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BREAKOUT 3.0

Our Path Out of the Fiscal Trap

By

Jay B. Gaskill

 

 

In a report ominously titled “The Moment of Truth”, the president’s deficit commission has spoken, and the situation is not pretty. 

 

The full text is available at this link: http://www.fiscalcommission.gov/sites/fiscalcommission.gov/files/documents/TheMomentofTruth12_1_2010.pdf .

 

In the section called The Looming Fiscal Crisis, the report tells us that -

 

“Our nation is on an unsustainable fiscal path.  Spending is rising and revenues are falling short, requiring the government to borrow huge sums each year to make up the difference.  We face staggering deficits.  In 2010, federal spending was nearly 24 percent of Gross Domestic Product (GDP), the value of all goods and services produced in the economy.  Only during World War II was federal spending a larger part of the economy.  Tax revenues stood at 15 percent of GDP this year, the lowest level since 1950.  The gap between spending and revenue – the budget deficit – was just under nine percent of GDP.

 

Since the last time our budget was balanced in 2001, the federal debt has increased

dramatically, rising from 33 percent of GDP to 62 percent of GDP in 2010.  The escalation was driven in large part by two wars and a slew of fiscally irresponsible policies, along with a deep economic down turn. We have arrived at the moment of truth, and neither political party is without blame.”

 

A chart shows the result of following the current administration’s plotted course – debt completely outstripping our ability to pay.

 

In a follow-on paragraph, we learn this gem:

 

“Rising debt will also hamstring the government, depriving it of the resources needed to respond to future crises and invest in other priorities. Deficit spending is often used to respond to short term financial “emergency” needs such as wars or recessions.  If our national debt grows higher, the federal government may even have difficulty borrowing funds at an affordable interest rate, preventing it from effectively responding.”

 

I recommend that you read this entire report.  I personally know and vouch for one of the members of the commission.  These are serious people.  Regrettably, in my opinion, they are not nearly serious enough.  One audacious goal, to “Achieve nearly $4 trillion in deficit reduction through 2020, more than any effort in the nation’s history...” is insufficient on its face.  If we are still running deficits by 2020, we will have run out of affordable money to borrow.

 

Background:  I’ve been on this issue for some time now.  In a recent post, part of this series, I reported that -

 

On 11-23-10, America’s credit rating by China has been downgraded. “Dagong Global Credit Rating on Tuesday downgraded the local and foreign currency long-term sovereign credit rating of the United States from AA to A+ with a ‘negative’ outlook, the Xinhua news agency reported.” {Link: http://www.google.com/hostednews/afp/article/ALeqM5jO96_CDFpUwPcXyN_jL-enhT3atQ?docId=CNG.736ad4cc4829f350c53be1828396ba2f.81 }

 

And that -

 

Ireland and Greece are examples of one possible future of the USA (see Irish collapse in the New York Times for the latest chapter). http://www.nytimes.com/2010/11/23/world/europe/23ireland.html?_r=1&ref=business. 

 

I asked --

 

Do you detect the shadow of the coming storm here?  There are two alternatives:  We get serious about fixing our overleveraged, over borrowed, over extended fragile prosperity, or the iron laws of economics will impose a solution from which we may not be able to recover for generations.

 

Our secret weapon, our only means available for a self-bailout, is to seriously attack the accumulated political load on commerce. 

 

BREAKOUT SERIES

http://jaygaskill.com/Breakout1.0.htm

http://jaygaskill.com/Breakout2.0.htm

 

Welcome to

BREAKOUT 3.0

 

WE NEED TO ACT BEFORE THE CRISIS BECOMES DISABLING.  BECAUSE OF THE INTERNATIONAL SITUATION, WE MAY BE PROPELLED INTO A SINK-OR-SWIM CIRCUMSTANCE BEFORE WE ARE READY.  PRUDENCE DICTATES THAT WE TAKE THE NECESSARY STEPS NOW.

 

As I’ve already argued, we are not without the means to extricate our economy. 

 

Do you detect the shadow of the coming storm here?  There are two alternatives:  We get serious about fixing our overleveraged, over borrowed, over extended fragile prosperity, or the iron laws of economics will impose a solution from which we may not be able to recover for generations.  Our secret weapon, our only means available for a self-bailout, is to seriously attack the accumulated political load on commerce. 

 

FREEING UP COMMERCE

BY USING THE POWER TO REGULATE COMMERCE

THE PLAN IN OUTLINE

 

1. [YEAR ONE THROUGH FOUR]

 

WE QUICKLY REIGN IN SUICIDAL BORROWING.

 

 

There is a fix, if we have the necessary will. 

 

If a budget hawk with guts were king of the hill and had a compliant congress, he or she would freeze entitlements, then scale them back to real revenue levels, sans borrowing; outlaw public sector unions; dismantle civil service and EEOC firing restrictions, then replace all of the bad, gutless managers, empower the new ones to discharge the deadwood; cut all non-military salaries 15%...THEN get serious.

 

As radical as something like this sounds today, it will sound reasonable when the country teeters on the edge of a sovereign debt crisis that threatens to stop the federal money machine in its metaphorical tracks.  Regrettably, by then the measures above will be insufficient. 

 

Bear in mind that, as of this day in late 2010, more than 40% of all federal dollars are not funded by incoming revenue.  In a recent post, I quoted Lawrence B. Lindsey, president of the Lindsey Group and a former governor of the Federal Reserve, who laid it out thus:

 

“Now suppose quantitative easing is “successful” in the way the Fed intends, taking inflation close to the average 2.4 percent rate of the last two decades and government borrowing costs back to their two-decade average of 5.7 percent. To get an idea of what happens to the budget, assume this transition happens over three years, so that by 2013 interest rates are back to “normal.” This “return to normal” will mean the government’s interest costs will rise to $847 billion by 2015 and $1.15 trillion by 2019.

 

“The increase in annual interest costs in 2015 alone—$557 billion—is nearly six times the additional revenue that is supposed to be collected by letting the higher end of the Bush tax cuts expire, the centerpiece of the current fiscal policy debate in Washington. The increase in interest costs in 2019—$795 billion—is two-and-a-half times the value of all the Bush income tax cuts of 2001 and 2003 that are due to expire. On the spending side, just the extra interest cost from a quantitative easing “success” would swamp, say, the entire defense budget for the rest of the decade. No plausible increase in taxes or reduction in spending could fill a gap of that magnitude.”

 

The quantitative easing to which Mr. Lindsey referred is the plan, now being implemented by fed Chairman, Ben Bernanke, to inject about .8 trillion dollars into the economy by simply creating money out of nothing – creation ex nihilo heretofore having been reserved to the Creator of the universe, now appropriated by irresponsible sovereign governments willing to issue fiat currency under duress.

 

When we do this sort of thing, the value of our loans to prospective lenders is diminished and the cost of those loans goes up and up, and eventually the loans dry up altogether.

 

By whatever means that can be agreed to in real time, in the real world, the US must crush the debt, moving from a nearly balanced budget in Y 1, to actual balance in Y 2, then an ongoing debt reduction surplus Y 3, Y 4, made structurally permanent thereafter.

 

Temporary macro-functional adjustments can be made within the overall federal system if emergency measures are seriously implemented.  The brutal fact of the matter is that much of the federal government’s activities do nothing at all to promote or sustain an economic recovery, however laudable or popular some programs may appear to be at the moment.  As a common sense conservative, I would protect the law and justice and national security sector from major structural cuts.  As to the rest of the system, we are restrained only by the weight of political tradition, a lack of imagination and the illusion that laws long in place cannot be changed.  At the end of the day, in an emergency, the discretionary spending part of the federal budget is 100%.  Permit me just a few examples, again bearing in mind that I am treating this as an authentic emergency and presuming bold leadership worthy of the moment: 

 

To fund the recovery we need to make large, painful reductions in some less economically productive sectors of government and funnel the same money via tax incentives and direct spending to productive, job-creating activities in the private sector.  In FY 2006, so-called mandatory federal spending amounted to more than half the entire budget (at 1.4 trillion), social security .544 tr., Medicare .325 tr., Medicaid .186 tr.  While the miscellaneous programs like food stamps, disability, unemployment, and the like came to .357 tr.  In the same year, discretionary spending was under .40% of the total (about 1.1 tr.), of which about half was for non-security spending (think health, education and human services). 

 

Again, my premise here is that we are or will soon be in a real emergency and that the appropriate leadership emerges.  All reductions to need to be reasonably immediate, but not retroactive.  This sort of decisive step would require an unprecedented level of coordinated and intelligent action at the federal level.  But let’s just imagine the ideal for a moment.  The process begins with across the board salary reductions and means-adjusted benefits reductions.  These are expressed as temporary, but their re-growth as the economy recovers should be kept at or below the general rate of inflation.

 

Social security is sacrosanct only in the sense that retroactive reductions in status are off the table.  But several obvious measures are not:  Moving up the minimum non-disabled retirement age from 62 to 72, with a concomitant federal policy that discourages mandatory retirement before then; means tested Medicare, especially for the drug supplement piece.  Over time the government must change its operating culture to more flexible, entrepreneurial one.  Only a true emergency and the prospect of even more dire consequences can concentrate the dull bureaucratic mind.  We could really large scale cuts, say as high as 15% in the overall budget in given sectors, but couple them with highly empowered management who are held accountable for results.  The necessity of making large salary cuts can be mitigated when good managers are given a freer hand in making do with fewer subordinates.  Most of us have served in organizations salted though with marginal, but hard-to-fire employees.  Fire the marginal employees first.  Do away wit all civil service impediments to good management.  Fire and replace the bad managers with good ones.  Clean house.  You get the idea. 

 

The restructuring measures would include the following – or their functional equivalent: 

 

  • Civil Service rules suspended to permit merit firing during cutbacks.
  • With a few, carefully designated exceptions, all government civilian agencies and departments would thin out staffing by losing all unfilled vacancies, then cutting the equivalent of 12.5% of all FTE positions, counting the vacancies.  Managers would be replaced as needed to achieve tough, merit-based dismissals.   
  • Entitlements are frozen to the dollar amount last paid based on the recipient’s status, then strictly tied to non-borrowed revenue in subsequent FY’s. 
  • All salaries reduced pro-rata (over the four year period) by the proportion of borrowed referral revenue. 
  • Active duty military exempted when funded by a war tax, time limited with periodic review and non-automatic renewal.  No war tax funds to be diverted outside the immediate military sector.   The war tax would be a flat tax levied on all individuals’ adjusted gross income. 

 

2. [YEAR TWO THROUGH FIVE]

 

WE PRIME THE PUMP WITH ONE-TIME REAL REVENUE

 

Generate bridge revenue to keep core federal operations going by approving selected export sales of surplus assets in high international demand, principally coal and natural gas (processed from domestic coal, or extracted from American deposits).  The USA is the Saudi Arabia of coal.  I hate to pose the question this way, but “What would the Saudis do”?

 

3. [YEAR ONE THROUGH YEAR FIFTEEN]

 

THEN WE UNLEASH OUR SECRET WEAPON

 

The real recovery is entirely located in the private sector, powered by new, profit-driven business activity.  Individual, well managed enterprises that make/sell/move the “real stuff” on which day-to-day commerce depends will link up with the “better mousetrap’ ideas and the surviving sound financial sources.  This is where the real recovery will begin.  That is where it has always been.

But this is exactly where a whole set of government impediments, tolerable in a boom, are fully capable, during a fragile recovery, of aborting the new stirrings of economic life in utero. 

What impediments, you ask?  Think of tariffs, business licenses, building permits, mindless approval loops, excise taxes, sales taxes, capital gains and income taxes, land use barriers, fees, more fees, hearings, slow-moving bureaucrats, all standing in line, blocking the path to economic growth....  You get the idea.  This is why successful businesses in the Third World have line-item budgets for bribes. 

This is the “Political Commerce Load Factor” (or PCL). 

The existing PCL has been augmented by an environmental set.  NOTE: the even more oppressive “evil carbon” set that is now in the queue could take down even a prosperous economy.  The PCL factors (extant and contemplated) are dangerous enough by themselves.  But when combined with price/cost instabilities induced by haphazard political market manipulation (the unintended consequences of non-productive subsidies, leading to artificial supply scarcities and-spot inflation), the effect is the same as putting a heavy foot on the national carotid.  Unchecked, political good intentions will consign us to Japan’s fate...or far worse. 

Therefore, our secret weapon, our only means available for a self-bailout, is to seriously attack the accumulated political load on commerce.  This will generate opposition, but some perspective here is needed. 

 

Nothing generates bigger riots than sudden, involuntary poverty. 

 

As we approach the prospect of reducing the political, regulatory and bureaucratic impediments in the US to profitable economic activity (i.e., recovery), we need to focus with laser efficiency on the legitimate core concerns that animated the regulation in the first place.  They fall into three categories: 

 

  • Environmental toxins
  • Heath risks
  • Public safety risks.

 

In each of these areas, China’s blowtorch economy is a cautionary tale as well as a working model of a rapid capitalist expansion.  China’s post-communist leaders have ignited a Wild West economy, the rough edges of which are insulated from protest by the selective use of the legacy tyranny-instruments from the Maoist days.  We’ve witnessed more of this than the Chinese people have.  The burning skyscraper in Beijing captured on US television during Diane Sawyer’s recent visit, the lead-painted toys of Christmas’s past, and the adulterated pet food are just the visible hints of the not-so-hidden costs of economic speed.

 

By contrast, the USA economy is like a sclerotic elder, using a walker, hesitating for endless discussion about the next step.  But the decrepitude of our own design, much of which was implemented over the last six decades by semi-autonomous bureaucracies tasked to make life better for some of us, no matter the general cost. 

 

The moment is overripe for an intelligent, focused attack on the political load burdening US commerce.  We are ready for a discussion of how regulatory easing would be managed and implemented. 

 

Not all of the burdens holding us back stem from health and safety concerns. 

 

Much of the burden represents the bureaucratic processes themselves, the “hearings” and “inputs’ and “reports” that are designed to substitute endless, unproductive discussions for decisive progress.  The post--earthquake San Francisco Bay Bridge replacement project (the quake was in 1989 and the work is just now approaching a visible terminus) was delayed at least a full decade while a highly politicized process invited “input”.  Most of the discussion was nominally about esthetics, but really about credit-sharing and the courting of embedded interests.  All this talk trumped public safety concerns and drove up costs. 

 

Delay is a form of regulatory abuse, the direct byproduct of politics as participatory obstructionism.

 

THE REAL STIMULUS PACKAGE

LIFTING THE POLITICAL BURDEN ON COMMERCE

 

We have the power to Break Out, only if we have the wisdom and courage to use it now. Breaking out of this dangerous economic malaise requires us to break through the Political Commerce Load Factor in the service of robust economic recovery.  It is both legally and practically feasible for a specific, as yet unnamed federal agency to be created, empowered and charged with the mission to break clear paths through the ice floes of bureaucratic red tape and punitive taxation so that nascent, privately funded commercial enterprises can flourish more quickly and robustly than anyone though possible, especially in the pre-recovery economic environment. 

 

In the same way that an Arctic ice breaker can break open a clear path for a fleet of fishing trawlers, a federal regulation and taxation ice breaker can do the same for a strong business recovery.  This would be proactive, creative conservative-liberal policy at its very best.  It would serve the same, practical function in the tangled web of business-killing regulations, licenses, permits, delays and kleptocratic taxes that bribes to in corrupt Third world economies.  Except that its operations, in partnership with cooperating state governments would be above board, transparent, subsidy-free and legal. 

 

The solution – or a major part of it - is to implement comprehensive commercial liberation, utilizing the commercial regulation powers conferred by the Commerce Clause, operating in reverse. 

 

Business people are not fools.  The protections afforded a start up would need to provide a clear path that could relied upon to remain clear for a reasonable time, say, a full fifteen years.

 

The basic template would be as follows:

 

The new Agency, let’s call it the Interstate Commercial Enterprise Deregulation Agency (ICEDA) would be given a fifteen year charter to liberate private businesses from burdensome, growth-impeding government rules, regulations, fees, mandatory reviews and other bureaucratic impediments to economic health (let’s identify them with a government acronym, Deleterious Regulations And Government-Imposed Tariffs (DRAGIT). 

 

The basic test: 

(1) Does the challenged government rule, regulation, fee, mandatory review or other bureaucratic impediment constitute a significant negative impact on new business activity, development or employment, whether directly or indirectly, potential or immediate?

(2) Would its elimination or proposed modification pose a significant risk to public health or safety over and above that which normally could be expected to occur from increased economic activity? 

 

When (1) is YES and (2) is NO, the ICEDA is empowered and directed to remove the DRAGIT.

 

The Agency would staff and supervise the several individual commissions that would locally exercise the deregulation power.  For example, the congress might direct that separate commissions be tasked to operate regionally or within designated economic sectors. 

 

State laws and regulations that potentially fall within ICDEA charter jurisdiction will present unique political and legal issues.  In legal theory, the ICDEA could run  roughshod over local jurisdictions, just as have the various federal regulatory agencies and commissions that have exploited the federal power to regulate commerce.  But it would be politically prudent for Congress to require that individual states reach a deregulation compact with the ICDEA, each having a separate sunset date, before the agency undertakes a review of state laws and regulations and is authorized to clear state-level paths of commercial development in a particular jurisdiction.  Under the commerce clause, almost all state regulations that impact commercial activities within their respective borders also affect interstate commerce.  Theoretically, the ICDEA could simply proceed on its own, plowing through commerce-obstructive state rules and laws relying on the supremacy clause.  When states are invited to apply for local regulatory relief, some will jump at the opportunity and more will follow, especially as the positive economic impacts of selective deregulation become apparent.   

 

The path clearing protection should be reserved for privately funded ventures only, the kind where the cost of failure is born by those who took the risks in the first place, the same investors who can reasonably expect to be allowed to retain the rewards of their success.

 

History tells us that this model or something very much like it will work.  History also tells us that when we Americans are challenged, we rally. 

 

JBG

 

 

Jay B Gaskill is a California lawyer who served as the Alameda County Public Defender before her left his “life of crime” to devote full time to writing.  His profile is posted at www.jaygaskill.com/Profile.pdf .