The unkindest cuts

Perhaps the biggest issue going into the fall’s midterm elections is the elimination, extension or modification of the so-called Bush tax cuts. It affects our wallets, of course, but also our nation’s financial future, as government debt continues to expand to immense proportions While the argument is sometimes framed as tax cuts for the rich, the truth is if Congress does nothing before January, virtually all Americans’ paychecks would shrink.

The tax cuts passed under the Bush administration, mostly enacted in 2001 and 2003, substantially lowered what every taxpayer, poor and rich, owes each year. Among the dozen major tax changes, the single biggest provision was a new 10% bracket for the first several thousand dollars we earn, which benefited all taxpayers, including low-income households who also received bigger refundable credits. Middle-income households got marriage penalty relief, and when the per-child tax credit doubled from $500 to $1,000, they got most of the benefit.

High-income households got their full itemized deductions back and estate tax relief, and investors got a lower rate on capital gains and dividends. Across the board, the marginal tax rates on wages fell from 28%, 31%, 36% and 39.6% to 25%, 28%, 33%, and 35%. In short, virtually every American’s paycheck got bigger.

The government is on an insane spending spree we cannot afford. It needs to reign in spending but politicians do not have the political will to make the tough spending choices. Let me illustrate with real numbers for 2010 the difficulty of returning to fiscal sanity.

Federal receipts are estimated at $2.1 trillion in 2010. If the government were a business or individual household it would hold spending to that level. Now lets look at spending.

The first item is interest on the national debt at $400 billion. We must meet this obligation or see the economy and our currency destroyed. Meeting the interest obligation leaves us with $1.7 billion to spend.

Next, if we were being fiscally responsible we would choose to begin paying down our debt. An annual payment of about $200 billion per year would retire the current debt in a little more than 50 years. Putting $200 million toward retiring the debt leaves us with $1.5 trillion to spend.

Next, national defense. The defense budget for 2010 is $720 billion. Realistically if we are going to spend within our means we cannot afford to spend 30% of federal receipts on defense. China has the next largest defense budget in the world at $100 million. To balance our budget without raising taxes we are going to have to make major cuts in defense spending. This means new priorities. The Founding Fathers warned us against foreign entitlements. To live within our means we will have to stop playing the world’s policeman. Pull troops out of Afghanistan, Iraq, Korea, Germany, Kosovo, Okinawa, and other places around the world. Cut more bases at home. If we returned to a military mission of defending the homeland we should be able to reduce military outlays to something in the area of $400 billion. We would still be spending 4 times what the China spends on its military. Spending $400 billion on defense leaves us with $1.1 trillion to cover the remaining functions and obligations of the federal government if we do not increase taxes.

On to entitlements. The two big ones are Social Security and Medicare. The SS trust fund is a myth, no money was ever saved so the SS checks must come from each year’s tax collections. At current benefit levels Social Security is estimated to cost $720 billion in 2010 and Medicare $460 billion. The combined total of $1.18 trillion exceeds the $1.1 trillion we have to spend, even after draconian cuts in defense spending. Plus we’ve not addressed the funding of other departments and services (operation of government, State Department, Commerce, Labor, Veteran’s Affairs, Education, Health and Welfare, HUD, NASA, FAA, National Parks, etc).

To balance the budget and pay off the debt is going to require significant cuts in defense spending, entitlements, and other government programs or massive tax increases the economy cannot afford.

Let’s continue with the illustration above. Cutting Social Security benefits and Medicare by 20% will free up $210 billion to cover the remaining obligations of government. This is nowhere near enough. To bring the budget into balance, entire departments will have to be eliminated. Some candidates would be the Departments of Labor, Education, Commerce, Agriculture, Energy, and Veteran’s Affairs (incorporate the essential Veteran’s services in the Defense Department budget). Privatize Amtrak, the Post Office, General Motors, AIG, NASA. End all forms of public assistance - welfare, food stamps, public housing. The states will have to pick up social services the people in each state want to fund.

The federal budget for the Department of State alone in 2010 is $52.8 billion or about 25% of the roughly $210 billion we have left to spend in this scenario. Do we need to operate embassies in every nation on the planet? Do we need the number of diplomats and analysts employed by the State Department today. Ten years ago, in 2000, the budget for the Department of State was $6.5 billion. Why would this department require $46.3 billion dollars more to operate in 2010 than it did in 2000? Cut this budget to $10 billion and we have $200 billion left to support all other functions of government.

If you sit down with the budget, you will see that $200 billion is no where near enough. Congress’s operating budget alone in 2010 is almost $5 billion. The Department of Homeland Security budget is $55 billion. The Department of Transportation Budget is $72 billion. The Department of Veteran’s Affairs budget is $56 billion. The Department of Treasury Budget is $13.4 billion. The Department of Interior Budget is $12 billion. The budget for operating the White House is $1.6 billion. The Department of Education budget is $63 billion.

Needless to say $200 billion is not enough to cover the rest of government spending at current rates. Elimination of more programs and huge cuts in others will be necessary to bring the budget into balance without raising taxes.

Unfortunately, I don’t see our politicians as having the ability or will to sit down and make the tough calls. Certainly President Obama doesn’t. He has signed the task to a commission which will report back after the November election.

Cuts of this magnitude will be painful and require redefinition of the government. There can be no sacred cows, not defense, not social security, not welfare. The size and mission of government will have to be diminished dramatically even at a $2.1 trillion dollar spending level.

I agree the Chinese spending is understated but I also know China has its own defense issues in the region. First, the Russia and China are natural enemies, despite their communist backgrounds. There have been border skirmishes. Likewise, China and India are rivals in the region and India is coming up fast. The same holds true with Vietnam. Radical Islam also poses a threat to China in China’s border regions. Nuclear armed Iran and Pakistan are significant threats to China if the US no longer has troops in the region to thwart the expansion of radical Islam. Plus, if the US retrenches, Japan and Korea will be faced with the choice of increasing defense spending or becoming client states of China. Their economies are capable of supporting higher levels of spending. They will pony up.

The direct cost of military personnel in the proposed 2010 budget is $150 billion, including the National Guard, Reserves, ROTC, housing allowances. If we reduced spending to $400 billion, there would be $250 billion left for operations and weapons procurement. The base Pentagon budget for 2010 is actually $533 billion. Over $120 billion is being spent this year on Afghanistan and Iraq alone.

I would withdraw to the homeland. With 2 million illegals streaming across the border every year, we have a war on the homefront we are not fighting while we are killing thousands of young soldiers in a pointless central Asian conflict that will continue long after we leave.

Today we have an “offensive” military than can project itself around the world in multiple “peace keeping” conflicts. American soldiers have been killed in Vietnam, Iraq, Afghanistan, Lebanon, Saudi Arabia, Somalia, Kosovo and other places over the past 50 years. Those deaths have not served our national interest.

Since WWII the Europeans have allowed the US taxpayer to fund their defense. The same is true of other countries around the world. Our economy is shambles and the US taxpayer cannot afford to carry the load.

If we have to fight on the home front it will be a quick war. Troops based in Okinawa, Iraq, and Europe will not protect the homeland from nuclear missiles fired from China, Russia, or Iran. It would be extremely difficult and expensive for any power to mount an amphibious invasion on our coastline.

For the last 20 years we have projected power like an imperialist nation because we had by far the strongest military in the world. What have we accomplished for our own national interest. Nothing. We conquered Iraq, yet the Iraqi oil will be going to other countries. We killed 50,000 Americans in Vietnam, yet it became a communist country anyway. Today it is a strong trading partner and we are sending US manufacturing jobs there.

I hope we don’t have to fight on the homeland. I do know today we have to make some very tough spending decisions to bring our fiscal house in order. If we keep spending at current levels the economy will collapse, the dollar will become worthless, and it won’t matter how many weapons we have stockpiled or where we have troops stationed.

There is risk involved in shifting from an offensive to defensive military. There is also risk involved in cutting out welfare programs cold turkey, which we must do to survive. There is also risk in ending the manned space program which this administration has already done.

The consequences of our economic recklessness are we must change our spending habits dramatically. I am willing to retrench globally because history shows the vacuum will be filled by other players and the Chinese won’t be able to take it all. Let Asia deal with Asia’s problems. If the European’s don’t man up, they will either become Islamic state or dominated by Russia. I don’t believe the Germans will be satisfied with either alternative.

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