As I have mentioned many times, the United States has no government at this time. The President is in way over his head on issues that he simply does not comprehend. Intellectually, he is completely out of his depth. The Congress is polarized into dysfunctional inaction at a time of crisis for the nation. American exceptionalism is dying through apathy and neglect. Free bread and circuses dominate individual enterprise and self-reliance. And that proved to be the ultimate death-knell for the Roman Empire of the West.
Yet there remains a narrow route back from the precipice. That route is grounded in the classical political economy of budget balance. So here, as a Thanksgiving offering, is my outline recipe for the Restoration:
1. Acknowledge economic reality: Over a foreseeable future, federal spending will not be reduceable beyond a minimum 20 per cent of gross domestic product. To cut further from the current bloated level of 25 per cent will provoke serious public unrest, and will be unacceptable politically under any regime that can be voted into office. That is what entitlement programs are designed to do. They lock in voting majorities among those who have gained access to the public troughs.
Given the debt crisis, this reality exposes a corollary. Federal tax revenues must exceed federal spending until the debt is reduced to acceptable levels. This implies that federal tax revenues must be increased to say 21 per cent of gross domestic product, from 15 per cent, for any foreseeable future. This is a sizeable increase in the overall tax burden on the nation. It is the inevitable price to be paid for past over-indulgence in free bread and circuses.
2. Do well while doing good:
“what is needed is spending reform that offers goals, specifics and ways to blend fiscal responsibility with modernizing government. This includes near-term action on discretionary spending and longer-term action to reform entitlements and reduce the growth of Social Security and Medicare. Then revenue contributions can be addressed in the context of tax reform.” Glenn Hubbard, ‘It’s Still Possible to Cut Spending: Here’s How’, The Wall Street Journal, November 23, 2011
The short term cuts would impact virtually all subsidy programs to businesses in the United States, including high-speed rail grants, community development, fringe education, and would involve the repeal of Obamacare. They would impact the defense budget, reflecting the winding down of two minor wars in Iraq and Afghanistan. They would impact significantly on aid to the Middle East other than to Israel. Long-term cuts would involve raising the age of eligibility for Social Security and Medicare to 70 years and shifting Medicaid block grants to the states who would be entirely responsible for Medicaid decisions. Means testing would be applied to Medicare , which would be reformed into premium support, allowing individuals to choose among a range of differentially valued options, paying out of pocket to access the more expensive options. Annual COLA adjustments to Social Security would be adjusted downwards . Federal employees would confront real wage reductions to bring their risk-adjusted remuneration in line with the private sector. Federal employees would be expected to fund their own retirement pensions.
Federal tax revenues would be increased, not by raising bracket rates, but by eliminating most tax expenditures and tax preferences, save for households that earn below a tightly defined poverty line. Such a tax reform would be progressive in nature, impacting high earners most, because they would no longer have access to tax avoidance measures. It would be growth-enhancing, much in the way that the Reagan tax reforms were in 1986.
In a nutshell, that is my proposed Thanksgiving feast. Eat well and think hard. Otherwise there will not be many well-endowed Thanksgiving feast in our American future.