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Oh What a Tangled Web We Weave

by John Rubino on December 12, 2012 · 13 comments

By the age of 12 or so, most people have learned through bitter experience that dishonesty is hard to pull off, because one lie tends to require more lies, until the complexity of the situation exceeds the liar’s ability keep everything straight.

This is just as true for governments as for individuals, especially when it comes to money. A currency that holds its value over long periods of time is nice but restrictive, because it limits a government’s ability to fight multiple wars and buy votes with generous social programs. So every government eventually resorts to monetary inflation, which is a combination of theft and deceit – or fraud, as it’s known in legal circles. By creating large amounts of new currency, a country lowers the value of each piece of currency in the hands of citizens, thus secretly taxing them to run the government. Then, to mask the effects of this stealth tax, governments distort their reported economic statistics to portray a world that’s healthier than the one most people experience. The goal is to siphon off as much wealth as possible while keeping the victims docile for as long as possible. The longer the con runs, the richer the people at the top become.

Eventually the gap between government reports and individual experience grows so wide that the lie is revealed and the scam ends, either through some sort of revolution or a financial collapse or both. A sign that we’re approaching that point is the following article, in which Time Magazine advocates making a heretofore-unspoken part of the con explicit government policy:

Fixing Inflation Adjustments Is the Smart Way to Shrink the Deficit

Let’s face it: There’s no way to reduce America’s budget deficit that won’t hurt someone, and that pain can’t be limited only to the rich. A payroll tax, passed in 2010, is scheduled to expire at the end of this year, for example, and that will cost middle-class households anywhere from $600 to $1,200. In addition, more than 20 million taxpayers could become subject to the alternative minimum tax (AMT), adding several hundred dollars to their annual tax bills on average. On the spending side, budget cuts would not only reduce government services but could also eventually cost tens of thousands of Americans their jobs.

But there are other ways to make progress on the deficit over the long term that would be a lot less painful and would also be politically viable. In my last column, I wrote about the estimated $30 billion a year that the Federal government could save by getting really tough on fraud. Even more could be done, though, by changing the inflation adjustments for government spending.

Cost-of-living adjustments (COLAs) are used throughout the U.S. economy – for union contracts and income tax brackets, as well as for government entitlements. It may seem only fair to adjust contracts and government programs for inflation – otherwise recipients would see their standard of living steadily erode over time. But there are a lot of ways to adjust for inflation. Moreover, the most commonly used gauge, the Consumer Price Index (CPI), may overstate the adjustment needed. Switching to a more conservative measure could save as much as $200 billion over the coming decade.

The most commonly proposed change is to replace the CPI with another index called the “chained CPI.” Basically, inflation is calculated based on putting together a basket of commonly bought goods and services and then tracking the price increases for them. In reality, though, people don’t consistently buy the same things. If one particular item – steak, for example – gets very expensive, people will typically buy something cheaper instead, such as chicken. The chained CPI takes into account the substitution of cheaper items for things that get too expensive, and is therefore arguably more accurate than the regular CPI. It also rises a little bit more slowly.

The result of replacing the regular CPI with the chained CPI would be slightly slower increases in monthly Social Security payments and some other government benefits. The new measure would also modestly boost tax revenues. The reason: tax brackets are indexed to inflation and would ratchet up more slowly if the chained CPI were used to adjust them. For many taxpayers, that would mean that some of their income would fall in a higher bracket.

Further savings could come from changing the formula used to calculate initial Social Security benefits. Because Social Security was originally designed to mimic a pension plan rather than look like a welfare entitlement, initial benefits are pegged to retirees’ earnings over their working lives. Because the general standard of living improves over time, wages and salaries normally outpace inflation – and so do initial Social Security benefits. (After benefits have begun, further increases are based on a more usual cost-of-living adjustment.) Some economists have long argued for altering the formula for initial benefits. Keeping the current more generous earnings-based calculation for lower-income retirees but switching to an inflation-based calculation for the more-affluent half of the population could eliminate half of the Social Security deficit over the next 75 years.

Such fixes to benefit plans are not uncontroversial. When a recent Republican budget proposal included changes to the way the Federal government calculates inflation, the idea was swiftly rejected by some Democrats. Opponents of the idea objected that retirees face higher inflation than the average American because of health-care costs and that some of the tax increases would fall on the middle class. It’s true, of course, that altering inflation adjustments will limit future benefit increases and cause an upward creep in income taxes. But the idea that the Federal deficit can be brought down to sustainable levels without anyone giving up anything is simply unrealistic. Hiking tax rates on the rich alone will raise enough revenue to cut the deficit only by about 8%. In the end, simple arithmetic ensures that the bulk of deficit reduction will come from the middle class – the challenge is to minimize the pain.

Unfortunately, tinkering with inflation adjustments will be little help with other runaway costs – most significantly health care, which presents even greater long-term budget problems than Social Security does. Advances in medicine often make treatment more expensive. In addition, health care is labor intensive, and in all service sectors it’s hard to offset rising labor costs with the sort of productivity gains that can be achieved in manufacturing. Doctors can only see so many patients an hour, teachers can only correct so many papers, and there’s a limit to how fast a pianist can play the minute waltz.

But where rising costs are chiefly the result of inflation adjustments, fine-tuning those mechanisms may be the least painful way to start bringing down the long-term deficit. The spending cuts that are currently scheduled to go into effect next year in the absence of a budget deal look horrific and could result in 7% to 9% reductions in a broad range of Federal programs. Surely it seems more rational to minimize the need for such sudden, deep, and indiscriminate cuts in the near term by accepting smaller increases in government spending over the coming decades.

Some thoughts
This is a perfect example of how lying sometimes corrupts both liar and victim. The honest approach to a situation where there’s not enough wealth would be to explain that everything from the military empire to the welfare state will henceforth have to live smaller. But that’s both hard to say and hard to hear, which makes the lie relatively painless for both sides. Just keep telling citizens that they’ll get everything they expect, while actually giving them a little less each year. Government gets the inflation-generated resources it wants, and the recipients of government spending get to pretend for a while longer that they’re taken care of. The problem is pushed into the future for tomorrow’s leaders and the children of today’s recipients to deal with.

Put more clearly, US voters are enabling the liars because – despite the mounting evidence that the lies are coming at our expense – we prefer the comfort of those lies to the harsh reality of no more free money for the lifestyles we thought were our birthright.

The result of dishonest public policy being enabled by voters in denial is a corrupt society, where lying – as in the article reprinted above – becomes acceptable public policy. We’re not far from the old Soviet joke, “we pretend to work and they pretend to pay us.”

  • Eternal Justice

    The first paragraph is true for most normal people, but does not apply to the elitist scum who rule our nations. They lie, lie, and lie again, with no regard to what is just and true. They are masters of the lie, and despise the truth. I can think of a certain attorney general who is like this.

    I will never forget a video I saw on the internet of Lady Gaga giving a concert, and she asked the audience if they knew what her dislikes (pet peeves) were. They quickly answered a couple of them, and then she said, “but there is something I hate even more than that….THE TRUTH.” How vile she is!

    These people rejoice in their lies and their deceptions, but truth and justice are eternal, and will prevail. Those who embrace evil, shall have evil as their reward.

    • Antiehypocrite

      The author forgets one thing that the elites know… if you tell the lie enough times regardless of how blatant it appears to be – it will eventually be accepted as truth by the masses.

  • Bob Wisner

    Great piece!

  • http://twitter.com/mijj mijj

    It might help if the purpose of the economy was kept in mind when seeking efficiencies.. ie. maintaining quality of life. (glances at military).

    Unfortunately, this seems to be a hidden truth because “quality of life” is significant for those that pull the strings of the puppet government and matters less and less as we go down the social string-pulling scale. This is a consequence of having a non-democratic government. (Democracy theater doesn’t count as democracy.)

    • Joe_Wazzzz

      Human nature will always condem democracy to failure. All governments are a mixutre of democracy, republic, tyrany/autocracy with one being the more prominent. Rule of law (republic) devolves into pseudo-democracy which eventually corrupts the monetary system by pilfering the treasury until the people surrender to tyranny to solve its monetay ills. Then tyranny is eventually overthrone by republicans and the whole thing starts all over again. None of them is pure or blameless. One survives by riding the political waves. Surf’s up dude!

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  • Bruce C.

    Another really evocative piece.

    As long as the reasons given for reducing deficit spending are things like “it’s unsustainable” or “it will bankrupt the country” or “it will lead to inflation and high interest rates”, etc. then few people will accept politically imposed (“chosen”) austerity. Those warnings have been sounded for most of my adult life and here we are, supposedly in the eleventh hour, with benign inflation (if not deflation) and record low interest rates. The Dollar index remains stubbornly high despite efforts to lower it and US Treasuries are as popular as ever (just ask the Fed). My point is that all those fears may be misplaced or still way too premature, so why should people stop the party if it may be unnecessary? If all of this fiscal gamesmanship is really problematic then the market place will respond accordingly. Practically speaking, what is the difference between chosen austerity and forced austerity? Answer: Forced austerity is politically easy and “blameless” and will occur only if and when it is really necessary. Evidently, most people would rather take their chances and postpone the “pain” than act preemptively now based on perhaps flawed logic. Another possibility is that if most people intuitively know that it is mathematically impossible to right this ship then why even bother to try other than to prolong the status quo (which includes denial) for as long as possible, whatever it takes.

    • Joe_Wazzzz

      Well said! The problem, as I see it, is that things could turn on a dime and worst case scenario, the outcome could well be apocolyptic; war and starvation. That being the case, I feel compelled to tell those people that I am concerned about (family and friends) what could happen. It then becomes apparent that while they see the logic, they don’t want to hear about it. If I pester them and I am right they will resent me for what will seem like “I told you so!” If I don’t tell them, then in all probability, I may well end up having to support them because I was the only one with enough foresight to prepare. It is a loose/loose situation for eveybody.

      • Antiehypocrite

        Without question the outcome will be devastating.

        I am not certain gold is the answer but I dumped a number of properties and other investments in 2007 in anticipation of this crisis and bought physical. The only assets I kept were my businesses here in Asia – I purchased a 2 hectare farm on which I have built a home – I own that outright.

        I have repeatedly warned others that something wicked this way comes – some of them have understood and taken action to protect themselves – some of them have remained in denial.

        In recent months many more of them are buying gold – these include some banker friends who have ‘seen the light’ (aren’t the bankers always the last to get clued in).

        And others who were I am sure laughing about my move into gold 5 yrs ago are now buying gold.

        That said, I hope they can keep kicking the can for a lot longer – I think QE is insanity but if it holds off the end game one more day or one more year I am thankful.

        Because when that can stops being kicked, we are going to have one hell of a disaster on our hands – like nothing we have ever seen or heard of before.

        We’ve got 7 billion people on this planet now – and they are going to be hungry and angry.

  • Bruce C.

    Here’s another thought I had about this subject.

    Some beliefs can be very difficult to overcome. Personally, I was smitten with the belief that I picked up in grade school, and am admittedly still affected by to some extent, that the written word is sacrosanct. My father and teachers were very strict about lying so it followed that if even the smallest lie between just two parties was unacceptable then certainly published and public material must be impeccable. Later on in my upbringing, after learning that some newspaper articles can contain misspellings and even grammatical errors, it was explained away as “you can’t believe everything you read,” but I took that to mean that mistakes can occur not that blatant, purposeful lies and deceit are a part of the journalistic lexicon. I can only assume that many others think the same way, so denial may not be the only explanation for peoples’ enabling. They may also just be naive and trust and believe too willingly.

  • Rob1911a1

    Simply eliminating the EPA, which COSTS our economy untold billions yearly (besides its own budget) and the Dept of Educ, which has never educated anyone, would save the nation OVER 200 BILLION PER YEAR; a TRILLION in just five years. Plus, as noted, without the EPA we might actually access the natural resources which make us literally the Saudi Arabia of Energy, thus FLOODING the economy with enormous wealth. The number of agencies extant, many of whose duties overlap those of other agencies, is staggering. For example, eliminate the BATFE and divide its duties among the FBI, Treasury Agency, Secret Service, etc. Eliminate the Bureau of Indian Affairs. (With the casinos, the Native Americans are better off than the rest of us). Just some suggestions.

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