The Braine Trust

The good news about the impending “fiscal cliff” is that it has cast attention on the rather dire fiscal condition of the US and the need to ultimately close the deficit. Unfortunately, the bad news is that there is still little consensus about what to do even at this late date AND predictably, what is being discussed is woefully short on what actually needs to be done. 

With only about two weeks to go, the two sides are at least talking now, though from all accounts the discussion is not going well. President Obama has offered (publicly at least ) a plan with virtually all tax increases with an estimated $1.6 trillion in new revenues thru increases in income tax rates and reducing and phasing out deductions for the “wealthy few” (currently defined as though earning more than $250 K). In contrast, the Republicans have offered (again “”publicly”)  to raise taxes on the wealthy by capping deductions for a total of $0.8 trillion in new revenues and have also offered significant long-term reductions in spending and particularly entitlements ($600 billion in Medicare cuts and long-term cuts in Social Security expenditures).

While reasonable people can argue about how much new tax revenue is needed to help close the deficit, virtually no one argues that we don’t need more tax revenues. I have consistently made the point in this blog that in order to increase tax revenues one MUST focus on the EFFICIENCY of the tax code. This extremely important concept seems to be largely lost on most politicians who after all are not exactly trained in dealing with  numbers or strange concepts like economics and finance. This seems to be particularly true with President Obama whose mantra of raising tax rates on the wealthy few is the ONLY tax idea he seems to have or at least the only one he wants to talk about. Never mind that we have had the Simpson-Bowles recommendations out for two years, which though by no means perfect, would represent a major improvement in the tax code and its revenue-raising ability, while actually reducing tax rates. This would have been an excellent place to start a dialogue with Congress, but the President has largely ignored it.

The sad part about all this  is the idea of simply raising the top two income tax rates seems to have gained credence with some as the key part of closing the deficit. But, the $800 billion in revenues over the next 10 years that increasing the top two rates would raise under the President’s estimate is less than 7% of the total deficit gap that we are likely to face. However, even this estimate is probably optimistic because it assumes that there will be NO change in how much reported income will occur in these top brackets. This ignores some important realities about the current tax code and who pays the top rates. The Congressional Budget Office (CBO) recently released a report on this very issue with regard to businesses. (See “Taxing Businesses Through the Individual Income Tax” December 2012). Since 1980, there has been a huge growth in receipts from proprietorships, S Corporations, general and limited partnerships and limited liability corporations with receipts from these businesses now accounting for 38% of total business receipts (vs only 14 % in 1980). These business entities pay taxes thru the individual tax code and account for a very significant share of total individual tax receipts and in particular, those filers that pay the top two rates. The amount of this business income that is reported under the individual tax code is likely to go down if the top two rates are raised, because of the very thin margins that these typically small businesses operate under. Some won’t expand as previously planned and even curtail operations; others may simply close up shop and, if their businesses are portable, end up overseas; and some of larger entities may actually convert to being C corporations to pay a lower tax rate. In the end, what is certain is that the increase of the top two rates will result in significantly less tax revenue than the projected $800 billion. 

Further, the focus on taxes has largely left the necessary cuts in federal government expenditures  along with entitlements largely out of the discussion. As I have noted, in my past posts, we MIGHT be able to increase tax revenues as a share of GDP from today’s current low levels (around 15 percent) perhaps up to the most recent peak of 18.5% in 2007 in the next few years. However, we will have to be willing to make major reforms in the tax code to get there. Even so, at best we can hope to cut 30-40% of our future deficits thru increased tax revenues.  This means the other 60-70% must come from federal budget cuts below CURRENT levels.  

How do we get there? Here the federal government needs to look to the private sector where many companies have successfully downsized , survived and in some cases thrived. Here are a few ideas which collectively should help us get most of the way there.

1. With the possible exception of entitlements, measure all cuts relative to current actual spending levels–This seems pretty obvious to most of us and is exactly how the private sector reins in budgets. In my own personal case at AEP, I am asked to cut a certain $ amount or % below my current year budget. This results in an actual cut or reduction in the amount of $ spent next year relative to the levels I spent this past year. However, amazingly enough, the government in its bureaucratic wisdom measures all cuts relative to what it projects it “would have” spent in the future. For example, an agency that spends $100 billion in 2012 and projects spending of $150 billion in 2015 can claim “cuts” of  $20 billion if it increases its spending “only” to $130 billion.  (For more on this insidious practice , go to wsj.com and look for the “The Budget Baseline Con” on December 4th.)
2. For ALL federal agencies, immediately freeze ALL salaries and benefits at current levels until the total budget cuts required by agency are met.
3. Freeze all new hiring unless explicitly mandated by Congress until the total budget cuts are met.
4. Cut all agency budgets (excluding entitlement spending) by 20% below current levels by FY 2016 (with a 5% cut in each of the next four years).–This is my own rough estimate of what is needed at the agency level. However, the number can be raised or reduced depending on what we are willing to do on entitlements.  
5. Implement a voluntary severance program for the next two years which provides additional benefits and incentives for some to take early retirement. This program would be available for only the first 10% of government employees.
6. Agency, departments or divisions within agencies (if eligible) that move to a direct “user fee” system can avoid the budget cuts and all other requirements noted above. But ONLY to the extent they are funded by the user fee system. This would include departments like the Bureau of Land Management or the National Park Service which should be able to fund most of their operations thru direct user fees or for that matter, the Energy Information Agency(EIA) whose data and models are mostly used by the private sector.
7. Make immediate changes to entitlement spending. Increase eligibility age for Social Security AND Medicare to 67 by 2015 and 70 by 2020. Make ALL social security benefits immediately taxable the same as regular income. “Means test” social security benefits so that they are phased out for those with high annual incomes. Reduce inflation adjustment for Social Security to equal CPI  minus 1 percent. Move Medicare to a voucher-based system more along the lines the Ryan plan.

To those who say that agencies can’t make 20% cuts over four years , I say “baloney”!  ( I actually said something else, but this is a  family blog). After all, we spent “only’ $2.7 trillion on government as recently as 2007 as compared to $3.6 trillion today or some 25% less. In addition, we need to consider getting rid of agencies or departments or divisions within agencies that have outlived their usefulness and provide little to nothing for Americans. The Departments of Agriculture, Transportation and Energy comes to mind as a prime candidates for either elimination or at least getting rid of many of their functions or divisions. However, virtually ALL government agencies have some departments or divisions that have long since outlived their usefulness.

In short, we can cut government spending substantially, while retaining essential government services and entitlement protection which ensure that the poor and disadvantaged have access to health care and welfare assistance.

Sadly, we are NOWHERE NEAR this discussion as Christmas approaches. Lets hope that the discussions on spending become more serious after the New Year. As Olivia Newton-John sang back in 1981, its time to “get fis-i-caL”

I promised a Presidential election post-mortem though I could only bring myself to start writing it last night. After a very depressing past couple of days, I now vow to be upbeat and  optimistic, and continue to do my part (however insignificant) in pushing for fiscal and monetary sanity in this country.

But first the post-mortem. The President and particularly his organization deserves a great deal of credit for their ability to get out the vote, particularly for younger voters and those in the inner cities. There was an overwhelming advantage in on-the-ground workers and volunteers and it led to many voters being literally transported to the polls (my wife helped in this regard during the early voting period in Ohio).  I saw nothing approaching this level of on-the-ground organization among the Romney camp.

The President managed to win an election despite a very high unemployment rate and a 30 year low labor force participation rate, a low rate of job and economic growth, and actual declines in average family incomes during his four years in office. Notably NO sitting incumbent President since FDR some 75 years ago has ever won reelection with such negative economic numbers and George Bush Sr., Jimmy Carter and Gerald Ford ALL lost with negative numbers not nearly as bad as the President’s.

So what happened? How did the President manage to win re-election? Herewith, my top seven reasons in no particular order:

1. Losing “Social” Platform–When the votes are all finally counted and analyzed, I believe it will show that the President won a large majority of women voters. Though it wasn’t usually mentioned as a critical issue in the campaign, it is fairly clear that the majority of the electorate supports a women’s right to abortion and contraceptive freedom. And for women voters, there is even more overwhelming support for “freedom to choose”. Fairly or unfairly, the Republican party and Mitt Romney were tagged as the party that would overturn Roe vs. Wade thru new conservative Supreme Court Justice appointees and limit or even eliminate such rights. (and of course, Todd Akin didn’t help matters). This was a political “third rail” for the Republicans and certainly was an important determinant in the vote of my wife and two daughters.
2. It’s the Economy Stupid??–The old adage is that incumbent candidates win or lose elections based on the economic numbers. On the surface, this appears to have been the case with three Presidents with bad first term numbers such as George Bush, Sr. , Jimmy Carter and Gerald Ford all examples of those failing to win another term in office. However, digging deeper, in all three cases, the reasons for their failure to win a second term has far more to do with other factors than the economy. In Bush’s and Carter’s cases, both faced strong third-party opposition in Ross Perot and John Anderson respectively which siphoned enough votes away from the candidates to ensure their defeat. Carter also had visibly failed in foreign policy with a 400+ day Iranian hostage crisis which literally left him spending most of his last year in the Rose Garden rather than out campaigning. In Gerald Ford’s case,  Watergate still loomed large with Nixon’s resignation only two years earlier and his defeat certainly had as much to do with that as anything else. In fact, examining Presidencies back to the beginning of the 20th century, ONLY  Herbert Hoover lost a second term because of the economy and that was the “Great Depression”. In other words, had unemployment been well over 10% instead of near 8% and had GDP been contracting rather than growing  (albeit very slowly), the economy would have mattered more and probably would  have swung the election. However, in Mr. Obama’s case, the economy was just good enough that many voters were willing to give him a pass on the issue and four more years to improve things.
3. The Power of Incumbency– There is little question that any challenger to an incumbent President faces an uphill battle. President’s that have won second terms outnumber those that have lost more than 2-1. Starting with FDR, we have had seven Presidents win second terms (FDR, Eisenhower, Johnson, Nixon, Reagan, Clinton and G.W. Bush) and only three lose (Ford, Carter, and Bush Sr.). Being an incumbent allows the President to look “Presidential” without campaigning and not having to do anything extraordinary or risky. Consider the aftermath of  Hurricane Sandy. President Obama did what any President would do. He talked of eliminating red tape, getting all necessary aid to the victims and toured New Jersey with Gov. Christie. There was nothing unusual in this response (and some citizens still in the dark ,without necessary supplies and gasoline might be arguing he and FEMA didn’t and aren’t doing enough). Yet, 40% of those voting for Obama cited it as an important reason that they voted for the President.
4. “In the Long Run, We’re All Dead” –Typically, voters don’t care much about the long-term. But as I have argued many times in this blog, we face multiple LONG TERM economic issues in the US which could easily result in very high inflation and interest rates, a stock market crash and a Major Economic Depression starting sometime in the next 2-5 years. The two factors under the federal government’s control –a Very High Federal Debt and Massive Money Printing–received some attention in the campaign–but not nearly as much as the shorter term problems of inadequate job and income growth. This isn’t surprising because few vote for the candidate that will help fix long-term economic problems which many voters don’t even understand let alone connect with.   
5. “You Say Yes, I Say No” –Pres. Obama was the “Yes” President and Romney was the “No” candidate and it doesn’t take an advanced degree in psychology to figure out who most voters like more. Let’s not forget that between early 2009 and 2012 federal government spending exploded like no time in US history other than World War II. In virtually every case, the President opted to bail out industries and unions (e.g. the auto/UAW bailout), expand and increase government assistance (e.g. unemployment benefits, Food Stamps, welfare eligibility etc.), provide direct housing assistance and even auto buying assistance (e.g. Cash for Clunkers)  and expand and increase subsidies to emerging but clearly uneconomic businesses (e.g. “Clean” Energy etc.). In fact, the only group  that the President said “No” too was the “wealthy few” who needed to pay their “fair share”of taxes. (even though this would do virtually nothing to reduce the deficit and harm small business).  In contrast, Romney was the consummate “No” candidate saying he would cut spending substantially (even “Big Bird”!). He failed to connect with many voters as how dire our long-term problems and their own lives would be  if we didn’t take action soon in reducing government spending.  He also failed to connect on the critical issue of tax reform and how important this would be in helping reduce the long-term deficit.
6. “A Working Class Hero is Something to Be”–Mitt Romney is a very rich man who happens to have been a very smart and successful top executive. When it comes to the economy I have little doubt that he would have been the better President.  In the current political environment, however, these two facts, being  “rich” and a “top executive”, don’t score well with many voters. The Obama campaign exploited this inherent advantage to the utmost. Here in Ohio, we had a barrage of negative ads in the early months of the campaign regarding  Bain Capital which made Mitt Romney look worse than the worst of the 19th century industrial “robber barons”. Though ultimately these ads were shown to be largely false, the damage was done early and was difficult to recover from. In the end, the label that Romney only cared about the rich and Obama was the man of the people no doubt resonated with a number of voters.
7. Cool and Charismatic–When it comes to politics, charisma is an important X-factor. There is no doubt that in part John Kennedy was able beat Richard Nixon in 1960 because he was MUCH more charismatic.  Bill Clinton exuded charisma which no doubt help him easily outdistance Bob Dole in 1996. When it comes to charisma and being “cool”, there is no question that Barack Obama easily wins over Mitt Romney. Consider during the last days of the campaign, Barack was playing pickup basketball with former Chicago Bull star Scottie Pippen and then giving a free concert in downtown Columbus with Bruce Springsteen and Jay-Z. On the very same day of Obama’s downtown free concert, Mitt Romney was out at the Columbus airport with none other than the Marshall Tucker Band. I rest my case!

I hope that the next four years are different from the last four and Obama and Congress can actually agree on a deficit reduction package that precipitously cuts government spending to  pre-2009 levels or lower and truly reforms the tax code so that we can increase tax revenues without substantially hurting the economy. For now, I will be optimistic. After all the sun is shining in Columbus in November, which suggests that anything can happen.

Based on my very unofficial poll with a small sample and thus high sampling error (alas, only about 30 of you who viewed my previous post actually answered the poll questions), it would appear that most of you think President Obama will win reelection. Some 83% of you predicted that Obama will win, with 60% of you saying he would garner between 280-299 electoral votes. A majority of you (about 58%) also predicted that Obama would win the popular vote. Meanwhile, in the crucial battleground states, 85% of you thought Obama would win Ohio, with 68%  believing he would carry Wisconsin and 54% giving Virginia to the President. Romney was expected to carry Florida by 71% of you and Colorado by 56% of you.

I will offer an election post-mortem after the real votes are in later this week.

Please vote today if you haven’t already!

I have always loved elections and election coverage irrespective of my own political feelings in the various races. Something about all those numbers and my utter fascination with our electoral college system (which of course is a pretty ridiculous system when you think about it) piques my interest. This is particularly true when the Presidential race is close like the current one. Consider:

• With 11 battleground states (CO, FL, IA , MI, NV, NH, NC, OH, PA, VA and WI), there is a total of 146 electoral votes in play for either candidate.
• Obama has only 201 relatively certain electoral votes and Romney has only 191 relatively certain electoral votes. These are in states like California, New York and Texas who best I can tell are probably unaware that there IS a Presidential election campaign going on.
• Thus, the electoral vote could conceivably range from anywhere to a 357-191 Obama win  to a 347-201 win for Romney.
• While unlikely, it is even possible that we could have a tie 269-269, if Romney can win FL, NC, VA, CO, IA and NV.

So now it’s your chance to prognosticate and take my poll(s). Only a few multiple choice questions. I promise it will be quick and easy and fun. I will report results prior to the election results coming out on Tuesday. Poll closes Tuesday 11AM.