RECOVERY 101

Introduction to

Recovery 101

An Exercise in Realistic Adaptation

By

Jay B Gaskill

Attorney at Law

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Copyright © 2011 by Jay B. Gaskill

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This article is posted on The Policy Think site at http://jaygaskill.com/Recovery101.htm

Disclosure One:

I am a fan of David Brooks, not because he is always right, but because he almost always makes sense in the way that smart, reasonable minds make sense when they are being intellectually honest.

David Brooks is an ecumenical centrist who – like many intellectuals of a certain age – are highly susceptible to the attentions of other intelligent people, provided they are charming and sincere.

Therein hides the trap: I believe Mr. Brooks has been overly charmed by our charming, but sophisticatedly disingenuous president
In today’s New York Times, (Ultimate Spoiler Alert), he praises both House Budget Chairman Paul Ryan and President Barak Obama, and laments that these two charming, intelligent people cannot locate the common ground that would yield the Grand Compromise needed to save the republic.

Disclosure Two: I am a disenchanted democrat of the Scoop Jackson bent, a realistic optimist (see Optimism 101[1]) who believes in American exceptionalism[2], entrepreneurial capitalism and a social compact that mandates honoring our contractual obligations, especially to our own citizens, among other things.

And I am a fiscal hawk for two primary reasons:

(a) Debts must be eventually paid or they will crush the debtor, gravely damage the debtor’s credibility, usually both.

(b) Evading debts by devaluing the currency with which debts are paid, especially using the mechanism of significant, protracted inflation, is a violation of the social compact (see above) bordering on theft.

Keep this disclosure in mind when reading Mr. Brooks’ piece.

Here is that link:  http://www.nytimes.com/2011/04/15/opinion/15brooks.html?_r=1&ref=opinion

David Brooks proposes that Congressman Ryan, whom he admires greatly, believes in five things that President Obama, whom he admires greatly, does not, to wit:

(1) Demographic trends make the current welfare state model unsustainable, therefore fundamental reform is necessary.

(2) Seniors and the middle class cannot be exempted from the needed cuts.

(3) Health care costs cannot be curtailed without market based reforms.

(4) Tax increases are off the table because of the damage they do to recovery.

(5) Government can’t effectively stimulate economic growth with targeted investments.

David Brooks agrees with Obama only on tax increases and the efficacy of targeted investments, but he agrees with Ryan on emtitlement reform, the realistic assessment that benefited groups cannot be exempted from cuts, and that consumer-driven market-based reforms are necessary to hold down health care costs.

Referring to Mr. Obama’s Washington University Speech[3], he gives the president credit where I believe it has not yet been earned.

These are exactly the sort of vague but well-intentioned policies that have sold well in election after election. The president is not being cynical about this.”

With one critically important qualification, I do agree with David Brooks’ assessment of the stakes:

After the next election, though, interest costs on the national debt are likely to rise ruinously, global markets might lose confidence in America’s debt, with catastrophic consequences.”

Here is my qualification:  If the next election fails to produce a sharp about face in the general direction of Congressman Ryan’s position (a direction that –IMHO- a hard-nosed realist liberal like Harry Truman would take), then there will be catastrophic consequences.

We are squarely in the Fiscal Trap situation I’ve been writing about in this and other Policy Think Site spaces for the last three years.

Yes, there is a realistic way out, but first:

Recovery 101

Recovering from the Conventional Wisdom

The first element of an economic rebound is the recovery from the conventional wisdom that got us into this mess.

Here are the key ten lessons on which any actual recovery (instead of one last bubble) must be constructed.

  1. There is no viable US economy without the productive sector.
  2. With the exception of a few public utilities, mostly operating at the state and local level, the US productive sector is private, not public; in the real sense, the productive sector consists of that part of our in-country economy that produces energy, food, goods and services that other productive economies would preferentially purchase from us.
  3. The notion that federal spending always stimulates economic growth is obsolete; it applied to a time when the USA had a far more robust productive sector; but our real productive sector is now pathetically hollowed out.
  4. The manipulation of asset prices in a closed economic system, whether in speculative financial instruments, in the stock market or in private transactions with a criminal Ponzi schemer like the infamous B. Madoff, can create bubbles, but almost never directly stimulate real production.
  5. Federal spending that has the net effect of transferring wealth from the productive to the non productive (however noble and humanitarian its objectives) operates as a net drag on the productive sector.
  6. Political management (an oxymoron) and political regulation operate to generate a growing load on the operation of commerce; over time, the political load on commerce cripples the productive sector.
  7. We are in a very dangerous slump; the US economy teeters on the edge of a protracted economic malaise that might actually mutate into a full-on depression.
  8. The US government is flat out of real money to throw at the problem (borrowing almost half of it ongoing expenditures, including the money to service its increasing debt); worse, it is at risk of postponing the necessary fiscal correction so long that its day-to-day essential operations would be placed at risk.
  9. There are trillions of dollars parked in private hands (some here, some offshore) waiting for opportunities to safely invest in new productive, commercial enterprises.
  10. Jobs tend to follow, not lead new productive enterprises; productive enterprises seek business-friendly environments, minimal political interference and the opportunity to retain and enjoy earnings and profits.

THE WAY OUT

A Thought Experiment for Obama Liberals

I invite you to entertain the possibility that these ten observations collectively capture the main truth of our situation.  If that is so, it should be apparent that the creative heavy lifting needed to extricate this still great nation from the morass necessarily includes a multi-level, multi-focal, practical and proactive effort to → ▼

…lift the political load on commerce.

I do agree with David Brooks that targeted investments can be effective, but only when they are not paid for by further borrowing and are done in the context of a truly credible full-on attack on the fiscal problem.  This would by no means represent the utterly irresponsible squandering of precious resources on shovel ready public works attempted by the last congress.  Instead it would represent something more fine-tuned, non-bureaucratic and intelligent, like the DARPA-seeded efforts to start a private sector space launch capability.

As a polity, we need to inhale and incorporate into our national DNA the primary lesson of entrepreneurial creativity: Empowered bureaucrats are the blood enemies of the creative enterprise.

And I also agree with David Brooks that tax changes that increase revenue can help mitigate the transition to fiscal soundness (a position that is actually shared by Congressman Ryan) provided that they are carefully and responsibly crafted so that:

(a) The tax burden is more widely shared.

(b) The net increase in the burden does not negatively impact production.

(c) The tax changes do not differentially punish or burden success.

Mr. Obama does not support (a) or (c) and betrays no sign of understanding what (b) entails.

The bottom line:  Over several decades, many thousands of petty and not so petty approval processes, licenses, regulations, “public input” mechanisms, bureaus and commissions and boards staffed with unelected ideologues, tariffs and other politically motivated obstacles to commerce have accrued like barnacles on an otherwise sleek sailing vessel.  The result replicates a third world crazy quilt of irrational regulations and interferences that have driven foreign corporations to outright bribery just to get something done.  Buried in this regulatory nightmare are some reasonable rules necessary to assure transactional transparency and to safeguard protect public health and safety.  This subset is miniscule compared to the far greater political load on commerce.

This is actually good news because it represent something real that we can do to help restart the productive economic engine without spending more borrowed public money.

Unpeeling the political load on commerce in a timely manner is the key to our escape from the fiscal trap.  The most plausible mechanism, as I have argued in other articles[4], is to achieve comprehensive regulatory relief by empowering regional deregulatory commissions, the actions of which are subject to congressional review, the authority of these commissions having been given a statutory sunset.  These commissions would harness the very “commerce clause” authority that allowed the regulations to accrue in the first place to selectively and intelligently peel them back, in order to free up economic growth.  And, yes, the devil is in the details – business knowledgeable and growth friendly commissioners who are sensitive to core health and safety issues will be needed.

Thereafter, all new regulations would require an economic impact report that, in the style of the environmental impact reports, would address the business, commercial and employment impacts of any new regulations, and would require a congressional green light before they could become effective.

There you have it.  The task ahead requires courage and honest by both liberals and conservatives.  The stakes could not be higher.

Here is David Brooks’ spoiler:

What’s going to happen is this: We’re going to raise the debt ceiling in a way that fudges the issues. Then we’re going to have an election featuring these rival viewpoints, and Obama will win easily.”

I disagree.  We Americans are writing this story and the narrative is under our control.  Public opinion polls tell us that a majority of Americans actually understand the gravity and scope of the fiscal crisis.  The most of us still believe in American exceptionalism. A majority of voters are out of synch with Obama 1.0, the arch liberal who pushed through a hugely costly health care reform scheme that rank and file Americans strongly opposed.

The remaining questions are these three:

  • Will the country be in a plausible economic recovery in late 2012?
  • Is there really an Obama 2.0?
  • Will the GOP nominate an electable candidate?

I don’t pretend to have the answers, so there is no Gaskill spoiler here.  But I have the audacity to hope that the answer to the third question is, yes.  And that the answer to a fourth question, “Will the next election produce a sharp about face in the general direction of Congressman Ryan’s position?” is also Yes.

Stay tuned.

JBG


[1] http://jaygaskill.com/Optimism101.pdf

[2] http://jaygaskill.com/CreativityAndSurvival.htm

[3] http://jaygaskill.com/BackToTheFutureWithBarak.htm

[4] http://jaygaskill.com/Breakout1.0.htm and http://jaygaskill.com/Breakout2.0.htm and http://jaygaskill.com/BREAKOUT3.0.htm

Back to the Future with Barak

Back to the Future with Barak

Welcome to

The DOT 2 DOT Blog

As Published On

→The Dot to Dot Blog: http://jaygaskill.dot2dot

&

→The Policy Think Site: http://www.jaygaskill.com

All contents, unless otherwise indicated are

Copyright © 2011 by Jay B. Gaskill

LINK TO THIS ARTICLE OR FORWARD IT TO OTHER READERS, AS YOU WISH.

Also feel free to PRINT IT FOR YOUR PERSONAL USE….

Otherwise,

The author’s permission to publish all or part of this article is needed.

License to print copies for use in group discussions is usually given on request.

For all permissions, comments or questions, please contact Jay B. Gaskill, attorney at law, via e mail at law@jaygaskill.com

As posted on The Policy Think site — http://jaygaskill.com/BackToTheFutureWithBarak.htm

Barak Obama

Leading From Behind

Analysis and Commentary

By

Jay B. Gaskill

Attorney at Law

Unlike the State of the Union Address, a setting in which other voices are automatically given space to present critical assessments and alternative proposals, Mr. Obama chose Washington University to belatedly address the nations pending fiscal crisis.  I use the term belated advisedly.  Mr. Obama was sharply criticized by opinion leaders from the left, right and center for blowing an opportunity to lead out on fiscal reform in his SUO address on 1-27-2010.

This president’s latest speech follows in the wake of the bold leadership (I use the term bold advisedly as it was acknowledged by the mainstream media) by a single Congressman from Wisconsin.  Congressman Paul Ryan (41) is by far the youngest Budget Chairman ever to serve in the House of Representatives.  By force of his focused intelligence, his dedicated study-time with a range of economic experts, his personal integrity and rhetorical honesty, Mr. Ryan has become the acknowledged national leader on the fiscal issue.

Our president is late to the fiscal restraint game and early to the 2012 campaign.  But his speech did begin to acknowledge the nature and some of the gravity of the fiscal problem we face. [The full text of today’s speech is in the Appendix below.]

It’s about time.

Mr. Obama has served as chief executive for a government system that, with his tacit and overt approval, has borrowed and spent more of the federal fisc (a $3+tr.debt increase in 24 months) in half a term than any prior administration has in a full term.  This is true whether this remarkable “accomplishment” is measured in absolute terms, or as a percentage of total expenditures.

The national debt is owned by the public (private citizens), and by the government itself and by foreign interests.  In contrast with prior years, a disturbingly high percentage of the overall national debt is now owed to foreign interests. The total national debt is now about $14.6 trillion – almost equal to the entire gross domestic product.  As of January of this year, foreign interests owned $4.45 trillion of our federal government’s debt, which is about half of the debt now owed to members of the American public ($9.49 $tr). Paradoxically, the remainder is held by the government, itself, but that is another story.

The pending fiscal crisis is historically unique because the total share of our debt owed to foreign interests has ballooned.  In 1988 for example it was 13% of the total, and Chinese institutions were not then a significant creditor.  We currently owe Chinese banks alone, about 1.1 trillion.  If you think that an argument over a few tens of billions of dollars might have resulted in a paycheck slowdown, consider the implications of losing a single lender like the Chinese when all federal government operations from, say mid-August, are being sustained by borrowing.

Sadly, the president’s speech began in full campaign mode, demonizing the Ryan proposal through caricature, e.g. – “they paint a vision of our future that’s deeply pessimistic” …  “a vision that says if our roads crumble and our bridges collapse, we can’t afford to fix them.  If there are bright young Americans who have the drive and the will but not the money to go to college, we can’t afford to send them.”…“a vision that says up to 50 million Americans have to lose their health insurance in order for us to reduce the deficit.”…“grandparents who wouldn’t be able afford nursing home care without Medicaid.  Many are poor children.  Some are middle-class families who have children with autism or Down’s syndrome.  Some are kids with disabilities so severe that they require 24-hour care.  These are the Americans we’d be telling to fend for themselves.”)  All of these presidential claims occupy that murky region between hostile posturing, hyperbolic rhetorical distortions and outright political prevarication.  As Congressman Ryan put it, “He has poisoned the well.”

In the speech, Mr. Obama proposed to cut 4 trillion over twelve years to the GOP/Ryan plan’s 6 trillion over ten years.  While in one sense our president seems finally to “get it” – but his speech was tardy; his proposal was weak in substance; his overall plan was sketchy on the level of workable details; and at the end of the day, this exercise had the look and feel of his latest foreign policy gestures.

Example: Mr. Obama proposed to raise one trillion dollars over the next twelve years by “cutting tax spending in the tax code” (this is his new Orwellian term for a tax increase[1]) especially by altering the rules for the wealthiest 2% of income earners in the country.  This would be accomplished in part by limiting itemized deductions for this income group[2] most of whom Mr. Obama asserts would be willing to help but were never asked!  Since Mr. Obama has apparently set his sights on their charitable deductions (while hoping at the same time to increase their marginal tax rate from the current 35%[3]), we can expect to see a drop in the income of charitable groups if his ill-considered proposal ever becomes law.  Since private charities do a demonstrably better job of helping the poor than government bureaucrats, these “tax expenses” are likely to hurt the poor more than the high earners Mr. Obama has just targeted.

An aside:

How refreshing would it be if POTUS acknowledged that private charity has repeatedly proved more efficient in helping the poor than public welfare…because that is what the evidence shows. If the president insists on “getting more” from the productive “rich” (noting that many small businesses whose owners are plowing earnings back into development are improperly swept into this category), then why not increase the marginal tax rate on the highest individual earners to, say, 38%, but provide an enhancement to the charitable deduction, by allowing an additional tax credit for each deductible charitable, effectively refunding the 3% increase in the marginal rate to those who give?  A lot of hospitals, medical research facilities and children’s relief programs would be grateful.  Even better:  The administration could help the poor, the economy and other good causes by keeping tax rates the same and instituting an across-the-board 2% tax credit supplement to the charitable deduction.

But the president’s ideological fixation on the “benign government bureaucrat” model reveals itself here and elsewhere in his policy choices.

One more example:  Mr. Obama proposed to save money in the health care sector by relying on a commission in the predictable event that his other “reforms” fail to generate cost savings.  It is styled an “independent commission”[4] but a better term would be a non-elected bureaucratic power node.  This is a very old idea, the classic top down, decree-driven cost saving technique that has failed to preserve quality of care or generate efficiencies whenever it has been implemented.  But Mr. Obama rejects out of hand the voucher system proposed by Ryan and others designed to empower medical consumer choice to bypass the health care bureaucracy. This is a system that is already working very well in the private sector in several parts of the country. Where self-pay systems have been tried, with or without vouchers, they have allowed individual physicians to deliver better services at lower costs to self-pay patients, thus bypassing both the government and insurance company bureaucratic load.

In these and other examples, Paul Ryan’s approach is the more innovative, forward-looking and the far better crafted as an economic growth model.

Mr. Obama sounded a bit defensive, and – dare I say it? – retrograde.

Of course Congressman Ryan does not speak for all of the Beltway GOP functionaries, just as President Obama does not speak for all the country’s democrats, especially those centrists outside the Beltway who are more sympathetic to the Ryan approach than to the “just say no” attitude of the Beltway democratic caucus.

Any bipartisan solution, if it materializes, will include reasonable patriots from both sides of the aisle in both chambers…but that may have to wait until this president or his successor demonstrates real leadership.

This is one of those “hinge of history” moments. For now, and not atypically, our new president is behaving more like an orating spectator than the active, hands-on leader the country needs.

JBG

Stay tuned for “Recovery 101” to be released on April 15.

RELATED ARTICLES:

Paul Ryan and the Path to Prosperity – Wall Street Journal 5 April 2011

http://online.wsj.com/article/SB10001424052748703806304576242612172357504.html

Jay B Gaskill, Creativity & Survival – The Policy Think Site

http://jaygaskill.com/CreativityAndSurvival.pdf

APPENDIX – The Advance Text of Mr. Obama’s remarks, C/O The WSJ.

APRIL 13, 2011, 1:49 PM ET

Text of Obama Speech on the Deficit as released by the White House:

Remarks of President Barack Obama

The Country We Believe In

The George Washington University

Washington, D.C.

April 13, 2011

As Prepared for Delivery—

Good afternoon.  It’s great to be back at GW.  I want you to know that one of the reasons I kept the government open was so I could be here today with all of you.  I wanted to make sure you had one more excuse to skip class.  You’re welcome.

Of course, what we’ve been debating here in Washington for the last few weeks will affect your lives in ways that are potentially profound.  This debate over budgets and deficits is about more than just numbers on a page, more than just cutting and spending.  It’s about the kind of future we want.  It’s about the kind of country we believe in.  And that’s what I want to talk about today.

From our first days as a nation, we have put our faith in free markets and free enterprise as the engine of America’s wealth and prosperity.  More than citizens of any other country, we are rugged individualists, a self-reliant people with a healthy skepticism of too much government.

But there has always been another thread running throughout our history – a belief that we are all connected; and that there are some things we can only do together, as a nation.  We believe, in the words of our first Republican president, Abraham Lincoln, that through government, we should do together what we cannot do as well for ourselves.  And so we’ve built a strong military to keep us secure, and public schools and universities to educate our citizens.  We’ve laid down railroads and highways to facilitate travel and commerce.  We’ve supported the work of scientists and researchers whose discoveries have saved lives, unleashed repeated technological revolutions, and led to countless new jobs and entire industries.  Each of us has benefitted from these investments, and we are a more prosperous country as a result.

Part of this American belief that we are all connected also expresses itself in a conviction that each one of us deserves some basic measure of security.  We recognize that no matter how responsibly we live our lives, hard times or bad luck, a crippling illness or a layoff, may strike any one of us.  “There but for the grace of God go I,” we say to ourselves, and so we contribute to programs like Medicare and Social Security, which guarantee us health care and a measure of basic income after a lifetime of hard work; unemployment insurance, which protects us against unexpected job loss; and Medicaid, which provides care for millions of seniors in nursing homes, poor children, and those with disabilities.  We are a better country because of these commitments.  I’ll go further – we would not be a great country without those commitments.

For much of the last century, our nation found a way to afford these investments and priorities with the taxes paid by its citizens.  As a country that values fairness, wealthier individuals have traditionally born a greater share of this burden than the middle class or those less fortunate.  This is not because we begrudge those who’ve done well – we rightly celebrate their success.  Rather, it is a basic reflection of our belief that those who have benefitted most from our way of life can afford to give a bit more back.  Moreover, this belief has not hindered the success of those at the top of the income scale, who continue to do better and better with each passing year.

Now, at certain times – particularly during periods of war or recession – our nation has had to borrow money to pay for some of our priorities.  And as most families understand, a little credit card debt isn’t going to hurt if it’s temporary.

But as far back as the 1980s, America started amassing debt at more alarming levels, and our leaders began to realize that a larger challenge was on the horizon.  They knew that eventually, the Baby Boom generation would retire, which meant a much bigger portion of our citizens would be relying on programs like Medicare, Social Security, and possibly Medicaid.  Like parents with young children who know they have to start saving for the college years, America had to start borrowing less and saving more to prepare for the retirement of an entire generation.

To meet this challenge, our leaders came together three times during the 1990s to reduce our nation’s deficit.  They forged historic agreements that required tough decisions made by the first President Bush and President Clinton; by Democratic Congresses and a Republican Congress.  All three agreements asked for shared responsibility and shared sacrifice, but they largely protected the middle class, our commitments to seniors, and key investments in our future.

As a result of these bipartisan efforts, America’s finances were in great shape by the year

2000. We went from deficit to surplus.  America was actually on track to becoming completely debt-free, and we were prepared for the retirement of the Baby Boomers.

But after Democrats and Republicans committed to fiscal discipline during the 1990s, we lost our way in the decade that followed.  We increased spending dramatically for two wars and an expensive prescription drug program – but we didn’t pay for any of this new spending.  Instead, we made the problem worse with trillions of dollars in unpaid-for tax cuts – tax cuts that went to every millionaire and billionaire in the country; tax cuts that will force us to borrow an average of $500 billion every year over the next decade.

To give you an idea of how much damage this caused to our national checkbook, consider this:  in the last decade, if we had simply found a way to pay for the tax cuts and the prescription drug benefit, our deficit would currently be at low historical levels in the coming years.

Of course, that’s not what happened.  And so, by the time I took office, we once again found ourselves deeply in debt and unprepared for a Baby Boom retirement that is now starting to take place.  When I took office, our projected deficit was more than $1 trillion.  On top of that, we faced a terrible financial crisis and a recession that, like most recessions, led us to temporarily borrow even more.  In this case, we took a series of emergency steps that saved millions of jobs, kept credit flowing, and provided working families extra money in their pockets.  It was the right thing to do, but these steps were expensive, and added to our deficits in the short term.

So that’s how our fiscal challenge was created.  This is how we got here.  And now that our economic recovery is gaining strength, Democrats and Republicans must come together and restore the fiscal responsibility that served us so well in the 1990s.  We have to live within our means, reduce our deficit, and get back on a path that will allow us to pay down our debt.  And we have to do it in a way that protects the recovery, and protects the investments we need to grow, create jobs, and win the future.

Now, before I get into how we can achieve this goal, some of you might be wondering, “Why is this so important?  Why does this matter to me?”

Here’s why.  Even after our economy recovers, our government will still be on track to spend more money than it takes in throughout this decade and beyond.  That means we’ll have to keep borrowing more from countries like China.  And that means more of your tax dollars will go toward paying off the interest on all the loans we keep taking out.  By the end of this decade, the interest we owe on our debt could rise to nearly $1 trillion.  Just the interest payments.

Then, as the Baby Boomers start to retire and health care costs continue to rise, the situation will get even worse.  By 2025, the amount of taxes we currently pay will only be enough to finance our health care programs, Social Security, and the interest we owe on our debt.  That’s it.  Every other national priority – education, transportation, even national security – will have to be paid for with borrowed money.

Ultimately, all this rising debt will cost us jobs and damage our economy.  It will prevent us from making the investments we need to win the future.  We won’t be able to afford good schools, new research, or the repair of roads and bridges – all the things that will create new jobs and businesses here in America.  Businesses will be less likely to invest and open up shop in a country that seems unwilling or unable to balance its books.  And if our creditors start worrying that we may be unable to pay back our debts, it could drive up interest rates for everyone who borrows money – making it harder for businesses to expand and hire, or families to take out a mortgage.

The good news is, this doesn’t have to be our future.  This doesn’t have to be the country we leave to our children.  We can solve this problem.  We came together as Democrats and Republicans to meet this challenge before, and we can do it again.

But that starts by being honest about what’s causing our deficit.  You see, most Americans tend to dislike government spending in the abstract, but they like the stuff it buys.  Most of us, regardless of party affiliation, believe that we should have a strong military and a strong defense.  Most Americans believe we should invest in education and medical research.  Most Americans think we should protect commitments like Social Security and Medicare.  And without even looking at a poll, my finely honed political skills tell me that almost no one believes they should be paying higher taxes.

Because all this spending is popular with both Republicans and Democrats alike, and because nobody wants to pay higher taxes, politicians are often eager to feed the impression that solving the problem is just a matter of eliminating waste and abuse –that tackling the deficit issue won’t require tough choices.  Or they suggest that we can somehow close our entire deficit by eliminating things like foreign aid, even though foreign aid makes up about 1% of our entire budget.

So here’s the truth.  Around two-thirds of our budget is spent on Medicare, Medicaid, Social Security, and national security.  Programs like unemployment insurance, student loans, veterans’ benefits, and tax credits for working families take up another 20%.  What’s left, after interest on the debt, is just 12 percent for everything else. That’s 12 percent for all of our other national priorities like education and clean energy; medical research and transportation; food safety and keeping our air and water clean.

Up until now, the cuts proposed by a lot of folks in Washington have focused almost exclusively on that 12%.  But cuts to that 12% alone won’t solve the problem.  So any serious plan to tackle our deficit will require us to put everything on the table, and take on excess spending wherever it exists in the budget.  A serious plan doesn’t require us to balance our budget overnight – in fact, economists think that with the economy just starting to grow again, we will need a phased-in approach – but it does require tough decisions and support from leaders in both parties.  And above all, it will require us to choose a vision of the America we want to see five and ten and twenty years down the road.

One vision has been championed by Republicans in the House of Representatives and embraced by several of their party’s presidential candidates.  It’s a plan that aims to reduce our deficit by $4 trillion over the next ten years, and one that addresses the challenge of Medicare and Medicaid in the years after that.

Those are both worthy goals for us to achieve.  But the way this plan achieves those goals would lead to a fundamentally different America than the one we’ve known throughout most of our history.

A 70% cut to clean energy.  A 25% cut in education.  A 30% cut in transportation.  Cuts in college Pell Grants that will grow to more than $1,000 per year.  That’s what they’re proposing.  These aren’t the kind of cuts you make when you’re trying to get rid of some waste or find extra savings in the budget.  These aren’t the kind of cuts that Republicans and Democrats on the Fiscal Commission proposed.  These are the kind of cuts that tell us we can’t afford the America we believe in.  And they paint a vision of our future that’s deeply pessimistic.

It’s a vision that says if our roads crumble and our bridges collapse, we can’t afford to fix them.  If there are bright young Americans who have the drive and the will but not the money to go to college, we can’t afford to send them.  Go to China and you’ll see businesses opening research labs and solar facilities.  South Korean children are outpacing our kids in math and science.  Brazil is investing billions in new infrastructure and can run half their cars not on high-priced gasoline, but biofuels.  And yet, we are presented with a vision that says the United States of America – the greatest nation on Earth – can’t afford any of this.

It’s a vision that says America can’t afford to keep the promise we’ve made to care for our seniors.  It says that ten years from now, if you’re a 65 year old who’s eligible for Medicare, you should have to pay nearly $6,400 more than you would today.  It says instead of guaranteed health care, you will get a voucher.  And if that voucher isn’t worth enough to buy insurance, tough luck – you’re on your own.  Put simply, it ends Medicare as we know it.

This is a vision that says up to 50 million Americans have to lose their health insurance in order for us to reduce the deficit.  And who are those 50 million Americans?  Many are someone’s grandparents who wouldn’t be able afford nursing home care without Medicaid.  Many are poor children.  Some are middle-class families who have children with autism or Down’s syndrome.  Some are kids with disabilities so severe that they require 24-hour care.  These are the Americans we’d be telling to fend for themselves.

Worst of all, this is a vision that says even though America can’t afford to invest in education or clean energy; even though we can’t afford to care for seniors and poor children, we can somehow afford more than $1 trillion in new tax breaks for the wealthy.  Think about it.  In the last decade, the average income of the bottom 90% of all working Americans actually declined.  The top 1% saw their income rise by an average of more than a quarter of a million dollars each.  And that’s who needs to pay less taxes?  They want to give people like me a two hundred thousand dollar tax cut that’s paid for by asking thirty three seniors to each pay six thousand dollars more in health costs?   That’s not right, and it’s not going to happen as long as I’m President.

The fact is, their vision is less about reducing the deficit than it is about changing the basic social compact in America.  As Ronald Reagan’s own budget director said, there’s nothing “serious” or “courageous” about this plan.  There’s nothing serious about a plan that claims to reduce the deficit by spending a trillion dollars on tax cuts for millionaires and billionaires.  There’s nothing courageous about asking for sacrifice from those who can least afford it and don’t have any clout on Capitol Hill.  And this is not a vision of the America I know.

The America I know is generous and compassionate; a land of opportunity and optimism.  We take responsibility for ourselves and each other; for the country we want and the future we share.  We are the nation that built a railroad across a continent and brought light to communities shrouded in darkness.  We sent a generation to college on the GI bill and saved millions of seniors from poverty with Social Security and Medicare.  We have led the world in scientific research and technological breakthroughs that have transformed millions of lives.

This is who we are.  This is the America I know.  We don’t have to choose between a future of spiraling debt and one where we forfeit investments in our people and our country.  To meet our fiscal challenge, we will need to make reforms.  We will all need to make sacrifices.  But we do not have to sacrifice the America we believe in.  And as long as I’m President, we won’t.

Today, I’m proposing a more balanced approach to achieve $4 trillion in deficit reduction over twelve years.  It’s an approach that borrows from the recommendations of the bipartisan Fiscal Commission I appointed last year, and builds on the roughly $1 trillion in deficit reduction I already proposed in my 2012 budget.  It’s an approach that puts every kind of spending on the table, but one that protects the middle-class, our promise to seniors, and our investments in the future.

The first step in our approach is to keep annual domestic spending low by building on the savings that both parties agreed to last week – a step that will save us about $750 billion over twelve years.  We will make the tough cuts necessary to achieve these savings, including in programs I care about, but I will not sacrifice the core investments we need to grow and create jobs.  We’ll invest in medical research and clean energy technology.  We’ll invest in new roads and airports and broadband access.  We will invest in education and job training.  We will do what we need to compete and we will win the future.

The second step in our approach is to find additional savings in our defense budget.  As Commander-in-Chief, I have no greater responsibility than protecting our national security, and I will never accept cuts that compromise our ability to defend our homeland or America’s interests around the world.  But as the Chairman of the Joint Chiefs, Admiral Mullen, has said, the greatest long-term threat to America’s national security is America’s debt.

Just as we must find more savings in domestic programs, we must do the same in defense.   Over the last two years, Secretary Gates has courageously taken on wasteful spending, saving $400 billion in current and future spending.  I believe we can do that again.  We need to not only eliminate waste and improve efficiency and effectiveness, but conduct a fundamental review of America’s missions, capabilities, and our role in a changing world.  I intend to work with Secretary Gates and the Joint Chiefs on this review, and I will make specific decisions about spending after it’s complete.

The third step in our approach is to further reduce health care spending in our budget.  Here, the difference with the House Republican plan could not be clearer:  their plan lowers the government’s health care bills by asking seniors and poor families to pay them instead.  Our approach lowers the government’s health care bills by reducing the cost of health care itself.

Already, the reforms we passed in the health care law will reduce our deficit by $1 trillion.  My approach would build on these reforms.  We will reduce wasteful subsidies and erroneous payments.  We will cut spending on prescription drugs by using Medicare’s purchasing power to drive greater efficiency and speed generic brands of medicine onto the market.  We will work with governors of both parties to demand more efficiency and accountability from Medicaid.  We will change the way we pay for health care – not by procedure or the number of days spent in a hospital, but with new incentives for doctors and hospitals to prevent injuries and improve results.  And we will slow the growth of Medicare costs by strengthening an independent commission of doctors, nurses, medical experts and consumers who will look at all the evidence and recommend the best ways to reduce unnecessary spending while protecting access to the services seniors need.

Now, we believe the reforms we’ve proposed to strengthen Medicare and Medicaid will enable us to keep these commitments to our citizens while saving us $500 billion by 2023, and an additional one trillion dollars in the decade after that.  And if we’re wrong, and Medicare costs rise faster than we expect, this approach will give the independent commission the authority to make additional savings by further improving Medicare.

But let me be absolutely clear:  I will preserve these health care programs as a promise we make to each other in this society.  I will not allow Medicare to become a voucher program that leaves seniors at the mercy of the insurance industry, with a shrinking benefit to pay for rising costs.  I will not tell families with children who have disabilities that they have to fend for themselves.  We will reform these programs, but we will not abandon the fundamental commitment this country has kept for generations.

That includes, by the way, our commitment to Social Security.  While Social Security is not the cause of our deficit, it faces real long-term challenges in a country that is growing older.  As I said in the State of the Union, both parties should work together now to strengthen Social Security for future generations.  But we must do it without putting at risk current retirees, the most vulnerable, or people with disabilities; without slashing benefits for future generations; and without subjecting Americans’ guaranteed retirement income to the whims of the stock market.

The fourth step in our approach is to reduce spending in the tax code.  In December, I agreed to extend the tax cuts for the wealthiest Americans because it was the only way I could prevent a tax hike on middle-class Americans.  But we cannot afford $1 trillion worth of tax cuts for every millionaire and billionaire in our society.  And I refuse to renew them again.

Beyond that, the tax code is also loaded up with spending on things like itemized deductions.  And while I agree with the goals of many of these deductions, like homeownership or charitable giving, we cannot ignore the fact that they provide millionaires an average tax break of $75,000 while doing nothing for the typical middle-class family that doesn’t itemize.

My budget calls for limiting itemized deductions for the wealthiest 2% of Americans – a reform that would reduce the deficit by $320 billion over ten years.  But to reduce the deficit, I believe we should go further.  That’s why I’m calling on Congress to reform our individual tax code so that it is fair and simple – so that the amount of taxes you pay isn’t determined by what kind of accountant you can afford.  I believe reform should protect the middle class, promote economic growth, and build on the Fiscal Commission’s model of reducing tax expenditures so that there is enough savings to both lower rates and lower the deficit.  And as I called for in the State of the Union, we should reform our corporate tax code as well, to make our businesses and our economy more competitive.

This is my approach to reduce the deficit by $4 trillion over the next twelve years.  It’s an approach that achieves about $2 trillion in spending cuts across the budget.  It will lower our interest payments on the debt by $1 trillion. It calls for tax reform to cut about $1 trillion in spending from the tax code.  And it achieves these goals while protecting the middle class, our commitment to seniors, and our investments in the future.

In the coming years, if the recovery speeds up and our economy grows faster than our current projections, we can make even greater progress than I have pledged here.  But just to hold Washington – and me – accountable and make sure that the debt burden continues to decline, my plan includes a debt failsafe.  If, by 2014, our debt is not projected to fall as a share of the economy – or if Congress has failed to act – my plan will require us to come together and make up the additional savings with more spending cuts and more spending reductions in the tax code.  That should be an incentive for us to act boldly now, instead of kicking our problems further down the road.

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[1] “…tax reform to cut about $1 trillion in spending from the tax code.”

[2]Beyond that, the tax code is also loaded up with spending on things like itemized deductions.  And while I agree with the goals of many of these deductions, like homeownership or charitable giving, we cannot ignore the fact that they provide millionaires an average tax break of $75,000 while doing nothing for the typical middle-class family that doesn’t itemize. My budget calls for limiting itemized deductions for the wealthiest 2% of Americans – a reform that would reduce the deficit by $320 billion over ten years.”

[3] This is my reasonable inference from Mr. Obama’s stated pledge to never again to allow an extension of the “Bush tax cuts, and from his 2012 budget proposal to raise that top rate by even more.”

[4]Now, we believe the reforms we’ve proposed to strengthen Medicare and Medicaid will enable us to keep these commitments to our citizens while saving us $500 billion by 2023, and an additional one trillion dollars in the decade after that.  And if we’re wrong, and Medicare costs rise faster than we expect, this approach will give the independent commission the authority to make additional savings by further improving Medicare.”