Sunday, November 18, 2012

Maybe the United States NEEDS a fiscal cliff

The riots we've been seeing across the European Union -- not just the 17 countries inside Euroland but also the 10 that are not -- are the result of people being fed up with having the cradle to grave welfare state being clawed back or almost eliminated.   Here in Canada we haven't gotten quite there yet, indeed nowhere near, but at some point I think something's going to give.

And as far as the United States is concerned, here is the so-called "fiscal cliff", which came out of last year's failed budget talks when the Tea Party obstructed any effort to come up with a compromise because that's just the way they are.   If something doesn't happen by the end of the year, there will be a major dose of shock therapy.   This includes budget cuts of about $110 billion per year for ten years (half from the military) and about $400 billion every year in tax increases.

These cuts and increases would happen each and every year over ten years.   This would include a major hike in public pension and unemployment insurance premiums (maybe as much as $4000 per family) and many more families would fall into the "alternative minimum tax" which was supposed to be a forced income tax on the super rich.

Many in the States think this could force the States back into recession.   I don't think it's that bad.   In fact, I think shock therapy is exactly what America needs.   One only has to look around the world to see how two other countries pulled it off.

Back in 1986, New Zealand was facing bankruptcy.   Literally.   In an attempt to save itself, the country underwent a major fiscal shock.   Major budget cuts were made and a new focus on core priorities made.   The currency was devalued (by removing the long time peg to the US Dollar -- it's worth pointing out that Canada did the same back in 1962 when the more than century par with the greenback was ended).    As well income tax rates were cut (including cuts in subsides, i.e. corporate welfare) and a national sales tax implemented.      Did it work?   Sure.   But the more or less tracking the Kiwi had with the Aussie and the "Loonie" ended.   Before the three currencies were more or less at par, nowadays while the latter two are more or less tracking with the greenback, the NZ buck is usually about 10 to 15% less.

It got nowhere near that bad in Canada.   But when our federal debt to GDP ratio got to 70% the Wall Street Journal infamously warned that we were on the verge of becoming a "banana republic" in the sense that we might not even be able to make the interest payments on the debt at some certain point in the future it was widely ridiculed but it make the powers that be wake up.    What did we do?   The proposed elimination of the GST was tossed, which kept about $25 billion in revenues back in the system.    Some income tax cuts were deferred.  And yes, payroll taxes shot up, including a phased in doubling of premiums for the Canada Pension Plan and Régime des Rentes de Québec.

But perhaps most controversially but also courageously in my opinion, the feds cut spending discretionary by 20% including an equally proportionate slash in the size of the public service.   Transfer payments to the provinces and territories were bundled and slashed (call it a form of "unfunded mandate" for health, education and welfare).   Over time the debt-to-GDP ratio hit a low of about 35% compared to nearly triple that in the States where it is now.  We're back up to about 40% but we're in way better shape than many of our trading partners.

So what can the US do?   Well, maybe shock therapy is in order for a country which thought it had a God given right to a AAA credit rating which was rightfully stripped from it a couple of years ago.   But this is a broad outline of what I would do.

Firstly, I would revisit the entire tax code.   Get rid of the multiple upon multiple tax breaks and replace it with a higher personal exemption.   One can then cut tax rates but raise revenues quite substantially.  That's what was done in 1986.

Theoretically (although not practically at this time) a more or less flat income tax could eventually be implemented.   Seven states (Colorado, Illinois, Indiana, Massachusetts, Michigan, Pennsylvania and Utah) have a flat tax.   It is also being seriously considered by the council of Washington DC.  Of course, Alberta has a flat tax with very generous exemptions so most people with low or moderate incomes don't pay any tax at all other than the health care premiums.

Second, and as unpopular as it sounds, America definitely needs a GST of some sort.   And it does have to be a  tax on goods and services as it is at the state level in many states.   There has to be some mechanism to make it partially refundable for less well off people as is the case in Canada -- but if the wealthy were forced to pay, say, an extra $8000 for every $100,000 on fancy cars perhaps finally they would shoulder the burden for the national defence.   That's what income taxes were originally designed for anyway -- a  levy for the rich, not a burden for the poor.

Third, the cap on the payroll tax needs to be raised, substantially.   Once you hit $113,000 in gross wages you no longer have to pay any social security taxes.  (It's about $45,000 here in Canada).   The premiums should be pegged to the entire gross, with the proviso that over a 10 year phase in the benefits paid out would reflect the premiums paid.

Fourth, there does indeed have to be massive spending cuts on the discretionary side.   I would however focus it on the military.   Instead of the pending 50-50 split between defence and "other", it should really be 80-20.   The American military will always be the most powerful.   They certainly have the resources to answer the call of duty anywhere, and after more than a century I think a lot of people in the country are sick and tired of fighting other people's wars.   They have dozens of units ready to move at just hours notice and cutbacks in military procurement (i.e. materiél) won't affect that.   Besides, a lot of money is wasted on unsafe equipment -- think the V-22 Osprey that the Marines finally gave up on, or the F-35 that Canada is still so hung up on but even the US Army is now clawing back by hundreds of units on after they lost a war game against the 1970s era Australian air force.   Yeah, Australia!

But leadership starts at the top.   And so finally any President who makes over a million a year should not collect any salary.  Same for the fat cats in the Senate and the House of Representatives.   The travel allowances ought to be cut back as well.   And no more rollover of campaign contributions to the next election.   Anything left over goes to pay the debt.

But maybe austerity is what's called for.   If it's good enough for Greece and Ireland, it sure as heck it's good enough for the States.  It's way past time the country claimed an exemption just because it's America.    Matter of fact, it's time for the IMF and the World Bank to bail out America.   That'll learn them.   Especially the Tea Party (i.e. neo-facists) who hates both of the main pillars of global  economic security.  I wonder how you translate "Special Drawing Rights" to ... um, how do I end this sentence?

1 comment:

Anthony said...

Perhaps the U.S. does...However, I think the fiscal cliff will be avoided.