He is looking significantly grayer than he did a month ago. It'll be interesting to see what happens in 2013 when the positions are reversed and the Bush tax cuts will expire without agreement in both houses.
I suspect this sorry affair has hurt Obama's power and credibility within his own party. They would be in a much better position to decide how the US will balance its budget had Obama simply declared the debt ceiling unconstitutional, as Bill Clinton advised him to. Now, they've ceded legitimacy to the Tea Partiers and will have to acknowledge them (and their demands) in future negotiations. To the Democratic senators and congressmen who have been around long enough to know what a bad idea that is, this deal comes off as a betrayal, one made worse by the president's flat refusal to consider the constitutional option. Even if Obama wanted the Senate to capitulate on the Bush tax cuts, he could well face a revolt. The Senate will hold absolute power on that one; they need simply do nothing to see them expire.
It was pretty clear that the Tea Party wing of the GOP was willing to see the US default if it meant no increase in revenue and steep cuts to entitlements; I wouldn't be surprised to see Reid et al stick to a "keep the tax breaks for middle income Americans and close loopholes and subsidies for corporations" line, then blame the Republicans for the raise in taxes on the middle class when they don't accept his proposal. After that, it's simply a matter of what a tax break will look like. Democrats have quite clearly stated their willingness to cut taxes for "working Americans" (ugh), so the Republicans would have to argue why they think corporate subsidies and tax breaks for the rich should be enacted when they will further worsen the deficit. If you're Reid et al, that's a much nicer position to argue from than if you accept Obama's near dogmatic insistence on compromise, or, as many Democrats see it, giving everything away.
That requires a great deal more self-awareness than I think the Democratic leadership is capable of. Rather, I think the Republicans will get whatever they want, minus some token concession. There's not a great deal of analysis coming from me on that (that sort of thing has gotten too depressing), just a cynical look at the last 30 years and an expectation of the same for the next 30.
That said, it's probably good news. If the Tea Party drives America into irrelevance it will be better for everyone in the long run. A monopole world is a terrible idea.
It's depressing that some of America's most important fiscal matters must now be negotiated at the point of a gun. The dearth of start ups focused on the public sector seems somewhat surprising to me. It seems that Silicon Valley should have a role to play in easing Washington's dysfunction that we are not playing.
I dunno, blood out of a turnip? Even if there's a need ( and there absolutely is ), the gov has no money. Doesn't sound like a business I'd want to get into.
Its not that there's no money. Its that there's no cost effective way for small organizations to negotiate the contract discovery, bidding, and award process
That's fair, saying there's no money was an exaggeration. Maybe no new money for new companies would have been more accurate, not to mention the issues you mentioned (which were dead on).
Code for America is a good project. I know that here in Philadelphia they are trying to make the city government more efficient/productive for citizens.
"One might think that the recent drama over the debt ceiling involved one side wanting to increase or maintain spending with the other side wanting to drastically cut spending, but that is far from the truth. In spite of the rhetoric being thrown around, the real debate is over how much government spending will increase. No plan under serious consideration cuts spending in the way you and I think about it. Instead, the cuts being discussed are illusory and are not cuts from current amounts being spent, but cuts in prospective spending increases. This is akin to a family saving $100,000 in expenses by deciding not to buy a Lamborghini and instead getting a fully loaded Mercedes when really their budget dictates that they need to stick with their perfectly serviceable Honda."
Please, no more family analogies. This metaphorical family can't increase their income by taxing better off families and most families don't have such a debilitating, unnecessary monthly payment like numerous wars to pay off.
True, but there are real families that incease their income by robbing better off families, and there are many families who use all sorts of justifications to avoid paying for things, including all of their taxes, so they can afford other things. Just because a family can't pass a law to sanction that behavior, doesn't mean the behavior isn't comparable to the government's.
I don't. I was merely stating a fact that families have means to increase income taking from the rich just like the government does. That's not to say theft and taxation aren't in the same ballpark. If the IRS demanded 80% of your income without a change to the tax code, what would you call it?
The analogy still works. Don't let taxes and wars confuse you. Both entities have limits to both the amount of revenue they take in and and the expenditures they make.
It's oversimplification. Getting in and out of a war isn't as easy as stopping pizza night on Fridays. And the mechanism of raising tax rates isn't similar to asking for and getting a raise from Father's boss.
Agreed. I think it was Boehner who compared the US debt situation to a household. These comparisons are like comparing a 747 to a Hotwheels car, and not just useless in most cases but damaging in the sense they cloud the more complex bigger picture.
No, a 747 actually provides a useful, reliable service for the average American, and the owner of it (excl. Air Force 1) doesn't threaten violence if you don't help pay for it. Stick with the car theme. Maybe the government is a stretched Hummer that needs a year's worth of income to get it out of the shop. OK, maybe Halliburton will accept half a year's income to fix it.
Ron Paul follows the Austrian school of economics. They believe that economics cannot be mathematically or statistically modeled, and the economic theories cannot be tested experimentally.
Family analogies are probably the best you are going to get for "analysis" from these people.
"They believe that economics cannot be mathematically or statistically modeled"
It can be modeled, the models just won't be predictive when applied to reality because it's impossible to control for variables in such a complex system. Mathematics and statistics can be used effectively in economic analysis, but the majority of what's produced (and that our government uses for guidance) succumbs to correlation/causation fallacies.
Economics is not science. It's theory. Economic theories are not testable. Trying to give one's work the impression of credibility through misapplied scientific language and methods is called pseudoscience, and its purpose is to mislead.
My problem with this whole incident is the crappy reporting like this statement from the article "Without an increase in the debt limit, the federal government will not be able to pay all its bills next month. President Barack Obama recently indicated he can't guarantee Social Security checks will be mailed out on time."
The key word in the first sentence is "all" and the second sentence is not exactly true. The US Gov would not of actually had to default, but would have had to cut spending in other areas. The modern press cannot actually claim to informing the electorate of anything but hyperbole and repeated, unexamined words of politicians.
You can't make that statement in a vacuum. Spending cuts now would be worse for the economy than tax increases now. So which do you choose, or do you choose to make changes once the economy improves?
"Spending cuts now would be worse for the economy than tax increases now"
According to whom? You do realize that these are cuts to government spending, right? How does government get money to spend? It taxes or borrows (taxes in the future). Therefore, a dollar not spent by the government (in a monopolistic, corporatist manner) is a dollar more for the private sector to spend (in a more competitive, efficient manner). If this wasn't true, the government would be the sole provider of all goods and services. Even if the private sector wasn't more efficient in allocating resources, the economy would only be hurt in the long term by that loss of efficiency, not any immediate loss of economic growth, because the spending just shifted from public to private.
I'm a fiscal conservative. However, I believe that a problem with your point of view is that, while the private sector might be more efficient with that dollar, the fundamental problem is that it might not spend it (or at least, not all of it).
In tough economic times, companies reduce spending. They try to wait out the storm. On an individual basis, this makes sense. In these times, the government can help balance this out by actively spending money.
Unless I put that dollar under my mattress, it will be spent by someone, provided that we have stability in the banking system and regulatory structure (i.e. not yet, but getting there). With inflation, however, I'd be a fool not to spend it or earn interest on it (let someone else spend it, or let a bank finance the federal debt with it).
How does the government know what the correct level of spending for a given company is? How does government know how to "balance this out"?
I'm not an economist, I can't answer any of your questions. I can tell you though that there's some historical data available (both at home, dating back to the great depression) and abroad (japan's lost decade) to base these types of decision on. My guess is that they spend in increments until they feel/observe that they have it right. Maybe they don't do a great job, but modern history seems litered with the impact of spending paralysis.
Also, I just don't believe that a company investing money into some financial vehicle is more effective at creating growth than government spending. That's just taking it too far for me. Spending often needs to be directed, in a manner the private sector just can't do.
Yes, I know about the Keyensians. If spending cuts are bad and tax hikes are good, then why not go all out? Why only $800B for the stimulus? Why not $8 trillion? We'd surely get the necessary loans with a 1.5 multiplier, right? The truth is that if there was a 1.5x multiplier, we would have had a much larger stimulus and it would be made permanent.
It doesn't matter whether the private sector is more efficient or not (although you can argue that Wall Street was almost comically inefficient during the credit meltdown of 2008).
Government doesn't exist to be the most efficient actor in an economy. It exists to invest in the things that the market cannot or will not provide -- public safety, military, education, transportation, and so on.
But the funny part is, that $ would not be spent in america. Why would you when the more efficient outlays of capital, and most likely growth areas, are in other countries?
Given 1) Free flows of liquidity. 2) Alternative higher growth areas and economies
Why wouldn't corporations take every penny and put them where they would get the most return? Because of some patriotic duty?
Simple: Large private-sector companies sitting on a mountain of cash right now; they're not using it to create jobs. This means that additional tax cuts (or keeping taxes at the same rate) will not create jobs; it will just make the mountain of cash larger. Closing corporate tax loopholes (which the US system is plagued with) and creating a temporary surtax for those who earn, say, $500,000 or more, will force businesses and people in that category to find more productive places to park their money. Hiring people has historically been a great way to do that because it prevents you from having to pay tax on the money while giving you or your business a productive benefit which you can hopefully use to make bigger profits in the future.
I am a bit confused - by private sector, are you referring to corporations as in public vs private sector. Or are you referring to people outside of the government as in households?
Further, isn't the discussion about removing tax breaks, which were given out with the expectation that they would expire before today. - Someone correct me if I am wrong and there is some other clause on the table.
While yes fixing the tax situation would by definition be taking money out of the private sector, it is not the entire picture - the money was never supposed to be there in the first place.
Looking at all of human history, can you see a trend of governments becoming more efficient without money? If you look at the economic history of the last two centuries it is far more likely that a government with less income will just go bust under its weight and default. Government and efficiency is almost an oxymoron. Larger companies generally become less efficient the bigger they become, the same is true for governments.
I would like to know why you are optimistic about the situation and why you think this time will be different than other similar (albeit on a smaller scale) situations in history?
When people are forced into an unfavorable situation that they feel needs to be gotten out of, they generally try very hard to do that.
This makes it different because the government's kind of been like "We're just going to pretend to have money and not worry about it". Now, they are realizing that they actually have to deal with it. That's what I'm hoping for at least.
There is no part of the budget that can't be cut except perhaps for interest payments on the debt. If we imagine that it's impossible to cut entitlement spending then we might as well go home right now and declare that the US has had a good run, because the math on that spending does not add up.
Debt service (a large and growing part of the budget) can't be cut, period.
Existing entitlements can't really be cut, the best you can hope for in a practical sense is giving a different deal to younger people, which doesn't change the budget outlook immediately.
You're right that the math does not add up. It doesn't add up because we insist on living in a fantasyland where revenues are off the table.
If you're trying to imply that those 34% must be the wealthy, remember that the vast majority of wealth in America is held by something like 1% of the population, not 34%.
Heh, no, quite the contrary. I'm at a loss as to why the 34% is as high as it is. My point was that I'm sure the 34% is full of people that make significantly less and yet pay a higher tax rate than those they're idealistically defending (meanwhile enjoying unemployment and having their benefits put at risk due to "compromise" tactics and the in-fighting)
You may or may not agree with a progressive tax system, but I wonder how on earth so many people have been convinced that a regressive tax system is good for the country. It's patently absurd that politicians are fighting tooth and nail to preserve tax havens and loopholes that allow the filthy rich to pay a 15-20% income tax whilst the rest of the 'middle class' is paying upwards of 30.
I was thinking the other day that people just don't understand how oppresive our current system of taxation is. We had a civil rights movement in the past, it's about time for a 'fiscal rights' movement.
What's shocking about that chart is that the difference between what liberals and conservatives think the wealth spread should be is dwarfed several times over by the difference between the average of what they both want and what it actually is. We should be able to come together on bipartisan tax increases for the wealthiest quintile— but people just don't know the facts.
It's not clear to me why, if someone has a vastly incorrect notion about the actual state of the world, we should put much stock in their opinion of how the world ought to be.
The best you could hope for is to infer some directionality. If I think the temperature of a room is 15C, and I say I think it ought to be 10C, but the actual temperature is 25C, then one should probably not infer anything beyond that I want the room cooler.
How is that relevant to my comment? The point is that Americans are voting against their self interest, not because of values, but because of ignorance.
Most politicians families are in said tax bracket. Most of their personal friends are also in that bracket. Arguments about the issues/merits of cronyism and nepotism aside, that is a simple answer as to why they are fighting so hard.
The amazing aspect is the people in the middle class arguing for the oppressive tax system. Perhaps it is American aspirationalism or some misguided belief in trickle-down economics. Either way it is a curiously unique situation.
What is patently absurd is the assumption that tax havens and loopholes are only for the filthy rich. I make less than $80K, I'm solidly in the "middle class", and my effective federal income tax rate last year was less than 6% after deductions etc. People just don't understand how to set down with a copy of Turbo Tax and ferret out the deductions.
What value does this actually create for the economy? You get some extra cash in your pocket, but for what actual gain? You spend hours, or days, or as is the case for some people I know week of their free time doing creative accounting. This is pointless busywork with no actual economic gain to a nation. The government gets less money from you, and you personally spend an amount of time on something that could be much better spent /generating/ or spending capital.
I honestly think governments should remove all deductions and just charge a lower tax rate. I know it is an economic tool to get people to do or buy certain things but income tax deductions really add very little value to the economy and waste people's time. Note, that I am talking about income tax deductions, deductions can be put on other taxes to encourage purchasing but then it is your choice to buy it or not and the gain is immediate instead of at tax time.
My comment was just to point out that loopholes exist for every income level, not just the rich. I agree that a simpler tax scheme like the "fair tax" or a flat tax with the first $(poverty level annually adjusted for inflation) tax free would be wholly better.
"The rich" pay a larger percentage of federal taxes than they did 20, 30, or 50 years ago. Moreover, we can't tax "the rich" enough to close the gap in our budgets and liabilities. We need to stop spending like sailors on shore leave first, then we need to simplify the tax system, then we need to make sure we're actually running at a surplus so we can pay down the debt. Everyone one of those steps will require hard choices and sacrifices by more people than just "the rich", there's no free lunch in balancing the federal budget.
This is because through a regressive taxation system and very successful lobbying of government they have allowed themselves to amass an amount of wealth so vast that wealth of the 'have nots' simply pales in comparison. I consider your assertion to be one of the more damning pieces of evidence that our system of taxation and distribution of wealth is completely amoral.
Ironically the size of this deal is only about half of what S&P said that they need to see to avoid a credit downgrade for the USA from AAA to AA.
Such a credit downgrade is likely to cause our interest rates to arise. A back of the envelope calculation suggests that the increased interest costs could cost us in the neighborhood of $2 trillion over the next decade. (See https://plus.google.com/u/0/114613808538621741268/posts/b7uw... for a line of reasoning suggesting that it could cost us that much.)
So the end result over the next decade is that we cut government by $2 trillion, raise the debt ceiling by $2 trillion, and pay $2 trillion more in interest. Thus leaving our actual deficit about the same, but causing our government to deliver $2 trillion less.
I hope the tea party is proud. Unfortunately the general public doesn't understand the numbers well enough to see how stupid this whole exercise was.
Supply and demand for bonds is heavily influenced by ratings, and investors always have choices.
There are plenty of stories out there of large institutional investors who have already reduced their asset allocations on treasury bonds because of this dangerous brinksmanship on the part of the Republicans.
Historically US debt traded at a substantially lower interest rate than other AAA debt. In fact we even hit a negative interest rate. People paid to loan us money! (They were willing to do it because markets were incredibly volatile, and buying treasuries was cheaper than putting large amounts of money in a warehouse, paying for a guard, and risking theft. I'm not joking.)
With the USA downgraded to AA and widespread awareness that stupid politics can result in us not paying, it is hard to conceive of a way that our interest rate will not rise.
Don't get me wrong. We'll still have a large and liquid debt market. But we won't enjoy the absurdly low interest rates that we have gotten used to.
I can easily conceive of it. Where else are you going to put it? Europe? The interest rates are set at auction, and if the stock market is really sour, and European bonds are less attractive, capital will pour into US bonds no matter what these ratings clowns say. (Aren't these the same folks that brought us AAA rating for MBSs less than five years ago, BTW?)
But if they made no cuts they would have been downgraded anyways. They should have raised taxes and done cuts to the point where they would not have to pay another 2 trillion in interest.
If we'd voted for the usual "bare increase" back in Feb, the bond markets would have not noticed and our rating would have been fine.
The cause of the downgrade is that our politicians demonstrated that even when they are negotiating under the best of all possible circumstances to solve our long-term problems, they act like idiots. A "grand bargain" was the only way that put us on a course to actually bring debt under control. Our inability to negotiate that combined with our long-term fiscal problems is a major long-term problem.
If you want to know more about our fiscal situation, I highly recommend http://www.kpcb.com/usainc/USA_Inc.pdf. It is very long, detailed, and depressing.
Here are a few key facts. Our government's cash flow last year was -$11,000 per household. Our government's net worth, if we used standard business accounting, is -$44 trillion. Or -$370,000 per household. By 2025, CBO projections show that our total tax revenue will be entirely absorbed by interest payments and entitlements.
As a country we need dramatic changes. Soon. And there is absolutely no indication that the political will exists anywhere to create them.
So we are in agreement. Anyways can mean different things, but it is better to face the (and I have -$100T NPV accounting) -$44T crisis earlier than later, what with the baby boomers still working. My only point is that at least this brought the looming debt problems to the forefront of Americans mind, albeit at a undesirable outcome. If this crisis had actually resulted in real cuts now and real tax increases now it would have softened the blow in the long term.
If this crisis had actually resulted in real cuts now and real tax increases now it would have softened the blow in the long term.
I'm not positive that that is true, but that is what S&P thinks.
The possibility to the contrary is that our economy is slowing again and we have more financial problems dragging us down. Real cuts and tax increases would slow it further. Reduced GDP growth increases our long-term fiscal problems. How exactly those factors would balance out against each other is a heavily debated problem in economics. (The two major political parties have sharply different opinions about the answer.)
But while that can be debated, my belief is that either "kick the can without the political fight" or "grand bargain" would have been better for us than what we actually wound up with. And I think we're in agreement there.
"By 2025, CBO projections show that our total tax revenue will be entirely absorbed by interest payments and entitlements."
That sounds worse than it is. Entitlement programs are major component of the budget. (The other is defense.) The real argument here is about what's going to take the fall for the last 10 years of wars, tax cuts, and bailouts. Will we choose to stop doing wars, tax cuts, and bailouts? Or cut entitlements instead? It looks like the bipartisan consensus is to go ahead and stay with the war/tax cut/bailout plan and shed social programs to pay for them.
If we as voters don't like that, it looks like our only option is to replace the officials in the legislative and executive branches in 2012 and try to roll back.
Let's say you earned $200,000 a year. You live a lifestyle that costs you $350,000 a year and currently owe $1.5 million. The interest payments on that are probably $30,000 a year (15% of your income). Your solution? Borrow more? What bank would lend you money?
Multiply those numbers by a million and you have the current situation of the US government.
Non-discretionary spending is spiraling out of control. I had this discussion at dinner last week where someone suggested it was crazy not to raise taxes. I disagreed. My argument is basically this:
1. People on low incomes currently pay little, no or even negative tax (factoring in government benefits);
2. Such a system creates a disincentive to work with the marginal rate of tax. If you earn $10,000 and get $2,000 from the government but by $20,000 you are paying $2,000 in tax with no benefits, the marginal rate of tax is actually 40%;
3. The problem isn't the top rates of tax, it's all the exemptions and the complexity of the tax system.
So how about instead of populist pleas of taxing the rich we simply make everyone pay their fair share? What about 25 cents in every dollar for every dollar you earn each year above $20,000 (and nothing below)?
Congress seems beholden to special interests and pork barrel politics. In the 90s Congress tried to surrender their power to the executive branch by passing the line item veto measure. In previous years they were unable to close military bases and had to establish the Base Realignment and Closure Commission.
Will it take a similar commission for Congress to distance themselves from similarly hard decisions? The longer this goes on, the harder it's going to get.
What I see happening in the coming years:
1. Retirement age being raised to 70 or even higher;
2. Federal sales tax similar to the consumption tax every other OECD nation has. State sales taxes are too complex. Interstate sales tax exemptions are fighting a losing battle to continue to exist; and
3. The US adopting a more isolationist foreign policy, including a continued decline in the US military that is already well underway (compare the size of the US armed forces today to what they were 20-25 years ago).
Comparing personal budget with US budget is a gross oversimplification.
First, US can (it is already doing via QE) monetarazie all the debt. And one comedian said: US can just start a little bigger war to get us out of the.
Also don't forget that 4/5 of all that "government" spending (that is medicare, SS and defense) is actually just tunneling money to other parts of economy (defense contractors) and poor people.
Also we have disturbing trend which will, I believe, start making differences: the rich are getting richer and poor are getting poorer. If that trend continues, we will see some Trocky wannabes popping around.
What I see happening in the coming years:
1. One more banking crisis: this time it starts from China. They say all depressions have two legs: the second is leg is longer.
2. Thanks for this new banking crisis, we will finally reconstruct the banking sector and make it more efficient. There will be no more 4 banks on each intersection in downtown SF.
The US spent $687B on Defense spending in 2010 [http://milexdata.sipri.org/], and $502B in 1990 (both numbers in 2009 dollars). China - the next guy down the list - is estimated at $114B. I'm a strong believer in the benefits to society that come from military research, but on a funding basis, don't you think there's some room to decline a bit there?
Having said that, I haven't been in the field or done serious writings and research on military readiness. If the US military is declining as bad as you say over the past twenty years, then isn't a larger question what we're spending all that money on?
> So how about instead of populist pleas of taxing the rich we simply make everyone pay their fair share? What about 25 cents in every dollar for every dollar you earn each year above $20,000 (and nothing below)?
That kind of misses the point. It's still a progressive rate structure--it just has fewer brackets than the current rate structure. If we are going to have a progressive rate structure, it's hard to make a sensible argument that fewer brackets are better[]. The most logical would be to have an infinite number of brackets, with your tax being the integral of continuous monotonic increasing function that starts at 0 and raises to whatever the highest marginal rate is.
[] Some people argue that fewer brackets simplify the tax code. They do, but in a trivial manner. All having fewer brackets does is reduce the number of entries in a table on page 1. All of the complexity in the tax code comes from determining what is income and who owes tax on it.
81 comments
[ 3.0 ms ] story [ 153 ms ] threadPositions won't be reversed. Obama really thinks bipartisanship works.
It was pretty clear that the Tea Party wing of the GOP was willing to see the US default if it meant no increase in revenue and steep cuts to entitlements; I wouldn't be surprised to see Reid et al stick to a "keep the tax breaks for middle income Americans and close loopholes and subsidies for corporations" line, then blame the Republicans for the raise in taxes on the middle class when they don't accept his proposal. After that, it's simply a matter of what a tax break will look like. Democrats have quite clearly stated their willingness to cut taxes for "working Americans" (ugh), so the Republicans would have to argue why they think corporate subsidies and tax breaks for the rich should be enacted when they will further worsen the deficit. If you're Reid et al, that's a much nicer position to argue from than if you accept Obama's near dogmatic insistence on compromise, or, as many Democrats see it, giving everything away.
That said, it's probably good news. If the Tea Party drives America into irrelevance it will be better for everyone in the long run. A monopole world is a terrible idea.
http://en.wikipedia.org/wiki/GovWorks
http://www.amazon.com/gp/product/B001TH2UC4/ref=as_li_ss_tl?...
Quote from http://www.ronpaul.com/2011-07-31/ron-paul-freeze-the-budget...
If you consider taxation theft, then yes.
Family analogies are probably the best you are going to get for "analysis" from these people.
They don't say you can not model the economy, they do say whatever correlations occur in your models can not invalidate logical necessities.
It can be modeled, the models just won't be predictive when applied to reality because it's impossible to control for variables in such a complex system. Mathematics and statistics can be used effectively in economic analysis, but the majority of what's produced (and that our government uses for guidance) succumbs to correlation/causation fallacies.
Economics is not science. It's theory. Economic theories are not testable. Trying to give one's work the impression of credibility through misapplied scientific language and methods is called pseudoscience, and its purpose is to mislead.
The key word in the first sentence is "all" and the second sentence is not exactly true. The US Gov would not of actually had to default, but would have had to cut spending in other areas. The modern press cannot actually claim to informing the electorate of anything but hyperbole and repeated, unexamined words of politicians.
This might be a good thing, it could force the government to be creative with their budgeting (and maybe even produce better results)
According to whom? You do realize that these are cuts to government spending, right? How does government get money to spend? It taxes or borrows (taxes in the future). Therefore, a dollar not spent by the government (in a monopolistic, corporatist manner) is a dollar more for the private sector to spend (in a more competitive, efficient manner). If this wasn't true, the government would be the sole provider of all goods and services. Even if the private sector wasn't more efficient in allocating resources, the economy would only be hurt in the long term by that loss of efficiency, not any immediate loss of economic growth, because the spending just shifted from public to private.
Edit (my own thoughts):
I'm a fiscal conservative. However, I believe that a problem with your point of view is that, while the private sector might be more efficient with that dollar, the fundamental problem is that it might not spend it (or at least, not all of it).
In tough economic times, companies reduce spending. They try to wait out the storm. On an individual basis, this makes sense. In these times, the government can help balance this out by actively spending money.
How does the government know what the correct level of spending for a given company is? How does government know how to "balance this out"?
Also, I just don't believe that a company investing money into some financial vehicle is more effective at creating growth than government spending. That's just taking it too far for me. Spending often needs to be directed, in a manner the private sector just can't do.
Government doesn't exist to be the most efficient actor in an economy. It exists to invest in the things that the market cannot or will not provide -- public safety, military, education, transportation, and so on.
Given 1) Free flows of liquidity. 2) Alternative higher growth areas and economies
Why wouldn't corporations take every penny and put them where they would get the most return? Because of some patriotic duty?
Further, isn't the discussion about removing tax breaks, which were given out with the expectation that they would expire before today. - Someone correct me if I am wrong and there is some other clause on the table.
While yes fixing the tax situation would by definition be taking money out of the private sector, it is not the entire picture - the money was never supposed to be there in the first place.
I would like to know why you are optimistic about the situation and why you think this time will be different than other similar (albeit on a smaller scale) situations in history?
This makes it different because the government's kind of been like "We're just going to pretend to have money and not worry about it". Now, they are realizing that they actually have to deal with it. That's what I'm hoping for at least.
Existing entitlements can't really be cut, the best you can hope for in a practical sense is giving a different deal to younger people, which doesn't change the budget outlook immediately.
You're right that the math does not add up. It doesn't add up because we insist on living in a fantasyland where revenues are off the table.
And what percentage of that 34% is enjoying a higher quality of life than 10 years ago AND makes under $250K a year?
I have to wonder. (yes, even knowing the [perceived] political alignment of HN and risk I'm taking with my vital karma.)
I was thinking the other day that people just don't understand how oppresive our current system of taxation is. We had a civil rights movement in the past, it's about time for a 'fiscal rights' movement.
http://steadfastfinances.com/blog/2010/10/09/behavioral-econ...
What's shocking about that chart is that the difference between what liberals and conservatives think the wealth spread should be is dwarfed several times over by the difference between the average of what they both want and what it actually is. We should be able to come together on bipartisan tax increases for the wealthiest quintile— but people just don't know the facts.
The best you could hope for is to infer some directionality. If I think the temperature of a room is 15C, and I say I think it ought to be 10C, but the actual temperature is 25C, then one should probably not infer anything beyond that I want the room cooler.
The amazing aspect is the people in the middle class arguing for the oppressive tax system. Perhaps it is American aspirationalism or some misguided belief in trickle-down economics. Either way it is a curiously unique situation.
I honestly think governments should remove all deductions and just charge a lower tax rate. I know it is an economic tool to get people to do or buy certain things but income tax deductions really add very little value to the economy and waste people's time. Note, that I am talking about income tax deductions, deductions can be put on other taxes to encourage purchasing but then it is your choice to buy it or not and the gain is immediate instead of at tax time.
Such a credit downgrade is likely to cause our interest rates to arise. A back of the envelope calculation suggests that the increased interest costs could cost us in the neighborhood of $2 trillion over the next decade. (See https://plus.google.com/u/0/114613808538621741268/posts/b7uw... for a line of reasoning suggesting that it could cost us that much.)
So the end result over the next decade is that we cut government by $2 trillion, raise the debt ceiling by $2 trillion, and pay $2 trillion more in interest. Thus leaving our actual deficit about the same, but causing our government to deliver $2 trillion less.
I hope the tea party is proud. Unfortunately the general public doesn't understand the numbers well enough to see how stupid this whole exercise was.
They are decided by supply and demand.
Since there are no other AAA rated markets as large, people will have no choice but to buy US debt. That demand will keep interest rates low.
There are plenty of stories out there of large institutional investors who have already reduced their asset allocations on treasury bonds because of this dangerous brinksmanship on the part of the Republicans.
Historically US debt traded at a substantially lower interest rate than other AAA debt. In fact we even hit a negative interest rate. People paid to loan us money! (They were willing to do it because markets were incredibly volatile, and buying treasuries was cheaper than putting large amounts of money in a warehouse, paying for a guard, and risking theft. I'm not joking.)
With the USA downgraded to AA and widespread awareness that stupid politics can result in us not paying, it is hard to conceive of a way that our interest rate will not rise.
Don't get me wrong. We'll still have a large and liquid debt market. But we won't enjoy the absurdly low interest rates that we have gotten used to.
If we'd voted for the usual "bare increase" back in Feb, the bond markets would have not noticed and our rating would have been fine.
The cause of the downgrade is that our politicians demonstrated that even when they are negotiating under the best of all possible circumstances to solve our long-term problems, they act like idiots. A "grand bargain" was the only way that put us on a course to actually bring debt under control. Our inability to negotiate that combined with our long-term fiscal problems is a major long-term problem.
If you want to know more about our fiscal situation, I highly recommend http://www.kpcb.com/usainc/USA_Inc.pdf. It is very long, detailed, and depressing.
Here are a few key facts. Our government's cash flow last year was -$11,000 per household. Our government's net worth, if we used standard business accounting, is -$44 trillion. Or -$370,000 per household. By 2025, CBO projections show that our total tax revenue will be entirely absorbed by interest payments and entitlements.
As a country we need dramatic changes. Soon. And there is absolutely no indication that the political will exists anywhere to create them.
I'm not positive that that is true, but that is what S&P thinks.
The possibility to the contrary is that our economy is slowing again and we have more financial problems dragging us down. Real cuts and tax increases would slow it further. Reduced GDP growth increases our long-term fiscal problems. How exactly those factors would balance out against each other is a heavily debated problem in economics. (The two major political parties have sharply different opinions about the answer.)
But while that can be debated, my belief is that either "kick the can without the political fight" or "grand bargain" would have been better for us than what we actually wound up with. And I think we're in agreement there.
That sounds worse than it is. Entitlement programs are major component of the budget. (The other is defense.) The real argument here is about what's going to take the fall for the last 10 years of wars, tax cuts, and bailouts. Will we choose to stop doing wars, tax cuts, and bailouts? Or cut entitlements instead? It looks like the bipartisan consensus is to go ahead and stay with the war/tax cut/bailout plan and shed social programs to pay for them.
If we as voters don't like that, it looks like our only option is to replace the officials in the legislative and executive branches in 2012 and try to roll back.
Multiply those numbers by a million and you have the current situation of the US government.
Non-discretionary spending is spiraling out of control. I had this discussion at dinner last week where someone suggested it was crazy not to raise taxes. I disagreed. My argument is basically this:
1. People on low incomes currently pay little, no or even negative tax (factoring in government benefits);
2. Such a system creates a disincentive to work with the marginal rate of tax. If you earn $10,000 and get $2,000 from the government but by $20,000 you are paying $2,000 in tax with no benefits, the marginal rate of tax is actually 40%;
3. The problem isn't the top rates of tax, it's all the exemptions and the complexity of the tax system.
So how about instead of populist pleas of taxing the rich we simply make everyone pay their fair share? What about 25 cents in every dollar for every dollar you earn each year above $20,000 (and nothing below)?
Congress seems beholden to special interests and pork barrel politics. In the 90s Congress tried to surrender their power to the executive branch by passing the line item veto measure. In previous years they were unable to close military bases and had to establish the Base Realignment and Closure Commission.
Will it take a similar commission for Congress to distance themselves from similarly hard decisions? The longer this goes on, the harder it's going to get.
What I see happening in the coming years:
1. Retirement age being raised to 70 or even higher;
2. Federal sales tax similar to the consumption tax every other OECD nation has. State sales taxes are too complex. Interstate sales tax exemptions are fighting a losing battle to continue to exist; and
3. The US adopting a more isolationist foreign policy, including a continued decline in the US military that is already well underway (compare the size of the US armed forces today to what they were 20-25 years ago).
First, US can (it is already doing via QE) monetarazie all the debt. And one comedian said: US can just start a little bigger war to get us out of the.
Also don't forget that 4/5 of all that "government" spending (that is medicare, SS and defense) is actually just tunneling money to other parts of economy (defense contractors) and poor people.
Also we have disturbing trend which will, I believe, start making differences: the rich are getting richer and poor are getting poorer. If that trend continues, we will see some Trocky wannabes popping around.
What I see happening in the coming years:
1. One more banking crisis: this time it starts from China. They say all depressions have two legs: the second is leg is longer.
2. Thanks for this new banking crisis, we will finally reconstruct the banking sector and make it more efficient. There will be no more 4 banks on each intersection in downtown SF.
Having said that, I haven't been in the field or done serious writings and research on military readiness. If the US military is declining as bad as you say over the past twenty years, then isn't a larger question what we're spending all that money on?
That kind of misses the point. It's still a progressive rate structure--it just has fewer brackets than the current rate structure. If we are going to have a progressive rate structure, it's hard to make a sensible argument that fewer brackets are better[]. The most logical would be to have an infinite number of brackets, with your tax being the integral of continuous monotonic increasing function that starts at 0 and raises to whatever the highest marginal rate is.
[] Some people argue that fewer brackets simplify the tax code. They do, but in a trivial manner. All having fewer brackets does is reduce the number of entries in a table on page 1. All of the complexity in the tax code comes from determining what is income and who owes tax on it.
Downvote worthless comments. Comments that you disagree with are not worthless.
If you agree with the comment vote it up, otherwise leave it alone.