Making Tough Decisions to Repair Our Fiscal Future
posted on 2010-06-29
Making Tough Decisions to Repair Our Fiscal Future
By Dan Cofall
For years there have been voices pleading, begging, and screaming to be heard above the din of Keynesians espousing the philosophy that goes against all things fiscally rational and embraces the politically motivated logic of successfully and indefinitely spending what you have not yet earned.
I remember my early courses in economicswhere the Keynesian philosophy was sacred ground. If you just made an oblique reference to Keynes in an exam, you were assured of a "gentleman's 'C' ". I truly don't remember any reference to the Austrian School of Economics or even the School of Cause and Effect, for that matter.
I never quite grasped the complexity of economics. It always seemed that this complexity was self-inflicted and arose from the need to encourage increasingly tortured theories that would support "growth-oriented" monetary and fiscal policies. Maybe it's just me, but the Federal Reserve always seemed to be running point for these edgy rationales -- the "Substitution Effect" and "Hedonics" come immediately to mind.
It was always about pulling the future into the present. Payday loans, reverse mortgages, life settlements, negative amortization loans, property tax loans, debit cards for your 401(k), paying a mortgage payment with a credit card. And this is just on the consumer side! The art of financial engineering came on the flip side with securitizations and writing financial performance insurance without any reserves. Then there's the government's contribution with unfunded mandates, guarantees based on nothing, and social engineering legislation that resulted in nothing but Hobson's choices for financial institutions.
Accelerate growth and you get elected, get a bonus, or get to keep your job.
We long ago abandoned any pretext of actuarially sound fiscal and monetary policies. Apparently, sometime early in the 1930s and again in the mid-60s, a fiscally punitive virus swept the nation, wiping only the brightest economic minds. Who could have sold or, for that matter, even envisioned something as unsustainable and unstable as Social Security or today's federal, state, and local employees' retirement plans? It's as if the greatest salesman in the world was the pitchman. I imagine that it went something like, "Okay, Mr. Smith, here's how it works. For the next 40 years, you pay me each month and, when you die, I'll give it back to you -- well, most of it." Then, about every 15 years or so, someone comes up with the bright idea to add new groups of beneficiaries and, to top it off, add more unfunded benefits for all. There was absolutely no regard for algebraic simplicity. I don't need Quants to tell me these things are bad.
Well, the Keynesians have finally succeeded in sucking virtually the last drop of blood out of our fiscal future. We've "securitized" everything that moved. We've dragged, kicking and screaming, every dollar of future income back to today; we paid huge bonuses and elected many arrogant, ignorant, and corrupt politicians. If it has an income stream, securitize it. If it can be leveraged, borrow against it. If you need votes, promise anything then kick the can. If you need more money, print it. Borrow first, tax next, and always fall back on monetization to cover the shortfall. Blame it on the other guy. Tell the lie long enough and it becomes the truth.
One problem, though, is that someday everybody runs out of "tools" to deal with a problem. Math is a sticky thing. We should have guessed that something was up when "governmental accounting" was created with only the most tangential reference to a balance sheet. I don't recall the word "accrual" in their lexicon.
Well, someday is today. We have a certified tax cheat promoting profligate spending and monetizing as a cure-all to folks at the G20. Profligate spending in the face of a world seeking fiscal contrition is, at the very least, uncomfortable. In the face of all that we now know about our fiscal condition, our Treasury Secretary told them to ignore 4,500 years or so of history. Spending cures profligacy! Printing cures saving! Give him the President's Nobel Prize because we can now wipe out world poverty if we can just manufacture enough money.
Truly, is there no sense of decency that acknowledges that mistakes were made and that debts must be paid? Is there no greater insult than when there are only two of you in a room, one of you is a thief and the other guy is working the room to convince you that you did it?
Please just stop the insanity and accept the simple solutions. One thing I know is that Americans will always do what's right and necessary once they're presented with the facts and the cure is clearly explained. Truth is the 12-stepper's first step. Tell folks why we must endure some lifestyle changes to provide a more viable future for our children. We did it during WWII. But our enemy was clearly defined and failure meant the unthinkable.
Define our enemy. Stand up and point your finger at those in positions of power who advocate profligate spending and prey on the uneducated, Republican and Democrat alike. Should you question your ability to discern truth, pull the challenger lever. Those good folks we lose are most assuredly outnumbered by bad folks.
Optimism courses through my veins. It's this very optimism that gives me the strength and determination to host a two-hour radio show daily, write and speak, plead, beg, and scream to all who will listen that there are solutions, but that our current path is surely dark and pungent. I'm optimistic that I'm right that Americans are smart and that we'll act for the good of all. I'm optimistic that Americans will dig deep into their souls and find the strength and intestinal fortitude to choose the right path, no matter how daunting. Should we not do so, and quickly, others will choose our path for us.
There are three paths.
Path One is our current path. It ends badly. First comes the deflation. Then come the overt monetization, and then the crippling hyper-stagflation destroying generational wealth. History is unambiguous and gold is its barometer.
Path Two acknowledges that Ben Bernanke didn't get his nickname "Helicopter" for no reason. It will occur to all that the only way to increase the velocity of money is to give it directly to individual taxpayers. No bank loans. No biased bailouts. No "targeted" stimulus plans. Refund to each taxpayer what they each paid last year in all federal taxes. It would cost about $1 trillion, far less than what we've already spent on nonsense. It would help but it wouldn't be the best solution. Surely it beats taxing and regulating ourselves into those who history is written about and not by.
Path Three is the acceptance of transient lowered financial expectations. Debts must be honored. Costs must be cut. Pensions must be amended. Value must be rethought. Those who have paid into systems must accept less to preserve the future, including private, local, state, and federal pensions, Social Security, and health services. But, simultaneously, prepare the country for future success. Private-sector job growth must be enabled by lowering corporate taxes, as virtually all countries are (corporations will pass taxes on to the consumer anyway), and reducing red tape. Encourage investment by allowing all corporate expenditures to be immediately deductible. Jobs follow investment. Government spending can't create wealth or be sanitized by some capricious "multiplier effect". Even the IMF just said that $1 of government spending equals only about $0.70 in benefits. Don't allow the tax cuts to expire (and stop pejoratively calling them "the Bush Tax Cuts"). Stop assuming that a public-sector job is as good as a private-sector job. Make things and do things that people want, tax it very little, and watch worldwide investment pour in.
And as a last thought, encourage immigration. Provide paths to citizenship. Do it now. Remember that we're not an immigrant nation but a nation that welcomes talented immigrants. (Why are folks called illegal immigrants here and refugees elsewhere in the world?) Welcome the best from every country, not the worst. We're not a refugee state. Americans wouldn't have been first to step foot on the moon without the German brain trust that immigrated to America after WWII. There's no open-border social imperative anywhere in the world. Countries pay big bucks to close their borders, actually. Our greatest hope today rests in our ability to return to educational and innovative preeminence lest we affirm that many of the jobs we off-shored as being too good for us were really our highest and best use of our workforce today. Decades ago, we had to support our "lifestyles" so we substituted the availability of cheap credit for quality educations and the results of that social experiment are painfully evident.
May I now humbly suggest that we embrace excellence and stop rewarding mediocrity? That includes our political and financial leaders, who I think will pay attention this fall.
Dan Cofall was a Professor of Finance at the University of Dallas Graduate School of Management for more than 13 years. He is also the Managing Director of Square Rock, Ltd., a company he founded in 2004 to provide financial advice to US-based debt buyers.