ENOUGH. STOP.
Whatever happened to some key principles for people and government to live by? Principles like…
Neither a Borrower nor a Lender Be
Yes the economy is now a great mess, but why? Excessive use of debt for social engineering put people in houses they could not afford in the first place. Owning a home is a noble goal. Under the Community Reinvestment Act, government and mortgage lenders, however, created mechanisms over the last 25 years for people to purchase homes without having the fundamental ability to pay for them in the first place. Here is a map from the Federal Reserve that shows the severity of the problem mortgage debt that has accumulated over time.
Then, as housing prices started to decline, and with slow long term wage growth combined with recent higher interest rates and oil prices, these mechanisms collapsed – more and more people could not afford their mortgage payments, the value of securities supported by the homes and mortgage debt payments could no longer be determined, and as a result, capital stopped flowing in the financial system as lenders suffered from debt write-downs and unpredictable high losses. It should be no surprise that a system that put people into debt that they could not primarily afford would eventually collapse. On October 7, Ben Bernanke said:
“The losses suffered by many banks and nonbank financial firms have both constrained their ability to lend and reduced the willingness of other market participants to deal with them. Great uncertainty about the values of financial assets, particularly more complex and opaque assets, has made investors extremely reluctant to bear credit risk, resulting in further declines in asset prices and a drying up of liquidity in a number of funding markets.”
And what is the answer we are given by the government and both political candidates – more and bigger government with increased regulation and more debt. Isn’t that what fundamentally got us into this problem? We need to ask, however, how much more debt can the US government really take on before it becomes a problem to future economic growth? After all, though the government has been able to issue increasing debt to fund deficits for 50 years, it also eventually needs to pay back its debt. So, should we go into more debt to pay for debt that people themselves could not afford? Will they (we) be able to pay off the US debt that continues to accumulate over 50 years to pay for more and bigger government?
The United States government is now $11 trillion in debt, growing to 80% of GDP. How? It is a result of running deficits for over 50 years that averaged -12% of government receipts per year and also expecting the government to bailout failed businesses/consumers. This debt level is equivalent to $36,500 for every man, woman and child in the US today. And is equivalent to $71,100 per person working today. Think about it, these are the amounts we would have had to pay in higher taxes in the past to achieve balanced federal government budgets. And it represents the amount of cumulative tax increases in the future to pay off past debts. Can you, or even just the wealthy, afford to pay this plus pay-off your own current debts? If just the wealthy (top 5%) paid the taxes for the current debt, they would have to pay an added $720,000[i] per person in their family. Of course such payments cannot be made in either case, but that effectively is what deficit spending is all about – borrowing money now to be repaid with future tax increases. Raising taxes to solve past deficit spending simply cannot be achieved as it is not affordable by any group of taxpayers.
In addition, according to the National Conference of State Legislatures report “State Budget Update: June 2008”:
· 31 states and Puerto Rico are reporting a budget deficit for FY2009 for a cumulative $40.3 billion. California alone is $15 billion.
· Seventeen states had FY 2009 budget gaps of 5% or more of their general fund budgets. In six of these the imbalance exceeded 10%.
Federal and State solutions, however, continue to be to borrow more money and increase the debt. It is getting so bad, that the state of California effectively asked the Federal government for a bailout.
If a household or a business were overspent 12% per year, what would they have to do? Either find a way to increase income or reduce spending. Governments, however, have not reduced their spending and have consistently sought to raise taxes or fees. Isn’t it time that the Federal and State governments truly reduce their spending to live within their means so that we can live within our means? Are we really willing to add even greater Federal and State debts in order to pay for their existing levels of spending (let alone add new spending programs)? The problem with government debt is that we consumers and employees do not incur the pain of excessive debt until it is too late. Is that pain starting to happen to us now in this economic mess? The sudden, enormous stock market fall could be a signal that there is now a concern about too much debt in our society. We need to STOP continuing to pile on more debt – government or consumer.
“Fair Taxes”
Our Founding Fathers created this country on the basis of people having both personal and economic freedom from government. It was patriotic to rebel against taxes. Now we are told that it is patriotic to pay more in taxes. If it is patriotic for the wealthy to pay more in taxes, why isn’t it patriotic for all to pay more in taxes due to the massive debt levels that have accumulated?
Despite this economic mess, Barack Obama continues to say that he will increase taxes on the wealthy and businesses. But these are the people and institutions that create the jobs for everyone else. The Wall Street Journal points out that Obama’s proposed tax changes on the wealthy would increase their combined tax rates from 44% to 62%. Would you invest more money and take risk if you could only keep 38% of your earnings? This tax rate change will affect the small business owners who are the ones that have created most of the new jobs in the past as they are often the ones with incomes greater than $250,000.
The fact is that there is no such thing as a “fair tax”. Even Obama said he personally does not like to pay taxes. The question is about what tax and spending policy encourages investment to create better jobs not what is a fair or patriotic tax. By continually increasing jobs and investment, there is a larger tax base for government revenues, but they too have to keep spending within their means.
Over the last 50 years, pursuing a low tax policy for all people has increased the economic incentive to invest and create jobs. The growth rate in the size of the labor force accelerated in the 1960s when Kennedy reduced taxes and was then sustained in the 1980s and 2000s when Reagan and Bush also lowered taxes. Here’s the labor force chart. The size of the labor force has grown faster than the population for 50 years from business investment and lower relative taxes. Now other countries have also figured these phenomena out. Formerly socialist countries are now pursuing low taxes and investment (Ireland, Brazil, etc.). Unfortunately, government has not lived within its means.
If it is now considered patriotic to pay higher taxes to increase spending, how soon will there be a tax increase on everyone to pay for the past excessive government spending or to increase spending? After all, this is the Democratic track record. Bush lowered taxes but, unfortunately he and the Democrats did not lower spending. There is only one candidate with a policy of low taxes and reduced government spending to create economic growth and jobs – John McCain – but he is not communicating it very well and it is not enough. STOP disincentives to investment and job growth.
Love Thy Neighbor
Remember when we were taught to “Love our neighbors as ourselves”? Well this principle is still a good one. Yet what do we have from government leaders who also serve as role models for society? Just the opposite - both Presidential candidates called for a civil campaign. Yet we have had nothing but uncivil behavior from both because they believe we are swayed by the negatives. Think about these things we hear from our leaders to understand why government does not work and how we accept such negative comments.
· Obama claims self righteousness and indignation after being attacked for his “pigs” remark. Yet he attacked McCain for being either unable or unwilling to identify the number of homes owned.
· McCain says we should (and that he does) “respect” Obama. Yet McCain also calls Obama an elitist and even dangerous (are we really to believe that Obama intends to cause harm, of course not).
· Bush is stupid according to Nancy Pelosi. Yet we depend on them working together for the sake of the American people regardless of the perceived IQ for either one.
· Harry Reid demanded that Bush admit his “mistakes” in the Iraq war in order to gain political advantage. Now that we are winning the war, is Reid willing to admit his mistake about the surge? Apparently not.
· AIG gets bailed out and then the executives go on a $440,000 retreat. While immoral, everyone lambasts them as greedy and accuses them of wasting taxpayer money. Yet all of us greedily seek similar things (e.g., higher pay and security without deriving a benefit to our employer). Are any of us really any better?
· Chris Dodd and Barney Frank angrily defend themselves as having done nothing wrong in the cause of the economic mess. But they certainly did not even listen to the warnings about Fannie Mae and Freddie Mac.
· At Republican campaign events a few people are calling Obama racist comments that McCain denounced. And John Lewis accuses McCain of promoting racist comments. Both sides demand an apology from the other instead of simply accepting it as wrong. Hateful comments by anyone serve no good purpose.
The real problem is all of us and our sinful human nature – we hurl insults at each other, will only accept our own point of view, and we express opinions without having researched information to form an opinion. Just because we have a right to our opinion does not make our opinion right. There is always other information and experts to consider than just our own understanding. Yelling at each other is not a healthy debate and will not bring about solutions. Compromise can advance multiple objectives but can only be achieved by working together as our government and social systems are designed to achieve. The design only works with civil, loving behavior to each other. Each of us needs to STOP our own bad behavior. It shouldn’t take a crisis for Democrats and Republicans to finally work together (or any of us for that matter).
We in America need to remember that a house divided cannot stand. Let’s all START living within our means, make sound investment based only on appropriate economic principles, serve others along with ourselves, behave with civility, and seek/create compromises in order to advance social not political objectives.
[i] $11 trillion divided by 5% of the US population (305 million people)
