Eating Peas

Fellow Ordinaries Elias Isquith and Mike Dwyer have fired the opening shots in our discussion about the latest budget proposal from that fiscal firebrand from Janesville, Paul Ryan, and Tod Kelly (who has just been knocking them out of the park on these pages recently) has given a much-needed reminder to everyone that minding our manners is helpful and parroting memes and calling each other names isn’t.

It’s easy to understand how tempers can flare over issues like the budget, so I thought I might take it upon myself to point out some things that might be helpful.

1. Our President acts like he is really our Prime Minister. This President’s style, even with his centerpiece campaign issue of health care reform, has been to describe a big idea and let Congress craft out the nuts and bolts — or not. The way he addresses at least domestic policy has always been, and is likely to continue to be, largely deferential to Congress. That is to be expected, given his background before taking his seat in the Oval Office. But his vision of his role as President is that of a Legislator-in-Chief. And equally distressing from a leadership perspective, in terms of the budget, little effort has been made by the White House to articulating a vision of what the government’s budget should be now that we are past the era of viable stimulus packages. Thus, Prime Minister Obama is a re-actor, not an initiator, of budget policy. This is a problem because…

2. Congress is institutionally incapable of addressing our government’s money problems. It’s as simple as this: Ways and Means is one committee, Budget is another. How the government generates its revenue — taxes — is handled by one group of specialists in Congress. What the government does with that money is handled bya  different group of specialists. They can talk to each other, sure, and they often do. But because the intelligence, willpower, creativity, and political power is divided between people who focus on different things. Ask someone on the Ways and Means committee how the budget should be brought in balance, and chances are good that Democrats and Republicans alike will say that spending cuts must make up the bulk of that effort; ask someone on Budget and the answer will be that taxes and revenues must be addressed in a serious way, even by Republicans. That includes Paul Ryan. But even though we’re supposedly out of the era of stimulus spending, we’re still more than fifteen trillion dollars in debt and that number is increasing by more than a trillion dollars a year. That is alarming, if nothing else, and I think that it’s a problem. And we only have two tools to solve it with because…

3. We aren’t going to inflate our way out of the problem. Historically, the traditional way governments have navigated through prolonged unsustainable periods of deficit spending has been to make the deficits sustainable through inflation. If tomorrow’s dollars are worth substantially less than today’s dollars, then paying yesterday’s debts with tomorrow’s dollars makes a lot of sense — it’s literally free money if the inflation and interest rates are balanced correctly. But we’ve delegated monetary policy to the Federal Reserve, and the Fed is backed into a corner. Interest rates cannot go any lower than zero, and both the internal and external pressures on the Fed’s board are strongly anti-inflationary. Now, inflation is greater than zero — 12.6% over the past ten years. But the public as a whole will not tolerate a high level of inflation and there is no real political appetite for it anywhere, including amongst the twelve unelected people who could actually do something about it. Given that, we have to cut spending or increases taxes. Now as for that first option that’s eliciting all the howls, which in turn are eliciting all the jeers…

4. It sucks to cut spending, and spending cuts will have to come from somewhere. The primary objection to the Ryan budget is a familiar one: it cuts too much social welfare, deblitatingly so. Maybe that’s true. By my estimation, social welfare programs and the bureaucracies that support them constitute 62% of the Federal Budget.* We cannot make meaningful cuts if 62% of the budget is untouchable. Defense constitutes close to 19% more and yes, that too should be on the chopping block. I happen to think that if we stop exporting liberty to Afghanistan on flying death robots and bring the bulk of our troops home, nothing material will change in Afghanistan that actually affects the United States, and substantial savings will be realized, and fewer of our soldiers will die when ancient holy books get looked at cross-eyed. But that’s just me. Anyway, interest on the debt is about 4% of the budget and that is literally the only part that cannot be cut even if there is sufficient political will to do so. If you’re going to cut spending, then there must be no sacred cows. Now, that doesn’t mean we can ignore taxes, but…

5. It sucks to raise taxes, and the government has to generate money from somewhere. Just under half of all Federal revenues come from individual income taxes. The upper brackets already pay a tremendous percentage of that. Maybe they can pay more, maybe not. Corporate income taxes are about one-tenth of all Federal receipts. Social Security withholding is about a third of the total. Pretty much the rest comes from what some call “ad valorem” taxes, consisting almost exclusively of excise taxes on petroleum and natural gas, and pay-at-the-pump taxes on gasoline and similar refined petroleum products. And those are the only significant sources of Federal revenue. Customs duties aren’t a big part of that picture; this isn’t 1812. Whatever isn’t earned from one of those three sources is brought in by the sale of debt instruments like bonds and T- bills. That’s where the money comes from, so those are about the only places anyone can look to beef up revenue. And this limited universe of options to tackle such a massive and sensitive problem is compounded by the fundamental fact of life that…

6. Differing visions of the good are compatible with one another in a democracy, but we shouldn’t forget that are, in fact, different. My co-blogger Will had a great insight the other day, which in my opinion didn’t get the number of comments that it deserved. In a nutshell, Will pointed out that it turns out, it’s really true that people have different ideas about what a good society is, and while genuinely differ from one another in good faith, they do in fact genuinely differ from one another. That’s what a free society is about, it’s what a democratic framework of government is about, and working through those differing visions of the good is what public policy and even political debate is supposed to do. Do you realize what this means? If it’s true that someone else has a different vision of the good than me, then listening becomes as important as advocacy. Sadly, there isn’t a lot of listening going on with respect to this subject.

Bearing all that in mind, I make two propositions concerning this most recent Paul Ryan budget proposal which I submit for your consideration.

First, Paul Ryan just might be attempting to do something good here. Maybe you don’t think it’s good. But you should assume that he does right out of the starting gate. You should not assume that he is trying to protect his fat-cat donors and big corporations at the expense of the poor and the middle class because he is a Republican. Collectively, the Republicans are making a genuine bid for blue-collar, working-class votes. They aren’t just the party of the rich; and Democrats have plenty of corporate money and lists of fat-cat donors themselves.

The vision of the good that Ryan is, or at least appears to be, pursuing is a vision of a balanced budget and a government that engages in sustainable but reduced levels of activity. This may not be your vision of a good society or the government’s appropriate role in it. Elias pointed out in his article that a strong social welfare program may well increase social mobility. I kind of doubt that I agree with that in practice, at least as a broad rule. But the point is, a government that deliberately keeps its hands off of certain kinds of economic activities, and that doesn’t spend more than it takes in, is a defensible and viable vision of a good society.

To determine whether you think the Ryan budget is a good one or not, you must first articulate, if only to yourself, what you think a good budget would be. And don’t short-sightedly and immediately react to Ryan by saying, “Well, a good budget certainly doesn’t cut my favorite and indispensible program!” Because maybe it does. Elias reacts strongly to cuts in the Federal Department of Education, predicated in part on the idea that education is an investment in the future; without a well-educated society and workforce, we will be less economically viable as a nation in the future. This is true, but I have to wonder — for every dollar spent on educating, say, a fifth-grader, where does that money come from? I’ll bet that the number of Federal pennies in that dollar is in the single digits, and the rest comes from state and local taxes already, and pretty much always has.

I happen to think that, in broad strokes, the vision of a government that spends only what it takes in is a good one. Some others moderately disagree with me and think that at least a certain level of deficit spending is sustainable and even desirable. Still others — and specimens of this sort can be found in both parties — strongly disagree with me and think that deficits and the debt doesn’t matter at all, and we should spend what we need to in order to realize other priorities, borrow what we need to in order to cover it, and that with sufficient long-term economic growth and appropriate levels of inflation and interest, tomorrow can solve all of today’s fiscal problems. I don’t see that as a bad-faith vision of the good, but it is one with which I sharply disagree. This disposes me to want to say that a guy like Ryan is, at least in broad strokes, looking down the correct path. But I also know I need to do business with people from the other camps — and if that sounds a little Broderesque, I can live with that.

What I can’t live with is the approach to the subject that Congress, as an institution, seems to take. Collectively, Congress and the President all seem to think that the strategy of kicking the can down the road for the government to solve in ten or twenty years is the right solution. That’s a fine political solution. But at some point, you have to stop kicking the can down the road and pick it up and do something with it. Put it in a trash can or a recycle bin or make something out of it or just leave it be.

So: do you think a balanced budget is a priority at all? If so, how high a priority is it — meaning, if you want a balanced budged, what would you be willing to deficit-spend in order to accomplish? Or, you can decide that you think we can live with running our existing deficit indefinitely. Articulate the answer to this question before you evaluate Ryan’s proposal as good, bad, or indifferent.

My second proposition is that given a political landscape in which the President seems content to dispose of what Congress proposes, and in which Congress is divided into split partisan control of its houses and institutionally divided within those houses to prevent anyone from realizing a vision of realizing a coherent fiscal strategy, you’ve got Ryan working without any effective coordination with the people who are in charge of raising taxes. He knows that he’s going to have to negotiate with the Senate, and then negotiate with the White House. That’s how the process works, and what Ryan is doing is called, in my line of work, “an opening offer.”

Opening offers are important for two reasons: first, they define your objectives; second, they set one of the outer limits for the arena of negotiation. For that reason, opening offers typically constitute more than you’re hoping for even if you win it all; no one expects an opening offer to be accepted, and everyone expects that the opening offer will be so ambitious as to elicit a gasp from the offeror’s negotiating partners. The gasp is as much for show and posture as it is a genuine expression of outrage. Once the gasping is done, a counter-offer is made, equally ambitious for the other side, and now that the parameters are set, the real work can begin.

That’s what’s going on here — Ryan is making an opening offer in pursuit of a balanced budget. I cannot fault him for that.

If the government is going to move closer to a balanced budget, which is the vision of the good that Ryan is pursuing, then that means in this landscape it’s inevitably going to be a question of what blend of spending cuts and tax hikes we endure. How much do we cut, and from where; how much do we raise taxes, and on whom?

My political comment is — if we assume that inflation will remain at its current level, and we further assume that we are going to move towards bringing the budget back into balance, then every dollar that we don’t cut from our spending today is $1.25 that we will have to cut in 2022; every dollar that we don’t raise in taxes today is $1.25 that we will have to raise in 2022. Spending cuts and the tax hikes now are going to hurt. But they aren’t going to hurt any less in the future, and indeed will probably hurt more then.

So. Are we going to eat our peas, or not?

 

* Health and Human Services; Housing and Urban Development; Medicaid and related programs passed through to states; Medicare; Social Security; Unemployment and related mandatory welfare spending; Veteran’s Affairs; and a few others. See this pie chart for an overall look at FY 2010 spending.

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172 thoughts on “Eating Peas

  1. This is going to sound remarkably uncivil, but “eating our peas” sounds really nice coded language for, “well, I’m sorry the rich and powerful f’d things up over the past thirty years via tax cuts, wars, and massive deregulation, but they actually keep the lights on the around here. So, since you guys in the poor and working class actually don’t have much political capital, we can fix things by taking it out of your hide.”

    I know, remarkably uncouth of me.

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      • Steal the best parts of the plans of the Progressive Caucus, CAP, and Paul Krugman, and put that in place. Happily, their plans don’t involve gutting Medicaid to make sure capital gains taxes are eliminated.

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          • If you’re asking me what I’d do if I was Obama today? Oh, that’s simple. The moment I win reelection, I tell Paul Ryan and the rest, “the whole Bush tax cuts, and I mean all of them, are going down if you don’t work with me.”

            Best case scenario, an actual deal that isn’t horribly center-right is struck. Worst case scenario, still a revenue boom.

             

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            • Higher interest rates would hurt economic activity.
              The best definition of interest that I’ve ever hears was that “interest is the price of money.”
              It’s cheap to have money nowadays.
              Inflation is around 2 to 2.5 %– it’s not a problem.
              Raise the interest rates, and the burden of servicing consumer debt will increase substantially.
              That would almost guarantee a wave of foreclosures that made the last one look like the kiddie pool.

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              • “Inflation is around 2 to 2.5 %– it’s not a problem.”

                http://www.aier.org/

                It depends on whether sensible measurements are used or political measurements. Measuring what we use most shows a different story than the government number. It’s like the difference between government reported 8.2 unemployment rate, and the real number of people actually unemployed or underemployed. Government has cooked the numbers. Inflation, the expansion of money supply, is high, and now prices are rising along with the expansion. There’s always a lag. Prices are headed much higher.

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                • The EPI, a new proprietary index developed by the American Institute for Economic Research, reflects prices of goods and services people tend to buy frequently such as food, utilities, and fuel. 

                  Except that any economist knows that’s a crappy measure because of how volatile the price of oil is.  Whether fuel costs are rising or falling has little to do with the soundness of economic policy.

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                • The link is to a site that has an inflation index based on the “things people buy every day”. This makes sense if you’re trying to measure the standard of living, but its a terrible measure of inflation. Inflation has nothing to do with the cost of living.  Its precisely the opposite – real inflation doesn’t affect the cost of living at all because inflation includes all prices, including the price of labor. Its completely and utterly wrong to say things like “obviously inflation is higher than reported because I’m spending more of my paycheck on food and fuel”. That just means food and fuel have gotten expensive. If the problem was inflation you’d be spending exactly the same proportion of your paycheck on food and fuel.

                  This isn’t to say we shouldn’t have actual cost of living indices. We probably should, and in many respects the cost of living is much more important than inflation. Its just nothing to do with monetary policy, where inflation is.

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          • Its probably very hard to do, but so is what Ryan is proposing. You change the Fed’s informal policy target to either the CPI-U level (rather than the rate) or (better) to the Nominal GDP level, and back date the starting point to mid-2008 (when we were already in recession but before the financial crisis). Strictly, actually using NGDP as the target doesn’t require any inflation. It only creates inflation to compensate for missing growth.  Given the choice between 3.5% inflation and almost completely abolishing medicaid, pell grants, food stamps, TANF and most discretionary spending, where do you think the American public would go? I mean, neither will really happen, but if people understood that that was the choice, it seems like a no brainer.

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  2. Since nobody has commented, I will.

    One of the things that I agree upon in broad terms is the notion of lowering the corporate tax rate while closing loopholes.  Two of our issues currently concerning global business is:

    1) Our marginal tax rate is too high as compared to other countries.

    2) We have a lot of loopholes which allow companies within the U.S. to immediately declare losses while defering the tax on gains infinitely when it comes to overseas activities.  (In fact, I recently sat in on a tax meeting where my company’s lobbyists are urging Congress to pass legislation that would allow them to bring some of the gains into the U.S. while still deferring taxes on said gains.)

    Like it or not, we are not competing on a global scale and we have to take cues from our competitors, all of whom have put into play laws that make their country more attractive.    The U.S. has to treat tax as a commodity now instead of as a legislative matter.  We will probably have to accept some losses  (Example: If you lowered the marginal tax rate but closed enough foreign tax loopholes to balance it out, GE would almost certainly leave this country.  The only operations that they have here are loss leader operations that they can use to offset domestic taxes as well as bring foreign gains in.)  but, ultimately, what we do with our tax structure should be geared towards making our country look better while making other countries less attractive all while not losing tax revene.  A tricky proposition but it can be done.

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  3. There is a whole salad bar of veggies here Burt. You talk a lot about Ryan and a lot about finding the best  mix of tax hikes and spending cuts. Ryan isn’t proposing any tax hikes, only a pile of tax cuts. So its hard to see how he is voicing a starter plan when he hasn’t even shown a willingness to do one half the things we need to do.

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  4. Burt this is one fishing AWESOME post! Excellent job!

    There is an excellent book called “Getting to Yes“. Pages one on talk about abandoning “negotiating from positions” as contra to the intelligent goal of reaching a “Wise agreement” efficiently and with minimal animus generated. For this post I dug out my 1981 copy and just want to type the bullets here:

    • Arguing over positions is inefficient
    • Arguing over positions endangers an ongoing relationship
    • When there are many parties, positional bargaining is even worse
    • Being nice is no answer

    Solution?

    1. People: Separate the people from the problem
    2. Interests: Focus on interests not positions
    3. Options: Generate a variety of possibilities before deciding what to do
    4. Criteria: Insist that the result be based on some objective standard

    This assumes of course that the parties actually desire reaching an agreement. I’m not certain this crop of congress critters can separate the people from the problem and the critters are themselves part of the problem. Institutional interests are the rest of the problem, for instance getting out of Afghanistan won’t diminish the military’s budget much, they will still feed and pay those soldiers and continue having bases in out of the way places and overpriced weapon systems that feed local congress critters’ constituencies.

    Another key concept in the book is BATNA (best alternative to a negotiated agreement). The BATNA here is that China (and Japan) continue to buy our debt, blindly. That method virtually guarantees economic disaster and very likely war within 5-10 years. It is naive to think otherwise, all wars are at their core economic. When America defaults on its debt as it surely must if a major buyer is not found for that $Trillion per year (and growing) budget deficit we keep amassing… put it this way, we spend a trillion per year on social welfare programs, how will those work when the recipients have to receive IOU’s instead of their checks? The problem with the PiGIS is they keep borrowing to keep their collective ships afloat. The EU steps in and buys the (relatively speaking tiny) debt. When the US sneezes the entire world catches economic pneumonia.

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    • getting out of Afghanistan won’t diminish the military’s budget much

      The military has to re-arm for readiness purposes.
      There will be upgraded weapons systems phased in at that time.
      And it’s going to be expensive.

      Personally, I favor selling off every overseas military base and withdrawing from NATO, but that’s just me, and nobody ever listens to ol’ Will H.

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  5. I think this is a fantastic post, Burt.

    I know this is probably going to sound partisan, but it’s really an acknowledgement of the economic principles.
    The Left likes to tout Keynesian economics. Fine. I can go there. I prefer those grounds.
    But an important and oft overlooked part of Keynesianism is that stimulus spending is counter-cyclical.
    And that’s not the way it works in practice.
    Once a program (and its budget!) is established, it’s darned hard to let go of it.
    And that’s not the way it’s supposed to be.
    I think if we’re going to justify deficit spending, it has to be to a stimulative effect.
    The good part is that the budget is for only one year, and we can make some manner of adjustments to what lies ahead.
    And there’s a lot of uncertainty there.
    Two things are for sure though: All of that excess liquidity will be drained from the economy at some point, and it’s going to hurt a lot when it happens (think Volcker).

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    • Two things are for sure though: All of that excess liquidity will be drained from the economy at some point, and it’s going to hurt a lot when it happens (think Volcker).

      Yes.

      Where is it going to go?  That’s the part I’ve been trying to figure out for the last five years.  That $1.2 trillion dollars Still talks about is there.  It’s not doing anything.  As near as I can tell it can’t go anywhere.  There’s no place to put it, unless you bank on the future, and that involves being the first man over the trench and into no man’s land.

      If we can figure out where it’s going to go, we can figure out how to raise revenue off it.

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      • The numeric value probably isn’t going anywhere.
        The value of it has been drifting downward for some time; the dollar is losing value against other currencies.
        It’s not bad for exports, and so I would expect to see that continue.
        But that’s why you see Japanese auto manufacturers building in the US, while they move out of Australia, whose currency is strongly linked to gold.

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        • I guess what I see is that all that quantitative easing flushed a lot of cash into the system that all floated to the top of the soup pot and was skimmed off and put in the fluid cash bucket that sits next to the soup pot.

          But you’ve got a gold bubble, and we *still* have a real estate bubble, and wages are still stagnant relative to costs but that’s because real wages have to fight globalization pressure (it’s one of those economic confluence near-miracles they’re not falling, iff’n you ask me) and most costs have already reaped the benefits of outsourcing if there ever were any real ones.  The cold fact of the matter is most of the dollars are sitting in nonproductive caches and the people who would spend money… don’t have enough of it.

          Inflation would be a great way out of this problem if the inflationary burden was spread out proportionately to capital, but it doesn’t work that way.

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          • Just to add to that:
            There have been several more short-lived bubbles since the housing collapse. As I remember it, there was one in ore and mining products followed by one in grains, and a big one in oil preceding those two.
            That is a bit troubling.

            Two years ago, I would have said that the cash reserves aren’t returning to the market due to uncertainty. These days, I really think it’s more of a demand issue.

            The big, big problem with inflating our way out of it is that that amounts to reducing our standard of living; the sticky wages effect. The five factors of production (as I learned them) are: land, labor, human capital, physical capital, and entrepreneurship. When the pricing of those factors of production begin to rise, labor is always the last one to go, real wages begin to decline, and our standard of living begins to fall.

            The other issue with inflating our way out of it is that it would be giving away economic activity to our competitors. When interest rates are higher, it attracts more capital investment, and raises the cost of American exports. I’ve heard it argued by economists that the higher interest rates in the Reagan years were the real cause of off-shoring, as other locations became more attractive.

            Inflation comes with its own risks. What’s odd about it is that this seems to be used by the Left in much the same manner as the Right uses tax cuts as the answer for everything. Neither side is being truly forthcoming about the matter. There are reasons that we don’t reduce taxes to 0%, and there are reasons we don’t target inflation at 100%.

            As consumers of the political product (which, although much of it is differing weighting of the same evidence, though probably just as much as quite the same as a preference for Camels over Marlboroughs), we should be skeptical of both sides, including the one we lean toward. Like any other marketing campaign, their job is to sell us a product, and not to tell the naked truth.

            As it stands, the hope is that the excess liquidity can be drained off as economic activity increases in a measured way that wouldn’t harm output so much. And these guys at the Fed know what they’re doing. That said, look at where we are now. They have been so wrong so many times before.

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    • Spending can be counter-cyclical.  Clinton accomplished it somewhat (getting rid of the deficit and running surpluses during an economic expansion).  Bush destroyed that by cutting taxes and running massive deficits during an economic expansion, but that’s   due to a Republican choice to be overwhelmingly fiscally irresponsible, not due to a law of nature.  Canada pulled off counter-cyclical spending, too – we ran large surpluses in the ’90s and early 2000s when the economy was doing well (to the point where the worst thing our conservatives could say about the Liberal Party was “you’re running surpluses instead of just cutting taxes!” – another example of conservative fiscal short-sightedness).

      So the precedent seems to be – Keynesianism works, but only when you have fiscally responsible liberals in power.

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      • Katherine your meme is flat out WRONG. Clinton did NOT leave a budget surplus for Bush to fritter away. I don’t blame the left for ignoring the facts on this, it breaks up a great lie, but it is a lie nonetheless.

        Canada is a special case because of Alberta’s oil. Take away the vast oil revenues and Canada’s economy returns to the shambles it was before the oil was developed.

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        • Ward I haven’t read through your link regarding Clinton but I can say with great confidence that you’re flat out wrong regarding Canada. Canada has the tenth largest economy in the world and in 2009 only 2.9% of their national GDP was from energy exports (which includes not just oil but also electricity and nuclear fuel). The development of energy had absolutely nothing to do with Canada’s economic troubles and their subsequent resolution of the same (note also that Alberta’s energy sector began development around 1923 so it predates both Canada’s economic troubles AND their correction of their economic problems).

          If by economic shambles you’re referring to Canada’s fiscal troubles in the 90’s it’s important to know that the financial crisis was resolved by conservatives raising taxes and then their successor Liberal governments cutting spending (particularily military spending) to produce over a decade of budget surpluses. In other words it was done mainly by liberals governing responsibly as Katherine notes (though I do think conservatives get some credit as well).

          I have great respect for your wit and commenting in general but I would strongly suggest that you keep your subject south of the 49th because in characterizing Canada as some kind of oil dependant petrostate you’re making yourself look enormously foolish.

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          • True, I neglected to give Mulroney credit for the GST, which contributed greatly to the balancing of the budget and had high political costs.  His government deserves some recognition for that.

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          • North, America consumes 25% of the world’s energy while producing 25% of the world’s GDP. The correlation is no accident, energy=GDP output. It is nearsighted to focus only on the direct value, while ignoring the indirect. While the US is a net energy consumer, it also is the 3rd largest producer in the world. It just needs more, hence the imports. Looking only at the raw value of energy as produced and sold misses the bigger picture of how that energy multiplies throughout the economy, in manufacturing, services, petrochemicals and so on.

            As for Canada producing from the oil sands since 1923, a couple of bbls don’t count. It took a massive and consistent effort and government subsidies to create the massive Canadian oil sands industry of today. It stands as an object lesson for the rest of the world on how to do things right. We can and should have an entire discussion and possible OP on the subject, I’m more knowledgeable than you might imagine on it.

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            • I remember reading back in 2003 that oil would have to rise to $50/bbl to make oil sand extraction feasible. At the time, it was sitting around $28.83, and it sounded like pie-in-the-sky thinking.
              What a difference a few years can make.

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            • Ward, that may be, but attributing the vast majority of Canada’s economic output to that sector (let alone crediting that sector with single handedly rescuing and maintaining prosperity for the entire country) strikes me as betraying a willful ignorance of Canada’s economy, their recent political and fiscal history. It’s also somewhat insulting to essentially write the country off as a mere petro state. I’d add that there also is a kind of willful whistling past the graveyard here since it’s patently obvious that the medicine Canada took in the 90’s is pretty much perfectly applicable to the US’s budget woes today.

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              • North, I respect you at least as much as you respect me. ;)

                Please don’t misinterpret my words, I am by no means comparing Canada to some tinhorn petrostate like Venezuela. Rather I respectfully place Canada in the same category as the highly respected “petrostate” known as Norway. Norway has intelligently managed its sovereign wealth created by the oil bonanza in the North Sea. That said, Canada’s relationship with Alberta is somewhat checkered. I suspect I’m a lot older than you, when I talk about the past, I’m talking a few decades beyond your purview.

                As for percentage of GDP, why is it that oil sands account for 41% of Canada’s federal budget? Wouldn’t such a wimpy 2.1% of GDP logically represent 2% or so of the federal budget? Perhaps something is missing in your understanding here, perhaps we can fix that?

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                •  

                  Well good, I’m glad we can speak with mutual respect.

                  I am not rich in time this afternoon so I had time for only a brief google-foo but I think that jobmonkey is monkeying with your numbers. The Globe and Mail was what I grabbed right quick but oil revenues aren’t even on the federal budget. Accordingly my original objection pretty much stands. http://www.theglobeandmail.com/news/politics/budget/article1488651.ece Canada’s economy is a lot more than just a frosty bucket of oil.

                  That said, perhaps you and I (and Katherine) are talking past each other. What shambles are you referring to when you talk about Canada being rescued from a shambles by oil development and returning to it if the oil were to go away? You definitely have the advantage in years on me (and possibly Katherine). When she and I talk about Canadian crisis’s we’re typically (and definitely in the case of this thread) talking about the economic and budgetary crisis in Canada in the 90’s. That crisis was solved with responsible government policy: taxes raised, spending cut and budgets balanced. Yours is the first reference I’ve ever had of oil galloping to the rescue. Perhaps I’m misunderstanding you? If so by all means illuminate away!

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          • Katherine, you should read the link I sent you, or this one if that one is too difficult. The bottom line is Social Security, otherwise known as FICA. Americans here have argued with me that FICA is a TAX. It is not. The letters FICA stand for: Federal Insurance Contributions Act, and that is exactly what it is SUPPOSED to be. In fact the SCOTUS of the time took a long hard look at FICA’s constitutionality hence the FDR regime attempting to stack the deck by drastically increasing the SCOTUS size. It is very similar to the Obamacare issue, people being forced to purchase a product (in this case essentially life insurance with an accelerated annuity death benefit). The concept was good, people /should/ have life insurance but refuse to buy it on the open market (similar to health insurance). Contributions to FICA are no more a tax than contributions to a 401K are.

            Starting in the Johnson regime, the government started robbing FICA to pay for budgetary misadventures elsewhere. He was able to hide the dramatic and rising costs of the Vietnam war for instance. The “robbery” was “legal” because the money withdrawn from Social Security was replaced with IOU’s. Unfortunately those IOU’s are being replaced with IOU IOU’s today. Clinton’s “trick” in 2000 was to “borrow” from the FICA funds and treat them as “income”. Now if you go to the bank and borrow $100K, you can only treat it as “income” if you have no intention of EVER paying it back. However you now have an issue with the bank and certain law enforcement agencies. Now if you believe Clinton never had any intention of EVER paying SS back for the money he “appropriated” then I will happily concede your point, and we can all watch while he gets marched off to jail.

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      • I wouldn’t say that being fiscally responsible is the exclusive province of either party.
        I lived in a state which required that all budget surpluses be refunded, and under Republican control, I got a check from the state.
        Canada’s currency is known as a “commodity currency,” and its value is strongly related to the price of oil. They have benefited a great deal from this.

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        • No doubt they have Will. Canada has also benefitted from having an economy that is more free than that of the US. They’ve benefitted from having past (mostly Liberal) governments that paid down their debts and balanced their budgets. They’ve certainly benefitted from spending less on healthcare and also in getting good results from the money they’ve spent. They’ve also benefitted from having rather strictly leashed banks that (until the bust) were derided for being boring, staid and low profit; and now are considered the go to model for stable banking. There are a lot of components to the current economic oomph in Canada.

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        • I wouldn’t say that being fiscally responsible is the exclusive province of either party.
          I lived in a state which required that all budget surpluses be refunded, and under Republican control, I got a check from the state.

          Yep, that’s one way of doing it, and a very popular way too.  But it makes my point – that doesn’t enable counter-cyclical spending, because the government doesn’t improve its fiscal position using surpluses, so having had surpluses doesn’t benefit it when recessions come and stimulus spending is needed.

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  6. There’s a whole bunch of things I could say here, but this is the most important – its really important to distinguish between the short and long term deficit problems in the US. The short term deficit is caused by three things – the recession, the Bush and Obama tax cuts and the wars. The wars are a done deal – congress made the unprecedented decision not to pay for them when it authorized them and there’s no changing that. The recession is outside of congress or the president’s direct control, although I’m of the school that says the Fed could have been, and probably could still be, more expansionary without risking inflation. The  tax cuts will fix themselves if we let them. Actually all of this will fix itself if we let it – the recession will end, the tax cuts will expire and the wars will wind down. Congress can – indeed, should – do nothing and the problem will go away.

    The long term deficit is another matter. Its driven by just one thing  – health care costs. Its quite unlikely costs will continue to rise at the currently expected rate, because things that cannot possibly go on forever do eventually stop and the cost of healthcare in the US is already quite extraordinary by both international and historical standards. But costs are already too high, so its clear we have a problem – its just very unclear how large that problem really is. Given the nature of the problem, you’d ideally want to rebuild all the federal health programs to give all participants in the system a better idea of the costs and benefits of their actions. Extraordinarily, the British NHS in its present incarnation is more responsive to prices than  the US healthcare system right now. Some  amount of rebalancing away from wasteful spending in other areas, including the millitary, is no doubt also desirable for itself, but in all honesty I don’t expect it will contribute much to closing the healthcare spending hole.

    On the current politics – Ryan’s budget is profoundly unserious as policy. If you want to pretend to balance the Federal budget without touching medicare or the millitary and further cut taxes, thats fine, but acknowledge that you’re just pretending. Ryan’s previous plan at least dared to touch medicare, even if it didn’t get it right. Obama isn’t serious about the deficit right now either because there’s an election coming up. In all probabiliy he was serious back last year when they were trying to negotiate a grand bargain, but that window is closed for now.

    Regarding the vision of government – no modern developed nation operates with a government that can only spend what it takes in in a give year. The political obstacles are huge, but ideally we want a government that spends what it takes in over the economic cycle. There’s an argument to be made than in the US, the states and not the Federal government should be running the social programs, so they and not the Feds should be running the deficits, By default, however, the states have ceded the business of borrowing over the economic cycle by passing balanced budget amendments. No-one’s proposing to unwind that, so the idea of balancing the budget every year isn;t commendable – its a recipe for a permanent recession. In all probability Ryan knows that, which just makes this effort even less serious.

     

     

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    • Viz your argument, I think the main issue with the Ryan Budget is that it doesn’t actually address medical costs. It just hand-waves them away by telling seniors “here, have a voucher for insurance.” It makes absolutely no attempt to contain the costs or even make an effort to see if the total GDP share of medical costs versus the rest of the economy is in anyway close. Effectively, he’s Off-booking the most serious cost growth area which will either A. consume state budgets (and probably require massive medicaid expansion) or B. massively consume savings/disposal incomes for families who have to support elderly relatives or C. make a need for a new program that will actually cover it as the elderly become an enormous financial burden for people.

      In any of those 3 cases, Ryan’s plan is a fantasy and I somehow doubt that in 50 years the US populace (and more importantly the electorate) will go “the elderly don’t matter.”

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    • Its quite unlikely costs will continue to rise at the currently expected rate, because things that cannot possibly go on forever do eventually stop

      Thirty years is a long time for the baby boom demographic lump to get smoothed out by the Reaper.

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    • no modern developed nation operates with a government that can only spend what it takes in in a give year. The political obstacles are huge, but ideally we want a government that spends what it takes in over the economic cycle

      AFAIK singapore succeeds at doing this most of the time. Usually, Singapore runs a budget surplus. It only reaches into the reserves when there is a severe economic downturn.

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      • Make Simon’s original statement “no modern developed nation of significant size with a broadly-based open economy”.  Singapore is a city, and by global standards, not a particularly big one.  It has the enormous advantage to sit at one end of the busiest shipping passage in the world, making it a transshipping port entirely out of proportion to the size of its own economy.  40% of the population are foreign nationals.  80% of the population lives in government-regulated housing. 70-80% of the population gets their health care through a public health system with costs tightly controlled by the government.  Many of the boom-and-bust industries are entirely missing: resource extraction, agriculture, etc.  What can be accomplished on that scale, and in those circumstances, is very different from what can be accomplished under different conditions.

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    • Regarding the vision of government – no modern developed nation operates with a government that can only spend what it takes in in a give year. The political obstacles are huge, but ideally we want a government that spends what it takes in over the economic cycle.

      There’s a couple of ways this could be handled better than we do now.  One is the states’ way–bonds for capital expenses, but with operating expenses covered each year.  The other is to adopt an unbalanced budget amendment.

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      • In my fancier moments, I sometimes dream of creating some sort of absurd revenue locked system and taking away the government’s ability to do anything but distribute a fixed share of revenue….

        Something like 20% of GDP – (Growth Rate of last FY – 3).

        This would mean you get an extra 1-2%age points to spend if growth is under 3% and less if it’s over it. Automatic Keynesianism…

        …this proves more than anything I think that I need some sleep.

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      • Monetary policy is not primarily about interest rates, its about money. The Fed operates by buying things with newly created money. There is no shortage of things it can buy – in the recent past its bought private mortgage debt, federal mortgage debt, bank debt and longer term treasuries. It could buy gallons of milk of bridges in Alaska if it really needed to.

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  7. An excellent piece Burt, I think you nailed a point that the “socialism vs. social darwinism” brouhaha is overlooking – there is a real problem with your government’s Budget here, and one way or another it will be solved.  It can happen slowly or quickly, but  no amount of sparkling rhetoric will persuade a brick wall to stand aside.

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    • So far people have been proposing that Japan will FINALLY bite the bucket after years and years of deficit spending and that it’ll blow up once it reaches x% of GDP to debt to ratio…hasn’t happened yet, and I somehow doubt it’ll happen so long as the yen is a useful secondary global reserve currency.

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      • This is akin to arguing that falling off a building is perfectly safe because nothing bad has happened half-way down.  So long as debt is growing faster than a country’s tax base, collapse is inevitable, at some point interest payments will exceed revenues (this actually happened to New Zealand in the 1980s) and that makes default certain.  At some point the usefulness of the currency as a reserve becomes endogenous, once the government looks ready to start inflating people will flee the currency in a very short pace of time.  Fiscal crises do not progress linearly, they move very slowly, and then very quickly.

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        • As Simon K noted above, though, the actual “debt growing faster than the country’s tax base” thing isn’t actually true wrt to the medium term US budget. All that’s required is a lapse of the Bush tax cuts.

          Long term obviously medicare growth needs to be restrained, but that’s more of a sector of the economy with regard to GDP issue, not so much as simply a government budgeting issue.

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  8. Our President acts like he is really our Prime Minister. This President’s style, even with his centerpiece campaign issue of health care reform, has been to describe a big idea and let Congress craft out the nuts and bolts — or not. ”

    To my mind, that’s more presidential than prime ministerial.  A prime minister would draft the legislation him- or herself, or delegate the drafting to another cabinet member.  Letting Congress do it seems almost exactly the textbook example of how things are done in a presidential system.

    Your actual critique of Obama–as a reactor more than as an actor–is pretty good, though.

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  9. If we don’t inflate our way out of our problems, we’re doomed. Lost Decade at best, Deflation at worst. Inflation is the scylla we ought to be aiming for, right about now.

    Who said that 1xGDP Governmental Debt is a bad thing? We let common citizens get loans to the tune of at least 5x their income, and that’s under strict loan terms!

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    • So, how do you propose to create a broad-based inflation that includes the price of labor (ie, wages broadly)?  Because if other prices increase and wages don’t, you’ve got a serious problem.

      30 years ago the mechanism was relatively clear.  The Fed pumped money into banks; banks were not allowed to speculate in the markets; were required to maintain pretty good standards for real-estate loans; and couldn’t move money overseas easily.  So they made somewhat more risky loans to businesses for expansion, those businesses hired workers domestically, increased hiring pushed wages up, higher wages increased demand for other goods, the price of those goods increased, inflationary spiral ensued.  Increasingly sophisticated automation is a related issue, as expanding production requires far fewer workers than it used to.  Essentially all of the constraints that forced banks and businesses to channel a large part of the increased money into wages for the masses have gone away.  The mechanism is broken, and no substitute has been proposed.

      At the upper levels, the people in charge won’t even acknowledge that the mechanism is broken.  Although Dr. Bernanke does seem to be getting closer to saying to Congress, “You’ve taken away the Fed’s tricks for stimulating employment; it’s your problem now.”

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      • Nature faces this problem constantly.   The answer is pretty obvious: specialization.

        There are roughly three sorts of national economies:  Sellers, Makers and Thinkers.   Sellers sell logs to Makers, who turn them into chairs for the Thinkers to sit in.   The Thinkers stay on top through technology transfer, selling ever-better multi-axial turret lathes to the Makers.

        The Sellers are scheming, sick of selling logs and ore, they’re trying to become Makers, so they build dams to power the Maker’s tools.   The Makers are scheming, trying to become Thinkers, investing in universities so their kids can make cheaper versions of those high-margin turret lathes.    The Thinkers, well, there’s only so far you can go on technology transfer without inventing better technology.

        Every economy is some mix of these three.

        In a well-run nation, all this scheming becomes part of government policy making, driven from the ground up.   America’s really good at it, insofar as we’ve got a great university system.   The Makers are sending their kids over here for an education, hoping they’ll return to turn their Maker society into a Thinker society.

        America has largely exported the Maker components of its society.   Remember, the Sellers are also selling labour, but they’re trying to become Makers themselves.   Thinker societies need high margins, Sellers on their way to becoming Makers will do so at any cost.  Problem is, for every such transition from Seller to Maker, wages go up and another Seller is in competition with this new Maker society.   China’s got this problem just now:   they’ve made it to Maker status but the disk drive manufacturers have moved to Thailand.   Makers have to make commodity products.

        Thinkers make speciality goods and more importantly, provide speciality services, particularly education, which includes a view of how a Thinker society thinks.   All those little incubators in the university towns are how Thinkers stay on top.   China’s society is top-down, still unwilling to get rid of Communism.   That sort of society can never graduate to Thinker status.   Nobody can make anyone else think.

        Wages will take care of themselves.   The Industrial Revolution is just now taking hold in most of the world, a great wave washing away the sandcastles of the Sellers, usually ruled by some tin-horn autocrat intent upon robbing his own country.   The Banana Republicans are doomed.   Mankind wants to think, demands it.  Soon enough, the Sellers will get wise to the value of their commodities and some clever nations have made the jump from Seller to Thinker with no intermediate Maker step.  Think of countries like Costa Rica which have preserved their jungles and now make tidy profits on tourism.    Lots of American oldsters retire to Costa Rica.   Well-run country.   No army.

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        • “America has largely exported the Maker components of its society.”

          Exported the positions, but not the people.  What do you do with the folks who used to be Makers but whose positions have gone, and who are not capable of being Thinkers?  Reduce them to Sellers (of labor, since most of them don’t have anything else)?  That’s tough on the 50-year-old with a mortgage and two kids starting college.  Or put them into Thinker positions, with all of the problems that that entails?  I’ve cleaned up code and circuit designs done by non-competent Thinkers; I’ve read enough of your posts/comments to know that you have cleaned up such code as well, or at least thrown up your hands over it; putting non-Thinkers in those positions is a pure dead-weight loss, as the economists like to say.

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          • Let’s say we arranged our society, like Germany, so that Maker had an ongoing training scheme which kept him viable.   Let’s imagine a scheme, an open union which operated rather like teacher training.   Teachers have to go back to school all the time.

            Makers aren’t stupid.   An order comes through:  make U units of Component C.    The Maker depends on the guys in the labs to come up with Component D.   C will become obsolete.   Henry Ford faced this problem with his Model T:  his factory was so specialised to making Model T he couldn’t retrofit the factory fast enough to make his new Model A.   Other car manufacturers ate his lunch while he retooled.

            A Maker can be turned into a Thinker.   Thinkers make prototypes, Makers fulfil orders.   It’s not much different than the relationship between an architect and his construction foreman.    But the construction foreman relies on clever, qualified workmen to stay on schedule.   As you point out, people such as you and me are forever having to correct the mistakes of Thinkers who weren’t really thinking.   But some of those messes, I think particularly of bad circuit designs, resolve to prototype bullshit which made it onto the board because someone just cut-n-pasted instead of working through V I and R along the way.   That’s where a good Maker comes into the picture, the construction foreman who told Frank Lloyd Wright he was an idiot for building in uncovered adobe.   You need ladrillo to cover adobe.   Wright’s out there, hands on his hips, dreamily admiring his adobe walls until the first rain falls on Scottsdale and washes them away.

            The best work I’ve ever done was based on Makers promoted to Thinkers.

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            • The best work I’ve ever done was based on Makers promoted to Thinkers.

              There’s a selection process there, though. Being able to take people from makerdom to thinkerdom is not the same thing as assuming that we can transform makers into thinkers more generally.

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                  • Though bourbon is surely the gods’ drink of choice atop Olympus, my ancestors have transformed bourbon into something called Cherry Bounce for centuries.   One of those ancestors was one of the first people convicted of jury tampering, in Williamsburg Virginia.   Seems there was a dispute between brothers over inheritance of a store.   One brother took the jury out on a weekend fishing trip and filled them so full of cherry bounce they returned to the jury box with such crippling hangovers the judge gave him thirty days in jail for it.

                    Cherry bounce is an Old Fashioned on steroids.

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                  • Oh, granted, certainly.

                    If you can’t make anything, your Thinking is likely based upon assumptions ungrounded in reality.  Absolutely.  And most people currently sitting in Thinker’s chairs don’t belong there.

                    But I firmly believe that real Thinkers are rare cats anyway.  Although our economy and world and everything would be zawzome if we could just double the number of good Thinkers, I think we’re stuck with a fairly consistent… and small.. percentage of the population.

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                    • America’s capable of attracting Thinkers.   We still have the best university system in the world.   Thinkers aren’t as rare as all that:  the novice Thinkers need to be plugged into the Maker world.   That’s where Germany shines brightest:   seems like every little village has three or four high tech machine shops cranking out some preposterously value-add proposition, submarine propellers and the like.

                      America needs to get a real labour movement started again.   Not the old model with hard-hearted idiots in an adversarial relationship with platoons of lawyers and negotiators on both sides of the table.   A real labour movement, with management and workers scheming and dreaming about making high-margin products the world will really want, on the same side of the table.   This isn’t a pipe dream, it’s possible, indeed absolutely necessary.   We’ve seen what happens when you try to transplant software and tech support offshore, the results are routinely awful.   Your point still stands, not all Makers can become Thinkers.   Thinking requires Understanding.

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              • That’s true enough:   Sutor, ne ultra crepidam.   Though the shoemaker’s opinion on subjects other than shoemaking might not be solicited, when it comes to the subject of shoes and feet and how to make a better shoe, nobody knows the subject better than the humble Maker.   Woe betide the Thinker who believes otherwise.

                I see this problem constantly.   Some turtle head executive from Carpetland wants a system but won’t involve the people who have to use it while I’m designing it.    I don’t even bother asking for his permission any more, I just wander out to the factory floor and ask the workers to tell me who deals with the problems in the current process.   Keep that one person involved in the design and things go swimmingly.   Never rely on Carpetland to understand, much less solve a problem in the Maker world.

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  10. Wow, that post is awesome. This line was my favorite:

    First, Paul Ryan just might be attempting to do something good here. Maybe you don’t think it’s good. But you should assume that he does right out of the starting gate.

    I’ve said for a long time that if you assume bad intent from your political opponents from the start then you are guaranteeing failure.

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    • It’s a high minded line, I agree, and the heart is in the right place but I dunno; a jaded view of opponents motivations strikes me as the more practical one. O’s last 4 years certainly strike me as outlining the limits of acting like your opponents have no bad intent when their actions suggest otherwise.

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    • Assuming good intent is all well and good — when you don’t have a past history, or the person in question isn’t part of a group defined by a given idealogy — in other words, [i]when you have no data to make educated guesses with[/i].

      That’s not the case with the GOP — or Paul Ryan.

      Or heck, any of us. Tell me — when you hear someone propose a plan (a plan for anything!) that has two parts — and one part is full of detailed proposals and specifics, and the other is just a generalized “And we’ll make X into Y” — which part of the plan do you think they’re really serious about — and which part is just filler for some other agenda?

      That’s the problem with Paul Ryan’s plan — he’s very, very, very specific on what taxes he’s going to cut. But very, very, very vague on how he’s going to raise money on the other side.

      He’s very specific on what he’s going to spend — but very, very vague (other than percentages) on what he’s going to cut in terms of spending.

      If you do even the slightest bit of applying Paul’s vague goals to reality, you’re looking at politically impossible numbers — on the “cut spending” and “raising money” side.

      So I think it’s perfectly okay to assume that the tax cuts and spending hikes are the [i]real[/i] Ryan plan — because those are the detailed parts, the parts that are politically possible, and the parts that his party has championed. Pretending the VAGUE parts — the domestic spending cuts and tax increases (sorry “loophole closing”) that require politically impossible (even if the GOP controlled all three branches of government outright) — are somehow serious is, well, it’s just being naive.

      Ryan wants to cut taxes. A lot. he doesn’t want to cut defense spending. At all. That’s 100% in line with the GOP’s own actions, goals, and outright acts of the last two decades — and it’s the only parts of his “budget” that have actual real proposals on it.

      Eliminating loopholes and cutting domestic spending to the bone? The former isn’t a serious idea — I guess it’s just a nod to the fact that “tax cuts increase revenues” is becoming an increasingly threadbare offer — and the latter is, well, wishful thinking. I’m sure the GOP would love to cut domestic spending by 80%. But unless the good ole’ US of A shrinks in size and population by 80%, that ain’t happening.

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  11. It’s amazing that Paul Ryan can propose a budget that slashes spending and cuts taxes, and he’s greeted as a serious thinker who wants to solve our problems, while any budget proposed by someone on the other side who wanted to massively increase taxes while slightly increasing spending would be greeted as a pie-in-the-sky fantasy. (Note: This is not because I support the latter; it’s because both are pretty clearly unserious ideological jerkoff fantasies.)

    Maybe it’s embedded in this asinine “eat your peas” phrase, but there’s just something that turns people on when right-wing maniacs come in the room and tell us that the real way to fix our problems is to repeatedly fuck the poor. I fundamentally don’t get it.

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            • I haven’t looked at Ryan’s proposal yet, so take this for what it’s worth, but is Ryan proposing decreases in current predicted spending as opposed to cuts in actual current spending?

              E.g., if the budget is currently predicted to increase by, say $8 trillion and he cuts $5.3 trillion off that increase, then the actual budget would still increase, while he can still plausibly (if somewhat disingenuously) claim spending cuts.

              I don’t know that this is what’s going on here, but it’s such a common practice that it’s what I would expect to see.

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              • I just did a quick skim of the Bipartisan Policy Center’s review of the Ryan proposal, and that’s exactly what’s going on. He is proposing cuts to the currently planned amounts of increased spending, not cuts from the actual amount of current spending.  So Mike’s claim was possibly confusing, but not false.

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                • That’s not what’s going on. As best as I can tell from looking at his budget itself, which is really hard because official budget websites never give numbers, he is counting using nominal dollars. Here’s a picture that at least illustrates this:

                  http://budget.house.gov/UploadedPhotos/MediumResolution/68fce171-d783-43ca-8600-b85d4694f5f9.jpg

                  In order to go from 23-24% of GDP to 20%, you have to decrease real spending. I don’t see any way around that. It is likely true that the budget in nominal dollars will increase due to growth rates, but I’m still rating the claim that he’s increasing spending as “false”.

                  (Also, that picture seems to make it clear that the $5.3 trillion of cuts are w.r.t. the president’s budget, so I will gladly back off that particular number.)

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                  • Ryan,

                    “In order to go from 23-24% of GDP to 20%, you have to decrease real spending. I don’t see any way around that.”

                    Actually that’s an easy one. Typically with budget proposals they always over-estimate GDP. When called on it they will suggest that because their budget is so awesome, GDP will increase. That means they can increase spending in real dollars but it will appear to decrease as a share of GDP.  Both sides do this regularly.

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                  • In order to go from 23-24% of GDP to 20%, you have to decrease real spending.

                    Not if GDP increases sufficiently.  According to the BEA the 2011 U.S. GDP was just over $15 trillion.  24% of that is ~$3.74 trillion.  If our GDP increases in the next decade to $19 trillion (using constant dollars), 20% of that would be $3.8 trillion.

                    Of course that’s even easier if you use nominal dollars.  I haven’t looked at Ryan’s plan closely enough to either agree or disagree with you on that, but it wouldn’t surprise me since it would make marketing of his plan easier.

                    And I’m  not making any claims about what U.S. GDP will do or be 10 years from now, only noting mathematical possibilities. Mike is certainly right that they tend to overestimate GDP growth because that also makes their marketing of proposed budgets easier.  For those numbers I tend to rely on the CBO, because while they’re far from perfect (because it’s close to a pure guessing game, especially the farther out the forecast goes) their predictions tend to be less partisanly biased than what you’ll get from either party or from just about any president’s OMB.

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                    • If they knew how to make GDP a certain number on a certain date, they would have done it by now. I don’t place a lot of stock in those numbers.

                      Ryan’s budget (to my understanding) reduces the increase of the current budget. That is, this year’s dollar amounts are greater than last year’s, but the rate of increase measured year-over-year is lower.

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                  • Keep in mind that population is increasing. If you hold real spending constant, real per-capita spending is decreasing. Even if you increase real spending in proportion to popualtion growth, leading to constant real per-capita spending, any increase in real per-capita GDP (which is the norm) will result in declining spending as a percentage of GDP. This is basically what happened in the ’90s. Between the cuts to military spending and Congressional Republicans holding domestic spending in check, real per-capita spending remained more or less constant, and spending as a percentage of GDP fell by quite a bit. It wouldn’t have fallen as much if it hadn’t been for the Internet boom, but it would have fallen some regardless under any non-recessionary conditions.

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        • Well, IIRC —

          The Ryan plan cuts taxes — heavily titled towards the upper brackets — by a significant amount above and beyond the Bush tax cuts currently set to expire. These are detailed proposals, very solidly spelled out.

          The plan holds (or increases, depending on whether you’re counting some proposed Defense cuts) the Defense budget.

          Then the plan — very  nebulously — claims it will close some loopholes and ends some exemptions, but doesn’t specify any of them. it will then cut domestic spending to a certain % of GDP — but does not say how. (it does amount to something huge, like down to 20% of the current budget).

          So depending on how charitably you handle the nebulous aspects of the budget, and depending on how much you like your voodoo economics, the plan does everything and anything.

          What it spells out explodes the deficit. What it assumes, but doesn’t specify, sorta pays for all that under ideal assumptions and without any gesture towards political reality, so it kinda is a wash.

          Pratically speaking? Doing nothing (letting the Bush tax cuts expire) is a far faster way of balancing the budget, and doesn’t rely on airy assumptions, magic asterisks, or wishful thinking. Or, you know, unspecified later actions.

          The Ryan plan is half a plan. Specifically, it’s the “tax cut” half of a budget plan. The “tax hike” and “spending” part are left as an exercise to the reader.

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          • “Then the plan — very  nebulously — claims it will close some loopholes and ends some exemptions, but doesn’t specify any of them.”

            I believe that Rep. Ryan has stated publicly that choosing which loopholes and exemptions isn’t his job, that belongs to Ways and Means.  Funny how the responsibility for the tax rate structure isn’t also over there.

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              • It’s really more a matter of the structure of our federal government more than anything else.
                Try reporting fraud to the federal government.
                Try it. Go ahead.
                Do you have any idea who receives the complaint?
                Well, first of all it depends on what was gained in the fraud, then who was involved. Those two things could send you in very different places. The amount of the fraud is important as well.
                There are so many considerations, it makes me fell sick to even think of them all.
                But that is the structure we have in place.

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    • Blame our Puritan roots. To suffer is to be Godly. Americans are raised to — for lack of a better word — worship money and the rich, to believe that having them is a sign of hard work and worth and if you don’t have them, you are either lazy, a sinner, or otherwise undeserving.

      People suffering from a “rough patch” should, obviously, be supported by friends, family, or the local church. Good people won’t have a rough patch longer than that — long enough to need welfare, or such — if they do, it’s because they’re not good people.

      So, yeah — a budget that screws the poor is automatically more right and proper, because the poor are poor because they deserve it and shouldn’t be getting money from hard working Americans.

      It’s no different than “Hands off my Medicaid” posters at Tea Party rallies or articles on virulently pro-choice women getting abortions.

      The default context for “the faceless poor” is “lazy, shiftless, probably minority, probably drug using, and gaming the system”. So they should be screwed. And when all that poor screwing screws the hard-working American, it’s just proof government doesn’t work. If all that money hadn’t been wasted on the “bad” poor, it would have been there for the deserving but unlucky.

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  12. In the first place – despite being a lefty, I consider myself a fiscal conservative.  In the long term, you need to balance the budget, even if it’s not going to happen in the next couple years.

    However, the Ryan plan has nothing to do with making hard choice.  It’s fiscal insanity to say we can slash taxes, raise military spending, and still cut the deficit, and anything that claims to do so really does amount to “fuck the poor”.  Cutting taxes on the wealthy and raising military spending is what Republicans have been doing since Reagan and, predictably, it’s the major cause of the debt problem the United States has right now.

    Social Security doesn’t appear to me to be an issue; it’s by and large sufficiently funded for the next several decades.

    The biggest thing that needs to be done is, yes, more tax increases, including tax increases on the wealthy.  A lot of the wealthy (ref: Mitt Romney, Warren Buffet, etc.) pay relatively little in taxes.  I’ve got a couple of proposals:

    1) Increase the top marginal rate to 40%.  (Note: that is top marginal rate.  It doesn’t mean you pay 40% of your income in tax!  It means you pay 40% of whatever you make that’s over $380,000.)

    2) As an alternative to the above, you could reduce income tax rates at the lower brackets and bring in a carbon tax.  Offset it with tax returns scaled by income, so that your influence on consumption will be determined only by the substitution effect.  Then you get revenue and less carbon emissions – double win!  You’ll get less revenue in the longer term if people stop using fossil fuels as much, but if you’re a conservative, consider that a plus.

    3) Equalize capital gains tax rates with income tax rates.  It’s ridiculous to me that we treat money gained through the stock market, which requires no personal effort, as more valuable than money gained through work.  And maybe if playing the market was incentivized equally to working, rather than far more so, we’d get less speculative bubbles.

    None of this is unreasonable; taxes have been going down for several decades as part of a deliberate conservative policy (“starve the beast”) to create an impetus for cutting social spending.  There’s no reason whatsoever why anyone who’s not a conservative should accept that framing.

    One we’ve dealt with the tax situation, move to the spending side.  First thing: military cuts.  It has to be done, and it can be done with less pain than a lot of other potential cuts.  Afghanstan’s already likely to wind down over the next few years.  We’re not going to be able to turn it into a modern state.  Al Qaeda’s effectively dead, so Afghanistan doesn’t pose a major threat regardless.  Beyond that, start closing US military bases throughout the world.  Pick a few – maximum three – regions of MAJOR strategic concern where you need to keep bases (the Mideast will likely be one).  Withdraw from the rest.  Definitely close any bases in Europe – they’re a reasonably prosperous, stable continent who can take care of themselves, and they face no major military threats.  Close all bases in Latin America – they piss off most people in the region, and there’s nothing there that seriously threatens the US either.  (On a related note, end the War on Drugs, both the externally-waged one in South America and the internally-waged one in US cities.)  Shut down the Okinawa one that the Japanese are annoyed about – if someone says they don’t want your ‘support’, it’s reasonable to take them at their word.  Thirdly, start reducing the number of military personnel, at least through lower recruiting; future wars will probably not be won by army size, and having a smaller army is a deterrent from getting involved in unnecessary wars in the first place.

    On to domestic policy.  Deal with the messed-up criminal justice system.  Stop locking people up for minor drug charges.  Get rid of three strikes laws.  I won’t propose legalizing marajuana because it isn’t going to happen, although it would be a fine idea.

    Finally, you are going to need to do something to deal with health care costs.  So’s Canada – it doesn’t matter what your health care system is, dealing with the aging boomers is going to be a strain, and health care is the largest section of social spending that’s genuinely facing a problem.  Frankly, I don’t know enough about health care policy to propose what specifically to do about this, but it will certainly be an issue.

     

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    • Katherine – this should have been a post. Good stuff and well thought out. I don’t have major disagreements with any of it. My minor disagreements would be the capital gains rates. I realize it is income but when you say there is no personal effort involved, I diagree. Assuming the risk of investing one’s money is nothing to take lightly or dismiss as easy. Just ask anyone who got crushed in the dot com bust.

      I think there’s some potential to close bases with the military’s new realignment plan but it’s not going to be nearly what the bulk of the public wants.

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      • Mike,

        Yes. BUT, there are people out there making a living deliberately breaking American industries. (google “cancer economy”). I say we tax the living shit out of ’em.

        If you got enough skin in the game that you gonna lose everything if you lose, fine, pay 10% like the next shmuck. But if you’re putting your money in a hedge fund… (those things nearly never lose, and one of the times they did lose was because of direct governmental intervention), then we ought to tax the living bejeebus out of ya. If you lack skin in the game (because you hired the smartest shmucks around, and are deliberately keeping them captive — legally mind…), can we please tax those people??

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        • google “cancer economy”

          I just did, and guess what I found?  Three pages into Google I found one–count it, one–link to an actual “cancer economy” concept, and it was a comment on SciForums by someone who clearly doesn’t understand economics and even that person was talking about something different than what Kim was talking about.

          She’s making shit up…again.  She should be banned just for being a serial liar.

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          • well, dude, forgive me, but that wasn’t my term. yes, I rather ought to know that my friends are likely to come up with novel terms for the obvious. It’s colorful and interesting.

            as to what I meant, well, I’ll explain it down below, if you’re interested.

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        • I googled “cancer economy”, and I got a bunch of articles on the economic impact of cancer.  It would be helpful if you elaborate what types of businesses you are talking about and how they’re destroying American industry, so I can make an informed response.

           

           

           

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          • Back in the “boom years” (2006 seems so long ago, doesn’t it?) Every retailer needed to show more stores, to be a “growth stock”, which meant putting down stores even when they weren’t profitable, nor ever likely to be. Walgreens

            Even McDonalds got in on the act to some degree — they used to take pride in never ever closing a store (because they did their homework, and put them in where they’d make money).

            So you have a retail boom, where people are putting in stores (there’s one I drove by that was a complete ponzi scheme, was never actually making money, just putting in new stores and stock skyrocketing) just to put in stores [Let me be clear: this is a separate trend from putting in stores in unsustainable housing developments like parts of NE Pa.]

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            • Ah.  That’s certainly a problem, but tax policy doesn’t strike me as the best tool for dealing with it.  Off the top of my head, I’d say investors need better information on which to make their decisions.

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              • It was the investors pushing for this, because it was easy to make money betting on someone else being the “greater fool.” Run the stock market up, make tons of cash. Crash the stock market, make tons of cash.

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                • Investors as a whole would be better off if they had the information to invest in companies which were actually growing, rather than ones which only gave the appearance of growing.  Some unscrupulous high-information people are able to take advantage of other people being low-information.  That doesn’t mean that increasing information wouldn’t address the problem.

                  Now, I have no idea specifically how to do that – the world of finance is hardly my speciality.  But I expect something could be designed.

                  Conversely, taxation doesn’t seem like an effective instrument for this at all.  The government would need to have all of the information on which companies were doing this – the same thing low-information investors need.  But then the government would also need to implement taxes on those businesses, stop taxing them at the higher rate if they stopped doing it, deal with lobbyists who could come up with sophisticated arguments as to why what their company was doing didn’t actually fall under the tax, deal with high-priced company lawyers arguing that the government was arbitrarily discriminating between businesses…it would be very difficult, very slow, and very unresponsive to events.

                   

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                  • End 401ks, to start out with. Those moneymanagers aren’t out for your best interest, or if they are, they are extremely incompetent.

                    Yes, investors ought to know about things. But they REALLY ought to be able to control their investments, and dumb money (75% or so of the market) just ascribes to the idiotic buy and hold strategy (oh, it’s not bad, if you don’t need anything better than inflation. But  how long do you wanna retire?)

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                    • The problem with that is investigating sound companies.
                      I find it more useful to trade volatility on a swing trade strategy.
                      Something like Ford, overall sound, but fluctuating, makes money over and over again. But not so much in the long-term.
                      You have to know when it’s time to walk into the barbershop & get your hair cut.

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      • I don’t criticize it solely for making any hard choices; I criticize it for failing to solve the problem it identifies (rising public debt), and doing things (tax cuts and increased military spending) that in fact make the problem worse.  If you’ve got a way of solving the problem, how “hard” your choice are isn’t pertinent; what’s pertinent is whether they’ll work.

        And yes, when an very, very small segment of the electorate controls a massive proportion of the wealth, and has seen their taxes substantially cut over the last few decades, I don’t think having them pay more to sustain the economic stability that allows them to make that money is at all unreasonable.  They’ll probably still come out of it with a net reduction in taxes since the 1980s, as they’re still benefitting from all the reductions made to the lower tax brackets (again, an understanding of what “marginal tax rate” means is helpful).

        In order to balance the budget, you need to 1) increase taxes, 2) decrease military spending and 3) address domestic spending, particularly Medicare and Medicaid costs (I’d say “entitlement programs”, but as I noted about Social Security is fairly sustainable).  Ryan attempts to do one of those three, and go in the wrong direction on the other two.  That’s not a plan.  I propose we address all three issues, and have laid out some details of how to do so.  When the Republicans have a plan that addresses all three of the issues, I’ll be happy to debate that one.

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    • I don’t think there’s any reason to keep the tax rates so low. From the report that I have seen from the ECB, there are only two nations in Europe that have a high enough rate to have any effect as per the Laffer curve, and the US could go much higher, even to 50%. I don’t think that high would be prudent, but 40% sounds workable.
      I disagree with the concept of a carbon tax. I favor cap-and-trade. A carbon tax penalizes bringing new technologies online. That’s the real problem. We have ways of dealing with carbon emissions, but getting those technologies online takes time. I spent 8 months at this site last year working on the power block and in QA/QC. Gasification technology is not feasible under a carbon tax.
      You hear a lot about fat cat investors making gobs of money, and that’s often used as justification for raising the capital gains rate. The fact is that there are more in retirement accounts in the market than there are fat cats. Tying it to half the marginal rate, or a flat 20% would not be a bad idea; but if you go much beyond that, it’s going to hurt not only the retirees, but the pension funds; and the pension funds of various states have been in trouble for some time.
      I would like to see a lot of the social engineering removed from the tax code. Make it really simple– no manner of deductions whatsoever.

      I’m all for closing military bases, and even withdrawing from NATO. In general, I believe that re-evaluating our relationship with Western Europe is long past due.

      I would like to see an expansion of HSA’s & similar programs to encourage private savings for health care.

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      • Carbon capture’s fairly speculative; I think the possible positive effect of a carbon tax in advantaging renewable energies relative to fossil fuels, and its benefits in encouraging people to use less fossil fuels, more than outweighs any issues it might create for carbon-capture research.

        You hear a lot about fat cat investors making gobs of money, and that’s often used as justification for raising the capital gains rate. The fact is that there are more in retirement accounts in the market than there are fat cats. Tying it to half the marginal rate, or a flat 20% would not be a bad idea; but if you go much beyond that, it’s going to hurt not only the retirees, but the pension funds; and the pension funds of various states have been in trouble for some time.

        Capital gains have tax brackets the same way income taxes do, though, right?  So people with relatively small profits from investment get taxed at a low rate; people who make very high profits (the “fat cats”) get taxed at a high rate.  If you equalized it with income tax rates, people making under $34,000/yr in investment income would only have a 15% tax rate on the amount from $8000-$34,000, and a 10% rate on amounts under $8000.

        I agree on simplifying the tax code, provided that you increase income-scaled tax credits for lower-income people to offset the effects of removing tax exemptions for specific things.  But it’d be a political fight, and you’d need fairly strong bipartisan backing to get it through, because no one party wants to deal with the fallout.

         

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        • Capital gains have tax brackets the same way income taxes do, though, right?

          Long term capital gains are taxed at 15% today. Short term capital gains are simply treated as income. The entire purpose of capital gains tax laws was to encourage people to buy and hold Regardless of what that financial wizard Kimmi claims, “buy and hold” has done exceedingly well for Warren Buffet and thousands of his investors.

          As I understood it, Ryan’s plan wanted to move the tax rates to two simple rates and eliminate the majority of loopholes. Yes the devil’s certainly in that detail, but the “effective” rate on corporations who are taxed at 40% typically works out to the same 25% that Ryan is shooting for. My son a CPA works for a $multibillion entity is full-time focused on tax mitigation strategies. Perfectly legal and replicated across our entire economy. Without the loopholes he could perhaps spend his time more productively in superior endeavors actually relating to the business. Accountants won’t be unemployed, they will be otherwise engaged, and economically this could be a /very good thing/.

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          • Yeah. when you buy and hold an entire company. Gee whiz, ain’t you surprised when you can do something with it?

            “Umm… I accidentally bought another company again…” (no, I’m not quoting warren buffet on that one.)

             

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          • There’s also the issue of capital gains taxes unfairly burdening the elderly — the folks who salted away their earnings in the buy-and-hold strategies every sensible person should undertake.

            Here’s the problem:  if Ryan undertakes a massive reform of corporate taxation, it will meet with a bigger fire storm than Obama’s PPACA legislation.   Even if Congress went about closing the loopholes gradually, like as not, more will be created.

            I’d certainly approve of a tax simplification strategy.   Mine wouldn’t be a step function, though.   I’d derive a multivariate normal distribution considering the effects of taxation on investments which would investigate how to stimulate Americans to save and invest rather than borrow and spend.   Sometimes investors hold onto their positions too long out of an irrational fear of taxation, a problem Paul Ryan’s plan doesn’t address effectively.   More people, the stupids, don’t invest at all.

            I don’t have a clear picture of where this model might lead, but it’s just maddening to see people behave stupidly with their money.    Progressive taxation as proposed in most circles is simplistic to the point of being Crazy Talk.   There has to be a better way.

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            • If I did this buy and hold, that every sensible person ought to have done, I’d be about 50% underwater right now.

              Maybe I’m biased.

              But the Nasdaq market hasn’t recovered to 2000’s levels, yet, has it?

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              • Depends on what you bought and held.   After that nightmarish Citigroup gig, watching those chumps attempt to turn loan denial straw into high interest gold like so many demented Rumplestiltskins, I bought real gold in 2007 and stayed there while the rest of the world went to hell in a hand basket.  Still don’t figure I made any real gains, just froze my old age money at 2007 value.   Good thing I held onto that gold through 2008, too, though it sank like a stone for a while there.

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  13. If one assumed that the Ryan budget really did what you claim, then you would have a point. It doesn’t.

    Now, it’s probably true that even a responsible Republican budget (responsible but of course colored by Republican policy preferences) would probably draw howls of outrage from the left and from Democrats. But let’s deal with that eventuality in the unlikely event that it occurs.

    Of course in the current political environment, it’s understandable that the Republicans don’t put forth a serious plan. Just as the failure of the Democrats to do so is also understandable. And perhaps we can even give Ryan some credit for courage for at least a few proposals which will be unpopular with at least a small portion of the Republican base. Just as Obama deserves some credit for supporting compromise budget proposals which were unpopular with some portions of his base.

    Me? I’d enact some fairly large long term cuts to medicare, even though they probably would kick in just when I’d be eligible, large cuts to defense spending, smaller cuts to everything else, and a significant tax increase. All of this back loaded, both to avoid messing with the current anemic recovery, and because the most serious deficit problems don’t start kicking in for about a decade. No one would be happy with that, left or right.. A responsible Republican budget would be lighter on the defense cuts (but still include some), heavier on the “other” cuts (but not, unlike the Ryan budget, make the silly assumption that the government can virtually shut down outside of defense and transfers to the elderly), and lighter on tax increases (but still more realistic than the current Republican tax increase orthodoxy). Heck, at some level I’d even welcome a SERIOUS Republican plan that had the ideological content of the Ryan plan but really did manage to address the long term deficit problem in a serious way.

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    • As an addendum to this, part of the problem with the Ryan plan is avoiding the kind of specifics that represent the politically difficult decisions. The loophole closing is an example. There is very strong bipartisan agreement conceptually on this point – for good reason – but in practice the big deductions are wildly popular, and the smaller deductions have intense support from politically influential rent seekers.

      I happen to think that, in a less disfunctional world where some some of reasonable budget compromise was possible, tax code simplification would be one of the easier pieces. But it would have to be done in a bi partisan matter. No sane political party is going to seriously mess with people’s tax deductions without bipartisan cover.

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