Republicans rooting for more economic misery

The Thinker by Rodin

For most Americans, particularly the unemployed ones, the 2012 elections cannot come too soon. Sadly, most Americans who could vote did not bother to vote in the 2010 midterms, particularly the unemployed ones who were having trouble keeping a fixed address. This allowed the crazies (a.k.a. Tea Party Republicans) to get control of one house of Congress. Many of those who did vote for the Tea Party though did so on the assumption that they would do something tangible to create jobs.

Silly voters. Of course everything Republicans say they are doing is to help facilitate job creation. Yet despite all the tax cuts, spending cuts, and regulatory changes our unemployment rate remains basically unchanged at 9.1 percent. In fact, the unemployment rate has gone up since January, when Republicans came into power in the House. (It was 9.0% in January 2011.) Cutting the deficit is somehow supposed to create jobs, but it has also added hundreds of thousands of public sector workers to the unemployment roles as governments everywhere pare spending. Other tactics to reign in spending, like the brouhaha over extending the federal debt ceiling, only served to make our creditors more nervous, adding more uncertainty into the economy, possibly triggering a double dip recession. The stimulus, which at least succeeded in priming the economy a bit and reducing the unemployment rate a percentage or so, is all gone. Meanwhile, businesses are sitting on record amounts of capital, but don’t want to use it to do any hiring because of all the uncertainty in the economy.

Next week President Obama plans to deliver a speech on unemployment to a joint session of Congress. He is expected to say Congress must act to create jobs, but the initiative is almost doomed to go nowhere. Which means if you are unemployed you have to hope against hope that despite all these negative signs employment will pick up, or saner heads will prevail after the 2012 election. If you are getting by on food stamps, you may want to start your own vegetable garden because so many Americans are on food stamps that the program is running out of money, so it is likely to get chopped back. And if you are one of the long-term unemployed that have depended on extended unemployment benefits for at least some income, those benefits will stop arriving soon. So the prognosis for an economic recovery before the election is not great, and made even worse by cutting food stamps and unemployment payments. That’s even less money that will go into the economy.

Republicans take as a matter of faith that if the government stops interfering with the private sector, then free from these constraints the private sector will pick up the slack by investing and hiring people. So far the evidence is just the opposite. The truth is of all the agents that can cause economic growth to occur, in the short term the government is the only that could truly change the dynamic. This is because through intelligent policy, government can inject money into the economy that buys goods and services, and helps employ more people. When people are employed, they have income that they spend, which puts more income in other people’s pockets, which causes growth and begins a virtuous cycle. Moreover, our ability to do so has arguably never been cheaper. Interest on U.S. treasury bills are less than inflation, which effectively means not only that we can borrow money interest free, but also that others are actually paying us money to give us money.

The evidence suggests that if the U.S. were to borrow money now and put it to use to grow the economy, through projects we already need like infrastructure improvements, we would stimulate the economy, effectively pay no interest to do so, and begin a virtuous cycle that would increase employment and growth. Moreover, as people acquire income again, they also contribute taxes again at all levels, which give governments more income than they would have otherwise. Intelligent short term deficit spending now seems very likely to reduce long term deficits through economic growth, which comes back to the treasury in the form of increased tax revenues.

It’s clear to me that Republicans really have no desire to grow the economy or bring down unemployment, at least not until Obama is out of office. And they are willing to keep Americans unemployed to be faithful to an ideology that is proving not to work. Indeed, they seem intent to throw sand into the engine of our economy. The hope seems to be that Americans will blame Obama instead of their party in 2012, although polls suggest Republicans and Tea Party Republicans in particular will shoulder most of the blame.

The only thing we can say for sure is that there is at least a year more of misery ahead, and it will be borne principally by the unemployed and the disenfranchised because Republicans will put ideology ahead of the needs of the American people.

But we actually NEED those government services

The Thinker by Rodin

It’s hard to believe, but there are senators and congressional representatives who actually want to be in the Supercongress.

The Supercongress (otherwise known as the Joint Select Committee on Deficit Reduction) was a creation of recent legislation signed into law to raise the federal debt ceiling. It will consist of twelve members, six from the House and six from the Senate, with each house contributing three Republicans and Democrats each, appointed by their majority and minority leaders. The Supercongress gets to write a bill that will realize at least $1.5 trillion in deficit reduction over ten years. The law will be voted on by each house and only a simple majority is required for passage. No amendments or filibusters are allowed. If their recommendations are not voted into law and signed by the president, the “one size fits all” meat cleaver comes out, chopping most programs including defense by large amounts, exempting only some of the biggest entitlements.

It’s clear that the legislation authorizing an extension of the federal debt ceiling did not solve our deficit problem. That’s the job of the Supercongress: twelve of 535 people in Congress, required to seek compromise that so far has proven elusive. By law, the committee must have its recommendations by November 23, 2011 and both houses must vote on it by December 23, 2011.

In the field of project management, we have use a term called the triple constraint. Every project is constrained by three forces: cost, scope and schedule. If you want to manage a project properly, you must adjust these factors intelligently or the project will fail to meet its objectives of delivering a project on time and within cost. The federal government has its own triple constraints: taxes, deficits and programs. In the past, no one wanted to raise taxes and no one wanted services cut, so deficits expanded. Now deficits cannot expand, at least beyond the current debt ceiling, without new legislation. This means that either taxes have to rise, programs must be cut, or some combination of the above.

Republicans think they are being principled by saying they will not allow taxes or the deficit to rise, meaning all deficit reduction will come from program cuts. Members of the new Supercongress are already nervous. Some of them are carefully qualifying their conditions. For example, some Republicans are saying they might allow revenues to increase by “closing loopholes”, as if these were not tax increases. This scenario is unlikely in any event because Republicans will be pressured by their party not to permit any tax increases. Even if some new taxes become part of the bargain, it won’t begin to be enough to close the deficit gap. As much as Republicans would like to get rid of the EPA and Education Departments, Democrats will ensure these agencies would survive. In any event, these programs are tiny compared to entitlements. Which means the only way to realize savings will be to cut entitlements like Medicare, Medicaid and Social Security. In short, the committee and Congress would have to vote in favor of a package guaranteed to cheese off the voting public come November 2012.

A few outcomes can be predicted with reasonable certainty:

  • Those Republicans and Tea Partiers dead set against raising both taxes and the debt ceiling will pine for the good old days when they would just charge the difference, and wonder why they were so brainless to press the issue when they will take the political fallout. Most of them will be thrown out of office if they follow through on their convictions. Their hands have not yet been pressed to the hot stove yet. When it is, they will realize that America has an important message for them: Don’t you dare mess with my Social Security and Medicare! They will learn something amazing: a vocal minority called The Tea Party does not represent Americans at large.
  • You don’t mess with American business either. American business depends as much on the federal dole as do Social Security and Medicare recipients. Take, for example, our bloated defense industry. Do you think they are going to go on a diet without expending massive amounts of capital to ensure they are exempted? Granted, a lot of defense spending is wasted, purchasing armaments, equipment and services that our own defense secretary says we don’t need. But that money still goes somewhere. It feeds a huge array of middle class defense and technology workers, and keeps afloat companies like Northrup Grumman, Boeing and Unisys. It pays for lavish salaries for their CEOs, provides for their corporate jets and their personal staffs. Take away their defense business and for all practical purposes they go bankrupt. Since defense spending still be severely curtailed with automatic cuts, they would be dramatically impacted. Expect a whole lot of hullaballoo if the tail does not continue to wag the dog.
  • But all that wailing will be nothing compared to heat Congress will get from the soldiers if their retirement benefits are scaled back and their health care costs go through the roof. They already work at substandard wages, often 24/7 in battle zones, and put their lives on the line for our freedom. They do so for patriotic reasons but also because the military offers a fair deal: low pay now for retiring at age 40 on half pay and virtually no health care costs. This is some compensation for the hassle they endure while in the military. They are going to go ballistic. Weren’t these same politicians spouting platitudes about supporting the troops?
  • When push comes to shove, which will happen sometime after whatever laws gets passed or not, future congresses are going to do the only sensible thing they can do in this mess to minimize the political impact: raise taxes, mostly on those who will inflict the lowest political pain. Eventually Congress will figure out this will be the rich people. In addition, poor people will continue to take it on the chin. If any entitlement really becomes a shadow of itself, it will be Medicaid. In the eyes of Congress, the poor always have been and will be second class citizens.

Republicans operate under the illusion that government is a massively wasteful institution. It is certainly bloated, but mostly out of necessity. Major problems like income security and health care in old age do not happen due to the genius of the private sector. Had such solutions existed, none of these programs would have come into existence in the first place.

The reality is the world we live in is incredibly complex, and we need a government to ensure it all works in the first place. Abolishing the EPA does not solve the pollution problem. Getting rid of the Education Department will not make American children better educated. What we need is greater value from the services we already have. We need to control the costs of entitlements like Medicare so people get more benefit. Congress is supposed to look at programs like Medicare and say, “This fee for service thing is too costly. We need to do it more intelligently and pay for outcomes instead.” That’s the real job Congress was elected to do, they just don’t realize it yet. They will after the wreckage of the 2012 election.

Congress can start with a few of my suggestions.

How to achieve an accountable government

The Thinker by Rodin

After having spent decades largely ignoring the problem, the exploding federal deficit is suddenly on the minds of Congress. It’s so on their minds that they have forgotten to work on other things, like creating jobs. This new deficit fever is especially surprising given that Republicans are leading the bandwagon, since their deficit spending caused most of our debt. Moreover, one of their heroes, Dick Cheney, famously said deficits don’t matter.

While debt matters, I doubt our increasing indebtedness is what is driving these new deficit hawks. What matters is that a vote on the debt ceiling can be used to restrain the size of government, and Republicans passionately care about that. The same senators and representatives, who just a few years ago were voting for programs to increase the debt, and just last December agreed to extend tax cuts for the rich and lower social security withholdings, are now threatening not to extend the debt ceiling next month.

Something does need to be done about controlling our debt, but intelligently, not stupidly. I consider myself a fiscal conservative. That does not mean I am also ideologically aligned with “small government”.  I simply believe that, in general, government should to live within our means. To me this does not mean we necessarily cut spending to match expected receipts. If we as a nation decide we have priorities, like addressing global climate change, and that requires raising taxes, then I am okay with raising taxes. I suspect we would be long gone from both Iraq and Afghanistan had we had “pay as you go” wars. In fact, the Iraq war probably would never have started, and our debt would be at least a trillion dollars less.

There are times when reducing deficit spending is counterproductive, and that may still be true today. We know enough about economics now to know that spending money stimulates others to spend money, which helps the economy grow and creates jobs. If our federal deficit is about $1.5 trillion a year, taking that much spending out of our economy suddenly will be like throwing sand into our nation’s engine. This effect can be observed in Great Britain, which chose sudden and severe austerity. It is finding its unemployment rate soaring, its GDP declining and its taxes much higher. Perhaps they had no choice given how overextended they were. At least in the short-term, austerity is causing immense suffering for no obvious reward. In general, debt is undesirable, but is it more undesirable than negative growth and increased unemployment? Shocks to any system are rarely beneficial.

To me it makes much more sense to come to consensus on national deficit goals and systematically work toward them. A pragmatic goal would be to have a balanced budget in five years and a credible bipartisan law in place that gets us there. How to make it credible? It could be that the president’s budget has to meet the yearly goal, and first be scored by the Congressional Budget Office (CBO), which asserts it as financially sound. If the deficit is $1.5 trillion, reducing debt by $300 million a year should be doable, particularly if it allows for taxes to be increased if spending is also cut. While we are easing off the economy’s gas pedal, perhaps the country will perk up enough where that growth will provide more tax revenues, thus making spending cuts less draconian. Why put our nation through needless pain?

I think our debt speaks to two larger problems. The first is political dysfunction for which traditionally deficit spending has been the consequence. In addition, we often spend tax money inefficiently or on “nice to have programs” of marginal value. We already have organizations like the General Accountability Office (GAO) and the CBO that exist to inform policymakers on whether programs are effective or not. The problem is Congress rarely takes their advice.

We already know how to intelligently solve most of these problems; we just lack the will to do it. Medicare, for example, wastes tens of billions of dollars a year by paying fraudulent bills. It probably cannot be solved by audits alone, as the volume of billing makes it impossible to root out all fraud. Systemic change is needed instead. There is also a lot of waste when we pay providers for unneeded services and tests. Doctors complain they don’t earn enough from Medicare reimbursement to be profitable. The evidence is overwhelming that they make up for it by adding additional tests and procedures.  Consequently, Medicare needs to reward efficient health care based on satisfactory outcomes. Medical practices suspected of a lot of bogus billing should be audited, prosecuted when possible and publicly scorned if they bill for markedly more procedures per patient than most practices. Ironically, even with its waste, Medicare is still far more efficient and cost effective than private health insurance. If we could find effective and cost effective ways to deliver health care in the United States, and cap defense spending to inflation, then most of the other problems would solve themselves.

I favor automatic sunset provisions for all programs unless they can be independently shown to be achieving their objectives for the agreed upon budget. New programs should be established with clear goals, with expected outcomes required within defined timeframes. These accountability criteria should be part of the legislation. The CBO should provide language for objective criteria that the program would have to meet and it should be inserted into an accountability part of any spending legislation. The GAO should be the independent arbiter of whether the programs actually met their goals. If they did not, programs would automatically sunset unless Congress granted an extension. This too would do a lot to align our government toward being efficient by building efficiency into the system.

This is similar to how I manage my own financial life. Government is more complicated of course, but these principles are solid and should scale. If we could actually govern like this, then maybe no one would talk about out of control government again.

Spoiling for a government shutdown

The Thinker by Rodin

Here inside Club Feb (the federal government) the incessant question is “Will the government shut down on March 5th?” That’s the date when, unless a new continuing resolution is passed or the Senate and House can agree to an omnibus spending bill acceptable to the president, much of the federal government “shuts down”. In that event, as a federal employee who is likely to be deemed non-essential, I will most likely go home having no idea when I might come back to work.

I suspect this won’t bother much of America, since federal employees have for the most part not been touched by the recession that is still impacting the country. (The same cannot be said for state and local workers.) The thinking will probably be something like, “Well, good. They should feel what the rest of us are going through.”

Maybe we feds will, or maybe we won’t. Fifteen years ago when the last shutdown occurred, non-essential employees eventually received back pay for their furloughed status. This is considered less likely this time. So perhaps I should use my furlough time to stand in line at the unemployment office. At least I would be using my time to generate some income.

For people like me, a shutdown is likely to be an inconvenience and maybe a moderate financial hit. My family has plenty of savings that should ride us through this time. It would take a few months being furloughed for us to feel a lot of pain, although I am sure I will feel more anxiety the longer it goes on. My wife remains employed in the private sector, albeit for considerably less than my salary, so we will have some income. While it lasts, I will be financially prudent and husband cash. I won’t be paying anything on my mortgage beyond what the credit union demands. I won’t be taking any vacations. I may boycott restaurants for a while and defer most optional spending. If I do any extra spending it will be for paint. Paint is cheap and there are always rooms that need repainting.

For many other federal employees down the GS ladder, a furlough of any duration will hurt. Contrary to the public perception, government jobs do not come with lavish salaries. The principle benefit of federal employment is consistency: checks are electronically deposited every two weeks like clockwork. Many federal employees live paycheck to paycheck like their private sector friends. They will be hurting if a shutdown lasts more than a few weeks.

Ironically, the people the shutdown will hurt the most will be those not in the public sector. As I mentioned over eight years ago, the number of federal employees understates the true federal employment picture because it conveniently ignores contractors. The employers of these contractors may dole out salary while their contracts are suspended, or may not. In my building, those likely to go without pay include cafeteria workers, janitors, the housekeeping staff, the grounds crews and a fair portion of the security force. They, of course, are the most visible of those directly affected. Contractors working off site will also be affected. Some with national security contracts and other “essential” contractors will keep humming along. All these affected people will likely be spending less money. Restaurants such as Starbucks in D.C. will likely be impacted, and these reduced sales will affect what they order from suppliers. So there will doubtless be a multiplier effect. Clearly, a shutdown of any significant duration will undermine our economic recovery. Deficit spending may be undesirable, but it is still spending. It keeps people employed and the economy humming.

Politicians will be busy trying to win a war of perceptions. It is likely that Republicans will lose this one. The real pain may begin around March 10, when the first set of social security checks may not go out, although according to NPR the primary impact with Social Security will be enrolling new registrants. In 1995, checks to veterans were suspended, which made for terrible PR. Perhaps President Obama could declare these functions to be essential, but there is little reason for him to do so, as it only gives Republicans more leverage. Expect very public closures of national parks, including prominent places like the Smithsonian and the Statue of Liberty. Other essential functions should keep humming along. Do not expect TSA employees to stop working. In many cases, it remains murky whether those who are essential will be paid. In my agency, “essential” people are required to work but there is no way to pay them. Can any employer require someone to work with only a promise of payment at some murky time in the future? If it goes on long enough, it feels a bit like slavery.

There are some additional things that could be done to move negotiations along. Perhaps President Obama could order the Treasury not to pay members of Congress, which may not be possible. What will happen during a furlough is that a representative’s or senator’s staff would be furloughed. History suggests that if  social security payments are stopped, everyone will sober up, but suspending veterans’ pension payments could do the trick. The wildcard of course is that we have eighty-seven new House Republicans, most of them aligned with the Tea Party, who do not seem amenable to any sort of compromise. The public will doubtless be regularly polled to see which side they agree with. At some point, one party may realize obstinacy is counterproductive to their reelection, and cave.

In the fifteen years since the first government shutdown, doubtless the bureaucracy learned some lessons as well. My current job is in many ways a direct response to the last shutdown, since it resulted in making our data publicly accessible. The strategy worked, to the tune of twenty million or more web pages served per month just for the system that I manage. Should serving this data to the public be deemed not essential, a growing and possibly vociferous community of people and organizations that depend on our data would note its absence. While I expect most phone calls that Congress will receive will come from frightened senior citizens and veterans, government provides a lot more services than it used to, and many are now available on the Internet 24/7/365. The effect may be to raise the pain threshold, but that may be useful if it leads to a quicker resolution of the conflict.

Here inside Club Fed, there is a certain nervousness about a shutdown, but also a certain resignation. Some things are simply beyond our ability to control. As prudent stewards, however, we must be prepared to act if the government is shutdown. Right now, this preparation is taking significant time and resources. Perhaps in the grand scheme of things it is good if it results in an end to deficit spending. Right now, all this necessary preparation means we are doing less of our primary mission. In that sense, it adds to waste in government.

I am betting it’s going to happen. The House seems to be spoiling for a fight. I might as well head to my local Lowes and start buying paint and rollers.

My plan to reduce our deficits

The Thinker by Rodin

Over at Daily Kos, many are calling President Obama’s bipartisan commission to recommend was to achieve fiscal stability, “The Cat Food Commission”. If enacted, a proposal released yesterday by the commission’s co-chairs Erskine Bowles and Alan Simpson would certainly require a lot of austerity and painful choices. This is why it doomed to go nowhere. However, it is useful to underscore what it might take to actually achieve a balanced budget.

It’s like Bowles and Simpson tried to produce a document they knew could not possibly garner any support. Even some members of the commission, who were surprised when the co-chairs released it, found they could not support it. Outgoing House Speaker Nancy Pelosi quickly rejected its suggestions for changes to Social Security and Medicare. There are some good ideas in the recommendations. Simplifying tax rates, for example, would make a lot of sense and make it harder for some to avoid paying a fair share of taxes. Overall, the proposal requires too many sacred cows to be slain. As one example, it says that we should stop the home mortgage interest deduction. Good luck on getting that one through Congress. You can bet if it came to a vote, the real estate lobby would target for defeat any member of Congress that voted for it.

So I know a few things already. Congress will not pass some massive, comprehensive budget reform law. That is as likely to happen as a single payer health care plan was likely to pass in this Congress. No, if it happens at all, there will be all sorts of backroom wheeling and dealing, with the big winners likely big business and the big losers ordinary, income-challenged Americans. Most likely, Congress will choose to punt any real reform until sometime past 2012 and hope an improved economy keeps voters from focusing on the problem. While our budget deficit has been a long-standing and chronic problem, what citizens really want from our government now are jobs and some semblance of the prosperity they had ten years ago. The budget deficit issue was mostly fodder whipped up by Republicans and Tea Partiers to add to our anxiety level so they could win political power.

No question about it: our budget deficit is bad. However, it is not nearly as bad as some would suggest. Our debt, as a percentage of gross national product, has been much higher than it is now. Toward the end of World War 2, public debt hit around 110% of GDP. Now we are about 50% of GDP. This number would be a lot less intimidating if we were still not painfully climbing out of a recession. If you produce less output, then of course your debt as a percentage of GDP will be higher. After World War 2, the government generally lived within its means or racked up only modest deficits. We reached a post World War 2 low during President Nixon’s term of office. It has skyrocketed under Republican presidents since that time. As a nation, we have endured much higher levels of relative debt before and came through it, and have done it without draconian solutions like cutting social security benefits.

What disturbs me the most about the Bowles-Simpson proposal are some of its assumptions. One assumption is that tax rates should be as low as they are now. If anything, our current tax rates are too low and need to be higher. In order to keep taxes at that low a level and shrink the deficit, it proposes all sorts of unpopular ways of cutting expenditures, most of which are impossible to pass. Moreover, since they are politically impossible to pass, at some point you must raise taxes to make up the difference.

Their proposal to reduce social security benefits and extend the retirement age is very unpopular with the public, who are happy to pay higher withholding rates in order to keep the current retirement ages. Then there is the good news from the system’s trustees that Social Security is solvent for at least the next fifteen years with no changes to the law. Solvent means that Social Security’s accumulated assets (in U.S. Treasury Bills) won’t be exhausted for at least 15 years, and it only just recently started to draw down from them. In short, Social Security is not causing a drain on the treasury and for now its surpluses reduces our budget deficits. So it needs tweaks rather than the draconian solutions in this proposal. Rather, it appears that the Bowles-Simpson proposal wants to monetize the Social Security surplus to further reduce the deficit. This can happen if the retirement age increases because the U.S. Treasury makes money as long as Social Security collects more than it pays out. Frankly, this and similar “reform” proposals are a scam and taxpayers should be up in arms about it. Many of the new Tea Party members of Congress were elected promoting the false claim about the imminent bankruptcy of the Social Security system.

What are feasible ways to really get to a balanced budget again? The fastest way is to have an economy that is rapidly growing with near full employment, because that means more taxes are collected, obviating a whole lot of painful deficit reduction choices. Arguably, the fastest way to do this is to borrow more money to stimulate the economy some more. That’s not likely to happen and even I agree that the odds it would work at creating lasting growth are dubious. This, combined with modest tax rate increases, say to levels during the Clinton Administration, would do a lot to bring in more revenue and close the deficit gap.

Since Social Security is solvent, the three biggest factors driving the deficit are Medicare, Medicaid and defense spending. (Too low tax rates should go without saying.) The new health care law will, if it is not overturned, squeeze cost savings from Medicare and Medicaid, slowing their rate of growth but not to the point where they keep up with general inflation. It would not be popular, but legislative caps on these programs to a percent of the GDP would be a sane approach. If anything should stimulate efficiency, this should. Caps could be raised, but only if revenues were raised as well, i.e. it was deficit neutral.

Then there is the Department of Defense, which even its secretary admits is a vast, inefficient and bloated bureaucracy, feeding an ever-expanding military industrial complex. Our military is also vastly overleveraged. Frankly, we cannot afford the military we have. It needs to be shrunk. As a nation, we need to make hard choices about where to spend our defense dollars. The Bowles-Simpson proposal at least does us a favor by pointing this out. Reducing our military presence overseas and closing many of our overseas bases makes a lot of sense.

If you look at the drivers for deficit spending, along with entitlements, elective wars also drive up debt. Bush’s two wars in Iraq and Afghanistan will cost at least three trillion dollars, and probably more like four to five trillion after all the costs are paid out. Our current debt is about 13 trillion dollars, which means just these two wars have bloated our debt by nearly 25%. Elective wars have huge financial consequences so they must be much harder to start and need to be paid for. Here is my proposal: strengthen Congress’s right to declare war or any major military incursions. Require that all wars be paid for in higher taxes, unless two thirds of both houses of Congress agree to suspend the rule. Another lesson: diplomacy is a lot cheaper than war!

Do these things and many of the other problems will take care of themselves. Any new entitlement needs to go through a process to ensure it is deficit neutral (which is the case with the health care law, by the way). Congress’s recent pay-go rules need to be codified into law, which will probably require a constitutional amendment.

Politicians often find it more expedient to cut discretionary spending, but excluding defense, this is a small portion of the federal budget. In 2009, non-defense discretionary spending was only 12% of the federal budget, or about $437 billion dollars out of a $3.5 trillion dollar budget. This spending rarely rises much beyond inflation. Entitlements and defense spending are driving up the debt. While there is wasteful non-defense discretionary spending, it’s likely not a lot, and certainly not enough to solve our deficit problem. For most of us giving up our space program, food and drug safety, air traffic control system, national parks, the weather service and such are not negotiable anyhow.

In short, we don’t have to retire at age 69 in order to solve our fiscal problems, but we do have to seriously contain costs for entitlements, decide defense spending is not sacrosanct, keep ourselves out of elective wars, and, yes, raise taxes to something reasonable but not too burdensome. Why would we choose to spend our senior years eating cat food when it is not necessary?

Let’s get to it.

Fraying at the edges

The Thinker by Rodin

From this point on, Rome had to support herself without the wealth of the eastern part of the Empire on which she had previously been able to draw. Yet the vast bureaucracy which that wealth had spawned and the 300,000-strong army it had funded were both still there, and the only way to support them was by raising taxes.

So began a chain of events which was to lead to the fall of the Western Roman Empire within less than two hundred years, destroyed by it own taxation system. Higher taxes devolved on to tenant of either land or building as higher rents. After a time the tenants had less surplus with which to support their families, so the birth-rate fell. At the same time, administration and collections of the new taxes demanded more bureaucrats, and in order to support them taxes had to raise again, so the population declined further. It was this descending spiral that ruined the West, as the economy faltered and began to grind to a halt.

James Burke
“Connections”, 1978

Life is keeping me very busy, too busy to blog in any meaningful fashion. However, I did find the following excerpt from James Burke’s Connections interesting. I see many parallels with the current state of the United States.

The combination of the Roman Republic and the Roman Empire survived for about a millennium, a remarkably long period. The United States has been a republic for 234 years. Although never officially an empire, since its ascendancy at the end of World War II, the United States has carried many of the traits of empires.

Unlike the Roman Empire, high taxes are not currently our problem. At least our federal taxes are currently lower than they have been in generations. Rather, deficits are a symptom of our own republic fraying at the edges, as is the political disunity now in Washington. Curiously, deficits are not really buying us the services that we need to remain an empire. Much of it is going toward unproductive uses, such as needless wars in foreign countries, inefficient health care delivery systems and wasteful agricultural subsidies.

Considering the Roman Republic and Roman Empire existed for a millennium and we have existed for but two hundred and thirty four years, it is reasonable to wonder how much longer our empire has. From the looks of things today, unless we get ourselves together, prioritize what is important and find more productive ways to achieve our aims rather than through force of arms, it may be a much shorter period than we think.

The dangers of deficit fever

The Thinker by Rodin

Why study history? After all, many people (particularly students) find history boring. However, there are excellent reasons for studying history. By observing our actions in the past and their effect we can predict with a fair amount of confidence whether they will work again. For example, based on our experience during the Great Depression, cutting spending lead to less economic activity and prolonged the Great Depression. Lesson: the government should keep spending in ways that stimulate the economy until a recovery is sustainable.

So what are we doing as we just begin to emerge from the Great Recession? Why, we are cutting spending! With history as our example, we now know that we are almost guaranteeing a double dip recession. Moreover, what we are cutting suggests profoundly stupid choices. It appears that whenever we finally emerge from our economic doldrums and near double-digit unemployment, our status of still being a superpower will be problematical.

It is easy to look at countries like Greece, which is in the midst of a terrible deficit-driven crisis, and figure we need to buckle down ourselves. Greece is buckling down, largely because it had no choice. Here is what austerity is also bringing in Greece: a sharp and marked drop in standards of living, a rise in already high unemployment rates, and credit that is hard to get and when available only at usury rates. There is also a lot of civil strife. Students, pensioners and government employees are marching in the streets. Rioters have already killed some people and damaged considerable property. Greece is on the edge of anarchy.

However, here in the United States both our “welfare state” and our total debt as a percentage of GDP is a fraction of Greece’s. This suggests we are in no danger immediate danger from excessive debt. In fact, as financial markets now look shaky again, even more money is flowing into U.S. Treasury bills. So our country is still seen as a safe haven for money, and our debt is seen as good debt, at least compared with other investments. Unlike in Greece, only a small percentage of us retiring at fifty-five or sixty are retiring on a pension. Most of those retiring are retiring only because they lost their jobs and no one will hire them.

Having lost their jobs, they have far less money in their pocket, so they are spending less. When people spend less and earn less, governments collect less in the way of taxes. For the most part, state and local governments cannot raise taxes enough to make up the difference, so they must cut services instead. And since states and local governments have little in the way of bloat, essential services are being cut. Firefighters, police and teachers that thought they had steady jobs are finding themselves unemployed. Here is a real trickledown effect. Because they have less to spend, retailers receive less and perhaps cut their workforce, or reduce hours. When retailers sell less, they need less from wholesalers who also cut jobs. When wholesalers need less, producers and manufacturers make less so they cut jobs. So the economic effect keeps trickling down, exacerbating unemployment, reducing tax revenues and extending our economic doldrums.

Moreover, our supposedly precious children are getting inferior educations. They are stuffed into classrooms with more students, lose opportunities for extracurricular activities and in at least 120 school districts have four-day school weeks. We will depend on their income in our own retirements, but it’s hard to understand how. By teaching them less today, they will likely be behind children in other countries. All these negative effects are because we are now alarmed over short-term deficits that it appears we can comfortably sustain over the short term.

If you have trouble starting your car, you might pump the accelerator hoping the engine will start. The same is true with our economy. What you don’t do is the moment it sputters to life stop giving it gas.

Deficits remain important in the long term. However, Republicans don’t seem to understand that raising taxes is a viable way to solve deficits. If deficits are truly more important than anything else is, then raising taxes has to be on the table. Otherwise, keeping taxes low is more important than deficits, which is the philosophy they have traditionally embraced. It is also important to get spending in line with revenues. But first things first. First the economy has to be vibrant enough so that economic activity reduces unemployment and drives wealth. When this happens, tax collections also increase, reducing deficits.

Unquestionably, we waste and misdirect much of our tax dollars. Our spending on war in Afghanistan is an egregious waste of money because it is a lost cause. A lot of the money given to the Afghan government instead lines the pockets of its largely corrupt Afghan officials. It also goes to pay off warlords who look the other way so our supply trucks carry cargo safely to remote locations. Aside from the wars in Iraq and Afghanistan, huge amounts of money are wasted within the Department of Defense. Secretary of Defense Robert Gates agrees. There is also huge waste in the Medicare system. Some of these expenditures, like building aircraft engines we don’t need, do feed American families. However, but they don’t go to buy things we need to make our country stronger and safer.

It’s pretty clear what we do need to do.  We need to create jobs for the unemployed that will leave us with a stronger country. Jobs provide money, but also feed faith in the future. You don’t get there by laying off teachers, policemen and firemen. These are our first priorities, which is why it makes no sense for Republicans (and one turncoat Democrat) to kill a bill that keeps them employed. You also get there by building and rebuilding bridges and roads, funding innovative research for the 21st century and by investing in the educational needs of all our citizens, activities that are underway but where more money is likely needed. You don’t get there by cutting off unemployment benefits because people have been two years without a job. All that does is breed poverty and homelessness. However, if a chronically unemployed person at least has a check coming in, maybe he can pay his rent and buy food and clothing. That money stimulates a lot of economic activity.

You also raise taxes where it makes sense to do so. Aside from the poor economy, what is feeding the deficit? Mostly tax cuts that we gave to the richest Americans. These are people who can certainly afford to pay more taxes and in some cases genuinely want to pay more taxes. These huge tax cuts drove the problem that caused our deficits to explode. Certainly now is not the time to raise taxes on middle and lower income people, but those who can afford to pay more in taxes certainly should, particularly when richer Americans historically have paid much higher tax rates and still maintained a great standard of living.

Perhaps to achieve fiscal solvency it will be necessary to extend retirement ages or cut benefits in social programs like Medicare and Medicaid. These cuts become much more likely though in a hampered economy. I know my lifestyle would take a severe hit if I lived on half my income. The same is true with our government. A thriving economy will be the engine that creates this wealth again, as it did under Bill Clinton.

We need to spend more to get this economy moving again, even if the debt numbers look scary in the short term. Just as importantly, we need to spend wisely, investing on essentials like education, our state and local governments, and our infrastructure. Doing so prepares us for the economic challenges of the 21st century. To narrow the deficit, we need to repeal tax cuts given to the rich. At the very least, we need to redirect wasted money from places like Afghanistan into useful activities, like maintaining basic services for our citizens. What we do not need is what we have now: a panicky and foolish Congress that cannot see that their version of austerity is just another word for continued recession, unemployment and our quick descent into a second world country.