Debt, Catastrophe, and Foreign Entanglements

by Mitch Kitroser on July 28, 2011

in Connecting the Dots, Deep Economy, Economics, Fiscal Policy, Good Government, Tax Policy, USA, War

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A young father of our country. The battle raging today between Democrats and Republicans will not solve  the nation’s debt problems, nor avert a financial catastrophe in the future. The politicians do not appear to have a handle on a comprehensive solution to our financial woes. I’m not certain that I do, either, but I feel an obligation as a citizen and a stakeholder in our nation’s present and future to present my ideas and add to the debate.

The issues, as I see them, revolve around the debt ceiling, government obligations, the economy, consumer debt and what George Washington might consider foreign entanglements of the kind he warned us against in his farewell address. The solutions must benefit the American taxpayers today and in the future. Here are the issues and some ideas toward resolution.

1.         Debt Ceiling

The current issue of the day. Without some agreement, the government loses its ability to borrow additional money to pay the bills it has already incurred. This is analogous to requesting an expansion of my credit limit in order to pay my current bills, something I do not think any bank would approve for any civilian borrower.

Ben Franklin

Courtesy American Philosophical Society

2.         Continuing to Provide Government Services as Promised.

Medicare, Medicaid, Social Security and Defense spending are the only parts of the future government budget large enough to for cuts that will meaningfully impact the budget and the debt.  To state otherwise is disingenuous.  It is time both parties stated this and got it out on the table with the American people.  One of the reasons for the health care plan was to begin to address these issues of ever expanding costs, and their impact on Medicare and Medicaid.  This point was lost in the debate but needs to be made.  To do nothing is to court disaster.

3.         Our economy is stagnant.

The standard solution for government debt is growth.  By growing the economy, we raise total income and in turn, raise tax revenues, even without tax increases.  The inability to grow the economy is a contributing factor to our situation.  Japan is a good example of a modern country with no appreciable growth over the past ten years.  We need to come up with a plan to encourages growth to avoid a duplication of their situation.

4.         Growth.

Part of our inability to grow is our inability to complete in a global economy.  Millions of jobs have been lost overseas to workers who simply cost significantly less to employ.  Any business that manufactures anything substantial cannot afford to pay American workers to produce it.  As other countries continue to do an ever better job of educating their youth, our ability to compete diminishes more and more.  Our public school system is not working effectively and needs to be overhauled or we will be unable to compete and grow effectively in the future.

5.         Wages and Jobs.

We cannot reduce wages in this country due to the cost of living in this country.  Regardless of minimum wage laws, it is impossible for most American workers to work at a wage that would make them competitive with workers in low wage countries due to the significantly higher standard of living here and the significantly higher cost of living here.

6.         Consumer Debt.

Any solution that contemplates the American citizen spending more money to boost the economy must factor in the current debt load of the average American citizen.  It is not just the government that is overextended.  Millions of American families are overextended and cannot spend discretionary income, because they do not have any extra money to spend.  Many of those live in homes that are upside down and any increase in interest rates (for example, as a consequence of a government default or failure to address the debt issue) will cause more assets to be paid to lenders and leave less assets available for consumer spending.  Consumer debt and cost of living must be considered in order to effectively chart a course back to financial solvency.

So, to summarize …We need to borrow more and more money just to pay our current bills, our ability to continue to borrow at reasonable cost is threatened by the very borrowing we need to do (regardless of the debt ceiling issue), we have continuing bills and obligations into the foreseeable future that we cannot afford to pay and our revenue base (taxes) is stagnant and could actually decrease if there is another recession.  Our budgets for the next few years also contain deficits built in that will require additional borrowing, regardless of the cost of borrowing at that time, thereby racking up even more debt and putting us deeper into the hole.

Proposed Solutions.

If an American family or a corporation had the problems our national government has, they would be looking at bankruptcy and reorganization.  No one would choose bankruptcy lightly or cavalierly. Nor should the government. We need to chart a better course than that, restoring our standing in the world as a reliable credit risk while also getting our house in order at the same time. The problems are complex and I do not think the solutions can be simple. This solution, however, supports the American Taxpayer, and would tend to balance government budgets most of the time.

The American Taxpayer.

If anyone in this economy deserves to be helped with taxpayer money, it should be the American taxpayers.  The government, over the past two and a half years, has instituted programs to help the banks survive, bailed out failing automobile producers, and printed money to maintain its own liquidity.  These plans have not helped much beyond averting immediate crashes.  No long term progress has been made.  A more effective (and probably more popular) solution would be one that provided some assistance to taxpayers who are overextended and in debt.

The government could, and I think should, create a program which creates very low interest loans for American taxpayers solely to allow for refinancing of current debt.  No new money would be added to the economy, since higher interest debt would be retired dollar for dollar with the creation of the new debt. This is not suggestion that loans be canceled; it is suggesting that loans are transformed, renegotiated. Americans who elect to participate in this program would then have the ability to reduce their monthly debt obligation by a substantial amount, thereby providing them with the ability to spend discretionary income on new products, which would provide a boost to the economy.  The government, as creditor, would either service this debt or, preferably, sell the debt to banks for servicing, providing the government with a new source of income.  Money for this program would need to be created by Congress, and my suggestion is that Congress agree to use Article II, Section 8 of the Constitution, which authorizes the coining of money.

This is not really any different from what the government has already been doing with Quantitative Easing (QE2) except that the taxpayers become the direct beneficiaries of the program.   A side benefit is that the reduction in debt also results in a reduction in the cost of living, enabling worker to take lower paying jobs and still provide a sufficient wage to provide for their families.  Modifications in the unemployment program would need to go hand in hand with this program to provide graduated benefits over time, increasing the incentive to go back to work more quickly by stepping down the benefits over time.  Consideration should be given to reducing the minimum wage for anyone who accepts benefits under this program as should a sliding cap on their ability to obtain other consumer credit until their debt to the government is partially and ultimately fully paid.  Minimum wage reductions in general would enable corporations in the United States to offer work here at salaries competitive with foreign workers, providing a solution to growth of business here.

The Federal Government.

Again using Article II, Section 8 of the Constitution, Congress could monetize the debt, by simply authorizing the creation of money to pay it off, either partially or fully.  This is an extreme step which would have serious consequences worldwide, including a strong possibility of the devaluation of the dollar.  Devaluation is a double edged sword, as it causes inflation of the price of goods sold here (reducing our standard of living) but it also allows business here to sell products overseas at more competitive prices.  This is a trade off, but one I submit we need to strongly consider in light of our current financial situation.  As part of this decision, the Congress should also consider authorizing the monetization of future Social Security obligations, thereby reducing the need for future debt.  Taking those obligations out of the annual Federal budget would then enable Congress to also enact a balanced budget amendment for future budgets, with exceptions only in times of war, declared by Congress and only then with further specific approval of Congress.  An overhaul of the tax code would be appropriate here, requiring more Americans to pay taxes but reducing tax rates under a simplified code without many exemptions.  Everyone benefits from government services and everyone should pay their fair share for these services.  It seems to me that we would all be better off with a plan of action from Washington that addresses the issue rather than another “band-aid” on a wound that requires a tourniquet, or a temporary stop gap.  Ultimately, we face financial ruin unless effective plans are instituted and I do not see any solutions on the horizon from either party right now.

The ultimate result of the implementation of my plan would, hopefully, be balanced government budgets coupled with an ability to meet the current and foreseeable Social Security obligations without crippling the budget.  As growth and competitiveness takes hold, tax revenues will increase and the government will have additional income.  The true test will come at that time.

There are core services that our government must provide and everyone expects…police, fire, roads, a safe food and water supply, defense, safe air travel and many others.  But there are many other services that can and probably should be eliminated.  States can and should take a greater role in deciding what non-federal services should be provided.  Ultimately, even Education and Health Care can and maybe should be removed from federal management.  What is not done by the government can be more efficiently and competitively done by private industry, with government oversight to ensure that citizens are not being deprived of services for unlawful and discriminatory reasons.  This privatization would also reduce federal budgets while increasing the growth of private industry at home, providing for less of a tax burden and more tax revenues simultaneously.  The final goal to the plan is the balance of private industry with benevolent and limited government oversight, protecting the citizenry from abuse but refraining from controlling the delivery of products and services.  In essence, a return to a time of efficient, effective government with lower taxes and more private industry growth.

Our Worldwide Empire and Foreign Entanglements.

We spend a huge amount of money on defense, more than the rest of the world combined.  While presented to the American people as necessary for our safety, this spending finances our cost to run and control a worldwide empire.  I believe that this is done for two reasons; our need for energy and our desire to project our influence militarily around the world.  I submit that the money we spend to maintain our supply of oil would be better spent on developing new energy sources here at home, ultimately freeing our nation from the need to befriend and protect kingdoms and dictatorships in order to secure a source of energy.  As for our ability to project military power around the globe, I submit that force is a poor substitute for real influence, and diplomacy is more cost effective.  That is not to say that we should leave our country exposed, but we should not require sufficient military might to conquer the world.  As with all things governmental, balance is needed and we have clearly lost sight of that balance, given our current military expenditures.

In Conclusion,as noted above, the ideological battle today raging between Democrats and Republicans will not solve the nation’s debt problems, nor avert a financial catastrophe. The politicians do not appear to have a handle on a comprehensive solution to our financial woes.  I’m not certain that I do, either, but I feel an obligation as a citizen and therefore a stakeholder in our nation’s future to present my ideas and add to the debate.

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