Friday, April 6, 2012

Facing Reality on the Deficit, Why the Problem Won't Be Solved

http://taxprof.typepad.com/taxprof_blog/2010/11/wsj-hausers-law.html

The above link demonstrates a very interesting reality:  no matter what the Federal Government has done in terms of taxes, they get right around 19% or so of GDP.  That's really quite amazing when you think about it, considering the extremely high marginal rates that persisted throughout much of this period.  What it tells us is that the economic and political systems have strong negative feedback effects that draw tax revenues powerfully to around this level.  It means that any expectation of solving the deficit problem long term by raising taxes is extremely unlikely to get much traction.

So if we can't reasonably expect to get more tax revenue as a fraction of GDP, we can cut spending right?

Here's the deal there:  yes, you can cut all kinds of stuff, like, for instance, our subsidization of both sides in the Arab-Israeli conflict, various agricultural subsidies, the NEA, etc, and you probably should, if only to demonstrate that you're serious about living within your means.  But these things are small fry.
The elephants in the room are defense, medicare/medicaid, and Social Security.  If you actually wanted a balanced budget next year---and make no mistake, unless you plan to balance the budget next year, you'll never balance it (most plans backload the pain until a much later election cycle and the cuts mandated never actually seem to happen)---you would have to savage these three areas so badly you couldn't get elected dogcatcher.

Should you decide to elect Romney, as it is looking like he's going to be the nominee, it is quite likely that he will reduce the deficit, a little bit.  But it'll still be a VERY positive deficit and the debt/GDP will continue to grow and grow.  Should the fed have to raise interest rates, you'll start to feel that more and more.  Should you keep Obama he'll probably keep the deficit right about where it is at, so you'll simply spiral a bit more quickly in your debt/GDP rise.  Neither Ryan nor Paul's plan will solve the problem either, and they're both politically DOA anyway. 

Simply put, nobody will do the right thing because nobody has the incentive to do the right thing and every incentive to harshly criticise even woefully inadequate half-measures.  But for the fact that we're the world's reserve currency, the matter would have already come to a head.  How long will it take for it to come to a head?  It is very hard to say, but I would watch the ongoing processes in the so-called PIIGS nations very closely.  I'd also consider diversifying my portfolio to include such things as gold, silver, lead, and brass.  Judging by the markets and news stories, lots of Americans seem to be doing this anyway.

10 comments:

coldequation said...

The deficit will be solved when the US is insolvent and nobody wants to buy bonds anymore. No sooner, no later.

Hail said...

"nobody will do the right thing because nobody has the incentive to do the right thing and every incentive to harshly criticise even woefully inadequate half-measures"

Democracy.

Hail said...

CE, is that you? Your blog is dearly missed.

Jehu said...

CE,
That's unfortunately likely the case. Also, I agree with Hail, we've missed your blog---I've kept the link to it open in the hopes it might return someday.

Olave d'Estienne said...

By "gold, silver, lead, and brass" are you talking about stockpiling ammo to protect precious metals, or do people really invest in lead and brass? (You can point and laugh if it's the former.)

The other way out of the budget crisis is for the Supreme Court to return to a formalist interpretation of the 10th Amendment, abolishing welfare, foreign aid, and Medicaid, with some wiggle room for Medicare and Social Security to privatized. It's no more plausible than any of our Presidential candidates balancing the budget though.

I think the "insolvency--no one will buy bonds" scenario is most likely. I don't even know why anyone is buying government bonds right now (or why voters are approving them at the state & local levels).

Jehu said...

Olave,
As I understand it, investing in either would've done you proud. People aren't stealing copper wiring from houses and such because its cheap. But yes, obviously, I'm suggesting supplementing ones normal financial investments with enhanced defensive capabilities should the center not hold. I'd also suggest picking up a few water filters as well---Monolithic makes some excellent and cheap offerings in this space that are non-powered and gravity fed.
Your Supreme Court scenario is a very happy one. Regretably, I don't think I can obtain enough liquor presently to make me think it likely. They might well spare us the abomination that is Obamacare though, so I suppose you could say they are likely to make a significant contribution towards slowing the runaway growth of the national debt.

Olave d'Estienne said...

Regretably, I don't think I can obtain enough liquor presently to make me think it likely.

I don't literally laugh out loud very often. Bravo! You are quite right and you gave me a good laugh at all of this mess.

The Cold Equations said...

Thanks, Jehu and Hail. I'm in a position where it would be career suicide to be outed writing what I wrote, but maybe someday...

Anonymous said...

You are absolutely correct that it is all downhill from here.

I suggest that you invest in more brass, lead and copper, along with dispensers of the aforesaid elements.

Won't get fooled again said...

I think that it is worse than you claim. That is because apart from the fact that no one has the political incentive to fix the deficit, politicians actually have an incentive to spend more money buying votes. They also have an incentive to bring in more non-productive people.

On top of that, the low IQ minorities and their social pathologies are reducing the productive output of the high IQ.

So, it is like a perfect storm of misery.