What Is the “True” Cost of Government?
As a former Tax Auditor with the State of New Mexico, the deliberate plane crash back in 2010 into a Texas IRS building touched a nerve with me. Taxing my audit victims felt pointless when NM had a $600 or $650 million budget shortfall, depending who you believe. Would a cynical tax auditor be welcome in the T.E.A. Party? If you don’t know, T.E.A. = Taxed Enough Already. Would you believe that we are under-taxed considering all the services we demand from Govt? Therefore, the fundamental problem facing America today is that our Federal and State leaders have lied – and continue to lie – about the “True” Cost of Government (TCOG). They are scared to death what would happen if we knew what all those Govt services really cost.
In 2010 I sent off a missive to Federal Reserve Chairman Ben Bernanke; they sent me a cute boiler-plate reply. I had to vent that the Fed’s actions violate everything I learned about Economics in college. America has always been a “mixed” economy with the Govt directly or indirectly picking the winners and losers; the shrill voices that cry of Socialism bore me. Yet doesn’t it seem like our Federal Government exists today solely to prop-up markets? This is not real Capitalism! If it were, the winners could truly win – and the losers, like banks – would be forced to use the Federal Bankruptcy courts. At least 1/3 of the banks went under during the Great Depression, for a variety of reasons, and the world did not come to an end (funny how Republicans advocate Social Darwinism for people but not for Corporations nor banks) . Is this really the Role of Government today, acting as ‘mob muscle’ by keeping out new companies from threatening Big Business and the status quo? Not counting the obvious (agriculture), look at everything the Govt does:
1. Govt props-up Labor markets via 99-weeks of unemployment benefits. This is compounded by #7, artificially low interest rates to maintain “Full Employment.” Our economy now seems resistant to Keynesian adrenaline, stimulus spending, – whatever – like a drug addict who needs to increase the dose to get the same high. Just because it worked in 1935 doesn’t mean it works now. If we eliminated the deduction parents get for having children then perhaps the supply of labor into the market would stabilize 20 years from now; why does the Govt need to subsidize breeding? Reality check: people who have kids demand more Govt services and an argument could be made that they should be taxed more! If you want to have 5 kids versus a more rational decision to have just one child, why must Govt give the same deduction for each additional child? Granted, more low-income people tend to have large families but there are still plenty of high net-worth Americans who choose to have large families. Considering the global population today, our Federal Govt should cut the deduction in half for each child a family has after the first. Freedom means you are able to have children versus one’s reproductive rights in China – but it does not mean the Federal Govt should be obligated to subsidize your “lifestyle” choice.
2. Govt props-up Energy markets via wars to artificially lower the price of gas when compared to the price in Europe or Asia. Funny how $8 per gallon stimulates demand for 50mpg cars. Big Oil is also quite happy the US Navy protects oil tankers in the Strait of Hormuz and countless other shipping lanes. In Economics, there is a concept of “sticky prices,” in that prices are usually set at a certain level and consumers expect that level. Since 2001, our Govt has been complicit in helping Big Oil raise prices gradually, and therefore, increasing their profits. Although the cost of gas in the United States is lower than other G20 countries – the change from $1.50 per gallon to $3.50 a gallon is remarkable. American consumers have grudgingly accepted this new level in less than 10 years (they still agree to pay the market price even if they curse like a sailor each time they fill up their tanks)! It is up to the reader to determine if the political intent of our leaders is a valid rationalization: Democrats favor higher gas prices in order to set a price “floor” which artificially makes regular cars / trucks more expensive when compared to a Chevrolet Volt. Republicans favor higher gas prices because it makes the global oil reserves – currently estimated to be worth $1 trillion – more valuable when drilled, developed, refined, and finally brought to market.
3. Government props-up Automobile markets via the bailouts of GM and Chrysler and via #2 lower-cost gas that helps American companies sell high-margin trucks / SUVs. American’s have been breast-fed on the notion that they are entitled to drive big V8 cars and trucks until the end of time. But don’t take away my V8 Mustang (just kidding)! Seriously, it may take an entire generation to convince Americans to accept a ‘Buddhist Minimalist’ approach to cars and trucks. The gas-guzzler tax has become an incidental line item on high-demand cars. Govt has a role to play in this market, in my humble opinion, to convince the industry to change to more light weight materials since you cannot change physics: lighter vehicles need to burn less gas. Taxes on gasoline are, in economic terms, a regressive tax since more low income people depend on their cars and trucks to take care of their family needs – or for the poor landscaper – a necessity for her to run her business. A more logical and ‘fair’ option would be to tax the car / truck buyer based on the weight of the vehicle! Ford has announced a massive engineering program to change the Ford F-150 truck to made with aluminum body panels (http://blogs.wsj.com/drivers-seat/2012/07/27/ford-plans-new-f-150-with-aluminum-body/) in order to save an estimated 700 pounds! Creating a basic $20,000 4-door family sedan made out of 100% aluminum would drastically save a lot of gas and this should be The Manhattan Project of the 21st Century. Exotic materials like aluminum have only been the realm of exotic sports cars and it is time for light-weight materials to be used in mainstream cars and trucks.
4. Govt props-up Real Estate markets via first-time buyer credits and mortgage interest tax deductions. The Truth, with a capital T, is that not every American can (or should) achieve the American Dream of owning their own home. It is a dream for a reason: not all dreams come true! Cheap cars, cheap real estate, and cheap goods from China are the 21st Century equivalent of the Govt saying, “let them eat cake.” Our political leaders can’t deliver real improvement in our standard of living via rising wages – so they pacify us with cheap (disposable) imports since our currency is essentially worthless.
5. Govt props-up Education markets via the supply-side logic of Federal Direct Student Loans. Reality check: we don’t see 100% of college freshmen self-selecting high paying careers in science, engineering, or medicine. Would Soviet-era central-planners allow an unlimited number of students to pursue English degrees? Education today is just like any other business: they only want to fill empty classroom seats. If you successfully obtain a high-paying job after graduation, that is merely incidental. If the Govt is to subsidize higher education it should only provide FDSLs to students going into math, science, engineering, medicine, and maybe teaching, things our society desperately needs. And there should be a massive penalty if these students chicken out and change majors. The best way to cut the cost of college, including the costs at for-profit schools, to eliminate the phony degrees, tenured professors, and bloated administrators, is if every student knows they have to graduate with real marketable skills. This can only happen if students without access to scholarships or grants have to get loans at banks and pay the current market interest rate NOT guaranteed against default by the Govt. The only Govt protection should be to prohibit these private loans from being discharged via bankruptcy (student loans are already exempt from discharge). The Role of Govt – in the realm of publically-funded State universities – is not to protect a select upper-class of tenured professors from the risk of being fired.
6. Govt props-up the Medical / Big-Pharma markets via 17-year patents on drugs. If we really want a Wal-Mart health care system, allow prescription drugs to become generics after 7-8 years. Big Pharma must learn to spend R&D dollars on drugs with a 50 cent/pill retail cost, not $5/pill. Same goes for MRIs and other medical devices: allow Xerox and other companies to make them after 7-8 years.
7. Govt props-up the Banking / Financial markets with near zero interest rates. The basic function of a bank is to create new money from interest charged on loans. But people (even bankers!), tend to waste things that are cheap, a consequence of “easy money” psychology. So banks sometimes get to replenish their Monopoly money directly from the Federal Reserve, avoiding Wall Street investors and their scrutiny; a normal business must go to the market when it needs to raise capital. Search Wikipedia on the Austrian Business Cycle Theory (http://en.wikipedia.org/wiki/Austrian_business_cycle_theory) to understand one possible explanation of the 2008 financial crash. This, in my opinion, proves that the Fed keeps interest rates absurdly low for purely political reasons; the Fed is not as “independent” as we are led to believe.
The paradox with #7 is the Ultimate Failure of Supply-Side Economics: as the economist Malthus predicted, we now have a General Glut and oversupply of everything but on a global scale! The Fed today is nothing more than a puppet agency because its Chairman does not want to displease the President nor Congress with high interest rates. Today we have both high Govt debt combined with high unemployment. High unemployment would normally justify low interest rates in the hope that banks would be more liberal to lend money. Our entire economic foundation is based on hope – hope that a bean-counter will lend you money! High interest rates are supposed to cool off an over-heated economy by forcing people and corporations to forgo spending on a whim. Economists have fancy terms like one’s “marginal propensity to consume” and the “elasticity of demand.” When it comes to our hyper-consumption economy, a person forced to choose between using an 18% credit card versus a 17% credit card is pointless when the 17% card is maxed out and they really want to buy a new pair of skinny jeans. Even a 30% interest rate rarely restrains our irrational consumption.
All kidding aside, what should we cut from unlimited Govt spending? Should we mandate 4-day school weeks to cut the cost of public K-12 education despite the obvious need to increase the number of days kids spend in school? Maybe the voters(!) could get some minimal illusion of Democracy via a national ballot referendum freezing the salaries of all Federal employees, including Congress, by eliminating their annual Cost of Living Adjustments. How about a 4-day, 32-hour, work-week for all non-law enforcement Federal Govt offices? We can no longer afford a Federal Govt that is active 24/7; the painful cuts are coming just like in Greece. Consider only the 2011 deficit of $1.5 trillion: assuming 2% interest on Tbills, a $1.5 trillion ‘mortgage’ would require monthly payments of more than $5.5 billion. Over 30 years we would end up paying more than $1.9 trillion for the ability to borrow $1.5 trillion last year. Since it doesn’t sound like a lot, it is easy to rationalize deficit spending when looking at only one year. But what of all prior year deficits? No one, not even professional mainstream economists suggest we retire the $16+ trillion national debt, the principal. Paying only the interest perpetuates denial about the TCOG. If we were to retire the debt we would need to pay about $51.6 billion per month, or just over $18.5 trillion over 30 years, assuming that we stopped annual deficits immediately. Per www.usdebtclock.org (as of August 2012), if the TCOG invoice were sent to each taxpayer, we would all need to come up with more than $140,000; total debt per citizen comes to more than $180,000. No one even mentions all the unfunded obligations of the US Govt at more than $120 trillion! When many Americans today are struggling to earn $30K/year in dead-end service-sector jobs, how can our Govt continue to spend paper wealth when the economy didn’t generate any real inflation-adjusted wealth at the individual micro-economic level? This must prove that deficit spending is asinine not just generational theft. Here is something for the Republicans to chew on: 25 million actual unemployed Americans have no Capital to become entrepreneurs, and therefore, they have no income for the Govt to tax! If the rest of the US tax base declines, this will cause our Govt to collapse just like the former Soviet Union.
Christopher van Lone
