Suze Orman- a personal finance guru for whom I have tremendous respect- says that much of our personal finance troubles come from our willing belief in lies, and that we can only free ourselves from these problems when we start to acknowledge the truth about our money. It is high time that we as Americans, and as Republicans, stop lying to ourselves about the single greatest economic threat to America. It is high time that we faced the truth about the nation’s debt, and our party’s role in creating it. So here are some facts:
When Ronald Reagan took office, the National Debt was $934 billion dollars. That was about 30% of GDP.
When George W. Bush took office, the Debt was $5.7 trillion. That was about 60% of GDP (that figure actually dropped in the Clinton years).
Currently, the debt is fast approaching $11 trillion, close to 70% of GDP. INTEREST on the National Debt in FY08 amounted to $451 billion, around 20% of government expenditures, and $1500 for every man, woman, and child in America.
The deficit for just the first four months of FY09 is $569 billion. Obama’s “stimulus” hasn’t even begun.
Obama has assured us that we will have trillion dollar deficits for years to come. That means that the next Republican President- even if she wins in 2012- will inherit a cumulative debt around $15 trillion. Considering that the economy is currently shrinking, and that the CBO projects that Obama’s “stimulus” will drag the economy in a few years, that means the next Republican President could well inherit a debt that is larger than our entire annual economic output.
The economic boom of the last 25 years was largely artificial. While the federal government spent around $10 trillion we didn’t pay for, the private sector followed suit. According to the Federal Reserve, Americans held around $2.5 trillion in consumer debt at the end of 2008. That’s about $8500 per capita, and THIS DOES NOT INCLUDE MORTGAGES. Estimates vary, but leverage and falling home values probably have 20-30% of homeowners owing more on their homes than they are worth.
While we are not Argentina, it is worth noting that Argentina had a National debt less than 60% of GDP when they defaulted in the 90s. They still haven’t recovered.
It seems clear to me, at least, that we are on a downward spiral that is going to end very badly. China is already closing off the tap of credit, as they are funding their own $600 billion stimulus. I cannot see how the not-too-distant future does not bring high inflation and high interest rates. And all of these problems don’t even begin to address the looming insolvency of Social Security and Medicare.
And so I am proposing the only heresy graver than questioning Israeli policy in the GOP…
It is high time that we acknowledge that we have both a moral and an economic imperative to raise taxes as soon as the economy stabilizes. It is time to forget everything you learned on the radio about economics. We have a moral obligation to pay our bills.
Now I can already hear the objections. “We are already overtaxed!” That may be true, but we still aren’t paying for what we are spending. And for historical perspective, the top marginal rate in Reagan’s 6th year of office was 50%, and that rate kicked in at a lower income than Carter’s top rate (adjusted for inflation). So for most of the “miraculous 80s” the top rate was 50%. In the roaring 90s, the top rate was 40%. Currently, it stand at 35%. Now I know you don’t raise taxes in a recession, but raising them when the economy stabilizes will not be the end of civilization.
Objection #2 brings in the full force of Talk Show Economics. “Cutting taxes INCREASES revenue, and raises taxes DECREASES revenue.” This is only half true, and only to an extent. Generally, lower taxes stimulate growth, so it is fair to say that cutting taxes raises more revenue than would have been raised at the lower rate had the economy not grown. But it is not necessarily true that tax cuts raise more revenue than would have been raised had the rate not been cut. It depends on what part of the Laffer Curve you are on. And this is only common sense. If tax cuts ALWAYS brought in more tax revenue, then let’s cut taxes to 0.0000000000001% and we’ll have the debt paid off in no time!
We also cannot simply cut domestic spending and get out of this. The time for that is WAY past. Simply cutting “fraud, waste, and abuse” will hardly put a dent in it, despite popular fantasies about government bloat. If you really want to cut spending, make people pay for what the government is spending. If you want to shrink the government, make the voters actually pay for their government. Stop the free ride.
So what does this mean for 2012? I don’t expect any Republican to have the guts to propose a tax increase, no matter how high the debt. So I would look to a candidate who showed real leadership when faced with a deficit. Any knucklehead can cut taxes and run up the debt. That’s easy. Shoot, Bush could do it. I want to see a candidate who made tough choices that actually closed the gap, whether in the House, Senate, or Governor’s mansion. I want someone who was willing to do what needed to be done.
Folks, it’s not 1981 any more, and we can’t promote the same policies that made sense in 1981. We can no longer afford the Empire. We cannot afford all of the good things that government can do for people, and we cannot afford tax rates that do not pay for what we spend. It is time to cut spending, and raise taxes. The 25 year bubble has popped. We can’t fake it any longer, and the longer we try the worse it is going to be. It is time we stopped lying to ourselves about money. Let the Era of Austerity begin.
1. jrcutler Says:
February 13th, 2009 at 11:04 am
Very true, this problem has gotten out of hand, and no one is prepared better to continue what has been done than Obama.
This is a terrible time to have a Democrat in the whitehouse. By the way, who do we answer to anyways when it comes to “our national debt” maybe if everyone knew the answer to that question, maybe out debt wouldn’t be so out of control. If we owe our debt to ourselves, I don’t see why spending will ever slow down, do you?
6. Matt C Says:
February 13th, 2009 at 11:23 am
Kind of yes, kind of no.
I agree that we as the GOP must take full responsibility for our hand in creating the current deficits and debt. But just raising taxes will NEVER solve the problem because no matter how much extra money the government takes in, it will spend it on something else and create even larger deficits. Hundreds of years of history, with only a few that had balanced budgets, bear this out.
We absolutely must decrease domestic spending – and here’s the rub: we’re not going to be able to make a dent just by talking about discretionary spending. We need to take on welfare – Medicare, Medicaid, Social Security, Food Stamps, etc. Those social welfare programs eat up well over 50% of our federal budget every year, leaving us little to work with and showing just how ridiculous focusing on “pork” really is.
Here’s my plan, and I’ve been developing it for quite some time now:
• Institute a 1% federal sales tax applicable to every good and service purchased. Include in the legislation that the total revenue from this tax must go directly to paying down our national debt, and that when the national debt hits zero, the tax is automatically eliminated with no opportunity to reinstitute it unless deficit spending occurs – and only then with a supermajority vote.
• Pass a balanced budget amendment requiring every budget submitted to Congress to be balanced except in the case of national emergencies, such as war or Katrina-like national disasters.
• Completely and totally privatize Social Security. The idea that the federal government is involved in a retirement program is philosophically ludicrous, and even moreso when you see that the average rate of return on SS investments is less than 2%. Sell it to the American public as a X years-long phase out plan and that they are getting more of their money on every paycheck to put in a retirement account of their choice – more money in the hands of more people, giving them more freedom and more choice! With the right salesman (or woman) this could be a winner.
Just eliminating the national debt and Social Security frees up over 33% of our total federal budget, and it heads off the impending fiscal doom of social security going broke and costing us trillions upon trillions of more money. The next step then would be to massively reform the rest of the welfare programs like Medicare and Medicaid, which currently take up another 25% or so of our federal budget and are threatening to, just by themselves, increase to the point where spending just on those programs will be larger than our entire current federal budget. That is the part of the plan I’m still working on…
7. Matt C Says:
February 13th, 2009 at 11:27 am
Oh, I forgot a couple other things, too – privatize the Post Office, which loses money every year they’re in existence. There’s probably a slew of entrepreneurs that would jump at the chance to open a mail delivery company, and I’ll bet you anything they’ll do it more cost effectively than government workers.
Also, privatizing Social Security frees up billions of dollars (if not more) of business money, since companies will not be paying half of every single employee’s SS taxes any longer — allowing them to invest in technology, more jobs, etc. It could lead to a huge economic boom.
8. Kavon W. Nikrad Says:
February 13th, 2009 at 11:31 am
I agree that we as the GOP must take full responsibility for our hand in creating the current deficits and debt. But just raising taxes will NEVER solve the problem because no matter how much extra money the government takes in, it will spend it on something else and create even larger deficits.
Amen a thousand times Matt C.
Tax cuts are not the problem. The three most infamous supply-side tax cuts: the Kennedy Tax cuts, the Reagan Tax Cuts, and the Bush Tax Cuts, all resulted in INCREASED revenue. The problem is that Government has never cut SPENDING except for a few year in Reagan’s first term and for a few years in the 1990’s.
The idea that placing additional an tax burden on job creators and American families will result in more prosperity is ludicrous, quite frankly.
This is where “The Old Man” was right. Many ridiculed his constant harping on Earmarks and Pork Barrel spending during the campaign. But let’s give credit where it is due, he was right—it is the spending that is killing us.
9. MWS Says:
February 13th, 2009 at 11:44 am
I agree with most of #6, and I hope I emphasized that we need to cut spending as well as raise taxes. I like your idea of a national sales tax to pay off the debt.
As for a balanced budget amendment, I’m all in favor, but it has to have teeth, or te Congress will ALWAYS declare some state of emergency. Currently Congress has a “Paygo system, where spending increases and tax cuts are supposed to be offset elsewhere. They simply get around this by tagging regular spending bills as “supplemental” or “emergency.”
10. MWS Says:
February 13th, 2009 at 11:48 am
“Tax cuts are not the problem. The three most infamous supply-side tax cuts”
I agree they are not the problem, in and of themselves, but when we are so far in hoc, they become part of the problem.
(KN) “The idea that placing additional an tax burden on job creators and American families will result in more prosperity is ludicrous, quite frankly.”
To clarify, the purpose of tax increases would not be to create prosperity, but to avoid disaster from the mountain of debt. That’s why I tagged it the “Era of Austerity.” It’s not so much about artificially creating boom times anymore through buying what we cannot afford, but heading off catastrophe by paying for what we already bought.
11. fran Says:
February 13th, 2009 at 11:56 am
THE EMPHASIS NEEDS TO BE ON SPENDING CUTS!!!!!!
It will make a huge difference.
I grew up in Alberta when they did it. People whine and moaned but eventually the majority realized it was for the best:
It pissed me off every time during the debate when Obama would say we need a scalpel instead of an axe. We do need an axe. He needs to be well aware of these numbers!
12. MWS Says:
February 13th, 2009 at 12:02 pm
“That’s nothing, my mortgage alone is 200% of my personal GDP. I’d like to be in the 70% range like the government.”
The difference is your mortgage is an amortizing loan that is structured for payoff in a set number of years, with the qualification that you have the income those payments.
The government is paying interest only, and STILL can’t make the payments.
13. MPC Says:
February 13th, 2009 at 12:10 pm
#1, the debt is owed to foreign investors, generally the Chinese and Japanese. Our government can spend with abandon because, until now at least, China has been willing to foot the bill, having confidence in future payout.
It’s a death warrant to let the debt continue to balloon as it is doing, and if tax hikes are really the only way we can immediately stem that, it’s a step we have to take. As the deficit runs up, that in itself will halt investment and growth. At worst, we get this:
Which is what happens when foreign countries start to smell trouble and unease and stop loaning us money in effect to pay for our debts. Obviously the dollar is considerably studier than the Argentine peso was, but with the comparative strength of alternate foreign currencies, particularly the Euro, this is not impossible. It doesn’t matter how we cut it, but it needs to happen soon. Taxes must go up, and those programs have got to start getting trimmed.
With respect to that, I really like your ideas MattC. The problem is political feasibility. I’m afraid that short-sighted voters will not have the will to do anything about it until it’s too late.
14. MWS Says:
February 13th, 2009 at 12:22 pm
The dollar could be headed the way of the Peso.
Consider that our current accounts deficit (trade deficit plus budget deficit) had been running about $1 trillion a year. This year, it’ll probably be around $2.6 trillion (with the “stimulus”). That means a net outflow of $2.6 trillion this year in capital.
The world is awash in dollars. If China didn’t artifically peg its currency to the dollar, the dollar would immediately weaken. And where are the trillions coming from that the Fed is handing out? Presumably, the printing presses. I don’t see how we can avoid a massive weakening of the dollar, coupled with sky high inflation and interest rates.
Y’all may want to think about locking in 30 year mortgages, btw. I wouldn’t be a bit surprised if mortgage rates are in double digits in 2-3 years.
15. John Mark Says:
February 13th, 2009 at 1:03 pm
I agree with MWS, that we seriously need to consider tax-hikes. Republicans have married the idea that tax-cuts are always good, the logical conclusion to that is that it would be good to have no taxes, and therefore no government. Therefore, we’re stuck advocating the idea that’s logical conclusion is anarchy. I think this hurts us politically as people look at Republicans and we’re not expressing a real idea of what think the ideal rate for taxes, or spending is, instead we make it seem that its ideal not to have taxes and spending; meanwhile the Democrats come across as willing take a critical look at what taxes and spending should be. I don’t think the Democrats have come to the right conclusion, but Republicans need to anaylize things beyond less spending and less tax-cuts.
16. Falz Says:
February 13th, 2009 at 1:19 pm
I stop reading at this point: “That means that the next Republican President- even if she wins in 2012-”.
17. Michael Lawrence Says:
February 13th, 2009 at 1:28 pm
Good piece MWS. I’m inclined to agree. The national debt is far and away the issue that I am most concerned about as a voter. I wouldn’t object to a tax increase to begin actually paying down principal on it. Though I’d want the tax increase to be across the board so that the 50% who don’t pay taxes would have to start, even if was only a modest amount. It’s ridiculous that half the people in this country pay no taxes and enjoy all the benefits.
18. MWS Says:
February 13th, 2009 at 1:32 pm
John Mark and Michael,
Good points, both.
19. John Mark Says:
February 13th, 2009 at 1:35 pm
17, Well there’s some people who can’t make money and who it doesn’t make sense to tax. Also, unfortunately we’ve got to consider the implications of being the party who’s calling for tax-hikes one the lower income people. I think a big reason for Obama’s sucess, was that he was able to pound home the idea that his tax plan benefited 95% of Americans more than McCain’s.
20. MWS Says:
February 13th, 2009 at 1:36 pm
Honestly, I’m surprised I haven’t gotten a more hostile reaction than I have. Some have rightly pointed out that spending has to be cut, that tax increases must be accompanied by spending cuts, that tax increases should go to pay down the debt, and should be shared by all.
Hopefully this is representative of the party as a whole. If voters get serious about the debt, their leaders will follow.
21. John Mark Says:
February 13th, 2009 at 1:40 pm
20, Don’t get your hopes up. Post this on RedState and I think you’ll get your hostile reaction.
22. MWS Says:
February 13th, 2009 at 1:40 pm
I agree that folks who can barely take care of themselves shouldn’t be paying taxes. But I know that half the country is not destitute. And when half the country is not invested in how taxes are spent, that creates a problem in a democracy. You are right that there are huge political problems with raising taxes on the middle and working class. Clinton learned from Mondale’s mistake, and ever since the Democrats will only raise taxes on “the rich.”
That’s one reason Matt C’s national sales tax makes so much sense.
23. MWS Says:
February 13th, 2009 at 1:43 pm
Don’t let your misogyny keep you from the discussion!
24. John Mark Says:
February 13th, 2009 at 1:51 pm
I have heard that the 11 trillion dollar debt figure is not the useful figure to use as it includes debt owed by one part of the government to the other. Someone told me the public debt which is what we actually owe is more like 6.3 Billion dollars. That’s still huge though.
25. MWS Says:
February 13th, 2009 at 2:11 pm
The 6 trillion figure pretends that the money borrowed from the Social Security Trust fund is still there.
26. SteveS Says:
February 13th, 2009 at 2:13 pm
Good post MWS, and I too am surprised that the reaction wasn’t more hostile. I think the reason is that what you wrote was simply too well argued for anyone to strongly disagree with.
I think a good place to start would be an increase in the gas tax. But you can’t get elected calling for that.
27. sdpride Says:
February 13th, 2009 at 2:23 pm
“If it seems that raising taxes is the only way to reduce the national debt, at least when so much spending is mandated by “entitlement” programs, that only shows the need for an economic dictionary. “Taxes” is one of those treacherous words with more than one meaning, enabling politicians to shift back and forth between meanings when they talk.
Unless spending is reduced, then of course more tax revenues are necessary in order to reduce a deficit or bring down a debt. But tax revenues and tax rates are two different things, even though the same word — “taxes” — is used to refer to both.”
“If Congress can just reduce the rate of increase in spending, rising tax revenues can reduce the deficit and eventually eliminate it.”
“Promoting the growth of the national economy would be one of the fastest and best ways of reducing the national debt.”
28. Swint Says:
February 13th, 2009 at 2:31 pm
This was one of the better posts I have seen on here lately. Not that I agree 100% with the proposals, but it was innovative and smart. I agree that this is a monstrous problem, but I am not convinced that significant tax increases are the solution. I do, however, like the 1% national sales tax with all of the caveats that Matt mentioned and getting rid of social security.
The problem, as has been stated, is the political viability. Implementing the necessary changes would be political suicide for the sitting President and maybe the party that institutes it. The only way I ever think it would be possible, barring a complete collapse of our country is a 2nd term president with an veep that is not running in the next election. Basically, what we had in Bush. This president will also have to have a lot of cojones as well. Even then I doubt congress would ever agree to it.
MWS and Kavon, do you mind if I repost this and some of the comments on both of my blogs at dryflypolitics.com and swint.instablogs.com?
29. Evil Conservative Says:
February 13th, 2009 at 2:39 pm
Congrats on the post. A lot of good insights.
One thing though that hopefully eases a little concern in terms of time frame to fix this:
“China is already closing off the tap of credit, as they are funding their own $600 billion stimulus. ”
That’s true, but NYU professor Roubini, who is a notoriously cynical economist right now, is saying that China is so tightly linked to our success (as our other nations) that to close off the tap would be disasterous for them.
Now that’s what he believes. I agree, but at some point inside the next 50-100 years they will close it off and become the world’s #1 superpower.
Britain choked on the gluttony of empire and imperial conquest. We’re going out with a whimper on the sloth of entitlements.
30. Tom in SoCal Says:
February 13th, 2009 at 2:44 pm
A national sales tax is the last thing we need. It may sound like a good idea, but it would lead us to the same situation as Europe. A high VAT (sales tax) and a high personal income tax. Do you think a 1% national sales tax would stay at 1%? Of course not, it would be increased to pay for … (fill in the blank).
In fact look at Europe closely, because that is where the Dems want to lead us. High taxes, the government in charge of many many things and very little productive growth.
31. MWS Says:
February 13th, 2009 at 2:53 pm
“MWS and Kavon, do you mind if I repost this and some of the comments on both of my blogs”
Fine with me.
32. MWS Says:
February 13th, 2009 at 2:54 pm
Tom in SoCal,
“In fact look at Europe closely, because that is where the Dems want to lead us.”
That’s not what I’m proposing. I’m proposing we pay off the debt, and that will take higher taxes as well as reduced spending.
33. Tom in SoCal Says:
February 13th, 2009 at 4:07 pm
That might be what you are proposing, but in reality it would not happen.
34. MarkG Says:
February 13th, 2009 at 4:40 pm
I agree with Tom’s skepticism of the national sales tax: It would rise over time, especially because another type of federal tax would simply make it easier for politicians to play three-card monty stunts with revenue streams.
Also, although consumption taxes, flat taxes, and the Fair Tax all have their appeal, I can say from living under the 16 percent VAT regime in Germany, a lot of economic activity occurs “off the books.” Dodging taxes for services is rampant in the informal economy due to the punitive VAT rate (now 20 percent). But if it weren’t for this gray market, many would not even be able to afford to hire the very services they provide for others. I knew many laborers such as plumbers and roofers who did much of their work after hours on a cash basis for friends of friends, and who said that they couldn’t actually afford the rates they officially have to charge thanks to the VAT and various strangulatory regulations.
As to Matt’s (MWS’s) general point: Yes, tax hikes do deserve sincere discussion, but I’d frame it as an either-or proposition. Either we raise taxes or cut programs. Tax hikes should be addressed in the context of general tax code reform — tax rebalancing rather than higher taxes.
But I doubt many would take tax-cut bidding wars like we had in the last primary all to seriously.
35. ogrepete Says:
February 13th, 2009 at 8:40 pm
Nice post, MWS.
I’ve been worrying about this for quite a while. Our country is running toward bankruptcy faster and faster.
36. Doug Forrester Says:
February 14th, 2009 at 12:13 am
#34, I’ve got to almost entirely agree with MarkG here. Our whole set of taxes need to be rebalanced with an eye towards increasing revenue for debt repayment.