The Long Awaited Deficit Post

I really don't think that our congress will agree to a reasonable solution to the federal governments budget woes. I imagine that, come January 1, 2013, there will be increased taxes, increased debt ceiling, and increased spending.

President Obama wants to increase taxes on the rich. Let's take a look at what this actually means:

There are almost 138 million tax returns with positive AGI (and these are the returns who pay income taxes. Some are single people, some are joint filers). The top 5% of Americans have a combined income of just under $2.5 trillion, and pay $508 billion in taxes.

Here's my data (source):



The US Governments budget deficit for 2012 is $1.3 trillion. If we want to eliminate this deficit, we could confiscate half of the remaining income from this small group every year without growing the total debt (as long as spending doesn't grow--fat chance). To do this, the effective tax rate (which is different than the "marginal tax rate") would be 73%. Does anyone really think it makes sense to take that much of anyone's money? This is pre-FICA, Social Security, property tax, sales tax, and all those other taxes that governments like to hit us with.

This means that a household that currently makes a very comfortable $154k/year now makes around 40. Okay, not the end of the world, right? But who are these people? Doctors, lawyers, and small business people (among others, yes). If you went through ten years of post-high school education, and suddenly, the return on investment is wiped out, how do you pay those loans back?

It's simply not realistic to get this money from this small group. Even if Congress raised taxes on the top 50% of Americans, the average effective tax rate would almost triple, from 12.5% to 31.7%. Raise your hand if you want your own takes to go up this much during a recession.

At the end of the day, taxes would have to go up an unreasonable amount to bridge the gap. But what about spending?

This has been covered by a lot of people, so I'll keep it brief: there have been very, very few years in which the US Government has spend less than it's brought in. Only eleven years since 1940. As a percentage of GDP, "revenues" have been very stable: between 15 and 20; spending, 17-22. This is bad news.

So the question becomes: after fixing this huge deficit/debt situation, which is better: a high tax/high expenditure government, or a low tax/low expenditure government?

First, taxes. Pretty much everyone agrees that raising taxes on goods like cigarettes will lead to fewer people smoking them, as they become more expensive. Economic data largely show this to be true. Apply the same concept to everything else: if you want less of it, tax it. What happens if we tax soft drinks? People will drink less. Alcohol? Same. And labor? It's intuitive. Everyone will work to aquire an income to a certain point. After that, you have to decide where you want to spend the next marginal hour: watch TV, work, start a new business, spend time with your kids. If you're suddenly taking home two thirds or less of what that previous hour would have given you, your decision could be different. That could mean that the business you thought about starting becomes too risky, and the rest of us never get to use that product.

Next, spending. Most of the studies I have seen show that government spending actually hurts the economy. I'll let smarter people than myself spell it out:

In addition to crowding out private spending, government outlays may also crowd out interest-sensitive investment.¹¹ Government spending reduces savings in the economy, thus increasing interest rates. This can lead to less investment in areas such as home building and productive capacity, which includes the facilities and infrastructure used to contribute to the economy's output.
An NBER paper that analyzes a panel of OECD countries found that government spending also has a strong negative correlation with business investment.¹² Conversely, when governments cut spending, there is a surge in private investment. Robert Barro discusses some of the major papers on this topic that find a negative correlation between government spending and GDP growth.¹³ Additionally, in a study of 76 countries, the University of Vienna's Dennis C. Mueller and George Mason University's Thomas Stratmann found a statistically significant negative correlation between government size and economic growth.

Emphasis mine. RTWT.

If we want economic growth, we need to have low taxes and low government spending. Economic growth is what allows the poor in the US to live as kings could not even 100 years ago. It's the development that brought us cars and planes, air conditioning and TV, refrigerators and the ability to buy things from our mobile phones at the click of a button. Economic growth is what we need to bounce back from this recession, and more spending and taxes will only make us worse.

I really hope my prediction at the top of the page is wrong, but the political class seems to be content to kick the can down the road until this government is bankrupt, so they can blame someone else.

Private Police Forces

This is the first in what I intend to be a long line of posts exploring how (or if) the free market would give us better solutions than government. 

Of course we will start with what many consider to be an "extreme" option. Even most libertarians I know would say that one legitimate role of government is to protect the population from crime and violence. Let's start with the arguments against, and the responses to it.

1) Private police forces would only serve the wealthy. The simplest response to that: this is what happens now. As The Daily tells us, those who live in Detroit (a city known for not being wealthy) are not getting police protection (HT to Reason). Mara Gay writes:

The last time Brown, 73, called the Detroit police, they didn’t show up until the next day. So she applied for a permit to carry a handgun and says she’s prepared to use it against the young thugs who have taken over her neighborhood, burglarizing entire blocks, opening fire at will and terrorizing the elderly with impunity.

 Average response time for police in Detroit is 24 minutes, according to Gay, which is more than double many other major cities.

Worse, government police forces spend their time harassing innocent people. According to the ACLU, New York City's stop and frisk policy means that nine innocent people get harrassed in order to catch one small time drug user.

The effect of all this is that the poor don't get any of the benefits of having police, and are actually oppressed by them. In fact, The Washington DC court of appeals has ruled that the police are under no obligation to protect you.

2) Poor people could not afford a private police force. This is almost an extention of #1, but worth answering. Gay states in The Daily that Detroiters are paying $10-$200 a month. According the National Center for Policy Analysis, it IS much more expensive in some cities, but the reason for that are regulations that severely restrict who may act as private security. Some cities only allow off-duty police officers to act as security, and costs can be $30 an hour. It would seem that government interference in this case makes the poor worse off.

3) Government police need to be the ones to solve the crimes. Also valid, but how are they doing at that? One thing I don't ever want to happen to me is murder. But if that ever happens, I want them to catch the bastard. Unfortunately:

Despite dramatic improvements in DNA analysis and forensic science, police fail to make an arrest in more than one-third of all homicides. National clearance rates for murder and manslaughter have fallen from about 90 percent in the 1960s to below 65 percent in recent years.

The majority of homicides now go unsolved at dozens of big-city police departments, according to a Scripps Howard News Service study of crime records provided by the FBI.

The FBI goes on to say the reason: crimes of passion (with an easy to identify assailant) have been replaced by gang and drug related murders.

4) If we have private police forces, they'll start acting like warring gangs to increase their territory. Sounds to me like this is another area in which they would then be acting like governments currently do. It's certainly possible that, as private police forces gain popularity, that they may decide to use violence to eliminate the competition. After a period of consolidation, we'd end up in the exact same situation that we are in today. However, this is all highly hypothetical. Should we really choose the devil we know, given all the clear victories that would come with the change? The danger, in this situation, is that we would lose control over who protects us, right? Do we have control now?

Verdict: Putting the protection of citizens in the hands of a political class means that this protection becomes politicized. If you don't like how the politicians run things, well, you get one chance every two, four, or six years to weigh that against the hundreds of other things that they've done, and choose to keep them or not. If you employ a private company, you can make that change any day. A privatized force will, and does, deliver many advantages, and does appear to be the superior choice.