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How to Fix the Budget

Pretty much. The big four items are Medicare, Medicaid, Social Security and Defense. If you’re not talking about cutting any of those you’re not serious about balancing the budget. The solution is probably going to end up being younger workers paying into a system they will never collect from, in order to cover their parents checks and old age medical care.

The problem with that equation is that there are not enough jobs for young people, because the economy is hobbled by a massive government that is doing too much and has become unpredictable. I believe the current debts we’ve already run, including the debts not generally counted (in promises the government has made), will result in a reduced standard of living for the next several generations, as the rest of us pay off previous generations who did not save enough to enjoy the type of retirements they demand, nor have enough kids to make up for not saving.

My real fear is the burden will become substantial enough it will be impossible for younger people to save, and when they hit the point where they can no longer work, the government will be too broke to do anything about it. That will be called Generation-Screwed, and I’m not convinced it won’t be my generation. Hopefully when I get old and grumpy I can vote to kick that can down the road to the Millennials, who had a chance to put a stop to this shit, but decided they wanted eight years of hope and change.

37 Responses to “How to Fix the Budget”

  1. Arnold says:

    I think your diagnosis is wrong doctor! the problem with the equation is not because of government intrusion but a general deleveraging of the American household. This is supported by Federal Reserve data on national flow-of-funds. The American consumer drives the american economy and as long as they feel the need to shed debt, they won’t spend on goods and services and the economy will suffer. So we need to rely on another source of growth. Usually that would be exports but most of our major trading partners are doing just as bad or worse then us. the whole moral of the story is, to get us out of this mess, someone is going to need to spend money.

    • Sebastian says:

      I think the root of the problem is that there’s been too much money spent that people didn’t have to begin with. Households have gotten the message, but our government hasn’t.

    • Harold says:

      Here and below you’re thinking in the extremely short term (as to the below, when will we ever be able to reverse course?). What allowed the American household to get so leveraged in the first place? Along with those of so many other counties (yes, Freddie, Fanny, the CRA et. al. had a role but they don’t explain real estate asset bubbles in Europe)?

      Well, one big reason is the Federal deficit and the entirely related trade deficit, where we send dollars abroad and get back “stuff” in return. In some ways that’s a great deal, we have tangible stuff, they have steadily less valuable dollars … but, well, there are responsibilities that come with being the country with the world’s reserve currency, and consequences when you take advantage of that.

      • Arnold says:

        I’m not sure what responsibilities you are talking about. To answer your other comment- we can reverse course…all we need to do is “simply” get the deficit under nominal GDP growth.

    • Patrick H says:

      No, spending money is EXACTLY the wrong thing to do. The American Household AND the government both need to stop spending money and start saving. The more they save, the less waste is made, and the more the market can correct. Its painful, but the longer it is put off, the more painful it becomes.

      • Arnold says:

        What market correction? Housing is already going through that. The problem with that simplistic way of thinking (the thinking that got us the great depression) is that it assumes that the market is always efficient and logical- it’s not. Economic downturns not only get rid of failing businesses- they also get rid of healthy ones too. Not only that, if the downturn is too great (ever hear of a deflationary depressionary spiral?) it can massively damage long-term productivity.

        I’m a bit puzzled though about you equating saving with decreasing waste. What is waste? Wouldn’t you say that capital sitting in a federal reserve account making almost no interest could be considered waste if that capital could be used by business to invest? Isn’t that what’s going on now?

        And what if we did find a way to put off this “correction” you talk about- indefinately, would that be wrong? Would it be wrong to reduce the human suffering of such a correction. See, I get troubled by this “orthodoxy of the markets” belief that is held by so many- as if the markets are our gods. To me this is 1930 all over again with “liquidate labor, liquidate stocks, liquidate farmers, liquidate real estate… it will purge the rottenness out of the system. High costs of living and high living will come down. People will work harder, live a more moral life. Values will be adjusted, and enterprising people will pick up from less competent people.”

        • Harold says:

          Rather obviously we have vastly different views on both how the world works (I mostly an Austrian) and history, e.g. what I’ve read says we didn’t have a “liquidate labor” attitude in 1930. Rather, Hoover jawboned companies into not decreasing wages … until they went bankrupt in the face of the deflationary depression.

          We aren’t going to agree on this, we’ve stated our opinions, and now we can just wait a decade or two and see who’s right (none of us are in policy making positions, I assume).

  2. Arnold says:

    Most of the increase in government publicly traded debt has been due to a cliff diving of revenue and an increase in the automatic stabilizers. While I’m uncomfortable with deficits in excess of 5% of GDP year after year I’m also afraid of a massive fiscal tightening happening in the near term- while the american household is still deleveraging. the GDP equation is simply GDP (Y) is a sum of Consumption (C), Investment (I), Government Spending (G) and Net Exports (X – M). So if you have a drop off in Consumption (which is going on now) and drop off in investment, if you also drop off Government spending the economy will suffer-unless net exports or one of the other variables increases. In my perfect world- fiscal consolidation would not begin until unemployment goes below 6%- most likely around 2015-2016. That being said, when we do consolidate, we need to look at entitlement spending- especially medicare (SS atleast has an “easy” fix)

    • Cargosquid says:

      The problem is, who decides when unemployment actually drops below 6% since the BLS has been finagling the numbers and actually getting it there. If we can get it there, we’ve already solved the problem.

      • Arnold says:

        What “finagling”? I know there are problems and questions with which the way the BLS counts unemployment but I wouldn’t say that the BLS is deliberatly giving out false data

        • Sebastian says:

          I’m not sure it could be called “finagling,” but we probably undercount unemployment. My signifiant other is not among the unemployed. Statistically, she not in the labor pool anymore, but she would gladly take a proper job if she could find one.

          Likewise, I’m in a job where I took a 40% pay cut. Am I underemployed? I don’t think so. I think my drop reflects market realities, and I’m quite happy in my current job, and have turned down offers of more money (though still 20% less than I was making). How should that be considered in the unemployment roles though?

          I think one could make a very good argument that most of the economic statics collected are meaningless for a modern economy. What is unemployment? I don’t think that number is as easily quantified as it may have been 20 or 30 years ago.

          I tend to view what we’re going through right now as a depression. It’s just a vastly different kind of depression as the kind we went through in the 1930s. I think if you counter underemployment, and people who would like to work, but have given up, this is still a pretty awful economy.

          And I’d note, I don’t blame Obama for that; if McCain had won, it would still be bad, and I said back in 2008 that I don’t know why anyone would want to be the next President, because it was going to suck pretty much no matter who won. But I think Obama’s huge sin was passing a massive new entitlement no one understood, and trying to buy the Democrats back to a “permanent majority.” That’s an illusion. FDR got away with it because FDR had better fundamentals for new borrowing. This guy is just kicking the can down the road, buying enough votes, and hoping when it all comes crashing down, someone else takes the blame. That’s not leadership, and it’s all going to bite everyone in the end.

          • Harold says:

            Obamacare is of course a “big sin”, but I count it as more of a “turn us permanently into a Social Democracy” as has been the universal pattern elsewhere (although we may end up being exceptional again, especially since it’s so badly constructed and is being strongly resisted). It’s been a dream of the Democrats since Harry Truman, right?

            To me, what appear to be permanent “trillion dollar deficits as far as the eye can see” and no economic recovery for the foreseeable future are the biggest sins. Although I’ll note FDR was accomplishing the latter through “bold (mindless) experimentation”, only the demands of WWII turned his attention elsewhere and of course absorbed the nation’s unemployed in vast numbers.

            I suppose part of this is that either Obamacare or the latter is very likely result in my premature death, but due to genetics I’m in a better position to roll the dice on healthcare (e.g. neither of my late 70s parents have a GP, are regularly seeing a doctor or taking maintenance medicines).

            Anyway, I think you may in part agree, this is indeed kicking the can down the road, my beef is that he drastically increased the speed.

    • Sebastian says:

      My concern is: I’m not sure that government shouldn’t deleverage along with households. I worry that the current practice is just kicking the can down the road, to avoid what ultimately is going to be more painful if we wait another decade or so to do it.

      • Arnold says:

        Wouldn’t that just make the problem worse? Decreasing GDP increases your debt-GDP ratio and not only that- exacts a human toll as well. I always ask people who say what you say “why?”. What is the evidence? And I don’t mean comparing us to Argentina or Greece (both which are horrible examples). We borrow at an extremely low rate and will probably be borrowing cheaply for most of this decade (10 year breakeven, 10/30 year spread all indicate that financial markets are willing to lend the U.S. cheaply for a substantial amount of time). And while I’m not a huge fan of our debt level- what about Japan? Japan- who’s debt situation is far worse off then us and whose demographics are terrible seems to borrow more cheaply then we do. So my questions is, why are you so afraid of bond vigilantes when there is no evidence they are coming? Why put so many through misery?

        • Patrick H says:

          Why put so many through misery?

          To prevent more misery for more people in the future. Pushing it off is not the solution.

          • Arnold says:

            The thing is that there is almost no evidence that we will have “misery” in the future. IF there was this fear there would be signs- whether it be a significantly high raise in the 30 year yield, a 10 year breakeven that is extremely high…etc. The problem is that none of these indicators support what you say. Nor do historical examples- Japan today, U.S. of the 1950′s, France of the 1920′s, the UK of the middle 19th and early 20th century. Again, the Japanese manage their extremely high debt (well well above ours) quite fine and they have demographics which are just awful. While what you say can hold true for places that don’t borrow in their own currency, its much more complicated when it comes to countries that do borrow in their own currency

            • Harold says:

              First, to quote Herbert Stein, “If something cannot go on forever, it will stop,” and it’s certain the the world’s appetite for US Federal debt is finite, especially at its current low, low interest rates (which are in turn crushing those who typically depend on returns from bonds of all sorts). Now, you and I don’t know when the limits are going to be reached, but I don’t think you can reasonably deny they exist (see below for discussion of why Japan is at least in part a special case).

              Second, history says when a country’s real debt to others—not including what one part of the government “owes” to another, like the Social Security “Trust Fund” AKA “lockbox”; that money is gone, spent as it came in, and it went into deficit in 2010, i.e. FICA taxes aren’t enough, it’s drawing money from the general fisc—when that real debt reaches 90% of GDP, it won’t get paid back, one way or another. I forget where we are right now, but it’s between 60 and 90% and with “trillion dollar deficits as far as the eye can see” it won’t be long before we reach the fatal threshold.

              Third, predicting we’ll be able to continue paying very low interest rates on it is highly speculative, and so much of it is now in short term instruments (3 years or less) that even modest rises, say to historical norms, would result in a very quick and difficult crisis. BTW, do you remember the end of the Carter era when we had to pay 20% on it?

              Fourth, getting back to the first, what’s your limiting principle? When’s the time to merely cut back on deficit spending? Yes, you talk about increasing GDP to address the other side of it, and I’m all for that, but with the insane clown posse running the country, I’m betting on things getting worse, not better. For one personal example, there’s a very good and convenient to me bank that I’m only keeping a small checking account in because it’s nearly certain Dodd-Frank will force them to sell out to a bigger bank in due course.

              As for Japan, they’re are at 230% of GDP the last time I checked, but they’re a special case in at least one way I know of: until fairly recently, the Japanese people (which the nation has seldom, if ever, been run for their benefit; I note their fertility crash started in 1974) had three ways to invest their money: the government’s postal system bank, rather dangerous regular banks, and insanely dangerous stocks.

              Most went into the former, and you can guess where it’s been “invested”, and what’s going to happen as its very rapidly aging population tries to draw that down.

              Another thing that’s not well publicized is that the government has already de facto seized much of the government pension funds. This has to do with the several systems they run in parallel and most especially the one that’s run for the majority? of the people who work(ed) in the high risk, low reward part of the economy. i.e. not the lifetime in one big company but from one job to another. When the prefectures (sort of like states) computerized those accounts, they somehow lost track of a great deal of what is owed to how.

              It’s a big problem, one that “uncharacteristically” for the view of modern Japan has already resulted in blood.

    • Andrey says:

      Why people are counting Government spending as part of GDP is beyond me…

  3. James Nelson says:

    Even the baby boomers are generation screwed. With current levels of inflation and zero interest rates, it is not possible to maintain any level of hope for retirement. There are already talks by the Labor and Treasury Departments to require IRAs, 401ks, 403bs and etc to hold US bonds to maintain their tax exempt status. The “retirement” bond already exists.
    Look at what happened when the government of Argentina pulled this routine. It is already later than you think and almost no one is going to have much of any kind of retirement. The whole world owes more that it can possibly cover.

    • Rob Crawford says:

      What can’t be repaid, won’t.

    • Arnold says:

      Argentina is a bad example. They borrowed in U.S. dollars. Essentially a Greek-esk situation

      • Alpheus says:

        You keep on dismissing Greece, Argentina, and Spain (did you do Spain? No matter: others have) as “they’re not like us, so what happened to them can’t happen to us”.

        The funny thing is, I suspect that they are more like canaries in the mine: they aren’t like the miners, but when they lose consciousness, it’s not a good sign for them, either.

        The fact is, a lawyer making $250,000 a year can very well find himself bankrupt after twenty years, simply because he went into huge amounts of debt to support a flashy lifestyle, to keep up appearances, while a teacher can make only $50,000 a year, and be almost a millionaire in the same timeframe. The difference is keeping track of where your money goes, and actually saving it.

        And, frankly, as a country, we’re looking far more like that lawyer, than we are that teacher–and Argentina, Spain, Greece, and even California and GM are far more like the Federal Government than we are willing to admit. And that can’t be a good thing!

  4. PhilaBOR says:

    While I agree that government spending is way too high and needs to be reined in, the only fix for old age programs that has a chance to work is raising the retirement age. We could reduce benefits, but they’re not enough to live on now. Raising the retirement age means you work longer but when you retire there’s not a lower benefit. I don’t know what the number is, maybe 70, maybe 75 or more. Is this a politically acceptable solution? Don’t know. AARP will fight it, but something needs to be done…or maybe we print money until we get to Weimar or Zimbabwe.

    • Harold says:

      And what will that do for the ability of the young to get jobs, especially good ones, good enough to have families and all that?

      Don’t keep up the population growth and all these plans become Ponzi Schemes (well, even more than they already are, especially due to drastically changing life expectancy).

    • Arnold says:

      There are 2 main issues in your paragraph- SS and Medicare. SS is an easy fix- you can re-adjust the inflation calculation and remove the FICA tax cap and that would close most if not all of the percieved deficit. Medicare is a whole-nother story. Essentially there is no easy fix. We spend a huge amount of our GDP on healthcare- more than most other countries- and its increasing. until you fix that there will be no fix to medicare

      • Alpheus says:

        Ironically, it’s things like Medicare that’s driving up the costs, too. They dictate to doctors what they will and will not pay; they then dictate to the doctors what the patient will and will not pay; the doctors then push up the cost, just to break even–and they can’t charge other patients lower rates, because they are then charged with “Medicare fraud”.

        But do you know of one potentially easy fix to Medicare? Just ignore it, and ignore the insurance agency, and start up “transparent cost” clinics where you have to pay cash up-front for surgery, but the cost of that surgery, including anesthesia and whatnot, is right there for you, in an easy to understand number. Reason TV had a mind-boggling video describing the system in Oklahoma; the clinic they discussed would charge as much as a fourth of what would typically be charged a patient at a regular hospital!

        But the question is: *who* would be willing to go to such a clinic?

        (Answer: I wish there was such a clinic nearby, in Utah, to go to… :-)

  5. Fiftycal says:

    As someone about to go into Medicare, Social Security and retirement, I say; THANKS for your support.

  6. I don’t think the Milenials voting for Romney would have put a stop to anything. He was campaigning on no cuts to Social Security or Medicare and raise spending on military another 42%. We were screwed no matter who won the election (unless it would have been a Ron Paul / Gary Johnson type candidate).

    • Sebastian says:

      And of course, Ron Paul and Gary Johnson totally carried the day on the millennial vote. I’m kind of tired of hearing that. Whatever Paul and Johnson may represent, it’s not hitting this generation, and that has more to do, in my opinion, with the messengers than the message. Paul is a washed up politician with a lot of a really awful baggage who never shouted more than “Congressman from Texas” from his political capabilities, and who also managed to make some utterly despicable allies in his not-so-distant past.

      Gary Johnson I truly like, but he was ahead of his time. If he had been a more forceful personality back when he was fresh off a successful two term governorship of a swing state, he could have really been someone. But his timing was four years off. He dropped out of politics for nearly a decade, then decided he missed it, came back, fared poorly (as could have been predicted) in the GOP primary and then beclowned himself by taking up the Libertarian mantle. He’s not alone, there have been plenty of former GOP politicians to hoodwink the Libertarian Party into thinking they had the real juice to get that magical 5% it takes to be taken seriously. The only tragedy is, Gary Johnson is the kind of guy I would have really liked to have seen become successful. But there’s a point, no matter how much I might like someone, that just’ been foreclosed by circumstance. Politics is littered with bodies of people who had the potential to do better, but circumstance conspired against. Hell, that’s probably most of them.

      • Patrick H says:

        Are you serious? Paul had HEAVY support in the millennial vote. You know who was out in GOP conventions? Lots of young people. Paul’s message resonated with young and old, rich and poor. He was never washed up (he got more and more of the vote each year he ran) and had no baggage (other than what people made up to discredit him). He was a principled man who shouted “NO” to every bad law that came about. And EVERYBODY has some utterly despicable allies, whether they know it or not- so that’s a cheap shot without a valid point.

        • Sebastian says:

          If he really had that kind of broad support, he would have beat Mitt. He didn’t, because he doesn’t. And I agree that much of Paul’s message is the key for the GOP attracting a new generation, I think they need to do with someone who isn’t Ron Paul. Could be Rand Paul? Maybe. I’d prefer a Gary Johnson-like figure to take up the mantle, but I think Johnson was just out of politics too long, and it’s not going to be him. But perhaps someone like him.

      • And yet you fail to point out how we would all magically have unicorns and puppys if Romney had won. While many things might be better with Romney than Obama (especially from a gun stand point) spending isn’t likely to be one of them. Next thing you will be pretending that Bush was a fiscal conservative… We have been on the path to the cliff for a while and Bush and Obama have only pushed the accelerator down on the gas pedal even more. Romney campaigned on not cutting anything, I can’t even see him likely to have taken his foot off the gas let alone try to turn around anything. So I stand by my point we were screwed pretty early on as the American people said in the primaries that they didn’t want someone who was willing to make a tough choice they just wanted to kick the can down the road.

        • Sebastian says:

          I don’t think it would have been all unicorns and puppies. Romney was the only tool we had available to get rid of Barack Obama and start turning the ship of state, albeit slowly, a bit more to the starboard, instead of the sharp veer port that the current Captain is taking this ship.

          And no, I don’t think Bush wasn’t a fiscal conservative. I’m not defending Bush’s wild spending. I’ve been hearing from people on the left “Well, this is paybacks for us having to put up with 8 years of Bush,” not thinking that maybe I had to put up with 8 years of Bush too. But Bush did at least give lip service to the need for entitlement reform, but no one wanted to hear it until things got real after 2008. I think Obama knows the current path is not sustainable, but I believe he’s hoping he can arrange everything so that this all blows up in the face of the GOP, and they take the blame, thus guaranteeing the 21st century will be yet another progressive century.

  7. Harold says:

    I think Obama knows the current path is not sustainable, but I believe he’s hoping he can arrange everything so that this all blows up in the face of the GOP, and they take the blame, thus guaranteeing the 21st century will be yet another progressive century.

    I think he’s a fool. He’s no FDR, but he and the Dems might be able to lay a lot of blame on the GOP, which if it ends the party wouldn’t necessarily be the end of the world, it has to radically change or be replaced anyway. I don’t see how he’ll escape plenty of blame for himself and the Democrats, e.g. when was the last time he or they used the word “stimulus”?

    • Alpheus says:

      I remember someone made a prediction that the person elected President in 2012 would be the last President of that particular Party. If so, then Obama winning this election will have backfired. Here’s to hoping that the person who made that prediction is right!

      I’m sort-of hoping that the Republican Party goes down as well, but that’s probably hoping for a little too much. If these parties go down, I also hope that the parties that rise to replace them will be better than the ones we currently have.

      • Harold says:

        Bobb Krumm, but he limited it to a Republican; he thought Romney would win the nomination and I think he thought the election as well.

        Right now things are too path dependent, i.e. when does the free ice cream run out, and who will be blamed for that. And is there any scenario in which the top promisers of free ice cream, the Democrats, survive its end?

  8. NUGUN says:

    Sorry, the choice of Romney was in no way an alternative to avoiding that which you speak of. Just maybe 2-4 years of prolonging its impact. Sadly.

    :-(

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