How To fix Our Credit Rating

So who do you think has a firmer grip on reality, Nancy Pelosi, or Paul Ryan? Since reality has now come calling for Washington, I think the answer is pretty clear, and completely relevant. The fact that people want lots of free stuff from the government and that there are polls which reflect that, doesn’t necessarily make it a good idea to give it to them. It doesn’t even make it possible to give it to them. As an old friend of mine used to say “People in hell want ice water… but that don’t mean they gonna get it.”

By now you certainly know that S&P has downgrade the credit of the United States of America to AA+. This is the same rating they give to Belgium. There's a "change" for you. In response to the enormous political pressure which was brought to bear by the Whitehouse, Moody’s and Fitch have not followed suit. At least not yet. I think they still will. So long as progressives still have influence in our government things will get worse for our finances not better. And Moody's and Fitch may be very political, but they are still financial companies. In finance (and everywhere else outside the beltway), politics doesn’t trump reality.

Which brings us back to Nancy and Paul. Do you think Nancy’s alternate universe where there is a rainbow in every pot and a unicorn in every garage is a good model for a society? If so, have a long look at the situation in Greece. That’s the only thing the future now holds for Nancy and her like minded progressives. Paul’s view is a much more sober one where we are all forced to get by on no more than we have. That’s what the future holds in the real world.

Scarcity is tragic, but inevitable. It would be great if everyone had all they wanted, of everything, all the time, but that is not how the world works. There aren’t so many Ferrari’s or private jets, or supermodels that everyone can have one. Instead we need to find a way to either content ourselves with what we can afford, or to make the sacrifices necessary to get something more. But we need to make those decisions ourselves. No matter how smart the people who run the government are, they’ll never know better than you do what you want for dinner.

What we need to solve our fiscal problems is not some magical government panel empowered to do to MRI’s and retirement checks what Jesus did for loaves and fishes. All we really need to get our fiscal house in order is rapid economic growth. But we won’t get that from a president and an administration that want to make all the decisions about who will grow, who won’t, and how and where that growth will take place.

There is no secret to generating economic growth, it’s just that the progressives don’t really want to generate any. They’d rather have green energy than coal even though it costs more. They want everyone to be in a union even though that means lower productivity and higher unemployment. And they want to shrink the gap between rich and poor even if the only way to accomplish it is to make the rich guy unemployed for a few years, and everyone gets poorer. But what they really want most of all, is to be the people who make all the decisions about what happens in the economy. They want it all directed from the top down, and they want to be at the top directing it. That never works.

It’s time now to send all the progressives back to the teacher’s lounge and to let those of us who actually know how to generate economic growth do so. It’s time for the government to quit the experimentation and the BS "investment in the future" where they squander money based on politics rather than the return the spending brings. What they really need to do now is to get out of the way and allow more economic liberty.

We need to change the tax code to a transparent consumption tax. Not a VAT where the government still gets to pick the winners and losers and to hide who is paying the tax and who isn’t. Instead it should be a simple and straightforward consumption tax like a national sales tax or an income tax that exempts investment and savings. We should also cut capital gains and corporate income taxes to zero - permanently. It would be better to increase the other taxes to compensate for the lost revenue since they distort economic decision making less.

If the progressives are really up in arms about all the "unfairness" (and when aren't they), implement a reverse income tax like the one Dr. Freidman was always taking about. If you make less than X, you get a check from the government to bring you to that level. Simple, uncomplicated, and it doesn’t involve much government control. What level is X? I don't know... let congress decide. They can even change it every year for all I care. But it has to apply to every citizen the same way. Any benefit which is targeted, is a benefits which is a mistake.

Those changes alone if implemented today, may very well give us double digit growth for 2014. By 2016 the economic growth would be so powerful and unemployment so low, that the Fed would have to raise rates dramatically. But if we all have jobs again, no one will mind. The best social welfare program in the world is a job. And tax reform like this will give us more jobs than we can handle, as fast as we can handle them.

That won’t be soon enough to save Obama, but to paraphrase my brother, I think his coffin has enough nails in it now anyway. There probably isn’t any saving him or history’s view of his legacy. You won't here this from the NYTimes or NBC, but the truth is, it hasn't really all been George Bush’s fault. Obama has been fabulously inept at running the country, and has listened to all the wrong people. But that’s what you get when you hire someone from the faculty lounge.

And here’s the real kicker – if Nancy and her far left companions don’t like the changes proposed above, make all the same plans anyway. Because after November 2012, it's very likely that Nancy is going to be replaced by a gay libertarian who will vote like Ron Paul (or someone like him) so there is no need to pay any more attention to her or her ilk. They are completely divorced from reality, and since reality has finally come calling for Washington DC, that will soon become apparent to the American voter.

The Obama presidency always felt like the last gasp of a movement that knew it was on borrowed time. At this point the only thing left for them is the riots of Athens, or to step down and let other call the tune. But rioting won't supersede scarcity any better here than it has in Athens. It’s time for them to step back and let the grownups to figure out how to keep the ship from sinking before it’s too late.

We need to quit running the government by ‘political connections’. No more special cases. No more waivers or exceptions. We need simple straightforward rules that apply to everyone in the same way. Everyone should run on the same track, and start at the same gun. No more playing favorites. And when one person runs harder than the rest and wins, he should be allowed to. He shouldn’t be pushed back because he’s not in a preferred race, political class, or has good political connections.

That’s what will save America now. We need to end the ‘government thumb on the scales’ version of fairness that the progressives so love, and go back to ‘actual’ fairness once again.

And S&P has certainly signaled that it’s time to finally make that change.