Bank rob­bers can show Congress where the money is

The Pak Banker - - Front Page - Caro­line Baum

BY this time, any­one with a heart­beat knows that there is some sort of unique fi­nan­cial rock for­ma­tion pos­ing a threat to the US econ­omy at year-end; that if Pres­i­dent Barack Obama and Congress don't find a way around it -- some­thing at which Washington ex­cels -- bad things will hap­pen to all of us.

Par­don my ver­bal gymnastics, but I'm try­ing to avoid typ­ing "fis­cal cliff" even as our government bar­rels to­ward it. In case you were un­der the im­pres­sion there was a sense of ur­gency about prevent­ing $500 bil­lion of au­to­matic tax in­creases and spend­ing cuts from tak­ing ef­fect in the new year, think again. Obama sched­uled no meet­ings with con­gres­sional bud­get ne­go­tia­tors this week. As soon as law­mak­ers re­turned to Washington, Obama de­cided to take his case to the peo­ple or, al­ter­na­tively, bring the peo­ple to him to plead his case.

Ever since the Nov. 6 elec­tion, both par­ties have been fo­cus­ing on a sin­gle, con­tro­ver­sial is­sue: whether the Bush-era tax cuts for in­di­vid­u­als mak­ing more than $200,000 a year ($250,000 for house­holds) will be al­lowed to ex­pire. Obama has threat­ened to veto any leg­is­la­tion that ex­tends the cuts on the top 2 per­cent "be­cause it's bad eco­nomic pol­icy," ac­cord­ing to White House spokesman Jay Car­ney.

The ex­pi­ra­tion of tax cuts on top earn­ers would in­crease fed­eral rev­enue by $824 bil­lion dur­ing the next 10 years, ac­cord­ing to Con­gres­sional Bud­get Of­fice es­ti­mates. If Congress does noth­ing -- if taxes go up across the board, dis­cre­tionary spend­ing is cut and Medi­care pay­ments to doc­tors are slashed, among other au­to­matic ad­just­ments -- the Trea­sury would take in an ad­di­tional $5.1 tril­lion of rev­enue over 10 years.

That's hardly chump change, but even "big tax in­creases can't cover the ris­ing cost of en­ti­tle­ments," said Joe Car­son, di­rec­tor of global eco­nomic re­search at Al­lianceBern­stein LP in New York. Manda­tory spend­ing on pro­grams such as Medi­care, Med­i­caid and So­cial Se­cu­rity, to­taled $2.05 tril­lion in fis­cal 2012, or 58 per­cent of the fed­eral bud­get.

Based on de­mo­graphic trends, en­ti­tle­ment spend­ing will reach $3.55 tril­lion in 2022, con­sum­ing al­most two-thirds of the en­tire bud­get. In the past, the US gen­er­ated enough rev­enue to cover fu­ture costs. Dur­ing the 1980s and 1990s, for ex­am­ple, the ra­tio of cur­rent rev­enue to en­ti­tle­ment spend­ing five years out was 1.4, ac­cord­ing to Car­son.

Then the cost curve started bend­ing in the wrong di­rec­tion. The ra­tio of rev­enue to fu­ture en­ti­tle­ment costs fluc­tu­ated be­tween 1 and 1.1 over the past decade: Tax rev­enue barely cov­ered the part of the bud­get that is on au­to­matic pi­lot. Even with a rev­enue boost from in­ac­tion on the fis­cal cliff, the ra­tio of cur­rent rev­enue to pro­jected en­ti­tle­ment spend­ing never ex­ceeds 1.15 dur­ing the rest of the decade, Car­son says.

"The fu­ture cost of manda­tory pro- grams ab­sorbs all of the pro­jected growth in rev­enue from tax in­creases and eco­nomic ex­pan­sion over the next decade," he said.

In other words, with­out re­form­ing en­ti­tle­ments, there will be no money for de­fense, ed­u­ca­tion and other dis­cre­tionary pro­grams. That may be fine with Grover Norquist, he of the no- tax pledge, but it isn't prac­ti­cal.

Nei­ther is the no­tion that the US's fis­cal prob­lems can be fixed by rais­ing rev­enue, elim­i­nat­ing waste, fraud and abuse (peanuts in the grand scheme) or tin­ker­ing with dis­cre­tionary spend­ing. Congress should heed the ad­vice of Wil­lie Sut­ton. Ac­cord­ing to lore, when Sut­ton was asked why he robbed banks, he replied: "That's where the money is." (Sut­ton de­nied ever say­ing that.)

If Congress wants to re­duce the deficit, sta­bi­lize the debt, put spend­ing and rev­enue on a sus­tain­able path, or all of the above, it has to go where the money is. And the money, or the growth in spend­ing, is in en­ti­tle­ments.

Obama has said he is open to re­form­ing the pro­grams for the sick and el­derly. Not that he has put any­thing on the ta­ble just yet. And some mem­bers of his party blanch at the idea of cut­ting even a dime in ben­e­fits.

Still, many sen­si­ble ideas for re­form­ing en­ti­tle­ments have been floated over time, in­clud­ing grad­u­ally rais­ing the el­i­gi­bil­ity age for So­cial Se­cu­rity and Medi­care; us­ing prices, not wages, to com­pute a worker's ini­tial So­cial Se­cu­rity ben­e­fit; in­dex­ing fed­eral pro­grams to a chained in­fla­tion mea­sure that more ac­cu­rately re­flects changes in spend­ing pat­terns than the con­sumer price in­dex; and sub­ject­ing pro­grams to means test­ing. None of th­ese long-term op­tions even men­tions the word "voucher."

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