How to Fix America Part II: Fix Our Nation’s Finances
MADISON, WI (The MPJ) — Did you know America is broke? We’re completely bankrupt! The coffers at Social Security are empty! And, in case you didn’t click on those links, they’re to PolitiFact articles showing those statements to be nonsense.
That’s not to say America doesn’t face financial challenge. We’re spending significantly more money than we’re receiving in tax revenue. Expenditures in the long-term are also going to rise, and rise significantly, while tax revenues in this economic climate are going to suffer until further notice. This means two things: 1. We must increase overall revenue by both raising taxes and increasing the efficiency of our spending and 2. We must grow the tax base by growing the overall economy.
Unfortunately, Republicans refuse to raise taxes to a level that can actually sustain the government, and Democrats are unwilling to stand up and make sure our resources are allocated in the most beneficial way possible. Although I think MSNBC’s Dylan Ratigan hit the point more succinctly in a rant this week on this show, saying Republicans refuse to do anything, and Democrats refuse to do anything beyond their own term in office.
We cannot continue this ridiculous trend, and we must put forward a new strategy. And here it is in three (not so easy) steps.
1. Use taxes exclusively as a means to fund the government, and stop using it as a political football disguised as a “job creator/killer.”
Taxes are going to have to go up, folks. This is simply because the government is not bringing in enough revenue. Making things worse, the favorite mantra of Republicans in Congress, that America doesn’t have a “taxing problem,” it has a “spending problem,” completely ignores the fact that we, in fact, have both.
Here’s the thing. As you can see by this graph, we had budget surpluses set to end out the 1990s under Bill Clinton’s economic policies. However, once we entered the Bush era, with his massive tax cuts in 2001 and 2003, the deficits immediately returned. And this flies in the face of what we call “prevailing wisdom.”
Back in April, Rep. Dennis Kucinich (D-Ohio) said that the biggest cause of current deficits were the Bush tax cuts. PolitiFact said that was true. This was around the same time, two of Kucinich’s Midwestern colleagues took up the opposite end of the argument, and got knocked around for it. Rep. Joe Walsh (R-Illinois) said that every time we’ve cut taxes, revenues have increased and the economy has grown. That’s false. While in November of last year, Rep. Mike Pence (R-Indiana) said that raising taxes actually reduces revenue. False again.
It’s time we cast aside these fiduciary fallacies where less is more, and more is less (literally), and get back to reality. A reality even President Ronald Reagan understood, despite the fact his legacy is that of a tax cutter, and not a hiker. Though Reagan is most famous for his big tax cut in his first term, Reagan overall raised various taxes 11 times.
So let’s stop all this tax demagoguery, and get back to responsibly funding the government. We’re all going to have to pay the bill in the end. So lets get to paying it now instead of the bill plus extra interest later.
2. Spending is going to increase anyway, so we may as well get the most possible out of each dollar.
Spending is going to increase. This is guaranteed. It doesn’t matter what Republicans or Democrats do because the spending that’s going to truly increase isn’t up to them. It’s up to Social Security, Medicare, Medicaid, and the flood of retiring baby boomers that just started reaching that magic age of 65 (my mother being among the first) this year, and becoming eligible for those programs.
The biggest population boom in our nation’s history is reaching retirement age at a time when health care costs are skyrocketing, and after decades of raiding the Social Security fund purposes other than Social Security. This doesn’t mean we should kill these programs in manners like those proposed by our very own Rep. Paul Ryan (R-Wisconsin). The solution is to get health care spending, across the board (not just for seniors) down. That’s going to be tackled in further depth in the next How to Fix America. But it needs to be done, and that’s going to take some doing.
But the spending we can control needs to be streamlined, and each dollar needs to be maximized. That means less spending on defense, where the benefits of that spending end up heavily overseas (by means of both overseas-based contractors and the overseas nature of military conflict), and less spending on incarceration (specifically for minor offenses, that just takes otherwise productive people out of the workforce, and locks them up at next to no benefit for the rest of us).
That means less spending on administration and bureaucracy, and instead focusing on streamlining administration. Some areas of the government are far ahead of the private sector when it comes to administration costs, for example (oddly), Medicare. But the federal government is also far behind the private sector in administration costs in some areas, like theUS Postal Service.
I’m not proposing a Six Sigma approach to government (largely because this is a fatally flawed methodology that has destroyed a number of private employers, such as Circuit City and Sears, and even its founding corporation, Motorola). However, a “lean” approach to spending must be employed.
And there’s a second side to that coin. Increasing spending on the most effective sectors of government expenditures. One of the most cost-effective areas to increase spending in the US is on infrastructure (which will be tackled in the fourth installment of How to Fix America) and education (which was tackled in the first installment).
3. Switch from a supply-side focused economic policy to a demand-focused policy.
If you really want to fix the government’s balance sheet, fix the economy.
For the last thirty years, we have focused most of our effort on the “supply” side of the supply-demand dichotomy. Here’s the problem with that…supply doesn’t drive the economy. Demand does. And that’s what we’re having a problem understanding now, despite this being a core teaching in pretty much any Economics 101 course in college.
What we’re seeing right now is corporations doing extremely well on paper. They’re sitting on a pile of cash while their P&L sheets show their continued profitability, and yet we wonder why they’re not hiring. I’ll tell you why they’re not hiring. They have no reason to.
With demand as low as it is right now, and continuing to decrease, corporations don’t have any incentive to increase supply. So they’re just going to sit there and horde their cash (also in part due to their reluctance to invest further in the financial markets due to increasing market volatility) and wait for people to start wanting to buy their products again. Yet, if you increase demand, the supply will follow. If there’s one thing we’ve learned over the past couple hundred years of our capitalist system, it’s that if there’s a buck to be made, nobody’s going to leave it on the table.
This is a case for more direct government spending, even going so far as another Works Progress Administration style program. These programs will fix the demand problem that we have. When we invest taxpayer money in putting people to work (specifically doing productive things, not digging holes to fill back up, mind you), it has a demonstrated trickle-up effect.
The companies that are put to work see the first benefit. Road construction companies, engineering firms, etc get the money first. They then spend it on raw materials and equipment such as concrete, rebar, cable, computers, backhoes, cranes, etc. They also spend it on labor. The people they hire also need things and now have the ability to purchase them. They can now make purchases from the basic (housing, groceries, utilities) to the common (televisions, computers, chairs, couches). That money then moves to the next step, as those televisions, backhoes, concrete, and groceries get produced, and that money keeps moving, effectively, through the economy.
No, it can’t go on forever. But it’s not supposed to. Just like your car’s engine can’t run on its starter motor forever, but it requires it to get the thing started. And that’s how this should be viewed, as a starter motor for our economy. Use government spending to force the engine of our economy to turn until it can fire and run on its own. It’s worked before, and it will work again.
That’s, honestly, the only thing that will dig us out of the economic morass we find ourselves in. And that’s going to be the best way to fix our nation’s finances. Fix the economy, fix our fiscal priorities, fix our government’s balance sheets. Plain and simple.
Related:
The idea that raising taxes can fix the mess we’re in is ludicrous. We have a stagnating economy with minimal growth and you want to take more money out of the economy? Federal spending has doubled in the last decade. How could increased revenues possibly keep up with this rate of growth? Obama and others have advocated increasing taxes on those earning over $250K as a big part of the solution. You could tax all income over $250K and we would still have over $1 trillion per year in deficit spending.
As for the notion that spending increases are inevitable, it’s this sort of defeatist thinking that got us into this mess. Reform of entitlements can change the trajectory of federal spending. WIthout serious reform, Medicare will rapidly grow to the point where we’re spending more on this single program than we do on the entire federal budget today. Even if you don’t think we’re bankrupt now, you can’t possibly believe that we will be able to afford Medicare as currently constituted in the future.
As an aside, I frequently see liberal commentators like yourself assert that Medicare administration are lower than those in the private sector. This is simply false. Here’s an explanation of why:
http://www.heritage.org/research/reports/2009/06/medicare-administrative-costs-are-higher-not-lower-than-for-private-insurance
That analysis also fails to take into account that much of the administrative burden is shifted to physicians and hospitals, who have many more hoops to jump through with Medicare than with private insurers.
I think the only place where we agree is on defense spending. Our military budget, like the rest of our budget, is bloated. We spend more on defense than the rest of the world combined. It’s insane.
Now we come to your third point. Our government faces a financial crisis whose root cause is out of control spending. So what’s the solution? More spending, of course. We’ve spent hundreds of billions of dollars on so called economic stimulus. It’s done us no good and may have done great harm. Keynesian economics is inherently flawed. Among the best analogies that describe how it works: First you break a bunch of windows. Then you pay people to fix the windows. High taxes, over-regulation, absurd energy policy, the minimum wage, and various subsidies are how government breaks the windows. No amount of “investment in infrastructure” or other pretty euphemisms for increased government spending can fix these problems. The benefits are meager and the costs in terms of some combination of increased taxes or increased deficit spending are enormous.
Many of the problem areas that you are choosing to focus on in this series (healthcare, education, etc.) have one thing in common: government intervention. The parts of society that are the most broken are also those where the federal government exerts the greatest influence. This is not a coincidence. More government is not the answer. The path to prosperity is through less government, lower taxes, and more personal freedom.
Well, as I said above, raising taxes NOW will help (specifically with the debt/deficit) since the supply-side of the economy is flush with cash it’s not doing anything with. We’re in a demand-recession combined with a liquidity trap, which has a number of implications that are being completely ignored in economic policy-making.
But in times like this, we’re SUPPOSED to run a deficit. That’s Macroeconomics 101. When private demand tanks, the government has to get in to fill that gap. Once the economy is back up, revenues increase (due to increased taxable economic output) and rates will increase marginally in order to fill the deficit/debt hole back up. That’s the step we failed to take during the 2005-2007 period, when the economy was technically doing “well.”
And saying spending increases are inevitable isn’t “defeatist” thinking, it’s the deduction from facts in evidence. Specifically, a population explosion that started 65 years ago is now becoming eligible for government benefits. And not only is the number of people entering those programs skyrocketing, so is the cost of one of those benefits – health care. So even if we zeroed out ALL discretionary spending, and made deep cuts to the Pentagon, net spending will still increase over the next couple decades because of the simple fact the baby boomers are entering retirement. Some entitlement reform will be necessary to deal with the costs of this, but even at that…costs will go up.
As for the Medicare argument, well, the Heritage Foundation is where bunk is born. They’re the ones who invented the numbers that made Paul Ryan’s “budget” work (even though the rest of the economic world realized the numbers don’t add up). They take the same study that I cited above, and then take it completely out of context.
The gist of the study showed Medicare IS more cost-efficient than private insurance, just not as efficient as the government claims it to be. It then takes an analysis of the administrative costs of private insurance, but makes them look better by removing commissions, profit margins, and taxes. That’s like quoting the price of a car without tax, title, license, tires, or doors. You can technically remove all of those things, but you need them for the product to function and be sold.
So what we have is this comparison:
-For every $1.00 that Medicare receives as premiums, policyholders receive (worst case scenario) just under $0.95 in benefits.
-For every $1.00 that private insurers receive as premiums, policyholders receive (best case scenario) just over $0.84 in benefits.
Heritage can take those numbers and shake them up in a Boggle box all they want, but numbers are numbers and math is math, once all the rhetoric is removed.
For the third point, the root cause of our country’s financial crisis is NOT “out-of-control government spending.” That’s nonsense. There’s two main causes.
1. The fact that we’re in a deep, deep recession (which always causes deficits, regardless).
2. 10 years of unsustainably-low tax rates combined with 2 unfunded wars, as linked to above.
And the analogy you propose to Keynesian economics is total rubbish. For one, Keynes himself says that spending money on “make-work” is economically detrimental, and won’t help anything. That’s why he insists money be spent on useful work, like infrastructure and other things that, once completed, will contribute to the economic machinations of the recovery to follow. And saying infrastructure spending doesn’t produce a net benefit is incorrect. According to a report from Moody’s (http://www.economy.com/mark-zandi/documents/assissing-the-impact-of-the-fiscal-stimulus.pdf) spending on infrastructure produces $1.59 for ever $1 spent (see table on page 3). Tax cuts (which is what 75% of the Obama stimulus was) only produce $1.03 for every $1 spent.
Second, we’ve seen over the past several decades that tax rates and economic performance have absolutely zero correlation. One of the longest periods of economic expansion in American history was when top marginal tax rates were 91%. If you want to buy into the Laffer Curve nonsense, feel free. But understand that the Laffer “peak” is somewhere above 91%. At that point, how useful of a theory is it in practice?
Over-regulation CAN be detrimental to economic performance, sure. And that’s why it’s a good thing (I guess) we haven’t had any of that for decades. The problem is, under-regulation has the same destructive quality. To wit: Between the passage of the New Deal until the de-regulatory sweep of Reagan, we had zero financial crises. Since Reagan, we’ve had 3 (S&L collapse, tech bubble, housing bubble), each one sending the economy into recession. That’s 1 per decade. We can’t keep up this trend.
Finally, you say the areas that are most broken are those involving government intervention. I’ll concede that to a point. That point is the fact that the past 3 decades of trying to “shrink” government is what’s caused these problems. Education is in the weeds because for 30 years we have cut the flow of money going into it, and mismanaged what DID go into it. Healthcare in every other country has greatly benefitted from government intervention, in terms of cost-benefit and services provided. Right now, what we have here in the US is just a de facto subsidy to the health care sector that is encouraged to gouge, and is protected from anti-monopoly rules that every other company in the country has to follow.
The size of government is, to a large extent, a meaningless, existential point of argument with zero practical application. Yes, it can get “too large” (see Soviet Russia, Communist North Korea) and it can get “too small” (see present day Afghanistan, Pakistan, Yemen, Somalia, etc). The path to prosperity does involve minimal taxes, and maximal personal freedom. However, we have gone way under ideal levels on the former, and are in a position at present where more economic action on the part of government doesn’t impede the latter (see: liquidity trap).
So, to sum up, saying “less taxes, less government spending, more personal freedom” is great political rhetoric, but it’s meaningless in terms of actionable public policy.
I can understand a rationale for deficit spending during a recession, but not at our current insane levels. Over a number of decades tax revenues average about 18% of GDP. We’re spending something like 23% of GDP (hard to tell when we’ve been operating without a budget for so long). This is while revenues have fallen to 14% of GDP. If you tell me you want to spend 18% or maybe even 20% of GDP I could deal with it. 23% and growing isn’t going to work.
Budget growth isn’t inevitable. If you limit the federal government to things it ought to be doing, rather than trying to fund retirement and healthcare for every senior, we can stop the freight train. When these programs were started, most people didn’t even live long enough to collect benefits. I think a social safety net for those who truly need it will be far more sustainable than trying to do everything for everyone.
The Medicare administrative cost thing is really a small point. There are lots of things that don’t get taken into account in those analyses, such as the fact that the IRS collects all the premiums for the program. There’s also lively debate about who weeds out more fraud and how that skews the numbers. In the end, it doesn’t really make much of a difference.
I think government meddling and distortion of the market is the main cause of the huge growth in healthcare costs. When all of the normal market signals are removed and consumers are shielded form the costs of their care, the costs grow unchecked.
To say that deregulation under Reagan or attempts to shrink government are at fault for our current problems is a mistake. Reagan inherited an inflationary crisis and his economic policies got us out from under it. The size and scope of government has grown unbated for decades. This is undeniable. Debate about this issue is hardly meaningless. I think it’s the chief problem our country faces. Everything in our lives gets better over time, except for those areas that we leave to government.
You’re right that current spending is hovering around 23% of GDP while revenues are hovering around 14%. But the latter half of the equation is what’s really the problem, when historically, revenues have trended between 18% and 21% of GDP. And the biggest contributor to the rise is still entitlements like Social Security, Medicare and Medicaid.
And saying that limiting government spending to what it “ought” to do is a philosophical argument that, yes, we can have out, but it’s not going to go anywhere. Let’s face it, Social Security and Medicare are promises made and kept by the government for decades, people like them, and they’re not going anywhere. Beyond that, they were put in place to correct for market failures. And the method of correction (including everyone, and not just those “in need”) is economically more efficient than the other way around.
As for Medicare/private insurance fraud, studies show they’re on equal footing. If I remember right, fraud makes up about 3% of either system (I can go and find the study later, I think I’ve Googled myself to death today with all the stuff I’ve been working on).
But the distortion of health care costs isn’t caused by “government meddling,” it’s caused by 2 things:
1. Protected monopolies (that is, monopolies that are allowed by lack of government intervention).
2. Inelastic demand (people want to live, and there’s nothing “the market” can do about it).
But I will dive more into those items in the next “How to Fix America” since health care is up next.
And you can say that Reagan’s economic policies “got us out” of the economic mess we were in at the time (which included the whole “stagflation” problem), but that crisis wasn’t caused by us…it was caused by OPEC. And the economy corrected itself when the second OPEC oil crisis ended. The inflation crisis was misread since the key cause of inflation at the time was…oil. Since that crisis, we’ve developed measures to read REAL inflation versus commodity-led inflation, so we don’t have someone like Paul Volcker raising rates at the Fed when he shouldn’t have.
And here’s what really crushes your final argument. Everything in our lives ISN’T getting better. For the past 30 years…they’ve been getting worse. Real earnings have been getting worse. Income disparity has been getting worse. The cost of living and creating/maintaining a home has been getting worse. Marriage rates have been getting worse. Divorce rates have been getting worse. The rate of family creation has been getting worse.
Government intervention isn’t the cause here. But, as I’ve laid out in the original article, it can be (part of) the solution.