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Archive for the ‘Fiscal Cliff’ Category

The Cost of “Bernie Care”

September 25, 2017 Leave a comment

Senator Bernie Sanders has expressed support for and formally introduced a plan for a health insurance system to be run by the federal government which has been called “Bernie Care” in some media outlets.  A number of other Democratic politicians have also expressed support for this idea. This is quite likely to be the Democratic Party response to the problems with Obamacare. Indeed Barack Obama expressed his own support for this national health insurance program before his first election as President (I saw the videotape of his statements at that time) but he claimed the country was not yet ready for such a health insurance program. What would such a program cost? The Urban Institute has published a study to answer this question. Read more…

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The U.S. Tax-Income Ratio

August 17, 2017 1 comment

I recently saw a news report about federal government tax receipts and I began to wonder what trends, if any, have been present in the public’s support of government as measured by its tax payments. Most media reports that I have seen focus on the dollar amounts of federal government tax revenue but it is more informative to include state and local governments as well so that we can get a more accurate measure of public tax payments to the government.

But rather than looking at tax payments in dollars, it is more useful to look at tax shares of our incomes. The economy grows over time and so it is more informative to see what fraction of our incomes are paid to the government so that we can adjust for the size of the economy as it changes through time. For this post, I will use Gross Domestic Product (GDP) as a measure of our incomes and I will use Federal plus State and Local receipts to capture the revenues of all sorts that flow to the government. All of the data was drawn from the St. Louis Federal Reserve Bank FRED database which is freely available to the public. The data is annual and it covers 1929 through 2016. Read more…

The Government Deficit and the Fed

April 13, 2017 1 comment

The Federal Reserve recently announced an increase in the interest rate which it sets. This has implications for the government deficit which may not be well understood by the average person so I thought that it might make sense to discuss the connection between the Federal Reserve and the government deficit. What this discussion reveals is that the Fed has been helping to finance the government deficit in the U.S.

The Consolidated Government Budget Constraint

There is a relationship between the government and the Fed known as the Consolidated Government Budget Constraint that is written below.

Spending + Interest Payments + Net Transfer Payments =

Tax Receipts + Change in the Stock of Debt + Change in the Monetary Base

The items on the left side of the equal sign are the uses of the government’s funds. Spending refers to the fact that the government buys goods and services, it makes interest payments to the holders of government debt, and it makes transfer payments to individuals in the economy. The right side of the equation is the list of sources for the government’s spending. It receives tax payments, it issues or retires bonds, and the last item reflects bond purchases or sales by the Federal Reserve. It is these last two items that reflect the connection between the Fed and the government deficit. Read more…

Economists Running for Office

August 31, 2016 Leave a comment

I have tried to stick to economics on this blog, meaning that I do not get involved in expressing political opinions for any reason. But I learned something today that I felt should be passed on to my readers.  And that is that two economists, Lawrence Kotlikoff and Edward Leamer, are running for President and Vice President of the U.S. Their web site is kotlikoff2016.com.

These are two established and highly competent economists but, let me be clear. I am not expressing my endorsement of them. I am merely passing on the information to those who might be interested.

Given the turmoil that we are seeing in this election season, it is quite interesting to see two economists feel that they should get on the ballot. It really is true that the U.S. economy has extremely serious problems that are not being addressed by either of the two mainstream candidates running for President. I will be interested to see just how far these two economists get to the jobs they seek.

The Unfunded Liabilities of the Social Security System

March 24, 2016 Leave a comment

The Trustees of the Social Security System issue a report each year on the overall state of the system.  The 2015 report is available publicly (https://www.ssa.gov/oact/tr/2015/trTOC.html). Consider the following statement in the Overview section of this recently-released report.

The open group unfunded obligation for OASDI over the 75-year period is $10.7 trillion in present value….

In the above statement, OASDI stands for Old Age and Survivors Disability Insurance, the formal name for the Social Security program. The statement seems shocking because it suggests an enormous payment of benefits owed to individuals for which there is no funding source. This staggeringly large number is what is often reported in the media. But my guess is that most readers have no way of knowing how this number arises. With a bit of arithmetic, it is possible to show how it is obtained. Read more…

Government 101: Why Government Programs Never Seem to End

January 8, 2016 Leave a comment

Ronald Reagan once made a comment to the effect that government programs never seem to end. A recent story in the press indicates why Reagan was spot on with this comment.

A recent media report indicated that Senator Ted Cruz is campaigning in Iowa and he has criticized the ethanol programs imposed by the federal government. While Senator Cruz is not the only senator taking this position (for example, I have heard Senator John McCain enunciate an identical position in the past), what is remarkable is that Senator Cruz has made these critical remarks in a state containing residents, such as corn farmers, who benefit mightily from ethanol fuel mandates. The press report indicates that the ethanol industry is spending millions of dollars in an advertising campaign designed to prevent Senator Cruz from winning the Iowa caucuses.

This news report illustrates the truth of a comment that I heard the late Milton Friedman make many years ago explaining why government programs seem to last forever. The benefits of the ethanol program accrue to a small number of individuals who are fully aware of the manner in which they benefit. The costs of these programs are diffuse and spread across many individuals and are small, per individual, compared to the per-individual benefits that accrue to those who are made better off by the ethanol program. Indeed, those bearing the costs may not even be aware that they are made worse off by the ethanol mandates.

Econ 101 students can easily figure out the impact of ethanol fuel requirements. The demand for corn rises which raises the relative price of corn. Farmers rationally put more land into growing corn, an act which reduces the supply of crops other than corn, thus raising their relative prices. So we see that crops have their prices increased (and paid by consumers) in agricultural markets.

Second, talk to any automotive engineer as I have and they describe the ethanol mandates as absurd. They do little to reduce gasoline consumption and it is an inefficient fuel. As a friend once said, you could plant the entire United States with corn and you still could not run all of the cars in the U.S. Finally, there is now scientific evidence (I even saw this described on the evening television news many years ago) that ethanol production pollutes the environment more than the production of gasoline.

But corn farmers and those in the ethanol industry vote and use their votes partly to keep this environmentally-destructive subsidy to themselves in place. Welcome to the corruption of a democracy.

The Wisdom of a Balanced-Budget Amendment

December 4, 2015 2 comments

I read in the local newspaper today that there is some discussion going on in the Michigan state legislature regarding the federal government deficit. Specifically, there is a coalition of states that has begun to form that would force the federal government to convene a constitutional convention only concerned with the adoption of a balanced-budget requirement imposed on the federal government. Michigan is apparently discussing whether the state should be a part of that coalition. This development is a very good one for reasons that I will sketch below.

By allowing government deficits to exist, there has been a perversion of government policy that may well destroy our country in the future. It is all too often observed that government programs exist mainly to line the pockets of politically-connected groups, thereby enhancing the reelection prospects of the politicians handing out the subsidies. There is an enormous list of these programs. The Export-Import Bank, farm subsidies, ethanol programs, and many more (see a previous post for others) do nothing for the welfare of the country but the recipients of these programs benefit mightily. As the late Milton Friedman said many years ago, the benefits of these programs benefit a few who lobby furiously to get them, but the costs are diffuse, spreading across many people. And so the cost to each person is small and may not even be recognized by the individual bearing these costs. As a result, it is all too easy for the government to borrow to finance yet another vote-buying scheme. All it has to do is borrow to finance any new such spending program since raising tax rates may anger taxpayers.

The problem is that the United States is heading for an explosion of its entitlement costs that has been noted many times by economists (I wrote on this previously here). No economist that I know thinks that the U.S. can finance several trillion dollars in deficits and so, when these occur in the future, what is to be done?

Read more…

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