Explaining the Federal Budget

Here:

\"\"Sure looks like a spnding, not a tax, problem to me.

True, there\’s no particular reason that tax should only be 18% of the economy, but it is true that even if tax were on that long run average, there would still be a huge deficit: so it\’s not a collapse in revenues that\’s causing the problems.

12 thoughts on “Explaining the Federal Budget”

  1. Apparently it’s most unusual historically to get the US tax take above 20%. So getting the tax take up by about 10%, from 18% to 20%, still leaves a bit to do on the expenditure front. Mind you, it may all be too late anyway. Leave it to the Fourth Republic to sort out, under the Great Redeemer.

  2. Or: the US was founded to avoid paying tax and will die to avoid paying for pensions, medicines and surgery.

  3. I watched Channel 4 news on this issue last night; the line from the Scottish lady in front of a building of Congress was that those Tea Party zealots would block a deal to raise taxes and hence avoid disaster.

    Thanks for linking to this, Tim.

  4. The Economist was squealing that the Republicans are being dangerously irresponsible in refusing to consider tax increases. The whole thing sounds as dumb as fuck to me. If you are running short of money then you need to spend less, not hound your boss into giving you a payrise.

  5. Tim W, you’re conflating two problems:

    1) the actual national debt (in *actual money owed to actual people*) in 2011
    2) the projected national debt in 2021 if rules on the key middle-class-welfare programmes (Medicare & SS) aren’t changed.

    2 obviously needs to be addressed by 2021, either by telling middle-class Americans that they need to starve in the gutter and die of TB, or by raising taxes.

    But 1 is the problem *now*, which has come through the combination of falling tax revenues, rising expenditures through natural stabilisers, and starting the recession with a deficit caused primarily by tax-cutting and wars. The fact that the US needs to cut projected long-term spending doesn’t mean it needs to cut short-term spending.

    And the fact that the bloody Economist is arguing for tax rises is Indicative: if you’re siding with Sarah Palin against the Economist, that’s a good sign that you’re wrong, just as if you’re siding with Bob Crow against the Economist.

    If you are running short of money then you need to spend less, not hound your boss into giving you a payrise.

    I’ve generally gone for both. Unless you’re a masochist, getting paid more is nicer than cutting spending. And no, of course domestic finances aren’t generalisable to government finances.

  6. john b…

    “2 obviously needs to be addressed by 2021, either by telling middle-class Americans that they need to starve in the gutter and die of TB, or by raising taxes.”

    And/or by pissing of less money at bridges to nowhere, subsidies to medical doctors and lawyers and a bunch of other stuff

    “But 1 is the problem *now*, which has come through the combination of falling tax revenues, rising expenditures through natural stabilisers, and starting the recession with a deficit caused primarily by tax-cutting and war”

    me thinks the QE stuff had something to do with it as well, right?

    “And no, of course domestic finances aren’t generalisable to government finances.”

    The very problem is that far too many people think that they are not.

  7. “me thinks the QE stuff had something to do with it as well, right?”

    No, actively wrong. QE reduces the value of the dollar, which goldbugs view as default, but which doesn’t affect the nominal or %GDP value of the national debt. It increases the national debt as denominated in RMB, but that doesn’t matter.

    On the latter point, whenever I’ve had a problem with my domestic finances, I’ve dealt with it by getting either a payrise or a better job. As Tim N implies, this isn’t really achievable in the short-term if you’re a country (although there are obvious long-term analogies).

  8. And the fact that the bloody Economist is arguing for tax rises is Indicative: if you’re siding with Sarah Palin against the Economist, that’s a good sign that you’re wrong, just as if you’re siding with Bob Crow against the Economist.

    You don’t have to be siding with Sarah Palin in order to think the Economist is talking nonsense. I quit reading it when I lived in Russia and realised that Putin’s Russia was not actually Stalin’s USSR, but it doesn’t mean I side with Putin.

  9. On the latter point, whenever I’ve had a problem with my domestic finances, I’ve dealt with it by getting either a payrise or a better job.

    Not an option open to most, I suspect.

  10. QE could reduce the national debt as you swap dated interest-bearing bonds with undated non-interest bearing cash. As it happens the Federal Reserve says it is going to reverse those transactions, so it will have no impact…

  11. Andrew Montgomery

    For someone who makes such a big fuss about numbers and maths, you’re ignoring the obvious problem.

    Those figures are percentages: dollars spent divided by GDP. If the denominator falls, then the % rises even if spending doesn’t change.

    In past years the annual increase in spending was covered by the increase in GDP. Now GDP is stagnating but spending continues to rise. The government should scrap inflation-linked salaries, benefits, and pensions; and make them GDP-linked instead. Budget problem solved; and as a side benefit it would give all public-sector workers an incentive to boost GDP.

  12. “True, there’s no particular reason that tax should only be 18% of the economy”

    But it isn’t. This refers only to federal taxes, not to the entirely separate take (and services provided) by the States. And the spending problem is in many cases in areas precisely which are constitutionally the responsibility of the States, for which the Federal government has no mandate. And yes, on matters regarding the US economy I suspect that Mrs Palin has a better track record in recent years than “The Economist”.

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