January 6, 2013

Fiscal Cliff? Nope. Liability Falls? Yep.

I don't know about you but I am certainly comforted by the apparent fact that our national fiscal problems really aren't problems after all. Cliff? Pshaw! Based on policies emanating from Washington it appears it is more a gently sloping field of poppies...you know just like that heartwarming scene in The Wizard of Oz where Dorothy, the Cowardly Lion, the Tin Woodsman, and the Scarecrow are skipping along, enjoying the day on their way to the magical Emerald City where they hope to find the Wizard who can solve all their problems. 

Come to think of it...a little girl who is lost and trying to find her way, a lion without courage, a tin man without a heart, and a scarecrow without a brain all skipping along full of unbridled optimism through a field of pretty little flowers seductively lulling them into a fatal sleep... Maybe that IS the best picture of our current situation!

Back in the real world, Mortimer Zuckerman penned a good piece in a recent issue of U.S. News and World Report that is a pretty easy 'read' while still imparting the magnitude of the debt problem we are facing. A few extracts to set the stage:
  • Today the estimated unfunded total [debt] is more than $87 trillion, or 550 percent of our GDP. And the debt per household is more than 10 times the median family income.
  • Today, less than 40 percent of our budget is actually decided by Congress and the president, down from 62 percent 40 years ago. [the larger percentage is comprised of obligations or 'non-discretionary expenses' such as interest payments, social security, etc.]
  • Merely to avoid going deeper into debt, to cope with the speed at which compound interest is growing the real debt annually, we would have to collect $8 trillion in taxes each year...And here's the nub of it: All individuals filing tax returns in the country with incomes over $66,198 have a total adjusted gross income of about $5.2 trillion. The total corporate taxable income (at its peak in 2006) amounted to $1.6 trillion. This means that we have a maximum of roughly $7 trillion available if the government confiscated the entire gross income of individuals and corporations—not nearly enough to cover the yearly growth of U.S. liabilities. [emphasis added]
While this should be sufficient to raise at least an eyebrow or two -- "hey, Dorothy, I'm starting to feel really, really sleepy" -- it doesn't really address the 'how' of how we got here nor does it provide insight into the various forces in play that have effected and will continue to effect our situation.

This item, The Real Cliff, by Christopher Demuth (The Weekly Standard), however, does. It's the best article I've read on this topic. If you have any interest at all about the true nature of the fiscal problem our country is facing, please take the time to read this. It runs three and a half pages in print (in the magazine) but it's well worth your time, I assure you. 

Obviously I've had some fun with metaphors taken from the Wizard of Oz but the waterfall picture is much, much more apropos. The way I see it, a cliff is a static situation. The cliff is just 'there.' The only way one call fall over the edge (presuming you aren't pushed) is to walk to the lip and either lose your balance, have ground give way, or willingly leap to one's death. America isn't being 'pushed' by anyone, neither are we 'losing our balance.' If any 'ground is giving way' I guess one could make the case our economy is collapsing underneath us and that we are somehow powerless to stop it...but I just don't buy that. Are we willingly leaping to our death? 

In contrast, a waterfall is fed by a river that reaches a 'cliff' and flows on over. Rivers have currents that gather speed and strength. They have rocks and shoals and eddies and deep smooth runs and branches that feed in and lead away. They are formed by a myriad little rivulets that emerge from springs and are fed by runoff from surrounding terrain, that combine into a rushing torrent of water that proves to be extraordinarily resistant to change and difficult to emerge from. If you wait too long and get to near the falls, you're pulled over the edge regardless of any effort you make to escape. 

As Demuth so wonderfully, or sadly, points out we are very far downstream and rapidly approaching a fall that we may not be able to escape unless we somehow find the ability to exert herculean efforts to avoid. Some paraphrased highlights from his article:
  • America's de facto fiscal policy since the early 1960s: continuous government borrowing to pay for current consumption.
  • The Keynesian proposition in the context of practical politics...government officials, weighing current revenues and expenditures, should weigh the needs of the known present against the resources of an imagined future. But the present is always cluttered with problems and difficulties, while the future is an abstraction. 
  • It [has] turned out that the public's tolerance for high debt and deficits was much larger than anyone had supposed. Today, one would have to say that tolerance is unlimited so long as the public is faced with abstract numbers in newspaper headlines rather than tangible consequences.
  • Generational accounting suggests that future generations will be paying nearly all of their lifetime income in taxes, which obviously cannot happen...the real harm of financing current consumption with ever-increasing public debt [is that substantial] segments of the population become accustomed to levels of government benefits that cannot be sustained.
The herculean effort required in our current situation? Congress must gather the courage to say 'no' -- to the President, to constituents, to their own careers if necessary -- and lay-out to the public the reality of our situation while the public must realign its expectations with fiscal realities. If this doesn't happen, and very soon, then we're all going over the falls together.

I hope Glinda shows up soon!

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