Revenue isn’t the problem

Yesterday’s post dealt with the precarious financial situation Uncle Sam is in.  Interestingly, today I happened to stumble onto U.S. News and World Report’s ranking of the “Best States for Fiscal Stability.”

The top three are Tennessee, Florida, and South Dakota, in that order.  What do all of these have in common?

They are three of the eight U.S. States that still don’t have a personal income tax.  Tennessee does tax dividend — investment — income, but not wages.  But it relies mostly on sales taxes to pay its bills.  So why is it so stable?

For one thing, its Constitution requires a balanced budget.  Spending in a given year cannot exceed revenue collections and reserves.

Maybe Uncle Sam should take a trip to Nashville before he has to face the music.

UPDATE: as I was saying

That which can’t continue, doesn’t

The fiscal day of reckoning may be close at hand for the United States:

According to the U.S. Treasury Department’s Office of Debt Management, the U.S. government is just five years away from the point where every new dollar it borrows from the public will go toward funding interest payments on the national debt.

That is the main takeaway from the Debt Management Office’s Fiscal Year 2019 Q1 Report, which featured the Office of Management and Budget’s latest projection of the U.S. government’s borrowing from the public…

Net interest on the national debt has become one of the fastest growing segments of federal spending. When the national debt reaches the point where all newly borrowed dollars must be used to pay this mandatory expenditure, the U.S. government will have passed the event horizon that marks the boundary of the national debt death spiral.

Cities and territories in the United States that have crossed that crisis point have either gone through bankruptcy proceedings or their equivalent, or they have implemented major fiscal reforms that reversed their fiscal deterioration, wherein the best-case scenarios, they acted to restrain the growth of their previously out-of-control spending to restore their fiscal health.

Interest on the national debt is going up quickly for two reasons.  Obviously, the government continues to spend waaaaaaaaay more than they squeeze out of the economy (us) through taxation, adding to the total amount it owes.  More importantly, however, the many record deficits recorded over the past 10 years were done so at historically low interest rates (engineered by the Federal Reserve, which in the process robbed productive citizens of some of the proceeds they would normally have earned through their savings).  Inevitably, those rates have begun to climb again.  It may seem incremental on a chart, but keep in mind that just one percent of $22 trillion is $220 billion.

Continue reading

Tariffs and national self-interest

Patrick Buchanan provides a succinct summary of why Trump’s emphasis on tariffs in the relationship with China is hardly unprecedented.  In fact, one could say it’s a return to the policies that once made a young nation great:

A tariff may be described as a sales or consumption tax the consumer pays, but tariffs are also a discretionary and an optional tax. If you choose not to purchase Chinese goods and instead buy comparable goods made in other nations or the USA, then you do not pay the tariff.
China loses the sale. This is why Beijing, which runs $350 billion to $400 billion in annual trade surpluses at our expense is howling loudest. Should Donald Trump impose that 25% tariff on all $500 billion in Chinese exports to the USA, it would cripple China’s economy. Factories seeking assured access to the U.S. market would flee in panic from the Middle Kingdom.
Tariffs were the taxes that made America great. They were the taxes relied upon by the first and greatest of our early statesmen, before the coming of the globalists Woodrow Wilson and FDR.
Tariffs, to protect manufacturers and jobs, were the Republican Party’s path to power and prosperity in the 19th and 20th centuries, before the rise of the Rockefeller Eastern liberal establishment and its embrace of the British-bred heresy of unfettered free trade.
The Tariff Act of 1789 was enacted with the declared purpose, “the encouragement and protection of manufactures.” It was the second act passed by the first Congress led by Speaker James Madison. It was crafted by Alexander Hamilton and signed by President Washington.

As Buchanan mentions, tariffs were once an integral part of an economic policy that became known as “The American System” — a policy so successful that other nations emulated it.  It’s worth noting the Federal government undertook its first infrastructure projects with almost no other source of funding other than tariffs (land sales being the main exception).  I’ll admit: I’m not a fan of the Federal government doing public works projects.  But the limited revenue stream tariffs provided kept such activity modest in the early republic, and for the most part it’s easy to see the wisdom of such projects as lighthouses, postal routes and the Cumberland Road.

Still, public works projects were controversial, even then.  Many in the South believed tariffs disproportionally benefitted northern industrial interests through protectionism and infrastructure.  Tariffs sparked the Nullification Crisis in South Carolina, and was cited as one source of discontent as States left the Union after Lincoln’s election in 1860.  Sectionalism aside, the nature of tariffs as a voluntary tax that promotes national self-reliance and internal growth recommends it as one of the best ways to fund a limited government.  Certainly, the explosive growth of Uncle Sam after institution of the Income Tax is evidence of that.  I’ve said before that a national sales tax would be preferable to an income tax (provided it didn’t result in both being in effect).  Many of the same reasons apply to tariffs.

Buchanan rightfully points out that abandoning so-called “free trade” for a tariff system that enforces fair trade will be painful in the short term, much like a junkie getting over their addiction.  American wages have been stagnant in inflation-adjusted terms since the 1970s.  The only reason we appear to have a higher material standard of living is the influx of overseas goods that appear cheap on the price tag, but which in reality take a heavy toll on the nation in terms of lost industries, disappearing jobs and a growing economic dependency on outsiders.  That doesn’t even take into account that many of the reasons goods made in places such as China are ‘cheaper’ is that they lack protections for workers and the local environment — impacts we considered so important here that we willingly added them to the economic burden of production.  In short, “free trade” as it’s currently practiced is an apples-to-oranges comparison that hides or downplays the negative aspects of globalism.

Why are we buying from China?

It’s no secret the U.S. and China are increasingly at odds with each other.  China fully recognizes — even embraces — this development, pouring effort into projects like the Confucious Institutes and developing spies among the key staff of important members of Congress.  China holds a significant fraction of the U.S. public debt — a potential lever in any showdown, given our nation’s reliance on deficit-spending.  While we’ve heard nothing but “Russia, Russia, Russia” since the 2016 presidential election, it’s China that poses the most long-term threat to U.S. national security.

And yet, we continue to enable them:

There are two ways for spies to alter the guts of computer equipment. One, known as interdiction, consists of manipulating devices as they’re in transit from manufacturer to customer. This approach is favored by U.S. spy agencies, according to documents leaked by former National Security Agency contractor Edward Snowden. The other method involves seeding changes from the very beginning.

One country in particular has an advantage executing this kind of attack: China, which by some estimates makes 75 percent of the world’s mobile phones and 90 percent of its PCs

Supermicro had been an obvious choice to build Elemental’s servers. Headquartered north of San Jose’s airport, up a smoggy stretch of Interstate 880, the company was founded by Charles Liang, a Taiwanese engineer who attended graduate school in Texas and then moved west to start Supermicro with his wife in 1993. Silicon Valley was then embracing outsourcing, forging a pathway from Taiwanese, and later Chinese, factories to American consumers, and Liang added a comforting advantage: Supermicro’s motherboards would be engineered mostly in San Jose, close to the company’s biggest clients, even if the products were manufactured overseas.

Today, Supermicro sells more server motherboards than almost anyone else. It also dominates the $1 billion market for boards used in special-purpose computers, from MRI machines to weapons systems. Its motherboards can be found in made-to-order server setups at banks, hedge funds, cloud computing providers, and web-hosting services, among other places. Supermicro has assembly facilities in California, the Netherlands, and Taiwan, but its motherboards—its core product—are nearly all manufactured by contractors in China…

“Think of Supermicro as the Microsoft of the hardware world,” says a former U.S. intelligence official who’s studied Supermicro and its business model. “Attacking Supermicro motherboards is like attacking Windows. It’s like attacking the whole world.”

The entire, detailed article, is worth reading. As you do, consider that our government increasingly uses server-enabled cloud computing, even for the most sensitive of information. Does it make sense for our government and military to use hardware produced by our all-but-in-name adversary? What carefully implanted surprises now await us in an actual showdown with this emerging power? Shouldn’t our policy be to encourage cost-effective manufacturers here at home?

Over the past 30 years the world became obsessed with obtaining cheap products from China. We’re finding out now they may have cost more than we ever suspected.

Make America great again — make America self-reliant, manufacturing its own goods again.

Uncle Sam’s debt is getting “interest”ing

That which cannot go on forever, ceases:

Interest payments will make up 13 percent of the federal budget a decade from now, surpassing spending on Medicaid and defense.  Finding the money to pay investors who hold government debt will crimp other parts of the budget. In a decade, interest on the debt will eat up 13 percent of government spending, up from 6.6 percent in 2017.

Within a decade, more than $900 billion in interest payments will be due annually, easily outpacing spending on myriad other programs. Already the fastest-growing major government expense, the cost of interest is on track to hit $390 billion next year, nearly 50 percent more than in 2017, according to the Congressional Budget Office.

Some members of Congress want to set the stage for even more red ink. Republicans in the House want to make last year’s tax cuts permanent, instead of letting some of them expire at the end of 2025. That would reduce federal revenue by an additional $631 billion over 10 years, according to the Tax Policy Center.

Despite the tax cuts pushed by the Trump administration, the Federal government collected a record amount of tax revenue from October 2017 to August 2018. Washington doesn’t have an income problem. It has a spending problem.  Roughly a third of the Federal Budget in any given year is financed by borrowing money.  A family that ran its household budget that way would soon be bankrupt.  The Federal government has creative ways of masking its increasing insolvency, but it’s there nonetheless.  The spending spree of the past two decades was possible mainly due to low interest rates across the economy.  As the economic outlook in the U.S. turns upward, so will those interest rates.  A single percentage point increase equates to about $160 billion, given the official government debt of just shy of $16 trillion.  (Counting the ongoing raid of Social Security Funds — listed innocuously as “intragovernmental holdings” — the actual debt is over $20 trillion.)

In short, next year the government will spend close to $400 billion just to service the debt.  Not a penny of that amount will improve the infrastructure of our nation, modernize our military or provide services for our citizens.  It will simply go straight into the pockets of those who hold pieces of our country’s debt.

That debt has increased eight times faster than the government’s annual budget.  In 1981 — 37 short years ago, the U.S. debt hit $1 trillion for the first time.  That was an accumulation of more than two centuries.  In less than 40 years, that debt increased 1,600%.  The Federal budget over the same period increased from $1.9 trillion in 2015 dollars* to $3.8 trillion in 2015 — a “mere” doubling in spending.

We’ve been running like the cartoon coyote in thin air after leaving the cliff.  Gravity — in the form of normal historical interest rates — is about to kick in.

It will not be pretty.

___________________________________

* People are so used to hearing about inflation, and the need to “adjust for it” when comparing years, that few stop to ask what drives it.  The standard explanation is that basic market economics causes it.  Not true — government deficit spending does.  By flooding the market with dollars to enable his spending sprees, Uncle Sam diminishes the value of each individual dollar.  It is, in effect, a “stealth tax” on the spending power of Americans.  The value of a U.S. dollar remained remarkably stable from 1787 to 1913, with a directly convertible exchange rate of $20 to an ounce of gold.  Only after creation of the Federal Reserve, which enables this gorging on debt, did that change.  As of this writing, one ounce of gold is worth about $1200.  That represents an 85% loss of dollar value in just over a century.

The absolutely useless GOP

It’s clear at this point in history those of us who want a restoration of the characteristics that once made America great — prudence, self-discipline, foresight, statesmanship, to name a few — will have to look somewhere other than the GOP to find them:

Sen. Rand Paul (R-Ky.) was hoping his Republican colleagues would be embarrassed by their vote to jack up federal spending earlier this year and support his plan to phase in a balanced budget. Few were.

Paul got 20 other Republican senators on Thursday — less than half of the Senate GOP caucus — to vote for his “penny plan,” which would balance the federal budget over five years by cutting spending except for Social Security by 1 percent every year. No Democrats back the proposal…

“Republicans only care about budget deficits when they’re in the minority,” said Jason Pye, vice president of legislative affairs at FreedomWorks.

Mark Meckler, president of Citizens for Self Governance, agreed, saying, “There are very few sane people willing to have a rational discussion about fiscal responsibility … It’s obscene. These guys are pigs in slop.”

One percent a year should be easy to find in a $4 trillion budget.  But I’m sure the gluttonous swamp would cry the fiscal sky is falling (“Children will starve!  Seniors will be destitute!  Illegal aliens won’t have as much welfare support”).  Well, maybe not that last talking point (they aren’t completely foolish and willing to admit their agendas).  But here’s some perspective:

Paul’s plan would have reduced spending by $404.8 billion in the fiscal year that starts October 1. After the budget balanced in five years, spending would be held to 1 percent increases per year, resulting in a budget that was 14.6 percent bigger in 10 years that it is now.

In other words, even after balancing the budget, the overall size of it would continue to grow.  Don’t overlook the fact in the excerpt above that a mere one percent of Federal spending equals $404.8 billion!  A true conservative would say balancing the budget would be preparatory to starting to trim back the Federal Leviathan.  Yet these GOPers can’t even countenance the first step!

Putting America first, or “making America great again” is inseparable from solving our budgetary house of cards.  You failed once again, GOP.  When you ask yourselves how in the world a man like Donald Trump could get elected, just look in the mirror.

As for us, primary season is upon us.  One of my Senators just guaranteed he won’t have my vote.  How about yours?

By the purse strings

Since leaving the military, former Chairman of the Joint Chiefs Admiral Michael Mullen has spoken often about what he considers to be the biggest danger to U.S. security: the national debt.

China may be about to give us an object lesson in that assessment:

China added to bond investors’ jitters on Wednesday as traders braced for what they feared could be the end of a three-decade bull market.  Senior government officials in Beijing reviewing the nation’s foreign-exchange holdings have recommended slowing or halting purchases of U.S. Treasuries, according to people familiar with the matter.

China holds the world’s largest foreign-exchange reserves, at $3.1 trillion, and regularly assesses its strategy for investing them. It isn’t clear whether the officials’ recommendations have been adopted. The market for U.S. government bonds is becoming less attractive relative to other assets, and trade tensions with the U.S. may provide a reason to slow or stop buying American debt…

Most Americans who pay attention to government spending habits are happy merely to see the deficit fall.  But even if the deficit were brought to zero (i.e. the government miraculously balanced its budget) the outstanding debt still has to be renegotiated periodically, as old bonds mature and new ones are issued.  When there is less demand for new bonds, the yield (interest) has to rise in order to become more attractive.  Thus, even with a balanced budget, our roll-over debt is a potential time bomb.

For the last decade, the U.S. has been able to take advantage of record low bond yields as the Federal Reserve held interest rates at historic lows in the wake of the mortgage debt crisis in 2008.  This, incidentally, is why your bank pays you next to nothing on your savings any more — the same policy that keeps the government’s borrowing costs low essentially robs individual savers.  Unlike taxes, people don’t immediately recognize this fiscal effect the debt has on them.

If forces beyond the government’s control — say, the largest holder of U.S. debt decided not to roll over its holdings — caused bond yields and interest rates to rise faster than desired, the results would bankrupt the U.S. Treasury overnight:

Given its sheer size, if the interest rate on that debt were to rise by even 1%, the annual federal deficit rises by $200 billion. A 2% increase in interest rate levels would up the federal deficit by $400 billion, and if rates were 5% higher, the annual federal deficit rises by a full $1 trillion per year.

The only way to begin mitigating this risk is to not just balance the budget but to start paying down the debt.  Think that will happen?

Me neither.  The day may be fast approaching when the government, in order to service its creditors, has no choice but to cut many of the programs people have become entirely dependent upon.  It may also impose confiscatory taxation, seizing the property of those who’ve managed to save and invest during these irresponsible years.  In both cases, the social consequences will be enormous.

As the Instapundit likes to say, “things that can’t go on forever, don’t.”  The exponential rise of our national debt can’t go on forever.  It’s simply a question of when an event will occur that undeniably shows the emperor has no clothes.