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SKARBECK: Getting out of a hole requires digging by all

July 2, 2011

Ken Skarbeck InvestingThe headline in The Wall Street Journal the other day said it all: “Debt hamstrings recovery. Inability of nations, consumers to get out of hock weighs on global economy.”

The article notes that, today, U.S. consumers have more mortgage and credit-card debt than they did five years ago. The debt problems at the federal and municipal levels are well-known. The U.S. government debt-to-GDP ratio will hit 100 percent this year, up from 62 percent in 2007, according to the International Monetary Fund. And, of course, the European debt problem is worsening.

This overhang of debt is likely to take years to work off and will prolong the slow, patchy recovery before the global economy finally gets back to full health. Interest rates may remain low for a much longer period than usual.

As much as we all complain, there isn’t any magic wand a politician can wave to immediately cure the problem. The credit crisis exposed the unsustainable spending, pensions and entitlement policies of the federal government.

Politicians that have taken the cleaver to government programs could suffer the voters’ wrath. New Jersey Gov. Chris Christie just signed into law sweeping changes in the state’s pension and health benefits that will save an estimated $130 billion over 30 years. Once fully enacted, a New Jersey state employee making $70,000 a year will pay an extra $5,000 for family health care and make $1,100 more in pension contributions. In addition, the minimum retirement age was increased to 65 from 62, and cost-of-living increases were frozen. Recent polling shows more than half of New Jersey residents oppose Christie’s re-election.

We live in a fantasy world if everyone thinks we need to cut back on spending unless it affects them. This is where our political leadership is going to earn its pay, because the constituency that is on the receiving end of the government’s dollar will always complain about any cuts to their programs.

And, while Christie made some enemies with his high-profile battle with the teachers’ union, where he and other Republicans are dropping the ball is their stance on taxes. Christie’s decision to let a surcharge on New Jersey’s highest-earning taxpayers expire riled state Democrats.

There has been talk about reforming the tax code to eliminate some of the many deductions and credits, but whatever action is taken it should be revenue-positive—in other words, a tax increase.

Many have heard the saying, “There is no ‘I’ in team.” Frankly, that is where the country sits right now, as one giant underperforming team. And we need a coach who will demand a little sacrifice from all the players so we can become a great team again.

Both sides need to give up a little bit of their turf.  Democrats have to consent to spending cuts and Republicans have to allow for some taxes to increase, all for the greater good of the team. We may not like it, but our kids and generations to come are depending on it.•

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Skarbeck is managing partner of Indianapolis-based Aldebaran Capital LLC, a money management firm. His column appears every other week. Views expressed are his own. He can be reached at 818-7827 or ken@aldebarancapital.com.

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