Wednesday, August 11, 2010

Cognitive Dissonance on Steroids

As promised in the last blog, I have been trying to bone up on some of the unwashed, unappreciated bastard children of conventional economics, such as Biophysical Economics and Complexity economics but I am still a ways from writing that blog. What's keeping me from my task at hand are stories that just keep blowing my mind. Yesterday I stumbled upon an article in the journal Energy Policy by Roger Stern in which he attempted to estimate the cost of maintaining aircraft carriers in the Persian Gulf for a 30 year period starting in 1976. Here is the link: By the way our 5 deferment patriot is standing in front of the newest Ford Class carrier which will set us back $9.3 Billion and that doesn't include the 60-90 aircraft normally carried which run as high as $60 million for a new F-18. For those 30 years, the cost of "Force Projection", the catchy phrase used was $7.3 TRILLION!! Obviously that figure will be going up. What did we get for our policing of the oil lanes besides 30 years of oil? Was that a rational use of our money? Can we afford another 30 years of policing? Obviously not. Truth to tell, we can't afford even one more year. We are bankrupt. The empire is kaput but like one of those mammoth 1000' carriers , once you step on the brakes, it will take many miles to stop.
Bloomberg carried an editorial by Lawrence Kotlikof, one of the few prescient economists is the business. an excerpt:

Aug. 11 (Bloomberg) -- Laurence Kotlikoff, an economics professor at Boston University, talks about the state of the U.S. economy. Kotlikoff speaks with Erik Schatzker on Bloomberg Television's InsideTrack." (Source: Bloomberg)

"Let’s get real. The U.S. is bankrupt. Neither spending more nor taxing less will help the country pay its bills.

What it can and must do is radically simplify its tax, health-care, retirement and financial systems, each of which is a complete mess. But this is the good news. It means they can each be redesigned to achieve their legitimate purposes at much lower cost and, in the process, revitalize the economy.

Last month, the International Monetary Fund released its annual review of U.S. economic policy. Its summary contained these bland words about U.S. fiscal policy: “Directors welcomed the authorities’ commitment to fiscal stabilization, but noted that a larger than budgeted adjustment would be required to stabilize debt-to-GDP.”

But delve deeper, and you will find that the IMF has effectively pronounced the U.S. bankrupt. Section 6 of the July 2010 Selected Issues Paper says: “The U.S. fiscal gap associated with today’s federal fiscal policy is huge for plausible discount rates.” It adds that “closing the fiscal gap requires a permanent annual fiscal adjustment equal to about 14 percent of U.S. GDP.”

The fiscal gap is the value today (the present value) of the difference between projected spending (including servicing official debt) and projected revenue in all future years.

Double Our Taxes

To put 14 percent of gross domestic product in perspective, current federal revenue totals 14.9 percent of GDP. So the IMF is saying that closing the U.S. fiscal gap, from the revenue side, requires, roughly speaking, an immediate and permanent doubling of our personal-income, corporate and federal taxes as well as the payroll levy set down in the Federal Insurance Contribution Act. " Here is the link:
Did you catch the IMF phrase that the US will need a permanent fiscal adjustment of 14% of GDP? If you're not on the floor by now, you should be. Here is the math: We have a $14 Trillion GDP. 14% of that is about $2 Trillion. Federal revenue is just a bit more so the IMF says we will in effect have to double the taxes of everyone who pays taxes!!! Is there anyone, any politician
out there talking about this impossible hole that the US finds itself in? (Deafening silence).
How are you going to double the taxes of the middle class? They don't have any freaking jobs and given the fact that the corporations have off shored all the decent jobs, their children wont have any freaking jobs. And in case you missed it, we are in a depression. So that leaves the corporations, but most of them don't pay much in taxes. Oh I know, Mitch McConnell whines that US Corporate tax rates are the highest in the world(not true) so the GOP wants to cut taxes for the fat cats. You remember, trickle down, create jobs..blah...blah...The real truth is that the US has a nominal tax rate of 35% for the biggest corporations but because those corporations wrote the corporate tax laws, US corporations enjoy an effective real tax rate of only between 14 and 18% depending upon which source you cite. Any many of the very biggest like Goldman Sachs and GE pay less than 5% in most years and it is those tax breaks that have destroyed middle class jobs for the last 30 years. Middle class income adjusted for inflation has barely budged since 1973, up only 10% in 35 years. But the richest 10% has seen their income up 90%. A CEO in 1973 earned 23 times mean income. Today he earns over 300 times mean income. So if you double what Goldman Sachs paid in corporate taxes in 2008, that only takes you to 2%! And if you double what GE paid, it doesn't even take you to 1%! To get an idea how GE managed to pay virtually no taxes, you would have to go through the estimated 24000 pages of their tax return. The is no chance under the current tax code that you will be able to double taxes on companies that hardly pay anything anyway. It would be far better to lower the nominal corporate tax rate to say 15 or 20% under a flat tax scheme with zero deductions but GE and GS would squeal like piggies and mobilize their hundreds of lobbyists to kill that idea in a NY minute. So maybe it's time to summarize this difficult spot we find ourselves in the summer of 2010: 1. The US is functionally bankrupt as are many of the states. There will be no way to pay the retirements promised or expected for state and federal workers let alone current levels of Social Security, medicare, and Medicaid entitlements. 2. The banks are bankrupt or would be if accepted accounting rules were again used. Obama and his Keynesian economic gang took 2000 pages to pass reform legislation which the banks were thrilled with. All they needed to do was reenact the Glass-Stiegal act which ran to 40 pages. We are virtually guaranteed another banking collapse. The financial markets are a rigged suckers game with traders in control. The May HFT(high frequency trading) meltdown in which it was revealed that HFT is over 70% of all trades on the NY Exchange was enough to make this sucker sell most of his stocks and mutual funds. 3. The corporations control the three branches of government but their very attempt at control has destroyed confidence in the
political system by the American public. We now have a co opted dysfunctional political system engaged in internecine polarizing debates, full of sound and fury and signifying...NOTHING.
I think we are looking at a very complex economic and political system teetering on the brink needing only a traumatic event to tip it over into collapse. What form it will take is any body's guess but it could be another misguided military misadventure such as an attack upon Iran by our over extended military or by Israel. The trigger could be another attack upon US infrastructure by middle east extremists who feel they have nothing left to lose. A coup against the House of Saud could do the trick as well as any number of natural catastrophes. The financial default of a major state such as California might provide an inflection point.
It behooves all of us to be preparing for the possibility of a collapse. In a future blog I will try to offer up some ways in which we as individuals can protect ourselves from the consequences of a political and financial delamination.

1 comment:

RBM said...

Biophysical Economics and Complexity economics

Would that be as in George Mobus' work at ?

Since I found you at TAE, and I found them at The Oil Drum where I also found George ...

If not give him a look. I think they are conceptualizing the next level of where Economics should go.