Nick Gillespie: How to Balance the Budget Without Raising Taxes or Cutting Essential Services

There’s a 19 percent solution to our debt and deficit problems.

Sen. Rand Paul’s (R-KY) new budget plan cuts $500 billion from the federal budget this year. Paul proposes cutting defense spending by 6.5 percent, saving $47 billion. But will his fellow Republicans go along?

Rep. Paul Ryan (R-WI) put forth a budget plan with $32 billion in spending cuts for fiscal 2011 last week, but even that plan let security spending grow. The Washington Post reports, “Under the GOP plan, agencies related to national security – including the Pentagon and the departments of Homeland Security and Veterans Affairs – would get a slight bump in funding, receiving an extra $8 billion compared with current levels.”

And other Republicans are even less interested in cutting defense spending.

Rep. Vicky Hartzler (R-MO) recently told the New York Times that “now is not the time to talk about defense cuts.”

“I will not support any measures that stress our forces and jeopardize the lives of our men and women in uniform,” said Rep. Buck McKeon (R-CA), the new chairman of the Armed Services Committee. “I will also oppose any plans that have the potential to damage or jeopardize our national security.”

Congressional Republicans say they’ll get around to holding a vote for the 2011 budget (the fiscal year started Oct. 1, 2010) during the week of Feb. 14. But as President Barack Obama and Congress start wrangling over raising the debt ceiling and hashing out budgets for 2011 and 2012, there’s really only one figure you need to keep in mind if you care about restoring the federal balance sheet to some semblance of sanity.

That figure is 19, which is the percentage of total economic activity or Gross Domestic Product (GDP) that the federal government can realistically plan on in terms of revenue.

Any budget plan that is predicated on the government raising more than 19 percent of GDP will only guarantee continuing annual deficits and out-of-control debt levels.

Federal debt held by the public, the amount the government owes to foreign and domestic creditors, has surged to $9 trillion, or roughly $29,000 per person. That amount doesn’t include the money the federal government has borrowed from other government accounts like Social Security or Medicare (that’s another $5 trillion). The speed of the debt increase is as dazzling as it is the product of bipartisanship. As George W. Bush took office, gross debt was $5.9 trillion and by the end of 2008, it was $10.6 trillion.

The mounting debt stems from massive spending increases and minimal tax receipts. In fiscal year 2010, which ended last September, the government spent $3.6 trillion while collecting $2.1 trillion, resulting in a $1.5 trillion deficit. As a percentage of the overall economy, spending equaled 25 percent of gross domestic product (GDP) and the deficit came to 10 percent of GDP, figures not seen since World War II.

These trends are unsustainable and threaten to destroy not only any sort of near-term recovery but the long-term economic growth that increases standards of living.

Any plan to bring fiscal sanity to Washington must be based on realistic projections of revenue and a bipartisan consensus on what cuts should be made. A successful plan can’t deliver a death blow to a nascent economic recovery by jacking up taxes and it shouldn’t immediately slash spending that many have come to rely on, especially in tough times.

What’s needed is a multi-year framework that will allow the government, taxpayers, and creditors alike to feel confident that change is both possible and deliverable.

As a first step, the president and Congress should consider a 10-year plan that will balance the budget in 2020 without raising taxes from their current rates, give representatives and taxpayers a say in what outlays should be cut, and still keep government outlays slightly higher as a percentage of GDP than they were in Bill Clinton’s last year in office.

There’s no secret to balancing a budget: You simply can’t spend more than you take in. Since 1950, revenue from all sources has averaged just below 18 percent of GDP. There are years where the number is higher — in 2000, revenues reached 20.6 percent of GDP — and years when it is lower — in 2010, revenues only amounted to 14.5 percent of GDP — but the average is tightly clustered around 18 percent of GDP. This level has been maintained despite all sorts of attempts to radically increase and decrease tax rates and other revenue mechanisms. Unfortunately, federal spending since 1950 has averaged just below 20 percent of GDP, which explains why our cumulative debt continues to grow.

The CBO projects that, if the current Bush tax rates, fixes for the alternative minimum tax, and other measures are kept in place, federal revenues will reach about 19 percent of GDP in a few years and then remain at that level. While that figure is a bit higher than the historical average, it is well within the bounds of reasonable expectations.

The CBO estimates that if spending isn’t cut, the federal budget will grow from $3.7 trillion this year to over $5 trillion in 2020 (all numbers are adjusted for inflation). However, the CBO says that total GDP in 2020 will be $19.5 trillion. That means that if the government wants to spend 19 percent of GDP, it should only spend about $3.8 trillion. So if we want to balance the budget in 2020, we need to cut about $1.3 trillion in projected spending (due to rounding, some of the figures don’t add up perfectly). If you spread that amount over 10 budgets, it comes to trims of $130 billion in each year of the next decade from projected spending increases (not from current spending levels).

For illustrative purposes, the following table spreads those cuts equally on a percentage basis over the six largest categories of federal spending. However, the cuts do not have to be spread across the board. Some categories could increase, while others are subjected to larger cuts. The table also shows what the total projected federal budgets would look if spending restraints are enacted.


Another appealing aspect of this plan — apart from its simplicity — is that it makes it very easy to design budget rules around it. The road is clear and Congress can adopt strict and credible budget caps for the next ten years that can’t be overridden without serious consequences.

David Osborne, the former head of Vice President Al Gore’s “Reinventing Government” task force, is a believer in what he calls “budgeting for outcomes.” As an advisor to various cash-strapped state and local governments, Osborne pursues a two-step strategy to fixing out-of-whack budgets. First, and most importantly, you set “the price of government.” That is, you figure out how much money you can spend in a given year. When it comes to the federal government, we have a strong sense of how much revenue will be available based on the past 60 years of experience and the CBO’s projection: It will be around 19 percent of GDP.

The next step is to clearly establish the top priorities of the government. In rank order, what are the most important things that the federal government needs to be doing and what are the things it can pull back from? For example, Sen. Rand Paul’s plan cuts federal education spending by 83 percent while cutting defense 6.5 percent. Do taxpayers share those priorities? The strength of Osborne’s approach is that it builds consensus even as it makes government decision-making more transparent.

Once the cost of government and its rank-ordered priorities are established, spending decisions become much easier both to make and to defend before a voting public. And the public isn’t shrinking from the conversation. Indeed, a January poll from CBS News found that 77 percent of Americans favor balancing the budget by cutting spending, compared to 9 percent who wanted to raise taxes. Majorities say they in favor of means-testing Social Security, reducing farm subsidies, and cutting defense spending. It’s time to those sentiments to the test. If we don’t, we’ll be facing higher taxes, higher spending, higher debt, and almost certainly higher interest rates and dollars that are worth less and less.

It’s well past time that the same elected officials who got us into the budget mess not only join but lead the conversation on restraining spending. As they pursue a 19 percent solution to the nation’s budget problems, they can always point out that in 2000, a year most Americans remember fondly, the federal government was spending just 18 percent of GDP.

Nick Gillespie is editor in chief of and Veronique de Rugy is an economist at The Mercatus Center at George Mason University. A version of this article will appear in the upcoming March issue of Reason magazine.

Read more: Debt, Deficit, National Debt, Federal Deficit, Federal Budget Deficit, Economy, Budget Deficit, Paul Ryan, Politics News

Pearl Korn: Just Whose Economic Recovery Is it, Anyway?

After hearing the SOTU speech, no one can have any doubts about where our president’s political proclivities lie. Fully on display were his elitist credentials as a conservative and pro-business president who is all too willing to throw “ordinary people” — a/k/a hardworking and struggling Americans — under the bus. At the end of the speech, even weepy Boehner and hard-nosed McConnell must have found a great deal to cheer about. Were it not for their recent efforts to repeal the contentious health care reform bill, they would probably have celebrated the event with Obama in a conga line around the Oval Office wearing party hats.

The president offered a glowing report of an economy on the mend, for which he, of course, took credit. Offering up tax cuts for corporations and aid for their research and development programs so even more profits could be realized. I, personally, would have liked to have heard more about who those good souls are who would be on the receiving end of this support, and how giving them more of our blood and treasure will in turn aid the economy. “Competition” was mentioned no less than 9 times and “jobs” 32 times as the president announced our reentry into the global economy full-throttle. With corporate profits at an all time high, it would seem tax increases rather than tax cuts should have been put forth, at least as an option. As for those who can’t find work, the conventional thinking in DC appears to be that it is because they lack the necessary educational skills, and so it is their fault. Americans will have to be better educated in order to compete with workers in India, China and South Korea who are paid pennies on the dollar in comparison. Yes, Mr. President, big business shipped all those jobs overseas because we’re too stupid.

So, continued Obama, “the economy is growing again,” and he has “broken the back of the recession.” Yes, the financial sector, among other corporate entities, is thriving due to the generous bailouts provided by the American taxpayer — corporate welfare handed out to those who created this mess in the first place, both at home and abroad. The Republicans, and now the Dems, it seems, have shown themselves to be little more than lackeys for the elites, two parties against the people, creating a more disenfranchised America. Welfare continues to be provided for the rich, while safety net programs for those who need it most are offered up for the chopping block.

Only 36,000 new jobs were created last month, when 148,000 had been predicted. Could the administration’s continued support of NAFTA-style trade agreements that do not create jobs at home be part of the problem? Since the 90’s and the introduction of NAFTA, we have lost 5.1 million jobs and 46,000 factories have closed, contributing to our ever-growing trade deficits. Obama’s recent China agreement is a disaster, now to be followed by a Korean trade agreement projected to cost another 159,000 U.S. jobs. This is another of the President’s campaign promises that seems to have gone missing: over-hauling America’s “free” trade agreements, starting with NAFTA.

Our standard of living is now below that of several European countries and Japan. Wages have been flat or decreasing for decades, Mr. President. Where in the SOTU was your compassionate reference to the homeless, the hungry, the poor, those who have lost their homes and those 13.9 million still out of work? Instead, you presented the same warped view of the economy we get from the experts:

  • Even though unemployment is now 9%, a significant drop, a closer look reveals that millions no longer are looking for work and have given up in despair — our jobless recovery. How are they doing, Mr. President?
  • Corporate productivity is up while every ounce of blood is squeezed out of employees terrified of losing their jobs. Meanwhile, corporate costs are at a rate lower than in the past 50 years. More hiring must take place and investment in businesses that employ workers here at home must materialize.
  • Retail sales have improved, and there is hiring in this sector, as well as the service and health industries. But these jobs come with low wages. Walmart reported $409 billion in revenue last year, more than Apple, Exxon Mobile, Coca Cola and Morgan Stanley combined. Walmart’s size alone makes them capable of destroying communities just by showing up, driving out local stores and businesses. Adding to their negative impact are the traditionally low wages they pay and penurious health “benefits” they offer, which only boost their bottom line, not that of their workers.
  • 20% of New Yorkers are now forgoing visits to doctors and purchasing prescription drugs due to costs, a health care disaster lurking down the road and a story repeated across the country in every state. Congress and our President must open their eyes and take a look at what is really happening around the country.

If the new buzzword is “competition,” how is it that the most uncompetitive industry is the banking industry? Controlling most of the nation’s wealth, the American people have been reduced to serfdom, beholding to the banks for our every daily need: car loans, education, mortgages, paying for food, clothes, prescription drugs – the list goes on. We bailed out Wall Street and banks to the tune of 12.3 trillion dollars of taxpayers’ money, and today they are sitting on unprecedented mountains of cash here and abroad, while offering little if anything to bail out homeowners who continue to lose their homes, which will number over 1,000,000 more this year. Homeownership is now at a low of 66%.

Meanwhile, loans to small business are few and far between, and those credit card rates keep an indentured working class in bondage while the banks make more money than ever. Stockholders aren’t doing too badly either, along with Bank CEO’s and other high-level banksters. To create banking competition, now is the time for State Banks to be created in every state. It would offer up competition to the banking industry — a “Public Option,” if you will — forcing them to compete and lower loan rates while reducing unemployment and providing for municipal needs like infrastructure, loans to businesses, schools, student loans and other services. No gambling on risky products allowed, and accountability would be high since the only shareholders would be the states and their citizens. The Bank of North Dakota is the template for this kind of national economic revival that we need and are more than ready for. North Dakota’s 4% unemployment rate is to be admired, along with the fact that they have been solvent for 100 years (see my previous HuffPo article on North Dakota’s bank Here).

Here is another suggestion, Mr. President: How about a stimulus effort from the banks, a novel idea of giving back to those taxpayers who saved their behinds and pulled them from the brink. Call for a banking summit at the White House of all of the CEO’S of major banks and press them to raise the anemic interest rate on savings accounts. That 0.5% interest rate doesn’t keep up with inflation, further eroding principal. After all, Mr. President, this is also workers’ money that is used by banks to make loans and plump up their profits. We need an interest rate increase on savings accounts equal at least to the cost of living annually. Surely, hardworking Americans having a savings account with a respectable amount of interest would be helped in these tough economic times? How much would this pump up the economy while creating even more business and profits for banks? I can see the banking community even launching a national advertising campaign as a result of this grand effort about YOUR FRIENDLY NEIGHBORHOOD BANK. The good will would be enormous. Money would remain in local communities, benefiting local small businesses and winding up back in the banks in those communities – a win, win.

And let’s not forget those drowning homeowners who still need help refinancing their mortgages, Mr. President. Stop their spiral downward. Press those CEO’s at the banks to renegotiate mortgage loans and save those homeowners on the brink of becoming homeless themselves, as predatory speculators swoop in for the kill. And while I am dreaming about pie in the sky, why not roll back those credit card rates as well, at least for two years to match your extension of the tax giveaway to the millionaires’ club?

The American people need not be sacrificed as the cost of promoting corporate growth. Both can coexist. It is time to seek a balance, Mr. President.

Read more: Mitch McConnell, John Boehner, Economy, Mortgage Crisis, Jobs, Credit Cards, Bank of North Dakota, Barack Obama, Recession, Unemployment, Conservatives, Bailout, Sotu, Nafta, South Korea, Tax Cuts, Banks, China, Republicans, Business News

Mary Bottari: Banksters Back in the Black: JP Morgan Chase

Earnings and bonus reports are rolling in and the big, bailed-out banks are back in the black. In 2010, total compensation and benefits at publicly traded Wall Street banks and securities firms hit a record of $135 billion — up almost six percent from 2009 according to the Wall Street Journal. JPMorgan Chase CEO Jamie Dimon may take home the biggest bonus check, an eye-popping $17 million.

While the Wall Street economy is booming, the real economy is in a dead stall. Only 36,000 jobs were created in January 2011. A roundup of recent headlines shines a light on how big banks like JPMorgan Chase make their big bucks.

No Saving Private Ryan

U.S. foreclosure filings are projected to reach 9 million in 2011. An increasing number of the foreclosed are U.S. service members even though they have access to special protections and programs. USA Today reports that foreclosure filings near military bases jumped 32 percent since 2008. More than 20,000 veterans, reservists and active-duty troops lost the homes to foreclosure in 2010, the highest number since 2003. This report comes hard on the heels of an NBC expose showing that JPMorgan Chase illegally overcharged 4,000 active service members for their mortgages improperly foreclosing on a number of them.

Diane Thompson from the National Consumer Law Center points out that big banks and mortgage service firms have perverse financial incentives that spur them to foreclose. “The servicer’s expenses, other than the financing costs associated with advances, will be paid first out of the proceeds of a foreclosure… Whether and when costs are recovered in a modification is more uncertain.”

In other words, big banks and mortgage firms are rushing to kick American families to the curb to pocket more fees. Thanks for the service boys!

Profiting on Poverty

In these hard times, some 43 million American families rely on food stamps. To the surprise of many, JPMorgan Chase is the largest processor of food stamp benefits in the United States. The bank is contracted to provide food stamp debit cards in 26 U.S. states and the District of Columbia.

The firm is paid per customer. This means that when the number of food stamp recipients goes up, so do JPMorgan profits. Talk about perverse incentives. JPMorgan is taking its responsibility to keep the U.S. unemployment rate high by offshoring the servicing of many of these contracts to India, according to ABC News.

Michael Snyder of the Seeking Alpha blog put it best: “There are just some things that are a little too creepy to be outsourced to private corporations.”

Aiding and Abetting Bernie Madoff

According to documents in a lawsuit made public Thursday, senior executives at JPMorgan Chase expressed doubts about Bernie Madoff’s miraculous investment returns more than 18 months before Madoff’s Ponzi scheme collapsed, but continued to serve as his primary bank and failed to report him to federal authorities.

The lawsuit was filed against JPMorgan and other firms by the bankruptcy trustee gathering assets for Madoff’s victims. The suit alleges that JPMorgan allowed Madoff to move billions of dollars of investors’ cash in and out of his bank accounts right until the day of his arrest even though there were an abundance of red flags.

The bank “had only to glance at the bizarre activity” in the Madoff accounts “to realize that Madoff was not operating a legitimate business,” the trustee asserts. The unusual activity should have tripped the banks anti-money laundering software. The suit also alleges JPMorgan was creating products to leverage off of this relationship with Madoff. The bank denies any wrongdoing.

Covering Up Fraud at Bear Sterns

Another lawsuit filed in 2008 by mortgage insurer Ambac Assurance Corp against Bear Stearns and JPMorgan was recently unsealed. A trove of documents reviewed by Atlantic Monthly suggest that Bear Stern executives cheated clients out of billions by double dipping on securities sales they knew to be flawed. In a stack of damning emails, Bear Sterns top executives crow over selling investors a “sack of shit.”

Ambac also alleges a cover up by JPMorgan and recently won a court order to add misrepresentation claims against the bank to its suit, which can double or triple lawsuit awards. JPMorgan, of course, denies any wrongdoing.

“Not Fair,” says Dimon

At last week’s World Economic Forum in Davos, Switzerland, Jamie Dimon lambasted the media and politicians for portraying all bankers as greedy evil-doers. “I just think this constant refrain [of] ‘bankers, bankers, bankers,’ — it’s just a really unproductive and unfair way of treating people. It’s not fair to lump all banks together,” he steamed. Don’t worry Jamie, you are on a level all of your own.

Learn more about JPMorgan Case and its role in the financial crisis at

Read more: JP Morgan Chase, Financial Crisis, Bear Stearns, Jamie Dimon, Wall Street Crisis, JP Morgan Buys Bear Stearns, Wall Street Bonuses, Jamie Dimon JP Morgan, Business News

Did Obama Break His Pledge to Force Banks to Help Homeowners?

Has Obama broken his pledge to help struggling homeowners facing the threat of foreclosure?

ProPublica has a lengthy article out examining the ways that the Obama administration has failed to come through when it came to changing bankruptcy laws and forcing banks to modify mortgages.

On the campaign trail back in September 2008, Obama pledged, “I will change our bankruptcy laws to make it easier for families to stay in their homes.” Over three years later, the foreclosure crisis is far from over, and, as ProPublica reports, Democrats feel that he has fallen short of his promise.

The piece zeroes in on two particular shortcomings: first, the administration’s reluctance to get behind “cramdown,” which seeks to give bankruptcy judges the authority to renegotiate home mortgages. And second, the administration’s signature anti-foreclosure effort, the Home Affordable Modification Program (HAMP), which merely offers banks incentives to modify mortgages, and his been roundly regarded as a failure.

Although Obama initially included cramdown as part of his proposal to stem the tide of foreclosures, ProPublica reports that “when it came time to fight for the measure, he didn’t show up. Some Democrats now say his administration actually undermined it behind the scenes.”

ProPublica lays out an array of damning quotes from Democrat lawmakers.

“We would propose that this stuff be included and they kept punting,” said former Rep. Jim Marshall, a moderate Democrat from Georgia who had worked to sway other members of the moderate Blue Dog caucus on the issue.

“We got the impression this was an issue [the White House] would not go to the mat for as they did with health care reform,” said Bill Hampel, chief economist for the Credit Union National Association, which opposed cramdown and participated in Senate negotiations on the issue.

Likewise, Treasury Secretary Tim Geithner and Larry Summers, then Obama’s top economic adviser, were not in favor of cramdown, ProPublica reports. According to Rep. Zoe Lofgren, who led the charge for Cramdown in the House, Geithner “was really dismissive as to the utility of it,” while Summers, in private meetings “was not supportive.”

“Their behavior did not well serve the country,” Lofgren told ProPublica.

Meanwhile, HAMP, the program that the administration is supporting, is doing little. As the Huffington Post reported last October:

“Far from helping at-risk homeowners, the Home Affordable Modification Program has actually made some homeowners worse off, according to the Special Inspector General for the Troubled Asset Relief Program — also known as the Wall Street bailout. The Treasury Department set aside $50 billion from TARP, plus another $25 billion from taxpayer-owned Fannie Mae and Freddie Mac, to give mortgage servicers thousand-dollar incentives to reduce monthly mortgage payments by modifying eligible homeowners’ loans. But more people have been bounced from the program than have been helped by it.”

The really bleak part, as ProPublica points out, is that homeowners facing bankruptcy are forced to undergo great scrutiny while bailed-out banks were given a comparatively free pass:

While the government had been relatively undiscriminating in its bank bailout, it would carefully vet homeowners seeking help. HAMP was written to exclude homeowners seen as undeserving, limiting the program’s reach to between 3 million and 4 million homes.

Read more: Mortgages, Foreclosure Crisis, Economy, Financial Crisis, Banks, Bank Bailout, Housing Crisis, Cramdown, Home Foreclosures, Underwater Mortgages, Business News

Jobs Still Absent From Recovery

As the economy increasingly shows positive signs of recovery, one crucial piece lags: jobs.

After companies cut payrolls to boost profits during the downturn, they’re now reluctant to hire workers again, the Wall Street Journal reports. Earnings have improved and sales are up, but many workers have yet to share in the bounty.

The worst economic downturn since the Depression has prompted many companies to hoard cash, to protect against losses. In the third quarter of last year, U.S. corporations increased their cash holdings by 7.3 percent, setting a new record with $1.9 trillion in liquid assets, according to Federal Reserve data. That’s money they’re largely not spending on workers.

While in this defensive crouch, companies in the S&P 500 index saw fourth-quarter earnings rise 28 percent above the same period a year earlier, the WSJ notes. Sales were up 7.7 percent.

Other signs, too, point to a recovery: Yields on Federal government debt have been rising in the past week, indicating that inflation may be creeping into the economy, the WSJ reports in a separate story. Investors rushed to put their money in bonds when economic prospects seemed grim, but now, bonds’ popularity may be fading. The sharp rise in yields indicates the economy may be picking up steam, and it makes the long-term commitment of a bond less attractive.

But workers have largely been left out. The economy added a measly 36,000 new jobs in January. While the unemployment rate fell to 9 percent from 9.4 percent, that figure reflected a shrinking of the workforce, as many of the jobless gave up looking for employment. Nearly 5 million discouraged workers were left out of that 9 percent rate, HuffPost reported.

Even when companies’ revenue fell in the wake of the recession, many were able to pull in profits by reducing their expenses. They laid off workers, and squeezed higher productivity from the workers who remained.

Now, with the recovering seemingly gathering strength, companies seem inclined to stick to these new practices. And with commodity prices high, companies may look to make additional cuts.

That’s part of the reason why the recovery itself feels uneven. In addition, home prices continue to fall, eroding household wealth and making homeowners more vulnerable to default and foreclosure.

Homeowners’ equity, or the stake they can claim in their homes, fell 2 percentage points in the third quarter of last year, according to Federal Reserve data. The drop ended five quarters of steady growth since the figure hit its all-time low in the beginning of 2009.

Read more: Business News, Jobs, Hiring, Economic Recovery, Unemployment, Profits, Inflation, Bonds, Economic Crisis, Business News