Ronald Reagan brought a resolute philosophy to the Presidency. He wanted to starve the federal government for funds. With less money available, not only did he think he would be able to moderate the growth of government, but also ultimately shrink it. He believed that less government meant more personal freedom. While Reagan was able to shrink the percentage of Gross Domestic Product (GDP) that the federal government took in taxes, he failed to stem its profligate spending habits.
Now 28 years later, a president is elected whose goal (while not as succinctly stated) is just as obvious in its effect. Mr. Obama has proposed budgets that project deficits of a trillion dollars for the next ten years. Is it any surprise that his wise, old economic advisor, Paul Volcker, has started floating the idea of a VAT tax? It does not take much imagination to conclude that the proposals that emerge from the Bipartisan Commission on Fiscal Responsibility and Reform will state we need more revenue (taxes) at the federal level to avert financial disaster. The question is how did we get here?
Life is full of little things that are harbingers of much larger things. Recently, I ran into a client and his wife. Since most conversations regarding their family finances are with the husband, I was a little surprised when she expressed dismay that so much tax was being withheld from her husband’s paycheck. Without injecting any political comment, I attempted to explain to her what might be the cause of her concern. But the truth is that most people do not connect the dots between their vote and the consequences. When the end result hits you squarely in the family bank account, a realization sometimes occurs resulting in an epiphany.
This encounter was reminiscent of one I had in 1996 after the Gingrich Congress cut federal expenditures. During a parent meeting at my child’s day school, a woman was ranting about how the cutbacks had hurt a local food bank we regularly supported. The idea was that instead of funneling your money through the federal government, you would keep more of your own income and thus be able to support the food bank without paying a “transaction fee” to Washington. In addition, private citizens would be able to make wiser choices than detached federal employees, who regularly directed grants to politically-favored groups. This lady could not grasp this basic concept even though the people in the room were at that moment making contributions to help the food bank. After the meeting, I asked the woman why her husband wasn’t with us. She indicated that, though it was after 8pm, he was still at work. She did not quite correlate the long hours he worked with the huge cost of government. Rather, she continued with her harangue that the government should cover all our needs. Presumably, there must be a pot of gold somewhere paying for all this.
These are just two stories among millions and California, of course, is ground zero for this insanity. Despite an ongoing state budget disaster that is impossible to ignore, voters approved a state-wide $3 billion initiative to create a green environment. Voters in Los Angeles approved a $2.2 billion school construction bond to be funded by increasing property taxes – as if cleaner, newer schools would resolve the problem of a horrendous school system.
This is replicated across the country. Miami is building a $550 million stadium to accommodate their baseball team. The baseball team typically draws somewhere around 15,000 fans per game on a good day and they could not fill their stadium when their team was winning the World Series in 1997 and 2003 yet they needed a new place to play. The residents of the city will pay for this boondoggle while praying for, but never actually generating enough revenue to pay off the debt. Minnesota copied this misfortunate situation by paying for $350 million of their new stadium’s cost with no assurance of ever being repaid. Politicians saying yes once again with borrowed money never to be repaid.
These examples all involve educated individuals/voters who are totally detached from the role of government and who will pay for it. They demand an ever-increasing number of services, and then cannot understand why government budgets are completely out of whack. Their public employees receive outrageous compensation, benefits, and retirement packages, and yet they remain ignorant and express no outrage.
Now governments worldwide are bumping up against the upper limits of sane borrowing. But what is sane? A recent article in the Washington Post stated that economists disagree on the level at which government debt becomes a problem. These economists predict that the debt-level average among developed countries will be 118% of GDP by 2014, and that this level may be a problem. They claim that 90% would be safer for economic growth.
Listening to economists like this will lead us to worldwide disaster. How about 5% or 10% or 15% of GDP as a safe level of national debt? What about telling our public employees that we cannot pay you more than we earn in the private sector? What about saying to the public: Nice idea, but we cannot afford it? What about voters saying I like that idea, but we do not have the money to do that right now? What about saying you can no longer retire with full benefits at 65 years of age – and that the time has come to change it to 68, 69, or even 70?
Until our elected officials (and the people who vote for them) embrace some realism about the financial obligations of government, reasonable levels of services, and the limitations of debt-based funding, we will be teetering on the edge of financial disaster. That time is now.