Jeffrey Sachs provides the detail to what just happened in the US:
In the agreement signed yesterday, the White House and Senate Republicans agreed to extend the Bush era tax cuts that were set to expire on January 1. Extending the expiring tax cuts costs 2.5 per cent of national income in reduced revenues in future years (a fact not yet mentioned to the American people, I kid you not). You might think that Congress would care about that loss of revenue in view of a budget deficit of around 7 per cent of GDP. You would be wrong. Congress is happy to vote for the tax cuts, leaving to a future date the spending decisions.
…
Our federal deficit is therefore stuck at around 7 per cent of GDP. Yet the two parties just ran the most populist campaigns this side of a banana republic, and I do a grave disservice to banana republics these days to say so. The Republicans wanted to extend the Bush-era tax cuts for 100 per cent of the population, especially for the rich, whom they call “job creators”. The Democrats wanted to extend the Bush-era tax cuts for 98 per cent of the population, whom they call the “worthy, hard-working middle class”.Yesterday, these two incisive political forces made a mighty compromise. The Bush-era tax cuts will be extended permanently for 99 per cent of the population. This was a difficult compromise. The Republicans had to swallow a marginal tax rise of 4.6 percentage points for households with income above $450,000. The Democrats had to swallow hard to endear themselves to households between $250,000 and $450,000 in income, who got more of a break than Mr Obama had pledged during the campaign. To sweeten the deal further, many other tax breaks and temporary spending measures were extended for somewhere between one and five years.
Okay – so why are we surprised? Public finances are only ever seriously reformed when politicians run out of other people’s money. The US is nowhere near that unhappy position (or happy if you want fiscal reform sooner rather than later). Although Bryan Caplan thinks otherwise.
The right comparison is government debt relative to annual tax revenue [and not GDP]. By this correct measure, the U.S. is indeed in irresponsible territory. Take 2011: With government debt at 67.7% of GDP, and government revenue at 15.4% of GDP, the U.S. debt/income ratio was already about 440%.
Sachs wants to increase tax to GDP by about 7 percent (from 16 percent to 23 percent).
Sure, we have no social safety net. Sure, we have an underclass. Sure, we have crumbling infrastructure. Sure, we emit 17 tonnes of carbon dioxide per American. Sure, around two thirds of our kids don’t finish a bachelor’s degree. But hey, we have low taxes, and that’s what our revolution was about.
…
The US needs at least 23 per cent of GDP at the federal level to make the society function even at a minimum standard but collects only 16 per cent in revenues at the federal level. We should be spending around 2 per cent of GDP less on the military but 2 per cent of GDP more on other things, notably clean energy, infrastructure and education.
There is the problem – he wants to spend money on things the US federal government should stay clear away from – clean energy is a fiscal black hole, education is a state responsibility, as is most infrastructure.
Sinc, this is structural so it will continue until the brewing ‘revolutionary event’ in whatever form it takes intersects the decline curve.
This will go on for years of course, and it’s why the re-election of Comrade the Preshizzle (Paco™) which cause Monty etc to have highly excited trouser accidents is irrelevant.
Looking carefully at the states shows something interesting. There’s a growing impact of grass-roots American Constitutionalists gaining power at local and state level, while the Nobility (mostly US Democrats) pours fuel on to their fire through spectacularly bad policy proposals (Feinstein’s gun ban’s a cracker of a cack-handedness perfectly designed to cause a flood of people to join the Constitutionalists) and truly awful policy.
This bodes very badly for us unless we start to re-arm. This US bifurcation is going to further destabilise our 19th century multipolar world by reducing teh USA in terms of relative power.
No more sponging off the US Navy – it’s what’s in the future.
Mk50 of Brisbane
3 Jan 13 at 10:16 am
In the Australian and US federal context, this is true, but in a broader context, we would be better off if government got out of the business of providing education and left it up to parent and schools, without government involvement.
johno
3 Jan 13 at 11:13 am
Well here is an object lesson in all three
( apologies to JC who I recall doesn’t think much of Tyler Durden – but go we must where the linkies lead )
So we have clean energy, whereby the US taxpayer subsidises the conversion of crops into motor fuel;
Infrastructure – think how much more biofuels could go on scenic train trips of North America if the Feds built more rail lines ! and;
Education – ‘oh look, the Feds are throwing magically printed money around like drunken sailors in a whore house ! Watch and learn young jedi-clean-energy-entrepreneur while we slide up next to the drunken sailor and walk him back and forth a few times, relieving the strain on his wallet at each circuit of the dance floor !!’
Mr Sachs couldn’t have asked for a more timely example of his theories in action if he had taken a drum of biodiesel for a roadtrip to Niagara Falls himself
Myrrdin Seren
3 Jan 13 at 11:57 am
“no social safety net…an underclass…around two thirds of our kids don’t finish a bachelor’s degree.”
What does he mean “no safety net”?, thank the Great Society reforms of the 1960s for the underclass, and how many kids does he want to waste their time at uni?
Rafe
3 Jan 13 at 1:52 pm
Uh huh. I think he is confusing tax take with revenue.
Entropy
3 Jan 13 at 1:59 pm
When Obama was running the first time he gave an interview about energy which was quite impressive on the surface. This was because, relative to other politicians he seemed to know something about energy. His catch-phrase was: changing the energy economy.
It sounded impressive until you actually asked how he was going to do it. His cure-all was biofuel and his plan was to switch from petrol to corn ethanol and then to synthetic ethanol. Sounds jolly good until you realize he’s a lawyer and not a chemist. We don’t have a clean alternative to oil now, we’ve got hungry peasants.
On the other hand when you consider that the previous administration’s first significant act was to let their corrupt crony mates write the energy policy of the US well… Not much of a choice is it?
Adrien
3 Jan 13 at 3:51 pm
Wasn’t he the one who sent all the Russian oil wealth into the hands of the Kleptocrats under Yeltsin?
Only fair he turns his attention to the remaining super-power.
Be afraid, be very afraid when Jeffrey Sachs turns up in your town. On the other hand, if Dominique Strauss-Kahn turns up all you need do is lock up your daughters.
Grey
3 Jan 13 at 7:26 pm
“Sure, we have no social safety net.”
Over 100 million Americans receive some kind of means-tested social assistance (that does not even include recipients of Social Security, Medicare or Earned Income Tax Credit)
http://www.weeklystandard.com/blogs/over-100-million-now-receiving-federal-welfare_649589.html
But facts and data be damned. All that matters is the ideological metanarrative. And the dominant narrative is that society’s woes are invariably due to a lack of government expenditure and a free market ideology laying waste to all that is civilised and good.
Monkey's Uncle
3 Jan 13 at 7:37 pm
And the figure I quoted above would not even include expenditures by the states, only federal expenditures. They would not include Social Security Disability Insurance either, as this is not a means-tested welfare program (but the numbers on disability have been growing substantially, as is largely the case in most developed nations).
Monkey's Uncle
3 Jan 13 at 7:42 pm
Krugman: Obama Might ‘Go Down In History As The Wimp Who Threw It All Away’
Krugman is surreal divorced from reality.
The surreal worldview is one of the frightening aspects of the recent resurgence of leftism for me.
As Melanie Phillips put it:
JamesK
3 Jan 13 at 8:22 pm