Understanding the US Government Simply

Stuff

Central to economic activity are businesses and industry who sell stuff, and in so doing make money (hopefully).

Industry

With that money businesses do a number of things; pay wages, buy raw materials, pay other business expenses and pay taxes.

I have made a distinction between compensation being paid to the wealthy (calling them salaries), and compensation being paid to the poor and middle class (calling them wages). I know the reality does not break down that neatly, I am doing it for simplicity's sake.

Taxes

The federal government gets half of its money from individual and corporate income taxes.1 Income tax paid by individuals comes disproportionately from wealthy individuals. Close to half of taxpayers don't pay any income tax at all, which is why in the picture below no income taxes are shown being sent to the government by the poor individuals.

Entitlements

A large chunk of federal spending goes towards entitlement programs - welfare, Medicare, and Medicaid - all programs which primarily benefit low-income people. The entitlement programs are like a giant wheel, which take a pile of money from one place (the wealthy and businesses) and turn it through a variety of government agencies to another place (the poor and elderly).

So, Does this make Sense?

No, not really. Regardless of one's ideological or philosophical position, it is inefficient and wasteful to move money through the great wheel. Every step of the way incurs costs and efficiency losses. It's like running a 500 foot hose around your house to water some plants that are 10 feet away. The diagram below is an illustration of the money truck driving around the entitlement circle dropping bundles of money out the back as it goes

Are the losses really as great as the graphic suggests? Probably not. Or at least, not on paper. It is hard, however, to quantify all of the losses. Some losses can only be measured by comparisons to alternatives.  What would you do with the money spent on you through entitlement programs if it was in your pocket instead?

Why do we do it?

I suspect there are two reasons. First, is that many likely see it as a necessary counterbalance to the Republican agenda (an agenda which is not entirely their own).  If Republicans work to put money in the hands of businesses and the wealthy, then Democrats have to work to redistribute that wealth back to the poor and middle class.

Secondly, and Democrats may not want to admit it, but being responsible for a very large stream of money flowing into the hands of very large groups of people provides tremendous political advantage.

Am I actually agreeing with Republicans?

Sort of. Half agreeing I guess. We agree in wanting to shrink entitlement programs but we do so for entirely different reasons. For my part, I do not disagree with working for a more economically equal society, I just think the entitlement program is an inefficient way to do so. Instead of sending the huge pile of money on its great wasteful journey, send it directly to the people (you know, the shortest distance between two points being a straight line).

Ya, that's what I'm talking about. See how nice that looks and how stupendously simple it is. We will get back to that in a bit.

Republicans on the other hand aren't really interested in a more equal society; they just want to turn back entitlement programs. This is how they want things to look:

Republicans

Republicans will give all sorts of reasons for doing this; Limiting the size of government, combating spending (and the rising deficit), ideological quandaries with income redistribution, and entitlement programs being unsustainable.

Republicans will make all of these points sound really good. The great genius of Republicans over the past few decades is their tremendous ability to convince ordinary folks that they are working for them. Reagan of course was the master of this, which I think is largely why he is so revered. His trickle down economics has to be one of the great scams of all time, and essentially amounted to saying, "the best place for your money is in my pocket". Brilliant!

It is important I think to keep things simple when evaluating politicians. There are two things I think you should always try to know about a politician: To find out exactly what a politician is going to do for you and to follow the money. Following the money is a subject for a whole other article, but the other part is really important. A politician should be able to look at you and very specifically tell you exactly how they can help you. and if they can't, then I would argue that they aren't really working for you.

When you scrape off the rhetoric there really are only two things the Republicans ever say; cut taxes and cut spending. Of course when they say those things, they don't mean cut all spending and taxes, they mean cut entitlement spending and cut taxes for the wealthy and for businesses. Neither of these things do any direct good for ordinary folks. These measures will always be presented with theoretical benefits for common people, but they are always shadowy possibilities around the corner, or existential doomsday scenarios; deficits bankrupting our grand-kids, evil socialist takeovers (not that anyone has any idea what socialism is), or Obamacare death panels killing granny.

Compare that to what republicans say to the wealthy and to businesses. We want to cut regulations. We want to reduce your taxes. Very clear and very direct.

The answer

We all know the answer. We all felt the answer in the rage people had when fat-cat wall street pimps laughed their way to the bank with their giant bonuses bulging in their pockets.

Yes, rich pimp guy, I know you do, but then I have some news for you - we ALL work hard for our money.

Wealth Distribution

Researchers Michael I. Norton and Dan Ariely have conducted a survey to examine American perceptions about wealth distribution2. Respondents were asked what they believed wealth distribution was and what they thought the ideal wealth distribution should be. They then compared these results to what wealth distribution actually is. Their findings are summarized in the graph below.

The actual wealth owned by the bottom 20% of the population is 0.1%. That's 0.1% not 1% - equivalent to one dime out of every hundred dollars owned.

It is astounding how far off people's perceptions are, both in how they perceive distribution, and again in what they ideally would want distribution to be. To look at it another way, let's consider two particular circles. The actual 2nd 20% circle and the ideal bottom 20% circle highlighted below.

The actual 2nd 20% circle represents the wealth owned by the bottom 80% of the population, while the ideal bottom 20% circle represents how much wealth people believe the bottom 20% of the population should own. They are almost the same!

How in the world can our country look so massively different from what we want it to be. It is absolutely stunning to me. Americans are suffering from a mass Power Word Stupid spell and we had better soon wake up.

Dad

When I was a kid, my Dad stocked shelves at a grocery store. He had been there awhile and so his pay was higher than what someone would make starting out, but his longevity in itself is different from how things are today. My mom stayed home with my sister and me. We were a long way from rich but we were also a long way from being poor. We had a house, a car, food, clothes and health insurance, with enough extra to go on small vacations and to have nice christmases. You can't do that anymore - not with a low skill manual labor job - probably not even with a high skill manual labor job - maybe not with 2 of those jobs.

This isn't just my story - this is most of our stories. We don't get as much for the same amount of work that we used to. We all know this to be true. We know it in our realities and we know it in our guts. Have we gotten lazy, less skilled, less educated, less productive, less creative? No, we have just had a decades long assault on our compensation through stagnant wages, outsourcing, stripping benefits, beating down unions, and the poor state of our educational system.

But, it has to be that way.

Due to globalization, and low cost labor in other parts of the world, it is necessary for American labor costs to be reduced so American companies can remain competitive. Right? I mean, that's the argument isn't it? But then, aren't high wages and CEO pay as much a cost of business as labor costs? Why is it that low wage employees are the only ones who have had to make the sacrifice? Have American corporations been losing money, have CEOs and other high-wage earners been losing money or income? No, they are all doing just fine. In fact they're doing better than fine.  There are all sorts of statistics that show how well the wealthy are doing.  There's no need to go over all of them.  This one in particular, I think is pretty good - it shows percent change in households of certain wealth levels.

Capitalism

There is no morality in Capitalism. Pure capitalism is essentially a king of the mountain death match. We add morality to it because we dislike the idea of death matches. So, we have things like safety nets (welfare, unemployment, bankruptcy, etc), so that when people get tossed from the mountain (which we accept as being alright) they don't fall to their deaths. We also have referees (the SEC and other government regulators/laws/regulations) that can say things like, "hey you, gouging eyes out is unacceptable".

But, referees, have over the past few decades been increasingly bound and gagged (sometimes by themselves), and the people with power to make changes - who are also the ones making most of the money - have been free to rig the game in their favor. Rigging the game is exactly what they are supposed to do as good capitalists. They aren't necessarily interested in the greater good of the company or its workers or the country, they are only interested in the money in their pockets, and so they reduce whatever costs they can to make that happen; reducing compensation paid to labor, eliminating regulations and responsible risk management practices, and reducing taxes.

You don't have to believe that this is true. Reality proves reality. What is, is what was desired by those with the power to make it happen.

Middle Class

The country that we know today was largely built in the aftermath of WWII with the expansion of education, massive infrastructure development, and the rise of the middle-class. Whether it was understood or not people were seen as assets whose value was increased by providing them education, skills, and work opportunities that granted them the money and time to devote to consumption and leisure.

Now, workers are valued for how cheap they are, and we take large groups of people who could be tremendous assets and marginalize or disparage them (like treating immigrants as invaders).

What do we do?

It is simple.  And, it is impossible.  We do what I showed before:

A massive redistribution of income. Massive to the point of doubling minimum wage or more. Along with an equally massive effort to revamp the education system to not only be internationally competitive but build a workforce with skills relevant for the future.

Can this happen? No way - it isn't in the interest of anyone with the power to do it, and anyone who it would be in the interest of has no power to make it happen. We can not win.  I hope you weren't looking for a happy ending.

Notes

1. Data for taxes and spending comes from sites created by Christopher Chantrill. Taxes at http://www.usgovernmentrevenue.com/ and Spending at http://www.usgovernmentspending.com/

2. Michael I. Norton and Dan Ariely. "Building a Better America - One Wealth Quintile at a Time." Forthcoming in Perspectives on Psychological Science. Accessed 23 Jan. 2011. http://www.people.hbs.edu/mnorton/norton%20ariely%20in%20press.pdf

3.  Edward N. Wolff. "Recent Trends in Household Wealth in the United States: Rising Debt and the Middle-Class Squeeze—an Update to 2007." Levy Economics Institute of Bard College, 2010. Working Paper No. 589. Accessed 23 Jan. 2011. http://www.levyinstitute.org/pubs/wp_589.pdf


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Comments 21 comments

phdast7 profile image

phdast7 4 years ago from Atlanta, Georgia

junkseller! How did we miss this "Incredible Essay?" It is extremely well written, the graphics are wonderful and understandable. Your writing style is easy to follow, you make sense, you aren't a strident crazy or a hate-mongering ranter.

You exercise intelligence, reason, and a touch of humor. I think I may have died and gone to "Essay Heaven." Simply Amazing. Seriously, this is amazingly good work on all kinds of levels. Thank you! Sharing.


Angela Brummer profile image

Angela Brummer 4 years ago from Lincoln, Nebraska

I could have never understood this so simply except for you ability to explain and the picture book effect! Voted up up up!


Rodric29 profile image

Rodric29 4 years ago from Phoenix, Arizona

This is interesting but it is very one sided and partial. I was entertained by the graphs and language, but I only agree with a small portion of what you say. I am an republican leaning independent and I am poor. I am not deceived or tricked. I wonder why is that always the answer for people that disagree?

I will not deny your talent to entertain, but as a former talk radio junky, your words are just as divisive as many conservative hosts. I am entertained but misinformed.

Usually in this situation my assertions are disregarded or brushed off my name-calling. We need Republicans and Democrats to balance the government. Just as there are varying schools of though in the Democratic Party, there are varying thoughts in the Republican Party.

There are rich and poor in both parties.

Voted up for its entertainment value and interesting because of its informational merits.


peoplepower73 profile image

peoplepower73 4 years ago from Placentia California

Excellent presentation. I love the way you took complex issues and presented them one step at a time. It appears as if our political system is evolving to pure republican capitalism, mainly because might is right and in this case might is gazillions of dollars, thanks to Citizens United. I don't think there is much hope for liberalism and regulated capitalism. It's sad because I think we need a balance of both. I believe unfettered capitalism is very dangerous for this country, but it looks like that is where we are headed. And if the Republicans get total control of the government, they will blame liberal democrats for the problems they the republicans created.


junkseller profile image

junkseller 4 years ago from Michigan Author

@phdast7

Thank you for the very nice comments. I've always liked this hub. It's nice to finally get some feedback. Thanks.


junkseller profile image

junkseller 4 years ago from Michigan Author

@Angela Brummer

Thanks for stopping by. I'm a big fan of simple models, especially with pictures. Hope it was helpful.


junkseller profile image

junkseller 4 years ago from Michigan Author

@Rodric29

DIVISIVE

Being one-sided doesn't automatically mean divisive. I have presented a model which helps me understand things I see in the world, but it has enough substance to it that someone can take a responsive position to it. Someone could for instance present an alternative model which presents a different viewpoint or offer evidence they believe refutes my model. A back-and-forth between responsive statements is what I believe debating to be.

To me, being divisive is doing or saying something which is not responsive. Name-calling, for instance, or hyperbole. Obama is a Muslim socialist who wants complete control over you. That is hyperbole. Whether true or not, there is no way to respond to it other than saying, “no he isn't”. Now, if someone were to say that Obama is a socialist and offer as evidence his alleged membership in the New Party in the 90s than at least something has been offered to which a response can be given.

It is kind of a blurry distinction, but I think an important one. I am not a fan of divisiveness, but at the same time we can't be so worried about it that we do not present clear and strong arguments.

TRICKERY

This wasn't really meant as a criticism of my fellow citizens. While I do think some have been tricked, I don't think that is necessarily a reflection upon them, nor is the trickery exclusive to one party. And in truth, I didn't really mean this as a criticism of conservatism, either. If we take conservatism to be limited government and fiscal responsibility, I don't really have an issue with that, and even if I did I would have no problem with other people holding that position. I'm all for differing views.

This was meant as a critique of the Republican Party, whose plans always seem to have two phases. Phase one is to help business and the wealthy and phase two is to help regular people, but while phase one is always clear (lower taxes, kill regulations), phase two always seems to be theoretical--lower taxes on job creators and THEN they might create some jobs.

And while some Republicans may actually believe and work for phase two, I believe there are far too many of them who simply use the promise of phase two as a means to accomplish phase one. The fact that phase one seems to be working and phase two isn't would seem to support this conclusion.

MODELS

Models really can't be used as proof of a truth. They are simply a way to test observable behavior or patterns. Saying the model proves the behavior would be backwards. With the model, though, one could then test reality (and then refine or scrap the model). Walker in Wisconsin I think would be a good test case. Ostensibly his actions are to help regular Wisconsin citizens, but the only clear and direct impact so far has been to help business (through reduced wages and a stronger bargaining position). According to what I have laid out, Walker has successfully completed phase one. My theory is that phase two will never happen. We'll have to wait and see, and hopefully I will be proven wrong.

I have no problem with thoughtful comments. Your criticism has given me something to think about. Thanks for stopping by, reading, and commenting.


junkseller profile image

junkseller 4 years ago from Michigan Author

@peoplepower73

The marriage between Tea Party types and free marketeers has me dumbfounded. On one hand they warn against the dangers of the tyranny of government power, while on the other seem to have no concern at all for the tyranny of power in corporations. I don't get it. Even if you go back to Adam Smith, he wasn't a free marketeer like people are today. He understood as well as anyone the dangers of things like corporate monopolies.

The truth is that giving corporations complete freedom does NOT lead to a free market. The ability, for instance, for fossil fuel companies to affect politicians and thereby regulations, laws, land deals, and taxes can't possibly lead to a free market. In fact, if we truly had a free market, gasoline would probably be up around $10-12/gallon.

And so here we have Romney, a theoretical small-business, free market guy, saying he will get into office and lower gasoline prices, even though the only way he could possibly do so is either through the hand of government or by altering the market. It is bizarre.

I think we are on the same wavelength. Thanks for stopping by and the nice comments.


suzettenaples profile image

suzettenaples 4 years ago from Taos, NM

This is brilliant! You have a keen understanding of economics and politics. I hope you are planning on running for POTUS someday so you can implement your ideas and strategies. If this is what you propose, I will vote for you. This is so interesting and informative. I agree, we need to make minimum wage a liveable wage. Yes, the money needs to go directly to the people, not the entitlement circle you presented. Great suff! I never believed in triple down economics even during the Reagan Administrations. I always said, his ideas were a bunch of baloney. Now, we are reaping what Reagan sowed. Thank you for illustrating this so well!


peoplepower73 profile image

peoplepower73 4 years ago from Placentia California

Junkseller: I like the way you think and can cut through the fog of name calling, hyperbole, and propaganda. it's a very refreshing approach. Some how the republicans seem to think that everything in the private sector is self-regulating. If someone gets exploited as a result of fraud, so be it. That person will be extinqushed and the system will some how take care of everything by seeking its own level. Therefore, greed and corruption is not a bad thing, because the system is self-regulating. However, when the banks needed a bailout, the money came from the public sector, not the private sector. I look forward to reading more of your comments.


junkseller profile image

junkseller 4 years ago from Michigan Author

@suzettenaples

Junkseller 2016! Haha. Actually I think I'd be a terrible politician. I am far too idealistic and not nearly political enough, though I guess by today's standards that might make me perfect. I'm curious if you have looked at Jill Stein's campaign. She is the Green Party candidate. I haven't looked that closely but she does seem to at least be a populist. Supports a living wage for everyone, a new green economy, tougher financial regulations, etc.

SUPPLY SIDE ECONOMICS

I was reading a bit about supply-side economics recently (which is related to the idea of trickle-down economics). The basic premise is that boosting the supply side of the economy can potentially boost the demand side and improve the overall economy. So for instance by lowering taxes, businesses can produce more, lowering the price of goods, and people will have more money to buy more. Overall result is a better economy. This actually makes sense and in fact the basic ideas are now just considered part of regular economics.

The problem of course with lowering taxes is that the government loses revenue (at least in the short term). From what I have read most economists seem to agree with this.

The original supply-side supporters were pretty smart people and they understood the loss of revenue issue, but they were also more like surgeons with a scalpel, and believed supply-side policies should be used specifically and selectively. Not all cuts will be positively or equally good.

Today's slash-taxes-no-matter-what politicians have two problems. Generally, they seem to be dishonest about the loss of revenue issue and either do not mention it or do not offer spending cuts to compensate, and they no longer seem to be surgeons. Instead they are hatchetmen who charge into the room and start hacking at anything that says tax on it. I'm exaggerating of course to be dramatic, but the point to be made is that they seem to base their tax policy on ideology rather than economics. Though the same can probably be said about many Democrats as well. In truth, the macroeconomics of our world are extraordinarily complex, and it is probably only a handful of people who truly understand the ramifications of different policies.


JayeWisdom profile image

JayeWisdom 4 years ago from Deep South, USA

I encourage the author of this hub and everyone who reads it to read a book by Nobel laureate and Columbia professor Joseph Stiglitz. That book is: The Price of Inequality.

Even before you read the book, please check out what Stiglitz (as a real economist) has to say on the Daily Ticker at these links: https://ieonline.microsoft.com/#ieslice

http://news.yahoo.com/video/dailyticker2012-278394...

There are some good brains in the U.S. Unfortunately, they are not in the U.S. government!


suzettenaples profile image

suzettenaples 4 years ago from Taos, NM

Wow! You are one interesting person. So sorry you won't consider running for President lol! All the people with the good ideas don't want to run for Pres. I'm idealistic too, so I know where you are coming from. But, at least you know what you are talking about. I understand your point about the trickle down economics. I theory it sounds good - in reality, our government has been too corrupt for it to work. And, the point you make about slashing taxes is a good one. Thanks, though, for an interesting discussion.


JayeWisdom profile image

JayeWisdom 4 years ago from Deep South, USA

The first link I added was bad. This is the right one:

http://news.yahoo.com/video/dailyticker2012-278394...


phdast7 profile image

phdast7 4 years ago from Atlanta, Georgia

Junkseller- Thank you for writing such a topical and important Hub. Terrific conversation. :)

JayeWisdom - Thanks for the recommendation. I just went online and buoght a used copy of Stieglitz book. :)


junkseller profile image

junkseller 4 years ago from Michigan Author

@JayeWisdom

I haven't read Stiglitz, but would like to. I'd also recommend his book (co-written with Linda Bilmes) "The Three Trillion Dollar War: The True Cost of the Iraq Conflict"

Ayn Rand types present an ideology that the rich are rich because they are essentially better people. They've worked harder, are smarter, or whatever the case, and deserve everything they have.

Stiglitz seems to represent the opposing view. The rich are rich (partly) because of their access to the game which they have rigged in their favor. He seems like a smart fellow, I'd like to read some of his stuff.

He was on Democracy Now on June 6. He talked a little about his book as well as other topics. http://www.democracynow.org/2012/6/6/joseph_stigli...


Rusti Mccollum profile image

Rusti Mccollum 4 years ago from Lake Oswego, Oregon

The American people need to band together and say enough is enough. NUMBERS talk.The more people that get mad the more our "elected" officials will listen.They of course want to be elected.Instead they lie, get in office and like fighting a big bully we just don't defend ourselves.We don't hold the accountable,for the promises they make.


JayeWisdom profile image

JayeWisdom 4 years ago from Deep South, USA

There are entrepreneurs, intelligent and hard-working, who deserve the wealth they earned, but many rich people in America simply had the luck to inherit their money. Some of these fortunes have passed down for generations straight from the robber barons of the early 20th century.

This subsection of the very affluent don't even have to waste thought or energy looking after their money and making it multiply or avoiding the payment of taxes. Their family's squadron of attorneys and accountants handle those onerous tasks for them.

Simply having and spending boatloads of money amassed by someone else (possibly unethically) nearly a century ago does not render the current beneficiary/spender "special." That's my opinion, of course, and many people will not agree with me.


Kathleen Cochran profile image

Kathleen Cochran 4 years ago from Atlanta, Georgia

There are entrepreneurs, intelligent and hard-working folks who have also been give a huge advantage over the middle class because of regulations that either went away or were ignored. Too often when someone says they want smaller government what they mean is they want fewer regulations and fewer folks enforcing the ones that are left.

Junkseller: "You are accurate and ethical and I want you out of this building." It's from the movie, The Paper. Ever see it?

Up and useful.


cprice75 profile image

cprice75 4 years ago from USA

Interesting points. I liked the section titled "But, it has to be that way." Isn't it interesting that those who want to cut production costs only tend to throw those costs on the little guy. Their own compensation tends to go up. Fascinating.


dellea 2 years ago

junkseller... I've actually disagreed with 99.9% of what you've written here on Hubpages, however this hub seems to be the single belief-connection that we have in common... not only factual but revealing, very accurate indeed!

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