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Fiscal Responsibility: A Pipe Dream?

Posted 8/10/2010

First of all, let me lay something on the table. I am a self-proclaimed deficit hawk, and have been one since 1981 or so. I believe… correction: know that deficits matter. And with deficits of over $1 trillion dollars annually for the foreseeable future, deficits matter more than I can articulate. Until we balance our budget, we cannot have low interest rates in the context of a healthy economy. That is to say that, until we act fiscally responsible in this country, the price of an improving economy will be rising interest rates. Rising interest rates will then stifle any recovery, and we’ll wind up back into an economic ditch, from which we’ll remove ourselves only at the expense of rising interest rates again. And so on and so on.

Being that I am in the business of mortgage financing, I don’t like rising interest rates for an obvious reason- it stifles my income. (Hope the table’s big enough.) But this is only part of why I hate deficits. The other big reason, as I get older and gain some generational perspective, is that I see a burden that we are placing on future generations that is unconscionable. Our children’s children’s children, who will probably not even know our names, will be paying on our debt; which now exceeds $13 trillion, for as long as they live unless we do something about this problem now. 

This country has had a surplus economy in recent memory. During the late ‘90’s and early 2000’s, the U.S. budget was as much as $200 billion in the black on an annual basis. In all fairness, there is some dispute as to whether or not some budgetary considerations were moved off budget to make things look black when they were really red. But we couldn’t even play that shell game now if we wanted to. At $1.3 trillion dollars in the negative, it would be laughable.

How did we go from surplus to deficit? Right after becoming President, George W. Bush proposed, and got passed, the biggest tax cut in history. His belief was at the time, perhaps justifiably, that a $200 billion dollar annual surplus should be given back to the taxpayers, and the economy would grow if they spent and invested their money instead of having the government hold it and decide how to make use of it. Makes sense in the context of a huge surplus, although I think the best use of the money at the time would have been to pay down our already huge debt, which is what the US Treasury had been doing at the time. That being said, the mindset of the US citizenry at the time was that we’d have surpluses as far as the eye could see, and the American taxpayer was due a refund of sorts. Fair enough! But then the tragedy of 9/11 took place. This led the US into one, and then two, wars. By then the Bush tax cuts were in place, and there was no political will to put the tax cuts on hold. We were going to fight two wars and cut taxes at the same time, something that had never been done before. As this was all happening, the dot-com bust was simultaneously laid upon us. Not only had taxes been cut, but the stock market lost trillions in value as the US fell into a severe economic slowdown, further decreasing tax revenues. 

Then enter the mortgage debacle, which sparked a slam to the US economy not seen since the Great Depression. It caused the death of Lehman Brothers, an institution on the American economic scene since the mid 1800’s, along with other one-time stalwarts, and almost caused the demise of GM and Chrysler. (Only temporary co-ownership by the US government, and adoption of Chrysler by Italy’s Fiat, saved the two automakers.)  To keep the US from going the way of the Soviet Union, then-President Bush and then-Treasury Secretary Henry Paulson instituted an unprecedented stimulus program designed to bring the US bank from the brink of economic disaster. Then our new president, Barack Obama, along with a Democrat-controlled Congress, expanded the Bush-Paulson stimulus even further, causing many to question as to whether the US was becoming a socialist society, vis-à-vis Scandinavia. As we all know, socialist countries; even those who pretend to be socialist temporarily to get out of an economic logjam, spend vast sums of their citizens' money in order to provide for those same citizens. In the US, that spending has now outpaced its revenue to the point that our annual deficits are in excess of $1 trillion (more than twice the worst annual deficits of the G.W. Bush years) and our debt exceeds $13 trillion.

What can be done about this seemingly untenable economic problem? As is well known, President Obama has appointed a commission to figure out a solution to our deficit spending. It is headed by Erskine Bowles, a Democrat, and Alan Simpson, a Republican, both considered, like myself, deficit hawks. All together, including Bowles and Simpson, there are 18 panel members, chosen by Obama, Senate Majority Leader Harry Reid, Senate Minority Leader Mitch McConnell, House of Representatives Speaker Nancy Pelosi and House Minority Leader John Boehner.

I don’t have inside information, but let me tell you in advance what I think the commission is going to recommend. I believe they’re going to say that it would be best if the US gradually switch its taxation method from taxing income to taxing consumption, as in a value-added tax or national sales tax. I have made this recommendation in a previous column and I think it’s the best, and therefore the most obvious, solution to this debacle. By taxing consumption we could eliminate tax avoidance by those who participate in the underground economy; i.e., those who work for cash. This is an illegal, yet common, practice in many trades. Those of us who pay taxes as we should are paying the share of those who avoid paying taxes, much to our detriment and the detriment of the government. The other advantage of this type of taxation is that the savings of the working person will increase, allowing them to invest in government securities, diminishing the need for he US to rely on foreign investors to feed our deficit. The long-term danger of having to kowtow to foreign governments to lend us money lest we go broke is a dangerous precedent we’ve already set! The consumption tax can be tweaked as needed to avoid budget deficits in the long run. In my opinion, the consumption tax should be phased in over a period of 5 to 10 years so those in the profession of tax preparation can switch gears without leaving their differentials lying in the middle of the road. (I love car analogies.) And as I’ve espoused before, this consumption tax should replace the income tax- not merely be added to it. And I’ll be the first to admit that since this would be such a sea change in the way the US collects it revenues, that politically, it might be poison ivy. Hopefully, the Simpson-Bowles commission will put on a little Calamine and move forward!