Thoughts and Truth from the Impossible Life

US Economic Questions

If you postpone short-term pain, you end up with long-term pain.

If an individual, family, or business has been living for the day without regard for the morrow, spending more than it makes, buying what it does not need, saving nothing, making foolish and reckless investments, and borrowing more than it can repay, we do not prescribe more of the same. We counsel abstinence. “The family has to tighten their belts.” Unnecessary spending is eliminated.

But societies and governments are different, are they not? Has economics not taught us that the rules applying to an individual do not apply to society as a whole? More deficit spending, false stimulus spending, bailouts of big weak companies is the government’s spending without regard for the morrow.

Is it not defiant of common sense for the US government to start up another and even bigger round of printing money, lending, and borrowing? This does sound suspiciously like trying to cure a hangover with more alcohol.

Is it not better for sound companies to buy cheap assets from failed companies and put them to productive use?

What good is the so called stimulus spending when it gets spent on foreign products, the money leaving the country and not returning without increasing American employment? Why not issue stimulus vouchers/checks to be used ONLY on American made products? That would have helped American employment even if it increased the national debt.

December 31, 2010 Posted by | Constitutional Issues, Politics/Government/Freedom, Societal / Cultural Issues | , , , , , , , , , , , , , , , , , , | 1 Comment

Winners and losers – Tax Policy

Any overhaul of the income-tax code will produce more losers than winners. It has to, since the object is to reduce the national debt by squeezing more revenues out of taxpayers without them realizing it by lowering tax rates.

Talk about déjà vu all over again. We last heard this line of reasoning some 30 years ago, when supply-side economics was all the rage. Then, it was claimed, lower taxes would encourage business to invest more, thereby creating jobs and thus more tax revenues.

The huge budget deficits that blew up during President Reagan’s first term demonstrated that what looks good on paper does not always translate into positive results in the real world.

This time around, would-be tax reformers think that by ridding the tax code of most deductions, credits and exemptions, the tax base will be broadened, thus generating more tax revenues.

It remains to be seen how taxpayers will react to the elimination of their cherished deductions and exemptions, but my guess is most won’t exactly be jumping for joy.

For example, changes to the deductions for mortgage interest and property taxes certainly won’t be welcomed by current and prospective homeowners. Without these deductions, the cost of buying and owning a home effectively goes up, thereby pricing many people out of the market.

And do you think charities will greet an end to the deduction for charitable contributions? Quite the opposite, I would think.

As for business, being able to expense the depreciation on a piece of equipment or a building can make the difference between affordability and not for many firms. This, of course, would suggest less, not more, investment with a resulting loss of jobs — the last thing this economy needs.

Tax reform can also be used as a subterfuge for redistributing income and wealth from rich to poor or from business to consumers and vice-versa, depending on which party gets the upper hand in rewriting the tax code.

If the pols would be satisfied by reducing the size of the country’s debt relative to our gross domestic product, this can be accomplished by running smaller budget deficits.

However, to shrink the actual debt itself Washington would have to run surpluses in its budget. This won’t happen anytime soon — nor should it, in view of the precarious state of the economy.

Former Reagan White House budget director David Stockman says the tax deal emerging in Washington is “Keynesian flimflam” that won’t help stimulate the economy. In an interview with Simon Constable, he rails against the current system of deficit financing and warns the U.S. faces a crisis of indebtedness in the long run.

If anything, this economy needs more stimulus, not the restraint that would result from any effort to reduce the budget deficit. This means more deficits — for a while.

When the time comes to reduce the government’s budget deficit, there is one way to do it that does not require alienating a big chunk of the population or getting bogged down in tax reform.

This approach is to get the economy to grow faster. The higher the economy’s growth rate, the more tax revenues it will throw off, which, when combined with spending restraint, will shrink the deficit over time.

To me this is a win-win strategy. Who would argue with a policy that creates jobs and helps improve living standards while boosting sales and earnings at the same time?

The main question is how best to accomplish this objective. Should we cut taxes, raise spending or both? As long as it stimulates the economy, any of these choices is fine with me.

And if it means running a big deficit for a while longer — so be it. The best way to reduce the deficit in the long run is to keep running one in the short run.

December 15, 2010 Posted by | Politics/Government/Freedom, Societal / Cultural Issues | , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , | Leave a comment

Federal Budget Deficit

Solving Federal Budget Deficit Is a Generational Struggle

The battle between young and old has existed forever, but never has it been so political. Previously, the lighthearted debates were of the “back in my day” or “you kids have it easy” variety. They were confined to debating the merits of current trends in music, fashion, or social mores. But today’s debate will be much more heated and consequential than whether rap music is a legitimate musical genre. That is because it is a generational battle that centers on an increasingly scarce and valuable resource—government money.

After years of willful avoidance, our nation’s long-term budget problem is finally getting the attention it deserves. Brought on by our own economic collapse, spurred by a Greece hovering near default, and re-energized by the recent deficit commission report and IMF bailout of Ireland, government debt is a worldwide problem. The question is how to solve it. After a brief period of wailing and gnashing of teeth by pundits, the recommendations by the Bowles-Simpson deficit commission have already faded into the lame-duck muck. House Speaker Nancy Pelosi provided the most straightforward assessment, calling the proposal “simply unacceptable.” She argued that,

Any final proposal from the [deficit] Commission should do what is right for our children and grandchildren’s economic security as well as for our nation’s fiscal security, and it must do what is right for our seniors.

Sadly, I am not sure Speaker Pelosi’s hypothetical proposal is possible. Doing right by our nation’s children and seniors would be a dream combination for electoral success, but is a much more difficult task in reality. The truth is our nation faces a choice. And while the recent debate has been dominated by the question of whether higher taxes or spending cuts should be the primary means of reducing our deficit, a much more fundamental question exists. It is a question of young and old. Or as Washington Post writer Robert Samuelson said, “It means asking how much we allow benefits for the old to burden the young through higher taxes, lower public services, slower economic growth and weakened national security.”

[Read more about the deficit and national debt.]

One of the primary drivers of our deficit is our aging population. This should not come as a surprise. The CBO predicted the enormous budgetary pressures that would be created by retiring baby boomers as far back as 1996 in a report entitled “Addressing the Impact of the Aging Population on the Long-Term Federal Deficit.” It warned that, [i]f the government made no changes in entitlement programs for the elderly, the forthcoming large increase in the retired population would dramatically expand federal spending.” They further argued that funding these “entitlements through borrowing is not a long-term option.”

Don’t tell that to Washington. In the 14 years since the CBO’s warning, the only reform Congress has made to our entitlement structure is enlarging it. We’re thus left with a problem that demands a political solution. But what should it look like? The menu of options is admittedly unattractive. On the one hand, if we wanted to achieve annual deficits of 2 percent per year, individual income tax rates would have to undergo a 50 percent across the board increase. On the other hand, if we wanted to maintain our entitlement structure as is, Samuelson estimates that we’d have to cut all other spending by 80 percent. Neither of these presents a realistic option for future generations. Fundamentally addressing entitlement spending has also proved politically impossible because of the inevitable backlash of seniors.

Although this debate is necessarily generational, it needn’t be antagonistic. In reality any solution will involve shared sacrifice. Every generation must understand that it has been promised more than the government can deliver. Changes such as raising the retirement age, means-testing our Medicare benefits, or transitioning government healthcare from defined benefit into defined contribution plans, would not be borne solely by the baby boomers. The sooner we change, the sooner we can all play by the same rules, without a playing field tilted in any generational direction.

The generational struggle between young and old is a small battle in a large war against our growing national debt. Only by working together can we solve our growing deficit so that we can be able to tell the next generation with complete honesty, “you kids have it easy.”

December 11, 2010 Posted by | Constitutional Issues, Politics/Government/Freedom, Societal / Cultural Issues, World Affairs | , , , , , , , , , , , , , , , , , , | Leave a comment

Federal Debt

December 7, 2010 Posted by | Constitutional Issues, Politics/Government/Freedom, Societal / Cultural Issues | , , , , , , , , , , , , , | Leave a comment

   

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