What Should I Do?

How to Explain the Current Economic Situation to Friends & Family

Sunday, March 13, 2011, 4:46 PM

Given its simple elegance in addressing a question frequently asked on this site, this post has been elevated from the forums section. It has been updated by site members rhare and travlin since its first appearance (the original post can be read here).

I've been working on a way to get across to friends and family how bad the economic situation has become. I find one of the biggest problems is that when numbers are in the billions and trillions they are very hard to imagine, and people get this glazed/deer in the headlights look. So I decided to try to scale the numbers in a way that can be more easily visualized. 

Below is an updated version, with many thanks to members of PeakProsperity.com community who suggested changes/corrections, and particularly to Travlin for rewording much of the message to make it a better story. Hopefully this version will help convince others of the serious nature of the US fiscal outlook. 

My Troubled Relative 

I need your advice. I have a relativewho is in financial trouble. He makes $50,000 a year, but he spent $74,591 last year, and his prospects of making $50,000 this year look kind of bad. There's a good chance he will get a pay cut.

Unfortunately, he’s been overspending for quite a while and has charged $295,632 on credit cards. He’s been lucky enough to get low teaser rates, and when those have expired, he’s been able to transfer the balances to other low-rate cards. So he keeps charging $24,591 per year beyond his income. If he can’t keep rolling over his debt at super low rates, the interest will quickly eat him up.

But, that's not his worst problem. He convinced his family he was a great investor. His parents gave him a portion of their income for many years, and he promised he would make regular payments to them and cover their medical care when they got too old to work. The problem is, he spent all the money. He also has dependents who are poor, and he promised to help them out, too. To cover those promises, he should have $2,372,953 sitting in a bank account earning an interest rate that keeps up with inflation. But the money is all gone.

So what should he do? Well, his Republican friends, who say they are responsible with money, have decided he must really cut spending to get things under control. There are lots of things he can live without, so they say he should reduce spending by $1,292 per year. His Democrat friends say that’s too much. They feel it would be a great hardship for him to cut spending that drastically, so reducing it by $137 should be about right.

So here’s the picture:

  • $50,000: Income
  • $74,591: Expenses
  • $24,591: Deficit
  • $295,632: Short-term revovling debt at artificially low rates
  • $2,372,632: Unfunded promises
  • $1,292: Republican friends budget cuts
  • $137: Democrat friends budget cuts

So, what does the future look like for my Uncle Sam? Do you think he can keep going like this much longer? What about his family who are counting on the promises he made to them? Do you see any possible solution other than bankruptcy? 

Multiply the above numbers by 47,620,000, and you get the fiscal picture for the United States Government in 2010:

  • $2.381 Trillion: Revenue
  • $3.552 Trillion: Budget
  • $1.171 Trillion: Deficit
  • $14.078 Trillion: Debt
  • $113 Trillion: Unfunded Liabilities (Social Security, Medicare, Medicaid)
  • $0.0615 Trillion ($61.5 Billion): Republican proposed budget cuts
  • $0.0065 Trillion ($6.5 Billion): Democrat  proposed budget cuts

Sources

Wikipedia: http://en.wikipedia.org/wiki/2010_United_States_federal_budget

US National Debt Clock: http://www.usdebtclock.org/

CNN: http://www.cnn.com/2011/POLITICS/03/09/photos.proposed.cuts/index.html?hpt=Sbin

Calculations

3.552T Budget / 2.381T Revenue * 50,000 Income = 74,591 Expenses

74,591 Expenses - 50,000 Income = 24,591 Deficit

1.171T Deficit / 2.381T Revenue * 50,000 Income = 24,591 Deficit

14.078T Debt / 2.381T Revenue * 50,000 Income = 295,632 Short Term Debt

113T UFL / 2.381T Revenue * 50,000 Income = 2,372,953 Unfunded Liabilities

61.5B Republican cuts / 2.381T Revenue * 50,000 Income = 1,292 Republican cuts

6.5B Democrat cuts / 2.381T Revenue * 50,000 Income = 137 Democrat cuts


This What Should I Do? blog series is intended to surface knowledge and perspective useful to preparing for a future defined by Peak Oil.  The content is written by PeakProsperity.com readers and is based in their own experiences in putting into practice many of the ideas exchanged on this site.  If there are topics you'd like to see featured here, or if you have interest in contributing a post in a relevant area of your expertise, please indicate so in our What Should I Do? series feedback forum.

If you have not yet seen the other articles in this series, you can find them here:

This series is a companion to this site's free What Should I Do? Guide, which provides guidance from Chris and the PeakProsperity.com staff on specific strategies, products, and services that individuals should consider in their preparations.  

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38 Comments

Travlin's picture
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Rhare This is a simply

Rhare

This is a simply brilliant way to illustrate our problem.  I have one suggestion to add to Poet’s idea of presenting this as a description of my friend Sam.  (Post 1 in the thread.) http://www.peakprosperity.com/forum/how-explain-friends-current-economic-situation/54377#new  I believe you calculated one ratio to apply to all the numbers to bring them down to a comprehensible scale.   To end the story of Sam dramatically we can say, “Now multiply these numbers by X, and this accurately describes the financial condition of the United States Government.”  So what number is X?

Very nice work Rhare.

Travlin 

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The value of X

Travlin wrote:
To end the story of Sam dramatically we can say, “Now multiply these numbers by X, and this accurately describes the financial condition of the United States Government.”  So what number is X?

I used the revenue as the base number so:

X = 23,810,000  (2,381,000,000,000 ÷ 100,000)

I also added the following in the letter I sent to the editor of our local paper:

If the US completely dropped all Social Security, Medicare, and Medicaid promises and decided to balance the budget and pay off the debt already incurred in 30 years at 3% interest the current budget would still need to be cut by more than 1/2 (55%).

Poet's picture
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Uncle Sam

I'll recap what I said before...

Really great analogy! This is really a great way to talk about the situation with people!

Obviously customizing the approach to suit the audience and to make it really hit home, that's what your post is about.

As you know, I would ask people I know if they could help with advice for a friend I have, whom I'll call "Sam". Maybe at the end, after receiving financial advice from them, I would reveal that it's actually a relative. It's "Uncle Sam". Their jaw should drop about then...

For those who may want to emphasize a different aspect of the "mob", rather than say "mob" they could try changing that to "parents". Many years ago, "Sam" started collecting money from his parents and promised invest it for them for their retirement. He sent them statements every year showing how much they had contributed and what they could expect to get. But now they're REALLY heading into retirement and have medical issues and bills looming.

But "Sam" actually squandered all the money as soon s he got it. Now what is he going to have to do? Do you think he will either have to borrow more, or reduce what he promised he would give them? Sam has "kids" (food stamps, welfare, defense, etc.), too.

Poet

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Perfect antidote to NY Times Paul Krugman

Not sure if y'all have read Mr. Krugmans NY Times op-ed from Mar 10, 2011 where he says there's no reason to get so worked up about the budget:

First, the nation is not, in fact, “broke.” The federal government is having no trouble raising money, and the price of that money — the interest rate on federal borrowing — is very low by historical standards. So there’s no need to scramble to slash spending now now now; we can and should be willing to spend now if it will produce savings in the long run.

Of course he doesn't mention that we're borrowing the money from ourselves and debasing our currency and exporting inflation as a result.

http://www.nytimes.com/2011/03/11/opinion/11krugman.html?_r=1&hp

green_achers's picture
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Is the US really paying 30%

Is the US really paying 30% interest on its debt?  That's astounding.

rhare's picture
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Huh?

green_achers wrote:
Is the US really paying 30% interest on its debt?  That's astounding.

The comment about 30% was comparing to a consumer with a low interest card that suddenly finds the interest rate at something like 29.99% (as has been discussed on other forums).  Currently the US is paying around 3% on debt (more info here as well).  How much longer that can continue is anyones guess....

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The Exponential Equation

This is an excellent article.  Thanks!

The next piece of info that I would throw at people is a basic overview of exponential equations.  Like Albert Bartlett said "The greatest shortcoming of the human race is our inability to understand the exponential function."  When people start seeing the huge difference between an interest rate of 4% to 8% to 12%, etc. on the national debt they start to grasp the very precarious situation we are in.

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You beat me to it.  I have

You beat me to it.  I have been using a similar (but not nearly as good) analogy for the past few months when trying to get people to realize the ridiculous predicament we are in.  Well done!

I have found in my discussions that people are just clueless as to the difference between a billion and a trillion!  One guy asked me "but don't other people owe us a bunch of money too?"  Good Grief. . .

Rector

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Any of you getting through?

This is fascinating and very interesting!  This seems like an excellent way to explain IT to someone.  However, I'm very pessimistic anyone will actually listen and be transformed by this.  Have any of you gotten through to somebody who was previously clueless, disinterested, distracted?  What's been your percentage of success/failure.  I've gotten through to one person completely, and that happened the same way it happened to me: The Crash Course.  But he's one of only 3 people I've spoken to who've watched the whole course, everyone else is "too busy."  However, there have been a few who took me at my word (without understanding what's going on for themselves) and asked me what they should do (good grief!).  I don't want to tell someone what to do if they don't know why and could make the decisions themselves. 

We deserve the business and political leaders we have because they are just like us, just more so.  We live beyond our personal means.  They live beyond their corporate means and national resources/tax base.  We put off important and painful choices, which just makes things worse.  So do they, on a much larger scale. We lie and deceive to cover up our mistakes and moral failings.  So do they, on a much bigger stage.  If WE would pay attention and wield the power WE have, this could have been prevented and even at this late stage we could still choose the least of the bad paths available to us.   However, WE are no wiser or better than the fools running the ship.  Sorry, I'm very pessimistic, but still trying, like you.  This approach might reach a few, and that would be worth it.

Sound collision. Brace for impact.

ronyissar's picture
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mistake in the unfunded liabilities

great comparison.

only you have a small mistake - the link to the 144T unfunded liabilities isn't for today's situation, only a projection to 2015.

Today it stands at approximately 113T.

http://usdebtclock.org

sjdavis's picture
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Nice work - where's defense?

Nice work rhare, think the analogy achieves much of the goal of distilling the numbers to friends and family.  Billions are hard enough to fathom, Trillions a whole other realm of comprehension.

My question is, where are the spending cuts in defense?  That's what completes the argument.  Defense is roughly the same number as Social Security.

rhare wrote:

If the US completely dropped all Social Security, Medicare, and Medicaid promises and decided to balance the budget and pay off the debt already incurred in 30 years at 3% interest the current budget would still need to be cut by more than 1/2 (55%).

Given the 55% spending cuts required as described, we're only talking about $6B and $60B in proposed cuts for either party.  Once the real concept of trillions are understood, it's obvious how unserious both parties are about solving the budget.  Including defense spending makes the argument both serious and apolitical.

With that, I think the statement describing the republican side as "extremely fiscally responsible" is quite misleading.  A better description of those cuts would be something like "more than democrats, but insignificant nonetheless."

But as far as a frame of reference to help friends and family with the numbers, good job and thanks.

The most concerning line in the link you provided is 

The 2010 Budget proposed by President Barack Obama projects significant debt increases.[13][14] The debt is projected to nearly double to $20 trillion by 2015, but is expected to increase to nearly 100% of GDP by 2020 and remain at that level thereafter.

How is it projected to increase to nearly 100% of GDP within 1 decade, yet that is not the headline?  Strange.  Consider those increasing debt payments in a decade of rising yields and the story goes from strange to scary.

rhare's picture
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Thanks for all the great comments....

I had no idea this would resonate with so many people when I put it on the forum.   For those that have asked how well this analogy works, I have no idea, as I sent it to a few friends at the same time I posted it on the forum.  I'm hoping it will help show people the sheer magnitude of the financial problem we face.

I generally have people respond in several ways when you try to talk to them about the US fiscal situation:

  1. We will just raise the retirement age and reduce benefits a little and everything will be okay.
  2. We just need to tax the rich some more and that would close the budget.
  3. We need to stop spending on the wars and military and that would solve the problem.
  4. We will just be like Japan and struggle through our own lost decade.
  5. We need to cut the waste in government and that will close the budget gap.

It's funny because I have learned that I can predict which answers I will get based on someone's political leanings. SmileNone of the answers even remotely show a understanding of the size of the problem and they show no awareness of any impact from the other 2 E's.

One nice thing about the smaller numbers is you can use tools like mortgage calculators that won't handle billions or trillions.  Any calculations done using the smaller values are proportional to the larger values.  That is how I came up with the following:

  • If we completely default on Social Security, Medicare, and Medicaid - that is end the programs completely tomorrow and decide we want to pay off the debt in 30 years at 3% (assuming we could somehow finance it for 30 years - who carries the note?), we would have to cut spending by 56% to 1.67T.  If we wanted to keep current spending the same and still pay off the debt we would need to raise taxes by 80%.  And both of those scenarios assume we ditch the entitlement programs.
  • If we want to keep current spending levels and finance the entitlement programs over a 30 year time frame at 3% we would need to immediately raise taxes by 385% (so almost 4x the tax payments).  I don't know about anyone else, but I certainly could not afford to pay 4x in taxes.

If that doesn't show how completely screwed we are, I don't know what will.  It's numbers like this that lead me to the conclusion that none of the current debates matter at least as far as resolving our current fiscal crisis.   Since I don't think there is any way citizens are ready to accept the type of cuts necessary I'm resolved that we will have a catastrophic collapse at some point.  I'm just hoping I can get my friends and family to wake up in time to prepare for what's ahead.  The situation in Wisconsin is really scary because it shows how upset people get over what are truly insignificant cuts compared to what's going to occur.

thc0655 wrote:

Sorry, I'm very pessimistic, but still trying, like you.  This approach might reach a few, and that would be worth it.

Sound collision. Brace for impact.

We are in complete agreement.

sjdavis wrote:

With that, I think the statement describing the republican side as "extremely fiscally responsible" is quite misleading.  A better description of those cuts would be something like "more than democrats, but insignificant nonetheless."

Perhaps my sarcasm was too subtle. Wink

sjdavis wrote:
Defense is roughly the same number as Social Security.

Actually only current spending is about the same.  Social Security unlike defense has promised payments in the future with a NPV (net present value) of 14T.  My point was not really to indicate what we need to cut, just that we need to make really really big cuts, and the entitlement programs are such a large part of the problem that they will have to be cut significantly.  I completely agree with you that the growth in the debt not making the headlines is very very scary, but it just shows how most citizens are unaware of the situation. 

ronyissar wrote:

only you have a small mistake - the link to the 144T unfunded liabilities isn't for today's situation, only a projection to 2015.

Today it stands at approximately 113T.

What's a few trillion among friends. SurprisedI have seen quite a few different values for the NPV of the entitlements.  I suspect the value shown at us debt clock is probably more accurate, and I was sloppy just quickly looking for a value when I wrote the original post.

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Thank You Thelma and Louise

First Rhare, I love the analogy wish I'd thought of it (too).

It seems more real when you can compare it to your actual family finances. Many of us get so upset because we try to explain to someone that, "Hey, if you were broke and your bills were already more than your income, would you sit around discussing where to stay on your planned trip to Hawaii, or what color your new SUV should be, etc." That is the insanity we seem to face almost daily. 

Finally, now that you have put the numbers down and shown that even with complete cuts of virtually all the big liabilities we still won't be free of this burden, I feel like we should take the lead that Thelma and Louise has shown us and just put the pedal to the metal and get it over with. Let's crash this thing and if anything is left, start from scratch.

SS

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sublime resignation

Well,

I suspect, the scale can be decreased to fit the income level of the person being addressed. Sort-of.

Why do I say that? Because the above scenario is EXACTLY how Americans have been living for almost a generation. When I graduated from college, I thought if I could make $12,000/yr I would not know what to do with all of the extra money. I would say, that within 3-5 years that amount became $35-50K/yr. Meaning, the life style, (House, 2 cars, annual vacation, retirement fund) went from $12K/yr to maintain to $35K/yr within 3-5 years.... now, did my salary increase that much? NOPE. I lived with my parents in the beginning and then moved to a modest apartment. Luckily,  I had a company car at the time and my $12K salary afforded me relative comfort. My cohort of friends however, lived the life. Running credit card debt up and home mortgage as well. They had big weddings and even bigger houses. Their children, now adults, have learned how to live the same way.

My point is, even a $100K/yr scenario may bee too high for some to comprehend. Lots of folks I know have to live on less than that and most likely know all too well and have to use the credit shuffle to stay alive.

So then, why do their eyes glaze over when you speak to them about such things? I think part of it is because they already know, deep down, how bad it is because they already live it from one paycheck to the next.They are already in survival mode. They have conceded that there is nothing that can be done. All that is left is hope and prayer.

C.

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rhare wrote: Since I don't

rhare wrote:

Since I don't think there is any way citizens are ready to accept the type of cuts necessary I'm resolved that we will have a catastrophic collapse at some point.

+1 on that statement.  300+ million strong, all unwilling to accept shared sacrifice.

rhare wrote:

Perhaps my sarcasm was too subtle.

Maybe that, but I'm also a terrible judge of written sarcasm.  Whether a sports or economics forum, I've mis-interpreted sarcasm before.

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Adjust to median household income?

RNcarl wrote:

Well,

I suspect, the scale can be decreased to fit the income level of the person being addressed. Sort-of.

My point is, even a $100K/yr scenario may bee too high for some to comprehend. Lots of folks I know have to live on less than that and most likely know all too well and have to use the credit shuffle to stay alive.

Good point Carl.  It might be more effective to calculate this based on the median household income, which I think is about $45,000 per year.  $50,000 is close and a nice round number, so just cutting Rhare's numbers in half might be more effective.

Travlin 

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How to visualize the debt

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excellent stuff...

...rhare -- another arrow in the ol' Quiver o'Reality.  One can never have too many, since most people tend to keep on ignoring reality no matter how full of arrows their hind end is.

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I think the $100K income

I think the $100K income figure is just right actually.  It's higher than the average household income, but maybe that's appropriate considering many people think of the US as a successful, wealthy nation and $100K/year is to many a goal post of 'success'.  The idea of your outwardly successful uncle Sam earning $100K per year yet loaded down with debt seems perfect for the situation, and yet $100K/year is still within the realm of comprehension for most.

All in all a great article.

- Nickbert

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rhare, I 100% agree in your

rhare,

I 100% agree in your scenario and I 100% agree that we are headed for a catastrophic failure because of the lack of fortitude to address the real issues.  However, even I have a problem with comparing government debt with personal income.

I would have to add to the analogy that Uncle Sam is in bed with all the banks, creates and prints all the money, has all (or a lot) of the guns, and has naked pictures of all the people that have loaned him money.  So, it doesn't matter how much he spends as there is no one that can hold him accountable.

Somehow, despite the reality of the situation (at least from a personal perspective), it seems like Uncle Sam has 9 (or maybe unlimited) lives or at least has most of the world convinced that he does.  Even those of us who don't believe that there's a real wizard behind the curtain can't seem to find the lever to expose him.

Clicking my red shoes,

Richard

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Income

I understand the political realities we face in Washington, but it seems to me the analogy completely glosses over the "income" side.  Unless I'm mistaken, the top Federal tax rate right now is close to 38%.  In 1960, that same rate was 90%.  And some corporate giants (like B of A) pay no Federal income tax at all.

As an independent, I'd tell Uncle Sam to get a second job. Or in the real world, ask Congress to raise the tax rates for high income earners and corporations.  I'm not saying we shouldn't figure out a way to cut expenses, but it doesn't make a whole lot of sense to ignore potential revenue sources.  There's no reason, other than lack of political will, that we can't increase revenues at the same time we cut expenditures.

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Taxes Won't Be Going Up - And Don't Matter Anyway

t.tanner wrote:

I understand the political realities we face in Washington, but it seems to me the analogy completely glosses over the "income" side.  Unless I'm mistaken, the top Federal tax rate right now is close to 38%.  In 1960, that same rate was 90%.  And some corporate giants (like B of A) pay no Federal income tax at all.

As an independent, I'd tell Uncle Sam to get a second job. Or in the real world, ask Congress to raise the tax rates for high income earners and corporations.  I'm not saying we shouldn't figure out a way to cut expenses, but it doesn't make a whole lot of sense to ignore potential revenue sources.  There's no reason, other than lack of political will, that we can't increase revenues at the same time we cut expenditures.

T.Tanner

Please note that, though taxes were high back in the 1950s, etc. there are also many different kinds of trusts, vehicles, loopholes and deductions that are not available today. The effective tax rates on some of America's riches families back then still ended up being ZERO.

I don't think higher taxes - especially on the rich - will happen. Politicians campaign on tax cuts. Their political contributions come from high income donors.

Do you remember just a few months ago when the Republican minority in the Senate threatened to block ALL legislation - not just fiscal legislation - unless the expiring Bush Tax cuts were also extended to cover income beyond the first $250,000 per year? Among other things, those extra Bush-era tax cuts amounted to those in the highest tax brackets being able to keep an extra $46 for every $1,000 in earned income, an extra $20 for each $1,000 in capital gains. Expiring the tax cuts would have put taxpayers back to 2003 tax rates. They were willing to effectively shut down Congress for those making more than $250,000 per year.

So as you can see, taxes are decreasing at the federal level despite record deficits. The political support is just not there. And people at the bottom are barely scraping by. Remember, 100 million people (that's roughly 1 in 3 Americans) live in households where income is $25,000 or less.

There may very well be some tax increases - especially on Social Security or Medicare - but that won't be enough to offset a problem that is growing faster than tax revenues can increase. (Again, do you recall that for 2011, workers get to keep 2% more of their wages via reduction in Social Security contributions but the SSA will still act like they contributed 6.2% instead of 4.2%? Doesn't sound fiscally responsible to me! )

So yes, the "Uncle Sam" analogy is about right. (And I'm glad I was able to help contribute to the ideas in the current edition.)

Poet

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ttanner wrote:I understand

ttanner wrote:
I understand the political realities we face in Washington, but it seems to me the analogy completely glosses over the "income" side.

I do not believe you truly understand the realities since you seem to be clinging to the "tax the rich" or "tax the corporations" mantra:

Total household wealth in the US: $54.2 Trillion

Unfunded Liabilies (NPV): $113T

Notice that $113T is vastly larger than $54.2T, so exactly how can you tax or confiscate to even remotely cover a $113 trillion?  You could take all assets from everyone in the US and not even be 1/2 way to covering just what is needed in the trust funds today to cover promised outlays.  Even if you did confiscate from the rich, who would you sell the assets too?  If you take the assets from the wealthy, their is no one left to buy those assets (since it's not generally cash that you can redistribute - you would have to sell houses, stock, bonds, cars, household stuff) and as soon as you flood the market with those assets their value will drop.

ttanner wrote:
Unless I'm mistaken, the top Federal tax rate right now is close to 38%.  In 1960, that same rate was 90%.  And some corporate giants (like B of A) pay no Federal income tax at all.

Yes, it's called not double taxing.  A company can pass the profits through to it's shareholders who then pay the tax.  I don't intend on addressing how high taxes should be, but if you tax it at the company then you have less to tax as income/capital gains for shareholders. 

Also, it's important to realize that once you start taxing at a high enough rate, eventually you loose the ability to tax.  Say you are sitting around with $100K trying to figure out what to do with it, you can choose to invest in a company that might pay you 10% (if your lucky) for your investment, meaning you make $10K/year.  However, after a 90% tax, you end up with $1K / year, or about 1% return.  A lot of people would say, screw investing it, I'll just buy a bigger house or a nice car instead.  So now you have reduced the ability for a company to grow and potentially hire employees which reduces your potential tax base.  IMNSHO - taxing income is stupid, you want to tax spending.  You want to encourage investment and discourage consumption.

ttanner wrote:
There's no reason, other than lack of political will, that we can't increase revenues at the same time we cut expenditures

True, but the problem is the expenditures and promised expenditures are so large that they will never be paid.  We will either default outright or via inflation.

Here are a couple of other interesting numbers I came across while working on this response that help put things into perspective:

Total annual payroll in the US: $5.1 Trillion

Market Cap of all US public companies:  $15 Trillion

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$113T unfunded liabilities

rhare wrote:

ttanner wrote:
I understand the political realities we face in Washington, but it seems to me the analogy completely glosses over the "income" side.

I do not believe you truly understand the realities since you seem to be clinging to the "tax the rich" or "tax the corporations" mantra:

Total household wealth in the US: $54.2 Trillion

Unfunded Liabilies (NPV): $113T

Notice that $113T is vastly larger than $54.2T, so exactly how can you tax or confiscate to even remotely cover a $113 trillion?  You could take all assets from everyone in the US and not even be 1/2 way to covering just what is needed in the trust funds today to cover promised outlays.  Even if you did confiscate from the rich, who would you sell the assets too?  If you take the assets from the wealthy, their is no one left to buy those assets (since it's not generally cash that you can redistribute - you would have to sell houses, stock, bonds, cars, household stuff) and as soon as you flood the market with those assets their value will drop.

ttanner wrote:
Unless I'm mistaken, the top Federal tax rate right now is close to 38%.  In 1960, that same rate was 90%.  And some corporate giants (like B of A) pay no Federal income tax at all.

Yes, it's called not double taxing.  A company can pass the profits through to it's shareholders who then pay the tax.  I don't intend on addressing how high taxes should be, but if you tax it at the company then you have less to tax as income/capital gains for shareholders. 

Also, it's important to realize that once you start taxing at a high enough rate, eventually you loose the ability to tax.  Say you are sitting around with $100K trying to figure out what to do with it, you can choose to invest in a company that might pay you 10% (if your lucky) for your investment, meaning you make $10K/year.  However, after a 90% tax, you end up with $1K / year, or about 1% return.  A lot of people would say, screw investing it, I'll just buy a bigger house or a nice car instead.  So now you have reduced the ability for a company to grow and potentially hire employees which reduces your potential tax base.  IMNSHO - taxing income is stupid, you want to tax spending.  You want to encourage investment and discourage consumption.

ttanner wrote:
There's no reason, other than lack of political will, that we can't increase revenues at the same time we cut expenditures

True, but the problem is the expenditures and promised expenditures are so large that they will never be paid.  We will either default outright or via inflation.

Here are a couple of other interesting numbers I came across while working on this response that help put things into perspective:

Total annual payroll in the US: $5.1 Trillion

Market Cap of all US public companies:  $15 Trillion

rhare

I'm confused about $113T unfunded liabilities.  If I understand correctly, the unfunded liability is the difference between the benefits that have been promised to current and future retirees and what will be collected in dedicated taxes and Medicare premiums. So the $113T are spread owed over many years. So leaving all other deficits aside, do you have an idea how much has to be saved every year to balance this $113T ?

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NPV entitlement calculations (maybe?)

SailAway wrote:
I'm confused about $113T unfunded liabilities.  If I understand correctly, the unfunded liability is the difference between the benefits that have been promised to current and future retirees and what will be collected in dedicated taxes and Medicare premiums. So the $113T are spread owed over many years. So leaving all other deficits aside, do you have an idea how much has to be saved every year to balance this $113T

You are correct.  The numbers are the NPV and assume some given rate of inflation over I believe 75 years.  I haven't been able to find what inflation numbers were used but the $113T was calculated by the Federal Reserve which I believe (as do many others) massively underestimates inflation.  So, I recommend calculating at 0% (assume they have the inflation number right), and 3% and 5% just in case they are off a bit. Smile

I have never done these calculations, so please if anyone sees anything wrong let me know.  Of course all the numbers, including those from the Federal Reserve are pretty big WAGs. To do the calculations I used  a mortgage calculator and simply scaled the values by a billion.

If you trust that theFederal Reserve, then 113T @ 75 years at 0% - no need for the mortgage calculator here - 113T / 75 = 1.506T / year.  At 3% we would need 3.790 trillion/year, and at 5% it would be 5.787 trillion/year.

So best case to balance the budget at current spending rate, cover the entitlements and pay off the existing debt (@3%/30 years), we need (all numbers in trillions):

2.381 (current revenue) + 1.171 (deficit) + 0.712 (debt payment) + 1.506 (entitlements) = 5.77T in revenue, or 250% more than current revenue.

If the Federal Reserve is off by 5% on the interest rate they used, we would need:

2.381 (current revenue) + 1.171 (deficit) + 0.712 (debt payment) + 5.787 (entitlements) = 10.05T in revenue, or 422% more than current.

I don't see us making any of these numbers work, raising taxes that much would crush the economy and make the problem even worse.  That's also a big assumption that we could finance the current debt at 3%.

Note: I would really love Chris to comment if this off the cuff calculation is close...

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In his recent interview on

In his recent interview on this site,  John Williams stated that if the federal governement used GAAP and taxed both individuals and corporations at 100%, we would still be running budget deficits.  We can't get there from here.

Nate

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Poet -  I agree.  There's

Poet -  I agree.  There's very little chance that we'll choose to raise taxes on those most able to afford them.  Which is too bad, as it's typically better to climb down a cliff than to jump off and trust you'll land on something soft.  

To clarify my point, I'm not suggesting that we can solve our financial woes by increasing taxes.  But any tactic that allows us to manage our descent deserves serious consideration.  The fact that one of our major political parties has embraced the old "Know Nothing" banner from the 1840s is no reason to ignore one of the few cards we have left to play.

Which brings me to rhare.  I appreciate your long and detailed comment - it was truly a thing of beauty - but I'm afraid you lost me toward the end when you wrote, "So now you have reduced the ability for a company to grow and potentially hire employees which reduces your potential tax base.  IMNSHO - taxing income is stupid, you want to tax spending.  You want to encourage investment and discourage consumption."

Help me out here.  I understand your desire to discourage consumption - it seems a pretty standard theme around these parts - but why are you so worried about propping up growth?  Aren't the two ideas, if not mutually exclusive, at least on opposite sides of the aisle?  And isn't the concept of limitless expansion in a finite physical space one of the key problems we're facing?  

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Distributed vs centrally planned - investment vs consumption

ttanner wrote:
Help me out here.  I understand your desire to discourage consumption - it seems a pretty standard theme around these parts - but why are you so worried about propping up growth?  Aren't the two ideas, if not mutually exclusive, at least on opposite sides of the aisle?  And isn't the concept of limitless expansion in a finite physical space one of the key problems we're facing?

Just because we are faced with limited growth or even reductions doesn't mean you don't need capital to build/create things that are needed for the future.  It's not necessarily propping up growth, but rather allowing capital to flow to those areas where it's most needed.  I believe the free market and highly distributed systems generally lead to the better solutions than any centrally planned method - this is because distributed systems tend to try many more things and the viable solutions survive the rigors of competition.  In a centrally planned solution generally fewer options are tried and your relying on luck of the planner to pick a correct solution. 

Now you may not agree with my private versus government choice, but I ask you, isn't nearly all government spending consumptive (healthcare, welfare, war, entitlements)?  Do you see that changing anytime soon given the size of the budget for entitlements and defense spending?

As far as why tax spending, it's because we are faced with limits and we need resources to be directed where they will do the most good, and that is capital investment over consumption.

ttanner wrote:
The fact that one of our major political parties has embraced ...

Do you honestly see any difference between the two parties?  They are both for large government, out of control spending, and the status quo.  This can easily be seen by the example of the cuts proposed by the Republicans and the Democrats - both show absolutly no acknowledgement of the serverity of the situation.  Neither party has shown even the slightest awareness of the energy crisis we face.  The Republicans stick with the old we have as much oil as we need in the US and we just need to drill, while the Democrats push alternative energy with little understanding of the severity of the energy crisis we face (ie - solar/wind won't fix it).   Neither side appears to have even a basic comprehension of the magnitude of the energy problem.

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Do Uncle Sam's Income/Expenses include Social Security?

I'm wondering if the numbers in your story include revenue from the Social Security and Medicare taxes as well as social securtiy and medicare payments.

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Social Security included in Income/Expenses

steveyoung wrote:
I'm wondering if the numbers in your story include revenue from the Social Security and Medicare taxes as well as social securtiy and medicare payments.

Based on the descriptions at Wikipedia (where the budget data was pulled) and the numbers from usdebtclock.org.  I would have to say yes it does include both the revenue and payouts.  This year I believe they are pretty close to equal to slightly more spending (a few 10s of billions) than revenue.

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I prefer percentages over amounts

Well,

I like percentages. I understand them better.  I know anything more than 100% means a deficit. I can spend 100% of my Maypo. I cannot spend 110% of it. I can't spend 10% more than I have.... Oh, wait, yes I can... I have that cool little credit card in my pocket!! Then, I can pay the 10% back so that the amount I "borrowed" equals 300% of what the original amount was that I used to buy those cool new fake spinner hub caps for my Yugo!!!

When we are confronted with logic like this that has been perpetuated for over a generation, it is no wonder our "leaders" are clueless.

Anyone remember the real estate investing books from the '80's that said to use credit cards to buy foreclosures, fix them up and flip them before the payments came due on the cards? Those are the folks who are now in charge.

C.

BTW, both political parties in this country are two sides of the same rotten sandwich.

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who's going to pay the bill? The rich, of course.

Well, maybe the politicians won't raise taxes on the rich voluntarily, but if the 98% of not-filthy-rich NFR get it figured out correctly, then perhaps they will let their policitican's know that either they raise taxes on the rich or the NFR are going to revolt.   Really, if 98% of a population gets together to overturn 2%, then they are going to have their way. A war with such odds would only take a few weeks to conclude. Don't forget, people are broke now, but they still consider themselves middle class.  They have two cars, 4 TV's,  a few computers, ipods, etc.  Wait until it sinks in that they are poor.  the US is a like a chicken with it's head cut off at the point where the head has been cut, but it is still running around not knowing it is dead yet.  People (not this group)  don't face reality until they have to and even then they will hold out.  

The really interesting question is why do so many of the NFRs want to cut services to the poor, rather than tax the rich.  I think it's because they want to be like the rich themselves, and hold out the hope they will be, and they revile the poor.   We are unfortunately at a stage of human development where we blame people for their circumstances and figure they must have done something to deserve it, just as some idiot pundits recently claimed that the Japan disasters were retribution from God.  This plays very nicely into the hands of the oligarchs, who after all, "deserve" their just rewards because they are all so superior.

It occurs to me that when the system collapses, the first will be last and the last will be first, because those countries living close to the land will be able to survive, while our highly interdependent society will not function.  In China, 20 minutes from the skyscrapers, it is agrarian.  What is the backk up system in the US?  You know what they say, the higher you climb, the further you have to fall. 

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The Last Will Decline Faster

Carodox wrote:

It occurs to me that when the system collapses, the first will be last and the last will be first, because those countries living close to the land will be able to survive, while our highly interdependent society will not function.  In China, 20 minutes from the skyscrapers, it is agrarian.  What is the backk up system in the US?  You know what they say, the higher you climb, the further you have to fall. 

Carodox

While it is entirely possible that, when the system collapses, the first will be last and the last will be first... During the long declining road towards that collapse, the first will continue to be first, and the lower-middle and the last will suffer even more.

Look at fuel prices and food prices, for example. The poor of Egypt spend 50% of their money on food, and it's already subsidized. Rising food and fuel prices hurt them hard. Here in the U.S., our poor also spend a lot on food, but that's also mitigated by food stamps. But the more money you make, the less you spend on food and fuel.

In a decline-to-collapse situation, things get worse faster for the lower-middle to last - amongst countries and within countries. But the first will remain first, and the ones with wealth will always manage.

In some of the prime areas of Madagascar, for example, Saudi Arabia, China, and Korea have locked in contracts to control and farm hundreds of square miles of land. They know what's up.

As oil prices increase, wealthy countries will continue to be able to purchase fuel from the countries producing it, while poor countries without oil to export will experience real problems, and the poor within the countries exporting oil will find themselves priced out of the oil market.

As there's less funding sent to Third World countries for basics like food aid, vaccinations, medical care, their lifespan will get brutishly short - especially with HIV/AIDS stalking the land..

Poet

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Carodox wrote:The really

Carodox wrote:
The really interesting question is why do so many of the NFRs want to cut services to the poor, rather than tax the rich.

You missed the point.  Taxing the 2% and where do you end up? Exactly the same place.  The reason for the article and subsequent posts was to hopefully get more people to stop blathering on about taxing the rich and wake up to the fact that we have so far over promised on services that there are not even remotely close to enough rich to tax.

As for why the NFR don't want to see the taxes on the rich is because all the tax proposals that have come out from the left clearly are aimed at those in the upper 50% that actually pay any taxes, not the upper 2%.  Who cares if some billionaire gets a bit more favorable taxation if it means the people who make the 100-250K and have small businesses don't get crushed in the rush to tax.

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The Deficit Explained In Shots Of Jack Daniel's

The Deficit Explained With Shots Of Jack Daniel's

Although it should be noted that the deficit was actually higher in the years before 2008 as well, with the costs of the wars hidden off the budget until Obama brought them back onto the budget... And obviously the deficit is actually MUCH higher if you recall that the government spends any extra Social Security money it receives and doesn't consider that deficit spending.

But in terms of the proposed cuts... Face it. Neither the Republicans nor the Democrats in Congress are serious. They're both delusional.

Poet

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Food security

Poet wrote:

In some of the prime areas of Madagascar, for example, Saudi Arabia, China, and Korea have locked in contracts to control and farm hundreds of square miles of land. They know what's up.

I know that Saudi Arabia is 'buying' large contracts for riceland right here in Thailand. It is already bordering illegal business because no foreign entity can own land. Fake Thai companies with paid nominees are setup especially to circumvent this law. But when SHTF those contracts will be voided. At that moment it will be each country for its own. And if you not have enough amounts of food production demestically and don't have a large enough army to go fight for it, well bad luck and see your people die by the hundreds of thousands.

It is one of the reasons i moved to Thailand, because here food is falling from the trees.

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It Depends

Brainless wrote:

Poet wrote:

In some of the prime areas of Madagascar, for example, Saudi Arabia, China, and Korea have locked in contracts to control and farm hundreds of square miles of land. They know what's up.

I know that Saudi Arabia is 'buying' large contracts for riceland right here in Thailand. It is already bordering illegal business because no foreign entity can own land. Fake Thai companies with paid nominees are setup especially to circumvent this law. But when SHTF those contracts will be voided. At that moment it will be each country for its own. And if you not have enough amounts of food production demestically and don't have a large enough army to go fight for it, well bad luck and see your people die by the hundreds of thousands.

It is one of the reasons i moved to Thailand, because here food is falling from the trees.

Brainless

I would say that, if Thailand remains a  food-exporting nation that is more than capable of feeding its people, then the Saudis have little to fear, because there will be enough for all. So long as the people are fine, the Saudi lands in Thailand will be fine.

In areas where the people are suffering and there is a shortage of food, then either they will take over like the Blacks attacking White farmers in Zimbabewe, or the Saudis will increasingly have to bribe an increasingly corrupt and brutal government to keep the people down.

Poet

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