Free Markets, Free People

Economy

Welfare State In Crisis

The bailout of Greece may not work. Spain is teetering on the edge of serious financial doom. The Euro is taking a beating. And the banks of Europe are not looking too healthy overall. Meanwhile, here in the States, unfunded government debt, already expanding at an unprecedented rate, is set to explode. What do all of these things have in common? They are the direct result of expanding the welfare state without any means of actually paying for all of it.

In truth, there is never a way to pay for expanding the welfare state because, while wealth creation isn’t a zero-sum game, the population of wealth-creators is; after all, not just anyone can create electricity, telephones, heart medications, MicroSoft, Wal-Mart, or even pencils without some know-how, sweat and inspiration. If that were possible, then wealth creation could never be retarded, regardless of the impediments. Some wise, noble, and completely selfless individual would always emerge to drive the economy forward. Alas, self-interest trumps all, without which wealth-creation is for the horses.

No matter how ingenious the plan, or divine the motives, the only way for governments to fund the welfare state is to tax the wealth-creators. As even the most Marxist of intellectuals knows, if you want less of something, then tax it. This is why cigarettes are levied against in ridiculous proportions, and why carbon taxes are considered (by some) to be the savior of our planet. Well, taxing wealth-creation works exactly the same way: tax it more, and you will get less of it. Which leads to the inexorable conclusion that, as the governments of the world sink deeper into fiscal crisis, the looters will be coming en masse.

Does that mean that we are in for another Great Depression? Not necessarily. In fact, I predict that no such thing will occur. For starters, we have many institutions in place today that didn’t exist in the 1930’s such as the FDIC, Social Security, Medicare, the IMF, and the World Bank. Some of these things are arguably beneficial in that they smooth out the rough patches that economies inevitably encounter. The U.S. economy, for example, may not have realized the devastation it did if old people, like McQ, could have survived without taxing their families’ resources so much, or the FDIC had been in place to quell bank runs. Maybe. But more importantly, in this day and age our politics and law-making bodies (and those of every democratic society) are dominated by those whose own self-interest is firmly grounded in the ability to buy votes. That ability is highly dependent upon feeding the welfare state, since the vast majority of votes are bought from those who don’t create electricity or heart medications. This is why politicians of all stripes won’t take steps that would decrease the welfare state, because to do so will cost them votes — to the politician who promises more largesse at the expense of whatever hated rival is being villainized at the time. Accordingly, the odds are rather stacked against wealth-creators continuing to employ their skills in service of the very state that punishes them.

Instead of the Great Depression, Part Deux, I would predict that the elites (those, and their friends, who hold the power to dole out goodies for votes) will shuffle the deck just enough to ensure that they stay in favor, while allowing the overall health of the economy to softly fade into oblivion. They are like Dr. Kevorkian administering to capitalism. The ability to create wealth will slowly continue to be arrogated to the governors and “experts,” while the welfare state expands in decrescendo. Eventually, we will be left with something akin to the Ottoman Empire: all power and glory in name only, inside a rotting shell, harkening back to a time so dissimilar as to be unworthy of the title. What’s left will be hopeless, farcical and cruel, and will not have the slightest ability to nurture the welfare state that started it all. Perhaps the “Long Morose” would be a better title.

Irrespective of my gloomy predictions, there simply isn’t any question that, at some point, the beneficiaries of the great welfare state will have to take a bath. Most likely, that day will come when everyone jumps in the tub together. Until that time, prepare for the politically powerful to loot the wealth-creators out of existence in order to pay off the welfare beneficiaries. Eventually the only ones left to take that bath will be the filthy and the unwashed.

More debt pressure on Europe…and US business

Following yesterday’s announcement that Greek debt was downgraded to junk status, today Spain’s debt was downgraded as well. Spain is, in many ways the bellwether for Europe’s debt crisis. Spain has a much larger economy than Greece. So large, in fact, that it may be too big to bail out.

Fortunately, Spain’s debt is still less than 60% of GDP; however, the country is on a reckless fiscal path and the government shows no signs of doing anything about it.

As a result of the growing crisis, the Euro is getting hammered in the FOREX market, while the dollar is soaring. This is, in effect, an interest rate hike for US businesses that export to the Euro zone.

Naturally, this places downward pressure on US export sales at a time where the overall business climate is still weak. So, none of this is good news for the American economy, either.

Shocking news: ObamaCare will increase the nation’s health care costs

Yes, yes, I know – it comes as a complete surprise.  No question, we all thought having more covered by insurance, no pre-existing conditions, no caps on payouts and lower premium costs – all the while run by our efficient government – would surely lower costs.  It’s just logical, right?

President Obama’s health care overhaul law will increase the nation’s health care tab instead of bringing costs down, government economic forecasters concluded Thursday in a sobering assessment of the sweeping legislation.

You know, you want to laugh at this because most people who gave up on moon ponies and unicorns when they were 8 knew that what was promised by this bill wasn’t possible.  But it is hard to laugh at this level of mendacity.  Isn’t it interesting that now suddenly the truth begins to filter out – after the fact, of course.

USA Today, in true sycophantic fashion, tries to lessen the blow to the administration by calling it a mixed verdict. It also notes it is the first look at the legislation by “neutral experts”. That’s because it was so important to rush this bill through without giving anyone time to read or analyze it – you know, so the benefits could kick in … in 2014.

And what do these experts find? Well it is less than a “mixed verdict”. As I read it, it’s an outright condemnation of the law.

[T]he analysis also found that the law falls short of the president’s twin goal of controlling runaway costs. It also warned that Medicare cuts may be unrealistic and unsustainable, driving about 15% of hospitals into the red and “possibly jeopardizing access” to care for seniors.

Translation: this goes to the central political point about the bill. Who among the politicians in DC are going to be willing to take on the necessary cuts to Medicare promised by the bill (to “pay” for it) and alienate one of the most powerful demographic election blocs?

The Medicare actuary says no one.

The report acknowledged that some of the cost-control measures in the bill — Medicare cuts, a tax on high-cost insurance and a commission to seek ongoing Medicare savings — could help reduce the rate of cost increases beyond 2020. But it held out little hope for progress in the first decade.

“During 2010-2019, however, these effects would be outweighed by the increased costs associated with the expansions of health insurance coverage,” wrote Richard S. Foster, Medicare’s chief actuary. “Also, the longer-term viability of the Medicare … reductions is doubtful.”

Of course they are, and anyone but the moon pony crowd knew that going in. It’s like the promise of eliminating “waste, fraud and abuse”. If there was any appetite or ability to do that, don’t you think the estimated $60 billion a year in Meidcare waste, fraud and abuse would have been eliminated by now?

And what if they did make the cuts?  Anyone, what is the likely reaction of health care providers?  Uh, “we don’t take Medicare/Medicaid patients anymore”? That is exactly what will happen.  That means those with government insurance coverage won’t be able to find access (unless that too is eventually mandated). 

A separate Congressional Budget Office analysis, also released Thursday, estimated that 4 million households would be hit with tax penalties under the law for failing to get insurance.

The U.S. spends $2.5 trillion a year on health care, far more per person than any other developed nation, and for results that aren’t clearly better when compared to more frugal countries. At the outset of the health care debate last year, Obama held out the hope that by bending the cost curve down, the U.S. could cover all its citizens for about what the nation would spend absent any reforms.

The report found that the president’s law missed the mark, although not by much. The overhaul will increase national health care spending by $311 billion from 2010-2019, or nine-tenths of 1%. To put that in perspective, total health care spending during the decade is estimated to surpass $35 trillion.

The administration doesn’t even argue the point, claiming that’s a bargain for insuring 95% of the country. Of course, what USA Today doesn’t point out is that 75% of the 4 million households that will be hit with those tax penalties average less than $60,000 a year individually and families making less than $120,000 a year.

Also keep in mind that the CBO analysis and estimate are based in the assumption that absolutely everything in the bill goes as planned – to include the Medicare cuts. Or said another way, the $311 billion “cost’ is a joke and it will most likely cost far more than that.

The CBO also looks at Medicare:

In addition to flagging the cuts to hospitals, nursing homes and other providers as potentially unsustainable, it projected that reductions in payments to private Medicare Advantage plans would trigger an exodus from the popular program. Enrollment would plummet by about 50%, as the plans reduce extra
benefits that they currently offer. Seniors leaving the private plans would still have health insurance under traditional Medicare, but many might face higher out-of-pocket costs.

That brings us back to the politics and the polite word used -‘unsustainable’ – to mean the cuts just aren’t going to happen.

USA Today ends its article with this:

In another flashing yellow light, the report warned that a new voluntary long-term care insurance program created under the law faces “a very serious risk” of insolvency.

What they’re talking about is this:

One other interesting note from this study was a paragraph on the new Community Living Assistance Services and Supports insurance program for home care, known as the CLASS Act.

While it produces a $38 billion net savings through 2019, that’s mainly because you have to pay five years of premiums before you can start taking advantage of the program.

After that, the Medicare Actuary doesn’t like the way it looks in financial terms.

“Over the longer term, expenditures would exceed premium receipts, and there is a very serious risk that the program would become unsustainable as a result,” the study says.

“Unsustainable” – pay 5 years of premiums before you get the first benefit and the “expenditures would eventually exceed premium receipts”. Sounds exactly like every other program I’ve seen designed and engineered by politicians. That’s why we’re in the freakin’ fiscal mess we’re in now.

And the moon pony crowd keeps believing you can get something for nothing and that we can fix crap like this to where it will actually work and cost less too.

Repeal it.

~McQ

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The New Jersey model

An interesting article in the Wall Street Journal about newly elected NJ governor Chis Christie.  The Republican, elected in a traditionally blue state, ran as if he’d be a one-termer and laid out the distasteful medicine necessary to put the state’s fiscal house in order.  To the surprise of many, he won.  He’s now engaged in doing what he said he’d do.

His assessment and conclusion are solid:

“We are, I think, the failed experiment in America—the best example of a failed experiment in America—on taxes and bigger government. Over the last eight years, New Jersey increased taxes and fees 115 times.”

And what has NJ gotten for that?

New Jersey’s residents now suffer under the nation’s highest tax burden. Yet the tax hikes haven’t come close to matching increases in spending. Mr. Christie recently introduced a $29.3 billion state budget to eliminate a projected $11 billion deficit for fiscal year 2011.

Obviously, as must be done in a state which has the nation’s highest tax burden, Christie has laid out a very aggressive plan that cuts spending to eliminate that deficit. And, as you might imagine, the entrenched interests which will see their budget’s cut are almost unanimous in their opposition. Most the opposition comes from government unions, and especially from New Jersey Education Association, the state’s teacher’s union.

And Christie is using a little of the left’s favorite tactics against them:

“I’m a product of public schools in New Jersey,” Mr. Christie explains, “and I have great admiration for people who commit their lives to teaching, but this isn’t about them. This is about a union president who makes $265,000 a year, and her executive director who makes $550,000 a year. This is about a union that has been used to getting its way every time. And they have intimidated governors for the last 30 years.”

Christie is obviously not going to be intimidated. And he’s got the numbers and, apparently, the public behind his effort to pare the educational establishment down to a manageable and affordable size:

While the state lost 121,000 jobs last year, education jobs in local school districts soared by more than 11,000. Over the past eight years, according to Mr. Christie, K-12 student enrollment has increased 3% while education jobs have risen by more than 16%. The governor believes cuts in aid to local schools in his budget could be entirely offset if existing teachers would forgo scheduled raises and agree to pay 1.5% of their medical insurance bill for one year, just as new state employees will be required to do every year. A new Rasmussen poll found that 65% of New Jersey voters agree with him about a one-year pay freeze for teachers.

The union, of course, has it’s own favored solution and I assume you can guess what it involves:

But the teachers union wants to close the budget gap by raising the income tax rate on individuals and small businesses making over $400,000 per year to 10.75% from its current 8.97%.

Obviously he has a lot of other fights within the state on his hands, such as cutting the onerous regulation regime the state has built, but he has a primary goal and desire to return the state to fiscal sanity. And he also knows that to do that he has to lower overall taxes – if he wants to again attract business and those who earn enough to provide a solid tax base.

The governor aims to move tax rates back to the glory days before 2004, when politicians lifted the top income tax rate to its current level of almost 9% from roughly 6%. Piled on top of the country’s highest property taxes, as well as sales and business income taxes, the increase brought the state to a tipping point where the affluent started to flee in droves. A Boston College study recently noted the outflow of wealthy people from the state in the period 2004-2008. The state has lately been in a vicious spiral of new taxes and fees to make up for the lost revenue, which in turn causes more high-income residents to leave, further reducing tax revenues.

So here’s a governor who understands that what has been heaped on the back of the taxpayers that are left is too much and is looking at other real ways of reducing the cost of government – i.e. actually seeking out where it has become bloated, putting some of the costs of the benefits government workers receive back on them, cutting unnecessary spending all with a goal of eliminating the deficit the state faces. And, by the way, planning on reducing the tax rate with an eye toward luring back the affluent and businesses with an eventual goal of actually increasing tax-revenues, and jobs, and all the other benefits such an influx would bring.

“What I hope it will do in the end is first and foremost fix New Jersey, and end this myth that you can’t take these people on,” he says. “I just hope it shows people who have similar ideas to mine that they can do it. You just have to stand up and grit your teeth and know your poll numbers are going to go down—and mine have—but you gotta grit it out because the alternative is unacceptable.” He also strongly believes that voters elected him specifically to fight this fight. “They’re fed up. They’ve had enough. In normal circumstances I wouldn’t win,” he says.

He’s probably right about that. He probably wouldn’t have won 3 or so years ago.  And he’s right that the voters, as his election demonstrates, are “fed up”.  But, once the cuts start to hit, nothing says Christie will be given the continued support necessary to accomplish his goals.  But he seems to be a man who is going to do all he can to accomplish them. I call it the New Jersey model because if successful, Gov. Christie will provide both the blueprint and the success story which small government/fiscally conservative types can point to when discussing what must -and can – be done at both a state and national level. I’ll be watching the NJ saga develop with great interest over the years, and wishing Gov. Christie the best of luck in attaining his goals.

~McQ

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Sure is quiet out there

I’m sure you’ve noticed the pattern – when unemployment figures show an increase in jobs, even a tiny one, administration figures can’t wait to find a microphone to announce that things are finally turning around.  When “unexpectedly” bad numbers show up, they want to talk about other things.  This happens to be one of those weeks:

In the week ending April 10, the advance figure for seasonally adjusted initial claims was 484,000, an increase of 24,000 from the previous week’s unrevised figure of 460,000. The 4-week moving average was 457,750, an increase of 7,500 from the previous week’s unrevised average of 450,250.

Now I’m not saying that’s abnormal or something only this administration does, but given the extent and duration of the unemployment situation, increases in the number of unemployed should be unexpected.  And while any increase in jobs is to be seen as a positive sign, until there are multiple months above the + 140,000 level, we aren’t adding any jobs.  That number is seen as what is necessary to maintain an employment rate percentage. So even to maintain a 9.7% unemployment percentage we need that monthly positive number to do so.  The point being, reports like the one above indicate we may see that 9.7% rate nudge upward soon.

Lastly, one of the reasons many experts expect this to be a jobless recovery is because of its length.  Companies who shed jobs over a year ago and have survived and may even be starting to thrive a bit are going to think very hard before they put more labor on.  If they’ve been able to function efficiently – i.e. if their productivity has increased (and thereby their profit) with a reduced staff, they’re very likely to maintain their staffing at present levels.  If they hire it won’t be until they absolutely have too (driven by a significant increase in business) but that could be months if not years away.

Certainly not a rosy picture.

~McQ

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Laying the groundwork for new taxes

There is no one out there that won’t agree that government has gotten us into a debt-ridden fiscal mess.  Note I said government, meaning both Republicans and Democrats.  And now, on a spending binge from hell, we’re starting to see how this particular administration plans to address the growing concern over the debt.  Given some choices  -cut spending, cut the size and cost of government or increase taxes – it appears it will choose the taxation route.  And Paul Volker is just one of many who will be making the case.  Reuters reports:

The United States should consider raising taxes to help bring deficits under control and may need to consider a European-style value-added tax, White House adviser Paul Volcker said on Tuesday.

Volcker, answering a question from the audience at a New York Historical Society event, said the value-added tax “was not as toxic an idea” as it has been in the past and also said a carbon or other energy-related tax may become necessary.

Though he acknowledged that both were still unpopular ideas, he said getting entitlement costs and the U.S. budget deficit under control may require such moves. “If at the end of the day we need to raise taxes, we should raise taxes,” he said.

Should we?  Or should we approach it from a different direction – such as the first two choices.  But the expansion of government is an ideological choice of the party in power.  Don’t believe it, check out this article about hiring.  The government is seeking to add 193,000 new jobs in the next two years.  So, uh, it’s up to you to pay off the deficit and get those entitlement costs under control.  And, of course, notice that Volker points to both a VAT and a tax like cap-and-trade as “necessary”.  Note too that neither tax is a direct income tax although both would directly and expensively impact income of all consumers by making virtually everything cost more.  However, the charade of “95% of you won’t see your taxes go up by a dime” will be maintained.

What voters need to do this November is make the Congressional races about the difference between the choices I’ve laid out.  And, unlike Volker’s conjecture, we need to make the VAT and cap-and-trade as electorally toxic as possible to those that support them while rewarding those who take the alternative approach.  There is no reason that increasing taxes should or must be the only solution to the unchecked profligacy of government.  Perhaps, instead, it is time to limit government’s ability to spend us into oblivion and put the people in office who can start that process rolling.

~McQ

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Government unions and politicians – an unaffordable mix

Yesterday I noted that Massachusetts is faced with figuring out how to handle the Cadillac tax among its government workers.   Many of the very expensive plans are found among municipal workers, most negotiated by government unions representing the workers.

There’s another ticking time bomb out there that isn’t getting the press it deserves which too can be laid at the feet of unions which represent government workers and gutless politicians who can’t say no with your money.  California provides a good example:

The state of California’s real unfunded pension debt clocks in at more than $500 billion, nearly eight times greater than officially reported.

That’s the finding from a study released Monday by Stanford University’s public policy program, confirming a recent report with similar, stunning findings from Northwestern University and the University of Chicago.

To put that number in perspective, it’s almost seven times greater than all the outstanding voter-approved state general obligation bonds in California.

Those are the facts, stated simply.  It provides an example of absurd extravagance within the public sector and now a huge level of debt on those unfunded promises – and that’s what we’re talking about here – of $500 billion.  Where will California get the money, since these promises are contractual obligations and it can’t print money?

From, increased debt, cuts in other state services or increased taxes or all three, that’s where.  David Crane explains how the state ended up in this condition, using GM as an example:

How did we get here? The answer is simple: For decades — and without voter consent — state leaders have been issuing billions of dollars of debt in the form of unfunded pension and healthcare promises, then gaming accounting rules in order to understate the size of those promises.

As we saw during the recent financial crisis, hiding debt is not a new phenomenon. Indeed, General Motors did something similar to obscure the true cost of its retirement promises. Through aggressive accounting, for a while it, too, got away with making pension contributions that were a fraction of what it really needed to make, thereby reporting better earnings than was truly the case.

But eventually the pension promises come due, and for GM, that meant having to add extra costs to its cars, making its prices less attractive to consumers and contributing to its eventual bankruptcy.

Issue debt, spend the money, game the accounting system, look surprised when the obligations come due and blame your predecessors.  The new way in American politics.  As we saw with the charade of health care reform, it is alive and well and pumping out more unfunded entitlements as we speak.

But sticking with the case of California, Crane (who, btw, is a special adviser to the Governor on jobs and economic growth) gets to the heart of the matter, something I see more and more of:

Last summer Gov. Arnold Schwarzenegger proposed exactly that. Since then? Silence. State legislators are afraid even to utter the words “pension reform” for fear of alienating what has become — since passage of the Dills Act in 1978, which endowed state public employees with collective bargaining rights on top of their civil service protections — the single most politically influential constituency in our state: government employees.

Because legislators are unwilling to raise issues that might offend that constituency, they have effectively turned the peroration of Abraham Lincoln’s Gettysburg Address on its head: Instead of a government of the people, by the people and for the people, we have become a government of its employees, by its employees and for its employees.

This isn’t at all uncommon among state, local or the federal government.  And it is an ever increasing base – the one sector still hiring throughout the recession is government.  What Crane points out is a problem everywhere.  Pension funds, in many cases are underfunded.  Government employees have union negotiated benefits that are unaffordable given the current fiscal climate and are most likely unaffordable even in good economic times.  Gutless politicians, especially those who count on those public sector unions for support on election day, refuse to address and act on the problem.

And taxpayers?  Again, these are contractual obligations – if the money’s not there, it has to come from somewhere.  Any guesses who ends up holding the bag?

If public service is about serving the public, my guess is the public is going to want to know why their servants make more than they do and have better benefits as well?  The answer is found under the roof of your state legislature where politicians use your money, as well as obligating you to future debt, to buy the support of the government unions.

Heck of a scam if you can pull it off, huh?  And to this point, they have.

~McQ

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Chart of the day – debt controlled by foreign governments

There’s been a lot of discussion about how much of our debt is controlled by foreign governments.  The answer is found in this chart.  In short a lot (more than half) and growing.


The significance?  A sort of unacknowledged elephant in the room:

While the ownership of our debt may be theoretically neutral, there is a case to be made that this debt reliance gives significant bargaining power to individual foreign governments.

In the world of international politics, nothing is “theoretically neutral” that can be used as an advantage against another country. In the case of our debt we are handing out that ability each and every time we spend more than we have and ask foreign governments to finance it. Another in a seemingly endless number of reasons to cut spending, stop borrowing, pay off our debt and get our financial house in order.

~McQ

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Digging into the March unemployment numbers

Not to make to much of them, but this is important to know when you hear some of what is going to pass for analysis today and this weekend.  Calculated Risk does a good job of drilling down into the numbers and giving them some context.

First, part timers.  The BLS reports:

The number of persons working part time for economic reasons (sometimes referred to as involuntary part-time workers) increased to 9.1 million in March.  These individuals were working part time because their hours had been cut back or because they were unable to find a full-time job.

Calculated Risk adds:

The all time record of 9.2 million was set in October. This suggests the increase last month was not weather related – and is not a good sign.

Again, while any gross positive number is better than a negative number, other areas of employment don’t necessarily support an outlook that says “the job picture is turning around”. As if to emphasize that point, Gallup’s “underemployment” numbers were released today as well and they increased to 20.3% of the US workforce is underemployed – up from 19.8% in February.

A second number to consider is those who’ve been unemployed for over 26 weeks and would work if a job was available:

According to the BLS, there are a record 6.55 million workers who have been unemployed for more than 26 weeks (and still want a job). This is a record 4.3% of the civilian workforce. (note: records started in 1948)

The number of long term unemployed is one of the key stories of this recession.

It is the highest number ever recorded since records started in 1948. The previous high was 2.5% in 1983.  And, as the cite points out, this is “one of the key stories of this recession” and one that isn’t yet showing signs of improving.

The Wall Street Journal points out:

A survey of private employers shows they shed 23,000 jobs in March in a sign that the labor market remains a mixed bag in an economy that is otherwise growing again.

The private-employer report, which came two days before the Labor Department issues its own, broader job report, was a disappointment to many who were expecting both measures to mark a turning point into positive territory.

Calculated Risk concludes:

Although the headline number of 162,000 payroll jobs was a positive (this is 114,000 after adjusting for Census 2010 hires), the underlying details were mixed. The positives: the unemployment rate was steady, the employment-population ratio ticked up slightly (after plunging sharply), and average hours increased (might have been impacted by the snow in February).

But a near record number of part time workers (for economic reasons), a record number of unemployed for more than 26 weeks, and a decline in average hourly wages are all negatives.

Shorter version: Don’t put too much positive weight on this month’s numbers.

There is a lot that has to change in the markets in general before you’re going to see any significant change in the labor market. So when you hear the talking heads this weekend tell you that it is all turning around and it will be sunshine and roses from now on, take it with a grain of salt.

[Welcome Real Clear Politics readers]

~McQ

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