The "Balanced Approach" To Deficit Reduction

Here is Francesca Chambers of Red Alert Politics reporting on President Obama's recent statements to the effect that the American public, by re-electing him, has given him his mandate to raise marginal tax rates on the "rich" (I prefer the term "high earners").  This is all a part of the "balanced approach" to deficit reduction -- to reduce the deficit, you need "balance" between  spending reform and revenue increase.

Ms. Chambers challenges the president's math as to whether he really got a mandate.  I challenge his math as to whether any conceivable program of tax increases on high earners can make even a dent in the deficit problem.

Here's my math.  In year one, the restoration of Clinton-era marginal tax rates on taxable incomes above $250,000 is thought to be likely to raise around $42 billion, per CBO figures reported at Political Carnival here.  The projection/guess is that that figure will then go up  modestly with economic growth in succeeding years, maybe by $10 billion per year.  That's how they get a figure of $1 trillion over 10 years.

OK, here's what happens with Medicare/Medicaid over the same time period.  In year one, they are up $50 billion, just the one-year increase eating up more than the entire yield of the tax increase on the high earners.  In year two, M/M are now up $100 billion over today's base; the tax increase on the high earners yields $39 billion for that year above today's base, per CBO.  In year three, M/M are up $150 billion over today; the high-earner tax increases yield $64  billion extra.  In year 4, M/M are up $200 billion; the tax increases yield $75 billion.  Year 5:  M/M up $250 billion; tax increases yield $87 billion.  Continue for as long as you can stand it.  It gets worse and worse every year.

Did you notice that I wasn't even compounding the M/M increases? I was just adding a flat $50 billion per year, which is the projection for next year.  In any self-respecting Ponzi scheme like M/M, the increase compounds.  At 7% CAGR, a $50B increase this year becomes $53.5B in year 2,  $57.25B in year 3, $61.25B in year 4, $65.54B billion, and so forth.

So to keep up with the M/M increases using only income tax rate increases on the high earners, you would need to increase the rates not by 3%, but more like 5%, and not just one time, but every year.

  36% this year, then 41%, then 46%, then  51%, then 56%, and so on.  Since we're starting at about 36%, in 13 years we'll be past 100% tax rates on income above $250,000.  And don't mention that to New York State and City -- they think they get 12% of your income.  If you concede them the 12%, New Yorkers will be past 100% income tax rates in 10 years.  What's your plan for year 11?

Nothing about this is really much different from Madoff.  The math is the math.  The only thing that counts is ending the inexorable auto-pilot geometric increases in the big entitlements.  Whether or not you think that tax rate increases on high earners are a good thing, or whether you think that they ultimately hurt the low earners by degrading economic performance and decreasing opportunity, it is still indisputable that as long as the big entitlements are on auto-pilot geometric growth, such tax rate increases are a complete drop in the bucket.

Has President Obama actually thought this through?  To the extent he has any plan at all, I think it's something like, I can keep this thing going for another four years, and after that it's not my problem.  Or, perhaps, this math is too hard for me, but I really want to punish the successful for their success, so I'm going to do it.

Low Income Public Housing On The Barrier Islands?

Have you been struck, as I have, by the sad tales in the press over the past couple of weeks of the suffering of the residents of the high rise low income public housing projects in Coney Island and the Rockaways?

These areas have lost electricity for weeks, and much is still not back on.  Many stores have been closed and have still not reopened.  With elevators out of commission, residents have had to walk up to their apartments,often ten or even twenty flights up.  And in high rises the water also doesn't work without electricity.  These are very serious problems, even more so for the elderly or disabled.

Excuse me, but how could it possibly be that we have high-rise, electricity-dependent low income public housing projects sitting on the barrier islands?  (Yes, Coney Island and the Rockaways are barrier islands.  Look at that map in the previous post.  Coney Island is right at the top of the red pin; the Rockaway Peninsula is immediately to its right.)

It is a given that a barrier island can be overwashed by the ocean in a big storm at any time, and over the course of 50 to 100 years it becomes almost certain that it will happen at least once. What possible excuse is there for housing the dependent poor, elderly and disabled in electricity-dependent high rise buildings in these places?  This is a very clear example of the total inability of government entities to make rational decisions.

Of course, these buildings were built about 20 to 50 years ago.  Nobody's still around to be held accountable.

As to the other people with homes on the barrier islands, I'm sorry but you should not have a house there unless you are prepared to lose it, including accepting the financial consequence of the loss.  And I say this as someone who used to own a house on Fire Island.  (On that map, our house was right about where you see the "ay" in "Great South Bay."  We sold it in the late 90s.)  I was never comfortable owning on the barrier beach, and was relieved when we sold the house.  My neighbors thought I was crazy. Many had summered there their whole lives without ever having a problem, although much of Fire Island had been destroyed in the great hurricane of 1938.  This time, I understand that most every house in our former community suffered at least  some damage, although the town was not wiped out.

Anyway, the idea that the government can just use the infinite credit card to make it so no one with a house at the barrier island needs to take any loss from a hurricane -- that just can't work.  Sorry.  We'll see how long the current illusion lasts.

Big New Infrastructure For New York

Christine Quinn is probably the leading candidate to succeed Mike Bloomberg for mayor.  She is relatively sane compared to the other Democratic candidates, and is thought to have Bloomberg's backing.  (Currently she is Speaker of the City Council, and represents our district in the West Village.)

Yesterday Quinn gave a big speech before the Association for a Better New York.  As reported in this morning's Wall Street Journal, she used the occasion to call for a major new infrastructure project to put some kind of storm surge barrier up across the harbor to protect the city from future storms.  She mentioned total price tags for the barriers and other protections in the range of $20 billion.

That's all very nice.  What she didn't mention is that New York is out of money for big infrastructure projects because we overspend on the things I mentioned yesterday:  public employee pensions, education and Medicaid.  Back in the days before public employee pensions and Medicaid, and when costs of the public schools were reasonable, New York City built the water system, the subways, the big bridges and tunnels. Today we're building two small subway extensions with a total of four stations, about a 1% addition to the system, with much of the cost paid by the Federal government, and even that is of questionable affordability.  Meanwhile, there are plenty of other infrastructure projects that should be built and aren't. They have been squeezed out.

So Christine, please answer the question, if you want to build these storm barriers,  how exactly are you going to get the existing unproductive overspending under control first?

One final thing:  The WSJ article doesn't say exactly where these storm barriers would go, but the proposals I have seen would run the barriers from the western tip of the Rockaway peninsula over to Sandy Hook New Jersey, and maybe another smaller piece across Hell's Gate to guard against water from Long Island Sound coming in from the northeast.   These barriers would protect Manhattan Island first and foremost, and all of the harbor waterfront in Brooklyn and New Jersey, and even Staten Island.  But they would not protect the barrier islands of either Long Island or New Jersey:  the Rockaways, Long Beach, Jones Beach, Fire Island, or the New Jersey shore.  In other words, of the worst-hit areas from this recent storm, really only Staten Island and Coney Island would be protected.

In the map below the pin shows the location of Quinn's proposed barrier.  All those Long Island beaches to the east, and the Jersey shore to the south, are left out.  Not that there's really anything that can be done to protect them, but we should realize what our money can and cannot buy.

 

Why New York City Is A High Tax Jurisdiction

Our mayor Mike Bloomberg likes to call New York a "luxury good" when defending our high taxes.  And progressive New Yorkers seem to take pride in paying high taxes, convincing themselves that the taxes pay for a higher and more compassionate level of services to the children and the needy.  Unfortunately, they are completely being taken in.

There are really three places where almost all of the differential in spending between New York and other jurisdictions can be found:

(1) Public employee pensions are way out of line in New York.  Current spending by the City on public employee pensions is $8.4 billion per year, 12 % of the total budget.  That's because we let City workers retire after 20 (police and fire), 25 (transit) or 30 (teachers) years of work, and spend 25 or more years of fully-paid leisure.  The $8.4 billion is about $5 billion above a reasonable amount for pension expenses.

(2) The cost of education is also way out of line in New York. City.  According to census bureau figures cited here, New York City school spending was about $19,000 per student in 2009.  That's about double the nationwide average of $10,615 per student cited here for 2010.  What do we get for double the cost per student?  Worse test scores than the national average.  The double cost has nothing to do with providing better education to the kids, and everything to do with a restrictive union contract that makes us hire twice as many people to do the same work.  With over a million school children, the extra $8000 per student is an $8 billion budget item.

(3)  In New York, we pay between double and triple the amount per Medicaid beneficiary as they pay in other large states like California and Texas.  According to statistics here (statehealthfacts.org), California's2009 Medicaid payments per enrolee were $3,527; Texas $4,884; and New York$8,960. With over two million enrolees in New York City, that's a differential of about $10 billion that we're spending above what California would spend for the same number of people. The Feds pick up about half of the $10 billion, and the state a quarter, so for the New York City budget this is about a $2.5 billion number.

These three items account for over $15 billion of excessive spending in a budget of about $70 billion.  Do the taxpayers get anything for this extra $15 billion?  For comparison, the entire take of the City income tax is about $8 billion.

How To End The Drug War

Now that Colorado and Washington have legalized recreational use of marijuana, the big question is, will the Federal government continue prosecutions against sellers of marijuana in those states -- or for that matter, in any state?

Federal prosecutions against California medical marijuana distributors have continued under a regime where the prosecutors have convinced the Federal judges not to allow the defendants to mention before the jury that their activities are legal under California law as passed by a referendum of the people.  State officials have not taken the next step.

How about this, Colorado and Washington:  assuming there are any prosecutions, assign state employees to stand outside the Federal courthouses where a prosecution takes place and hand out flyers containing information that (1) under state law passed by a referendum, marijuana is legal, and (2) jurors can vote to acquit in any case for any or no reason and there is nothing the prosecutor can do about it (sometimes known as "jury nullification").

In 2011 when activist Julien Heicklen tried handing out flyers like that in front of the Federal courthouse in New York, he was arrested by the Feds and prosecuted for "jury tampering."  Federal judge Kimba Wood threw out the indictment.  However, despite the obvious issue of suppression of free speech, she ducked the First Amendment issue, instead saying that the Federal jury tampering statute did not apply where no specific case was at issue.

Anyway, are the Feds really going to arrest the Governors of Colorado or Washington for exercising their First Amendment rights and informing the people accurately about the law?

The Big Picture

Looks like the Federal deficit for the fiscal year ended September 30, 2012, is coming in at just over $1 trillion.  That's actually a small improvement over the prior years of the Obama administration.  At the bottom of this post is a deficit chart from the Wall Street Journal in October.

But does the improvement represent something headed back toward stability?  Don't bank on it.  On the positive side, the cost of the Iraq war is way down, and the cost of the Afghanistan war is starting to come down, which hopefully will continue.   Without tax increases, revenue has recovered from a recession low of about $2.2 trillion, and is back up to around $2.7 trillion at an annual rate.

But overall spending continues at over $3.7 trillion per year.  What is filling in as the war costs decrease?  Obviously, the entitlements.  The CBO baseline projections for Medicare spending show $569.4 billion in fiscal 2012 (just ended) rising to $830.6 billion by 2019 and $1,047 billion by 2022.  Hey, that's less than a 7% compound annual growth rate -- pretty good!  Don't believe it.  For one thing, they've always been overly optimistic since day one of the program.  For another, they have assumed that all the Medicare cuts under Obamacare take effect without any problem.  Good luck with that.  How about if you assume that the Obamacare cuts will not happen or will be evaded?  Then according to the Kaiser Family Foundation the number rises to $935 billion by 2019.  That puts the CAGR back around the 8% we all know and love.

And that's just the start.  The CBO Medicaid spending baseline shows Federal spending on the program going from $275 billion in fiscal 2011 to $622 billion in fiscal 2022 - a 7+% CAGR that is also probably way optimistic absent fundamental program reform.

And then there are other exploding programs of the hand-out state, including social security disability and food stamps.  And don't forget the cost of Obamacare itself, already predicted by this site to be a Ponzi scheme in the making.

The proposals for tax increases limited to high income people cannot remotely keep up with the increases in the entitlements alone.  Advocates for ending Bush-era tax rates on income over $250,000 put forth optimistic projections that that change alone could generate almost$1 trillion in revenue over ten years. I don't believe it, but suppose it is true.  That's $100 billion per year on average.  The increase in annual Medicare and Medicaid spending during the same time period is projected at $700 billion -- and that is also optimistic.  Where is the other $600 billion per year coming from?

I'd kind of like to see some kind of a plan from the president.  I don't think we will ever see one.  I predict that in the next four years, we will see no proposal from the administration that would reform the big entitlement programs to get their growth rates down under the growth rate of the economy.  It will be, continue the Ponzi scheme and apres moi le deluge.