http://www.cnbc.com/id/40641123
Moody’s – the bond rating service that completely missed (or hid – depending on your point of view) the problem in 2008 with the mortgage securities that nearly collapsed the entire global finanacial system – is warning the U.S. Government that if they pass this Tax “Cut” package, they’re really, really going to get serious about cutting the U.S. Treasury’s Aaa Bond Rating at some point in the future.
Three words – “Just Do It”.
Let’s pull the bandaid off and get done with pain. Fighting cancer depends on getting the patient as close to death as you can without killing them to kill off the parasitic cancer cells. That’s where we are. The longer you wait to see what’s going on, the less chance that the patient will survive.
It’s not the tax relief at issue – it’s the cuts and fooforah around Social Security and such. Tax relief is beneficial – the add-ons and usual pork are not.
The history of Empires has clearly shown they prospered when total governmental cost was about 10% of GDP. When total governmental cost reached 20% of GDP they slowly declined. The U.S. total governmental cost is currently at least 40% of GDP. To reduce total governmental cost to 10% of GDP requires eliminating 75% of current government spending.
The recently completed Armey study showed that prosperity is optimized at a total federal governmental cost of 10% of GDP. Assuming the federal government is responsible for half of the total U.S. governmental cost, the Armey result seems historically too high by a factor of two, but let’s assume the Armey study is correct.
The federal government currently consumes about 20% of GDP, or about 3.5 trillion dollars per year. To reach a total federal governmental cost of 10% of GDP would require reducing the total federal governmental cost to about 1.75 trillion dollars.
This 1.75 trillion dollars should consist of normal yearly federal governmental expenditures plus the cost of repaying principal on the direct debt. Currently, the direct debt is about 13 trillion dollars.
To pay that off the direct federal governmental debt in 20 years requires retiring about 0.65 trillion dollars of debt each year. Subtracting this 0.65 trillion for debt repayment from the assumed optimum 1.75 trillion federal budget produces 1.1 trillion dollars available for normal yearly total federal expenditures.
To reach this optimum level of 1.1 trillion dollars for normal federal expenitures requires reducing the total normal yearly federal expenditures (exclusive of debt repayment) to 31% of current federal expenditures.
That level of reduction requires totally cancelling all forms of welfare and other transfer payments, and eliminating other optional expenses (marble palaces for legislators to work in, for instance). The only governmental costs remaining would be defense, justice, and a low level of miscellaneous expenses.
Those expenses are, in fact, the only governmental expenses specifically authorized by the Constitution.
And Armey being the Washington Insider and Usurper of the TEA party movement is applying static analysis. Such a drastic cut in spending would create a downward spiral in GDP. That would reduce income taxes, Social Security (FICA) and corporate income taxes lower than current levels.
The fatal flaw to Keynsian stimulus funded with debt is an assumption that GDP always grows. When you use the leverage orca multiplier effect, it serves to speed up the collapse.
A GDP that includes government spending is one big ponzi scheme. When you do that, prosperity would arrive when 100% of the population works for the government and they are paid with worthiess rubles. The workers pretend to work and the government pretends to pay them.
GM workers mostly believed that GM could survive just fine if the only people that bought GM cars were employees getting a deep discount twice a year and dumping them into the used car market.
One pole of the available options (a drastic reduction of governmental cost) creates the problem Art described.
The opposite pole (steadily increasing governmental cost – funded substantially by borrowing) will drive the country into a financial default, which will create approximately the problems Art described.
The question is whether there exists a less ugly choice between these two seemingly unacceptable poles. I’m not sure that there is, but if it exists it would have to consist of a small, but steady, absolute reduction in governmental costs every year.
A small, but steady, absolute reduction of yearly governmental cost would leave government still borrowing large amounts for a decade or so. If those loaning those large amounts find the intermediate option unacceptable, the intermediate option will also lead to a financial default and the problems Art described.
Hence, the two polar options are guaranteed to fail. The intermediate option requires implementing a plan which: (1) requires long term consistency in a political environment which can change dramatically every two years; and (2) the cooperation of lenders who might not want to cooperate unless they are given a lot of power.
Remember Matthew Lesko? He sells this book of government handout programs (which he freely admits is just a reprint of a government book you can get right from the government).
One of my fantasies would be to pass a law that every third item would be terminated arbitrarily.
My other fantasy is to move the District of Columbia to the current geographic center of the country – Kansas City, Dallas Fort Worth, Saint Louis…. To break the connection (at least temporarily) between the government and the northeast power centers and the fact that criminal court cases involving the Federal government end up often being decided by partisans shipped in from the the public housing projects.
When I was a kid, I remember reading in the Weekly Reader in school how Brazil was going to create a brand new city in the interior to be its capital – Brasilia. I haven’t looked into it recently, but my impression is it didn’t turn out well and all it did was create two capital cities.
Maybe the moral is that all options produce ugly consequences. The conclusion could be that the U.S. standard of living must be lowered before financial (long term) economic stability can be achieved. That leads to a discussion of what policies would incentivize economic growth which could restore an ongoing steady increase in standard of living.
So the way to increase the standard of living is to reduce our expectations. I propose we start solving the national debt problem by borrowing more money. Freedom is slavery, after all.