Tax Loopholes and Tax Reform

Not sure they will get around to tax reform this year, but I am told that tax reform is high on the legislative agenda. Tax reform usually involves significant changes in income and/or business tax rates. For example, we hear talk that US corporations pay tax rates that are very high. A tax reform might, therefore, reduce the rate to something lower. Tax reform might instead lower tax rates for the middle class or for rich people. There are many ways to do tax reform.

As a result of the lower tax rates of a tax reform, tax revenues would likely fall. So an important part of any tax reform that lowers tax rates but does not want to create larger government deficits is the accompanying ways to raise tax revenue. One approach would create a totally new tax. Some thought was given to the USA adopting a value added tax or perhaps an import tax. More likely, however, is the closing of existing tax loopholes. That approach sounds much better to most of us. But as I will show below, it is not so easy and the attempt to close loopholes may actually doom tax reform.

First, our friend Wikipedia says a loophole is an ambiguity or inadequacy of a system, such as a law or security, which can be used to circumvent or otherwise avoid the purpose, implied or explicitly stated, of the system. That makes a loophole sound pretty bad. It should be easy to eliminate tax avoidance. But a further look at tax loopholes suggests that many of the biggest ones are there for specific reasons.

We sometimes use the word tax expenditure for myriad reasons that allow people to avoid paying tax. Tax expenditures are defined as special provisions of the tax law such as exclusions, deductions, deferrals, credits, and tax rates that benefit specific activities or groups of taxpayers. Tax expenditure? Tax loophole? Pretty much the same thing. But the wording is kinder. Why? Because it implies that it isn’t an error or a deficiency in the system. Rather, it is an intent to promote an end. Getting rid of a loophole sounds easy. But a tax expenditure has a purpose. Do we really want to end it? If so, who gets hurt?

Below I list only some of the major tax expenditures and the amounts (in billions of dollars) estimated by the Tax Policy Center for 2018 (http://www.taxpolicycenter.org/briefing-book/what-are-largest-tax-expenditures)

Exclusion of employer contribution for medical care premiums

  and medical care $235.8

Exclusion of net imputed rental income $112.7

Deferral of income from controlled foreign corporations $112.6

Capital gains $108.6

Defined benefit and defined contribution employer health plans $140.4

Mortgage interest expense on owner-occupied homes $68.1

Earned income tax credit $63.6

Deductibility of state taxes $63.3

Child credit $54.3
Charitable giving $51.2

There are plenty more but this list adds up to just short of a trillion dollars. Thus we learn two points. First, that’s a healthy amount of money if we are looking for loopholes to close. Second, who is going to resist closing each one of these? People who want cheaper healthcare? People who receive rental income and capital gains? State and local governments? Poor people and those who represent poor people? Parents? Homeowners?

Other federal government tax loopholes?

            American Opportunity Tax Credit to reduce the cost of education

            Savers Tax Credit helps low income people save for retirement

            Lifetime Learning Credit to reduce cost of education

            Retirement Saving Accounts

            Carried Interest Loophole for mostly high income taxpayers

  529 College Saving Plan for parents saving for child’s education

                      

Finally comes the fun part. There are so many loopholes in our tax system that you would have difficulty listing them all. Investopedia (http://www.investopedia.com/financial-edge/0512/americas-most-outrageous-tax-loopholes.aspx) found some interesting ones that relate to state and local taxes:

            The Florida Rent-A-Cow Credit

            Washington DIY Cigarette Discount

            The Arkansas Credit for Naturally Destroyed Autos

            The Accelerated Depreciation of NASCAR Tracks

            Larry’s JD exemption (just kidding)

Even with these last few loopholes, there were reasons for instituting them. Closing tax loopholes is not a slam dunk. Tax reform and reducing our tax rates is valuable for many reasons. But if tax reform is not going to blow a hole in our national deficit and debt, then some of these tax loopholes have to go. Which ones will you vote for? 

Medical Care Costs

(I apologize for the formatting this time. This one looks pretty bad. This blogspot is not user friendly when it comes to formatting and formatting is not my thing.)
On July 18 and 25 I wrote blogs that  focused on government spending on healthcare. I got some questions and decided to look a little further into medical costs. 

Below are words I lifted from the Bureau of Labor Statistics which define the two medical price components found in the US Consumer Price Index. Medical Care relates mostly to Commodities like pharmaceuticals and medical devices. The larger of the two components measures the prices of Medical Care Services from regular doctor's office visits to hospital services to buying a pair of glasses.

Medical care in the CPI is broken down into medical care commodities (mostly prescription and non-prescription drugs) and medical care services.

Medical care services is the larger of the two components, representing over three-fourths of the medical care weight and about 6 percent of the entire CPI market basket.

Exactly what does the CPI price in medical care services? The largest components are hospital services and physicians’ services. Also included are dental services, services by other medical professionals, eyeglasses and eye care, and nursing homes.

In other words, the medical care services index in the CPI reflects the cost to consumers not only of trips to the doctor’s office or to the hospital, but also of trips to the dentist, psychologist or chiropractor, or even buying a new pair of glasses or staying in a nursing home.

The goal today is to compare the long-term behavior of these two medical price series to the performance of the overall Consumer Price Index which includes everything purchased by typical US urban consumers. 

The first table below presents the inflation rates for five decades beginning in 1966 and ending in 2016.  You can see, for example, that the CPI rose 8% per year from 1966 to 1976. In the next decade it rose by 9% per year. Since then inflation has been falling to where it grew by a mere 2% per year from 2006 to 2016. In each of those decades the price of medical care rose faster than the CPI. For example, in the decade from 1976 to 1986 Medical Care Commodities was increasing by 13% per year while the CPI rose by 9% per year. Medical Care Services rose even faster than Medical Care Commodities in three of the five decades. It rose, for example, by 14% per year from 1976 to 1986. 

The second table lets you see more directly how Medical Care Commodities and Medical Care Services were changing relative to the overall CPI. For example, from 1966 to 1976 Medical Care Services rose by 12% per year relative to the CPI at 8% per year. That implies that Medical Care Services were rising 50% faster than the CPI. Did that relative performance change? As you read down the last column of the second table you see the numbers 50, 56, 125, 67, and 100. The general trend has been upward for 50 years. Medical Care Services from 2006 to 2016 rose twice as fast as all goods and services. 

For the last 50 years Medical Care Commodities and Medical Care Services have grown much faster than overall prices of consumer goods and services. There is reason to believe from these numbers that the gap has increased over time and while the gap has been larger (1986 to 1996) it was very high from 2006 to 2016. 

The obvious next question is to ask is why. But answering that is no easy task. The provision of healthcare has changed much since 1966 and again since 2006. Medicaid and Medicare made for major changes and more recently Obamacare added new layers of delivery and payment. Today we nail down one point -- the medical sector has been and continues to be highly inflationary when we compare it to the other things we buy. 

The CPI attempts to make adjustments so that we compare apples with apples over time. Therefore, a rise in price should not indicate an increase in quality -- it should be a rise in price for a like or similar good or service. But we know that technology in medicine has been very important and while the Bureau of Labor Statistics may try to adjust for quality, I am guessing these adjustments are not perfect. Healthcare is both better and more expensive. I fear much of what the numbers show is that we are paying more to stay healthy and alive. 

One upshot of today's data. If government is spending more for healthcare today it is not just because of Obamacare. Healthcare prices have overshot just about everything for half a century. If we want to control how much we pay either through or without government, we need to better understand pricing of healthcare goods and services. 

Annual Inflation Rate Per Decade

1966 to 2016, in Percent

CPI All items, Medical Care Commodities, 
and Medical Care Services

			Medical
		Medical	Care
	All	Comm	Services
66 to 76	8	10	12
76 to 86	9	13	14
86 to 96	4	8	9
96 to 06	3	5	5
06 to 16	2	4	4

Relative Annual Inflation Rate Per Decade

1966 to 2016, in Percent

CPI All items, Medical Care Commodities, 
and Medical Care Services

			Medical
		Medical	Care
	All	Comm	Services
66 to 76		25	50
76 to 86		44	56
86 to 96		100	125
96 to 06		67	67
06 to 16		100	100

Fed Policy and a Rubber Seesaw

You know what a seesaw is, right? It’s a lot of fun. It’s a long board with a fulcrum at the center. Tuna sits at one end and Peter sits at the other. When Tuna move downward, Peter moves upward. You can do that all day. Or until the board breaks.

Lots of things in economics are like seesaws. The price of JD goes down and demand for JD goes up. The value of the dollar goes down and the Scots buy more JD. The Fed reduces the interest rate and the economy expands. Lots of seesaws out there.

In the past, the Fed believed in a seesaw called the Phillips Curve. This Phillips Curve said that if the unemployment rate went down then inflation would go up. Since inflation and unemployment were so rigidly related, either one could be used to indicate a need for monetary policy. A reduction in the unemployment rate meant inflation was rising and the Fed could back off. That is, the Fed would give less stimulus to the economy.

But that was in the past. Now the Phillips Curve is no longer rigid. It’s like the Phillips Curve has a bend in the middle, and both ends are going down. Think of the Gateway Arch in St Louis. Imagine a seesaw with both ends on the ground. Weird. Tuna and Charlie would sit there and nothing would happen. How sad.

Dr. Yellen is very confused about all this. Inflation and unemployment are both down. The thing that is curious about her reaction to all this is that she ignores the unemployment rate being down as she favors the information she is gleaning from the inflation rate. The unemployment rate is so low many folks are being tempted to return to the labor force. That should be a sign that Fed stimulus is no longer needed. But Dr. Yellen doesn’t want to be guided by this. She would rather focus on the inflation rate’s downward status. If the inflation rate is down then, by gosh, she is going to keep stimulating the economy.

It seems crazy and backward to me. Unemployment is very personal. People are getting jobs. We should like that. But we also know that pushing unemployment too low can bring very undesirable results. Just like a racer who runs the first lap much too fast, she may not have enough gas left to finish well. Inflation is also very personal. Most of us prefer a lower water bill to a higher one. Ask your neighbor. Is she complaining about prices being too low?  I don't think so. So why would the Fed want to continue with a policy of making things more expensive for us? 

Answering that question requires a fresh paragraph. Why does the Fed want to make things more expensive? The answer is that the Fed associates a low or falling inflation rate with dismal expectations and a lack of buying power. So even if everyone had a job, the Fed would still worry that something is amiss in the economy. And Dr. Yellen would keep stimulating.

What could be wrong with that? There are a couple of problems. One I mentioned above. We often associate over-stimulus with bad future events such as recessions. The second reason is that lower inflation rates might be the result of things the Fed simply does not and should not control. Maybe that thing is global competition. Or maybe the low inflation rate is the result of innovation that lowers prices. Clearly the Fed has no business or tools to interfere with either of those things.

Dr. Yellen has her teeth clenched like a dog with a bone. And she is not going to stop clenching until she gets us back to the good old days when inflation was soaring. She might coax output and income growth above 3% for a while. But if we learned anything from the past, an economy that grows too fast too long gives us a recession and higher unemployment. It is quite possible and highly desirable for her to implement a less stimulating policy. She should get to that task immediately and quit using low inflation as an excuse. Demand too low out there? Ask Amazon.com. I don’t think our problem is insufficient demand. 

Net Neutrality: David Versus Goliath?

I was thinking about words and names and it occurred to me how misleading they can be. Social Security is a good one. Who feels secure about their retirement years because of the Social Security checks they may or may not receive? It should have been called Pin Money or maybe Chump Change. It is a damn shame that so many people will retire with little in the bank and must rely on so-called Social Security.

And then there is Net Neutrality. At first I thought NN had something to do with not touching the badminton net. Then I realized it had something to do with the Internet, and it made total sense – the Internet should be neutral. The Internet should not be for or against Tom Brady. But then I read on and realized NN is all about a war between ISPs (Internet service providers like Comcast and AT&T) and all those content providers (like Amazon, Google, Facebook, and thousands of others).

The issue took on significance when President Obama’s FCC initiated a rule that concluded that Internet service is a basic need. It’s like weed – we all need a little from time to time. No, that’s not true. It is like the pavement between your house and your job. We all need to get to work. Your sexy neighbor with the big smile and hot red car should not have better access to that concrete than you. Be proud of that Lada and drive it right down the middle of the road!

The FCC enacted the Open Internet Order in 2015 to treat Internet service more like a road or a public utility. And thus the issue got hot. President Trump’s FCC reopened the case and is wondering what to do about it, so it is approaching a boiling point. I like the article I just found by Nelson Granados https://www.forbes.com/forbes/welcome/?toURL=https://www.forbes.com/sites/nelsongranados/2017/05/31/the-net-neutrality-debate-why-there-is-no-simple-solution/&refURL=&referrer= ) 

The article is pretty unbiased as indicated by the title – The Net Neutrality Debate: Why There is No Simple Solution. Granados concludes that NN is much like any government regulation – the basic premise might be correct but the unintended side-effects need to be considered. On the one hand, the right amount of NN means more fairness to content providers. Too much NN means a lack of progress, investment, and innovation on the part of ISPs.

When Granados says there is no easy solution, he basically means it is not easy to find the exact point of net benefit to society with NN. As in many cases, the answer lies not in the perception of government versus the company but rather impacts on one set of companies (and consumers) versus another set of companies. As you can imagine, both sets of companies are lobbying the government when it comes to NN. The ISPs (e.g. Comcast, Verizon, AT&T) want lighter regulation. The content providers (Amazon, Facebook, Google, Netflix, and many more) want tougher regulations.

In this blog post today I don’t pretend to know enough about which side is right. Perhaps you will educate me. But what I do think is curious is how many people are phrasing this as a David (content providers) versus Goliath (ISPs) confrontation. And of course, we are supposed to favor tiny sweet David over huge ugly Goliath. So today’s post is a look at the relative size and wealth of some of these companies.

I got the data from the Internet and mostly from Forbes.com. Most of it is for year 2016. So here goes…CP means content provider and ISP means Internet Service Provider.

The largest companies in terms of market value are CPs – Alphabet, Amazon, and Facebook. The largest ISP (AT&T) is valued at $255 billion with Verizon at $199 billion. The main point here is that there is no David and no Goliath if the biggest CPs are duking it out with the largest ISPs.

I will admit that this data may be misleading. For example, saying that AT&T is a CP might be misleading because it operates in numerous business activities. The same goes for Alphabet which owns Google. But the data are relevant in the sense that these companies lobby, and the entire wealth/sales of the company is an indicator of what they are capable of spending on government support. The column presenting each company's sales data is not more helpful in the David/Goliath breakdown. ISPs AT&T and Verizon have huge sales but so does CP Amazon.

I had a limited purpose today. NN is not a David/Goliath story. It is more a government regulation story. We consumers don't really care who wins but we want two things. We want continued investment and innovation from the Internet. We also want fairness in the sense that some content providers are not elbowed out of competition simply because they are friends with the right people. We want our Internet cake and we want to eat it too. Hopefully a public discussion will move the regulatory needle so we at least get a nice brownie with some ice cream on top of it. 

                                             Sales      Market

                                                            Capitalization

                                             $Bil        $Bil

CP          Alphabet                90         583

CP          Amazon               136         423

CP          Facebook               28         411

ISP         AT&T                  164         255

ISP         Verizon                126         199

ISP         Comcast                 80         178

ISP         Charter                   29         101

CP          Priceline                 11          88

CP          Netflix                      9          64

CP          Salesforce                8           58

1969 Was a Good Year

I wanted to compare some data and found a nice series for government spending going back to 1969. Not sure why they started the data in 1969, but they did. So I started thinking about what things were like about 50 years ago.

I started with my favorite subject, me. I finished my BS in Industrial Management at Georgia Tech in June of 1968 and to escape the draft, I started an MS program there. Strangely enough, the draft was not impressed by my love of Industrial Management, so they sent me a draft notice in late 1968. They let me finish two quarters of my new program and asked me to report for basic training in March of 1969. So in 1969 I was about 23 years old and was spending time training in Texas and Colorado. I finally settled into an Air Force base in Tucson, Arizona. I was an Airman First Class. I had one stripe. I think I made less than $100 per month.

On that salary I was lucky that a stamp cost 6 cents and a gallon of gas was about 35 cents, which made it economical to drive down to Nogales, Mexico to buy rum. A dozen eggs was 62 cents. For real people who could think about such things because they had a median income of about $8,300, a car cost about $2,000 and a decent house ran $30,000.

I was fully employed in the USAF in 1969. The national unemployment rate was 3.5%. A recession started in December 1969 so the unemployment rate started rising in 1970. The inflation rate was 4.5% in 1969. I could remind you of more – but that’s probably enough for the purposes today.

My main purpose is to look at how we spend the government’s money today compared to 1969. The table below shows 1969 spending in billions of dollars and as a percent of total government spending. 

                                          BIL$      %ofTotal

       Total Government      183.6          100

       Total Mandatory          53.6            29

       Social Security            26.7            15

       Medicare                       6.3              3

       Medicaid                       2.3              1

Our beginning situation finds government spending of about $184 billion in 1969. What we refer to as Mandatory Spending comprised a little more than a quarter of that total spending. Social Security spending was responsible for most of that – and amounted to 15% of total government spending. Medicare and Medicaid were toddlers in monetary terms – accounting for about 4% of all government spending in 1969.

A lot of water has passed under the bridge since then. For example, my forehead has grown several thousand percent since I was 23, and my time in a 10K race might have tripled. In basic training we had to run a mile in less than 6 minutes with combat boots on. I am not kidding. Anyway, let’s look at our government in 2016.

                                          BIL$     %ofTotal

      Total Government       3,853          100

      Total Mandatory         2,428            63

      Social Security              910            24

      Medicare                       693            18

      Medicaid                       368            10

As you might expect, if all the things we buy went up in price then government spending would do the same, and it did. Government spending went from $184 billion to $3,853 billion. That’s an increase of 21 times. Notice that if median income had gone up 21 times, it would now be about $174,000. So let’s give a big cheer for government growth. Way to go, government.

The above table shows that total Mandatory Spending went from being 29% of total government spending to 63% in 2016. That means – tada – that Mandatory Spending went up a lot faster than overall government. Mandatory Spending went up 45 times in 47 years! If median income had gone up that much, the median person today would be making $374,000 per year. You guys all make that amount, right?

You smarty-pants are starting to get my drift. Now let’s look at Social Security, Medicare, and Medicaid. To cut to the chase, Social Security went up 34 times; Medicare by 110 times; Medicaid by 160 times. These three programs have gone from being 19% of all government spending to 52% of it. Or put another way, all the other things the government spends on went from being 81% of the budget to 48%.

I know I harp on this point a lot. But the baby boom generation is just getting started. We were born from 1946 to 1964. Those born in 1964 are mere babies in their fifties. If we don’t focus more on how we spend money on the old folks, then the rest of you are going to have to live on a lot less. Maybe you should think about it a little more. In case you are interested, if median income had gone up by the same number of times as Medicaid (160 times) we'd each be making about $1.3 million a year. Sweet. 

Single Payer Health Insurance and Federalism

 A frequent comparison brought forth by those who favor single-payer health insurance is to make note of nice places around the world where single-payer works well. If it is good for them, then it must be good for us. I’ll drink to that!

No I won’t. This kind of comparison is like saying if a shirt fits perfectly on a dwarf, then it should be great for portly me. Suppose single-payer is great in Sweden. Does that really mean it is great for the USA? Why don’t we see a single-payer system for all of Europe? Or for the EU countries? Or for the G20? The answer is simple. They don’t want it. These places I mention are not only big but they are also dissimilar. People in northern Holland don’t have much in common with those silly Limburgers. Can you imagine the Hungarians and the Germans wanting the same single-payer system? I can’t.

But the US is one country, you retort. States are not the same thing as countries. But pshaw, I say. I know a few New Englanders who can’t even say Mississippi with a straight face. The south is where those “deplorables” live. Without getting so silly, I cannot see folks in South Dakota or Idaho wanting to have the same single-payer system as the groovy people of California. And then there is the idea of a frugal state like Indiana pairing up with scofflaws in Illinois. The USA might be one country but that does not mean that we all live or think alike.

The proof is in the pudding – or shall we say our governing documents. We purposely created a federalist country composed of strong states. Today we continue to honor the federalist state in many ways. We find comfort in the idea that some king living on the east coast can’t tell us how to run our lives. Sure, we have a big national government that does a lot of things. But think about all the areas that are left up to states or cities or counties. Police, fire, education, zoning, roads, parking, and so on. This is not trivial stuff. State and local area government budgets and regulations impact us in major ways every day.

Why don’t we turn over the police departments to the national government? Why doesn’t the US Congress run our fire departments? I am sure that it is possible to make strong statements about the great efficiency or perhaps some sense of fairness that derives from national control. But the answer is simple. It doesn’t make sense. Locals better understand the local problems. Locals know how to create local solutions. And what might be fair in W. Lafayette might not seem so fair in Bloomington.

Some of our politicians and ideologues want us to believe that single-payer is a slam dunk for the USA. Since it is a fait accompli, then it follows that anyone against it must have ulterior motives. But the truth is that the case has not been made. Bernie Sanders can rant all he wants but that doesn’t make people in southern Georgia have the same health issues and problems as those who live in Brooklyn. It does not mean that because a small European nation finds single-payer ducky that a huge economic space populated by 330 million Hoosiers, Tarheels, and Buckeyes is going to love it.

Republicans are trying to make the case for healthcare reform. It is an uphill fight for many reasons. But one of the reasons is the apparent superiority of single-payer. Why isn’t single-payer being held to the same kinds of debate and logical standards? Why do we noddingly approve of single-payer as the words are spoken? 

Sustainable Medicaid spending

Since the government is working on several different versions of a healthcare bill for the USA, it is not easy to know what will be legislated and how those changes will affect us. What we can know is that some folks will claim the sky will fall, and maybe it will. But since the sky has never fallen in my lifetime, I thought I would look backward in this post. This continues my wail about government addiction to debt. Lost in the preoccupation with the future is what happened to government spending and debt in the recent past. We don't really hate poor people. But we do have to think harder about how we accumulate debt. So here goes.

I got a little wild and crazy with the data. It makes me want to gulp JD and sing Blue Suede Shoes (Carl Perkins version). At the bottom of this post is one huge table with three parts.
     Part 1: Amounts for various categories of government budgeting in billions of dollars for the years 2006, 2011, 2016, 2021, and 2026. The data for 2021 and 2026 were given to me by Putin. Just kidding. They are estimates of the future based on past legislation. That is, if we do not change any legislation, that is what the Congressional Budget Office thinks will happen to spending in the future.
     Part 2: The changes, in billions of dollars, between those five-year time periods.
     Part 3: The percent changes between those time periods. The last two lines 06-16 and 16-26 summarize a comparison of 10 years past to 10 years in the future.

Let's start with the last column which shows federal government revenues. The government collected around $2.4 trillion in 2006. By 2016, it was raking in $3.3 trillion, an increase of about 36%. That seems reasonable. With no legislative changes, this would increase to almost $5 trillion in 2026 or 51% higher than in 2016.

I started with revenues because they are a benchmark for how much spending could grow without increasing the government debt. A 51% increase in the next 10 years seems reasonable. But then, if you are paying that 51% increase, you might want to argue about that. One thing we learn is that the rate of growth of federal taxes will be much higher (the rise from 36% to 51% is a 42% increase) in the future compared to the past. Don't say a word to me about austerity!

With that benchmark, we can now look at spending. Let's start with Medicaid.  Medicaid was a mere $181 billion in 2006, rising to $369 billion in 2016. So in the past 10 years, Medicaid spending rose by 104%. Review: Taxes rose by 36%; Medicaid by 104%. Medicaid will rise another 78% from 2016 to 2026. So whether we look backward or forward, Medicaid is one of the stars of government spending -- rising much faster than overall revenues.

If we want to be concerned about deficient government spending, look at the Income Security (Part of Mandatory Spending) and Discretionary changes. These components contain a lot of government programs*. After rising by 52% in the past 10 years, Income Security is projected to grow by only 21% in the next 10. Discretionary spending rose by 17% in the past and could rise by 24% in the future. Laggards!

Not to be prejudiced against Social Security and Medicare, you can see that those programs are doing their respective parts to bankrupt our country. After growing by 67%, SS will grow another 84%; Medicare will leap by 101% after growing by 84% previously.

The sad conclusion is this: As a centrist I support using the government to help people. But as a centrist, I also believe the best way to help people in a sustainable way is to not go bankrupt. These numbers help us see that we are on our way to trouble. These numbers do not incorporate any proposed increases in spending on military and infrastructure and do not incorporate any budgetary changes attendant to reforming healthcare or taxes.

These numbers suggest that Medicaid is among several key spending areas that must be addressed. It is not our national purpose to harm or kill the old and sick. But it is in our national interest to find ways to correct a problem in such a way that we can sustain programs that help the elderly, the sick and others. If ideologues scream murderer every time a program's growth is slowed -- then we will have to deal with a world in which none of the government works.

*Discretionary Spending includes spending on such items as education, scientific research, infrastructure, parks, environmental protection, some low-income assistance, public health and more.  

Table 

	Social			Income	Discre-	Rev-
Billions	Security	Medicare	Medicaid	Security	tionary	enues
2006	544	377	181	200	1017	2407
2011	725	560	275	404	1347	2303
2016	910	692	368	304	1185	3268
2021	1184	904	479	320	1306	4011
2026	1674	1390	655	369	1464	4948
	Social			Income	Discre-	Rev-
Change	Security	Medicare	Medicaid	Security	tionary	enues
6 to 11	181	183	94	204	330	-104
11 to 16	185	133	93	-100	-162	965
16 to 21	274	212	111	16	121	743
21 to 26	490	486	176	49	158	937
Percent	Social			Income	Discre-	Rev-
Change	Security	Medicare	Medicaid	Security	tionary	enues
6 to 11	33	49	52	102	32	-4
11 to 16	26	24	34	-25	-12	42
16 to 21	30	31	30	5	10	23
21 to 26	41	54	37	15	12	23
6 to 16	67	84	104	52	17	36
16 to 26	84	101	78	21	24	51

US Leading in Government Deficits

Two weeks ago, I wrote a post about US national debt and deficits and concluded that past governments have put our country in a very tough place with few good options that could restore economic growth. Some friends wondered whether the US is alone is this distinction. So I found some IMF data to compare the US against other key countries.

The first line in the table below gives you US information. After averaging annual government deficits of 3.5% of GDP from 1999 to 2008, the deficit is now 4% in 2017. Thus the deficit is now worse. We had deficits in all 7 years since 2011 with the highest deficit in 2011 of 9.6%.

In all these categories, the US was worse than the EU and the other comparison countries. While all these countries are habitual debtors, Canada was slightly better since it had a surplus in one of those seven years. Germany had only two deficits in those seven years. Wunderbar!

When it comes to 2017, the US and Japan were tied with deficits of about 4% of GDP. Germany posted a surplus in that year of 0.6% of GDP. The UK, Canada, Italy, and the EU had deficits that were smaller (better) than 3% of GDP. The difference between 3% and 4% might seem small but remember we are taking these numbers as a percentage of GDP, which is $15 trillion in the USA. Also keep in mind that four is 33% higher (worse) than three. I next looked at a table with similar data for emerging markets and found that even this comparison is not good for the US. China, Russia, Mexico, Turkey and Romania among many others all had smaller (better) deficits than the US in 2017. Of course the US beat Brazil and Venezuela, Pakistan, and India. Way to go team!

The US stood out from the pack in having recorded the highest one-year budget deficit between 2011 and 2017. Japan came close with 9.1% and the UK's was 7.7%. The rest were virtually half or less than half of the US budget deficit.

Conclusion: the US tends to have larger deficits than other comparable world leaders -- both before the recession and after. We not only have larger persistent deficits but we also juice them higher when faced with a major recession. Apparently government deficits are our drug of choice.

I then found another table that compared the US to 39 other advanced nations. In 2017, there was not one single country with a budget deficit larger than the US deficit of 4% of GDP. There were 10 countries in 2017 that had surpluses: the Netherlands, Luxembourg, Latvia, South Korea, Macao, Iceland, Singapore, Hong Kong, Norway, and New Zealand. These countries typically have budget surpluses.

The US has a deficit problem whether we compare the numbers in dollars, in percent of GDP, in one year or over many. It is clear from looking at 40 major industrial countries that such behavior is neither typical nor desirable. We are hooked on the government spending drug. I think we need an AA meeting.

Budget Data for Selected Countries and Regions
Source: International Monetary Fund, World Economic Outlook, April 2017, Table A8.
Key:
2017: Budget position in 2017. Minus indicates deficit.
Fiscal Year 2017 ends September 30, 2017
99 to 08: the average budget position from 1999 to 2008
Change: Change from that average to 2017
# Defs 11 to17: How many deficits from 2011 to 2017
Highest 11 to 17: Highest annual deficit from 2011 to 2017

	2017	99 to 08	Change	# Defs	Highest
				11 to 17	11 to 17
US	-4.0	-3.5	Worse	7	-9.6
EU	-1.5	-2.0	Better	7	-4.2
Germany	0.6	-2.1	Better	2	-1.0
France	-3.2	-2.6	Worse	7	-5.1
Italy	-2.4	-2.9	Better	7	-3.7
Japan	-4.0	-5.5	Better	7	-9.1
UK	-2.8	-1.9	Worse	7	-7.7
Canada	-2.4	1.1	Worse	6	-3.3

Happy July 4, 2017

When I was a kid my father used to lament that he could no longer get a Chinese meal for 25 cents. Born in 1915, he lived through the Great Depression and served in World War II. It was not easy for me to understand him because so much had changed in the 50 or so years between when he had been born and when I was a teenager. Now I am the old dude, and it dawned on me how much time has passed and how much "distance" there is between my world and that of my grandkids.

I think of that on the 4^th of July 2017. Today I think of that distance as most of us seem to agree that our national problems couldn’t be worse. Most of us can’t even mention politics among family and friends for fear of starting a fight. But then it dawned on me that just like it shaped my father, time and experience have given me a perspective. I forget it most of the time but on the 4^th of July, it is worth thinking about.

In elementary school, we practiced air raids by hiding under our desks in case the Soviets decided to attack us. At Ponce de Leon Junior High School in Miami, we held our collective breath as a Soviet ship carried missiles toward Cuba. Jackie Robinson had to stay in a different hotel from his white Dodgers team mates. Cassius Clay changed his name to Muhammad Ali and later spent time in prison for saying what he believed. Elvis changed from serious musician to Vegas entertainer, and Bob Dylan gave up his acoustic guitar for an electric one. I played little vinyl records on a phonograph at 45 speed, and our landline was a party-line with a human operator at one end whose name was not Alexa. I used to give my punch-card computer programs in a cardboard box to a guy called the computer operator who laughingly told me that the turn-around time would be 24 hours. Ya'll, come back tomorrow. 

The point? A lot of water has gone under the bridge. How can my grandchildren understand anything I say when I used to watch my mother hang clothes on something called a clothesline after scrubbing them on a washboard? But the truth is that on 7/4/17, much has not really changed. Today we have very challenging economic and social problems. We still find ourselves in a very scary world where our leaders cannot trust the bad guys to not make trouble. Technology both thrills and worries us. Driverless cars? Robots? Artificial intelligence? These and other innovations both fascinate and threaten. I recall one colleague telling me right after the Soviet Union fell that the future of the world would henceforth be peaceful. What was he smoking? Change is the only constant we will ever know, and any generation that thinks tranquility or the end of the world is right around the corner is fooling themselves.

The point? Lean back and take a big drag. This is as good as it gets. Appreciate the now for what it really is. Our current President doesn’t look or act like John F. Kennedy. But Kennedy almost got us all blown away playing chicken with Nikita Khrushchev, and he showed he wasn’t very adept when he messed up the Bay of Pigs invasion. Iran, North Korea, and China are threatening but we have lived through plenty of menacing situations, not to mention the the Vietnam War, Cuban Revolution, Korean War, WWII, WWI, and so on.

The economy is nothing to write home about today. But the ups and downs of the 1970s were no fun either. As we exited WWII, most people were pretty sure we would fall back into the Great Depression once the government spending stimulus for the war was retracted. While we are not now setting records for economic growth, we haven’t had a recession in almost nine years. I think we had two  recessions in every decade since the 1950s.

We worry about low inflation and interest rates. True, they have their negatives. But many of us remember rising inflation and mortgaging our first homes at double-digit interest rates. We didn’t have to take a finance course to understand the power of compound interest.

What’s the point today? The point is that we should give our family and friends a big high-five as we enjoy the birthday of America. Our land is not perfect and it is far from being safe and strong. But it has been worse before and it will probably be worse again in the future. There has never been a time when all was well and we didn’t have important things to threaten us. Our land is what it always has been – a work in progress in a dangerous world. And thus, we will always have to be aware, mindful, and ready to act to preserve what we have.

Combine that truth with the larger truth of our freedoms. We have freedom to express and share our views. We have freedom to fashion solutions for tomorrow. We have freedom to argue and to be right sometimes and wrong other times. Today let’s worry less about our troubles and disagreements and kiss the ground that gives us so much. Tomorrow let's get back to the work of making things better. 

Raise your cups of JD to the 4th!