Size Of Government - What Do We Really Want?

[ziggy29]

A wisely run government would run surpluses during the boom years so that they could deficit spend in the bad years. We've been deficit spending through the boom years, which has made our situation all the more disasterous.

If we could do this, deficit spending in a recession might be justified. The problem is, what politician (regardless of party) will stand up to all the special interests who want that surplus money?

What you are describing here is actually close to pure (and complete) Keynesianism. Most people simply refer to Keynesianism as "deficit spending" but that's really only half of the picture. The other half -- the half no one has tried -- involves *cutting* spending and debt reduction during the boom years. But again, who's going to get up and say they want to slash government programs (and employment) 10% because the economy is booming? No one will, and they likely never would.

 

[M Paquette]

A lack of arithmetic...

For FY2010 total federal spending is roughly 3.5 trillion dollars. That number, less tax revenue, leaves a deficit of 1.3 trillion, just under 2/5 of the total spending.

If we look at the spending pie, we can slice it up roughly as:
1/5 non-defense discretionary spending
1/5 defense
1/5 Social Security
1/5 Medicare (less than that now, much more than that in 10 years)
1/5 interest (which will be growing) plus smaller bits of entitlements

Now, nobody wants to touch the defense slice.
Not paying the interest is Bad. Really Bad. Greek Default bad, only it's the largest economy in the world, not something the economic size of Connecticut. You really want to zero out your retirement savings to make a political point?

Balance the budget without tax increases by removing 2/5 of the spending without touching any sacred cows.

 

[MasterBlaster]

What you propose doesn't really address the so-called "entitlement" issue.The Medicare/Medicaid/SS part of the budget will grow (in real terms) in but a few years to be as large as the total budget is now. Without constraints, (net) taxes (all of them not just income taxes) will need to approximately double.

With taxes at that level you could expect a severe economic downturn. That would then cause taxes to drop causing the need to further increase taxes. After awhile, like they tell us, it just isn't sustainable.

So, we may as well address our problems now.

 

[Texas Proud]

For FY2010 total federal spending is roughly 3.5 trillion dollars. That number, less tax revenue, leaves a deficit of 1.3 trillion, just under 2/5 of the total spending.

If we look at the spending pie, we can slice it up roughly as:
1/5 non-defense discretionary spending
1/5 defense
1/5 Social Security
1/5 Medicare (less than that now, much more than that in 10 years)
1/5 interest (which will be growing) plus smaller bits of entitlements

Now, nobody wants to touch the defense slice.
Not paying the interest is Bad. Really Bad. Greek Default bad, only it's the largest economy in the world, not something the economic size of Connecticut. You really want to zero out your retirement savings to make a political point?

Balance the budget without tax increases by removing 2/5 of the spending without touching any sacred cows.

So, that breaks down to 20% for each area....

cut non-defense by 50% is 10% of the total

cut defense by 20% is 4% of the total

cut SS by 20% is 4% of the total

cut medicare by 20% is another 4%

for a total of 42%...

Once revenues start to come back because of the recovery, use half to pay down the debt which will reduce that amount and the other half to increase spending where it is needed most...

Not as hard as you think.... but this could never get done because nobody wants their special interest cut...

 

[Purron]

What you propose doesn't really address the so-called "entitlement" issue.The Medicare/Medicaid/SS part of the budget will grow (in real terms) in but a few years to be as large as the total budget is now. Without constraints, (net) taxes (all of them not just income taxes) will need to approximately double.

With taxes at that level you could expect a severe economic downturn. That would then cause taxes to drop causing the need to further increase taxes. After awhile, like they tell us, it just isn't sustainable.

So, we may as well address our problems now.

OK, so cut entitlement spending. The spiraling cost of health care is a key component of this budget dilemma. We need to take a cold, hard look at our health care system and figure out a better way. I don't think any of us like the idea of sick, elderly and helpless Americans being without decent health care.

 

[MasterBlaster]

OK, so cut entitlement spending. The spiraling cost of health care is a key component of this budget dilemma. We need to take a cold, hard look at our health care system and figure out a better way. I don't think any of us like the idea of sick, elderly and helpless Americans being without decent health care.

So we have an opportunity right now to change things. Or we can continue as we have, head in the sand, and eventually be forced into the same things anyway. We'll end up going through something like Greece is going through now.

What happens if they have a big Treasury bond sale party... And nobody comes ?

 

[jdw_fire]

I'm not making the argument, I'm only questioning your assertion that lower taxes are linked to lower growth...

...

Likewise, it's hard to see how raising taxes would not put a relative damper on business investment and therefore job growth. Other environmental effects may swamp that out, but the effect is still there.

I can see how raising the tax rates at the higher income levels can lead to job and therefore economic growth. It comes in 2 parts.


For the 1st part, consider an example of a business owner, who owns a non-corporate business or a single owner LLC (which files profits/losses on the owner's personal tax return) that employs multiple people. Fortunately for this business owner, s/he is expecting a large net profit from his/her business this year. This business owner has a decision to make, s/he can choose to 1) use that net profit to expand the business this year. This expansion would be done by either upgrading/buying additional equipment or hiring more employees (or both) which makes said profit tax deductible (by eliminating it) and increases the value of the business. Or 2) not expand the business and therefore realize the profit on his/her 1040 schedule C, pay income taxes on said profit and then either spend or save what is left. I suggest that the higher the marginal income tax bracket rate is for this business owner the more likely s/he will reinvest that year's profit back into the company, so as to avoid those taxes and make the company more valuable, hoping to cash in on the CG laws. This reinvestment will create jobs at this company and/or the companies that build the equipment used by this company.


For the 2nd part, consider the higher income taxes paid to the federal government. All else being equal this additional tax collected will offset with an equal about of debt and therefore our public debt will be lower. This means there will be less interest paid by our government and therefore there will be more effective use of those tax dollars (again all other things being equal). More effective use of tax dollars (via less interest paid) should help the economy grow.

 

[M Paquette]

So, that breaks down to 20% for each area....

cut non-defense by 50% is 10% of the total

cut defense by 20% is 4% of the total

cut SS by 20% is 4% of the total

cut medicare by 20% is another 4%

for a total of 42%...

Once revenues start to come back because of the recovery, use half to pay down the debt which will reduce that amount and the other half to increase spending where it is needed most...

Not as hard as you think.... but this could never get done because nobody wants their special interest cut...

That non-defense discretionary slice includes things like Homeland Security, FBI, CIA, federal prisons, and The Usual Suspects like agriculture subsidies.

The budget is chock full of special interest goodies.

The nearer term issue I find highly entertaining is the "We don't need to raise the debt ceiling" crowd, who don't seem to understand that once the cupboard is empty, and we can't borrow, that we will only have 3/5ths of the monthly income needed to cover expenses.

Treasury's best estimate is that the cupboard is bare as of August 2, when we will have exhausted all the short term shuffling and scrounging that has kept us afloat since April. Which bills and paychecks do we not pay?

 

[Danmar]

Yep -- cut MY taxes, cut THEIR programs.

Frankly I'm neither wedded to "big" government nor "small" government dogmatically. I want a government that works well and provides reasonable services and programs relative to the taxes I pay.

Now that seems like an intelligent approach. Difficult to implement of course.

 

[MichaelB]

Treasury's best estimate is that the cupboard is bare as of August 2, when we will have exhausted all the short term shuffling and scrounging that has kept us afloat since April. Which bills and paychecks do we not pay?

Well, we could start with the House of Representatives and then move quickly to the Senate. Then TSA.

 

[jdw_fire]

So, that breaks down to 20% for each area....

cut non-defense by 50% is 10% of the total

cut defense by 20% is 4% of the total

cut SS by 20% is 4% of the total

cut medicare by 20% is another 4%

for a total of 42%...

...

10% + 4% + 4% + 4% = 22% (not 42% unless you plan on not paying any of the interest)

 

[samclem]

. . . Or 2) not expand the business and therefore realize the profit on his/her 1040 schedule C, pay income taxes on said profit and then either spend or save what is left.

... and if it is spent it contributes to job growth and to another business's balance sheet. If it is "saved" it is (likely) invested directly or indirectly in a different business, which helps it become more efficient, or in US government obligations, which (through increasing demand for same) reduces the interest rate paid by the government on these notes.

I think your example only holds true if we neglect the "what next" or if the business owner takes the profit and buries it in a hole.

 

[jdw_fire]

... and if it is spent it contributes to job growth and to another business's balance sheet. If it is "saved" it is (likely) invested directly or indirectly in a different business, which helps it become more efficient, or in US government obligations, which (through increasing demand for same) reduces the interest rate paid by the government on these notes.

I think your example only holds true if we neglect the "what next" or if the business owner takes the profit and buries it in a hole.

so then are you saying that if the business owner invests (100% of the net profits) directly in his/her own business it wont produce greater job/economic growth then would happen if s/he invests (100% of the profit - taxes) in bonds or stocks? i think not, therefore my example still holds, reguardless of the "what next"!

 

[samclem]

so then are you saying that if the business owner invests (100% of the net profits) directly in his/her own business it wont produce greater job/economic growth then would happen if s/he invests (100% of the profit - taxes) in bonds or stocks?

Yes. Example: If the business owner decides to buy bonds from another company rather than invest the money back in his own business, it follows that he expects a greater risk/adjusted return. On average, that greater return can only occur if the "other business" puts the capital to work in a more productive manner than he could have. "More productive" = greater job/economic growth.

Efficient capital markets keep money flowing to the businesses expected to use these funds most effectively--to produce more growth (and wealth). In your example, only the part of his profit that was "lost" to taxes escapes this "highest expected utility" market mechanism.

 

[obgyn65]

Reading these posts here is a bit depressing... I may not be able to FIRE in 2012 as planned after all, instead I may need a couple more years to wait and see what's going to happen with SS, Medicare.

 

[chinaco]

Ideas on how to fix it... from the geniuses that got us here!

Somethin' to be said for that... huh?

The Aspen Institute and The Atlantic magazine, many spoke enthusiastically about a list of recommendations for a debt solution hammered together last December by a bipartisan committee chaired by retired Senator Alan Simpson (R-Wyo.) and former Clinton administration economic adviser Erskine Bowles. Those recommendations call not only for tax reform but for fixes to the budget process, Social Security, health care spending in the private and public sectors and an increase in mandatory retirement-savings programs.
Here is an overview of the comments from some of this year's participants, a gathering of what The Aspen Institute calls the world's "most inspired and provocative thinkers, writers, artists, business people, teachers, and other leaders."

Big thinkers tackle debt solutions at Aspen Festival - Jul. 13, 2011

 

[Midpack]

Not a bad article, interesting what leaders say when they are not in the election cycle. I've often wondered if Americans were presented with our spending, like the 2010 pie chart, and then told this is how much your taxes would have to increase to balance the budget now (assuming no change in marginal rates). I did the math in an earlier thread, and I think it was something like a 70% increase across the board. You would think folks could get a more creative faced with such a prospect. Have you ever seen a politician or anyone in the media take such a direct approach?

Instead we're allowed to insist that someone else (the rich) should pay more and we're entitled to benefits we haven't fully paid for ('I paid all my life so I am entitled to the same Soc Sec/Medicare as the last generations got - take it out of defense, end the wars'). My other favorite is increasing Corp taxes, as if ultimately that's not passed on to 'us' entirely. All these positions can easily be shown to be unworkable, yet we keep up the charade.

Flame away...

 

[Hamlet]

Do you think there will be any clarity then?

There will always be another election 2 years away.

Reading these posts here is a bit depressing... I may not be able to FIRE in 2012 as planned after all, instead I may need a couple more years to wait and see what's going to happen with SS, Medicare.

 

[explanade]

How many people on this forum wants SS or Medicare cut?

Is it possible to keep the current level of benefits without raising taxes?

For taxes to remain where they are, Washington would need to end Medicare as we know it, end Social Security as we know it, severely shrink the military — or do some combination of the above.

http://www.nytimes.com/2011/07/13/b...-rise-in-the-end-david-leonhardt.html?_r=1&hp

To shrink govt. SS, Medicare and the military will have to be cut. Do people who want to RE expect not to count on Medicare at least?

 

[Texas Proud]

10% + 4% + 4% + 4% = 22% (not 42% unless you plan on not paying any of the interest)

Opps... Looks like I added in the 20% for each area....

 

[Texas Proud]

I can see how raising the tax rates at the higher income levels can lead to job and therefore economic growth. It comes in 2 parts.


For the 1st part, consider an example of a business owner, who owns a non-corporate business or a single owner LLC (which files profits/losses on the owner's personal tax return) that employs multiple people. Fortunately for this business owner, s/he is expecting a large net profit from his/her business this year. This business owner has a decision to make, s/he can choose to 1) use that net profit to expand the business this year. This expansion would be done by either upgrading/buying additional equipment or hiring more employees (or both) which makes said profit tax deductible (by eliminating it) and increases the value of the business. Or 2) not expand the business and therefore realize the profit on his/her 1040 schedule C, pay income taxes on said profit and then either spend or save what is left. I suggest that the higher the marginal income tax bracket rate is for this business owner the more likely s/he will reinvest that year's profit back into the company, so as to avoid those taxes and make the company more valuable, hoping to cash in on the CG laws. This reinvestment will create jobs at this company and/or the companies that build the equipment used by this company.


For the 2nd part, consider the higher income taxes paid to the federal government. All else being equal this additional tax collected will offset with an equal about of debt and therefore our public debt will be lower. This means there will be less interest paid by our government and therefore there will be more effective use of those tax dollars (again all other things being equal). More effective use of tax dollars (via less interest paid) should help the economy grow.

To me there is a huge flaw in this logic...

The business owner will only invest to grow his business if there are customers.... putting money into a business that is not attracting a lot of new customers is wasting money....

A good busines owner will expand his business when he/she can expect to make a profit on that expansion, which includes taxes... raising taxes will make a lot of marginal expansions not happen...

 

[explanade]

If economy picks up and a business owner sees opportunity to grow the business, is he not going to expand because the marginal rates are a couple of percentage points higher?

I guess the potential for higher revenues and profits would have to exceed the higher tax bite to make it worthwhile.

 

[Midpack]

Do you think there will be any clarity then?

There will always be another election 2 years away.

Maybe I am naive about the American people, but it would be nice to see someone try something new instead of the same old narrow minded polarized rhetoric from politicians, media, special interests and the electorate. Wonder what would happen if Obama tried it in prime time, and stuck with the theme until the media and the electorate faced it? Decades of kicking the can down the street has gotten us nowhere but further in the hole. Wishful thinking I guess, but what's the saying 'insanity is doing what you've always done and expecting different results.'

BTW, the proposals I mentioned in the post above aren't useless, but none of them alone solve the problem.

 

[Midpack]

How many people on this forum wants SS or Medicare cut?

Is it possible to keep the current level of benefits without raising taxes?

To shrink govt. SS, Medicare and the military will have to be cut. Do people who want to RE expect not to count on Medicare at least?

I assume this is tongue in cheek. Of course everyone wants the status quo, but I'd like to see a balanced budget that realistically balances the budget without increasing revenues (some could come from an economic expansion, but some will have to come from taxes IMO), reducing Soc Sec, reducing Medicare and reducing defense spending - all four. Interest won't go away, in fact it'll get worse when interest rates rise (and they will). And the rest can be on the table, but eliminating all other spending only makes a dent in the deficits we're running. The big four can't be avoided as far as I can see.

I am planning on a lesser Soc Sec and Medicare benefit. Anyone who is about to retire or retired in the last 10 years or so who didn't has been asleep at the wheel IMO.

 

[MasterBlaster]

Medicare will probably devolve into something where end of life care is modest. So rather than spend really big bucks on those that have little chance to make it, spend the available money on those that can benefit from it.

If they do something like that then Medicare can be made much more affordable.

I have seen in my own extended family, how outrageously expensive and (arguably) wasteful Medicare can be.