Free Markets, Free People
Orwellian, in that his claim is as follows:
President Obama is marketing his new budget by saying it has “more than $2 in spending cuts for every $1 of new revenue.” Is this true?
In a word, no.
In fact, his spending increases and advertised spending cuts cancel each other out—leaving only a massive tax increase.
Here’s a graphical representation of the point:
Yeah, I know … big surprise.
A politician lied again.
Apparently President Obama is sure his newest budget proposal is so good there’s no room or need for negotiation. Or so a senior White House official says:
“We don’t view this budget as a starting point in the negotiations. This is an offer where the president came more than halfway toward the Republicans,” a senior administration official told reporters Tuesday, speaking on condition of anonymity to detail the forthcoming document.
“So this is our sticking point,” the official said. “And the question is: are Republicans going to be willing to come to us to do serious things to reduce our deficits?”
Obama is proposing a $3.78 trillion dollar budget. Estimated tax revenues for 2014 are $3.22 trillion. Yet, this is being touted as a “budget cutting” budget and the White House claims it is exactly what the Republicans have wanted.
What … another deficit?
By the way, I don’t want “reduced deficits”. I want NO deficit. I.e. any budget that begins with an amount higher than the estimated tax revenues for the year is Dead On Arrival.
And that’s precisely the declaration this budget (like all the other budgets Obama has submitted) deserves.
It’s hard, in a nutshell, because no one wants to see their favorite programs defunded. The system encourages politicians to pander to these constituencies for votes. The result is ever increasing spending while both the public and the politicians claim to be for spending cuts.
A perfect example of the process can be found in microcosm in Chicago, where, to save money in the wake of intemperate government spending, the school system plans on closing 54 schools. The constituency affected are not going to let this go quietly. Even though the plan would save the city $600 million over 10 years and certainly help close the 1 billion dollar shortfall it suffers, the people (voters and teacher’s unions) who don’t want those schools closed are taking their protest to the politicians (aldermen) who depend on their votes.
The problem now being realized with the process described above is there’s a thing called “reality” that intrudes on this system of ever increasing spending to satisfy the demands of ad hoc constituencies. It’s called economics. And it has laws that resist being broken. Laws such as you can only spend more than you have for so long before you can’t get anymore to spend. And at a local level, where a city government can’t print money, that reality has come to bear on the process that the city of Chicago has indulged in for so long.
It can’t afford the process any longer. And that means the process and its cycle will, of necessity, have to be broken if the city isn’t to become another Detroit. In the case of the school closings in Chicago, the only question that remains is whether or not the politicians, in the face of opposition by a coalition of voters/unions/politicians, will do what is necessary or – as we see on a national level time after time – endeavor to find a way to satisfy the coalition and kick the can down the road?
To the story:
Chicago Public Schools officials ended months of speculation when they released the list of 54 schools the city plans to close, but the pushback against Mayor Rahm Emanuel and his schools chief is likely just starting to ramp up.
As word of the schools on the long-awaited closings list trickled out Thursday, parents, teachers and community members — some furious, some in tears — vowed to fight the closings. One group took a bus of people to protest in front of the homes of school board members, and some parents spoke of a lawsuit. The Chicago Teachers Union already had scheduled a mass protest march through downtown for next week.
"We are the City of Big Shoulders and so we intend to put up a fight," union President Karen Lewis said. "We don’t know if we can win, but if you don’t fight, you will never win at all."
Emanuel and schools CEO Barbara Byrd-Bennett say the closures are necessary because too many Chicago Public School buildings are half-empty, with 403,000 students in a system that has seats for more than 500,000. But opponents say the closures will further erode troubled neighborhoods and endanger students who may have to cross gang boundaries to attend school. The schools slated for closure are all elementary schools and are overwhelmingly black and in low-income neighborhoods.
About 30,000 students will be affected by the plan, with about half that number moving into new schools.
So 30k out of 403k will be effected in a school system that appears to have a declining population. Any sensible person would understand that even if money wasn’t a problem, at some point adjustments would need to be made.
But we’re a schizo population who somehow believes – even as our reality reminds us in our own lives daily that we’re delusional – that we can have our cake and eat it too.
This problem and the reality aren’t unique to Chicago:
Chicago is among several major cities, including Philadelphia, Washington and Detroit, to use mass school closures to reduce costs and offset declining enrollment. Detroit has closed more than 130 schools since 2005, including more than 40 in 2010 alone.
The problem is, however, pretty unique to cities who’ve followed that process I described above and, for the most part, have been “blue” strongholds for decades. Reality is weighing in on their misguided governance with a vengeance.
What’s interesting is it is pitting blue against blue (blue city government against teacher’s unions, etc.). And, it also has a coterie of politicians who refuse to accept reality because, well because it could cost them their jobs and the perks that come with it:
The issue has again pitted Emanuel against the Chicago Teachers Union, whose 26,000 members went on strike early in the school year, idling students for seven days. Chicago aldermen and other lawmakers also have blasted the plan.
Of course they have. Common sense and reality say the plan is the way to go.
But we all know, in the world of politics, common sense was killed off decades ago and reality is ignored as long as possible.
And look at the result.
Thought these two graphs illustrated part of it very well:
But remember — they want you to believe it is a revenue problem.
I continue to be stunned by the apparent willingness of all involved on the left to whistle past the graveyard when it comes to understanding what our fiscal governmental problem is and how to fix it. Here … let’s try a picture:
Oh, look … it’s spending. Specifically, spending on entitlements and interest on the money we’ve borrowed to do so. And what are we talking about cutting? The military, of course. Because, you know, it is in the blue slice of the pie. Make sense?
Pac Man’s revenge. By 2050, he will have swallowed all of the blue.
But, hey, it’s “absurd” to argue about raising the debt limit. By the way, does anyone remember when Sen. Obama declared that raising the debt limit signaled a failure in leadership?
The more I see politics of today the more I think George Orwell simply listed by about 30 years. Imagine a politician a few decades ago trying to make this argument and then calling the other guy’s argument “absurd”.
“While I’m willing to compromise and find common ground over how to reduce our deficit, America cannot afford another debate with this Congress over how to pay the bills they’ve already racked up,” Obama said in the East Room of the White House at what aides have billed as the final news conference of his first term. “To even entertain the idea of this happening, of America not paying its bills, is irresponsible. It’s absurd.”
But the problem is, thanks to both Congress and this administration, we are not paying our bills. We’re borrowing money that we don’t have and have been spending it. I find it ironic, that the president who has run up the largest deficit in history is talking about being irresponsible.
And then, there’s this:
“They will not collect a ransom in exchange for not crashing the American economy,” Obama said. “The full faith and credit of the United States of America is not a bargaining chip.”
But that is precisely what Obama is doing, using the credit rating of America as a bargaining chip – to justify more spending on credit. No irony there. Interesting that Obama is suddenly concerned about “not crashing the American economy” when his profligacy has put us in a position we are in today.
“The issue here is whether America pays its bills,” Obama said. “We are not a deadbeat nation.”
Yes we are. He just doesn’t know it yet, or at least won’t admit it. And much of the cause rests with him as signified by his absurd argument.
In case you’re looking for an “fiscal cliff” bottom line, here it is in one sentence.
According to the Congressional Budget Office, the last-minute fiscal cliff deal reached by congressional leaders and President Barack Obama cuts only $15 billion in spending while increasing tax revenues by $620 billion—a 41:1 ratio of tax increases to spending cuts.
If there’s any good news in this “compromise” bill, it is that the Democrats will get their tax on the rich, and it will make absolutely no difference in the debt.
As we’ve been saying for years, it’s not a revenue problem, it is a spending problem.
In fact going over the fiscal cliff is not been avoided, the chasm has just been deepened. Or said another way, the can has been firmly kicked down the road.
The word of the day?
UPDATE: In case you were wondering what this means in nice round numbers in terms of debt:
The fiscal cliff deal approved by Congress will increase deficits over the next decade by close to $4 trillion, according to the Congressional Budget Office.
Like I said, in full sarcasm mode, “great job!”
So tell me again why the government can’t seem to get along with what it already gets?
Taking into account all taxes on earnings and consumer spending—including federal, state and local income taxes, Social Security and Medicare payroll taxes, excise taxes, and state and local sales taxes—Edward Prescott has shown (especially in the Quarterly Review of the Federal Reserve Bank of Minneapolis, 2004) that the U.S. average marginal effective tax rate is around 40%. This means that if the average worker earns $100 from additional output, he will be able to consume only an additional $60.
And yet the prevailing political attitude seems to be that of France’s “leadership”, i.e. government, has first claim on all your earnings and if you protest you’re “greedy”.
Speaking of France, California seems bound to duplicate its latest tax scheme:
Consider California, which just enacted higher rates of income and sales tax. The top California income-tax rate will be 13.3%, and the top sales-tax rate in some areas may rise as high as 10%. Combine these state taxes with a top combined federal rate of 44%, plus federal excise taxes, and the combined marginal tax rate for the highest California earners is likely to be around 60%—as high as in France, Germany and Italy.
Yet they wonder why people are fleeing the state.
Impact and implications?
Higher labor-income and consumption taxes also have consequences for entrepreneurship and risk-taking. A key factor driving U.S. economic growth has been the remarkable impact of entrepreneurs such as Bill Gates of Microsoft, Steve Jobs of Apple, Fred Smith of FedEx and others who took substantial risk to implement new ideas, directly and indirectly creating new economic sectors and millions of new jobs.
Entrepreneurship is much lower in Europe, suggesting that high tax rates and poorly designed regulation discourage new business creation. The Economist reports that between 1976 and 2007 only one continental European startup, Norway’s Renewable Energy Corporation, achieved a level of success comparable to that of Microsoft, Apple and other U.S. giants making the Financial Times Index of the world’s 500 largest companies.
Yet we continue to try to recreate Europe’s debacle here.
The economy now faces two serious risks: the risk of higher marginal tax rates that will depress the number of hours of work, and the risk of continuing policies such as Dodd-Frank, bailouts, and subsidies to specific industries and technologies that depress productivity growth by protecting inefficient producers and restricting the flow of resources to the most productive users.
If these two risks are realized, the U.S. will face a much more serious problem than a 2013 recession. It will face a permanent and growing decline in relative living standards.
These risks loom as the level of U.S. economic activity gradually moves closer to that of the 1930s, when for a decade during the Great Depression output per working-age person declined by nearly 25% relative to trend. The last two quarters of GDP growth—1.3% and 2.7%—have been below trend, which means the U.S. economy is continuing to sink relative to its historical trend.
But your political and financial lords and masters know best, don’t they? Just ask them. They continue down this road despite the fact the destination is in plain sight in Europe and it isn’t pretty.
Occam’s Razor states “entities should not be multiplied unnecessarily.” Said another way, the simplest explanation is usually the most likely explanation. In this case the simplest explanation is incompetence. But is it really incompetence? With the European example staring them right in the face it’s hard to believe anyone is that incompetent. The conclusion to their policies have already been proven to be a disaster.
So one has to being to consider other possibilities when those who are pushing the policies seem oblivious to the obvious.
You have to begin to wonder if it is a problem of hubris. I.e. “the only reason it hasn’t worked before is we weren’t in charge”. We’ve seen that in any number of instances throughout history where discredited or obviously illogical ideological ideas were tried and they again failed.
Or you have to consider the words “by design”. But then you’re stuck with trying to come up with a valid reason “why”. Recreating Europe’s debacle, or Japans’s or, for heaven sake, our’s in the ’30s would seem to be something smart politicians would attempt to avoid.
But here we are.
Economic growth requires new ideas and new businesses, which in turn require a large group of talented young workers who are willing to take on the considerable risk of starting a business. This requires undoing the impediments that stand in the way of creating new economic activity—and increasing the after-tax returns to succeeding.
And yet, we see a government bent on erecting even more impediments via increased taxation, costly new laws and onerous regulation.
Isn’t it about time we demanded to know “why?” More importantly, maybe we should ask whose side they’re on.
When is the GOP (and the public) going to learn?
How many times have we heard that the only thing standing in the way of a grand bargain to reduce our growing national debt is Republican intransigence on taxes? If Republicans would only agree to dump Grover Norquist, Democrats will agree to cut spending and reform entitlements. Then, we can all join hands and sing Kumbaya as we usher in a new era of compromise and fiscal responsibility.
Except that now that Republicans have agreed to raise taxes, er, revenue, as part of an agreement to avoid the looming fiscal cliff, liberals appear to have decided that there really isn’t a need to cut spending after all.
Yup, in fact they’ve taken entitlement reform “off the table”.
Senate Democratic leaders signaled Tuesday they would not agree to any entitlement reforms before the end of the year that cut spending on Medicare and Medicaid beneficiaries.
They also said that any year-end deal to avoid the expiration of tax cuts and implementation of spending cuts — known as the fiscal cliff — must include a provision to raise the debt ceiling, which would otherwise have to be addressed early next year.
The White House and Reid have indicated they will not consider cuts to Social Security, a notable change from 2011, when President Obama said “everything is on the table,” including entitlement programs dear to his party’s base.
In other words, we’re back to “tax the rich”, raise the debt ceiling and spend, spend spend. Meanwhile, it is left up to the GOP to “compromise” by breaking the tax pledge (led by the Judas goats, Saxby Chambliss and Lindsey Graham) or be forever branded as the intransigent “bad guys” in this.
Meanwhile, low information Americans who, by over 60% approve of taxing the rich, will buy the spin by the press painting the GOP as the cause/reason for the calamity while Democrats “lament” the problem (“but, hey, that’s now the law thanks to Republicans”) and gleefully rub their hands in delight at all the new revenue they’ll have to “redistribute”.
Some things never change, do they?
The cultural corruption of entitlements should, by now, be well known. But it also is just as well known that our current system incentivizes the “Santa Claus” form of government vs. that of the night watchman. The end state is inevitable. It isn’t a matter of “if” but “when”.
“The more government takes in taxes, the less incentive people have to work. What coal miner or assembly-line worker jumps at the offer of overtime when he knows Uncle Sam is going to take sixty percent or more of his extra pay? Any system that penalizes success and accomplishment is wrong. Any system that discourages work, discourages productivity, discourages economic progress, is wrong.” – Ronald Reagan
You’d think that would be self-evident. Apparently it’s not. And if you doubt that, watch what happens next year as our “leaders” try to figure out how to get us to pay their way out of the mess they’ve made (and for which we’ve never, ever held them accountable).