28 Jan 2011 The Problems with America

Common sense as defined in the Encarta Dictionary is “sound practical judgment derived from experience rather than study.” In his 1776 treatise Common Sense, Thomas Paine used plain language to speak to the common man and woman in America challenging the authority of the royal monarchy over them. For the next few minutes, to the extent possible, try to suspend influences that pull you away from common sense thinking; such as politics, media, and persuasive speakers. 

America has a debt problem

As an American, your share of the national debt is $45,400 right this moment. But we know that not every American pays his bills or carries his load. So let’s look at the debt from the perspective of those who do. According to the IRS 85% of taxes were paid by the top 25% of wage earners in 2007. For those carrying the load, the share of national debt is roughly $3.1 million each. If you make more than $75,000 you are a member of this elite group. By the way, if you were asked to repay it over the next 30 years at 4%, you would need to come up with an additional $180,000 a year. Better get to work!

Economists look at the national debt as a percentage of the gross domestic product. Today the government announced that GDP rose at an inflation-adjusted annual rate of 3.2% in the fourth quarter. Yet even with faster economic growth, the debt will eventually begin rising faster than the economy can pay it.

The national debt last peaked at 121.7% of GDP in 1946 due to the expenses of WWII.  Subsequently it fell to about 33% of GDP in 1980, and then roughly doubled to the 60% range during late 70’s through the mid-nineties. After hitting 67.3% in 1996, a few rare budget surpluses during the tech boom drove the national debt back down to about 57% in 2001. Since then, however, deficit spending of the last decade has taken the average back up over 70% of GDP.

The debt explosion comes essentially from the mother of all government bailouts in reaction to the worst recession since the Great Depression and to the bailouts of banks, insurance, and mortgage companies. But as a matter of common sense, we know that the debt problem can’t be fixed until we solve the spending problem.

America has a spending problem

Since the 1930’s the federal government has taken an increasingly active role in the nation’s social problems. However, centralizing social welfare programs does not make them more efficient. It makes them inherently less efficient. Bureaucrats in Washington know very little if anything of the needs of people living in Arizona or Tennessee, yet they treat them all the same. They know nothing of the state or local services provided by churches or other organizations which are infinitely more capable because as locals they know the real needs and how to best align scarce or limited resources to meet them. They also know the deadbeats – those who are capable of producing, yet find scamming the system easier.

Forty years later, in the late 70’s there emerged this idea that the government could ‘fix’ any problem the private sector threw at it; from busted Savings and Loans, to massive hedge fund failures, to dot com crashes, to huge bank failures. This idea is nonsense from a common sense perspective.

In a capitalistic model, businesses are started to make profits. Risk is the great regulator. In order to survive, businesses manage the amount of risk they are willing to take against the profits they expect to make. By effectively ensuring the largest of these businesses against failure, because they employ too many people, the government essentially incents the managers of these businesses to take even greater risks next cycle, virtually guaranteeing future crises.

The three largest social drains on US resources are Social Security, Medicare, and Medicaid. 36% of last year’s spending in the federal budget went toward Healthcare and Welfare. The next largest budget item was defense at 23%. Problem is, the first two items have become rights in the minds of many in this country, and rights aren’t easily taken away.

There are all kinds of rights, legal rights, natural rights, claimed rights, liberty rights, negative and positive rights. But for the sake of this common sense discussion, let’s consider whether healthcare is a right or not. The liberty right definition is a freedom or permission for the right-holder to do something, and there are no obligations on other parties to do or not do anything, such as free speech or the pursuit of happiness. Under this definition, I am not obliged to pay your healthcare. Yet under the claim right definition when social welfare services are provided, citizens have legal claim rights to be provided with those services. Yet I cannot find in our Constitution a bridge between the two rights that require me to pay for your healthcare. But today, if I don’t, I go to jail. And any politician who suggests reducing social spending likewise faces a shortened career. Are we not right back to the risk argument for businesses? If the government pays for healthcare, why do I need to work for it?

Solutions?

Like it or not, our debt and spending problems will be improved or made worse by politicians and by ‘we the people’ who elect them. Common sense tells us that the solutions are not in greater spending or higher debt, but rather in reduced and better-placed spending, in allocating scarce resources where they will do the most good to ‘protect and defend’ the American people.

Sacrifices and tough political choices will need to be made that transcend personal and party gain. Social programs that aren’t needed, or that are duplicated many times over, or that provide help where it should not be provided must be ended. They waste money, but infinitely more important, they waste lives. Defense spending should be downsized to protection of our country, not policing the rest of the world.

Businesses should be intelligently regulated. The government should stimulate business and hiring generally by keeping taxes simple and low. Businesses must be allowed to fail, taking the jobs with them when they do stupid things. Employees have responsibilities in doing the right thing just as their managers do.

A balanced budget amendment may be a good start at reigning in government spending if it provides sufficient flexibility for unforeseen emergencies such as natural disasters and war. Term limits might also be a good measure to end professional government. Simplifying the tax code is a no-brainer.

The clear message is that our way back is not going to be easy. But more importantly, it is not just Washington’s job, but ours to oversee them and to pitch in with active morality, not morality-by-proxy. We must pay attention, we must let them know we are doing so and we must act when the need calls.