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SEIFFE:  IOUSA Premiere Reveals Nation's Deficits

Friday, August 22, 2008 

By Ralf Seiffe

The Peter G. Peterson Foundation premiered the IOUSA movie last night in many packed theatres across the U.S.  The film takes a close look at the nation’s financial trajectory and finds four main deficits are causing the $56 trillion debt we face.  Afterward, five distinguished men discussed the most important elements in a nationwide hookup and if they are right, there may be some significant structural changes in our tax system on the horizon.

Pete Peterson, the founder of the Concord Coalition and a remarkably smart investor has established a new Foundation to raise awareness and develop solutions to the nation’s fiscal problems.  He’s pledged a significant portion of his fortune to help Americans understand the fiscal, trade, savings and leadership deficits we suffer and the movie is the Foundation’s opening salvo.  On the night of the premiere, Peterson invited the Foundation’s new CEO, David Walker along with Warren Buffet and both CEOs of the Cato Institute and the AARP to appear with him and discuss the nation’s fiscal predicament.

Of the four deficits, the ones that concerned the panel most are the savings and leadership gaps.  Savings are created when an economy or an individual produces more than they consume; they occur when something is left over. Americans were once serious savers and David Walker, the former Comptroller General of the United States, pointed out that the benefits of putting something away for the future. These include the ability to invest in new technologies and products, new productive capital investments and the peace of mind a rainy day fund provides.  The lack of savings make an economy vulnerable to downturns, nothing in reserve obviates investments and in the extreme, more consumption than savings leads to liquidation of assets. 

Unfortunately, the American economy is based on consumption and we’ve arrived at the point that we do consume more than we produce.  The result is that foreigners are tiring of holding our IOUs and are converting paper assets these into productive assets as the recent hostile purchase of Anheuser-Busch reminds us. 

Americans are beginning to notice this phenomenon, don’t like it and are asking for solutions.

One reason our economy is so consumption-dependent is because we’ve structured it that way.  We tax income and thereby discourage productivity while we reward consumption with incentives.  For example, taxable income is the difference in what an enterprise produces less the inputs consumed.  In that sense, income is a form of savings and if savings are desirable, we should encourage more.  Instead we progressively tax this form of savings. 

On the other hand, we allow the deduction of mortgage interest which directly increases the size--and the contents--of properties the average homebuyer consumes.  Since this increases consumption, without a greater change in production, we should discourage this activity as it is consumption.

If the object is to encourage and increase savings, then we should create incentives that will give us that result.  In the case of income taxes or payroll taxes, it would appear that we are taxing--and discouraging--that which we want.  And, the deductions permitted in the tax code actually exacerbate the problem. 

One solution is to change to a consumption based tax system, one that completely changes incentives from discouraging savings.  Only one of the several tax reform proposals we are seeing changes the nature of the tax system to one that discourages consumption and removes the drag of heavy taxation on production and, by extension, savings.   It is the Fair Tax System many on the right and left have begun to advocate.

One can sincerely argue the merits of a consumption based tax versus an income tax.  The Fair Taxers make their case with two recent books and a supporting army of advocates.  By his nature, views and presumptive position, the role of defending the status quo falls, now, to Barack Obama. 

Evidence accumulating around the world shows the 19th century, system we use is hurting our ability to compete and save.  Rather than making fine distinctions on the existing income tax system, the candidates for all offices should be having a national discussion about the structure we use to finance government.  As voters, we should insist that each side show us how their idea sustains our current living standard and enhances our nation's future viability.

The other problem the after movie-panel identified is the leadership deficit.  Using words like “poisonous” partisanship and “win versus lose”, this wide range of viewpoints agreed that the political structure we have is unlikely to solve the problem. We are unlikely to have real, positive change until a crisis on the scale of Pearl Harbor or 9/11 occurs or voters come to understand that the present course will lead to an even more painful disaster.   

But in the end, it is not our representatives’ lack of leadership that is the problem--politicians merely seek the best path to reelection.   Existing political forces ratchet policy towards economic entropy because there is no well-organized countervailing force to articulate a better way.  Americans of good will need to see IOUSA and take its message to heart.  From that, we need to synthesize a constituency for sustainability that makes it possible for our elected officials to do the right thing.  Until we do, that $56 Trillion hole we are in will just get bigger. 

Ralf Seiffe advises business start-ups and product launches from Chicago, Illinois and is a political analyst and columnist for the Illinois Leader and Illinois Review.

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