It is tough to grasp the enormity of the numbers involved with the budget and the debt. How large is $1 trillion dollars exactly? So let’s look at it from the perspective of a buck.Looking at the 2010 budget, the economy for our purposes is 14-1/2 bucks. All of this 14-1/2 bucks is created by people who are working in the private sector. Uncle Sam creates no wealth, regardless of how some politicians talk. Consider this, if Uncle created wealth then why does he need to tax?
From the 14-1/2 bucks created by people who work the government took $2.16 in taxes. That’s not too bad, but the government spent $3.46, which means that it borrowed $1.29 for its operations. But that’s not the whole story of the government, because government activities also place a drag on economic activities.
Government red tape diverts labor, which would otherwise be available for wealth creation, to the task of compliance. The total burden of government on an economy is its taxation, borrowing (removes capital that could make the private sector more productive), and cost of regulatory compliance. The total of these various costs provides an estimate of government burden.
As we’ve seen taxes and borrowing take $3.46 from the economy. In a study of compliance with the tax code, Dr. Laffer estimates that it takes 41 cents to pay our taxes. A 2009 study by the SBA estimated that the cost of regulatory compliance to the economy was $1.75 in 2008. It has only grown since then so that this is a good conservative estimate.
Total Government Burden = $3.46 + $.41 + $1.75 = $5.52
An astonishing 38% (for the math challenged reading this $5.52/$14.5*100%, but my math is OK) of economic activity is consumed by the federal government. High-tax states can add 10% or more to that. The total government burden is approaching, or surpassing, 50% of the economic output of this nation. It is no wonder the middle class is shrinking; every private sector worker is supporting, in essence, someone who receives a government check.
This also helps us to understand why it is so difficult to close a $1.29 deficit gap that is but 9% of the economy. An economy struggling to support a 50% government burden could collapse under the weight of an additional 9% burden. That is the problem we face. But when there is a large, and growing, deficit either revenue must be increased or spending cut. That's the alternatives.
The rich people should contribute more say liberal politicians . If we tap them for that $1.29 then all will be fine. Reports on how much good this will do vary, but work in the National Review Online by Robert VerBruggen show that it might close this budget gap if we take almost all that they have. It’s OK to hate the rich, but it starts to sound like theft, even for liberals, to take it all.
No problem, let’s just cut defense spending. After all it was George Bush's two wars that created this problem. The government spent 69 cents on defense in 2010; that’s doesn't cover the $1.29 needed to close the debt. OK. We can cut defense and something else, but we can't touch entitlements, which takes $2.39 of the spending. If it is off the table and everything else is cut then the government still is out of balance by $.23 as it is spending $2.39 and tax revenues are $2.16. Thus we can see that cutting everything but entitlements from the budget and leaving the rich just a little bit could close the budget hole.
But there’s another problem, which is that entitlement spending is growing faster than the economy. So we can solve the problem perhaps for a year or so by cutting everything but entitlements from the budget and fleecing the rich. It is hard to see how this is going to work for the long term. The political chattering class, it seems, have promised more than working people can deliver and there must be cuts to entitlement spending.
That’s the deal. A buck just doesn’t go as far when the federal government gets their hands on it. Only by slowing the growth, substantially, in entitlement spending AND cutting the burden of government will we be able to extract ourselves from this hole. If we don’t do that, then take a tour of Greece to see our future.
Elko Mike
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