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September 15, 2004 Voodoo economics II - The Sequel We all remember "Voodoo Economics" don't we? Well, welcome to the sequel "Voodoo Economics II - "cost" = spending". In today's Boston Globe, an attempt is made to show how Kerry's proposed spending of $2.2 trillion (yes, its gone up again) is less than the "cost" of Bush's proposals. Cost v. spending? First let's take a look at their chart:  A $1 trillion "cost" to privatize Social Security? Or $1 trillion saved by younger future recipients in private accounts --- enough that perhaps the government won't be doling out any to them when their retirement comes? Social Security has to be fixed at some point and now is as good a time as any. Consistent with Bush's "Ownership society". Or how about a $243 billion "cost" associated with new tax cuts and tax free health savings accounts? The cost of tax cuts? Cost to what? Fat government programs which could pare their share of revenues perhaps? Cost to subsidy programs that the government should forgo? Cost to programs in areas the government has no business? Meanwhile citizens are left with the opportunity to take charge of their own healthcare costs. Again consistent with Bush's "Ownership Society". Cost? Its only a cost if the federal government has the money. If the money belongs to the citizens, it isn't a government cost. When the Globe uses "cost" it assumes ownership of the money by the govenment. It assumes it to be its irrevocable due. And when it is kept by those who earn it instead of being handed to the government to be handed out by the government in its various programs, that "costs" the government per the Globe. Its a convoluted and specious argument at best. If we take these bogus "costs" out and compare spending programs we find that out of the $2.9 trillion that the Globe claims Bush is proposing, in reality, we're down to 1.65 trillion in spending. Still too much, but wait there's more. Again a "cost" is being correlated with the spending proposals on the Kerry side of the chart. $1 trillion for permanent tax cuts. That's future revenue if taxed at the former rate. Vapor revenue. It is not a "cost". Its not a spending proposal. So now, we're down to $650 billion on the Bush side for new spending. At least as outlined by the Globe's numbers. Again too high, but nothing like the $2.9 trillion nonsense the Globe was trying to pawn off. In reality, when comparing "spending" its Bush $650 billion, Kerry $2.2 trillion. On the Kerry side, we're looking at pure and unadulterated spending. Proposal after proposal to increase spending. Well almost. Remember those middle class tax cuts? Remember how Kerry says he wants those while claiming he'll pay for everything else with increased taxes on the two precent of the highest income earners in America? Kerry also has called for a middle-class tax cut, which is expected to cost more than $400 billion. No kidding? $2.2 trillion in new spending proposals and $860 billion in new revenue, offset by a 'cost' of $400 billion for middle-class tax cuts? That takes the increase in revenue from the 2% down to a net $460 billion, not the $600 billion we've been told to expect. So Kerry says he's going to cover $2.2 trillion in spending with a $460 billion net increase in income tax revenue? And cut the deficit as well? Sure sounds like voodoo to me. |
At least the title of their chart is honest, although probably not in the way they intended.
Posted by: Lance Jonn Romanoff at September 15, 2004 01:47 PM
I assume that these numbers are intended to represent spending above and beyond spending already in place. With that in mind, why is $440B for HS/DEF included in Bush's "additional"spending? Or does this mean that "jfk" doesn't plan to spend ANY money on defense? Something doesn't add up...
Posted by: s. at September 15, 2004 03:06 PM
Good questions. The Globe doesn't specify. But you're right. Is this over and above regular spending in that department or is it over and above what Kerry plans on spending?
Posted by: McQ at September 15, 2004 03:13 PM
McQ is absolutely right on principle. The chart isn't comparing spending to spending. One quick comment while I digest the rest of this nonsense: On funding private retirement accounts, we have to recognize the enormous unfunded liability that already exists under the Social Security plan. It's huge. I'll find a reference later, but the $1 trillion is simply funding a liability for benefits that already exists. Remember, under the current plan, current workers accrue future benefits (until and unless Congress changes the rules), which under govenment accounting rules aren't recognized as liabilities (unlike private pensions). Nevertheless, these liabilities exist. Under whatever privatization plan is introduced, worker contributions to self-directed plans will reduce future Social Security liabilities. It's definitely not new spending. It's funding a liability.
More later.
Posted by: Dave Sheridan at September 15, 2004 03:17 PM
Anybody else wonder what will happen to the markets if the government actually allows us to invest some portion of our social security in equities? You would rather suddenly have millions and millions of dollars in new money hitting the markets. Anbody else think this would cause markets to shoot up and risk inflation?
Posted by: Curt Mitchell at September 15, 2004 03:22 PM
Interesting how they don't dissect Kerry's spending proposals...I think the 2.2 trillion is just his health care and educational spending. Anyone have an actual heads up on what the 2.2 trillion includes?
Posted by: Chris at September 15, 2004 03:50 PM
Curt: Yep....that's my question about this. Will we see dramatic overcapitalization, like the late 90s? Or will it force the market to be less speculative? Or will we invest overseas?
The possibility of some wild market swings are there.
Posted by: Jon Henke at September 15, 2004 03:59 PM
Guys, privatization doesn't mean it must go into the stock market. CDs, bonds, other financial instruments or, since there'd be a hell of a market, some sort of new financial instrument designed to be safe and return a good yield for a long investment period.
Posted by: McQ at September 15, 2004 04:31 PM
Yes, but an investment in what?
Posted by: Jon Henke at September 15, 2004 04:40 PM
Something other than government spending.
Regardless of who spends it, its going into the economy. Obviously if saved it will go into some sort of financial instrument which will be either a stock, bond or similar instrument. IOW, much like the 401K's out there, it will be invested. I'm not sure how 1 to 10% of your social security "contributions" is going to make any more of an impact than 401K's did (what's the figure ... somewhere around 80% of Americans are now invested in the stock market because of them?)
With the SS contribution you can choose to be a little risky with it (stocks) or very conservative with it (bonds and money instruments). My guess is most would put some in the former and most in the latter (simply because they don't trust what they don't know).
Posted by: McQ at September 15, 2004 04:54 PM
Privatization would in the short run tend to cause higher stock prices, since there would be more dollars chasing the same number of shares. It would also tend to lower interes rates on bonds: more money coming in raises the price of bonds, which lowers the interest rates. That would probably happen to interest rates on bank deposits, as well.
But this would also tend to depress interest rates on loans. Banks would have more money to lend, so in order to put that money to work, they'd have to make their loans more attractive.
But the big question is, would we then see a stock market bubble, like 1998-2000? I'm betting not. You see, as one age of people take their money out of stocks (either as cash for retirement or moved into insured returns to prevent nest egg depletion), another age of people would be getting into the market. Instead of a bubble, there would be a brief step up and a plateau from this increased investment. Once into the plateau, stocks, bonds, and other investments would go back to equilibrium, though likely at a higher level than before.
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