Alternative to raising taxes - cut spending - what would you cut?

[fnord123]

The following graph is taken from The Market Ticker, which I assume a lot of folks here are familiar with. If not, google it - the author often posts good info (although he tends to be very vitriolic).  This is a graph of where the US federal government currently spends its money:



Currently we are spending about 40% more than we are taking in.  A recent survey found less than 1 in 4 Americans are willing to accept cuts in SS or medicare, with even Tea Party folks being against cuts by a 2-1 margin (source: http://online.wsj.com/article/SB1000142 ... %3Darticle).

I'm curious what people on this forum would cut.  Let's make it easy and assert that the usual "fraud and waste" canard that most politicians trot out would actually cut spending by 5% (a ridiculously optimistic assumption).  Where would people get the remaining 35% from?

[MediumTex]

Raising the FICA wage base to $250,000 and raising the SS retirement age a bit (phased in) is a good place to start.

Closing down some foreign military bases would also be a good thing to do.

Maybe bring those troops from Britain, Japan and Germany home.  WWII is over.

[moda0306]

Why we spend so much money on keeping old people alive and comfortable is beyond me... I like my socialism youthful and educational, not geriatric and stale... you know where my vote goes.

[fnord123]

Raising the FICA wage base to $250,000 and raising the SS retirement age a bit (phased in) is a good place to start.

Closing down some foreign military bases would also be a good thing to do.

Maybe bring those troops from Britain, Japan and Germany home.  WWII is over.

For FICA, only about 13M of Americans make more than $100K (source: http://en.wikipedia.org/wiki/Personal_i ... ted_States).  For simplicity, let's assume 10M of them make $250K+, the remainder make < $120K.  10M people * ($250K - $107K (current cap)) * 6% FICA rate = $86B.  The Federal Deficit for 2011 is ~$1.5T.  Fraud fixes 5%, so $75B.

$1.5T - $75B - $86B = $1.34T to go

Let's say we close a ton of bases as suggested, and that accounts for 20% of DOD spending.  DoD is 18.74% of a total budget of $3.83T (source: http://en.wikipedia.org/wiki/2011_Unite ... ral_budget).  20% * 18.74% * $3.83T = $143B saved.

$1.34T - $143B = $1.197T to go

[MediumTex]

Although I am more comfortable in the role of predicting that things will get worse, an improving economy and falling unemployment rate will naturally lower the deficit as tax revenue rises (I'm assuming no change in tax rates and no change in government spending).

[Lone Wolf]

Unfortunately, a colorblind person just can't make out much on a chart like this.  Because of this, I'll have to be a little hazy.  I'm also assuming that this is "fantasy league politics" where we do not have to be concerned about what politicians of the current political parties would agree to or propose.

So if I'm not mistaken, we need to save about $1.2 trillion to be back in balance.

I like Harry Browne's idea of ending Social Security by performing a one-time sale of federal assets (such as land and utilities) to private entities and then using the proceeds to purchase private annuities whose benefits are equivalent to Social Security for the people approaching retirement.  Not only does this save you $700 billion this year, but it provides us a graceful way to exit what we have all figured out is a Ponzi scheme... without giving anybody the Ponzi shaft.  Savings: $700 billion+, year after year.

The department of education and the department of energy provide neither.  Close them and net about $70-$75 billion.  Those are easy but there are so many others that could be eliminated or at least dramatically reduced, returning those resources to the private sector.  Think how few of these departments existed in 1900, 1920, 1940, or even 1960.

I understand that there's a big "spread" between what I am proposing and what is politically possible.  Politicians have little interest in shrinking government, a tendency that the citizenry is guilty of enabling.

But consider that before World War I, the total tax burden for federal, state, and local taxes was comfortably below 10%.  It is now well over 50% and we are also piling up an unfathomable debt.  Wipe the slate clean and really think that through.  Is an arrangement like this really the best idea?  Should the federal government be anywhere near this size?

To me, it's clear that the right answer is for government to become much, much smaller.

[moda0306]

Didn't privatization of utilities lead to Enron manipulating the California energy markets into blackout?

[fnord123]

Unfortunately, a colorblind person just can't make out much on a chart like this.

Whoops - sorry about that!  If the percentages in each slice are legible, then decoding should be possible even if colorblind - the categories on the right are sorted by size, as are the percentages of the slices.  So the biggest percentage on the pie chart is 19.63% (top right), and the top category is Social Security, that means SS is 19.63% of federal spending. The next percentage in the pie chart is 18.74% (center right), and the next lower category in the list is Department of Defense, so the DoD is 18.74%, etc.

But consider that before World War I, the total tax burden for federal, state, and local taxes was comfortably below 10%.  It is now well over 50% and we are also piling up an unfathomable debt.  Wipe the slate clean and really think that through.  Is an arrangement like this really the best idea?  Should the federal government be anywhere near this size?

That's precisely the sort of thing I am hoping people will think about.  It really depresses me when even supposedly fiscal radicals like Tea Party folks are 2:1 against cuts to SS or Medicare - it betrays a basic unwillingness to face the economic realities of the welfare society and the resulting costs.

My personal proposal to reduce deficit would be to adopt a European style healthcare system.  I've had family members be treated in Europe so I have anecdotal evidence that it works, and all the studies I've read show the outcomes are similar between US and Europe as well in terms of quality of treatment. By doing so about 30-40% of our healthcare spending would be reduced.  Medicare (12.79%) and Medicaid (8.19%) make up $803B of expenditures, taking off a third of them would save about $270B.  With MediumTex's cuts (that I agree with), that brings the deficit down to $920B.
Some countries have private insurance still available, which I like (let people pay more for better treatment).  As it is today, the current healthcare system in the USA is an economic disaster.

[Lone Wolf]

Didn't privatization of utilities lead to Enron manipulating the California energy markets into blackout?

No.  This was caused by foolish decisions within the government.  It's a pretty interesting story.

The California government instituted price caps on energy produced within the state.  Without the ability to raise their prices, there was no incentive for utility companies to increase production in times of increased demand.  This limited supply (as price controls always do, creating shortages every single time.)

At this point, California's throat was laid bare for Enron's fangs.  Do you see the obvious play here?  Enron could create a shortage by buying up power in-state and selling it off elsewhere, forcing California to buy its power out of state in Enron's markets at the uncapped prices.  It's simple arbitrage and only possible in the presence of price controls.

Politicians will add politically expedient "features" like price controls into markets time and again.  When this inevitably leads to shortages or brutal arbitrage like what you saw from Enron, politicians will (just as inevitably) blame a "free market" that does not exist.  Sadly, this isn't the first or the last time they'll do this.

As an historical footnote, Ponzi's original scheme was based on a kinda-similar form of arbitrage having to do with US postage coupons.  (It was much simpler arbitrage and less harmful.)

My personal proposal to reduce deficit would be to adopt a European style healthcare system.

While we're talking about the earlier years of the United States, consider how much lower health care costs as a percentage of GDP were.  Government involvement with health care was minimal.  Market forces kept prices in check.

Now the price system has been virtually removed from health care, and costs inevitably spiral upward.  Instead, more than half of all health care costs are picked up by the government, removing most price sensitivity.  And rather than catastrophic insurance, both tax law and recent health care legislation push you more and more in the direction of what can only be called "pre-paid" health care plans.  Price sensitivity and self-rationing are even further eroded to almost nil.

Prices are the conduits for information within a market.  Returning the signal of prices to the health care market (and greatly reducing government's involvement) would be the first step to bringing prices back under control.

[moda0306]

Interesting, LW.

Though I will say, both healthcare and energy are probably situations where markets would work well (healthcare before government interference), government monopoly has also shown to work quite well (europeans pay far less overall and end up getting better care), but combining the two gives you the worst of both worlds instead of the best.

I'm not convinced on either of your points, but the Enron-arbitrage piece was particularly interesting.

[fnord123]

Prices are the conduits for information within a market.  Returning the signal of prices to the health care market (and greatly reducing government's involvement) would be the first step to bringing prices back under control.

I think at this point there is an expectation (and desire) by a large majority of people that basic healthcare be available to most people.  While I think a truly privatized system could provide that (perhaps in conjunction with church-sponsored hospitals for the truly poor like we used to have), I don't think there is a realistic way to get there from here.  

The current system we have seems to me to be actually worse than what many more socialist countries have.  It not only costs us more money (both taxes and out of pocket) but makes companies that employ American workers less competitive.  We cannot stick with the current system.

[TBV]

Normally, we understand implicitly that, all things being equal, spikes in demand will lead to higher prices.  Why should it be any different in healthcare or education?  Since the 1960's, we've flooded the healthcare and education markets with government dollars.  No wonder costs are rising.   If providers had to get by on the money in the pockets of their customers, as they did before Medicare and jumbo student loans, costs would come down.

Our housing market is a prime example of this.  The more society promoted affordable housing, the less affordable it became. Once soft money was removed from the equation, housing affordability was enhanced.  Perhaps less really is more.

[MediumTex]

Normally, we understand implicitly that, all things being equal, spikes in demand will lead to higher prices.  Why should it be any different in healthcare or education?  Since the 1960's, we've flooded the healthcare and education markets with government dollars.  No wonder costs are rising.   If providers had to get by on the money in the pockets of their customers, as they did before Medicare, costs would come down.

Our housing market is a prime example of this.  The more society promoted affordable housing, the less affordable it became. Once soft money was removed from the equation, housing affordability was enhanced.  Perhaps less really is more.

Harry Browne made a similar point in "Why Government Doesn't Work."

[moda0306]

TBV,

How do other countries manage to teach smarter kids for less and keep more people healthier for less with much more government-run systems?

[Lone Wolf]

Though I will say, both healthcare and energy are probably situations where markets would work well (healthcare before government interference), government monopoly has also shown to work quite well (europeans pay far less overall and end up getting better care), but combining the two gives you the worst of both worlds instead of the best.

I agree that health care costs are lower outside the United States, but I disagree about quality of care.  Quality of care inside the US is still without peer.  For example, this comparison between the health care system of the US and Canada is illuminating.

I have personal experience with this as well.  My great-aunt by marriage is Canadian.  When she got cancer when she was in her early 60s, she was deemed to be too old for treatment.  She had to pay for treatment herself in the United States.  If that were me, I'd want a refund on every dime of taxes I'd ever paid in to such a system.  

United States maternity wards are also amazingly good.  All of my suggestions for (hopefully positive) change should be viewed in light of the fact that I believe we are very lucky to live in the United States.  This all costs us more than it needs to, though.

I'm not convinced on either of your points, but the Enron-arbitrage piece was particularly interesting.

Thanks.  These are big issues, so I doubt anyone is expecting a "Eureka!" moment where we all spontaneously agree on everything.

I think at this point there is an expectation (and desire) by a large majority of people that basic healthcare be available to most people.  While I think a truly privatized system could provide that (perhaps in conjunction with church-sponsored hospitals for the truly poor like we used to have), I don't think there is a realistic way to get there from here.  

The closest you can come in a free market is something like this: for those that cannot participate in the health care system at the market price, you provide a system of health savings accounts and vouchers for catastrophic insurance.  I think with a simple, robust design this would actually work very well.  It's not a politically popular idea, though, and I do not expect to see it.

You're right that there are no easy answers, of course.

[moda0306]

Just to take pause... I realize we're getting into a lot of political discussions (unions, taxes, etc)... I don't think you could find this much rational political discourse anywhere on the internet, or at a dinner table for that matter.  Tip of the cap to everyone for honestly, calmly addressing other peoples' concerns and all of the extremely interesting observations and points made.

The PP is a humble portfolio by nature, so there's little surprise you would find such calmed banter on a forum such as this.

[TBV]

TBV,

How do other countries manage to teach smarter kids for less and keep more people healthier for less with much more government-run systems?

Well, like in Germany and Japan, they pay the providers less.  Elsewhere, costs are restrained by having large single markets instead of local non-competitive ones, by having cultures that promote activity and low-fat diets, by focusing on acquiring skills needed in the market as opposed to valuing medieval poetry the same as electrical engineering.  And oh yes, when all else fails, they ration the delivery of services. I must say, though that I admire South Korea, which has a nationwide healthcare system that features truly low cost local providers linked together in a national system.  Their educational system is not half bad either, although robust public support has led to an over-supply of higher educational institutions, much like we did in the baby-boom era.

[murphy_p_t]

"what would you cut?"

for starters, anything not specifically permitted by the *enumerated* powers of the US constitution

next in line would be foreign military bases & interventions & other undeclared wars

next is all foreign aid

[TBV]

"what would you cut?"

for starters, anything not specifically permitted by the *enumerated* powers of the US constitution

next in line would be foreign military bases & interventions & other undeclared wars

next is all foreign aid

Your reply reminds me of the disconnect I felt between Harry Browne's grandfatherly discourses on finance and his more strident observations about politics.  Yet, it's getting easier and easier to see the connections between the two, and the sincerity behind both.  You definitely captured some of the main bullet points.

[MediumTex]

You could always try the approach of saying "starting with NO government, what would be essential?"--and create one based on that approach (sort of like the Founding Fathers attempted to do).

Harry Browne outlined this concept of what he called "starting from zero" in his audio course.

It's very simple, but very effective.

I understand it's not going to happen, but it makes me feel better to think about it in this way.

[Pkg Man]

My current approach is to say that everything we spend money on today should be cut.  While obviously this is not maximizing the value of each dollar of spending, I can still easily live with it.  I doubt there is a single government program in existence that does not have a larger budget today compared to five (maybe even two) years ago.

[MediumTex]

A lot of so-called "homeland security" spending has a Keystone Kops quality to it.

I think we could cut a lot of that and wouldn't notice.

I travelled last week and opted out of the naked photo booth and instead got my junk touched.

At least the TSA guy wasn't wearing leather chaps.

[6 Iron]

I would eliminate all federal spending that could and should be be administered more efficiently on the state or local level: health and human services,  education, welfare, Agriculture, housing and urban development.

I would keep, but streamline to near the point of pain state, defense, attorney general/FBI, and treasury. I am still thinking about transportation and energy,  but if kept as a cabinet level department, it would be shrunk and combined.

[Lone Wolf]

A lot of so-called "homeland security" spending has a Keystone Kops quality to it.

I think we could cut a lot of that and wouldn't notice.

I travelled last week and opted out of the naked photo booth and instead got my junk touched.

At least the TSA guy wasn't wearing leather chaps.

Are you kidding me?  You want to cut Homeland's budget and they can't even afford to get these TSA guys a decent pair of leather chaps?

It sounds like $40 billion doesn't buy what it used to.  Thank goodness I got in on my Mad Max portfolio early.

[Pkg Man]

To be perfectly honest, in my view the people of the US are beyond the point of "irreconcilable differences".  And I think the posts on this and the "Wisconsin" thread are a microcosm of this fact.  The ultimate solution is to realize this and agree to an amicable separation.  Yes, you heard me correctly, I believe that the US has become too large to be governed effectively by a single national government.  We simply cannot achieve a national consensus as our views and priorities have become so divergent.

There is nothing inherently wrong with wanting, for example, a larger social safely net and a smaller military, and there is nothing inherently wrong with wanting a far more limited Federal government that provides only for the "general welfare" but a large military (not to leave out the Libertarians, who want less of both, but they will never find a home anyway, as much as I might sympathize with them philosophically).  To put it into a current policy example, why should half of the nation be expected to be content with the the half-loaf of a hybrid public-private health care system, when they really want a single-payer system, while the other half is forced to take half a loaf they want no part of? 

I am not sure that with diametrically opposed beliefs we will ever be able to really sort out our national priorities.  And we simply cannot long survive while the two sides take alternating turns at the wheel, resulting in no real solutions ever being implemented.  The system that we currently have results in high spending but lower than necessary taxes to support the level of government we have chosen.