Natural Limit on Federal Revenue

It is a good thing that we do not get as much government as we pay for. - Will Rogers

A new graph is making the rounds on conservative sites showing that regardless of changes in the tax law, 

"From 1930 to 2010, tax revenue collection in the United States has never topped 20.9%, averaging 16.5% of GDP over these 80 years. ...
During the time period examined above, the rate of income taxation on the highest earning Americans has fluctuated drastically, from 25% of income in 1930 to 92% of income in the early 1950’s. Despite these vast differences in these top marginal rates, the total percentage of GDP that the federal government has collected in revenue has changed little."

Green line = tax revenue collected as % of total income

Politicians at all levels, city, state, federal, believe that deficits can be fixed by raising tax rates. But history shows that those individuals paying the most taxes find ways to shelter their earnings so total tax revenue rarely goes up and sometimes even falls. You may say, "well then, close the loopholes", but then new loopholes are found. Don't forget that most Congressmen and Senators are very rich and want loopholes for themselves. And in today's global economy, if US taxes become too high, it's not that difficult to move your business out of the country.

Analyst Veronique de Rugy, who created the graph above, says, "In recent years, spending, not revenues, has deviated from its historical path; spending must be addressed to rectify the budget."  A few weeks ago I mentioned the Wall Street Journal story, A Sucker's Play -- Each $1 in Higher Taxes Results in $1.17 of New Spending. Estimated projections of new tax revenue results in politicians increasing spending even more - with disastrous results when these projections fall short of reality. In California, a recent report shows that cities and counties will have to pay 55% more to the state for at least 19 years to cover pension expenses; the tax revenue currently collected is far below expectations.

Bottom Line

With politics there is never a time to cut the budget. When times are good and revenue is high, money is allocated to higher civil servant salaries and pensions, and new programs are created for the poor and middle class. When times are poor, it is unthinkable to cut programs for the poor who are most in need (they need even more money!) and there is no way to cut back on civil salaries which are fixed by contract. Obama recently proposed a two year freeze on federal salaries and there were many objections from the left on how horrible this would be! A federal commission to reduce the deficit heard from many organizations - each said, "Yes the government spends too much and must cut back, but not with us, we are essential."aBack in August I wrote about the Laffer Curve, the idea that beyond a certain point, higher taxes lead to greater tax evasion and the net result is less tax revenue collected. This has been observed in states like NJ and Maryland which raised taxes on the rich, only to have them leave the state, and the total tax collection fall. See Actions have consequences.

Pollyannaish Economic Prognostications

"At some point, someone is going to have to level with the American people about just how bad things really are and why, despite all the ministrations from Washington over the past two years, they don't seem to be getting much better."

- John Merline, Opinion Editor, AOLnews.com, Aug 13, 2010

I'm amazed at people who believe that the government knows best and can be trusted to control the economy. Centralized planning has never worked, in any country, ever. History is full of examples of failed socialist states, failed attempts at price controls in "free" states, and failed attempts at government controlled utilities (eg. British coal mines). In a free market economy the penalty for being wrong can be the loss of your job or the bankruptcy of the company. Mistakes are weeded out. This is not the case in government - "What our stimulus of a trillion dollars failed?! Why that must mean we did not spend enough and must keep doing more of what failed before." The penalty of failure is an important component of free markets and why the concept of "too big to fail" is such a dangerously wrong idea.

The opinion editor at AOLnews.com has published an article entitled, "Opinion: Where Did All Those 'Green Shoots' Go?" The article includes this chart of "Pollyannaish Economic Prognostications" from the Obama administration over the past two years. It maps government statements to the unemployment rate. From the chart you can conclude one of two things:

1. The government economists are totally clueless
or
2. The administration is lying and not reporting the real predictions of the economists

A) Obama budget predicts that the unemployment rate for 2009 will be 8.1 percent (actual rate is 9.3 percent), and says it will be 7.9 percent in 2010 (average so far: 9.7 percent). -- Feb. 26, 2009


B) Fed Chairman Bernanke says he sees "green shoots" of U.S. recovery, which, he said, would "pick up steam" next year. -- March 15, 2009

C) Obama says, "We are beginning to see glimmers of hope." -- April 14, 2009

D) CNN reports that "Job Recovery May Be on the Way." -- May 18, 2009

E) Jeffrey Kling of the Brookings Institution says, "It seems clear the U.S. economy has turned a corner." -- June 5, 2009
 

F) Bernanke says recovery is under way and "prospects for a return to growth in the near term appear good." -- Sept. 16, 2009


G) Obama says, "We are seeing the corner turn on the economy growing again." -- Feb. 7, 2010

H) Obama says, "The worst of the storm is over. ... We are beginning to turn the corner." -- April 3, 2010

I) Obama says, "The economy is getting stronger by the day." -- June 4, 2010

I) Vice President Joe Biden dubs the months ahead "Recovery Summer," and David Axelrod adds that "this summer will be the most active Recovery Act season yet." -- June 17, 2010

I) Obama declares the economic recovery is "well under way." -- June 29, 2010

J) White House press secretary Robert Gibbs says, "The economy is getting stronger." -- July 8, 2010
 
Bottom Line
 
What's the truth? Aug 10 the Federal Reserve issued a report saying the "pace of recovery in output and employment has slowed in recent months." Jobless claims have hit a nearly six-month high. There is talk in the media about a possible "double-dip" recession.
 
Check out the article "The Cabinet From Another World" by IBD Editorials.

"America is wising up to this administration's incompetence. Only minutes after [the labor] department reported that payrolls had shed another 131,000 positions in July, there was Secretary [of Labor] Hilda Solis speaking brazenly of the "strong and immediate action" the White House had taken to save or create "more than 2.5 million American jobs." But as the market action showed [the Dow fell 100 points in seconds], investors could see she didn't know what she was talking about."

"...There's never been an administration led by so few people with any experience in the private sector — including the president, the vice president and even the treasury secretary, who last week wrongly called it a "myth" that raising taxes on high-income Americans would hurt small business."

What does a Trillion dollars buy?

"The nine most terrifying words in the English language are: 'I'm from the government and I'm here to help.'" - Ronald Reagan

For this post, I'll let a picture be the star. What has the one trillion dollar stimulus package achieved?

Lies, damned lies, and statistics

While the news in this graph is very bad for the US and for Obama, I'll switch hats from government cynic to mathematician for a moment.

I've always associated the phrase, "Lies, damned lies, and statistics" as a favorite quote of Mark Twain but Wikipedia claims it was first used by British Prime Minister Benjamin Disraeli. While the chart above is accurate, it uses three techniques to exaggerate the message and editorialize.

1. This chart does not prove a "swindle". That's just the artist's opinion. I do agree however with the byline, "Reality Trumps White House Promises".

2. I doubt very much that the Obama's sad face is related to the stimulus. The artist wants us to assume that Obama has acknowledged his "guilt" in the "swindle". To my knowledge Obama is still claiming with a smile that the stimulus is a success.

3. The vertical scale of the chart is approximately 7 to 10.5%. By not starting the vertical scale at zero, differences are exaggerated. The White House predicted 8% but got 10%. This is an actual error of 1/4 or 25%. But the graph shows the red line climbing to 4 times higher than the White House "promise" for a perceived error of 400%.

Now here is a more honest graph of the same numbers.

Bottom Line

I'm now putting my government cynic hat back on...

Recall how this stimulus package was passed in Congress. It was urgent to prevent an economic disaster. There was no time to read the details. We were asked to trust our leaders that they knew best how to solve the crisis by throwing lots of money at it. I hope Americans never make that mistake again.

Federal Pay Gap

“That government is best which governs least” – attributed to Thomas Paine but unknown

I’d like to thank Cato-at-Liberty for the charts in today’s blog. The numbers come from the annual report of The Bureau of Economic Analysis showing compensation levels by industry (Tables 6.2D, 6.3D, and 6.6D).

At one time federal employees were underpaid. So in order to attract workers they were offered great benefit packages instead. But a funny thing happened. In order to attract top talent and win the votes of federal employees, congress has been steadily increasing the pay for itself and for all government employees. In 2008, the average wage for 1.9 million federal civilian workers was $79,197. Compare this to an average of only $49,935 for the nation’s 108 million private sector workers (measured in full-time equivalents). As the chart below shows this pay gap is increasing.

If we also measure the always-generous federal benefits the size of the gap is astonishing! Federal worker compensation averaged a remarkable $119,982 in 2008, more than double the private sector average of $59,909.

Bottom Line

Government is a necessary creature but it should not be pampered or overfed. George Washington warned in his farewell address as president of the dangers of "big government". Even a democratic government can become a "despot" if it assumes too much power.

"It is important, likewise, that the habits of thinking in a free country should inspire caution in those entrusted with its administration, to confine themselves within their respective constitutional spheres, avoiding in the exercise of the powers of one department to encroach upon another. The spirit of encroachment tends to consolidate the powers of all the departments in one, and thus to create, whatever the form of government, a real despotism. A just estimate of that love of power, and proneness to abuse it, which predominates in the human heart, is sufficient to satisfy us of the truth of this position."