Why do governments get into debt?

So now you're back to your 1%? Like I keep asking, why can't you provide just a single root problem of the middle classes? Just one will do for now.

First you say your middle class wages have stagnated which is not a root problem that can be solved. Then I ask you if your middle class don't like their wages and your answer is to talk about the 1%?

You have no clue what percentage of the middle class have taken steps to acquire more education and skills yet you complain about their wages?

It is clear from your diatribes on PF that you despise the wealthy for their successes and riches...

 

Yes, the money will move to the best ROI and there is no need to vilify those who take advantage of the situation to capture all the economic growth.

However the US has adopted a tax policy that encourages investors to put their money into speculative market gambling which, conversely has increased the relative risk in the type of direct investments that would bring wider economic growth. A capital gains tax would be sufficient if the tax consequences of market speculation was a bit greater than the tax consequences of more direct investment. Raising the capital gains tax to the same level as other income or higher would regenerate the flow of investors monies into the type of more direct investments that have historically generated wide economic growth.

This would also go a great way towards tying government revenues to economic growth sufficiently enough for the government to begin engagement towards a fiscally responsible future. To continue down the current path for much longer will be a disaster for all but the wealthy, whose wealth will continue to grow while the rest of the economy stagnates and the middle class continues its long slow decline into poverty.

From a historical economic perspective it is nothing less than another repetition of the same old syndrome that has played out at least a dozen times in the US economy over the last 150 years. It is so regular that it has garnered a name, the business cycle, which some economists consider an act of God.

What really happens is that savings are attracted to the speculative markets, which produce fabulous returns compared to any other investment, which causes the market to grow even more, which attracts even more savings, which eventually starves the rest of the economy from the borrowing it needs to continue to grow. Businesses become increasingly unable to find financing. Growth plans are put aside along with wage increases and new hiring. Meanwhile the population continues to grow so unemployment rises and employers take advantage to break unions and reduce wages as much as they can. The median income begins a decline and that causes consumption growth to slow. The general economy stagnates.

Meanwhile the speculative markets continue to rise but become more and more volatile as more and more money chases ever greater and faster gains that become increasingly more risky. In the 1990s the biggest returns for speculators could be found in Asia, which was forced to open its financial markets by the WTO. The huge flows of money into Asian economies created a bubble of over investment that collapsed in 1997 when fleeing investors demanding currency exchange overwhelmed the central banks reserve capacity. Speculative money flooded from Asia into the US tech industry, which collapsed a year later.

In the early 2000s the investment community found a hole in the heavily regulated, bank dominated US mortgage lending market, tiny non-bank mortgage lenders were regulated only by the SEC, whose only remit was to ensure that any securities they sold to fund their operations actually contained real mortgages. All that speculative money sloshing around the planet looking for the next big thing had found a new place to play, one that dwarfed everything else and could play out for years. Thus, the US housing bubble began. Others turned to the EU, flooding the lightly regulated mortgage markets in the UK and Ireland and Spain.

The result of all that money flooding around the world was, and is bubbles. The vast flood of speculative money created a bubble of over investment in property markets in the US, pushing up prices and vastly increasing the risk of mortgage lending for everyone. Then the speculative money left and the sector that generates 40% of all US economic activity suddenly collapsed, and took half the accumulated wealth of the middle class with it.

I do not see accumulations of wealth as necessarily a bad thing but when it becomes apparent that letting $100sBillion just slosh around the planet chasing the best ROI regardless of the economic and social calamities that it creates, something should be done to heartily discourage the people deciding to do this from their disregard for others.

If those with wealth refuse to behave responsibly to those their actions impact they do not deserve anything.

 

And I keep asking you, a root problem of what? The economy?

The root problem of the middle classes is that they are getting a smaller and smaller share of the nation's income and wealth and their incomes have stagnated.

Why isn't it? Why shouldn't the middle class share in America's properity. It would only *not* be a problem is your a 1% apologist, which of course is right up your alley.

You asked me if I was saying that. I said no such thing. I asked you a question back about the 1% to show you how silly your question was.

You tell me what % of the middle class are satisfied with their wages. My guess is we will see a large percentage that are not.

More people are getting educated today than any time in history, a trend that has continued over the past 30 years. So what?

It is clear from your diatribes on PF that you despise the working middle class, and are only interested in increasing the share of income and wealth taken by the 1%.

 

A person has an idea, gets a company going, and can't go any further without financing, so sometimes the option is to go public. Microsoft, Google, Facebook, etc. are in this category. So the public invests in the company, taking ownership in the form of stock shares...now, how does the investor obtain his payback? His payback comes from selling his stock assuming the stock price has risen above commissions and fees and taxes, etc. Who can he sell his shares to...another person or company. Now if you remove this option of a company selling shares, then how can these companies raise the money they need to reach their potential? Banks and/or a handful of private investors cannot or will not come up with a billion dollars. IMO all of this is a great thing in the USA! Sometimes a company sells more stock to raise capital and sometimes they buy back stock...again all of this is great. So whether we buy a lotto ticket, or property, or a stock certificate, all of them carry risks and all of them have 'potential' for payback with interest. Lastly, Americans demand the highest returns in their stock funds, retirement funds, pensions, etc. and speculative investing in the stock market has been one of the solutions. I've always said one of the true problems is that we don't have a safe place to store cash and earn interest...FDIC only insures $250K and interest varies greatly from 0% to whatever the few good times provide. We can stick cash in US bonds but this doesn't work for most people. But if we did have a way to save more while earning some decent interest, more people would sock away their cash...however this means the cash is not being invested with those fledgling companies and other ways which bring such benefit to society. Lastly, all of that cash would not be in stocks and bonds, etc. if there were better places to invest...but there are not without great risks. And we can't really force investment because it only works if there is demand for the products and services and right now the economy is telling me that people don't have another dime as consumers...

 

People 'having a smaller share' of something is not a problem? You drive a Ford Pinto and I drive a Porsche; how can this be a problem? Do you want me to sell the Porsche and give you some of the proceeds so you can buy a different car? Your Pinto serves the identical purpose as the Porsche but you believe you must have something different than a Pinto and that the cash will come from me? Similarly you cannot compare your $18K income to my $180K income because there's nothing to compare! We both achieved what we achieved based on our personal efforts; if one person did not achieve what another person achieved, seems to me all the solutions belong to the person wanting/demanding more.

What you're really saying I believe is that millions of Americans simply cannot put forth the effort to acquire the necessary education and skills to secure their dream job, so instead of reaching for the brass ring, it's easier and what 'morally responsible' for others to share their earnings? What makes those who succeed great for society is that they put forth the effort to meet the challenges of life. Seems to me the root problem is how do we encourage all of those who perceive they are failing to do better? If you're talking about jobs, then more education and skills increases the earning potential...this applies to both those unemployed and those currently working. Relocation is necessary to be located in job producing areas. Short of this they must hunker down and accept what is thrown at them...

 

FICA/Payroll/Self-Employment taxes are indeed an "income tax" but are a dedicated income tax. They are exclusively dedicated to funding of social welfare programs (i.e. Social Security/Medicare) under the law.

We can also note that approximately 40% of the people that pay FICA/Payroll/Self-Employment income taxes do not receive any benefit from those taxes as they die before they receive any benefits from that taxation.

 

Getting back to the original point of this thread, as it applies to the United States, the reason the United States is in debt is simply because the Congress failed to collect the necessary tax revenues to fund the authorized expenditures. The American People had more than enough annual income to fund the authorized expenditures but the Congress did not collect that revenue through taxation.

Instead the US Congress imposed the obligation to fund the expenditures on the future income of Americans by borrowing agianst their income.

 

I've explained the problem numerous times in prior posts and in detail in the links I gave.

A gutted middle class -- the great engine of spending -- doesn't have the resources to drive a strong economy.

What you're really saying believe is that the "trickle down" policies of the last 30 years -- tax increases on the poor and middle classes, huge tax cuts on the very richest, gutting union influence and power, and holding down the minimum wage, and many other things, are largely responsible for the 1% now getting 20% of the nation's wealth, double from 30 years ago.

That equates to about $650 billion every year of private spending not being spent into the economy. The equivalent of about 3x the stimulus each year. It makes a huge difference in the economy.

The richest 1% take 20% of the nation's income and 40% of the nation's wealth. How much more do you all need to take?

 

After FICA taxes were raised on the poor/middle classes, trillions of excess dollars (ie more than needed to pay benefits were paid in FICA taxes). Those trillions went into the regular budget, where they essentially offset the deficits created by huge tax cuts mostly benefitting the richest.

It was the biggest poor to rich transfer in history, part of the "trickle down" scheme to make the richest richer and richer.

It worked fabulously well.

 

None of the funds collected by FICA/Payroll/Self-employment taxes in the Social Security Trust Fund were used to reducing the funding obligations of income taxes. While they were "loaned" out to provide the money necessary for spending at the time the general tax revenues are still required to repay the borrowing. As of March 2011.......

http://www.intellectualtakeout.org/library/chart-graph/components-federal-debt

Not a single dime of the Social Security Trust fund has been lost although the obligations to fund general expenditures, based upon borrowing from the Trust Fund, were placed upon future incomes by the borrowing against the Trust Fund. It really didn't matter where the federal government obtained the "money" to pay for general expenditures as all ultimately must be paid for by either current or future income taxes.

This is one place where "conservative" arguments fail. They endorsed the lower tax rates accomplished by deferring taxation through borrowing and then object to increasing the taxation necessary to repay the borrowing. They like to talk about "Democrats wanting something for nothing" while they're one of the hugest advocates of "wanting something for nothing" when it comes to taxing and spending. If we just wanted to pay back the borrowing by government during the last ten years (about $10 trillion) over the next ten years it would not only require about $800 billion in more tax revenues to balance the budget but another $1 trillion in additional general taxation to pay back the $10 trillion worth of borrowing.

Conservatives, especially those in the Tea Party movement, not only don't want to pay for current authorized expenditures of the US government they really don't want to collect enough in taxes to pay down the national debt. Just the amount of money to repay the national debt even if the US budget was balanced (which they don't propose) would require a huge income tax increase in America.

 

Technically FICA is not an 'income tax' but instead 'similar' to income tax. When you do your tax preparations there is no mention of FICA taxes.

Regarding 'dedicated' taxes to fund SS, etc. they actually go directly into the general fund and are not dedicated to anything...one of the many federal government smoke and mirror financial games...

 

SS funds do not 'go directly into the general fund". They are deposited with the Treasury in return for US Treasury bonds that pay interest. Medicare and other parts of the government which also have dedicated revenue streams are also issued Treasury bonds for excess monies that are deposited with the Treasury and cash them in when they need the money to fund their programs. They are required to do this by legislation. The only difference between the bonds that they hold and other bonds issued by the Treasury is that their bonds are redeemable on demand.

In other words, all these Trusts are required by law to deposit their excess revenues with the Treasury. The issuance of Treasury bonds is to insure that these excess revenues will be recovered from the Treasury as needed, to be spent as intended.

These trusts cash their bonds at the Treasury as they need them and the Treasury pays them just like any other bond. The smoke and mirrors is created by those who think that there is no obligation to pay Treasury bonds just because they are held by a party they dislike. Next they will be saying that the US should not pay bonds held by China, or Venezuela, or whoever else is the boogeyman of the day.

 

Actually it is on Line 57 of Form 1040

The FICA/Payroll/Self-Employment taxes are an income tax authorized by the 16th Amendment to the US Constitution. If the 16th Amendment were repealed these taxes would become unconstitutional.

All FICA/Payroll/Self-Employment tax revenues are deposited in the Social Security/Medicare Trust Fund and payments for Social Security/Medicare are paid from this trust fund. Funds in excess of those necessary to fund the annual Social Security/Medicare expenditures can be loaned to the "General Fund" (at interest) for general expenditures. These loans (with interest) must be paid back to the Trust Fund upon demand and they are repaid with general tax revenues.

The National Debt only refers to the debt owed by the American People (that is collected as general taxation) related to general expenditures and not to Social Security/Medicare that have always had more funds than necessary to pay for all expenditures. In fact about $3 trillion of the US National Debt is owed to the Social Security/Medicare Trust Fund.

 

So what you're saying is the Reagan era republicans raised taxes on the middle class so that the rich job creators could end up with tax cuts, and not have to pay for the government's bills any longer?

Well that is what caused the government debt, but why are the rich job creators responsible for government debt to begin with. They are the ones that should have the luxury of lower tax rates than the middle class, because they provide them with a source of income.

Without the capital from the rich, they would leave this country and move to a country that is more welcoming of them with lower tax rates. Government debt is not the job creators responsibility to pay with higher tax rates, so that is why it is high now.

 

They are the ones with the money who have benefited from our system they permits them to leverage off the work of others to make fortunes.

We have more than enough capital sitting in offshore accounts. Without spending from the middle class, there is no demand for goods and services to drive a robust economy. Which is exactly what is happening, thanks in part to the transfer of wealth from the lower/middle class workers to the richest via "trickle down" FICA tax increases and income/investment/estate tax cuts for the richest.

 

This is the myth of trickle-down economics as "investments" predominately don't create any jobs. Consumption, not investment, creates jobs. It doesn't matter how much money is pumped into an enterprise if consumption does not drive demand for the goods/services of the enterprise the enterprise fails. If the enterprise does have demand for it's goods/services it doesn't actually require outside investment as it can expand based upon sales profits.

We can also note that over 95% of investments are in "secondary" investments that don't even capitalize enterprise. Only the direct investments in stocks and bonds being issued directly by the enterprise provide any capital to the enterprise and "bonds" are merely a loan that a successful enterprise could probably obtain from a bank.

Secondary investments are actually parasitic related to the ecomony as they fundamentally take wealth from the national economy without creating any goods or services that are a component of the GDP.

It is actually the lowest paid workers in society that contribute the most to the economy as they have the highest consumption relative to income in the economy. Economies are built from the bottom up and not the top down. The very wealthy only spend a very small percentage of their income on consumption and contribute very little to the overall economy.

This is more BS as it is the consumption that drives economic expansion. We've had over 50 consecutive weeks of "economic expansion" but little job creation because 95% of the income from the "economic expansion" is going to the top 1% of income earners.

http://news.yahoo.com/charts-rich-won-great-recession-130300311.html

While the bottom 99% did see a minor increase in income of 0.4% most of that went to the top income earners in that category. Millions of Americans have seen their income drop by 25% or more since 2008. In my field alone, which is a high income field, wages dropped from $60/hr in 2007 to as low as $30/hr today and that is a 50% reduction in income for tens of thousands of previously "upper middle income" families.

 

FICA taxes paid in are used to pay out SS, etc. Any surplus money goes to the federal budget in return for government securities. The securities are held in a trust fund and redeemed as necessary. There is no money accumulating anywhere...all money goes into the general fund and is spent on general government expenditures. The term 'trust fund' is misleading because all it contains are government securities which are only provided when there is a FICA surplus...I call this smoke and mirrors...

 

http://ssa-custhelp.ssa.gov/app/answers/detail/a_id/392/~/what-is-the-meaning-of-fica

What does FICA mean and why are Social Security taxes called FICA contributions?

Social Security payroll taxes are collected under the authority of the Federal Insurance Contributions Act (FICA). The payroll taxes are sometimes even called FICA taxes. But what is FICA? Is it a separate law, apart from the Social Security Act?

In the original 1935 law, the benefit provisions were provided under Title II of the Social Security Act (which is why we sometimes call Social Security the Title II program). The taxing provisions were under a separate title, Title VIII. There is a valid reason for this, which pertains to the constitutionality of the law. As part of the 1939 Amendments, the Title VIII taxing provisions were taken out of the Social Security Act and placed under the Internal Revenue Code. Since it wouldn't make any sense to call this new section of the Internal Revenue Code Title VIII, it was renamed the "Federal Insurance Contributions Act."

The payroll taxes collected for Social Security are of course taxes, but they can also be described as contributions to the social insurance system that is Social Security. Hence, the name Federal Insurance Contributions Act. So, FICA is nothing more than the tax provisions of the Social Security Act, as they appear in the Internal Revenue Code.

 

It seems your only objection is that excess SS funds are directly invested in government debt so your objection should disappear if they were instead invested in the private market.

Consider this, SS like most pension funds, would necessarily adopt a very conservative investment strategy. US government securities are considered the safest investment on the planet so it is most likely that the SS trust administrators would invest, like most other pension fund administrators, almost all their excess funds in US government securities.

Just because this particular pension fund is operated by the government does not make its funds part of the general governments fiscal operations. What is most interesting to me about your argument is that a few decades ago when SS began accumulating its surplus it was conservatives in Congress that prevented the passage of legislation that recognized the long term fiscal position this borrowing was getting the government into. In the mid 1990s the government reined in spending increases, raised taxes and started on a path to paying down the national debt so that by 2010 the government would be in a fiscally sound position because that was when SS was projected to go from surplus to deficit and begin cashing in its government bonds.

Unfortunately the Republicans took control of the government in 2000 and, through a series of massive tax cuts, two unfunded wars and a huge unfunded expansion of Medicare, completely destroyed any chance of the government gaining a sound fiscal footing by 2010 to begin to meet its SS obligations. In 2006 the CBO was projecting a $1.2Trillion budget deficit for 2010. This was two years before the economic calamity of 2008. The conservative mantra during the Bush years was that deficits don't matter.

Now the conservatives are suddenly all about fiscal responsibility and want to steal the SS money to pay for their completely irresponsible tax cuts by naively convincing imbeciles that the debt and deficit are entirely created by having to pay for SS. Well I got news for you, I spent the last thirty years paying into SS and the contributions of my generation paid for our parents to have a comfortable retirement and an extra $2Trillion in advance for our own. If you conservatives think that you can steal our money by pretending sudden fiscal sincerity you need to realize that you have not even begun to stir your opposition and once they get going your crackpot ideas will be hounded back under the rocks they crawled out from under.

 

... and the TAX is based upon "gross earned income" and is therefore an "income tax" on gross wages (with limitations). Any tax based upon "income" is an "income tax" by definition.

 

I don't object to the government providing securities for excess FICA; I object to the smoke & mirrors of this process. People hear the word 'trust fund' and immediately believe it's filled with cash. Government cannot invest in the private market...it's too risky and politically cannot be done.

I won't argue or discuss politics...this is for losers. If you wish to blame one party or the other, this is nonsense since both parties play a role in deficits and debt and budgets, which includes both parties totally supporting unfunded wars...

 

Okay...you call it an income tax and I'll call it a payroll tax.

If FICA were truly an income tax, then I'm thinking it should be applied to all income. If I learn in college how to become a day-trader, and upon graduation make my living trading stocks, and this is my sole income, I won't be paying a dime of your FICA income tax. But if I can't make enough trading stocks and work at the corner store for some extra income, both me and my employer will be assessed a 'payroll tax' to support FICA...

 

It is pretty straight forward and in plain sight what is going on with excess FICA contributions so where exactly is the smoke and mirrors?
The only smoke and mirrors I can see comes from the right, which has spent the last decade or so deliberately obscuring the well known fact that SS was going to begin cashing in its securities around 2010 when it projected current contribution to begin falling short of funding its immediate obligations.

Paying back SS was a big reason for the fiscal agreement engineered between Clinton and the Republicans in the 1990s, which raised taxes and reduced increases in government spending in order to reduce the governments privately held debt so it would be able to meet its obligations to SS without undue fiscal distress by 2010. Then in 2000 the Republicans took control of the Congress and the Presidency and immediately tossed fiscal responsibility under the bus with massive tax cuts, unfunded wars and a huge unfunded expansion of Medicare which doubled the national debt in 6 years. In 2006 the CBO projected a Federal deficit of $1.2Trillion by 2010.

In 2008 the economy tanked, Obama got elected and suddenly it was all his fault and the debt and deficit were suddenly a big deal that needed to be reduced drastically right now. Now it is fiscally irresponsible to pay back the $2Trillion borrowed from SS because the government cannot afford it. Well, the government cannot afford the defence department either but the defence department did not lend the government $2Trillion.

The reality of the situation is that government spending has remained fairly steady at around 20% of GDP for the last 60 years while the tax cuts in the 2000s reduced government revenues from a little more than 19% to less than 16% of GDP. This may not seem like much but it is enough to turn a $5Trillion national debt into $15Trillion in less than a decade, a debt that will be well over $25Trilion by 2020 because republicans are intransigent about tax increases but also demand full funding for defence and for SS and Medicare for those over 55.

Here's the thing, all other Federal Spending can be completely eliminated and these three things along with paying interest on the national debt would still generate a deficit and an increase the national debt in 2020.

 

My guess is a great majority of Americans have no clue where excess FICA contributions go.

Sorry but I won't discuss politics...Dems and Reps can be equally blamed for the mess we are in...

 

It was in 1983 that they increase SS tax increases to generate surpluses to fund the boomers' retirements. For 3 decades the working poorer/middle class paid higher FICA taxes than necessarry to pay for SS benefits, which accumulated in the neighborhood of $3 trillion dollars, last I checked.