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Is the United States Bankrupt?
FEDERAL RESERVE BANK OF ST. LOUIS REVIEW ^ | July 1, 2006 | Laurence J. Kotlikoff

Posted on 07/10/2006 10:59:12 AM PDT by Paul Ross

Synopsis

Is the United States bankrupt? Many would scoff at this notion. Others would argue that financial implosion is just around the corner. This paper explores these views from both partial and general equilibrium perspectives.

It concludes that countries can go broke, that the United States is going broke, that remaining open to foreign investment can help stave off bankruptcy, but that radical reform of U.S. fiscal institutions is essential to secure the nation’s economic future.

The paper offers three policies to eliminate the nation’s enormous fiscal gap and avert bankruptcy: a retail sales tax, personalized Social Security, and a globally budgeted universal healthcare system.

_Preface

Is the U.S. bankrupt? Or to paraphrase the Oxford English Dictionary, is the United States at the end of its resources, exhausted, stripped bear, destitute, bereft, wanting in property, or wrecked in consequence of failure to pay its creditors?

Many would scoff at this notion. They’d point out that the country has never defaulted on its debt; that its debt-to-GDP (gross domestic product) ratio is substantially lower than that of Japan and other developed countries; that its long-term nominal interest rates are historically low; that the dollar is the world’s reserve currency; and that China, Japan, and other countries have an insatiable demand for U.S. Treasuries.

Others would argue that the official debt reflects nomenclature, not fiscal fundamentals; that the sum total of official and unofficial liabilities is massive; that federal discretionary spending and medical expenditures are exploding; that the United States has a history of defaulting on its official debt via inflation; that the government has cut taxes well below the bone; that countries holding U.S. bonds can sell them in a nanosecond; that the financial markets have a long and impressive record of mispricing securities; and that financial implosion is just around the corner.

This paper explores these views from both partial and general equilibrium perspectives. The second section begins with a simple two-period life-cycle model to explicate the economic mean-ing of national bankruptcy and to clarify why government debt per se bears no connection to a country’s fiscal condition. The third section turns to economic measures of national insolvency, namely, measures of the fiscal gap and genera-tional imbalance. This partial-equilibrium analy-sis strongly suggests that the U.S. government is, indeed, bankrupt, insofar as it will be unable to pay its creditors, who, in this context, are current and future generations to whom it has explicitly or implicitly promised future net payments of various kinds.

The world, of course, is full of uncertainty. The fourth section considers how uncertainty changes one’s perspective on national insolvency and methods of measuring a country’s long-term fiscal condition. The fifth section asks whether immigration or productivity improvements arising either from technological progress or capital deepening can ameliorate the U.S. fiscal condition.

--SNIP--[skipping ahead to the meat of the paper]

THE U.S. FISCAL CONDITION

As suggested above, the proper way to consider a country’s solvency is to examine the life-time fiscal burdens facing current and future generations. If these burdens exceed the resources of those generations, get close to doing so, or simply get so high as to preclude their full collection, the country’s policy will be unsustainable and can constitute or lead to national bankruptcy. Does the United States fit this bill? No one knows for sure, but there are strong reasons to believe the United States may be going broke.

Consider, for starters, Gokhale and Smetters’s (2005) analysis of the country’s fiscal gap, which measures the present value difference between all future government expenditures, including servicing official debt, and all future receipts. In calculating the fiscal gap, Gokhale and Smetters use the federal government’s arbitrarily labeled receipts and payments. Nevertheless, their calcu-lation of the fiscal gap is label-free because alter-native labeling of our nation’s fiscal affairs would yield the same fiscal gap. Indeed, determining the fiscal gap is part of generational accounting; the fiscal gap measures the extra burden that would need to be imposed on current or future generations, relative to current policy, to satisfy the government’s intertemporal budget constraint.

The Gokhale and Smetters measure of the fiscal gap is a stunning $65.9 trillion! This figure is more than five times U.S. GDP and almost twice the size of national wealth. One way to wrap one’s head around $65.9 trillion is to ask what fiscal adjustments are needed to eliminate this red hole. The answers are terrifying. One solution is an immediate and permanent doubling of personal and corporate income taxes. Another is an immediate and permanent two-thirds cut in Social Security and Medicare benefits. A third alternative, were it feasible, would be to immediately and permanently cut all federal discretionary spending by 143 percent.

The Gokhale and Smetters study is an update of an earlier, highly detailed, and extensive U.S. Department of the Treasury fiscal gap analysis commissioned in 2002 by then Treasury Secretary Paul O’Neill.

Smetters, who served as Deputy Assistant Secretary of Economic Policy at the Treasury between 2001 and 2002, recruited Gokhale, then Senior Economic Adviser to the Federal Reserve Bank of Cleveland, to work with him and other Treasury staff on the study. The study took close to a year to organize and complete. Gokhale and Smetters’s $65.9 trillion fiscal-gap calculation relies on the same methodology employed in the original Treasury analysis. Hence, one can legitimately view this figure as our own government’s best estimate of its present-value budgetary shortfall. The $65.9 trillion gap is all the more alarming because its calculation omits the value of contingent government liabilities and relies on quite optimistic assumptions about increases over time in longevity and federal healthcare expenditures.

_____________________________________________________

Laurence J. Kotlikoff is a professor of economics at Boston University and a research associate at the National Bureau of Economic Research.

© 2006, The Federal Reserve Bank of St. Louis. Articles may be reprinted, reproduced, published, distributed, displayed, and transmitted in their entirety if copyright notice, author name(s), and full citation are included. Abstracts, synopses, and other derivative works may be made only with prior written permission of the Federal Reserve Bank of St. Louis.



TOPICS: Business/Economy; Editorial; Extended News; Foreign Affairs; Government; Miscellaneous; Philosophy; Technical
KEYWORDS: 1lunaticnotion; absurd; biggovernment; conservatism; economics; economy; fairtax; frb; ghokal; govwatch; healthcare; insnaity; insolvency; overspending; smetters; socializedmedicine; socialsecurity; taxes; tinfoilhattime; usbankruptcy; utterhysteria; weallgonnadie
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For those with some interest in the technical analytical approach to the issues which are too often brushed away with hoary anecdotes.

As for the Government already maybe trying to inflate its way out of this mess of its own creation...


1 posted on 07/10/2006 10:59:15 AM PDT by Paul Ross
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To: Paul Ross

Is the Pope Catholic?


2 posted on 07/10/2006 11:01:24 AM PDT by leadpenny
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To: RhoTheta

Ping for later reading.


3 posted on 07/10/2006 11:02:17 AM PDT by Egon (We are number one! All others are number two... or lower.)
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To: Paul Ross
A third alternative, were it feasible, would be to immediately and permanently cut all federal discretionary spending by 143 percent.

I'd settle for cutting it 100%.

4 posted on 07/10/2006 11:03:39 AM PDT by Toddsterpatriot (Why are protectionists so bad at math?)
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To: Paul Ross
The answers are terrifying. One solution is...

Even believing the bad numbers, a combination of solutions, including the one they didn't mention, economic growth, will get us out of this mess. Another possibility is producing cheap power from semconductors or nanotechnology (e.g. solar, depolymerization, etc)

5 posted on 07/10/2006 11:04:36 AM PDT by palmer (Money problems do not come from a lack of money, but from living an excessive, unrealistic lifestyle)
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To: Paul Ross

One way to wrap one’s head around $65.9 trillion? Even Algore's head ain't that big!.......


6 posted on 07/10/2006 11:05:39 AM PDT by Red Badger (Follow an IROC long enough and sooner or later you will wind up in a trailer park..........)
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To: Paul Ross

How much is gold an ounce?


7 posted on 07/10/2006 11:05:58 AM PDT by Dallas59
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To: Toddsterpatriot

I'd go for the 143% and ask for the bridges to nowhere nowhere money back.


8 posted on 07/10/2006 11:05:58 AM PDT by palmer (Money problems do not come from a lack of money, but from living an excessive, unrealistic lifestyle)
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To: Paul Ross

Hmm, time for a road trip with a few cases of beer which won't help the problem but it would make us feel better. Or, maybe we need to just have a big garage sale? Maybe put the capital building and some other junk we don't need on ebay?


9 posted on 07/10/2006 11:07:50 AM PDT by isthisnickcool (nac uoy daer sdrow sdrawkcab?)
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To: Toddsterpatriot

You'd eliminate our military, Coast Guard, any semblance of border control, default on our bonds, cut off Social Security, Medicaid, transportation funding, etc?

Wow. Radical!

I think we should get the so-called "nondiscretionary spending under control." Our republican congress and republican president have failed in this regard. Naturally, the Dems would make it much worse, and try to solve all these problems with tax increases......


10 posted on 07/10/2006 11:07:55 AM PDT by dashing doofus
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To: Paul Ross
As for the Government already maybe trying to inflate its way out of this mess of its own creation.......

The ol' tried and true method. It works everytime it's tried......Remember WIN! ????.....

11 posted on 07/10/2006 11:08:06 AM PDT by Red Badger (Follow an IROC long enough and sooner or later you will wind up in a trailer park..........)
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To: palmer
Even believing the bad numbers, a combination of solutions, including the one they didn't mention, economic growth, will get us out of this mess. Another possibility is producing cheap power from semconductors or nanotechnology (e.g. solar, depolymerization, etc)

All those possibiliities are not ignored, and are indeed evaluated. Check into the guts of the paper, note the discussion pertaining to technology, productivity growth, and "capital deepening."

12 posted on 07/10/2006 11:08:37 AM PDT by Paul Ross (We cannot be for lawful ordinances and for an alien conspiracy at one and the same moment.-Cicero)
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To: Paul Ross
countries can go broke

The populace can become impoverished, but talking about states as if they were large, generalized versions of individuals is reasoning by false analogy. Everybody should buy gold so when the state rounds up all the wealth of the populace they will find it all easier and more conveniently.

13 posted on 07/10/2006 11:08:48 AM PDT by RightWhale (Off touch and out of base)
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To: Dallas59

1 ounce of gold = 1 ounce of gold.........A=A.......


14 posted on 07/10/2006 11:09:19 AM PDT by Red Badger (Follow an IROC long enough and sooner or later you will wind up in a trailer park..........)
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To: Paul Ross

Maybe.

I've been reading articles reaching very similar conclusions for about 40 years.

The economy hasn't collapsed yet. (Which doesn't necessarily mean it won't tomorrow.)

However, the sky is falling types do not have a great record of successful prediction.


15 posted on 07/10/2006 11:11:11 AM PDT by Restorer
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To: RightWhale
Everybody should buy gold so when the state rounds up all the wealth of the populace they will find it all easier and more conveniently.

Sigh. The Beer Trip is beginning to sound better all the time, eh?

16 posted on 07/10/2006 11:11:48 AM PDT by Paul Ross (We cannot be for lawful ordinances and for an alien conspiracy at one and the same moment.-Cicero)
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To: dashing doofus
default on our bonds, cut off Social Security, Medicaid

Paying interest isn't discretionary. Neither is Social Security. Is Medicaid? I didn't think so.

You're right, I wouldn't want to eliminate the military.

17 posted on 07/10/2006 11:13:17 AM PDT by Toddsterpatriot (Why are protectionists so bad at math?)
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To: ancient_geezer

Ping. You have an ally here.


18 posted on 07/10/2006 11:13:56 AM PDT by expatpat
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To: Paul Ross
The Gokhale and Smetters measure of the fiscal gap is a stunning $65.9 trillion! This figure is more than five times U.S. GDP and almost twice the size of national wealth.

It appears the answer to the question is "yes", we just haven't declared it yet.

19 posted on 07/10/2006 11:15:22 AM PDT by OB1kNOb (This is no time for bleeding hearts, pacifists, and appeasers to prevail in free world opinion.)
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To: Paul Ross
Republicans will never raise taxes and Republicans will never cut spending.

There is only of realistic scenario: when the crunch comes, the Republicans will be kicked out on their butts and we'll have higher taxes imposed by Democrats.

Oh, and you can bet those Democrats will go much further than just raising taxes. We'll have another damn FDR.

I suppose I could hope that Republicans might change their attitude, but as far as I can tell, the only thing most of them care about is being pro-life.

Heck. You can even have taxpayers build a 200 million dollar bridge to nowhere in Alaska, but that's A-Okay. The Senator from Alaska is pro-life, after all.
20 posted on 07/10/2006 11:16:04 AM PDT by mc6809e
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To: OB1kNOb

If the American people ever allow private banks to control the issue of their currency, first by inflation, then by deflation, the banks...will deprive the people of all property until their children wake-up homeless on the continent their fathers conquered.... The issuing power should be taken from the banks and restored to the people, to whom it properly belongs. -Thomas Jefferson


History records that the money changers have used every form of abuse, intrigue, deceit, and violent means possible to maintain their control over governments by controlling money and its issuance. -James Madison


If congress has the right under the Constitution to issue paper money, it was given them to use themselves, not to be delegated to individuals or corporations. -Andrew Jackson


The Government should create, issue, and circulate all the currency and credits needed to satisfy the spending power of the Government and the buying power of consumers. By the adoption of these principles, the taxpayers will be saved immense sums of interest. Money will cease to be master and become the servant of humanity. -Abraham Lincoln



Despite these warnings, Woodrow Wilson signed the 1913 Federal Reserve Act. A few years later he wrote: I am a most unhappy man. I have unwittingly ruined my country. A great industrial nation is controlled by its system of credit. Our system of credit is concentrated. The growth of the nation, therefore, and all our activities are in the hands of a few men. We have come to be one of the worst ruled, one of the most completely controlled and dominated Governments in the civilized world no longer a Government by free opinion, no longer a Government by conviction and the vote of the majority, but a Government by the opinion and duress of a small group of dominant men. -Woodrow Wilson

http://www.themoneymasters.com/presiden.htm


21 posted on 07/10/2006 11:18:42 AM PDT by cope85
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To: Toddsterpatriot

The Federal Reserve - What Is It? Who Is It?
http://www.freerepublic.com/forum/a3b13c8401f8f.htm


22 posted on 07/10/2006 11:20:05 AM PDT by cope85
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To: Paul Ross
Is the United States bankrupt?

Yes. Fiscally, culturally, morally, and every other kind of way.

Brief examples of each:

Fiscally - The Social Security System is near bankrupt, yet illegal aliens are drawing benefits from it. We're also now giving illegal aliens benefits from Medicare.

Culturally - Hip-hoppers hold their crotches while they "sing". Hollywood is unable to make a movie without loading it up with F-bombs.

Morally - Same-sexers are now getting "married". "Booty calls".

23 posted on 07/10/2006 11:21:07 AM PDT by my_pointy_head_is_sharp (Evil never sleeps...)
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To: Restorer
I've been reading articles reaching very similar conclusions for about 40 years.

The economy hasn't collapsed yet. (Which doesn't necessarily mean it won't tomorrow.)

I have a book written about 1930 or so that predicts the longterm failure of socialist systems.

It took 70 years for the Soviet Union to collapse.

When the prediction is made isn't as important as when it comes true.

24 posted on 07/10/2006 11:21:17 AM PDT by mc6809e
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To: mc6809e
...and Republicans will never cut spending.

It can happen, no matter how "unrealistic."

25 posted on 07/10/2006 11:22:18 AM PDT by Paul Ross (We cannot be for lawful ordinances and for an alien conspiracy at one and the same moment.-Cicero)
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To: cope85
You got anything else getting 13 to 14 percent?

Let me guess. It's owned by foreign bankers? How much money do the evil owners of the Fed suck out in profits every year? Must be billions? Trillions? What kinda dividend do they pay?

http://www.freerepublic.com/forum/a3b13c8401f8f.htm

This article has been deleted.

26 posted on 07/10/2006 11:24:12 AM PDT by Toddsterpatriot (Why are protectionists so bad at math?)
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To: mc6809e

I bet the book didn't think it would take 60 years from 1930.

While the accuracy of past predictions does not necessarily indicate the accuracy of those for tomorrow, the record should also not be ignored.


27 posted on 07/10/2006 11:26:42 AM PDT by Restorer
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To: Paul Ross
Or to paraphrase the Oxford English Dictionary, is the United States at the end of its resources, exhausted, stripped bear, destitute, bereft, wanting in property, or wrecked in consequence of failure to pay its creditors?

Does PETA know about this?

Maybe they should have read that dictionary instead of paraphrasing it.


28 posted on 07/10/2006 11:27:22 AM PDT by nathanbedford ("I like to legislate. I feel I've done a lot of good." Sen. Robert Byrd)
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To: Paul Ross
The paper offers three policies to eliminate the nation’s enormous fiscal gap and avert bankruptcy: a retail sales tax, personalized Social Security, and a globally budgeted universal healthcare system.

Their solution: More taxes, personalize the unfunded SS funds (personalize the debt, maybe?), and more BS spending.

BWAAAAAAAAAAAAAAAAAAAAAAAAAAHAHAHAHAHA!

How about we just CUT GOVERNMENT SPENDING!

29 posted on 07/10/2006 11:29:06 AM PDT by balrog666 (Ignorance is never better than knowledge. - Enrico Fermi)
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To: nathanbedford

Economists, with spell-checkers. Obviously the editor missed it.


30 posted on 07/10/2006 11:29:31 AM PDT by Paul Ross (We cannot be for lawful ordinances and for an alien conspiracy at one and the same moment.-Cicero)
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To: Paul Ross

globally budgeted universal healthcare system....


He lost me right there.....


31 posted on 07/10/2006 11:29:50 AM PDT by mo
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To: my_pointy_head_is_sharp
Your fiscal example of USA being bankrupt is wrong since SS is currently running a surplus and depending on what is done with it, it may or may not go broke.
32 posted on 07/10/2006 11:32:30 AM PDT by Eagles Talon IV
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To: Paul Ross
stripped bear

??????? Is this paper actually from the Fed? You would think someone with the skill to write a paper like this would know the difference between bear and bare

33 posted on 07/10/2006 11:33:03 AM PDT by 6ppc
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To: Paul Ross

I know the answer to this one.

No. No it isn't.


34 posted on 07/10/2006 11:34:09 AM PDT by bobdsmith
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To: Paul Ross

Businesses don't go bankrupt until the creditors cut off the cash flow........................


35 posted on 07/10/2006 11:35:34 AM PDT by PeterPrinciple (Seeking the truth here folks.)
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To: expatpat; Taxman; pigdog; Principled; EternalVigilance; rwrcpa1; phil_will1; kevkrom; n-tres-ted; ..

A picture is worth a thousand words.

http://mwhodges.home.att.net/fed_budget.htm

 

 


36 posted on 07/10/2006 11:41:12 AM PDT by ancient_geezer (Don't reform it, Replace it.)
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To: mo
He lost me right there.....

Me too!

37 posted on 07/10/2006 11:43:25 AM PDT by Paul Ross (We cannot be for lawful ordinances and for an alien conspiracy at one and the same moment.-Cicero)
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To: ancient_geezer

Why is it so hard for the government to come to grasp with the notion that the solution to budget problems IS TO SPEND LESS. Just about every family and individual has had to do this at some point, it's not that difficult.

What boggles the mind is the thought that government programs need real growth, because most don't. The average program should be budgeted this way: take the population of the country and divide it into the program's budget, the following year take the rate of inflation, add it to the per capita dollar amount and multiply by the population.


38 posted on 07/10/2006 11:49:50 AM PDT by wagglebee ("We are ready for the greatest achievements in the history of freedom." -- President Bush, 1/20/05)
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To: Toddsterpatriot

I think we're on the same wavelength. The budget should be balanced, responsibly (i.e. with spending cuts), and entitlement spending (Medicaid, Social Security) must be brought under control.

Bush needs to veto some spending. Hell, he needs to veto SOMETHING!


39 posted on 07/10/2006 11:50:09 AM PDT by dashing doofus
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To: wagglebee

Why is it so hard for the government to come to grasp with the notion that the solution to budget problems IS TO SPEND LESS

Spending less doesn't buy votes. Especially votes from the ones not participating in paying the bills.

 

The Honorable James DeMint (R-SC)
United States House of Representatives
APRIL 5, 2001

Bush touts relief as tax day looms

Another 3.9 million Americans will have their income tax liability completely eliminated, officials said.

That's 3.9 million Americans more added to the spending constituency of 70% of the public clamoring for more from government, figuring someone else foots the bill.

It's like me in the restaurant: What do I care about extravagance if you're footing the bill?
--- Walter Williams.


40 posted on 07/10/2006 11:54:34 AM PDT by ancient_geezer (Don't reform it, Replace it.)
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To: palmer
Cuts in Medicare, Medicaid and Social Security are inevitable, so the numbers mentioned will change. Still, the numbers on the deficit are hard to swallow. Paying back such a deficit will be difficult. Inflation is a disaster, but we seem to be satisfied with low level inflation of 1-4%. If inflation goes back to those stagflation days of Jimmy, holding gold and real estate will be good.
41 posted on 07/10/2006 11:56:26 AM PDT by GeorgefromGeorgia
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To: ancient_geezer

Ping to the Geezer. Actual data that shows that the "entitlement" side of the budget is driving the deficit (which remains under 5% of GDP -- of concern, but not the debacle that Hillary-Gore-Kerry-Pelosi-Reid would have us believe).

Now, if we can get a graph of US revenues, we will see that revenues are growing strongly. But, the Dems still want tax increases, and call reductions in the rate of spending "cuts."

Kudos for showing some actual data.


42 posted on 07/10/2006 11:56:36 AM PDT by dashing doofus
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To: wagglebee
What boggles the mind is the thought that government programs need real growth, because most don't.

Yes. Baseline budgeting must be killed.

43 posted on 07/10/2006 11:56:53 AM PDT by Toddsterpatriot (Why are protectionists so bad at math?)
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To: dashing doofus
Bush needs to veto some spending. Hell, he needs to veto SOMETHING!

Yes! And get serious about sealing the border. Probably wishful thinking.

44 posted on 07/10/2006 11:59:37 AM PDT by Toddsterpatriot (Why are protectionists so bad at math?)
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To: dashing doofus
One thing that will help bring spending under control is to first make the costs of government obvious to taxpayers and make sure everyone pays taxes as well.

THEN we'll see some voter action to curb the runaway (and sometimes hidden) spending that we now have. And there's a tax system that will do this.

It's time for the FairTax!!!

There are huge bundles of information available about it and it is the most thoroughly economically-studied tax plan ever put before congress.

Heres the bill itself, HR25.

And here's the website with extensive economic data - the FairTax website.

There's lots of helpful information there on many, many different topics. Check the FAQs and Rebuttals for example.

45 posted on 07/10/2006 12:05:53 PM PDT by pigdog
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To: dashing doofus

ping


46 posted on 07/10/2006 12:06:22 PM PDT by Jack Black
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To: Toddsterpatriot

Agreed.

His "plan" to mobilize some national guard troops to free up INS agents is already proving to be nothing more that a political statement. He promised a few thousand, but we've only added a few hundred.

Why don't we just build the stinking fence??? Who gives a rat's ass if it offends the Mexicans? Right now the situation is kinda like that toll booth in the movie "Blazing Saddles." The illegals: "Badges?! We don't need no stinking badges!"


47 posted on 07/10/2006 12:08:04 PM PDT by dashing doofus
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To: Restorer
However, the sky is falling types do not have a great record of successful prediction.

It only takes once. But, right now they are 0 for a gizzilion.

48 posted on 07/10/2006 12:13:36 PM PDT by Always Right
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To: ancient_geezer
There are studies that show a retail consumption tax would jump start the economy adding an additional 10 to 15% growth very quickly. Economic growth like that would go a long way toward stabilizing the dollar and paying off these horrendous contingent liabilities. In addition, under a National Retail Sales Tax companies would repatriate the estimated trillion plus of dollars sitting offshore because of confiscatory tax rules.
49 posted on 07/10/2006 12:17:10 PM PDT by groanup (How do you know we aren't movie stars?)
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To: Paul Ross

Yep, its bankrupt. Send me your worthless T-bills, bonds and paper money. I will buy them for 10 cents on the dollar.


50 posted on 07/10/2006 12:17:29 PM PDT by Raycpa
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