Archive for the ‘national debt’ Category

The Financial Status of Social Security, Part 1

FinancialStatusOfSocialSecurity_Part1  <– PDF version

Dear readers:

This is the first in a series about the true financial status of the Social Security Trust Fund.   There are several useful charts showing the historical state of the Trust Fund since 1937; for that reason it is available only in PDF format.

Thanks for reading,


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The Politics of the “Fiscal Cliff”

ThePoliticsOfTheFiscalCliff  <– PDF version

So the elections are finally over and our illustrious federal officials now turn their attention to the so-called “fiscal cliff”.  At issue here is whether the Bush-era tax cuts will expire, along with the Social Security withholding reduction enacted in 2010 as a temporary stimulus measure.  The “fiscal cliff” came about per an interim agreement reached last year, as a result of the debt-ceiling escalation in Aug 2011 and the subsequent failure of Congress to come to a consensus on a fiscal policy.  The idea behind the interim agreement was simple: impose across-the-board spending cuts of $1 trillion over ten years and let the Bush-era tax cuts expire on 1 Jan 2013 unless a long-term fiscal policy is enacted.  The $1 trillion in spending cuts, spread over ten years, result in $100 billion in cuts every year, split approximately equally between defense and non-defense.  This was regarded by its designers as so abhorrent that it would provide sufficient motivation for Congress and the President to actually make a deal.  But the negotiations since the election have not been going too well; and of course both sides are busy blaming each other.

I will review the situation, and show how the Republicans, contrary to conventional wisdom, actually hold all the cards here.  First, a few undisputed facts:

1.  The President campaigned successfully on two notions: that tax rates must go up for the wealthy, and must come down for the middle class.  He has said the marginal rates on the wealthy should go back to the 1990’s; in other words, from 35% now to 39.4% as they were in theClintonera.

2.  If the “fiscal cliff” occurs, tax rates will go up for both the wealthy and the middle class.

3.  The long-term fiscal problem of the nation cannot be solved by spending cuts alone, nor by tax increases alone; a combination of the two is necessary (i.e., a comprehensive package).

4.  The history of past “comprehensive” reforms, as enacted under Reagan and Bush, Sr., shows that the Democrats always insist on tax increases immediately, with a promise of spending cuts in the distant future.  Of course, politicians being who they are, those cuts never happen.  It is safe to say that no Democrat in Congress will ever vote for any bill that actually cuts spending in the near term unless he is forced to do so.

5.  No Democratic President will sign a bill that results in immediate spending cuts, unless he is forced to do so (like Bill Clinton).

6.  If anything bad happens to the economy, the propaganda wing of the Democratic Party (i.e., CNN, CBS, ABC, NBC, and PBS; plus the major newspapers led by The New York Times) will blame the Republicans; if anything good happens in the economy, they will give Mr. Obama all the credit.

7.  The Democrats and their propaganda wing have long held that the Republicans are the party of the rich (conveniently ignoring the fact that tax provisions favoring the wealthy were passed mostly by Democratically-controlled Congresses over the last 50 years).

8.  The Democrats and their propaganda empire have claimed that the Republicans are holding the middle class hostage to protect the rich.

9.  Mr. Obama has stated that he will only accept a “fiscal cliff” deal if it raises tax rates on the wealthy.  He has claimed the wealthy are those with incomes over $250,000.

10.  The Republicans have thus far admitted that revenue increases are necessary and are willing to do so by removing some loopholes used by the wealthy and limiting some deductions.  They do not want to raise tax rates on the wealthy due to a “tax pledge” made some years ago.

Here are a few observations and applications.  First, consider the cuts in the “fiscal cliff” legislation.  The cuts are across-the-board, without the necessary and prudent prioritization that rational people would do.  However, let’s be realistic: it actually imposes spending cuts immediately, and for that reason alone is probably the best that our ruling elite can do as things stand presently.

Secondly, the wealthy already pay a large portion of income taxes.  So, if revenues are to be increased via the Republican preference (closing loopholes and limiting deductions), or increased by Mr. Obama’s preference (raising marginal rates), the wealthy are going to pay more either way.  In reality, the best thing for the nation is the Republican way, since it will do more to promote fairness in the tax code, and limits the ability of Congress to punish their enemies and reward their friends through the tax code.

Third, if we go over the “fiscal cliff”, taxes will go up for those of us in the middle class.  So taxes will go up — what else is new; and how will it matter all that much?  State and local taxes of all types have been going up all along.  Recall that the Social Security withholding reduction was intended to be temporary anyway (it was also a bad idea).  The increase in taxation via federal marginal rate increases is small compared to the already-occurring increases in the cost of living due to the Federal Reserve’s currency-printing machine.  If either side truly cared about the middle class, perhaps they would take action to restrain Mr. Bernanke.

Fourth, although most Republicans were dumb enough to sign “no-tax” pledges at the urging of Mr. Grover Norquist, the simple fact is that both the expiration of the Bush-era cuts and the repeal of the Social Security withholding reduction are already accomplished facts if a deal is not made.  They cannot be accused of raising taxes if they allow law per a vote already taken in 2011 to occur.  Only a moron would sign such a pledge anyway; since when did Mr. Norquist assume the authority to supersede the needs of the nation and the powers of Congress contained in the Constitution?  If Mr. Norquist wishes to be emperor, perhaps he should run for the office.

Fifth, the “smart money” has known for months that our ruling elites are incapable of anything better than the impending “fiscal cliff”.  As for the future of the stock market, the “smart money” managers have probably already priced-in the effects.

Sixth, if one is going to be accused of something, one may as well do it.

With these facts and observations in mind, it seems to me that the Republicans hold all the cards here, and it is possible to get true reform that actually helps the nation.  Mr. Obama needs to score political points by raising taxes on the wealthy (it won’t solve the fiscal problem, but he needs to score points).  He won re-election, so let him have his political points.  The increases on the wealthy are his most famous political need, but not his most important one.  Many of his supporters are middle-class.  He needs a tax cut for them much more than he needs a tax increase on the wealthy.  The Republicans in the House should immediately pass legislation that raises marginal rates on the wealthy to 50%, with no corresponding demands for spending cuts and no other conditions subject to objection.  This is far above the rates that prevailed in the Clinton era.  In fact, they should pass a series of bills that raise rates on the wealthy to 60, 70, 80, or 90%, and let the Senate Democrats and the President choose the one they want.  This turns the argument around while costing the Republicans nothing: taxes are going up on the wealthy either way.  If the Democrats think those marginal rates are too high, it will be incumbent on the Democrats to negotiate lower rates for the wealthy to protect their friends in the tall buildings in Manhattan.  If the Democrats do not really want higher rates on the wealthy, by all means they shall have their “fiscal cliff”.  If they settle on the new rates for the wealthy, Mr. Obama will have his political points, but leaves the Republicans in control of what he needs more (the middle class tax cut).  Then the Republicans can actually do what they’ve been accused of: hold the middle class tax cuts hostage — not to protect the rich, but to get spending under control and thus stabilize and secure the nation’s long-term financial health.  They should demand immediate spending cuts in return for an immediate reduction in tax rates for the middle class, thus forcing the Democrats to do what is necessary but have never done before.

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A Note on the Budget Impasse, Part 2

A_Note_On_The_Budget_Impasse_2   <== PDF version

We’ve all heard the news about the “budget deal”.  Congress passed, and the President signed, the “Budget Control Act of 2011”, which averts the immediate prospect of a “default on the federal government’s financial obligations” by raising the “debt ceiling” about “$2.4 trillion” while “cutting spending” by a guaranteed $0.9 trillion over ten years, plus an additional $1.2 trillion in “additional cuts” which are to be specified by a “Select Committee” required to report its recommendations by 23 Nov 2011; if this Committee cannot agree, or Congress does not pass a list of “spending cuts”, then the $1.2 trillion in “spending cuts” will go into effect “across-the-board”, “divided evenly” between “security” and “non-security”.

Before we celebrate too much, let’s keep in mind that the federal government was already planning on spending levels that would increase the national debt from about $14.3 trillion to about $24 trillion over the next ten years.  Secondly, “discretionary” refers to all the things the Congress has allowed itself year-to-year control over, which happen to be all the things authorized by the U. S. Constitution.  Third, “non-security” is a code word for “entitlements”, often called “mandatory” spending because the payments are automatic, even though no such power to enact them is mentioned in the U. S. Constitution.  So, “discretionary” spending refers to all the things that the government is constitutionally authorized to do, “mandatory” spending is all the things the government is not constitutionally authorized to do.  If that seems strange to you, rest assured that it makes perfect sense to the people in Washington.  Fourth, “default” means that the government would not have the cash flow to meet all the promises it has made, and would therefore have resulted in politicians actually having to make all those “tough choices” they always brag about.  Fifth, Congress has traditionally changed the rules on these types of deals after the fact; usually the overall spending goes up no matter what.  Sixth, for those unfamiliar with it, a debt ceiling is the total amount of debt the government allows itself to obligate the taxpayers in the long run.

With these useful definitions in mind, let me restate my opening paragraph again, but this time the phrases in quotes will be in accordance with their true meaning:

We’ve all heard the news about the “smoke-and-mirrors swindle”.  Congress passed, and the President signed, the “Business as Usual Act of 2011”, which averts the immediate prospect of a “politician having to do his job” by raising the “actual total debt” to about $21.9 trillion while “pretending to cut spending through promises to reduce the rate of increase” by a guaranteed $0.9 trillion over ten years, plus an additional $1.2 trillion in “accounting gimmicks” which are to be specified by a “bipartisan group of entrenched party hacks” required to report its recommendations by 23 Nov 2011; if this Committee cannot agree, or Congress does not pass a list of “less-than-desired-increased-spending-levels”, then the $1.2 trillion in “less-than-desired-increased-spending-levels” will go into effect “targeted at enemies”, “according to which faction has the political advantage” between “constitutionally necessary tasks, which they don’t care about” and “entitlements, which they are afraid to discuss”.

As I speculated in my first essay on this subject (11 Jul 2011), this bill is full of the usual deceptions, delays, and artifices.  There will come a day, however, when real choices have to be made.  The longer it is put off, the more painful it will be.  As the people in Washington seem to be comfortable with these do-nothing illusions, they will no doubt continue to do so for as long as they can borrow another dime, after which there will be a Very Unpleasant Reckoning.

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A Note on the Budget Impasse

A_Note_on_the_Budget_Impasse  <== PDF version

Most of us have heard about the big “budget debate” in Washington between the leaders of the two major political parties.  The Washington establishment and the media are telling us that it is necessary to achieve some kind of long-term budget agreement in the next few weeks or else the U. S. will default on its obligations by 2 Aug 2011.  Now of course, the government has a lot of money rolling in each month – more than enough to pay interest on the debt that is due each month.  So, defaulting on our $14.4 trillion debt is actually a matter of choice.  What the politicians want us to believe is that come 2 Aug they will be able to pay only part of their obligations and renege on the rest; i.e., they will have to “default” on something. But it will certainly not be interest payments on the debt (that would cause real economic problems), what they mean is that some interest groups, some corporate welfare queens, some individual welfare recipients, or some illegal aliens will not get all the free goodies they have been promised out of our pockets.

I for one don’t believe it, on the grounds that no one, not even two-bit party-hack politicians, could be stupid enough to delay resolving this issue until a few weeks before the Big Event.  If it is true that they knowingly and willfully delayed all this time, recognizing months in advance that such an event would be triggered by their inaction, the proper remedy is for them to resign in disgrace for dereliction of duty.  That can never happen.

Mr. Obama and Mr. Boehner, as leaders of their respective parties, have been haggling (we are told) over a long-term “solution”.  At one point, it was to be a $4 trillion “solution”, involving spending cuts to the largest budget items (Social Security, Medicare, and defense) to be augmented by tax increases on the middle class and the wealthy.  Supposedly, Mr. Obama’s Democratic allies rejected any talk of reducing those entitlements, while Mr. Boehner’s Republican allies rejected any talk of tax increases; hence they are now struggling to come up with a “small” $2.1 trillion deal.  But, we should remember that no one in Washington, regardless of party, ever gets around to actually cutting spending.  If they cut a deal, the tax increases would go into effect immediately, whereas the spending cuts would be scheduled for ten years from now and would simply never happen; this is exactly what occurred during the tax increases of the Reagan and G. H. W. Bush eras.  It is even worse than that: when the “deficit hawk” Republicans gained control of both houses of Congress in 2000, the first thing they did, and continued to do, was to increase spending just as the Democrats had done.  I would be leery of any so-called “solution” according to the usual formulas.

In the end, the big-money, big-vote-getting interests obtain their desires through exemptions, exclusions, subsidies, outright gifts, and unfunded mandates on the states, while the average guy continues to lose ground or stay where he is.  That said, I may be fairly conservative, but I would not be opposed to a “provisional” tax increase to help deal with the debt.  “Provisional” in this context is understood to mean a tax increase devoted only to reducing the debt.  But, to guard against the political trickery of the past, I would remain in favor of a tax increase only under the following caveats:

a.  Revenue increases shall be imposed only by a payroll tax, which may be graduated and scaled for total income (i.e., the rich to pay more, the poor less); this eliminates loopholes to aid the politicians’ favorite friends.

b.  In year 1 of the budget deal, spending will be cut by “X” amount, without any increase in marginal tax rates.

c.  In year 2, of the budget deal, tax rates may be increased to approximate “X” from the year before.

d.  The same formula as above shall prevail for all succeeding years, that is, the amount of additional revenue in a given year shall not exceed the budget cuts of the past year, as compared to the year before that.

Only then can we be assured that the spending cuts are real; secondly, we will have a solid metric by which to evaluate the magnitude of the subsequent tax increase.  The politicians will complain that the additional revenue will come too late; that people will suffer in the initial cuts.  Poor babies; maybe they should have given that some consideration before they ran up our credit card to $14.3 trillion; just a thought.

Now that I’ve mentioned tax loopholes, I would also like this budget deal to address the complexity of the tax code, which exists only to benefit special interests and politicians’ favorite puppies.  Therefore, I require, as compensation of my taxes going up, a reduction in the volume of the tax code according to the following schedule:

a.  50% reduction in tax code volume within the first four years

b.  An additional 50% reduction (to 25% of current) in the next succeeding four years

c.   An additional reduction (to 12.5% of current) in the next succeeding four years.

In order to ensure Congress and the IRS comply with these restrictions, I require a provision by which all income and payroll tax withholding shall cease if Congress and the IRS refuses or is unable to meet the above reductions.

None of these ideas have any chance of passage, of course.  But it will be entertaining to see what our illustrious leaders foist on us this time.

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