[I know, this one’s out of order. False advertising. But I couldn’t resist commenting on the sequestration debate. I’ll get to spending soon.]
Suppose there was a TV show where we could watch particularly idiotic governments in operation, a sort of combination C-SPAN and Saturday Night Live. I’ll call it SNL-SPAN. (It’s copyrighted, pal, so don’t even think about ripping off this brilliant idea.)
My guess is that the US government would garner huge ratings, right up there with perennial favorites like North Korea, Iran and Italy. Consider the January episode, called “America Debates the Fiscal Cliff.” Hilarious! After a year of doing precisely nothing, we managed to effect a clever bit of demagoguery in which taxes were raised on the rich while spending wasn’t cut a dime.
Demagoguery, as you may know, occurs when a government trumpets an action that is meaningless – or even counterproductive – but which is politically popular. America learned this technique from Argentina. In the case of “America Debates the Fiscal Cliff,” we were told that new taxes on the rich would raise about $600 billion over ten years. Hilarious! Everyone knows that the rich are notorious for avoiding new taxes by simply changing their behavior, meaning the taxes will raise pathetically little. (Even as we “speak” my clients are busily Brandeising(1) these taxes.) No spending cuts, little new revenue. Dumb, dumb, dumb. (But hilarious!)
Now let’s hit the fast-forward button on our DVR and watch the February episode, entitled “America Debates the Sequester.” Even more hilarious! Damned if it doesn’t out-poll Italy, where the contestants for Prime Minister included a former Communist, a comedian convicted of manslaughter, and that buffoon Berlusconi. In this episode we raised no revenue at all, and cut spending bluntly across-the-board, axing solid, effective programs along with ridiculous pork barrel stuff. President Obama called it “dumb.” I’ll see him that and raise him two: dumb, dumb, dumb. (But hilarious!)
But hold up there, Hopalong!(2) Suppose, instead of broadcasting these two apparently independent episodes separately, SNL-SPAN had inadvertently combined them into one deadly-dull episode entitled, “America Cuts Spending and Raises Taxes.” Our ratings would have plunged! We would have been right down there in the basement with the likes of Germany and the Nordic countries, a circle of ratings hell known as You’re-Getting-Canceled-Mid-Season. “Geez,” viewers would have complained, “That’s the way governments are supposed to work. Who wants to watch that?”(3)
It’s true that I’ve belittled the revenue raised in the first episode and the mindless spending cuts hacked off the budget in the second episode. But when you watch the episodes together, you notice subtle-but-important points. First, while the new taxes on the rich won’t raise enough revenue to shake a stick at, they did demolish the No-New-Taxes-Not-Now-Not-Never mindset that had stymied action previously. That’s an important breakthrough.
Second, while the across-the-board cuts are mindless, that’s always the way budget cuts get made. It’s the only way government budgets get cut.(4)
Granted, the new taxes and budget cuts don’t solve America’s problems, because (a) nothing has been done about the Thundering Herd of Sacred Cows known as Medicare, Medicaid and Social Security, and (b) no one in either party has had the courage to look Mr. and Mrs. Middle Class America in the eye and say, “Sorry, folks, but it’s time to step up to the plate and pay your fair share of taxes.”
Before the two terrific episodes of SNL-SPAN were combined into one terminally boring episode, I would have said that America won’t deal with (a) and (b) until the global bond markets make us do it. Now, I’m not so sure.
(1) You’re probably thinking that “Brandeising” is another one of my infamous neologisms. So did I! But it turns out that a couple of law professors at St. Thomas University Law School beat me to the punch (albeit in the formulation “neo-Brandeising”) by almost fifteen years. See, “Would Alan Dershowitz Be Hired to Teach Law at a Catholic Law School? Catholicizing, Neo-Brandeising, and an American Constitutional Policy Response,” 23 Seattle Univ. L. R. 355 (Fall 1999). In any event, the brilliant Supreme Court Justice Louis D. Brandeis famously articulated the difference between avoiding taxes (a legitimate and grand American pastime) and evading taxes (a crime): “For my tax evasion, I should be punished. For my tax avoidance, I should be commended.”
(2) For those of you too young to remember, Hopalong Cassidy was an idol to millions of kids, including your humble scrivener, back in the 1950s. There is a cute – no, strike that, positively adorable! – photo of me at age 4 or 5 wearing the Full Hopalong, from black hat to black boots, including two spiffy sidearms. I’m grinning into the camera like I’d just ridden in from the prairie, which in my mind I’d certainly done. The guy who played Hopalong, by the way, was William Boyd, a remarkable personality: strong, opinionated, articulate, deeply concerned about the impact of Hopalong on the delicate psyches of his little fans. And he was indestructible: he appeared in more than 70 films and was married five times.
(3) In fact (the mind boggles), taken together with the spending cuts associated with the 2011 near-debt default, the combination of spending cuts and new taxes we’ve instituted comes perilously close to the $4 trillion budget reduction everyone (including me) thought was politically impossible.
(4) And not just governments. I’ve been a president, CEO or Chairman of one company or another since 1983, as fine an example of the Peter Principle as you’ll ever see. I could sit down with my team and say, “Folks, expenses have gotten out of control. Please go back to your desks and cut out the fat.” But what good with that do? Nobody ever has any fat in their budgets! No, what you do is, you say, “Folks, effective today your annual budget is cut 10%. Make it work.” Miraculously, they make it work.
Next up: Spending Some Time on Spending (honest!)
Please note that this post is intended to provide interested persons with an insight on the capital markets and is not intended to promote any manager or firm, nor does it intend to advertise their performance. All opinions expressed are those of Gregory Curtis and do not necessarily represent the views of Greycourt & Co., Inc., the wealth management firm with which he is associated. The information in this report is not intended to address the needs of any particular investor.