"The 2012 Budget - A Day of Reckoning Dawns"

Sydney M. Williams

Thought of the Day

“The 2012 Budget – A Day of Reckoning Dawns”

April 11, 2011

Whether you love him or hate him, you have to admit Republican Representative of Wisconsin Paul Ryan has been the first politician, since the fiscal and budget crisis developed, to place his hand on the third rail of politics – entitlement reform. (I say the first since then, because George W. Bush did attempt Social Security reform in March 2005, but was almost immediately foiled by his own party.) As Draconian as some claim Mr. Ryan’s proposal is, it only projects a balanced budget in 2040. Thirty years, frankly, is not good enough. On the other hand, the CBO (the Congressional Budget Office) has projected that the Obama budget left untouched would, in eleven years, add $12.2 trillion to the $13.5 trillion we had at the end of fiscal year 2010 (since the end of September 2010, we have added another $700 billion,) almost assuredly generating a credit downgrade on U.S. government debt.

While the federal government avoided a shut-down at the 11th hour Friday night, the fight over the deficit ceiling and the 2012 budget have yet to be fully joined.

The battle will not just be about numbers. It is about the sort of a society we want. Extremists from both ends of the political spectrum have served to divert attention from these more important questions. Fiscally, conservatives do not want to see the impoverished go hungry, without medical care, unclothed or un-housed. Neither David Koch nor Charles Krauthammer is uncaring or miserly. Most fiscal liberals understand that there are limits to government largesse, and that entitlement programs, in their current form, are unsustainable. As much as I disagree with Paul Krugman and feel he is politically – not sensibly – motivated, he is neither stupid nor naïve. The situation has become more polarized, in part, because the dialog has been one of inmates in control of the asylum – a plight fanned by a press desperate to sell content and by bloggers desperate to attract eyeballs. The good news is that, as Erskine Bowles (co-head of the President’s Deficit Committee) said, “The period of denial is over.” The bad news is that the President has thus far chosen to ignore the recommendations of that committee. (That may change when the President belatedly addresses the nation on Wednesday evening.)

Congress has been reluctant to say no to those that ask – whether the request is for corporate or individual tax breaks, or whether it is to fund a project that will help a fellow congressional member be re-elected. There are limits as to what well-intentioned men and women can do – and the limits are largely financial. Taxes can only be assessed on earnings. Too much of government’s focus, over the past several years, has been on what government can provide, and not on, as President Kennedy asked, what people can do for the country. Paul Ryan, in the preamble to his recommendation, states that our debt is an “existential threat.” Both parties have been guilty of raising expectations as to what government can do, which is a prime reason, in my opinion, as to why Congressional term limits are imperative to honest, efficient and effective government.

The hole we are in is one of our own digging. With the exception of the Ronald Reagan years, the decades since President Lyndon Johnson and his policies of “guns and butter,” (Great Society programs, while waging a land war in Southeast Asia) have seen politicians consistently promising more than they could honestly deliver. In the mid 1970s, outlays as a percent of GDP rose to 20%-22% from the 16%-19% of the early post war years. That period ended with the 2009 budget year. A combination of the financial crisis and the new administration’s social programs (“a crisis is a terrible thing to waste”) increased outlays to 25% of GDP in 2009, the highest percent since World War II, and 23.8% in 2010, the highest since 1946. Despite reductions in marginal tax rates in the 1960s and 1980s, federal tax receipts continued to rise, though at a lesser rate than spending. The financial meltdown and the recession combined to produce tax receipts in 2009 and 2010 that were the lowest percentage of GDP since 1950 .

Individuals and businesses (except those financial firms deemed “too big to fail”) live under the threat of bankruptcy. States, by law, must balance their budgets. The threat of bankruptcy brings a discipline, a characteristic absent from Washington and also, unfortunately, missing among those banks that operate with the expectation they will be bailed out should trouble arise. According to polls quoted over the weekend by Robert Samuelson, in a column in Investor’s Business Daily, about two thirds of Americans want more public spending on education, healthcare and Social Security, but the same numbers of Americans feel that deficits and taxes are too high. This disparate attitude is a consequence of government promising what it cannot deliver.

Paul Ryan also addressed the tax issue, urging Congress to lower the marginal rates for both corporations and individuals, while eliminating a number of deductions – in fact simplifying the tax code – a recommendation the President has made as well. The left has attacked the recommendation to reduce rates, as they pertain to individuals, as a giveaway to the rich, but that masks the truth. What has been a giveaway to the rich have been the myriad deductions, credits and write-offs available under the existing system. Otherwise, why would Warren Buffett pay less in taxes than his secretary? Reducing the marginal rates, broadening the base and eliminating many popular iconic deductions, such as mortgage interest and limiting the deductibility of charitable contribution to some percent of total income would generate more revenues from the wealthy. With taxes, it is not the rate that is important, it is the actual receipts.

Honesty has been missing. Politicians must be honest as to the real costs of the programs they propose. The American people must be equally honest in what they want from government. If they decide they want government to play a bigger role in their lives they must be willing to pay for it. If they want to pay less, they must understand they are going to get less. There is no free lunch. It’s not complicated. Washington has lied to us for so long that this make-believe “Land of Nod” where we now dwell has become reality in our minds. Waking up has been painful.

Whatever action does get taken, between Congress and the President, must restore the confidence of the American people (pessimism doesn’t work, as Jimmy Carter discovered), and it must help drive economic growth. The fastest way out of the current morass is for the economy to expand and private sector employment to pick up. Increased tax receipts will follow.