That deficit thing is going to get worse

The Congressional Budget Office released its projections that say the decrease that has been occurring in the deficit is coming to an end. With the improving economy, sequestration cuts and not funding as many troops in the Middle East, the deficit has quietly been reduced to a less painful level, but we are still in a deficit position. The last time we had a surplus budget was when President Bill Clinton left office and before the President George W. Bush tax cuts that put us back into deficit.

The CBO anticipates the deficit to rise again this fiscal year and continue to rise. So, the debt will continue to climb and interest costs will become increasingly an important part of the budget. There is a group called The Concord Coalition (see link below) who advocates for addressing this ticking time bomb now. They have a bipartisan group of Board members and help frame a discussion balancing the spectrum of needed spending cuts and revenue increases.

The major parts of our budget that should get our attention are in five areas:

Expenditures: Social Security, Medicare/ Medicaid/ ACA, Defense

Revenues: Corporate Taxes and Individual Taxes

The other stuff is minor relative to these big items, but of course we need to address each and spend judiciously. There are ways to shave spending off each of these key expenditures, without being too detrimental to the underlying programs and needs. And, we could be more dramatic if we want to make significant cuts, but people need to know what they would be losing. We also need to recognize there are some areas, such as infrastructure investments, that need to be increased and funded.

Yet, we also need to reform our tax system to make it simpler for all and make it easier to repatriate some offshore corporate income which goes untaxed here. In my view, we also need to garner more revenue as we are one of the least taxed (relative to GDP) countries of the 33 member countries of the Paris based Organisation for Economic Cooperation and Development. So, we need to base our decisions off comparative information to other countries, as no one wants a tax increase, but that is something that should be considered.

Regardless of what we need to do to accomplish the task at hand, we need to move forward before the interest costs get too burdensome. Also, as we age as a country, our costs pressures will increase with healthcare and retirement costs. If we wait too long, the cuts will need to be more severe and more of us will be impacted. Learn what each candidate will do about these issues. They seem to be silent on these issues and that is not a good thing.

http://www.concordcoalition.org/

Simpson-Bowles still gets the conversation started

In honor of November 8 being Deficit Day, meaning our US revenue for the year has run out in covering our expenses, I think it is important to revisit some of the saner voices on these issues. Former Republican Senator Alan Simpson who partnered with former Chief of Staff (for Bill Clinton) Erskine Bowles to lead a committee to address the deficit, has penned an interesting editorial. In essence, he is critical of the various tax plans submitted by GOP candidates for president all of which would materially increase the deficit. He notes they are so poorly conceived, that there are not enough legitimate cuts to overcome the loss of revenue.

Simpson knows of what he speaks. The Simpson-Bowles Deficit Reduction Plan combined strategic spending cuts with revenue increases to reduce the deficit. It was well conceived, but not perfect, as nothing is. People found faults with elements of it, which is a reason it did not move forward. Yet, it was a terrific conversation starter. It was something to work with and modify, as needed. And, it spoke to the need to increase revenue along with spending cuts.

One of the issues conservative folks have with the plan is the revenue increases, but let me state three truisms, two of which are universal, and one that applies to the United States.

  • Of course, people don’t want to pay higher taxes, but they do realize a need to pay for expenses.
  • Any politician can get elected saying they will reduce taxes. But, that promise should not be confused with good stewardship.
  • Per the Paris based Organisation of Economic Cooperation and Development (OECD), the US is one of the least taxed countries of 33 countries who have participated in analyses dating back over forty years. In fact, the US is well beneath the median tax rate of the recurring OECD surveys.

The deficit is important and we need to be smart with what we cut and actually increase spending in some areas. Yet, we must garner more revenue or we will never get there. There is a reason President George W. Bush fired his Treasury secretary as he argued against the Bush tax cuts. It should be noted the budget was balanced by President Clinton the last several years of his presidency, which was handed over to Bush.

While President Obama has done many good things, he is an imperfect president, like they all are. One of my biggest criticisms of the president is not embracing the Simpson-Bowles Deficit Reduction Plan and say let’s start with this. It would have been a great conversation starter and still could be.

 

But, how could you let this happen?

“But, how could you let this happen?” is a phrase often uttered after an event has made the headlines. People are incredulous and leaders, in response, will look at others to blame for the recent turn of events. Yet, oftentimes, the leaders omit their role in the event which occurred by their failure to act. Or, the event was going to happen, and no proactive action was taken to lessen the impact.

I have written before about how social workers are sometimes thrown under the bus for a family treating a child poorly or rampant substance abuse exposing children to things they should not see at their ages. Invariably, the social worker is handling far too many clients due to budget cuts over the years, so that families do not get the attention needed. Depending on travel, capabilities, types of family challenges, and numbers of family members, a social worker should ideally have less than twenty clients. The ratio of 16 to 1 is often mentioned as ideal. Yet, when something goes wrong, we often see social workers with 150 or 200 clients, which means no family gets the attention they need. I have the greatest admiration for social workers, but even Mother Teresa would have a problem with the caseload.

However, this line of questioning is much broader than making sure we staff sufficient numbers of social workers to meet a community’s needs. It gets into most areas of politics and governance. Last week, I was watching a leader of the US border guards on the news describing the problems with the influx of child refugees. He defined and demonstrated how difficult the job is and noted we are already understaffed due to the sequestration budget from last fall. So, to state the obvious, we have people in Congress who, in addition to not passing an Immigration Bill, have not funded the open positions in the border patrol making it harder for them to secure the border. Please reread that last statement, as we have some Congressmen and women who are insisting we secure the border, yet they won’t fund staff to secure the border, in general. This is before the latest request for funds to handle the refugees.

Yesterday, I was encouraged that a bi-partisan bill was agreed upon between the House and Senate committees on handling veterans’ affairs. Senator Bernie Sanders (I) and Representative Jeff Miller (R) are the key proponents (kudos to both). Yet, when the VA Hospital problems hit the fan earlier this year on wait times and veterans not getting served, the echo from Congress was loud, “how could you let this happen?” A veteran leader noted this is the same Congress who would not sign off on Senator Sanders bill earlier this year to address known concerns saying it was too much money, but offered no compromise solution. Yet, they did not do a mea culpa and say we screwed up earlier. Our leaders talk a big game about taking care of veterans,  but we are much more prone to fund tanks and planes we don’t need, than take care of wounded soldiers. Soldiers who have fought much longer and, since fighting among civilians, have been exposed to more PTSD need our help and not just our “atta-boys and girls.” Words are cheap, very cheap. Thank you Senator Sanders and Representative Miller for your actions to support our troops.

Finally, I will drift back to another favorite topic of some and that is Benghazi. “How could you let Americans get killed?” is asked. This issue has been put to bed for eighteen months in a non-partisan review led by Admiral Mullens and Ambassador Pickering, neither of whom were asked before Congressional Committees to speak on their report from December, 2012 until the committees were apprised of this oversight. The report went through all of the areas where we could have done better, but one area was interesting. Security of all embassies had been shortchanged by budget cuts in funding from Congress. So, we cared less about securing our embassies and then cried foul when something happened. And,this is not the first time our embassies and foreign service personnel have been attacked. “How could you let this happen?” the same folks asked.

The two common themes from the above are budget cuts impact service and it is hypocritical to totally blame someone else for something you, as a group, had a hand in causing. As a business person and volunteer board member of non-profit groups, I recognize fully that budgets are not infinite and require trade-offs. I do think we need serious discussions about where we spend our money. Yet, I am also mindful there are some that want to axe everything without noting what services are being performed. And, I also am aware there are those who say cut this or cut that, but when reminded that people back home or funders’ businesses are impacted, change their mind. There are so many military weapons that are not needed and are stockpiling, yet because of funders and lobbyist efforts, we cannot stop making them, e.g.

We have a deficit and debt problem in this country. The answer that the Simpson-Bowles Deficit Reduction Commission came to in December, 2010 is both spending cuts and revenue increases are needed. Before we have other “what-ifs” happen, we need to take a look at that report as a plan to start from.

 

 

 

Who is Paul O’Neill and why should his opinions matter?

I am in the middle of a fascinating book by Charles Duhigg called “The Power of Habit – Why We Do What We Do In Life and Business” and a very useful example appears involving Paul O’Neill. The name rang a bell for another reason, but more on that later. Who is Paul O’Neill? O’Neill was the CEO who turned Alcoa around during his tenure from 1987 – 2000. He joined a company in turmoil, and under his leadership, the value of the company doubled and the annual revenue went from $1.5 Billion in 1987 to $23 Billion. How did he help Alcoa achieve these results?

Ironically, when he made his first speech to investors and stock analysts, they came away unimpressed. He was not a well-known quantity having served as a in the VA Administration, Office of Management and Budget and as a Vice President and President of International Paper. Yet, what he said in that speech gave everyone pause. He said “I want to talk about worker safety.” He went on to discuss how Alcoa had a horrible safety record and his goal was “to go for zero injuries.” Many stock analysts were stunned by this focus as he did not use any of the typical words around synergy or rightsizing, etc. Several told their clients to divest of Alcoa stock after that meeting. One analyst later said “It was the worst piece of advice I gave in my entire career.”

Why the focus? The purpose of the book is to understand the role habits play in everything we do. If you can find a keystone habit and get someone to change it, then other better habits will follow. Companies were no different. O’Neill recognized before he took the job, he needed to help Alcoa change, but the unions did not trust management, communication was poor and processes needed changing. So, he decided to focus on the one thing everyone could agree on – worker safety. By focusing on worker safety, he would help change that habit and watch it spillover.

O’Neill instituted a policy that his managers had to notify him of an accident in the company within 24 hours along with a plan on how we learned from it and how we could avoid it happening again. Many thought it was just window dressing, but two weeks into his tenure, a young man acted rashly to fix a machine and was killed. O’Neill took this to heart and said “I killed this man. All of us in this room killed this man.” Everyone saw this was meaningful and things started to change. But, it was more than safety improving. To receive a report within 24 hours with a plan, a leader needed to know about the accident, what happened and how it could be avoided. Communication up and down the ranks improved, so the safety improvements could be conveyed and understood.

To improve safety, though, you had to improve processes. You had to make things easier to work with and provide the equipment to be safe. Not only did safety improve, but so did productivity. And, with these better communications, ideas from the manufacturing floor started to flow up. Some of the ideas had been bottled up for years, but now people felt empowered to share them. And, before the internet got up and running, they were using an intranet to communicate these ideas which kept them ahead of the competition and let information pass quickly. So, the company took off, because of O’Neill’s purposeful focus on one keystone habit – let’s make our jobs safer.

Where the name sounded familiar is O’Neill became President George W. Bush’s first Secretary of the Treasury in January, 2001. However, with all of his success and track record, he was fired by December 31, 2002. Why? O’Neill was very outspoken in his criticism over the now famous “Bush Tax Cuts” and our going to war with Iraq. As Secretary of the Treasury, he had seen a report that said the US had a looming deficit problem that would require tax increases and spending cuts. That report was suppressed by Bush and we went ahead with the Bush Tax Cuts that unbalanced our surplus budget left by President Bill Clinton aided by his Chief of Staff, Erskine Bowles.

Quoting a footnote in the book, Duhigg notes “However, O’Neill’s politics did not line up with those of the President Bush, and he launched an internal fight opposing Bush’s proposed tax cuts. He was asked to resign at the end of 2002. ‘What I thought was the right thing for economic policy was the opposite of what the White House wanted,’ O’Neill told me. ‘That’s not good for a treasury secretary, so I got fired.'”

I put O’Neill’s quotes in bold for effect. I would add that Warren Buffett, another pretty smart cookie, largely said the same thing at the time. Buffett said “You are giving me a tax cut I do not need.” So, just to state the obvious:

– we had a balanced budget, even a small surplus;

– President Bush wanted to push tax cuts to stimulate the economy;

– his Secretary of Treasury, a pretty competent leader, reads a report that forewarns of deficits down the road and tells the President and Vice President Dick Cheney (by the way, he recommended Cheney to Bush’s father for Secretary of Defense), that tax cuts are not the right answer for the economy and we need increases and spending cuts;

– the President and Vice President (who wielded more power than many VPs) ignores his advice and asks him to resign;

– we now have budget deficits heightened by the Bush Tax Cuts and two unfunded wars; and

– we continue to fight over these Bush Tax Cuts and need to raise revenue as well as cut spending to address the deficit, two ideas the suppressed report and fired Secretary of the Treasury espoused in 2002, eleven years ago.

Hindsight is usually 20/20, but the last bullet is very important. We have leaders who refuse to see that we must increase tax revenue and cut spending. No greater authorities than Alan Simpson and Erskine Bowles reached that same conclusion in the Simpson-Bowles Deficit Reduction Commission report. O’Neill, a very successful and competent CEO told his bosses, Bush and Cheney, this very thing and got fired. He also told them this before it would happen and before Bush actually threw gasoline in the fire and made it worse. Not to beat a dead horse, but Presidential historians have also noted President Bush as one of the worst presidents we have ever had and contrary to what his brother Jeb said last week, history will not judge him any better looking back from a future date.

So, to recap. Paul O’Neill, Warren Buffett, Alan Simpson and Erskine Bowles, all pretty capable people, said we need tax increases and spending cuts to address our deficits.However, O’Neill said it in official capacity as Secretary of Treasury and got fired. And, now we are living with not only the failure to act, but actions taken by Bush that are perpetuated today. I think O’Neill and these other people’s opinions matter and we should listen to them.

 

Isn’t it Ironic – the Underlying Fiscal Cliff Issue

I don’t often get the chance to quote an Alanis Morissette song lyric, but from her song “Ironic,” the often repeated lead lyric is “isn’t it ironic?” Since we are in the final countdown toward the fiscal cliff, I would like to add a verse to her song to discuss openly an underlying theme, one which the news agencies seem to ignore. I would also like to give a shout out to Vincent Mudd, Barneysday, and Hugh Curtler who on their respective blogs have provide useful and data driven perspective on the pending fiscal cliff (check them out at respectively at www.vincentmudd.wordpress.com, www.mountainperspective.wordpress.com, and www.hughcurtler.wordpress.com).

The irony is we are talking about extending in some form the Bush Tax cuts which are the primary reason we have the deficit today. As an independent voter, both political parties are misleading the American people and not talking about the shared sacrifice we need to resolve our deficit. Very clearly we need spending cuts. Yet, equally as clear is we need to raise tax revenue otherwise the math won’t work to solve our problem. Who says this? For starters, this is the basis of the Simpson-Bowles Deficit Reduction Plan.  However, I want to set that aside and go to a data point external to the US. I like to look at data which compares the US to the rest of the world as it gives an unbiased, comparative view of our problems and gets away from the politics of my data is better than your data.

I have cited before the well-respected global organization based in Paris called the Organisation of Economic Cooperation and Development (OECD). Please refer to their website at www.oecd.com for validation of this information. One of the studies of data the OECD does is look at tax revenue relative to gross domestic product (GDP) of each country. Tax revenue includes federal, state and local taxes relative to GDP. At least going back to 1965, the OECD shows the comparative ratios of Taxes/ GDP for 34 countries. I have referenced this before, but let me reiterate data at two key time points.

– In 2009, the US ranked 32nd out of 34 countries in Taxes/ GDP, third from the bottom. Further, the US was just shy of 10% beneath the average ratio of the 34 countries.

– In 2000, the US still ranked low in standing for the 34 countries, yet was around 5% beneath the average of the 34 countries. This is the final year of Bill Clinton’s presidency and we actually had a budget surplus due to the efforts of Clinton, his Chief of Staff Erskine Bowles (why is that name so familiar?), and Congress.

The Bush Tax Cuts came in two waves after his inauguration in 2001. The first irony is we did not need the tax cuts then. One of Bush’s tax advisors was forced to resign after he publicly disagreed with Bush over these cuts. Even Warren Buffett was critical of the lowering of the dividend tax rate to 15% from the ordinary income tax rate. Paraphrasing his quote he said at the time you are giving millionaires a tax cut they do not need. And, there are far more knowledgeable people than me on this subject, but I offended some folks back in 2001 when I said we did not need these cuts and at some point we have to step up and pay for something. One of my pet peeves is politicians who cut taxes for political gain, as in my mind, any dumb ass can get elected saying they will cut taxes.

So, here we are over ten years later discussing whether we continue these tax cuts or just continue them on those making less than $250,000. Going back to my two data points from the OECD survey, that 5% differential from 2001 to 2009 in the US Taxes/ GDP ratio versus the 34 country average stands in the way of getting back to fiscal responsibility. This is why I am so strident in my views against the Tea Party (Taxed Enough Already Party) and Lobbyist Grover Norquist. Of course, we need to be smart about what we spend and we should cut spending in numerous areas including Defense. Yet, we have to step up and pay for something. To do this, we need to raise tax revenue. Messrs. Simpson and Bowles (there is that name again) know this which is why they include tax revenue increase (add Boehner and Obama’s proposal together to get close to theirs) along with spending cuts.

Of course, the GOP will tout growing the economy with lower taxes will do the same. First, economists have shown this is a fallacious argument. If you don’t believe me then why did Senator Mitch McConnell bury a report from a non-partisan governmental agency that came to this conclusion in October? Second, why does David Stockman, one of Ronald Reagan’s economic advisors say Trickle Down economics did not work? Third, why does Warren Buffett say the tax rates don’t get in the way of an idea that will make money. Tax rates have been historically higher in the US and we had a lot of investment going on then.

So, part of me agrees with my friend Barney who says let them go over the cliff and pull the scab off. The tax increases will get us closer to where we need to be. Economists have said the abruptness of the change may stall the economy. Coupled with this change is the cessation of extended unemployment benefits and the elimination of the temporary FICA tax roll back of 2% of pay. Even our friend Mr. Bowles says we should phase in the changes. Yet, if we did go over the cliff, we would all share the sacrifice.

That is where both parties are misleading the American people. All of us will have to play a role in reducing the budget. And, guess what – none of us will like it, but that is where our politicians need to shoot straight with the American people. At least the President gets part of this answer, but he does not go far enough. Thanks to Mr. Norquist, except for a few brave souls in the GOP, most have not gotten at least to where the President is.

So, Alanis “isn’t it ironic?” that we are debating over the extension of the key reason we have our deficit. Isn’t it ironic that the author the Bush Tax Cuts is considered by historians as one of the worst presidents in history, some pointing to this reason as he took a surplus budget and made it a deficit budget. I would ask the GOP if he was so great, how come he has not been invited to your last two conventions?

So, President Obama, Speaker Boehner and Senators Reid and McConnell, please shoot straight with the American people and start telling us what we need to hear. I do have a compromise for you, if you want one. Let the Bush Tax cuts expire – all of them – yet continue the FICA tax rollback of 2% of pay for one (or two) more year(s). It was temporary to begin with. Extend the unemployment benefits, but look for strategic cuts in Defense, Medicare and Social Security. Americans won’t like it, but they will understand if you start shooting straight with them and stop listening to lobbyists like Mr. Norquist and all of the defense contractors who don’t want you to cut their budgets.

Isn’t it ironic, don’t you think?