Rubén Rivero Capriles

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Democrats' Tax and spend vs. Republicans' tax less and spend just as much (enhanced on Aug. 18, 2009)

Partisan Democrats have not got yet that tax and spend isn't a viable fiscal policy. Partisan Republicans have not realized that "tax less and spend just as much while blaming 'socialist Democrats' for their profligacy" makes even less fiscal sense. In other words, we can thank both parties for the fiscal crash course we are on.

Below are summarized the conclusions of a very interesting debate on Facebook. I thank Dale Wettlaufer, Ira Malis, Lindsey Truscott Breslin and Laura Boydston for making this essay possible. I also thank my grandfather, Mr. Moisés Capriles, for his helpful experience, healthy skepticism and detached point of view.

The blue dogs have shown what is obvious. The 10% of the population that is the Pelosi left and the 10% of the population that is the loonie right, are offset by the 80% of voters that fall in between. Why can't there be a candidate through the primaries that dares to fight his or her party's fringe? Maybe a third party in the middle is what is needed.

A few decades ago most voters were fairly moderate and did not much differentiate a middle of the road Republican from a middle of the road Democrat. It seems that there is much more polarization over all now, thanks a bit to the media as well. People can't even raise politics as they get called behind their back as vegetarian Obama lovers and are attacked later. Why aren't the sensible moderates standing up? The electorate needs to take on the fringe of both parties. They are not doing what their electorate wants, they're just trying to stay in office, to stay in "power".

The state of political conversation has probably deteriorated at the same rate as the United States overall debt situation. A commonsense accounting approach must be demanded first from the government. The irony of the U.S. Congress telling corporate America in the wake of Enron, Adelphia, Tyco, and Worldcom its accounting is dirty is a very sad farce. The federal budget takes into account none of the future healthcare liabilities that are growing every year as the Baby Boom hurtles toward retirement. If corporations accounted for themselves in this way, their CEOs and CFOs would be locked up. So would the U.S. fiscal situation with a rational and sober accounting regime. Then it's pretty much up to all of us to sacrifice. Higher-income people are probably going to see higher tax rates, which means they will have to save and invest more to keep up the same rate of growth, all else equal. Lower-income people are going to need to retire later and receive fewer benefits when they do.

USA Today reported in 2008 that the Federal government's entitlement program liabilities total $57 trillion and unfunded Medicare liabilities total $30 trillion. Under US GAAP accounting for corporations, that liability would accrete (grow) at some rate reflecting the unwinding of the discount rate at which the future liabilities were discounted. If we use the federal government interest rate (the private sector would use a AA bond rate), the expense you would see in the budget would be $690B. That is not in the federal budget because the US government uses a different, cash accounting, system and not the accrual accounting system US corporations (and pretty much corporations around the world) use to recognize the accretion of future liabilities as they move from the present to the future. This USA Today article has more on it: http://www.usatoday.com/news/washington/2008-05-18-Redink_N.htm . We also recommend Pete Peterson's book on these issues: Running on Empty: How the Democratic and Republican Parties Are Bankrupting Our Future and What Americans Can Do About It. Pete Petersons is the Chairman of the Blackstone Group, former Commerce Secretary, and former Chairman of the Council of Foreign Relations: http://en.wikipedia.org/wiki/Peter_George_Peterson. He is one of the wealthiest people in the United States and is well versed in accounting.

American military presence around the world will probably need to be scaled back. Debt must be paid down, consumption must decrease to favor savings. Finally, if (the big if) the U.S. economy is able to avoid inflation, the interest on national debt won't sink the country. The short-term nature of the $11+ trillion in national debt means a doubling in interest rates would add more than $250 billion in annual interest rate expense to the federal budget. As of the second quarter of 2009, annualized interest expense for the federal government ran at $277 billion, according to the Bureau of Economic Analysis' National Income and Product Accounts website: http://bea.gov/national/nipaweb/Index.asp. If interest rates double from levels that are low compared to the last 40 years, an outcome to which we make ourselves more vulnerable given current account deficits and reliance upon external creditors to support that deficit, interest expense would surpass $500 billion with higher rates and higher debt outstanding. That's where things could start to spin out of control.

The figures above were accurate on August 16, 2009. The source is the U.S. Treasury at http://www.treasurydirect.gov/NP/BPDLogin?application=np . Total external US federal government debt held by the Public, outstanding was $7.3 trillion at the time of writing. Total public debt outstanding was $11.6 trillion, which counts intra-governmental holdings or debt of $4.3 trillion. Moreover, US federal government interest expense ran at $277B annualized in Q2 2009. The source is the  Bureau of Economic Analysis, on line 29 at
http://bea.gov/national/nipaweb/TableView.asp?SelectedTable=87&Freq=Qtr&FirstYear=2007&LastYear=2009. This implies a 2.4% annualized rate, which indicates an average maturity on US federal debt of about 6 years, looking at the current yield curve on Bloomberg. If rates go to 4.8%, that's 4.8% * $11.6 trillion, or a new interest expense of $556B, for margin expense of roughly $280B.

There is optimism about green technologies creating a massive change for global society and creating a huge secular growth driver for the U.S. when a culture of fewer fossil fuel consumption is established. The trade deficit could fall, the freed-up resources could be saved or invested in new technologies, and the jobs and profits created would enhance the US's and the world's tax base. The biggest losers in that scenario would be the OPEC and former Soviet Union nations, which of course is bad for Boeing, Hermes, South African and US thoroughbred horse farms, Sotheby's, Ferrari, and the like. There are always winners and losers. In all, there is a long, hard road ahead and it would be great if everyone could agree on the fight to share. The name-calling fomented by the likes of Rush Limbaugh and Senator Franken is useless for all.

Some red-meat-eating longtime GOP voters voted for Obama because the GOP spun out of control. They are uncomfortable with a few things in the current administration's platform, but it's a sight better than what McCain and the GOP were offering and had offered. Moreover, Al Gore had the right idea with the "lock box," and if he weren't so anti-business and were able to finesse the tax rate thing better, he would have been a two-term President. He really botched it, unfortunately. He was on the right track with entitlement funding.

Congresspeople who publicly describe themselves as liberal or progressive received a combined vote total of 72.9 million Americans. Pelosi’s voting record puts her in the top 1/3 most conservative House democrats. Not only is it factually inaccurate to describe America as 10% liberal, it is inaccurate to describe Pelosi as among the most liberal.

Even the briefest glance at historical spending to GDP ratio and total government spending (in inflation adjusted terms) shows that the Republican party has grown the government more than the democratic party in every year they have held the presidency since 1953. In other words, the Republicans have continually and consistently outpaced the democrats in growing the size of the government and the only shrinkages of government in size and cost, relative to GDP and employment, have been under democratic administrations. The last time a democratic president voted or signed an increase on taxes on the majority of Americans was in 1964. In fact, in inflation adjusted terms, at no time in our voting lives has a Democrat submitted a bigger bill than any Repbulican president has. It’s interesting that the notion of tax and spend democrats still holds strong.

This is a creative use of statistics. Because of the lack of term limits, it is hard to beat an incumbent, especially a blue incumbent in a blue state or a red incumbent in a red state. So just because 72.5 million people elect people that self-describe as liberal or progressive does not really prove everything. If 2/3 of the democrats were more liberal than Pelosi, that would become a concern. Again, the statistics above may be misleading. Since most Democrats and Republicans stick together, it only takes a few votes against the party to have your record shown as less liberal. On any important vote for the ultra-left, Pelosi has voted with that group.

Defeating communism and defending the United States is not cheap. So to hear Obama talk about being "fiscally responsible" after the pork-laden stimulus program and the budgets and deficits he is projecting, is laughable. According to the National Journal, which rates both liberals as to their "liberalness" and the same for conservatives, Nancy Pelosi (in 2006, the last year she was rated as they don't rate the speaker), was was the 20th most liberal congressperson in the House. She was ranked more liberal than Maxine Waters, Barney Frank, and self-described socialist Bernie Sanders (before he joined the Senate.

The opening paragraph used the pejorative, "tax and spend," and turned it on itself as a comment on the GOP fiscal strategy over the last 30 years. The point was that both parties are spenders because they are both populated by politicians who desire re-election. Both contributed to ever-increasing spending programs that have automatic escalators, resulting in a compounding rate over time greater than the compounding rate of the tax base. Eventually that results in a crisis, which will be faced in the next ten years if entitlement spending is not changed. Perhaps the only way to get the US federal budget and debt situation fixed is through contributions to the solution from across the income spectrum. High-income earners will have to give more and recipients of entitlement spending should expect less if we want to work our way out of it.

If the suggested scaling back of US worldwide military presence happens, 21st century United States standing to the population of the rest of the world will become much more positive. The current state of Venezuelan affairs was also referred to on our original discussion. As OPEC's founding nation in the Western Hemisphere, it is ironic that Venezuela is becoming a net coffee importer. One of the few comparative advantages that Venezuela offers to the world nowadays, is that some of its well-educated citizens understand and are able to deal with recessions and bad economic times with better tools and experience than citizens of developed countries, which have been pampered until very recently. The Cubans in Florida who quickly learned how to succeeed are a valid comparisom. Other than that, it is sad to see that the oil pseudo-wealth will just vanish. At least Dubai used their oil money wisely and are well prepared for the future green world scenario.


There is some optimism abroad about Venezuela long-term. Colombia provides an excellent example of how a country can turn around. Venezuela is ideally situated long-term between the Atlantic and the Pacific near the Panama Canal, it has 2,000 km of Caribbean coastline, excellent renewable water resources (a huge issue in the 21st century), good iron ore reserves, and a manufacturing base. Should a new moderate government arise during a global economic recovery, growth in private wealth along with protection of civil freedoms, the country could be on its way. Patience is a virtue that must be practiced.

Thanks again to Dale Wettlaufer, Ira Malis, Lindsey Truscott Breslin and Laura Boydston for the good discussion. We will now try to track down the U.S. government accrual accounting report vs. US budget cash accounting. We are looking forward in keeping a discussion of this sort nearly across hemispheres and across generations.

http://www.rroopstr.com        http://www.riverocooper.com
   
Rubén Rivero Capriles
Caracas, August 17, 2009