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Wednesday, November 23, 2011

Polls vs. Pols

Yesterday’s online National Journal reports on their new poll. Their headline reads:

“Poll Shows Public Opposes Sequestration”

“Sequestration” means the automatic cuts resulting from the committee’s inability to reach an agreement. Here is their summary of the poll results:

“Opposition to proceeding with the automatic cuts was widespread in the poll. They were opposed by three-fifths of whites, and nearly two-thirds of minorities; at least 57 percent of every age group; and 58 percent of independents, 66 percent of Democrats and 62 percent of Republicans. The only exception to the pattern: Whites with at least a four-year college degree split almost evenly on whether the cuts should go through.”

And here is the National Journal’s polling question that yielded the poll results:

“As you may know, if the super committee does not meet its deficit reduction target by the deadline, Congress has set rules requiring large automatic cuts on defense and domestic programs. If the committee fails to meet its target, do you think these automatic cuts should go into effect or that Congress should take action to stop them?”

This question is misleading. The “automatic cuts” cannot by any stretch of a non-Washingtonian imagination be described as “large” or as “cuts”. But somewhere over 99% of Americans who are not members of Congress naturally assume the “large spending cuts” are large cuts from current spending levels. In fact, the total annual automatic cuts are small and only reduce the increases in annual spending. They do not reduce total annual spending – total annual spending increases every year. Ask an uninformed public a misleading question and what do you get: misleading poll results. The problem, of course, is that however flawed the polls are, they carry a lot of political weight that can be thrown around come election time by those who seek to exploit the public’s ignorance about the national fiscal crisis.

What is to be done? We need a new poll. We need a new poll that is not misleading - a new poll that gives the American people candid, realistic choices and in so doing guides the politicians to act in a manner that reflects informed public opinion. Absent informed public opinion, the 2012 election will be decided by debates about the wrong issues. The winners will have a mandate to address the wrong problems.

What fiscal choices do you suggest the new poll should offer? Here are mine, but undoubtedly you can recommend better ones by using this blog’s Comment feature.

“As you may know, the super committee did not meet its deficit reduction target by the deadline. Which of the following steps should Congress take to address the federal government’s financial crisis?

(1) Continue to increase both federal spending and the national debt each year in hopes that (a) the US economy will improve each year so that tax revenues will increase but (b) interest rates will remain at the current unusually low levels. If interest rates return to normal levels, the interest payments on the national debt will increase from the current 10% of tax revenues to 25% - 30% of tax revenues. If you choose (1) and if interest rates return to normal levels, the interest payments on the national debt will be larger than all Social Security payments, larger than all Medicare payments, larger than defense spending and larger than all other federal spending combined by 2021.

(2) Reduce current federal spending in the years 2013 and 2014 by 3% - 5% to get to a balanced budget in 2014. In 2015 – 2017, reduce federal spending by 2% - 3% to generate budget surpluses and apply the surpluses to reductions in the national debt. If tax revenues are lower and/or interest rates are higher than those expected by the Congressional Budget Office, the spending cuts will have to be larger.”

The spending cuts I have used in (2) are higher percentages than those in the Gradual Plan.

If there is anyone who thinks (2) above is as or more misleading than the National Journal’s poll question, please offer a Comment. How can we improve (1) and (2)? It is not easy to craft poll questions that are viewed as “non-misleading” and “fair and balanced” by all sides. Perhaps we should have two elections in 2012. The first election would decide the poll questions. The second election will choose the “winners”. I write “winners” because unless informed voters choose the winners, the winners will not be in office for very long. We will lurch election after election from one party to the other. Today far too many voters are clueless about the nation’s fiscal problems. Until the polls provide the voters with sound questions and realistic choices, most pols will choose and frame the issues for self-benefit. An uninformed electorate allows the politicians to choose and frame the issues and then chooses the most persuasive answers to the wrong questions. That is how we have come to where we are. It does not have to be this way.

So, which national news organization will step up and conduct the new poll?

If none, which national group will do so?

If none, is there not one American billionaire or multi-millionaire who will fund the new poll?

Wednesday, November 16, 2011

The Deficit Reduction Supercommittee

As the Supercommittee nears its deadline for an agreement among its 12 members, it is a good time to prepare for the misleading language that will be used by all sides to characterize an agreement or lack thereof. How many in the media will tell their viewers/listeners/readers that the language used by many members of Congress is not the same English language used by America's families and those working in the private sector?

(1) The most frequently abused term will be "spending cuts". Of course, regardless of what agreement is or is not reached, federal spending will not be cut - it will increase every year. If a family or company decides it must cut spending, it cuts from current spending levels so that future spending actually declines from current spending. Not so in Washington. Future spending, even after so-called "spending cuts", will not decline - it will only increase - because the "spending cuts" are made against future, higher budgeted spending levels.

(2) The second most frequently abused term will be "debt reduction". Some members
of Congress will actually claim their agreement or perhaps their own proposal
will or would have "reduced the national debt". But let's remember - this is
the Deficit "Reduction" Supercommittee, not the "Surplus" Generation
Supercommittee. Only annual surpluses generate the surplus cash to pay down the
national debt. The Deficit Reduction Supercommittee was established to craft
lower deficits. Readers of the book know that lower deficits lead to only one
thing: a higher national debt balance. So if these "debt-reducing" members of
Congress were cornered by a reporter into defending their debt-reducing
language, what possibly could they say to defend themselves? They would say
either or both of the following: (a) "Because the deficits will be lower, the
national debt balance will be lower than it would have been if we had not
agreed to lower the future deficits and/or (b) because we have lowered the
future deficits, the national debt as a percentage of GDP will be lower than it
would have been if we had not agreed to lower the future deficits." Are you

(3) How do we make some progress here? If you have any suggestions, please
share your ideas by posting a Comment. I suggested in the book that each
candidate for Congress and the White House be asked to pledge not to use
the kind of Washington Deficit Doubletalk in (1) and (2) above. What about
asking each of the candidates for president to sign a pledge to talk about America's fiscal crisis without using Washington Doubletalk? If one of the "moderators" in a televised debate were to ask each candidate to take the pledge, what would happen? Would each candidate agree? Please keep in mind: we're not asking each candidate to agree or disagree on the solutions to the fiscal crisis. We're only asking each of them to speak about federal spending, the deficits and the national debt in the same language all of us use in our daily lives. Is that asking too much?

Tuesday, November 8, 2011

The US Must Be a Tax-Free Export Zone

Can Congress help our anemic economy generate new jobs that are not directly or indirectly funded by taxpayers? Yes it can, but first members of Congress must understand the cold realities of our nation’s economic dilemma.

The combined financial and psychological effects of a 10% unemployment rate on consumer spending can’t be overstated. The unemployed are buying only the bare necessities while employed Americans are anxiously looking over their shoulder at the 10% unemployment rate. Worried about the possibility of joining the unemployed, many of the employed have reduced their purchases. So until the 10% unemployment rate declines to normal levels, we can’t look to the American consumer to get the economy moving again.

As 70% of the US economy is driven by consumer spending, American business is highly dependent on the American consumer. Burdened by excess capacity and the costs of excessive government regulations, US companies are unlikely to add significant capacity by investing in new employees and equipment until consumer spending increases. So we can’t look to business spending to get the economy moving again.

The federal government has spent unprecedented taxpayer funds on “stimulus” spending but has stimulated neither employment nor the economy. So we can’t look to higher government spending to get the economy moving again. The Fed has exhausted its bag of monetary hat tricks without having material impact on the spending decisions of consumers and business. So we can’t look to the Fed to get the economy moving again.

An economy’s size is the sum of (1) consumer spending plus (2) business investment plus (3) government spending plus or minus (4) the trade balance. As we can’t look to the first three for much help, we must look to higher exports to get the economy moving again. Domestic sales are not going to grow materially, so US companies must increase exports to gain new revenues. Employment will increase when export sales increase enough to require additions to existing capacity.

A significant expansion of US exports will increase American jobs while also reducing the national debt. In 2008, Germany’s, the UK’s and Japan’s exports as a percentage of GDP were 59%, 35% and 21%, respectively. US exports were $1.9 trillion - only 13% of GDP. US exports could double and not even approach the relative levels of those in Germany or the UK. How many new jobs would be created by an additional $1.9 trillion in export sales of US products and services? Whatever the number, these new jobs will pay for themselves rather than be funded by taxpayers and will generate higher federal tax payments to help reduce our national debt.

How can the new Congress help transform America into the world’s greatest export machine? Because US firms pay one of the world’s highest income tax rates, they are at a disadvantage when competing in the global economy. Congress should permanently waive the corporate income tax on new export sales. One approach is to waive the corporate income tax on that portion of a company’s export sales that exceed its export sales in the year prior to this reform’s enactment by Congress. This one reform will provide a huge incentive for US companies to seek new export business in foreign markets and will make US companies more competitive in the global economy.

A tax-free export zone enables American companies to take advantage of existing unused business capacity rather than require, as does the current equipment depreciation acceleration law, acquisition of new equipment in order to get the tax benefit. US business has little appetite for acquiring new capacity until consumer spending and/or exports climb and existing unused capacity is reduced. Tax stimulus proposals - especially temporary measures - that only tinker with the cost structure of US business do not confront the blunt reality of how we get the economy moving again: it’s by increasing business revenues. Turning the entire US into a tax-free export zone is definitely not tinkering. It’s a fundamental game changer for American companies and American jobs.

The export tax waiver must be permanent because even after the unemployment rate declines, we need every export dollar to reduce our national debt before interest rates rise to levels that make it impossible for Washington to ensure national security, provide essential public sector services and honor America’s debt obligations. Government debt can be reduced only by private sector cash flow.

Fortunately, the aggregate scale and higher growth rates of Asian and Latin American economies provide substantial export opportunities for American firms. Unlike the millions of debt-addicted American consumers still struggling with spending hang overs, Asian and Latin American consumers are generally not yet infected by chronic debt. They can consume a higher portion of their relatively low incomes because they do not have large American-style loan repayments.

Making the entire US a tax-free export zone is not a cure-all for our financial problems. But this one reform will generate incremental revenues that will strengthen our companies, reduce unemployment, reinvigorate consumers and help pay the interest and principal on our huge national debt.

Tuesday, November 1, 2011

We're On!

In Chapter 1, on page 12, this question is asked and then answered: “What is the difference between the annual deficit and the national debt?” In the book’s early drafts the answer started with something like “You would be surprised how many people cannot answer this question. Almost every week I see the word ‘debt’ used when the writer was clearly thinking ‘deficit’.” As the year 2011 progressed and the debt ceiling issue moved to the forefront, the frequency of these mistakes increased. But as one month led to the next, the number of pages in the book increased as well, so when it came time to delete sentences and paragraphs in order to get the book down to a readable length, I deleted the above quoted verbage.

I suppose some will think I am splitting semantic hairs here. Fair enough. But how are we to resolve our differences about these important issues if many of us are using the same words to mean different things? Some hairs are at the core of the problem. Some hairs are at the periphery. When core elements are confused by the No One’s of the world, no harm – no foul. But when “debt” and “deficit” are used interchangeably by influential folk, harm is done.

Here is one example of what I am talking about:

“If the president really wants to lead from the front, he should summon the Democratic and Republican leadership, along with all 12 members of the House-Senate deficit ‘supercommittee,’ to join him at Camp David and tell the world that they are not coming back without a Grand Bargain - one that offers some short-term jobs stimulus, a credible long-term debt reduction plan with entitlement cuts and tax reform that increases revenue.”

My guess is that Tom Friedman (NYT, 9/24/11) was thinking “deficit reduction plan”, not “debt reduction plan”. Those of you who read his column are in a better position to interpret his words than I am.