Wednesday, July 27, 2011

You Call That Compromise?

Imagine a couple sitting at the kitchen table and discussing their finances:

Husband: “Our savings account will run dry by Thanksgiving, and we’ve maxed out all our credit cards. I haven’t done a budget in two years, but I’m going to try and get a few more credit cards so we can keep spending more than we earn.”

Wife: “Another credit card might help us in the short term, but can we afford it? Won’t it ultimately create a bigger problem in the future?”

Husband: “Oh, no. Not at all. You see, I’ve projected out our future earnings and expenditures, and assuming we get a 10% raise every year, interest rates stay at these historically low levels forever, and our house value reverts back to it’s 2007 levels, we should have no problem paying off our debt in 27.4 years.”

Wife: “Really? Shouldn’t we just adjust our spending to make ends meet today?”

Husband: “Why would we do that? Don’t you like our weekly hot rock massages and Friday night dinners at Nobu? ”

Wife: “I do, but shouldn’t we actually pay down our debt and save some of our income so that we don’t have to rely upon our kids to fund our retirements.”

Husband: “OK, fine. I’ll be the adult in the room and suggest a compromise. How about you let me get the new credit cards, but in return, starting in 2018, we’ll only get one massage a month, and we’ll go to Ruth Chris Steakhouse instead of Nobu on Friday’s because it’s about 10% cheaper. With those changes, my calculations show that we’ll save $100,000 over the next 12 years, and it will only take us 21.6 years to pay off our debt. How’s THAT for compromise!”

Wife: “How about we avoid the new credit cards, cut the massages and go to Chipotle on Fridays. That will save us $300,000 over the next 10 years.”

Husband: “I couldn't possibly do that to our poor masseuse.  In the name of compromise, here is my final offer - you let me get the new credit cards, we’ll only get one massage per quarter, and you go get a better job and make more money. After all, our debt is not just a spending problem, it’s also a revenue problem.”

Wife: “You're a moron...”

Doesn’t this sound like the buffoonery in Washington over the last few months regarding the budget and debt ceiling debates? President Obama and the Democrats (i.e. the husband) are claiming to be the responsible adults in the conversation, despite having failed to pass a budget in over 2 years, even when they controlled Congress and the White House.  Their preferred solution is to go out and get another credit card and figure out the rest later. And by later, I mean after the 2012 elections, because they know we’re in a pile of trouble and without a major rebound in the economy, some seriously hard and unpopular decisions will be required to avoid fiscal disaster.  Despite their strong rhetoric, they know they can't just "tax-the-rich" their way out of the problem as there's just not enough revenue there to grab to make a significant impact.

The Republicans have used the debt ceiling talks to take a stand and demand serious and immediate budget cuts (not as serious nor as immediate as we would like) in exchange for allowing a new credit card.  The Democrats feigned compromise and produced illusory cuts over the next 10 years. For example, the Harry Reid plan would reduce the deficit by $1.8 trillion over 10 years (per CBO, and mainly by pulling out of Iraq and Afghanistan, which is optimistic at best).  Both parties are guilty of scoring budget cuts off of projected spending over a 10 year period to make them look more impressive.  The 2010 single year deficit was $1.3 trillion, and 2011’s is expected to be even higher, so we're not sure how any number below $5 trillion over 10 years realistically addresses the problem.

When the Republicans called their bluff by refusing to raise the debt ceiling without more robust budget cuts (still not enough for us) and gimmicky future votes (e.g. a balanced budget amendment that has 0% chance of passing either the House or the Senate), Obama went on national television to again try and place the blame for the current deficit on Republicans while lecturing them from his ivory tower on the value of compromise.  As if that wasn't enough, he threw a grenade into the negotiations by adding tax increases into the “compromise” at the last minute (no plan in Congress included tax increases). 

To his credit, President Obama has come out and proposed reasonable cuts to the budget, even putting previously untouchable entitlement programs on the table, but his good deeds are often overshadowed by his tendency to blame others for our problems (both Bush and his policies, or the "rich" and their tax cuts) - a trait that seems to be getting worse as his problems get bigger.  Americans want a fix, they don’t want election year politicking to result in kicking the can down the road...again. Unfortunately, our leaders (on both sides of the aisle) are more concerned about their own jobs than America’s fiscal soundness.

Since we loathe those who only complain about problems without suggesting a solution, here’s the’s "compromise" that we're sure would equally anger both parties and would immediately disqualify us from public office, so we must be on the right track. 

The US currently collects 15% of GDP in taxes, but spends 24% of GDP - why not meet half way and gradually move taxes up to 18% of GDP and spending down to 20% of GDP?  Here's how we'd do it:
  • Any debt limit increase must be offset by at least twice that amount in real and irrevocable spending cuts. We'd accept one for one cuts if it was required to avert a default, but when measuring these cuts, they must be compared to 2010 spending levels, not future budgeted levels of spending. No budget gimmicks, no soft cuts that will supposedly happen in 8 years time - real savings. 
  • Tax increases, while not preferred, would be acceptable if they are felt by everyone.  These increases can be progressive (i.e. larger % increases for higher incomes), but it's important that all American’s feel the effects of government spending. We'd prefer a major simplification of the tax code – three income levels (starting at $0), three rates (starting at 5%), and a tax return that fits on a postcard.  All current deductions/credits/allowances that only certain people can take advantage of would be gradually phased out of the tax code. We can’t have 50% of the country paying zero or negative income taxes and then voting for bigger government, while 2% of the country funds this unlimited expansion. If you want big government, you have to help pay for it, and feel the impact of higher taxes on your paycheck and on the economy (see Europe). Additionally, any tax increases must be offset by at least two times the amount raised with real and irrevocable spending cuts.
  • Any actual cash surpluses (we can dream right?) generated by the above policies would be split evenly between tax refunds to all taxpayers and a trust fund for future fiscal emergencies.  Any release of those funds would require a 3/4 majority vote from Congress and Presidential approval. 
  • All government programs are eligible for cuts, especially Social Security, Medicaid/Medicare, Obamacare and defense spending.
  • The government must produce a balance sheet and income statement that is compliant with the same accounting standards as listed corporations, and audited as such. This does not need to replace the current government accounting rules, but it should be made available as supplemental information for taxpayers to see a more realistic view of government’s finances, it’s liabilities in particular. 
We have many more ideas, but the above would be a great start to the process of digging ourselves out of our financial hole.


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