Stocks

From here.

It is an open secret that the stock market in the U.S. is currently being driven by fewer than a dozen wildly overvalued tech stocks that account for the lion's share of it's growth (like the ones shown above, particularly Tesla and SpaceX).

The stock market is not particularly good at accurately estimating the true value of public held companies.

Inaccurate stock prices are an objectively bad thing at the level of the aggregate economy, because they cause investment capital to be misallocated. Too much money is allocated to investments that don't have as good of a likely return on investment, while too little money is allocated to investments that could produce better returns. And, since the stock market is huge, the economic consequences of these misallocations of investment capital on the economy are huge and negative.

Inaccurate asset prices also allocate personal wealth to people who hype their stocks to be worth more than they really are to stupid investors, basically, systemically creating immense returns to dishonesty.

Asset price bubbles aren't bad for everyone. There are two basic ways you can profit from them. One is to invest in the bubble asset despite knowing that it is overvalued, to ride its irrational surge in price, and to get out before the bubble pops. The other is to short the bubble asset and profit when the bubble pops, but this requires your short to be timed for when the bubble pops.

Why is the stock market so bad at pricing these stocks despite the fact that some of the smartest people in the country are employed to analyze and act on this data, and despite the fact that there is a lot of very good quality data about publicly held companies that can be used to value them accurately that is available?

One possibility is that a lot of investors in the stock market are on autopilot trading schemes, like index funds, that are free riding off the people who are actively trading individual stocks, that increasing numbers of ill-informed investors are actively trading individuals stocks as it has become easier to do so, and that the bad decisions of this dumb money is being amplified by autopilot trading.

Another explanation, not necessarily inconsistent with the first, is that this is a generational effect. Baby boomers are moving into their final years of employment and into retirement. They have immense stock market wealth. They are retired and bored, so they try actively trading individual stocks, and they are pouring money into the stock market that exceeds the extent to which stocks have reasonable values (as are individuals who save for retirement believing Social Security to be in peril and knowing that unlike Boomers, they have no defined benefit pensions). Due to the geriatric character of people with power who know what is going on, this is not a problem that they want to solve because they benefit from overvalued stocks in their retirement when they are living off of their investments. Political momentum for reform will come when the Boomers retire or when the bubble collapses, whichever comes first (and asset price bubbles inevitably collapse sooner or later even though the timing of when the bubble pops is notoriously difficult to estimate).

If the bubble sustains itself until the Boomers are mostly dead, the pain will be felt by Generation X and to a lesser extent Millennials (who will at least have more time to recover), in other words, by people like me.

Abuse In Orphanages

New Zealand's government is hardly the most corrupt or ill-intentioned in the nation. But there, as is the case almost everywhere, going back to at least as far as the Old Testament, orphans get a raw deal and are frequently abused. 

More than 30% of people in care in New Zealand from 1950 through 2019 were abused and many more were neglected. I suspect that as horrible as this is, that it is worse in many other countries (probably including the U.S.).

The mix of problems in New Zealand is multi-faceted. 

Most children in care were Maori (i.e. indigenous Polynesian), even though New Zealand is currently only about 18% Maori, usually in cases where they were removed from their families, putatively, for abuse or neglect. It is a fair guess that Maori children were also on the receiving end of a disproportionately share of the abuse suffered by children within the system. This has echoes of the notorious residential schools in Canada and the U.S., long ago, in addition to the other issues with abuse in orphanages without ethnic bias and issues of the treatment of indigenous people thrown in.

The culpability of New Zealand’s Catholic, Methodist and Anglican churches is also predictable and has been mirrored in Canada, the U.S., and the U.K., as well as many other places. Partially related is the religious affiliation of Maori people, of whom there are about 1,075,000 in the world (mostly in New Zealand, but with about 1/6th in Australia and about 21,000 elsewhere):

Given the total population, 0.1% corresponds to about 500 to 1500 people, and 0.2% corresponds to about 1500 to 2500 people.

Of course, while this is dismal, surely a large share of children in care in New Zealand genuinely were victims of abuse and neglect before the government stepped in and removed them from their families.

New Zealand deserves credit, at least, for a thorough investigation, for apologizing, and for resolving to take action. It is also worth noting that New Zealand apparently has a "no-fault accident compensation system" that makes sense as basically a more seamless version of a system where everyone has casualty insurance (it is discussed at the end of this post).

More than 200,000 people are estimated to have been abused by state and religious organizations in New Zealand that had been entrusted with their care, according to the final report from a landmark independent inquiry released on Wednesday.

The abuse included sexual assault, electric shocks, chemical restraints, medical experimentation, sterilization, starvation and beatings, said the report from the Royal Commission of Inquiry Into Abuse in Care. Many of the victims were children who had been removed from their families and placed in state, religious or foster care.

“For some people this meant years or even decades of frequent abuse and neglect,” the report said. “For some it was a lifetime; for others it led to an unmarked grave.” . . .

The inquiry, established in 2018 by the New Zealand government, involved interviewing nearly 2,500 survivors as it examined orphanages, foster care systems, mental health facilities and other forms of care that were charged with supporting 655,000 people from 1950 through 2019. The inquiry’s leaders described it as the widest-ranging examination of its kind in the world.

The report noted that most children in care were Indigenous Maori, even though the group makes up a minority of the country’s overall population of five million people, and said that “Maori were often targeted because of their ethnicity.”

Beyond the 200,000 people estimated to have been abused, the report said countless others had suffered neglect. . . .

The inquiry found that even when abuses by government and religious leaders were discovered, the leaders “were rarely held to account for their actions or inactions, which emboldened them to perpetrate further abuse.”

Among the inquiry’s 138 recommendations were calls for public apologies from the pope, the archbishop of Canterbury, and New Zealand’s police commissioner and its top civil servant. It also urged the government to overhaul the country’s no-fault accident compensation program to provide tailored support for survivors of abuse.

The report prompted New Zealand’s Catholic, Methodist and Anglican churches to promise change. “We will ensure that action follows our review of the inquiry’s findings,” Steve Lowe, president of the New Zealand Catholic Bishops Conference, said in a statement. “We owe it to survivors,” the Anglican Church said in another statement.

The report follows decades of complaints from survivors. “Survivors repeatedly called for justice but were unheard, disbelieved, and ignored,” according to the report. “Significant resources have been used to deny survivors their voice and to defend the indefensible. This must stop.”

From the New York Times (July 24, 2024).

The core forward looking recommendations of the report are here and focus on creation of a single national regulatory system for both secular and religious care systems.

National No Fault Accident Compensation

According to an article in a medical journal that is very opposed to the tort system of medical malpractice:

In 1974 New Zealand introduced a publicly-funded accident compensation scheme with the goals of minimising the incidence and impact of injury. 

The scheme provides assistance with the cost of treatment and rehabilitation for all personal injuries, regardless of fault, and in exchange bans suing for compensatory damages. Medical injury has always been covered under the scheme. Consequently, in New Zealand there is no culture of suing doctors for damages and doctors pay comparatively low medical indemnity fees of around £790 per annum. Doctors are held to account under separate processes including the Medical Council of New Zealand’s competence and fitness to practise processes, an independent patient complaints system, and a separate disciplinary process. 

The patient complaints system was introduced in 1994 on recommendation of a 1988 government report that found wanting the prior accountability processes in an environment where patients were unable to sue. In New Zealand, patient complaints are not a demand for financial recompense but a demand that an individual be held to account for perceived wrongdoing. A patient may lodge both a claim for treatment injury compensation and, regardless of injury, a complaint against a practitioner.

Although medical injury has always been covered under the scheme, the compensation of medical injury has not always been without fault for doctors. Prior to 2005, patients could obtain compensation by proving medical error. Because all findings of error were reported to the Medical Council, compensation could bring disciplinary repercussions for doctors. Fear of punishment and/or reputational damage discouraged some doctors (and some patients) from participating in the compensation claims process, unfairly restricting access to compensation for injured patients. This situation was rectified in 2005 under the ‘no-fault’ legislative reforms. The reforms extended eligibility to all injuries caused by treatment and replaced the prior reporting duties with a new duty to report ‘risk of harm to the public’ to the ‘authorities responsible for patient safety’. These changes freed doctors to participate in the compensation claims process with little fear, and improved information flows within the system.

The program explains itself here:

Our no-fault scheme covers everyone, including visitors, who are injured in an accident in Aotearoa New Zealand. It can include events that result in mass casualties, and covers children, beneficiaries, and students. You’re covered if you’re working, unemployed, or retired.

There are some limits to the support we can provide. These limits are set by Parliament, which makes laws about what we can and can’t support.

If you're injured in an accident, make sure you go and see your doctor or health provider first. They can make a claim for you. Claims can be made up to 12 months after your injury. We may still consider claims made after this time if there’s a good reason for the claim not being made sooner. 

What is no-fault cover?

No-fault cover means it doesn't matter what you were doing when you were injured or who was at fault. We'll cover you, as long as the injury falls within our legislation.

The cover we provide helps pay for costs to support your recovery and get you back on your feet. It includes payment towards medical bills, treatment, help at home and work and help with your income. 

Physical injuries we cover

A physical injury is when there is actual damage to your body. This includes: 

• sprains or strains - such as the ankle, back, knee or shoulder sprains
• wounds - cut, broken or bruised skin
• burns
• fractures
• dislocations
• dental injuries
• hearing loss
• concussion and loss of consciousness
• maternal birth injuries which occurred on or after 12:00am on 1 October 2022.

We cover most physical injuries if they're caused by: 

• an accident
• sexual violence

We can cover injuries or conditions that happen over time and are caused by the type of work you do. This is known as gradual process conditions. We have to establish if your work tasks or workplace environment are causing your condition.

We can also cover injuries that are long-term, permanent or that happened at birth. 

Injuries caused by treatment

Sometimes getting treatment can cause an injury. We can cover a treatment injury if: 

• the treatment directly caused your injury
• a registered health professional was treating you
• it's not a normal side-effect of your treatment.

We can also cover injuries caused by treatment for an injury we've already covered. 

Conditions that come on gradually from work

We can cover injuries or conditions that happen over time and are caused by the type of work you do. This could be things like: 

• tendonitis from overusing muscles or heavy lifting
• deafness caused by noise at work
• infections or diseases from exposure to certain environments. 

Serious injuries and disabilities

We can cover injuries that cause long-term effects and disabilities including spinal and traumatic brain injuries (TBI), such as concussion.

Find out how we're working to reduce the number, severity, and impact of TBIs:

Reducing traumatic brain injuries 

Mental injuries we cover

If we accept your claim for a physical injury, we can also cover mental injuries resulting from that injury. For example, post-traumatic stress disorder after a physical assault.

If your physical injury is caused by medical treatment we may also be able to cover a resulting mental injury, even if the physical injury isn’t covered.

We also cover mental injuries if you've experienced, seen or heard a traumatic event at work such as working in a retail shop when a robbery takes place. This is even if you haven't been physically injured. 

Sexual abuse

We provide support for anyone in Aotearoa New Zealand, including visitors to the country, who has experienced sexual abuse and assault. We may also be able to help if you're an Aotearoa New Zealand resident and have experienced sexual abuse while travelling overseas. It doesn't matter if the event happened recently or a long time ago.

If you've experienced sexual abuse, use the Find Support website to see the organisations that have therapists who can support you. This support is fully funded and you can start whenever you're ready. There are also services available for your family.

If you're having trouble getting in touch with the right therapist, contact us. We'll help you to make an appointment. 

Dental injury

We can pay for dental injuries caused by: 

• an accident
• sporting injury
• as a result of medical or dental treatment.

We don’t pay for: 

• damage to your teeth or dentures due to normal wear and tear, eg chewing or biting
• damage to your teeth due to decay or gum disease
• damage to your dentures while you were not wearing them
• treatment that was done by someone that’s not a registered dentist, eg a dental technician.

Your dentist will help you to make a claim if you have an injury we cover.

Injuries causing death

We give financial help if someone dies as a result of: 

• an accident
• a work-related disease or infection
• a treatment injury we're covering
• a self-inflicted injury (in some circumstances). 

Maternal birth injuries

If you have experienced an injury while giving birth on or after 1 October 2022, we may be able to help with your recovery. We have guidance on what's normal and what's not.

This is essentially "no-fault" automobile insurance and worker's compensation on steroids and has a lot to be said for it in some form. The tort system does a poor job of compensating people with smaller injuries, and people who have suffered from bad outcomes and accidents when fault is less clear cut. The tort system is also slow, uncertain, and involved immense transaction costs.

What Does It Cost To Retire In Tampa?

A news report estimate makes it seem like it is very expensive to live in Tampa, Florida.

The budget assumed breaks down roughly as follows:

But don't believe the hype. In 2021, Tampa, FL had a median household income of $59,893. https://datausa.io/profile/geo/tampa-fl That's what 50% of whole households are living off there.  Nationally, the average retiree lives on about $30,000 a year.

Suppose you want to retire in Florida (which is what the person in the Facebook post that I am reacting to in this post was talking about).

The average rent for a one bedroom, which is what a retiree typically needs, is less than $1,600/month, which trims $4,800 a year from the total. 

$450 a month for food is high, $300 a month is probably plenty for two people who can usually cook from scratch (which you have more time to do when retired), which saves $1,800 a year. 

I can't imagine why someone with Medicare, a Medicare supplemental insurance and renter's insurance for someone age 65+ (car insurance goes in the vehicle line item as shown) would pay $700 a month for insurance and medical expenses that aren't covered, it would be not more than $400, a reduction of $3,600 a year. 

$9,000 a month, year in and year out for "disasters" is absurd if you rent your home and have the insurance describe above, and already have emergency funds saved upon from your career that you are living off in retirement. 

And $16,800 a year in taxes isn't a thing if you are retired (Florida doesn't even have a state income tax). 

$12,000-$18,000 a year for a car is also high - I pay less than $4,000 a year for a car as a working adult who makes business trips all over the state now and then including the purchase price of the car spread over its useful life of 100,000 miles, car insurance, gas, maintenance, car washes, etc., so reduce that line by $8,000 a year. 

This is $44,000 a year less than the $90,000 a year shown ($46,000 a year), which is quite a bit less than the median income in Tampa. 

You certainly need more than Social Security to live comfortably in retirement, which averages $18,000 a year or so. https://www.fool.com/.../average-social-security-benefit.../ But a retired couple can live comfortably in Tampa for a lot less than $90,000 a year. Indeed, they can live modestly but comfortably, for about half that amount.

They can probably live comfortably enough there with Social Security and Medicare with a nest egg of $700,000 in some reasonable income based investments generating a very manageable 4% of principal, i.e. $28,000, of distributed income each year, which is the industry standard. Any additional returns on the principal increasing the principal to deal with inflation (and you can deplete some of the principal over time to deal with additional inflation since you don't live forever and don't need to die with lots of money in the bank). 

Of course, it is a matter of degree and a bit more is more comfortable and a bit less is tighter. My budget is a lower middle class to middle middle class budget.

You can reduce the size of the nest egg quite a bit, and also hedge against inflation in rent, if you own a modest 1 bedroom condo in Tampa instead. 

You can buy a decent 1 bedroom condo in Tampa for about $150,000, and then you're just paying homeowners insurance, property tax, the HOA fee, and utilities, which isn't nothing (about $100 a month of property tax, $260 a month of HOA and $100 a month of condo insurance in excess of the renter's insurance cost estimated above, and $140 a month in electricity) but $700 a month is a lot less than $1,600 a month - $10,800 a year less which reduces the size of the nest egg you need from $700K to $430K, while costing only $150K and hedging against increased rent in the future (buying is cheaper because current mortgage interest rates of 7%-8% are higher than current investment returns in an income oriented fund).

So, if you sell you current home purchased for a larger family you can net a lot of the $580K you need to have saved to live in retirement. Also, by living in a condo you reduce the physical maintenance work you need to do in retirement if you own a non-condo home when that gets harder. 

Say you have $380K in home equity net of costs of sale, which would be a pretty modest house in lots of the U.S. if you bought it 30-40 years ago and paid it off, then you only need $200K of retirement savings, which isn't heaps for a married couple over their entire careers.

Also, by the time that one of you needs to live in a nursing home, you will probably be able to qualify for Medicaid to pay for it given what the "community spouse" is allowed to have, without having to "pay down" much of the retirement nest egg.

Mike Johnson's Economic Policies

Republicans favor policies that make people poor, sick, and stupid.

Republican Congressman Mike Johnson is the newly elected Speaker of the U.S. House of Representatives. What policies does he favor? Paul Krugman, writing an op-ed pieces at the New York Times, tells us:

Until his sudden elevation to speaker, Johnson was a relatively little-known figure. . . . now that Johnson has become the face of his party, people really should look at the budget proposal the committee released for 2020 under his chairmanship. . . . 

Start with Social Security, where the budget calls for raising the retirement age — already set to rise to 67 — to 69 or 70, with possible further increases as life expectancy rises. . . . Then there’s Medicare, for which the budget proposes increasing the eligibility age “so it is aligned with the normal retirement age for Social Security and then indexing this age to life expectancy.” Translation: Raise the Medicare age from 65 to 70, then keep raising it. . . . 

Most nonelderly Americans receive health insurance through their employers. But this system depends greatly on policies that the study committee proposed eliminating. You see, benefits don’t count as taxable income — but in order to maintain this tax advantage, companies (roughly speaking) must cover all their employees, as opposed to offering benefits only to highly compensated individuals. The committee budget would eliminate this incentive for broad coverage by limiting the tax deduction for employer benefits and offering the same deduction for insurance purchased by individuals. As a result, some employers would probably just give their top earners cash, which they could use to buy expensive individual plans, while dropping coverage for the rest of their workers. . . . 

the budget would impose savage cuts — $3 trillion over a decade — on Medicaid, children’s health coverage and subsidies that help lower-income Americans afford insurance under the Affordable Care Act.

How many Americans would lose health insurance under these proposals? 

Back in 2017 the Congressional Budget Office estimated that Donald Trump’s attempt to repeal Obamacare would cause 23 million Americans to lose coverage. The Republican Study Committee’s proposals are far more draconian and far-reaching, so the losses would presumably be much bigger.

Social Security's Fate

Krugman in an op-ed in the New York Times explains that in a worst case scenario of no action, the Social Security Trust fund keeps it solvent for another 12 years and then benefits get slashed by 20% as the trust fund can no longer buffer the shortfall of current receipts relative to current expenses while bearing the full weight of the Baby Boom generation.

Put another way, to keep 100% of current anticipated benefits, Social Security revenues need to increase by 25% in 2035, or somewhat less than that if revenues start to increase sooner. 

This is happening 25 years sooner than actuaries predicted it would in 1981 when major reforms to the system were put in place.

[I]n 1981 a bipartisan commission set out to secure Social Security’s future. It tried to do so with two measures. First, it increased the payroll tax rate; the idea was to make Social Security a bit more like a “real” pension fund by taking in more than it was spending, building up a serious trust fund that could help defray costs once the baby boomers hit the system. It also set in motion a gradual rise in the age of eligibility for full benefits, which started at 65 and will reach 67 for those born after 1960.

All of this was supposed to secure the system’s finances until 2060. It did in fact buy the system a number of decades, but the Social Security Administration currently expects the trust fund to be exhausted by 2035. 

The main reason for the shortfall, as I understand it, is that taxable wages have grown more slowly than expected, which in turn is largely the result of rising inequality: A growing share of overall income has gone to people with really high earnings, and much of that income isn’t subject to the payroll tax with its limit.

The Impact Of Interest Rates And COVID

I think Krugman is probably overlooking, in furtherance of advocacy, the impact of sustained very low interest rates on federal Treasury Bonds in the last fifteen years and have only just returned to the rates that they were at prior to the Financial Crisis of 2007-2008, the only time period in recent history in which Treasury bond interest rates were below 4% for more than a very brief time period since at least the 1960s. 

This has left the Social Security trust fund with lower than its anticipated earnings as of 1981 when Treasury bond interest rates were at record highs that peaked at more than 15%. 

But Treasury bond interest rates look likely to be above 4% going forward and this could significantly improve the financial outlook for the Social Security trust fund.

Ten Year Treasury Bond Interest Rates (Source)

The twelve year to insolvency estimate also probably don't fully reflect the probable impact of COVID-19 on Social Security's benefit obligations, however. Current estimates show only a modest COVID impact on the Social Security trust fund, but that assumes that excess deaths cease in 2023 which currently seems unlikely, even though they are waning a bit.

The lion's share of people suffering premature deaths from COVID are already receiving Social Security benefits or imminently about to do so. 75% of the 1,113,560 COVID deaths to date (as we are nearing the three year anniversary of the first significant numbers of deaths from COVID) are of people 65 years of age or older. Another 18% are of people age 50-64 year old. So, 93% of COVID deaths have been of people age 50 years old or older, and deaths in the 50-64 year old age range are still strongly biased towards the high end of this age range. There have been 73,435 COVID deaths of people under age 50 in the last three years and even among those deaths, 62% have been of people in their 40s. Just 2.5% of COVID deaths have been of people less than 40 years old. 

As an aside, the number of deaths for women are lower than the number of deaths for men at all ages under age 85. Women account for 56% of COVID deaths at age 85 and up, but this is because they make up 64% of the population age 85 and older due to their longer life expectancies. The death rate of women from COVID is lower than the death rate of men from COVID at all ages. Overall 55% of COVID deaths are men and 45% are women, and more than 55% the people who died of COVID under age 85 are men.

Also, rather than ceasing to be a problem after the year 2023 as Social Security actuaries have assumed, COVID-19 looks like it will continue to be a leading causes of death for people age 50 and up for the foreseeable future, in part, because the COVID vaccines and actual infection with COVID only seem to provide full immunity for a matter of three to six months, even though they are quite effective at preventing death from COVID as shown in the chart below:

As of February 24, 2023 the U.S. is experiencing COVID deaths at a rate of about 125,000 per year. There is also no assurance that some new variant won't lead to a new spike in COVID deaths like four previous spikes after the initial spike of COVID deaths in the U.S. over the last three years.

Notably, COVID deaths aren't being substituted for many deaths from other causes in the same demographic. The main source of the discrepancy between excess deaths and COVID deaths is due to deaths outside hospitals that are probably due to COVID in people who weren't tested for COVID when they were sick.

COVID-19 and rising interest rates on Treasury bonds combined will probably push the twelve year date for the Social Security trust fund to run out by a number of years, even if there are no changes to the system.

Potential Policy Solutions

Modest tweaks to the Social Security program could greatly mitigate this issue, such as: 

(1) increasing the retirement age which is currently age 67 for people born in 1960 or later who are currently 62 to 63 years old, and will hit their increased retirement age sometime in the year 2027.

(2) increasing the maximum income subject to Social Security payroll taxes from the current $160,200, 

(3) expanding the wage base to include non-payroll, non-self-employment income, as the 3.8% Obamacare tax on investment did for Medicare, 

(4) increasing the payroll tax from its current 7.65% for employees and 7.65% for employers (a combined 15.3%),  with a nearly equivalent self-employment tax rate that adjusted for the lack of an employee/employer FICA tax split (which works out to about 14.13% of unadjusted self-employment income), 

(5) allowing some of the Social Security Trust fund to be invested in something other than Treasury Bonds which almost by definition have the lowest return on investment of anything it could be invested in, as almost all state and local government pension plans in lieu of Social Security do), 

(6) capping high end benefits for high wage earners more than the current system does or means testing benefits above a certain level, or 

(7) using new revenue sources like a tax on tax favored retirement plan assets with high benefits, a tax on tax favored retirement plan distributions, or earmarking new or existing gift and estate tax revenue for this purpose. 

 

Krugman notes that there is nothing sacred about funding Social Security, which isn't truly comparable to a private pension plan, with something other than payroll taxes. 

Krugman doesn't mention it, but the fact that the number of workers supporting each person receiving Social Security benefits is projected to fall to a record low of 2.1 people working per person receiving benefits also argues against a plan to increase revenues solely with payroll taxes.

Life Expectancy At Age 65 Is Tied To Income

Krugman also notes that the link between income inequality and life expectancy inequality impacts what seems fair since people in the top half of incomes live five and a half years longer on average than people in the bottom half of income (whose retirements actually cost the system less per year since Social Security benefits are still tied, albeit in a progressive fashion, to lifetime earnings). 

People in the bottom half of incomes had an average life expectancy at age 65 which was one year longer in 2006 than it was in 1977. People in the top half of incomes had an average life expectency at age 65 which was six years longer in 2006 than it was in 1977. 

This disparity was only about 3% for people who reached age 65 in 1977, but has grew steadily through 2006 to a 34% disparity, and shows every sign of continuing to grow. 

This is so despite the fact there all senior citizens in the U.S. are part of Medicare, a national single payer healthcare system for almost everyone aged 65 plus in the United States. 

This is also true despite the fact that low income people receive a far larger share of the taxes they paid back in Social Security benefits than higher income people do, effectively making up for a larger share of their income during their working years. Middle class people are less reliant upon Social Security benefits in their retirements than working place people.

The Economics And History Of The Rural-Urban Divide

This question and answer is migrated off of Politics Stack-Exchange:

Question:

Rural counties in the US generally tend, (often overwhelmingly), to vote Republican, while metropolitan counties similarly tend to vote Democrat.

Over the last few decades which portions of the average rural voter's disposable income in dollars, (or if there is no change, their quality of life), have consistently improved as a result of Republican policies, relative to Democratic policies?

Over the last few decades which portions of the average metropolitan voter's disposable income in dollars, (or if there is no change, their quality of life), have consistently improved as a result of Democratic policies, relative to Republican policies?

The question is not about the subjective values people place on different changes in their lives. It would be nice to factor state-of-health into that somehow too, but I realize that will get too murky.

This question aims to find historical factors, (or elicit pointers to them), that could be used to evaluate how much, or how little, influence pocketbook voting factors have had. I'm looking for drivers of whatever rational components exist that might be obscured by more conspicuous subjective motivations.

Answer:

The question is one that any accurate answer to must be very complex and detailed. This answer explores the underlying facts that would drive an ultimate answer without trying too hard to actually quantify and spell out in more detail the economic benefits and losses associated with various policies.

Subtypes of Rural Voters

One important difficulty in the analysis it that there are multiple types of "rural voters" who have different kinds of economic interests. Each one has its own economic interests that are easier to analyze separately than in the aggregate when economics incentives to get get muddied.

The stereotypical rural voter is a family farmer. But, only about 2% of the population of the United States is employed in farming, and even if you have a substantial multiplier for people who economically benefit when farmers are doing well, this is still only a modest share of the rural population in the United States. Farming is one of the few sectors of the U.S. economy that produces a trade surplus, rather than a trade deficit. For the most part, the farming industry has been reasonably health and stable with increased productivity and decreased employment almost every decade since the 1790s and earlier (new organic farms finally broke the trend in 2010). Almost all of the gradual but very long term decline in the proportion of the population engaged in farming is due to technologically driven improvements in farming productivity. But, the tobacco farming industry has collapsed in the last decade or two, and a lot of big U.S. farm products are heavily dependent upon federal subsidies (for much of recent history, 50% of the income of corn, sugar and cotton farmers came in the form of federal subsidies), in part, because their international competitor are also heavily subsidized. Tobacco, sugar and cotton are all predominantly Southern crops. Corn is predominantly a crop of the Great Plains. Ranching, which is a major part of farming in the mountain West, is less heavily subsidized, as is fruit growing and wine making which is a particularly large part of farm economies in Florida, California and Arizona, each of which has a larger than average percentage of people living in urban areas.

A rapidly growing, but much less familiar form of rural voter is someone who lives in a "exurb", which is a low population density area, usually adjacent or near a genuine suburb, and commonly home to affluent individuals stereotypically living on 5 acre "ranchettes" who either are willing to have a long commute in exchange for a less crowded rural lifestyle, or are retired, or can telecommute or otherwise work from home. This segment of the rural population includes a disproportionate share of people in the top 1% of income and wealth, respectively, and of the top 10%.

Another group of rural voters are those who rely on extractive industries like coal mining, oil and gas drilling, and the like for their livelihood. The coal industry is seeing huge declines as cheaper renewables, cheaper natural gas, and greater air pollution controls make it less attractive as a fuel, this is a long term trend that has recently accelerated and reached crisis proportions. The oil and gas industry has historically been a boom and bust proposition dependent on global oil prices, but has recently seen a huge boom due to fracking that has greatly reduced U.S. oil imports and has created demand for pipelines to make newly developed fracking based production available where demand is greatest.

Quite a large share of rural voters are elderly retirees or elderly farm economy asset owners who live mostly off rents. Often they settled in rural communities when they were economically more healthy (e.g. in a small town that relied on one factory that left or mine that shut down), but never moved away. For example, a significant share of my extended family consists of older relatives who live in towns listed in books like "the ghost towns of Ohio" and "the ghost towns of Michigan". These towns are very solidly Republican.

It is worth noting that while people under age 65 in the U.S. live in a heavily market dominated economy where poor employment outcomes mean poverty and a lack of access to health care, almost everyone over age 65 has most of their healthcare paid for by Medicare (a FICA tax financed, single payer system that pays providers more or less the same rates as private insurance companies and has few cost controls), more than half of their nursing home costs paid by Medicaid (which is stingy in how much it pays providers and moderately means tested), and receives enough of a guaranteed income from the combination of Social Security and SSI payments to keep the poverty rate for people age 65+ (even if they have no retirement savings of their own) above the poverty line, regardless of the state of the local economy. People in this age bracket are also most likely to own a home with a paid off mortgage and to have significant financial investments compared to all other age groups. But, people who own homes in rural areas have seen far less housing price appreciation than people in urban areas, so they can't afford to move from rural areas to urban areas because this would increase their housing costs so much. So, for seniors, there is an economic incentive to maximize their purchasing power by living in places with a low cost of living, and to stay in places with low housing costs if they already living in houses in those areas, because their income does not depend upon where they live (unlike non-seniors who earn less in rural areas removing much of the benefit from a lower cost of living). Essentially, the U.S. has a European style welfare state for all of its senior citizens, and one of the weakest welfare states in the OECD for people who are not senior citizens. While some of the programs that benefit seniors (SSI and Medicaid nursing home coverage) are means tested, the lion's share of this welfare state for seniors (Social Security and Medicare) is not means tested and is instead structured as social insurance.

A lot of rural voters in the hill country of the South particularly, but in small towns across the county, live in what amount to company towns where one or two modest sized factories provide most private employment. Everybody knows about the decline of the large, often unionized factories owned by big businesses, often in big cities, in the "Rust Belt" and the Northeast. Far fewer people realize that a significant share of the remaining manufacturing capacity in the United States has relocated to union unfriendly, small towns in the South, usually in fairly small enterprises that have supplier relationships with big name manufacturing companies but aren't big names themselves. Many of these towns were hard hit by the Great Recession in 2008, due to the general disruption to consumption caused by the initial real estate and financial market crisis that started this recession.

A variation on this theme are small towns centered around smaller military bases or military academies (public and private). Also, active duty military personnel at both the enlisted and officer level are disproportionately from the South in particular (around 50%), and Red States, generally, regardless of where they are stationed. As a result, veterans, including disabled veterans and veterans who have served in combat, disproportionately live in the South. It is also worth noting that the military is one of the most racially integrated employers in the United States. There is no big private business in the United States where such a large percentage of their workers spend a large share of their routine work days with other workers of different races as the military. The size of the U.S. military has decreased greatly since the end of the Cold War in 1989 (with a more than 25% of active duty personnel levels since the 1980s, and obviously a far greatly decline since Vietnam era peaks). Military spending on expensive major weapons systems like aircraft and ships and submarines built in large cities has grown much faster than military spending on personnel who frequently hail from rural areas (which has actually declined as military spending overall has surged).

Also notably, the military that has such a huge rural economy is basically a socialist economy. Access to resources is governed by bureaucratic decision making and politics, not market forces or profit margins or productivity. Service members have also no freedom to decide where they will live and work, and routinely get shuffled around contrary to their own wishes. Lots of basic economic needs are provided for in kind, rather than in cash. The cost of basic groceries and consumer purchases is subsidized through the PX system. Everyone has at least one guaranteed job per household, but nobody is allowed to quit. There is universal health care, dental care, and housing. Children in military families have access to military provided schools. Pensions and post-retirement benefits are very generous relative to the private sector. Active duty military personnel with larger families receive more compensation (including in kind compensation) than those without families or with smaller families. Income inequality among active duty military personnel is profoundly less great than in the general economy even after accounting for the non-monetary privileges of rank with economic value.

Another variation on this theme are small towns centered around one or more prisons (e.g. Canon City, Colorado). Prison populations grew steadily for decades until just a few years ago when declining crime rates (which have fallen since the 1990s) and state budget concerns led a movement towards "smarter" sentencing and controlling incarcerations rates. Incarceration rates tend to be higher in Southern states which are often more rural as well.

There are also a few kinds of rural voters who tend to be liberal leaning contrary to the usual trend, although they are a decided minority of the rural population:

* Residents of small college towns and research facilities and towns with notable boarding schools where colleges take the place of factories in a small town economy.

* Residents of small towns that rely on tourism and/or artists colonies and/or retreats for their economic well being (think of towns like Jackson Hole, Taos, Telluride, Martha's Vineyard, and Manitou Springs).

* Residents of small towns that are predominantly non-white (there are lots of predominately Hispanic small towns along the Texas border with Mexico, in New Mexico, in Southern Colorado, there are many Native American and Native Hawaiian towns in the American West, Hawaii and Alaska, there are a fair number of predominantly African-American small towns in the South).

* Organic farmers and legal marijuana growers.

* Solar utility operators.

* Park rangers and communities around national and large state parks, other than the farmers and ranchers in those communities.

Other Facts

The South was less industrialized than the North on the eve of the U.S. Civil War. Its economy was destroyed during the Civil War, and took further blows during the Reconstruction era at the hand of "carpetbaggers" from the North, particularly involving Northern banks providing financing to plantation owners who would pledge their land as collateral and often lost that land when they failed to repay the loans as agreed. Only in the last few decades has the South made appreciable strides towards catching up economically with the rest of the country from these setbacks and the "Deep South" is still decidedly behind economically even today as is Appalachia (for quite different reasons).

Appalachia's economy is a predominantly combination of near subsistence farming, coal mining, and small factories. Most of the region is in a state of serious economic decline and has been for decades.

Rural areas, in general, average about half of the per capita economic productivity of metropolitan areas. Indeed, there are a strong and predictable relationship between the size of a metropolitan area or rural region with a comparable geographic area, and per capita economic productivity. Almost uniformly, in every country on Earth, the larger the population of a metropolitan area or the rural equivalent, the more productive it is per capita, and the lower its population is, the less productive it is per capita.

Red States are overwhelmingly receive more federal funds than they pay in federal taxes, while Blue States tend to receive less in federal funds than they pay in federal taxes.

Unsurprisingly, if you think about it, rural areas tend to have little net migration into those areas (and few immigrants who are domiciled there) and urban areas tend to have more in migration and more immigrants. (If you have lots of migrants into your area, you cease to be rural quite quickly.)

Rural areas are generally stagnant or declining in population. Urban areas in some places are stagnant in population (particularly in the Northeast and Midwest) and in others are growing rapidly (particularly in the South and West). But, the shift from less urban to more urban areas while relentless and continuing for centuries, has taken place more slowly than most people realize.

More rural states tend to have more regressive taxes and lower taxes overall than more urban states.

In the South, there are substantial African-American populations in both urban and rural areas and the percentage of the population that is African-American is quite high compared to states outside the South. In the North, African-American populations are largely confined to large urban areas and their less affluent first ring suburbs, and segregated neighborhoods that are a legacy of pre-Civil Rights era patterns of housing discrimination remain the norm in older parts of non-Southern cities (although newer suburbs tend to be considerably more integrated than older neighborhoods outside the South). About half of the African-American population in the United States lives in the South, and the extent of the ongoing economic, family and cross-migration ties between the South and urban African-American populations in large American cities like Chicago, is greatly under-appreciated. In the South, essentially all African-Americans prior to the Civil War were engaged as slaves in agriculture and after the Civil War, most African-Americans continued to be engaged in agriculture because there was no other healthy sector of the economy to earn a living in. In the North, African-Americans trace their roots to the "Great Migration" and less intense versions of that movement of people before and after that wave of migration, mostly to industrial cities seeking factory jobs at the height of the U.S. industrial economy that declined starting around the 1970s and has continued to decline in employment but not productivity, partially due to automation and partially due to offshoring of jobs to lower wage, less regulated countries. The loss of urban factory jobs led to the collapse of the African-American married couple family structure as far fewer men has steady good jobs that allowed them to support a wife and kids economically (a pattern that less educated whites would follow a couple of decades later), and to the decline of Rust Belt cities across the Midwest and Northeast. The story of African-American migration to the American West is quite different as it wasn't as large and wasn't driving primarily by the pursuit of factory jobs that came in abundance and then left for good.

One implication of the different spatial distribution of people by race is that lots of metropolitan areas have de facto segregated schools, while Brown v. Board of Education and the cases that followed were quite effective in requiring schools in small towns and rural areas with racially mixed populations to be integrated, since they don't have many schools period and don't have nearly as great residential segregation into large nearly mono-racial groups of neighborhoods the way that many large cities do. Small towns and rural areas also generally don't have enough students to support significant choice options or charter schools within the public school system. Also, many non-Southern cities have a long traditional of Catholic K-12 schools sponsored by the Roman Catholic Church, subsidized by parishes, while the South which has few Roman Catholics also has few Catholic schools as a result.

A significant share of the gaps in income, education, crime and other socio-economic indicators between Southern states and non-Southern states in the U.S. is associated statistically with having larger African-American populations, although Southern whites are still lower in income, less likely to receive educations, and more likely to commit crimes, etc. than whites in metropolitan areas outside the South.

The cost of living is lower in most rural areas than in most urban areas, although part of that lower cost of living is attributable to subsidies of rural governmental functions like road and bridge maintenance and K-12 education by residents of more urban areas. As a result, lower incomes in rural areas imply less of a hit to purchasing power from disposable income than a crude comparison of nominal income between urban and rural areas would suggest. The biggest source of regional differences in the cost of living is the cost of housing which is much greater in healthy urban areas than in rural ones, although housing is also very cheap in depressed Rust Belt urban areas where populations are just starting to stabilize after several decades of declining populations.

Elite institutions of higher education are disproportionately outside the South and outside Red States, and students from Red States who attend these elite institutions frequently assimilate into Northern/Blue State culture and do not return to their home states. There has been long term brain drain (and plain old population shifts) from rural America to urban America more or less continuously since the 1870s, with the possible interruption of the Great Depression and World War II. In general, the most economically fit individuals tend migrate away from places that are economically weak, and the least economically fit individuals tend to continue to live where they were born.

White Americans without college degrees are much more likely to not marry and to divorce and to have multiple marriages during a pre-elderly lifetime than they were historically, while white Americans with college degrees are now more likely to marry and less likely to divorce than they were for the past several decades. This has been driven economically by basically 0% earned income growth for men without a college education since about 1970 combined with rising job insecurity and growing disability rates, accompanied by rapid earned income growth for women without a college education, combined with a rise in the tendency to marry someone with similar education. Women without college educations are dramatically less economically dependent upon their husbands than they used to be, while the economic dependence of women with college educations on their husbands remains high because both men and women with college degrees have seen surging incomes since the 1970s and most women with college degrees experience large income penalties for leaving the work force for a while to raise children while women without college degrees don't face those kinds of income penalties in their far less skilled jobs.

Rural areas have a larger proportion of jobs that don't require college educations than urban areas.

Rural people are far more likely to own firearms, especially long guns purchased primarily for hunting and protection from wild animals, than urban people, because it is much cheaper and easier to hunt and fish in rural areas than in urban areas. There is less of a rural-urban disparity in hand gun ownership because hunting and protection from wild animals are not factors in hand gun ownership. Also, crime rates are lower in rural areas than in urban city centers, and police response times are much slower in rural areas than in urban areas due to the lower population density which means long distances from a police station to the average crime scene.

Large urban areas have large immigrant populations spanning a range from very low income to very high income professionals and are vital to large urban economies. Highly skilled immigrants are a significant share of the work force in medicine, in academia, in engineering and in other technology industries, all of which involve jobs disproportionately located in large urban areas.

This trend is long standing and dates back to the late 1800s. The economic tendency of immigrants to work in large urban areas is one of the main reasons that large urban areas have much more religious diversity and many more residents who are neither WASP nor African-American, that rural areas. Catholic migration to rural areas was largely confined to the North and the West and largely dates to the 19th century, after which further Catholic migration to the U.S. was largely to large urban areas like all other forms of immigration to the U.S.

A number of refugee communities (e.g. in Saint Louis and Great Detroit and in Wisconsin) have migrated to Rust Belt cities where they have filled inexpensive neighborhoods largely deserted by the original residents and revitalized them as ethnic enclaves.

Rural areas have far more local governments and far more elected officials per capita than urban areas. As a result, far more rural people have run for elective office or held an elective office or know someone who has done so, and rural people have far more influence in a direct democracy manner over their local governments than people in urban areas. But, also, as a direct consequence of the larger proportion of elected officials, and also as a result of the lower rates of educational attainment in rural areas, elected officials in rural areas are far less "elite" educationally, socioeconomically, and in political and administrative competence than elected officials in urban areas, on average. Political activity is far more "professional" at the local government level in urban areas where there are far fewer governments and far fewer elected officials per capita, and a far greater supply of people who higher education and with high level managerial and professional work experience.

In addition to true local governments, many economic functions that are carried out by investor owned companies in urban areas are handled by consumer or producer cooperatives in rural areas. Rural phone companies and electric utilities, rural financial institutions, rural farm product marketing companies, companies that provide irrigation water, and lots of the companies that sell goods to farmers, for example, are all organized as cooperatives of either consumers or producers and run on a much more democratic basis than investor owned companies. This is a legacy of New Deal policies that has remained in place due to historical contingency and inertia.

Thus, no only due rural people have a greater democratic say in how their local governments are run, they also have a greater democratic say in how some of their key utilities and economic institutions and are far more likely per capita to serve on the governing boards of such institutions (even though, as in the case of governments, they have far less formal training and expertise in doing so than their urban counterparts running investor owned corporations that do the same things in urban areas).

Conclusion

A full analysis of the economic implications of these facts for the pocketbooks of rural v. urban people would take a long time and more space than a single answer would allow, but these facts suggest pretty directly some conclusions about which policies would and would not help rural v. urban people economically.

Social Security and Medicare Aren't Driving Deficits

Economist Robert J. Samuelson's op-ed in the February 5, 2010 issue of Newsweek offers up some simply facts about the projected federal budget deficit and then reached the wrong conclusion from them.

He notes that:

First, from 2011 to 2020, the administration projects total federal spending of $45.8 trillion against taxes and receipts of $37.3 trillion. The $8.5 trillion deficit is almost a fifth of spending. In the last year (2020), the gap is $1 trillion, again approaching a fifth: spending is $5.7 trillion, taxes $4.7 trillion. All amounts assume a full economic recovery. The message: there's a huge mismatch between Americans' desire for high government services and low taxes.

Second, almost $20 trillion of the $45.8 trillion of spending involves three programs—Social Security, Medicare (health insurance for those 65 and over), and Medicaid (health insurance for the poor).

Samuelson fails to make clear that Social Security and Medicare, which make up about $16 trillion of the spending, have their own dedictated payroll tax funding source. Not only do FICA and self-employment taxes cover the entire cost of Social Security and Medicare (with a combined distributional impact that is mildly progressive), these taxes generate a surplus that is used to fund other governmental programs, in exchange for which the federal government issues Treasury bonds earmarked for future Social Security and Medicare funding.

Looking At The Net Cost of Social Security, Medicare and Medicaid

The source of our budget woes look very different when you consider Social Security, Medicare and Medicaid were have integral funding sources other than federal general revenues attached to them. The net costs of these programs combined (calculated below) is about $3 trillion from 2011-2020. How does this change Samuelson's numbers?

First, from 2011 to 2020, the administration projects total federal spending of $27.8 trillion against taxes and receipts of $19.3 trillion. The $8.5 trillion deficit is almost a third of spending. All amounts assume a full economic recovery. The message: there's a huge mismatch between Americans' desire for high government services and low taxes.

Second, $2 trillion of the $28.8 trillion of spending involves three programs—Social Security, Medicare (health insurance for those 65 and over), and Medicaid (health insurance for the poor).

On a net basis, these big dollar programs represent about one-seventh of federal general fund spending over the next decade.

What Is Driving The Deficit?

How does proposed 2011 federal spending break out on a net of ear marked revenues basis?

Total: $2,276 billion

* Defense: $912 billion (including veteran's benefits and military retirements)
* Interest On The National Debt and Federal Employee Retirement Payments: $459 billion (including Social Security and Medicare Trust Fund interest payments)
* Income Security: $289 billion (e.g. SSI, Food Stamps)
* Net Social Security, Medicare and Medicaid Spending: $151 billion
* Education and Training: $122 billion
* Other Health Spending: $121 billion
* Transportation: $41 billion
* International Affairs: $65 billion
* Administration of Justice: $60 billion
* Other: $56 billion (includes natural resources, energy, agriculture, general science, general government operations, commerce and community development).

This break down also nets out unemployment insurance expenditures against earmarked FUTA payroll tax revenues, and nets out transportation spending against excise taxes ear marked for transportation.

In very round numbers, 40% of net spending is attributable to national defense, about 20% is attributable to past overspending, about 18% goes to help the poor and prepare people for employment, about 12% goes towards health care, and about 10% goes towards everything else.

Since we are stuck with past spending, the roughly one-third this spending that is driving the deficit comes entirely from the other 80%.

Basically, we have taxed ourself less lightly the necessary to pay for spending which is going towards, in roughly equal parts, spending on national defense and on spending to help the needy secure the necessities of life, education and health care. Medicare Parts B, C and D, and Medicaid are important parts of the second component. Social Security and Medicare Part A are not a drain on the budget at all.

The obvious solution does not include any major tinkering with Social Security or Medicare Part A. Instead, the obvious solution is some combination of tax increases, reduced defense spending, and cuts to programs to help the needy secure the necessities of life, education and health care.

Defense spending related to active wars is obviously problematic to cut, but a very large part of the defense budget has nothing to do with pending military action.

Given these options, increased taxes on those with an ability to pay is clearly more just than big cuts to programs to help the needy secure the necessities of life, education and health care. The only place were it seems plausible that there might be savings important enough to matter in the scheme of the larger budget is in efforts to control the rising costs of health care.

So, there you have it. My recommendations on how to deal with the deficit:

1. Increase tax revenue by about $740 billion a year, less the amount of any cuts that can be made in items two and three. As explained below, this probably boils down to about $640 billion a year in new tax revenue.

2. Cut defense spending in areas unrelated to pending wars. I would suggest that a $75 billion cut would be a reasonable starting point to attempt to secure.

3. Control federal health care costs. Total federal spending on health care (including Medicare Part A spending) is about $500 billion. I would suggest that a $25 billion cut would be a reasonable starting point to attempt to secure.

I also don't think it is important to close the deficit in a single year. A realistic plan to do so over three years might involve (with cuts and increases in each year relative to the baseline year, not cumulative):

Year One: Increase Revenue $220 billion, cut defense spending by $25 billion, cut federal health care cost by $5 billion.

Year Two: Increase Revenue By $440 billion, cut defense spending by $50 billion, cut federal health care costs by $15 billion.

Year Three: Increase Revenue By $640 billion, cut defense spending by $75 billion, cut federal health care costs by $25 billion.

Selective cuts elsewhere (e.g. farm subsidies) could reduce the need to raise more revenue.

Revenue Details

Where would the increased revenues come from? Mostly from cutting items described as "Tax Expenditures" (Table 19-1). Some big items, with their 2011 budget year dollar estimates include:

* Deferral of income from controlled foreign corporations: $34 billion
* Deferral taxes for financial firms on certain income earned overseas: $6 billion
* Inventory property sales source rules exception: $3 billion
* Graduated corporate income tax rates: $3 billion
* Capital gains tax rate preferences: $25 billion
* Step-up basis of capital gains at death: $25 billion
* Exclusion of interest on life insurance savings: $27 billion
* Tax free interest on housing and mortgage bonds: $2 billion
* Exception to the passive loss rule for rental losses: $10 billion
* Accelerated depreciation on rental housing: $14 billion
* New technology energy credit: $1 billion
* U.S. production activity deduction (Section 199): $18 billion
* 50% expensing of liquid fuels refinery equipment: $1 billion
* Excess of percentage over cost depletion: $2 billion
* Special Blue Cross/Blue Shield Deduction: $1 billion
* Additional deductions for the elderly and blind: $3 billion
* Energy production and investment credits: $1 billion

These would collectively raise $173 billion of 2011 year revenues.

Other tax revenue raising changes I would propose (not specically scored for cost):

Investment Income
* End the qualified small business stock capital gains tax rate preference.
* End preferrential tax rates for "qualified dividends."
* End graduated tax rates for the income taxed to trusts and estates.
* Lower the maximum amount that may be considered for pension contributions through employer plans, 401(k) plans, Keogh plans to include only income subject to full FICA taxation (or the self-employment tax equivalent), and further limiting this contribution to $10,000 per year (adjusted for inflation) for the benefit of any given employee.
* Cap combined contributions to employer plans, 401(k) plans, Keogh plans, IRAs, Roth IRAs, Education savings accounts, pre-paid tuition plans, medical savings accounts, HSAs and similar tax preferenced saving options to $15,000 per year (adjusted for inflation).
* End 1031 exchanges of real estate.
* Include otherwise tax exempt municipal bond income in excess of $250,000 a year in income.
* Reduce the charitable deduction allowed by the amount of any tax exempt municipal bond income of the person making the charitable deduction.
* Tax the passive investment income of otherwise tax exempt organizations in the same manner as Section 527 political organizations (i.e. reduced by connected expenses at the corporate tax rate in excess of a $100 exclusion), except where the sole purpose of the organization is to invest on behalf of others who can be taxed upon receipt of the income.

Personal Expenses
* Ending the mortgage interest deduction for second homes.
* Limit the mortgage interest deduction for first homes to $75,000 per year (adjusted for inflation).
* End the deduction for business meals and entertainment.
* Limit the deduction for first class travel expenses to 50%, or the documented cost of business class travel, whichever is greater.
* Limit the deduction for business lodging to $250 per person per day (adjusted for infliation).
* End the "parsonage allowance" exclusion from income
* Repeal the special hobby loss rule for horse racing.

Business Property Deductions
* Limit the cumulative depreciation/Section 197 deduction on property that is subject to a loan secured by a security interest to no more than the purchase price of the property less the outstanding principal balance on the loan at the end of the tax year in question.
* End depreciation of real estate.
* End inventory valuation on a LIFO basis for tax purposes.

Information Reporting
* Require payments to a non-corporate person, which would have to be reported on an information return such as Form 1099, to be reported on the same form if made to a corporation.
* Disallow business expenses of $600 or more not supported by a 1099.
* Require information reporting of all distributions (however characterized) to business owners or their spouses, and to lenders (in amounts more than $600 per year) from closely held entities.
* Disallow rental expenses for real property for which a complete address is not provided.
* Include on every individual income tax form: "Did you pay residential rent at any time during the year? If so, provide each address where you lived and paid rent for a month or more, during [year], if any." Index this information with Schedule E returns. Provide a $500 reward (per property, split if there are multiple reporting tenants, but in no case less than $50 per taxpayer) if this disclosure results in an increase in a landlord's income after an audit.

Non-Income Taxes
* Reinstate the estate tax at 2009 levels.
* Increase federal gasoline taxes to 40 cent per gallon from the current 18.4 cents per gallon to eliminate or nearly eliminate general fund expenditures for roads and bridges.

Calculating The Net Cost Of Social Security, Medicare and Medicaid

The Net Cost of Social Security

In 2008, the Social Security portion of payroll taxes (the Old-Age and Survivors and Disability components) exceeded disbursements by about $55 billion, before considering income of $18 billion from taxing Social Security benefits and $114 billion from interest on an accumulated $2,366 billion in the Social Security Trust fund. Social Security has drawn less than the taxes allocated in all but a few years since it was established. In 1980, one of the worst years in its history, it collected $3.5 billion less in taxes than it disbursed, and even in that year it was owed $2.4 billion in interest on the Treasury bonds held in its trust fund, for a net deficit.

Benefits from Social Security are paid to about 51.8 million people (as of May 2009). About 36.2 million of the beneficiaries are aged sixty-five or older. About 3 million are retired workers between the ages of sixty-two and sixty-five who received benefits early in exchange for a smaller monthly benefit payment. About 7.3 million beneficiaries are disabled. About 5.4 million are survivors or dependents of beneficiaries who are under the age of sixty-five (mostly spouses of retirees, disabled widows or widowers, spouses and children of disabled workers, and orphans).

On average, beneficiaries receive a positive, but low return on their payroll tax investment in the system. The return on investment is higher for lower income people, and lower for higher income people. The people least likely to receive a positive return on investment on their payroll tax investment are people with high incomes who never marry.

No other government program lifts more people out of poverty.

The Net Cost of Medicare (HI)

Medicare (Hospital Insurance) a.k.a. Medicare Part A, pays for a large portion of a few months of hospital care and post-hospital care. The beneficiary group overlaps neatly (but not quite precisely) with Social Security beneficiaries. The biggest difference is the Social Security early (i.e. pre-age sixty-five) retirees aren't entitled to Medicare.

The Medicare system (Hospital Insurance), is a bit more complicated in its financing than Social Security. It has both payroll tax funding, and premiums that are charged to participants, as well as interest on its trust fund that amounted to $17 billion on a trust fund balance of $319 billion in 2008, and earns money from the taxation of benefits to the tune of $12 billion in 2008.

There was a Medicare surplus, even excluding trust fund interest, that was invested in Treasury bonds and used to pay general fund obligations of the United States, every year from 1999-2007. In 2008, Medicare program revenues exclusive of interest and money from the taxation of benefits fell short of disbursements by about $29 billion, although after the interest payments and taxation of benefits, it was due on its trust fund Treasury bonds, the Medicare program's deficit was just $0.5 billion.

The Net Cost of Social Security and Medicare (HI)

Taken together, Social Security and Medicare Hospital Insurance programs generated $42 billion more in revenues than they disbursed in 2008, exclusive of trust fund interest and $30 billion of taxes on benefits. The combined Social Security and Medicare trust funds amount to $2,685 billion of Treasury bonds that generate an additional $131 billion in revenue.

The combined Social Security and Medicare program has generated more in revenues than they disbursed, exclusive of trust fund interest and taxation of benefits, in every year from 1990 to the present. In 1980, the combined system cost $4.4 billion exclusive of trust fund interest and taxes on benefits, and just $0.6 billion paid for with trust fund withdrawals after accounting for interest payments on trust fund balances earned, and this was promptly repaid to the trust funds for the system.

The Social Security portion of the system has in a quite stable track. It will start to need its trust fund interest to pay its expenses only starting in 2017 (i.e. not at all for the first seven years of the period Samuelson reviews), will not draw on Social Security Trust Fund prinicipal until 2025 (well after the period that Samuelson reviews) and will not exhaust the Social Security Trust Fund principal until some time in the 2042-2052 time period, depending upon the long term economic and actuarial assumptions used. Of course, even tweaks in benefits or payroll taxation could significantly extend these numbers.

Medicare Parts B and C

Medicare Part B is medical insurance, and Medicare Part C is a program in which people eligible for Medicare Part B get similar benefits provided through an HMO.

In 2008, the total premium revenue for Medicare Parts B and C was about $50 billion. Interest on the Medicare Part B and C Trust fund was about $3.5 billion in 2008, and had a balance of about $59 billion at year end. Benefits and administrative expenses for Medicare Parts B and C cost $183.3 billion in 2008.

The general fund expenditure cost of Medicare Part B and C benefits and administration exclusive of interest income was about $133.3 billion in 2008.

Medicare Parts B and C combined had 41.7 million beneficiaries in 2008 (3.2 million Medicare Part A beneficiaries did not participate in Medicare Parts B and C). The average benefit per beneficiary in 2008 was $4,322.

Medicare Part D

Medicare Part D, which started to operate in 2006, is a benefit that provides part of the cost of prescription drugs for participating Medicare beneficiaries, who pay a premium that averages $338 per year, depending upon the provider chosen. Medicare Part D provides an average benefit of $1,517 per beneficiary. There were 32.3 million Medicare Part D beneficiaries in 2008.

In 2008, the total benefit cost including costs of adminstration for Medicare Part D was $49.3 billion. This was funded with $5 billion in premiums, $7.1 billion in transfers from state governments, and $37.3 billion of federal general fund revenues. The state government contribution to Medicare Part D approximates a part of the Medicaid expenses that the states were relieved of by the Medicare Part D program.

SSI

The Supplemental Security Income program is a means tested federal welfare program funded out of the general fund budget for the "needy aged, blind and disabled." This program has about 7.6 million beneficiaries, mostly low income Social Security beneficiaries, at a cost of $49 billion dollars a year. The cost of the SSI program is less than the pre-interest/pre-benefit taxation amount of the Social Security program's surplus.

Samuelson's Social Security number doesn't include SSI, so we won't either, but it is linked to the Social Security program so I include it for completeness.

Medicaid

Medicaid accounts for about 17% of the combined expenditures for Social Security, SSI, Medicare and Medicaid. In the 2011 budget, that is about $149 billion of federal spending. The federal and state governments contribute roughly equal shares to the cost of the program.

Bottom Line

The bottom line breaks down roughly as follows:

Social Security and Medicare Part A:
* Net Federal Revenue $42 billion
* Taxes On Benefits Revenue $30 billion
* Trust Fund Interest Income $131

Medicare Parts B and C:
* Net Federal Revenue ($133.3 billion)
* Trust Fund Interest Income $3.5 billion

Medicare Part D
* Net Federal Revenue ($37.3 billion)

SSI (Not included in total, for informational purposes only).
* Net Federal Revenue ($49 billion)

Medicaid
* Net Federal Revenue ($149 billion)

Total Net Federal Cost (After Considering Trust Fund Interets Income And Taxes On Benefits, From Social Security, Medicare and Medicaid): $155.1 billion

The Total Net Revenue is about 10% of proposed total spending for 2011 on these programs. If one were to take 10% of the $20 trillion figure offered by Samuelson, you'd get $2 trillion.