A Call For True Fiscal Conservatism (or Why Taxes Must Be Raise For ALL Americans)

As a fiscal conservative, my ideal is a government that imposes a modest tax burden that is sufficient to match or exceed public expenditures. But, if we are unable to stem the expansion of the size and scope of the state, true fiscal conservatives must accept the need for increased government revenue. And with the federal government so deep in a fiscal abyss, any responsible politician has to accept the need for significant revenue increases. The problem is that our political elites is now divided between Republicans who cannot publicly acknowledge this reality and Democrats who by and large treat the issue of tax hikes as a cheap political tool.

In the last year, diatribes against the "rich" who "do not pay their fair share" have become increasingly common. In principle, I am not opposed to increasing taxes on the wealthy, however when we look at the evidence, it becomes clear that this is little more than catharsis, employed by politicians to rile and rally their base. To start off with, the top 10% of income earners enjoy 45% of national wealth, but pay approximately 70% of all taxes. So, the numbers do not support the premise that the wealthy do not pay their "fair share" of taxes. But, the pertinent question remains: will substantially raising taxes on top earners address our pressing fiscal crisis, or is this another example of cheap political grandstanding?

The New York Times published an article extolling the need to raise taxes on the wealthy as a means to address the $15.47 Trillion Dollar National Debt, noting that rescinding the Bush Tax Cuts on those earning more than a million dollars would generate an estimated $700 Billion in revenue over the course of 10 years. At a first glance this sounds impressive, however when we crunch the numbers we see that this would only equal a 4.25% reduction in the $1.645 Trillion yearly federal deficit and would not even begin to pay down the debt. However if we were to allow the Bush Tax Cut to expire for All Americans, including the middle class and poor, over a decade, revenues would increase by $3.7 Trillion. On a yearly basis this would equal $370 billion, which would come to a 22.5% reduction in the deficit

What are the policy implication of these figures? First, calls to squeeze the rich may be emotionally appealing to the economically illiterate, but from the point of debt reduction, it is largely meaningless. Those serious about using revenue generation as an element in a debt reduction plan would call for the repeal of the Bush Tax cuts for All Americans, including the 47% of Americans who do not pay federal taxes.. To reiterate our previous point, rolling back the Bush Tax Cuts for just the wealthy would only generate $70 billion per year in additional revenue, but when we include all Americans it surges to $370 billion. Thus we arrive at the first fundamental problem: any candidate who called for broad tax hikes on the middle class would lose almost conservatives and liberal support.

The second policy implication is that the growth in debt is mostly driven by excessive spending, not by revenue short falls. Case in point, rolling back all of the Bush Tax cuts would only reduce the deficit by $370 billion (22.5%), which means that to achieve a balanced budget, the remaining 1.275 Trillion (77.5%), would have to be come from sharp spending cuts. But, the Obama Administration is only willing to cut $1.1 trillion over the next decade ($110 billion a year), which may sound impressive, but it allows for a yearly deficit of 1.165 Trillion!  And most Republican proposals are scarcely better.


 Thus we arrive at the second fundamental problem: any candidate proposing sufficient spending cuts would be reduced to a pariah among media elites and most voters. Those who promoted military cuts would incur the wrath of neo-conservatives and those who called for significant entitlement reforms would be vilified by liberals. The only remedy is aggressive spending cuts and only then the repeal of the Bush Tax Cuts, because few politicians would resist the temptation of directing increased revenues towards expanding their programs of choice, rather than true deficit reduction. Tax hikes will be a necessary element of any serious debt reduction plan, but until we cease electing so many Democrats and Republicans of such low moral and intellectual caliber, we can expect tax hikes to be continue their role as a cheap political tool. 

Will Shock Therapy Be Necessary?

Anyone who has reviewed the hard numbers is aware that the current fiscal path of the United States is completely unsustainable and the surge in government debt and unfunded liabilities will either lead to bankruptcy or long term economic stagnation. In the second, more probably scenario, taxes will be substantially raised and a larger and larger portion of expenditures will be shifted away from discretionary programs (education, infrastructure, technological investment, defense, etc.) towards mandatory domestic spending (entitlements and pensions) and the servicing of debt (interest payments). This will place enormous burdens on an already beleaguered private sector and limit our capacity to invest in education and infrastructure. And almost certainly, the state will rely on inflationary measures to meet impossible financial promises, which history shows is fraught with economic hazards. Or, the nation can establish a sustainable fiscal path by substantially reevaluating and reforming the size, scope and priorities of the state. So, if the need for significant reform is so obvious, why has it not occurred? 

Over the long run, balancing the budget, eliminating subsidies and curbing entitlements would result in greater economic health for the nation, but at least in the short run, these measures would increase economic distress, which in a competitive political environment is impossible. Balancing the budget through deep spending cuts and tax hikes would certainly increase unemployment. Much needed reductions in military spending would further increase unemployment by diminishing the demand for goods and services produced by military based industries and decommissioning troops would increase the supply of labor. Ending the war on drugs would save us billions of dollars, but would result in a loss of the relatively high paying jobs that the incarceration industry provides and freed prisons would further expand the supply of labor. Eliminating agricultural subsidies would induce temporary pain for farmers, but would result in a more economically rational market. Gradually reducing subsidies (welfare) for single motherhood would cause distress, but over the long run would result in a reduction of costly social pathologies. Increasing educational subsidies, while decreasing welfare would provide incentives for workers to shift away from economic sector with a surplus of labor (i.e. low wages) towards ones with a high demand for labor (i.e. high wages). Curbing the supply of government subsidized undocumented labor would offer net savings to tax payers, but would impose significant costs on a myriad of industries. Some firms would shift to documented labor, others would invest in automation, while others would wither on the vine.
The most challenging reforms would address the expanded role of the federal reserve, because it would entail challenging deeply entrenched political and economic practices. More than anything allowing for true economic corrections, rather than maintaining a regimen of central planning, economic stimulus and inflation would be an indispensable step in reestablishing a sound economy and currency. For example, rather than seek to bolster the housing market and construction sector, the government could allow for organic market corrections to proceed. This would entail a gradual liquidation of bad debt, the rational reallocation of capital and labor and deflation that would synchronize housing prices with real, sustainable demand. And refusing to bail out moribund (but politically connected) firms, rather than allowing for their liquidation, would cause temporary distress, but re-establish market discipline and curtail nepotism. Contrary to popular narratives, most firms that become bankrupt through ill management do not disappear, but are rather bought up by more competent investors.

The most (seemingly) radical proposal would be to allow for market forces, rather than central planning to determine interests rates. Rather than maintain interests rates below inflation to spur unsustainable spending, market forces would drive up interest rates, providing incentives for a debt ridden public to increase their savings rate. When aggregate savings sufficiently increased the supply of available capital, market forces would drive down interest rates and create incentives for investment. This would simultaneously increase the demand for investment capital (loans), while temporarily limiting the incentives for savings. This would surely induce painful corrections across the economy, but over the long run would spare the American people from disastrous government created bubbles, booms and busts. More than anything, allowing for a shift away from over-consumption and debt towards saving, investing and production, would create a more sound and sustainable economy. For, it has become abundantly evident that a consumer, rather than a producer driven economy is not the path to long term prosperity.

All those who journey down unsustainable paths must sooner or later acquiesce to the need for change. The questions is not if, but rather in what manner will economic reform be pursued. A study of history shows that reform can be undertaken over time in a measured fashion or by shock therapy. In the former, forward thinking leaders directly confront fundamental economic ills and over time enact painful, but needed reform. In this scenario, the government is able to act with foresight, rather than react to increasingly destabilizing economic corrections. The best example is China; starting in 1978, Deng Xiaoping and more forward thinking factions of the communist party assessed that in the long run their economic path was unsustainable and began 30 years of gradual, yet significant economic reform. While the Chinese government merits harsh criticism for its abysmal human rights record, it has presided over a continuous economic boom that has raised the living standards of millions of its citizens and allowed it to become one of the main financiers of the American government's spending binge.

However, in most cases, a nation demonstrates an unwillingness to confront and reform unsustainable economic and fiscal paths. Rather than allow for needed market corrections and austerity measures, the government opts for expanded state intervention in the economy (stimulus measures, manipulation of interest rates, expansion of the money supply, etc.) which at best forestalls the inevitable. Eventually the day of reckoning arrives and the severity of the market distortions and the debt overwhelms the capacity of the state, forcing it to finally enact needed structural reforms. But, unlike its forward thinking compatriots, they do not have the luxury of pursuing proactive, measured reforms, rather they are forced to enact reactive, emergency measures. Owing to the swiftness and severity, such measures can be dubbed "shock therapy." The most prominent example is Chile. In 1973, Chile was ravaged by massive inflation (700%), huge government deficits and a shortage of basic goods and services. The military junta was faced with the choice of pursuing half measures that would at beast result in continued economic sickness or pursue bold economic reform. They chose the latter, they sharply reduced government spending, curtailed the money supply to bring inflation under control, privatized hemorrhaging state enterprises, eliminated subsidies, opened up Chile to foreign trade and investment, etc. This shock therapy resulted in an immediate rise in unemployment, a sharp drop in production and a decline in living standards. But, over time the reforms bore fruit and Chile is now the most stable, prosperous and least corrupt nation in Latin America. In contrast its neighbors that failed to undertake measured reforms or shock therapy now languish in relative economic and social malaise.

The Obama Administration's continued reliance on Keynesian (stimulus) measures leads me to conclude that they lack the insight or will to pursue measured structural reforms. I predict that we will only begin to seriously address our fundamental fiscal ills when our foreign creditors cut us off or substantially raise the cost of borrowing. Or, worse yet, when foreign governments abandon the dollar as the de-facto global currency. At that point we will be forced to react, most likely in the form of wide reaching economic, political and cultural shock therapy. While I dread this prospect, perhaps we have reached the point were only a significant shock will awaken us from our half century of statist somnolence and insatiable sense entitlement.

The Great American Divide

Pictured Above: Nouriel Roubini

In the following video, the well respected economist Nouriel Roubini explains in clear terms that once you calculate our federal, state & local debt and unfunded liabilities (from social security, medicare & pension plans), the United States is in deep trouble. By any measure, the fiscal status quo is completely unsustainable and will lead to national bankruptcy, yet during recent debates on the debt ceiling, it was clear that few Republicans and even fewer Democrats are willing to pursue fundamental change. Between both sides, virtually every unsustainable program and policy (in their present forms) from social security to military spending to our current tax rates, were "off the table." Hence, the Great American Divide that will define politics in the coming years will be between those who will defend a broken status quo and those willing to acknowledge that we must undertake dramatic reforms. This will not only effect the size and scope of government, but almost every facet of economic, political and social life. Such changes can either be undertaken with thoughtful planning and foresight or forced on us as the welfare and warfare state collapses under the burden of unfunded liabilities. Paradoxically, the most ardent defenders of the status quo are self proclaimed progressives.

The Biggest Earmark Is Empire

In his piece "The Biggest Earmark Is Empire", commentator Jack Hunter points out the incompatibility between being fiscally conservative and supporting America's global empire. Whereas most of the left does not acknowledge the waste and ineffectiveness of the welfare state, much of the right is unaware that this is also true for the warfare state. And by promoting aggressive (but fiscally necessary) cuts on welfare programs, while ignoring defense spending, politicians like Paul Ryan do much to lower conservatives in the eyes of the general public. In another post Mr. Hunter adroitly points out that progressives and neoconservatives are both aggressive statists, the only difference being that progressives tend to promote domestic intervention whereas neoconservatives focus on international intervention. And by involving the United States in Libya's Civil War, Obama has achieved the dubious distinction of doing both!

Tax Loopholes Are Not Conservative!

After 8 years of the atrocious GW Bush Administration, many Americans equate corporate welfare and tax loopholes with conservativism. To dispel this notion, more conservatives need to join their progressive compatriots and raise hell when companies like GE use tax loopholes to pay zero dollars in taxes and follow their indignation with efforts to close these loopholes.

"But wait, aren't low taxes a fundamental tenant of conservatism?" you may ask.

 Yes, across the board low taxes, fairly applied to all individuals, industries and enterprises is conservative. But, maintaining a tax regiment that combines high corporate taxes (yes, our rate of 35% is among the highest in the world) and a myriad of loopholes and subsidies for politically connected corporations and industries is not. To start off with, its an example of cronyism in which select corporations increase their influence over the government via their lobbying efforts. Such influence allows them to gain unfair advantage over their less connected market competitors. Granting politicians the power to exercise undue control over the economy by helping to choose which companies and industries become winners, is a departure from free market principles. And such actions ultimately increase the tax burden on the larger public.

Predictably, few politicians on either side will fight to create a simpler, less interventionist and burdensome tax code, because that would diminish their power to grant favors and gain campaign contributions.

GE: 7,000 tax returns, $0 U.S. tax bill

By Annalyn Censky, staff reporterApril 16, 2010: 11:52 AM ET

NEW YORK (CNNMoney.com) -- General Electric filed more than 7,000 income tax returns in hundreds of global jurisdictions last year, but when push came to shove, the company owed the U.S. government a whopping bill of $0.

How'd it pull off that trick? By losing lots of money.
The 2009 income tax bills for America's biggest companies ranged from $0 to $15 billion. Here's why.


GE had plenty of earnings last year -- just not in the United States. For tax purposes, the company's U.S. operations lost $408 million, while its international businesses netted a $10.8 billion profit.

That left GE (GE, Fortune 500) with no U.S. profit left for Uncle Sam to tax. Corporations typically face a 35% federal income tax on their earnings. Thanks to its deductions and adjustments, GE reported an actual U.S. federal income tax rate of negative 10.5%. It got to add a "tax benefit" of $1.1 billion back into its reported earnings.

"This is the first time in at least decades that GE has reported negative U.S. pretax income and it reflects the worst economy since the Great Depression," Anne Eisele, GE's director of financial communications, said via e-mail."

But what about the $10.8 billion profit overseas? GE is "indefinitely" deferring income tax payments on those profits, Eisele said.
It may seem like accounting magic, but it's completely legit.

GE isn't the only "Top 5" company on this year's Fortune 500 list that owed no income taxes. Bank of America (BAC, Fortune 500), which suffered major losses in 2009, included a tax benefit of $1.9 billion in its annual profit.


"That's one way of escaping taxes," said Scott Hodge, president of the Tax Foundation. "Companies get to deduct their losses, so if there's no earnings, then they pay no income tax."

But GE isn't exactly escaping all tax-related pain: The company paid almost $23 billion in taxes to governments around the world from 2000 to 2009, Eisele said.

Plus, paying the accountants to crank out 7,000 tax returns can't be cheap.


And then there's all the lawyers needed to defend those returns. GE filed tax paperwork in more than 250 jurisdictions around the world last year. "We are under examination or engaged in tax litigation in many of these jurisdictions," the company dryly notes in its annual report.

GE may not owe the IRS, but it still has to file -- and its filings are epic.

In 2006, as the IRS ramped up its corporate e-filing program, the tax agency actually issued a celebratory press release when it processed GE's tax return. On paper, the return -- the nation's largest -- would have totaled a massive 24,000 pages. But instead, the IRS was able to upload the 237 MB document in under an hour.


Reading it, though, is apparently taking a bit longer. The IRS is currently auditing GE's tax returns for 2003-2007.
 http://money.cnn.com/2010/04/16/news/companies/ge_7000_tax_returns/

A Conservative Argument for Higher Taxes

Roger Lowenstein presents a conservative argument for letting the Bush Tax Cuts expire for ALL Americans. I believe that paradoxically, the reasons why the growth of government expenditures is out of control for so long, is because tax rates do not reflect the trust cost of goods and services provided by the government. Basic economics and psychology dictates that when voters do not feel the fiscal burden of the government programs that they enjoy, they will have zero incentives to curtail their growth. If we as a nation were forced to pay for these services via a balanced budget, our taxes would more than double. Of course this would be extremely painful, but only at that point would we begin to pressure our representatives to seriously cut spending. Only at that point would we begin to carefully prioritize the means and ways in which we spend our limited public resources. My bet is that even the most zealous "neoconservatives" would think twice about launching wars if they had to bear its full cost via high taxes. And even the most passionate "progressive" would become more discriminating about who receives public assistance.

Debt Pyramid Scheme Now the Norm in America: Roger Lowenstein

By Roger Lowenstein - Dec 19, 2010

Bloomberg Opinion

The tax compromise that the president, after protracted bargaining with Congress, signed into law Friday represents the worst of each party’s principles. Democrats agreed to forgo their insistence on raising taxes to narrow the widening budget deficit. Republicans forgot (again) that they are supposedly the party of smaller government.

In effect, each party stuck to the portion of its principles that will be popular with the electorate right now -- and dismissed the part that would be unpopular. The Washington compromise is symptomatic of the disease infecting government at many levels. It is known as short-termism.

The better course would have been the simplest one: Let the Bush tax cuts -- on every income group -- expire. Democrats (I am one) have generally supported raising tax rates only on the rich. I never liked that approach because it’s an attempt to curry favor with the majority of the public by saying, “The deficit is not your problem; it’s only the problem of wealthy people.” It sends a misleading, as well as divisive, message that, for the majority of Americans, incremental government services, such as stimulus spending or rising health-care expenditures, are free.

No Free Lunch

To make serious inroads on the deficit, we should restore Clinton-era tax rates on every income group. The wealthy would suffer by far the largest incremental burden -- which is proper -- but the middle class wouldn’t get a free lunch. The Republican Party has opposed restoring the old rates because, as it has repeatedly demonstrated, it is allergic to all taxes. Since it isn’t opposed to government spending, only to revenue, it is hypocritical and exceptionally short-term focused.

Republicans claim that higher taxes translate to lower growth. Recent evidence is to the contrary. In the 1990s, the top tax rate was 39.6 percent. The U.S. enjoyed a booming economy, warmed by the balmy breezes of a balanced budget. In the 2000s, George W. Bush cut the top rate to 35 percent. Deficits ballooned, and the economy was mostly lousy.

Going back further, the connection is murky at best. In the 1960s, marginal tax rates were extremely high -- 70 percent and in some years even more. The economy roared. In the 1970s, taxes remained high and the economy slumped. In the 1980s, President Ronald Reagan slashed taxes: By 1988, the marginal rate was only 28 percent and the tax code was greatly simplified. Clearly, those giant tax cuts, plus the elimination of many loopholes, stimulated a boom.

Runaway Deficits

Though that decade-by-decade synopsis inevitably simplifies, the evidence suggests tax rates should be as low as possible subject to the constraint that the budget IS roughly in balance in good times, and even in bad times avoids the risk of runaway deficits. But with the government borrowing equal to 9 percent of gross domestic product, and with large entitlement- spending increases looming, we are well into runaway territory already.

The evidence also shows that small changes in tax rates don’t depress the economy, especially when the outlook for tax rates is consistent and when tax policy is straightforward.

Current policy fails on inconsistency grounds -- given the deficit, tax rates are unsustainable. The most serious quarrel with raising rates now is that we are still emerging from a recession. But this isn’t Herbert Hooverism -- the U.S. economy has grown in every quarter since mid-2009.

Presidential Courage

It is true that, given the weakness of the recovery, the timing isn’t ideal. However, Congress has been passing off the bad coin of the Bush tax cuts for almost a decade. Why should we think that Congress or President Barack Obama will show more courage in 2012 -- a presidential election year?

For obvious humanitarian reasons, I support the extension of unemployment benefits. Obama could have proposed an additional extension in return for the lower estate-tax levels so hotly pursued by Republicans. Unlike cutting taxes on people with jobs, extending benefits to those without jobs is truly part of the safety net -- one that, if properly explained, the electorate would get.

Finally, lowering the payroll tax, which will drain funds from Social Security, is incredibly shortsighted. It is only weeks since Obama’s panel on the deficit highlighted the need to strengthen entitlement budgets.

Punishment for Savers

I suspect the Federal Reserve has contracted the same disease -- pushing ultra-low short-term interest rates. This encourages consumer spending and the credit-card mentality of the pre-crash years, and it punishes people who save.

The Fed is responding to today’s sluggish economy, though the signs for tomorrow are bullish. Rising long-term interest rates suggest that if the Fed had a little patience, the recovery would continue without further easing.

Another example of short-term thinking is the maintenance of the government’s role in propping up mortgages -- chiefly through the failed Fannie Mae and Freddie Mac. Wouldn’t it be more prudent to let home prices fall to whatever level the market would support? Then, private mortgage financing would return, leading to a sustainable housing recovery based on real- market prices.

Short-termism is also alarming at the level of state governments, which are facing massive budget shortfalls even as they refuse to adequately fund their pension plans. It isn’t inconceivable that the federal government will be faced with another too-big-to-fail entitlement -- that of a bankrupt local government.

With the private sector recovering, albeit slowly, and public finances worsening, the time to restore our public finances to health is now. And if doing so delays the economy’s return to full and robust growth, then let the recovery come more slowly -- and let it be built on sound financing and not on a new pyramid of debt.

(Roger Lowenstein, author of “The End of Wall Street,” is a Bloomberg News columnist. The opinions expressed are his own.)

To contact the writer of this column: Roger Lowenstein at elrogl@hotmail.com

To contact the editor responsible for this column: James Greiff at jgreiff@bloomberg.net

http://www.bloomberg.com/news/2010-12-20/debt-pyramid-scheme-now-the-norm-in-u-s-commentary-by-roger-lowenstein.html

Race To The Fiscal Bottom (MUST READ)

David Stockman: The U.S. Is In A "Race To The Fiscal Bottom"

By Jennifer DePaul, The Fiscal Times

Oct. 6, 2010

It’s been nearly three decades since David Stockman was the brash and brilliant enfant terrible of President Reagan’s White House, but he hasn’t mellowed with age.

Stockman, Reagan’s budget director from 1981 to 1985, initially became famous for his zeal in slashing government spending on almost everything except defense. Less government and lower taxes, he fervently believed, would ultimately mean more prosperity for everyone. But he will be best remembered for confessing, in an interview with William Greider for The Atlantic Monthly, his disillusionment with the “supply-side” economic policies that led to soaring deficits under Reagan. “None of us really understands what’s going on with all these numbers,’’ he declared, along with many other criticisms that nearly got him fired.

Today, Stockman is working on a book about the financial crisis, and he recently shared his thoughts with The Fiscal Times about some of today’s most pressing fiscal issues. No surprise — he’s as brutally candid as ever.

The Fiscal Times (TFT): What should the president and Congress do about the Bush tax cuts this year?

David Stockman (DS): The two parties are in a race to the fiscal bottom to see which one can bury our children and grandchildren deeper in debt. The Republicans were utterly untruthful when they recently pledged no tax increases for anyone, anytime, ever. The Democrats are just as bad — running their usual campaign of political terror on social security and other entitlements while loudly exempting all except the top 2 percent of taxpayers from paying more for the massively underfunded government they insist we need.

The fact is, the Bush tax cuts were unaffordable when enacted a decade ago. Now, two unfinanced wars later, and after a massive Wall Street bailout and trillion-dollar stimulus spending spree, it is nothing less than a fiscal travesty to continue adding $300 billion per year to the national debt. This is especially true since these tax cuts go to the top 50 percent of households, which can get by, if need be, with the surfeit of consumption goods they accumulated during the bubble years. So Congress should allow the Bush tax cuts to expire for everyone. By doing nothing, the government would be committing its first act of fiscal truth-telling in decades. In effect, we undertook a national leveraged buyout, raising total credit market debt to $52 trillion, which represented a 3.6X leverage ratio against national income or GDP.

TFT: Should the government provide more stimulus for the economy, or cut spending to bring the deficit down?

DS: We are not in a conventional business cycle recovery, so stimulus is futile and just adds needlessly to the $9 trillion of Treasury paper already floating dangerously around world financial markets. Instead, after 40 years of profligate accumulation of public and private debt, and reckless money-printing by the Fed, we had an economic crash landing, which left us with an enduring structural breakdown, not just a cyclical downturn.

In effect, we undertook a national leveraged buyout, raising total credit market debt to $52 trillion which represented a 3.6X leverage ratio against national income or GDP. By contrast, during the 110 years prior to 1980, our aggregate leverage hugged closely to a far more modest ratio at 1.5 times national income.

The only solution is a long period of debt deflation, downsizing and economic rehabilitation, including a sustained downshift in consumption and corresponding rise in national savings.

And a key element of the latter is a drastic reduction in government dis-savings through spending cuts and tax increases — and these measures need to start right now. Keynesian policymakers who say wait for the midterms to address the deficit are like battleship admirals: They are fighting the last war with the same failed strategy that gave rise to our current predicament.

TFT: Do you see the work of President Obama’s deficit commission as important or a waste of time?

DS: The deficit commission is a complete waste of time. The nation has become fiscally ungovernable because the fiscal policy of both parties is based on what is essentially the Big Lie. The earnest remonstrations of the commission’s report will be lost in the deafening partisan rancor which is certain to swell after the coming election.

TFT: You spent many years as a public official. What do you consider your greatest contribution?

DS: For a flickering moment I helped revive a vision of small government based on low taxes, the denial of weak fiscal claims rather than weak clients, and social progress through liberation of the nation’s entrepreneurial endowments and energies. But that vision has been subsequently crushed by 30 years of fiscal profligacy, warfare state adventurism and crony capitalist policies championed by the lobbies of K Street, the financiers of Wall Street and the farmers, homebuilders, energy producers and sick-care companies of Main Street. After the abomination of the Bush/Paulson bailout of the big banks, the state has no boundaries whatsoever. So fiscal policy is now just a fiscal food fight.

TFT: What’s your biggest regret from your years as President Reagan’s budget director — was it talking to Bill Greider for the Atlantic article?

DS: I do not regret talking to Bill Greider at all. My alleged “confessions” were inadvertent, but in historical hindsight the article was just the wakeup call that was needed at that delusionary hour. By the fall of 1981, we had just gone through an orgy of tax-cutting which reduced the revenue base by a staggering 5 percent of GDP, far more than Reagan had asked for, due to the pile-on of goodies for oil and gas, property developers, equipment vendors, homebuilders and scores of other special interests. At the same time, domestic spending had been cut by less than 1 percent of GDP and even that was being offset several times over by an explosion of defense spending. It was a formula for fiscal catastrophe. Grieder’s piece colorfully dramatized this condition, and helped trigger a slow march of policy — the tax increases of 1982-84 and the slowdown in the defense buildup — backward from the precipice.

TFT: With the midterms just a month away, do you think the GOP will gain as many seats as some are predicting, and if so, will that doom Obama's agenda?

DS: The Republicans will undoubtedly gain a lot of seats, if not congressional majorities. But the main result of that will be not only to doom the Obama agenda, which deserves to be stopped, but also any chance of addressing the fiscal issue until April 2013 at the earliest. Unfortunately, since we are in a chronic debt deflation, the GDP deflator is heading toward zero and real growth may limp along at 1 to 2 percent. That means that money GDP is growing at the shockingly low rate of 2 to 3 percent, or not even $40 billion per month. By contrast, the built-in deficit will result in $100 billion of bond issuance each and every month — meaning that through at least the spring of 2013, our national debt will be growing two or three times faster than the economy. So we are rolling the dice big time in a global bond market which is now a volcano of leveraged speculation and massive front-running of the expected multitrillion quantitative easing 2.0 (i.e. debt monetization) by the Fed. In this environment, one hiccup and it’s game over.

TFT: Your assessment of the Obama's presidency at this point?

DS: Obama’s presidency is a profound disappointment. So far, he’s proven that when Republican’s start elective wars, Democrats can’t end them; when Republicans empty the Treasury, Democrats can’t replenish it; when Republicans put a middle-class destroying money printer at the head of the Fed, Democrats reappoint him; and when the Republicans unleash an orgy of dangerous speculation on Wall Street, Democrats pass a contentless, 2,300 page, enabling act which will do nothing to protect Main Street from another financial meltdown, even as it keeps K Street fully employed.

TFT: What will happen to health care if the Republicans become the majority party?

DS: Health care accounts for 17 percent of GDP and is the dysfunctional heartland of crony capitalism. They only thing which will change if the GOP becomes the majority is that the RNC will collect more of the vigorishes.

This article originally appeared at The Fiscal Times and is republished here with permission.

Read more: http://www.businessinsider.com/david-stockman-us-is-in-race-to-the-fiscal-bottom-2010-10#ixzz17x1dEFug

The Four Deformations of the Apocalypse

David Stockman is a rare breed, a true fiscal conservative who takes on Republicans for irresponsible tax cuts and Democrats on for out of control spending. In this insightful piece, Stockman as a conservative, beckons Republicans to return to their long abandoned

philosophical core of balanced budgets and fiscal responsibility. The fact that Stockman does not take the Democrats to task for their large part in the fiscal debacle, indicates that he believes that they are beyond the pale of fiscal conservatism and limited government.

Four Deformations of the Apocalypse

By DAVID STOCKMAN

Published: July 31, 2010

IF there were such a thing as Chapter 11 for politicians, the Republican push to extend the unaffordable Bush tax cuts would amount to a bankruptcy filing. The nation’s public debt — if honestly reckoned to include municipal bonds and the $7 trillion of new deficits baked into the cake through 2015 — will soon reach $18 trillion. That’s a Greece-scale 120 percent of gross domestic product, and fairly screams out for austerity and sacrifice. It is therefore unseemly for the Senate minority leader, Mitch McConnell, to insist that the nation’s wealthiest taxpayers be spared even a three-percentage-point rate increase.

More fundamentally, Mr. McConnell’s stand puts the lie to the Republican pretense that its new monetarist and supply-side doctrines are rooted in its traditional financial philosophy. Republicans used to believe that prosperity depended upon the regular balancing of accounts — in government, in international trade, on the ledgers of central banks and in the financial affairs of private households and businesses, too. But the new catechism, as practiced by Republican policymakers for decades now, has amounted to little more than money printing and deficit finance — vulgar Keynesianism robed in the ideological vestments of the prosperous classes.

This approach has not simply made a mockery of traditional party ideals. It has also led to the serial financial bubbles and Wall Street depredations that have crippled our economy. More specifically, the new policy doctrines have caused four great deformations of the national economy, and modern Republicans have turned a blind eye to each one.

The first of these started when the Nixon administration defaulted on American obligations under the 1944 Bretton Woods agreement to balance our accounts with the world. Now, since we have lived beyond our means as a nation for nearly 40 years, our cumulative current-account deficit — the combined shortfall on our trade in goods, services and income — has reached nearly $8 trillion. That’s borrowed prosperity on an epic scale.

It is also an outcome that Milton Friedman said could never happen when, in 1971, he persuaded President Nixon to unleash on the world paper dollars no longer redeemable in gold or other fixed monetary reserves. Just let the free market set currency exchange rates, he said, and trade deficits will self-correct.

It may be true that governments, because they intervene in foreign exchange markets, have never completely allowed their currencies to float freely. But that does not absolve Friedman’s $8 trillion error. Once relieved of the discipline of defending a fixed value for their currencies, politicians the world over were free to cheapen their money and disregard their neighbors.

In fact, since chronic current-account deficits result from a nation spending more than it earns, stringent domestic belt-tightening is the only cure. When the dollar was tied to fixed exchange rates, politicians were willing to administer the needed castor oil, because the alternative was to make up for the trade shortfall by paying out reserves, and this would cause immediate economic pain — from high interest rates, for example. But now there is no discipline, only global monetary chaos as foreign central banks run their own printing presses at ever faster speeds to sop up the tidal wave of dollars coming from the Federal Reserve.

The second unhappy change in the American economy has been the extraordinary growth of our public debt. In 1970 it was just 40 percent of gross domestic product, or about $425 billion. When it reaches $18 trillion, it will be 40 times greater than in 1970. This debt explosion has resulted not from big spending by the Democrats, but instead the Republican Party’s embrace, about three decades ago, of the insidious doctrine that deficits don’t matter if they result from tax cuts.

In 1981, traditional Republicans supported tax cuts, matched by spending cuts, to offset the way inflation was pushing many taxpayers into higher brackets and to spur investment. The Reagan administration’s hastily prepared fiscal blueprint, however, was no match for the primordial forces — the welfare state and the warfare state — that drive the federal spending machine.

Soon, the neocons were pushing the military budget skyward. And the Republicans on Capitol Hill who were supposed to cut spending exempted from the knife most of the domestic budget — entitlements, farm subsidies, education, water projects. But in the end it was a new cadre of ideological tax-cutters who killed the Republicans’ fiscal religion.

Through the 1984 election, the old guard earnestly tried to control the deficit, rolling back about 40 percent of the original Reagan tax cuts. But when, in the following years, the Federal Reserve chairman, Paul Volcker, finally crushed inflation, enabling a solid economic rebound, the new tax-cutters not only claimed victory for their supply-side strategy but hooked Republicans for good on the delusion that the economy will outgrow the deficit if plied with enough tax cuts.

By fiscal year 2009, the tax-cutters had reduced federal revenues to 15 percent of gross domestic product, lower than they had been since the 1940s. Then, after rarely vetoing a budget bill and engaging in two unfinanced foreign military adventures, George W. Bush surrendered on domestic spending cuts, too — signing into law $420 billion in non-defense appropriations, a 65 percent gain from the $260 billion he had inherited eight years earlier. Republicans thus joined the Democrats in a shameless embrace of a free-lunch fiscal policy.

The third ominous change in the American economy has been the vast, unproductive expansion of our financial sector. Here, Republicans have been oblivious to the grave danger of flooding financial markets with freely printed money and, at the same time, removing traditional restrictions on leverage and speculation. As a result, the combined assets of conventional banks and the so-called shadow banking system (including investment banks and finance companies) grew from a mere $500 billion in 1970 to $30 trillion by September 2008.

But the trillion-dollar conglomerates that inhabit this new financial world are not free enterprises. They are rather wards of the state, extracting billions from the economy with a lot of pointless speculation in stocks, bonds, commodities and derivatives. They could never have survived, much less thrived, if their deposits had not been government-guaranteed and if they hadn’t been able to obtain virtually free money from the Fed’s discount window to cover their bad bets.

The fourth destructive change has been the hollowing out of the larger American economy. Having lived beyond our means for decades by borrowing heavily from abroad, we have steadily sent jobs and production offshore. In the past decade, the number of high-value jobs in goods production and in service categories like trade, transportation, information technology and the professions has shrunk by 12 percent, to 68 million from 77 million. The only reason we have not experienced a severe reduction in nonfarm payrolls since 2000 is that there has been a gain in low-paying, often part-time positions in places like bars, hotels and nursing homes.

It is not surprising, then, that during the last bubble (from 2002 to 2006) the top 1 percent of Americans — paid mainly from the Wall Street casino — received two-thirds of the gain in national income, while the bottom 90 percent — mainly dependent on Main Street’s shrinking economy — got only 12 percent. This growing wealth gap is not the market’s fault. It’s the decaying fruit of bad economic policy.

The day of national reckoning has arrived. We will not have a conventional business recovery now, but rather a long hangover of debt liquidation and downsizing — as suggested by last week’s news that the national economy grew at an anemic annual rate of 2.4 percent in the second quarter. Under these circumstances, it’s a pity that the modern Republican Party offers the American people an irrelevant platform of recycled Keynesianism when the old approach — balanced budgets, sound money and financial discipline — is needed more than ever.

David Stockman, a director of the Office of Management and Budget under President Ronald Reagan, is working on a book about the financial crisis.

http://www.nytimes.com/2010/08/01/opinion/01stockman.html?pagewanted=1&adxnnl=1&adxnnlx=1292202050-ZWSmmb7N7mvjo5hhjenJ3A

David Stockman - This Man Makes Sense!

David Stockman was the Director of the Office of Management And Budget, until he resigned in 1985, owing to his concerns about mounting national debt brought on by the Reagan Administration's failure to match its tax cuts with equal cuts in spending. Stockman is an independent minded fiscal conservative who has spoken out against the Bush Tax Cuts, as well as the out of control spending of the Obama Administration. His critique of the Federal Reserve is most insightful, especially regarding the erosion of its independence and the danger of the latest round of quantitative easing. He stated "I think the Fed is injecting high grade monetary heroin into the financial system and one of these days it's going to kill the patient."

http://www.youtube.com/watch?v=2lVDS9hwKs0