A Simple Government (8 page)

As things are going now, Social Security is expected to
run out
of money by 2037. Let us pause. . . . That is only twenty-six years from now. Most of you are probably old enough to know from experience how quickly that time will pass. Where will you or your children or your grandchildren be when that happens? Let’s also note that Social Security, right now, has unfounded
liabilities
of about $70 trillion. That’s right.
Trillion
. (You haven’t yet forgotten that illustration, have you?)

What all of this means is that we must do everything we can to delay making payments to those who are too old to have their benefits reduced. Tax incentives could encourage such people to keep working beyond retirement age, letting them keep more of what they earn. (I don’t know about you and your friends, but I find that most people get bored after a few months of the “golden years” and want to work at something in order to feel useful. Rocking Chairs “R” Not Us.) Also, benefits could be made higher the longer the recipient waits past age seventy to retire; currently, they stop rising at that age. Finally, some people don’t need Social Security at all. Let’s offer them the option of a tax-free, lump-sum benefit payable at their death to their chosen beneficiary. This provision could delay some payments for decades.

The picture is hardly brighter with Medicare, which is expected to become insolvent by 2017 and currently carries unfunded liabilities of about $38 trillion.

Furthermore, in order to help pay for ObamaCare, Medicare is scheduled to be cut by $500 billion over the next decade. If that kind of cut is actually made (a huge
if
), shouldn’t the savings be used to extend the life of Medicare rather than to pay for this new (and widely unwanted) new entitlement?

There are potential answers readily available. For instance, we could switch to vouchers for Medicare; that way, recipients would be able to buy private insurance in the marketplace. Also, we should recognize that, just like Social Security, the Medicare program has not kept pace with the increases in life expectancy. We should raise the age of eligibility. I know that’s not politically smart to say, but I promised you I would do my best to talk sense in this book! This society likes to boast that age sixty is the “new forty,” because people live better and longer. Fine, so if we feel as good as we did at forty when we turn sixty, shouldn’t we be able to stay active and productive by continuing to work for a few more years? That would make it even more likely that the benefits will be there waiting when we reach the age or condition when we really do need them.

Our economy has tanked precipitously, but there is a very simple way to bring it roaring back. The key is jobs. When the economy slows and unemployment rises, not only do tax revenues drop, but government spending increases because of the increased demand for safetynet items like unemployment insurance and food stamps. This means that the government is forced to spend more even as it takes in less.

But while the deficit can expand very quickly, as we’ve experienced, it can also contract very quickly. When people both have jobs and feel confident they will either keep them or have no trouble finding new ones, they (1) spend more (remember, 70 percent of our economy is driven by consumer spending), (2) pay more to the government, and (3) take less
from
the government.

Even if Ben Bernanke is right that we can’t entirely grow our way out of the current economic mess, we must wring every last drop out of growth that we can. That means creating as many jobs as we can, and job creation requires funds for new businesses to start up and existing businesses to expand. Even though small businesses create about 70 percent of our new jobs, they have more trouble getting credit than medium-sized and big businesses. They are therefore affected more seriously by our growing deficits and debt, which soak up available capital and drive up interest rates.

According to the Kauffman Index of Entrepreneurial Activity, all of the approximately forty million
net new jobs
between 1980 and 2005 were created by firms that had been in business for only five years or less. They also found that if we take firings and layoffs into account, older companies added almost no net new jobs during the same period. Yet it’s harder for small start-up businesses to get financing than it is for established companies; moreover, because of the greater risk of failure, they have to pay higher interest rates just to get off the ground. As long as the government continues nutty policies that hinder or hurt small businesses, the existing factors do not bode well for job creation.

It doesn’t take Nostradamus to predict the future we’re facing. As the interest on our national debt pushes interest rates for the private sector ever higher, many businesses will never get started, and others will be unable to grow to their full capacity. In other words, there is really an inverse correlation between our national deficit and our future economic growth. Unfortunately, it couldn’t be simpler to understand: As interest rates rise in order to finance growing government debt, fewer and fewer new jobs can be created, and that situation in turn depresses revenues and adds to the debt, which in turn pushes interest rates up even higher.

Why not just “tax the rich”? After all, we certainly hear that a lot from the White House and from a certain side of the aisle in Congress. But we have to consider one simple fact: The top 1 percent of American taxpayers now pay more than all of those in the lowest 95 percent combined. What more can they be expected to contribute? Meanwhile, about half of us pay no taxes at all—a very unhealthy situation. Almost everyone should be contributing at least something to the pot; those who don’t contribute have little reason to care about what is done with everyone else’s investment.

I’d say that representation without taxation is as threatening to our national character as taxation without representation. Those who don’t pay taxes—that is, who are not pulling their weight in the community—have no real reason not to vote for more and more government services. And that will lead to more and more dependency, making the country more and more like a European welfare state. At times, a safety net is essential, but it must not be used as a hammock that can lull us into lethargy. This country was built by personal responsibility, work, and risk taking.

Maybe you personally don’t have a philosophical objection to raising taxes. But practically speaking, there is no way we can tax our way out of the current situation. As taxes are raised, growth of the GDP is cut, basically killing the geese that lay our golden eggs.

So what’s the solution?

When you come down to it, the answer is very simple (as the title of this chapter hints): Do not spend money that you do not have. Of course, even the simplest idea can be extremely difficult to execute. After all, temptation has been a human problem since Eve ate the apple in the Garden of Eden. It was certainly enticing a few years ago, if you were living in a modest tract home, to be assured that you could easily afford a fancier house in a more upscale neighborhood, even if, in your heart, you suspected that you really couldn’t. Too many of us, of course, gave in to that temptation. Now that some of us have lost the big house and have had to retreat to a tiny apartment, that tract house looks pretty good.

Fine. You learn from mistakes; you move on and do better. You take a second job; you go to night classes. Instead of remaining chained to a credit card and its minimum monthly payments, you set a new goal of putting aside a year’s salary in savings. You strive, by becoming the most conscientious and productive person in your office or plant, to be the very last person who would be fired. As you continue honing your job skills, you add new ones to make yourself more marketable. Working hard and working smart won’t just create real prosperity for you and your family—as opposed to the illusion of prosperity a bubble creates; they will help create real prosperity for the whole country.

Americans don’t have ranks and titles, and most of us like that. Still, some of us try to distinguish ourselves from the herd by showing off our “stuff,” our houses, our cars. In the run-up to this crisis, many of us probably looked at our neighbors and wondered how they could support their lavish lifestyles: How could they afford that top-of-the-line remodel, not to mention those luxury cars, private-school tuition, and trips to Hawaii and Europe? Then, as we watched their house go into foreclosure and saw them slink away, we realized the truth: They really had never been able to pay for all of those nice, shiny things. They were overleveraged big time. By using what they thought was equity in their house to buy toys, they were actually using their Visa to pay their MasterCard bill. Instead of thinking,
What’s wrong with us?,
since we couldn’t seem to make two plus two equal eight, as they did, many of us who did not get overextended now feel pretty darned smart. We learned that not only is material wealth less important than we thought, but it is also a trap. From the errors of the high rollers, many of us have gained new priorities; we’ve learned to distinguish between real needs and frivolous wants. Let’s join together and promise not to forget those lessons anytime soon.

Because friends, the party really is over. We have to sober up and pay for our excesses. We are entering—as we need to—a new era of reality and responsibility for our families and our country. Already American families have shown they understand this by adjusting budgets and lifestyles. So far, not surprisingly, government doesn’t get it: Our leaders are still cowering behind smoke and mirrors.

Most politicians already know everything I’ve shared in this chapter. The problem is not ignorance but their refusal to make choices that will be painful and politically unpopular. Everyone is aware of the coming crisis of unsustainable spending, deficits, and debt. But given the way our government functions, it’s likely that nothing significant will be done until that disaster is fully upon us. Once again, just as with the bank bailouts, policy will be made in the panic mode, rather than calmly and deliberately. In other words, when our finances finally crash into the iceberg, the outcome is unlikely to reflect wisdom or fairness. Instead, it will be a matter of who can get into the lifeboats first. You know who that will be: those who have the most clout and political power, who can spare themselves pain and inflict it upon someone else.

One risk we might run is that a frightened government will just print money in order to pay off its enormous debt with cheaper dollars. That will inevitably lead to inflation, or even hyperinflation. In the 1920s, a similar decision caused people in Germany to have to buy bread with wheelbarrows full of money. If you thought that was something that only happens on the History Channel, think again. And if you’ve ever heard or read anything about the 1930s, you know that things did not end well. What would be a windfall—a quick and dirty way out—for the government would be an unmitigated disaster for the American people. It would also upend our whole system: The government is supposed to work for us, not the other way around.

Do we want to imitate Europe, where the government takes care of you in exchange for very high taxes and reduced individual opportunity? Do we want to be coddled like that, or do we instead want to remain the people of responsibility who made this country strong and free? The social spending of European countries is not hindered by a military budget like ours, which accounts for almost half the world’s defense spending. Would we prefer to surrender our superpower status rather than repair Medicare and Social Security?

We built America by relying on ourselves, our families, and our neighbors—not on the federal government. To change our economic system to a European-style welfare state, we’d also have to change our culture. We’d have to abandon a heritage and a set of values that has worked well for over two hundred years, much more effectively than any other in the history of the world.

That’s why resolving this crisis is not just about money, about cutting this or taxing that. Rather, it is essentially about who we are. It’s about who we want our children and grandchildren to be.

 

 

 

 

 

I
t’s one of the great ironies of history that a beverage so thoroughly associated with polite culture—tea—would become a flash point in America’s struggle for independence. Wars have been fought over love, treasure, territory . . . but tea? Of course, what Americans have revered as the Boston Tea Party was in truth anything but, and what you may not realize is that it wasn’t actually a revolt against
high
taxes. In fact, the price of tea was actually reduced by Britain’s Tea Act of 1773 in an effort to prop up the floundering East India Company, which had a monopoly on tea sales to the American colonies. London knew of Americans’ passion for tea (sort of the eighteenth-century version of the near-tyrannical grip Starbucks has on us today!), so, in what you might call a corporate bailout King George style, the Tea Act reduced the taxes on the East India Company’s business in an attempt to support the long-standing trade giant. But as has been our own experience with corporate bailouts, the outcome fell short of expectations.

While reducing the overall price of tea for American colonists so East India could undersell illicit tea smugglers and regain its dominance of the market, prime minister Lord North left in place the Townshend duty—a tax of three pence per pound of tea—for the sole purpose of putting a stick in the eye of colonists, who were growing increasingly hostile toward taxation without representation in Parliament. Even some members of Parliament implored the prime minister to stop poking the bear in this way, but he would have none of it. He wanted to send a message. (An important footnote here is that Lord North also knew where the revenues of the Townshend duty went—to pay the salaries of Britain’s bureaucrats and administrators in the colonies. Without a paycheck, he feared they’d soon “go native.”)