Category Archives: Politics

Doing Math vs Political Posturing on Federal Budgets

With all the noise about federal budgets, sequesters, debt ceilings and taxes, its sometimes hard to figure out what’s real.

So I spent a little time doing some research using government statistics and basic math this evening. The results are shown on the spreadsheet below comparing various economic factors.

In summary, between 1967 and 2011:

Population growth was 159% and inflation was 673%, which combine to create a normalized growth basis of 1,071%.

Gross Domestic Product grew 168% relative to normalized growth.

Average  household income increased 119% relative to inflation but only 45% relative to GDP growth.

The official poverty level stayed flat relative to inflation but increased only 38% relative to GDP growth, while the number of people living below the poverty line increased 105% relative to population growth.

Federal spending grew 214% relative to normalized growth  and grew 127% relative to GDP growth.

The deficit portion of federal spending has increased 1,411% relative to normalized growth. In dollars it has increased 15,112%.

Our federal debt has increased 4,337%.

So what conclusions can be drawn from those numbers?

1)   Government spending has clearly grown far more than the economy, inflation, population or average family incomes.

2) Our economy is growing faster than normalized growth expectations so productivity is improving.  That’s good news. Our society has extra resources to solve problems. We shouldn’t have to borrow.

3)   The disparity between GDP growth and average household income growth indicates significant wealth is accumulating that is not accruing to the average household, thus wealth disparities are clearly increasing.

4)   Growth in average household income has been better than inflation, but the average household income data shown is presumably skewed by the increasing share of  income accruing to wealthy households.  Average middle class family incomes are likely holding steady or improving a bit, but that data is hard to tease out of the statistics.

5)   Poverty is getting worse in America. Significantly increased government spending has not helped at all to alleviate poverty and likely hasn’t done much good for average middle class households either.

6)   It appears that there is plenty of room to cut federal spending to be more in line with normalized growth.

7)   Growth in federal deficit spending and debt is dangerously unsustainable and needs to be addressed.

The “tax the rich” vs “cut the budget” rhetoric in Washington is not solving the urgent problem we have of getting the deficit and debt under control. We need to do both.

What the statistics don’t show is there are smart ways and stupid ways to implement both spending cuts and tax revenue increases. There are plenty of programs and entire federal departments that can be selectively eliminated because they frankly aren’t doing anyone any good except the government employees who take home paychecks. Raising tax rates is not the answer when the byzantine tax code is riddled with loopholes for the wealthy to exploit. We should be eliminating all tax loopholes, eliminating the corporate tax altogether and then treating capital gains, dividend income, carried interest and all the other specially favored income categories of the wealthy as regular income taxed at regular rates.

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Another Rational Tax Option

Controversial as the proposals in it are, I got generally positive feedback from the recent publication of “A New Tax Policy for the 21st Century”.

The most productive suggestion was from my friend Bill Stillinger, who suggested that along with taxing fossil fuels, we should also be taxing financial transactions. That got me thinking about an article I read in the Wall Street Journal, “Derivatives – Trading Tally: $700 Trillion (or so)”, which suggests that the global financial derivatives market has a nominal valuation on the order of $700 trillion with an annual turnover of $3.7 quadrillion. Numbers like that will make your head spin.

For perspective, at Market Watch, Paul Farrell suggested some numbers back in early 2008 to get a sense of how big these derivatives market numbers really are:

U.S. annual gross domestic product is about $15 trillion

World’s GDPs for all nations is approximately $50 trillion

Total value of world’s stock and bond markets is more than $100 trillion.

Farrell also quotes Warren Buffett from his Berkshire Hathaway Annual shareholder letter back in 2002 with some prescient wisdom on derivatives markets:

“We try to be alert to any sort of mega-catastrophe risk, and that posture may make us unduly appreciative about the burgeoning quantities of long-term derivatives contracts and the massive amount of uncollateralized receivables that are growing alongside. In our view, however, derivatives are financial weapons of mass destruction, carrying dangers that, while now latent, are potentially lethal.”

Note that Buffett recognized the danger well before the financial collapse of 2008 precipitated by the collapse of the mortgage derivatives market.

Its hard to get a sense of how much of the global derivatives market involves US transactions or at least US parties to transactions. But if we had a tiny tax on the nominal value of derivatives transactions, and as a wild guess presume that a US party is on one side or another of about one quarter of the worlds financial derivatives transactions, we could replace every current source of government revenue with a tax on such financial transactions of less than a quarter of one percent. If we included every other form of financial transaction including stock and bond trades, bank transactions, etc. then the tax could be lower.

Perhaps nominal value isn’t the right metric to tax. Farrell suggests:

Also, keep in mind that while the $516 trillion “notional” value (maximum in case of a meltdown) of the deals is a good measure of the market’s size, the 2007 BIS study notes that the $11 trillion “gross market values provides a more accurate measure of the scale of financial risk transfer taking place in derivatives markets.”

(Note that Farrell was writing three years ago and the derivatives markets have apparently added another $200 trillion or so in deals since being responsible for the market crash of 2008 – which should probably tell us something about true effectiveness of the so called financial market reforms Congress has put in place.)

Perhaps it is the actual cash value of transactions backing these deals that should be taxed at a higher rate. The fundamental point is that such transactions don’t appear to be providing much public good in their current formulation relative to the huge public risks and problems they entail. We should tax them both to garner some public value and to discourage risky and unproductive financial speculation.

I’d be glad to have a small tax on my credit card transactions and mortgage payments, if by doing so we could replace the counterproductive drag on our economy that our current tax system entails and help discourage some of the speculative churning of the financial derivatives market. Rather than having the vast majority of transactions merely enriching bankers and traders, it would be great to have the nation gain some actual value from Wall Street.

Shifting away from taxing productive work and investment and instead taxing waste and unproductive activities can take many forms. Combining the fossil fuel taxes suggested in “A New Tax Policy for the 21st Century” with a very small financial transactions tax could likely pay all the costs of government, wipe out the federal deficit and return us to a prosperous economy with lower energy prices than Europe and no other forms of taxation.

Discouraging the speculation and risk that Warren Buffett clearly recognized the derivatives markets both represent and encourage, would also be a worthy goal of public tax policy.

Significant change is inevitable.  Our current government funding model is clearly not sustainable. The politics of enacting change like this will be a serious challenge. But we should at least begin debating sensible and fundamental changes to get our economy  and our society back on track.

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A New Tax Policy for the 21st Century

The following was published in the Spring 2011 Issue of Northeast Sun, the journal of the Northeast Sustainable Energy Association.

A New Tax Policy for the 21st Century

Let’s revitalize the US economy by replacing all federal revenues with a simple energy tax

America needs new answers regarding energy, economics and the environment. There are no real solutions on the table. And everybody knows it.

One radically simple proposal could work: Replace all federal government revenue with a simple energy tax. That may sound impossible. But it is a far more realistic approach to the problems our country faces than the pseudo-solutions that make their way through Congress these days.

This idea could inspire and appeal to Americans across the political spectrum while igniting an unprecedented era of economic prosperity. Along with radically reducing energy waste and pollution, it could release our society from the burdens and economic distortions of our current tax system, make our economy vastly more efficient and our industries far more competitive internationally, and provide the security of greater energy independence.

The numbers work

According to the US Energy Information Agency, in 2009 our country consumed about 18.8 million (18,771,400) barrels of petroleum a day, the equivalent of more than 287 billion (287,765,562,000) gallons of petroleum a year.

The Congressional Budget Office reports that all federal revenues for fiscal year 2010 were about  $2.2 trillion ($2,162,000,000,000). That includes all individual income tax, corporate income tax, investment taxes, social security tax, disability insurance, hospital insurance, unemployment insurance, excise taxes, fees, energy and transportation taxes, and every other form of federal government revenue other than debt.

Doing the math, if we replaced every source of government revenue with a tax on petroleum, that tax would be only $7.51 per gallon. And if you add the average mid-December 2010 cost of premium gasoline of $2.85 a gallon (before taxes), the total price on gasoline and other petroleum products would average about $10.36 per gallon.

That isn’t a whole lot more than average prices for premium gas in Europe in mid-December 2010, as reported by the US Energy Information Agency: Belgium, $7.42; France, $7.15; Germany, $7.39; Italy, $7.19; Netherlands, $7.93; UK, $7.31. And those countries are burdened with massive taxes on top of high energy prices.

Along with paying far more for petroleum, in 2009 Europeans paid about twice what Americans paid for natural gas and coal. If our federal energy taxes roughly doubled the price of both the billion-plus short tons of coal and the 23 trillion cubic feet of natural gas we consume each year, that could partially offset and reduce taxes on petroleum, leaving our overall level cost of energy around the same as Europeans currently pay—while replacing all other forms of government revenue completely.

To keep American industry competitive, the feds should also collect a tariff on goods from countries that don’t implement similar levels of taxation on energy. That unilateral action would do far more to spur responsible energy policy worldwide than well-intentioned but unenforceable international treaties. At the same time it could further reduce energy taxes or help offset the federal budget deficit.

Most sensible people would favor the opportunity to adopt a European level of energy prices in exchange for no government interference with business revenues and personal income: no IRS, no income taxes, no payroll taxes, no business taxes, no inheritance taxes, no government fees.

The obvious pushback

Many will argue that high price signals will encourage energy conservation and alternative energy resources, thus putting government revenues at risk.

Radically reducing energy waste and pollution is one of the fundamental benefits of this proposal.  Reducing the need for military adventures and compromised foreign policy to secure oil are other intended benefits. With the Congressional Budget Office reporting that federal expenditures are now more than twice what was spent in the year 2000, most Americans are also ready to see the excesses of government spending and intrusions into the economy constrained.

As the idea of tax shifting is taken seriously and refined, we can likely find consensus to tax other wasteful or counterproductive activities. With a shift to rational taxation, we can balance our federal budget and pay down our out-of-control federal debt, while more appropriately aligned market forces improve our lives and the environment.

We should begin the tax-shift conversation by recognizing how affordable it could be to align rational revenue policy with sensible market mechanisms that would encourage economic prosperity, job and business growth, broadly shared environmental and clean-energy goals, and the basic principles of personal freedom and liberty that our country was founded upon.

Big changes for big challenges

Minor adjustments to the sclerotic, contradictory patchwork of public policies that have emerged over the decades won’t address the massive challenges that confront our nation. As we face continuing economic stagnation and pass the era of peak oil production, it’s time to get serious about transforming our economy and restoring our economic productivity. We need to rethink the role of government and how we fund it.

It is clear from polls that most Americans are fed up with Congress, the federal government, and politicians from both parties. Everyone hates the complexity, irrationality, and obvious corruption of our tax system, which discourages work, productivity, entrepreneurship, job creation, and almost every other goal and fundamental value that our economy is purported to be based upon.

Think of the productivity gains that would be unleashed if businesses could make decisions based on common sense rather than manipulations of the tax code.

Think of the jobs that would be created if we no longer imposed punishing taxes on working and productive investment, if we eliminated the insane tax subsidies for shifting industrial productivity overseas, and if we eliminated the payroll tax penalties on hiring.

Think of the time, money, and talent that would be freed up if we no longer had to spend countless hours and dollars reporting our personal business to the government. The IRS itself estimates that about 7.75 billion hours of human labor went into completing 2009 tax forms—and that doesn’t include the vast amounts of time and money spent figuring out how to game the system and avoid taxes.

Making the transition

Change this profound couldn’t and shouldn’t happen overnight. We should plan a transition over at least fifteen years, first replacing the most regressive and counterproductive forms of taxation, like payroll taxes, with energy taxes, and then phasing out other forms of taxation while increasing energy taxes. The transition period would give businesses and individuals time to make appropriate plans and investments for the future. The certainty associated with substantial energy taxes would do far more than any other solution being proposed to encourage investment in energy conservation and clean energy.

To minimize the cost, complexity, and impacts of tax collection, energy taxes should be implemented at the wholesale level, at the mine, well, or port of entry. Another technicality that could help ease the transition would be a ratchet mechanism on energy prices. Whenever market forces pushed energy prices up, they would be allowed to rise, but as energy prices declined, energy taxes would rise at a matching rate. This would have the added benefit of discouraging unproductive speculation in energy trading markets.

Change this fundamental would affect every American. Inevitably, the winners and losers will lobby madly to turn a simple idea into the complicated sausage making that is the hallmark of Congress. But if we insist that its simplicity and transparency are critical to its success, perhaps a bold proposition like this could gain enough support to overcome the corrupting influence of lobbyists.

Why tax fossil fuels?

Energy is the lifeblood of a modern economy. The highly concentrated energy available from fossil fuels is a precious resource both for us and for future generations. Unlike metals or other materials that can be readily recycled in a prudent society, once mined and burned, fossil fuels are gone forever. They shouldn’t be squandered but rather husbanded wisely, as higher prices would encourage. Balance of trade deficits, compromised foreign policy, pollution, the cost of military entanglements, and other challenges resulting from our fossil fuel addiction offer clear reasons to focus taxation on fossil fuels. It is far past time to put a fair price on the costs of the traditional energy industry’s “economic externalities.”

Arguably, irreplaceable fossil fuels that have taken millions of years to form should be considered common resources that provide benefits for the common good. Although we begrudgingly accept being forced to pay such taxes today, government funding through the confiscation of the fruits of citizens’ work and investment is actually far less rationally or morally justified.

Finding broad-based consensus

We all need to overcome our fear of sensible change. This proposed tax shift represents a real test for clean-energy advocates, environmentalists, and political liberals, conservatives, and libertarians to all match our rhetoric with good policy solutions. Are conservatives really willing to effectively promote liberty, economic efficiency, and fair free markets? Are liberals able to admit that like so many federal policies they have supported, our convoluted tax system is completely failing to meet their progressive goals? Are libertarians able to admit that there is a role for government and that collecting taxes rationally is better than the corrupt irrational system of taxation we have today? Are environmentalists ready to support policies that are economically sensible? Are clean-energy advocates ready to compete in a fair marketplace rather than begging for government subsidies? Rather than blaming others for our nation’s problems, we all need to focus on finding solutions sensible enough to garner broad support.

Let’s start taxing waste and pollution instead of punishing people for working, creating jobs, and making productive investments.

Let’s try real market-oriented solutions and restore the economic competitiveness our nation enjoyed before every aspect of the economy was micromanaged by the government and manipulated for tax reasons.

Let’s encourage conservation of our limited fossil fuel reserves so we don’t impoverish our children, grandchildren, and planet with our profligate waste.

Let’s fundamentally reform the American economy with a government funding system that doesn’t undermine the most essential ideals and principles of our national heritage.

Let’s support an idea bold enough, simple enough, and compelling enough to actually work.

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Why Isn’t The American Job Market Recovering?

Jim Tankersley asks “What Really Happened to 15 Million Jobs?”.  After pouring over statistics, he seems at a complete loss to speculate on any real answers. It seems that like so many other Washington focused pundits, he really just doesn’t want to face the quite obvious answers. I felt compelled to contribute in the comments section:

If one can manufacturer anywhere in the world; communicate instantly to anywhere in the world; find plenty of skilled educated labor virtually anywhere in the world; and ship raw materials, components and finished products at low cost thanks to still very inexpensive energy prices – then there are some very fundamental questions to be asked.

Even if one is a very dedicated American patriot, does it make sense to expand in a location with oppressive zoning, building, environmental, labor, financial and other regulations; extremely high and unreasonable litigation exposures and risk; an assertive and active legislative and regulatory environment in which the rules of the game are constantly changing; increasingly intrusive direct government involvement in businesses and markets; massive and unsustainable public deficits, debt and unfunded liabilities; already high taxes inevitably moving higher; labor costs five or ten times higher than those in China or India; increasingly business hostile rhetoric from the dominant political party; decaying infrastructure; and a pervasive culture of entitlement?

It actually isn’t any surprise at all this country is losing jobs and companies worldwide are choosing to invest elsewhere, except perhaps to those who still believe the naive platitudes of the political “progressives” who are impeding any chance of reviving any actual progress.

The gross imbalances we have enjoyed relative to most of the world are unsustainable. Pretending otherwise is foolish.  Our living standards will move into balance with the rest of the world, as will our regulatory environment, legal environment and all the other factors that influence the real competitive advantages of  locating a business in one place over another. Its inevitable.

Its time to get real about making the US competitive again. It can be done through deliberate public policy decisions or much more slowly and unhappily through unstoppable global economic forces. Protectionism or militarism will only make matters worse.

Over at the Atantic, Arvay responded to my comments:

Dialing down our society to the conditions that make China’s labor so inexpensive — few environmental protection regs, massive poverty, child labor, company housing that’s more like a Stalag than a home — if that’s the future you want, I think you should brace yourself for the inevitable revolt here. Your economies will be nullified by the internal security measures necessary to protect the elite.

Pervasive culture of entitlement? You mean Social Security and medicare? Or the swollen Pentagon budget? Which would you sacrifice?

If American business can’t figure out how to make itself valuable to a broad range of the public, especially via job creation — we’ll need to find a different model. Oh, you’ll get your Chinese type government, but I think you’ll find the public executions of executives who fail or cheat to be a notable downside.

Be careful what you wish for.

Good thoughts. Here’s how I responded:

Arvay,

I did not suggest what I wish for. I suggested why businesses choose to locate jobs where they do.

What I wish for is a more common sense approach to government. We can have environmental protection without regulations being unnecessarily expensive, arbitrary, complicated and time consuming to comply with. We can have tort reform and a responsive legal justice without huge costs for participation in the system and outrageous rewards to lawyers for things like class action suits. We can scale back the role of government in selecting winners and losers in business. We can have rational financial regulation that protects Main Street and average citizens from the voracious “too big to fail” banks, offers real competition and opportunity for small banks in our financial system, and shuts down the huge institutions that caused our financial mess rather than continuing their ongoing bailouts and subsidies. We can have antipoverty programs that don’t engender a culture of dependency and an underground economy. We can create retirement systems that aren’t based on the exact same formulas used by Mr Ponzi and Mr Madoff for funding. We can create a medical payment system that protects people from catastrophic medical events but makes us all pay for regular, routine and minor medical care so there is some natural consumer driven price control built into the system. We can have a balanced budget amendment for the Federal Government so we are forced to pay for all the largess our Senators and Representatives bribe us with rather than burdening our children with unsustainable debts. We can reverse the growth of regulation that has crossed beyond the point of necessary and effective and in sum is making our society much less well off due the the cumulative impact and drag on our economy. We can start paying the real price of fossil fuels rather then continuing the subsidy of their waste. We can get the government out of the role of skewing the economy in favor of large corporate interests rather than competitive businesses. We can dramatically scale back the military, close at least 90% of our foreign military bases and end the hopeless wars we are engaged in. We can make citizens more responsible and accountable for our own decisions. We can scale back our government, deficits, debt, entitlements and taxes.

Not only can we do all those things, we have to if we want to be competitive in the global economy. As Tankersley pointed out in his article, labor costs are a small fraction of the cost of manufactured goods. And as middle classes grow in emerging markets, wage disparities are narrowing for the right reasons – their standards of living are improving. If labor were the only factor, the advantages of being close to America’s huge market and avoiding the risk of political backlash that is emerging in our country would outweigh the labor cost discrepancy. But there are far too many factors that are within our capacity to control that we are just doing wrong. For the most part, things have been moving in the wrong direction on policy matters for decades.

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Imagining A Responsible Congress

In “A Congress that reasserts its power”, George Will clarifies how Congress has neglected its most fundamental responsibilities for decades. He suggests hope that the 112th Congress will restore the separation of powers and limited role of the federal government that is clearly defined in the Constitution, though long ignored in Congress.

The country is watching to see if this Congress has the seriousness of conviction to follow through on the rhetoric upon which they were elected.

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Revisiting Health Care

David Brooks wrote an excellent summary of all the reasons the recently passed health care bill is inevitably going to fail to achieve its purported goals. He highlights the need for both parties in congress to provide realistic plans for addressing the out of control cost escalation in the health care system and thus in government entitlements and budgets.

The formula for reform promoted a year and a half ago by Whole Foods CEO John Mackey is still the most reasonable approach I have seen proposed.

The early failures of the new health care policy that Brooks points out, as well as the skyrocketing cost of the similar Massachusetts health care system, should be enough for any responsible politicians to want to seriously revisit the issue in a credible manner. Unfortunately politics always trumps good policy in Washington. So it will be a couple years before anything effective is done about health care costs. Meanwhile our new law will continue to make matters worse than they were in regards to costs, government budget impacts and distorting business decisions.

For anyone paying attention, there is a general rule that can be observed in the functioning of government. The longer, more complex, more ambitious and hard to understand a law or regulation is, the more likely its unintended consequences will lead to the opposite net impacts that its sponsors purported to achieve.

It is not clear that responsible grownups will rule in Washington any time soon. But the current symbolic efforts to repeal the health care fiasco passed last year are a good sign that at least some people in Congress are starting to realize that citizens expect realistic and responsible solutions from our government.

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Get The Energy Sector Off The Dole

In “Get The Energy Sector Off The Dole“, clean energy investor Jeffrey Leonard offers a great way to make renewable energy more competitive, reduce pollution and greenhouse gas emissions, and help restore our economy to some rationality and health with competitive markets.

The title says it all. Leonard suggests ending all direct subsidies, tax advantages, hidden subsidies in special regulatory treatments and other “externalized” subsidies for all energy industries. Its great stuff.

Some choice quotes:

Government statistics show that about 70 percent of all federal energy subsidies goes toward oil, natural gas, and coal. Fifteen percent goes to ethanol, the only renewable source of energy that consistently gets bipartisan support in Congress (think farm lobby and Iowa). Large hydro-power companies—TVA, Bonneville Power, and others—soak up another 10 percent. That leaves the greenest renewables—wind, solar, and geothermal—to subsist on the crumbs that are left.

None of these estimates account for continuing support to the nuclear industry, estimated to be about $1 to $2 billion, much of it to promote research and development efforts on new nuclear technologies and waste disposal methods. There are plenty of hidden subsidies, too. We place a cap on liability for accidents (like the BP oil spill). We offer the nuclear industry large loan guarantees. And, of course, we maintain an immense military embroiled in the Middle East and elsewhere as it tries to secure access to energy resources around the globe………..

We can waste money and distort the market by subsidizing all of these forms of energy. Or we can just call it quits on the waste. Disarm completely. Kill all the subsidies—yours and mine,,,,,,,,,,,.

So we find ourselves in a new political moment when for the first time it is possible to imagine an alliance of GOP libertarians, disaffected environmentalists, and budget hawks coming together for a grand deal that would sweep away sixty years of bad energy policy. Obama should seize the moment to bring this coalition together in support of a single objective: to eliminate all government subsidies and tax credits on production of all primary sources of energy.

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