5 ducats

How to Balance the Budget

First, we shouldn't balance the budget most years. During recessions we almost have to run a deficit due to higher unemployment benefits and lower income taxes, plus we need someone to borrow the money that households and businesses save (otherwise the economy continues to shrink). In the boom times the government should run a surplus in order to pay down the debt from earlier recessions, slow down an overheating economy, and reduce competition with private investors for savings.

Our long term average deficit should be less than or equal to our economic growth rate, which includes increases in population, productivity, and inflation (though inflation growth is often consumed by higher interest rates on the debt). As long as our future tax base increases by as much as our deficit, we can pay off that deficit without raising tax rates. Ideally, our deficits are spent on investments that increase productivity (infrastructure, education, research) that make it easy to repay. 

As US economic growth rate accelerates towards normal levels (3%?), the deficit will naturally shrink due to higher tax revenues and lower spending on unemployment benefits and SNAPS (food stamps). But there are two long term fiscal problems that won't easily be fixed with economic growth.

1. Top tax rates on ordinary, capital gains, dividend, estate, and business income are all near post-WWII lows.
2. Medicare and Medicaid spending is increasing much faster than reasonable economic growth.

We need to raise taxes back to something around what they were during the Clinton administration (when we ran a surplus, but before so many boomers retired). Everyone hates to pay higher taxes, and the ones with the most money are invariably the ones going to be tapped, yet they have the most lobbying power. Here are tit-for-tat tax ideas that may be more palatable:

• Tax capital gains as ordinary income, but allow capital gains to be reduced by an inflation index and eliminate the AMT.
• Tax dividends as ordinary income, but allow corporations to deduct dividend payments to US taxpayers as a business expense.
• Tax inheritance over 10 times the median income as ordinary income, but eliminate the estate tax.
• Implement a carbon tax and eliminate alternative energy credits, but reduce top corporate tax rate to 28% and make R&D tax credits permanent.
• Eliminate most itemized personal deductions, but replace them with non-refundable tax credits @ 15% of expense (regardless of tax bracket).

As for slowing the growth of medical expenses, maybe Obamacare will help. So much of health care spending is for insurance overhead (10%), insurance profits (10%), and provider billing (at least 15%). The size of these expenses don't make any sense. I don't have a solution of how to reduce them, but it would be easier to cut these than healthcare itself.

Why Romney Lost

Everyone else has theories of why Romney lost, and since I have no special experience or knowledge on the subject, I thought I would opine too. 

Republican leaders were by all accounts genuinely shocked that Romney lost. Since most polls indicated that Obama had a small lead, and virtually all forecasting models predicted a large Obama electoral win, the leadership shouldn't have been surprised. They should have at least had a healthy uncertainty on who would win. 

Republicans cherry picked their data. They used polls that weighted their results by assumptions of low minority and youth voting. You see, many polls aren't raw data because the data has been adjusted by models. Models shouldn't be used to predict the future as much as simulate what happens under given scenarios or assumptions. You should always question a model's assumptions. Always. But favorable assumptions generally get little scrutiny, in business as well as politics.

The cherry picking of polling data is emblematic of the current Republican Party: only watch Fox News, only listen to Rush Radio, only read the Wall St. Journal, only accept science that supports unlimited earth extraction, only accept economics that proves that smaller government is always better. This self selection bias of information means that one is less likely to see coming problems, and therefore one won't be prepared to avoid or mitigate the risks. If you think you are winning Ohio then there's no reason to change tactics, strategy, or message.

Underneath the cherry picking of information sources is the fundamental reason why Romney lost - the Republican Party does not allow dissent within its ranks. Dissent or even uncertainty is inconceivable because all consume the same information and opinions. One does not openly disagree on religion, taxes, immigration, science, polling, etc. Disagreement is heretical, worthy of scorn and even hatred. That creates a tighter unity in the Republican base than the Democrats. But it drives away those that aren't already in the base, such as minorities, non-Christians, scientists, etc. - even if they agree with much of the platform.

I doubt the Republican base can expand much until their source of information expands and allows the diversity and uncertainty of data that is reality. Until then, their ideology will continue to win elections in the smaller, homogenous populations of congressional districts, but they will tend to lose at the Senate and national level. Divided government will continue until primary voters realize that campaigns based on good government administration are more successful than ideology. Of course, corrupt and incompetent government will be punished regardless of ideology.

Wasted PAC Money

I live in the swing state of North Carolina, so I get lots of campaign phone calls on my business hard line from both parties. I might listen to an earnest volunteer. But most are computer calls, on which I promptly hang up. Doesn't everyone? More annoyingly, the computer calls are often silent for several seconds after I pick up the phone. Again - who wouldn't hang up on such a call?

I thought that the TV ads were bad in NC, until I went to Virginia last week. A commercial break might have 6 commercials, and 5 of them would be political. Worse yet, the very same commercial would often show twice within the same commercial break. Even more absurd, within a 30-minute show you could see the exact same commercial 6+ times. 

I know that people absorb a message better with repetition, but that much repetition just pisses people off. It would be one thing if the commercials were funny, or had a catchy jingle, or at least a variety - but they don't. Even if they commercials were slightly entertaining, no for-profit advertiser would run an ad that frequently. And for good reason.

The worst offenders of the robo campaign calls and saturation bombing of TV commercials are the PAC's (I'm thinking of GPS Crossroads in particular on the phone calls). Which makes me think that the money the invariably wealthy donors provide is being largely wasted. What's more, I bet that a lot of the donations are sucked up in adminstrative fees by the PAC administrators, and by their cronies who provide various overpriced services to the PACs. The PAC donors might want to temper their partisan passion with a bit more fiduciary due diligence. Or at least they might want to stop calling me.

Stop All Free-Riders

Governor Romney said that 47% of the population believe they are victims who are entitled to government support and don't pay federal income taxes - in other words, Democrats. But who are the 47%?

• Retirees that live off of Social Security or military pensions,
• Disabled,
• Full time students,
• Enlisted service men with children,
• Minimum wage earners with children, and
• Unemployed.

Many of these are Democrats, though many are Republicans, and many simply don't vote. Some work long and hard, but don't earn enough to support themselves, much less pay taxes. Some usually work, but haven't in the prolonged recession. But there are also what economists call free-riders; people who rely on government support even though they could work to support themselves.

How many of the 47% are free-riders? I don't know, but it is a minority, and it is insulting to broadly paint almost half the population as government free-loaders. The government provides various forms of social insurance to its citizens in return for mandatory premiums. Those who claim the insurance benefits are not free-loaders, unless their claim is fraudulent (a free-rider). Provision of social insurance by the government is preferable to the private sector because it will have lower overhead expenses, will not have the expense of private profit, and virtually no credit/counterparty risk. The private sector is better at many services, but this is one where they aren't.

I haven't seen Romney harp on how to identify or solve the problem of free-riders. I wish he would, because their presence many social safety net programs. But I think Romney prefers the broad brush, because that enables him to be a victim. After all, being a victim of wasteful government spending on deadbeats enables Romney and others to rationalize not paying their own fair share of taxes. 

Some free-riders take government benefits that they don't deserve, while other free-riders evade taxes that they should pay. Their immoral behavior is accepted as ethical within each of their socio-economic spheres. Within their clans they congratulate each other for cleverly either drawing more illicit benefits or hiding more income. Ironically both the rich and poor free-riders claim to be victims of abuses of those at the other end of the income spectrum. Their excuse is that their actions are legal (though some of it clearly isn't, as Swiss bank accounts would suggest).

We have allowed the standard for appropriate behavior to fall from what is moral or ethical, down to what is merely legal. Paying taxes is a moral requisite, and a basic civic duty. We don't like to do it, just like we don't like to serve on a jury or be drafted into military service. It should certainly be expected of politicians. 

I wish that someone ran on a platform of good government - not more or less government, but good government. Part of that means that the free-riders of government benefits are forced out, and the free-riders of the tax system are forced to pay. Maybe everyone pays at least a token amount in federal taxes (though you really can't squeeze blood from a turnip), but the tax reform mostly means that the system is simpler, fairer, and is enforced - including on the mega-wealthy. I think most voters would strongly support such a platform. If we get rid of the free-riders then it removes the victim-hood excuse for immoral activities that harm our nation's finances and even the common integrity that we need to function.

Future of Conservatism

Jonathan Chait writes that this is the last Presidential election that can be won by relying on white votes. America is gradually turning more Hispanic and multi-racial, and perhaps that shrinking of the white population itself has spurred more isolation and fear by rural, suburban, and older voters. The Republican platform has become ignorant and extreme (rich essentially won't pay taxes, against taxes for poor children's health care, for a gold standard, as little social insurance as possible, no defined minimal level of financial, air, or water regulation, no evolution, no climate change).

Humans prefer to live with other people that are like themselves (race, education, politics, age, family size, etc.). So Conservatives may be able to control the House for some time, as pockets of whites cluster in Congressional districts. But their competitiveness in the Presidency is on the decline, and will be in the Senate. Unfortunately the House may continue to be a dissident member of government for many years, though their majority will gradually dwindle.

Of course the Republican platform could change in order to incorporate Hispanic voters. Jeb Bush has been lecturing the party on that for years. I'm sure at some point it will happen. But the Republican Party could get more extreme before it moderates into a group that wants to govern rather than destroy government. Because it is likely that Romney will lose, and many Conservatives will declare that they lost because Romney wasn't extremism wasn't sincere enough. Their rigidity will not allow changes that welcome new members.

I fear the US government faces another decade or more of dysfunction. In defeat the House may lash out in anger in ways that threaten the nation, such as defaulting on government debt. We need to make sure this doesn't happen. The media must call them on it, and the corporate campaign contributors must demand it.

A Candidate's Significance Test

It is political season, which means that we hear more meaningless gibberish than usual. A candidate promises to create jobs, and that becomes the headline. I propose a simple significance test for whether this is worth listening to, much less occupying news headline space. Simply turn the statement into a negative, and if it sounds absurd then it is pablum and should be ignored. An alternative approach is to consider if the candidate's opponent would ever pronounce the opposite of the statement, "I promise to destroy jobs."

This pablum may be served by an attractive person, with an emotive voice, inspiring music, and accompanied by various propaganda techniques (motherhood, apple pie, cross, flag waving, etc.) - but it is still pablum. Pablum plays to basic human desires of almost all people and not just Americans, for example: employment, food, health care, education, national security, personal security, lower taxes, less debt, and more wealth. It would certainly be news if a candidate proposed to reduce any of these.

What we should consider, and what should be worthy of a headline is HOW a candidate proposes to serve our basic needs. For example, on health care the President might explain how the Obamacare legislation will lower health care costs, and Romney could explain how competition with the private insurance will lower government Medicare. Instead we get incredibly broad ideological statements such as "less government", or conversely "the government will fix it". For many voters that statement alone is enough for them to choose, but these glittering generalities fail to explain either whose services will be cut or who will pay for them.

The implicit voter assumption is that "I won't pay more in taxes, and I won't receive less in services." The logic for believing such an unsubstantiated assumption may be because the voter personally identifies with the candidate, and that the candidate will take care of the voter because they are in the same socio-economic-cultural-religious cohort. In truth, must of us have as little in common with our Congressman as we do with a professional athlete for a local team - which is to say that both claim to live in the same metropolitan area for part of the year. 

Candidates who avoid discussing policy solutions rely on building a bond of common identity with voters. In playing to the vanity of the voter, they claim that these common characteristics are evidence of their leadership skills. This leads to parading the lowest common denominators such as love for mother, wife, and children. But if you love your immediate family that doesn't make you either a good person or a good leader. It makes you normal.

Not to cheapen it, but love and support for our immediate family is a basic instinct that is practiced by the birds and baboons. Unless you are a psychopath, one of the miseries of someones life is if they lack the love and support of a family member. But we can't chose our family members, and many great people function in spite of family problems. Likewise, the loss of an immediate family member, particularly early in life, is something with which we can empathize with a candidate, but that is irrelevant to their office. When a candidate says, "My wife is emotionally distant and my child is an embarrassment." then print it, until then let's lay off the emotive family props.

Politicians tend to be guilty of marital infidelity, particularly the most sanctimonious of them. They tend to spend long periods away from their family in ways that most would not accept. And they prominently display their families on stage, in speeches, and in commercials so that the children are subject to an extraordinary level of public scrutiny and criticism. I'm pretty sure a disproportionate number of politicians are sociopaths. If you are genuine, it can usually be conveyed without a mult-million dollar advertising campaign.Their campaigns go to great length to make these people seem genuine because they are in fact disingenuous. 

The press and public need to look beyond the pablum, props, and ideology to see what, if anything, the candidate proposes. We get the government that we vote for, witness that Congress operates almost entirely on pablum, props, and ideology - which is to say that they are utterly dysfunctional.

Ready for Democracy? Then eliminate Congress.

Contrary to common opinion, the US is not a democracy. Citizens never vote on federal policy, but instead vote on individuals to represent themselves. That is a republic, not a democracy. It is how most “democracies” work, and it has generally functioned pretty well, until now.

Now our representatives simply don’t function. Ezra Klein enumerates the reasons why this is the worst Congress ever. You might dispute some points, but I think almost everyone would agree that Congress is horrible and has no prospect of getting better. Making jokes about Congress is as old as Congress itself. From my reading of history, even the Continental Congress was full of petty politics, posturing, and incompetence. It is largely what drove Benedict Arnold to become a traitor. 

 

Why Congress Failed

But why is Congress so bad now? I think two reasons. First, news has become entertainment, so it is emotional rather than informative. I’ll guess that for every hour of TV news there are 40 minutes of emoting, 20 minutes of commercials, and 3 facts. The advent of more news portals allows sensationalism to cater to each cohort and causes more polarized knowledge and opinions. This polarization is reflected in, and played to by, politicians. It creates a vicious cycle of polarization, particularly on the right where they are told that all news sources other than Rupert Murdoch and Rush Limbaugh are part of the vast liberal conspiracy (not coincidentally improvng Murcoch’s and Limbaugh’s profits).

The other reason why Congress is so bad is because more than ever they are responsible to campaign contributors. They spend a large percentage, even a majority, of their time raising political donations. For example Minority Leader Pelosi admits to attending on average more than one fundraiser per day (400+ per year). Do you think Speaker Boehner is any different? Even if the politician is rich enough to fund their own reelection, they are still assigned quarterly fund raising goals by and for their party, which are enforced by committee assignments, seniority, and support by party and PAC spending.

The result is a Congress that agrees on little. When they do agree, it is usually because lobbyists pay them to do so, and in return the lobbyists are the ones that actually write the bill’s spending and tax details that we never see, but which benefit the lobbyist’s employer disproportionately. Congressmen don’t know the details because they are too busy trying to get re-elected, not to mention that many of them are more extroverted than detail oriented (they’d have to be to spend so much time begging for donations).

 

Eliminate Congress

Term limits don’t work because they doesn’t stop the underlying influence of political parties and money. The same goes for changing the way that congressional districts are drawn or primaries are held. And even if you disagree with the Citizens United decision by the Supreme Court that campaign finance restrictions impede the guaranteed right of free speech by corporations, one should agree that you cannot prohibit individual campaign spending without restricting free speech.

Rather than reforming Congress, abolish it and replace it with a democracy where voters make the highest level decisions and elect executives to implement them and manage the government functions.

The fear of a true democracy is that the nation will be ruled by the emotions and short-sightedness of a mob. The uneducated rabble will tax the wealthy too much, give away too many entitlements, rush to war at any provocation, and retreat when disappointed. Thus a republic is said to be superior to a democracy because we get to pick from the noblesse oblige to rule us. This sounds antiquated and snobbish, but who wants to be ruled by a mob?

Yet here we are, staring at a Congress that has utterly failed according to bipartisan opinion and empirical measure. Our nobility is filibusted.  Fortunately, changes have occurred since colonial days that make democracy more practical and possibly less mob-ish.

• Universal education – we complain about the quality of education today, but the literacy rate is much higher than 230 years ago.
• Unlimited information – we have the Internet, TV, radio, and much cheaper publishing.
• Voting technology – we really can count everyone’s vote in a single day, and could do much better with newer technology.
• National identity – citizens within the colonies thought of themselves as Virginians, New Yorkers, etc. more than as Americans, so the Senate was needed for the smaller states to join.

 

Implement Democracy

It isn’t practical for the public to make most policy decisions because there are too many of them, and because it requires too much expertise. Therefore most policy decisions should be delegated to an executive, and that executive will of course delegate many smaller decisions down their chain of command to career government employees. The main duty of Congress is to raise funds and spend money for the general benefit of the nation. That duty, at a high level, is assigned to the public.

The nation’s budget can be divided into a handful of categories:

• Social Insurance (health, old age, unemployment),
• Natural Resources (public land use, shared air & water quality),
• Infrastructure Investment (transportation & technology),
• Foreign Relations (diplomacy & defense). 

The public would vote on who is to head each of these four departments, as well as how much budget each would receive.  The public would also decide upon the President, who would lead the rest of the government (Justice, Treasury, etc.) and would be the titular head of state.

The Treasury would raise revenue based on tax rates decided by voters. Although various details of the tax code would be delegated to the President and Treasury staff, it would nevertheless require a much simpler tax code than our current horror. For example, the public would decide the highest marginal rate for individuals and businesses, the amount of deductions allowed, and the progressivity of the taxes.

Spending and tax rates would be based on the median value of all votes, which would naturally moderate decisions towards the wishes of the most citizens. A ballot vote could include the maximum allowable deficit, or maximum spending, etc. Departmental spending could be scaled as an absolute dollar amount, a percentage of all spending, relative to GDP, or relative to tax revenue.

The terms of the Executives and President would each be four years, with each executive’s term beginning on a different year. Annual elections would be scheduled say, during the first 7-days of each calendar year and would include selection of executive(s) as well as that year’s budget. Biometric verification (which can now ID based on blood vessels in your hand) could be used at voting booths so that the booth could be unmanned and open 24 hours a day in a public location, much like phone booths of not so long ago. Voting could fit everyone’s schedule.

In order to appear on the ballot of the election, the candidate would need to be nominated by a minimum number of voters, who took the time to stop by their polling booth in the quarter before the election and cast their choice. There would be no special provision for parties to automatically place their own nominee, which would reduce the power of political parties. Likewise, any special referendums for the next election would require a nomination of a minimum number of votes in order to appear on the ballot.

Offices that now require Senate approval, such as Federal judges, would be delegated to the appropriate executive. A simple majority vote by the public could block an appointment, and such a vote could also lead to impeachment or to cease military action. Quarterly votes could be regularly scheduled to decide these and other decisions of the day.

I believe that if taxing and spending were decided by the median of the voters, then we would have a different budget. For example, polls indicate that most voters want lower military spending, higher taxes for the wealthy, and simpler taxes with fewer loopholes. But those aren’t options that we now have, or if we do they are packaged with other choices that many won’t accept. Such important decisions deserve to stand on their own.

 

Amend the Constitution

The framework that the founding fathers created is 230 years old. I think they would be amazed that it has lasted so long with so little alteration, while so much else has changed. Our founding fathers were men with a better idea than European monarchies and constitutional monarchies. They created a broader based republic and guaranteed more personal rights. But they weren’t prophets delivering tablets from God; the Constitution is not a religious creed. It is a work of men, albeit particularly wise men of their day. Is our Constitution so perfect that we haven't needed any changes in 45 years? Evidence says otherwise.

The framework that I have proposed is imperfect and incomplete. But hopefully it stimulates ideas that are better governments than what we now have. Before you excuse an attempt at more democratic inclusion as a utopia doomed to a feckless mob, I urge you to look at what we’ve got now. Maybe we could test new ideas on a state level government first.

The biggest obstacle to changing our current government is that Congress would not vote to eliminate itself. But perhaps some of these ideas could spur Congress to reform itself. For example, the idea of selecting median values for spending and tax rates might work in Congressional votes as well as citizen votes. We survive by innovating to a changing environment, while preserving our ethics. It is past time for us to innovate again by making major amendments to our Constitution.

Occupy Policy

Income disparity in the US is enormous, but what is the public to think of that? Few begrudge an entrepreneur making a fortune, because many of us one day hope to be such a person. A better distinction is made on the many high income earners didn't get their money by creating a good or service, particularly when government policies and taxes favor them.

If the Occupy movement is dominated by disheveled and disorganized people with unmarketable educations who complain that they are underemployed, then they will merely be served up by the news media as entertainment until a more interesting lead story comes along. The Occupy movement had better come up with some promising policy recommendations, or else they will either be dismissed as whining losers, or hijacked by an organized political power. The policies need to be focused (no more than 3), have broad appeal, and move beyond partisan hot buttons (gay rights, animal rights, and abortion rights).

Here are my suggestions:

1) Reduce mortgage debt. We've bailed out banks, time to bail out borrowers. However debt forgiveness is a dangerous precedent that would make future lenders wary of making loans, so it is better to dramatically lower interest rates. One approach is to lower borrower's interest rates and make them apply some of the savings to paying down their principal faster. 

2) Invest in America. The US government can borrow for 10-years at 2%, that means that the government can finance investments very cheaply. Since private industry is saving money rather than investing, the government should pick up the slack. Everyone should submit ideas for government investments (direct or indirect). A good investment should return more than the cost of interest (which isn't much these days). These investments could be improvements to infrastructure, education, research, energy independence, etc. Thousands of ideas will be created from a grass roots effort rather than from top down. Then prioritize the investments and create a giant bill that contains projects from around the US that are supported by both the recepients and the businesses that will produce the investment. Make local congressmen explain to their voters and contributers why they don't want those investments in their district. Congress will pass that bill because local pressure and the need to get re-elected outweighs partisan politics.

3) Include capital gains, inheritance, and gifts in the Alternative Minimum Tax. In return, the entry point for the AMT would be raised so that it effects fewer middle class families and the estate tax is repealed. This would catch most of the wealthy who pay very low taxes, without making a class distinction at $1 million of income. It is worth noting that most capital gains income is the result of trading stocks, bonds, or real estate where no jobs, goods, or services were created. And those who inherit fortunes are just lucky on who their parents were and did no work to earn that money.

Fake Postal Crisis

The USPS has two crises, one is real and one is manufactured by Congress. The real crisis is that 1st class mail has dropped by 20% over the past 4 years. Not surprising if you've heard of the Internet and the Great Recession. The manufactured crisis was created by the Postal Accountability and Enhancement Act of 2006.

This law requires the post office to fund the NPV of its health care premiums (active and retirees) for the next 50 years within the next 10 years (by 2016). Sounds prudent, doesn't it? Just one problem. Nobody does this, because it is way too expensive. Almost everyone (public or private) mostly pays as they go. 

Do you (or your employer) set aside money for your food, housing, or healthcare for the next 50 years? After all, you know that you will someday need that money. Or are you planning to pay for most of that with future income? If we all tried to save this much money, then we wouldn't have money for buying anything else, nor for that matter would there be a place to invest that much money.

The post office has already set aside $42 billion, enough to pay for lifetime health care benefits of 100% of their retired postal workers and covered spouses. The post office is now asking for relief. They want to get out of the government health care plan - which is itself just a cafeteria plan of different private health care options (the same thing as Congress gets; and most employees and Congressmen go with Blue Cross). Getting out of the current healthcare plan allows them to withdraw their $42 billion and buy whatever healthcare they want with it.

The US Postal Service faces many challenges, and many opportunities for innovation. I wish them good luck, but I don't know enough to opine on planned improvements. But I do know that the decision in 2006 by Congress and Pres. GW Bush to prefund healthcare expenses for 50 years was either intentionally self-destructive and/or stupid. We have enough real problems without creating new ones.

Berlusconi's vow to leave

I'm surprised this hasn't gotten more press coverage. Whenever I'm despondent on the state of US politics, I like to see what Italian Prime Minister Silvio Berlusconi is doing. I think the headline says it all, Berlusconi vows to leave 'shitty' Italy.

IBGYBG Federal Budgets

If someone has a proposal to balance the budget then let's see it. But it has to be for next year, and it has to be specific. None of this stuff where the changes don't hit until many years into the future (IBGYBG = I'll be gone, You'll be gone), by which time future Congresses will have over written your budget with their own. No across the board percentage cuts, or freezes, or vagueness about eliminating tax loopholes and waste. Tell everyone exactly what you want to do now.

I know many conservatives want a balanced budget now, but then the specifics get dim. From what I know of their values and ideology, I think I can build a proposal. They might want to cut Social Security - but at least for the next year, that isn't much of a problem anyway (probably no problem if we had full employment). And they might want to cut Medicare too. But the political reality is that old people vote, and making significant cuts to Social Security's or Medicare's current recipients would get them booted out of office in the next election. So let's take these off the table for 2012. Likewise, conservatives tend to like national defense, so I won't cut that.

But conservatives really don't like the government providing assistance to individuals, and they don't like regulations that impede on business. With that in mind, I've tried to construct what I think a conservative balanced budget would look like, starting from Obama's current 2012 budget (some Republican leader said Obama didn't have a budget - took me 5 seconds to find it on the Internet, along with details from every Cabinet level department).

If we cut pretty much all benefits to needy individuals, except for Social Security, Medicare, and veterans, then we get close to balancing the budget. That means no federal money for Medicaid, food stamps, unemployment benefits, student loans, subsidized housing, etc. I also eliminated several government departments that they either don't like, or find unnecessary. That lowers the deficit from $1,042 billion down to only $110 billion.

Potential Conservative Balanced Budget Cuts:

There aren't any big ticket items left to cut, so one would need to cut a lot of little things from programs like highway funds, medical research, defense, etc. to reach the last $110 billion. As a reference point, the military in Iraq and Afghanistan is budgeted to cost $118 billion in 2010.

It is worth pointing out that many of the programs that provide assistance to individuals such as unemployment benefits and food stamps (SNAPS) are "automatic stabilizers" meaning that their payouts automatically increase the weaker the economy gets. If our economy were stronger, many of the programs would naturally shrink. These programs help people when they need it most, though media and politicians rarely attribute our higher government spending to programs which require no extra approval by the President or Congress. It also means that they cost the government the most when tax revenues are the weakest and therefore exacerbate deficits.

These payments to individuals tend to be immediately spent rather than saved, which is an argument for their efficacy over tax cuts as a stimulus. One could argue that they do nothing to stimulate investment - although without consumer demand in a recession, higher private investment is illusive anyway. Conservatives would argue that the government support of individuals in a time of crisis removes the urgency of the incentives for the individual to find work and support themselves, thereby lengthening the duration of the economic slow down.  People who like these programs tend to like them even more in a recession. Those who dislike the programs tend to hate them in a recession. They are politically polarizing programs. 

Note that this is not a budget proposal that I personally support; it is far too draconian for my taste. I've created these budget cuts as an example that has detail, substance, and immediacy. It also helps identify the scale of cuts required if we aren't willing to touch Medicare, defense, or raise taxes. People can see where the cuts are coming from, and with a little help, the consequence to individuals. Any politician or pundit who advocates a balanced budget, or even large spending cuts, should provide this kind of detail. Otherwise they are just playing games.

Balancing the Budget One State at a Time

Many people are concerned about all the tax dollars that go to DC and are spent there. Not surprisingly, $5.55 of Federal spending occurs for every $1 of tax of revenue that is raised there. What other states are feeding at the Federal trough? 

Here's Federal spending per dollar of tax revenue (for 2005, more recent year available):

 

This is back in 2005, so maybe some of these differences are due to housing booms or recessions. So I looked at the data going back to 1981. Although there was some variation from year to year, the patterns were pretty consistent. New York and New Jersey paid more than they received every year. California paid more in 20 out of 25 years and averaged receiving 92 cents for every dollar of tax paid. Most of the deep South never paid as much as they received. Nor has South Dakota, Montana, or Idaho. Alaska hasn't in 20 years.

Some states have a lot of poverty, which may explain why they are on this list. Some may have a lot of retirees that receive Social Security and Medicare (some retirees are pretty wealthy, so maybe it is a push). Some states are more likely to have large military bases due to their location (i.e. Hawaii). Other states may tend to get agricultural subsidies. And some states have a lot of corporate headquarters located within them. Every state has an explanation.

Sometimes sharing money across state boarders is good, so that if one state that is in trouble (recession, disaster) then they can be helped by other states. But in the long run, we hope that we all pull our weight. We should identify who isn't and correct it.

Many state governments make a big point of saying that their spending has to be balanced. Imagine if we balanced the Federal budget for each individual state. The states that typically vote Democratic should be all for that. The states that are strongly Republican should be very worried. Not just the citizens in those states, but the businesses that directly or indirectly rely on government revenue. Many Republican states should probably look a bit less to DC for where the Federal money is being spent, and a lot more within their own state borders. It likely that large cuts in federal spending will tend to hit Republican states harder than Democratic states.

It would be informative if we could see data like this for many more cohorts. By city, by occupation, by industry, by age, by family size, etc. Even for each individual family, a list of taxes paid versus federal spending received (hard to do, since the benefits of many expenses are shared). But if we did this, people might discover that they only need to look in the mirror to discover why we have a Federal deficit. If we start from that point rather than blaming liberals in DC, then our politicians would have an easier time balancing the budget.

If you are interested in looking at the data for yourself, visit the tax foundation's website.

Your Dollar is Worth More Today

Your US dollar is worth more today. How can that be? Look at the change in value today of various things on the financial markets (in US dollar terms): S&P 500 down 6.7%, Euro down 0.7%, Oil down 6.5%, Wheat down 3.9%, Lumber down 3.1%, Copper down 4.6%. Even Frozen Orange Juice Concentrate was down 5.2%.

What went up today? The US dollar went up against not only the Euro €, but also the Canadian $, the Australian $, and the British £. The 10-year US Treasury bond increased by 2% today (causing yields to fall). That doesn't sound like a world that is worried about the US government defaulting.

Gold went up 4.2%, and silver up 2.3%. The Yen, in dollar terms, was up 0.5%.

Basically, everything that you could use is cheaper today. Commodities fell, and so did currencies of countries that produce commodities. In my opinion, every nation in the Euro has a higher chance of default (albeit still very low) than the US because of the contagious banking problem there - in spite of what S&P thinks.

The economy is slowing, and so too may corporate earnings. Even after the past week, US stocks are still expensive in terms of their price relative to the 10-yr trailing average of earnings (CAPE). The S&P 500 would have to fall another 16% to hit the 100-yr average CAPE, or another 69% to hit the lows we saw in 1932 and 1982. 

Anything that is a medium of exchange or store of wealth is worth more today. Anything whose value is based on utilitarian aspects is worth less. Our dollars are worth more today. But that doesn't feel good if you own something besides dollars, Treasury bonds, gold, or silver. If the fear continues, people will continue to sell assets and hold dollars and precious metals. That would cause lower consumption, lower sales, lower profits, and lower employment.

People aren't consuming, they aren't investing, and they aren't even really saving. They hoard mediums of exchange in order to preserve their wealth. This is the essence of deflation. We had a very deflationary day. It is the opposite of inflation; our currency now buys more. That sounds good at first, but now you see that deflation really sucks. 

How to Fix Budget Politics

After seeing Congress' solution to our debt ceiling and the Eurozone's solution to their much likelier bond default, I think we will all welcome being governed by a new breed of super intelligent chimps. Rise of the Planet of Apes may look utopic, not apocalyptic.

I see little interest in solving our economic problems. But there is huge interest in blaming the problems on the other party. I see no one that offers even an implausible economic policy - even one that would be politically untenable in the hyper partisan environment. (for my economic policy proposal, see here).

If 'None of the Above' was a candidate in the next elections, it would win in a landslide. But that is no more helpful than waiting for super intelligent chips. Instead, let's pressure every candidate for Congress (and the President, lobbyists, and other experts) to declare exactly how they want to tax and spend. The CBO can create a fairly detailed 2-page list of government spending programs and tax choices to be made in the next year, and estimate what the deficit will be based on the numbers input.

This tax and spend list won't be for the next 10-years, which is a favorite political trick which pushes all the pain to distant years. That is utterly irrelevant since future Congressmen will make their own decisions anyway. All I want to see is the budget preferences for next year. And the list won't allow someone to make across the board caps or changes, or to do a "me too" on someone else's bill or list. If someone wants to be a copycat, then they have to figure it out and fill in each line. And they will need to understand each line so that they can answer questions from constituents and lobbyists.

I bet that if each Congress member has to declare budget details for the next year, then they won't look all that different. Because once they have to go beyond glittering generalities and outrageous ideologies, the reasonable choices are pretty obvious. Once you have to declare the specifics to constituencies, the consequences make the divisive rhetoric politically untenable.

Calls for a balanced budget amendment will look silly if your proposal for next year has a trillion dollar deficit. Feigned outrage over the need to raise the debt ceiling will be recognized as crass and dishonest if your own budget preference would have done no better. Many congress members will actually learn something about the budget beyond reciting their party's talking points. And the public may actually learn how their government really taxes and spends, and stop believing propaganda. Or so I hope.

Tax Lottery

and now for something completely different...

Everyone hates preparing, filing and paying their taxes. Many people love playing the lottery, in spite of odds worse than being struck by lightning (but no one expects to be struck by lightning). So put the two together. Here are the rules:

• 1 in 100 Federal tax returns get a $100 prize.
• 1 in 1,000 tax returns get a $1,000 prize.
• 1 in 10,000 tax returns get a $10,000 prize.
• 1 in 1 million get $100,000 (bigger prizes don't offer more incentive, but ruin lives).
• In order to win, your return must be filed on time and accurate.
• Accuracy of smaller prizes is checked by standard computer programs.
• Accuracy of larger prizes is verified by tax return audits.
• If someone selected for a prizes fails the accuracy test, then another winner is selected.

The cost of the proposed lottery would be roughly $400 million. Sounds like a lot of money until you consider that it would account for 0.01% of total federal spending. If that seems like too much, then drop some of the prizes. But I bet that the improvement in the accuracy and timeliness of tax return filings will more than pay for the cost of the prizes. Plus, it will add some excitement and even hope to the otherwise awful chore of filing your taxes.

If someone wants to be elected President of the US, then they should propose the tax lottery. All the pundits will hate it. But your average voter will love it.

Internet Based Revolutions

There's a lot of hype in the media about how Facebook, Twitter, and other social media/Internet tools aide people in organizing to protest, or even revolt against an oppressive government. I think this shows how sheltered most Western journalists are. If I were in the secret police, I would LOVE Facebook. It is a free organization chart of the opposition. The Internet is a tool, and it can be used at least as well to crush organization as it may be used to create organization. For it to succeed in protests or revolution, Internet tools would have to be used in very secretive ways.

For a good discussion on the topic, see this RSA Video. If you haven't seen RSA Animate videos before, you are in for a treat. They are usually entertaining, and sometimes a bit provocative. Their approach is a much better way to communicate than a PowerPoint.

The Nature of Risk

Between natural and financial disasters, risk is being discussed a lot lately.  Often someone points out that a catastrophic event is very rare, and therefore couldn't be anticipated. But the nature of risk management is to extrapolate the probability of rare events, and also to consider the severity of the loss should that event occur.  Usually it isn't a case of if the event will occur, but when.  If an event is likely to happen once every hundred years, and it hasn't occurred in 70 years, that makes it no less likely to happen tomorrow (and in a bubble, more likely).  One usually can't time when rare events will happen. Yet one must still have a plan of how to respond - particularly if the severity of loss is high.

What is most striking is the failure to anticipate a chain reaction of risk events. In the financial world risk is usually broken up into several types: credit risk, market risk, and operational risk. If credit losses are severe, then it will lead to the value of a firm's assets to fall, prevent them from raising more capital, overburden staff and computer systems, and uncover heretofore hidden fraud. This is what always happens, and it should be expected that credit, market, and operational risks are interdependent. Yet it is usually no one anticipates or prepares for the chain reaction of events. Once can easily see a parallel with an earthquake, tsunami, power loss, nuclear accident. Chain reactions are a fundamental part of risk.

Real Star Wars

We are moving closer to Star Wars, but it probably won't involve lasers, a missile shield, or The Force.  Yesterday the Air Force launched  another test of its X-37B Space Plane.  This plane looks like a small (29'), unmanned Space Shuttle.  Development used to be headed by NASA, but in 2004 it was taken over by the Defense Advanced Research Projects Agency.

The Air Force won't say much about the X-37's mission or capabilities.  Amateur astronomers have tracked it and noted that it has the same type of orbit as reconnaissance satellites.  Its low earth orbit means it travels at at least Mach 25, and circles the globe every 90 minutes.  A serpentine orbital path regularly puts it over most of the globe on a regular basis.  Like the Space Shuttle, the X-37 lifts off from a rocket, but returns to earth like a plane.  Unlike the Space Shuttle, it can stay in space for 270 straight days.

It is easy to speculate about many military applications that such a space plane could undertake.  Very specialized reconnaissance is obvious, but what else?  The payload potential would allow it to release smaller, less detectable, temporary drone satellites for separate missions.  Or the X-37 could be used to knock out satellites in a number of ways; such as the most obvious of firing a projectile, or less traceable ways such as leaving debris in the path of a satellite, using magnetic waves or particles, or sending a substance that harms solar panel absorption.  

Another military application of a mini-space shuttle could be to launch scramjet missiles.  Scramjets are incredibly fast; they won't even work below Mach 3, have been tested to Mach 10, and in theory would work to Mach 25 (19k mph).  A scramjet has few moving parts and needs to carry little fuel because as much as 90% of the fuel comes from the air and oxygen in the environment that is compressed as it is shoved down the engine throat at Mach >3.

The downside of a scramjet is that you can't get enough atmospheric oxygen to power it until it is going at least Mach 3.  Going that fast isn't easy.  The last test flight required a turbojet B-52 to fire a rocket that contained a scramjet plane - in other words, 3 kinds of propulsion systems were needed.  But with the X-37 already going Mach 25, getting a scramjet started shouldn't be nearly as difficult (though still complicated).

Why is going Mach 10 or 20 so important in a weapon?  It isn't just that speed makes it hard to track or engage countermeasures.  It is that Force = Mass times Velocity^{2 (squared).} At Mach 20, you scarcely need an explosive charge because every 1 pound of the projectile has the force of 400 pounds at Mach 1, but is focused in a smaller area.  At Mach 20, a few pounds of metal would pierce any armor or sink any ship, and a few hundred pounds would penetrate bunkers. 

All of these applications are speculation by me, and I have no experience or education in defense or aerospace.  But some of the potential is obvious, which is why the Chinese have expressed concern that the X-37 is starting an arms space race (China Daily), and the Chinese and Russians are talking about starting their own space plane projects.

Hydraulic Fracturing Dangers?

Hydraulic fracturing is a technique where gas drillers pump large amounts of liquids at huge pressure into a natural gas reservoir in order to fracture the less than ideally porous rock. This method has been successful at greatly increasing natural gas extraction in the US, including in fields that were previously not cost efficient to drill. I've seen sporadic complaints for several years about the process ruining well water, causing small earthquakes, poisoning people, and even blowing up a house or two. The composition of the fracturing chemicals is an industry secret (making it hard to test for), but is reasonably a soup of light hydrocarbons and chemicals which eat through rock.

The petroleum industry denies the claims. But the number of growing complaints gives the claims credence. The idea that it poisons well and ground water is particularly plausible. At a minimum, I think the Federal government should have clear rules on how fracturing can be done.

1. The chemical makeup of the fracturing liquid must be disclosed and available for analysis.
2. Protecting casement for the pipes must be pre-formed above ground and pressure checked so that it is known that the pipes are properly sealed.
3. Pipes must be sealed from horizontal leaks or contamination for at least X? feet below the surface.
4. Fracturing liquids must be stored in metal tanker trucks and cannot be stored, even temporarily, in ground basins (which sometimes leak).
5. Water rights to water wells within X distance of fracturing must be purchased prior to drilling.
6. Special rules should be made for fracturing near lakes, rivers, and aquifers.

I'm not a petroleum engineer, and I haven't read these suggestions anywhere. So maybe I'm way off base. But I'm pretty sure that something must be done, even if private industries don't like more regulations. The potential for a private firm to ruin people's property and health in order to increase profit is too high. And the ability for an individual to successfully litigate against a drilling firm is too low to prevent it.

For a lengthy news story on the topic, read this.

Supreme Court Decision Now

We've got 4 different legal decisions on the health care reform bill, and more coming.  So far two judges support it and two say it is unconstitutional.  Some of these judges have been virtually hand picked by virtue of where the suit was filed, so that the filer was already confident in how the judge would rule.  With each decision, politicians and pundits use it to support whatever their position already is. 

More importantly, all of these decisions are leaving health care changes and decisions in limbo, and that is worse than having the law stand or fall.  State governments, regulators, insurance companies, employers, and individuals need to know how to proceed.  It is also running up court and legal bills around the country as more suits are filed and argued.  What a waste of money in an already overburdened judicial system that has too few judges working.

Everyone knows that the constitutionality of the health insurance mandate will ultimately be decided by the US Supreme Court.  So Chief Justice Roberts should fast track this case to his bench and thereby save countless time and money spent in lower courts, and allow insurance companies, employers, and individuals the ability to move forward with their plans based on whatever the decision is.  My guess is that the Supreme Court will strike down the insurance mandate; legal arguments will be a cover for partisan beliefs and party line votes.  So be it.  Because in this case, indecision is the worst decision.