The Wrongologist

What’s Wrong Today:

The Deficit, the Debt, the Budget.
Discussing these complex and interrelated problems is exceedingly difficult.
Making them understandable enough to hold the voter’s attention may be
impossible.

The economic
theory, the budget process and the implications of the debt are mind-numbingly
complex, while the numbers, measured in billions and trillions of dollars, are
barely comprehensible.

We’ve
heard so often: The “out of control budget
deficit is going to bankrupt the nation and destroy our economy”, that we’ve become jaded to solutions and to
the politicians who continually beat us over the head with the warning.

So, What’s Wrong?

    We have come to accept a process
whereby we plan our fiscal year with budget deficits. We need to explode the
DELUSIONS of both parties that are preventing them from doing anything of
substance to restore fiscal sanity. Here are some delusions to detonate:

Delusion
#1: The American people are over-taxed


Reality: Americans
are the lowest-taxed people of any major country. During the
Wrongologist’s lifetime of work, there have been many rounds of tax cutting:

• The Reagan tax cuts of the 1980’s knocked
  the maximum rate down from 70% to 28% and indexed the brackets to inflation
  
• The Gingrich-inspired tax cuts on
  dividends and capital gains
• The Clinton-inspired addition of tax credits
  for dependent children) in the 1990’s
• The Bush Administration tax cuts in
  the 2000’s that further dropped the taxes on dividends and capital gains to 15%
  and expanded the credit for dependent children

Statistically, effective tax rates
for the upper-middle class quintile have been reduced exactly 50% since 1980. So, if taxes have been cut in half on a
percentage basis, while Federal spending has roughly doubled, then something’s
out of whack.

Note
that the above graph shows deficits, year by year, as a percentage of GDP. The graph illustrates the following
points:

• The largest contributor to the deficit is the reduction in tax
  revenue. This is mostly attributable to lower tax rates.
• The second largest contributor is the increase in unemployment
  payments, food stamp outlays, and people starting to collect
  Social Security.
• The Troubled Asset Relief Program (TARP) signed by
  President Bush and the job stimulus program created by President Obama have
  added little to the deficit. Both programs were temporary.

The
Republicans like to tell us that our income tax rates are nominally among the
highest in the world but they forget to mention that individuals and
corporations have all kinds of deductions written into tax law.

    Fact: Americans are NOT over-taxed relative to other countries.

Delusion
#2: Federal spending can be easily cut because the budget is filled with waste
and fraud

It is true that there are bogus line-items in the
Federal budget. And there is fraud. However, we need to make cuts in the
primary components of federal spending:

• Social Security: 20%
• Medicaid and Medicare: 20%
• Military (including veteran’s
  affairs): 20%
  
• Other social welfare benefits: 15%
• Interest on the debt: 6%
• “Everything else”: 18%

The
reality is that neither party is interested in making meaningful cuts because
Social Security, Medicare and the military are revered by both parties.

There is too much political pressure
by an aging population to imagine that Social Security and Medicare will be cut
significantly. Republicans think
cutting defense spending is political suicide with their base.

Delusion
#3: When the economy returns to “normal” we will grow our way out of
the deficit

This
is the grandest delusion of all, since our economy has NEVER sustained real growth
above 3% a year. At best, there have been three or
four years of above-par growth followed by a recession that wipes out half of
it.

Republicans keep telling us that if
we cut taxes below where they are now, then the economy will see fantastic
growth spurts, perhaps as much as 5% a year. Mr. Romney is promising 4%.

    Few
can truly believe that cutting taxes will add to growth. The
wealthy and large business already own and control more capital than at any time in history. They are parking
it, not in new and expanding businesses, but in T-bills, that now pay NEGATIVE
interest (rates below the rate of inflation). As long as they prefer to
earn NEGATIVE interest instead of making new investments in productive business
enterprises, the economy is going nowhere, even if taxes are cut to zero.

The government will only be restored to fiscal sanity
by:

1. Increasing taxes on both the middle class
and the wealthy:

• Get rid of some deductions like letting people deduct the mortgage
  interest on their vacation homes
• Raise the effective tax rate on the super-wealthy (incomes above $1
  million) from 15% to 40%
• Impose a federal capitation tax (say,
  1%?) on accumulated wealth
  above some level (say, $100 million?)
• Lower
  the floor for Luxury tax on expensive items
  (costing greater than $5k)

Get
over your squawking and screaming. The
alternative is either to bankrupt the country and/or devolve towards a Third
Country standard of living.

The
idea of cutting corporate taxes further is absurd when
most corporations have gamed the tax laws to the extent that many pay their
CEO’s more than they pay Uncle Sam. We
should tax offshore capital accumulated by corporations at the source, not when
they are repatriated.

2. Implement a (very) few big ideas about
growing the economy:

    The Federal Budget cannot be balanced
when 20+ million formerly employed tax-paying Americans are twiddling their
thumbs, either on the unemployment line or working part time at minimum wage jobs
where income taxes are not assessed.

• Let’s reject the Republican idea
  that more tax cuts will jump start the economy

• Let’s accept the Democrat’s plan of
  putting people back to work by rebuilding infrastructure (roads, ports,
  bridges, smart electric grid, Internet)

• Let’s bring jobs back to the USA by limiting offshoring. This
  requires rethinking “free” trade and implementing tariffs, domestic content
  requirements and taxes on US corporations’ offshore subsidiaries

While
raising tax RATES might help balance the budget, we’ll never be able to close
the deficit completely unless the taxpaying BASE is restored to full
employment.

Once we get the average American and
the Congress Critters to think beyond these three delusions, they can work on the
big picture of the economy, government spending and move to make BIG changes.

The time is past when politicians in
Washington can continue to believe that we can balance the budget by shifting the small change from pocket
to pocket.

This is an area where the
Wrongologist endorses Mr. Romney’s “Big Change“ trope.

Small Changes to our economy will
NOT suffice.

“…people with overlapping
delusions get along wonderfully.”

Daniel
Mackler, Toward
truth: A psychological guide to enlightenment