Buffeting an otherwise fine evening

As promised, I wanted to share some thoughts on last night’s screening of I.O.U.S.A., the new documentary film exploring America’s fiscal challenges. The film was, by and large, a success. It has taken a famously unsexy problem and rendered it in a manner that most people, people who are largely innumerate, can understand. The only protests I have heard thus far concern how the film’s approach was a little hackneyed from a film-making perspective, or that the film’s content was boring (a complaint that itself is hackneyed).

The filmmakers had a daunting challenge in organizing and editing the relevant information needed in order to make a case that the federal government’s unfunded liabilities are a major hazard to future prosperity. I prefer not to pick nits over the cinematic choices they made. To anyone moderately interested in the subject matter, it was provocative enough, and the case was stated in plain language regarding the implications of our collective profligacy. I for one was extremely moved: saddened by my fellow citizens’ ignorance and apathy; angered by my elected representatives’ largesse and cowardice; and, conversely, heartened by the efforts of those folks who labor without fanfare and far from the spotlight to make this issue more prominent in our national discussion.

Concerning the film itself, I believe we got precisely what was advertised, and I hope it succeeds with moviegoers around the country during the run-up to the November elections.

The more interesting and controversial part of the evening came afterward, when audiences around the country were beamed a live broadcast from Omaha, Nebraska, featuring a panel discussion with Warren Buffett, Pete Peterson, David Walker, Bill Novelli and William Niskanen.

It became evident to me, as each panelist introduced himself and his reaction to the film, that the promoters of the movie must have agonized over inviting Warren Buffett to participate on the panel. On the one hand, as the richest man in America, Buffett would easily be the most recognizable name on the panel and probably generate interest in the film. He has something of a cult following, with thousands of billionaire wannabes hanging on his every word. And besides, his folksy straight-talk can be trenchant and entertaining. On the other hand, though, Mr. Buffett’s remarks last night did much to undercut the message of the film. The film, at root, is an attempt to energize people by revealing a potential crisis of enormous proportions; at times last evening, Mr. Buffett seemed to wish all of this away, calling himself the panel’s “token Pollyanna” and invoking a certain American exceptionalism that will see our economic pie grow forever larger.

It wasn’t that Mr. Buffett is unconcerned about the implications of our addiction to deficit spending (particularly when we borrow the money abroad and lose leverage in international affairs), but he seemed to regard it with the same degree of concern one might have for a pothole in his neighborhood. My sense is that his good nature and aversion to worry left the audience feeling much better about the scary state of affairs detailed in the movie. After all, if the richest man in America isn’t particularly worried, why should I be?


Buffett’s Sunny Optimism Misplaced?

But you should be worried, not least because some of Mr. Buffett’s key remarks last evening were entirely disingenuous. When Mr. Buffett invoked his “growing pie” analogy, he seemed to suggest that our ever-growing gross domestic product will forever keep us ahead of any shockwave emanating from a fiscal disaster, that the problems detailed in the movie are not are large as they seem because our economic growth will outpace our liabilities. This so annoyed David Walker, the former US Comptroller, that he felt compelled to challenge Buffett in front of Buffett’s hometown audience. Mr. Walker reminded the Sage that the movie’s projections took future economic growth into account. In other words, even if we were to grow in a manner consistent with the past 50 years, the problems won’t go away, but this did little to shake Mr. Buffett’s sunny take on the future.

I’m glad Mr. Walker had the courage to speak up and disagree, but what if both Messrs Walker and Buffett are incorrect about the “growing pie”? Is it so outrageous to imagine a period of time in the future in which real economic growth stalls, or even contracts? A long economic contraction brought about by, say, a nuclear terrorist attack, an ecological/biological disaster, or a “peak-oil” scenario? But, as Mr. Walker reminded the audience last night, even if we could assume consistent gains in our national economy, our unfunded liabilities will still swell into a tidal wave of debt. Growth or no growth, Mr. Buffett loses the argument.


Tax 101 for Non-Buffetts

A second point, less important than the above, but rating higher on the disingenuous scale, was Mr. Buffett’s implication that he is not being taxed enough. He began by stating that never in his adult life had his tax burden been less than it is today, which is 15% by his figuring. He then alluded to his cleaning lady, whose tax burden he supposed to be 15.3%. What Mr. Buffett doesn’t care to tell you, however, is that these tax rates reflect the taxes levied on entirely different kinds of income. I must assume, given the rates he supplied last night, that most, if not all, of Mr. Buffett’s income is derived from stock sales and stock dividends. These are taxed at the lower capital-gains rate and the dividend-income rate. If Mr. Buffett’s income was derived from a salaried position, or from operating a business as a sole proprietor, like his cleaning lady, I can assure him that he would pay over half of it in federal taxes. To the unknowledgeable, Mr. Buffett’s apples-to-oranges comparison might lead one to believe that the rich aren’t carrying their weight, but as The Wall Street Journal explained back in July, the rich are paying their fair share.

As the chart I borrowed from the WSJ illustrates, our progressive federal tax system is doing precisely what it was designed to do, which is to shift the financial burdens of funding the US government away from the poor and onto the rich. As you can see, the top one percent of America’s earners pay 40% of all taxes, despite their earning but 22% of the pie; conversely, the bottom 50% of earners contribute just three percent of the government’s income. We can argue, I suppose, about whether the rich can afford to pay more than they already do, but to suggest that rich folks are not pulling their collective weight is ludicrous.


I.O.U.S.A.: The Silent Movie Version

As the short discussion above of taxes reveals, one of the difficulties in addressing budgetary and fiscal problems is the ideological divide about how to address the challenges we face. My main beef with I.O.U.S.A. is that, while it lays out clearly and forthrightly the challenge, it goes silent when it comes to solutions. It does this precisely because it does not want to inflame partisan anger; the makers and promoters of I.O.U.S.A. want the movie to educate people concerning the problem, and introducing solutions might discourage folks from appreciating that we have a problem in the first instance by offending their political sensitivities concerning taxes and spending.

In truth, the longer we delay in addressing our fiscal imbalances increases the likelihood that both higher taxes and lower spending will be necessary to dig ourselves out of a deep fiscal hole, but as things are right now, the old argument is still a valid one to have.

But what the last eight years have shown us (as if it was a difficult premise to grasp in the first place) is that you can’t lower taxes and raise spending at the same time. You can’t have your cake and eat it, too.

Supply-siders will tell you that lowering taxes, like the Bush tax cuts, actually raises more revenue due to increased economic stimulus and growth, yet during President Bush’s first term, revenues were flat and have only increased since 2006. This year, federal revenues are expected to be 21% higher than during Mr. Bush’s first year in office. If you look at the data from the Clinton years, when taxes were raised and supply-side theory was abandoned, the outgoing Clintonites left Mr. Bush federal revenues that were 43% higher than during Mr. Clinton’s first year in office. Supply-side economics might have some benefits at certain times and in certain contexts, but I hope we can finally put to bed the notion that tax cuts raise more money for the federal government.

Even if one were to assume the rosiest scenarios of supply-siders, the real tragedy of the past eight years is not our ability to collect revenue, but our profligacy in spending it. During the Clinton years, federal outlays increased about 35%. Under President Bush, the increase in outlays is projected to be 57%. Add to that the slower rate of growth in federal revenues during the past eight years, and that’s why you have record-setting $400 billion-plus annual deficits and why our federal debt is on schedule to break the $10 trillion mark next year. It’s unconscionable, really.

While President Bush has been extraordinarily careless with the federal purse, our current fiscal troubles really have so little to do with the favorite pegs that folks use in hanging him out to dry. The Iraq War, for instance, has contributed relatively little to our sickly financial condition. Likewise, the earmark scandal and general waste in government doesn’t really move the fiscal needle much either. At the end of the day, the biggest culprit year after year is healthcare. Other than a slice of a pie chart showing that healthcare expenses exist, I.O.U.S.A. had little to say about how to fix the problem, and given the campaign promises of both presidential candidates, which would further add to our unfunded liabilities, I don’t see this problem being solved in the next four years.