It is unclear to me whether either Romney or Obama can fix the fundamental fiscal problems that ail America. I give credit to Ryan for having the guts to be a lightening rod for entitlement reform, but even his plan for putting the US back on a sustainable fiscal path is filled with wishful thinking about spending cuts. See the Council for Foreign Relations (CFR) chart and related comments at the bottom of this email for an sobering analysis of Ryan’s plan. (The CFR is about as down the middle a think tank as you are going to find; this is not a partisan low blow on Ryan.)
There are no easy answers to America’s fiscal challenges that can be implemented with what either the Dems or the GOP promises. The Dems want us to believe that a combination of defense cuts, tax hikes on the wealthy and strategic new subsidies for green energy, education, infrastructure and health can re-invent the US economy, thus leading to a revitalized economy and eventually … a balanced budget. Keep dreaming!
I highly doubt the GOP can balance America’s books by using what seems to be a re-tread of the Reagan formula: lower taxes, de-regulation and higher growth – but no net cuts to spending and maybe even more spending.
The crisis we have is a spending crisis and both parties are to blame. Check out the charts directly below these comments. They show how few households pay taxes and how large a percentage of the Fed budget goes to “subsidies” to households in one form or another.
What we need is a bipartisan effort to reduce public subsidies that BOTH parties use to pay off special interests. The GOP loves public subsidies in the form of tax breaks; these breaks go in large measure to the so called wealthy. Consider the business tax write off for health insurance or the tax write off for interest expense, which encourages home owners to maximize mortgage leverage and for business owners to maximize leverage on their balance sheets. Actually, the Democrat Party also especially likes the health insurance subsidy – Obama blasted McCain for suggesting in 2008 that we should get rid of tax breaks on company sponsored health care!!
Simpson Bowles suggested we get rid of these two tax breaks – and others – so that we could simplify the IRS code and lower marginal tax rates for everyone. We desperately need a Simpson Bowles approach, but can either party deliver?
Obama wants to increase taxes in order to pay for additional subsidies in many other parts of the economy, including for low interest loans for college education, for green energy, for infrastructure projects (he wants a national infrastructure bank) and for his expanded health insurance, Obamacare.
Obama lives in a fantasy world where such subsidies are efficiently allocated and work to make the economy more healthy and more sustainable, while reducing income inequality and leveling the playing field for disadvantaged household – so everyone has a shot at a good future if they work hard and act responsibly.
This is pie-in-the-sky hocus-pocus fantasy-land!!
Public subsidies are like a cancer. They grow and grow and meanwhile suck the life out of the host.
We need to get rid of ALL subsidies. period.
We need bi partisan cooperation for ending each party’s favored subsidies. Every subsidy goes to an ostensibly worthy cause. But, do we ever sit down and review what are the effects of the subsidy programs we already ahve? The way I see it subsidies are self defeating because they raise the demand for the subsidized good or service, thus raising the price which begs the need for even larger subsidies. This is exactly what we’ve seen in health care and education and in the financial sector. the more we subsidize these sectors of the economy, the higher the prices go – resulting in a price and access “crisis.” Ultimately, the answer to the healthcare and education and financial sector stress we’ve seen is public ownership. Only will 100% public ownership promise to fix the distortions in markets caused by subsidies. the problem with the public ownership model is that we know it doesn’t work as demonstrated throughout history. Subsidies are a slippery slope to public ownership of the key sectors of our economy.
The Dems want to solve the access crisis in health care and secondary education by doubling down on the subsidy schemes that have fueled “hyper” (relatively very high) inflation in these sectors and created the access crisis in the first place. and now Obama is selling major new subsidy schemes for other sectors of the economy, such as green energy. What did we learn from the ethanol disaster, which has been impossible to unwind even though Al Gore has admitted the ethanol experiment is an unmitigated disaster. It requires more CO2 to grow the corn used to make ethanol than ethanol saves versus gasoline and the cost to tax payers is billions.
The US has become the subsidy nation. We like to think that we aren’t a social welfare system, like Europe, but if you look through our system of private delivery for education and health to the public subsidies going to these sectors we see that the sectors are private only in a nominal sense. The problem for the GOP, which is the historical champion of the free market, is that the party has supported massive public subsidy schemes to special interests (including the military industrial complex). The GOP has also made some noise about the Federal Reserve, but at the end of the day the GOP needs the public printing press just as much as the Democratic Party.
The GOP is bereft of ideas when the market “fails” because the GOP doesn’t want to admit its complicity in distorting the market with massive subsidy schemes it promotes including the Federal Reserve, which subsidizes the financial sector.
The Dems on the other hand are bereft of ideas once the economy is saved from period crisis and requires the public sector to get out of the way. Instead the Dems propose even more public sector involvement to fix an inherently unstable capitalist system.
the GOP claims to favor small government and free markets, but in reality it favors slightly smaller, but still enormous government, and a rigged system based on subsidies and money politics.
The loser in all of this is the so called “free Market” which gets blamed for all of the public sector interventions that caused the dysfunction in the first place.
I am not arguing that the economy would work perfectly if we reduced special interest subsidies such as for healthcare and green energy and for financial sector and housing and farm sector and education. what I am saying is that the subsidies promise better results than the free market, but in fact deliver worse results.
The free market may result in income inequality and unlevel playing field and in business cycles and industrial accidents and asset bubbles …. But, these natural features of markets are only made worse by well intended subsidies or direct public interventions or regulations to fix them!!! this is the law of unintended consequences.
America is sometimes called cowboy capitalism because it seems like we don’t have such a public sector involvement in the economy. But, reality is much different than appearences. America’s public sector involvement is in many respects hidden because it is delivered in the form of subsidies to nominally “private” entities that act in the “market” delivering goods and services. the distortions and dysfunction caused by public sector subsidies are no less pernicious than more direct and explicit welfare schemes in Europe, but they are hidden. Thus it is easier to blame or villify the market in America when things do go wrong, when in reality the cause of the problems trace back to public subsidies, which are sold by political elites as well meaning public policy.
In fact, what we have is a case of the public sector using subsidies as a means of playing the money politics game while selling these policies as pro-voter. The voter gets screwed because subsidies result in dysfunctional markets (often with exaggerated price inflation causing an access crisis for lower income households) which begs more public intervention leading to further market distortion and dysfunction.
The market is an easy bogey man for the distortions and dysfunction caused by ostensibly well meaning subsidy policies – that I believe are really fundamentally about politicians delivering goodies to special interest groups who contribute to finance political campaigns.
The answer is not to pass campaign finance reform. the answer is being aware that subsidies and government regulations are the currency that politicians use to drive money politics. Let’s get cynical folks!!!
Why do we believe in free lunch promises from politicians? No more empty promises. Don’t believe the government can work miracles via subsidies. If we don’t get rid of subsidies, we will sink under their weight as the productive parts of our economy are made to pay for subsidies (wealth transfers) that are like empty calories for the economy.
Friday, September 7, 2012
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America’s real long-term fiscal problem: The federal government has become a gigantic wealth-transfer machine
The charts above illustrate two disturbing trends that help frame the long-run fiscal challenges confronting the U.S. that far outweigh any possible near-term fallout from the pending “fiscal cliff” that the federal government faces at the end of this year.
1. The top chart above (data here, see Table 6.1) displays the increasing share of the federal government’s spending on “payments to individuals,” based on actual data from the Office of Management and Budget (OMB) for the years 1952 to 2011 and its projections through 2017.
In 1952, less than one out of every six dollars spent by the federal government represented payments to individuals. By 2010 payments to individuals had increased so dramatically over time that roughly two out of every three dollars (66.1 percent) spent by the federal government in that year were payments to individuals for programs like Social Security, Medicare and Medicaid, public assistance, food and housing assistance, and unemployment assistance. Last year, payments to individuals as a share of federal spending decreased slightly to 65 percent, and that category was more than three times larger than the share of 2011 federal spending on defense (20.1 percent), and more than ten times larger than the share spent by the federal government on interest payments for the national debt (6.4 percent). The OMB estimates that payments to individuals will exceed 68 percent of federal spending in 2014, 2015 and 2016, before falling slightly to 67.5 percent in 2017 when payments to individuals will exceed $3 trillion for the first time.
2. At the same time that payments to individual Americans consume an increasing share of federal spending, the burden of taxes to finance federal spending is falling on a shrinking group of American taxpayers. According to a recent study by The Tax Foundation, 41 percent of federal income tax filers in 2010 had a zero or negative federal income tax liability after taking deductions and credits, which was a slight decrease from the previous year when 41.7 percent of tax filers had no tax liability (see bottom chart above). In both years, the number of nonpaying tax filers exceeded 58 million. After fluctuating in a range between roughly 20 and 25 percent for the fifty year period from 1950 to 2000, the percent of Americans filing tax returns but paying no federal income taxes has increased sharply over the last decade to record-setting levels above 40 percent in the two most recent years.
So why does this matter?
Our long-term fiscal problems won’t be fixed until we address what might be our nation’s most serious fiscal-related problem: we’re increasingly becoming a European-style “entitlement nation,” with “payments to individuals” increasing both in absolute dollar amounts and as a share of total federal spending, while at the same time the share of Americans who face a zero or negative tax liability is above 40 percent and rising. In other words, a declining share of American taxpayers is being forced to finance the rising cost of the federal government, which is increasingly being spent on payments to individuals.
John Merline (now at Investor’s Business Daily) described the situation this way in an AOL News editorial last year:
“When you put these two trends together, what you find is that the federal government has over the years essentially turned into a gigantic wealth-transfer machine — taking money from a shrinking pool of taxpayers and giving it out to a growing list of favored groups. This situation will make getting the federal budget under control increasingly difficult, since it will invariably involve pitting those writing checks against those cashing them.”
More recently, AEI’s Nicholas Eberstadt wrote in last Saturday’s Wall Street Journal:
“Within living memory, the federal government has become an entitlements machine. As a day-to-day operation, it devotes more attention and resources to the public transfer of money, goods and services to individual citizens than to any other objective, spending more than for all other ends combined.”
That’s the long-term fiscal cliff that should have us all very concerned – the fact that the federal government over time has turned into a gigantic entitlements and wealth-transfer machine.
Posted on Thursday, September 6, 2012
In his Path to Prosperity, Republican vice presidential candidate Paul Ryan called for $40 trillion in spending over the next 10 years, $7 trillion less than President Obama called for in his 2013 budget. What accounts for the gap? $1 trillion is from Medicaid and other health programs. Another $1.4 trillion comes from anticipated (wished for?) interest-cost savings ($4.3 trillion compared with $5.7 trillion). So where does Ryan make his really big cuts? “Other” mandatory spending. $631 billion was spent on these programs in 2011, though Ryan proposes paring this to only $349 billion by 2018. Over ten years, Ryan slashes a whopping $3.5 trillion vis-à-vis Obama, targets unspecified, from this large and broad category, which includes political minefields like unemployment compensation, retirement benefits, earned income and child tax credits, food assistance, and veteran benefits. This sounds a lot like a New Year’s pledge to cut 1,000 calories a day from the category of “meals.”
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