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July 31, 2012

Signs of the Coming Socialist Apocalypse

A while back the Editorial Staff raised the intriguing possibility that we are nearing an economic tipping point that will motivate progressives to support cuts in entitlement spending:

What if the solution to our current economic difficulties turns out not to be a top down, but a bottom up solution? Stories like this suggest that a sea change in the way Americans think of government is more likely to flow organically from current events than from political rhetoric...

What interests me here is the suggestion that even the most ardent supporters of big government can be persuaded to support cuts in entitlement spending, once it becomes apparent that such cuts are necessary to ensure the survival of the social safety net. What if all We the People need to unite behind sensible budgetary reform is a powerful object lesson?

As if on cue, here's Bill Keller in the NY Times:

We are an entitled bunch.

This brings me to a soon-to-be released study by the incorrigible pragmatists at Third Way, the centrist Democratic think tank. The study takes a familiar refrain and presents it with a graphic wallop. Though it was intended as a wake-up call, not an indictment of a generation, it can be read as both.

The authors examined two categories of federal spending over the past 50 years, representing two of government’s fundamental missions. One was “investments,” which includes maintaining our national infrastructure, keeping our military equipped, helping assure that our work force is educated to a high standard, and underwriting the kind of basic scientific research that is too risky or long-term to attract private money. The report calls this the legacy of President Kennedy’s New Frontier, though the largest infrastructure project in our history, the interstate highway system, was Eisenhower’s baby, a reminder of the days when Republicans still believed in that stuff. The other category was “entitlements,” a catchall word for the safety-net programs that provide a measure of economic stability for the aging and poor: Social Security, Medicare, Medicaid, etc.

You will not be surprised to hear that the red line tracking entitlements goes up while the blue line reflecting investments goes down. What is alarming is the trajectory.

In 1962, we were laying down the foundations of prosperity. About 32 cents of every federal dollar, excluding interest payments, was spent on investments, only 14 percent on entitlements. In the mid-70s the lines crossed. Today we spend less than 15 cents on investment and 46 cents on entitlements. And it gets worse. By 2030, when the last of us boomers have surged onto the Social Security rolls, entitlements will consume 61 cents of every federal dollar, starving our already neglected investment and leaving us, in the words of the study, with “a less-skilled work force, lower rates of job creation, and an infrastructure unfit for a 21st-century economy.”

His op-ed contains the raw materials of a powerful argument, especially when combined with Obama's recent "you didn't build this" gaffe. The catch 22 is that no matter which way you take the President's comments, they are damaging.

If you believe Obama meant that business owners didn't really build their businesses, that's bad enough. But if you believe the President was referring to the infrastructure needed to support prosperous free markets, it's even worse, because this makes it painfully obvious that his administration is charging in the wrong direction at breakneck speed:

crowding out.png

We looked at public investment since the 1950s and compared investment levels to the economy’s average rate of growth. We saw that periods with high levels of investment experienced higher growth, and as investments declined, so did our economy’s rate of expansion. Investments averaged roughly 5% of GDP in the 1950s and 6% in the 1960s. These decades were marked mostly by robust growth. Following the height of public investment in the 1950s and 1960s, our nation’s economy grew at an annual average of more than 3% from the 1960s through the 1990s. As we’ve devoted a dwindling share of resources to priorities like cutting edge technologies and better roads, however, economic growth has declined. Our growth rate fell below 2% in the 2000s, and CBO projects growth rates around 2.3% in the coming decades. While we understand that there are numerous factors affecting the nation’s growth, this overall trend threatens middle class opportunity and our nation’s ability to compete and prosper.

This is a winning message for conservatives, as it allows them to tie misplaced government spending to economic decline. When the former editor of the NY Times writes, "We should make a sensible reform of entitlements our generation’s cause", clearly the political ground is shifting beneath Obama's feet.

Posted by Cassandra at July 31, 2012 07:35 AM

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Comments

I thought the folks at FireDogLake would have apoplexy over that OpEd. It's 100% clear to them that the problem can be fixed up by a combination of confiscation of wealth from rich people and enlightened monetary policy. But I hope you're right that the middling-mass of the country is moving in this direction.

Posted by: Texan99 at July 31, 2012 10:03 AM

"This is a winning message for conservatives, as it allows them to tie misplaced government spending to economic decline."

J.E.H. Reads Priority Flash Message from White House to all MSM/Public facing entities for distribution:

We inherited these failed policies from IKE!

Posted by: J. Edgar Hubris at July 31, 2012 11:54 AM

He's proceeding from a misunderstanding: The authors examined two categories of federal spending over the past 50 years, representing two of government’s fundamental missions.... The other category was “entitlements,” a catchall word for the safety-net programs that provide a measure of economic stability for the aging and poor: Social Security, Medicare, Medicaid, etc.

This, as it's currently constructed, is not a part of the mission of government. Government has a role as a last resort to provide subsistence to those few who still need help after their own, their family's, the local communities, charity and church resources have been fully committed. Even FDR's original structure of Social Security was one of supplemental income, not replacement income.

Obama's recent "you didn't build this" gaffe.

That was no gaffe--that was one of the few times Obama actually told the truth about what was in his heart.

Other than these quibbles, though, Keller has made a powerful argument for the benefits of a free market and provided a clear description of how government has gotten in the way of the welfare of us all. This isn't all on Obama, either; he's only the one currently in power, and the one who's acted sufficiently overtly that we're starting to wake up. This has been a failure of Democrats generally, and of Republicans.

Eric Hines

Posted by: E Hines at July 31, 2012 12:04 PM

The New York Times uses the word "sensible" in an interesting way. You are left to wonder, when they talk about "sensible gun control" just what that might mean in practice. The NRA is generally not convinced to abandon its opposition because of the NYT's sensibility; we'll have to see, I guess, if the AARP is readier to abandon its interests.

Keller talks about solutions toward the end of the piece, although he dismisses the Republican ones because (a) they are about privatization, and (b) the savings from reform might not get plowed back into "investments." Thus, what he's really saying is not that we need to cut spending; it's that we need to re-prioritize spending.

Even if liberals were able to overcome the entrenched opposition in order to follow Keller's lead, then, the problem doesn't get any better: they believe we can continue to spend, as long as we cut here to spend there. The whole motivation is a desire to increase spending, at least on a favored category of "investments."

Meanwhile, the government red-ink spends more than forty-two thousand dollars per household in a nation where the average per-household income is only forty-nine thousand. "Federal debt and retiree commitments equal $561,254 per household. By contrast, an average household owes a combined $116,057 for mortgages, car loans and other debts."

The problem isn't merely that people can't or won't see that this isn't sustainable. The deeper problem is that the only reforms that are really "sensible," given the scale of this problem, are opposed by powerful and entrenched interests.

The probability of electing a Congress with the guts to defy every entrenched interest in America, and the capacity to sustain political will from Americans even after they start feeling the pinch of slashed benefits and goodie-programs, is quite small. The probability that we'll reach a political crisis looks much, much larger. That's not to say we should stop trying to explain the problem and elect the Congress. It's just an assessment of what's most likely to happen.

Posted by: Grim at July 31, 2012 12:28 PM

Actually, Keller doesn't believe we can continue to spend at our current rate. That's not what he's arguing here:

Some of the growth is built into formulas that increase benefits faster than inflation or G.D.P. And a lot of it is us: boomers, aging into Social Security and Medicare. “We’ve reached the point where our working-age population over the next 30 years grows by one-fifth, and our elderly population grows 100 percent,” said Jim Kessler, the senior vice president for policy at Third Way.

Indignant readers are already revving up to tell me that Social Security and Medicare are sacred promises, that cutting them would be stone-hearted Republicanism. A.A.R.P., the lobby for people we used to call senior citizens until we realized that meant us, got hammered by the left earlier this year when its C.E.O. dared to convene a meeting of Washington insiders to even discuss the subject. No wonder A.A.R.P. shies away from supporting any entitlement reform.

But the traditional liberal alternatives — raise taxes on the well-to-do, cut military spending — are not nearly enough by themselves. The arithmetic simply doesn’t work, unless we face the fact that entitlements are a bargain we can’t afford to keep, not in full.

So the question is not whether entitlements have to be brought under control, but how.

*****************

That's a startling admission for a progressive. And while it's not yet where we need to end up, it's a start. re: this, I don't agree:

what he's really saying is not that we need to cut spending; it's that we need to re-prioritize spending.

He first argues that current entitlement spending is unsustainable. You simply can't get to the conclusion that he's not talking about cutting spending.

He's talking about cutting (because current spending levels aren't sustainable) AND re-prioritizing (because the mix is wrong).

Posted by: Cassandra at July 31, 2012 12:36 PM

He first argues that current entitlement spending is unsustainable. You simply can't get to the conclusion that he's not talking about cutting spending.

Well, there's entitlement spending, and then there's spending....

Eric Hines

Posted by: E Hines at July 31, 2012 05:57 PM

...there's entitlement spending, and then there's spending.

Show me where Keller argues we can spend the same total amount, and I'll be happy to discuss.

One could make the argument (though this is not actually something Keller argues) that spending less on entitlements and more on infrastructure - IOW, spending the same total amount, but changing the mix would be likely to boost growth and therefore revenue.

In that case, though total spending would remain constant, spending as a % of GDP would decrease. I would argue that this amounts a decrease in spending, albeit in relative terms. A simple example will illustrate:

You spend $100 a month on entertainment. Is that "too much"? Is it "unsustainable"?

Not enough information, because we don't know how much you have to spend. If you're Mitt Romney and your income is several million a year, $1200 on entertainment is sofa change.

If your disposable income won't cover $100 a month and you are paying for it anyway with money you don't have (going into debt), that's both too much AND unsustainable.

But it's a moot point because interest on the debt (past deficit spending) is continuing to grow and thus we have a sustainability problem regardless of what the money is spent on. I suspect even Keller would acknowledge that.

Posted by: Cassandra at July 31, 2012 06:27 PM

He's actually not talking about cutting entitlement spending there anyway; he's talking about slowing the rate of increase by adjusting the COLA process downward (or, as he puts it, "aligning the automatic cost-of-living formula with reality").

There are some of what he calls "incremental cuts," in the sense of raising the retirement age or asking wealthier citizens to accept less. Those are both good ideas; but the question is, as Mr. Hines says, whether he means for those cuts to be cuts, or whether he just wants to cut from here so we can increase there. Here's what he says about it:

"And it’s not at all clear the Republicans would assign any of the savings to investing in our future."

So... maybe some of the incremental cuts might not get reassigned to new investments? Meanwhile, we continue to increase entitlement payments, but at a slower rate than before.

Let's say we take them up on this compromise. Back up whatever kind of cuts you can get, let them re-invest a certain amount of it, but ask that there be a final baseline cut as our part of the compromise. How do we get from there to fixing the problem of households being on the hook for 89% of their annual income in additional debt? If they manage to cut the rate to 75%, that'd be a victory of a sort, but it still means that the government is red-ink spending at an extreme scale.

And that's just spending at current levels, before the bulk of the Boomers go onto these programs. The costs are about to explode; but every year we add to the national debt, we also add to the next year's required debt service expense. If we can't actually get below receipts, so that we have a budget surplus, we're still on that glidepath to destruction.

Tex's FDL people at least understand that there's no way to do it through income tax increases -- they're wanting to institute a new type of tax, a "wealth tax," that allows them to go after anything you have left from the last thirty years of earning money. That gets us out of the trap that I'm already paying 15%-20% of my income in taxes, but the government is spending 89% more of my income; you can't raise income taxes to 109%. You can come after my total net worth, though; and if that means I have to sell my house to pay the 'wealth tax,' well, I should have been paying more taxes all along anyway. I should just be grateful to have gotten to live in such a nice house for a while, since really my having the money to own it was a form of theft from the state.

Posted by: Grim at July 31, 2012 06:34 PM

"And it’s not at all clear the Republicans would assign any of the savings to investing in our future." So... maybe some of the incremental cuts might not get reassigned to new investments?

No, that's not what he's saying.

He's not willing to cut entitlements if NONE of the cuts are redirected to investment. This is the literal meaning of saying that Republicans might not invest *any* - even a part of - the savings.

IOW, he's not willing to trade something for nothing.

Let's say we take them up on this compromise. Back up whatever kind of cuts you can get, let them re-invest a certain amount of it, but ask that there be a final baseline cut as our part of the compromise. How do we get from there to fixing the problem of households being on the hook for 89% of their annual income in additional debt?

Well first of all, I'm not sure where this 89% is coming from Grim. Is that 89% a year, every year? Or are you treating this as though 75 years of deficit spending had to be paid off all at once?

If they manage to cut the rate to 75%, that'd be a victory of a sort, but it still means that the government is red-ink spending at an extreme scale.

Keller answered your question: he says that in addition to cutting spending, revenue must go up.

Which is the point of that tax graphic I put up a while ago. There's no getting around the fact that the current highest marginal tax rate is far lower than it has been at many other times in our history (though the point at which it kicks in is lower as well). But as Keller points out, taxing the rich alone won't solve the problem. The math doesn't add up.

You seem to be ignoring that admission.

As for the FDL folks, are you seriously suggesting that such a tax would pass Congress? You're the one who's always talking about wealthy special interests - I'm surprised to see you taking Firedoglake seriously on anything.

Posted by: Cassandra at July 31, 2012 07:05 PM

Show me where Keller argues we can spend the same total amount....

Actually, he avoids the argument altogether. Even the alternatives he mentions are others' alternatives, not his own. He does, with suitable nebulosity, suggest that we boomers "make a sensible reform of entitlements our generation’s cause," insist that AARP et al., lead--somehow, somewhere--and "keep the heat on Congress and the president to double down on the cost-saving provisions in Obamacare--"which are proving daily to be nonexistent.

On the other hand, where does argue that we cannot? My point, on the other hand, was that our government has shown no penchant for actually reducing spending. As Grim has pointed out [are we tag-teaming instead of contesting now? The Apocalypse...] the "reductions" mentioned by Keller are not cuts, but merely reductions in the rate of growth--in fine, not cuts at all.

The Republican plan...would cut the cost of entitlements largely by moving toward privatization: personal investment accounts for Social Security, vouchers for Medicare. And it’s not at all clear the Republicans would assign any of the savings to investing in our future.

Here, Keller misses an enormous point. That privatization is the largest investment government can make: returning our money and our duties to us, rather than usurping both to itself.

Finally, One could make the argument...that spending less on entitlements and more on infrastructure - IOW, spending the same total amount, but changing the mix would be likely to boost growth and therefore revenue.

In that case, though total spending would remain constant, spending as a % of GDP would decrease. I would argue that this amounts a decrease in spending, albeit in relative terms.

I wouldn't. If my income doubles, but my spending increases by 50%--or stays the same--I'm spending more now than I was, or the same amount, in any sense of "increase/decrease." The only thing my spending:income ratio indicates is how much I can afford that increase in my spending, or how much I can afford that constant spending.

Eric Hines

Posted by: E Hines at July 31, 2012 07:11 PM

My point, on the other hand, was that our government has shown no penchant for actually reducing spending. As Grim has pointed out [are we tag-teaming instead of contesting now? The Apocalypse...] the "reductions" mentioned by Keller are not cuts, but merely reductions in the rate of growth--in fine, not cuts at all.

That's not actually true, though. Raising the income cap and the retirement age are cuts.

The only thing my spending:income ratio indicates is how much I can afford that increase in my spending, or how much I can afford that constant spending.

Hellooooooooooooo.... :)

It would affect whether you have to borrow to finance current spending, and whether you have enough disposable income to pay down current debt. Yes, let me forestall you -- Congress will never do that, ever. There is no chance of it happening.

Our only alternative is to retreat to our respective corners and refuse to budge.... which is where we are now.

Not a solution.

Posted by: Cass at July 31, 2012 07:18 PM

Hellooooooooooooo.... :)

Howdy. Glad you recognize that a reduction in % GDP isn't an actual reduction.

...retreat to our respective corners and refuse to budge

Not exactly. The (Republican) House has passed a number of bills that address our current economic malaise. The Republicans of the Senate have tried to bring these, and ideas of their own, to the floor for debate. It's the Do-Nothing Democrat-controlled Senate that has refused to budge. It's also the Democrat President who's threatened veto of bill after bill--without even knowing the contents--if they don't include his personal demands. He won't even brook passing a bill so that he can see what is in it.

You've decried this impasse for some time. What's your solution?

Eric Hines

Posted by: E Hines at July 31, 2012 07:36 PM

Well first of all, I'm not sure where this 89% is coming from Grim. Is that 89% a year, every year?

Yeah, it is. I think my mental math is wrong, and it's closer to 86% than 89%, but I was thinking of the number cited here: "The government red-ink spends more than forty-two thousand dollars per household in a nation where the average per-household income is only forty-nine thousand."

So, if we're going to fix this with income tax increases, we're going to need a little more than another 42 thousand dollars a year from each household (on average). Every year. For current spending levels.

Since you're already paying 15-20% of your income in taxes, most likely, you may actually not be able to produce another 86% of your income in taxes if you're in one of those many houses sort of near the middle. But even if you could, that just gets us to sustainability at current spending levels. It doesn't begin to address the entitlement issue, which is going to explode as the Boomers retire.

If we don't get to a surplus, in addition to the rising costs of entitlements, we also have a year-by-year increase in the cost of debt service. And, just to make the picture a little worse, this assumes that interest rates stay at historic lows. If the cost of borrowing goes up, the debt service cost goes up with it.

Why is that important? Keller makes the point that GDP growth rate is rather low right now. But if the economy improves, interest rates will rise. In other words, there's no 'growing out of it' solution either. If we get the growth we need, our debt will explode.

We've got to get to budget surplus -- not against current spending levels, but against whatever we finally decide is the maximum we are going to spend on Boomer entitlements and pensions. We've got to figure out how much we can actually cut, given not only the AARP but all the other interests opposed to such cuts, and then we've got to figure out how much we can increase taxes, given not only Grover Norquist but all the other opposition to that.

If that number doesn't put us in surplus, we're going to get to the crisis point.

Now, the good news is that, in the short term, Congress doesn't have to muster the political will to do anything to make the situation better. If Congress fails to take action, we're about to see some pretty massive tax hikes ("Taxmegeddon") coupled with some pretty massive budget cuts ("sequestration"). After that, though, we've still got big, big rocks to move to get to a real fix.

We won't know how to begin thinking about that, though, until we know what the composition of the government is post-election.

Posted by: Grim at July 31, 2012 07:42 PM

doesn't begin to address the entitlement issue...

No, that's too strong. The extra 86% of your income will address the entitlement crisis, as long as the interest rates never rise. That's the rate for actually paying off all the retirement/entitlement issues. So, if we can take average 86% of household income in addition to existing taxes, every year, we can get to where we need to be -- if we don't see interest rates go up.

Posted by: Grim at July 31, 2012 10:54 PM

The (Republican) House has passed a number of bills that address our current economic malaise. The Republicans of the Senate have tried to bring these, and ideas of their own, to the floor for debate. It's the Do-Nothing Democrat-controlled Senate that has refused to budge. It's also the Democrat President who's threatened veto of bill after bill--without even knowing the contents--if they don't include his personal demands. He won't even brook passing a bill so that he can see what is in it.

Passing "bills that address our current economic malaise" is not the same as passing bills that have enough support to become laws. Whether you (or anyone else) likes it or not, the only way to get a bill passed is to draft one that contains enough meat to satisfy BOTH sides.

You've decried this impasse for some time. What's your solution?

See last sentence above. If a bill has broad popular support, the President won't veto it because that would (by definition) be unpopular (and in any event, such a veto could easily be overridden by Congress). If a bill can't make it through the Senate, that tells you something. You may like the bill, but the test is not whether or not YOU like it, but whether it has sufficient votes to pass.

Now I suppose we can keep hoping that we'll take both houses in a landslide, in which case the votes will be there (assuming, of course, that something that has rarely if ever happened - unanimous conservative support for conservative bills - magically happens). You may devoutly wish for that to happen. I may echo that wish. But it ain't likely.

Likewise, we can continue to oppose any bill that doesn't give us 100% of what we want (and give the other side 0% of what they want). But that's not going to move the ball down the field.

My solution is what it has always been: compromise and sustained, incremental progress.

Posted by: Cassandra at August 1, 2012 09:10 AM

Grim:

Throughout history, there are really only two ways governments get themselves out of massive debt:

1. Inflation, which wipes out the value of the debt (but also of private wealth, savings, and retirement accounts)

2. Default.

There are one or two countries (Romania comes to mind) successfully implemented austerity measures and paid down their debt, but they are the exception to the general rule.

None of this is a mystery. Personally, I rather doubt Congress will get us out of this because intransigent voters on both sides won't let them and would vote them out of office if they tried.

So I think we're headed for default, inflation, or some combination of the two.

Posted by: Cassandra at August 1, 2012 09:48 AM

Just for reference:
Current Budget = $3.6tn
Current Debt = $15.8tn
Current Population = 313mm
Current Households = 115mm

Per Household budget expense ~= $31,600
Per Household debt expense ~= $138,400
Per Person budget expense ~= $11,600
Per Person debt expense ~= $50,500

Posted by: Yu-Ain Gonnano at August 1, 2012 10:05 AM

Thank you, Yu-Ain :)

I am not sure (maybe Yu-Ain can help?) how to interpret per household stats. What I'm saying here is, do they mean what we think they mean?

The notion of an "average household" or "average household income" is a useful fiction. In reality household income is a skewed bell curve with a long tail on the high side of the income spectrum. So, while looking at average debt per household may help some people visualize the magnitude of the debt, I'm not at all certain it's a useful metaphor in the context figuring out how to pay down the debt.

When I say, "I don't know", I'm not being coy. I just am not smart enough, or lack the mental bandwidth, to give this the thought it deserves.

I don't think there's a realistic scenario in which every house will pay an equal share of the deficit. And household incomes are not equal anyway. So I think when it is used in the context of paying down the debt, the metric distorts reality.

I'm tired, and worried, and I don't want to make you all angry. You're my friends, and I love and respect you even when we disagree. I don't want to damage relationships I have treasured for years.

And I no longer know how to communicate what I'm thinking without doing damage.

We live in a country with a fiat monetary system. The real danger here (and it's one I think conservatives don't appreciate nearly enough) is a crisis of confidence. We can't just yank the steering wheel back to where it was in the 1800s. We're not the same country. The economy is not the same as it was then.

We got here by inches and if we're lucky we might be able to dig ourselves out by inches. As much as I wish there were a magic wand that would make people we don't agree with go away (or convert them overnight), I don't see that happening.

Reality is often unpalatable, but it's what we have to deal with. So I don't understand all this talk about digging in our heels and refusing to accept less than all of what we want. When the other side does that, we call them unreasonable.

I see only one solution here: simply cutting spending won't solve the deficit problem. We need more revenue too. Republicans reflexively fight any suggestion of raising revenue, though. We are part of the problem. The notion that small increases to tax rates will bring the economy to a screeching halt are not supported by the historical record. Small increases are not the same as having a marginal tax rate of 98%. They won't have the same effect. The marginal utility of income differs, depending on how much disposable income one possesses. I don't like paying high taxes, but we could easily pay 10 or even 20% more if that would help us get the nation out of debt. Of course I don't want to pay more to support already out of control entitlements, but there's real room for compromise here.

Unless of course our position is that every person who disagrees with us is evil and out to destroy America. Some days it really seems that way to me. We've now had several bipartisan commissions that have come up with workable suggestions. I don't think either party will support them, though.

So we're back to gridlock: doing nothing. There's an old saying in the Marines: an imperfect plan is better than no plan at all.

Where do we go from here?

Posted by: Cassandra at August 1, 2012 10:45 AM

YAG:

Those numbers differ from the ones USA Today has, which I've been relying on. I like their numbers because they try to sort out how much we really owe in terms of pension commitments and entitlements. By their lights, if we keep promises made under current law, the total per-family debt is over half a million dollars. Current year per household debt, not just expense but expense beyond revenue, is over 42 thousand dollars.

If we want to focus on different numbers we can, but we need to be clear that we're no longer talking about the whole problem. We're making an assumption about what promises we won't keep; whereas that assumption is really the exact political debate we're in right now.

Posted by: Grim at August 1, 2012 11:35 AM

My intent in my last comment was not to elevate one set of numbers over another. I'm more inclined to believe the ones Grim linked to, but there are so many ways of calculating stats like this that I couldn't quickly determine which ones make the most sense.

IMO, no matter how they're calculated, the numbers are alarming enough to make the case that:

1. Current spending levels are not sustainable.
2. We can't keep kicking the can down the road like we're doing now.

Posted by: Cassandra at August 1, 2012 11:43 AM

Cass:

I think we can't decide where to go from here until after the elections. The realm of what is politically possible will change substantially depending on the outcome, especially of Congressional races.

I expect us to get to Taxmageddon and sequestration precisely because of Congressional failure. That will give us $494 billion in additional revenue, with about a hundred billion more coming in cuts from sequestration.

Sequestration is terrible for defense policy, but it's probably the only 'compromise' available in the short term. It's likely to happen because it's the default action if Congress can't do anything, which seems to be where Congress is right now.

So in the short term, we wait and see what the institutions look like post-November. The combination of the budget cuts and the tax increases will cost millions of jobs -- sequestration is estimated to put 2+ million people out of work by itself -- which will slow the economy. However, on the plus side, it will get our budget deficiency down somewhat.

After that? We'll just have to see what the possibilities are. We need to get to surplus through some combination of revenue and cuts, but there may be options if Congress is no longer non-functional.

For example, we could obtain a lot of revenue by permitting more oil and gas exploration, if Republicans do well; that would spur the economy somewhat. Or, if Obama and Elizabeth Warren win the day, perhaps we could do the same thing -- but with a nationalized, British Petroleum type system.

Or we could find ourselves without good options. But which set of not-good options, we won't know until November.

Posted by: Grim at August 1, 2012 11:44 AM

...compromise and sustained, incremental progress.....

Yet, for the last 80 years, what we've gotten instead, with compromise, has been sustained, incremental degradation.

Obama has the right of it: this is an election (but it won't be just one election--it'll be a whole series) about two different views of government and the role of government: big government that does for us, or little government that lets us do for ourselves. There's no room for compromise here. We can't agree to a smaller tax increase without agreeing to a tax increase. "They" can't agree to a smaller spending cut without agreeing to a spending cut. If we get gridlock out of that, that's not all bad. The lack of it got us Obamacare and Dodd-Frank. Compromise got us the last 80 years, and presently the enormous and failed bailouts and "stimulus" spending, and it would have gotten us only Obamacare-lite and Dodd-Franklet.

We live in a country with a fiat monetary system.

This isn't new. All of humanity, throughout history, have lived with fiat money. Gold, silver, seashells, all have had only, and exactly, the value governments said they have.

So I don't understand all this talk about digging in our heels and refusing to accept less than all of what we want. When the other side does that, we call them unreasonable.

I never have. And I'm not alone. Nor have I refused to accept less than all that I want. But I have refused to compromise on my principles. Where I differ with "them" unyieldingly is in my view that they operate from false premises: the government needs the money, or that it's a priori government's money. Even the talks of "revenue neutral" tax reform, or of "increasing revenue without raising tax rates" are misguided because of those false premises.

It is a legitimate debate to have concerning what it is we should allow government to spend our money on, but until we've settled that, the only purpose of revenue/tax discussions couched in those terms is to make the needed reforms politically palatable.

Finally, and separately, I'm tired, and worried, and I don't want to make you all angry.... I don't want to damage relationships I have treasured for years.

No worries there. We all get...enthusiastic...in our remarks. Nothing personal is implied, nor is anything personal taken.

Eric Hines

Posted by: E Hines at August 1, 2012 12:20 PM

Well, at this point, I'm not really taking sides. I'm reading through to kinda try to sorta, maybe figure out what opinion I might or might not have.

I just saw a lot of numbers flying and some disagreement of them so I thought it might help to at least nail some down.

The Budget and Debt came from the DebtClock (which tie back to CBO and Treasury numbers. i.e. they use the $1.3tn 2012 deficit not the $5tn USA Today does) and the population numbers came from Census estimates.

As for the "properness" of using averages in highly skewed data... That is is legitimate concern. Medians are usually more informative as they are less sensitive to the skew. That said, my interpretation in this case runs more along the totals.

But those totals don't really exist. Sure you can take the number of households*$49k, but you are still missing the corporate income. And yes, yes, I know corporate profits are really and truly the rightful income of the shareholders (I would prefer to get rid of Corporate income taxes and tax dividends as regular income because, well, it is), but the numbers aren't calculated that way. So, regardless, of the propriety of using average/medians, individuals/households, we are missing the "corporate citizen's" share of the budget and debt.

Posted by: Yu-Ain Gonnano at August 1, 2012 12:35 PM

I shouldn't say that they don't exist, but rather that no-one has yet looked them up. I'm sure they are out there somewhere. But using tax data will be difficult because, given tax law, at least a portion of last year's losses can be used against this years profits. Individuals can't report negative income, but companies can and do. So I'm not sure they are comparable, and you'd probably need an accountant to do it.

Posted by: Yu-Ain Gonnano at August 1, 2012 12:41 PM

But as for compromise, I agree in principal, I just haven't seen much from a budgetary perspective that convinces me that it has worked in practice to do anything but create push the problem into the future, but simultaneously make it a bigger problem.

The issue I have supporting higher tax rates is that it doesn't increase revenue. Tax Revenue has been 18%-19% of GDP regardless of the tax rates and brackets. All changing the tax brackets do is shift the distribution of who pays and given that the top 20% of individuals already account for 94% of all individual tax reciepts how much more can you really slough off on them?

It's an empty symbolic gesture so that the Dems can have someone to blame and demonize.

Posted by: Yu-Ain Gonnano at August 1, 2012 01:01 PM

I am not so sure that all these measures the Repubican House has passed don't have bipartisan support in the Senate. Reid - a single man wielding the power of the position he holds - won't even let these things come up for a vote in the Senate...

Posted by: Miss Ladybug at August 1, 2012 01:32 PM

Well, in all fairness bills are blocked by both parties all the time, and the problem has gotten worse in recent years. The minority party uses the filibuster and the majority party never lets bills out of committee.

This is part of my problem with scorched earth tactics: what goes around, comes around.

The House and Senate are composed of people, and when you play hardball, the other team remembers and will be quicker to retaliate. Both parties have refused to allow votes - if you doubt that, Google will disabuse you of that notion fairly quickly.

I wrote many times about this during the Bush years and was mostly told that this wasn't something that should be changed. I don't agree. But if I'm not mistaken, the vast majority of bills never come to a full vote. Don't quote me on that, though :p

Posted by: Cassandra at August 1, 2012 02:32 PM

Obama has the right of it: this is an election (but it won't be just one election--it'll be a whole series) about two different views of government and the role of government: big government that does for us, or little government that lets us do for ourselves. There's no room for compromise here. We can't agree to a smaller tax increase without agreeing to a tax increase.

And we won't pay down the deficit without a tax increase. The numbers just don't add up. Simply spending less won't pay off the existing debt. So it would seem that "not agreeing to a tax increase" and "paying down the deficit" conflict with each other.

"They" can't agree to a smaller spending cut without agreeing to a spending cut.

If this is really what the two parties are about, we're screwed. Tax increases and spending cuts aren't principles. They're tools used to achieve principles (balanced budgets, smaller/bigger government, etc). If being a conservative means no tax increases - ever - even when we owe money we can't pay back and that means leaving a mess for our kids, then I think that's a load of crap. Period.

If we get gridlock out of that, that's not all bad.

Unless you think our generation shouldn't be saddling future generations with our debts.

I just haven't seen much from a budgetary perspective that convinces me that it has worked in practice to do anything but create push the problem into the future, but simultaneously make it a bigger problem.

What about the surplus during the Clinton years?

Posted by: Cassandra at August 1, 2012 04:09 PM

My quick look at the budget data is that since 1972 year over year growth had generally been falling until Clinton, where it plataued at a very stable 3-4% (really amazingly stable actually, swings of 5 percentage points year to year were not unheard of). I'm not sure that halting a downward trend speaks toward the success of compromise. (Unless one can argue that the y/y growth would have made a sharp upturn without it and it was compromise that prevented it).

But, had the trend continued, the surplus would have been larger.

The other thing that's interesting is that it was the first time that Y/Y spending growth and Y/Y GDP growth didn't really line up.

It seems to me that when GDP is growing 5%/year it would be an easy compromise to allow spending to go up 3% instead of only 1-2%. Dems get more spending, Reps still get a surplus: Win-Win.

So without an argument (that very well may be able to be made) that Y/Y spending growth would have skyrocketed without compromise, I can't attribute the surplus to it.

Posted by: Yu-Ain Gonnano at August 1, 2012 05:04 PM

A lot of the Clinton success came down to gridlock, though. By inclination he preferred grand schemes, but after his first two years he was hamstrung by a defiant Congress. They refused to raise social spending, and his DOD appointees cut defense. He blocked plans to cut taxes, and they gave him a line-item veto on budgets in the hope of getting a future President. (SCOTUS killed it first, though Clinton used it dozens of times.) If Congress wanted to override, they needed 66 votes in the Senate, which they often couldn't get because Democrats or Republicans wouldn't play along with the override.

That -- and a booming economy that fueled big revenue streams -- is how we got to a surplus.

Posted by: Grim at August 1, 2012 05:15 PM

That -- and a booming economy that fueled big revenue streams -- is how we got to a surplus.

That's an oversimplification. You're ignoring the fact that taxes also went up, Grim. As did tax revenue as a % of GDP.

The highest marginal tax rate under BushI was 28%.

Under Clinton, it was almost 40% (39.6).

Under Bush II, it declined to 35%.

These are large swings (+ > 10%, - about 5%).

You can't simply ignore parts of the picture. Total tax revenue went up when taxes went up...

Which supposedly can't happen, we're told. Except when it does happen.

Posted by: Cassandra at August 1, 2012 05:30 PM

And we won't pay down the deficit without a tax increase. The numbers just don't add up.

I'm not sure what numbers you're looking at. In 2007, according to Census Bureau data collected from IRS-aggregated Form 1040 filings, Americans earned $17.8 trillion dollars from all sources: wages and salaries, interest payments, dividends and capital gains, gambling earnings, pass-throughs from their small businesses, and so on. In that same year, according to the GAO, Americans paid an aggregate of $1.15 trillion dollars in taxes on that income. That's with that Clinton spike in marginal tax rates. And with all those tax credits, deductions, and other loopholes and subsidies in the tax code then extant (which haven't changed in any substantive way since).

A simple flat tax--which everyone would pay--of 10%, and with all those carve-out idiocies removed, would produce $1.78 trillion--a precious revenue increase. $500 billion/yr committed to paying down the debt makes a nice start. If we wanted to exempt half the then-current year Federal Poverty Guideline income from that flat tax, that would reduce, but not at all eliminate, the surplus. That ignores corporate taxes. On that, I agree with Yu-Ain; these ought to be done away with (and since they're not included in my calculation above, that would have no impact on the surplus--except to expand it through increased economic activity); it's not the corporations, that pay those taxes, anyway, but their customers.

There's budget surplus--and deficit reduction--with reduced tax rates. My snide remark above notwithstanding, there is a critical difference between tax rates and tax revenues. One comes from the price we're charged by government, the other comes from economic activity--which is potentiated by lower prices.

And if government spends less, also, the surplus grows. One source of spending less is through privatizing Social Security and Medicare: that's $1.148 trillion in Federal spending in 2011--another nice hit to the debt (I'm eliding Medicaid, which I think also should be privatized, because I'm unsure of the Federal-State breakout of this spending). Of course, this conversion can't be done overnight, if only to preserve the finances of current and soon-to-be retirees who've already been Dragooned into these systems; this would eat into any particular year's share of that trillion dollar cut in spending.

Hard to do, politically? Yew betcha. Nearly impossible, even. But "hard" and "nearly impossible" both mean possible. Compromise all you want on that path, but that's the path.

Tax increases and spending cuts aren't principles. They're tools used to achieve principles....

Of course. But since these tools are critical to achieving the principle of big or little government, it's absolutely necessary to control their use. The focus on taxes and spending is entirely legitimate; although it's also legitimate not to lose sight of other trappings of government size--its corporate footprint, beginning with, for instance, the size of the government labor force.

Eric Hines

Posted by: E Hines at August 1, 2012 06:24 PM

Total tax revenue went up when taxes went up...

Which supposedly can't happen, we're told. Except when it does happen.

To my knowledge that argument only holds when all else is equal. When GDP is growing, all else is not equal. The argument would be that had there not been a tax increase, revenue would have grown even larger. Thus it "reduces" revenue in Net terms.

But since no one ever runs a control group, that kind of statistical analysis is Post-PhD level Econometrics and there are *still* massive disagreements.

Posted by: Yu-Ain Gonnano at August 2, 2012 09:55 AM

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