly moderate and did not much
differentiate a middle of the road Republican from a middle of the
road Democrat. It seems that there is much more polarization over all
now, thanks a bit to the media as well. People can't even raise
politics as they get called behind their back as vegetarian Obama
lovers and are attacked later. Why aren't the sensible moderates
standing up? The electorate needs to take on the fringe of both
parties. They are not doing what their electorate wants, they're just
trying to stay in office, to stay in "power".
The
state of political conversation has probably deteriorated at the same
rate as the United States overall debt situation. A commonsense
accounting approach must be demanded first from the government. The
irony of the U.S. Congress telling corporate America in the wake of
Enron, Adelphia, Tyco, and Worldcom its accounting is dirty is a very
sad farce. The federal budget takes into account none of the future
healthcare liabilities that are growing every year as the Baby Boom
hurtles toward retirement. If corporations accounted for themselves
in this way, their CEOs and CFOs would be locked up. So would the
U.S. fiscal situation with a rational and sober accounting regime.
Then it's pretty much up to all of us to sacrifice. Higher-income
people are probably going to see higher tax rates, which means they
will have to save and invest more to keep up the same rate of growth,
all else equal. Lower-income people are going to need to retire later
and receive fewer benefits when they do.
USA
Today reported in 2008 that the Federal government's entitlement
program liabilities total $57 trillion and unfunded Medicare
liabilities total $30 trillion. Under US GAAP accounting for
corporations, that liability would accrete (grow) at some rate
reflecting the unwinding of the discount rate at which the future
liabilities were discounted. If we use the federal government
interest rate (the private sector would use a AA bond rate), the
expense you would see in the budget would be $690B. That is not in
the federal budget because the US government uses a different, cash
accounting, system and not the accrual accounting system US
corporations (and pretty much corporations around the world) use to
recognize the accretion of future liabilities as they move from the
present to the future. This USA Today article has more on it:
http://www.usatoday.com/news/washington/2008-05-18-Redink_N.htm . We
also recommend Pete Peterson's book on these issues: Running on Empty: How the Democratic and Republican Parties Are Bankrupting Our Future and What Americans Can Do About It. Pete Petersons is the
Chairman of the Blackstone Group, former Commerce Secretary, and
former Chairman of the Council of Foreign Relations:
http://en.wikipedia.org/wiki/Peter_George_Peterson. He is one of the
wealthiest people in the United States and is well versed in
accounting.
American
military presence around the world will probably need to be scaled
back. Debt must be paid down, consumption must decrease to favor
savings. Finally, if (the big if) the U.S. economy is able to avoid
inflation, the interest on national debt won't sink the country. The
short-term nature of the $11+ trillion in national debt means a
doubling in interest rates would add more than $250 billion in annual
interest rate expense to the federal budget. As of the second quarter
of 2009, annualized interest expense for the federal government ran
at $277 billion, according to the Bureau of Economic Analysis'
National Income and Product Accounts website:
http://bea.gov/national/nipaweb/Index.asp. If interest rates double
from levels that are low compared to the last 40 years, an outcome to
which we make ourselves more vulnerable given current account
deficits and reliance upon external creditors to support that
deficit, interest expense would surpass $500 billion with higher
rates and higher debt outstanding. That's where things could start to
spin out of control.
The
figures above were accurate on August 16, 2009. The source is the
U.S. Treasury at
http://www.treasurydirect.gov/NP/BPDLogin?application=np . Total
external US federal government debt held by the Public, outstanding
was $7.3 trillion at the time of writing. Total public debt
outstanding was $11.6 trillion, which counts intra-governmental
holdings or debt of $4.3 trillion. Moreover, US federal government
interest expense ran at $277B annualized in Q2 2009. The source is
the Bureau of Economic Analysis, on line 29 at http://bea.gov/national/nipaweb/TableView.asp?SelectedTable=87&Freq=Qtr&FirstYear=2007&LastYear=2009.
This implies a 2.4% annualized rate, which indicates an average
maturity on US federal debt of about 6 years, looking at the current
yield curve on Bloomberg. If rates go to 4.8%, that's 4.8% * $11.6
trillion, or a new interest expense of $556B, for margin expense of
roughly $280B.
There
is optimism about green technologies creating a massive change for
global society and creating a huge secular growth driver for the U.S.
when a culture of fewer fossil fuel consumption is established. The
trade deficit could fall, the freed-up resources could be saved or
invested in new technologies, and the jobs and profits created would
enhance the US's and the world's tax base. The biggest losers in that
scenario would be the OPEC and former Soviet Union nations, which of
course is bad for Boeing, Hermes, South African and US thoroughbred
horse farms, Sotheby's, Ferrari, and the like. There are always
winners and losers. In all, there is a long, hard road ahead and it
would be great if everyone could agree on the fight to share. The
name-calling fomented by the likes of Rush Limbaugh and Senator
Franken is useless for all.
Some
red-meat-eating longtime GOP voters voted for Obama because the GOP
spun out of control. They are uncomfortable with a few things in the
current administration's platform, but it's a sight better than what
McCain and the GOP were offering and had offered. Moreover, Al Gore
had the right idea with the "lock box," and if he weren't
so anti-business and were able to finesse the tax rate thing better,
he would have been a two-term President. He really botched it,
unfortunately. He was on the right track with entitlement funding.
Congresspeople
who publicly describe themselves as liberal or progressive received a
combined vote total of 72.9 million Americans. Pelosi’s voting
record puts her in the top 1/3 most conservative House democrats. Not
only is it factually inaccurate to describe America as 10% liberal,
it is inaccurate to describe Pelosi as among the most liberal.
Even
the briefest glance at historical spending to GDP ratio and total
government spending (in inflation adjusted terms) shows that the
Republican party has grown the government more than the democratic
party in every year they have held the presidency since 1953. In
other words, the Republicans have continually and consistently
outpaced the democrats in growing the size of the government and the
only shrinkages of government in size and cost, relative to GDP and
employment, have been under democratic administrations. The last time
a democratic president voted or signed an increase on taxes on the
majority of Americans was in 1964. In fact, in inflation adjusted
terms, at no time in our voting lives has a Democrat submitted a
bigger bill than any Repbulican president has. It’s interesting
that the notion of tax and spend democrats still holds strong.
This
is a creative use of statistics. Because of the lack of term limits,
it is hard to beat an incumbent, especially a blue incumbent in a
blue state or a red incumbent in a red state. So just because 72.5
million people elect people that self-describe as liberal or
progressive does not really prove everything. If 2/3 of the democrats
were more liberal than Pelosi, that would become a concern. Again,
the statistics above may be misleading. Since most Democrats and
Republicans stick together, it only takes a few votes against the
party to have your record shown as less liberal. On any important
vote for the ultra-left, Pelosi has voted with that group.
Defeating
communism and defending the United States is not cheap. So to hear
Obama talk about being "fiscally responsible" after the
pork-laden stimulus program and the budgets and deficits he is
projecting, is laughable. According to the National Journal, which
rates both liberals as to their "liberalness" and the same
for conservatives, Nancy Pelosi (in 2006, the last year she was rated
as they don't rate the speaker), was was the 20th most liberal
congressperson in the House. She was ranked more liberal than Maxine
Waters, Barney Frank, and self-described socialist Bernie Sanders
(before he joined the Senate.
The
opening paragraph used the pejorative, "tax and spend," and
turned it on itself as a comment on the GOP fiscal strategy over the
last 30 years. The point was that both parties are spenders because
they are both populated by politicians who desire re-election. Both
contributed to ever-increasing spending programs that have automatic
escalators, resulting in a compounding rate over time greater than
the compounding rate of the tax base. Eventually that results in a
crisis, which will be faced in the next ten years if entitlement
spending is not changed. Perhaps the only way to get the US federal
budget and debt situation fixed is through contributions to the
solution from across the income spectrum. High-income earners will
have to give more and recipients of entitlement spending should
expect less in order to work a way out of it.
If
the suggested scaling back of US worldwide military presence happens,
21st century United States standing to the population of the rest of
the world will become much more positive. The current state of
Venezuelan affairs was also referred to on our original discussion.
As OPEC's founding nation in the Western Hemisphere, it is ironic
that Venezuela is becoming a net coffee importer. One of the few
comparative advantages that Venezuela offers to the world nowadays,
is that some of its well-educated citizens understand and are able to
deal with recessions and bad economic times with better tools and
experience than citizens of developed countries, which have been
pampered until very recently. The Cubans in Florida who quickly
learned how to succeeed are a valid comparisom. Other than that, it
is sad to see that the oil pseudo-wealth will just vanish. At least
Dubai used their oil money wisely and are well prepared for the
future green world scenario.
There
is some optimism abroad about Venezuela long-term. Colombia provides
an excellent example of how a country can turn around. Venezuela is
ideally situated long-term between the Atlantic and the Pacific near
the Panama Canal, it has 2,000 km of Caribbean coastline, excellent
renewable water resources (a huge issue in the 21st century), good
iron ore reserves, and a manufacturing base. Should a new moderate
government arise during a global economic recovery, growth in private
wealth along with protection of civil freedoms, the country could be
on its way. Patience is a virtue that must be practiced.
Thanks
again to Dale Wettlaufer, Ira Malis, Lindsey Truscott Breslin and
Laura Boydston for the good discussion. We will now try to track down
the U.S. government accrual accounting report vs. US budget cash
accounting. We are looking forward in keeping a discussion of this
sort nearly across hemispheres and across generations.
Rivero & Cooper, Inc.
Rubén
Rivero Capriles. Caracas,
August 18, 2009
