Everybody Loves Reagan

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We studied Reaganomics last semester and it was quite interesting. Reagan’s plan tried to fix several huge economic problems. The economy was terrible when Reagan took office. Unemployment and inflation were high, and the country was deeply in debt. Here are some highlights to impress your friends with:

One thing that was destroying the economy was inflation. Reagan wanted to reduce inflation rates, so he restricted access to money. The Federal Reserve made interest rates so high that people couldn’t take out loans for cars or homes, and businesses could not expand. The idea was that if people couldn’t afford things, then the cost of those things would have to go down. It was incredibly painful to the economy early on. However, the plan worked. In 1983, when they finally lowered interest rates, the economy rocketed back up.

Reagan believed that deficit spending—spending money the government didn’t actually have—caused the country’s economic problems. His administration decided that best way to solve this problem was to reduce the amount of money the government spent. He cut or reduced several programs, but increased the military budget and canceled out much of the cuts. He did not manage to reduce government spending enough to offset the rest of his ideas.

The cornerstone of his presidential legacy, known as supply-side economics, was a reduction in the federal income tax and capital gains tax. The idea was that by taxing companies lessand, therefore, increasing their supply of money, they would put that money back into their businesses via expansion that added more jobs as well as improvements to production and service so that products were cheaper to purchase. By not taking as much money from individuals, the assumption was that they would able to spend more and contribute to economic growth.  Individuals would earn more, and pay taxes on that extra money, thereby replacing the government’s loss from lowering taxes. This is a controversial idea and opinions on the results are mixed. The general consensus is that any tax cuts need to also be reciprocated by reduced government spending in order to be completely effective.

Reagan also reduced government regulation. The goal was for thegovernment to take a backseat. He deregulated phone, gas and cable companies with the goal being “healthy competition”. Under his Presidency, the government also backed off from overseeing Savings and Loans companies. This gave those companies much more leeway in what loans they gave and what interest they could charge, savings and loan businesses could make incredibly risky investments. Many see this as what set the stage for the recent real estate crisis.

His policies were drastic and in some ways very effective at getting the economy headed in the right direction. Many herald him as a great economist who made the tough choices to get this country out of the worst economic downturn since the Great Depression.

I find it incredibly interesting that some of his policies were not nearly as effective as he wanted them to be, had what could be considered a questionable lasting impact, and yet there are people who completely swear by his presidency.

Why National Debt is a Problem

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Think about the government the same way you think about your own budget. They “earn” money by charging taxes. They have “bills” that they need to pay, such as government programs, public subsidies, and make payments on loans to other countries.  The problem here is that the federal government does not need to balance its budget. It does not have to account for all the money that it spends but can’t actually pay for. If you want to see what we currently owe, check out this debt clock. At the time I’m writing this, each person has to make almost $58,000 more than they already are just to cover the amount of money the government has spent up til now.

This makes me angry. There are plenty of things that I want: a new rug for my ugly apartment, a fancy dinner out every once in awhile, a better computer, the newest iPhone. But these things cost money, and I don’t have enough. Plus I know I am incurring debt through student loans that I will have to pay off. I could use credit to get the stuff I want right now, but someone will come looking for the money. Because I won’t have it, I’ll have to file for bankruptcy. Yes, I might get to keep my new iPhone, but they would probably turn off my service and make it worthless. My credit will be so damaged that it will affect my job prospects and my financial choices.

If I was the federal government, though, it would not matter. If I were the government, I’d have a few choices. I could print more money so that I could pay off all my debt, causing inflation. If I didn’t want to do that, I could just raise taxes and make other people cover my debt so that I broke even. Another option would be to offer bonds. Kind of like that saving bond your grandma got you for your 8th birthday. Investors bid on the bond and whatever they pay for it is what the government earns. The problem with this system is that the loan will eventually come due. With interest. So the government will end up owing even more than they raised. If tax revenue has not increased, they will be unable to pay off the now-due loan. They will be presented with the same three options as before. So they will issue another bond. And it will go on and on.

Eventually, though, nobody will want to buy the bond because it will be too big of a risk. And if you don’t think that is a possibility, look at Greece. Then the government would be forced to either print more money—and make the dollar basically worthless—or raise taxes to a dangerously high level that could force companies out of business and people out of work.

It is a vicious and dangerous cycle. It worries me, and it should worry you, too.

It Doesn’t Matter What You Call It.

Because states—and Washington D.C.—have the right to tax its residents however it sees fit, it can vary greatly from state to state. In some states, there is no income tax at all. The following states do not tax individual income: Alaska, Florida, Nevada, South Dakota, Texas,Washington, and Wyoming. In addition, Tennessee and New Hampshire only tax things like interest earned from stocks and bonds. It sounds like a good deal and that people should be flocking there to keep more of their earned money in their pockets. But is that the whole story? Of course not.

States need money. It has to come from somewhere. Even if you aren’t paying income tax, it is coming from somewhere. Some states, like Alaska and Nevada, have other ways to make up for their loss in revenue. Nevada has gambling money, and Alaska has oil money. Other states use one or a combination of sales, corporate, and property taxes to generate capital. Most places even let governments on the local level get in on the action.

In other words, they’re still getting your money. They just call it something different. For example, Texas and New Hampshire both made the top 10 list of states with the highest property taxes. So maybe they don’t take your hard earned cash right out of your check every week but the land your house is sitting on is going to cost you. Wyoming and New Hampshire are in the top ten for vehicle taxes, too. Texas and Washington also break the top 15 of states with the highest sales tax rates. Wyoming’s tax base is 99% and is so different that I have to study it separately, and it taxes its residents enough that it ends up taking the 4th highest amount in the country. But, you know, no income tax.

Be smart, America. Don’t get suckered in by relocation sales pitches. When they throw things like “no sales tax,” “no income tax,” or “corporate tax breaks and incentives” at you, take a look at what they mean. Do real research when you are debating a move. If you have a choice on where to go, think about what you want your future to look like. Are you planning to buy a house or a car? Are you looking for somewhere that is small business friendly? What about if you are near retirement age? There is a lot to consider when you look at the tax implications. Look not just at how much they plan on taking out of your check. Look into how much they plan on getting out of your checking account, too. Some of these places might end up seeming too good to be true. You might change your mind and pick somewhere else. That low priced real estate they’re trying to sell you on might eat you alive in property taxes. Look at the state and local sales tax rates. You might be surprised.

You don’t have a choice about the cost of taxes at the federal level, but moving to a different county or state can impact how much of your money you get to keep. Don’t forget that.

Where is Your Money Going, America?

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This is an interesting question. Believe it or not, the White House actually tells you.

Since social security and medicare are collected separately and itemized on your W-2, these are the big ticket items. But they are obvious because they’re listed clearly on your tax forms. You can go back and look for exactly what you are paying into these.

Do you know where the rest of your money goes?

At least back through 2008, defense and healthcare have been the top two. They occasionally flip-flop for the top slot. But with the ACA being in full effect now, it probably is no surprise to anyone that healthcare is the biggest money grubber at a little over a quarter of all remaining funds collected. Nearly half of the money going into healthcare goes to Medicaid and CHiP.

As I mentioned, defense takes up the next biggest piece of thepie, at 24%. However, out of that total, less than 6% goes toward military pay and benefits. That is health care, insurance, and pay for members and their families. We are talking .015% of total budget. This is not a large amount. Equipment and supplies are the big ticket item here at nearly 10% of the defense budget. How much of that do you think are huge government contracts that senators push for projects in their respective states? I bet it’s an impressive number.

After that, most of your money goes toward federal pensions and public services. Which is not very surprising since congress can make back up to 80% of their pay for their retirement, and they get paid handsomely. You only have to serve five years—in contrast most companies and public service make people work 20—and senators are elected for six, so it is a done deal for them. They still have to wait for retirement age, but still.

The next thing your tax dollars pay for is interest on money that the government owes on bills they aren’t paying back or have not finished paying. Nice, right?

Rounding out the bottom are things like VA programs, the justice system, state parks and other natural resources, science and space programs, and natural disaster funds.

I know people who really like getting a large tax refund at the end of the year. I do not. Here’s why: If you get a lot of money back, you are giving the government an interest-free loan for whatever they want during the year. Then you or someone you hire has to navigate confusing tax code—all to get as much of your money back as you can. If your deductions were set up properly, the government could only take what it actually deserved. You would break even at tax time. Granted, it is not as fun anticipating a zero balance. But which would you rather have: that money in your accounts all year helping you pay bills or earn interest, or letting the government borrow it interest-free?

Think about it.

So how is the Thesis Going?

That is all anybody seems to ask lately. It is “Hi, What’s up? Oh, you’re writing a thesis, right? How’s that going?” I don’t know if people are just trying to be nice or what because they likely don’t care. People don’t actually want to hear anything about economic policy. Usually, they get all glassy-eyed or fall asleep and start to drool. And I get it. This stuff isn’t for everyone. I think it is interesting, but then again, of course I do. I learned early on that economic theories aren’t something you bust out with at parties. It would be nice if I could talk about it a little more, as I am going to have to defend the thing at some point, but that’s why I’m a teaching assistant, right? Guaranteed audience that has to sit there and listen to every word I have to say.

But anyway, back to the thesis. I am still in the work phase, so I am elbow-deep in global economic studies. My thesis centers on using Greece as a cautionary tale to argue against moving toward a more global economy, particularly with a unified currency. Printing additional currency, while it increases inflation, is an important tool in the economic arsenal of a nation when they need to get out of a recession. If you take that ability away, dangerous things can happen. Imagine what the country would be like if we literally ran out of money. Other countries who shared our currency would be able to interfere with, and potentially dictate, our ability to recover.

Sometimes my thesis keeps me up at night. My brain gets caught up in creating all these terrible scenarios. The problem is that they are so believably terrifying. It makes me wish I had picked a topic about kittens or interior design—a hobby of mine. Granted, my econ professors would not like it but it might helpmy insomnia. Then I go back to the library and hit the stacks again, and find out something really interesting, and I am happy with my topic again.

I know myself and how I jump from research lily pad to research lily pad—much like other people fall into YouTube wormholes, so when I write, I actually disable my internet access. It helps to keep me focused on the information I’ve already gathered.

I am going to take some time out to design some imaginary global currency. Aside from being fun to do, I think it will add something to the actual report. I am thinking yellow and purple. This is what I think about when I get writer’s block. It is a good way to ease myself back into the topic, and it is fun to think about making your own currency.

If you had the chance to make your own, what would you call it? Mine is still nameless.