Tough Questions on our Fiscal Crisis

May 23, 2012 at 8:04 am

Fred Thompson received this email from an associate who raised some difficult questions on bipartisanship and our current fiscal crisis. He felt like these questions deserved some answers. Here is the email and response:

Fred, I enjoy reading your comments.  I am inclined to agree with your observations, and those of Will and Brooks, about the problem with bi-partisanship, and the bad outcomes that can come from compromise of values.  However, I also agree with Jim Cooper’s so far unsuccessful attempts to broker some restraint on spending.  So I have a question and would value your point of view.  According to a DC based economist with Merrill Lynch who spoke recently at an investors meeting, the most recent US expenditure budget is funded 60% with tax revenues and 40% with new debt.  The broad categories of spending are roughly as follows:  5% interest on the debt, 13% on all governmental operations, 22% on defense, and 60% on “entitlements” (social security, medicare and medicaid payments, federal and veterans pensions, etc.).
My question is this, assuming the national goal is to begin reducing the national debt, where can we cut to reduce the expenditure budget by 40% so we don’t have to borrow any more money to run the government?  We can’t change the debt service — that is probably going to increase.  Even if we cut expenditures for all governmental operations by half, we would still be short with 33.5% to go.  If we were to cut the others (entitlements and defense) by 41% each we would be close to break even, with something left over to apply to begin bringing down the deficit.  But I don’t think budget cuts of that magnitude are wise, nor are they politically feasible and economically realistic.   So my question is, if the goal is to balance the budget, realistically, how can you do that without a tax increase coupled with significant cuts in expenditures — basically what Simpson-Bowles Commission recommended?


Fred’s response:

First of all you have fiscal reality and then political reality, the dimensions of  which will be largely affected by the Nov. elections. That aside for the moment, I think it will be extremely difficult to balance the budget in short order. The debt is too large and the economy and the politics can’t take it. And it’s not necessary. What is necessary is that we start down a path of spending reductions and stick to it. We’re going to have to do a lot of things right for a long time. Not even one new administration can do. It is going to require bipartisan leadership if we’re ever going to deal with the entitlement issue and a by-in by the American people,as well as the first two branches of govt.. Unfortunately we have not demonstrated that we can do that. My criticism of bipartisanship is because of the way it has been used–as a way to exacerbate the problem, instead of solving it. So if we can solve the politics of it, how do we address the debt problem?  Willie Sutton is still right. you gotta go where the money is. That’s entitlements. No reform plan effects current or near retirees but the payout path for the future is unsustainable  and 10,000 people are retiring a day. But there’s no area that should be immune from at least modest cuts. But we cant cut our way to prosperity and a balanced budget either. We must have sustained growth in order to achieve these goals. This is where tax increases hurt. Especially income and cap gains taxes. In the first place, the govt. never gets the revenue it projects from a tax increase. They collect about the same amount of revenue, as a percentage of the economy, with a lower income tax   as they do with a higher one. With a higher rate they just get a bigger piece of a smaller pie. It’s more of a political matter than a fiscal one. I do think Simpson-Bowles was a good start though not perfect. Note, they actually proposed lower income tax rates, while raising some revenue elsewhere. It even had bipartisan by-in. But the president backed away and chose demagoguery instead, which I think makes my point.Finally, there is more than one way to skin this debt cat. That’s not the problem. The problem is still the lack of political will.   Good to hear from you.

- Fred Thompson

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