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Hawking: Humans at risk of lethal ‘own goal’ – BBC | “Nuclear war, global warming and genetically-engineered viruses are among the scenarios he singles out.
And he says that further progress in science and technology will create “new ways things can go wrong”.
Netflix: The most feared force in Hollywood? LA Times |
German car makers are getting hyped about hydrogen – Ars Technica |
Why it’s not so hard to make an innocent person confess – SA |
Much of Making a Murderer goes on to explore whether or not his confession is accurate, and how it could have arisen. … There are three main reasons why people confess to crimes they did not commit.
The first is that they are voluntarily giving a false confession. … The second is that they are being compliant. Third, they may have difficulty separating fact from fiction.
Making a Murderer digs deep into the problematic police assumptions and strategies that may help to generate a false confession. What the show does not explore is how, after you get an initial statement from your suspect, you can also make them believe it. This is what I do in my own research, in which 70% of participants have told me all about how they committed crimes (assault, assault with a weapon, and theft) that never happened.
For Catering to Girl Consumers, Lego Angers Feminists – RCM |
Perhaps predictably, Lego has been condemned by feminists and culture warriors for making Lego too “girly.” Those familiar with the Friends line already know how, instead of red and blue bricks for making fire stations, the new line designed for girls features purple and pink blocks (among other colors) for constructing yachts, homes, and restaurants. …
The Lego Friends line, which is just as rigorous in terms of construction difficulty as any other line, was designed to appeal to girls in ways that Legos did not before.
Lego wanted girls to buy their products, so it designed products that appealed to them, based on market research.
Map Envisions What a Worldwide Subway System Would Be Like – Wired |
Tinder and the data of mating – FastCo via Marginal Revolution |
The US economic recovery has seen GDP growth average around 2%, the Eurozone about 1%. Likewise, the US unemployment rate has fallen by half to 5%, the EZ is still in double-digits at 10.5%. Not a great recovery here, but a whole lot better than across the Atlantic. That, despite a 25% corporate tax rate there vs. 40% here.
In “The ECB and the Fed: A comparative narrative,” Dae Woong Kang, Nick Ligthart, and Ashoka Mody investigate the reasons for the divergence (italics mine):
Although the Great Recession was viewed – especially in Europe – as mainly a US problem, the Eurozone has been implicated from the start and felt virtually the same impact in the early stages. The US economy, however recovered much faster. US stock prices and GDP regained their pre-crisis levels by late-2011; the Eurozone barely reached that stage in 2015. The US policy response was much more proactive. Fiscal stimulus was greater than in the Eurozone in 2008-9; the US also returned to fiscal austerity later, in 2011 rather than in 2010 as the Eurozone did. More important was the US authorities’ active resolution of banking stress; Eurozone banking problems were allowed to fester.
And throughout, US monetary policy was much more aggressive. In a recent paper, we used a narrative approach to identify the role of monetary policy during the Great Recession. The US Federal Reserve lowered its policy interest rate (the Fed Funds rate) from 5.25% in September 2007 to 0-0.25% in December 2008. At that point, the Fed also initiated quantitative easing and began ‘forward guidance’, making public its intention to keep interest rates low ‘for some time’.
The ECB’s first reaction to the Great Recession was in July 2008, and it was to raise the policy rate (the main refinancing rate). After the Lehman bankruptcy in September 2008, the ECB joined an internationally coordinated rate reduction on 8 October. But then the ECB’s slow pace of rate cuts was interrupted by two more hikes—in April and July 2011. The policy rate was brought to near-zero only in November 2013; modest quantitative easing began in September 2014 and was expanded in January 2015.
The above chart, by the way, is from their analysis. Anyway, all this echoes what I have been writing, including the following posts:
Anti-poverty group Oxfam has published a report making some flashy claims about global inequality. Among them: Just 62 individuals had the same wealth as 3.6 billion people — “the bottom half of humanity” — an estimated $1.76 trillion. Also, the richest of the rich are hiding $7.6 trillion in a “global network of tax havens.”
Now apparently one of Oxfam’s main data sources was a wealth report from the bank Credit Suisse. Note this chart from the report showing which regions have what share of rich and poor and in between:
Now, look at that bit of blue at the top left-hand corner, which suggests North Americans (Europeans, too, in aqua) represent a big chunk of the the poorest 10% of people in the world. China on the other hand, has virtually none of the world’s poorest. That, even though the US and Canada have a per capita GDP of about $70,000 a year versus less than $10,000 for China. Really?
Well, it all makes more sense when you realize “wealth” is defined as the present value of all assets minus debts. So, as the CapX blog pithily points out, “A young investment banker with student debts is deemed one of the poorest people in the world. However, a rural farmer in India with minimal savings is considered richer than the young investment banker.” Likewise this from the Adam Smith Institute:
By Oxfam’s measures, the poorest people in the world are recent Harvard graduates with student debt piles. The bottom 2bn don’t have zero wealth, but rather about $500bn of negative wealth. The poorest person in the world is richer than the next 30% put together. Having negative wealth may actually be a sign of prosperity, since only people with prospects can secure loans. But there is a bigger issue with the narrative: more meaningful measures show greater equality. Those in the middle and bottom of the world income distribution have all got pay rises of around 40% between 1988-2008. Global inequality of life expectancy and height are narrowing too—showing better nutrition and better healthcare where it matters most.
And this from Felix Salmon of Reuters:
Some poor people have modest savings; some poor people are deeply in debt; some poor people have nothing at all. (Also, some rich people are deeply in debt, which helps to throw off the statistics.) By lumping them all together and aggregating all those positive and negative ledger balances, you arrive at a number which is inevitably going to be low, but which is also largely meaningless. The Chinese tend to have large personal savings as a percentage of household income, but that doesn’t make them richer than Americans who have negative household savings — not in the way that we commonly understand the terms “rich” and “poor”. Wealth, and net worth, are useful metrics when you’re talking about the rich. But they tend to conceal more than they reveal when you’re talking about the poor.
It’s also very much worth mentioning that global extreme poverty — defined as $1.90 a day by the World Bank — has fallen to 700 million, or 9.6% of the world’s population, from nearly 2 billion, or 37.1% of the worlds population in 1990. Did this happen through a global wealth confiscation and the closing of tax havens? No. It’s due to faster economic growth in Asia. And how do nation’s achieve that? From The Economist:
The world now knows how to reduce poverty. A lot of targeted policies—basic social safety nets and cash-transfer schemes, such as Brazil’s Bolsa Família—help. So does binning policies like fuel subsidies to Indonesia’s middle class and China’s hukou household-registration system (see article) that boost inequality. But the biggest poverty-reduction measure of all is liberalising markets to let poor people get richer.
Links and quotes for Jan. 15, 2016: How Wikipedia changed the world, rich states, poor economies, and more
View related content: Pethokoukis
How Wikipedia changed the world – The Telegraph |
Although Wikipedia itself is not raking in profits, it has disrupted an array of social and business models during its meteoric rise, ranging from encyclopedia publishing, to secondary school education.
When Encyclopedia Britannica closed its print operation in 2012, its President Jorge Cauzu told media: “Britannica is insignificant compared to the size of Wikipedia. We cannot post an article on every cartoon character, celebrity, or sports figure.” Anecdotally, the impact of Wikipedia on encyclopedias has been dramatic.
Of course, it wasn’t just Wikipedia that decimated the print business of encyclopedias – it was computers themselves.
The government wants Silicon Valley to build terrorist-spotting algorithms. But is it possible? – Fusion |
A Millennial Mom’s Guide To CES – TechCrunch |
Tesla embraces new market – vegans – CNBC |“All the car companies want sustainability cred,” said Jack Nerad, executive editorial director at Kelley Blue Book.”
25 Million New Jobs Coming to America, Thanks to Technology – Fortune |
Connecticut and New Jersey: Rich States, Poor Economies – Justin Fox |
I’ve been writing a lot lately about the diverging economic prospects of big cities and suburbs, so the possible explanation that immediately struck me is that Connecticut is all suburbs. (Which isn’t strictly true. But the state’s largest city, Bridgeport, has only 147,612 people, so it’s not far off.) That got me thinking about the suburb-filled state on the other side of New York City, New Jersey, which isn’t as fiscally bad off as Connecticut but is also a very affluent place that has had its share of economic woes lately.
Are conservative and libertarian law professors more productive? – Marginal Revolution |
A new study, forthcoming in the Harvard Journal of Law and Public Policy, suggests that conservative and libertarian professors are more productive than are their colleagues. James Cleith Phillips, a Ph.D. student at the law school at the University of California at Berkeley, compared the publication and citation records of faculty members at the 16 highest-rated law schools in the country. He found that conservative and libertarian professors at the law schools were more productive than their peers. The paper says this finding is consistent with (but does not demonstrate) the thesis that conservative and libertarian applicants face some discrimination in the hiring process.
As I write this, the US stock market is down again, losing about 6% for the new year in total. And the most current economic reports are pretty lousy, nudging big banks to lower their GDP forecasts. Here is JPMorgan:
We are lowering our tracking of real annualized GDP growth in Q4 from 1.0% to 0.1%. Two reports out today contributed to this downgraded assessment. First, retail sales in December came in rather shockingly weak, which was accompanied by modest downward revisions to October and November retail sales. Second, the business inventories report for November suggest a fairly aggressive push by business to reduce the pace of stockbuilding last quarter. We now see inventories subtracting 1.2%-points from growth last quarter, offset by a disappointing but not disastrous 1.3% increase in real final sales.
We are also lowering some our outlook for Q1 GDP growth from 2.25% to 2.0%. While the inventory situation should turn to being roughly neutral for growth, the quarterly arithmetic on consumer spending got a little more challenging after this morning’s retail sales figure, which implies flat real consumer spending in December. We now see real consumer spending in Q1 at 2.5%, versus 3.0% previously. We are leaving unrevised our outlook for 2.25% growth over the remaining three quarters of the year. We will discuss in a separate email the policy outlook, which in any event is currently being swayed more by the inflation data than the growth data.
Never like to see the Zero Handle. So is the US Two Percent Economy headed into recession? Well, I am not going to head into the weekend on a down note, so I give you this from Deutsche Bank:
Falling markets induce recession forecasts quicker than you can scream sell. A Bloomberg survey puts the odds of a US slump this year at one-in-five, double three months ago. Really? In the 12 months leading up to each of the past five American recessions, annual auto sales growth was negative in at least eight months. No single such month so far. And cheap oil keeps those wheels turning. Growth in miles driven, which typically collapses before a recession, is near a decade-high. It’s not just cars Americans are getting around in – planes were also 85 per cent full in December. Finally, for market watchers worried about a flattening yield curve, the ten year-two year spread fell to a post-2008 low of 1.15 per cent this week. The last two times that happened a recession was at least three years away.
Thanks to Ted Cruz, the idea of instituting a value-added tax here in America is firmly part of the policy debate in the GOP presidential primaries. But it wasn’t so long ago that Democrats were pretty hot about the idea. Back in 2009, liberal think-tank boss and outside Obama adviser John Podesta said big budget deficits meant a value-added tax is “more plausible today” than ever. Indeed, lots of Dems were talking about it, including then House Speaker Nancy Pelosi.
I recall attending a 2009 Center for American Progress event — the think tank Podesta ran — and enthusiasm for an immediate VAT was running high. This from a blog post I wrote back then when I worked at Reuters:
So I am at this CAP thing on the deficit where talk of higher taxes was hot and heavy. Both Robert Rubin and Roger Altman seemed to imply that the financial markets will force action sooner rather than later on the deficit — and that means higher taxes. Outside WH adviser and CAP president John Podesta was talking up the VAT over the weekend, and Altman said today that the WH will have to start doing $500 billion to $700 billion a year in annual deficit reduction during this term. Maybe $400 billion of that should come through higher taxes such as a national VAT.
And a VAT wasn’t just the Dems’ preferred choice to close the budget gap, but also to pay for Obamacare. (What’s more, since it was a consumption tax and not an income tax, Team Obama could maybe argue it was still keeping its middle-class tax pledge.)
Now none of this means a VAT would necessarily be a bad idea or somehow should be off the table. It has its pluses and minuses. Certainly it makes the tax code more scalable if we need to sharply boost the US tax burden. My guess — about as far as I would go — is that a VAT wouldn’t be an optimal tax reform, thought it certainly could result in a more pro-growth code. But there are trade-offs.
Thursday’s GOP presidential debate in South Carolina featured a feisty back-and-forth between Ted Cruz and Marco Rubio concerning Cruz’s tax plan. Rubio said Cruz’s “business flat tax” is really a value-added tax that will blindfold “the American people so that they cannot see the true cost of government.” Cruz argued that a VAT is “a sales tax when you buy a good,” and his new tax is instead “imposed on on business.”
Make no mistake here. Cruz is proposing a VAT add-on to the existing personal income tax system. Specifically, it’s a “subtraction-method” VAT. Cruz explained it pretty accurately in a Wall Street Journal op-ed. A business would pay a 16% tax on its “gross receipts from sales of goods and services, less purchases from other businesses, including capital investment.”
The Tax Foundation — which analyzed the Cruz plan and also describes it as a VAT — explains it this way:
For example, suppose you love watching Disney movies on Netflix. Netflix’s gets revenues from your subscription, and then it uses some of that money to pay Disney for the rights to Disney content. If we counted that money both at the Disney level and the Netflix level, we’d end up taxing the same basic product twice, merely because it involves two different companies. … The way the subtraction-method VAT fixes this is by, well, subtraction. Under this kind of tax system, Netflix would count all of its revenue, but then subtract the amount that it pays to other businesses, like Disney. Disney would then have to account for its own revenue and also file taxes. The result is that everything gets neatly single-counted, and nothing gets double-counted. There’s also one other thing the tax subtracts: capital costs. That is, when Ford builds a new auto plant, it can deduct those business costs as well
Now the subtraction-method VAT is not exactly like the VATs seen in Europe. Those are “credit-invoice” VATs and are charged per transaction. (This 2006 Congressional Research Service study provides a good explanation of the technical differences and the pros-cons.) But what both kinds of VATs have in common is that they are great ways to raise lots of money (The Tax Foundation calls it a “powerful tax that captures pretty much all of the income in the country”) with the least amount of economic distortion or harm because it does not penalize savings and investment.
A VAT can be split into a business cash flow tax and a wage tax, with the wage tax collected as an employee payroll tax that shows up on workers’ pay stubs. Or, the total VAT collected from businesses along the production chain can be listed as a separate line item on the final customer’s receipt, the way state and local retail sales taxes are listed. But, the [Rand] Paul and Cruz plans would collect the VAT from businesses without listing it on customer receipts, ensuring that neither workers nor consumers would ever see the tax. … His plan would make the tax hard to see precisely so that people could be told that they’re not paying it. The government would subtly and relentlessly tax away 16% of workers’ real wages while assuring them that they’re paying “no taxes whatsoever.” … If the United States is to have a VAT, it should be adopted in the light of day, not snuck through as a “business tax.” And, once adopted, its tax burden should be made visible to the American people, who have a right to know the full cost that they’re paying for their government.
Why does Cruz not concede this point? Of that, we can only speculate. Is a VAT a good idea? Consumption taxes are more pro-growth than income taxes, an especially important feature if you think the US tax burden needs to rise in the future given demographic pressures. Again, here is Viard in a podcast Q&A with me:
Looking out 10-15 years, you know we have to deal with this entitlement problem. We need a tax code that needs to be more pro-growth, more efficient. Factoring in the likely politics as well, what will the eventual reform of the U.S. tax code look like? Will it be a progressive consumption tax or might it be something else?
Well, you know, I’m not an expert on predicting what will happen. I find it a lot easier to sit back and offer my thoughts on what should happen, but I’ll take a stab at your question. You know, I think there is – I would like to see the progressive consumption tax option adopted. I think, though, that the X tax – you know, it’s hard to explain to people it doesn’t really have a footing in our political debate right now. And so the odds are probably against that, sad to say.
You know, I think that what we are more likely to end up doing is to have a value added tax alongside an income tax. It’s definitely not an ideal outcome. It means that we are keeping an income tax system that has a penalty on saving and investment. It means we have two tax systems available to the government, which would make it easier for it to raise revenue. But it is a better outcome, of course, than just jacking up income tax rates to stratospheric levels. So it leaves me with a mixed feeling, but that is where most other countries have ended up and I think that’s the single most likely outcome for us as well.
A little over a week ago, a Reddit user started a thread asking, “Immigrants to America: What was the most pleasant surprise?” It has since had hundreds of comments, with contributions coming in from both longtime Americans and new residents.
A few days ago, Jim Pethokoukis wrote here on AEIdeas about Gallup data showing Americans seem both miserable, and yet increasingly satisfied with their standard of living. The website Knowable.com highlighted 25 of the many replies to the Reddit thread, but in the spirit of appreciating the USA and putting our possible misery in proper context, we’ve picked some of our own highlights below (sometimes edited for grammar, and bold mine):
- Free public restrooms and how every establishment has air conditioning.
- Clean streets, good luck finding a trash can in Pakistan.
- Fireflies… I honestly thought they were mythical, like fairies, until I saw one for the first time in Virginia.
- Showers and running hot water. I was born in the Philippines. Not having to fill buckets with water and boiling some over a stove top was such a big surprise for me.
- Buildings and bridges are so .. .amazing, the infrastructure is good, it makes you thing “wow, mankind DID THIS!”
- Small talks. I really didn’t expect people to just strike up a conversation with someone they’ve never met before.
- People telling me I must be American based solely on my English skills and disregarding my ethnicity feels weird. I like it.
- My dad was born in Trinidad. He says the first thing he ate when he came to the US was pizza. He said that it was magical, and that nothing has ever been as good as that first piece of pizza.
- The fireworks. I had moved on the 4th of July and I was quite young. But I still remember the fireworks.
- What surprised me was the social circles that existed in schools and in life. Back in Italy, schools didn’t have the nerds, the jocks, the skater kids, emos, or what else have you. People were all basically the same, with minor differences in interests. Most everyone played soccer, was a casual gamer, and hung out in the town square at night. That’s it. It may sound like an exaggeration, but 95% of my friends there were exactly like this. So when I came to school here, I was amazed by how the jocks would hang out at gyms and play 4 different sports after school, while the skaters headed off to find a park. It was so different. And I loved it. Because while I could fit it back in Italy, I was always much more introverted and interested in nerd stuff, and in the US I finally found people who were really like me. It was really unexpected, and you only notice it after spending a lot of time in America.
- Moving to the Deep South, I was expecting to be met with the stereotypical racist KKK type of folks. Luckily, everyone at my school was super friendly and helpful.
- Growing up, I was taught the Vietnamese version of the Vietnam War in school. In my mind, I thought in America people would not talk about it since it’s a shameful thing and the government would suppress all discussions of it like in Vietnam. When I came here, I saw that people can openly speak about these things even when there are many disagreements.
- Arrived at 15 from Mexico legally. I lived in poverty but never went hungry, thanks to the social safety nets. My parents worked hard and had a business going within a couple of years. I graduated college and became an engineer. Fast forward 24 years and I’m making a 6 figure salary and living a very good life. The American Dream is alive and well.
- I remember that when I was getting my driver’s license in Trinidad, everyone told me to go with a few hundred dollars in my pocket. It’s very common you’ll be asked to pay a bribe.
- The fact that no one was threatening to kill my family based off of our religious beliefs.
- I’m the son of Korean immigrants. My dad said that Americans are probably the hardest workers in the world. He’s worked in various international companies, and he admits that Americans are the easiest to get along with because of their versatility and open-mindedness. He flat out said he prefers Americans leading projects over anyone else.
- Space. Having separate houses with a huge backyard is a luxury that’s only for the rich in the Netherlands.
- It was my 2nd week in America and I was nervous when I was checking out 4 books at the local public library. I love libraries and where I come from you can normally checkout 3 books. I thought this being America I could try my luck and add another book. The nice checkout girl proceeded my order, out of curiosity I asked her how many books could I checkout in one go. Her answer: 75. This to me symbolised what America stood for.
- People with power are careful when dealing with ordinary people. “Public servants” in most third world countries are the masters and the ordinary public are the “Servants.” This is not the case in the US.
- The most important thing I liked about US is the awareness of people to fight for their rights, respecting others views and respect for humanity. … This might be one of the reason that it is very common for people to sue each other. While [in] other countries, people will silently compromise and accept their situation as a fate…. it seems, the US expects everyone to be aware of what he/she deserves. This is probably the best form of freedom.
And what one American wrote in in response:
I would like to say something to all of the immigrants who have responded to this thread, as a natural-born American:
Thank you. Thank you SO much for everything you’ve shared.
I spend a lot of time studying political issues, meaning I get caught up for weeks or months at a time studying economics, history, logic, sociology, psychology, or anything else relevant, and I often go around for huge lengths of time with this floating sense of dread that everything is doomed and the world is coming to an end.
It really lifts my spirit to be reminded of the good things that make America unique in the world, and I’m also reminded that it’s the millions of individuals making individual decisions every day that run this country…
View related content: Pethokoukis
Netflix CEO ‘Loves’ Netflix Password Sharing – Techdirt |
“It’s not that we’re unmindful of it, it just has no impact on the business,” HBO CEO Richard Plepler said. It is, in many ways, a “terrific marketing vehicle for the next generation of viewers,” he said, noting that it could potentially lead to more subscribers in the future. “We’re in the business of creating addicts,” he said. …
“We love people sharing Netflix,” CEO Reed Hastings said Wednesday at the Consumer Electronics Show here in Las Vegas. “That’s a positive thing, not a negative thing.”…A lot of the time, he said, household sharing leads to new customers because kids subscribe on their own as they start to earn income.
Fitbit CEO on Wearable Gadgets, the Future of Sensors, and Wall Street – MIT Tech Review |“So you can envision in the future what really we want to do is get to the point where not only are we addressing lifestyle conditions but more chronic conditions as well, whether it’s heart disease, obesity, etc.”
Why Media Titans Would Be Wise Not to Overlook Netflix – NYT |
So here’s a question for you, my media-mogul friend. How worried are you about Netflix? And more to the point: Are you worried enough?
It’s possible you’re not. Yes, Netflix has grown substantially over the last few years, now claiming more than 70 million subscribers who pay about $8 to $10 a month for access to a large library of movies and TV shows. Last year the streaming service’s stock was the best performing of the Standard & Poor’s 500-stock index, rising 140 percent.
And its prospects keep looking brighter: Last week, Reed Hastings, Netflix’s goateed chief executive, announced he would make his movies and TV shows instantly available to almost every country in the world (the big exception, for now, is China). The move nearly doubled Netflix’s potential market — the service is now accessible to more than 540 million households worldwide with broadband Internet access.
If we eat locally, we all would starve – UW |
The New Vision for AT&T – Techpinions |“It is clear from my discussion with Mr. Lurie this year that AT&T has put the pieces together to deliver one of the most integrated set of services any company could offer in our digital age.”
Obama’s Anti-Cancer Moonshot Will Need More Than Research – Wired |“But is the problem that there’s not enough research money (the NIH anti-cancer budget is already $5.3 billion), or that it’s not going to the right place? Or perhaps, that cancer is just a really, really tough biological hombre?”
So You Want to ‘Redistribute’ More Wealth, Do You? – Donald Boudreaux |
So here’s the question: Would ordinary men and women be enriched if the government confiscated the great bulk of Ms. Bigbucks’s fortune? How would the government do this confiscation? One way would be to nationalize Bigbucks, Inc. But then the fortune would still be, as it was before nationalization, tied up in the factories; the only difference from society’s vantage point would be in whatever ways the factories are operated differently. Is it likely that a nationalized Bigbucks, Inc., would be run as efficiently and as productively as it was run when Ms. Bigbucks owned and oversaw its operation? Hardly.
Democrats have big spending plans. Republicans have big tax cut plans. Debt and deficits? No one much talks about those things any more, apparently. But they should. Sure, as Wall Street Journal reporter Nick Timiraos notes, the “U.S. budget deficit ended last year at its lowest level since 2007, marking the sixth straight annual drop.” The federal budget gap deficit ended 2015 at $478 billion, or around 2.6% of GDP. Timiraos explains why we no longer have the trillion dollar deficits of the Great Recession years:
After the financial crisis, the U.S. government in 2009 ran deficits not seen since World War II as revenues fell sharply and stimulus flowed. Deficits began to recede in 2010 as the stimulus faded and revenues stabilized. Congress cut spending further after Republicans took control of the House in 2011. Government spending started to rise two years ago, but deficits continued falling because of strong receipts to the Treasury, in part from tax increases that took effect in 2013. Outlays last year rose 5%, roughly the same pace as the year before. Revenues were up 6%, versus a 10% gain in 2014.
The US has still added nearly $8 trillion in debt since 2007, more than doubling the debt-GDP ratio to around 73%. And the current deficit numbers may mark the bottom:
Outlays last year rose 5%, roughly the same pace as the year before. Revenues were up 6%, versus a 10% gain in 2014. Government spending will rise further after last fall’s bipartisan agreements between President Barack Obama and Congress that boost discretionary spending caps through September 2017 and extend a series of tax breaks for businesses and households. Economists at Goldman Sachs estimate the deficit could rise to $650 billion, or 3.5% of GDP, in the fiscal year ending Sept. 30 and to $575 billion, or 3% of GDP, in fiscal 2017.
I would add that CBO’s forecast shows a steady rise in mandatory spending — including Medicare, Social Security — as a share of GDP starting in 2019 from 13.1% of GDP to 14.1%. And then up and up afterward to 16.0% in 2040. And there’s your trouble. Old people — or, rather, the promises made to them.
Let me put it this way: Last May a group of AEI scholars updated a comprehensive 25-year budget plan. And by any measure it contains sweeping reforms to how Washington spends.
Medicare? Its benefit structure would be modernized so it competes with private Medicare plans under a premium-support system.
Social Security? It would provide a flat, universal benefit that would virtually eliminate poverty in old age. Benefits would increase for poorer retirees but middle- and upper-income individuals would have to save more for their own retirement.
Medicaid? Replace federal matching payments with block grants that grow with the economy and permit states to manage their Medicaid programs more efficiently.
Obamacare? The ACA’s subsidies would also be converted to state-level block grants, and the current tax exclusion for employer-provided health insurance would be replaced by a refundable health insurance tax credit that provides a flat dollar subsidy, with higher payments to those with lower incomes and greater health risk. In short, our welfare state would be make fiscally sustainable with more of its benefits directors to the neediest.
And how does this all shake out financially? Federal spending as a share of GDP would rise by a couple of percentage points, from 20.5% in 2015 to 22.5% in 2040. Disappointed? Nonsense. That increase is three percentage points less than the CBO forecast. And the debt-GDP ratio would decline to 63%.
More good news. That’s way less than the 107% CBO forecast. Now that isn’t 0%, and it is about 30 percentage points higher than pre-Great Recession. And no balanced budgets (at least not when including debt payments.) Also, all these numbers include higher tax revenue, rising from about 18% today to 21% in 2040. The income tax would be replaced by a progressive consumption tax, and all energy subsidies, tax credits, and regulations would be replaced by a modest carbon tax.
So there you have it. One version of what smart, conservative reform looks like when applied to the real world. There are others of course. But if you see a plan that assumes minimizing the safety net and welfare state or slashing taxes back to 1920s levels or counts on hyperfast economic growth — or one that dreams 90% tax rates and a 1990s Scandinavian-style social democracy — be skeptical.