A couple of days ago Ray Dalio (or his social media assistant) had a impassioned post at LinkedIn on how urgently we need to balance the federal budget. I presume that was an indirect pitch for his new book.
I put a response there which has received a few approvals with a simple question: how? The only budget item that really could use cutting is healthcare spending and we can’t balance the budget by cutting taxes. Indeed, we need to raise the effective tax rate and that’s harder than it sounds. The effective tax rate on the top 1% of income earners has been remarkably steady since 1950 (2025 update here) despite a reduction in the top marginal tax rate from 94% to its present 37%.
As to cutting healthcare spending we’ve never been able to manage to do that. The most we’ve accomplished is slowing its rate of increase which is what was done in the last budget.
So, I’ll ask my questions here. How do you increase the effective tax rate; how do you decrease spending? I’m in favor of it. I just don’t know how.
I think the outcry over DOGE tells us we don’t yet have political will to cut spending.
Effective tax rate? My gosh, we already have roughly half the population paying no income taxes. People paying the freight push back when they feel they have in fact paid their “fair share”. I think the rate has remained stable because it’s human nature.
So. How to balance a budget? My only answer is growth. And you don’t optimize that in an economy devoted to more government, redistribution and regulation.
I agree with Drew that the outcry over DOGE says we don’t have the will to do it (yet). Further, the fact that the rescission package barely passed is also a bad sign. We cut $9 billion dollars out of a $7 trillion dollar budget. That amounts to 13 cents out of every $100 the government spends. I am thankful we cut the 13 cents, but we need a lot more.
How do you eat an elephant? One bite at a time. What are the bites we can take? Some of it gets into the perverse incentives the government creates with their programs. Here is an example:
My friend Larry retired from the plant and started drawing Social Security. He was a very good engineer and would come back to work part time until he reached the income limit where the government would effectively give a 50% tax penalty in loss of Social Security benefits for any more earnings. We would not see Larry the rest of the year. From an government spending perspective, they did not save any money by this policy. They did lose tax revenue from him not working more. Eliminating this penalty would remove a perverse incentive against work and more income. There would be a net revenue boost as it also creates more economic activity.
We have multiple safety net incentives that are terrible. They discourage people from working. I think there was a study in Chicago that showed getting a pay raise at income levels between minimum wage and $18.00 per hour actually decreased net cash for those using the social welfare system. I’ve seen it personally where a friend has a son with Muscular Dystrophy. When her husband started earning more, she had to quit her job to avoid losing Medicaid for her son. This cost the government revenue and caused the economy to shrink.
Charlie Munger described incentives as superpowers. Our laws need to be modified with that understanding. Incentives have superpowers, but our laws create a ton of perverse incentives.
Like Argentina, we will get around to fixing the problem when the crisis is bad enough.
On another site at which I comment, the response uniformly is that we should balance the budget by cutting defense.
In the most recent budget the amount appropriated for defense is $1 trillion and the projected deficit is $1.9 trillion. Not to belabor the point but we can’t eliminate the deficit by cutting defense. If we can squeeze defense contractors, we should do that but it still won’t accomplish major reductions without having our military do less. And even then we will need to make substantial cuts in other areas, namely healthcare spending.
“If you’re in a hole, stop digging.” — Will Rogers
It probably wasn’t Will Rogers since the first time that quote appeared in print was before he rose to prominence but I agree in principle.
I think the problem is less the aspiration than the accomplishment which is impeded by the incentives of public officials.
I think the fact that DOGE was resorted to as a way to cut spending showed the real lack of will. The cutting should be done by Congress, not by one guy with a team of 20 year olds who knew nothing about what they were doing. The outcry was over the way it was done. There are literally thousands of people who have worked in government and business who would have been better able to make judgments about what and how to cut.
Steve
I don’t believe that. I believe the outcry was over that Trump sponsored it and that it was being done at all.
There is a significant faction among the Democrats who’ve been aspiring their whole lives to be government apparatchiks. That’s the problem with Ezra Klein, MY, and the other “abundance” Democrats. They mean “central planning”, e.g. jobs for them.
Dave Schuler: I think the problem is less the aspiration than the accomplishment which is impeded by the incentives of public officials.
Passing a tax cut when already running large deficits is the surest way to make the problem worse. Stop digging.
steve: I think the fact that DOGE was resorted to as a way to cut spending showed the real lack of will.
Quite so. Spending is the responsibility of Congress. Wresting control from Congress is damaging to constitutional safeguards. Yes, representative government is messy.
Keep in mind that Caesar and Hitler both initially took power through legal and constitutional means. Caesar was made dictator under provisions meant for emergencies (sound familiar?), while Hitler was appointed Chancellor, and then the supine Reichstag (sound familiar?) passed the Enabling Act gave him the legal power to rule by decree. Of course, Trump is no Caesar, the latter being an administrative genius. Nor is Trump a Hitler, the latter holding deeply held beliefs.
I have opposed every tax cut of the last 25 years. This one is no exception.
“I don’t believe that.”
Then you are wrong. If the cuts had been undertaken by Congress there would have been heated debate and people would have been unhappy. No matter the outcome no one likes losing. However, article after article focused on how people were told they had to immediately leave the office or had two weeks until they had to leave. AS you should know businesses dont usually act like that unless they are really in trouble.
There were lots of reports about how the 20 year olds making decisions on whom to fire let go the wrong people and had no idea to get them back. How they stranded US workers in foreign companies with no way to return. That provoked a true outcry. On the legal front it provoked an outcry since it was viewed by most people that Congress had already passed budgets and laws and Musk/Trump had no authority to bypass Congress.
The left was going to oppose anything Trump did. On that I will agree. But the manner in which DOGE was formed and acted was unique, outside of any established norms, was incompetent by almost any standard, lied from the very beginning and continuously about what they were doing and was a surprise to almost everyone. Note that Trump didnt run on the plan that govt spending would be cut based on the whims of Musk and a bunch of 20 year old coders.
Steve
Now you have just said that the outcry was because of the way it was done AND there would have been an outcry if Congress had done it AND that I was wrong for saying that there would have been an outcry regardless. Pick one.
I am assuming that you meant by outcry an exaggerated response with a lot of emotion. Using your apparent definition we have had an outcry over every bill or regulation ever passed by Congress. So I am not saying there would have been an outcry if Congress had made cuts. I am saying that there would have been disagreements in line with past actions by Congress. The response to DOGE was pretty heated, well beyond normal acts by Congress and it was mostly driven by the facts that its was being done by one person in charge of a bunch of 20 year old coders.
Query- You have a long career in business. If you needed to cut spending in any of those would your first choice be to ask a 23 y/o coder with no experience in your business to make the decisions and they would make the decisions after only a week or less of looking at computer records and mostly not talking to anyone working within your company including you? Is that how you would do things or does that seem absurd?
Steve
Charlie Musick made some valid points. The one about incentivizing work was one I personally ran into during a brief public health stint. One of my clients wanted desperately to get off of welfare, asking for help to enroll in an LVN nursing program so she could become gainfully employed to support herself and her kids. My superiors told me it was a waste of time, discouraging me from helping her, saying her best choice was just to stay on welfare. After I left that job I continued to stay in touch with this woman, getting her into a program which she graduated from, and went on with her goal of self support. Her plight, and how the government felt it better to keep her dependent on them, was an enlightening lesson for me.
Also, Russ Vought, Director of the OMB, put together that small $9 billion recession package more as a trial balloon to see if it could pass congressional approval. The fact it passed at all, with only a small margin, was still a major boon creating impetus to send up more rescission packages that will slice away our deficit more in bits and pieces than what was dramatically suggested by Musk. Regarding Musk’s role in all this, without the interjection of his group of young geniuses the window shade of how much fraud and waste there really is would never have been pulled.
Didn’t use the edit function. Should have corrected recession to rescission.
My first choice wouldn’t have been a 54 year old billionaire who didn’t grow up in the United States with no experience in my business sector but considerable experience in raising ruckuses. The 23 year old was the 54 year old billionaire’s choice. Being smart is not enough.
I’ve posted on this subject before. What we need is someone with extensive experience in government who realizes that it needs a major overhaul. That’s nearly a contradiction in terms.
The Republicans prefer a professional disrupter; the Democrats prefer to make no cuts (although some seem to want to cut the defense budget to zero which is insane). During Bill Clinton’s term of office you could tweak around the edges and improve things considerably but a lot has changed since then. We’ve spent trillions we didn’t have and operated under the delusion that we could deindustrialize, let China provide our heavy manufacturing for us, and maintain military primacy.
I’ve posted on this subject before. What we need is someone with extensive experience in government who realizes that it needs a major overhaul. That’s nearly a contradiction in terms.
Yep, you’ve been saying that for over twenty years that I’m aware of. As well as much else you stated above in both the post and the comments. I believe you’re mostly correct.
I believe I’m correct that our elites have no idea what else to fo other than more of the same, and that many of them know this must be a disaster for the nation sooner or later, and for whatever reasons (none of them good), they don’t care or actively want disaster.
Regardless of all that, it’s good to see you still active. I hope you and yours are all doing well. Fwiw we’re doing well enough on my end.