Deficit Reduction

Christina Romer, formerly chairwoman of Obama's Council of Economic Advisors, has a column in today's NY Times Business section titled What Obama Should Say About The Deficit. She says:

My hope is that the centerpiece of the speech will be a comprehensive plan for dealing with the long-run budget deficit.

That is my hope too. 

Both the left and right can agree that we can't sustain deficits of $1.25 trillion for many years. Just in case you didn't know, that is Obama's proposed budget for 2011. One which projects revenues of $3.8 trillion. 

The thing that left and right find difficult is agreeing on how to eliminate the deficits.

The good news is we have a roadmap from the bipartisan National Commission On Fiscal Responsibility and Reform who issued a report with its recommendations last month

I thought I'd lay out a few things that many people don't want to admit.

1) The deficit will not be eliminated without dealing with military spending and social security, which are often mentioned as "untouchable." This paragraph from Newsweek tells the story:

In Obama's budget, Social Security costs $787.6 billion; defense costs $928.5 billion; debt payments cost $250.7 billion. Together they total $1.967 trillion. If you remove that $1.967 trillion from the equation, as Lee suggests, you're left with $1.863 trillion in spending to work with. At this point, balancing the budget—i.e., wringing $1.669 trillion in savings out of that last $1.863 trillion—would require slashing every government program that's not defense or Social Security (Medicare, Medicaid, veterans affairs, education, and so on) by 89.6 percent.

The US spends between $700bn and $900bn on defense (I see a bunch of different numbers), which is about 40% of the entire world's military spending and six times more than the next largest country, China. While the US is spending its money on military matters, the rest of the world, most notably China, is investing their capital in their economy, infrastructure, and growth. This is going to have to change. And it will require America rethinking its role in the world.

Social Security represents about 20% of the federal budget. Our country continues to operate a defined benefits plan while most businesses have moved to a defined contribution plan. The federal government has to recognize that Social Security, as currently constructed, is a bankrupt retirement plan. This will require some big changes, many of which are politically difficult. But until we are honest with all americans about the problems with the current approach, we cannot force the changes that are necessary.

2) The deficit will not be eliminated without raising taxes on some people. Letting go of the Bush tax cuts for those who make $250k and over would product $400bn which represents more than 10% of the budget. I recognize that this is a big political issue and one which Obama helped himself politically by letting go of recently. But I really don't see how the math works without getting the wealthiest americans to chip in some more money.

3) The rest of the budget, non military, non social security, non interest payments will have to be cut aggressively. The Tea Party wants to cut these areas by 40%. I suspect that is never going to happen. But a 20% cut in these areas, which is what the UK is doing, seems necessary.

If you cut military by 1/3, restructure social security, eliminate the Bush tax cuts on the over $250k crowd, and cut the rest of the budget by 20%, you can probably get the budget balanced. This would have to be done over a decade or so, in order to reduce the fiscal impact on the economy, which will be significant. But I don't think the US has another option, unless we want to choose bankruptcy.


Comments (Archived):

  1. Max Ischenko

    Exubirant defense spending was part of the reason USSR empire fell apart. I firmly hope US can use common sense much more efficiently that the former totalitarian state.

    1. fredwilson

      that’s a great point and one which might make this discussion easier politically

    2. Schuyler Deerman

      As a percentage of GDP, the US ranks 24th in military spending, behind Turkey and China. Though that’s not excuse to spend more, military spending is only part of the budget problem.

      1. Alexander

        According to these statistics the spends about twice (4%) as much as China (2%) as a share of GDP. Though you are right in that a few countries spend even more as a share of GDP; Georgia, Saudi Arabia, Oman, Israel, Chad, UAE, Jordan, Iraq and Sudan.Ranked no. 1 within OECD (a group of rich countries) though.

        1. JLM

          The problem with comparing US military expenditures to Chinese expenditure is the currency and the comparison of actual costs.An American rifleman — complete with medical, PX, leave, family benefits, housing — is much more costly than a Chinese rifleman. When you go to fight, you don’t bring your pay stubs, you bring your riflemen.The Chinese are very dangerous — building new silent submarines (read “boomers” off our coast in 10 years), a well protected sub base, cyber warfare warriors of the first note, satellite warfare warriors of the first note, an unbelievable build up of landing craft and surface to surface missiles opposite Taiwan, new J-30 Stealth fighter, MRV ICBMs and the list goes on forever.Having said that, the US spends way too much on the military but the problem is that we underwrite the entire world’s safety and that is a big task. Take a look at the oil business wherein we protect the Middle East and the world’s shipping lanes.Somehow we should be sending the bill to the rest of the world.

          1. Fernando Gutierrez

            I agree that the US withstands a too big percentage of the security tasks in the world. But to make other countries pay you should first make them agree in what should be done. And that’s something easier to be said than done.If American riflemen are too expensive then maybe some wars should be fought with other countries’ armies. If it’s done with many other jobs I don’t see why it can’t be done with armies. I know this is a sensible issue, but when the situation is not sustainable unthinkable things must be done.

          2. disinter

            Or maybe we should stop engaging in idiotic and illegal wars of aggression?

          3. JLM

            Nobody hates war like someone who has seen it up close and personal. It is the greatest waste of human capital imaginable. All wars represent failure of diplomacy, intelligence and the ability to reason with other nations.Some wars are inevitable — let’s resist the temptation to be a pollyanna here — and are “just” though they still represent failure.The best way to avoid war is to field an incredible fighting force which no nation or group of shit heads could imagine provoking. Peace through strength. Sweat in peace to avoid blood in war.When provoked sufficiently, strike silently and swiftly with overwhelming force and annihilate your enemies. Pile their skulls and let their mothers weep.The first part of the Afghan conflict when we flooded the Northern Alliance with Special Forces teams and advisors; and, provided artillery, air and communication support was an ideal arrangement and was quite inexpensive.When we began to build infrastructure — Burger King — and undertook to transform Afghanistan into an American style nation with all of our governmental capabilities — including a freakin’ Supreme Court — we lost the financial battle.We should approach most wars like “repainting” rather than razing the house and building a new one.

          4. Dave Pinsen

            It’s called fighting wars by proxy, and it has a long history. We fought the Soviets by proxy in Latin America during the ’80s. It certainly is a lot cheaper than fighting wars with American troops.

    3. disinter

      This totalitarian empire is no different from the USSR.

    4. JLM

      The USSR economy failed for a great number of reasons. Military spending was only one of them.The fact that it was a polyglot of different countries forced together at the point of a bayonet and held together by horrific repression was at the core of its problems.The economy under such a regime was also repressed and though the USSR was blessed with incredible commodity wealth — oil, coal, minerals, timber, furs, diamonds — it had no entrepreneurial zeal to build great products and companies. Because its repression also repressed the talents of its people.Perhaps the lesson to be learned is that a sound and vibrant economy is the first building block of national defense.The US war fighting policy has to be revisited and the notion that we rebuild every country that we engage with militarily has got to stop. We should be punishing angels who swoop down, annihilate the bad guys and go home instead of importing McDonald’s, installing flush plumbing and worrying whether they are going to have a US style political infrastructure.We should just kill shit heads and go home.

      1. William Mougayar

        Re: “We should just kill shit heads and go home.”Yes, the world would be a better place then.

      2. fredwilson

        my dad, a retired army general, totally agrees with you JLM

        1. JLM

          Just a couple of trade school guys. LOL

    5. disinter

      Where did the USSR empire go to die? Afghanistan.Where is the US empire?

  2. CliffElam

    Oh, god, politics on a non-politics blog. And yes, perhaps because I got 10 hours sleep last night….You could fix social security forever by making one small change: stop letting the gubbmit spend the social security revenue as if it were current account income. If they’d made that change in the last “overhaul” we’d not have to talk about it now.Reducing US military spending is trickier because a lot of other countries (*cough* EU *cough*) would have to put on their big boy (or girl) pants and prepare for their own defense. But it would reduce our overhead and increase theirs, which would be helpful from a competitive standpoint.I wonder what would have happened after Haiti if we’d not had two carrier groups to drop on them for humanitarian aid. Remember, the US military is also the world’s largest relief organization.-XC

    1. Fernando Gutierrez

      EU countries won’t increase military budgets. Here most people don’t care about other countries’ governments. Our governments have been very good selling stuff to dictators all around the world in the past (Sadam, Gadafi…), so there is not a direct interest in defeating them.And economy around here is as broken as in the US.

    2. Dave Pinsen

      For a non-politics blog, this was actually a pretty decent political post. Probably the best one I’ve seen from Fred so far.Re Social Security, as long as its invested in a class of Treasury securities, the government will to spend it. I agree, though, that we’d be better off if the (temporary) SS trust fund surplus had been invested in assets that weren’t liabilities of the federal government. After the crash in ’08, I blogged that investing part of the fund in stocks at that point would have made sense.

  3. benpixel

    I hate myself for doing this here but I’m trying to contact you and I guess you are not seeing my mails. Are you even reading your @union… email?Best regards.

    1. fredwilson

      i do read my emails, but i use a bunch of filters and prioritization schemesjust put “left a comment on AVC” in the subject line and send it again

  4. kidmercury

    oh boy……talk about a gift wrapped opportunity to mention 9/11 being an inside job! thanks boss!since we know that 9/11 is an inside job, since there is an abundance of factual information and a large group of niche experts all coming to the same conclusion thanks to the truth the internet is here to reveal, we can cut the military budget significantly. for the newcomers, this info is all over the place….i always recommend starting here. look at all the prestigious people with their fancy badges supporting 9/11 truth, so don’t worry, it’s safe for you to as well.there are lots of government bureaus filled with corruption. let’s eliminate them. let’s send these folks to the unemployment line where they can join the rest of america! a short list:DHSDEABATFFBIEPADOENRO (bonus points if you even know what this is)lots more, that’s just the easy stuff. there is a conspiracy with an abundance of information and expert witness testimony supporting the case of deleting each of the aforementioned. with moral and economic authority on our side (so long as we live in cognizance of the truth), the case for deletion is strong.of course the real issue is monetary policy. all money is loaned into existence, and thus there are incentives to perpetually expand the supply of money, which means perpetually expand the supply of debt, which means deficit spending. the monetary policy problem must be solved.but let’s be real, people. none of this reform is ever going to happen. the military industrial complex is not just going to roll up and say “alright, you got us, we quit and will give you your freedom back.” no, we’re going to need to take it back simply by rebuilding our local communities using networking technology in a peaceful and economically advantageous manner. with enough success on this path, they’ll voluntarily abandon their methods and come join us, once it is clear that re-wiring the economy via networking technology is where the real opportunity is.

  5. ErikSchwartz

    We spend a lot on defense because casualties are unacceptable to the American public.When was the last time an F15 was lost in air to air combat? Yet we’re spending $150M per plane to introduce the F22. We’re spending $3.5B per ship on the DDG 1000.Technology has done an amazing job at reducing casualties on the battlefield. That in turn has allowed us to be somewhat cavalier about engaging with force where maybe we should not because the cost of warfare is now mostly borrowed dollars rather than American lives.That combined with the push from industry Eisenhower warned us of. Always good to watch the prescient a second time.…BTW, Go Patriots! 🙂

    1. fredwilson

      sorry about the pats. that 45-3 trouncing was unwise.thanks for sharing the eisenhower video. such an important warning, so ignored

      1. ErikSchwartz

        You got to wonder how over the top Rex goes this week. I can’t even imagine what he’ll say if the Jets win next week and Rex has TWO WEEKS to talk.Jets D (especially the secondary) played awesome. The field position the Pats gave the Jets made it easy for the offense and Sanchez. I’m not sure what they were thinking with the fake punt.

        1. fredwilson

          or the drive near the end where they ran the ball without much urgency

          1. ErikSchwartz

            That too.


    I think where the military is headed long term is more unmanned and/or remotely piloted fighting machines. This will make things cheaper in 10 years or so. Can we wait for the technological breakthroughs which will make our army more capital efficient? Not really my field of expertise, so I can’t comment on that.

    1. Dave W Baldwin

      All disciplines will reduce needed military capital. To speed that up, we need to move toward attaining more with less rather than the over the top spending to contractors.It is also a matter of getting the top brass in on where we can be technilogically over the next 3-5 yrs and avoid the conflicts like getting the tank into the calvary over the objections of those who wanted to stay on horseback.

  7. disinter

    Taxes should not be raised on anyone. That is like saying you are going to punish your theft victims because you spent more than you looted.The government has absolutely no business being in the social security business in the first place.

  8. disinter

    Can anyone explain how Social Security is ANY different than the Ponzi scheme Madoff is in prison for?

    1. andyswan

      Madoff was missing two things that the government had:1) Men with guns and jails who could “influence” the reluctant participants.2) A printing press.

      1. JLM

        So true and the funniest thing I have read in days. LOL

        1. fredwilson

          do you think Andy comes up with his material?

  9. ErikSchwartz

    What nobody remembers about the Bush tax cuts is that they were designed to return the surpluses being generated in the late 1990s and projected to continue through the 2000s. Those projected surpluses did not happen.Instead we cut taxes and went to war at the same time (boggle). And somehow Obama gets blamed for the US being broke.

    1. disinter

      When has Obama approved a balanced budget? He is responsible for the largest deficits in history.

      1. ErikSchwartz

        He hasn’t. But lets not pretend the hole did not get dug before he got there.

        1. disinter

          True, but he has done nothing to reverse it. In fact, he has made it worse than any other President in history.

          1. ErikSchwartz

            You might be right, but it’s too early to tell. How we’re doing economically lags what we’re doing to change things by a number of years.

          2. disinter

            The budgets that he has signed into law since elected are public record.Reduce government (non-productive) spending and the productive sector will have more to spend = economic progress.

          3. ErikSchwartz

            The effects of the spending are not clear yet.To put a VC spin on it DST investing $500B in Facebook was bad investment because FB has spent the cash but the revenues (which lag the investment) are not there yet.

        2. Dave W Baldwin

          Erik, it is not a matter of figuring whom to blame, for that just returns to the straw man problem. The simple fact is we are where we are. Confidence is needed to produce growth…and we can’t stop growth due to one special interest crying over fairness.To confront the honest truth about what we’re really talking about regarding spending is a good thing and needs to be amplified.Trying to make Bush the straw man doesn’t solve anything, and placing the problem on the current Congress and Executive Branch needs to be the focus.

    2. JLM

      The real challenge with solving problems is the tendency to get into the “blame game”. As if somehow if the “other” guy was also a wastrel, then it’s OK for this guy to be a wastrel.The revelation is this — it’s OUR damn money they are wasting.Our society is being taxed far in excess of 50% — we are no longer working for ourselves, we are working for the government.That’s where we should really start — what is the maximum effective tax rate that a man should be asked to pay on his labor?Walk the cat backwards from that simple philosophical point.

      1. JLM

        Think about it — YOU are a government employee! YOU!

        1. Philip A. Smith

          Not true . . . government employees get better benefits

  10. Dan Epstein

    Interesting topic.Re: military spending, I’m not sure viewing it as a % of GDP is the right way to compare our spending to other countries’. From wikipedia, we spent $650 billion on military expenditures in 2009 (4.3% of GDP). China was the next biggest spender at just under $100 billion (2% of GDP). So even if we cut military spending by 1/3, we’d still be spending 4x as much as our nearest “competitor” using 2009 stats (….A different way to approach the argument of cutting military spending might be to ask how much more than our competition do we need to spend to maintain our position of strength? 2X? 3X?From the stats linked above, we spent more on military spending in 2009 than the next 14 countries on the list combined.

    1. JLM

      The next 14 countries combined do not underwrite the safety of the entire world.

      1. Dan Epstein

        I’d agree with you there. For better or worse, we’re seen/expected to be the first responder to much of the world. A decade ago I would’ve (foolishly) told you we could accomplish most anything we wanted to around the globe. Given our experience in Iraq and Afghanistan, I’m less sure.One of the many debates we (the US) need to have is what is the role of our military around the world? What is our role, if any, beyond protecting America and American interests around the world? I’m not informed enough to comment, but I’d love to see other thoughts. For example, should the US be doing anything now to help in Australia or Brazil? Should the US be doing anything to support allies in Lebanon or Tunisia? What about in Mexico, which shares a border, where drug gangs and cartels are essentially at war with the government?

        1. JLM

          The situation in Mexico is perhaps the most dangerous local problem we have. I live in Texas and where once upon a time we might have gone across the border for some Mexican food, a few cervezas and some senoritas — it is a death defying idea.There is an armed insurrection in Mexico with the drug lords fielding 140,000 riflemen with better weapons and more ammunition than the government which fields approximately 60,000 soldiers and national police with inferior weapons and insufficient ammunition.All because of the drug demand in our country.The Rio Grande Valley, once the fastest growing portion of the US, is a war zone and is slowly being surrendered to lawlessness.

          1. Dan Epstein

            Sorry to hear the situation has gotten so bad down there. We’re not in Texas anymore, but my family is originally from Temple.

          2. JLM

            Small world. I lived in Temple for a couple of years and built the big industrial park there which housed the big Mobil Chemical plant.I often fly from Georgetown to Temple to practice tough n gos at the Temple airport. Two big very well maintained runways with free popcorn in the FBO.I ate at Clem Mikeska’s — which is pretty damn fancy now — a couple of weeks ago when coming back from Dallas.

          3. Dan Epstein

            Small world indeed. Dad’s Dad worked at VA Hospital; Mom’s Dad at the Dr. Pepper bottler. I’ll have to tell my folks about Mikeska’s–they’ll get a kick out of hearing it’s gone upscale.

          4. fredwilson

            we have to decriminilize drugswe created the mob with prohibitionand we’ve created druglords in mexico, columbia, and afghanistan with our current prohibition on drugs

          5. JLM

            I can certainly appreciate your frustration with the issue and understand how one might be tempted to grab at a “global” settlement as a means of making the problem go away.The problem is very complex as even the very term “drugs” is not a similarly defined term amongst well educated folks.Are you going to decriminalize marijuana only? Meth? Heroin? Cocaine? Crack? Pills of all kinds?You are not dealing with rational folks on the other side. They will not all decide to become Episcopal ministers when their livelihood is taken away from them. They will simply morph into another type of crime.In Mexico in particular, you are dealing with a lawlessness which may well overturn a sovereign nation on our border. This is a very dangerous situation.A crack head who is going to rob your house because he is high on illegal crack and has to get money to buy crack is also going to rob your house when he is high on legal crack. Because he still needs to buy his crack.The big difference is going to be that the progression from marijuana to crack will be legal, broader and faster.Take a careful look at the impact of medical marijuana plant genetics on the plant itself. It has progressed from approximately 3-7% THC content to in excess of 25% — by pure plant natural selection genetics. This is now a highly intoxicating drug flirting with heroin level intoxication.This is happening because the cultivation of marijuana — MMJ — is now legal and the growers can simply select seed from the most vibrant and productive plants and thereby magnify and increase the yield and THC content.This is happening in real time in places like Colorado which has legalized medical marijuana through a constitutional amendment. The annual productivity of the 6 authorized plants has dwarfed what any legitimate patient could smoke in 5 years.The rolls have grown from less than 1000 to almost 50,000.If we have created the mob, then we need to do to them exactly what has been done to John Gotti not legalize it.

          6. fredwilson

            that’s a losing battle JLMyou can’t stop humans from being human

  11. Mark

    This was a surprise topic. I agree on all points, however it should be mentioned that the current deficits are greatly exacerbated due to large drop in revenue due to the recession. Of course, a complete economic recovery won’t close the gap, but the 2011 deficits should be seen in that light.I don’t know anyone that thinks we can’t cut defense spending, regardless of their politics. The disparity between policy and public opinion seems to me to be the greatest here, and that’s where I think serious budget cuts must start.The costs of imperialism have broken the back of most every dominant nation. There are more than enough examples for us to learn from.

  12. Richard Koffler

    Your analysis ignores the largest potential contributor to closing the deficit: growth. Creating wealth is how you solve the problem, not taxing productive behavior. You should know this as a VC. Sadly, the only political agenda that supports this is by a party that has little chance of making it into government: the Libertarians.

    1. andyswan

      Love it. Would add to one of your lines: “Creating wealth is how you solve the problem, not taxing productive behavior AND REWARDING UNPRODUCTIVE BEHAVIOR.”

      1. fredwilson

        you can’t create wealth burning $1.25 trillion a year Andysee my comment to this original comment

        1. andyswan

          I don’t disagree….I am fine with eliminating social security, medicare, the depts of edu,commerce, homeland security, hhs, it’s etc.Replace income tax with Fair tax every single American pays.Unleash the beast!

          1. Richard Koffler

            And while we’re cleaning up the tax monstrosity by replacing it with a flat personal income tax, we can keep on going and eliminate the corporate income tax. Bring it down to zero, and tough if the EU bitches about unfair competition or whatever they call it today.

          2. andyswan

            Of course. There is no reason to tax members of a corporation twice

          3. JLM

            There is no reason to tax ordinary income, then tax it again when it is invested and generates a capital gain and again when you have the misfortune of dying.The fact that the people have not revolted against the unfairness of this multiple levels of taxation is a reflection on the basic intelligence of our Nation.

          4. andyswan

            The Frog is brought to boil slowly

    2. ErikSchwartz

      Does that work forever?

      1. Richard Koffler


    3. fredwilson

      if you fix the expenses, you’ll need to grow the revenues close to 50% to close the gap. that would take several decades during which you are burning $1.25 trillion a thing i’ve learned in the VC business is burn rates will kill you and you need to cut the burn to live another daygrowth can be part of the answer but only if we get our house in order

      1. Richard Koffler

        Thanks for the replies; they made me realize that my comment was incomplete because I didn’t say that I agree with your statements about cutting expenses (but not those about taxes). I should have written something like, “Notwithstanding your true comments about cutting expenses, your analysis is incomplete because it ignores the largest potential contributor to closing the deficit: growth….”…and finished it with, “Quoting Sir Winston Churchill, ‘…for a nation to tax itself into prosperity is like a man standing in a bucket and trying to lift himself up by the handle.'”

      2. Reid Curley

        All that is necessary is to stop GROWING expenditures at such reckless rates. Now, I realize that in Washington reducing the growth in something is described as a cut, but we should not tolerate such sloppy language here.http://www.cato-at-liberty….

        1. Kevin S

          Reid, not disagreeing with your point that growth in expenditures is the problem, but the finer point to the issue is that it is entitlement spending and not discretionary spending. It is easier to cut discretionary spending, but unfortunately the problem is Medicare.How do we cut that? We can pay doctors less, we can not give it to people over a certain income level, or we can ration it. The heated rhetoric this summer showed nobody is willing to do any of those things. So what is the solution? Waive a magic wand, close our eyes, and hope it goes down? I honestly have no idea. But to see what I mean, check out the second graph on this blog: http://theincidentaleconomi

          1. CJ

            If we had real national healthcare paid for by the people, all of the people, then Medicare wouldn’t be an issue as healthcare would be properly funded. As it stands we kid ourselves with the real cost of healthcare and think that throwing the expense on the back of the wealthy is acceptable.

    4. JLM

      We have a SPENDING problem. Cure spending and the revenues will be adequate to run the country.The government is an insatiable, bloated beast which needs to be structurally altered, have its its unquenchable demand for $$$ trimmed and be put on a strict diet.The current approach is all about negotiating with a crack head as to how much of YOUR money he can spend on his vile habit.It is a SPENDING problem and until spending is curtailed it will not change.Giving a crack head more crack is never the right solution.

      1. Scott Barnett

        Could not agree more JLM… we have this conversation with our teenage daughters regularly. They don’t buy clothes, games or anything else unless they have the cash to pay for it. We explain to them how their Mom and Dad use credit (we pay our CC bills every month, and we don’t buy ANYTHING on credit that we don’t already have cash to pay for). We also explain that the government is a lot more complicated than our household budget, but not really. Just like I won’t justify buying a new toy with the logic “I’ll make more money to cover it”, I don’t want the government making a budget assuming they will simply raise more money than they do now.There’s only 2 ways to balance a budget – raise income (e.g. taxes) or decrease costs (e.g. gov’t spending). Fred does a great job showing how challenging it will be simply decreasing costs.The one thing that wasn’t brought up is the politics of this issue – I see more finger pointing than problem solving going on to position people for the next election, and that’s truly sad.

        1. Richard Koffler

          There are two ways to raise government revenue: raise tax rates if they are below the Laffer Curve’s high-point, or keep tax rates as they are (or lower them) and increase taxable income (i.e., growth, wealth creation). Raising tax rates today is probably a sure way to get a short-term bump and a long-term slump.

          1. Scott Barnett

            Richard – thanks, but I think I’ll let my kids learn about Laffer Curve’s from an economist, not me :-)In terms of your second sentence – again, I’m no economist, but isn’t our tax rate lower now than pretty any time over the past 50 years? I’m not advocating a tax increase per-se, but I do agree with Fred’s comments regarding revenue/wealth creation – and that is never a short term solution. It takes years for growth to take place, if it’s going to happen organically. I don’t think a tax rate increase alone is the solution, but I don’t agree that simply raising the tax rate immediately leads to long-term slump.

          2. JLM

            The problem with raising taxes just now is both the fragility of the economy and the disincentive to create jobs.We really have gotten to the point that we in a Matrix like horror movie with all of our labor harnessed by the government — which in an ironic twist is supposed to be us or serving us — in a seamless web with the fundamental tenet being that government tells us how much we can keep rather than us telling government how much they can have.Think about it — government thinks they are doing you a favor when they tell you you can keep the fruits of your own labor.

    5. Markus

      Growth would increase the governments revenues, but without a serious reassessment of what is done with the money, it would only lead to more of the same. Given 4 trillion, they’ll spend 5. Given 5 trillion, they’ll spend 6 and a half.Since it’s hard to forecast growth realistically it wouldn’t be wise to count on that.

      1. fredwilson

        makes me more skepticali cant’ stand the WSJ

  13. Peter Somerville

    Fred, could you explain why your starting point is a 33% cut for defense discretionary spending, but a 20% cut for non-defense discretionary spending? Having served in both parts of the government, my suspicion is that there’s room for at least 33% cuts to both.I’m happy to see a developing consensus around cutting spending. Beyond the talking points from left or right, I suspect a VC perspective on government spending would be enlightening.

    1. fredwilson

      because i think we spend way too much on defenseeisenhower said it best, “beware of the military industrial complex”

  14. Dale Allyn

    Fred, your post follows the norms of how the U.S. government functions, and in that vein presents your view of a possible solution which might somehow be adopted. The truth (in my opinion) is, that if a fairly radical approach such as you and others have suggested is adopted, then it makes much more sense to have the guts to do the right thing and replace the current labyrinth we call the tax code with a simplified tax alternative. Of course I’m referring to a flat tax (scaled for income tiers). I’m also a fan of a national sales tax, so long as the new programs are revenue neutral (cuts are still needed).These tax system alternatives would reduce a huge expense in operating I.R.S. while largely “gelding” a corrupt congressional body as they spend endless hours sneaking crap past citizens hidden in each letter of policy. It also brings nearly every American to the point where they can easily understand whether there is really a tax increase for them, or a decrease for them, in any given tax event, rather than convoluted garbage that’s sold to them now. In other words, everyone will understand that their flat tax moved from 11% to 13% or that the national sales tax (or V.A.T.) went from 4% to 5%. Even the most politically disinterested person will know what’s happen to tax levels and better understand budgeting. Of course, getting some revenue from the underground economy occurs with the V.A.T. as well.With all this clean up of the tax code, congress will have more time to concentrate on actually creating useful policy. Then they can eventually move to shorter-term congressional sessions, and then return home to work in the environment they’ve created in the off-season. This would then be a government of the people, by the people and for the people.

    1. fredwilson

      i’m totally with you Dalei am a big fan of the idea of lowering marginal rates and eliminating all deductionsi not entirely sold on a flat tax because i think it is regressivebut i think massive simplification of the code would be an amazing accomplishment

      1. Dale Allyn

        Fred, I agree regarding the flat tax being imperfect (and I tried to keep my comment short and simple), but I think we’re on the same page regarding the need for massive simplification. What an exciting development that would be. Then we could all get down to business, both government and the private sector.

      2. Dave W Baldwin

        Fred, you and Dale are both right. The way to get to the needed conclusion offered at the end of Dale’s proposal regarding the shortening of Congressional Sessions is to cut Congressional pay.

      3. ShanaC

        It is overdue and it would probably cause people to pay more taxes. We’re at a point where the average taxpayer is paying too much to want to increase their marginal wealth. We’re also at a point where more than 60% of people can’t file taxes by themselves because the tax code is too complicated for a layman to understand.That is a shanda.

      4. Dave Pinsen

        The bipartisan deficit commission’s plan proposed lower marginal rates (including lower income tax rates and a lower corporate tax rate). I’m surprised more Republicans haven’t embraced it.

      5. Philip A. Smith

        Fred,While you have a concern that a flat tax would be regressive, I would suggest that part of our current problem relates to the existence of a progressive tax code . . . as it currently exists. The end result is that a very small percentage of taxpayers pays a majority of the taxes and approximately 50% pay no income taxes at all. Increasing levels back to the Clinton era levels for those with incomes above $200K is a prime example. It is also an easier/somewhat cowardly approach since such a small percentage of the population actually pays any increase. It would annoy fewer voters, and have a substantially lower impact then making everyone pay.Also, a flat tax does not necessarily have to be as regressive as you may think. Consider the following:Tranche I: 100% of population . . . very small percentage . . . ie 1%Tranche II: Once income exceeds a certain percentage of the poverty level . . . a flat rate with no deductions in the long run . . . except potentially for charityTranche III: Not one I truly favor, but one that would essentially be a compromise . . . perhaps 25% higher then Tranche II.The tranche I is intended such that every member of the population would experience any tax increase . . . even if just small. All current tax credits that benefit the poor would be changed to welfare . . . lets call it like it is. This could be structured in such a way that the current impact of the change is zero. It is the future I would want to change.All deductions would go away with possible exceptions:-mortgage deduction . . . this would be removed over a 10 year period to lessen the impact on an already hurting real estate market.-Medical expenses: either individuals should be allowed to deduct 100% of medical as a credit, or the ability of corporations to deduct employee medical should be eliminated . . . aiming for consistency.-Long-term capital gains: deferred as long as reinvested 100%-Should not be double taxation on corporate income paid out as dividendsIncreasing the tax rate should be difficult and across the board . . . .perhaps 60% of both houses. . . probably require a constitutional amendment. Tough spending questions should not be answered by raising taxes. Decreasing taxes should be equally difficult until the government’s debt ratio is significantly decreased.The bottom line is that calculating income taxes should be a simple item for most families . . . although a large part of me would also like also like to see taxes paid on a quarterly basis . . . without having any employer involvement . . . so people really understood what taxes they paid.Of course, the above is the simple part of the problem as what we really have is a spending problem. -All government reporting should be on a GAAP basis . . . attempting to make it as hard as possible to hide future liabilities as they are created,-The budget process should have a baseline of . . . . the prior year. For example, the budget for 2012 should not be based off the prior year’s budget for 2012. It should be based off how much was spent in 2011. It should not be possible to refer to a 10% cut for a line item when in reality, more money is being spent. Can anyone imagine having a budget process for a business like this?-Every department should be told to reduce by 20%. In fact, I would be telling department heads that if they can’t find the 20% . . . find another job. This includes the military . . . do we still need military in Germany/Japan . . . if so . . . charge the local government. We should not be subsidizing the defense budgets of other countries. Many of our allies are able to spend less on military because we spend it for them.-We also need to take a firm look at what the federal government should be doing period. If departments can be cut more then 20% . . . do it.-Restructure social security/medicare to the point that they reasonably fit into the budget.-Pay levels should be reduced by a minimum of 10%. To set an example, I would cut the pay for Senate/House by 20% . . . all perks should be taxed as the private sector is treated.-The entire pension system needs to be restructured (this is true at every level of government) . . . not allowing for anyone to receive pension payments until the age that social security recipients receive money. Eliminate possible double dipping and that is just the beginning.The bottom line is that historically federal receipts have been generally in the 15%-20% range. Our spending should fit this. In the past, those running for office like to run on the fact that more money comes into their districts then goes out in taxes . . . think Robert Byrd. That is unsustainable.The behavior of our public officials has convinced me that a balanced budget amendment is necessary. In a perfect world, during the seven years of plenty, we would build up a surplus to be used during the seven years of famine . . . ie deficit spending. Unfortunately, our politicians seem incapable of doing that.The above also makes it clear why I would never be able to successfully run for public office. I would probably anger just about every voter . . . somehow.

        1. PhilipSugar

          Perfectly said. They only thing I would add is each person who is being paid by the government needs to post to a search-able site what they did that benefited their employer. I.e. you and me. Let us search for the deadbeats. Obviously if you are a teacher, police, front line employee you can say did my front line work.

  15. George A.

    Agree on all counts, you have left out the sacred cow of medicare/medicaid, which exceeds social security and almost equals defense spending.A good hard look at the numbers is enough to scare the crap out of you. If you look at the proposed budget and projections (located here:… you will see that 110% of the planned 43% deficit reduction by 2013 comes from revenue increases and spending actually increases over this period by 2%. This obviously puts a lot of pressure on the economic recovery in order to make our country remotely solvent.If you dig behind the budget one layer further, Interest costs over the next two years will grow 74%, and this assumes Moody’s and S&P don’t proceed with their threat of cutting the sovereign debt rating for the US. Such action would have a catastrophic impact on funding costs.As it is, the rise in interest expense shields much of the austerity measures planned in the budget. What’s more, if you cut spending elsewhere (defense, social security etc), the multiplier effect works against you, and tax receipts drop commensurately.The paradox is clear: Everyone should be worried about this…yet it is in everyone’s best interest for no one to be worried about it…A crisis in confidence would only accelerate the inevitable.

    1. fredwilson

      the CEO needs to act ahead of the investors losing confidence. we have to do this now

      1. JLM

        Perhaps the greatest problem we face today is simple lack of executive and problem solving experience and business knowledge.You cannot be at war with the US Chamber of Commerce and expect to influence the job creating engine of the US economy.There is a huge difference between governing and campaigning.Unfortunately the current administration is going back into campaign mode as we speak. Perhaps they never really changed out of that gear.

  16. Clay Johnson

    The problem with the deficit debate is that we leave process out of the equation. The federal government is incredibly inefficient at spending the money it has buying the things that it needs. There is plenty of room in our budget to give us the services we need — we just need to get government to spend its money efficiently. The Federal Procurement Process (Federal Acquisition Regulation and DFAR) are excessively wasteful– causing government to spend upwards of 100x on things that we ordinary folks don’t.We need to spend just as much time discussing *how* government spends our money as we do *what* it gets spent on. See here:

    1. ShanaC

      You know, DFAR, etc. probably influences how startups bill themselves to the government. if they are locked out of the big because of the expense, that is long term bad for how our government agencies overall progress and work

    2. thedavidlewis

      Clay, thanks for your work in bringing transparency to government… unless you are the Clay Johnson who was a part of the Bush Administration.

    3. fredwilson

      yup, just getting local governments to stop hiring contractors and start using open source is a telling exercise

  17. Chewier

    Nothing that a few years of double digit inflation won’t fix.

    1. disinter

      Which is coming very soon.

  18. ErikSchwartz

    At the end of the day there are three places where meaningful cuts can be made to the federal budget.Defense. (sacred cow)Social Security. (sacred cow)Medicare. (sacred cow)You can get RID of the departments of energy, interior, education, the NEA, and everything else. Unless you drastically cut defense, SS, and medicare you are not going to move the needle in a meaningful way.

    1. JLM

      I agree with you more than you agree with yourself. LOLPerfect.

    2. Dave Pinsen

      The Bowles-Simpson commission (whose plan Fred linked to) deserves credit for not sparing any one of those sacred cows.

      1. ErikSchwartz

        I agree.The “fiscal conservatives” in the GOP said it was a non starter.So did the democrats.

        1. Dave Pinsen

          See my other comment here about the political challenge of deficit reduction.

  19. Dhiraj Kacker

    Here’s something from NYTimes to play with:Budget Puzzle: You Fix the Budget…

    1. ShanaC

      Honestly, as a teaching tool, I thought that webpage was brilliant. I sort of wish it would go superviral and then the gov’t would complile the data to figure out how to balance the budget in a way most people agree on.

  20. chrisdorr

    Fred, great comments, well thought out and reasonable, even if someone does not agree with every single point. And it seems to have woken everyone up this Sunday morning.And I would add to those that think your post is “political” that you are doing what any responsible citizen should do-actually state a position that relies on specific suggestions to start or continue an important discussion that affects all of us.Though you don’t use these words, I think what you state has an important assumption under it–the notion of shared sacrifice, which I think is essential to a real democracy. Everyone has to pitch in.

    1. fredwilson

      thanks Chris. i want to participate in the discussion and debate. this is important stuff

  21. andyswan

    The cuts will be hard, but they should be hardest on the parasites first. Both internally and internationally.We CAN grow our way out of the deficit after elimination of the parasitic culture. Unfortunately it appears the powers that be are more inclined to inflate our way out of it….so that our voting blocks of dependents don’t turn on their sugar-daddys with pockets full of other people’s money.

    1. steveplace

      But when you speak of parasites, they will just counter with “freedom,” “justice,” and “terrorism.”

    2. disinter

      Government by definition is one huge parasite. Yes, we should eliminate it.

      1. andyswan

        Just get back within Constitutional limits and we will be fine

        1. disinter

          That didn’t work so well the last time (when it was created), look where we are today. No need to make the same mistake.

  22. christopolis

    It will not happen. We live in a democracy remember? You think a gazillion boomers are going to vote to reduce their social security? Do you think communities are going to vote high paying military jobs away? Or even better that their spineless representatives are going to do it?It is time to be honest. America is London 1900. Onward and downward.Also when you say stuff like “until the Federal Government…” as if it is a monarchy that is so sad and the true root of the problem. The federal government is the people or at least that is the way it was supposed to be.The debt numbers do not even include off balance sheet stuff or state and municiple debt. The will to solve this problem does not exist in this democracy. The can will be kicked down the road and quality of life for most will continue t spiral downward as Goldman gets another 10 billion in bonus money. eventually there will be systematic imbalances that cannot be papered over and most likely even more war.None of this even addresses the interest rate? The Federal reserve is now buying something like 30% of all treasuries. Eventually rates will have to come up to attract buyers.

  23. Jon Smirl

    The budget would make a lot more sense if you split Social Security and Medicare into its own budget. Move the Social Security taxes onto that budget and give it credit for interest being earned on the treasuries in its “lock box”. Doing that would make it obvious if SS is sustainable, being raided, generating a surplus, etc…The deficit is even worse than pictured. SS is running a large surplus currently. That surplus is supposed to be buying treasuries to be used to pay future benefits. But the government is spending that surplus in the general budget. Move the phantom treasuries SS owns into the SS budget and show an increased debt on the general budget. That will make the interest payment pie jump in the general budget.I’m not convinced that taxing the wealthy is the right solution especially in the area of capital gains. It is critical to this country to maintain as large as capital pool as possible. Richard is right, the only possible solution is growth. A main fuel of growth is cheap capital.

    1. JLM

      In the construct of the budget, we need some basic organizational disciplines employed. This is all about budgeting expertise, transparency and providing information to decision makers in a manner that makes it easier to make prudent decisions.We need:1. An operating budget for what it costs to run the government on a Department by Department basis with a keen eye to what funds are being generated by each Department through its fee and royalty income;2. A capital budget on a Department by Department basis which shows its plans to deploy capital on a multi-year basis to accomplish its mission;3. Enterprise budgets for all programs which are benefit programs showing the magnitude of the income and expenses on a multi-year basis; and,4. A consolidated cash flow budget which compiles all of the above.This would be coupled with a detailed projection — 1, 3, 5 year projections — certified by the Sec Treas as being the “available” funds for the future. Many States do this very thing and it is published BEFORE a legislative session by the Comptroller.Lastly, we need to create 2 year budgets so that the budget does not become a constant series of short term fights and 11th hour compromises. Texas has a 2 year State budget and the intervening year is a time of peace and tranquility — well, comparatively.If we had this organizational approach in hand, we could make very easy decisions to balance the books — like, let’s delay that new computer system or new fighter until next year because our income looks a bit anemic this year.We could also look at the Department budgets and make better decisions as to their operations. The Parks Dept and Interior Dept both have enormous sums of fee and royalty income but it is squandered in the overall budget because nobody every really sees it.

      1. Jon Smirl

        I agree with all of this. Without reasonable accounting you can’t tell where the big problems are. Mixing operational and capital expenditures is the worst sin. Borrowing is ok for capital expenditures but it is suicide for operational expenditures. With the current data you can’t separate operational from capital expenses.The first thing the Tea Party should pass is a law requiring realistic government accounting. That simple act will cost nothing in the big scheme of things and it would open a lot of eyes.

        1. ErikSchwartz

          Sadly the tea party is a cultural movement not a fiscal movement.

    2. fredwilson

      i did not suggest eliminating the cap gains differential. i’m a big fan of incenting investment

  24. JackSandlerBloom

    Fundamentally correct. BUT the U.S. does not have to give up its crucial military leadership – which Mr. Wilson does not understand is crucial to his happy little VC world and safety and security of his beautiful family. And it does not need to transition social security to defined contribution plan. It needs to raise the retirement age over time. Also, he is ignorant of the role of Medicare which is by far the largest problem in deficit reduction. He needs to actually read the commissions report before posting.B-Professor Jack Bloom, Pace Univeristy

    1. ErikSchwartz

      If we cut our military budget in half we will still lead the world militarily.We’ll just take substantially more casualties when we choose to use the military.

      1. JLM

        Remember that Eisenhower — who knew a thing or two about warfighting and the military — balanced 8 straight budgets, built the American nuclear arsenal and initiated the Interstate Highway system. A damn good piece of work.He also sounded the clarion call to “beware the military-industrial complex” — that segment of American industry which makes its money by proposing, developing and building single source advanced weapons systems far in advance of any adversarial threat.We routinely develop airplanes in advance of OUR own air fighting capabilities — not because an enemy has developed a competitive threat. We are at least 20 year ahead of any current Russian or Chinese fighter or multi-threat aircraft.We constantly fail to maintain longterm capabilities which simply work — witness the decision to retire the A-10, a flying tank which was used with such unbelievable capability in both Gulf Wars to stand off 6-10 miles and kill tanks.I am a fairly big military hawk having graduated from a military school and having been a professional soldier, but the guys who do the fighting do not care if they are killing shit heads with 20 year old artillery or 20 year old planes.Casualties are a function of the effective deployment of combined arms — infantry, armor, artillery, air power, surveillance, technology at the point of attack — at the point of attack.Casualties are a function of the rules of engagement. If you are not allowed to level a compound of mud huts when you take fire from them, then you are going to lose men if you have to close with and engage them with rifle fire. I would stand off and call in the artillery and air power and level the place.Casualties are a function of leadership and at this junction in time, the US military has the best leadership and soldiers in its history. I sit on the Foundation Board of VMI and I can tell you with great certainty that most of my classmates could not get into that school today.The cuts in the military have to be in the development of weapons systems which are not necessary right now. Some of this is just an issue w/ postponing their development.

        1. ErikSchwartz

          The top tax rate under Eisenhower was 92%

          1. JLM

            And he had a Republican Congress.The average tax burden for all of the US was only 20%.There is no question that we will have progressive tax rates.

          2. ErikSchwartz

            Of course prior to the 1960s republicans were different. The South was entirely democratic and now it’s entirely republican.

          3. disinster

            I think you have both figured out that there isn’t a dime’s worth of difference between the two factions (Repug and Dem) of the mega pro-state party by now…. no?

          4. JLM

            Having grown up in the 60s, I opine — EVERYTHING was different in the 60s. But your point is well made.That is why many of the longer term comparisons are invalid.We no longer live in a world of “25 years of experience” but rather 1 year of experience 25 times and maybe the real interlude is now 6 months.

        2. ShanaC

          I think we are learning that from Stuxnet. And Stuxnet was probably much cheaper than warheads. So can we cut the big planes and move to more surgical methods (like stuxnet)

        3. Dave Pinsen

          There are certainly excesses in military procurement that should be reined in, but I think it’s a good thing to have the most advanced military equipment in the world. Because that’s not the sort of thing you can improvise in a pinch when you need it. A simple way we could reduce our military spending without reducing our war fighting capability would be to bring back the draft.With a draft, we could scrap all the money spent on recruiting and advertising, and with such a large pool of potential draftees, we could select single men without kids, which would dramatically reduce the armed forces’ social spending (on Defense Department-run K-12 schools, social workers, etc.).Since we’d of course have a lot more eligible potential draftees than we could accommodate in the military, I’d give priority to the children of Congressmen. Let every able-bodied, military-age son of a sitting Congressional Rep or Senator be conscripted. A side benefit of that would be that we’d be more judicious in our military adventurism in the future. And that, of course, would save us even more money.

          1. JLM

            I agree with you philosophically and would like to agree with you totally but having served in the military when the Army was transformed from the draft to an all volunteer force, I can only say that the volunteer force fights much, much, much better than a draftee Army.What we need is universal service.I am not wrapped in my underwear about the macho testosterone sense that everyone has to be a rifleman because there are simply guys who cannot do that job but can be very productive members of our society and can serve in hospitals, municipal works, parks and other public service positions.We need to take the two years between high school and college/trade school and allow folks to serve and then provide them with a free public school education if, and only if, they are trained for jobs that can actually provide tax paying employment.We don’t need any more poets.We really have to avoid wars where we build huge amounts of infrastructure, rebuild the country and move in for the long haul. We need to get in, get out and kill as many shit heads as we can in 12 months and come home. We should use enormous amounts of firepower and leave carnage and wreckage in our wake and resist the temptation to build a country in the process.

          2. PhilipSugar

            Unfortunately, I can’t like this more than once.

          3. Dave Pinsen

            “having served in the military when the Army was transformed from the draft to an all volunteer force, I can only say that the volunteer force fights much, much, much better than a draftee Army.”The end of the Vietnam era wasn’t a high point in terms of quality and morale of recruits; I wouldn’t extrapolate from that to conscription armies in general. Conscripts fought quite well on the beaches of Normandy. Other factors are important, e.g., how the draft is implemented (i.e., is it relatively porous, like the Vietnam-era one, or does it get a broader sample of the country’s military-age men, as in WWII?), the quality of the leadership class (the career NCOs and officers who would still be volunteers), etc.A broader national service program might make sense.Agreed in general about the benefits of killing shitheads and then leaving, versus nation-building, but I think this is in part closing the barn door after the horses have left. After almost ten years (!) in Afghanistan and eight in Iraq, I think everyone has absorbed that lesson.

          4. JLM

            While I agree that the Army at the end of Viet Nam was pretty sorry, nonetheless that was the end of the draft and is a valid reference point. You may not like it but it is the only draft we have had recently.The comparison to the American Army in WWII is a difficult one to make effectively as many “conscripts” were, in fact, volunteers who simply submitted themselves to the draft as the draft was both universal and unquenchable. There were no draft numbers. There was no escaping the draft.Even using that frame of reference, the Army’s historic Regular divisions fought more effectively because they had better NCOs, got the academy junior officers and had better Generals.There is no question that units which are staffed with volunteers are better fighting units than conscripts or even National Guard or Reserve units.

          5. Dave Pinsen

            Jeff,1973 isn’t the only data point we have re the draft. We’ve had conscription during plenty of wars. We can learn from what we’ve done wrong and what we’ve done right in the past.Even with conscription, career NCOs and officers would still, of course, be volunteers, and there’d still be be elite units staffed by volunteers.

        4. CJ

          I love the mention of Eisenhower here and the Military-Industrial complex but it’s a bit incomplete. He’s not only referring to “that segment of American industry which makes its money by proposing, developing and building single source advanced weapons systems far in advance of any adversarial threat.” but also the segment of American industry that is in bed with the government to use it to industrial and economical ends. Lots of room for conspiracy theory here but also lots of truth that’s elusive to those who dismiss it.

    2. disinter

      What is so crucial about military leadership?

  25. rfreeborn

    Fred,You should check out this article and the associated link to the NY Times Budget Balance exercise. It’s a pretty interesting exercise in using *real* numbers.

    1. fredwilson

      yes, someone else also shared that linki will go check it outthanks

  26. Charlie Crystle

    2 wars on top of the massive defense budget, tax loopholes, and continuing to allow illegal trade behavior that sends economic activity (and the innovation around it) offshore

  27. MeanMisterMustard

    I think this is a good start Fred, but you need to go farther to really see the problems. The Defense budget isn’t just big, it is used almost exclusively to protect the status quo: why on earth does the U.S. have bases in dozens of countries? Not because U.S. citizens on average are any safer, but rather because it helps protect a set of very narrow economic interests: this is classic rent-seeking. And the fact that the military is also Keynesian make-work for the economically disadvantaged in the most backwards parts of the U.S. further highlights it perniciousness, those jobs buy votes and forestall much needed political realignments.And to all the self-proclaimed Libertarians out there, get over yourselves. Libertarians talk about promoting wealth creation, but you are all so clichéd (including Peter Thiel!) and unable to see who actually constrains wealth creation. Libertarians in the main are simple-minded idealists whose tunnel vision keeps them from seeing that their talking points are trojan horses for rent-seeking behavior.Short thought: entrepreneurs, VCs and people in tech need to start seeing politics more clearly. When they do, I expect some meaningful shift in U.S. policy. But to do that you all have to get over the faded paradigms and put on your thinking caps.

    1. disinter

      Correct on the first paragraph.

    2. fredwilson

      where do we go to “see politics more clearly”?

      1. JLM

        A huge resource that I find to be indisputable is It is excellent though its info is dated by a couple of years.

  28. Paul Meloan

    Too many people view Soc Sec as a retirement plan and not as a social insurance policy. First step is to change that view

    1. JLM

      We have two societies in America — the entrepreneurial “eat what you kill” society and the entitlement society.The politicians have grown the entitlement society at the expense of the entrepreneurial society because they can shoplift their votes with the money generated by the entrepreneurial society.It is very simple math — if you start with hand feeding the lower 50% with the money from the top 10% while simultaneously demonizing the top 10% — you can steal elections.The funny thing about it is that if SS had been safeguarded and not commingled with the general fund of the US, we would all be singing its praises. I actually think it is not too late.

  29. Stephen Purpura

    There is a real political difference between people in the U.S. on Social Security. One side views it as preventing grandma and grandpa from eating cat food while the other views it as a poorly run retirement plan. I seriously doubt that anyone using this blog sees it as a retirement plan. But the political reality is that Social Security is politically stronger as long as all most people see it as a retirement income supplement.Having suffered through too many homework exercises in graduate economics on two-period (or n-period) utility maximization (work period and retirement period), your commenters who say that the answer is ‘growth’ are spot-on. Social Security is designed to be self-sustaining as long as the economy grows at a rate of about 3% or higher (depending on inflation and currency prices). Its balance sheet will look awful during periods when real GDP growth is below trend.All medical spending needs to be cut through a systemic change. Growth trends in industry can’t be eliminated by economic growth; economic growth exacerbates them because it makes competition for wasted resources cost more.The problem with defense spending is the amount of money that gets blown up and doesn’t contribute to long term productivity.

  30. Guest

    Fred Wilson 2012?

    1. kidmercury

      i’m rooting for him to get the mayor badge in fredland

    2. fredwilson

      not a chance. but i’d be happy to share my views with Obama about what it will take to earn my vote again in 2012. i put some of it in this post

  31. steveplace

    Simon Johnson talks about his ideas here, including issues with current structure of US Tax Code:'ve also got a bunch of US companies who do not pay any sort of effective tax rate due to some sort of money funnel voodoo through Ireland. If you can structure a revenue neutral solution to bring that cash back into the US, it creates some wealth expansion.But here’s a great chart that helps explain the current situation:, the primary change from 08-09 with respect to the deficit was not discretionary spending– it was a drop in revenues. The US has just gone through the biggest drawdown in wealth since the Great Depression, so it’s expected that any government revenue derived from income is going to suffer.I know this is a stretch, but what happens to revenue if we actually see a bump in GDP or jobs? What if the economy doesn’t get zerohedged again and revs kick up again?Furthermore, what happens if we actually drawdown significant forces in both Iraq and Afghanistant? We’ve spent a little over $1T since the war on terror began, so that would be quite a peace dividend.One more thing– the UST now owns 1.65 billion shares of AIG. The May 55 calls are currently going for about 5 bucks. So if the gov’t covers up on their stake, they pull in about 8BB to reduce their basis and raise capital. Drop in the bucket but I don’t see why they haven’t collared up yet.

  32. ian_peterscampbell

    Great post. Businesspeople and engineers know (and extoll) the importance of practical, realistic decision making rather than perfect, correct decision making. We decry the perfectionism and stubborn insistence on taking no action that is not a “correct” solution that we associate with academia.But let the conversation turn to politics or economics, and all of a sudden many dig their heels in like the most ivory of tower academics. All of a sudden practicality and realistic solutions are thrown out the window by people on both sides of the aisle. I wish the people who were so good at making practical, compromise decisions day-to-day would do more to lead the charge into finding common ground and workable solutions in politics.

    1. fredwilson

      that’s why i post about this stuff from time to timei think we, the citizens of the US, owe it to each other to discuss the realities of our situation

  33. Mike Champion

    Fred, would be interested to see how you fill out this NYTimes “budget puzzle”, which allows sharing your results:…Here’s the choices I made to solve our national budget woes:

    1. Dave Pinsen

      Great idea, Mike. We can vote with Disqus “likes” and make this a little straw poll. Here are my choices, more tilted toward spending cuts than yours.

  34. JLM

    By Executive Order the Administration could freeze spending levels at TODAY minus 15%. That would be so easy to make happen as to be laughable.This is exactly what States — the prudent States mind you — are doing to balance their budgets. Today.Those Governors are not smarter than the President. They just operate in an environment in which they must constitutionally balance their budgets.To balance the budget, you have to want to balance the budget.The Congress could propose a balanced budget amendment.The Congress needs an intervention which in great measure is the message of the Tea Party.The problem with this adult approach is that the Administration cannot pursue its “initiatives” — like healthcare, carbon taxes and other draconian business hating laws — and cannot employ the greatest number of $150K + employees in the history of the US.

    1. Peter Fleckenstein

      I’m not so sure a balanced budget amendment or an executive order to freeze spending levels is the long term solution or short term for that matter.A balanced budget amendment basically allows the government to spend as much as they want as long as the revenues coming in match it. We’ve seen the brilliant success of “Pay-as-you-go”.What we need is a constitutional amendment that caps federal spending to 15% of GDP.Yes, that will mean drastic cuts across the board in Federal Spending. I mean across the board – Discretionary, Non-Discretionary, and off-balance sheet.Do Americans have the constitutional fortitude to move forward with this? I think we got our answer on November 2, 2010.

      1. JLM

        Point well played on the government spending everything they can get their hands on.We have to do something which is both symbolic and sets a real limit.The debate about the debt limit is purely symbolic and it has to get some teeth into it.

      2. disinter

        Then they would just lie about the GDP…. this is the government we are talking about here.Look what they did with the “official” inflation index etc.

        1. Peter Fleckenstein

          Only if we allow them. If we want to get done what is correct we must beruthless in our actionable pursuit.

  35. John Frankel

    Agree on problem, but not on solutions.Re Military: we have grown up in a world with one dominant power and increasing democracy in the world. Are these linked? Is the US making a strategic investment in the military, so that as they are unchallenged other countries see that a military build up is pointless (the only ones ignoring this seem to be the North Koreans, the Chinese and Iran, but that is another story).Re raising taxes on those that have high incomes: it starts to address another big issue that is wealth inequality, and that is at an extreme and the Fed’s current policies are exacerbating it. But, the bigger tax issue is tax simplification; today almost every filer has a loophole or a deduction, and the complexity of the code is leading to an increasing drag on growth and productivity. Imagine what those tax accountants could be doing productive in the economy if they were released to the real economy.Re social security: the biggest imbalance here is the difference between life expectancy and retirement age. When it was introduced they were pretty close, but life expectancy grows by a month or so every year (so far) and so where only 50% or so lived to retirement now the vast majority do and life expectancy at retirement is about 19 years. Retirement has moved from a few years of support for some, to an expectation of almost two decades of vacation. Society cannot afford that and will not. Changing the funding from defined benefits to defined contributions simply is counter to a safety-net approach that most expect of social security. There should be encouragement of private pensions, but the safety net needs to be there…it just needs to cut in at a later age for most, and should be indexed to life expectancy. Moving retirement age from 65 to 75 gradually would do wonders for the ability of this economy to fund it.SIze of government: at the margin each government employee takes someone out of the productive private sector that generates GDP and puts them as someone who needs to be funded via taxes. Smaller government should lead to higher GDP, higher tax revenues and less government spend. What is not to like?Healthcare: well that is another financial sink hole that would need to be addressed.

    1. JLM

      It is time to think the unthinkable — defined contribution v defined benefit and with an actual account that holds the beneficiaries’ money. Time to end the Ponzi scheme.

      1. John Frankel

        For you and I defined contribution makes sense. Firstly we have reserves to contribute from, secondly we have the intellectual resources to make decent financial decisions. The problem is a quarter of the population is in the bottom quartile and probably can’t do either. Thus the need for a safety net, unless you want to see elderly disenfranchised poor in society.

        1. JLM

          The SS payroll tax — employee and employer portion which amounts to 15% of income — is more than enough to fund a defined contribution plan.Perhaps the only way to get the SS problem fixed is to get the government out of the business of holding the money. They cannot be trusted to hold the money because they spend it and slip in IOUs.This is like trusting the rent money to your drunk brother and being surprised he spent it on booze.I think you underestimate the native intelligence of the masses. I am not suggesting the complete privatization of SS just the conversion from defined benefit to defined contribution.Guys like you and I should be able to opt out even if that means abandoning half to all of our contributions to date. Have you ever perused your SS contribution history and put a 7-12% ROI on it? The amount of money is enormous.I want government out of my finances. Only because they are not very good at it.

          1. John Frankel

            I do as well, but it is not going to happen. They are a (not so) silent partner. This is tax, pure and simple. Best remedy to me is to increase retirement age substantially.

  36. William Mougayar

    I recall a couple of years ago,- in responding to the planned expansion of US government spendings, Bill Gates & Jack Welch said (paraphrasing) “…but can we afford to do this now?”.The issue is that there’s always someone that will bail someone else out, and that removes any fiscal discipline. The US government bails out big business, and foreign bonds bail out the US government.That said, inflation plays a factor in deficit reduction. Surprising that the inflation topic wasn’t even mentioned once in that NY Times article.

    1. Dave W Baldwin

      And everyone is worried about the coming round of inflation needed.

  37. LissIsMore

    Social Security is not a contributor to the deficit. It, in fact, runs a surplus at the moment. While long term there may be some structural problems that need to be addressed, there are exactly $0 in the current budget deficit which are related to the Social Security.The part of the budget related to Social Security is that the Treasury needs to pay back the money that it borrowed from the Social Security Trust Fund. We borrowed that money we need to pay it back. Instead, they are talking about cutting benefits.So, while reforming Social Security is an issue that we need to tackle, it is not related to the current budget deficit and it all this talk in DC about Social Security cuts is just another way for the system to work against those that need help and for the benefit of the entrenched interests.

    1. JLM

      I am with you completely but this year the cost of SS was greater than the baksheesh of SS.We are now just for the first time paying out more than we are taking in — those damn Baby Boomers!

      1. LissIsMore

        Yes. SS has a problem as well. It will start to draw down the trust fund at a projected rate which will leave it in deficit in about 20 years. No arguments that this needs to be addressed.My point is that SS contributes nothing to the mind boggling 1.5 trillion dollars of the in-year budget deficit. So when the deficit control conversation turns to SS benefit cuts as part of the solution I scream. This is like a game of three card monty.

        1. JLM

          You are absolutely correct. This is why programs like SS and Medicare should be treated like enterprise funds. Enterprise funds are treated like a separate budget and show flow of cash in and out independent of the general fund. Though the general fund may be source of some of the inflows.It is very important to note however that this year the SS outflows — for the first time ever — exceeded the inflows. It’s those damn Baby Boomers.

  38. JLM

    We are on an unsustainable path of spending. We are not headed to the Emergency Room, we are headed to the cemetery.Taxes are too high — income (Feds, States, Cities), property, sales, gas, excise — at over 70% aggregate for the most productive elements of society.The IRC is no longer a “tax” Code, it is a compilation of special interest considerations and a mechanism for redistribution of wealth from the productive to the unproductive. It is a political manifesto.Nobody understands the IRC. Nobody. The Sec Treas cannot figure out his own taxes even using Turbo Tax and he is a modestly above average intellect.The Congress is a funding maw and the legislation is being developed by lobbyists and special interests. You cannot expect to get good laws in 2000 page spurts.There is no such thing as “experimental” legislation which is passed to see — hmmm, I wonder what this will do?Social Security is a Ponzi scheme. The account needs to be “trued up” and the money no commingled with the budget. It is an enterprise fund.Social Security should provide for the opportunity to opt out and it should be indexed to current life expectancies.We have created enormous gobs of government in the form of Departments which are not the province of the Federal government but should be left to the States. Get rid of them.The military budget should focus on short term warfighting capabilities and stop funding weapons systems for the next 50 years today. Just postpone — not abandon — some of those programs for a few years while we get the books balanced.We have to stop rebuilding the countries we pick a fight with and be prepared to make a budget BEFORE we go to war. Kill shit heads and go home immediately.We have a spending problem not a funding problem.You cannot have something just because you want it.If you pay people to sleep on their couch, they will sleep on their couch.If you want to create jobs, you will have to allow the job creator to make a damn $.IF WE CAN GET THOSE SIMPLE STATEMENTS AGREED TO,

    1. Peter Fleckenstein

      You nailed it again JLM. Allow me to expand just a little:The answer to solving our path to the cemetery starts with basing those simple statements on these fundamental truths:We must come to the understanding that all of these problems we’re facing right now started with us.We have no one to blame but ourselves.We elected these miscreants into our Congress.We allowed them to shirk their Constitutional mandates from us. (Yes folks we tell our government what to do not the other way around.)We encouraged them to regulate the living daylights out of our personal and professional lives.We now must pay the little price of sucking it up so that we and more importantly future generations, will prosper and enjoy life to the fullest as is was meant to be.Again – Absolutely outstanding JLM.

  39. Druce

    A little context:At the end of Clinton years, we had 27.2% Federal debt to GDP, and a budget which was in balance at the top of the business cycle. SS was still pretty fixable, if not Medicare.Bush came in, there was a recession and he did a few things- ran a couple of wars without taxes to pay for them- instead, a big tax cut- did nothing with SS and Medicare, added a big unfunded Medicare prescription drug entitlementThen Obama came in in the middle of the huge crisis and did some more stuff- Stimulus- Freddie/Fannie blew up and their off-balance sheet debts became Federal debt- Health care reform, which while not a solution should help the Medicare problemIn rough terms where we find ourself is Federal debt about 50% of GDP, and something like 8% fiscal deficit.Now, what constitutes a sustainable fiscal policy? Suppose you make 100,000 and your income grows 10% a year. So next year you make $110,000, and your debt has grown to $105,000. You might say…I can borrow $5,000, and my debt/income ratio will be the same. You could spend $115,000. And as long as the difference between your real income growth and real interest rate remained 5%, you could keep spending 5% more than you earn indefinitely, and your debt/income ratio would stay the same. The same applies to GDP. (Of course, if suddenly your income growth is flat and real interest rates are 5%, you would now have to pay down 5% a year, a 10K drop in income compared to the previous scenario leads to a 20K drop in spending power – that’s what is happening to Greece.)Bottom line is, yes, we’re on an unsustainable path. But our debt is not yet out of control, rates are low, and we have a country and currency people trust. It’s like a diet, we need a long-term change in behavior or we’re going to have a heart attack.Unfortunately, Tea Party type hyperventilating about the debt and pulling stunts like debating not raising the debt ceiling does nothing except make investors worry about US political risk. When coupled with politics that suggest the only thing that matters is tax cuts, it suggests that behavior change will not happen before the heart attack and we become like Greece or Argentina.People don’t change when they see the fire, they change when they feel the heat.(see… for figures – tables 1.2 and 7.1)

    1. JLM

      I agree with almost everything you say which is said in a very logical manner.The real question is — who started the fire?I suspect that the credit belongs to the Tea Party, the French Resistance of American political life. United not by what they believe in but by what they oppose.

      1. Druce

        It was always burning since the world’s been turning LOLRight now it seems like there are people who spent eight years making decisions to run up the debt, saying ‘deficits don’t matter’ and ‘starve the beast’, and now all of a sudden they’re ZOMG THE DEBT where did that come from? the arsonists complaining that the house is on fire.maybe a better analogy is if your mom or spouse is baking cakes for you every day and then suddenly you’re in the doghouse and it’s OMG you have to get on a crash diet ASAP.yeah. there’s a long term problem, it needs a long term solution.I’m totally in favor of getting the fiscal house in order, massive tax simplification. but I can’t help noticing that the party that’s supposedly in favor of spending cuts was in power for eight years, and nothing happened…almost makes you think that people want $5 trillion of GDP of government services, defense, cops, roads, schools, health, and only want to pay for $4 trillion.I would love to go to just a flat income tax (something like 0 for the poor, 10% for the middle class, 20% for the well off), and a VAT, with lower rates on groceries and high rates on luxury products, and user fees. The corporate income tax is a perverse joke in terms of incentives… it rewards leverage, it creates ridiculous ‘expenses’ like jets, junkets, and restaurant meals, income is inherently subjective, it’s a full employment act for lawyers and accountants. It’s the dream tax for politicians, voters think someone else pays it, politicians can grandstand about companies that only pay 5%, and meanwhile use the levers to get contributions and fat lobbying jobs to keep it that way.

    2. disinter

      Our debt is not yet out of control? Are you serious?Dude, we are so far in debt that nobody wants it anymore. The Fed is literally printing money out of thin air to buy treasuries due to lack of demand. We are in deep shit and it will only be resolved via inflation. This is very bad.

      1. Druce

        source please. see for instancehttp://www.visualeconomics….people don’t want to buy our debt, unless we pay the whopping rate of 3% and change. for most countries that’s a pipe dream, and it was a pipe dream for the US not very long ago.

        1. JLM

          Yes, I would have to say that one of the most ridiculous elements of current events is the fact that we are broke and the market says that our debt is golden charging a very small fraction above projected inflation to lend money to us.Every country should be so broke and in debt given borrowing rates.

  40. ErikSchwartz

    Perhaps we need to change the cap gains tax structure. I recently heard that due to the massive volumes of machine trading 70% of equities are held for 11 SECONDS or fewer. Those investors don’t do much to help build companies, yet their profits are treated as short term cap gains.It would be interesting to play with the cap gains tax numbers.LT (>12 months) drop the rate to 5%ST (1 week to 52 weeks) set the rate to 15%VST (very short term, under a week) some really punitive rate.Basically turn the public markets back into a way to help build companies rather than a casino for quants.

    1. ShanaC

      That, and some of the recommendations about IB talking to trading and research a bit more may cause a lot more liquidity and growth in smaller caps, because right now we don’t have that. Those companies probably have room to grow, and we just don’t know because we’ve made it too expensive in the public markets to find out.

    2. JLM

      Capital gains after 5 years should be 0%!

      1. Keenan

        That has some merit to it.

    3. Dave Pinsen

      Aren’t short term cap gains already taxed as ordinary income? I don’t think the tax code is the way to stop the 11 seconds nonsense. I read elsewhere about a proposal to require all bids to stay open for a minimum of one second, to stop the high frequency trading arms race. Something like that might be more effective.

  41. ShanaC

    I have one question to ask:Why the hell do we have sacred cows in this budgetary mess!Interestingly, I am of the opinion that the cash is causing fatness of behavior by the government – and if they cut back we’d probably be able to get more out of what we are spending.I would like to see the government do more with less with say Medicare. Especially if watching dollars and cents means better quality of life (because we’re not spending on stupidity because we can…)Same with the military. Why do we spend what we spend? Are there better ways of spending the same money.Same even with education….

    1. fredwilson

      sacred cows are a result of politics and politician’s survival instincts

      1. ShanaC

        I have a pitchfork which I am not afraid of using over the idea of sacredcows.

  42. Rob K

    Amen. A-frickin’ Men.Unfortunately, almost all of the moderate politicians are gone so your suggestions are going to get lost in partisan rhetoric.

  43. celestus

    You are incorrect on #2.Letting the Bush tax cuts expire for the $250k+ crowd would raise an extra $400 billion in revenue *over 5 years*, i.e. $80 billion per year. The federal budget is $3.5 trillion, so you should mean more than 2%, not more than 10%.I’m sure it doesn’t change anybody’s view, but it’s important to address the confusion.

    1. fredwilson

      thanks for clarifying that. not sure where i got the bad data

  44. Jake Howerton

    Glad you have pointed out the elephants in the room but why are people fixated on the Bush Tax Cuts? It would hardly make a ripple in tax revenue. Income tax reform is desirable but we need more honest thinkers around this issue.My proposal: 15% flat income tax. NO deductions. 0% on first $10k(or similar)to protect low income individuals and still be a fair system.Benefits: * Same revenues* automate the entire system and save billions (probably 100s of B)* everyone can understand it.* nobody is subsidizing normative relationships or other tax credits they might disagree withCons:* out of work tax accountants* citizens will have a clear understanding of how much of their money their govt is wastingAssumptions: $1Trillion income tax revenue, Per capita income of $33k

    1. ErikSchwartz

      If you kill mortgage interest tax deduction the housing market will crash further.Probably has to be done but given that most of the middle class wealth is tied up in housing it will have major consequences.

      1. Jake Howerton

        This is a really weird myth and logic error. The savings for the average person in a mortgage would far outweigh any benefit they were getting from MITD, making it possible for more people to stay current, keep their homes, making mortgages more profitable.

        1. ErikSchwartz

          Only if you compare one steady state to the other. The problem is the transition.

          1. Jake Howerton

            Definitely, if MITD was the first thing you killed you might be in trouble.Luckily, we have an entire year between tax dates. You could easily leave all the payroll deduction hooplah in place on people’s paychecks for the first year. Nearly everyone with a paycheck would still be getting a refund when tax day came around.

  45. mattb2518

    Great post. People will argue specifics to death, but the spirit and willingness have to be there before there is a sovereign debt crisis. That may be impossible. I read somewhere recently that our elected officials have a hard enough time getting along during times of prosperity – and that the “politics of scarcity” were going to be ugly. Personally, I’d like to see a more business-focused approach when you have a business headed towards bankruptcy and (a) work primarily on the expense side of the ledger, and (b) cut once, swiftly, up front. Not death by 1000 cuts over 10 years.

    1. fredwilson

      i’d like to see a big cut upfront, but i think that may be counterproductive because of its effect on the economy

  46. Nic Fulton

    What proportion of the military funding goes to high-tech companies? I remember in the post dot-com bubble days that the survival route for start-ups was to turn to government, e.g. security, intelligence services etc. What’s the position now? In your portfolio do you have companies that draw from the military coffers?

    1. fredwilson

      not that i know of

    2. RAholt

      There’s another take on military spending that I’ll propose: it all just doesn’t go into a sink hole and evaporate.Salaries get spent. R&D makes its way into the public sector. Places like the Idaho National Laboratory (… create “interesting” software …I’m not saying that defense spending is effective or efficient but is does cycle back into the economy.

  47. thedavidlewis

    A quarter century ago, my Econ 1 professor at UC Berkeley explained Reganomics. President Reagan, he explained, had three goals:1) Cut taxes on the wealthy as he experienced 70%+ marginal tax rates as an actor. [DONE]2) Defeat the Soviet Union: While central control of the means of production didn’t work, it was Reagan’s massive increase in military spending that the Soviets couldn’t compete with that was one of the factors to bring it to its knees. [DONE]3) Cut “social spending” by the federal government: This was the toughest. Reagan could not achieve all of his goals in eight years and knew that this would be the hardest with Tip O’Neill as Speaker of the House. By cutting taxes and increasing spending, long-term deficits were all but guaranteed. With a long-term view, wait until the US could no longer afford social programs and they would have to be cut. We are well past that point. Bush II and the neo-cons ensured that.

  48. paramendra

    You hit the nail, Fred. The military has to be touched. Social Security and Medicare have to be touched. I Fixed The Budget, You Can Too

  49. Gopinath Subbaraj

    Fred, you know what is regressive, 15% tax for capital gains and 35% for earned income!. Thus the tax rate of you and buffett are less than half that of small business owners like me… I like deficit commissions suggestion to lower the top marginal tax rate to 24% and treat both earned income and capital gain the same!

    1. fredwilson

      just remember that i am re-investing the money i earned and payed ordinary income taxes oni could keep it under the mattress of course

      1. Gopinath Subbaraj

        Fred, in the same logic an argument could be made that S-corp owners like mine would not work hard or expand our business if our tax goes from 35% to 40% (which you are advocating!).Anyway i personally think that if capital gains is taxed at the same rate as income (but at a lower overall rate like 24%) it wont discourage investment…The individual US states are doing this anyway (tax income and capital gains at the same rate).

  50. jgn

    Stop lumping Social Security with health care.Here is a chart from the Perot organization, based on data from the GAO (similar data may be found from the CBO):…As a % of GDP, SS is NOT the big problem. The big problem is health care.Health care is THE issue.Health care needs to be cheaper, or the government needs to pay for less of it, or the government needs to raise taxes . . . or some combination of the three.Here’s another version of the point that SS costs are simply not rising in the same way as health costs, from the Director of the CBO: “Under current law, spending on Social Security is also projected to rise over time as a share of GDP, but much less sharply. CBO projects that Social Security spending will increase from less than 5 percent of GDP today to about 6 percent in 2035 and then roughly stabilize at that level” ( may be ideological reasons for wanting the government to get out of the social security business, but as a % of the nation’s output, it’s not the most significant problem.

    1. Peter Fleckenstein

      It would seem that upon looking at the perot chart it would be apparent that what you say is correct.However, once we get below the surface and understand SS at a deeper level then SS is a very big problem.There are ZERO funds in the Social Security Trust Fund. It is an unfunded liability. It always has been and always will be.There are no assets in the SS Trust Fund.The government projects the interest earned on these “assets”.They also project when these “assets” will be exhausted.There are no assets. The government is lying to you, me, and everyone.It is the largest ponzi scheme in the history of the world.I have some disheartening news for those who say that SS is backed by special Treasury bonds and therefore, they are assets – What assets were the special Treasury bonds issued from? Nothing. Zip. Zero. Nada. Zilch.So what we have is a black hole that government uses to confiscate more of our tax dollars.By the way, medicare & medicaid have the same “trust funds”. (Sorta getting the picture about one of the many reasons why there is so much medicare & medicaid fraud?)As for the CBO’s numbers – The CBO is told what to and how to calculate. You know like Enron did.The issue is the decades of Bigger Government operators continuing to confiscate as much of our money as they can for their own personal agenda.This has nothing to do with ideology. It has everything to do with willfully committing crimes against the people of the United States.Please tell me what CEO who did the above wouldn’t be perp-walked and in jail … for life.

  51. Dave Pinsen

    The political problem with deficit reduction is that the easiest thing to do is to ignore the problem as long as possible. If politicians are faced with the choice of enacting unpopular budget cuts and tax increases on the one hand, versus kicking the can down the road on the other hand, they won’t deal with the deficit until a crisis forces them to do so.The statesmanlike approach for President Obama would be to make the case for deficit reduction, and propose that the Bowles-Simpson budget proposals be enacted on January 21st, 2013, the day after the next president is inaugurated, unless an alternative set of measures to achieve the same goals has been signed into law before then. That way, the decision for pols wouldn’t be deficit reduction or no deficit reduction, but the Bowles-Simpson deficit reduction plan or another one.The president and his party could then craft and run on their version of deficit reduction legislation, and each of the Republican primary candidates could craft and run on theirs. And in 2012 the voters could decide which version they preferred.

    1. fredwilson

      great idea

    2. JLM

      Don’t you think that the last election, in great measure, answered that question?I am not interested in Presidents being statesman. I am interested in them being leaders whose party affiliation becomes irrelevant the day they report for work. They govern all Americans not just the ones that elected them.I am interested in Presidents who are willing to do the right thing driven by facts and numbers. Harsh facts and troubling numbers which have only limited solutions and which only get worse with time.We do not have 2 years to fool around with these issues.Why empanel a commission if you have absolutely no intention of even considering following their recommendations?We are at the economic equivalent of eating dessert first for 30 years.The problem is more the Congress than the President. The Congress has been on a spending binge for a quarter of a century. Both parties are implicated and both parties are culpable.That is why only the President can resolve matters and why it is so damn important that he deal with it absent the partisan baloney. I do recall some mojo about “post partisan” something or other?

      1. Dave Pinsen

        Actually, no, I don’t. And the Republicans who voted against the Bowles-Simpson deficit reduction plan seemed to agree.It’s one thing to have voters energized by the idea of deficit reduction in the abstract; it’s another thing to have them vote with specific proposals for deficit reduction in mind.The problem is that if only one party or candidate proposes a list of specific spending cuts or tax increases, their opponents can demagogue the issue without offering any bitter medicine of their own. The idea I mentioned above is a way past that. It’s statesmanlike in that sense.

  52. Edward

    Fred, great sharing! Can’t agree more with you. It is especially pleasing to hear from you that you are for tax raising. It’s sometimes kind of uncomforting to know of the fact that some of the rich do his/her best to avoid taxes.

  53. Frank Restly

    There is another option. Don’t worry about deficits, instead reduce debt.

  54. John Frankel

    Democracy is in a “bubble”.Seriously, it is delicate and has to be fought for unless you want to have representation without taxation. 48% of the population pays no Federal taxes and so has “no skin in the game”.

  55. Kevin S

    I really like the graph in this post: http://theincidentaleconomi…Basically, everything but Medicare/Medicaid just doesn’t matter long term. Social Security and the military are expensive, tax cuts are expensive, but they are relatively low growth problems. Medical expenses consuming an ever larger portion of the economy is a huge problem. Even just cutting that from the federal budget and pushing it onto private household budgets wouldn’t change the economic problem, growing healthcare expenses are consuming our economic growth.The big question is: how do we fix this?And my personal question is: how can small businesses and startups in particular change this.

    1. fredwilson

      yup, we have to get patients back to paying for their health spendingthere is no other way

      1. JLM

        You have hit the nail on the head. The current debate is not about health “insurance” it is about health care.You do not get all the bills paid for your car when you buy auto insurance — just the catastrophic stuff.That is how health INSURANCE should be structured. The individual pays for normal stuff and insurance provides protection for the catastrophic stuff.

  56. Philip Smith

    Fred, glad to see you bringing this up!The country – at Federal, State and City levels – has to get it’s fiscal house in order and this is where leadership will really count because these will be very hard things to do. It has been good to see Jerry Brown in California step up and start this dialogue at the State level – something Schwarzenegger did not do and Whitman would unlikely have done.While the components and the dynamics vary significantly at these different tiers of government the one thing Brown has not yet addressed is the State and City pension debacle. It is simply outrageous that a city manager can make $300,000 a year, and then retire at age 50 or 55 after 30 years of service at basically full pay or close to it. And in many cases these people then take another job while drawing the pension.Bruce Malkenhorst, a former city employee of Vernon, CA takes home – get this – over $500,000 a year in pension payouts! Just recently, several top-executives in the UC system have threatened to sue the University of California if it reneges on its deal to pay proportional retirement benefits to all UC employees who make over $245,000 a year – in other words at a time fee hikes have gone through the roof in a college educational system that used to be the envy of the world many senior UC executives who already make multiple 100’s of thousands have basically said to the State and the students “screw you, greed rules”.I may be wrong, but I believe a lot of the same thing happens at the Federal level. When I worked in the telecoms equipment sector we had a Federal business unit staffed largely by ex-military and civilian folks. Very good, they were. But outrageous that they were drawing full pensions from the Feds while being paid market salaries by us.I don’t begrudge the military, police and firefighters a good pension. But the double-dipping and so forth is just not acceptable, and these folks (as evidenced by their relatively young ages at retirement) can still contribute to the system they bail on.All your points on the Federal level – well taken! But if major changes are to be made to social security then I suggest this will go down a lot better if government at every level is mandated to put it’s own pension house in order as well. A good start would be to mirror retirement ages in all these roles to the same requirements as those to receive Social Security. No, I’m not expecting that a police officer stays on the beat at 66 or 67. But if we’re gonna pay him/her then why not be assigned to community outreach, or education programs, a desk job or something productive.Keep up the great work!Philip

    1. JLM

      The issue is not all pensions. The issue is abusive pensions.The big difference is the environment in which the pension is granted, how it was negotiated and how it was paid.When pensions are negotiated by blocks of people (such as AFSCME or educational associations or organizations), then the results are totally disconnected from the issue of the underlying economics and become a feeding frenzy.Start with the most fundamental consideration — why are these folks being paid so much in the first place? Why?Your example of the military is not a fair comparison. Military officers do not collectively bargain and do not have the ability to influence their retirement pay. They also go in harm’s way for $20K of life insurance. A pretty crummy bargain.The most important thing about military pensions is that they are not connected to the underlying compensation of the military. There is no connection between the pay a retired Colonel gets and what an active duty Colonel gets. If a soldier retired at 50% he gets 50% of the wage he received when he retired forever. Not a very good deal.There is no question that the issue of retirement age has to be addressed and now. This is particularly true when Senators are serving until they are in their 90s.

      1. Morgan Warstler

        The pension issue is almost entirely State and Local.And then there’s this: Total public employee compensation in 1998 (F,S&L) was $918B, twelve years later is $1.7T – that’s $500BILLION over the inflation adjusted dollars.This is my problem with all discussion about US deficits, until we see that $500B cut from Public Employee Compensation (headcount reductions and frozen salaries), it is ridiculous to discuss tax increases.My solution for cuts isn’t brutal either, in 7-12th grade, fire bottom 25% of the teachers – extra bonus the bottom 25% skew towards the older most expensive teachers riding it out for higher pensions.Tell the remaining 75% of the teachers they will now be working year round with class sizes 1/3 larger.And tell the students anyone who gets a D is attending summer school when they can get the kind of smaller class instruction they obviously need.

        1. JLM

          The Federal pensions are a huge mess because most of them start w/ only 20 years of service. I am perfectly sympathetic to a guy who has been a soldier and has endured combat and overseas unaccompanied assignments getting a pension at 20 years but not for guys who have been working for the FDA in a lab.The whole thing with teachers is simply the unions and suitable pay rates. I am very sympathetic to “good” teachers and think that merit based compensation is great but not tenured based compensation.The military is actually a meritocracy plus some guys get killed in combat thereby making a bit of room at the top.

          1. JLM

            Yes I did, thanks. It is a thought provoking article. I would use the word “innovator” rather than “entrepreneur” as one can be an innovator in the Army without having to really take any risks.BTW, I recently hired 3 former military WP combat veterans w/ MBAs. They are the best.One caution — looking at the opinions of WPs in regard to the military is like asking the Jesuits about the Catholic church. You get one very slanted view.The simple truth of the matter is that there is a huge meritocracy — albeit with a zero defects rating system — in which not everyone can be a General. This tension creates a bit of natural selection.When I was in, they had real promotion boards and the boards had to consider the top 5% of the lower grade for promotion regardless of how long they had been in rank. This resulted in some real fast movers in those days.What is missing in the article is the acknowledgment of the impact of military politics — assignments as a General’s aide de camp, White House Fellowships, teaching at WP, foreign branch specific assignments and your performance at military schools like Command & Gen Staff, War College, etc.I do think that much of the cream does get to the top in the military. David Petraeus is a consummate politician — married the Supe of WP’s daughter, aide de camp to Hugh Shelton (first Spec Ops Chairman of Jt Chiefs), Princeton PhD, rewrote the Army Counterinsurgency Manual when we were involved in 2-3 such wars. He is a thoughtful warrior scholar with perhaps a bit more scholar than warrior.

  57. Rick Wingender

    Fred, this is the best, and most important, post you’ve ever made. I’m posting this on my FB page next, and I hope everyone else does too. I agree with everything in the post. I would also add that we need to get tougher on companies that overcharge the government, and we need to put more people in prison for taking kickbacks, bribes, and other forms of financial corruption.

  58. Doug

    May I suggest you stick to venture capital. Your dull, repetitive static policy analysis is the pablum we have been served by blue state rich folk for 30 years or more. We need a complete overhaul in how we go about raising revenue for government spending. And we need to restructure our entitlements to account for changed demographics, life spans and affordability. Lastly, we need to restructure the balance of power moving more programmatic spending decisions to the states and localities. Shuffling the deck chairs as they say is not going to rebuild the country’s financial and strategic underpinnings. Innovation, change and “new business models” will. I would have thought you would understood that. Leave the Keynesian op ed pieces for the intelligencia to prognosticate upon.

    1. fredwilson

      may i suggest you learn some mannersi appreciate you have a different viewif you learn to express it politely and articulately, it might sway meand othersbut being an asshole won’t get you very far in life

      1. kidmercury

        gonna have to side with fred over doug in this beef. doug, an unfamiliar commenter, starting off with an insult…..not going to get very far. fred took the high road here, which, while boring, does ensure victory in the beef.

  59. Keenan

    I’ve read just about every comment here. This is exactly what this country needs, more dialog. It’s nice to see.One thing that was conspicuously absent was the definition of defense. It seems to me that the definition of military strength is morphing. It’s no longer just tanks and bullets but economic strength, national talent pool, technology and positive social culture.We aren’t doing well in any of these areas. Our economy is in the shitter. Our monopoly on talent is being threatened as immigrant students are returning home rather than staying here and those that want to stay struggle to get visas. We are still doing well in technology, but our social environment is fractured, angry, frustrated and disconnected. We’re less happy and giving than we’ve ever been.All the military spending in the world doesn’t protect us from internal decay.I suggest that in today’s world and tomorrows, brute force (tanks, bullets, etc) play a smaller role in the defense and strength of a nation.It can be argued that although China spends considerably less than the US, they don’t have to. They sit on a mountain of cash. They are experiencing a huge rise in nationalism and their talent pool is growing exponentially. Tank and bullets are of no threat to China.If I’m right here, investment in the Military Industrial Complex is not only costly, it’s not necessary. If we can agree on this hypothesis, we can start cutting the military budget without fear of vulnerability.Maybe the the best military, defense oriented thing we can do is STOP spending on the hardware and brute force efforts.

    1. fredwilson

      great points as usual Keenan

  60. Borisfowler

    Conversation is such a key part to bringing about change. I am a Political Science major at ASU and it baffles me that there is so much politics in politics. Let me explain. There is so much opposition in this country to move ideas forward that most of the time they just die.When someone, like Fred, proposes something like this that has a realistic shot at getting the US in a better position financially, something needs to be done to make that happen. I love the idea of putting money back into the economy rather than spending it on defense.I don’t think all politicians are corrupted, but I do not understand how personal gain and getting re-elected is more important than making a conscious effort to better our country.Anyway…I’m sure it will all be fine in the end.Boris

  61. Akira Hirai

    Fred – Your analysis is right on the money. Unfortunately, pragmatic voices like yours (and the Deficit Commission’s) are sure to be lost in the shouting match between the far left and the far right. Keep up the good fight!

  62. rogermushroom

    America has built it’s economy over the last half century by political and military intervention in other countries which has only been possible by it’s massive military budget. This intervention has allowed it maintain something of a stranglehold on the capitalist market which has provided a large source of income.China’s economy has grown so fast by approaching the world of capitalism by other means (some of them maybe construed as under handed or immoral) but it’s now a new world where the U.S have more difficulty wielding it’s power for income.For the U.S to make such large military spending cuts would mean a huge shift in the countries economic philosophy and present a risk (which is the reason for the resistance to the cuts), however it’s seems like a good time to make this change.

    1. Dave Pinsen

      Your first paragraph isn’t quite accurate. Keeping the peace in Europe and Northeast Asia for most of the last ~50 years has provided an economic benefit to the U.S., but it’s provided an even bigger economic benefit for countries in those regions (including China: absent U.S. naval hegemony in the Far East, China’s neighbors would be spending more resources arming themselves and less trading with China). Germany, China, Japan, South Korea, and Taiwan have all benefited from this American military spending, probably more so, on net, than we have.Long ground wars, such as the ones in Iraq and Afghanistan, haven’t provided any similar economic benefit to the U.S., (except to the extent that much of our spending on them constitutes a de facto domestic stimulus).As part of our world’s policeman routine, we also unilaterally dropped most of our tariffs after World War II, which has been a huge economic benefit to the world’s trade surplus countries. China shouldn’t expect that to continue much longer.Also, re using military force, it’s worth remembering that, since its founding, the People’s Republic of China has subjugated Tibet and fought wars with us and South Korea, India, and Vietnam, respectively.

      1. rogermushroom

        This isn’t how the the so called ‘project for the new american century’ neoconservative movement saw it and reagan for that matter. Rather than benefiting financially directly from the wars, some of the motivation behind the wars were to display U.S dominance in the world and to facilitate the introduction of companies into these countries, both of which were intended to have had indirect economical benefit. This was proved to not be an effective stance in certain situations such as in Iraq and Afghanistan which have far from gone as expected. I am not however saying that was everyones motivation.I believe it was concluded that tariffs weren’t an effective model for the world of globalisation and free trade, and the economic benefit to drop them far outweighed the income they generated. Protectionism doesn’t exactly encourage other countries to import your products, however you are correct this has had huge advantage to China who exports huge swathes of goods to the U.S.The China-Vietnam war finished very soon after Moa left and well before the huge reforms which eventually catapulted China into it’s current situation, so they had little sway and whats currently going on.This isn’t supposed to be a U.S bashing commet, I think the U.S have and still do make huge contributions to the world, but to cut military spending in such a way would require a big change in how they go about do this.

        1. Dave Pinsen

          The idea that the point of either the Afghanistan or Iraq wars was to “facilitate the introduction of [U.S.] companies into these countries” strains credulity. In the case of Afghanistan, it was (and remains) a fourth world backwater, with a puny economy (even taking into account its illicit economy). In the case of Iraq, the U.S. has gone out of its way to quell any such speculation, and nearly all the contracts to develop Iraq’s untapped oil fields ended up going to foreign countries. Even if those contracts had gone to U.S. companies, the war would have represented a net loss economically for the U.S., which has poured resources into building modern infrastructure in Iraq.There is a broader point here in that despite its world-spanning military engagements, the U.S. is in a sense an anti-empire. Throughout history, empires have extracted economic value from their conquests by demanding tribute. We have mostly done the opposite, spending inordinate amounts of money to build up countries, including ones that have turned into economic competitors.Protectionism, as Ian Fletcher has noted, vaulted the U.S. froma promising mostly agricultural backwater, pupil at the knee of European industry, into the greatest economic power in the history of the world.More from Fletcher on this:In the end, America only seriously turned away from protectionism as a Cold War gambit to prop up capitalist economies abroad and tie them to the U.S. Geopolitics trumped domestic economics. Ironically, our old protectionist playbook for economic development is the same one, in many respects, that China and other nations are using against the United States today. Back when we were the ascending economic power in the late 19th century, it was Britain that complained about “unfair trade!” They were right, of course—but given that nobody forced free trade upon them, it was their own fault. Today, having forgotten our own history, we can’t even recognize the game being played against us, let alone figure out how to counter it. We will continue to pay a high price in lost jobs and declining industries until we wise up.

          1. rogermushroom

            You seem to be being selective when quoting me and also incorrectly paraphrasing in parts.As stated the Iraq war did not go as planned, the bill was far greater than expected (and still growing), the plan was shock and awe with none of the mess afterwards, just a station in the middle east. Hence the financial discrepancy.The main drivers behind the Iraq war where members of the ‘Project for the new American Century’, who have made such statements as.”we need to accept responsibility for America’s unique role in preserving and extending an international order friendly to our security, our prosperity, and our principles.”Which directly contradicts a lot of what you have said.The lack of U.S company presence in the oil fields of Iraq wasn’t through lack of trying, but after the Oil Law legislation broke down and the Iraq government refused to negotiate with companies outside the oil auctions the acquisitions became less profitable.You quote from Fletcher who I guess is a pro protectionist economist, there are alternative views which claim U.S influence over other states enabled U.S companies to gain huge advantage in such areas as the aerospace, microchip and automobile markets to name a few, which in turn contributed directly to the American economy. I have already accepted that China has gained massively from the U.S interventions but this is something which has become most apparent in the last decade. This and the lack of success in recent wars may be a motivator for the U.S to reduce it’s military spending and adopt a different approach.

  63. Steve C

    I’d like to disagree with the implicit premises. Governments are not in business to make a profit, the returns on many programs are seen via increases in growth or benefits in terms of social stability. There are limits to the size of deficit you can run, of course, but (if my understanding is correct) even economists don’t quite understand where the line is.…The US is somewhere in the middle of the field if you consider the rich world. So at the moment there’s no budget crisis.Looking forward, apparently the ONLY thing that matters is growth in the Medicare spending:

    1. Steve C

      I posted a Debt-to-GDP map. If you’re interested in deficit-to-GDP:http://www.usgovernmentspen…There’s no doubt that TARP is mixed in there, and a spike in govt spending is to be expected during a historic economic crisis. If you look at historical trends the current deficit is not that exceptional.

  64. Ian Warner

    Fred,I am going to play a little devils advocate here:Since all federal reserve notes (the U.S. dollar) are debt, would not reducing deficit spending result in a contraction of the money supply? A contraction at precisely the wrong time? In your head imagine a significant amount of Federal spending, and those dollar deposits, removed from banks – banks who require those dollars as part of their reserve ratio to create more money (via loans).I would certainly like to reduce the spending of the federal government, but the void must be filled by something. A free market would be nice. Of course, neither you, nor I, nor any business or entity can survive perpetual deficit spending – the United States included.My conclusion is that the model is broken, and until we fix the model it won’t matter. How do you cure metastatic cancer?After the Fed’s latest round of quantitative easing, QE2, the Fed is now the largest holder of United States Treasury securities – surpassing China.Take a look:…What does that tell you?

    1. fredwilson

      that the situation is totally messed up and we have a crisis on ourhands and nobody is acting like that is the case

      1. Ian Warner

        Yes, well for us personally it means that equities and bond markets are being propped up via the printing of money. It prolongs the status quo. Cheap interest rates keep the housing markets from collapsing further and mortgage backed securities from further systemic default. How long can this continue? Who knows.One thing is for sure though, when interest rates rise it will be the end of the parade of speculation at the expense of savers. Since both entrepreneurs and VC’s exist in the equities market, it won’t make for the best exit environments.

  65. David

    I just want to note briefly, also, that a temporary extension of the tax cuts is precisely the worst option – it increases the deficit while being anti-stimulative.Let’s say you run a business, and have $100k left over after your expenses. You can pull it out now, or reinvest it so you can hopefully pull more out later. If you expect that tax rates will be higher in two years, you need to expect to make that much more on the money in order to justify hiring someone new or buying new equipment – the kind of spending that will actually make the economy work again. The “compromise” between the two parties was substantively worse than what was proposed by either, and amounts to just a transfer of money to the wealthy.

  66. foodtraveler

    Fred,While my political views are more conservative than yours, I support your position that there can be no untouchables allowed and taxes do have to go up to some degree. Thanks for having a more balanced and realistic discussion of the issue.Bill Camp

  67. Tomdorsey

    Fred, the only place you are dead wrong is that you think that increasing the taxes on those making over 200M single and 250M married will go unnoticed. You think that behavior will not change when you increase taxes on a particular group. History shows in ever case that what you tax you will get less of. Those in the high tax brackets will parry any move the government uses to increase their taxes. Fred, most of these people who you consider the rich are the Sub chapter S owners who hire most of the people in the U.S. Don’t think that if the tax is levied on this so called rich person he won’t find a way not to pay it himself. Say you are a Sub chapter S company and $150,000 dollars is available at the end of the year to give out to employees as bonuses. And say you increase X owner of the company an additional $50,000 in taxes. Who do you think will pay that tax? Now there will be $100,000 available to pay out in bonuses not $150,000. The employees ultimately pay. Increase capital gains taxes, and non capital gains investments will increase. You can in essence forget that $400 billion you would expect from higher taxes on people who have the resources to avoid the tax.

    1. fredwilson

      i didn’t say it would unnoticedwhy would you think that i would think that it would?

  68. kidmercury

    try the < blockquote > tag instead.