I have been having the same discussion with several people about the idea of raising/cutting taxes, increasing/decreasing government spending, who should pay what, and other similar iterations of the idea of what the government's role is with our money. I want to give everyone a quick summary of what is happening (to the best of my knowledge), why it is bad, and then give a few basics of human psychology as to why neither party has a good plan for the future of the government.
The scariest thing right now is that while we sit and do nothing, the government is quickly pushing us towards a stagflation scenario like we had in the 1970s. Take a look at the currency base in 2008 compared to the currency base today. The federal government has added $1.4 trillion dollars to the currency, a 140% increase. Why does this matter? The money supply at its basic level determines the cost of goods. A simple example from a basic economic course uses this example: Let's say all of the goods sold in 1 year is 10 loaves of bread. Let's say all of the money available is $100. That means that each loaf of bread will cost $10. If the government now prints another $100 of currency, giving a total of $200 in the economy, the price of bread will be pushed up to $20 a loaf. now certainly there are some other effects, as well as some lag to the pricing as it takes awhile to push that currency into the market, but you can see how in general, adding money to the supply will push up prices. If your wages don't keep pace, the government basically taxed you without ever having to vote on a tax at all.
So why is the government putting out so much money over the last few years? The truth is they have had to print money to finance the debt. The amount of debt the federal reserve is holding hit another record. Never before has the federal reserve held so much debt as assets. This is because as our debt has approached 100% of our GDP, other nations are beginning to question our ability (or our willingness) to pay them back. So guess what, we are financing our own debt. Wouldn't it be nice if you could just print up money out of thin air and then borrow it to yourself? That is what the federal government is doing. At some point, no one is going to want to sell us goods, or they will be dramatically inflated in price, so buy your luxuries now (if you can afford them) - because there won't be too many big screen TVs or the latest fashionable jeans in your future.
The debt itself is also a problem because it diverts money from other investments. People who have money don't store it under their mattress. It has to go somewhere. So, do I take a risk and buy a corporate bond or do I buy a federal bond that pays decently and can save me money on taxes? When we buy goods from other countries like China, they have to do something with the dollars we send them. Do they buy products back from us, do they invest in American companies, or do they buy our government debt. Up until this point, they have bought our debt because it is a nice, easy, safe investment. By deficit spending, the government is keeping some money out of being invested in companies or products that could increase production, thereby creating jobs and income. Don't believe me? Even the Congressional Budget Office agrees with this assessment.
Now for the partisan crap. So the GOP is asking for cuts, saying the democrats are spending us into oblivion. They are right. Since President Obama took office, we have added $3 trillion to the federal debt. However, the GOP has just as much or more blame at this point. President Obama's predecessor, George W. Bush, was also bad, bringing the federal debt from $5 trillion at the start of his first term to $11 trillion in 2008. We simply cannot keep doing this. Again, the CBO agrees with this assessment. Both parties need to suck it up and start making cuts, no matter how bad it hurts. We can't help anyone if the country goes bankrupt.
I see many of the liberal bloggers I follow saying we should raise taxes, especially on the rich, to get the budget in line. It seems so wrong to take away programs for the poor such as medicare, medicaid, food stamps, etc. The rich should pay more so those people can have a better life. It would be really nice if it worked that way, but it doesn't. I'm sorry to have to break it to you, but you can only tax so much. As I said in a previous post, no matter what the tax rate has been historically, the government won't ever be able to collect more than about 18-19% of GDP. It just won't happen. Why?
Let's think about this. Let's say you make $10 million/year. That's a darn good salary. The government takes $3 million every year for taxes. OK, living on $7 million isn't too bad. Now the government says we want $4 million. What's going to happen? Well, I might ask for more money from my employer, or if I own a company I might charge more for my product. I want to live a $7 million dollar lifestyle. So where do those costs get passed? They are passed on to us who buy those products.
Or, maybe I've made $10 million over several years, and I have a nice chunk saved up, maybe I'll just move to the Caribbean and avoid paying the taxes. Then what does the government get? $0. Not $3 million, not $4 million, but $0. That tax increase didn't work out so well. Maybe I take my company to China, or Mexico, or somewhere with lower taxes. Now not only is my tax money gone, so are the jobs.
Here's the thing about people and their money. They worked for it and they want to keep it. It would be awesome if rich people would be willing to pay more (and they can, the treasury will accept any money above the normal tax bill). We can only do so much before they take action to avoid working rather than work and see so much go to the government. The rich will only allow Robin Hood to hit them so much before they move away from Sherwood Forest - because they can.
Think of it another way - Let's say you and/or your family income is $50,000/year. It's a decent wage, but I don't think anyone would say you are "rich." However, one could argue that you are rich. At $50k/year, you are making over 2.5 times what someone making minimum wage is making, even if they work full-time. Maybe you should pay a little more, so that person minimum wage can live more like you. Come on, don't you think you should help them? I mean, minimum wage is below the poverty line.
The scary part about the above thought is that it could happen. What is "rich?" Should it really be up to the government to decide who has too much and who doesn't have enough? Maybe you shouldn't be allowed to buy that second big screen TV. That money could buy 2 months worth of food for a poor family. Maybe you should be limited to a 1200 square foot house - why do you need more room? The extra money could go to house the homeless. I'm not trying to be facetious, I am trying to make a point. I know we can make an educated guess as to what is rich or poor, but should it be up to the government to decide how much is too much? If I am making $50,000 a year now and get a promotion because of my hard work and now make $100,000, should the government take away my extra $50,000 since I didn't need it before? Do I need it now? Probably not, but it will certainly improve my life.
The other more delicate matter is the idea of someone's worth. Do you feel a nurse making $30/hour deserves that wage than some 19 year old flipping burgers? Of course. Just as a CEO of a large corporation gets paid big bucks because his/her company makes tons of money for shareholders. Sometimes people are limited by their intelligence, their drive, or any number of factors that make us all individuals. If we all had equal drive and equal intelligence, wouldn't we all just have built our own Apple computers in our garage? We have to acknowledge our limitations. In fact, some people might simply be poor at managing their money. Why else would 1/3 of large lottery jackpot winners go bankrupt? Sometimes, we can't save people from themselves. And some people do have more value to society than others based on what they contribute.
Certainly there are people that need help. I'm certainly not saying we shouldn't help the poor, the elderly, the mentally or physically disabled, but there is a limit to what government can do. It is hard to send money off to the government because we don't usually see the results. Think of how good you feel when you donate to Goodwill or The Red Cross. That is because we can see the good those organizations do in our community. Because we have allowed the government to take over so many of those roles, we don't see the effects in our community because it happens behind the veil of government. The bigger problem is because we are forced to pay taxes, it is more difficult if not impossible to hold the government accountable. If I donate to the Red Cross and don't like the way my money is used, I can donate to the Salvation Army the next year. With the government, I just have to keep paying.
The bottom line is people are self-interested. It is biology. It is in our DNA. We will always try to get more and be better for ourselves and our family. And what is wrong with that? Don't we want our kids, our family to have a good life? We have to stop acting like rich people are evil for being rich. They might have alot more money compared to many of you, but you have much more than many others as well. Life isn't always fair. Get used to it.
Here's how you can make a real difference. Do you hate seeing CEOs of corporations getting rich? Stop buying their products. Quit using your services. I love it when an uber-liberal tries to spout off about these evil rich people and how we need to stop them as they pull into Wells Fargo to get cash from their ATM while wearing jeans they bought at Macy's and a t-shirt from Wal-mart. Ditch your corporate bank, and visit your local, hometown bank or credit union. Don't buy from Target or Wal-mart, instead shop your local grocery store. Buy your toiletries from your hometown pharmacy. You do have the power to be rid of rich CEOs. If everyone ditched Wells Fargo or Bank of America tomorrow, they would close down their doors pretty fast. If everyone went with a few less bottles of water and took better care of their underwear and stopped shopping at Wal-mart, they would fold up in short order. Don't buy a kindle, a nook, a iPad, etc. - buy used books from your locally owned thrift shop or visit your library. Want to support unions? Only buy union made products - clothes, cars, cell phones, televisions, etc. Make sure everything you buy is union. That is how you show support and make a difference.
I think the best path we could take is to simplify the tax code. Quit pandering to every special interest through countless forms and worksheets and make it simple. Base taxes on a flat percentage after exempting the minimum wage. For a couple, that would mean an exemption of about $30,000. I would bet most real middle class would see a tax savings since the exemption would be large than most tax write-offs anyway (mortgage interest, IRA contributions, etc).
We can't turn the government into Robin Hood. It won't work. We still carry our animal instincts to do what's best for ourselves. Let's not ignore that fact. And please, stop being a hypocrite. You can't hate the rich and then support their cause by patronizing their low prices or convenience. You can't act like you want to make a difference, but only make it when it is convenient for you. And please, let's help each other and our local communities and stop having the government do it for us. Do you want to be in charge of your money, or do you want those in Washington DC controlling it? I'll pick the former.