Federal budget problem is burden all will have to resolve

By DAVID MOON, Moon Capital Management, LLC
October 28, 2012

Austan Goolsbee, the former Chair of the Council of Economic Advisors, recently commented on the political difficulties of solving our country’s budget mess. He noted that 75 percent of Americans think government spending should be cut, but 85 percent of Americans don’t consider entitlements spending.

Therein lies the political problem and the fertilization of the existing algebraic problem.

Famously pessimistic Marc Faber, known in the financial world as “Dr. Doom,” warns that the US should “reduce government immediately by 50 percent.”

That idea, while provocative and appealing to some, is both naïve and relatively meaningless.

The federal budget would not be balanced even if the size of government was reduced by 100 percent.

If before disbanding, Congress shut down the Departments of Everything, including the military and CIA, our tax revenues wouldn’t be enough to fund Social Security, Medicare, Medicaid and interest on the debt.

The 2012 executive budget showed $2.5 trillion in spending on “Mandatory Programs,” compared to $2.4 trillion in total revenues.

Passionate political types argue that wealth disparity and the tax code create divisive conflicts between economic classes – and it does. The more dangerous looming threat, however, is an intergenerational collision. Either younger people are going to be taxed more or future Medicare and Social Security benefits are going to be reduced. Or both.

Honest people can argue about whether people should pay 36 or 46 percent of their income above $250,000 in taxes, or whether estate tax rates should be tripled. But those are political issues. Those are questions of fairness. They are not solutions to a trillion dollar annual deficit or $16 trillion in debt. Increasing the total taxes paid by the top five percent of wage earners by 25 percent raises an additional $127 billion. The federal government spends $3.8 trillion a year.

When I was younger I was broke. In those days I looked forward to paying taxes. I wanted to make enough money to pay a lot of taxes. I promised never to complain about income taxes.

Well, I lied. I was naive and had no idea what I was saying.

But I am going to have to pay more taxes. And it’s not just me. As politically incorrect as it is to say, our federal budget is a problem that will have to be solved on the backs of the middle class ... and the upper class and the lower class ... the elderly and the young... or it will not be solved at all.

It will be solved with higher tax rates and new types of taxes. The solution will include modified entitlements – both in real and nominal terms.

The federal pension and healthcare problem is now so large that it will require shared sacrifices of some sort – even if not explicit – not just among the one percent or the five percent, but among much of the 47 percent, as well.

Every large problem could have been solved when it was a small problem. It’s too late for that.

David Moon is president of Moon Capital Management, a Knoxville-based investment management firm. This article originally appeared in the News Sentinel (Knoxville, TN).

Click here to subscribe to MCM commentary.

MCM website