Budget Deficit Pirouette: The Worm Turns

--by Sebastian

I know I've written it somewhere before, but there are certain issues which are deeply important to a party's leadership so long as they are out of power, but vanish with the wind when they win.  The ones I've identified are gerrymandering, voter fraud, and the budget deficit.  For a high level politico, worrying about the budget deficit is an important way to try to stop an opponent's ill-advised spending, but is an unfortunate necessity when talking about one's own vitally important spending.  This ties in with my 130% theory that politicians play into the electorate's very real desire to have much more spending and much lower taxes. 

Since the Democratic Party has recently regained power, I expected the high level rhetoric on the budget to shift as well.  I did not expect the first signs of that to come from an economist who has spent the better part of the past five years railing about deficit.  But unfortunately, Krugman wrote this:

One of the biggest questions is whether the party should return to Rubinomics -- the doctrine, associated with former Treasury Secretary Robert Rubin, that placed a very high priority on reducing the budget deficit. The answer, I believe, is no. Mr. Rubin was one of the ablest Treasury secretaries in American history. But it's now clear that while Rubinomics made sense in terms of pure economics, it failed to take account of the ugly realities of contemporary American politics. And the lesson of the last six years is that the Democrats shouldn't spend political capital trying to bring the deficit down. They should refrain from actions that make the deficit worse. But given a choice between cutting the deficit and spending more on good things like health care reform, they should choose the spending.

In a saner political environment, the economic logic behind Rubinomics would have been compelling. Basic fiscal principles tell us that the government should run budget deficits only when it faces unusually high expenses, mainly during wartime. In other periods it should try to run a surplus, paying down its debt. Since the 1990s were an era of peace, prosperity and favorable demographics (the baby boomers were still in the work force, not collecting Social Security and Medicare), it should have been a good time to put the federal budget in the black. And under Mr. Rubin, the huge deficits of the Reagan-Bush years were transformed into an impressive surplus.

But the realities of American politics ensured that it was all for naught. The second President Bush quickly squandered the surplus on tax cuts that heavily favored the wealthy, then plunged the budget deep into deficit by cutting taxes on dividends and capital gains even as he took the country into a disastrous war. And you can even argue that Mr. Rubin's surplus was a bad thing, because it greased the rails for Mr. Bush's irresponsibility.

As Brad DeLong, a Berkeley economist who served in the Clinton administration, recently wrote on his influential blog: "Rubin and us spearcarriers moved heaven and earth to restore fiscal balance to the American government in order to raise the rate of economic growth. But what we turned out to have done, in the end, was to enable George W. Bush's right-wing class war: his push for greater after-tax income inequality.%" My only quibble with Mr. DeLong's characterization is that this wasn't just one man's class war: the whole conservative movement shared Mr. Bush' squanderlust, his urge to run off with the money so carefully saved under Mr. Rubin's leadership.

With the benefit of hindsight, it's clear that conservatives who claimed to care about deficits when Democrats were in power never meant it. Let's not forget how Alan Greenspan, who posed as the high priest of fiscal rectitude as long as Bill Clinton was in the White House, became an apologist for tax cuts -- even in the face of budget deficits -- once a Republican took up residence.

Now the Democrats are back in control of Congress. They've pledged not to be as irresponsible as their predecessors: Nancy Pelosi, the incoming House speaker, has promised to restore the "pay-as-you-go" rule that the Republicans tossed aside in the Bush years. This rule would basically prevent Congress from passing budgets that increase the deficit. I'm for pay-as-you-go. The question, however, is whether to go further. Suppose the Democrats can free up some money by fixing the Medicare drug program, by ending the Iraq war and/or clamping down on war profiteering, or by rolling back some of the Bush tax cuts. Should they use the reclaimed revenue to reduce the deficit, or spend it on other things?

The answer, I now think, is to spend the money -- while taking great care to ensure that it is spent well, not squandered -- and let the deficit be. By spending money well, Democrats can both improve Americans' lives and, more broadly, offer a demonstration of the benefits of good government. Deficit reduction, on the other hand, might just end up playing into the hands of the next irresponsible president.

In the long run, something will have to be done about the deficit. But given the state of our politics, now is not the time.

Like dealing with gerrymandering, now is never the time if you happen to be in power.  This is of course the dark Democratic reflection of "starve the beast".  The other side can't be trusted to be fair (season to preference by inserting "cut useless programs" or "raise taxes") therefore we must be imprudent now to force them to be prudent in the way we like later. 

Of course Krugman is being silly to pretend that there are going to be enough savings from 'fixing' anything to actually fund a new program.  The Medicare Drug Program he specifically calls out was projected to be much more expensive in its Democratic Party form--and that is even with the drug price negotiation piece.

Krugman has successfully performed the deficit pirouette less than three months after the election.  Others will follow.  But don't expect them to be as sober as even he is.  PAYGO is the next to fall.  I don't really blame the Democrats.  They are focusing on their side of the electorate's irrational "more services AND lower taxes" desire. 

We need a mechanism to show the electorate on a yearly basis exactly how much their preferences cost them.  I still like Henke's proposal for a floating tax rate:  set a level of taxation to pay this year's budget.  You can make it progressive or flat.  You can exempt people from the bottom of it or even guarantee a minimum income with a negative income tax rate graduated at lower levels.  This sets the tax level for the next year.  (Take the spending for the Jan through Dec 2006 year.  In January 2007 announce the tax rate.  That will be the tax rate for the 2007 year and will be paid by April 15, 2008.  We can even keep paycheck withholdings.)  In January 2008 the tax rates are automatically adjusted to pay for all the spending from January 2007 through December 2007.  Those rates would be for taxes paid by April 15, 2009. 

As government became more frugal, you would automatically see more money.  The cost of new programs would be actually felt.  It would be easier to really see how such things effected your bottom line.  Like buying a new TV or a new house, I'm certain new spending would be authorized.  But there would be a price, and it would be much clearer than now.  I won't say that would entirely fix the 130% problem, but I suspect it would help quite a bit. 

UPDATE:  Sorry, I didn't see that hilzoy posted on exactly the same topic. 

UPDATE II:  As a reader at AngryBear pointed out, Krugman's argument makes no sense with reference to the Medicare drug program, but it offers excellent cover for spending the money even if still deep in deficit, when the Bush tax cuts expire.

Comments

[LizardBreath]

Like dealing with gerrymandering, now is never the time if you happen to be in power.

Except for every &#$#^@#*!! time the Democrats have been in power over the last several decades. While you may not have intended it this way, this statement is so enraging that I won't be able to post further on this thread and remain within the posting rules.

[J. Michael Neal]

I agree with Lizard Breath. Anyone who votes Republican has no standing to complain about this. You guys caused the problem. We fixed it. You guys caused it again.

Sebastian, your position is that it is the responsibility of the Democrats to fix the things that Republicans break. Not just once, but every single time we come to power. All so that Republicans can break it again.

As it happens, I disagree with Krugman, and think that we do really have to fix the budget deficit, even though I guarantee you that the next Republican administration will break it again. However, that is a debate for Democrats to have. Republicans have demonstrated that they have no place at this table.

[cleek]

LB, JMN, hear hear, megadittos. what the previous two posters just said.

and to add: we'll let you know when you (as a party) are qualified to speak to anyone else about fiscal responsibility. until then, talk to the hand.

merry friday!

[Ugh]

1m in ur budgit, bein a drunkin saylor

[Bernard Yomtov]

I second LizardBreath's comment.

Further, I don't think that the strategy Krugman advises is, as you put it, a way to force Republicans to raise taxes later. It is a way to neuter standard, but effective, Republican rhetoric. What Krugman is saying is not that he thinks his suggestion is good policy in the abstract. It is that the current political climate does not permit deficit reduction. Therefore Democrats should at least direct the spending toward their preferred policies.

I don't fully agree with Krugman. I think some reduction is politically feasible. For example, I think Democrats could take advantage of the expiration dates built into some of the Bush tax cuts, and just let them expire. That would be not too politically difficult, it seems to me, especially if deficits continue to be large.

So I think your interpretation is a bit unfair. Sometimes only second-best is possible.

[KCinDC]

How exactly do you expect Henke's proposal to be implemented? The Republicans will never do it, because it counts as a tax increase. So you're left once again relying on the Democrats to selflessly sacrifice their political ambitions by passing the thing and then being savaged for "voting for 147 tax increases" or some such foolishness.

[dmbeaster]

Sebastian:

Sorry -- but conservatives (meaning those that have supported Reagan, Bush I and II)have zero credibility when asserting that this statement applies equally to both parties: there are certain issues which are deeply important to a party's leadership so long as they are out of power, but vanish with the wind when they win... [such as] the budget deficit.

As a conservative, you apparently have a hard time grasping what history has shown to be true for the last 30 years, and which is discussed by Hilzoy -- Republicans love massive deficit spending, whereas the Democrats have a long history to the contrary when they are in power.

You therefore misunderstand and misrepresent Krugman's point. He is all for restoring fiscal responsibliity, but he is suggesting that it be done slowly in stages. As he says:

I'm for pay-as-you-go. The question, however, is whether to go further.

Krugman argues that Democrats should use savings now to promote policies Democrats favor, and tackle the deficit down the road. His point is a political one -- that there is nothing to be gained from a more fiscally conservative approach since the Republicans will just misuse it again in the future.

Given that the last 30 years consist of Republicans making a horrible mess of government finances and then seeking to profit politically from the Democrats' efforts to clean up the mess, Krugman is saying don't play that game.

I am not sure to what extent I agree with Krugman, but I do know that for Republicans to express the opinion you voice is like an unreformed drug addict complaining that a methadone program is a non-serious solution when only cold turkey will demonstrate the true bona fides of the anti-drug campaign. You just don't get to complain that your rival is a phony who only cares about half measures when you are the problem.

[cleek]

italics-be-gone!

[Dantheman]

I agree entirely with J. Michael Neal, both as to Sebastian's position being the equivalent of the Democrats acting as the Republicans' fixers, and that the Democrats should actually fix the budget situation.

However, it should be on the Democrats terms (i.e., restoring far more progressivity to the tax code, ending issues of Social Security solvency by removing the cap on wages subject to the tax, cutting programs dear to Republican voters hearts, such as farm subsidies, etc.). Unfortunately, that means that doing no harm through following PAYGO is the best we can expect until 2009.

[thetruth]

(i.e., restoring far more progressivity to the tax code, ending issues of Social Security solvency by removing the cap on wages subject to the tax

In other words, cutting the incomes of those most likely to invest, and thus grow the economy. That's not good in the long run. If you're going to change the tax code, make the tax structure flatter. If you decrease the tax rate on those with the highest marginal propensity to save - the very wealthy - the savings rate of the country as a whole will increase, and future growth will be higher. In the long run, this allows everyone to be able to consume more, even though amount of taxes paid by the lower, middle, and the bottom part of the upper class has increased.

"Soak the rich" is good if you're a populist seeking to set off a class war, but it's bad macroeconomics in the long run.

[Dantheman]

thetruth,

You sound like Phil Gramm at the time of Bill Clinton's tax increase, saying that it is sure to lead the economy into recession. Everyone here remembers how bad the Great Recession of 1994 was, don't they?

[Sebastian Holsclaw]

"How exactly do you expect Henke's proposal to be implemented? The Republicans will never do it, because it counts as a tax increase."

Why would that be a tax increase?

To everyone who suggests that Republicans are the problem: I'm sorry, but Democrats controlled the House of Representatives for the period 1955 to 1995, many of those years with very noticeable majorities. They controlled the Senate from 1955 to 1981 and again from 1987 to 1995. The major shift on hilzoy's graph is the period 1992-1999--note that the shift begins before the tax hikes and is very largely due to the extremely favorable economic conditions during that period, much of which (in the spikiest period) is considered in retrospect the unsustainable tech bubble. This can easily be seen because as economy faltered in the waning months of the Clinton presidency, the budget 'surpluses' vanished despite zero change in policy (this is even before the election).

[Pascal's bookie]

I'm with thetruth. The very richest individual should pay no tax at all. They should collect the tax. After all if he/she weren't trustworthy they wouldn't be rich in the first place. Also they don't need the tax money so they would only collect as much as was needed.

Obviously it's too much trouble for just one person to collect all they tax so they should delegate and just tell the next 10,000 richest people how much tax they need to get, and those people can collect the money from the people who deserve to pay it. I think I good name for the tax collecting 10,000 would be "The Dukes". We could give them ermine cloaks and redcoats.

[KCinDC]

Republican politicians would consider it a tax increase, for campaign purposes, because it can (and will, unless you believe the deficit can be eliminated in one year) cause taxes to increase. They've certainly flayed Democratic candidates for "tax increases" that looked a lot less like tax increases than Henke's legislation would.

[Sebastian Holsclaw]

Well heck, if we followed Krugman's advice and didn't increase the deficit we could fund it at the current levels of funding and we would still get the price effect on new spending.

BTW, I should repeat again that since Krugman now says that current deficits are not so bad, it provides perfect cover for using the expiring Bush tax cuts on brand new spending. Which for budgetary purposes is exactly the same as not letting them expire at all.

[Ugh]

Why would that be a tax increase?

Seb- from your description of Henke's proposal (I've not read it) , since the gov't is running a deficit in the current year, taxes would go up in the following year.

[CaseyL]

Hey! I have an idea - why don't we see what the Democrats actually do, rather than treat Krugman's column as if it was already adopted as Democratic Party policy and has already been enacted?

[Bruce Baugh]

One point of note in response to the claim that it's as much a Democratic problem as Republican: look at what budgets the Republicans submitted when in the presidency. Sure, sometimes such things were DOA. But as statements of priority they are very revealing.

[hilzoy]

Seb: the economic conditions were not, in fact, all that favorable in 1993. (Recall that Bush lost in part because the economy was deep in recession.) It was Clinton.

Part of my argument is also: the problem as a whole will not get better until we stop acting as the Republicans' enablers. ('Republicans' here = those Reps with the power to determine government spending -- politicians, not e.g. you.) In 2000, I did not believe that whatever we saved, the Republicans would spend, and that our hard-won deficit would be used several times over to justify utter irresponsibility. I now do.

I no longer wish to provide any such justification. I will not support violating PAYGO. But I will also not call for us to start preparing the ground for another Republican binge.

[Bruce Baugh]

Noisy vigorous agreement with Hilzoy here. The Republican Party can complain again about this stuff when it shows a serious commitment to fiscal responsibility. In the meantime, the Democratic Party has some civic duty to use federal revenue in ways better than saving up to let the next Republican administration throw away. Good stuff now > waste later.

[hilzoy]

Actually, on reflection, supplemented by checking, 1993 felt like recession, but the real recession was over by then (in terms of GDP growth. Still, 1993 was not so hot, especially not compared to 1992 and 1994. Data here.

Note that 1992 is when the graph in my post seems to turn, because that is when it reaches its lowest point. It did not start going up in 1992. It started going up in 2003, which is when the tax hike was.

[lily]

In response to thetruth up thread: actually soaking the rich works very well. That's one of the reasons why countries like Sweden, Norway and Holland have higher standards of living (asmby access to education, health care, living wage jobs) than we do. The transformation of Victorian England to the country it was pre-Thatcher had a lot to do with the decision to soak the rich. The myth that taxing the rich harms the economy and that benefiting the rich helps is a religious conviction that got transmuted into an econnomic theory. It has its roots in the old Puritan belief, which they got from Calvin (if I remember correctly), that God, being All-knowing, new who was saved and who wasn't and that we moratls could tell be God's chosen because the select thrived in this world and thhe rest did not. The poor and unfortunate were not of the select and the rich were. That belief lost its religious trappings but stayed with us in our persistant cultural bias against the poor and in favor of the wealthy. Actually rich people aren't any more likely to be industrious, moral, or possesed of other Puritan virtues than the poor are to be lacking, but the prejudice remains.

[lily]

Oops, lousy proofreading.

[bob mcmanus]

"Soak the rich" is good if you're a populist seeking to set off a class war"

Well a socialist in th middle of a multi-generational class war, and soak is not the verb I wuld use, but close enough.

"Paygo" crikey. In one sense, I need to see how this plays out, because I expect Bush to veto every single piece of legislation for the next two years, calling it "excessive spending" If a budget or resolution passes at all, anything, it will more on Repub terms than Democrats.

Bush and others in his party can simply flat out lie. Puts liberals at rhetorical disadvantage.

Talk talk talk. Everything, everything Democrats should do in the next two years should be aimed at gaining the Presidency and expanding majorities. If proposing good policy and trying to be reasonable and responsible works so be it. Nothing decent will get passed.
...
Long term, Repubs will play this game harder and harder until the entitlements are dead. We are in a war with deadly (Katrina and body armor) enemies and are currently suffering casualties.

I suggest nationalizing the energy and communications industries, with zero compensation, as soon as possible. Republicans sure aren't going to help on global warming, and the media must be controlled, for it certainly will not anything but opposed to decency and fairness.

[Bruce Baugh]

As a historical note, Lily, the emphasis on material prosperity as a measure of God's favor is part of the tail end of the Puritan era. The actual Puritans didn't at all expect material success as anything like guaranteed; they knew that the material world passes, and didn't think of it as God's big priority. Wealth came to matter more as their descendants lost confidence in the unseen world.

[Bernard Yomtov]

To everyone who suggests that Republicans are the problem:

A brief history of the post WWII deficit as a percentage of GDP:

The 1946 deficit was 7.6%, down from much higher numbers in the war years. Afterwards, it stayed generally in the range of 0-2%, and before 1982 went over 3% only in 1968(3.2%), 1975(3.5%), and 1976(4.1%).

In 1982 it was 3.7% and it went up from there, averaging 4.7% in the Reagan-Bush I years. Note that this average is much higher than any single Vietnam era deficit.

The deficit then began to drop sharply, with the budget in surplus in 2000 and showing only a 0.3% deficit in 2001.

It then jumped to 3.1% in 2002 and has been at Reaganesque levels since.

As for the "dot.com boom" theory, it's true the market rose sharply during the Clinton years. The S&P 500 increased at a 15.6% annual rate during his Presidency, while the rate for Reagan was only 10.9%. Still, 10.9% is pretty healthy, and the rate was much higher for most of the Reagan period. From his inauguration to the !987 crash the S&P rose at a 14.3% annual rate, not much less than the Clinton rate. Yet, plainly we did not have Clinton-type surpluses in the 1980's; rather we had deficits that were quite high in historical terms.

So perhaps those of us who suggest that "Republicans are the problem" have some evidence to support that suggestion.

[thetruth]

That's one of the reasons why countries like Sweden, Norway and Holland have higher standards of living (asmby access to education, health care, living wage jobs) than we do.

That's not what I would use to measure standard of living. Note that by two of those three measures, Cuba has a fantastic standard of living. Should we use it as a model of how to run our economy? Bob seems to think so - "I suggest nationalizing the energy and communications industries, with zero compensation, as soon as possible".

As for Sweden:

The tax burden in the Swedish economy tripled between 1950 and 1980. In 1970, when taxes were not much higher than they are in America today, Sweden's GDP per capita ranked fifth in the world. Since taxes passed 50 percent of GDP the country's overall prosperity has dwindled, and the downturn has been most dramatic in measures of the standard of living. In 1970 Sweden ranked third in OECD for individual consumption, 39 percent above OECD average. By 1995, Sweden barely beat the OECD average, ranking 14th with an individual consumption 1.4 percent above OECD average, and has been stagnant since that time

Actually rich people aren't any more likely to be industrious, moral, or possesed of other Puritan virtues than the poor

I'm not going to get into the "moral" issue, but rich people are certainly more likely to be industrious than the poor. You can get rich by working hard. Suppose we have two people who work minimum wage jobs their entire lives. One of them works 40 hours a week. The other works 45, and invests the earnings from the extra hour a day. When it is time for retirement, the second worker will be a millionaire. Now, imagine if the worker put in the effort to acquire marketable skills, and put in more hours. Wealth isn't random.

[Fledermaus]

but rich people are certainly more likely to be industrious than the poor.

No. They just have more resources. And in the case of trust fund babies, they rarely utilize them wisely.

[Keir]

You can get rich by working hard.

You can get poor by working hard.

You can get poor by working less.

You can get rich by working less.

All four statements are true, because there is a large enough sample set.

As to the distribution, if the US system is anywhere like truly meritocratic, why does economic status at birth function as relatively good indicator of economic status throughout life?

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[CaseyL]

"That's one of the reasons why countries like Sweden, Norway and Holland have higher standards of living (asmby access to education, health care, living wage jobs) than we do."

"That's not what I would use to measure standard of living."

Blimey, it isn't? What do you use, then?

[thetruth]

What do you use, then?

Real per capita income and the degree of legal protection for private property rights.

[chdb]

...so when is thetruth moving to the United Arab Emirates?

[hilzoy]

"By 1995, Sweden barely beat the OECD average, ranking 14th with an individual consumption 1.4 percent above OECD average"

Statistics from the Swedish Central Bank here. Two notes: (a) there was a big economic downturn in 1994-5. (b) Since then: some stagnation.

[Keir]

The oil fields are "Ours" because we control them, and will continue to do so until there is a stable government in Iraq that we can trust to protect US interests in the region.

Real per capita income and the degree of legal protection for private property rights.

Shorter thetruth: me! me! ME!

[lily]

Bruce, it's been years since I last took an American history class and I am prepared to believe that I remember things in a pretty generalized way. For example I used "select" when "elect' would have been a better word choice.
Also I am aware that all Puritans didn't think alike, nor did their beliefs remain static over time. Nethertheless that assumption of the inate unworthiness of the poor and the worthiness of the not-poor does go back to a branch of Christian theology. It is belief that is very handy, so it persists. During the Potato Famine the English political class used it as an excuse to let the Irish starve. In the twenties in the US it mutated into the pseudo-science of eugenics. Now it pops up as an principle of an economic theory. It wasn't good theology, or good science and it's lousy economics.

[thetruth]

...so when is thetruth moving to the United Arab Emirates?

According to the Index of Economic Freedom's 2006 Property Rights section:

"Although the UAE has a full complement of institutions for the legislative, executive and judicial branches of government," reports the Economist Intelligence Unit, "in practice all important decisions are made by the ruling families of the emirates, particularly Abu Dhabi…. While tradition dictates that these bodies take decisions in the interest of citizens, the deliberations of these institutions are not transparent or accountable. This leaves considerable scope for inefficiency as instances of incompetence, corruption or excessive red tape are hidden from public view and are rarely open to challenge." All land in Abu Dhabi, the largest of the UAE's seven emirates, is owned by the government.

Since 1) they are only middling on the criteria I put forth for standard of living, 2) standard of living is not the only thing I consider when choosing a residence, and 3) I am not currently considering a move, the answer to your question is, "Not soon, if ever".

Since the UAE must have fairly decent access to health care (its life expectancy is closing in on that of the US), may we assume that once it improves its literacy rate and enacts a nationwide living wage law, you will be packing your bags to emigrate, chdb?

Given the above rankings, and the per capita income statistics, perhaps "so when is thetruth moving to Luxembourg" might have been a more relevant question.

[Bruce Baugh]

Oh, I didn't mean to contradict you, Lily, just to add some (hopefully interesting) details.

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[243]

thetruth: The other works 45, and invests the earnings from the extra hour a day. When it is time for retirement, the second worker will be a millionaire. Now, imagine if the worker put in the effort to acquire marketable skills, and put in more hours. Wealth isn't random.

Figuring 52 hours extra work a year at constant rate of $5.15 per hour and a return on investment of 10% over inflation (or no inflation) compounded annually then it will take our enterprising young worker 60 years to achieve millionaire status, so starting work at age 15 he could retire a millionaire at age 75, presuming he didn't have the poor taste to get sick. laid off, need dental work or whatever during that time. Chances of success here seem pretty random to me.

[CaseyL]

Per capita income is an average, not a mean. One billionaire and 99 migrant laborers average out to a respectable-seeming PCI - yet there is still one vastly rich person for 99 poor ones.

Protection of private property matters more than education, healthcare, and livable wages, in how you reckon "standards of living."

And access to oil is worth more than all the lives in Iraq, you've said.

I don't think even the UAE is quite right for you. I think, actually, your time has already come and gone - over a century ago, on the battlefield of Gettysburg.

[socratic_me]

I think this is a measure of how old-fashioned I am about some things, but it always gives me the creeps when people talk about money as though it is somehow good outside of its use to improve one's life. That is, I think it terribly wrongheaded to think that money spent on making, well, MORE money, is somehow better than money spent on tawdry things like food, rent and bills.

I know the argument always goes that somehow down the line the money being invested at the top ends up making more money for people at the bottom as well, but when the argument plays out, inevitably, the shift that caused us to value money qua money over money qua "feeding the kids" means that those trying to feed the kids always get the short end of the stick.

So when I see a standard of living such as "access to education, health care, living wage jobs", all of which point directly toward actual improvement of quality of life, shot down in favor of "real per capita income and the degree of legal protection for private property rights.", which inevitably relate directly to the value of money just for sheer money, I am left a little speechless.

That sensation gets even worse when I reflect that "per capita" here of course is a measure of mean income, not median, so it always refers to more MONEY not more food for the kids and is, of course, weighted such that having a few unfettered super duper rich people improves the measure more than actually putting food on everyone's table.

And of course, we all find ourselves unsurprised that "legal protection for private property rights" always means "don't take any of MY money" even as the suggestion is floated that the poor, having so little property to spare that they would waste it on trivial things like food (which makes no new money) instead of investment (which makes tons of it) should have their property rights infringed even more in all the ways that were just claimed to be so important. Yet again, the money abstraction rears its ugly head, and actual property falls to the wayside.

Money is the new property. If the poor cannot understand that, let them eat change.

[socratic_me]

Casey,

Average and Mean are usually used coextensively. I think what you mean there is :
"Per capita income is an average, not a median."

[hilzoy]

I find inherited wealth completely unrelated to hard work, etc., but perhaps that's just me. Likewise, the many very significant benefits of growing up well off. Some countries take steps to create a more level playing field, so that equality of opportunity can genuinely be everyone's birthright. Others, well, not so much.

[KCinDC]

243, thetruth said an extra hour of work per day, not per week, so your calculation is off by a factor of 5.

Hilzoy, you're not taking into account all the hard work those pre-conception souls put in, competing to get into the really well-positioned wombs. Just because you've forgotten about the competition you went through before you were conceived doesn't mean it didn't happen.

[thetruth]

Figuring 52 hours extra work a year at constant rate of $5.15 per hour and a return on investment of 10% over inflation

The example I gave was an extra hour of work per workday (5 days a week). Sorry if that was unclear. Specifically I calculated 260 hours of work at $5.15 an hour per year, invested at the end of the year in a small company stock fund in a tax deferred account at $15 per transaction netting an annual investment of $1,324. I assumed a 12% nominal return and 3% inflation, which are in the neighborhood of long term (70 year or so) averages for small company stocks.

I assumed the worker started working at age 18 (college would be extremely inefficient if you are going to spend your whole life working a minimum wage job) and retired at 65. The calculator I used gave a an inflation adjusted total of $1,132,196.

presuming he didn't have the poor taste to get sick. laid off, need dental work or whatever during that time

The worker who didn't work an extra hour would have those issues also, and the worker who did work an extra hour would have exactly the same resources available to deal with them if he left his savings alone.

And access to oil is worth more than all the lives in Iraq, you've said.

Not just access to the oil. Ability to prevent others from controlling its access or disrupting its supply routes. Our nation's interest and ability to remain the sole hyperpower remain linked to those abilities unless and until cheap and reliable alternative sources of energy become available.

I find inherited wealth completely unrelated to hard work, etc.

Inherited wealth is related (usually) to the hard work of the person who originally created that wealth, and the person who originally created it should be free to determine what is done with his property. If the inheritors do not continue their benefactor's prudence (they often don't), the wealth will be gone within a few generations anyway.

One billionaire and 99 migrant laborers average out to a respectable-seeming PCI - yet there is still one vastly rich person for 99 poor ones.

So? As long as we are talking about a country with a strong legal system to protect everyone's rights, what is wrong if one person ends up more successful than others? The one billionaire could either keep his wealth to himself until he died, and left it to others, or, as is more common with billionaires, he could decide how to charitable distribute his life's work in ways that reflects his values. Maybe build some libraries or something.

[243]

theTruth: Specifically I calculated 260 hours of work at $5.15 an hour per year, invested at the end of the year in a small company stock fund in a tax deferred account at $15 per transaction netting an annual investment of $1,324. I assumed a 12% nominal return and 3% inflation, which are in the neighborhood of long term (70 year or so) averages for small company stocks.

Ok, I screwed up. and using the rest of my figures the Million mark is reached after 46 years and not 60.

I'm really curious about the 12% return though. Do most small company stocks actually have a 70 year life span. If this is a normally expected rate of return for investments then why are bonds etc. well under that rate.

The worker who didn't work an extra hour would have those issues also, and the worker who did work an extra hour would have exactly the same resources available to deal with them if he left his savings alone.

Regarding medical care, there is modest medical care available for the indigent. Not being indigent our noble worker would need to spend his own funds to receive treatment, probably for better treatment, until his funds ran out. Basically in our current society he would have no choice in leaving his savings alone. Perhaps with some sort of universal healthcare he could retain his savings, but in the case of serious illness, he can most likely kiss his savings goodbye. I don't know what the odds of living till 65 or so without serious medical expenses are, but this needs to factored.

[thetruth]

Do most small company stocks actually have a 70 year life span.

Nope. The majority of them will not make it anywhere near that long. But some of them will be the next Microsoft, Wal-Mart or Exxon. The net result after taking that "survivor bias" into account is, according to what I read, in the range I cited over long periods of time.

If this is a normally expected rate of return for investments then why are bonds etc. well under that rate.

Risk. A bond from the US government (or a large, established company with manageable debt) has a very predictable return. If you buy a 2 year US Treasury yielding 4.71% you almost certainly will earn a 4.71% annualized nominal return. If you buy stock in a small company and hold it for 2 years, it very well may go bankrupt, and it very well may double in value.

There was a book written in the late 1990s called "Dow 36,000" that argued that since stocks, on average, had much higher returns than bonds, they had been undervalued for decades, and even given the high valuations stocks had at the time, a huge increase was likely in the near term.

Events provided evidence that the argument was fallacious. Risk matters.

For our hypothetical minimum wage worker, the risk is acceptable, because of the long time period over which he will be continually adding to his investments.

Regarding medical care, there is modest medical care available for the indigent. Not being indigent our noble worker would need to spend his own funds to receive treatment, probably for better treatment, until his funds ran out.

So, in the worst case, the worker will have funds available that may well save his life, and that will prevent him from becoming a financial burden on the rest of us, and in most cases, he will retire with funds that will enable him, even if he moves his money into more conservative investments upon retirement, to live with an income several times higher than that he had while working. And in a better than expected, but still quite plausible case, the minimum wage worker will retire with an income greater than 90% or so of Americans (SWAG), and greater than 99.5% or so of the people on the planet Earth. What exactly is the downside again?

[SomeOtherDude]

I don't think even the UAE is quite right for you. I think, actually, your time has already come and gone - over a century ago, on the battlefield of Gettysburg.

Posted by: CaseyL | December 22, 2006 at 11:20 PM

I'm stealing that one.

[Jesurgislac]

I see thetruth managed to wreck yet another thread. Curiously enough, the well-known acronym DNFTT also applies to DNFtt. This may not be coincidental.

[liberal japonicus]

Jes, you've been had. I claim no great insight, but I found it interesting that it was easy to call bs when the talk was digging wells or pay for teachers, but when it got to economic discussion, it became a lot less clear.

[Jesurgislac]

Jes, you've been had.

No... I think not. After all, I figured it out responding to the first comment thetruth made... and thereafter, responded no more.

I claim no great insight, but I found it interesting that it was easy to call bs when the talk was digging wells or pay for teachers, but when it got to economic discussion, it became a lot less clear.

I find it interesting that Sebastian Holsclaw and I, who normally have nothing else in common, both evidently have BS detectors advanced beyond what anyone else on this blog is using. Possibly it's the gay gene... :-D

[hilzoy]

It was dragging Sweden into it that got me.

Pwned!

[OCSteve]

I suggest nationalizing the energy and communications industries, with zero compensation, as soon as possible. Republicans sure aren't going to help on global warming, and the media must be controlled, for it certainly will not anything but opposed to decency and fairness.

I honestly can’t tell if that is a serious comment or snark. I’m hoping for snark of course…

[dmbeaster]

Sebastian:

To everyone who suggests that Republicans are the problem: I'm sorry, but ...

Uh, simple facts; Carter years, minimal deficits despite stinky economy; Reagan and Bush I years -- record deficit spending in good and bad economic years; Clinton years, decreasing deficits every year resulting in surplus whether good or bad economics; Bush II years -- record deficit spending in good and bad economic years.

A thirty year record that correlates exactly to who controls the executive. Sorry -- if you don't see cause and effect, you cannot be persuaded by facts.

Second canard -- Clinton budget record due to "luck of the economy." Sorry -- Clinton tax inxcreases (voted against by every Republican) was the critical factor -- without it, no deficit reduction. Without question, the extent of the reduction was helped by a positive economy.

Reich was relentless as a deficit hawk -- Clinton had the best monetary policy due to his diligence of any president in memory. Then we get Bush II and "Reagan proved deficits don't matter" per Cheney. Pay-go was also a key tool during the Clinton years to reign in spending despite running budget surpluses. The party who scrapped it once they got into power - the Republicans.

Your party absolutely stinks when it comes to basic fiscal discipline, and has a solid record of doing so at every opportunity it gets. Democrats are not saints, but there is absolutely no parallel.

[hilzoy]

Oh, and Seb: about 'using Bush tax cuts on new spending': first, the Bush tax cuts are set to expire, so I don't think we'd get much PAYGO credit from eliminating them. Second, there's always the little matter of the AMT to consider. It counts as a monstrous tax cut. So we don't have much room to play with, even if we repeal the Bush tax cuts tomorrow.

[cleek]

Specifically I calculated 260 hours of work at $5.15 an hour per year

chances are that worker is going to get in a salaried job where the actual number of hours worked is disconnected from his actual income.

i can work 40 hours, 50, 60, 70 hours a week and still get the same salary. i can even work 10 hours a week, as long as i'm in the office, and still get paid the same amount, if my manager can't find anything for me to do that week.

tell me, how many millionaires are working for hourly wages?

[Bruce Baugh]

One other thing that occurs to me in reviewing the budget data: the Democrats used to have problems with sensible budgeting. But that changed significantly under Carter, and then lots more under Clinton, and no Democrat with any shot of being elected shows signs of wanting to return to the bad old days. In the same period, the Republicans went from okay to profoundly awful, and as nearly asd I can tell, no voice of serious responsibility is anywhere close to the centers of party power now. Judging changes in trends like that seems to me very important - we have to allow room for surprises both good and bad, but we can also say "if this continues..." and form some judgments about what to do while we're waiting for bettr news.

[OCSteve]

One point I have not seen discussed is defense spending. To kind of flip this argument around, the point can be made that Republican administrations have to increase defense spending and rebuild the military after the neglect of the previous Democratic administration.

The most obvious example of this is Carter/Reagan. To be fair, there was a large decrease in defense spending under Nixon and Ford, but that was primarily due to the end of the Vietnam War. Even then, the Democrat controlled congress cut budget requests.

Carter ran on a platform of cutting defense spending. Even while there was some minor increase in the Pentagon’s budget under Carter, he scrapped key weapons programs, and one of his first acts in office was to cut $6 billion from the defense budget.

We all know what happened to defense spending under Reagan.

Bush 41 had already reduced defense spending by a fair amount (based on the defense budget he inherited from RR). Part of that was due to the end of the Cold War, but part of it was due to the Democrat Controlled congress.

Among Clinton’s first official acts was proposing deep cuts in defense spending. He had to backtrack from his original plan and wasn’t able to cut as deeply as he wanted, and Congress increased defense spending beyond what he requested. But the effect on the military was devastating.

By Clinton’s last year in office the joint chiefs had to go to Congress and beg for funding>:

Testifying before the Senate and House Armed Services Committees, the Joint Chiefs of Staff presented a unified front, saying budget cuts in the mid 1990s "mortgaged the future" of the military.
…
"We have diverted soldiers from other organizations to fill our high-priority, war-fighting formations," said Army Chief of Staff Gen. Eric Shinseki. "Second, we have, for years, mortgaged our future readiness -- this modernization effort -- in order to assure that our soldiers had, in the near-term, what it takes to fight and win decisively."

Now Bush 43 and the WoT. I’m not going to criticize his defense budgets (accountability for how the money is spent is another question). Were we part ways is on non-defense related discretionary spending. When RR increased defense spending he at least partially offset that with cuts in non-defense discretionary spending. My problem with Bush and the last Congress is that they increased non-defense discretionary spending as much or more than defense spending.

[OCSteve]

Oops - wrong thread, that was meant for Hilzoy's post on the same topic.

[Brad DeLong]

Sebastian--whether by accident or by design--has missed the significance of this passage in Krugman's op-ed: "Nancy Pelosi, the incoming House speaker, has promised to restore the "pay-as-you-go" rule that the Republicans tossed aside in the Bush years. This rule would basically prevent Congress from passing budgets that increase the deficit. I'm for pay-as-you-go. The question, however, is whether to go further..."

Pelosi's renewed endorsement of PAYGO is very important. Restoring pay-as-you-go means that the Bush tax cuts expire at the end of this decade--unless, that is, some coalition finds sufficient spending reductions relative to the current baseline spending path to pay for an extension of the tax cuts.

The embrace of pay-as-you-go orders up a $300 billion rise in taxes at the end of this decade. That's a significant amount of deficit reduction all by itself, and a very significant change from Bush administration idiocy.

This is a post that he simply should not have written--not, at least, until the Democratic legislators drop their commitment to PAYGO.

[bob mcmanus]

"I honestly can’t tell if that is a serious comment or snark. I’m hoping for snark of course…"

Heck, when one Party follows Friedman/Norquist, and the so-called "liberal" Party is somewhere between Dirksen and Reagan, that leaves me at least 60% of the political spectrum in which to play. I can say anything.

Democrat Party:"We promise spending restraint, balanced budgets, and tax cuts with matching offsets under PAYGO." I feel like hugging a Walton.

I would start singing L'Internationale but that might be snark.

[bob mcmanus]

Let me see, political economics:

Communism = 10

Socialism = 9

Social Democracy = 8

Strong Welfare state(Sweden/France) = 7

50/60s America, with 70+ percent marginal rates, public utilities, huge gov't projects like Highway System and Medicare = 6

80/90s America with the beginning of inequailty, emphasis on upward distribution, identity politics, tax cuts, spending restraints, military hardware, media controlled by right = 5

Yup. Political discourse is limited to the 0-4 range.

Brad DeLong showed up to reassure Sebastien Holsclaw? Golly.

[Tim]

Call me a cynic, but the day after gasoline prices hit $6.00/gal the oilcos will probably be nationalized. Who's going to go to the wall for them, on either the right or the left?

[cleek]

but the day after gasoline prices hit $6.00/gal the oilcos will probably be nationalized.

because ExxonMobil will finally be able to buy the US Govt outright, due to their 45th year in a row of record-setting profits.

[Randolph Fritz]

Sebastian, would you have the Democrats follow your nice little theories and lose power again to someone who is likely to expand the deficit more than Reagan and both Bushes?

Let me gently point out that the floating tax is the sort of policy proposal that comes from people who don't know much about economics. Problem is, some kinds of government spending rise during recessions; unemployment payments and such. So the floating tax would have the effect of automatically raising taxes during recessions, which is a Really Bad Idea.

[bago]

This is brilliant. Add a direct signalling mechanism to the cost of government, and you restore the data flow and eliminate the possibility of deficits.

This eliminates all kinds of rent seeking and tax shelters, hiding in the complexity of the code. I love it.

Best of all, any Hayekians would be forced to love it, essentially getting the entire Chicago school on your side, meaning you have co-opted any serious academic opposition.

[TaxAxe]

When I started this, I didn't intend to, but I have read every one of these posts. And now I think I should explain.
I have realised over the years, the importance of the Gold Standard, and why it was abandoned. That said, I apologise for being so rude as to comment on American money matters. But some things about this discussion are fascinating and American money is a hot topic at the moment.
I have a Google Alert, "Money Politics Taxation", just about the whole of World Events, are contained in those three words.
There is a move going on, to establish a world order. And the way things are looking America is going to lose out. It will cost you dear. And you being our staunch ally, that is not in our interest.
Far be it for me to try to tell you what to do, but I would point out that in your back yard, there does seem to be a great deal of discussion about Taxation and Budget Deficits. But there is another voice in amongst that academic discourse and analysis.
This voice is asking, "In this world of Human Rights, why is it that the Taxpayer has no Rights?" It is now a moral and legal obligation of every working man to pay an increased Tax, just to support not only those that are Physically or Mentally unable to support themselves, but anyone claiming to need support.
The True question everyone should be asking, is not the extent or percentage of Taxation being taken. The question should be, Why are the Politicians Spending so much? And if I may be so bold, I would suggest you cut back on overseas aid. So much of it seems to be attached to "sticky fingers". Enough now, before I go too far.
A Very Merry Christmas and a Very Prosperous New Year to you All.Regards, ATF.

[dmbeaster]

One point I have not seen discussed is defense spending. To kind of flip this argument around, the point can be made that Republican administrations have to increase defense spending and rebuild the military after the neglect of the previous Democratic administration.

This assumes that our outrageous level of defense spending is somehow appropriate, and that Reagan's extremely wasteful defense spending was useful or even needed. My favorite example -- billions for battleships.

Seems like Bush II did just fine with that military force funded by Clinton for eight years. The 2003 wars were fought fundamentally by the military resulting from the Clinton era.

We have already fallen victim to the fate Eisenhower warned about -- the military-industrial complex runs the show. We basically outspend the world on military matters -- it cannot last.

[Andrew]

Seems like Bush II did just fine with that military force funded by Clinton for eight years.

Isn't this at odds with the fact we're losing in Iraq and (arguably) Afghanistan?

[liberal japonicus]

Andrew, you might want to be careful where you score your points. It sounds like you are suggesting that we are losing because of flaws in the military, not because of decisions made by the administration. Remember that if a liberal were to say that it was the military's fault, s/he would be branded as a loser/defeatist in a heartbeat.

[Andrew]

I think there's plenty of blame to go around regarding our failures in the Iraq and Afghanistan. But as a profession soldier, it's hard for me to argue that we're losing (or drawing) two wars without conceding that we bear some share of the blame.

Although, rereading the quote, I'm not sure where you get the idea I'm suggesting we're losing because of flaws in the military, though as I noted above, I do think that is a factor. But my point was simply that arguing that President Bush has done 'just fine' with the military bequeathed him by President Clinton seems wholly at odds with the facts on the ground. Unless I have completely misread dmbeaster and he is of the opinion we're doing just fine in Iraq and Afghanistan.

And, in the spirit of the season, perhaps we could worry less about 'scoring points'. I don't consider this a game.

[liberal japonicus]

Apologies if I misread your quote or the intention behind it. I'd suggest that framing it as a question places the onus on the person questioned and a statement might be better. And, if you feel that the military does share a portion of the blame, how precisely do you accrue such blame to Clinton as opposed to attempts to undercut the authority of Clinton as commander in chief? (a google brings up this)

I also feel a bit noting this to you, but I also have to think that this notion of 'bequeathing' the armed forces on the next administration, while a convenient metaphor, treats the military as an hand me down Chevy rather than the complex entity that it is and treating the military in this manner tends to devalue the institution.

[Andrew]

I intended to place the onus on dmbeaster. He made the claim that Bush did just fine with the military created by Clinton. It doesn't seem unfair to ask if he really thinks that's the case. Or do you feel dmbeaster meant something different from his quote?

[LizardBreath]

My understanding was that the Army was in superb shape at the beginning of the Bush administration for the purpose of fighting high intensity wars. It wasn't big enough or well trained for the purpose of a counter-insurgency the size of Iraq. (Correct me if I'm wrong about either part of this -- you're certainly more knowledgable about it than I am.)

So dmbeaster was, I think, correct to argue with OCSteve's assertion that Clinton had wrecked our military, although he's certainly wrong that Bush is doing fine with the superb military he was handed.

[Andrew]

Hm. I don't see where OCSteve claimed President Clinton 'wrecked' our military. He does note that President Clinton's defense budgets harmed the Army's modernization efforts, but that is not at odds with dmbeaster's claim. The quote alleges that readiness was maintained at the cost of modernization. I don't think that's particularly controversial.

[Gary Farber]

TaxAxe, I'm afraid we're confiscating your caps key for 48 hours, until you've proven you can type responsibly with it.

You can pick it up at the office after passing a 200-word test the day after tomorrow.

[Bruce Baugh]

The results as I understand them suggest that we did in fact have in 2002 the military necessary to defend our country's vital interests - in this case, responding to a terrorist attack and thoroughly routing out the perpetrators. We didn't have the military for an opportunistic, immoral war of aggression against a nation not threatening us, but I don't necessarily see that as a disadvantage. Legitimate purpose and available resources seem to have matched pretty well.

[Bruce Baugh]

Also, Gary wins my admiration for the day for a much funnier and more concise response than I'd been able to think of.

[liberal japonicus]

Andrew, I think the OCSteve quote is here

One point I have not seen discussed is defense spending. To kind of flip this argument around, the point can be made that Republican administrations have to increase defense spending and rebuild the military after the neglect of the previous Democratic administration.

While dm might be guilty of 'sexing up' the reference, the underlying notion is of Republicans administrations having to repair Democratic mistakes. The onus should be on determining whether or not that is a fair assessment, not with coming up with an alternative scenario that dm has to defend. This is what I was thinking of when I referred to 'scoring points', not to the idea that you were unserious about the discussion.

[KCinDC]

Gary, you're being unfair to TaxAxe, who for all we know is commenting from the 18th century.

[Sebastian Holsclaw]

"The embrace of pay-as-you-go orders up a $300 billion rise in taxes at the end of this decade. That's a significant amount of deficit reduction all by itself, and a very significant change from Bush administration idiocy."

I'm afraid I have to strongly disagree. If you immediately spend that money--which PAYGO does NOT stop--you have improved the deficit situation not one single bit. And that is precisely what Krugman is suggesting. If you have heavy debt and you increase your income by 100,000 per year, you haven't helped your situation if you immediately commit to 100,000 in additional annual spending.

[Slartibartfast]

Hopefully TaxAxe is no partner in crime to the "Axe The Tax" guy.

Merry Christmas to all. I'm somewhere near Atlanta, enjoying the arctic weather and a Young's Oatmeal Stout.