“Solutions” to Deficits – The National Sales Tax

May 1, 2010 · Posted in General Economics · Comment

In my post What’s the Problem With Government Budget Deficits? I recently wrote:

“Solutions” to Deficits

As I explained, the ultimate damage caused by public budget deficits occurs at that point in time when taxpayers are forced to restrict their consumption and unjustly bear the cost of malinvestments from the past.

Ironically, when you look at the political stage, all you will hear in regards to “solutions” to deficits in the end, will be tax hikes. These are not solutions. They are the ultimate manifestation of the very problem at hand. They are, in fact, the precise opposite of a solution. Keep this in mind whenever you hear politicians talk about deficit solutions.

This guy over at The Atlantic is promptly jumping in to pose as a hapless example of what I described:

Here’s why we need [a national sales tax]: If you think the deficit looks bad now, wait a few years. Rising health care costs for retired baby boomers will push U.S. debt levels past their World War II-levels. But whereas WWII ended and we owed that debt to ourselves, our entitlement system is woven into American life and we owe half the resulting debt to foreign countries. Approaching this challenge will require some combination of robust growth, spending cuts, entitlement reform and more tax revenue.

Thanks, oh guy who doesn’t get it :)

Tags: deficits, national sales tax, tax, taxes, VAT

What’s the Problem With Government Budget Deficits?

April 26, 2010 · Posted in Government · Comment

Government Spending & Taxation

A government is that group of people which periodically obtains goods owned by other people within a certain territory by means of theft, also called taxation.

Since theft is an act of aggression it violates the victim’s value preference. After the goods have been obtained the people in the government will put them to one or the other use. They will hire people, purchase arms, establish offices, give some money to people so long as they prove that they are not working, hire tax collectors, throw people in jail who sell or carry a certain vegetation, maintain those jails, send people in green costumes to countries overseas to aggress against and shoot people, etc. All these activities will ultimately serve those people in whose pockets the stolen money ends up, some more, some less, some sooner, some later. In general these will always be external businesses who bribed government officials, bureaucrats, and to a lesser degree welfare recipients.

Every time someone is hired and every time resources are purchased by government officials they will not be available to people who would have obtained them on a voluntary basis for other uses. It is at the very moment that the stolen money first exchanges hands after being stolen that it begins to exert the harmful effects that result from bureaucracy.

These are all just examples which are well known and nothing surprising or new. The fundamental fact about government activities is that they by necessity and by definition go against the value preferences of those who are not in the government, viz. the majority of the people. This is how they ultimately reduce the welfare of society, and thus ultimately the happiness of the majority.

Budget Deficits

When that same group intends to employ more resources than it is able to fund from the money obtained in its regular annual extortion runs, it borrows additional money from certain people in a credit transaction, resulting in public debt. This additionally borrowed money is what is commonly referred to as a budget deficit.

When projects are funded via a budget deficit, the additional money is actually obtained in a voluntary transaction at first. An investor who is offered a better deal by the government than he might have found elsewhere, hands over money with no aggression involved. But he is promised repayment of his money plus interest through future theft from taxpayers. Instead of purchasing and putting to use factors of production in the service of consumers, as some other entrepreneur would have had the incentive to do with that same money, the government will fund the same kinds of consumptive or even destructive activities as described above with the borrowed money.

The fundamental difference in the case of the budget deficit is that at the moment of putting the funds to use, the money has, for now, been obtained from someone who voluntarily entered into this transaction, with the intention of sharing the future loot from the theft promised.

Thus taxpayers won’t immediately be forced to restrict their consumption because somebody else is doing it for them at the beginning. However, as the public debt interest has to be paid in the future, and the principal sum needs to be repaid, taxes will inevitably rise. Taxpayers will be more and more forced to restrict their future consumption in order for the government to pay off the investors who restricted their consumption in the present.

The burden of restricted consumption is thus shifted over time from the investor over to the taxpayer. However, the investor made the choice voluntarily, along with all the risk of default which comes with the contract. (In fact, a complete debt default is precisely what the investor would suffer for funding a comparable project on the market, ensuring corresponding and healthy incentives moving forward.) The investor’s time preference and value preference is at no point being acted against. Nothing is violently taken away from him or anybody else. He willingly participates in the transaction.

The taxpayer, however, never had any choice. He doesn’t necessarily realize that what the government consumes now will be funded by his restricted consumption in the future. Money that would usually have been used to fund the purchases and thus spur production of capital goods (whose employment would increase the production of consumer goods in the future), is now employed in fundamentally consumptive government activities which necessitates that the debts be paid off through the restriction of future consumption lest a default occur.

But the crucial point with the budget deficit is that, from the consumers’ (= the majority’s) point of view, the effects of deficit financing don’t show up until a later point in time. In the meantime it all appears to be taking its normal course as things would on the market. But when the debts need to be paid off, the expectation that the borrowed funds were used to obtain capital goods which would enable repayment through the production of more consumer goods with less labor input than before, turns out to be a completely false one. No new capital was generated from the projects in question and upkeep of existing capital was, as a tendency, being neglected. Capital consumption inevitably ensues.

Thus, with a budget deficit, and more broadly with the public debt, the fundamental damage occurs at the point where money is taken away from the taxpayer to pay off the investors who voluntarily funded unproductive and ultimately coerced projects in the past.

From the point of view of the majority of the people, the real problem in the phenomenon of the budget deficit lies in the fact that it adds to the public debt and that they or their progeny will at some point have to foot the bill for past expenditures and thus resource employments, again undertaken against their choosing, time preference, or value preference.

It is also important to consider that at any given point in time the current generation is already paying off debts for unproductive undertakings pursued by governments in the past, making the damage caused by deficits and public debt a lot more tangible and immediate, and conveniently ruling out significant tax cuts by the government.

This is very important: When people say something like “the deficit is damaging/bad/a problem/etc.” what it ultimately means is that the money used for more spending and favors and owed by the government to investors will be taken from you or your children in the future via the threat of kidnapping and imprisonment if you don’t comply. This is really at the root of all the problems around public debt owed, and the deficit that we hear about every year is just piled on top of that existing debt.

Due to the fact that the effects of deficits are not immediately noticeable to the general public they are an incredibly convenient way of funding government programs and shifting involuntary burdens on to future disenfranchised generations. Thus public debts will always continue to grow along with rising taxes, until a level is reached where the required tax burden becomes untenable, where creditors can no longer be paid off, the government can no longer fund itself, where social tensions rise between recipients and payers, and where the whole superstructure that is the government collapses in its entirety.

“Solutions” to Deficits

As I explained, the ultimate damage caused by public budget deficits occurs at that point in time when taxpayers are forced to restrict their consumption and unjustly bear the cost of malinvestments from the past.

Ironically, when you look at the political stage, all you will hear in regards to “solutions” to deficits in the end, will for the most part be tax hikes. These are not solutions. They are the ultimate manifestation of the very problem at hand. They are, in fact, the precise opposite of a solution. Keep this in mind whenever you hear politicians talk about deficit solutions. Raising taxes to reduce deficits is absolutely and 100% an admission that one has completely failed to solve this deficit problem, and in fact laid the final brick that was missing in the very process of the public’s depredation via deficit spending.

A real solution would of course be to make investors suffer the consequences of their unproductive investments, default on the public debt, stop stealing money from people, and allow for voluntaryism to take the place of interventionism.

Tags: budget deficits, deficits

The Solution to Deficit Reduction – A Task Force … Yay!

January 23, 2010 · Posted in Government · Comment

As a response to its rampant and unprecedented budget deficits, President Obama is doing just what we would expect from a good old fashioned and clueless politician – he endorses a task force to talk about deficit reduction until the end (!!) of the year:

President Barack Obama Saturday endorsed a bipartisan plan to name a special task force charged with coming up with a plan to curb the spiraling budget deficit, though the idea has lots of opposition from both his allies and rivals on Capitol Hill.

The bipartisan 18-member panel backed by Obama would study the issue for much of the year and — if at least half of the GOP panel members agree, a big obstacle — report a deficit reduction blueprint after the November elections that would be voted on before the new Congress convenes next year.

“These deficits did not happen overnight, and they won’t be solved overnight,” Obama said in a statement. “The only way to solve our long-term fiscal challenge is to solve it together — Democrats and Republicans.”

This task force will have plenty of time to sit around and do nothing while the taxpayer will continue to be pillaged. In the end, all I expect them to come up with is some superficial and immaterial spending reductions (to make it look good), and massive tax increases.

The highlighted part above is actually quite funny: Over the past 100 years there have been two parties in Congress that continuously ran up government spending and deficits. In particular over the past 10 years the Republican Bush administration ran up until then never before seen deficits. Then the Democratic Obama administration picked up on that an ran up even higher deficits.

Now, the solution to the problem is supposed to be a bipartisan task force, comprised of Republicans and Democrats to solve the structural deficits brought about be Republicans and Democrats.

If one is capable of understanding the hypocrisy behind these policies, the following is of course completely predictable and unsurprising:

First, however, the plan would have to pass the Senate on Tuesday, where a vote has already been scheduled. Moderate Democrats want to attach the deficit task force plan to legislation to permit the government to continue borrowing money to pay for its operations.

Ladies and gentlemen, I give you … the Government of the United States!

Tags: budget deficit, deficits

Keynesian Academics Unhappy About Record Deficits; They Want More!

November 18, 2009 · Posted in General Economics · Comment

Brad Delong seems to be coming to the realization that we are in a depression:

For 2 1/4 years now I have been saying that there is no chance of a repeat of the Great Depression or anything like it–that we know what to do and how to do it and will do it if things turn south.

I don’t think I can say that anymore. In my estimation the chances of another big downward shock to the U.S. economy–a shock that would carry us from the 1/3-of-a-Great-Depression we have now to 2/3 or more–are about 5%. And it now looks very much as if if such a shock hits the U.S. government will be unable to do a d—– thing about it.

We could cushion the impact of another big downward shock by a lot more deficit spending–unemployment, after all, goes down whenever anybody spends more (even though sometimes falling unemployment comes at too-high a price in rising inflation), and the government’s money is as good as anybody else’s. But the centrist Democratic legislative caucus has now dug in its heels behind the position that we cannot undertake more deficit spending right now because we have a dire structural health-care financing proble afrer 2030. The Republican legislative causes has now dug in its heels behind the position that the fact that unemployment is 10% shows not that policy earlier this year was too cautious but rather that it was ineffective. And the Obama administration has not been able or has not tried to move either of those groups out of their current entrenchments.

… unfortunately he also deems it necessary to draw precisely that conclusion which is farthest from the truth. He is yet another sad casualty of the phenomenon I expected to occur sooner or later, as I outlined in The Great Depression 2.0:

Once existing stimulus programs and credit expansion attempts subside, there won’t be much left to pick up the slack. The consumer won’t be able to go back to business as usual unless he goes through a long period of reduced consumption, deleveraging, and savings, a period during which the majority of production and spending inside the US will have to be focused on capital goods, so as to restore a balanced ratio between the production of consumer goods and the production of capital goods.

At the point when these government stimuli wind down, Keynesian clowns will be jumping out of the bushes left and right, and demand that the government take on more debt and spend more money. But at some point their mindless tirades will no longer appeal to an overtaxed and overleveraged populace. Their ivory tower nonsense will be way too far detached from simple realities.

I would submit that precisely this is the case now. Deficits are larger than ever and are likely to get higher. People are sick and tired of it.

I would like people like Krugman and Delong to answer some simple questions: How much more until you’re happy? Which sum of money borrowed from foreigners and banks, owed by taxpayers, and spent by bureaucrats on goods and services (and your salaries of course) will be our salvation? What’s the magic mark?

The truth is: there is no such number. In fact, every single dollar more is a dollar too many spent by government. There is nothing new to this development. Government spending has been on the rise for at least half a century. The direction couldn’t be more false. The path could hardly be more disastrous. The repetition of past mistakes couldn’t be more appalling. The apathy and ignorance of academia, media and politics couldn’t be more mind boggling, the gulf between illusion and reality more severe.

Tags: deficits, government spending in the US, keynesian

Obama on Solid Track to Top Bush’s Deficits

July 14, 2009 · Posted in Government · Comment

The AP reports Budget deficit tops $1 trillion for first time:

The deficit of $1.09 trillion so far this year compares to an imbalance of $285.85 billion through the same period a year ago. The deficit for the 2008 budget year, which ended Sept. 30, was $454.8 billion, the current record in dollar terms.

Revenues so far this year total $1.59 trillion, down 17.9 percent from a year ago, reflecting higher unemployment, which cuts into payroll taxes and corporate tax receipts.

Under the administration’s budget estimates, the $1.84 trillion deficit for this year will be followed by a $1.26 trillion deficit in 2010, and will never dip below $500 billion over the next decade. The administration estimates the deficits will total $7.1 trillion from 2010 to 2019.

Just to get an idea of how reliable these government estimates are: Please note that not too long ago, in its 2009 budget document, the government said that it was expecting a deficit of $611 billion for 2009, and $300 billion and lower for the years to come.

I noted back then that these numbers are way off and in February proposed the following figures:

Now that we have updated figures on coming expenses it’s time to update the deficit predictions:

$1.65 trillion for 2009

$1.6 trillion for 2010

$1.95 trillion for 2011

$2.2 trillion for 2012

As you can see, now my 2009 figure is optimistic already. I expect same will apply to the following years. I also said in that same post:

If President Obama keeps spending like this, and really wants to cut the deficit in half by 2013, he will at one point be faced with no other choice but to raise taxes on all Americans, rich, middle class, and poor. This is of course nothing new. Taxes have been rising in the US for the past century.

Back then there was no talk about those kinds of taxes. Since then through now we have heard more and more such proposals.

A national sales tax:

With budget deficits soaring and President Obama pushing a trillion-dollar-plus expansion of health coverage, some Washington policymakers are taking a fresh look at a money-making idea long considered politically taboo: a national sales tax.

Taxes on health benefits:

An effort by Senator Max Baucus of Montana to develop compromise health care legislation has come under sharp assault by fellow Democrats who have urged him to abandon a plan to help pay for the bill by taxing some employer-provided health benefits.

A tax on generous employer-provided health plans is favored by Republicans and several centrist Democrats. But opinion polls show the idea to be generally unpopular, and several senators up for re-election in 2010, including the majority leader, Senator Harry Reid of Nevada, have said they oppose it.

Health tax for high income earners:

Democratic lawmakers in the U.S. House of Representatives want to increase taxes on the highest- earning American families to help pay for an overhaul of the nation’s health-care system.

Legislation to be unveiled on July 13 would raise $540 billion over the next decade by setting a 1 percent surtax on couples with more than $350,000 in annual income, said Representative Charles Rangel, chairman of the tax-writing Ways and Means Committee. Higher rates would take effect for those earning $500,000 and $1 million, Rangel said.

… we shall see how many more ways and suggestions to loot and tax the people into oblivion they will come up with over the following months.

Meanwhile, contact your representatives. Tell them your opinon. Tell them you will do everything in your power to vote them out of office in 2010 if they vote for any more boondoggles.

Tags: deficit spending, deficits, president obama

President Obama – Elevating Bush’s Inattention to Deficits to an Art Form

July 10, 2009 · Posted in Government · 2 Comments

Here is a fine, uncompromising, and devastating take down of President Obama’s economic policies:

Last week, we discovered that the state of California will gladly pay you Tuesday for a hamburger today.

With California mired in a budget crisis, largely the result of a political impasse that makes spending cuts and tax increases impossible, Controller John Chiang said the state planned to issue $3.3 billion in IOU’s in July alone. Instead of cash, those who do business with California will get slips of paper.

The California morass has Democrats in Washington trembling. The reason is simple. If Obama’s health-care plan passes, then we may well end up paying for it with federal slips of paper worth less than California’s. Obama has bet everything on passing health care this year. The publicity surrounding the California debt fiasco almost assures his resounding defeat.

It takes years and years to make a mess as terrible as the California debacle, but the recipe is simple. All that you need is two political parties that are always willing to offer easy government solutions for every need of the voters, but never willing to make the tough decisions necessary to finance the government largess that results. Voters will occasionally change their allegiance from one party to the other, but the bacchanal will continue regardless of the names on the office doors.

California has engaged in an orgy of spending, but, compared with our federal government, its legislators should feel chaste. The California deficit this year is now north of $26 billion. The U.S. federal deficit will be, according to the latest numbers, almost 70 times larger.

Bleak Picture

The federal picture is so bleak because the Obama administration is the most fiscally irresponsible in the history of the U.S. I would imagine that he would be the intergalactic champion as well, if we could gather the data on deficits on other worlds. Obama has taken George W. Bush’s inattention to deficits and elevated it to an art form.

The Obama administration has no shame, and is willing to abandon reason altogether to achieve its short-term political goals. Ronald Reagan ran up big deficits in part because he believed that his tax cuts would produce economic growth, and ultimately pay for themselves. He may well have been excessively optimistic about the merits of tax cuts, but at least he had a story.

Obama has no story. Nobody believes that his unprecedented expansion of the welfare state will lead to enough economic growth. Nobody believes that it will pay for itself. Everyone understands that higher spending today begets higher spending tomorrow. That means that his economic strategy simply doesn’t add up.

Character Deficit

Back in the 1980s, Reagan’s own economist, Martin Feldstein, spoke up when he felt that the Reagan administration was pushing the deficit too far. Where are the economists with such character today? Apparently, the job description for economists has transformed from recommending policies that are defensible to defending whatever policies that the political hacks in the West Wing dream up.

As bad as the California legislature has been over the years, it has never entered a fiscal crisis like the one that we face today and then doubled down with a massive spending increase. In the end, when times got tough, patriotic and sensible Californians of both parties stood up and began acting like adults.

Maybe the same thing is starting to happen in our nation’s capital. The key players in Washington are Senator Evan Bayh and 15 Senate Democrats who joined him this year in forming a coalition of moderates. One thing that has distinguished moderate Democrats from the garden variety of the species is heightened concern about fiscal responsibility.

Off a Cliff

With the price tag of Obama-care likely to exceed $1 trillion, moderate Democrats face a simple choice. They can jump off the cliff with the president, or they can stay true to the principles that they have espoused throughout their careers.

There are reassuring signs that principle is winning. One of the most expensive components of the Obama plan is the so- called public-insurance option, which opponents fear would result in massive government subsidies. Senator Mary Landrieu said that she is “not open” to a public option that will compete with private insurance.

Many other Democratic Senators, including Ben Nelson, Blanche Lincoln, and Tom Carper, also oppose the public option. As the cost estimates increase and support wanes, the Senate Finance Committee is even going as far as to pursue its own health-care plan, meaning that the health-care end game is now in sight.

Tax Bite

Moderates might support Obama’s health-care objectives if the bill also included tax increases to cover the spending increases. But those tax increases would likely be unpopular, making it almost impossible to pass a bill.

Given the increasing public concern about deficits that heightened significantly last week because of the California crisis, there are only two possibilities left. Either the Obama plan will come crashing down or Senate Democrats will concoct some bill that has health in the title but costs almost nothing and does even less. With Al Franken arriving in the Senate and providing Democrats with a crucial 60th vote, the latter seems most likely.

…the author may be partisan or biased, but that doesn’t make one’s statements false. This administration is not going anywhere. It is caught in a mess that it won’t be able to get out of gracefully. The political retaliation will follow sooner or later as reasonable movements expose its blunders.

The only way this will not happen is if Obama manages to turn the corner and paddle back at some point. I don’t see that happening anywhere or anyhow or anytime soon. As I have said before. President Obama had the greatest of opportunities. He could have hit the ground running and changed course, do unpopular but necessary things, let the correction of the consumption business cycle run through as quickly as possible, and blame it all on the previous excesses. Instead he went full throttle in the wrong direction. He continued Bush’s fiscal policies. He mocked those who stood up for responsibility and against spending programs. He made a completely unnecessary gamble:

Obama is gambling with the future of his administration. If he doesn’t deliver true change, things will get worse and worse. If he shoves this bill down the throats of the American people, it will be him and Democrats in Congress who will have to share the blame. This bill was never his bill. It was the Congressional Democrats’ bill, led by Harry Reid and Nancy Pelosi. Now Obama has made it his bill. All the scandals, wasteful projects and corruption that will be uncovered under the projects funded by it will be associated with him. His partisan speech today might very well have marked an early end to bipartisanship for the rest of his tenure.

His fundamental misunderstanding on this matter is that he believes these disagreements are nothing but political games. They are not. They reflect sincere and deep-rooted concerns of the direction where this country has headed. They represent the voices of millions of frustrated workers, businessmen, housewives, students, and retirees calling their representatives, jammed fax machines, letters, town hall meetings, and the like. The movement for liberty is not one of political expediency. Its members are not in it for personal, monetary, or political gain. They are in it for true conviction and with all their heart. But on top of that, it is a movement of substance, reason, logic, and sound understanding of historical and economic facts. There is nothing in the world that could change some one’s mind, once one has understood the true blessings of Freedom, Liberty, Peace, Prosperity, and Happiness. It is a patient movement. It is not in a rush. It isn’t going away. It will grow stronger year by year. To ignore it would be the biggest mistake Obama could make now.

If he continues doing it, the political retaliation will ensue sooner or later in the next Congressional elections and maybe in the next presidential elections. This is an unnecessary, harmful, and avoidable political gamble.

Tags: deficits, president obama