Tax plan possibilities

Mar 26, JDN 2457839

Recently President Trump (that phrase may never quite feel right) began presenting his new tax plan. To be honest, it’s not as ridiculous as I had imagined it might be. I mean, it’s still not very good, but it’s probably better than Reagan’s tax plan his last year in office, and it’s not nearly as absurd as the half-baked plan Trump originally proposed during the campaign.

But it got me thinking about the incredible untapped potential of our tax system—the things we could achieve as a nation, if we were willing to really commit to them and raise taxes accordingly.

A few years back I proposed a progressive tax system based upon logarithmic utility. I now have a catchy name for that tax proposal; I call it the logtax. It depends on two parameters—a poverty level, at which the tax rate goes to zero; and what I like to call a metarate—the fundamental rate that sets all the actual tax rates by the formula.

For the poverty level, I suggest we use the highest 2-household poverty level set by the Department of Health and Human Services: Because of Alaska’s high prices, that’s the Alaska poverty level, and the resulting figure is $20,290—let’s round to $20,000.

I would actually prefer to calculate taxes on an individual basis—I see no reason to incentivize particular household arrangements—but as current taxes are calculated on a household basis, I’m going to use that for now.

The metarate can be varied, and in the plans below I will compare different options for the metarate.

I will compare six different tax plans:

  1. Our existing tax plan, set under the Obama administration
  2. Trump’s proposed tax plan
  3. A flat rate of 30% with a basic income of $12,000, replacing welfare programs and Medicaid
  4. A flat rate of 40% with a basic income of $15,000, replacing welfare programs and Medicaid
  5. A logtax with a metarate of 20%, all spending intact
  6. A logtax with a metarate of 25% and a basic income of $12,000, replacing welfare programs and Medicaid
  7. A logtax with a metarate of 35% and a basic income of $15,000, cutting military spending by 50% and expanding Medicare to the entire population while eliminating Medicare payroll taxes

To do a proper comparison, I need estimates of the income distribution in the United States, in order to properly estimate the revenue from each type of tax. For that I used US Census data for most of the income data, supplementing with the World Top Incomes database for the very highest income brackets. The household data is broken up into brackets of $5,000 and only goes up to $250,000, so it’s a rough approximation to use the average household income for each bracket, but it’s all I’ve got.

The current brackets are 10%, 15%, 25%, 28%, 33%, 35%, and 39.6%. These are actually marginal rates, not average rates, which makes the calculation a lot more complicated. I did it properly though; for example, when you start paying the marginal rate of 28%, your average rate is really only 20.4%.

Worst of all, I used static scoring—that is, I ignored the Laffer Effect by which increasing taxes changes incentives and can change pre-tax incomes. To really do this analysis properly, one should use dynamic scoring, taking these effects into account—but proper dynamic scoring is an enormous undertaking, and this is a blog post, not my dissertation.

Still, I was able to get pretty close to the true figures. The actual federal budget shows total revenue net of payroll taxes to be $2.397 trillion, whereas I estimated $2.326 trillion; the true deficit is $608 billion and I estimated $682 billion.

Under Trump’s tax plan, almost all rates are cut. He also plans to remove some deductions, but all reports I could find on the plan were vague as to which ones, and with data this coarse it’s very hard to get any good figures on deduction amounts anyway. I also want to give him credit where it’s due: It was a lot easier to calculate the tax rates under Trump’s plan (but still harder than under mine…). But in general what I found was the following:

Almost everyone pays less income tax under Trump’s plan, by generally about 4-5% of their income. The poor benefit less or are slightly harmed; the rich benefit a bit more.

For example, a household in poverty making $12,300 would pay $1,384 currently, but $1,478 under Trump’s plan, losing $94 or 0.8% of their income. An average household making $52,000 would pay $8,768 currently but only $6,238 under Trump’s plan, saving $2,530 or about 4.8% of their income. A household making $152,000 would pay $35,580 currently but only $28,235 under Trump’s plan, saving $7,345 or again about 4.8%. A top 1% household making $781,000 would pay $265,625 currently, but only $230,158 under Trump’s plan, saving $35,467 or about 4.5%. A top 0.1% household making $2,037,000 would pay $762,656 currently, but only $644,350 under Trump’s plan, saving $118,306 or 5.8% of their income. A top 0.01% household making $9,936,000 would pay $3,890,736 currently, but only $3,251,083 under Trump’s plan, saving $639,653 or 6.4% of their income.

Because taxes are cut across the board, Trump’s plan would raise less revenue. My static scoring will exaggerate this effect, but only moderately; my estimate says we would lose over $470 billion in annual revenue, while the true figure might be $300 billion. In any case, Trump will definitely increase the deficit substantially unless he finds a way to cut an awful lot of spending elsewhere—and his pet $54 billion increase to the military isn’t helping in that regard. My estimate of the new deficit under Trump’s plan is $1.155 trillion—definitely not the sort of deficit you should be running during a peacetime economic expansion.

Let’s see what we might have done instead.

If we value simplicity and ease of calculation, it’s hard to beat a flat tax plus basic income. With a flat tax of 30% and a basic income of $12,000 per household, the poor do much better off because of the basic income, while the rich do a little better because of the flat tax, and the middle class feels about the same because the two effects largely cancel. Calculating your tax liability now couldn’t be easier; multiply your income by 3, remove a zero—that’s what you owe in taxes. And how much do you get in basic income? The same as everyone else, $12,000.

Using the same comparison households: The poor household making $12,300 would now receive $8,305—increasing their income by $9,689 or 78.8% relative to the current system. The middle-class household making $52,000 would pay $3,596, saving $5,172 or 10% of their income. The upper-middle-class household making $152,000 would now pay $33,582, saving only $1998 or 1.3% of their income. The top 1% household making $782,000 would pay $234,461, saving $31,164 or 4.0%. The top 0.1% household making $2,037,000 would pay $611,000, saving $151,656 or 7.4%. Finally, the top 0.01% household making $9,936,000 would pay $2,980,757, saving $910,000 or 9.1%.

Thus, like Trump’s plan, the tax cut almost across the board results in less revenue. However, because of the basic income, we can now justify cutting a lot of spending on social welfare programs. I estimated we could reasonably save about $630 billion by cutting Medicaid and other social welfare programs, while still not making poor people worse off because of the basic income. The resulting estimated deficit comes in at $1.085 trillion, which is still too large—but less than what Trump is proposing.

If I raise the flat rate to 40%—just as easy to calculate—I can bring that deficit down, even if I raise the basic income to $15,000 to compensate. The poverty household now receives $10,073, and the other representative households pay $5,974; $45,776; $297,615; $799,666; and $3,959,343 respectively. This means that the poor are again much better off, the middle class are about the same, and the rich are now substantially worse off. But what’s our deficit now? $180 billion—that’s about 1% of GDP, the sort of thing you can maintain indefinitely with a strong currency.

Can we do better than this? I think we can, with my logtax.

I confess that the logtax is not quite as easy to calculate as the flat tax. It does require taking exponents, and you can’t do it in your head. But it’s actually still easier than the current system, because there are no brackets to keep track of, no discontinuous shifts in the marginal rate. It is continuously progressive for all incomes, and the same formula can be used for all incomes from zero to infinity.
The simplest plan just replaces the income tax with a logtax of 20%. The poor household now receives $1,254, just from the automatic calculation of the tax—no basic income was added. The middle-class household pays $9,041, slightly more than what they are currently paying. Above that, people start paying more for sure: $50,655; $406,076; $1,228,795; and $7,065,274 respectively.

This system is obviously more progressive, but does it raise sufficient revenue? Why, as a matter of fact it removes the deficit entirely. The model estimates that the budget would now be at surplus of $110 billion. This is probably too optimistic; under dynamic scoring the distortions are probably going to cut the revenue a little. But it would almost certainly reduce the deficit, and very likely eliminate it altogether—without any changes in spending.

The next logtax plan adds a basic income of $12,000. To cover this, I raised the metarate to 25%. Now the poor household is receiving $11,413, the middle-class household is paying a mere $1,115, and the other households are paying $50,144; $458,140; $1,384,475; and $7,819,932 respectively. That top 0.01% household isn’t going to be happy, as they are now paying 78% of their income where in our current system they would pay only 39%. But their after-tax income is still over $2 million.

How does the budget look now? As with the flat tax plan, we can save about $630 billion by cutting redundant social welfare programs. So we are once again looking at a surplus, this time of about $63 billion. Again, the dynamic scoring might show some deficit, but definitely not a large one.

Finally, what if I raise the basic income to $15,000 and raise the metarate to 35%? The poor household now receives $14,186, while the median household pays $2,383. The richer households of course foot the bill, paying $64,180; $551,031; $1,618,703; and $8,790,124 respectively. Oh no, the top 0.01% household will have to make do with only $1.2 million; how will they survive!?

This raises enough revenue that it allows me to do some even more exciting things. With a $15,000 basic income, I can eliminate social welfare programs for sure. But then I can also cut military spending, say in half—still leaving us the largest military in the world. I can move funds around to give Medicare to every single American, an additional cost of about twice what we currently pay for Medicare. Then Medicaid doesn’t just get cut; it can be eliminated entirely, folded into Medicare. Assuming that the net effect on total spending is zero, the resulting deficit is estimated at only $168 billion, well within the range of what can be sustained indefinitely.

And really, that’s only the start. Once you consider all the savings on healthcare spending—an average of $4000 per person per year, if switching to single-payer brings us down to the average of other highly-developed countries. This is more than what the majority of the population would be paying in taxes under this plan—meaning that once you include the healthcare benefits, the majority of Americans would net receive money from the government. Compared to our current system, everyone making under about $80,000 would be better off. That is what we could be doing right now—free healthcare for everyone, a balanced budget (or close enough), and the majority of Americans receiving more from the government than they pay in taxes.

These results are summarized in the table below. (I also added several more rows of representative households—though still not all the brackets I used!) I’ve color-coded who would be paying less in tax in green and who would be more in tax in red under each plan, compared to our current system. This color-coding is overly generous to Trump’s plan and the 30% flat tax plan, because it doesn’t account for the increased government deficit (though I did color-code those as well, again relative to the current system). And yet, over 50% of households make less than $51,986, putting the poorest half of Americans in the green zone for every plan except Trump’s. For the last plan, I also color-coded those between $52,000 and $82,000 who would pay additional taxes, but less than they save on healthcare, thus net saving money in blue. Including those folks, we’re benefiting over 69% of Americans.

Household

pre-tax income

Current tax system Trump’s tax plan Flat 30% tax with $12k basic income Flat 40% tax with $15k basic income Logtax 20% Logtax 25% with $12k basic income Logtax 35% with $15k basic income, single-payer healthcare
$1,080 $108 $130 -$11,676 -$14,568 -$856 -$12,121 -$15,173
$12,317 $1,384 $1,478 -$8,305 -$10,073 -$1,254 -$11,413 -$14,186
$22,162 $2,861 $2,659 -$5,351 -$6,135 $450 -$9,224 -$11,213
$32,058 $4,345 $3,847 -$2,383 -$2,177 $2,887 -$6,256 -$7,258
$51,986 $8,768 $6,238 $3,596 $5,794 $9,041 $1,115 $2,383
$77,023 $15,027 $9,506 $11,107 $15,809 $18,206 $11,995 $16,350
$81,966 $16,263 $10,742 $12,590 $17,786 $20,148 $14,292 $17,786
$97,161 $20,242 $14,540 $17,148 $23,864 $26,334 $21,594 $28,516
$101,921 $21,575 $15,730 $18,576 $27,875 $30,571 $23,947 $31,482
$151,940 $35,580 $28,235 $33,582 $45,776 $50,655 $50,144 $64,180
$781,538 $265,625 $230,158 $222,461 $297,615 $406,076 $458,140 $551,031
$2,036,666 $762,656 $644,350 $599,000 $799,666 $1,228,795 $1,384,475 $1,618,703
$9,935,858 $3,890,736 $3,251,083 $2,968,757 $3,959,343 $7,065,274 $7,819,932 $8,790,124
Change in federal spending $0 $0 -$630 billion -$630 billion $0 -$630 billion $0
Estimated federal surplus -$682 billion -$1,155 billion -$822 billion -$180 billion $110 billion $63 billion -$168 billion

Why are movies so expensive? Did they used to be? Do they need to be?

August 10, JDN 2457611

One of the better arguments in favor of copyright involves film production. Films are extraordinarily expensive to produce; without copyright, how would they recover their costs? $100 million is a common budget these days.

It is commonly thought that film budgets used to be much smaller, so I looked at some data from The Numbers on over 5,000 films going back to 1915, and inflation-adjusted the budgets using the CPI. (I learned some interesting LibreOffice Calc functions in the process of merging the data; also LibreOffice crashed a few times trying to make the graphs, so that’s fun. I finally realized it had copied over all the 10,000 hyperlinks from the HTML data set.)

If you just look at the nominal figures, there does seem to be some sort of upward trend:

Movie_Budgets_nominal

But once you do the proper inflation adjustment, this trend basically disappears:

Movie_Budgets_adjusted

In real terms, the grosses of some early movies are quite large. Adjusted to 2015 dollars, Gone with the Wind grossed $6.659 billion—still the highest ever. In 1937, Snow White and the Seven Dwarfs grossed over $3.043 billion in 2015 dollars. In 1950, Cinderella made it to $2.592 billion in today’s money. (Horrifyingly, The Birth of a Nation grossed $258 million in today’s money.)

Nor is there any evidence that movie production has gotten more expensive. The linear trend is actually negative, though with a very small slope that is not statistically significant. On average, the real budget of a movie falls by $1752 per year.

Movie_Budgets_trend

While the two most expensive movies came out recently (Pirates of the Caribbean: At World’s End and Avatar), the third most expensive was released in 1963 (Cleopatra). The really hugely expensive movies do seem to cluster relatively recently—but then so do the really cheap films, some of which have budgets under $10,000. It may just be that more movies are produced in general, and overall the cost of producing a film doesn’t seem to have changed in real terms. The best return on investment is My Date with Drew, released in 2005, which had a budget of $1,100 but grossed $181,000, giving it an ROI of 16,358%. The highest real profit was of course Gone with the Wind, which made an astonishing $6.592 billion, though Titanic, Avatar, Aliens and Terminator 2 combined actually beat it with a total profit of $6.651 billion, which may explain why James Cameron can now basically make any movie he wants and already has four sequels lined up for Avatar.

The biggest real loss was 1970’s Waterloo, which made back only $18 million of its $153 million budget, losing $135 million and having an ROI of -87.7%. This was not quite as bad an ROI as 2002’s The Adventures of Pluto Nash, which had an ROI of -92.91%.

But making movies has always been expensive, at least for big blockbusters. (The $8,900 budget of Primer is something I could probably put on credit cards if I had to.) It’s nothing new to spend $100 million in today’s money.

When considering the ethics and economics of copyright, it’s useful to think about what Michele Boldrin calls “pizzaright”: you can’t copy my pizza, or you are guilty of pizzaright infringement. Many of the arguments for copyright are so general—this is a valuable service, it carries some risk of failure, it wouldn’t be as profitable without the monopoly, so fewer companies might enter the business—that they would also apply to pizza. Yet somehow nobody thinks that pizzaright should be a thing. If there is a justification for copyrights, it must come from the special circumstances of works of art (broadly conceived, including writing, film, music, etc.), and the only one that really seems strong enough is the high upfront cost of certain types of art—and indeed, the only ones that really seem to fit that are films and video games.

Painting, writing, and music just aren’t that expensive. People are willing to create these things for very little money, and can do so more or less on their own, especially nowadays. If the prices are reasonable, people will still want to buy from the creators directly—and sure enough, widespread music piracy hasn’t killed music, it has only killed the corporate record industry. But movies and video games really can easily cost $100 million to make, so there’s a serious concern of what might happen if they couldn’t use copyright to recover their costs.

The question for me is, did we really need copyright to fund these budgets?

Let’s take a look at how Star Wars made its money. $6.249 billion came from box office revenue, while $873 million came from VHS and DVD sales; those would probably be substantially reduced if not for copyright. But even before The Force Awakens was released, the Star Wars franchise had already made some $12 billion in toy sales alone. “Merchandizing, merchandizing, where the real money from the movie is made!”

Did they need intellectual property to do that? Well, yes—but all they needed was trademark. Defenders of “intellectual property” like to use that term because it elides fundamental distinctions between the three types: trademark, copyright, and patent.
Trademark is unproblematic. You can’t lie about who you are or where you products came from when you’re selling something. So if you are claiming to sell official Star Wars merchandise, you’d better be selling official Star Wars merchandise, and trademark protects that.

Copyright is problematic, but may be necessary in some cases. Copyright protects the content of the movies from being copied or modified without Lucasfilm’s permission. So now rather than simply protecting against the claim that you represent Lucasfilm, we are protecting against people buying the movie, copying it, and reselling the copies—even though that is a real economic service they are providing, and is in no way fraudulent as long as they are clear about the fact that they made the copies.

Patent is, frankly, ridiculous. The concept of “owning” ideas is absurd. You came up with a good way to do something? Great! Go do it then. But don’t expect other people to pay you simply for the privilege of hearing your good idea. Of course I want to financially support researchers, but there are much, much better ways of doing that, like government grants and universities. Patents only raise revenue for research that sells, first of all—so vaccines and basic research can’t be funded that way, even though they are the most important research by far. Furthermore, there’s nothing to guarantee that the person who actually invented the idea is the one who makes the profit from it—and in our current system where corporations can own patents (and do own almost 90% of patents), it typically isn’t. Even if it were, the whole concept of owning ideas is nonsensical, and it has driven us to the insane extremes of corporations owning patents on human DNA. The best argument I’ve heard for patents is that they are a second-best solution that incentivizes transparency and avoids trade secrets from becoming commonplace; but in that case they should definitely be short, and we should never extend them. Companies should not be able to make basically cosmetic modifications and renew the patent, and expiring patents should be a cause for celebration.

Hollywood actually formed in Los Angeles precisely to escape patents, but of course they love copyright and trademark. So do they like “intellectual property”?

Could blockbuster films be produced profitably using only trademark, in the absence of copyright?

Clearly Star Wars would have still turned a profit. But not every movie can do such merchandizing, and when movies start getting written purely for merchandizing it can be painful to watch.

The real question is whether a film like Gone with the Wind or Avatar could still be made, and make a reasonable profit (if a much smaller one).

Well, there’s always porn. Porn raises over $400 million per year in revenue, despite having essentially unenforceable copyright. They too are outraged over piracy, yet somehow I don’t think porn will ever cease to exist. A top porn star can make over $200,000 per year.Then there are of course independent films that never turn a profit at all, yet people keep making them.

So clearly it is possible to make some films without copyright protection, and something like Gone with the Wind needn’t cost $100 million to make. The only reason it cost as much as it did (about $66 million in today’s money) was that movie stars could command huge winner-takes-all salaries, which would no longer be true if copyright went away. And don’t tell me people wouldn’t be willing to be movie stars for $200,000 a year instead of $1.8 million (what Clark Gable made for Gone with the Wind, adjusted for inflation).

Yet some Hollywood blockbuster budgets are genuinely necessary. The real question is whether we could have Avatar without copyright. Not having films like Avatar is something I would count as a substantial loss to our society; we would lose important pieces of our art and culture.

So, where did all that money go? I don’t have a breakdown for Avatar in particular, but I do have a full budget breakdown for The Village. Of its $71.7 million, $33.5 million was “above the line”, which basically means the winner-takes-all superstar salaries for the director, producer, and cast. That amount could be dramatically reduced with no real cost to society—let’s drop it to say $3 million. Shooting costs were $28.8 million, post-production was $8.4 million, and miscellaneous expenses added about $1 million; all of those would be much harder to reduce (they mainly go to technical staff who make reasonable salaries, not to superstars), so let’s assume the full amount is necessary. That’s about $38 million in real cost to produce. Avatar had a lot more (and better) post-production, so let’s go ahead and multiply the post-production budget by an order of magnitude to $84 million. Our new total budget is $113.8 million.
That sounds like a lot, and it is; but this could be made back without copyright. Avatar sold over 14.5 million DVDs and over 8 million Blu-Rays. Conservatively assuming that the price elasticity of demand is zero (which is ridiculous—assuming the monopoly pricing is optimal it should be -1), if those DVDs were sold for $2 each and the Blu-Rays were sold for $5 each, with 50% of those prices being profit, this would yield a total profit of $14.5 million from DVDs and $20 million from Blu-Rays. That’s already $34.5 million. With realistic assumptions about elasticity of demand, cutting the prices this much (DVDs down from an average of $16, Blu-Rays down from an average of $20) would multiply the number of DVDs sold by at least 5 and the number of Blu-Rays sold by at least 3, which would get us all the way up to $132 million—enough to cover our new budget. (Of course this is much less than they actually made, which is why they set the prices they did—but that doesn’t mean it’s optimal from society’s perspective.)

But okay, suppose I’m wrong about the elasticity, and dropping the price from $16 to $2 for a DVD somehow wouldn’t actually increase the number purchased. What other sources of revenue would they have? Well, box office tickets would still be a thing. They’d have to come down in price, but given the high-quality high-fidelity versions that cinemas require—making them quite hard to pirate—they would still get decent money from each cinema. Let’s say the price drops by 90%—all cinemas are now $1 cinemas!—and the sales again somehow remain exactly the same (rather than dramatically increasing as they actually would). What would Avatar’s worldwide box office gross be then? $278 million. They could give the DVDs away for free and still turn a profit.

And that’s Avatar, one of the most expensive movies ever made. By cutting out the winner-takes-all salaries and huge corporate profits, the budget can be substantially reduced, and then what real costs remain can be quite well covered by box office and DVD sales at reasonable prices. If you imagine that piracy somehow undercuts everything until you have to give away things for free, you might think this is impossible; but in reality pirated versions are of unreliable quality, people do want to support artists and they are willing to pay something for their entertainment. They’re just tired of paying monopoly prices to benefit the shareholders of Viacom.

Would this end the era of the multi-millionaire movie star? Yes, I suppose it might. But it would also put about $10 billion per year back in the pockets of American consumers—and there’s little reason to think it would take away future Avatars, much less future Gone with the Winds.

How (not) to talk about the defense budget

JDN 2457927 EDT 20:20.

This week on Facebook I ran into a couple of memes about the defense budget that I thought were worth addressing. While the core message that the United States spends too much on the military is sound, these particular memes are so massively misleading that I think it would be irresponsible to let them go unanswered.

Tax_dollars_meme

First of all, this graph is outdated; it appears to be from about five years ago. If you use nominal figures for just direct military spending, the budget has been cut from just under $700 billion (what this figure looks like) in 2010 to only about $600 billion today. If you include verterans’ benefits, again nominally, we haven’t been below $700 billion since 2007; today we are now above $800 billion. I think the most meaningful measure is actually military spending as percent of GDP, on which we’ve cut military spending from its peak of 4.7% of GDP in 2010 to 3.5% of GDP today.

It’s also a terrible way to draw a graph; using images instead of bars may be visually appealing, but it undermines the most important aspect of a bar graph, which is that you can easily visually compare relative magnitudes.

But the most important reason why this graph is misleading is that it uses only the so-called “discretionary budget”, which includes almost all military spending but only a small fraction of spending on healthcare and social services. This creates a wildly inflated sense of how much we spend on the military relatively to other priorities.

In particular, we’re excluding Medicare and Social Security, which are on the “mandatory budget”; each of these alone is comparable to total military spending. Here’s a very nice table of all US government spending broken down by category.

Let’s just look at federal spending for now. Including veterans’ benefits, we currently spend $814 billion per year on defense. On Social Security, we spend $959 billion. On healthcare, we spend $1,018 billion per year, of which $536 billion is Medicare.

We also spend $376 billion on social welfare programs and unemployment, along with $149 billion on education, $229 billion servicing the national debt, and $214 billion on everything else (such as police, transportation, and administration).

I’ve made you a graph that accurately reflects these relative quantities:

US_federal_spending

As you can see, the military is one of our major budget items, but the largest categories are actually pensions (i.e. Social Security) and healthcare (i.e. Medicare and Medicaid).

Given the right year and properly adjusted bars on the graph, the meme may strictly be accurate about the discretionary budget, but it gives an extremely distorted sense of our overall government spending.

The next meme is even worse:

Lee_Camp_meme

Again the figures aren’t strictly wrong if you use the right year, but we’re only looking at the federal discretionary budget. Since basically all military spending is federal and discretionary, but most education spending is mandatory and done at the state and local level, this is an even more misleading picture.

Total annual US military spending (including veteran benefits) is about $815 billion.
Total US education spending (at all levels) is about $922 billion.

Here’s an accurate graph of total US government spending at all levels:

US_total_spending

That is, we spend more on education than we do on the military, and dramatically more on healthcare.

However, the United States clearly does spend far too much on the military and probably too little on education; the proper comparison to make is to other countries.

Most other First World Countries spend dramatically more on education than they do on the military.

France, for example, spends about $160 billion per year on education, but only about $53 billion per year on the military—and France is actually a relatively militaristic country, with the 6th-highest total military spending in the world.

Germany spends about $172 billion per year on education, but only about about $44 billion on the military.

In absolute figures, the United States overwhelms all other countries in the world—we spend as much as at least the next 10 combined.

Using figures from the Stockholm International Peace Research Institute (SIPRI), the US spends $610 billion of the world’s total $1,776 billion, meaning that over a third of the world’s military spending is by the United States.

This is a graph of the top 15 largest military budgets in the world.

world_military_spending

One of these things is not like the other ones…

It probably makes the most sense to compare military spending as a portion of GDP, which makes the US no longer an outlier worldwide, but still very high by First World standards:

world_military_spending_GDP

If we do want to compare military spending to other forms of spending, I think we should do that in international perspective as well. Here is a graph of education spending versus military spending as a portion of GDP, in several First World countries (military from SIPRI and the CIA, and education from the UNDP):

world_military_education

Our education spending is about average (though somehow we do it so inefficiently that we don’t provide college for free, unlike Germany, France, Finland, Sweden, or Norway), but our military spending is by far the highest.

How about a meme about that?

The terrible, horrible, no-good very-bad budget bill

JDN 2457005 PST 11:52.

I would have preferred to write about something a bit cheerier (like the fact that by the time I write my next post I expect to be finished with my master’s degree!), but this is obviously the big news in economic policy today. The new House budget bill was unveiled Tuesday, and then passed in the House on Thursday by a narrow vote. It has stalled in the Senate thanks in part to fierce—and entirely justified—opposition by Elizabeth Warren, and so today it has been delayed in the Senate. Obama has actually urged his fellow Democrats to pass it, in order to avoid another government shutdown. Here’s why Warren is right and Obama is wrong.

You know the saying “You can’t negotiate with terrorists!”? Well, in practice that’s not actually true—we negotiate with terrorists all the time; the FBI has special hostage negotiators for this purpose, because sometimes it really is the best option. But the saying has an underlying kernel of truth, which is that once someone is willing to hold hostages and commit murder, they have crossed a line, a Rubicon from which it is impossible to return; negotiations with them can never again be good-faith honest argumentation, but must always be a strategic action to minimize collateral damage. Everyone knows that if you had the chance you’d just as soon put bullets through all their heads—because everyone knows they’d do the same to you.

Well, right now, the Republicans are acting like terrorists. Emotionally a fair comparison would be with two-year-olds throwing tantrums, but two-year-olds do not control policy on which thousands of lives hang in the balance. This budget bill is designed—quite intentionally, I’m sure—in order to ensure that Democrats are left with only two options: Give up on every major policy issue and abandon all the principles they stand for, or fail to pass a budget and allow the government to shut down, canceling vital services and costing billions of dollars. They are holding the American people hostage.

But here is why you must not give in: They’re going to shoot the hostages anyway. This so-called “compromise” would not only add $479 million in spending on fighter jets that don’t work and the Pentagon hasn’t even asked for, not only cut $93 million from WIC, a 3.5% budget cut adjusted for inflation—literally denying food to starving mothers and children—and dramatically increase the amount of money that can be given by individuals in campaign donations (because apparently the unlimited corporate money of Citizens United wasn’t enough!), but would also remove two of the central provisions of Dodd-Frank financial regulation that are the only thing that stands between us and a full reprise of the Great Recession. And even if the Democrats in the Senate cave to the demands just as the spineless cowards in the House already did, there is nothing to stop Republicans from using the same scorched-earth tactics next year.

I wouldn’t literally say we should put bullets through their heads, but we definitely need to get these Republicans out of office immediately at the next election—and that means that all the left-wing people who insist they don’t vote “on principle” need to grow some spines of their own and vote. Vote Green if you want—the benefits of having a substantial Green coalition in Congress would be enormous, because the Greens favor three really good things in particular: Stricter regulation of carbon emissions, nationalization of the financial system, and a basic income. Or vote for some other obscure party that you like even better. But for the love of all that is good in the world, vote.

The two most obscure—and yet most important—measures in the bill are the elimination of the swaps pushout rule and the margin requirements on derivatives. Compared to these, the cuts in WIC are small potatoes (literally, they include a stupid provision about potatoes). They also really aren’t that complicated, once you boil them down to their core principles. This is however something Wall Street desperately wants you to never, ever do, for otherwise their global crime syndicate will be exposed.

The swaps pushout rule says quite simply that if you’re going to place bets on the failure of other companies—these are called credit default swaps, but they are really quite literally a bet that a given company will go bankrupt—you can’t do so with deposits that are insured by the FDIC. This is the absolute bare minimum regulatory standard that any reasonable economist (or for that matter sane human being!) would demand. Honestly I think credit default swaps should be banned outright. If you want insurance, you should have to buy insurance—and yes, deal with the regulations involved in buying insurance, because those regulations are there for a reason. There’s a reason you can’t buy fire insurance on other people’s houses, and that exact same reason applies a thousandfold for why you shouldn’t be able to buy credit default swaps on other people’s companies. Most people are not psychopaths who would burn down their neighbor’s house for the insurance money—but even when their executives aren’t psychopaths (as many are), most companies are specifically structured so as to behave as if they were psychopaths, as if no interests in the world mattered but their own profit.

But the swaps pushout rule does not by any means ban credit default swaps. Honestly, it doesn’t even really regulate them in any real sense. All it does is require that these bets have to be made with the banks’ own money and not with everyone else’s. You see, bank deposits—the regular kind, “commercial banking”, where you have your checking and savings accounts—are secured by government funds in the event a bank should fail. This makes sense, at least insofar as it makes sense to have private banks in the first place (if we’re going to insure with government funds, why not just use government funds?). But if you allow banks to place whatever bets they feel like using that money, they have basically no downside; heads they win, tails we lose. That’s why the swaps pushout rule is absolutely indispensable; without it, you are allowing banks to gamble with other people’s money.

What about margin requirements? This one is even worse. Margin requirements are literally the only thing that keeps banks from printing unlimited money. If there was one single cause of the Great Recession, it was the fact that there were no margin requirements on over-the-counter derivatives. Because there were no margin requirements, there was no limit to how much money banks could print, and so print they did; the result was a still mind-blowing quadrillion dollars in nominal value of outstanding derivatives. Not million, not billion, not even trillion; quadrillion. $1e15. $1,000,000,000,000,000. That’s how much money they printed. The total world money supply is about $70 trillion, which is 1/14 of that. (If you read that blog post, he makes a rather telling statement: “They demonstrate quite clearly that those who have been lending the money that we owe can’t possibly have had the money they lent.” No, of course they didn’t! They created it by lending it. That is what our system allows them to do.)

And yes, at its core, it was printing money. A lot of economists will tell you otherwise, about how that’s not really what’s happening, because it’s only “nominal” value, and nobody ever expects to cash them in—yeah, but what if they do? (These are largely the same people who will tell you that quantitative easing isn’t printing money, because, uh… er… squirrel!) A tiny fraction of these derivatives were cashed in in 2007, and I think you know what happened next. They printed this money and now they are holding onto it; but woe betide us all if they ever decide to spend it. Honestly we should invalidate all of these derivatives and force them to start over with strict margin requirements, but short of that we must at least, again at the bare minimum, have margin requirements.

Why are margin requirements so important? There’s actually a very simple equation that explains it. If the margin requirement is m, meaning that you must retain a portion m between 0 and 1 of the loans you make as reserves, the total amount of money supply that can be created from the current amount of money M is just M/m. So if margin requirements were 100%—full-reserve banking—then the total money supply is M, and therefore in full control of the central bank. This is how it should be, in my opinion. But usually m is set around 10%, so the total money supply is 10M, meaning that 90% of the money in the system was created by banks. But if you ever let that margin requirement go to zero, you end up dividing by zero—and the total amount of money that can be created is infinite.

To see how this works, suppose we start with $1000 and put it in bank A. Bank A then creates a loan; how big they can make the loan depends on the margin requirement. Let’s say it’s 10%. They can make a loan of $900, because they must keep $100 (10% of $1000) in reserve. So they do that, and then it gets placed in bank B. Then bank B can make a loan of $810, keeping $90. The $810 gets deposited in bank C, which can make a loan of $729, and so on. The total amount of money in the system is the sum of all these: $1000 in bank A (remember, that deposit doesn’t disappear when it’s loaned out!), plus the $900 in bank B, plus $810 in bank C, plus $729 in bank D. After 4 steps we are at $3,439. As we go through more and more steps, the money supply gets larger at an exponentially decaying rate and we converge toward the maximum at $10,000.

The original amount is M, and then we add M(1-m), M(1-m)^2, M(1-m)^3, and so on. That produces the following sum up to n terms (below is LaTeX, which I can’t render for you without a plugin, which requires me to pay for a WordPress subscription I cannot presently afford; you can copy-paste and render it yourself here):

\sum_{k=0}^{n} M (1-m)^k = M \frac{1 – (1-m)^{n+1}}{m}

And then as you let the number of terms grow arbitrarily large, it converges toward a limit at infinity:

\sum_{k=0}^{\infty} M (1-m)^k = \frac{M}{m}

To be fair, we never actually go through infinitely many steps, so even with a margin requirement of zero we don’t literally end up with infinite money. Instead, we just end up with n M, the number of steps times the initial money supply. Start with $1000 and go through 4 steps: $4000. Go through 10 steps: $10,000. Go through 100 steps: $100,000. It just keeps getting bigger and bigger, until that money has nowhere to go and the whole house of cards falls down.

Honestly, I’m not even sure why Wall Street banks would want to get rid of margin requirements. It’s basically putting your entire economy on the counterfeiting standard. Fiat money is often accused of this, but the government has both (a) the legitimate authority empowered by the electorate and (b) incentives to maintain macroeconomic stability, neither of which private banks have. There is no reason other than altruism (and we all know how much altruism Citibank and HSBC have—it is approximately equal to the margin requirement they are trying to get passed—and yes, they wrote the bill) that would prevent them from simply printing as much money as they possibly can, thus maximizing their profits; and they can even excuse the behavior by saying that everyone else is doing it, so it’s not like they could prevent the collapse all by themselves. But by lobbying for a regulation to specifically allow this, they no longer have that excuse; no, everyone won’t be doing it, not unless you pass this law to let them. Despite the global economic collapse that was just caused by this sort of behavior only seven years ago, they now want to return to doing it. At this point I’m beginning to wonder if calling them an international crime syndicate is actually unfair to international crime syndicates. These guys are so totally evil it actually goes beyond the bounds of rational behavior; they’re turning into cartoon supervillains. I would honestly not be that surprised if there were a video of one of these CEOs caught on camera cackling maniacally, “Muahahahaha! The world shall burn!” (Then again, I was pleasantly surprised to see the CEO of Goldman Sachs talking about the harms of income inequality, though it’s not clear he appreciated his own contribution to that inequality.)

And that is why Democrats must not give in. The Senate should vote it down. Failing that, Obama should veto. I wish he still had the line-item veto so he could just remove the egregious riders without allowing a government shutdown, but no, the Senate blocked it. And honestly their reasoning makes sense; there is supposed to be a balance of power between Congress and the President. I just wish we had a Congress that would use its power responsibly, instead of holding the American people hostage to the villainous whims of Wall Street banks.

Fear not the deficit

JDN 2456984 PST 12:20.

The deficit! It’s big and scary! And our national debt is rising by the second, says a “debt clock” that is literally just linearly extrapolating the trend. You don’t actually think that there are economists marking down every single dollar the government spends and uploading it immediately, do you? We’ve got better things to do. Conservatives will froth at the mouth over how Obama is the “biggest government spender in world history“, which is true if you just look at the dollar amounts, but of course it is; Obama is the president of the richest country in world history. If the government continues to tax at the same rate and spend what it taxes, government spending will be a constant proportion of GDP (which isn’t quite true, but it’s pretty close; there are ups and downs but for the last 40 years or so federal spending is generally in the range 30% to 35% of GDP), and the GDP of the United States is huge, and far beyond that of any other nation not only today, but ever. This is particularly true if you use nominal dollars, but it’s even true if you use inflation-adjusted real GDP. No other nation even gets close to US GDP, which is about to reach $17 trillion a year (unless you count the whole European Union as a nation, in which case it’s a dead heat).

China recently passed us if you use purchasing-power-parity, but that really doesn’t mean much, because purchasing-power-parity, or PPP, is a measure of standard of living, not a measure of a nation’s total economic power. If you want to know how well people in a country live, you use GDP per capita (that is, per person) PPP. But if you want to know a country’s capacity to influence the world economy, what matters is so-called real GDP, which is adjusted for inflation and international exchange rates. The difference is that PPP will tell you how many apples a person can buy, but real GDP will tell you how many aircraft carriers a government can build. The US is still doing quite well in that department, thank you; we have 10 of the world’s 20 active aircraft carriers, which is to say as many as everyone else combined. The US has 4% of the world’s population and 24% of the world’s economic output.

In particular, GDP in the US has been growing rather steadily since the Great Recession, and we are now almost recovered from the Second Depression and back to our equilibrium level of unemployment and economic growth. As the economy grows, government spending grows alongside it. Obama has actually presided over a decrease in the proportion of government spending relative to GDP, largely because of all this political pressure to reduce the deficit and stop the growth of the national debt. Under Obama the deficit has dropped dramatically.

But what is the deficit, anyway? And how can the deficit be decreasing if the debt clock keeps ticking up?

The government deficit is simply the difference between total government spending and total government revenue. If the government spends $3.90 trillion and takes in $3.30 trillion, the deficit is going to be $0.60 trillion, or $600 billion. In the rare case that you take in more than you spend, the deficit would be negative; we call that a surplus instead. (This almost never happens.)

Because of the way the US government is financed, the deficit corresponds directly to the national debt, which is the sum of all outstanding loans to the government. Every time the government spends more than it takes in, it makes up the difference by taking out a loan, in the form of a Treasury bond. As long as the deficit is larger than zero, the debt will increase. Think of the debt as where you are, and the deficit as how fast you’re going; you can be slowing down, but you’ll continue to move forward as long as you have some forward momentum.

Who is giving us these loans? You can look at the distribution of bondholders here. About a third of the debt is owned by the federal government itself, which makes it a very bizarre notion of “debt” indeed. Of the rest, 21% is owned by states or the Federal Reserve, so that’s also a pretty weird kind of debt. Only 55% of the total debt is owned by the public, and of those 39% are people and corporations within the United States. That means that only 33% of the national debt is actually owned by foreign people, corporations, or governments. What we actually owe to China is about $1.4 trillion. That’s a lot of money (it’s literally enough to make an endowment that would end world hunger forever), but our total debt is almost $18 trillion, so that’s only 8%.

When most people see these huge figures they panic: “Oh my god, we owe $18 trillion! How will we ever repay that!” Well, first of all, our GDP is $17 trillion, so we only owe a little over one year of income. (I wish I only owed one year of income in student loans….)

But in fact we don’t really owe it at all, and we don’t need to ever repay it. Chop off everything that’s owned by US government institutions (including the Federal Reserve, which is only “quasi-governmental”), and the figure drops down to $9.9 trillion. If by we you mean American individuals and corporations, then obviously we don’t owe back the debt that’s owned by ourselves, so take that off; now you’re looking at $6 trillion. That’s only about 4 months of total US economic output, or less than two years of government revenue.

And it gets better! The government doesn’t need to somehow come up with that money; they don’t even have to raise it in taxes. They can print that money, because the US government has a sovereign currency and the authority to print as much as we want. Really, we have the sovereign currency, because the US dollar is the international reserve currency, the currency that other nations hold in order to make exchanges in foreign markets. Other countries buy our money because it’s a better store of value than their own. Much better, in fact; the US has the most stable inflation rate in the world, and has literally never undergone hyperinflation. Better yet, the last time we had prolonged deflation was the Great Depression. This system is self-perpetuating, because being the international reserve currency also stabilizes the value of your money.

This is why it’s so aggravating to me when people say things like “the government can’t afford that” or “the government is broke” or “that money needs to come from somewhere”. No, the government can’t be broke! No, the money doesn’t have to come from somewhere! The US government is the somewhere from which the world’s money comes. If there is one institution in the world that can never, ever be broke, it is the US government. This gives our government an incredible amount of power—combine that with our aforementioned enormous GDP and fleet of aircraft carriers, and you begin to see why the US is considered a global hegemon.

To be clear: I’m not suggesting we eliminate all taxes and just start printing money to pay for everything. Taxes are useful, and we should continue to have them—ideally we would make them more progressive than they presently are. But it’s important to understand why taxes are useful; it’s really not that they are “paying for” government services. It’s actually more that they are controlling the money supply. The government creates money by spending, then removes money by taxing; in this way we maintain a stable growth of the money supply that allows us to keep the economy running smoothly and maintain inflation at a comfortable level. Taxes also allow the government to redistribute income from those who have it and save it to those who need it and will spend it—which is all the more reason for them to be progressive. But in theory we could eliminate all taxes without eliminating government services; it’s just that this would cause a surge in inflation. It’s a bad idea, but by no means impossible.

When we have a deficit, the national debt increases. This is not a bad thing. This is a fundamental misconception that I hope to disabuse you of: Government debt is not like household debt or corporate debt. When people say things like “we need to stop spending outside our means” or “we shouldn’t put wars on the credit card”, they are displaying a fundamental misunderstanding of what government debt is. The government simply does not operate under the same kind of credit constraints as you and I.

First, the government controls its own interest rates, and they are always very low—typically the lowest in the entire economy. That already gives it a lot more power over its debt than you or I have over our own.

Second, the government has no reason to default, because they can always print more money. That’s probably why bondholders tolerate the fact that the government sets its own interest rates; sure, it only pays 0.5%, but it definitely pays that 0.5%.

Third, government debt plays a role in the functioning of global markets; one of the reasons why China is buying up so much of our debt is so that they can keep the dollar high in value and thus maintain their trade surplus. (This is why whenever someone says something like, “The government needs to stop going further into debt, just like how I tightened my belt and paid off my mortgage!” I generally reply, “So when was the last time someone bought your debt in order to prop up your currency?”) This is also why we can’t get rid of our trade deficit and maintain a “strong dollar” at the same time; anyone who wants to do that may feel patriotic, but they are literally talking nonsense. The stronger the dollar, the higher the trade deficit.

Fourth, as I already hinted at above, the government doesn’t actually need debt at all. Government debt, like taxation, is not actually a source of funding; it is a tool of monetary policy. (If you’re going to quote one sentence from this post, it should be the previous; that basically sums up what I’m saying.) Even without raising taxes or cutting spending, the government could choose not to issue bonds, and instead print cash. You could make a sophisticated economic argument for how this is really somehow “issuing debt with indefinite maturity at 0% interest”; okay, fine. But it’s not what most people think of when they think of debt. (In fact, sophisticated economic arguments can go quite the opposite way: there’s a professor at Harvard I may end up working with—if I get into Harvard for my PhD of course—who argues that the federal debt and deficit are literally meaningless because they can be set arbitrarily by policy. I think he goes too far, but I see his point.) This is why many economists were suggesting that in order to get around ridiculous debt-ceiling intransigence Obama could simply Mint the Coin.

Government bonds aren’t really for the benefit of the government, they’re for the benefit of society. They allow the government to ensure that there is always a perfectly safe investment that people can buy into which will anchor interest rates for the rest of the economy. If we ever did actually pay off all the Treasury bonds, the consequences could be disastrous.

Fifth, the government does not have a credit limit; they can always issue more debt (unless Congress is filled with idiots who won’t raise the debt ceiling!). The US government is the closest example in the world to what neoclassical economists call a perfect credit market. A perfect credit market is like an ideal rational agent; these sort of things only exist in an imaginary world of infinite identical psychopaths. A perfect credit market would have perfect information, zero transaction cost, zero default risk, and an unlimited quantity of debt; with no effort at all you could take out as much debt as you want and everyone would know that you are always guaranteed to pay it back. This is in most cases an utterly absurd notion—but in the case of the US government it’s actually pretty close.

Okay, now that I’ve deluged you with reasons why the national debt is fundamentally different from a household mortgage or corporate bond, let’s get back to talking about the deficit. As I mentioned earlier, the deficit is almost always positive; the government is almost always spending more money than it takes in. Most people think that is a bad thing; it is not.

It would be bad for a corporation to always run a deficit, because then it would never make a profit. But the government is not a for-profit corporation. It would be bad for an individual to always run a deficit, because eventually they would go bankrupt. But the government is not an individual.

In fact, the government running a deficit is necessary for both corporations to make profits and individuals to gain net wealth! The government is the reason why our monetary system is nonzero-sum.

This is actually so easy to see that most people who learn about it react with shock, assuming that it can’t be right. There can’t be some simple and uncontroversial equation that shows that government deficits are necessary for profits and savings. Actually, there is; and the fact that we don’t talk about this more should tell you something about the level of sophistication in our economic discourse.

Individuals do work, get paid wages W. (This also includes salaries and bonuses; it’s all forms of labor income.) They also get paid by government spending, G, and pay taxes, T. Let’s pretend that all taxing and spending goes to people and not corporations. This is pretty close to true, especially since corporations as big as Boeing frequently pay nothing in taxes. Corporate subsidies, while ridiculous, are also a small portion of spending—no credible estimate is above $300 billion a year, or less than 10% of the budget. (Without that assumption the equation has a couple more terms, but the basic argument doesn’t change.) People use their money to buy consumption goods, C. What they don’t spend they save, S.

S = (W + G – T) – C

I’m going to rearrange this for reasons that will soon become clear:

S = (W – C) + (G – T)

I’ll also subtract investment I from both sides, again for reasons that will become clear:

S – I = (W – C – I) + (G – T)

Corporations hire workers and pay them W. They make consumption goods which are then sold for C. They also sell to foreign companies and buy from foreign companies, exporting X and importing M. Since we have a trade deficit, this means that X < M. Finally, they receive investment I that comes in the form of banks creating money through loans (yes, banks can create money). Most of our monetary policy is in the form of trying to get banks to create more money by changing interest rates. Only when desperate do we actually create the money directly (I’m not sure why we do it this way). In any case, this yields a total net profit P.

P = C + I – W + (X – M)

Now, if the economy is functioning well, we want profits and savings to both be positive—both people and corporations will have more money on average next year then they had this year. This means that S > 0 and P > 0. We also don’t want the banks loaning out more money than people save—otherwise people go ever further into debt—so we actually want S > I, or S – I > 0. If S – I > 0, people are paying down their debts and gaining net wealth. If S – I < 0, people are going further into debt and losing net wealth. In a well-functioning economy we want people to be gaining net wealth.

In order to have P > 0, because X – M < 0 we need to have C + I > W. People have to spend more on consumption and investment than they are paid in wages—have to, absolutely have to, as a mathematical law—in order for corporations to make a profit.

But then if C + I > W, W – C – I < 0, which means that the first term of the savings equation is negative. In order for savings to be positive, it must be—again as a mathematical law—that G – T > 0, which means that government spending exceeds taxes. In order for both corporations to profit and individuals to save at the same time, the government must run a deficit.

There is one other way, actually, and that’s for X – M to be positive, meaning you run a trade surplus. But right now we don’t, and moreover, the world as a whole necessarily cannot. For the world as a whole, X = M. This will remain true at least until we colonize other planets. This means that in order for both corporate profits and individual savings to be positive worldwide, overall governments worldwide must spend more than they take in. It has to be that way, otherwise the equations simply don’t balance.

You can also look at it another way by adding the equations for S – I and P:

S – I + P = (G – T) + (X – M)

Finally, you can also derive this a third way. This is your total GDP which we usually call Y (“yield”, I think?); it’s equal to consumption plus investment plus government spending, plus net exports:

Y = C + I + G + (X – M)

It’s also equal to consumption plus profit plus saving plus taxes:

Y = C + P + S + T

So those two things must be the same:

C + S + T + P = C + I + G + (X – M)

Canceling and rearranging we get:

(S – I) + P = (G – T) + (X – M)

The sum of saving minus investment (which we can sort of think of as “net saving”) plus profit is equal to the sum of the government deficit and the trade surplus. (Usually you don’t see P in this sectoral balances equation because no distinction is made between consumers and corporations and P is absorbed into S.)

From the profit equation:

W = C + I + (X – M) – P

Put that back into our GDP equation:

Y = W + P + G

GDP is wages plus profits plus government spending.

That’s a lot of equations; simple equations, but yes, equations. Lots of people are scared by equations. So here, let me try to boil it down to a verbal argument. When people save and corporations make profits, money gets taken out of circulation. If no new money is added, the money supply will decrease as a result; this shrinks the economy (mathematically it must absolutely shrink it in nominal terms; theoretically it could cause deflation and not reduce real output, but in practice real output always goes down because deflation causes its own set of problems). New money can be created by banks, but the mechanism of creation requires that people go further into debt. This is unstable, and eventually people can’t borrow anymore and the whole financial system comes crashing down. The better way, then, is for the government to create new money. Yes, as we currently do things, this means the government will go further into debt; but that’s all right, because the government can continue to increase its debt indefinitely without having to worry about hitting a ceiling and making everything fall apart. We could also just print money instead, and in fact I think in many cases this is what we should do—but for whatever reason people always freak out when you suggest such a thing, invariably mentioning Zimbabwe. (And yes, Zimbabwe is in awful shape; but they didn’t just print money to cover a reasonable amount of deficit spending. They printed money to line their own pockets, and it was thousands of times more than what I’m suggesting. Also Zimbabwe has a much smaller economy; $1 trillion is 5% of US GDP, but it’s 8,000% of Zimbabwe’s. I’m suggesting we print maybe 4% of GDP; at the peak of the hyperinflation they printed something more like 100,000%.)

One last thing before I go. If investment suddenly drops, net saving will go up. If the government deficit and trade deficit remain constant, profits must go down. This drives firms into bankruptcy, driving wages down as well. This makes GDP fall—and you get a recession. A similar effect would occur if consumption suddenly drops. In both cases people will be trying to increase their net wealth, but in fact they won’t be able to—this is what’s called the paradox of thrift. You actually want to increase the government deficit under these circumstances, because then you will both add to GDP directly and allow profits and wages to go back up and raise GDP even further. Because GDP has gone down, tax income will go down, so if you insist on balancing the budget, you’ll cut spending and only make things worse.

Raising the government deficit generally increases economic growth. From these simple equations it looks like you could raise GDP indefinitely, but these are nominal figures—actual dollar amounts—so after a certain point all you’d be doing is creating inflation. Where exactly that point is depends on how your economy is performing relative to its potential capacity. In a recession you are far below capacity, so that’s just the time to spend. You’d only want a budget surplus if you actually thought you were above long-run capacity, because you’re depleting natural resources or causing too much inflation or something like that. And indeed, we hardly ever see budget surpluses.

So that, my dear reader, is why we don’t need to fear the deficit. Government debt is nothing like other forms of debt; profits and savings depend upon the government spending more than it takes in; deficits are highly beneficial during recessions; and the US government is actually in a unique position to never worry about defaulting on its debt.