If you live in the U.S. and haven’t been otherwise incapacitated over the last month or so, you are abundantly aware of the buzz surrounding the Healthcare debate of late. While I haven’t written in the past few weeks (I’ve been busy… uh… DRINKIN’), I’ve been carefully filing away various concepts I garner from TV news, various articles, emails from friends, and conversations with friends and family. While I admit I haven’t had the time to truly delve into the matter fully, I felt it necessary to just get some thoughts down to preserve for later discussion as this issue progresses. This may be a bit of a rant, so be prepared.
Whatever happens with Mr. Obama’s plans for healthcare reform, one thing is certain: it’s going to cost mucho dinero. Even if the reform of the system is rewarded by greater efficiency, less cost, and is in fact sustainable, the cost of such a transition will be, uh… HUGE. The question naturally follows, “How are we going to pay for this?” With MONEY, you idiots! OK, that was a cheap shot, but one that leads to the next obvious question: “WHERE are we going to get the money to pay for this?”… a much more interesting question.
When you need money, how do you get it? You earn wages from your employer for your labor (sweat equity), sell something (employing your own capital), borrow it (consumer loans, credit cards, mortgages, etc.), or steal it (so many jokes, so little time). The federal government generally has only two ways to raise funds: taxing your broke ass, and borrowing from communist regimes – if you don’t think that’s funny, stop reading and go get a drink. Now, I’m fully aware that China doesn’t hold all our debt. In fact, the greatest debt holder is the U.S. public itself through Treasuries. I digress. But to be clear, generally taxes and borrowing are the government’s only sources of revenue.
Now, most people understand that the well is only so deep. The argument then turns to what government can do to shore up existing programs to save money for others. As an example: How many $300 toilet seats do we have to shed to pay for this new nuclear missi… or uh, provide healthcare for the homeless? Most people, myself included, tend to think this should be an easy thing to do; it’s a simple matter of sitting down and prioritizing. But, when the overall picture of government expenditures and budgets is examined, it’s not so simple.
It is generally accepted that two thirds of the federal budget is “mandatory” which leaves the other third as “discretionary”. According to Tom Gorman’s, The Complete Idiot’s Guide to Economics - 2003, “mandatory” spending translates to entitlements such as Social Security, Medicare, veterans’ benefits, and Food Stamps (pg. 184). What’s interesting about “discretionary” spending is that it isn’t always exactly discretionary. For instance, Congress votes annually on defense spending, but nobody is going to come out and say defense is “optional” (ibid). In that sense it’s quasi-discretionary at best.
Essentially, it comes down to the fact that spending cuts aren’t as easy as people think. Obama tried recently and met with a nice bit of flack. He outlined $17 billion in cuts only to have his efforts thrown back in his face for their insignificance. That comprises 2.16% of the $787 billion stimulus package, and .15% of the $11 trillion budget deficit we’re running. That’s like somebody giving you the volume knob from your car stereo back after the car’s been stolen (just tryin’ to help put it into context). In essence, we shouldn’t expect spending cuts to amount to anything truly substantial anytime soon.
Big O recently made a speech announcing that Congress is going to head back to the Pay-Go policy of the 1990’s. Basically, for every dollar Congress spends they have to find a source of funding for it by cutting other spending. “Good job, Big O! What? That doesn’t include healthcare? You mean we can do tens of billions more in borrowing and sort it out later as long as it’s for healthcare? Oh… Ok. But everything else is Pay-Go right? Wink, wink… nod, nod. I gotcha Mr. President.”… said Ms. Pelosi.
So let’s talk about debt. The U.S. incurs debt through the issuance of Treasuries. They pay less interest than you and I because they are considered to be relatively riskless assets backed by the “Full Faith and Credit of the United States”. That said, federal interest payments are HUGE! Just as an individual usually has to pay a higher interest rate the more money they borrow, so does Uncle Sam. For instance, in the last three months 10 year treasury yields have gone from around 2.6% to over 3.8%: Uncle Sam pays more because the more he borrows, and the shakier his financial house is, the more lenders get skittish. This has helped to fuel the controversial topic of the world replacing the almighty Dollar as the preferred reserve currency.
Now, there are some who say that deficit spending is cool. They argue that since we’re mainly borrowing from ourselves that it doesn’t matter. They don’t mind rolling the debt on to our progeny because, after all, they’ll be the ones that benefit from the money we’ve spent today, right? Kickin’ the can down the road so your kid has to deal with it; what a bunch of winners. They continue that since the debt just keeps rolling over and getting refinanced that it really doesn’t matter; sorta like the proverbial borrowing from Peter to pay Paul. There’s another name for that… PONZI SCHEME!!
I, like many other Americans according to recent polls, would like to see more financial responsibility on the part of the government. Americans seem to have heeded the warning of deficit hawks like David Williams, former Comptroller General. Like our recent recession and bubble burst, the overspending that caused it is clearly unsustainable, as is the government’s overspending. Deficits matter and cannot be ignored. We ought to care more not to kick the can down the road to our kids. We ought to seek to pay for our own debts in our lifetimes.
So, if we’re not going to borrow the money where are we going to get it? The short answer is taxes. Taxes will inevitably have to go up to shore up deficits and pay for new programs. My thought is that first, the Bush tax cuts will expire. That’s not too bad a deal it seems. After all, the tax rates would go back to what they were in the Clinton days when we ran a budget surplus and the economy did OK. After that, it seems Big O’s White House will likely go for tax hikes on the rich before anything else (he did campaign on this). Recall that during the New Deal, the upper crust saw marginal tax rates as high as 90%. Imagine that: every dollar you make over $250,000 the government takes $.90. I doubt we’ll get there, but I would expect progressive taxation to get a bump. After that, the other 95% of Americans that Big O plans not to tax will eventually start to see a creep. Maybe not in income taxes, but likely in value added taxes – sales tax, surcharges, etc.
I’ve ranted for a bit here, so I’ll rest for now. But the bottom line, in my opinion, is we are going to continue to see deficits for many years to come, and taxes will inevitably rise.
One final thought: If you have thoughts of your own you would like to interject, PLEASE comment. I put this out there for people to read and contemplate, and hopefully learn. But, I WANT TO LEARN FROM YOU TOO!! If you think there’s something I’ve missed (there always is), or if you have a differing viewpoint (and plenty do), the only way I’m going to know is if you leave a sweet little comment for me. Toodles till next time. – Love, Little Tommy Jefferson.
