Is the US the Next Enron?
2011-08-13 · Guest: Peter Suderman (Associate editor of Reason magazine) · 50:15
Standard and Poors downgrade and US fiscal policy
Bob Zadek and Peter Suderman discuss the Standard & Poor’s downgrade of the United States’ credit rating, analyzing both the short-term political gridlock and the long-term fiscal challenges posed by entitlement spending. They explore historical precedents like Canada’s recovery from a downgrade and debate the feasibility of solving the debt crisis through tax hikes on the wealthy versus structural spending cuts.
Topics: S&P Downgrade, Fiscal Policy, Entitlements, National Debt, Tax Reform, Political Gridlock, Medicare, Medicaid
Speakers: Bob Zadek, Peter Suderman, Caller (Jeff), Caller (Gaylord)
Introduction to the S&P Downgrade [00:00]
Bob Zadek: Well, here we are, Sunday at noon. Welcome to the Bob Zadek Show. I’m your host, Bob Zadek. Every Sunday at noon on 910 AM Fox News Radio. Thanks so much for tuning in. We are the leading, if not the only, libertarian talk radio show in the Bay Area. Follow us on Facebook, follow us on Twitter. If you have a libertarian or non-libertarian point of view, your views are welcome here. 800-345-5639 is the way to get through. Our battery of operators is standing by, waiting for your calls. Thanks so much for listening.
I’m Bob Zadek. I am part of, to use one of President Obama’s popular phrases these days, I am one of the more vulnerable among us. I am a member of a religious minority, I am a senior citizen, I am part of a working family, I am a hard-working American. You would think that Obama would be looking out for me, but he is not. And I am here to make sure that I look out for myself and for you.
The topic today is the Standard & Poor’s debt downgrade. Was Standard & Poor’s correct? Did they have the right to do what they did? That is a question being asked by the Senate Banking Committee as we sit here. Is America, to use another phrase in vogue, on the right track or on the wrong track? What is all of this about? The discussion is loaded, loaded with code words, but I have spent the weekend putting on my cryptographer hat and breaking the code, and I’m happy to share the results of my endeavors with you. I will break the code on the debate. To help me sort all of this out and to understand what it’s all about, I’m delighted to welcome Peter Suderman. Peter Suderman is an associate editor of Reason magazine. He writes regularly on healthcare, tech policy, and pop culture. Peter was a writer and editor at the National Review, the Competitive Enterprise Institute, and FreedomWorks. Peter is widely read in the Wall Street Journal, New York Post, Newsweek, Atlantic, Washington Examiner, and the Washington Times. Thanks so much for joining me, Peter.
Peter Suderman: Thanks for having me.
Political Gridlock and Fiscal Insanity [03:08]
Bob Zadek: Peter, your recent piece in Reason magazine suggested that our country was losing its collective deliberative mind. Help us understand the issue.
Peter Suderman: Well, I wasn’t so much saying that I think that. In fact, what I was saying is that if you look at S&P’s downgrade report, it kind of looks like they’re saying that. And if you look at what S&P says in the report in which they explain their reason for downgrading the United States’ credit rating, what they say is that we sort of have two types of craziness in our finances and in our politics. And there’s a short-term craziness, they’re saying, in our sort of current political situation, in the gridlock in Congress, its inability to solve the big debt problems, the big fiscal problems that face the nation.
And because Congress is sort of so, you know, the partisan differences are eating up so much time and preventing work from getting done, that’s one part of the problem, and that was sort of the proximate cause for the downgrade. That’s why they chose to do it now, because the fight over the debt limit, they say, revealed exactly how bad the partisan gridlock has gotten in Congress.
But then there’s another part to this, and that’s sort of the long-term picture that they point out. And that’s where the real core of the problem is. And the long-term picture is that we’ve got an unsustainable fiscal situation that we haven’t dealt with, and that mostly has to do with entitlements and Medicare and Medicaid, the two big health entitlements in particular. And so if you sort of game out the fiscal situation the next couple of decades, those two programs are going to be the biggest single drivers of the long-term debt. And nothing that Congress is doing right now, nothing in the debt plan, aims to address those programs in any significant way.
And then, you know, if you sort of combine that with the current political gridlock, it looks like making those big changes is going to be very, very hard. And so what S&P is basically saying is sort of there’s two ways in which America’s system is crazy: we’ve got sort of short-term political craziness that’s preventing us from solving the long-term fiscal insanity that we’ve walked ourselves into.
Bob Zadek: What’s interesting is there’s been a lot of talk in Congress, in the business community, that the system is broken. And I dare say anybody who says that has no sense of American history. In fact, the system is working absolutely perfectly. When our system of government was formed 230-odd years ago, we created a bicameral legislature. We have the Senate, the wise men serving six-year terms, the deliberative body, the thoughtful Americans—putting aside the issue they aren’t that thoughtful, they aren’t that smart, but as designed on paper, we have the Senate.
And then we have the House. Two-year terms. What does that mean? The House must always be responsive to the passions of the voters. As soon as the voters get riled up, it immediately affects the House of Representatives because they’re going to be running for office in no time, and they better be responsive. So what happened was the passions of the people got all riled up in 2010, and the people spoke. And they spoke by the election of the 87 so-called Tea Party Republicans. And the people took immediate control of one house of Congress. This isn’t the system failing; this is the system exactly as it’s supposed to work. I get goosebumps when I think about it. How did the Founders know that it was important to have one of our houses of Congress to be so responsive to the people? So this isn’t craziness. If you want to say it’s craziness, then you have to say a voting majority of the country is crazy, and darn it, I’m not prepared to say that.
Peter Suderman: Well, I think obviously the Founders designed the system with checks and balances, and that most of the time that’s a great thing, and there’s obvious benefits to that. We can see those benefits of having a slow and deliberative system that also has the opportunity to respond, as you say, to the people’s passions. But when you look at the big fiscal problems that the country is heading into, that can also slow some of those solutions down potentially. And so there are some tradeoffs that go on here.
But I don’t think that you necessarily want to read the S&P’s downgrade as entirely blaming the Tea Party and as blaming Republicans and that sort of thing, as a lot of people have said that you should do. Instead, what I would say is that you should read it as saying that the inability of our political system right now to recognize the long-term fiscal problems that the United States faces is going to make it harder to even start to solve those problems. And you can look at the two parties here, and it’s pretty clear that at least one party has taken some better steps to recognize the problem. The House, as you know, passed the Ryan budget at the beginning of the year, and while that budget isn’t perfect by any means, it’s probably the best single step towards fixing a lot of the entitlement problems. But a plan like that right now isn’t going to get through the Senate just because of the makeup of the Senate, and certainly not going to get through the White House while President Obama is in it. And so we have these checks and these balances, and for the most part, they help us, but at times when the system has sort of walked itself into big problems, an organization like S&P is going to look at that and say, “Wait a minute, that might in fact make it harder to solve some of those problems long-term.”
The Business Analogy of Debt [11:09]
Bob Zadek: When we come back, we’re going to discuss: did S&P have the right to do what they did? And in 90 seconds, should we rename the United States Sherwood Forest? You’ll see what I mean in 90 seconds.
Welcome back to the Bob Zadek Show. I’m your host, Bob Zadek. I’m joined by Peter Suderman. Peter is an associate editor at Reason magazine. Today’s topic is: is America fiscally insane? Are we dealing appropriately with our fiscal and budgetary problems, specifically the Standard & Poor’s downgrade?
My day job is I’m an attorney and I deal in the area of commercial credit. I represent creditors, people who make loans to businesses. I’ve been doing it for about 46 years. What’s going on in Washington and what went on with the downgrade and the issues on raising the national debt was, to me, almost identical to what I have seen happen so often in a smaller context when a business finds itself with less cash flow than it needs to satisfy all of its obligations. What that business person will do, what they will be advised to do by their turnaround specialists, their financial advisors, will be: “Well, the first thing you have to do is you have a senior lender. The senior lender has an incredible amount of power over you, Mr. Businessperson. So first of all, take care of your senior lender. Approach your senior lender, tell your senior lender, ‘Look, we have fiscal problems, we’re getting it together, but one thing is for sure, Mr. Bank, Mr. Senior Lender, we will not harm you. So we will take care of you. We have enough money to pay you, so please line up with us, line up on our side, and join with us as our ally as we deal with our other claimants.’”
Now, then sitting at the table with your other claimants, you have your senior lender sitting right there saying, “We’re on board, we’re with the businessperson.” In translating that to government, the bondholders who Standard & Poor’s was speaking to are the senior lenders. And government’s task was to first of all make peace with its bondholders, assure the bondholders, “You will be taken care of, don’t worry. Now be with us as we deal with the other claimants.” It’s going to be a little crazy, but just be on our side. That’s what the government didn’t do. They lost the faith of their bondholders in the guise of Standard & Poor’s. And Standard & Poor’s, looking at the situation, offered an opinion to downgrade the value of US debt.
What should be pointed out is what Standard & Poor’s did, they did voluntarily. Nobody asked them to do it; they simply offered an opinion for free. Now, Robert Reich, who is an economics professor at Berkeley and was President Clinton’s Secretary of Labor, he asked this silly question: “Who gave Standard & Poor’s the authority to tell America how much debt it should shed and how?” Peter, doesn’t Reich know better? Standard & Poor’s doesn’t have any authority; it is merely offering an opinion which people can listen to or dismiss.
Peter Suderman: I think that’s basically correct. I mean, certainly this is what Standard & Poor’s does. This is their business—letting their clients, letting the world know, letting people who are interested in who’s a good credit bet know what they think, what their considered professional opinion is about who’s a good credit risk and who isn’t. And what they decided was that at this point, thanks to a variety of factors—the long-term fiscal situation and some of the current politics, the current management of America’s fiscal state—the United States is not quite as good a credit risk as they thought it was a year ago, two years ago, as they had previously believed. And so that’s their business and that’s what they’re doing, and they have every right to do it.
On the other hand, I would say one thing: S&P is one of three big credit raters that is actually given a special status by the government under federal law. It’s the government that said, “We’re going to listen to S&P’s and we’re going to let them be the watchdogs.” And the government put them in charge of being the independent watchdogs. And so the question is, who let them and who gave them the authority? Well, it’s the federal government who decided to do so in the first place, thinking that there should be outside opinion, outside raters looking in at the United States’ books.
The Senate Investigation and Canada’s Example [16:30]
Bob Zadek: What’s really interesting is we have right now, since everybody is angry at Standard & Poor’s, we have none other than the Senate Banking Committee who is looking into holding hearings investigating Standard & Poor’s. Can you believe it? On the one hand, they imbue Standard & Poor’s with this incredible power and this special status, and now they want to investigate Standard & Poor’s because they don’t like Standard & Poor’s opinion. In fact, there’s this wonderful quote by Senator Tim Johnson, who’s chairman of the Senate Banking Committee, and he said the downgrade was “an irresponsible move.” How could offering an opinion for all who might be interested be irresponsible? It is an opinion. But we have the Senate and the SEC both threatening investigating Standard & Poor’s because Standard & Poor’s has offered the very obvious opinion that the management of the country is, as Peter says, dysfunctional.
Now Peter, in terms of the solution, as you have pointed out, you don’t have to look very far geographically to find a solution that might work, do you?
Peter Suderman: No. I mean, in terms of looking at other countries that have lost their AAA credit rating, that have been downgraded and then have regained it, we could look right next door to our neighbors to the north in Canada. Canada in 1993 was downgraded from a AAA rating. They had a pretty similar situation to the United States right now in that they had rising debt, they had a sluggish economy, and they had not just rising debt, but rising debt that they didn’t know what to do with. It looked like it was going to keep rising on an unsustainable path to the point where they weren’t going to be able to pay for it at a certain point if they kept on the same path they were going.
And so in 1993, they were downgraded, and throughout 1994 and 1995, they had sort of a big national political discussion about what to do, and they passed a major, major budget overhaul that included a little bit of tax hikes and a whole lot of major cuts. I think it was seven to one, wasn’t it?
Bob Zadek: Seven to one.
Peter Suderman: That’s right. It was about a seven-to-one ratio of cuts—seven dollars in cuts for every one dollar in tax hikes. The tax hikes were really pretty minimal, tinkering around the edges. The biggest thing was a less than half a point increase in the corporate income tax rate; they went from 39.1% to 39.5%. And then the rest of it was all cuts. And so by 2002, in just a little bit under a decade, they were able to regain their AAA rating. But it took a while once it happened, and it took also a major rethinking of what the country’s budgetary priorities were going to be.
Bob Zadek: And not only Canada, but there are many countries that would be in the same downgrade support group that the United States is now in. Perhaps the UN should form this little subset, this little committee of group therapy for countries which have suffered downgrades. I think Austria, Denmark, Finland, Sweden, New Zealand all suffered downgrades, and all seem to be functioning pretty well in the family of nations. And it’s not mysterious. And Peter, the point you make is that you don’t fix the problem with tinkering. You don’t fine-tune, you don’t make minor adjustments. This requires massive restructuring or else it’ll fail. Am I correct?
Peter Suderman: Yeah, I mean, that’s exactly right. If you look at what the Congressional Budget Office has said, basically we can get rid of most of the government outside of Medicare, Social Security, and Medicaid—the big entitlements—or we can fix those problems, or we can raise taxes dramatically more than they’ve ever been historically. Basically looking at raising—historically taxes have run about 19% of GDP, of our total economic output per year. And if you want to raise them to 30, 35% of our total economic output so that the government is consuming a third of our economy, well, that’s what it’s going to take if you want to keep spending on the rate that we’re projected to spend. And so those are sort of the options, and tinkering’s just not going to do it.
Sherwood Forest and Class Warfare [21:45]
Bob Zadek: I made a reference before the last break to renaming the United States Sherwood Forest. As we go to our next break, let me explain. The issue is being presented to the public as spending versus revenue, or spending versus raising taxes. Now, revenue, of course, is a code word for raising taxes. Now, that’s all code. Let’s understand that the issue of spending—spending means entitlements. Entitlements are unemployment insurance, Medicaid, Medicare, Social Security. It’s giving money to a class of people. Where does the money come from? Well, those people who encourage spending say we do it by taxes. So we tax the rich—which includes me and probably everybody out there who has two nickels in their pocket—we tax the rich to give to the poor. So this whole budgetary fight is about nothing more complicated than “let’s take from the rich and give to the poor.”
And if anybody out there thinks that is the way to prosperity, please call me: 800-345-5639. So don’t be misled by “investing in the future.” It is simply taking from the producers to give to the takers. That’s what the debate is all about. And just say that. And there are many people out there who find that to be appropriate governmental policy. Fair enough, I disagree, but don’t disguise it in things like entitlements. An entitlement is manufactured; it’s only entitled because a voting majority in Congress says you’re entitled to it. So if we want to live in Sherwood Forest, that’s what we’re going to do. Others of us think Sherwood Forest is a failed fiscal model.
Back in 90 seconds, Bob Zadek and Peter Suderman. We’re talking about the Standard & Poor’s downgrade, fiscal problems, and how will we get out of it? 800-345-5639.
Welcome back to the Bob Zadek Show. I’m your host, Bob Zadek, joined by Peter Suderman. Peter is an associate editor at Reason magazine. Today’s topic is: is America fiscally insane? Are we dealing appropriately with our fiscal and budgetary problems, specifically the Standard & Poor’s downgrade?
What was really strange in the debate surrounding the downgrade, as Peter has pointed out, is there is not much eye towards the future. For some reason, the United States—and Peter, this is sort of my opinion—is spending a lot of time worrying about preserving all of the economic benefits of the people who are around today. Now, it seems to me on a pure morality level, the people who are around today, as opposed to future generations, have really enjoyed the benefits of a hyper-inflated economy, of an economy that was on steroids and was artificial. And that was probably a level of prosperity that was artificial, that shouldn’t have been that way. And all that’s happening now is we’re going back to a more sound, more rational, more realistic level of economic activity, rather than nailing future generations, taking from them so we can preserve the artificially high standard of living we have now. Isn’t part of this about a generational fight, Peter?
Peter Suderman: Oh, it’s absolutely a fight about achieving and finding a sort of fiscal arrangement between generations because deficit spending now, by definition, it has to be paid back at some point. It has to be paid back, and that means that if we’re deficit spending now, as we are doing to the tune of about a trillion and a half dollars this year, last year, a trillion dollars a year or so going forward, all that deficit spending, that borrowed money, we borrow it now, we’ve got to pay it back later with interest. And it’s not going to be the people who are working now who are paying it back; it’s going to be the people who are working in 10 years, in 20 years, in 30 years. And so it’s absolutely true that the people who are going to be benefiting from these things today are benefiting from it through payments that will be made by the next generation 10, 20, 30 years out from now.
But I wanted to actually go back to something you said right before the break about the way that a lot of the folks, in particular the Obama administration, suggest that you can solve our fiscal problems just by taking a little more from the rich and giving to the poor. I forget exactly what Obama’s line is, but he uses it a lot. It’s something like “asking those who are better off to pay a little more.” I think that’s what he says. And the problem with that is that even if you agree with that approach, even if you think that it’s a good thing morally from a values perspective for the rich to pay more in order to benefit those with lower incomes, it doesn’t work from a math perspective. The math just doesn’t add up. You cannot pay for the entitlement state that we have simply by taxing the rich more—certainly not at levels that we could actually manage.
So for example, if you allowed the Bush tax cuts on the rich— the top two income classes—to expire, you could potentially, under the best estimates, reduce the deficit by about a trillion dollars over the next decade. Now, that’s some money for sure, but the best estimate, the one that is probably unrealistic, suggests that we’re going to have a seven-trillion-dollar deficit over the next decade, and probably more like a 12-trillion-dollar deficit. So a trillion dollars in deficit reduction from taxing the rich just doesn’t get you there. It doesn’t even get you halfway there. And so we’re going to have to find other ways to cut back and to fix our spending problem. Taxing the rich simply just doesn’t do it.
Bob Zadek: That’s easy, Peter. Just tax the poor. And actually, Obama likes to use the phrase “the more fortunate among us,” and it enrages me. I am not more fortunate. I work my butt off all the time. I go to night school, I work and work and work and work. And if I have enough money to pay my bills, it’s not because I drew a lucky number in the lottery; it’s because I worked my butt off. Don’t you dare call me fortunate. Just call me hard-working, call me honest, call me ethical, call me Bob, but don’t call me fortunate. I am not fortunate; I am just hard-working.
Caller Segment: Jeff on the Clinton Era [30:28]
Bob Zadek: Now Peter, we have a caller. We have Jeff on line one. Jeff, welcome to the show.
Caller (Jeff): Hey, thanks. Didn’t Bill Clinton kind of pay down some of the deficit? He had a surplus when he came into office, and he just raised it to 39%, right? So why can’t we do that now?
Peter Suderman: So this is what I was just talking about. And actually, your numbers are wrong. If we ended the Bush tax cuts, it would save two and a half trillion over 10 years, not a trillion. What I said was that if you ended the Bush tax cuts on the top earners—so if you take the top two tax brackets and end those. Democrats have said they don’t want to raise taxes on people making less than $250,000 a year. They’ve said it many, many, many times. And so my point is that if you want to attempt to solve this problem at all by raising taxes, you’re going to have to start raising taxes on the middle class and raising them quite a bit. And politically, if for no other reason, that’s incredibly difficult. Most voters don’t want to do it, and you really don’t see many Democrats who are in favor of doing that.
Caller (Jeff): Back in the 1950s and ’60s, the top 1% were paying like 90%. Plus our trade policies have gotten way out of whack. That’s the problem.
Peter Suderman: But even if you bring in 2.1 trillion dollars by letting the entire Bush tax cuts expire—the best projections for the next decade alone still show a seven-trillion-dollar deficit, and really probably more like a 12-trillion-dollar deficit. So where’s the rest of that money going to come from? And the biggest drivers in the long term are the entitlements.
Caller (Jeff): They started going up with the supply-side that doesn’t work, you know? They need to get rid of that first of all.
Bob Zadek: Well, actually, of course, we had a very high marginal tax rate, but lots and lots and lots of deductions and exceptions. So it was just—the tax code was much like what it is now with a nominal higher marginal tax rate, but with so many what they call tax loopholes and tax expenditures that in effect people end up paying the same rate anyway. It’s just a very skewed system which gives all kinds of benefits to all kinds of subsets. And that’s the fight today over how we structure the tax code.
And one of the areas, by the way, I should mention that there is happily, Peter, some agreement between Democrats and Republicans, between progressives and fiscal conservatives, is everybody seems to agree that we have to lower the marginal tax rate and get rid of lots of deductions. The fight, of course, the bloody fight, is going to be over whose deduction is lost. And that’s where the bloody battle is going to be.
Peter Suderman: Yeah, tax code simplification is something that lots of people want, sounds great, I’m certainly for it, but it’s going to be a really hard fight when you look at things like getting rid of the biggest tax deductions end up being sort of middle-class benefits in a lot of ways. They are the employer health insurance tax deduction—so when your employer buys health insurance for you, your employer’s not paying taxes on it—and then the mortgage tax deduction. And so people are paying fewer taxes when they are homeowners. And so the middle class like those tax deductions and like those—you can call them loopholes, you can call them carve-outs, whatever you want to call them—but they like not having to pay those taxes. And so it’s going to be a big fight trying to figure out exactly how we’re going to simplify taxes and how we’re going to make this easier in the long run. But I think at some point we’re going to have to have a pretty big overhaul of the current tax system.
Class Warfare and Entitlement Growth [34:52]
Bob Zadek: The terrible distraction to me, the terrible, terrible distraction where the discussion gets so emotional, is when the progressives—and they are the primary villains here in what I’m going to say—where the progressives convert this so much into a class warfare system. I was reading a piece by William Gale at Brookings Institute, and he says in describing the deal, Peter, that you wrote about, he says the deal between the Democrats and the Republicans to raise the debt ceiling in exchange for some spending cuts, he says, “The deal puts the burden on the poor and middle class.” How could it be a burden to take away something that you’re only getting because of political largesse anyway? How can that be a burden on you when you’re getting a gift from the government? To call that a burden—you want to call it the denial of a benefit that you have no birthright to, but you’re getting because 51% of the elected officials gave it to you. The denial of a benefit, the denial of a gift, but don’t call it a burden. But that’s what we get from the Brookings Institute.
We have Paul Krugman, who uses the word “extremist” in every piece that he writes. And the last great extremist that I can remember was Ronald Reagan, who was an extremist when he ran for Governor of California, an extremist when he ran for President, and that didn’t work out so well. And we have Howard Dean who says, “We should raise taxes on the wealthy.” Now Peter, I wonder what the economics textbook defined as who is wealthy or not. Sounds a little subjective to me.
Peter Suderman: Well, you know, we’re all aware that the line that has been drawn for whatever reason seems to be folks who make about $250,000 a year or more. But you know, it’s interesting that we talk about these things as taking away from the poor or the middle class, that the debt deal is taking away from them. In fact, the debt deal would allow discretionary spending to continue to rise starting after next year. And so in 2012, we’d be spending about 1.04 trillion dollars in discretionary spending, and by 2021, we’d be spending about 1.2 trillion dollars in discretionary spending. So there’s not actually cuts here with the exception of the coming year. After that, the numbers keep rising again; they just rise a little slower than they were projected to rise beforehand. So we’re not taking away anything; it’s just giving out a little bit less.
Bob Zadek: More about the code words used in the current debate when we come back. This is Bob Zadek, 800-345-5639, talking with Peter Suderman. We are discussing the Standard & Poor’s downgrade. Did they have the right to do so, and what does it mean to you and to me? Back in 90 seconds.
Welcome back to the Bob Zadek Show. I’m your host, Bob Zadek. I’m joined by Peter Suderman. Peter is an associate editor at Reason magazine. Today’s topic is: is America fiscally insane? Are we dealing appropriately with our fiscal and budgetary problems, specifically the Standard & Poor’s downgrade?
What was really strange in the debate surrounding the downgrade, as Peter has pointed out, is there is not much eye towards the future. For some reason, the United States—and Peter, this is sort of my opinion—is spending a lot of time worrying about preserving all of the economic benefits of the people who are around today. Now, it seems to me on a pure morality level, the people who are around today, as opposed to future generations, have really enjoyed the benefits of a hyper-inflated economy, of an economy that was on steroids and was artificial. And that was probably a level of prosperity that was artificial, that shouldn’t have been that way. And all that’s happening now is we’re going back to a more sound, more rational, more realistic level of economic activity, rather than nailing future generations, taking from them so we can preserve the artificially high standard of living we have now. Isn’t part of this about a generational fight, Peter?
Peter Suderman: Oh, it’s absolutely a fight about achieving and finding a sort of fiscal arrangement between generations because deficit spending now, by definition, it has to be paid back at some point. It has to be paid back, and that means that if we’re deficit spending now, as we are doing to the tune of about a trillion and a half dollars this year, last year, a trillion dollars a year or so going forward, all that deficit spending, that borrowed money, we borrow it now, we’ve got to pay it back later with interest. And it’s not going to be the people who are working now who are paying it back; it’s going to be the people who are working in 10 years, in 20 years, in 30 years. And so it’s absolutely true that the people who are going to be benefiting from these things today are benefiting from it through payments that will be made by the next generation 10, 20, 30 years out from now.
But I wanted to actually go back to something you said right before the break about the way that a lot of the folks, in particular the Obama administration, suggest that you can solve our fiscal problems just by taking a little more from the rich and giving to the poor. I forget exactly what Obama’s line is, but he uses it a lot. It’s something like “asking those who are better off to pay a little more.” I think that’s what he says. And the problem with that is that even if you agree with that approach, even if you think that it’s a good thing morally from a values perspective for the rich to pay more in order to benefit those with lower incomes, it doesn’t work from a math perspective. The math just doesn’t add up. You cannot pay for the entitlement state that we have simply by taxing the rich more—certainly not at levels that we could actually manage.
So for example, if you allowed the Bush tax cuts on the rich—the top two income classes—to expire, you could potentially, under the best estimates, reduce the deficit by about a trillion dollars over the next decade. Now, that’s some money for sure, but the best estimate, the one that is probably unrealistic, suggests that we’re going to have a seven-trillion-dollar deficit over the next decade, and probably more like a 12-trillion-dollar deficit. So a trillion dollars in deficit reduction from taxing the rich just doesn’t get you there. It doesn’t even get you halfway there. And so we’re going to have to find other ways to cut back and to fix our spending problem. Taxing the rich simply just doesn’t do it.
Bob Zadek: You’re exactly right. When I read that statistic a number of years ago, I was astonished. And what it teaches us is you can do whatever you want in terms of legislative tax policy, but the money just doesn’t flow in. It’s almost as if it is a rule of nature that the economy will not produce more than 19% of the GDP in terms of taxation. That either people stop working or they use loopholes or they do whatever, but it’s astonishing to me, and the number is always 19%. So do what you want in the legislature, but you can’t increase tax revenue. You only can increase numbers on a form, but the dollars remain the same. It’s an astonishing statistic.
Peter Suderman: Yeah, I mean, historically, the historical suggestion is basically that raising tax rates on the rich doesn’t really do it. You do see other countries that manage to get much higher tax bases, much higher total revenue—their government eats up a much larger percentage of their economy—but the way they do this, in fact, is by taxing the middle class and through regressive taxes like the VAT tax, taxes that disproportionately hit the poor and the middle class. And so if you can find me a lot of Democrats whose solution here is “let’s tax the poor more” and who are going to agree to that, then maybe you could get those revenues up. But I don’t even see Democrats, the pro-tax party, arguing for things like that. And so the bigger point is that raising the tax rates on the rich will only get you so far, and it doesn’t solve even half of the problem that we have.
Caller Segment: Gaylord on Government Spending [42:20]
Bob Zadek: Peter, we have a caller. We have Gaylord. Gaylord, welcome to the show.
Caller (Gaylord): Well, yes, thank you. I appreciate your conversations this afternoon. I just had a comment. It seems like everything you guys talk about is more of a smokescreen for everything else. Our government started out in the 4% range that you just talked about, but now we’re at the 15 and 20s or whatever. All we have to do is stop government spending. Get rid of the Department of Energy, stuff that’s been there for 50, 60, 70 years, all salaried and yet doing nothing other than a draw on the government, slowing government down 1 or 2 or 3% a year for the next 10 or 15 years, and we maybe will be able to get out of the mess.
Bob Zadek: Well, Gaylord, your principle is exactly right. And of course, that goes down to, as Peter will join in a second, what should we be spending our money on? When, you know, Gaylord, one comment sticks in my mind during before there was a budget deal, there was this discussion—and Peter, I know you’ll remember—when there was a lot of talk in Washington about getting rid of all non-essential government functions until we get out of the mess, until we sort of sign the budget deal. And I say, non-essential government functions? I have an idea: any non-essential government function, let’s get rid of it forever.
Caller (Gaylord): Absolutely. Absolutely. I’ve been self-employed since I was 25 years old, and I’m still working. Got six kids that still need help, you know? Everybody’s in the same boat. They’re just looking for the next Friday paycheck. They can’t comprehend the situation from my outlook as to what it’s been in the last 50, 60 years. The changes are phenomenal. The entitlements are growing.
Bob Zadek: Absolutely. Gaylord, you are part of the more fortunate because you work. Thanks for calling, Gaylord. Peter, non-essential government services—why are they employed by us if they’re not essential?
Peter Suderman: Well, it’s certainly, you know, funny that we have non-essential services and that we’ve already designated them and that we’ve already sort of planned this out for, “Okay, well, what if we really have to, what don’t we need?” And they know what we don’t need. And to the caller’s point, it’s true, it’s certainly true that the best way to cut discretionary spending is to get rid of programs entirely. Not scale back, not tweak around the edges, but to just cut departments and programs entirely. That is by far the best way to cut back on discretionary spending.
But what I would add to that, though, is that there’s only so far you can go by cutting programs, by cutting departments from the discretionary side. One of the interesting facts that’s come out recently is that over the last 40 years or so, basically all of the growth of government has come from healthcare spending. Between 1967 and 2007, the entire growth of the federal government can be traced to healthcare spending. And so it’s these healthcare obligations that people tend to poll pretty well—Medicaid polls alright and Medicare polls very, very well, and people are very attached to these benefits—but it’s those healthcare obligations that have grown government the most in recent years and that are really going to sort of do in our finances and do in our books over the long term. And that’s the problem that we’re just not addressing, that we’re not taking care of in any kind of way.
Bob Zadek: This will be a very exciting year in electoral politics. 2012 could be the most important year in American history since 1787 when the Constitution was finished. It’s going to be a fun year and I’d like to share it with you every Sunday at noon on 910 AM. 800-345-5639 is our number every week. Peter, thanks very much for your time. You were very gracious to give myself and my listeners an hour of your valuable time on a weekend. We appreciated your thoughts. Hope to have you back again real soon. Bob Zadek, hope to be back with you folks next Sunday. Thanks for listening.
Peter Suderman: Thanks so much for having me.