October 23, 2009

Year-end Deficit Report, Part 2: AP’s Crutsinger Misses ‘The Year of Going Galt’

AtlasWillShrug1009As I pointed out Monday night (at NewsBusters; at BizzyBlog), Associated Press reporter Martin Crutsinger, in his Saturday morning report on the federal government’s full-year fiscal results, conveniently “forgot” about a major accounting change that enabled President Obama’s Treasury Department to report a final “deficit” of “only” $1.417 trillion.

That’s hundreds of billion of dollars lower than the $1.75 trillion expected in February. The change, which caused “investments” in financial institutions, General Motors, Chrysler, and other entities to be accounted for on a “net present value” (NPV) basis, had an initial impact of over $175 billion when first implemented. Crutsinger ignored the change, even though its implementation occurred after that February estimate.

Though the end of a fiscal year represents a perfect opportunity to extend readers’ understanding of how our government (sort of) works, Crutsinger also did not tell readers that the reported “deficit” is nowhere near the amount of the increase in the national debt that occurred during the fiscal year. As of September 30, the national debt was $11.910 trillion, or $1.885 trillion higher than the national debt a year earlier. That means that the most recent year’s “unreported deficit” was $468 billion.

One other area where Crutsinger erred was in his breezy opening paragraph assessment that the precipitous drop in cash receipts during the most recent fiscal year – officially understated for a reason I will note shortly — was entirely due to the recession:

The federal budget deficit has surged to an all-time high of $1.42 trillion as the recession caused tax revenues to plunge while the government was spending massive amounts to stabilize the financial system and jump-start the economy.

…. For 2009, the government collected $2.10 trillion in revenues, a 16.6 percent drop from 2008. That was the largest percentage decline on records going back nearly seven decades.

Not so, sir.

The first thing to understand is that the drop in receipts from economic activity was much worse.

The only reason the government is able to claim that receipts dropped by “only” 16.6% is that Treasury treated the $96 billion in economic stimulus payments made during calendar 2008 as “negative receipts” instead of more properly accounting for them as outlays. A case could be made for this treatment if every taxpayer had received a stimulus payment proportional to the amount of tax paid. But this isn’t what happened. Many higher-income tax payers did not get a stimulus check, while many lower-income filers who paid no tax at all still got one. By contrast, a similar mass-check payment program that occurred earlier this year involving payments that went to Social Security recipients was properly accounted for as outlays.

The properly stated degree of the receipts drop is 19.5%, as shown here:

USTrecsAndOutlaysFY09v08

Now that the full extent of the decline in receipts is clear, let’s look at how and when the drops occurred. Let’s start by looking at the situation quarter-by-quarter:

USTquarterlyCollectionsFY09

The fact of the matter is that this recession — where the drop in real GDP has been less than 4% — doesn’t fully explain why year-over-year quarterly receipts dropped by as much as 31% during the past fiscal year. Something else is at work here. Martin Crutsinger should have looked into what that something else might be.

I described what I believed it was in July 2008. I came to this description after watching Democratic nominee-to-be Barack Obama, Nancy Pelosi, and Harry Reid spend the previous weeks demonstrating total disinterest in or hostility towards getting this economy the energy it needs to function and promising to radically raise taxes on the most productive in the name of wealth redistribution. Here is what I wrote:

Businesses and investors are responding to their total lack of seriousness (about energy and taxes) by battening down the hatches and preparing for the worst.

The most productive people began to withdrew into their cocoon not because the economy was in a serious recession — at least as normal people define it (second quarter 2008′s annualized growth was +1.5%). What happened is that enough of them to matter started “going Galt.”

Looking back in April 2009 at the previous nine months, I wrote the following about what subsequently took place:

Starting in June (2008) and all the way through to Election Day, Nancy Pelosi, Barack Obama, and Harry Reid repeatedly told the country that they were ready, willing, and would soon be able to starve the country of the conventional sources of energy it needs to keep its economic engines running, regardless of the consequences, bowing before what may be the greatest hoax in human history. Enough high producers to make a difference believed them and abandoned their previous guarded optimism.

Starting in June and all the way through to Election Day, Pelosi, Obama, and Reid — but especially presidential nominee Obama — told the country that they were ready, willing, and would soon be able to punitively tax the 5% of the nation’s most productive so they could redistribute money to everyone else. Enough high producers to make a difference believed them and abandoned their previous guarded optimism.

In September, the decades-in-the-making, Democratic Party-driven housing and mortgage lending mess came to a head at Fannie Mae and Freddie Mac. Washington then allowed itself to be blackmailed into a series of financial sector and other bailouts that appeared to be, and have turned out to be, seemingly endless. Enough high producers to make a difference headed for the lifeboats and abandoned what little optimism remained.

Enough high producers to make a difference abandoned their spring (2008) optimism, not because of then-current economic conditions, which were at worst mediocre. They did so because of their assessments of what economic conditions would be in the not-too-distant future, based on the perilous pronouncements of Pelosi, Obama, and Reid. Many of those who didn’t catch on during the summer did so after observing the reckless September-October actions of the Washington establishment.

As a result, they took steps that businesspeople, entrepreneurs, and investors ordinarily take when a serious recession takes hold — not hiring, not expanding, letting people go and not replacing them, making worn-out equipment last longer instead of buying new, and others — before the serious recession took hold. They deliberately downsized in response to stated promises by powerful government officials Pelosi, Obama, and Reid to penalize and punish them and the economy as a whole, if and when they gained power.

In other words, enough high producers to make a difference preemptively “went Galt.”

The horrid collections results of the first three calendar quarters of this year, especially the cliff-dive in individual income tax receipts, were at least as much the result of the “going Galt” phenomenon as they were of the recession itself.

The third calendar quarter’s shortfall of “only” 14.4% might appear to be cause for hope.

Nope. Thanks to this administration’s failure to do anything about the chronic uncertainty and fear it has injected into nearly every nook and cranny of the economy, the government’s collections shortfall has spread to what it gets through withholdings from workers’ paychecks:

UST4Q09v08ReceiptsRefunds

Year-over-year collections from withholdings fell over 10% during the most recent quarter, even though average quarterly unemployment increased “only” 3.5% during the intervening year. Many formerly well-paid employees are earning much less, paying not only less tax, but proportionally less as a percentage of their lowered income. Employees at the lower end of the pay scale are working fewer average hours. Given that most economists and other analysts both in and out of the government are saying that unemployment will stay high until at least late 2010, future year-over-year improvements in the withholdings number, which is by far the most important one on the list, are probably not on the horizon.

That’s especially true because the disincentives to work hard have increased significantly during this administration’s early months, and there are more possible disincentives on the horizon. This Forbes report by Janet Novack and Stephanie Fitch (“When Work Doesn’t Pay For The Middle Class”) explains how ugly the situation is in great detail.

What the Forbes pair is essentially telling us is that “Going Galt” has spread from the highest producers to above average and average ones. This, at least as much as the recession itself, explains why collections have cratered so severely, and why anyone expecting a robust recovery in money coming into the Treasury is probably setting themselves up for significant disappointment.

The establishment media’s failures to recognize and cover the “going Galt” phenomenon of the past 16 months, and the more recent “it isn’t worth it to work” trend, are two more significant journalistic oversights in a very, very long list of them.

Cross-posted at NewsBusters.org.

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28 Comments

  1. We have cut back drastically, used all extra income to retire debt, and cut off any spending not necessary for survival.

    We are leaving California for Tennessee, 65+ acres with varying topography, plus three water sources and four natural gas wells. I will be installing solar panels and a turbine on the creek that flows right next to the house. We are going off the grid.

    My government wants to rape me, I won’t be there for the taking. Wake me up when we have a true conservative in the White House and true conservatives running Congress.

    Comment by Blogspan — October 23, 2009 @ 5:48 am

  2. [...] THE YEAR OF Going Galt? [...]

    Pingback by Instapundit » Blog Archive » THE YEAR OF Going Galt? Plus, When Work Doesn’t Pay For The Middle Class…. — October 23, 2009 @ 7:04 am

  3. “Boohoo for them. Many people don’t have a job at all. Now THAT’S a problem.”

    But, the “problem” is significantly because the people for whom you shed cynical tears have opted out. Do you want those people without jobs to have them again? Or, do you prefer to satisfy your desire to look down your nose at the people who “brood more about the x%”?

    Comment by Bart — October 23, 2009 @ 7:25 am

  4. Thoreau was “going Galt” (not that I can remember Atlas Shrugged all that well) long before there was a nanny state. It’s kind of disingenuous to blame it on Obama and pals. There are hundreds of good reasons to take the 65+ acres in Tennessee etc. many of them enthused over by the hated greens. If you’re a lefty, I guess that you can say you are did it because of GWB, if a righty, because of Obama. Why not because it is what makes sense to do, or what you WANT to do?

    Comment by Dwight — October 23, 2009 @ 8:54 am

  5. [...] it, there are some basic principles they just don’t [...]

    Pingback by To Summarize: The Democrats Have Absolutely Sucked For This Economy « Tai-Chi Policy — October 23, 2009 @ 9:15 am

  6. #3, but did Thoreau do what he did for strictly economic reasons because the fruits of his labor were being plundered, thus concluding that he would work less and enjoy more leisure?

    Comment by TBlumer — October 23, 2009 @ 9:30 am

  7. No, of course Thoreau did not do it for purely economic reasons. One has to have a mind that thinks “purely economically” to do anything for that reason. He wanted to have time for what was important to him, including the “work” unique to him. If people are going countrified just because they are damned if they will give more taxes to the government, then they are not likely to be particularly fulfilled in the country either. Most people who are good with money, think about it a lot, and also brood more about the x% that the government is “stealing” from them. Personally, I think that such a mind-set is its own punishment. One has to listen to a lot of whining and howling. It is tedious to listen to, but the folks are so passionate about it, it must float their boat. The idea that something beside money and their work is worth spending more time on, may not come so easily to many of them.

    Boohoo for them. Many people don’t have a job at all. Now THAT’S a problem.

    Comment by Dwight — October 23, 2009 @ 10:36 am

  8. For what it is worth, I payed off my debt and since the tax break under the stimulus was only a change in withholding and not a change in my tax liability, I’ve simply chosen to work less hours, despite the fact that I can work 8 hours OT every week if I wanted.

    Why fund this disaster of a presidency if you don’t have to.

    Comment by The Machiavellian — October 23, 2009 @ 11:25 am

  9. #6, oh for cryin’ out loud, “going Galt” in the modern sense isn’t about total withdrawal. It’s about choosing more leisure over work, because work isn’t worth it. It happened first to those who either are punished the most because they are the most successful and others who see it coming.

    It’s now happening to the middle class due to the shackles disguised as welfare and other government benefit programs that move one towards leisure simply because the grief, stress, and costs involved in working aren’t worth it when the government is on a marginal basis going to get more out of it than you are — and will then waste it.

    Comment by TBlumer — October 23, 2009 @ 11:29 am

  10. I saw this coming in 2006 and wrote as much in August of 2007 on a variety of political forums, to the chuckles of the left who advised the 2008 issue would be the war and by the right who did their ‘don’t worry, be happy’ dance. Undaunted, I put my home up for sale and got out at the top of the market, paid all debt, moved from a high tax state (Maine) to a low tax one (Idaho), bought a new home for 10% less than asked and put down a big down payment, locking in a good 30 year fixed rate mortgage,moved all my 401K funds into conservative IRA’s. I have made it through the last two years on a much smaller income but have made money in my IRA’s, live modestly on my own funds, and think I can go on like this for a very long time…IF we do not have hyperinflation. I did not plan for all the government spending and our printing press economy. I should have bought a lot of gold or silver and bailed on the economy a year earlier.

    Comment by JIMV — October 23, 2009 @ 11:52 am

  11. Didn’t Thoreau bring his laundry home to his mother and live off friends? Not really going Galt.

    Comment by Mark — October 23, 2009 @ 11:59 am

  12. From what I am seeing, “going Galt” in the modern sense now means not choosing more leisure over work, but more choosing of increasingly sophisticated ways of cheating on taxes, more cheating on customers, more cheating to take advantage of government wealth transfer schemes, and more outright involvement in illegal but profitable activities.

    What was law-abiding civil society has now decided that they are going to join the political class (and certain professional classes) in their philosophy of “by any means necessary”.

    Comment by PR — October 23, 2009 @ 12:04 pm

  13. Many people are going off the financial grid, for a variety of reasons everyone mentioned here. One issue not mentioned is the drop in available credit for small businesses — a direct result of the government takeover of the largest banks. Increased taxes and less available credit are part of the plan to increase conformance to the new government order.

    However, there is a greater moral issue involved. Who wants to have anything to do with a government that has become so powerful and corrupt that it takes a majority of the earnings of the productive class and turns around and uses it to “buy votes” from the parasite class?

    Anyone wondering why Obama doesn’t seem to go below 50% in the polls needs to look at the numbers of beneficiaries of his largesse (with other’s money). It’s about 50% and that is by design. You get elected by 51% and if you steal from 49% and use it to get 51%, you just bought the election.

    Happy Days!

    Comment by Concerned Citizen — October 23, 2009 @ 12:22 pm

  14. Odd. My comment at # 3 was addressed to the comment at #7. Gah! I’ve slipped backwards in time again!

    Comment by Bart — October 23, 2009 @ 12:29 pm

  15. #6, you are missing the central point of going Galt by Small Business owners and those who make large wages, the point is that all economic activity is governed by the risk/reward relationship. As an example, if I make a 5% net profit on my current activities and I know between Cap & Trade’s higher energy prices and ObamaCare’s higher employee costs will exceed my profit margin, there is NO POINT in increasing my exposure to that risk. The logical response is to REDUCE and levelise my future risk by: 1) shedding employees who will cost me more and 2) NOT expanding my operation risking more capital since there will be no net return on it, in order to maintain my net 5%.

    Here’s another way to look at it, Pareto’s Principle: The 80-20 Rule
    http://www.bsu.edu/libraries/ahafner/awh-th-math-pareto.html

    If I can achieve 80% of my goal by expending 20% of the total effort, is it worth it to me to expend 80% more effort to get the remaining 20%???? Progressive Taxation does pretty much the same thing. It’s not a question of whining about what the government is taking from me, it’s about being unwilling to work for free for the government who pisses away my hard earned money on nonsense. The whiners are the bureaucrats who act as parasites breeding exponentially with little if any benefit to the host.

    Comment by dscott — October 23, 2009 @ 12:33 pm

  16. In 2007 we started hearing from regional bank and high net individuals their fears about an Obama Presidency. They were withdrawing from all “risky” ventures. Not withdrawing from the marketplace completely but lowering their level of exposure to risk.

    Throughout 2008 the trend continued and we adjusted accordingly. Simply put, we lowered our exposure to risk as well as our expectations of reward. In March, we closed down our last venture after failing to find reasonable rates to replace worn equipment.

    The uncertainty of govt action and future actions added too much risk into normal decision making for any ordinary investor or lender. The only loans and investment being made are secured several times over and at rates that make it impossible to repay and remain viable without a national round of double-digit inflation.

    Businesses know as the govt will soon discover that one cannot borrow and spend their way to prosperity. Inflation will allow the govt to increase revenues (and bracket creep) without a tax increase. It will also destroy savings, lenders, investors and businesses that fail to raise prices quickly enough.

    Comment by AndyJ — October 23, 2009 @ 12:50 pm

  17. I am curious-
    Marginal tax rates are lower now than they have been since WWII.
    For instance, during the Eisenhower Administration, the top marginal tax rates were somethng like 80%.
    During the 1960′s and 1970′s business regulations were far more stringent, and welfare was more generous.

    How many “Top producers” went Galt then? Or is this generation of Galts somehow more sensitive? Maybe this is some sort of Darinwian action, a weeding out of the hothouse flowers who are unable to survive in the modern economy.

    Comment by Reason60 — October 23, 2009 @ 1:13 pm

  18. #17, you clearly didn’t read the Forbes article. Please do. And spare me the arrogance.

    Comment by TBlumer — October 23, 2009 @ 5:15 pm

  19. When you lose your job, ‘Going Galt’ is not an option. It is mandatory.

    Comment by Richard of Oregon — October 23, 2009 @ 6:12 pm

  20. @ PR #12 – Why is it a bad thing to follow the example of most of the current WH Cabinet/appointed Czars? How many have had to admit not paying their taxes? Sauce for the goose…

    Comment by JDH — October 23, 2009 @ 6:30 pm

  21. Didn’t Thoreau bring his laundry home to his mother and live off friends? Not really going Galt.
    Comment by Mark —

    He brought the laundry home when he lived at Walden, but there was a maid at the boardinghouse he evidently paid a nominal sum to do it. Ostensibly, he was clearing and improving the land for Emerson. After Walden, after nanny-handy-manning for Emerson for a while, he lived back home in a garret room at the boarding house for the rest of is life, working one day a week in the garden or pencil factory to pay his room and board. His surveying paid the rest of his bills.

    And he did refuse to pay his taxes once, supposedly protesting slavery, and also wrote, “the government which governs best, governs not at all.” What a kidder, eh?

    Comment by Dwight — October 24, 2009 @ 9:48 am

  22. I’ve halved my income, eliminated 100% of my previous 100+ hours-a-week literal death-grind-employment. It wasn’t really a “choice” as I finally hit the proverbial “wall” and just couldn’t keep going.

    I’ve since come to realize that with the lower taxation and eliminated expenses that went only to support the killing grind, I have just as much money in my pocket as I once did working the equivalent of 3-4 full-time jobs.

    Never again.

    A friend had a 5-location business. He’s closed 4, cut his hours by over 80% and his income hasn’t dropped at all – though that of the 40 now-unemployed people he was forced to cut has dropped precipitously.

    Thanks Dear Reader! GREAT job with that economy-thing — I can’t WAIT until you do your magic on what’s left of our health-care system!

    Morons…

    Ask yourself this: If they were TRYING to destroy the country, what would they do differently?

    Comment by Dedicated_Dad — October 26, 2009 @ 1:49 pm

  23. @20 – I did not say it was a bad thing, but did I need to? For the consequences of Sauce for the goose… see Italy in the 30′s with the rise of fascism and the rapid decline of present day Britain. I think the election of Obama is due to the calls for totalitarian fixers to “restore” the Utopia many delusionals see slipping away.

    Comment by PR — October 26, 2009 @ 2:36 pm

  24. Nice.

    It doesn’t matter whether the R’s are transferring wealth to their elite friends, or whether the D’s are trying to pry it loose and killing the economy in the process.

    This is all part of an out of control and dysfunctional

    http://thecivillibertarian.blogspot.com/

    Frankenstein Government. The only way to retrofit this non functioning mess is for this country to align under a third party. Jumping to and fro, from one demented party to the other, only ensures that this shell game continues ad infinitum as evidenced by the last 45 years.

    Did you love that cash for clunkers, housing tax credit, rigged GDP number this a.m.? Market sure did. Shrug dat.

    Comment by BM — October 29, 2009 @ 2:52 pm

  25. For instance, during the Eisenhower Administration, the top marginal tax rates were somethng like 80%.

    What percentage of the population paid that much back then?
    What percentage paid even 40%?

    Educate me.

    Comment by PA — October 29, 2009 @ 8:32 pm

  26. #17, I should have added that your claim that biz regs were worse in the 60s and 70s is patently absurd.

    Comment by TBlumer — October 29, 2009 @ 11:10 pm

  27. Going Galt is great if you have built the resources to do so. Quite a few Boomers have, and we are retiring a little earlier than planned, and living a simpler life. It’s fantastic, and we aren’t subsidizing the crooks in D.C. with much of our money now.

    Comment by Meremortal — October 31, 2009 @ 1:29 am

  28. [...] federal government saw its tax collections fall by almost 20% in fiscal 2009 compared to fiscal 2008. Through the first seven months of the current fiscal year, [...]

    Pingback by BizzyBlog — May 30, 2010 @ 11:56 pm

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