Aware Brain

Media and economists alike have dozens of reasons for why the US is in recession. Some suggest that the cause of the recession is the housing decline. Other experts claim it is because of weakness in the banks and Wall Street financial institutions. Layoffs and business decline is sometimes the culprit.

In fact, all of those are mere symptoms of the underlying issues. The condition of the US economy is under stress because of two simple problems.

1. Promised services vs. government revenue. Over the past 50 – 70 years, the federal government has made commitments to its citizens and foreign states in the form of promised services, social programs, and treaties. Medicare and social security are the largest and most obvious, but tens of thousands of smaller programs have become to be depended upon by Americans. “As people grew more affluent,” writes Matt Miller, a journalist and a consultant for McKinsey & Company, “they’d want more of what only government could provide — a strong military, public order, good schools and assorted welfare benefits, services that private citizens would have trouble arranging for on their own.” The simple fact is that the revenue received by the US government, mostly from taxes, is grossly insufficient to pay for all of them. It is a basic math problem.

2. Government liabilities. Because of decades of the government paying for services it cannot afford, an immense pile of liabilities and debt has been accumulated. The total amount of debt owed by the government, including liabilities it is responsible for, is an amount that has no conceivable way of ever being repaid with current revenue.

The only final answer to resolving these two issues is that Americans will need to get used to much higher taxes, and receive much less in the form of benefits provided by the government. It is that simple.

All of the stimulus programs, bail-outs, foreclosure prevention systems, and other financial schemes enacted will not repair the condition of the American economy unless they raise government income (taxes), and lower expenses (services). Raising taxes and reducing services will have negative affects on every US citizen.

Those with higher income and of more wealthy means will feel the pain from having more of their earnings and wealth taken due to higher taxes. Inflation (which is actually a form of taxation, a result of government currency printing) will also affect this group as it erodes the value of their cash holdings.

Americans with lower incomes will be affected by having less government services available to them. Although many social services appear to be provided by local governments, these municipal programs rely on federal support to survive. The first signs of people being stressed because of social service reductions will appear at the local level. The problem is made worse in a recession as more people will begin needing social services. The social safety net is being stretched “all over the country,” said Jacqueline Byers, research director for the National Association of Counties in Washington. “The formerly middle class who lost jobs, homes, or both suddenly are requesting assistance for the first time.”

In California’s Contra Costa County, 40,000 families are applying for just 350 affordable-housing vouchers. Church-operated pantries are running out of food. he worst financial crisis in seven decades is forcing thousands of previously middle-income workers to seek social services, overwhelming local agencies, clinics and nonprofits. Each month 16,000 people, including many who were making $60,000 to $100,000 annually just a few years ago, fill four county offices requesting financial, medical or food assistance.

Nationwide, demand for food stamps, one of the first benefits that new applicants for services qualify for, has mushroomed since the recession began. A record 5.11 million Americans were collecting unemployment benefits in the week ended Feb. 14. “People are physically going through a slow death,” said Karen Stewart, an area real-estate agent who earned about $80,000 a year just three years ago and is now down to her last $700. “You don’t have any support and the support systems that were in place before aren’t in place anymore.”

Whether or not these social services were appropriate in the first place has proponents on both sides of the argument. The real answer is that it does not matter; people who were expecting or counting on these services, right or wrong, will have to do without them. This will affect the culture and social environment of the country in significant ways, for a long time. An example of how a shortage of services can affect a society comes from Contra Costa County. The county’s Housing Authority has a five-year wait for affordable-housing vouchers, said executive director Joseph Villarreal. “There’s always a level of desperation” in applicants, Villarreal said. “But the degree and depth of it now I’ve never seen: I’m not used to getting calls from clients saying they’ll kill themselves if they don’t get on the wait list.”

What this means for most Americans is that the long term solution for successfully navigating the recession is greater self-sufficiency. Humans have become used to expect social services such as artificially lower housing costs, to such an extent that when affordable housing is not available suicide is contemplated. Many mental health experts nationwide are reporting increase in psychological issues and suicide concerns. The Great Depression of the 1930′s was worse than this economic decline so far, and while suicide was sometimes an issue, many people endured much worse conditions with strength. A person who feels hopeless because of a lack of “affordable housing” should consider the perseverance of this woman, who managed to live in an open tent with her two young children during the Great Depression.

As far as tax increases go, the results may not be as bad as what many believe it might be. For some individuals the tax burned will increase. Higher tax rates will likely be permanent. For a half-century, federal taxes have remained fairly constant relative to the size of the American economy — equal to about 18 percent of gross domestic product. But the 18 percent era has to end soon. It won’t end because government is a radical tax and spend entity. It will end because of a basic economic reality. To keep even a moderate level of services, this is necessary. How will this affect the economy and growth of production? When over the past 60 years did the American economy grow fastest? The 1950s and 1960s, when the top marginal tax rate was a now-unthinkable 90 percent. And when over the past generation did the economy grow fastest? The late 1990s, when President Bill Clinton briefly took federal taxes to 20 percent of the G.D.P.

The government debt load. The governments current annual revenue is $2 Trillion. This means that if every penny of all the revenue was paid towards the $65 trillion in liabilities, it would take almost 33 years to pay off the debt. (65/2=32.5) However, the US cannot pay all of the revenue towards liabilities, because it uses that money for ongoing expenses such as interest on the debt, medicare payments, and operating the government. In fact, the $2 trillion does not even cover the annual operating costs. If Generally Accepted Accounting Principles (GAAP) are used, the US loses another $4 trillion per year. So that $65.5 trillion will become almost $70 trillion next year, and $74 trillion the year after that. This is not counting if the government spends any more phantom money on bailout or stimulus programs.

“In the seven years of GAAP reporting, we have seen an annual average deficit in excess of $4 trillion, which could not be possibly covered by any form of taxation,” said economist John Williams.

“Shy of the government severely slashing social welfare programs, federal deficits of this magnitude are beyond any hope of containment, government or otherwise,” he said.

Those are the real issues. Housing prices, foreclosures, layoffs, stock market crashes, and the merits of various bailouts are simply symptoms of the true problems, and potential distractions to solve them. In 1972, an Eastern Airlines jet with 176 people on board crashed in the Florida Everglades killing everyone. The pilots lowered the landing gear, but an indicator light failed to confirm it was down and locked. The jet then circled west over the Everglades at 2,000 feet as the cockpit crew spent the next seven minutes fixated on whether the problem was a faulty $12 bulb or failed landing gear. While focused on the light, the Lockheed L-1011 began a stealth descent. No one in the cockpit noticed. At 11:41 p.m., Capt. Loft, satisfied the bulb was the culprit, advised the tower they were coming in and returned his attention to flying the plane. But it was too late.  “Hey, what’s happening here?” Loft said as he frantically pulled up while banking to the left in a futile attempt to rescue Flight 401. At the Miami tower, the jumbo jet disappeared from the controller’s radar screen at 11:42 p.m.

Foreclosures and layoffs are just indicator lights.

~ by Dave on February 27, 2009.

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