Daily Archives: August 2, 2011
Let’s see how today went, shall we? We got our debt ceiling deal, but the Dow dropped 266 points, and the S&P 500 fell 33 points, so it’s now negative for the year. The yield on the 10-year T-note dropped to 2.61%. Gold, meanwhile, hit a fresh record high of $1,644.50/oz. So, I guess this year’s Recovery Summer is over.
None of this, by the way, has anything to do with the debt limit battle in DC. No one on Wall Street really thought a deal wouldn’t be struck. At the end of the day, everybody was pretty confident that the debt ceiling would be raised, and a default avoided.
Stock prices are volatile, of course, so one day’s movement doesn’t mean much, but we have lost about 800 points on the Dow since 22 July, so the trend isn’t good. What’s worse is the steady decline on treasury yields and the climbing price of gold. When you couple that with the 0.4% 1Q GDP increase, and the danger of downward revisions to the lackluster 2Q GDP over the next two months, the evolving picture doesn’t look pretty. We’ve also has a few weeks of unremittingly bad economic releases, showing the economy might be heading back towards recession, and unemployment getting closer to 10% than 8%.
So then what’s the problem? I mean, we’ve had our big stimulus, and our TARP and our Quantitative Easing I and II, and we’re still not only barely budging into positive GDP territory, but now all the signs are showing the economy slowing. What’s happening? Why isn’t any of this working?
I think the answer can be found in what I wrote in my previous post about debt levels, and how over the last several years…
…a body of peer-reviewed work has been developed (PDF) that shows that an excess of government debt serves as a drag on the economy, shaving at least a full percentage point off of annual GDP growth. And we’ve learned that this negative economic effect has a non-linear effect on economic growth as debt increases.
What seems to happen is that, as you begin to approach a debt-to-GDP ratio of 100%, economic growth slows. As you add debt, there’s a non-linear decrease in economic growth. and each additional increment of debt slows growth more than the last. As I also pointed out, this has some pretty scary implications for Keynesian policies, because as you add debt, you’re no longer stimulating growth, you’re hindering it ever more strongly.
That puts policy makers in a pretty bad spot. For instance, right now, real short-term interest rates are effectively zero, so the interest rate tool is no longer of any use to the Fed. You can’t lower rates below 0%. With that tool gone, the only thing left to try and stimulate the economy is to add more debt. Conversely, cutting spending will result in more government workers and contractors being moved over to the unemployment line, and the economy still slows. It’s a trap, where all the standard policy moves result in a slowing economy.
Back in the 80’s my fellow Econ and Business undergrads would debate about all the debt Reagan was adding, and trying to figure out when all that debt would begin crowding out private investment and slowing economic growth. As it turned out, it took far longer than any of us believed it would, but I think we finally have the answer.
The really scary this is that, if we decided that we had to bite the bullet, and impose some austerity, it really wouldn’t help much. We could cut discretionary spending by half, and all it would do is gain us a few years of breathing space before the coming explosion in Social Security and Medicare entitlements—about $60-76 trillion worth of them—eat up any short-term savings and debt reduction we might acquire. After all, discretionary spending—including defense—is only about 39% of the current budget anyway.
What part does economic growth play in all this? Well, it’s clear that 2% per year isn’t going to help much.
It is a generally accepted truism that the trend rate of growth in a mature economy is 3%. There are a lot of reasons given for this; slower population growth in developed countries, large sunk costs in plant and capital, blah, blah, blah. But why should any of that matter? Just because population growth is slow, it doesn’t necessarily follow that the growth of wealth or human ingenuity is hampered.
Here is a reason for that slow growth that’s almost never given. You see, one of the things that mature economies all seem to have in common is large government expenditures, extensive entitlements, massive regulatory oversight, and increasing debt. All of that is financed by taxation to remove money from the productive portion of the economy. So, one of the primary reasons we have slower economic growth is because we trade it for public goods.
Now, we may love these public goods. And they are certainly nice to have if you can afford them. But the evidence is increasingly that we cannot. if we could, we wouldn’t be racking up a level of peacetime debt that’s nearly 90% of GDP. Not only do we give up a lot of economic growth to sustain these public goods, but, apparently, we eventually give up all of it…at which point, we have to give up the public goods as well.
If we really want to climb out of this hole, then what we really need to do is to radically rethink what government should be, what it should be allowed to do, and how it’s funded. It’s not enough any more to cut budgets, while leaving the regulatory, entitlement, taxation, and spending structure intact. A truly radical solution would be to limit government spending and revenues to no more than 10% of GDP in peacetime. Replace the income tax with a 10% VAT. Eliminate the departments of Education, Commerce, Labor, Transportation and Agriculture. Repeal most Federal criminal laws. Privatize social security. Enforce free markets, rather than the crony capitalism we have now.
No one in our current political class has the slightest interest in any of those suggestions. Drastically reducing the size and scope of government is the only solution that can possibly increase economic growth substantially, and give us a shot at paying off our ever-increasing debt, but our current political class will never embrace that.
The thing is, reality doesn’t care what the political class—or anyone else for that matter—wants. It just is what it is. So, no matter what happens, we won’t have to worry about the deficit or government spending for much longer. Either we’ll fix the problem by electing a political class that’s devoted to cutting government across the board and paying down the debt. Or we won’t fix the problem, and the resulting bankruptcy and hyperinflation will allow us to monetize our debt, wipe out the life savings of every person in the country, and we will start over from scratch with a bright shiny new currency!
But the problem will get solved. The only question is how much control we’ll retain over the process, and how much government we’ll retain at the end of it.
Witness the story about the DOT proposing a new rule that would require all operators of farm equipment to hold a Commercial Driver’s License (CDL). That would also require all the paperwork and cost that goes with it (while small family farms try to comply with rules, costs and regulations designed for semi-truck drivers). Here’s a video to help explain the story:
Of course, saying that the idea is "absurd" has simply lost its impact in this sea of absurdity. Absurd, it seems, is the new normal. Along with the environmental movement’s success in limiting land use, to include land owned privately, as well as the Kelo decision giving much broader eminent domain powers to governments, property rights have never been more in peril. And property rights, whether you want to believe it or not, are fundamental to our other rights.
Now we have another attack on property rights – you’ll no longer have the right to decide who can drive what on your private property. The tradition of family farms – which relies on everyone in the family to succeed – is now about to irrevocably regulated away.
Some more details about what this means:
The proposed change also means ANYONE driving a tractor or operating any piece of motorized farming equipment would be forced to pass the same rigorous tests and fill out the same detailed forms and diaries required of semi-tractor trailer drivers. This reclassification would bury small farms and family farms in regulation and paperwork.
Some of the additional paperwork and regulation required:
-Detailed logs would need to be kept by all drivers – hours worked, miles traveled, etc.
-Vehicles would have to display DOT numbers
-Drivers would need to pass a physical as well as a drug test – every two years.
The Wisconsin Farm Bureau Federation (WFBF) is one of many farm organizations not happy about the idea and has sent the DOT a letter expressing this opinion:
“WFBF opposes any change in statue or regulatory authority that would reclassify implements of husbandry or other farm equipment as Commercial Motor Vehicles (CMVs)”
WFBF Director of Governmental Relations Karen Gefvert continues, explaining the excessive cost to farmers if this allowed to move forward:
“The proposed guidance by the FMCSA would result in an initial increased cost to each Wisconsin farmer and employee of $124 just for the CDL license, permit and test; not to mention the time and cost for the behind-the-wheel training that is several thousand dollars.”
Additionally, Illinois farmers believe this regulation will also force new restrictions on trucks used in crop-share hauling. (One estimate claims more than 30% of Illinois farmers utilize shared land.) These crop-share trucks are typically limited-use vehicles that often travel fewer than 3000 miles each year, mainly hauling crops from the fields to nearby grain elevators. To require them to follow the same rules as semis would also mean a farmer would be forced to purchase substantial insurance.
If you want to find a way to drive individually owned farmers out of business, adding absolutely unnecessary requirements and costs is a great way to start.
I’m not a conspiracy theorist, but I do want to point to something that I’ve known about an watched over the years. It’s called “Agenda 21” and it is a UN program first signed on too by George H.W. Bush in 1992. Here’s some of the disturbing verbiage driving that agenda:
Land… cannot be treated as an ordinary asset, controlled by individuals and subject to the pressures and inefficiencies of the market. Private land ownership is also a principal instrument of accumulation and concentration of wealth and therefore contributes to social injustice; if unchecked, it may become a major obstacle in the planning and implementation of development schemes. The provision of decent dwellings and healthy conditions for the people can only be achieved if land is used in the interest of society as a whole. - Source: United Nations Conference on Human Settlements (Habitat I),Vancouver, BC, May 31 – June 11, 1976. Preamble to Agenda Item 10 of the Conference Report.
That has pretty much been a guiding principle in the UN’s agenda for decades, obviously, and now in it’s Agenda 21. We, apparently, along with 177 other world leaders, signed on to this anti-American (and I mean that in the truest sense of the word) agenda. George Soros is a huge backer of the initiative, and I’ve found, over the years, if Soros is for something, freedom is surely going to take a beating. I’m not saying that there’s an active, agenda driven group that is purposely trying to implement this agenda. I am saying though that this agenda can and may be used as a self-justification for various officials at differing levels of government to implement its principles because they believe in them.
You can read a bit about it here. Bottom line, of course, is it is against private ownership and as we saw in Kelo private ownership was indeed “a major obstacle in the planning and implementation of development schemes.” So instead of upholding individual property rights, the court opted to give governments at all levels broader power to take private property.
This new requirement from DOT is somewhat different. It actually takes power from states and localities and centralizes it. By making farm machinery something which must be regulated by the federal government, it usurps that local and state power in favor of broader federal regulation. Of course the loser here is the farmer who must now face the cost, lost productivity and bureaucratic record keeping and other compliance costs of something which has never been and shouldn’t now be any concern of the Federal government.
This isn’t the only example of these sorts of attacks. You have the EPA attempting to expand beyond its mandate. And other bureaucracies are as well. And it isn’t just limited to the federal level. At every level there’s some government bureaucrat trying to find ways to control your property or tell you how you must live on it. In one of the silliest, but obviously serious attempts (the property owner was threatened with 93 days in jail for non-compliance with some vague city ordnance), we see a city manager going way beyond what most reasonable people would find, well, reasonable:
Thankfully, public pressure made the boob back off, but I have little doubt in my mind he’d have jailed the woman if left to his own devices. “Agenda 21” stuff – eh, probably not. Tin-pot dictator’s syndrome? Probably. But regardless, a threat to property rights.
Our property rights are dying the death of a thousand cuts. We need to push back and push back hard against infringements on a local level (the garden) as well as the national level (DOT and EPA regulatory power grabs).
Otherwise, when they decide they can control the temperature in your house automatically (as they’ve tried in CA), you won’t have a legal leg to stand on. Right now they’re both wooden and government termites are busily at work.
First of all it’s an incredible amount of nothing except politics.
"In reaching this agreement, each political party yielded to the other party’s highest-priority political and ideological interest," and fails to resolve the country’s long-term budget problems, Sen. Joe Lieberman (I-Conn.) said Monday.
Indeed, for all the high-stakes political drama and the apparent damage the months-long debate has inflicted on the political standing of both parties and the president, the compromise — what White House officials refer to as a "lowest common denominator" deal — achieves relatively little in the short term.
But, like most compromise, that’s the basis of such "deals". Unless very skillful or in negotiations with a pressure filled time limit one has to find the lowest common denominator and find it fast. And that’s precisely what this deal was – just enough to get enough votes on both sides of the aisle.
The question is, will it actually do anything about spending in reality. The answer is most likely “no”. Lieberman is exactly right. It not only achieves relatively little in the short term, it mostly relies on “savings” from money never spent, only projected to be spent. Obviously then a billion dollars not spent today could add up to many billions down the road if in fact it had been spent. So when you see huge numbers like 500 billion, remember that over 10 years the real cut is probably 50 billion. Or, for most numbers seen projected over 10 years, you can reduce it by a factor of 10.
Here’s the crux of the deal –
In the government’s 2012 fiscal year, the cut would be $21 billion, or less than 1% of a nearly $3.7-trillion federal budget, according to the Congressional Budget Office.
The bulk of the projected $2.1 trillion or more of cuts does not start kicking in until after the next election when a future Congress and president could choose to rewrite the plan — a point that many conservatives have worried about.
"Enforcement is the key to whatever we do. It’s always in the out years and it never happens," said Sen. Michael D. Crapo (R-Idaho), using the budget lingo for the latter years of a long-term deal.
I know, “wow”, huh? $21 billion. And in the meantime, permission to spend $2.1 trillion more. So are you still wondering why voters have no faith in politicians of either party?
The bill almost certainly defers until after next year’s election the central choice most budget experts say the country eventually must make: higher taxes or deep cuts in Medicare, the nation’s huge and fast-growing health program for the elderly.
Of course it does. John Boehner is claiming he got 98% of what he wanted. Well if that’s the case, he didn’t want much. And politically he gave away the most potent argument against this president until after the election.
Yet even with this pathetic bill we have the Civility party, that would be the Dems, out and about vilifying (remember this is the new civility – it’s much like the new math) the Tea Party with the VP calling them “terrorists” (along with Joe Nocera in the New York Times) and probably the most absurd but honest statement coming out of the mouth of Rep. Mike Doyle (D-PA):
We have negotiated with terrorists,” an angry [Congressman Mike] Doyle [D-Pa.] said, according to sources in the room. “This small group of terrorists have made it impossible to spend any money.”
Uh, yeah, right. You mean they’ve made it tougher to spend money like a drunken sailor on shore leave in Hong Kong on money borrowed from his buddies (product idea – Democrat Barbie, “being civil is hard”).
Finally, the “super-committee”:
A bipartisan congressional committee set up by the compromise bill is supposed to grapple with the long-term choices over the next four months. White House officials insist they see that panel as a serious opportunity to try again for a major deficit reduction deal. Their hope is that members of both parties will back an agreement rather than accept automatic across-the-board cuts in defense and domestic agency budgets.
But many in Congress, whose leaders will appoint the panel’s 12 members, believe the panel more likely will deadlock.
"I think it’s very possible, maybe even probable, that with a committee you’re going to have a 6-6 vote," said Sen. Saxby Chambliss (R-Ga.).
And, of course, should it deadlock, the meat axe will fall heaviest on defense. And meat axe is the correct metaphor because the cuts mandated by failure to act are across the board cuts, not carefully considered cuts which will eliminate unneeded or unnecessary spending but leave critical spending alone. Nope, we’ll see a grand hollowing of the force – again.
So, all in all, not such a grand deal after all. But, with the smoke and mirrors show and the liberal caterwauling we’ve heard, you’d think they’d actually cut some real money we don’t have out of the current budget.
Oh, that’s right, we don’t have a current budget do we?
And why again is this crowd still in Washington DC?