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Tom Watson: Speeding Toward the Fiscal Cliff and the 1%

Class warfare isn't the way to re-establish America's financial sustainability, but creating a climate for growth and opportunity will

Nobody should be surprised to discover that our country has rung up a massive national debt, is running huge annual budget deficits, and has an economy that is seriously underperforming its growth potential.

Everyone is frustrated and the various “Occupy” movements and some of our politicians seem to place the blame on the top 1 percent of earners in our country. Is it really their fault?

We recently exceeded $15 trillion in gross national debt. The gross domestic product (GDP) is slightly less than that. Our debt-to-GDP ratio now exceeds 100 percent. History shows us that a 90 percent debt-to-GDP ratio is the historical point of decline for most countries, as interest on the debt impedes growth.

$5 trillion of our debt was added in the last three years and President Barack Obama’s budget projects $1 trillion annual deficits for many years. For context of how much money that is, in 2010 constant dollars we spent about $4 trillion to fight all of World War II. What exactly have we achieved with this new $5 trillion in new debt?

Despite the political posturing, the top 1 percent has seen its incomes and assets decline just like everyone else — only worse. IRS data show that in 2009 the top 1 percent had seen its percentage of total adjusted gross income decline to about 11 percent from 17 percent in only two years. Anyone in the nonprofit fundraising business knows this firsthand.

The economy should be growing at 4 percent to 5 percent by now if this recession followed a typical profile. It’s not. Growth is halting and anemic, unemployment is persistently high, real estate continues to struggle as we wait for another economic shoe to drop.

Obama and Rep. Lois Capps, D-Santa Barbara, seem to think the way out of our largely government-created mess is more government. More “investment” in infrastructure like high-speed rail, more government “investment” in green energy, more “investment” in social welfare programs, “investment” in student loans, etc. And, of course, raising taxes on the rich to pay for all this “investment.”

Rich being defined as a couple making more than $250,000 per year. The top 1 percent in 2009 was $343,000. The top 1 percent already pays about twice as much of the tax burden as its percentage of income. Exactly how raising taxes on the rich, which takes more money out of the private economy, will make said economy grow faster remains a great mystery.

It is an interesting theory that government spending can drive the economy; unfortunately, it has little basis in reality or empirical evidence of success. Look no further than our recent experience. We’ve just spent about $5 trillion in deficit spending in three years, so where’s the growth?

Our tax system historically captures about 18 percent of GDP in tax revenue regardless of tax rates, while federal spending is now about 25 percent of GDP. We are guaranteed to run huge deficits when the government gets this large. That is not the fault of the 1 percent.

When all levels of state and local government spending are included, it accounts for about 40 percent of GDP. That’s not the 1 percent’s fault either.

Government consumes wealth, it doesn’t create it. Every dollar the government spends is a dollar that is either taxed or borrowed from the private economy. Those dollars are no longer in the private economy engaged in commerce and investment.

Worse yet, about 21 cents of every dollar the government takes goes to pay for the government itself. By any measure, that is a horribly inefficient “investment” model.

Taking money from one pocket and putting into another does not create any net aggregate demand or economic growth. This is why all of these government-directed “stimulus” spending programs have been largely ineffective. There are 2 million more unemployed people now than there was when Congress passed Obama’s massive stimulus bill in 2009.

Bottom line: The bigger the government, the smaller the private sector. Government spending is generally an economic retardant, not an accelerant.

The private sector creates wealth, not the government. Significant wealth has been destroyed in the recession and we have not generated enough new growth, i.e. wealth creation, to get this economy back on its feet.

Why? One big reason is that government spending is crowding out private activity by borrowing 40 cents for every dollar it spends and running $1 trillion-plus deficits. What is the opportunity cost of all that borrowed money for government spending? Where else would it be used instead of chasing politically favored but wasteful green unicorns like Solyndra?

Employers also face the certainty of escalating costs of employment and doing business as a result of various new laws like Obamacare, new EPA regulations and other mandates. These costs are escalating at an unknown rate. Taxes are also due to increase significantly unless the laws are changed.

When businesses make investment and hiring decisions, they look for a return on investment (ROI) over a period of time, say five years. If they don’t have any certainty as to what their costs or taxes are going to be, it is difficult to make a confident ROI calculation, which increases the risk. Greater risk requires a greater return to justify the investment. After-tax ROI is what matters.

Returns high enough to justify the increased risk are difficult to achieve in real life, so businesses sit on their cash in search of other opportunities. Business is currently sitting on an estimated $2 trillion in cash.

Robust economic growth enabled by growth-friendly policies and government spending restraint is the answer. When government is consuming 40 percent of GDP it is difficult to grow — and that is what we are experiencing. Government is overhead. Who can afford a 40 percent overhead?

This election will set the course for our future, and our children’s. If we continue with the big government, big spending, high regulation, European social welfare state model, we will end up exactly where the Europeans are. Broke. 

We are witnessing the collapse of the European model, but why follow them to certain doom? We aren’t far away now, and if we don’t change course soon we’ll meet the same fate. No country has ever taxed, spent, borrowed and printed its way to prosperity.

If we change course — and I am optimistic we will — we can recapture our prosperity and grow our standard of living, and preserve the opportunity that America has always represented. We’ll need the 1 percent investing its capital and building businesses to get there.

The class warfare game of pitting one American against another is cynical, destructive and, frankly, un-American. The focus should be on growing the pie instead of redistributing it. That is quintessentially American.

Tom Watson is a Santa Barbara businessman and was the 2010 Republican nominee for the 23rd Congressional District seat.

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