...hopeless. There is not much uncertainty about it. It's written as plainly on the wall as it possibly can be. And it's not a big mystery, revelation, or surprise, either. (And my post here contains no deep insights or great original thoughts.)
Meaningless slogans like "Yes, We Can" (Obama); that "our best days are ahead" (Biden) or "Renew the Promise of America" (Romney), or that we are "God's Nation on Earth," won't fix the problems. And neither will the politicians. It does not matter who will be elected President in November 2012---Obama or Romney---and they are both as good as it gets. But we can't blame them. Even if you elected me to the US Senate or House or Presidency, nothing would change.
If Obama is elected, the Republicans in the House will block anything of importance that he could possibly propose. (If any Republicans waver, the TEA party will make sure that they understand that their reelections are at stake.) If Romney is elected, the Democrats in the Senate will block anything of importance that he could possibly propose. Frankly, conducting war is the only important economic policy that our President can still conduct with reasonable certainty. (Maybe it is just as well that the War on Terror [just like the war on disease] can never end; and that the President can incarcerate individuals at will if he just proclaims they are terrorists. I just hope that writing this blog does not qualify me.)
But let's face it--no president would dare to tackle our big problems. Not Obama and not Romney. Our big problem is not Al Queada. The remnants of Al Queada are gnats. It's not even fundamentalist extremists or our now-useless trillion-dollar war in Afghanistan on behalf of kleptocrats. It is not flag-burning, gay marriage, abortion, or most of the other little issues (like Romney's stupid birth joke or Obama's stupid small-business gaffe) that seem to interest our voters.
It's The Economy, Stupid
We really have only one big problem. It is our economy. As David Wessel has recently pointed out again (David was not the first and he surely won't be the last), only taxes, defense, and entitlement spending matter in the federal budget. Everything else that Presidents could possibly change is rounding error.
Here is the basic math for 2011. There are about 70 million positive tax payers in the US (out of a population of about 310 million---fewer than one in four). The federal government spent about $3.5 trillion, taxing $2.2 trillion (about $32,000 per tax payer [/tp]), and borrowing $1.3 trillion (about $19,000/tp). If you pay more or less than $32,000 in taxes per year, just multiply by appropriate factor.
Here is how the Feds spent the $3.5 trillion:
- Defense: 20% ($0.7 trillion, $10,000/tp)
- Veterans and Federal Retirees: 7% ($0.2 trillion, $3,000/tp)
- Social Security: 20% ($0.7 trillion, $10,000/tp)
- Medicare/Medicaid/Childrens Health Insurance (Chip): 21% ($0.7 trillion, $10,000/tp)
- Interest on Debt: 6% ($0.2 trillion, $3,000/tp; this will go up as the debt piles on)
- Sum = 74% ($2.5 trillion, $35,000/tp)
Ka-ching. At this point, we are at $2.5 trillion, which is way over budget. Social Security and Medicare are set to increase tremendously soon, too, as more baby boomers will be retiring. But wait, there is more. Should we cut our entire safety net (unemployment, earned income tax credit, food stamps, etc.) for the needy?
- Safety Net: 13% ($0.4 trillion; $6,000/tp)
- Sum = 87% ($2.9 trillion)
Which ones should our politicians cut? Talking about a few billion in pork or waste here and there is a fun diversion for politicians who want to to avoid talking about the real problem.
Taking on the Big Three
Entitlements: Not when it comes to reducing entitlement spending. The reason is simple: Old people vote. In droves. If there will ever be any danger of the Ryan plan really passing (and although it would have been a good start, it doesn't go far enough), most House Republicans will vote against it. Heck, even Ryan, just minted VP candidate, is already running away from his own plan! And let's not forget that it was the Republicans in 2005 who expanded Medicare to cover prescriptions, which was roughly as expensive as Obama-care (yet better targeted towards those who vote; it also made them less likely to support health-care for others = Obamacare; there is great irony in Romney attacking Obamacare as a big government program by arguing it hurts Medicare). We can't even raise inflation to save us: the benefits are inflation-indexed, courtesy of the Republicans, too! The system has been set up so cleverly that it no longer takes active political intervention to appropriate the funds. Instead, it would take active political intervention even to slow its growth rate.
Unless the AARP understands that there is no alternative, that we are hitting the wall, the AARP will block any reduction in elderly benefits. (The only entitlement that can go down is Medicare, which is the weakest political link. The poor don't vote [as much] as the elderly, although enough of them vote for the Democrats to make such reductions difficult, too.)
Defense: Not when it comes to reducing defense spending. It would make any politician look weak. The spin doctors can turn such proposals too easily into votes at the next election. And don't forget that it was the Republicans who started our trillion-dollar wars, not the Democrats. It is the Republicans who advocate more than the Democrats for more military spending--although they never say who should pay for it. As for me, I think our real danger is not a weak military, but a weak economy. We should not squander our resources on competing with the rest of the world militarily, but on competing with the rest of the world economically. Heck, why does the US military need to be all over the world? What good does it really do us?
We should not only shrink our military budget, we should halve it. And then halve it again. This would get us to the same 5% fraction of the government budget where Germany and most other Nato countries sit today. But fear not---it won't happen until we are hitting the wall.
Taxes: Not when it comes to increasing taxes. Republicans cannot propose or vote for higher taxes of any kind, even if or especially when such taxes would make sense. We should tax oil and gasoline, and use the tax receipts to become independent of foreign oil. Before you think I am a Democrat, I am not. I would probably vote against most tax increase proposals, because they usually do not make economic sense, and the tax receipts are so badly and inefficiently spent. Thank our public sector unions. I would happily pay more for public education if only there were no teachers' unions.
Do Tax Cuts Help The Rich or Job Creators? Do They Create Jobs?
And let's stop calling the rich the job creators. The rich are the rich. (And, again, they are not necessarily the high income earners and high income-tax payers.) Are our voters really so dumb as to not understand that job creators is a code word that means rich? This is a rhetorical question. The answer is of course "yes, they are this dumb." Take that back--maybe we should continue calling them job creators.
But where is the evidence that tax cuts and tax refunds will create more jobs? For example, large US companies already have abundant cash right now to invest. They are not deterred as much by high taxes (which they will pay only if they will be successful) as they are by overregulation and poor investment opportunities. Tax shelters, litigation, financial trading, and, more importantly, investing abroad are simply more profitable than starting businesses that employ low or modestly skilled workers in the US.
Job Creators? Tell me---what business in the US would you create today if I gave you $100 million, no strings attached? If you wanted an economic policy to create US jobs, start thinking about what we should do to attract capital into businesses that really do create US jobs, especially for our less skilled fellow citizens. It may indeed be a good idea to reduce the taxes and tax receipts to leave more money with the people who earned it, but don't deceive yourself: without clever strings that are not easy to escape, tax refunds are not going to create many new jobs in the US, especially for the bottom half. (Housing construction was pretty good for many years, but it doesn't look like it will come to the rescue anytime soon. Infrastructure? What? More public spending? Medical? What? More healthcare spending?)
We Need The Republicans! Or Do We?
Tax Reform? Kudos to Romney/Ryan for mentioning it. It is desperately needed, but I am afraid that if the politicians touch tax reform, the same thing will happen that always happens when Washington parties and lobbyists touch an economic issue. The outcome will be worse.
It is telling that Romney has not spelled out what he would do if given a free hand. He won't have a free hand, so there is no danger of it happening, and yet he is still incapable of making sense. Are we voters supposed to break out in laughter when he starts with "I will reform the tax code" (Congress' job), or more hilariously "if I was president, I would cut taxes" followed by claims that our deficit is too large, that the military budget is off-limits, and that social security and medicare is off-limits? David Stockman, Reagan's budget director, phrased it this way: Mr. Ryan’s plan is devoid of credible math or hard policy choices. And it couldn’t pass even if Republicans were to take the presidency and both houses of Congress. Mr. Romney and Mr. Ryan have no plan to take on Wall Street, the Fed, the military-industrial complex, social insurance or the nation’s fiscal calamity and no plan to revive capitalist prosperity — just empty sermons.
Diversionary claims such as that 'cutting pork and medicare fraud' will give us enough money to make this possible are non-sense. Cutting fraud may well be a good idea, but there just isn't enough fraud to solve the federal budget problem. (Estimates are as high as $65 billion.) Besides, it is not possible to reduce fraud in any program to zero, and reducing fraud also costs money. We simply have no choice. We absolutely need to cut social security, medicare, and medical costs. The only question is whether we do it now or later. We do need to cut the medical paperwork, which costs more than the medical care itself. We cannot afford the current "private insurance vs doctor paperwork death match." Maybe we also need death councils. We cannot afford to spend a few million dollars for any senior who wants to extend his last few months on a respirator at public expense.
And why are the Republicans the party that attracts the stupid in such large numbers? Birthers? Creationists? Even the TEA party. The Anti-Intellectualism (Anti-Elitism, especially in the Republican party) should worry all of us. It is a reflection of the fact that the Republicans have become a party for the dumb that Bachmann, Palin, Perry, and Beck are leaders, not Collins, Snowe, Ron Paul, and George Will. Yes, Ryan is smart, but now that he is VP, he is backpedaling faster from all his past proposals than I can run forwards. I can't blame him: the fact is that neither his Republican base nor the US overall would vote for his plans. Seniors would vote against all of them. (And neither would Congress.)
But don't think the Democrats are any better, even if they attract fewer nutcases. (And listening to Paul Krugman makes me ill. I can't believe that this guy used to be a credible economist. Nobel Prize or not, interesting points or not: in the end, these days, he is nothing but an ideologue. That's all.)
Face it, Obama, Joe, Mitt and Paul: if you can't or won't cut defense, social security, and medicare, you are deceiving us. Cut the bullshit, please. The way you are going, one of your successors will face the situation that Greece faces today.
Our Root Problem
I haven't mentioned the root cause of our problems yet. It is the power of lobbies: lawyers, unions (esp public sector unions), pharma, doctors, teachers, prison guards, the military, Haliburton, Oil, Koch, Hollywood, Wall Street. Lobbies may not be able to gets laws passed, but they sure can block changes that harm them. The fact is money can buy enough elections--our voters are not that smart. They can be "managed." Lobbies can remove enough hostile politicians to prevent adverse changes. Most politicians and high civil servants know that they will finally earn "real money" when they work for these lobbies after they step down. If one of our really powerful lobbies were to lose from a new law, it cannot happen. Obamacare is a prime example. Universal coverage was a good idea, but the end result was so badly legislated that it is not clear whether the outcome was better or worse.
A related fact is, if you are a politician who wants to be elected (and the politicians simply don't get elected--look at Ron Paul), you have to learn how to lie (factcheck). It reflects as much on the kinds of people who want to become politicians, as it reflects on us as voters. In fact, because lying is more effective in gathering votes than telling the truth, the trend towards outright lies in politics will only accelerate. do you really care as a politician if an ad is effective whether it is true or not?
Luigi Zingales in his new book and in his previous book with Raghuram Rajan is absolutely correct. However, he is too optimistic that the problem has a chance of fixing within our system.
Our lobbies are pure poison. Frankly, our political system is so corrupt, it is rotten to the core. Don't blame the players. They follow the rules of the game and do what is expected of them. Blame the system.
Ironically, I now think that our best chance is for a few of our super-rich (like Buffett, Gates, and others) to get together and create a new lobby. This lobby must be committed to educating our voters and to fully and richly fund the campaigns of any challengers to politicians that do not sign pledges that move us in the right direction (e.g., an intelligent balanced budget amendment; an amendment drastically reducing the power of lobbies [thus putting themselves out of business]; no-more-growth and indeed shrinkage in the defense and entitlement budgets). But this is a very dangerous path and it scares me. Power corrupts.
Where Are We Heading?
So where are we headed? Our government budgets on all levels are like ships steaming towards the abyss. Each ship is unstoppable until it is right in front of the abyss. Until we are there, we cannot steer them into another direction. It does not matter whether changing course is in our collective interest or not. What matters is whether it is in the interest of both political parties, therefore in the interest of the individual elected Congressmen, and therefore in the interest of the lobbies that fund and win elections. Until we are staring into the abyss, I am convinced that we will not see any positive meaningful changes in direction. It will take another 10-20 years before we are there (sooner if another major crisis happens).
So what will happen next? There is a good chance that most of the mandatory automatic budget cuts at the end of the year, "agreed" to in the budget negotiation, will actually take place. There is a small chance of some horse-trading to reduce defense cuts, presumably at the expense of programs for the poor (Medicare). But this year is small stuff in the scheme of things. We will hit the budget ceiling next year again. And the following year again. And again. And again. Does anyone have an idea who will give? I don't think either side can. It will be an unstoppable object hitting an immovable wall. Maybe it's a good thing. There is some entertainment value in it. And maybe it can force an acceleration in our decision-making, as it gives us a glimpse into how our long-term future looks like. Heck, it may be our only chance to make changes before we become Greece.
If we wait until the creditors stop extending funds to us, the social upheaval from the sudden cuts will be so severe that it could disintegrate the US and/or its democracy. Some have argued that there have always been naysayers, and the worst never happened. This is true, but we never had a situation in which the government and its politicians so routinely borrowed such a huge fraction of GDP for such an extended period of time and had made so many inescapable commitments to its future tax receipts. The Great Depression almost destroyed democracy everywhere. (It did in Germany.) What's coming has the same potential.
Our only hope is a balanced-budget amendment, but, of course, there is no hope that it would be passed. Not a simple balanced-budget amendment---cutting during recessions would be stupid (when labor to fix up infrastructure is relatively cheap)---but a balanced budget amendment that is based on a moving average of past receipts---say 5 years. Before the politicians can rack up spending and hand out spending promises in the next expansion, they would first have to pay back what they borrowed in the last contraction. And the balanced budget should require all promises (such as SS and Medicare) to be fully funded when the promises are made. If the obligations increase or tax revenues decrease, the shortfall needs to be made up. This means that we would have to worry about funding the looming demographic issues today, instead of in the future when we will hit the wall.
But This Was Just a Taste...
And remember: as big as our immediate budget crisis is, it is nothing compared to what's heading towards us over the next 3 decades---the retirement of the baby boomers. It is not just a federal crisis, it is also a state crisis, and a municipal crisis.
It is not just a Federal problem. Defined-benefit public pension deficits will explode many cities. If you think the courts should rule that pensions have precedence over "greedy financier" creditors, just realize that if the courts really do rule in favor of the public unions, it will be the end of municipal borrowing at reasonable interest rates and therefore the immediate bankruptcy of many more cities. Perhaps this is for the good, as it will force mayors to deal with and stop handing out public union deals that are bankrupting all of us. (I am curious to learn what will happens if the inhabitants of these cities move away to escape their obligations. Bankruptcy can become a self-fulfilling prophesy. Thousands of cities could turn into Detroit and Philly, but on a much larger and more extreme scale.)
As I already wrote above, repeatedly, again and again, over and over, our already promised entitlement obligations will clobber government budgets. Nothing that I am writing about is a deep economic insight, or a secret. Eduardo Porter writes today in the NY Times: By 2020, 70 million Americans are expected to be on Social Security, up from 45 million in 2000. The ranks on Medicare will swell to 64 million, up from 40 million in 2000. (Even though the elderly claim to have paid for it, they did not. They paid way too little for what they are getting now. It is the young today that will end up paying too much for what they will be getting.) Roughly, if these Americans were retired today, the government would spend another $0.5 trillion and take in $0.5 trillion less for an additional annual deficit of $1 trillion (above our current $1.3 trillion deficit). The going projections for our obligations from about 2025-2030 on dwarf our other problems, except of course defense spending.
If you think the US will be able to tax its way out of this problem, don't get your hopes up too much. I believe we are not far off from the point where increases in taxes will induce high-income earners to stop coming to the USA and perhaps even to start leaving. (Capital is so mobile, much of it has already escaped from the USA. More will escape soon.) There is not a whole lot more in revenues that the US can raise from the upper end to cover its defense and entitlement expenses. Some, but its limited. We can't tax those on the bottom of the economic ladder. Watch A Better Life. Do you really want to tax the bottom quarter? They don't have it easy. Most live on the edge, always just one accident or illness away from financial ruin. It's tough down there. Very tough.
I have been telling you: Watch Greece. It's a preview of what's coming...
If We Can't Rescue Ourselves, What Can Rescue Us?
Can innovations rescue us? Not likely. Patents now prevent more innovations than they foster. (Thank the lobbies!) Nothing major new is on the horizon, either, and the lawyers and regulatory agencies are likely to sue any non-100% safe innovations (like ipods) out of existence. A risky new energy source, or a completely new type of plant that could explode? Forget it. A new drug? Billions of dollars and years for approval. A new type of portable phone? Not a chance. Besides, the lawyers have the greatest lobby of all. Most Congressmen and politicians---and pretending economics experts in Washington---are lawyers. (If the alternative is to appoint the chief architects of the financial crisis, as Obama has done, maybe lawyers are a good thing.)
Can immigration rescue us? Not in my lifetime. This is an example of how dysfunctional we are. Immigration is a policy that should be relatively easy to fix, and yet we cannot. Start with plain decency: treating our illegal immigrants from Mexico who just seek A Better Life like we treat them in the US today is as bad as pure racism and sexism. How can any decent person, much less someone claiming to be Christian, be against the Dream Act, or something that reaches much further? How can anyone who claims to be religious be so petty and small as to begrudge what they had as a birthright also for their decent and hard-working neighbors? As far as I am concerned, we should deport those who are not willing to share this privilege which was not earned by merit, and not the illegal immigrants. Let's see how they would then feel about illegal immigration if by accident it were discovered that they were not born in the US, at all, and don't have the legal right to stay here, either. Would this simple little change, that happened before they were born, really make a difference in whether they deserve to be American or not? Deserve to stay (and work) or not?
But I am digressing. For our own sake, we need to fix immigration, too. The only economic advantage that we, the US, still have over China, Europe, and India is that our higher education system still attracts the brightest minds from all over the world. We literally steal them from other countries. But if the World's brightest scholars and scientists ever move abroad, it will be the end of the US as a super power. (And fortunately, our big potential competitors, like China and India, have their own home-made problems. Our system may be corrupt, but their's are corrupt-squared and cubed.)
Can political reform rescue us? I don't think so. First, as I already mentioned, everything that Washington touches usually comes out for the worse. Lobbies will stop adverse changes. The changes we need are so far-reaching that they may well require a whole slew of constitutional amendments. It's the system that is bad, not the players. The chance that amendments will happen is zero.
What Should We Do?
My radical renewal manifesto is here. No chance that it will ever be enacted. So...
What Should You Do? Party like its 1999?
Like Romney's horse Rafalca, I will be ok. I am highly educated and well off. I benefit from a great public pension defined benefits--as a UC professor, I am among the entitled. These promised UC pensions may well ruin the UC itself, but we UC employees collectively won't compromise. And why should we? So that the CA prison guard union gets more? No way.
I will try to make sure that my kids will be ok, too (just as most wealthy parents do these days). Eventually, the US crisis will hit my class, too. I will be dead by then. No one will remember that I wrote this.
But I do pity those less fortunate than us. Poorly educated (not because of the little money per student (now about $10,000 to $15,000 per child per year), but because our teacher unions block any reasonable reform). The California Teacher's Union is spending $350 million (!!) in lobbying a year, defending a system that serves its members but not our kids. We are not giving the poor much of a chance. Economic mobility is at an all-time low, and will probably decline further.
If I sound pessimistic, I am. I don't vote. I would not know who for. It wouldn't matter, either. There is really nothing else I can do, either. There is really nothing anyone can do. This is how empires die--centrifugal internal forces that cannot be stopped. This time, watch it in real-time.
If I sound depressed, I am not. I focus on the positive. I try to help those poorer than myself in local initiatives. I take care of my students. And my kids. I study economics. I will try to write fewer opeds like this one...
Please convince me that my outlook should be more optimistic. Feel free to tell me where my analysis has gone wrong. If you agree, please link to this web page, http://dismal-economics.blogspot.com/2012/08/the-us-economic-outlook.html .
Next time I should write about the disavowance of reason, science, and technology; environmentalism, overfishing, and global warming risks (crazy and non-crazy); the decline in journalistic standards (Fox and Kim Kardashian instead of CNN); our stupid and crazily expensive War onPoor Blacks and Hispanics Drugs; or how $30 million Californians are irrelevant, because the Public Sector Unions Democratic Party of California is in such full control that all elections are foregone conclusions. Or the crazy Bush Sr law called the ADA that serves the disabled was passed without any concern for cost, at all. Just like the crazy Supreme Court ruling that is on the way of allocating 1/2 of our public education funds to kids with special needs. Yes, we need to take care of the disabled and kids with special needs and our elderly and our sick, but whenever cost is no concern, the costs eventually overrun the systems. The trick has to be finding a good balance.
Next time I should write about the disavowance of reason, science, and technology; environmentalism, overfishing, and global warming risks (crazy and non-crazy); the decline in journalistic standards (Fox and Kim Kardashian instead of CNN); our stupid and crazily expensive War on
I loved reading this piece! Well written! :)
ReplyDeletejason
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