November 24, 2009

What kind of country can we actually afford?

One aspect of number analysis that I find very satisfying is the coherence that a consideration of Large Numbers seems to bring to any issue. I'm not primarily a quantitative guy (I have a nephew who handles that role), but I prefer the mathematical analysis of issues to general, how shall we call it, bullshit argumentation that passes for so much public discourse in these here United States.

For example, there is currently raging (sort of) a big argument about whether the "deficit hawks" or the "Keynesians" occupy the intellectual high ground on how to get the American economy moving again. The deficit hawks are numerous: Kent Conrad and Byron Dorgan of the Senate Democrats, the Blue Dogs of the Democratic Caucus in the House, many others. The Keynesians are the Nostalgic Liberals, such as Paul Nobel Krugman and Dean Baker. The latter notes in a recent essay on the HuffPost:

"There is another side of this Japan story that makes the idiocy of the deficit scare stories even more apparent. According to the deficit fear mongers, the dollar has been falling in recent months because investors are becoming increasingly worried about the U.S. government's ability to pay off its debt. But one of the currencies that the dollar has fallen against is the yen. Are investors who are worried about the U.S. government's ability to pay off its debt selling dollars to buy the bonds of the Japanese government, which has an even higher debt burden?"

It strikes me that it's a little harsh, in this day and age, to talk about the "idiocy" of deficit scare stories. Mr. Baker has also co-written a book about the "myth" of the Social Security crisis, and has also, tellingly, co-authored with Paul Nobel. I think I'm beginning to understand their underlying thesis: the United States and its economy are in a sense Mathematical Constants, like the Speed of Light (C) or the force of gravity in falling body equations. We are, and always will be, preeminent among nations, and any slump (such as the current "recession") is simply a negative deviation from the mean. Thus, it is perfectly alright to take on debt in any amount, regardless of how dire current finances are (and they are very dire indeed), because the stimulus spending enabled by massive borrowing will fire up the economy, improve the tax inflow, and restore us to fiscal balance.

Really, when you think about it, no other analysis of their arguments makes any sense. That must be what they're contending. So sure is Mr. Baker of this thesis that he feels confident in labeling those who think otherwise "idiots" and "deficit scare mongers." This "Recession," you see (which often seems like so much more than that) is a cyclical dip, like all those before it since World War II, and will pass soon, and we'll go back to our merry life where 72% of our commercial activity was based on trips to Sonoma Williams or picking up the newest version of XBox360 Call of Duty World at War for the little kids at home. Thus, if current tax inflows to the Treasury are about $1.9 trillion, consisting of approximately equal flows of income tax and FICA (plus minor contributions from estate tax and other payroll taxes), which they are; and if our budget is about $3.4 trillion, which it is; that even if this looks horrifying at first glance, it's only because you're an idiot and a scare monger, and you don't understand economics as well as people who write books and win Nobel Prizes.

But suppose, just suppose, that the figure of $1.9 trillion is about what the American people can now afford to pay in taxes, that it's a best case for years to come because of a fundamental shakeout in national economics. Isn't there, really, a pretty good case for that? Does that number really seem like it was picked out of a hat? How could it be? It's what the American people are actually paying. Krugman/Baker and others who use ad hominem terms to describe their lesser fellow mortals (not that I don't appreciate the use of the ad hominem) are assuming that the tax receipts will soon soar up to the $3 trillion level or so, to match the budget expenses, if we'll just do the sensible thing and spend another tril keeping teachers and firefighters on the job and extending unemployment benefits to some of our 20% nonworking citizens. That's all it will take; Keynes said so. It's just not that big a deal.

Yet (and here's where the Big Number Ideas come in) I keep coming back to that "insight" I had long ago that the U.S. economy is fictitious, as a sustainable matter, to the extent of about 35% of its nominal worth. I admit it was a guess; but I had the hunch that the stock market, when it was at about 14,000 Dow, would fall to about 9,000 (it went me one better, of course). I based this intuition on reading I had done, specifically, books by Kevin Phillips and Chalmers Johnson. They went deep, way down into the ugly entrails of the American economy. What they found was that we weren't really earning all the money we were spending, not by a long shot. We borrowed all that money and that made the economy seem more robust than it was. Thus the Pond Thesis: half the money during the Bush "boom" years was borrowed on the basis of real estate (re-fi, lines of credit); 70% of economy = spending, take away half, what ya got? 35% reduction.

Now consider this: during the Bush years, the top tax receipt year was about $2.7 trillion (that was the era when even corporations were paying income taxes, which essentially they do not anymore.) What percentage drop is implied by a reduction from $2.7 trillion to $1.9 trillion? Gee, it seems right in the range of 30%, doesn't it? All that borrowing enabled spending, which enabled corporate profits, which enabled employment, which made possible an actual Federal budget based on income instead of a Ponzi scheme where we pretend that a ridiculously inadequate cash flow supports unlimited borrowing in order to pay interest on previous borrowing.

Oh sure, it could be a coincidence. But have you looked around at your America lately? We're in trouble. Borrowing huge sums is not going to restore us to prosperity. It's going to be the work of years, not a financial trick where we "get well" because the loan came through. I have no idea what kind of country a $2.0 trillion dollar federal budget would support, but it probably would put an end to speculations on how many Middle Eastern countries we can afford to rebuild at any given moment. Those folks in the Emerald City (D.C.) should get out a little more; take a drive through East Oakland or Riverside, California, or overbuilt Florida, Phoenix or Anywhere, U.S.A. This isn't going to be over soon, but the fantasy that it will is a very dangerous delusion.

Although, before closing, I would add one thought. There is something that could be done to bring us much closer to balance. 40% of the Treasury's income taxes are paid by 1% of the population, the plutocrats. Remarkable, eh? So restore marginal tax rates to their Eishenhower-years levels, and......oh right: hahahahahahahahahahahahahahahahahahah!!!

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