Reform Party of California: America’s debt and elusive economic reality

Context

Somewhere along the line, someone said that compound interest is the most powerful force in the universe.[1] That is an exaggeration, but it makes a point. Money subject to compounded interest increases exponentially over time.[2] That is good if you are saving money, can get a relatively good rate of return and have time. Since it is the flip side of lending money, a similar exponential growth phenomenon can apply to servicing debt obligations over time. There is evidence that until 2008 exponential U.S. debt increases were fueling U.S. economic activity over the last 38 years or so.[3] That implies that exponential interest payment increases will accrue over time unless the principal is paid down before then. Relevant questions are whether our current economic situation is sustainable or not, and if not, how do we attain sustainability. Is there a tipping point at which we cannot sustain our debt obligations without imposing massive, painful spending cuts? Have we passed that point or is it far in the future?

As usual, the situation is complicated and finding elusive reality is not easy. There are different ways to see economic issues and policy options. Ideologies give differing weights to various factors, with weight accorded to factors that fit the ideology. Facts are light and ideology is heavy. Liberals often argue one way and conservatives generally argue the opposite.[4] Partisan arguments are sometimes accompanied by little or nothing. Sometimes there is some data and substance, but that is usually accompanied by a lack of context and a lot of self-serving spin. The situation is usually very hard to judge. Opinion guided by ideology usually does little to shed light on what really works for any given set of circumstances. What works is what best serves the pubic interest[5], but that needs to be divined through the dense fog of the two party system.

The reality of two-party politics has to be factored into consideration of economic policy. As argued before, relations between the two parties in congress are poisonous and prospects for anything other than gridlock are not good.[6] What, if anything, will change that is unclear. Generally speaking, there are only few neutral voices that consistently try to pierce the dense fog of self-serving two-party political rhetoric. The situation is complicated and tainted by special interest demands backed by money and political self-interest.[7] That two-party context undermines the arguments that both the left and right make. Credible arguments and context have to come from elsewhere.

A key question to keep in mind is whether the two parties are being honest with the American public about our economic situation and prospects for change. Are they focused on other concerns such as blaming each other for the situation we are in or are they communicating honestly?[8] There is evidence that neither of the two parties alone will be candid. The rhetoric and posturing suggests that at the very best, the two parties might talk straight to the public if, and only if, they can figure a way to equally share voter’s anger once they understand the true nature of the situation we are in.[9] Neither party is willing to fall on the sword of candid honesty about what has to come if the situation is to change in any meaningful way.

Economic reality

Credible people argue that to bring deficit spending under control, federal tax revenue needs to increase and and entitlement spending needs to decrease. For example, expert analysis says that to avoid going deeper into debt based on tax increases alone, the treasury would need to collect over $8 trillion in taxes annually, but that is not even remotely possible.[10] Part of the problem is an apparent inability of policy makers to face reality: “Neither the public nor policy makers will be able to fully understand and deal with these issues unless the government publishes financial statements that present the government’s largest financial liabilities in accordance with well-established norms in the private sector.”[10] That sentiment reflects the well-known tactic of politicians who routinely use accounting tricks to disguise reality from the public. It is a popular political tactic that has been around for decades or longer.

It would appear that the two parties cannot come to grips with what it is we are facing, much less have the courage to tell the public exactly what will probably happen to entitlement benefits, economic growth and our standard of living. Despite their apparent ignorance and shared culpability, they confidently blame each other and believe that the situation will get fixed if their own policies are put in place. From where the Reform Party of California (RPCA) sits, there are goods reason to believe that if either democratic or republican policy goals were fully implemented that the public interest would not be best served. The same is true if there were to be compromises between the left and the right on tax and spending issues. Both sides suffer from the same flaws the RPCA has repeatedly discussed, i.e., blind faith in ideology, corruption by special interest money and self-interest.[11]

And, as the RPCA and others have pointed out, there is roughly $70-$85 trillion in unfunded liabilities that come due and payable over the next 30 years or so.[12] That is mostly for projected entitlement program spending and other obligations such as employee pensions. The current rhetoric and finger pointing simply ignores this issue and focuses on the on the books debt, which is about $12-$17 trillion depending on how you count it. To arrive at the lower $12 trillion figure, some analysts ignore the roughly $4.8 trillion the U.S. owes itself, e.g., via debt (special bonds) issued to the Social Security trust fund.[13] Either that $4.8 trillion will somehow be paid back over time, or benefits will need to be cut.

A republican plan

In March of 2012, House budget committee chairman Paul Ryan (R-WI) released his “Path to Prosperity”, which was a budget resolution for fiscal year 2013. It was very similar to a plan he released the year before in 2011. Ryan’s 2012 budget proposal was a plan to reduce federal deficits and balance the budget in 10 years.[14] Unfortunately, the plan speaks in generalities. When it comes to what changes in spending means for individuals, there is little or no detail in Ryan’s proposal. That makes it easy to criticize it as an attack on the middle and lower classes, which is how liberals tend to characterize it.

Ryan’s plan would reduce health care spending for the poor, and reduce spending for education, infrastructure, research, public-safety, and/or low-income programs. Military spending and Social Security would remain largely intact. Ryan’s plan claims that it will reduce deficits by $4.4 trillion over 10 years compared to what president Obama proposed in February 2012. Among other things, Ryan’s plan would (i) restrain government growth by repealing the “Health Care Law”, i.e., Obamacare, (ii) repair “a broken Medicaid system”, (iii) save Medicare and (iv) make the corporate tax code more competitive.

Liberals criticize Ryan’s plan as pushing the burden and pain of reduced spending onto the middle and lower classes while benefiting wealthy individuals and entities. As mentioned above, there are no clear statements of exactly what effects Mr. Ryan’s plan would have on ordinary people. The impact on Medicare of Ryan’s plan to give people vouchers to buy insurance is unknown, but it is reasonable to guess that costs to individuals would go up. That would happen if voucher increases do not keep pace with insurance increases. A criticism of vouchers is that it negates traditional health care guarantees that Medicare provided in the past. Ryan’s plan would repeal the Affordable Care Act (the ACA or Obamacare) and reduce Medicaid spending with money going to states in block grants.

One analysis estimated that repeal of the ACA could reduce enrollment by 17 million and reduced Medicaid spending could cause up to about 14 million poor people to lose health care coverage.[15] Another analysis of a the earlier Ryan budget plan estimated that about 8-10 million low income people would lose access to food stamps.[16] The current plan presumably would have similar effects on access to food stamps. That analysis included this: “Last year (the 2011 proposal), Ryan called for extraordinary cuts in programs that serve as a lifeline for our nation’s poorest and most vulnerable citizens, with at least 62 percent of its budget cuts over ten years coming from programs serving people of limited means. That approach violated a core principle of the Simpson-Bowles fiscal commission – that deficit reduction should not increase poverty or hardship – as well as basic principles of fairness.”[16]

The political reality

It is fair to say that Ryan’s plan rejects universal health care coverage. Instead, it proposes significant federal health care spending reductions and decreases spending for other major safety net programs. In view of its failure to be clear about its effects, the Ryan plan is fairly characterized as mostly smoke and mirrors coming from a conservative ideologue focused on pushing an ideological agenda while, by being silent, hiding real projected impacts on ordinary Americans, especially the lower and middle classes.

While the Ryan plan probably would improve the federal government’s fiscal health over time, one should ask if (i) this way of doing it best serves the public interest and (ii) whether most Americans want to do it that way. The fact that Ryan’s plan leaves so much unspoken argues that Mr. Ryan himself is not confident that the American public would accept his proposals if they were honestly and clearly explained. As far as the RPCA is concerned, if you cannot be honest and clear with the American people about the effects of your own major policy proposals on domestic spending programs, you are very likely not best serving the public interest. Instead, you are very likely hiding policy implications that you do not want the public to be generally aware of.

Conclusion

Mr. Ryan’s, budget plan is a smoke and mirrors political game that is routine in two-party politics. The point of the sleight of hand is to avoid blame for what Mr. Ryan and the Tea Party folks apparently want to do. However, actions like this are probably a major factor behind the loss of trust by many Americans in congress (not   necessarily the federal government).[17] Like it or not, the political reality is probably this: Our situation probably is not sustainable. We are in a deep hole fiscally and it may take real pain for over a generation to get out of the mess. The coming disputes will be ideologically-grounded and center on whether our situation is sustainable, and if not, how to get us out of it.

Both parties now in power got us into this situation and they will not be honest about our circumstances, prospects or policy options. Neither side is willing to accept blame.[6] Our problems, including this one, are fully bipartisan. That is something the RPCA has argued repeatedly. Working within the two-party system to fix things amounts to doing the same thing over and over in a desperate plea for change. That cannot and will not happen within the two-party system. Change has to come from the outside, which is something that president Obama himself clearly acknowledges.[18] The best, maybe only, way to facilitate that change is to walk away from the two parties and the broken system they built.

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Separate commentaries on democratic budget plans and on the proposals from the Simpson-Bowles commission will follow this commentary.
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Footnotes:

1. Link: http://quoteinvestigator.com/2011/10/31/compound-interest/.

2. Link: http://mathcentral.uregina.ca/beyond/articles/CompoundInterest/Money.html.

3. Link:http://www.todayszaman.com/news-266015-power-of-compound-interest-as-applied-to-the-current-debt-crisis.html.

4. For example, the endless minimum wage disputes with the never-changing arguments or logic:http://ivn.us/2013/08/14/why-we-should-raise-the-national-minimum-wage/?utm_source=house&utm_medium=email&utm_campaign=newsletter-min-2013-08-29;http://ivn.us/2013/08/15/why-we-should-not-raise-the-national-minimum-wage/?utm_source=house&utm_medium=email&utm_campaign=newsletter-min-2013-08-29.

5. Link: http://reformparty.org/reform-party-of-california-essays-6-what-is-the-public-interest-and-how-is-it-best-served/.

6. Link: http://reformparty.org/reform-party-of-california-commentary-colloquies-in-venom/.

7. The adverse influence of ideology, special interest money and political self-interest have been argued before:http://reformparty.org/reform-party-of-california-essays-what-is-the-proper-size-and-scope-in-government/;http://reformparty.org/reform-party-of-california-essays-politics-and-special-interest-money/;http://reformparty.org/reform-party-of-california-essays-self-interest-vs-public-interest/.

8. Link: http://www.factcheck.org/2013/03/the-sequester-blame-game/http://www.cbsnews.com/8301-505123_162-57506201/national-debt-passes-$16-trillion-should-you-worry/http://www.cbpp.org/cms/?fa=view&id=3490http://www.globalpost.com/dispatch/news/regions/americas/united-states/110727/blaming-obama-the-debt-crisishttp://www.bloomberg.com/news/2011-07-26/republican-leaders-voted-for-drivers-of-u-s-debt-they-now-blame-on-obama.html.

9. Link: http://www.examiner.com/article/shared-responsibility-and-shared-sacrifice-more-than-political-buzzwords.

10. Link: http://online.wsj.com/article/SB10001424127887323353204578127374039087636.html.

11. Links: http://reformparty.org/reform-party-of-california-essays-politics-and-special-interest-money/;http://reformparty.org/reform-party-of-california-essays-self-interest-vs-public-interest/;http://reformparty.org/reform-party-of-california-essays-what-is-the-proper-size-and-scope-in-government/.

12. Links: http://reformparty.org/reform-party-of-california-essays-politics-and-special-interest-money/;http://qz.com/111454/the-us-government-has-about-70-trillion-in-off-balance-sheet-liabilities/.

13. According to the trustees 2012 report (http://www.ssa.gov/pressoffice/pr/trustee12-pr.html), the Social Security trust fund (http://en.wikipedia.org/wiki/Social_Security_Trust_Fund) was owed $2.7 trillion at the end of 2011.

14. A link to the 99 page plan for FY 2013 is here:http://budget.house.gov/uploadedfiles/pathtoprosperity2013.pdf . Comments by the plans’ author, House budget committee chairman Paul Ryan’s (R-WI, a Tea Party conservative) here: http://online.wsj.com/article/SB10001424052748703806304576242612172357504.html. Some media commentary on the plan are here: http://www.reuters.com/article/2013/03/12/us-usa-fiscal-ryan-idUSBRE92B02E20130312http://www.usnews.com/opinion/articles/2013/03/12/right-and-left-slams-paul-ryans-path-to-prosperity-budget. Paul Ryan’s financial backers and media comments on his politics:http://www.opensecrets.org/politicians/summary.php?cid=N00004357http://news.yahoo.com/tea-party-gets-man-ryan-vice-president-073903869.html. Paul Ryan’s comments on his own politics:http://www.ontheissues.org/House/Paul_Ryan.htm/.

15. Link: http://kaiserfamilyfoundation.files.wordpress.com/2013/01/8185-02.pdf; see page 2 of the analysis.

16. Link: http://www.offthechartsblog.org/dont-forget-ryans-budget-of-last-year/.

17. Link: http://www.people-press.org/2013/01/31/majority-says-the-federal-government-threatens-their-personal-rights/.

18. Link: http://firstread.nbcnews.com/_news/2013/07/24/19656670-obama-agenda-change-comes-only-from-the-outside?lite; Mr. Obama’s reference to change needing to come from the outside was intended to mean that average Americans would need to put pressure on both parties to do something or another. The RPCA believes that pressuring the two parties will not work. The pressure has to come literally from outside the whole system. If you try to work form within the system, it will silently devour and kill your proposals. Special interests are never going to back down from defending their interests and no one should expect anything else. That is not a criticism of special interests. It is just a reflection of the reality that most, but not all, special interests are there to serve themselves first and foremost. This is a matter of human nature and there is no point criticizing that. The reality just needs to be acknowledged and dealt with. That is why the  RPCA consciously elevates service to the public interest over service to special interests  (http://reformparty.org/reform-party-of-california-essays-6-what-is-the-public-interest-and-how-is-it-best-served/). That viewpoint provides a different context from which to view politics. If you stay within the two-party system as it is now, it will continue to function exactly as it is designed to function. Specifically, it will provide service to special interests, including both political parties, before the public interest. The choice is clear; Status quo or change. You can stay with the two-party system and watch the failure continue to unfold over time or you can break away. Breaking away supports efforts to fix  our problems without the crippling constraints the broken system imposes.

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