What’s behind United States budget problems?

We see endless fighting between the Democrats and Republicans about the budget, but no real explanation as to what the issues are. My view is that there is a structural imbalance between government revenues and expense that is likely to get much worse in the years ahead. This structural imbalance is related to too few people with jobs, growing limits on oil supply, and the inability of the economy to continue growing as rapidly as required to maintain our current financial system. Let me explain the issues as I see them.

Too Few People with Jobs

Figure 1. US Bureau of Labor Statistics employer non-farm employee counts divided by US Census Bureau resident population estimates

Between 1970 and 2000, the percentage of the US population with jobs rose, at least partly because more women entered the work force. Since 2000, the percentage of people with jobs has been declining as jobs are increasingly sent to offshore locations, and economic growth stagnates.

Clearly, it is easier to keep a balanced budget when the percentage of the population employed is rising than when it is falling. When it is rising, there are more people to pay taxes, and fewer needing support benefits of various types. The reverse happens when the percentage of people employed is falling.

The Connection Between Jobs and Oil Demand

Figure 2. Number of jobs from US Bureau of Labor Statistics non-farm employer; oil consumption is "Product Supplied" from US Energy Information Administration

If we look at historical numbers (Figure 2), there seems to be a close tie between the number of US jobs and the amount of oil consumed in the US. One connection is that jobs often use oil in some way–operating machinery, or transporting goods. Anther connection is that people with good paying jobs can afford to buy goods and services (like vacations) that use oil, so the demand for oil stays high, even with high oil prices.

Unfortunately, even with rising prices, the amount of oil extracted in the world has been been approximately flat since 2005. The share of the oil that has been going to the US and other OECD countries has been falling.

Figure 3. Oil consumption by region, based on BP Statistical Data. (FSU is Former Soviet Union).

Figure 3 shows that the countries that have been able to obtain an increasing share of oil are the “Other” category–(that is, excluding Former Soviet Union and OECD countries). These countries include OPEC oil exporting countries, plus China, India, and many other countries who use little oil on a per capita basis. Major oil importers like the US have tended to see recession as oil prices rise, cutting back demand for high-priced oil, and the jobs that go with this demand. Economist James Hamilton has determined that in the US, 11 out of 12 post-World War II recessions were preceded by oil price shocks.

Figure 4. US "product supplied" based on EIA data, divided by US Census Bureau resident population

When we look at US per capita oil consumption, we see it has been dropping since 2005, and especially since 2007 (Figure 4). This is as expected, based on Figure 3.

Demand for cheap oil is quite different for demand for expensive oil. Many potential buyers want and can use cheap oil. US infrastructure was built on cheap oil. Expensive oil tends to be a problem, causing recession for countries that import very much of it. The risk is that rising oil prices will again cause major recession among the major oil importers, and with it a further drop in demand for oil, and more loss of jobs.

Unfortunately, there is good reason to believe that there will not be a major uptick in oil supply that will ease the high price problem. The International Energy Agency says, “The Age of Cheap Oil is Over”. The Wall Street Journal published an article called IMF: ‘Increased Scarcity’ Ahead for Oil Markets which says:

Governments should brace for “increased scarcity” in global oil markets and the risk of additional sharp price increases in the coming years, the International Monetary Fund warned Thursday.

Private Industry Wages and Salaries Have Fallen

Figure 5 - Private industry wages and salaries from US Bureau of Economic Analysis (not adjusted for inflation)

If we look at private industry wages and salaries (Figure 5), we find that as of the latest available data (February 2011), total wages and salaries were still below peak levels in the first part of 2008. These numbers have not been adjusted for inflation. If they were, the fall would be even more pronounced.

Figure 6. Private industry wages and salaries from US BEA. Other line is sum of transfer payments and government (including local gov.) salaries from US BEA.

If there are not enough private industry jobs to go around, various approaches can be used to try to remedy the situation. One possibility is transfer payments, like unemployment insurance, Medicaid, and Social Security. Another is by hiring more government employees, including state and local employees. In this graph, the red line is private industry wages and the blue line is transfer payments plus government payrolls. While there are other sources of tax funds than private industry payroll (taxes on businesses, for example, and taxes on government employees’ wages) the narrowing of the gap between these two lines since 2008 is a major reason for the current budget problems.

Social Security Funding Issues

Figure 7. Social security funding disaggregated into current year contributions and interest on government debt (from Social Security Administration).

Social Security benefit payments have been escalating rapidly, at the same time that contributions have declined, since so few people have jobs (Figure 7). Interest credited by the Federal Government has been flat recently, because of declining interest rates. Despite all of the assurances the government makes, Social Security is on close to a pay-as-you-go funding basis. Each year, the government takes whatever excess revenue has been collected from recipients, and uses it for whatever purposes it deems fit (having nothing to do with Social Security). It replaces the funds it takes with non-tradable IOUs, which don’t show up in most compilations of US debt. It is the presence of these IOUs that allows the government to say that the program is funded until some distant year. See my Oil Drum post from a year ago, called Social Security and Medicare Funding Issues: Even Worse when One Considers Resource Constraints.

In calendar year 2011, Social Security contributions were reduced from 12.4% of taxable wages to 10.4%, a reduction of about 16%. This drop pretty much guarantees a funding shortfall for Social Security (even with investment income on the IOUs). This shortfall won’t show up in budget calculations, however, because it is an off-balance sheet item.

Growing Mismatch between Tax Revenues and Expenses

While government receipts have been rising, spending has been rising much faster.

Figure 8. Government receipts and expenditures, based on US BEA data.

Figure 8. Government receipts and expenditures, based on US BEA data.

Government receipts and expenditures shown in Figure 8 are broadly defined–they include state and local programs as well as federal programs, and programs like Social Security as well as ones that are budgeted yearly. I have used data on this basis, because all the programs are interrelated. If the federal government cuts back on its funding, state and local taxes will need to be higher.

Figure 9. Government receipts divided by private industry wages, and government expenditures divided by private industry wage, based on BEA data.

Figure 9 shows that compared to private industry wages, government receipts have remained relatively level since 2000. What has grown is government expenditures (broadly defined, including state and local government expenditures, and including Social Security), relative to private industry wages.

Slight of Hand Approaches

There are various slight of hand approaches that governments can use to improve reported economic growth.

Figure 10. Nominal GDP (from BEA) adjusted reduced for stimulus impact of increase in US debt (from http://www.treasurydirect.gov/govt/reports/pd/histdebt/histdebt_histo5.htm). for increase in

GDP is a measure of how an economy is faring. It can be temporarily increased in many ways: by debt-based government stimulus spending, or by artificially low interest rates, or by excessively loose lending standards, allowing people who cannot really afford to buy homes to do so. It is difficult (or impossible) to tell exactly how much benefit actions such as these have.

Theoretically, there ought to be a multiplier effect, beyond the direct additional spending. For example, if additional federal government spending allows a teacher who would not otherwise be employed to have a job, she will probably by more goods and services than she would have without a job, and the people who obtain money for those goods and services she buys will again spend the money she gives them.

In Figure 10, I made a rough estimate of what the effect of additional debt might be on US GDP, assuming a multiple of 1.0 to 2.0 is appropriate with respect to additional federal debt. With either multiple, the effect is quite large. Other indirect stimulus attempts, such as Alan Greenspan’s artificially low interest rates after the Dot-com bubble, and the later the encouragement of loose lending standards by banks, could also be expected to help reported GDP.

I would consider Quantitative Easing (between November 2008 and June 2010 and again between August 2010 and June 2011) to be another slight-of-hand approach. According to Bill Gross of PIMCO, the effect of QE recently has been to reduce interest rates on bonds by as much as 150 basis points. Because of the low interest rates available on bonds, interest in buying other asset classes, such as buying stocks and commodity futures is enhanced. The same article quotes Ben Bernanke as talking about how equity prices have risen significantly and volatility in the equity market has fallen in response to QE.

While approaches such as these have helped keep reported growth rosy, it is hard to see how creative approaches such as these are long-term solutions, especially if things continue to get worse.

What’s Ahead?

There are two trends that are easy to spot:

1. Baby boomers are reaching retirement age, and the number of people drawing Social Security and Medicare benefits can be expected to grow significantly, without adding correspondingly to the number of people paying taxes (or Social Security premiums). Furthermore, many of these people will want to sell their large homes, adding to the oversupply of homes for sale.

2. Oil supplies are likely to get increasingly tight, causing prices to rise further, until recession brings prices down. More recession can be expected to bring further job loss.

The combination of these two trends suggests strongly that the imbalance between government receipts and expenditures (shown in Figures 8 and Figure 9) is likely to get much worse in the future than it is currently. Even more exotic “slight of hand” approaches are likely to be needed, to maintain the appearance of reasonable economic growth.

Exponential Growth in a Finite World

One reason for concern is the fact that our financial system needs economic growth to function properly. Our economy is debt-based, meaning that money is created by lending it into existence. This money needs to be paid back with interest, but the interest component is not created at the same time. When the economy is growing, there is little difficulty, since by the time the loans come due, on average, there is enough growth to pay back the debt with interest. In a flat or declining economy, there tend to be huge numbers of debt defaults. Artificially low interest rates can partially fix the problem, the system really needs economic growth to function as planned.

The long term basis for economic growth tends to be fossil fuel use. Fossil fuel use has been growing for 200 years–about as long as the US has been in existence, so economists have tended to assume this growth is the natural state, and can be counted on indefinitely. Unfortunately, this assumption is not true.

If we look at a graph of world population (Figure 11) and compare it with a graph of fuel use overlaid on the same graph (Figure 12), it is pretty clear that the huge spike in population occurred at the same time as growth in fuel use (first coal, then oil, natural gas).

Figure 11. World Population Growth

Figure 12. World population from US Census Bureau, overlaid with fossil fuel use (red) by Vaclav Smil from Energy Transitions: History, Requirements, Prospects.

The reason for the connection is  clear, if a person thinks about what fossil fuels, and in particular oil, are used for. Oil is used to power farm machinery; to power irrigation equipment; to make herbicides, pesticides, and fertilizer; to refrigerate food after production; and to transport food to market. If a farmer has to do all the work himself or herself, or with only the aid of animal power, his productivity is much less, and he is able to support many fewer people who are not farming. Additionally, oil is used to make many other things, such as medicines, which have allowed life expectancies to be much longer than in the past.

My blog is called Our Finite World. The world has a finite number of atoms; the amount of oil, natural gas, and coal that is economically extractable is also finite. The problem now is that we are reaching limits in their extraction, especially for oil. This causes oil production to stop rising, and prices to spike.

There is a parallel in the biological world. When organisms find an exhaustible food supply (for example, yeast eating sugars in a bottle of grape juice), their population tends to grow exponentially, then collapse, as the limited food source is exhausted. Oil and other fossil fuels enable the current very large food supply we have on earth. If we exhaust the fossil fuels that we can reach (even if this exhaustion comes because prices are too high for the economy to support), collapse in the world population can also be expected.

There are three views as to how the current human predicament can be expected to work out:

1. Continued Exponential Growth. This is what most economist assume, and what the scientist putting together climate change models assume. Fossil fuel use is expected to grow for the lifetime of the models, despite rising oil prices and investment cost. The big long-term issue is viewed as climate change.

2. Standard Peak Oil Theory. The belief here is that the supply of oil and other fuels is limited by geological factors, with economics making little difference. The expectation is that oil, gas, and coal supply will decline slowly over, say, the next 100 years or so. When Hubbert made projections of this type, he did it in the context of other fuels keeping the economy going on a “business as usual” basis, so that economics did not play a major role.

Figure 13. Figure from Hubbert's 1956 paper, Nuclear Energy and the Fossil Fuels.

3. End to Growth and Collapse. This is my view of the major risk, in the years ahead. High oil prices are likely to bring on recession and a reduction in oil demand. The financial system cannot withstand the lack of economic growth that is likely to occur in such a situation, and many debt defaults and layoffs are likely to occur. The underlying cause is that it is becoming non-economic to extract oil–we are using more and more energy to extract oil, so that net energy from what is being extracted is dropping below the level needed to keep society operating. The result is likely to be collapse, as there are more and more debt defaults, and it becomes more difficult to keep financial institutions afloat.

If I am correct, we could see a major collapse in the next few years, relating to a significant extent to our ability to keep funding all of the programs we currently have, with a declining tax base.

Future Scenarios

We really don’t know what is ahead. Three scenarios come to mind as possibilities:

1. Somehow, political powers will figure out a way to reign in spending, by substantial cuts to military expenditures, Social Security, Medicare, Medicaid, government employment, road paving, education, medical research, and many other programs we have considered essential to date. Ben Bernanke (or his successor) will figure out a way to create major inflation, so we don’t formally default on our debt. Somehow, we will transition to a much lower energy economy through our normal political process, without actual collapse.

2. Huge infighting will continue between the Democrats and Republicans, until some outside force causes the current system to stop working. For example, it may become necessary to pay much higher interest rates because other countries raise their interest rates, and interest payments balloon. Or perhaps defaults by other countries will make it clear that the United States is in not a whole lot better shape than many of the others. If enough counties are unable to pay their debt, international trade might be cut back greatly, because countries will not trust one another to pay for goods shipped, unless potential buyers actually have other goods they are able to trade in return. Each country will attempt to go it alone, producing goods primarily based on its own resources. There may be a formal restructuring of debt, perhaps stretching out payment terms. As in (1), a huge number of programs will need to be cut back, like Social Security, unemployment insurance, and Medicaid, because of low taxes to support these programs.

3. Things fall apart. If collapse starts, the government could find itself with huge obligations in many areas, such as FDIC bank guarantees, pension guarantees, and Fannie Mae and Freddie Mac loan guarantees. At the same time, the tax base could erode further, due to more layoffs, falling property values, and falling stock market values. I can imagine a scenario similar to the dissolution of the Soviet Union situation taking place. The Federal Government might just disappear, and the individual states would be left on their own, either to go it alone, or band together with other states, and form new governments.

Responding to Our Predicament

I recently wrote a post called, What President Obama should have said regarding energy policy, in which I rough out a plan for the United States to get off fossil fuels. I also explain why I believe that what are now called “renewables” should be referred to “fossil fuel extenders” because they temporarily add a bit to supply, but do nothing to solve our long term problem. To the extent that fossil fuel extenders are high priced and require a lot of investment, I consider them to be part of the problem, not part of the solution.

I would like to see both Democrats and Republicans sit down, and figure out what the problem really is, instead of being so adamant that their own views are correct. Both sides seem to be to be significantly wrong in their views.

The Democrats should be aware that their views on attempting to help the climate are likely to make collapse sooner and more severe, and the models upon which they are basing their climate decisions assume unrealistically high fossil fuel use (see Appendix below). If collapse does occur, it likely will lead to a drop off in all fossil fuel use as well as a drop in world population. As a result, there will be less pressure on ecosystems of all kinds.

The Republicans seem to be overoptimistic as to what can be done with additional drilling, and with a partial switch to natural gas. I do not object to trying this approach, but believe optimism as to what it can reasonably accomplish should be tempered. Costs and energy used in oil and gas extraction are rising rapidly, and we too, are reaching the point where it will cease to be economic to drill, because the energy used in the process will be excessive compared to the energy of the oil and gas extracted.

Hopefully, we can find ways to mitigate the predicament we are in. I tried to lay out a rough transition plan for the US in my Obama post, mentioned above. Working on an international financial system would that is not debt based could be very helpful, if it allows more international trade to continue. The employment problem can be “fixed” if we can get workers transferred over non-fossil fuel approaches requiring more manual labor, if the economics can be worked out. I am not sure there is any “good solution,” but if all sides could sit down and understand where we are, it seems as though we would have a better chance at figuring out mitigations.

Appendix – Climate Change Estimates Using Lower Estimates of Fossil Fuels

Figure 14. Fossil fuel estimates used by de Sousa and Mearns in their estimate of CO2 emissions.

Luis de Sousa and Euan Mearns put together an estimate of expected carbon dioxide equivalent emissions, using the estimates of fossil fuel use shown in Figure 14, as shown in this Oil Drum post. In this estimate, fossil fuel use peaks in 2018.

Figure 15. Forecast CO2 equivalent concentrations, based on the calculations of de Sousa and Mearns.

Luis de Sousa and Euan Mearns used the fossil fuel estimates in Figure 14 together with the MAGICC program used by IPCC modelers to estimate future CO2 equivalent emissions shown in Figure 15. If the actual situation is collapse, rather than the “Peak oil” type decline curve shown in Figure 14, the drop off in CO2 equivalent concentrations would seem to be greater and come more quickly.

Of course, climate change already seems to be a problem, and there are other reasons (such as ocean acidification) for eliminating excess CO2, so actions may still be needed. But decisions should be made in the context of understanding the full situation, including the downside if collapse is exacerbated and there is inadequate fuel for mitigation.

About Gail Tverberg

My name is Gail Tverberg. I am an actuary interested in finite world issues - oil depletion, natural gas depletion, water shortages, and climate change. Oil limits look very different from what most expect, with high prices leading to recession, and low prices leading to inadequate supply.
This entry was posted in Energy policy, Financial Implications, News Related Post, Oil and Its Future and tagged , , , . Bookmark the permalink.

59 Responses to What’s behind United States budget problems?

  1. Owen says:

    Want to see the problem? It’s not rocket science.

    365 days/yr X 12,000,000 barrels of oil/liquids imported X $120/barrel (Brent closed at 126, and some imports from Canada are not priced at Brent, so 120 rather than 126) =

    incrementally . . . 365 days X 12 million = 4.38 billion barrels / year

    X $120/barrel = $526 billion leaving the country each year — in return for stuff we immediately set fire to.

    It is patently astonishing to me that Russia and KSA don’t ally themselves and set the oil price to a number that will destroy the ability of competitors to fund their military.

    • wotfigo says:

      It is patently astonishing to me that Russia and KSA don’t ally themselves and set the oil price to a number that will destroy the ability of competitors to fund their military

      Reagan & Thatcher (UK Prime Minister at the time) did exactly this to Russia (the Soviet Union aka the Evil Empire) in the 1980’s. They opened the taps in Texas & the North Sea & basically destroyed Russias income from the only foreign exchange it could get its hands on, oil. Goodbye FSU.

      I bet they haven’t forgotten that.

      • Owen says:

        There is considerable talk behind the public scenes of KSA and Russia. KSA is appalled that Obama threw Mubarak off the cliff, after having been a staunch US ally for 40 years. They are watching yet further incompetence by the present US government in Libya.

        They do not want to be next. A Russia alliance could secure their future. In fact, it might improve it, elevating them to more than the mere subtle global dominance they now enjoy.

        • marty says:

          Just for the record. KSA participated in the drowning of Russia in oil as well, there were a lot of complicated actions towards strategic ends during the Reagan administration.

          To counter some of this the current administration would need to construct some strategic goals, and then become proactive. There is a limit to post-modern philosophy in international affairs as applied to political diversity, “whatever they want” won’t work.

          I think a Russian/KSA alliance would be very very scary for any administration, even this clueless one. A scarier one would be the addition of India and China to that alliance. As Mahan wrote long ago, sea denial is easier than sea control. The wild cards are the relationships with Iran and Pakistan, if Pakistan went farther into “failed state” then China would have its opportunity for reproachment with India. Only a revolution could alter the Iranian/Russian connection. China simply can’t force project without India.

          For the KSA there are GIGANTIC risks here, my personal opinion is that they’ve been working with China as their hedge for years. Their “short of war” strategic move is selling oil for something other than dollars.

        • wotfigo says:

          KSA & Libya.

          The Saudi’s gave approval for NATO / USA intervention in Libya. They hate Gaddafi anyhow.

          The “condition” was that the US would not intervene in the Saudi invasion, oh sorry, invited assistance, in Bahrain.

          Done Deal

          And as for a Saudi / Russia alliance remember that both these countries rely on selling their FF to the west for their income & standard of living. If they were to cosy further up to China in a China / Russia / KSA alliance then things will get real ugly real quick. I think China sees the KSA as a US oil patch & will not push that issue.

        • Owen says:

          Heavens no. KSA delivers far more oil to China than to the US. China is the excellent customer of note for the Saudis, not the USA. The USA is the provider of top quality weapons that consistently outperform competition.

          But if you can defund the US, then those weapons go away. A Russia/KSA alliance can raise global prices to the point where the US can’t have an economy. The Russians could hire away all the smart Lockheed folks and put them to work at MiG by simply paying them 3 or 4 times what Fort Worth can offer, while simultaneously ensuring their safety (while the Dallas area has food riots).

          Russia / KSA as a new cartel has world domination written all over it. China’s growth could be managed in exactly the same way — via price choking.

          If it’s played right, geology can decide the victor. It will not be the US, if the US gov’t allows it to play out.

  2. Jb says:

    Gail,
    Thanks for the great post. Under scenario #3, could US states that produce oil seize control of their mineral rights, pull the drilling permits and renegotiate the contracts with corporations? Corruption at the local level would take over quickly if no one is answering the phone in DC.

    • I have no idea how things would work out with states operating on their own. It really would depend on how well interstate trade would hold up if there isn’t a common monetary system (a possibility)–also how international trade for replacement parts would hold up.

      If local people can figure out a way to do extraction quick and cheap, I expect it would get done, without worrying about details like safety.

  3. Jb says:

    Stiglitz video over at Jesse’s:
    http://jessescrossroadscafe.blogspot.com/2011/04/stiglitz-of-1-by-1-and-for-1.html

    In the second video, he says that “the best way to reduce the deficit (as I said) is to put America back to work.”

    So if a lack of cheap, high quality oil prevents job creation, then the deficit must be inflated away, defaulted on, or simply ignored until it’s irrelevent.

    • Ed Pell says:

      Does Stiglitz say how he would put Americans back to work?

    • Right now, our workers are competing with China and India’s workers who are paid a whole lot less, in large part because they use a lot less oil and gas, and need less wages to support their lifestyle.

      Also, goods and services over produced there are produced with electricity, made from cheap coal (with limited pollution reduction capabilities). So our goods and services have a double handicap, the wage handicap and the electricity handicap, but both are tied to energy. As oil prices rise, and as we add more expensive ways of making electricity, our competitiveness goes down further and further.

      • Ed Pell says:

        I read this comparison who is better prepared for peak oil?
        1) the American who drives his used F150 pickup 20 miles to go work as a greeter at Wall-Mart
        or
        2) the Indian programmer who works for IBM in Bangalore and commutes 10 miles in a new turbo charged diesel van with 7 other programmers.

        It is called competitive advantage it is what we do not have.

  4. Ed Pell says:

    The US needs to do three things
    1) increase the eligibility age for social security and medicare to 75
    2) close all foreign military bases and end all foreign wars and cut the DOD down to 200 billion per year
    3) build out a new energy infrastructure

    The first two just take political will. The third requires energy input and lots of it. But we can at least start with the existing energy surplus that we do have. You say you do not see a surplus. We will need to do things like rationing so we can divert enough energy to the build out. This will require sacrifices like car pooling (two people in a car rather than one, two generation of a family in one house rather than two houses, etc).

    Of course no politician can get the money needed to be elected if they put forward these ideas. So as available export oil goes down we will ration but fail to build a new energy system and as export oil falls so will the standard of living in the US. Time to move to a location that is warm in the winter and can grow food (has water and soil).

    • wotfigo says:

      4) Tax corporations & high wealth individuals
      5) Expand electric rail both intercity & intra-city (metro & light rail)

      • marty says:

        Let’s do this through a flat tax at least for individuals which would eliminate a nice chunk of the IRS, and a huge chunk of the accounting/lawyering done for individual submitting their taxes. I’m done with regressive/progressive tax strategy discussions because while it sounds great in theory when they are done with all the special exceptions from people coming to work for the treasury paying no capital gains taxes to depletion tax breaks on my personal stake in shale gas drilling and the waste of all this administration – it doesn’t matter. Because the spiritual costs takes it over the top, it INVITES corruption, it INVITES people to say/lobby that what they do is MORE IMPORTANT than what other people do.

        I’m sorry if my mother works a second job cleaning goldman’s bathrooms at night to put me through college and pays taxes, I do not see her as less important than the goldman executive paying zero taxes because he goes to work for the treasury department.

        Pick your favorite pairing.

    • Owen says:

      Without dabbling too very much in philosophy, let’s examine just what happens with a DoD budget reduction from its current 665ish billion (including supplementals) to 200 billion.

      That is 465 billion dollars, and for all expenditures of this type 80% are personnel costs at the end of the pipeline, be it uniformed people, civilian DoD employees, or contractor employees. Defense folks are from the hard sciences (as opposed to soft sciences, not a statement of difficulty), even those without degrees (production technicians, aircraft mechanics, etc) and they are paid well.

      This high pay helps some in reducing the numbers you would toss onto the sidewalk but it’s still $465 billion / say, $80,000 (incl benefits) = about 5.8 million people.

      If we then toss back in unemployment costs for them, plus welfare and food stamps and utilities subsidy and housing subsidy, plus the loss of the White House and Congress to the Democrats as this particular surge in the unemployment rate would be north of 20% for one would suspect decades — it’s not clear that you really want to do this, is it?

      Let’s also wonder about the geopolitical questions of military response spectrum for a DoD reduced to 1/3 its present size. It has always been very well understood, because of the personnel costs laid out above, that nuclear forces are cheap. Warheads do not require people. This inevitably translates into a response profile that eliminates options.

      China sees its chance and makes the move to enslave Taiwan. What is the US response with $200Billion and no overseas bases from which to deploy force logistics? Answer: there are no options other than nuclear, and the always delightful strongly worded protest letter to the UN Security Council. Backstab Taiwan, or interdict the invading forces at their debarkation ports on the China coast with nuclear weapons.

      Russia (GAZPROM) decides it has had enough of Ukrainian pipeline levies, and also had enough of Germany charging so much for its exports. They make their move. What is your profile of response options with Ramstein closed down and unavailable for force logistics? Answer: Nuclear weapons employment along the armored front, along with the always popular strongly worded letter to the UN Security Council (where Russia has a veto).

      Of course, before these events unfold, the President will have been briefed that his only contingency for such things is always nuclear. His rhetoric in foreign policy speeches will need to emphasize it, in hopes that deterrence will be effective for all future moments of tension. And so you’ll have a President threatening nuclear war in every policy speech he ever gives on any foreign policy matter that ever arises. Will that win votes?

      From a left wing perspective, not right wing, I really don’t think you want to do this.

      • Ed Pell says:

        The world will have to take care of itself. We are broke and can not afford to pay for their defense. Yes China and Russia and Israel may gain territory.

        • Owen says:

          Correct. And given that Taiwan is not too valuable, and the Senkaku Islands are, China will be gaining Japanese territory. No real reason for them to stop there, either. Hawaii is attractive.

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  6. Kathryn says:

    Gail, I agree we are facing a bracing wind of declining energy, related job declines, etc, but it seems like at least part of the employment/revenue imbalance is related to tax sheltering and jobs being transferred off shore by America’s largest money generators, the corporations. We middle class are paying our taxes and seeing our services cut while we are seeing our revenues sucked up by energy company subsidies, tax shelters, credits, etc. Doesn’t it seems like we need to put this on the table as well?
    Kathryn

    • Jb says:

      Kathryn, I agree but doubt anything will be done voluntarily in the near term to rebalance the system. In the meantime, the government + subsidized corporations will continue to bleed the host (us, the middle class) dry. My guess is they will continue to do so until the system collapses: subsidies can’t keep up with declining demand from paying customers. We’ll know this is happening when rolling blackouts become a way of life. Barring a US disaster similar to Japan, this could be years away as the lack of cheap, high quality liquid fuels slowly pushes the bulk of the middle class into poverty. Perhaps localized power stations will develop in wealthy enclaves while the suburbs evolve into something else. The spread of radiation from Japan to milk / water here in the US is worrisome.

    • The more we raise taxes on oil and gas companies, the faster production drops. Our infrastructure is built for oil and gas, so this is a problem.

      With respect to renewables, the more we support them, the more our energy costs rise, and as far as I can see, we don’t add much to net energy. They also don’t really help our long-term energy picture. We also make ourselves less competitive with other countries, like India and China.

      So my take is pretty much the opposite of the standard one. We should probably leave things alone tax-wise, or cut subsidies on so-called renewables. If they can stand on their own financially, fine, but otherwise, they don’t make sense.

      If everything collapses quickly, all of this discussion may not make much difference. All of this is only a tiny piece of the total.

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  9. Ed Pell says:

    Figure 8 says the federal government takes in 4 trillion per year. I understand where about 1.5 trillion (income tax) comes from. Where does the rest come from?

    • The $4.0 billion is broadly defined government, not federal government. I got my amounts from Table 3.1, from here.

      There are separate tables 3.2 through 3.9 which give some breakdowns of this. Table 3.3 lists state and local taxes as $2.1 trillion. This includes sales taxes as well as real estate, gasoline, and other types of taxes. Contributions for Government Social Insurance are listed as $1.0 trillion in Table 3.1. I presume this would include social security and medicare. Taxes on corporate income (from 3.1) are $0.4 trillion.

      I would have to look at these tables a little closer to figure out all the details, but you get the idea.

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