By Lawrence Grossman
REFLECTING ON THE “FISCAL CLIFF” THEATRICS in Washington and the public’s response, it seems clear that the vast majority of Americans believe the fiscal cliff is essentially about government’s failure to act responsibly.
What really occurred, and it happened long ago, is that we went over a “political cliff” characterized by a new political culture in Washington that is unwilling to make practical economic decisions any more.
The political cliff is not only the cause of the so-called fiscal cliff, but it is the reason we can expect this fiscal cliff to be just the first step down a dangerous fiscal cascade.
If we do not want events to end in true crisis, we should not expect the same political cliff dwellers to come up with a workable plan. This point was demonstrated again when the “compromise” tax solution that emerged from months of negotiations in Washington actually made our fiscal condition worse — adding $4 trillion to the forecast debt over the next decade alone, a 25-percent increase in the national debt from today.
The current trajectory of debt growth is out of control and, if unchecked, future costs would become unbearable in just a couple of decades. Today we may see an example of this in Greece, suffering with more than 25 percent unemployment, radically increased costs of medical care, years of economic contraction, the collapse of their ability to borrow on the open market, the rise of racist and extremist political movements, and the nation being subject to foreign oversight of its finances.
The U.S. national debt, which was about 33 percent of GDP in the post-war era through 1980, now stands at about 70 percent of GDP, and is forecast to hit about 300 percent over the next 75 years. Unfunded future benefit promises (i.e., Medicare and Social Security) are variously estimated to range from three to 10 times the size of the officially counted national debt. Interest payments on the national debt are forecast to increase from 1.5 percent of GDP in 2011 to 16 percent — a tenfold increase — in 2086.
In personally tangible terms, the Medicare and Social Security Trust Funds are forecast to be depleted in about 13 and 20 years, respectively; thereafter, Medicare and Social Security benefits would be cut drastically from today’s levels.
The U.S. Treasury Department’s latest “Financial Report of the U.S. Government” states clearly that “the continuous rise of the debt-to-GDP ratio illustrates that current policy is unsustainable.” The Treasury Department estimates that “preventing the debt-to-GDP ratio from rising over the next 75 years would require running primary surpluses over the period that average 1.1 percent of GDP. This compares with an average primary deficit of 0.7 percent of GDP under current policy. The difference, the ‘75-year fiscal gap,’ is 1.8 percent of GDP. … Closing the 75-year fiscal gap requires some combination of expenditure reductions and revenue increases that amount to 1.8 percent of GDP on average over the next 75 years.”
The Treasury report, released last year, also emphasized that these “base case” projections assumed that the Bush-era tax cuts would expire on Dec. 31, 2012. Because they were made permanent by the “fiscal cliff compromise,” the fiscal gap now most resembles the “Alternative” case estimate of the Treasury, which is about 8.3 percent of GDP on average over the next 75 years. The GAO estimates that in the Alternative scenario, “by 2040 more than half of all federal revenue will go to net interest payments” and that “waiting 10 years (to address the issue) would increase the fiscal gap to nearly 10 percent of GDP.” (“The Federal Government’s Long-Term Fiscal Outlook, Fall 2012 Update,” GAO).
In U.S. budgetary terms, this “gap” could be closed if projected levels of revenues and spending improved 40-50 percent from currently planned levels.
These are the numbers that constitute the true fiscal challenge. Yet our “political cliff” means that the real challenge is effectively ignored by politicians who prefer to fight partisan battles.
Voters as well seem not to realistically understand the challenge: A recent Pew Center poll found that “when faced with the tradeoff of taking steps to reduce the budget deficit or keeping Social Security and Medicare benefits as they are now, the public favors keeping benefits as they are now by a margin of 56 percent to 32 percent.” Nouriel Roubini, a leading macroeconomist, recently summed up the situation: “The reality is that America has yet to wake up to the full extent of its fiscal nightmare.”
To address the debt crisis successfully, it may be necessary to set aside for the moment the substantial policy disagreements and particular interests to focus on the relevant numbers that will get us to a practical financial framework stated in clear and quantifiable terms.
Such a plan ought to strive to be equitable, practical and comprehensible. It should essentially leave unchanged the relative positions of all value judgments and policy choices currently reflected in law. To that end, below are elements of a potentially equitable and workable plan to resolve the fiscal challenge.
1. A fixed percent surtax would be added to all federal income tax returns until fiscal balance is restored. Therefore, all taxpayers would pay more in equal proportion.
2. A fixed percent spending cut would apply to all federal government expenditures until fiscal balance is restored. Therefore, all government programs would receive less in equal proportion.
3. The surtax percent and the spending cut percentage would be equal. Therefore, tax increases and spending cuts would be proportionately equal.
4. The tax and spending percentages would start at 2 percent and increase 2 percent each year until fiscal balance is restored. This would gradually restore fiscal balance in about 10 years.
5. All remaining federal deficits until fiscal balance is restored would be financed with Treasury bonds funded by the Federal Reserve. This would immediately halt the debt explosion. It would not add to the net cost of financing our debt because the interest we would pay on new debt to the Federal Reserve would be paid back to the government as income.
Essentially, we would be covering the deficits with newly printed money that may have an inflationary impact; that may be viewed as another potential tax which would be very widely shared.
While this is obviously not a pretty picture, the question here is whether it is preferable to continuing along the current, deteriorating course.
Lawrence Grossman is the principal of Grossman Financial Management and a certified financial planner, SEC-registered investment adviser and accredited investment fiduciary. He has taught financial planning at the University of California, University Extension, Davis and Berkeley. He lives in Benicia.
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Yikes…we are lost at sea with not even jerks in the wheelhouse—Who’s been running this show for the last 50 years? Can kickers just going down the road?—pb
Mostly Democrats Peter.
That’s the most ignorant remark I’ve seen today (and you have a lot of competition). Reagan and Bush didn’t add to the deficit I suppose. In a pig’s eye!
The question was posed for the last 50 years
The debt today is about : $16,432 Billion
Starting with JFK in 1960, the amounts added under Democrat Presidents was about $8,722 Billion, under Republicans: $7,710 Billion.
Of that $8,722 Billion added by Democrats, more than 75% of that amount was added by the Keynesian, Barrack Obama.
Don’t worry, he has 4 more years to top that record!
LOL
He will, I am sure. Actually, Obama in four years has added more to the debt than Reagan and Bush II did in 16!
Right – because he was handed the worst economic crisis since…well, since the last time an incompetent Republican (Hoover) handed the Great Depression to a Democrat (Roosevelt.)
John Maynard Keynes realized that when you have a lack of demand of the depths we have experienced in this Lesser Depression, and the Great one 80 years ago, government spending is the only thing capable of generating sufficient demand in the economy to produce an energetic recovery. For the great depression, it took the massive government program called Winning World War II to do it.
Also worth pointing out: absent George W Bush’s tax cuts and spending increases from 2001-2009 (and if he’d done like virtually every other wartime president and raised taxes to pay for his wars), the entire national debt would have been entirely paid off by late last decade – and if you don’t believe me, just check the news archives for Alan Greenspan in the late 1990s warning of the dangers of <paying off the entire national debt too soon. This was, no joke, the big economic worry of the year 2000.
Get this right: the short-term problem is a lack of demand in the economy; the (possible – there is actually some debate about this) long-term problem is excessive government debt. Solve the short-term problem, and the long term problem becomes much, much easier to manage.
Larry said: “That’s the most ignorant remark I’ve seen today”</i
Larry is referring to my “mostly Democrats” comment to Peter.
Look at it this way, If we look at the 56 year span from Kennedy to Obama and we allow a count of 1 each for the party that contols the House, the Senate and the Presidency, for a possible total of 168, the Democrats would have a score of 110 and the Republicans would have a 58.
Thus “mostly Democrats” is an accurate statement.
And only in that elementary view does it approach accuracy, ignoring entirely countless variables and historical context.
Nah, it is just a reflection of the Democrats team. the one you adore so much.
No it’s a reflection of your childlike view of the world. Which history has proven wrong time and again.
Explain where and when. As you said wrong time and again. Tells us where DDL was wrong Time and Again. Can you do that “Here Comes the Judge Real American.”?
What variables and historical context. You said it now give us your source as you always ask others. Come on Real American state the source or your imaginary comment. Believe me residents of this fine city Real American will not state his/her source.
Blob have you ever posted a source for any of your nonsense? Ever, even once?
No, your addlepated poppycock comes undo lutes from your stunted mind. Which is why you have achieved only the contempt and scorn of this beautiful city. And only ever will.
Well it is not surprising that Real American comes back with an attack. Simple he/she can not answer so go on the attack. Personal at that. I do believe Real American if you read my posts they are my own personal ideals and do not need to be backed by sources. The source is me. If I post a fact very few if any will challenge them. Everyone knows I do my homework and will not question my stated facts. What does your nasty comment above prove. Nothing except you do have a dislike for Bob Livesay and a few other conservatives that post a comment. You have always gone after Bob Livesay, DDL and Optimisterb. Given a chance also Jim Pugh. You seem to protect any Liberal/Socialist who also makes very nasty and many times personal attacks on the same people. I do believe you might be surprised how many Liberals in Benicia that I have a very good relationship with. Most understand my ideals do differ from theres but do not go on a personal and nasty attack as you and your very few other locals do. You gain nothing but do get a little space up and down the comment section to prove what your agenda is. Personal and nasty attacks on the names I stated. I write LTTE all the time. Why not come out of hiding and make a comment via a LTTE with your name on my LTTE. You will not. Just hide behind a made up name that most now think you do not deserve.
“The source is me.” Yes, we know. Which is why your posts have no credibility. Because we know the fallacies to which you subscribe, and the weakness of your mind.
“I do believe you might be surprised how many Liberals in Benicia that I have a very good relationship with.” I do believe you would be surprised to find out what those liberals really think of you.
“Just hide behind a made up name that most now think you do not deserve.” Ha! But you don’t get to be the arbiter of what I do and don’t deserve, do you, Bob?
I just did.
No, you didn’t.
Undiluted
Odd that anyone even thinks there is a solution to this mess other than complete collapse of the financial system. Kind of like trying to plug the hole in the hull with mattresses after the Titanic hit the iceberg.
But I give Larry kudos for trying!
Larry,
Thanks very much for putting this together. I’d be interested in knowing what interest rates Treasury used in making their forecasts. We apparently are paying around $200 Billion currently to carry the debt and a report indicated it would be $1Trillion in just 8 years, dwarfing all other expenditure categories. I have to assume that is because of expectations that rates will rise significantly over what are now very low rates as well as our continued deficit spending (notwithstanding that we have been assured that that we certainly don’t have a spending problem). In any case, what this suggests to me is that the time horizon for getting this under control before we run into some extremely serious socioeconomic problems (ala Greece) is much sooner rather than later. I hope those with some clout in Washington take suggestions such as yours seriously before we get to that point.
Cut the quibbles, people. Surtax? Absolutely yes, it’s been done before. Don’t be so small with it. Make it 6
%. Proportional cut to all programs? NO, not on your life! They represent PROGRESS for the most part. Get real and take it out of the Pentagon budget. Bring troops home from Germany & Afghanistan.. Shut down half or more of the “lilypad” bases, worldwide. Focus on West Africa. Cut weapons systems R&D and procurement. We’re already the best, technologically, we don’t need to equal the next ten largest, military-spending nations combined. (Sorry, all you folks invested in the military-industrial complex. Suck it up!) Keep the Pacific Fleet but cut all the other services’ manpower by 35%. Spend that part of the savings on U.S. infrastructure. Make lots of jobs. Stand up to Norquist, the Tea Party and the NRA!
I stand with Bob Shelby, the Pentagon and our “imperial spread” are nauseating, Eisenhower tried to warn the world, the military-industrial nutcases need to be trimmed back to the small testicled-world dominators they attempt to be… and take their high-magazine assault rifles with them…our infrastructure and obese WallMarters look like white-trash when stacked against the Mercedes-Benz plutocrats—shame on you, clowns…W’s phony “weapons of mass destruction,” two illegal wars on a credit card and tax cuts for the rich that promoted ” derivative” machinations = pigs at the hog trough–how does financial gluttony feel while riding on decaying infastructure? I’ve seen sheepdogs with higher aspirations that don’t pee on electric fences–pb
Robert, Peter,
The defense budget was about 925 billion, for 2012, the deficit, was 1,100 billion. If we eliminated ALL defense spending we would still be 200 billion in the hole.
No one said eliminate Defense spending, just trim out the gluttony…that’s for starters…It may set a precedence in other departments and mindsets—including graft and corruption and unnecessary charging against Medicare for surgeries, unneeded tests, etc…think austere, not gluttony at taxpayers expense—
Is everyone a part of the problem or part of the solution? We ALL must contribute at the personal level or we’re going down the toilet together—count on it—pb
With all due respect to the author. No mention in the above article: about crony capitalism and the massive controlled fraud perpetrated on the American people by the bankers and Wall Street;no mention of tax cuts for the rich; no mention about stimulating job growth -unemployment is 14.4 percent according to the U-6 index or 22.3 percent according shadow stats.org; and, of course no mention of military spending. See article below for a wake-up-call.
http://www.washingtonsblog.com/2012/02/debunking-the-myth-that-war-is-good-for-the-economy-once-and-for-all.html
Will deceptively stated: No mention in the above article: about crony capitalism and the massive controlled fraud perpetrated on the American people by the bankers and Wall Street;
And no mention by you Will of: the governments involvement through Fannie and Freddie (FM’s) by holding far more bogus loans and losing far more money than the Banks George Bush and John McCain telling the Democrat controlled Congress that the FM’s were on a path to destruction. Barney Frank standing up in defense of FM’s at hearings he chaired while literally in bed with a high ranking FM official
the law suits filed by various groups including ACORN (with Barrack Obama), which forced banks to change policies the fact that the government told/allowed banks to count unemployment benefits as “income” to qualify for a loan
If you are going to challenge the author at not being honest, you should at least have the courage to be honest yourself.
The Federal government’s fingerprints are all over where we are today. At the same time the debt we have amassed is a “sunk cost” and is only useful in the sense we need to stop building on it and most certainly scale back policies that hold back economic growth and the revenues to pay it. BTW, I trust Will realizes that “crony capitalism”, while not a new term, has come into vogue in the last few years to refer to policies in the current administration. A Republican would never have gotten away with that.
More on Freddie and Fannie for the community to consider…From the author of “Bailout Nation.”
Also an article (I couldn’t post?) titled: ” The Myth of Fannie Mae, Freddie Mac, Barney Frank, the housing bubble and the Recession.” Gives a detailed explanation of this period in our economic history
Source: The Long Goodbye
August 12, 2010.
http://www.ritholtz.com/blog/2010/05/rewriting-the-causes-of-the-credit-crisis/
Will, you did not answer the questions posed to you earlier, nor did you read the dissenting report. You should try looking at both sides sometime Will, it might open your eyes.
Right back atcha
I read the full report, did you?
“You should try looking at both sides sometime Will, it might open your eyes.”
Right. Back. Atcha.
I heard you the first time and I told you I did look at both sides. I read the Democrats cover up and I read the dissenting report.
The facts back up the dissent.
I seriously doubt it if either you or Will took the time to do so, if Will had he could quickly have answered my reasonable questions posed to him, instead of searching for an article that backs his misconceptions.
Dennis,
I’m not sure they’re listening. It always seems to be the “usual suspects”, whether banks, greedy capitalists, etc. The truth is that there is no way any of this could have happened without the explicit or implicit approval of our elected officials. Banks and securities firms are and have been regulated for years. Regulators either knew or should have known what was going on and failed. Folks in Congress and various administrations going back decades dropped the ball. The lesson in all of this should be that simply saying that all we need is more regulation or jail time for miscreants doesn’t guarantee a thing. Some folks, sadly, always seem desperate to blame anything and anyone but themselves or their good intentions when things go wrong. Never go back and examine how things happened, never do something based on actual outcomes – just do “something” and hope for the best and if that doesn’t occur, look for scapegoats. At some point you run out of the “usual suspects.”
You consistently fail to hold conservatives to the standard you hold so-called liberals. Which makes you either incompetent or a partisan hack. I like to think it’s a little of both.
To continue down the present path as the writer says is not at all good. The very simple solution is to get unemployment down to about 4.5%. Reduce federal spending by 1% each year for the next ten years. Add no new benefits or programs without a revenue source to cover the new benefit. S/S, Medicare and Medicaid can easily be fixed with minor adjustments. Such as age, no cap on S/S participation by employees but done on a rising scale then a cap and a downward scale, Increase medicare payroll payment to about 1.75 from present 1.45%, there is no cap on medicare payroll deductions. Remember I said S/S employee payments on a rising scale. This would more than cover the issue on the middleclass. Unemployment reduces revenue. Borrowing decreases ability to spend. Strong employment is the answer and it will answer all the problems if the government is controlled on spending. Spending has always been the problem not revenue. Mr. Grossman and his figure are just what they are figures. Some of his solutions sound good but have consequences and will never happen. What I just stated can happen and it will not hurt but improve the middleclass and their ability to continue as the middleclass. President Obama is not the great protecter of the middleclass. Just the opposite. He knows where all the money is and it is not in the top 2%. Keep your eye on the President and his attack on the middleclass for their money to support his agenda.
More on crony capitalism and who is Jacob Lew?
http://neweconomicperspectives.org/2013/01/jacob-lew-another-brick-in-the-wall-street-on-the-potomac.html#more-4386
Will Jacob Lew is just another yes man to President Obama. Anyone that follows President Obama and his favorite sons knows this man very well. He will be a disaster.
Another opinion on Fannie and Freddie for the community to consider…
http://myesoteric.hubpages.com/hub/Fannie-Mae-and-Freddie-Mac-Is-Not-Responsible
Wishful thinking Will.
Seriously? Using the Financial Crisis Inquiry Report ” from the “National Commission on the Causes of the Financial and Economic Crisis in the United States ” to defend the FM’s?
Suggest you do these things:
1) Read the dissenting report regarding that cover up and shill job by tired political hacks looking to cover their own asses.
2) Answer these questions (the answers are in the dissenting report):
What was the dollar value of bad loans by private banks vs. FM’s?
What was the failure rate of loans made by private banks vs. FM’s?
3) Explain to me why it was not a conflict of interest for Barney Frank to have, as his life partner, a man who was a high ranking official at FM?
4) Take a look at Roy Corday’s announcement yesterday explaining the actions now being taken by the government to prevent such a reoccurrence. (it is available at http://www.whitehouse.gov). Hint: had those policies been followed at FM, this whole mess would have nbever happened.
Also Barney has now admitted mistakes that he never admited before. Also Barney said no oversight was needed FM. So much for government intervention. Lacking oversight that President Bush asked for.
Another opinion for the community to consider. Do the research for yourself and get both sides to the situation or story. Doing your own research is very rewarding and takes very little time. Give it a try. Posting someone elses thoughts is all it is. Someone elses thoughts. O like original thinbking and ideas to solve issues and problems. It is very obvious that some of the Liberal ideas have not worked and I will also say Republicans ideas also. So your own thinking and ideas are just as important as a reference to someones elses failed ideals. Thats a memo
i have appreciated the many thoughtful comments. anyone interested in talking about compromise?
“We must address one last issue and that is the ongoing financial scandals. We wish to share our view that such crimes ought to be punished much more vigorously and that we need much better regulation to curtail these offenses. We believe that the major banks are a problem for our economy. They are not only too big to fail – more importantly, they are too big to manage, too big to regulate, and too big to trust. That is, in large
measure, why these crimes persist: the financial lobby has effectively deterred regulators and our elected
leaders from successfully preventing such wrongdoing. Breaking the law has become just another business risk to management. On a positive note, we hear raised voices in influential and reasonable quarters favoring the break-up of big banks. Hopefully, that will occur.”
Source: Market Update. Lawerence Grossman. July 2012.
Mr. Grossman I agree with your concluding comments from your financial newsletter. Unfortunately, you can’t have a compromise (“Hopefully, that will occur.”) when the Great Recession-financial scandals have not been prosecuted. We had the Savings and Loan crisis; Enron scandal; Long Term Capital Management fiasco; the more recent Libor problem all of these situations have involved fraud. I’m glad you used the word crime (“these crimes persist”). Fraud is a crime.
Mr. Grossman you asked the question “..Anyone interested in talking about compromise?
My response would be: No compromise until we prosecute the crime!!
Will G stated: No compromise until we prosecute the crime!!
Good idea. Let’s start with Barney Frank!
Another look at the Fiscal Cliff for the community to ponder…
http://www.kyklosproductions.com/posts/index.php?p=178
Very boring read with no solutions. One fact is very evident. Redistribution of the wealth. No doubt about that in this very long and boring read. Again an attempt by our local “Citizen :Research Reporter” to again remind the local folks that they are not aware and do not follow these issues. Will just how uninformed do you think the folks of this city are? I personally think the residents by the most part are very well informed. They really do not not need more Liberal thinking about the fiscal cliff. My personal belief is we should revert to a system that every month every tax payer write a check for State, Federal and Payroll taxes that are due. Do not pay for three months and the whole thing comes out the fourth month. This will not happen and should not. If it could it would for sure get the attention of the tax payer in a hurry. You would then see many changes in tax codes, S/S and Medicare. all to the benefit of all tax payers. They would all benefit. The tax payer and not the Liberal politicians who want to make your decisions because you are not capable of thinking. Please Will the residents are not that uninformed as you wish to beleive as you put forth very Liberal thinking articles to convince they are not informed. Very condesending and a big insult to local residence. Thats another memo
Not condescending, not boring, just an effort to broaden the discussion. Thanks Will for posting this very interesting and informative article.
I do understand what you are saying. Sorry it is a repeat of what has been in the news for the last six months. Just where do you think the local folks have been.?
I don’t know where the local folks have been and neither do you. All I know is knowledge is welcome, and admonishing someone for trying to join and broaden a conversation is ignorant.
I have a sneaking suspicion the progressives are losing this argument. So what else is new?
What would be new is an admition of their numerous errors.
Ha! You missed the point of this oped entirely. Unsurprisingly, so did DDL and the Blob. For a clue, note the author’s lone comment. Or you can just go back to your echo chamber, where only history proves you wrong.
Real American: I enjoy your comments, send me an e-mail sometime: PetrBray@AOL.com
Thanks–pb
Dear all:
Vultures, Gnats and Goats/Lost Pharaoh –
All the quasi-flying vultures crap on us
with their under-regulated, greed-soaked aspirations
and then the gnats arrive to do what about it?
Buzz and fluff, buzz and fluff, as if that was enough.
Lady down the street was broken into the other night,
the vermin looking for an open window
and an easier road through life,
just enough to wear over their sloth-filled coats.
Goats up on the hills seem to be the wisest of all,
eating the weeds before the weeds become fire fuel.
So if I see you on the trail, I might not send an e-mail,
I may show a benevolent face or smile,
or may sigh and wait a while to see if the prevalent odor
is of vultures, gnats, or goats up on the hill.
Best wishes to us all – The Lost Pharaoh –
©Peter Bray, 1/14/13 All rights reserved
RA said: You consistently fail to hold conservatives to the standard you hold
Who is you?
Your post comes under Reg Page, so it is not clear. But my comment would apply either way:
Do you have an example or is this just another one of your spurious allegations?