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Monday, April 18, 2011

Hah, In a Nutshell

Niall Ferguson writes an America-congratulatory piece that posits that Americans are prepared to do the right fiscal thing:
Churchill had it right. The United States will always do the right thing once all the other possibilities have been exhausted. For a long time many people clung to the delusion that the United States could simply borrow $1 trillion a year for the rest of time. Now only two possibilities remain.

The first possibility is the one devised by Rep. Paul Ryan, which would eliminate the deficit largely through deep spending cuts and Medicare reform. Possibility two is President Obama’s bid to close the budget gap with more modest cuts and tax hikes on “millionaires and billionaires.”
Except that Ferguson gets the choice wrong. We don't have the binary choice Ferguson posits, as Robert Samuelson explains:
We won't make much progress until (a) Democrats concede that spending control requires genuine cuts in Social Security and Medicare, which now total $1.3 trillion annually and represent 35 percent of federal outlays; and (b) Republicans acknowledge that, even after significant spending cuts, tax increases will be needed to balance the budget. Last week, there was little sign of either. President Obama rebuffed Social Security and Medicare cuts. Most Republicans held fast on taxes.
...
The trouble is that Obama's budget already assumes higher rates (39.6 percent) on incomes exceeding $200,000 (individuals) and $250,000 (couples). Suppose we get tougher on the very rich. One proposal would raise rates to 45 percent on incomes from $1 million to $10 million, with rates increasing to 49 percent on incomes of $1 billion. Over a decade, tax revenues would grow about $900 billion, says the advocacy group Citizens for Tax Justice. Assuming the money materialized, it's a lot -- but only a tenth of the decade's deficits.
We are facing deep cuts to current social spending as well as tax increases. Also, we can't afford to just exempt people over 55. Whatever we're doing, we need to start it quickly so we can see the effects and negotiate the best outcomes over a few years.

Ferguson is right that perceptions that we have a real problem are growing among the public. But the lies the public have been told will take some time to expire from the public consciousness.

Comments:
Until we start talking about severe cuts to things like the TSA and military, we aren't taking any fiscal problems seriously.
 
Money for the TBTF and now austerity for the little people.

Sporkfed
 
Until we get to the business of doubling the size of our Navy, Air Force, Army and Marine Corps, we are gambling our national survival in a crooked house.

It's 1937 again.
 
IMO, increasing taxes is the equivalent of giving more booze to an alcoholic. The Congress of the United States has an addiction and it is to spending other people's money. We need an intervention and maybe we got one via S&P downgrading the credit outlook for the U.S. But from what I have seen the dems are still in deep denial and unalterably addicted when they proclaim they don't see how our credit rating could be that bad. What are they smoking??

The only way I would agree to increasing any taxes or new taxes is if some mechanism could be inserted that would force Congress to keep cutting spending each year in spite of increased revenues. Would it be possible to make the tax increases (some have suggested a new 2% national sales tax) contingent on continuous reductions in spending? How could we make sure the new revenue is used only to reduce debt??

Mark my words, increase revenue and it will be spent. The Congress, particularly the dems but some old guard eastern RINOS as well, are deeply addicted and in denial about it.
 
We need an intervention and maybe we got one via S&P downgrading the credit outlook for the U.S.

Probably will be used as a reason, rather than an intervention.
 
I have been going round and round about this with the boyfriend. God knows where he gets his info, but he claims that we have one of the lowest rates on wealthy individuals and that tax rates used to be higher on them. Any good sites where I can refute this?

The weird thing is, he told me the other day that he likes Ron Paul. I'm not sure if it's progress or not ;)
 
Teri,
Your boyfriend is right.
 
Don't raise taxes ... eliminate deductions, exemptions, and loopholes, and then lower the rate. You'll take in more and cause fewer malinvestments.

The top 400 personal income tax filers only paid 17% percent, and that's because there are too many ways to shelter too much income.

But the trustifarians and the municipalities and a host of other beneficiaries won't like it when their tax benefits go away.
 
Teri - your boyfriend is correct, except that marginal rates don't tell the whole story.

For a history of just income tax marginal rates, try The Tax Foundation.

US tax rates currently "flip" in comparison to most developed countries - individual tax rates for high income individuals are lower and corporate tax rates are higher. Since 2005 I have been writing about the US losing the corporate tax competition.

Mind you, some of the largest corporations get untold tax bennies so they end up paying little tax.

If we cut our corporate tax rate to 25% with little in the way of special provisions, we'd have both more jobs and more corporate tax revenue.

Progressives in the US are in denial about corporate tax rates; the more socialist countries have all cut tax rates substantially for corporations, but they do have high tax rates on individuals.
 
Jimmy - fair enough. Yes, I do think we can only afford to raise tax rates if we also have strong constrictions on spending. The era of federally-funded cowboy poetry or dance therapy must die.

Take the SS situation. Here you have had people paying higher taxes than needed for almost 30 years, and all we got out of it was cowboy poetry. So the individuals who paid the higher tax feel defrauded, but yet we spent the money and worse yet, we built up a larger structural deficit than we would otherwise have had. Not only do people have less money than they would have had if they had kept the money and saved it, the total federal gap to be closed to fund the payment of their retirements is considerably higher than otherwise.

That's a lose-lose situation; we can't afford to go on doing the same.
 
What Jimmy j, njcommuter, and MOM said.

A friend of mine recently spoke to a county commisioner here, and he said the average welfare recipient gets around $40k in benefits. Lets start by cutting that in half, and stop the practice of giving them an incentive to have more children, because dependents under the age of 18 is a ticket to 18 years on the dole. Two children, properly spaced gets you 36 years - thats a career. Medicaid alone amounts to $10k per recipient.

After that get rid of the EITC - one child reduces your taxes by more than $3000. In other words, the tax payers are subsidizing the child to the tune of more than $250 per month. On top of that, the child gets a subsidized Federal health plan. It's time people with children started paying their share. At most, we should get all the $3000 per annum back in higher taxes on the parent, or a lien on their property, if they can't pay it.
 
"So the individuals who paid the higher tax feel defrauded, but yet we spent the money and worse yet, we built up a larger structural deficit than we would otherwise have had. Not only do people have less money than they would have had if they had kept the money and saved it, the total federal gap to be closed to fund the payment of their retirements is considerably higher than otherwise."

So true. When I applied for SS(1995), I got my records and calculated what the money I had paid in would have been worth if I had kept it in a tax free savings account or annuity paying 3%. It would have amounted to a nice chunk of change. Interest rates on annuities were higher then and I could have secured a lifetime annuity payment higher than what the Gubmint was paying. That said, there would have been no COLAs such as SS has provided. And there, I think, is one of the major problems with the SS program. No private defined benefit pension can afford COLAs. IMO, COLAs in Gubmint pensions (of all kinds) have exacerbated the problem and given our pols the idea that all benefits (and their extra-constitutional programs such as cowboy poetry) must always increase. Hence the built-in, must-have increases in every department, nook and cranny of gubmint at all levels. (Federal, state & local)

The jig is up. Either we cut our spending or we can expect the same kind of collapse as Argentina.

If Congress does its job, I fully expect to pay more for my Medicare and Tricare. If doctors don't get paid more for Medicare patients, there will soon be no doctors who will take Medicare. I also expect that my SS will be subject to means testing if Congress takes its job of rejiggering entitlements seriously.

Just examining two departments that were set up recently - Education (1977) and Energy (1979) - would reveal that, in spite of trillion$ of dollar$ spent, neither department has met their goals of improving our situation in education and energy. Both could be done away with and there would be no ill effects.(except for those who work there.) There are other departments that are ineffective, but those two are low hanging fruit, IMO. Big savings can be had, if all gubmint programs are subjected to a green eyeshade evaluation and cuts made in ineffective programs.
 
Two thoughts.

Americans would gladly go along with a plan of shared sacrifice (wasn't that the original FICA overhaul), however, as our country has splintered from among other things affirmative action, unchecked immigration, and financial pillaging of the middle class by the upper, no one trusts and sacrifice is going to be shared. Instead the country is devolving to factionalism more approximating the historical norm, and most recently on notorious display in the Middle East.

DoE? They would be a bad joke if the stakes weren't so high: http://www.youtube.com/watch?v=WWUeBSoEnRk
 
Jimmy,

The Department of Energy is where some DoD semi-dark programs go to hide. A goodly chunk of that spending would simply migrate back to its old home at DoD.
 
IMO, increasing taxes is the equivalent of giving more booze to an alcoholic.

I agree. I used to be resigned to the idea that more taxes would be needed.

Watching the "stimulus" program being crafted in 2009 cured me of that. These people will spend every cent we give them and more. They must be bludgeoned into commonsense. They cannot be paid to come to it.
 
WSJ said, "The Department of Energy is where some DoD semi-dark programs go to hide. A goodly chunk of that spending would simply migrate back to its old home at DoD."

Works for me. Defense is one of the few Federal departments that is in the Constitution. Yes, DOD could be run more efficiently and we should make every dolar count. If they csan justify the program - have at it!
 
US spending on defense is greater than the rest of the world combined.

Even if it had a Calvinist efficiency streak approaching the likes of Sam Walton or Andrew Carnegie it is completely out of scale.
 
Sorry, too many pronouns.

Even if the DoD had a had a Calvinist efficiency streak approaching the likes of Sam Walton or Andrew Carnegie, the absolute level of spending is completely out of scale.
 
Allan, there's three factors behind that:
(a) a longstanding American bias in favor of heavy logistical support and leading-edge technology to reduce casualties (this has played out in Iraq and Afghanistan, where combat deaths are running about 1/3 of the historical norm for that type of operation)
(b) many other countries (in particular, Russia and China) don't pay troops much nor provide much in the way of benefits; we do.
(c) we are the guarantor of the global commons, in the same way that Great Britain was in the 19th century. Others only have to be strong locally; we have to be able to project power to very distant, logistically difficult locales (like, for example, Afghanistan).
 
WSJ, Yes I'm familiar with those arguments, and I agree with them to a point.

However, has anyone sat down and considered what the minimum cost to accomplish those goals are? I rather doubt it. Yes, we are accomplishing them, but could we still be the hegemonist for 50% less? I don't know (and perhaps like the cost of an exotic sports car, if you have to ask... ;-), but it wouldn't surprise me we could stay the unequivocal top for 50% less. Seeing how I was reading about NATO sans US was running out of bombs to drop on Libya, the competition these days doesn't seem all that stiff.

Additionally, watching the Middle East these last 10 years I'm not sure what it's gotten us. We are so much bigger than everyone else, that we now lack the will to go in and actually beat the other side into submission. Since all we do is break stuff without ever closing the deal, the rest of world has decided were just a bully to wait out.
 
Well, if we want to do a drawdown, the thing to do is to get back offshore (focus on airpower and seapower). There's little reason why we should still have ground forces stationed in Korea and Europe. Third Marine Division needs to come home from Okinawa; 70 years there is long enough.

But it isn't going to be as cheap as you think. When the Cold War ended, we took a procurement holiday and ran the military on its existing capital stock. Without an increase in shipbuilding, we're likely to see the Navy shrink another 25% over the next decade, as the ships built in the late 70's and the 80's wear out ... and of all the services, a maritime trading nation like us can least afford to skimp on the Navy. Recapitalizing the Air Force likewise won't be cheap.
 
We're going to cut defense spending, but we need to realize that our planned scale of social spending is so far beyond defense spending that no cuts in defense can come close to covering the problem.

It's 2011. We now begin the big annual increases in Medicare as boomers start to become eligible.

The truth is that we are going to cut defense spending, we are going to cut discretionary spending, we are going to cut Medicare and Medicaid benefits, we are going to raise taxes and we are still going to find ourselves in a deep hole.

And Allan, I totally agree. "Shared sacrifice" in the US vocabulary has come to mean "you should pay more and I should get more".

When we stop throwing the grand American self-pity party, we can buckle down and get to work. It can be done. We have not yet accumulated the will to do it.

The best reason to crush public unions is that they represent a huge special interest bloc that believes it can immunize itself from the general trend. When they start feeling the general pain, we'll be able to negotiate.
 
We're going to cut defense spending, but we need to realize that our planned scale of social spending is so far beyond defense spending that no cuts in defense can come close to covering the problem.

This is true but there is lots of waste in DoD (ask anyone who has worked in it) and it should not be a sacred cow.

My brother is a pharmacist in a rural area. According to him, one cannot predict by prescribed drug alone whether or not the patient is on Welfare/Medicaid except in one case: Ritalin.
 
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