The SOTU Speech I Would Have Given

Delivering his last State of the Union (SOTU) speech as President, unless reelected, Obama predictably took credit for anything that justifies giving him another term and blamed the failures – notably high unemployment and a flagging economy – on the previous administration. Remarkably, after three years of his presidency, Bush remains Obama’s Moriarty.

The chest-thumping rhetoric delivered last Tuesday was plainly a campaign stump speech. Conspicuously absent, however, were the grandiloquent though vacuous references to hope and change with which the then-unknown Senator Obama hypnotized throngs of want-to-believers in 2008. But the 2012 campaign will now be dogged by a record which President Obama should have to explain to politically wizened voters who still poll in the majority against ObamaCare, stimulus spending, and bailouts – his major first-term achievements. Unable to explain them or blame them, Tuesday’s speech revealed a strategic switch to “equality” and “fairness” as the new “us versus them” lever for his reelection.

I sincerely hope that voters will see that Obama’s vision for America is one of trickle down government in which more and more of our wealth is confiscated in order to seize more and more control of our lives. I doubt that voters will see that. But do we really want more regulations; more government-directed spending; more power centralized in Washington; more dependency of citizens on government programs; more debt piled on our children and grandchildren and Americans yet unborn; more ill-thought-out programs like Social Security, Medicare, and Medicaid whose spending is engulfing our economy; more parenting by a president who believes he knows what’s best for us … even better than we know for ourselves? What happened to the vision of American Exceptionalism and the City Set Upon a Hill, neither of which Obama believes in? What happened to the expectation, which evidence showed to be true, that every generation would live more prosperously than its parent’s generation – until private-sector dynamism was hobbled by the excesses of the last two presidential administrations?

This week’s blog was initially planned to compare the main arguments of Obama’s 7,000-word, 65-minute speech against the facts – which are well-publicized on the Internet. Instead, I decided to write the SOTU speech I would have given – in a lot less words than Obama used.

So, here we go.

Mr. Speaker, Mr. Vice President, members of Congress, distinguished guests, and fellow Americans:

I come before you this evening to speak on behalf of the state of our Union. I wish I could begin by assuring you and the American people listening by radio or television that the state of our Union is strong, as my predecessors have done in their State of the Union speeches. Unfortunately, I’m unable to do that.

The Federal budget is out of control. The most recent CBO estimates report the deficit – the amount by which federal expenditures exceed revenues (i.e. mostly individual and corporate tax receipts) – will be $1.2 trillion for the fiscal year that ends in September. The national debt – i.e. the accumulation of historic deficits – now stands at $15.3 trillion. To put that debt in perspective, every person in the American workforce would have to give up two years’ income to pay it off.

Just a decade ago, the debt was $3.3 trillion – about 20% of the current figure. It is obvious that we are spending at an unsustainable rate. How have we been able to continue this spending spree? By borrowing about 36 cents of each dollar we spend. We were borrowing 40 cents per dollar two years ago.

Would you conduct the affairs of your household that way? Certainly not. If you attempted it, the creditors would ultimately turn off your borrowing spigot. Your government should not conduct its affairs that way either, and it’s up to the voters to turn off the borrowing spigot. Your federal government lacks the discipline to do it.

If the US economy were a business, the GDP (Gross Domestic Product) would be its sales revenues. Over the past 40 years, the cost of your federal government (i.e. what it spends) averaged 18% of the country’s “sales” revenues (GDP). During the last two administrations, however, that percentage has crept up to 25%. Why? Because of 9/11 and Homeland Security. Because of No Child Left Behind and an expensive Medicare Part D prescription benefit. Because of healthcare reform. Because of two wars and the care of veterans of those wars. Because of many other increases in government expenditures.

In order to avoid sinking further into a morass of debt, we would have to maintain the current ratio of national debt to GDP. This would require tax receipts to exceed federal expenditures by 1.5% in order to pay the current average interest. Otherwise we have to borrow more to pay the interest. Today the debt-to-GDP ratio is 101%. Two years ago it was 88%. We are losing ground and entering frightening, unknown territory in this ratio.

Current interest rates are low. But before the 2008 recession began, interest rates were around 5% – closer to the historic norm. If interest rates return to historic levels, the expense of continuing to spend at current levels on top of our current national debt could give our creditors pause. Our borrowing is already a national security concern because so much of our debt is held by countries that don’t see the world as we do.

The picture I’m painting should be clear. Government is involved in doing more and more for its citizens – some of it appropriate and unavoidable, and some of it unnecessary. And most of what government does “for us” is grossly intrusive, like the TSA “strip and pat,” like the IRS, which knows too much about our personal affairs, like ObamaCare that will have access to our medical records to learn what conditions we are being treated for and the outcomes of those treatments.

Take the TSA as an example. The Israeli airport security system is the best in the world. There have been no acts of terrorism passing through the Ben Gurion International airport since 1972. There are no pat-downs, no full body screens. Their system is based on profiling. Our system treats all travelers alike – like potential terrorists. The Israeli system is not only more effective than ours, it costs less.

The US federal government never implements any program for which costs versus benefits is a major concern. The government will spend a dollar to save a dime. Homeland security is an example.

Education is another.

Under the Constitution, the federal government has no role in education. Education is a state responsibility – indeed a local one supervised by local Boards of Education elected by the local community. Yet, the federal government has built up a massive federal educational bureaucracy which will cost taxpayers almost $80 billion to operate this year. That cost is in addition to $175 billion in stimulus spending that was given to states and school districts to bridge state budget shortfalls during the current recession, including paying existing and new teacher salaries. Why are teacher salaries in Fond du Lac, WI a federal concern? Why does a taxpayer living in Dade County FL have to pay for them?

What would have happened if the federal government were not involved in state education? The states would have figured out a solution to pay teachers on their own. It might not have been the best solution, but having the essence of a “rich uncle” to bail them out was clearly not the best solution either. States now must hire untold thousands of administrative employees to fill out federal paperwork to justify the monies they receive and the uses to which they are put. In the process, state and federal education officials and citizens themselves have lost the freedom to act on their own in education because they accept federal funds.

Let’s travel back in time about 45 years, to visit the 1965 centerpiece of The Great Society legislation – Medicare and Medicaid. What possible constitutional justification did the federal government have for getting into the insurance business? In 1965 the House Ways and Means Committee estimated that the hospital insurance portion of the program, Part A, would cost about $9 billion annually by 1990. Actual Part A spending in 1990 was $67 billion. When they were created, Medicare Part A and B were predicted to cost about $12 billion in 1990. Actual Part A and B spending in 1990 was $110 billion – off by nearly a factor of 10. Today, the unfunded liability for Medicare A and B is about $75 trillion. Who is going to pay that? Your grandchildren – and maybe their grandchildren!

The federal portion of Medicaid, which is a state-managed program, was estimated to cost $1 billion in 1992 and its actual cost was $17 billion in 1992.

MIT economist Amy Finkelstein is an expert in Medicare and Medicaid. Unlike commercial insurance, in which the insured must first pay a deductible before insurance kicks in, Medicare and Medicaid provide “first dollar” coverage – there is no deductible. Finkelstein’s research shows that, concerning these programs, supply created its own demand – i.e. the availability of first dollar Medicare drove healthcare costs higher than they would have been otherwise. The availability of Medicare to pay the bills for the over-65s accounted for more than half of the growth in healthcare spending between 1965 and 1970. Medicare increases caused new hospitals to be built and existing hospitals to expand their capacity. Increased capacity spilled over into commercial insurance plans and increased their costs also.

Before Medicare existed, 51% of the people over 65 bought their own health insurance. Those who didn’t buy insurance paid for care out of pocket. Those who couldn’t afford to pay received charity care – essentially the group now covered by Medicaid. These are examples of government “doing” for people what they could and were doing for themselves to solve their problems. Cheap, taxpayer-subsidized government insurance crowded out private insurance for the 51%, paid the bills for the “self-pay”, and took over what charity was providing.

What did society get for the money spent by the government to provide this health insurance? Essentially nothing. There was no impact on death rates. The only “benefit” Finkelstein found was that out of pocket spending by the heavy users of healthcare declined substantially because Uncle Sam paid it. If society had simply paid those out-of-pocket expenses directly, rather than having Medicare as an intermediary, total healthcare cost increases would have been significantly lower.

Finkelstein’s 2005 research showed that consumers will regulate their healthcare spending if they are required to pay more of the costs of routine chronic care, while protecting them against the catastrophically high expense of acute care episodes. High deductible plans are one way to let doctors and consumers – rather than government bureaucrats – negotiate and manage healthcare expenditures. A plan for doing that was introduced last year – six years after Finkelstein’s research – in the House by Rep. Paul Ryan (R-WI).

A similar argument can be made for the introduction of Social Security Insurance. For the first 160 years of the Republic, citizens provided for their own retirement. Virtually every citizen saved something for inevitable retirement. Some worked until they died or were no longer were able to work. Some received help from families. Some – a minority – asked for help from charities. Yet the government decided to solve a problem that wasn’t a problem. It introduced an ill-conceived Social Security program whose existence is doubtful for our grandchildren but whose expense will be paid by them nonetheless. [I discussed the flaws of Social Security in my August 21, 2010 blog and therefore won’t repeat them here.]

Social Security, Medicare, Medicaid, and programs of that ilk have created a society that is dependent on the government for its day-to-day needs. Today half of the households have at least one person who is receiving government assistance on average, which means there are households with multiple recipients or multiple services. Starting in 2012 with the retirement of the first boomer, that percentage will grow until conceivably only a minority of the working population is truly independent and self-supporting. Today more than 45 million Americans receive food stamps. That’s one out of seven men, women, and children on food stamps in a free republic. Today there are more households receiving income support (unemployment benefits, Social Security, disability insurance, Medicare, Medicaid, veterans’ benefits, education assistance, and other cash transfers of government funds to individuals) than they pay in taxes (income, payroll, and other taxes). This is an astonishing development when you consider that 75 years ago, none of these programs existed and none of this dependency existed. Are we more free or less free today?

How can someone receive more in benefits than they contribute to the commonweal? Because half the wage earners pay no income tax. Whereas, 40% of income earners pay 99% of taxes and the top 1% pays more in taxes than the bottom 95% combined.

The US is the most progressively taxed nation among the Western democracies. The concept of tax progressivity is based on the economic theory of diminishing marginal utility. That’s an academic concept which means the more you have of something, the less value there is in having more of it. So, if you have five cars, theoretically owning a sixth is less value to you than when you bought the second or third or fourth.

Car enthusiasts will probably argue with that logic as taxpayers also do … because the 40% who pay the 99% only make three times the money earned by the lower 60%. Get that? A group of high income earners makes three times as much money as another group but pays 75 times more in taxes. That is marginal utility taken to the point of absurdity. But it is the basis of the tax code.

The current tax code is a monstrosity. It is a crazy quilt of patches enacted over the years by Congress to give preference to one interest group over another. And it can be safely said that as soon as Congress passes a new law affecting income taxes, an army of dedicated accountants and tax lawyers go to work to figure out how to minimize or negate its impact. That may offend the delicate sensibilities of those who are equally dedicated to extracting more income from the “rich” (although no one has defined the income level at which “richness” begins) but it is not illegal to avoid taxes; it is only illegal to evade them. There is a big difference.

If the tax code is to work as planned, it will require reform that incents taxpayers to comply because they believe it is fair. That is not the case today. High income earners feel they are unfairly discriminated against – and the example given above is ample explanation why – whereas government leaders are more focused on increasing government tax revenue than they are in decreasing government expense.

Fairness means that an income earner is not discriminated against by the tax code based on how much income is earned. It also means that an income earner is not discriminated for by the tax code based on how little income is earned. Everyone – and I mean everyone – should pay taxes. That way, everyone pays attention to how much government costs them personally. When some people are exempted from taxpaying on the basis of their income – and exempting half of the income earners is an obscenity – they have no interest in the effectiveness and efficiency of their government. Moreover, exempting a group from paying taxes smacks of political bribery.

Thus, someone who makes three times more than another person should pay three times more tax dollars to the government. Businesses and people should pay the same rate because business profits, whether they are distributed or not, belong to people, not businesses. Business profits should be taxed once – not twice as they are as dividends or three times as they are as estates (the death tax).

What I am describing, of course, is a tax code with only one rate, which some have called the flat tax or fair tax. And before anyone says “It won’t work here,” let’s consider where it has worked. Consider Hong Kong, which has had a 15% flat tax since 1947. It is one of the most prosperous cities in the world. How about Ireland and its 12.5% flat tax? Historically Ireland was renowned for its poverty and lost a million people 160 years ago in its potato famine. Today’s low taxes have made the Celtic Tiger a haven for international companies looking for low tax locales to build manufacturing plants. The Economist magazine ranked Ireland the best place in the world to live based on a "quality of life.”

What would happen if the US went from the highest taxed country in the world for businesses to the lowest? Those who excoriate outsourcing would have to find something new to complain about because the capital and jobs which are driven off-shore by high taxes would return with low taxes.

Mr. Warren Buffett has been in the news of late, complaining that he doesn’t pay enough tax. I know of no restriction for him to pay more voluntarily. I also know of no attempt by him to do so.

Among his perennial complaints about the tax code is his criticism that the payroll tax is too regressive. I happen to agree with him. I happen to disagree with his solution that the wage base should be increased. Instead my tax reform would get rid of payroll taxes altogether. In doing so, my reform would simply be following the example of Congress, which years ago began spending the Social Security surplus, created by the payroll tax, on general government expenditures. Since Congress considers that surplus to be no different than personal incomes, I agree with them. A separate tax to pay money into Social Security so Congress can filch it for general expenditures is a charade. We don’t need two taxes – an income and a payroll tax – there should be one tax on income – period.

I would also abolish all of the loopholes and exemptions that are so hateful to the current White House resident – which includes those he has proposed like exemptions for green energy, exemptions for companies that hire vets, exemptions for companies that continue business in this country and penalties for those which don’t, exemptions for small businesses and college students and building owners who install conservation gadgets, and exemptions for hi-tech producers. I agree with him that everyone should pay their “fair share” and his loopholes are no different from those he hates.

I promised to be brief so I’ll have to leave my comments about government regulation reform, energy independence, housing, downsizing our military, banking reforms, illegal immigration, the Middle East and Israel, the war on terror, and America’s influence in the world for another SOTU speech.

I will say this in closing, however.

We live in a dangerous world and nobody chose us to police it. We can’t run around the world righting every wrong. There are too many of them. But we must be prepared if the bad guys ever try to do us harm. To them, I give this warning.

When I was a boy, my parents moved around a lot. Every time we moved I found myself in a new pecking order of toughness in the neighborhood. I wasn’t a big kid but I learned unless I wanted to be in a lot of fights – which I didn’t – I had to have a plan. Therefore, when my parents moved to another city or neighborhood, I checked around to learn who the biggest bully was. Then I would find that boy and pick a fight with him. I’d beat the daylights out of him and sometimes I’d get the daylights beat out of me in the process. I never lost a fight, though some were draws. But after that, I didn’t have to fight anymore. And, I had a lot of friends.

Bad guys of the world: you’ve been warned.

Thank you and good night. God bless all of you. And God bless America!