Bankruptcy Usa

A recent business trip reinforced what is at stake in this week’s Federal budget debate. In Hong Kong, I was reminded of the grim consequences for that beautiful city of handing the keys to a regime that does not cherish personal and economic freedom. A bustling financial center built on the power of the private sector seems to have faded under the burden of government interference. It is a lesson for Americans to remember. 

Even more troubling, talk focused on the imminent decline of the United States and its currency. The Obama Administration’s financial plan for massive government expansion – the federal budget – was received with open skepticism. The prospect of trillion dollar deficits as far as the eye can see combined with the announcement of aggressive Fed purchases of long-dated Treasuries prompted two shots across the U.S. fiscal bow. First, Chinese premier Wen Jiabao announced that he is “a little bit worried” over the security of China’s U.S. investments, followed by a Chinese trial balloon to replace the dollar as the world’s reserve currency. (Concerns were far from alleviated when ham-handed Treasury Secretary Geithner briefly supported the notion and drove currency markets into a tailspin.)

Readers of this space know that I’ve been worried about the Obama budget since its birth (see here). Viewed purely from the prospective of domestic finance, it is breathtakingly risky. From an international perspective, it is worse. A central feature of the economic climate is that U.S. households entered this crisis having run up their debt between 2001 and 2007. Since then, they have seen their houses devalued and their portfolios pummeled. The unmistakable consequence will be a desire to rebuild their assets – indeed the saving rate has already moved from a low of zero (yes, Virginia, zero) to over 5 percent and may reach double digits. The U.S. recovery will likely be sluggish and long, and must be built on a foundation that emphasizes private investment and net exports.

For the Asian economies in general, and China in particular, this places their export-led growth models at risk, as the U.S. will no longer serve as the key retail market on the globe. But here’s the rub: for a long time, China has engaged in a form of vendor finance – it lent the U.S. the funds needed to buy its products. If the U.S. is no longer going to buy (as much), why should anyone lend (as much), and how is the Obama Administration going to borrow (much, much more)? 

Congressional Democrats have re-shaped the basic proposals by lopping off the unpleasant years 6 to 10 and disguising the costs of others, but the basic dangers remain. For that reason, it is heartening to see that Republicans have presented some full-blown alternatives to the Democrats’ plans. Let’s not be confused, there is no realistic hope for their passage. But it is imperative for there to be a debate about addressing the great issues that trouble America – health care costs, risky energy supplies, a failed education system, etc. – without creating another: bankruptcy USA.

In the Senate, Tom Conrad, Lindsey Graham, Kay Bailey Hutchison, and John McCain produced a full-blown alternative to the majority budget. It controls spending by keeping discretionary spending at baseline levels (including inflation increases) except for Defense and Veterans spending. It keeps taxes low and certain by extending the current tax rates across the income scale. The result, by 2019, they show a deficit of only $448 billion, far below the Obama plan of $1.189 trillion and a national debt that is $3.5 trillion lower. 

Importantly, it takes on the costly expansion of government after 2014 that is hidden by a 5-year budget. As with its competitors, this budget plan provides the flexibility – in the form of “reserve funds” – to address major issues: Social Security reform, health care reform including Medicare, energy security, tax reform, defense acquisition reform, and others. Finally, it moves toward enforcement strategies by placing barriers against having public debt exceed 65 percent of GDP or deficits exceed 6 percent of GDP.

Not everybody will find it perfect, but it is the third time – first stimulus, second the pork-ridden omnibus, and now budget – that Republicans have both disagreed with the President and provided an alternative vision. President Obama’s frequent assertion that those who oppose his plans do not care about America’s challenges does not square with the facts.

Facts are important. The intellectual foundation of the massive Obama government expansion is the assertion that small government approaches that harness economic incentives inevitably lead to an inadequate “trickle down” of well-being across the spectrum of Americans. In particular, the tax, trade, and commercial regulatory policies of Reagan, Bush, Clinton, and Bush have uniformly failed, necessitating a sharp move back to 1970s style economics of heavy industry-by-industry intervention and macroeconomic fine-tuning. 

Unfortunately, the recent work of Bruce Meyer and James Sullivan (“Five Decades of Consumption and Income Poverty,” National Bureau of Economic Research, Working Paper 14827), suggests this is wrong. A non-ideological, voluminous review of the evidence on U.S. poverty over the past 50 years using a variety of measures leads to several findings. First, the official U.S. poverty measure is deeply flawed. (This has been evident for quite some time, but with so much money tied to the existing measure it is nearly immortal.) Second, consumption-based measures of poverty – those based on how much people eat, the cars they own, their housing, etc. – are superior to income-based measures of poverty – which try to add up resources but do not address the actual lifestyle of families. And finally, using the right methods, one finds that poverty fell strongly in the boom of the 1990s and did not reverse course after 2000.  

The Obama policies are predicated on ideas that don’t match the facts. The Obama budget does not deliver a fact-based financial plan to support those policies. April Fools. Alternatives, such as those by the Senate Republicans, will not risk the financial future and will allow for debate and adoption of different solutions to our real challenges.