By Numerian

"The incentives in Washington are all biased toward posturing and blathering about the deficit, but inaction when it comes time to seriously reduce it."

Erskin Bowles: former Chief of Staff to President Clinton and prior to that a North Carolina businessman. Alan Simpson: at age 79, fourteen years senior to Erskin Bowles, and a former Republican senator from Wyoming. Alice Rivlin: also age 79, and Clinton’s former budget director. Peter Domenici: age 79, and a former Republican senator from New Mexico. These four people are the principal players in a set of competing proposals to do something about the US federal debt. They all have what Washington calls “gravitas”, which is a certain respectability that comes with age and experience. They also display that precious quality of “bipartisanship” which makes them supposedly immune from political bias. That’s why you get these Republican-Democrat partnerships: Simpson-Bowles, and Domenici-Rivlin. You would trust these people, wouldn’t you, to give you the cold, hard truth that politicians cannot deliver?

You shouldn’t. These people are good at delivering cold, hard truths in terms of areas of the budget to cut, and new sources of revenue to tap, which together over the long run will bring deficits down to zero and reduce the interest burden of the national debt to something manageable. But they won’t give you a vision of America under these new fiscal conditions. Reading through their proposals, we are left to imagine what America would be like in such a permanent state of austerity.

Bipartisanship to the Rescue

The Simpson-Bowles plan includes $100 billion in cuts in the Defense Department, a three year freeze on the salaries of federal employees, cuts in Medicare reimbursements to doctors, an extension of the age of retirement eligibility for Social Security, increased Social Security taxes, and an elimination of the tax deduction for home ownership. Under this plan, veterans, retired people, and medical practitioners are going to take the brunt of the deficit-reduction burden. Simpson-Bowles are completely silent on whether to end the Bush tax cuts for the super-wealthy, or, if you want to wield the scalpel more broadly, to that 1% of the population that earns a quarter of all annual earnings in the US.

The Domenici-Rivlin plan features a value added tax of 6.5% on consumer purchases, along with a reduction to two tax brackets of 15% and 27%. This is a favorite right-wing proposal, or at least almost as favored as the flat tax. To jump start the economy, there would be an initial one year tax holiday for all workers. The loss of $1 trillion in annual income tax in this day and age of trillion dollar Federal Reserve bailouts for banks doesn’t seem to shock anyone anymore, and as with all such tax give-aways, the right wing orthodoxy promises that economic growth will generate much higher tax returns down the road that would pay for the holiday spree. There are some heavy cutbacks in Medicare and Social Security spending under the plan, and after the tax holiday, federal discretionary spending would be frozen starting in 2012. As with the Simpson-Bowles plan, the über-wealthy are not expected to suffer the indignity of a phase-out of the Bush tax cuts that transferred so much of the nation’s wealth to a few hundred thousand people.

Naturally, the reaction of various vested interests to either plan has been ferociously negative. Liberals find both plans unacceptable because the burden of deficit reduction is placed largely upon the poor and lower middle class, with little pain being shared by corporations, the military, or the wealthy. Conservatives are horrified at even a hint that taxes need to be raised. Vested interests – such as unions, teachers, veterans, small business owners, retired people – all have found something in these plans that prevents them from withholding support. There are no natural constituencies of support for either of these proposals, and this has to do with the fact that deficit reduction is inevitably going to violate sacred promises made by politicians in the past.

Government workers were promised if they eschewed the riches that would come with private sector salaries and bonuses, they would receive generous pensions. Career military members were promised retirement at age 50 with their own generous pension, and the right to enter a second career, often as a consultant to the military or lobbyist for defense contractors. Baby Boomers were promised by no less a personage than Alan Greenspan that if they accepted a hefty boost in their FICA payroll taxes over their working life, Social Security benefits would be guaranteed for as long as they lived. Seniors were promised subsidized medical care even if the cost of these services was escalating every year by double digit percentages. Workers who salted away some of their earnings in their 401k were promised an 8% growth rate per annum if they invested in equities. Homeowners were promised a lucrative tax credit on mortgage interest just for owning a home, which they were assured would only increase in value year by year.

Each of these promises has built in expectations with some segment of the voting population. Doctors who specialize in geriatric care could not survive without Medicare rebates, just as the real estate industry would have to shrink in size if the interest deduction was disallowed. Many Tea Party supporters would not be able to attend their rallies without their motorized scooters, provided courtesy of the federal government. Every Congressional district in this country is dependent on military largesse in the form of bases, national guard armories, production plants, recruiting offices, and supply depots. Any Congressional vote on spending reductions or tax increases is always determined by the lobbying and voting strength of those people who are being asked to accept some financial pain.

Political Inaction as an Art Form

As a consequence, nothing really gets done. In a lament about the sadly dysfunctional political environment in Washington, two Bloomberg reporters – Peter Coy and Heidi Przybyla – wrote an opinion piece last week titled Death and Taxes – Will Washington Ever Grow Up?. The authors do a good job of laying out the competing ideas for deficit reduction, but they don’t completely capture the dysfunctionality at work here. Defense Secretary Robert Gates is quoted as describing the Simpson-Bowles proposal as “math, not strategy”, but the authors omit the more telling statement from Gates that “The truth of the matter is when it comes to the deficit, the Department of Defense is not the problem.”

No one knows the exact size of annual military expenditures, but the published numbers show that Defense is budgeted to spend $664 billion this fiscal year, not including around $58 billion paid out to veterans as pensions, unknown amounts funneled through the CIA, the US nuclear weapons program, and anywhere from $100 billion to $400 billion in estimated interest expense based on borrowing to fund the Middle East wars (the US hasn’t paid for any of its wars with current taxes since the 1950s).

Secretary Gates has volunteered to produce $100 billion in expense reductions in his budget, but he refuses to give up these savings to the US Treasury to reduce the deficit: he wants the money to be ploughed back into other Defense programs. This is American exceptionalism applied to the micro level; American military initiatives are such an exceptional force for good in the world that the Pentagon automatically assumes its deficit spending ways are exempt from change, and that the country can continue to borrow to pay for the 9% annual growth rate in Department of Defense outlays since 2000.

If the sober, ultra-serious people who run the Defense establishment aren’t going to “grow up”, what hope is there that politicians are going to do anything about deficit spending? If you want to get elected in America you need a Ronald Reagan sunny disposition, assuring Americans that they are an exceptional people entitled to an exceptionally promising future. Everyone knows what happened to Jimmy Carter, the last national political figure to tell the American people some cold, hard truths they didn’t really want to hear. Carter is still a source of ridicule for Republican pundits.

Besides, there is a legitimate school of thought that says there is not only nothing wrong with the level of deficit spending at the moment – in fact more is needed to combat the economic depression. Paul Krugman leads this group of Keynesian economists, and he gets a lot of support from liberal voters who suspect that all this deficit concern is part of a plot by conservatives to create such gigantic debts that the country will ultimately be forced to cut back on the welfare state, especially Social Security and Medicare. Tax-loathers such as Grover Norquist have said for years that this is the conservative plan, and these people make it impossible for any Republican politician to think privately or publicly about raising taxes.

Even the  Keynesians  are  Concerned

Even the Keynesian economists do not suggest that the current level of deficit spending is healthy or sustainable. They see deficit spending of up to $2.0 trillion a year as a necessary evil to get the economy moving again, after which they would love to see these numbers go back down to a “normal” level of $400 billion. There may be public debate over whether Social Security faces a crisis or not (the people managing the trust fund don’t think so), or whether deep cuts should come in the social welfare budgets vs. the Pentagon budget, but there is no real dispute that the past few years of trillion dollar budget deficits are not sustainable in the long term.

The incentives in Washington are all biased toward posturing and blathering about the deficit, but inaction when it comes time to seriously reduce it. There are, in other words, no grown-ups in Washington unless they are old and retired and willing to stick their necks out with actual suggestions on what to reduce and where to raise revenues. But people like Bowles, Simpson, Rivlin, and Domenici spent their lives in a political environment characterized by myopia when it came to deficits, because there were never any consequences to borrowing year after year to finance current consumption. While they have a foreboding about what “the market” will demand of the US if it continues on this borrowing spree, they don’t really have a sense that things will get all that bad. This is the United States, after all – big, powerful, and, well – exceptional.

This means that the grown-ups who will finally force the US to reverse course may only be found out there in the global bond market – the individuals and institutions who hold most of the US debt. At some point, a few of them will act in their self interest and place their Treasury holdings up for sale, triggering a cascade of sell programs. The sudden ratcheting up of interest rates for government paper will cripple the ability of the US to continue paying interest on its debt unless it drastically cuts back on all three of the budget colossi: Medicare/Medicaid, Social Security, and defense spending. The United States can only hope at that point that the government’s reaction is based on a realistic idea of why this happened, and a reality-based vision of what America will look like going forward.

If a Real Grown-Up Was in Charge

If by lucky chance the United States had a reality-based President in the White House willing to tell cold, hard truths, here is what she or he would say:

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My Fellow Americans,

In the past two months our government debt has suffered catastrophic losses in the global bond market. Whereas a few months ago interest rates for 2 year Treasury notes were around ½ of 1%, they are now 3%, and this type of drastic increase has occurred in every maturity of our debt. Our thirty year bonds had a yield of 4% at the start of this crisis, and now yield over 8%. As this has been happening, the US dollar has experienced a collapse in the foreign exchange markets.

Some people say this sell-off of our government debt was an attack planned and executed by China. We have no evidence of this, and all the evidence we do have tells us that the sell-off began spontaneously in several market centers and escalated as more and more investors sold their Treasuries rather than take further losses in their portfolio. Besides, the U.K., Germany, Japan and other major countries have had similar problems with their government debt.

If it were true that one country orchestrated a financial attack on the US – and it is not true – you would be entitled to ask “How did our country ever get into such a vulnerable financial position.” The fact is, for over fifty years the United States has turned to debt to finance its current needs, rather than raise taxes to pay for the things we wanted. This attitude to “just charge it” persisted no matter which party was in power in the White House or Congress. Our politicians kept making promises to you about your retirement, your health care, your security, your shelter, and the availability of food and energy, that we could not ultimately meet. There was no discipline to our borrowing and spending because the financial markets indulged us, and because everyone thought our children’s children would ultimately pay down this bill. No one thought that we would see in our own lifetime the financial markets suspend our credit line.

Nor is our debt problem restricted just to the federal government. Most of our state legislatures are grappling with budget deficits that can only be mended with steep cuts in services. Our high yield bond markets – trading what is known as junk debt for heavily-indebted companies – have seized up. We as politicians sat back quietly while the financial industry aggressively marketed debt to you and your family, and we find out now that the banks and mortgage companies often broke the law in the process. As a consequence of this irresponsible and illegal behavior, our major banks are now in receivership and creditors as well as large depositors have experienced billions of dollars of losses. Most importantly, the average American consumer is burdened with mortgage, credit card, student loan, automobile, and other debts, and increasing numbers of you cannot meet the interest or principal payments. Consumer defaults are skyrocketing as a consequence of this crisis.

Mark this well – as a result of this crisis your standard of living is going to go down. There are major long term trends that are contributing to this decline in our living standards. Our population is aging and more people are heading into retirement hoping that the few who are working will support the many who are not. About one-third of the planet’s population in India and China are now aggressively working to achieve our lifestyle, and as they succeed in underpricing us in goods and services, we lose jobs and income. The essentials of modern life, such as energy and commodities to support our transportation and food needs, are becoming scarcer. But we made these problems much worse by ignoring them, by allowing our political system to be corrupted by huge donations from corporations and wealthy individuals, by refusing to vote because “it wouldn’t make any difference”, and by masking over the decline in our living standards by the analgesic of debt.

My friends, the era of pain avoidance is over. The era of pain management is upon us. It is now the role of government to manage this transition to a lower standard of living so that the pain is shared equably in our society. This means that government must concentrate first and foremost on the essentials – food, shelter, and fuel for our people. Very soon, nearly 50% of our population will be classified as poor by official standards, and they will necessarily receive priority attention from my administration. For those who are fortunate to have a job or the resources to support themselves for an extended period of time, we will attempt to fairly distribute the inevitable cuts in social services that are to follow.

Let me assure the financial markets that rumors about a default by the United States on its debt are completely unfounded. We will make every effort to continue to meet our financial obligations. It is true, though, that whereas at the start of this year one out of every ten dollars in taxes was used to pay interest on our debt, now – given the substantial increase in interest rates – that burden consumes four out of every ten dollars in tax receipts. This is why major cuts are now required in our national budget.

Because our priority must be on meeting the basic needs of our people, it is time to look seriously at scaling back our enormous military obligations overseas and the defense budget that takes up one-fourth of all of our spending. We will accelerate our departure from Iraq and Afghanistan. We will be looking at scaling back our defense footprint around the globe by closing hundreds of bases and cancelling many weapons systems that are not essential to national defense. There will be many job losses in the military and the defense industry as a result of these actions, and many Congressmen will fight to preserve their local defense component, but we cannot survive as a nation by maintaining anything like our existing defense establishment while half our people starve and are homeless, and the other half struggle to avoid their fate. We must recognize that the enormous scope and size of our defense establishment has in some ways secured our safety from overseas enemies, but at the cost of destroying our well-being domestically. Our new goal will be to secure our safety from overseas enemies with a smaller and more focused Department of Defense, and where possible we will continue to fund local police and fire departments, as well as the national guard and Homeland Security, to ensure domestic security.

Similarly, the time has come to recognize that there are only two segments of our society capable of providing additional tax revenues: wealthy individuals, and large corporations. Both of these groups have benefited enormously over the past 40 years from a shift of wealth and productive resources to them, at the expense of the middle and lower classes. We must and we will redress these imbalances. No doubt some of these people or corporations will threaten to leave the US. In some respects we don’t want them here if they are not willing to put up a fair share in support of our people and our economy, but we will make it difficult for them to take their money and run. Accordingly, we will continue to work with other governments overseas to standardize tax rates and reduce inducements for hot money to move from country to country.

All of these actions by your government are going to increase unemployment in the immediate term. This is unavoidable, but we are going to make every effort to ameliorate the problems of the unemployed. You can, as a result of these actions and what I am telling you today, choose to vote us out of office at the next election. That is your right, but I ask you first and foremost not to fall victim to the politicians who tell you there are easy or quick solutions to our problems. You should demand candor from all government officials at all levels of government, and a candid review of our problems will reveal that it will take years to fix them. We have lost a substantial part of our manufacturing and productive capabilities in this country by misguiding these activities overseas, and falling for the illusion that financial services was somehow a valued contributor to the economy.

To rebuild our productive economy – to create goods and services that people at home and abroad wish to buy – will take imagination, entrepreneurial spirit, market discipline that rewards investment in successful enterprises, and some government help along the way. This can and will be done, in the traditional spirit of America where hard work is valued and easy money rejected. Our parents, and their parents before them, lived simpler lives than we do, and we would consider them materially “poorer”, but they were not necessarily less happy. There are advantages to a simpler life – more time for your family and your personal development – and the goal of a reduced standard of living does not mean we must be less happy as a result. The transition to a simpler life, however, will be painful for many, and as I said, our job in government is to ensure that all of us will at least have food, shelter, and fuel during the years ahead.

Finally, none of this will matter in the long run without a major reform of our campaign finance system. We must get big money out of politics at the federal and state level. Please join me in urging your state legislature to vote in favor of a Constitutional amendment that limits campaign contributions to individuals who reside in the district or state of the candidate seeking funds, and which puts a $5,000 cap per individual. Campaign contributions from corporations, foundations, out of district individuals, foreigners, from special interest groups, or in the form of in-kind donations, must be forbidden by Constitutional amendment.

We are embarking on perilous times – a time of severe trial for all of us and for our country. The journey may take many years, but there is a brighter future at the end of our troubles. We can succeed if we help each other on this journey, and if your government directs resources to the most needy among us.

May God bless and keep America.

First posted at The Agonist