Tuesday, August 24, 2010

Spare a Dime

U.S. Is Bankrupt and We Don't Even Know It. By Laurence Kotlikoff:

Let’s get real. The U.S. is bankrupt. Neither spending more nor taxing less will help the country pay its bills. What it can and must do is radically simplify its tax, health-care, retirement and financial systems, each of which is a complete mess. But this is the good news. It means they can each be redesigned to achieve their legitimate purposes at much lower cost and, in the process, revitalize the economy.

Herb Stein, chairman of the Council of Economic Advisers under U.S. President Richard Nixon, coined an oft-repeated phrase: “Something that can’t go on, will stop.” True enough. Uncle Sam’s Ponzi scheme will stop. But it will stop too late.

And it will stop in a very nasty manner. The first possibility is massive benefit cuts visited on the baby boomers in retirement. The second is astronomical tax increases that leave the young with little incentive to work and save. And the third is the government simply printing vast quantities of money to cover its bills.

Most likely we will see a combination of all three responses with dramatic increases in poverty, tax, interest rates and consumer prices. This is an awful, downhill road to follow, but it’s the one we are on. And bond traders will kick us miles down our road once they wake up and realize the U.S. is in worse fiscal shape than Greece.

----- Kotlikoff may be right that the US is bankrupt. But I'm not impressed with his solutions. Yes, let's get real.

Kotlikoff proposes reforms of the U.S. financial system, tax system, health care system, and retirement income system. His proposes reform of the financial system, transforming all financial companies with limited liability, including incorporated banks, insurance companies, financial exchanges, and hedge funds, into pass-through mutual funds, which do not borrow to invest in risky assets, but, instead, allows the public to directly choose what risks it wishes to bear by purchasing more or less risky mutual funds. --- Hmmm "allows the public to directly choose" ... how would that be accomplished? By choosing what the smartest guys in the room advise?

He proposes "Limited Purpose Banking" which forces financial intermediaries to limit their activities to their sole legitimate purpose—financial inter-mediation. Limited Purpose Banking substitutes the federal and state financial regulatory bodies with a single financial regulator called the Federal Financial Authority (FFA). The FFA would have a narrow purpose namely to verify, disclosure, and oversee the independent rating and custody of all securities purchased and sold by mutual funds. --- Ahhhh, FFA, another federal bureaucracy and its bureaucrats are born.

He backs replacing the federal income tax with a national sales tax. Or consumption tax. Or "fair tax" as the three (sales, consumption, fair) seem to be more or less the same taxation method (government hand in your pocket), perhaps with a tweak here or there. Value-added tax is a similar animal, used in Europe and Japan. China has a consumption tax and income tax (taxed at 25% for a factory worker income plus overtime and bonuses equivalent to US $3670, 45% tax if one of the lucky $100,000 earners). But so much is "free" in China - healthcare, housing, some food, sometimes utilities, etc. and a lifetime membership in the Party.

Sounds good on the surface, only taxed on what you consume, but in the real world, every consumption tax hits low and middle income households to a greater extent than the income tax does. What?! You think the wealthy will never again find a way around taxes? Just ask John Kerry, expert in yacht sales and excise tax. Economists and politicians promise there are "conceptual ways" to avoid any burden on lower/middle households - but you must hold your breath until those concepts are actualized.

On healthcare Kotlikoff proposes one system that works for everyone: "Participants - including all who are currently uninsured, all Medicaid and Medicare recipients, and all with private or employer-supplied insurance - would receive annual vouchers for health insurance, the amount of which would be based on their current medical condition. Insurance companies would willingly accept people with health problems because their vouchers would be higher. And the government could control costs by establishing the values of the vouchers so that benefit growth no longer outstrips growth of the nation's per capita income. It's a "single-payer" plan - but a single payer for insurance. The American healthcare industry would remain competitive, innovative, strong, and private."

--- Government already covers over half of US healthcare costs. "Insurance companies ... would willingly accept ... vouchers ... would be higher." Lobby those vouchers higher and higher K Street. What's that sound? Oh, government expansion, but the industry is still private (and war is peace). "Government could control cost ..." ROTFL hahahahahahahahaha. Gimme a minute ... hahahahahahahaha.

You know, simply eliminating corruption and the crooks who game the system, and dumping the hundreds, maybe thousands, of failed programs/departments, would be sufficient - lets call it budget cuts and draining the swamp. Instead, the experts (pols and e-con men) claim we need bigger government to save us from government.

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