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Semi-retired technology (originally) entreprenuer living in Seattle with my partner, Michael, and our three cats: Barnum, Bailey and Buster.  Currently mostly on hiatus from technology; exploring new things I couldn't when I worked full-time.  And...continuing my love of all goods baked. 

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#fb Compromises required to tame the deficit!

Interesting article in Time Magazine about the compromises both sides are going to have make in order to get the deficit under control.  Here is a hopefully short(er) summary.

First, you have to believe that control over the deficit is important.  I do, if only from a pure market/investment standpoint.  In the 1930s most of our debt was held domestically and we didn't have the massive social security and medicare commitments which exist today.   Luckily for social responsibility we are able to finance our excess spending through the desire of foreign governments to purchase unprecedented levels of our debt at very low interest rates:  mostly Japan and of course China.  Those who don't believe deficit reduction is important, maintain that this insatiable appetite for our debt will continue in perpetuity.  But if that generosity were to wane and we don't get the public debt under control, the only way to finance it is by raising interest rates to make the debt more attractive.  This would be huge a problem not only for the cost of government service of the debt, but also for any business or consumer which borrows money as they are intimately linked.  I for one believe this generosity is more likely to abate than continue on forever.  Should we be betting the farm (our economic stability) on the continued generosity of other countries which can reek economic havoc on us by simply deciding to sell (or no longer purchase) our massive amounts of debt?  Seems the best answer is:  NOT.  The best way around this is to make sure that we get the debt under control while still maintaining our social responsibility.

For deficit reduction to occur, no longer can both sides "win" as has been occurring for decades:  taxes cut and spending increased.   The article postulates that both sides are going to have to give in and without the requisite political grandstanding which the Republicans are just waiting to jump on (see "no new taxes below").

First, a little "Government Spending 101".  On an average year the government brings in 17% of GDP in taxes; some years more, some years less. Military spending accounts for 5% of spending.  Health and Social Security each about 5%.  Interest on debt load will soon reach 2% (ed.  assuming today's historically low rates).  There we go.  We're done.  We've already spent all our revenue and we haven't even talked about:  homeland security, unemployment benefits, job training, state and local government support, higher-ed support, satellites and space missions, the NSF, NIH, NOAA, community development, food stamps, low-cost housing, infrastructure (roads, bridges), environmental protection, emergency relief (think Katrina), the judicial system, international diplomacy and poverty relief, renewable energy.  None of these programs is temporary and many are already considered underfunded and required to maintain a fair and efficient economy.  All together, the budget line items equal about (ed. 24%) of GDP (2010).

Now, let's talk about waste.  About 2-3% of GDP could be cut from the military by ending the wars and eliminating other inefficiencies.  We have to admit to ourselves that at a minimum, the Iraq war was a colossal waste of money for which we will be paying for many generations to come.  Medicare/Medicaid could also be made more efficient, but probably only to the extent that it offsets future growth which is good but doesn't help bring down the current deficit.  Removing earmarks could cut around 1% of GDP.  Even if we cut the military budget, remove earmarks, reform entitlement programs and remove the Bush tax cuts, we will still be significantly under-funded and public services will remain threadbare.  There seems to be no way around the fact that we need to raise taxes, hence the comment about political grandstanding above.  This would surely be used as an election year issue (remember Bush I).

First, the article asks that Republicans accept higher taxes as a % of GDP to be directed mainly at line items which build a base for the country's future: education, training, poverty relief, infrastructure and deficit reduction.  Democrats abandon the tax-the-rich-only approach and look at broad based tax increases and low marginal tax rates.  Implement a broad national VAT tax, but alongside a reduction in marginal tax rates to limit the VAT impact and a reduction in corporate taxes to help maintain global competitiveness and drive job growth.  It is thought that it is better to be socially progressive on the spending side rather than the taxing side.  Lower taxes to stimulate job growth but spend on health, education, training and child care to build a good base for the future. 

The second item of compromise could coalesce around the doctrine of "fiscal subsidiarity":  push the solution to problems to the lowest possible level of government where it is believed that localized, targeted solutions are more efficient than broad national programs.  Taxes would be collected by the federal government and transferred to state governments which would work with local governments to design and implement programs.

The third discussion item should be around market-based solutions rather than broad government programs when possible.  Democrats should accept the concepts of school vouchers and personalized health and education accounts as a means to install personal responsibility within government financed programs.  Also, in terms of infrastructure upgrades, use "toll" mechanisms to place the burden on the direct beneficiaries of the infrastructure.  Finally, aside from shutting down the wars, get the remainder of the military budget under control (aka "how to bypass some of the most powerful lobbyists in Washington: military contractors").

All of this requires two conditions: 1) taxes can no longer be a political game of chicken; and 2) Washington must be weaned off lobbyists.  The article concludes:  "Will we kill our economic future by shortchanging the public on investments needed to modernize the economy and train the workforce?  Will we borrow heavily from China and other countries to cover today's spending while racking up massive bills for our children?  Or might we just decide to protect the future of our country through a judicious mix of tax increases and spending cuts that will bring honor to this generation and prosperity to the next?"

After going through this exercise to summarize the article it does all come off as very "pie in the sky".  There is little chance that you could ever get these kinds of compromises through in a non-election year and even less in an election year.  Not to be pessimistic, but we will probably continue to do everything the article warns against.  It's all about short-term thinking: "What can I do to make sure I maintain my elected status while pushing off problems to the future when I won't care 'cuz I'll be dead".



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