The Math of the Welfare State gives us a Bleak Future of Alternatives

Posted by PITHOCRATES - December 4th, 2011

Week in Review

Europe’s troubles will be our troubles.  Just give it some time (see The Welfare State’s Day Of Reckoning Is Here by ROBERT J. SAMUELSON posted 12/2/2011 on Investors.com).

Government expansion was one of the 20th century’s great transformations. Wealthy nations adopted programs for education, health care, unemployment insurance, old-age assistance, public housing and income redistribution.

“Public spending for these activities had been almost nonexistent at the beginning of the 20th century,” writes economist Vito Tanzi in his book “Government versus Markets.”

The numbers — to those who don’t know them — are astonishing. In 1870, all government spending was 7.3% of national income in the U.S., 9.4% in Britain, 10% in Germany and 12.6% in France. By 2007, the figures were 36.6% in the U.S., 44.6% for Britain, 43.9% for Germany, 52.6% in France.

Military costs once dominated budgets; now, social spending does…

To flourish, the welfare state requires favorable economics and demographics: rapid economic growth to pay for social benefits; and young populations to support the old. Both economics and demographics have moved adversely.

The great expansion of Europe’s welfare states started in the 1950s and 1960s, when annual economic growth for its rich nations averaged 4.5% compared with a historical rate since 1820 of 2.1%, notes Eichengreen. This sort of growth, it was assumed, would continue indefinitely. Not so. From 1973 to 2000, growth settled back to 2.1%. More recently, it’s been lower.

Demographics shifted, too. In 2000, Italy’s 65-and-over population was already 18% of the total; in 2010, it was 21%, and the projection for 2050 is 34%. Figures for the European Union’s 27 countries are 16%, 18% and 29%…

In 1960, 26% of federal spending represented payments for individuals; in 2010, it was 66%. Economic growth in the 1950s and 1960s averaged about 4%; from 2000 to 2007, the average was 2.4%. Our elderly population was 13% in 2010; the 2050 estimate is 20%.

The high cost of the welfare state has required ever increasing taxes which has dampened economic growth.  The availability of birth control and abortion has reduced the population growth.  More and more seniors are being supported by fewer and fewer young workers.  Requiring ever higher taxes to support the welfare state.  Which further dampens economic growth.

It’s a vicious cycle.  And it won’t end until welfare nations go bankrupt.  Or until the pre-birth control and abortion generations die out.  A bleak future of alternatives.  But a future the math gives us.

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The Zimbabwean Reserve Bank Governor Gideon Gono does not Approve of Current American Monetary Policy

Posted by PITHOCRATES - December 4th, 2011

Week in Review

For all of you tax/print and spend Keynesians, here’s an example of what can go wrong when you try to print away all your financial worries (see The Dollar Is Dead, Says the World’s Worst Central Banker by Reuters posted 12/2/2011 the Atlantic).

You might not be a fan of Ben Bernanke’s monetary policies. And you might be fed up with the European Central Bank’s dawdling. But whatever their shortcomings might be, at least they’re not responsible for 231,000,000% inflation.

Sadly, the same cannot be said for Zimbabwe Reserve Bank Governor Gideon Gono.

Gono was the man who turned on the printing presses to fund Zimbabwe’s government after dictator Robert Mugabe drove its economy off a cliff. The resulting hyperinflation left the Zimbabwe dollar effectively worthless. But at the very least, everybody got some totally sweet 100-trillion-dollar bills. They even kind of looked like monopoly money.

Nowadays, Zimbabwe uses the American dollar as its main official currency.

Imagine you are a Zimbabwean.  You had your life savings in the bank.  Saved up from working hard and pinching your pennies.  And you won the lottery.  All together let’s say you accumulated one million dollars for your retirement.  The only problem is that you are a Zimbabwean.  And those dollars are now worthless.  So you have nothing.  And can’t retire.

This is what hyperinflation does.  Inflation does the same.  Only at a slower pace.  It makes your money worth less.  And as it shrinks prices soar.  Because that money becomes more worthless with every day.  And it takes more and more of that useless stuff to buy anything.

“With the continuous firming of the Chinese yuan, the US dollar is fast ceasing to be the world’s reserve currency and the Euro-Zone debt crisis has made things even worse,” he said earlier this week, according to New Zimbabwe. “As a country, we still have the opportunity to avoid being caught napping by adopting the Chinese yuan as part of consolidating the country’s look East policy.”

As Zero Hedge pointed out, it’s a bit concerning that the man responsible for the world’s most staggering monetary failure now sees storm clouds gathering around the greenback. On the other hand, it’s the man responsible for the world’s most staggering monetary failure. We may need to take his opinion with a grain of salt.

If that ain’t a kick in the crotch.  An architect of monetary destruction wagging his finger at American monetary policy.  Sure, we should take his opinion with a grain of salt.  But if anyone knows anything about inflation, this guy does.

Of course, Zimbabwe ships about 40% of its exports to China.  So that may be part of it, too.  That may help them gain some better terms with the Chinese.  But still.  If anyone knows what NOT to do it’s this guy.  And it sounds like he’s telling the Americans that they are doing what they should not be doing.  Printing money.  Like he did.

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The Government pays $230,000 for Green Jobs Website that won’t list any Green Jobs

Posted by PITHOCRATES - December 4th, 2011

Week in Review

If you want to look for green jobs on the Internet, don’t go to this government website (see A $230,000 Taxpayer-Funded ‘Green Jobs’ Website, but No Jobs Listed by Mike Brownfield posted 12/2/2011 on The Foundry).

How’s this for a waste of taxpayer money? According to Energy& Environment News, the Department of Energy is paying $230,000 for a website to promote career paths in the green energy sector–and it has, ironically, prohibited the listing of actual jobs in the industry.

Could it be that the administration doesn’t a website listing green jobs because there are so few jobs to list?  Or perhaps they don’t want to list any green jobs because you can trace most of them back to government funding.  Because the free market economy isn’t hiring.  Because no one is buying what these green industries are selling.  Unless they have massive government subsidies.

It probably shouldn’t be surprising that a “green jobs website” doesn’t actually list any green jobs. After all, President Barack Obama’s green dream has proven to be a bust. The President made green jobs a centerpiece of his Administration, and he hailed them as the future of this U.S. economy. The trouble is, those jobs didn’t materialize, despite a massive infusion of federal spending–including billions in the 2009 stimulus bill.

Even The New York Times wrote, ”federal and state efforts to stimulate creation of green jobs have largely failed” and Obama’s goal of creating 5 million new green jobs within 10 years is a “pipe dream.”

Maybe the Obama Administration is operating under “The Field of Dreams” theory — if they build a website, the jobs will come. A better strategy would be to get the federal government out of the way and let the free market thrive instead of spending taxpayer money on quarter-million-dollar PR projects.

I guess it’s a little of everything.

Based on this failure of the green agenda I’m not sure why they would even want a green website.  Unless that $230,000 was used to repay a campaign donor or something.  I mean, let’s face it, you don’t need to spend $230,000 for a static website.

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The Germans are the Atlas of the Eurozone and the French may be Adding to their Burden

Posted by PITHOCRATES - December 4th, 2011

Week in Review

The French and the Germans are carrying the weight of the Eurozone.  Sort of like a family.  Where the Germans are the hard-working adults.  And the French are the successful children with good jobs but living over their means.

Children being children, they want more of the same good times.  The parents, who have experienced true hard times, believe more in thrift and hard work.  So it’s natural that the French and Germans have different views on how to  handle Greek debt.  The French say let’s just print more Euros and monetize it away.  The Germans say, what?  Are you crazy (see A Culture Clash by Veronique de Rugy posted 11/28/2011 on The New York Times)?

First, the perceptions of the consequences of monetizing the Greek debt differ across the Rhine River. It is well known that Germans hate inflation. It is deeply rooted in their psyche. Part of Germany’s official theory is that Hitler came to power because of the disastrous consequences of the hyperinflation of 1922-1924 during the Weimar Republic. The French, on the other hand, have no such fears. On the contrary, ignoring how inflation chipped away their capital, my parents’ generation often fondly remembers paying their house “grace à l’inflation” during the 1970s.

Second, the official government debt and deficit numbers of France and Germany are substantially different. The Organization for Economic Cooperation and Development projects Germany’s debt at 87.3 percent of G.D.P. with a deficit of 2.1 percent of G.D.P. —possibly sustainable levels. However, France’s levels of debt and deficit are higher and unsustainable (debt of 97.3 percent of G.D.P. and a deficit of 5.6 percent of G.D.P.).

Third, attitudes toward reforming social programs differ too: in recent years. Germany has engaged in significant structural reforms to tackle the rigidity in the labor market as well as demographic pressure on the private and public pension system. France, however, has been reluctant to change any “acquis sociaux,” France’s famous social entitlements.

With higher levels of debts and no will to reform entitlement programs, sooner or later France is likely to need a European Central Bank “bailout” to keep paying its bills (and French banks may also be in big trouble). The need for a rescue plan makes France more inclined to set a precedent. However, Germany, after 60 years of desperately trying to avoid inflation, is reluctant to pay that bill.

It’s going to get tough in the Eurozone.  For Germany, that is.  Not only are they the responsible adults living a life of thrift and hard work, they’re children may soon be moving back home.  This on top of trying to save the rest of the Eurozone.

Poor Germans.  The Atlas of the Eurozone.  The only question is will they reach their limit?  And shrug off this crushing weight?

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The U.S. Taxpayer may have to bailout American Airlines’ Union Pension Plan

Posted by PITHOCRATES - December 4th, 2011

Week in Review

We simply can’t afford pension plans anymore.  Defined benefit plans need to go the way of the dinosaurs and fast.  Most retirement plans have already gone to employee 401(k) plans.  Where the employer pays the employee and forgets about him.  Or her.  Only unions and the public sector cling to these golden parachutes.  Because they know in the end they can get the taxpayer to pay for them when their greed gets the better of them (see US may have to foot American Airlines’ pension bill by NEWSCORE posted 12/1/2011 on the New York Post).

US firms or taxpayers may be on the hook to pay for American Airlines’ massive pension bill, if the bankrupt carrier chooses to drop its pension plans as part of restructuring efforts, the Financial Times reported Thursday.

Joshua Gotbaum, director of the Pension Benefit Guaranty Corporation (PBGC), told the FT that taking on American’s pension plans would worsen the insurer’s deficit and might trigger higher premiums for the companies that finance it.

The PBGC is funded by US firms that offer defined benefit pension plans. The agency insures about 27,600 single employer plans and 1,500 multi-employer plans, guaranteeing defined pension plans for about 44 million US workers…

PBGC has already requested permission from Congress to raise the premium it charges US corporations by $16 billion over 10 years.

America can’t afford a privileged class any longer.  The declining birth rate put an end to that a long time ago.  For pyramid schemes don’t work when the top is wider than the base.

We need to transition from defined benefit to defined contribution.  No more pensions.  People must save for their own retirement with a 401(k), IRA, annuity, etc.  And that goes for Social Security, too.  Not now.  But some future generation will have to pay for their own retirement.  Because sometime in the future Social Security just won’t be there anymore.  Not with a declining birth rate.  And unless you want to establish strict Catholicism as the state religion (no birth control or abortion), that birthrate isn’t going to change.  So that leaves only one option.  No more pensions.  Or privileged classes.

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American Airlines to file Bankruptcy to get their Labor and Pension Costs under Control

Posted by PITHOCRATES - December 4th, 2011

Week in Review

American Airlines is hurting.  They’ve lost about a billion dollars for each of the last 10 years.  Because of high fuel costs.  And high labor and pension costs (see American Airlines files for bankruptcy protection by DAVID KOENIG, AP, posted 11/29/2011 on Yahoo! News).

The parent company of American Airlines filed for bankruptcy protection Tuesday, seeking relief from crushing debt caused by high fuel prices and expensive labor contracts that its competitors shed years ago…

AMR Corp., which owns American, was one of the last major U.S. airline companies that had avoided bankruptcy. Rivals United and Delta used bankruptcy to shed costly labor contracts, reduce debt, and start making money again. They also grew through mergers.

American — the nation’s third-largest airline and proud of an 80-year history that reaches back to the dawn of passenger travel — was stuck with higher costs that meant it lost money when matching competitors’ lower fares…

AMR, however, wants to push ahead with plans to order 460 new jets from Boeing and Airbus and take delivery of more than 50 others already ordered. New planes would save American money on fuel and maintenance, but the orders will be subject to approval by the bankruptcy court.

The two greatest costs of an airline are fuel and labor.  Which have to be paid for by passengers buying tickets.  Airplanes are expensive but they’re fixed costs amortized over time.  Their other costs are relatively fixed and aren’t volatile.  It’s fuel and labor that will make or break an operation.  During good times unions demand generous pay and benefits packages.  Which airlines can pay during good times.  It’s either that or face a strike.  The problem is the bad times.  And there are always bad times.

Bad times are when people aren’t flying and airlines have to cut ticket prices to encourage them back onto their planes.  And high fuel prices.  Fuel costs are such a large percentage of an airline’s costs that spikes in fuel prices results in marginal routes losing money.  Put the two together and it’s impossible to pay those generous pay and benefits packages any more.

The losers will be American Airlines employees and AMR stockholders.

Shareholders almost certainly will be wiped out. The stock had already lost 79 percent of its value this year on fears of bankruptcy.

AMR has lost more than $12 billion since 2001, and analysts expect it will post more losses through 2012. Speculation about an AMR bankruptcy grew in recent weeks as the company was unable to win union approval for contracts that would reduce labor costs. The company said it was spending $600 million more a year than other airlines because of labor-contract rules — $800 million more including pension obligations.

On Tuesday, Horton said no single factor led to the bankruptcy filing. He said the company needed to cut costs because of the weak global economy, a credit downgrade that raised borrowing costs, and high, volatile fuel prices. The price of jet fuel has risen more than 60 percent in the past five years.

If you’re losing $1 billion a year you’re doing something wrong.  Either you’re not charging enough for tickets.  Or your costs are too great.  Competition sets the price of tickets.  So it’s not that.  Which leaves costs.

Approximately 80% of their losses are due to labor and pension costs.  And math doesn’t lie.  So it’s the labor and pension costs.   But wait a minute, you say.  What about that 60% increase in fuel costs?  Well, that could be a problem.  If it wasn’t for the fact that all the airlines are paying 60% more for fuel.  So you can’t blame the fuel costs.

You see, those other airlines can afford that 60% hike in fuel prices because they already went through a bankruptcy to get their labor and pension costs in order.  Which is what American Airlines needs to do.  If, that is, they want to keep flying airplanes.

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Iranians attack British Embassy in Tehran, Keeps working on Nuclear Program despite Escalating World Opposition

Posted by PITHOCRATES - December 4th, 2011

Week in Review

The Iranians have attacked the British embassy in Tehran.  Something like this hasn’t happen since the Iranians attacked the U.S. embassy in Tehran.  That’s the problem with a rogue regime.  They go rogue (see Storming of British Embassy in Iran: This rabid rogue state could tip the world into a new dark age by Michael Burleigh posted 12/2/2011 on Mail Online).

That rampaging mob of ‘students’ storming the British Embassy in Tehran on Tuesday, lobbing petrol bombs, ransacking the building, burning the Union Jack and threatening to hold hostage terrified members of staff inside the compound, was a deeply worrying spectacle for those of us who have studied the Iranian regime over the years.

The mayhem followed a vote in Iran’s parliament to downgrade diplomatic relations with Britain – a response to the tough new financial sanctions imposed by London last week over Iran’s nuclear programme, after the International Atomic Energy Authority warned that Iran is getting ever closer to building a bomb.

These protesters were clearly orchestrated by the Iranian regime, for the mayhem could never have taken place without sanction in a country where secret police stalk the streets, torture is endemic, criminals are executed in public and foreign embassies are closely guarded and monitored.

Far from being students, many of the thugs involved were elite members of Iran’s paramilitary Basiji brigades, a hard-core volunteer outfit under the control of the country’s Revolutionary Guards, who answer to the country’s top cleric, the Supreme Leader Ayatollah Ali Khamenei.

Iran plays by no rules but their own.  Embassies are supposed to be sovereign soil.  Iranian territory ends at the walls of the British Embassy.  Just as British territory ends at the walls of the Iranian embassy in Great Britain.  This is sacrosanct in the international community of nations.  And here the state has orchestrated an attack on a foreign embassy.  This isn’t diplomacy.  This is the action of a rogue state.

So why did the Iranians do this?  Because they’re pissed.  No one is buying their story of why they are going nuclear.  They say it’s for energy.  But they also have said they want to remove Israel from the map. Which happens to be another use for nuclear technology.  Weapons.  And mass destruction.  So the international community of nations is starting to pull away from Iran.  Apply sanctions.  And a few other things.

As President Ahmadinejad said recently: ‘All our banking operations, all our trade, all our purchases and sales, all our agreements are being monitored and blocked’.

The truth is that the country’s nuclear ambitions are under siege as never before.

Israel’s intelligence agents are ruthlessly assassinating Iran’s top nuclear scientists one by one, while sabotaging the country’s nuclear processing plants using cyber-warfare and explosives placed by double agents – only this week there was a huge unexplained explosion at a nuclear facility in the city of Isfahan.

The Israelis are in survival mode.  Because they know what what’s going to happen if Iran gets a nuclear bomb.  They’re going to use it.  And they know where.  All that Iranian talk about hating Israel and wanting to incinerate it kind of telegraphed their intent.

The kind of behaviour we are witnessing in the attack on the British Embassy is all too frighteningly reminiscent of the day in November 1979 that so-called students burst into the U.S. Embassy, demanding that America surrender the exiled Shah, who was being treated in the U.S. for cancer.

The Supreme Leader of the day, Ayatollah Khomeni, endorsed the ‘students’, who settled down to a government-licensed siege, with U.S. diplomats held hostage in harrowing conditions for 444 days.

The young Mahmoud Ahmadinejad, now president, was one of the hostage-takers.

That’s right.  Mahmoud Ahmadinejad was one of the thugs that violated U.S. sovereign territory back in 1979.  Once a thug always a thug.  Only he’s now the head of state.  And may shortly have access to nuclear weapons.

Indeed, many believe that Iran’s behaviour is so outrageous, and its nuclear capability now so dangerous, that a military strike is the only option left to the international community to bring the renegade nation into line.

Israel is already considering such action against Iran’s three main nuclear facilities, which are hundreds of miles apart: a Russian-built-and-staffed light water facility at Bushehr; a major underground uranium plant at Natanz; and two water facilities at Arak to convert uranium dioxide into weapons-grade plutonium…

The Iranians have threatened dire consequences if such an attack took place, including firing long-range ballistic missiles, thought to be more accurate than the Scud missiles Saddam Hussein launched against Israel during the first Gulf War.

They are also likely to retaliate against any neighbouring state that allows Israel to fly through their airspace towards Iran, including Turkey and Iraq.

They may risk attacking U.S. forces stationed in Iraq or the nearby Gulf states, sucking the U.S. directly into the conflict. Significantly, only the U.S. military has the necessary firepower to deal with Iran’s formidable military machine.

If the U.S. was dragged in, Iran would not only engineer conflagration in the Middle East.

It has also threatened to cut off oil supplies from the region by unleashing Chinese Silkworm missiles or suicide-bomber boats against tankers in the Straits of Hormuz, the world’s vital oil lifeline.

Industry experts calculate this would instantly send the price of oil soaring three times its present price to $300 or more a barrel – which would be even more catastrophic for our ailing economies than the unresolved eurozone crisis.

The Arab Spring is heading into winter.  ‘Moderate’ Islamists are winning elections.  That means these countries, one time friends and allies of the United States, are becoming more Islamist.  More like Iran.  It’s going to become harder and harder to isolate Iran in the Middle East when she gets more friends and allies throughout the region.  Which is going to make it easier for Iran to follow through on these threats.  So what do we do?  Trust Iran and do nothing while they develop and use a nuclear device?  Or strike now and risk a conventional war?

Something has to be done.  While Barack Obama has tried to play nice to our enemies the world has become a more dangerous place.  Obama has failed.  He just doesn’t get it.  The only thing our enemies respect is brute force.  And the will to use it.  So far he has shown the will to kill from a distance with drones and Special Forces.  Or invade a country that is no threat to U.S. security interests.  Where there was little chance of losing an extended military engagement.  So as not to alienate his antiwar political base.  But will he attack Iran to save vital U.S. security interests from nuclear attack?  Will he take that political risk?  Especially when all of this is happening in an election year?

Only time will tell.

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JFK would have seen a lot of himself in Ronald Reagan

Posted by PITHOCRATES - December 4th, 2011

Week in Review

If you read a speech by JFK without knowing it was a JFK speech something interesting would happen.  You would think you were reading a speech by Ronald Reagan (see By Today’s Standards, JFK Was A Tax-Cutting Supply-Sider posted 11/25/2011 on Investors.com).

Forty-nine years ago, with the economy still recovering from a 10-month recession that ended in 1961, President Kennedy sketched out a bold plan to get the economy moving again. It focused on deep, across-the-board cuts in taxes. Those cuts, made after Kennedy’s tragic death in November 1963, created a boom that lasted through the 1960s and into the 1970s. Contrast his tax-cutting rhetoric of nearly 50 years ago with today’s tax-hiking rhetoric of President Obama and his Democratic colleagues. Following is an abridged version of Kennedy’s remarks to the Economic Club of New York on Dec. 15, 1962.

Yeah, that’s right.  That’s JFK we’re talking about here.  A tax-cutting supply-sider that has more in common with Ronald Reagan than Jimmy Carter, Bill Clinton or Barack Obama.  And he was a Cold War warrior to boot.  Also a lot like Ronald Reagan.

Here are some closing remarks from that JFK speech.

In short, it is a paradoxical truth that tax rates are too high today and tax revenues are too low, and the soundest way to raise the revenues in the long run is to cut the rates now.

The experience of European countries and Japan have borne this out. This country’s own experience with tax reduction in 1954 has borne this out. The reason is that only full employment can balance the budget, and tax reduction can pave the way to that employment. The purpose of cutting taxes now is not to incur a budget deficit, but to achieve the more prosperous, expanding economy that can bring a budget surplus.

Perhaps the Republicans should be quoting this guy.  Run a candidate that is like JFK.  And put him up against Barack Obama.  That would make an interesting campaign.  For the left hates Ronald Reagan.  But they simply adore JFK.  Even though he stood for everything they’re against.

And whenever the Democrats attack the Republican candidate, the Republicans could say that it was an attack on JFK.  Because the Republican candidate believes what JFK believed.  You raised tax revenue by cutting tax rates.  Not by raising tax rates like Barack Obama wants to do.

Unfortunately the Kennedy legacy is not the JFK legacy.  It’s more the liberalism of Teddy Kennedy.  Who stood for everything that JFK did not.

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