Friday, January 4, 2013

The next fiscal battle (Part I)

Is this a trick question?

As should have been expected, Congress and the White House shook hands on a thirteenth-hour fiscal deal that makes almost nobody happy.

It takes the kind of perverse genius that emerges only within committees to strike a “grand bargain” that hacks off both neo-conservatives and progressives in equal measure.  “The certain result will be an economic pie that doesn’t grow fast enough,” Michael Goodwin grouses, “which will lead to new demands for more redistribution under the guise of ‘fairness.’  Always, the government redistributes by taking the first bite for itself. But David Rothkopf counters, “While many in Washington are breathing a sigh of relief and some are trying to spin the outcome as a win for the president, those who characterize this bill as a genuine victory for anyone at all have clearly lost perspective.”

On the income side, taxes go up for everybody, though largely for the well-to-do:  the top tax bracket goes from 35% to 39.6%; estate taxes increase 5%; capital gains and dividends taxes increase from 35% to 40%; and the SSI tax rebate sunsets, returning to 6.2%.  Somewhat offsetting these increases are extensions of Obama’s child, earned income and college tuition tax credits, “bonus depreciation” on new business property and equipment investments, and credits for R & D costs and renewable energy.

On the expenditure side, though, nothing much was really accomplished beyond the usual don’t-put-off-until-tomorrow-what-you-can-put-off-even-longer approach to the deficit.  Except that doctors took it in the shorts and lost some incentive to serve Medicare patients, which should please everyone who grumbles about the undeserving poor taking advantage of entitlement programs … and ignores that it hurts the deserving poor as well.  (Unless they’re Randians, who think that “deserving poor” is an oxymoron.)

Happy freakin’ New Year.  No, there’s no gift receipt for this; we’re stuck with it.  And I do mean stuck.

No surprise, then, that those who’ll be paying more taxes this year are hollering already, though the stock market paid our fearless leaders a remarkable compliment by jumping up 1.8% to 2.5% (depending on which metric you use — the former is the Dow Jones, the latter NASDAQ).  Since the expenditures can only got kicked down the road a couple of months, people are already pre-fighting the next battle over budget cuts.

Transfer Payments (red) vs. Defense (blue) as Percentage of GDP

The obvious targets are military spending and transfer payments.  Except that military spending, as much as it is ($834.5 billion), has been declining over the last sixty years as a proportion of the budget (from 85.25% in 1953 to 22.19% as of July) and in comparison to gross domestic product (14.63% to 5.28%, just up from the Clinton-era low of 3.71%).  Moreover, the Department of Defense puts more people to work than just those on the government payroll; the Pentagon buys an incredible amount of stuff, from F-35s to ball-point pens, from UAVs to undershirts, plus more than enough food to … well, feed an army. 

And all this spending indirectly pays the wages of thousands upon thousands of people along the production chains: e.g., the miners who extract the iron from the earth, the refinery workers who turn it into steel, the millers who turn the steel into armor, the factory workers who turn the armor into M1A2 tanks.  We’re not talking government cheese here … these people work for a living, and they pay taxes.  (More on this subject at another time.)

That leaves us with transfer payments.  Primarily Social Security, Medicare and Medicaid.
This is how much of federal receipts transfer payments represent.

The “big three” safety-net programs account for almost three-quarters (73.65%) of all transfer payments, almost half (46.68%) of the federal budget, and represent 11.1% of GDP.  As such, it presents a nice, fat target for those wishing to dam the river of tax dollars ... especially those who can’t understand why those damn slackers won’t get real jobs with real health benefits and stop sucking on the public teat.

Which just begs for the question: What “real jobs”?

As Lanny Ebenstein points out, we’re still over four million jobs down from where we were in 2008 (the graph below is from 2006); of the 847,000 jobs added since June, almost three quarters (621,000) have been with local, state and federal governments — not to say, I hasten to add, that these aren’t real jobs.  So far, the private sector has been creating jobs at such an anemic rate that it can barely keep up with the increase in the population base, let alone replace the jobs lost.
Jobs lost since September 2006

Unemployment is down because the labor force participation rate is down; translated, that means that people have quit searching for work, or have finally run past the federal extension of unemployment benefits and are no longer represented in the system.  As of September, almost 48,000,000 people — about 15.5% of the population — were receiving food stamps; at that time, BLS’s U-6 metric had 14.7% either unemployed or underemployed.

And you want to shrink the safety net?  Good luck with that; let me know how that works out for you.

Look, I’m under no illusions as to the efficiency of the current system; I know that all three of the big safety-net programs are plagued by waste and fraud, that they’re burdened beyond their original design.  I also know, however, that “starving the elephant” doesn’t work, that it doesn’t force bureaucrats to spend federal funds more effectively.  Rather, they tend to compensate for the waste and the fraud by obstructing legitimate claims from the deserving poor or (as above) reducing the incentive of third parties to participate.

Moreover, no matter how much money the CEOs represented by the Campaign to Fix the Debt throw into the fight, these programs enjoy far too much political and popular support to take more than token cuts.  To save money on these programs effectively, to really make these programs efficient, Congress will have to put on some overalls, climb into the machine and plug the waste-and-fraud leaks.

That, however, is seemingly too hard.  Much easier to demonize the recipients as lazy bums sucking on the public teat.