John Locke Update / Research Newsletter

How Not To Fix the National Debt

posted on in Fiscal Insight

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And waste $30 million in the process

Few would argue that the ballooning national debt — officially at $16.2 trillion and $52,000 per capita — is not a problem and merits no attention. You might be surprised to learn, then, of a slick campaign to build a bipartisan coalition of people who agree that "America’s growing federal debt threatens our future and that we must address it."

This Campaign to Fix the Debt already boasts $30 million in funding and is rolling out digital, print, and television ads to persuade people of what they already know to be true. The organization also plans to have 20 to 25 state chapters, including two already open in Tennessee and New Hampshire.

Unfortunately, however, this organization has no real solutions — nothing that would change the underlying incentives of Congress and the President. We can all look at a problem and declare it a problem. That is child’s play. Providing solutions is another story — and the best "framework" they offer is the president’s Simpson-Bowles Commission, which failed to even agree on a proposal to publish.

There are solutions out there; they and their well-heeled supporters are just not promoting them. Consider either a balanced budget amendment or the National Debt Relief Amendment, both of which I support by way of a state-initiated amendments convention. As public choice economics dictates, "institutional problems demand institutional solutions." Federal officials have also proved themselves in dire need of an external check to halt their eagerness to borrow on the backs of people not yet here to defend themselves. (If you are inclined to support financially an initiative that would address the national debt head on, I recommend RestoringFreedom.org, chief promoter of the National Debt Relief Amendment.)

Not only are Fix the Debt representatives ignoring real solutions and not offering their own, they are spreading unwarranted fears that a swift balancing of the budget would bring a "fiscal cliff." According to the co-chairman of the New Hampshire chapter, Nashua Mayor Donnalee Lozeau (R), even minimal spending reductions as part of the potential sequestration at the end of this year would cause "another Great Depression." What was the name of your organization again? How ironic.

Many state governments manage to balance their books each year, and that does not cause the sky to fall. In fact, 49 of the 50 states have some form of balanced budget constraint. Yet federal officials have spent deficits of greater than $1 trillion for the past three years straight.

In the process, they have expanded their spending from below 20 percent to more than 25 percent of the economy. As Burton Abrams of the Independent Institute noted in the Washington Times, this grossly unsustainable federal spending is the real fiscal insanity, not a balanced budget.

The expensive and counterproductive activities of the Campaign to Fix the Debt should come as no surprise. It is made up of the very people who, to a large degree, have profited from and are responsible for the debt crisis in the first place. This includes a host of former congressmen and even Alice Rivlin, a former Federal Reserve vice chairman and one of Barack Obama’s appointees on the failed Simpson-Bowles Commission.

Individuals like these will gladly accept donations and pretend they are building a coalition. All the while, as they snub and distract people from constitutional solutions, they are working against their very own purported objective.

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More stumbling and cronyism from North Carolina’s treasurer

Back in April, I wrote of Janet Cowell’s conflicts of interest and underperformance in her role as state treasurer. Well, the damning news keeps coming in, as reported by Carolina Liberty PAC, the News & Observer, the Civitas Review, and even the Washington Examiner.

Cowell saw fit to invest $26 million of the state’s pension funds into the initial public offering of Facebook. In no time, however, that stock had lost $4 million in value. So too had North Carolina’s state employees, or at least the people left paying for the pensions. Given that state employees expect, and likely will get, their pensions with certainty, such losses will eventually fall on taxpayers.

While the state controller reports unfunded pension liabilities of around $3 billion — a few hundred dollars per North Carolina resident — that reflects a discount rate of 7.25 percent. In other words, a more realistic discount rate of 4 percent or less would lead to a much higher estimate. State Budget Solutions, for example, calculated the unfunded pension liability to be $49 billion.

It doesn’t stop there. To recoup these losses, Cowell is leading a class action lawsuit seeking compensation from Facebook and its underwriters, alleging that they misled potential investors. On its face, this case appears to be thin, given the volatile nature of such public offerings. More importantly, though, to bring the case, Cowell rejected six North Carolina law firms already on retainer with the state. Instead, she chose two New York law firms, Bernstein Litowitz Berger and Grossmann alongside Labaton Sucharow. They happen to have donated more than $75,000 to Cowell’s campaign since 2008, but of course that had nothing to with the selection.

Notes

  • Another year, another tax increase for North Carolina’s employers. Given that the state remains delinquent with its Unemployment Insurance system — $2.5 billion delinquent and third worst in the nation — it is going to fail to meet a November 10 deadline for repayment.

    The consequence of not resolving this is a mandatory tax increase on employers and continued interest payments. For each year, the federal UI tax increases by 0.3 percent ($21 per employee), this time from 0.6 to 0.9 percent, to go into effect in January of 2013. Since the Great Recession, the interest payments have totaled $162 million, and the next payment will be approximately $73 million.

  • Do you know any individuals interested in exploring the philosophy of and political movement towards liberty? If so, please inform them that Students for Liberty will be hosting a regional conference in Chapel Hill this Saturday. These conferences highlight the wave of articulate and passionate young liberty advocates and are for both students and non-students alike. Here is one of their recent blog posts, "Are You Breaking the Law?" if you’d like to get a sense for what they are up to.
  • If you’ve not heard, Atlas Shrugged Part II is now out in theaters, and I saw it on its opening night. While the first film disappointed me and appeared very amateur, the second is an improvement. Even for those unfamiliar with the story, you could watch and get value out of the film without having seen the first part in the series.

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Fergus Hodgson (@FergHodgson) is Director of Fiscal Policy Studies at the John Locke Foundation, a Policy Advisor with The Future of Freedom Foundation, and a member of the American Legislative Exchange Council’s Tax and Fiscal Policy Task Force. He… ...

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