John W, thanks much for this submission. Well written and informative says Big Al!

FISCAL IRRESPONSIBILITY

A response by John W. Robertson

I was listening to the May 24, 2012 Daily Rant on Korelin Economics Report, and
decided to have one of my own.

Most of us already understand the problems of fiscal irresponsibility today.
How — or is there — a way to get out of it? This is not the first time a large,
generally-affluent nation has faced un-payable debts. Seeking an internal-
solution that remains within a nation’s own control is desirable, rather than
chance an externally-forced one, such as would be the case if other countries
refused to buy any more U.S. Treasuries, a precipice we are walking near to
now. In the Daily Rant interview, Marshall Berol cites an article where fiscal year
spending by President Obama is attributed to President Bush (which you can
currently find at Investor’s Business Daily article “Claim Obama Slowed Spending
Shows Democrats’ Dishonesty”, http://news.investors.com/article/612501/
201205231830/claim-obama-slowed-federal-spending-is-false.htm). The article
is worth a read, but it also moved me to think about a similar time that deficits
and surpluses were attributed to a certain president: The year 2000.

BUDGET DEFICIT Vs. NATIONAL DEBT

There are still a large number of people who confuse (willingly, it seems) the
difference between a budget surplus with the federal debt. The year 2000 U.S.
federal budget, when all receipts from all sources were considered, recorded
a net $236.2 billion surplus. The total national (federal) debt accrued by that
time was $5.4 trillion (Source: CBO). Millions do not understand these simple
statistics, thinking the first to be the latter, an expedient fantasy for some.
Imagine then, how easily certain spinsters might find it to cite all borrowed dollars
spent in 2009 as the doing of just president “X” (Bush) who started the year in
office, even though president “Y” (Obama) finished the year in office – almost 11
months of it.

Not mentioned in the original IBD article or KER interview is the flawed precept
that whoever currently occupies the White House does not really matter.
President’s are not monarchs. They do not directly control all aspects of budget

spending. I chuckle, though soon afterward sigh, when I see comparatives of
what-happened-under-this-president or under-that-president. Looking at the
House and Senate majorities is typically much more useful, as frequently one or
both chambers are held in a majority by the opposite party to that of the reigning
president. For example, when Democrat Clinton was President, the Congress
was Republican controlled. Yet even this is too simple, as it doesn’t start to
consider the effects of unelected advisors, or kow-towing to party lines, and of
course, special interests. Simple comparatives don’t work, yet millions know only
to look at the current occupant of the White House. As an aside, the increasingly
wild use of Executive Orders are turning presidents into monarchs. Presidents
Obama and Bush together have created more unilateral Executive Order “laws”
than Queen Elizabeth has in British Commonwealth during her 60 year reign,
at least if one considers Royal Ascent a custom more than legal procedure.
And they say America won the Revolution! But no one is complaining about
Executive Orders.

THE LAST BUDGET SURPLUS

Since budget surpluses are a good thing, let’s look at some of the reasons why
the 2000 budget surplus happened.

•

BABY-BOOMER CONTRIBUTIONS – in their substantial peak earning years,
Boomers were largely the reason why the1990’s generated unexpectedly
high tax receipts, not only in the U.S. but in every nation with post WWII baby-
booms.

•

ACCOUNTING – this will be review for an enlightened few: Those
unexpectedly high tax receipts included Social Security and other trust
fund contributions such as the Civil Service Retirement Fund, Federal
Supplementary Medical Insurance Fund, Military Retirement Fund, and
several others. Funds not needed for the then-present year 2000 payouts
were re-directed towards general purpose budget items, rather than being
deposited as true surpluses into their respective trust funds or refunded to
taxpayers, an accounting no-no. Not even the Roosevelt Administration
had thought of this, but no one cared. The budget was being balanced for
the first time in decades and that was all that mattered. Most of you already

understand there is no money, and little trust, in the fund. It simply relies on
Social Security taxes that are collected each year to sufficiently provide for
all Social Security payments due to be paid that year — assuming there are
enough workers employed and at high enough tax brackets to provide the
needed taxes. But we don’t have enough Gaviscon to get into that now.

•

ECONOMIC CYCLES – the 1990’s almost had to boom, because of the bust
that preceded it. That’s a bit simplistic, but the double-digit interest rates
and inflation of the 1970’s was tamed after an arduous decade. Resolution
Trust finished working through the first housing bust, that of the 1980’s
(remember that one?), making property cheap enough to buy again. Even
in California. The internet and computerization made a huge difference in
productivity that we take for granted today, taking us from a monochrome,
IBM-clone world into an inter-connected, Pentium 486 Windows world.
This isn’t some wistful 30 second look at history (OK, it is). But those two
advances — communications and computing — blew the top off the average
worker’s productivity, and created a lot more output for a given unit cost,
while allowing Lean Manufacturing/JIT to really come into their own with very
accurate inventory systems. It also brought a lot of patentable knowledge
and skills into the mainstream, put to use for domestic employment before the
term “outsourcing” had been coined. Other factors, like Iraq War I and the
Reagan Administration’s beefed-up military spending had the usual M-I spin-
off effects.

•

STOCK MARKET BUBBLE – Repeat after me: a government can collect
higher tax revenues only when businesses and employees are generating
higher net incomes. Attributing a gradual rise in incomes over the period of
a decade to whoever is the current president is a senseless and odd way of
viewing things. Those who would try to do so have no grasp of cause-and-
effect, or worse, would rather disavow the contributions of all others to the
country and the economy, in deference to a single “chosen one”…a president
they like today. The 1990’s offered something extra-special, of course, where
some investors became too speculative but also very wealthy in the process.
The President, the Treasury, the Fed, ACORN, CALPERS and just about any
other group you can think of made a few bucks because of the stock market
bubble, either in a direct or indirect way, yet they did not contribute to the
fundamental factors that allowed businesses to grow. Giving them credit for

creating the windfalls they received is outrageous. Without regard to how
bubbles form and how their after-effects are reconciled, this was a key cause
of government surpluses at the time, and again this happened in both the US
and around the world. It was certainly not due to a single person sitting in an
egg-shaped office on Pennsylvania Avenue.

We are going to skip a few items like credit expansion, which had it’s apex after
year 2000, or changes to legislation, which probably helped foster the surplus in
the short term but also caused a disaster in the long.

WHAT DID NOT WORK

Since we accentuated the positive of what helped create a budget surplus above,
it’s probably worth noting what did not help create it.

•

IT WASN’T JUST US – most of the entire western world also enjoyed stock
market rallies in the 1990’s, buoying tax receipts and trade with countries
everywhere, even with non-western world nations. Governments typically
felt this new wealth to be of their own brilliance in economic planning, rather
than an effect of baby-boom demographics and the other points above. Being
whisked-away in escorted convoys and invited to conferences with great food,
while every word you speak is translated in real-time into 28 languages can
apparently deceive some into thinking they are smarter than they really are.
Hint: When other countries on different continents, with different cultures, and
different trading partners than yours, also have a budget surpluses, then it’s
just possible your surplus might not be due to your own fabulous policies.

•

WILLFUL MISUNDERSTANDINGS AND APATHY – disappointingly,
there were and still are a large number of citizens who want to credit their
governments of the 1990s for any economic successes and surpluses of the
day, believing said governments were the actual ones responsible. You will
know these people when they cite “Under president x, the unemployment rate
was 4%” or whatever economic statistic is being touted.

•

ONE POLITICAL SYSTEM WORKED BEST – nations both left- and right-of-
center all did well in the 1990’s despite having different ideologies, yet each

nation feels it was their own unique ideology that led to the good times. This
is ridiculous. All nations did well because of the “rising tide rises all boats”
effect, where the tide was demographics and a confluence of other cycles
noted above. We could get into a discussion about which nation had the
lowest unemployment, the highest stock market gains, or where the roaring
nineties really started, and the answers are interesting because they do point
to places with the freest markets. But the key point here is that a person
would have to be remarkably insulated to suppose that an international
economic boom was created by the intelligentsia creating their own domestic
political agendas.

WHAT TO DO

And so we come back to the original question…what would it take to get back
to a surplus budget again? I am convinced we could still do it if we wanted to.
Below are some steps similar to what other countries have done to shore-up
balance sheets, improve confidence, lower unemployment, and improve trade.

•

BALANCE THE BUDGET – This cannot be done in one or two years, but what
is important is announcing that a country intends to start balancing, and then
demonstrate that resolve by taking immediate action to prove it. This step
alone signals to trading partners that a country is serious about its economy,
trade relationships, and its future. Social Security and Medicare benefits are
big questions still, but remember that the promotion of fiscal responsibility has
the interesting effect of improving the chances for a real recovery, which then
makes it easier to sustain those promises into the future. However difficult
those choices may be, they are easier if the economy stands on firm ground.

•

PLAN FOR DEMOGRAPHIC CHANGES – A decade late and a few trillion
short, this problem is yet to be addressed. Some countries started to address
it while times were good in the 1990’s, and are pretty well-off because of it.
Canada, Australia and New Zealand are good examples. France, Spain and
the UK are bad ones. Social Security started with an (albeit overfunded) ratio
of 16 workers to every 1 retiree, requiring a 2% payroll tax, and was supposed
to stabilize around 8 workers to 1 retiree. Today, there are currently less than

4 workers per retiree, requiring a 12.3% payroll tax. By 2020, CBO estimates
put the ratio around 2 1/2 workers to every 1 retiree. In case you’re curious,
the payroll tax will have to be raised to over 20% to maintain the status quo
– assuming such a tax could even be sustained. There is not going to be a
happy answer – it will involve cuts and higher taxes, but the sooner decisions
are made, the easier it will be for workers and retirees.

•

ENCOURAGE BUSINESS ACTIVITY – Rather than list off a series of
business-friendly inducements, it should suffice to say we must carefully
consider what business owners say they need, and provide as much of that
as possible. Some of it won’t be possible, but much of it will be. Very few in
Congress or in your local State legislatures have actually started a business,
and as such, do not fully understand what it is like to jump surprising hurdles
placed unexpectedly in your path on a regular basis. Experience running
an established business doesn’t really count here, no matter how large
or small, because many of the initial challenges are already overcome, or
delegated to others. Creating a completely new product or service in the
absence of anything else previous requires a special skill. Speaking with
some experience, new businesses need certainty of tax policy and not 1 year
special exemptions meant to buy votes. Taxes on new start-ups could be
deferred or completely waived during the first 5 years, without any special
paperwork, or rather than just providing time-limited and complicated Section
179 depreciation expense (if you don’t understand what I’m talking about,
that’s the whole point – tax laws are terrible). Reducing red tape, such as has
been recently done with the U.S. patenting process in the last several years
is a good but all too rare real-life example of what a fledging business needs.
And so we come to a list of inducements after all. It takes real fortitude for
a small 1 or 2 person entity, often funded with a loan from a 401(k) or from
home equity, or after an arduous process with the SBA, and try to turn it into
3, 5 or 10 brand new jobs, which if successful, would provide plenty of taxable
revenue for government to subsist on.

•

PROMOTE STABILITY – After wars or economic shocks recede, a great
opportunity exists. After running with uber-efficiency through two stock
market crashes, a housing bust, and a financial freeze, the economy will
blossom when prices and the availability of raw materials become predictable
and stable. This point could be a long discussion, but as an example, the

increased efficiency of gasoline engines in the 1980’s, a result of the inflation
of the 1970’s, helped convince OPEC to keep oil prices lower, because they
realized there were workarounds and market responses to high oil prices.
The pendulum swung further than OPEC wanted, but $18/bbl oil prices were
the result in 1999, and this was despite the fact that demand for oil was strong
and increasing. That’s what can happen when efficiencies born-out of crises
meet price stabilization and the certainty of supply, particularly for inelastic
goods like oil and rare earth metals, or for “goodwill” assets like patents and
researched knowledge, which can be leveraged with confidence because the
stability implies less risk for turning such investments into new products.

•

RESPECT THE CURRENCY – Many of the above points are naturally
reinforced by treating fiat currency responsibly. Don’t borrow. Don’t invite
open-ended liabilities. Back the currency with asset and commodity reserves,
as well as other existing measures such as national productivity and GDP.

Unfortunately, we seem to be taking the opposite trend of all these ideas. It’s
too bad, because there’s still (just) enough time left the fix the problems that
lie in wait: The $15.9 trillion national debt overhang, and unsustainable Social
Security and Medicare liabilities. But we have to act very soon.