Monday, June 30, 2008

Ralph Nader on This Week with George Stephanopoulos

Ralph Nader was a guest on the June 29th program of This Week with George Stephanopoulos. A video of the interview can be found here. For about 4 minutes, George Stephanopoulos and Nader talked about Nader's recent criticisms of Obama. Stephanopoulos then asked the following:


Here's what I don't get. Is there any doubt in your mind that Barack Obama would be a better president for your issues, for the things you care about, than John McCain?


Nader replied:


Well, anybody would be better than the Republicans.


Stephanopoulos then asked why Nader trained all his fire on the Democrats, Nader protested that he was simply answering the question he had been asked, and Stephanopoulos replied that this was driven by issues that Nader had raised that week. Nader did go on to spend about 30 seconds making a number of criticisms of McCain.


To see firsthand how much Nader was training his fire on Obama versus McCain, I went to Nader's website at http://www.votenader.org/. The initial screen is split in two with "Corporate greed, Corporate power, Corporate control" on the left side and "People fighting back, Nader/Gonzales '08" on the right. Across the top is the question "Which side are you on?". Although I'm sure this was not intended, it reminded me of George Bush's statement, "You're either with us or against us in the fight against terror." In any case, I continued on to Nader's blog at http://www.votenader.org/blog/. Looking down the page at the entries, I saw negative comments about Obama on June 28th, 25th, 24th, 23rd, 20th, 18th, and two posts on the 16th. There was also an explanation on June 26th of what Nader had meant when he accused Obama of "talking white". In any case, I saw no negative reference to McCain until the last mentioned post, the second one on June 16th. Hence, it does seem that, at least recently, Nader has been training most of this fire on Obama.


I have no idea why Nader appears to be focusing on Obama. I can only guess that he thinks that more of this potential votes will come from current Obama supporters. On this topic, there is an interesting entry on June 18th that promotes something called VotePact. Basically, the idea is that a pro-Nader Democrat finds a friend or relative who is a pro-Nader Republican and they agree to both vote for Nader. This keeps either of them from tilting the election toward the candidate who they like least, the so-called "spoiler effect". This seems a bit naive. You are counting on your friend or relative to keep their word and vote as they have promised.


A much more effective method to empower voters to vote for third party candidates without worrying about the spoiler effect would be Instant Runoff Voting. Briefly, the idea of this system is that every voter ranks the candidates according to their preference. If a voter's first choice has no chance of winning, then that voter's second choice is counted. If the voter's second choice then has no chance of winning, the voter's third choice is counted (and so on). You can find more information on Instant Runoff Voting here.


The Nader site does have a short post on Instant Runoff Voting here. The post's support seems to be a bit tentative as it states the following:


Nobody knows how IRV will actually work in the United States - no matter what its fervent supporters may hope for. It has to be tested and also clarified within the context of local, state and national campaign funding laws.


These statements may well be true. Still, it does seem that Nader could do much more to address the spoiler issue and, in so doing, greatly strengthen the potential of future third parties. On this topic, I'll repeat the following excerpt from an open letter to Ralph Nader that I originally posted nearly 4 year ago:


I think that Nader could best publicize this issue by running his campaign to promote his positions but dropping out just before the election, stating that he is forced to do so by the current system so that he does not act as a spoiler. He could then recommend that his supporters vote for the candidate who has best taken up his positions or that he most supports. That, at least, would give him some political leverage and the major parties, as well as the people, might give a little more thought to addressing this issue. In any case, this would be much more responsible than acting as a spoiler.


I still think that this would give Nader more leverage in promoting his issues, especially the obstacles faced by third parties. Of course, I'm not counting on him doing this. Still, I hope that he will at least become more balanced in his criticisms of the candidates.

Monday, June 23, 2008

The Financial Report of the United States Government (Part 2)

My prior post looked at Net Operating Cost and Net Position as presented in the Financial Report of the United States Government. As mentioned, these two measurements are similar to the Unified Deficit and Debt Held by the Public which are presented in the U.S. Budget. The former two measurements are accrual-based and the latter two measurements are cash-based. The Net Operating Cost and Net Position are two of three major items shown in Table 1, titled "The Nation By the Numbers - An Overview", on page 3 of the 2007 Financial Report. The third major item is Social Insurance Exposures. Following is an excerpt starting on page 24 that describes this last item:


For the ‘social insurance’ programs (e.g., Social Security, Medicare Parts A, B, and D), the Statement of Social Insurance (SOSI) shows the estimated future scheduled benefit expenses net of contributions and tax income (excluding interest), based on each program’s actuarial trust fund report.


Table 8 shows estimated net social insurance and other exposures for both the ‘open-group’ and ‘closed-group’ population, which differ based on the population measured. As shown in Image 3, the ‘closed group’ pertains to individuals age 14 and over on January 1 of the valuation year and/or those who have met or will meet other eligibility requirements during the projection period (typically 75 years). In short, it represents an estimate of the responsibility, under current law, of future taxpayers to pay benefits to current participants. By comparison, the ‘open group’ is comprised of workers who will enter covered employment during the period, as well as those already in covered employment at the beginning of that period. That is, it represents the ‘closed group’ plus all future projected participants who will make contributions to postemployment benefit plans and/or will be eligible for benefits over the 75-year projection period). Since the open group's contributions will significantly exceed benefits earned during the projection period, it can be expected that the net social insurance benefits for the open group ($40,948 billion in 2007) would be less than that for the closed group ($45,062 billion).


The following graph shows the social insurance exposure for the open group as calculated in the Financial Report for every year since 2000:




The actual numbers and sources are at http://www.econdataus.com/pver07.html. As can be seen, the exposure for Social Security has remained fairly stable since 2000 but the exposure for Medicare Part A and B have been growing more noticeably. Also, the additional exposure created by Medicare Part D (the Prescription Drug Coverage) in 2004 is very apparent.


Finally, the graph shows that the present value of the exposure of Social Security and Medicare over the next 75 years is estimated to be about 300 percent of GDP. This is over four times the absolute size of our current Net Position of minus 67.4 percent of GDP. However, the following excerpt on page 25 of the 2007 Financial Report warns about comparing these values:


This forward-looking information combined with other financial statements and information provides both a short- and long-term view of significant financial issues facing the Government. As indicated above, however, it should be noted that significant differences exist between balance sheet liabilities and the exposures from the SOSI, which limit their comparability:


* The Balance Sheet presents a ‘snapshot’ at a point in time of an entity’s current financial condition, with an emphasis on how current and prior actions and events have impacted its assets and liabilities.


* The SOSI presents the calculated net present value of future estimated revenues and expenditures over an extended period. They represent an assessment of the extent to which the social insurance programs are out of balance under current financing arrangements relative to scheduled benefit obligations. Since they are not liabilities, and therefore do not impact either an entity’s current assets or liabilities, they are not included on the balance sheet according to Federal accounting standards.


In any case, the following graph shows the social insurance exposure for the closed group (consisting of current participants only):




As before, the actual numbers and sources are at here. The main difference that can be seen from the prior graph is that the exposure for Social Security is more than double. I believe that the main reason that Social Security is so much more affected than Medicare is that it is funded by a much larger percent of the FICA tax. Employee and employer each pay 6.2 percent of the FICA tax toward Social Security but just 1.45 percent toward Medicare. A portion of Medicare is funded by premiums paid by beneficiaries and by infusions from the general fund. Hence, Social Security would be much more affected if future participants left the system. This gives some idea of the so-called transition costs that would need to be paid to move to a prepaid retirement system.

Monday, June 16, 2008

The Financial Report of the United States Government

The Government Management Reform Act of 1994 (GMRA) required the U.S. Government to submit consolidated financial statements audited by the GAO (U.S. Government Accountability Office) beginning with fiscal year 1997's Financial Report of the United States Government. Each year since then, the Administration has issued two reports that detail financial results for the government. These are the President’s Budget and the Financial Report of the United States Government. The following excerpt from page 4 of the 2007 Financial Report describes the difference between the two documents:


The Budget's emphasis is on initiatives and how resources will be used, focusing on the Government's spending surplus or deficit. The Report focuses on the Government's net operating cost - how resources have been used to fund programs and services. How does the Government’s largely cash-based spending deficit differ from the largely accrual-based net operating cost?


  • The Budget shows receipts, or cash paid to the Government (e.g., income tax payments and national park fees received); while the Report presents revenue, or amounts that the Government has earned, some of which has not yet been received.
  • The Budget reports cash outlays when the Government makes payments to individuals, businesses or other parties. The financial statements reflect costs in the period in which resources are consumed or liabilities increased.
  • From Table 2, almost the entire difference between these two reports can be explained by a single item. The Budget does not include $90.1 billion in postemployment benefits earned by, but not yet due to be paid to, employees in fiscal year 2007.
  • Similarly, the Budget does not include an estimated $36.8 billion of additional clean-up costs that the Government will eventually have to pay to fund environmental efforts (e.g., EPA Superfund).
  • Conversely, the Budget does include more than $13 billion in net spending for Capitalized Fixed Assets. For Budget purposes, the entire purchase price for major assets, such as buildings or aircraft carriers must be shown as a cost in the year of outlay. However, due to their estimated longevity, agencies capitalize and depreciate (i.e., spread) the cost of these assets over their ‘useful lives’ in the financial statements.


Table 2 mentioned in the third point above shows the difference between the Unified Budget Deficit and the Net Operating Cost for 2006 and 2007. The following graph shows the same basic information for 1998 through 2007:




The actual numbers and sources are at http://www.econdataus.com/frus07.html. As can be seen from the first table, the $90.1 billion mentioned in the third point refers to liabilities for civilian, military, and veteran postemployment benefits. Liabilities for civilian postemployment benefits have varied between $39 billion and $84 billion since 1998. Liabilities for military and veteran postemployment benefits have varied a bit more widely with those for the military jumping a large $407 billion in 2001. Page 12 of the 2002 Financial Report gives the following explanation for this:


During fiscal 2001, there was an increase of $406.8 billion for military employees benefits, which was mostly due to reflecting the initial non-recurring effect of the National Defense Authorization Act and other actuarial assumption changes. In addition, there was an increase of $139.3 billion for liability for veterans compensation and burial benefits caused by changes in interest rate and other actuarial assumptions.


There is additional information on page 110 of that report. In any case, the main point evident from the above graph is that the net operating cost calculated in the Financial Reports has been notably larger than the unified budget deficit calculated in the U.S. Budget.


The following graph shows the difference between the "Debt Held by the Public" (from the Budget) and the "Net Position" (from the Financial Report):




As before, the actual numbers and sources are at http://www.econdataus.com/frus07.html. The debt held by the public and the net position are the cumulative effects of the unified deficit and net operating cost, respectively. Each year's net position is equal to the prior year's net position plus that year's net operating cost (with some minor adjustments). Similarly, each year's debt held by the public is equal to the prior year's debt plus the unified deficit (plus some minor adjustments). As can be seen from the above graph, the debt held by the public is about 37 percent of GDP and has improved slightly the past two years. The net position has likewise improved slightly the past two years but is a much larger 67 percent of GDP. Also shown is the "Gross Federal Debt". Following is an excerpt from a prior post that explains the difference between this and the debt held by the public:


These debts are currently about 9.3 trillion dollars and 5.2 trillion dollars, respectively, and are related in that the gross federal debt is equal to the debt held by the public plus "intragovernmental holdings". This intragovernmental debt is chiefly held by trust funds with a bit more than half of it being held by the Social Security trust fund. A list of these trust funds, along with the actual numbers and sources for the graph above can be found at http://www.econdataus.com/debt09.html.


As can be seen, the gross federal debt has continued to get worse since 2001. It should be noted that the net position does not include liabilities for Social Security and Medicare. Those are addressed separately in the Financial Reports. In any event, the net position gives a somewhat more troubling view of our financial condition than does the unified budget deficit. That is especially the case with the pending retirement of the Boomers.


The Financial Report of the United States Government (Part 2)

Sunday, June 8, 2008

You Can't Soak the Rich - A Response (Part 3)

My prior two posts looked at the effective tax rate for all taxpayers. Additional information can be obtained by looking at the effective tax rate by taxpayer income quintiles. The following graph shows the effective individual income tax rate by income quintiles (plus the top 10, 5, and 1 percent of incomes):




The actual numbers and sources are at http://www.econdataus.com/efftax05.html. The graph shows an interesting thing about the Tax Reform Act of 1986. This tax cut lowered the top marginal rate from 50 percent in 1986 to 28 percent in 1988. However, the graph shows that the effective tax rate dropped for every quintile EXCEPT the upper quintile during this period. This was most noticeably true for the top 1 percent of incomes where the effective rate rose from 18.3 percent in 1986 to 20.7 percent in 1988. As the numbers show, the average pretax income for the top 1 percent of incomes was between $689 thousand and $867 thousand during this period, well within the top marginal bracket. How is it that their effective rate went UP when the top marginal rate went down from 50 to 28 percent? The answer doubtlessly lies in the other measures of the Tax Reform Act of 1986 shown here. These included tax hikes such as the elimination of the preferential tax treatment of capital gains and the strengthening of the Alternative Minimum Tax, raising the rate to 21 percent. They also included cuts in deductions such as the repeal of the deductibility of state and local sales taxes, the repeal of the deduction for two-earner married couples, and the repeal of income averaging for all taxpayers. In any case, this shows that the top marginal rate is not even a reliable guide as to the level of taxation of the top 1 percent of incomes. The effective tax rate is a far superior guide.


One other interesting thing apparent in the above graph is that the effective tax rates of the bottom four quintiles all decreased from 1981 to 2000 whereas the effective tax rate of the top quintile remained fairly stable. The effective tax rate of ALL taxpayers remained fairly stable as well, pretty much following that of the top quintile. How was the effective tax rate of the lower four quintiles able to drop without having a noticeable effect on the effective tax rate of all taxpayers? Much of the answer likely lies in the following graph which shows the percent increase in the real (inflation-corrected) average pretax income of the quintiles:




The actual numbers and sources are at the same location as the prior graph. As can be seen, the real pretax income of the lower quintile has hardly changed since 1979, rising just 1.3 percent from 1979 to 2005. The real incomes of the second, third, fourth, and fifth quintiles increased by 10, 14.7, 23.5, and 75.1 percent, respectively, over that same period. Finally, the real incomes of the top 10, 5, and 1 percent of incomes rose 97, 122, and 201 percent, respectively. In summary, the real incomes of each progressively higher bracket grew faster than the bracket below it.


Hence, the fact that the effective tax rate of ALL taxpayers did not decrease as the effective tax rates of the lower four quintiles decreased is likely due to the fact that a larger and larger percent of total income went to the top brackets and was therefore taxed at a higher rate. This might be easier to understand if one considers the case where the effective tax rates of all quintiles remain the same but more and more of the income goes to the top quintile. This would mean that more and more income would get taxed a higher rate, raising the effective tax rate paid by taxpayers as a whole.


The two graphs above taken together show that the effective tax rate of the upper income brackets did not noticeably decrease over the period from 1979 to 2005 despite the fact that the top marginal rate was halved from 70 percent to 35 percent over this period. The effective tax rate of the lower four income quintiles did decrease noticeably from 1979 to 2005. However, this was not necessarily due to the tax code becoming more progressive in any way. It was most likely due chiefly to the fact that a larger and larger percentage of all income flowed to the upper income brackets.

About Me

I became interested in U.S. budget and economic matters back in 1992, the first time that I remember the debt becoming a major issue in a presidential election. Along with this blog, I have a website on the subject at http://www.econdataus.com/budget.html. I have blogged further about my motivations for creating this blog and website at this link. Recently, I've been working on replicating studies such as the analysis at this link.

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