Jeopardy, Taxes and Liar Liar

On June 7 of 2011 I wrote about jeopardy in Jeopardy, US Debt, and Funny Cigarettes. So this post today is Jeopardy II. It is more than a year later and apparently no one on the planet Earth took my profound advice. So here we go again.

One of the things the candidates and the media have latched onto is tax cuts. Obama points to a study that shows that tax revenues are going to fall off a cliff under a Romney presidency. Romney retorts that they won’t because his goal is to make sure that his tax cut plan does not increase the size of the government deficit. Romney won’t be specific about the tax loopholes he will close that will bring about his desired result. So the Democrats are calling Romney a liar. Liar liar tongue on fire hang your pants on a telephone wire.

The Rs line up behind Romney and the Ds enjoy the liar liar story. While they do that I am sitting here thinking about jeopardy. No not Alex Trabek and the show on television. I am thinking about the word jeopardy. My Dad was big on that word. Jeopardy is danger or the probability of an adverse event impacting you. If you walk across a street you put yourself in jeopardy. That is, you put yourself in the way of danger. Most of us do a quick cost-benefit analysis when we decide to take a course of action. If the benefits of walking across the street outweigh the possibility of a car running you over and creating harm, then you knowingly put yourself in jeopardy. Most of us don’t actually do a calculation. Most of us just use common sense and practical experience so we don’t really think about jeopardy for everyday things.

But sometimes we should think twice. For example, inviting all your friends via Facebook to a party at your parents’ house might not be the best thing to do – especially if you have 9000 Facebook friends.  Or driving at 120 MPH on the left-hand-side of a mountain road near Seattle might not be prudent. Drinking JD straight from the bottle has also been known to create less than favorable outcomes. This is what jeopardy means – knowingly putting yourself in harm’s way.

So now we get back to the tax issue. I know our candidates are earnest about this issue – but really folks – it is not what we should be getting hot and bothered about. If you look carefully at the expressed plans of both candidates, neither one really goes after the central problem of national deficits and debt. When I say “goes after” I am using this phrase in the way a great linebacker might go after a tailback; a lion closes in on its prey; or a Georgia Tech freshman who “bird-dogs” on 10^th street. Going after something means a couple things. First, the object of your attention is very important to you. Second, you go after it was gusto. Does Obama or Romney have lust in his heart and a gleam in his eye when he discusses deficits and debt? Are you bowled over when Romney says his tax plan will keep the $1 trillion + deficit from getting larger? If you said no then you need to think more about jeopardy.  

Let’s look at some official future budget projections. This data comes from the Office of Management and Budget. You might call this Obama’s plan for the future. I will not quote figures for Romney’s budget since we really don’t know them. But as I said above, his only real promise is that his plans will not make the deficit larger. So I am guessing the below numbers clearly understate what will really happen in the US in the way of Federal Government budgeting under either Obama or Romney.

The government deficit averaged approximately $1.3 trillion per year from 2009 to 2012. This caused the gross national debt to increase from $11.9 trillion to $16.4 trillion in four years. The part of that debt held by the public went from $7.5 trillion to $11.6 trillion. We all agree those increases are huge. But here is the point – we have been able to survive it. This is like the guy driving much too fast on the mountain road – everything might seem okay so far but he puts himself in serious jeopardy. What happens if a troop of Cub Scouts is suddenly seen crossing the road?

So one would think that after our dear politicians see this data in 2012 they would clearly want to remove this sense of jeopardy. But no way – here is what they plan for our future – and of course this is pretty rosey stuff compared to what will probably transpire under either candidate. Between 2012 and 2017 Obama plans these changes (in trillions):

                                                           2012               2017                      

Tax Revenue                          $2.1                 $3.9

            Outlays                                    $3.8                 $4.5 

            Deficit                                      $1.3                 $0.6

            Gross Debt                             $16.4               $21.3

            Debt held by the Public          $11.6               $15.7

The gross debt will go up about as fast as the economy – remaining at about 105% of GDP in 2017. In 2000 the gross debt was 56% of GDP and was 65% as recent as 2007. The more important debt held by the public will go from 74% of GDP in 2012 to 77% in 2017. It was about 32% of GDP in 2001 and rose to 36% by 2007. Thus, as a share of the national economy, debt in 2017 will have than doubled since 2007.

Let’s be clear. This is alarming. Let’s suppose you let your weight get away from you on your last Mediterranean cruise. You went from a svelte 200 pounds to a little more than 250. Yikes – even your pantyhose doesn’t fit. So your doctor says you need to lose some weight and you tell him you have a very ambitious plan that is almost guaranteed to keep you at 250 for the next five years. No way are you going to gain one more pound above 250! That doesn’t sound like progress and it just raises the probability that harm will come to you.

Most of us know the complications that can occur if you remain grossly overweight. The economy seems to have weathered these debt increases so why can’t we continue to do that? Why care that the debt remains at about 105% of national output in the next five years?  The answer is jeopardy. Once debt has reached 100% of GDP people notice. They notice a lot of things:

o   It is much harder to pay off debt at 105% of the nation’s income than if it were 56%.

o   That implies that the longer you wait to deal with this problem the more pain there will be – the larger the future spending reductions and tax increases will have to be.

o   The interest expense of the debt gets larger and larger and makes it even harder to reduce government spending and the deficit. So it makes the problem even more difficult. In 2001 the net interest paid by the Federal Government was $206 billion. It rose to $225 billion by 2012 and is expected to be $565 billion by 2017. Of course, interest rates are incredibly low now. If interest rates were to rise to levels considered normal, we could see net interest rise to about $1 trillion in 2017.

What happens when you suddenly see the Cub Scouts in the road? What happens if on the way to 2017 another significant world economic slowdown or recession occurs? What if the US goes into another recession? We had a recession in 2008-2009 – it would not be unusual for another recession to hit us by 2017. Then you can just kiss your sweet butt good-bye. We will have put ourselves in jeopardy and we will pay dearly.

In such a recession national income will fall and automatic government stabilizers will make the government deficit even larger. Discretionary policy will likely add even more to spending increases and tax cuts. Our ability to pay off the debt will fall with our incomes. Debt to GDP would rise to 150% or more of GDP.

Do you want to live in Greece? Do you want to live in a country that has no good alternatives left? Do you want to read every day in the paper about world investors selling US stocks and bonds – and watch whatever wealth you might have had dwindle to nothing? Do you want to read about all those companies that resume layoffs and plant closures? Do you want to see on TV the results of the US dollar deprecating by 20% -- and the resulting raging inflation rates of all those things we import?

I hope the answer to all those questions is no. The interesting thing is that once you reach 250 pounds, you don’t have to stay at that weight. If you were stupid and once drove too fast down the mountain road you can be thankful that nothing happened and you don’t ever do that again. If you are President Obama or Governor Romney you can look at our national debt mess and preach fire and brimstone until those clowns we call a government do something real about the jeopardy we find ourselves in. It isn’t too late. Jeopardy means putting yourself in harm’s way. This country needs a real diet and now! We need to make real progress against deficits and debt. Planning to get the deficit down to $600 billion in five years is not going to cut it. Keeping national debt at roughly 105% is just irresponsible.