The Federal government never has enough money and over the past decade they have created enough money, Dollars, that there is a title wave of them about to hit us; we need a different system that the politicians can’t subvert. This short post is a way to achieve that.
The following figures are taken directly from the following government reports: Bureau of Economic Analysis (BEA) monthly report of the GDP of the United States; Monthly Treasury Statement; the Bureau of Labor Statistics (BLS) monthly employment situation; The Monthly Statement of the Public Debt of the United States and the Department of Defense (DOD) Active Duty Military Strength Report. The Monthly Treasury Statement data is reformatted to calendar year format the government fiscal year format which runs from October to September so we can compare apples to apples.
First the Facts for 2014:
#1 The federal government currently spends almost $4.0 trillion a year ($3.885 trillion) of which some is derived from taxes & fees ($3.096 Trillion) and some is borrowed ($789.5 Billion). More on this subject later since the official GDP figures are different; so we use $3.2 Trillion here instead of the actual $3.9 Trillion, to be consistent with BEA numbers (explained later).
#2 There are some 151,012,000 people working for a living including ALL categories (the BLS does not count farm, self-employed and the military). This figure is the average for the calendar year 2014.
#3 If we assume there are 2,000 hours worked per year per person that equates to 302 billion hours worked per year. This is the only assumption used here and since many workers are part time this maybe an overstated number. Whether it is or not doesn’t matter to the discussion of the concept. It would only matter if implemented.
# 4 Therefore, if we divide the $3.2 Trillion spent by the Federal government by the 302 billion hours worked by all the citizens, that gives a ratio of $10.56 of federal spending per hour worked.
Now here is the concept:
The idea is based on an economic principle that my advanced econ professor taught me my senior year at Ohio University which is, basically just a form of a thought experiment. The principle is that if we make a change and the result of the change shows a result that is the same as before the change, then there was no real change in the output only a change in how we got there. The assumption then is that it makes no difference which method is used.
What follows is for federal spending only, state and local could also be added to this but that is too complex for this brief overview. This does include ALL revenue going to the federal government no matter the reason or program including social security.
#1 We eliminate ALL personal federal taxes and fees and ALL business taxes and fees as well which then reduces the governments’ income to zero (all borrowing is also eliminated).
#2 Simultaneously we reduce individual pay rates by the exact amount of the taxes they pay. For example if you were making $25.00 per hour but only taking home $20.00 per hour the change we make would be that you would now be making $20.00 per hour but paying no taxes so your take home would be the same as before $20.00 per hour (no change).
#3 Businesses would be required to reduce prices such that their income would be unchanged in a similar manner. So the net economic effect on the economy from this change (initially) would be zero since private and corporate spending would be exactly the same (no change).
#4 To compensate for this loss of revenue the federal government would be allowed to create fiat money (no real change from what they do now) at the rate of $10.56 per hour worked by the citizens. And since there would still be 302 billion hours worked by the citizens (no change) they could spend $3.2 trillion dollars (no change).
$5 The result is that there is still the exact same amount of money in the economy in both the current system and the new system. All we did is change the method of how it got from the worker to the government.
You can see we have made major changes but nothing has really changed, we just changed the method of how we got from there to here. So therefore we are in accordance with the economic principle we started this section with being true.
I think you can see the benefits to this kind of system and, of course the devil is always in the details; however I believe I have considered most of them and they are not major obstacles. I do agree that this would take a lot of re-education to the public but I think it could be sold especially after 2017.
The major benefits are:
#1 The federal government can only spend more money when there are more people working more hours. That is an incentive to promote growth not dependency.
#2 No one has to worry about paying federal taxes so all purchasing and investment decisions are based on economics not tax avoidance. This makes for a much more efficient economy.
#3 The federal budget is always in balance. No need to borrow money and this also forces international trade to be in balance since the government doesn’t need to borrow from foreigners.
#4 Lower prices for products produced here would make the US more competitive and since the take home income is the same internal growth would be immediate.
#5 We end up with a labor based currency which is a improvement over what we have which is debt based. It also takes gold out of the equation except possibly for international trade since the current system we have of pegged rates does not work. However, that is a different subject for other papers.
#6 There are no downsides other than some federal agencies would no longer be required, such as the IRS and the FED. So actually the federal government would need less money.
The equations shown after this discussion are used in national income accounting to calculate Gross National Product (GDP). To show how this works we present an example using the real numbers for 2014. Again this is a simple macro model and the details are much more complicated then what is shown here. However, that doesn’t matter since the principle is valid and all the details can be worked out.
Note the BEA does not count borrowed money and transfer payments are not shown as growth. The BEA’s G also includes state and local spending much of which is transfer payments from the federal government. This means that the BEA figures for “government” used to calculate the GDP are not the same as shown by the United States Treasury for federal spending and borrowing. We will use the BEA figure of $3.2 Trillion instead of the actual $3.9 trillion pulled from the economy by the federal government for 2014 in this exercise.
GDP = Y = C + I + G + (X – M)
GDP = Y = $17.7 = $12.1 + $2.9 +$3.2 + ($2.4 – $2.9)
Where C (consumption net of taxes CN) can be defined as gross income (Cg) less federal taxes (TF) or CN= CG – TF
Where I (investment net of Federal borrowing or IN) can be defined as gross investment (IG) less federal borrowing (BF) or IN = IG – BF
Where G (government) can then be defined as government taxes (TF) + government borrowing (BF)
X is exports
M is Imports
Y = CN + IN+ G + (X – M) or
Y = CN + IN + TF+ BF + (X – M)
After the proposed change
CG = CN
IG = IN
G = Hours worked (HW) * $10.56
GDP = Y = CN + IN + G + (X – M)
GDP = Y = CN + IN + 10.56 * Hw + (X – M)
GDP = Y = CN + IN + (10.56 * .302) + (X – M)
GDP = $17.7 = $12.1 + $2.9 +$3.2 + ($2.4 – $2.9)
Obviously nothing has changed since in either the old method or the new method The GDP = $17.7 trillion. Properly packaged, presented and sold by someone would solve many of our problems and doesn’t hurt either conservative or liberal principles.
Notes and Comments:
Federal Spending is very different from what is generally shown or known, for example: The Monthly Treasury Report for 2014 (adjusted to a calendar year) Shows the Federal Government spent $3.585 Trillion dollars derived from $3.096 Trillion from taxes and fees and $667 billion from borrowing. However the National Debt during the same period went up by $789 Billion so there was additional cash needed for changes in payables and obligations and capital projects of $122 Billion. Therefore the federal government actually spent/used $3.885 Trillion in 2014 or 21.95% of the GDP.
Also as previously mentioned transfer payments to the states and cities i.e. block grants do not show as being Federal spending in GDP analysis. That is unfortunate since the federal government has strings attached which give them control of the money and that will get much worse after 2016 when the full force of the Affordable Health Care Act goes into effect.
The purpose of the quick review of my idea is to show that economically and monetarily this system works. It works because economics is about people and what motivates them. In one sense Karl Marx was right labor is the ultimate source of value, he was wrong in how to use that principle and that wrongness has lead to much suffering in the world as we tried to absorb his idealist thoughts (socialism) into the real world.
This proposed system is a method of merging both Adam Smith and Karl Marx while rejecting John Maynard Keynes completely.