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VangelV said...

Another wonderful example of how productive businesses in a competitive environment have had to keep increasing their efficiencies and pushing prices lower. The problem that we face comes from the massive spending regimes that has been pushed by governments at all levels. Those regimes will have to be financed by taxes from taxpayers, which means that the items you have shown are not as affordable in after tax income as you may be claiming.

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PeakTrader said...

VangeIV, tax rates don't need to rise to finance government debt:

1. Foreign saving that flowed into the U.S. can continue to "erode" from currency exchange rates, inflation, and interest rates.

2. Government spending and regulation can be reduced.

3. The U.S. economy can expand at a faster rate to increase tax revenues.

4. Foreign owners of U.S. debt (e.g. the wealthy or highly skilled) can sell their assets, exchange their currencies for dollars, and move to the U.S. (which would raise their living standards substantially).

Here's what Scott Grannis wrote recently:

"We don't need higher tax rates to balance the budget, we need an extended period of much slower growth in spending. If revenues were to continue growing at the rate of the past six months, and if spending were to be frozen at current levels, the budget would be balanced within 5 years, with revenues and spending likely to be about 19% of GDP. That would put us back to the levels that prevailed, on average, for most of the postwar period."

I think, the best course of action (next year) is reducing government spending and rolling back regulations. Then use those saving for tax cuts to facilitate economic growth, which will raise tax revenues.

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VangelV said...

"1. Foreign saving that flowed into the U.S. can continue to "erode" from currency exchange rates, inflation, and interest rates."

OK, I'll play. What you are saying that instead of having to pay off debts by having the revenue come from taxpayers you propose to reduce the real value of the currency by inflating the supply so that the people hurt the most are the savers that are required to make capital accumulation possible and the bond holders that financed the government's operations. How exactly will hyperinflation be a positive thing?

"2. Government spending and regulation can be reduced."

It does not make any difference. The sum of the public debt and unfunded liabilities stand at more than $100 trillion. The only way to reduce spending is to end SS and Medicare benefits for many of the people who have paid the bills for current recipients. The resulting riots would make what we saw in Greece and France like a Sunday walk in the park.

"3. The U.S. economy can expand at a faster rate to increase tax revenues."

Of course it can. All you have to do is to fire most public sector employees and cut government to the bone. Do you see that happening?

"4. Foreign owners of U.S. debt (e.g. the wealthy or highly skilled) can sell their assets, exchange their currencies for dollars, and move to the U.S. (which would raise their living standards substantially)."

That only happens in a deflationary environment that would coincide with a huge regulatory and immigration overhaul. There is no way that the Fed would allow deflation so you would have to close it down. Do you see that happening?

"Here's what Scott Grannis wrote recently:

"We don't need higher tax rates to balance the budget,..."

Either I was not clear or you misunderstand. I have never called for more taxes. I have called for a massive cut in spending by governments. But knowing what we know about voters, politicians, and human nature, I do not see anything that would convince me that the cost cutting path is seriously being considered.

To convince me that anyone is serious about cutting taxes and reducing spending I need to see a few things.

1. Cut the size of government substantially.

2. Close the military bases in Germany, Japan, and South Korea.

3. End the war in Afghanistan.

4. Cut aid to Israel, Turkey, and Egypt.

5. Repeal Obamacare.

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PeakTrader said...

VangelV, the Mundell-Fleming model (and variations) shows when the U.S. current account deficit was $800 billion (a year), with an $800 billion capital account surplus (to balance the balance of payments), the U.S. was near an optimal point. The U.S. shifted towards a suboptimal point during the recession. However, it's moving towards the optimal point again. There are several mechanisms. However, I'll explain one:

Export-led economies sold their goods too cheaply and lent their dollars too cheaply to generate a virtuous U.S. cycle of consumption-investment to maintain their employment levels.

Those economies lost investing in the U.S., because a weaker dollar means they had to exchange more dollars for their currencies, and from relatively low interest rates (U.S. T-bonds are the safest investment in the world), and they exchanged their goods for dollars instead of exchanging their goods for U.S. goods, which means if they bought U.S. goods in the future, prices would be higher (from inflation, i.e. they'd receive fewer U.S. goods).

Anyway, I don't expect hyperinflation, because the Fed will drain dollars out of the economy to maintain sustainable growth or price stability.

Your $100 trillion of unfunded liabilities is not a real number. Future workers will help support future retired workers. It's likely benefits will be cut one way or another.

Who knows what the results of the Tea Party and Republican House will be in 2011. Also, it's possible a Republican will win the White House in 2012 with a 60-seat Senate.

Health care is very expensive in the U.S., because the government made it expensive and inefficient, e.g. through 150,000 pages of regulations. Obama stated we cannot afford "bubbles" and then went on a huge spending spree. Who knows, he may have prevented a huge Biotech-Health Care bubble.

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Jet Beagle said...

peak trader,

I agree that the $100 trillion unfunded liability number is not real. Both medicare and social security costs will be somehow reduced before they are allowed to consume all government revenues. Unfortunately, the solution will likely include means-testing.

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PeakTrader said...

Jet, yes. The time frame of that $100 trillion is also important. Is it till 2050?, 2070?

$100 trillion is a lot of money, e.g. compared to the current $14 trillion of government debt. However, over the next 10 years, the U.S. may produce over $200 trillion of output (at 6% nominal growth per year).

Between 2010 and 2050, the U.S. may produce over $1 quadrillion of output.

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PeakTrader said...

The stock market is a leading economic indicator, because it discounts the future.

The U.S. economy is on track to improve short-term, over the next year. However, it's uncertain if it'll continue to improve or worsen thereafter. It'll depend on what happens in 2011.

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PeakTrader said...

U.S. agriculture subsidies are chicken feed :

Most U.S. Farm Subsidies Go to 10% of Recipients, Group Says
May 04, 2010

"U.S. farm subsidies topped $15.4 billion last year, according to the Environmental Working Group, which says the payments are too costly and more of the funds should be used to promote green agricultural practices."

I guess, corn isn't green enough.

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PeakTrader said...

The government promotes risk in the private sector, and when the inevitable failure takes place, the government blames the private sector.

The government brought down the whole economy, and put the economy in a position where we need the government to rescue the economy.

So, the free market bad, the government good.

Government should complement, not compete, with the free market.

Do we really want government to micromanage our lives?

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PeakTrader said...

All government workers, including politicians, should work part-time at real jobs :

Obama could work as a manager at 7-11, Bernie Sanders could be a VP at Walmart, Sara Palin could run a shooting range or work in a rodeo, Joe Lieberman could be the backup voice for Elmer Fudd, John McCain could not only teach skydiving and parachuting, but lead by example, Nancy Pelosi would fit in at the front desk of a nursing home, particularly in Cuba, Mitch McConnell would be an excellent auctioneer.

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PeakTrader said...

The role of the Fed has been underappreciated to some. Would the U.S. have been better off with a depression in the 1970s, similar to the depressions in the 1870s and 1930s. Of course not.

The Fed has helped smooth-out both long-wave and short-term business cycles to improve economic growth. Therefore, the U.S. also had one of the greatest eras of prosperity from 1982-07, greater than the Industrial Revolution a hundred years ago.

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http://www.american.com/archive/2010/december/how-government-failure-caused-the-great-recession