Did you know? The government would have to double income tax rates and not see any tax avoidance or evasion to close the deficit.
- 2011 Deficit: $1,299 billion
- 2011 Income tax revenue: $1,273 billion
Did you know? The government would have to double income tax rates and not see any tax avoidance or evasion to close the deficit.
Tagged big government, Deficit, income tax, taxes, United States
The United States accrued a huge debt to fight the American Revolution. The debt equaled 35 to 40 percent of GDP at a time when government spending and taxes were just 2 percent of GDP. Interest consumed about half of the government’s revenues. Numerous states and the government under the Articles of Confederation were negligent in paying interest and principle. The nation faced a real debt crisis.
The Founding Fathers recognized the burden of such a large debt and wanted to pay it off.
In a Wall Street Journal op-ed, Paul Ryan explains his budget proposal and includes this great chart:
Part of Ryan’s plan is to reduce government spending to the “long-term average” of about 19-20 percent of GDP. By what twisted logic does it make sense to leave government spending at 19-20 percent of GDP? Even Bill Clinton spent less than that.
Spending at these “average” levels is what got us into this mess. We should return to the level of federal government spending that existed prior to the progressive takeover of government, when the federal government spent about 2 to 4 percent of GDP during peacetime, more during depressions and wars. Maybe 2 to 4 percent is too low in these “modern” times. Personally, I think the federal government should spend about 5 percent of GDP. Three percent of which would be for defense and two percent for all other functions of the federal government, which are not that many according to the Constitution.
The federal government posted its largest monthly deficit in history in February at $223 billion, according to preliminary numbers the Congressional Budget Office released Monday morning.
That figure tops last February’s record of $220.9 billion, and marks the 29th straight month the government has run in the red — a modern record. The last time the federal government posted even a monthly surplus was September 2008, just before the financial collapse.
Last month’s federal deficit is nearly four times as large as the spending cuts House Republicans have passed in their spending bill, and is more than 30 times the size of Senate Democrats’ opening bid of $6 billion.
Actually, those figures overstate the cuts because it is comparing a yearly cut to a monthly deficit. In reality, the annual deficit of about $1.6 trillion is 26 times as large as the Republican budget cuts and 267 times the size of the Democrats’ proposed cuts.
I’m glad to see Washington is taking this problem seriously…
Last weekend, Ireland agreed to an 85 billion Euro bailout ($112.5 billion), details of which should be announced this weekend. But that hasn’t stopped the turmoil. Today, Irish bond yields hit euro-era high, banks sink:
Yields on Ireland’s bonds reached a new euro-era high Friday as investors dumped the nation’s debt securities, and Irish bank shares also kept falling in expectation the banks are heading toward greater state ownership.
Analysts said Ireland’s bonds and banks are getting battered because deep skepticism remains that an international bailout loan – whose details are expected to be unveiled Sunday – will be enough for Ireland to resolve its debts.
The Irish Times said an agreement on an euro85 billion ($112.5 billion) IMF-EU loan for Ireland could be announced Sunday, one week after Ireland formally applied for a financial rescue. It would be used as a credit line by Ireland’s government and banks, which both have been priced out of the bond markets.
Yields on Ireland’s 10-year bonds rose to 9.22 percent from 9.02 percent Friday, a new high since Ireland joined the euro in 1999.
Wasn’t the whole point of the bailout to end or at least alleviate this crisis? But now, the crisis is getting even worse as traders/investors lose confidence in Ireland’s ability to resolve its debts and the Eurozone’s ability to help.
Now, the Eurozone and IMF are proposing a bailout of Portugal. Will that bailout fare any better than this one? As I’ve written previously:
And all the bailouts in the world won’t end this madness until these countries get their fiscal and monetary houses in order.
So far, the bailouts have been a reward to countries that behaved poorly by spending more than they had and making bad investment. Conversely, the bailouts are punishing those who successfully avoided the urge to over-leverage and over-spend.
Bailouts will only work when they reward those who made mistakes in the past but are now behaving well. However, all these at-risk countries are proposing to reduce their budget deficits to three percent of GDP. I do not call that behaving well. I call that behaving less badly than before. Until these countries propose balanced budgets and plans to pay off their debts, they should receive no bailout money. But that is unlikely to happen because those “strong” countries that are providing the bailout money, such as Germany and France, have no plans of their own to balance the budget and pay off debt. Thus, we are in a situation where countries needing to bailed out are providing money to those who are in even more desperate need of a bailout.
The blind leading the blind… And the sovereign debt crisis continues.
The EU and IMF had hoped that bailing out Ireland would end the sovereign debt crisis or at least forestall it for the time being. As I explained previously:
I don’t see how this changes anything. It may stave off immediate default, but Ireland is simply borrowing more money, exactly what got it into this mess in the first place. This simply buys them time to get their house in order, but will they?
I then compare the bailout to Dr. Evil:
These bailouts, loans, and austerity measures in Greece, Spain, Portugal, and Ireland are “an easily escapable situation involving an overly elaborate and exotic death.” Instead of eliminating the deficit immediately, they have convoluted plans to reduce it over a five-year period. Will these plans work? Nobody knows. But that’s okay because “we’ll just assume it all went to plan.”
It only took a few days to prove that I am correct. Marketwatch reports:
European government bond markets were in turmoil Tuesday, as Portuguese and Spanish yields followed Irish yields sharply higher on growing doubts about the ability of politicians to contain the euro zone’s sovereign-debt crisis.
Rising bond yields underline fears that the debt crisis, which has already forced Greece and Ireland to seek bailouts, will spread to other high-deficit countries, potentially shutting them out of credit markets.
The yield premium demanded by investors to hold Portuguese 10-year bonds versus German bunds widened to 4.34 percentage points from around 4.08 percentage points Monday.
The spread between Spanish and German yields widened to 2.32 percentage points, exceeding the spread of 2.27 percentage points seen earlier this month.
How could the EU and IMF really be so stupid to believe their bailout would work. They thought their bailout of Greece and 750 billion Euro backstop would end the crisis once and for all. That failed, but they didn’t let that stop them from making the same mistake again.
It is often said that insanity is “doing the same thing over and over again and expecting different results.” Supposedly, Einstein said as much.
This leaves us with three options:
Which do you think it is?
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