Tag Archives: national debt

Gee I’m Glad I’m Not A Conservative Republican, I can sleep at night

Monster under bed

It never fails to amaze me what disturbs the radical right.  When the city of Charlotte, NC declared that transgender individuals should use the rest room which best suits them the troglodyte state legislature promptly  enacted a solution to a non-existent problem.  Should anyone question their motives, such as a Fox News broadcaster asking specifically how many children have been molested in restrooms by a transgender person, the Governor has a quick response:

“How many cases have you had in North Carolina in the last year where people have been convicted of using transgender protections to commit crimes in bathrooms?” Wallace asked.

“This wasn’t a problem!” McCrory replied. “That’s the point I’m making. This is the Democratic Party and the left wing of the Democratic Party.”

“Have their been any cases of this?” Wallace pressed.

“Not that I’m aware of,” McCrory admitted. [C&L]

There would be a reason for that. There haven’t been any.  There weren’t any last year, and there haven’t been any in the last five years.  The charade continued:

“If there’s no problem then why pass the law in the first place?” Wallace hammered.

“There can be a problem,” McCrory fired back. “Because the liberal Democrats are the ones pushing for bathroom laws.”

“I’m not interested in that,” he added. “We did not start this on the right. Who started it was the political left.” [C&L]

Oh, because there CAN be a problem. Like there Can be a monster under my bed?   The logic defies description.  Because a city decided to protect the rights of a group of people, and because those people give some other people the creeps, therefore the state legislature should enact a statute forbidding the protection of those aforementioned individuals? Or, perhaps, because some little junior high school boys might want to sneak into the girls locker room we can’t enact protection for transgender kids and adults?  Bluntly speaking, junior high school boys and those adults who haven’t matured much beyond that stage are much more sinister than any transgender males or females using a restroom in which they’re comfortable.

Children If the Republicans want something to worry about, something more tangible than the non-existent child molesters who seem to populate the imaginations of conservative politicians, how about the scary prospect of hungry children?  In 2014, in the richest nation in the entire world, 15.3 million children lived in what is politely known as “food insecure” households. [FA.org]  As of 2014 there were 415,129 children in foster care. 107,918 children were waiting to be adopted.  Instead of worrying about some fictive character lurking in a rest room, how about getting a bit more worried about REAL children who aren’t eating, and aren’t finding homes?

Vote suppression map The  tortured conservative  logic is similar to argument for voting restrictions of which the Republicans are so fond.  Talk about an upcoming election and they begin to sound off on Voting Integrity.  Ask them about the number of prosecutable cases of voter impersonation fraud and the babbling begins.  Inform them that voter impersonation fraud is mostly smoke and no fire [Politifact] [Brennan Center] with 31 cases out of one billion ballots cast [WaPo] and the response is invariably along the line of “But but but It Could Happen.”  Yes, and there could as likely be a monster under my bed.

It’s more disturbing to find that in the 2012 elections some 35.9% of Americans voted.  48.7% of us voted in 1964, 47.3% voted in 1968 and we haven’t gotten above 45% since. [EP.org]  However, by Republican lights it’s better to be frightened of 31/1 billion ballots than of low turnout elections.  What’s the difference between these two issues  — voter impersonation fraud and low voter turnout? One’s a real problem and the other is a Monster Under The Bed.

Unstable Furniture Beware those doing mathematical calculations!  Like the distraught lady on the American Airlines flight who “saw something” and “said something,” only the Something was an Ivy League economist working on a differential equation. And, no, he’s not an Arab – he’s Italian. [WaPo] That didn’t stop the Ditzel from reporting that he made her feel uncomfortable, like he Might be a terrorist.  Unfortunately, the Ditzel didn’t know that since 2011 there have been 238 Americans killed by terrorist attacks, that would be an average of 29 annually.  29 annual deaths is about the rate for Americans killed by being crushed under unstable furniture or television sets. [WaPo] [CPSC pdf]  One might wonder if she has everything in her home bolted down tightly?

This incident isn’t quite on par with CNN’s epic mistake reporting an “ISIS flag” comprised of sex toys at a British gay pride parade [HWR] but it’s close.  Should we want something REAL to worry about, perhaps we should try avoiding things that make ISIS happy. For example, announcing that we’re AT WAR with ISLAM – which is, of course, precisely the message they’d like to use for recruiting purposes.

Money Stack

If transgender people, imaginary voter impersonators, and putative terrorists aren’t keeping the conservatives up at night then they could always worry about The Debt, The Debt, The Horrible No Good National Debt.  It’s the reason we can’t do anything – like fix our infrastructure or education our children, or take care of our elderly, or provide better Veterans’ benefits, or feed the hungry.  This fear is especially harmful to those who tend to swallow dollar amounts whole.  By the way, if the Republicans need something else to worry about, some 4,800 people die every year from choking related accidents. [NSC]  Here are some soothing words for those who tend to obsess over whole dollar reports on the national debt:

“…this problem — reporters giving the public meaningless raw-dollar amounts — is pervasive in economics journalism. But the people who run CBO are well aware of this point, and present their projections as a percentage of GDP. Interest payments will be 1.3 percent of GDP in 2015, and 3 percent in 2025. The deficit itself will be 2.6 percent of GDP, and then 4 percent, over that same time period.

Obviously, in an ideal world, you’d prefer these numbers to not grow. But increases of 1.7 and 1.4 percent points of GDP over a decade are hardly something to get excited about. [TheWeek]

OMG, we can’t leave the debt to our children! Okay, so it’s better to leave them with crumbling infrastructure? With an archaic energy grid? With a lack of public educational facilities and programs? With no affordable child care? Without food?  Without affordable housing? Without health care?

If the Republicans really wanted something to be frightened of, how about the D+ grade we get for our infrastructure?  Our aging energy grid?  Our colleges scrambling to find funds to replace reductions in state spending?  Those 15.3 million kids going hungry?  Or, if life itself seems perilous perhaps it’s because every day 297 people in American are shot in murders, assaults, suicides and suicide attempts, unintentional shootings, and police interventions. And, every day 89 people die as a result of gun violence. 31 are murdered, 55 are suicides, 2 are accidental, 1 is killed by police intervention, and 1 in unaccounted for. [TBC]

Or, to put the matter in some perspective, between 2005 and 2015 there were 71 Americans killed in terrorist attacks on U.S. soil. During that same period 301,797 were killed by gun violence. [Trace]

Nightmares are distracting and distractions.  The imaginary becomes more intense than the reality.  Somehow we can’t seem to focus on some very real problems in this country – hungry children, un-adopted children, children in inadequate classrooms, low voter turnout, an aging infrastructure and energy grid, gun violence and its tragic outcomes – because we have to deal with the monsters under the Republican mattresses.

Monsters bed And, that’s a real nightmare.

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Filed under conservatism, CPSC, gay issues, Gun Issues, Human Rights, Republicans, Vote Suppression, Voting

Very Basic Finance

There are some excellent references available on-line concerning what financial institutions trade.  And, once more I apologize for the redundancy in the basic message BUT it is important:

One mans debtIn the simplest of all realms, if I owe you $25.00 then I’m in debt and you hold something receivable; the $25.00 plus any interest we’ve agreed upon. The “bond” is a more sophisticated IOU.  The safest of these are Treasuries which come in three basic flavors — Treasury bills (13 weeks to 1 yr. investments), notes (2 to 10 yrs.), and bonds (10 yrs).  Because these are backed by the full faith and credit of the United States of America the Treasuries are the safest IOU in which a person can invest.

There’s also a gadget called a “Zero Coupon” Treasury” best explained by the CNN Money description:

“Zero-coupon bonds, also known as “strips” or “zeros,” are Treasury-based securities that are sold by brokers at a deep discount and redeemed at full face value when they mature in six months to 30 years. Although you don’t actually receive your interest until the bond matures, you must pay taxes each year on the “phantom interest” that you earn (it’s based on the bond’s market value, which usually rises steadily during the time you hold it). For that reason, they are best held in tax-deferred accounts. Because they pay no coupon, zeros can be highly volatile in price.” [CNNMoney]

And, there’s one more Treasury on the ladder, the inflation indexed Treasuries — also explained by CNN Money as follows:

“Inflation-indexed Treasuries. These pay a real rate of interest on a principal amount that rises or falls with the consumer price index. You don’t collect the inflation adjustment to your principal until the bond matures or you sell it, but you owe federal income tax on that phantom amount each year – in addition to tax on the interest you receive currently. Like zeros, inflation bonds are best held in tax-deferred accounts.”  [CNNMoney]

Notice these last two are better placed in someone’s “tax deferred” account.  In the case of all these forms of bonds, if you have them in your portfolio then you are holding government IOU’s + the interest the government promises to pay.   Want to find out those interest rates? The Department of the Treasury has a whole page for that.   Want Bells and Whistles? The Treasury site has a page for that too, with charts, historical data, and graphs.

How I Calmed Down And Learned Not To Be Scared Of The National Debt.

First, breathe deeply.  Simply because some commentator, pundit, or investor is making hissing sounds whenever the topic moves to the National Debt, doesn’t mean we have to panic.

Remember all five of the forms of Treasuries are secured by the federal government.  But, but, but… The Chinese are about to “own” us?  Yes, China tops the list of foreign investors in U.S. Treasuries, with about $1316.7 billion in their accounts.  Does that mean the Chinese “own” us? No.  Like every other domestic investor they want to (1) hold the bond to maturity and collect the interest; or (2) sell bonds in the bond market at a profit.   But, but, but… what if they cashed in all at once?  Stop.  Think.

They bought the bonds for the same reason we’d buy E Series savings bonds — because they’re an ASSET.  Government debt being our asset.  Now, what possible reason could the government of China have for dumping all its ASSETS on the market at once? Most folks cash out in circumstances which are usually on the negative side. We cash out when we need to raise funds or when we think the value of our ASSETS may decline.  So, do, governments.

As long as other countries view the United States as an economic power — which we are, with the largest economy on this planet — then investing in US is a good idea.   It’s in our own best interest to keep it that way.   As of 2014, the U.S. economy is valued at approximately $17 trillion; China at $10 trillion; Japan $5.3 trillion; Germany $3.7 trillion; France $2.8 trillion; Brazil $2.6 trillion; U.K. $2.5 trillion. [CNN

There are two reasons foreign investors like purchasing U.S. Treasuries.  The first is obvious from the list of values in the last paragraph. We’re the biggest, safest, investment they can make.  The fancy term is that we have “premium risk free assets” on the market.  Secondly,  these Treasuries are liquid.  Liquid + Safe = a very desirable investment.  There’s also a third reason, we’re the world’s reserve currency, with some 87% of all financial transactions in global foreign exchange markets taking place in U.S. dollars. [GAO]   Because we are the largest Gorilla in the Financial World, we can borrow surplus savings from other countries beyond what we could invest all by ourselves.  The GAO report phrases this more elegantly:

“…an economy open to international trade and investment, such as the United States, essentially can borrow the surplus of savings of other countries to finance more investment than U.S. national saving would permit. The flow of capital into the United States has gone into a variety of assets, including Treasury securities, corporate securities, and direct investment. [GAO]

That’s the preferred direction for investments — INTO the United States.   The bigger and safer we appear, the more surplus savings from abroad we can take in, or conversely when the economies of other countries aren’t looking too attractive the capital flows into our “safe harbor.”

There are limits, as there are to all human endeavors.  We don’t want to rack up “too much” indebtedness” such that investors start to look elsewhere and we have to raise the rates (yield) on our bonds, bills, and notes.   The trick is to determine what’s “too much.”

National debt clocks are useless.  The only thing those graphics are good for is to scare people into believing we already have too much indebtedness.   Those inclined to panic should step back from the abyss and remember that our debt is someone else’s asset.  Assets they are holding because they believe we are the best, safest, investment they can make.   How do we know that the world is still happy with us?  We look at the Yield Curve.

Where do we find that Yield Curve?  On the front page of the U.S. Treasury Department’s web site.   The U.S. Treasury is currently paying 0.04% to attract investors in one month bills; a two year note currently pays 0.30% interest; and, a 30 year bond pays 3.55%.    It’s fairly apparent when the “too much” level has been hit — the yield on a 10 yr. bond from Greece is a whopping 8.18% (compare to U.S. 2.59%.) [Bloomberg]

Thus, when the Advocates of Austerity cry, “Look at the Clock!” The correct response is “Look at the Yield Curve.”  In other words — what we really ought to be wary of is the day that the Yields soar upwards.  That “debt clock” is a gratuitous graphic, which obfuscates the real issue: If we are going into debt are we getting a return on it?

Debt incurred for war/military operations is essentially a loss on the books.  We borrow money and then blow things up.  Debt incurred for the improvement of infrastructure projects means that we may just be using other people’s surplus savings to build our own highways, air transport facilities, and communications systems, all items which become assets on our own books.   The essential question concerns the purpose to which we put those borrowed funds.  

Now, breathe more easily and decide HOW we should be spending the surplus savings we are siphoning off from foreign investors.

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The Revenue Side of the Equation: Two Suggestions

ScalesIf the leadership of both major U.S. political parties are truly serious about “paying down” the national debt, and reducing our budget deficit, then both need to move beyond the Austerian economics embedded in the Budget Control Act of 2011 (sequestration).

Perhaps in the rarefied atmosphere of academic debate it’s remotely conceivable that government services could be cut back sufficiently to balance the effects of (1) two major military operations, (2) one major recession, and (3) tax reductions during war time — however, as we discovered during the last government shutdown, “we” want leaner government BUT we don’t want our national parks closed, our NIH studies delayed, our Veterans Benefits deferred, our Indian Health Service programs halted, or our FAA flight safety personnel home on furlough, and so on and on.

The efficacy of the Austerian solutions to the economic doldrums in Europe has already been questioned.  As of May 2013 members of the European Union were seriously questioning the “dogma of Austerity.” [CSMonitor] [Slate][USNWR]  Predictably, there were voices from the financial sector replying that “real” austerity would have worked, and that the philosophy wasn’t truly implemented.  [Forbes]  Once more we tread into Academia, the land in which the theory of “true” austerity drives headlong into the realities of governance.  We may want lower taxes in general, but we also want inspected food, safe air travel, veterans paid what they were promised, scientific trials for cancer treatments, national parks and memorials open and protected, unpolluted air, clean water, regulated nuclear power plants, disaster aid and relief, insurance for livestock losses, and all those other “details” swamped in the rhetoric of the Austerian ethereal-ism.

Sequester Savings

The focus on Austerity Economics (and politics) places singular focus on cutting expenditures — but there is another side to the equation — loath though political leadership may be to discuss it — increasing revenue, otherwise known to  one and all as “raising taxes.”

Let’s begin with the premise that current levels of income disparity are counter-productive to growth in the United States economy.

Income inequality graph 2

The concentration of wealth (and income) in the upper echelons of American income earners doesn’t create the level of aggregate demand which could be achieved if more people had more money to spend for more goods and services.   So, let’s talk about Tax Reform.

On one hand we have the Ryan Plan:

“The tax proposals in the budget that the House approved on April 15 place a top priority on cutting  taxes for high-income people, while doing nothing to reduce budget deficits, themselves.   In addition to making the Bush tax cuts permanent and continuing to provide relief from the Alternative Minimum Tax (AMT) at a cost of nearly $4 trillion over ten years, the House budget advances a series of additional tax cuts that would primarily benefit high-income households at a cost of nearly $3 trillion over that period, most of which is assumed to be offset by reductions in tax expenditures that are left unspecified. ”

Not to put too fine a point to it — but this is austerity on steroids — and there is probably a reason those reductions in tax expenditures are left unspecified.  As we saw during the shutdown, it doesn’t take much pressure to make Republicans cave for specific funding categories.

Options

#1. Financial Transaction Tax could be one way to increase revenue by transactions which would not exacerbate income disparity, would be relatively easy to administer, and might address some of the volatility issues in our current equities markets.  A fuller explanation is available from the Center for Economic and Policy Research, published in 2010.  More information is available from the Center for American Progress (Feb 25, 2013).  See also: Zero Hedge, Nov 2009).  For those who really want to get into the weeds of the European Council’s consideration of a financial transaction tax, there’s Bruegel.Org’s “Benefits of a Transaction Tax,” available in download (pdf) at this link.   The Irish Congress of Trade Union published its “Case for the FTT,” (pdf) Nov 2012.  “FTT: Europe Needs It,” published by the World Economic Review, March 2012. (pdf)

#2. Modify the capital gains tax.  Our current tax system taxes actual w-o-r-k done by human beings at a higher rate than income earned by money.

Most long term capital gains are subject to a top rate of 15%. [TPC] The individual income tax rate (+$400,000-$450,000) are subject to a maximum rate of 39.6%. [TPC]  This system doesn’t serve to ameliorate the income disparity in this country, and is popular only among those who serve the interests of the financial sector and adhere to the principles of the Supply Side Hoaxsters.

Additional information on the current state of capital gains taxation can be found at “A Tragedy in Two Acts,” Bloomberg, Dec. 9, 2012.  CNN “Money” March 1, 2012.  “Who Pays Capital Gains,” CTJ, and
“Ending Capital Gains Tax Preference.”  “Rising Income Inequality and the Role of Shifting Market-Income Distribution, Tax Burdens, and Tax Rates,” EPI, June 2013.   “Capital Gains Tax Rates, Stock Markets, and Growth,” Brookings, November 2005.

Not that we can expect members of the Nevada congressional delegation like Rep. Mark “Alamo” Amodei (R-NV2) and Senator “Default Dean” Heller (R-NV) to give these proposals much serious consideration, but perhaps those more inclined to balance the scales in our tax system will give modification of the capital gains taxes and the enactment of a financial transaction tax a serious thought or two.

 

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Filed under Economy, Heller, Politics, tax revenue, Taxation

Are We Serious About Discussing The National Debt?

OK, let’s talk about the debt and the deficit — but let’s have a serious, adult, conversation.  Here are some suggested rules for this road:

We need to talk about our national debt as a fiscal policy matter, not as a political propaganda talking point.

#1. One of the crucial points we need to acknowledge is that we were involved in two very expensive wars between 2000 and 2013.  We racked up some significant debt during military operations in Afghanistan and Iraq.   The military endeavors in Afghanistan have been, and continue to be, exceedingly expensive:

“The fact remains, however, that if the CRS and OMB figures for FY2001-FY2013 that follow are totaled for all direct spending on the war, they reach $641.7 billion, of which $198.2 billion – or over 30% – will be spent in FY2012 and FY2013. This is an incredible amount of money to have spent with so few controls, so few plans, so little auditing, and almost no credible measures of effectiveness.” [CSIS]

The removal of American forces from Afghanistan will curtail future expenditures, but the debt remains.  Whether we like it or not, we have to pay for both the direct expenditures for military operations, and we have to allocate funds for indirect costs which we may reasonably expect to incur.  There will be Veteran’s benefits to distribute, survivors’ benefits, and other VA services.

Although we are no longer a significant military presence in Iraq, the debt for our military actions and “reconstruction” is still on the books.  As of March 2013, the Iraq war cost $1.7 trillion which should be added to another $490 billion in benefits owed to Iraq War Veterans. [Reuters]

However convenient it may be to run on about “out of control” and “rampant” spending — it is absolutely necessary to be honest about the major elements included in the total indebtedness — and we cannot honestly discuss our national debt without acknowledging its major components, such as the wars in Afghanistan and Iraq.

At some point the national discussion must answer the question: How do we pay down what we owe for these wars without jeopardizing the promises we made to the men and women we sent to fight in them?

Secondly, we need to address the issue raised in the CSIS report, i.e. how we account for and administer our military expenditures?  There have been several attempts to improve Pentagon auditing, but the situation remains alarming.  The Defense Contract Auditing Agency, which is supposed to prevent over-payments, fraud, and abuse is in disarray.

The DCAA has a budget of $573 million, and a backlog of 24,000 audits.  This means that at the rate it is operating it cannot clear its backlog until 2016.  [BusinessIns] Note, it isn’t that the Pentagon doesn’t want to audit its contracts, it is that with current personnel and resources — it can’t.   Audits in 2011 (the last year for which figures are available) the DCAA recouped about 9% of the $128 billion in costs  it audited.   If we apply the 9% rate to the current backlog of $574 billion we could expect to recoup some $54 billion. [BusinessIns]

Therefore, another question we need to raise when discussing “waste, fraud, and abuse” in a significant portion of our national expenditures is:  Have we allocated the resources necessary to perform the audits imperative to the reduction of wastefulness?  It makes precious little sense to argue for either a reduction or increase in allocations to the Department of Defense unless we are willing to provide the necessary fiscal oversight of those allocations.

#2.  There needs to be an agreement as to what does and does not contribute to national indebtedness, especially in terms of earned benefit programs.

First, while we may argue about the philosophy underpinning the Social Security program, there is no argument about how it is funded.   The Social Security Administration explains why some have been confused about the “debts owed to the SSA”:

Most likely this question comes from a confusion between the financing of the Social Security program and the way the Social Security Trust Fund is treated in federal budget accounting. Starting in 1969 (due to action by the Johnson Administration in 1968) the transactions to the Trust Fund were included in what is known as the “unified budget.” This means that every function of the federal government is included in a single budget. This is sometimes described by saying that the Social Security Trust Funds are “on-budget.” This budget treatment of the Social Security Trust Fund continued until 1990 when the Trust Funds were again taken “off-budget.” This means only that they are shown as a separate account in the federal budget. But whether the Trust Funds are “on-budget” or “off-budget” is primarily a question of accounting practices–it has no effect on the actual operations of the Trust Fund itself.  [SSA] (emphasis added)

From 1984 onward the Social Security Administration was empowered to hold special issue securities which are non-public securities, not available on the commercial market, that can be redeemed as the SSA determines it needs in order to make its revenues meet the amount of benefits to be paid.  In short, it was the Reagan Administration’s intent that there be a “savings account for the trust funds” to address the retirement of the Baby-Boomers, and the increased number of beneficiaries who would be eligible for benefits.

While it might be advisable to decrease the need for the Social Security Administration to dip into its Special Issue reserves, it cannot be rationally argued that the SSA contributes in any significant way to the national debt.

There are alternatives to decreasing benefits, the most common being an increase in the earnings cap.  The current contribution and benefit base is set at $113,700 meaning that all income above that level is not subject to taxation.  [SSA]

“Currently, earned income in excess of $113,700 is entirely exempt from the 6.2 percent payroll tax that funds Social Security benefits (employers pay a matching 6.2 percent). 5.2 percent of working Americans make more than $113,700 a year.” [NYT] (emphasis added)

When the Congressional Budget Office released its report on Social Security in July 2010 (pdf) altogether too many focused on the problems sections and insufficient attention was paid to the options the report presented.  There was, for example, Option 6, removing the cap:

Under this option, Social Security’s total revenues would increase by about 0.9 percentage points of GDP in 2040, or by about 18 percent relative to current law. This option would improve the 75 year actuarial balance by 0.9 percentage points of GDP and would extend the trust fund exhaustion date beyond the 75 year projection period. As a result, payable benefits would be higher from 2039 onward, especially for people born later. This option would primarily affect taxes paid by high earners. (emphasis added)

When we discuss options regarding the “reform” of earned benefits (“entitlements” if you will) ALL the options should be on the table — including the removal of the regressive cap on income subject to the Social Security taxes.   [See also NYT]

There’s nothing intrinsically wrong with discussing “entitlement reform” as part of future budget and funding planning.  However, there is something very wrong about assuming that all such ‘reform’ be borne by the 95% of the U.S. population who are to accept reduced benefits,  for the benefit of the top 5% of income earners.  A person earning an adjusted income of $1,000,000 annually isn’t paying any Social Security tax on $886,300 of his or her income; the equivalent of 16 people who earn the U.S. median wage of $54,000.

Those wishing a fuller account of the elite assault on earned benefits should read, or review, Thomas B. Edsall’s excellent commentary in “The War on Entitlements,” NYT, March 6, 2013.

#3. We need to factor in the impact of the recession.   There’s really no way around this:

“Including all the stimulus spending, tax cuts, bank bailouts and automatic stabilizers, the Great Recession will add about $4.2 trillion to the federal deficit by the time the economy has fully recovered in 2016, based on back-of-the envelope calculations using figures from the Congressional Budget Office and the congressional Joint Tax Committee.”  [MarketWatch]

Or we could review the report from the Dallas Federal Reserve, and the Recession looks even worse if we look at total costs to the overall economy : “Last month, the Federal Reserve Bank of Dallas published a staff paper estimating the costs of the 2007-2009 financial crisis. The conservative estimate came out at 40 to 90 per cent of 2007 output, roughly US$6 to US$14 trillion.” [INET]

Recessions reduce income, reduced income reduces tax collections, reduced tax collections reduce government revenue, reduced government revenue increases debt.

If “tax reform” is advocated as a way to recoup the losses from the Great Recession, then we need to move beyond the Supply Side Hoax.   The notion that lower taxation would lead to more government revenue, was then — and is now — a theory in search of reality.    From the “been there, done that” corner:

“Supply-side economics starts from the generally accepted economic insight that tax policy can influence private-sector decisions by changing the incentives to work and invest. But supply-side acolytes take this relatively mundane observation to an extreme conclusion. They argue that lowering taxes for people, especially for those who have a lot of money to invest, will always lead to better economic results, and furthermore, that lower taxes is the single most critical intervention the government can undertake to stimulate growth.

This assertion—that lower taxes for the rich will lead to improved economic results—is testable. Of course, pure natural experiments in economics are few and far between, but over the last 30 years the United States alternated between economic policies that were heavily influenced by supply-side ideas, then were not, then were again. This variation allows us to compare economic performance in the various eras. If proponents of supply-side theory are correct, then the supply-side eras should outperform the non-supply side era. But that’s not what happened.” [CAP]

Reduced to a single chart we can see the results of the Supply Side Hoax applied to the U.S. public debt.

Supply Side TrendsWhen we apply Supply Side policies the blue line (national debt) increases, when we don’t the national debt is reduced.

It would follow from this that the “No New Taxes” (aka Supply Side Mantra) line makes a lovely and enticing slogan, but the application of the policy hasn’t resulted in better levels of investment growth, significant gains in productivity, better overall economic growth, better employment numbers, more income for the middle class, or better wages for working Americans.  These are all associated with increased federal revenue levels, we would obviously benefit from adopting a more realistic pro-growth tax policy than simply adhering to the narrow “no taxes = pro-growth” incantations from the Supply Siders.

When the push runs into the shove, a discussion of tax policy in regard to the reduction of the national debt should realistically incorporate the means why which federal revenues can be increased, without exacerbating the already serious level of income inequality, stagnating wages and salaries, and burdens on the American middle class.

If we’re truly serious about discussing the means by which we are to address the level of the national debt, then pontificating and nibbling around the edges of the 15% of the Federal Budget which concerns non-defense discretionary spending doesn’t suffice.   Are the advocates of cutting the food assistance programs really trying to convince us that they are taking important steps to curtail federal spending when those programs comprise some 0.24% of the federal budget? [InteractiveCP]

There are, indeed, some very serious questions to be answered when the question of the National Debt is raised: Not is sound bites and slogans, but in sound economic thinking and earnest efforts on behalf of working Americans.

 

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Keep It Simple: The National Debt Explained Without Panic

Before anyone starts panicking over The National Debt – Oh My Deity In What Ever Form It Takes – Look At The Big Numbers On The Clock:   Feel free to print off the graphics and stick them to the bathroom mirror:

Debt Asset

Yes, that’s correct, and it has been since some man or woman said, “I don’t have all the rabbit pelts yet to trade for your pot, but can I owe your four rabbit skins?”  If the answer is “yes,” then the “creditor” in this transaction is free to start planning how to use the total 14 rabbit pelts in the original bargain that  he or she will receive when the transaction is completed.  Also, the “creditor” in this example could tell yet another individual, “You’re asking for 14 rabbit pelts for that spear, I have ten now and I’m going to get another four from X, so I’ll give you the ten I have now plus the agreement that I’ll hand over the remaining four when I get them. ”  This is so simple even our Caveman could do it.

In our caveman example, the promise of the four rabbit pelts has the same value as the ten in hand IF the people in the market for pots and spears trust the person to come up with them to complete the original transaction.   This is CREDIT, as in the Latin “credere” (to believe, as in credo, “I believe.”)  As in the French crédit, as in the English CREDIT.   The promise to deliver the four remaining rabbit skins is an ASSET which the creditor/investor may use to conduct other transactions.

Sovereign nation

You and I have creditors — banks, credit unions, and other entities to which we owe money for purchases on credit.  Our corporations may issue bonds, our local, state, and federal governments may issue bonds — but I don’t get to issue my own “bonds” — for that matter,  who would buy them when there are government issued obligations of much greater value at much less risk?  Nations are financed by the selling (or auctions) of notes from their Treasuries.  In other words, except for the accounts payable to firms doing business with our government, the U.S. doesn’t have “creditors” is has INVESTORS.

Who owns our public debt? The GAO provides the following information:

Who Owns US debt 2That’s right — a large chunk of our federal “debt” is money we owe to ourselves — especially by the Social Security and Medicare Trust Funds.    Who owns the rest of it? (The part in the blue shaded area. )

Who owns US debt

If we add the approximately 42.2% of the U.S. debt owned by U.S. individuals and institutions to the 17.9% of the U.S. debt owned by the Social Security Trust Fund it means that about 60.1% of our total national debt is owned by OURSELVES.   If we add in the U.S. debt (Treasuries) owned by the Civil Service Retirement Fund, and the U.S. Military Retirement Fund that’s another 8.1% for a total of 68.2% of our national debt owed to ourselves.

Remember: One man’s debt is another man’s asset?  We own nearly 70% of our own debt, which in other terms means we have assets based on the full faith and credit of the United States in our own portfolios.

So WHY did Senator Tom Coburn (R-OK) stand on the Senate floor and chop up a poster of a “U.S. Credit Card?”  He says:

“I think it’s time we quit borrowing money against the future of our kids,” Coburn said. “It’s time we quit mortgaging their future. It’s time we started taking responsibility for the actions of the federal government rather than giving excuses for why we can’t get together and address the real problems of this country.”

I just love it when politicians play the “Think of the Children” card.  What Senator Coburn is saying, in essence, is “Let’s stop issuing Treasury notes to the Social Security and Medicare Trust funds, and the Civil Service Retirement Fund, and the U.S. Military Retirement Fund?” … and to the Federal Reserve…and to the major banking institutions…and to the general public in the form of Savings Bonds?

When the kiddies “hit the future” those bonds will have been repaid or will be earning interest for their retirement or for their medical needs when they are over 65 — or for other purposes if they’ve been collecting savings bonds. By all means “let’s think of the children” — and allow those funds to invest in the safest securities available in the world, U.S. Treasuries.

A debt level problem

Recall our caveman.  The very local economic wealth was increased by the value of four rabbit pelts when one person decided to take the promise of the other person on faith.  In a more modern setting if a person has a credit score from a rating agency that’s closer to 850 than it is to 300, then that individual can take on more indebtedness because lenders perceive the person to have “good credit.”  The loan created may be used to generate more wealth, as when it’s sold to into the secondary market, a common transaction with credit card accounts, student loans, automobile loans, and home mortgages.

The danger for the United States with a House of Representatives some members of which don’t think “default” is a dirty word, and are ready to dive over the fiscal cliff,  is that if we default — our “credit rating” drops.  If our credit rating drops then it will cost us more to borrow in the future — and there’s the point at which someone could rationally say: “Think Of The Children!” —  Children who will have to pay taxes to support  increased debt service because Pop and Grandpa decided it wasn’t a big deal to put the “full faith and credit of the United States” at risk.

On August 6, 2011, amid the last great fiscal cliff histrionics, the United States of America lost its AAA rating from Standard and Poor’s because the rating agency (which helped give us the Housing Bubble debacle) wasn’t convinced the U.S. had done enough to “stabilize the nation’s medium term debt dynamics.” [Reuters] The outcome was the highly unpleasant and economically unproductive Sequester Deal.   The CBO weighed in with its comments on the impact of the Sequester spending levels:

“Although output would be greater and employment higher in the next few years if the spending reductions under current law were reversed, that policy would lead to greater federal debt, which would eventually reduce the nation’s output and income below what would occur under current law. Moreover, boosting debt above the amounts projected under current law would diminish policymakers’ ability to use tax and spending policies to respond to unexpected future challenges and would increase the risk of a fiscal crisis (in which the government would lose the ability to borrow money at affordable interest rates).”

This recommends a balancing act.

Balance Fulcrum formula

In economic terms, we need to balance our level of indebtedness with our need for economic growth.   If we keep in mind that economic policy should be a balancing act rather than adding too much weight on one end of the bar or the other we should end up in better shape.  Too much spending without raising revenues tips the balance, as does slashing spending without concern for the consequences on economic growth.   The balance is a political act, setting economic policies with an eye toward keeping things level.  So, how are we doing?

National Debt PresidenciesAnd what are we trying to pay off?

Source of National Debt

In other words, we’re out of balance primarily because we cut revenues (Bush II tax cuts) and lost revenues from the Housing Bubble Crash and Mortgage Meltdown while adding expenses associated with military operations in Iraq and Afghanistan.  As the graph indicates, if we’d not tried to cut taxes in wartime, and hadn’t had to incur expenses associated with preventing the next Great Depression — the level of indebtedness would have continued its downward trend.   In short, there’s no such thing as a free war.

What we don’t need at the moment are politicians dramatizing the horrible terrible no good debt — especially on behalf of the children — or demanding we put all of our emphasis on economic growth.  The Austerians have held sway thus far, and we have the sluggish economic growth rates to prove it.  However, we do need to be aware that as we experience economic growth, this in turn fuels higher revenues leading to lower indebtedness.

What we don’t need is Panic —

Panic Quote

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Amodei, Heck, Right Face, Left Face, Backwards, March

Joe HeckRepublican members of the Nevada Congressional delegation Joe Heck (R-NV3) and Mark Amodei (R-NV2) are following the Tea Party script in the ever evolving rationale for the impasse created when the House passed a Continuing Resolution (defunding the implementation of the Affordable Care Act).  The Senate received the CR, stripped out the defunding section, voted on the clean version, and sent it back to the House.  The House has yet to vote on this measure.

Remember when, not so long ago that the House version of the CR was all about repealing “Obamacare?”  That horrible no good terrible job killing freedom smashing liberty restricting socialist communist anti business law of the land to allow people to buy private health insurance policies in a competitive marketplace?  Well, no longer — NOW the House refusal to bring a clean CR up for a vote is all about — The Debt and The Deficit.

Representative Heck tells the Las Vegas Sun his views on a clean Continuing Resolution:

“It would have to be a bill, and I don’t comment on hypothetical bills,” Heck said when the Sun asked if he might consider signing on.

But in theory, Heck is not on board.

“What is there associated with the clean (budget resolution)?” he asked. “How are we going to address our debt and our deficit?”

How are the debt and deficit to be addressed in the Senate version of the Continuing Resolution?  How about like this?

Clean CR Senate

What we have here is another instance of the Republicans refusing to take “YES” for an answer.  The Clean CR is $217 billion less than the Obama Administration’s proposed budget.  It is $109 billion less than the previous incarnation of the Ryan Budget.  The Senate CR is $80 billion less than the 2011 Budget deal, and only $19 billion more than the proposed 2014 Ryan Budget.  Is Representative Heck saying that he’s in favor of allowing the federal government to go into default for $19 billion?   Just to put that number into perspective, the blundering F-35 program has cost the U.S. taxpayers some $400 billion since 2001, [Time] a number which comes down to about $30.76 billion per year.

Amodei 3Nevada District 2 Representative Mark Amodei, has also changed the marching tune, offering this variation:

“We ain’t repealing Obamacare, we ain’t defunding Obamacare, we get that,” Amodei said. “It’s not just health care. It’s $2 trillion more in debt. If you get policy concessions in order for having more debt, what’s the matter with that? What’s the evil in that?”

Amodei may not have as purple a district as Heck, whom, he surmised, has “gotta be mindful of who his folks are.”  [Las Vegas Sun]

Herein, Representative Amodei engages in a bit of obfuscation.  Where did that $2 trillion more in debt come from? It may be the total of all federal debt.  It might be the number being bandied about in right wing circles for the national debt, or it might refer to the number the Congressional Budget Office projected as necessary to begin reducing the national debt in relation to the Gross National Product to 31% (below the 40 yr. average.) [Reuters] However, no matter the origin of the number, it represents long term budgetary goals and figures — and only tangentially relates to the Continuing Resolution to keep the government floating for the time remaining until the next GOP tantrum.

Bottom Line: IT, if by IT Representative Amodei means the Senate’s version of the Continuing Resolution, doesn’t add $2 trillion to the national debt.

Evidently, NOW the dismantling of the Affordable Care Act is reduced in GOP parlance to the status of a “policy concession.”

For the sake of clarity in this squabble, which threatens to take the United States of America into a default, let’s review some basic points:

(1) The raising of the debt ceiling has NOTHING to do with increasing the national debt.   President Obama isn’t the first President to ask for a “clean CR,” President Reagan wanted one in a 1986 battle with a Democratically controlled Congress in 1986. [NYT]  What President Obama understands now, and President Reagan understood then, is that a Continuing Resolution merely authorizes the Treasury to pay bills we have already incurred.  It doesn’t increase the amount of future appropriations.  Representative Amodei’s and Representative Heck’s concerns notwithstanding — the CR doesn’t add to the debt — it authorizes the payment of current debts.

(2) The Senate version of the Continuing Resolution IS a compromise between the Administration’s budget proposal, the Senate budget, and the House budget.  In a normal environment, after the two versions of the budget were passed by the respective houses in March, a conference committee would have been appointed to work through the differences and to bring a compromise budget to the original houses.  Senate Budget Chair Senator Patty Murray (D-WA) has asked 19 times for the Senate to appoint conferees to a budget compromise conference committee and has been rebuffed by Republicans each time.  The House has not appointed any of its members as conferees to such a committee.

(3) We have been on a trajectory to significantly reduce the federal debt.   IF we accept that $4 trillion target for budget reductions over the next ten years, then the Obama Administration has been remarkably well focused.  There’s good news and bad news with this target, summarized as follows concerning the President’s budget:

“Cutting an additional $1.5 trillion would indeed stabilize the debt, leaving it growing at about the same rate as the broader economy for the rest of the decade, the CBO said. However, the debt would remain above 73 percent of gross domestic product — the highest level in U.S. history except for the period after World War II. [WaPo]

However, someone needs to ask the question: Is debt reduction an appropriate focus during a recessionary period or exceptionally slow recovery?  It’s important to notice at this point that Austerians focus on cutting government spending — even though government spending is part of the GDP formula — to the exclusion of consideration of the possibility of tax increases, and the increased revenues available when wages and salaries are also increasing.  This position is analogous to expecting a camp stool to balance on only one of its three legs.

Meanwhile back in the real world, Governor Sandoval is already feeling the bind:

“… the consequences have already started. In a meeting with his cabinet, Sandoval warned that Nevada would soon run out of money to process unemployment benefits or cover food stamps, and that National Guard vehicles had already been grounded because of a lack of funds to pay for basics, such as gas.”  [LVSun]

So, Representatives Heck and Amodei continue their forward, backward, left face, right face, backwards march in step with the Tea Party leaders in the U.S. House of Representatives, while the Nevada National Guard isn’t going anywhere…

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The Crisis Factory goes Dancing With the Debt Fetish

Marathon DancersOne of the little problems with the Politics of Hyperbole is that eventually someone may notice not every minor annoyance constitutes an emergency.  Not even every major issue is an emergency.  However, nothing has prevented the radicals from manufacturing crisis after crisis in order to monopolize the conversation and distract this country from some very real issues we need to address.

The Distractions

Pillar OnePeople are in imminent danger of becoming dependent upon government.   Hogwash. Only the most extreme social libertarian would contend that having police, fire, and emergency medical personnel creates “dependency,” and how foolish does a person have to be to argue that we don’t need public health inspectors?  Further, if we allow for the old saws that two “heads are better than one,” and “many hands make light work,” then we know there are many tasks at which we do much better when we work together: Building roads, dams and bridges; Conducting relations with foreign countries; Protecting our citizens from or responding to natural and man-made disasters; Promoting our national economy.  And the list goes on.  Or, to introduce yet another well known concept:

“No man is an island,
Entire of itself,
Every man is a piece of the continent,
A part of the main.
If a clod be washed away by the sea,
Europe is the less.
As well as if a promontory were.
As well as if a manor of thy friend’s
Or of thine own were:
Any man’s death diminishes me,
Because I am involved in mankind,
And therefore never send to know for whom the bell tolls;
It tolls for thee.” — John Donne (1572-1631)

Pillar Two: People are burdened by an unconscionable level of federal debt.   This argument is extremely convenient for those who have another agenda — cutting spending on domestic programs with which they are in fundamental disagreement.  The proposition requires adopting a variation on the White Queen’s belief in “six impossible things before breakfast.”

The United States is the most powerful nation, with the most powerful economy in the world.  China’s GDP is $8.227 trillion; U.S. GDP is $15.68 trillion.  Therefore, it is necessary to manufacture PERIL in order to substantiate the claims that we are burdened by indebtedness such that we cannot afford to (fill in the blank with the program one wishes to dismantle).   There are some real issues, just not the ones usually cited in the conservative press.  For example:

The Trifflin Dilemma Peril:  “He pointed out that the country whose currency, being the global reserve currency, foreign nations wish to hold, must be willing to supply the world with an extra supply of its currency to fulfill world demand for these foreign exchange reserves, and thus cause a trade deficit.”  Translation – The stronger the nation the more likely other nations are to want to invest in it, and the more other nations invest in it the more vulnerable the nation becomes to foreign influences on its economy.

A variation on the Trifflin Dilemma often shows up in the conservative media in the form of a new version of the old obnoxious  Yellow Peril argument — What if China called in its investments?  They could OWN us.  Instead of rewriting the posts, this topic has been discussed at more length in “The Republican Debt Wish” (2006), “Something to Think About,” (2008) and “When Willful Ignorance Meets Economic Reality,” (2011).

One one of the consequences of paying attention to the debt, as opposed to focusing on the economic growth which facilitates the repayment of those obligations, is dangerous in itself, as explained by Nobel Prize winning economist Joseph Stiglitz:

“The fundamental problem is not government debt. Over the past few years, the budget deficit has been caused by low growth. If we focus on growth, then we get growth, and our deficit will go down. If we just focus on the deficit, we’re not going to get anywhere.

This deficit fetishism is killing our economy. And you know what? This is linked to inequality. If we go into austerity, that will lead to higher unemployment and will increase inequality. Wages go down, aggregate demand goes down, wealth goes down.” [HuffPo]

Pillar Three: The free market will cure all ills.   When pressed to explain why, for example, the Affordable Care Act, is so onerous, the right is often moved to propose that the “free market” could have solved all the problems associated with health care insurance situation in the United States.

The first question we need to ask in regard to this contention is: Are we using the right tool from the box?  Consider your utensil drawer in the kitchen.  Does it contain at least one table knife, bent at the tip because it was pressed into service as a screw driver or as a lever?  Like the trusty table knife, the free market is an excellent tool for delivering the goods and services we require, but there are some tasks for which is it simply not the best implement to apply.

We could apply the free market to our transportation system by privatizing all our now public roads and charging tolls for their maintenance and use — however, we need to calculate the cost to our economy of raising costs for the factors in our transportation sector.  In this instance, the cost to the trucking industry is a negative factor in economic growth, and it is better policy to “subsidize” the industry by providing well maintained roads and functional bridges to secure the benefits of our economy.

Since we accept that corporations should operate for a profit, then in the realm of health care insurance it makes good free market sense for the company to insure only healthy persons (certainly not those with pre-existing medical conditions, or those who are elderly) and to keep those medical loss ratios at the lowest possible level.  In short, if we allow the free market to function in its purest form in the delivery of health care, then we should rationally expect that the least costly services will be provided, to those who need the least service.  Sometimes it’s really not about the money.

We can quantify the economic contribution of a father or mother in the family, but that doesn’t determine his or her value.  We don’t calculate a cost-benefit analysis in order to decide on marriage. We can quantify the economic contribution of roads, bridges, and airports, but that alone doesn’t determine their value to us.  We can quantify the benefits of education in terms of test scores, but we can’t determine how a person will synthesize information accumulated from the arts and from engineering to determine the best design for a marketable household appliance.

Focus Please

There are issues we need to address, most of which have profound implications for our economy. Among these are:

#1. Global climate change.  This isn’t “lib’rul hype;” this is about living on a planet capable of sustaining human life. Yes, if we foul our nest, the planet will probably last another 6 billion years, but WE won’t.   The 2007 University of Maryland study (pdf) projects economic impacts in terms of agriculture, energy, and transportation; in terms of our eco-system; and, in terms of water and infrastructure elements.   The fifth assessment from the IPCC released recently should convince all but the most delusional that WE are the problem.

The conservatives continue dancing with the Debt Fetish

#2. Student Loan Indebtedness.  If we’d really like to have young people start contributing to our economy, especially in regard to consumer spending, then it would be nice if they had more unencumbered income with which to do just that.  The Wall Street Journal calls the current situation the “Student Loan Straitjacket.”

The conservatives continue to dance with the Debt Fetish, but “What of the debt for our grandchildren?”  Flash Dispatch to the conservatives — These ARE our grandchildren.

#3. Infrastructure issues.  It isn’t like the American Society of Civil Engineers haven’t been trying to get our attention.  The National Report Card is not pleasant or reassuring reading — but it should be read, and we should be paying attention.

The conservatives continue to dance with the Debt Fetish.  How do we pay off any portion of the debt if our physical infrastructure is so dilapidated as to impede the progress of our distribution systems?

#4.  Employment. Of all the associated issues this is the most central.  We could be putting people in the construction sector back to work if we could enact funding for infrastructure projects.  We could be putting people to work in alternative energy projects… We could be putting people back to work in new jobs in new manufacturing sectors.  However, we are still dancing with the Debt Fetish…

…and like the marathon dancers of the Depression Era we will proceed having put a great deal of effort into endeavors promising very paltry results.

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