The choom gang controls Washington; plunges America over the cliff

When details emerge, even novices will quickly see that Democrats and Republicans have lost America’s financial way. Photo: Americans are plummeting over the cliff

NEW YORK, NY, December 31, 2012 ― Our political leaders have made zero progress on resolving the fiscal cliff economic crisis.

Despite earnest claims of harboring best intentions, President “What-me-Worry” Obama shares blame for the latest impasse with a bi-partisan posse that includes Speaker “La Vida Loca” Boehner; House Minority Leader “It Never Rains in California” Pelosi;  Senate Leader “Naturally High” Reid; and Senate Minority Leader “”I’ve Got a Deal for You” McConnell.

Forget rumors touted in our pliant mainstream press of valiant last-minute success.

When details emerge, even novices among us will quickly see that Democrats and Republicans have all lost America’s financial way.

The Federal Government deficit is stuck on large, America’s accumulated debts are monstrous, and our politicians are up in smoke that is legal now, only in a few states.

Why are we now in economic limbo, more than four years following the wake-up call in October 2008?

Perhaps old habits have become the rage in Washington.  In his youth, Barack Obama definitely inhaled marijuana as a proud member of “The Choom Gang”. Seems to me that our President has been taking us for a ride like this one he apparently enjoyed back in his school days[i]:

“The Choom Gang’s preferred mode of transportation was a Volkswagen bus affectionately known as the “Choomwagon”. According to one anecdote, the Choomwagon and a Toyota in which Obama was riding raced to the top of Mount Tantalus, and the Toyota rolled off the road. The Choomwagon’s passengers found the future president staggering on the road and laughing so hard he could barely stand up.”

Driving the ship of state under the influence is dangerous business.

The trouble, for those of us who live outside the Augean swamp of Washington, is that politicians tasked with solemn responsibilities apparently enjoy back-room “deal-making” and the glare of media attention much more than they relish studying hard economic truths.

Despite best efforts by a generally incurious mainstream press to shield us from reality, the pungent haze of half-truths and outright falsehoods will eventually lift. Soon, rich and poor alike will be crying as we realize just how far all of us have already traveled on the road to economic oblivion.

Some simple economic realities help frame the vexing issues.

Reality # 1: America needs a realistic plan to close the yawning chasm between federal spending and federal income—not a fanciful ten year inventory of dreams.

Recent government data suggests that the Federal Government is currently spending $ 1.2 trillion more than it takes in this year alone.

 

The President has been forcing attention on equitable distribution of the tax burden.

However, America is already in another recession—no orthodox tax plan whose central premise is raising rates will actually generate a growing stream of Federal Government revenue in the near term.

Mr. President, if it is so dangerous now to raise rates for the bottom 98%, why exactly shall we raise rates on the top?

Are we going to punish some of us until we all succeed?

Or is that simply the choom talking?

Reality # 2:The deficit problem seen now is long in the making and not an isolated inconvenience.

Total Federal Spending has soared out of control since 1999, far outpacing growth in Federal Receipts[ii].

In the last two years of the Clinton era, the Federal Government generated asurplus of $ 284.0 billion. In eight years during the Bush era (2001 to 2008), the Federal Government generated a deficit of $ 2,313.8 billion. Under Obama, the Federal Government racked up a deficit of $ 3,774.7 billion in three short years.

A plan to close the deficit must start by attacking spending in three meaty areas: (1) transfer payments to persons; (2) compensation to federal workers; and (3) purchases by the Federal Government of services provided by the private sector. Together, these three areas alone accounted for 78.0% of controllable Federal Spending[iii].

Reality #3: Transfer payments should flow primarily to the truly needy—not to each American.

Under the current system, all Americans eventually receive transfer payments from the Federal Government[iv]. In 2011, transfer payments to individuals were $ 1,735.8 billion in total.

In 2011, the average transfer payment paid across all households was $ 14,335 whereas the average gross income of households in the bottom 20 % was $ 11,239[v].

Even if incomes in the bottom 20% of all American households are higher than estimated by the U.S. Census Bureau, Americans should continue to maintain a supportive “safety-net” for the less fortunate. Perhaps the amounts paid are generous enough, perhaps these amounts should be cut, or perhaps these amounts should be somewhat higher.

However, why should households at the top require transfer payments from the Federal Government?

Households in the top 20% earned an average of $ 178,020 in 2011. Even though their incomes also remain under pressure, these households have accumulated substantial wealth. Do prosperous households really need to count on receiving their share of transfer payments going forward?

One negative consequence of America’s addiction to Federal Government Deficits has been persistent decline in the “real” value of our currency, which has dropped in inflation-adjusted terms and dropped significantly in gold-adjusted terms since 1998.

According to one estimate, the top 50% of America’s households owned a staggering 98.8 % of American household wealth[vi]. Shouldn’t the top share of households care a lot more about protecting their accumulated wealth, measured in a strong dollar, than receiving far smaller flows of nominal benefits?

As part of a “grand bargain”, higher income earners and the wealthy might just embrace elimination of the cap on assessments for Social Security taxes and to strict “means-testing”, if transfer payments actually were channeled primarily to the needy.

Reality # 4: Compensation and Employment Levels for Federal Government Workers Must be Brought into Balance with the Private Sector.

Federal workers earned an average of $ 128,916 per annum in 2011, including fringe benefits. Private sector workers earned $ 64,560 or roughly one-half of the Federal average.

The gap between pay for Federal workers and pay for the rest of us who struggle in the private sector presents a deeply troubling picture.

In the private sector, jobs and income remain under a relentless assault that no politician can restrain. However, in the public sector, powerful unions and painful political realities have painted America into a place where too many coddled bureaucrats earn too much precious money doing way too little to advance the true economic interests of the nation.

No, the solution here does not lie simply in eliminating Federal Government programs. Instead, all Federal Government workers should accept reductions in their compensation to bring their pay much closer into balance, given the relative security each enjoys in continued employment.

Reality #5: The Federal Government has succumbed to the kind of mania that buries “sub-prime” borrowers.

The Federal Government has been able to continue an orgy of deficit spending for two bad reasons. First, the rest of the world’s major governments appears even more screwed up. Second, the Federal Reserve System is powerful enough (for now) to intimidate all other market participants from mounting a concerted bear raid on the U.S. dollar.

 

In a worst case that is becoming increasingly likely given the manifest economic incompetence of our politicians, bond vigilantes could start forcing the Federal Government not just to close the budget deficit, but also to begin bringing our debt load downwards.

Even if miraculous intervention averts the “fiscal cliff” in the last seconds of 2012 or the early days of 2013, our highly paid leaders have proven beyond doubt that American political leadership is ignorant of important economic realities and incapable of achieving discipline. Those of you who think America is immune from the kind of assaults that brought down Greece, humbled Ireland and threaten Spain and Japan need to prepare.

In any other significant nation, crowds would be swarming throughout the land and demanding new, economically responsible leadership. However, we remain complacent in this great, supposedly rich land.

Boycott French champagne (if you can afford it), join your leaders in lighting up some American weed (in states where this is legal) and get ready for a hot New Year at the gates of economic hell.

Follow @CharlesOrtel on Twitter.


[i] “The Choom Gang’: 9 juiciest details from Barack Obama’s days as a pothead”,The Week, 25 May 2012. (Item 6).

[ii] The source for information concerning Federal Government expenditures and receipts is Bureau of Economic Analysis (BEA) National Income and Product Account (NIPA) Table 3.2 Federal Government Current Receipts and Expenditures.

[iii] Total Federal Spending was $ 3,757.0 billion in 2011. From this total, we subtract $ 325.0 billion in interest expenses and $ 130.0 billion in depreciation. Transfer payments to persons were $ 1,735.8 billion (52.6%); compensation to Federal Government workers was $ 477.0 billion (14.4%) and purchased services were $ 364.2 billion (11.0%).

[iv] In 2011, transfer payments to persons were $ 1,735.8 billion. Social Security was $ 713.3 billion; Medicare was $ 545.1 billion; Unemployment was $ 108.0 billion; Refundable Tax Credits were $ 99.1 billion; Supplemental Nutritional Assistance was $ 72.7 billion; Veterans’ Benefits were $ 61.8 billion; Supplemental Security was $ 45.9 billion and approximately 10 other smaller programs accounted for the remainder or $ 91.9 billion.

[v] The Federal Government does not publish precise information concerning the breakdown of transfer payments by household. In logic, transfer payments should flow primarily to lower income households. For this discussion, we assume households receive the same average transfer payment. Considering all Federal transfers, this pattern may conceivably hold true. The U.S. Census Bureau (USCB) provides estimates concerning how gross income is distributed among households. See USCB Table H-3: Mean Household Income received by Each Fifth and Top 5 Percent, All Races, 1967 to 2011. As the USCB explains in more detail, these estimates tend to underestimate the amounts of transfer payments received by households and to underestimate the gross incomes of households.

[vi] Linda Levine, Distribution of Wealth across Households, 1989 to 2010, Congressional Budget research Service, 17 July 2012.

 


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Charles Ortel

Charles Ortel became a lapsed member of the silent majority in August 2007 when he began alerting the public to dangers posed by structural changes in the global economy. Since then, Charles has appeared in the print, radio and television media with increasing frequency. Brass Tacks will attempt to offer non-partisan perspective on factors contributing to the unresolved, burgeoning crisis and discuss potential solutions. Graduated from Horace Mann School, Yale College and Harvard Business School, Charles tries to learn each day.  

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