America's Debt Woe Is Worse Than Greece's Yet We Continue To Spend Like We've Hit The Lottery!

Our government is utterly broke. There are signs everywhere one looks. Social Security can no longer afford to send us our annual benefit statements. The House can no longer afford its congressional pages. The Pentagon can no longer afford the pension and health care benefits of retired service members. NASA is no longer planning a manned mission to Mars.

We're broke for a reason. We've spent six decades accumulating a huge official debt (U.S. Treasury bills and bonds) and vastly larger unofficial debts to pay for Social Security, Medicare, and Medicaid benefits to today's and tomorrow's 100 million-plus retirees.

The government's total indebtedness -- its fiscal gap -- now stands at $211 trillion, by my arithmetic. The fiscal gap is the difference, measured in present value, between all projected future spending obligations -- including our huge defense expenditures and massive entitlement programs, as well as making interest and principal payments on the official debt -- and all projected future taxes.

The data underlying this figure come straight from the horse's mouth -- the Congressional Budget Office. The CBO's June 22 Alternative Fiscal Scenario presents nothing less than a Greek tragedy. It's actually worse than the Greek tragedy now playing in Athens. Our fiscal gap is 14 times our GDP. Greece's fiscal gap is 12 times its GDP, according to Professor Bernd Raffelhüschen of the University of Freiburg.

In other words, the U.S. is in worse long-term fiscal shape than Greece. The financial sharks are circling Greece because Greece is small and defenseless, but they'll soon be swimming our way.

To grasp the magnitude of our nation's insolvency, consider what tax hikes or spending cuts are needed to eliminate our fiscal gap. The answer is an immediate and permanent 64% increase in all federal revenues or an immediate and permanent 40% cut in all federal noninterest spending.

Such adjustments go miles beyond anything Congress and the president are considering. No wonder. They are focused on limiting growth in the official debt, while ignoring what's happening to the unofficial debt. To understand the thickness of their blinders, note that the fiscal gap, after inflation, grew by $6 trillion last year, whereas the official debt grew by only $1 trillion. Hence, our leaders are looking at one-sixth of the problem.

The August budget ceiling crisis deal calls for $2.5 trillion in budgetary savings over the next ten years. President Obama is unveiling plans Monday to cut the debt by $3 trillion. Both of these are peanuts compared to what's needed to start eliminating the fiscal gap.

There is a way forward to deal with both our fiscal mess and the economy, which is lying on the operating table in desperate need of open-heart surgery. Such surgeries are called radical because they require radical intervention. But they are also extremely safe compared with the alternative -- administering Band-Aids and letting the patient die.

At www.thepurpleplans.org, I provide five radical, but absolutely essential plans to fix taxes, health care, Social Security, the financial system, and energy policy. Collectively, they would more than eliminate the fiscal gap and get our economy out of the emergency room and onto the racetrack.

The plans are called purple because they should appeal to blue Democrats and red Republicans. If neither party adopts them, I guarantee that a third-party candidate running via www.americanselect.org will.

The Purple Tax Plan is of particular relevance now, given Obama's decision to push for a repeal of the Bush tax cuts for the rich and to levy a new tax on the super rich -- those with incomes above $1 million.

The president wants to raise taxes. Can't argue with that. We desperately need much higher revenues along with much lower expenditures. Federal revenues measured as share of GDP are at a postwar low. And the president wants the rich to bear a bigger share of the tax burden. It's hard to disagree with this either. The rich have been getting off far too easy for far too long.

But the Republicans want to ensure that more taxes don't mean more spending or smaller spending cuts than would otherwise arise. They also worry about high tax rates discouraging work, saving, and job creation by entrepreneurs.

Most of us agree with both the president and the Republicans, which is possible because they're both talking past each other. But what we really want is a tax system that's simple, transparent, fair, and efficient. Neither the personal income tax, the corporate income tax, nor the estate and gift tax meet these criteria. Each is a bigger nightmare than the next.

The Purple Tax Plan entails radical surgery. It eliminates the personal income tax, the corporate income tax, and the estate and gift tax. In their place it substitutes a highly progressive 17.5% federal retail sales tax plus a demogrant -- a monthly payment to each household, large enough that it reimburses the poor for the sales tax they've paid. (The 17.5% rate is the tax's nominal rate. Its effective rate is 15%, since 15 cents of every dollar spent goes to taxes and 85 cents to goods and services, with 15 divided by 85 equaling the 17.5% nominal rate.)

If you're a Democrat, a sales tax, apart from the demogrant, probably sounds highly regressive. But nothing could be further from the truth. Taxing consumption is mathematically identical to taxing what's used to buy consumption, namely one's wealth and one's wages. Warren Buffett would effectively pay 15% on his wages, but also 15% on the principal of all his wealth, which is not now being taxed.

The day the Purple Tax is implemented, Buffett will have the same number of dollars in wealth, but the purchasing power of his wealth will fall by 15%, thanks to the 17.5% higher costs of goods and services. And whether he spends his wealth on himself or gives it to his kids to spend, his wealth, plus any accumulated asset income, will buy 15% less in goods and services.

The Purple Tax also makes the payroll tax highly progressive by eliminating its ceiling and exempting the first $40,000 in wages from the employee portion of the tax. Finally, the Purple Tax includes a 15% inheritance tax on inheritances and gifts received in excess of $1 million.

Since the payroll tax is levied at close to a 15% rate, and the sales tax has an effective rate of 15%, and the inheritance tax rate is 15%, the Purple Tax plan imposes a single tax rate. This is very important for budgetary discipline. Under the Purple Tax, everyone will know that if Congress spends more on anything, the 15% effective tax rate will need to go up.

The ongoing food fight between Obama and the Republicans is hiding the real game -- spending ever-larger sums on ourselves and leaving ever-larger bills for our kids. This fiscal child abuse must stop. The Purple plans would let both sides claim victory, save our kids, and get our economy back in the race.

Article by Laurence J. Kotlikoff, Courtesy of CNN

Note: Laurence J. Kotlikoff, an economist, is a William Fairfield Warren Professor at Boston University, a columnist for Bloomberg and Forbes, and the author of 14 books including "Jimmy Stewart Is Dead" (John Wiley and Sons), "The Healthcare Fix" (MIT Press), and "The Coming Generational Storm" (co-authored with Scott Burns, MIT Press) 

Economic Armageddon and You (Video)

A quick lesson in economics and how the US is applying it..

Psst. No shutdown During a Government Shutdown.

The US Government's bloated bureaucratic behemoth is in little danger of "losing out" during this recession. Its workers are practically guaranteed to keep their standard of living, regardless of the pain millions of taxpayers who pay their salaries are feeling. Say it aint so, O.

WASHINGTON – Social Security checks would still go out. Troops would remain at their posts. Furloughed federal workers probably would get paid, though not until later. And virtually every essential government agency, like the FBI, the Border Patrol and the Coast Guard, would remain open.
That's the little-known truth about a government shutdown. The government doesn't shut down.

And it won't on March 5, even if the combatants on Capitol Hill can't resolve enough differences to pass a stopgap spending bill to fund the government while they hash out legislation to cover the last seven months of the budget year.

Fewer than half of the 2.1 million federal workers subject to a shutdown would be forced off the job if the Obama administration followed the path taken by presidents Ronald Reagan, George H.W. Bush and Bill Clinton. And that's not counting 600,000 Postal Service employees or 1.6 million uniformed military personnel exempt from a shutdown.

So we're talking fewer than one in four federal workers staying at home. Many federal workers get paid on March 4, so it would take a two-week shutdown for them to see a delay in their paychecks.

The rules for who works and who doesn't date back to the early 1980s and haven't been significantly modified since. The Obama administration hasn't issued new guidance.

The air traffic control system, food inspection, Medicare, veterans' health care and many other essential government programs would run as usual. The Social Security Administration would not only send out benefits but would continue to take applications. The Postal Service, which is self-funded, would keep delivering the mail. Federal courts would remain open.

The cherry blossoms in Washington would bloom as usual, and visitors to the city would be able to park and see them in all their glory around the Tidal Basin.

But they wouldn't be able to take the elevator up the Washington Monument, visit museums along the National Mall or take a White House tour. National parks would be closed to visitors, a loss often emphasized in shutdown discussions.

The Capitol would remain open, however. Congress is deemed essential, despite its abysmal poll ratings.

The IRS wouldn't answer its taxpayer hotline — at the height of tax-filing season. Under IRS precedents, the agency would process tax returns that contain payments. But people getting refunds would have to wait. [Fancy that!]


All sides say they don't want a so-called shutdown like the two separate partial government closings in 1995-1996, when President Clinton and a then-new GOP majority in Congress were at loggerheads over the budget. Republicans took most of the political blame, and the episodes gave Clinton critical momentum on his way to re-election.

There haven't been any shutdowns since then. The politics stink.

But from a practical perspective, shutdowns usually aren't that big a deal. They happened every year when Jimmy Carter was president, averaging 11 days each. During President Reagan's two terms, there were six shutdowns, typically of just one or two days apiece. Deals got cut. Everybody moved on.

In 1995-96, however, shutdowns morphed into political warfare, to the dismay of Republicans who thought they could use them to drag Clinton to the negotiating table on a balanced budget plan.

Republicans took a big political hit, but a compendium of the other hardships experienced reads like a roster of relatively minor inconveniences for most Americans: closed parks, delays in processing passport applications, 2,400 workers cleaning up toxic waste sites being sent home, and a short delay in processing veterans' claims. A new government standard for lights and lamps was delayed.

To be sure, furloughs can be a major hardship for federal workers. Even those in essential jobs — and required to work — could see their paychecks delayed if a stalemate dragged on.

Lawmakers, however, typically provide back pay, even for employees who weren't required to work. A repeat of that could raise hackles with some in the tea party-backed House GOP freshman class. A spokesman for House Speaker John Boehner, R-Ohio, wouldn't address whether furloughed federal workers would receive back pay if there is a shutdown this time.

Regardless, federal contractors would lose out. Many contract workers could be furloughed without pay and not receive lost wages retroactively, especially in an extended shutdown.

Under a precedent-setting memorandum by Reagan budget chief David Stockman, federal workers are exempted from furloughs if their jobs are national security-related or if they perform essential activities that "protect life and property."

In 1995, that meant 571,000 Defense Department civilian employees, some 69 percent, remained at post, while 258,000 other Pentagon workers were furloughed. Eighty-five percent of Veterans Administration employees went to work as did 70 percent of Transportation Department workers.

But just a handful of Environmental Protection Agency employees and only 7 percent of NASA workers were on the job, according to Clinton administration data.

This year, NASA would face widespread furloughs that suggest a shutdown could interrupt preparation for space shuttle flights this spring — though the "life and property" rules would almost certainly be invoked so that the Space Shuttle Discovery could land as scheduled on March 7. It took off Thursday afternoon.

Just 4 percent of employees at the Department of Housing and Urban Development went to work in the 1995 shutdown, as did 11 percent of Department of Education employees. The National Archives shut down completely, as did the tiny Selective Service System.

Then there's Social Security. Current beneficiaries need not worry; their payments wouldn't be affected. And given the most recent precedent from the Clinton administration, those eligible to apply for benefits would be able to do so.

During the first shutdown in 1995, the Social Security Administration initially furloughed 93 percent of its workers and stopped enrolling new beneficiaries. But it reversed course in the second shutdown and kept 50,000 additional workers on the job.

If the federal government is shut down for several days, the Census Bureau could miss its April 1 legal deadline to provide 2010 redistricting data to the states. The bureau is currently in the midst of checking its population tallies, which are broken down by race and ethnicity down to the neighborhood level, for many states.

By the March 4 deadline, the bureau expects it will have distributed the data to about roughly half the states, with big states such as California, New York and Florida potentially left hanging if the government closes down.


Article by Andrew Taylor, Courtesy of Associated Press

David Walker - Former US Comptroller General: Obama Has "No Coherent Strategy" for Tackling Deficit or Creating Jobs

 

Every good fight needs a good strategy. But, the fiscal fight this country has been battling for the last few years hasn’t got one says David Walker – the so-called “Paul Revere” of fiscal responsibility.

“We have no coherent strategy to be able to improve our competitive posture, to be able to generate job growth [or] to be able to deal with our structural deficit,” says Walker, Founder and CEO of the Comeback America Initiative and also the former U.S. Comptroller General.

If Walker is right, the United States is in serious trouble. This year the U.S. deficit will hit $1.5 trillion and if left without remedy will grow to $18 trillion by the end of 2021. (See: Dangerous Debts: Holtz-Eakin “Infinitely” Concerned U.S. Is Next Japan)

President Obama touched on our dire deficit situation during his second State of the Union last week, but Walker felt he did not go far enough.  He believes as the executive of the country President Obama should have laid out specifics on out how to move this country forward. “We heard a lot of talk about it in the State of the Union,” he says. “We hear a lot of talk about it from politicians on both sides of the political aisle. It is time for action. We need results, not rhetoric.”

But, with a newly elected divided Congress, are these results achievable?

Moody’s Investors Services doesn’t think so. Last week the ratings agency expressed concern that even in the face of these dreadful problems, Congress will not be able to find common ground.

Walker does not agree entirely. “There is a growing consensus that we need to do something. There is [just] not a consensus on what needs to be done,” he tells Aaron in the accompanying clip, suggesting we should focus primarily on these actions to fix our long-term structural deficits:

• -- Lower discretionary spending – including defense (excluding war costs) - to 2008 levels adjusted for inflation and population growth.

• -- Set discretionary spending caps.

• -- Set pay-as-you-go rules for both spending programs and tax cuts.

• -- Set debt-to-GDP targets with automatic spending cut/tax surcharge enforcement mechanisms to start in 2013 or 2014.

“Without a strategic planning framework that is future focused, results oriented, geared towards outcomes where we are trying to achieve specific results,” we aren't going to make any real progress, he says. “We have too many career politicians in office that are focused more on getting re-elected rather than keeping America great and keeping the American dream alive."

Still, Walker is optimistic that the voting public is much smarter than politicians give them credit. “When you tell them the truth, the whole truth, and nothing but the truth and help them understand that this country’s future is at risk…they will support action,” he says.

What the country really needs now, he says, is leadership and that leadership must first come from the President of the United States.

Article by Stacy Curtin, Yahoo Finance