2011 August 12 Friday
How Fast To Hit Economic Wall?

Jim Goad comments on the retarded state of US public debate over the debt ceiling and spending.

Since there will be no happy ending, this weeks-long “debate” boiled down to a drunken saloon argument over whether we drive into a brick wall at 85MPH or 95MPH. This country’s financial wad is red, white, and blown. Neither side wanted to admit that the nation’s financial condition is way beyond redemption. All they did was argue over an acceptable size for the tumor and tried to place blame for who caused it. Neither side is willing to admit that it’s terminal cancer.

My take: the political class is a reflection of the deluded voters who put them there. As the Democracy In America blog at The Economist points out, the American people do not want either fewer benefits or higher taxes - except on a few.

ACCORDING to a new CNN poll, 63% of Americans want the imminent "super committee" to call for tax increases on high earners and 57% want large cuts in domestic spending. Sounds sensible! But don't get your hopes up. Only 47% favour big cuts in defence spending. Worse, a mere 35% support "major changes" in Social Security and Medicare.

The position of the vast majority of Americans is that, except for a small number of fat cats, we shouldn't have to give up anything to close the monstrous deficit. Brink Lindsey points out that entitlements spending is set to grow so much that just taxing the rich won't generate enough income to pay for the projected future growth in entitlements.

And, as Mr Lindsey notes, citing the CBO, maintaining anything in the neighborhood of status quo growth rates in entitlement spending would require huge across-the-board tax increases. Yet 87% of Americans oppose tax increases on the middle- and lower-classes. If I were a big credit-rating agency, this is what I would cite in support of the proposition that American debt is increasingly risky. Politicians naturally fear straying too far from public opinion, and this makes the incoherent cast of American public opinion dangerous.

If you aren't familiar with the details of the the entitlements problem read my category archive on entitlements. The story is bleak. The population is aging and other things are going wrong. The ratio of productive employed workers to everyone else is falling. The productive can't fund a larger number of non-workers without giving up quite a lot - like in Euro welfare states with much higher overall taxes.

The top 3% earn 26% of total income. The top 3% are those who make $200k and higher. Putting 74% of earned income off limits for tax increases won't provide for enough taxable income to keep the government funded. If the tax rates go way up to 60+% on the top earners some will just leave. Others will stop earning as much. That's why European countries use a Value Added Tax (basically a sales tax). They tax consumption because it lets them raise more than income tax alone. But a tax on consumption is a broad based tax that would hit everyone, not just the top 3%.

Also as Brink Lindsey points out, if the US government succeeds in upping its cut of GDP enough to fund entitlements the US rate of economic growth will slow substantially.

A recent paper by Swedish economists Andreas Bergh and Magnus Henrekson surveys and untangles the confusing, apparently conflicting literature on the relationship between the size of government and economic growth. They find that once the focus is narrowed to rich countries only, and consistent measures of the size of government are employed, a reasonably consistent picture emerges. “The most recent studies,” they conclude, “find a significant negative correlation: An increase in government size by 10 percentage points is associated with a 0.5 to 1 percent lower annual growth rate.”

I already expect economic stagnation anyway due to Peak Oil and other limits to growth. Since oil prices are going to go back up and that will cause a recession all the official government projections of future budget deficits are way too optimistic. US government financial soundness depends on growth. Take away growth and the money for big entitlements promises to the elderly and poor will not materialize. Our financial system's accumulated debt can't be paid back once Peak Oil hits and therefore our government's promises can't be kept.

Those big deficits the US government is running are all claims on your future earnings ability. Since the deficits are going to continue the claims against your future living standard are going to get bigger. Therefore, as I said in my previous post, you've got to try harder just to maintain your current position. Excel in your skills development and career or go down. The middle will not hold.

Share |      By Randall Parker at 2011 August 12 11:00 AM  Economics Living Standards


Comments
Black Death said at August 12, 2011 12:55 PM:

All true. The FY 2011 budget calls for expenditures of about $3.8 trillion and revenue of about $2.1 trillion for a deficit of $1.7 trillion. The following items could be pretty much completely eliminated: Departments of Commerce ($13 billion), Education ($71 billion), Energy ($41 billion), HUD ($49 billion), Small Business Administration ($1 billion), agricultural subsidies ($20 billion), all foreign military and economic aid ($50 billion). Additionally, a 50% cut in the $800 billion defense budget would give the US defense expenditures in the range of 2.8% of GDP, generally above those of other NATO nations, Russia and China. And we haven't touched entitlements (yet). How much have we saved? About $645 billion, or about 38% of the total deficit.

These are the "easy" cuts, the ones that most Americans won't find too difficult to accept. Farmers receiving subsidies, defense contractors and bureaucrats may howl, but I'm not very sympathetic. But from here on out it only gets harder. If the Republicans can relieve themselves of their ridiculous infatuation with the military, they ought to do pretty well. (Yes, I know that's a big "if"). Such a stance would allow the GOP to come out for "protecting" Medicare and Social Security at the expense of chopping away at Medicaid, food stamps, housing subsidies, welfare and all the other goodies for the parasitic classes. The Democrats will gag at having to choose between the elderly (whose votes are up for grabs) and the poor (who never vote for Republicans, when they bother to vote at all.)

Mthson said at August 12, 2011 2:09 PM:

Amazing that only 47% favor big cuts in military spending. The only reason we "need" extraordinary military spending is that people hate us because of our extraordinary military spending.

If tax payers were given the choice of a $5000 cash gift each year instead of funding their part of military adventures overseas, most people would respond rationally and take the cash.

Jehu said at August 12, 2011 4:51 PM:

Here's the problem. Whatever party actually fixes the problem (i.e. forces the US to live within its means) will incur so much wrath from the American voter that they'll be dead for a generation. Try convincing career politicians to do that---it is a total nonstarter. Thus running into the wall, collapsing, and rebuilding is the only realistic course.

Randall Parker said at August 12, 2011 5:01 PM:

Black Death,

I expect most Americans will find the Education $71 bil cut a hard pill to swallow. The myth that a college education always improves security is starting to break down. But we need more time for the faith in education to weaken.

Since entitlements are over half the federal budget and the deficit is 45% of total expenditures it is clear that we can't get to a balanced budget just by cutting non-entitlements spending.

It gets even worse going out as the percentage retired goes up. The fact that we are already in this much trouble before the bulk of the Baby Boomers retire tells us the problem is going to get far worse. Peak Oil is still at the level of a weak tropical storm. It is going to become a Cat 3 hurricane and go up from there. Then the crisis will get far worse.

With a shrinking GDP tax increases will make living standards decline even more sharply. People will oppose tax increases for this reason. I do not know how this will all shake out. But the crisis looks set to intensify.

Randall Parker said at August 12, 2011 5:05 PM:

Jehu,

Yes, you describe it in a nutshell. There are politicians in DC who, behind close doors and with people who they can trust, can probably tell you in great detail what some of our problems are. But they can't get reelected with honesty.

We need more truth tellers and we need truth tellers on many subjects.

Black Death said at August 12, 2011 6:48 PM:

RP -

The Department of Education is a useless bureaucracy. It has done nothing to improve test scores or education in general since its inception in 1980. Eliminating it would not damage education in this country. Sort of like the Department of Energy has done nothing about promoting energy self-sufficiency and preventing oil spills or the Department of Housing and Urban Development did nothing to prevent the housing bubble (or maybe made it worse). All of these useless bureaucracies need to be jettisoned. Remember, these are the easy ones.

Yes, we can't get the budget under control without cutting entitlements - the question is which ones to cut, and by how much. The Republicans, if they are smart (again, another big "if") will circle the wagons around the seniors and throw the poor people under the bus. Too bad for them.

And Jehu is probably right - politicians of both parties may secretly want a crash so they can act as our "saviors" and gain even more power over us. This one isn't going to be pretty.

Randall Parker said at August 12, 2011 8:16 PM:

Black Death,

I'm the choir when you preach about the Department of Education. But most of the rest of our population are still believers. I can tell this when I talk with friends who are paying to send their kids to college and I ask them about what they are willing to spend, what their kids are going to study, and whether they could consider blending in online lower cost options. Faith in the education bubble is still too strong.

Talented marketers in colleges and universities have very effectively created a university prestige racket. That Washington Monthly article is worth reading in full. You will see what we are up against: Marketers who want to keep those $71 billion flowing. They've sold a mythological story about education and taken in generation after generation of parents.

Some cracks in the faith in the conventional model are starting to show. See my post Value Of Elite College Educations Questioned. But only a severe financial crisis (which is coming) will make a necessity of radical reform and a shift to online education and other cost cutting measures.

no i don't said at August 13, 2011 11:39 AM:

Yeap. This was the U.S.A. Everything from around 2001 is and will continue to be downhill.

Hey not to worry, I mean in the end the World is a little more than the U.S. It will surely continue with or without the U.S., no big deal. I mean, after all there were only 3 really worthy things that ever came out of the U.S.: Rock and Roll, Abraham Lincoln and Thanksgiving Dinner.
Oh, hey, and let's not forget of course Calvin and Hobbes... so make it four, but that's it.

John said at August 13, 2011 2:10 PM:

Off topic but:


Pakistanis and Indians Jailed for Starting Birmingham Riots



http://www.birminghammail.net/news/top-stories/2011/08/11/saltley-man-first-to-be-jailed-for-birmingham-riots-full-court-report-from-first-day-of-prosecutions-97319-29216078/







John Derbyshire estimates that blacks comprise about 2% of the British population but 60 - 70% of the rioters.





http://www.nationalreview.com/corner/274226/epitaph-britain-john-derbyshire#

Engineer-Poet said at August 14, 2011 6:27 AM:

John, stop spamming that on every thread on every HBD-related blog.

Mthson said at August 14, 2011 2:45 PM:

This is the only human biodiversity related blog I have time for now, so I was glad John posted.

Randall Parker said at August 14, 2011 7:40 PM:

Mthson,

Check out how many places he posted those links.

There are a lot of commenter warriors out there. But note he didn't even bother to learn "a href" syntax so that people would actually bother to click thru on his links. Annoying and ineffective at the same time.


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