Saturday, December 3, 2011

Are we like the Greeks?

I heard on the radio the other day an example of what has caused the financial melt down in Greece. A state run railroad takes in 100 million in euros in revenue, but pays out 400 million in salaries. This was the result of years of political patronage where each party has given out jobs to their friends as rewards. The irony here is that Greeks in general hate to pay taxes, and most pay very little. If some tax collector works a little too hard at their job they are demoted. I'm not sure if the railroad workers, whom are paid directly by the government (taxes), are an exception to this tax averse tax behavior, but some how I think they are no different that the rest of their fellow countrymen. In this Americans are not too much different. Many Senators and congressmen have taken the no new tax pledge headed by Grover Norquist's organization, American for Tax Reform. The push for tax cutting and deregulation started back in 1980 when Ronald Reagan became President, and it is also when our current economic woes began. I like to call this the Curse of the Gipper, Ronald Reagan.

After World War II the United States and a Debt to GDP ratio of upwards of 120%. I started my graph at 1945 where that ratio was a mere 117% of GDP. This ratio came down over the next 30 year until 1980 where it was at 33%. From President Reagan's first budget in 1981 to George H. Bush's last budget in 1992, that ratio climbed up to about 65%. President Clinton's last budget in 2000 brought down that ratio to 57%. After George W. Bush's Administration last budget that ratio tipped up to around 70%. President Obama's ratio has gone up to around 103% of GDP by 2012. Over a 67 year period we have gone from 121%, down to 33% and back up over 100%. If you add up the Debt added by each political party, the Republican’s own about 75% of it, Democrats 25%. More important, the interest payments from the Reagan and 1st Bush's debt are quite high at around 6% relative the the 1-2% rates of 2009-12 period.    

This is an easy graph to make, below is the link to the Historical Tables, which can be download into a spread sheet for your personal analysis, (HTTP:// I think all Americans who have the least amount of interest in our Debt/Tax polices should make one of these graph as a rite of passage. But this graph is nothing new, and has been created many times, so I don't think there is much debate over it. These are the basic facts all Americans should know, but to much of my disappointment I fear few do.

Besides the aversion to paying taxes we share with the Greeks, we also have the same hypocritical view on spending. What caused the deficit during the Reagan and Bush 12 years was cutting taxes and lots of defense spending. Oh yes they all like to complain about entitlement programs like Society Security and Medicare and Medicaid. But the largest Social Security has been a net positive revenue program until just the last couple years in our current Great Recession. This should be no surprise since Social Security revenue is dependent on employment, and unemployment is now at 9%. Over the 30 year period from 1980 to 2010, around 4 trillion dollars of entitlement programs surpluses (mostly Social Security, the famous Treasury backed IOU's) have been spent on other programs. A large portion would have gone to defense, since it has grown so much. In 2010 defense spending was around at $700 billion, up from perhaps $350 billion in 2000.

The graph above is very important because is shows how are tax base has become more employment dependent. Recessions will always affect tax revenues negatively, but with now 80% of the tax revenues coming from individuals and Social Security, tax revenues have become especially sensitive to high unemployment. Social Security is the big game changer here, and it affects most those making less than the cap of $105,000 in annual income the most. Now there is a valid point to be made that employers pay half of that 40%, (6.2% on employee, 6.2% on employer), but if you examine this split in terms of over all wages, which have been flat when adjusted for inflation over the past several decades, and that middle America, that 80% as recently reported now only have 16% of the nations wealth, and the fact that corporations are currently making record profits throughout this recession, I tend to think that your average person who makes less than the Social Security cap is paying for the employers 6.2% share through reduced wages. Furthermore, employers can write off the 6.2% and the Medicare 1.45% an expense, like payroll and other costs of doing business. Your average American worker is not so lucky.

So when some Americans complain about the entitlement programs, don't listen to them. Your retirement program surpluses have been spent on massive defense spending, waging wars in Iraq and Afghanistan. This and deregulation has brought us to this point in our economic history. Something you don't hear much any more is the term, “Trickle Down Economics”, but it was a often used and very controversial theory of economics, which got its start in the Reagan Administration. It has now morphed into slogans like, “don't over tax the job creators”. But after 30 years of cutting taxes and defense spending, we have racked up close to 15 trillion in Debt. Our interest bills, cash paid out, are between 200 and 250 billion. Pray that our interest rates don't rise.  


The above graph shows how the deficits started backup with the Bush tax cuts.
Note we were in surplus until mid 2001. Also see how the deficit started to explode in 2007 and stopped in 2009 after Obama's first year in office. The deficit is the result of is the result of falling tax revenues due to the dramatic number of job losses and stimulus spending.
Yes President Obama has contributed to the debt. But this was not done because of some failed economic theory, which also conveniently pads the pockets of the wealthy. It has been a real attempt to keep our economy from spiraling out of control, and he has managed to put the breaks on. Now it appears we our stuck. So what does the opposition, the Republicans, offer as a remedy to our current dilemma? Tax cuts, deregulation and as Mitt Romney stated at his Citadel speech not to long ago, more defense spending. Have they forgotten that deregulation is what brought on the financial crisis in the first place! Oh please, let us not learn from history, even if it is a recent as 2 or 3 years ago. The absurdity of the Republican and Tea Party positions (I really see no difference between them) is beyond all common sensible comprehension. But then so is the fact that some people who are not wealthy still support them. Or perhaps it is counter intuitive, and the average person just isn't sophisticated enough to get it!

Over the last 30 years our national credit card had been run up to 70% of GDP before Obama was elected, by tax cutting, defense spending, and deregulation that has allowed Wall Street to take massive risks which had gone bad, and needed to be rescued with the people's tax dollars. Obama followed up on the W.'s plan to save Wall Street, except he actually put in some limits on it, so in the end it may cost very little or even return a profit. He saved the automotive industry, much to the chagrin of the opposition, which is now profitable and still American owned. I sincerely think it is time to put this so called economic theory to rest. Whether you call it “Trickle Down Economics”, or don't formant class warfare by punishing the “Job Creators” for being successful. It just doesn't work! Making the wealthy wealthier is no magical job creating program. More like a magical propaganda program, that has worked better than one could possibly imagine, thanks to the abysmal ignorance of so many Americans of the simply facts I have presented here. The Republican and the Tea Party don't want to fix what has worked so well. They are still trying to spin it one more time, and their track record has been pretty good. There needs to be a balance approach in tax revenue increases and spending cuts to move us to a sane economic footing. The good news is the Super Committee has failed, and between the spending cuts which will now be triggered, and expiration of the Bush Tax Cuts, we might have a chance of making some real progress.

This brings me to another point in my comparison to the Greeks. American business are well know for their aversion to paying taxes, and I serious don't think that our defense industry, like the Greek railroad employees, are atypical in this regard. Heaven forbid they pay that which they so avariciously engorge themselves with, tax revenues! It would appear we are a lot more the Greeks then we care to think, and the fate they are experiencing at present, we may not avoid unless we agreed on prudent tax polices.

How defensive is lots of defense spending? Ronald Reagan was famous for increasing defense spending, and is often credited with ending the Cold War as a result of his saber rattling. Republicans in general have a strong tendency to play the fear card, pledging to increase defense as a political tactic, and Reagan was a real artist at this. Which brings me to the graph above. If you examine this graph, you will see a large drop in the price of oil from 1981 to 1986. With the USSR as an exporter of oil, and the United States is an importer of oil, this drop in oil prices is a very signification factor in why the USSR collapsed, as their oil revenues shank, making subsidizing their inefficient economy become more and more difficult. I'm sure increasing defense spending and spiriting the USSR on in the arms race had some effect. But having your oil revenues halved over the course of 6 years is for me, the most significant event that caused the USSR's demise.

The United States spends a disproportionate amount on defense, more than any other nation, and defensive spending in general is an economically inefficient way to run an economy. Lets talk about tanks. We make the best in the world and as an American I'm proud of that. I think a strong defense is important. But how much is enough? When we build a tank, we put it on a parking lot with thousands more. That is a lot of sunk capital sitting around, and that is the best it gets. When we use it in a war, we start spending and enormous amount on running it, and when soldiers are injured or killed in it, that tragedy for their loves ones costs far more than our country spends on their medical services, and we cannot easily calculate that. My point is quite simple. War is a necessary expense, but it is a net drain on our economy and not to mention our national soul. We have been spending far more than necessary and we need to seriously evaluate our polices on defense spending.

Are we winning the War on Terror? In 2001 we were hit by Osama bin Laden's terrorists for a cost of under a million dollars. We have since reacted by invading two countries at a cost of well over a trillion dollars. If one defines war as an economic struggle, or politics by another means. Are we winning? There will be more terrorist attacks in our future, whether in the next couples years or decades. I sincerely hope we learned a lessen from this first decade of the 21st century. The Greeks squandered their economic future on political patronage, we on defense spending and other countries I'm sure a bit of both.

We now even consider corporations people. An absurd position issued by our highest court, which I have difficulty taking seriously, but shows how influential corporations have become.

So I propose the "Soylent Green" test to determine who is a person and who is not. In that 1973 science fiction movie classic, Charlton Heston's character Thorn, learns that the only available food source for the population of 40 billion, Soylent Green, is made from people. “Soylent Green is people!” Thorn cries in horror. Well if someone can explain to me how a corporation, which is an entity that is a legal construct, and has no corporeal form, can be made into Soylent Green, then I'm willing go along with the distorted view of our Supreme Court.

At last, how much are we like the Greeks, oh I'd say maybe 20%. That portion of Americans which are wealthy enough to take advantage of tax loop holes, and make a lot of their income from capital gains, unlike most of us regular people, who just suck it up and pay up.