The False Concept of Tax Cuts

There seems to be a rule of thumb among many Republicans lately that has caused me large amounts of confusion. Apparently, cutting taxes will increase government revenue when the economy improves due to the tax cuts. Republicans hold Ronald Regan up as a shining example of the success tax cuts have as economic stimulus. However, this simple explanation of success falls short of historical accuracy.

This belief of tax cuts to encourage economic growth is known as “supply side economics”. The economic theory postulates an increase of government revenue at a lower tax percentage due to a growing economy. This theory is dependent on economic expansion resulting from new tax cuts yet if an economic contraction occurs, government deficits increase drastically. This risky maneuver has backfired every time since 1980 but the belief tax cuts help the economy stems from false concepts of what has caused economic recoveries in the past thirty years.

Ronald Regan implemented supply side economics during his first year in office by cutting $39 billion from the federal budget; created a 25% tax cut over three years, and faster write-offs for capital investments. The gamble was that such a huge tax cut would shock the economy from its stagnant state and the result would be a growing economy which would cover the cost of the government tax cuts. Instead of economic expansion the country fell into a recession and a mounting federal deficit forced Regan to increase budget cuts and increase taxes.

During the recession in 1982 the Federal Reserve Chairmen Paul Volker had worked to decrease the double digit inflation and lower the double digit interest rates that were crippling the economy. When Volker’s many painful reforms started to lower inflation and interest rates the economy boomed while Regan was increasing taxes and cutting spending to handle the federal deficit. The economy flourished during Regan’s Presidency but the federal debt was growing at a frightening pace. The promised increased government revenue was not materializing.

Republicans claimed that supply side economics had created the economic boom of the 1980’s although lower inflation and lower interest rates were the real drivers of the economic expansion. This Republican propaganda spin allowed George H.W Bush to win the election in 1988, fortunately, Bush did not hold to the “Voodoo” economic policies of Regan.

President Bush felt that America could not grow and prosper with the growing federal debt. Bush pushed for more federal spending cuts but the Republican congress also wanted to cut taxes again which would have increased the deficit in 1989 to $500 billion. Instead of increasing the debt levels, Bush signed a Democratic bill that raised taxes to battle the deficit left by Regan. The Republican voters felt betrayed by Bush who had promised “no new taxes.” Bush’s political career was killed when he signed the bill. Although Bush’s broken promise cost the Republican Party the election in 1992, the tax increases halted the budget deficit and helped Bill Clinton and the conservative congress to create a large federal surplus in the 1990’s. The 1990’s saw a long economic expansion with no tax cuts, instead, low interest rates and low inflation once again spurred economic growth.

This decade of prosperity came to an end when George W. Bush won the election in 1999 and returned the political agenda to supply side economics. In his first year Bush passed a slew of new tax cuts and championed many new financial reforms focused on easing the accounting standards of large corporations. At the same time he increased welfare programs with no balancing tax increase to cover the spending. The country entered the Tec and Telecom recession which reversed the federal surplus in two years. By 2005 the country was engaged in two military conflicts while more tax cuts took place.

During this period of increasing debt levels the US economy recovered from the 2001 recession but this success was not due to the many Bush tax cuts. The new fed chairman Alan Greenspan kept interest rates artificially low to stimulate economic recovery and this was mixed with Bush’s increased mortgage spending through Fannie and Freddie Mac. The mixture led to an economic recovery which eventually caused the housing bubble burst in October of 2008. Faced with economic depression due to his tax cuts and increased mortgage borrowing, Bush passed the $700 billion TARP bill to rescue the nation’s credit markets further increasing the national debt.
By looking at the historical timeline since 1980 it seems that cutting taxes did little to stimulate the economy and increased the federal debt levels astronomically. In addition, entitlement programs such as social security, welfare, and Medicare were expanded with no tax increases to balance the new entitlement spending. Every major tax cut since 1980 happened before or during an economic contraction. Each recovery was due to a combination of lower inflation or low interest rates and not from large tax cuts.

For me to say that lower tax rates are bad for the economy would be a false statement. Lower tax rates over long time periods encourage less government spending and increases a strong and vibrant economy. That said, large tax cuts in short periods of time while increasing spending has led the large debt America has created.

America has to decide if we will pay off our debt and cut spending or cut taxes in political retaliation to a liberal president which will place a tombstone over our fiscal grave. When will America put aside our political differences and realize we have a responsibility right now to pay for our borrowing? I guarantee if we cut taxes more our nation will be forced to default before end of the decade. The discussion should not be about taxes but about entitlement spending that is bankrupting this nation. I personally choose responsible taxes and spending cuts rather than a second great depression.



Some Sources:

http://www.reagan.utexas.edu/archives/reference/reference.html
http://www.reagan.utexas.edu/archives/reference/pressketch.html
http://www.investopedia.com/terms/v/voodooeconomics.asp
http://yellowroad.wallstreetexaminer.com/blogs/files/2008/06/inflation.gif

Let’s Have a Rational Talk about Healthcare

The rage healthcare creates keeps me out of the debate most of the time. I research what companies will make money from this bill because that is my job. However, I am a member of this nation and feel it is time to place my 2 cents into the firestorm.

My attention to healthcare was sparked by how much the United States spends on healthcare. The United States spends more as a percentage of GDP than any other nation in the world. In 2007, the United States spent 16% of our GDP on healthcare; compare that to 11% by France and 9% by the United Kingdom. However, spending is not the problem, the problem is the low quality of our healthcare system. The US came in at 16 of healthcare quality in the world, this indicates a systematic problem.

If the problem is a system issue, then identifying the main cause of troubles is imperative. Government involvement in healthcare is not new. The government officials that started the involvement process were trying to help yet the system got worse. There is nothing wrong with trying to create a better system but if the government solution was to throw money at healthcare in the name of helping the poor, then they planned poorly. The result of government involvement is a nightmare of perverse incentives that has turned the system away from the patient. How much money a hospital can get out of a patient is the most important aspect of most doctors. Add in the fear of lawsuits, defensive medicine, and no competition between hospitals you get an extremely expensive healthcare system.

Monetary expense is only one type of cost this nation pays. The number of people that die from hospital born disease and mistakes is staggering. 40,000 people died last year from staph infections they acquired in the hospital; that is unacceptable. In addition, government involvement in colleges has lead to an exploding cost of college and this includes medical schools. There are not enough doctors graduating from medical school to replace retiring professionals. There is a 100% chance of a shortage of doctors in this country which will drive up costs in ways I cannot imagine.

All of these issues convince me reform is/was needed. The argument that liberals are trying to take over our country and ruin the best healthcare system in the world is a ludicrous statement. The system was already terrible and socialist.

Healthcare reform did address some much needed issues but failed to fix any of the messed up incentives, tort-reform, medical college reform, or quality issues. The bill focused on most of the wrong problems that would have addressed cost and quality. Instead, politicians argued over uninsured and government insurance plans. This nation already had universal coverage, if you walk in you get treated.

I would have hoped Republicans would have tried to get cost control issues into the reform bill rather than saying no to reform. Without line-item veto Obama would have had to sign a bill that included universal coverage and cost/quality control laws. What did we end up with? A bill that did nothing but add more people into a crappy system.


Reform is needed, and both parties have to address the real issues.


Souces: The Economist, March 20th 2010

The War With Iran

For the last eight months I have been waiting to see a red flash across the TV screen that reveals Israeli fighter jets have bombed several nuclear targets in Iran. Fortunately this has not happened and I am finally breathing a sigh of relief because the probability of war with Iran is dwindling. However, there is still a loose cannon on deck that could engulf the Middle East in war. Israel has not come to terms with the possibility of a nuclear Iran and it places the United States in an uncomfortable political position.

On the surface the Obama administration still wants to prevent Iran from obtaining nuclear weapons yet many deadlines have passed without a hint of effective sanctions on Iran. This is not a sign of political weakness but rather the admission of diplomatic defeat.

Sanctions have been in place against Iran for the better part of 35 years and failed to bring Iran to the table with meaningful negotiations. Placing new sanctions would require the full support of both Russia and China. However, Russia and China benefit by having United States forces tied up in the Middle East and allows them to expand their spheres of influence with little resistance. Helping the United States would go against their incentives. So short of a full military strike there is nothing the United States can do to stop nuclear proliferation by Iran. However, Israel is in a different political situation were a military strike is an acceptable solution.

Israel’s foreign policy has always been driven by a fight for survival and little has changed since the nation’s birth. Iran has been a constant thorn in the side of Israel since the end of the Iraq/Iran war in the 1980s. Iran now has considerable influence in the Middle East through its proxies of Hamas, Hezbollah and many other militant groups. The long-term goal of Iran is to be the regional political powerhouse and build an effective and wealthy commercial petro-empire. Iran has large oil fields that it has been unable to effectively pump due to the many sanctions on oil equipment. To survive Iran imports almost half of its refined oil needs. This situation has led the Iranian leadership to use military proxies to gain influence over many of its neighbors allowing the nation to import more equipment through China and Russia.

The development of nuclear energy accomplishes two goals for Iran. First, creating effective nuclear power will drastically cut the nations reliance of imported fuels. Second, having an atomic weapon is the best deterrent bar none in the world and would force the world to lift sanctions that have been in place for decades. Iran has very little to lose at this point in history by developing a nuclear weapon.

Israel on the other hand cannot even entertain the idea of Iran developing a nuclear weapon due to the small size of the country. Even a crude weapon would cripple Israel and open the flood gates of its many enemies. The chances of Iran using an atomic weapon as an offensive weapon are slim to say the least. Iran knows Israel possesses atomic weapons and it could not hope to win an atomic firefight with Israel. The problem is what if radicalism in the Iranian leadership allows such a suicidal bombing to happen? There lies the great danger for Israel.

So what is going to happen? I have a very hard time believing Israel is going to sit around and let Iran continue to refine radioactive materials and the notion that an air strike would not be effective is ridiculous. It would take less than half of Israel’s air force to completely destroy or damage all of Iran’s nuclear sites. It is Iranian retaliation that worries the United States and Israel. Iran would use its proxies in Syria, Palestine, Iraq and in other nations to completely interrupt oil coming out of the Middle East. This could severely hurt recovering economies across the world and possibly force the United States to respond with military force, engaging our nation in a third Middle East conflict.

The situation is incredibly complicated and is on the brink of collapsing on a daily basis. How Washington responds to an Israeli air strike will test the Obama administration to its limit. Let us all hope Israel keeps a cool head for everyone’s sake.

States Should be Taking Responsibility

November might be a long way off but the ominous political summer storm will soon engulf the entire nation. I can already hear the political radio adds blasting over the airwaves and see the polarized television commercials between innings of baseball games. Even in this remote area of Colorado the political bashing will reach uncomfortable levels and stress the community to the breaking point. In fact, political rage might be worse in smaller rural areas due to recent popularity of the Tea Party movement.

From my removed prospective, the fundamental issues for our national and local governments is lost in political polarity of both major parties. The issue is really a simple concept for most people on an individual level but due to political positioning the concept has been twisted and manipulated into large scale arguments and complicated solutions. So what is this simple issue that faces our nation?

It is paying for what we receive. All taxes have an associated expense in government, from the local level all the way to Washington. American society expresses what public goods that we want and governments respond by estimating the cost and collecting taxes for each public service. For example, Americans love roads because it allows the freedom to go where we want, when we want. Having well maintained roads is an American tradition that started at the foundation of this nation. In return, the roads provide more than personal freedom, it connects cities, towns and individual houses and allows commerce to flourish. These fee-free roads have helped America become an economic power house.

Paying for what we receive is not a complicated concept. However, both political parties use misleading statements to paint the idea that taxes are bad, instead of taxes being a basic price tag on a good or service. The Tea Party movement owes its popularity to the concept of evil taxes and the opinion taxes should be kept to an absolute minimum.. Far left Liberals on the other hand think of taxes as a corrective tool to punish large companies or wealthy individuals, taxes are ok as long as the rich pay. These two extreme understandings of taxes have diluted the middle of the political spectrum to a point that politicians can buy votes by promising but never paying.

This ongoing process has resulted in citizens who no longer remember why we pay taxes. Citizens want more services and no taxes. The concept of a negative change to the status quo of taxes is known as psychological price anchoring. Humans usually use a starting number to determine the value of a good or service. The starting number does not have to reflect the true cost or value of the good or service but it always effects what the individual thinks of the value.

For example, if I paid $50 in taxes a year (including sales taxes) due to a tax relief program, then I would use that $50 as my anchor in determining the value of public goods I received. The next year a new government was elected and repealed the tax break due to a rise in the state deficit. My taxes are now $1500 a year. Due to the anchoring effect my brain uses, my first reaction would be outrage due to the raise in my taxes. I received all the same services the year before for $50 and now I have to pay $1450 more this year. However, if I took an account of the services I received and then calculated the cost of my share of those services. I would discover that the $1500 was a really good deal. So instead of anger, I might feel good about the services I am receiving.

What am I getting at with this lengthy description of taxes? As a society we enjoy the benefits of public goods and services. So instead of trying to get more without paying we need to account how our tax dollars are used. Right now America can see how inefficient the national government has become and it is not because everyone in congress is corrupt. (although there are many examples of corruption) It is due to the fact one city cannot provide all public services for 300 plus billion people.

States and local governments can effectively handle how much to tax vs. how many services communities want and need. The benefits of having local economies handle their own taxes and finances are enormous. Taking a quick account of service provided to citizens and adding in future goals and projects, local government can then tax the population accordingly. If there is corruption or serious mismanagement of taxes the local population can take action quickly and not have to worry about lobby groups, corporations and other stalling tactics that are present in Washington. Taking responsibility for our taxes is the best way to improve this nation over a long time horizon.

The sad truth is the majority of local governments would rather receive “free” money from the federal government because it helps in elections. Why tax for something when you can get it for free? Well, rational people understand that nothing is free and by delaying payment for a service, we only hurt ourselves in the future. It is time for people to stop complaining about taxes and hold states and local governments accountable for the services we receive. Until then, politicians will promise more and pay for less. America will continue to add to the debt until we are forced to cut most services or raise taxes to unattainable level. Either way, citizens will pay for our lack of fiscal responsibility.

The Exploding Cost of College

I wince in mental anguish every time my grandparents recall how much they paid for college in the early 1950’s at Colorado State University. Their yearly tuition was less than $100 per year. Yes, the 1950’s was a long time ago but the cost of college has beat in inflation by astronomical levels. According to an article in 2008 by U.S News, the average cost of attending a four year public university was $17,000 a year. $100 in 1950 adjusted for inflation equals $900 presently, how did college cost get so out of control?

Many colleges argue they offer more services to their students now than they did 60 years ago such as internet, TV, parking, computers and so on. However, does that account for the fact college is seventeen times more expensive than in 1950?

To answer that question let us look at the cost of college since 2000. Business Week released statistics on the cost of college; the average cost of college has gone up 92% since 2000. There are two main reasons for this explosion in college education.



The first reason is colleges are paying more for the retirement of their professors and faculty members coupled that with earlier retirement by most professors the costs to maintain pension plans is becoming increasingly expensive. The second main reason for college cost is the fact the federal government is giving more aid. When Washington gives out aid, colleges counter by increasing tuition and other costs and the result is a back and forth game of rising costs verses rising aid. The problem is much of the federal aid is in the form of student loans which have to be paid back and adds to the debt burden of college students.

There are several other reasons for the rise in the cost of college but it is clear these are the two main culprits. In a weakening economy many students are taking a huge gamble on going to college only to find they cannot find a job even at low paying jobs. The result is jobless grads with an enormous debt load that cannot be refinanced or defaulted on, when the students cannot pay; their credit rating suffers making the probability of getting out of debt even lower.

At some point college, even on a community college level, is going to become too expensive to justify for most middle class students. This will leave the majority of the work force without the education it needs to make the United States economy as powerful and flexible as it has been. At some point colleges need to understand they are crippling many students before they even graduate and the government needs to recognize they cannot handout aid to colleges that take advantage of government help.

I do not believe this country can take another 92% rise in the cost of education in the next decade without severe social and economic repercussions.

Nuclear Power Misconceptions

With the President backing nuclear development last week, many opponents of nuclear energy have publicly criticized the move for several reasons. However it is time to address ideas and stereotypes that originated in the 1970’s and understand why nuclear power is a big step towards good environmental and fiscal stewardship in the United States.

The Wall Street Journal had a great editorial in Saturday’s paper but I am going to add and expand on some of the points that William Tucker made in his article.

Nuclear power is not safe. The truth is that nuclear power might be the safest energy source in the world. There have been two incidences of nuclear accidents. First was the Three Mile accident when a faulty cooling valve caused a meltdown of a reactor without injuring anyone. All reactors in the US now share all information on reactor malfunctions to avoid any accidents. Many lawsuits and false claims of higher cancer rates have continued to circulate since the 1979 accident. However, there has been no proof of radiation contamination in the area and all lawsuits have been rejected due to lack of radiation contamination.

Then there is the infamous Chernobyl disaster in the former USSR satellite of Ukraine. This reactor accident stemmed from the USSR military performing tests on the incredibly crude reactor. The reactor did not have a protective shield and the staffed that manned the plant were not trained on nuclear power. To make matters worse the military took safety features built into the reactor and turned them all off. The resulting malfunctions lead to a steam explosion that killed two workmen. Over the next several months 30 operators died from radiation poising. This could have been avoided if the workers had protective emergency suites or if hospitals knew how to treat radiation poising. But the USSR was not known for caring for its citizens. The only long term health consequences has been 200 cases of thyroid cancer in which 12 children have died since 1990. The reactor was nothing like reactors anywhere else in the world and cannot be an example of what might happen to Western reactors.

Nuclear power is too expensive. As William Tucker points out in his article, each 1,500-megawatt rector costs around $5 billion, this might seem expensive until you compare it to the equivalent capacity in wind power. You would have to build 4,000 windmills at $1 million dollars a piece and then build hundreds of miles of transmission lines and then the equal amount of capacity in natural gas generators to back the wind power up when the wind does not blow. The cost of the windmills alone is $4 billion and does not include the new power lines or backup gas plants. We are trying to cut down on CO2 but we still have to use it with wind? Lets do some math. As of the end of 2009 wind generates 35,000-megawatts of power or 1.9% of all US power. If it takes 4,000 windmills to make 1,500-megawatts then almost have 100,000 windmills in the US. To power the US with wind it would take almost 5 million windmills and this would all have to backed-up with gas and coal when the wind does not blow in areas. 5 million windmills x $1 million = $5 Trillion plus a new grid plus equal amount of backup power. Rough stuff.

Nuclear power plants could be used by terrorists. This is crazy for two reasons. First, nuclear power plants cannot be turned into nuclear bombs it is just not possible. Second, the concrete safety shells protect from attacks inside or from the air or ground. Search Youtube.com “Plane crashes into wall.” There is no threat from terrorist.

Nuclear Waste cannot be taken care of and lasts thousands of years. This is only true in the United States. The rest of the world recycles their waste and it not only produces almost no radioactive waste but does not have to be stored in a mountain. Reprocessing reduces waste by 97%. For example the French have been reprocessing their fuel for thirty years and the thirty years of waste is kept in a one room basement under the La Hague plant. France has been powered by 70% nuclear for over 30 years.

Reprocessing will lead to nuclear proliferation in other nations. Even if other nations could steal our left over waste in the US plutonium has never been a good source of nuclear bomb material. In addition, many nations have now built bombs without stealing from our waste piles so this is really a mute point.

In closing, there is really no reason the US cannot become a leader in nuclear energy in the next decade and cut all coal and oil power from the country. We can produce less co2, decrease acid rain and other side pollution from coal and oil. We can mix in wind and solar because nuclear power is a great back up for those energy sources and with the money save we can finally upgrade the grid and maybe even move towards electric cars. This can be accomplished in the next decade if we allow it to. No other energy source can provide that. If climate change is going to kill us and the polar bears by 2050, we cannot wait for wind and solar to find a way to store energy for long periods of time. Nuclear is the way to go, I just hope fear does not stop progress.


Sources:
“Obama’s Nuclear Power Breakthrough.” The Wall Street Journal 02/27/2010 A15
“Chernobyl Accident.” The World Nuclear Association. http://www.world-nuclear.org/info/chernobyl/inf07.html

USA: Public-Sector’s Retirement on Privet Sector’s Dime

The political arguments over the federal debt levels have been raging in Washington for decades. We have heard political leaders preach responsibly and then pass bills that spend needlessly. It seems to me the United States public has resigned itself to these wasted promises and accepted the status quo. If all the debt problems stayed in Washington, accepting the status quo might be an acceptable path for the public to take because eventually Washington will not be able to spend any more. However, the debt crises is striking much closer to citizen’s homes and not staying in Washington.

States across the nation are facing an immediate pension shortfall in the next few years. All 50 states pension budget gap, between benefits promised and assets to pay, total a staggering $1 Trillion dollars in December 2008. Making the predicament even more worrisome is the shortfall has gotten worse since 2008 but the actual figures have not been calculated yet. The recession has hit state pension plans hard for a variety of reasons but it is clear if adjustments are not made soon, entire states may have to file for bankruptcy which would add to the federal debt load and hurt many states credit ratings.

The question I had was how states had shortfalls when most states are not legally allowed to borrow money like the federal government? States have the pesky problem of balancing the budget on a yearly basis unlike Washington but I could not find were the money was going. I found the problem lies in municipal employees. For decades public-sector jobs have seen huge increases in salaries, benefits and pensions compared to private sector jobs. Increases in all of these areas are not a problem by itself but the spending balloons when unions get involved with government bureaucracy.

37% of state government workers are unionized compared to 7% private sector workers in 2008. Public unions have held above 30% of the work force for 25 years and in the process have pushed harder and harder for more benefits, greater job security and larger pensions. This has created expensive city budgets that have come under greater stress over the last few years. For example, 61% of spending in Philadelphia is spent on the work force and the benefits that go along with those workers. The system is becoming hard to hold up but how much do government employees make compared to private workers?

Government employees earn 21% more than private workers and have a 24% greater chance of receiving full health care benefits. 84% of state and local workers have defined-benefit retirement plans compared to 21% of private workers. Many might feel that it is not a big deal but the problem is states and cities can no longer afford such extravagant retirement plans. In 2008, Vallejo, California went into bankruptcy because of the labor costs and retirement plans and still has not gotten out of bankruptcy court due to public unions striking and refusing to give up pensions. Many more cites are about to follow. Harrisburg, Pennsylvania is trying to make a $2 million payment by March 1 due to union worker costs.

Some cities and states are making the adjustments required to save budgets but union workers are not taking cuts quietly. Many public workers go on strike and shut down services to cities and states. These strikes are devastating to local economies because many public works have a monopoly on services leaving the citizens that pay their salaries at the mercy of the strikers and government officials trying to balance the budget have to give in due to the fact new workers cannot be hired quickly enough to get basic services running again.

So that leaves the rest of us to pay for the shortfall so our state or city does not go belly up. Not only do we pay government workers more money then private sector jobs, but we get less productivity as well. It is also very hard to reform workers to get more productivity due to union contracts that retain workers for decades even if they do little to no work. After decades of low productivity the rest of us pay for their fat tax free retirement pensions they did not have contribute to. The private sector has to pay higher taxes and cut services we pay workers to take care of. It is a vicious circle of fewer services for more money. No wonder Greece is going bankrupt for the same reasons. Everyone one in the private sector better get out our check books because we have to pay public sector retirement out of our savings. Also, Municipal bond holders might want to watch out.

Sources:
2/18/10 The Wall Street Journal “Municipal threat”
12/10/09 The Economist, “Public sector unions, welcome to the real world”
2/20/10 The Economist, “State-Level Pensions: Promises to keep.