Bananaland
Every since the late 2010s, the US fiscal situation has become unsustainable. Unless dramatic changes are made, we are eventually headed toward a major problem (sharp tax increases, high inflation, or default.) Now it seems as though dramatic changes are going to be made—albeit in the wrong direction. Here’s Bloomberg:
The back-and-forth over taxes has escalated in recent days. In an interview with CBS News over the weekend, Republican vice presidential nominee JD Vance tried to outflank Democrats by floating a $5,000-per-child tax credit — $3,000 more than the size of the current credit and even larger than President Joe Biden has proposed.
Harris, rallying supporters in Nevada, endorsed a version of Trump’s own promise to exempt tipped wages from taxes. . . .
Trump has also proposed ending the tax on Social Security benefits entirely, replacing current policy that gives targeted tax breaks to lower-income seniors. His proposal could cost as much as $1.8 trillion and ultimately endanger the Social Security trust fund itself, according to nonpartisan budget watchers.
Largely absent from the discussion, for now, are the tax cuts from Trump’s 2017 tax law that will expire at the end of 2025. Extending those cuts carries a $4.6 trillion price tag.
Just what the tax code needs—more complexity.
Inevitably, people will tell me that it’s always been this way. No it hasn’t. America has not always been a banana republic. The national debt as a share of GDP fell sharply in the second half of the 20th century. Bill Clinton ran three consecutive budget surpluses at the end of his administration. Fifty years ago, presidents were held accountable for their crimes—indeed bipartisan pressure forced Nixon to resign. You did not have the Supreme Court ruling that presidents were above the law.
Sorry, it has not always been this way.
I guess if we’re going broke anyway, why not throw a wild party with borrowed money before the creditors show up at the door. Or pray that AI will save us all.
PS. As always, there will be unintended consequences:
But the plan is not without controversy. Economists say it could incentivize workers and employers to shift more compensation from wages to tips.
I recall when 10% was normal. Then 15%. If this passes I might just become one of those greedy old curmudgeons and stop at 20%, no matter how high they try to push the standard tip. And will my dentist start demanding tips, with the threat of pain if I don’t pay up?
As for Social Security, lower wage seniors are already exempt from paying income tax on their benefits. So that tax cut will favor the more affluent—like me!
PPS. Oh, and I forget to mention Trump’s plan to use billions of taxpayer dollars to invest in cryptocurrency. What could go wrong?
PPPS. Predict how many days before one of our politicians advocates abolishing the gasoline tax.
I’ve come around to the HL Mencken view of the world. Treat politics like a big joke or it will drive you crazy.
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13. August 2024 at 17:44
The anti-crypto crowd are morons.
It’s like being anti-apple or anti-microsoft in 1980. The modern day luddites are usually old. They don’t understand tech. Dex and liquidity pools are too difficult for them to grasp. They’re idiots to an extent that is almost unfathomable.
But it doesn’t matter. Innovation will move on without you. You can cry all you want, but web3 isn’t going anywhere. DEX’s are the future. And nobody knows precisely which blockchain will emerge victorius, but what we do know is that XRP is now being implented by almost 80% of Japanese banks; we know that right after XRP settled with the SEC for 125M, JP Morgan agreed to use it for settlements. Furthermore, decentalized liquidy pools will lower inequality substantially. No longer will brokerages and banks have centralized control.
It’s beautiful.
America should be the crypto hub of the world. If we can get Sumner and Krugman, and the losers off our back, we will be.
And if you actually spent time listening to stump speeches and Trump’s conversation with Musk, you would know that he wants to cut spending subsantially.
13. August 2024 at 20:08
I remember when 15% was for good service. 20% was for excellent. Guess I am young. I am shocked to get prompts for 25% or 30%.
I happen to support the tipping system. I don’t agree with the zero-tips crowd, but I do think we would be better off with the Swedish 0%-5%-10% system and not allow so much compensation to be tipped determined.
But there is another knob to do that! raise the minimum wage for tipped occupations.
13. August 2024 at 22:41
Where’ve you been?
“Democracy is the theory that the common people know what they want and deserve to get it good and hard.”
“Under democracy each party always devotes its chief energies to trying to prove the other is unfit to rule, and both commonly succeed and are right.”
“Every normal man must be tempted at times to spit on his hands, hoist the black flag, and begin slitting throats.
He wasn’t all politics:
Men are generally happier than women. They marry later and die sooner.
14. August 2024 at 00:45
(You have some formatting issue with the blockquote for Bloomberg not ending where it should.)
Robin Hanson would say the child tax credit is wise in the long run. See his post https://www.overcomingbias.com/p/can-govt-debt-solve-fertility. If it increases the number of future taxpayers then it pays for itself.
14. August 2024 at 02:41
While the trend of running unsustainably high deficits is concerning, it isn’t surprising to me. I’ve long thought the US would run up a high debt to help smooth the increased costs of baby boom retirement. The question is how long this lasts. History has shown that US attitudes about deficits and debt can shift fairly quickly. As it stands now, we’re still pretty far from being Japan debt-wise, yet we have much better economic growth prospects.
That said, Japan wasn’t behaving like a banana republic. Their running up of debt was in large part a very intentional, though misguided, attenpt at public goods investment to boost the Japanese economy, both cyclically and secularly. There is seemingly much more uncertainty in the current US situation than there was in that of Japan.
Will some combination of AI and reforms help to reverse these dangerous current trends? Will the relevant zeitgeist change? I suspect these irresponsible policies won’t last, but I’m not as confident as I’d like to be.
I do agree with Scott that I think the US is going to become more like a Western European country in terms of taxes and benefits. It seems to be strong natural tendency that wealthy countries head in that direction. Republican application of real politiks to try to prevent what is probably inevitable have helped take the US down the banana republican path, having so undermined confidence in government and other institutions.
14. August 2024 at 03:32
Sara, investing in existing crypto tokens is still insane for the government to do. Just like it would have been insane for the government to buy Apple or Microsoft in the 1980s. The government doesn’t have to do everything.
(And on another level, the government could issue its own blessed crypto token. Getting official government approval for a token would surely give it lots of value, compared to all the other ones that are on very shaky legal footing.)
14. August 2024 at 04:22
There are some issues with the formatting of this post on my machine. Like too much block quoting, so it’s not obvious where your commentary starts back up (though I can figure out, just not obvious).
14. August 2024 at 07:56
We are in the pandering part of the campaign. Since it’s a close election if one candidate panders to a group the other candidate will need to match. Other than making crypto investors rich, always a national priority, I cant see why the US would want or need a crypto reserve. Let the buyers of crypto bear the risks.
Steve
14. August 2024 at 08:24
Sara said:
“The anti-crypto crowd are morons.”
So anyone who is not a socialist like you, not a person wanting the government to prop up industries with our hard earned tax dollars, is “anti-crypto”? If I don’t want the government spending billions on a stockpile of toasters, am I anti-toaster?
The classic thinking of a “progressive” If you don’t want government spending money on X, you must be against X.
Oscar (and John), Thanks, I fixed it.
I have mixed feelings on the child tax credit—I doubt it would have much impact on the birth rate for most people, except perhaps the poor. That doesn’t make it a bad idea, I just doubt that $5000 is a reasonable figure for a country that is already broke. A smaller figure is probably justified for standard utilitarian reasons. And what’s next? Government provided child care? Our “unmet needs” are essentially limitless.
Michael, You said:
“I’ve long thought the US would run up a high debt to help smooth the increased costs of baby boom retirement.”
But we are doing the opposite, running big deficits now which will force smaller deficits in the future, when the fiscal burden is much higher.
Steve, You said:
“We are in the pandering part of the campaign.”
Yes, but the pandering is now far worse than in any other election I’ve witnessed.
14. August 2024 at 09:26
Lunacy. A democratic country gets the political class that the median voter wants. We have no one to blame but ourselves. Trump, Biden and Harris would either not be running for office or completely different in their policy approaches if the median voter were wiser.
Do you have any explanation for the decline in the median voter? Our political class is merely a symptom. What is the big change between the Clinton years and now that explains the increasing idiocy of the median voter? The death of the WWII generation?
14. August 2024 at 11:11
Scott, if you look through the “paper” that exchanges hands (tax money and borrowed money from bonds), what are the fundamental differences between borrowing vs taxing to pay for government programs? Clearly, in both situations, the resources allocated for the government programs will be used. So that aspect is the same. Perhaps with a general tax, some people won’t have savings to allocate to taxes so they will have to reduce consumption. So with taxes, some of the resources will come from redirecting the production of consumption goods to the production of government programs. With borrowing, the resources for the production of government programs are coming directly from other possible investment goods. But since those investment goods are involved eventually in the production of consumer goods, consumption also must drop eventually. So it seems that in either case, borrowing and taxes are the same, in that consumption must drop in order to allocate resources to government programs.
With borrowing, there is the interest that is paid on the principle. But this is a transfer of assets between citizens. Goods are neither destroyed nor created.
Essentially, as a country, we are choosing between paying taxes now for the government goods vs paying taxes later to pay for the debt that is used to acquire the government goods now, but the government goods must eventually come from the consumption of other privately produced goods. Is there any difference in actual goods produced between those two scenarios? It seems that there isn’t.
14. August 2024 at 16:18
Bananarama!
Why control the borders? That’s for real countries, not Bananaland!
We don’t need no housing, we don’t need no infrastructure and we don’t need no industrial base (double negatives for emphasis, as in we don’t need no academic rigor either).
They only hope may be for the Federal Reserve to buy US treasuries, ala The Bank of Japan. Build that balance
sheet.
Sure. Cut federal outlays and raise fuel, property and import tax taxes. That would work too. Ain’t going to happen.
14. August 2024 at 16:27
Core CPI’s six-month annualized rate fell to 2.8%, while the three-month rate cooled to 1.6%
OK three months is not quite long enough to draw conclusions…but…cutting. rates a good idea
14. August 2024 at 16:37
Travis, You said:
“The death of the WWII generation?”
You can argue that the older generation is the biggest problem. Perhaps it would make more sense to talk in terms of the lessons of WWII being forgotten. Nationalism is no longer electoral poison.
The problem with debt is that it means higher future taxes. You’d like the debt policy to smooth taxes over time, to minimize the deadweight loss from taxes. We are doing the opposite, cutting taxes in the late 2010s which will lead to much higher tax rates in the 2030s. Very short-sighted.
14. August 2024 at 16:58
Scott,
Yes, I take your point. Given reasonable assumptions for growth and the Treasury yield curve, if present trends continue, we could see just the interest on the national debt being at around 6% of NGDP in 10 years. That’s pretty sobering.
15. August 2024 at 03:52
“Grocery price gouging to feature prominently in Harris economic plan
Harris will lay out actions she plans to take in her first 100 days as president to lower food and other everyday costs during a speech this Friday in North Carolina.”
—30–
Maybe, this being Bananaland, Harris will regulate the price of bananas.
Is a race to the bottom the right way for the two major parties to run for the White House?
Start diversifying your assets offshore?
15. August 2024 at 07:08
Scott,
One point — in retrospect Nixon was probably innocent. With some separation in time, it’s become clear that the “smoking gun” tape was nothing of the sort and the conversation was about protecting the names of democratic donors to Nixon from being outed illegally.
In that sense, the Nixon affair shows the US to have been a banana republic back then too. Maybe since the Eisenhower administration.
Regarding the TCJA — isn’t the Trump proposal to impose an import tax to fund its renewal? I think as much as tariffs are harmful, are they a worse policy than going back to the Obama tax rates?
15. August 2024 at 07:58
Jon, You said:
“in retrospect Nixon was probably innocent.”
Um, “innocent” is not the term I’d apply to Nixon. I’m old enough to remember that era—there were many smoking guns. I don’t know what your source is, but I’d suggest finding some more unbiased ones.
“I think as much as tariffs are harmful, are they a worse policy than going back to the Obama tax rates?”
Yes, they are worse. And no, they won’t “fund” the TCJA. Tariffs generally raise far less revenue than expected.
BTW, After Nixon, Congress clawed back some of its power. Let’s hope they do the same after Trump/Biden. We are nearing an elected dictatorship when a president can enact a big tax increase without the approval of Congress.
15. August 2024 at 08:26
As a deficit hawk, I find this election even more depressing than the last. It seems our two parties have decided that talking about the consequences of our debt is political suicide. Which makes me think that we’ve already essentially made our decision about how we’re going to handle the debt: default. In Trump’s case, I hold open the possibility that he understands the compounding nature of the problem but doesn’t care as long as it doesn’t get in the way of his grift. In Harris’ case, I hold open the possibility that she simply hasn’t thought about the consequences of too much debt.
15. August 2024 at 09:04
Scott,
LOL. Okayyy. Google “Nixon smoking gun tape” and understand that there is a specific audio recording widely known as the “smoking gun tape”. Read any major book on watergate and the resignation and learn about that the role of that Tape in establishing Nixon’s guilt in violating his oath of office.
The in retrospect, refers to whether the contemporaneous understanding of that tape was correct. John Dean, who you might recall, was the key witness against Nixon wrote in one of his books that the tape was misunderstood.
“ When revealed by order of the U.S. Supreme Court in late July 1974, this became known as the “smoking gun” conversation, because it was viewed as hard evidence, demonstrating beyond question, that Nixon’s final defense about the Watergate break-in in his April 30, 1973 speech, followed by his May 22nd statement, was bogus, which doomed the Nixon presidency. Ironically, this conversation has been mistakenly understood as an effort by Nixon and Haldeman to shut down the FBI’s entire Watergate investigation. This appears to be the case only when viewed out of context.” Pg 55, “ The President’s Defense, What He Knew and When He Knew It”
So which John Dean to believe? The one who testified against Nixon or the one who wrote a book 50 years later when saving his own skin doesn’t look so important anymore.
The key question to watergate was always whether Nixon obstructed justice by covering up the actions of campaign operatives.
15. August 2024 at 12:56
@Jon:
It’s interesting to contrast the 2 eras and their presidential scandals.
Nixon was forced to resign after his own party abandoned him, in the aftermath of investigations into some campaign ‘dirty tricks’ that he covered up. How quaint!
Trump literally tried to overturn a presidential election he lost, with actual schemes of fake electors and mobs pressuring Congress. So surely his party forced him to resign too!
15. August 2024 at 12:59
@Jon:
Hit send too quick…
That’s what Sumner means by banana republic. Back then voters and parties expected at least a baseline of decorum and respect for the democratic process, where even a small thing like the Watergate break in would topple a president.
Today a much bigger and more blatantly destructive electoral stunt just results in the perp being nominated again to run for president. That’s a lot of bananas.
15. August 2024 at 15:24
Jon, I’ve had people try to engage me on nutty conspiracy theories like the CIA killed JFK, or Joe McCarthy was telling the truth, or Nixon was innocent. Sorry, life’s too short.
There are numerous books that document Nixon’s many crimes. Read them.
15. August 2024 at 22:05
The Dems have always been against basic market economy outcomes. Now the Republicans don’t regard them as a winning part of their platform either.
It’s rich to hear our home-grown economists lampoon a nation that their profession has failed so miserably.
16. August 2024 at 08:21
In the UK, in 99% of places there is either no tip or a service charge (normally 12.5%) is automatically added to the bill. I tried to explain to an American tourist in a pub the other day that one doesn’t tip in a pub and he was extremely confused and ended up giving the barman several dollar bills, which the barman had no use for… Take the American out of America…
Completely off-topic, but I just noticed you got a shout-out in a letter to the FT the other day: https://www.ft.com/content/4dc91bbc-b24d-4db4-a76d-9b00900aeacf
17. August 2024 at 20:44
Thanks Tacticus. I’m honored to be mentioned in the same sentence as Friedman and Bernanke.