Thursday, April 19, 2012

Can America Be Saved?

Can America Be Saved?

No. It is too late.

Let's set the stage. While most of the news reports and political talk focuses on the deficit, the real issue is the accumulated debt. About $15.5 trillion and compounding. (For a fascinating, but spooky view see: ). If you have a copy of Excel, there is a very handy mortgage calculator. I plugged in $16 trillion - the debt is very likely to get at least that large before anything to change it happens - and got the following: amortizing that balance like a traditional 30 year mortgage requires a monthly payment of $76.4 billion, or $917 billion per year. I guess one could argue we are paying about one-fourth of interest today. Effectively half of our spending is covered by borrowing not by tax revenue.

If we pay just the interest portion alone and don't try to reduce the principal - a major step forward from where we are - would require an annual interest payment of $640 billion. That's the government equivalent of paying the minimum monthly payment on your credit card. Using my rough math that would be at least $480 billion a year more than we are paying today.

The current annual deficit is about $1.3 trillion. A combination of revenue increases and spending cuts $1.9 trillion would be required to stop the debt from getting larger; about $2.2 trillion to amortize the existing debt and pay it off in 30 years. Let's summarize again: that is $2.2 trillion per year every year for the next 30 years, good times or bad, recession or recovery.

I've learned a few things in forty-plus years in business. One of them is that one doesn't get what one deserves, or has earned, or thinks one is entitled to. One gets what one can negotiate. A second is that no matter how good the idea, concept, invention or innovation it must marketed or sold successfully. Build a better mousetrap and the world most definitely will not beat a path to your door. Take a polyester blanket, cut out sleeves and a hood, call it a "Snuggie" and sell it on direct response TV and you may make hundreds of millions.

Almost anyone capable of second grade math knows that America has a debt problem of quite unimaginable proportions. Quite literally nothing like it has ever happened in the world before; no one a) had that amount of money to lend; and b) no one would have lent it if they did. Despite widespread acceptance that this can't go one, only a handful of people have made a serious attempt at dealing with it. Let's give credit to two: Congressman Paul Ryan and Congressman Ron Paul. While Congressman Paul has no mathematical chance of getting elected (we'll return to the concept of inability to perform basic math later) he deserves kudos from everyone for speaking one blunt truth: annual spending needs to be cut by more than a trillion dollars. Congressman Ryan also merits our approval by at least bringing forward a plan.

Here's why these two prophets will continue to wander in the wilderness.

The Never Compromise on Principles Argument
I listen to Rush Limbaugh, Mark Levin, Mike Gallagher, Sean Hannity and Bill Bennett when I can. Just because of my work schedule I listen to Hugh Hewitt more. There are a couple of Texas conservative talk show hosts I listen to occasionally, particularly Michael Berry. While not 100% true for every one of them every time, I believe they would confirm that they are generally opposed to any federal tax increase. The line parroted by politicians and pundits is: "Washington doesn't have a revenue problem; Washington has a spending problem". And I would submit that: a) that is completely and essentially inarguably correct, and b) totally irrelevant.

No One Will Surrender Their Favorite Programs

In my line of work in corporate finance and accounting we know what happens to companies that don't make consistent profits. They vanish like the Dodo. Seen a Curtis Mathes TV lately? A Packard -Bell computer? Or a Packard/Studebaker/Nash/Cord/Dusenberg? Shopped in a Linens 'n Things or a Circuit City A Woolco? A Borders? For most enterprises, making the numbers works starts with creating an annual budget. Simple stuff: total spending must be less than total revenue. If it isn't, department heads meet with the CEO or COO or CFO and cut their expense plans until the planned revenue is bigger than planned spending. No one likes budget reviews, but everyone knows they're necessary.

In our current divided and ferociously-partisan situation, no one has the power to force reductions, and no one is going to compromise. Talk about the most meaningless reduction in Medicare and Democrats rush to press conferences to accuse Republicans of attempting to balance the budget on the backs of the elderly and poor. Talk about reducing military spending and Republicans hustle to talk radio to accuse Democrats of "gutting our military".

Let's return to marketing. Congressman Ryan's plan doesn't go nearly far enough, but he's already getting blistered. I watched Sunday talk shows and saw how vicious the attacks are. Cagey Chuck Schumer staked out the Democratic talking points quickly and well with the predictable argument of an attack on Medicare. Ill-prepared show hosts failed to ask Schumer the real question - "OK- you don't like Ryan's plan - but where is your plan?"

Ryan's plan won't go anywhere because the marketing is all wrong. There is no way to sell a plan that starts with a tax rate cut. It doesn't matter if it is logical or even important, it's a marketing non-starter. Leave rates in place, with the current spate of deductions and go for the kind of spending cuts necessary. That's a deal that might have a chance to get negotiated. It might require even more: to negotiate a deal, rates may even have to go up.

But taking a compromising position, that is, agreeing to both tax increases and spending cuts, earns the ferocious enmity of partisans on both sides of the aisle. To such an extent that anyone attempting a compromise can expect a challenge from someone even more partisan from one's own party to oppose you in a primary (see Orin Hatch). Not an environment for one to make a bold compromise.

Republicans posit some amorphous position about broadening the tax base and stimulating economic growth. Democrats push increasing the tax on the rich. Republicans: check your math: growth and cuts that results in a $2.2 trillion annual change in net deficit? Please. And Democrats: there isn't $2.2 trillion to be taken every year for the next thirty from rich people. We have a lot of rich people in America, but not nearly that many.

With no one in the middle, no one ready to compromise, and apparently no elected official that understands compound interest, my answer is no, America can't be saved. Total interest-bearing debt is now larger than total annual GDP. Somewhere around there is usually the demarcation line. Investors demand much higher rates to purchase incremental government-issued paper (see experiences of Italy and last year and Spain right now). Governments respond, belatedly, with austerity programs. Affected individuals riot in the street. Where does that occur for us? At 110% of GDP? 120% of GDP. Impossible to know. But at some point there is a buyers' strike, and the wheels come off the car.

To me, it boils down to some simple questions:

Would you be willing to pay a higher tax rate to save America?

Would you be willing to support ending America's forward military bases in Japan, Germany, Saudi Arabia and Korea to save America?

Would you be willing to pay more for Medicare premiums to save America?

Would you be willing to work a few more years before collecting Social Security to save America?

Are you prepared to push for closing entire Cabinet-level departments (e.g. Education, Energy) and watching hundreds of thousands of government workers lose their jobs if it would save America?

Are there enough people in the U.S. who would answer yes to those? Not some of those. $2.2 trillion annually will require all of those. While I would like to believe in the better angels of the nature of the American citizen, recent years don't give me any reason for optimism.

No.  In my view America cannot be saved.  But I would certainly welcome an opposing view.