Plan to Cut the U.S. Federal Budget Deficit Draws Strong Response From Money Morning Readers

[Editor's Note: When it comes to explaining the interaction of politics and business, Money Morning's Martin Hutchinson is without peer. In an open letter to U.S. President Barack Obama and members of Congress that appeared Wednesday, Hutchinson outlined a five-point plan that will essentially save the U.S. economy. We encourage you to forward that plan to your elected representatives.]

Today's lead story in Money Morning - "An Open Letter to Washington: How to Slash the Federal Budget Deficit and Save the U.S. Economy" - is generating the strongest response of anything we've published in recent months. In that piece - essentially a political/economic commentary - Money Morning's Martin Hutchinson outlines a broad five-part plan for attacking both the federal budget deficit and the soaring national debt.

The commentary, written in the form of an "open letter" to U.S. President Barack Obama and members of the U.S. Congress, has already been widely syndicated and is generating scads of comments and e-mail responses.

We even urged readers who agree with all or most of it to say so by forwarding it to their elected representative in Washington.

It's no surprise that the column has generated such strong interest. As a former international merchant banker and financial advisor, Hutchinson has an engaging way of highlighting the top issues in the global marketplace. But given all this interest, I thought I would take a few moments to share with readers some of the questions and comments - as well as some of the criticisms - that we received.

However, before I do so, allow me to make this key point: I have said many times - and in many different forums - that the Money Morning readership base is smart, well-informed and passionate about the key issues of the day.

The comments posted today (Wednesday) make that point even better than I could. Money Morning welcomes constructive comments - both pro and con. So please continue to write. Thanks to everyone who's already done so.

So let's get to the comments...

Time to Cut

Reader Jack McMenaman suggested that the time has come for federal job cuts. That suggestion certainly merits consideration. Corporations must control spending and expenses during tough times. Government should be no different. And the U.S. federal government needs to be refocused into a leaner, more efficient organization. The time to act is now.

Job cuts could well be part of the equation in terms of the $150 billion in immediate net spending cuts that Hutchinson has called for. Great points.

Albert Bentley, a reader from Australia, wants to see a greater sense of urgency from America's elected officials. He's absolutely correct in urging both Congress and the Obama administration to take Money Morning's suggestions very seriously.

[It's great to hear from readers "down under." As an aside, I should tell you that as a career-long journalist who's very interested in global investing trends, I've for years been a regular listener to world-band (shortwave) radio broadcasts. And Radio Australia is one of my favorite listening targets.]

Hutchinson makes the point that now is the time to act on this plan to streamline and refocus the U.S. federal government. That's not because it's convenient to do so. It's because - as you point out - we are on the verge of losing control. This is the United States' last best chance to fix its federal finances.

If we put this off much longer, the national debt will be too large to attack - sentencing this country to a future as an economic also-ran.

Power Play

Alchemists of Loss
One reader took strong exception to Hutchinson's call to make the economy work better by removing "the subsidies for agriculture and "green" energy, especially the combined subsidy and tariff for corn-based ethanol."

Unfortunately, this particular reader took that to mean that we were calling for an end to any and all green-energy/alternative energy initiatives.

Nothing could be further from the truth.

Ironically, we found that we actually agreed with most of the points that this particular reader made in his note to us. And it helped that another reader, Jon Volz, actually stepped in to clarify our points.

You see, as Volz quite articulately noted, we're not advocating an abandonment of green-energy initiatives. We just want Washington to abandon subsidies and incentives that are unrealistic, don't make economic sense or fail to address the urgency of the situation.

In fact, we believe this country should be putting together a national energy policy that's akin to a full-court press - taking advantage of any and all real opportunities that are out there. Not only is a commitment to other forms of energy necessary from a U.S. economic standpoint, it's also one of the greatest profit opportunities for individual investors in the years and decades to come.

So I think we're actually on the same page as this reader, despite his criticism.

Death by Debt

Reader Jeff Pluim really liked Hutchinson's plan for rescuing the U.S. economy - with one exception: He strongly disagrees with our call to end the tax-deductibility of corporate debt.

With any individual news story, commentary or investment analysis story, there's only so much space available. And that means that we can't always go into as much detail as we'd like to.

This portion of Hutchinson's plan is one such case. So I took this opportunity to better make our case to this reader.

Pluim's big issue with this proposal is that such a change in the tax code would hammer the U.S. small-business sector.

"As a small businessman, and with deep connections into the small business community, I know that small businesses do not expand using their own capital. They borrow it," Pluim said. "Small business is a huge factor in the creation of new jobs. If a small business cannot deduct the cost of borrowing, then any expansion is going to wait a long time. The negative effects on an economy that is already suffering would be substantial."

We agree that small business is the No. 1 creator of new jobs and is also a key engine of U.S. economic growth.

When it comes to the tax deductibility of corporate debt, our big issue is with major corporations that overleverage themselves. The tax code nurtures this - and so does Wall Street, thanks to all the fees it collects from helping companies issue "high-yield" debt (i.e. junk bonds).

It's almost as if whatever small business gives us, overleveraged corporations taketh away.

As a career business journalist, I think back to the leveraged buyout ("LBO") craze of the late 1980s, when iconic movie character Gordon Gekko's comment that "greed is good" had theater audiences nodding in agreement.

It's no surprise that this financial frenzy was followed by the "corporate-downsizing" mania of the early 1990s, which led directly to the "jobless recovery" and slow-growth economy of the first half of that decade.

Big companies overleverage themselves during fat times, but don't build in a margin of safety for the downturns that inevitably follow. Then when the economy sours and these firms can't cover their interest payments, they need to embark upon a slash-and-burn cost-cutting spree, which typically involves scores of layoffs.

In fact, the term "layoffs" is a misnomer. Smart journalists stopped using that term when companies announced the job reductions and just started using the term "fired." After all, these aren't "layoffs" in the classic, temporary-furlough sense - these are jobs that once cut are never coming back.

This creates a whipsaw effect on the economy that's not healthy. And that's not all - the fallout extends into the financial markets, too. During healthy periods, investors grab high-yield ("junk") bonds for their hefty yields, and stuff them into the income portion of their portfolios.

As we saw last year, this tends to turn into a bit of a financial frenzy. Very often, investors forget that junk bonds are supposed to be riskier than corporate or government debt, and so we see investor risk aversion disappear (by that, I mean that investors start to regard these junk bonds as near-replacements for government bonds or top-grade corporate debt). When the economy sours - as it eventually always does - junk-bond prices collapse, investors get scorched and the overall economic malaise deepens.

Nonetheless, reader Pluim's comments are valid. And I'm confident that there's a way to address both of these needs.

Drill Here, Cut There

Reader Greg Hansen presented us with a veritable shopping list of suggestions and comments - almost too many to fully address. So I opted to address the points that appeared to be the most relevant, or that featured the greatest urgency.

On the energy front, Hansen urged our elected officials to "drill here, drill now (and to) build nuclear power plants." As I noted above, Money Morning believes that a full-court press on the energy front is definitely a front-burner need. Great comment.

In terms of ways to cut spending and other things that contributed to the budget deficit, Hansen said to "stop all subsidies, especially to foreign governments. Stop the war and rebuild our defenses Eliminate job-killing agencies like the EPA." Hansen also said it was time to "cut congressional salaries and their budget in half - they caused the problem."

I told this reader that "some of the spending cuts you advocate should certainly be in the mix in terms of the $150 billion in spending cuts that Hutchinson says Washington needs to find immediately." And Hansen's intimation that there needs to be an overall streamlining and refocusing of the federal government is right on target, too.

Nicely done.

Tobin Tax Advocate

As part of his U.S. deficit-reduction plan featured in yesterday's column, Hutchinson urged U.S. leaders to implement a small "Tobin tax" on Wall Street transactions, which would sharply reduce rent-seeking "fast trading" and derivatives activities.

Reader Michael Hullevad wrote in to agree, stating that "a Tobin tax of 0.50% will not hurt the public very much. It will cost the "banksters" a lot more than they like to admit!
Putting a tax on gasoline - of perhaps 50% to 100% - would (also) be a very good idea, slashing consumption to a more sustainable level. I know how much people love their V-8 trucks, but it does not take more than a ‘four-banger to get to work. In fact, I find it highly patriotic to use as little imported gas as possible."

I told Hullevad that he's "clearly a regular reader of Money Morning, and of Martin's columns in particular. Martin is a big advocate of a Tobin tax. He's written several columns about it; in fact, late last year he actually wrote an open letter to Washington advocating just such a move. We're big believers in the potential benefits that a Tobin tax could bring. Well done."

More in Common Than Not

A reader who identified himself as Sebastian Milito criticized our debt-reduction plan for points he said that it failed to make. In lumping us in with mainstream media "pundits," however, it quickly became clear that almost all of these alleged shortcomings had to do with topics or assertions that Money Morning has done a terrific job addressing - and in many cases even predicting them well ahead of time.

Here's an excerpt from my response.

"Thanks for the note. Actually, despite your claim that we're not addressing the issues, the issues that you've outlined sound like a story list out of the Money Morning news archive. The fact is that we've addressed virtually all the topics you've listed here - and many more besides."

The war? We've said again and again - going back to the previous administration - that this government needs to make some tough choices about how it's spending its money. Our activities in the Middle East are among those choices that must be addressed.

In today's piece, Hutchinson said the federal government has to immediately identify $150 billion in real spending cuts. We didn't specifically say what those cuts should be. The point that I think you need to understand here is that space for individual stories is limited, and this one had to cover a lot of ground. But if you look at our cumulative news coverage, commentaries, special reports, investment analyses, reader-service stories and economic-outlook series, we've drilled down into the details time and again.

China? For years we've been imploring our elected leaders to look at the wheeling and dealing that emerging superpower has been engaged in while we spin our wheels and try to force other countries to act as we want them to before we'll sign any contracts. Indeed, one very recent series of stories noted that China and other Asian countries are snapping up oil properties right here in North America - in Canada, which is literally right under our noses. Those opportunities were there for the taking - right in our backyard - for years. Now many of them are locked up for decades. And we'll see no benefit.

As for unbridled greed - we've been harder than anyone on Wall Street and its "profit-at-all-cost" mentalities. In fact, Hutchinson was actually one of the very first writers to warn of the ticking financial time bomb known as credit default swaps. He wrote about that in April 2008 - that's about six months before the global financial crisis hit like the economic tsunami that it proved to be (to show that I'm not spinning a yarn here, click on this link to see the story Credit Default Swaps: A $50 Trillion Problem).

That's just one example - I could list many more. And I could continue to address some of your other criticisms here, but it would prove to be more of the same.

After urging this gentleman to become a regular reader of our content, I closed by stating that Money Morning has "developed a reputation as being a very prescient news organization, as well as one that's not at all afraid to take on vested interests."

We Seek Your Support

Take some time to look at Hutchinson's column - "An Open Letter to Washington: How to Slash the Federal Budget Deficit and Save the U.S. Economy." If you agree with all - or even most - of what we say, consider forwarding it to your elected representative. The instructions on how to do so are posted at the end of the story.

Readers may also write to us at [email protected].

Action to Take: Support our campaign to have the Obama administration and the U.S. Congress enact the spending cuts and achieve the needed revenue increases that will bring about meaningful reductions in the U.S. federal budget deficit - thereby keeping this country from amassing the $20 trillion debt load that many forecasters are currently projecting.

If you wish to do so, we urge you to contact your elected representative in Congress right away. Here's what you need to do.

Step 1: Read today's Money Morning column by Martin Hutchinson: "An Open Letter to Washington: How to Slash the Federal Budget Deficit and Save the U.S. Economy." If you agree with all - or even most - of what we say, consider forwarding it to your elected representative. To find out who your congressional representative is, and how to contact them, please click here (Website address is: ).

Step 2: You can pen your own cover letter. But you should also feel free to cut and paste the model e-mail note that we've displayed just below.

In either case, we suggest using the following subject line (by using a consistent subject line, Congress will understand that a true taxpayer campaign is underway).

Subject Line: Attack the Deficit Now

Step 3: Make sure to include a link to today's "open letter" in Money Morning.

Step 4: Lastly, drop us a note to let us know that you've joined us in taking steps to fix this country's budgetary and economic problems. Write to us at [email protected].

Feel free to use this letter:

Dear [Decision-Maker],

I am writing to urge you to attack the federal budget deficit and to avoid a nightmarish future in which the once-great U.S. economy is being crushed by $20 trillion in federal debt.

I realize that this involves tough choices. But I also understand that by taking a consistent, measured, long-term approach now, we can avoid a future marked by tepid growth, perpetually high inflation and unemployment and a complete lack of global economic competitiveness.

The accompanying open letter, published by the global investing news service Money Morning, details a five-point plan that employs such an approach. As a member of your constituency, I urge you to read and carefully consider this plan, to dispense with the usual political game-playing, and to act with the urgency that this dire economic situation demands.

For more information on how this combination of spending cuts, carefully chosen revenue increases and key moves by the U.S. Federal Reserve will help the American taxpayer, please read this recent commentary published by Money Morning:



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About the Author

Before he moved into the investment-research business in 2005, William (Bill) Patalon III spent 22 years as an award-winning financial reporter, columnist, and editor. Today he is the Executive Editor and Senior Research Analyst for Money Morning at Money Map Press.

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