Author: Larry Littlefield

I just got home and received the monthly e-mail from the New York State Department of Labor. During the annual re-benchmarking process, during which employment statistics for the past are adjusted based on more detailed data that has become available, New York City private employment was adjusted upward by a stunning amount. In fact, if the data holds up to later adjustments, annual average private wage and salary employment in the city would have been within 12,000 jobs of the all time peak in 1969. (Including the self-employed, that peak was passed some time ago).

Which just goes to show what I have come to believe. New York City's economy is no longer very dependent on Wall Street. It is New York's tax base, and the extent to which city and state residents are socked with tax increases and service cuts, that is dependent on Wall Street.

I was going to complete my posts on federal finance with a discussion of the national debt, but it turns out that the Federal Reserve’s Z1 data for 2011 will be released on March 8th, allowing me to extend an important part of the discussion – the part concerning total U.S. debts including state and local government, consumers and the private sector– by one more year. So instead I’ve decided to once again check in on two Brooklyn fictional couples: the Young Hopefuls, both age 32 with a six-year-old child and a newborn, and the Senior Voters, now both age 72. How do their circumstances and taxes differ?

The Presidential campaign has shined a spotlight on the inequities in the federal tax code, with wealthy former private equity executive and current candidate Mitt Romney paying a far lower share of his income in federal taxes than most middle-income workers. Between growing tax inequities, less restrictive regulations leading to an era of legalized fraud, and corporate bailouts, it has become clear that the so-called one-percent rule the federal government in Washington. But who rules state and local government, where the serfs – and particularly the young – are paying even less attention? In New York that is clear as well: senior citizens, particularly retired and soon to retire public employees. The fictional Senior Voters are such retired public employees, and they are on the way to having a “retirement” that lasts as long as – or if they are lucky longer than — they worked. The Young Hopefuls, in contrast, may face poverty in old age, as they (like most younger private sector workers) do not have any employer-provided retirement benefits, and their federal old age benefits are being encumbered by the soaring federal debt. But how are they faring now? Let’s fire up the Turbo Tax and find out.

As shown in my previous post, a minority of federal activities account for the vast majority of federal spending. These are National Defense and Veteran’s Benefits, Social Security, Medicaid and Medicare, and interest on the national debt. The national election should really be about those issues, and federal tax revenues. Yet I’m willing to bet that if your local incumbent member of Congress even bothers to campaign, rather than having secured a guaranteed re-election by being in a safe district and/or keeping challengers off the ballot, he or she will probably talk about anything and everything else.

In the line chart of federal spending that is part of the spreadsheet that is linked here, one can see that the dashed line – “everything else” – fell from 6.6% of GDP in FY 1979 under President Carter to 4.9% of GDP in FY 1995 under President Clinton, with the greatest decreases during the Reagan years. Post Reagan, the pattern had been that spending on everything else fell as a percent of GDP when the economy was strong and rose as a percent of GDP when the economy was weak – implying that it pretty much stayed the same as GDP did better and worse. In FY 2011, however, federal spending on “everything else” jumped to 6.8% of GDP, the highest level since the Carter Administration. To understand why, print out the spreadsheet chart on “Minor Spending Categories,” and read on.

This post continues my review of recent federal government financial history, based on this spreadsheet, that began with this background post and continued with this post on federal revenues. The discussion that follows here is on the major categories of federal expenditures, the ones that really matter, the ones that account for the most money. The federal government has been described as a social “insurance company that also has an army.” And Social Security, Medicare, Medicaid, National Defense and Veteran’s Benefits, and interest on the national debt accounted for 71.9% of federal spending in FY 2011 – and 65.4% of federal spending in FY 1979 at the start of this analysis.

In terms of what the federal government actually does, moreover, it is actually an army, a post office, and a bunch of bureaucrats sending money to others who actually do things. Most Medicare and Medicaid-funded services are provided by the private sector or public facilities run by state and local governments. Social Security and interest on the debt are simply cash taken in, and cash sent out. The smaller categories of spending, to be discussed later in a separate post, generally involve payments to state and local governments, which do the actual work. Since money in and money out is the nature of most federal finances, activities by others funded by “spending” is little different than activities by others induced by tax preferences. Those “tax expenditures,” not tabulated in the spreadsheet, cost the federal government an estimated $1.1 trillion in FY 2011, according to the Statistical Abstract of the United States for 2012 (Table 477). Total federal “spending” tabulated as such was an estimated $3.8 trillion that year.

Prior to the Great Recession, I had heard federal politics described as little more than an ongoing argument about taxes; who pays too much, who pays too little, how much should be collected, how much can be collected. The data shows, however, that while there may be a big government-small government going on, however, that is only on the spending side. The generations now in charge have voted to pay for small government, aside from the peaks of economic bubble when corporate income and capital gains taxes are pouring in. The question is “who will get the small government that has been paid for?”

In fact, right at now the federal tax burden, as a share of the economy, is lower than it has been at any point in my working life – even though spending is higher. Federal taxes are far lower as a share of GDP than in the lowest year under President Reagan, by a wide margin. I can confirm this in my own life – our own total federal, state and local burden is much lower as a share of our income than in the early 1990s, when we had far less income, no dependents, and little in charitable deductions. Even though with regard to income taxes, we don’t benefit from the sweet deals the executive class gets on capital gains or retired government workers get on New York’s state and local income taxes. At the start of the Great Recession, I had expected tax burdens to soar as the federal government, state and local governments attempted to fend off bankruptcy. While state and local taxes have increased, federal taxes have fallen. The federal data may be found in the spreadsheet linked from this post. A discussion of how we got here follows.

There is no getting around it, 2012 is a federal election year. The bad news is because New York is not a swing state, we already know our votes for President will be nothing more than symbolic. Unless we are in swing districts, the same may be said of our votes for Congress. The good news is we will thus be spared the special interest-financed cavalcade of lies, distortions, and “culture war” irrelevancies that constitute political campaigns. You don’t have to know that much to be unable to listen to anything that any of them say without getting disgusted.

Without a meaningful vote, and unwilling to listen to the meaningless BS, I’ve decided to participate in the election by presenting some facts. Facts about how much money the federal government has taken in, and spent, by category, as a percent of its economy, during the recent epoch of political history. That epoch began with the election of Ronald Reagan as President, which ended an epoch that began with the election of FDR. With the Room Eight attachment function still dead, the site owners have posted an Excel spreadsheet, with a series of worksheets and tabbed on the bottom, at this location. The background required to understand it follows in the rest of this post; my view of what it means will follow thereafter.  Download the spreadsheet, print out the graphs and tables, and read on. 

I'm still working on a tabulation and explanation of federal finances, but meanwhile the New York Times has done a good job summarizing the federal issues that really matter. As opposed to the stuff politicians talk about. Reading this article reinforces the idea that the majority of those 55 and over, those in Generation Greed, are in fact greedy, and those who pander to them are evil. If those who are not greedy don't stand up for younger generations right now, instead of simply refusing the face up to what the situation actually is, and all of those younger don't realize what is going on, the result will be a bigger disaster.

As you read the article, your will hear some say that all sacrifices — whether higher taxes or the loss of senior benefits – should be made by those 54 and younger, because those older “did what they were asked to do” and those younger “have time to adjust.” Remember that the current deal is a deal that older generations made with themselves, promises they made to themselves and decided not to pay for. Just like the public employee unions and state politicians and their deals to retroactively enrich the pensions of those cashing in and moving out, and then cut pay and benefits for those coming after. And younger generations have been and will be poorer on average at each point in their lives, with the biggest difference coming later – in old age. Finally, after years of importing more than we export and borrowing the difference, Americans are facing (or not facing) a significant decline in their standard of living. “Buy now pay later” has killed us, and those seeking to exempt themselves from the damage are hypocrites or worse.

In an article, Bloomberg News wonders why people continue to pull money out of the stock market. “The stock market has effectively doubled since the March ’09 low, and we’re still in redemption territory for equity funds,” Liz Ann Sonders, the New York-based chief investment strategist at Charles Schwab Corp., said in a Feb. 2 phone interview. Her firm has $1.7 trillion in client assets. “That’s never happened.” It happened after the Great Depression. For decades after, corporations had to pay dividends to attract investors.

“The price-earnings ratio for the benchmark gauge of American equities has fallen to 14 times reported income, down from 24 at the end of 2009.” But are those earnings real, or fraudulent, as in the 1990s? And if they are real, how dependent are those earnings on the federal government running a massive budget deficit and the Federal Reserve keeping interest rates artificially low, neither of which is sustainable? And even if the earnings are sustainable, why should investors care if all the money goes to excess executive pay in the form of stock options and awards rather than dividends? The dividend yield is about 2.0%, less than half its historic average. Instead of real investor returns today, the executive class promises investor returns tomorrow, but it has been making the same promise for nearly two decades. Public employee pension funds remain available as a sucker, but even these are starting to get fed up – and to object to small returns in exchange for outsized pay in hedge funds and private equity.

At this point, only insiders know what it is that Governor Cuomo is proposing for public employee pensions in New York. But we do know this; the pensions that most recently retired and soon to retire public employees were promised back when they were hired were not “unsustainable.” They were made unsustainable in subsequent deals. We are suffering higher taxes and diminished public services because older generations cut deals with themselves to drastically enrich those pensions and inflate their cost. And now, according to the Governor and Mayor Bloomberg, future hires will receive retirement benefits that are worth far less than what current generations had been promised to begin with. And every institution, including the media, run by Generation Greed cheers.

But no one will connect the two. No one will explain why younger generations deserve so much less in retirement than older generations. And why older generations, retired and current workers, should not be made to sacrifice as well to offset the harm their self-dealing created. And no one will tell younger generations the truth – that they will be less well off than those who came before, on average, at each point in their lives because of what was taken by those who came before and continues to be taken by those who came before, at their expense.

In recent weeks Sheldon Silver has taken time out from advancing the interests of older generations and politically connected interests (at the expense of the common future and the less well off), and proposed an increase in the minimum wage for New York State to a higher level than the federal minimum wage. Mayor Bloomberg has concurred. In response, the predictable battle has emerged between those who claim that a higher minimum wage would wipe out jobs that businesses could not afford to fund at those levels, and those who claim that the higher wages would lead to more consumer spending and thus create jobs. In reality, however, both sides are right, about different places. As I’ve noted previously, a higher than the U.S. mandated minimum wage makes perfect sense in Manhattan, where Silver and fellow supporter Mike Bloomberg are from, and no sense in Upstate New York. The higher minimum should not be imposed on Upstate; neither should Downstate be precluded from a higher minimum because of Upstate objections.