Most people assume that the mismatch between US federal government revenue and expenses will go away, with enough time. All that is needed is a little “patch” now, and some more time, in order for the mismatch to disappear.
I don’t think the mismatch can be made to go away, partly because the mismatch between government revenue and expense is far worse than most realize. Furthermore, high oil prices seem to lead to recession, making it more difficult to fix the gap between government revenue and expenses.
There is good reason to believe that oil production will not increase materially in the next few years. With oil demand from China and India continuing to increase, the mismatch between oil supply and demand can be expected to get worse with time, leading to more recession, and a greater gap between US federal government revenue and expenses.
Because of these issues, about all recent debt limit agreement can be expected to do is push the problem down the road for a few more months. Eventually, we will be back into recession, and the revenue /disbursements mismatch will be worse than it was the last time around.
Mismatch between Government Revenue and Expenditures is Very Large
The way I look at federal spending is to look federal government revenue and expense on a combined basis (including budgeted programs, off-budget spending, and Social Security) using historical data from the Congressional Budget Office (CBO). Instead of comparing amounts to GDP, I compare amounts to non-governmental wages (Private Industry Wages + Proprietors Income) from the Bureau of Economic Analysis, since I believe this gives a more stable base, and since, as a practical matter, most taxes are on wages.
When we look at Federal Government expenditures and revenue in that way, what we see is as follows:
Figure 1. Federal Government revenues and expenditures on a cash basis, compared to non-governmental wages, based on BEA and CBO data.
While revenue is down by about 5 percentage points recently, spending is up by close to 20 percentage points. My calculations include increases in internal debt but do not include increases in external debt, so really reflect what the Federal government has spent on a cash basis. If we categorize outgo based on categories given in the CBO report, and compare them to my non-governmental wage base, this is what we find:
Figure 2. Federal Government Expenditures as a percentage of Non-Government Wages, based on CBO and BEA data.
Based on Figure 2 information, there has been huge growth in the category called “Medicare, Medicaid, etc.” This category would also include unemployment insurance (to the extent it is funded by the federal government), plus many other mandatory federal programs, such as food stamps and Supplemental Security Income. The increase in the “Medicare, Medicaid, etc.” category is easy to understand with the recent recession, because there are many people who are unemployed or underemployed.
My non-budget spending category is determined by subtraction–comparing how much external debt actually increased to the expected increase based on the sum of the various programs. This approach will tend to understate non-budget spending (such as military spending and stimulus spending).
If we look at revenue (Figure 2), also using CBO amounts, we find that the decline in revenue reflects a combination of decreases in all categories, not just personal income taxes. Corporate income taxes are also recently lower, as is the “Other” category, which includes excise taxes (such as on gasoline) and estate taxes.
Figure 3. Federal government revenue breakdown, as percentage of US non-governmental wages, based on BEA and CBO data.
The thing we notice, both from Figure 3 and from Figure 1, is that Federal Government revenues have never exceeded 40% of non-governmental wages for very long. Government revenues are now at 34.6% of non-governmental wages. The drop in individual income taxes started back in 2001, at the same time the percentage of the US population with jobs started declining (Figure 4).
Figure 4. Ratio of number of people employed to US population, based on BLS and Census Department data.
In Figure 1, we saw that the size of the gap between revenue and expenditures was of the order of magnitude of 20% – 25% of non-government wages. If the mismatch between revenue and expense is a permanent one, we really need this much more revenue to fund the current system (not considering the big increase in Social Security payments in the next few years, as “Baby Boomers” retire). But looking at where revenue comes from in Figure 3, there is no possible way to get this much additional revenue. If individual income taxes were to be the sole source of this increase, we would need to triple individual income taxes, to provide enough revenue in total. More taxes on the rich would barely scratch the surface of this problem.
The Reason our Problem is a Permanent One
We are used to thinking of the use of debt as something to be expected, but this is something that is not really true, unless the economy is in long-term growth mode. If the economy is growing (Scenario 1 of Figure 5), it makes sense for the government and individuals to borrow, because the future appears to be better than today, and offers good prospects for debt repayment, with interest.
Figure 5. Two views of future growth
The problem comes when the economy can no longer grow, or actually begins to decline (Figure 5, Scenario 2). Most economists do not even consider this possibility, but in a finite world, at some point, this will have to happen because finite resources deplete. The only exception might be if we can figure out a way to somehow disassociate growth from the underlying resources used to manufacture and transport goods and services, but this seems extraordinarily unlikely.
Oil supply has a been a problem since 2005. Regardless of how much price has increased (or decreased), there has been little change in world oil production.
Figure 6. World oil production, compared to Brent price, based on EIA data.
Economists tell us that if an item such as oil is in short supply, prices will rise, and either more of the item in short supply will be found, or a substitute will be found. It seems to me that there is a third alternative, which we are now encountering. In the agricultural world, if a required nutrient is not in available in adequate supply, the yield of the crop is reduced, based on the amount of the limiting nutrient. (This is called Liebig’s Law of the Minimum.) It seems to me that we are encountering the corresponding problem with the economy now, if high oil prices are thought of as a limiting an essential part of the economy.
Oil is used in very specific ways in the economy–for example, in transportation, in growing food, in operating heavy construction equipment, and in making many products including synthetic fabrics, asphalt pavement, and pharmaceutical drugs. There are no good substitutes within any short-term time horizon.
When oil prices increase, consumers tend to cut back on discretionary purchases, because oil price increases tend to cause food and commuting expenses to rise, and these are necessities. Earlier this year, economist James Hamilton showed that oil price spikes were associated with 10 out of the last 11 US recessions. Now, oil prices are again high, and economic growth during the first half of 2011 was less than 1%. We are again seeing signs of recession. If oil is really a limiting input for the economy, this is exactly the type of response we would expect from high oil prices.
While world oil production is flat as shown in Figure 6, consumption of the United States and many other “developed” nations is down recently, especially during the 2008-2009 recession.
Figure 7. Oil consumption based on EIA data.
The reason for the decline in oil consumption of Europe, Japan, US, and Australia is competition for limited supply. Oil consumption in my “Remainder” category (including China, India, most oil exporting nations, and many small “lesser-developed” countries) is rising rapidly.
I believe the reason for the shift in oil consumption to less-developed countries is because oil consumption tends to go to the countries where the jobs are–in part because the jobs, themselves often use oil, and in part, because those with jobs have the financial resources to buy goods and services made with oil. So as we import more goods from abroad, the countries we buy from prosper, and our own economy meets more recessionary headwinds.
Going forward, it is not at all clear that world oil production (Figure 6) will increase above its current level. In fact, it may very well decrease, as old fields become more depleted. Given the likelihood of continued growth in the “Remainder” category (Figure 7), this means that the United States and other “developed” countries may continue to experience declining oil consumption. Not surprisingly, given this background (high oil prices reflecting limited oil supply tending to cause recession, and oil consumption tending to go where jobs are), low oil consumption seems to be associated with a low number of available jobs (Figure 8).
Figure 8. Relationship between US jobs (from BLS) and US oil consumption (EIA "product supplied")
This relationship becomes even closer when we adjust for the long-term downward trend in oil consumption (Figure 9).
Figure 9 - US oil consumed per person employed, based on EIA and BLS data, with fitted exponential trend line.
An Unwind in Private Debt Makes our Current Problems Worse
When the economy is growing, as in Scenario 1 of Figure 5, it is possible for private debt to continue expanding. But once the economy stops growing and starts shifting toward decline, growing private debt become much less possible. Part of this decline in debt occurs simply because it doesn’t make sense to borrow from the future, and pay back the loan with interest, when the future provides fewer goods and services than today. Also, in a declining economy, businesses see no need to borrow to expand their businesses. Instead, they repay existing loans, and don’t take out new ones. In addition, there tend to be many more defaults in a declining economy. (See my posts The Link Between Peak Oil and Peak Debt – Part 1 and The Link Between Peak Oil and Peak Debt – Part 2.)
When we look at the recent trend in United States non-governmental debt together with the increase in governmental debt, the graph is quite disconcerting:
Figure 9. US Domestic Debt, split between government debt (external only) and non-governmental debt. Based on Federal Reserve Z.1 data. Excludes Foreign Debt.
Our economy is used to the stimulus it gets from increasing debt. The government can try to increase debt to make up for the lack of increase in private sector debt. But if growing debt really no longer makes sense, because of the difficulty the economy has growing when oil prices are high, then attempts to make up for the shortfall in private debt will never work. Private debt will keep shrinking, and government will be too small to make up the shortfall. Furthermore, in a declining economy, repaying governmental debt is likely to prove impossible.
Is There a Solution?
It is hard to see a solution to the mismatch between revenue and expenses. Laying off government workers and cutting back government safety-net programs will tend to be recessionary. Raising taxes will also tend to be recessionary. Low-cost oil has enabled our current standard of living. As low-cost oil is replaced by high-cost oil, we need to expect our standard of living to fall, because we will find the cost of many essential items increasing, without our salaries increasing. Even adding more high cost oil (say, from deep-sea locations) won’t fix this problem.
Government programs have tried to hide the trend toward more job layoffs and a lower standard of living that comes with lower oil consumption through stimulus programs and bailouts, but this cannot continue indefinitely, because the underlying problem has not been fixed. Eventually, the mismatch between government revenue and expense will become more evident, and the government will find it needs to cut back on many popular safety-net programs, or find the interest rates it needs to pay for sovereign debt significantly raised.
The level of changes agreed to today in today’s debt cap legislation is far too low to significantly change the current situation. We will still be left with a wide gap between federal government revenue and expenses, and the likely prospect of recession in the future.
It is hard to fix the mismatch between government revenue and expenditures. One thought is that we need new types of taxes that will discourage “exporting” of jobs, and encourage “importing” of jobs. We need a clear focus on keeping jobs in this country, even if the goods produced here cost more.
We probably also need to work on finding jobs for people, outside of our current oil-based economy. At one point, it was usual for one family member to remain outside the paid work force, and instead work on raising a garden, preserving food, and taking care of children and the elderly. We may need to go back to this model again, as more of the norm.
I am afraid I do not have all of the solutions. If solutions were easy, we would not be in our current dilemma.
Thomas M. The real problem is that our left hemispheres have become dominant. Our left hemispheres produce models of reality, but they cannot differentiate between the model and reality. Whatever models you or I present here are suspect for that reason.
This has real consequences,
For instance there has been a lot of work done on Latice assisted nuclear reactions, colloquially called “Cold Fusion”. http://www.lenr-canr.org/LibFrame1.html
When presented with this non-model reality the Left brain thinks it must be wrong as it is not in the model. And it begins to confabulate.
After all the model IS reality to the Left brain.
Another thing that the Left cannot do is “Insight”. It has no understanding of this fundamental error of confusing reality with it’s model.
We have to find some way of reballancing our two brains.
The way of rebalancing our two brains is called meditation – both to generate insight and to cultivate model-independent awareness. This type of meditation, however, should not be confused with the altered-state thrill-seeking commonly labeled as meditation.
Excellent post!
We clearly have a SPENDING problem in this country, not a taxing problem. Even during the “good ole days” when marginal rates were very high, we didn’t collect any more revenue. Once recessions and bubbles are removed, the government has collected about 18% of GDP for the last 60 years. Meanwhile, spending has increased from 18% to 25% of GDP. Simple math.
Our standard of living is based on cheap money (Government Debt) and cheap energy. These are not sustainable. Therefore, unless we have a miracle, our standard of living will continue to decline. You can’t fix these structural issues with a simple tax tweak. We need a comprehensive strategy to address all the components of our standard of living. Comprehensive strategies are VERY hard to accomplish in a democracy without a major crisis. This is one area where China, with a command and control economy, has a genuine advantage (partially offset by the corruption this type of economic model always fosters).
We have millions of PhD’s doing “research” in our fine educational institutions. Perhaps a few could spend a little time on:
Energy: we need to replace oil with something cheap (solar? nuclear?)
Housing: we need inexpensive and energy efficient housing (passive solar designs?)
Food: we need less reliance on petroleum in our food production cycle (buy local?, victory gardens? organic?)
Transportation: we need a distributed workforce (encourage work from home?)
Population: worldwide, we need to incentivize people to have less children, not more
Sorry I came late. There is just so much I can take.
It seems to me that it is time for triage.
We divide the population between who is not going to make it. Ignore them.
Who will definately make it. Ignore them.
Concentrate on those who might make it.
Which parts are worth concentrating on?
I suggest the internet, climate? and space colonisation are worth keeping.
What should be ignored are malnourished people in ecologically devastated areas and the very rich.
It seems like electricity is one of the things that may not make it. Without electricity, a lot of other things fail. This one of our problems. If we can keep governments working as they are today, electricity likely won’t be a problem. So make sure governments don’t cease to function is another major item of importance.
I am afraid space colonization is never going to make the list. It is just too far down on our list of priorities.
According to the IMF projections, it is medical expenses which are driving our deficits. Yet see this post by Mark Hyman, MD, on the recent study which showed complete cure of diabetes in 8 weeks by simply changing what people eat:
http://drhyman.com/new-research-finds-diabetes-can-be-reversed-6187/?utm_source=Publicaster&utm_medium=email&utm_campaign=drhyman%20newsletter%20issue%20#27&utm_term=Get+the+story
The study, entitled Reversal of type 2 diabetes: normalization of beta cell function in association with decrease pancreas and liver triglycerides, was exquisitely done. The bottom line: A dramatic diet change (protein shake, low glycemic load, plant-based low-calorie diet but no exercise) in diabetics reversed most features of diabetes within one week and all features by eight weeks. That’s right, diabetes was reversed in one week. That’s more powerful than any drug known to modern science.
So we are bankrupting ourselves trying ineffectually to save people from their own folly. I vote to let them just die if they persist in their folly.
Don Stewart
I agree that our medical system isn’t working. We definitely need a system that aims for keeping people healthy, not maximizing incomes of health care providers. Doctors are so tied in with the system of providing drugs for every ailment, they never even consider suggesting diet and exercise as solutions to their patients.
Part of the problem too is with the food industry. I think that restaurant food needs to be greatly changed (including portion sizes), and the amount of over-processed food in grocery stores stopped as well. But it is hard to make any of this happen. There are too many people making money off the current system.
Gail
You might like to check
http://peakwatch.typepad.com/decline_of_the_empire/
for some data on defense and medical care as the essential drivers of the disaster. He also shows the lobbying budgets for these two components and their public statements about the dire consequences of any cuts.
Don Stewart
PS My view remains, of course, that we cut these two or we fade into oblivion.
Thanks for the link! I agree defense and medical care are both way to high. They are part of the whole mess we have gotten ourselves into.
I found part of the answer to our debt problem. Google Earth Sagaponack, NY, on Long Island. After the zoom stops, look southeast to the coast. Can people with houses like that help balance the budget? There are many, many huge mansions in, and near, every large city in the USA. Thousands and thousands of them. Google Earth around silicon valley, or outside LA and San Diego. I read somewhere that the average income of the top 115,000 US income taxpayers is about $24 million. And that nearly 400 people in the USA had incomes of a billion dollars in 2007.
I would like to recommend that everyone watch the CNBC TV documentary by David Faber, ‘Untold Wealth: The Rise of the Super Rich in America’, but it mysteriously disappeared from the long list of specials on the CNBC TV website. (Faber’s ‘House of Cards’, the story of the 2008 sub-prime crash, is still there. They sometimes rerun it on holiday weekends. It is a masterwork, as good as ‘Inside Job’.) After first seeing ‘Untold Wealth’ last year, I was wondering how long it would take to disappear. It only took about a year. I guess the fellow not being bothered by spending $40,000 for one (1) replacement tire on his $2.3 million dollar sports car, in his private museum with the auto elevator in it, was a bit too dangerous for the millions of unemployed Americans to possibly see. They surely didn’t want it to become a stolen YouTube sensation as the Congress discusses raising the age for medicare eligibility to 67 when Canada has nearly free medical care for everybody.
I just love when people say that even if we taxed the rich at 100%, it couldn’t balance the budget. Fox News, owned by Rupert Murdoch, loves that one. Using that logic, why did I ever have to pay a single penny tax? They wasted what I paid on one bomb in Iraq. (And a couple of trillion more, to give Iraq to the Iranian Quds Force general who now runs the southern half of Iraq. I bet those ungrateful Iranians never even sent George Bush a thank you card for getting rid of their only obstacle to becoming the predominant power in the world’s oil station, Saddam Hussein.) No, the very rich can’t balance the budget. But they can sure get it a lot closer to being balanced. They think their lobbyists can buy them a virtual free ride in Congress, with hedge fund multi-billionaires paying a carried interest tax rate of 15% forever. Until things get tough, they sure can. But eventually, they could find themselves in another Egypt, or worse, another French Revolution.
Perhaps your suggestion is part of the solution.
If share prices start decreasing and debt defaults start increasing, I suspect that quite a few of these rich people will find themselves less well off, without an increase in taxes.
Off topic but are you still following Chevron and Equador?
http://cartalk.com/blogs/jamie-kitman/?p=289
Gail – I can’t help but think that serious conservation might help in this situation, both personally and collectively. Recent reports that the Japanese have cut energy consumption by 23% since their tsunami and nuclear plant problems shows that it can be done. The drain on our economy with higher energy prices has to be a significant drag on the economy. Conserving energy would partially mitigate this problem.
I do like your suggested lifestyle changes.
I am wondering how the Japanese changes will really work out. The Japanese economy had been growing very slowly (nearly flat) for quite a few years before the earthquake. I am suspicious that there are going to be a lot of round-about effects (layoffs, debt-defaults) that won’t be evident for some months, or into next year. The economy also will have less resilience this way. If a typhoon hits, or there is some other stress, the country will be less able to respond.
I like this site very much so much excellent information. “Funny how just when you think life can’t possibly get any worse it suddenly does.” by Douglas Noel Adams.
Hi,
I believe the ‘Fairtax’ system which replaces taxing income( from individuals to business) with a 23% tax on new items only which funds all government expenses including Medicare and S.S. would cause a renewal of our economy. Unless you have read ALL the material on Fairtax.org please do not do not comment negatively by repeating ignorant misconstrued partial facts about it. There are many features to consider. One important one is that the vast ‘underground economy’ that is, the crooks, cheaters etc. would contribute via their purchases of new items. The total estimated amount I think is near 50 billion dollars a year.
One other result would be lower product prices overall and a return to America of businesses that fled for better tax havens overseas – as if they don’t get enough relief already here.
Would you like to take home ALL your wages and spend them as you want? Study Fairtax.org become a believer and contact your rep. 60 congressmen are sponsors of the Fairtax Act which is introduced each year but unfortunately rejected by the rest ( They fear loosing power over us. Taxing income is confiscation. Taxing only new products has us controlling how much we pay but we all need new items and no one is going to not buy and when including the 40% who do not pay now the government would likely collect more.) even in the face of possible economic collapse. The more people that demand serious consideration of it the sooner we will achieve a better life for all.
Rates of consumption have been shown to be more consistent than wages over time so revenues would likely be more reliable also.
What my calculations are showing is that to support the current system, taxes need to be very much higher than is currently the case. A 23% tax on new items only won’t be enough.
One can calculate the ‘inclusive 23% or 30% exclusive but the result is the same. The Fairtax Org. insists the revenue would be more than sufficient.By the way, I missed mentioning that services would be taxed also. I wonder Gail if you have studied the website?
I doubt the people from Fairtax have any idea how short our current funding is–they certainly aren’t trying to collect multiples of current income taxes. This is not a hurdle anyone would want to build into their tax system.
All discussions about growth and resource scarcity suffer from one fundamental fallacy. They tacitly assume that cheap oil necessarily leads to economic growth. However, there are many examples of economies in the past which failed to grow despite cheap and plentiful oil resources. Given this fact, it is extremely dangerous to assume that the present recession is caused by the scarcity of oil. In fact, I personally believe that the problems we suffer from have more to do with debt saturation than with a lack of cheap oil. Debt levels can not be increased beyond a certain level. That level could be influenced by oil prices, but the principal existence of that level has nothing to do with oil.
Whether or not economies fail to grow because of cheap oil, the converse is clearly a problem–a country that has infrastructure that has been planned for cheap oil, but suddenly faces itself with expensive oil, is likely to shrink, not grow. So I don’t think your reasoning follows.
I suggest you read some of my other posts. Back in early 2008, I forecast much of what happened in the 2008 recession, and indicated a bigger debt unwind was still ahead:
Peak oil and the Financial Markets: A Forecast for 2008
Delusions of Finance – After the fact explanation of what I saw, that others did not.
Gail:
You cannot hammer these points home often enough. Our monetary system REQUIRES an expanding physical system. Any constraint on the physical system will destroy our monetary system unless there is an extraordinary reorganization of the monetary system. Presently we are seeing the rumblings of instability, and we are on the cusp of destruction or reorganization. Nate Hagens had an excellent presentation on this: http://www.zerohedge.com/news/guest-post-nate-hagens-were-not-facing-shortage-energy-longage-expectations
In either case, the form and substance of a lifestyle that once was will no longer be. This is a certainty. Prudence dictates that we begin individually adopting more reliable lifestyles – no debt, less stuff, more skills, stronger neighborhood ties. And where possible, we should begin advocating public policy along the same lines.
Those in apartment blocks are not impaired. An amazing quantity of wild vegetables, herbs, fruits, and medicines are readily available anywhere greenery grows – parks, roadsides, vacant lots, landscaping, etc. My municipals parks are full of hackberries, hawthorne, persimmon, crabapple, dock, burdock, sorrel, chickory, wild carrots, parnips, wild lettuce, plantago, dandelion, sage, thyme, mint, echinacea, balm, cattail, mushrooms, etc. Much of this just “weeds” and completely overlooked. All of this bounty is free – if you spend the time to learn. Even apartment dwellers can do that.
While I agree with you that we must change, I fear those apartment concentrations will not be supported in my area by the (lack) of concentration of parklands, even with some of my possible “technical trespass” in establishing cattails. I see nothing but “dieoff” without some focus on sustainable grains.
@Gail
I see only one solution to this problem, cut down on your lifestyle, it’s too extravagant anyways. Perhaps we don’t need politicians as much as we need philosophers and religious leaders who can tell people that maybe driving less or eating less isn’t the end of the world, that one can still be twice as happy while earning a little less and spending a little less. Perhaps it’s time to reinvent what we should strive for.
Wise Indian-
Let’s hope that that is enough of a change.
I can vouch for the fact that it doesn’t matter how much you have to spend, but you do need enough for food, and probably shelter and clothing.
Points:
The Defense Department has no role or training in handling natural disasters. I don’t recall any failure of DoD as regards Katrina. Some DoD equipment was used to transport equipment or food. Local National Guard troops maybe did some patrolling, but they are quasi DoD at most.
DoD exists to defend American interests from foreign military attempts to advance other interests. That’s the mission. It’s not to put out forest fires or rescue people from flooding. If you want an organization to do that, one must fund it and train it.
As for the Debt Ceiling agreement, I got $5 here that says if Q1’s GDP of 0.4% persists into Q2 revisions down from 1.3%, in a matter of days we’ll see that agreement torn up and stimulus funded. We will see a new U3 number this Friday. If it arrives at 9.3% or higher, well, we already had a glimmer of proposed new borrowing with a proposal to extend the 2% Soc. Sec. tax cut, and you can rest assured the present tax rates (sometimes quaintly called Bush tax cuts) will be extended along with that 2%. Both those items, btw, amount to only about $110 billion each. They are insignificant.
Quick edit of myself as regards the Coast Guard. Another quasi DoD situation, that do have the occasional foray to foreign lands. They don’t put out forest fires. Rescue from flooding . . . sort of an amorphous definition.
The use of national guard in disaster response is what it is, but command structures are generally segmented between NG units and active duty units. There is talk of undoing that segmentation, but that’s not the norm and I suspect it won’t be the norm. It smells of a play by NG folks to get access to active duty funding. It’s not the first such and won’t be the last.
The core concept is that the US military’s role is to defend American interests from foreign threats. There is little or no domestic role for the US military, and frankly, that’s probably the way you want it.
From the July 2011 issue of Army Times
DoD grooms commanders for disaster response
PETERSON AIR FORCE BASE, Colo. — The Defense Department is grooming a new type of commander to coordinate the military response to domestic disasters, hoping to save lives by avoiding some of the chaos that plagued the Hurricane Katrina rescue effort.
The officers, called dual-status commanders, would be able to lead both active-duty and National Guard troops — a power that requires special training and authority because of legal restrictions on the use of the armed forces on U.S. soil.
http://www.armytimes.com/news/2011/07/ap-new-commanders-for-disaster-response-070311/
Yup, that’s the talk of undoing the segmentation.
It smells like mission creep and I’ll be surprised if it survives funding cuts.
I’m with Owen, I don’t remember the DOD failure. I got to Katrina about day+2 with a trailer, 100gallons of gas, and 30 days of tuna and peas in cans and my pickup truck. The next 30 days were instructive for a long time prepper like me. In Gretna on the Mississippi at a giant warehouse where all the Christian Relief organisations organized you could watch the flash&bang of the marines off the Tarawa class ship that we were directly across from. We were surrounded by soldiers, as not only did we have the only supplies (initially thanks to friendships.org) for the surrounding towns, but we had all the illegal drugs that were constantly being seized in unguarded, unlocked containers, in the wharehouse. I never saw so much illegal drugs even in pictures.
On day 32 when I had to leave, FEMA (finally) showed up in Gretna. While I do not totally agree with Ed, what appeared to work down there was citizen 2 citizen. In fact a year later some group did a survey of “rescues” and it was 85% citizens in Bass boats, it had little to do with any level of government
Government is coercive that is it’s nature, all forms, whether fines, imprisonment, or death, this is the trade that we made at the Peace of Westphalia to minimize religion. The State was to be our Savior, not Jesus. Hansen’s panels are just more of the same, my experiences with NSF or DARPA panels would not lead me to believe that they are the solution. Read Kuhn.
I was thinking governmental failure, not necessarily DOD failure. Government programs often don’t work out as well as planned.
Thank you, your articles are always a breath of fresh air.
L
I don’t really see debt as the biggest problem. The US and other countries can simply abrogate their foreign debt and proceed to operate on a barter basis with each other. Even if our domestic debt is not repaid (much of our domestic Federal debt is owed to ourselves via the Social Security “trust fund”), many people, including myself, would have most of their savings wiped out, but the entire physical plant of our nation would remain. Debt default would not have even the slightest amount of impact compared with, say, nuclear war.
The really big problem is how we allocate dwindling resources after the debt is gone, money is worthless and most jobs have disappeared. The economy would certainly have to be a non-market economy, perhaps a command economy similar to Cuba or pre-perestroika USSR. Perhaps all the functions of government and resource allocation will be handled by the military under martial law. I can only assume that very detailed plans have already been developed by our Defense Department that would allow them to “hit the ground running” after the conventional economy collapses. I certainly hope so. Some well organized entity has to take over or millions of Americans will rapidly die of starvation
I see political problems as ranking high on the list of our future issues. The former Soviet Union fell apart, after the price of oil dropped, and it could no longer collect adequate funds from export. Once prices started rising again, its production started rising as well. See Figure 1 of this post. But future consumption never rose to its same past level–see Figure 2 of the same post.
All of the disruption, and falling apart, can cause huge longstanding problems. If there is a major change in political, the new system doesn’t necessarily replicate the old system in terms of how much it produces. I am not convinced that the Department of Defense will be any better prepared than they were after Katrina.
In addition to the (pure?) politics, I’d like to propose changes in the political/economic systems through using systems which are already out there from borrowing money through Kiva/LendingClub/Prosper to alternative currencies like BerkShares or IthacaHours or pure social “gifting circles” like dailyfeats.com.
I like the idea of alternative currencies and gifting circles better than lending clubs (unless they do it without interest, and forgive the loan if circumstances turn down).
Lending with interest has worked well in growing economies, and some of the “Emerging Market” economies have been growing more than others. But once things start turning down, we are likely to see many more debt defaults. If you google the words “repay loan commit suicide” (not in quotes), you get a lot of hits. For example Microfinance Borrowers Commit Suicide (Microfinance Africa) and India Micro credit driving people to suicide in India. There are many other stories as well, not mentioning microcredit in particular.
Given how effect the war department has been at social work in Iraq, Afghanistan, Pakistan, Libya, Yugoslavia and Yemen I do not want the war department in charge of my food, water, housing, transportation, education, clothing, etc.
Jay Hansen is one of the few people that has proposed anything specific to handle “dwindling resources after the debt is gone, money is worthless and most jobs have disappeared.” See his America 2.0 proposal:
http://dieoff.org/america.htm
Jay Hanson’s “solution” is to eliminate the market based capitalistic system we now have and set up a committee of scientists and other experts to recommend new policies and structures. Of course it would be nice to organize everything well in advance of the coming collapse, but that has not happened and will not likely ever happen.
I don’t have any particular love for the military, but they are already used to maintaining some semblance of order and structure in chaotic situations. I know of no other branch of our Federal, State or local governments that would have a chance of reacting effectively to economic collapse. Perhaps the DoD would bungle the job too, but they would stand a better chance than FEMA.
The military “maintains order” by murder and threat of murder. Yes it would work but that is not the America I want. I will take the goodwill of my neighbors over “military order” any day.
Jay isn’t very supportive of corporations and free enterprise, is he?
I didn’t read all of what he wrote, but it seems like for a government system to work, it would have to be on a small scale–individual village, for example. I don’t see the US government replacing the free enterprise system.
Capitalism and free enterprise work very well when there are no physical constraints and growth is possible. With the pie getting larger everyone can have more, and thus even if the rich take a larger slice, peace is possible. When growth stops and reverses, as it is now, capitalism no longer works due to the social unrest caused by everyone having to make do with less and worrying about fairness between classes and tribes and countries. Under these circumstances we need a system that can allocate scarce resources in a visibly fair way (i.e. rationing) and centrally mandated reductions in waste (i.e. no more SUVs even if some can still afford them). This is in large part what Jay advocates. I’m not saying Jay has all the answers, only that I have not found anyone else that has even attempted to construct a realistic story. Transition Towns do not address the realities of a collapsed monetary system and negative growth so they do not count in my mind.
Thanks for the summary.
I agree that we are again going to need to share more equally when there is less to go around. If paper investments decline in value, this may help the situation along, as well, since many of the rich may suddenly become much less rich.
I think part of what has to happen is a change in the way of thinking. It is going to be hard to do that quickly.
Ed and Gail,
Eventually all of those who survive will be living on small farms or very small villages. Gail’s post is about the transitory nature of the debt ceiling extension and what is likely to happen to the debt in our debt based economy. To paraphrase George Bush, “When that sucker goes down”, there will be a huge mismatch between where millions of people are actually living (in cities) and where they will need to live (on small farms) for the next centuries/millenia.
When that mismatch is created (over the course of days or months), something has to happen to support the folks stuck in the cities. They aren’t going to just walk out into the countryside and set up their new life. Some entity is going to have to bring them food and oversee distribution. All of the neighborly goodwill in the world is not going to put food in their mouths. All the neighborly goodwill in the world will not maintain order among millions of starving people.
But for those of us already in the country on small farmsteads and small villages, Ed is absolutely correct. I live on 16 acres in rural Hawaii. I will certainly rely on my neighbors and they on me. I am not too worried about the necessity for martial law where I live, but if my children are still living in cities on the mainland when this all comes down, I hope that someone will keep control of the situation, if only long enough for them to come live with me in the country.
“It is hard to fix the mismatch between government revenue and expenditures. One thought is that we need new types of taxes that will discourage “exporting” of jobs, and encourage “importing” of jobs. We need a clear focus on keeping jobs in this country, even if the goods produced here cost more.
We probably also need to work on finding jobs for people, outside of our current oil-based economy. At one point, it was usual for one family member to remain outside the paid work force, and instead work on raising a garden, preserving food, and taking care of children and the elderly. We may need to go back to this model again, as more of the norm.”
I like these two paragraphs. Your article was very complete the one topic you did not touch on was hyperinflation. Which of course is not a solution to the root issues just another possible symptom.
A heavy tariff would be a tax to encourage importing jobs.
I like the lifestyle of the second paragraph but it raises many issues. In family care of the elderly implies less work for doctors and nurses in nursing facilities. Most Americans live in cities and have no yard to grow food. In Sweden school does not begin until age seven if there were a parent at home we could cut school costs by cutting the first two years off of public school. If there were a parent at home we could start school at a sane time (not 7:00am). No need to get the kids out of the house before both parents go to work. More real food less store bought chemical, corn syrup pre-made “food”. Not all elderly have grown children, not all grown children have elderly.
Still lots of savings possible in the war department.
As I say, it is hard to find very workable solutions. Poor people especially are in apartments, or are renting a home, and don’t really have a chance to plant a garden. Not all areas are ideal for gardens, either.
We do need the rich to share with the less well off. It is hard to see how that will happen, except for higher tax rates on the rich.
I strongly support high tax rates on the rich. But how much money would that raise? What fraction of the problem would be solved?
I don’t know how much high tax rates on the income of the rich would solve, but it wouldn’t be much.
Furthermore, higher capital gains rates only help if stocks and other items sold are appreciating. I expect we may see decline in the future.
The “Bush Tax Cuts”, that is, current tax law, if they expire, are worth $120 billion in revenue — in 2007, when there was actual economic activity to tax. If “the rich” portion of the rates expire and the rest are left alone, the revenue (again 2007 calculations) would be about 24 billion. And btw, the Learjet and Cessna Citation “loophole” is worth a grand total of $2 billion.
The problem, of course, with the rhetoric is that the Democratic party is violently opposed to tax increases. Yes, not the Republicans. The Democrats. There is direct, inescapable proof of this.
From 2008 to 2010 the Democrats had an overwhelming majority in Congress and for much of that period of time (14 months, I believe) there was also a filibuster-proof Senate majority. Not once in those two years was a tax increase law brought into place. The Democrats never even tried to raise taxes.
They had the ability to address fiscal disaster with any tax increase they wanted to advance. They could have shut off the Bush tax cuts EARLY, not waiting for expiration, but they did not.
Why? The answer is obvious. The people reject tax increases. The internal factions of the Democrat congressional caucus(es) never would have permitted it and would have joined with the GOP minority to defeat them.
So let’s be sure we remember party choices of just a year ago. The Democrats CHOSE to not raise taxes. They, solely, had the ability to do so. They CHOSE not to.
Hi Gail,
I don’t find the above statement to be self-evident. I’ve been hearing that wealth inequity in the US is probably the worst since 1928. What seems more likely is that higher marginal rates on high-earners, eliminating corporate tax loopholes, more tax on FF, etc could provide revenue for job creation programs. I don’t find much correlation in US financial history that supports a direct relationship between tax rates and recession – one way or the other. Perhaps I’m missing something – I don’t pretend to be a financial expert.
I am talking about huge tax increases on practically everyone, to obtain the kind of increases in revenue that would be needed. Certainly the discretionary income of lower-income people would be hard hit. There would not be extra tax-funded programs in return for the increases in taxes this time either (as there normally would be), because we are correcting for overspending. I don’t think the current situation is very comparable to a normal tax increase.
Raising tax rates on people who have more money to spend than they know what to do with is not going to have much of an effect, I agree.
Good point. This tax increase would not stimulate our economy. It would contract it to the extent that the debt is extranational.
Is there a solution? Not according to Carmen M. Reinhart and Kenneth S. Rogoff in “This Time Is Different: Eight Centuries of Financial Folly”. Their analysis of several hundred years of financial history suggests that when debt to GDP exceeds 90% there is no turning back from a currency crisis. It’s already too late for many countries including the US. Best buckle up.