Ware Farms

Speaking truth to prejudice

Tuesday, February 08, 2005


Long Term Fiscal Problems Ignored

An e-mail to my son on September 4, 2004:

Dear David,

Yes, wars are expensive. The Iraqi operation is costing a billion dollars every six days for a total of $131,000,000,000 so far. Therefore the nation should go to war only when there is an real threat to our national security, something that wasn't true in Iraq.

In all prior conflicts, the President asked the country to make sacrifices to pay for these military operations. The Income Tax was initiated in 1915 to pay for WWI, for example. Yet when members of Congress, including Republicans like John McCain wanted to pay for the $87 billion expense of the wars in Iraq and Afghanistan by postponing the tax cuts that were to take effect in 2003, the President refused. Postponing tax cuts is the absolute minimum in sacrifices, yet even this was too much to ask. So the $87 billion was added to the national debt.

In 1980, when faced with ever increasing deficits, President GHW Bush supported a deficit reduction plan which included modest tax increases on those with the highest incomes and spending reductions in equal proportions. Still, in his last year in office, the deficit reached $280 billion. When President Reagan took office, the highest tax rate was 70%. Bush's plan reduced some of the previous cuts and made it 35%, which is still half of what it was 20 years before.

President Clinton's deficit reduction bill continued this effort using the same approach of equal parts spending reductions and tax increases including a rate increase to 39.5% on the 2% of our highest income earners. While it's true that those who have this rate applied to a million dollars in income are paying $395,000 in taxes, a $45,000 increase from before, it also means that they have $605,000 left over to spend as they wish. This is 15 times the median income of all working Americans.

As the government demand for borrowed money fell, interest rates eased leaving entrepreneurs with a greater supply for investment in new businesses and the hiring of more workers. The Clinton bill also increased the earned income tax credit, one of President Reagan's ideas, which put more money in the hands of 8 million working families, parents who were likely to spend most of this money, thus boosting the economy. This led to the greatest economic expansion in post WWII history while at the same time increasing government revenues, further reducing the need for government borrowing, which led to even lower interest rates, and so on. President Bush started out with historically low interest rates and a $163 billion budget surplus.

This might have given us a grace period to address three huge long term problems.

1. The national debt peaked at over $5.9 trillion with an annual interest expense of $238 billion. The last country to carry such a large debt was Tsarist Russia. With nearly 30% of this debt being held by foreigners and foreign countries including $132 billion by Communist China, this limits our foreign policy options and effects our national security.

2. Medicare expenses continue to rise much faster than inflation which puts the solvency of the fund in jeopardy. The sooner we address this looming problem, the less drastic the solution will be.

3. The SSA has lent the general fund $1.8 trillion to finance it's operations. As the baby boomer generation retires over the next few decades, this surplus will diminish requiring the government to find these funds elsewhere. At some point the government will have to start paying back this debt so the SSA has the funds available to continue paying retiree benefits.

So what has the President done to ease these three areas of serious concern?

1. Pushed through tax cuts which will raise the national debt (public and SSA) to $8.6 trillion by 2014. This is ONLY if they aren't made permanent and the alternate minimum tax isn't adjusted. At current low interest rates, this would cost $344 billion in yearly interest charges. But in reverse of what happened in the 1990's, as government demands more money to finance this deficit spending, those who supply the funds will require higher interest payments to divert this money from other uses. Each per cent rise adds $86 billion to the yearly interest. In a global free market, the government has no control over these interest rates and is 100% obligated to pay whatever the global demand requires.

2. Added a drug benefit, two thirds of which goes directly to the drug companies, America's most profitable industry, with no designated source of financing, just add $536 billion to the deficit. The underlying financial difficulties, meanwhile, are left un-addressed.

3. Proposes personal retirement accounts which would reduce the amount of money collected by SS by 12.5% for those who sign up for it, costing the treasury up to $2 trillion as it continues to pay full benefits to retirees during the transition period. The underlying financial difficulties, meanwhile, are left un-addressed.

I really feel I made my patriotic contribution to our 12 year struggle to get our national budget in balance, by paying 4.3 cents more for a gallon of gas, for example. Yet, not the war, not homeland security, not the medicare drug benefit, no nothing does the President think worthy to ask the American people to pay for. It all blithely goes on our national credit card for our children and grandchildren to concern themselves about. All the hard work to balance the budget has gone down the drain by the most irresponsible President in our country's history.

Love, Dad


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