Just Keep Talking

"The less you intend to do about something, the more you have to keep talking about it."

Otherwise known as the Law of Inverse Relevance (LIR). We must credit the LIR to a fictional character, Sir Arnold Robinson, who spoke those lines back in the 80’s during the first episode of Yes Minister, a BBC comedy series. I suppose the real credit goes to the writers Antony Jay and Jonathan Lynn. They also get credit for this jewel:

“Politicians like to panic. They need activity - it is their substitute for achievement.”

And so we watch our government, at all levels, flailing around and trying to figure out how to satisfy “we the people” without taking goodies away from some of “we the people”. What’s going on in Wisconsin today is a classic example. It’s not a matter of IF someone will have to give up something, it’s just a matter of who. And guess what, those who are being asked to give up something are having a fit. At the national level it’s why we resist making meaningful spending cuts or increasing taxes.

Yes, I’m ok with increasing taxes in order to bring down the national debt even though increasing taxes would only amount to a drop in the bucket compared to spending cuts. Our tax revenues account for well under 20% of GDP. Let’s assume that “we the people” would support a 10% increase in taxes across the board. Best case scenario in 2011, we increase revenues $300B on a $3.8 Trillion budget with a projected $1.3 Trillion deficit.

Another way to look at it is that for the past 50 years, tax revenues as a % of GDP have been in the 15-20% range, regardless of tax policy. Pre-Bush tax cuts we were closer to the 20% number, so we’ll use that. And let’s use the optimistic 2011 GDP forecast of $15.2 Trillion. Even with the higher tax rates our revenues would be just over $3 Trillion, well short of the proposed $3.8 Trillion spending budget. We would need a GDP of $19 Trillion and the higher tax rate to support a $3.8 Trillion budget. So when the politicians are struggling to cut $100 billion (that would be 0.1 trillion), I think we are in big trouble. We have to cut spending, seriously cut spending.

And I’m not one of those who insists that we must pay off our national debt. That’s crazy. Some level of debt is acceptable. Since WWII, our debt as has ranged from 1/3 to 2/3 of GDP. But we are now close to a debt level that equals GDP and will soon exceed it. Since 1984 our GDP has grown by over 350%. Our national debt has grown by over 850% !!! Clearly an unsustainable pace.

Another way to look at it is that IF we maintain our current debt level at around $14 trillion, our GDP would need to reach $21 trillion for us to get back to a what would still be considered a relatively high 66% debt-to-GDP ratio. That also means our GDP needs to increase by almost 50%. The good news is that is very doable over a decade or perhaps less.

STEP 1 IN RETURNING TO FISCAL RESPONSIBILITY IS DO NOT ADD TO THE CURRENT DEFICIT…PERIOD, END OF DISCUSSION. Cut spending, raise taxes, whatever; but do not add one more penny to the national debt.
That means putting everything on the table including Social Security, Medicare and Medicaid. Given our demographics and the rising costs of healthcare, we cannot resolve the debt problems without addressing these three areas. These three and the defense budget are the big buck items. We have to cut, cap and/or figure out a way to pay for them.

In talking about the government, Will Rogers once said: “If stupidity got us into this mess, then why can’t it get us out?” Will Rogers was making a joke. I’m not sure that it was just stupidity that got us into the current mess, but I am sure that stupidity will not get us out of it. Neither will talk. The time for talk is over. It’s time to fix the problem.