By Dustin, on September 2nd, 2010
Last month I wrote a post in which I showed the number of undocumented workers vs. how much we spend on border security. My conclusion was that the amount spent on border security had little effect on immigration. The numbers are the best evidence:
Daniel Griswald over at CATO’s liberty blog comes to the same conclusion in his post, What’s Behind the Decline in Immigration? It’s the economy, Stupid. He writes:
The more obvious explanation is the steep economic recession that began to bite in 2008. The downturn has been especially brutal in the housing and construction industries where many illegal immigrants found employment during the previous boom. As evidence, the decline in the number of illegal immigrants has been steepest in those states, such as Nevada, California, and Florida, where the housing downturn has been the most severe.
Libertarians. What can I say, we disagree on macroeconomics, but can agree on this and the need for comprehensive immigration reform.
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By Dustin, on September 1st, 2010
Since the United States started running up large budget deficits when the Great Recession started, there has been some talk by some groups that our debts are “unsustainable” and the United States risks being “Insolvent” and forced into bankruptcy(see here, here, and here).
So let’s say that the deficit levels stay at the level they are and the economy remains bad and it causes the Unites States to become “Insolvent”, then what happens? The answer is, nobody knows. The reason is that no country, that controls its own currency, has ever declared bankruptcy and quit paying its bills.
That being the case, anyone who tells you what would happen, and the warning signs that its about to happen is only giving their best educated guess since its never happened.
That being said, I came up with an idea of how to tell if the United States is heading towards insolvency. First, make a list of all the countries and their debt-to-gdp ratio. This will tell us how much every government owes vs. how much they make every year. Once we’ve done that, we can see where the United States ranks. Now we can look at all the countries that have a higher debt-to-GDP ratio. Presumably any countries that have a higher debt percentage would go bankrupt before the United States. They can be our canary in a coal mine.
Fortunately, Wikipedia has already made the list for us using data from the CIA.
As you can see, if the United States is or is becoming “insolvent”, then so are 46 other countries that will do so first. I don’t see how our government could go into bankruptcy, but not Italy which has more than twice our debt problem.
This isn’t to say debt isn’t a problem, just that we aren’t quite at the point where we need to worry about insolvency. Once our debt-to-gdp ratio is either in the top 3 of the world, or other countries(who control their own currency) start defaulting on their loans, then we should start worrying.
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By Dustin, on August 31st, 2010
The CATO institute is the foremost libertarian political organization. I like their blog because even though it’s ideological, it’s non-partisan. Meaning they will criticize both political parties and criticize both depending on what their advocating. That being said, in a recent post they took some cheap shots to try and disprove Keynesian economic theory.
Wikipedia gives a good summation of Keynesian economic theory:
Keynesian economics (pronounced /ˈkeɪnziən/, also called Keynesianism and Keynesian theory) is a macroeconomic theory based on the ideas of 20th century British economist John Maynard Keynes. Keynesian economics argues that private sector decisions sometimes lead to inefficient macroeconomic outcomes and therefore advocates active policy responses by the public sector, including monetary policy actions by the central bank and fiscal policy actions by the government to stabilize output over the business cycle
Economists who accept this theory usually advocate that when the economy is doing good – as indicated by rising inflation- the government should reduce spending and pay off past deficits, but when the economy is bad – as indicated by high unemployment – our government should increase spending in spite of any deficits that may occur. The key part of the theory is that in a typical business cycle unemployment and inflation are indirectly related. As one rises, the other should fall.
It is with this part of the theory that CATO tries to “disprove” in a post called Does High Unemployment Make Inflation Impossible?
If this “slack theory” of inflation makes you too sanguine about future inflation, recall that it is the same theory that predicted stagflation would be impossible in 1973–75 and 1979–81. Figures from The Economist, August 21, raise some doubts. The latest unemployment rate in Argentina is 8.3%, but CPI inflation over the past year was 12.2%. Unemployment in Venezuela is 8.2%, but inflation is 13.3%. Unemployment in Egypt is 9.1%, but inflation is 10.7%. Unemployment in India is 10.7%, but inflation is 13.7%. Unemployment in Turkey is 11%, but inflation is 7.6%. Wasn’t high unemployment supposed to make high inflation impossible
My first problem with this is that Keynes never said High Unemployment makes inflation impossible, so I think CATO setup a straw man argument.
My second problem is the 2 examples used to point out when the united states had both high inflation and high unemployment. Both of them were caused by a giant oil shock(1973 and 1979). No macroeconomic theory can fix or prevent a sudden scarcity of a natural resource that is integral to an economy. Of course it’s going to wreck it. Those 2 cases weren’t caused by a typical business cycle and had a clear cause.
Third, and finally, CATO tries to disprove their straw man argument by listing off countries that have fairly high unemployment and inflation. The problem with this is that typical inflation and unemployment is different for every country. It varies based on natural wealth of the country, their various policies and laws, and levels of corruption. Therefore comparing one country to another isn’t useful. You have to compare trends within the country.
Let’s take a look at Egypt. According to the CIA, unemployment in Egypt was 9.4%, but inflation was 11.8% in 2009, but in 2008 unemployment was 8.7% and inflation was 18.3%. So when CATO says that inflation in Egypt is 10.7% you can see that 10.7% is a low inflation rate… for Egypt. Turkey‘s numbers play out similarly to Egypt’s. Inflation was 10.4% in 2008, and went down to 6.3% in 2009. At the same time, unemployment, as Keynesian economists predict, went up from 11.2% to 14.1%. I went through all of the countries listed, and India was the only country whose inflation\unemployment didn’t act in perfect accordance of Keynesian economics. However, in India’s case, it’s GDP grew at the same rate both years suggesting that something else was going on because GDP growth and employment rate almost always rise and fall together.
In the end, India and the two oil shocks of the 1970s does disprove the straw man argument that CATO setup. It is possible to have high unemployment and high inflation, however I think that’s a long ways from disproving what Keynes actually theorized.
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By Dustin, on August 30th, 2010
It’s Monday, so not ease back into the work week with some humor. From Allgov:
Nobody likes taxes. The problem is that the United States government needs money—lots of it—to do all the things we want it to do. So we tend to think of taxes as unpleasant necessities. I believe we can eliminate taxes completely. We just need to be more aggressive about creating new sources of revenue. Here are a few suggestions:
Here’s a couple of my favorite suggestions, but you should really go and read the whole article.
Sell Advertising on Paper Money
Take a look at a dollar bill. See that blank border that surrounds the designs on the front and back? There are dozens of companies that would pay huge sums of money to insert their logos and slogans into that space.
*snip*
Sell Invasion Insurance to Dictatorships
The United States spends almost as much money on our military as all the other nations of the world combined. This is an enormous drain on our national budget and we don’t get much in return for all the money we spend. Currently, the U.S. tries to intimidate other nations, such as Iran, by threatening to invade them. Instead, let’s just charge each dictatorship in the world an annual fee in exchange for the promise to not bomb them.
I came up with a couple of my own ideas to add to the list:
- Create a national lottery, but rig it so that nobody ever wins. I think this would be great. People would keep playing this lottery, but our government could just pocket all that money every week. If people get suspicious because nobody ever wins, they can just hire an actor and pretend that person won.
- Piracy. Hey, if it’s profitable for Somalia, surely our navy could do it.
- Sell the moon. Hey! we were there first and if I learned anything in grade school it was “finders, keepers”. If the rest of the world wants any moon real estate, they better” buy now at our low low sell out prices!”
- Hire out CIA agents as bounty hunters. Need someone whacked? Let the government do it for you. If you got enough money, no target is off-limits.
- Borrow Recklessly, then change our phone number. All right, we all got that one deadbeat relative who never pays his bills. Our government should take a lesson from them. Step 1, they run up a bunch of bills. Step 2, change their phone number. Step 3, move out and crash on someone’s couch until the bill collectors give up. Step 4. They start going by a new nickname on legal documents. Here’s how I think this would play out on the international level. Step 1, borrow a bunch of money from China. Step 2, the Whitehouse and congress change their phone numbers so when China calls, they get a busy signal. Of course, eventually they’ll send their collectors to the United States to collect their money – that’s when we go to step 3. We all move to Canada for a few years until things “settle down”. Step 4, we re-emerge as the Combined States of America.
Well, that’s all I got. Do you have a… *ahem* creative suggestion to get rid of taxes.
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By Dustin, on August 27th, 2010
One of my favorite, and most frequent commenters, Robinson, asked a question this week. How does the “fair tax” hold up against modern taxes? What are the problems and benefits? That’s a small question with a big answer. First, let’s figure out how to judge a tax and then next week, I’ll discuss how the Fair Tax holds up against those criteria.
Here are the criteria of how I judge a tax.
- So what is the purpose of a tax? The textbook answer for taxation is of course, “To provide revenue to government for its operation and programs.” Most government entities must collect taxes before they can spend anything. Hopefully this is obvious and needs no further explanation. So the first criteria is “How much revenue will it bring in?”
- A problem with taxation is that it can discourage productive behavior and hurt the economy. For instance, if a city has too high of property taxes, people might move out. Not something the city wants. So the second criteria is “how much does it discourage productive behavior?”
- Another purpose of a tax might be to reduce undesired behavior. This is known as a sin tax. Also, the revenue from the sales can be used to deal with increased government expenses. For instance, the tax on cigarettes would be a sin tax. The higher prices is meant to discourage people from using them, and the revenue from the tax can be used to pay for increased medical costs. So, does a tax discourage undesirable behavior.
- How much does it cost to collect a tax? If the purpose of a tax is collect revenue, then you don’t want to spend more money collecting it than you actually get. For instance, a toll can be an expensive tax because you have to pay someone to sit in a booth all day, every day, collecting tolls.
- The fifth criteria is, how easy is it to enforce? Kind of a related issue to number 4. Will it be possible and practical to enforce the tax. For instance, you could try and tax people every time they charge a rechargeable battery, but how would you enforce it? Also, if a tax is too high it can encourage more and more people to try and skirt around a tax.
- The sixth criteria, if it’s a service tax, “does it pay for what it’s intended to pay for?” This applies mostly to excise taxes and tolls. Examples are tolls you might pay for bridge or particular highway. Another example would be the tax on gasoline. The money raised by that tax is put into building new roads and maintaining the old ones. For these taxes you have to judge if it’s raising enough revenue to pay for what it’s intended to pay for.
- Is a tax fair or does it unfairly target certain groups of people? This is a hard category to judge. For instance, you might say that property taxes unfairly target homeowners, to benefit renters. You might also say that the gasoline tax that pays for our highways isn’t fair because electric cars don’t pay into it, but still use the roads. A tax can be unfair if it tries to collect money from those who don’t have or earn enough to pay the tax.
So those are the criteria I will use when judging a tax. What do you think? Am I missing a category?
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By Dustin, on August 26th, 2010
Let’s pretend for a moment that you’re a bank. You make money by loaning people money and them paying you back with interest. So what stops you from loaning money to whomever wants it? The risk is that the person won’t be able to pay you back. Let’s say though, that some guy comes into your bank and asks for a loan, and tells you that his rich uncle will co-sign the loan. You then do a credit-check of this uncle and find out that he has unlimited money. That means no risk to you. What a deal! Just one question though, why doesn’t that rich uncle just loan the guy the money?
That is my question when the government does so-called “Loan Guarantees”. Often when the fed wants to encourage a private enterprise they will guarantee their loans so that banks will lend them money. The banks take the deal – there’ is no risk to them after all. The company then does their thing. If they succeed the bank makes money and every body is happy – including the fed which owes no money. If they fail, the bank is happy because they still get their money, but the tax payer is left with the bill. If it’s something worth doing, like researching a new technology, encouraging business in a poor area, or developing a natural resource, I don’t mind risking government money on it for the greater good, but why give the banks a free ride?
If the congress thinks something is worth doing and banks won’t loan the money, why not loan the federal money directly from our government? Worse case scenario is that the enterprise fails and the fed is on the hook for the same amount as if it was a guaranteed loan, but if it succeeds, then the taxpayer can actually make money on the deal. This seems like an obvious benefit to the fed and banks no longer get a free ride.
So why doesn’t congress loan money directly? My guess is that it’s all about perceptions over the budget. If congress guarantees a loan in 2010, it doesn’t cost anything for the 2010 budget. In fact, it may never show up on the budget if the enterprise is successful. However, if the enterprise fails, it won’t show up as a cost to the budget until years later. Probably long after the president that approved it is out of office, the congressman that voted for it are now Senators, and the Senators that voted for it are dead or retired. In other words, the people that agreed to guarantee it will be long gone by the time there’s a default and it shows up on the U.S. budget.
So why not stop loan guarantees and start doing more direct lending. There is a recent precedent where this was successful and the federal government came out ahead. It was with student loans. For a long time our government would guarantee student loans to get banks to loan to students for college. The public benefit is obvious – a better educated work force is a more productive work force. However, starting last year, the government quit guaranteeing those loans and started loaning directly to students. Now, according to the non-partisan Congressional Budget Office, the fed is on its way towards saving billions of dollars a year thanks to this decision.
So, why not expand this to all services. For the last month I’ve been reading about all sorts of programs where the government guarantees loans. I think it’s time for politicians to quit hiding our obligations in the short term, and save us some money in the long run.
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By Dustin, on August 25th, 2010
Our government collected fewer taxes in FY2009 than it did in FY2000 – this can be said without adjusting for inflation. In 2000, the government took in 1.54 trillion dollars in on-budget taxes, but only took in 1.53 trillion in 2009. This is despite spending twice as much money in 2009 than in 2000. Tax receipts during the 90s grew fast. That was partly do to higher taxes and also with a phenomenal increases in GDP and wealth. Then came the 2000s. Tax receipts languished from lower taxes, a recession, more tax cuts, another recession, a slow recovery, and then the Great Recession. So as an academic exercise, let’s see where the budget deficit would be if tax revenue had grown instead of diminished during the 2000s. You can see how revenue has slowly, but steadily, gone up during the 80s and 90s, but then went sideways during the 2000s. I included the raw numbers, plus numbers that adjust for inflation.
(Click chart for larger image. Click here for the numbers)
I always read some pundits claiming that the Clinton-era tax and GDP growth was unsustainable(see here for example). Therefore, I calculated the tax revenue increases of 1993-2000. The average growth was 8.78%. However, since I’m adjusting for inflation now, I adjusted everything to 2009 dollars. This yielded average growth of 6.01% in tax revenue from 1993 to 2000. However, since people accuse that being unsustainable and unrealistic, I decided to chart out the slowest growth in tax revenue from the Clinton Era. It was 5.9% if using non-adjusted numbers and 3.61% if using adjusted numbers. Here’s what revenue would’ve been like if the 2000s had averaged the slowest rate of the 90s.
(Click chart for larger image. Click here for the numbers)
Whether or not you adjust for inflation, it would’ve put on-budget revenue at approx 2.6 trillion$ in 2009 and 2.74 trillion in 2010. What that means is that the on-budget deficit would’ve only been 400$ billion dollars in 2009 if our spending patterns had been exactly the same. However, if you strip out all the spending that was done because of the great recession, but keeping stimulus spending, that would’ve been 397$ billion in spending cut. The 2009 budget could’ve been balanced if revenue had grown at the slowest rate it grew in the Clinton Era, and there had been no Great Recession. No other adjustments necessary.
Now let’s explore another scenario. Let’s say that tax revenue had grown even slower than the slowest rate it did during Clinton’s presidency. I decided to take a look at what the average growth rate for tax revenue has been since 1962. When adjusting for inflation, the average growth rate from 1962-2000 was 3.16%. However, if you exclude the Clinton era completely it’s even lower. From 1962-1992, the average growth rate was 2.4%. You can see my raw numbers and other statistics here. I added to the graph what would’ve happened if the 2000s had maintained revenue growth in accordance to the historical averages. This time I only included the adjust for inflation numbers.
(Click chart for larger image. Click here for the numbers)
If 63-2000 average tax revenue increases had occurred in the 2000s, the 2009 revenue would’ve been about 2.55 trillion. That means the 2009 budget would’ve only had a 50$ billion dollar deficit once you take away the Great Recession spending. That probably would’ve been easily covered if you eliminated the 2009 stimulus spending.
If 63-1992 average tax revenue increases had occurred in the 200s, the 2009 revenue would’ve been about $2.38 trillion. That would mean that the 2009 budget would have to have been about 620 billion dollars lighter. If, once again, we assume no Great Recession and remove $400 billion, that still leaves 220$ billion to cut from spending. Not an easy task, but much less daunting than the 1,500 billion dollars we actually had because of sideways revenue.
If there had been no recession, where would you cut that 220$ billion from the 2009 budget? Remember – I already removed the direct costs of the recession(and only those costs).
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By Dustin, on August 24th, 2010
This is a commission that was created in 1998 that was supposed to do for Alaska, what the Appalachian Regional commission Denali is supposed to do for Alaska. Here’s a description of the commission’s history and goals:
the Denali Commission is an independent federal agency designed to provide critical utilities, infrastructure, and economic support throughout Alaska. With the creation of the Denali Commission, Congress acknowledged the need for increased inter-agency cooperation and focus on Alaska’s remote communities. Since its first meeting in April 1999, the Commission is credited with providing numerous cost-shared infrastructure projects across the State that exemplify effective and efficient partnership between federal and state agencies, and the private sector.
I question the wisdom of this program when the program it’s based on, the Appalachian Regional Commission, hasn’t succeeded in it’s mission over the last 45 years.
The late Senator Stevens essentially created this commission. Some of his critics suggest imply that the commission was just his way of institutionalizing his pork barrel spending. Allgov calls the commission his “pet project”. While in congress, Senator Stevens would lament the difficulty of keeping the commission funded.
It will be interesting if the funding for the program remains without it’s biggest champion in congress. Here is the history of it’s spending and it’s projected spending according to the White House’s latest budget figures. (Raw numbers)
 Click Chart for Larger Image As you can see that the spending on the commission is surging right now – probably from the stimulus, but is set to almost disappear over the next 3 fiscal years. That funding has plenty of time to come back. It’s hard to keep popular programs down, and apparently, many rural Alaskans really like the things it’s doing.
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By Dustin, on August 23rd, 2010
As the yearly budget deficit has grown radically during the recession, so has the total debt that the United States has accumulated in it’s 234+ years of existence. So how much does the United States owe? Well… there’s really 2 answers to that. If you want the numbers, here they are. The total US federal debt is approaching $13.5 trillion and approaching $8.9 trillion. zFacts has a national debt counter if you want to see what the total debt is, this very moment. If you’d like an explanation of why there’s 2 answers, read on.
As you probably know, there’s this thing called the Social Security Trust fund. Actually, there are lots of government controlled trust funds out there. Many of them have lots of money in them(Like Social Security). The first number doesn’t add in the value of these trust funds, the second number does. Which number is the “real” debt number is all in how you look at it.
If you look at it as the trust funds exist and the government has “borrowed” from them to support spending today, then the federal debt is indeed approaching $13.5 trillion dollars. However, if you look at all the money the federal government owes minus what it’s “saving” in it’s trust funds, then the federal debt is only approaching $8.9 trillion dollars.
Before you decide how you want to view the debt, you may want to think about the consequences of your view on social security. If you view the federal debt as $13.5 trillion, then you must also believe that the social security trust fund is fully funded and will be fine until it runs out in 2037. Conversely, if you view the United States debt as only $8.9 trillion, then you must believe that social security is already in crises because the so-called “Trust Fund” is nothing but government bonds that have already been spent by the government, and that Social Security checks are going to start coming out of the general fund.
I included this last paragraph because U.S. government debt is usually reported as the larger number(i.e. Heritage Foundation and OpenMarket). However, those same organizations then claim that the Social Security Trust Fund has been raided and is empty(See here Heritage Foundation, OpenMarket). Well good news, guys! If the Trust fund is “empty”, then the national debt is only $8.9 trillion.
It is one way or the other. The United States federal debt can’t be over $13 trillion dollars AND have an “empty” Social Security Trust Fund. Those statements are not compatible no matter how you look at it. Anyone who tells you otherwise is either a liar or has been lied to themselves.
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By Dustin, on August 20th, 2010
The Appalachian Regional Commission is a partnership between the federal government and 13 states with territory that exists in Appalachia. It is a slowly dieing entity that spent 68 million dollars in 2009. Here’s a little history of how the program started in 1965, courtesy of wikipedia:
Beginning in about 1960, the Council of Appalachian Governors, a group of the nine governors of the Appalachian states of Alabama, Georgia, Kentucky, Maryland, North Carolina, Pennsylvania, Tennessee, Virginia, and West Virginia, united to seek federal government assistance for the mountainous portions of their states, which lagged behind the rest of the United States in income, education, health care, and transportation. During the 1960 Presidential campaign, candidate John F. Kennedy met with the governors to hear their concerns and observed living conditions in West Virginia that convinced him of the need for federal assistance to address the region’s problems.
Here is the stated goals of the commission from their website.
RC funds projects that address the four goals identified in the Commission’s strategic plan:
- Increase job opportunities and per capita income in Appalachia to reach parity with the nation.
- Strengthen the capacity of the people of Appalachia to compete in the global economy.
- Develop and improve Appalachia’s infrastructure to make the Region economically competitive.
- Build the Appalachian Development Highway System to reduce Appalachia’s isolation.
Now, here is why I said that it’s a slowly dieing program. It’s funding has been declining for the last 40 years except for a few years during the 90s. (Raw Numbers here.)
 Click Graph for larger Image. In fact, the commision no longer even has sole control over one of it’s primary goals: The Appalachian Development Highway System(ADHS). The ADHS is now funded through the department of transportation since 1999. Even, if it still controlled those funds, it’s funding would mostly be going down. (Raw Numbers here.)
 Click Chart for larger Image. Even if you counted the Highway system, you can see that the cost of the program has been going down for a while. To that I say, why not? The stated goals of the commision is to bring appalachia living standards on par with the rest of the nation. The program is now 45th anniversary. You would think that 45 years would be enough time to accomplish a goal of bringing people out of poverty. If the commission hasn’t succeeded by now it must be either incompetent, or underfunded.
I easily found 2 sources that make the case that past funding has been insufficient considering the goals of the commission(here and here), but could not find anyone claiming the opposite. I cannot help but wonder if perhaps the commission had been properly funded from the outset if they could’ve saved some money long term. After all, if the region was economically productive, it would mean more tax payers and fewer recipients of social security and welfare.(so no one is confused, I am not saying all Appalachians are living off the government, but many areas have a higher percentage than the national average)
Whatever the reason is that Appalachia still has hight poverty rates, it’s pretty obvious that someone screwed up. Either the commission is incompetent\focusing on the wrong problems, or congress has not properly funded the program.
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