Suggested Answers to Short Quiz

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johnkarls
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Joined: Fri Jun 29, 2007 8:43 pm

Suggested Answers to Short Quiz

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SUGGESTED ANSWERS TO SHORT QUIZ


Question 1

Are our authors irresponsible by giving the American electorate permission to blame America’s political stalemate on the American political system, rather than taking responsibility for their own dysfunctionality? [You have permission to consider the other questions before answering this one!!!]

Answer 1

Let’s consider the other Q&A’s first.

Question 2

Which American President popularized the phrase “Starve the Beast”? What is meant by the phrase?

Answer 2

President Reagan.

Through 1980, in broad general terms the Democratic Party always tried to increase governmental spending for worthwhile programs and the Republican party always tried to balance the budget.

President Reagan, in broad general terms, reversed the primary goal of the Republican Party away from balancing budgets toward reducing spending.

The “beast” in Reagan terms was the federal government. And Reagan believed that the only way to reduce governmental spending was to cut taxes which he viewed as “starving” the beast.

Question 3

Has either major political party since Ronald Reagan stood for fiscal responsibility?

Answer 3

Not really – see Q&A-2.

Two footnotes, however =

First, while considering what became the Tax Reform Act of 1986, Sen. Phil Gramm (R-TX) and Rep. Warren Rudman (R-NH) proposed the Balanced Budget Act which was famous from the mid-1980’s through the 1990’s for “requiring” Congress to “pay for” any increases in spending with off-setting spending cuts and/or tax increases.

The “requirement” of the Balanced Budget Act was only moral because nobody was going to prosecute Congress for violating one of its own laws, and there is a constitutional issue whether any Congress (there is a new one every 2 years) can legally bind subsequent Congresses.

However, Gramm-Rudman (as the Balanced Budget Act was commonly called, though Gramm & Rudman did add Sen. Ernest Hollings, D-SC, as a name co-sponsor at the last moment before enactment to provide a bi-partisan façade) was generally honored from the mid-1980’s through 2000.

Second, Newt Gingrich’s famous “Contract With America” which swept the Republicans to control of the House of Representatives following the 1994 elections, was built upon Gramm-Rudman by including as its penultimate plank the requirement for a 60% vote in the House (otherwise only the Senate has 60% votes) to pass a tax increase, and as its ultimate plank the requirement for “honest accounting” in the federal budget based on “zero base-line budgeting.”

Although Republican control of the House continued through the 2006 elections, Gingrich was deposed as Speaker following the 1998 elections and resigned as a Representative on 1/3/1999 whereupon both his Contract With America and Gramm-Rudman were soon forgotten.

Question 4

Who is Grover Nordquist? What is the text of his famous pledge?

Answer 4

Grover Nordquist is a famous lobbyist who raises money from donors to combat tax increases. He supports for election/re-election candidates who sign his "pledge" and recruits/funds candidates to oppose anyone who has violated his pledge.

Nordquist's "Taxpayer Protection Pledge" promises "to oppose any and all efforts to increase the marginal income tax rate for individuals and business; and to oppose any net reduction or elimination of deductions and credits, unless matched dollar for dollar by further reducing tax rates."

The last time we checked (for our 12/14/2011 meeting), 238 of 242 House Republicans, 41 of 47 Senate Republicans and all of the Republican Presidentical candidates had signed the pledge.

The "pledge" is the Maginot Line of the TEA Party against tax increases.

Question 5

How many Republicans have signed Grover Nordquist’s no-tax-increase pledge?

Answer 5

Please see Q&A-4.

Question 6

Why is Grover Nordquist so effective?

Answer 6

Because a lot of money is donated to Grover Nordquist’s “Americans for Tax Reform” to prevent tax increases.

And because every Republican has nightmares about Nordquist recruiting and funding a primary challenger, even if the challenger cannot hold the seat for the Republicans in the general election (please see Q&A-7).

Question 7

Would the Republicans have control of the Senate if Grover Nordquist were not so quick to field such candidates as “The Witch” in Delaware in 2010 and to “throw under the bus” such stalwarts as former Senate Foreign Relations Committee Chair and current ranking-minority member Richard Lugar in 2012?

Answer 7

Of course.

[Republicans hold 47 Senate seats currently and will hold 45 in the next Congress beginning in January.]

Question 8

For our 6/13/2012 meeting on “The Submerged State: How Invisible Governmental Policies Undermine American Democracy,” we recognized that there are three types of governmental expenditures = (A) appropriations, (B) tax expenditures and (C) mandates. Would attacking (A) or (B) violate Grover Nordquist’s pledge? Would attacking (C) have any impact on the federal deficit even though doing so would comprise a reduction in governmental expenditures?

Answer 8

Attacking (A) and/or (B) would NOT violate the Nordquist pledge (please see Q&A-4 for the text of the pledge).

Attacking (C) would have no impact on the federal deficit even though it would reduce governmental expenditures.

Question 9

How many tax expenditures are identified annually by the Congressional Joint Committee on Taxation and what is their annual total cost?

Answer 9

The JCT annually identifies approximately 200 tax expenditures.

Since the JCT refuses to recognize zillions of tax expenditures for political reasons, we are forced to make our own shrewd guess of total cost =

Both the top corporate income tax rate and the top individual income tax rate are 35%.

The economy’s annual Gross Domestic Product is $16 TRillion.

Accordingly, if ALL income were taxed at 35%, the income tax would raise $5.6 TRillion annually.

Since World War II, TOTAL Federal Revenue has ranged between 15% and 20% of GDP.

Even the difference between the high-water mark of 20% which hasn’t been approached in 12 years, and the top corporate & individual tax rates of 35% = 15% of GDP.

And a minimum of 15% of GDP does NOT take into account the fact that there are other federal taxes such as the gasoline excise tax, payroll taxes for Social Security and Medicare, and the federal estate tax.

How much is 15% of GDP???

$2.4 TRillion -- more than double what would be needed to eliminate our annual $1 TRillion federal government deficits.

Question 10

Even though the JCT annually recognizes approximately 200 tax expenditures, does the JCT recognize all of them or are quite a few left un-recognized for political reasons?

Answer 10

Is the JCT controlled by politicians or is it controlled by politicians???

Question 11

Of all the tax expenditures that could be halted in order to raise revenue without violating Nordquist’s no-tax-increase pledge, why are charitable contributions and mortgage deductions the only two that receive publicity?

Answer 11

Because Democrats and the mainstream media want to scare voters into supporting an increase in income tax rates.

Question 12

Does the lack of limelight for the other couple hundred tax expenditures mean that the threat of their elimination is merely an opportunity for the pivotal politicians to shake down for “campaign contributions” the clients of lobbyists who are pushing for maintaining those tax expenditures?

Answer 12

Is the sky blue???

Question 13

What is the historical level of federal governmental appropriations in terms of GDP?

Answer 13

Since World War II the level of federal expenditures has been approximately 20% of GDP, which (no great mystery!!!) is the approximate level of tax revenues during that period.

However, since the 2008-201? economic meltdown, federal expenditures have been approximately 25% of GDP due primarily to automatically-increased “safety net” expenditures.

The post-2008 difference between the 25%/GDP expenditure level and the 15%/GDP revenue level = the oft-heard remark that the federal government currently borrows 30% - 40% of everything it spends.

Question 14

How much will that percentage (the “historical level of governmental appropriations in terms of GDP” in Q-13) have to increase to cover the cost of the Obamacare (the term embraced by the President) extension of Medicaid to cover 16 million additional Americans?

Answer 14

Our shrewd guess rather than relying on governmental statistics???

The U.S. is widely reported to spend 16%/GDP each year on health care = $2.6 TRillion/year.

Obamacare extends healthcare coverage to 32 million additional Americans (per CBO estimates) and the American population is currently 312 million.

$2.6 TRillion for the 280 million Americans that were covered = $9,286/year for each covered American.

[NB: this is a slight over-estimate because many of the uninsured received minimal-to-nonexistent healthcare services through hospital emergency rooms.]

Accordingly, annual Medicaid costs can be expected to increase $148.6 Billion/year to cover the additional 16 million Americans being added to Medicaid by Obamacare.

[NB: this is a slight over-estimate not only because the $9,286/year/person, as noted above, was a slight over-estimate, but also because the $148.6 Billion/year should also be reduced by the pre-Obamacare cost of the minimal-to-nonexistent costs of providing healthcare to the 16 million new Medicaid recipients through hospital ER’s.]

Vis-à-vis the precise question asked, $148.6 Billion/year = 93 hundredths of 1%/GDP.

Question 15

How much more would that percentage have had to increase if Obamacare had not excluded from the federal budget the cost of covering another 16 million additional Americans (for a total of 32 million additional Americans per the Congressional Budget Office estimates) by means of the famous insurance “mandate” upheld by the Supreme Court which saddled healthy young people with that cost in the form of unwarrantedly-high insurance premiums paid to private insurers?

Answer 15

The same math for the 16 million additional Americans whose healthcare will be financed by the famous insurance “mandate” as for the 16 million additional Americans added to the Medicaid rolls = another $148.6 Billion/year = another 93 hundredths of 1%/GDP.

Question 16

How much will that percentage have to increase to bail out under-funded pension plans of Blue States and of their local governments?

Answer 16

Did our Short Quiz inspire the State of Illinois to release a new political ad this week featuring an orange python named Squeezy aimed at getting the federal government to bail out the $95 Billion of under-funding of Illinois state pensions??? [Since the ad mentions no steps that Illinois itself will take, political analysts view the ad as a blatant first-attempt for obtaining a federal bail out.]

Although Illinois is thought to have the worst under-funding problem at the state level, $95 billion * 50 states would be $4.75 TRillion. [Which might not even cover the ACTUAL (vs. ESTIMATED) under-funding for Illinois and the other 49 states.]

And this does not even begin to take into account the zillions of municipal governments, virtually all of which have significant pension under-funding because it is so easy for politicians to make pension promises to their unions that will have to be paid, if at all, by future politicians.

In this regard, it is noted that during the last year or so, there have been a half dozen bankruptcies of significant municipalities.

Over the next decade, this will become a torrent!!!

Who wants to bet that bailing out states/municipalities, which tends to be more a blue-state problem, will not become a major Democrat-Republican national political issue as, in effect, blue states seek to be bailed out by red states???

But to answer the precise question asked, only God knows!!! [And for the atheists among our members, such as Bill Lee, nobody knows!!!]

Question 17

How much would that percentage have to increase to provide a French-style universal educational system where the entire cost of all French universities (including graduate-level education) is shouldered by the French government and all French students are eligible for university or technical/trade schools based on competitive examinations?

Answer 17

The cost of all higher education in the United States in 2002 [per Linda Gorman, "State Education Subsidies Shift Students to Public Universities" - National Bureau of Economic Research (5/12/2009), the text of which is reproduced in the "Reply" to this "Topic"] was $289 Billion of which state governments gave $66 Billion to state colleges/universities to subsidize tuition.

$289 Billion was 2.6% of 2002 US GDP.

It should be noted that the cost of higher education which is highly labor intensive, has been rising faster than the general rate of inflation. So perhaps rounding up to 3% of GDP would be a good benchmark.

Question 18

Does the fact that no French citizen has to worry about the cost of medical care or the cost of college for her/his children reduce stress (and, as a result, reduce medical costs for treating stress-induced illness) and increase life expectancy?

Answer 18

Is the sky blue???

Question 19

Now that our national debt has surpassed our GDP and reached the percentages of GDP typical of Europe’s “problem children” (Greece, Spain, Italy, etc.), how much of current federal appropriations would have to be diverted to paying interest at “junk bond rates” if the U.S. dollar goes “in the toilet”?

Answer 19

100%, easily. Nothing left for anything else.

As previously mentioned, federal revenues have only ranged between 15% and 20% since World War II and have not even approached 20% since 2000.

And if US debt plummets to junk-bond status, we would be lucky to find any lenders at 20% interest rates, or at any interest rate for that matter!!!

Question 20

What does President Obama’s “base line” (none of his proposed budgets for the last three years has received a single vote in either the Senate or the House) show as the percentage of national debt to GDP 10 years from now?

Answer 20

President Obama’s FY-2013 Budget Proposal (p. 205) calls for federal deficits totalling $10.1 TRillion for 2013-2022.

$26.4 TRillion is, therefore, what President Obama proposes as our national debt by the end of FY 2022 ( = our current national debt of $16.3 TRillion + the $10.1 TRillion of additional deficits 2013-2022).

In all fairness, President Obama’s budget also estimates (also p. 205) that GDP will increase to $25.49 TRillion, thereby maintaining the ratio of federal debt to GDP at just over 100%. But many critics (including many Democratic US Senators, all of whom refused to vote for President Obama’s budget which failed to get a single vote in the U.S. Senate) believe his GDP projections are wishful thinking.

Question 21

Although Europe’s “problem children” pay interest on the order of 8%, that is due to the market perception that Germany will continue to “bail out” the “problem children” -- does Germany have the capacity and the will to “bail out” the United States to shield us from full “junk bond rates” (north of 20% if we can even find lenders)?

Answer 21

Definitely not the will and probably not the capacity.

Question 22

Who is hurt if the U.S. dollar goes “in the toilet”? American corporations? American workers? American retirees? Owners of stock? Owners of bonds? Savings account depositors?

Answer 22

As we have studied many times in the past with respect to countries whose currency goes in the toilet (e.g., Germany in the 1930’s when its economy ran on British Pounds after its own Reich Marks went in the toilet and Russia in the 1990’s when its economy ran on US Dollars after the old Soviet Ruble went in the toilet), corporations can adapt fairly easily to running on foreign currencies. The only disruptions stem from hopefully-temporary reductions in demand in the home-country market (which may be a “drop in the bucket”) and the wipe-out of the value of their tax-depreciation deductions for historical costs which are measured in the now-worthless currency.

Accordingly, stock prices in real terms can recover fairly quickly, though who would now bother to calculate those prices in terms of a currency that no longer effectively exists rather than in terms of the new functional currency (e.g., British Pounds for 1930’s Germany and US Dollars for 1990’s Russia).

American workers will “take it on the chin” in the same manner as they traditionally have as they are forced to fight for wage increases to merely keep pace with inflation. Except now they have the problem “in spades” as they fight for the value of their old wages in now-extinct US Dollars in terms of the new functional currency.

Owners of stock should be all right in the medium to long term, as soon as corporations have adjusted to the new functional currency and new market conditions (as described above).

Owners of bonds and savings-account depositors will “take it on the chin” because the bonds and savings accounts and, for that matter, anything else denominated in now-extinct dollars (for example, pensions) have become worthless.

Retirees will “take it on the chin” to the extent that they depend on pensions, bonds, savings accounts, etc. But should be all right in the medium to long term to the extent that their wealth comprises corporate stock (or other assets that maintain their intrinsic value, as opposed to their nominal value as measured in plummeting dollars).

Question 23

What does the answer to Question 22 say about a society that is busy converting the cost of retirement from employer-funded “defined benefit” pension plans to personal Sec. 401(k) plans that give retirees ulcers over the fear that they will live too long?

Answer 23

That it is morally bankrupt!!!

Question 24

Because of the likelihood that the U.S. dollar will go “in the toilet” (because of our deficits and our accumulated debt, if not the shenanigans of the Federal Reserve for which we recommended following our 12/14/2011 meeting the prosecution of Federal Reserve Chair Ben Bernanke), isn’t the best investment any American can make at this time a NEGATIVE investment in dollars (in other words, borrowing soon-to-plummet dollars) to finance assets that will retain their intrinsic value (vs. their nominal value as measured by plummeting dollars)?

Answer 24

Of course!!!

Question 25

So now what is your answer to whether our authors are irresponsible by giving the American electorate permission to blame their political system rather than taking responsibility for their own dysfunctionality?

Answer 25

Yes, our authors are irresponsible.

Question 26

In other words, aren’t Americans nothing more than children who regularly vote for Santa Claus and who don’t have the maturity to pay for what they want? And isn’t Grover Nordquist playing the role of The Grinch Who Stole Christmas?

Answer 26

Yes. Yes.

Question 27

And isn’t the real solution to our dysfunctionality not the “band aids” suggested by our authors but a Balanced Budget Amendment to the U.S. Constitution?

Answer 27

Of course.

In this regard, we should re-consider the 1995 Balanced-Budget Amendment to the U.S. Constitution which was easily approved by the two-thirds vote in the U.S. House of Representatives for referral to the 50 states for ratification but fell one vote short of the required two-thirds vote in the U.S. Senate.

The text of the 1995 Balanced-Budget Amendment is available on http://www.ReadingLiberally-SaltLake.org by scrolling down to the 13th of 16 items in the Reference Materials section for our 12/14/2011 meeting.

The text of the 1995 Balanced-Budget Amendment did provide that an annual budget would not have to be balanced if (1) a Declaration of War (which we haven’t had since World War II) is in effect, (2) there is a Joint Congressional Resolution declaring an imminent and serious military threat to national security, or (3) a deficit is approved by 60% of the total number of members (vs. 60% of those voting) in each House.

johnkarls
Posts: 2034
Joined: Fri Jun 29, 2007 8:43 pm

Article Cited in Q&A-17

Post by johnkarls »

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The National Bureau of Economic Research – 5/12/2009

State Education Subsidies Shift Students to Public Universities

"If state subsidies were instead given directly to students as portable grants or vouchers that could be applied to any in-state college, total enrollment would remain approximately the same overall but an estimated 29 percent fewer students would choose public four-year colleges. Most would shift to private four-year schools."

In 2002, states spent about $66 billion on higher education subsidies, a substantial fraction of the $289 billion spent on U.S. post-secondary education. According to the National Center for Education Statistics, U.S. post-secondary expenditures were $19,220 per student, the highest in the world.
Rather than giving aid directly to individuals to use at the college of their choice, states historically have subsidized tuition for in-state students at public colleges and universities by giving operational funds directly to the schools. As a result, in 2002, the average list price for four-year private colleges was $18,273 while it was only $4,081 for in-state students at four-year public colleges. Because colleges vary in their instructional resources, the question of whether the price gap created by the state subsidies affects enrollment decisions is an important one.

In Does the Format of a Financial Aid Program Matter? The Effect of State In-Kind Tuition Subsidies (NBER Working Paper No. 9720), author Bridget Terry Long uses several data sources from the early 1990s to examine how changing the structure of state aid might alter student undergraduate enrollment decisions. She finds that expenditures, the student-faculty ratio, and the percent of faculty with a Ph.D. degree positively affect the likelihood of attendance at a particular school. Higher tuition and distance from home have negative effects on the probability of enrollment. The quality of the other students also matters. For every 10 points that an individual's SAT score exceeds the average at a particular college, his likelihood of enrolling falls 29 percent.

Long finds that the current regime of state subsidies primarily increases enrollment at public four-year colleges. If state subsidies were instead given directly to students as portable grants or vouchers that could be applied to any in-state college, total enrollment would remain approximately the same overall but an estimated 29 percent fewer students would choose public four-year colleges. Most would shift to private four-year schools.

Linda Gorman

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