GOOD MORNING, MR. PRESIDENT. REALITY HAS ARRIVED.

GOOD MORNING, MR. PRESIDENT. REALITY HAS ARRIVED.

A Sober Reflection

By Jay B Gaskill

Yesterday, they gathered and tuned in; the president spoke; the crowds cheered; the elites partied; then everyone went home. The sun came up.

Reality has arrived.

This president may have just experienced the high point of his entire second term. Yesterday’s historic events began with charismatic grandiloquence delivered to fawning glitterati. What’s next? If we are now in for more POTUS grandstanding and congressional gridlock, Mr. Obama’s legacy will capsize before our very eyes with shocking speed.

It may be small consolation for the 47 percent of Americans who voted to retire our president, but there are no popular choices left for Mr. Obama. The tin can the politicians have been kicking down the road has become the classic immovable object – a can that weighs over two trillion tons. Well before Mr. Obama’s term is over, the can will no longer budge. …And the bond markets will not lend us cheap money; …and the fed will not be able to rescue us with electronic faux currency; …and the fiscal cupboards will be empty. Our unsustainable borrowing addiction will be at an end. …We will have quit our addiction…frozen turkey.

Wyoming’s Senator emeritus, Alan Simpson, speaking for the Simpson-Bowles deficit commission put it starkly last year: We can’t tax our way out of this; we can cut our way out of this; and we can’t grow our way out of this.

All three are needed – but we effectively only control taxes and spending cuts. The single most irresponsible way out of this – other than paralysis – is to double down on faux money creation, setting off one last bubble of rampant consumption (a monetary bubble); this will trigger dangerous inflation in order to deflate the debt by effectively devaluing the dollars we owe. The same ploy was tried in the Third World economies of South America (the banana republics) with truly dreadful results. It was tried earlier in Germany’s Weimar Republic, just before Hitler took over. What did the philosopher George Santayana say about history?

Up to the present moment, there has been no effective presidential leadership on what several economists and responsible political leaders have described as this country’s greatest crisis since World War II.

To grasp how simple and yet almost impossible to accomplish a comprehensive solution to this really is to achieve in the real world, just take a moment to examine a baseline hypothetical example.

First, form a mental picture of the scope of the problem. The federal government is running about 40% short of tax revenue every month of ever year. The debt service on all that the government owes is a dangerously high slice of the entire budget – a number exceeding the annual cost of the defense department…every year. That number is artificially low because the interest rates are artificially low – close to zero. Even so, it is increasing because the federal government continues to borrow without repayment.

Even taking all the income from the top 1% of US earners could not fix this. So here’s a crude outline of one hypothetical solution – keeping in mind it’s in the general category of impossible dreams:

· Social Security is taken off the table for the next decade by three simple reforms: Going forward, the entry age is increased to 69, the COLA’s are suspended for all recipients who have other income that equals or exceeds their SS benefit checks, and the payroll tax earnings cap ceiling for withholding the tax (at present, no tax on earnings over 113,000) is eliminated. {This is not an eternal fix, but it is a responsible “can kicking” exercise.

· A flat, dedicated national security / defense tax (not to be used for domestic purposes, just DOD, Homeland Security and related functions) is implemented at 3.5% of adjusted gross income. No exceptions. No deductions.

· The entire federal budget is frozen at current dollar levels, no percentage increases, a real freeze including all benefit programs. Each department, program and function, year-on-year gets the same or less dollar amount. Increases are “rob Peter to pay Paul” tradeoffs. This includes Medicare’s expenses that exceed Medicare taxes. This includes pensions to the extent that they are not funded by federal employee contributions. And so on.

· Federal employees, starting with the president (in a bold gesture) take a 5% cut in salary, everybody in, top to bottom, no exceptions.

· This leaves the prospect of growth in the private, tax paying economy, as the only optimistic wild card, and the point serves to highlight the argument that increased federal taxes and reduced benefits will depress the economy. Hence the absolute necessity of comprehensive deregulation of the commercial, private economy. …Not piecemeal reform, mind you, but a truly comprehensive rollback of the political load on the private economy on an emergency basis, excepting only those regulations with a bright line clear connection to public health and safety. This could be a big boom or a moderate boost depending on the international economic situation. But it would definitely increase the GDP.

Please note that I’ve just described a version of that rarest of metals, far more precious than gold, called unobtanium. And even with these hypothetical measures, the federal behemoth could not be brought in immediate fiscal balance. But it would be set on a glide path towards that goal over a period of years, during which the debt would continue to grow, but at a lower and lower rate. This curve would lead to a landing, not a crash, and Americas’ creditors would be reassured. The various cliffs would be avoided. And if real economic growth takes off, the fiscal balance point arrives much sooner.

The problems are far more challenging for Mr. Obama because he is ideologically predisposed against comprehensive deregulation of the commercial sector, and he seems to prefer gutting the DOD to reducing any entitlement program, let alone merely freezing benefits at a given level.

Yet leaders are born in crises. Reality is a great teacher. Do we have a great student at the helm? We’ll know in a few weeks.

JBG

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