Common Sense on Government Spending
Posted by Jeff Id on January 3, 2013
UPDATE: This link is relevant to the discussion below. http://noconsensus.wordpress.com/2012/03/17/conservative-fantasy-world/
Tom Fuller and I have always had a cordial relationship despite the fact that his politics are Pelosi-left. He left a comment on the last thread in relation to taxes and the deficit which depicts exactly how the left-wing media is trying to portray our current debt situation. While he is refreshingly honest in his beliefs, they do not match objective reality.
Hiya Jeff (and all…)
If I can focus first on the debt argument here, I must say I am not at all worried by American levels of public debt.
Our debt has been higher in the past as a percentage of GDP, which is the only sane metric to use. The people who are lending us money are in line to do so. They have more confidence in our ability and intention to pay than maybe you do. They like us so much they’re willing to lend us money at effectively zero interest.
If America were a ‘household’, its debt would be considered very manageable–a bit more than 100% of annual income. Anybody reading this who has a mortgage may well hold a much higher percentage of debt.
What worries me is that our obligations are set to grow dramatically, to help seniors stay out of poverty and get some sort of medical care. That is why I am not overly upset at taxes returning to levels last seen during the Clinton administration, when we managed to grow the economy quite well, even with taxes at a respectable level.
We’ve had much higher debt in the past and done just fine. We’ve had much higher taxes in the past and done just fine. We have problems ahead that we need to prepare for–but we can and we will.
Happy New Year!
Now the only time in history that debt hit a higher percentage of GDP in the US was in WW2. I like this first graph because it doesn’t try to blame one party or the other for spending but it does show how serious the situation is in recent years. Everyone likes to hate Bush Jr. because that is what is popular today, but unlike most people, my beef with him was that he didn’t fight congress enough on spending. You can see that as a percentage of GDP, he barely tweaked the debt level until the last two years of his presidency when the Democrats controlled two branches of government and massive spending bills were passed under the false guise of “saving the economy”. The 2012 point at the end of the graph is an out-of-date estimate.
So when you look at that plot, the only time we had a debt level this high was when we were in the middle of a world war. Not just an ordinary little war, a world-wide battle for our lives.
The next graph shows the continual cancer-like growth of the largest and most powerful government in world history as a percentage of its populations Gross Domestic Product (GDP). Note that the plot is of “total government receipts” rather than the receipts from income tax so popular in leftist newspapers. Receipts from income tax have remained flat, and the media continually confuses its audiences with this tax fact that represents a small fraction of the picture. Total government receipts, is the Federal-only tax load on the economy in dollars, and does not include State taxes. When discussing historic tax levels, this is the majority of the real tax that you should be looking at, as these are the actual tax dollars being sucked out of the “free market” by our “limited” central government.
So the next time you hear that US taxes were much higher in the past….
Now there are a number of countries with higher receipts as a percentage of GDP than this, that the left likes to use as examples. However, these countries are either very much business repressed or in unusual economic circumstances like Denmark experiences, where exports provide the funding to allow a relatively successful left-wing society on a very tiny scale. I like the Denmark example because its often used as a counter example to a US style of government, yet it is comprised of 5 million people who are ironically dependent on oil and gas for their funding. There is nothing wrong with that in my opinion, but it cannot be scaled to function here as the amount of gas and oil required to support the same system for 300 million people would quite literally “flood” the market. You might even need an actual boat! We also have that little problem that the left seems to think CO2 emissions are killing the planet so instead of moving forward with common sense production of gas, there is great resistance to it.
I like this next graph taken from usgovernmentrevenue.com. It depicts several of the primary sources of income for the US governement and you can see fairly clearly where the increases in figure 2 above come from.
The blue line is total revenue, red indicates income taxes, green is business and other revenue, gray is ad valorum (property tax), and yellow is social security/medicare tax. Now we often look at the volatility of a timeseries while studying climate here, note the extreme fluctuations at the most recent end of the graph. These are caused by dynamics in the economy as the government borrows and spends to try and prop up our over-taxed free market economy. Notice the business and income taxes are the lines which create the recent short term variability in the total, not the social tax, and not the property tax. These taxes are profit based tax, rather than asset based. This fluctuation represents extreme losses of income in the private sector (loss of profitability). This income loss was unequivocally created by government loads on the economy which come in all forms. e.g. People like to say the housing “bubble” was the cause in 2008, but providing housing to those who couldn’t afford it, was just one of the many government loads created nearly exclusively by the Democrat party in the interest of fairness. Of course there are other examples as well but that one is a pet-peeve of mine.
One theme here is that ever-tightening regulations are also taxes on the economy. These costs are true and real expenditures from business (taxes), and real checks are written to pay for them, yet the increases in cost are not shown in the plot above. These costs should not be ignored lightly but are difficult to quantify as they are not easily tracked. I find that today’s anti-industry climate makes the Democratic party completely deaf to the consequences of these realities, and while we are about to experience them in very clear and unfortunate economic terms over the coming decades, the yellow journalism of today will not discuss the problem.
So now that we have figured out that taxes as a percentage of the US economy have never been higher, let’s look at the total government debt. Tom wrote, “We’ve had much higher debt in the past and done just fine.” This seems reasonable at first glance but let’s look a little closer at figure 1. In World War II, the US debt skyrocketed over 4 years from 52 percent to 121 percent of GDP. This expenditure was massive and I think even most Germans of today would admit it was necessary. Reading an expanded view of the graph, the WWII expenses took 16 years under a booming economy to pay them off to pre-war levels. Our net government revenue at the time was under 25% of GDP, and the hidden social/regulatory costs to operate a business were far lower than today.
So in reality, we paid much less tax in the 50′s than today and it took over a decade to recover from the WWII expenditure in a booming economy. To me this indicates that Tom is right, we can recover from our current debt, yet in order to do it we have to bring government spending, anti-business regulations and taxation down dramatically. If we don’t reduce business regulation, the same government revenue means that you have a hidden net-higher rate than a numerically comparable rate in history.
Let’s look again at Figure 3 above to see if we can tell what is responsible for our currently massive tax levels. After WWII, income taxes were increased dramatically. Overall tax rates were low enough that the economy continued to grow, yet this is the time when Social Security programs were enacted. Social Security was a liberal social program designed with the best intention and the yellow line represents the tax level for social security as a percentage of GDP. What I notice is a continued growth of social security income to nearly ten percent of the total economy before 1990. Visually this represents the majority of the federal tax increase between 1960 and 1990.
I am pretty sure that we are fully stuck with the SS and Medicare tax for the foreseeable future, yet it is very clear that by looking to emergency spending of WWII, we are overspending in an unprecedented manner. Don’t forget that even with the high taxes, the social programs are famously under-funded.
Together these plots show that we are currently spending more money as a percentage of GDP than we were in WWII and that taxation growth up to 1990 was largely a function of liberal social programs. In WWII, we were smart enough to stop the spending and rebuild our economy. At that time, we had reduced tax law that favored manufacturing and did not have the insane employment laws, environmental laws and compliance costs we have now. The plots indicate to me that nothing about the US situation is even remotely similar to history. The addition of an underfunded Obamacare expense to our budget is a guarantee that everything will not just be alright in the future either. To sum up, we have government expenditures in excess of a WWII scale, during peacetime, with nothing but increases in spending and taxation as far as the eye can see.
What’s more is that the information in the graphs above, combined with the present recession, is a strong indicator that we are on the wrong side of the Laffer curve. Ignore that little detail at your own peril.
On Debt vs GDP
So Tom then wrote this statement which also needs discussion: “If America were a ‘household’, its debt would be considered very manageable–a bit more than 100% of annual income. Anybody reading this who has a mortgage may well hold a much higher percentage of debt.”
This is also a complete misnomer often sold by left-wing media that many reasonable people believe. Gross Domestic Product is not “Income”, it is gross sales. The profit on GDP is Income, and it is a tiny fraction of GDP. The comparison is therefore a non-sequitur. If you sell a box of oranges to your friend for the same cost at which you bought them, how much of your personal GDP (gross sales) from the oranges, is available for payment of debt?
It is more sensible to look at the national debt other ways. If we take the 16 trillion of debt and divide it by the 300 million population, we get a nice low number of $53,000 usd per man, woman and child. This is not a bad number to work with and doesn’t sound insurmountable by itself. Unfortunately, only working people pay taxes, and they only work for a fraction of their lives. Currently we have about 110 million employed people in the US which brings the total debt that working people owe to the government to 145,000 dollars per working person. There are about 110 million households so this is very similar to the dollars owed per household as well.
But the annual deficit is what contributes to debt, and our government spending is so massive that and we are presently borrowing $10,000 per household per year. This means that every home needs to send $833 more per month to the federal government in taxes just to break even with our current expenses, and does not include the coming spending increases with Obamacare. Most readers will agree that that is a fairly huge amount of money for the government to be borrowing on our behalf during peacetime. Those households on social security would really need to tighten their belts to pay that bill.
None of this includes the also massive debts being incurred by left-wing State governments like California and Illinois. Illinois currently carries a debt of 55,000/private worker for example.
The financial situation of this country is terrible. The latest tax bill was full of payoffs to left-wing campaign supporters for Obama. I have never witnessed the kind of quid-pro-quo corruption of his administration, like Benghazi, that doesn’t even make a footnote in the media today. The media excoriates big business conservatives, then giggles as the Democrats hand out huge piles of cash to big business, right after receiving campaign cash from them.
Common Sense Solutions
While people can interpret the numbers above differently, the range of reasonable interpretation does not include the possibility that what our government is doing might somehow be ok. It doesn’t take a rocket surgeon to work out what we need to do to fix it. It also doesn’t take much of a crystal ball to see what the future will bring if we don’t change our ways.
Spend less, tax less, spend less, control less and spend less and we will all have a better future.