UNREALITY SQUARED

"The difference between reality and unreality is that reality

 has so little to recommend it." ~ Allen Sherman

Five weeks before the November elections, I am totally tired of hearing that it's impossible to enact effective economic policies to revive the economy before the election.  This week the Senate Democrats once again cowardly retreated and said they would not consider the expiring Bush tax cuts until after the election, as if that will give them a better chance to do the right thing. The media barrage of "The Republicans, powered by the tea partiers, are poised to take over the country – or at least the House of Representatives," and "The Democrats are cowering in their corner, wondering what to do," is unrelenting. Shadowy pollsters dutifully report their "latest insight" on a daily (or is it hourly?) basis to ratchet up anxiety for the tiny minority of people that purport to pay attention to such trivia. My bet is these poll/political minutiae super-consumers probably represent no more than a twentieth of the folks across the US that were reported last week to make more than $7,700,000 per year (themselves representing the top-earning 0.1% of taxpayers); at most maybe 15,000 souls in this nation of 310 million carrying iPhones with thousands of ever-active politico apps. But, boy, their shadowy influence seems to be growing over the "political cognoscenti." Extremes are strengthening at the expense of enacting well-recognized, effective policies to end the Great Recession for the millions of folks who remain unemployed. Why on earth is the political class arguing instead about the merits of giving the very wealthiest Americans a continued tax break? Talk about unreality from both ends of the political spectrum and tyranny of the minority. [In this paper I've given this current, unfortunate situation that we increasingly seem to be living in, when the extremes dominate the middle, the moniker "unreality squared."]

Why does it seem that when we're talking about political or economic forces the "normal (or bell) curve" – that we learned long ago best represents the real distribution of a wide variety of factors and characteristics, like people's heights and student test scores – no longer applies. See the traditional bell curve in this linked figure. Now, the bell curve may be old-school and has turned upside down, meaning the extremes of the distribution are far more prominent than the middle. This upside-down normal curve was termed "the Well Curve" by Daniel Pink, among the first to talk about it. More rigorously, the Well Curve is a type of bimodal distribution. Pink's Wired article, shows his Well Curve, representing the distribution of employees by firm size, illustrating the increase in tiny, "non-employer businesses" without any paid employees and the simultaneous increase in huge, corporate, multi-national enterprises. As he states, "while the big grow bigger and the small multiply, midsize enterprises are waning." Just like the income distribution in the US over the past decade or so – labeled as the hollowing out and drooping of the middle class; and just like the unwarranted excessive media frenzy about a " preacher " of a miniscule church who threatened to undertake some undisputed craziness guaranteed to upset lots of people. He knew what he was doing and won in a large sense. Will the media ever learn when to NOT promote a story covering an extremely crazy person that also creates huge negative consequences? Apparently not.

The 24/7 media cycle exacerbates this unreality for two reasons: (1) because the multitude of media sources are always desperately searching for material, no matter what its veracity or message – witness the "birthers" who refuse to accede to facts and reality, but still get media attention. What and who are we to believe in this age of instant, real-time expertdom and blog blasts from anyone who wants to spend a nanosecond or three analyzing the scene? And (2) because extremers – folks who purposefully use the media to broadcast their rhetoric-over-reality positions (see tea partiers among others) – know how to play the media game all too successfully. As I've mentioned before in other Papers, the fractionalization of modern American society also contributes to the increasing ease by which extremers of any sort disproportionately influence what used to be called "public opinion" through media exposure.

Is this a new phenomenon? Perhaps it is in its perceived intensity and frequency (due to modern telecommunications technology), but probably not as occurrences. Columnist Gail Collins wrote recently that "5 percent of our population is and always will be totally crazy." I personally believe it's a lot greater than 5%, but 5% still represents on average more than 300,000 crazies per state. It is just that this 5% now has a more visible, increasing and wholly undeserved prominence than ever before. It's this technology that challenges the drooping "middle" (perhaps a modern-day "silent majority") to remain relevant. That crazy Florida minister extremer allegedly received a phone call from the US Secretary of Defense who pleaded with him to renounce his plans. Amazing. What further incentives could "the establishment" provide make to extremers threaten more stupid, self-serving actions?

The Republicans apparently want to ride this wild elephant of extremers into the future; the Democrats once again, don't really know what to do and thus remain tentative, faltering and hesitant. This lack of conviction about calling a spade a spade (that the extremers are mostly idiots, unqualified for public office and don't have a cogent idea in their heads that is founded on common sense) will likely make their political demise a tragic reality on Nov 3^rd. In contrast, the Republicans have no qualms about offending people with their hypocrisy and self-righteousness.

The extreme tails of our society have figured out how to work the system and create unreality squared. Politically, we will see in about five weeks if the extremers who actually got on a ballot (including folks like Sharon Angle in NV, Carly Fiorina in CA, Carl Paladino in NY, Joe Miller in AK and Christine O’Donnell in MD) can win a general election. My view is that the outcomes will depend (as always) on who can get more of their supporters away from their TVs and DVRs to vote. So far, the Democrats have provided few motivating reasons for going to the polls and casting a vote for reason, rationality and common sense. Not admitting there's a wild elephant in the room that needs to be contained, countered and crushed will not provide victory for Democratic candidates in close elections. The Democrats should be ashamed of their feeble campaign performances so far.

For their own reasons, most media have relentlessly played up the possibilities of the extremers winning. I don't think this outcome is such a sure thing, assuming their opponents start actively countering the extremers. And I sincerely hope that does not come to pass and that the "muddled middle" can finally see that despite their justifiable upset at what they (and we) are facing economically, voting in extremers won't do anything positive beyond feeling good on Nov 2^nd. How could it when, among other things, extremers want to prioritize legislation to outlaw masturbation and eliminate Social Security rather than getting the country moving again (economically speaking)? How many "typical" voters really think it's in their best interest to give very rich folks continued tax relief? Probably more than I'd want to admit, but hopefully not a plurality. [An interesting article in Slate about perceptions of income/wealth distribution in the US makes the case that many non wealthy people are quite ignorant about the very large (and growing) proportion of the economic pie that is held by the wealthy. From this article, the richest 20% account for 93% of the nation's net worth (when you subtract housing; if you don't subtract housing it's 85%)] Time will tell.

My recommendation to counter unreality squared, above all, is GO VOTE on Nov 2^nd.

The 2% "solution"? I think not.

An article in Slate puts some needed perspective on the huge hype now being presented by both political parties regarding the Bush tax cuts' termination. the author dutifully presents in a summary, understandable manner the huge holes in arguments mostly made by conservatives that raising taxes for the very rich will be the death of the US as we know it. the wonder is from my perspective why any Democrat (other than Ben Nelson who's a DINO) could fall for this BS and waffle about "gee, maybe I should vote to continue the tax cuts" since trickle-down has been such a powerful, broad-based force helping regular folks in my district. Not. If liberals/progressives could ever get their legislative act together (not too likely, given what they've already squandered) and re-discover their backbones, this should be one of the easier fiscal decisions for Democrats to make - ever. Simply follow Nancy Reagan's surprisingly apt advice, "Just say No" to even thinking let alone acting to extend the tax cuts for those "unfortunate" folks, in Republican eyes only, making more than $250k/yr, representing roughly 2% of US households. The Democrats' miasma over such a well-defined, straightforward issue makes me really wonder what world these folks really live in - other than always looking for $$ rather than sense. Here's hoping common sense prevails - and the Bush Tax Cuts aren't extended for the wealthy... Bruce.

Enjoying Eugene with Liam - Aug 2010

Just a test

Started my blog Sep 12, 2010. Happy trails... Bruce.

Economic Eyeglasses for Our Fiscal Myopia - Jul 8, 2010

One of My Occasional Gray Papers



Economic Eyeglasses for Our Fiscal Myopia


Bruce A. Smith -- basmith81@hotmail.com -- July 8, 2010






In May I wrote a Grey Paper that focused on the fiscal myopia that now pervades our policy discussions – our collective inability to come to terms with the issues surrounding our growing public debt and deficits. More folks are discussing some of the issues surrounding our debt/deficit, but few policy makers are backing specific actions to mitigate this important, longer-term structural problem – after all, it's never the right time; or let's have a commission pontificate about it for six to 12 months. Although we like to think that such issues are the result of "other people's" actions, it's not true. I'm responsible, and so are you. We're all ultimately responsible for this economic state of affairs – we have grown quite accustomed to demanding and getting more government than we're actually paying for. This myopia has been unfortu-nately present at every level of government in the US (and, as we've seen in a number of other nations including Greece, Portugal, Spain, Ireland, Britain, and France). It seems to me that our political and economic "system" now has too much entropy and not enough directed energy for moving forward on issues surrounding longer-term structural deficits. The system itself appears bankrupt of ways to mea-ningfully resolve both our short-term cyclical problems as well as our longer-term structural issues.

TO BE CLEAR, these actions should be agreed to in a binding fashion by Federal, State and local decision-makers as soon as possible. But the longer-term remedies should not be implemented until our economic recovery is more broadly felt. Promoting government expenditures designed to strengthen the flaccid, uneven recovery in 2010 (e.g., extending unemployment benefits, increasing training expend-itures) remains justified. There are still 14 million people without employment. My proposed actions that mitigate longer-term fiscal problems can be implemented now. Those spending reductions fo-cused only on short-term deficit issues should not be applied now, only after the national unemployment rate is say a "mere" 8%, rather than the current near Olympian 9.5%. Actions to mitigate the structural deficit should be made now.


So, rather than bemoan the myopia and hope that somehow the political process on its own will miracu-lously resolve this, – a likelihood that's not significantly different from zero in my mind – I have given some thought to what public actions might begin to resolve our longer-term fiscal dilemma. I offer here a prescription for our needed economic eyeglasses to correct this myopia.


Unsurprisingly (and just like a pair of glasses), there are two inter-related components to any debt/deficit resolution – a cost/expenditure-reduction side and a revenue-enhancement side. I will deal with each in turn.


As is well known, the largest increase in Federal expenditures will come from mandated entitlements (Social Security, Medicare and Medicaid) that will engulf available revenues within a decade. Most States face similar entitlement challenges. State and Federal government cannot afford to provide expected entitlement payments to us Baby Boomers without significantly shifting other expenditures to these en-titlements. Such unfunded entitlements characterize the longer-term, structural deficit problems that must be acted on now. For example, it's estimated that the State of Ohio will soon need to devote one-half of its operating budget to pay for its unfunded public pension benefits – something that Ohio school children (and their parents), commuters, public assistance recipients (which increasingly now include more and more formerly middle-class folks who are among the long-term unemployed), library users, and the younger generation (who will be paying for most of these costs) may not be that willing to do. Something soon has to give.


Douglas Elmendorf, director of the Congressional Budget Office, recently appeared before the Obama administration's National Commission on Fiscal Responsibility and Reform (commonly known as the Debt Commission), the group under orders to come up with a proposal to balance the nation's primary budget by 2015. Mr. Elmendorf stated that public debt as a percentage of GDP is higher than at any time since World War II and that bringing it [public debt] back down to a sustainable level would require cuts that "represent the near elimination of all government programs except for Social Security, Medicare, Medicaid, and national defense." Despite this horrific vision, the Debt Commissioners seem to persist in following outmoded political clichés - Democrats want only to raise taxes and not touch entitlements and other government programs; Republicans want only to cut programs and not raise taxes. The Comptroller of the State of Illinois, a state with very, very dire fiscal problems – its deficit of at least $12 billion is equal to one-half of its annual budget – asserts, "Only the most delusional people think you can solve this without raising taxes." Mr. Elmendorf also said, "There is no intrinsic contradiction between providing additional fiscal stimulus today, while the unemployment rate is high and many factories and offices are underused, and imposing fiscal restraint several years from now, when output and employment will prob-ably be close to their potential." Something soon has to give.


We should begin by classifying spending cuts and tax increases into two general categories, ones that can; (1) reduce short-term, cyclical problems (e.g., continued unemployment benefits), or (2) reduce the longer-term structural deficit (e.g., reduce unfunded pension debts). These are distinct categories that unfortunately some Members of Congress confuse. We should pursue both types now. We can't approve a second 'mini-stimulus" package (including another extension for long-term unemployment benefits – an example of the first type) without also agreeing to actions that will mitigate our longer-term deficit (e.g., pension reform – an example of the second type). Having agreed to the actions now, we implement the longer-term solutions that involve cash outlays after unemployment drops to 8%. Not providing continued unemployment benefits for the long-term unemployed in the name of deficit reduction is short-sighted, heartless and stupid.


Actions designed to remedy our economic doldrums and reduce our public debt must be consistent with what I've called the "Three E's": they must be seen as equitable, effective and efficient. By far the most important attribute is equity and its handmaiden fairness, since any useful resolution to our debt problem should involve sacrifice on virtually everyone's part. And the only way a political solution can be created is if this sacrifice is seen as being borne by all parties; that it's equitable. Fully-shared sacrifice is essential for political action to be possible. No one can be left out of "paying" something for the out-of-bounds excesses of the past decade(s). As an understatement, this will be a political challenge at every level of government. Given what's recently happened in Congress, statehouses and city councils around the na-tion, I'm doubtful politicians are able or willing to surmount these challenges – but, hey, hope springs eternal. And, when they have to start closing schools in order to pay for bureaucrats' pensions, maybe they'll see their choices in a different light.


Lately, there have been a few, small, but somewhat encouraging signs. For example, four public em-ployee unions in California recently tentatively agreed to reduce the (future) costs of their pensions that are probably the most generous in the nation and not economically sustainable. California's public pensions represent an unfunded liability of at least $0.5T (trillion) – that's right, half a trillion dollars – almost seven times the state's official debt. Other states have begun to reduce some aspects their longer-term structural imbalances. Much more needs to be done.


So here's a list of possible remedies (both large and small) for rectifying our fiscal problems. First, what actions can we undertake to reduce public expenditures?


Reducing Public Expenditures.


All significant parts of US citizenry must feel the pain of expenditure reductions – no one group can be knowingly excluded from the affected (e.g., retirees, richer folks, left-handers, people who live in East Peoria, Berkeley, Lincoln or Dallas). Because of the primacy of the equity issue, everyone needs to "share the pain" and be subjected in some fashion to these cuts.


Public pensions and benefits are a significant fiscal debacle in the making – because of myopia, mistakes and mismanagement. It's perhaps the most pressing budget dilemma for almost every State (and county and municipality) in the near future. With few exceptions, this impending debacle is mostly denied by politicians (the same ones who put us in this situation). The causes are understandable – "captive" elected officials rewarded public employee unions (who provided them significant election backing) with bigger, broader pensions and benefits. These sizeable pension/benefit increases during the good times from the 1990's through 2007 were promoted as being "costless," since the economy was growing and pension fund returns were usually impressive. Unfortunately, even during these good times many states neglected to make necessary contributions to the funds. Needless to say, these large and growing unfunded pension/health care obligations have turned out to be anything but costless. The solutions are also understandable – contributions by the beneficiaries need to be instituted or increased and benefits need to be reduced (or "reformed" in PC-terms). Proposed actions include: increase the legal retirement age when pensions are first available; increase (or in most cases institute) pension contributions by all current public employees and beneficiaries (say at least a 10% contribution); narrow qualifications for receiving full pensions/benefits; significantly reduce pension maximums, especially for all new hires; no more 90% of your highest income as a pension base, instead use a multi-year average of income, like Greece just did. [And no more 90% at 55 years old, either. How about 65% at 65 years, after 30 years of service.] Remove all COLA adjustments for public pensions and SSI payments. Grab one of the 3rd-rails of public spending and reduce Social Security benefits by 1-2% (perhaps by making them means-tested).


Starting soon, certainly in the next decade, we will not be able to afford to pay stipulated public pension and health benefits, despite what public employee unions proclaim. In 2008, the 50 states reported public pension obligations of $3.3T, secured with assets of $2.3T. And, these all-too-impressive responsibilities are themselves drastically understated. If states had to report their pension obligations on a fair-value basis (as all private pensions must), they would be $5.2T according to the Pew Center on the States. Further compounding the problem, many state and municipal governments use 8%, an unrealistically high interest rate, to discount their future obligations. Many economists believe now using anything over 4.5% is unwarranted. State pension funds will run out of cash – Illinois is expected to be the first in 2018 and 19 others will run out of funds by 2025 – unless something is done soon. I would be astonished (and severely disappointed) if we taxpayers agreed to substantial tax increases to fund these pension/health care payments when schools and parks are being closed. Similar concerns have been raised about pensions/benefits at the county and municipal government levels.


An interesting suggestion for implementation of these remedies is to tie availability of Federal of State funding for all public agencies to the agencies having already adopted these or similar remedial actions. [This mimics what the US Dept of Education did for its stunning "Race to the Top" funding. ] If the states want the Federal or State funding, they have to have implemented the actions.


For private sector pensions, an increasingly used remedy for pension deficits is non-cash funding with tangible assets. The New York Times recently reported that Diageo, the world's largest liquor producer, plugged its pension hole by transferring over two million barrels of whiskey to its pension. If only public pensions could do the same – somehow I don't think preserved hot air will be worth as much as Johnnie Walker, Jose Cuervo, or Smirnoff. Don't Listen To the Howling (DLTH) by public employee unions, reti-rees and others.


Cut Federal (and State and local) government spending. Beyond pensions and entitlements, government spending needs, eventually, to be reduced. Because of its size, the Dept of Defense (DOD) is an aptly juicy target – OMG, it represents 59% of the total Federal budget. DOD cuts can happen now; other re-ductions – especially for social services –should wait until unemployment is 8% or less. This coming fiscal year (starting Oct 1), DOD's budget (including Iran & Afghanistan war funding) is an astonishing $708B, which makes up 44% of the entire world's defense expenditures! Who's kidding whom; this astounding sum can surely be cut by at least 7-10% without real consequence – although there will undoubtedly be huge howling by people with many medals and ribbons on their chests. Cuts should focus on weapons-based expenditures, especially new weapons' systems – don't you think it's time to eliminate all of that still-not-working (thankfully) Star Wars/space weaponry expenditures? And on reducing the number of facilities and our armed forces personnel – nearly two-thirds of the DOD budget is devoted to personnel, operations and maintenance. Beyond the DOD, tell each agency it has to identify now how to reduce costs by 5% per year over the next 2-3 years. [President Obama evidently has already asked Federal agencies to state how they would cut 5% from their budgets. A good first step.] These cuts should focus on reducing staff expenses – the largest single cost faced by public agencies – then on program cuts. The Dept of Agriculture is fine target for eliminating unjustified expenses and subsidies (e.g., overly-favorable to industrial agriculture price supports for ethanol, sugar, corn and wheat). DLTH


Re-institute the Federal "paygo" standard, this time without exceptions, for all government legislation. The "paygo" – pay-as-you-go – requirement has been briefly used by the Congress before. It should be re-instituted so that the normally budgetarily myopic Congress has to deal first-hand with the fiscal con-sequences of passing legislation that contains expenditures. This hopefully would create some fiscal dis-cipline and reduce the likelihood of creating more unfunded liabilities.


Stop using overly optimistic growth expectations to "pay for" added deficits. Every year, Federal, State and local government relies on assumptions for buoyant economic growth in the future to mitigate budget costs and imbalances; it's a fiscal cop-out. Henceforth, all economic forecasts of govt expenditures must assume no more than a 2% national GDP growth rate.


Pay/benefits freeze for members of Congress and staff, executive branch civil servants; state legisla-tures/agencies and county and municipal govt leaders/workers. Top-tier leaders of agencies voluntarily agree to a 2-5% pay cut (if it's not legally possible, they agree to donate that amount to the charity of their choice) before any broader cuts take place. No COLA adjustments. Reduce public payroll costs by 2-5%. According to the New York Times, the average federal civilian worker's salary with benefits was $119,982, compared with $59,909 for the average private sector worker; wow. Put in that light, a pay/benefits freeze looks completely equitable and necessary.


Consolidate govt entities and agencies. Eliminate outdated commissions/boards. DHTH.


Re-assess the Fed's enduring "quantitative easing" policies for what they increasingly seem to be – poli-cies that will eventually result in rising inflation and that in due course will reduce the real value of public debt-holders' liabilities – a time-tested policy to indirectly promote the sale of government debt.


Cut all Federal/State/Local "earmark" funding. Yes, it's a small percent of govt. expenditures, but ear-marks have become disproportionately prominent and are a mechanism of fiscal irresponsibility by public decision-makers to provide money to their non-Facebook "friends." It reveals the process of governing to be favoritist and corrupt. Eliminate it to improve government's deservedly depleted credibility.


Long-term public employees have at times received significant sums; some in the order of $100k, for ac-crued vacation/sick leave payouts at their retirement. These payouts should not be allowed. Vacation and sick leave was never designed to be a substantive source of retirement funds. I suggest either of two possible remedies. (1) Set absolute ceilings for amount of payout provided to retiring public employees for accrued vacation and sick leave that has not been used – I'd recommend no more than $10-15k per retiree. Or (2) a possibly more feasible alternative to a ceiling is to institute an annual "use it or lose it" rule – already used at private employers – so excessive leave cannot get accrued over time.


Give the President/Governor/Mayor/County Leader the ability to use a line-item veto on approved budg-ets. When available, this power has been used by the executive branch to eliminate the grossest exam-ples of fiscal malfeasance and self-servitude by legislators. 43 states have this power; many counties and municipalities also do. All government executives, including the President, deserve and need this ability. DLTH.


Enhancing Public Revenues.


Next, government revenues will need to increase if citizens want to continue to receive benefits provided by all levels of government. Although an increasingly distasteful prospect for many people (especially due to the unfounded success of conservatives convincing the public that supply-side economics and the Laffer curve were correct. Conservatives continue to talk out of the back of their heads when they state public deficits can be eliminated solely by reducing expenditures. Such reductions would require near total decreases in public programs that folks highly benefit from and value (such as Medicare and Social Security). [Again note Mr. Elmendorf's and the Illinois Comptroller's comments above.]


Also, despite what tea baggers and conservatives say, the US (and many states) has relatively unbur-densome tax rates, especially compared to other advanced G-8 democracies. [These folks probably be-lieve any tax rate above 0% is excessive. So it goes.] Something soon has to give, meaning taxes will need to rise in tandem with expenditure cuts.


Increasing tax revenues will only be possible if we, the public, believe these revenues will be used effec-tively for the public benefit. [Hence the importance of a "paygo" expenditure standard and cutting ear-marks, since government is increasingly seen by more citizens as ineffective and corrupt.]


Energy/Resource Actions.


As some of you know, I've spent considerable time analyzing various energy and environmental policies. So, actions to improve our energy efficiency and environmental quality are close to my heart and my mind. Here are a few actions that could help both our fiscal and environmental situation.


Carbon tax. Please, institute a broad-based Federal tax on carbon consumption now. It's beyond time for this action and fairly straightforward, as well as economically efficient and effective. If set appropriate-ly, it will serve to reduce all sorts of greenhouse gas emissions including really horrid one like perfluoro-chemicals, hydrocholofluorocarbons, and sodium hexafloride. They sound as nasty as they really are. It can raise money for green technology R&D, make people better realize the "true (higher) costs" of using fossil fuel, improve long-term public health and provide revenue for a number of purposes. Do it now, and make it effective in 12 months, or when unemployment is 8%. DLTH by utilities, other energy firms, and environmental cretins like Sen. James Inhofe.


Set a minimum $85 per barrel price for all oil consumed in the US. This would provide some economic "coverage" for emerging green technologies and, if combined with the carbon tax, would provide impetus for using less fossil fuel. [As of July 8th, one Web-listed price for crude oil was $75.80/bbl.]


Increase "resource fees" for use/extraction of Federal or State resources – like oil, natural gas, coal, minerals, and timber harvested from public lands. Under the influence of the industries they regulate, the Dept of the Interior has often acceded to charging all too low fees charged for extracting publicly-owned resources. This indirect subsidy needs to stop.


Increase Federal and State gasoline taxes. Amazingly, the Federal gasoline excise tax has been un-changed at 18.4¢ per gallon since 1997. The Obama Administration has talked about raising it – get it done, now. State gasoline taxes vary widely; Alaska's is 8¢/gal., California's is 46.6¢/gal. DLTH by Exxon-Mobil et al.


Other Revenue Enhancement Actions.


Trim tax exemptions (always a favorite until vested interests intervene); increase the capital gains tax; reduce or eliminate mortgage interest deduction especially for higher-income folks; make more public benefits means-tested. Reduce the sizeable tax subsidies, not discussed above, provided to the oil, gas, coal, minerals and other industries. DLTH.


A value-added tax - VAT. As a consumption-based levy and if appropriately designed, a VAT is likely to be less sensitive to reductions in revenues during a recession. Make this VAT very progressive and significantly tax consumption that's above $200k/yr. Pass legislation for this tax now as part of a compre-hensive "Enhanced Economic Benefits and Debt Reduction Act," with a VAT start date of 12 months after passage/execution – hopefully when unemployment is 8% – which will provide an incentive to spend now and spur the macroeconomy.


Remove the wage/salary ceiling on FICA. Make all earned income subject to the tax. For reasons that have always escaped me, earned income above $106,800 is not subject to the tax, a textbook example of unfounded tax regressivity.


Institute a uniform transactions/sales tax on all internet purchases. Sure, it might have been true that in the beginning of the internet (right after Al Gore invented it), commercial firms using the internet for sales should have been given a break by not charging sales tax. It's the "infant industry" argument given by nearly every new industry as a rationale for tax advantage. However, the internet is no longer seen as a "new thing" that might entail extra risk to use. They're no economic reason now to continue this exclusion for this well-established and growing industry. DLTH by Amazon et al.


Tax sugared drinks to raise revenues (perhaps targeted for health-related programs) and reduce con-sumption, perhaps with a "Healthful Reduction of Thoroughly Empty Calories Act." DLTH from the all-too-effective sugar/soda industry.


Raise the corporate income tax. The Federal corporate income tax is riddled with well-financed loopholes. Rather than attempting to close the myriad of loopholes, that would take a huge, frustrating effort, leave them and simply raise the tax rates. DLTH especially from the likes of the Chamber of Commerce.


And finally, how about a new indoor tanning tax? It could raise a bit of public revenue; and if high enough could reduce the use of this probably carcinogenic activity, and most important, it might especially upset Rep. John Boehner (who appears to be a frequent user in addition to being House Minority Leader) which would be a good thing. It's payback time for all the idiocy the Republican "leadership" has displayed on fiscal as well as many other matters of public importance.


What If We Don't Do Anything?


What if politicians stick with their tired, increasingly irrelevant platitudes – and the public doesn't prod them to do something about the longer-term deficit? The political class will end up continuing the status quo of doing nothing to remedy our fiscal problems, or more likely, make things worse by listening to lobbyists rather than citizens.


State and US bond spreads will eventually increase, raising the cost of servicing public debt (just like it has for Greece, Iceland and Ireland). China will more rapidly assume greater economic power and prom-inence. Fewer public programs designed to assist citizens (especially those with fewer economic re-sources) will be able to receive funding. And most importantly, our children's and their children's future will be diminished by our excessive debt and lack of fiscal discipline. If the status quo continues, the his-torically-broad array of discretionary public expenditures available to us will narrow and decline, possibly dramatically, and be replaced by payments for entitlements (overwhelmingly to Baby Boomer retirees). This is likely to increase social and economic tensions, especially between generations.


Nevertheless, unlike any other nation, the US has two distinct advantages: (1) international commerce remains based on the US dollar as its "reserve currency." This despite efforts by others to create other means of valuation and payment such as the IMF special drawing rights. And (2) unlike several other G-8 nations, the US population has an important, growing cohort of economically active younger people who can be a basis for economic advance. But, the US cannot continue to rely on these distinctions to do nothing. The international bond markets will eventually respond to the US's increasing fiscal deficits, just like they have for other nations. So will the WTO, IMF and World Bank. Something soon has to be done.


I believe doing nothing will likely lead to a bleaker, conflicted future in the US. This future can be avoided through action. Nevertheless, I expect some "negativists" (just say "no" to everything) may want such a future to occur and argue that doing nothing is correct, because they believe more economic, social and regional tension (enhanced by the status quo of government inaction) will augment their perverted sense of justice.


Doing nothing is unacceptable and unpardonable. Taking action now, such as I've suggested above, to mitigate our longer-term fiscal problems, even though it will involve shared sacrifice on many folks' part, will serve the broad public interest, put us more into balance and allow the US to move forward in a more positive and influential manner. Politicians need to discover the good sense and courage to get it done and stop being timid wimps. Each of us, all of us, is responsible for getting it done. Onward...

Generations of Progress? - July 19, 2010

P a g e

1


One of My Occasional Grey Papers1


Generations of Progress?


Bruce A. Smith -- basmith81@hotmail.com -- July 19, 2010


"If there is no struggle, there is no progress." ~ Fredrick Douglass


After I finished my last paper, "Economic Eyeglasses for our Fiscal Myopia," I've been thinking more about why it's been so difficult for us citizens and our elected politicians to resolve our longer-term fis-cal/economic issues. It struck me that this difficulty is really founded on demographic and generational differences.2 Culturally and economically, it is inevitable that tension arises when one generation that has enjoyed the fruits of power and influence begins getting challenged and eventually displaced by the up-coming generation. Although I don't believe this has "officially" started in the US, as the clock continues to tick, it's underway. To set the stage, here are simplified descriptions of the three generations affected by the fiscal issues I've been talking about.


 Baby Boomers – folks born in 1946-1964 inclusively; in 2010, aged 46-64, ~78M people, account for 29% of the US population; remain the majority of the work force; and since Boomers came on the scene, remain the largest age-related demographic the nation has ever seen. Although technically I missed Boomerdom by about 5 weeks, I consider myself a Boomer. Needless-to-say, we're very used to wielding influence and power and getting attention.3


 Generation X (aka, Gen X, the Baby Bust Generation and the 13th Generation (the 13th generation since the US was created) – folks born right after Boomers, 1965-1981 inclusively; in 2010, aged 29-45, ~46M people. The dates are not completely agreed-upon, an alternative is 1961-1981.4


 Millennials (aka, Gen Y and Echo Boomers) – folks born in 1982-2001 inclusively; in 2010, aged 9-28, ~60M people. The dates are not completely agreed-upon; an alternative is 1982-1995. Gen Y is composed mostly of kids of Boomers.5


We Boomers will soon be the most affected generation (MAG) when it comes to receiving entitlement expenditures (principally, Social Security, pensions and retirement health care) – the predominant long-er-term fiscal issue facing government – when the first of us turn 65 next year. We vocally expect to re-ceive our full, promised Social Security, pension, health-Medicare and other entitlement benefits and tell others it cannot be any other way – it's owed to us after all. For some of us, this vocalization is hypocriti-cally coincident with our simultaneous disparagement of "big government" (but for heaven's sake, don't decrease our big government benefits). Also, this expectation is in part based on the fallacy held by many people that they've already "paid our dues" over the years for our own social security; they don't (or choose not to) realize these rich benefits will be mostly paid by the next generation(s).


In contrast, Gen X and the Millennials will soon be the MAG when it comes to paying for Boomers' Social Security-pension-health care and related entitlement expenses. As a consequence of the Boomers long-time demographic, social, economic and political predominance, most elected officials are loath to pro-pose changes that would inimically affect them. But any discussion about impending problems in paying for Boomers' expected entitlements certainly arouses Boomers' attention and reaction.


Starting next year, the distinctiveness of Boomers, principally related to our large numbers, relative to subsequent generations, will begin turning from a macroeconomic asset that has generated impressive


1 GreyPapers are less formal than White Papers; hopefully not as heavy as Black Papers.


2 The importance of demography is echoed in Matt Bai's column in the July 18th New York Times, "When It's About Race, It's Probably About Age, Too." http://www.nytimes.com/2010/07/18/us/politics/18bai.html?_r=1&scp=2&sq=matt%20bai&st=cse


3 http://www.bbhq.com/whatsabm.htm


4 http://en.wikipedia.org/wiki/Generation_x


5 http://en.wikipedia.org/wiki/Generation_Y


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amounts of private income and tax revenue for decades to a likely liability when Boomers start being eli-gible for Social Security and Medicare. Demographers have known this for a very long time, of course. But the unfortunate coincidence of the lingering Great Recession has added to the risk associated with how to pay for these escalating public entitlement expenditures to Boomers.


The generational schism between Boomers and Gen X and Y will be far more prominent once noticeable public decisions get made about reducing the above risks. This is because there are only two solutions for achieving this – (1) by reducing entitlements and/or (2) by raising taxes to pay for them. The first way initially affects only Boomers; the second will mostly affect Gen X and Y. The Boomers, understandably, don't want our entitlements reduced in any fashion, we want the promised benefits paid without changes and paid by the next generations. Notions that we can allay some of these risks by increasing the retire-ment age, increasing contributions by beneficiaries for health care and public pensions, or directly reduc-ing benefits are all changes that will first affect Boomers. Paying for entitlement benefits by increasing various taxes (including FICA, income and sales) will mostly leave Boomers unaffected and instead place the burden predominantly on Gen X and Y. Solutions that cross the generational divide.


Politically, who is better organized for this confrontation? Gen X is the smallest of the three, pre-middle-age and perhaps on the way to having identifiable political influence. The Millennials (Gen Y) are a larger group (still almost 25% smaller than Boomers) but because they're the youngest, historically least likely to vote, or vote consistently. The Boomers are masters at rallying political support for their causes, espe-cially when they feel threatened (witness the disproportionate attention being given to the tea partiers, 75% of whom are older than 45), and reliably vote to make sure it happens. At this point, the Boomers easily win the "best organized" blue ribbon that can have a substantial influence on how politicians will decide on our longer-term fiscal issues. Of course, this will simply magnify the politicians' usual proclivity to push costs into future generations rather than more effectively and efficiently deal with them now.


Will this be a good thing? I think not, certainly not in the long-run. Within ten years, deficits will likely bal-loon, states will start running out of money for Boomers' entitlements, and eventually others (public bond-holders beyond our borders) will start imposing new requirements if nothing is done.


So, can this generational schism be trimmed? It's a long-shot in any case, but only by now spreading the fiscal sacrifices across many segments of our population – as I mentioned in my "Eyeglasses" paper – and thus across generations. That, of course, means Boomers need to stop unrealistically vowing we can have all our benefits without any cost consequences. It also means Gen X and Millennials need to step to the political plate and state they won't agree to foot the bill for the Boomers – who include their parents. Are we Boomers smart enough to look beyond our own cohort and our own narrow, short-term self-interest and consider what's best for all US citizens? When I look at what's reported in the media, I'm not confident. In no small part because no public authority – the President or someone else (certainly not any Republican) – is courageous enough to say what will realistically happen to everyone if our longer-term structural deficit isn't fixed.


If we want progress, all of us – the Boomers, Gen X and Millennial generations – will need to struggle with providing some fiscal sacrifice in the form of reduced entitlement benefits and increased contribu-tions/taxes. The broader the sacrifices are spread, the less the pain of each one will need to be. If we Boomers obstinately refuse to budge, everyone including us will suffer.