Free Markets, Free People

debt

Obama’s “paid for” job’s plan — nothing but tax increases

I know, you’re wondering, how does Obama plan to pay for his $450 billion plus job plan, right.  Because in the speech he made the claim this was all going to be “paid for”, remember.

Well here’s the plan:

White House Office of Management and Budget Director Jack Lew outlined President Barack Obama’s plan to pay for his $447 billion jobs plan — mostly through tax increases.

Lew said itemized tax deductions and exemptions for those making more than $200,000, and families earning more than $250,000 would be cut — raising about $400 billion to pay for Obama’s jobs plan over 10 years.

A change to bring more hedge fund earnings under normal tax rules as opposed to carried interest rates would raise another $18 billion.

The new tax rules would not take effect until January 2013, Lew said. Obama is not offering any spending cuts to pay for the jobs plan.

The rest of the total would be raised by cutting subsidies for the oil and gas industries to bring in another $40 billion, and change the depreciation rules for corporate jets. All told, Obama would cut $467 billion to pay for his plan.

Lew added that the White House doesn’t anticipate that raising some taxes on high income earners would result in the loss of jobs.

Gotta love it.  No politics in this.  Nothing happens until January 2013 (how convenient).  And the changes will pay for his spending now in 10 years.   Wow, where have we heard that before?  More debt boosting smoke and mirrors.  More of the same old tired agenda.

And of course, we all know that no future Congress is obligated to any of this.  And you wonder why there are those of us out here shouting about paying for something now vs the future?

Also, it is a litany of those interests and demographics which reside on the Obama “enemies list”.  The rich and the fossil fuel industry.  It is the usual class warfare politics. To sell this Obama has to attempt to demonize the rich and the oil companies – even more than he’s done so already.  As everyone knows, I’m all for ending subsidies for everyone, but what Obama calls subsides in this case are tax breaks all businesses in all sectors take.  They’re not direct subsidies at all (regardless of what the press or the White House choose to call them).  This is selective taxation of the type that is meant to be punitive.

So here’s the money part of the great plan.  It is absolutely nothing the Republicans have supported before.  It should be Dead On Arrival.  Obviously, knowing the Republicans won’t support such a funding mechanism, President Obama is not at all interested in a compromise jobs bill.  Or bi-partisanship.  He’s put a completely unpalatable poison pill in the bill and will now try to paint the GOP as intransigent obstructionists.

And, given the fact that taking those tax breaks away from the oil and gas industry will cost them an extra $40 billion it’s hard not to believe it won’t cost jobs.  Note Lew didn’t address that point concerning the removal of the tax break.  He’s only claiming that in regards to the so-called “rich”.

Business as usual.  Tax and spend.  And as usual it is spend now an collect later.  Somehow we never get around to the spending cuts, do we?  $14 trillion dollars of debt say “no”.

~McQ

Twitter: @McQandO

Destroying the “taxing the rich is the solution” myth

If you listen to Democrats, all we need to do to solve the debt and deficit problem is to let the Bush era tax rates expire and raise the tax rate on the rich.  We’ve had Warren Buffet, among others, saying “hey, tax me more, I can afford it”.  And, of course, those standing their ground on principle saying revenue isn’t the problem and tax increases aren’t the solution are roundly condemned for being greedy and protecting the rich.

Well what if we increased the taxes on the rich?  What if we increased them dramatically?  Is our deficit problem likely to be solved?  The answer, of course, is “no”.  And here are the numbers:

“Even taking every last penny from every individual making more than $10 million per year would only reduce the nation’s deficit by 12 percent and the debt by 2 percent,” the non-partisan Tax Foundation’s David Logan writes.

“There’s simply not enough wealth in the community of the rich to erase this country’s problems by waving some magic tax wand,” said Logan.

Rest assured you’d only get one shot at all the money as well.  The  next year the majority of the rich — and that most likely would include Warren Buffet — would find ways to hide their income from such a level of taxation.  Human Nature 101.

So 12% of the deficit and 2% of the debt with 100% taxation.  Sound like a solution to you?  Of course not.   How about raising taxes in general,  good idea right now?

If you said, “no”, you’re in good company:

The majority of economists surveyed by the National Association for Business Economics believe that the federal deficit should be reduced only or primarily through spending cuts.

The survey out Monday found that 56 percent of the NABE members surveyed felt that way, while 37 percent said they favor equal parts spending cuts and tax increases. The remaining 7 percent believe it should be done only or mostly through tax increases.

Whether the president likes to admit it, we’re in danger of a double-dip recession, and one way to guarantee it is to raise taxes during such an unstable time as now.  Obviously if taxes are increased on the rich, it won’t be 100%, so the impact on the debt and deficit are likely to be minimal at best.  And it would be an action counter to what economists believe to be the best approach to avoiding a double-dip.

That most likely means that Democrats will continue to pursue such an increase with a single-minded purpose.  Or, in short, they still don’t get it — it’s the spending, stupid.

~McQ

Twitter: @McQandO

4 Trillion in debt added under Obama’s term

Deficit spending has risen faster under Barack Obama than any other president in history.  That’s not to say other presidents weren’t in the red during their administrations, but in the case of Obama, its over 4 trillion dollars in less than a single term

The latest posting by the Treasury Department shows the national debt has now increased $4 trillion on President Obama’s watch.

The debt was $10.626 trillion on the day Mr. Obama took office. The latest calculation from Treasury shows the debt has now hit $14.639 trillion.

It’s the most rapid increase in the debt under any U.S. president.

The national debt increased $4.9 trillion during the eight-year presidency of George W. Bush. The debt now is rising at a pace to surpass that amount during Mr. Obama’s four-year term.

The immediate problem isn’t about taxes or revenues, “it’s the spending, stupid!”  Byron York echoes the point:

It’s conventional wisdom in Washington to blame the federal government’s dire financial outlook on runaway entitlement spending. Unless we rein in Social Security, Medicare and Medicaid, the conventional wisdom goes, the federal government is headed for disaster.

That’s true in the long run. But what is causing massive deficits now? . . . The bottom line is that with baby boomers aging, entitlements will one day be a major budget problem. But today’s deficit crisis is not one of entitlements. It was created by out-of-control spending on everything other than entitlements. The recent debt-ceiling agreement is supposed to put the brakes on that kind of spending, but leaders have so far been maddeningly vague on how they’ll do it.

Precisely.  When treating a badly wounded person the immediate need is to stop the bleeding, not treat them for heart disease.  Once the bleeding is stopped, then you can worry about their heart and future treatments.

The spending has to stop.   And President Obama is not the man to do that.  He blames his spending on everyone but himself which indicates to many that he has no intention of slowing it down:

Mr. Obama blames policies inherited from his predecessor’s administration for the soaring debt. He singles out:

  • "two wars we didn’t pay for"
  • "a prescription drug program for seniors…we didn’t pay for."
  • "tax cuts in 2001 and 2003 that were not paid for."

While there is some truth to what he points too, the last is nonsense unless you believe the government has first claim to your earnings.  Those aren’t tax cuts, they’re tax rates.  They’ve been in place for almost 10 years for the first and eight for the second.  Tax rates are changed all the time, but until recently they’ve never been referred too as “tax cuts … that were not paid for”.  Also not mentioned in Mr. Obama’s litany is TARP – something he voted for – and the trillion dollar stimulus bill, not to mention the new health care law which analysis now shows bends the cost curve up.

Just as this economy is all his, so is the 4 trillion in borrowed money he’s spent during his term to little or no effect during his term.  And the budget he submitted to Congress this year, the budget that was rejected 97-0, indicated he still doesn’t understand the spending has to stop.

Our debt now stands at 97.6% of our GDP.  That’s default territory.  Yet there are those who have attacked Standard and Poors for downgrading their rating to reflect that reality.   This is serious business that effects or will effect everyone if it isn’t stopped.   GOP candidates need to concentrate on the immediate problem and announce and run on their plan to stop the bleeding.

~McQ

Twitter: @McQandO

Still not getting it – - Democratic Rep to introduce “Progressive” jobs bill

It might come as a surprise to some, but the bill Democrat Representative Jan Schakowsky (IL) plans to introduce as a jobs bill is long on borrowing money we don’t have and funneling that money through ineffective government programs.  Apparently they still don’t get it.

The member of the Congressional Progressive Caucus would spend $227 billion dollars and, best case, create 2.2 million jobs (or, again best case, a little over $108,000 a dollar a job).  Her plan reads like something from the Franklin Roosevelt administration:

Under her plan, the following policies would be implemented:

  • The School Improvement Corps would create 400,000 construction and 250,000 maintenance jobs by funding positions created by public school districts to do needed school rehabilitation improvements.
  • The Park Improvement Corps would create 100,000 jobs for youth between the ages of 16 and 25 through new funding to the Department of the Interior and the USDA Forest Service’s Public Lands Corps Act. Young people would work on conservation projects on public lands including the restoration and rehabilitation of natural, cultural, and historic resources.
  • The Student Jobs Corps would create 250,000 more part-time work study jobs for eligible college students through new funding for the Federal Work Study Program.
  • The Neighborhood Heroes Corps would hire 300,000 new teachers, 40,000 new police officers and 12,000 new firefighters.
  • The Health Corps would hire at least 40,000 health care providers, including physicians, nurse practitioners, physician assistants, nurses, and health care workers to expand access in underserved rural and urban areas.
  • The Child Care Corps would create 100,000 jobs in early childhood care and education through additional funding for Early Head Start.
  • The Community Corps would hire 750,000 individuals to do needed work in communities, including housing rehab, weatherization, recycling, and rural conservation.

Perusing the list, there’s absolutely no possible threat of waste, fraud and abuse, is there?  750,000 people hired to “work in the community” doing “recycling” and “rural conservation?”   “Weatherization”?  Nope, no chance of waste, fraud and abuse, none at all.

Of course, nowhere in there other than initially, is there any mechanism to fund the “jobs” created in the future.  They’d last as long as the $227 billion did and then the jobs would go away.   That would include the teachers, police officers and firefighters.  Those are simply in the plan to make it sound more acceptable.  If the localities who will get the teachers, police and firefighters funded by this boondoggle can’t afford to hire them now, chances are very good they won’t be able to keep them when the money runs out.

The jobs listed are also mostly make work jobs on make work projects that might be nice to have done, but aren’t going to contribute to the private economy (the actual engine of the economy) in any meaningful way.   Nothing is really “produced”, no wealth is created, no revenue – other than salaries – is taxable.

And finally, which health care providers is “Health Corps” going to hire?  There’s a shortage of health care providers in the private market.   Why in the world would they leave that to work for government in “underserved rural and urban areas?”

It is clear with Rep. Schakowsky’s proposal that the Progressive side of the aisle still don’t get it.   How much louder do the American people have to shout to be heard?

Cut spending.  Make government smaller.  Make government less costly.

Rep. Schakowsky and the Progressives are still stuck in the 20th century. We’re already living the Raw Deal thanks to spendthrifts like her.

~McQ

Twitter: @McQandO

Our major creditor’s name also ends with a vowel

One of the irritating things about being deeply in debt is dealing with your creditors. Happily, if your creditor is, say Wells Fargo, they tend to stay within strict legal bounds when dealing with you. If you’ve been unfortunate enough to seek credit from fellows whose last names end in vowels, they tend to be more…forceful in delivering their messages to you. As it happens one of the United States’ creditors also has a name that ends with a vowel: China.

And they have a message. The more or less official organ of the Chinese Communist Party—which is to say the Chinese Government—is the newspaper People’s Daily. So, it is with much interest that I read an op/ed piece in that fine journal with the title, "China must punish US for Taiwan arm sales with ‘financial weapon’". As messages go, this one’s pretty simple.

Now is the time for China to use its "financial weapon" to teach the United States a lesson if it moves forward with a plan to sale arms to Taiwan. In fact, China has never wanted to use its holdings of U.S. debt as a weapon. It is the United States that is forcing it to do so.

The U.S. House of Representatives just passed a debt ceiling bill on Aug. 1. On the next day, a total of 181 members of the House of Representatives signed a letter sent to U.S. President Barack Obama stating that the federal government should approve the sale of F-16 C/D fighter jets to Taiwan as soon as possible to help ensure peace and stability across the Taiwan Strait…

Despite knowing that major creditor countries, especially China, would be the main buyers of its new debt, certain arrogant and disrespectful U.S. Congress members have totally ignored China’s core interests by pressuring the president to sell advanced jets and even an arms upgrade package to Taiwan.

U.S. treasuries will lose value if China stops or reduces its purchases of them on a large scale, which will also affect the value of China’s U.S. treasury holdings. However,as the situation has gotten out of hand, allowing Washington politicians to continue their game might lead to more losses.

U.S. arms sales to Taiwan can only create more jobs for the United States but cannot improve the ability of Taiwan’s military force to compete with the Chinese mainland. The essence of the problem is that some U.S. Congress members hold a contemptuous attitude toward the core interests of China, which shows that they will never respect China. China-U.S. relations will always be constrained by these people and will continue along a roller coaster pattern if China does not beat them until they feel the pain.

I am mildly amused by the claim that such sales both threaten "China’s core interests", but "cannot improve the ability of Taiwan’s military force to compete with the Chinese mainland." Both of these arguments cannot simultaneously be true.

Less amusing is the common attitude of loan sharks to their creditors displayed here using much the same language that Tony "The Shark" would use: Namely, if creditors don’t do what they’re told, you have to "beat them until they feel the pain."

With the recent rise in bond prices and drop in yields, the Chinese have a number of options. The least damaging to the US would be to sit out a few bond auctions, which would force interest rates up. But they’ve also got the nuclear option of selling off as much paper as the market could bear. Yes, they’d forego some yield payments, but they’d probably make a nice tidy premium over the original purchase price to make up for it. Rising interest rates now, at a time when the economy is weak, and short-term rates are already effectively zero, would slow the US economy. At the same time, a massive repatriation of renminbi to China would cause a steep drop in the value of the dollar in foreign exchange markets. This would raise the price of imports equally steeply. This would cause something very similar to the oil price shocks of the 1970s, that plunged the US into stagflation.

Naturally, the Chinese would be hurt by the reduction in their export capability. The question then becomes, "Which of the two political systems, China or the US, is more concerned about democratic pressure to change policy in order to improve the economy?" Who is more responsive to public pressure: our government, or the government that initiated the Tiananmen Square massacre?

I don’t know about you, but I wouldn’t expect Hu "The Kommissar" Jintao to be the one that blinks first.

Of course, if we weren’t $14 trillion in debt, we wouldn’t be very vulnerable to this sort of thing.

~
Dale Franks
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Mark Steyn is brilliant—and grim

Mark Steyn, writing in Investors Business Daily, isn’t pulling any punches about what the near future holds for us if the Federal government keeps spending like there is no tomorrow. There won’t be.

[B]y 2020 just the interest payments on the debt will be larger than the U.S. military budget. That’s not paying down the debt, but merely staying current on the servicing — like when you get your MasterCard statement and you can’t afford to pay off any of what you borrowed but you can just about cover the monthly interest charge.

Except in this case the interest charge for U.S. taxpayers will be greater than the military budgets of China, Britain, France, Russia, Japan, Germany, Saudi Arabia, India, Italy, South Korea, Brazil, Canada, Australia, Spain, Turkey and Israel combined.

When interest payments consume about 20% of federal revenues, that means a fifth of your taxes are entirely wasted. Pious celebrities often simper that they’d be willing to pay more in taxes for better government services.

But a fifth of what you pay won’t be going to government services at all, unless by "government services" you mean the People’s Liberation Army of China, which will be entirely funded by U.S. taxpayers by about 2015…

And even those numbers presuppose interest rates will remain at their present historic low. Last week, the firm of Macroeconomic Advisors, one of the Obama administration’s favorite economic analysts, predicted that interest rates on 10-year U.S. Treasury notes would be just shy of 9% by 2021. If that number is right, there are two possibilities:

The Chinese will be able to quintuple the size of their armed forces and stick us with the tab. Or we’ll be living in a Mad Max theme park. I’d bet on the latter myself.

And we all know who’ll be running Bartertown.

Look, there’s no way to sugar-coat this. What’s coming isn’t gonna be pretty. Too many politically powerful groups have their fingers stuck too deeply into the DC pie to let it all just slip away without fighting tooth and nail. There are too many people who believe the gravy train of benefits coming out of DC should be endless to kiss that goodbye without a fight.

Look at what has been happening in Greece.  They’ve built up two generations of people who cannot and will not accept that they’re simply out of money.  Despite the fact that system has been thoroughly looted, they are adamant that the looting should continue.

If we don’t cut spending—and I mean real cuts, not cuts to some imaginary baseline that has $9 trillion is spending increases baked in—and some sort of serious tax reform that widens the tax base to raise more revenue, we’re done.

And don’t come back at me with some lame "Our GDP:Debt ratio was 120% at the end of WWII" silliness.  Yes it was. And you know how we fixed it? We cut Federal spending from $92 billion in 1945 to $38 billion in 1949. For 2011, 40% of the federal budget was financed with borrowed money: We’ll spend  $3.818 trillion, of which  $1.645 trillion is borrowed. If we funded only defense, Medicare/Medicaid, and Social Security, and interest on the debt, we’d still have a deficit of $673 billion. Just to balance the budget this year—forget paying off any debt—we’d have to cut an additional ~25% from Health, Defense, and Pensions. Follow the link and download the CSV file, open it up in Excel, and run the numbers yourself. The magic number to balance the budget this year is the revenue of $2.174 trillion.

There’s no big mystery as to why we got a downgrade from S&P. The mystery is why Fitch and Moody’s haven’t downgraded US debt yet.

To begin paying down the debt will require massive cuts in government spending, substantially widening the tax base, and some healthy economic growth—and good luck with that as we add another couple hundred k government workers to the unemployment roles, lay off 1/3 of government contractors to boot, and start asking the bottom 50% of taxpayers to actually, you know, pay taxes, along with everyone else.

If you’re under 50, and reach retirement age with any modicum of personal wealth, you can forget seeing a dime in Social Security or Medicare benefits when you retire. You’ll be means-tested right out of all that.

You think the debt ceiling battle was disruptive? Well, hold on to your hats, folks.

~
Dale Franks
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The economy–how bad is it?

One of the well known institutions that politicians like to point to when things are going well or bad is Wall Street’s stock markets.  They’re an indicator that at times are used to point out that things aren’t as bad as they seem and as well as illustrate how bad things really are.

Today is one of those latter examples.  The Dow and other indices plunged.  The Dow Jones Industrial is off 512 points, its 9th steepest drop ever.

chart_ws_index_dow_20118414253.top

 

The question of course is “why” and what one has to hope is the answer is something to do with a temporary situation.   But it doesn’t appear that’s the case.   Looking out at the broad economy, it seems, investors don’t at all like what they see.  Add the government’s continued inability to address the debt and deficit and you have what could be the beginning of many down days on the street.

"The conventional wisdom on Wall Street was that the economy was growing — that the worst was behind us," said Peter Schiff, president of Euro Pacific Capital. "Now what people are realizing is the stimulus didn’t work, and we may be headed back to recession."

That’s not what you want to hear when you’re hoping to see investment and an economy turn around.  And unfortunately, Wall Street is a place with a herd mentality, and when some investors get spooked, they all get spooked.  Yesterday indicated they’re spooked.

There’s "total fear" in the market, said Bob Doll, chief equity strategist at the world’s largest money manager, BlackRock.

European and Japanese policy makers had to step in and shore up their markets as the sell off gained momentum.

"In the last two weeks, we’ve been through the ringer," said Rich Ilczyszyn, market strategist with futures broker Lind-Waldock. "When we start looking at the recovery, there’s nothing to hang our hats on anymore."

So despite assurances that a “deal” to raise the debt limit would have a calming effect on world markets, the reality is it didn’t.  And Europe is in pretty deep trouble which is also reflected in this loss.  Add in the poor economic reports here that continue to pile one on the other and you have a situation that looks increasingly bleak.  The unemployment report today is most likely only going to underline that fact with most economists expect poor job growth to continue and the unemployment rate to stay at 9.2%.  And now the Dow has lost all of what it had gained in 2011.

Stay tuned.  Rocky road (continues) ahead.

~McQ

Twitter: @McQandO

Deficit “super-committee”? Dead on Arrival

One of the smoke-and-mirrors aspect of this debt deal that experienced observers noticed immediately was the “super-committee” that would negotiate the cuts before the December 23 deadline.  If that committee doesn’t agree upon suitable cuts, then the meat-axe of across-the board cuts, mostly focused in the defense area, will take effect.

Everyone with any sense understands that part of the process of making meaningful cuts in spending and thus the debt must address entitlement spending.  But apparently the liberal left is fine with gutting defense instead. Nancy Pelosi has basically declared that any committee members she appoints will oppose all entitlement benefits cuts.

The debt limit fight is over, but the fight over entitlement programs will continue for months. In the weeks ahead, the leaders of both parties in both the House and Senate will name three members each to a new committee tasked with reducing the deficit by at least $1.2 trillion.

The ultimate makeup of that committee is key. It will determine whether this Congress will pass further fiscal legislation, and, thus, what the major themes of the 2012 election will be.

At a pre-recess press conference Tuesday afternoon, TPM asked House Minority Leader Nancy Pelosi (D-CA) whether the people she appoints to the committee will make the same stand she made during the debt limit fight — that entitlement benefits — as opposed to provider payments, waste and other Medicare spending — should be off limits.

In short, yes.

"That is a priority for us," Pelosi said. "But let me say it is more than a priority – it is a value… it’s an ethic for the American people. It is one that all of the members of our caucus share. So that I know that whoever’s at that table will be someone who will fight to protect those benefits."

Right.  “Benefits” make up their “value” and “ethic”, meaning  they’ll decide what you owe others and what you’ll pay for it and you just shut up, sit back and be quiet.  That’s their “ethic”.  Their “values” lie in redistributing wealth they don’t earn but they certainly find no problem in dividing yours out to those who they favor and/or who will vote for more “benefits” from your pocket book (or in this case, out of borrowed money).

Obviously Ms. Pelosi hasn’t yet quite figured out that the “benefits” that are key to her political agenda and provide her political power are no longer affordable.  Claiming she’s clueless is an insult to the really clueless of the world.   The welfare state has run out of money and all that is has promised is no longer affordable.

Until these people are replaced with people who actually understand the concept of limited government, property rights and the fact that they don’t have the right to anyone else’s earnings, nothing will change in DC or for us.

~McQ

Twitter: @McQandO

The markets are telling us things

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.

*sigh*

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.

~
Dale Franks
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The Death of Keynesianism (Updated)

Sen. Dick Durbin is an angry man, because he sees the debt deal as the death of Keynesian economics. For some reason, he appears to see this as a bad thing.  In his comments today, discussing the debt ceiling deal, he noted:

“I would say … that symbolically, that agreement is moving us to the point where we are having the final interment of John Maynard Keynes,” he said, referring to the British economist. “He nominally died in 1946 but it appears we are going to put him to his final rest with this agreement.”

That’s a bit of hyperbole, but even if true…well…so what?

Lord Keynes had some valuable insight into how fiscal and monetary policy can work inside certain parameters­, but outside those parameters­, it fails. And I have no doubt whatsoever that even Lord Keynes would recognize that, once a country has accumulate­d enough debt, the debt itself becomes a drag on economic growth, and attempting to inflate your way out of it by piling on more debt is a solution worse than the disease.

We’ve actually learned quite a lot about how the economy works since the General Theory was published in 1936, not the least of which were the limitation­s of Keynesian theory in the 1970s. Keynes famously noted that politician­s are almost always influenced by the opinions of some long-dead economist. Like John Maynard Keynes.

Keynesian economics should be dead. If nothing else, the existence of stagflatio­n in the 1970s should have shown that Keynsian policy prescripti­ons were ultimately unworkable­. Indeed, the very existence of Stagflatio­n shows that several central tenets of Keynesiani­sm are simply flat wrong. The response to this is usually that the 70s were an aberration due the oil shocks of the Arab Embargo, and the subsequent price hikes enforced by OPEC.

I am, of course, quite well aware of this. I did, after all, live through it.

I am also aware that Keynesiani­sm regarded inflation and recession as being mutually exclusive-­-an idea that fostered a reliance of the Philips Curve, and constant seeking by the Fed to find the NAIRU. I am further aware that the Fed’s response to the oil shocks was a highly expansioni­st monetary policy that ultimately kicked off a wage-price spiral in a recession, rather than causing an economic expansion. Apparently, we found the limit at which expansionist policy ceased to be expansionary, and became merely inflationary.

What solved that problem was Paul Volcker’s Fed adopting an explicit Monetarist policy at the Fed to essentiall­y ignore interest rates and concentrat­e on money supply growth. As hard as it may be to believe now, markets would almost shut down on Thursdays waiting for the M1, M2, and M3 numbers from the Fed. We mostly ignore that Thursday money supply release now. It took a fair amount of pain, and back-to-ba­ck recessions in 1981-82 with 11% unemployme­nt to solve the inflation problem, but it did wring inflation out of the economy.

What we learn from all this is that Keynes had some serious policy limitation­s in the real world. I believe that we are currently discoverin­g more of those limitation­s.

We’ve actually learned quite a bit about how economies actually work in the 75 years since The General Theory was published. Over the last decade, for instance, 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. I would submit that in light of this, that no matter how workable Keynesian theory may be in a regime of moderate public debt, with judiciously applied counter-cyclical monetary and fiscal policies, that it simply falls apart as the debt approaches 100% of GDP.  One of the key problems is, of course, that we’ve rarely seen the high levels of public indebtedne­ss we’re currently experienci­ng, so prior to this decade, much of the work in this area was theoretica­l, except for data from highly indebted emerging countries, which may not be entirely applicable to mature economies.

Sadly, we’re collecting that empirical data now.

I’d also point out that we also don’t have to rely solely on 1970s stagflatio­n to note the failure of Keynesian prediction­s in the real world. One merely has to look at the wide-sprea­d Keynesian prediction­s in the immediate Post-WWII era that massive budget cuts to pay down the war debt, coupled with the demobiliza­tion of 12 million soldiers, would lead to a return of the US to a depression economy. Of course, no such depression occurred. Quite the opposite, in fact.

It was clear, even a decade after the General Theory was propounded, that it was…incomplete.

One more thing that relates the current level of indebtedne­ss is that attempting to apply Keynes over and over again–but only the deficit spending part–is that, in effect, you’re arguing that the Keynesian solution is to spend, spend, spend, not matter what the level of debt.

There’s simply no evidence at all that even Keynes would have bought into that sort of argument. Indeed, quite the opposite is true. Lord Keynes never argued for increasing public spending as a matter of course, but rather tempering spending with budget-cut­ting at the appropriat­e time. Properly applied, even Keynesiani­sm tends towards a balanced budget over time. What we’ve done over the past three decades isn’t Keynesiani­sm, it’s a perversion of it. We’ve spent like drunken sailors attempting to stimulate the economy, but we’ve never actually gotten around to cutting budgets and paying down the debt in the good times.  We’ve simply accepted the new level of increased spending as the baseline.

My argument  is that we’ve reached beyond the outer bounds where Keynes is applicable­. However relevant his observatio­ns may be in a regime of limited public debt and counter-cy­clical fiscal and monetary policy–wh­ich we’ve never really applied by the way, as we’ve ignored the budget-cut­ting bits–we’v­e simply passed the point at which his policy prescripti­ons can be relied upon, even if they are correct in other contexts.

If Keynesianism is dead, it’s mainly because we’ve killed it.

~
Dale Franks
Twitter: @DaleFranks

UPDATE: From Billy Hollis in the comments:

One of the main reasons I have disdain for experts that are part of the political class is the Honors Economics course I took in 1975-76. The professor (an excellent one, and one of the few non-collectivist professors in the department) had us read and contrast John Kenneth Galbraith, who was the leading Keynesian proponent of the time, and Milton Friedman. Galbraith sounded like nonsense to me, and Friedman seemed logical and reasonably clear…

Pumping up the money supply artificially increases demand, trading present good stuff for future bad stuff (inflation, high interest rates, etc.). The only way you can believe that such a technique works in the long term is to assume people are stupid and will fall for the same short term thinking every time you try it.

I’d respond that what JKG called Keynesianism…wasn’t.

Keynes said that in recessions or depressions, the government should use deficit spending to pump more money into the economy. This extra spending would increase the money supply, and stimulate the economy.  In addition, the government could cut taxes, allowing people to keep more of what they’d earned.

In good economic times, he said the government should operate at a surplus. That would keep the economy from heating up too fast, and set aside a store of money to be spent in the recessionary times. It would also reduce the money supply, and erase the inflationary pressures bought about by increasing the money supply during the recessions.  Taxes could also be raised to help make up the previous budget shortfalls.

So, in a perfect world, the budget would balance, over the course of a business cycle. You’re still trading present good stuff for future bad stuff, but in relatively tiny increments.  You really aren’t supposed to do it $14 trillion at a time.

What we had in the 1970s–and since–was half of Keynes.  The easy bit.  The bit that allowed us to spend, spend, spend, with nary a thought of ever applying fiscal austerity in the good times. Austerity is hard and unpopular. It’s easier just to spend money as a way to buy votes.

Since Keynesianism essentially requires the administration of wise philosopher-kings to administer it, democratically-elected polities have failed at implementing it.

Even more than that, Keynesianism essentially requires the ability to rather precisely target both the timing and amount of stimulus needed to ameliorate a recession, and the timing and amount of austerity to apply in an expansion to wring the expansionary and inflationary pressures out of the economy. But, absent a philosopher king who can operate in synch with the state of the economy, things begin to break down.

Timing the changes in fiscal and monetary policy are, at best, difficult in a democratic state.  Messy political deals have to be made and legislation gets held up while waiting for amendments to satisfy some special interest, without which, too few politicians are willing to vote in favor. On the monetary policy side, the effects of policy changes aren’t realized for 8-16 months after a policy change, such as a change in interest rates. And, in either case, no one actually knows what the state of the economy is right now. At best we know what the state of the economy was last month, or three months ago, when the statistics were compiled.

Even at the best of times, with political players of unquestioned integrity, the immense difficulty of knowing the precise timing and amounts of expansionary or contractionary policy that is needed is a daunting task.

Theoretically, Keynes theory is elegant, and explains much about money-based economies.  In practice, it’s so difficult and messy to try and implement, and so filled with negative incentives for the politicians who are asked to administer it, that it has simply proven unworkable.

Like communism, the fact that it’s never been properly implemented, or achieved the claimed result, raises serious questions about whether, in the messy world of real people, it ever can be.