patrick.net

I figure we’re running about 3% annually now

Actually, core is under 1% y/y, which is the better predictor of the long term trend.

http://www.nytimes.com/2010/05/20/business/economy/20econ.html

Inflation Rose in April at Lowest Rate Since the ’60s

Over the 12-month period that ended in April, the core index rose 0.9 percent, which economists said was the lowest it has been since the 1960s.

Getting inflation to happen is not under the control of the government or the Fed. It's not like they can just push some button and say 8% inflation. Many think the fed "printing money", or the congress spending it is sufficient. It's not when a currency is at the zero bound, the economy is saturated with debt, and new lending is happening slower that debt is being retired or defaulted upon.

It's not even a desirable goal to have inflation that high. It wreaks havoc on an economy. It will never be policy. If the government did have a button that could cause say 2-3% inflation though, including wage increases, it would probably be a good idea, to ease private debt burdens over time.

But I'm still betting on low inflation for the next few years.

Some inflation will be needed to reduce the debt

If you're referring to the National Debt, not really. For all the screaming about it, it's actually not that high. The much, much bigger problem is the unfunded liabilities of Social Security and especially Medicare. Inflation does nothing to help those liabilities since the costs grow right along with inflation. Not to mention the average maturity of US debt is about four years, and the cost of rolling over that debt will grow right along with inflation expectations. I wish I could give you a reference, but David Walker (former comptroller of the currency) discuses this in his latest book Comeback America, and if I remember right talked about it briefly at a Commonwealth Club appearance available online.

Not all inflation is created equal.

To service debt, what you need is after-tax WAGE inflation (ie greater net income coming into private sector as as whole).

Increasing energy costs aren't going to help debt service, unless your income comes from the energy industry.

Tax increases aren't going to help debt service for people who have to pay more taxes.

Government "pulling in spending" -- ie firing people & cutting wages -- isn't going to help debt service for people and communities dependent on this spending.

Reducing war spending is a necessary transition to a less unsustainable economic course, but comes with its own immediate costs. We're spending $900B/yr on war and national defense. Each 1% you cut is $9B, and divide that by whatever $/job you want. I like going with $100K/yr, so cutting 1% -- $9B/$100K -- is 90,000 jobs gone. Actual job loss is probably more like 300,000 given the velocity of money (each $100K gov't salary supports several other $50K/yr salaries in the private economy).

We got wage inflation in the 1970s thanks to strong unions and the lack of competitive labor pools to take the work from the employed. 2010 is a very, very different world from then. 1970 featured Mao's Red Guards in running battles with the PLA, 2010 features damn near everything we buy new made in China, and China Inc. eagerly looking at moving up the supply chain and taking over the higher-level goods that it hasn't yet.

One formerly inflation-protected subsector is the medical industry, but apparently Big Pharma is heading to a world of pain this decade as its money-makers are coming off patent, and of course the status quo of Medicare is unsustainable without tax increases and/or service cutbacks, neither of which are inflationary.

Farming is the one sector that is mildly inflation-protected in that they can and will pass higher costs onto the next level of the production process. But farming is only 1% of our GDP.

Unemployment is deflationary, in a VERY big way. 80% of our economy is "service providers". Which makes sense, as it's easy to trade services back and forth in the economy of plenty we've enjoyed since the 1950s. But the service sector economy can't inflate itself on its own, as service providers need business to survive, and there are too many service providers and not enough service consumers.

Everything depends on unemployment and wages. If my thesis that the 2004-2006 era of the economy was bull---- fakery entirely driven by unsustainable debt draws from housing, where we are today is in a continuation of the 2001-2002 recession.

Total mortgage debt doubled from $5.2T to $10.4T from 2000 to 2007. That $5T -- maybe half is still going to be dead loss, and I don't see any way to inflate our way out of it, unless we really get serious about kicking in some serious wage inflation.

We're going to need a bigger helicopter for that.

Troy says

We got wage inflation in the 1970s thanks to strong unions and the lack of competitive labor pools to take the work from the employed. 2010 is a very, very different world from then.

Indeed. This is a key point. A majority of unionized workers are now government employees. They are more likely to face pay CUTS in the next few years, as basket case states like CA have to reign in spending.

No wage inflation, no inflation.

All interesting points, and fairly valid, but I still think we're going to need a little of everything put into the mix to re-balance budgets, and debts. If we're at 1% inflation, then even 3-4% would be significant "improvement". Moderate taxes to fix medicare and social security seem reasonable.

I do believe the debt isn't unmanageable, but could be before things get straightened out. If housing prices don't come down, there will be a push for higher wages from the people. While the government might not be able to control it, people are going to demand more, even with high unemployment. Many will say "that is impossible" but it comes down to what you require to live. If you make a good case for a raise, then you're likely to get it. If your best employees can't afford anything, they will demand more, when they're "happy" they're likely to ask, not demand. So if the government keeps things priced just out of reach of the working class, they will start to push for higher wages. I do believe that inflation can take hold, and it likely will. The government might not be able to wave a magic wand, but the effects of keeping housing at the levels they are currently at will encourage people to seek higher wages.

While inflation won't help many of the liabilities the government has, it will help balance out some of the debts and budgets and hence why I'm saying it will be part of the solution, but not the only part. The people who will pay the real price here are people who hold foreign US currency, because it will be devaluing over time.

pkennedy says

The people who will pay the real price here are people who hold foreign US currency, because it will be devaluing over time.

Most USD assets are held by Americans, so Americans with savings would be hit hardest. Treasuries, Municipals bonds, corporate bonds, GSE bonds, etc. or indirectly through pension funds, money markets funds and the like. All of those will loose real value under inflation. Inflation doesn't just wipe away debt, it's wipes away savings (since they are just 2 sides of the same coin.)

I agree that inflation will hit Americans as well, since you're right it's a double edged sword. The advantage is that "most" of those people will also be earning in USD, so they'll while their network should be increasing (unless they're full relying on savings), while others outside the US will simply see the negative side of the coin with very little they can do to stop it. They obviously could try and sell it, but they need to buy something as stable, which there isn't. So it's a lose-lose situation for them.

It sounds like inflation is possible, perhaps not very controllable by the government, but overall it sounds like it will come into play. It almost has to come into play, I'm just wondering what levels would be acceptable to most people. The government, the feds, wall street, bankers, etc. Where will they start crying uncle and try and stop it?

pkennedy says

while others outside the US will simply see the negative side of the coin with very little they can do to stop it

Not even 20% of dollars assets are held by foreigners. Roughly 12% after you subtract out the USD debts they owe. I don't see this as a major factor.

pkennedy says

It sounds like inflation is possible, perhaps not very controllable by the government, but overall it sounds like it will come into play.

It doesn't sound like inflation to me.

I don't get it. We've got Nomo talking about Volker coming in to break the back of inflation. Meanwhile inflation at a near low post-WWII level. There is this bizarre disconnect between what's actually happening and what some people are worrying about (or hoping for). I'd guess some of it is generational.

10 year treasury is at 3.2%. People are flipping out of their minds to be talking about inflation.

If you assume the gov. numbers are correct then your view makes sense.

If you assume that the numbers are junk because they don't properly account for home prices among other things then you'd disagree.

Also things like QE and a ZIRP by the FED are not dollar positive, neither are the continuing bail outs of Fannie/Freddie. And that is without even touching on the cost of the entitlements that must either be cut or somehow paid for. What you may see short term is a increase in dollar value due to what is going on in Europe, but long term we're screwed.

There is no way they'll be able to tax enough to fund things, and cutting programs/entitlements would cause Great Depression era social conditions for the vast majority of Americans. The only thing left for the politicians is to try and devalue the currency to make debt more managable.

A 50% devaluation at a bare minimum over a few years time will be required....

Back in the '80s, wasn't inflation how Reagan figured he would deal with debt?

@tts
This is exactly what I said wouldn't be necessary if all variables were tweaked. Taxes raised, more robust collection, service cuts, inflation and recovery all need to pitch in to fix things. Cutting services might hurt inflation, and the tax base or what they're "chipping in", but in the end all of these things will need to be increased a few % points to bring us back.

@markinsf
The 12% foreign debt will obviously hurt the most. They won't be too happy about things. I agree that it's not a large amount. Probably not worth considering, and if all the lost was 25%, they might be happy, considering they would still have a strong place to put their money.

Inflation might not be a direct "turn on valve" like the FED dumping cash for 0%, but when money starts flowing again, and when people realize they need more to live they will demand more. I suspect the inflation demands will be mostly white collar type jobs, and blue collar jobs will still compete with foreigners for the most part, probably losing out. They might see a raise, but it probably won't be the same % as a white collar worker would see, thus separating their lives further. I suspect city dewellers will do the best, with places like NYC, SF, LA, having the largest increases.

Again, I don't think anyone can "turn on" the inflation tap themselves, but they can surely setup some of the groundwork.

I'm not hoping for inflation. I'm also not expecting masses of inflation either. I'm not expecting anything drastic, I think everything I listed above will have to "chip in" to change the direction of the economy. I don't think we are headed for the drain, I don't think we're headed for masses of riches like we've seen in the past. Clinton era growth, debt reduction and job growth *is* possible, it has happened in the recent past. The world has changed, but not enough that everything Clinton did, couldn't be repeated now.

I'm not so worried about HOW inflation is calculated, it might not be correct or completely accurate but it's been used for a long time and the numbers are known. I'm not looking for an exact inflation number, I'm looking more at what the current definition of inflation could go to without creating significant problems. If it's at 1% now, how much could it go up, before it became a significant problem, vs part of the solution.

pkennedy says

@tts

This is exactly what I said wouldn’t be necessary if all variables were tweaked. Taxes raised, more robust collection, service cuts, inflation and recovery all need to pitch in to fix things. Cutting services might hurt inflation, and the tax base or what they’re “chipping in”, but in the end all of these things will need to be increased a few % points to bring us back.

My response was mean for markinsf not you, sorry.

I don't think they'll be able to raise taxes or cut services without massive decreases in the standard of living of most Americans. Nothing turns out the voters like a hit to wallet, so people won't stand for that. They'll vote out anyone who raises taxes and cuts services. I think the politicians know it too which is why they really aren't doing much of anything.

Look at all the crap Obama caught just for raising taxes a few percent on people who make $250K or more for instance. Look how people like Rand Paul are getting some political power now, or at what is going on in Colorado Springs (people voted out the city council who wanted to raise taxes about $72 per person per year, now the city's street lights and various other services are being shut down while crime rises, at least 1 person has already been killed because of that alone).

Orig. story about Colorado Springs: http://www.denverpost.com/news/ci_14303473
Story about the man shot in his store parking lot due to the lights being out: http://www.gazette.com/articles/springs-97715-police-colorado.html
Here is what the DOJ has to say about street lighting and the effect it has on crime:

http://www.cops.usdoj.gov/files/RIC/Publications/e1208-StreetLighting.pdf

It is clear that reductions in crime can be achieved by improvements in street lighting and that these reductions will be most worthwhile in high-crime neighborhoods. It is also clear that improved lighting can reduce crime during the day and at night. This suggests that improvements to lighting not only act as a situational deterrent to crime, but can also improve local community cohesion and pride, which in turn increases the willingness of residents to intervene in crime or cooperate with the police. Improved lighting will also send a message to potential offenders that the neighborhood no longer offers easy opportunities for crime.

BTW they apparently had only turned off the lights in the "poor" areas of town, in the upper middle class and rich areas they left them on because they assumed they were being paid for.

http://www.csindy.com/colorado/noted/Content?oid=1692823

At their informal meeting Monday, several City Councilors expressed concerns that the darkening of about 8,000 streetlights — a budget-trimming measure — was not affecting all neighborhoods evenly. City staff admitted that streetlights in parts of the Old North End and Broadmoor areas had been spared on the assumption that costs were being covered by citizens.

He cited an e-mail from Jim Thomas, Colorado Springs Utilities field engineering supervisor, noting that North End residents were paying for new ornamental light poles to replace the less attractive ones used throughout town. Thomas went on to write, "We hoped to protect the Utility and the City Council by not turning off these lights while the homeowners are still paying for them on their taxes."

That logic concerned Paige, who said, "It just seems to me from this e-mail that it was a conscious choice and not an oversight."

2009 tax rate on a $200K house in Colorado Springs = approx. $78.71
Colorado Springs population: 380,300
Budget shortfall: $27,600,000
27,600,000/380,300= $72.57

All this over about $72 a person a year. Imagine what will happen if people have to pay hundreds more per year plus have services they depend on to make ends meet cut. I don't mean to be pessimistic but there is no way its going to work...

Well we will need to raise taxes to some degree. Taxes can be raised when they're hidden, they will find a way to raise the taxes though and get away with it. They've done it in the past and it worked out ok. What I'm trying to say is that we will have moderate boosts at all levels, nothing massive. We can't chop 50% of the work force in government, that just isn't going to fly. Then general gist of cuts is we need to kill the complete and utter buget for homeless people. Well, that could do it. But how about wages freezes, 10% cuts across a few programs, and some furlough days and reduce spending. It comes out to the same thing, one is semi-reasonable and going to be felt by all, one is just putting something up so utterly setup to fail, that it's nothing more than politics.

Raising the taxes on people over 250K, that isn't going to hurt that many people.
Closing some loop holes, that's just people who are abusing the system.
Cutting some services, sorry but we all have to pitch in a bit, but you're just getting hit with this, not raised taxes, be happy!
Etc.

You're Colorado numbers are interesting, but saying the light would have stopped the murder is sort of hard for me to believe. It might have, yes. It's good media for sure. But that murderer wouldn't have not committed that crime, he would have just found a better place to commit it. Or perhaps waited for the guy to go into a dark area, where he could do it. Light helps, but claiming it would have saved this guy? A little far reaching.

Don't forget, its $72.57 per PERSON. If you're a 5 person family, thats 362.85 more now.

I think we can cut that many jobs from the government, and the "market" would love it. I've seen a 25% reduction in pay in my field just by an extra 4% rise in unemployment. A couple of more points of unemployment would make great strides towards trimming the fat off people's salaries, therefore making them much more willing to eat shit and like it.

knewbetter says

I think we can cut that many jobs from the government, and the “market” would love it. I’ve seen a 25% reduction in pay in my field just by an extra 4% rise in unemployment. A couple of more points of unemployment would make great strides towards trimming the fat off people’s salaries, therefore making them much more willing to eat shit and like it.

Wow I hope you're kidding because that is pretty horrible.

Remember, you're the one saying "trimming the fat of people's salaries...making them much more willing to eat shit and like it". How would you like it if others applied that line of thinking to your wages/savings? Think about what effect it would have on the country/people if the gov. made it so that more people had to eat shit and like it.

You really think people would and should put up with that? Would you?

pkennedy says

Well we will need to raise taxes to some degree.

I think we could (and should) raise taxes greatly on the very (ie. $1 million+) high income earners and the rich (ie. $10 million+) to pre-Regan era levels as well as increase taxes on capital gains and close some loop holes, but for the middle class and poor who make up the vast majority of the population you couldn't do that. They simply don't have the money.

That still wouldn't provide enough money to pay for the current budget or entitlements though.

pkennedy says

What I’m trying to say is that we will have moderate boosts at all levels, nothing massive.

I know what you're getting at.

You want to cut a little here raise a little there, but the end result works out to be about the same for the avg. person. Raising taxes 10% or lowering gov. employee/minimum 10% (just tossing out simplistic examples, I know other things could be done) in of themselves aren't that bad, but doing both at the same time would be significant and would certainly be noted by Joe Six Pack.

pkennedy says

Then general gist of cuts is we need to kill the complete and utter buget for homeless people. Well, that could do it. But how about wages freezes, 10% cuts across a few programs, and some furlough days and reduce spending.

You could cut the entire budget for the homeless and do wage freezes as well cut some pork projects and it still wouldn't make a dent in the deficit.

pkennedy says

You’re Colorado numbers are interesting, but saying the light would have stopped the murder is sort of hard for me to believe. It might have, yes. It’s good media for sure. But that murderer wouldn’t have not committed that crime, he would have just found a better place to commit it. Or perhaps waited for the guy to go into a dark area, where he could do it. Light helps, but claiming it would have saved this guy? A little far reaching.

I thought you might say that which is why I included the quote from the DoJ report. Its one of those things that sounds silly at first until you actually go out at night into a part of the city where there are no lights... The effect the street lights have is mostly psychological no doubt about that, but it definitely works.

Also did you notice the part how they were keeping the lights on in the rich areas even though they weren't paying taxes on them either?

pkennedy says

Don’t forget, its $72.57 per PERSON. If you’re a 5 person family, thats 362.85 more now.

Yup. Still chump change compared to the services the city used to provide, that goes double for how much taxes would have to be raised to pay for the current federal budget. Its not just street lights that got turned off you know.

tts says

what is going on in Colorado Springs

I thought cities in CA were bad.

Spending by CO localities:

2000 $15.9B
2010 $35.5B

Up 123%

CO gross domestic product:

2000 $171B
2010 $251B

Up 47%

http://www.usgovernmentspending.com/Colorado_state_spending.html#usgs302a

Let's see. GDP has only grown 47%, while spending by cities is up 123%. The budget problems of Colorado cities couldn't possibly have anything to do with SPENDING could it?

pension and health care costs for city employees continued to soar

I don't blame people for not voting to raise taxes. Legislators nibble at the edges to turn off street lights, but never face the big expenditues: soaring city employee compensation.

CO may not even give cost of living increases:

Colorado Pension Vote Could Make State First In Nation To Limit Annual COLA Increases

http://www.huffingtonpost.com/2010/01/25/colorado-pension-vote-cou_n_436201.html

I really don't understand how you guys are reading inflation into any of this.

MarkInSF says

Let’s see. GDP has only grown 47%, while spending by cities is up 123%. The budget problems of Colorado cities couldn’t possibly have anything to do with SPENDING could it?
...
pension and health care costs for city employees continued to soar
...
I don’t blame people for not voting to raise taxes. Legislators nibble at the edges to turn off street lights, but never face the big expenditues: soaring city employee compensation.

The budgets are screwed up not because of pensions (although I would agree that some city employees get paid too much, that is a drop in the budget) but because the politicians blew the cash.

The pension funds used to be self funding 'til they got raided so that the politicians could pay for things (essentially vote buying) without raising taxes. They did that for YEARS, and now the situation has finally come to a head. To some extent the same thing happened with Social Security too BTW.

MarkInSF says

I really don’t understand how you guys are reading inflation into any of this.

Inflation is easy for the gov to produce, remember, if they have to they'll just mail people the cash as "stimulus". You also have to bear in mind how Fan/Fred/FHA are getting funded (not to mention the 2 wars we're fighting). That is all deficit money right now.

@tts
Interesting. I agree with basically everything you've stated. My example of the homeless was basically what Arnold said for california. We need to save some money, so instead of trimming, we'll cut the entire program and let everyone go up in arms. It'll never happen, it's just a political move. I also agree that cutting many programs just won't generate much cash, because it's got to be done to every program to make any results. You can't cut 5% from 5% of the programs and expect to make any headway.

I'm guessing that they will be able to do a few things, like raise taxes, and make cuts without causing too much of a ruckus. I like the pentagon saying everyone had to cut back 2-3%. That's really nothing. Turn your lights off at night, and have everyone make sure their monitors are off, that would probably be 2-3% for many places. A few programs will have to cut back more than 2-3% of course. Over the course of 3-5 years, that 2-3% adds up though.

I remember another city cutting the lights at night, I think it was in California somewhere. It saved some massive amount of money too! I did notice the rich vs poor lighting scenario as well, funny how they pulled that off. Those lights chew through a lot of power though. Traffic lights are probably some of the worst offenders, because they are on all the time. Every light is about 100W, and each intersection probably has 10+ of those lights running. That is about $1000/year in power for every intersection.

The problem with raising taxes too much, is that the rich have escape routes. If you're making 500K/year you're not in the best position to "escape", but if you're making over 1M, you're in a position where it starts to pay to have someone setup off shore accounts and/or setup businesses and other loop holes to absorb your taxes due. If you get the number high enough, companies will simply offshore themselves. While they SHOULD be paying more, if you push them too much, they will walk off. I'm not saying they should, but realistically they will. People like Warren Buffet would pony up, but other companies would just turn tail and hide in some other country.

tts says

The pension funds used to be self funding ’til they got raided so that the politicians could pay for things (essentially vote buying) without raising taxes. They did that for YEARS, and now the situation has finally come to a head. To some extent the same thing happened with Social Security too BTW.

Raided? Please explain.

I understand the Social Security part. They ran a surplus for many years. Where did they invest? Treasuries. US gov't owes itself.

Are you saying Colorado Springs invested it's pension fund in it's own municipal bonds?

pkennedy says

@tts

Interesting. I agree with basically everything you’ve stated.

Yea its weird how we keep going back and forth on this stuff since we seem to agree in principal on many things.

I think where we differ is on the short term severity of the issue as well as intelligence/effectiveness of our officals.

Basically I think our gov. is almost totally ineffective at this point and will not be able to prevent a crisis of some sort from manifesting since none of them can or will make hard decisions. I'm interpreting a bit here but I think you believe we've got more time and/or that policy wise we haven't quite painted ourselves into a corner so that drastic short term steps aren't required.

pkennedy says

I’m guessing that they will be able to do a few things, like raise taxes, and make cuts without causing too much of a ruckus. I like the pentagon saying everyone had to cut back 2-3%. That’s really nothing. Turn your lights off at night, and have everyone make sure their monitors are off, that would probably be 2-3% for many places. A few programs will have to cut back more than 2-3% of course. Over the course of 3-5 years, that 2-3% adds up though.

I think if we had started doing that stuff 8 or 9 years ago and prevented a housing bubble from being blown in the 1st place that this approach would've worked. Unfortunately I think we've pissed away all our easy outs from this mess, and all that is left are the ones that are varying degrees of bad and worse. That is why I always sound so pessimistic about this stuff...

pkennedy says

Those lights chew through a lot of power though. Traffic lights are probably some of the worst offenders, because they are on all the time. Every light is about 100W, and each intersection probably has 10+ of those lights running. That is about $1000/year in power for every intersection.

It was the bulb type traffic lights that used around 100w or so IIRC. They started switching them to LED versions about 4 or 5 years ago here in CA, and those only use around 20w and can last much longer. So as far as I know the costs have gone way down on those things. I know I haven't seen a bulb type traffic light in years.

Ooold paper from 2003:
http://www.cee1.org/gov/led/little_rock.pdf

newer info. from a LED manufacturer:
http://www.electronicstalk.com/news/swi/swi163.html

pkennedy says

The problem with raising taxes too much, is that the rich have escape routes. If you’re making 500K/year you’re not in the best position to “escape”, but if you’re making over 1M, you’re in a position where it starts to pay to have someone setup off shore accounts and/or setup businesses and other loop holes to absorb your taxes due. If you get the number high enough, companies will simply offshore themselves. While they SHOULD be paying more, if you push them too much, they will walk off. I’m not saying they should, but realistically they will. People like Warren Buffet would pony up, but other companies would just turn tail and hide in some other country.

I hear a lot of people say that about the rich. However there were plenty of rich people around 40 or 50 years ago when the rates were much MUCH higher (top tax bracket was over 90%) and the rich had no problem whatsoever paying.

Now politically its probably impossible to get rates that high again. Rewinding them back to where they were when Carter or Ford was in office should be plenty doable though.

MarkInSF says

Raided? Please explain.
...
Are you saying Colorado Springs invested it’s pension fund in it’s own municipal bonds?

I'm saying they spent the money (edit: retirement fund money that was supposed to be already invested, plus income from taxes already on the books that would've funded things just fine if it hadn't been used for pet and pork projects) on other things instead of raising taxes appropriately to fund those expenditures. That is why expenditures were able to climb so much higher than the rise in GDP. AFAIK they didn't engage in the same chicanery that the Treasury has WRT to SS.

@tts

Yes I have a tendency to believe that society will correct itself before imploding. Therefore, when things get bad enough that they need correcting, we will. Right now the debt level is at a level that isn't going to be manageable in the future, but currently is. Therefore we're waiting until we're in trouble before doing much. In the next couple of years, we'll see people making the necessary changes I believe.

Side note on the bulbs: Power is about $1 per watt per year. So 100 watts 24 hours a day for a year is about $100. Not to mention, I think I saw those lights cost about $180 each and were about $270 to replace? So putting in longer lasting leds, while more expensive up front, would pay themselves off pretty quickly. Although I've seen some pretty crappy led bulbs in recent years out there. I'm hoping they implement more energy efficient lighting around the cities in the years to come, it only makes sense.

As for the rich not running off 40 or 50 years ago. Where would they go? What would give them a decent life style, where they could float around and work/live offshore and maintain those incomes? Now a days, it's possible. It's possible to travel a lot more easily (I can book a flight anywhere in the world for tomorrow for probably less than 2K, that is a doable trip) 50 years ago, it wasn't that cheap or easy. Not every country had a decent infrastructure. Now people can live in the US, have off shore accounts/business easily. Unfortunately, now it's much easier. If tax rates were jacked up, people would jump ship. I'm not against taxing them, I just think it has to be well thought out. Simply pushing limits up now wouldn't yield the results we would expect in theory.

I also believe government is pretty useless, but when push comes to shove, things slowly get done. Maybe they're done poorly, or maybe they're done with masses of pork added in, but they get done. I'm not doom and gloom on society, it hasn't changed that much. It's gotten worse, but not in the extremes people think it has. I've seen other countries and their systems and we've got a long ways to go before totally inefficient can be really used.

tts says

The budgets are screwed up not because of pensions (although I would agree that some city employees get paid too much, that is a drop in the budget) but because the politicians blew the cash.

The pension funds used to be self funding ’til they got raided so that the politicians could pay for things (essentially vote buying) without raising taxes. They did that for YEARS, and now the situation has finally come to a head. To some extent the same thing happened with Social Security too BTW.

That's a little distorted. The largest part of any government budget (minus debt service) outside the federal budget is the employees. So politicians were "raiding" employee pensions to pay it's employees. The idea of "raiding" is also not very true. Almost every public pension plan (along with lifetime health benefits) in the country was dramatically underfunded even without any diversions of funds. It's far from a drop in the budget. It's the essence of the entire problem. The public employees have only had unions since 1962. Almost all the retirement benefits promised have been implemented since then. The bill is just starting to come due and will increase exponentially in the future.

pkennedy says

As for the rich not running off 40 or 50 years ago. Where would they go?

Europe wasn't exactly a 3rd world country at the time. Austrailia and New Zealand were pretty cool places to be back then as well.

pkennedy says

Now people can live in the US, have off shore accounts/business easily. Unfortunately, now it’s much easier. If tax rates were jacked up, people would jump ship. I’m not against taxing them, I just think it has to be well thought out. Simply pushing limits up now wouldn’t yield the results we would expect in theory.

There are rules in place already to prevent or penalize that sort of thing believe it or not. The problem is they're not being enforced due to regulatory capture.

bob2356 says

That’s a little distorted. The largest part of any government budget (minus debt service) outside the federal budget is the employees. So politicians were “raiding” employee pensions to pay it’s employees.

The money was supposed to go towards the pensions in first place and if it had there would've been no issue, they used it for something else besides that instead of making cuts or raising taxes elsewhere, if that isn't raiding a fund then I don't know what is.

bob2356 says

Almost every public pension plan (along with lifetime health benefits) in the country was dramatically underfunded even without any diversions of funds.

That wasn't always true you know. Used to be they had plenty of money. What do you think happened, they employed 10x the number of people just for the heck of it to blow the cash?

bob2356 says

It’s far from a drop in the budget. It’s the essence of the entire problem. The public employees have only had unions since 1962. Almost all the retirement benefits promised have been implemented since then. The bill is just starting to come due and will increase exponentially in the future.

You think the politicans didn't know that back then? The laws were originally written properly, and things would've been fine if the money hadn't been spent on other things. Look how high spending got in the 2000's, where do you think the money to pull that off came from? Who do you think decided to spend it? The unions? You can't blame the unions for the budget mess in that town, that is straight up blaming the victim.

pkennedy says

Yes I have a tendency to believe that society will correct itself before imploding.

Unfortunately the corrections occur in a way we dont expect them to occur.
No matter that we started to see the market correct in 2005, no one foresaw
how bad it was going to impact the economy.

MarkInSF says

I understand the Social Security part. They ran a surplus for many years. Where did they invest? Treasuries. US gov’t owes itself.

Not exactly . . .

FICA payers have been on the low end of the wage curve since FICA taxes from the first dollar of income and the FICA cutoff is in the low six figures.

Income tax payers are on the high end of the wage curve (the top 10%, whose incomes all exceed the FICA cutoff by some amount, pay 70% of the total income taxes).

So the past 27 years has seen income tax payers -- largely the well-heeled -- "borrow" $2T+ from FICA payers, largely the middle class. What a country. I'm going to laugh my ass off if the conservatives successfully rip off the past 30 years of FICA payers by blowing off the money now owed to them.

Me, having worked in college for 7 years (avoiding FICA) and then going to Japan for the next 8 I've largely avoided W-2 income and have a rather minimal contribution in my account.

The US government "borrowed" from the trust fund. So the trust fund has a large asset, and the treasury has a liability. In the end these are just accounting entries. If we net the two together we see that the government simply spent the FICA surpluses on other things. In the future the FICA taxes will be deficient, and the income tax payers will have to fund the shortfall.

But this is the way it must be. Those who are working must produce all that is consumed by all the consumers. The workers must support all the dependants including children, retirees and all other non-workers.

Zephyr says

In the future the FICA taxes will be deficient, and the income tax payers will have to fund the shortfall.

The future is now, LOL:

"This year, for the first time since the 1980s, when Congress last overhauled Social Security, the retirement program is projected to pay out more in benefits than it collects in taxes - nearly $29 billion more."

http://www.cbsnews.com/stories/2010/03/16/politics/main6302588.shtml

To repeat myself, the spin that "these are just accounting entries" obfuscates the very important fact that, since 1983, FICA payers have been over-taxed while everyone else (including FICA payers to some extent) have been under-taxed.

Now, as I said, I only have a puppy in this fight. If the rich & powerful can rip off the FICA payers later this decade or next when it's time to start redeeming these IOUs en masse, you'll hear nothing but a golf clap from me.

This would be the greatest crime in the history of the country, but H.L. Mencken had it right: "Democracy is the theory that the common people know what they want, and deserve to get it good and hard."

@tts
Europe wasn't exactly the best place to be after the wars. Probably around 1980's and on, it would have been easily to travel to and from Europe. But Europe in general has higher taxes than the US. If you're a millionaire, Australia isn't exactly near anyone else. There just weren't that many desirable places to go. Now there are lots of exotic places that can be easily reached, lived in, left and returned to, all with English as predominant language (at least in the rich areas, high end restaurants, hotels, etc).

Really, it's just being realistic, we're far more mobile today, than 30 years ago. Even finance. The UK was being blamed for not clamping down on their financial sector -- but it's their biggest money maker. Clamp down and they'll simply move, how far? Who knows, but LOTS of countries are vying for that money. Same with the US. Lock down NYC, and people will simply go to other countries, they can do their business there instead. It's a lose/lose situation.

I think Zephyr has it dead on. It's accounting semantics.

This doesn't really give me a clear answer though, what would be an acceptable level of inflation, or what we might see? Or put another way, what would be the net difference in inflation with the last decade, and what we're likely to see year/year and for how long?

I don't care how high taxes have to go or how much RE need to crash; I'd rather see that than inflation, which is theft. "We" do not "need" inflation in the least, unless "we" are the US government, looking for a way to welsh on our debts.

Inflation will keep RE artificially high, which is bad enough for future home buyers, but will also rob them of their savings and hinder their ability to make standard down payments.

If there's one good thing about the surge in baby boomer retirees, it's that it *should* be an opportunity to drastically reduce government employee bloat as these people leave and aren't replaced.

I'd like to see Social Security reduced for current payees in proportion to the shortfalls that are coming in now.

Troy, the US and Japan have a pension totalization treaty in force, which will enable the time spent paying into Japan's system count towards your US pension (and vice versa if you choose to return to Japan). It's a matter of filling out some forms -- do it, and don't lose out on those payments you had to make!