Is America on the Brink of Bankruptcy?
“The failures of federal, state, and local officials of both major parties, over many years, have primed a ticking bankruptcy bomb for America that will explode the American Dream if we do not disarm it.” The latter is the opening line of economist Peter Ferrara’s important new book, America’s Ticking Bankruptcy Bomb.
As Ferrara correctly sees it, the U.S. doesn’t presently suffer a lack of energy or ideas, rather its economic outlook has been weakened through bipartisan policy failure. In his own words, “By the end of President George W. Bush’s eight years in office, America had abandoned every one of the four major planks of Reaganomics”, and worse, when “President Barack Obama got behind the steering wheel in 2009, he accelerated into hyperdrive even more so in all the wrong directions, doggedly pursuing the opposite of Reaganomics in every detail”. And with anti-growth policy the author of every real economic downturn since the dawn of civilization, Ferrara seeks a 180 degree turn back to what has always worked.
The title of Ferrara’s book surely obscures its positive tone. As opposed to an angry polemic predicting bankruptcy and doom as far as the eye can see, Ferrara has written an optimistic treatise on policy meant to show academic and layman alike that we can most certainly put these depressed economic times in the rearview mirror if we return to sounder economic policies. America’s Ticking Bankruptcy Bomb’s greatest asset is that it shows us the way back to prosperity.
And what is the path? To Ferrara it’s fairly basic: taxes should be light alongside reduced government spending, regulation shouldn’t be intrusive, and monetary policy should lean toward stability of the value of the unit of account.
As Ferrara puts it, income tax rates, if too high, are “an unfair penalty on production, which is also economically counterproductive.” Tax rates applied to the business owner will in Ferrara’s words, “determine whether he undertakes the capital investment, or hires more workers.” To put if more simply, taxes are nothing more than a price placed on production, and if policy leans in favor of a high price on productive economic activity, there’s less incentive for the individuals who comprise what we call an economy to produce.
Of note to those still in thrall to the idea that tax rate boosts are in fact revenue enhancers, Ferrara discredits the very notion. As he reminds us, “Over the past sixty years, with top federal income tax rates as high as 92% and as low as 28%, the resulting revenues still persisted at 18-19% of GDP.” Ferrara adds that the latter is why “higher income tax rates make no sense regardless of your political philosophy.”
That Ferrara is correct here doesn’t, however, change the broader reality that handing governments massive amounts of revenues is ultimately a bad thing. Politicians are there to spend, so while Ferrara’s tax/revenue argument is bulletproof, it would be much better if he and others started talking about tax rates so low that they minimize revenues for politicians to waste. Ferrara more than once pays positive lip service to budget rules of the balanced budget variety, but as evidenced by the federal government’s consistent, 18-19% share of GDP in terms of revenues, it horrifies this reviewer to think that we’d continue to hand the political class so much money to spend.
What concerns Ferrara at present considering the basic planks of economic growth is that unless the 2003 tax cuts are made permanent, by 2012 taxes on income and capital gains are set to rise substantially, thus turning one of the essential planks of Reaganomics on its head. Ferrara instead seeks a 15% flat tax on income, which he points out is in fact a progressive tax for big earners providing a lot more to the U.S. Treasury than do average workers. What bothers him is that the graduated levels of taxation that prevail in the present tautologically penalize success.
The corporate tax rate under his plan would similarly fall to 15%, and would be shed of the myriad deductions which are really nothing more than central planning from the Commanding Heights. Taxes on capital gains and estates would be zeroed out under such a scenario, thus reducing the cost of saving. The boost to capital formation under Ferrara’s program would surely be profound, though there’s disagreement with his contention that corporations should be able to immediately expense against earnings equipment purchases.
It seems the more growth-oriented idea over a corporate tax would be a gross receipts tax. Businesses should not be favored by the tax code no matter their activity, and that includes hiring and investment in plant and equipment. Better for taxation to be totally neutral as to how they achieve profits, which would arguable make a receipts tax more ideal.
Considering the certain tax that is government spending, there Ferrara importantly acknowledges the explosion that occurred on George W. Bush’s watch, and worse, what’s happening under President Obama. Governments have no resources other than those they’ve first extracted from the growth-oriented private sector, but since Obama apparently didn’t get the memo (along with a Congress that’s never had spending discipline), the debt compiled under our current president in one term will on our present policy path be more than “all other presidents in history – from George Washington to George W. Bush – combined.”
Ferrara goes on to report that by 2080, “federal spending under current policies will explode to 75% of GDP.” An unfortunate path for sure, but maybe overdone? Indeed, the Republicans achieved no lasting electoral success for their profligate ways under our previous president, and much the same, voters are none too happy with spending patterns since Obama took over such that the Democrats lost control of the House in 2008, and stand to lose the Senate and the Presidency in 2012.
After that, while not strident, Ferrara notes that our debt/GDP ratio is on a Greek path, and we know what’s happening there. Sure, but the U.S. is decidedly not Greece, nor is Japan. Japan’s debt/GDP ratio is well over 200%, yet the country can still borrow. And while government spending in the U.S. is certainly an economy-sapping horror, the market for Treasuries is one of the deepest in the world, with investors lined up to buy our debt.
Though spending is always and everywhere a weight on growth, market signals suggest – quite sadly – that the U.S. has nowhere near maxed out its credit card. Populated by some of the most productive individuals on earth, investors are confident in the U.S.’s ability to pay its debts, so the better question might be just how exponentially better off if we’d be if our government operated within constitutional limits.
Ferrara’s solution to reduced government expenditures is pretty detailed. That’s important because as he notes, “Medicare alone will be costing taxpayers nearly $500 billion in annual revenues by 2018”, and then the annual cost of Medicaid is expected “to rise to $451 billion by 2018.”
A major driver of these increased costs is as he puts it, “economic”. Specifically, “it all stems ultimately from what is known as the third-party payment problem” whereby the “great majority of health costs in America are not paid by the patients themselves.”
Ferrara’s answer to the above is elegant for its simplicity. As he sees it, policy must “unite the decision over what health care to purchase and consume with the economic responsibility to pay the costs, so costs can be weighed against benefits in health care consumption.” Simplified even more, Ferrara wants to put the power over healthcare expenditures into the hands of patients, and if so, it’s fair to say that the costs that we as individuals and taxpayers face will decline.
Happily Ferrara doesn’t spout the frequent line about healthcare on its own being too expensive. As he acknowledges, one reason costs have risen so much in modern times has to do with amazing advances that will ultimately drive down medical expenditures. In a market economy, all of the good things that we have in abundance from mobile phones, to computers to Lasik surgery were all at one time expensive. Of course the beauty of the latter is scarce luxuries merely predict what will eventually be abundant, and all three are.
As for welfare, Ferrara refers to our welfare state as “a vast empire bigger than the entire budgets of almost every other country in the world.” The costs of maintaining this empire are certainly enormous, and by Ferrara’s calculations the “best estimate of the cost of the 185 federal means-tested welfare programs for 2010 for the federal government alone is nearly $700 billion, up a third since 2008.”
To reduce these costs, thus reducing the spending burden that is very much a tax on productive economic activity, Ferrara would hand control over welfare disbursements back to the states in the form of block grants a la the 1996 reforms fashioned by Congress. He notes that “I don’t believe in human suffering.”
That’s all well and good, though it should be said that we have a Constitution that specifically limits the powers of the federal government with the mess that is welfare arguably in mind. If Congress actually does what Ferrara wants, it’s fair to say that Congress will find new, and ultimately harmful ways to spend any monies no longer consumed by welfare.
One area to look in terms of new spending might be the highly mistaken bailouts of 2008. Ferrara is happily very skeptical of their efficacy, and makes the essential point that if “the taxpayers could be gouged for $700 billion to bail out the banks, how could anything be denied the poor, the sick, the lame….” This of course speaks to not only reducing the spending burden that is government, but also the funds at its disposal.
Indeed, it bears repeating that revenue-enhancing tax cuts, while surely beneficial from a growth perspective, are not beneficial from a spending perspective. Much as many on the right believe President Obama “owns” this economy, the sad reality is that the Bush administration certainly did hand him a mess; the bailout with taxpayer funds of insolvent institutions whose failure would have boosted long-term economic growth surely a major exhibit that Obama et al ought to exploit.
It’s truly time to starve the beast so that when the next “too big to fail” business fails, we let it die with economic growth in mind. Ferrara’s correct solution there is that “too big to fail” should be replaced by rapid bankruptcy. Amen.
With regard to regulation, it’s there that Ferrara is encyclopedic with his knowledge, specifically about healthcare. Indeed, his discussion of Obamacare and its implications is worth the price of admission alone to a very useful book.
Obamacare at its regulatory worst will require employers “to provide the health insurance for their workers that the government specifies they must buy.” Profits are what attract the investment that fosters company expansions and inevitable job creation, but with the Administration mandating gold-plated insurance that seemingly covers every known malady, this regulation will surely retard economic expansion.
After that, Ferrara points to mandates which tell insurers that they must cover all pre-existing conditions and refuse insurance to no one. In short, Obamacare’s rules and regulations have nothing to do with insurance, and not explained yet is how insurers will stay in business if any individual can command it after the fact.
Beyond that, Ferrara is not pleased with the Obama administration’s plan to regulate seemingly anything and everything; from healthcare, to energy, to finance. The problem with all three is too much regulation, and as Ferrara’s explanation of the financial crisis reveals all too well, those in banking labored under too many, as opposed to too little mandates.
Ferrara’s last plank is monetary policy. Quite unlike so many on the right, Ferrara correctly fingers Bush administration monetary errors in favor of a weak dollar that were a major driver of the tragic housing boom of the decade just passed. As he puts it, the “primary culprit for this monetary policy disaster is the Republican Bush administration.” So true, but so rarely said. Much as housing boomed during the Nixon and Carter years when the dollar was in freefall, so did it again under Bush with Fannie, Freddie and other falsely compassionate housing mandates adding gasoline to the Bush monetary fire.
Ferrara’s fix, and it’s this reviewer’s belief that such a fix would be the greatest form of economic stimulus of all, is that monetary policy “should be guided by prices in real markets, particularly the most policy-sensitive commodity prices, such as oil, silver, copper, and other precious metals, but especially gold (NYSE:GLD), the most policy-sensitive commodity of all, given its ancient tradition as a store of value and money in itself.” This can’t be stressed enough. There’s quite simply no housing mania during the Bush years if the dollar is defined in terms of gold, so absent a fix here, investment will continue to be distorted by money illusion in ways that will blunt the positive impact of everything else Ferrara seeks; specifically light taxes, lower spending, and reduced regulation.
There are surely disagreements with Ferrara, as there always are with authors. Frequently he cites the possibility that we’ll return to 1970s malaise, when in truth, we’re already there.
Ferrara suggests midway through the book that the actual policy crackup whereby his four planks were violated occurred in 2008, but this ignores a dollar already in freefall, heavy government spending, and growth-stifling regulations of the Sarbanes-Oxley variety already in place well before 2008. Notable with regard to Ferrara’s planks is that trade is left out, but with exchange underlying all economic activity, free trade should be the fifth plank in future editions, and the Bush administration hardly had a good track record there, much as the Obama administration doesn’t now.
Taking the essential importance of trade further, Ferrara seems to buy into the notion of energy independence, or the “Drill Baby, Drill!” absurdity that animates the Sarah Palin wing of the right. In truth, the world is awash in oil, it’s only expensive insofar as the dollar is cheap, and as profit margins for the oil (NYSE:USO) industry in the U.S. aren’t that special, the idea that we’d waste limited human, physical and financial capital to be “independent” with a commodity that is plentiful on the world markets seems a path to economic paralysis, as opposed to growth.
Probably the biggest disagreement has to do with the book’s title. Though our government spends way too much, there’s no evidence in the Treasury market that the U.S. is anywhere near bankrupt. If it were, Treasury yields, particularly on longer-dated securities would be going skyward. That they’re not calls for a different title, particularly when we consider once again how very optimistic is Ferrara’s tone.
Whatever the disagreements, America’s Ticking Time Bomb is a very good book that neatly lays out the basic policy changes necessary to get us back on the path to growth. Light taxes, low spending, easy regulation, stable money values and free trade are so simple, and ultimately so costless, but what’s unknown is whether either political party sees what’s so clear to Peter Ferrara.
John Tamny is a senior economic advisor to Toreador Research & Trading, a senior economist with H.C. Wainwright Economics, and editor of RealClearMarkets and Forbes.