Saturday, August 9, 2008

Deficits Come Home to Roost

I was talking to a friend of mine today, and she, a life-long Democrat, was showing me that she paid 35% in taxes. She said she did not mind paying 35% to the government and favors maintaining existing welfare programs as well as entitlement programs. I suddenly realized how dire our spending habits are--just maintaining existing programs would cost future generations trillions of dollars more than we can afford and would bring our nation closer to defaulting on government issued debt (bonds, Treasuries) or requiring foreign capital injections (e.g., Citigroup, Merrill Lynch and MGM Grand).

I then realized something unsavory--the money would be coming from my friend and I to cover the existing entitlement/spending programs, and the only way the government could get it was by taking more money from us and our children. I told my friend her 35% rate was an inaccurate indicator of how much government spending programs cost. In reality, unless the government wants to default on our debt, her tax rate should be 50%, and sales taxes would have to increase every year to cover government spending. I tried to tell my friend her support for existing spending programs means that my children and her children would eventually be subject to an income tax rate of around 50% and a California sales tax rate of around 10% to maintain the programs she likes. That's when I realized if you're an American, and you care about this country's future, you must support cutting government spending. The only question should be where the cuts come from, not whether they should be made. Even supporting the maintenance of current spending programs is wrongheaded.

I gave my friend a link to Richard Fisher's recent speech, which I've posted elsewhere on this blog:

I asked her to read it, because if she, a very smart law school graduate, could not understand that even maintaining existing spending programs required higher sales taxes and her children to pay 50% in income taxes or risk Zimbabwe-type inflation, we had little hope as a country of exiting our financial morass.

I facetiously pretended to be Uncle Sam with a spending problem. I told her I had been using my credit card and spending trillions of dollars of her money and now I needed more, or I'd go bankrupt. I said I had taken loans from the Chinese, Japanese, and British, and I had to pay them interest every single month. The 35% I was taking from her wasn't enough. I couldn't take too much from the poor--it would not be enough, even if I raised their taxes to 50%. The top 25% already pay 85% of taxes (see to support my spending habits, and it isn't enough. My friend and her children had to pay more.

I racked up a list of expenses I had--the war in Iraq, Fannie Mae, Freddie Mac, welfare, military, payroll, Social Security, Medicare, and Medicaid. I told her I had overused my credit card for the past ten years and was spending money I didn't have, while paying only the minimum balance each month. To make matters worse, I had little actual savings--I was living paycheck to paycheck, surviving on my friend's 35% injections. Thus, any spending was going to have to come from more loans and more debt. I said I was now having a hard time meeting interest payments on my loans, and she had to pay me more money so I could take it outside of our country to pay my foreign creditors. I explained if there was any other way of getting the money, I'd avoid raising taxes. Please, I begged her, show me a way to get the money without taking it from you and your children but also maintaining my spending habits. (And no, massive inflation is not an option--as Zimbabwe shows, if everyone's rich, no one is.)

That's when it hit me. There's no other way for Uncle Sam to get the money without cutting spending, except by raising taxes. For example, California will probably raise sales taxes to balance its budget, which will hurt the poor. (The sales tax is a "regressive" tax, a fancy way of saying it falls disproportionately on the poor.) California's spending, if it results in a higher sales tax, will cause the poor to save less money, because now they have to pay higher taxes when buying food, drinks, clothing, and cars. Thus, to maintain government programs that help the poor, California is going to raise a tax that will hurt them, so the government can make the poor more reliant on their programs. Confused? You should be. Like you, I didn't study Infinite Loop Economics.

And that's the harshest lesson of all--in part because we have tried to help the poor by spending money we don't have, we've destroyed our ability to help them. The poor don't have a lot of political power, so most likely, we will have a higher sales tax before a higher income tax (which falls disproportionately on the aspiring middle class and affluent).

So here's the sad, twisted result: we've spent money we don't have, causing us to take more money from the poor so we can give it to the government. The best way to help the poor is to take some short-term suffering--like cutting government programs, foreign spending (e.g., Iraq war), and general benefits (e.g. government employee pensions), so we actually have money in the bank to help the poor in the future. We had a surplus only a few years ago. See chart, below.

For the Republicans gloating right now, our surplus occurred under Democratic President Bill Clinton, a fact that helps Sen. Obama, not Sen. McCain. For the Democrats gloating now, the surplus occurred under a Republican Congress. As we can see, the issue of out-of-control deficit spending is non-partisan. We need to go back to having a surplus before we think about helping others. Anyone who talks about maintaining spending programs or worse, increasing entitlement programs, is doing our country a disservice.

Patriotic Americans must take away Uncle Sam's credit card, cut it up, and not return it until he reforms his profligate spending. That means cutting programs that help senior citizens, the poor, teachers, the military, and other government employees. There's no way around this harsh scenario--being on a budget isn't easy for anyone. But unless you want Uncle Sam to default on his debt, rampant inflation, or 50% taxes on your children, you will support a balanced budget. If you're still not convinced we have to cut spending, all you have to do is go out there and find that money-growing tree. It's out there somewhere, probably nearby the Tree of Wishful Thinking. Hopefully you'll find it before we all go off a cliff.


Not the King of Wishful Thinking

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