Thoughts on the fiscal cliff and the end of the Republic
This wasn't called "the Bush era tax cuts expiring cliff". That's because that was only one of the things hitting all at once. It got the most attention, I think, but what made it a "cliff" was that there were so MANY fiscal problems all piling up into one big stumbling block.
1.) Bush era tax cuts expiring, including end of 0% capital gains and dividend treatment for trust fund babies
2.) Bush era tax cuts expiring, including end of expanded EITC and child tax credits and American Opportunity Credit for working families with kids, marriage penalty abatement (by a tiny bit) and some other benefits thrown to middle class families so they won't notice the trust fund babies getting 0% tax rate.
3.) End of a 2% tax holiday on social security tax, which brought $1000 to each median worker. It was intended to be a stimulus, to get the money back into the economy right away starting in January, 2010. But no one noticed when they got $20/week, probably because their health insurance went up the same day as this payroll tax cut happened and they never saw an extra dime in their paychecks. So it utterly backfired as a stimulus, because what happened was that when it was due to expire on 12/31/10 Congress realized that, ZOMG, this was going to feel like a pay CUT to people when it went away. Because, although they didn't notice when they had an extra $20, they'd sure as hell notice when they had $20/less. So they hurriedly extended the bill into 2011. But there was NEVER any economic justification for cutting the income into the social security program, not when it's facing its own projected shortfalls coming far faster than anyone previously predicted. So everyone quietly decided this time to let that expire. My family will pay $2,000 more this year than last year because of this. Which, of course, means that the ONLY thing that happened at New Year's Eve is that taxes went up for all the laborers making under $113,000 and for all the laborers making over $450,000. Which one did you hear about, I wonder?
4.) AMT going unpatched once again, finally reaching so far into the middle class that it actually overlapped with the expanded EITC
5.) End of a generous estate planning tax revision that wasn't awful, but wasn't great, so in reality was actually a pretty good bill, back down to an awful version that turned what should be a good and decent tax into something onerous and unfair.
6.) Budget sequestration requiring that automatic budget cuts happen since Congress is completely incapable of making any rational budget policy; they effectively just threw it up in the air and whined "but it's HAAAARRDD"
7.) Debt ceiling talks, which are so politicized that you can hardly ever get to the CORE issue, which is that the present value of all future tax receipts is less than the current obligations we are pledged to repay. Our purported plan for this discrepancy is to just grow a lot. Rapid, effective growth in things like efficiency and innovative technology. Starting any minute now. No, now. Now, I mean.
8.) The Fed is keeping interest rates artificially low, so low that it makes more sense to borrow to buy a robot than to go through the bother of finding, hiring and training employees. Meanwhile, retirees who planned to live on their savings in old age find inflation is higher than the income they can make on safe investments; they can't quantify the interest they ought to have received in a free market economy for the rent of their money, so they don't realize how much of their retirement just got seized by the Fed to reduce borrowing costs to the United States. But these reduced borrowing costs cannot continue forever, and at some point in the foreseeable future the fiscal mess will hit the monetary mess and debt service on the United States debt will pass 100% of our annual tax revenue.
One of the things that I think is really interesting about the agreement hammered out last night is that they've agreed to put in a permanent patch to the Alternative Minimum Tax. It was created in the 1970's as a way to make sure that wealthy people didn't work the system using so many tax deductions and credits that they worked their taxes down to a ridiculously low level. The AMT is essentially a parallel, shadow flat tax of about 26%. (The proto-typical person hits these days is a doctor with student loans, a mortgage and a couple of kids; they'd lose their deductions and pay a straight 26% tax rate, but Bush fixed it so it only applies to earned income; if your money comes from invested wealth then you're not subject to this and can get all the deductions you want, and pay a top marginal rate of 15%.) (And, yes, Obama knows about this and has reaffirmed in three times now.)
The thing about the AMT is that when it was created they defined "wealthy" as married couple with taxable income of $45,000. That *was* wealthy in 1969. It was never indexed for inflation! So every year Congress has to revisit this issue and set a new AMT "patch" to fix that $45,000 figure to a more sane number for what constitutes a "wealthy" taxpayer. This has been going on every year for 30 years. For the past few years, however, Congress has been so ineffective that they haven't managed to get their act together enough to do even that, so the IRS has to go to print with tax forms that show law as it exists in December, and then we pay (as a country) to reprogram all the computers and reissue all the tax forms.
Over and over again we've talked at length about why not just index the AMT for inflation and be done with it? And the answer is that it is horrifying unpalatable to remove the amount of income from our 10 year revenue projections that will happen if we admit that AMT of 26% isn't really going to be raised from every family with a taxable income of over $45,000. You see, the Congressional Budget Office runs their numbers using current law. And current law is that the AMT level is $45,000, so it projects we'll GET that revenue. It's a total falsehood; there is no way we could even RAISE that sort of money from the lower middle class. But it shows up on the books for creditors to see when we're asking to borrow money.
So what's interesting to me is that Congress, by putting in a permanent AMT patch, is admitting out loud that we really have no chance in hell of repaying our Federal debt.
Interesting times.
I can tell you what will happen in two months when we are up against the next round of sequestration/budget deficit/national debt ceiling talks. Nothing. They'll kick the can down the road again. Our country is bankrupt and there is no way not to default on our debt, so the solid bet is that we will default on our debt. The actual plan is to devalue the currency and pay it back in nominal dollars, i.e., let inflation make the money we pay back feel like less. In personal terms, this means robbing buying power from savers to make it easier for debtor to pay back their loans. In real terms, this is why Jimmy Carter's inflation led to capital investment in manufacturing going oversees; why pensions are no longer funded by companies; why retirees live almost entirely on social security now. When saving is punished capital isn't created and there's no benefit in saving your money to spend in old age; better to consume it now than see it eroded by inflation.
So: inflation is PLAN A, But there are problems with that plan, specifically that we have so much debt unwinding right now that there are huge deflationary pressures on the economy still. So PLAN B is to grow our economy by some combination of efficiency and innovation, i.e., start making things people wish to buy. We'll see how that works out.
My prediction is that the United States has less than 30 years to live as a Republic. We've already given up on Democracy for the most part (with the most horrible Congress in history, did YOU go to the polls to vote against them in the primaries? I thought not. Quick, name your Congressman. Ever written him/her?) Congress now finds absolutely no odds in stewardship; no one ever got power by promising fiscal austerity. It's far far easier to promise the moon since we've totally given up the pretense of paying for our promises. So, it's not exactly a psychic ability to predict that there will come a point where we can no longer make good on the promises we've made (but not funded) to our own population and we can't hide it anymore by stealing from retirees and lenders. Oh, the retirees will continue to take it, but the LENDERS won't. They'll loan to Greece or Italy after they've done the necessary restructuring, or they'll invest in capital formation in their own countries, or whatever, and we'll be bankrupt. Because that's what a debt ceiling ACTUALLY is, the amount beyond which it isn't prudent to borrow anymore. And we've given up on paying attention to it because we don't like the implications. Far better for the country to fall in 30 years (or maybe 20, ouch, perhaps 10) than today, right?
But here's the thing; the Roman Republic stood for 500 years, but the Roman Empire existed for another 400. We've already demonstrated that we're PERFECTLY HAPPY being ruled as an empire (case in point: 10% voter turnout for primaries). The American public is anxious to get cheap clothes at Walmart and to have the opportunity to enter into debt slavery with credit card companies. (I don't know why this is, but it is evidently true so I'm not judging, just noting.)
So what will change under an Empire? I wonder that from time to time. I'm not sure. I honestly don't think it will be rioting in the streets (more than we already have) or random bands of brigands doing home invasions (more than we already have). I think it'll just be a gradual sinking into poverty, a stratification of people who are in the Royal Court and the ones who are serfs. The 20th Century was a glorious time to be a [straight white male] in American, but it's over. As Chris Martenson says, "the next thirty years will not look like the past 20 years." So I prepare by becoming as resilient as possible. Getting more education, getting my kids educated (including in foreign languages), putting the 10% I set aside for old age into tangible assets instead of financial instruments, trying to avoid expensive health care conditions that makes me dependent on the mercy of the government, trying to reduce my living costs, stuff like that. (I try to be conscious of where I'm dependent; medical services, energy inputs as well as financial inputs.) I really do think that society will not crumble, but I think the standard of living will inevitably fall to be more in line with the amount of energy inputs available for the level of economic output from our society. In other words, it's a good bet that eventually we're going to have to live within our means.
Happy New Year!
1.) Bush era tax cuts expiring, including end of 0% capital gains and dividend treatment for trust fund babies
2.) Bush era tax cuts expiring, including end of expanded EITC and child tax credits and American Opportunity Credit for working families with kids, marriage penalty abatement (by a tiny bit) and some other benefits thrown to middle class families so they won't notice the trust fund babies getting 0% tax rate.
3.) End of a 2% tax holiday on social security tax, which brought $1000 to each median worker. It was intended to be a stimulus, to get the money back into the economy right away starting in January, 2010. But no one noticed when they got $20/week, probably because their health insurance went up the same day as this payroll tax cut happened and they never saw an extra dime in their paychecks. So it utterly backfired as a stimulus, because what happened was that when it was due to expire on 12/31/10 Congress realized that, ZOMG, this was going to feel like a pay CUT to people when it went away. Because, although they didn't notice when they had an extra $20, they'd sure as hell notice when they had $20/less. So they hurriedly extended the bill into 2011. But there was NEVER any economic justification for cutting the income into the social security program, not when it's facing its own projected shortfalls coming far faster than anyone previously predicted. So everyone quietly decided this time to let that expire. My family will pay $2,000 more this year than last year because of this. Which, of course, means that the ONLY thing that happened at New Year's Eve is that taxes went up for all the laborers making under $113,000 and for all the laborers making over $450,000. Which one did you hear about, I wonder?
4.) AMT going unpatched once again, finally reaching so far into the middle class that it actually overlapped with the expanded EITC
5.) End of a generous estate planning tax revision that wasn't awful, but wasn't great, so in reality was actually a pretty good bill, back down to an awful version that turned what should be a good and decent tax into something onerous and unfair.
6.) Budget sequestration requiring that automatic budget cuts happen since Congress is completely incapable of making any rational budget policy; they effectively just threw it up in the air and whined "but it's HAAAARRDD"
7.) Debt ceiling talks, which are so politicized that you can hardly ever get to the CORE issue, which is that the present value of all future tax receipts is less than the current obligations we are pledged to repay. Our purported plan for this discrepancy is to just grow a lot. Rapid, effective growth in things like efficiency and innovative technology. Starting any minute now. No, now. Now, I mean.
8.) The Fed is keeping interest rates artificially low, so low that it makes more sense to borrow to buy a robot than to go through the bother of finding, hiring and training employees. Meanwhile, retirees who planned to live on their savings in old age find inflation is higher than the income they can make on safe investments; they can't quantify the interest they ought to have received in a free market economy for the rent of their money, so they don't realize how much of their retirement just got seized by the Fed to reduce borrowing costs to the United States. But these reduced borrowing costs cannot continue forever, and at some point in the foreseeable future the fiscal mess will hit the monetary mess and debt service on the United States debt will pass 100% of our annual tax revenue.
One of the things that I think is really interesting about the agreement hammered out last night is that they've agreed to put in a permanent patch to the Alternative Minimum Tax. It was created in the 1970's as a way to make sure that wealthy people didn't work the system using so many tax deductions and credits that they worked their taxes down to a ridiculously low level. The AMT is essentially a parallel, shadow flat tax of about 26%. (The proto-typical person hits these days is a doctor with student loans, a mortgage and a couple of kids; they'd lose their deductions and pay a straight 26% tax rate, but Bush fixed it so it only applies to earned income; if your money comes from invested wealth then you're not subject to this and can get all the deductions you want, and pay a top marginal rate of 15%.) (And, yes, Obama knows about this and has reaffirmed in three times now.)
The thing about the AMT is that when it was created they defined "wealthy" as married couple with taxable income of $45,000. That *was* wealthy in 1969. It was never indexed for inflation! So every year Congress has to revisit this issue and set a new AMT "patch" to fix that $45,000 figure to a more sane number for what constitutes a "wealthy" taxpayer. This has been going on every year for 30 years. For the past few years, however, Congress has been so ineffective that they haven't managed to get their act together enough to do even that, so the IRS has to go to print with tax forms that show law as it exists in December, and then we pay (as a country) to reprogram all the computers and reissue all the tax forms.
Over and over again we've talked at length about why not just index the AMT for inflation and be done with it? And the answer is that it is horrifying unpalatable to remove the amount of income from our 10 year revenue projections that will happen if we admit that AMT of 26% isn't really going to be raised from every family with a taxable income of over $45,000. You see, the Congressional Budget Office runs their numbers using current law. And current law is that the AMT level is $45,000, so it projects we'll GET that revenue. It's a total falsehood; there is no way we could even RAISE that sort of money from the lower middle class. But it shows up on the books for creditors to see when we're asking to borrow money.
So what's interesting to me is that Congress, by putting in a permanent AMT patch, is admitting out loud that we really have no chance in hell of repaying our Federal debt.
Interesting times.
I can tell you what will happen in two months when we are up against the next round of sequestration/budget deficit/national debt ceiling talks. Nothing. They'll kick the can down the road again. Our country is bankrupt and there is no way not to default on our debt, so the solid bet is that we will default on our debt. The actual plan is to devalue the currency and pay it back in nominal dollars, i.e., let inflation make the money we pay back feel like less. In personal terms, this means robbing buying power from savers to make it easier for debtor to pay back their loans. In real terms, this is why Jimmy Carter's inflation led to capital investment in manufacturing going oversees; why pensions are no longer funded by companies; why retirees live almost entirely on social security now. When saving is punished capital isn't created and there's no benefit in saving your money to spend in old age; better to consume it now than see it eroded by inflation.
So: inflation is PLAN A, But there are problems with that plan, specifically that we have so much debt unwinding right now that there are huge deflationary pressures on the economy still. So PLAN B is to grow our economy by some combination of efficiency and innovation, i.e., start making things people wish to buy. We'll see how that works out.
My prediction is that the United States has less than 30 years to live as a Republic. We've already given up on Democracy for the most part (with the most horrible Congress in history, did YOU go to the polls to vote against them in the primaries? I thought not. Quick, name your Congressman. Ever written him/her?) Congress now finds absolutely no odds in stewardship; no one ever got power by promising fiscal austerity. It's far far easier to promise the moon since we've totally given up the pretense of paying for our promises. So, it's not exactly a psychic ability to predict that there will come a point where we can no longer make good on the promises we've made (but not funded) to our own population and we can't hide it anymore by stealing from retirees and lenders. Oh, the retirees will continue to take it, but the LENDERS won't. They'll loan to Greece or Italy after they've done the necessary restructuring, or they'll invest in capital formation in their own countries, or whatever, and we'll be bankrupt. Because that's what a debt ceiling ACTUALLY is, the amount beyond which it isn't prudent to borrow anymore. And we've given up on paying attention to it because we don't like the implications. Far better for the country to fall in 30 years (or maybe 20, ouch, perhaps 10) than today, right?
But here's the thing; the Roman Republic stood for 500 years, but the Roman Empire existed for another 400. We've already demonstrated that we're PERFECTLY HAPPY being ruled as an empire (case in point: 10% voter turnout for primaries). The American public is anxious to get cheap clothes at Walmart and to have the opportunity to enter into debt slavery with credit card companies. (I don't know why this is, but it is evidently true so I'm not judging, just noting.)
So what will change under an Empire? I wonder that from time to time. I'm not sure. I honestly don't think it will be rioting in the streets (more than we already have) or random bands of brigands doing home invasions (more than we already have). I think it'll just be a gradual sinking into poverty, a stratification of people who are in the Royal Court and the ones who are serfs. The 20th Century was a glorious time to be a [straight white male] in American, but it's over. As Chris Martenson says, "the next thirty years will not look like the past 20 years." So I prepare by becoming as resilient as possible. Getting more education, getting my kids educated (including in foreign languages), putting the 10% I set aside for old age into tangible assets instead of financial instruments, trying to avoid expensive health care conditions that makes me dependent on the mercy of the government, trying to reduce my living costs, stuff like that. (I try to be conscious of where I'm dependent; medical services, energy inputs as well as financial inputs.) I really do think that society will not crumble, but I think the standard of living will inevitably fall to be more in line with the amount of energy inputs available for the level of economic output from our society. In other words, it's a good bet that eventually we're going to have to live within our means.
Happy New Year!