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Owe, yes we can
Fiddling as the debt ceiling falls in
By Bill Fleckenstein

8/1/11 

Regular readers know that I loathe all politicians. Almost by definition, anyone who wants the job has a serious character flaw and is basically capable of thinking only about his or her own re-election and power rather than embracing any change that is a long-term positive for the country. Thus, my bilateral disgust is part of what I believe keeps my views from being a political attack on either side. 

On the key issues, on Tuesday Dennis Gartman of The Gartman Letter shared a few factoids regarding taxes and spending levels, which I thought were worth passing along. 

All of us need to understand what the real issues are so we can formulate our own ideas about what needs to be done when the funding crisis I’ve long warned of finally makes the knuckleheads in Washington, D.C., focus on the underlying problems. (For a deep definition of the inevitable funding crisis, in which the country will struggle to finance its debt, read “Say goodbye to the bond bull market.” 

Government spending, according to the Bureau of Economic Analysis, has risen to 37% of gross domestic product from 27% in 1960. According to projections used by the bureau, that would rise to 50% by 2038. Obviously, that is not going to happen, but apparently that is the path we are on. 

As for taxes, the Tax Foundation reported that from 1986 through 2009 (the most recent year for which data are available), the share of federal income tax paid by the top 5% of income earners rose from 43% to 59%, while those who paid zero income tax or were net recipients of income from the government rose from 18.5% to 51%. 

These statistics are important, because the numbers are not sustainable, and obviously the 51% majority is not going to be inclined to have its taxes raised. While one can easily argue that many people who make a lot of money could pay more, you are not going to be able to balance the budget on the back of the top 5% of earners in this country, or any other small subset. 

Meanwhile, tax revenues do need to rise (though there are several ways to do this), as they are projected to be under 15% of the gross domestic product in 2011, versus roughly 18% when Ronald Reagan left office. Flat tax anyone? 

We’ll do the right thing, once we have no choice 

In the end, we are ultimately going to have to deal with huge chunks of spending, and specifically the parts of the budget that fall under the catch-all phrase “entitlements.” Eventually, we are going to have to means-test Social Security (and other programs), streamline health care, close lots of ridiculous tax loopholes, etc. And also the massive, bloated federal bureaucracy must be slimmed down. 

To be clear, the objective of my argument is to simplify some of the issues around the debt ceiling, the most important of which is the fact that, as a country, our government is out of control. 

I find many people are so upset about what has happened to them (particularly those in the middle class) that it is difficult for them to have a rational discussion regarding the government’s finances. But they are two separate issues. 

No middle ground 

For the record, I believe that the middle class was destroyed primarily by the Federal Reserve. (I even wrote a book about it, “Greenspan’s Bubbles.”) From roughly 1997 to 2007 in my daily column on my own website, I continually made the point that the first bubble -- and more important, the second bubble -- would wreak havoc on the middle class. 

During the equity bubble, we started to hollow out the manufacturing sector by shipping jobs overseas, as companies tried to become more “efficient” in order to send their stock prices higher. 

Nobody seemed to care at the time, as the whole country was captivated by the (erroneous) idea that you couldn’t lose money investing in stocks, even risky ones. Obviously, that illuminates another point, which is that greed on the part of many, including the middle class itself, only helped feed the destruction. 

The bursting of the real-estate bubble delivered the knockout punch. 

Had the Fed not been so irresponsible -- and the government not abdicated its oversight responsibility -- the middle class would be far, far better off than it is today. But, as I just noted, the middle class does bear some responsibility for having gotten greedy (though unsophisticated investors probably have some defense in having expected some adult behavior by the government, and certainly many innocent people who were not greedy have suffered badly as well.) 

Meanwhile, those who behaved prudently have also been punished because they are not paid any meaningful interest on their savings, while the reckless seem to get bailouts. But there is no doubt that the “authorities” at all levels (i.e., politicians and bureaucrats) did not do their jobs.

Bubbles cause misallocation of responsibility 

In any case, the broken state of government finances is a different subject from the fact that the middle class has been destroyed while banksters, CEOs and Wall Street have become obscenely rich. 

The latter point makes many people extremely angry, but that anger should not cloud the understanding that the government’s finances need to be addressed, and the problems cannot be solved by taking money back from those who have profited along the way, even though it would make a lot of people feel better. 

In any case, the posturing over the debt ceiling illuminates how many politicians of both parties are trying to turn this into political theater. While there are a few who seem to understand that we have a massive problem in this country, they are in the minority. Only when the country has a financial gun to its head will the politically expedient types deal with the issue. 

If we are lucky, we can have another election before then and throw out more incumbents. Then maybe we will have an even better chance of producing some sound legislation. Of course, that means we will have to wait until after 2012 and for the funding crisis. But if that’s what it takes for real reform, I suppose it will be worth it. 

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