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Sunday, December 2, 2012

Avoiding Sequestration & The Fiscal Cliff: A Better Approach to Reducing Debt by $4 Trillion AND Creating a Stronger America

Avoiding Sequestration & The Fiscal Cliff: Centrist Approaches to Reducing The Debt by $4 Trillion AND Creating a Stronger America

In the scenario presented below, sequestration is avoided. There is no fiscal cliff. Good programs are minimally impacted. Bad programs see more dramatic cuts. Government begins to be right-sized in an sensible manner! The recovery begins. Here's how to do it. 
Let’s look at our  federal budget. Government revenues (e.g., taxes and other income generating sources) are estimated to be $2.6 trillion for 2012. Our 2012 budget was $3.7 trillion. This means that we spent $1.1 trillion more than we took in last year. That's how bad things have become, fellow Americans. 

We must lower the amount that government spends. The 2011 Budget Control Act (BCA), enacted after the August 2011 debt ceiling and subsequent Supercommittee debacles mandates that at least $1.233 trillion be cut from the budget over the next 10 years. If we don't agree to a plan for budget reductions of $1.2 trillion, cuts will automatically take effect.

"Sequestration" means an across-the-board cut in all programs (other than federally mandated programs such as Social Security). Sequestration will make all government programs equally smaller. Sounds good to some, but that is actually a very bad thing. It means that better run, more efficient and effective programs are cut at the exact same level (4%) as poorly administered, ineffective programs. In this scenario, successful programs lose critical funding, improving programs cease their forward momentum, and and the worse programs, well, just get worse.

Reducing the size of the federal government in a rational, sensible fashion should be the principle focus of conversation in Washington DC. Once we devise this method, the markets will react highly favorably, seeing sensible government right-sizing, bipartisan resolve, and presidential (and congressional) leadership, which will lead to increased revenues and reduced budget deficits.

Here's a simple way for the President to lead the effort to reduce the size of government in a rational way that will be agreeable to both sides. The President should order his department Secretaries (e.g., Department of Defense, Energy, Treasury, EPA, etc.) to designate each program within the department with one of three priority ratings: 

- "A" priority programs (receive the lowest required percentage reduction - if any - in their budget);
- "B" priority programs (receive a higher percentage reduction than "A" priority programs)
- "C" priority programs (lowest priority programs receiving the steepest reductions).

In this scenario, each department program must be given an A/B/C priority designation. The A, B, and C programs must be proportionally equal in total size (funding dollars). In other words, one-third of the DOE programs from a funding perspective would be designated "A" priorities, while one-third would be designated "B" priorities, and a final one-third, "C" priorities. The president must direct his department secretaries to "make it happen."

The president can make adjustments as he sees fit. Should he do so, the political theatre would be truly wonderful, and productive for America. Should he adjust some A priority program funding upward he would then need to make proportional adjustments from a "B" or "C" priority programs further downward, to keep the one-third funding allotments equal.

Again, President Obama must reduce government expenditures by at least $1.233 trillion - he has no other choice. He might, however, propose to reduce the size of government even further, perhaps because he sees as many Centrists do that it is the right thing to do for future generations, or perhaps because he is forced to play this hand through negotiations with the House. He might for instance agree to 10 year reductions of $2 trillion. Think that's painful? Look to the EU to see real pain.

Regardless, President Obama in this scenario must (1) determine the total amount of cuts through negotiations with Congress ($1.233 trillion? $2 trillion?); (2) provide the ABC priority list given to him by his department secretaries, and (3) provide guidance on the percentage changes for A, B, and C priority groups to the Office of Management and Budget. OMB would  then determine the exact budget reduction amounts that A, B, and C programs would receive (assuming each class of program is actually reduced; for instance, the president could decide that "A" programs should receive an increase in funding) to meet the budget reduction goal, whether it be the $1.233 trillion budget reduction requirement mandated, or a higher goal, such as $2 trillion. Once the percentage reductions are determined, the President will require the A, B, and C priority programs within the respective departments to alter their budgets by the percentage amount identified for the coming fiscal year for each program.

And so, sequestration is avoided. There is no fiscal cliff. Good programs are minimally impacted. Bad programs see more dramatic cuts. Government begins to be right-sized in an sensible manner!

This method enables the department Secretaries themselves to rightsize their organizations to the realities of the day.  It is a simple and effective way to reduce the size of government based on the knowledge and expertise of the various department leaders, themselves.They know best where the fat is. 


So much for the expense side. On the revenue side, things are even more difficult. Unfortunately, class warfare has been waged from the Left against the Right, and Right against the Left, with President Obama refusing tax increases on the middle class, and partisan Republican leaders bitterly protecting the most wealthy among us. The result of this continued posturing will likely lead to bad legislation that will further divide an already splintering America.

The most sensible approach is to enact Bowles Simpson.  This  bipartisan solution makes the most sense. Legislators who do not favor this plan should be held to account for their inaction by their constituents. Assuming, however, that this does not occur, we must find other ways to reduce cost and increase revenue.

An alternative approach might be one that avoids class warfare by spreading the pain across all income categories, including the wealthy, middle class and the lower income earners among us, corporations, and supplemented by a broad excise tax, while granting allowances for citizens who have been underemployed or unemployed during the fiscal year.

A reasonable and responsible goal might be to generate at least $1.0 trillion in revenue increases, or a 2:1 ratio of reductions to revenues. This can be done in the following manner:

1. Across the board 2.5 percent tax hikes on all wage earners (result: $650 billion over 10 years).
Keep the same tax system that we have today for the present time (since Washington can't agree on anything right now). Add 2.5% on top of the total tax found on line 60 of the 1040 income tax form. Same for corporations.

2. A 10-year one percent Federal Value Added Tax (VAT) levied on individual item goods and services purchased having a price of $100.00 or more, each year for 10 years. The VAT could exclude certain items, such as food, tuition and related education and job training costs, and medical services, for instance. VATs are utilized in over 130 countries around the world as revenue generators. Proceeds from the VAT would go toward deficit reduction only. The federal VAT would generate approximately $450 billion in revenue over 10 years. 

This is not pain and will not cause unrest! If you want to see pain, and unrest, look to Greece, Spain, Portugal, or England, or France...

As we begin to get our fiscal house in order in such a sensible manner, the markets will respond favorably. Market risk and uncertainty will be reduced. Companies will invest in new plants, new markets, new equipment and new jobs. The unemployment rate will finally drop. Revenue will increase, generating additional revenues to pay down our debt further still. Our bond rating will return to where it belongs. Your retirement vehicles and other investments will show far more favorable returns. America will lead the world away from the cliff and to better times for all nations and peoples. 

$1.2 trillion reduction in spending and $2 trillion increases in revenues means that we are still $800 billion short of our $4 trillion goal. To reach that goal, we must either enact legislation reducing entitlement programs, or further reduce the size of federal government programs in ABC approach proposed above.

We might suggest splitting the difference, and reducing long term entitlements such as Social Security and other programs by $400 billion over the next 10 years, and hacking an additional $400 billion from federal programs using the A/B/C approach. Entitlement program reduction can be done in sensible fashions.

Painful? If you want to see painful, look to Greece, Spain, Italy or Portugal.

Quit bickering. Quit the self-interest. Get your head out of the sand. Do your part. 

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