Friday, November 26, 2010

Protect Your Country and Save Money: Contact Your Sentator

Russia has thousands of nuclear warheads that can reach America in an hour or so. If they are launched, for whatever reason, even a simple mistake, America will be destroyed. Al Qaeda can do damage, Russia can kill most Americans in hours. Fortunately, we can substantially reduce that threat and save money at the same time.

Following in Reagan's footsteps, President Obama recently signed a new START treaty with Russia. Like the previous START treaty, this will

  • Substantially reduce the number of Russian warheads that can reach America.
  • Put American inspectors on the ground in Russia to make sure the treaty is observed.
  • Reduce the number of American warheads we have to pay for, leaving 1,550 -- more than enough to deter any aggressor.

This treaty is a complete no brainer. It increases America's security and saves money. Opposition is limited to those who don't understand the facts and those playing stupid political games with our survival.

To go into effect, the Senate must vote for the treaty. Contact your Senators today and urge them to do so.

Wednesday, November 17, 2010

U.S. Federal Debt, Part II, Incentives

In Part I I laid out our debt problem. The short story: $13.7 trillion and growing fast. In that piece, I noted that all the major players: powerful people, Congress, federal managers, taxpayers, federal employees etc. all have strong incentives to increase the debt. Part II, this essay, is devoted to exploring ways to change that.

Let's start with an easy one: Congressional earmarks. For many years, each Congressman has been given a quota of money that they can spend in their district more-or-less as they please. Congressmen use these funds to get votes by giving voters stuff. Consider a new rule: earmarks are only allowed if total federal debt shrank the previous year. This would give each Congressman a powerful incentive to stop borrowing.

Now the hard one: a debt tax. This is an additional graduated tax on all income with most of the burden falling on the wealthiest (1), who are generally the most powerful and thus in a position to affect the debt. This tax is cut in half when we stop borrowing, and goes away entirely when the government has a surplus rather than a debt. The exact percentage is not critical, so long as it is too small to sink the poor and big enough to really matter to the rich. I suggest the following rates by income:

  • 1% $0-50,000 (55% of taxpayers)
  • 2% $50,001-100,000 (30%)
  • 3% $100,001-150,000 (10%)
  • 4% $150,001-200,000 (3%)
  • 5% $200,001-250,000 (1%)
  • 6% $250,001-500,000 (all others combined 1.5%)
  • 7% $500,001-1,000,000
  • 8% $1,000,001-10,000,000
  • 10% $10,000,001-100,000,000
  • 15% $100,000,001-1,000,000,000
  • 20% $1,000,000,001 and above.
This would give a strong incentive to the most powerful people in the country to have the federal government stop borrowing and pay off the debt. Yet even at the highest level, total tax when combined with current income tax would still be far less than the top tax rate of the 1950s and 60s; which was 91%. If the debt tax creates too much government income, damaging the economy, then other taxes can be reduced. I prefer taking people on the bottom off the tax roles entirely but there are other sensible approaches. For example, for the vast majority of Americans -- those earning less than $250K -- reduce the current income tax by the amount of the debt tax leaving taxation levels the same.

Right now federal managers are severely punished when they do not spend all the money they are responsible for by the end of the fiscal year (October 1). This is why the government goes on a buying spree every September -- managers are desperately trying to spend all their money. Instead of punishing managers who are fiscally responsible they should get awards, their projects should keep at least some of the money, and their budgets should not be cut. Those who over-spend should be cut. This could make a very big difference.

Finally, consider rank and file government employees. Their incentive is to increase their pay, which increases government spending. There is no way around this. However, federal employees are civil servants. Civil servants have strong job protection. Before the civil service was established it was normal for a new president to fire the entire government and replace them with campaign supporters. Laws to prevent this require a RIFF (reduction in force) to fire civil servants in any significant numbers. Usually the firing is by seniority -- the youngest, least expensive employees get canned. Civil servants could be given an incentive to reduce the debt if RIFFs were only allowed when the debt is increasing. As a general rule civil servants make less than those in private industry doing the same job, but they are compensated by job security. This would make job security contingent on reducing federal debt, a powerful incentive.

There you have it, ways to give the major players significant incentives to reduce rather than increase the federal debt. There may be better ways, but these would almost certainly work. It's also safe to say that as long as the incentives stay the same, and all the incentives are to borrow more rather than pay off the debt, the debt will increase until default and disaster (see Part I for details).

Part III: reducing government size and expenditures is next. Stay tuned.


  1. Small states, such as New Jersey, have raised taxes on the wealthy only to see them leave the state. However, leaving the U.S. is a much bigger step than moving from New Jersey to New York, and the U.S. has low levels of taxation compared to other industrialized countries. Not only are income taxes at the top brackets generally higher elsewhere, there is often a very large VAT (Value Added Tax) on everything purchased. Thus, flight of the wealthy to avoid the tax is unlikely.

Sunday, November 14, 2010

U.S. Federal Debt, Part I, The Problem

Today, the Federal Government of the United State owes $13.7 trillion. In the last year alone we have borrowed $1.7 trillion (source: TreasuaryDirect) on an income of $2.1 trillion (source). Worse, we have been borrowing huge amounts of money, almost every year, since the early 1980s. No one, not even the U.S. government, can borrow this kind of cash (1) without eventually being unable to make the payments. Indeed, there is already speculation that our creditors are getting nervous about being repaid. Without a major change in course, default is inevitable. When default happens the government will no longer be able to borrow; requiring us to immediately cut expenditure and/or raise taxes by roughly $150 billion per month if it happened today, more if later. This will almost certainly mean:

  • Most of the U.S. military will be demobilized and all foreign bases abandoned. We will lose whatever wars we are in.
  • Social security checks will be substantially reduced or eliminated.
  • Poor and elderly people will not get medical care.
  • All federal research will end: NASA, National Institute of Health, National Science Foundation, etc.
  • Most federal employees will lose their jobs.
  • The states and cities will lose all, or almost all, of their federal funding. Many teachers, police, firemen, etc. will lose their jobs.
  • All government bonds ($13.7 trillion today) will lose much of their value, throwing the economy into a deep dive, probably much worse than the Great Depression.

The borrowing must stop, and the debt must be paid off (2). It will be hard and painful, no part of the government can be spared and taxes must be raised, but the alternative is disaster.

Right now the short term interests of all the players is to increase spending and reduce taxes, hastening the catastrophe. For example:

  • Congressmen get votes and money by reducing taxes and giving people money (or tax breaks, which, for all practical purposes, is the same thing). They lose votes by increasing taxes and cutting off the federal money spigot.
  • Republicans win elections by cutting taxes and increasing military spending.
  • Democrats win elections by increasing social service spending.
  • Government managers are severely punished if they do not spend all the money allocated. I've talked to multiple mid-level government managers who proudly came in under budget their first year, and got clobbered. They all say they will never do that again.
  • Taxpayers do not want to pay for the government.
  • Government funding recipients, including everyone on social security, everyone on medicare or medicaid, everyone using a tax deduction, and all government employees, which means all military, almost all teachers, all police, almost all firemen, almost all researchers, etc., want their income to increase.
Everyone in this country has a choice: either increase your taxes and reduce the goodies you get from the government, or go off a cliff. In the near future I will lay out one approach to accomplishing this, including changing the incentives of the major players -- particularly the most powerful, which will increase revenue and reduce the size and cost of government.

However, no matter how we wiggle and shake, we owe $13.7 trillion, which means someone is going to pay at least $13.7 trillion in taxes. There is no way around this. It won't be the poor, they don't have any money. It will be the middle class, the rich, or some combination. How we allocate these taxes will determine what kind of country we are to become. Get the $13.7 trillion from the middle class and America will be a country of a few wealthy and many poor. Get the $13.7 trillion from the wealthy and the middle class has a chance to prosper and there will be fewer extremely wealthy individuals. Choose.


  1. Note that I do not use the term 'deficit.' This is because the official deficit is artificially manipulated to look much lower than it is. For example, until recently most of the cost of the Iraq and Afghan wars were not included in the deficit. Also, until last year the social security trust fund loaned hundreds of billions of dollars a year to the treasury but this was not included in the deficit. A truer measure is the total debt, which is used here.
  2. If we continue to borrow, the interest on the national debt will hit $1 trillion per year within about a decade. Regardless of the size of the interest payments, those tax dollars won't buy one gun, fund a single research project, build a single road, pay a single teacher, or fund a single social security check. The only way to stop bleeding interest is to pay off the debt.