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The Government's Trust Deficit Overhangs the Economy

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The "fiscal cliff" heading our way in January 2013 looms large as the gears of all three branches of the U.S. government are stuck in the political sand. Does anyone care? America is heading down the road to economic ruin.

At the "U.S. Debt Impact on National Security" conference on Sept. 17, Steve Bell, senior director of economic policy for the Bipartisan Policy Center, painted one disturbing scenario after another with bar charts and basic math. He said, "By 2025, 100 percent of the budget will go to paying the interest on all the money we owe. That's more than the annual budgets for defense, education, transportation, and research and development combined." Such cold calculus has a way of slapping one awake.

Budgetary Myth and Revenue Fantasy

"Fantasy number two," Mr. Bell continued, "is that the government can raise taxes to cover its debt obligations. That would be a 65-percent increase in the tax rate on 94 percent of the taxpayers, 102 percent for the top 5-percent earners, and 169 percent for the top 1 percent. If that were to happen, it would create less incentive to grow. People would find ways to be taxed less, including stepping down to lower tax brackets."

Further contraction of productivity will lead to a decrease in the tax base, which in turn will crimp revenue, which will force a helpless government to raise more taxes. In the meantime, the money meter on the government debts and interest payments will keep spinning, and a vicious tax cycle will continue.

At the same conference Robert Bixby, the executive director at the Concord Coalition, a non-partisan, grassroots organization "advocating generationally responsible fiscal policy," amplified Bell's runaway costs, the entitlement trap, and the reality that the government's pet budgetary line item -- discretionary spending -- will go to zero.

"As the entitlements go on autopilot, it's the rising costs in health care which will double the payments for Medicare and Medicaid by 2040." He added, "This generation has been presented with significant challenges that we must begin to solve. The Federal Budget Challenge allows us to examine areas such as health-care costs, taxes, education spending, and defense spending and allows Americans to become a part of the conversation about the tough choices facing our country."

Echoes from the Bloomberg Markets 50 Summit

At the Bloomberg Link Markets 50 Summit, held the week before in New York City, the day-long marathon of 16 panel discussions and interviews with global market leaders covered hot topics such as "Sprinting Toward the (Fiscal) Cliff," "The Election: Jobs and Taxes," and "Fixing Broken Banks."

In the banking session, Sallie L. Krawcheck, a former executive at Bank of America, grabbed the spotlight from her fellow panelists when she explained, "When my old friend Sandy Weill said Glass-Steagall should be reinstated, I was on vacation. I think my iPhone exploded with phone calls and messages. I think it's a great and fascinating debate."

Today, she's a critic of regulation and the financial industry: "This isn't about profit. This is about return on equity and the cost of capital. Here's the problem: These banks are so complex that the job of the boards of directors protecting capital is just insane. It's so complicated it makes you weep blood out of your eyes."

On the subject of too much risk, she said, "Thousands of hours are spent on risk models, measuring and controlling risk. We are humans. These models are internally generated (not transparent) with the sovereigns. There's a fundamental conflict. If Mary Shapiro was to give up on money reform, it would be a systemic risk after the downturn to get the stable economy back. Stress is related to this."

Byron Dorgan, former Representative and Senator from North Dakota, reminded the audience, "The cost is $17 trillion of what we have gone through. We don't have failed banks in North Dakota. We also found a lot of oil."

On fixing the banks, he cited Dakota Indian wisdom: "The success of the rain dance depends a lot on timing. Timing is everything. Timing is not in the favor of the banks today to ask for changes in regulations. We need to be smart, protect public interests, have regulations that are fair, then give the banks a green light and stay out of their way."

For Ms. Krawcheck, "Break them up. Everything we're talking about is really just the means to an end. Regulators are fighting complexity with complexity."

On jobs and taxes, the Honorable Elaine L. Chao, Former Secretary of the U.S. Department of Labor, pointed out, "Two thirds of the jobs are creating jobs. But when they see the avalanche of new regulation coming out of the federal government, there are all these burdens put on the SMBs for aggregate demand."

She warned, "Our country is on an unsustainable path of adding $5 trillion of new debt. First, if Warren Buffet feels guilty about taxes, he should just write a check. Number two, we are hurting the formation of small businesses. Fifty percent are not paying taxes. They think they do in paying income tax, but in the end they are not. We need to close the loopholes, too."

When asked about training and education for the unemployed, Ms. Chao said, "We all want job training. They spent $25 billion on training. Career civil service workers, the people are great, but the system is broken. If it was more streamlined (i.e., less government) and more focused, it would work."

Finally on the deficit, she said, "Look at the super committee. Simpson-Bowles. The solutions are all there. They're just mired in politics."

In the same session, Peter Diamond, Nobel Prize Laureate, Institute Professor, and Professor of Economics at MIT, said, "We need to reinvest and increase expenditures in education for children and improve reeducation to put people in jobs. There's a lack of adequate demand. There are a bunch of things we can do with infrastructure. We need infrastructure. We also need reform that goes beyond laying people off and not spending more."

"The fed (debt) trajectory is totally unsustainable. Yet we are at least a decade or two away from being Spain or Greece with the bond market," he concluded.

Sources of Optimism

Contrary to popular myth, hope and light are not coming from the elected officials in Washington, D.C. They are coming from people and new technologies that weren't invented inside the Beltway, either.

Social media, mobile apps, cloud computing, and big data analytics have changed the way we communicate and socialize today. The last three areas mentioned will transform business processes to be more efficient, to lower costs, increase productivity, and deliver data transparency for better and faster collaboration.

The reason for optimism to grow new jobs and with it the economy is coming from ordinary Americans in the form of startups and small-medium size businesses. The big bang of the new economic engine will come from these technologies -- the coming of a millennial development revolution.

That will happen only if Washington doesn't get in the way with more regulations, doesn't reform the tax codes, and doesn't fix the entitlement programs, while continuing to spend and heap more taxes on those trying to grow and create new jobs.

If presidential candidate Mitt Romney continues to step on his tongue and shoot himself in the foot and President Obama lacks the political will to tackle the deficit, then the trust gap between we the people and Washington expands until action replaces talk.