The Balooning Deficit - What's Up With That?

Why the budget deficits?  Find out for yourself here:

http://www.washingtonpost.com/wp-srv/special/politics/30-years-spending-priorities-federal-budget-2012/

The Washington Post provides a nice little interactive tool that helps you see where the money has been coming and going for the last 30 years.  For example:

You can see from the charts where the real problems lie.  First, revenues have declined $600 billion from $2.7 trillion in 2007 to $2.1 trillion the last few years.

Second, spending has gone from $3 trillion in 2007 to about $4 trillion each year since.

So breaking it down further, you will see the exponential growth of the entitlement programs, particularly health care-related expenditures.  You will also see the massive doubling of "income security" which is another word for unemployment benefits.  Oddly, that started in the 2010, most likely due to extending unemployment benefits from one year to two years.

On the revenue side, what happened in 2009?  Individual and corporate income taxes declined by $400 billion.  I believe that was due to an abrubt halt in routine investment gains that had been realized in prior years.  You can't really blame unemployment because payroll taxes hardly budged during that time.  Not only did capital gains evaporate and corporate incomes greatly decline, but you now have a carry-over effect with unrealized capital losses limiting tax revenues.

I guess the most disturbing thing to me is that the 2012 budget calls for a $500 billion increase in tax revenues.  If that doesn't happen we could be staring at a $1.6 trillion budget gap in 2012.  And it could get even worse, with a likelihood of much greater expenditures on interest on the national debt.

$1.6 trillion dollar deficit in a single year - whoa.  That is more than the entire federal budget when the first President Bush left office.  Yet I think the average taxpayer's income is probably not much higher than it was then.  (Mine certainly isn't.)

What can be done about this?  We could probably cut $200 billion from expenditures by getting employment back to pre-recession levels.  That might also add $100-200 billion in revenues.  But primarily the problem is the explosive growth of health care spending.  That absolutely must be stopped, and Obama Care is not going to do it.  Consumers absolutely must become aware of their health costs at the point where they make decisions that affect their health.

I recommend reading a book "The Coming Jobs War" by Jim Clifton.  That's a really good book that explains better than I can do in this blog.

No Place for Old Economists

I've been watching some old economists talking about "typically markets do this", or "when the economy returns to historical norms" or some such nonsense.  Maybe the law of supply and demand hasn't changed, but the historical norms of supply and demand in the West don't apply today and probably won't apply again until the world economy is fully globalized (yikes), or I expire (double yikes).

This really does matter to "main street" people because taxes, government spending and all manner of other decisions are based on these guys being right.

So you have one group of old economists called "supply-siders" who believe that if you throw money at the "rich" in the form of tax cuts, economic growth and jobs will just happen.

You have another group of old economists called "Keynesians" or "demand-siders" who believe that if you throw money at the "poor" that they will generate demand and the demand will result in economic growth and jobs will just happen.

Even the Federal Reserve is governed by these old economic views, as they wasted trillions of dollars "shooting in the dark" with easy money, assuming the economy would just magically recover.

Meanwhile we have tax policies designed to solve yesterday's problems of tight labor markets (capital gains tax breaks) and idiotic internet-bubble bad business models (dividend tax breaks).

Yes, it was a good idea back in the 1900s to incent businesses to invest in capital equipment to improve productivity.  It's not so good now - we are awash in productivity to such an extent that we no longer need about 25% of the available labor force in America.

Yes, it may have been a good idea back in the internet bubble to get companies to think about paying dividends instead of pursuing ridiculous, unsustainable revenue opportunities.  Now - not so much.

Now we have a situation where companies can make plenty of money with very little labor and the quality jobs that are available are easily filled with cheaper resources overseas.  But the supply-siders are continuing to push tax cuts and the demand-siders are continuing to push unsustainable government hand-outs.

At some point right-wingers have to say "tax cuts aren't the solution".  And left-wingers have to say "government hand-outs aren't working".  It's really that simple.  But the left continues to move left and the right continues to move right.  Here I am stuck in the middle again, in a vast un-represented waste land.

Van's List
My solutions involve eliminating laws and policies that make things worse.  That is free and simple.  Heres a partial list:

• Repeal Obama-care.  What a load of job-killing complexity and ill-timed policy.  Let's get people back to work so they can afford their own health care.
• Let the Bush tax cuts expire.  There are better ways to promote quality job creation.  If we're going to throw money at the problem, let's identify the problem first.  One thing for sure - those who live on high investment incomes don't need lower tax rates than those who work for a living.  The progressive income tax we have already provides tax breaks for lower income brackets, whether that is investment gains or earned income.
• Replace payroll taxes on both employer and employee with a revenue-neutral adjustment to the income tax, starting with the first dollar of income.  That will eliminate the concept of government-sponsored retirement and health care entitlements, and encourage people to plan their own futures without government subsidies.  It will also eliminate the perverse tax incentives to replace people with technology or offshore labor.
• Reduce unemployment benefits and re-direct that money to companies who will hire and train near-fit candidates from the unemployment rolls.  People need incentives to work, and companies need incentives to hire and train.  That's a policy that fits the economy today, and not one designed for an economy ten to one-hundred years ago.
• Eliminate all the new Obama EPA regulations and send half the EPA back to the college campuses from whence they came.  Thence they can pontificate about the causes of global warming and other idealistic causes du jour.
• One more radical idea - eliminate the exemption from overtime pay for salaried employees.  There is a problem today with companies eliminating jobs and piling more work on existing salaried employees.  This tactic works in a stressed labor market because people have limited alternatives to longer working hours.  And it is self-perpetuating by keeping the labor market stressed.  By eliminating the exemption from overtime, new employees would be cheaper than overtime, and the workload and wealth of jobs would be more evenly distributed.

If you are still with me, welcome to my world!  I'm sure I lost the left and right in that list of bullet items.  Please let me know if you agree (or not) by leaving comments.