Our Absurd Budget Debate
By Barry Ritholtz - April 9th, 2011, 8:17AM
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Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data, ability to repeat discredited memes, and lack of respect for scientific knowledge. Also, be sure to create straw men and argue against things I have neither said nor even implied. Any irrelevancies you can mention will also be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.
April 9th, 2011 at 8:35 am
Beautiful.
I tried saying it this way this week:
The US government budget is about 3.7 Trillion dollars, 3,700,000,000,000.
The US takes in about 2.4 trillion in annual receipts, 2,400,000,000,000.
If you lop off eight zeros, we spend like we’re buying a (cheap) BMW, 37,000,
although we’re taking in enough to pay for a well-equipped Honda Accord (24,0000).
And the current budget fight is, roughly speaking, over what options we can’t afford for the BMW.
April 9th, 2011 at 9:03 am
After peaking at $18.9 billion in 1919 (the year after World War I ended), federal spending was cut back to $3.5 billion by the mid-1920s — less than ONE FIFTH of its wartime peak. Data is from:
http://www.usgovernmentspending.com/
Why was this enormous slash in federal spending possible? Two reasons: (1) The US actually demobilized from the war and brought the troops home, leaving no foreign bases behind; (2) No federal entitlements existed, so federal spending ex-interest was ALL DISCRETIONARY.
On the flip side, the reasons today why politicians propose absurdly puny, non-material spending cuts are the opposite ones: (1) the US never demobilized from World War II, leaving a global military empire which is involved in endless foreign wars; (2) ‘mandatory’ spending on baked-in-the-cake entitlements and interest makes up the bulk of the federal budget now. Stopping ALL discretionary spending would STILL leave a deficit.
Getting US finances under control means ending the military empire, and converting entitlements into something more like ‘defined contribution’ plans instead of the present ‘defined benefit’ entitlements.
Without these two changes — both of which face enormous political resistance from entrenched interests — Usgov is on a ruinous path of exponentially increasing deficits and some kind of default, probably ‘soft default’ in the form of inflating away its obligations.
It didn’t have to be with this way. But as I never tire of saying, democracy coupled with paper money is like teenagers and whiskey: a deadly mix which can only end in tears.
Who would have thought that a muscle-bound superpower would end up being brought to its knees by the shrunken testicles of homegrown financial ruin? But that’s how they all end, going back to ancient Rome. Ruling the world is an idle and destructive dream. The Federal Reserve Act (permanent war finance), the federal income tax, and the Seventeenth Amendment (direct election of senators) are the evil triad of ‘progressive’ legislation from 1913 which set the clanking doomsday machine in motion.
Time to push the ‘reset’ button and get it right next time.
April 9th, 2011 at 9:05 am
Excellent graphic. Reminds me of when Mr. President was touting a few million cuts in spending about an year ago and referring to starting serious cuts and filling in the bucket one drop at a time while letting the big banks take over 300B a week prior.
April 9th, 2011 at 9:06 am
project this scenario here in some form:
http://cryptogon.com/?p=21666
As more and more people are pushed into povertysimple acts of survival may have unintended consequences.
April 9th, 2011 at 9:28 am
mathman,
from your link..
Georgian Woman Looking for Scrap Copper Cuts Off Web Access to Whole of Armenia
April 7th, 2011
Via: Guardian:
An elderly Georgian woman was scavenging for copper to sell as scrap when she accidentally sliced through an underground cable and cut off internet services to all of neighbouring Armenia, it emerged on Wednesday.
The woman, 75, had been digging for the metal not far from the capital Tbilisi when her spade damaged the fibre-optic cable on 28 March.
As Georgia provides 90% of Armenia’s internet, the woman’s unwitting sabotage had catastrophic consequences. Web users in the nation of 3.2 million people were left twiddling their thumbs for up to five hours as the country’s main internet providers – ArmenTel, FiberNet Communication and GNC-Alfa – were prevented from supplying their normal service. Television pictures showed reporters at a news agency in the capital Yerevan staring glumly at blank screens….”
~~
though, lest peep get the impression that “that’s Over There..”
http://www.businessweek.com/magazine/content/10_49/b4206066273601.htm
“Nov 24, 2010 · Within the last three years, copper thieves have disabled 130 cell tower sites across the U.S…”
~~
the ATLantic, even, does there best job of ‘cut ‘n paste’, here..
http://www.theatlantic.com/technology/archive/2010/11/copper-scavengers-loot-high-tech-infrastructure/67068/
~~
FBI: widespread copper theft puts US infrastructure at risk
By John Timmer | Last updated December 4, 2008 3:08 PM
Up until recently, economies around the globe were on a fairly steady upward trajectory, a growth that put pricing pressure on some of the raw materials needed for both production and infrastructure. That pricing pressure has, in some cases, led to a bit of a black market where the materials are forcibly recycled through various forms of theft. Copper is one of these materials, and a variety of anecdotal news reports suggest that theft of copper from various places it’s in use has been an ongoing nuisance in the US. Now, the FBI has performed an analysis of the situation that suggests copper theft actually poses a serious risk to the national infrastructure.
Copper’s electrical properties and relatively modest price have made it a mainstay of wiring, and it has also been used for applications such as plumbing and roofing. As copper was even cheaper in the past, there’s quite a lot of it out there already. A recent run-up in copper prices—the FBI says they rose 500 percent from 2001 to 2008—has made all of that installed copper appealing to thieves. …
http://arstechnica.com/security/news/2008/12/fbi-widespread-copper-theft-puts-us-infrastructure-at-risk.ars
~~
April 9th, 2011 at 9:31 am
This is a picture of a necessary but broken technology… failing as it always will to do more jobs than its capable of doing.
What a sad state both politics and economics have fallen to…
There is a simple truth underlying the quality and survivability of any civilization…
Its the decisions its members make individually and collectively. All we see that is a civilization can be most fundamentally defined as a product of decisions: ideas + actions.
Money is a technology… actually a very complex interacting collection of hard and soft technologies (a trading platform is hard tech; laws, regulation, design of oversight, etc. are soft tech)
It’s broken… whether intentionally, accidentally or a combination… IT’s BROKEN!
Major social damage is ongoing and will no doubt continue so long as these idiotic paradigms hold sway. This is a global problem and growing.
Decision Technologies: Currencies and the Social Contract
http://culturalengineer.blogspot.com/2010/07/decision-technologies-currencies-and.html
(Money, along with advertising and torture devices are DECISION technologies… and operate at a very fundamental level to steer human decision. Viewing currencies in this light has utility.)
There are no easy solutions… but NEW STRUCTURES AND INSTITUTIONS ARE NEEDED!
I’m a designer…
In trying in my long-winded and confusing way to explain a development I believe to be very important… the person I was speaking to summarized it better than I had:
“Are you saying there needs to be a p2p network controlled by its users and not governments or corporations, and that transactions should be able to be made via this network with no transaction fee?”
YES… I am!
This is not in opposition to either private enterprise or government… but a suggestion that a new structure is necessary which is not exactly either.
While my Commons-dedicated Account method… (and it IS a specific method)was originally conceived out of a desire to address issues in political fundraising and for the networking of very small contributions…
THE SAME MECHANISM IS VIABLE FOR ALL TRANSACTIONS!
AND can undercut PayPal and all similar while offering capabilities they cannot.
I believe there’s a critical opportunity that won’t be open long… to at least begin to make changes in the structure of finance, money and credit-creation generally… to de-centralize at least a part of that process.
And I’d like to suggest why a GENERAL UTILITY Internet Wallet under Commons control and ownership has a vital role to play in accomplishing those ends.
Ends that may never be reached by request or accident at this stage… especially if they are dependent upon a positive response from the same groupthink now dominant. They must be intentionally designed and implemented in a way that can arise naturally… and come into existence alongside (but not in direct opposition to) existing structures. (in my opinion… which sorely needs feedback).
The evolution of television provides an example of how a ‘hard’ technology… which COULD have done a lot more to open up politics, community, and civic life generally… has instead made politics ridiculously expensive… ALL because of the ‘soft’ technologies around it (first laws and regulation… finally simply cultural acceptance and forgetting)… ultimately becoming a sea of marketing to the ‘lizard brain’ and vastly INCREASING the cost of civic participation instead of reducing it.
Here’s an old post of my own addressing a bit of the root idea:
Why Chagora back from (5/31/08)
http://culturalengineer.blogspot.com/2008/05/why-chagora.html
April 9th, 2011 at 9:32 am
OT, What If Your Favorite Album Was a Book?
http://motherjones.com/photoessays/2011/04/record-books/cover
April 9th, 2011 at 9:33 am
Machinehead pretty well nails it with the exception of “getting it right nextime”. That is just too much to ask for from our fellow humans.
April 9th, 2011 at 9:41 am
Machinehead: “(1) The US actually demobilized from the war and brought the troops home, leaving no foreign bases behind; ”
Say what? The Okinawains, among others, will be happy to hear that. The people in Kaiserslauten will just be surprised.
The world is not like it was 100 years ago. We’ve advanced to the point where it’s pretty reasonable for a developed culture to ensure basic survival needs, even if there is some gaming of the system. Most conservatives are more properly reactionaries, wanting to turn back the clock, not slow it down.
April 9th, 2011 at 9:49 am
Now for the Big Lie:
The president said that negotiators have reached “a budget that invests in our future while making the largest annual spending cut in our history.”
http://firstread.msnbc.msn.com/_news/2011/04/08/6436987-obama-americans-of-different-beliefs-came-together
Obama of course is using current dollars to make this impressive-sounding claim. But with the price level having risen by a factor of 22.3 times since the Federal Reserve opened shop in 1913, it is knowingly deceptive to compare devalued 2011 dollars to the dollars of 1919, in which a spending cut of $15.4 billion over several years amounted to slashing 80 percent of then-peak federal spending.
Obama insults our intelligence by excluding inflation adjustment to claim that his molehill spending cut is an unprecedented, mountainous achievement. Our highly educated president is not innumerate; rather, he’s a slippery prevaricator.
April 9th, 2011 at 10:03 am
@Machinehead
Well, I wouldn’t worry about it. In your case, I’d say it’s a small insult.
April 9th, 2011 at 10:03 am
How about STEP 1: We Restore the Clinton TAX RATES.
Step 2: We end the endless war in Afghanistan. What’s the point? Ben Laden must be dead by now.
Step 3: Pull out of Iraq, thanks for the new contracts.
Step 4: Require Wall Street TBTF banks to split up.
Step 5: We review our need to have a standing army in every country in the world.
April 9th, 2011 at 10:09 am
It would be interesting for Mr. Ramirez to compare the top personal, corporate, and capital gains tax rates during the periods when the budget was balanced with today.
Another interesting comparison might be to compare the rate of government economic investment (highways, schools, science research, etc…) during the same periods with today.
I doubt Mr. Ramirez would ever do such a cartoon–it doesn’t fit his ideological agenda. Interestingly, I looked up Ramirez’s biography:
“Ramirez … graduated from the University of California, Irvine, in 1984 with a bachelors degree.”
Tuition was still almost 100% subsidized by the taxpayers in 1984 in California. Is Mr. Ramirez a soc-i-list? =)
April 9th, 2011 at 10:11 am
How about STEP 1: We Restore the Clinton TAX RATES.
Step 2: We end the endless war in Afghanistan. What’s the point? Ben Laden must be dead by now.
Step 3: Pull out of Iraq, thanks for the new contracts.
Step 4: Require Wall Street TBTF banks to split up.
Step 5: We review our need to have a standing army in every country in the world.
Step 6: Campaign finance reform. Really. As long as money equals speech, we will remain at the mercy of the super-wealthy.
April 9th, 2011 at 10:22 am
The Tea Party and the anti-Abortionist have been used again by the GOP. Who will do, say, anything to keep those tax cuts for the rich.
When will the suckers figure it out?
April 9th, 2011 at 10:43 am
What needs to be put in there (as as rotting evaporating piece of the pie) is the 400 Billion of tax-cuts just passed a few months ago. Nobody is fighting against irresponsible and damaging tax-cuts for the rich, and that is the main reason we have such an absurd budget deficit and national debt.
April 9th, 2011 at 11:14 am
I certainly can’t disagree with the title or the graphic in this piece. Nobody could.
This being said, it should be obvious to all that neither the legislative or executive branch will actually fix the problem. Nor will they discuss the problem or even acknowledge it publicly. But let’s be honest to ourselves. The American people support smaller government, but only if their pet programs remain and no real changes occur that affect them.
In summary, no significant spending decreases or tax increases can be expected. This means the deficit and national debt will only grow. Thus, the real questions and only important questions are “When will the US be considered insolvent by the rest of the world?”, “Who will be the first countries to force bankruptcy on the US?”,”What form will the resolution take, what changes will result that will trickle down to the average citizen, how will Wall Street function in a bankrupt nation, what will be the consequential damage to current US debt holders outside of the Fed?”, and more.
Text books say that interest rates in the US must rise, revenues should equal expenses, and US assets must be sold. Realistically, this will also be accompanied by US debt repudiation and consequential worldwide recession or depression. Remember, we invented jingle mail, and some people in high finance consider it to be a valid technique for cash management. By implication, the US bankruptcy will be a long and torturous affair, steeped in denial, diversion, excuses, and chest beating.
Gold nuts assume gold will rise to the stratosphere at this time. I doubt it. Rather we will likely see massive and legendary deflation in order to allow costs to fall to the level of average incomes. Gold will retain its relative value, but at a much much much lover nominal value. Equity markets will fall due to lack of liquidity and uncertain survivors. Debt will be near worthless because nobody will know if the issuer will repudiate it, USA debt included.
The above is a certainty. The timing is the only variable. My personal guess is the end 0f 2012 will be the earliest.
April 9th, 2011 at 11:21 am
Machinehead;
Social security is a defined contribution system with an insurance against poverty attached. The more you pay, the more you get back. However, if you are out of luck and become disabled then there is a greater payback (like life insurance with double disability payout). This program is actually very sound and has a 4 trillion dollar trust fund, so it is absurd to talk about it in the context of budget deficits. Only an idiot would try to predict the health of this program more than 20 years out in the future and start panicking about those predictions – history tells us that nobody can successfully predict anything economic more than a few years out in the future.
Medicare and Medicaid are insurance programs and by their nature insurances cannot be defined contributions, they are always defined benefit. In contrast to private insurance programs these programs have failed to let the premiums go up with the expenses (show me one private health insurance program that held their premiums at an inflation adjusted constant level for the last decade). We have for a long time failed to charge enough to cover the actual expenses for this insurance and now it is in trouble. What we need to do with this insurance program is what any private insurance company would and will do (if we hand it over to the for profit sector) – RAISE the premium. When Bush II added prescription drugs, he should also have increased Medicare/Medicaid taxes. Nobody in the private sector would have increased the benefits without also increasing the cost of the insurance.
The entitlement programs serve an essential function that a civilized society cannot do without. Moving them out of the public sector and into the for-profit private sector would increase their cost and end as catastrophically as that same move with Fannie and Freddie ended. That is when the private sector finally had sucked them dry and screwed them up, the tax-payers would be forced to bail them out because society could not bear the consequences of a total collapse of the functions they serve.
April 9th, 2011 at 11:36 am
Anyone that has seen hospital privatization: poor people kicked out into the street, and Insurance Industry Fraud: Rescission: 3% of sickest patients policies Cancelled would be INSANE to Privatize Medicaid and Medicare.
April 9th, 2011 at 11:37 am
Republican Incompetence in Regulating the Insurance Industry Made Obamacare Necessary.
Republican Incompetence Makes the Democratic Party Necessary.
April 9th, 2011 at 11:41 am
On the bright side, we may see QE3 or maybe even QE4 and QE5 to help kick the can down the road a little further. The Fed can simply donate the purchased debt to the UST and forget about it since the debt was bought with printed money. This should blast equities into the stratosphere as long as the Fed keeps the party going. The Fed will deny it is monetizing debt. Rather, it will claim it is adding liquidity to the credit and financial markets as mandated by law, and also maintaining stable prices by avoiding deflation. Realistically, the real trade off here is inflation and the accompanying discomfort caused by rising commodity prices vs. realistically dealing with decades of fiscal mismanagement in a way that forces this generation to pay for the excesses of all prior generations.
April 9th, 2011 at 12:23 pm
[...] on The Big Picture (who found it at Investor’s Business [...]
April 9th, 2011 at 12:31 pm
It’s Pie in the Sky. An thry fiddle on like Nero. Watch them shuck and jive.
This great viral tune says it all. It’s the new matra for all of us tired of the political charade.
Audio FIle:
http://www.crockagators.com/audio/Shuck_and_Jive_hifi.m3u
April 9th, 2011 at 1:10 pm
It’s a silly toon that buys into the propaganda from the American RightWing. Spending, in other than a few specific areas (three unpaid wars, the prescription drug plan for the pharmaceutical corporations and other Corporate Welfare), is NOT the problem. Lack of revenue, as a result of the numerous rounds of tax cuts for the Rich & Corporate, is the problem.
April 9th, 2011 at 1:47 pm
pmorrisonfl & machinehead:
First two comments were excellent.
April 9th, 2011 at 1:56 pm
“When will the US be considered insolvent by the rest of the world?”, “Who will be the first countries to force bankruptcy on the US?”
These questions at least are fairly easy to answer: “Not until developed countries have no reserve or trading need for $USD or dollar-denominated assets,” “No countries unless the US uses a global currency and/or the $USD has ceased to be a medium of exchange.”
Possibly within a century would be a better guestimate than within the decade …or maybe in the year 2525 (if man is still alive).
OTOH, if most other developed countries begin improving economically more quickly than the US, something that is not the case, now, and the US makes no substantive change in policy to control really serious cost problems such as health care and war it seems likely balance of trade will reach a point where the $USD loses significant status as a global reserve currency. How far that will go is anyone’s guess but there probably is a tipping point somewhere in there where demand for US bonds collapses and US interest rates must climb much higher to sell them; that’s going to hurt, seriously.
OT: as far as Machinehead’s comments go, any time I see “entitlements” identified as the problem WRT deficits it’s hard to take the rest of the points seriously since it is clear the author either does not understand how the system works or is purposely mischaracterizing it. The biggest “entitlement,” Social Security, is structured as a contributory paygo system (as DeDude points out) and can never be part of the deficit as a matter of both law and internal accounting. The fact that SS is added to the so-called “Unified Federal Budget” is an administrative ploy designed to make the rest of the budget look better, it has no substance in law.
None of the other five trusts are a problem either but the very notable exception of the large Medicare and Medicaid trusts more than makes up for that because medical costs are increasing at a significantly higher rate than revenues. Single payer would fix that and the (rather lame) reform act, ACA, at least takes a stab at it; the Ryan plan does nothing in this regard, it only cuts spending, and that fact alone would have been enough to condemn it as unserious even if the rest of its numbers were plausible.
April 9th, 2011 at 2:01 pm
One thing is clear from this debate. At universities in states like Mississippi and Texas, courses selling fundamentalist interpretations of female reproductive issues will now become part of the core curriculum for Accounting and Finance majors.
April 9th, 2011 at 2:03 pm
Looks like Pie Crumb Political Posturing, incestuous cousin of the Trickle Down Theory of Economic Growth. Fortunately they both fit within the Grand Theory of Shock and Steamroll. Mmmmm Pie.
April 9th, 2011 at 2:23 pm
RW Says:
“. . . in the year 2525 (if man is still alive).”
RW, dude, you just dated yourself (and because I got it, I’ve just done the same).
April 9th, 2011 at 3:15 pm
More evidence that there is very little difference between the political parties. We don’t really have a choice. Both parties represent a continuation of the welfare / warfare state. I doubt meaningful change can come from within either of these parties… they have created the system we have today for themselves and it perpetuates their power and wealth. They will not give it up voluntarily.
I would think a reset to the system must be forced from the outside of the system. The only thing I can envision is a military coup… officers are sworn to uphold the US constitution. Unfortunately, this alternative has a good chance of going horribly wrong.
April 9th, 2011 at 5:10 pm
RW,
Thanks for the comment but I disagree. If a family required 41% debt to balance an annual budget, they would not last long. If a small country required the same, they would be laughed at. If an 800 lb gorilla that used to look reputable now lives like a sloven drunkard with a loaded gun, you only need to analyze the potential damage that might result from confrontation in order to plan a method to secure your debts.
April 9th, 2011 at 5:54 pm
Let me see if I have this straight.
1) U.S. currency is basically a mini derivative contract as its value is based on the worth of its underlying debt obligations.
2) The current money stream brings in $2.174 trillion, or about 57% of total expenses, making the U.S. debt repayment money flow a negative $1.65 trillion, or -43%. an obvious subprime tranche.
3) Yet the ratings agencies rate the U.S. debt as AAA because of the ability of the Federal Reserve to offer a chain letter as a promissary note.
The more things change the more things stay the same.
April 9th, 2011 at 7:14 pm
[...] U.S. budget explained: “If you lop off eight zeros, we spend like we’re buying a (cheap) BMW… PrintEmailShare [...]
April 10th, 2011 at 4:18 am
“Nobody is fighting against irresponsible and damaging tax-cuts for the rich.”
Honestly…I just don’t know what all the fuss is about. This is like twins arguing over who lost the cat’s eye marble.
The fact is…the neighbor girl…was promised the cat’s eye marble from both twins on separate occasions…who gave her a wink and a nod…and the marble…and now both twins are arguing with each other…because neither one of them knows…they both gave away the cat’s eye.
In other words…greed has killed this country…and it is all over but the screaming.
The fact is ….the economy hasn’t made sense…regarding supply and demand since Reagan. This country has been living on credit so long…the politicians and the lobbyists have sold our birthright.
In 1980-something I called a national talk show and asked for a comment on…was this country on a race to the bottom…during the ramp up of right-sizing and off-shoring. I was ignored.
The good news is …my passport came in and I’m off to Costa Rica. Because I’m not about to stick around to turn out the lights…besides the electricity will be shut off when the national debt comes due!
April 10th, 2011 at 7:00 am
It’s self esteem day in Washington DC.
April 10th, 2011 at 8:45 am
[...] the current budget fight is, roughly speaking, over what options we can’t afford for the BMW. Read The Full Story Comments closed | Trackback [...]
April 10th, 2011 at 9:13 am
What’s absurd is that not one good reason has been given for cutting the budget and there are many good reasons for not cutting the budget. Until Congress demonstrates it understands the fundamental difference between the U.S. government ( Monetarily Sovereign) and say, Illinois (monetarily non-sovereign), we will continue to have budget cuts followed by recessions, just as we have for the past 4o years.
Rodger Malcolm Mitchell