Our perpetual state of budgetary crisis exists primarily due to one simple relationship: Our government believes it can/must provide first world medical services to the poor and retired. It collects tax revenue from workers who are being paid less and less. There are only two possible outcomes:
We reverse the direction of wages by essentially refusing to trade with mercantilists or
We match up the level of medical services to those in China since it will not be long before our workers earn the same wages as their peasants.
Given that there is not one political figure arguing in favor of canceling our free trade agreements, I’ll begin by discussing the second outcome. In 15 years (when I am eligible for Medicare) the entire system will be broke, based on its current level of coverage. It can be saved if it is recalibrated to Chinese spending levels. So how good is the Chinese System? The Wall Street Journal recently described a McKinsey study this way:
“A crisis between China’s chronically underpaid doctors, who look to pad their low pay checks with kickbacks from pricey drug prescriptions, and skeptical patients is well underway, highlighted by a spiking number patient attacks against physicians, the report said. According to McKinsey’s survey of nearly 6,000 physicians in 3,300 hospitals, 59% of doctors said they had been verbally assaulted by a patient or a patient’s family member. And 6% said they have been physically assaulted by patients.”
The good news is that 95% of all Chinese people are “covered”. The coverage does not include catastrophic illness. Rural health care services are greatly inferior to those provided in urban areas. Most rural hospitals are going bankrupt and there is an “insufficient” national drug supply.
“The average cost of a single hospital admission in China is roughly the same as average annual income, a 2008 paper published in The Lancet said. For the lowest fifth of income earners, it is more than twice average annual earnings” (Reuters)
That is our future. Yes, Chinese bureaucratic corruption is somewhat at fault and I would like to believe that when we are this broke our insurance companies and medical establishment will not rob and cheat the sick and old. Unfortunately that’s the problem with being broke, people lose their moral compass.
The greater point here is that we can’t allow outcome #2 to be our future. We have to abandon crazy trade policies with economic parasites. Otherwise, the single most important service we now expect from our government – health care, will collapse with our Federal budget. Baby Boomers think they have escaped the economic morass by the skin of their teeth. They have yet to grasp the fact that their retirement benefits are directly tied to the falling wages of their children. They still believe they are going to find support from entitlements just as they lose their jobs.
Part of the idea behind lowering marginal rates in 1986 was to provide extra incentive for un-wealthy people to generate income and become wealthy. Since then we have favored the already-wealthy by lowering capital gains tax rates. As we discuss returning the maximum marginal rate back to 39.6%, we are missing a huge factor that determines fairness and economic “efficiency”.
There is very little value in keeping income tax rates low for the super rich. They do not spend much of the un-taxed money and their investments are taxed at the (lower) capital gains rate anyway – not the income tax rate. If someone already has $20 million then my interest in protecting them from the tax man is far lower than my interest in providing protection and incentive to someone with a very small net worth. That’s the guy who’s working like hell to get rich. We need people like that.
A wealth tax would achieve a similar goal but I don’t believe in double taxation and I don’t want to see the super rich building mansions in Bermuda instead of Florida. I want to see these people invest for the long term. They simply don’t need income and the US Treasury does. A three tiered bracket would help correct for the differences between urban areas. Someone making $500,000 in LA or New York is certainly not amassing fabulous wealth but a guy in Schenectady NY with that income would be. Their respective net worth figures would reflect that fact so their tax rates would be significantly different.
If some fat cat is clipping coupons in very cheap Jacksonville Florida (no state taxes) then his marginal rate should be painful – at least until our budget is in surplus. I’ll start the conversation with these three tiers:
For Net Worth’s > $50 million the marginal tax rate would be 65%
For Net Worth’s > $10 million the marginal tax rate would be 50%
For Net Worth’s < $10 million the marginal tax rate would be 30%
You could probably talk me into a raising the threshold income level where the maximum rate would come into effect. I would also raise the capital gains tax rate on trading positions held for less than 5 minutes to 85% since such activity is utterly worthless in terms of improving market efficiency. The higher rate might force a lot of talented physicists and mathematicians back into scientific research where they belong. Mortgage payment deductibility must be capped and replaced with education expense deductibility. (Yes, I did write about this already.)
The founding fathers understood that a giant aristocracy was detrimental to society and economic development. They wanted to make sure we had significant estate taxes so the USA didn’t become ossified by a class system (like England). The class system is arriving thanks to China and we have to fight back any way we can. A good place to start is by rewarding the (relatively) poor hard working high earners at the expense of the happy fat cats.
The fiscal cliff has come about because Congress finally recognized their own inability to balance the budget. People go on draconian diets because they admit to themselves that they can’t control their weight and hate to exercise. When the date finally arrives to start the pain people often lose their discipline because it was self imposed. Voters barely care about budgets, they care about jobs so the conviction is weak in Washington and the desire to postpone – infinite.
Americans have completely lost touch with the reality that the US is no longer a wealthy country. It has wealthy citizens; It has some magnificent geography; It has a great history (mainly in the 20th century), but we have spent our savings and need radical surgery.
The US Postal Service serves as a good metaphor. It is a bankrupt anachronism. It is losing $5bn/Qtr and most significant mail is delivered by the private sector. Other than Netflix and the odd Amazon delivery the USPS is in the junk snail mail business. In the not too distant future you will get deliveries every Tuesday and Friday. They will be known as “mail days”. No one will give it a second thought. Everyone gets email- right?
Yet Congress is so corrupt and paralyzed that it can’t excise this massive money losing mess that means almost nothing to everyone. Yes, jobs will be lost and grandma in Iowa may have to wait a day or two for her social security check, but when your government is going broke, cuts must happen and (little) people will get hurt. If a legislator spends all his time worrying about every lost job then he will never have the nerve to cut anything.
I am not a heartless bastard who just had a fight with a miserable postal clerk. I understand that many of these people are low-skilled and most won’t be taken on by UPS. The sad story is that if you send all your jobs offshore and buy everything from Walmart, you are indirectly firing public sector employees because you’ll never take in enough revenue to pay them.
The choice is simple: either fix our trade mess, or start firing millions of people immediately. The key to figuring out how much we can afford is not to look at what the people want or what we spent last year or five years ago. It is to imagine a country full of $7/hr laborers. How much tax revenue do they generate and what kind of Social security and Medicare benefits are appropriate or affordable. We must recalibrate the entire Federal budget and we can’t wait for a good growth period.
This is what a good growth period is when you have giant job killing parasites sucking the life out of your economy.
For their deft ability and success at tax avoidance while the country goes broke we can only applaud their competency. Let us never again speak about how high corporate tax rates are strangling the private sector. With this many loopholes the rates mean absolutely nothing.
Why should corporations pay taxes at all you ask? Like people they use up national resources that must be replenished and maintained like roads, power utilities, water supplies, and regulatory agency oversight. Local real estate taxes cover some of this but never the long term investment costs. They expect their buildings to be protected by firemen and policeman and their energy supplies to be safely delivered with the help of the defense department. When their uncovered employees need medical services they will be using up public hospital resources.
If we set the rate to zero then some of the money flows down via dividends to the wealthy shareholders thus exacerbating our income distribution mess but frequently the money just gets stored up in Fort Knox size bank accounts- waiting for redeployment. Apple and Google seem very good at this.
The rate of payment has been declining for decades but in the last few years it has totally stalled:
Corporate profits however are on fire. You can see here how they have bounced back beautifully
from the recession collapse. Some of the reason for the mismatch is that those losses from 2008 could be carried forward but after 4 years it’s time to conclude that tax avoidance is the new big thing.
That leaves us with a missing hole estimated to be approximately $250bn/yr. at a time when our budget deficit is the highest since WW2! So here’s to you corporate bums, traitors and deadbeats, you have outfoxed the IRS and directly contributed to bankrupting the country you live in.
Paul Krugman recently attacked CNBC as a station about the .1%, for the .1% and by the .1%. The station whined and as one would expect, tried to assert that they are investment advocates and the stock market is a beautiful perfect indicator of America’s prosperity.
The stock market’s heaviest weighted stocks are of multinationals which employ mainly third world workers. Such companies as Apple, Dell, GE, and IBM do not have interests that align with those of the USA. Quite the contrary. They have no interest in employing any Americans – ever.
Median family income has historically correlated with the stock market – no more.
Median income is at the same level it was in 1996! This has a lot to do with the simple fact that total employment in the US hasn’t grown since 1998. Prior to 1996 the line tracks GDP growth quite well. You can see the dips for the 1980 and 1990 recessions. The stock market also got hurt during those slowdowns.
Since 1996 however the relationship between stocks and median income has eroded
to such a degree that there doesn’t seem to be any relationship at all any more.
Earnings of corporate “America” are not affected by how much money Americans make. They are serfs toiling outside the castle walls. Multinationals sell them stuff but refuse to feed them. They must scrounge for food. The workers are in China. The managers and owners are capitalist titans whose welfare (jobs and profits) has nothing to do with the people who live five blocks away from them.
The first world citizenry are still the only ones willing to pay retail for anything. In fact they are the only real global consumers- China’s savings rate is 50%. CNBC and various Wall St. malcontents are still eating at the 5 star restaurant of the Titanic after the iceberg has been hit. They think this model can go on forever. Consumer debt must rise to infinity and iPads sales (to their babysitters) shall never wane.
I’m sure they feel like the great gilded age robber barons -convinced of their own invincibility and irreplacability. The longer this system goes on the more bankrupt our society becomes and the harder we will fall. The next time you hear Larry Kudlow complain about government policy, remember that his interest in seeing higher highs in the stock market is perfectly consistent with seeing lower lows for the United States of America.
The New York Times Magazine carried an article about various manufacturing companies who are desperate for new workers. They need to have advanced math skills as well as an interest in working in a plant. Job security is poor because they can’t really guarantee that the whole plant may be moved to China next year.
Did I mention they only want to pay about $12/hour?
An unskilled laborer can earn $14/hr. as a supervisor at McDonald’s. You can virtually hear an economist, interviewed for the article, laugh out loud at the demand for more skills without any accompanying higher wage. We constantly hear about how we need better skilled labor and a better education system so we can provide business with what they need. “They” tell us there are 3 million jobs that are going unfilled in spite of the 8% unemployment rate. In fact our labor force is acting quite rationally. They are not acquiring new skills because there is no additional pay (= a negative rate of return)
The NY Times provides a case study with regard to the divide between the tradable sector and the nontradable sector. The former competes with the giant economic parasite known as China. They offer controlled peasants who accept slave wages and a currency guaranteed to stay permanently undervalued. What’s a multinational not to like? Every executive in a manufacturing company that has not yet outsourced all its labor feels pressure to pay his first world workers like Chinese slaves. McDonald’s has no outsourcing option.
And for all those politicians that keep saying “we don’t want those jobs” – you know, the ones where unskilled people do unskilled things and earn low wages. “Let them all got to the third world. We want to train our people for the next century to do creative innovative work like designing iPads” . Take a look at the average person at the food court of your local mall and tell me if they look like industrial designers with advanced degrees in science. Maybe you’ll understand why there is such a line to get a new job at Burger King.
Do spending orgies make sense when income growth is utterly stagnant? If a country has had income growth like ours then wouldn’t it make sense for us to declare a national retail holiday rather than a national midnight sale?
We should name it Black Savings Day.
Why do Americans only seem to find comfort during bad times from borrowing money to buy stuff they don’t need – that is all made in China. If we must have it, then we should allow items to be sold only if they are made in the USA – after all it is our holy national holiday.
The other part of this media created spectacle is that it is often nothing more than pure hype. The retail industry promotes the frenzy, to present this as an opportunity you shouldn’t miss. Last year, retail sales rose .2% – lower than any of the five preceding months. Yet AP reported:
“A record 226 million shoppers visited stores and websites during the four-day holiday weekend starting on Thursday, the Thanksgiving Day holiday, up from 212 million last year, according to early estimates by the National Retail Federation released on Sunday. Americans spent more, too: The average holiday shopper spent $398.62 over the weekend, up from $365.34 a year ago.”
The NRF is famous for making stuff up.
It’s all a scam and one that sends a very negative message. America has been a nation of spenders for far too long. Why don’t we relocate the Black Friday sales to your local bank branch and declare that the deals are only available to people who make new deposits or have steadily grown their savings accounts over the preceding year. There could be cheerleaders, male models and free food to spice up the stale bank atmosphere.
The Congressional Budget Office estimates that if we go over then federal spending will fall by $103 billion and tax revenues will rise by $399 billion (and another $105 billion later in 2013). That’s a grand total of $560 billion or 3.7% of GDP.
This mess is upon us because we want it to be – right? The leaders of all parties know the deficit is huge and ugly so they made themselves an offer they couldn’t refuse – reach an agreement or the bomb goes off on schedule. They did this knowing that reaching a deal was highly unlikely. I presume they made this grand bargain because they felt pressure from the average voter to fix the insidious deficit mess. Democracy works.
Republicans Should Be Especially Upset
Grover’s boys hate tax increases, right? They’re about to get a ton of them (provided you count, as they do. the termination of a tax holiday as an increase). If they really believed their own rhetoric they’d make a deal faster than congressional Dems. This is not a debate about how the Republicans are unhappy about tax increases on the rich. Taxes are about to rise for everyone! Republicans are being forced to show their true selves – do they care more about keeping taxes down for everyone or keeping the deficit down?
Democrats are about to abandon their ideology.
Yes I don’t know what the Democratic party’s beliefs really are but I’ll just say they’re OK with deficits and they love tax holidays or cuts for the middle class. Given that 83% of the changes are tax increases, and most of those are not on the top 1%, they should be desperate to get a deal.
So both sides desperately want a compromise, which brings us to the ugly problem. How do you get reelected if you’ve compromised with the enemy? Beware the Prisoner’s Dilemma.
How bad could it be?
The first thing to remember is that tax increases are not the same as bank failures. A broken banking system freezes credit and destroys confidence. What could be worse than having all your savings wiped out? If I raise your taxes, especially if you’re rich, there’s a chance that you will not change your spending habits at all. People might just borrow more to make up the difference and those with savings will just withdraw.
In any case a 3.5% hit will feel nothing like 2008 so let’s not blow this all way out of proportion.
At least after we suffer the hit we will be on a far better path.
Corporate taxes will be lower for companies that employ more domestic workers than foreign ones.
Transaction taxes will be applied to all electronic hiring services where the employee is outside of the community. Taxes must be paid on top of salaries paid to foreign workers. Tax evasion penalties will be enforced by the IRS.
As the globe’s a population has grown, our definition of community has changed. Nevertheless certain relationships are still the same.The health and welfare of my neighbors matter more to me than the health and welfare of people who live far away.
An outbreak of SARS in South Dakota matters less to me that an outbreak at my son’s school.
An economic depression that puts all my neighbors out of work will likely hurt the value ofmy house and lead to an increase in crime in my neighborhood, more than would be the case if the economy tanked only in Florida or Indonesia.
If I buy my goods from a local merchant, he may then hire me as his accountant. There is a valuable feedback loop.