Rate Watch #763 It Is Time to Get Serious about Fiscal Policy.

February 18, 2011
by Dick Lepre
[email protected]
www.loanmine.com

Getting Serious about the Fiscal Situation

Since an AI (artificial intelligence) is not yet available to produce fiscal and monetary policy we humans should be taking a serious look at this.

The President sent his budget plan to Congress this week. This plan reads as if no one who put it together had ever read the report of the National Commission on Fiscal Responsibility and Reform. That commission proposed a broad, workable, tough plan to put the U.S. on the road to fiscal sustainability. Politicians of both parties are ignoring that plan because the plan puts fiscal sustainability above politics. Politicians prefer getting reelected to the economic health of the nation. They put politics above fiscal sustainability. Shortly after becoming Speaker, Rep. John Boehner, was asked to name a single program he'd eliminate. "Don't think I have one off the top of my head," he said. If there is any hope in Congress it may come from a combination on Freshman Republicans really dedicated to spending less and one of those coalitions in the Senate. I do not pay enough attention to politics to have anything more than that to offer.

The President's suggested budget is simply building on the legacy of insane spending created by his predecessor. Profligacy has bipartisan support. This budget and the Republican response (such as it has been) is insane. The solution is to have the Federal government spend a lot less. Let me not be entirely vague but suggest where these cuts can be: energy subsidies, farm subsidies, much lower defense spending, an end to the Department of Education (education was better when the Feds had no involvement), an end to HUD - the single most mismanaged entity since its creation, an end to Federal involvement with highways, real privatization of Air Traffic Control, Amtrak and the USPS, and an end to talk about bullet trains. The U.S, is not like Japan (Tokyo-Osaka Shinkansen ) and France (Paris-Lyon TGV) which are the only 2 places bullet trains have operated without subsidies. The only part of the U.S. which makes any sense for high speed rail is between New York and D.C. or Boston-D.C. We folks in California are leading the way down this insane path. In November 2008, California voters agreed that the state should sell nearly $10 billion worth of bonds to start constructing a 220-mile-per-hour high-speed rail line from San Francisco to Los Angeles. The state's estimated cost for the entire system jumped from $25 billion in 2000 to $45 billion by 2008. The state already has a massive budget shortfall. China has the ability to build high-speed trains. Let them build high speed rail in California with their own money and run it as a business.

There are two places to see the basis for a real solution to fiscal policy. The first is the report from the fiscal commission. The second is the Cato Institute's work in progress at http://www.downsizinggovernment.org/

The horrifying thing is that all the cuts suggested do no even start to address the massive underfundings of Social Security, Medicare and Medicaid. It is imperative the either the taxes for these three be increased or the benefits reduced (or both.) There is no alternative. Also, funds which go into these trust funds have to stop getting spent by lending them to Treasury to cover deficits. If anyone other than the government did this they would be arrested for running Ponzi schemes. Medicare is built of a fallacy. The money in the trust funds is already spent. It exists only in the form of promises from the Treasury Department to replenish it in the future. Young people are going to have to pay for the medical care of old people. By the year 2030 the number of elderly people will grow by 75% while the number of working-age people will increase by only 11%. Do you see a problem here? Cutting Medicare spending is a fiscal necessity. Simply increasing taxes to make up the difference will seriously damage the tax base and the economy.

Irresponsible government spending will lead to disaster. One underlying problem is that until voters demand fiscal responsibility we will continue to have politicians defer the problem for the sake of getting elected/reelected. There is no political split here. Neither party has displayed an iota of fiscal responsibility.

The Congressional Budget Office warns that, without drastic action, the federal government will consume 43 percent of GDP by 2050. Toss in state and local spending, and government at all levels will take roughly 60 cents out every dollar produced in this country. State governments are going to have to face fiscal reality in the next couple of years. What happened this week in Wisconsin is just the start.

Will large reductions in government spending hurt GDP and jobs in the short-term? Probably, but I see no alternative. We need to get serious about the future. If taxes would really consume 60% of GDP in 2050 it is not too soon to start acting. Making the case that we need massive deficits to create jobs is a fool's task. It 1) defers the problem and 2) increases the size of the problem (the money spent on debt service) and the difficulty of overcoming it.

For me what is truly insane is the idea that >$1 trillion deficits for several years will somehow work out to be advantageous.

 

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Dick Lepre
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