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Saturday, February 06, 2010

A short note on fiscal policy during the Bush years 


Were the "Bush" tax cuts responsible for the country's fiscal condition heading in to the Obama years, or was it the orgy of spending? It was the spending. In an admittedly static model that assumes that lower spending would not have reduced tax revenues, if expenditures had grown only 4% per year from 2000-2008 instead of 8% we would have run a surplus as recently as 2008.


It's the spending


The years of Republican majority -- 2001 to 2006 -- were a wasted opportunity to shrink the government, war and recession notwithstanding.


16 Comments:

By Blogger MainStreet, at Sat Feb 06, 11:39:00 AM:

Great analysis showing that the tax cuts would have worked if spending was controlled. Now if the Democrats like Dodd and Frank had done their job and reigned in Fannie and Freddie, our country would be in great shape now. Instead, we are on the brink of bankruptcy with all the deficit spending and negative job growth.  

By Anonymous Anonymous, at Sat Feb 06, 12:59:00 PM:

The escalating costs of entitlement spending and interest payments on the debt mean that our federal budget will never be in balance again. There isn't enough money to finance these two, much less the remaining operations of the federal government.

It's trillion dollar deficits as far as the eye can see, until the monetary system collapses and hyperinflation makes our fiat-currency dollar denominated debts affordable.

If you want to see where we're headed, read about Argentina or Russia.  

By Anonymous Mad as Hell, at Sat Feb 06, 02:22:00 PM:

Remind me again, why are Bush - Cheney considered "conservative", but John McCain isn't? Why I am defined as a "RINO" for being fiscally conservative but socially liberal?

There's an alternative universe where we didn't invade Iraq, managed Afghanistan better ... where Bush didn't have to buy votes domestically ... with no Prescription Drug Benefit ... where Fannie / Freddie got reined in after their blatant financial frauds ... where Bush used his 9/11 political capital to pursue true energy independence ... where we punished big corporations for outsourcing jobs.

Both parties share the blame here. It's anyone who's tied to DC.

Anyone with a brain -- who cares about this country -- who looks at the chart above should be outraged, and want to pick up firebrands and pitchforks.  

By Blogger randian, at Sat Feb 06, 03:59:00 PM:

Entitlement spending is the tip of the iceberg. Government pensions are going to destroy us long before Social Security does. San Diego, for example, is practically bankrupt because of it, but they can't declare bankruptcy because California law doesn't permit a city or county to declare bankruptcy without the approval of a state commission. Said commission never says ok, so SD has no choice but to crush its residents with taxes.  

By Anonymous Jim Miller, at Sat Feb 06, 05:18:00 PM:

The Republicans lost control of the Senate in May 2001 when Jeffords jumped. They did not regain it until January 2003.  

By Anonymous Anonymous, at Sun Feb 07, 08:42:00 AM:

@randian,

I'm not trying to pick a fight, but I don't think that is correct. Vallejo declared bankruptcy in 2008 specifically to deal with pension obligation that were consuming something like 75% of the city budget. Also, Orange County declared bankruptcy in the 1990s.

Having said that, your comments about pensions are spot-on. I read an analysis two weeks ago indicating that the majority of states are now insolvent due to pension obligations.

At the end of the day all these programs will be federalized. The feds can print the money to cover the obligations.  

By Anonymous Mad as Hell, at Sun Feb 07, 03:18:00 PM:

"At the end of the day all these programs will be federalized. The feds can print the money to cover the obligations."

Or not.

"No" is a simple platform. The Tea Party movement is a primal scream of outrage. Am I wrong? Just say "no" at the federal level and California, Michigan, etc go broke. Then we have a big reality check. It's a start. Nothing else will work -- in the long run more will suffer if we don't  

By Blogger randian, at Sun Feb 07, 04:10:00 PM:

Anonymous, the bankruptcy commission was created in response to Vallejo's bankruptcy.

See this WSJ article: http://online.wsj.com/article/SB124346998818460615.html

There is also, if I recall correctly, a state law that prohibits California cities from abandoning or renegotiating union contracts and pension obligations, so they have no choice but to declare bankruptcy.

According to the following article, Houston is already functionally bankrupt and Oregon is looking at doubling its cost over the next 5 years for pensions, to 25% of every tax dollar they bring in.

http://globaleconomicanalysis.blogspot.com/2009/10/city-of-houston-is-bankrupt-so-are.html  

By Anonymous Anonymous, at Sun Feb 07, 11:43:00 PM:

@ randian,

Thanks for the link to the WSJ article. I assume from your post that the law was enacted in CA.

(Full disclosure: I'm an attorney). I agree with the comments in the WSJ article indicating that the CA law would not pass the smell test in bankruptcy court. Bankruptcy is federal law. As my bankruptcy professor (Pat Bauer) used to say when addressing conflicts between state law and federal law: "The feds have the nukes." A federal judge will have precious little sympathy with CA's attempt to frustrate federal bankruptcy law.

If SD is citing this law it is nothing more than a crutch. Kick it out from under them.  

By Anonymous Anonymous, at Sun Feb 07, 11:56:00 PM:

@ Mad as Hell,

Sadly, you're wrong. It isn't just CA and MI that will go broke, it is about 70% of the states and virtually every major city and county in the nation. (On the upside, the vast majority of these states an municipalities are blue.)

What you refer to as "a big reality check" will in fact be experienced as the widespread defaulting on legal debts and pension obligations, a large portion of which are due to police and firefighters. The next step is widespread corruption in our local and state police--and who could blame them?

No, this won't happen. These obligations will be nationalized. Major retirement reforms are coming, and this will probably be a part of it. It will be called "retirement security" but in fact it will be the effective theft of your retirement accounts, probably through a requirement that they be invested in treasuries. We are Argentina, and Obama is our Kirchner.  

By Blogger randian, at Mon Feb 08, 12:18:00 AM:

I agree with the comments in the WSJ article indicating that the CA law would not pass the smell test in bankruptcy court.

You're talking about the bankruptcy commission, right? You must have missed this comment: "Bankruptcy Code Section 109(c)(2), "an entity may be a debtor under chapter 9 of this title if and only if such entity -- (1) is a municipality; and (2) is specially authorized, in its capacity as a municipality or by name, to be a debtor under such chapter by State law, or by a governmental officer or organization empowered by State law to authorize such entity to be a debtor under such chapter."

Subsection (2) appears to give California's bankruptcy commission the power it needs to prevent any city in California, including San Diego, from filing a Chapter 9, thereby protecting union contracts and pensions.

This doesn't prevent a municipality from simply defaulting in lieu of bankruptcy, but that doesn't prevent the state receiver from simply jacking up local taxes to make up the shortfall. The state government will be able to crush its citizens with taxes while disclaiming any responsibility for it.  

By Anonymous Mad as Hell, at Mon Feb 08, 08:14:00 AM:

"it is about 70% of the states and virtually every major city and county in the nation."
To Anon @ 11:56 ... Point taken. But the bankruptcy of a major state like CA should be a wake-up call to the rest of the country. When the first big test case happens, it'd be disastrous for the rest of us if a federal bailout is done 100 cents on the dollar, like what the UAW achieved with Obama's help on GM. Which is why control of the House after 2010 is critical to how this plays.
The NPV of our public pensions is huge. If nothing changes -- New York State employees already own my house, for example. I'm not alone in this.
If you look at the future taxes necessary to close deficits, the federal government will need to own 90% of my future income over some threshold. The over/under is advertised as $250,000 -- but quick math shows this will need to come down to $100,000 or even $70,000.
The math is simple and ineluctable, on current trends. Under these conditions, the private sector -- as we know it -- collapses. Time and again history teaches why private gardens are necessary, lest we all starve.
This is fixable. Many government employees have to get a big paycut. Many government retirees have to have a big cut in their retirement benefits. If they won't take 80% or 50%, they get nothing. You can make it a voluntary election -- like a company buyout.
By extension, we need to cap Social Security / Medicare to current levels. Germany has already done something like this.
"We have met the enemy, and he is us."
For openers, we need better accounting. The interplay of federal and state is opaque. Does anyone know good sources that consolidate state and federal, payroll and income taxes, etc etc. A big driver of the Tea Party movement is a sense of what's going on here -- but real numbers would be a shocking eye opener.
One of the things that angers me about Obama & Co's faux socialism is that "we're not all in this together." We're not all equal pigs. If you're in the UAW you're lording it over your blue collar brothers in Michigan. Meanwhile -- by using the military as a jet taxi service for her extended family -- Nancy Pelosi has a carbon footprint bigger than Rhode Island. Those with the most to lose are actually private sector lower income workers and the young.
I can't wait for the Revolution.  

By Anonymous Anonymous, at Mon Feb 08, 09:21:00 AM:

@ Randian,

Thanks for the link. You appear to be correct that 109(c)(2) authorizes states to limit the right of municipalities to qualify as a "debtor" under bankruptcy law.

I took a quick look at the bill introduced by Mendoza (AB 155). It appears to have died in committee. The CA senate then introduce a similar bill, which also appears to have died in committee.

Is it your understanding that this bill passed and was signed into law?  

By Anonymous Anonymous, at Mon Feb 08, 09:38:00 AM:

@ Mad as Hell,

I agree with you on all the math, but disagree with your conclusions. Our currency is a fiat currency. It is backed by nothing other than the full faith and credit of the U.S. Treasury. It can be, and is, created at will by the Fed in collusion with the treasury.

As a society we do not generate enough wealth in current dollars to cover these obligations. And that doesn't begin to touch private sector debt and federal debt. All these institutions are insolvent.

We are faced with a simple choice to eliminate these debts and unfunded liabilities: we can default or we can inflate them away. We will choose inflation, just like the '30s and the '70s, only this time it will be much, much bigger.

Sadly, there is not much Republicans can do at this point in time. You can't unbake a cake.  

By Anonymous Anonymous, at Mon Feb 08, 10:15:00 AM:

@ Mad as Hell,

Further to your comments, here is a link to Nevada's current fiscal woes. The governor states that he can lay off every worker paid from the general fund and still be $300 million in the red. CA is in a similar fiscal situation.

http://news.yahoo.com/s/ap/20100207/ap_on_re_us/us_nevada_state_of_state

This revolution you can't wait for will be no fun whatsoever, and what emerges on the other side is probably not going to be to our liking. Just like the Great Depression, the most likely outcome is a vastly expanded Federal government which comes at the expense of states, local governments, and individuals.  

By Anonymous Mad As Hell, at Mon Feb 08, 11:11:00 AM:

To Anon @ 10:15

Point taken. Point taken again.

I don't want a revolution. I'm not political. I'd rather be left alone. I know enough to see a storm coming, but I'm not smart enough to figure it out. I'm not rich, and I'm not connected. So I expect to get hurt. Part of me would rather that the storm hit sooner. Without anything to lose, I can at least start trying to adapt.

It may play differently if the Republicans at least have a seat at the table. Or it may not. Not many Republicans in Congress have taken personal political risk for the sake of national fiscal prudence. But Boehner has impressed me as a fighter. There are others.

You're probably right that the outcome is a bigger, more intrusive federal government. Resistance is futile, join Obama's Borg. But that's not a certainty.

There's a fault line in our politics between those who get government checks vs those who pay for them. Both parties straddle this fault line -- the Republicans say they don't, but in practice they do. So there's a chance for political realignment, but the current state of DC and the parties plays against this.

I'm amazed that they very real budget gaps of state and local governments are dwarfed by the current deficit spending of the federal government. Because DC has the dollar printing press, we'll all be tempted to see DC -- and Queen Nancy -- as our collective savior.

Inflation can whittle away at the overhang of unfunded pension liabilities, but many government pensions are indexed. Being able to screw with the calculation of CPI may be the most important political tool of all.

Once inflation starts, it's hard to control. History shows that it creates a few winners, and makes most people losers.

My son's fencing coach is Ukrainian, and was in the Soviet Army toward the end. He tells stories of his unit getting orders and then being forgotten about for weeks at a time. No direction, no supplies ... being left to huddle in the cold for days at a time.  

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