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Nov 14 2012

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A Metaphor for POTUS’ Fiscal Remedies….

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"Truth Has No Agenda"

Numbers are dry and boring, so let’s begin today with a metaphor.

You have been busy living life. College, career, marriage, house, kids. You are striving for the American dream.

Yet, in all the competing priorities, it is your health that has suffered. That “freshman 15” has become a middle-age spread of 150 pounds or more. If you don’t do something fast and dramatic, the chances are good that you are going to die prematurely.

The solution is radical and life changing; gastro-bypass surgery; effectively re-routing your digestive track to create a tiny stomach. A combination of liposuction and the bypass surgery create a new road to recovery and health. The stomach can only accept a fraction of the food that you were able to consume before, and with a vigorous exercise program, the remaining weight begins to melt off. It is not fast or easy, but within a year, patients return to a more normal weight and a regular life without the immediate threat of complicating disease.

Now, the doctor has laid out the options, and it’s up to you to choose who will do the surgery for you. You do your research and find “Clinique Obama,” where their founding principle is a “balanced approach” to your weight loss reduction requirements. Sounds caring and empathetic. They understand your sense of loss at never seeing another Big Mac.

So, the day arrives. They wheel you into surgery, easing your fear with reassuring words about the marvels of the new life that will be waiting for you. You fade out under the anesthesia.

Hours later, you slowly wake up. You are groggy, but you already know there is something wrong.

Both of your legs have been amputated below the hip bone. Your left arm is gone at the shoulder. You look down at the front of your body and there are no incisions. The rolls of fat are still there. Your stomach is still there, intact.

Yet a smiling nurse walks in, proclaiming the surgery to be a success. Your procedure has just removed more than 100 pounds from your body mass. You are well on your way to your goal weight, and the best part – you can still eat all the Big Macs you want….

That, in a nutshell, is a semi-humorous view of the dire fiscal straights in which we find ourselves as a nation, and the President’s solution.

Meeting with labor leaders and progressives at the White House yesterday, the President called for $1.6 trillion in new tax increases to address the looming financial Armageddon of the “fiscal cliff,” discussed in detail here. The tax increases are part of the Administration’s $4 trillion plan to bring the US budget deficit under control, if not into balance.

The President’s rationale for this plan could easily be labeled as fiscal malpractice.

It does nothing to contain the costs of the real drivers of future US debt, and it seriously undermines incentives for the private sector to invest capital in the economy to produce jobs, business growth – and government revenue. The plan is punitive and counter-productive, fulfilling progressive visions of social justice, while damning the US economy to sluggish mediocrity and a “new normal” of high unemployment, low growth and stagnation. Worse, even this retributive plan must rely on budgetary smoke and mirrors to meet even superficial deficit reduction targets.

POTUS said voting was the best revenge, but it appears that his budgeting is better.

Here is what the Congressional Budget Office (CBO) said about the drivers of US debt:

“Altogether, the aging of the population and the rising cost of health care would cause spending on the major health care programs and Social Security to grow from more than 10 percent of GDP today to almost 16 percent of GDP 25 years from now. That combined increase is equivalent to about $850 billion today. (By comparison, spending on all of the federal government’s programs and activities, excluding net outlays for interest, has averaged about 18.5 percent of GDP over the past 40 years.)”

Did you get that? All federal spending over the last 40 years has averaged 18.5 percent of GDP. The explosion of entitlements will take up 16 percent of GDP by itself over the next generation, requiring either massive spending cuts, or massive tax increases.

And what plan did the President lie out to reform these programs for long-term sustainability yesterday?

None. Zero. Nada.

What he actually proposed instead was ending the Bush tax cuts for those earning more than $200,000, imposing a special tax on millionaires and cleaning out all the loopholes and deductions for filthy rich. There hasn’t been a soak the rich plan this audacious since FDR.

But here, the President is seriously messing with something that is already working. You see, the untold story of our current federal budget dilemma is that the problem is with expenditures, not revenues.

Since the President extended the existing Bush tax cuts at the end 2010, individual tax payments to the federal government have increased by $266 billion.

But wait, it gets better.

A little noticed fact about overall federal revenues, certainly something that Team Obama does not want you to know, is that even with the feeble economic recovery over the last 43 months, federal revenues – with the Bush tax cuts intact – have been increasing from 2009/financial crisis lows.

In 2009, the government took in $2.1 trillion. In 2012, the Feds took in 2.5 trillion. That is only $100 billion less than the $2.6 trillion the feds collected in 2007, the last pre-recession year and a historic high for federal tax collection.

The Congressional Joint Tax Committee has stated that expiration of the Bush tax cuts at the high end would bring in $82 billion in additional revenue per year for a ten-year total of $820 billion (based on a static model that does not factor the response of tax payers to new taxes). But in only three years, based on economic growth only and with no change in the Bush tax cuts, revenues to the government grew by $363 billion.

Which approach seems more likely to both incentivize growth and deliver revenues?

The challenge, which the President and Democrats refuse to acknowledge, is on the other side of the ledger – spending. It has grown $800 billion since 2007, to $3.5 trillion last year, and to an expected $3.6 trillion this year. The irony of the Obama first term is that to the extent that the deficit has been reduced at all from its all time high of $1.4 trillion in 2009, it has been due to economic growth, with the Bush tax cuts in place, not spending restraint.

The other pillar of the President’s $4 trillion plan to balance the budget is a hocus pocus budget gimmick, pure and simple.

CBO projects budgets in ten year increments. So, regardless of the changes on the ground, CBO has continued to project significant spending on Iraq and Afghanistan as part of their baseline, even though the US has already withdrawn from Iraq and will do the same in Afghanistan in 2014. The money budgeted for these categories were never going to be spent.

With a magic wand, POTUS calls this $1 trillion in “unspent” funds a new surplus that can be used for deficit reduction (and according to his campaign, “investing in America). But it’s a figment. It was all going to be borrowed money anyway, had it needed to be spent. Only in Washington accounting can something like this be considered a tangible asset.

In sum, the President’s debt reduction policy is to slaughter the golden goose in the name of tax fairness, and scrape together enough crumbs from budget charades to create a reasonable facsimile of budget discipline, while doing nothing to address the long term drivers of debt.

It represents breath-taking economic ignorance and a stunning threat to American economic vitality.

If you voted for the President, you enabled this.

You have no one to blame but yourself for the outcome.

 

 

 

 

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