The question.
I must have hit a cord with my answer, as Watts initial reaction was to launch into an ad hominem attack claiming I was “unable to see the better times for the dour.” He claimed “all right numbers are in place. Layoffs are decreasing, job numbers are increasing, and even Wall Street is reaching record highs.” But then there is the minor fact that GDP has been dismal, and was actually negative last quarter. If it is negative this quarter we will officially be back in recession.
Watts also questioned my claim that the Senate is in violation of the law because they have not done a budget. Yet the article cited by Watts said, ”While the Senate is legally required to pass a budget, there is no penalty for not doing so.” Absent of a penalty does not change the law.
The law in question is the 1974 Budget Control Act section 300 which specifies the budget calendar. It is from the budget that the appropriation bills are then written. Democrats claim they can ignore this schedule. Even if true, is at best only a partial answer, though the 1974 Budget Act remains the law.
The article also said that “Appropriations bills are where spending is allocated.” True, but the Senate has failed here as well. The House has been doing its part of the job, passing a budget and most of the appropriation bills each year and sending them to the Senate. The Senate has not, and last year not a single appropriation bill even made it to the floor of the Senate much less passed and was sent to the House. Instead, it would seem the Senate counts on the need for continuing resolutions, after continuing resolution, after continuing resolution. After all, why follow the law, when you can have a budget crisis to blame on the other party?
Another point made in the article was that the Senate has not passed a budget, because the “Democrats don’t want the blame.” And once you get pass all the rhetoric and excuses, this may be the real reason. It is always easier to criticize those who put forth solutions than to come up with solutions of your own.
Watts goes on to claim “such a budget from the Senate would not be welcomed in the House.” So what? It is very clear that the House budgets and appropriation bills are not welcome in the Senate, but at least they follow the law and do them. Normally the first part of a negotiation is for each side lays out what it wants, and then the discussion is over how the differences can be reconciled.
As for implying that this was the President’s fault, I didn’t because that is not my view. Obama has plenty of faults of his own without having to bear those of the Democratic Senate. But this is a problem for the left which continually gives the Senate a pass for failing to do its job, as Watts has done.
As for relying on one source, that is at best silly. After all does Watts really believe that there is only one economist that holds such views? Space does not permit an analysis of all of Watts’ sources (One of the reason I do not give multiple sources in this type of discussion) but I will consider his first one.
Chad Stone claims “Tax Increases to Reduce Deficit Will Help, Not Hurt, Growth” by citing growth in the 1990s compared to 2000s. Unfortunately Stone neglects a number of key factors. The first couple of years following the tax increase were marked by a lackluster economy. When the Republicans won the house in 1994 they did pass tax cuts, in particular in capital gains taxes.
In addition, and probably more importantly, the late 1990s was unique in that it was marked by the internet boom, which was driven by changes in technology rather than government policy. Thus Stone, by putting the dividing line in 2000, puts the growth from the Internet Bubble as part of his growth in the 1990s but the resulting crash and recession gets counted against the 2000s. On the other hand there are numerous examples of tax increases depressing the economy and bringing in less money, some of which I cite in my book, Preserving Democracy.(e,g., pg 39,40)
As for my second “single” source, Gilder’s book can only be a single source if you ignore all of the numerous sources and studies cited in his book.
Watts says the budget “must be set with priorities given education and the good of the people, requiring those with much to give more than those who have little.” Ok, as to the latter, that is already the case, as I document in Preserving Democracy, the top 1% pay 37% of all Federal Income taxes, while the those at the lowest income brackets, because of credits, receive more back in refunds than they even paid in taxes. Nor is anyone I know against “those with much” having more taken from them, but as Ross Perot said, the devil is in the details.
And in the details there is a moral issue. If I want some money for a noble purpose, I do not have the right to take it from someone else by force. That is theft. Getting more people to help me forcibly take the money does not change the nature of the act, regardless of how many I get to help me.
We tend to ignore this problem when it comes to government and taxes, but the problem does not really go away. It is one thing for the people in a democracy to choose to impose upon themselves taxes so as to pay for the government they want. Those who take money by force, can then at least justify it by claiming that it is a burden shared by all. It is quite another thing when it ceases to be a shared burden and is just imposed on others. Morally this is much closer to theft than it is to a shared burden. There are other problems, but this reply is already long.
So for my budget priorities, the bottom line for me is that Government is causing far more problems than it is solving. Thus, except for defense (and to some extent even in defense, as a lot of thing in the defense budget are not really defense) the federal government should be massively transformed. Departments like Education should be abolished, areas like the EPA radically transformed.
This is going to happen. The only question is will we do now when we can plan it out over many years and thus minimize the pain, or will we wait for us to become like Greece and have those changes forced on us by economic reality thereby maximizing the pain. I prefer the former, but I suspect we will get the latter.
Tag: budget
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Hushbeck: Question 2, Reply 2 – The Budget
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Watts: Topic 2 Reply 1 (The Budget)
The Question
My first concern with my friend Elgin is that he is too filled with Conservative media’s information that he is unable to see the better times for the dour, an unfounded picture of what is actually taking place. If we do not have a basis of fact I our discussion, how will we proceed?
While I do not seek to undermine the tough times faced by those seeking to work, I would be remiss if I didn’t point out that all of the right numbers are in place. Layoffs are decreasing, job numbers are increasing, and even Wall Street is reaching record highs.
Let me also contend with his rather bold statement that passing a budget is a matter of law. I would doubt such an issue based, once more, on facts. Further, let us consider that such a budget from the Senate would not be welcomed in the House which has, thus far, acted only a temper-tantrum throwing toddler. Somehow, my friend Elgin seems to imply that this is the President’s fault and as such, the President could somehow force the Senate to create a budget. This is not only well outside the realm of likelihood, but so too the Constitution.
But, to my friend’s suggestions.
I believe we would both agree on ruling out Government induced hyperinflation.
However, I do not think his reaction and discarding of taxes is altogether sound. One does not simply quote one economist, but must rely on a preponderance of data. Further, my friend falsely attributes (following the lead of the Conservative media) to Christina Romer a conclusion she does not support. What do we actually know? That those to whom much is given, much is required. While I do not support retreating to the tax rates under President Eisenhower, a Republican, I do support higher tax rates on those who can afford it.
Unfortunately, instead of a balanced view, my partner in these discussions, suggests cutting spending. In the same study he uses to suggest, wrongly, that more taxes hurt, Romer suggests spending cuts hurt. And she continues this theme as well with her follow-up article. While he quotes a conservative icon, Gilder, he again simply chooses to remain with only source, rather than numerous sources, such as Romer, who state with proof that spending cuts will not help an economy.
I am unsure how these things aid in the discussion of the budget. I would hasten my friend back to the conversation. The budget must be set with priorities given education and the good of the people, requiring those with much to given more than those who have little. As the Senator from Massachusetts said, no one in the United States stands where they are without someone else.
If Mr Hushbeck means to explore austerity, this is a train-wreck waiting to happen. If he means to suggest that lowering taxes and cutting spending is the best possible way forward, this is a fantasy that leads to fateful junctures in history. No, a budget relying on austerity will not rescue us from our current economic troubles.
A budget that raises revenue by closing loopholes, raising taxes, cutting defense spending and other government spending, while increasing spending on social progress programs. -
Elgin: Topic 2 Reply 1 (The Budget)
The Question
While Watts and I both seem dissatisfied with the current budget process, I found his suggestions at best unrealistic. He suggests that budgets be done “several years in advance.” Of course one of the current problems is that the Democrats in the Senate have, in violation of the law, refused to even do a budget in nearly 4 years. The President submits budgets that are late and so unrealistic that some have not gotten a single vote even from members of his own party.
Currently budgets are done for 10 years. This actually is one of the problems for it allows all kinds of games to be played. While taxes, either cuts or increases, seem to start in the current budget year, “cuts” are almost always in “the out years.” As such these cuts can function as offsets to balance out other changes over the 10 year budget cycle. The problems is that while this may all looks good on paper, the cuts often never happen, because the current Congress cannot bind future Congresses.
For example, On Jan 1 this year both the House and the Senate passed a law preventing a 26% cut in the payments for Medicare, and a 2% cut in Medicare payments to doctors. Why such bi-partisan action? Because there is no way politicians in either party are going to let such cuts happen. But if this is true, why were these cuts in the law to begin with so that they needed to be overridden?
The answer is that these “cuts” were part of the Balanced Budget Act of 1997. They were supposed to cap spending to a “Sustainable Growth Rate” each year. But each year when the caps are about to take place, Congress votes to override them. But note that Congress does not vote to overturn the law, just that year’s cuts. This is because they need the “cuts” in the out years, or the budget would seem even more out of balance then all the games they play make it appear. This is part of the issue with the unfunded liabilities mentioned in my initial answer and why the games they are playing cannot go on too much longer.
But this is not the only problem. Another problem is that because of baseline budgeting these projections in future years are taken as the starting place. Thus if a program is projected to get a 10% increase in a future year, but when that year come it only gets a 5% increase, there will be wailing and gnashing of teeth over the “massive cuts.” It is because of games such as these that even after the sequester, with all of its massive “cuts,” ultimately the Federal government will still be spending $15 billion more than last year.
About the only place this is not true is with defense spending, for the defense department seems to be the only branch of the federal branch that actually has any cuts as opposed to reductions in the rate of increase. According to the President’s budget, over the last several years the Defense department’s small increases have not kept up with inflation, and starting this year will see real reductions. Even before the sequester, defense spending will go from $716B in 2012 to $701B in 2013 and down to $587B in 2017. When adjusted for inflation (using 2005 as the base) this becomes $610B in 2012 to $587B in 2013 and down to $460B in 2017.
Now one could argue that this will be like the Medicare “cuts” and be repealed every year. However, history, both long and short term, argues against this. When adjusted for inflation, defense spending peaked in 2010, and has been decreasing since. In addition the 1990s were a period of decline which saw defense spending go from $303B in 1989 down to $268B ten years later ($481B to $346B in Constant dollars).
What makes this worse is that the Defense department is not like a doctor. If for some reason Congress did not rescind the cuts, a doctor could just stop seeing Medicare patients when that happened. The defense department, however, must and does plan over many years. For example, building a new fighter or a carriers is a many year process. If the money is not in the budget, it cannot be done.
Consider the Navy for example, The Quadrennial Defense Review said that we should have 346 ships to do the mission the nation has given the Navy. The Navy, realizing the situation, said they could get by with 313, which has recently been reduced yet again to 300. Yet we only have about 287 and we look headed to 250. As Robert Kaplan put it, “There is a big difference between a 346-ship US navy and a 250-ship navy – the difference between one kind of world order and another.”
To make matters even worse, because of recent cut backs the Navy does not even have enough money to run the ships that it has. Thus, for example, it is keeping the USS Harry S. Truman in dock instead of sending it to the Persian Gulf. All branches are cutting back on training and one thing is clear from history, less training means more lives lost when the military is needed. So while I agree with Watts that “First, [the budget] must focus on defense” that is hardly what the Democrats do, and sadly a growing number of Republicans as well.
Watts suggestion that tax rates be “set at relatively high levels” so that “Congress will have to act.” But it is far from clear why they would have to act, other than that this would kill the economy. Like an addict needing their next fix, Congress desperately needs money for they are addicted to spending. If given the promise of new monies from increased taxes, they will simply spend it. Then when the taxes depress the economy even further and the revenues do not come in, we will be in even a worse hole.
Finally, Watts argues that “welfare of the people must be included in the budget.” I would argue that the best thing for the welfare of the people is to have a strong and vibrant economy so that the people can take care of their own welfare. As for those who cannot take care of themselves, private charity, state and local government can best take care of them.
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Hushbeck on Question 2: The Budget
Link to question #2.
The 21st century has been marked by economic bubbles. It began with the collapse of the Internet bubble starting in the late spring of 2000 when venture capitalists pulled their money from many fledging internet companies. This sent shock waves throughout the economy during the summer and fall of that year as many big name companies collapsed, throwing the economy into recession.
With the resulting decline of the stock market, people were looking for a safer place to invest. Over the previous decade the federal government had been demanding that lenders offer more avoidable home loans. These new loans made housing seemingly a great place to invest.
As money moved into housing a second bubble developed, the housing bubble. By 2007 it too was collapsing. When this was combined with a depression era account rule, reinstated in November 2007, it caused the economic crisis that rippled through 2008 and into 2009 when the resulting recession ended.
But if the recession ended in the spring of 2009, why are things so bad now, four years later? The reason is that we are in yet another bubble. But unlike the Internet and Housing bubbles, this bubble is in government.
Washington D.C. is a boomtown, in which even the highly priced housing market in the surrounding areas are doing fine. But the growing government is stifling an already struggling private sector with taxes and new regulation. This only increases the need for government services, which causes government to grow even more, further stifling the private sector. This is a classic bubble.
Herbert Stein famously said, “that which cannot go on forever, won’t.” The simple fact is that the federal government cannot go on forever borrowing 42 cents out of every dollar it spends. To be sure, this is not a problem that started with Obama. The roots go back decades. But it is true that Obama has taken the problem to new levels never before reached.
While people complain about the seemingly never ending crisis after crisis in Washington over fiscal cliffs, continuing resolutions, and debt limits, the first step in fixing this is well known: Get a budget then stick to it. But Obama for the 3 straight year just missed another deadline. But at least he does finish his budget eventually, even if he is constantly late. The Democrats in the Senate have not produced a budget in nearly four years, even though required to do so by law.
But the real problem that is driving all of this is that government has made so many promises, that it is impossible for them to keep them all. This is why the politicians keep “kicking the can down the road.”
We focus on the deficit, i.e., how much money we will need to borrow this year to make ends meet, about $1 trillion; or the debt, how much money we have already borrowed and need to pay back, about $17 trillion. This is over 5 times the yearly budget and more than the total Gross National Product of the country. This put us very close to the territory of Greece and other economic basket cases out there.
Both of these are huge problems, but they pale in comparison to the unfunded liabilities, i.e., the promises that politicians have made, but have not bothers to pay for. This is about a staggering $90 trillion. It is no wonder politicians do not want to deal with this, for it means coming clean and admitting that there is just no way we and keep the promises they made. We simply will never be able to pay for it.
As Stein said, “that which cannot go on forever, won’t.” At some point this bubble will end. We can either change course to get our finances under control or it will, like all other bubbles, reach a point where it collapses. Exactly how this will happen cannot be predicted, we could see massive inflation in which our money become basically worthless (Note the 100 trillion dollar bill from Zimbabwe which is worth about $5). We could see a depression so deep that the last four year will seem like “the good times.” It will probably be some combination, but it will not be pretty.
Already we cannot find enough lenders to loan us the money we need to pay our bills each year. As a result the Federal Reserve has been effectively buying it by just printing money such that over the last few years we have tripled the money supply. If it was not for the economy being so bad, we would have already seen inflation, and in fact, we may be beginning to see it now.
There are only three ways to deal with this. One approach would be to encourage inflation. Cut the value of a dollar in half, and you effectively cut the amount we owe in half. This may be what is behind the increase in the money supply, though even if this were the case, I doubt, given the harmful effects of inflation, that any would openly admit it. This approach is deceptive in that the early stages of inflation look like economic growth and seem positive. But in the long run this is a horrible option.
A second approach would be to increase taxes. The problem here can be seen in a study by Christian Romer, former Chair of Obama’s Council of Economic Advisers, which showed that a tax rate above 33% brings in less, not more, money. I know those on the left often questions this, but it has numerous historical examples that have demonstrated it to be true. Given that just federal taxes on the upper income earners, those who pay the vast majority of the taxes, already exceed this, higher taxes will not work. While lower income earners are still below the 33% level, raising taxes on them is hardly likely in the current “tax the rich” environment.
That leaves cutting spending. This is not as onerous as it may at first seem. Studies cited by George Guilder in his book Wealth and Poverty, demonstrate that countries that have chosen this approach generate so much economic growth, that within a few years they actually have more money to spend than countries that tried to tax their way out of their financial problems.
Ideally, the best approach would be to focus the government, both tax system and regulation, towards economic growth, while cutting spending. However, in the current political climate that is not going to happen. Even if it did by some miracle, I believe our current problems are so severe that we can no longer avoid significant pain, we can only minimize it. Which given the inclination of politicians, means that the government bubble will be like all other bubbles, we will avoid the warning signs until it is too late, and economic realities take over.
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Joel Watts on Topic Two: Reshaping the Budget
Link to question #2.
Reshaping must always start with the philosophy of the budget. What is the budget’s use? I would not consider the budget the economic structuring document, free of morality or agendas we’ve come to expect from such a cold rehearsal of the facts. The first thing I would want to see done is to reshape the approach to the budget. I would rather see it drafted several years in advance. While I am not in favor of the necessary allusions to Stalin, a five-year budget, addressing the specifics should be mandatory. In other words, draft budgets that are meant to hang over into subsequent presidential terms.
What are the specifics? I would say that tax rates will be set at relatively high levels, acting as a counterweight to an ineffectual Congress. Thus, to alleviate such an exhaustive tax rate, Congress will have to act to set not just spending but so too revenue. This would require Congress to rely more heavily on experts and plan for a five-year stretch, keeping spending to a minimum while having a tax rate that is expected to cover the spending. If revenues come in over budget, this will be used to off set any deficit. If there is no deficit, then revenues should be redirected back to the taxpayers directly, although leaving some monies in the treasury as a cushion.
The philosophy of the budget should always look into the future, but we seem to have become stuck in the near past. By forcing the budget process to look forward, it may be Congress will have to act with some amount of temperance.
Budgets should focus on several things. First, it must focus on defense. While I believe in a Just War Theory, I also believe that SunTzu’s hidden message is to be so well prepared for an attack, your enemy will simply not attack. However, the United States has become overburdened with a defense budget squandered on pet projects of Congressmen and women. With a five year budget plan, defense would be aimed at protecting the country rather than readying itself for war or engaged in an ongoing war.
The welfare of the people must be included in the budget. We have certain obligations to both those who have gone before us and those who come after us. Thus, budgets must include a certain amount of social welfare programs, limited to, again, five-year programs. There should be very few corporate welfare programs, and if such exist, they should be aimed at developing technologies and promoting American businesses. Most of the social welfare programs should be funded from taxpayers paying directly into their own accounts, such as unemployment insurance and social security. These programs must be kept off limits from the Government.
A subset of this area of the budget is two areas I consider vital to the progress of the country. First, budget must include monies to education. Second, infrastructure must be included. The budget must include forward looking accounts to promote both of these areas.