The Foregone Conclusion

Public Policy Commentary from Austin, TX

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Why The Federal Budget is Not Your Household Budget

Well, we made it through the debt ceiling. Sort of. There was a large budget cut (make no mistake, 1 trillion dollars is a lot of money), but small in the overall scope of things. Is our debt long-term solvent? No, not by any means. Is right now the time to make it so? Most all economists assert absolutely not. So, a lot of the plans proposed by moderates in the U.S. Congress have been centering on plans that make short-term deficit spending now, while reducing the overall cost curve and lowering deficits in the next 5 or so years, after the recession has passed.

All that said, I’ve seen this quote by Dave Ramsey make some headlines, and thought it worth discussing:

If the US Government was a family, they would be making $58,000 a year, they spend $75,000 a year, and are $327,000 in credit card debt. They are currently proposing big spending cuts to reduce their spending to $72,000 a year. These are the actual proportions of the federal budget and debt, reduced to a level that we can understand.

The quote is, for all intents and purposes, mathematically correct, but insinuates a misleading principle. That principle is this: that federal budget is like, and should be compared to, our personal household budget. The argument goes that the U.S. government should manage its debt and budget like you or I do.

The argument has emotional appeal, for sure – with money being tight, and the middle class squeezed more than ever, why shouldn’t government cut back? Why shouldn’t we reduce the level of services (an important thing to remember is “government spending” is, in essence, public services) just like I’m reducing the amount I spend? It makes sense emotionally. Does it logically?

Not really. Here I’ll lay out a few reasons why the argument, when under scrutiny, doesn’t hold water.

1. Families Don’t Issue Their Own Currency

If my family was in debt, and I was the same as the federal government, I then plausibly could just call up my nephew Mr. Treasury, print off the exact amount of money I was in debt for, and pay it off. Secondly, all government IOUs are accepted as payment; it usually spends by crediting bank deposits, then cash, then Treasury bonds. So, if I were the government, I could just issue a Shaun bond, and pay off my debt that way. Unfortunately, I can’t.

2. Inflation Drives Affordability

If you and I run out of money, we simply stop spending. We are “revenue constrained” in our spending personally – meaning that we can only spend what we take in. The federal government is not backed by gold, or another barterable item, but by credit. What does this mean? This means, since 1971, when we moved off of the gold standard, the federal government no longer had to convert dollars to gold. Which means the federal government can print off as much money as it likes, without being revenue constrained.

But wait, won’t this cause inflation? Absolutely, if done too much. You just have to watch prices on treasury bonds to see if inflation is rising. But this has far-reaching implications; when the government spends too much, we don’t assert that it’s because it will run out of money (because it can’t), we assert that it might cause inflation (or worse, hyperinflation). This is a logical and reasonable claim.

But that means that the federal government isn’t revenue constrained – it’s inflation-constrained. This means the real driver of when the government can spend, and when it cannot, is inflation. So, if inflation is high, the government should raise taxes (or stop cutting taxes) and cut spending. When inflation is low (as it is now, with core inflation at 1.6%), the government should be spending money. So, currently, we have low core inflation, (I’ll do another post on why I’m using core inflation, and not core inflation + commodities, later) meaning that our fiscal policy should be to increase spending – the GDP formula of “GDP = consumer spending + private investment + government spending + (exports – imports)” asserts this as well. Then, once inflation starts to rise, we decrease spending and raise taxes.

3. I Can’t Decide What I Get Paid

If I was in debt and making $40,000 a year, then I would normally have to cut my personal spending and adjust my lifestyle, or find a new job. However, if I can’t find a new job, I’d have to do the former. (In fact, a big reason the topic argument appeals emotionally to most people right now is because finding a job currently is very difficult.) However, the federal government is not like me – it can simply raise revenues. This can be done by levying taxes, cutting tax exemptions, reducing payments, cutting subsidies, selling bonds, and more. I, however, can’t tax my neighbors and force them to give me money (or “more” money, for that matter).

4. There’s No Due Date

A small point, but a main reason we worry about debt personally is those bills that come in the mail (and then subsequently, the collection agencies). If I don’t pay my debt, I lose whatever it is I bought with it – or something else I own. There’s a due date on my debt; a deadline, so to speak, in which I have to pay my debt.

The federal government doesn’t have this. There’s no day of judgement in which the U.S. government must pay its debts or be taken over. In fact, the U.S. government has been in debt for every year of its existence except 1835-1837. A minor point, but it’s worth noting.

5. I Don’t Owe Money to Myself

Most all of my bills are to entities other than my family – auto loans, credit cards, a mortgage, medical institutions. However, roughly 70% of the debt the U.S. has issued is to itself; creditors such as investors, t-bond holders, government accounts, or the Federal Reserve. In other words, debt you owe to yourself is not the same as debt owed to someone else.

6. Debt Insures Stability

Because of #5, those involved in the debt of the United States are financially invested in making sure that the currency of the federal government stays solvent, lest they not be paid back what they are owed. They would much rather see a stable currency instead of inflation that inflates away the IOUs they hold, and have a vested interest in making sure they can continue to collect interest payments on U.S. debt.

*  *  *

There are quite a few reasons that the federal debt doesn’t equal the household debt. While our long-term deficit is definitely an issue worth doing something about, there are better reasons to do so (long-term solvency, currency inflation, interest payments) than saying we need to “balance” our budget like a family does.

Does Half the Country Pay No Taxes?

I’ve heard this statement a lot recently with the debate on the deficit going, and thought it was worth some investigation. To be fair, it seemed entirely plausible – the current U.S. tax system has quite a few deductions, and those with high income in dividends, lots of properties, or living off of low-income grants would seemingly be plausible. So what did I find?

Well, the claim first comes from the Joint Committee on Taxation, which said that around 51 percent of taxpayers had zero federal income tax liability or had received a refundable credit in the 2009 tax year. Seems legit; the JCT is a non-partisan organization, and often produces good data. However, one point to immediately clarify on before we proceed – taxes in the U.S. are not just income tax, as the JCT report here is analyzing; we have property taxes, payroll taxes, excise taxes, gas taxes, and tons more taxes that most people don’t even see or realize (or care) they’re paying. So the claim that more than 50% of people don’t pay any taxes isn’t really true. 100% of Americans pay some form of tax.

But what about income tax? As it stands, if half of Americans don’t pay that, then it might be time for some reform in that area. Digging deeper, there’s another misdirection play here: the JCT report states that it includes filers and non-filers – meaning that it includes in its percentages people who don’t file taxes at all. What does that mean? Well, it doesn’t really mean tax evaders – what it does mean is people who simply don’t have an income (since income tax taxes, well, income): the retired elderly, students, or the unemployed. How much of a percentage of Americans fall into that category?

Well, we already know that 9.2% of Americans are unemployed, so there’s that part. 60% of the 50% that doesn’t pay income tax (so that’s 30% of all Americans) don’t pay income tax because they don’t make enough money to even fall into the lowest tax bracket: $20,000 (a family of four making less than $22,350 falls under the poverty line in the U.S.). That leaves around 11.8% of Americans left who are either retired or not paying income tax. Wikipedia states that 12.8% of the current U.S. population is 65 years of age and older – very close to our 11.8%! But how many of those would fall under the poverty line and pay no tax? We know that 27% of the retired in 2005 made below the poverty rate (and would therefore be exempt from income taxes), so that means that about 1/4th of the ~12.8% of elderly Americans pay no tax – so around 3.46%. So subtract that from our 11.8% of Americans we still haven’t figured out why they don’t pay taxes, and we’re left with a grand total of 8.34%, or around 1 in every 12 people.

Whew. That was a lot of math. So 1 in 12 people don’t pay federal income tax. That definitely does not come close to 1/2 of Americans – the sleight of hand in the initial claim is quite shrewd. Now, what about that 8%? Well, most would fall into the category of having dependents, using the mortgage interest deduction, or other tax deductions to make it by without paying taxes. In fact, the non-partisan Tax Policy Center states that 16.2% of the 50% not paying federal income taxes have a cash income level above $100,000. How is this so? They explain:

IRS studies show that high-income households that owe no income tax most commonly get much of their income from tax-exempt bonds or from overseas sources for which they get foreign tax credits.

Makes sense. I recommend that article from the TPC in full, as it does a good job explaining how we in America do a lot of social policy through the tax code (commonly done through “tax cuts” legislation). Our problem here isn’t really unequal levels of taxation; it’s a complicated tax code with lots of deductions to encourage purchases, financing, stock trading, giving, and home-buying.

P.S. For more information on tax liability shares, the CBO has published a great document showing how much of a percentage of federal taxes each income level pays here.

Entering the Jungle of the Amazon Tax Debate

Currently, Amazon is trying to negotiate with the Texas government on the collection of sales tax in the state with regard to their online store; they’ve proposed that the Texas Legislature grant them a 4 1/2 year extension from sales tax; in return, Amazon will bring an estimated 5,000 jobs to Texas and give around $300M in capital investments. So what’s really going on here?

In 1992, the Supreme Court ruled that if a company has a physical presence in a state, the state may (though is not required to) collect sales tax on any purchases made from that company. Last September, Texas Comptroller Susan Combs sent Amazon a notice saying that they owed over $269M in unpaid sales tax from Texas; this was on the heels of a large budget deficit in the latest Texas Legislative Session, and the Comptroller’s office – like many others at the capital – were looking for ways to shore up revenues to fill the gap. One of those was by collecting unpaid sales tax like Amazon’s from online retailers in the state.

Amazon holds a distribution center in Irving, Texas, therefore putting it under the focus of the Supreme Court ruling – Texas can legally, if they choose, collect sales taxes from Amazon for the prior and all future fiscal years after 1992. Earlier this Session, lawmakers added an amendment to SB 1, the main budget bill for the session, enforcing the collection of the tax. Governor Rick Perry vetoed a similar bill (HB 2403) that had identical language, and is attempting in the special session this summer to have the tax amendment stripped to grant Amazon the exemption.

Comparing and contrasting the numbers leads one to think the deal is fair; 5K jobs and $300M in investment over 3 years would match the $269M in tax revenue for the 4 years for 2005-2009; however, this would also bar Texas from collecting future tax revenue over the next few years (which would likely be significant, as online sales continue to rise rapidly and are only predicted to grow even more). The tradeoff, then, is the jobs factor – are the 5,000 jobs worth the potential loss in revenue?

One can see both sides. Unemployment in Texas currently stands at 8%; more jobs would definitely help that picture. Plus, it would assure businesses leaving other states and looking to open bases of operations here that Texas is business-friendly (although, to be fair, Texas is already widely known as biz-friendly, and taxing online sales most likely would not shake that belief). What also must be considered are the political implications; the Republican Governor Perry surely does not want to be seen as “raising” taxes on anyone – even if the taxes are just lawfully being collected – or being a governor who pushes jobs away from a state in a time of high unemployment. Especially not a governor who is currently looking into running for the presidency – which includes getting the Republican nomination in a highly anti-tax Republican year.

However, the problems on the other side are harsh – the Texas Legislature is in a revenue crunch, and has been for years. The 2006 business tax cut did not bring in near the amount of revenues that it was intended, and some have argued that it caused a structural deficit in Texas. This was apparent in this years $16B budget deficit; which ended in over $4B being cut to the education funding in Texas. This will likely cause local property taxes to rise for most Texans as school districts try to balance their own budgets over the next year and keep teachers from being laid off (the current prediction of education jobs that will be lost hovers around 96,000). So the Legislature, already worried about the massive cuts in this session, and likely worse ones next session, is not very friendly to letting major corporations skip out on sales taxes – money that could be used to shore up the deficit at home.

Also, there’s a strong argument that the exemption is anti-small business, as all other businesses are required to pay the tax; why not Amazon? Why do large corporations get to skip the tax, but not local shops and stores? As the e-commerce market becomes more and more saturated with small businesses attempting to broaden their sales base, one could make a case that an exemption for Amazon is actually anti-business for Texas.

The debate is a tricky one, and definitely does not hold a black-and-white answer. It will be interesting to see how it unfolds; and I doubt the negotiations are over – that offer from Amazon will likely get more and more appealing as the summer continues.

Ahoy, Redistricting Ahead!

Congressional redistricting will be a part of the Special Session for 2011. Doesn’t require much words, as these excellent interactive maps provided by the Texas Tribune do all the talking:

http://www.texastribune.org/library/data/texas-congressional-redistricting-before-after/

Austin, specifically, will be split into 5 separate districts – the biggest loser in this? Rep. Lloyd Doggett (D), who will shift from a district that voted Democratic 58% in 2008 to one that voted Republican 56%. Lawsuits are coming, as the Houston Chronicle reports.

The real question is, will these make it past the Voting Rights Act? You decide.

The State of the Texas Budget

No detailed post today, but I figured I’d link to an excellent article by R.G. Ratcliffe at Texas Monthly today describing what’s going on with the Texas Budget for this session:

http://www.texasmonthly.com/blogs/burkablog/?p=10476

The money quote:

But nobody is perfect, and the biggest motivator for closing a budget deal in the regular session may have come this week, when House Republicans – especially those from rural areas – started seeing what their tough-as-nails austerity budget would do to their local school districts…Some rural school districts would see cuts in state funding that exceeded $2,000 a student.

Also, in that post, a very helpful link to tracking the effect of actual education job losses per district:

https://sites.google.com/site/txedujoblosses/home

This is what spending cuts in Texas mean, by the way.

What’s all the fuss about the Debt Limit?

Today is a special day  – the U.S. government has hit its “debt ceiling”, a Congress-imposed limit on the amount of debt the government can legally borrow. Currently, it is at $14.294 trillion dollars. Yes, that’s with a ‘t’. So what does this mean? Does it mean the world is ending, as some have claimed? Or does it mean nothing at all, as others have said? The truth is it’s somewhere in between – but to which side it leans is the important part. To make an objective view, lets first get some history about the debt limit.

History and Purpose

In 1917, the U.S. Congress passed the Second Liberty Bond Act, a measure passed at the time to help finance U.S. expenses incurred while entering World War I. This allowed the Treasury to issue what were called “Liberty Bonds”, or long-term bonds that were paid back at low rates to help finance major expenses, therefore holding down interests costs. A similar raise occurred to help finance WWII efforts as well. It has been raised 74 times since March 1962, most of those times small increases to account for inflationary pressure. A few times have been large, however, such as in 2000-2007, when they were raised a total of over $4 trillion.

So if it’s raised almost every year, what’s the point of even having a debt limit in the first place? To be fair, the ceiling’s intentions are good – it’s supposed to help limit Congressional spending. Obviously this is not effective, however, and budget experts agree that the proper channel for such limitations is in forum debate and legislation, where details can be properly worked out and solutions made, rather than a hard cap. Furthermore, the party not holding majority power in government at the time nearly almost always votes against raising the debt limit; making a serious issue often a partisan one. (President Obama voted against raising the limit in 2006, but has since called that a mistake.)

What Happens if We Ignore it?

A big question is what happens if Congress just decides, “Forget it, we’ll just not raise the limit.”? Case in point – today. The government will not shut down; nor will it effectively go into default immediately. The U.S. Treasury has quite a few tricks up its sleeve that it can do to avoid defaulting on the debt, as well. Currently, the U.S. Treasury has delayed pension payments and suspend issuance of securities to state and local governments, and will probably move to cease offering a few of its other securities and investments. This will effectively give the Treasury around another 2 months or so, according to most estimates, but are only temporary measures.

Does this affect anything? Currently, no – bond rates have stayed low today, and one can assume from such that global investors and markets still view the U.S. as financially solvent. However, the closer we get to the limit, the more precarious this becomes.

The Final Countdown

According to most estimates, the Treasury will effectively run out of emergency measures on August 2nd, 2011. What would happen if that occurs without a raise in the debt ceiling? Well, Treasury Secretary Timothy Geithner put out a statement just today on that:

Interest rates for state and local government, corporate and consumer borrowing, including home mortgage interest, would all rise sharply. Equity prices and home values would decline, reducing retirement savings and hurting the economic security of all Americans, leading to reductions in spending and investment, which would cause job losses and business failures on a significant scale.

Default would have prolonged and far-reaching negative consequences on the safe-haven status of Treasuries and the dollar’s dominant role in the international financial system, causing further increases in interest rates and reducing the willingness of investors here and around the world to invest in the United States.

Many economic experts have also affirmed the statement that the dollar would drop significantly as a global stabilizer should default happen (see Greece for an example of such a default on a weak currency), which would drastically affect exchange rates on the dollar, as well as imports and exports.

But that’s not all, apparently; since the government would effectively run out of money (and by law because of the debt limit could not “print” more), military salaries and benefits, Social Security and Medicare benefits, Medicaid payments to states and all tax refunds would be halted immediately. Most discretionary programs (such as parks, grant programs, etc) would be halted, as well. U.S. Bonds would take a tailspin; Former Congressional Budget Director Rudolph Penner is quoted as saying “Our bond market and stock market would crash.” Treasury bond rates would likely rise 0.5%. J.P. Morgan estimates that GDP would drop 1%, and mortgage rates would rise 0.5%.

Of course, Congress would have until August 2nd to deal with this. Most experts think that Congress will not risk such severe repercussions and eventually pass a raise in the limit. Currently, House Republicans are opposing the limit (remember, they are the minority party, as stated earlier). House Majority Leader John Boehner has stated that he will not raise the ceiling without spending cuts (but will not agree to tax or revenue increases designed to cut the deficit). Democrats, with a few exceptions, being in the majority, have supported raising the limit.

Obviously, there is a lot of political games going on. Republicans are following polls that show most of the public oppose raising the limit (although, to be fair, most of the public is woefully uninformed in proper financial policy). So we’ll see what happens in the next couple of months. But, as shown, not raising the debt limit won’t immediately hurt us, but come August, will.

On Campus Carry

Currently in the TX Senate right now is a bill that legislators have nicknamed, “Campus Carry”. A hot button issue, for sure, but what exactly is campus carry? What does the bill entail, and who would benefit from it?

The bill SB 354 (txt version out of committee here) is currently sponsored by 13 of the 31 senators in the Senate, with Sen. Jeff Wentworth, R-San Antonio, at the helm. It passed in the House as HB 1167, by Rep. Van Taylor, R-Plano. Currently it is stalled in the Senate, as Wentworth only has 20 votes – one shy to bring the bill up for consideration. Support for the bill has mainly come from conservative groups in Texas, including pro-gun rights groups; opposition has come from education faculty, teachers, police departments, and college students.

The bill, on the other hand, is a bit misunderstood. Here’s what it actually does:

1. It only allows those carrying a CHL (Concealed Handgun License) to carry guns on campus. To have a CHL, according to Subchapter H of Section 411 Texas Government Code, you have to be:

  • 21 years or older
  • A legal resident of Texas for at least 6 months
  • Have never been convicted of a felony or have fugitive status
  • No Class A/B misdemeanors
  • No chemical dependencies
  • Not be delinquent on child support payments, state taxes, or under a court protective order
  • And a few other restrictions

In other words, it’s pretty difficult to get a CHL license. Only 2% of Texans currently have one. So, statistically, passage of this bill would not mean that suddenly every person you meet on a college campus would be packing.

2. It would allow CHL holders to carry guns inside buildings on campuses. Under current Texas law, CHL holders can already carry guns on campus grounds, and anyone can have a gun in a car parked on campus grounds, CHL license or not. So this bill isn’t about allowing guns on campus – that already is a part of Texas law – just instead on allowing guns within buildings and classrooms. So, yes, under this law, someone could be armed next to you in your class. However, they would still have to have a CHL.

3. You would still have to be 21 years of age or older. Period.

4. Private colleges may opt-out of this law, and may ban guns in any form on their campuses, as they are privately owned institutions and thereby not under the same restrictions as publicly funded universities.

5. There would be an exemption where this law would still bar guns on or about “hospitals” on campuses – basically any medical facility.

6. Sporting events are still off-limits: no guns allowed. Colleges can regulate storage for resident students.

By passing this bill, Texas would become the 2nd state to do so – the first being Utah. It’s sparked a fierce debate, and I thought I’d outline the cases for and against.

The pro-side argues on the side of self-defense; basically, allowing guns in buildings will give students the ability to defend themselves; they cite recent shootings, saying that students could have prevented or lessened violence. They also argue that state-funded institutions should abide by U.S. 2nd Amendment rights.

Opponents to the bill state that this would decrease security on campuses, as it hinders security officials from being able to determine the aggressor in violent situations. It also would increase the chance of collateral damage should such a gun battle occur. Police departments and campus security officials have been stridently opposed to the bill, claiming it would undermine their ability to provide a safe environment on campuses.

The bill currently lacks a vote to pass; however, there is speculation that adding an opt-out clause for public universities could help its passage. Also, there have been proposals that would ban residents of college campuses (such as those living in dorms) from carrying and storing weapons.

Personally, I don’t think allowing guns in classrooms is a good idea. However, if passed, I don’t think this will cause an OK Corral shootout a week as some opponents of the bill have claimed. That said, the whole idea of someone being able to carry a weapon in already passionate college campuses is something I’m not keen on. We’ll see what happens.

The Public vs. Private Question

Recently, the Texas Legislative Budget Board (LBB) posted an analysis on the effect of the House Appropriations Committee’s budget showing a loss of 271,746 jobs in 2012 – and 335,244 in 2013 – if the proposal were to pass. This has stirred up a lot of talks – and questions – about what can be done to minimize the pain across the board.

An argument that has been made recently is that public sector employees – such as teachers, state agency workers, and others – should take a cut in benefit packages to ease the burden on the state. What specific benefits are we talking about here? A few of them might be:

  • Base Salary
  • Health/Insurance Benefits
  • Retirement Investments (ERS for state employees, TRS for teachers)

The argument has gone that public workers receive too high benefits. The state cannot afford them. They need to be cut, and the public employees need to help sacrifice to bear the load of the budget deficit. This leaves us to ask one crucial question – are these claims true?

Well, it depends on what you specifically are asking about. Let’s look at each area. What about base salary? Some have claimed that public sector employees earn more than (or even the same as) private sector equivalents. However, this is simply not the case; public sector workers in Texas earn on average 17% less than their private counterparts.

Well, what about benefits? Surely after those are added in, and then compensated, the net amount averages out with public employees on top? Average costs of health insurance premiums on the private market are around $350 per month for an individual currently. The state currently contributes 100% of state employees benefits, which averages around $480 per month, or a plan around $130 more than an individual plan bought on the private market. For dependents, the state covers around 50% of the premiums per dependent. So, that amounts to a savings of $1560/year. Now let’s take that amount and look at it in the context of an average state employee salary of around $39,000. Adding those numbers gets us a cost benefit of $40,560 as a total, benefits-added salary.

So how does $40,560 compare to an equivalent private sector salary? Well, 17% more than our average state salary above would be $45,630, or $5,070 more than the public employee’s earnings – after health benefits. If we assumed that the private employee didn’t get insurance and bought the same exact plan on the independent market, the private employee’s salary would drop to $44,070, or $3,510 per year more than the public sector employee. So, while yes, the health benefits are better for public employees, the difference in salary simply doesn’t make up the gap.

That leaves TRS/ERS investments next; these funds tend to be very conservative with low yield and aren’t really better than a 401k or IRA, more common in the private sector.

In summary, the overall benefits and compensation of public sector workers is not really “better” than their private equivalents – one could more strongly make the opposite case.

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