Except that here in figure 3.1, using publicly available data from the Congressional Budget Office, is how federal discretionary spending is projected to alter over the next decade, after taking those $917 billion cuts into account.1
Figure 3.1: US federal discretionary spending limits, 2012–2021, under the Budget Control Act 2011
Source: Congressional Budget Office.
Please study the graph very carefully. You may want to look at it under bright light, or make an enlargement, or enter the data into a computer program of your own devising. Once you’ve conducted any checks that occur to you, I’d like you to list any cuts you can see. You know: cuts. Where spending gets smaller from year to year. I don’t see any such thing in that graph. What I see is a federal discretionary spend that increases in every year. Not all that much to start with, but then at an increasing pace. That’s not cutting anything. It’s certainly not cutting $917 billion. In fact, it looks an awful lot like spending money. Money which the government does not have and will need to borrow.
But let’s continue, because our brave congressmen and congresswomen magnificently managed to save a further $1.5 trillion over the same ten-year period. That’s an impressive sum of money. If someone in my firm managed to save even 1% of that figure, I’d give him or her a nice rise and maybe even a corner-office.
Unfortunately, no one knows where that $1.5 trillion is going to come from. The Pentagon budget? Social security? Medicare? Food stamps? Please don’t ask me, because I don’t know. Nor does anyone else. What’s more, we don’t even know when these savings are going to happen. Not 2012, that’s for sure. But 2013? Or 2021? Or sometime in between? We don’t know. The money being saved is in a currency called future-money. It’s easy to save future-money. You just decide to spend $5 trillion in 2025, then change your mind and decide to spend $4.5 trillion instead. If you can manage that, you can save half a trillion future-dollars any time you like. Once you get good at it, you can do it five times before breakfast.
But it gets better. The $1.5 trillion which is being saved we-don’t-know-how and we-don’t-know-when also includes an unknown quantum of interest savings. That’s interest being saved on money we haven’t spent and haven’t borrowed. It’s future-interest on future-money, which is being saved at a random time and from unknown sources. It’s imaginary savings on imaginary interest created by imaginary cuts against a theoretical baseline. That’s how you save future-money. You should try it sometime.
Meantime, back in reality, the 2012 budget will still show a deficit of $1 trillion and the deal agreed with such fanfare on the Hill will cut 2012 spending by just $22 billion from a total spend of $3,600 billion. That’s the cut.2
All this ‘cutting’ is absurd enough, but the fun has only just started—because future-money is a currency that works best in happy-land, a place known only to economic forecasters working in Washington. Here in table 3.1 are the economic assumptions which underlie the White House budget for 20123 (and on which the numbers above are also based):
Table 3.1: Principal economic assumptions in US 2012 budget (%)
Source: Fiscal Year 2012 Budget of the US Government, www.whitehouse.gov.
In happy-land, the economy races away, unemployment tumbles, inflation remains low, and interest rates creep up a little but stay affordable. In happy-world, taxation is strong, because all those companies are booming away. Federal obligations on such things as food stamps and housing benefits will diminish for the same reason. It’s easy putting budgets together in happy-land, because all the nasty things (inflation, unemployment) do all the right things, and all the nice things (GDP growth) go skipping away like spring lambs.
Sadly, happy-land doesn’t look much like the planet I live on. On my planet, unemployment has stayed relentlessly high. Leading indicators of mood such as the ISM index show consistently negative results.4 Growth is constantly being revised downwards.5 Inflation is burdensome. The highly depressed yields on US Treasury bonds—currently at historic lows and likely to be among the lowest we see in our lifetimes—reflect the bleak outlook for the US economy.
The simple fact is that the US government is making no real cuts in spending or borrowing. It has no credible austerity plan for the medium term. Its budgeting is based on economic nonsense. And our politicians don’t want a truthful debate about any of these things.
That’s the bad news.
There is, however, good news too. Around the world, governments have faced precisely these kinds of problems and have responded in exactly the right ways. Sweden had a huge banking bust in the early 1990s. It managed to force the costs of bailout almost exclusively on to shareholders, with such success that the costs ultimately borne by taxpayers were somewhere between 0 and 2% of GDP.6 In the meantime, however, the government was left with a fiscal deficit amounting to 12% of GDP and public debt projected to reach 128% of GDP unless something were done. So something was done. Cuts were made, taxes raised, and the necessary adjustments communicated clearly and honestly to citizens. There was, in addition, broad political consensus about the need for all this. In a time of crisis, the political class worked together and the Swedish people recognized that, little as they might enjoy the austerity process, it was nevertheless essential.7 The harvest of all this difficult work was both predictable and golden. Sweden currently boasts strong growth and sound banks, and holds national assets in place of a national debt. There is no reason why that happy future should not come to America too. All it takes is common sense.
Taxes
I’m a hedge fund manager and a business owner. I have an income which is well above the median national income. So you might expect me to be a strong supporter of the Bush-era tax cuts and of those Republicans in the House today who vow never to raise a tax. And in part, you’d be right. I believe in a small state, with low government spending and strong incentives to invest, work, and take risks.
But tax cuts made when the budget is in deficit aren’t really tax cuts at all. All you’re doing is borrowing money, which will one day have to be repaid with interest. You might receive a $10 tax rebate today, but you’ll pay $12 for it in the future. That’s not a tax cut, it’s a tax increase. It’s the opposite of what any fiscal conservative should recommend. In the scathing words of a blogger for The Economist:
Basically, in the grip of careless enthusiasm about the economic future, we borrowed $3 trillion from bond markets and handed it out to citizens in rough proportion to how rich they already were. In the middle of a recovery. This is not a useful thing for the government to do.8
Damn right it isn’t. It’s madness. Given that China is now the major holder of US Treasury bonds, the Bush administration in effect decided to borrow heavily from a fast-emerging communist power in order to fund a consumption splurge that was most pronounced among the wealthiest 1% of Americans.9 Figure that one out, if you can.
To be fair to President Bush, however, his approach to revenue was not a new one. In 1980, the year when Planet Ponzi started to turn, the average effective federal tax rate on the median American household was 11.4%. By 2010, that rate had plummeted to just 4.7%.10 That is not a reasonable amount for the average family to pay in exchange for defense, social security, Medicare, Medicaid, homeland security, the Department of Education, environmental protection, and various other services besides.
The results are all too predictable. If you want to understand why we have a deficit in the US, look at figure 3.2. The graph is unusual in that it aggregates all sources of government revenues: not just taxation but other fees, charges, utility revenues, rents—any money that leaves your pocket and ends up in the government’s.11
Figure 3.2: Total US government revenue, 1965–2010
Source: Christopher Chantrill, www.usgovernmentrevenue.com.
The blunt truth is that government revenues haven’t been this low for fifty years. To return to the taxation levels we experienced back then would be fine—I like low taxes�
�—but in the 1960s we were steadily paying down the national debt. Low taxes (and other charges) were justified by prudent finances. You have to earn the right to cut taxation, and we haven’t: we’ve spent three decades having fun and racking up debt in the process.
In any case, American taxation is already low. If we consider only the OECD group of rich countries, taxes in the US are lower than they are in Canada. Lower than in Britain or any European OECD country. Lower too than they are in Australia and New Zealand. Lower than in Israel. In fact, there are just two ‘rich world’ countries with lower tax rates than ours: Chile and Mexico.12 I’m not sure that most US citizens would willingly swap places with citizens of either of those countries.
We don’t simply have a problem when it comes to the amount of tax collected. We have a huge problem when it comes to the way we collect taxes. Take corporate taxes as an example. We impose taxes at the second highest rate in the rich world (35%), yet the corporate tax code is riddled with incentives, subsidies, exemptions, and loopholes.13 The result is crazy. We give firms a huge disincentive to earn money at home (because our basic tax rate is so high), while giving them huge incentives to play the system. And remember: the United States boasts some of the world’s most innovative and entrepreneurial companies. If we give those guys an incentive to find ways around our tax code, they’ll turn out to be world-beaters.
World-beaters like General Electric, for example.14 GE earned $14.2 billion of profit in 2010, of which $5.1 billion was generated in the US. I’m guessing that you earned less than $5 billion that year, but I’m damn sure you had a more painful settlement with the taxman. In 2010, GE’s net corporation tax obligation to the US government was sub-zero. The firm actually derived a net benefit from the government. In the five years to 2010, GE accumulated $26 billion in American profits and booked a net benefit of $4.1 billion from the IRS. That’s completely insane. You don’t, however, need to be GE to outperform in this way. Big Oil can play the same game to almost equal effect. According to a Citizens for Tax Justice report out in 2011, ‘Over the past two years, Exxon Mobil reported $9,910 million in pretax US profits. But it enjoyed so many tax subsidies that its federal income tax bill was only $39 million—a tax rate of only 0.4%.’15 It’s true that to some extent these ultra-low figures are affected by the correction of prior year estimates; but a tax system that was not riddled with gamesmanship, loopholes, and exemptions would not see corrections on this scale—or the resulting wildly low tax outcomes. And, unsurprisingly, Exxon is not alone in experiencing such results. In 2008, the Government Accountability Office said that 72% of foreign corporations with businesses in the United States paid no federal income tax at all for at least one year between 1998 and 2005.16
There are countless other examples of huge, profitable companies paying far less in tax than they would do in almost any other jurisdiction in the world. Our tax system ought to be giving companies incentives to invest, to innovate, and to grow. Instead, we’re giving them incentives to hire tax lawyers—and generating compliance costs estimated at a staggering $163 billion a year.17 The inevitable result: we collect far less in tax than we ought to. In 1952—a year when, by the way, the United States led the world on every conceivable measure of industrial and commercial success—almost one-third of all federal tax receipts came from corporations. Today, that figure is under 10%.18 It’s bananas. And the answer is so obvious. We need a low rate of corporation tax—Ireland levies its rate at 12.5%, for example—and then we need to collect it. Like, actually knock on GE’s front door, and say, ‘Sorry, guys, but since you live here would you mind contributing?’
Similar problems affect the taxation of individuals. Nina Olson, the National Taxpayer Advocate, estimated in a December 2010 report that taxpayers spend a total of 6.1 billion hours a year complying with tax-filing requirements.19 That’s the equivalent of 3 million full-time jobs which could be spent doing something productive—like building cars or writing program code—and are instead used to generate paperwork. Because that paperwork is insanely complex, individuals end up caught in a vicious Catch-22. Taxpayers who honestly seek to comply with the law often make inadvertent errors and consequently make overpayments or suffer IRS enforcement action. Since that’s not a particularly attractive option, many taxpayers seek instead to become sophisticated tax experts, constantly seeking loopholes, shelters, and exemptions. The result: everyone is stressed, financial incentives are muddled and contradictory, taxpayers spend way too much time and money on paperwork—while the government collects far less than it ought to.
Again, the answer is unbelievably simple. The number of exemptions needs to be slashed. At present, the US Treasury gives away about $1 trillion in exemptions and tax breaks.20 That’s the budget deficit right there. Meantime, our overall tax rates need to stay the same or come down. The incentives to play the system would be hugely reduced as a result. Fairness would improve and the rewards to hard work and enterprise would increase. It’s so simple—but it isn’t even in prospect.
The Pentagon
Since I’ve just enraged the Tea Party movement by supporting higher taxes, I may as well drive any remaining conservative readers into a fury by advocating that we also cut the defense budget. (If it’s any consolation, I’m about to enrage liberals too. Either I’m dead right or I’m crazy.)
Our defense budget is a mess. I’m all for a strong military. I’m proud of all that they do for their country and proud of the decisive way that America has led the free world over the past six decades. I’m proud of the resolution with which we hunted for and then took out bin Laden. But that doesn’t mean it makes sense to turn a money-hose onto the Pentagon and leave it running at full blast. No organization in the world will thrive under those conditions.
Let’s start with the big picture. In 2010 the United States spent $698 billion on defense, 43% of the global total. That may sound like a high proportion, but it understates our position of dominance. For one thing, our oldest and closest allies also spend a lot on security. Britain, France, Japan, Germany, and Italy are all there in the top ten defense spenders, and neither India nor Saudi Arabia is exactly hostile. The United States and its closest allies account for just shy of 70% of global defense spending.21 Are we expecting assault from outer space? Terrestrial enemies such as Iran, North Korea, and Syria are vastly outgunned by their neighbors, let alone by the United States.
What’s more, the Department of Defense is called that for a reason. It isn’t called the Department of Protecting the Entire World. Still less is it called the Department of Looking After African Fishermen, yet the DoD’s AFRICOM command reports that its responsibilities
include piracy and illegal trafficking, ethnic tensions, irregular militaries and violent extremist groups, undergoverned regions, and pilferage of resources. This last challenge includes oil theft, as well as widespread illegal fishing that robs the African people of an estimated $1 billion a year because their coastal patrols lack the capacity to find and interdict suspicious vessels within their territorial waters and economic exclusion zones.22
Excuse me? The key phrase in that bizarre paragraph is ‘their coastal patrols.’ Not ours. Not our patrols, not our coasts, not our fishermen, not our fish. A billion dollars a year is a lot to lose, but since when did the welfare of African fisherfolk become a US strategic priority? Why are ethnic tensions and pilferage of resources in Africa something that American citizens should spend their money on? And these things are expensive. In 2010 AFRICOM enjoyed a budget of $302 million, up from just $125 million in 2008/9.23 Although these sums are small in the context of our runaway budgets, they’re also indicative. At a time when you’d think the government would be thinking hard about every dollar it had to spend, it vastly increased the budget of a command structure which believes its remit includes limiting illegal fishing activity in Africa.
The same culture of spending and poor cost control runs ramp
ant throughout the Pentagon. Take, for example, the F-35 Joint Strike Fighter. The program started, as so many of these things do, with a good idea: build a relatively cheap aircraft, produce it in large numbers, ensure it’s versatile enough that—with a few tweaks—the same basic plane can serve for army, navy, and marine corps. The idea started out as a way to save money.
And then … the Pentagon went to work. Estimated costs per plane almost doubled. Including research and development costs, the anticipated procurement cost per aircraft currently stands at over $150 million.24 The jump-jet version of the aircraft intended for the marine corps currently doesn’t work and probably never will. Even the version intended for the navy is of questionable utility. The plane has a maximum range of 600 miles. China’s fast-advancing missile technology means that our carriers will be pushed out into the western Pacific where they’ll be able to threaten a few Pacific islanders and absolutely nothing else. Oh, and to ensure the right degree of stealthiness, the plane carries just two air-to-air missiles.
Now I’ll admit I’m not the go-to guy for commentary on air combat effectiveness, but I’m not alone in questioning the F-35. Senator John McCain, hardly a security wimp, called the project a ‘train wreck.’ The head of the air dominance branch of the Air Combat Command says he wakes up ‘in a cold sweat’ thinking about it. The Economist reckons the plane will probably be obsolescent within ‘a few years’ of entering service. The lifetime cost of maintaining and operating this train wreck—a cost which American taxpayers will bear in full—is currently estimated at $1 trillion.25
Or take our aircraft carriers. A Ford Class carrier with a full complement of aircraft costs approximately $15–20 billion in hardware alone. (Manning, operating, maintaining, and controlling the ship costs far more again.) The United States boasts eleven such carrier groups. No other country possesses even one. Yet we’re currently planning to maintain this huge overmatch, despite the fact that those multi-billion-dollar craft are ever more vulnerable to fairly cheap and increasingly sophisticated ballistic missiles. As Secretary of Defense Robert Gates caustically put it: ‘You don’t necessarily need a billion-dollar guided missile destroyer to chase down and deal with a bunch of teenage pirates wielding AK-47s and RPGs.’ You do if you’re the Pentagon.26
Planet Ponzi Page 4