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Monday, March 28, 2011

A "fiscal showdown" over triviliaties 


Facing a deficit of $1.65 trillion this year alone, our two national parties are locked in a "fiscal showdown" over whether the spending cuts should be $61 billion or $20 billion. This is sheer craziness, denial and irresponsibility of the very worst sort. We need cuts on the order of many hundreds of billions of dollars in the annual operating budget, and we need drastic reductions in our future obligation to pay "entitlements," itself a term that should be stricken from our national vocabulary. Yes, I would agree to a repeal of the Bush tax cuts -- all of them, not just for the "rich" -- in return for a reduction in federal spending of, say, $800 billion. That strikes me as a reasonable political bargain, and both parties should get right down to the business of making it happen.


19 Comments:

By Anonymous Ignoramus (Prolix Mode), at Mon Mar 28, 05:37:00 PM:

Obama wants to play rope-a-dope going into 2012: Blame harsh cuts on the Republicans, AND their unwillingness to tax the rich as the cause. It might even work, if the Republicans run the wrong candidate. e.g. Mitt “Carried Interest” Romney.

But the train wreck may start before then. The Fed says it will stop QE2 soon. When it does, I expect rates to back up even though we’re in a tepid recovery. If so, we’ll double dip. Knock-on effects from Japan won’t help here. Don’t forget the feedback loop in US interest expense – in some scenarios it can go parabolic.

We’ve needed QE1 and QE2 because no one else but the Fed will buy enough of Little Timmy’s paper. If you think QEn! is sustainable, then we could just raise the debt ceiling to $100 trillion and put it all on the Fed’s balance sheet, couldn’t we?

If we raise taxes, we’ll kill any hope of GDP growth – and it won’t deliver the necessary revenue. I don’t know that short-term austerity measures answer. We need long-term gradual fixes to major items. Here are the choices:

1) Everything but Entitlements and Defense. There’s only so much to cut here without cutting into the basics of why we have a federal government in the first place. But I’d eliminate entire agencies, and in some cases start over with an updated smaller mandate. I’m looking at you, EPA. Don’t stop until DC unemployment equals that in Akron. I’d bet that for every job lost in DC, we’ll get five jobs created elsewhere.

2) Defense. If we don’t modernize and downsize, we’ll go the way of the Soviet Union. We only really need the Navy with the Marines (British Empire model), and some Air Force drones. If we don’t do occupations, we don’t need the Army. I hate Dick Cheney AND Samantha Power.

3) Social Security. By itself, not as broke as some say. For years we’ve enjoyed an excess of revenues in, versus payments out. The rest of the government spent the difference. But no more. If we just fiddle with the criteria it can remain solvent. If we make radical cuts here, we’ll have elderly people who paid in eating cat food to survive.

4) Medicare/Medicaid. We need a radical change here. It’s the only way out. Expanding M/M with Obamacare is going in the wrong direction, as we’ll soon really find out. Give M/M back to the states.

****

Before Dawnfire screams about anyone taking away his tanks, none of the foregoing can happen in the current political environment. We’ll need a crisis first. We can’t finance a federal government that’s over 25% of the economy, and that’s actually larger than 25% on close examination. When the crisis hits, the role of the federal government vs the average citizen will likely take on a different dimension. The Borg will either get bigger or smaller.  

By Anonymous SongDog, at Mon Mar 28, 05:41:00 PM:

Any bargain of that sort is a fool's errand unless there is a way to guarantee the spending cuts will be permanent -- or at least, very very difficult to undo. The history of government spending in all western democracies is that the long term trend is ever upward, our own notwithstanding. As soon as the public's attention is distracted, or whenever a crisis of some sort unfolds, the spending will zoom and that will be the end of the restraint.  

By Blogger Dawnfire82, at Mon Mar 28, 05:56:00 PM:

Hey, I don't scream. And if I did, it wouldn't be about tanks.

"2) Defense. If we don’t modernize and downsize, we’ll go the way of the Soviet Union."

I think we're plenty modernized now, (was not true circa 2007) but you're probably right about the downsizing. Our days as a global hegemon are ending, and the sooner that is recognized the less painful it will be. Anyone else remember that old quotation about how Prime Minister Eden was the last PM to think Britain was an empire, and the first to learn otherwise (with regard to the Suez war in 1956)?

"We only really need the Navy with the Marines (British Empire model), and some Air Force drones. If we don’t do occupations, we don’t need the Army."

Way overstated. For instance, only the Army has parachute and air assault regiments (essential to a conventional and rapid response to global crises; the 82nd were flash deployed to Saudi Arabia after Saddam took over Kuwait). It's also the home of the great majority of special warfare and intelligence capability. Civil affairs? Primarily an Army affair. Air and sub-strategic missile defense? Army. Et cetera. Overlooking, of course, the need for maintaining institutional experience, logistics, and so on for the next conventional war. What are we going to do when the Mexicans invade? (don't laugh too hard, that's what Stratfor's president predicts in a couple of generations)

Your choice of institutions also seems to imply that we're maintaining significant overseas
projection of force capabilities. I'm not terribly optimistic about that.

You'd also get less bang for your buck slashing the Army. The Army gets the least money of the three primary services. If you're looking to save money, Navy and Air Force are where it is.

But if you want to reduce the Army, S. Korea and European stations are a good place to start, IMHO. The Koreans are big enough to stand on their own, and the Europeans have depended on us so long they've forgotten how to walk; it's time they relearned.  

By Anonymous Anonymous, at Mon Mar 28, 06:07:00 PM:

I don't see it happening. Our reps in Congress are to spending as junkies are to heroin. There's just not enough Paul Ryans, Rand Pauls and Allen Wests to go around. We just have to keep voting the bums out until we get a majority with a little personal responsibility. Other than that, kiss it goodbye.  

By Anonymous feeblemind, at Mon Mar 28, 07:54:00 PM:

My crystal ball says the Fed will continue to buy the debt for the indefinite future.

Printing money is the path of least resistance for Congress.

As inflation accelerates it can be blamed on 'greedy corporations" and they can be punished with higher tax rates for their "obscene profits'.

It won't end well.

I hope I am wrong.  

By Blogger Georgfelis, at Tue Mar 29, 12:35:00 AM:

We had a deal once where we were promised spending cuts in exchange for taxes. It was called TEFRA. The cuts never happened. Now they want to try that (censored) again? As opposed to the Dems, we can understand history.

Cuts FIRST, real cuts, solid cuts, the 100 billion is a starting point, not an ultimate goal.  

By Anonymous Anonymous, at Tue Mar 29, 05:19:00 AM:

It would be worth while to find out what the money is being spent on. For example, materials (bricks and mortar, asphalt), working staff (teachers in class), magerial staff, etc.

My guess is that the best place to cut is not by agency, but to remove administrative staff starting with the most highly paid and working downward.

Obviously those are the very people who decide who gets the sack, and they will fight hard against it.

I may be completely wrong, but I think the mandarins are the enemy.

DC  

By Anonymous Anonymous, at Tue Mar 29, 08:20:00 AM:

Everything but Entitlements and Defense. That would be a good start, but it ain't gonna happen. So how about a 5% reduction for every cabinet member, with instructions on what competency he's expected to maintain at all costs, and allowing said department figure out what gets cut. Repeat yearly.

Despite my obvious bias for Marines, I think disestablishing the Army would be reckless. I am well aware that Marines can accomplish every single combat capability that the Army can (including para and air assault, thank you very much). But we can't do it in depth over a very long period. If we do, then we wind up BEING the Army, and what's been accomplished?

Leatherneck  

By Anonymous Robert Arvanitis, at Tue Mar 29, 09:00:00 AM:

I propose a new rule for small-government discussions: Always work in billions.

That way we show the deficit as $1,650 billion. and the "draconian" cuts as a risible $20 billion.

At some point the sheer weight of digits will shame the left. 20 out of 1,650? Even non-mathematicians can relate.  

By Anonymous Anonymous, at Tue Mar 29, 11:14:00 AM:

Following Robert Arvantis' excellent suggestion, we should not lose sight of the fact that at 5% across the board cut, as many advocate, will only cut about $175 billion. Still, it's a start, and it has the tremendous advantage of simplicity. The Dems will try to whine about this cut or that cut, but we should (for now) just keep saying a 5% cut should be easy. It's little, so little that no one will actually notice but it could help.  

By Anonymous Anonymous, at Tue Mar 29, 11:15:00 AM:

Following Robert Arvantis' excellent suggestion, we should not lose sight of the fact that at 5% across the board cut, as many advocate, will only cut about $175 billion. Still, it's a start, and it has the tremendous advantage of simplicity. The Dems will try to whine about this cut or that cut, but we should (for now) just keep saying a 5% cut should be easy. It's little, so little that no one will actually notice but it could help.  

By Anonymous Anonymous, at Tue Mar 29, 11:23:00 AM:

Ignoramus, your interest rate analysis suffers from the flawed assumption that our financial "markets" are in fact markets. They are not. We now live in an economic world that could best be described as financial fascism, with the Federal Reserve playing the role a financial central planning agency. Its job is to play extend and pretend, masking as long as possible the fact that the U.S. Federal government is bankrupt.

America has crossed the monetary Rubicon. There is no turning back now. Allowing interest rates to rise back to market rates will force the bankruptcy of the federal government in less than one year. America is stuck with ZIRP, QE, and quasi-imperial foreign wars permanently, or at least until the monetary system breaks down.

Watch closely the debates in the Fed on stocks versus flows. The Fed's balance sheet is now big enough to support a temporary, covert QE3 using roll-over revenues in its exiting portfolio. The Fed will likely do a head-fake, announcing an end to QE and perhaps raising interest rates by 0.25. Expect a 20-30% correction in risk assets and a formal acknowledgment of a double-dip by January 2012. A formal QE3 begins in earnest in 2012.

--Anon Attorney  

By Anonymous WLW, at Tue Mar 29, 01:17:00 PM:

Tigerhawk, do you know anything of American tax history? You advocate ending the Bush Tax cuts. Do you know that the American Income Tax is based on Karl Marx's Gradual Income tax in his Communist Manifesto!?!?

Are you truly that ignorant that Rich need to be attacked and their wealth confiscated to fuel social policy? When you say "End Bush tax Cuts", what you are actually promoting is Wealth Redistribution. No person should pay more than 10% in taxes across the board. The wealthy should be treated the exact same way the poor should! Only in services and licenses is there to be graduation. Not in taxation. You preach "equality" all the time but you are a hypocrite because you don't preach equality in Taxes. Shame on you.  

By Anonymous feeblemind, at Tue Mar 29, 02:31:00 PM:

Does anyone know?

If we taxed all Americans 100% of their income, would we be able to balance the budget?  

By Anonymous Ignoramus, at Tue Mar 29, 04:19:00 PM:

In response to the last post, we currently raise about $900B per year in federal income tax, which is down from its peak of $1,163B in 2007. So we'd need to more than double it to cover current projected deficits.

Some suspect that's always been Obama & Co's plan -- socialism achieved through the tax code.

The income tax doesn't hit the "rich" so much as it hits certain high earners. Folks like Obama purport to aim at evil billionaires like Larry Ellison, but hit the local opthamalogist instead. Maybe that's why so many billionaires are Democrats.

***

I overstated the case for military cuts. 10-15% over time should still be workable.

Another poster (AVI?) hit the nail on the head -- we can't keep giving away free state-of-the-art healthcare -- at least not the way we're doing it now. That's the core problem.  

By Anonymous feeblemind, at Tue Mar 29, 08:23:00 PM:

Thanks for the reply Ignoramus.

If the current deficit is about 2.5 trillion, using your 900 bil figure, tripling the income tax rate would (in theory, disregarding tax avoidance behavior) only add an additional 1.8 trillion to the coffers. Not enough to close the gap.

As an academic exercise, would be interesting to know what percentage of our paychecks would have to be looted to balance the budget?  

By Anonymous Ignoramus, at Wed Mar 30, 06:44:00 AM:

Re: tax figures, there's a great historic table here.

Payroll taxes are are over $800B, corporate taxes are about $200B, other taxes are about $350B, for a total that's over $2 trillion.

These are huge numbers compared to anything financial on the planet ... except for US federal spending. e.g., Exxon-Mobil just earned $30B for 2010 ... only a month of Stimulus Mad Money for Pelosi back in 2009.

Officially the White House already expects the personal income tax to double by 2016, based on optimistic GDP growth and the end of the Bush tax cuts after 2012. Even with that assumption, the White House projects trillion dollar deficits to the end of time. It's insane.

On paper, to balance the current budget, you'd need to tax most income over $100,000 -- or even at a lesser threshold of say $70,000, or even $50,000 depending on your assumptions. Assumptions matter a lot here because you'd get some very strong second and third order effects, to put it mildly.

Current trajectory won't give us socialism through the tax code, if that's the plan. It'll just kill the middle class and solidify the position of the overlords.

It's not like any of this is a surprise. I posted here about this exact point two years ago. Bienvenidos a Argentina!  

By Anonymous Ignoramus, at Wed Mar 30, 06:58:00 AM:

Re: tax figures, there's a great historic table here.

Payroll taxes are are over $800B, corporate taxes are about $200B, other taxes are about $350B, for a total that's over $2 trillion.

These are huge numbers compared to anything financial on the planet ... except for US federal spending. e.g., Exxon-Mobil just earned $30B for 2010 ... only a month of Stimulus Mad Money for Pelosi back in 2009.

Officially the White House already expects the personal income tax to double by 2016, based on optimistic GDP growth and the end of the Bush tax cuts after 2012. Even with that assumption, the White House projects trillion dollar deficits to the end of time. It's insane.

To balance the current budget, you'd need to tax most income over $100,000 -- or even at a lesser threshold of say $70,000, or even $50,000 depending on your assumptions. Assumptions matter a lot here because you'd get some very strong second and third order effects, to put it mildly.

Current trajectory won't give us socialism through the tax code, if that's the plan. It'll just kill the middle class and solidify the position of the overlords.

It's not like any of this is a surprise. I posted here about this exact point two years ago. Bienvenidos a Argentina!  

By Blogger ruralcounsel, at Mon Apr 04, 01:55:00 PM:

No negotiations. No compromises. Turn off the tax faucet. Shut it down. Let it crash.

It's the only way to rid ourselves of these government and non-free market corporate parasites. Government has become the largest special interest group around, and it isn't interested in the welfare of the American people any more than it is forced to be. We have to destroy the village in order to save it.  

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