Free Markets, Free People

Taxes, Spending, and the Fate of the Republic

The direction the country is taking bothers me. Increasingly, I see little hope for a bright prosperous future. Frankly, things cannot continue going in the direction they’re heading without a disastrous result.

Mark Steyn wrote earlier this week:

Generally speaking, functioning societies make good-faith efforts to raise what they spend, subject to fluctuations in economic fortune: Government spending in Australia is 33.1 percent of GDP, and tax revenues are 27.1 percent. Likewise, government spending in Norway is 46.4 percent, and revenues are 41 percent – a shortfall but in the ballpark. Government spending in the United States is 42.2 percent, but revenues are 24 percent – the widest spending/taxing gulf in any major economy.

This is unsupportable, by any measure, and should be seen to be so by anyone with common sense, irrespective of political party, but apparently is not. And it’s important to recognize that the reason revenues are at a historically high 24% of GDP—the historical average is around 18%—is that GDP growth for the last 4 years has been atrociously bad, and well below the 3% historical trend rate of growth.

In a rational world, we would make a decision to settle on a continuum somewhere between cutting government spending to 24% of GDP, and raising taxes to 42.2% of GDP, which would necessarily imply massive tax increases on the middle and, yes, even the lower class.

At the moment, however, it is impossible to cut spending to 24% of GDP. Not just politically impossible, though that appears to be true also, but I mean impossible impossible. The reason it is impossible is that 24% of current GDP will not cover the cost of mandatory entitlement spending and service on the national debt. More than 62% of government spending is mandatory spending on essentially social security and Medicare. Another 6% is interest on the national debt, and it’s only that low because 1) the Fed has been buying massive amounts of US treasury bonds, and 2) interest rates are historically low.

In other words, 68% of the federal budget is taken up by entitlements and debt service, alone. We could eliminate the entirety of the rest of the federal government and, at current rates of taxation, would still run a deficit.

At the current rate of spending, we can expect to add over $12 trillion dollars in debt over the next decade. To combat this, the president has requested an additional 1.6 trillion in new revenue, which he expects to gain by increasing tax rates on only the upper class. Even assuming, arguendo, that such a taxation plan would actually result in that much additional revenue—which it likely would not—we would still add an additional $10 trillion in debt.

And that, of course, assumes interest rates would not rise from their current low levels. A rise to the historical rates of interest would increase debt service costs from $250 billion per year to $650 billion per year, or approximately 15% of the budget.

Neither Congress nor the President are proposing a serious plan to balance the budget, which would require a politically impossible mix of massive budget/entitlement cuts, and/or massive tax increases on the middle and lower classes.

Absent such a plan, we will inevitably default on our debt, or hyperinflate our way out of it, both of which are merely two sides of the same coin. In either case, the dollar will lose its status as the world’s reserve currency, and the life savings of every single person in the country—except, perhaps, those embodied in some classes of hard asset—will be rendered worthless. There will be massive unemployment, and a high possibility of civil strife. Imported goods will essentially be unobtainable, and I’m not just talking about BMWs and Land Rovers, but everyday things we never even think about, like fresh fruit from Chile in the winter, or clothes from Singapore and Taiwan at any time.

The least damaging course of action would be a massive reduction in government spending. A more damaging course would be a massive increase in taxation. The most damaging course would be to do nothing but nibble at the edges of spending and taxation until we default, either formally, or de facto through hyperinflation. So far, we are set on the third course.

We are set on a path to completely destroy the currency and economic life of the Republic, and we will inevitably do so without massive tax increases, massive spending cuts, or some mixture of the two.

Meanwhile, in Washington, DC, the Fiscal Cliff negotiations—by which I mean "farce"—continue. Personally, I’m a charter member of the Let It Burn club. The Democrats have set up a narrative in which, no matter what happens, Republicans will get the blame. And yet, 18 months ago, what we’re now calling the Fiscal Cliff was unilaterally hailed as a wise, bipartisan, and far-seeing compromise that would set the country on the road to financial rectitude. And quite frankly, the president is giving every indication that he wants to go over the Fiscal Cliff, and that he can weather the political and economic fallout from it.

OK. Then let’s test that theory.

This is not a risk-free strategy. As Ace of Spades points out:

The Walk Away/Let It Burn option is growing on people. One cautionary note, though: This will provoke a serious constitutional crisis and may undo the Republic. So a soft Let it Burn could turn into a genuine collapse of the Republic.

Obama is a tyrant. If Republicans do not lift the debt ceiling, it is perfectly obvious what he will do, as he’s argued for it before: Like Putin, he will begin unilaterally asserting power he doesn’t have.

And what will be the recourse? Court, I suppose. Impeachment, sure, but Democrats will block conviction. So whether or not the President can suddenly assert sweeping power over the purse — sweeping aside the last real check on his power granted to the House of Representatives — will depend on the vote of Justice Go Along to Get Along Roberts.

President Obama has already asked for it. It’s that one exception I mentioned before: He is asking for unilateral power to raise the debt ceiling and no president should ever have that power.

Our constitution is clear that the money bills must originate in the house. Equally clear is the principle of Congressional supremacy, in that Congress may pass laws even over a presidential veto.  The debt ceiling is clearly a Congressional, not a presidential prerogative.

Congress, of course, has already amended the Constitution’s strictures in practice. For instance, the Senate takes House bills, say, for building a dam, and strips the original language, then loads it up with budgetary items. The House accepts them in conference. Additionally, we have operated without a federal budget—though one is required annually by law—since 2009. This is a…constitutional novelty.

But giving unilateral budgetary power to the president goes far beyond novelty. In my view, granting this power to any president will mark the end of the Republic, just as surely as the creation of the First Triumvirate marked the death knell of the Roman Republic.

The American people elected President Obama. It is only right that they should reap the full measure of the consequences of that decision. Ace is right. Going over the Fiscal Cliff may undo the Republic. But if that is true, then I’m entirely unconvinced that the Republic should be saved.

Dale Franks
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37 Responses to Taxes, Spending, and the Fate of the Republic

  • well that’s cheerfull.

    • Pearl Harbor Day.

      • With our history taught the way it is, isn’t that the day the Japanese defeated us after we dropped nukular bombs on their innocent cities to start a war that George Bush Senior could be a hero in so he could become President?

  • This administration does not believe that the 14th Amendment gives the president the power to ignore the debt ceiling — period,” Carney told reporters Thursday.
    Congressional Republicans are threatening another standoff over raising the nation’s debt ceiling — hoping to use congressional approval of the borrowing limit as a chip in the larger standoff with President Obama over debts and deficits.
    Some legal scholars believe that the 14th Amendment — which affirms the validity of the public debt of the United States — supersedes the statuary borrowing limit set by Congress.
    But the White House disagrees — saying that their legal interpretation is that only Congress can lift the borrowing limit.

    So do they believe what they say, or will they “find” this “new path” some time in the future ?

    • “So do they believe what they say”
      No, do you?   did you ever?
      I grew up looking over a wall at the Soviet Union and Red China – they used to “say” things too, very few of which could be believed.
      The only difference is the lies are on THIS side of the wall for sure now, and there’s no one with any power who seems much interested in stopping it.
      The Reds lost, and are going to win.

    • “Some legal scholars believe that the 14th Amendment — which affirms the validity of the public debt of the United States — supersedes the statuary borrowing limit set by Congress.”
      Obviously ‘some legal scholars’ have never actually bothered to read the 14th amendment. Or the Constitution.

      • Only a Titanic class asshole would think the debt clause in the 14th Amendment applied to anything but the end of the (a) Civil War.  Durbin is obviously one such titan.  It must be nice to be completely divorced from history and reality.

  • The republic is already dead. This evil monstrosity that has replaced it will inevitably fail. The sooner it does the better off we’ll all be.
    Let. It. Burn.

  • Foreign goods you mention are the prices they are because of the level of exporting they do to the US.  Imported fruit wouldn’t be unobtainably expensive for long.  Expensive, yes.  Unobtainably, no.  Many of those economies are not self-supporting. 

    In fact, all sides have been preventing equalization for a long time.  Loss of jobs for real work should be met wage reductions and loss of purchasing power as forces attempt to bring equilibrium.  The places that gained our lost production to should have wage increases and and improved dollar.  This would stabalize things.  But, through manipulation of currency and/or wage restrictions, those places have kept that from happening on their end.  On our end, we’ve been propping things up through stimulus and social benefits so one person’s job loss doesn’t affect other person’s wages. 

    This has been going on slowly for 40 years.  We’ve lost the ability to keep equalization from happening and the stage has been set globally, not just locally, and its a globally unsustainable model.  We’re all going down.   

    • China has had staggering wage increases, for a variety of reasons. One of which was our printing money which gave them inflation the poor dears. China should have done a more balanced growth program which would have allowed and encouraged imports. That also helps growth, but makes it more organic rather than forced, and they would not have had to do all the currency games.

      • 10 x a very small number is still a small number and it won’t matter until all workers wages overall start moving into the neighborhood our our wages. 

        • No, it does matter because their productivity and overall quality have not increased either. And China’s rule of law and IP protection are atrocious. The math now stands that if you open a factory in the South its gets very close to China’s overall costs.

    • Huh…???  WTF are you talking about WRT “foreign goods”?  The next paragraph makes LESS sense.
      The real price of goods…wherever they were from…would not change much under Dale’s scenario.  What WOULD change is our ability to find and meet that price with currency that was wildly fluctuating.  An orange on the world market would cost roughly the same in real price terms.  The issue would be how you or I could manage to pay for it with dollars that were falling in the toilet value-wise.
      DALE: figure you may know this, but a lot of BMWs are built here.  Very pretty plant.

      • What….you haven’t gone round to Lowe’s and bought a Chinese made wheelbarrow to lug your bread money around with?
        Oh well, we’ll all get good at gardening again I suppose.  Green heaven!

      • The prices we pay WOULD increase, you dolt, because the exchange rate would be to our disadvantage, meaning more USD to make an RMB. If it takes more USD to equal an RMB (or fewer RMB to equal a USD) then the price WE pay goes up to make up the difference so that they still end up with the same amount of money.
        And they might make BMWs here, but the offset is in Germany – that’s where the profit goes, which means we will still pay more unless ze Germans are willing to take a massive cut in profits.

        • The prices we pay WOULD increase, you dolt

          You really need to learn to read, and what terms mean.  Terms like “the real price of goods”.  Not in inflated dollars, which I SAID.

  • It’s all about managing the post-disaster blame. Give Obama that blank check he wants. Let it burn.

  • Let It Burn may be less a matter of choice than we’d like to think.  IFFFF the GOP did everything right today that exists in the realm of political possibility, I frankly wonder if we left the tipping point in our baffles some time ago.  Certainly ObamaCare…unless stopped somehow…WILL carry us over the falls.  We may be in that current already.
    I do have reservations about a Let It Burn option, having mostly to do with my grandchildren.  A world-wide cascade collapse would really, truly be a killer.  It would be hard to predict how many would die, and what would come out of the ashes.

    • Predict LOTS and LOTS and LOTS and you’ll begin to be close.
      What comes out of the ashes?   Do you speak Chinese or Spanish yet?  Low tech wins the world wide cascade collapse match.  We’re too tightly coupled to our power hungry tech.

      • Yeah, because we have a huge pool of people who think food magically materializes inside grocery stores, the water coming out of the pipe is always magically clean, and electricity comes out of the atmosphere via a magic machine and gets stuffed into the wires that lead to their house.

        Sure, theoretically they know there’s more involved, but they have lived their whole lives operating under the “magical systems” mental model. They implicitly believe that those systems will never fail. A few understand that they might fail for a few days (ala Sandy), but that when that happens, it’s somewhere between an inconvenience and an adventure. They cannot conceive of a meltdown that would remove every one of those magical systems from their lives for months or even years.

        If that meltdown happens – and only fools think it cannot – then some of those magical thinkers are in for shock after shock. They are going to find that people will kill for food when the grocery stores run out. They’ll get sick drinking water that’s no longer magically clean, and they will be amazed that somehow the drugs to fix them right up just are not available. They will find that a lifestyle utterly dependent on electricity will leave them cold and cut off when the magical machine at the power station no longer has coal or oil. They will learn about manual labor – how much it hurts and how little it returns when the magic of technology isn’t available.

        They will find that their moral smugness about guns will melt like ice in a volcano when a real gun is pointed at them. They will feel envy at the second cousin who reacts to lack of food by shooting a deer, dressing it, and cooking it (probably using it to supplement the stored food he already has). 

        They will die from violence and hunger and sickness and exposure. The uneducated ones will die in confusion and terror. The educated idiots won’t do much better, but they will wail the whole time that it’s the fault of those mean people who would not let them build Utopia.

  • I think everyone is too pessimistic. What will happen is that the moment things really get bad, suddenly the Democrats will say “Now is the time to make tough decisions” and they will reform everything.
    This happened in Sweden, Canada, New Zealand, etc.
    The only thing to give pause is that we have the reserve currency, and that maybe our populace is far stupider than the aforementioned countries.

    • I’m not by nature a pessimist.  I HAVE read and understood the Cloward-Piven evil, however.  There are people here who are working it, I have to conclude.  They are INTENT on forcing collapse.  The cataclysm that would ensue is something they actually would welcome…perhaps with a mild sigh.  “Broken eggs…omelet…all that…”

      • Well, they’ll smile mildly for a while, as long as their little ivory tower enclaves are able to last anyway.  They’re in Billy’s magical model mode, when their tofu and Evian trains stop coming, it’ll be entertaining.  I’d pay to be there when they shout “but I liberated you!” to the mobs they are overrun by.

        • I can imagine a lot of people would find “Rack of Elitist” moist and tender.
          The veneer of our civilization is really very, very thin.

          • That’s the way I’ve always seen it…a veneer, and I agree, it’s about 2 weeks thick at best once you stop moving food into the grocery stores.

    • “suddenly the Democrats will say “Now is the time to make tough decisions” and they will reform everything”
      There are two assumptions there, both of which are debatable;
      1) They will be willing to change their positions in the face of disaster. History shows us that not everyone will.
      2) They actually know how to *correctly* reform anything. Ignorance, especially willful ignorance, takes time to correct. And stupidity is forever.

    • I’d be hesitant to apply those examples to us. Sweden is less than 3% the size of the US, and New Zealand is less than 2%. Even Canada is around 13 or 14% of our size.

      A small, homogeneous society can shift direction much, much faster than a larger, diverse society, and with fewer consequences. it is not at all clear to me that the experiences of those countries can scale up to meet our problems.

      Sure, we can change, and maybe we’ll get through without too much unrest if it’s done soon enough. But that’s not the way I’m betting. At a minimum, I’m expecting long term civil unrest (weeks or months) in at least five major cities.

      Worst case could be quite a bit worse. We are outside any reasonable historical comparisons here. Never before has a society so detached from providing for themselves been thrust into a possible complete meltdown of the world’s largest financial system.

      In the Depression, most Americans lived on a farm and just buckled down to living off their own land. I’m just guessing, but the percentage of people who know which end of a hoe to hold is probably less than five percent. (Just joking – make it “know how to use a plow”.)

      • …..must……..restrain………….. jokes about hoes………..

      • Seriously though, you’re right, we’ve never been so divorced from the land in such numbers.   Urban Population density has changed as well since city slaying disasters like WWII, the rise of the suburbs has moved the food supply to well outside walking distance from the city limits, rise of the corporate farms, and the improvement in transport method and road grid has pushed all of it way way out.

      • considering there is over 30 cities in the US with populations over 500k i would say 5 cities is a low estimate.

  • Oh good, a post by Dale…
    I haven’t been driven to drink for a while…

  • This will provoke a serious constitutional crisis and may undo the Republic.

    As opposed to the crisis we’ve been under for the last 100 years?

  • The case from the other side:
    My prediction of the future runs a little like this: Eventually the Republicans will come to recognize that they lost the election. As soon as they can figure a way to save face, and still do what’s necessary, then we can be well on the road to recovery. With the Democratic Party holding the power of the Presidency for the next 12 year (four under Obama; and eight under Hillary Clinton), and the Congress again becoming a majority monopoly of the Democrats (because of rapid improvement of the economy through Democratic initiatives), the American economy will be in recovery.
    The issues of Affordable Health Care Act which a not optimal (and believe me, liberals, unlike conservative beliefs, are completely aware of ObamCare. We understand that because of the conservative blockade, a lot of non-idealized compromises were required to make a start on staying abreast of the rest of the industrialized world as far as this issue is concerned. The next 12 years of Democratic governing.
    The extreme-right-wing will lose support and continue to be marginalized, as has always been the case in history. With this marginalization, religion will be taken out of politics, and placed back in the churches—where it belongs. This will allow those who want to be guided by religious dogma freedom to do so; and those who do not feel obliged to particular set of doctrines the freedom to reject them. The Republican might be able to change, or it might go the way of Lincoln’s rival:
    All in all, people will know a new freedom from the threat of illness or accident; and the economic freedom to change jobs, quit their job and become an entrepreneur, without worrying about losing their health insurance. We might even end the War on Drugs, and find a whole new source of revenue (tax on the legal sale of once illegal drugs), and stop imprisoning people for just trying to change their reality—like some do right now, legally, through alcohol intoxication.
    I can see many other benefits to be achieved in the future—I’m optimistic. But before the readers start calling this Marxist utopianism, let them reflect on their own return to the period literally supposedly spelled out in the Constitution as reactionary utopianism.