After receiving many comments on my recent post laying some of the blame for our deficits on President George W. Bush, but much more of the blame on President Barack Obama, I decide to recheck how I that this impression.
If you believe that “a picture is worth a thousand words,” then these pictures will relieve the need for much narrative. It’s easy to be in denial when your information is based on opinions or incorrect data. It is much harder when faced with graphic evidence. Therefore, this post is for all of those who disagree about who caused the spending problem in recent years in the USA, and for all those who have been arguing to no avail to prove that point.
Further, readers should realize that we have both a revenue problem and a spending problem. The spending problem is by far the worse of the two, but both need to be addressed. The president’s misguided desire to “tax the rich” would not solve the revenue problem. It would just conform to his “take from the rich\ and give to the poor” ideology.
Another famous figure in history shared this view. He said (paraphrasing), “From those according to their means, to those according to their needs.” His name was Karl Marx, author of the Communist Manifesto.
At this point it is easy to see when the spending skyrocketed and who was in control of the US government. The chart that follows provides numerical data to confirm the same problem. It also shows the dramatic slowing in revenue, which has made the deficit problem far worse. Theoretically, when there is a shortfall in revenue, the best idea is to slow down spending to compensate for it.
Instead, our President and his Democratic allies in Congress from 2008-2010 did just the opposite—they accelerated spending. For over 800 days, they failed to do their fiscal duty and create a budget for the United States of America. By doing this, they could continue their irresponsible spending via series of “continuing resolutions” instead of actually showing how bad things were. The first glimpse of how bad America’s overspending had become was the ridiculous 2012 budget proposal submitted by President Obama in Feb. 2011.
Even the Democrats in the Senate saw that it would be bad government and bad politics to vote for that, so it went down 97-0. Now we face a new problem. America must cut spending. However, spending cuts must be done “carefully” in 2012, to allow the economy to continue recovering, and withstand the shock of eliminating thousands of (largely unnecessary) government jobs.
Next, the tax code of the USA needs a dramatic restructuring to broaden the revenue base, increasing revenue from taxes, and meanwhile, lowering the tax rates on individuals and companies. Lower tax rates—done correctly—have been proven over and over to stimulate economic growth, which in turn creates jobs, and generates new tax revenue. The reason this kind of growth is stimulated is that private sector investment due to lower taxes comes in the form of spending cycling through local economies many times before landing in a bank or other investment.
Few people think about this, but the cycle is evident. When consumers in a community shop and spend, that money is used to pay suppliers and employees for goods and services. Those suppliers and employees, then spend it again, on their own needs, perhaps clothing, gas, maintenance of their home, etc. Those merchants once again employ people and buy materials and the spending cycles again. Most studies have shown that the money cycles 6-7 times before landing in a savings or investment account.
A problem not mentioned in the above chart is that the assumptions about growth and revenue from growth are wildly optimistic and very unlikely to materialize in the future. That means the real gap is almost certain to be much bigger than the graph above shows.
The deficit problem is shown to be a problem due to a combination of revenue dropping and spending increasing dramatically. Changing neither one (alone) will solve the problem of deficits as far as the eye can see, but spending is far more directly controllable than economic growth and the resulting tax revenues.
The problem of how to limit spending is easily visualized by looking at where the spending goes. Four huge segments: Social Security, Medicare/Medicaid and Defense account for 2/3 of the spending, and a fifth one: Interest, is marginally uncontrollable since it is a result of decades of deficit spending.
The surprising segment on the revenue chart is how small the contribution from Corporate Income Taxes is, compared to the others. However, one point to remember is that every added tax levied on corporations eventually is either passed on to their customers (consumers) or makes that corporation less globally competitive and more vulnerable to damage form foreign competition. Thus, it isn’t as simple as “tax the big corporations more.” There are consequences to taking that approach—and they are not good ones.
Bottom line: America has a dual problem: Excessive spending and inadequate growth which does not lead to job creation. Until we have a President who understands the fundamentals of actually living within your means instead of just talking about it, nothing will get better. Things might actually get worse.
John Mariotti is an internationally known executive and an award-winning author. His book, The Complexity Crisis was named one of 2008’s Best Business Books. In his recent novel, The Chinese Conspiracy, he merges an exciting fictional thriller with the factual reality of America’s risk from Cyber-Attacks. (www.thechinesecomspiracy.com) Mariotti does Keynote speeches, serves on corporate boards and is a consultant/advisor to companies. He can be reached at www.mariotti.net .