A Partisan Post, You Have Been Warned

Last night I read a post by Brad DeLong that made me so mad I had trouble falling asleep. (Not at DeLong, mind you.)  There’s really nothing unusual in there — hysteria about the deficit, people who voted for the Bush tax cuts and the unfunded Medicare prescription drug benefit but suddenly think the national debt is killing us, political pandering — but maybe it was the proverbial straw.

First, let me say that I largely agree with DeLong here:

“I am–in normal times–a deficit hawk. I think the right target for the deficit in normal times is zero, with the added provision that when there are foreseeable future increases in spending shares of GDP we should run a surplus to pay for those foreseeable increases in an actuarially-sound manner. I think this because I know that there will come abnormal times when spending increases are appropriate. And I think that the combination of (a) actuarially-sound provision for future increases in spending shares and (b) nominal balance for the operating budget in normal times will create the headroom for (c) deficit spending in emergencies when it is advisable while (d) maintaining a non-explosive path for the debt as a whole.”

Now, let me tell you what I am sick of:

1. People who insist that the recent change in our fiscal spending is the product of high spending, without looking at the numbers, because their political priors are so strong they assume that high deficits under a Democratic president must be due to runaway spending. And it’s not just Robert Samuelson.

2. People who forecast the end of the world without pointing out why the world is ending. Here’s Niall Ferguson, in an article entitled “An Empire at Risk:”

“The deficit for the fiscal year 2009 came in at more than $1.4 trillion—about 11.2 percent of GDP, according to the Congressional Budget Office (CBO). That’s a bigger deficit than any seen in the past 60 years—only slightly larger in relative terms than the deficit in 1942.”

But does he mention that the reason for the 2009 deficit is lower tax revenues due to the financial crisis and recession? No.

Here’s Ferguson on the 10-year projection:

“Meanwhile, in dollar terms, the total debt held by the public (excluding government agencies, but including foreigners) rises from $5.8 trillion in 2008 to $14.3 trillion in 2019—from 41 percent of GDP to 68 percent.”

Does he mention that, as early as January 2008, that number was projected to fall to 22%, and the majority of the change is due to lower tax revenues? No.

3. People who posture about our fiscal crisis who voted for the Bush tax cuts — shouldn’t shame require them to keep silent?

4. People who say, like Judd Gregg, “after the possibility of a terrorist getting a weapon of mass destruction and using it against us somewhere here in the United States, the single biggest threat that we face as a nation is the fact that we’re on a course toward fiscal insolvency,” as if this is a new problem, when it’s been around since 2004 (see Figure 1) — when, I might add, Judd Gregg was a member of the majority.

(Tell me, was Niall Ferguson forecasting the end of the American empire in 2004, when everything he says now about long-term entitlement spending was already true? That’s a real question.)

5. People who say that we can’t pass health care reform because it costs too much, ignoring the fact that the CBO projects the bills to be roughly deficit neutral, ignoring the fact that the Senate bill has received bipartisan health-economist support for its cost-cutting measures, and ignoring the fact that our long-term fiscal problem is, and always has been, about health care costs (see Figure 2).

6. People who say the Obama administration is weak on the deficit (Ferguson refers to Obama’s “indecision on the deficit”, and he is gentle by Republican standards), when by tackling health care costs head-on — and in the process angering their political base — they are doing the absolute most important thing necessary to solve the long-term debt problem.

7. People who cite “financial ruin” purely, absolutely, incontrovertibly as a political tactic to try to kill health care reform (courtesy of DeLong and Brian Beutler):

8. Joe Lieberman.

By James Kwak

86 responses to “A Partisan Post, You Have Been Warned

  1. james, i appreciate your emotion.

    it’s possible though that at least some of the decrease in tax revenues we are seeing could be permanent. technology is an enabler.

  2. I’m missing the connection between technology and lower tax revenues. Some lower tax revenues may be permanent, but I think there’s a solution for that (which many people may not like).

  3. Economic amateur

    You wrote:

    “The deficit for the fiscal year 2009 came in at more than $1.4 trillion—about 11.2 percent of GDP, according to the Congressional Budget Office (CBO). That’s a bigger deficit than any seen in the past 60 years—only slightly larger in relative terms than the deficit in 1942.”

    But does he mention that the reason for the 2009 deficit is lower tax revenues due to the financial crisis and recession? No.

    Here’s Ferguson on the 10-year projection:

    “Meanwhile, in dollar terms, the total debt held by the public (excluding government agencies, but including foreigners) rises from $5.8 trillion in 2008 to $14.3 trillion in 2019—from 41 percent of GDP to 68 percent.”

    Does he mention that, as early as January 2008, that number was projected to fall to 22%, and the majority of the change is due to lower tax revenues? No.

    Actually, many of those who correctly anticipated the current crisis were factoring such developments (e.g., falling tax revenues) into their equations. The sunny deficit and debt level “projections” you refer to came from incompetent policymakers and economists who did not see the crisis coming.

  4. Count me as a top 10% earner who would happily bring back the 90% marginal income tax rate.

  5. Thought-provoking post. First of all, let’s attack the arguments and not the arguer; civil discourse requires that we ignore — nay, applaud — past positions that have changed due to new input. Second, I agree with you that it is foolish for “deficit hawks” to include healthcare in a deficit discussion, it is only relevant to discuss healthcare’s impact on the deficit. As was realized late in GWB’s second term, the tax-exempt spending on healthcare swallowed up essentially all the economic growth during his two terms resulting in a failure to grow the tax base: doing nothing to limit the growth of healthcare expenditures should be expected to grow deficits as it will further erode the tax base.

    Clearly, there are only two ways to meaningfully reduce the deficit without major upheaval in the government: (1) limit defense/war spending and (2) decrease health spending (by the government and the larger economy in total). The major defense costs are obvious. The only proven way to control the growth of health spending is by rationing. Insurers today ration by taking essentially one of two positions: (a) pay for everything the doctor and covered patient agree should be done or (b) deny any coverage to the patient (through claims of fraud or exclusion). The middle position of assessing whether a service is medically necessary, is fraught: such assessments are generally made with limited information and have difficulty standing challenges in court or Congress.

    We may or may not agree that now is the time to establish the infrastructure for post-recession deficit reduction. If we do, containing healthcare costs must be part of the equation. Tax increases should also be part of the equation, and such tax increases should not be applied exclusively to the rich. Comfortable but by no means rich, I was embarrassed last year to see what a tiny fraction of my income was required of me in federal taxes. I use federally funded highways, clean water, clean air, and inspected food on a daily basis. The benefits of these federal services should not accrue to me by mortgaging the future of my children. However, we should not hamstring economic growth by too strong a focus on debt reduction that we allow tight credit to force the economy to atrophy during a recession.

  6. James: The federal deficit FUNDS private sector savings. Running a surplus in normal times, as Brad recommends and you endorse, mean you are just draining the private sector of savings, and thus increasing its leverage. A completely stupid idea that we’re still feeling the effects from in the US from way back to Rubin I!

    Brad’s surplus all comes from taxing the right, which includes two earner families in california making $200K, seeing half of it taken away, and not being able to afford a house.

    Taxes are much too high in the US right now. The incredibly unproductive public sector is much too large, especially in California.

  7. Maybe a tax on lobbying is needed similar to the UK bankers bonus tax? All payments to members of congress (for whatever reason) to be non-deductible expenses and matched 1:1 (variable over time as required to fund deficit) with a payment to Treasury?

  8. James, part of our freedom is freedom of speech. Technology has given us the tools to promote this ‘speech’ almost instantly, far and wide. We live in the midst of a howling gale of opinions, a Force 12 of views battering us incessantly. You and I, and a million others, as Blog authors, are part of that gale.

    Those that embrace power, those that manipulate, those who lie, those who wish to control, are in this same maelstrom as those who seek the truth, want a better world for the next generation, a fairer society, a most just way of life.

    So for the average joe, such as me, just wanting to work out how to manage one’s life and make the best financial decisions (I’m 65), it’s a bloody nightmare – the more one reads, the more confused one becomes.

    So, in the end, you have to trust your own beliefs, your own standards and just ignore the huge amount of crap out there in the ether.

    Baseline Scenario, for me, is a major contributor to understanding the truth of our present world. So, James, sleep well tonight in the knowledge of the good that you are doing.

    (Having read this before pressing the submit key, I seem to have rather got carried away with my own emotions – should I click that key? Oh, well…)

  9. Here is Canada we have a singlepayer healthcare system funded by taxation. Each provincial health ministry (apparently) can be compared to a large American HMO.

    The way our medical system works: You want the good fortune to — never — need major medical care. But you know the care will be there when you need it. And you know everyone you love and care about, all the people you associate with, have had and will get the medical care they need.

    I personally do not mind paying taxes to fund our healthcare system. Our healthcare system helps to creates a society that I depend on and participate in.

    There are enough problems and sadness when there is a major illness in the family. At the same time Canadians do not have the financial stressors that poor and middle class Americans must deal with when it comes to a major illness. Individual Canadians have little, to virtually no, anxiety on how to pay for personal and family medical costs. The Canadian system is not perfect. But IMHO still far ahead of the American system.

  10. Don’t look at the front of the current issue of Newsweek then… :-(

  11. I have great respect for Robert Samuelson and Niall Ferguson.

  12. Thank you for a post that expresses so well an anger I have felt growing.

  13. “The federal deficit FUNDS private sector savings. ”

    the chicken and the egg.
    You (and Marshall Auerback et al.) state:
    1. there has to be a federal deficit, which then
    2. allows people to put their savings into.

    As long as there is a huge federal debt (= added deficits from previous years), private savings can very well be used for paying down a little bit of that debt (thereby reducing the future debt servicing costs), hence there can be both savings and no current deficit.

    Also, a person’s savings can be handed out as a loan to e.g. a company as a productive investment.

    Hence, I disagree with your proposed order.

    Also, I wonder what the end game would be, if following the proposed order. In the end the deficits add up to a debt so huge, that all the taxes collected are not even enough to pay for the interest on that pile of debt.

  14. “I personally do not mind paying taxes to fund our healthcare system. Our healthcare system helps to creates a society that I depend on and participate in.”

    This is key. Many in Canada feel the way you do. Even if not borne out by the numbers (haven’t checked) there is a widespread feeling of statis and homogeneity up there. Here in the states we’re breaking apart at the seems and there is a huge sense of “us versus them.” People are generally fine paying taxes that support people like them, family. “Why should *I* be subsidizing *those* strange, lazy people, seems to be the fundament (imagine Jimmy Goldsmith) of the problem.

  15. And since taxes function to adjust aggregate demand (NOT fund government), the government is telling us that they want to lower demand – for middle income Americans, that is.

  16. James, have you considered the Neo-Chartalist aka MMT view that since Nixon shut the gold window, things have changed dramatically and that monetary theory needs to be reconsidered in terms the fact that the government has a range of options not previously available, now that it is the monopoly provider of a nonconvertible flexible-rate currency of issue? See L. Randal Wray, Understanding Modern Money: The Key to Full Employment and Price Stability (1998).

    This position is an contemporary application of Abba Lerner’s principles of functional finance, as well as national accounting identities and stock-flow consistency as developed by James Tobin, on one hand, and Wynne Godley and Marc Lavoie, on the other. Highly recommend you investigate this if you haven’t. There are a slew of professional papers available at http://www.levy.org, too.

    According to this view, both deficit hawks and deficit doves are on the wrong track, since they are operating on pre-1971 monetary principles that are no longer operative in today’s world.

  17. thank you for your post. well written

  18. thanks for this, you have articulated what I’ve been feeling as well.

  19. “by tackling health care costs head-on — and in the process angering their political base — they are doing the absolute most important thing necessary to solve the long-term debt problem.”

    James, let me nit that *I* am sick of people who assume that an approach that is mandates w/o competition – as opposed to Medicare-E – will do anything to reduce health care costs. Insurance, pharma, health unCare stocks are up for a reason. Obama is angering “his” base *because* he does nothing to reign in costs (see GAO savings estimates for even the proposed sub-public option). Evergreening, opposition to re-imports, closed-door deals with pharma etc. are something that the victims understand, and cutting Medicare benefits while increasing pay will do nothing to reduce health care costs.

    To reduce health care cost, profits have to be reduced. The ceiling for savings is non-profit. To reduce health care cost, bureaucratic overhead cost have to be reduced resulting directly from the National Health Security “system of systems” that is being Rube Goldberged here one more time (placing the saddle on the egg-laying wool-milk sow). The ceiling to overhead cost reduction is unified single payer, or national health care.

    Medicare-E, Medicare-55, Medicare+5%, Medicare-not-with-negotiated-rates – it is obvious where the savings are bled.

    If Obama was act6ually trying to fix the problem, he would anger his real base – the industry that every broker expects to directly benefit from tax-subsidized mandates.

    So, short comment on your throw-away line: Bah. Humbug.

  20. James Kwak,

    Let me first say that I agree with your view about the US deficit and the importance of health care reform.

    However, you should know that you did the same thing you accused Niall Ferguson of! Review your analysis of the solvency/liquidity debate of banks, your prescription for saving the economy, and your idea of fixing systemic risk since the beginning of the year.

    You and Simon had a tunnel vision of what was wrong and what needed to be done. You and Simon, just like Niall Ferguson, cherry picked data to fit your misguided views and pandered to simpleton populists. Had your views prevailed, we would have fallen into another great depression.

    All those populists that took you seriously failed to see how the US GDP growth can swing from -6% to +2.7%, a 9% swing, in just 2 quarters! They’ve all missed the great financial healing of the stock market running up 60% and all risky asset classes recovering significantly from their lows. Well done you shafting your populists readers!

    Ferguson was wagging his righteous finger just like you’ve wagged yours throughout this year.

    The pot will always call the kettle black! Don’t worry, there are plenty of simpleton populists that likes their pots and kettles and other mundane kitchenware!

    Hey, let’s have a smack down between the pot populists vs. the kettle populists! Populists do have great entertainment value and they are easily motivated to do others bidding!

  21. The Ascent of Ferguson. Alas

  22. Yup. That and unpopular cuts.

  23. Carol: You have it backwards, Marshall is correct.

    The Govt can print money, the private sector cannot.

    The Govt prints money and gives it to the private sector (Govt spending). The govt takes some of it back (Taxes). The difference is the deficit.

    What happens to the money the Govt gives to the private sector but does not take back? It stays in the private sector. Private sector can shuffle it amongst itself as it wishes.

    You disagree with me, you disagree with accounting.

  24. That is exactly correct. We have an over leveraged private sector, a massive lack of aggregate demand, and very very high taxes.

    The solution to this is simple.

  25. Taxes are not necessarily too high – what is the benefit for the cost? I’m not saying that they are not too high, just asking what that tax money pays for…

    Budgets should be made from scratch each time based on priorities and outcomes, not added on to cycle after cycle. This would reduce waste and eliminate programs that have little significant benefit.

    This would probably reduce taxes and keep core benefits (legal system, defense, transportation, education, etc) intact.

  26. “(Tell me, was Niall Ferguson forecasting the end of the American empire in 2004, when everything he says now about long-term entitlement spending was already true? That’s a real question.)”

    I believe Niall Ferguson wrote a piece for the NYT Magazine maybe four or five years ago which claimed that the American people, for a variety of different reasons, would not accept empire as a long-term proposition. Though I can’t remember his argument word for word, I believe he cited the financial costs of empire when measured against Soc. Sec./Medicare obligations and the need for higher taxes, as well as cultural and social biases against long-term overseas military occupations.

    Also, given that a number of people above have mentioned Canadian Medicare, I must say that my stepmother is Canadian, and she once explained by way of an anecdote (a debate she overheard years ago between a Canadian man and an American woman) the Canadian attitude toward the single-payer system: when it comes to health care, Canadians would rather have a good floor for everybody rather than a penthouse floor for just a few.

  27. Machines don’t pay taxes, people pay taxes?

    ;)

  28. James Kwak,
    Although it speaks well of your character as a human being, I don’t think you should lose sleep over such a thing. Maybe it’s the relatively new father in you, but you don’t need to lose sleep.

    James, I guess this means you won’t be joining me and my pit bull “Carter” at the teabaggers protest tomorrow?? I made a flask of moonshine just for you. Our family thought we could have some pork grinds with you and then after that we could watch Fox News and kowtow to Glen Beck. We can’t stay too long cause there’s a cock fight I have to go to later.

    The Republicans have been hypocrites for literally decades James, going back to Goldwater and McCarthy. And just the other day I heard the old liar James Baker on Bloomberg talking about how hard Ronald Reagan worked to cut spending. If you want to see how much great work Reagan and James Baker did on spending look at the multiple graphs in the link here: http://www.huffingtonpost.com/hale-stewart/ronald-reagan-fiscal-dis_b_82370.html Also remember there were no overturned vetoes during Reagan’s administration, so that means ALL of the HUGE GARGANTUAN spending increases in federal government spending had Reagan’s signature right on the front.

    I guess the only government regulations James Baker likes are the ones that save his granddaughter from being sucked by a pool drain until she drowns AFTER THE FACT. Then all of the sudden James Baker thinks the government can be your friend….. but only when it concerns one of HIS relatives should government action be taken…..

    Lieberman is an entity, which I am ASHAMED to say I used to think of as a man I had respect for. He has now proved himself to be a hypocrite, an insurance industry lackey, and a bitter old man. The sooner he jumps over to the Republicans and gets his stench off of Democrats, the better.

    Oh ya: belated warning, this will be a partisan post, so 95% of you Republicans can suck my……..

  29. Here’s a recent DeLong quote:

    “But if you did get an explanation for the lack of congressional action it would go something like this: Attempts to move supply and demand in the market for savings in order to boost spending would (a) increase the national debt burden on future taxpayers and (b) lead to a large decline in bond prices and a boost in interest rates. Why? Because businesses would try to increase their liquidity to support higher spending, driving up interest rates, which, in turn, would cause businesses to cut back on investment, thus neutralizing most or all of the stimulative policies.

    Similarly, if you were to ask the Federal Reserve why it isn’t doing more to reduce unemployment and boost spending and income, the answer you would get is this: Spending is in no way constrained by a shortage of liquidity. We have already done all we can do, indeed we have “flooded the zone” with liquidity. As a result, the Fed is disinclined to pursue additional tweaks of supply and demand in the market for liquidity because it fears such efforts would fuel destructive inflation in the future without boosting employment and spending in the present.

    Both of these arguments are comprehensible; each might well be true. But they cannot both be true at the same time.”

    In essence – you can argue that fiscal stimulus won’t help (and you might be right), and you can argue that monetary stimulus won’t help (and you might be right), but you CANNOT argue that BOTH will fail, and still call yourself a rational human being.

  30. Also, it is important to separate blame from future policy. On the issue of policy, there is legitimate difference in opinion: how much monetary vs. fiscal stimulus, where should fiscal go (short term jobs, or long term infrastructure), etc. Not everyone who is concerned about certain spending pots in the federal budget is out to destroy the federal government.

    However, the blame for the deficit is concrete… Yet Obama is quickly gathering that blame to himself. The Obama Administration has been singularly incompetent at publicly assigning blame – instead focusing (for far too long) on winning Olympia Snowe’s one vote, like a cuckolded husband from a Shakespearean comedy. It has also focused on cooperative policy even while absorbing punishing attacks from those who smile to him in meetings.

    But most of all, the Administration has made many tactical errors – errors in appointing Senators to Cabinet slots who got replaced with weak appointees, keeping Summers/Geithner, supporting the banks so vocally without even talking about blame, assuming it will get the same favorable treatment from the press it got in the campaign, etc.

    It’s hard to stand up for an administration when the administration won’t stand up for itself – the ‘above the fray’ approach is not winning. Lincoln did not win the debates by staying above the fray. He attacked relentlessly.

    Fill in the following SAT style question: If Obama were Neville Chaimberlain, then the NeoCons would be the …”

    (Does that count as invoking Godwin’s Law?)

  31. David Nowakowski

    That is correct. In 2004, Prof Ferguson was writing his book “Colossus” on how AMERICA SHOULD EXPAND ITS ‘LIBERAL’ EMPIRE, and do a better job running the world.

    http://www.epinions.com/review/Colossus_The_Price_of_America_s_Empire_by_Niall_Ferguson/content_189016673924

  32. I mostly agree. Telling point:

    “Insurance, pharma, health unCare stocks are up for a reason. Obama is angering “his” base *because* he does nothing to reign in costs (see GAO savings estimates for even the proposed sub-public option).”

    When Obama’s rating recently dropped <50, I wonder how much is his own base expressing anger/dismay for not doing enough…

  33. “Lincoln did not win the debates by staying above the fray. He attacked relentlessly.”

    Worked out well for a while.

  34. Redleg: There is insufficient aggregate demand, hence high unemployment. You can fix that through higher taxes or higher Gov spending, key is to get the deficit bigger.

    Taxes don’t fund spending, they just adjust AD.

    Since spending is slow to get off the ground, and people get mad when they see it going to vested interests (Obama’s banker friends, unions, etc.) AND it is hard to turn off when AD is restored, tax cuts are better.

    Declare a payroll tax holiday until inflation begins to rear its ugly head. Then declare the holiday over.

    Simple

  35. You make a good argument for stimulus by the Federal government at this time in order to help the private sector. The long run effect of running deficits during good economic times however makes the difficulties of effective stimulus much more difficult when it is necessary for the Federal government to go into to further debt.

    We are seeing this play out right before our eyes.

  36. Neo con answer: Winston Churchill

    Man on the street: the leader of the NSADP

  37. Then what is stopping you from voluntarily giving your money, at that notional 90% marginal bracket to the government? If you think it is the part of citizens in the top 10% to be taxed in such a way, then what are you waiting for?

  38. The Fed deficit (or surplus) needs to be managed to control inflation and employment. Essentially what monetary policy claims to be able to do, but cannot.

    I don’t see what the long run problems are with managing the deficit in this way.

  39. For a reason which would be obvious with a little thinking. A lue is at the bottom of this comment.
    Although you should be cut a break on this; after all, if a Chicago MBA can make the same
    ‘mistake’ (http://crookedtimber.org/2008/02/16/revealed-preferences/, it must be a very difficult concept :)

    SPOILER ALERT

    SPOILER ALERT

    http://en.wikipedia.org/wiki/Collective_action_problem

  40. Thanks for the lue, though it is not quite as applicable as it may seem. Here we have an individual stating that he would “happily” pay 90% of his money to the government at a certain tax bracket, and implying that he is in such a bracket. Talking about collective action and group behavior in this case boils down to: But why should he if no one else is? It is a childish excuse. If he would be happy to do pay these funds, why not lead by example and just pay them now? Certainly no one, but him, is stopping him.

  41. Further, in April of 2004, his book “Empire” spoke of the great and still-rising power of the United States and how she would dominate and, thus, improve the world. I recall listening to him on the radio that May/June — I think “Fresh Air” — explaining our economic dominance and the strength of our fiscal situation.

  42. Here’s what you’re missing.

    First of all, Master of None is probably not an altruist (like everybody). Most studies about the psychology of the utility of money once you get past sustenance/security levels show that it has a lot to do with social status, impressing your peers, etc. I.e., it doesn’t matter that much to your happiness how big your house is, as long as it’s as big/bigger than your peers. Imposing an increase in marginal tax rate doesn’t affect the pecking order in terms of income, so Master of None would not be relinquishing much social status under an increased marginal tax rate, whereas he might be if he simply donated it to the government.

    Second, even if some of his income is taxed at the 90% marginal rate, this doesn’t mean that he’s giving 90% of all his income, which I’m sure you know.

  43. I am very proud.

  44. And that is a good argument for doing both. One may be a waste, but the other will do some good. (OC, if you knew which one would work, that would be different.)

  45. But gov’t money is DEBT, even if backed by taxes. You forgot the interest paid.

  46. Insofar as the debt and deficit, it is impossible to ignore the incredible loss of revenues, especially since the Federal budget is also being swelled by state budget (revenue also) shortfalls. The larger problem is that we are not willing to increase tax rates for those who are making more than half a million a year. In the 1950′s the top marginal rate was 90%. Now it’s less than 40. Think how much we could cure by doing that. But, we all know that in our electronic global economy, this would create other serious problems in collecting. It doesn’t have to go to 90%, but probably 50% would be fine to nearly balance things. But, gee, then most of thos on Capital Hill would have to pay much higher personal taxes. Oh, well, so much for a great idea.

    This just underlines the hopelessness that jumps out at us from between the lines of this post.

  47. I didn’t say anything about raising taxes – I questioned the benefits from paying taxes.

    What I said was that government budgets need to be completely overhauled to the last penny, and reconfigured based on priorities. Spend on the important things and when the money runs out, no more spending. Tax revenue goes up and down without changing rates, and doing this ensures that the important government functions are maintained and identifies the rest of the stuff for what it is: a luxury.

    reference http://www.hutchinsonleader.com/community/raymond-norton/price-government-rightsizing

  48. I was thinking nazis, but I always get the two confused.

  49. It 90% top rate was really the TOP rate, taxing the truly large incomes of the day not the 300k (or whatever it is) where it starts today.

  50. ang: I understand the psychological theories and am calling out exactly what you say, but you may be right, in that I may have it reversed…

    First, broad psychological theories like this are used to describe behavior in general: they are never rules to describe an individual’s behavior in every case – especially when an individual makes a specific claim that they would “happily” take an action that appears contrary to the theory.

    But that is where I may be mistaken…. He claimed he is a top 10% earner: Not top 1% or 5%. Therefore, his income should be at least $150K but well under $199K according to current income distributions. Since he would likely be completely untouched by any notional 90% marginal bracket (for example, if we use President Obama’s standards of who will and who will not see a single dime of tax increase), the implementation of such might just move his social status up, by moving those above him down by putting what is almost a full cap on their incomes. Now, this person in the top 10% is at much greater social parity with those who had previously had much more.

    In other words, if we are to use broad psychological theories, along with generally current tax claims by politicians, he is essentially saying: “Count me as a top 10% earner who would happily bring back the 90% marginal income tax rate…. for people who make more than me.”

    Otherwise, a broad theory is not an excuse when an individual makes a specific claim of what behavior he would “happily” take.

  51. Economists count on the fact that the principal is created but the interest is not, forcing the overall economy to grow infinitely to keep up with the payments. It does make some sense. Create the principal, but never create the interest for the current year in order to force next year to be economically bigger just to service the debt. My only problem (that no economist has explained in a sensible way to me yet) is that I’m not sure of how you sustain exponential infinite growth in a universe where you’re bounded on both extraction rate of resources and absolute amount of resources available.

    I suspect they ignore the question because they assume there’s no constraining resources in the system that we’re short on yet. Feels like they’re assuming a can opener, honestly.

  52. So basically investment comes down to an almost religious decision on faith in one’s self.

    That scares the hell out of me. I’m awful at picking winners and losers.

  53. You are not alone!

  54. How many breast cancer patients could have their treatment paid for with the taxpayer dollars spent on bank executives’ salaries and credit default swaps which bankers had ZERO capital for??? I don’t suppose Kay Bailey Hutchison is interested in that number is she??? I mean we won’t see any sham press releases or phony interviews from her offices with those math figures will we??? If you have any survival instincts you won’t hold your breath waiting for that.

    A no vote stands for letting big bankers rape and pillage American bank depositors and taxpayers more. Check and see if your House Representative voted no and wants large bankers to sodomize you for more bankers bonuses and inflated salaries.
    http://politics.nytimes.com/congress/votes/111/house/1/968

  55. interest paid works the same way. it’s just another form of Govt spending, and the Govt can do it without limit, to whatever degree it wants.

    Govt can set interest payments to zero if it wants and not do this any more (like it is now).

    Or Govt can set interest payments higher.

    Govt money isn’t backed by taxes. Taxes create the demand for Govt money (how else can you pay them?)

  56. benefit of paying taxes is that it keeps you out of jail!

  57. I have been reading this blog for a couple of months and have really enjoyed many of the items posted but I have to admit that the number 8 item in this post was spot on and it made me laugh out loud because it is so true.

  58. Of course gov’t money is backed by taxes. A tax base is the one asset that a government has – take that away and government goes away, especially in a world of fiat money.

  59. Redleg:

    You have it exactly wrong, especially in the world of fiat money.

    Govt deficit spending is what gives us the private sector the money it needs to pay taxes.

    If the Govt ran surpluses, eventually the private sector would run out of money to pay taxes.

    The Govt can print money. It does not need money it can make itself from those who are unable to make it. Think about it. This is just accounting.

  60. Wow. I cannot decide if Kwak is simply delusional, or a symptom of the overwhelming parasitism sweeping America.

    Let me answer your doubts and frustrations.

    Part 1 of the puzzle: As a producer, or host, that the parasites are feeding on, here are some stats for you:
    1. 22,000 federal employees make over $170k
    2. 63,000 make over $150k
    3. 320,000 make over $100,000

    Part 2 of the puzzle: Only 9% of Obama’s cabinet have private sector experience (translation: only 9% have ever had a real job). Historical average – approx 50%.

    Part 3: Obama (and Bush before him) have presided over an unprecedented expansion of government – their next target is the energy industry and healthcare (budget neutral? Hahahahahahahahahahahahaha)

    Part 4: GOVERNMENT DOES NOT CREATE ANYTHING. It only grows from tax revenue from those of us who actually do create and build the world around us. So growing the government can only happen at the expense of the producers of the world.

    WHY IS THE ECONOMY REFUSING TO MEND ITSELF? Those of us who slave away, build real things, and have the fruits of our labor siezed from us to be given to those who didn’t earn it…. F*** you.

    We have chosen to shrug. Whats the point of working if its all taken away from you? Good luck trying to pay for all your big government crap. Tax revenues are going to keep plunging, and you’re going to be up sh** creek. Don’t believe me? Just keep watching the news and the world around you.

    As for me? I’m a producer. I’ll always survive. Without me, you won’t.

  61. Well played.

  62. But the gov’t doesn’t print money. The Fed does.

  63. Lawrence Baxter

    James, your best post ever!

  64. Actually Redleg, the Treasury does. And the Treasury is part of the Govt. The Fed, while technically not part of the Govt, is, in fact, part of the Govt.

  65. Paralithodes,

    You’re still missing the point about collective action. I am also willing to be taxed at a higher rate, IF it would accomplish a social good. Now if I alone (or Master of None & I) voluntarily gave extra money to the government, it accomplishes nothing except to make us poorer. But if everyone who earned income at our level were taxed at a higher rate, and the billions raised were used for a social good (pay for healthcare, reduce the deficit, etc), then we would be accomplishing something with our extra taxes. But there’s no point in doing it alone. I hope you can see this point.

  66. Not sure I saw it quite like that. More just, in the end, listening to one’s intuits. Sort of along the lines of think three times, measure twice, cut once. Doesn’t guarantee accuracy but it helps.

    As an example, while I truly don’t know where the US economy will be in, say, 2 years time, I am tending to think it is more likely to be weaker than now. Thus this leads me to ponder greater investment in fixed interest vehicles. While not immune to the views of those who recommend otherwise, my intuition will be reinforced by commentary that supports my developing model of the next 24 months, and so on, and so on.

    Scares the hell out of me as well but is there a better, as in more reliable, technique? Professional advisers don’t have that good a record.

  67. I may be missing the point. Or I may just thoroughly disagree with using “collective action” theories as an excuse for not taking an individual action when you clearly recognize it as the right thing to do. Certainly if you are at the 10% point, a marginal bracket of 90% will not make you “poorer” since you will still be in that 10% group, ceteris paribus. And who can deny that every additional tax dollar collected is an additional dollar for the government to spend or use to cover existing obligations? It is not like there is any additional overhead in you voluntarily claiming fewer deductions and claiming less of a refund. You have other options as well. If the two of you gave 90% of your money above a certain income point to a non-profit dedicated to providing health care to those who could not afford it, you would make a significant contribution with potential immediate impact, to a social good.

    You are essentially saying that you personally will not do what you think is right because you don’t want to hurt your own social status relative to your income group peers and you are using a broad theory as an excuse. You are saying that you will happily do the right thing – but only if everyone else is forced to do it as well. You will only sacrifice something if all others at or above you are forced to sacrifice at least as much.

    Research shows that so-called “conservatives” are more likely to give (and when they do, to give more) of their money to charity than so-called “liberals.” Yet the former is very often described as “greedy” by the latter because they are typically against increased taxes. How exactly does this square with these collective action theories?

    If your point is that it is valid to use a broad sociological or psychological theory (the best psychological theories with statistically significant backup rarely explain the majority of variance between peoples actions), as an excuse for individual refusal to do what they know is the right thing to do, then I will continue to “miss the point.” Especially from people actually have knowledge of these theories and use them for such excuses.

  68. Paralithodes,

    Yes you are (still missing the point). You can use whatever words you like to describe this (e.g. refusing to do what is right, etc). What I’m telling you is a fact of simple human motivation. People will perform unselfish actions as a group to achieve a goal they believe in; they will not perform the same actions individually if they deem individual action likely to be ineffective. I’m not sure I can state it any simpler than that and I have no interest in arguing with you.

  69. That’s an interesting fact, devoman, especially considering the fact that history is replete with examples of individuals performing unselfish acts to achieve a goal that they believed in. And for every example that could be found, there are likely many others that are unknown. The world has been full of martyrs.

    You use the excuse that your individual action would have no impact, but we should both know that is false.

    First, every 90 cents of every dollar you earn above that 90% marginal rate would be a 90 cent impact.

    Second, the personal impact on you, of self-taxing at a notional 90% bracket, vs. whether everyone was taxed at that same bracket, is nothing. Why, in this case, should it matter, since at the end of the accounting cycle you might come out with exactly the same amount of money under either scenario?

    Third, numerous individual actions can leading to collective efforts for a goal, without simply waiting for the ruling power to create a new law to apply to everyone. Here in this one obscure thread, we already have you and Master of None! Between the two of you, this may be $10′s of thousands! Perhaps this may pay for an additional high-tech prosthetic for a kid returning from war, who may have taken an individual, altruistic action.

    As a side point, I would be reluctant to describe any social or psychological theory as a “fact” that describes all people in all cases (which is essentially what you are doing by using it as an excuse in an individual observation). This simply does not exist in the social sciences.

    There are also other psychological theories about when a person *claims* that they would take an altruistic action under certain conditions, yet do not actually take them when given the opportunity. Some may say that this is in itself a method by which some people try to project elitism and superiority. The lay person may simply say: “Put your money where your mouth is, before you try to force your view or morality onto everyone else.”

  70. Agoraphobic Kleptomaniac

    A couple of points Paralithodes:

    Conservatives “give more to charity” mostly due to the fact that conservatives are more likely to be 1) Rich and 2) Churchgoing, and church tithes are considered charity. I’m sure if you adjusted for these factors, the gap would either disappear or drastically decrease.

    You’re missing the point of where this started, and what Master was saying. If he threw 90% of his top mariginal income at the government, they wouldn’t know what to do with it, because it’s not allocated for in the budget. Yes, make a joke about government and not using money they don’t even have, but your argument is invalid and simplistic. For the government to do good with that money, they have to do things like pass a bill that gives everyone healthcare with that money, or expand welfare, or pay for low income housing. Tossing money hand over fist at the government isn’t going to do anything without a program to spend that money. To retort with “so do it” is as intellectually honest as saying “Nuh-uh!”

  71. 3-D: “Economists count on the fact that the principal is created but the interest is not, forcing the overall economy to grow infinitely to keep up with the payments. It does make some sense. Create the principal, but never create the interest for the current year in order to force next year to be economically bigger just to service the debt. My only problem (that no economist has explained in a sensible way to me yet) is that I’m not sure of how you sustain exponential infinite growth in a universe where you’re bounded on both extraction rate of resources and absolute amount of resources available.”

    First, and most important, the economy is not forced to grow infinitely to keep up with interest payments. Two things happen. One, people default on loans and go bankrupt. Two, government debt increases in nominal terms, reducing the need for people to go bankrupt in order to create money. These things are true whether the economy grows in real terms or not. Yes, it does mean that there will be an eventual reevaluation of the currency. For instance, when the smallest U. S. bill being printed has a face value of $10,000, it might be exchanged for a “new” bill with the face value of $1. That still might not buy a cup of coffee.

    As for exponential growth with limited resources, Nick Rowe gives a good discussion at http://worthwhile.typepad.com/worthwhile_canadian_initi/2009/10/economic-growth-the-universe-and-the-meaning-of-life.html#more . The key idea is that you can have economic growth without using up limited resources.

  72. “Since spending is slow to get off the ground, and people get mad when they see it going to vested interests (Obama’s banker friends, unions, etc.) AND it is hard to turn off when AD is restored, tax cuts are better.”

    Than is plausible. However, to the best of my knowledge, the empirical data about which is better is not clear. But in the current circumstances, should we be quibbling about which is better? Both tax cuts and spending are effective, and both should be employed.

  73. The US economy thrives on public innovation. Many people fail to realize that the DOD and other governmental institutions developed the internet, containerization (what makes global trade possible), etc. We are currently funding biotechnology in a large way, which will be the source of our growth for the coming decades.

    Bottom line is only hacks, who do not know what they are talking about, use the excuse “those of us who slave away, build real things, and have the fruits of our labor seized from us to be given to those who didn’t earn it.” Most of the economy relies entirely or at least partially on the government (banks, drug companies, health care, agriculture, you name it).

    The high-tech industry is almost entirely developed through public funding and grants to public/private universities and research labs. The taxpayer funds development, once the technology becomes viable corporations seize the technology and profits. American capitalism is really lemon socialism. The loss making capital-intensive development process is socialized by the public sector, any profit is privatized. Then people “who slave to build real things” complain about getting taxed when in reality the taxes are really more of a removal of subsidy.

    The US economy relies on a very dynamic public sector. Private corporations have an internal deficiency for long-term growth. Management in private corporations must as an institutional imperative focus most on the next quarters profits or next months stock price. They would never dream, or be allowed to by their shareholders, of funding R&D at the level of government. Shareholders would not bare the risk and could not stomach too great a loss.

  74. Interesting points. The linked article references research showing that conservatives are more charitable across all income levels, despite that “liberal” families are actually more “rich” than “conservative” families. Your first point, which is based on nothing more than a mere stereotype in the first place, is false. http://www.realclearpolitics.com/articles/2008/03/conservatives_more_liberal_giv.html.

    Your second point about it being church tithes may be partially true, but I have not reviewed any specific research on the matter and given your false assumptions for #1, cannot simply take you at your word.

    Your argument that the government “wouldn’t know what to do with [the extra money], because it’s not allocated for in the budget” is absolutely absurd. It ignores one very specific reality. Even devoman uses the example that extra money could be used to “reduce the deficit.” Yes, the government does not need to budget additional tax revenue to reduce the budget deficit: Every extra dollar collected above the projected tax revenue directly reduces it all by itself!

    I’m not quite sure how you boiling down my argument – in your words – to “so do it” is intellectually dishonest on my part. And I’m not quite sure how it would be intellectually dishonest even if those were my simple words. But even if I was, I’m not the one claiming I would “happily” pay higher taxes in order to promote the social good, while implying that I could easily afford it, but then incorrectly using (or allowing others to incorrectly use) broad psychological theories as an excuse to take no action before being forced to do it. Is that your definition of intellectual honesty?

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  76. 3. People who posture about our fiscal crisis who voted for the Bush tax cuts — shouldn’t shame require them to keep silent?

    5. People who say that we can’t pass health care reform because it costs too much, ignoring the fact that the CBO projects the bills to be roughly deficit neutral, ignoring the fact that the Senate bill has received bipartisan health-economist support for its cost-cutting measures, and ignoring the fact that our long-term fiscal problem is, and always has been, about health care costs (see Figure 2).

    These two statements are total loads of s^!t!!!! A vote for the Bush era tax cuts places you in a position where you can no longer challenge the actions of the majority????

    Since the Dems have voted in near totality for this abortion of a bill, does that mean that they no longer have the moral right to challenge any future piece of legislation designed to get our fiscal house in order, such as massive and draconian cuts in every federal department? That seems only fair and reasonable, based upon your logic.

    So the Bush era tax cuts caused our fiscal crisis? Show me the proof!

    You say “ignoring the fact that the CBO projects the bills to be roughly deficit neutral, ignoring the fact that the Senate bill has received bipartisan health-economist support for its cost-cutting measures, and ignoring the fact that our long-term fiscal problem is, and always has been, about health care costs (see Figure 2).”

    You conveniently left out the fact that the CBO also stated that the true 10 year cost of this bill once implemented will be $2.3 Trillion. Most of the deficit neutral claptrap is based upon the fact that we will be taxed for 4 years before any benefits are paid. The next 10 years is the real measure of the outcome of this bill, and it will be HUGELY EXPENSIVE and WILL INCREASE THE DEFICIT, and IT WILL NOT CONTROL COSTS.

  77. “Part 2 of the puzzle: Only 9% of Obama’s cabinet have private sector experience (translation: only 9% have ever had a real job). Historical average – approx 50%.”

    We just *had* the MBA Cabinet, the CEO Cabinet. Perhaps fewer corporate CEO types are what the USA needs.

    “Part 4: GOVERNMENT DOES NOT CREATE ANYTHING. It only grows from tax revenue from those of us who actually do create and build the world around us. So growing the government can only happen at the expense of the producers of the world. ”

    A hint – caps don’t make lies anymore true.

  78. Please consult somebody who has common sense. One person kicking in some money is nothing; a million kicking in some money starts to matter.

    I’m amazed that anybody is making this argument anymore; do they still expect it to work?

  79. “Thought-provoking post. First of all, let’s attack the arguments and not the arguer; civil discourse requires that we ignore — nay, applaud — past positions that have changed due to new input. ”

    Not if the new input was that The Other Side is in charge.