Avoiding a Predictable Crisis
At 100% of Gross Domestic Product, the U.S. debt, like Abraham's bosom, is so high you can't get over it and so wide you can't get around it. And by 2020, under current policies, the vigorish on the debt will top $1 trillion, sucking out money we cannot spend on our citizens. Instead, the Chinese, who hold the largest portion of the 50% of U.S. debt owned by foreigners, will be spreading around our money on their people. Today, 100% of tax receipts covers interest and mandatory (entitlement) spending. The rest of the money to pay for everything else, including defense, is borrowed. This is no way to run a railroad, much less the United States.
These dramatic points were made recently by Erskine Bowles in a lecture in Chapel Hill, NC, where he stepped down as president of the UNC system of colleges and universities in 2010.
Bowles, an investment banker, served as head of the Small Business Administration under Bill Clinton and later as chief of staff. In 1996, he submerged himself behind closed doors with Republican Senate leader Trent Lott and House speaker Newt Gingrich to hammer out a balanced budget agreement hailed as an historic milestone in governmental economics. Just last year Bowles was appointed by President Obama to a blue-ribbon deficit reduction committee co-chaired by former U.S. Senator Alan Simpson. They dug deeply into the nation's finances and made recommendations ultimately ignored by the president, but used by the Gang of Six in Congress during the negotiations over extending the debt ceiling -- to Bowles, a low point in American politics. He said that during the debate the interest required to purchase credit default insurance instruments as a hedge against U.S. debt was the same price as Mexican default insurance -- a harbinger that it can happen here: America can sink to second- and third-world status.
Bowles, reminding his audience that the debt debacle is "the most predictable economic crisis in history and the fiscal path we are on is simply not sustainable," pondered where the revenues will come from to reduce the debt and create growth before the United States loses its world financial clout. We can't tax our way out, he maintains, unless federal income rates are hiked to 80%, corporate rates to 70%, and capital gains to 50%. We can't cut our way out without emasculating government and national security to dangerous levels. And we can't grow our way out: the consumer/small business sector, comprising over 70% of the U.S. economy -- that creates all new jobs in the U.S. economy -- is either leveraged to the hilt or can't borrow because banks will not lend. New business starts have been declining for 30 years and big business is "on strike," as Bowles puts it, sitting on huge sums of cash and waiting for the crisis to pass.
But it may not pass if action is not taken, and soon. There was an urgency in his voice as Bowles outlined the options he recommends, with the caveats that his plan will not do harm to the poor and will not risk national security -- adding that former Joint Chiefs Chairman Admiral Mullen maintains that the debt crisis is a larger enemy than terrorism. And Bowles thinks the U.S. cannot continue in its role as the world's policeman spending more on defense than the 14 nations following us in military output.
Other caveats include not crippling education and research expenditures, but Bowles added that waste is apparent, requiring cuts. While president of the UNC system, he identified overlaps and waste, noting there are 82 programs funded to increase teacher effectiveness. And Bowles suggests hacking into the sacred cow du jour on campus today -- federal spending on grants to 3,000 colleges and universities -- knowing a large percentage of the research is repetitive, unnecessary, and often preposterous.
But $4 trillion must be cut in ten years, says Bowles, painful as it is, in order to reach the goal of reducing the total debt from 100% of GDP to 62% by 2015 and 60% by 2020, and the annual deficit to 2.3% of GDP from a projected 19% in 2015. And there is a way beyond cutting costs: tax reform. Today, according to government figures, $1.1 trillion in tax revenue is given back to taxpayers in the form of deductions, including the popular tax breaks for mortgage interest that captured headlines when the Bowles-Simpson plan was first introduced.
But Bowles offers a sensible solution to close the deduction gap -- and create revenue to reduce the debt. Under his plan, the rate for workers making up to $70,000 a year would be a flat 8%, from over $70,000 to $210,000 in annual income 14%, and above $210,000 23% -- in other words, a modified flat tax that would replace the current tax system that Bowles says is so wacky that you couldn't make it up from scratch if you tried.
Will his ideas prevail as the congressional budget-cutting panel meets to decide the fate of the nation? Probably not because the much-needed non-partisan approach taken by Bowles (he compliments tax-cutting Representative Paul Ryan) is too sensible to be adopted by a Congress that would rather hold its breath and turn purple rather than meet each other halfway and hammer out a solution. Can the president lead the country to a compromise that works? The recent jobs program he is taking to Capitol Hill says no. Cutting payroll taxes for people with jobs, while calling for the unemployed to pick up shovels and build highways, demonstrates that he cannot think or lead -- a reality most Americans have already figured out.
A partisan Congress and a faux president add up to disaster. Meanwhile, the bell is tolling for America.