Memo to Government: Cut Spending
The financial news this week contains a curious mix of stories, that all have a common theme. America may be heading toward some very difficult times ahead. And, the primary reason is that our Government, at all levels, has spent us into ruin. The most frustrating part of this story is that nobody in office seems to get it. It’s almost like a horror movie, where you can hear the scary music playing in the background. But, the oblivious politicians are too busy partying to notice the guy with the chainsaw, wearing a hockey mask.
Entitlements Gone Wild
According to the Wall Street Journal, nearly half of all Americans live in a household in which someone receives government benefits. At the same time, American households not paying federal income taxes has also grown to an estimated 45% in 2010, from 39% five years ago. There are an estimated 10% of tax payers who get refunds, even though they don’t pay any taxes. And, the percentage of the federal budget spent for entitlements is currently 64%, the highest in history.
Message from Voters
The latest high-profile TEA Party victory in Delaware has rankled the Republican leadership. They were hoping to use the anti-Obama backlash to retake control of the Senate in November. Now, they fear they may lose this seat and remain the minority party. This doesn’t surprise me because the Republicans haven’t shown any kind of fiscal restraint or leadership. And, they remain oblivious to the message from voters, which is to reduce the size and scope of the government.
Tax Cuts Expiring
The Bush-era tax cuts are set to expire at the end of the year. And, the trillion dollar question is whether or not to extend these cuts or to let them expire.
- President Obama wants to allow the tax cuts to expire for the rich, who make more than $250,000 per year.
- Republicans want to extend the tax cuts indefinitely, warning that raising taxes on employers will plunge us back into a recession.
- Democrats initially supported letting the tax cuts expire. But, as the election approaches, they are starting to cave in to avoid a backlash.
My solution is simple, a good old-fashioned compromise. Keeping the cuts in place, but raising the long-term capital gains rate from 15% to 20% should allow the recovery to continue, without piling onto the deficit.
Greenspan Changes his Mind
This week, Alan Greenspan surprised everyone by advocating that we let the Bush-era tax cuts expire. When Alan Greenspan used to run the Federal Reserve, he was all for tax cuts and he strongly supported the current cuts that are set to expire. But, in typical Greenspan double-speak, he advocates new tax cuts at the same time he warns about the deficit.
“We should not have tax cuts with borrowed money, but we should have tax cuts, and the more as far as I’m concerned the better, but only in the context of bringing the deficit down. Unless we do that, I think we have very grave problems ahead.”
Unfortunately, he doesn’t give any explanation of how tax cuts would bring down the deficit. And, he ignores the most obvious solution, which is to cut government spending to reduce the deficit, while keeping taxes lower to stimulate the economy. How did we listen to this guy for 20 years?
The Bottom Line
The bottom Line is that it’s not going to be easy to rein in spending. No matter what part of the budget gets cut, someone is going to be unhappy about it. But, we have to put a stop to the free-lunch mentality, before we all go hungry.
“Three groups spend other people’s money: children, thieves, politicians. All three need supervision.”
Dick Armey – House Majority Leader (1995-2003)
Recommended Reading
Len Penzo – My $114,000 Challenge to Uncle Sam
Invest it Wisely – The Rising Chinese
Squirrelers – Tax Rates by Country
This post was featured on the Carnival of Personal Finance over at Well Heeled Blog. If you aren’t familiar with the Carnival of Personal Finance, you need to check it out. It’s the premiere carnival for Finance Blogs.
It’s a bit scary when you find yourself unable to distinguish which initiatives are backed by the Democrats, and which are proposed by Republicans.
To get political for a second, isn’t it strange that the right is currently composed of rich people fighting tax increases on one hand, and, basically, fundamentalists who are willing to make cuts everywhere except defense (the biggest portion of our budget) on the other?
I voted for the Democrats because they make be spending as much as the GOP did, but at least they’re doing it with the right motivation and a coherent strategy.
You can’t blame the government for a lousy economy and lack of jobs while telling them not to spend money, can you?
Cognoramus,
I have always said, the main difference between the Republicans and the Democrats are the special interests they represent. Neither party is representing voters right now. That’s why I find it so interesting to watch the rise of the Tea Party, even though I’m not a member. We need another choice, just to break the two-party duopoly that has been ruining our country.
Yes, I can definitely blame the government for the recession, although I don’t blame the current administration. I mostly blame the Fed for manipulating the interest rates and past administrations for poor regulation of the banking system. It started with Clinton and continued with Bush, so it’s not a partisan thing. Both parties sold us out and contributed to this mess.
The economy is a short-term problem. The deficits are a long-term problem that will take decades to get under control. It’s just like if we owed $200K each on our credit cards. We can’t start to pay that off, until we stop spending foolishly. Consumers have figured it out, but the government still hasn’t.
At least, that’s my take on the situation.
Wow. Where to begin here…
1. Defense is NOT “the biggest part of the budget” as Cognoramus mistakenly asserts. Defense spending takes up only 20 percent of the budget. On the other hand, social programs such as Medicare, Medicaid and Social Security take up 41 percent of the budget – 55 percent if you count other “safety net programs.” We owe well over $100 trillion in unfunded obligations for those social programs – before Obamacare. Not so for defense.
2. Of those items above, the federal gov’t is ONLY specifically authorized to provide for the national defense in the Constitution. Nothing there about entitlement programs.
3. The Dems are not spending “as much as the Republicans.” Yikes! Since taking over Congress in 2007, the Democrats are running annual deficits that are 10 times higher than the Repubs did between 1996 and 2006. The Republicans ran up deficits of only $1.2 trillion between 1996 and 2006. In contrast, the Dems in Congress have presided over $3 trillion in deficits in just THE LAST 3 YEARS. When it comes to running up deficits, the Democrats have no peers.
4. George W. Bush was no conservative – and his big spending policies led disgusted conservatives to stay home in droves during 2006 and 2008 elections. Now look what we have. The liberals in Congress doubled down and then some on Bush’s excess and now our kids and grand kids will be paying the price for it. Never again.
5. Keynesian economic policies have failed miserably and will keep us in this mess. The $787 billion stimulus was a complete failure. You want the economy to recover? Then drastically reduce the size of government and cut taxes. Tax revenues increase and the economy flourishes every time meaningful tax cuts are enacted. It worked beautifully to get us out of recessions with Reagan’s cuts in the 80s and Bush’s in 2003. With Reagan, revenues increased in 8 out of 10 years after implementation of the tax cuts. Bush’s 2003 cuts saw the biggest increase in federal revenues in history between 2003 and 2007. After that, the Dems took over Congress and it has been all downhill from there.
Best,
Len
Len Penzo dot Com
Len,
I can always count on you for a lively debate.
Here is my take:
1. The good news is that Defense has probably dropped from 20% of the budget. The bad news is that defense spending hasn’t gone down. Instead, Entitlements have gone up so much, they now take up 65% of the budget. They are crowding out spending for anything else.
3. More bad news. The deficit this year alone will probably exceed 1.2 Trillion dollars, which is more than 1996-2006 combined. I think it passed a trillion in July or August. Democrats own most of this year’s deficit, but Republicans haven’t set a frugal example either. They did give away a trillion dollars to banks in 2008.
5. Keynesian economics have failed for the same reason most economists are clueless; they’ve never run a company or held a private sector job. We have to stop letting academics experiment with our economy. Keynes died over 60 years ago. How are his theories even considered relevant today?
Ronald Reagan was The Man. If he was still our President, the economy would be recovering and the terrorists and rouge nations would be cringing in fear. Young people have never seen a competent President running this country. Man, I miss those days.
Thanks for including my article in your recommending reading. Much appreciated.
I think you said it very well in your last sentence: “we have to put a stop to the free-lunch mentality, before we all go hungry”.
Wise Squirrel,
I always try to put something fun and unique in the Bottom Line section. I was having trouble this week and then I came up with that line.
I am one of those fundamentalists that Cognoramus refers to, but I think defense could be trimmed as well.
We don’t have subsidized homes and subsidized food for all (well, with all the recent govt. intervention you can argue these points somewhat), and yet shelter and food are crucial to life. If we can survive with private shelter and private food, why do we need to redistribute, tax, and spend so much wealth in order to have a public *anything*?
When it comes down to it, national defense and national security are probably the hardest problems to solve privately, but there are plenty of other areas which would benefit from more competition and more choice. Monopolies are not good for the consumer, and a government monopoly is no exception to this rule.
Thank you for including my article as well!
Kevin,
Both of my folks worked in defense and there is an insane amount of waste, fraud and inefficiency. I would like to see us get a lot more bang for our defense buck and scale back this part of the budget. To do this, we need to start with reforming the DOD’s bizarre procurement process. Then, tell contractors, there are no more cost over-runs. If you bid X dollars, we expect you to deliver for that, even if you eat the profit. That’s what they do in the private sector and it works.
But, the real elephant in the room is entitlements and the new tax policies. This isn’t Greece and we can’t afford to spend 65% of our budget on entitlements. We can’t afford to let 45% of people not pay any taxes. And, we can’t give refunds to 10% who don’t pay. No matter what else we cut, this alone will sink us. This is just common sense.
Wholeheartedly agreed. For defense, I think we can question how much of the defense burden the U.S. really needs to take on its own, and how much can be deferred to Japan and Europe. I’m not convinced that excessive military projection is a good thing for national security, not to mention the huge hole it puts in the budget.
When it comes to taxes and wealth distribution, clearly even the most socialist of people must see that current trends cannot be continued in perpetuity. Even in Europe, pragmatism is overtaking idealism.
I don’t think you’re quite the fundamentalist type I was talking about 🙂 So far I agree with everything you’ve said. The logistics of military projection is the big problem, even without getting into fraud waste and abuse.
I’m getting ready to start my third deployment with the Army, so today I went and got (another) issue of gear. Among the gear were 4 Army Combat Shirts (value: $170), issued indiscriminately to everyone, even those of us who already have several from the past.
All this despite the fact that (a) we get a yearly clothing allowance of several hundred bucks, and (b) those shirts are only authorized for wear by people going out on patrols and such, or less than half of the deployed force.
This is one relatively small issue, but imagine how many more like it come up just because we have to maintain a massive overseas presence?
We could save a fortune by closing up our foreign bases. The ones that are the most obvious to me are Okinawa and Korea. It’s been over 60 years and we are still there. We need to pull out of Okinawa, before we get kicked out, like we did in the Phillipines. And, South Korea is wealthy enough to fund their own defense of the DMZ. If we leave the region, North Korea won’t have us to blame for all of their problems. One day, I would love to see Korea reunify, like Germany did.
We’re still in Germany, too, and the government basically pays to subsidize every American soldier’s family over there, in addition to providing gasoline at U.S. prices and such.
You’re definitely right about Okinawa. No one I know who’s been stationed there has ever said that American service members are well-regarded there.
I think Germany is a little different. When we tried to shut down Ramstein the locals freaked out and wanted us to stay. They appreciate the boost to the local economy. Plus, it offers a strategic base for Europe, Asia and the Middle East. We bring a lot of wounded through there.
In Okinawa, there were a couple of high-profile crimes by service members. Japanese are pretty nationalistic and they would probably welcome our departure. Plus, what are we doing there? Everyone I know who has been deployed in Okinawa played softball all day. It’s not like Korea, where you are staring across the DMZ at a communist army.
Bret, you might find these articles interesting:
The first one shows how people (and income) have been flowing between the different states:
http://athousandnations.com/2010/09/20/when-u-s-tax-returns-vote-with-their-feet/
And this one is about the economic freedom index; looks like Canada is almost more economically free than you guys down south 🙂 : http://athousandnations.com/2010/09/20/economic-freedom-of-the-world-annual-report-2010/
Interesting articles. I saw some really great interviews with Texas politicians on how they had largely avoided the recession and housing crisis. Their message was one of self-sufficiency and common sense, which is what voters need to hear more often.
I think we should’ve given them this memo a LOONG time ago!I feel like they’re cutting the budget in areas where we need the budget to extend more to like schools. I’m sure that there are other areas where they ought to be cutting the spending but are not like the war going on in the middle east.
Wars are easy to start, but hard to finish. These two wars are going to cost us a fortune and pile onto the deficit for years. The good news is that we are finally heading towards a conclusion in Iraq. But, we are still quite a ways off in Afghanistan.
Bret, there is certainly a problem with government spending, and the lack of distinction between Democrats and Republicans gave rise to the Tea Party candidates.
The administration has a huge PR problem as well: public unrest from all socioeconomic levels. It’s kind of hard when you have high unemployment, scared businesses, and have targeted high-earners. Fiscal austerity is a better plan than deficit spending though.
I think the economy needs to heal itself, which takes time.
I was watching the President on TV yesterday and he does have a huge PR problem. He was trying to explain how they were doing all the right things, but it will take time for the economy to recover. This message wasn’t playing well.
Millions of voters hate the President so badly there is nothing he can do to win them over. If unemployment dropped to 4% and the deficit disappeared tomorrow, they would still hate him. Some pretty smart people I know are completely irrational about this.
But, the biggest problem are all of the people who believed in him who are disenchanted. I don’t think they expected the spending and deficits to go out of control, with no positive effect on the economy. They are starting to realize that promise and reality are two different things. And, the reality isn’t pretty.
I also think an undue amount of blame is being vented toward Obama, since he’s not solely to blame.
However, if one good thing comes out of this, it’s that people will remember (for a while, anyways) that government cannot wave a magic wand and solve all of your problems. At least, I hope that’s what people take from this. They could just as easy fall prey to the next soothsayer who comes to sing them a song.
It’s strange how polarized we are as a nation. Some people think the government is the solution to everything. The other group wants to have a very limited government. There is no spirit of compromise, which is what our nation was founded on.
Hi Bret, the horror movie analogy was funny! I feel like I have about as much influence on Congress as I do on movie characters.
Employers have already cut back sharply on hiring and other spending due to uncertainty about the health care law. If the taxes expire, this will directly impact small business owners and I expect many will lay off more employees to afford the taxes.
I totally agree that we have to rein in spending. We can do it in a thoughtful organized way or in a panic mode when our foreign creditors cut us off.
The reality is that the huge amount of government spending ($24.7 trillion for TARP last time I checked) hasn’t helped the economy much at all. My husband’s CEO talked to his IT group on Monday and said that the recession isn’t over, no matter what the economists say. The company is struggling and won’t make its numbers again this year. Their major clients are banks and retail.
Technically, the recession ended last June and we are in a slow recovery. That is, if you believe the government economists. But, it sure seems like a recession with so many people out of work. I imagine the banking industry will pick up soon. But, I wouldn’t count on retail to come roaring back.
In my opinion, most of the stimulus money went to special interests and other connected people. They certainly didn’t hire many employees. Instead, they just seemed to pocket most of the money. Employers know the payroll taxes have to go up and the new health care bill is a huge impediment to hiring.
Waste, waste everywhere, and not a cut to be found.