Honey, we bankrupted the kids!
Worried that the global financial crisis combined with the Great Recession in the United States has bankrupted not just ourselves but our kids and their kids?
Good. You should be worried. Maybe then we’ll do something about the problem before it’s too late.
First, here’s the good news for those of us who live in the United States. (If you live in some other den of fiscal iniquity, just remember that the names of the characters may be different but the story is pretty much the same.)
The Federal budget deficit for fiscal 2010 (including a proposed $100 billion for new spending to create jobs) will be a record $1.6 trillion. This new record will beat the old post-World War II record (set in the distant past of fiscal 2009) by $150 billion. The 2010 budget deficit is equal to 11% of U.S. GDP. (For reference the budget deficit that has pushed Green into crisis is equal to 12.7% of Greek GDP.)
How can this possibly be good news? Because the new budget proposed by the Obama administration for fiscal 2011 (that’s the fiscal year that starts in October 2010) says the annual deficit will shrink to 4% of GDP by fiscal 2014.
And now for the bad news.
Ain’t gonna happen. At least not if we follow the spending and taxing policies laid out in the Obama administration’s budget.
That budget assumes 2.7% GDP growth in fiscal 2010. That’s reasonable. It’s certain close to the consensus among economists for this year.
But looking out toward fiscal 2014 the budget quickly arrives in fantasy land. The budget projections assume GDP growth of 3.2% to 4.3% for six consecutive years.
And this at a time when most economists—even the optimists at the Federal Reserve—are worried that this recovery will be weaker than most recoveries after a recession and that the long-term speed limit for growth in the U.S. economy is headed lower. From 1975 to 1995 full trend economic growth in the United States was about 3%. The Fed now estimates the speed limit to growth at 2.5%. Other economists, including those at the Congressional Budget Office, think it’s even lower at 2.3% annually or so.
In other words the U.S. can’t grow itself out of this hole nearly as easily as the Obama administration wishes.
Slower growth after the recession is one thing arguing against an easy solution—but it’s by no means the only problem.
The interest rate the U.S. pays on its debt is rising—just when the amount of debt has soared.
Cutting the budget looks—how shall I put it—impossible because our government, especially our wonderful Senate, is locked in gridlock. I find it hard to imagine how the Senate will even pass any kind of budget this year.
And even in the best of all political worlds, cutting the budget is hard. Only 40% or so of the Federal budget is what’s called discretionary (and that 40% includes the military budget.) the rest consists of entitlements such as Social Security, Medicare, and Medicaid. These entitlements are the hardest part of the budget to cut—and the fastest growing.
And we don’t have a huge window in which to act.
In my January 8, 2009 post http://jubakpicks.com/2010/01/08/the-u-s-and-the-rest-of-the-developed-world-is-near-the-point-where-debt-takes-a-big-bite-out-of-growth/ I wrote about research that argues that when a country’s accumulated gross debt rises above 90% of GDP it starts to reduce a country’s economic growth rate by a median of 1 percentage point and an average of 4 percentage points. On current trend the United States will show a debt to GDP ratio above 100% by 2012.
A slower economic growth rate caused by high debt levels makes it even harder to grow your way out of the hole.
And then, of course, there’s the long-term demographic trend. The United States is an aging country. We’re not aging as quickly as most of the developed world such as Japan and France and we’re not even aging as fast as some part of the developing world such as China. (For more on how the world is aging see my post http://jubakpicks.com/2010/02/05/how-to-build-a-global-portfolio-what-countries-do-you-want-to-own/ ) but aging relatively slowly doesn’t help in this situation. A country that is aging in absolute terms is getting older and can look forward to a slower rate of economic growth.
If all this makes the situation sound depressingly grave, I’m afraid I’ve got even worse news. The traditional solution the world has developed for fixing this kind of debt problem when it’s the result of a few years of financial mismanagement doesn’t work very well when we’re looking at a deeper and chronic problem shared by many of the world’s countries.
You can see the traditional solution—I’ll call it the IMF (International Monetary Fund) solution since the formula is one that the IMF has applied to developing countries for decades—in the plan proposed by the Greek government to end its financial crisis. To get the annual deficit down from 12.7% of GDP to 3% by 2012, the government has proposed cutting wages for all public sector jobs, cutting public sector jobs, cutting wages in the private sector to restore the economy’s global competitiveness, and raising taxes and cutting entitlement payments.
Aside for the high level of pain in such a “solution,” it’s not clear to me that the IMF formula can work when applied across the entire global economy. The plan really boils down to cutting wages so that the economy can export its way out of debt (while at the same time reducing the growth rate of that debt by cutting spending.
The entire globe growing its way out of debt by cutting wages and export more runs into a major problem: Where are the buyers if wages are down across the world? (For more on whether the Chinese consumer can save the global economy see my post http://jubakpicks.com/2010/02/02/can-the-chinese-consumer-save-the-global-economy/ )
According to some number crunching from Barclay Capital the IMF formula wouldn’t have to be that painful in the United States. The U.S. is comparatively lightly taxed (Shh! Don’t tell anyone in Washington) compared to its peers. Taxes in the United States come to just 27% of GDP on average over the last 20 years. In 2008 the figure for other developed countries in the Organization for Economic Cooperation and Development was 41%.
All then U.S. would have to do to start down the path toward reducing its deficits and the debt to GDP burden would be to raise taxes to 35% of GDP, freeze Social Security payments at current levels, and cut spending on everything else across the board.
That might be less painful in the short run, but 1) it’s hard to see how that big a tax hike wouldn’t reduce economic growth—you’re talking about taking money out of the economy to pay down debt, remember—and 2) if cutting spending in the United States was that easy we wouldn’t be in the hole that we’re in.
The traditional solution isn’t the only way out. If we could find some way to increase productivity, then we’d get more economic growth and have to raise taxes and cut spending less.
It’s not out of the question. Productivity in the United States has fluctuated widely in recent decades. From 1979-1990 U.S. productivity grew by a slow 1.4% annually. From 2000-2008 productivity grew at a 2.5% annual rate. And from 1995-2000 productivity grew an annual 2.8% rate.
Unfortunately, even if we’re measuring productivity accurately—and it’s not clear that we are—it’s hard to come up with solutions that raise productivity in the short run. Improved education, better in-career retraining so that workers stay unemployed for less time, more access to life-long education and training, and credits that improve the quality of the tools and equipment that workers use all work in the long run, although the research differs on exactly how much they contribute to raising productivity and over what period of time.
There’s no reason not to try these long-run solutions. They might help in the short-run too and the problem is certainly big enough and long-lasting enough that help that arrives in 2020 is still likely to be desperately needed.
In the short-run, though, probably the biggest help would be credible fiscal leadership. International investors and the bond markets need to be convinced that the U.S. is serious about fixing this problem and that it has a credible plan for a solution.
A big part of the crisis in Greece results from the bond markets not believing in either the government’s plan or its ability to deliver it.
The U.S. could easily wind up in crisis over the same lack of credibility.
I’m not hopeful that enough politicians in Washington will put aside their short-term goals for the 2010 elections long enough to come up with a budget plan. After all the Senate couldn’t even pass a proposal to set up a commission to recommend cuts that couldn’t take effect until fiscal 2012.
So I’ve started scouting around for a T-shirt I can give to my kids. It would read “My parents bankrupted the global economy and all I got was this lousy T-shirt.”
It’s not as good as a secure financial future, but, hey, it may be the best my generation can deliver.
Jim,
I notice that the Obama administration claims different numbers for the budget deficit as a percentage of GDP. By 2012, for example, they predict a deficit of 70.8% vice your figure of 100%. It appears they are including public debt, but not intra-governmental obligations. For those of us concerned about the national debt and our children’s future, which figure do you think we should be using, and why?
Jim,
There is one other way: the U.S. can inflate it’s way out of debt. No, it’s not pretty, and carries it’s own kind of pain. But it does have the virtue of being politically viable.
EdMcGon,
Goodpoint. Politically viable AND investor friendly (kind of)!
The Fed is dead set on inflating away our debt, I think any short term dollar strengthening is a buying opportunity for many stocks.
The PIGS are the main wildcard……..
Yesterday I posted that Euro zone’s social programs are too generous and beyond their mean. They need to cut spending and bring the deficit down. I actually thought the same for US, just did not say it. Now I am glad to see Jim saying it in this post which I saw on MSN first. If other countries have tested and used the IMF method, why shouldn’t we, the US?
Here is my Rx for US:
(1) Cut the SIZE of government at ALL level by HALF. (We’ll still be fine. Most the “public servants” are not needed anyway). We no longer can afford the government that we have now, at least the size. Additionally, make it harder for the so-called “public servants” who are essentially public masters to spend your and my money by taking away their government credit cards. It’s too convenient for them to spend our money. More, have you heard some state employees retire at about 40 and get life time pension? What’s up with that?
(2) Cut all the social entitlements and raise the age. I know many people will not like this, but it’s better than compeltely running out money!
(3) Cut the military spending and bring home all troops. (Let the Europeans, Japanese, Koreans, etc. defend themselves! Can you all imagine how expensive it can be to have military bases in Germany, Italy, Japan, Korea, etc.?) The US military need to be LEAN and MEAN.
(4) Cut all the bells and whistles of being “the leader(s) of the free world” to JOB-RELATED only. Why do we have to foot the bills for the leader’s personal date in NY, family trips to national parks. I heard they have planned spring break in Indonesia and Australia! That’s wonderful, but pay it yourself! Why do we have to pay for another leader’s (I call her the new Queen of Mean.) children’s and grand children’s use of military planes? She spend $100K on in-flight food and beverage on her way to Copenhagen, make you thinking what kind of food she was eating. Why do we have to pay the make-up artist that travels with the leader’s wife? Is she too afraid to let her “subjects” to see her real face? Even the Olympic pitch was not JOB-RELATED. You can leave it to the mayor of Chicago. The significance of US in the world has dropped significantly too. “Leader(s) of the free world” is no longer that important to the world. A large part of the world is NOT lead by you. You can not even lead the free world that much any more. So, there is no needs to keep such huge entourage either. By the way, you don’t need a “his and hers” planes to a global warming meeting. The specially made Boeing 767 is large enough for both you.
(5) Keep the Bush tax. To “soak the rich” crowd: the rich’s money won’t be there (for you to tax it) if there is no economic activities to generate it.
Remember, people in this country are suffering. Many lost jobs and homes or are threatened to loose it at any moment.
If the future is so dire, what sense does it make to invest in stocks with any long term horizon?
YX,
I couldn’t agree with you more! But I would classify your suggestions as a “nice start”.
kimisan,
I wouldn’t say the future is “dire”, although I would call it murky. Just personally speaking, I haven’t kept many investments around for longer than a few months lately. The market has been changing too quickly in the past year.
Ever traveled to a place you’ve never been before?? I’ve said in conversations with friends and Jim has certainly eluded to in articles over the past year and a half, this is a strange world, one we’ve not seen before. If I remember my recent world history, global economies haven’t been in such a mess like we’ve seen before. U. S. economic history (last 30 years or so) reveals that the current administration and congress doesn’t want to read and reflect on that history. We really haven’t seen this economic landscape quite like this before. How do you convince leaders to pay attention?? VOTE (wisely)!!…for those who claim to have fiscal restraint and responsibility. Even at that, our kids and grandkids still have a mountain of a problem. You’d figure since our world is getting older, wisdom would follow…not working out that way!
Regarding the US “low tax rate”. I agree. If I’m not mistaken, I believe the tax rate in Denmark is like 50%. But, from what I understand, their goverment “takes care of everything.” If you find yourself unemployed, the compensation is for two years at 90% of your pay. There are many other perks. I am totally against socialism, but as time goes by, and feeling that our government is leaning that way, I am becoming more and more convinced that it may be the way to go. So, I’m not worried about the future..the govment will take care of me!
By the way, who is to say the U.S.’s tax rate is “low”? Is it possible that European countries have rates that are too high?
While I will agree the U.S. has a tax rate too low for the amount we spend, the problem is NOT the taxes, but rather the spending!
YX,
I agree with you on some points, but are you serious about the bush tax cuts? How does that help our deficit? You want to cut all entitlement programs, but leave tax cuts for the rich? How has that worked out for us? Not very well, unless you like the huge deficit we have.
Domino412,
I agree with you also, I don’t understand why socialism is such a bad word. Most European countries are much more socialist than ours, yet the consistantly are more happy and satisfied wit their gov’t. I laugh when politicians say they don’t want the gov’t to change the best health care system in the world, when the best we have been ranked recently is in the mid 30′s worldwide. Being beat by socialist healthcare systems handily. We got into this mess by giving massive tax cuts while we had two wars. The only solution is for everyone to give up a little, and not feel so entitled to thier tax cuts or social programs.
Quite apart from the US and the PIGS, a lot of this applies just as well to the UK, too. I’m particularly struck by Jim’s comments on politicians setting aside their short term goal to get elected. Our government here in the UK is persistently refusing to say what it would do about our debt and deficit because they’re scared to death of spooking the electorate and losing the upcoming election (by the end of Q2) as a result. It won’t do them any good if the markets punish them for vacillating in the meantime, which outcome seems increasingly more likely as time passes.
There is no way the US government & the Fed are going to do the right thing and cut spending to any degree that will make a difference. Jim didn’t even mention the biggest problem, which is the $75 trilion NPV of unfunded liabilities. Moreover, the budget problems we have are moderated by historically low interest rates, just wait until the rest of the world wakes up to our fiscal problems and forces interest rates higher. That will make the budget problem even worse and in a hurry.
What the gov’t is going to do, is what governments always do when they have fiat currencies and run into a severe fiscal problem, they’re going to print endless piles of new dollars and they’re going to kill the dollar by doing it. No way that’s investor friendly. That’s going to lead, someday, to a currency crisis and then to currency controls and the inevitable social consequences.
Protect yourself folks, even if you think my scenario is unlikely. Buy some gold and/or silver and, most importantly, store it outside the country. Lots of easy ways to do this from a foreign safety deposit box, Perth Mint Certificicate or a Swiss depository like GoldMoney. I have all three, among others, and I consider them a cornerstone of my financial planning.
I don’t believe that either cutting spending or raising taxes are viable solutions in the short-term. Both will arrest economic growth and be political suicide in an election year. Should be an interesting Super Tuesday this year.
Does anyone else think that there is no political discipline, resolve, or effective mechanism to meet the challenges we as a nation face in this new global financial environment.
The U.S. is pedaling debt in a market place that is saturated with it, the Chinese brag of huge GDP gains yet is export driven and the entire western world that has been the engine of economic growth and proseperity has maxed out its credit card.
If the next great credit crunch comes from a default in sovereign debt and everyones solution is inflation in a world with limited resources.. I’m scared of the fallout. I don’t know with any certainty were any of this leads but it can’t be good. Usually when something cannot be sustained it either stops or collapses and the fallout is usually pretty bad. Anyone else see a war perhaps civil and or international on the horizon.
Don’t mean to be bearer of bad news… but i see a cliff and I dont take comfort that we live in a political environment in which the leader of the free world says something to the effect of “remember this is what I inherited.” Where is the general or commander in chief that says “you guys screwed up, now get out of my way! I’m going to fix it before this gets out of hand.” This world is thirsty for leadership, instead we have a community orgainizer and the stock market and the hysteria that has set in is a reflection of that.
specialcraig,
Socialism is a bad word if you believe that the founders of our constitution wasn’t on that page at all (read it…lit’s a fairly short document). As for tax cuts, economists can’t agree on much of anything; history proved that they work, and well, as long as restraint in spending is exercised…it hasn’t been for a long time.
So far as this “class envy” junk is concerned (pitting the rich against the ‘have nots’), how soon we forget it’s those ‘nasty rich’ folks that are able to hire us…I know, let’s punish them, encourage them to hold on to their lute by taxing them to death…all because enough of you are envious of their position. Shame (I ain’t rich…not even close)! You somehow think you’re entitled to make them pay for your economic pain because it makes you feel better!
Perhaps reading a little history would reveal that a lot of this mess began in the early to mid 1900s. Remember Social Security? No one thinks about that. Medicare and medicaid? How soon we forget. Such vomitous notions would make our founding fathers turn in their grave!
So far as our healthcare and its delivery system is concerned…it’s so bad that heads of state of other countries come here for treatment…perfect? No. Better than anyone elses? You bet!…(don’t know who you’re quoting for the number 30??) I don’t buy it.
Sorry guys for the rant…When you read such obvious error and wrong conclusions, you’ve got to right it.
Special Craig:
Though I am not a Bush fan, I remember Bush cut taxes for EVERYONE. He created the lowest bracket (I believe it’s 10%) and eliminated tax for income below certain level (I forgot the number though, probably around $40K). Now people at this level will have to pay more, if Bush tax expires.
It’s NOT Bush taxes, but his TWO WARS (now increasingly looks useless wars) and a gigantic unfunded new entitlement that put us further into the fiscal mess. Of course, the worst thing is to trying to increase the pubic debt (by an extraordinary amount), at the same time increase taxes. That was the Rx for Japan’s lost decade.
rjtroup,
Wasn’t our last president a “general” or “commander in chief”, he lead us off a cliff, and we blindly followed. I don’t see how in this political environment where everything is the other sides fault, and no one will even discuss the issues how our country is going to find our way out of this mess. It is much easier to blame the other guy, than to come up with an actual solution. The worst part is when there is an actual solution proposed, the lobbyists kill it before it has a chance. I very well could see a revolution, or civil war, happening, because the current path we are on is unsustainable.
Jim,
The budget deficit is not the most important metric to follow — government spending is better. The deficit just shows HOW the spending is going to be financed –either with taxes or borrowing. Both can inhibit the growth of the economy. Certainly raising taxes enough to eliminate the deficit is not going to help the economy grow. Those who say that deficits don’t matter for economic growth are misleadingly correct — they don’t in that they are not really worse for the economy than raising taxes — it is the spending that really matters. So, the government’s forecasts as to the closing of the deficits in the future years should be evaluated in the light of HOW they will be closed. Of course, when the borrowing to finance deficits is done with China, then you have other worries!
Jim, if 40 percent of budget is discretionary and 60 percent on ss, medicare and medicaid, that implies interest on 12 trillion or so in outstanding bonds is in the discretionary bucket (as opposed to entitlements bucket). What percent of budget is dedicated to interest payments?
And shouldn’t interest payments be deemed an entitlement (at least for the bondholders)? Over last 30 years marginal tax rates have dropped dramatically- by half for the top bracket. And interest obligations on national debt has grown even more dramatically. Coincidence?
I saw someone wrote “political suicide” if cut entitlement. That’s exactly right. We are a country where politicians no longer work for its people but themselves. Keeping THEIR jobs has become paramount for them.
bobisgreen,
Here you go, from the world health organization: http://www.photius.com/rankings/healthranks.html
Its not that I am agianst the rich, but how did the rich get rich? By making money off the have-nots. So it’s a two way street. I look at how the middle class just gets squeezed and squeezed, and so that they can’t get much more out of them. Our productivity rate went up, because you laid off two people, and let one guy do the job of all three of them. How come the company doesn’t pick up the health care increases, why does it get passed right through to the employee? Inflation has increased yet job wages haven’t. So let me flip the question, why should middle class people work harder to make the rich richer, when they get nothing out of it?
XY,
I don’t beleive tax cuts are bad, I believe tax cuts for no reason are bad. Taxes should be used by the gov’t to control unwanted behaviors, or to induce wanted behaviors. Across the board tax cuts just add to the deficit without doing any good. It is similar to entitlment programs, where every wants their tax cut then, without having to do anything for it. I also agree with the political suicide comment. However I don’t think they are working just for themselves, what is the benefit of being in political office? You have lobbyists that have lots of money hanging around trying to get you to do things for them. Just being in office doesn’t pay all that well.
What percent of budget is dedicated to interest payments?
—————
I think a more revealing analysis looks at the percent of income/corporate tax receipts required to pay net interest on the debt. According to the administration’s recent budget proposal:
2009 8.88%
2010 8.68%
2011 9.78%
2012 11.72%
2013 13.68%
2014 14.76%
2015 15.71%
2016 16.13%
2017 16.63%
2018 17.05%
2019 17.44%
2020 17.83%
Note, there is also interest on the accumulating intragovernmental debt, which is one big IOU.
I don’t believe that the PIIGS are the wildcard, the UK and the US are the wildcards, the PIIGS may be the clam before the storm…..
During the last 30 years, the economy (and the markets) were on an upswing because of Reagan tax and entitlement cuts and real-wage reductions (end of unions), not because we found a gold mine underneath the country. (Yes, the productivity due to technology in the 2nd half of the 90s was a positive factor, but not enough.) In the end, large masses are poorer (in real sense) and a little minority is richer (in real sense.)
Now, is it too much to ask the rich to pay the cost of this 30-year party? After all, they are the ones who arranged the party, they are the ones who had fun (i.e. made tons of money) and in the end made 350 million American to clean up (bailout) their puke. Is it too much to ask to take responsibility for the irresponsible party?…
The rich have tons of money. They don’t know what to do with it. They keep it in money market accounts. They don’t need incentives beforehand like tax cuts to make investments. They should get a tax break only if and when they directly invest in actual factories in this country. That’s what they do in developing countries. That’s what we should do here too. Enough is enough!…
Honey, we bankrupted the kids!
———
Incidentally, Jim, this can’t all be bad. If we are headed to fiscal crisis or at least a reduced standard of living in this country, there are long-term bets to be made by investors that will be beneficial. And if you have children, perhaps part of the strategy should include making these same long-term investments for them and schooling them on what they need to know as they mature. Far and away, most people will be supine in the face of these potential storms.
specialcraig,
Regarding your quote: “Taxes should be used by the gov’t to control unwanted behaviors, or to induce wanted behaviors.”
Exactly who determines what is wanted or not? You? Me? Someone else?
Frankly, that is the absolute WORST possible use of the tax code imaginable.
In the meantime, why don’t we increase income taxes on the rich, so we can discourage them from making more money? Or consuming? Because, God forbid, they might actually put some money into the economy. It’s much better to give it to the politicians in Washington who know far better what to do with it than any of us…
Here here for your mention of the puiblic sector problem and potentially, solution — that is cutting benefits (instead of raising them every year even in midst of the recession). This taps into a central problem with our system but you’ll rarely hear the topic broached by our pols on either side of the aisle. A few pertinent essays in the WSJ recently about the problem of coddling our public unions (“Public employee unions are sinking California”)
There are three deficits not mentioned which should concern those with posted comments:
1) a leadership deficit…defined as follows – people with the courage and the talent to do the right thing and assume accountability for solving problems beyond the realm of self interest or fiduciary responsibility to shareholders, simply because they have both the means and capability for doing so.
2) a deficit of people with enough education and willingness to participate and sacrifice their time, talent, and resources to work through dilemmas – not just complex problems, so that bankruptcy is not the only legacy of an entire generation focused on self interest because they could be and because of the sacrifice of a prior generations.
3) a deficit of clear socially accepted priorities expressed in a manner that encourages people to still believe there is a way to contribute and make a difference.
Remember what Pogo, the comic strip character, saw when he looked in the mirror. The government? No. The greedy rich? No. A currency crisis? No.
He looked in the mirror and saw the enemy.
Its really great to see everyone crunching numbers to try and get a fix on what’s going on. I’ll offer a solution that’s been suggested before and takes very little intellectual effort: Stop all foreign wars, kill the fed and return to the gold standard, use our troops to protect borders. Of course, this will never happen–its fantasy. Or is it? Look to a Texas congressman that’s been proposing many of these ideas for many years. I hate using cliches but tough times require tough actions. Its time we took our country back from the career politicians who have a direct phone line to wall street. We see all this happening and we continue to allow it. I remember an article Jim wrote a while back when oil and gas prices were skyrocketing. He commneted that Americans were so apethetic that noone would balk until gas was 5 bucks a gallon. It never got there but it came close. Everyone and their brother complained but noone took to the streets and did anything about it. Americans have become indifferent and apethetic. We sit on our butts and complain and do nothing. And that’s exactly how our children will remember us. Get of your a$$es and take this country back or we will all be shopping for Jim’s sardonic shirt!
SpecialCraig,
I went to your web site. seems the people running it like to quote the New York Times. I wonder what their political bend is? I still maintain ours is the best! Why would you as a leader of a country go to #37 for treatment? Why not go for #1? Guess what? THEY DO! they come to us!
As for your other comments: 1. You have the same opportunity to educate yourself, come up with a marketable idea for a product or service, assume ALL the risk and liability for success or failure, invest your own (borrowed or not) capital for the venture, choose (or not) to provide health insurance, retirement and other benefits which you, the employer, will pay the bulk of the tab (my employer pays about $7000 per annum for me), pay the taxes and stay on top of all the state, local and federal regulations for your industry, just so you can listen to employees complain about “the rich get richer and the poor get poorer”. Well, what are you waiting for? Go quit your job and open your own business. If you did,I bet you wouldn’t write about “class envy” anymore!
this is a “guns” (Unjust War) or “butter” choice. By default most here want to keep the guns and strangle the poor and middle classes. It is not the only option.
bobisgreen,
We are #1 in medical care if you have unlimited money and resources. But for the rest of us, our quality of care as a population is not the top in the world. This is despite us spending 50% more per person than any other country.
Re: Medicare, it does have much too many issues but it at least spends 95% of its money on medical care while the private health insurer you or I might have spends 80% of the money it brings in, keeping the other 20% to pay CEO’s, people to deny necessary medical care, and other important jobs to our society, along with billions in profit that could provide health care.
Special Craig:
Here is the 101. ALL tax cuts regardless “purpose” increase economic activities, thus growth. Only those who want to control people’s life hate tax cut. Period.
> Only those who want to control people’s life hate tax cut. Period.
Control people’s life?… Whose life is being controlled? The ones who flip burgers, attend tables, man assembly lines, type letters, sweep streets, die in plant explosions, mine implosions or the ones who decide who to lay off, how much to pay and those who take “risks” by being Too Big To Fail?…
XY,
I don’t agree, I think part of being in a society, is to pay your part, in keeping it a society. Common interests need to be paid for. Social safety nets are needed, in case you lose a job, have a medical emergency, etc… Taxes are needed to pay for these things. I understand your thinking, that if taxes are cut it can increase economic growth, but because it can doesn’t mean that it will. Since the Bush tax cuts were passed, how much has the economy grown? Also, how low should we take tax cuts? At what point does it become detrimental to our society, that we can no longer fund common interests? Would you agree that if there were no taxes that would be a bad thing?
Everything is a matter of degree and change over time.
If you increase or decrease taxes, spending, rate by a certain amount/percentage you have to compare it with the base amount and take into considerations other factors.
Taxes, growth and debt are all tied together. Don’t forget we live in a finite world and real money and resourses are limited. If you give to someone you have to take from somewhere particularly in a short run
About taxes
You say cut taxes. That means that you have to either cut social programs or increase debt. Assume nobody wants or can have more debt that mean to cut social spending.
The “best solution” would be to “reduce” the number of sick, old, unemployed, public schools, road, services etc. Are we ready to do this?
As Gebbels used to say “no people no problems”.
Another problem with cutting taxes is what to do next. Assume you cut it and you have an economic boost. Then cut them again, another boost, but you can not cut them to zero.
Another fact people like to refer to is Reagnomics and JFK tax cuts. This is stupid. During those times total American debt as a percentage of GDP was 120-150% vs 350% now and marginal tax rates were much much higher.
Actually the expotential increase started during the Reagan second term. The tax cuts did not trigger as much growth as intended whatever the way you argue about the net effect
Ask your self if you want to live tax free or worry free?
About growth
In order to companies to hire people they need to sell more. Everybody agrees with that
To sell more means Americans need to buy it or foreigners in the case of export.
The key is the there is no sufficient demand for almost any goods or services. Average majority just don’t have money to spend and can not borrow because of the high debt level.
It is that simple! We don’t need new businesses who can not sell their products. We have overcapacity in private sector. At most we need reallocation of capital not new capital in the private sector
How to fix it? To increase demand. How to increase demand?
Here Obama comes. First through public/taxpayers spending.
Don’t forget that most of the taxes are paid by the richest. Why? Because there are too many people who are are poor compared to the richest and the gap is huge and growing
Then, hold your breath, through redistribution/taxation.
Simple example. You have a factory and make shoes.
Let assume that a person needs three pairs. If 90% of people can afford only one pair and 10% can afford 1000 pairs you can sell only 90×1+10X3=120 pairs. But if you redistribute income through taxes, wages, etc. and now 90 people can buy 2 pairs your total sales will be 90×2+10×3=210. Wow, almost double.
That is simplistic but this explains why more balanced ( I don’t say equal) society is beneficial to overall growth.
Americans are bought on one stupid idea that everybody can be rich. But don’t forget that for one winner there are thousand of losers and the winner takes it all what others are supposed to do
It sounds to me that the best solutions for “radical thinkers” would be to balance demand and supply and unleash the free market forces again.
To balance means: to destroy 20-30% of industrial output: get rid of old, sick, unions and all others who can not work for a dime, eliminate all debts and declare war on everyone who does not agree with it.
The government role? Just police, army and judges. Let the new life begin. Welcome back to 18th century
PS I have naive questions for the free market proponents.
How these guys or banks can make such huge profit/bonuses? Where is competition that is supposed to drive the prices down they charge for their services? If this field is so lucrative why don’t we have more people getting in?
The second question is about losers. I understand that it should be both sides on any trade. It is a zero sum game. Who are losers.
If they all win by the market tide moving up why they deserve bonuses?
It is anticapitalistic and a kind of entitlement. I know many say I wish I were them. Is not this a root cause?
Wow, well put gorbouno
So, the growth based on tax cuts was just smoke and mirrors. It was a scheme to make rich richer.
It was not based harder on working double-shift. It was not based on newly discovered natural resources. It was not based on productivity.
It was based on debt. It was mortgaging our children’s future. Thank you Jim Jubak for bringing our children into the big picture.
—
“During Reagan’s tenure, income tax rates of the top personal tax bracket dropped from 70% to 28% in 7 years,[10] while social security and medicare taxes increased.[11][12] Real Gross Domestic Product (GDP) growth recovered strongly after the 1982 recession and produced five straight quarters of growth averaging 8.5%. The GDP grew during Reagan’s administration at an annual rate of 9.4% per year, the Real GDP (adjusted for inflation) increased 3.96% per year on average [13] higher than the post-World War II average of 3.6%.[14]
Unemployment peaked at 10.8% in 1982 then dropped during the rest of Reagan’s terms, averaging 7.5%, and inflation significantly decreased.[15][16] A net job increase of about 16 million also occurred (about the rate of population growth). Reagan’s administration is the only one not to have raised the minimum wage.[17]
The policies were derided by some as “Trickle-down economics,”[18] due to the significant cuts in the upper tax brackets. There was a massive increase in Cold War related defense spending that caused large budget deficits,[19] the U.S. trade deficit expansion,[19] and contributed to the Savings and Loan crisis,[20] In order to cover new federal budget deficits, the United States borrowed heavily both domestically and abroad, raising the national debt from $700 billion to $3 trillion,[21] and the United States moved from being the world’s largest international creditor to the world’s largest debtor nation.[22] Reagan described the new debt as the “greatest disappointment” of his presidency.[21]”
http://en.wikipedia.org/wiki/Reaganomics
It’s one thing to quote silly tag lines like “Bush tax cuts for the rich” and completely biased WHO “research” (read propaganda) papers. It’s a completely different thing to demonstrate actual knowledge and the ability to form coherent, concise thought.
Passing thoughts:
Cutting government spending will lower inflation expectations, thus lowering long term interest rates (we currently have widest margin and yield curve ever), thus spurring a housing recovery. Government is hurting, not helping interest rates.
WHO studies automatically downgrade US health because IT IS NOT SOCIALIZED. That’s a bias, and biased studies are useless.
What do you think about individuals in a country with the highest standard of living who think the grass is greener elsewhere?
Anyone who quotes Bush tax cuts and tries to link them to the REAL ESTATE BUBBLE aftermath is an ideologue with zero credibility.
Class mobility is high. I love the US opportunity to achieve through my own hard work. That’s dignity.
The vast majority of “the rich” got rich because they gave to society, innovated, and RAISED EVERYONE’S STANDARD OF LIVING. How is this a bad thing again?
Jim answered the question of why everyone cannot inflate (devalue) currency. Read Barry Eichengreen and Peter Temin’s “The Gold Standard and the Great Depression” and you’ll see why this causes great depressions.
So back to investing…
Jim, in your “how the world is aging post” you said Brazil and India had young populations. (and Brazil met your other two criteria for long term investing).
Are they any other countries to consider that would meet those three criteria. Much has been said about Brazil lately, just looking to find a research target for future goals for myself and my kids.
Thanks for all you do, I really do appreciate it!
specialcraig:
The problem with you “do gooders” is that they are like blood sucking vamprie that never can get enough of sucking people’s hard earned money for your own gain. You acted like people in this country have not been paying enough!
“Do gooders” often live large at tax payers dime (like those we see these days) and leave their constituents in dust. 50+ years went by, it’s the same. “For the greater good” is simply a cover for you people to empower yourselves over the people. You are afraid of people having more of their money on hands. You are afraid of people having the freedom to spend their own money. That’s your true nature.
Well said YX.
Oh well…
Sigli,
I’m not even sure what points you are against besides the WHO, maybe they are biased, I don’t know, do you have any other studies that show different? Other leaders may come to this country, but they have lots of money. Tell the uninsured people in this country that they have the best health care, because they get no health care, unless they go to the emergency room, and we the tax payers or insurance buyers foot the bill. Maybe that is why the WHO is biased, because they take into account the amount we spend on health care. It’s amazing other gov’ts can control costs better than a free market system.
XY,
Why are you going on the attack, I and others just laid out valid points. All you have to come back is to say that we are blood suckers and we are afraid to have people have FREEDOM to spend their own money. I don’t think any of us said that anywhere in any of our posts. Although the saying does sound familiar…….
I know of one senator who has been arguing to reduce spending since his first induction: Judd Greg (R-NH). Can you guys help me with a list?
It is essential that we know who to vote for so why not add a few delegates names to your blogs and give us a chance to sshape the next elections landscape?
I have a couple of friends. Both of them are conservative, right wing type of views on everything.
Both of them for whatever reasons were ruined by theirl medical bills. Interstingly enough one of them changed his mind and realized that he would have rather had higher taxes and health/job/income safety. Another one has become even more conservastive and started to blaim liberals and similar for the system they created. Basically he is saying I would rather die than give up my freedom to choose a doctor, insurance coverage, or pay higher taxes to have peace of mind.
What I am trying to say is that for many people in America their economic and social views are a kind of religion they believe or want to believe in. They deny any arguments or logic, even their personal experience.
When I said many people I am afraid to say that they are a majority, a silent majority and they are not loud or outspoken but they vote. The silent majority rules!
IN terms of investing, I invest in real values- commmodities and growth- emerging markets with a time horizon of 3-5 years. I will revisit my views then
spcialcraig:
I just simply want to show the true color of those “do gooders”. You people have no trouble to lecture people of this country to pay more for the “greater good of a civil society”, but you can not stand a little rebuttle! Too bad, I have little more here:
The biggest problem with the “tax for the greater good” crowd is that they often do NOT pay “their part”. Their tax cheats only exposed in daylight when they wanted to be on the cabinet or something! Further examine their so-called tax “errors”, it’s hard any “error”. One former cabinet nominee who has never met a tax hike he doesn’t like left about $500K lobbying income and goodies unreported! The unpaid tax alone on that income was over $100K. That’s how you people operate! Tell the rest country to pay more for the “greater good of a civil society” while you keep more for your own good!
XY,
I’ve lost you. Are you talking about a cabinet nominee, or are you talking about ‘all’ the do-gooders? I think you just painted us all with a broad brush by saying what we all are, based on this one rich guy. Was Bernie Madoff a ‘do gooder’ or on of you guys? Because you’ll have to add a couple of more zeros to the bill that he owes.
My objective wasn’t to lecture you, I’m not even speaking, you are in no way obligated to read my post. I was trying to point out ways that we could improve our economy and country, and make money. You did the same in your original post. In your rebuttles you didn’t lay out one thing that could do anything to fix anything. You called me a bad guy, and said I wanted to keep more money for myself, yet I said I was for raising taxes, including my own. I feel like this is what the right wings ideas have boiled down to, where are your ideas besides cut taxes and call the do-gooders bad names or socialists? Is that the reason that our country is headed down this path?
Well at least we’re all on the same page as to how to fix our “problem”!
Southof8 , thanks for the back up a few weeks ago on the “racist” post.