Why is America in debt and how can we fix it?

[davidmoore63@y]

One of the reasons people get confused is that they think the economics of government are similar to the economics of individuals. Hence, they think that if the US has a large amount of debt it's something to be worried about, as you would if you had a large personal debt. The crucial difference is that the debt of the US is denominated in US dollars, which is a currency that the US can create with the push of a keystroke at the Federal Reserve. Hence, the US can never be forced into bankruptcy, since it can create dollars in any quantity it pleases. Once that is understood, it's easy to see that it's possible to run a permanent, growing deficit (for example, one that keeps total debt to GDP at a constant percentage).

The consequence of running an excessive debt (at an ever increasing percent of gdp say), is that ultimately the US may be forced to create more dollars to repay holders of the debt such as foreign creditors, Social security recipients etc. This potentially creates inflation whereby the value of dollars versus everything else decreases. The decision to do that is essentially a political one, since inflation causes a transfer of value between classes of people (from lenders to borrowers of fixed rate debt).

But my main point is that this is NOT like the economics of an individual person, a company or even a State. Those entities can't print dollars.

 

[phyzguy]

It's pointless to look at countries, because they are run by governments; that's what a country is.

Instead, you should be looking for examples of communities where the people living there, instead of expecting the government to build fundamental infrastructure, have private companies do it. There are plenty of them out there, and there would be more if governments didn't stomp on such efforts wherever they can.

Can you give me an example of a community where the infrastructure is privately owned and financed? Note that having a private company do the building is not the same as the infrastructure being privately owned. The interstate highways were primarily built by private companies, but they were financed and are owned by the federal government.

 

[gfd43tg]

All I know is that the airports in the USA look like garbage compared to China (at least the major Chinese cities). We are woefully behind in our city metro rail systems as well, far far behind China. How did this happen??

 

[phyzguy]

All I know is that the airports in the USA look like garbage compared to China (at least the major Chinese cities). We are woefully behind in our city metro rail systems as well, far far behind China. How did this happen??

I agree. Somehow we have gotten the idea in the US (as expressed by PeterDonis and AgentSmith in this thread) that we don't need the government to invest in basic infrastructure, like roads, railroads, airports, etc. In my opinion, this is crazy. As a consequence, our infrastructure is falling apart. The solution is simple and obvious. We need to pay more taxes, so that the government can invest in these things, like we did in the past.

 

[PeterDonis]

All I know is that the airports in the USA look like garbage compared to China (at least the major Chinese cities). We are woefully behind in our city metro rail systems as well, far far behind China. How did this happen??

Because we expect governments to manage these things, but unlike China, we don't allow our government to treat the population of the country as expendable labor.

Somehow we have gotten the idea in the US (as expressed by PeterDonis and AgentSmith in this thread) that we don't need the government to invest in basic infrastructure, like roads, railroads, airports, etc

Um, you do realize that airports, for example, are almost always owned by a government? Same for roads, railroads, etc. That's why they so often suck.

I'm not saying that investment in basic infrastructure is not needed. Of course it is. I'm saying that we should not want governments to do it, because the only way for governments to do it efficiently is for them to be like the government of China: as above, they have to be able to treat the population of the country as expendable labor. Governments have been doing that to build large infrastructure since Cheops was a little boy.

But in the US, we have this idea that the government is supposed to serve the people, not the other way around. That means our government can't be the kind of authoritarian entity that it is in China. And that means our government will never be able to manage infrastructure as efficiently as private entities in our society.

Btw, this does not mean I'm a fan of China's government either. I'm not. That should be evident from the language I used to describe how they treat their country's population. But even apart from that, the problem with the China model, like any model of authoritarian central planning, is that it fails miserably as soon as the central authority makes a wrong decision about what to build--"wrong" in terms of the actual value it will provide, as opposed to something useless like the prestige of the ruler. (How much value did ordinary Egyptians get from the pyramids?) And that will always happen; it's just a matter of time.

 

[PeterDonis]

Can you give me an example of a community where the infrastructure is privately owned and financed?

Any gated community. Also, historically, company-owned towns were fairly common at one time in the US.

Furthermore, when you get down to the size of a town, the divide between a "government" and a "private community" owning infrastructure is not as clear. Towns themselves are a sort of hybrid between private communities and governments. Historically, in the US, they were more like private communities; they built and managed their own infrastructure based on decisions made at town meetings and with funds voluntarily contributed by the residents, and did not rely on forced taxation or on grants or other sources of funds from governments at higher levels. That model is less common now only because governments at higher levels have aggressively expanded their power.

 

[gfd43tg]

I agree. Somehow we have gotten the idea in the US (as expressed by PeterDonis and AgentSmith in this thread) that we don't need the government to invest in basic infrastructure, like roads, railroads, airports, etc. In my opinion, this is crazy. As a consequence, our infrastructure is falling apart. The solution is simple and obvious. We need to pay more taxes, so that the government can invest in these things, like we did in the past.

I think part of the skepticism comes from the fact that the money seems to keep going into new wars instead of infrastructure

 

[gfd43tg]

By the way, my comment doesn't apply only to China. The same thing goes for Hong Kong, their airport and metro is way better than a US major city. And they don't have an authoritarian government

Sorry for comparing with the Jones

 

[mheslep]

I disagree. Name a country where the fundamental infrastructure (roads, water supply, sewage removal and treatment, ...) has been built and financed by private companies.

The US. Built, financed, and operated.
https://en.m.wikipedia.org/wiki/Private_highways_in_the_United_States
Also France.

 

[phyzguy]

Any gated community. Also, historically, company-owned towns were fairly common at one time in the US.

Your mention of gated communities is where I have a fundamental problem with the whole concept of privatizing basic infrastructure. If you follow it to its logical conclusion, you end up with a country where the wealthy live in gated communities with exceptional infrastructure, and the poor live in the rest of the country, with its crumbling, decaying infrastructure. If you happen to be born into a wealthy family, things are great, but if you have the misfortune to be born poor, there is no hope to rise out of poverty, because you don't have access to education, health care, and all of the many other things that you need to develop. This is fundamentally opposed to the idea on which America was built - that anyone who works hard can become successful. I certainly don't want to live in the country that will result if we continue along this path. In addition to the gates you will require to keep out the people that haven't paid for your infrastructure, you will probably need bodyguards if you venture outside your gates.

 

[mheslep]

The large middle class arose in the US long before the advent of majority government financed infrastructure.

 

[PeterDonis]

The same thing goes for Hong Kong, their airport and metro is way better than a US major city. And they don't have an authoritarian government

I wouldn't be so sure.

 

[PeterDonis]

If you happen to be born into a wealthy family, things are great, but if you have the misfortune to be born poor, there is no hope to rise out of poverty, because you don't have access to education, health care, and all of the many other things that you need to develop.

You're assuming that wealthy people who don't share any of that wealth with the rest of society will stay wealthy. In a free society, they won't. Wealthy people still need to trade with everyone else, and people who are in poverty and have no education, health care, etc. make much worse trading partners than people who have access to all those things.

In fact, historically, there is only one way that wealthy people can reliably avoid the need to share their wealth: buying government favors. That's how the so-called "robber barons" did it in the late 19th century, and that's how many wealthy people do it today.

This is fundamentally opposed to the idea on which America was built - that anyone who works hard can become successful.

And in the days when the Federal government was small, that was more true than it is today. Today it is not enough to work hard; you also have to be willing to game the system. Or you have to be lucky enough to work hard in one of the few fields the system hasn't taken over yet--but such fields come and go quickly, because the system latches onto them and turns them from meritocracies into bureaucracies.

 

[russ_watters]

The only thing cheaper that borrowing money cheaply - is not borrowing money at all..

For example, if it were possible to invest in infrastructure without having to incur debt, that would be optimal.

These statements sound nice, but are self-contradictory/impossible. When you buy something, the money has to come from somewhere. With government spending, it either comes from taxes or from debt. You imply it just materializes out of thin air...which I certainly agree would "be optimal"!

If the money comes from taxes, it reduces the money available in the economy. If it comes from debt, it is basically "free", except for the interest (which today is near zero). For example, if you spend $10 of your own money to buy something for $10, it cost you $10. If you borrow the money, it cost you nothing. So yes, borrowing money cheaply is cheaper than paying for something via taxes.

 

[russ_watters]

Infrastructure does not have to be built or financed by government. We are so used to government doing it today that we forget that. Governments don't build parking lots or factories or warehouses; they don't have to build roads or water systems. The best thing governments can do is provide a tax and regulatory environment conducive to safe construction of infrastructure. I can attest from personal experience that government financed and supervised infrastructure construction is not usually the best in terms of quality and cost.

It's pointless to look at countries, because they are run by governments; that's what a country is.

Instead, you should be looking for examples of communities where the people living there, instead of expecting the government to build fundamental infrastructure, have private companies do it. There are plenty of them out there, and there would be more if governments didn't stomp on such efforts wherever they can.

You're splitting a hair that doesn't exist. My small townhouse community owns its road. Is that different from government ownership/financing? No: my townhouse association is a government!

What I think you are trying to describe is 3rd party private companies owning infrastructure. That would be extremely difficult because, for example, the 3rd party company would somehow have to acquire all of the land under which the road/bridge/sewage treatment plant was built. In the end, at best, they end up looking like government regulated monopolies, like the utility companies.

But in the US, we have this idea that the government is supposed to serve the people, not the other way around. That means our government can't be the kind of authoritarian entity that it is in China. And that means our government will never be able to manage infrastructure as efficiently as private entities in our society...

Any gated community.

You're suggesting a problem, which I agree is real, but your alternative really isn't one because as I said above, the difference between a gated community and the US Federal government is merely the scale. It seems to me that what you are advocating is a benevolent dictatorial government, not private ownership of the infrastructure: the problem of democracy in this case is that people are short-sighted and infrastructure requires a long view to do effectively. That problem is identical for the federal government and my one-road, 38 unit townhouse community. But if there was one guy who could make all the decisions and wasn't so short sighted...

 

[PeterDonis]

If it comes from debt, it is basically "free", except for the interest (which today is near zero).

But the reason the interest rate is near zero is that the money that you get when you get a loan is printed on the spot; it doesn't come from actual savings. So it isn't "free"; it is still taking resources away from other parts of the economy (because printing money increases the money supply without increasing the supply of goods and services, so the goods and services the printed money buys are taken away from other parts of the economy where they would have been used if the money hadn't been printed).

my townhouse association is a government!

Is it? Mine isn't. It's a privately owned corporation.

 

[PeterDonis]

the difference between a gated community and the US Federal government is merely the scale

And that's a big difference. See below.

It seems to me that what you are advocating is a benevolent dictatorial government

No, I'm advocating that we stop expecting the government to do all the things we now expect the government to do.

the problem of democracy in this case is that people are short-sighted and infrastructure requires a long view to do effectively.

Government doesn't fix this, because government is as short-sighted as the people who elect it. In fact, more so, because the time horizon of government is the next election, whereas individual people are at least capable of thinking longer term than that. But private corporations (particularly corporations whose stock is not publicly traded) are much better at making long-term investments, precisely because they don't have to pander to popular fads and issues that are constantly jerking the government around, nor do they have to keep up short term numbers to keep the stock market happy.

As an example, consider that there are private individuals planning to build spaceships to mine asteroids, with expected return on the investment starting some time in the 2030's. Whereas NASA can't even figure out how to get people back to low Earth orbit. Why? Because NASA is hamstrung by political changes, whereas the private individuals are not.

That problem is identical for the federal government and my one-road, 38 unit townhouse community.

I disagree; scale makes a difference. Orders of magnitude more scale makes orders of magnitude more difference in the complexity of the problems faced and the decisions required--if you insist that the problems and decisions must be centralized. The correct response is to not do that. See below.

if there was one guy who could make all the decisions and wasn't so short sighted...

There is no such thing. Nobody is smart enough and wise enough to make decisions that affect everybody. That's why nobody should have that power. And the larger the scale, the more important it is not to centralize power that way, because the consequences of the inevitable mistakes people will make are much worse. And that's not even considering what happens when special interests start competing for control of all that centralized power.

 

[PeterDonis]

the 3rd party company would somehow have to acquire all of the land under which the road/bridge/sewage treatment plant was built.

Whereas the government...has to acquire all of the land under which the road/bridge/sewage treatment plant was built. Sometimes that's very difficult; there are roads in my area that have been on the drawing board for years, but the government wasn't able to get all the landowners in the right of way to sell.

at best, they end up looking like government regulated monopolies, like the utility companies.

It is true that land, and things like rights of way for roads that depend on land and land configurations, are a sort of "natural monopoly" in a way that many other things aren't. Utilities can also be, to an extent. But that should be a temporary state of affairs, sooner or later to be overcome by technology. The problem is that governments keep the natural monopolies entrenched even long after they are no longer natural monopolies. The telephone system in the US is a perfect example.

 

[russ_watters]

But the reason the interest rate is near zero is that the money that you get when you get a loan is printed on the spot; it doesn't come from actual savings.

For a government, borrowed money is "printed on the spot" regardless of what the interest rate is. But yes: it doesn't come from savings.

So it isn't "free"; it is still taking resources away from other parts of the economy (because printing money increases the money supply without increasing the supply of goods and services, so the goods and services the printed money buys are taken away from other parts of the economy where they would have been used if the money hadn't been printed).

Generally that causes/you are describing inflation, but for whatever reason, it isn't right now. So right now, the cost of borrowing is very low. That isn't to say I think we should keep increasing our debt level -- I don't, because sooner or later the cost of borrowing is going to go up. The main point was to discuss why having some debt (just not too much) is a positive thing, not a negative thing. Most of us know that in our own lives anyway: we live in houses we could not afford if not for the ability to borrow money to buy them.

Is it? Mine isn't. It's a privately owned corporation.

So is mine -- You're missing the point: that privately owned corporation is your local government. You have a board of directors who are elected by the community and make all the decisions, right?

And that's a big difference. [scale]

It's really not. The main problem we are discussing here, shortsightedness, is a human failing that exists regardless of scale.

No, I'm advocating that we stop expecting the government to do all the things we now expect the government to do.

I'm a republican so that should sound great to me, but it isn't a complete thought: If not government, who should own/build/maintain our infrastructure and how? I'll give you an example that sounds to me like what you are describing:

My clients are pharmaceutical corporations. They have decided that their core business is pharmaceuticals, and therefore they should do nothing else. The cafeteria, janitors, security, even the facilities maintenance and engineering is outsourced. What happens when a company gets a contract to maintain someone else's facilities and gets paid separately to replace things when they break? They stop doing maintenance. That way, they increase their profit on the maintenance (they get paid for something they don't do) and then they get paid again to replace things when they break, because they weren't maintained!

So if that isn't the business model you are after, please explain to me what the business model you advocate is.

Government doesn't fix this, because government is as short-sighted as the people who elect it. In fact, more so, because the time horizon of government is the next election, whereas individual people are at least capable of thinking longer term than that.

What government has over individuals is that the things they build stay where they are built, for many decades. In a townhouse community, people might expect only to live there for 5-10 years, so they may hope to leave before the road needs re-paving. With government, a bridge needs to last 75 years, regardless of how short-sighted the person who builds it is. So in that way the time horizons are inherently longer even if the people are only thinking 3-4 years at a time. In any case, that doesn't address the issue of ownership, only decision-making.

But private corporations (particularly corporations whose stock is not publicly traded) are much better at making long-term investments, precisely because they don't have to pander to popular fads and issues that are constantly jerking the government around, nor do they have to keep up short term numbers to keep the stock market happy.

Disagree. I think what you describe there is a huge problem in private industry today: hired-gun CEOs, who don't expect to be around for more than 5 years and so will pump-up short term stock prices at the expense of the long term health of a company.

As an example, consider that there are private individuals planning to build spaceships to mine asteroids, with expected return on the investment starting some time in the 2030's. Whereas NASA can't even figure out how to get people back to low Earth orbit. Why? Because NASA is hamstrung by political changes, whereas the private individuals are not.

Er...except that I'm reasonably certain those private asteroid mining companies are pure scams. Setting the time horizon out 15 years enables them 15 years of freedom to fund-raise without producing anything, before dissolving. NASA? There is nothing for them to "figure out". They can could put people back into leo if they were mandated to. But they do what they are told, and right now they are being told to... run a scam with a 15 year time horizon, that nobody actually thinks is intended to produce anything (a non-existent Mars mission).

There is no such thing.

Yes, I know: that's the myth of the benevolent dictator I'm (sarcastically) referring to. That's why democracy is the worst form of government except for all the others.

 

[russ_watters]

Argh, I must have palmed my touchpad, because I lost an edit. I'll try to re-create:

I disagree; scale makes a difference. Orders of magnitude more scale makes orders of magnitude more difference in the complexity of the problems faced and the decisions required--if you insist that the problems and decisions must be centralized. The correct response is to not do that.

TV shows such as "Modern Marvels" give an interesting insight into large project management theory. I've been told that the largest number of people one person can directly manage is about half a dozen. So even from a small project all the way up to the Big Dig, the solution is the same: cut the project up into however many tiny projects you need to make each individual piece manageable. That way, management of the re-paving of my community's 200 yard road is not fundamentally different than the federal government building a new interstate. In either case, when you assemble the projects into one big project, that is pretty much by definition "centralized", so I'm still not clear on how you think we could get away from that.

Whereas the government...has to acquire all of the land under which the road/bridge/sewage treatment plant was built. Sometimes that's very difficult; there are roads in my area that have been on the drawing board for years, but the government wasn't able to get all the landowners in the right of way to sell.

Sure: it's not necessarily easy for the government, but they do have power that private companies don't have (eminent domain). Not to mention more resources and no requirement to turn a profit.

It is true that land, and things like rights of way for roads that depend on land and land configurations, are a sort of "natural monopoly" in a way that many other things aren't. Utilities can also be, to an extent. But that should be a temporary state of affairs, sooner or later to be overcome by technology. The problem is that governments keep the natural monopolies entrenched even long after they are no longer natural monopolies. The telephone system in the US is a perfect example.

Natural monopolies are what they are: they are natural. I don't see a way around that and I don't see why the US telephone system needed to be broken-up. There may be elements of the service that can be split, but ultimately you only have one phone line, one power cable and one fuel line going into your house. Each of these can only be owned/operated/maintained by one company. The most that you can de-regulate is the generation of the utility, but a good half of the utility can be nothing but a monopoly.

 

[PeterDonis]

for whatever reason, it isn't right now.

It isn't because the printed money is not being lent; the banks are leaving it sitting in their accounts at the Fed.

right now, the cost of borrowing is very low.

No, the cost of borrowing seen by the individual borrower is very low. The actual cost is higher than the cost the borrower sees, because it includes all the effects of skewing the economy by stealthily redistributing resources to less efficient uses. Cheap money for real estate means, for example, that on my drive to work, I pass numerous office buildings that are completely empty and have been so for years, while the roads leading to them are in poor repair. In other words, cheap money for real estate caused resources to be directed from a more efficient use (repairing roads that needed it) to a less efficient use (building office buildings that no one needed).

The main point was to discuss why having some debt (just not too much) is a positive thing, not a negative thing.

Yes, and the conclusion I thought the discussion had come to was that debt is a good thing if it leads to investment that increases economic growth. But if the effect of cheap debt is to redirect resources to less efficient uses, it isn't increasing economic growth.

that privately owned corporation is your local government

Now you're playing with words. A corporation is not a government in the sense of the word that's relevant for this discussion. It doesn't have police powers. It can't force me to pay taxes. It can't levy fines and penalties on me. It can't put me in prison. And it can't force me to do business with it, or with any other entity, if I don't want to. Something is only properly called a government, at least in the sense that's relevant for this discussion, if it can do all those things.

You have a board of directors who are elected by the community and make all the decisions, right?

Sure, but that isn't what makes something a government, at least not in the sense that's relevant for this discussion. See above.

If not government, who should own/build/maintain our infrastructure and how?

It depends on who is using the infrastructure and what their needs are and how those needs can be most efficiently satisfied. The best way to figure that out--in fact, the only way we know of that works at scale--is a free market.

if that isn't the business model you are after, please explain to me what the business model you advocate is.

What you describe is not something that governments do any better than private corporations. Stupidity is universal. The correct remedy is to stop doing the stupid thing--in the case you describe, obviously the incentives are wrong, so you figure out a way to fix that.

(In the specific example you give, if I were your clients, I would be looking to outsource to facilities management companies that do everything for a fixed annual fee--preventive maintenance, corrective maintenance, etc. Many companies lease their facilities rather than own them for this very reason. I can see why a pharmaceutical company might want more control over some facilities, but in that case, management of those facilities--drug production plants, for instance--is part of their core business, whether they like it or not, and they shouldn't be outsourcing it. I don't think Intel outsources the management of their chip fabrication plants.)

What government has over individuals is that the things they build stay where they are built, for many decades.

Over individuals, maybe, because individuals don't build large things. But private companies do. For example, the skyscrapers in Manhattan were not built by government. They were built by private companies. They have done a better job of staying where they are built than most government-built structures I have seen.

I think what you describe there is a huge problem in private industry today: hired-gun CEOs, who don't expect to be around for more than 5 years and so will pump-up short term stock prices at the expense of the long term health of a company.

I agree this is a huge problem, but it's only a problem for publicly traded companies, and not even all of them--only the ones that are large enough to make them attractive targets for hired-gun CEOs.

I'm reasonably certain those private asteroid mining companies are pure scams

Some of them undoubtedly are--as you say, it's a wonderful way to extract money from people without having to actually produce anything. But some of them are being funded by people rich enough to put up their own money--Elon Musk and James Cameron, for example. AFAIK Elon Musk, at any rate, is perfectly serious--he's building his own rockets now.

NASA? There is nothing for them to "figure out". They can could put people back into leo if they were mandated to. But they do what they are told, and right now they are being told to... run a scam with a 15 year time horizon, that nobody actually thinks is intended to produce anything (a non-existent Mars mission).

Yep. But the difference is, you and I, who know it's a scam, don't get to opt out by not putting up our tax money. Whereas nobody can force us to invest in private asteroid mining ventures that we think are scams.

 

[rootone]

I don't think a reasonable case can be made for asteroid mining as a profitable business.
There is no reason to expect asteroids having huge amounts of valuable resources which cannot be found somewehre on Earth.

 

[PeterDonis]

management of the re-paving of my community's 200 yard road is not fundamentally different than the federal government building a new interstate.

Yes, it is, because the ratio of management overhead to actual productive effort goes up with the size of the project. That's because, as you note, a single person has a pretty small span of control--I've seen numbers from half a dozen to ten or so, but half a dozen works fine for this discussion. Consider: your community's 200 yard road might need, say, 20 people involved to get it paved. Let's say 24 to make it an even multiple of a half dozen. That means you need 4 managers to manage 24 workers, for a ratio of 1 to 6.

Now consider building a section of a new interstate, requiring, say, a thousand or so people. Make it 864 for a reason that will soon be apparent. That means you need 144 first-level managers. But that's too many for them to work effectively, so you need a second tier of managers--24 of them, since each one can only manage 6 first-level managers. That's still too many, so you need a third level of managers--4 of them. So we now have 172 managers managing 864 workers, for a ratio of about 1 to 5.

But even that is too optimistic, because when you have multiple levels of management like that, communication between people is less effective, so efficiency goes down and you need more people still.

when you assemble the projects into one big project, that is pretty much by definition "centralized", so I'm still not clear on how you think we could get away from that.

Sometimes you can't; sometimes you have no choice but to execute a large project that requires many levels of management, and accept the costs of doing so. But I think that is true far less often than many people think it is. We centralize many things for no good reason other than that we have a lot of large governments that are always looking for more things to do.

it's not necessarily easy for the government, but they do have power that private companies don't have (eminent domain). Not to mention more resources and no requirement to turn a profit.

Is that supposed to be a feature, or a bug?

Natural monopolies are what they are: they are natural.

At a given state of technology, yes. But technology can change. See below.

ultimately you only have one phone line, one power cable and one fuel line going into your house

When I was a kid, that was true, yes. But now we don't have a phone line going into our house at all. We have Vonage, so we get our phone service over the Internet. (And we don't even use that line much any more; we use cell phones for practically everything now.) So technology has removed the natural monopoly that once existed for home phone service. That may well happen in the not too distant future for the power cable and fuel line as well. That has already happened to some extent with the internet line--there are plenty of houses in my neighborhood with an ordinary TV-style internet cable, a fiber optic internet cable, and a cable from a satellite dish all going into them. (Not all in use at once, of course, but their presence is evidence of multiple options being available.)

 

[rootone]

It gets worse when you consider that when we agree on laws, (social type laws), then law enforcement becomes necessary,
So then you need another level of enforcement to ensure that that law enforcement people actually are acting lawfully,
and er?, more layers of stuff, which is probably not very useful, but it continuous the continuum.

 

[SuperHawk500]

The reason we are in debt is not related to entitlements or the size of our government per se, excluding the military, it is a result of our taking on the role of the world's police force. It is our military spending that pushes us over the top every single time. We Americans have to realize that most of the world's industrialized countries are smaller than ours, yet actually provide even more generous entitlement programs in terms of universal healthcare, paid domestic leave and paid college education, for example, but do not have a debt ratio anything approaching our 18 Trillion. They can do so because they do not have this military burden and because they require about 40% to 50% of total income to run their governments. Thus, if you consider the fact that the wealthiest citizens in our country capture the lion's share of total income but do not have to pay much if anything in taxes, then it becomes abundantly clear why we always come up short. . Based on that understanding, it is obvious that lightly taxing a majority of our income, e.g. at tax rates of 15% or less, is doomed to failure. (On that note, we should all laugh at flat tax proposals of 15% as they are absolute mathematical non-starters right out of the gate.) Of course, the low effective tax rates on the wealthiest are due to their effective lobbying in Washington to obtain subsidies and tax breaks not available to the average person and that is made possible based on their ability to give unlimited amounts of donations to support the campaigns of the politicians that vote the way they want them to.

In conclusion, the manner in which our current tax system is set up combined with unfair campaign financing laws and the level of military spending we do year in and year out - we have essentially been at war (cold and hot) continuously since December 7th, 1941 - I would argue that it is mathematically impossible to balance our budget let alone have money left over to pay down the existing debt. It is important to note that most of our federal debt is owned by American citizens directly or indirectly and of that many are very wealthy. Thus, the wealthy, by virtue of the current tax laws, have so much money left over that they buy T-bills with a portion of the money that they should have paid in taxes. In other words, instead of having to pay their fair share of taxes, they can take that money and loan it to the government and get paid back with interest! How great would it be for the average person if, rather than paying taxes, he or she would have the option of loaning that money to Uncle Sam and thereby turning a liability into an investment asset.

The cure:

1. Reintroduce higher tax brackets as we had in most of the 20th Century where incomes above multiple millions per year are taxed well above 50%. Why? Because it curbs cheating, prevents overcompensation, makes businesses income spread resulting in higher incomes for all employees, frees up more money for job creating R&D and simply allows companies to hire more people rather than being forced by an out of control board of directors to unjustifiably concentrate all the wealth success of a corporation in the hands of a CEO. We need as a society to come to the realization that no one is worth being paid hundreds of millions of dollars let alone a billion dollars in their lifetime, no matter their contribution to society, how smart they are, how athletically gifted or how pretty they look in front of a camera. Besides, it is much better for an economy to have one-thousand millionaires rather than one billionaire because the former will outspend the latter and therefore generate more positive economic activity. (And don’t give me the example of someone developing a miracle medical cure. Past history has shown that such scientists are never compensated to that level, and bedsides, the prospect of receiving such overcompensation is not what motivates them in the first place.)

2. Create a tax law that limits access to all deductions to a percentage of income on income earners over approximately $500,000 per year. Currently, for example, capital gains treatment of capital gains income is unlimited.

3. Eliminate the inheritance tax on all estates below $20 million, however any remainder must go to the US Treasury - other than up to a billion dollars thereof given to legitimate charities or to set up genuine foundations. The result would be increased revenues and no more wealth dynasties, and thus, the creation of a true meritocracy. Thank you Alexander Hamilton.

4. Change the securities laws to require that in an IPO none of the incorporators are able to retain more than 10% of the offered shares and that they must divest themselves of the majority of those shares within five years of the offering. The idea being that publicly held companies should be just that, publicly held. No person should hold more than one-half of one percent of the outstanding shares of a public company. We do not need individuals to enjoy the benefits of generating money publicly, yet retain the defacto control of a privately held entity. Concomitant laws would also have to passed increasing the disclosure requirements of privately held businesses and a force majeure provision enacted requiring them to go public if a certain revenue levels are achieved. These rules would be required to prevent the subterfuge of public companies “going private” to avoid these new stock ownership provisions. This incorporator stock limitation requirement would also prevent the creation of overnight billionaires, a wealth generation fantasy and undeserved concentration of wealth our economy cannot endure.

5. Wall Street reform. In addition to the foregoing, eliminate or greatly reduce the “casino” aspects of stock trading, such as, selling short or long or day-trading. Also, we must reduce the size of banks so none are “to big to fail”. Additionally, we need greater enforcement of existing laws to criminally punish those involved in illegal stock market activities, and especially those that result in economic harm/collapse. No one should be too big to go to jail and face liquidation of their estate.

 

[BWV]

LOL, if you ban selling long that is a sure fire way to make the market go up!

 

[phyzguy]

SuperHawk500 - I couldn't agree more! Unfortunately, the odds of these things happening in the current political environment are near zero.

 

[mheslep]

The reason we are in debt is not related to entitlements or the size of our government per se...

Yes, entitlements are most of the reason for the rate of growth in the debt. Defense is a fifth of the budget. Health care (Medicare, etc) and pensions (social security, etc) together are half of the budget, and together with welfare (food stamps, etc) they tally 60% of the budget. Their share of the budget will continue to increase. Medicare and SS spend much more than they take in.

I agree that defense spending is too high (higher than at the peak of the cold war against a super power. Why?) but it is none the less much smaller than entitlement spending.

 

[Vanadium 50]

The reason we are in debt is not related to entitlements or the size of our government per se, excluding the military, it is a result of our taking on the role of the world's police force

In 2013, the DOD budget was $672B. The deficit was $680B.
In 2012, the DOD budget was $688B. The deficit was $1087B.
In 2011, the DOD budget was $611B. The deficit was $1300B.
In 2010, the DOD budget was $664B. The deficit was $1294B.
In 2009, the DOD budget was $661B. The deficit was $1413B.

Even if the entire Department of defense were to be dissolved, there would still be substantial deficits.

 

[BWV]

If the deficit is less than nominal GDP growth then debt/gdp (the relevant measure of a country's debt) is declining. As its impossible and counterproductive to run large surpluses, this is about the best that can be hoped for. If nominal GDP grows at 4% and the US runs 2% deficits, the debt ratio will shrink over time.

 

[Vanadium 50]

BVW, how does that work? Suppose the government's revenues are 10% of the GDP, and they run a 2% deficit every year.

Year 1: GDP = $10T, Revenues = $1T, Expenditures = $1.02T, Deficit $20B, Debt $20B
Year 2: GDP = $10.4T, Revenues = $1.04T, Expenditures = $1.06T, Deficit $20.8B, Debt $40.8B
Year 3: GDP = $10.82T, Revenues = $1.082, Expenditures = $1.103T, Deficit $21.2B, Debt $62B

Debt/GDP is increasing.

 

[BWV]

BVW, how does that work? Suppose the government's revenues are 10% of the GDP, and they run a 2% deficit every year.

Year 1: GDP = $10T, Revenues = $1T, Expenditures = $1.02T, Deficit $20B, Debt $20B
Year 2: GDP = $10.4T, Revenues = $1.04T, Expenditures = $1.06T, Deficit $20.8B, Debt $40.8B
Year 3: GDP = $10.82T, Revenues = $1.082, Expenditures = $1.103T, Deficit $21.2B, Debt $62B

Debt/GDP is increasing.

in your example if nominal GDP grows by more than $20B then the Debt / GDP ratio will shrink if you start with existing debt at current levels of close to 100% of gdp:

with nominal GDP growth of 4% and deficits of 2% of GDP:
year 1 10T GDP, 10T debt, 200B deficit debt / GDP = 100%
year 2 10.4T GDP, 10.2T debt, debt / GDP = 98%

given enough time, Debt / GDP ratios will converge to the ratio of deficit / change in nominal GDP, so in your example, Debt to GDP would plateau at 5%

 

[Vanadium 50]

in your example if nominal GDP grows by more than $20B then the Debt / GDP ratio will shrink if you start with existing debt at current levels of close to 100% of gdp:

I don't see it that way either:

Year 1: GDP = $10T, Revenues = $1T, Expenditures = $1.02T, Deficit $20B, Debt $20B, Debt/GDP = 0.2%
Year 2: GDP = $12T, Revenues = $1.2T, Expenditures = $1.224, Deficit $24B, Debt $44B = 0.36%
Year 3: GDP = $14T, Revenues = $1.4T, Expenditures = $1.428T, Deficit $28B, Debt $72B = 0.51%

 

[PeterDonis]

I don't see it that way either:

You're leaving out a key initial condition that he specified:

if you start with existing debt at current levels of close to 100% of gdp:

So the numbers he is envisioning look like this (assuming a 2% deficit every year and nominal GDP growth of 4% per year, and starting Year 1 with debt equal to 100% of GDP):

Year 1: GDP = $10T, Revenues = $1T, Expenditures = $1.02T, Deficit $0.02T, Year-Start Debt = $10T, Year-End Debt = $10.02T, Year-End Debt/GDP = 1.002.

Year 2: GDP = $10.4T, Revenues = $1.04T, Expenditures = $1.0608T, Deficit $0.0208T, Year-End Debt = $10.0408T, Year-End Debt/GDP = 0.97.

Year 3: GDP = $10.808T, Revenues = $1.0808T, Expenditures = $1.10242T, Deficit = $0.02162T, Year-End Debt = $10.06242T, Year-End Debt/GDP = 0.93.

The catch to all this is that the GDP growth is nominal, so we don't know, just from the numbers above, whether it is due to increasing creation of wealth or to just printing more money. If it's the former, the debt to GDP ratio decrease is a sign that society is getting wealthier so it is easier for it to pay back the debt. If it's the latter, the debt to GDP ratio decrease is a sign that society is redistributing wealth from creditors to debtors, by reducing the value of the debt held by creditors. This trick only works because the debt is denominated in currency; if debts were denominated in something real like wheat (or better, something real and hard to produce more of, like gold), only the first way of debt to GDP reduction (creating more wealth) would work.

 

[BWV]

Nominal is all that matters here, as nothing will wipe put debt faster than a hyperinflation. High inflation has many other problems of course

I don't see it that way either:

Year 1: GDP = $10T, Revenues = $1T, Expenditures = $1.02T, Deficit $20B, Debt $20B, Debt/GDP = 0.2%
Year 2: GDP = $12T, Revenues = $1.2T, Expenditures = $1.224, Deficit $24B, Debt $44B = 0.36%
Year 3: GDP = $14T, Revenues = $1.4T, Expenditures = $1.428T, Deficit $28B, Debt $72B = 0.51%

Youare starting from zero, so of course debt ratios will increase - but debt / gdp in your example here will cap at 5%, which is the ratio of the deficit to change in gdp. Any starting debt ratio above 5% will result in falling debt / gdp ratios