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5-5-5, Castor Oil for the Budget Impasse

“Everyone Talks about the deficit, but no one does anything about it.”   (With apologies to M. Twain)
It’s that time again, when the thoughts and conversations in our nation’s capital turn towards debt.   Actually, our government is always discussing debt, usually in the context of spending more tax dollars on more projects that may or may not have any impact on the people that are being taxed in the first place.
Republicans are touting a plan that will cut 6 Trillion dollars in the next decade; the Democrats are forwarding a plan to cut 4 trillion over the next decade.      Both parties are also facing the need to raise the government borrowing limit from 14.3 Trillion dollars to whatever level will allow them to kick the can down the road another 6-12 months.   Actually, they will probably try for 12-15 months to put it smack dab in the middle of the next presidential race.
Yeah, they are serious all right.
Both the Republican Plan and the Democratic plan suffer from Washingtonitis, that myopic view that GDP will rise at nearly 6% per year, taxes will increase by 10-20% per year and everything will be right with the world.    Man, that is some good Hopium that they are smoking up there.
A perfect example of just how well the politicians can control the budget cutting ax is the recent touting of saving 38 billion dollars in spending, which when the smoke cleared and the mirrors were taken away, amounted to just 353 million dollars.    Less than 1% of the touted savings.    Yeah, that’s really taking the budget cutting ax to the table (is that a nick I see, on the axe?)
In order to tackle the greatest problem facing our generation (outside of nuclear fallout, terrorism and environmental degradation), we have to acknowledge that our current system is over bloated, out of whack, out of step and over-reaching in intent.    Nearly a third of our budget “income” comes in the form of payroll taxes that are supposed to be building up to take care of Social Security.   Instead, these funds are being absorbed as they arrive and turned into Treasury Debt, backed by the full faith and credit of the Federal Government.
That and a silver dime will get me a Mountain Dew in 20 years.
So when we discuss the budget problem, we have to acknowledge that it is worse, much worse, than we have been led to believe.    Back in the last century, when they raided the Social Security Lockbox to help “balance the budget”, it was with the understanding that the government would make good the IOU’s that the money was being replaced with.    In actuality, all we did was trade one fiat with another.    The Social Security payroll taxes are 4/10th’s of the federal budget income!      Another 40% is the income taxes, which means that people who pay taxes are funding more than 80% of the yearly budget.    Guess who pays just 9% of the income?    If you guessed Corporate Taxes, you would be correct!
Of the 865 Billion dollars that Social Insurance taxes bring in, 701 Billion is scheduled for Social Security payments.    Medicare and Medicaid account for another 793 Billion.    Our “contract” with those who have gone before us in the work force amounts to nearly 1.5 Trillion dollars in spending.    That is almost 75% of our total revenues!     This is the reason why no plan can work without cuts to the social part of the spending pie.      And if you add what is called “income security” and includes such programs as Food Stamps (SNAP) and unemployment, family support and foster care, etc, that’s another 438 Billion dollars or just about the entire revenue stream in just Social Programs!    Our envisioned “safety net” has become strangle weed and is suffocating our national budget!  
National Security spending is the other “large” item on the expenditure list, absorbing some 530 Billion dollars.    But when you add in the rest of the “security” items, Homeland Security, Veterans Affairs, State and International Programs and Energy, the bill jumps to 682 Billion dollars.
All these programs show why spending is out of control and not likely to be corralled by the politicians blowing smoke.   All the savings being touted by both parties are the results of “savings” that would occur IF we all get to see paradise by the dashboard lights.      That is not going to happen because of the very nature of our chaotic existence.     We cannot go 10 years or more without some major occurrence that would negate the very hypothesis of budget cutting.
These “expectations” by both parties assume (and we know what happens when we assume) that revenues will double by 2018, the majority of that increase will come in the form of Individual Income taxes which are expected to rise by 148%!      Since Republicans want to cut taxes for the wealthy, just how deep into the average taxpayers pocket are they planning to reach?     Is this some new way of taking a person’s socks off?
All the budget projections from both parties are full of high expectations for income and lowered expectations for spending.   Neither uses realistic assumptions.    All assume massive growth in individual income taxes.    All assume spending growth that is under 7% per year or less.    None will even begin to address the 14.3 Trillion dollars in national debt that is a ticking time bomb waiting to go off at the first sign of a rise in interest rates.
How responsible are the budgetary figures that both parties are playing with?    Since 2007, revenues have underperformed expectations to the tune of 1.5 Trillion dollars in three years.   Spending meanwhile was 900 Billion dollars more than expectations for a total miss of some 2.4 Trillion dollars.   And that was for just three years!     What we added to the Deficit was even more mind boggling.   In 2007, the budgetary expectations were that we would see a yearly surplus by 2012!     Instead, we added that 2.4 Trillion dollar miss to our outstanding obligations and will add another 1.4 Trillion by the time we reach September 30th of this year.
So given the track record of just the last three years, how can we expect the politicians, who can only produce phone book sized budget proposals (and that’s just the corrections) to do the right thing?    And what is the right thing to where people don’t feel like they are being singled out to deal with the entire problem?
5-5-5
So now we see the problem, how about a sensible proposal for a path to put us back on track?    Unfortunately, like the political proposals already circulating, it assumes that nothing major crops up in the next five years, but it would at least spread the pain out and put us on course to finally begin to deal with things.      But one has to understand that nothing is sacred and many things will see cuts that will impact every American.
Five Percent spending cuts, Five Percent Tax Hikes for Five Years, a 5-5-5 proposal.    We are 50% apart from what we bring in through revenues and what we spend.    Starting immediately, every program, every department, every federal employee will see a cut of five percent.     Across the board, tax rates will rise five percent for all classes and businesses.      These changes will take place every year for five years until our revenues balance the spending.     It is draconian.   It is a hardship on everyone, especially the poor.    It will hamper our overseas response in a military sense; it will impact our seniors, people who are unemployed and people who are on food stamps.     It will impact the disabled, it will hit the struggling homeowner and it will not be easy.      The hard tasks seldom are.      It will not reduce the federal deficit, but it will lay the groundwork for balancing the budget in five years.   We will still add 3 Trillion dollars to the deficit before the balance is reached.   But it will be reached and produce a true surplus in the 5th year, so we can begin to retire the national debt, not add to it.
Congress is not about to cut their benefits, but it is time for them to be cut.     We were never expected to have lifetime politicians, but rather citizen-politicians who returned to their communities after a few years of service to the country, to live under the laws they created.    We have a government that is reaching into too many lives, touching too many people, intruding into too many personal decisions.   Do we really need 15% of the population relying on the government for food assistance?   Whatever happened to personal responsibility?
Current expectations for revenue income in 2012 and 2013 are absurd, as are expectations that spending will remain steady at 2011 levels through 2013.    Our National debt (that 14.3 Trillion number that Congress is debating raising) would increase to at least 15.1 Trillion by September 30th, the end of this fiscal year, surpassing the national GDP which is expected to amount to 15.034 Trillion in 2011.   That will happen this year, not within the next decade!     All the discussions about how indebted we are will not amount to a hill of beans once we surpass that level.     It will make the journey much more difficult, the burden that much harder to share.   Nothing we can do will stop that from happening now.
I said earlier than the plan was predicated on nothing serious happening in five years.   No massive natural disasters, no energy crisis, no new wars, no new fiscal malfeasance.      We need no new bailouts, no black programs, and no new space goals.    We must get our fiscal house in order, we must curb our government spending and we must take seriously our obligations at home, before our obligations in the rest of the world.     We can no longer make the world safe for democracy; we must consider making our country solvent, for our children and grandchildren.      To do that, we must stop the giveaways and trickle downs and begin planting the seeds for the future.     We must begin to rely more on ourselves than on our government for our lives and hold those who refuse to be responsible, at least accountable for their actions, whether they are a bank, a company, a politician, a celebrity or an individual.
The past four years we have done things the wrong way and the hole we have created is vast.    It will take a vast undertaking to stop digging that hole and begin filling it in.    To hold course, steady as she goes, will cost us at minimum, another 6 Trillion dollars in National Debt by 2018.    To hold to a Republican or Democratic course will still add Trillions to the National Debt by 2018.   The 5-5-5 would at least hold out hope for bringing things back into the black.   Under the 5-5-5, the following could be expected.  
2011
2012
2013
2014
2015
2016
Spending
3.708
3.523
3.346
3.179
3.020
2.869
Revenue
2.228
2.339
2.456
2.579
2.708
2.844
deficit
1.480
1.183
0.890
0.600
0.312
0.026
Total Five Year Deficit
3.011
Click to enlarge
 
Yes, this doesn’t address the details and we all know that the devil is in the details.   But the figures speak for themselves, at least mathematically.     Perhaps what we all need is someone who is not a politician to develop the budget and make the cuts that are too political to make.    Maybe that is the answer and the revenue side will take care of itself.       There are more than just Republican/Democratic proposals out there, but darn few will ever see the light of day.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.