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Keeping Track of Entitlement Dollars

February 26, 2013

Keeping Track of Entitlement Dollars with Figures

Economic Growth and Productivity

Imagine you are looking into the window of a clothes-dryer F1 and items are tumbling by. Instead of clothes you see dollars and tagged goods and services. It appears that the dollars are chasing the goods and occasionally a dollar catches a good and it drops from view. Every item in the dryer is something that was produced and is in the market waiting for a buyer. Every dollar has come from work that produced the goods. When a dollar and an item “drop”, something sells, space is opened for making a new item and generating another dollar for future purchases. The dryer illustrates how an economy works and how growth occurs.

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In economic terms the production within a society is the GDP or gross domestic product. This measure attempts to sum up the value of all goods and services provided and sold to domestic and foreign markets. A dynamic economy grows by producing more and more valuable goods and services and selling them.

Increasing worker productivity, more output from less resources, keeps the price below the perceived value so that sales grow in an open market. Person A makes something and sells it to person B who does a service or otherwise has funds to buy from A. The economy grows with more jobs and more money in circulation as high productivity lowers the cost of basic needs and opens opportunity for discretionary spending.

Taxation and Government Spending

When the government collects something, a tax, from the productive worker, the worker has less to spend on something else made by another productive worker and thus a job may be lost.

In a democracy, each worker would accept that a part of his productivity should flow from him to his government. The government may spend the money for the good of all including the worker, say by building a road, teaching worker skills, adding farm irrigation systems, and in doing so the government creates a productive job. The added infrastructure can improve productivity and feed a growth cycle. In this case the new job, financed with tax payer money, can have a synergy that lifts many workers and creates jobs. The irrigation project for example may open new farm lands and offer new production at declining cost.

Voters in a benevolent society, in which most citizens have income beyond that for basic needs, may approve taxation measures to support disabled or less capable workers so that everyone can have a basic needs standard of living. Better worker health, housing, and nutrition could add more productive workers to the system.

The ideal way to lift the economy and add jobs is to grow demand by raising productivity and lowering cost. When the government spends money, the economy grows by two forces: 1. Possible higher productivity leads to lower cost to make competitive products for domestic sale or export to world markets, and 2. The government cash flow to the workers puts more dollars in the system chasing goods, raising the domestic demand for goods and driving job creation.

As an increasingly large number of jobs are created by the government many jobs only marginally meet the goal of creating higher overall productivity to lift the economy.

The government may need to spend the tax money “defensively” in a way that does not add to productivity but avoids a downside event— foreign invasion, highway robbers, airport bombings, or a poor folks revolution. In economic terms, every job could be sorted into productive and defensive and the defensive jobs would be removed from counting toward GDP. In an imperfect world, these jobs are certainly necessary; however, since nothing new is produced and marketed, they are a drain on the economy relative to jobs which add goods and services. These defensive jobs do increase money flow, add buyers, and raise demand, but since nothing new is produced, the average standard of living will be lower relative to an ideal society, a paradise, where defensive measures were not needed.

The government may spend money on foreign aid as a protection against loss of world stability and possible loss of trade. These expenditures will not all create US jobs and some of the money spent will leave the circulating system. The money flow out of the system will directly reduce domestic jobs and lower standards of living.

The government may interfere with the supply and demand of goods, services, and labor by spending the collected tax money in a way that adds no productivity or has “negative productivity”. A farm subsidy may flow taxpayer money from productive workers to a rich farm owner who then hires no one and actually cuts production to support a market price (in the goal of lowering the farmer’s risk).

The government may provide many basic needs to the poor and create incented demand for some items. “Special cash” for certain items, food, housing, health care, child care, will inflate the cost of these items for every buyer relative to the free market cost. When the special cash is spent, the government will need to tax more or borrow money to redeem the vouchers and pay real cash to the seller.

At some point the economy may breakdown when economic growth, the real productivity growth does not raise enough new tax revenue to fund the existing level of government spending. The backup plan is to keep borrowing money. Everyone can still get paid as shown in the chart, but without a new direction of funds to add productivity, the economy will not magically grow. Borrowing will be a dead end street.

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While the “special cash” spending created more demand it may also reduce labor supply. When the special cash provides for many basic needs, some workers may choose not improve their skills and do productive work to improve their standard of living. If the threshold level of support is higher than the market pay rate for certain jobs, a job will be lost as no one will do that job for the market rate. If the job is essential, picking a crop or collecting garbage, the pay rate for the job must be increased to get workers. Higher pay adds to the cost to produce the goods which can be viewed as lost worker productivity or more correctly a price-value adjustment.

In summary, all money removed from the system by taxation in the first cycle lowers the standard of living for the individual taxpayer, a productive worker who has less to spend. The recirculation of the tax money to gainful projects can generate increased productivity through investments in better infrastructure or the money can be just handed out for no work-unemployment benefits or special cash. Increased productivity increases the overall standard of living, while re-circulating the collected money for no production lowers the standard of living.

Which Jobs are “Productive”? Running the Legalistic Society

The operators of the legal system, the attorneys, the judges, and all of their facilities are funded from either taxes, insurance payments, or directly from the productive worker. Every dollar for the legal system is taken from the production dollars and effectively spent for “defensive measures” with NO REAL productivity gain. In effect, this “cost of doing business” lowers the standard of living for the whole system, while creating a high standard of living for the best players of the legal system.

In an open market workers will develop their skills to improve their productivity and earn a higher standard of living. Currently, the highest standards of living can flow to the “masters of defensive measures”, who provide protection for the productive workers. Does this seem like a mafia extortion operation? Nothing new is produced by “defensive” workers, but without them the worker’s risks the loss of personal assets is too high to accept. “Pay or I’ll break your face.”

As with all money removed from the production system, the overall standard of living of the society is lowered by the deductions for “defensive workers”. As the legal system drives up the downside risk, the risk of losing all of one’s wealth, the cost of protection increases with an increasing drain on the productivity and the average standard of living.

The elected officials can control the laws and support programs that funnel money into certain businesses outside of an open market. While there is still competition to hold the very lucrative jobs, the result can be viewed as a “royal society” that acquires much more wealth than the average productive worker.

In a cycle of payments for insurance and legal fees, the average standard of living is driven down. As when the tax collector came, the worker had to accept that he would have less to spend. Now the worker needs protection from the legal system and effectively pays a tax that ultimately flows to the “royal society”. Special cash also adds a burden to the worker who pays inflated prices for goods that are being chased by special dollars.

As an example, the worker wants to have the valued service of a doctor. In a simple market, he would pay a market rate for his care. The best and the brightest would become doctors and be fairly compensated within that market.

In an evolved legal society, the worker must buy insurance because the cost and downside risk have become too high. The doctor buys insurance because the laws create high downside risk for him, too. The productive worker is now paying for the doctor’s productive work plus an assessment of roughly 30% that is funding the insurance and litigation cycle.

When the government is the largest consumer of health care via care for retired workers, care for the poor and the disabled, the taxpayer-worker is now caught in a double cycle. The government as a big buyer is driving up cost. This requires more taxes or borrowing to support the citizens who are receiving the health care and to pay the care provider plus the money for legal system protection.

If this has all been mind boggling, we can return to stare at the clothes-dryer, Figure 2. We now see that the dollars are smaller to buy goods and services which grow positive production jobs. Some money goes to “def” buying defensive “goods”. They are MUST buy items– insurance, police services, local taxes, and legal fees. The economic growth is lower and so the “events of dollars catching goods” are less frequent. The economy is slowing. Tax revenues are falling and only the red borrowed dollars and yellow special use cash are keeping it from coming completely to a halt.

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When we look at the present state of the US economy Figure 3 it gets even more complicated!

 

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Conclusion, if Any

The maze of government spending, constant printing of checks and funding of vouchers and EBT cards is the common view of “entitlements”. The story told herein sees a broader picture of entitlements to include all of the second tier recipients of the government cash flow. These folks cheer for debt reduction while not seeing themselves as getting hand outs.

  1. Reform of spending with the goal of improved economic growth needs to take on a larger program of change and overcome significant resistance from the lobbies and beneficiaries who do very well on their cut of government spending.

2. The idea of defensive spending needs better ties to the real risk that is avoided so spending decisions reach a value balance with the goal of economic growth from infrastructure

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