Despite all of the political ballyhoo over the current Washington stand off between the usual suspects over the debt ceiling negotiations I decided to delve into it because I believe this to be a very important time in our nation's history even if the principals involved do not always act like it. Why? Because our ability to significantly lower our government's expenditures and decrease our debt now will decide whether or not we will be Greece in ten years (no offense to my Greek friends; I love the olives and the ouzo but I'll pass on the austerity, thank you). Therefore I want people to know the facts regarding each sides' claims and goals as well as what is at stake. Here's a clue: U.S. National Debt Clock.
I've seen a lot of discussion on the topic and like with any significant political event (and by significant I mean one that involves Republican vs. Democrat, liberal vs. conservative, money and election campaigns) if you've watched enough news type shows you've heard people debate both sides of everything and various versions of the facts. With this event I found myself frustrated (once again) trying to listen between the rhetoric and sound bites to discern what is true and what is typical political bull@#%. So I finally decided to spend a little time searching for what I think are the key facts in this debate and publish them. I did my best to find reliable sources of information and I include the links to these sources where appropriate so you can evaluate for yourself. I'm here to discuss not slant so I appreciate any and all comments and additional information from credible sources that may further enlighten. If you need to learn more about the debt ceiling before reading further click here:
http://money.cnn.com/2011/01/03/news/economy/debt_ceiling_faqs/index.htm.
The positions of the two political parties facing off in this debate are as follows:
The Republicans: They go first because they initiated this stand off by refusing to raise the national debt ceiling without agreements on federal spending cuts. They say they want cuts equal to the amount of the debt ceiling increase. Well kind of. I haven't found any concrete statement on the amount that the debt ceiling will be raised but a Reuters article from June 7 estimates that it will be $2.4 trillion. Since this is more than the entire annual federal budget then cuts attempting to equal this amount will have to be done over multiple years. Currently the negotiations consider cuts over a ten year period. This charge is lead by Tea Party members who got elected on the promise of a more fiscally responsible government that lowers its spending rather than raising its taxes to get its debt under control. They are forcing a kind of off season budget battle by using the debt ceiling increase deadline(s) to force negotiations the way the federal budget deadline was used last fall and other times in the past. They are pushing for cuts in areas such as education and research but seem resistant to cuts in the defense budget. They also want to cut money from the entitlement sacred cows: social security, medicare, medicaid etc. They seem opposed to any tax increases on anyone or anything.
The Democrats: They would prefer to not do these negotiations and just approve the debt ceiling now and hash out the rest at budget time next year but since the Republicans control the House of Representatives they have to play ball to some extent. The President says that both sides have already agreed to $1trillion in cuts (remember that's over ten years). Of course the Democrats have demands of their own before they agree to anything else. The President wants to raise taxes on people making more than $200k a year (couples making $250k). However all of the leading Democrats have talked much more about cutting government subsidies to oil companies. Just last week in his sort of press conference the President added "private jet owners " to the pay more taxes list. The Democrats are resistant to cuts in the entitlement programs and say that budget cuts should come from everywhere, including the defense budget. They say that some taxes will have to be raised; that the budget deficit is too great to be eliminated with budget cuts alone. However they are not currently talking raising taxes on on individuals making less than $200k a year.
So who here has the right idea (or are they all wrong)? Well let's break it down...
Should the Republicans be using the debt ceiling vote to negotiate budget deals? Well this is purely a matter of opinion. So far the financial markets are behaving is though they believe the ceiling will be passed so no harm has been caused, yet. In a perfect world a debt ceiling vote could come and go and the budget would get done when its time comes, but then again in a perfect world we wouldn't need a debt ceiling raised and the Democrats would manage to pass a budget when they control all three branches of government, but they didn't. If stimulus package votes are going to happen in the middle of the night and we aren't going to find out what is actually in healthcare bills until after they are passed then why not use a debt ceiling vote to cut our obviously bloated federal budget. As a tax payer and someone who needs a job for the next couple of decades I'm glad to see someone acting like the debt problem is, well, a problem. However if we get to the last week in July without the raise then I believe we will see adverse affects in the financial markets. I'm pretty sure the principals involved know this and politically they can't afford to be responsible for not raising the ceiling in time so I'm not worried about that happening.
Should the entitlement programs be part of proposed budget cuts? The answer is yes because they have to be. The debt that will be caused by them in their current forms is so crushing that pretending we can do something about getting our debt under control while leaving entitlements alone is rearranging deck chairs on the Titanic. Even the liberal minded Huffington Post thinks so:
"Given the sheer size of Medicare, nearly $500 billion a year, any deal on reducing future deficits is likely to include savings from the program, if not the benefit cuts many Democrats
oppose."
(source: http://www.huffingtonpost.com/2011/06/05/debt-ceiling-medicare-budget_n_871456.html)
The social security system looms as another large future drain of the federal budget as well:
"Social Security's financial crisis will begin far sooner than many politicians claim. In less than three years, the first baby boomer will reach retirement age. Once that happens, Social Security (and Medicare) will be on a slippery slope toward insolvency. While Social Security can continue to use its tax receipts to pay full retirement benefits until 2018, Congress cannot wait that long to act."
(source: http://www.heritage.org/research/reports/2004/09/misleading-the-public-how-the-social-security-trust-fund-really-works)
Social security, medicare and other government health programs combined for 40% of the 2010 budget. Entitlement cuts,reforms or whatever you want to call them have to be part of any deficit reduction plan. Like Greece our government simply can't afford to finance all of its past promises going forward.
Should the defense budget be part of the proposed budget cuts? For me the same logic applies here as the previous discussion. The Center for Budgetary Policy and Priority says defense accounted for 20% of the federal budget in 2010 so trying to leave it out of a deficit reduction discussion is about as silly as leaving out entitlements. I live in the Washington D.C. metro region. My first time ever taking pictures here included one of the Pentagon's post 9/11 reconstruction. I know many who's job is related to national security in some manner and several ex-military people. Even before locating here I always thought of defense spending as a high priority but you can only provide the defense you can afford. Sorry pro military conservatives but we no longer have a super power's balance sheet so we can no longer fund the super power military as we have in the past. That's just how it is.
Should taxes be raised on wealthier Americans as the President suggests? Okay this one is a little involved. What the President is talking about doing is letting the Bush tax cuts expire for individual income over $200k a year or joint income over $250k. This means you still get the current tax rate for every dollar under the $200k or $250k then every dollar over would be taxed at the pre-Bush tax cut rate (to see a chart of tax brackets and rates for all years click http://www.taxfoundation.org/taxdata/show/151.html). According to money.cnn.com this would amount to $700 billion more tax revenue over ten years. Those against this tax raise argue that tax hikes retard economic growth and therefore a recession is the wrong time for such an increase. It is true that in general higher taxes stifle entrepreneurship and therefore new business creation. However after reading the chart from the link above I discovered that the tax rates for the top brackets were actually higher during the much heralded Regan recovery of the eighties than the pre-Bush tax cut rates. Even adding the additional Medicare taxes that Obamacare levies against this same income group still leaves their rate significantly lower than that of the Regan era. Therefore I find it hard to argue that these tax hikes will significantly damage our economic recovery. Sorry Tea Partiers, I understand why you are against this but you will never convince the majority that the top bracket can't afford to pay more given their current rate. To get the cuts you want you have to go ahead and swallow this one.
So what are these tax breaks for oil companies the Democrats keep talking about? I have spent a lot of time on this subject because, well, the Democrats have. Also it is another case of politicians reducing a more complex issue into cheap sound bites. One complication is exactly which subsidies are the Democrats talking about? There are pieces of legislation on the books regarding oil company subsidies dating back to 1916. The nature and costs of this early legislation is best described in this excerpt from a February 3, 2011 congressional report:
"Congress has allowed oil and gas companies to deduct “intangible drilling costs” since 1916. Intangible costs of exploration generally include wages, costs of using machinery for drilling, and the costs of materials like drilling muds, chemicals, and fuel that get used up during the process of building
wells. While most businesses must write off these expenses over the useful life of the property, oil companies can write these expenses off immediately.Ending this tax subsidy would raise nearly $8 billion over the next decade."
(source:http://democrats.naturalresources.house.gov/sites/democrats.resourcescommittee.house.gov/files/Oil%20Profits%20and%20Tax%20Breaks%20(2-1-11)3JD_JP_D)
Eliminating this subsidy seems reasonable given the vast difference in the oil market today compared to 1916. Even the Texas Republican George W. Bush has been quoted as saying so. So where is the confusion and controversy? If you've heard any discussion about this topic on the television you've probably heard different (much higher) figures quoted than the $8 billion over 10 years stated above. Why is this? In 2005 congress passed The Energy Policy Act of 2005 which mostly provided incentives to energy companies for the development of alternative energy. Here is a breakdown of the $14.5 billion in annual subsidies it provides:
- $4.3 billion for nuclear power[10]
- $2.8 billion for fossil fuel production
- $2.7 billion to extend the renewable electricity production credit
- $1.6 billion in tax incentives for investments in "clean coal" facilities
- $1.3 billion for energy conservation and efficiency
- $1.3 billion for alternative motor vehicles and fuels (bioethanol, biomethane, liquified natural gas, propane)
- $500 million Clean Renewable Energy Bonds (CREBS) for government agencies for renewable energy projects.
As you can see only $2.8 billion of these subsidies relates to fossil fuel production which of course includes coal and natural gas as well as oil. Additionally the legislation included changes that raised the tax revenue collected from the energy companies:
"...according to the nonpartisan Congressional Research Service, the tax changes in the 2005 energy bill produced a net tax increase for the oil and gas companies..."
I've seen Democrat leadership speak on this subject several times over the last few weeks and I keep hearing different versions. When they quote costs of the subsides they misleadingly include that spent on the alternative energy despite the fact that the White House has been a strong supporter of its development and has said nothing about cutting its funding. To further murky the waters they sometimes say that they only want to cut the subsidies to just the "Big Five" oil companies as Nancy Pelosi did during an interview with Larry Kudlow on CNBC May 16, 2011:
"IN OUR PROPOSALS TO REDUCE THE DEFICIT, ONE OF THE PROVISIONS IS TO REMOVE THE SUBSIDIES, THE TAX BREAKS FOR BIG OIL. OVER TEN YEARS, THAT WILL SAVE ABOUT A LITTLE MORE THAN $30 BILLION."
If Rep. Pelosi is referring to the 2.8 billion a year spent on fossil fuel subsidies then her statement is ambiguous because this is the total for all companies not just "Big Oil". I assume then that she is talking about the total of all subsidies received by the Big Oil companies. If the Democrats really want to cut subsidies for alternative energy development by our largest energy companies I'm okay with it but I want people to know that is what they are talking about. The large oil companies, like other large U.S. companies, make a lot of money and will continue to do so if congress ends their alternative energy subsidies. They will just start spending less money on developing alternative energy. The biggest problem I have here is that the Democrats want to make a $3 billion a year cut their main talking point. This is less than 0.09 % of the $3.5 trillion budget of 2010. Compare this with the estimated $60 billion a year in medicare theft that occurs according to CBS news. I think the Democrats are singling out the oil producers for cheap political gain not budgetary pragmatism. The U.S. companies currently sitting on the largest piles of cash are in the technology sector not the energy sector. If the Democrats want to go after someone's stash to help the federal budget they should send the IRS to Silicon Valley first. Alternatively they could send them to Fairfield, Ct., the home of G.E. who made news back in March for its achievement of making billions of dollars and not only avoiding the payment of any U.S. taxes but actually receiving a 3.2 billion dollar tax benefit as discussed here: http://www.nytimes.com/2011/03/25/business/economy/25tax.html.
What is this corporate jet tax break the President just started talking about? Frankly it's moronic that I even have to discuss this matter but the President gave it importance when he brought it up half a dozen times during the press conference. The tax benefit that he is referring to is simply an accelerated depreciation allowance for private jet purchases instigated post 9/11 to aid an ailing aviation industry with sales. It is still in affect because its extension was a provision of the infamous "stimulus" package happily signed by the President himself in 2009. Now he has decided that the $3 billion over ten years savings to the federal budget is worth potentially damaging the revenues of one of our few successful domestic industries in a time of terrible unemployment and anemic GDP. I'm sorry Obamaites but this makes no sense and is just sound bite politicking that is more ridiculous than the oil company tax discussion. Even Democrat and former New York Governor David Patterson says the President "sounds shrill" talking about this. This is my source for the jet tax discussion: http://blog.heritage.org/2011/06/29/obama-blasts-private-jet-tax-breaks-created-by-his-own-stimulus/
What about other areas of the budget (education etc)? I believe that cuts will unfortunately have to come from everywhere to tackle our massive debt. Education is an area where I would just look to trim the fat as opposed to deep cuts. As education is only 3% of the current budget my rule of thumb would be to not cut it by more than 3%. Some other programs like support for the arts and scientific research are things that a government should support but are luxury items and therefore may have to experience deeper cuts. I hate to see cuts in these areas and to see people lose their jobs either but the lessen of Greece is that as painful as the cuts will be now they will be much worse if postponed until later. Hopefully those in charge will do an adequate job prioritizing such that the grief is not disproportional to any one group.
Well there you have it; budget cuts Blades style. Just remember that whatever comes out of Washington this month it will not be the end of this debate but only the beginning. Projections have our national debt hitting $20 billion in ten years given the increase in cost of the entitlement programs as the baby boomer generation ages so even if the government manages over $2 trillion in cuts over ten years we will still have far to go to get our national debt under control. Strategies utilizing tax reforms, budget cuts and job growth will need to be implemented aggressively and soon. So please contact your representatives and tell them you understand the dire need for deficit reduction and your desire to see significant budget cuts to that end. To find your representative: https://writerep.house.gov/writerep/welcome.shtml. Have a wonderful independence day and ciao for now.
Well there you have it; budget cuts Blades style. Just remember that whatever comes out of Washington this month it will not be the end of this debate but only the beginning. Projections have our national debt hitting $20 billion in ten years given the increase in cost of the entitlement programs as the baby boomer generation ages so even if the government manages over $2 trillion in cuts over ten years we will still have far to go to get our national debt under control. Strategies utilizing tax reforms, budget cuts and job growth will need to be implemented aggressively and soon. So please contact your representatives and tell them you understand the dire need for deficit reduction and your desire to see significant budget cuts to that end. To find your representative: https://writerep.house.gov/writerep/welcome.shtml. Have a wonderful independence day and ciao for now.
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