Taxes

Think about taxes.

They are the amount you pay the Government in exchange for certain services.

The biggest items we pay for are National Defense, various entitlement program, and the Interest on the National Debt.

It might be better to say we pay for Military services since most of it has a very tenuous line to actual defense of this country.

In fact its fairly safe to say that with our Nuclear Arsenal, it is unlikely that anyone would overtly attack us.

Before World War 2 we tended to keep a fairly small active army when we weren't actually at war.

Following that war, we perceived a need to counter the threat of worldwide communist expansion and defend our European Allies via NATO.

The chart below shows the last 100 years of spending and we see the increase of WW1 followed by a decrease and the increase of WW2 followed by a decrease.  However the post war amounts dwarf the prewar amounts and have continued.

What have we gotten for this spending?  Well the country has not been invaded but we have thousands of dead young people because of Korea, Vietnam and the War on Terror.

The question is, what do we gain by all this spending?  Consider how much less the National Debt would be if we curtailed it a bit?

A Country in Debt

If you consider a simple economic construct, the country and many of its citizens are living on borrowed money and therefore borrowed time.

You can blame it on any number of things, but in many cases it simply comes down to wanting what we want now, and worry about tomorrow later.

This was part of the issue involved in the financial crisis of 2008-2009 where an assumption that home prices would only continue to go up led to loans on what is best described as a whisper and a prayer.

When they didn't go up and many of the mortgages couldn't be refinanced or paid, we had a collapse that almost drove us into a depression.

To solve that problem we inserted a great amount of money into the economy via stimulus to give us a jump start.

We are still living off a series of jump starts as we haven't reigned in spending and individual income growth has not kept up with debt increases.

We can't afford many of the things we want and the Government can't afford the programs it already has.

No one seems willing to do what needs to be done to address it so I guess eat, drink and be merry, until they take the T-Bird away.

Debt Bubble

In general Americans are poorer today than they were at the turn of the century in 2000.

Since that time average household income is up about 14% but big ticket items like housing, college, health care, cars ate up much more.

In order to keep up we borrow and debt is at an all time high.  This is actually what one would expect as the population increases, but per capita debt has also risen significantly.

So a modest increase in income offset by significant increase in debt does not equate to a great economy.

It equates to a economy that is at risk.

The increase in debt is possible because we have seen interest rates kept artificially low.

Similar to previous periods when the economic elements get our of kilter, there is usually a dramatic adjustment.

That adjustment is needed to bring debt and incomes into balance.  It could be inflation, deep recession or something unpredictable, but these type of out of balance situations are not sustainable over the long term.

We have a debt bubble and it will pop.

Just when is the question?

Budget Follies

We live in a country where the Government spends much more than it collects in taxes.  Faced with that the last congress at the urging of the administration passed a tax break primarily for businesses and the wealthy.  The deficit grew and so did the national debt.

National Debt is one of those things that is fine until the day that it isn't.  Since we run higher and higher deficits we are forced to borrow to pay the interest on it.  As it grows the interest grows and we need to borrow more.

We have actually been pretty fortunate in the fact that interest rates have been very low for an extended period of time.  The interest on the debt is dependent on the amount of the debt and the interest rate.

There is no current achievable way to eliminate the deficit.  We would need to take draconian measures to even come close.  Massive cuts in popular programs or significant tax increases would be required and no one in politics is going to do that.

The other way to reduce or possibly even eliminate the deficit would be if the economy was to grow at a rate that we aren't even close to.  achieving.

In the budget about to be proposed by the administration we see significant increases in defense and wall funding slightly offset by unacceptable reductions in domestic programs.

It includes unrealistic growth projections that make it look like we can actually reduce the deficit.  So far this year the deficit has increased 77% over the prior fiscal year as growth has slowed, our trade deficits have increased and spending is greatly outstripping revenue.

It may improve a bit as the year progresses, but the year we are talking about started in October so we are approaching the half way point.

Since the financial crisis we have seen deficit numbers that were unimaginable not too long ago, but having gotten used to them we do not treat them as a crisis.

They are much more of a national emergency than the issue on our southern border.

National Taxation

Many people in the United States think we are overtaxed.  By pretty much any measure we aren't.  In 2015 our tax as a percent of GDP was 26% well below the average of 34% for other developed countries.

Tax by Country

I'm sure taxes are complained about everywhere, and there is no political capital to be gained by proposing to raise them, however, if growth and reduced spending aren't going to eliminate the deficit, the only thing left to do is to raise taxes.

However, besides the political consequences there will also be economic ones.  The Government doesn't collect taxes or borrow money to sit on it, it is used for many purposes all of which, except interest on the national debt, end up increasing our GDP.

Whether the money is used to pay for a fighter plane, a federal salary, a social security check or food stamps it enters the economy and circulates.

Since the deficit is so high, we are borrowing over a trillion dollars in 2018 which is stimulating the economy.

Its not much different with people who take out loans or credit card debt to buy things today with the promise of paying the loan back in the future.

So were we to stop borrowing for current costs and instead increase taxes, we would see that amount disappear from the economy, not because of the taxes, that money would be spent, but because we wouldn't have that loan stimulus every year.

I want to make sure it is clear that eliminating the deficit would not eliminate the National Debt.  It would take many years of surplus income to do that.

The increase would be in the order of an extra 25% based on 2019 projections where revenue is projected at $3.42 trillion while expenses are estimated at $4.41 trillion.  No one is proposing raising taxes that much, in fact, you see very little action related to this issue.

In the best case scenario we see spending go down and tax receipts go up because of economic growth.  In a much more troubling scenario we see spending go up and revenue go down because of a recession.

If nothing is done about the debt, at some point we won't be able to borrow enough to fund it and that will lead to any of a number of bad scenarios, such as runaway inflation, widespread unemployment, recession, devaluation of the American dollar.

None of it is good.

National Spending

If you want to reduce or reverse the deficit the concept is simple, income has to exceed spending.

Enough economic growth could do both those things, but as discussed yesterday the likelihood of that happening is next to nothing, based on current economic conditions.  If it was to happen it would be great, but it isn't happening.

So why not just reduce spending enough to eliminate the deficit?  It would work if it was possible, but Government spending isn't a bunch of wild and reckless extravagance.  Most of it is tied into three areas, Defense, Entitlements or Debt service.

I include both Social Security and Medicare under entitlements although for some reason people don't want to, equating entitlements to "give-aways".  Since we contribute to those programs we have earned them, and we have meaning we are entitled to them.

To get enough reduction to meaningfully impact the deficit you need to consider the big contributors.  Of course the other areas need to be efficient but the numbers, even at zero don't work, and those programs are not about to be zeroed out any tie soon.

Interest on the National Debt is a large expenditure and it is growing as the debt increases and as interest rates climb.  This is not optional spending and the only way to reduce it would be to reduce the debt and/or the interest rates.  Interest rates have been at historic lows and they are starting to rise.  There is little we can do about this area without addressing the other areas.

Entitlement spending is the favorite area to cut except for the fact that the programs included are extremely popular with the public.  Some changes to social security and Medicare are probably needed,, but any change is going to face stiff opposition.  Other entitlement programs include popular things as well and while there is a general belief that we are giving away billions of dollars to people who don't deserve it, each program has survived multiple years of unfriendly scrutiny by hostile congressmen, so while some waste and abuse will exist, the programs themselves are not overly generous handouts.

Of course there is a factor that has led to some of the waste and abuse as we have reduced the federal workforce who would be charged with enforcement.  There is no desire to greatly increase that workforce so enforcement is reliant upon less and less cops on the beat.

Without a significant change to popular programs that would reduce spending significantly, there is simply no way entitlement programs can be reduced enough to eliminate the deficit.  In fact the deficit is over a trillion dollars and spending reductions are never going to fix that, although they could contribute.

The last significant area is national defense which is, to some extent, a sacred cow.  Expenditures here are increasing as we see little interest in balancing the spending against our budget situation.  There is certainly some opportunities for reduction here, but people serving in our military should not be hurt.  Defense programs are a double edged sword, since because they are American based they are economic boons for the areas where weapons are manufactured and they create jobs.  Reducing our overseas commitments is possible but delicate and not probably in the best interests of our national defense.

Spending, although a popular area to attack is simply not going to eliminate the deficit without sacrifices we aren't willing to accept.  In fact we have large spending needs related to infrastructure and border security that will increase spending as well as increases in the areas mentioned above.

That leaves only income as a possible solution.

National Debt

How serious is our National Debt problem?

Well, it is very serious or maybe it isn't.

It is certainly at historic amounts and is consuming more and more of our annual budgets every year just to service it.

However as long as people, and countries, are willing to lend us money by buying our bonds and notes, we can move along quite nicely.

Until we can't.

If you consider the current period a bit of a grace period to get our act together, we have to somehow turn our annual deficit into an annual surplus, if we want to reduce the debt.

There is no current scenario where that is going to happen without either an incredible increase in growth, a dramatic reduction in spending or a significant increase in taxes.

Growth would of course be the best scenario as it helps to reduce some entitlement spending and increase taxes as more taxable income is generated.

This was the scenario at the beginning of the second Bush administration and we almost immediately reduced taxes and increased spending.

Per Capita real GDP rose 23% during the 8 years of the Clinton Presidency and we went from deficit to surplus.  In the 20 years since, it has increase by 21% and we have slid back into deficits.

Yes we had the Internet bubble and the financial crisis, but we would need to return to the growth of the 90s for a prolonged period to get back to surplus.  The chance of that happening seems slim to zero, but maybe something will change.

So spending and taxes would have t be addressed, and I'll discuss those next.

Debt, it will eventually bite us.

Its one of the things that we accept but don't like, taxes.

Running on a platform that promises to reduce taxes is almost always better than using common sense and saying you might have to raise taxes.

Taxes are too high is the most common comment people make about them but what should we cut is the general problem.

So we cut taxes and increase spending, which is after all a recipe for ultimate disaster.

The real question should be what do we want and how are we paying for it?

The Government is unable to meet its annual obligations and has to borrow every year just to keep running.

To fix this you need either more income or less expenses or a mixture of both.

You might argue that we should eliminate waste, fraud and become more efficient, and we should, but that is not solving the budget problem.

We are also not solving it by ignoring the big ticket items and reducing small (at least by Government standards) programs.

This is complicated by the sacred cows we have, the untouchables, so to speak.

I don't want to ignore growth, since growth reduces certain expenditures and increases taxes without increasing the tax rate.  However we are not going to see enough growth to fix our problem, and eventually, our problem is going to have a negative impact on growth.

We keep kicking this problem down the road, supported by low interest rates and general confidence that we will pay our loans.

Both of those facts can change fairly quickly and with potentially disastrous results.

We either address the issue of where to spend our income or we face significant economic disruption, sooner or later.

Economic Thoughts

The last financial crisis was primarily brought about because a debt house of cards fell apart.

Home ownership was considered a way to raise people into the middle class since the statistics showed that people who owned homes were generally increasing wealth faster than those who didn't.

The house of cards required homes to go up in value continuously so that the money lent recklessly would be safe because equity in the homes increased.

This actually worked for a while and because home lending was considered safe, despite the weakness of the loans, the money was repackaged into bonds with triple A ratings.

The whole scheme requires that the money you use to lend gets replaced as you sell the mortgage notes to get more money to lend.

It just required a little impetus to tumble down, as home prices stopped rising, money stopped flowing and mortgage payments stopped being paid.

Once money got tight the consequences were felt worldwide as we had an aptly named financial crisis as wealth disappeared and banks were in jeopardy.

We climbed out of that after a lot of pain and stayed out of it by injecting money into the system which acted like a stimulus replacing the money from the discredited junk mortgage market.

Its a treatment, but not a real cure.  A real cure would require the economy to grow without any Government stimulus.

It seemed to be going that way but then we elected the dontard who presided over a massive stimulus of a tax package that put money into the hands of wealthy individuals and businesses.

In addition the congress delivered a massive spending plan that also puts money into the economy.

Its money we don't actually have, so we have to borrow it.

The federal debt is the new house of cards and unless we get the deficit under control it wouldn't take much to see it collapse.

Maybe a trade war?

Debt

The amount of debt the country is building is setting new records all the time, and worse is that the rate of growth is increasing due to the tax cuts and the increased spending.

Further, the low interest rates we have been experiencing are showing signs of increasing and if they do the amount required to service the debt will also increase.

Can the country afford it?

Well the simple answer is no.

The more complicated answer is still no, but we can party till the bills come due.

A basic rule of finances is you don't borrow to pay for current expenses, you borrow for extraordinary items, like a house, a car, or an education.  If you have to borrow to buy milk, you probably have a problem.  If your ordinary budget simply doesn't cover your regular expenses you definitely do.

The US budget doesn't cover its expenses.

Part of the problem is that we have to pay over $300 billion just to cover the interest on the debt we already have.  We run a deficit of nearly $1 trillion so a third of that is for the interest.

That's a little bit like paying your credit cards with new credit cards.

Its actually a lot like that.

With the deficit and debt growing a relatively minor change in the interest rate is significant.

There is no real solution being proposed and the only real ones would be increased taxes or reduced spending.

Enjoy it while you can.

Debt

Economies run along fairly smoothly at times, as long as their is a level of trust that tomorrow will be similar to today.

This means there is widespread belief that bills will be paid, items will retain value and credit can be extended.

Credit is to a large extent what economies depend on, since without it we would have to satisfy all our obligations when they happen.

Credit is of course also a dangerous thing when you use more of it than you can afford.

The obligation to pay in the future requires income in the future, enough income to cover current requirements and credit payments.

Many companies and individuals can't afford to do that without getting additional credit.

In fact that's the situation the United States is in.

To pay the notes and bonds coming due it has to borrow more money, which it promises to pay in the future.

Our debt has been rising since the Clinton years, the last time we had a budget surplus.  With the recent tax cuts and spending increases it is increasing much faster.

Right now there are plenty of buyers willing to buy our debt, its still considered safe, but how long is that going to last?

Let's be clear.  Ultimately, the debt can be paid since we control the value of our money.

It is still something of a house of cards since if uncertainty enters, interest rates will rise, making the debt more expensive, creating more uncertainty, causing interest rates to rise, etc. etc.

You see this happen to companies (Toys-r-Us) fairly frequently where the downturn in their business wasn't by itself enough to ruin them, but the high debt levels were.

We could be fast approaching a tipping point as we see trade wars added to a situation where less taxes are being collected while spending increases.

Maybe not yet, maybe.

Saturday Ramblings

Sadly, John McCain's condition seems to be worsening.  He was a hero, despite being captured and a decent and honest person, who's politics I didn't always agree with, but still, I wish him the best.

Chances of the tax bill passing seem higher, Although the majority in the Senate is razor thin.  See if anything develops over the weekend.

Business has been pushing to get the corporate tax rate lowered for quite a while and the whole act is really designed to do that.  The rest of it is just give and take to make it seem like something and some will be winners, mostly very wealthy people and everyone else will be about the same.

The debt will increase, and it is worth discussing if reducing revenue with such a large deficit makes sense?

The entire Republican agenda is predicated on concepts that develop out of conversations you hear at cocktail parties and they accept the conclusions blindly.

Certain truths are simply accepted, regulation is bad, less government is good, wealth trickles down.  Of course, those things are worthy of discussion although its never as clear cut as that.

The real issue in this country is pretty simple, our demographics.

The baby boomer bulge is moving into retirement and the number of replacement workers is not enough, but that's probably a good thing since so many jobs have been automated out of existence.

The problem it creates is that without that pyramid where there are more workers on the bottom paying in than on the top taking out, social security is not sustainable.

We need more young people and instead of welcoming them we are trying to kick some of them out.

Suppose for an instant that the corporate tax reduction does result in some sort of expansion, although I don't think it will.  Where are the workers?  They happen to be overseas so the hiring isn't going to be in the rust belt.  Economics dictate what you pay and for low skilled workers this country's workers want too much.  Skilled workers are actually in short supply already, so that's not going to lead to much.

The companies will use the money to reward their executives even more since profits will be up, and maybe buy back their own stock or acquire other companies.  Those things don't create jobs, generally they end up reducing them as redundancies are eliminated.

What would create good paying jobs for people with basic skills would be infrastructure investment to fix our roads and bridges.  There are years of work in those projects but now, with the reduction in income, we have less money to pay for them.

Oh well, they are going to celebrate passing something, hope the people figure out its just a scam.

Paying their Debt

The monkey house passed a "tax reform" bill that manages to pay their owners significant amounts by taking it from the rest of us either now or in the future.

The argument that this is going to be good for the economy is so shaky that I find it hard to believe any of them believe it, but being monkeys they might.

Now attention turns to the Senate where we will see if they can pass something that enables the two bills to go to conference.

I realize that we have seen the wealthy take over the Government via money and they have gotten people elected who are only concerned about keeping the donations flowing.

I would have thought that the American people would realize what was happening, but when you realize all the news most people absorb has to be in short soundbites or headlines, it is too easy to convince enough of the uninformed to vote for a monkey.

We will get you a good paying job, although you have no skills and just a rudimentary education.

We guarantee your children will be no more educated than you are by privatizing our schools and letting our donors make money for not educating them.

In fact we will make sure the people who donate to us can privatize more and more things so that a hefty percentage of the taxes get to them so they can donate some to us.

You live in a state where they supply public services?  Well stop indirectly subsidizing you socialists by double taxing you.

It doesn't matter to us as long as we get enough donations to run TV ads telling you we are going to make your life better, but have a gun.

You are addicted to opioids?  Well we are defunding programs that could help you but just vote for us and we will take care of you.

We are gong to strip your pension and disability benefits but you can buy a gun.

It's the best retirement plan we can think of.