How The Federal Budget Will Finally Get Fixed

The congressional supercommittee officially becomes a failure today, but while it could not come up with $1.2 trillion in budget savings, it did show us that there are exactly two ways in which Washington’s red ink can finally be stopped.

The first is what I would call Reaganesque realignment. If the 2012 elections provide a decisive edge to one party or another, that party will have a chance to impose the policies it favors to try to bring government spending back into some sort of sensible relationship to revenue.

The second is the European method – the dynamic that is playing out right now in Spain, Italy, Greece and other spendthrift eurozone nations. If we do not get our act together, bond buyers will eventually stop fooling themselves into thinking that our government’s debt is virtually risk-free, just as they have stopped believing that European sovereign debt is safe. The cost of further borrowing – as well as the cost of servicing earlier debts – will become prohibitive. At that point our political system will come up with a solution, like it or not, because there will be no other choice.

The supercommittee was destined to fail for the reasons I discussed in this space four weeks ago. It was designed to try to do something that simply cannot be done right now: convince the two political parties to willingly compromise on their core political objectives and policy beliefs. A lot of people are castigating lawmakers for their intractability, but it is probably unfair, or at least unrealistic, to expect them to behave otherwise.

Most House members come from districts dominated by their own party. Deviating from party orthodoxy does not earn respect; it earns a primary challenge from your party’s hardliners. Most senators, likewise, come from states that are decidedly red or blue. Only a few have a chance to run in the middle – and they can only appeal to that middle after they first satisfy their party’s base in the primaries. The system is designed to drive moderates out of elections before they even have a chance to run. That does not make compromise easy.

Beyond electoral politics, it is not Congress’ fault that Americans are divided fairly evenly into two camps regarding how they think their government should operate. It is even less Congress’ fault that Americans are not particularly rational or consistent. A lot of people who support Republicans say the government should spend much less money, including on entitlements, but they don’t want changes in their Social Security or Medicare benefits. A lot of Democrats want more jobs but less robust corporations. You can’t get from Point A to Point B, but these same voters blame politicians for failing to reconcile their own irreconcilable demands.

Neither Republican nor Democratic politicians will buck their party’s true believers, partly because they can’t and partly because they are true believers themselves. They really think the approaches they espouse are the right ones, and that the other side’s policies would bring the United States, or at least a large portion of its citizenry, to rack and ruin.

So the only way to get a solution is to have one imposed, either by voters or outsiders. If enough voters become convinced of the wisdom of, say, raising taxes or cutting spending, politicians who generally oppose that approach will eventually be forced to respond. If financial markets stop sustaining our current policies, our policies will change because there will be no other choice.

The big question is how much damage we will do as we pile up debt at around $100 billion every month while we wait to get things under control. There is a chance it will be considerable. That’s unfortunate, but like the supercommittee’s failure to reach a compromise, it is absolutely predictable.

Either we wait for the markets to save us from ourselves, or we save ourselves first. Next year’s elections will tell us which it is going to be.

About Larry M. Elkin 525 Articles

Affiliation: Palisades Hudson Financial Group

Larry M. Elkin, CPA, CFP®, has provided personal financial and tax counseling to a sophisticated client base since 1986. After six years with Arthur Andersen, where he was a senior manager for personal financial planning and family wealth planning, he founded his own firm in Hastings on Hudson, New York in 1992. That firm grew steadily and became the Palisades Hudson organization, which moved to Scarsdale, New York in 2002. The firm expanded to Fort Lauderdale, Florida, in 2005, and to Atlanta, Georgia, in 2008.

Larry received his B.A. in journalism from the University of Montana in 1978, and his M.B.A. in accounting from New York University in 1986. Larry was a reporter and editor for The Associated Press from 1978 to 1986. He covered government, business and legal affairs for the wire service, with assignments in Helena, Montana; Albany, New York; Washington, D.C.; and New York City’s federal courts in Brooklyn and Manhattan.

Larry established the organization’s investment advisory business, which now manages more than $800 million, in 1997. As president of Palisades Hudson, Larry maintains individual professional relationships with many of the firm’s clients, who reside in more than 25 states from Maine to California as well as in several foreign countries. He is the author of Financial Self-Defense for Unmarried Couples (Currency Doubleday, 1995), which was the first comprehensive financial planning guide for unmarried couples. He also is the editor and publisher of Sentinel, a quarterly newsletter on personal financial planning.

Larry has written many Sentinel articles, including several that anticipated future events. In “The Economic Case Against Tobacco Stocks” (February 1995), he forecast that litigation losses would eventually undermine cigarette manufacturers’ financial position. He concluded in “Is This the Beginning Of The End?” (May 1998) that there was a better-than-even chance that estate taxes would be repealed by 2010, three years before Congress enacted legislation to repeal the tax in 2010. In “IRS Takes A Shot At Split-Dollar Life” (June 1996), Larry predicted that the IRS would be able to treat split dollar arrangements as below-market loans, which came to pass with new rules issued by the Service in 2001 and 2002.

More recently, Larry has addressed the causes and consequences of the “Panic of 2008″ in his Sentinel articles. In “Have We Learned Our Lending Lesson At Last” (October 2007) and “Mortgage Lending Lessons Remain Unlearned” (October 2008), Larry questioned whether or not America has learned any lessons from the savings and loan crisis of the 1980s. In addition, he offered some practical changes that should have been made to amend the situation. In “Take Advantage Of The Panic Of 2008” (January 2009), Larry offered ways to capitalize on the wealth of opportunity that the panic presented.

Larry served as president of the Estate Planning Council of New York City, Inc., in 2005-2006. In 2009 the Council presented Larry with its first-ever Lifetime Achievement Award, citing his service to the organization and “his tireless efforts in promoting our industry by word and by personal example as a consummate estate planning professional.” He is regularly interviewed by national and regional publications, and has made nearly 100 radio and television appearances.

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