Things are a bit upside down right now

We meet new people all the time. Last Tuesday my wife had an ad on Craigslist for a box full of Lego pieces. It had been sitting around the house for a bit, so it was time for Craigslist to the rescue. Within an hour she got a call and an other 45 minutes later, the potential buyer, Johnny, knocked on our door. As we were enjoying the start of happy hour and Johnny turned out to be a delightful man from Denmark who came to this country 13 years ago, we offered him a glass of wine and soon an interesting conversation unfolded. You see I love to converse with people that actually do understand and read more than what they get served in Newspapers and by Talking Headlines.

Johnny came to this country because he wanted to. He comes from a country that primarily exports knowledge and some cheese; his particular expertise is software programming. Even though Denmark is considered a socialist leaning society here in the US, it can nevertheless boast a high standard of living and being amongst the world’s happiest people for many consecutive years now.

Like so many expats, Johnny sees the United States for what it is these days; an empire trying to shake of the curtailing restraints of what once was a republic in search of democracy. Try to tell this to anyone out there in the streets and you will get the “deer in the headlight” look at best, or a fist lift followed by the misguided assertion that if you don’t like it here, you should leave.

Well I have been around the block on this continent for more than 30 years now, and I empathize with Johnny, because I am learning that many Americans know or at least have a gut feeling about all the things that are going wrong lately, but kind of feel helpless. In 2008 we tried to vote intelligence, after 8 years of village idiocy, which ended up in 2 full war commitments, and yet, the new wave Obama “intelligence” has now turned out to be a follower of the empire building fashion, ready to send American Troops anywhere in the world without even a effort of establishing a constitutionally required Declaration of War.

So our conversation with Johnny (and his girlfriend Renee who dropped by as well) turned to what the US does, besides the military obviously, with the taxes it collects. And even though we both left Europe at an early career age, mostly for tax reasons, we have to admit in hindsight that European Governments spend their tax collections primarily in line with Wagner’s Law. And that’s when our conversation became really interesting.

The American public debt – now at around $14.5 trillion dollars  – has been in the news a lot, but how we accrued it, who holds it and whether it really represents an acute problem is not well understood.

There’s an economic principle known as “Wagner’s law,” which holds that as a country gets wealthier, its tax burden tends to increase progressively. In this sense our growing public debt has put trillions into the pockets of the American people. Just think about it. Wagner’s law makes perfect sense in the following progression:

in a poor country, citizens are happy when they get a paved road; in a middle-income country, they expect a public school on that road; and in the wealthiest countries in the world, the public expects safe air-traffic control to guide them into an airport where they can catch a cab to a world-class public university.

As the expectations of what we want government to do rise, so do the tax revenues that are necessary to pay for it all. Everyone benefits.

Three Decades of National Debt Building

To give Adolf Wagner the proper economic credentials, at age 35 (in 1870) he took over the Chair of Staatswissenschaften (economics) at the University of Berlin, by that time not only the premier university in Germany but probably in the world.

 Wagner’s law holds true for every country in the world except the United States, where conservative economic discourse prevails.

About thirty years ago the Conservative Right convinced a lot of Americans that they could enjoy tax cuts without losing out on any of the services they’d come to expect. The Supply Economy Model would provide adequately. And that’s a big part of why our public debt jumped from $997 billion when Reagan took office to over 14 times that number today.

We could have paid for everything as we went through higher taxes but we didn’t. In 2008, the USA ranked 26th out of the 30 countries in the Organization for Economic Cooperation and Development in terms of our total tax burden (the share of our economy we fork over to the government), coming in almost 9 percentage points below the average of the group of wealthy nations. And what we are currently experiencing is the pendulum forcefully swinging to the other side.

Personally I have confidence that over time it will work out better for all Americans, but currently we are seeing an upside down state of affairs with a lot of experimental efforts that create more debt. The incriminating fact to recognize is however basic and simple: We thought we were financially ready to start living the good life about 25 years too early and some correction is due.

The National Debt increase is the only short term way to correct without extreme pain leading to chaos. All other options, except for total abandonment of the existing standards, were wiped out by the 2008 crash.

And in this context it is remarkable how little the average American knows about the national debt.

For example:
• We’ve Always Been In Debt

Before the first session of the U.S. Congress came to a close, the public debt stood at more than $75 million, and since that time it has never been paid down. In 1835, we came close – that year, the national debt stood at just under $34,000.
 The last time the public debt decreased was in the mid-1950s, so every year since we’ve hit a “record high” debt in dollar terms.

But a better measure is how much debt we have in relation to our economic output, and that number peaked at around 120 percent of GDP during World War II.

• Contrary to Popular Belief The Chinese Are Not Our “Bankers”

The US National Debt

It’s become conventional wisdom that central banks in China and Japan hold a ton of U.S. debt. In The Hill last week, Tom Schatz, president of the conservative disinformation outfit known as Citizens Against Government Waste,  offered some typical fearmongering, writing that the public debt will not only result in “a lower standard of living for future generations,” but that “the Chinese, who own the largest foreign share of U.S. debt, will have the American people ‘working’ for them.

The reality is that, as of September 30, 2010, China held 9.5 percent of our outstanding debt. The largest lender to the U.S. government is the people of the United States – we own 42.1 percent of the national debt in the form of Treasury bills held in our pension funds, 401(K)s, etc.
And 4.6 trillion – about a third – is held by the government itself. Almost 18 percent of the T-bills outstanding are sitting in the Social Security trust fund, earning interest and making the retirement program incredibly secure despite all the claims to the contrary.

• Historically Republicans Left More Debt Than Democrats

Between 1960 and 2010, federal spending as a share of the economy has bounced around within a fairly narrow range of between 17.7 percent (under Eisenhower) and 21.8 percent (during the first George Bush’s term in office). Republicans are just as happy to spend, but they run on tax cuts, and the result is that since the middle of the last century, contrary to the “tax-and-spend” label, it’s been Democrats who are far more conservative when it comes to keeping deficits under control than their Republican counterparts.

Presidencies over the last 30 years had the following starting points:

• Ronald Reagan started his term with total debt outstanding of 930 billion and increased total debt outstanding to $2.7 trillion. This is a 13.71% compound annual increase. He never balanced a budget.
• Bush the Elder started his term with outstanding debt of $2.7 trillion and increased total debt to $4 trillion. This is a 10.32% compounded annual increase. He never balanced a budget.
• Clinton started with total debt outstanding debt of $4 trillion and increased total debt outstanding to $5.6 trillion over two terms. This is a 4.2% compounded annual increase. He balanced his last three budgets.
• George W. Bush started with $5.6 trillion total outstanding debt and increased total outstanding debt to $10 trillion. That works out to a 9.8 percent annual increase over two terms – Let’s not even mention balancing a budget.

That Obama’s first years have taken us to $13.5 trillion is alarming but not deadly – yet.

• Republic versus Empire

It’s ironic – or a testament to the influence of the conservative message machine on our discourse – that discussion of the public debt so frequently centers on “entitlements” like Social Security (which hasn’t added a penny to the national debt). After all, we’re still paying for Korea and Vietnam and Grenada and Panama and the first Gulf War and Somalia and the Balkans and on and on.
Estimates of just how much of our national debt payments are from past military spending vary wildly. Economist Robert Higgs calculated it like this:
I added up all past deficits (minus surpluses) since 1916 (when the debt was nearly zero), prorated according to each year’s ratio of narrowly defined national security spending–military, veterans, and international affairs–to total federal spending, expressing everything in dollars of constant purchasing power. This sum is equal to 91.2 percent of the value of the national debt held by the public at the end of 2006. Therefore, I attribute that same percentage of the government’s net interest outlays in that year to past debt-financed defense spending.

In 2007, when Higgs did that analysis, he came up with a figure of $206.7 billion annually, just in interest payments on our past military adventures. Yes it is expensive to be the World’s Policeman trying to disguise a agenda of the Empire Builders.

• Public Debt Is Not Just About Borrowing

While our public debt has allowed us to violate Wagner’s law, it’s important to understand that we don’t just sell bonds in order to borrow money. When countries with widely traded currencies like the U.S. issue bonds, they are considered the safest investments around, and are therefore issued, and purchased, regardless of the government’s cash-flow needs.

Johnny and I agreed, both natives from semi-socialist countries, that neither system or ideology of economic approach is ideal, but that Wagner’s Law should get a closer inspection, since paying taxes is no different than purchasing a car or home.
There is an expectation of value return attached to the payment, or else….

We also concluded that the surface on State Road 200/A1A is a disgrace and dangerous to anyone using it. In both our native countries upgrades and repairs to a road like that would have been executed several years ago.

Taxes and Value have a direct balance correlation and we both agreed that much of government’s poor performance here, is probably more a matter of poor planning and execution than ill will. We could be wrong of course but looking at the time it took to to finish repairing Fletcher Ave and the Amelia Parkway, I tend to agree.