Is a Major Overhaul of the US Government Possible? Feedback Wanted!

[onegermanbeerglass]

Alright, so I really shouldn't say great, because that's spin. Of course I think its great, its my plan. I can call it great in reference to its size, so be forewarned, its big.

I've gradually been hammering out the loose details of a major overhaul of the U.S. Government and the way we work. The basic infrstructure and command structure remains the same and nothing, so fair as I can identify, about this plan changes the U.S. Constitution or is unconstitutional.

What I would like, and why I often outline it for people, is to hear serious feedback, either significant, legitmate flaws, or ideas to expand upon it in a positive way.

The ideas laid out here are somewhat general and not particularly specific. The idea is to create a structure where numbers are not included so they can be calculated for a specific period in time, should it ever be instituted, where they apply, and not for what works now (one of the reasons why the Social Security Program is flawed).

The whole idea lays out like a spider-web, without a clear center, so starting at a particular place is not necessary. I'll take from a recent thread about Social Security, and start with that aspect of the system. To clarify, correcting Social Security is an aspect of the system, but not its sole purpose.

Social Security
Social Security lacks clear stability. It's origin is socialist Germany where the program was set up as a self-sustaining program. The average lilfe expectancy in Germany at the time was roughly age 63, with Social Security paying out at age 65. Germany used excess funds from Social Security to fund other portions of the government.

The two current main plans involve leaving it as is, more or less, which will eventually deplete the resources and become an additional pit of debt, and privatizing individual accounts, which lack the stability of and protection of the current system, most resulting in people having the same amount of personal funding to invest and risking loosing the retirement aid of Social Security to failed investment.

My plan for Social Security does involve privatization, but not by individual accounts. While I admit that debt is bad thing and a problem, fixing the whole system requires some additional debt to start. Taking the existing and incoming funds from Social Security taxes, the government collects these funds and turns them over to a number of top investing firms. For about 2 years (exact amount to be determined at that time) Social Security benefits are paid with debt, allowing for the accumulation of a base fund for the investment firms.

The investment firms, in order to gain accesses, must sign an agreement paying them based on results. Accountability is the key here. Dept. of Treasury is the oversight. The firms can invest however they choose, but are only paid by a commission based on the fund's increase. Each firm is allocated a portion the firm can reasonable handle, but large enough to allow diversifacation of the fund. Like commodities, all of the funds' investment plans will be considered protected information which use of in planning investments would consitute insider trading (such a large fund could influence the market heavily).

The diversification potential of the fund, because of its large size gives it the protection of Social Secutiry, but the investments will, more often then not, yield higher after inflation returns than treasury bonds. The cost of paying the firms who manage the money will be based on the yield, and therefore, self-sustaining.

Some of the funds can come from...

Reformed Tax System
While I do approve of the flat-tax system, it remains imperfect, mainly because of a lack of voter support. I have a preferred system which is similar in benefit but meets the needs of the country and the interest of the people better. Its main flaw, as far as I can find, is convincing wealthy politicians to support it.

A national, progressive sales tax which replaces our entire current system of taxation. Sales tax increases significantly under this program, to accomidate for the loss of tax wages from income and capital gains taxes. The sales tax is progressive based on luxury. A specific structure of "Goods Categories" is created which defines the level of sales tax. The greater the luxury, the higher the tax. It would function loosely like this:

1. Education & Foundation: This category is tax free. It includes educational books at all levels, children's clothing, baby fomula & diapers, and similar objects based heavily, not loosely, in eduction and child needs. Additionally, non-educational children's books through roughly age 9 reading level (to aid literacy).

2. Needs: This category has little to no tax applied. It includes items necessary for all human beings. Generic, not name brand, clothing, and basic foods like bread, milk, grains, fresh fruits and vegetables, and water.

3. Fundamental Health Care: This category would be tax free. It includes only the most basic and necessary of medications and medical services. All check-ups and routine examinations are included. Also, all need or die medication is included.

4. Services: This category includes the remainder of medical services as well as other paid for services. The taxation of this category is a low to moderate level, based on the service industry's value in job growth to our economy, the taxation is reduced, despite its level of luxury.

5. Everyday Wants: Fast food (healthy or not), name-brand clothing, and other similar items are covered under this slightly higher tax category. Most automobiles are covered under this category.

6. Basic Luxuries: This high taxation category covers the high-end name brand clothing, luxury automobiles, and similar items.

7. High Luxuries: Yachts, private jets, and other extremes are the most heavily taxed.

Environment & Sin tax - these are bumps to the above categories which should continue. Anything harmful to your health is what I mean by sin tax. This includes cigarettes, beer & liquer (but not wine), unhealthy foods, and certain drugs. The environmental tax bump is applied to low gas milage vehicles and other things deemed harmful to the environment.

Additional categories can be added, this is just a rough outline of the programs.

This program all but completely eliminates the need for the IRS, which is a large tax burden under the current system. It also prevents the loopholes that yield low taxation levels. Lastly, it gives people with debt more ability to pay it off, by providing those who have to live on necessity because of debt, more of their own income, and gives those with little to no debt the ability to invest more and more easily. Lastly, it yields a more consumer driven economy where individuals have more buying power.

But...

What Becomes of the IRS
The down side with flat tax and national sales tax programs is the elimination of hundreds of thousands of government jobs. The result would be a painful hit on the economy.

With my plan, some jobs, mostly temporary, are still lost. Those in the IRS with a background or understanding for accounting are given an advisor status within the government budgeting programs. Their sole purpose is to find wasteful spending and produce quarterly reports of cuts they found. These cuts should not be of a political nature, but instead ways of reducing costs and yielding the same results.

What is Done with the Governmental Waste

All, or nearly all, resources found in this manner go toward gasoline and health insurance subsidies. The subsidies are provided on the requirement of reduced pricing for gasoline and reduced health insurance cost to businesses.

The key componant to this is a public service announcement calling for businesses which benefit from the reduction of these costs to reduce their retail prices to the consumers and a call for the media to identify and make public the names of any companies which benefit and do not reduce prices.

The resulting decreases in pricing should yield greater buying power for consumers and create an increase in overall demand, boosting the economy.

The trick here is timing. Given our current situation, this program could be dangerous, we need first, to create some inflation to give us a cushion against both panicking the market and the economic boom.

More Investing
Between the decrease of costs for retail goods, the increase in take home income (all of it), the increase in personal investing, and the use of Social Security as an investment, businesses are provided with a wealth of resources for funding growth.

This creates an excess of resources for businesses which allow the to grow quickly with the increase in demand for goods, due to lower pricing, and a booming economy.

One More Government Waste
Morallity aside, people use illegal drugs, and the War on Drugs is a failing endeavor. While I don't support drug use as a good idea, I believe there are better ways to address the drug problem.

The more dangerous drugs, like heroine, and LSD, should remain illegal. But less dangerous drugs like marijuana and cocaine should be moved to a controlled substance category, with government controlled pricing. Making these drugs initially cost about thrice their current street value, we convert what can constitute routine use recreational drugs to luxuries which would likely be used less frequently due to cost.

Some of the funding for the war on drugs is converted into the public announcement campaign making clear the real and accurate dangers of drugs, similar to the anti-smoking campaign. The remainder of the funding goes toward diminishing debt or more accurately, reducing the increased debt caused by the initial Social Security start up costs listed above.

Back to Social Security
After about two years, when Social Security gets its reset and becomes self-sustaining, the excess funding left over from the costs for the "War on Drugs" is applpied to diminishing the debt or at least the deficit.

Cutting Deficit and Debt
Over the years, we slowly cut government waste, using the accountants from the former IRS, but slowly so we don't harm the economy. Part of the funding once used for the IRS and DEA are applied against the debt. Economic growth yields higher tax revenues which can further be applied against the debt. Additionally, de-inflation with increase jobs at higher purchasing value wages, due to decreased pricing, creates less need for entitlement programs, saving the government additional money which can be applied against the debt.




OK, that's it in a nutshell. Let the bullets, and hopefully good ideas, fly.

 

[russ_watters]

Ambitious, to say the least. I don't agree with all of it, but I agree with more than I disagree - overall, a good plan. And the fact that you're thinking about the big problems that not many are thinking about is key.

 

[Aquamarine]

For a very large fund, it is almost impossible to get a higher return than the market average. Thus probably not more than a 1-4% in real return per year.
http://www.efficientfrontier.com/ef/499/ms5867.pdf

Anyhow, this cannot save the the current system since the stock market is clearly overvalued using for example pe or dividend yield averages. The stock market will at best go sideways for a long time.

The only right thing to do would be an immediate and massive reduction in government spending.

$45 trillion is a lot of money by anyone’s standard. One way to comprehend it is to look
at the following menu of pain – the alternative immediate and permanent fiscal policies
needed to eliminate this fiscal gap. The menu contains the following equally indigestible
entrées. The first is raising federal income taxes, personal and corporate, by 60 percent.
The second is raising payroll taxes by 95 percent. The third is cutting federal
discretionary spending by 106 percent. And the fourth is cutting Social Security and
Medicare benefits by 45 percent.

Bear in mind that these figures aren’t coming from alarmists like me. They are coming
straight from the United States Treasury and are so scary that the administration has gone
to remarkable lengths to deny the study was ever commissioned, produced, or censored.

http://econ.bu.edu/kotlikoff/Fixing%20Social%20Security%20and%20Medicare%20for%20Good.pdf

Professor Laruence J. Kotlikoff have studied these questions extensively and possible solutions:
http://econ.bu.edu/kotlikoff/
http://econ.bu.edu/kotlikoff/Going%20Critical.pdf.pdf

But the problem is much larger than government spending. Individual Americans have the lowest savings rate and highest debt ever in history and are increasingly dependent on the kindness of strangers. Personally, I think the system if far beyond the point of no return and will end in the usual historical manner: hyperinflation which will eliminate debt, confiscate savings but devastate the economy.

 

[russ_watters]

The only thing I disagree with is this:

Anyhow, this cannot save the the current system since the stock market is clearly overvalued using for example pe or dividend yield averages. The stock market will at best go sideways for a long time.

And though I know this is the main reason for the current funk, its had a long time to settle-up for the wildness of the late '90s. P/e ratios may, historicaly, be a little high (do you know how high, exactly? I'm not sure), but I think prospects for future earnings/overall economic growth warrant it.

The second reason I disagree is that I don't think people are taking into account the effect of dumping a couple of trillion dollars into the market. The law of supply and demand demands that prices go up, and p/e ratios will end up higher for that reason. That gives a lot of room for the prices p/e levels to go up, yet still settle out at a reasonable level (whatever that may be). This also means that the more money you dump into the market, the better the return you can expect.

 

[Gokul43201]

I'm not sure I follow this. How can the market be expected to trend upwards if the p/e is greater than the (inverse of the) yield from say, the 10-year treasury note ? Even a sidewards movement is only fortuitous, is it not ?

 

[russ_watters]

I'm not sure I follow this. How can the market be expected to trend upwards if the p/e is greater than the (inverse of the) yield from say, the 10-year treasury note ? Even a sidewards movement is only fortuitous, is it not ?

I'm probably a little thin on the connection between the p/e ratio and government securities. Could you expand on why here should be a connection? I'm aware of a connection between growth rates of securities and stocks (they are inversely proportional), but not what that has to do with p/e ratios:

THIS is the logic I'm using.

First, you have to understand that different industries have different p/e ranges that are considered "normal". For example, technology companies may sell at an average of 40 p/e, while textile manufacturers may only trade at an average of 8. There are the exceptions, but for the most part, these differences between sectors are perfectly acceptable. They arise out of different expectations for different businesses; tech stocks usually sell higher because they have a much higher growth rate and earn high returns on equity, while a textile mill, subject to dismal margins and low growth prospects, will trade at a much smaller multiple.

It follows that a tech-intensive economy and its associated high growth rates will cause higher p/e ratios to be perfectly acceptable.

 

[Aquamarine]

Here is an article explaining the relation between interest rates, p/e ratio and the stock market. In short interest rates have been a good guide short term, but long term the p/e ratio is more important.
http://www.investopedia.com/articles/03/112703.asp

The overall p/e for the market is now around 20. Certainly a great improvement from the 45 level seen before, but still some way to the historical average of 14 and a long way from the level around 5 seen at bottoms of the bear market that have always followed a major stock market bubble. And there have always been hot technological stocks, once TV and railways were viewed similarly to the Internet today. There is no reason that "it will be different this time".

But more importantly, the real bubble has not burst yet. The stock market is merely a sideshow. The real bubble is a credit bubble, in bonds, in real estate and in derivatives. Markets which dwarf the stock market in size by magnitudes. The Fed has created artificial growth by for twenty-five years through lowering the interest rates, creating massive financial earnings through the use of credit. The economies of the west have been transformed from being dependent on producing things to producing credits. The recent improvement in earnings is to a large extent due to the massive decrease in interest rates by the Feds printing press after the stock market crash.

But now inflation is raising and interest rates with them. And this will burst the real bubble, creating the real and truly epic financial crash. Although the timing and speed is uncertain. Japan has still not recovered from its slow-motion burst that started in 1990 after a much less impressive bubble, in an economy that has a high savings rate.

Here is the view of Bill Gross, manager of world's largest bond fund:
http://www.pimcoadvisors.com/commentary/mgr_billGross02012004.jsp

The result of central planning of the creation of money after abandoning the usual free market choice and restraint, the gold standard:
http://www.prudentbear.com/archive_comm_article.asp?category=Guest+Commentary&content_idx=23343

An excellent series of articles:
http://www.financialsense.com/stormwatch/oldupdates/main.htm

 

[onegermanbeerglass]

Incidentally, some of the plan's benefits to budget would be (based on this years info):

Reduced Spending:
10.4 Billion in IRS this year (gained gradually over probably 10 years)
c. 1.6 Billion in DEA this year (gain about half back almost immediately)
? in spending on imprisoning marijuana & cocaine offenders
? in court and legal fees from prosecuting the above

Increased Revenue:
250-400 Million in marijuana tax revenue for California alone under current sales tax laws.
Under this plan's tax changes: about 8-13 Billion in sales tax revenue for California alone, estimated 120 Billion in total sales tax revenue for all the US.
Further, I estimate, with a government regulated pricing, increasing the cost about thrice, tax revenues from marijuana only, could be as high as 360 Billion.
Additional tax revenue for Cocaine.


On other concerns:
We can't cut spending to the degree suggested. The impact on the job market would be devistating, which would harm tax revenues. The country would fall into a long and deep recession. I would estimate at least 20 years without going back heavily into debt.

Russ's 1st Comment:
I'm curious about what you desagree with. Is it for personal reasons, like morality or ethics, or logistical matters? Can you offer ways to improve upon the parts you disagree with?

Can We Take it Further?
Does anyone have thoughts of things to add, or areas that need addressing in this plan? I wouldn't complain to someday right a 1500 page (or so) plan detailing a government plan to recommend for this country (something that might give it a slim chance...).

I welcome help and ideas from anyone willing to take the project seriously.

 

[Aquamarine]

I think your ideas are good. A sales tax and a flat tax are certainly better alternatives than the current tax system. However, a sales tax or a "fair tax" on its own cannot replace the current tax system, let alone pay for the generational deficit. Unfortunately, I think that the most likely outcome is a high value-added tax like in Europe without cutting any other taxes.
http://www.prnewswire.com/cgi-bin/stories.pl?ACCT=104&STORY=/www/story/10-13-2004/0002275597&EDATE=

Ending the war on drugs and taxing them is excellent.

Since the US spends more on defence than next 15 nations combined, defence could easily be at least halved. And that is a major part of the budget.

Other government areas should also be reduced as suggested.

Regarding other good ways to handle government spending, read the articles by Kotlikoff who may one of the foremost experts on this issue. But these don't solve the rest of the financial bubble.

The Social Security trust fund cannot be used for investment since it is empty:
http://mwhodges.home.att.net/cur-year-deficit-trusts.htm#treas_secretary

The US will probably get a depression, cut spending and high unemployment no matter what is done, the only thing should be to limit to damage as much as possible. A quick and painful depression is better than a bleeding slow one. The depressions during the nineteenth century were painful but over in at most a few years. The socialistic intervention of Hoover and Roosevelt created a 15 year long depression. Japan has also tried to stop its recession through state intervention and is now also approaching the 15 year landmark.

 

[russ_watters]

The real bubble is a credit bubble, in bonds, in real estate and in derivatives. Markets which dwarf the stock market in size by magnitudes. The Fed has created artificial growth by for twenty-five years through lowering the interest rates, creating massive financial earnings through the use of credit.

This is a complicated issue and a long post that I'll get into tomorrow (bed time), but for now, I can't see why growth based on borrowed money is somehow "artificial" (especially, considering that its been sustainable for 25 years). Two reasons:

One, with interest rates low, the loans themselves don't generate wealth. I could see how if interest rates were high, growth would all be money growing on money, not money growing on products as it is with low interest rates. But the second reason is the bigger one:

Loans cause money to flow through the economy, and its the flow - the activity - that growth is based on. Flow is economic activity and more flow is growth. For example, a new house:

Its tough to argue that a new house is somehow "artificial." It was bought by an owner, financed by a bank, and built by a contractor, and it exists (not just on paper like a stock). Even if the owner immediately defaults on his loan after receiving the house, the house is still there and neither the bank nor the owner are worse for the wear: the bank owns the house and breaks even and the owner started and ended with nothing and also breaks even. The builder (and the economy) keep the income from building the house.

 

[russ_watters]

The overall p/e for the market is now around 20. Certainly a great improvement from the 45 level seen before, but still some way to the historical average of 14 and a long way from the level around 5 seen at bottoms of the bear market that have always followed a major stock market bubble. There is no reason that "it will be different this time".

I'm not saying "it will be different this time." I'm saying it will be the same - it will continue to follow the traditional rules of p/e ratios. When expected growth is high, acceptable p/e ratio is high, and when expected growth is low, acceptable p/e ratio is low. I agree that if the economic growth goes away, we're screwed whether that means the laws of p/e ratios are holding or not. So I think we're arguing something we needn't be arguing. The real question is: should we expect the growth of the last 25 years to continue - and I think that's your real point: we shouldn't.

You're saying the "real" bubble hasn't burst yet - my question is why not? We're now (apparently) recovering from the worst bear market in 25 years. If that isn't the bursting of a bubble, why wasn't this the time for the bubble to burst? If the answer is that interest rates and inflation are still low, what reason do we have to believe that the double digit inflation and interest rates of the 70's will return? I would hope that the government learned from the surplusses in the 90s that keeping interest rates low is a better way to control debt than pushing inflation up.

 

[Aquamarine]

This is a complicated issue and a long post that I'll get into tomorrow (bed time), but for now, I can't see why growth based on borrowed money is somehow "artificial" (especially, considering that its been sustainable for 25 years). Two reasons:

One, with interest rates low, the loans themselves don't generate wealth. I could see how if interest rates were high, growth would all be money growing on money, not money growing on products as it is with low interest rates. But the second reason is the bigger one:

Loans cause money to flow through the economy, and its the flow - the activity - that growth is based on. Flow is economic activity and more flow is growth. For example, a new house:

Its tough to argue that a new house is somehow "artificial." It was bought by an owner, financed by a bank, and built by a contractor, and it exists (not just on paper like a stock). Even if the owner immediately defaults on his loan after receiving the house, the house is still there and neither the bank nor the owner are worse for the wear: the bank owns the house and breaks even and the owner started and ended with nothing and also breaks even. The builder (and the economy) keep the income from building the house.

The central banks of the world have been granted a state monopoly on the creation of money, inflation and the ability to influence interest rates and the economy. With the assumption that central planning will be a better alternative than a free market.

For an explanation why this is the cause of depressions and inflation, see the Austrian theory of the business cycle:
http://www.benbest.com/polecon/buscycle.html

Some other things to note. Low interest rates cause the amount of money to increase faster and not slower. Since more people want to take loans if the interest rate is low, the Federal Reserve must create more money with the printing press if they want the interest rate to remain low.

A new house is "artificial" if it would have never been built if not for the low interest rates forced by the Fed. The "artificial" lowered interest rates changes the pattern of investment in the economy. It gives money to companies and people with borderline profitability. Projects that should be liquidated are allowed to survive, projects that should never have been started flourish. For a while, there is a economic miracle, everybody can do what they want. But then inflation starts to rise since there is more money than resources. In the end there will be a painful crash. It is true that the new house remains, but it will have lost most of its value and it will have taken resources from better alternatives.