How Does the US Federal Budget Work?

With all the talk about the budget, deficit, and debt lately, I’ve been trying to understand how the US federal budget works. It hasn’t been easy. I haven’t found any comprehensive and even-handed analysis of how the government spends and taxes, so I have tried to collect the information I found into one place and give it some context. I relied extensively but not exclusively on information from Wikipedia (which has a very good page on the budget) and used additional readings to double-check it. I use fiscal year (FY) 2010 numbers except where indicated. I include a list of sources at the end of this post if you want to do your own research or check my facts. Please let me know if you feel I’ve made a mistake, left something out, or failed to explain something. I will continue editing to improve this overview. This post will focus on how the budget does work and I am working on a companion post about how I think it should work. I’ve tried, for the most part, to keep my opinions out of this one.

The post is divided into three sections: Big Numbers, Spending, and Income. Continue reading

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Changing the Terms of the Debate on Government

I’m about as frustrated as the rest of the country as I hear about the stalemate in congress over raising the debt ceiling and dealing with our deficit and debt. I think that one of the reasons that the Tea Party and the fiscal conservative strand in the republican party has been able to gain so much traction in the last three years has much to do with the narrative clarity of their story. Government is inefficient. Inefficiency is bad. Therefore, government is bad. Freedom is good. Free markets epitomize freedom. Therefore free markets are good. The political left, meanwhile, seems mired in their arguments, full of piecemeal justifications, and unable to confront head-on the stripped-down logic of their opponents. My goal in this post is to try to point out the inconsistencies of the Tea Party’s logic and re-frame the discussion for the Left.

My arguments will follow this general sequence: Free markets don’t and can’t behave the way the Tea Party says they do. ‘Efficiency’ is a hollow concept as it is currently used and needs to be re-evaluated. Even freedom has been oversimplified and used as an ideological weapon rather than an ideal to work towards in practice. All of this means that the Left needs to challenge the Tea Party on their terms and assumptions and re-insert government into an efficient and freedom-pursuing solution.

Proponents of laissez-faire capitalism claim that the central strengths of free markets are their (theoretical) amorality, transparency, democracy, basis in individual freedom, and efficiency. Ask most economists and they’ll tell you that science and math back these claims up, but they will slip in that parenthetical fine print just as I did. The parentheses are what make free markets so slippery to pin down, but if we analyze what the reality of free markets are we can see that those two punctuations hold back a corrosive truth that, once released, eats through the foundations of the argument against government. Markets are fundamentally different in reality than they appear on paper and in the mathematical models. Here’s why:

Markets cannot be amoral because they are directed and influenced by people, who are fundamentally moral. Markets tend to favor certain outcomes because humans tend to favor certain outcomes. Markets cannot be separated from human systems, and therefore they cannot be considered amoral. Markets are not transparent because, as any economist will reluctantly grumble, there is no such thing as perfect information. Nobody can measure nor organize the information necessary to make perfectly informed decisions and there are myriad examples of individuals or groups warping or hiding information in order to cheat the system. Transparency is a nice idea, but it’s only that. Markets are NOT strictly democratic because democracy means one vote per person whereas markets mean one vote per dollar. Economic votes are cast by the people who control the dollars, so what would be a democracy given zero inequality is really an oligarchy in our current arrangement. The claim that free markets are based on individual freedoms seems to me to be basically true, with some qualifications involving the idea of freedom that I’ll deal with later on. Still, I accept that free markets are the best way to promote individual freedoms.

Now to efficiency. Markets can only be called efficient by a very particular definition of efficiency. If efficiency means that the greatest output is produced by the least input, then by golly markets (theoretically) are efficient. Leaving aside this particular parentheses, however, we can take issue with the definition itself and contrast this production-based definition of efficiency with a broader one: The means which most effectively obtain the desired outcome. All of a sudden we need to define the desired outcome. Implicit in free market economics is that the desired outcome is maximized production, but I propose that there are a few things that are more important than maximum production. Things like economic justice, equality, sustainability, and public goods like education, parks, peace, and security. I’m afraid that each of these things implies an inefficiency according to the production definition. Want justice? It’s simply not efficient to take care of the poor or nonproductive in society. Want equality? It just distorts incentives to produce and invest in order to maximize output. Like nature? It’s only another input that should be used to maximize production. Want public goods? Markets can’t really handle public goods because of the problems of controlling access and policing free-riders. No person that I’ve ever encountered really wants to give up on these important human values, which means that we should take a look at my expanded definition and work backwards.

Okay, so we want justice, public goods, nature, and equality as well as the freedom that comes along with ‘free markets.’ These are our desired outcomes. So what are the most efficient ways to achieve them? Well, it certainly appears that the free market economy is the best way to approach freedom, but how do we balance the benefits of free markets with our other priorities? Well, that’s where history has provided an answer. Societies organize themselves into political systems and make decisions to uphold their desired outcomes. That’s right, we’re talking about government. It turns out that, to go back to my definition, we want certain desired outcomes that cannot be provided by free markets and the most efficient way to achieve them is through government.

Wait a second. That’s the opposite of what the libertarians and fiscal conservatives have been saying.

Exactly. If we broaden our definition of efficiency beyond maximizing production to include the important human values that hopefully we all share, we can conclude that free markets are inefficient and government is the only solution.

Now, this does not settle the debate of ‘how much government is the right amount,’ but it does change the footing of the discussion in important ways. Now that we’ve concluded that government is efficient insofar as it helps us achieve our desired outcomes, we must define more exactly what they should be and how to measure and maintain them. This is where libertarians step in again and demand that we bow down to their god: freedom. Freedom is sacred and inviolable. Try to argue against freedom! Well, how about if I just bring to light the caveats that are often swept aside and ignored?

What is freedom, really? It’s something that’s not questioned much, but if we think about it we all know that freedom is kind of self-contradictory. Individual freedom needs to be curtailed or it will impinge on itself. If individuals are completely free to act as they wish, then they are free to limit the freedoms of others (say, by stealing or killing), thereby negating freedom. Freedom needs constraints to exist universally. True freedom comes from a system wherein individual freedoms are limited to actions that do not conflict with the freedoms of others. This will maximize current freedom, but we also need to consider the past and future if our idea of freedom is to go beyond a shallow abstraction.

I believe freedom needs a concept of justice to ensure that we don’t dismiss past atrocities as irrelevant and a sense of responsibility for the freedom of those to come after us. Because freedom has been violated in the past, we have historical injustices in addition to the current injustices of birth and fate to contend with. In order to pursue freedom generally, we need to limit some current freedoms to compensate for past denials. Policies like a progressive tax system, welfare for the disadvantaged, and restrictions on the power of money to control politics and society are aimed to do this. If we believe that future freedoms should be protected, then we need to make sure that what we do today won’t impinge on the freedom of others later on. We have to limit a bit more freedom to ensure that people don’t take advantage of natural resources for their own benefit, thus depriving others of the freedom to benefit from ecological diversity or clean air and water.

This logical sequence quickly puts the Ayn Rands out there in apoplectic fits because they see no end to the rationalizing away of our precious freedoms. Where will we stop? When the individual is subjected to the collective like an animal slave? When individuality, creativity, and innovation are crushed out of humanity?

Uh, no.

As I said from the start in my definition of efficiency, we only agree to the most efficient means to achieve the desired outcome. Since the desired outcome is not subjugation, we will not design a system that will lead to it. We agreed that our desired outcome included freedom as the central value, but now we can see that freedom in a meaningful sense requires limitations that can best be applied by a government. Additionally we agree that we need government to promote important values like justice, equality, ecological sustainability, and public goods. There is nothing totalitarian about ensuring that our government is strong enough to protect these values. The surprising thing is that by these understandings of efficiency and freedom, the left can turn the right’s argument on it’s head: government is perfectly efficient and is indeed the only efficient solution. To promote freedom we must compromise and limit freedom. More generally we need to clearly define what our desired outcomes are and show that government will be contained to effectively pursuing them.

My hope in this post was to undermine some of the ideological shouting matches that happen when we talk about the role of government so that we can discuss real solutions. There is still plenty to debate about, but let’s agree that both government and free markets are part of the solution and stop accusing the other side of hating either freedom or the poor. Unless we can find ways to talk reasonably about these issues we’re just going to keep filibustering, mudslinging, and wasting time and energy looking for short-term political tactical advantage.

Let me know your thoughts and comments on these ideas. It’s a work in progress. 🙂

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The Nature of Freedom in our Economic Discussions

Too frequently what happens when those on the left of the political spectrum debate or argue with those on the right is a dialogue that devolves into a shouting match. It’s understandable when so many of the issues are deeply personal and emotional, as the issues surrounding public unions are in Wisconsin. What I’d like to do here is pose a debate between what I see as the two dominant economic perspectives in American public discussion and work backwards to analyze the underlying assumptions and differences that too often go untouched. By doing this maybe we can gain a deeper understanding and basic respect for the other side and remember that very few people are truly unreasonable. I can’t claim to be perfectly objective here, though I respect what I understand to be each position. I welcome comments about whether you think I’m on the mark or if I’m missing important points. Here goes: Continue reading

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Do ‘Free Markets’ Even Exist?

It seems to be assumed in most discussions about economics and the role of the government that free markets are better than government regulation, but I think before that discussion can happen we need to analyze what we mean when we say ‘free markets.’ In their pure form (which is the only form that is truly ‘free’) they rely on several assumptions about human nature and reality that don’t reflect actual practice. On a macro level, free markets require perfect information and perfect competition in order to function as proponents claim they do(eg. maximizing both individual and collective economic opportunity). By perfect information I mean that every individual understands all of their economic options and knows their own short-term and long-term best interest. Perfect competition means that everyone is on the same footing in the beginning. Theoretically, we should all have the same advantages and the best (most efficient) competitor should profit most.

Neither of these requirements (perfect information and competition) exist in our world. The tendencies of information and advantages are to accumulate with the wealthy and privileged, who have in turn inherited their position via their place of birth, socioeconomic status, race, and sex. Unless we are to take these factors as the basis for what we think people deserve, we must change things. Freedom of opportunity is hailed as the great leveler to allow those without advantages to still have a chance to change their destiny, but to accept this freedom as a given and to ignore the work that must be done to improve and maintain it is to live in a delusion.

Not only are ‘free markets’ a myth, but they are a myth that perpetuates the system itself by defining the debate as between freedom and regulation. This rhetorically powerful label of ‘free’ is used as a blunt object against those who argue for unregulated markets, but it does not reflect reality. I don’t believe in the cut-and-dry class struggle view of Marxism, but it is clear that ‘free market’ is a misnomer.

There is no such thing as free markets, nor will there ever be. There are only biased markets, and biased markets must be regulated by society in order to preserve justice and equality.

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The Meaning of Efficiency

I’ve been thinking around the relationships between free markets, efficiency, and sustainability lately. I hope to come back to discussions of food production and sustainability soon, but for now here are some of my thoughts about efficiency:

First, I started to tease apart what is really involved with the term ‘efficiency’ apart from our common usage of it. Princeton’s online ‘wordnet’ has a nice, succinct definition of “the ratio of the output to the input of any system.” Another, less scientific way to state it seems to be ‘the best means to attain the desired ends.’ This iteration highlights the normative judgments implicit in our everyday use of the term. Efficiency in its technical sense defines the inputs to maximize outputs, whether that be production or destruction. The atomic bomb is the most efficient means to kill large numbers of people, but our goal should not be to destroy life. When we use efficiency in the economic sense, we generally refer to utilizing resources such that no more output can be got from them without additional input. Though the language is slightly different for each of these definitions, ‘outputs’ has the same meaning as ‘desired ends,’ just with different connotations(outputs=value neutral, desired ends=normative). Continue reading

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Response Part 2: The problems with global food production

Michael posed another challenge to my assertion that there are serious problems with the current food production system by pointing out that our current system produces enough surplus to make us one of the largest grain producers and exporters in the world. He argued that if we took my advice and reorganized our food production system using more local agriculture, then we would essentially be starving the world through our selfish need to take better care of the environment. I brought up some counterarguments at the time, and now I will revisit them and expand upon them further. Continue reading

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Response to Michael: Part 1

This will be the first part in a series that I hope to do about globalization, food production, and sustainable economic development. I’m titling them ‘Response to Michael’ because these thoughts were brought together in a great discussion/debate one evening about the pros and cons of the globalization of food production and capitalism in general. My friend Michael brought up some challenging arguments and prompted a stimulating conversation and a number of ideas that I’ve since been wrestling with. I hope to receive comments and feedback in order to continue to develop my position on the issues and hear criticisms from those who hold different opinions. Continue reading

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