The Bipartisan Deception

George Bush and John Kerry are lying to you.

They say they’re fiscally responsible. But they have abandoned the goal of a balanced budget in this decade.

They say they’re going to cut the deficit in half by 2009. But their own spending and tax-cut plans make that goal impossible, even laughable.

They say they’re going to pursue the war in Iraq, spend more on domestic programs, and cut taxes. Then, practically in the same breath, they unabashedly deny that these budget-busting plans will cause financial harm to you or your family.

This is the bipartisan deception – a deception that invalidates dozens of campaign promises and scores of election-year attacks made by both sides.

As a direct consequence of this deception, investors will lose their retirement … families will lose their homes … and future generations could suffer a debased standard of living.

Neverthless, on the stump or in the debates, you hear no voices of protest. You hear no one challenging the candidates about the financial consequences of their proposals … no one speaking up to defend fiscal integrity or a sound dollar … and no one representing the millions of victims who will suffer the consequences.
But if you search beyond the campaign rallies and outside the spin rooms, you will find that there are many who are not afraid to speak the truth. Join me for a brief tour of the Web and you’ll see what I mean …

The Concord Coalition

Our first stop is www.concordcoalition.org, the home page of a nonpartisan, grassroots organization advocating fiscal responsibility.

The group was founded in 1992 by the late Senator Paul Tsongas (D-Mass.), former Senator Warren Rudman (R-N.H.), and former U.S. Secretary of Commerce Peter Peterson.

And just last Thursday, October 7, they issued a scathing press release with a detailed report on fiscal policy in the 2004 presidential campaign.

Their conclusion: Neither President Bush nor Senator Kerry has a credible plan for dealing with the fiscal challenges he will face if elected. Specifically …

“Both candidates are touting expensive initiatives costing about $1.3 trillion that would make deficit reduction more difficult in the short-term and fiscal sustainability unlikely in the long-term. The policy options in their plans are very different but the bottom lines are not. Regarding the deficit, they appear to be taking alternative routes to a similar destination …”

“Neither candidate sets aside resources for reform of the alternative minimum tax (AMT) beyond 2005 …

“Neither candidate has publicly stated his assumptions for the ongoing costs of operations in Iraq and Afghanistan …

“Neither candidate has proposed a strategy for achieving long-term fiscal sustainability …

“Both candidates’ proposals have back-loaded costs. The President’s 5-year budget omits almost 90 percent of the 10-year revenue loss from his tax policy proposals. The cost of Senator Kerry’s health care plan grows by 50 percent between 2009 and 2014 …

“Both [are] ducking issues they don’t want to face. For President Bush, it’s potential tax increases. For Senator Kerry, it’s potential entitlement cuts. The credibility of their respective fiscal policy plans is stretched thin because neither will put all policy options on the table …

“[T]he American people deserve something more from their candidates than an invitation to a free lunch – even if that is what they want to hear.”

CAGW

Next, we go to the Website of Citizens Against Government Waste (CAGW) at www.cagw.org.

Back in 1982, President Reagan directed industrialist J. Peter Grace to form a commission, telling them to “work like tireless bloodhounds to root out government inefficiency and waste of tax dollars.”

For two years, the Grace Commission, 161 corporate executives and community leaders plus an army of 2,000 volunteers embarked on a waste hunt through the federal government. As a result, they made 2,478 recommendations which, if implemented, would have saved the American public $424.4 billion over three years, an average of $141.5 billion a year, all without eliminating essential services.

Then, in 1984, to give the project the long-term follow-through it deserved, Peter Grace and syndicated columnist Jack Anderson co-founded Citizens Against Public Waste, which now boasts a million members and supporters.

Their perspective on the election: Neither presidential candidate has divulged a realistic plan for simultaneously expanding government programs and lowering the budget deficit.

But their gripe is not just with the presidential candidates. Their releases uncover fiscal irresponsibility in all corners of government. Here are just three examples:

Example #1. Last month, between Hurricanes Ivan and Jeanne, they issued “a Category 5 warning to taxpayers” – that members of Congress were preparing to take advantage of the devastation caused by the recent hurricanes to fund their own parochial projects.

“Congress simply has no shame,” said CAGW President Tom Schatz. “Knowing that this is most likely the last opportunity to bring home the bacon before the election, members are busy maneuvering behind the scenes to add their pet projects to the emergency supplemental. … [L]oading the bill with pork could be more costly than cleaning up after the three hurricanes …”

Example #2. “It is ironic, but not surprising, that members of Congress are rewarding themselves with a pay increase in the same piece of legislation in which they are placing a greater burden on taxpayers …

“Members of Congress must think that money grows on trees. With a $422 billion deficit clearly they are not doing their job. While they may have the power to give themselves a raise, Americans are in position to fire them come this November.”

Example #3. Back to the presidential candidates, the CAGW also raps the fiscal irresponsibility of the Kerry health plan:

“At tonight’s presidential debate … Sen. Kerry will talk about his plan like it’s the greatest thing since sliced bread. But it’s really the most expensive and complex system since Hillary Clinton’s 1994 proposal …

“While Kerry’s plan purports to provide ‘affordable, high-quality health care’ that ‘will keep our families healthy, our businesses competitive, and our country strong’ … It is estimated Kerry’s plan will cost taxpayers $1.5 trillion between 2006 and 2015. However, this huge price tag would cover approximately 18 million people, a figure nowhere near the 45 million people who are now uninsured.”

The Brookings Institution

Our last stop today: The Brookings Institution at http://www.brook.edu.

As you probably know, it is one of Washington’s most respected think tanks – also independent, and nonpartisan, with more than 140 resident and nonresident scholars, and over 200 research assistants and support staff.

Of special interest on today’s tour is the most recent work of William G. Gale and Peter R. Orszag, also serving as codirectors of the Tax Policy Center.

Their latest article, “Bush Administration Tax Policy: Revenue and Budget Effects” leaves little doubt that, despite any good intentions, the Bush tax cuts could be a recipe for fiscal disaster:

“If the tax cuts are made permanent, the revenue loss will exceed $3.3 trillion (1.7 percent of gross domestic product) over the period 2001 to 2014. The net budget loss (including higher debt service payments due to increases in federal debt) would be almost $4.5 trillion (2.3 percent of GDP) …

“Because the tax cuts phase in over time, the averages above understate the relevant long-term magnitudes. In 2014, for example, the revenue loss from the policies noted above would be $373 billion (2 percent of GDP) and the budget costs would be $583 billion (3.2 percent of GDP). Over the longer term, the tax cuts would reduce revenue by 2 percent of GDP on an ongoing basis.

“Even if the tax cuts are not made permanent, the federal government faces significant deficits over the next 10 years under plausible scenarios, and an unsustainable long-term budget path. Making the tax cuts permanent would significantly exacerbate both of those problems.

“Tax cuts have to be financed. They are not simply a matter of returning unneeded or unused funds to taxpayers; instead, tax cuts represent a choice by current voters either to require future taxpayers to pay for current spending, or to cut such spending …

“[T]o pay for the tax cuts in 2014 would require a 45 percent reduction in Social Security benefits, a 53 percent cut in Medicare benefits, or changes of a similar magnitude.”

Still not convinced?

Consider, then, the choice quotes below, courtesy of the CAGW:

Heritage Foundation: “While it’s true that Kerry hasn’t provided a detailed plan, neither has the president.”

Cato Institute: Bush’s warnings about Kerry’s spending plans are “inconsistent” with his own proposals. “There’s no way to accomplish (Bush’s) major new measures, including tax reform, without substantial increases in spending.”

Club for Growth: Under both Bush and Kerry “fiscal responsibility takes the back seat.”

Largely Undisputed Facts

If the inevitability of a fiscal disaster were hotly disputed by the experts, I might understand the fearless fibs of the candidates.

Or if the facts were locked away under some cryptic code, I might also be more forgiving.

But as you’ve seen from my brief tour, although experts may differ on the details, the broad facts are largely undisputed and widely available. Almost every unbiased budget and tax expert agrees that:

our nation is on a collision course with near- and long-term fiscal disaster …
neither candidate has come forward with a solution, and …
both candidates are outbidding each other in a race to make the disaster even worse.

Therein lies the most shocking reality of our times: As a nation, we KNOW it’s a deception. And yet, we continue to allow ourselves to be duped by it anyhow, speech after speech, debate after debate.

The victims, unfortunately, will be many …

Victim #1. Investors

In the face of massive federal deficits – PLUS surging oil prices – the government will either have to let the economy slide or flood the economy with more printed money.

That means higher unemployment, higher inflation, or an unhealthy mix of both. It also means the value of your stocks and bonds could be trashed.

Think you’re off the hook if you don’t own any? Think again. Because many of the financial institutions you’re counting on – insurance companies, banks, mortgage companies, and brokerage firms – are loaded with stocks, bonds or equivalent fixed-income assets.

When these assets fall in value, the institutions’ net worth also plunges. If they have an adequate capital cushion, they will survive. If not, their only choices may be bankruptcy or a government bail-out.

Victim #2. Homeowners

As you saw in last week’s Martin on Monday, Gretchen Morgenson gave you the key facts eight days ago in the Sunday New York Times of October 3:

The median home in America is saddled with 58.7 cents in mortgage debt for every dollar of value, up dramatically from 33 cents in 1979.
The percentage of households that have more mortgage debt than home value has more than doubled in the last decade.

In short, homeowners are swimming in debt precisely when the bulging budget deficit is going to either drive up the cost of that debt, drive down the income they’ll need to make payments … or both. Many could lose their homes.

Victim #3. Future generations?

Many experts rightfully bemoan the probable fate of future generations. But the data now pouring in seem to be telling us that the day of reckoning may be a lot nearer than they think. Indeed …

Despite the most radical and irresponsible combination of fiscal and monetary stimulus in modern history, we still have the weakest economic recovery in over a half century!

Friday’s unemployment report brought that point home. And no non-partisan economist with a modicum of self respect can deny it.

Don’t get me wrong. This is not the legacy of George W. Bush alone. The blame must also be shared by Bill Clinton and nearly all those who preceded him in the past 45 years. But no matter who’s to blame, the recovery’s surprising weakness begs this obvious question:

What will happen to the economy when George Bush or John Kerry discovers he cannot sustain the maddening pace of government stimulus?

Two Scenarios

My view: There are two possible scenarios.

Scenario A. The next president does everything in his power to (a) keep his promises, (b) artificially stimulate the economy, and (c) ignore the deficits for as long as possible.

Result: Future generations are forced to pay the price with decades of rising inflation, high interest rates, stumbling stock markets, and chronic unemployment. A true, long-term recovery is postponed far into the future.

Scenario B. Due to powerful market pressures, the next president is forced to back off from fiscal and monetary stimulus. He has no choice but to focus on cutting the deficit, even if that means letting the economy to sink back into recession.

Result: Present generations pay the price and make the sacrifices. We tough it out through another stock market crash and a few years of acute unemployment. But this helps us pave the way toward a true, lasting recovery.

Which will it be? Scenario A or Scenario B? Long-term pain or an immediate crisis that will help put us on a stronger path?

I am convinced that we have good chance for the latter; and in that sense, I am actually an optimist – not a pessimist.

I believe that when push comes to shove and our nation faces a true financial emergency, either George Bush or John Kerry will rise to the occasion and do the right thing.

And I believe that whenever they slide back into fiscal irresponsibility, millions of investors like you will make sure they get back on track.

To make that happen, you won’t have to bang your fist on the desk of some faceless bureaucrat. Nor will you have to wait two years for the next election. All you’ll have to do is call your broker or click on your mouse, issuing one four-letter command: “Sell.”

It will protect you from loss. And it will send a powerful message to Washington that they’d better quit the nonsense … or else.

Only later, when they truly commit to restoring fiscal integrity, can the operative word be upgraded to “hold” … and only later, when there’s concrete evidence of progress – when the potential rewards truly outweigh the risks – can it be an outright “buy.”

Good luck and God bless!

Martin

Martin D. Weiss, Ph.D.
Editor, Safe Money Report
Chairman, Weiss Ratings, Inc.
martinonmonday@weissinc.com

Martin Weiss and “Martin on Monday” are non-partisan. Third-party ads do not necessarily represent their opinion and should not be interpreted as an endorsement.

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