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As Long as We Remember...

December 4, 2012

Over The Cliff and Into The Woods

Farrell Keough

We’ve recently been discussing the issues surrounding how to handle our government shortfalls. Some of this includes what is often referred to as “austerity” measures. Truth be told, that is far too simplistic a definition, but one that plays well in the press and with many of our elected officials.


A recent Washington Post article outlined some of the issues surrounding the approach of the “fiscal cliff.” While the article speaks to possible compromises (or the lack thereof) and the impacts on business and taxpayers, it is bereft of a thorough review on spending.


Consider our military spending – as President Dwight D. Eisenhower noted, we do have a “military industrial complex.” Hence, we need to be cognizant of the costs and overruns. That said, our military expenditure is only 18% of our budget! If one were to ask the general person on the street what our military cost is, it is likely the numbers people would guess are much, much higher than 18%. (The Romans spent around 50% of their budget on the military – but, of course, they were a nation-building empire)


So, where are the real expenditures? In an April, 2009 speech, President Barack Obama outlined just where the major expenditures exist.


“But let's not kid ourselves and suggest that we can solve this problem by trimming a few earmarks or cutting the budget for the National Endowment for the Arts. That's just not true. (Applause.) Along with defense and interest on the national debt, the biggest cost drivers in our budget are entitlement programs like Medicare, Medicaid, and Social Security – all of which get more and more expensive every year. So if we want to get serious about fiscal discipline, and I do, then we're going to not only have to trim waste out of our discretionary budget – which we've already begun – we will also have to get serious about entitlement reform.”


So, what constitutes an “entitlement program?” People who are retired and get a Social Security check every month have, as a general proposition, paid into that program for their entire lives. Can one declare that an entitlement? But(!), many other people get Social Security payments due to health issues and other aspects which allow such payment. Can that be considered an entitlement? Very simplistically – yes!


We must be equitable when we consider these programs. Like it or not, our elected representatives made Social Security what it is today. To that end, we have many parents and grandparents dependent upon these checks. We must continue to pay into this flawed system as we have a social contract with those who came before us.


That said, there is no reason we can’t determine an age of cut-off.


For instance, in the plan proposed Congressman Paul Ryan (R., WI), workers under 55 could have invested up to 1/3 of their SSN account into an investment. This would mean that everyone of working age would still pay into the plan, but those younger than 55 could create an alternative retirement plan – something SSN was never meant to be.


So, where does this leave us? Increase taxes? Make cuts across the board?


Consider the following. There is NO relationship between revenue (taxes) and expenditures (government spending). This is why our representatives consistently raise the debt ceiling – even during times when taxes were cut. Spending on programs is the life-blood of many of our elected representatives. They love to tout how they brought home the bacon to their constituents.


Keeping this in mind, how much benefit will we see by raising our taxes? Even President John F. Kennedy realized this and pressed for a 20% across the board tax cut. Putting more disposable income into the pockets of every American stimulates greater purchasing power which, in turn, generates more revenue for the federal government coffers. So, while some people may make the proposition that we must raise taxes on an exclusive few, and we must close what many describe as “loopholes,” in truth, that will not affect the real problem of spending.


One option is to allow the sequestration to happen. In short, this will account for “roughly $500 billion worth of automatic tax increases and nearly $100 billion of spending cuts effective January 1, according to the Tax Foundation. Yes, a 5:1 ratio of tax increases to tax cuts!


Of course, our elected representatives could have a “come to Jesus” moment and actually make wise cuts. However, a cut to Congress often means the departmental budget will only increase by 3% rather than the expected 7% – that is not a cut since the cost is still increasing by 3%.


If history is any forecast of the future, we will not see the needed cuts; we will see an increase in taxation. We may also see a trade-off in expenditures for various programs (a cut in Medicare to fund Obamacare) which will be presented as an overall and long term savings.


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