The EU finds itself between Scylla and Charybdis over the parlous state of the Greek economy, with no graceful exit plan. Portugal, Italy and Ireland lag not much further behind. Paying down mushrooming public debt will require the kind of spending cuts that typically lead to social unrest, but failing to do so jeopardizes the single monetary policy upon which the euro zone is founded.
This is both directly and indirectly an issue for the US as well:
The U.S. must press Europe to act in a way that supports the broader global economy. We should encourage an orderly resolution to problems in Europe, and press the Europeans to bring in the IMF in an appropriate fashion. The U.S. must stop relying on Europe to be “careful,” and instead cooperate assertively to help reduce the risk of further collapse in Europe.
American leaders must also address problems at home. Unless and until the U.S. puts in place a plausible process to take its own government debt off an explosive path—for example, through an independent but Congress-backed fiscal commission of some kind, with everything on the table—we are vulnerable to the same kind of debt dynamics that now plague parts of Europe.
This is not a call for immediate fiscal austerity; that is the path back to the 1930s. But no country can go on issuing your debt without consequence when the buyers declare, “Enough!” In the case of the U.K. and the U.S., the macro situation remains stable only as long as foreigners buy and hold our government debt. This is a major economic and national security risk.
Financial markets are telling us the euro zone is under threat, but the real message is much broader: Unsustainable debt dynamics can undermine us all.
“Everything on the table” means both higher and broader taxation, to be sure – but it also means touching previously untouchable mandatory spending accounts on popular middle class entitlement programs such as Social Security, Medicare and Medicaid. We are simply past the point, pace Paul Krugman, where we can just throw another trillion at it.
Not and maintain our sovereignty.
The party’s over – time to get back to work.
Even with these clear warnings, Obama wants keep expanding entitlements. SocSec recently became insolvent, taking in less than expending, about 7 years ahead of schedule. Lets keep piling the debt on.
“Obama says new budget rules will rein in spending”
What there’s going to be a rule that he can’t hold a pen?
The Party’s over indeed. I’ve always felt that the social welfare state, which is in effect and practice literally a ponzi scheme and would be illegal for a private company to try to pursue, has been the voters throwing themselves a party which none of them intend to pay for.
There’s some massive hurt and real change coming down the pipeline. This will involve many of the “too big to fail” companies being allowed to go under, i.e. Union pension and health care schemes with money losing front companies like GM attached, and banks and investment firms that over-leveraged themselves and made too many bad debt investments. Social Security, Medicare and Medicaid will have to be drastically overhauled. When Social Security was first implemented you received benefits at 65 and the average life expectancy was 62. There’ll be little choice but to reduce benefits and raise significantly the age at which you can start drawing them.
We’ve tried to avoid the necessary creative destruction and it’s short term hurt that keeps an economy healthy for too long now by kicking the can down the road for hopefully “someone else” to deal with through maintaining inevitably unsustainable institutions and propping up failing companies. This will only make the eventual correction worse rather than soften the blow. In the past year our attempts to kick the can down the road have given us debt on a massive scale and failed to resolve any of the underlying problems, which will make the pain that much worse with the specter of unheard of inflation now added to mix of problems looming over heads like the sword of Damocles. Thanks Obama. And the Democrats want to socialize health care, digging the hole deeper and blowing away the relationship between citizen and government the founders intended??? They’re so far off the mark it’s not funny but scary.
I got mine, Jack–and most of it is overseas “vacationing” on various islands. Anyone so foolish as to trust their lives to ANY government with the power to print fiat money at will almost deserves what they get. I say “almost” because, like most of us, until very recently I was in no position to escape; locked, as it were, inextricably linked within the national economy by dint of the very fact it is the national economy which provides us our lively-hoods during the “boost phase” of our lives/careers. And, of course, there is nothing that can be done (aside from attempting to elect representatives that have even a nodding acquaintance with business & finance) until one reaches a critical mass (as it were) financially such that one assumes escape velocity. And even then most of us are not truly free of all hazards. Unless one is willing to forever become an expatriate overseas–a “man without a country” in effect–we are tethered to the land of our birth by familial, social and cultural ties–even by inertia itself in most instances. So although the crew manning the Ship of State may be a ship of fools, we are all along for the ride in a ship heading directly for the financial shoals and rocks. Mebee time for a political mutiny to take control of the wheelhouse. Lets send a msg by starting a campaign for everyone to mail Obama a set of ball bearings. No note attached–just the steelies. Wonder what the reaction would be if a few million sets of THOSE things showed up on the WH doorstep?
(could also be interpreted as “greasing the skids”
)
I prefer the theme as “An American President at war with Americans” myself.
Boy! Ain’t that the sad and sorry truth.
VX we can run anywhere you want, but this is one even we won’t be able to escape. When the US of A goes, it will take the rest with it. You’re not going to be able to run far enough. Unless, of course, you’ve discovered faster than Light travel and are holding out on us.
STOP THE SPENDING!
Exception- Give generously to candidates who seem to genuinely grasp the seriousness of our situation and are willing to set it right. Regardless of what state they are in.
Club for Growth feeds a lot of good recommendations on good folks in winnable races, so you don’t waste money tilting at windmills.
[...] Lex (via Gerard) has Greek Lessons Financial markets are telling us the euro zone is under threat, but the real message is much [...]
As a fellow boat-schooler (class of ’63), I am a regular reader of Lex’s blog, which I find informative and enjoyable – although I believe my political leanings are far to the left of Lex and most of his readers. I am struck enough by comments on this article to point out a set of facts that I believe are relevant:
– During the years 2000-2008, the US government took in as Social Security receipts a bit more than $1.5 trillion more than it paid out in Social Security payments.
– The tax cut passed under the Bush administration reduced taxes over the past decade by $1.35 trillion, with most of the reduced taxes going to the two upper brackets.
Now, with a recognition that we face deficits, the suggested response is to fix (reduce) Social Security.
Yes, it’s demographics. The baby boomers will start retiring shortly and our entitlement programs will become insolvent unless there is some unprecedentedly large economic growth / productivity improvement so we can support more retirees with fewer workers.
And to be honest, taxes will likely have to be raised too.
Gary, while likely true remember Social Security, as well as Medicare, Medicaid, and most other expenses, while taxed under different guises the monies collected go into the general fund, not any sort of special fund. Further, since the creation of the 10% tax bracket, change in the AMT levels, and adjustments of the child tax credit had as much if not more effect on revenues as did the Bush tax cuts (economic growth rates more than doubled after the 2003 cuts, with the tax code becoming even more progressive in that it shifted a greater portion of the tax burden to the wealthier) I think it’s safe to say the problems with Social Security cannot be laid solely upon a tax cut enacted in 2003.
This is a problem based not on tax code but on demographics. Put simply, there’s more of you (class of ’63) and fewer of me (class of ’90), you’re living longer than is fiscally convenient and government has made you a promise my labor has to cash. Luckily for us all, our elected leaders have been kicking this can down the road for well over 40 years hoping somebody else gets to take the heat for fixing it when you retire.
That time is now upon us.
There have been calls for reform in the past as various administrations and individuals have looked at the trends and noticed the long-term problem. They have been, invariably, demonized as wanting Grandma to subsist upon Alpo rather than her government-certified 2% return on investment that ensures she continues living the high life of a fixed income earner in an inflationary world.
The danger here is that increasing taxes does not invariably increase revenues, as money and income are shifted to less-taxed places or forms. Likewise, lowering taxes does not invariably reduce revenues as a broader and more robust economy increases the overall sum siphoned off even as the rates are kept the same or lowered.
What one really wants to avoid is a case of high taxation and high social welfare that, combined, makes productive pursuits not worth the effort.
http://www.dailymail.co.uk/news/article-541598/Meet-families-ones-worked-THREE-generations–dont-care.html
Yes, they are an extreme example. On the other hand, ten people in a three-bedroom home is hardly uncommon now, and was fairly commonplace not that long ago in our own history. Large families, small homes, the only real difference between the folks mentioned in the Daily Mail article and my own parents and many of my neighbors is that my parents weren’t owed a house, or chits for food and clothing and medical expenses. They had an incentive to work, to take economic risks in the hopes of reaping a reward. Tax the small businesses too much, tax those folks who have rare skills and earn more than their menial labor counterparts, and you might just find they quit producing, quit taking those risks, quit putting forth the extra effort, and live off the increasingly-smaller number who do.
You might also find that the more you remove from the tax rolls the more likely they are to vote for promises of other people’s money, which works great for re-election until there’s no more money to direct their way as the Europeans are starting to discover.
Somebody once opined, with respect to the economy, that a rising tide lifts all boats. I’d further the analogy by offering that a single, narrow wave will not lift those boats, but will in fact break their keels. Finding that trade-off between reward for work and revenue for the fed is a delicate act.
– Max
Ahhh, the Huffington Post crowd checks in with their well rehearsed talking points. Allow the injection of a little reality.
1. The hated Bush tax cuts resulted in federal tax revenues of 18.4% (taking 2006 as the mid point). That is ABOVE the 20, 40 and 60 yr. historical averages.
2. The increased child tax credit, marriage penalty relief, 10 percent bracket, and AMT fix had a combined budgetary effect of $114B in 2007 — all not “tax cuts for the wealthy”. The capital gains, dividends, and estate tax cuts — tax cuts for “the wealthy” — amounted to $36B. Individual income tax relief benefited all families with taxable incomes over $62,000. If $62K is “rich”, well, that is rich.
3. The Bush tax cuts resulted in the top tiers actually shouldering MORE of the total tax burden, In 2004 (first year following the implementation of both cuts), the share paid by the top quintile rose to 67.1% (up from 66.6% in 2000). At the same time, the bottom 40%’s share dipped from 5.9% to 5.4%.
4. To propose that tax cuts “cost”, presumes that tax policy has no effect on the economy. It is hilarious to hear the same people that will argue FOR raising cigarette taxes to hinder smoking, purport that raising taxes on work and investment has no effect on those activities.
Tax revenues are a function of two variables: tax rates AND the tax base. New York has shown the disastrous effects of focusing government revenue streams on a narrow band of the tax paying population. We don’t need to replicate that on a national basis.
I know, VX, I know…
Scott,
Not truly surprising that the share of income taxes paid by those at the top went up since 2003. The share of national income by those at the top went up markedly. For example, those in the top 1 percent of national income in 2003 earned about 17.5% of the total national income. That figure rose to 19.8% in 2004, to 21.9% in 2005, to 22.8% in 2006, and to 23.5% in 2007. Not surprising that their share of the national income tax also went up.
It is certainly true that too high a tax rate can discourage initiative. But, those of us a bit older remember when upper bracket tax rates were far higher – for example, in the first half of the 60s, the top tax bracket on regular income was 91%. In the last half of that decade, the top rate dropped to 70%, then to 77%. I don’t recall that the 60s was a decade lacking in American ingenuity and accomplishment. Looking back at those rates, it is difficult for me to believe that a return of the top rate from its current 35% to the 38.6% that existed prior to the Bush tax cuts would stifle financial initiative.
Thanks for your thoughts, however. Difficult to imagine that either of us is likely to significantly affect the others economic views, I suppose. :>)
Gary-C/
Always glad to see my “elders” around here. Makes this class of ’66 guy feel young (ish) again.
You mention that you believe a return to the higher marginal rates wouldn’t necessarily be deleterious, but left unmentioned the fact that those high marginal rates applied to only a tiny fraction of all income due to the numerous itemized deductions then allowed–interest on auto loans, credit cards, medical expenses above 1% AGI, etc. The quid pro quo for lowering rates was the expansion of the taxable base by eliminating the vast majority of such itemized deductions. Were rates to be raised again to the levels you suggest without restoration of those previously eliminated numerous deductions the results would be little short of disasterous to the middle-income taxpayer.
Gary-C:
I have a reply to you @9:05 trapped by the moderation trolls. Come back later, if would be so kind…
What the top rate is, is really meaningless from a revenue standpoint, since it applies to a microcosm. That 90% 1963 rate would only apply to incomes over $2,800,000 in 2009 dollars — Barbra Streisand and Derek Jeter money. The growth in the economy isn’t fueled by rock stars and five year pro sports careers — it is fueled by the guy who owns three gas stations, and wonders if he should take the risk to open a fourth. He won’t see $2.8M in a single year in his lifetime. And Derek Jeter’s money won’t employ a single person — but the gas station owner’s decision will employ construction workers to build, and workers to staff a new station. And if you want to raise his rates, while capping his deductions, is it so far fetched that he will decide “Nope — not worth it”? The Kennedy tax cuts helped to trigger the longest economic expansion in the history of the United States, up to that time. Between 1961 and 1968, the inflation-adjusted economy expanded by more than 42 percent. Think there was no cause and effect?
That’s on the micro level — on the macro level, do taxes exist to raise necessary revenue, or to extract “economic justice”? Because if you really want to raise money to fund the activities of government, as New York and California have learned, you don’t target a narrow band at the top — you create a broad based economy that raises total revenues, across all income strata. We could probably have a long discussion on that one. But I’d start with making our schools as good as Finland’s. According to an OECD study, raising US school performance to Finnish levels would produce economic benefits of $103B per year — in perpetuity. And they spend LESS per student. Aren’t our teachers as good as Finland’s?
But if you are looking for “economic justice”, then we really part ways. That’s like saying it isn’t fair that Brad Pitt is better looking than me. So we should disfigure him so I feel better?
All of this needs to start at the TOP….the Middle Class has been taking it on the chin too long…EXAMPLE – I was notified that ALL homeowners will need Flood insurance, regardless of where you live….Agent said that will be an addtional $500 on my policy – Add into that a local tax increase of $300 and we are almost at $800 more than last year’s tab to keep the house solvent…
I was laid off for 5 months last year and the only offer i got on any consequence was working for a military contractor in AFGHN…so that’s where I am…HOW long I will need ot be here is a topic of much debate between me and the missus…looks like right now it could wind up being a 2-5 year plan of me working overseas in a WARZONE to pay for the basics for the family…How F$%CKED UP is that??? I already did my service with 14 years as a SEABEE and now i’ll have to make it another bunch of years away from home to keep the status quo…not that I’m complaingin as it beat the SHITE out of unemployment but GEEZ…
Worst day here wasn’t Thanksgiving or Christmas…it wa smy daughter’s birthday – that day kicked my ARSE….61 days until R&R…can’t come quick enough…
Pardon me for picking on you, SK1, but you are a great example of how a lot of this makes no sense.
Who notified you that you need flood insurance? Is it *your* home or not? Shouldn’t you be the one to decide if you need flood insurance or not? You’ve bought a home and some land and you’ve given somebody else the right to tell you what you can do with it? Where were they with their part of the mortgage payment and the fees for the home inspection? They want a say, shouldn’t they pay?
Same on the local tax increase. Unemployment is at 10% nominally, your local government raised your taxes $300 on a home that has likely gone down in value, now you’re in Trashcanistan because that’s where the jobs are and meanwhile your local government is getting raises, cost-of-living increases, and just passing it on to you because you have the audacity to have property.
Why isn’t your local government cutting staff? Or reducing pay? Or cutting services? How are they justifying that new $300 they want from you?
That, my friend, is the problem. $800/year in the grand scheme of things isn’t that big a deal — it’s the equivalent of having a timing belt break on your daily driver, or replacing the living room carpet. But your timing belt breaks once every ten years or so, it’s not an annual expense. The carpet lasts for 15 years. Somewhere along the line your local government decided they needed that $800 from you, and there’s not a darned thing you can do about it, and they’re coming back for it again next year.
Friend, while I know there’s little you can do about it, in my opinion you’re in the wrong country fighting the wrong enemy when it comes to your finances.
– Max
USAA tells me I need flood insurance, because Hillsborough County says I’m in a flood plain, and Florida law requires houses in flood plains to have flood insurance. When I bought the house I wasn’t in a flood plain. The flood plain ends at my backyard line, but the farmer behind me lives on equally flat land equidistant from water. They just figured I’m a middle-class guy in a planned development and would just pony up the extra, science and geography be damned.
If you have USAA property insurance in Florida, go over it with a fine-tooth comb and you’ll probably find you’ve been “opted in” on some neat fees by the state, which USAA is in no rush to tell you about. You have to opt out in writing, as well, not just with a phone call.
My house went through five hurricanes with me in it, not a lick of damage, not a hint of flooding. But strangely enough, after all the insurance companies fled Florida, the flood maps got redrawn to generate a lot of new revenue for the remaining companies. USAA has sent threatening letters if I don’t get flood insurance, but no one has made me do anything about it and I intend to keep on ignoring the law until someone tries to enforce it on me, a US military member residing overseas.
And I’m way upside down in my mortgage, with some pittance of a tax reduction (no houses are selling in my neighborhood so there’s no real way of reckoning how much value they’ve lost). If I had the nads I’d walk away from the mortgage. I don’t care about buying another property in the next decade, and by the time the bank stopped begging me to pay them anything, please, anything, I’d have another $20,000 in my pocket.
Yeah, it stinks.
Like you, I’m upside down on a house, with a relo coming. Guess where we part ways, is that I signed a piece of paper that said if they gave me money, to pay the people that built the house, then I would make the payments. Nothing in my mortgage said that if at some point, the house was worth less than I owed on it, then I could walk away.
But your mileage may vary.
I used to be involved in Flood Plain admin in Ohio. Just recently people with a FedGov guaranteed mortgage were told they would be required to have flood insurance, no matter where they are located. In the past this applied only if you lived inside the boundary of the 100 year flood plain. In recent years there has been a problem with people not having flood insurance, yet having residential property damaged by flood events. Many of these people did not live in the 100 year zone, or even the 500 year zone.
The National Flood Insurance Program is administered by the state in most cases. They have to adhere to the Federal regulation on the matter, which are generated by FEMA.
Gary C,
Max, your name is drifting a bit. Please tell me you’re not posting from Beaverton, OR. Seriously.
And for my next impression…
Still here on the high plains, Curtis. I’m assuming there’s some glitch and the website didn’t update the name field properly. Nothing Lex can’t fix should he be so inclined.
– Max