Tuesday, October 23, 2012

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 10th 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. 

4 comments:

  1. Lar, bird dogging on 10th St nowadays can be hazardous to one's health even if O'Keefe HS no longer exists.

    I believe that the candidates aren't ignoring the elephants in the room, the debt and deficit, and I believe that they each have a plan. I believe each would be completely stupid to verbalize their plans because the truth, like jumping on a bicycle with no seat, really hurts....Romney's probably for a shorter duration than Obama's. But the attitude of the electorate today is "No pain, no way, no how, no time! Hurt me, I'll hurt you back." Obama's plan will be painful for the duration. Even the French don't like what they have, and that's where O's plan is taking us. So as a candidate, why shoot your own foot off when you can be vague and non-committal and get away with it? After all, inquiring minds don't really want to know especially if it'll bring misery even for a short time. Blame the people not the candidates.

    You want "loopholes?" How about all those subsidies that cost us...and I do mean us...billions/year? Do George Lucas, Bill Gates, et al really need a mortgage interest deduction? Do I? It's really a subsidy for the housing industry. I happen to believe that if that "loophole" went away, the really smart people in the housing industry would figure out a way to make buying a home easier to start with and bring the cost of mortgages to a point where we don't need the interest deduction. The really dumb people will go out of business. Of course, we first all have to agree that people who can't afford a house to start with shouldn't be given one at taxpayer expense. When you throw in all the subsidies for oil, coal, alternative energy/lifestyles, etc., there's whole s...... big pot of money being dumped in a black hole somewhere.

    However, if we continue on the path we're on, I fully expect to see a new $15-million note with Bozo the Clown's picture on it. We'll need it to just to buy a Happy Meal........with apples not fries.

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  2. Dear Fuzzy,

    I agree they are not saying anything and that is why I wrote the post. But it is worse than that. Obama has no sincere interest in the deficit -- his goal is to redistribute income. Romney seems more open to reducing the deficit but he is trusting tax cuts and growth too much. My point about jeopardy is that we need a strong plan now to reduce deficits. Not tomorrow. I am not sure that he or anyone else is really serious about spending and loopholes. I suspect that before we see your hyperinflation we will be experience a collapse of bond and stock markets. That's not a Happy Meal!

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  3. My comments:

    Taxes and cuts. Our debt, if it was a personal debt to earnings ratio would result in individual bankruptcy. Raising taxes is OK if it does not choke off consumer and small business spending. On the other hand allowing an environment for small business and business for that matter to prosper creates more wealth and even at lower taxes more gross tax revenue....if however debt gets too high it is a wash. That is a tricky slope to manage and should not be attempted by politicians or intellectuals.

    The candidates are not sharing details of their plans because neither have any of substance and do not want the other to pick on their plan or use it as a weapon against them.

    Is there a way? Do not really know but I know the way is not an extension of what we have been doing the past 25 years. When Rockefeller, Vanderbilt and Carnegie grew rich they did so by building what this country did not have and that was transportation, building/bridge infrastructure and fuel. That was a big step forward. What is the new thing? What is the next step forward? This was not an economy built on bubbles....although it did need some tweaking in the 1930's. World War 11 created a building boom for almost 30 years along with a population boom to work and prosper from it. That is over and the boomers are nearing either retirement or working until they drop. The military complex grew as the US became the World's policeman but with technology the need for that elaborate infrastructure is declining. IT in hardware or software is where the jobs are now plus medical and or health related services....but those jobs are not building the US at the pace we have seen since the Civil War.

    The core problems are declining demographics, declining education,lack of something to really grow other than declining infrastructure or military equipment and so forth. Yes we will have some growth and yes there is another recession lurking...they are cyclical and that cycle is typically 6 to 7 years...plus all of the good stuff done by Uncle Ben.

    Sounds like a dower projections but answer the question...what are we going to get real growth from.

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  4. James,

    Let me try to answer your excellent question. The main point is that we have to prioritize. In the 20 years before the recession began in 2008, the USA was dealing with all the trends you mention and was growing at a decent rate. That rate might not have been what we had in the past but it was enough to insure an increase in GDP per capita and it kept employment growing and unemployment at tolerable levels.

    It was a concern but not a fire. Then wham -- all the imbalances of the past hit us hard and we have been swooning ever since. We have to deal with that first. That is our first priority. Obama dealt with it in his way and it has not been very successful. We need to deal with debt, housing debt, financial instability, and government debt. That should be our first priority. It can be done but as I said in my post -- neither party is doing much about it.

    The other problems you mention are difficult and require their own solutions. When we deal with the first priorities and get the economy closer to potential output growth -- then we need to work on the long term economic growth challenges. History suggests that countries often have huge hurdles and sometimes get past them. Having economic and political freedom and a flexible economic system helps.


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