President Obama did the nation a huge service today, in two respects. First he took off the mask and told us explicitly that the "change" he wants is an explicit move towards welfare-state socialism, and, second, in doing so, he set out the major thrust of his re-election campaign. In a 55-minute speech in Osawatomie, KS, the president explicitly argued that capitalism is a failed economic system, and the main thrust of government economic policy should be the redistribution of income.
It’s darkly amusing that he makes this argument just weeks—perhaps months—before a major political and financial crisis, caused mainly by their socialist policy leanings, strikes Europe. They are just about to hit the stark reality of what happens when you run out of other people’s money to spend to finance extravagant social benefits. President Obama, it seems, is keen to rush us down the road to meet them. Not that we aren’t already pretty far down that road ourselves. The national debt is now over $15 trillion, more or less 100% of GDP, with no clear path to reducing that percentage in the near future, or even in reducing the rate of growth substantially.
President Obama apparently thinks that the solution is to take the money from "the rich" and distribute it to the rest of us. The trouble is, we could take pretty much everything the rich have, as well as all the profits of all the Fortune 500 companies, and it wouldn’t even even cover 1 year’s worth of government spending. As economist Walter William notes:
This year, Congress will spend $3.7 trillion dollars. That turns out to be about $10 billion per day. Can we prey upon the rich to cough up the money? According to IRS statistics, roughly 2 percent of U.S. households have an income of $250,000 and above. By the way, $250,000 per year hardly qualifies one as being rich. It’s not even yacht and Learjet money. All told, households earning $250,000 and above account for 25 percent, or $1.97 trillion, of the nearly $8 trillion of total household income. If Congress imposed a 100 percent tax, taking all earnings above $250,000 per year, it would yield the princely sum of $1.4 trillion. That would keep the government running for 141 days, but there’s a problem because there are 224 more days left in the year.
How about corporate profits to fill the gap? Fortune 500 companies earn nearly $400 billion in profits. Since leftists think profits are little less than theft and greed, Congress might confiscate these ill-gotten gains so that they can be returned to their rightful owners. Taking corporate profits would keep the government running for another 40 days, but that along with confiscating all income above $250,000 would only get us to the end of June. Congress must search elsewhere.
According to Forbes 400, America has 400 billionaires with a combined net worth of $1.3 trillion. Congress could confiscate their stocks and bonds, and force them to sell their businesses, yachts, airplanes, mansions and jewelry. The problem is that after fleecing the rich of their income and net worth, and the Fortune 500 corporations of their profits, it would only get us to mid-August.
We could take everything the rich have, and it still wouldn’t give us a balanced budget for one year. Collecting money the next year would also be…problematic, too.
But, the president has to be—well, not admired, exactly, but recognized—for his utter inability to accept that reality. As well as his apparent ability to construct "realities" that aren’t true.
At no time during the president’s hour-long perversion of the country’s economic history did he even allude to the massive growth in government spending we’ve seen, the cronyism between government and big business that led to private profits and socialized losses, or the explosion of debt that’s grown from $1 trillion in 1980 to $15 trillion today, all of which has resulted in removing money from the productive economy, and funneling it into government priorities, rather than into private income and investment. At no time did he mention the aggressive enforcement of the Community Re-Investment Act, which essentially forced banks into making sub-prime loans—indeed, explicitly instructed banks to make such loans—that led to the mortgage bubble and, when the less credit-worthy mortgagees couldn’t pay, it’s collapse—as a prime cause of our present economic difficulties. These are failures of government, and the president calls it a failure of capitalism.
"The market will take care of everything," they tell us. If we just cut more regulations and cut more taxes — especially for the wealthy — our economy will grow stronger. Sure, they say, there will be winners and losers. But if the winners do really well, then jobs and prosperity will eventually trickle down to everybody else. And, they argue, even if prosperity doesn’t trickle down, well, that’s the price of liberty.
Now, it’s a simple theory. And we have to admit, it’s one that speaks to our rugged individualism and our healthy skepticism of too much government. That’s in America’s DNA. And that theory fits well on a bumper sticker. (Laughter.) But here’s the problem: It doesn’t work. It has never worked.
In the president’s mind, economic freedom and capitalism don’t work. Never have. How he explains America’s ability to become the richest country the world has ever seen while operating under such a system is a complete mystery. And never mind that, to the extent the American system has failed, it is the reduction of economic freedom and the growth of government—especially over the last 50 years—that caused the failure.
But have no doubt that he believes this foolishness, even as the government-run technocracy he admires so much is literally weeks away from running the European Union’s economy straight into the ground. In a bit less than a year from now, we’ll see whether a majority of Americans believe it as well.
And if they do believe it, then the interesting question will be how they expect to pay for it.
Today’s economic statistical releases are limited to retail sales numbers for the pas week. Redbook and ICSC Goldman both show a lull in retail sales. Redbook reports retail sales are up 3.2% from last year, while ICSC-Goldman reports a drop of -2.3% for the week, up 3.8% for the year. Redbook explains the lull by saying that shopping patterns have "intensified" for the holiday season, in that people go out for big bargains on Black Friday, then wait until the last minute before buying Christmas gifts, causing a drop in shopping in early December.
Today’s economic statistical releases:
Factory orders fell -0.4% in October with both orders for durables goods down -0.5%, and orders for non-durable goods down -0.3%. But this is a report from October, and last week’s ISM manufacturing index indicates that orders came back fairly strongly in November. Whether that will continue if the Euro collapses is another question.
Speaking of the ISM, the non-manufacturing index today shows some slowing in the service sector, as the index fell from 52.9 to 52. A reading above 50 generally indicates expansion.
Today’s economic statistical releases:
The big number today is the monthly employment situation. The BLS released the headline as "Unemployment rate falls to 8.6% in November; payroll employment rises by 120,000". The numbers behind the headline are less impressive. Actually, the headline isn’t all that impressive, considering that 120,000 new jobs is, at best, an anemic rate of job growth. Also, it’s the time of year when a fair amount of hiring is seasonal, for temporary Christmas jobs, which can make the employment situation look better than it actually is, despite the seasonal adjustments to the data employed by BLS. Looking deeper, the labor force participation rate continued to fall -0.2% to 64% as nearly half a million workers left the labor force.If the labor force participation rate was at the historical average of 66%, the unemployment rate would be 11.41%. 2.6 million persons were marginally attached to the labor force, about the same as last November. The average workweek is unchanged at 34.3 hours, where it has been since September. Even worse, average earnings declined this month with the average hourly wage dropping 2 cents an hour to $23.18. So, I think we can say that the drop in the unemployment rate is mainly due to people leaving the labor force, as the rate of job creation is weak. Also, the lack of change in the workweek, and decline in wages implies that hiring pressure among firms is essentially non-existent as there has been no increase in the workweek for three months, and a glut of labor still exists as upward pressure on wages reversed this month. The only positive thing I can glean from this report comes from the household survey, where the number of respondents who are employed rose 278,000 to 140,580,000.
Monster.Com reports their employment index fell 4 points in November to 147 as online recruitment slowed.
You can wade through all the trash he throws up there as a preface to his central point, but I’ll save you the trouble. Writing in the WSJ, Andy Stern says:
The conservative-preferred, free-market fundamentalist, shareholder-only model—so successful in the 20th century—is being thrown onto the trash heap of history in the 21st century. In an era when countries need to become economic teams, Team USA’s results—a jobless decade, 30 years of flat median wages, a trade deficit, a shrinking middle class and phenomenal gains in wealth but only for the top 1%—are pathetic.
This should motivate leaders to rethink, rather than double down on an empirically failing free-market extremism. As painful and humbling as it may be, America needs to do what a once-dominant business or sports team would do when the tide turns: study the ingredients of its competitors’ success.
No poisoning the well there, huh? The “conservative-preferred, free-market fundamentalist, shareholder-only" model? Really? Where?
And why was it “so successful in the 20th century” and why is it having problems now? Well that’s a fairly easy question to answer. What happened increasingly in the 20th century that is at an all time high now?
Answer? Government. It has increased dramatically in both size and intrusiveness. We don’t have a “free-market” system anymore. Haven’t for quite some time. It’s a convenient shibboleth used by opponents of free markets such as Stern. We have a government that has, in the century cited, turned it into crony capitalism. Any resemblance here in the 21st century to a “free market” model is purely coincidental. And we now have a debt drag imposed by out of control government spending that has finally topped our total yearly GDP.
As usual, with those who think China has figured out how to build the socialist dream, they never figure in the damage done to the model that was “so successful in the 20th century” because doing so kills their entire premise. Government is their vehicle to both wealth and social justice. They have no concept of how markets work so are gullible enough to still believe that central planning, properly done, can work. And they take the fact that China has risen economically as proof of their premise.
What they don’t do is look behind the curtain. Stern talks about his trip there, “a trip organized by the China-United States Exchange Foundation and the Center for American Progress—with high-ranking Chinese government officials, both past and present.”
Yes indeed, very likely to see the underside of the economy is a show tour aren’t you?
A caller to Rush Limbaugh who spends a lot of time in China lays out the reality there:
CALLER: Because once you get outside of the main cities, there are still people plowing fields behind cows and oxen, still hand harvesting corn, grains, rice. I mean, it’s still very much a Third World economy once you get outside of the main cities.
RUSH: With a First World military.
CALLER: Yeah, that’s true.
RUSH: That’s where much of their spending goes. Their infrastructure is built on the cheap, too. Doesn’t take much wind to bring down some of their so-called powerful infrastructure. But, you’re right, and this is what President Bush was telling me, that the big challenge is keeping those peasants behind the oxen. Don’t [let] them into the city. The cities can’t handle them. The cities are teeming with people already. But it’s always been the case that there is this romance — the left has romance — with the romantic attachments to all these tyrannical communist regimes, and now they’re looking at China and you’ve got this Andy Stern guy and other people telling us, "This is what we need to be. We need to emulate the ChiComs. The ChiComs are doing it right."
This is simply the usual nonsense wrapped up in a little different packaging. It is the leftist dream – a strong central government planning the economy in which it ensures social justice as its highest priority (btw, China is an environmental disaster area, but you won’t hear that from the likes of Stern). And that doesn’t mean market capitalism, even if the Andy Sterns of the world want you to believe that.
While he avoids the obvious problem of government intrusion and its disastrous effect on the economy, he does touch on the political problem we still endure. We have politicians who prefer being Santa Claus to the Grinch and whose whole political horizon never goes beyond the next election.
But the central problem we have isn’t needing a new economic model. Instead we need to go back to the old one before it was corrupted and distorted by government. Instead of more government, as Andy Stern wishes, we need precisely the opposite – much less government.
If we want to regain our economic footing and dominance, what government needs to do is get the hell out of the way, get spending under control and pay down the debt (which should become its primary focus over the coming decades) to eliminate the debt drag it has created.
Other than that, it’s job is to be the night watchman, not Santa Claus. Our problem isn’t economic models. Our problem is exactly what Stern wants more of.
Obviously economics wasn’t his strong subject in whatever schooling he received and history was apparently completely skipped. How else to explain the utter nonsense he pushes in his article?
Today’s economic statistical releases:
Today’s chain-store results do NOT confirm the widespread anecdotal reports of a strong Black Friday week, trending at a same-store year-on-year 2.5%.
Initial jobless claims rose 6,000 to 402,000 in a short Thanksgiving week, which clouds the results.
The Bloomberg Consumer Comfort Index remained steady at -50.2 compared to the previous -50.1.
The ISM Manufacturing Index rose to 52.7, and many of the sub-indexes rose sharply, a good sign for the economy.
Construction spending rose 0.8% last month, which is nice, even though it’s rising from an extremely depressed base.
Today’s economic statistical releases:
The Mortgage Bankers Association reports that mortgage applications were down by -11.7%, but the short Thanksgiving week clouds the significance of this week’s results. Delving deeper into the report shows new purchase applications were down -0.8% while refinance apps fell -15.3%.
The Challenger Job-Cut Report shows layoff announcements are fairly steady this month at 42,474 compared to 42,759 in October and 48,711 last year.
ADP, the country’s largest third-party payroll processor, estimates private payrolls rose 206,000 in November. We’ll see if Friday’s Employment Situation confirms that.
3Q productivity and costs were revised downward slightly, with productivity increasing at 2.3% annually, while labor costs fell -2.5%. This is pretty much in line with the GDP revision for 3Q.
The Chicago PMI indicates a pickup in business activity for the Chicago area, with the index rising to 62.6 from 58.4. This report is widely seen as a predictor of the national PMI, which will be released tomorrow.
The National Association of Realtors reports their pending home sales index rose to 93.3 from 84.5.
Or maybe a better analogy is Nero and Rome. Politicians and hard decisions just don’t seem to mix very well do they? It is much better to be Santa Clause than the Grinch. Especially if you want politics to be your career.
Maybe that’s the problem. If you remember correctly, at least in the US, politics was supposed to be a part-time job. But here as in Europe, it has developed into a full-time job that requires excessive pandering to special interest groups using taxpayer money and borrowing as the means.
And here we are.
In Europe, it has, as predicted for decades, finally reached a tipping point. And the political elite? They really have no idea how to handle the problem (and the same sort of problem is becoming evident here). So they resort to the usual reaction of politicians caught in an uncomfortable situation. Defer a decision:
Under pressure to deliver shock treatment to the ailing euro, European finance ministers failed to come up with a plan for European countries to spend within their means. Such a plan is needed before Europe’s central bank and the International Monetary Fund consider stepping in to stem an escalating threat to the global economy.
The ministers delayed action on major financial issues – such as the concept of a closer fiscal union that would guarantee more budgetary discipline – until their bosses meet next week in Brussels.
If their finance ministers can’t put together a plan of action, what in the world are the ministers going to do next week? Megan McArdle notices the can kicking as well and also recognizes that they’re doing that in a cul de sac:
Keeping the euro together requires much more than fiscal integration–all fiscal integration does is turn the peripheral countries into something like those Algerian ghettos ringing Paris. Actually correcting these imbalances is going to require a lot of people in the periphery to get up and move. That’s a really tall order. Despite the fabled European multi-lingualism, in my experience, the majority of workers speak English about like I spoke high-school French and college Spanish; well enough to go on vacation, but not well enough to enjoy living in another country. I’m told that this is about standard. And that’s just one of the many barriers to movement between countries.
It’s not just the Germans who have to ask themselves whether the PIIGS won’t eventually say "Enough!" and renege. The bond buyers have to ask the same thing. At this point, it’s not entirely clear to me that any solution is credible enough to kick the can more than a very short distance down the road.
McArdle’s question in the title of the piece is “How can Europe possibly save itself?” You could read the question two ways. The first is wondering out loud what Europe could do to fix the problem and solve the dilemma they’re in. The second is rhetorical and reflecting a belief that it can’t.
Given this latest deferral, I’m beginning to see the question as rhetorical and the result as catastrophic. If you want to see a real “Domino Effect”, let Europe collapse.
Oh, and by the way, they just downgraded the third quarter GDP estimate from 3.1% to 2.3%.
And that sound you hear? The can clinking along as politicians the world over do what they do best.
MICHAEL ADDS: You could actually read the question a third way: Who will step in to save Europe from itself? Why, none other than good ole Uncle Sam (aka we the taxpayers):
The Federal Open Market Committee has authorized an extension of the existing temporary U.S. dollar liquidity swap arrangements with the Bank of Canada, the Bank of England, the Bank of Japan, the European Central Bank, and the Swiss National Bank through February 1, 2013. The rate on these swap arrangements has been reduced from the U.S. dollar OIS rate plus 100 basis points to the OIS rate plus 50 basis points. In addition, as a contingency measure, the Federal Open Market Committee has agreed to establish similar temporary swap arrangements with these five central banks to provide liquidity in any of their currencies if necessary. Further details on the revised arrangements will be available shortly.
U.S. financial institutions currently do not face difficulty obtaining liquidity in short-term funding markets. However, were conditions to deteriorate, the Federal Reserve has a range of tools available to provide an effective liquidity backstop for such institutions and is prepared to use these tools as needed to support financial stability and to promote the extension of credit to U.S. households and businesses.
This is essentially a back-door bailout of the Euro. The Fed fixes the interest rate for these loans (the currency swaps) at today’s rate, sends a bunch of US dollars to European central banks (and elsewhere), which then loan out those dollars to European banks facing a “liquidity crisis” — i.e. running out of money and holding diminishing assets (one of which may have almost crashed last night). Nominally, the European central banks are on the hook for any losses suffered, but we all know how that works.
You can read more about how these swaps work here.
Today’s economic statistical releases:
The Conference Board’s consumer confidence index jumped sharply upwards, from 39.8 to 56, mainly on employment optimism.
Distress sales and foreclosures seem to be pushing the housing sector deeper into contraction. The S&P Case-Shiller home price index fell again, -0.6% for the month, and -3.6% for the year. On the other hand, the FHFA reports housing prices rose 0.9% last month, though they’re still down -2.2% on a year over year basis. But, the FHFA only reports on conventional loans or those bundled by government agencies—which often has price caps. Case-Schiller is far more broad, and the FHFA picture is probably missing a lot of trouble in the housing sector.
The State Street Investor Confidence Index rose 2 points to 97.2 from a revised 95.2 last month, as institutional investors became a bit more jaunty.
Finally in retail sales, Redbook reports a year-over-year jump of 5.4% in sales last week. ICSC-Goldman is also strong, with sales up 1.7% for the week, and up 4% over last year.
Yes, Paul Krugman has a novel idea that no one has previously thought of … we can get out of this mess we’ve spent ourselves into by taxing the rich.
And by the way, income inequality now makes that both feasible and acceptable:
About those high incomes: In my last column I suggested that the very rich, who have had huge income gains over the last 30 years, should pay more in taxes. I got many responses from readers, with a common theme being that this was silly, that even confiscatory taxes on the wealthy couldn’t possibly raise enough money to matter.
Folks, you’re living in the past. Once upon a time America was a middle-class nation, in which the super-elite’s income was no big deal. But that was another country.
The I.R.S. reports that in 2007, that is, before the economic crisis, the top 0.1 percent of taxpayers — roughly speaking, people with annual incomes over $2 million — had a combined income of more than a trillion dollars. That’s a lot of money, and it wouldn’t be hard to devise taxes that would raise a significant amount of revenue from those super-high-income individuals.
Because you know, “super-high-income individuals” don’t deserve to keep the money they earned, because, well, we’ve gotten ourselves in this awful mess and we need someone to bail us out.
And they have a lot of money, by gosh. A lot of money. So “it wouldn’t be hard to devise taxes” that would take most of it on the marginal side. Because again, we should have first claim when we get ourselves in trouble. Besides, they have more than enough money and they should pay their “fair share”.
A couple of reminders. Despite what Krugman says, taxing the top 0.1% isn’t going to make a significant difference. And even if it did, it would only make that sort of difference once. The next year, that money would be much less available. Which would probably mean what?
Well “rich” would have to be redefined, wouldn’t it? Maybe then it would be the top 1%, because we all know they have more money than they need and they should pay their fair share, right?
As a reminder, the Adjusted Gross Income necessary to be considered a one-percenter is a ‘rich’ $343,927. And this particular percentage of tax payers are indeed shirking their fair share. After all, they only pay 36.73% of all income tax collected now. Surely we can kick that up to, oh I don’t know, at least 50%. And, of course “we” can, certainly. For a short time, that will indeed bring in more revenue. But, again, once the marginal rate goes up those being stuck with the tax bill will go to work finding ways to minimize that hit. And, they will.
Which means those top 5% suddenly become vulnerable, etc.
A short version of the Krugman solution can be found working so well in Europe right now. And E21 does a good job of reminding us of Krugman’s unadulterated enthusiasm for the social welfare states to be found there. E21 also does a great job of eviscerating Krugman’s arguments concerning Europe’s problems:
Paul Krugman insists that the European debt crisis has nothing to do with excessive government spending. The problem, to him, is a failed monetary experiment that deprives nations like Greece and Italy of the ability to print money to inflate away excessive debts. The need to create an alternative understanding for the origins of the debt crisis is only natural given the extent to which the current crisis has tarnished the statist ideology that Krugman generally follows. But his basic claims are nonsensical, as is Krugman’s citation of Sweden and Germany as economic role models. While these economies have performed relatively well through the crisis, it was because they abandoned Krugman’s preferred economics and moved in a more market-oriented direction long-ago.
He was wrong about Europe and he’s wrong about taxes. He’s become an economic joke but just doesn’t know it yet. He’s a one-trick pony who, much like the global warming alarmists, ignores the fact that what he continues to claim is viable and necessary is constantly and consistently being trashed by reality.
The only good news is he remains a source of entertainment. It’s sort of like a game. You wonder how long he can go before reality actually grabs him by the scruff of the neck and makes him recognize the error of his ways (my bet? Never happens). And, as a bit of side fun, you wonder how long the NY Times will continue to let Krugman push his reality challenged agenda forward before they finally (and, of course “reluctantly”) can him (see first bet – they haven’t a clue).