Sunday, December 5, 2010

U.S. Federal Debt, Part III, Expenses and Income

In Part I I laid out our debt problem. The short story: $13.7 trillion and growing fast. In Part II I discussed ways to give the major players incentives to eliminate the debt, reversing current incentives. In the current section, Part III, I discuss ways to reduce expenses and increase income. The ground rules are: everything gets cut and everyone pays more taxes. The scale of the problem is much too large for any other approach. I break this rule once because overall economic costs should go down significantly although government costs go up. It should be noted that most deficit reduction proposals boil down to: cut stuff I don't like and tax other people, i.e., everyone else hurts but not me. This is not serious. Serious debt reduction means cutting things you like and paying more taxes.

Note that I do not put dollar figures on these ideas. That's because I do not have the resources to make realistic estimates. However, in all cases brief reflection will show that costs will go down or income will go up, often by a lot. Now for the proposals:

  • Each year, eliminate all tax breaks. This will raise a lot of revenue. Allow Congress to put tax breaks back in, but only associated with tax rate increases to pay for them and only by a separate vote for each tax break. This would reduce the complexity of the tax code and, therefore, implementation costs. It would also substantially level the economic playing field and contribute to economic growth. It will probably be necessary to reduce tax rates to avoid over-taxation.
  • Eliminate all government subsidies except
    1. Research and development, which the government is very good at and pays for itself handsomely (consider the Internet, which began as a government project).
    2. Purchasing. The government buys a lot of stuff, and this can be used to boost important emerging industries. For example, it would make sense for all government buildings and military bases to be energy self-sufficient so as not to be vulnerable to attacks on the power grid. This would justify covering all buildings with solar cells and installing wind generators where appropriate. This would enhance national security directly and develop permanent domestic energy supplies.

    Eliminating subsidies would substantially reduce government expenses and level the economic playing field.
  • Change our military grand strategy from global military domination to self-defense. While we call our military the Department of Defense, it is neither designed nor deployed to defend America -- as we discovered on 9/11/2001 when our multi-hundred billion dollar military failed totally and a few passengers on United Flight 93 provided the only effective defense [reference]. If you do not think we seek global military dominance, consider:
    1. We can completely destroy any nation or combination of nations with our nuclear stockpile. Only Russia has similar capabilities.
    2. We can destroy any building in the world within a few hours with our precision guided munitions, and we can do that to thousands of buildings within hours or days. No other nation has this capacity.
    3. We can deploy hundreds of thousands of troops to the furthest reaches of the Earth, for example, Afghanistan. No other nation has this capacity.
    4. We spend more on the military ($680 billion -1,300 trillion this year, depending on what you include) than the rest of the world combined, even though many of the other powerful militaries are our allies and America is extraordinarily easy to defend: two borders are large oceans and both neighbors are friendly, small, and weak.

    Defending America is pretty easy and should be fairly cheap. Global military dominance, on the other hand, is infinitely expensive. Although we have more than doubled expenses since 9/11, we have failed to destroy tiny al Qaeda. Indeed, al Qaeda is probably stronger today than it was then. The expense of global military dominance feeds into al Qaeda's strategy, which is to trick America into spending ourselves into bankruptcy. This strategy is working very well.

    Of course, global military dominance is nice to have. One can push small nations around at will and even intimidate large ones. However, it is bankrupting us. We will either abandon it gradually, under control, or we will spend ourselves into default and the system will come crashing down in a completely uncontrolled manner with disastrous consequences. Choose.

  • Get rid of the mercenaries. The wars in Iraq and Afghanistan are the first in which America made extensive use of mercenaries, euphemistically called 'contractors.' These are also the longest wars America has ever fought and neither is headed for decisive victory. This isn't an accident. There are many reasons mercenaries are a particularly bad choice for counter-insurgency warfare, but there is a more fundamental issue. Mercenaries don't benefit from winning, they lose their jobs. Mercenaries benefit from the longest, most drawn-out war possible. Mercenaries are also very expensive. Get rid of them.
  • End the war on drugs. Portugal did so and ten years later the number of heroin addicts was cut in half. Not only can whole government bureaucracies be eliminated and policing and court costs reduced, there will be hundreds of thousands fewer inmates in jail sucking up tax dollars rather than paying taxes. Legalization would put an end to funding criminals and terrorists with this illicit trade. The Taliban, al Qaeda's ally, receives substantial drug money (see Seeds of Terror by Gretchen Peters) and countries like Mexico and Columbia have been destabilized by drug wars. Finally, done properly, legalization can destroy the drug trade entirely using the civil court system. See How to Actually Win the War on Drugs for details.
  • Social Security can help a little, but not much. Unlike the federal government, social security is currently paying all its bills and has $2.7 trillion of government bonds in the bank. In 20, 30, 40 years, depending on who you believe, social security will run out of money. There are several ways to deal with this, the simplest of which is to raise the retirement age for people under 30 or 40. However, this will do nothing to help with the current fiscal crisis. Indeed, little can be done since even if social security generated a surplus again it would only replace outside debt with social security bonds. These bonds are very low interest so it would help a little. There are two ways to provide social security money to the general fund: increase income or decrease benefits. Income could be increased by raising the cap on income subject to social security taxes. If the cap were eliminated, one could even lower the tax rate on 85% of Americans as so much of America's income goes to those at the top. The other way, reducing benefits, can be done in two ways: reduce everyone's benefits -- and put millions of grandmas into poverty -- or means-test benefits so those with ample funds will get smaller social security checks. Choose.
  • Medicare is the exception. The American medical system is, by far, the most expensive in the world; and the results are among the worst in the industrialized world (see here for this and other supporting info). America also has, by far, the most complicated health care system and the only one in the industrial world where basic health care is profit driven. The government already pays something like 45% of all health care costs. For something close to that we should be able to provide basic health care to everyone. I suggest "Medicare for All." It's simple, people on Medicare usually like it, and we understand it. For those who want more extensive coverage, a lightly regulated for-profit sector should work fine. While this would probably increase government expenditures somewhat, if the experience of every other industrialized country is any guide, total health care costs could be radically reduced and Americans would, on average, get better health care.
  • Cut back the mission of government agencies. There are many, many government agencies that could have their mission cut back, but I don't know enough about them to suggest anything specific. NASA I know a bit more about, having worked there as a contractor for 30 years. NASA's current goals are very ambitious -- appropriate for a wealthy nation. However, we are no longer really a wealthy nation. We are nation mired in debt. As with the military, we need to do less, or face financial collapse. The things to drop are those that are less important for day-to-day practical life. Thus, human travel beyond Low Earth Orbit should be dropped until our finances are in order. As implemented, the human space flight program is mostly for prestige, a luxury we cannot afford at the moment. Much of the deep space science program could be dropped as well and for the same reason: they are nice, really nice, but they are not necessary and don't contribute as much to 'the general welfare' as they could. NASA should be trying to spawn space industries that will eventually pay for themselves and increase the tax base. This is exactly what happened with communication satellites and, more recently, Earth observation satellites. Further possibilities include space tourism and space solar power. Space tourism may get some very important support from Obama's new initiative to purchase flights to the International Space Station (ISS) by developing a private, commercial human launch capability. Space solar power is getting nothing, which is silly while vast sums are spent on prestige.
  • Tax pollution. Pollution shifts costs from those producing it to those harmed by it. For example, polluting the air and water can lower production costs, but drives up medical costs for those poisoned by the pollution. Taxing pollution provides revenue and reduces pollution, a win win. Setting the right taxation level is difficult. One approach is to identify an acceptable level of a given pollutant and, over time, raise or lower taxes until that level is reached. Ideally, pollution taxes could provide the bulk of government revenue, eliminating income tax for most.
  • Tax financial speculation. The capital markets in the U.S. are very well developed and provide an important function: generating funds to create and expand business. However, the financial markets are also rife with speculation that provides no benefit except to transfer money to and from the speculators. Speculation, particularly computerized speculation, also creates bubbles and other financial pathologies; sometimes on very short time scales (seconds for computerized trading). Speculation cannot be eliminated, but it can be substantially reduced by taxing it. Specifically, add a time-based tax on financial transactions. Financial assets, such as stocks, held, say, a year or more would not be subject to this tax. Financial instruments sold more quickly would be taxed more and more for shorter and shorter times between acquisition and sale, culminating in a, say, 1% tax for assets held less than one hour. A tax of this nature would cost real investors nothing, but short-term speculators that buy and sell on literally a second-to-second basis would be hit hard, and hopefully eliminated. Exceptions could be made for certain technical brokers who are simply managing a market. This tax would also generate a lot of income, possibly allowing a reduction in the income tax.

    There you have it, ideas to cut federal spending and increase revenue, sometimes radically; and something radical is needed. The federal government borrowed $1.7 trillion in the last year. That's about how much we must cut expenditures and increase taxes just to avoid increasing the interest payments we must pay on our $13.7 trillion debt. We need to cut expenditures and raise taxes more than $1.7 trillion just to reduce the bleeding. Right now interest payments are about $400 billion. Over the roughly 80 year life of an average taxpayer, $32 trillion in taxes is needed just to pay the interest. What do you get for that $32 trillion? Nothing. After paying $32 trillion in taxes you still owe $13.7 trillion and your grandkids can pay another $32 trillion to get nowhere. We need to not only eliminate the deficit and stop borrowing; we need to pay down the debt. That requires serious spending reductions and tax increases.

    Lots of people will tell you they are serious about the deficit and the debt, but are unwilling to cut anything they like or pay more taxes. Real fiscal control will require cutting pretty much everything and involve pretty much everyone paying more taxes. The alternative is massive financial collapse. Choose.