Tuesday, November 5, 2019

Debt and Deficits

Background:

The US running debt clock is just a few ticks below $23 trillion, which the entire group agreed was a concern. This total debt ranks the US number eight in the world in terms of debt to GDP ratio at 107%. This is a top ten club that we should not want to be a part of, and puts us in the same league as Japan (unique economic model) as well as Greece, Italy, Portugal and Venezuela.

One of our members pointed out that given today’s low interest rates, this level of debt is not a huge problem right now. The service on our debt is only about $400 billion and represents just under 10% of our budget. While $400 billion is a lot of money and could fund many needed governmental programs, it is the future that is of concern to the entire group.

While Republicans criticized the nearly $10 trillion in debt accumulated under the Obama administration, the out of control spending has continued under President Trump. Last year’s deficit, for example, was nearly $800 billion and next year’s projection is for another $900 billion deficit. If this out of control spending continues and interest rates ever return to historic levels like five or six percent, service on the debt could easily top a trillion dollars and become the largest single element of our country’s budget.

Finally, the group understands that balancing the budget will require some difficult decisions. The combination of mandatory spending, like Social Security and Medicare, plus spending on the military, which is actually a discretionary expense, and service on the debt, which cannot be ignored, represents 86% of our budget. On the revenue side, we understand that every dollar taken in by the government takes money out of the economy and that we can’t get it all just from the rich. Taxing the top 1% at 100%, which will never happen, will only bring $600 billion into the government coffers. Revenue should come from a more balanced approach and by growing the economy so that it delivers higher revenues even at current rates.


Spending and Revenue Solutions:

1. Social Security must be restructured or it will be insolvent by 2034. Addressing its shortcomings offer both spending and revenue opportunities.

a. We should increase the age of eligibility for SS from 62 to 65 or 66. When SS started, back in 1940, life expectancy in the US was 62, today life expectancy is 79. We believe this change should apply to those age 49 and lower, as these people still have a chance to change their plans for retirement.
b. The above change would also affect the contributor / beneficiary ratio which was 16.5 to one even back in 1950. Today that ratio is 2.8 to one and by 2030 it will be 2.4 to one unless these changes are made. This is just not manageable.
c. We would also suggest that we increase the current limit on SS taxed income, which is only $128,000 today. We would suggest that all income, including capital gains, should be subject to SS taxes up to a million dollars a year.

2. The group was also very interested in a balanced budget amendment for the federal government as most state governments currently have.
a. This amendment to the constitution would have to make allowances for emergency situations like wars or economic catastrophes.
b. This amendment could also be tied to a Debt to GDP ratio for the total debt. It could suggest, for example, that the budget should balance if the total debt is higher than 70 or 80% of GDP. Currently our debt represents 107% of GDP

3. We would recommend that Congress reshuffle the tax cuts they voted in last year. We believe that a 25% corporate tax rate would keep us more than competitive on a global basis and that we should use all the increased revenue to lower the individual tax rates. While this would be a wash in terms of projected revenue, we believe it would create a positive “demand side” boost to the economy, thus increasing job creation and tax revenue from new tax payers.

4. While we all have great respect for our military, we all agreed that there are probably ways to reduce this huge (over $700 billion a year) element of the budget. For example, we have bases in over 80 countries in the world that are in those countries at great expense. Do we really need all of these bases in a world where we have the fire power available on our aircraft carriers and submarines? We believe a 10% cut in military spending is possible without endangering our country’s safety. Our spending would still be almost three times that of China.

5. We would recommend a reduction in cabinet level departments. President Lincoln had seven cabinet positions, but today we have 15. With each department comes its own level of complexity and expense. I would suggest that we totally eliminate the Department of Education since the country’s SAT and ACT scores have actually fallen since it was created and we continually fall farther behind other countries in our math and science scores. Give some of the $70 billion we spend on this department to the states and put the rest towards reducing out debt. Commerce and Labor Departments could be combined as well as Agriculture and Interior. Efficiency should be the motto and savings should be used to reduce the deficit.

6. Our group also thought a move to put America first would help stimulate the economy and recognize some savings. We should certainly push to source products from companies from this country, but there was also a suggestion to penalize products made outside America and especially countries who do not have a reciprocal trading relationship with us, like China.

Benefits from these recommendations:

Our group was very focused on both the revenue and spending sides of this issue, but we also kept the economy in mind as we made these suggestions. While the suggestions for the Social Security Trust Fund are mostly designed to save that program for future generations, we thought that all the other suggestions would actually stimulate the economy through the supply or demand side. So, in addition to the actual savings attached to each idea above, we would expect revenues to go up through higher general employment and higher corporate and small business profits which would both result in higher absolute taxes paid.

Our group unanimously agreed with these solutions, which should signal the likely approval of the vast majority of Americans of both sides of the ideological spectrum. I believe that a plan that would incorporate these planks would not only work to resolve many of the problems we face today, but would also gain support of the vast majority of the American people.

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