Economics 101 for 2012   1 comment

The federal budget is currently unsustainable. How do I know that? I can do basic math.

No matter who won the election, basic math was going to be a problem for them. The national debt is just shy of $17 trillion. The annual deficit is about $1 trillion. In 2010, the annual “budget” (what we spent, because Congress didn’t actually pass a budget in the last four years) was $3.8 trillion dollars. So just about $1 of every $3.50 we spend is borrowed from China or Japan or ….

Mittens didn’t win the election, so let’s not talk about his plans because they became irrelevant when President Obama won a second term. President Obama wants to raise tax rates on those making $250,000 or more back to the level they were at under the Clinton administration. He promises budget cut of $500 billion over the next 10 years. That’s $50 billion a year saved. He proposes to raise revenues by … well, about $800 million a year. His own website says the average family of wealthy people would only pay about $200 a year. That works out to about $800 million. That’s $8 billion in 10 years. But we have a $1 trillion a year annual deficit.  Every year we spend $1 trillion in borrowed money. So $50.8 billion dollars per year goes into $1 trillion and — that gap won’t close, will it?

Let’s be realistic, folks. There simply is not enough money in the economy to sustain the current level of federal spending. You’d need to tax all wages and investment earnings at about 65%. It’s simple math, using 2010 levels. All wages and investment earnings then were about $7.4 trillion. The federal government spent $3.8 trillion. Tax everyone above the poverty level at 65% and you close the fiscal gap. Sure, you could play with those numbers but another math reality lesson is that if you taxed all the millionaires and above at 100% of their incomes, you’d only raise about 40% of the fiscal gap for one year. Not that anyone is suggesting we tax rich folk at 100% of their income. That would be a self-defeating tax policy the collective cash cow that already pays more than 50% of all the tax revenues collected would to flee the country and take their income with them. Not even Obama Democrats would be that foolish … I think. Let’s just assume they’re smarter than that.

So President Obama wants to raise tax rates on the rich to Clintonian levels. Okay. While he’s at it, to be perfectly realistic, he should probably also raise all rates back to Clintonian levels. Since I know I can’t live on 35% of my income, I’d be down with a 4% increase so long … so long … as he also (ALSO!) reduced spending to Clintonian levels. In 1999, the Clinton administration spent about $1.7 trillion. Yeah, his entire budget for 1999 was only a few billion dollars more than the deficit for 2010 was. Do you see a theme here?

Sustain that for about 10 years and the economy would be very robust once more. I tried to figure out the effect on the debt, but my calculator has trouble with trillions. I think it would be reduced by 50% after 10 years under that scenario.  But how would we ever survive without the nearly $2 trillion in federal spending that would need to be eliminated EVERY YEAR?

Much like a family facing bankruptcy because they’ve run up too much debt on their credits cards and lack the income to cover the interest payments, the United States needs to seriously discuss what each of us is willing to do to avoid the national equivalent of living under a bridge. The last family I knew who went bankrupt gave up a bunch of nice cars, some jetskis, a few snow machines and some jewelry, but they still live in a house and not under a bridge, so the trade off was apparently worth it. Nationally, there must be things we can live without. I live in an oil state and I can’t figure out what the Department of Energy does that’s worthwhile. Test scores have gone down since the Department of Education was created in 1978. Together, they account for about $100 billion annually. If we’re looking for federal toys that we can live without, how about the ones that don’t seem to accomplish a lot?

Sadly, I don’t think Congress, the President or either of the two major political parties recognizes that we need to make some decisions NOW in order to even have a national future. Yesterday, when Boehner and Pelosi appeared on television, it sure looked like they planned to postpone some of the real hard choices until later — how long later remains to be seen.

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Posted November 26, 2012 by aurorawatcherak in economics, politics

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