Why Picking the President is Like Picking a Stock

GDP, or Gross Domestic Product, is the total amount of goods and services that every working person produces in this country each year.

In 2007, GDP was $13.671 trillion dollars. That means that all of our efforts - your's included - produced $13.671 trillion dollars worth of output.

In a previous piece, we discussed the historic relationship between the U.S. Budget and GDP: Since 1970 (or the "modern financial era" of record keeping) Uncle Sam has taxed its citizens and corporations an amount that averages out to 18.2% of GDP each year.

That means the annual haul from income taxes, corporate taxes, estate taxes, sin taxes (and every other tax you could think of) that Uncle Sam takes from us each and every year adds up to roughly 18.2% of GDP.

But before we go forward, let me emphasize an important point here: Our economy is able to grow at the fastest rate of any mature, industrialized economy (even with cyclical hiccups every four years or so) because every party that has held power for the past 40 years - whether Democrat or Republican - has never taxed Americans at a rate exceeding 20% of GDP.

Indeed, the optimal rate of taxation for our country is really well illustrated in the table below:

click to enlarge images

Revenues by Major Source, 1980 to 1985, as a Percentage of Gross Domestic Product (Sources: C.B.O.; Office of Management and Budget)

For those of you old enough to remember, in 1982 Democrats and Republicans joined forces to lower taxes for all Americans. The net result was that taxes as a percentage of GDP fell from an average of 19.26% to 17.4%, a drop of almost 10% for American taxpayers.  And as many of you also know, Americans spent the extra cash well, propelling the economy to its greatest expansion in the post-war period.

One of the biggest knocks many people have with this economic period of time is that we as a country weren't as disciplined on the spending side of the equation. I couldn't agree more. Instead of cutting taxes and spending, we just cut taxes and maintained, if not increased, our spending.

How? Through borrowing insane amounts of money which increased our national debt to obscene proportions. Unfortunately for our grandchildren they will have to pay that money back one day.

And that brings me to my main point today: How to pay for the things we want as a nation while giving a stronger country to our children than we inherited from our parents.

Let's assume that we are disciplined enough to not allow Uncle Sam to take more than 18% of GDP in taxes on any given year. And because of that discipline we are able to maintain the growth of GDP at a 3% rate, a decent growth rate for any mature, industrialized economy. 

By 2010, our GDP would have grown to $14.938 trillion from $13.671 trillion in 2007, an increase of $1.2 trillion dollars. Having our GDP grow by $1.2 trillion dollars over the next four years would mean that we would increase the amount Uncle Sam takes in taxes by a whopping $216 billion dollars (assuming Uncle Sam taxed our citizens at 18% of the increase in GDP).

My point is that to actually give a stronger nation to our children than the one we inherited from our parents, we're going to have to be disciplined about taxation and borrowing.

If we want our economy to grow at the best rate possible (to create the most amount of jobs possible), we're going to have to limit the amount that Uncle Sam taxes from its citizens to no more than 18% of GDP each year.

Furthermore, whatever programs we want to initiate, we're going to have to be disciplined on the spending side of the equation. That means that to add any program we decide as a nation we want to add, we're not going to be able to borrow money from China to add it - we're going to have to make the kinds of choices and sacrifices that every working American family makes each year when living on a budget.

(This isn't a Republican thing or a Democrat thing. This is a grandchildren thing. This is an American thing. This is a "greatest-generation" type of thing. If you can hang with that premise, I encourage you to keep reading.  If not, you may want to stop reading now...)

Are you ready? Here's how the U.S. government spends our money:

Outlays for Major Categories of Spending, 2005 to 2007, in Billions of Dollars (Sources: C.B.O.; Office of Management and Budget)

As you can see from the table above, our government has total outlays of $2,730.2 trillion in 2007. Here's a breakdown of exactly where it went:

2007 Discretionary Spending Outlays, in Billions of Dollars (Note: Discretionary Spending is the amount of money that can be spent at the discretion of our government each year. This includes defense, domestic and international programs; Sources: C.B.O.; Office of Management and Budget)

Outlays for Mandatory Spending in 2007, in Billions of Dollars (Note: Mandatory Spending is the amount of money that cannot be touched by our government each year. This includes spending for Social Security, Medicare, Medicaid and other social safety net programs; Sources: C.B.O.; Office of Management and Budget)

As you can see from the table above we're going to have to cut from our existing programs to pay for the kinds of things we want to pay for. And that's cool - it's just a function of deciding what type of nation we want to be.

But make no mistake about it - decisions must be made.

For example, the easiest thing to cut would be defense spending. Trimming that down by 50% would give us roughly $274 billion dollars in extra money. But remember - last year, we borrowed almost $170 billion dollars.  And if we are truly disciplined about leaving our grandchildren a better nation than the one we inherited, we wouldn't borrow money. That means that even if we cut our defense spending by 50% we would only free up $100 billion dollars if we agreed not to borrow any more money.

(As one of you pointed out, we do not like a "guns and butter" policy. I couldn't agree more - we simply couldn't afford it).

So it's tricky, but like I said we can do it. We're Americans. We can do anything.

Now that you have some facts in front of you, I'd love to hear your thoughts on what programs mean the most to you (universal health care, free education, etc.) and where you would like to cut from the budget above to pay for them.

Feel free to have fun with this while you're thinking about it. The coolest thing about this is that we could all play President without ever having to run for office and deal with living life in a fishbowl.

Comments

[investor88:]

Dylan in this article is calling for responsible government and restraint in spending. We may yet see some national responsibility emerge in future years but such change in national behaviour is likely only after a country goes through a deep recession like those of the 1930s or the mid 1970s. If the current period of economic difficulty morphs into a deep recession then we can resonably expect change in America; if America muddles along with government bailouts here and there and spreads out the pain Japan style, we cannot expect human behaviour to change. All in all hope for the best, prepare for the worst. It is worth noting that America prospered from 1982-2000 in no small part because of the period of suffering in the 1970s.

2008 Sep 07 05:24 AM

[bq:]

very good article! where would the freddie/sallie bailout hit this analysis?
seems like higher inflation and unemployment would also have an impact. would be cool to have some objective forecast numbers for 2009 to identify/quantify the big issues for the next couple of years.

if the govt looked at budgets the same way we have to in the business world, we might be able to make some progress on being better stewards. just getting agreement on "no new borrowing" would be a great start.

2008 Sep 07 10:15 AM

[Anton Wahlman:]

This is very simple. Our government is too fat and needs to get on a diet. The government does all sorts of things that are unconstitutional, such as social security, medicare, medicaid, you name it. The Federal government spends some $3.1 billion per year of which The Pentagon is some $650 billion, or about 1/5th. Add some overhead, and we could cut the size of The Federal government by probably close to 75%. Look at the income and capital gains taxes in Hong Kong, Estonia, Albania and other places where economic growth has been strong in the last few years -- nobody should have to pay more than 10% to the government.

2008 Sep 07 11:41 AM

[fireball:]

anton wahlman
thank you for your post. be careful my friend. you make perfect sense. a dangerous attitude these days.

2008 Sep 07 01:59 PM

[Agreement:]

Which "government"? I recall from a civics course that we have about 5,000 governments in our U.S. republic -- states, cities, counties, school, transit and other kinds of districts, all with taxing power to pay for the increasingly expensive services we demand more and more of and the jails and prisons we can't seem to get enough of. Are we overtaxed and under-represented or undertaxed and over-represented? Either way, there seems to be agreement that economically we're overextended.

2008 Sep 26 12:33 PM