A prescription for US deficit reduction

Benj Gallander and Ben Stadelmann
Thursday, September 29, 2011

A little over a year ago, Standard and Poor’s was kind enough to invite Benj to its 150th birthday party. Quite frankly, that was a surprise, because his contrarian bent means he is not part of the mainstream. But the event aroused his curiosity and, as it was being held at the Royal York Hotel in Toronto, he was mighty sure that the food would be yummy. Which it was.

The various presentations were all rather humdrum, to be sure, with little enlightenment shed on the happenings of the time. Nor was there illumination on where things were heading. And when question time began, the first query was a puffball posed by Tom Kloet, CEO of the TSX. More yawns.

Then Benj decided that it was time to move beyond the simplistic and asked something like, “It is obvious that the problems in the United States are huge, given the debts and the deficit. Why have you not downgraded the United States?”

The gist of the response was that S&P is a very conservative organization and therefore the United States still was a triple-A country. And it was pointed out that Ontario’s debt was worse than California’s, albeit that did not seem relevant. Later, in conversation with two of S&P’s top brass, the conservatism again was palpable.

The rating agency made it official in August: the United States is no longer triple-A beef, and stock markets reeled after the downgrade. But this should have happened a long time ago, as it has been obvious for years that the U.S was no longer worthy.

When would a downgrade have been reasonable? How about when America committed to the Long War, without adopting any plan to pay for it? After the Fannie and Freddie debacles added hundreds of billions in liabilities to the government balance sheet, the time was also ripe to say goodbye to the triple-A rating. Again, nothing happened.

Only the combination of previous events, coupled with the ridiculous entanglement about raising the US debt limit this summer, finally pushed S&P to move. One could easily argue that the downgrade should have been another couple of notches, but at this point we’ll simply give kudos that they finally took this “drastic” step. Apparently, Fitch and Moody’s do not have the cojones to do the same thing.

Of course, as was to be expected, there was a tremendous backlash against Standard & Poor’s for its decision. President Obama insisted that the new rating was unfair. On August 20, he stated, “This is still the greatest country on earth. We still have the best workers and farmers, entrepreneurs and businesses, students and scientists.”

This was akin to the Toronto Maple Leafs, who point to their rich history when discussing the club’s fortunes. However, it has been eons since either of these “clubs” were number one, and it is depressing to see how far both of these greats have fallen.

Some people argue that the United States cannot default because the country can simply print more money. Hogwash! Here is a list of some of the nations, those that print their own money amongst them, that have defaulted since 1998: the Ivory Coast, Seychelles, Grenada, Belize, Moldova, Ecuador, the Ukraine, Pakistan, Peru and Venezuela. Want something bigger? Argentina’s was better than $82 billion in 2001. Smaller in terms of dollar value, but with a larger impact, was Russia’s default in 1998 with losses of $72 billion. Yup, they do print their own currency.

The increase in the debt limit is akin to the person who avoids a fiscal disaster by juggling numerous credit cards. When fortunate enough to receive further credit that keeps the hounds from knocking down the door, he feels better off. Meanwhile, the hole gets deeper.

To alleviate the noose, the United States continues to follow the same path, which evidently is not working. Here are some suggestions for the United States to begin to turn the page and get its fiscal house in order.

The US should cut its military expenditures dramatically. Currently it spends about six times as much as the number two nation in the world, China. It spends about 11 times the amount of number three, France. Cutting this tally of approximately $700 billion by at least 25 percent would still allow the US to outspend adversaries by an ample margin, but take a whack out of the deficit.

Americans still pay far less at the pumps than people in most other nations. A tax of a dime or twenty cents per gallon when people fill up would likely add $25 to $50 billion to tax revenues, discourage consumption and aid the environment.

Warren Buffett is correct. Taxes need to be raised on the rich. If not increased, certainly the tax breaks that they have enjoyed, and which have been extended, should be eliminated. The income disparity among our southern neighbours is reprehensible.

Trickle-down theory, whereby spending by the rich will help the poor, has been proved to be a chimera. It would be far easier to ignite the economy by giving 1,000 poor people $1,000 than one person $1 million. “Trickle up” is a key to stimulating the economy and create jobs.

That is the fourth plank of reducing the deficit/debt: America must not only create jobs, but prevent their elimination. The United States needs a “War on Unemployment.” Job losses mean less revenue coming to the government and more money flowing out. The way forward for the economy is to tap the productive capacity of the millions of unemployed.

These are just some of the possibilities to turn around America’s losing battle on the debt and deficit. There are lots of other potential solutions, but starting here would help. Will any of these happen? At this point, the political resolve to work together and battle the deteriorating situation does not exist.

Maybe when the hole is more profound, perhaps too deep to dig out of, our southern neighbours might rally to battle this scourge that threatens their country. In all likelihood, as far away as it is, Leaf Nation is closer to a turnaround than the United States of America.