Dan Mitchell, Senior Fellow at the Cato Institute, speaks at Moving Forward on Entitlements: Practical Steps to Reform, NTUF’s entitlement reform event at CPAC, on Feb. 11, 2011.
This testimony was delivered on September 20, 2011.
Mr. Chairman and members of the committee, thank you for inviting me to testify today. My comments will examine the likely damage to the economy if federal spending and debt keep spiraling upward.
Rising Spending and Debt
Federal spending and debt have soared over the past decade. As a share of gross domestic product, spending grew from 18 percent in 2001 to 24 percent in 2011, while debt held by the public jumped from 33 percent to 67 percent. The causes of this expansion include the costs of wars, growing entitlement programs, rising spending on discretionary programs, and the 2009 economic stimulus bill.
Projections from the Congressional Budget Office show that without reforms spending and debt will keep on rising for decades to come.1 Under the CBO’s “alternative fiscal scenario,” spending will grow to about 34 percent of GDP by 2035, as shown in Figure 1, and debt held by the public will increase to at least 187 percent of GDP.2
Hopefully, we will never reach anywhere near those levels of spending and debt. Going down that path would surely trigger major financial crises, as the ongoing debt problems in Europe illustrate. It is also very unlikely that Americans would support such a huge expansion of the government. The results of the 2010 elections suggest that the public has already started to revolt against excessive federal spending and debt.
Some policymakers are calling for a “balanced” package of spending cuts and tax increases to reduce federal deficits. But CBO projections show that the long-term debt problem is not a balanced one — it is caused by historic increases in spending, not shortages of revenues. Revenues have fallen in recent years due to the poor economy, but when growth returns, revenues are expected to rise to the normal level of about 18 percent of GDP — even with all current tax cuts in place. It is spending that is expected to far exceed normal levels in the future, and thus spending is behind the huge increases in debt that are projected.
1 Congressional Budget Office, “Long-Term Budget Outlook,” June 2011. 2 Organization for Economic Cooperation and Development, “Economic Outlook Database,” September 2011, Annex Table 25, http://www.oecd.org/dataoecd/5/51/2483816.xls.
The persistence of poverty in Baltimore is disturbing. It is even more so when one looks deeper into the official data.
The 2010 American Community Survey (ACS) estimates that 25.6 percent of Baltimore’s population “for whom poverty status is determined” (602,129 people) are in poverty, as measured by pre-tax income relative to the poverty threshold used by the U.S. Census Bureau. For example, if a two-person family’s pre-tax money income is less than $14,218, it is considered poor; the corresponding figure for a family of four is $22,314.
However, the 25.6 percent figure doesn’t tell the whole story about Baltimore’s poverty.
If latent poverty is to be reduced, Baltimore needs to address the problem of how to improve economic development.
If one looks at the ACS for families, one finds that 28 percent of Baltimore families with children under 18 are living below the poverty level. That figure rises to an astonishing 40.6 percent for female-headed families with no father present. Is it surprising that poverty persists in Baltimore?
Poverty is often blamed on high taxes, onerous regulations, barriers to occupational entry and other economic factors. But poverty is also affected by people’s choices. For individuals who wait to have children, get married and stay married, obtain more education, and stay out of jail, poverty rates diminish greatly.
The poverty rate for married-couple families with related children under 18 in Baltimore is only 7.4 percent (7.5 percent for whites and 6.8 percent for blacks). Educational status is also important: Female-headed households with less than a high school degree have a poverty rate of 44.1 percent; the rate is 11 percent for those with a college degree.
With many dysfunctional families, a culture of crime, and public schools that are frequently ineffective and sometimes dangerous, the cards are stacked against poor people trying to escape poverty in Baltimore.
Government policies can influence one’s choices and the level of responsibility one takes. The growth of the welfare state has eroded personal responsibility and made the poor more dependent. After spending billions on welfare programs since President Lyndon Johnson announced the War on Poverty, the U.S. poverty rate is still about the same as in 1966 (14.7 percent). How can that be?
One answer is that the official poverty statistics mismeasure the actual extent of poverty. The U.S. Census Bureau measures only pre-tax money income and ignores noncash transfer payments in the form of Medicaid (by far the largest welfare program), food stamps, children’s health insurance, and child nutrition and health. If those in-kind transfers were included, the official poverty rate would decrease substantially.
Nevertheless, as Charles Murray pointed out in his landmark book Losing Ground (1984), even if all transfers were included as income and brought many people above the poverty thresholds, “latent poverty” would remain. That is, if welfare payments were taken away, people would return to poverty. Welfare alone cannot create wealth. Economic growth is the only sure way to reduce dependence and poverty.
Just look at China. Since 1978, when it began its march toward the market, China has achieved the world’s highest sustained rate of economic growth and allowed several hundred million people to lift themselves out of absolute poverty.
Counting noncash benefits of those living in poverty in Baltimore would reduce “poverty” but not free people from welfare. A huge underclass has captured politicians for their cause of maintaining and increasing transfers rather than limiting the size and scope of government to make people more responsible and foster economic growth.
No one could say that the poor in Baltimore today are less well-off materially than 50 or 100 years ago. Indeed, if one looks at personal consumption expenditures — a better measure of one’s living standard than pre-tax money income — one finds that official figures significantly overstate the extent of poverty.
Data from the U.S. Bureau of Labor Statistics show that in 2009, consumer expenditures for the lowest fifth of income earners were more than twice as high as before-tax income (which includes cash transfers and food stamps). Average annual consumption expenditures were $21,611 for the lowest quintile, while income was $9,846.
This disparity is due to underreporting of income, outside financial assistance, loans and other factors. If poverty is better measured by one’s consumption rather than income, then Baltimore’s 25 percent poverty rate is misleading.
Most “poor” households now have a TV, air conditioning, enough food and medical care. Many have Internet access and a cell phone (subsidized by the federal government). What they don’t have is a safe environment, two parents and choice in education.
If latent poverty is to be reduced, Baltimore needs to address the problem of how to improve economic development. Part of that problem lies in heavy taxes on capital, but part also lies in the rise of government welfare and the decline in morality.
The bulk of Baltimore’s budget is spent on public safety (crime reduction) and education. Government failure is evident in those areas — taxpayers are not getting their money’s worth. Rather than spending more on welfare, perhaps it’s time to think about how to reduce latent poverty and make people more responsible for their choices.
Surprising facts about America’s poor Here are some interesting facts: Morning Bell: Surprising Facts about America’s Poor Mike Brownfield September 13, 2011 at 11:00 am In his address to the joint session of Congress last week, President Barack Obama called for $477 billion in new federal spending, which he said would give hundreds of thousands of disadvantaged […]
I love Milton Friedman’s film series “Free to Choose.” In that film series over and over it is shown that the ability to move from poor to rich is more abundant here than any other country in the world. This article below reminded me of that that. Are Poor Really Helpless Without Government? By Michael […]
Heritage’s experts watched President Barack Obama’s debt reduction and tax increase proposal. Here are their immediate reactions:
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Raising Investment Uncertainty Will Prolong Economic Stagnation
One of the pillars of the President’s deficit reduction plan unveiled this morning is a new minimum tax rate for millionaires. Targeting American earners whose income often comes from investment profits, the President is proposing a special tax, the “Buffett Rule,” to increase the tax burden on investors.
Investment drives productivity and economic growth. Already, many investors are shying away from markets at this uncertain time, choosing instead to preserve their principal wealth in bonds and commodities such as gold. Proposing higher taxes on investment only increases uncertainty for investors and means that even less investment will occur. Even a little less investment leads to lower productivity, slower economic growth, weaker wages and salaries, and lower household wealth. This is the exact opposite of a jobs plan. It’s a plan to prolong the economic stagnation.
Holding necessary entitlement reforms hostage to higher taxation undermines debt reduction and economic recovery. According to the Heritage Foundation,
While it is currently popular to target high-income individuals for higher taxation, it is economic folly to target investment income. Raising the tax burden on investment income further damages the economy and ultimately affects all members of society. Investment income is highly elusive, as individuals and businesses can alter the timing of investment income and forego investment altogether if their returns fall below required levels. The current economic uncertainty, which increases risk premiums, is already causing many investments to be delayed or foregone. Policymakers are scrambling to encourage businesses and entrepreneurs to start investing again. Why they would then threaten to tax the income from these investments to pay for new entitlements is not clear. […] Taxing investment income would […] reduce investment in the economy, which is dangerous during a period of recovery.
The President is correct in that our tax system is too complex. However, the President’s proposal to increase taxes on investors is the wrong way to reform our tax system.
Romina Boccia
Want to Tackle Spending? Obamacare Has Got to Go.
President Obama pointed to changes already enacted into law under Obamacare to reduce federal health spending, but the fact is, Obamacare will increase deficit spending significantly. To fix the health care system and restore fiscal responsibility in Washington, Obamacare has got to go.
The new health law relies on tax hikes and dubious savings from broken programs to cover the cost of a major Medicaid expansion and new health entitlement spending, despite the fact that serious reform is needed to rein in the cost of the health entitlements we already struggle to pay for (which the President rejected in his speech). New Obamacare entitlement spending includes a generous taxpayer-funded subsidy to offset the cost of coverage for several million Americans, and a new, government-run long-term care insurance program already acknowledged by independent experts to be unworkable and likely to require a taxpayer bailout (in other words, more deficit spending). Obamacare originally received a favorable CBO score only because of the budget gimmicks included in the legislation. Looking beyond the smoke and mirrors shows that not only will Obamacare fail to fix our health care system, but we simply cannot afford it. Repeal is the only solution.
The President also pointed to his signature health care legislation to control the cost of health, but the new law does not tackle the main drivers of runaway health care spending and will not control costs or make health care more affordable. It leaves in place a flawed system which insulates patients from the cost of their health care decisions and encourages unnecessary spending. It keeps health care consumers from choosing the health plan that best suits their needs and from seeking the best available value for the medical goods and services they require. Obamacare increases the role of government in every corner of the health care system and grows dependency on flawed government health care programs.
Brummett’s criticism could have been leveled against Bill Clinton recently because he is involved in partisan politics for President Obama and in the very same speech he says two things that show that he doesn’t know what he is talking about. 1. He brags about bringing people together while attacking Republicans. 2. He says he did not engage in class-warfare in a speech where he engages in class-warfare. Of course, Brummett will omit pointing this out in his future columns.
In this speech in Little Rock on October 1, 2011 former President Bill Clinton noted:
There is no example of a country in the fix we are in that can balance the budget without a combination of spending cuts, the people who can afford it paying more and growing the economy.
What was the secret of the Clinton Presidency? Clinton tells us in the same speech:
We decided to stop the politics of pitting one American against another by race…income, by anything else.
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President Obama and other politicians are advocating higher taxes, with a particular emphasis on class-warfare taxes targeting the so-called rich. This Center for Freedom and Prosperity Foundation video explains why fiscal policy based on hate and envy is fundamentally misguided. For more information please visit our web page: www.freedomandprosperity.org.
I just don’t understand how a politician can say two things in the same speech that cancel each other out? John Brummett and Max Brantley and liberal bloggers like Blue Arkansas love to try to act like all of our problems would be solved if we could take the money from the rich guy. Below is an article that makes some great points concerning class-warfare:
Jeffrey A. Miron is Senior Lecturer and Director of Undergraduate Studies at Harvard University and Senior Fellow at the Cato Institute. Miron blogs at JeffreyMiron.com and is the author of Libertarianism, from A to Z.
What is the “fair” amount of taxation on high-income taxpayers?
To liberals, the answer is always “more.” Liberals view high income — meaning any income that exceeds their own — as the result of luck or anti-social behavior. Hence liberals believe “fairness” justifies government-imposed transfers from the rich to everyone else. Many conservatives accept this view implicitly. They oppose soak-the-rich policies because of concern over growth, but they do not dispute whether such policies are fair.
But high tax rates on the rich are not fair or desirable for any other reason; they are an expression of America’s worst instincts, and their adverse consequences go beyond their negatives for economic growth.
The liberal hatred of the rich is a minority view, not a widely shared American value.
Consider first the view that differences in income result from luck rather than hard work: some people are born with big trust funds or innate skill and talent, and these fortuitous differences explain much of why some people have higher incomes than others.
Never mind that such a characterization is grossly incomplete. Luck undoubtedly explains some income differences, but this is not the whole story. Many trust fund babies have squandered their wealth, and inborn skill or talent means little unless combined with hard work.
But even if all income differences reflect luck, why are government-imposed “corrections” fair? The fact that liberals assert this does not make it true, any more than assertions to the contrary make it false. Fairness is an ill-defined, infinitely malleable concept, readily tailored to suit the ends of those asserting fairness, independent of facts or reason.
Worse, if liberals can assert a right to the wealth of the rich, why cannot others assert the right to similar transfers, such as from blacks to whites, Catholics to Protestants, or Sunni to Shia? Government coercion based on one group’s view of fairness is a first step toward arbitrary transfers of all kinds.
Now consider the claim that income differences result from illegal, unethical, or otherwise inappropriate behavior. This claim has an element of truth: some wealth results from illegal acts, and policies that punish such acts are appropriate.
But most inappropriate wealth accumulations results from bad government policies: those that restrict competition, enable crony capitalism, and hand large tax breaks to politically connected interest groups. These differences in wealth are a social ill, but the right response is removing the policies that promote them, not targeting everyone with high income.
The claim that soaking the rich is fair, therefore, has no basis in logic or in generating desirable outcomes; instead, it represents envy and hatred.
Why do liberals hate the rich? Perhaps because liberals were the “smart” but nerdy and socially awkward kids in high school, the ones who aced the SATs but did not excel at sports and rarely got asked to the prom. Some of their “dumber” classmates, meanwhile, went on to make more money, marry better-looking spouses, and have more fun.
Liberals find all this unjust because it rekindles their emotional insecurities from long ago. They do not have the honesty to accept that those with less SAT smarts might have other skills that the marketplace values. Instead, they resent wealth and convince themselves that large financial gains are ill-gotten.
Jeffrey A. Miron is Senior Lecturer and Director of Undergraduate Studies at Harvard University and Senior Fellow at the Cato Institute. Miron blogs at JeffreyMiron.com and is the author of Libertarianism, from A to Z.
The liberal views on fairness and redistribution are far more defensible, of course, when it comes to providing for the truly needy. Reasonable people can criticize the structure of current anti-poverty programs, or argue that the system is overly generous, or suggest that private charity would be more effective at caring for the least vulnerable.
The desire to help the poor, however, represents a generous instinct: giving to those in desperate situations, where bad luck undoubtedly plays a major role. Soaking the rich is a selfish instinct, one that undermines good will generally.
And most Americans share this perspective. They are enthusiastic about public and private attempt to help the poor, but they do not agree that soaking the rich is fair. That is why U.S. policy has rarely embraced punitive income taxation or an aggressive estate tax. Instead, Americans are happy to celebrate well-earned success. The liberal hatred of the rich is a minority view, not a widely shared American value.
For America to restore its economic greatness, it must put aside the liberal hatred of the rich and embrace anew its deeply held respect for success. If it does, America will have enough for everyone.
Addington, McConaghy Debate Obama’s Jobs Plan Published on Sep 9, 2011 by Bloomberg Sept. 9 (Bloomberg) — David Addington, vice president at the Heritage Foundation, and Ryan McConaghy, economic director at Third Way, discuss President Barack Obama’s $447 billion jobs plan. They speak with Deirdre Bolton and Erik Schatzker on Bloomberg Television’s “InsideTrack.” (Source: Bloomberg) […]
Is soaking the rich fair? Five Key Reasons to Reject Class-Warfare Tax Policy Uploaded by afq2007 on Jun 15, 2009 President Obama and other politicians are advocating higher taxes, with a particular emphasis on class-warfare taxes targeting the so-called rich. This Center for Freedom and Prosperity Foundation video explains why fiscal policy based on hate […]
Take a look above at this clip. In his article “Class Warfare versus Pay it forward,” Sept 26, 2011, Arkansas News Bureau, John Brummett tries to make the case that Obama is not involved in class warefare. He quotes Elizabeth Warren to prove his point. Unfortunately, logically this argument fails because although we all benefit […]
The Flat Tax: How it Works and Why it is Good for America Uploaded by afq2007 on Mar 29, 2010 This Center for Freedom and Prosperity Foundation video shows how the flat tax would benefit families and businesses, and also explains how this simple and fair system would boost economic growth and eliminate the special-interest […]
Five Key Reasons to Reject Class-Warfare Tax Policy Uploaded by afq2007 on Jun 15, 2009 President Obama and other politicians are advocating higher taxes, with a particular emphasis on class-warfare taxes targeting the so-called rich. This Center for Freedom and Prosperity Foundation video explains why fiscal policy based on hate and envy is fundamentally misguided. […]
President Obama and Alternative Minimum Tax Dan Mitchell does it again. He is always right on the mark. CPAs Celebrate as Obama Proposes to Create a Turbo-Charged Alternative Minimum Tax Posted by Daniel J. Mitchell Wow, this is remarkable. The alternative minimum tax (AMT) is one of the most-hated features of the tax code. It […]
Max Brantley on the Arkansas Times Blog, August 15, 2011, asserted: Billionaire Warren Buffett laments, again, in a New York Times op-ed how the rich don’t share the sacrifices made by others in the U.S.. He notes his effectiie tax rate of 17 percent is lower than that of many of the working people in his office on account of preferences for […]
Five Key Reasons to Reject Class-Warfare Tax Policy Max Brantley on the Arkansas Times Blog, August 15, 2011, asserted: Billionaire Warren Buffett laments, again, in a New York Times op-ed how the rich don’t share the sacrifices made by others in the U.S.. He notes his effectiie tax rate of 17 percent is lower than […]
Dear Senator Pryor, why not pass the Balanced Budget Amendment? (Part 11 Thirsty Thursday, Open letter to Senator Pryor)
Dear Senator Pryor,
Why not pass the Balanced Budget Amendment? As you know that federal deficit is at all time high (1.6 trillion deficit with revenues of 2.2 trillion and spending at 3.8 trillion).
On my blog www.HaltingArkansasLiberalswithTruth.com I took you at your word and sent you over 100 emails with specific spending cut ideas. However, I did not see any of them in the recent debt deal that Congress adopted. Now I am trying another approach. Every week from now on I will send you an email explaining different reasons why we need the Balanced Budget Amendment. It will appear on my blog on “Thirsty Thursday” because the government is always thirsty for more money to spend.
Edward Glaeser, a professor of economics at Harvard, is the author of “Triumph of the City: How Our Greatest Invention Makes Us Richer, Smarter, Greener, Healthier and Happier.”
Aug. 1 (Bloomberg) — Under the current political compromise the U.S. debt ceiling will eventually be raised by $2.1 to $2.4 trillion dollars says Bloomberg Government analyst Scott Anchin. The cuts will only lower the nation’s debt to GDP ratio to 76.2% by 2020 says Bloomberg Government analyst Christopher Payne. (Source: Bloomberg)
We have stared hard into the abyss of a national default, and the close call with financial Armageddon is starting to make a balanced-budget amendment look good.
A stringent restriction on public borrowing, if properly crafted, offers the hope for more fiscal responsibility, less wasteful spending and a slightly less terrifying budgetary process. Yet while a well-crafted amendment looks a little better, there are enormous challenges in creating a sensible measure that balances fiscal restraint with the ability to adapt to new circumstances.
Balanced-budget amendments have been in circulation for decades; Minnesota Representative Harold Knutson proposed a constitutional limit on borrowing back in 1936. In 1982, the Senate approved an amendment requiring that “prior to each fiscal year, the Congress shall adopt a statement of receipts and outlays for that year in which total outlays are no greater than total receipts,” but that proposal died in the House. In 1995, the House passed an amendment requiring that “total outlays for any fiscal year shall not exceed total receipts for that fiscal year;” it failed in the Senate.
The possibility of a balanced-budget amendment is back, and the case today seems a lot stronger than it did in the 1980s and 1990s. I rarely favor changing the Constitution, which can lead to fits of folly like the 18th Amendment that brought about prohibition. Moreover, Congress can run a balanced budget any time it wants simply by cutting spending and raising taxes.
Broken Process
Throughout most of my life, the debt has seemed manageable and the budgetary process seemed to work, more or less. The robust deficits of the Reagan era were reduced with a bipartisan deal signed by President George H.W. Bush. During the Clinton years, the combination of a centrist Democrat who cared about bond markets and an empowered Republican House led to budget surpluses.
During those years, it seemed clear that deficits were rarely the real enemy. The big social costs from big government came from wasteful spending, not from financing that spending with taxes today or tomorrow. If you spend $100 million on a bridge to nowhere, it doesn’t much matter if that bridge is paid for with taxes or debt.
The best argument for balanced budgets is that forcing governments to pay for their spending with current taxes will produce less wasteful spending. The past decade has done much to illustrate the allure of spending without taxation in Washington. The rotation of the parties was supposed to cycle gently back and forth between Democratic generosity and Republican thrift, but that model disappeared in the 1980s. Instead, Democratic taxing and spending is succeeded by Republican spending and not taxing.
Political Pandering
And it’s hard to give any government much credit for cutting taxes without cutting spending. That’s not political courage; it’s pandering.
If we were confident that federal spending was delivering great bang for the buck and that the U.S. was going to be much richer in the future, then perhaps high interest payments could be accepted as the cost of a better tomorrow. But there is plenty of federal spending that could be cut, such as agricultural subsidies, new highway construction and subsidies for homebuilding inTexas. Surely, not every dollar of defense procurement is absolutely necessary.
State Beneficiaries
Another reason to favor more federal fiscal restraint is that we could use a better balance between state and federal spending. Over the past 50 years, the federal government has become heavily involved in financing infrastructure, even when those projects overwhelmingly serve in-state users and could be funded with user fees. Why is it so obvious that the federal government has a role in funding rail between Tampa and Orlando, or a big tunnel in Boston?
Washington’s prominence is explained primarily by the federal government’s ability to borrow, and not by any inherent edge it has in infrastructure development. Federalizing expenditures breaks the connection between the projects’ funders and the projects’ users. Any instance when we’re spending other people’s money is an invitation for waste.
States and localities saddled with balanced-budget rules are relatively parsimonious and spend a fair amount of time debating even relatively modest public investments. That’s far more desirable than the federal government’s freedom to distribute billions without imposing taxes on voters.
Responding to Downturns
The current system’s pathologies should leave us open to the possibility of a new budgeting procedure, but the literature on state balanced-budget rules teaches us that the devil is in the details. In many cases, the state rules have weak teeth, and do little. When they do work, they can seriously constrain a state’s ability to respond to downturns.
During the recent collapse, the federal ability to borrow has thrown a lifeline to local governments, leading to greater preservation of important local services, such as education. Although the federal government could benefit from a little less budgetary freedom, the states either need more ability to borrow during downturns or more investment in rainy-day funds.
Any federal balanced-budget amendment should allow the government to spend more than it collects in taxes during wars and recessions, with the understanding that it will spend less during peaceful times of plenty. If the budget is to be balanced, it should be balanced over the business cycle, not year by year.
State of Emergency
But the crafting of such an amendment won’t be easy. The most natural out, perhaps, is to allow Congress to declare an economic emergency, which would temporarily eliminate the budgetary straightjacket. But then what’s to prevent lawmakers from declaring a perpetual state of emergency?
Another worry is that freezing the federal ability to borrow will create more pseudo-borrowing through semi-public entities, such as the mortgage lenders Fannie Mae and Freddie Mac.
I dreaded the prospect of default and would love to see a system that ensures the books are regularly balanced except during extreme times. A balanced-budget amendment might make that happen, but it would have to be done right. It would be far better if we could just count on Congress to live within its means, but the fiscal experience of the last decade has made such optimism untenable.
(Edward Glaeser, an economics professor at Harvard University, is a Bloomberg View columnist. He is the author of “Triumph of the City.” The opinions expressed are his own.)
To contact the writer of this article: Edward L. Glaeser at eglaeser@harvard.edu.
To contact the editor responsible for this article: Max Berley at mberley@bloomberg.net.
This post today is a part of a series I am doing on the 66 Republican Tea Party favorites that resisted eating the “Sugar-coated Satan Sandwich” Debt Deal. Actually that name did not originate from a representative who agrees with the Tea Party, but from a liberal.
Rep. Emanuel Clever (D-Mo.) called the newly agreed-upon bipartisan compromise deal to raise the debt limit “a sugar-coated satan sandwich.”
“This deal is a sugar-coated satan sandwich. If you lift the bun, you will not like what you see,” Clever tweeted on August 1, 2011.
Southerland: Cuts and Caps Will Help Us Conquer the Debt Crisis
Steve Southerland, II (published by The Tallahassee Democrat)
By the time you finish reading this sentence, Washington will add another $360,000 to our national debt. With each day of delay, we dig our economic hole $4 billion deeper.
Make no mistake about it — we’re gazing into an economic abyss. Incredibly, some in Washington believe the best way to get back on track is to move the guardrail closer to the cliff’s edge. I refuse to join the agents of inaction who would rather bankrupt this great nation than make the tough, forward-thinking decisions necessary to fix our fiscal future.
Since 1962, Washington has raised the debt ceiling a mind-boggling 74 times. Yet with every increase, our elected officials failed to implement cost controls on future spending, choosing instead to shift responsibility onto the shoulders of future generations.
We simply cannot afford to continue down this path to economic ruin. The buck stops here and accountability begins now.
There’s an adage that says success has many fathers, but failure is an orphan.
Those words could fittingly be the official motto of Washington, D.C.
The time has come for Republicans and Democrats alike to take ownership of this massive failure of governance. Short-sighted neglect from both parties helped create our $14.3 trillion debt. Both parties have, at one time or another, been more concerned with maintaining their grip on power than with empowering a change of culture in Washington.
I’ve heard loud and clear from citizens across North and Northwest Florida: You’ve had enough. You want Washington to reflect the challenges you face every day in meeting a family budget or keeping a small business afloat. You rightly expect the federal government to do more with less.
Nearly 100 days ago, I publicly announced my support for a common-sense plan of cuts and caps to conquer our debt crisis. I am pleased that a bipartisan majorityof the House joined me in committing to this effort by approving last week the Cut, Cap, and Balance Act of 2011.
This responsible plan would ensure that Washington cuts its spending immediately while enforcing caps on future spending and sending a federal balanced budget amendment to the states.
If you are a senior or a veteran, your benefits are protected under this plan. Wasteful spending will be weeded out, but your Medicare, Social Security and veterans benefits absolutely will not change.
If you are a small-business owner, lifting our crushing burden of debt will restore certainty and stability to the marketplace, allowing you to expand operations and create jobs.
And if you are a parent, you can take comfort in knowing that your children and grandchildren have hope for a day when they won’t be saddled with the consequences of poor economic decisions from the past.
The House has acted boldly to approve a concrete, measurable strategy to cut the debt.
I am hopeful that ongoing negotiations between President Obama and congressional leaders will build upon this momentum to achieve an agreement in line with the House-passed plan.
As I have consistently stated, I am firmly opposed to increasing the debt limit unless there is a serious, game-changing plan to cut, cap and balance Washington’s checkbook. We will never digest this mountain of debt by simply nibbling around the edges.
With the president’s self-imposed Aug. 2 deadline fast approaching, many Americans are understandably concerned about what will happen if a debt-ceiling agreement proves elusive.
Whether there is an agreement in the next 10 days or not, revenue will continue to come in to the federal treasury. The president will continue to have the constitutional responsibility to prioritize federal spending. His administration will continue to set the timetable by which Social Security, Medicare and veteran benefits are paid.
In an effort to reassure those who have earned federal benefits, I introduced legislation that would ensure our seniors, veterans and active duty troops come first, receiving their full pay and benefits even if there is no debt limit agreement in place by Aug. 2. Your government made a promise to you, and you deserve to know that promise will be honored.
Great nations have fallen throughout history when they grew too bloated and careless to prepare for their economic future. We must not repeat those same mistakes.
When our children and grandchildren look back on the debates of today, do we want them to mark these times as the moment when the American Dream slipped away? Or do we want them to be thankful that we finally stood up, fought for their future and changed the culture in Washington?
The United States Postal Service (USPS) stands on the brink of financial collapse. According to the Postmaster General, by next month, USPS coffers will be down to a week’s worth of cash.[1] The government-owned enterprise barely avoided default this week when Congress extended the due date for a $5.5 billion payment due to the U.S. Treasury for retiree health benefits. The new deadline is November 18. And by early 2012, USPS may be unable to meet payroll.
Congress should act quickly to address this not-so-slow-motion postal train wreck. The goal, however, should not be to “save” USPS or even to save mail delivery. Policymakers should not play King Canute, ordering back the advancing tides of technology to preserve an obsolete industry. Nor should taxpayers be asked to pay for such an effort. Instead, the aim of policymakers should be to remove barriers that are hindering efforts by USPS to adjust to the new digital world. This should include making it easier for USPS to close post offices, reduce its workforce, and trim services.
The Decline of Mail
USPS’s decline is not a new story. As early as 1992, the U.S. General Accounting Office (now the U.S. Government Accountability Office) raised concerns about diversion of business from USPS by new electronic communications, including the then-exotic “e-mail.”[2] In recent years, the steady migration to online forms of communication has become a stampede, leaving mailmen holding the (empty) bag. The numbers are stark.
From 2006 to 2010, overall USPS mail volume dropped by 20 percent, from 213 billion pieces of mail to 170 billion.[3] During the same period, the government-owned business incurred $20 billion in losses. It expects to lose nearly $10 billion more in 2011.
Certainly, the sour economy has not helped things. But the losses began before the downturn began, and after the overall economy recovers, postal fortunes are unlikely to rebound. According to a 2010 study by the Boston Consulting Group,[4] mail volume will decline an additional 15 percent by 2020, with first-class mail falling a jaw-dropping 35 percent. This means the average postal customer will receive only one first-class letter per day, down from around two today. At that level of mail, USPS will lose a staggering $15 billion per year.
Restructuring Needed
Recognizing the need for change, USPS has proposed a wide-ranging set of restructuring steps, many of which would require congressional action to implement:
Reducing the postal workforce. USPS has proposed cutting 220,000 positions, leaving its workforce—which once ranked with Indian Railways and the People’s Liberation Army as among the world’s largest—at 425,000 employees. Some 120,000 of these cutbacks would be through layoffs, which are barred under current union contracts. For most private companies, such provisions would be lifted as part of the normal bankruptcy process. As a federal agency, however, USPS cannot enter into bankruptcy. Nonetheless, Congress should adopt legislation to allow USPS to reduce its workforce.
Closing post offices and other facilities.USPS plans to reduce the number of retail facilities it operates from 32,000 to 20,000 by 2015 and has already identified 3,700 for closure. In addition, it plans to cut its 500 processing plants to 200. With declining mail volume and improved technologies, this makes sense. Yet the efforts are hindered by a warren of federal rules restricting the closure of facilities and requiring cumbersome processes for doing so. Congress should eliminate these restrictions.
Discontinuing Saturday delivery of mail. Moving to five-day-a-week delivery would save $2 billion–3 billion per year. Such an adjustment is not unprecedented. Before telephone service was widely available, mail deliveries were sometimes made several times a day. Just as telephony made such multiple deliveries unnecessary, Internet communication has made Saturday delivery nonessential. Under current law, however, USPS is barred from paring back its current delivery schedule. This prohibition should be lifted.
Several proposals are pending in Congress to allow this restructuring to take place. The most comprehensive is H.R. 2309, sponsored by Representative Darrell Issa (R–CA), which was approved by a subcommittee of the House Oversight and Government Reform Committee last week. The bill, however, would place USPS, once it defaults on an obligation, under the direction of a financial control board. Operating much as a bankruptcy court operates, the board would have the power to force renegotiation of union contracts and other cost-cutting steps. In addition, the bill would create an independent commission to select post offices for closure, similar to the Base Realignment and Closure Commission used to identify military bases for termination.
There are also a number of proposals pending in Congress that would move in the opposite direction, further limiting USPS’s ability to close facilities or change service levels. These proposals would limit USPS’s ability to respond to today’s challenges.
Putting Taxpayers at Risk
Some have also suggested refunding to the USPS billions in supposed overpayments it has made to the U.S. Treasury to fund its retirement obligations or to allow it to only partially fund those liabilities. President Obama, for instance, has proposed refunding to USPS billions in retiree health care payments and refunding claimed pension fund overpayments. There is, however, considerable doubt as to whether USPS actually overpaid.
Moreover, as the Office of Personnel Management’s Inspector General has pointed out, if USPS is not required to fully fund its full retirement cost, American taxpayers will be put at risk if USPS defaults.[5]
In any case, such cash infusions would only kick the can down the road at taxpayer expense while leaving USPS’s fundamental problems unresolved.
Ending Special Privileges
USPS can also benefit from innovative uses of its assets and new business offerings. Ideas range from putting advertising on delivery trucks to offering Internet-based services. Such innovation and diversification may hold the key to USPS’s survival. But before USPS is allowed to expand into new areas, it must relinquish its ties to the federal government and the special legal privileges it still holds.
For instance, while USPS has struggled to compete against e-mail, it still holds a protected legal monopoly on the delivery of physical letter mail. This should be eliminated. If others are willing and able to provide a competing business in the shrinking letter-mail market, they should be encouraged, not restrained. Abolition of this outdated law, moreover, could itself actually help USPS reform. Allowing new entrants to try their hand at mail delivery could foster new ideas and fresh perspectives in the postal business. Such new blood may be just what mail delivery needs.
Delay Is Not an Option
USPS is failing and needs to change. As currently structured, it cannot survive unless supported by tens of billions of dollars in subsidy. Congress, however, is making that change harder to achieve by not allowing USPS to restructure and respond to today’s communications marketplace. It should act now to lift these barriers to change while protecting taxpayers.
James L. Gattuso is Senior Research Fellow in Regulatory Policy in the Thomas A. Roe Institute for Economic Policy Studies at The Heritage Foundation.
Runaway Spending, Not Inadequate Tax Revenue, Is Responsible for Future Deficits
Everyone wants to know more about the budget and here is some key information with a chart from the Heritage Foundation and a video from the Cato Institute.
The main driver behind long-term deficits is government spending—not low revenues. While revenue will surpass its historical average of 18.0 percent of GDP by 2021, spending will shoot past its historical average of 20.3 percent, reaching 26.4 percent in the same year.
PERCENTAGE OF GDP
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Source: Heritage Foundation calculations based on Congressional Budget Office data.
The charts in this book are based primarily on data available as of March 2011 from the Office of Management and Budget (OMB) and the Congressional Budget Office (CBO). The charts using OMB data display the historical growth of the federal government to 2010 while the charts using CBO data display both historical and projected growth from as early as 1940 to 2084. Projections based on OMB data are taken from the White House Fiscal Year 2012 budget. The charts provide data on an annual basis except… Read More
Authors
Emily GoffResearch Assistant
Thomas A. Roe Institute for Economic Policy StudiesKathryn NixPolicy Analyst
Center for Health Policy StudiesJohn FlemingSenior Data Graphics Editor
Using Social Security as his prime example, Professor Friedman explodes the myth that the major expansions in government resulted from popular demand. In a speech delivered more than 30 years ago, he directly relates this dynamic to today’s health care debate. http://www.LibertyPen.com
Professor Williams explains what’s ahead for Social Security
Governor Rick Perry got in trouble for calling Social Security a Ponzi scheme and I totally agree with that. This is a series of articles that look at this issue.
This article appeared in the Washington Times on January 22, 2010.
Could it be time to put Social Security reform back on the table? That would seem to be a bizarre question, given the spectacular failure of President George W. Bush’s attempt to reform the troubled retirement program. Yet, none of Social Security’s problems have gotten better during the intervening years.
Social Security is the largest government program in the world, accounting for 23 percent of the federal budget. The Social Security tax is the largest tax the average American family pays. Indeed, nearly 80 percent of Americans pay more in Social Security taxes than they do in federal income tax. And, millions of seniors depend on Social Security for their retirement income.
The program is unsustainable. It cannot pay future benefits without drowning our children and grandchildren in debt and taxes. Social Security will begin running a deficit by 2016, just six years from now. In theory, the Social Security trust fund will pay benefits until 2037, which should serve as cold comfort to today’s 31-year-olds. But that figure is misleading because the trust fund contains no actual assets. The government bonds it holds are simply a form of IOU, a measure of how much money the government owes the system. It says nothing about where the government will get the money to pay back those IOUs. Even if Congress can find a way to redeem the bonds, the trust-fund surplus will be exhausted by 2037. Overall, the amount the system has promised beyond what it can actually pay now totals $17.5 trillion. Yes, that’s trillion with a T.
[S]tudies show that long-term investment remains remarkably safe.
Equally important, workers still have no ownership of their benefits. This means that workers are left totally dependent on the goodwill of 535 politicians to determine what they will receive in retirement. Low- and middle-income workers are still unable to accumulate a nest egg of real, inheritable wealth. And younger workers still receive a dismal rate of return on their money.
If Social Security’s problems haven’t changed since the Bush years, neither have the possible ways to fix those problems: Raise taxes (the Social Security payroll tax would have to be nearly doubled to keep the program afloat), cut benefits by as much as 25 percent or allow younger workers to invest privately.
We could always raise taxes or cut benefits enough to bring the system into balance. Some have suggested removing the cap on income subject to the payroll tax. But while that would be the largest tax increase in U.S. history, at least $1.3 trillion over the first 10 years, it would increase Social Security’s cash-flow solvency by just seven years. Raising taxes or cutting benefits will make an already bad deal worse for younger workers, many of whom will end up paying more in taxes than they receive in benefits. And raising taxes will do nothing to fix the fundamental problems of ownership, inheritability and choice.
The only workable solution still is to allow younger workers to invest privately a portion of their Social Security taxes through personal accounts so as to take advantage of the higher returns earned through investment in real assets, and offset the reduction in government benefits that will be required to bring the system into solvency.
Critics undoubtedly will point to the collapse of the stock market in 2008 and suggest that private investing is just too risky. However, studies show that long-term investment remains remarkably safe. If workers retiring today had been allowed to start privately investing their taxes 40 years ago, they obviously would have less money than those who retired a couple of years ago, but they still would have more than Social Security promises. Remember, someone retiring today would have begun contributing to his or her retirement account 40 years ago, when the Dow was at less than 1000.
Not every worker would want to take on the risks and volatility of private investment. Some might prefer the political risks of today’s system despite its looming insolvency. But that’s why personal accounts have always been – and should continue to be – an option. Those who want to remain in the current system should do so, but those who wish to invest a portion of their money privately should be given that choice.
Not surprisingly, a great many would do so. A survey taken last year by Sun Life Financial at the nadir of the market’s decline found that 48 percent of American workers would opt out of Social Security even if doing so meant the loss of all future Social Security benefits (something far more drastic than is being proposed). Among workers younger than 30, the number wanting out of Social Security was a startling 59 percent.
Today’s conservative leaders might want, understandably, to stay far away from any initiative associated with Mr. Bush. Yet no one who aspires to political leadership can ignore the need to reform entitlement programs, including Social Security. Those who are willing to do so in a way that gives workers more choice and more control over their money may find themselves doing something that is surprisingly popular as well as good public policy.
President Obama and other politicians are advocating higher taxes, with a particular emphasis on class-warfare taxes targeting the so-called rich. This Center for Freedom and Prosperity Foundation video explains why fiscal policy based on hate and envy is fundamentally misguided. For more information please visit our web page: www.freedomandprosperity.org.
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Should the rich move off the land?
Another great article from the Wall Street Journal. (I do not believe in evolution but the illustration is a good one as far as the point goes.)
Megaship ahoy! To escape higher taxes, the wealthy could relocate…to open waters
According to biologists, billions of years ago the first sea creature wiggled onto the beach. This was a pivotal moment in life’s long march from amorphous sea snot into the highest form of mammalian beings—hedge-fund managers. Many people see that as an improvement, but I’m not judgmental. What we don’t know is why the first sea creatures were so anxious to leave their ocean habitats. My guess is that it had something to do with taxes.
Reliable people on television have informed me that taxes are the root cause of all behavior. And that means we can predict the future by looking at tax policy. In fact, I hear tax-related predictions every time I accidentally stop thinking about myself long enough to notice that others are talking. What I haven’t yet seen is anyone correctly predicting the future based on tax policy. Apparently that burden has fallen to me.
Scott AdamsFreed of taxes, a billionaire could save enough money to pay for a floating fortress of awesomeness.
Somewhere in Washington our leaders are furiously planning an economic death spiral. It will start innocently with a modest tax increase on the rich, the same way you might pluck a chicken to give it fair warning before you barbecue it. The final phase will involve a tax rate on the top 1% of earners that is so high it can’t be described without the Viking word for pillage. I base my prediction on the fact that the country is out of money, poor people don’t have any, rich people do, and the middle class has almost figured out how voting works.
In the old days, every member of the middle class thought he or she had a chance of becoming rich. In that sort of optimistic environment, you don’t want to urinate in the pool that you hope to someday swim in. But lately there’s more fatalism in the air, thanks to our crushing debt and the hobo militias that I assume are forming all over the country. The middle class will soon trade their unrealistic dreams of wealth for the opportunity to transfer money from total strangers to themselves—a process often referred to as fairness. That’s when the rich will get serious about an escape plan, just like the brave little sea creatures billions of years ago.
But where can the rich go? Their choices include nations that have swarms of malaria-infested mosquitoes, bad TV, deadly climates, decapitation issues, French people, bland food and other signs of inhospitableness. When you consider these factors plus wars, pollution, terrorism, floods, droughts, earthquakes and tornadoes, I think you’ll agree that most of the surveyed land on Earth is unfit for fancy people.
This is where technology trends come in. We’ve already entered the era of megaships, including plans for island-size vessels with permanent homes and businesses. We’ll soon see rapid advances in high-speed Internet for seafaring vessels, floating fisheries, hydroponic gardens, energy generated from waves, and desalination. The only other element needed to trigger mass migration of the wealthy to the oceans is a financial motive. If a billionaire can escape taxation by leaving his dirt-based country behind, he’ll save more than enough money to pay for his floating fortress of awesomeness.
Out at sea, you can declare your own sovereign state or form alliances with other island-vessels. Taxes would be a thing of the past. Any government-like decisions can be handled through a Facebook page. The only downside would be listening to Ron Paul nagging you to use Twitter instead to keep government small.
Pirates would be a cause of concern, obviously. But if a billionaire has enough money to buy an island-size vessel, he probably has enough to outfit it with a drone air force, radar, sonar, laser guns, torpedoes, ship-to-ship missiles, and other technology so cool that just thinking about it raises my testosterone count.
If some country with a military tells you to move from its favorite part of the ocean, you can turn off your stabilizers and let the current do the rest. Your island home would be like a Gandhi that floats. (That’s not redundant, because I’m almost positive that Gandhi would go straight to the bottom of the pool if he tried to tread water.)
And no nation is going to try to conquer an island vessel for its treasure, because most of the residents’ riches will be invested in financial instruments, not stuffed in mattresses on the ship. For a fully equipped military, the cost of attacking an island vessel would exceed the value of the designer handbags and gold toilets it could seize.
The ocean is the safest place on Earth if you play it right. Super hurricanes caused by climate change (allegedly!) are no problem for ships that can relocate at any time. And droughts can’t hurt you if you get the desalinization technology right. There’s almost no problem so big that it can’t be avoided by a billionaire in the middle of an ocean.
You might doubt my vision of the future, but let me ask you two questions: 1) How big is Larry Ellison’s yacht? 2) Does his Japanese-style house have paper walls for realism or to make it lighter because he plans to someday lift it with helicopters and move it to his boat?
Total Welfare Spending Is Rising Despite Attempts at Reform
Taxes per Household Have Risen Dramatically
