NPR radio recently featured a show on Magnetar, a hedge fund that bought CDOs on mortgage backed securities (MBS). For an in depth look at the MBS and CDO creation process and a clear, simple explanation of what a tranche is, you can can read the several part article at Pro Publica’s web site.
The tea party, Libertarians, and conservatives of both the fiscal and social ilk have made repeated calls for “limited government”, meaning the federal government. In detail, what does limited government mean? As always, the devil is in the details.
Below are several federal grants to the states that the federal government has no business being involved in – in my opinion. Many of these are good programs but simply do not need to be administered at the federal level. However, the federal income tax brings the money from individuals to the federal government where the power brokers in Congress and the lobbyists decide on how to dole it back out to the states and individuals, which is where the money came from in the first place. Countless federal agencies dilute that tax money before it gets doled out. The complete list is here.
These are 2007 figures, rounded to the nearest billion dollars:
Medical Assistance Program $203B – the states can take care of this on their own. Why do the Feds need to get involved?
Unemployment Insurance $36B – We already have state unemployment. Federal unemployment kicks in when a state runs out of money or the Congress decides to extend benefits. Why can’t the states simply charge more and let’s get the Feds out of the picture.
Supplemental Nutrition Assistance Program – $30B. Are the states so incompetent at administering their own affairs that the Feds have to step in on this?
Temporary Assistance for Needy Families (TANF) $16B – Instead of helping needy families in our own states, our tax money helps families in other states. Federal employees working in Health and Human Services (HHS), not state agencies, get to decide who is deserving of this assistance and who is not.
Federal Pell Grant Program $14B – are the states really that bad at managing the educational needs of their residents that we need the wisdom of a federal agency to administer this needs-based program for college and graduate students?
Title 1 Grants $13B – here’s another program where big daddy in Washington, DC helps the states help disadvantaged school children. Evidently the states suck at this too.
Special Education Grants $11B – this federal program for disabled school children helps states who evidently weren’t taking care of these less fortunate kids. Why bother having any state governments? Evidently, most state governments are incompetent and need federal help.
National School Lunch Program $8B – the states can’t even adequately feed the kids who attend school in their state.
Head Start $7B – this program for pre-schoolers is needed because the states can’t take care of their own.
State Children’s Insurance Program (SCHIP) $6B – another example of the feds having to step in because there was a perceived need that the states weren’t taking care of.
Special Supplemental Nutrition Program for Women, Infants, and Children (WIC) – $6B – more nutritional help for the states, who can’t do anything right.
Federal Transit Formula Grants $6B – urban taxpayers pay most of the federal income tax in this country so this is a way for the Feds to give back some of that tax money to the cities to help them get their residents to and from work so that those residents can continue to foot the Federal tax bill.
Foster Care Title IV-E $5B – another great program to help foster kids but why does it need to be at the federal level?
Above are only several of the 160 or so federal programs that are listed on 4 pages in this report from the Census Bureau. Maybe we should disband all the states and become one state run by the folks in Washington, DC. We would get rid of a lot of duplicate state agencies, who are evidently incompetent or negligent. Then, when I call my state governor’s office, they will answer the phone “Hello, this the Colorado Division of the Executive Branch of the U.S. Government.” That is where we have been slowly heading for the past half century or more. I hope that we will take another road. I don’t like what I see up ahead on this road.
A few days ago, the Bureau of Labor Statistics (BLS) released their state by state unemployment report for March and it is uglier than the proverbial junkyard dog. The stock market is only 8% below its level of 3 years ago, before the loss of over 8 million jobs. If you live in one of the worst hit states – California, Nevada, Michigan, Florida, Rhode Island and S. Carolina – the real unemployment, or U6 rate, is probably over 20%. That rate includes people working part time because they can’t find a full time job and those who have given up looking. Here’s the ugly picture based on data from the BLS. Click to enlarge.
The Consumer Price Index is a yardstick of changes in everyday expenses. It is used to recalculate Social Security payments each year and governs a wide range of employment and union contracts, affecting the paychecks of millions of Americans.
How it is measured is a source of disagreement among economists. The task of trying to replicate the buying habits of a country is difficult, almost as difficult as picking a winning bracket in the NCAA basketball tournament. There are a number of CPI measures but the CPI-W is the one most widely quoted. This index aims to replicate the cost of living for urban wage earners and clerical workers. Even though many seniors are not working, the cost of living adjustment (COLA) for their Social Security check is based on this index. Since the 1980s there has been a separate index, the CPI-E, that more accurately reflects costs for seniors, but it has not been adopted for one simple reason – cost. Rising health care and housing costs for seniors make this index about 1% higher than the commonly used CPI-W.
Although the index includes computer software and accessories, the cost of computers themselves do not seem to be covered. That cost has dropped dramatically. As I was cleaning out some files, I came across this nugget of nostalgia from a computer magazine in 1996. Below you will see a “Desktop Workhorse” probably designed for a small businessperson and priced at over $2300 for a computer that is 1/10th as powerful as a cheap $500 computer today. (Click to enlarge)
A few days ago, I looked at the conservatives’ claim that reducing tax rates produces more revenue. We saw that the gains in revenue were largely from increased Social Security and Medicare taxes. A secondary component of that increase was capital gains taxes.
The chart below shows the relationship in the percentage of capital gains taxes to individual income taxes collected as one series and the second series is the amount of corporate and individual dollars collected (in 2000 constant dollars). We can see the close relationship that an increase in capital gains taxes has on total income tax collections. (Click image to enlarge)
I have long advocated abolishing capital gains taxes for a number of reasons. The chart above shows just how unpredictable this tax is as a source of income for the federal government, making it difficult for any government to adequately budget for it. The lost revenue could be made up with a small surcharge on investment transactions, as I have suggested previously.
Continuing my study of the shell game that our elected representatives are playing, today we’ll look at the revenue sources of the federal government minus Social Security taxes. (Click image to enlarge)
During the Nixon era in the late sixties and early seventies, excise and other taxes decreased. As inflation ran rampant during the seventies, taxes on individuals made an increasing contribution to the federal pot. As a share of the pot, corporate taxes decreased so that in the last three decades, individual taxes and Social Security and Medicare taxes on individuals made up about 3/4 of federal revenue.
As I have noted before, this country practically invites imports. We have the lowest import duties of any developed country yet we scratch our heads and wonder why our trade balance is so far in the red, why we have a deficit, and where have the jobs gone?
Some will say that government needs to get leaner but most large organizations, both private and public, do not run lean. Any of us who have worked for a large corporation can attest to that fact. We can continue to campaign for leaner government but the fact is that the federal government is not raising enough money. Like a giant Ponzi scheme, our elected representatives have been collecting Social Security taxes and treating the excess taxes as “income”.
In this coming decade, the boomers will start asking for their Social Security pensions. The largest influx of retirees won’t occur for another 10 years and the demand for Social Security pensions will overwhelm the receipts collected sometime in the middle of the 2020s.
Just as Bernie Madoff swindled most of his investors by not investing the money entrusted to him, politicians will be in the uncomfortable position of admitting that they spent rather than invested the Social Security excess taxes and there aren’t enough new taxpayers to get the money from.
It’s going to be a bloody battle then – not as bloody as a battle scene in the movie “Braveheart” but you get the idea. Retired people get the majority of their income from Social Security. Inevitably, politicians will have to find some way to tell boomers that their pension payments are going to be reduced. The coming furor will make a Tea Party rally look rather sedate.
Yesterday I looked at the increasing share of Federal revenue that comes from Social Security and Medicare taxes. The chart below shows total Federal revenues broken into two components, Social Security/Medicare taxes and all other taxes, most of which are personal and corporate income taxes. (Click graph for larger image)
Today I’ll look at taxes and GDP, or Gross Domestic Product. The chart below shows Federal revenues less Social Security and Medicare taxes as a percentage of GDP. (Click graph for larger image)
In 1980, Ronald Reagan led a campaign to reduce the 1980 17% tax bite. In each year in the late 70s, the Social Security trust fund had run a deficit, which prompted a series of Congressional increases in Social Security taxes. From 1977 to 1987, the social security tax increased 23% while the Medicare tax increased a whopping 62%.
In 1986, the first of the baby boomers turned 40, entering their peak earning years. As the income of boomers grew, so too did Social Security and Medicare revenues.
The chart below shows federal revenues as a percentage of GDP. (Click graph for larger image)
Note again the increasing percentage of taxes that comes from Social Security and Medicare. Instead of investing Social Security taxes to pay the future benefits of the boomer generation, politicians of both parties used the taxes to offset declining income tax revenues. Conservative politicians campaigned on lowering taxes while liberal politicians campaigned on offering more programs.
To this day, conservative politicians repeat their mantra that lowering tax rates produces greater tax revenues. The data simply does not support that contention.
Liberal politicians continue to dream up new programs to fix another of society’s needs. To this day, liberal politicians avoid the fact that the only way to fund more programs is to increase taxes on some segment of the population. President Obama ran for office promising to increase taxes on a relatively small segment of the population, the “fat cats” making more than $250K per year. Eventually he – and we – will find that there aren’t enough fat cats in the country to pay enough additional taxes for his proposed programs.
As the chart above shows, we cannot run a country by collecting only 10% of GDP in income and miscellaneous taxes without running ever larger deficits. Several weeks ago, the rating agency Moody’s anticipated the possibility of downgrading U.S. Treasury bonds from AAA status by the end of the coming decade unless we make some changes in our deficit. Such a downgrade would increase the cost of borrowing, adding significantly to the interest we pay each year on our national debt.
Conservatives have repeatedly argued that even though tax rates were cut during the Reagan administration, federal tax revenues have increased in almost every year. Is this true? YES. The Tax Policy Center presents a history of federal tax revenues from the Office Of Management and Budget (OMB).
BUT, what conservatives don’t acknowledge is the effect that Social Security revenues have had on total tax revenues. Combining a history of Social Security revenues with the history of total Federal tax revenues, I created a chart to show the effect that increasing Social Security revenues have had on total federal tax revenues.
As you can see, it has been dramatic. When we subtract Social Security revenues from total federal tax revenues, we see that, contrary to what conservatives maintain, income tax revenues in constant 2000 dollars have not increased almost every year since the Reagan era tax cuts.
The larger income tax revenues of the 1990s was due not to a decrease in tax rates but to an increase in tax rates on the upper income brackets. As the stock market experienced the “irrational exuberance” of the 1990s, capital gains taxes increased dramatically.
Have the Bush tax cuts of 2003 contributed to more tax revenues? Yes, BUT most of the revenue gains were again from capital gains taxes. As the stock market dramatically declined in the latter part of 2008, capital gains and the taxes on those gains evaporated.
The decrease of income tax revenues accelerated in 2009 and although the chart does not show it, the constant dollar income tax revenue in 2009 was about the same level as 1980.
This year’s federal deficit will be about 10% of GDP. Let’s put that figure in perspective. Since World War 2, there have only been three or four years that the deficit has exceeded 5% of GDP. Former Vice-President Dick Cheney famously said that “deficits don’t matter” but they do – for governments, for companies, for individuals.
States have employed lotteries to fund a number of programs, including education and state parks. The federal government should have a lottery to help pay off the deficit. The prize? A 10 year holiday from federal income taxes for 50,000 winners. High income earners would buy a lot of lottery tickets, paying back the $2 trillion in tax cuts that they were awarded in 2003. If 146 million U.S. taxpayers bought just one $99 ticket, that would raise $14 billion less expenses. How many tickets would you buy to get a 10 year reprieve from federal income taxes? The federal government could “kick the can down the road”, forsaking some future tax revenues for some instant revenue.
Although high income earners would benefit the most by winning, the lottery would generate sales among those of all income classes. Lottery tickets would have to be tied to an individual’s social security number to prevent a secondary market of buying and selling of tickets.
The federal government could sell broadcast rights to the prime time night of the lottery drawing , thus earning additional revenue. The number of viewers would probably exceed that of any Super Bowl, presenting a bonanza opportunity for networks to sell premium advertising time.
If we are going to have big government, let’s have smart government. Let’s have fun government.
This past week, President Obama met with leaders of both parties in a televised summit designed to enable each party to publicly state their positions on health care reform. Ostensibly, the summit’s purpose was to find common ground between the parties but the only common ground was the line drawn in the sand between the two parties.
The summit did make clear each party’s fundamental view of the role of the federal government. This debate has continued for two centuries and, as I noted in an earlier post, James Madison crafted the debate into this country’s Constitution as the only solution to keep the confederation of states unified into a single country.
During the seven hour summit, Mr. Obama probably put the core issue most succinctly. After saying that the public could see the difference in each party’s position, he said “that’s what elections are for.” He could have been referring to the past election, which gave the Democratic Party a clear mandate for change. In a subtle way, he may have been referring to the upcoming November elections – let the voters decide which position they prefer.
What muddies the political waters are the independents and the “in-betweeners”, those who think that a limited role for federal government should not be as limited as Republican ideologues argue for. On the other hand, these “middle-of-the-roaders” may see the large role of the federal government espoused by Democrats as too intrusive.
Politicians are prone to explain things in nutty sports metaphors, as though the general public had only a 4th grade education. So, in case you have only a 4th grade education or are a lover of stupid metaphors, let me explain it this way: it’s like there’s cows on one side of the fence and sheep on the other side of the fence. The sheep believe in eating the grass all the way down to the ground. The cows believe that they should leave a bit more of the grass blade showing so that the grass can regenerate. A bunch of people sit on the fence trying to figure out which side of the fence they’re going to jump on.
Yee-hah!
