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History and Arithmetic
by Michael Farrell
Many years ago, I was taking a course at one of the more advanced Army schools. Due to the nature of the material, the ability to use a calculator and do some relatively basic algebra — plugging numbers into formulas and hitting enter — was critical. Some of us were very capable, most of us were capable, a few were pretty hopeless. I was in a study group for one of these things, and prefaced the explanation of something with “It’s algebra…” My buddy’s response was “I can do algebra. That’s not a problem. It’s all these Xs and Ys…”
So, it strikes a note with me when I read a piece from the Kennedy School of Government that provides the best explanation of why Reagonomics can’t work and why the deficit cannot be reduced by cutting spending. Jeff Frankel is a MIT Economics PhD over at the Kennedy School, and he sees the problem as lying at the intersection of arithmetic and history. Because of history — poorly understood history poorly remembered — we are incapable of having rational discussions with the Tea Party faithful and their captives on Capital Hill. Not only don’t the numbers work, the numbers can’t work…without some shared sacrifice and significant increase in revenue. How do you get revenue? You get it by taxation. How do you get money from taxation? You get it from the people who have the money to tax…
Frankel’s explanation is so simple, and shows some of our government accounting problems. Remember Al Gore and the “Lock Box” for social security. Didn’t happen. Social Security payroll taxes come in, they get processed and they get paid out. The difference between what comes in –rougly 15% of payroll nationwide — and what gets sent to the recepients goes into bonds. The money gets spent as part of general revenue. It’s been that way for a long time — T-Bills are the safest investments you can find, unless you’re some clown like Glenn Beck, envisioning a barter system based on freeze-dried food, .308 ammunition, and gold. Without that source of revenue, bad things happen. You could increase the revenue here by increasing the percentage or increasing the amount of income that gets taxed. Most of us don’t ever really see ceiling on this; but, if we were to raise it to $200K, the trust fund would be solvent for a long time. And, since it’s solvent now barring Beck’s various prophecies coming true until 2050 or so, things would be fine for most foreseeable event horizons.
If you think Beck and his ilk are not demented, stop reading this, write a comment to the effect that I’m obviously a Jew-loving liberal tool of the Israelis and the Commies, and save yourself some irritation. However, Frankel does the best job I’ve ever seen in laying out the problem. If you either don’t think Beck has access to some revealed wisdom or you’re willing to be persuaded, Frankel’s piece is more than worth your time.
Total federal spending is $3 ½ trillion in round numbers. That spending number minus tax revenue left a budget deficit of $1.3 trillion in fiscal year 2010. Putting aside a very small number of genuinely sincere libertarians like Ron Paul, most Republican congressmen want to exempt defense spending and senior-related spending (Social Security and Medicare), and to make all the cuts in non-defense discretionary spending. (That was their official platform in November’s election.) How much would you have to trim non-defense discretionary spending to balance the budget? Start — as many people would like to – by eliminating all foreign aid. Contrary to what they think, foreign aid is of course only about 1% of total outlays. Next imagine zeroing out all of veterans’ benefits, all federal spending on education, and all federal spending on transportation. That includes programs so popular with their beneficiaries that the congressmen voting for them would be virtually certain to lose re-election. But some of the freshmen say they are willing to pay that price, so let’s go full speed ahead. We are only up to 6% of total outlays. Now eliminate every dime of non-defense discretionary spending: parks, weather service, food safety, SEC, FBI, border patrol, politicians’ salaries… everything. Do you think that closes the gap? It only gets you half way there! Domestic discretionary spending is not where the big bucks are.
The arithmetic in fact works out quite simply. Of the $3 ½ trillion in federal outlays, just under 1/5 is non-defense discretionary spending. Another 1/5th is defense. Social security is the third 1/5th. Medicare is the fourth 1/5th (slightly less now, but far far more in the future). The last 1/5th is interest on the debt (which will also grow enormously in the future) plus other entitlements. Numerically speaking, we would have to eliminate not just all non-defense discretionary spending, but also all defense. Or else all social security spending (but we would have to continue somehow collecting the payroll taxes that are supposed to fund it!). Or else all Medicare spending. The unmistakable implication is that a solution to our long-term fiscal problems will have to involve some sharing of sacrifice among each of these five categories. And increased tax revenue as well.
Admittedly, the Republican leadership’s goal for the current fiscal year was to reduce domestic spending by “only” $100 billion. But the freshmen’s position is that this goal is not enough. (At the same time, they are unable to come up with that much in specific cuts that they are willing to put their names to, for the same familiar reasons. Domestic discretionary spending is not where the money is.)
A reasonable medium term goal might be to raise taxes as a share of GDP at least to 18%, what it was during the Reagan administration, and to lower spending to 23%, what it was then as well. Of course these two numbers still leave us with a deficit of 5% of GDP, which was Reagan’s record. It will take us much longer to get back to the fiscal rectitude of Clinton. It is not possible to eliminate the need to borrow, in the short run.
Very simple. The numbers don’t work without some sort of new revenue. The ideas floating around Capital Hill and the various statehouses that don’t include some increase in revenue from increased taxes are silly. Add some more revenue to the pie, and you’d be amazed at how quickly everything gets back to something sustainable for the long run.
Not sure or want to play around. Frankel has links to a site at the NY Times and The Program for Public Consultation. I’ve played with both, and the results are interesting. If we went back to the Clinton Tax Rates, we’d have money for a lot of things we need to do while paying down the deficit and the debt. However, spending cuts alone don’t get there.
Paul Krugman is another of the smart people that I look to when I’m trying to understand economic issues. Krugman’s column today makes the point that cutting spending is just a bad idea…we’re nowhere near recovery, job numbers are awful and the economy is fragile. The worst idea is to pull money out of the economy but cutting government spending. Increased federal spending has been offset by the disasters happening in state and local government.There’s a net loss in jobs, which means there is a net loss in consumer spending. What’s about to happen in Wisconsin is being played out in lots of places across the country — not the boneheaded union busting, but the layoffs and impoverishment of the middle class. Krugman slashes and burns through the Republican argument, but he does it with a rapier and a laser. What they’re saying is empirically wrong and doesn’t work — outside of that, great idea. Sounds good on Fox News. This is, of course, the sort of silliness that got us here and threatens the future.
The clear and present danger to recovery, however, comes from politics — specifically, the demand from House Republicans that the government immediately slash spending on infant nutrition, disease control, clean water and more. Quite aside from their negative long-run consequences, these cuts would lead, directly and indirectly, to the elimination of hundreds of thousands of jobs — and this could short-circuit the virtuous circle of rising incomes and improving finances.
Of course, Republicans believe, or at least pretend to believe, that the direct job-destroying effects of their proposals would be more than offset by a rise in business confidence. As like to put it, they believe that the Confidence Fairy will make everything all right.
But there’s no reason for the rest of us to share that belief. For one thing, it’s hard to see how such an obviously irresponsible plan — since when does starving the I.R.S. for funds help reduce the deficit? — can improve confidence.
Beyond that, we have a lot of evidence from other countries about the prospects for “expansionary austerity” — and that evidence is all negative. Last October, a comprehensive study by the International Monetary Fund concluded that “the idea that fiscal austerity stimulates economic activity in the short term finds little support in the data.”
And do you remember the lavish praise heaped on Britain’s conservative government, which announced harsh austerity measures after it took office last May? How’s that going? Well, business confidence did not, in fact, rise when the plan was announced; it plunged, and has yet to recover. And recent surveys suggest that confidence has fallen even further among both businesses and consumers, indicating, as one report put it, that the private sector is “unprepared to fill the hole left by public sector cuts.”
Arithmetic and history; empirical facts and context. Worth keeping in mind…
Short URL: http://www.veteranstoday.com/?p=84705
Posted by Michael Farrell on Mar 4 2011, With 0 Reads, Filed under Government, Politics. You can follow any responses to this entry through the RSS 2.0. Both comments and pings are currently closed.
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“The study of money, above all other fields in economics, is one in which complexity is used to disguise truth or to evade truth, not to reveal it. The process by which banks create money is so simple the mind is repelled. With something so important, a deeper mystery seems only decent.” John Kenneth Galbraith (1908- ), former professor of economics at Harvard, writing in ‘Money: Whence it came, where it went’ (1975)”
So, Michael, you want to increase taxes, continue borrowing, and joyfully zoom down the liberal idiocy track of spending out-of-control, of course skimming from every dollar taxed, borrowed or spent.
Forget WDC for the moment and think about YOUR household. Let’s assume you have a steady, relatively fixed income. If taxes are increased, you and your family will have less money to spend. Maybe you’ll go to restaurants 2-4 times less per month. Maybe you’ll go to the grocery store a bit less and when you go you’ll attempt to spend less. To attempt to survive, your local neighbors will have to boost their prices — this is called inflation.
The ripple effect of just your family alone’s attempt to manage your fixed income stream will reduce the cash flow in your community. Your family can’t print money and it can’t tax others outside your community circle to boost your local economy. Multiply your situation by 160 million or so families and the inflationary situation is hopeless unless we find a way to get boost 160 million family income to their previous levels of economic effectiveness.
What is the real government plan? Cause inflation. But trust me, the 160 million families on the back end will take the brunt of that.
Personally, it is my opinion Krugman is an ill-informed mouthpiece, and I don’t know much about Frankel. What I do know, from a family standpoint, the backbone of the American economy, they are both wrong.
Notice the two keys in brevity of response. To dig our way out of this hole, the government for the first time in about 100 years will have focus on “family units” and the family units “economic effectiveness” at the local level.
One doesn’t have to be a rocket scientist to understand that the two most significant keys to economic recovery and growth is “family units” and the family unit’s “economic effectiveness”. All else is carrot whacking bullshit.
Cheers and keep writing.
US Vet
Thanks for writing. Unfortunately, I think you’re dead wrong, but at least you’re thinking.
Let’s begin with the “family unit” thing. You’re assuming that all family units are the same thing. The old “2-parent home, 3.2 children, dog, goldfish, 2.5 year old car in the driveway…: etc. etc. Nobody has a guaranteed, fixed income — unless you’re a subsistence farmer some place. The overall economy affects all the “family units,” and some of them get whacked. Most of them get whacked.
Since the 80s, the people you think need to get greater economic clout are the people who have not. That simple. The solution Frankel and Krugman discuss is really a return to a tax rate that was too low to begin with. The Reagan tax rate cuts did a number of the revenue for the country. You and I got a few grand more per year; the Koch brothers — and I feel like I’m piling on, so we’ll add Derek Jeter and Bob Dylan to the mix along with Martha Stewart and Perez Hilton — get 10s of millions of dollars added to their wealth. You and I probably spent most of our new found “wealth”…on credit card interest. Which, pre-Reagan tax cuts, was deductible. Post Reagan, not deductible.
Now, using my family unit — wife, husband, 3 cats, two cars, house that lost 44% of purchase price — as an example, a 3% increase in my taxes under the current system results in an increase of about $1000 to the Feds. A 3% increase in Donald Trump’s income results in an increase of about $150K to the Feds. It’s the Willie Sutton principle — go where the money is. Instead, since Reagan and the whole trickle down thing, the Feds have been directed to where the money isn’t.
As for inflation, I don’t think that’s anyone’s plan. The fact that prices go up isn’t necessarily do to inflationary pressures. It can be be tied to the law of Supply and Demand. I noticed this morning that Kenya is supposedly excited by rising coffee prices because that should result in more prosperity. Up to a point, it will. Then coffee becomes too expensive. My preferred “Venti Americano with an extra shot” has gone up in price by a buck since the new year. I can choose to pay, or I can change drinks. Or, I can brew my own coffee.
Oil is more interesting. There has been no shortfall in production; however, the cost of the stuff at the well head is not the price that we pay. We all know this. It’s speculation — while the cost of oil will inevitably go up without some serious re-tooling of our thinking and our energy use — I think the futures trading business has a lot more to do with price hikes. It is not only possible but encouraged to game the system. It’s overly complicated — but your barrel of East Texas Crude if such a thing exists costs about the same to produce and market as it always did. However, there are more middle men wanting their piece.
Let’s say that I’m doing credit default swaps on Jet Fuel. The crap shoot that is tomorrows price results in my buying it at X and hedging at Y and re-insuring at Z. Derivatives are wonderful for financiers — however, they add cost for consumers without adding value.
Now, I like the things that government does. I like schools, police, firemen, libraries, roads that don’t tear out the undercarriage of my car, bridges that don’t fall into rivers. I liked it more when it did more. However, in order to more, it has to spend more. We’ve done the Grover Norquist-Karl Rove starve the beast thing for 30 plus years; seriously, has it worked?
I grew up in the 50s and 60s. I don’t recall a lot of homeless folks, or lots of beggars. Unemployment was 5% or so; people had jobs that paid a wage that provided for prosperity. My dad bought a new car every three-four years. My mom didn’t work. The GI Bill loan on their home had a 3% rate.
Something went wrong between 1980 and today. Most car loans are for five-six-seven years. Unemployment has been 7% or higher since 9/11. The wealth of the nation is more and more concentrated at the top end. Something has to change.
Or not. That’s the nice thing about history.