Why Laurence Kotlikoff sees Economic Meltdown for the U.S.A.

(CBC Radio One) The fiscal cliff that overhangs Washington, is a legally-binding 600-billion dollar tax increase and spending cut package, which automatically takes effect unless another solution can be found, agreed, signed and enacted by January 1, 2013.

But according to Laurence Kotlikoff, that 600-billion-tax-increase-and-spending-package is a mere drop in the bucket compared to the 222-Trillion-dollar fiscal gap in the U.S. economy – which is also here right now, not in some distant future.

Kotlikoff believes Washington has been running a Ponzi scheme for six decades and higher taxes and belt tightening won’t be enough to stop the coming Greek tragedy.

If U.S. Senator Joe Lieberman is right, the U.S. economy will be side-swiped on January 1st by 600 billion dollars worth of tax increases and spending cuts. While that would certainly shrink the country’s annual budget deficit, most independent observers say it would also push the U.S. far into recession, and maybe take the rest of the world down with it.

Laurence Kotlikoff is an economist at Boston University and the author of several books, including Clash of Generations. He also launched a Presidential run in this last election as the candidate for the advocacy group Americans Elect, but ended his campaign last spring. CBC Radio One – Gord Westmacott

Listen to this fascinating ‘The Current ‘ segment produced by CBC Radio One Gord Westmacott. (Courtesy of CBC) Laurence Kotlikoff: Is the United States Broke?

JOHN BRIAN SHANNON

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The Prescription for America’s Economy

by John Brian Shannon

As much as I’d like to simply jot down the prescription to cure what ails the American economy, I won’t.  Not before discussing it with you first.

Any doctor will tell you it is better to question, test, diagnose — and then prescribe. So, on that doctorly note let us commit to what ails the U.S. economy before I go off writing prescriptions.

It seems that America is not feeling too well, although she is still plenty powerful. Just sort of an uneasy feeling, a lack of confidence and somewhat limited flexibility. Underneath it all, she is sitting on top of a mountain of debt which just feels wrong.

Ed Hall’s excellent website has numerous links for visitors who may be interested in America’s debt and deficit information.

Here is a snapshot of what it said today:

The Outstanding Public Debt as of 28 Jul 2012 is:
$ 1 5 , 8 8 3 , 9 7 2 , 7 6 5 , 4 7 2 . 1 6

The estimated population of the United States is 313,211,460 so each citizen’s share of this debt is $50,713.26.

The National Debt has continued to increase an average of $3.90 billion per day since September 28, 2007!

If we add to that debt, the total unfunded liabilities and expenses of the United States, the total  liability of the U.S. federal government rises to an estimated 130-140 trillion dollars when all entitlement spending obligations are factored in. Ouch.

Not quite a ‘Code Blue’ condition, but a little too close for comfort. Time to call a doctor – and a good one!

Economist and former senior federal economic policymaker, J. Antonio “Tony” Villamil, the dean of the business school at St. Thomas University, who served as U.S. undersecretary of Commerce for economic affairs during the George H.W. Bush administration, commented in the Miami Herald on America’s debt situation.

The federal debt/GDP ratio is on an unsustainable path, with the federal debt held by the public surpassing 100 percent of GDP in a few short years, according to the non-partisan Congressional Budget Office (CBO). If we desire stronger economic and employment growth, we need a market-credible, long-term fiscal plan that places the federal debt/GDP ratio on a declining scale. Read the entire article here…

Dean Villamil has labeled the present era as “The New Normal” with cyclical (short-term) and fundamental (long-term) factors at play “that suggest a continued period of sluggish economic activity and slow employment growth…”

He expects the cyclical problems — such as the burst real estate bubble and a huge build-up of private debt, both of which conspired to create the largest economic contraction since the Great Depression — will diminish over the next 12 months leaving America with (only!) some fundamental economic challenges to solve.

[Fundamentally]… at this stage of an economic cycle, the economy should be expanding at a 3-percent to 4-percent annual rate, not at the tepid 2 percent or less, as is the case today. – Prof. Tony Villamil

Professor Villamil believes as I do, that growth-based policy is the better way to solve the economic juggernaut squarely ahead of us. When GDP grows faster than the federal debt, the debt-to-GDP level falls correspondingly, which is a happy side-effect of more and better-paying jobs for citizens, higher revenues for governments and a better educated workforce on account of all those parents who can now afford to send junior to university.

Canada took the ultimate shortcut towards these goals some time ago and it was hailed as a spectacular success. The Canadian government instituted a 7% Goods and Services tax on practically everything sold in Canada, from bubble-gum to skyscrapers and everything in between. This raked in uncountable billions of dollars for the government which allowed it to eliminate the huge deficit, make significant paydowns on the accumulated debt, finance massive job creation programs and restructure it’s financial obligations. It’s an outstanding and well-documented success by any measure.

This success story illustrates a major economic leap for Canada and one easily tailored to the U.S. situation. It should be carefully considered by U.S. policy-makers.

One problem Canada wasn’t required to face, was an economy awash in trillions of dollars of ‘easy money’  which led millions of American consumers towards insolvency when the economy began changing in response to economic events occurring outside the U.S.A. in 2008.

For example, the monetary base, due to Fed action, has exploded to $2.6 trillion as of May 2012. This could create an inflationary spiral in the longer term, causing another great recession. Read Dean Villamil here…

For those who support a massive injection of cash into the economy by the government, this is a fine short-term way to stimulate the economy, provide employment, increase taxation revenue for governments and to temporarily stabilize the economy. It is a fine idea and worthy of serious consideration by American policy-makers.

But while stimulus spending would help the economy short-term, it does not address the core issue of the non-growth government policies which caused America’s economic woes in the first place.

I promised you a prescription America, and here it is;

  • A federal 7% Goods and Services Tax on everything sold inside the country beginning in 2013. Some amount of revenue-sharing should occur. If 50 billion dollars of GST are collected in the state of California by the federal government by Jan 1, 2014, for example, California should receive half that amount back from the feds — which the state can then use to spend on it’s own infrastructure and debt-reduction program.
  • Of the federal government’s portion of the GST — half of it should go to paydown the federal deficit until there is no deficit.
  • The other half of the federal government’s portion of the GST should be used for ‘shovel-ready’ infrastructure projects designed to cut unemployment levels in every state.
  • The planned budget cuts to U.S. military spending and other federal spending cuts should still occur as they are necessary and overdue, but could benefit from a relaxed implementation schedule.
  • A comprehensive, results-oriented, duplication of services and waste reduction study by all federal departments with the emphasis on cost-reduction and streamlining of services.
  • Which easily-treatable illnesses could increase American productivity if that cost was covered by government? We need a list! Spending mere pennies per worker here, can save the country many billions of dollars of lost productivity.

Short-term stimulus, combined with a national sales tax – the proceeds of which to be evenly split with the states, eventual elimination of the federal deficit, massive spending on national infrastructure projects, continued cuts to military spending on a slightly-relaxed schedule, national waste/duplication elimination, along with increases to productivity courtesy of free (minor disease) health care – will have America feeling back to her old-self within ten years — and after that, feeling ever better!

In fact you’re looking better now America — just reading your prescription!

Related articles
About John Brian Shannon

I write about green energy, sustainable development and economics. My blogs appear in the Arabian Gazette, EcoPoint, EnergyBoom, Huffington Post, United Nations Development Programme, WACSI — and other quality publications.

It is important to assist all levels of government and the business community to find sustainable ways forward for industry and consumers.

Green Energy blog: http://johnbrianshannon.com
Economics blog: https://jbsnews.wordpress.com
Twitter: https://www.twitter.com/#!/JBSCanada

The Case For Austerity

by John Brian Shannon

Finally, finally, finally.

After decades of running endless deficits which, when left unpaid at the end of each year are added to the government debt — increasing the overall debt-to-GDP ratio numbers of nations, many governments around the world have begun to rein-in their spending.

Why is that important? Because those are the same debt-to-GDP ratios that the worlds major credit rating agencies cite when they lower the credit rating of nations which have managed to spend more than they take in year after year – through the good times and the bad times.

Decade after decade, deficits pile up, until one day your national credit rating has sunk from AAA+ to only B+ or worse! This brings about a number of unwanted consequences for those countries.

One, the cost of borrowing multi-billions of dollars to cover government debt is increased at each and every downgrade.

A small change to the interest rate doesn’t hurt much when the amount financed is a small amount, but it really hurts when the amount financed is in the hundreds of billions of dollars. For example, the U.S. is presently financing 15 Trillion dollars of debt (accumulated deficits) and will add another 1.4 Trillion dollars of deficit to the government debt at the end of this fiscal year – September of 2012.

Imagine the borrowing costs on 16.4 Trillion dollars. Now, imagine the borrowing costs on 16.4 Trillion dollars and add another 1% to that interest rate – which is the hypothetical equivalent of a one-point reduction in the credit rating, let’s say from AAA to AA for example. Forget about the B+ rating – you don’t want to know.

Year in and year out, in good times and in bad times, huge chunks of national treasure in the form of interest payments on federal debt and deficits are paid by the taxpayers to foreign lenders to cover the cost of government overspending. It is an automatic drain on a country’s wealth.

Credit rating agencies become empowered at times like these and begin making suggestions to governments in order for them to receive a better credit rating – and thereby lower their overall cost of borrowing.

One suggestion is to impose austerity measures to lower government spending – in an attempt to stem the economic bleeding of the economy in question.

Cutting the number of government workers to decrease government spending is one way to accomplish that – as is reducing the number, or quality, of services that a government performs. In fact, there are thousands of ways to raise revenue and lower spending to eventually produce a zero deficit condition. Levelization of government finances becomes the priority.

Which is a relatively easy thing to do during the good times when the economy is expanding, jobs are plentiful and the government is raking in boatloads of income tax, sales tax and other government revenue-generating schemes — although, even then it is rarely attempted.

Some excellent examples of exceptions to this paradigm do exist.

Austerity during the bad times has no redeeming value at all – except for one important point, which I will cover shortly.

Politicians have traditionally shunned austerity during the good times because in all but a very few cases it gets them voted out of office.

At the worst possible moment, we are now beginning to do the right thing — returning to balanced budgets and paying down government debt.

Everyone is beginning to ‘get it’ governments simply cannot run huge deficits decade after decade and not face a downgrade of their credit rating, which drives up the cost of financing that accumulated debt load. Which, in turn, slows the economy – code words for increased unemployment, higher taxation, stagflation and a lowering of services provided by the government.

So, what is the important point? Voter acceptance – which may be putting it too strongly – but at the very least an understanding is now forming in the consciousness of voters, that governments cannot continue spending at unsustainable levels for decades at a time. Tentatively at first, but now with increasing resolve, politicians have begun to feel empowered to speak out about lowering government deficits and cutting national debt loads.

Now that the process has started (very unfortunately, during the bad times) I would expect it to continue during the coming good times – which, according to the legendary words of economist John Maynard Keynes – is the proper time for deficit-cutting and debt paydown.

It has worked before. In the early 1990’s, Canada was facing high deficits, a toxic government debt load and a lowering of it’s credit rating — at a bad time economically speaking. The then-government of Prime Minister Jean Chretien and his astute Minister of Finance Paul Martin, jumped at the opportunity during a time of nominal growth and higher taxation to cut the deficit to zero and dramatically paydown the accumulated Canadian federal debt.

In short, a win for austerity. A wildly successful effort by those two gentlemen who made it look easy and who never, ever, once complained once about the task fate appointed them.

In fact, there is no doubt at all about it in Canada – austerity won and it won handily.

In the case of Canada, there was no option but to win, there were no better choices available and no big brother like some nations in the EU have available to them to bail us out. The government of the day decided to pare down spending, increase revenues and they were so successful at doing so their plan worked better than even they themselves had envisioned.

The reason Canada was so successful?

Theirs was anything but a clumsy attempt to balance the budget and paydown the debt and both the Prime Minister and the Finance Minister went around to meet the Premiers of each Canadian Province to sell the austerity package to Canada’s Premiers before attempting to take their plan further afield.

Then, and only then, they went to Wall Street to sell the world’s leading economy on the Canadian plan to eliminate Canadian deficits and lower the country’s total debt load.

Once all of that had successfully taken place, Canada’s Prime Minister and its Minister of Finance approached the credit rating agencies with a fait-accompli plan.

By ensuring the full support of every relevant player well-beforehand, Canada won over the credit rating agencies in a moment.

John Brian Shannon writes about green energy, sustainable development and economics from British Columbia, Canada. His articles appear in the Arabian Gazette, EcoPoint Asia, EnergyBoom, Huffington Post, the United Nations Development Programme – and other quality publications.

John believes it is important to assist all levels of government and the business community to find sustainable ways forward for industry and consumers.

Check out his personal blog at: http://johnbrianshannon.com

Check out his economics blog at: https://jbsnews.wordpress.com

Follow John on Twitter: https://www.twitter.com/#!/JBSCanada

SEE ALSO:

http://www.theglobeandmail.com/report-on-business/economy/the-lesson-from-canada-on-cutting-deficits/article4252006/?page=all

A short excerpt of this excellent article appears below. Please click on the link above to read the entire article.

The lesson from Canada on cutting deficits
LOUISE EGAN, RANDALL PALMER
OTTAWA— Reuters
Published Monday, Nov. 21, 2011 2:32 PM EST

“Finance officials bit their nails and nervously watched the clock. There were 30 minutes left in a bond auction aimed at funding the deficit and there was not a single bid.

Sounds like today’s Italy or Greece?

No, this was Canada in 1994.

Bids eventually came in, but that close call, along with downgrades and The Wall Street Journal calling Canada “an honorary member of the Third World,” helped the nation’s people and politicians understand how scary its budget problem was.

“There would have been a day when we would have been the Greece of today,” recalled then prime minister Jean Chrétien, a Liberal who ended up chopping cherished social programs in one of the most dramatic fiscal turnarounds ever.

“I knew we were in a bind and we had to do something,” Mr. Chrétien, 77, told Reuters in a rare interview.

Canada’s shift from pariah to fiscal darling provides lessons for Washington as lawmakers find few easy answers to the huge U.S. deficit and debt burden, and for European countries staggering under their own massive budget problems.

“Everyone wants to know how we did it,” said political economist Brian Lee Crowley, head of the Ottawa-based think tank, Macdonald-Laurier Institute, who has examined the lessons of the 1990s.

But to win its budget wars, Canada first had to realize how dire its situation was and then dramatically shrink the size of government rather than just limit the pace of spending growth.

It would eventually oversee the biggest reduction in Canadian government spending since demobilization after the Second World War. The big cuts, and relatively small tax increases, brought a budget surplus within four years.

Canadian debt shrank to 29 per cent of gross domestic product in 2008-09 from a peak of 68 per cent in 1995-96, and the budget was in the black for 11 consecutive years until the 2008-09 recession.

For Canada, the vicious debt circle turned into a virtuous cycle that rescued a currency that had been dubbed the “northern peso.” Canada went from having the second worst fiscal position in the Group of Seven industrialized countries, behind only Italy, to easily the best.

It is far from a coincidence that the recent recession was shorter and shallower in Canada than in the United States. Indeed, by January, Canada had recovered all the jobs lost in the downturn, while the U.S. has hardly been able to dent its high unemployment.

“We used to thank God that Italy was there because we were the second worst in the G7,” said Scott Clark, associate deputy finance minister in the 1990s.

Canada’s experience turned on its head the prevailing wisdom that spending promises were the easiest way to win elections. Politicians of all kinds and at all levels of government learned that austerity could win.”  read more…

 

 

 

 

Foreign Policy Magazine’s “A Kremlin Made of Sand” – MY COMMENT

Russian President Vlad Putin was the man who brought in 2-consecutive-term limits for the office of Russian President and without any complaining when the time arrived he did exactly as the Russian constitution required – he stepped down from Presidential office. All in all, pretty democratic of him.

Under his leadership and under the leadership of Dmitry Medvedev, the Russian economy has never been better – and yes, just like all economies these days a slip-up could prove costly. It’s the same everywhere it seems!

If the oil price happens to slip below $115. per barrel, I’m certain the Russian’s can simply defer some of their spending programs, until the oil price picks up again. Having hit ‘peak oil’ a few years back, I doubt prices will be dropping much, nor for long – as demand is still growing as the world economy returns to normal.

Paragraphs 3 and 4 (impressively and highly annotated) from Wikipedia — attest to Vlad Putin’s management successes during his first two terms as President and one term as Prime Minister. This information is widely accepted as factual and without contest.

“Putin has overseen a return of political stability and economic progress to Russia, ending the crisis of the 1990s.[4][5]
During his presidency, the Russian economy grew for nine straight years, seeing GDP increase by 72% in PPP (sixfold in nominal),[6][7] poverty decrease by more than 50%,[8][9] and average monthly salaries increase from $80 to $640.[6][10]
These achievements have been ascribed by analysts to strong macroeconomic management, important fiscal policy reforms, surging capital inflows, access to low-cost external financing and a several fold increase in price of oil and gas.[11][12][13]
The fast formation of the modern middle class in the country, the 2.3 times increase in real incomes between 2000-2011 as well as improvements in healthcare and public order allowed Russia to achieve the highest level of life expectancy in its history.[14]

As Russia’s President, Putin passed into law a flat income tax of 13%, a reduced profits tax, and new land and legal codes.[12][15]

As Prime Minister, Putin oversaw large scale military reform and police reform. His energy policy has affirmed Russia’s position as an energy superpower.[16][17]
Putin established a number of national champions, i.e. state corporations which oversaw the restoration of high-tech industries in the country (such as nuclear industry and defence industry).
Significant rise in foreign investments[18] contributed to the boom in such sectors as automotive industry.

Economic megaprojects which Putin endorsed have included the construction of major export pipelines (notably ESPO, Nord Stream and BPS-2), the restoration of the global satellite navigation system GLONASS, and the building of infrastructure for top level international events held in Russia (2006 G8 Summit, APEC 2012, and multiple sporting events).”

http://en.wikipedia.org/wiki/Vladimir_Putin

As a person widely-known to not like surprises, he welcomes any opportunity for communication with world leaders, which makes them feel quite comfortable enough to pick up the phone to discuss any matter at all with him — oh, how unlike the Soviet era of leadership!

We in the West don’t fully appreciate how fortunate we are to have Vlad Putin holding the position of the President of Russia.

Follow John Brian Shannon on Twitter: https://twitter.com/@JBSCanada