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The America They Believe In? Part I

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At their national convention last week, the Republican party outlined their proposal on how to bring jobs, economic growth, and renewed prosperity to America. The plan is fairly straightforward: reduce federal spending on entitlements, payrolls, and employee benefits, lower personal income and corporate tax rates, and restrain the abilty of the Federal Reserve to raise and lower inflation.

The prevailing theory is that the federal government has spent the country closer to a “fiscal cliff” and that the influx of cheap capital into the economy (and in particular the financial sector) is holding back job creation and stagnating economic growth. So, reducing this spending will slow the advance of the national debt, while tax incentives will encourage new economic activity from private sector industries. It’s a good sounding theory, until we consider that Greece, Italy, Spain and Portugal have pursued this same strategy in Europe, and their debt concerns worsened as deflation and unemployment permeated their economies. If enacted, the Republican proposals would produce similar results in the U.S. economy, increasing unemployment, and causing massive shortfalls in federal revenue, effectively putting America back on a path towards recession. 

Cutting Down To The Nitty Gritty

So what exactly do the Republicans propose to do to bring back prosperity? 

  • Limit federal expenditure to 20% of GDP annually
  • Return federal discretionary spending on non-security related items to 2008 levels
  • Repeal the Affordable Healthcare Act
  • Lower wages and benefits for federal employees
  • Reduce the size of the federal workforce
  • Repeal federal regulations in Dodd-Frank
  • Decrease marginal tax rates by 20% 
  • Repeal the Alternative Minimum Tax
  • Lower corporate tax rates to 25% 
  • Create a commission to conduct an audit of the Federal Reserve System and explore the feasibility of returning to a Gold Standard for the U.S. dollar

The purpose of all the cutting and repealing is twofold. Ideally, the reductions in federal spending are supposed to slow the increase of the public and intragovernmental debt while prioritizing federal expenses toward defense. The addition of a gold standard would restrict the powers of the Federal Reserve to expand its balance sheet by purchasing assets or selling Treasury bonds on the open market. Lowering tax rates should generate economic activity and growth by increasing the expendable income of consumers and corporations, allowing these entities to further invest their money into the general economy. 

On the spending side, here’s a look at what these proposals look like on paper: 

Federal Spending would be limited to 20% of GDP annually.

  • Based on data from the CIA WorldFact Book, the 2011 U.S. GDP fell between $15.09 and $15.29 tillion, so the 20% limitation would be between $3.018 and $3.058 trillion per year. 

Discretionary Spending unrelated to defense would go back to pre-2008 levels.

  • Spending Items Affected:
  • Dept. of Health and Human Services
  • Dept. of Education
  • Dept. of Veterans Affairs
  • Housing and Urban Development
  • State Dept. and Other Intl. Programs
  • Dept. of Energy
  • Dept. of Justice
  • Dept. of Agriculture
  • NASA
  • Dept. of Transportation
  • Dept. of Treasury
  • Dept. of the Interior
  • Dept. of Labor

Comparison of 2012 and 2008 Spending Levels: figures shown are in billions of dollars, data courtesy of the GAO Federal Balance Sheet Report for fiscal year 2011


Reduced Wages and Benefit allotments for Federal Employees: note that figures listed are in billions of dollars. Here thousands of billions would be trillions of dollars in real value. 

At present, there seems to be no specified criterion or target for reductions in either category. However, given the level of spending and comparing these figures against the data available (courtesy of the Office of Personnel Management) on the civilian and military workforce we can calculate the funds spent per individual per employee. 

  • There’s a total $2,031,000,000,000.00 in employee benefits and wages. divide that by the 2,776,000 total executive branch employees (which include legislative, judicial, and postal employees) that comes to $583,465.42 per person annually. 
  • Total military benefits and wages came to $3,765,700,000,000. Divided by the 1,602,000 men and women in uniform that comes to $2,350,624.22 per person annually. 

Based on what has been published and reported on the Republican agenda around military spending, most of the defense related spending in the federal budget is either left at present levels or expanded further.

Spending Reductions Related to Medicare: 

Like the federal wage cuts, the Republican plans for spending reductions are not very specific, but there is plenty of data on what the government actually spends on these programs. 

Note that the following figures listed are in billions of dollars, hence thousands or tens of thousands of billions would be trillions or tens of trillions respectively. Spending figures are for FY2011.

 

Republican proposals for Medicare center around the use of a voucher system, where the government issues vouchers of predetermined value for the purchase of private health insurance. The idea is that a voucher system would simplify the amount the government disburses to Medicare recipients and would make long term cost analysis easier as fewer variable rates of expense are easier to account and track. 

On the income side, Republicans would lower all marignal tax rates by 20% across all income levels. For those unfamiliar, the United States employs a progressive income tax, which taxes at an increased rate at higher levels of income accounting for deductions. As an example of how the tax is calculated see here. In 2011, the tax rates and income threasholds were thus: 

A 20% reduction in these rates would mean that individuals earning less than $35,350/yr in gross annual income would incur no federal income tax, while those earning $35,351 and higher would only be subject to a maximum rate of 15%. Married couples filing their taxes jointly wouldn’t pay tax on the first $70,700 of their gross annual income and individuals filing as Head of Household wouldn’t pay tax on the first $47,350.

Republicans also want to repeal the Alternative Minimum Tax. The AMT is the second of two federal income taxes that U.S. wage-earners may be required to pay. According to U.S. tax code, a person must either pay the AMT or the Marginal rate based on whichever amount would be greater in accounting for possible exemptions. Overall, the AMT levies a fairly flat rate (though the percentage is considerably higher) and uses a predetermined amount for exemption based on income. The AMT was originally intended to target high income individuals as the rates on captial gains (which they’re more likely to have) and regular income are higher, while the amout retained through exemptions is phased out to zero at the highest levels of income. 

2012 AMT Tax Structure: 


Lastly, Republicans want to cut corporate tax rates to a maximum of 25%. Similar to individual income taxes, corporate taxes in the U.S. are also progressive so higher levels of income are taxed at higher rates. 

2012 Corporate Tax Structure:

With the top tax rate set at 25%, corporate incomes above $75,000 would not be taxed at the Marginal Rate. 

Last, but certainly not least, are the proposals regarding the Gold Standard and the Federal Reserve System. Republicans are considering using a Gold Standard to value the U.S. dollar, evidenced by the plan to audit the Federal Reserve over the previous four years and the plan to create a gold commission to explore the feasibility of a gold standard. Ideally, a Gold Standard would restrict the ability of the Federal Reserve System to increase the money supply (thus raising inflation), since the value of the currency in circulation could not exceed the value of the gold held in U.S. reserves and depository insitutions. 

So Mr. Man, Why Is All This So Bad?

In a recession, simultaneously cutting both government spending and revenue has a negative impact on the economy through increasing unemployment and raising the national debt. On the spending side, most of the proposed cuts to government spending involve reductions in federal payrolls, entitlements, benefits, and discretionary projects. Reductions in these areas raise the unemployment level directly through layoffs of government employees, cancellation of government projects (e.g highway construction) and elimination of government agencies. Debts also increase here as incomplete projects that are funded with allocated funds are canned due to lack of funding, adding liabilities on the federal balance sheet.

On the income side, reductions in federal revenue through tax cuts or tax incentives further exacerbate funding and staffing concerns for federal projects brought on by spending reductions. Also taxation tends to be the government’s primary source of revenue, meaning that reductions here force the government to seek out alternative sources of income. Usually governments turn to their central banks to either increase the money supply, which raises inflation, or sell bonds on the open market which increases the overall debt. The struggling nations of in the Euro area are a prime example of the ineffectiveness of such policies on stimulating economies in recession. 

Continued in Part II

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About Alexander J Smith III

  • Glenn Contrarian

    Problem is, the conservatives have never been able to answer this one nagging question: why is it that with the exception of certain OPEC nations, ALL first-world nations are socialized democracies with what the conservatives would think are economically-disastrous tax rates and regulation, whereas ALL of the many nations around the world which have small governments, low taxes, and little regulation are third-world nations?

    If the economic structure of socialized democracies was SO bad, then they’d never have become first-world nations to begin with! And if small government, low taxes, and little regulation were the path to national prosperity, there’s a whole lot of third-world nations who would first-world nations already.

    But none of the conservatives have been able to answer this particular conundrum…not that it matters, because the nation’s economy can go to hell in a handbasket as long as they get their way, they’re in charge, and they get their money.

  • Glenn Contrarian

    And Alex –

    Great article, for those of us who are not facts-and-figures challenged.

  • Igor

    That business about “…tax incentives will encourage new economic activity from private sector industries. ” doesn’t seem to work out at all, and it certainly hasn’t the last few years as businesses are just banking their tax gifts so that the money goes dormant.

  • Alexander J Smith III

    Glenn

    As always i greatly appreciate you taking the time to read and comment on my work. I really appreciate it

  • Alexander J Smith III

    Igor

    Yeah that’s one of the reasons I think that the Fed continues to expand its balance sheet. Ideally, its job is to create conditions that make investing attractive from the private sectors POV, but they aren’t using the capital, like you pointed out they’re just sitting on it and so the Fed keeps pumping liquidity into the economy to keep money flowing. Demand for it is out there, but it seems the federal government are the only ones really looking to capitalize on that demand

  • Igor

    IMO our entire tax break idea, which is little more than trying to bribe businesses to actually do business, is a failure. Take away ALL business tax breaks, create a sensible system of outright subsidies, like SBA, and finance too-big-for-private-money jobs outright, and vigorously enforce anti-monopoly laws to break up overgrown capital concentrations that are stifling entrepreneurship by small bussinessmen.

    We’ve got to cut back overgrown sunset behemoths the way that a good gardener cuts back any wildly overgrown plant in his garden.

  • Igor

    The republicans basic economic idea is wrong: they wish to move more money into the hands of capitalists (they assume, I guess that those older wiser hands will better administer the money than the silly whim-driven masses).

    But it is wrong. Demonstrably wrong. Economies prosper, or not, according to the demand created by the most numerous consumers, for the simple reason that their high Marginal Propensity To Spend gives them the highest Economic Multiplier. Every dollar they spend is echoed through the economy 3 or 4 times.