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Follow the money

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By Jim Rohrer

Congress passed a budget bill and the President sent his budget request to Congress where the differences between the two must be resolved. All signs point to much higher spending as Congress has voted to eliminate the sequestration imposed in 2013 to limit the growth of government spending. It’s not remotely possible that the total will represent a balanced budget as spending will again exceed revenues.
It’s interesting to note that only in five years during the last 50 have we spent less than we took in. The result is a $19 trillion national debt, which most believe will be at $21 trillion when the budget resolution process has been completed. In 1946, during World War II, our debt was 120 percent of our Gross Domestic Product. I am certain that citizens understood that winning the war was a higher priority than balancing our national checkbook. Our annual debt was 73.8 percent of GDP in 2016, and the CBO numbers show that we will be above 100 percent by 2030. Only two of our allies — Japan and Italy — have a higher debt to GDP ratio than our 87.9 percent.
In 1988, Peggy Noonan wrote the famous words for George H. W. Bush’s campaign pledge “Read my lips, no new taxes.” That pledge helped him get elected president. Once in office, he was determined to reduce the ballooning debt he inherited from the Reagan Star Wars spending. The economy was not great, so he proposed big spending cuts. To secure some cuts, he put increased taxes on the table. The new taxes began in 1990 and raised the government’s revenue levels and began to lower deficits. The brave move cost Bush a second term, and Bill Clinton got credit for surpluses from 1997 to 2001.
Of course, 2001 brought 9/11 and the beginning of the two Middle East wars. President George W. Bush proposed a tax cut to help the economy and passed an expensive enhancement to Medicare. The tax cuts didn’t prove to be revenue neutral, so all these events ballooned the debt again. President Obama inherited the great recession. He and Bush endorsed massive spending to bail out our banks. The wars continued, and the debt between 2009 and ‘12 approached 10 percent of GDP, the highest ever recorded.  As President Obama ended the Iraq war and downsized the Afghanistan war, the economy improved, and Congress imposed the sequestration act, the debt between 2013 and 2016 receded to around 2 percent of GDP.
Because of our deficits, we are in a borrowing mode each year. Usually we are looking to borrow around $450 billion annually. Two-thirds of our debt is owed to internal accounts like the Social Security trust fund, the Federal Reserve, some U.S. employee retirement funds, but the other third is owed to foreign governments. Japan and China are by far our largest creditors among foreign governments. Few among us feel good about borrowing from foreign governments.
We like to criticize Washington for failing to cut spending, but that’s a tough thing to do. Twenty-five percent of our budget goes for Medicare, Medicaid, the Children’s health program (CHIPS) and the subsidies from the Affordable Care Act, which allow coverage of people with preexisting conditions. Another 24 percent goes to Social Security, 16 percent goes for defense, 10 percent goes for the safety net to help those who struggle and 6 percent is the cost of financing our debt. That’s 81 percent of our budget and, politically speaking, it’s untouchable. Now we are trying to fund investment in our infrastructure and the tax cuts probably will reduce revenues. The prevailing line by the administration is that the tax cuts will raise revenues, but that hasn’t worked since rates were greatly lowered in 1982. Count me among those who call that idea voodoo economics. So, I’ll conclude with an idea with which no one will agree. The economy is excellent, we are at full employment and we need to fix our infrastructure … a perfect time to raise taxes.  

Jim Rohrer of Evergreen is a business consultant and author of the bi-books “Improve Your Bottom Line … Develop MVPs Today” and “Never Lose Your Job … Become a More Valuable Player.” Jim’s belief is that common sense is becoming less common. (More about Jim at www.theloyaltypartners.com.)