Bill Clinton's Risky Budget Plan

Like many Americans, I was quite impressed with President Clinton's proposals in his State of the Union speech. Reducing the deficit is crucial to our long-term economic health.   Yet careful reading of the text of his address, put into context with his overall belief in the ability of government to solve all of our woes, lead me to believe that this program in its final form will do much more harm than good, especially to the middle class he purports to help. 

In fact, the middle class will end up bearing the brunt of the financial cost of the new taxes as the cost of goods and services rise to offset the higher energy costs.  In addition to the estimated direct cost of $17 monthly, a typical family with take home pay of $500 per week would see additional indirect costs of about $20 per month for every 1% increase in the inflation rate.  If inflation exceeds 10% as it did in the late seventies, this program could wind up costing the average middle class family in excess of $1,500 annually. 

On the spending side, only $5 billion of Mr. Clinton's $73 billion in annual spending cuts are scheduled for the first two years of his plan.  I doubt that we will ever see these cuts.  Beyond that he has called for $30 billion in short- term stimulus, $27 billion to increase the Earned Income Credit over five years, $13.8 billion for Head Start and $3.6 billion for the Women, Infants and Children program, not to mention his yet to be unveiled health care plan. 

Mr. Clinton's proposals are bold, but I am afraid misguided. Instead of real deficit reduction, we will see increased spending and risky tax increases.  Instead of a growing economy, the only things likely to grow are government, taxes, prices and eventually unemployment lines.  If we are truly concerned about reducing the deficit and fixing our economy, the public should demand spending cuts first, taxes later.

A Flat Tax Can Be Both Fair and Progressive

There are three reasons we should consider a flat tax:

1) It is simple - How much time have you spent filling out your Social Security returns? None. Why? Because it is a simple flat tax.

2) It doesn't require significant collection efforts. Sales taxes require a fair amount of paperwork by the collector (i.e. retailer) to report and remit. Plus, depending on what is exempted, it could be very complicated and prone to abuse and fraud.

3) It can be as fair or progressive as we want it to be. Consider these two scenarios.

A 10% tax on everything over $25,000:
A person making $25,000 or less would pay no tax
A person making $50,000 would pay $2,500 (10% of $25,000) or 5% of their total pay.
A person making $100,000 would pay $7,500 or 7.5%
A person making $1,000,000 would pay $97,500 or 9.75%

A 20% tax on everything over $50,000:
A person making $50,000 or less pays nothing.
A person making $100,000 pays $10,000 or 10%
A person making $1,000,000 pays $190,000 or 19%

As you can see, we can set the rate and the exempted amount wherever we would want to get the effective rate desired for various income levels. In example 2 above, the person making $1,000,000 makes ten times the person making $100,000, but pays 19 times more in taxes. Still, he pays no more on each incremental dollar than anyone else. It achieves both progressivity and fairness.

Good Intentions, Not Such Good Outcomes

With the recent outcry for change in this country, I have been contemplating some of the change that has been called for in recent years.  This has included elimination of tax shelters for the wealthy, increased taxes (including luxury taxes) to reduce the deficit, an increase in the minimum wage, extended unemployment benefits, reductions in military spending, a new civil rights bill, anti-discrimination laws to protect Americans with disabilities and more stringent laws to protect workers and the environment.

Interestingly, each of these proposals, representing a liberal or populist point of view, were enacted.  Now we find ourselves in a protracted recession, yet we believe the solution to these problems is to follow the Democrats further down the primrose path of populist policies.

Consider the effects that some of the policies above have had on our economy.  The elimination of tax shelters, one of the great populist policies of the past decade, led to a tremendous drop in real estate investment.  In turn prices fell, greatly excacerbating the S&L mess.  The luxury tax on cars and boats led to mass layoffs in those industries.  The reduction in military spending, while promising to be beneficial in the long run as production switches to wealth creating industries, has in the short term displaced thousands of workers.  The civil rights bill and to an even geater degree the Americans with Disabilies Act, while certainly necessary, will hamper our global competitveness as businesses try to absorb the economic impact of these laws.

The Clean Air Act and efforts by OSHA to protect workers are also placing increased burdens on business at a time when they can least afford it.  A perfect example is a requirement by OSHA that drycleaners meet stingent exposure limits for solvent vapors within their operations.  The deadline, which is rapidly approaching, will require many operators to make major investments in new equipment to meet the new guidelines.  Most of those affected are older family operations.  Rather than making the investment, many are choosing to retire.  Unfortunately, because of the increased regulation, the value of their businesses are next to nothing.  As a result the nest egg they were counting on for retirement has been wiped out, forcing them to live on social security and putting a further drag on our social services. And this represents just an infinitismal portion of our vast economy.

As for the minimum wage, we can never raise it enough to provide more than a subsistence wage.  Whenever it is raised significantly, employment will eventually drop and prices will rise, making the new wage no better than the old one. The answer is to provide the education, motivation and training so that our work force can excel in higher value added, hence higher wage, employment.  We can then let the truly low wage, low value jobs migrate overseas.

Much is made of the unfairness of a system where many become wealthy while others cannot find employment.  Yet wealth and employment are inextricably linked.  Put in an unusual way, if each employee generates an annual profit of $1,000 for his employer, would you rather the employer earn $5,000 or $500,000 each year.  In one case you have five employees, in the other five hundred.  Rather than look at the employment however, we look at the profit and consider it unfair.  In turn, we look to tax the profit, taking it from productive investment and placing it in he government's trust, one of the least productive investments we can make.  The end result is less private employment and more government dependence.

This country has great problems, but we have even greater potential.  By providing education, motivation and hope to our underprivileged we can eliminate the scourge of drugs and crime in our communities.  Each time a person is
turned from a government dependant to a productive member of society, our spending needs drop and our revenue increases. Outside of education, the government cannot encourage this effectively.  Government cannot make a poor person wealthy, nor even comfortable.

Journal Entries 1989 - 1990

May 5, 1988

Is abortion murder? If someone feels abortion is wrong, then shouldn't their choice be not to have one, or do they have a moral obligation to prevent others from having one also? If so, how far does that moral linkage stretch? To family members, their state, the nation, the world? In other words, will God punish us for not doing all we can to stop as many abortions as possible? If so, should we pursue this course to the exclusion of all else or will God treat each abortionist or abortionee individually? 

If we do allow abortion, does that cheapen life, making euthanasia of the sick, the elderly or the inconvenient easier? 

The argument that makes me sick is the economic one, particularly among middle class people who opt for a microwave, a VCR or a later model car versus a third child. If all the effort expended on both sides of the argument were to be focused on preventing unwanted pregnancies, more abortions would be prevented than any law that could be enacted, which brings me to the pro-choice argument for reproductive freedom. What about prophylaxis and contraception? Or are they incapable of proactive thought and simply capable of reactive correction? I give them more credit than that.

May 6, 1989

Visited Plaza Frontenac (a high-end shopping center) today. No matter how wealthy I may become, I never want to be like these people. They should be made to drive around North Saint Louis to see how some people live. What's sad is that if these people are conservative, they feel that the plight of the poor is the fault of the poor so "don't ask me to help," while if they're liberal, they say, "take a percentage of my pay in taxes to help them so I can sleep with a clear conscience." I'm sorry, but neither approach is correct, nor sufficient, I know I'm guilty of not doing my part, but admitting so does not absolve me of said guilt. What do we do to resolve the situation in the inner city?

May 7, 1989

Pundits wonder why we split our vote, resulting in a republican president, but a democratic congress, the reason is simple - Democrats promise jobs, programs and contracts to their constituents (more than their share of the pie, so to speak). Republicans promise to keep a lid on such giveaways. Hence, people vote to get their goodies from congress, but send a Republican to the White House to make sure the rest of the country doesn't get theirs.

May 8, 1989

If politicians and sociologists want to address our problems, they must stop dealing strictly in absolutes, particularly as they pertain to groups of people. Instead, they must realize that behavior is spread along a bell curve from one extreme to another. For example, economically, people are motivated to different degrees. Some are simply driven to succeed no matter what the payoff, while others could not care less about success so long as they get their sustenance. The vast majority of people lie somewhere in between. By the same token, some people will be enticed to remain home with a very simple subsidy., i.e., welfare, while others will require larger subsidies in order to give up their occupations. A graphic representation of this phenomenon would be as follows. The number of people who would quit on the y- axis and the amount of the Subsidy on the x-axis. The graph shows a standard bell curve,  with fat tails at both ends. 

Obviously, unemployment becomes more attractive to greater numbers, as the dole grows larger as people leave their jobs however, output shrinks accordingly, leaving more dollars chasing after fewer goods. The resulting inflation will reduce the purchasing power of the government subsidies, forcing people to go back to work or demand a greater Subsidy from the government. Given the growth in dependence on, not to mention expectation of, government support, this second scenario seems very likely. 

What this example also points out is that government handouts do not improve the lot of the lower class, but simply encourage reduced total output (GNP),thereby reducing the total material wealth of the general population. 

The key is to provide opportunity, education and motivation to work (hence produce) while sustaining those who can't work without enticing workers to leave their jobs.

The scenario painted above (rising unemployment and inflation) defines stagflation, much like we had throughout the 70s. Part of this was due to shocks and commodity markets (Oils, minerals and such), but is it not possible that part would be attributed to the Subsidy phenomena.

To give credence to Subsidy Theory, let's look at agriculture with various government subsidies given to farmers to reduce production, why do some farmers continue to produce? Some do so because they can make more by producing than by accepting government handouts. Others will produce simply because they feel obligated to do so. The net result of the subsidies, however (the stated goal in fact), is reduced output and higher prices. Is it not safe to assume that public welfare would have the same net result, though the stated goal is to help those in need? In reality, we are subsidizing reduced output, and hence higher prices. This explains why. Market principles, free of government intervention will create the greatest national wealth. It is then incumbent upon management to see that this wealth is distributed fairly, according to each person's ability, not each person's needs - the direct opposite of Marx. It is only when management is derelict in this duty or in providing unfair or unsafe work conditions that labor unions become a necessity. I am sure that I will be using bell curve phenomenon to describe other events as we fill these pages. 

May 8, 1989

May 10, 1989

1) the reason our courts have resorted to legislating from the bench is that our elected legislators Congress have become too politically afraid cowardly to do so. 2) If Congress truly felt it $,89500 per year is too little to attract an able Congress, then that must mean the Congress we have is inept 3) On the other hand, if the public truly believes you get what you pay for and that we are not paying enough to get a qualified Congress, then why did we re-elect 98% of the incumbents running for re-election? 4 ) Tying each of these 3 points together, If Congress is afraid to make tough choices for fear of losing their seat, then they must feel their pay is good. I say cut their pay so that losing their seat will not be as traumatic, making it more likely that they will make the tough choices. This may also result in the election of people truly attracted for the good of public service.

May 11, 1989

GM just introduced the Lumina line of cars, admitting in print that they may not excite you, but that's okay, because they did not want to alienate people who might think it's ugly. That is exactly why they are losing market.share - people want a car that turns heads

5/17/89

Nearly one million people protested in Beijing today during Gorbachev's visit there. Several thoughts on the situation. One, the students claim to want greater democracy but appear to have little concept of what that actually means. Two, what the really appear to want is greater equality (in relation to government leaders), as well as greater freedom, but equality is inversely related to freedom. The best on can hope for is equality of opportunity if freedom is the real goal. Three, the protesters are spearheaded primarily by students which may parallel our own student movement of the sixties, which was marked by fragmented goals and self-limiting fervor due to the aging of the generation and the end of the Vietnam war. With China, trying to limit population growth, the fervor may die in the same manner. Four, without a clear understanding of democracy, how will the students know if they have achieved their goals? Five, why do we take such satisfaction in civil disobedience in other countries, yet treated it as an unpatriotic aberration when it happens here? Why can't we appreciate freedom of speech and expression of disagreement with the government, when we desire to claim the leadership and the fight for freedom?

5/17/89

Several universities are banning racial slurs on campus. I'm sorry, but as much as I detest racial bigotry. I cannot condone these actions. What is to prevent the banning of discussion of any sort regarding race in order to prevent possible discord? If the government suddenly prevented blacks from discussing or fighting racism in the name of racial harmony, all would be lost. It is talk that is most controversial which must be protected because other kinds are not challenged

Another point on racism: I feel that a distinction must be made between racial insensitivity and racial bigotry. The latter consists of true hatred, or at least a belief that the races are different. The former is a matter of oversight, Ignorance or even being so colorblind as not to notice certain insensitivities. The stadium spade work headline is such a case [sidenote: The St. Louis Post Dispatch ran a photo in May of 1989 showing a group of public officials performing a ceremonial groundbreaking using shovels. All were Black]. I truly believe that the Post-Dispatch did not put together the fact that the people in the picture were black with the headline. While it was unfortunate, it was not hateful, as some have claimed.

5/19/89

Besides the fact that heterosexual sex is less efficient in transmitting the aids virus, another reason that it has not spread in the heterosexual community is perhaps that our behavior was altered by the herpes scare, causing at least a reduction in the number of chancy encounters

Is modern medicine polluting our gene pool? Is it possible our evolution as a species has stopped, or at least slowed? In years gone by, most genetically-defective babies would have died, taking their genetic defects to the grave.  Today, many of these children are saved and can reproduce passing their genetic makeup to their children. Is it possible that prenatal screening and abortion are god's attempt to reinstate the evolution of the human race? Just speculating.

5/24/89

"It is when people feel their country can do no wrong that their country is most able to do wrong."

6/24/89

Economists argue over the validity of supply-side economics and whether Reagan's tax cut resulted in supply or demand driven growth. By common supply and demand theories, these two types of growth can be easily differentiated. When supply decreases before demand (supply-side), the workforce will grow to produce the supply. Concurrently, prices will fall or inflation will slow because supply exceeds demand. By examining performance of the economy under Reagan, this appears to have happened.

When policies stimulate demand before supply can catch up, inflation will result, possibly even wiping out the increased demand before production can increase. This is the end result of monetary policies, which provide transfer payments without encouraging productivity improvements. While Reagan's tax cuts may have been demand inducing, his corporate tax breaks encouraging capital investment improved supply concurrently, preventing inflation. This, more than the budget deficits resulted in the unprecedented unbroken growth of the last six years.

The Supreme Court ruled that desecration of the flag is protected as freedom of expression under the First Amendment. Many groups (veterans etc.) are claiming the flag is too important to allow such activities. They fail to separate the flag from the rights it symbolizes. The flag is simply a piece of cloth. I find it scary that people are willing to sacrifice a fundamental right, one which makes this country great, in order to protect a mere symbol, a simple piece of cloth. When one considers it, the destruction of a red, white and blue piece of nylon would affect them not in the least. But preventing criticism of our country, even the least little bit, will begin to erode the rights we hold so dear. Then, when we fight under this banner, what would we be fighting for? It must be remembered that at the outset of the. Revolutionary war, our flag did not exist. Therefore, our founding fathers could not have been fighting for this flag, but for an ideal instead. It is the ideal, not the flag, which must be protected

6/27/89

George Bush has requested a constitutional amendment to prevent desecration of the flag. Is the point of this to stop desecration or increase the symbolic importance of the flag? By making it unconstitutional to desecrate the flag, we will make burning the flag not just a symbolic gesture against America, but instead, an actual defiance of the Constitution. This will make desecration even more symbolic and therefore more enticing to those looking for gestures against America. How will we deal with those who violate this constitutional amendment? If we do not deal harshly with them, would that not cheapen the entire Constitution? Ironically, attempting to protect the flag could actually do more to tatter the fabric of American democracy than any public flag burning could ever hope to achieve. 

Another question. Since the Supreme Court upheld flag burning as a form of free speech wouldn't an amendment. To prohibit it, be an infringement upon the first amendment. Can a contradiction shut such as this be upheld or could an amendment itself be declared unconstitutional?

Doomed to Wallow in the Baby-Boomer's Wake

 [This was originally a hand-written journal entry in 1989]

I think I'm doomed to wallow in the wake of the "baby boom." Everything is geared toward pleasing those born 1945-1964. Unfortunately, that means music, radio, TV, politics geared to people who are up to 15 years older than me. When I was five, they were 20 and listening to Dylan, the Stones, etc. When I was 15, they were 30 and getting Springsteen. Now, I'm faced with Thirty-something and "sunny, lite rock." I dread being 55 and faced with music "for those with minds like spider webs."

I also fear becoming expendable as this generation becomes a burden. At first (as usual), their market and political clout will bring them enormous attention, but by the time I reach 65, our numbers will have thinned, our youngsters will be weary of supporting us, and even Beatles albums will be taken out of print.