By Jay B Gaskill
Author of Hemingway, Two & a Half Men – http://jaygaskill.com/CelebratingEarnestly.pdf
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GREAT AMERICAN COMEBACK
An Exercise in Reality
Jay B Gaskill
Attorney at Law
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Once upon a time a great city, called Neverpay, thrived on an island in the shadow of a towering mountain. The aboriginal founders called it Mt. Paymenow.
As time passed, geologists who studied Mt. Paymenow discovered some frightening features. The towering mountain was unstable and eventually and inevitably was destined to fall and smother the entire city, burying every person and structure under a suffocating layer of debris - not one living thing could survive.
Hearing these reports, some citizens of Neverpay chose to seek offshore refuges, hoping to survive the predicted Great Collapse. But the geologists warned that the collapse of Mt. Paymenow would generate a huge wave that would swamp everything within rowing distance. As the warnings of the geologists spread though the city, about half the population became fatalistic and the other half were consumed with panic. Political paralysis ensued.
The day of reckoning drew closer and closer.
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Unless the reader is severely metaphorically challenged, the broad outlines of the looming fiscal crisis facing the US are evident in this little fable. The difference, of course, is that we have created the mountain of indebtedness that towers over the entire economy. Therefore, we are still in a position to take it down.
In point of fact, the entire US debt, structural, long term, projected and immediate, so far exceeds our ability to pay, that any silver bullet solution looks like something constructed of that magic 22nd century substance, Unobtainium. We are told that the US government has obligated itself to pay back the staggering sum of 14 trillion dollars. But this sum is actually far lower than the actual amount, when all currently mandated entitlement spending is factored in.
“In a recent interview with Bloomberg TV, Dr. Nouriel Roubini, one of the foremost economists monitoring the global financial and economic crisis, warns of grave dangers facing the public budgetary imbalance of the United States. ‘The fiscal problem is very serious. The bond vigilantes have not yet woken up in the U.S. in the way they have in the Eurozone. Unless the U.S. addresses this fiscal problem, we’re going to see a train wreck.’
“Roubini in the past has supported the vast budget deficits of governments and monetary loosening of central banks as a painful but necessary measure by advanced economies to redress the damage resulting form the financial and economic collapse of 2008. Even then, he warned that there was no free lunch, and that policymakers would have to present a credible plan for withdrawing stimulus and monetary easing and curtailing their levels of public debt. Now, with a full-fledged sovereign debt crisis raging in Europe and the U.S. trapped with a structural mega-deficit, Roubini and other perceptive economists are clearly worried about the unsustainable budgetary imbalance of the U.S. federal government. Indeed, a day of reckoning is coming closer, with no cogent remedies on the horizon. It is becoming far more likely that a fiscal train wreck is a future destination for the U.S. economy, and that future may not be long delayed.”
But the scariest of these scenarios are unnecessarily dire because they lump together everything the USA owes, including our promises to the entitlement beneficiaries among us, all in one large pot. When we project the consequences of inaction, the disaster looks both inevitable and catastrophic. This is a bit like a picture of a race car heading down the side of a hill at 120 mph into a turn that cannot be made at a speed faster than 30 mph.
Only if we assume that the brakes are not applied soon enough, the predictions of disaster will be realized. But we are not speed-crazed automatons.
Assuming someone wakes up in time to apply the brakes, a deeply sobering picture still remains - one analogous to the race drives, dazed and injured, abandoned by the roadside never to drive again.
This bind is all about the consequences of broken trust. Do we break out commitments all at once in a bankruptcy, dishonor them serially or allow the fallout to start a world war?
Did I use the term bankruptcy? Of course there is no official mechanism for a sovereign bankruptcy on the scale of a superpower, but we have seen one in our lifetime. The collapse of the Soviet Union was a de facto bankruptcy because the old sovereign ceased to be, voiding treaties, debts and other arrangements. This, of course, did not mean that anyone would be willing to lend the new Russia a dime. That we perceived such “help” to be in our national interest was a unique circumstance. Would China continue to lend? Would Europe? Would the Saudi princes?
Or...do we suck it up and stage a comeback? Just because that is a no-brainer option, does not guarantee its timely adoption by the no-brains living inside the Beltway...
Just what would the Great American Comeback look like? Imagine living in a world where the following measures are actually implemented over a five year period.
1. We begin by sharply and candidly distinguishing between our structural, entitlement-driven fiscal reckoning, and the immediate hemorrhage, by agreeing to defer the former while committing without delay to begin hard-nosed implementation of a robust and realistic plan to accomplish the latter.
2. The immediate hemorrhage (the fact that the US is currently borrowing half of its spending, while attempting to “monetize the outstanding indebtedness” with fed. fiat money) is so dramatically unsustainable, even over the next four fiscal years, that it must be fully staunched well before then. Only when that looming reality drives a working political consensus will there be hope for the Great American Comeback.
3. Staunching the bleeding means arriving at a new plateau of serially balanced budgets, hopefully without adding crippling taxes that institutionalize the current low level of productive economic activity. If we are not very careful we risk producing a chronic state of recession, bordering on a “new normal” in which we accept 8 to 10% unemployment as the best we can do.
4. Realistically, the required austerity measures will involve the wholesale slashing of entire sectors of government spending, or the across the board, pro-rata reduction of salaries and benefits, or a brutal combination of each. Unless overall economic activity can somehow be increased, government revenues (adjusted for inflation) will not increase. If taxes are increased, there is a real existential threat that overall income-generating economic activities will be suppressed. The taxation solution creates a classic “Catch 22” trap. To put it mildly, the problem requires an as-yet unrealized level of maturity on the part of policy makers inside the Beltway.
5. IF the federal government’s measures to staunch the arterial bleeding take hold, the government will need to quickly open up the private sector to investment, profit-making enterprises. This is actually not difficult to implement on a policy level - the obstacles are entrenched ideological and political interests. The reason that such a “capitalist opening” could happen at all is a psychological one. The same sense of urgency and purpose that will finally generate the political climate for stemming the hemorrhage will also support a great reopening to capitalist expansion. The policy measures are well known among free market economists: During a time window long enough to lure investors to the table (ten years or more), we deliberately return to the regulatory atmosphere of the late 19th and early 20th centuries, allowing exceptions only for those clearly necessary measures to protect against fraud and non-speculative threats to public health. Wide open exploitation of natural resources will be coupled with an export tax, the revenue from which will be taxed at a flat rate and diverted exclusively to US debt reduction.
6. But the task of staunching the hemorrhage will mean overcoming huge opposition from public sector unions. The starting point will be across-the-board public sector salary reductions. “But resignations will follow”, some warn: So much the better for the public fisc. Top positions like POTUS, Agency and Department heads and members of congress will take a 40% cut in pay (leaving only the non-retirement benefits intact). Nothing short of a step that dramatic will open the way for the other necessary measures. All other federal employees, excepting active duty military, would then take a 20% cut. Fierce union and interest group opposition is to be expected, but there will be opposition from conservatives as well, because (do the math) some tax increases will be also needed. We should use the opportunity to move in the direction of a flatter, more stable income tax system, with a single iron clad commitment: All new taxes must be applied to reduce the indebtedness. One possible exception: To prevent further erosion in the military, we enact a carefully crafted War Tax, administered with complete and integrity to support actual combat readiness and strength. As an overall firewall: All tax increases will have a ten year sunset. Re-regulation will not occur in any instance without an economic impact statement and a 25 month sunset.
7. Entitlement reform must begin as the austerity plan is implemented. It necessarily will have several elements. The overarching goal is to migrate as swiftly as practicable away from defined benefits packages to an available, funded-benefits system in which anyone who is a net aggregate recipient (thinking of the retirees who have already received more that they paid in) will receive means-tested benefits reductions. For political and moral reasons, the Social Security piece should be staged such that current recipients 65 or older are not be forced to migrate to a different system. The cleanest way to reform the drug entitlement piece is to tie co-payments to a mix of means-testing and a pro-rata increase in deductibles and co-pays, as available (i.e., not borrowed) government resources require. The Medicare system is too complex to address in a few lines, but, again means-testing and a shift to a self-pay with a sliding scale deductible - reimbursement arrangement is clearly necessary
8. Overall, the best strategy to address the support load of an aging population is to work the problem from two ends.
(a) Initiate a bottom-to-top revamping of the entire US employment system, using and changing incentives and disincentives to recruit as many as possible older citizens into economically productive activities, whether full time or part time. Total retirement should never be required before the age of 80, except as actual medical conditions dictate. And the choice should not otherwise be between full time employment and no employment at all. There are too many elements of this to summarize, but note the implications for age discrimination and pensions.
(b) At the other end, the number of fresh, younger taxpaying economically productive workers in all fields needs to be ramped up. This means that immigration policies need to be radically revamped. A single criterion should dominate over all of the national origin, ethnic, political and social ones: The in-migrant’s prospective economic contribution to the US economy and his or her demonstrated willingness to remain a law-abiding, well assimilated member of our polity.
9. The American people are still willing to endure considerable hardship whenever two conditions are met:  Leaders endowed with credibility lay out the truth about the real situation and outline a plausible path out of the pit.  That same leadership cohort has unquestioned honesty and competence. These criteria cannot be met by most of the talking heads in Washington, DC, let alone our POTUS. Nevertheless, the truth-telling and the Comeback Plan need to be aired now.
10. Life is never perfect and the best solutions are rarely even close to perfect. Among the attitude adjustments needed to bring off the Great American Comeback are the attainment of confidence with humility, and the persistent pursuit of the attainable optimum instead of the divisive struggle for unattainable utopias.
Some Related Articles by Jay B Gaskill
The Great Keynesian Collapse of 2008
Lancing the Bubble http://jaygaskill.com/AmericanBubble.htm
BREAKOUT 1.0 http://jaygaskill.com/Breakout1.0.htm
BREAKOUT 2.0 http://jaygaskill.com/Breakout2.0.htm
BREAKOUT 3.0 http://jaygaskill.com/BREAKOUT3.0.htm
American Dream, American Nightmare http://jaygaskill.com/AmericanDreamAmericanNightmare.htm
Bernanke’s Gamble http://jaygaskill.com/BernankeGamble.htm
The Fiscal Trap is Real http://jaygaskill.com/BlackWeekendHeadsUp.htm
China and Paul Krugman http://jaygaskill.com/ChinaKrugmanGreatAdjustment.htm
Crash Warning http://jaygaskill.com/CrashWarning.htm
Read “Creativity and Survival” at http://jaygaskill.com/CreativityAndSurvival.htm
And Stay Tuned for the Sequel in MARCH