Deconstructing Debt and Deficits, and Where We Go from There

I've never been a huge Tony Robbins fan AND I have never doubted his sincerity or his brains at what he does.   Below he's put together a truly first class piece of work that really brings home the scope and scale of both our total Debt (which just crossed $16 Trillion - thanks Washington!), as well as our ongoing annual deficit. Commentary below the video.




The commentary: Let's start with the big stuff.  $16 trillion in accumulated debt plus another $117 trillion in unfunded liabilities means we owe a grand total of $133,000,000,000,000.00, or $427,653 for every man, woman and child in the nation.  And the number keeps growing every second.

The big conclusion I draw from this is pretty straighforward: For this number to have gotten this big with the majority of the public being largely unaware and not understanding what it means to them is a crystal clear indicator that we have hired the wrong people to run our business (of every party and persuation) for very long time.  This needs to change, and as soon as the people get engaged it will - I hope that happens soon.

Where to go from here: As with most things in the human experience, when we find ourselves in an unacceptable circumstance the only thing that really matters is what we decide to do about it.  The "why's" of what got us there are only valuable as a guide for illuminating things to avoid in the future.  In looking at solutions to our debt problem the school of thinking that seems to get the most attention simply promotes a basic, binary approach - higher taxes, lower spending, or a combination of the two.  If we accept that binary premise as fact, then we that's all we have, and all we'll ever have.  Fortunately as humans we excel are being creative - and that is exactly what is required here.

Here are three things just to consider (and the first two are old news):

Stop spending!  The old adage applies - "When you hit rock bottom, stop digging!"  To put it simply - run the government like a business by incentivizing performance that reduces budget size, spending levels, duplication of effort (do we really need dozens of departments with the ability to arrest our citizens?) and improves efficiency.  Above all, we can't afford to add any more weight to the cart, and any politician who is unable to work towards that goal needs to be voted out of office at the first opportunity.

Cut taxes! - This is counter to the general media conversation and not very (currently) populist AND here's the deal: Every time since the 1940's (which is when permanent taxation began in the US) that marginal tax rates have been lowered, actual tax receipts have risen. 

How can this be?  We lower rates, but then we actually end up with more money flowing into the Treasury??  It's true.  Please understand that there are no politics here - only empirical, numerical fact, and the facts are incontrovertible.  Don't believe it?  Go investigate at the CBO website.

The fact that when we lower tax rates actual tax receipts increase indicates something incredibly important (that I've talked about here before), which is that there is in all probability an Equilibrium Tax Rate - the phenomenon is called The Laffer Curve.  Equilibrium points are very common in economic theory, and Tax Rate Equilibrium is simply the rate that yields the highest actual tax receipts.  When rates go down and receipts go up it is telling us that rates are too high, and my guess is that they are far too high.

Quick Note: As with any politically-charged issue there are lots of folks who dispute the numbers for lots of reasons (there's a pretty good one here).  The main problem with all of them (besides being mostly politically motivated), is that they look at the US economy as a closed system, when in reality our place in the global economy and as the global reserve currency are advantages that no other economy can replicate, and we need to use those advantages.

And finally: Rev the Engine! - This item gets almost no attention out there, even though it is one of the most critical solutions we can go after.  "Rev the Engine" is about increasing the velocity of money through the system (not increasing the amount of money in the system).  The velocity of money is, in my opinion, one of the key triggers of the Laffer Curve phenomenon (lower tax rates equals higher actual tax dollars collected).  Semantically I use the engine reference for a reason: Engine speed is measured in RPM's.  By the same token, monetary velocity (at least in terms of this discussion) is measured by how many times a dollar can go around the system.

Example: Let's make a point of taxation the start / finish line in this race.  If conditions exist to make it possible for a dollar to make it to the taxation point two times in a year, instead of one, then that dollar has 100% more taxation revenue value.

So what does it take to increase economic velocity of money through our economy?  Think of it this way: What makes people and companies not want to send their money through the system in the first place?  At the end of the day I believe that it is simply Risk.  In this view Risk equals friction, and friction slows down the money - Risk in making or taking a loan, risk in starting a business, risk in hiring an employee, risk in expanding a business, risk in taxation itself - the simple risk that they will not get that dollar back again.

From a business perspective what are the places where government can change the perception of risk in the economy?  Here are a few:

• Unemployment costs
• Regulation costs
• Uncertain government policy
• Unfair international competition
• Unfair currency translations
• Unfair or even uncertain taxation - as an example if by sending that dollar on its journey through the system you will only get $.25 cents of value (so assuming a 75% tax rate, which we have actually had in the US in the past)

Each of the above (and many more) increase the perception that a dollar spent will not be able to be recaptured, and ends up putting dollars on the sidelines instead of producing positive economic effect.  Currently US companies are sitting on nearly $2 trillion in cash, with a huge build up coming since the financial crisis.  The reason - too much perceived risk.

From a policy perspective, the job of the government should be to remove impediments and friction (risk) on the cyclical flow of money through the economy to the highest extent possible.

Conclusions: The three items here, pursued simultaneously, in my opinion would put economic growth over 8% within 24 months for a period of between 5 and 10 years.  The resulting tax revenue would be enough to eliminate the outstanding debt within 15 years, and have the unfunded liabilities in check (as long as we don't allow the politicians to go and fritter away our wealth yet again!).

All that by simply hiring the right people in Washington, unchaining both the economy and, most importantly, We the People!

So You Want to Compete, Huh?

The story of the day from DC appears to be "Obama's economic agenda: Boost US competitiveness" (from AP, via Yahoo!).  So the President appears to believe that the way to spur our economy is by making US businesses more competitive.  I agree!  I wonder if he's serious?

As I totally would expect, there was pretty much zero detail in the story on exactly how the Administration plans to accomplish this.  The allusion was that all would be revealed during the State of the Union address - history shows that promises like this have nearly zero probability of actually materiallizing in any meaningful way (remember Bush's promise to secure the border?).

To me this looks to be the opening act in the Administration's coming run towards the center (gotta get re-elected, right?).  I think we may be in for the most amazing show of polical marketing ever seen!  Expect it to get piled high and deep, and the BS-o-meter to go right off the charts.

This "Competition" nonsense is going to rank right up there.

The truth is that the things required to allow us to actualy compete are the very things that this Administration can't (won't) do.  Competition isn't some abstract concept.  It simply means that US products and services must offer a better value than global alternatives in terms of some meaningful combination (as defined by the buyer) of price, quality and function.  That's pretty much it.



Of the three attributes to facilitate effective competition, quality and function can be explored pretty quickly.  In the commoditized world in which we live there simply aren't enough qualitative differentiators available, or barriers to copying function to make advantages in these areas achievable in the short-term (i.e. before November 2012). 
 
With that being said, offering amazing tax credits for R&D activities and incentivizing (not subsidizing) immediate innovation could produce pretty fast results in bringing back some previously offshored activities (and helping the unemployement rate).
 
Being that this would require effectively reducing corporate taxes, I think this option can be safely discounted:the Administration running towards the center is one thing - a socialist becoming a conservative is probably asking a bit much.
 
Sadly, the fact that the reduction in unemployment costs, additional personal income taxes generated and additional, tertiary tax receipts from higher overall domestic economic activity would probably replace the "lost" corporate taxes a couple of times over will, of course, fall on deaf ears to those folks who are more concerned with positions and power than results.
 
The reality is that the government does not perform commercial innovation, invention or efficiency.  It can only cutoff or disinentivize these activities by the people.
 
So, that leaves price.  If we want to compete (i.e. sell more!) then the fastest path to accomplishing this is to sell our products and services at a better price.  Luckily the government can do plenty about this.  Question: What are the things that systemically make "Made in the USA" more expensive than global alternatives, and over which the government has direct influence?  There are several incredibly important ones:

• Labor Cost - I think that generally most folks would agree that employee earnings should go up, not down.  There is, however, a lot of opportunity to be had around the efficiency of labor dollars.  Paying people not to work, incentivizing unproductive wage allocations and holding companies hostage to broken collective bargaining process (hello Detroit) are all examples of government assisting in the artificial inflation of inefficient labor.  If it sounds like I am criticizing labor unions in a sideways fashion, then let me be direct: Labor unions are broken, just as government is broken.  Listen to the market, assist in its efficiency, and get out of the way.
• Tax Costs - there's simply no way around the facts.  Businesses don't pay taxes - they pass them along to the buyer.  Period.  The End.  Anyone that tells you different is lying, and every cost that is passed along (and increases price) directly, negatively affects competitive position.
• Regulation/Legislation - See "Tax Costs" above.  Regulation (just like funding the Government) is essential.  Inefficient regulation is expensive (uncompetitive).  Beaurocracy as a subsititue for regulation is potentially deadly (Healthcare anyone?).  Guiding theme: We allowed our government to regulate and legislate our manufacturing sector out of existence, and to incentivize the movement of millions of jobs offshore- we can order them to allow it all to come back , and all it takes is a little taste for competition.
• Level the Playing Field - Just as our goverment has disastrously hobbled our businesses' abilities to compete, other countries actively give their own products an edge (in their local markets, as well as here in the US).  Fair is fair.  Anyone not playing fair should be locked out of our markets.  I'm not saying we should go out and start trade wars; only that we should demand fair treatment and accept no less.  The reality is that they need us (and access to our markets) just as much as we need them - and probably more.

Independence is our birthright.  Economic independence is essential in protecting our personal freedoms.  We have access to everything we need, and we have allowed the government to choose for us not to use what we have.  Any item or input (energy, people, rare earth elements) for which we are dependent on another country should be allowed to be produced here.  Do that and we won't just compete - we'll lead the pack.

So there it is Mr. President.  If you seriously want to facilitate the ability of our businesses to compete globally, all you have to do is get out of the way.  And completely alienate the radical core of your support base.  That won't happen.  That's why the latest "story" is just the latest, worthless PR move.  Don't believe it.  Get ready for more.