Does The U.S. Really Have A Fiscal Crisis?

By Simon Johnson

The United States faces some serious medium-term fiscal issues, but by any standard measure it does not face an immediate fiscal crisis.  Overindebted countries typically have a hard time financing themselves when the world becomes riskier – yet turmoil in the Middle East is pushing down the interest rates on US government debt.  We are still seen as a safe haven.

Yet leading commentators and politicians today repeat the line “we’re broke” and argue there is no alternative other than immediate spending cuts at the national and state level.

Which view is correct?  And what does this tell us about where our political system is heading?

Our main fiscal issues are three (see my testimony to the Senate Budget Committee earlier this month).  The most immediate problem is that our largest banks and closely related parts of the financial system blew themselves up in 2007-08.  The ensuring recession and associated loss of tax revenue will end up pushing up our government debt, as a percent of GDP, by around 40 percent.  Very little of this debt increase was due to the fiscal stimulus; mostly it was caused by lower tax revenue, because of the slump in output and employment.

The financial system poses a major risk to our fiscal outlook over the next few years.  Unless you think that the Dodd-Frank reform bill really ended “too big to fail” and the associated excessive risk-taking culture, you should worry a great deal about the boom-bust-bailout-fiscal damage scenario that the Bank of England now refers to routinely as the “doom loop”.

Of the national level politicians now pushing for spending cuts, almost none showed up to fight to contain the fiscal risks posed by our largest banks.  The Brown-Kaufman amendment to Dodd-Frank – which would have placed a limit on the size and debt (relative to equity) was supported by 33 Senators, only a handful of whom were Republican.

But, then again, the Obama administration also fought hard against Brown-Kaufman.  Treasury Secretary Tim Geithner argues that the TARP bank bailouts will end up costing the tax payer very little.  He is forgetting the broader fiscal damage done by the collapse of the real economy and the loss of 8 million jobs.

Second, we need to control healthcare spending as a percent of GDP.  The issue is most definitely not about cutting the current level of such spending or immediately reducing the benefits in Medicare (although if you have ideas for that, send them along).  But in the projections, by 2030 or 2040, the growth of healthcare spending ruins us all – whether or not we get the government to pay for it.

During the healthcare debate of 2009-10 there was very little attempt to explain this issue and discuss the options.  The administration made a half-hearted move in this direction but backed away as soon as leading Republicans began to claim there were “death panel” proposals on the table.

Third, our tax system is completely antiquated.  For the same level of tax revenue relative to GDP, we could greatly reduce the distortions (e.g., disincentives to work) just by modernizing.  The right and the left agree we should tax consumption more and income less, but neither is willing to make any kind of meaningful move towards a value added tax (VAT).

The right seems afraid that this tax will be too effective and power an expansion of government.  The left thinks a VAT is necessarily regressive (imposing more burden on poorer people), despite all the evidence that the impact of VAT depends on how it is designed – because you can choose what gets zero taxes (e.g., baby clothes) and high taxes (e.g., yachts).

The only room for bipartisan consensus here seems to be what we got in December 2010 – a big tax cut.  Cutting taxes is nice, but only it is consistent with keeping the budget on a sustainable path.

How does the Republican initiative to cut spending fit in with these budget issues?  Not very much is the generous answer.  Their proposed cuts at the federal level are for discretionary nonmilitary spending, but this is small as a percent of the budget (and therefore of the economy).

But the problem here is bipartisan – as it was with the tax cut last year.  None of the leadership on either side is willing to talk openly about how our biggest banks caused great fiscal damage.  No one is willing to explain why our healthcare costs continue to rise.  And no top politicians currently champion real tax reform.

The Republicans have seized a moment.  To them, this is not really about fiscal responsibility; this is about an opportunity to shrink the size of government.

But the Democrats have played perfectly into their hands.  The heart of their mistake was the president’s refusal to explain clearly how the financial system produced a recession that has pushed up our national debt.

Both sides of our political elite have contributed to the sense of fiscal crisis.  And as we continue down this path – dangerous big banks, out of control health care spending, significant tax cuts, small changes in nonmilitary discretionary spending, and irresponsible rhetoric on both sides – we are well on our way to a real crisis.

An edited version of this post appeared this morning on the’s Economix blog; it is used here with permission.  If you would like to reproduce the entire post, please contact the New York Times.

99 thoughts on “Does The U.S. Really Have A Fiscal Crisis?

  1. Why not a progressive consumption tax ? Replace the PIT, the CIT and the Estate Tax with a progressive comsumption tax. I am perplexed that only Bob Frank seems to be for this.

  2. Why not HR 6550, The National Emergency Employment Defense Act, which would un-privatize the Fed, bring the central bank into the Treasury Dept., and end fractional reserve banking?

    Well, we all know why not. But why don’t Dr. Johnson and James Kwak investigate it and write about it? Dennis Kucinich is expected to re-introduce the bill this month.

  3. @Simon,

    Nice post and I generally agree with your recommendations. I’m an admirer of your work and commentary, but unfortunately cannot say the same about your colleague Mr. Kwak.

    Take his last post which isn’t much more than a polemical, distorted rant against his favorite pinata, David Brooks. If he’s going to compare public versus private sector compensation, he should have a *real* analysis that includes pension benefit comparisons.

    I’d like to come to for some real insights as opposed to the lefty version of Fox News that Kwak seems so determined to create. If that’s his ambition, then he should find notoriety elsewhere and not damage your site’s and your own credibility.

  4. Nice post, but Simon should ask someone to proofread for him.

    (1) “Very little of this debt increase was due to the fiscal stimulus; mostly” huh?

    (2) “Cutting taxes is nice, but only it is consistent with keeping the budget on a sustainable path.” HUH??

  5. Obviously we do. Do your standard measures include government revenues as a percent of expenditures? At trough interest rates? A mild backup in rates will create an immediate fiscal crisis, given the short-term funding of our national debt. Safe haven effects of the Middle East turmoil on Treasuries and the dollar have been negligable. Long-term fiscal solvency depends on managing healthcare costs, but the market may also “demand” short-term sacrifices.

    But there is something else. The role of the banks in the crisis is not in dispute, but the size and growth rate of the economy pre-crisis was a consequence of the credit bubble and growth of the FIRE industries that they were a part of. These obscured the true baseline for sustainable growth–which is not reflected in official projections, and perhaps not yours. Factoring this in, and unless and until we experience the next productivity revolution, all projections are much worse: social security becomes an issue very rapidly, revenue assumptions go out the window, and so forth.

  6. Unfortunately, our President…for whom I voted twice in “08…is “out to lunch”! He has proven that he is a “ditherer”…not a LEADER! And as for cretans like McConnell, “Boner”(sic) and other members of the “low forehead set”, if they are inspired enough to close the bathroom door, it’s a major accomplishment.

    Without an inspiring leadership figure (think FDR or Teddy) the country will continue to drift and dither until its national pride and initiative are totally GONE (which won’t take long, given the Repugnicans paranoid and destructive tendencies).

    For my five close buddies who gave their all in WWII for what was then a WONDERFUL country….”Sorry, guys! died in vain” As for me, I’ll be re-joining them soon and hope to have a seat on the “50-yard line” for the FINAL SOLUTION….somehow, that term has certain “ring” about it now.

  7. . . kinda reminds me of the climate change question. Spin from all sides makes it hard to know the truth.

  8. Re: Healthcare spending busting the budget.
    I just got a pair of sneakers (for diabetes) that Medicare paid $353.00. They were your everyday K-Mart garden variety. Also a recent A-Fib episode at the ER and an overnight stay that cosr Medicare $6,800. Was treatment necessary? Yes, but not at these greedy prices. The doctors and hospitals and related providers are busting the budgets. The problem is too many hands in the pie and no morality anywhere.

  9. Simon I surprised at you. Here we sit with nearly 100% debt to GDP here in the states with a 10% GDP budget deficit and a even larger structural deficit problem with Healthcare and you don’t sound the fiscal alarm.

    Can there not be a bubble in US treasuries. The market did not price in the Greek crisis until way late in the game and was treating them like they were good as German Bunds.

    In three years time we are going to be sitting some where between 120% and 130% debt to GDP with no plan to reduce the relative percentage and our long term structural deficit with Healthcare will become surprising short term. By the time growth gets the deceit under control, a big if, we will be due for another recession and then what. We don’t have the internal Savings or political will of Japan to sustain over 150% debt to GDP and Japan is now looking pretty unsustainable in its own right.

    We need to get our fiscal house in order otherwise we risk losing our reserve currency status and destabilizing the world economy in the process possibly producing a recession.

    We may not be broke now but we will be if we don’t start reforms today. Blame it all on the bankers, that fine I do to but it does not change we are heading to broke at a pace that should scare an economist of your stature.

  10. I rarely post any more, since I don’t believe
    that Messrs Johnson and Kwak read what we write.
    I’ve posted about Health Care Costs before, and
    both the above gentlemen completely ignore the
    data. But I have a few minutes so I’ll try
    1. The U.S. pays 16% of GDP on health care.
    The rest of the developed world countries —
    Japan, Canada, England, France, Germany,
    Denmark, Sweden, etc — pay less than 10%
    of their GDP on health care. I suspect that
    this disparity may be because these other
    countries have Single Payer, aka Socialized
    Medicine, whereas these terms frighten us
    USAns to death.

    2. All these other countries rank above the
    U.S. in most measures of health, whether it
    be longevity, infant birth weights, average
    age of primaparas, women’s health during
    pregnancy and childbirth, etc etc.

    There! I’ve said it again. My duty is done
    for another couple of months.

    Best wishes to all,

    Alan McConnell, in Silver Spring MD

  11. Middle Class and Upper Class have already been taxed considerably on their incomes. Some were still able to save much. To now tax them at 20% on savings is ridiculous. What about all the seniors who have savings? The purchasing power of those savings would now go down significantly.

  12. It is one thing to understand that VAT can be made progressive. It is quite another not to notice that US political culture has been undoing progressivity for some time. The same bunch of guys would be in charge of tax policy, with the same motives to resist progressivity, as is the case with our current system. The generally understood risk in any tax policy reform is that the same greedy mustards who lobbied to get the current system will lobby to screw up any new one.

  13. The deficit doesn’t matter. You’re quite right we need to seriously restructure the banking system, reform the tax code and as Allen notes above, moved to a Medicare for All system, but between here and there we have a trillion dollar output gap to fill. None of these are possible and the economy will not improve until you (well not just you personally Simon, all of us) accept that the deficit doesn’t matter

  14. Others on this site DO read and pay attention. Please do post more as it is always good to get as much input as possible when formimg opinions.

  15. Explain please how Obama would wish to oppose the wishes of the financial services industries when he is their bought and paid for servant.

    Recently his boy Geithner made statements which translate well to “the business of America is financial services.”

    So what I say is let us get to the “big one” as soon as possible and just get the kabuki over with.

    The waiting is the annoying thing.

  16. The original proposer of a consumption tax, which he called an expenditure tax, in modern times was Nicholas Kaldor in his 1955 An Expenditure Tax. It was tried in a couple of countries with mixed results. He thought that one of the reasons for its limited success was the timid nature of its implementation.

  17. the upper class taxed significantly on their incomes, in what world do you live? The very rich get most of their income from cap gains and dividends, now taxed at 15%. They pay very little in payroll taxes, but a minimum wage worker is taxed 12.4% (temp 10.4%) on the very first $ of income, and all of his income. No the rich are FAR from over taxed

  18. I would take timmy with a grain of salt. Even if what he says he believes, the English and parts of Europe have held that title for centuries. If he wishes to jump on that bandwagon its only because others took a wrong turn and still found a way to turn a profit, now Timmy wants us to try to do the same. And in either case, the initial downfall (or big one as you put it) will first come from abroad when ever it comes.

  19. As for death panels within health care reform, I hope it’s true. When I’m slobbering all over myself and crapping my pants, I hope they come knocking!

  20. “Spin from all sides makes it hard to know the truth.”

    And that’s not just about climate change or the budget. In a way, it’s the fundamental problem in our society–most of the rest of our troubles derive from this, at least in part. The world it too complex for anybody to really have a grasp on the facts of more than a small piece of it. How can I know the truth about most of what I hear on the radio or read in the blogs/newspapers, etc.? Only when it touches on my areas of personal expertise is that really possible–and even then not always achieved.

    When we can’t count on knowledgeable people to provide a disinterested summary, something that is easy enough to undestand but doesn’t distort the essence of the issues, then we lose our basis for democracy. The public is manipulated non-stop by spinmeisters, and ignorance grows exponentially over time. Behind this fog of disinformation, the oligarchs have free rein to build their kleptocracy.

    I’m not sure when our culture ceased valuing integrity–but until that gets reversed, nothing can change.

    Sorry for the preachy tone of this comment.

  21. For all the reasons you mentioned, parasitic financial sector, antiquated tax code and completely inefficient healthcare system, the US definitely is in the midst of a fiscal crisis. The worse I’ve seen in my life.

  22. Economist Dean Baker has some great ideas about reducing the cost of Medicare, as well as US Health Care in general.

    For example:

    1. Allow Medicare to reimburse doctors in foreign countries for providing big ticket services to US patients. Doctors in these other countries could provide surgery and other services at a lower cost. Most American workers have had to face outsourcing. Why shouldn’t doctors?

    2. Allow foreign doctors to immigrate to the US and make it easier for them to become licensed here. Most American workers have had to face increased competition from sizable immigrant labor pools. Why shouldn’t doctors?

    It’s also true that big hospital corporations virtually control the markets in some US regions. Why shouldn’t they be broken up and forced to compete more aggresively?

    Finally, as Dr. Andrew Weil has said over and over again: It’s not a health care system. It’s a disease management system.

    These high tech, expensive, patented medicines and treatments cost far too much compared to the benefits they deliver. We could get equivalent or nearly equivalent results for much less money. But Big Pharma and the FDA keep America in a rut.

    What a joke.

  23. Hey that’s not preachy, it’s a good rant!

    What scares me — aside from all the spinmeisters – is reification — how with our ever increasing power of communication we can create our own realities, blind spots, and self-fulfilling prophecies.

  24. @ MSM
    “For the reasons you mentioned, parasitic financial sector, antiquated tax code and completely inefficient healthcare system”

    I’ll start by veering off subject just a bit for all is relevant . Rahm Emanuel was just elected mayor of Chicago by a landslide. Why? Daily* retires and brother gets seated at right hand of Commander and Chief. Please just take notice of the timing. David Axelrod and retired mayor Daily* – Rahm will work the Chicago magic (phones) that runs the state,
    making for C&C Obama’s reelection bid?
    President Obama is a laggard, a reactionary, and not a very good one at that. He can’t innovate or implement without others doing his legwork, period! He is a terrible communicator in MHO, and certainly not a visionary. For two years he watched the countries poor burn in default doing nothing for the “Yes We Can” crowd that put him where he is, how’s that for change we can believe in? Rather he let the financial sector run amok while force feeding his doomed too fail ,”Health Care Reform Law” down the public’s throat instead of a socialized single-payer adoption…simply pathetic!
    Next we have the antiquated “Tax Code” which keeps his health care goons in control…monitoring the citizenry too toe-the-line? Corporate Tax rates at 28% has forced America’s Multinational only to nest on foreign soil – now isn’t it quite ironic that they now like their new sovereignty? Yes, indeed, they figuratively, and literally have flown the coop bringing their fledgling siblings along the tradewinds of a freelance flightpath! Hooray?
    We all know the outcome of a VAT? Yea, it will end up on the editing floor of “The Big Pharma/ Health Care Providers”, “The Big Six Banksters/Financial Behemoths”, “The American Born/Bred Multi-National’s[?]”, and indiscriminately censored by the K-Street *Gang*! Just look at the Heath Care exemptions today for big Corporations such as MacDonald’s, WalMart, and others, just to name a few of the already thousands of freeloaders given amnesty already…disgusting to say the least!
    Lastly , as I touch my hand on the pulse of this fluid “Poetry-In-Motion” Health Care debacle that doesn’t drop a dime off the deficit for four years, and ya wanna know why it’s time to clean house,…? Yea “Main Street Muse” you nailed it!

    Thankyou, Simon and James as always for your great digging for “America’s Sake”!
    PS. You both are the greatest :-))

    God Bless You, Julian Assange!

  25. Viagra put “Big Pharma” and the “FDA” where they are today…need I deliver the one-liner…?

  26. We do not have anything resembling a fiscal crisis. We do have a failure of will to apply appropriate countercyclical fiscal policy in the face of 16% unemployment. //so it goes …

  27. “The left thinks a VAT is necessarily regressive (imposing more burden on poorer people), despite all the evidence that the impact of VAT depends on how it is designed – because you can choose what gets zero taxes (e.g., baby clothes) and high taxes (e.g., yachts).”

    This is the U.S., you know. In the U.S. a VAT would surely be regressive. If you really want a progressive VAT in the U.S., start with a Federal luxury tax, and go from there. (Fat chance, eh?)

  28. Hmmm. It seems like the U.S. does have a Federal luxury vehicle tax. Par’n my iggerance. Maybe it has other luxury taxes, as well.

  29. Unless congress has passed another federal luxury vehicle tax, the last one expired Jan. 1, 2003 after being in effect for the previous 10 years. Considering which party was running the country at the time, I seriously doubt they passed any further luxury taxes.

  30. The answer is a resounding no!!! There is no fiscal “crisis,” however there are some concerns which will need adjustment to properly address.

    What we have is a political crisis. The stentoric shouts regarding a fiscal crisis are just the next stage of the elitist battle to control a nation of 325,000,000, about 99% of which are nebish ostriches who would rather let politicians, pundits and halfwits do their thinking for them. We have a government which is clearly unpopular (both Dems and Reps have a popularity rating far below 50% in all polls recently taken). We now have the best government money can buy and will continue to have that until the election laws are changed to allow for more responsive, responsible and rational government in lieu of our present plutocratic rule. Anyone who says otherwise is either stupid, brainwashed, or part of the problem, or all three.

    True, as many have said, including many on this blog, our present fiscal path is unsustainable. The reasons are many, but the solutions can’t be had with our government in full control of those who would not permit rationality to triumph over massively well funded special interest politics.

  31. There is no fiscal crisis yet, but the share of government in national income is going up while the tax base is shrinking. Given that the status of reserve currency (which grants the Us unique seignorage opportunities) requires a very credible military superiority (and the belief among allies and foes that that power will be used ruthlessly), so the myth of defence being a national luxury offers no relief either to high-spending socialists.

    The only way out is to shrink entitlements, and under the current circumstances no one will stand in the way. Wisconsin is showing how to do this even in a state with a strong communautarian tradition and a high percentage of Democratically leaning voters. But further tax cuts first, otherwise the Beast may yet survive. Once that is done, a flat tax would be OK, or even a VAT.

  32. . . or, as some have said here, we can shrink the bloated costs in the “entitled” military and medical establishments — and also eliminate the cost of the blood sucking medical insurance game by going to a direct pay system like Canada’s.

    Our goal could be to get our cost/benefit ratios in line with those of other developed countries. Not like we are exploring unknown territory, is it? But no — we will deny medical care to the old and the poor instead.

  33. I may be wrong, but I believe that in England at least it is possible to buy a luxury yacht and pay no VAT at all. Something to do with protecting the shipbuilding industry

  34. The number one obsticle to a flat or VAT is that no one has an implement stragety. The period inbetween would result in over taxation, which the American public has little patience for. As do all the Federal workers whos high paying jobs would be extinct.

  35. Completely agree with Alan Mcconnell on healthcare issues.

    Carla: thanks for link to Democracy Now.

    Just peruse the following two links for some “happy” reading and then ask yourself if this country will face another greater fiscal crisis and is currently in a fiscal crisis- the answer is yes, and yes.

    Gaming the system to the MAX continues without restriction. These are only two recent examples- the list I have compiled since 2008 is unreal.

    Take a look at the FDIC guarantees provided on assets in bank takeovers. That alone will give you a few sleepless nights.

  36. There is little doubt we are headed TOWARD a fiscal crisis whether or not we are there now.

    Why, in God’s name, do we have to wait until our situation is desperate to do anything to prevent or correct it??

  37. I suggest the reason we see any disparity between public and private compensation is that private employment compensation (on average) has been in decline for decades and that merely because of unionization, public sector workers have not fallen as far behind. However, what did Obama do as a knee jerk reaction to budget worries? Freeze the pay of federal government workers. Public employees are captives to politics. Union representation is the only means they have to counterweight the political pressure.

  38. I am gratified and flattered that a few people
    here actually _read_ my previous comment, and
    thus encouraged it would be curmudgeonly of
    me not to respond.

    What is below is a shortened verson of an
    article I sent to Mr Kwak last July, in the
    hopes that he would accept a guest post while
    he was doing his hard summer work. He was
    kind enough to reply, but turned me down.

    Maybe others here might enjoy

    D e f i c i t for D u m m i e s

    Taxes(1): An “emergency” tax of 60% on all income above
    $1,000,000. (Such income levels were taxed at 90% back in
    pre-Reagan days.)

    Medicare and Medicaid: Get rid of the health insurance
    industry; introduce Single Payer. That way we can get our
    health care costs down to around 10\% of GDP, the level it is
    in the rest of the developed world. Businesses should like
    this, since this decreases their tax burdens and paper work.

    Taxes(2): Institute a sales tax on stocks and other financial
    transactions; a .5%(.005) tax on every financial transaction on the
    NY Stock Exchange, NASDAQ, Chicago Board of Trade, etc. This
    would not bother the ordinary person, but might slow down the
    casino aspects of these markets. It would bring in great hunks
    of moolah too.

    Wars: Shut down the illegal and immoral wars in
    Afghanistan and Iraq IMMEDIATELY. They cost
    $2,000,000,000 per WEEK. Bring our troops home and settle
    them in pleasant camps along the US-Canadian border, on the
    alert for a possible Canadian attack. We don’t know when
    Osama bin Laden may suddenly make a move toward Canada; our
    military should be held in readiness for such eventualities.

    Social Security: Raise the cap on Social Security
    contributions from its present level to $1,000,000. Make
    a note to look at this issue again in 2035.

    The above assumes that our lords and masters
    are serious that the deficit is a problem.
    Does anyone see any sign that e.g. Boehner
    or Sen McConnell(no relation) have any taint
    of seriousness?

    Best wishes,

    Alan McConnell, in Silver Spring MD

  39. I agree with Simon. Two events played havoc with the federal debt during the Bush Administration. First, the 2001 tax cut that even Greenspan agreed would add to the debt, and second, two wars, the cost of which was shifted into supplemental appropriations. I remember with irony President Ford speaking with great concern about the federal deficit. This debt problem began to snowball with the shift to a predominantly neo-conservative fiscal policy in the 1980’s.

  40. Well, Mr. McConnell I read your post. Yours is the nasty little truth that single payer opponents never want to acknowledge.

    Because I have been curious about why we ended up with a system dependent on private insurers, I on labor relations during the post war period. Our system was a result of a political failure in 1948. Union leaders wanted some form of universal health care sponsored by the government. So did President Truman. However, as we were paranoid in our anti-communism(and seemingly still are)during the post war period, such an approach was too socialist. Our solutions had to be clearly capitalist, free-market solutions. The union heads settled for the private plans for their members as the best they could get.

    Recently, Linda Bird Johnson told of going to Independence, Missouri with her father President Johnson to sign the Medicare law so he could give the pen to Truman and also give him the first medicare card. Johnson saw the law as indebted to Truman’s vision.

  41. It is important to remember that FICA constitutes a substantial tax on the middle and lower classes and is phased out above $106,800, so that as middle and lower wage individuals pay both the income tax and fica plus medicare, they can end up with a combined tax rate equal to or higher than their wealthy cousins. So, to agree with Dirk, the wealthy are severely undertaxed. (Having been wealthy, middle, and lower income in recent years, I know that paying any tax feels painful.)

  42. End fractional reserve banking when it’s near impossible to just get stronger consumer protection against predatory bank practices? You’re kidding yourself.

  43. As someone with a PhD in a highly technical field, who slogs in the trenches of University teaching, I feel pretty confident that I can say that the majority of people are honestly not interested in ‘knowledgeable people’ or what they think about anything. This is largely because people don’t want to hear things they don’t want to hear.

    ‘Knowledgeable’ people tend to give bad news. Commercial interests, on the other hand, are glad to tell you what you want to hear.

  44. This was pretty much my reaction, too.

    Am I missing something or are Treasury Prices just based on buyers’ attitudes? If buyers tomorrow decided that Treasuries weren’t worth the paper they’re (not) printed on, they’d all be instantly worthless, yes? So, saying Treasuries are priced well is just saying ‘people’ (here, Treasury buyers) think the US is in good shape. But that doesn’t MAKE the US in good shape.

    What confuses the hell out of me about all you economist-types is how you use group attitudes and perceptions as ‘facts’ and then extrapolate from that. I never have gotten it through my head how that works. You’ve concretized something that the rest of us in the sciences would be very nervous about concretizing…

    To the rest of us, I think this kind of ‘data’ that Simon Johnson is citing, reads more like a circle: “People think we’re healthy, so people think we’re healthy.”

  45. You know how most of the letters in the blog posts are black, and every once in a while you see pretty blue letters with equally pretty blue underlining? Those are called links. They take you through a wormhole to a parallel universe where Mr. Spock, with a goatee, hands you a document that was associated with the link. There were a couple of these links in Mr. Kwak’s last post. One was a detailed study of public/private compensation in WI. I read it last night, and suggest you take a look at it and get back to us tomorrow.

  46. If Kwak’s commentary ruffles your garters so I fear that an in depth critique of the right’s ongoing confidence game would give you the vapors.
    Brooks is an incompetent and a confabulator whose only purpose is to present the soft face of what passes for indolent “conservatism.” He is presumably an adult and can answer for his ramblings as such. Declaring the commentary of Kwak to be the “Fox News of the left” is simply a tepid ad hominem that positions you in a vague warm soup of alleged centrism based on drawing false equivalencies.

  47. Oh, boy, mondo, something else to keep me up at night. You are so spot-on. Thanks.

    P.S. Thanks to CBS for very relevant remarks also; not preachy at all.

  48. All those people who claim Social Security is bankrupting the country? Those are people who make more than $107,000 a year (often much, much more) and they do not tell you that taking the cap off the FICA would solve 75% of the SS shortfall for all time. A shortfall that is not even scheduled to occur, BTW, until 2037 or so.

    Wouldn’t it be terrible if the upper middle class and the wealthy had to pay payroll taxes comparable to what the working poor pay? I know it’s a shocking concept.

  49. wow, you foreign guys just don’t care how many governments and heads roll as long as you keep YOUR “entitlements” rising

    you still will definitely lose the war…so enjoy the “battle” won throwing women and children in USA overboard first…

    how delusional you all are – stealing from the very people you should be sucking up instead…

  50. On the contrary, “whess,” public union representation isn’t a counterweight to political pressure, it is in fact political pressure — linked to a taxing authority.

  51. Little blue letters? Yes, I read the linked polemic on Wisconsin public “not” overpaid. Seems that the author, like Kwak, omits certain facts about public pensions which are exorbitant.

    So I’ll offer you a few little blue letters which refer to:

    “Currently, teachers can retire at 57 after 30 years of experience and receive annual pension payments equal to 48% of their top pay, in addition to Social Security and other annuity benefits, WASB staff counsel Barry Forbes said.”

    PS, note the headline about the $ 10 billion plus shortfall.

  52. “simply a tepid ad hominem that positions you in a vague warm soup of alleged centrism based on drawing false equivalencies.”

    Guess you learned how to write from a Wisconsin unionized school teacher.

  53. The only way out is to shrink entitlements?
    Not quite.
    First, please explain why bad debts to private financiers MUST be repaid?
    Yes, I know that pensions, granny, etc hold some of this debt.
    DEFAULT the debt – ALL OF IT, or nearly so. Then cut budgets. Much less needs to be cut after the interest paid => zero. This way the pain gets distributed across income quintiles.

    While this is ongoing, revoke the FR Act and issue sovereign currency with a mandate to index the amount of currency to the population.

  54. Mr. Johnson,

    You make the fundamental error that most modern economists or ‘financialists’ make. You assume that the market properly discounts the probability of debt crisis in the near future. What were interest rates in Greece or Iceland 6 months before things blew up there? How about 3 months? What makes you think the onset of a crisis will be any less sudden in the US.

    The markets are moved by the net perceptions and attitudes of irrational masses, and they fail miserably in this respect due to their accumulated human normalcy bias. Again and again, market dislocations, especially credit crisis…’surprise’ the markets. They are then dismissed at 6 standard deviation events or outliers that ‘could not be predicted’.

    The real question people like you should ask is what business do we (you) have applying gaussian distributions and models based on the same to anything involving human mass psychology and market behavior?

    But if we took that away from you…then you would have nothing would you?

    Just because the market says we do not have a crisis does not mean we will not have one tomorrow…and when were are there…whoa it is going to be something to behold.

    We are clearly in the Ponzi finance stage of the credit cycle. The only way to stave off collapse is to create more credit/debt to re-fund the existing unsupportable debt. What what happens in June when QE2 expires. I lay 3:1 it will quietly be extended…because without it, we will not be able to place the new debt the UST has to issue as a result of backing all these existing bad debts that we are too spineless to write off.

  55. stealing from the very people you should be sucking up TO instead…

    now let your head do the 360 spin

  56. What what happens in June when QE2 expires. I lay 3:1 it will quietly be extended…because without it, we will not be able to place the new debt the UST has to issue as a result of backing all these existing bad debts that we are too spineless to write off.

    I wouldn’t go so far as to say quitely, more like forcefully, and I am looking forward to that time too.

  57. Well, we have the sovereign part, so in that respect we’re way ahead of the countries on the euro. Now all we have to accomplish is the debt-free part. Should be easy as pie, right?

  58. @ Diogenes

    Curious how the political pressure on america’s unions (gov’t,private,public) are methodically being decompressed to the point of no return? How timely? Where are we being led? Think…”Political Action Committees (PAC’s)”, and union support of politic’s in America will square up against Corporation’s in (Supreme Court – pro-active nonsense?) donations – but with only one holding the “Money Bag”! How quaint?

    God Bless You, Julian Assange

  59. The way this science stuff should work is that you, or someone, should dig into the data presented in the study and find where the mistakes are if the results can’t be reproduced. You can’t just dismiss out of hand the results just because they don’t support your political agenda and expect to be taken seriously.
    This article says teachers in some school districts made consessions. One amounted to $50M over two years. The WI average health insurance contribution is 5% of the total cost going as high as 20% in one district.

  60. I was not talking about private debts here (assuming you refer to obligations of private to private). The US gvt (and especially the States run the risk to make pensions etc credible government commitments, but without the extraction capacity to pay them. The only outcome would then be that those entitlements are cut, preferably explicitly. Otherwise inflation will do it, but that is a bad way. Much better to tell all those state etc entitlement holders that the gvt made a mistake in the past and that they have to expect less. I phase the thing in of course, by increasing the retirement age (say by two years for the 1950-1960 cohort and another 5 years staggered for the remaning cohorts. Would give people plenty of time to adjust. As to the health care system: that would require serious revenue cuts to ptoviders, much more competition and tort law reform. Elementary.

  61. You are missing my point. I’m talking muni bonds and treasuries.

    It is in the best interest of governments to default on their bonds. Fiscally, it makes cutting of services less severe and gives the agency a clean start, and electorally (different than politically) because the rich feel the pain too.

    The eventual outcome of the destruction of collective bargaining in the US, amplifying the disparity between the really rich and everyone else, will be bloodshed. If everyone gets screwed, everyone is more likely to accept it. If one class benefits over all the others – e.g. – then you will eventually have a revolt.

  62. I did notice that the fiscal forcasters are wrong, even in the short term. Timmy said that the debt ceiling would not be reached till 3-31 to 5-16 of this year, that was in Jan. I doubt it will last till the 2 week pseudo extension of the funding of the Gvt. Between that and doing their taxes there won’t be any time to campaign, and that’s no fun no matter how tight the money supply is.

  63. The lumping of the estate tax in with taxes that should be reduced is crazy: that’s the most progressive tax of all, because it’s the tax on unearned wealth (and unearned income – to the heir when he/she receives this wealth he/she did nothing whatsoever to earn). To eliminate tax on unearned income and continue tax on anything else is profoundly bad.

  64. There is no “bubble” in Treasuries, because the U.S. govt., as a currency issuer, is a fundamentally different entity than the Greek govt., which is a currency user. Until you you educate yourself about what that means, you will continue to quite literally talk nonsense.

  65. Yes. We live in a bubble nation. For every narrative we get a bubble. And yes, when everyone’s lost in their bubble, the wealthy elite marches right through them all, dragging us all down as they walk off with all the money.

  66. No…military spending is a totally different animal. We have a “world policeman” complex. Ike was right. But, to the point, on average, hospitals write off 50-65% of their total billable services. Factor in the additional costs for dealing with private insurance carriers and the never-ending battle between regional and local hospitals over service area competition, you’re lucky that the $6,800 wasn’t over $20K.

  67. There is plenty of money to regain our “country-hood.” The wealthy paid 91% income tax in 1959. Today, it’s been reduced largely to category of “capital gains.” The banks are awash with trillions of dollars, a major portion of which should be invested in the country rather than their global robber baron exploits. We have a tax code problem, not a deficit problem.

  68. China ain’t losing money betting that industrial world greed is anything less than industrial grade. Years ago we launched our foray into economic globalism. But it was tethered with a list of trade agreement elements like environmental protection, human rights, people friendly labor laws, and honest handling of one’s currency. HA! To our fabulously wealthy titans of the American economy, we are but another labor pool to step on when they’re not playing us all against each other.

  69. I’m buying a picture frame for Bayard’s rant. Bravo! We need to invest our energy in development a narrative that works, not wrestling with elements from inferior narratives.

  70. People have been lost in their own bubble for quite some time, this is nothing new. What is preventing you from starting your own anti-wealthy elite march and taking back some of all that money? And just who are the “us”‘s that are all being dragged down, i’m not one of them.

  71. It WAS a better country back then(obviously save the horrific treatment of Blacks, Asians, etc), and mostly because of Teddy/FDR’s reforms. There were/are REASONS said reforms/laws were put in place, and though it’s extremely difficult to get that across to people, will never stop trying.

    Obama is the POLR(Pres of Least Resistance).

    So Rondon, just want to say thanks for serving, and to let you know that we’ll keep fighting the criminals to the bitter end.

  72. me too; i’m surprised at how little I hear about Frank’s ideas outside of his books and columns. The calculation is essentially the same. The VAT’s a silly idea fraught with the same temptations as the current tax regime. Eliminate all deductions, exemptions and tax subsidies, thereby, increasing revenues by over a trillion dollars per year. Take business out of the political equation by eliminating taxes on businesses (about 16% of total tax revenue). Net effect is still a huge increase in net revenues(say, $500MM) to the federal government. Too simple, too effective to be considered. Oh yeah, why not increase the rate of progression, invert (collect on incomes over $45k, say, without limit – whose idea was this limit, anyway?) or eliminate social security taxes (regressive) completely and reduce the overall tax rates on incomes below $100k without sacrificing fiscal responsibility? Duh, we know why… One last comment: the top marginal rate during the Eisenhower administration (even with Republican Congresses) was 90% (incomes over $1,000,000? I forget, right now).

  73. I am amused by the current discussion about the national debt. We’ve had this discussion twice previously during the period 1982-2000. In both cases, the debt explosion occurred during Republican administrations and Congresses while non-military federal government use of contractors to fulfill functions of various agencies and direct federal government employment exploded simultaneously. Same old, same old. Why have I nearly lost hope for good sense on this issue and taxes?

  74. Why not look at teacher compensation in other states, too? The reality of compensation for teachers in Florida, among other states, is that medical insurance premiums are closer to 50% for family coverage (I know, we pay more than $600/month for our family plan, about 12% of my wife’s gross salary and about 15% of her net). As far as the 48% of top pay, it’s really 48% of the average of their last k years (depending on the state) and legislation is pending in many states to increase the value of k (thereby reducing the pension expense). But, then compare the value of the teacher’s activity with that of, say, an Arthur Anderson accounting partner. Maybe, the “exorbitant” pension benefit seems a little small, then? Compare to other professions, please, as well as broaden the scope of the database for your original evaluation.

  75. From a Modern Monetary Theory perspective (borne out by data) taxation functions to remove money from the non-government sector. It doesn’t functionally fund government spending. That said, taxation reduces the amount of money non-government actors have to spend for necessary goods and services and to save. Given that lower income non-government actors (most people) have a higher marginal propensity to spend and have less money to spend anyway a progressive consumption tax hits the least able harder than others. If that is how we want to live, then your idea makes sense. I don’t want to live that way.

    Bill Mitchell wrote a relevant blog that includes the effect of taxation yesterday. You may want to read it …

  76. In 1955 some choice tax brackets were:
    20% for income between $0-$4,000 (married filing jointly)
    22% for $4k-$8k
    26% for $8k-$12k
    30% for $12k-$16k
    34% for $16k-$20k
    38% for $20k-$24k

    90% for $300k-$400k
    91% for $400k and up.

    In current (2010) dollars those brackets would be:
    20% for $0-$32k
    22% for $32k-64k
    26% for $64k-$96k
    30% for $96k-128k
    34% for $128k-$160k
    38% for $160k-$196k

    90% for $2.4M-$3.2M
    91% for $3.2M and up.

    For comparison, the tax tables for 2010 have:
    10% for $0-16,750
    15% for $16,750-$68k
    25% for $68k-$137k
    28% for $137k-$209k
    33% for $209k-374k
    35% for $374k and up.

    Shall we go back to the 1950’s?

  77. Yes,
    And reverse every stinking capital gains tax reduction in the last 30 years.

  78. Quote “The right and the left agree we should tax consumption more and income less,”..

    Thats true if you define left to include the NY Times.

    I can’t speak for other “left” people, but the idea of a consumption tax while the crimminals from Goldman Sachs and the other banks that brought us the housing crisis go free seems kinda …right wing.

    After we raise the top marginal rate to something reasonable, like 80% (anyone else understand that marginal rates and cowboy behaviour by CEOs are linked ?), and after we apply a 5 dollar a gallon gas tax, phased in over 10 years (avg life of a car), and after we get rid of tax breaks for corporations (still waiting for the day economists realize taxes on corporations are not just passed onto consumers, probably be as slow as they were to realize that free trade isn’t always good) then we can talk about consumption taxes

  79. Without TBTF, those responsible for this crisis would have been out of jobs and out of homes. The majority of politicians in Washington in both parties are responsible for propping them up at our expense.

    Krugman, Obama, et al railed on Republicans for spending too much and causing a fiscal emergency throughout ’01-’06. Now it’s reversed.

    If you toss aside partisanship for just a minute, you’ll see that both Republicans and Democrats take turns raping the people. The people deserve the idiots they elect.

  80. Wise allotment of government funds should be done. Spendings on healthcare,education, military and other government programs should be prioritized accordingly. We should also be knowledgeable on the financial issues that our country faces.

  81. The fact of the matter is that America really DOES have a monetary crisis, since the America’s real economy has been shrinking for about a generation. By real economy, I mean the key productive sectors that contribute to wealth crreation in industrial society. It may seem hard to believe in the midst of America’s capsizing “service economy” but America’ rise to economic prominence was based on manufacturing and an abundant oil supply (mining). Employment in manufacturing is dwindling, and the tax base that manufacturing once provided is coming apart.Production in manufacturing is falling, as domestic demand is falling. Americans cannot afford what they used to. Mining in America is a mature business. Production of fossil fuels aren’rising fast enought to keep up with population growth. America has already used up almost all the cheap oil that was available within its borders. In order for the economy to grow, oil consumption will have to increase because its consumption-based economy is based around the car.
    Despite, right-wing efforts to claw more oil from the Arabs, America is losing ground to emerging markets, whose oil companies are securing more oil contracts for the remainder of all the oil fields in Africa and even in the Middle East.
    American consumption of the world’s dwindling supply of cheap petroleum supply doesn’t appear to be expanding anytime soon.If anyone here
    subscribes to the theory that money=energy, then you understand that energy supply needs to expand to allow money supply to expand. Money supply expands with economic growth. If the amount of energy doesn’t grow, if the economy doesn’t grow, or grow fast enough to meet the needs of the humans that inhabit it, it start collaping on itself. The economy implodes.

  82. The fact of the matter is that America really DOES have a monetary crisis, since the America’s real economy has been shrinking for about a generation. By real economy, I mean the key productive sectors that contribute to wealth creation in industrial society. It may seem hard for some of the younger folks out there to believe while being in the midst of America’s capsizing “service economy” ,but America’ rise to economic prominence was based on manufacturing and an abundant oil supply (mining). Employment in manufacturing is dwindling, and the tax base that manufacturing once provided is all but gone. Production in manufacturing is falling, as domestic demand is falling. Americans cannot afford what they used to and the rest of the world can produce itself what it used to buy from America. Mining in America is a mature business. A combination of lack of demand and depletion afflicts it. Production of fossil fuels aren’t rising fast enough to keep up with population growth projections. America has already used up almost all the cheap oil that was available within its borders. In order for the economy to grow, oil consumption will have to increase because its consumption-based economy is based around the car.
    Despite, right-wing efforts to claw more oil from the Arabs, America is losing ground to emerging markets, whose oil companies are securing more oil contracts for the remainder of all the oil fields in Africa and even in the Middle East.
    American consumption of the world’s dwindling supply of cheap petroleum supply doesn’t appear to be expanding anytime soon.If anyone here
    subscribes to the theory that modern currency equals energy, then you understand that energy supply needs to expand to allow money supply to expand. Money supply and energy supply expand with economic growth. If the amount of energy doesn’t grow, if the economy doesn’t grow, or grow fast enough to meet the needs of the humans that inhabit it, it can collapse on itself. The economy can implode. Energy is just that important.

  83. @ A Real Black Person

    “…emerging markets, whose oil companies are securing more oil contracts *(dwindling supply of cheap petroleum supply)”

    “Across Globe, oil and gas supply at risk” by George Jahn 5/6/2006 (AP)”
    Vienna, Austria – Unrest in Africa. Mideast insurgency and terrorism. Iran’s nuclear brinkmanship. Russian pressure politics. South American resource nationalization.
    Piece by piece, the global energy puzzle reveals a bleak horizon for a world frantically searching for secure oil and gas supplies.
    Concerns over Iran – the world’s fourth-largest oil producer – have been the prime factor driving crude prices to record levels and, combined with tight global refining capacity, for pushing U.S. gasoline pump prices above $3 a gallon in many places.
    With the U.N. Security Council deadlocked, and Tehran refusing to cease uranium enrichment, there is no end in sight to the struggle or the upward price spiral.

    A barrel of crude was trading around $70 a barrel Friday (5/5/06). But Iranian officials this week predicted prices as high as $120 – a forecast some experts share.
    “I don’t think that’s far-fetched, assuming that the crisis with Iran will escalate,” said Michael Klare, author of “Blood and Oil”: The Dangers and Consequences of America’s Growing Petroleum Dependency.”
    By even the most conservative estimates, more than a quarter of the 80 million barrels of oil pumped a day worldwide comes from regions or countries where security of supply is in some way at risk. Disheartening? Worse may lie ahead, as the world’s hunger for energy grows, the tussle for oil and gas intensifies – and the turmoil perpetuates itself.”
    “More than half the world’s oil production is certainly controlled by governments. Some have unstable regimes or are threatened by internal rivalries.
    “Oil Reserves in Billion of Barrels” Statistics:
    Saudi Arabia – 266.8
    Canada -178.8
    Iran – 132.5
    Iraq – 115
    Kuwait – 104
    United Arab Emirates – 97.8
    Venezuela – 79.7
    Russia – 60
    Libya – 39.1
    Nigeria – 35.9
    United States – 21.4
    China – 18.3
    Qutar – 15.2
    Mexico – 12.9
    Algeria – 11.4
    Brazil – 11.2
    Kazakhstan – 9….Norway – 7.7….Azerbaijan – 7
    India – 5.8….Oman – 5.5….Angola – 5.4
    Ecuador – 4.6….Indonesia – 4.3….UK – 4
    Yemen – 4….Egypt – 3.7….Malaysia – 3
    Syria – 2.5….Gabon – 2.5 Fini!!!

    “Oil & Gas Rises Again”

    “Here comes $500 oil”

    “Simmons Discusses BP’s Oil Spill Cleanup Effords: Video”

    Please note: Matt Simmons dies “Two-Weeks” (Aug.8,2010) after openly criticizing “BP”!

    Important: Al Queda has been recruiting insurgents/militants in NW (Senagal/Gambia/W. Sahara/Mauritania) Africa for years as mercenaries to traffic the “Heroin/Cocaine” from Afghanistan/Columbia into Europe through trade routes via Morocco, Algeria, and Tunisia! They have been quietly coordinating a covert operation to disrupt the current government’s/countries in the news today through the huge cash trove/hoard from the trafficking of drugs! Perhaps their also trafficking weapons unimpeded – but whose?

    Lastly: Iran could have just been a diversion? “Big Oil” & OPEC like uncertainty because,…? They might even be behind the events with various entities to make billions$$$ JMHO

    Like your Read, thanks

  84. I agree that USA is not in an immediate crises. There are good and bad things in every financial system which are in US economic system as well.

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