Response To A Democrat

• August 24, 2012 • Uncategorized

The following is some criticism I got from a good friend of mine that is a very active Democrat – and my response to it.
“If your goal was to, in any way, speak also to Democrats, you lose points for misspelling the President’s name as “Barak,” and later in the piece referring to “Comrade O’s rape and pillage of US tax payers.”"

I’m not trying to speak to Democrats – I’m trying to rally the Tea Party to threaten any Republican that considers compromising with the Democrats on the “Fiscal Cliff”.  Yesterday Paul Ryan actually came out and said that he wanted to telegraph to the markets that the Romney/Ryan team would not allow the “dangerous sequestration cuts and tax hikes” to take place.  It needs to be made very clear to them that this is unacceptable to the grass roots.  As I said in the article – the only reason the American Taxpayer agreed to raise Congress’ credit card limit from $15.5 trillion to $16.4 trillion is because they promised us these cuts.  If they go back on their word – I want them out on their asses.  The Tea Party movement is just as much about reforming the GOP as it is about hating on Comrade O.  We need to get back to the small government, fiscal responsibility ideology of the “Contract With America” and we need to get away from the “fake fiscal conservative” legacy of the Bush administration.  IMO this means we have to distance ourselves from the military-industrial complex and corporate welfare – two powerful parts of establishment Republicans.  As an investor – few things piss me off more then hearing the CEO of company XYZ claim to be a Republican, only to defend how their specific subsidy, tax break or pork barrel project is VITAL to America’s future.  Ethanol blending credits, solar and wind subsidies, clean coal plants, pork barrel infrastructure projects, tax breaks for electric cars, “Cash for Clunkers” and yes massively over budget, no-bid military contracts …  It goes on and on – and it needs to stop.

 

The article really had 3 points.  The first was to establish how dire our situation really is – and that we don’t have 1 or 2 decades to fix it.  The second was to discuss the “Fiscal Cliff” and the third was to say that the “dangerous and radical” Ryan Plan is actually no where near radical enough.  In the near-term here is what I’m looking to accomplish in 2012.  1.)  I want to pressure Republicans to not reduce the sequestration cuts ($85 billion); 2.) I want to let extended UE benefits expire ($35 billion); 3.) I want to reverse the changes to welfare programs that have led to a 64% increase in food stamp recipients and a 72% increase in Social Security Disability claimants (~$100 billion); 4.) I want Obama’s payroll tax cut to expire (~$125 billion).  I’m actually hoping your side forces the Bush tax cuts to expire – I just want to make sure that the Republican’s hold firm and make them expire for everyone instead of just >$250k ($185 billion).  I’m hoping Romney will introduce his own tax system rather then simply renew the “Bush tax cuts” – after all, are they really Bush’s at this point?  Then after the election I hope Ryan revisits his plan to do 2 things – reduce his revenue growth rate assumptions and move up the timing of spending cuts to get our budget deficit to $0 by the end of Romney’s 1st term.


“The author of the Tax Policy Center study finding only half pay income taxes says you’re misstating his findings:

 

“Let me explain—repeat actually—what this means: About half of taxpayers paid no federal income tax last year. It does not mean they paid no tax at all. Many shelled out Social Security and Medicare payroll taxes. In fact, only 14 percent of Americans didn’t pay either income or payroll taxes. Some paid property taxes and, it is fair to say, just about all of them paid sales taxes of one kind or another. So to say they pay no taxes is flat wrong.”"


The failure to distinguish between FEDERAL corporate, income and investment taxes and payroll taxes proves my point that Democrats think of Social Security as a welfare program.  In my opinion the leadership of your party has been engaged in this deceit since FDR introduced the thing in 1935.  Social Security was introduced to the American people as something that would be paid by everyone and benefit everyone.  But all along Democrats have wanted to turn it into a vote buying welfare program where well-off American’s pay for the benefits of demographic groups that typically vote Democratic.  I think its VITAL to America’s future that American’s understand the difference between the 2 systems and the true goals of Democratic leadership – To get 51% of American’s addicted to handouts from Democrats paid for by the 49% of the population that votes Republican.

 

Social Security was set up so that everyone pays in and benefits are determined by how much you paid into the system over the course of your life.  Why else do you think you get a statement from SSA every year showing how much you have paid in every year and what benefits you are entitled to if you retired today?  Why else do you think they CAPPED the amount of income that can be taxed each year?  Another words, Social Security was not passed as a wealth transferring welfare program.  It was passed as a retirement plan before we had financial markets capable of supporting IRAs.

 

Ever since I have been paying attention to politics Democrats have done everything in their power to transition Social Security away from what it was sold to the American public as – and turn it into a massive wealth transferring, vote buying welfare program.  They want to uncap the amount of income that can be taxed.  They want to means test benefit payments so that the rich can’t receive them.  They want to collect Social Security taxes on investment income.  Basically they want to make it so that the top 20% pay for 85% of Social Security and receive no benefits.  The most recent travesty was letting Comrade O cut the payroll tax rate, which means instead of collecting non-progressive Social Security taxes to pay for future benefits, the problem has been pushed onto the general treasury – which is funded by highly-progressive taxes.  When Dear Leader passed this – I’m sure he had every intention of eventually making it permanent, causing 20% of Social Security taxes to be paid with more progressively collected taxes.

 

Your inclusion of property taxes or sales taxes illustrates another important point.  Democrat’s not only want to control the progressiveness of Federal taxes – they want to “make up for” the unjustly, unprogressive nature of state taxes (particularly those with no income or investment taxes).  These are STATE taxes, so they have no relevance to the discussion of the FEDERAL budget?  But your inclusion of them in your analysis – shows how frustrated Democrats are that State’s cannot afford to be more progressive in their taxation because they face competition from other states.

 

If you compare the level of taxation and its degree of progressiveness you will find a high correlation with population growth.  Right now you have thousands of high income residents fleeing taxes in California.  I’ve also seen this in Taxachusetts, with an increasing number of Hedge Fund and Mutual Fund managers moving to Florida because it has no capital gains tax vs 5.3% long-term and 13.5% short-term.  This is similar to the problem the EU is having right now.  France ups its top tax rate to 75% and everyone moves to Britain.  After all they have a common passport.  I can only imagine how cheesed off Hollande was when Cameron said he would roll out the red carpet for anyone wanting to move from France to Britain.

 

Democrats HATE the idea of tax competition.  They think its evil.  Most Republican’s think its a good thing – and the only thing that ultimately control the power of the state.

 

America is the only country in the world that taxes its citizens even when they do not work or live in the US.  And if you DARE renounce your citizenship they steal 35% of your assets and tell you that you can never visit the country.  Funny – I thought self-determination of citizenship was a basic human right.  America is also the only country in the world that tries to tax its corporations on the income they make overseas.  And yet Democrats complain no one invests in America – because the companies leave all their cash offshore to avoid taxes.

 

The federal government is 5x larger then it needs to be.  In fact, most government functions simply involve collecting money and then redistributing it to the states.  A great example is the Highway trust fund.  Only a tiny fraction of infrastructure projects need to be coordinated across multiple states.  Most road projects fall within a single city.  So why is it the Federal government needs to collect taxes and then send that money to the states?  Roads, hospitals, airports, schools, welfare, unemployment, medical care – all of this could be handled by state or even local governments.  But Democrats don’t want that because if one state decided to have higher, more-progressive taxes so it could pay union thugs $100,000 a year to collect highway tolls (assuming the union would kick back 20% of its dues to the politicians) and could bribe voters with more welfare payments – the rich people the Democrats need to pay for things would move to another state.  Collecting taxes and distributing that same money back to the states allows Democrats to control the level of taxes and the degree of progressiveness.  It also causes incredible amounts of bloat in government spending because their is no connection in people’s mind between cost and benefit.  Florida residents are going to pay the same amount of taxes regardless of whether or not they accept stimulus dollars to build a high-speed rail project.

“you exaggerate how similar the US is to Greece. The true debt to GDP ratio of Greece is anywhere between 170% and 422% depending on who’s doing the figuring. US debt to GDP ratio is about 100%. Not good, but not as dire as Greece or as you make it sound…”

Unfortunately it seems most of our politicians and economists agree with you.  Some go even farther, by claiming you can’t count the money we owe to Social Security so our debt to GDP is more like 70%.  And I think that will end up being a fatal mistake.  I’ve never seen that 422% analysis – so I can’t really comment on it.  Here is what I know.  Pre-PSI Greece had E206 billion of public bonds.  That got reduced to E66 billion.  The ECB owns E50bbn and the 2 EFSF bailouts totaled E200bbn.  That gets me to E316bbn.  Greek GDP is roughly $300bbn USD.  Using a 1.25 FX ratio gets you to 132%.  I have seen analysis for both Spain and Greece that adds in regional debt and guarantees of state owned company and bank debt.  This one (http://www.zerohedge.com/news/greek-%E2%82%AC107-billion-contingent-liability-gorilla-exposed) shows $107bbn = 167% of GDP.  But I can do the same thing for the US.  $15.98 trillion of debt vs $15.09 trillion of GDP = 106% ($15.3 last Q annualized).  Add in $2.8 trillion of state and local debt = 124%.  According to Wiki – Fannie and Freddie have $5 trillion of obligations the government has guaranteed.  And Obama has guaranteed $1 trillion of student debt.  That takes us to 164%.  If we add $9.2 trillion for unfunded Social Security and $24.6 trillion for unfunded Medicare we get 388%.  Want to get crazy – the CBO says the long-term gap between revenue and spending is $222 trillion.

 

I’ve also had people argue that the US will look more like Japan then Greece.  After all Japan has much higher debt to GDP then anywhere else in the world, but it hasn’t had the same problems as Greece.  Leaving aside the fact that Japan’s annual GDP growth of 0.6% since 1995 isn’t exactly a good prognosis ($5.34 trillion in 1995 to $5.87 trillion in 2011), the massive domestic savings generated in Japan’s corporate and private sectors has funded 94% of its debt issuance.  This compares to 28% ($4.45 trillion of $15.98 trillion) of US debt being held by foreigners.  As Japan’s demographics switch from saving for retirement to increasingly consuming in retirement – they are even more screwed then we are.  But I’m not Japanese, so I don’t really care.  In fact, I’d LOVE to find a way to take a mortgage out in Yen so I can profit from their demise.

 

Second, you want to have it both ways about Greece. You say, hey look, Greece let its debt grow big and now look at it: “Unemployment is 22.5% and GETTING WORSE! It was 16.2% one year ago. Youth unemployment is 55% – meaning there are more young men throwing fire bombs in the streets then working. The Greek stock market has declined from around 5,300 to 640! Everyone’s savings have been wiped out. I think we can all agree Greeks are in a Great Depression.”  True enough, but part of that increase in unemployment is BECAUSE OF the austerity measures imposed on the country in return for debt forgiveness — the same sort of austerity you’re prescribing for the United States.

You even acknowledge at the beginning of the post that a “fall over the fiscal cliff” would cause “GDP growth in 2013 [to]fall to -0.5% and unemployment could rise to 9.1%.”

This is a criticism I expected to face.  In fact before I started typing this, I was writing a post that started “I was thinking last night that if a Keynesian hack like Paul Krugman read my post yesterday, he would dismiss my entire argument using the “Paradox of Thrift”…  You didn’t word your criticism the same way a Keynesian-itsa would, but you mean the same thing – its classic Keynes vs Hayek.

 

From the perspective of the political class, the government is employing people and buying things.  If the government lays off employees – you increase unemployment.  If the government buys less – companies relying on government spending lay people off – you increase unemployment.  And all those unemployed people (assuming they don’t get 99 weeks of handouts from the government) – they buy less, leading companies that rely on consumer spending to have to lay people off – leading to even more unemployment.  In the fancy talk of Economists this is called the “Paradox of Thrift”.  Everything that is produced must be consumed (and vice versa).  Therefore, if everyone tries to spend less and save more, you’ll “lower aggregate demand” and cause a recession and less savings.  Not every country can run a trade surplus, not every government can run a budget surplus, not every company can be cash flow positive and not every person can spend less then they make.

 

This has a certain undeniable logic to it, and in fact it holds a large degree of truth.  However, as with all things Keynes came up with, the way our political class has deployed these observations has been short-sighted and disastrous.

 

First - While Keynes said the government should run a deficit when private activity is contracting, he also said the government should run a surplus when private activity is expanding.  He assumed a net balance over time of 0.  Obviously, that is not what we did (and by we I mean BOTH parties).  If we followed Keynes then the government would run at a surplus whenever GDP growth was positive by more then its long-term average and would run a deficit whenever it was below.  Since 2000 our long-term average growth rate has been 1.6%.  In 2008 and 2009 real GDP fell 3.9%.  In order to have raised enough funds to keep GDP at 0% during the recession we would have had to run SURPLUSES from 2003-2006 when real GDP growth averaged 2.9%.  In fact, if we had run a large enough government SURPLUS to reduce real GDP growth to just 2% from 2003-2006, we still would only have raised 90% of the funds needed during the recession.

 

Current GDP growth is 1.5%.  By the above logic, we shouldn’t be running a deficit, we should be running a balanced budget.  Obviously, given we are running a deficit of 12% of GDP, we wouldn’t be growing 1.5% if we cut the deficit to $0.  But if we EVER hope to dig our way out of this hole – shouldn’t we reduce government deficits as much as possible without creating a new recession?  Or do we not actually plan on paying this debt back?  Have we let our citizens know that at some point in the near future they are not only going to have to stop over consuming, they are going to have to over produce to pay the Chinese back?  I honestly suspect its the prior.  If Comrade O wins re-election my plan is to start a website called ItsNotMyDebt.Com where I collect signatures for US citizens saying they actually have no intention of ever repaying the US Debt – just so China has a heads up.

 

The problem isn’t just government debt – it’s all debt.  Debt is meant to be temporary – its meant to be paid back.  If one year you over consume relative to what you produce, then the next year you are supposed to over produce relative to what you consume.  But that’s not what we have in our government, corporate or individual markets.  Our government collects less in taxes then it pays its employees or gives out in welfare.  Lower taxes and higher transfer payments allow US citizens to consume more then they produce.  Across the globe we have huge differences between which governments run budget surpluses and which run budget deficits; between which countries run trade surpluses vs trade deficits; and between which citizens over produce vs over consume.  And its structural – not cyclical.  So we end up building up these big piles of debt – until the over producers realize the over consumers never intend to pay them back.

 

And our wealth redistribution and taxation policies are further distorting things.

 

Our welfare state encourages long-term unemployment, our Social Security system encourages early retirement and our subsidizing of student loans means we have far more people chasing PHDs in liberal arts then we will ever be able to productively employ.  The US employment to population ratio has fallen from 64% to 57.5%.  That’s a lot of people consuming and not producing.  We are still paying for Democrats pushing us to increase housing consumption among people that couldn’t afford it – average home equity is now 41% vs 61% in 2001 even though housing prices are about the same.  And then we let those people use home equity loans or low interest rate mortgage savings vs rent – to consume HDTVs and brand new automobiles.  The people that over consume the most are taxed the least and the people that over produce the most are taxed the most.  Think about how you change aggregate demand when you increase taxes on an over producer to lower taxes for or give $ to an over consumer.  Someone like Warren Buffet would have spent that money buying a company or building a new factory – the typical over consumer spends it on something made elsewhere.

 

The Democrats traditional solution to this has been to raise taxes on the over producers in order to lower government debts and give the over consumers more money so they don’t have to borrow so much.  Problem is, that doesn’t work and no economic model suggests it will.  When you tax an over producer, you generally don’t change their consumption – but you do impact how much money they have left over for investment.  In the worst case, when you tax the actual act of production – you reduce their production.  And when you give money to an over consumer, they don’t produce more, they typically consume more.  So you are actually making the problem worse.  Savers have less money to invest in the US and consumers have more money to buy Chinese imports.

 

This is a good time to bring up Twin Deficits Hypothesis and the General Equilibrium model…

 

GDP = Consumption + Investment + Government Spending + Exports – Imports

 

This model tells us a number of important things.  First, increasing government spending does not increase GDP if it has a negative impact on Consumption or Investment.  Thus government spending financed by taxes does not increase GDP.  Only deficit spending can impact GDP – and only if you assume that the credit the government takes is magically created out of this air and wouldn’t have otherwise been needed by a consumer or a company.  This is actually why Hayek argues government spending does no impact GDP over the long-run.

 

Now lets do some manipulation

 

Y=C+I+G+(X-Im)

(X-Im)=Y-C-I-G

Savings = Y-C-G

 

Therefore

 

Savings – Investment = Exports – Imports

 

Furthermore

 

Savings = Private Savings + Government Savings

and

Government Savings = Taxes – Government Spending

 

Therefore

 

(Exports – Imports) = Private Savings - Investment + (Taxes – Government Spending)

 

This is called the Twin Deficits Hypothesis which states that if the government runs a budget deficit, unless you have significantly greater Domestic Savings then Investment – you will run a trade deficit.  The larger the government deficit, the larger the trade deficit – unless you decrease investment.

 

This takes us back to the Japan vs US comparison.  Both countries run massive government deficits, but historically Japan has had very high levels of Private Savings.  Also, following the massive FDI binge of the 70s Japan has had enough spare capacity and didn’t need much investment.  So they actually managed to run trade surpluses and build up $1 trillion of FX reserves.  As I mentioned their demographics are changing and private savings are going down.  Likewise Fukishama means the country needs significant rebuilding to replace all of its nuke plants among other things.  Accordingly, Japan has started running trade deficits.

 

The US on the other hand has run $16 trillion of deficits, over the years.  About $4.5 trillion of that is held by foreigners, because we generate lower levels of private savings.  If you look at our trade numbers more closely you can see whom our over producers and over consumers are.  The US tends to create very high value add products and high value financial and consulting services.  No surprise, we ran a trade surplus of $179 billion in services in 2011.  We generate a similar amount of money on net investments, because we tend to earn VERY high returns on our financial investments abroad while paying very low interest rates on our debt.  Damn those lousy bums on Wall Street!  The other over producing sector that stands out are immigrants – because we have massive financial transfers of money back to their home countries – almost as high as our net investment returns.  Our over consumption comes from $337 billion of oil products and $296 billion of consumer products from China and $104 billion of electronics probably equally split between electronics from SE Asia and luxury European products.

 

I know it sounds horrible and mean, but if we had less progressive tax rates, less welfare and less transfer payments – We would have lower oil imports, lower Chinese imports, more savings and investment and lower debt and deficits.  But that’s an argument for another day.

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