More fuel for the fire

Another opinion on our fiscal problems - read the just-released CBO (Congressional Budget Office) report "Budget and Economic Outlook: Fiscal Years 2011 Through 2021". Of course they are required by Congress to make some overly-optimistic assumptions in their calculations:

In particular, the baseline projections in this report are based on the following assumptions:

* Sharp reductions in Medicare's payment rates for physicians' services take effect as scheduled at the end of 2011;

* Extensions of unemployment compensation, the one-year reduction in the payroll tax, and the two-year extension of provisions designed to limit the reach of the alternative minimum tax all expire as scheduled at the end of 2011;

* Other provisions of the 2010 tax act, including extensions of lower tax rates and expanded credits and deductions originally enacted in the Economic Growth and Tax Relief Reconciliation Act of 2001, the Jobs and Growth Tax Relief Reconciliation Act of 2003, and ARRA, expire as scheduled at the end of 2012; and

* Funding for discretionary spending increases with inflation rather than at the considerably faster pace seen over the dozen years leading up to the recent recession.

Yet even with these overly-optimistic assumptions the news is dismal!

Building the budget from the bottom up

Ok, in my last post I suggested we build the Federal budget from the bottom up until we reached the “magic number” of $2.217 trillion – the amount of money the Federal government brought in last year from all sources.

So let’s just look at this current year, ignoring for the moment some of the looming($100 trillion +) unfunded liabilities in future years.

First, of course, we would have to pay money the government is legally obligated to pay, which includes:

• Interest on the national debt: $188 billion

• Military veteran’s pensions: $59 billion

• Civil servant pensions: $70 billion

• Social Security: $730 billion

• Medicare: $492 billion

• Medicaid: $271 billion

Those obligations already total $1.81 trillion. We only have about $400 billion left to run all the rest of the Federal government, including paying people’s salaries and running their office buildings. What shall we fund next?

Military spending? Let’s cut its current budget of $685 billion in half to only $342 billion. That would leave us only $58 billion for everything else.

Running the legislative branch (Congress) would cost us another $2.8 billion even if we cut their current budget in half. Now we have $55.2 billion left.

Running the judiciary branch (courts) would cost us another $3.1 billion even if we cut their current budget in half. Now we have $52.1 billion left.

Running the executive branch will bust our budget. The Department of Homeland Security alone would cost $56 billion. The Department of Agriculture spends $95 billion a year. The Department of Education spends $68 billion a year. The Department of Health and Human Services spends $700 billion a year. The Department of Housing and Urban Development spends $40 billion a year. The Department of Justice spends $25 billion a year. The Department of Labor spends $40 billion a year.

There are another several dozen executive branch agencies, but I think you get the point. Even if we cut in half the budgets of the departments just listed above it would still add over $500 billion to the budget, and we only had $58 billion more to play with in the first place, once we had spent the money we were legally obligated to spend.

This exercise kind of concentrates the mind, doesn’t it? It makes it clear that the sort of baby steps being argued about so passionately in Congress now are in fact largely meaningless in the face of our budget problems. Cut the budget of every government department and agency in half and we still don’t bring in enough revenue to pay the bills.

It’s the revenue, stupid!

Amongst all the talk about cutting the Federal Budget, here is an innovative concept – how about we start from the revenue end and ask not what we want, but what can we afford with that much revenue? It is the way households and companies operate (if they are not dysfunctional). Perhaps it is the way the Federal government ought to operate as well.

As I have pointed out before, revenue is the key. If one wants more government programs, one needs more revenue. There are only two sustainable ways to get more revenue – tax more or increase the size of the economy. Taxing more sounds great, but it reduces the competitiveness of the American economy and hence in the long run reduces revenue.

The economy is now global. Many, perhaps most, large American firms make more of their profit abroad than they do here at home. They have no compunction about relocating their operations elsewhere if the business environment is better there. Nor should they – they are not in business to provide American jobs (despite what some politicians think), but to earn profits for their shareholders and survive in a highly competitive marketplace. If we want more businesses to start or remain or relocate to America, we need to make the business environment, including the tax and regulatory environment, more attractive here then elsewhere. It’s not rocket science!

So here is the magic number - $2.217 trillion. That is what the Federal government took in last year. We can spend about that much without adding to the debt, and if we spent less we could begin to pay off some of the $14 trillion in Federal debt. The Federal government actually spent about $4.472 trillion, and we had to borrow the difference – almost 40% of the budget.

I propose that rather that have hysterical debates about what to cut and how terrible the consequences will be for this or that group, we start the other way around, list in priority order what we are willing to pay the Federal government to do for us (and this includes entitlement programs like Social Security and Medicare), and end the list when we run out the $2.217 trillion of revenue.

And if the list ends earlier than we would like (as is likely to be the case), then we discuss what steps the government might take to help expand the economy and increase the revenues, so that we can afford more items on the list. Effective support of improved education and innovation would be a start (but “effective” is the key word here – not just more Washington bureaucracy). Improving the business tax and regulatory environment might also be reasonable things to do to attract and keep more business in our economy rather than in someone else’s, and hence increase Federal revenues.

Again, it’s the revenue, stupid!.

(PS – for those too young to recognize the allusion to “it’s the economy, stupid”, that phrase was a highly successful campaign slogan used during Bill Clinton's successful 1992 presidential campaign against George H. W. Bush.)

Cutting the budget

Well, President Obama said all the right words about cutting the debt and deficit last night in his State of the Union speech, but as usual didn’t make any specific proposals about what to cut. Senator Paul Rand and Representative Michele Backman, both Republicans and both Tea Party favorites, have released lists of what they propose to cut, and of course there are the predictable howls of outrage, especially from the liberals.

I think their proposals are quite reasonable. Yes, it will be unpopular to cut the National Endowment for the Humanities, eliminate the Department of Education and farm subsidies, as well as support for public broadcasting and Amtrak subsidies. On the other hand, if the government has to borrow 40% of its budget every year, then we simply can’t afford some of these things, nice as they might be.

In fact, “extreme” as they may appear, neither of these proposals cuts anywhere near enough from the budget to stem the debt tide. The numbers make it clear that we need to cut 30-40% just to stop adding to the debt, and a lot more to begin to reduce the Federal debt. And in fact there is no way to cut that much from the Federal budget without cutting some from the two major entitlement programs – social security and Medicare.

Time to get real about this problem. The president was right – for our future competitiveness we need to invest more in education and innovation. The only practical, sustainable way to do that is to cut, and cut drastically, almost everywhere else. I don't find the Republican proposals too extreme - I find them too timid for the size of the problem we face.

What it would take to eliminate the Federal budget deficit

The Republicans promised on the campaign trail to reduce the Federal deficit by $100 billion this year, though once they actually took control of the House at the beginning of this month they scaled that promise back to $50 billion, arguing that the fiscal year was already half over, so they couldn't cut more than half their promised $100 billion in this year. Of course, they have promised not to touch entitlements like Medicare or Social Security, nor the military budget, so they will be hard pressed to find even $50 billion they can really cut.

Representative Paul Ryan has an alternative budget plan to President Obama's, which seeks to cut $500 billion per year from the Federal deficit, and does so by cutting everywhere, including the entitlement programs and the military. It is unlikely to ever pass, of course, since it affects everyone's sacred cows. But if it did pass, would it be enough?

the 2010 Federal deficit was $1.3 trillion. That's not the Federal debt, which stands at around $14 trillion. That is just what we ADDED to the debt in 2010. So in fact we would need to reduce government spending and/or increase government revenues by about $1.3 trillion JUST TO KEEP EVEN, let alone pay down any of the existing debt.

So the Republican promise of $50 billion in cuts, even if it actually occurred (unlikely), is a drop in the bucket, and even Representative Ryan's "drastic" proposal to cut $500 billion per year isn't even half what is really needed JUST TO STOP INCREASING THE FEDERAL DEBT.

Democrats, of course, are no help at all in this discussion - they still want to INCREASE government spending for popular liberal initiatives, despite the ballooning debt.

What will it take for Congress and the administration to get real about this problem? State governors are finally getting real about the problem, but then they need to since most state constitutions prevent them from running permanent deficits. Perhaps we need a similar change in our Federal Constitution - something Congress can't simply bypass every six months as they do the debt ceiling.

Favorite quotation of the week

"That which can be asserted without evidence, can be dismissed without evidence."
— Christopher Hitchens

Recommended: Why The West Rules – For Now

Ian Morris’s new book, Why The West Rules – For Now: The Patterns of History and What They Reveal About the Future, is a dense, well-researched review of history from the emergence of modern humans to the present, directed toward answering the question “Why did the Western world end up ruling instead of the Eastern world?” After all, the East had advanced civilizations in China and India, among other places, while Westerners were still fairly primitive. Why did science and the industrial revolution advance so much faster and earlier in the West than the East?

Morris examines a number of theories, but concludes in the end it was geography more than anything else that gave the West the advantage it now holds. But he also argues that power and influence is now shifting inexorably to the East, for complex reasons that he explores in depth in the book.

Of particular interest is his methodology for measuring the “social development” of societies across time (a pdf document detailing the methodology - in 233 pages!! - can be found at http://www.ianmorris.org/socdev.html). The methodology is based on such things as the daily energy capture per person, the level of information technology, the level of civil organization, and the war-making capability of the society. One can quibble about details, but the overall picture on all the measures is startling – they run almost flat near zero for most of recorded history, and then take off toward the stratosphere in the past hundred years or so. Clearly something profound has happed to society over the past century, and even more profound changes are likely in the next century. So profound, indeed, that the distinction between East and West may soon become meaningless.

A good book, but be prepared to work to follow his arguments.

Keeping Perspective

A mentally deranged man shoots a Congresswoman and we have days of public debate in the media about whether it is the fault of overheated (Right wing) rhetoric. A mentally deranged man shoots a bunch of co-workers (which happens about once a week in the nation) and it hardly makes a ripple in the news. A mentally deranged college student or high school student shoots a bunch of fellow students in a school (which happens two or three times a year in America) and the media goes nuts. A mentally deranged man shoots a convenience store worker (which happens about once a month in America) and it hardly gets mentioned in the news.

Notice a pattern? If a shooting helps someone’s political agenda, especially a liberal agenda, it makes big news. If it doesn’t, it just gets thrown in with all the other daily murders in the nation and largely ignored outside of the local community.

The real issue here isn’t whether Sarah Palin is to blame for this shooting. The real issue is how did a known mentally-disturbed man manage to legally buy a gun?

The real ideological divide in America

Shorn of all the political hype and misinformation, and the now largely meaningless Democrat vs Republican party identifications, the fundamental political split in the nation today is over what the proper role of the Federal government should be. It is not a new argument – the Founding Fathers argued about this endlessly.

On the one hand there is the group that thinks that the Federal government’s powers should be sharply limited only to (a) things that the separate states need to cooperate on – national defense, foreign policy, and regulating interstate commerce, and (b) the protection of civil rights, as defined in the Bill of Rights. All else ought to be left to the individual states and to private enterprise. This is actually what the majority of the Founding Fathers subscribed to, because they had just come from a European system in which they found the government oppressive.

On the other hand there is the group that subscribes to the European strong-government, strong- regulation model, and thinks the Federal government is the appropriate vehicle to address all sorts of social and economic issues. This view is generally associated with the political left (the Democrats), although in truth the conservatives (Republicans) have been more than willing to allow government expansion where it helped or subsidized their businesses.

And in fact the small, very limited Federal government that was appropriate to our nation when it was new and small would not be appropriate now that America is large, wealthy, and a major player in a much more complex world. The Constitution is indeed a remarkable document, but it would be amazing if it didn’t need a few adjustments over the centuries to adjust to new circumstances.

So the real issue is just what those adjustments should be, and just how big and intrusive should the Federal government be allowed to become. There is, of course, no simple, neat answer – it is a matter of balance and trade-offs.

Here are some things to consider in this discussion:

1) Government bureaucracies by their very nature grow ever larger and less efficient, arrogate to themselves ever more power, and as they get larger become less responsive and more impersonal in their dealings with the public. This is a natural consequence of their not operating in a competitive business environment, of having no competitive market pressures on them to be efficient or customer-focused. It’s not that the people who work in a bureaucracy are sinister; it’s simply that their incentives are not aligned with the needs of the public they serve.

2) Money, like power, corrupts. It is simply a feature of human nature. Large governments manage large amounts of money, and the temptation to divert a little of that to oneself or to one’s friends or business acquaintances (in return for future favors, of course) is apparently almost irresistible. And for politicians, the temptation to buy votes, and hence buy re-election with some of that taxpayer money is equally irresistible. It is no wonder we have so many scandals in Washington – actually the level of outright corruption (straight bribery) is remarkably restrained by the standards of much of the world. Washington has evolved a much more “genteel” form of corruption among politicians and senior government and military officials involving lucrative job offers after one leaves public service, in return for favorable business contracts and subsidies and friendly legislation. Look, for example, at the generous corn ethanol subsidies as a glaring example of vote buying with taxpayer money.

3) It was never the intention of the Founding Fathers that people would become “professional politicians” and make their living at it. In the early days of this nation, Federal political office was an unpaid public service that one performed for a limited time out of obligation, not as a permanent livelihood. Once it becomes a paying profession, the overriding incentive is to keep the job, not to do the job right. People bemoan the absence of “statesmen” in government today, but how can we get “statesmen” if politicians are more worried about their re-election chances than the nation’s good?

4) Some people would like to try the European model. Well, Europe has tried it now for a long time, and one can look at their experience to see if it would be better. By almost any measure – economic growth, productivity, prosperity, citizen happiness, rate of innovation, etc – Europe ranks behind America. The few places where Europe does better, like primary and secondary education, may be due to some anomalies in the American system (the resistance of strong teacher’s unions to change, for example).

5) Politicians have over the past 50 years put a lot of government-subsidized entitlement programs and a lot of special-interest subsidies in place, and quite naturally it will be very hard, and politically dangerous, to try to wean people and business off of these. What is needed (but probably won’t happen) is an adult debate in this nation about what government services we all think are worth paying for fully with our taxes, and what services we either don’t really want or think private enterprise could provide at lower cost and/or better quality.

My own view is that the Federal government does indeed have some important tasks that only it can do, and it ought to be structured to do them effectively and efficiently, which implies far more accountability than we have at present. A nation as large as ours does indeed need a strong Federal government for some essential tasks, but we are poorly organized politically for those tasks, and as a consequence are wasting a lot on money and building a massive debt with little to show for it.

Recommended: The 10,000 Year Explosion: How Civilization Accelerated Human Evolution

The conventional wisdom is that evolution is a very slow process, and as a consequence humans today are not much different than humans 5000 years ago. Chochran (a physicist) and Harpending (an anthropologist) argue, from recent DNA evidence, that this is not so. “Deep” changes (changes requiring mutations in many genes), such as development of an eye, may indeed take a very long time. But “shallow” changes (meaning changes in just one or a couple of genes) can occur quickly, can produce profound changes in physiology and behavior, and if they increase fitness and survival, can spread through a population in relatively few generations. The example has been before us all the time – the evolution of domesticated plants and animals in just a few thousand years. The authors argue that civilization over the past 10,000 years has had a profound selective effect on the gene pool, and is still driving human evolution at an unusually rapid pace. A fascination book to read. (See book list in sidebar, under 2009, for ISBN details).

Recommended: Monsoon: The Indian Ocean and the Future of America Power

Robert Kaplan is a journalist/strategic analyst and author of some 12 other books about America foreign and military policy. In this book he argues that America’s historical preoccupation with the Atlantic and Pacific oceans has largely blinded it to the growing importance of the Indian Ocean, a key water highway for a majority of the world’s goods and energy supplies, and the site of a delicate confrontation between the USA and the burgeoning navies of India and China. This is a wonderful book to read, but a hard one to describe: part sensitive travelogue through all the countries that bound the Indian ocean, part analysis of the complex political/religious/ethnic balances throughout the region, part discussion of the tactical moves being made by China and India to expand their influence. Of particular interest is the discussion of the key geopolitical roles played by Burma (now Myanmar) and by the island of Taiwan. Well worth reading.