Fixing the U.S. Debt and Deficit

By Pete Peterson

All the economic experts, bi-partisan commissions, budget czars, think tanks, and academics will have statistics, formulas, historical data, and projections to justify myriad proposals. Some will gain enough clout to become fact; some will even work. However, the national discussion on regaining fiscal sanity could benefit with input from the bottom; U.S. citizens. It’s well past time that the government sought counsel from the governed. Here are some observations of areas where the debt and deficit could be improved.

Most recently, there has been much hand-wringing and teeth-gnashing over the debt ceiling accompanied by occasional blurbs about balanced budgets. If even half of the ideas below were implemented, it would be possible to begin to lower rather than raise the debt ceiling. As for balanced budgets, they are mandated constitutionally in many states and could be for the federal budget also. Just don’t expect that balance to happen very soon even if an amendment finds it’s way into the Constitution.

Both parties have seen fit to raid the Treasury on behalf of the companies which caused the financial collapse. With the next Presidential election season underway neither party has the hair on their hindquarters to tell their corporate donors TARP will not be revisited. That the executives of the institutions involved in TARP participated in the feeding frenzy should hardly be surprising, although their bonuses were overshadowed by a far larger misuse of these funds. When the furor began over the AIG bonuses, it was also revealed that $30B+ went to companies in Europe. Companies which received TARP shared the wealth via bonuses when it was not theirs to share. In fact, their response to TARP was to hog far more in bonuses (at taxpayer expense) than their companies even earned as profit. A substantial tax penalty (70% or better?) on these bonuses would net $Billions which could be used to buy back some outstanding debt and discourage future robbery from the public purse.

The so-called “living will” provision (for institutions of such proportions that they pose a systemic risk) is worthwhile. In short, companies currently deemed “too big to fail” should be put on notice that they have become “too big to BAIL”. If the international mega-institutions get the message of being exactly that they will be duty bound to their investors to have adequate reserves. Those that then do fall will be absorbed by the survivors of their collapse.

“Cash for Clunkers” packages were spread broader than they should have been. If anything, they should have been restricted to Ford, GM, and Chrysler. Japan should have done the stimulus for Honda, Toyota, and Nissan. Besides, Detroit didn’t have this coming; they had already been bailed out. The point here being that not $1 of TARP or any other stimulus package from the U.S. Treasury should have been allowed to leave the U.S. economy.

There has been discussion of federal wage and hiring freezes. The proposed freeze is a half measure which plays to the crowd, but does little to reduce the debt or deficit. Note that in Ireland government employees were notified that the smallest pay cut of 5% would be the burden of the lowest paid with larger pay cuts for higher pay grades. Considering that government jobs in this country pay far better than the public sector, a 5% cut should be fairly painless. An appropriate exception would be for the military. They should get a raise so they don’t have to rely on food stamps to feed their families. (Pay for these raises by not renewing contracts with Halliburton, KBR, etc.)

Another idea in circulation was to stop replacing federal employees who retire or otherwise leave government service. These suggestions, taken together, would result in the painless downsizing of government. As for hiring, the Obama administration has established new czars (with mushrooming staff) and packed existing agencies with the likes of the 16,000 IRS rookies. Is there anyone who seriously believe that these are the jobs America needs?

It has lately been reported that corn has risen 50% in the last year. In these circumstances, the agricultural subsidies extended by the lame duck congress with the Bush era tax breaks are unnecessary and obscene.

Another area in which to realize savings is Treasury bonds. In the late ’80′s a pie chart in the 1040 instruction book demanded attention. Still there, it describes the sources and expenditures of U.S. Treasury funds, including taxes. Not surprising was that Defense was the greatest spending portion. What seemed alarming then was that almost as large a piece of the pie went to service the public debt. Reason held that this burden would eventually be lifted if the U.S. Treasury would simply STOP selling bonds. (Recall the cardinal rule of holes; “When you find you’re in one; stop digging.”) Investor nations will not want for plentiful sources of government debt. Portugal, Greece, and Ireland will be glad to accommodate China and Japan. Expect the DEBT piece of the US Expenditures pie to eclipse defense in your next 1040 book.

As for taxes, there seems to be universal agreement that the tax code needs to be simplified. The various proposals range from dumping it in favor of a national sales tax, to a flat tax, to giving up some loopholes for a reduction in rates. It may also be worthwhile to add an incentive for U.S. corporations over foreign. The means for this would grant a more favorable rate to companies doing most of their business in this country and being mostly owned by U.S. Citizens. Why? As an incentive to stimulate domestic production (think: jobs) and reverse capital flight to foreign tax shelters.

As for Social Security, one overdue change which gets little discussion is to change the limit on wages subject to the tax which supports our elderly. During the darkest days of the financial collapse, the FDIC considered it prudent to raise the limit on protected deposits from $100k to $250k. Indeed that change was likely helpful in preventing a run on many wobbly banks. Even as the limit on deposit protection was timely, it is noteworthy that the $106k ceiling on income taxed for Social Security is just as outdated. The result of the current situation is that those who will need it most in their retirement are supporting those who need it least now.

One way mentioned to make Social Security last would be to make it needs based. But the wealthy who have contributed to it are as eligible as other taxpayers. It may be workable, however, to encourage those who could do without it to take a tax break in some portion of the amount of their Social Security by letting it stay in the fund or go toward our towering debt.

By far the best fix for Social Security would be to put Congress on it like Joe SixPack and watch it become quietly solvent when it is no longer raided for pork projects. The practice of get-elected-once-get-paid-for-life is no longer sustainable with $Trillions of debt. Besides our elected officials are NOT Royalty.

Finally, we see that Marie Antoinette (“Let them eat cake.”) and Leona Helmsley (“Only the little people pay taxes.”) are alive & well in DC. TARP, HAMP, “Clunkers”, etc. have revealed that both parties have embraced Supply-side Reaganomics. Jack Kemp would be proud.

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