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Number 42

SAFE

Secure America's Future Economy

Summer 2006

IS YOUR MEMBERSHIP UP-TO-DATE?

Membership means standing with other SAFE members in doing what we can to protect us all from a financial meltdown.

You may renew now by going to Join Us.

The powers not delegated to the United States by the Constitution, nor prohibited by it to the states, are reserved to the states respectively, or to the people.

There is a risk of a financial meltdown in this country and we take it very seriously. So do others including Economist, Laurence Kotlikoff, author of “The Coming Generational Storm” and Peter Peterson, former Secretary of Commerce and author of “Running on Empty.” The Concord Coalition founded by Peterson, Warren Rudman (R,NH) and Paul Tsongas (D,MA), is criss-crossing the country with presentations explaining the seriousness of the problem. Unfortunately, congress and the last several administrations have not taken the problem seriously.

The Congress has exhibited bi-partisan irresponsibility. We have known for many years that retirement of the baby boomers will put tremendous demands on Social Security, medicare and medicaid “entitlements”. We have known that there will be only two workers per retiree. Meanwhile, taxes supposedly meant for the imaginary Social Security “Trust Fund” have been spent.

Responsible behavior would have been to restrain spending to produce a surplus and pay down the $5 trillion debt owed to holders of U.S. government bonds. Instead, Congress has added a very expensive prescription drug benefit for everybody, including the very rich and middle class citizens who can easily afford their drugs. A deficit of $371 billion is projected for 2006 when we need a surplus.

The implied debt to cover future entitlements is about $50 trillion. Without severe cuts in entitlements, there will need to be severe cuts in federal government spending. Elimination of corporate welfare and other parts is fine, but it is not nearly enough.

Congress has dithered so long that, in order to atone for its irresponsibility, it must give up money and power. That is where the 10th Amendment comes in. We must adhere to the spirit of the 10th Amendment.

The federal government must stop using taxes from citizens to give grants, with strings attached, to state and local governments and others.

Federal grants in 2005 totaled $476 billion (“Downsizing the Federal Government” – Chris Edwards, Cato Institute). Elimination of federal grants would be a great start toward preventing a future financial meltdown. It would also allow members of Congress more time to attend to the core duties of the federal government.

A large part of federal grants is the $186 billion federal share of medicaid paid to the states in 2005. The federal contribution causes states to overspend, because in-state taxpayers pay only part of the cost. Medicaid would be less expensive and more flexible without federal involvement.

A big problem requires a big solution, and elimination of federal grants is a key to the solution. Other parts of the solution follow. Keep reading.

The U.S. Department of Education ($71 billion) should be abolished. President Reagan and Newt Guigrich proposed to abolish it, but it has continued to grow. Much better to let the states compete and learn from each other. Expect the education of children to improve after abolition.

The Department of Housing and Urban Development (HUD - $43 billion) has been destructive to cities and is plagued with mismanagement and fraud. It should be abolished.

The above information and much more comes from “Downsizing the Federal Government”. The author, Chris Edwards, suggests some modest cuts in entitlement benefits.

Cuts in benefits are, of course, vigorously opposed. However, we do not oppose modest cuts, because the young workers may face large increases in taxes. It is unfair to give the older retirees a free pass.

The 2006 Pig Book, issued by Citizens Against Government Waste lists “the most egregious and blatant examples of pork,” totalling $3.4 billion. The total pork is $29 billion which is only 8% of the $371 billion deficit projected for 2006.

Elimination of pork is fine, but is only a drop in the bucket. After the pork is eliminated, another $342 billion of cuts, or tax increases are required just to balance the budget.

But wait. There would still be $5 trillion ($5000 billion) owed outside of the government. This does not include future Medicare and Social Security spending commitments over and above anticipated income.

Holders of $5 trillion of U.S. Bonds could lose faith in the ability of the U.S. Federal Government to live within its income, and decide to dump the U.S. Bonds. To avert this disaster, the federal government needs to pay down the debt. This will require restraining the federal government to the functions listed in the U.S. Constitution.

ACTION: Submit a letter to editor criticizing a dubious grant from the federal government when deeply in debt (and/or call a talk show).

As the number of retirees expecting Social Security increases, the rates of workers to retirees will decrease to only 2 to 1. This could result in a crushing level of taxation, but establishment of Personal Retirement Accounts would decrease the need for future taxation.

However, the Personal Retirement Accounts will be taken from present taxes. This amounts to facing up now to the problem coming down the road. For an interim period money will be needed to pay some of the Social Security benefits while Personal Retirement Accounts are being established. The cuts in spending that we advocate will take care of this temporary need.

We advocate Cato Institute’s proposal for Personal Retirement Accounts explained in their booklet, “It’s Your Money”. If you’d like a copy, please contact Director Bill Morris.

Regulations are one aspect of an overbearing federal government. Many are counterproductive, unnecessary or useless. All are expensive. How expensive? About $8000 per year per household, based on studies by the Mercatus Center at George Mason University and by others.

Elimination of most of these regulations would leave us better off, help small businesses prosper, and increase tax revenue without raising tax rates.

Elimination of most of the federal regulations would facilitate debt reduction, if Congress would use the extra income for that purpose. However, we still need big cuts in federal spending.

Bill Morris discussed the advantages of the Fair Tax in the previous two newsletters. Replacement of the Income Tax and other federal taxes with this consumption tax will result in significant improvement in the U.S. Economy.

Economists attest to the advantage of this tax reform. Bills HR25 and S25 have co-sponsors and are awaiting action. Grass roots activity could make it happen. Bill has a 1000 word essay on The Fair Tax that you could use to spread the word. He’ll be happy to send you a copy: (302) 475-7060 or billemerym@aol.com.

SAFE will participate in the September 17 Community Day on the Campus of the University of Delaware, Newark, DE. Tentative plans include promotion of large cuts in federal spending, with individual states taking over some of the federal programs. To support this approach, we’ll probably show Amendment 10 of the Constitution Bill of Rights on a poster.

We’ll ask some of those attending Community Day to respond to a questionnaire on ways to avert a fiscal meltdown.

If you are willing to consider joining other SAFE members on our Community Day project, please contact Bill Whipple at 376-7036.

They came back. About ten years ago, The Concord Coalition came to Wilmington to try to get citizens to face up to the federal government’s deficit spending.

They returned May 1st to remind us how much worse it has gotten. And it has. Entitlements, including Social Security and Medicare now take half of the federal budget. Without reform, entitlements would take almost all government income by 2050.

Delaware Congressman Mike Castle and Senator, Tom Carper spoke briefly at the meeting. Castle said he favors the Line Item Veto. Carper pointed out that $300 billion of income tax is unpaid each year, and the government issues about $45 billion in overpayments.

Concord Coalition Executive Director, Robert Bixby told us that the public debt held by foreigners has risen to 40% of the total.

The big gun, David Walker – Comptroller General of the U.S., said the government is spending $1.35 for every $1.00 income, and the present debt is $135,000 for each full time worker. He concluded with pictures of his grandchildren and a reminder that we are being unfair to the next generations (just what SAFE has been saying, and we have printed pictures of two grandchildren in earlier newsletters).

Talks were given by Isabel Sawhill of the liberal Brookings Institution, and Alison Fraser of the conservative Heritage Foundation. Sawhill suggested suspending inflation of Social Security payments, cutting health spending, increasing the gasoline tax, eliminating income tax deductions and exclusions and bringing back pay as you go.

Alison Fraser listed 3 choices: Raise federal taxes from 20% to 27% of GDP, continue deficits resulting in higher interest rates, and (her choice) cutting spending, particularly entitlements.

Joe Minarik, VP for the Committee for Economic Development, said that if foreigners decide to diversify their investments, interest rates will go up, sending us downhill faster. Every year, 35% of U.S. debt turns over, so this could happen quickly. Minarik pointed out an irony – the U.S. borrows money from those to whom we preach. Also a parallel. If a breadwinner in the neighborhood dies, leaving his family deeply in debt, he is condemned. Yet, as the older generations die leaving a huge debt, we’re not very critical of ourselves.

SAFE Directors Martin, McClain and Morris were able to attend this session. None recalls which participant from The Concord Coalition told us something scary. In about 50 years, if the federal government were to continue its present behavior, all the taxes would go to pay interest on the debt. Obviously something would change well before then.

The Concord Coalition people reminded us that substantial changes are needed. The longer we wait, the more wrenching the changes will be. U.S. citizens inside and outside of the government need this wake-up call.

Their next session will be September 26th or 27th in Austin, TX. They are working on an October session and November sessions will be held in Denver and Seattle. They will be very busy in 2007. Call 703-894-6222 if you want details.

We recommend some big changes to avoid the well-known demographic problem. Opponents may claim that we are overshooting the mark. However, they should keep in mind the unpredictability of the future – whatever challenges Mother Nature has given us, she can always do more. Some examples are a huge hurricane, a volcanic eruption or a tsunami.

Senator Rick Santorum (R-PA) introduced S1750, the “Social Security Guarantee Act,” and it was supported by, “60 Plus Association” in their Spring 2006 publication.

President Bill Whipple wrote 5/26/06, to the 60 Plus President stating that “Giving seniors born before 1950 a “guarantee” while ignoring the interest of their children and grandchildren, would be selfish and irresponsible.” Bill also expressed our support of Personal Retirement Accounts.

Bill wrote Senator Santorum opposing the bill. Neither 60 Plus nor Santorum replied.

SAFE recently suggested to the Dean of Public and International Affairs at a prestigious “Ivy League” university that our core concern – restoring fiscal integrity to the federal government – could be the subject of a policy conference of great significance. Our letter to the Dean included the following:

The current deficits are bad enough, but they are dwarfed by the shortfall between the resources available for senior entitlement programs (Social Security, Medicare and Medicaid) and the rapidly rising costs for these programs. Unless corrective action is taken soon, we at SAFE expect a financial crisis that will rival if not exceed the Depression of the 1930s. Perhaps this sounds like an alarmist view, but many economic experts have reached the same conclusion – including Laurence J. Kotlikoff (Boston University economist). A review of Professor Kotlikoff’s recent book on the subject is enclosed, along with notes on a presentation he subsequently made at the University of Delaware.

SAFE’s ideas for restoring fiscal integrity are set forth on our Website (s-a-f-e.org), but other ideas should be considered as well. The point is not to sell a preconceived agenda, it is get people thinking and talking about the coming crisis while there is still time to turn things around. What better forum could there be in which to do this than in a well-conceived policy conference sponsored by [your school]?

Although the School’s public affairs conferences for the coming year had already been set, the Dean observed that “you have identified a critical issue deserving of more attention by policy makers” and promised to forward our suggestion to a colleague for consideration.

We intend to follow up on this matter, and are hopeful that it will bear fruit. Stay tuned!

If we at SAFE have said it once, we have said it a thousand times. The finances of the federal government are out of control and the results – barring corrective action soon – will be disastrous.

This is not simply our opinion. Many financial experts feel the same way. For example, Professor Laurence Kotlikoff writes that the United States is “heading into one God-awful fiscal storm, the full dimensions of which are hard to fathom. To make matters worse, our captain has lost his bearings; he’s got us pointed right at the storm and is gunning the motor. We’ve got one chance left to turn the ship around, batten down the hatches, and escape the worse, but we need to act decisively, and we need to act now.” “The Coming Generational Storm,” Kotlikoff and Burns, MIT Press (2004), pp. xii-xiii.

So far, the general public does not seem to be paying attention. One reason may be that SAFE is not the only advocacy group with a “doomsday scenario.” For example, environmentalists are offering disturbing theories about the consequences if global warming is allowed to continue – rising sea levels, horrific weather, and the end of life on earth as we have known it. See, e.g., Al Gore’s movie, “An Inconvenient Truth.”

If people are going to pick a problem on the horizon to address, should it be the coming fiscal meltdown or global warming? Here’s a table that compares several key aspects of the two issues.

Now I ask you, which of these issues do you believe we should be worrying about?

How come. . . when you post a letter you are confident it will reach it’s destination?

Postage stamps. . . one of the few products you can use up-side-down and it still works.

Every night. . . before lights-out I touch my hand to my eyes to make sure my eye glasses are not on my face.

THE BIG PICTURE	COMMUNITY DAY
WE GET SERIOUS	CONCORD COALITION TELLS IT LIKE IT IS
TWO MORE CUTS	SOCIAL SECURITY GUARANTEE ACT
CUTTING PORK NOT ENOUGH	SHOULD THERE BE A FISCAL MELTDOWN CONFERENCE
PERSONAL RETIREMENT ACCOUNTS	WHAT SHOULD WE WORRY ABOUT TODAY
CUT REGULATIONS	OTHER STUFF
REFORM TAX SYSTEM

	Fiscal Meltdown	Global Warming
Likelihood that there will be a crisis if corrective action is not taken.	100%, as the projected deficits are far too big to offset with tax increases or borrowing. Precedents – fall of the Roman Empire, French Revolution, double digit or higher inflation in many countries in the past 100 years.	Uncertain, as the earth’s climate has fluctuated considerably over the course of human history without dire consequences.
Time remaining before crisis.	Perhaps 10 years.	50 to 100 years.
Understanding of what must be done to avert a crisis.	High – the solution, basically, is to acknowledge that there is a problem and drastically cut Government spending.	Low – proposed actions might slow the rate of global warming, assuming cooperation of all the countries involved, but would not reverse it.