For many of us, myself included, the topic of economics can get a little confusing, particularly when it goes beyond balancing our checkbook. It seems economists have all kinds of categories other than simple debits and credits. When it comes to our government, it becomes even worse. That is because our elite politicians like to keep things murky, allowing them to spend more of our money. They have categories call unfunded, discretionary, entitlements, emergency, deficit, and others . In fact, if you or I conducted our personal finances like the government, we would either be broke or in jail, maybe both.
All of this does not have to leave us uninformed however. I researched over two dozen articles to try to find out what is actually going on, and I believe I got a good handle on the subject. In explaining this here on the website, I will try to use terms that we all understand, and keep the blinding array of numbers to a minimum. I did discover that if we look at simple numbers with some explanations, it makes understanding this stuff easier. The end result I did come up with is that basically our government needs to do some things soon.
First of all, the federal government must start living within its means. It cannot continue to spend more than it takes in as that only passes a burden on to our kids and grandkids. Secondly, the feds must do something about the entitlements that it is committed to pay. If left unchecked, they will take up over 50% of what the government pays out by the middle of the century. They must be totally overhauled and a way found to pay for them. Third, the government needs to devise a tax program that is fair and leaves more money in our pockets. It cannot expect to continually increase taxes just because the politicans want to enact some new program.
There are a lot of "myths" out there about the economy. I put myths in quotes because these ideas have some foundation in truth, but they aren't always fully explained. Politicians seeking to get elected like to give us the negative side so as to make it appear that we need them to solve some big problem. Of course there are needs that should be addressed by the government. We are not a nation of uncaring and selfish people. Most of us want to provide help to others, see to it that the environment is protected, and think that corporations need a watchdog to keep them in line. A good question to ask regarding this is, who is watching the watchdog? That is our job.
It also became apparent in doing this research that as Americans, we are going to have to give up some goodies in order to get the balance sheet balanced! We should consider carefully the words of President Kennedy who asked the nation at that time to "Think not what your country can do for you, but what you can do for your country"! We cannot continue to look at the government as the goose that lays the golden eggs. There is, as you have probably heard many times in your life, no free lunch. The government can't give us something unless it first takes it away from another. The government is not a producer of goods, earning money. It has none of its own, it was ours first.
With that in mind, I will go down the list in no particular order. I'll give you a topic, give some numbers and a brief explanation of what I think. I believe overall, that our freedoms are best protected when the government is kept in line. If we continue to give it more authority, it will end up costing us more than money. The quote above from historian Edward Gibbon really does say it all! Our job is to keep our country free, for us, for our kids, and for all future generations. If that is not our goal, then what is?
PERSONAL INCOME
There has been a lot of talk about the income Americans earn, and it is one of the more distorted subjects in the realm of economics. One big argument has been that the middle class, defined as those earning between $30K - $100K, is declining, and it is true. What is not emphasized however is the reason for the decline. What I learned is that the middle class is declining because more of that group has moved up the scale. In previous years, the percent of those in that category was 12%, but it has doubled to 24% in the last 10 years, while the number of those at the lower income level remained static. So, there is a smaller middle class because we are doing better, and it is also true that the bottom 20% of wage earners had their income go up by 80%.
It is also a fact that many lower income people receive significant government benefits that alleviate their difficulties. One in six people receive some type of government assistance. Even the poorest among us live better than George Washington could have imagined, better than any of the wealthy industrialists of the 19th Century.
In the gathering of statistics about income, there is a fundamental flaw in the method. Apparently, in most case, the statistics do not follow individuals throughout their careers, but only look year to year. If the method of tracking individuals is used, we find that as people get older and their work opportunities increase, they move rapidly up the economic ladder. The lower level income earners tend to be young, high school dropouts, single mothers, or folks with some sort of disability. In other words, people do improve over time, so much so that the middle class is shrinking because workers are doing better faster.
One other aspect of this has been what is called income disparity, the fact that the very rich earn 200 times what the average person does. This fact is relatively meaningless however for a few reasons. First, these very rich are few in number. Second, this large difference is due to bonuses and stock options. Lastly, the fact that they make mega-bucks doesn't take away anything from the rest of us. It has become a populist tool for politicians to use in order to distract us from what they are doing. In the end, being in America is a very good thing.
FEDERAL SPENDING
This is one area where our government is truly the guilty party because there is so little discipline. The deficit for this year was $160B, which some argue is very small when considered against the GNP (gross national product). I mentioned in the introduction how our elite politicians have used some creative accounting methods to hide what they really are spending, so this figure doesn't reflect reality. If we calculated in all government expenditures, such as entitlements, we would see this figure go through the roof.
Indeed, the U.S.A. borrows $20B per day from selling treasury bonds to primarily, foreign nations. Today, the country is $9T (yes, trillion) in debt, about $375,000 for every man, woman, and child. Japan and China hold over $1.5T in treasury notes alone, not even counting the Arab states. If we consider that at the current rate, entitlements such as Social Security and Medicare are going to comprise over 50% of what the feds will have to pay out at mid century, and our defense budget already takes up over 4%, it is hard to imagine how citizens down the road are going to be able to pay for the profligacy. These enitilements must be reformed soon, but of course partisanship has prevented that from occurring.
With regards to entitlements, it is interesting to note that the so-called PayGo rules our elites have been bragging about do not apply to entitlements, they also do not affect older programs that can be expanded, and they have no effect upon what is called discretionary spending. It only applies to new programs. How it will work is still murky, and it hasn't been applied to anything yet.
Certainly, it has not affected pork barrel spending, commonly known as earmarks. In 1994, there were 4,126 earmarks in the federal budget. By 2007, under Republican control, they jumped up to 15,877. This year, with the Democrats in charge, the number is over 30,000. What is being done to stop this waste by the politicians? Nothing.
Even the Farm Bill is out of control. President Bush asked for $4.9B this year. Congress replied by making it $15B. There are one million recipients of farm aid, and they aren't all farmers by any means. Included are scores of multimillionaires who live in Manhattan but own phony tax sheltered farms, millionaires that hard working middle class folks like you and me are supporting. Despite the rhetoric about tax cuts for the rich, the truth is that they do pay the most in taxes (see my page on taxes here), but they utilize loopholes, shelters, and other gimmicks to hide much of their income, which is a prime example of why we need a total reform of the tax code.
FREE TRADE
The most contentious issue in the economic sphere is without a doubt, free trade. Globalization is having a huge impact upon nations around the globe, and as the economic powerhouse of the world, the US is feeling the pressure the most. As other nations move into the world markets, it is inevitable that they are, at least in this intial phase, going to be taking production and market share from the nation that has the most, and that is America.
America's GNP is now $14T, a staggering amount. Imports are about 17% of that total. As for US exports, in 2006, they totaled $1.4T, no small amount. What that means is that due to globalization and free trade, more and more markets have opened up to American goods that would not have been able to be exported without free trade, just as American markets have been opened up to other nations. The trade deficit for this free trade expansion is $5T to the US. This means a lot of America dollars are held by other countries, and due to that over supply, the dollar is now at the weakest it has ever been.
Some folks see this as a big problem. Nations with excess dollars are buying into formerly American only corporations, but no one has explained how this is a problem. The back and forth of trade on a global scale has meant cheaper prices of goods, and jobs for the poor of other nations. Does anyone think that we Americans should stop buying Toyotas and Hondas, many of which are made here in America? The fact that some companies have partial foreign ownership is unimportant. The important part of that is to be sure that companies that produce items necessary for our national security are not owned by potential enemies.
Many speak about factory jobs that have gone overseas, and it is true that we have had some people lose out on good paying jobs. The benefit overall to Americans has still been on the plus. As other countries industrialize, the jobs that are created are lifting people out of poverty. As these nations develop a middle class of their own, they will be buyers, and some of what they buy will be made in America. What we need the government to do is to ensure a more level playing field in order to keep American workers and American products competetive.
What is needed at this point is patience and a hands off approach from Washington. The growing businesses in other parts of the world have been of benefit to those people obviously. In many places, even with a growing population, statistics show that infant mortalities are down. This type of benefit will also be good for America as other countries become more self sufficient and able to take care of their own. Businesses that are profitable are good. They provide jobs and benefits, and they create jobs for suppliers, truckers, utilities, etc. They also pay taxes, and they are opportunities for investment that make up the portfolios of many 401K retirement plans here in America.
If our government begins to over-regulate and over-tax businesses, they will not be able to expand. It is the expansion of business that creates wealth, and government intervention retards that process. Part of the reason for the rebellion that started our great nation was stated in the Declaration of Independence. In referring to the English King, it was written: "For cutting off our trade with all parts of the world; for imposing taxes upon us without our consent". Our fellow citizens from that time opposed the Stamp Act as oppressive, and the Boston Tea Party was not against any company, but against the King who wanted to keep control. Although the global economy is causing us some pain, in the long run America, which has the smartest, most hardworking, and productive people, will be better off.
ENTITLEMENTS
There is no doubt that there is a crisis in the entitlement programs the federal government has created over the years. The two biggest programs are Social Security and Medicare. Both of these can be solved and would be already if our elite politicians would actually do something for the country instead of engaging in partisanship.
The Social Security Trust Fund that was created to provide for our retirement has been anything but held in trust. The elites, when faced with a growing pile of money sitting around, decided to spend it on all sorts of other programs. Now there is little left except a pyramid scheme that anticipates that current workers will pay for the retirees. Sadly, the math doesn't add up.
The Social Security program should be salvaged. In the modern world where we do not even own the property we live on unless we continue to pay taxes, SS has been the only rope for most people. For many of us, if we had to depend upon personal savings to live out our old age, we would find ourselves living in the streets. It is the only federal government entitlement program I support.
Three things need to be done to save the Social Security program. First of all, the SS money should remain untouched in a "lock box" as the elites like to call it. Of course, they forget to tell us that it was designed this way to begin with. Secondly, the income cap (the amount of income that we actually pay SS taxes on) should be raised to $150K, maybe even $200K. Quite frankly, anyone earning that kind of income can easily afford to pay a little extra. Third, newcomers to SS should be allowed to invest a portion of the SS tax in personal accounts. It is well documented that such personal accounts will yield more income at retirement. The investment amount allowed is not great, but the benefits all the way around are. Despite the rhetoric, such personal accounts will not destroy SS. It is only an optional investment opportunity that some would take.
As for Medicaid, it should be part of a reform of our total health care system, and I deal with that on my page about healthcare.
CONCLUSION
The economic times are not easy. The world is undergoing rapid changes that are affecting every nation. Global free trade will be good for the world, and for America. What we need our federal governement to do is get its house in order, then stand back and allow the people of this great nation to utilize their own ingenuity, creativity, and energy to move America forward. As a free people, we have been successful for over 200 years. The greatness of America is not necessarily measured in dollars and nuclear submarines. It is the freedom provided to that indomitable spirit of men and women to build, improve, and create. It is the desire to excell, to enjoy the fruits of our own hard labor, to give to our kids and our grandkids the opportunities to reach their own potential.
Our government has a great responsibility to make these opportunities secure. We the people will do the rest. If the elites who are in charge would take seriously their jobs and stop mortgaging the financial future by deceiving the people into thinking they are able to get something for nothing, we will all be better off. Sadly, the two major parties have failed miserably in their performance. We should hold them accountable. The question is, are we afraid or do we have the guts to govern ourselves as a free people? Are we going to vote the lesser of two evils because it seems safer that way, or are we going to stand up and reclaim our inheritance? That is our job and it is our choice!
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