Cutting US Budget



House Republicans plan to cut $100 billion is positive step and will eliminate waste such as the Economic Dev Admin, Head Start, Community Dev Block Grants, and Education Dept bureaucrats. However, our deficit grows $4 billion per day so this saves 25 days and will reduce the 2011 deficit to $1.4 trillion down from $1.5 trillion. Much more action is required.


Debt Reality and Details


Our real US government debt counting current public and internal debt ($14 trillion) + obligated and promised new entitlements equals about $130 trillion. 2010’s world economy generated $62 trillion. In 5 years perhaps the world economy may grow to $75. What will our total debt grow too? Will there be world investors who would be willing (or able) to finance our growing debt? Or will a liquidity crunch lead investors to eschew US Treasury markets which would crash the US dollar?


US failure to address our debt will thus increase the possibility of a US dollar collapse and subsequent US bankruptcy. If that occurs a New Economic Order may arise where the IMF and G20 restructure our debt but impose severe financial penalties on us where most of our entitlements are wiped out.


We still have time to act. It therefore is up to those who know how to read balance sheets and acknowledge their reality to inform the public succinctly that we must immediately restructure our entitlements. Social Security, Medicare, Medicaid cost $2.1 trillion in 2010. By 2021 estimates are that they will soar to $4.1 trillion. By then it will likely be too late. We may be one incident away from world investors to shy away from financing our debt. Watch Egypt and Saudi Arabia closely. If oil jumps to $150 to $200 per gallon investors will (and shrewdly) conclude that US economic growth will seriously degrade. Subsequently the US will generate less revenues and debt will further escalate. Also watch Congress when it comes to address the debt ceiling. Failure to act in substantial way will also lead investors to shrewdly conclude that if the US is not serious about debt then any further financing of US debt would be too risky.


How to Cut Entitlements


So besides approving the $100 billion in non entitlement cuts additional actions now should include options in the line of the following:


Announce that all those on Social Security would continue to receive benefits but with a 20% ‘haircut’. Why 20%? Because we are cutting non entitlement spending (largely benefiting the young) by 20% so this will be fair for old and young. All under 63 will be forced to privatize their Social Security and have 3 years to prepare. In essence they will turn it into a 401 K or IRA type account. How will Social Security then be financed? Simplify our damn tax code that favors special interests resulting in little if any positive impact on the US economy. Replace the tax code with the Fair Tax now in Congress. It eliminates all individual federal and payroll taxes and corporate taxes. Fair Tax would be revenue neutral and for now charge 23% on all new products. ‘Prebates’ would be paid to low income; this would render the Fair Tax as progressive. Fair Tax would eliminate the archaic IRS. This by itself would boost US GDP by 2% which results in $300 billion. $300 billion more in the private economy may generate much more than that and therefore increase US Treasury revenues. World investors would be impressed. So the Fair Tax and our world creditors would finance all of US government costs and debt.


Medicare and Medicaid both should be immediately privatized. The only exception would be to provide only catastrophic health care via public sector to those who cannot afford it. This will then also decrease total costs by at least 20%. Decrease entitlements by 20% results in savings of $420 billion. Our 2012 budget deficit will then further be reduced from $1.4 trillion to $1.0 trillion. A more investor friendly tax structure would in time generate more revenues and thus by 2013 our budget debt may we well under $1 trillion – maybe $600 billion.


The above is much better than a very possible scenario whereby the IMF and G20 eliminate 80% of entitlements after US bankruptcy.


Next Steps


If you have other alternatives or want to challenge this one please respond. We all have the same goal – to increase US economic growth and maintain economic and social stability.


If you can read a balance sheet and choose not to ignore US balance sheet please contact me.


Economics 501

February 12, 2011


About economics501

1 - free market Capitalist; 2 - Fitness Entrepreneur; 56 years old, VP at an Investment Bank in NYC, ex Venture Capitalist, happily married with 2 girls. Education: Rutgers and NYU. I allow Ted Hruzd, my friend to blog at will here. He has many posts here. I have known Ted since we were both students at NYU. Ted also works for an Investment Bank as a VP in Equity Global Markets. ------------------------- I was very very Socialist leaning as a 22 year old. I then strongly believed in Gov role in helping the poor. However, as a USDA Child Nutrition Programs, I personally accounted for millions of fraud, abuse, and waste of tax payer money. I came to believe that the poor would be best served with less Gov programs and more with direct aid via tax system. Then after 5 years I became a free market capitalist, was a venture capitalist in 2007 and helped start 2 high tech companies. I dedicate this site to champion free market capitalism as the best road to Prosperity. Please join in. If you disagree, fine, but please post with dignity and class and be civil. Argue with facts always.
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