Whatever Can’t Be Sustained Won’t

There’s an excellent post at Of Two Minds chock-full of nice charts and graphs (for those of you who like nice charts and graphs) in a similar vein to my earlier post this morning. Here’s the 30 second summary:

  1. GDP growth has averaged about 2% since 2000.
  2. GDP growth has been flat since 2007.
  3. GDP growth since 2007 would have declined 11% without massive federal spending.
  4. Public employee healthcare costs in many jurisdictions have grown by 11% per year since 2000.
  5. Adjusted for inflation stock gains since 2000 have been negative.
  6. Public employee pension promises assumed annual gains in the vicinity of 8%.

These charts make it clear where we’re going in terms of public pension and healthcare costs. The real economy isn’t growing at all, or is actively shrinking if we remove massive Federal stimulus, and long-term returns in stocks are negative.

But let’s make the happy-story assumption the U.S. economy is about to resume its long-term GDP growth rate of abour 2% per annum.

A 2% (inflation-adjusted) growth rate in the real economy compounds to a 24% increase over 11 years, while an 11% annual increase in pension and public employee healthcare costs compounds into a 315% increase.

Is that disparity sustainable? Clearly, it is not.

You can’t fix that with tax increases, unless you’re planning on increasing taxes every year. The best you can do with that strategy is divvy up the ever-decreasing pie. This is no way to run a railroad.

20 comments… add one
  • john personna

    “unless you’re planning on increasing taxes every year”

    That almost sounds like the right plan ;-), a five or ten year progression in tax rate.

  • Arithmetically sound, politically impossible, likely economically disastrous.

  • john personna

    It is actually the one prudent plan, economically speaking. It is pure counter-cyclical taxation. You’d do a five or ten year progression timed to the recovery (and contingent on it).

    But as you say, politically impossible (as with everything else discussed here and at OTB today).

    This will be won or lost with sound-bite arguments. It will be “tax cuts make jobs” versus “tax the rich” with rare mention of pre-planning and economic cycles.

  • GDP growth since 2007 would have declined 11% without massive federal spending.

    Hmmmm….The precise nature of the figure is debatable, but qualitatively its fairly reasonable. At best what we did was transfer future growth to the present. That is future growth will likely be lower than what we’ve seen say since 2000. Unless of course you spent that money on things that will be productive in the future. Problem is most fiscal policy stimulus folks point to programs where their future productivity is…dubious. Things like unemployment insurance and food/income support spending isn’t likely to result in investments that have a long term payoff.

    Which further highlights why the assumption of returning to 2% average growth might be overly optimistic.

    As I indicated from the post earlier today the solution to our fiscal mess is: the null set. Proof: Trivial. Q.E.D. As such we’ll continue along as best we can then things will get really really bad. And with the large corporations essentially owning D.C. it is pretty obvious how the economic pie will be split up.

    It is actually the one prudent plan, economically speaking.

    Not really. See as you raise taxes higher and higher, contrary to the periodic argument around here, productive assets will either become fallow or move. Why put effort and time into an endeavor only to see your work be increasingly appropriated by a government that cannot control its voracious appetite? Even if you did get a tax hike through I think it is even money that spending would simply adjust upwards to the additional revenues. Factor in compounding of debt and it is likely that the process will accelerate.

    The solution that would work is a complete overhaul of our fiscal system. Something like a consumption tax/VAT along with changes in our financial system to reduce the likelihood of bubbles/financial collapses. Will we get it? No, way too many people have their fingers in those pies and like it just the way it is.

  • Drew

    “At best what we did was transfer future growth to the present. That is future growth will likely be lower than what we’ve seen say since 2000. Unless of course you spent that money on things that will be productive in the future. Problem is most fiscal policy stimulus folks point to programs where their future productivity is…dubious.”

    Exactly. A point my favorite economists – and me in sympathy – have been making for about two years.

    “Even if you did get a tax hike through I think it is even money that spending would simply adjust upwards to the additional revenues.”

    The empirical evidence suggest far better than even money. Almost metaphysical certainty.

    “See as you raise taxes higher and higher, contrary to the periodic argument around here, productive assets will either become fallow or move.”

    Impossible. Micheal Reynolds told me so. As I write this I’m in Naples, FL looking at real estate, not viewing IL’s debt circumstances and probable future tax policy favorably. This, of course, is also impossible. Michael Reynolds told me so.

    Separately. While on a boat ride on the Gulf this afternoon saw a bald eagle. First time. Not more than 40 feet away. That’s one tremendous bird.

  • Dave,

    I’ve pointed a number of people to this post. It’s a bit disturbing that several say the problem is not affordability but a lack of will to give people what they were promised.

  • john personna

    Not really. See as you raise taxes higher and higher, contrary to the periodic argument around here, productive assets will either become fallow or move. Why put effort and time into an endeavor only to see your work be increasingly appropriated by a government that cannot control its voracious appetite? Even if you did get a tax hike through I think it is even money that spending would simply adjust upwards to the additional revenues. Factor in compounding of debt and it is likely that the process will accelerate.

    I understand that your political philosophy is rooted in a dark cynicism. Heck, my own is rooted in a milder form of the same affliction.

    If the only thing wrong with countercyclical economic planning is that people might not be happy with that success, and might mess it up with higher spending (or less tax), then it isn’t really the plan that is at fault. It’s the “mess up,” kind of like what we have now, that’s at fault.

    (I think VAT’s main attraction is the taxes that go away, and the suggestion to the listener that they’ll come out ahead. How that really pays the bills … I’m not so sure … a little too cynical.)

  • john personna

    ““At best what we did was transfer future growth to the present. ”

    Most people would accept a lot of growth in the present in exchange for a small skim over the next 40, 50 years.

    That’s essentially what let us pay of WWII debt, while enjoying continued growth.

  • A VAT for the United States brings the differences between the political systems and experience for the United States and most European countries into high relief.

    We have a winner-take-all system; most European countries have parliamentary systems with some form of proportional representation. European countries never went through a Tammany Hall/spoils system period. Here in the U. S. there’s a fear, born of experience, that majorities or pluralities will wring all they can out of the system to benefit themselves and their constituencies. That’s mitigated somewhat by the proportional system in European countries and by different expectations of how government should behave.

    Here in the one party Chicago the squabble is among the South Side (mostly black), the Southwest Side (mostly white, Irish/ethnic), the West Side (mostly Hispanic now), and the Northwest Side (mostly white ethnic and which pays a disproportionately large share of the taxes). Each group believes with all its soul that control of the reins means it’s their turn to grab the goodies and Katie bar the door. There are no restraints to spending other than revenue and if the constraints on revenue are easily lifted it will be a ticket to disaster.

  • I understand that your political philosophy is rooted in a dark cynicism. Heck, my own is rooted in a milder form of the same affliction.

    There is nothing dark nor cynical about it. People respond to incentives. An incentive to invest and work is the payoff. Reduce the payoff you reduce the incentive to invest and work. Pretty freaking simple.

    Granted some people will never have the luxury of leaving the U.S. but investment sure as Hell can. I got news for you we have a current accounts deficit. A big one. But that isn’t bad (or all bad) because it means foreigners are doing the investing Americans wont (can’t really with our craptacular savings rate). You did see the italicized word right? If the return on investments in the U.S. goes below the second best option in country Whatever, then investment will fall and go elsewhere. Less investment today means less production tomorrow.

    And those people stuck here? Well that can always devote more time to activities that are not taxed. For example some people in the Midwest might be able to have a garden in the summer to offset part of their food bill and that work will harder to tax. A wife (or husband) might find that staying home and providing day care for her children while the husband works is a better use of her time which is untaxed and will save them added costs of daycare. She could also do other things that can add value to the household that are untaxed such as preparing food vs. buying prepared food. Yes it means greater hardship and lower standings of living…but I have never denied this aspect of perpetually raising taxes.

    Like I said, pretty freaking simple and no dark cynicism involved.

    I think VAT’s main attraction is the taxes that go away, and the suggestion to the listener that they’ll come out ahead. How that really pays the bills … I’m not so sure … a little too cynical.

    Have you read Hall and Rabushka’s proposal for a flat tax? It ends up working very much like a VAT. It is a “better” tax as it doesn’t have quite the same distorting impact an income tax does and is easier to figure out your taxes. This would add lots of money back into the economy towards productive endeavors that either wasn’t there to begin with or was unproductive. Many people would end up with more money in their paychecks and could spend more, this spending would stimulate economic growth as well. Now maybe you are right, that even this is too pie in the sky, but we could still switch to a better tax regime that would result in less onerous tax increases. But no, we can’t do that. Instead we have to say that Steve’s views on taxes are informed by a dark cynicism. Any cynicism I have is due to our current system which is so completely fucked up, and everyone running around thinking, “Well if we elect just the right guy, and make just the right tweak to the current regimes….”

    Here in the one party Chicago the squabble is among the South Side (mostly black), the Southwest Side (mostly white, Irish/ethnic), the West Side (mostly Hispanic now), and the Northwest Side (mostly white ethnic and which pays a disproportionately large share of the taxes). Each group believes with all its soul that control of the reins means it’s their turn to grab the goodies and Katie bar the door. There are no restraints to spending other than revenue and if the constraints on revenue are easily lifted it will be a ticket to disaster.

    Well, there you go. The wonderful beauty of democracy with an activist government that can spend money pretty much however it likes so long as it is in power (or that sub-party). By the way, that isn’t a cautionary tale about a VAT it is a cautionary tale about any and all tax increases.

  • Most people would accept a lot of growth in the present in exchange for a small skim over the next 40, 50 years.

    Sure if that is all we had to worry about. But it isn’t so this is a stupid comment.

    That’s essentially what let us pay of WWII debt, while enjoying continued growth.

    This ain’t the 1950s. Another stupid comment. I’d recommend you stop now.

  • steve

    “People respond to incentives.”

    If we pay teachers more, we will get better teachers?

    Steve

  • john personna

    Reductum ad absurdum, steve

    Or at least that’s the way my phone spells it.

  • If we pay teachers more, we will get better teachers?

    Or simply more teachers…more good ones, more bad ones, more average ones.

    The idea that you can just get better ones is somewhat dubious, IMO.

  • See as you raise taxes higher and higher, contrary to the periodic argument around here, productive assets will either become fallow or move.

    While true as far as it goes, taxes cannot be reduced to zero, so you’ll have to live with some of the ill effects of taxation regardless. The goal shouldn’t be to relentless reduce taxes in pursuit of maximizing productive capacity – rather we need to balance the benefits of taxes vs the costs. On the whole, I think the balance currently favors increasing federal taxes. After all, we’re at the point now where more than half the population doesn’t pay anything at all.

    I recently did my taxes and on an income of $85k a year my effective income tax rate is 3.7% – less than 12% if you include FICA. Add in my untaxed benefits (health care, etc), my total compensation is about $110k, so my tax rate is even lower. I personally don’t consider myself overtaxed.

    If the government takes more of my money then I will have to adjust somewhere and I’ll be less productive but given our nation’s fiscal state I see little alternative to increased taxes on pretty much everyone along with non-trivial spending cuts. You can reduce my tax burden to zero and I will certainly be more productive (actually, that money would go to additional saving), but it won’t do much good when this country flies off a cliff into Argentina-land.

  • Andy,

    Uhh…what? I wasn’t saying taxes should be reduced to zero, but responding to a suggestion that we implement a 5-10 year plan of annual tax increases or some such along with the notion that it wouldn’t have significant economic fallout.

    I recently did my taxes and on an income of $85k a year my effective income tax rate is 3.7% – less than 12% if you include FICA. Add in my untaxed benefits (health care, etc), my total compensation is about $110k, so my tax rate is even lower. I personally don’t consider myself overtaxed.

    Lucky for you, but reasoning from an unrepresentative sample does not make for an impressive argument.

  • Steve,

    I’m not sure what you mean by the null set in the context of our current fiscal situation – could please elaborate?

    As for my taxes, I’m not that atypical.

  • I’m not sure what you mean by the null set in the context of our current fiscal situation – could please elaborate?

    The null set is also called the empty set–i.e. it contains nothing. In this case, there is no feasible solution.

    As for my taxes, I’m not that atypical.

    That depends doesn’t it on how you compare to others with similar income as yours, doesn’t it. Saying you aren’t that atypical is quite different from demonstrating it.

  • Steve,

    The null set is also called the empty set–i.e. it contains nothing. In this case, there is no feasible solution.

    Thanks, that makes sense.

    That depends doesn’t it on how you compare to others with similar income as yours, doesn’t it. Saying you aren’t that atypical is quite different from demonstrating it.

    You’re right. Here ya go.

  • You’re right. Here ya go.

    Well that shows that people who are like you pay similar taxes, not that surprising. Looking up on that chart the single dude who works just as hard as you would pay taxes 2x to 4x higher than you do. Maybe you should have your taxes increased, but what about the single guy? In 2008 his effective federal tax rate was 4x yours, should his go up too?

    Here is an idea, next year why don’t you pay 2x your taxes and don’t take the refund….donate it to the government. Go into your employer and find out how much they withhold every month and double it with an additional lump sum being withheld each month. Some how I think when you see that smaller paycheck each month your wife will be a bit pissed at you.

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