Rather, I think the above path would mean a depression worse than 1929 in short order… I am not cynical enough to think that the GOP’s intent is the intentional destruction of USA, leaving it at third world 2.0 economic status. As such, there must be some logic, and some type of plan as to how that would play out successfully for all, or at least a significant number.

Such is what I asked a conservative friend, and the answer was that feedback from the free market thru pricing signals / supply / demand etc would solve many of the problems organically.

My response was that such assumes that the system is closed, that no alternatives exist, and that wealth is unlimited. Furthermore, I do agree that price signals make sense, that is until heavy duty manipulation enters into the ball game and renders them near useless.

I came up with the following counter arguments as to the free market, price signals, and a limit on wealth.

1. A competitor will come in and counter jacked up prices, thus mitigating their effect. This could work, but only if the market lead times were short enough for such to be viable. Ie, if I start a company today to compete with current or next gen Viagra, its going to take at least ten, if not twenty years or more before I can make any money off of it.

2. Over a very long period of time, the effects of price manipulation, and/or drastically shifting import/export mixes would ebb and flow such that they would average out. The net effect of this is that world prices for goods, materials, and labor equalize. Ie, all end up on a somewhat level playing field…. the exception being if we were to compete with a Keynes based economy.

3. Wealth is very much limited, in that many potential paths have such a high risk element combined with exceedingly low payback aspects that no investor in their right mind would enter the playing field. Case in point, our nations electrical grid has been in trouble for years… and yet nothing has really been done to address such, and likely nothing will be done until a massive section crashes and burns. The financials just dont make sense, as you cant predict when the system will collapse enough on a massive scale to justify a number of quarters of horrible returns.

By the same token, the conservatives are not entirely in error… the bit about lowered taxes can work, provided the taxes are high enough. Ie back in 70′s when taxes were nearly double what they are today, lower taxes could work. Otoh, when taxes are as low as they are today, debt is as high as it is, the Laffer models fall flat. People cant work enough to generate enough taxes… unless we switch to 80-120 hour work weeks.

There is some sweet spot between where we are today tax wise, and where we were in the 70′s. I think HW Bush had things pretty much right on the mark, and thus the economy did well during the Clinton era. We even had a surplus!

Most of the comments said something like the following… “yes, we must pay our obligations, ie what we owe to the bondholders etc, but we must stop spending. You dont give more booze to a drunken sailor.” Such is a reasonable response, but it requires one to separate loan payments, from previously made contractual obligations.

If major retailer comes to a mfgr, and says, I’m placing an order for 100,000 widgets over the next year, and I will guarantee I will take all of them, and I will pay you 1/12th every month, irrespective of sales volumes… If the retailor has a great track record of honoring its obligations, the mfgr will add staff, inventory, etc and commit to the contract. Likewise, with such a guarantee, an operating line of credit to make such happen is pretty likely. If the retailor is a startup, or has a marginal track record, and offers no guarantee, no way no how would any mfgr do so, as all the risk is on their shoulders, and likewise, it would be near impossible to secure an operating line of credit.

The US govt has long held the stance of a reliable and secure retailer in the above example. If they say they are entering into a contract, and the go ahead is given, bailing on said contracts midstream is unthinkable. States depend on fed money, govt contractors depend on fed money, etc etc. The government has stood behind its contractual obligations, short of any specific outs written into the contract. For the govt to arbitrarily say… sorry guys, we decided not to pay you, as we dont want to, is unthinkable, and will cause untold amounts of damage throughout the system.

Imagine with all the schools starting in August, how many will be in real trouble if they recieve 56% or possibly quite a bit less federal money than what they were expecting. Imagine the sticky deals where schools are mandated to do abcdef by law, and yet will not recieve any funds to do so. Imagine the ripples in agriculture if all of a sudden all the subsidies and price supports evaporate overnight just as harvest time rolls onto the scene. Imagine the morale of our military when they only receive about half of their paycheck.

The bottom line issue is this… you dont show up at the vendor at 4:59PM the day the payment is due, and then say sorry, we dont want to pay you, as we’d need to get another loan, and dont want to do that. Rather, when you write the funding bills, you cut this, or cut that, and simply dont enter into any contracts you aren’t willing to pay for. Granted, on a practical level, it’s very difficult to cut any programs when putting the budget together, but such is the job politicians are elected for. If they dont, there is always another one wanting to step into the fray.

Contractual obligations which are life safety critical (bullets for soldiers, medicare payments for life support etc) should always be held at a higher priority than loan obligations, that is, if one truly values life in actions rather than just words. Creditors recieve interest in return for a risk of not being paid… the greater the risk, the greater the interest. Yes, in the ideal world, loan obligations would be honored, but if the govt has to pick and choose who to pay as they have no money at all, human life should rank much more than financial agreements.

Then again, the argument that the govt is out of money is a bogus one… taxes are at their lowest point in 50 years, and investors are more than willing to buy more debt. Yes, debt is too high, government spending is too high, and yes the spending spree does need to be reveresed, but it can and should be done with honor during the budgeting process, not by playing a fast one, and using a crisis to intentionally bail on ones committed obligations.

In a nutshell, the federal government would have to shrink 44% overnight….

Then again, such an analysis assumes a number of things.

• That all income comes in at once, and all expenses come in at once… and they dont.
• That there is zero cash on hand. However there is, albeit there is the question as to how long incoming revenues? on hand could last. The best I can figure is a total switch to cash in – cash out won’t occur until mid month a week or so.
• That the treasury can prioritize who gets paid. The GAO says that debts can be liquidated, but really nothing about prioritization. Any attempt at prioritization by the treasury would end up in court forever, short of it being voted into law.

Some folks may feel that social security and medicare are safe, being they are paid from the trust funds… and they are in a sort of convoluted fashion. However, the supreme court deemed them not a property right, so it is exceedingly likely that they will be lower priority than paying the creditors in China and Japan. Then again, any congress person voting against paying someones social security check would be committing political suicide… thus, a bill to set such priorities would likely be bundled with paying middle east contractors or some other golden calf.

A more realistic scenario is…. govt screws around until the last hour, could be August 3rd, could be as late as Aug 23rd, and then the debt ceiling will be raised… and sadly if the GDP takes a header which is a fair possibility, it will have to be raised a whole lot more than what is currently proposed. The exception to this is if institutional investors (Wall Street, China, Japan) feel they are not well protected, they will force govt to act sooner rather than later.

An interesting observation of the power of institutional investors might be drawn from the date the debt ceiling is raised. If by chance it should occur before Aug 3rd, they are scared to death and very powerful. Otoh, if it drags on until defaults start to occur in drips and drabs, either they are exceedingly well protected somehow, and/or their ability to influence government has dropped multifold since 2008. If by some chance, the debt ceiling doesnt get raised… it becomes clear they have found the ultimate in protection. The tea party, no matter how vocal is nowhere near as poweful as the trillions of dollars at stake.

The thing is, defense spending is driven not by statistics or economics, but one of moral values. Ie, risk analysis defined spending based upon probability and consequences doesnt justify our spending 6X more than China (who pretty much bankrolls our economy), unless one starts playing moral games with the consequences factors.

In the post cold war era we live in now, a proportional response is preferred over nuclear action, even though economics alone would dictate otherwise. Ie, nuclear annihilation of an enemy even though it might be a very tiny fraction of the cost of troop engagement is anathama to the purity(disgust) aspect of morality. As such, while one could reduce military spending multifold, having the majority of ones efforts being limited to nuclear is problematic to both liberals and conservatives. A secondary issue of such a stance is the economic costs with the massive numbers of troops and defense contractors who would become unemployed.

Many on both sides have suggested that we return to the age old practice of isolationism… There is no question that having military bases scattered throughout the world is insanely expensive, to say nothing of the wars in the middle east. Some might say we have air to air refueling and thus we dont need as many bases. On the other hand, the KC-135 is approaching vintage status, (first flew in 57), albeit it is projected to be in service until 2040.

The counter to isolationism is that worldwide oils price and supply have a direct effect on our economy. Any actions affecting the worlds oilfieds and/or pipelines or even Gulf of Mexico oil leases could likewise cause major disruptions in the price and/or supply of oil. The reason this is a big deal to many is the US consumes about 24% of the worlds oil production… mess with oil nearly anywhere, and our way of life as we know it gets messed with severely.

This is compounded in that we are only 4% of the worlds population, and emerging economies oil usage is increasing exponentially. At the same time easily recovered and affordable oil is becoming more and more scarce all the time. Yes, the Bakken fields and other potential sites within the US boundaries might provide more than enough oil for our needs, but its recovery may not be economically feasible.

The private sector cannot justify the long term risk and investment needed for what may likely be a very small return due to massive drops in demand due to the resulting high price of oil. By the same token, a multiyear government program on the scale of the Apollo might work, but would also include substantial risk and waste… and thats without political partisanship and meddling.

A liberal response to such is it should be a priority to reduce our dependence upon foreign oil. Such makes good sound bites, but folks have been saying we need an energy policy since the 70′s and virtually nothing has happened… as cheap oil drives the economy. Ultimately though, geology is likely to force the issue, probably a lot sooner than most realize.

This is where the values on defense spending divide liberals and conservatives. (some comments from gailtheactuary’s blog)

Insisting that the US has some kind of right to burn all or most of the world’s remaining oil wastefully is dangerous, myopic nonsense. The US has in fact neither the right nor the might to do this comprehensively. Furthermore, the US has no pressing need to do so and could maintain a very good standard of living (equivalent to the West European standard) on about a quarter of its current oil consumption.

In contrast with

Might makes right. Pretty much every single time. God fights on the side with the biggest artillery. It is indeed dangerous, but the point is to make it dangerous to the competition, not your kids. It’s certainly not myopic nonsense. It’s the opposite. It positions to dominate the inevitable.

… Point being, regardless of the level of life, or of society, you will always want your kids to be in the dominant configuration. That’s why it’s not myopic. It positions to dominate the inevitable, regardless of what society that is dominated looks like.

And there in lies the heirarchy and peergroup value sectors that divide liberals and conservatives.

The thing is… its not just the rich, its nearly all of us. Folks dont want their 401K’s depleted, they dont want $8/gallon gasoline, they dont want reductions in govt benefit checks, they dont want a substantial decrease in standard of living. No one wants to risk what they have now, even if such would likely result in a better world in the future.

This is perhaps best illustrated with “The Red Button Problem“

In the summer of 2000, I asked a group of 100 people at a conference of spiritually committed people who would push a red button if it would immediately stop all narcotics trafficking in their neighborhood, city, state and country. Out of 100 people, 99 said they would not push such red button. When surveyed, they said they did not want their mutual funds to go down if the U.S. financial system suddenly stopped attracting an estimated $500 billion-$1 trillion a year in global money laundering. They did not want their government checks jeopardized or their taxes raised because of resulting problems financing the federal government deficit.

From a top level perspective, the economic return on daycare subsidies seem reasonable. Ie, by providing subsidies, it is possible for a family to obtain further education, and as a result earn enough money that said subsidy would no longer be needed well before the children outgrow the need for day care. Likewise, with further education, the family may be able to bootstrap its way into a better way of life as time passes. This seems to be supported by both parties, being that higher education grants for daycare have not been cut in any state proposal.

Likewise, from a liberal perspective, there is concern for the children and families themselves, ie without daycare subsidies, some are likely to suffer, some may even be injured or worse. Ultimately, the children should not have to suffer severe hardship due to the economic circumstances of the parents. Obviously there is a balance point to this, there will always be economic disparities between the well off and the poor… its likely a matter of how much is tolerable on each side of the equation.

From tea party perspective, the subsidizing of day care results in economic distortion. The free market is tilted by the govt, and as such daycare charges are higher than they should be, and likewise parental wages are lower, being that employers dont have to pay a wage high enough to cover the daycare costs of their employee. Of course, this analysis only works according if the iron wage law applies to all equally.

From a conservative perspective, there is the issue of moral hazard. Ie by providing a safety net, it may be inadvertantly encouraging folks, especially single parents to have more children. Then again, this is likely balanced in that many conservatives are proponents of large families.

Ultimately, as near as I can infer from the budget proposals from both parties, the daycare subsidy is going to shrink, or in some situations go away entirely (short of higher education grants). See the end of session budget.

I guess such is sort of an inevitable path, being the HHS need for services, just to remain on par with the past would require a 21.3% increase in spending. Its way beyond a tax and spend deal… ie medical costs continue to go sky high, the population continually shifts to an older demographic which requires increased services. Having the rich pay their fair share is not anywhere near enough to sustain current practice.

Such situations propose a lot of questions:

What is the answer for the families are currently dependent upon the daycare subsidy?

What is the answer for daycare providers who see ever increased regulation and govt mandated expenses all the while see ever decreasing revenue?

What is the answer for charities, families, or neighbors who would be willing to step up to the plate, but red tape and regulations make doing such impractical, or near impossible?

What is the answer for the state, when children get left alone, or older children get put in charge for extended periods and things inevitably go wrong?

There are no easy answers….

Tax fairness is a tricky deal, in the days of old, progressive taxation was pretty much the rule, namely if one made more, one should contribute more. If one looks at income taxation in isolation and without deductions or credits, at both the fed and state levels, such is how the system is set up.

Regressive taxation, where in the lower incomes pay higher taxes as a percentage of income is thought by many to be counter productive. The proverbial Warren Buffet comment of the wrongness of his secretary paying more in taxes as a percentage of income than he does comes to mind. Likewise, being the poor do not have access to the tax strategies of the rich, there are offsets in place like the EIC and others, where in the poor may pay zero income tax, and may even get tax rebates to offset the other taxes they indirectly pay in order to achieve some level of overall fairness in taxation policy.

The talking point about the poor not paying any taxes is a huge myth. They do not pay any income taxes, but they are swamped with others… albeit the income data in and of itself is likely skewed. Note that the poorest 10% of MN are paying ~30% of their income in taxes, albeit indirectly through direct and passed on local, property, business, and sales taxes. Also note that the income data on the poorest 10% may be substantially in error (page 17 of the MN tax incidence study)

Another issue to consider when it comes to taxation fairness is the resulting economic impact. Ie., a fair system of taxation may not necessarily make for optimum economic output for society at large, both rich and poor, as well as the the government.

1. If taxes are too progressive, net economic output will drop and likewise will government tax collection per the Laffer curve. An example of such might be the time frames when the Fed’s top income tax rates were above 70%. Such was the basis in part for supply side (trickle down) economics policies brought in by Reagan. Such is likely a primary issue behind current Republican strategies of no new income taxes, and most certainly no new taxes on the richer individuals.

2. The reverse is that if taxes are too regressive, the greater number of non-rich individuals will have reduced purchasing power, which reduces demand, which kills off real economic output which likewise leads to reduced tax collection per the Laffer curve. (Bear in mind, there is real economic output, and there is fictional economic output which often serves to mask reality… case in point Bernie Madoff etc). Many liberals believe taxes are too regressive today, and this in addition to fairness is likely behind the stance of Governor Dayton.

Putting the economics issues aside for a future blog entry, lets take a look at some data to see where MN really is. The Suits index is a measure of how progressive, or regressive a given taxation strategy is. A truly fair system would be neither progressive, nor regressive and have a suits index of 0. A fully progressive system would have an index of 1.0, and a fully regressive system would have an index of -1.0.

The following is taken from the MN Dept of Revenue Tax Incidence Study page 13 and is from 2008.

Personal Income Tax +0.218

Sales Tax -0.229

Business Taxes -0.204

Personal Taxes -0.020

All State Taxes -0.004

All Local Taxes -0.202

Total Taxes in MN -0.060

With a Suits index of -0.060, there is no question that Governor Dayton is correct in that the rich are not paying their fair share. In fairness though, it must be considered that the income data on the poorest MN decile is likely to be skewed substantially. The MN Dept of Revenue recognizes this (again on page 17), and by removing the first decile from the analysis, they come up with a suits index of -0.046 for 2008… It helps, but it still shows the current taxation system is anything but fair.

Next, lets go back in time…. Here is a chart from 1988 to a 2013 of the Suits index.

Again, it appears the rich have not been paying their fair share for many years, at least when it comes to a total taxation point of view.

I am guessing such may be a reason why Sen. Howe’s * proposal is getting so little traction, and likewise why the Republican party is so much against Governor Daytons approach.

A fair taxation system if based upon a sales tax would have to be quite expansive and as such would severely impact the richest 1%, as well as probably the top 10% of Minnesotans in a very negative fashion in contrast with the last 20 years or so.

The other option would be to provide offsets & credits for the many of the deciles as compensation… but such opens up a huge and likely contentious can of worms. I applaud Sen. Howe’s attempt as well as Governor Daytons to bring fairness to the tax system, but this is an exceedingly uphill battle no matter which party one is on.

*Bear in mind, the Suits index is based upon income, some economist suggest a consumption based index may be a more appropriate measurement…. alas one which is significantly harder to measure. It may be that Sen Howe is privy to some consumption data apart from the MN dept of Revenue income study which makes his approach more tolerable to all sides.

If we look at retail/commercial, we see revenue’s per square foot of space ranging from $100 to $700 with a mean of roughly $350. For those not familiar with the term, revenue per square foot is totally yearly sales divided by the square feet of a facility. Retail/light commercial would include things like restaurants, convention centers, hotels, etc. Such entities typically use a significant number of part time staff, so job creation stats look really good…. but a ~$10K/yr part time position doesnt do much to help the average joe, or his purchasing power within the community. Alas, the sector provides a huge sales tax boost. It also provides a huge boost to a states UI fund, being it is based upon number of employees rather than wages. In addition, lease revenue, and operating lines of credit provide for huge carrots for investors, many of whom will not be local.

If we look at dirty jobs, we see revenue’s per square foot roughly 15-35% of the above figures. Likewise, as many dirty jobs fall into the skilled and or semi-skilled realm, job creation figures will be much much smaller. In addition, sales tax figures will only be indirect, ie most dirty jobs fall outside direct sales taxation, but rather sales tax revenue would be based upon the purchasing power of the individual employee… and they may do their purchasing outside their community, or even outside their state. On a positive note, such jobs do pay much better, and are likely to be full time and provide benefits to the average joe. Ultimately though, other parties are constrained from easy skimming, unlike retail and light commercial.

Hmmm… so I looked up some data. From MN UI program.
http://www.uimn.org/ui/faq_bp.htm#Q3
Your unemployment benefit is approximately half of your average weekly gross wage up to a maximum of $578.

So, we have a contractor offering folks at best a pay rate of 50% of their previous wages, or for highly skilled specialists, perhaps 30% of their previous pay. If he is doing that to wages… imagine the deals he is trying to pull with his suppliers. Imagine the creative interpretation of specs he is using to cut as many corners as possible.

It comes back to the standard triangle. You have cost, quality, and time, pick 2.

Being time is almost always a fixed amount, I dont think I want to be anywhere near this guys projects. I dont blame folks for not working for him either, irrespective of pay… the safety culture is almost always the first thing to go when cutting corners.

Student Achievement, Testing, and Teachers

Some believe standardized tests are not a reasonable measure of students mastery or lack there or, yet point at standardized test results as to why charter schools and other approaches are not the end all solution.

Some believe that teacher performance or lack there is far from a large factor in a students achievement, yet at the same time find alternative teaching licensing programs dangerous and ill thought out.

Some believe that standardized testing is the greatest thing ever, so much so, that they dont seem to mind that 80%+ of the school years technology resources are tied not to education, but to testing. Some have even gone so far as to state more testing is needed.

Fairness and Inequality

Some believe that schools are tasked with solving societies social problems of fairness and inequality in addition to education. Others could care less whether fairness and inequality were addressed in a school format, much less being solved by it.

Some believe that students who dont want to be in school harm pull the entire classroom down, and as such mandatory attendance laws should be scrapped. Others believe that students who dont want to be in school should be kept there anyhow, such that society benefits by reduced crime in the future, no matter the cost financially, and to the other students in the short term.

Funding

Some see education as a way to make a fast buck, and get locked in to long term contracts favoring themselves via legislative action, thus spending money on lobbyists is nearly more important that the students. Others see any spending on politics whether it be via lobbyists or unions as a distraction from the primary focus, the student. Others go so far as to say it is wrong for a private entity to profit from public money, even more so if it takes money away from the classroom.

Some see vouchers as a way to save money, as in some situations, they provide K12 edu at 1/2 the cost of public education, but they dont consider what may be gained lost as a result. Others see any alternative methods of education as an attack on funding for public education, and as such is anathema.

I dont know what the answer is… but clarity and / or framing an issue with all the factors out in the open I think is key. Assumptions that folks are on the same page does not work out too well.