There will be spending cuts and tax hikes. Everyone thinks I'm out to lunch on this. But I don't care. I double down on this prediction.
Discussion
Agree, Tax hikes for sure.
Spending cuts not so sure.
The pairing of tax hikes and spending cuts will almost certainly be how a bipartisan consensus forms in response to the coming fiscal crisis. I feel good about my prediction.
Federal spending is $6 trillion and the deficit is $1.4 trillion.
The US would need to scrap its entire military budget ($800bn) to bring the deficit down a level where 2.7% CAGR is enough to stay solvent.
I don’t see that level of tax rises and spending cuts happening any time soon.
Yeah. I think it's mistaken to believe the political constraints on spending cuts and tax hikes will remain in perpetuity, if a full on government solvency crisis takes hold.
Also, I think it's not inconceivable that economic growth is about to go parabolic world wide, due to advances and automation. The account balance of the US Treasury may be the least of our problems in the coming decade.
But how do you tax AI?
It can move tax jurisdiction just as frictionlessly as capital. It’s not like oilfields.
Maybe giant data centres will move towards low cost energy locations?
But AI is likely going to be extremely difficult to tax and a huge amount of the profit will never be repatriated or taxed.
In fact it’s probably quite likely that AI destroys the tax base of most countries.
Perhaps. But I think the coming mass displacement of employment is going to shift political incentives in dramatic ways that will reset a lot of assumptions about where the Overton Window lies for policy potential.
I think we start gaming out various scenarios now.
I have no idea where we are heading but I can easily imagine half a dozen very different worlds in 5-10 years time.
I think there's a tendency among people in these conversations to believe that state capacity is in precipitous and irreversible decline. I think this stems from oversimplification of the equities and incentives.
To add a historical analogy: Weimar Germany's currency failed and the government became insolvent. But that did not presage a dissolution of the state, it presaged a massive increase in state capacity. And we all know how that turned out.
Excellent point. So many people argue that the dissolution of our institutions will lead us to eden. Without them, the scared, desperate, gullible majority would become the plaything of the despot with the best story of who to blame.
Not a popular viewpoint around these parts!
No. I appreciate your views and the arguments you’ve presented here. There is no doubt the ship we are on has been corrupted, but let’s not burn the blueprints.
Here's another unpopular view: I don't think our society is anywhere near a maxima in terms of corruption. Anybody who has studied political history carefully, would find themselves disabused of this notion quite quickly.
There is this strange element in many of these conversations which comes down to what I've previously called the "denial of progress", which appears to be born partly of ignorance for the problems of the past, and a human tendency to always think things are getting worse. Even when it's not true by any objective measure.
I would agree with this statement. Many wish to believe that their struggles are far more severe than their ancestors. I have more reasons than most to believe this, but I know it so far from the truth, on so many levels. Does this mean that mine don’t matter, or that we can’t work to make these better, of course not.
I think I'm pretty open-eyed about the challenges we face. I talk about them all the time. But I'm allergic to notions of "everything is so fucked, we need to burn our institutions to the ground and start over." I just get off the bus at that point, because I perceive extreme risks to freedom, liberty and peace if that were to transpire.
Many people are convinced that tools like bitcoin mean that none of these negative outcomes will come to pass, so they're sanguine about the idea of a catastrophic collapse of all of our political institutions. But I think this is silly at best, and dangerous at worst.
A desperate, starving bear will eat its young. History has shown us that a desperate group of men, will do far worse things than a bear.
I think parents will always organise institutions because they are a requisite for keeping children safe.
Anarchists are generally teenagers and young adults, and people soon grow out of this once they consider their own children living in a world with malevolent actors.
The first social problem to solve is malevolence.
🎯
It also doesn’t help that doom sells.
The key difference is that we now have a money that can be in the hands of the people not a central authority. While I think it’s a long shot, it does make for a different case from historical examples. We are entering new territory and it’s not an apples to apples comparison.
It's not dice I think we should roll. Iteration is better for bitcoin and for everyone.
Not at all difficult to tax.
Why would AI be difficult tax?
I think that is similar to tax internet companies.
Tax hikes often decrease total tax revenue over the long run
Yeah. But I don't think we are near the peak of the Laffer Curve, right now.
I’d have to see a breakdown of where the revenue is generated. I believe that either 2021 or 2022 was the biggest revenue year of all time, in part due to all the capital gains. With the money printer off, even increased tax rates might only produce a comparable amount of income instead of a greater amount, and I could see it becoming very quickly destructive to economic activity especially as we enter the next crisis.
The system violation is when the total debt grows faster than GDP in nominal terms.
That’s where USA is after COVID.
Debt is growing at $1.4 trillion per year (the deficit).
GDP is $26 trillion.
$1.4 trillion / $26 trillion = 0.0538
Which means US GDP now has to grow at 5.4% CAGR in order for the US government to avoid hyperinflating the USD under current tax and spending levels.
If you think a sustainable GDP growth rate is 3% then that’s a maximum sustainable deficit of… $26T x 0.03 = $780bn.
Now the Congressional Budget Office is predicting the opposite, they’re saying the deficit is set to double to $2.8 trillion within a decade as population ages.
Structurally the US is racing into a brick wall. It has been for a long time but only in terms of rates. We are now in the era of the national debt nominally outrunning GDP.
The window to recover from this is probably tiny.
I think the mistake is just assuming these variables will all hold constant. Market and political incentives will change over time. And there's going to be serious pain that will come from the necessary adjustments that will be forced on the system.