Wednesday, April 22, 2009

Change You Can Suspend Disbelief In

This is a guest post by Publius III. I am happy to see that guest posts are becoming a venerable institution here at ClubOrlov. Long live Samizdat!

Comprehensive tax relief is America's surest route to effective economic stimulus and genuine recovery. Elimination of all US income taxes would offer irresistible incentives to every American to go out and shop, swiftly restoring hope, confidence, and economic stability. For the US government, this policy shift would produce greater benefits at lower cost than any rescue package that has been tried or even considered.

How I learned to stop worrying and love the deficit

Over the last thirty years, the world has learned that deficits are a boon to any economy that is wise enough to use them appropriately. Indeed, perennial deficits have become a useful predictor of a nation's economic health and growth. It is government deficit spending that has created the jobs that have kept our little home planet glowing so brightly in the darkness of interstellar vacuum. The value of economic growth stimulated by each year's deficit invariably exceeds the nominal cost of the deficit itself. Budget deficits are also desirable on their own merits, because government borrowing provides a risk-free financial safe haven where the world's economic winners can place their winnings. These facts compel us to recognize that a perpetually growing total debt is highly desirable. The Obama administration certainly recognizes this key fact, and has been doing all it can to push public finances into the red as far and as fast as possible. It has also been working hard to "get the banks lending again," in order to promote rapid debt expansion in the private sector as well. Although most of this new debt would never be repaid, the massive wave of defaults will present a perfect opportunity for more government bailouts of insolvent financial institutions, further enhancing the deficit.

American redux

In 1835, the debt of the adolescent American republic was an unimpressive $34,000. But decade after decade the federal debt continued to expand, along with American power and influence. By the middle of April 2009, America's federal debt stood at $11.2 trillion. Current projections suggest that the total is on track to make $13 trillion before the end of the 2009 fiscal year.

Coincidentally, this figure is close to the one Bloomberg gave toward the end of March for the costs of the US government's various rescues, backstops, and guarantees in the current crisis. Bloomberg's tally so far shows the American public with $12.8 trillion in such spending and promises. Realistically, the odd war here and there will add another $3 trillion to America's deficit spending in the relatively short term. Neil Barofsky, the Treasury Department's Special Inspector for oversight of the first $700 billion allocated by Congress to help ease the pain on Wall Street, asserts that an additional $2.3 trillion will be needed for that purpose, taking the visible banking tranche to about $3 trillion, for now.

Meanwhile, a different branch of the US Treasury -- the Office of the Comptroller of the Currency -- catalogs $170 trillion in derivative exposure among five large US banks. A commonly accepted estimate of the failure rate of these derivative instruments is 20%. If the government is to continue to bail out the country's major financial institutions, the American public should expect this exposure to yield at least $34 trillion in new obligations. America's federal housing lenders Fannie Mae and Freddie Mac will no doubt want to pitch in as well, contributing another $5 trillion of their own exposure.

Finally, estimates of the present value of the unfunded entitlements of Social Security, Medicare, and Medicaid involve much guesswork but generally tend to fall in the range of $50 trillion to $150 trillion. For the sake of this analysis, let us accept the mean value of $100 trillion as gospel.

And so, in round numbers, we are looking at somewhere around $180 trillion in total American public debt. No other single parameter could better indicate America's full spectrum dominance in world affairs. Now, contrast this majestic sum with America's net income-tax receipts in 2008: a mere $1 trillion. The idea that such a paltry sum can defray the nation's public debt is simply laughable, and yet the economic damage it inflicts is no laughing matter at all. Its continued existence is nothing less than an insult to America's hard-working men and women.

Although the notion that income taxes could be eliminated altogether might seem shocking at first glance, the logic for doing so is deeply reassuring. Our $1 trillion in tax receipts is trivial. It would never be missed by the American government. Yet it remains a drag on consumer behavior. While the tax represents less than 0.6% of America's debt being amassed as you read these words, it represents 217 times America's disposable income. That is, the abolition of the federal income tax has a benefit-to-cost ratio of more than 36,000 to 1. A negligible increase of existing debt would translate promptly into a massive and continuing stimulus as taxable earnings are transformed into disposable income.

Deficit attention disorder

In an environment where $12.8 trillion can be conjured and deployed in a matter of weeks, and where expressions of dollar-denominated public obligations require fifteen digits, America's income-tax revenue is a mere rounding error in terms of government finance. Furthermore, as Federal Reserve chairman Ben Bernanke revealed in his recent “60 Minutes” interview on CBS television, the money being spent to rescue the American economy costs taxpayers nothing, because “it's much more akin to printing money than it is to borrowing.” And so Bernanke should find no problem with printing an extra trillion each year to make up for the loss of federal income tax receipts. Although it may superficially seem like an increase in government obligations, rest assured that it will not cost taxpayers a thing. Banish the thought of eventual repayment! We know full well that deficits just make America stronger! History now demands bold, decisive action from all of us!

Don't take it to the bank

No other program could produce an equivalent psychological or economic impact. For every individual US taxpayer, the abrupt and overwhelming relief of tax absolution would trigger an avalanche of consumer spending dwarfing all previous exuberances, irrational and otherwise. The benefits would extend to every wage earner and to all who are self-employed. Even those who pay no taxes today would indirectly benefit from the inevitable tsunami of prosperity. Stop thinking of it as debt; think of it as free money. Repeat after Chairman Bernanke: "it's much more akin to printing money." And if that money is printed in sufficiently large denominations, then printing a lot of money at once becomes very economical. Let's roll!


Hombre said...

Publius III
Are you kidding?! Are the planets lined up in some celestial sideways tangent?!
First, Dan W. (Ashes Ashes) Says we're going to war with Pakistan, now this at Dmitry's site!

Surely the last thing this country (and the world) need is this...

"...For every individual US taxpayer, the abrupt and overwhelming relief of tax absolution would trigger an avalanche of consumer spending dwarfing all previous exuberances, irrational and otherwise..."

Consume... consume... consume... til we reach the cliff and go crashing over the top!

Dmitry Orlov said...

As far as I can gather, Mr. P. isn't exactly kidding. His brand of irony is a bit like a splash of hydrochloric acid in the face, but it persuasively challenges an assumption most of us (that still have jobs) still have: we are going to go to work tomorrow, and, gosh darnit, we're getting paid, aren't we, people? Well, bring a wheelbarrow, because you are getting paid in fuffles. Good job, Mr. P., you left them all speechless, for once!

Anonymous said...

Hi Dmitry. Small farms under attack.

Anonymous said...

George Lucas' early film THX 1138 is once again worth watching. Pardon me for giving away the ending: our not-too-heroic hero escapes from ultra-medicated techno underworld because of... budgetary shortfalls! What a hopeful vision for our times!

Anonymous said...

I think this is viciously funny...

May I suggest that this little trillion could easily be obtained by taxing stock market transactions a modest 1 or 2 percent? In fact, none other than Milton Friedman made this comment many years ago in an interview! He said this would not only eliminate the need for any other taxes, but would also be Day Trader Hell...

dan said...

The only thing that is ridiculous in the article is how correct it is.
The only thing missing is the point that all of these dollars the banks lost never existed in the first place.

Dr. Doom said...

Great idea! Let's all try it for tax year 2009, and see what happens. If it's good, then we'll stop paying all but sales and property taxes. If it's bad, well, let's hope it isn't bad.

Anonymous said...

I gots no cash an I gots no home just plenty of nothing, so level that field and gimme dat hyperinflation!

Anonymous said...

Anonymous: " level that field and gimme dat hyperinflation!"

Easy. Just ask you landlord to quadruple your rent and simply pay four times more for food and necessities.

Or did you really think hyperinflation would result in a level playing field? Tsk-tsk... so naive.

jan said...

Totally brilliant and funny, but what else to expect from Dmitry?
I won't bother to check the math or stats, because as he points out, what's another trillion or whatever?
Jan at

mahadeva said...

Mr. Orlov - I really appreciate reading your blog and your intellectual approach. I wanted to ask a question, which is fairly off topic (but I don't know where else to post so that others may benefit from reading it).

I saw the video of your lecture about collapse in Russia. You talked about how people had their duchas (sp?) out in the country where they would grow food and would, for example, plant another row of potatoes if they expected the economy was going south. My question is, how did they protect their garden from thieves, especially considering that they did not even live on the land? Was the atmosphere just relatively peaceful enough that people wouldn't steal out of other people's gardens?


Anonymous said...

Soon to be all the buzz: What the Chinese (et al) want from their newly acquired american debt serfs.

How quaint, that anyone still believes the US people's primary monetary obligations concern their own all-but-expatriated kleptocracy.

Dmitry Orlov said...

mahadeva -

Most rural places in Russia were, and to a large extent still are, places where people knew each other quite well. The garden plots tended to be clustered together, providing safety in numbers. There was quite a bit of petty theft and pilferage, and also quite a bit of self-policing (people getting beat up for trespassing or stealing cucumbers and such). Few punishments are as humiliating as being loudly shamed and whacked with garden implements by a bunch of ornery old women!

One important thing to understand about that sort of thing, though: the growing season is short, the harvest period is even shorter, and unless thieves descend like locusts the effect of a bit of pilferage is minimal. During the growing season, people spend a lot of time on their plots, watering and weeding, so there is usually someone around. Also, harvest time is flush time for everyone, and people are unlikely to be hungry enough to steal food. The rest of the year the ground is bare and frozen, the few tools and supplies are locked in a shed, and there is nothing there that's worth stealing.

Lastly, feeding people creates a strong bond on a purely animalistic level, whether the transaction is legal or voluntary or not. People who feed others, even if unwillingly, still gain respect and admiration, even from thieves. Thinking of gardening as a component of an economy is just the wrong metaphor. It is much more like being part of an ecosystem that includes many different plants and animals, some of which happen to be human.

bryant said...

"Thinking of gardening as a component of an economy is just the wrong metaphor. It is much more like being part of an ecosystem that includes many different plants and animals, some of which happen to be human."

That is simply brilliant! Thanks

Anonymous said...

"Thinking of gardening as a component of an economy is just the wrong metaphor."

Amen, brilliant.

Kind of like calling one's limbs their assets (not to get punny about losing one's asset...).

Lloyd G. said...

Brilliant. I'll one up Publis III:
I want the government to quit asking me for taxes, AND I want them to give me a $20 gift card for McDonald's.

jpwhite said...

Most entertaining! All the author needs to do is tighten it up to a 3-4 minute delivery time, and it would make a perfect riff for Stephen Colbert.

I ass-ume that the author is kidding, but I still feel compelled to point out that America's public debt burden is far from being the sole source of the typical individual American's indebtedness. I know that in my own case, if I had been somehow relieved of my federal tax obligation for 2008, the few thousand dollars I would have saved would have been immediately swallowed whole by student loan and car payments, i.e. previously incurred debt. It would not fund some magical market surge that would cause the economic rebound everyone seems to be praying (and I mean that literally) for. And guess what? I'm in pretty good shape financially. If I'm underwater, then most of the people I know are at the bottom of the Marianas Trench.

Dmitry, I believe you when you say the guy is trying to make us think, and I appreciate that. But you could only buy the actual argument he's making by pretending that the consumer credit/consumption binge of the last decade or so never happened.

I can just see Colbert's delivery, though. "Deficits just make America stronger! The income tax must go! Nation, whip out those tea bags..."

Will said...

Speaking of dachas and gardens, Mr. Orlov - would you please comment on the "Anastasia" movement, which is basically a paradigm which presupposes that our relationship with gardens and the Earth is a spiritual one? I've been interested to note that this movement seems to be responsible for many Russians repatriating and thereby increasing the population, something which the Russian government doesn't seem to be able to do effectively...

Remoran said...

Hilarious and sad at the same time. The Fed is the cancer that created this disaster. Combine money created from nothing, back by nothing with tech, unbridled greed and government cooperation and you get America the broke. Simply unreal but hey, he who has the gold makes the rules, the power the Fed has and not the government.

Unbelievable and yes, taxes are for taking worthless paper out of circulation to give the illusion fiat money is worth something, a joke I would bet the Russians would understand because after all, they said the classic, "They pretend to pay us, we pretend to work."

Party on Dude. :)

mahadeva said...

Mr. Orlov - thanks for your response. I found it very informative and insightful. I'm glad to know that if I'm growing food, even if it gets stolen, it will still be beneficial to my situation and the greater ecosystem.