The Keynesian Fiat Economies are so Bad that the World is Turning back to Gold

Posted by PITHOCRATES - January 19th, 2013

Week in Review

Keynesians hate the gold standard.  They blamed it for the Great Depression.  Which they believed could have been avoided if the government printed more money instead of contracting the money supply.  For a Keynesian’s answer to everything is to expand the money supply.  So the government can spend more money.  This came to a head in the U.S. during the Seventies.  Foreign countries were converting their dollars into gold.  Because the U.S. was devaluating the dollar by printing so much new money.  So these countries took the gold instead.  Because you can’t depreciate gold.

The Seventies were a disaster.  It turned out that the government just couldn’t print money to pay its bills as the destruction they caused on the dollar devastated the economy.  So they backed off.  The Federal Reserve raised interest rates into the double digits to stamp out that destructive inflation.  The world didn’t return to a gold standard, though.  As most countries were still hard-core Keynesians who liked the ability to make money out of nothing so they can keep spending. But now the Eurozone is in a sovereign debt crisis.  The UK is slashing their NHS budget.  Japan is now spending twice their GDP and stuck in an economic slump going on for over two decades.  And as the U.S. is spending about 100% of its GDP they added a whopper of a new entitlement.  Obamacare.  The destruction of the dollar isn’t a question of if but when.  And now we’re seeing a quasi return to the gold standard as nations everywhere are losing faith in the ability of these Keynesian governments to spend responsibly (see A new Gold Standard is being born by Ambrose Evans-Pritchard posted 1/17/2013 on The Telegraph).

The world is moving step by step towards a de facto Gold Standard, without any meetings of G20 leaders to announce the idea or bless the project.

Some readers will already have seen the GFMS Gold Survey for 2012 which reported that central banks around the world bought more bullion last year in terms of tonnage than at any time in almost half a century.

They added a net 536 tonnes in 2012 as they diversified fresh reserves away from the four fiat suspects: dollar, euro, sterling, and yen…

Neither the euro nor the dollar can inspire full confidence, although for different reasons. EMU is a dysfunctional construct, covering two incompatible economies, prone to lurching from crisis to crisis, without a unified treasury to back it up. The dollar stands on a pyramid of debt. We all know that this debt will be inflated away over time – for better or worse. The only real disagreement is over the speed.

This is the inevitable result of Keynesian economics.  Reckless spending that destroys currencies.  And right now these countries stand in judgment of the U.S., the Eurozone, Great Britain and Japan.  Their social spending obligations have put them on a path towards currency destruction.  And they don’t want be around when that happens while holding dollars, euros, sterling, or yen.  Because they just won’t be worth the paper they’re printed on.

In Ayn Rand’s Atlas Shrugged American Industrialists went on strike.  Walked away from their companies and disappeared.  Leaving their overregulated and overtaxed businesses to the government to do with them as they pleased.  Refusing to be economic slaves anymore.  They eventually migrated to a place called Galt’s Gulch somewhere in Colorado.  Where they made their own community.  And economy.  Where creators traded with other creators.  Using that one money that stood the test of time.  Gold.  For if you wanted to buy something in Galt’s Gulch you had to have gold.  For no one accepted cash there.  Some have been predicting we’ve been on the brink of something like this actually happening for the last 80 years or so.  And now it’s happening.  Only it’s not American industrialists turning on the U.S. government but the rest of the world.

Is it any wonder that sales of Atlas Shrugged have surged during the Obama administration?  These people are seeing what these countries see.  The decline of the U.S.  And the destruction of the dollar.  Thank you President Obama.

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President Obama to Raise Taxes but it won’t Help our Budget Woes

Posted by PITHOCRATES - November 11th, 2012

Week in Review

It takes two things to make tax revenue.  Tax rates.  And economic activity.  For if you don’t have the economic activity it doesn’t matter what the tax rates are.  Because any given percentage of smaller amount of national income will be less than the same percentage of a larger amount of national income.  That is, higher incomes produce more tax revenue.  Not higher tax rates.  It’s simple arithmetic.  Something the Democrats talked a lot about in the recent campaign.  As if they understand this simple arithmetic.  Yet they don’t seem to understand that taxing a bigger pile of money produces more tax revenue that taxing a smaller pile of money (see Obama Wins 2012 Election: Why Your Taxes Are Going Up by Morgan Korn posted 11/7/2012 on Yahoo! Finance).

Obama has vowed to raise the top income tax rate for individuals to 39.6% and let the Bush-era tax breaks end for the highest income earners. The majority of Americans — those who are lower to middle class — could also see a 2% tax increase if Congress allows the temporary payroll tax holiday to expire at the end of the year…

Len Burman, a professor of public affairs at Syracuse University and a co-founder of the bipartisan Tax Policy Center, believes higher tax rates play just a small role in resolving the nation’s budget woes.

“In the long term [Obama] is going to need to raise taxes on more than just the rich,” Burman says in an interview with The Daily Ticker. “The budget problem isn’t going to be solved without broader-based tax increases, preferably done in the context of tax reform and also serious entitlement reform. We’re not going to be able to solve this on the tax side alone.”

After World War II our veterans came back home and started making babies.  Giving us the baby boom.  And the baby boomers.  Who entered the workforce about 20 years later.  Causing a boom in the tax base.  Resulting in a higher national income.  And higher tax revenues.  Which LBJ put to good use with his Great Society.  Giving us Medicare that cost a small fraction of our incomes in payroll taxes.  It was nothing in the grand scheme of things.  While the benefits were huge for our seniors.

So the welfare state exploded.  Thanks to that increasing tax base.  And those veterans making so many babies.  But then something happened in the Sixties.  Those baby boomers did not return the favor and continue the baby boom.  Instead opting to have fun instead.  Enter birth control.  And abortion.  Birthrates fell.  In time fewer people entered the workforce than left it.  Causing the population to age.  And the tax base to shrink.  All while those new entitlement programs continued to grow.  So fewer and fewer people paid for more and more entitlements.  A recipe for disaster.  A recipe for what we have today.  Entitlement spending obligations greater than the current tax base can afford.  And you can’t fix that with higher tax rates or new taxes.  You need a larger tax base (i.e., another baby boom).  Or entitlement reform.

It would take another 20 years for a new baby boom to produce new taxpayers.  So that leaves entitlement reform as our only choice.  And the only serious attempt to reform entitlements was roundly dismissed by the Democrats when Paul Ryan put his plan on the table.  Which was the only plan.  The only problem with the Ryan plan was that politicizing it would benefit the Democrats in the upcoming election.  So that’s what they did.  For winning elections trumps everything for Democrats.  Even saving Medicare.

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Tens of Thousands of NHS Patients waiting up to 12 Hours on A&E Gurneys for a Hospital Bed

Posted by PITHOCRATES - August 19th, 2012

Week in Review

There are times in American emergency rooms where patients are waiting on hospital gurneys (or trolleys) for a bed to open up in the hospital.  Sometimes emergency rooms get overwhelmed one day.  While another day they have empty beds and time to kill.  For it is hard to forecast health emergencies.  In the UK, however, it appears budget problems are exasperating their problems.  And they are trending in the wrong way (see 67,000 NHS patients forced to wait up to 12 hours on A&E trolleys by Telegraph Reporters posted 8/15/2012 on The Telegraph).

Almost 67,000 patients during the first half of this year endured long waits for emergency beds, an increase of nearly a third, according to the government statistics…

Over a six-month period to June, 66,845 patients were found to have waited for between four and 12 hours for a bed once doctors decided they needed to be admitted.

During the same period the previous year, nearly 51,000 patients endured similar waiting times, the equivalent of a 31 per cent rise, according to the DoH…

Tim Curry, the assistant head of UK nursing at the Royal College of Nursing, described the scale as “startling”.

He blamed the rise in the figures on a “perfect storm” of increased patient expectations, financial pressures and NHS reforms.

“You need skilled nurses and vacant beds, and both of those are under huge pressure,” he said.

To be fair they just don’t park these patients up against a wall while they wait.  Doctors and nurses are still assessing and treating them while they wait in Accident and Emergency (A&E) departments.  But there is a trend.  And it’s going in the wrong way.  Longer waits.  Because, of course, of financial pressures.  Caused by an aging population that is stressing their health system at the same time fewer workers are entering the workforce to pay the bills.  Fewer dollars (or pounds in this case) being spread out to cover more patients.  You don’t need to be a financial analyst to see what this will result in.  Longer wait times.  And rationing.  Including a shortage of skilled nurses and vacant beds.

The NHS has the same problem the Americans have with Social Security and Medicare.  All three of these programs were set up during a time of an increasing population growth rate.  People were having babies.  More workers were entering the workforce than were leaving it.  So each retiring generation had more workers in subsequent generations to pay the bills.  But after the baby boom this all changed.  People stopped having babies.  And throttled back the spigot of new taxpayers entering the workforce.  Which is causing budget deficits and mushrooming debt in every social democracy.  And until the baby boomers leave this world governments will struggle to provide for them with fewer resources.

So this would be the absolute worst time to introduce a new large government program.  Indeed only a fool or one blind of history and utterly ignorant of economics would propose a new massive entitlement program in this day and age.  Which, incomprehensively, the American Left did.  Giving the Americans Obamacare.  The biggest government program in American history.  And the Americans will have no hope of ever paying for it.  Not with an aging population.  And they did this while Social Security and Medicare are already projected to go bankrupt.  In fact, Obamacare even takes some $700 billion from Medicare.  Talk about your perfect storms.  If the Americans don’t repeal Obamacare (and reform their entitlements) their spending obligations will bankrupt them and transform America into a shell of her former self.

Some would say we should learn by Britain’s mistake.  The folly of national health care, especially with an aging population.  Instead the Obama administration seems intent on being the example of ‘what not to do’ for others to learn by.  For Obamacare is clearly something the Americans should not have done.

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The Federal Government taxes away about Half of Every Dollar the Middle Class Earns

Posted by PITHOCRATES - August 19th, 2012

Week in Review

Thanks to withholding tax people don’t fully appreciate how high their taxes are.  They know they’re high.  So high that gross pay means nothing to them.  Workers only speak of ‘net’ pay.  Or ‘take home’ pay.  The money they actually get.  Not that strange fictitious ‘gross’ pay on their paycheck stub.  Whatever that is.  And what is gross pay?  Their pay.  It’s their money.  And they would have had it when they cashed their paychecks if their employers didn’t withhold it so they could give it to the government.  And why does the government use the withholding tax to take our money?  Because if we had to write a check at the end of the year for our full tax amount there would probably be a nationwide tax revolt.  Which is why the taxing authorities take that money before it gets into our hands.  Because once it is in our hands people may be less willing to hand it over to the taxman.  Which is probably why the Founding Fathers didn’t include any withholding taxes in the Constitution.  They did not want to make it easy for the government to take our money.

So how high are the taxes on the middle class?  Pretty high (see Government Will Take Almost Half Your Paycheck in 2013 by Patrick Tyrrell posted 8/13/2012 on The Foundry).

A middle-class taxpayer’s income is subject to a 25 percent federal income tax. Then there is the federal Social Security and Medicare payroll tax of 13.3 percent in 2012—5.65 percent of that is removed from the employee’s paycheck, and the remaining 7.65 percent is paid by the employer. (In reality, the employee pays the entire 13.3 percent, because the employer’s portion of the tax does not affect the cost of labor: The employer would pay the employee 7.65 percent more if there were no employer’s portion of the payroll tax.)

So the 25 percent federal income tax plus 13.3 Social Security and Medicare payroll taxes equals 38.3 percent going to federal taxes in 2012.

And then there are state taxes. According to the Tax Foundation, the average state’s income tax rate for the middle-class taxpayer is 4.82 percent, which brings the total to 43.12 percent in federal and state taxes.

In Billy Joe’s Movin’ Out (Anthony’s Song) he says, “You can pay Uncle Sam with the overtime.  Is that all you get for your money?”  The point being is this.  Yes you can give up your Saturday and work some overtime.  But is it really worth it when you can only keep about $0.57 of each additional dollar you earn?  Not really.  Which is why a lot of people who work with their hands will do ‘side work’ for cash under the table.  So they can keep every penny of every dollar they earn.

Or some will work some hours serving tables in a restaurant.  For a little extra spending cash.  I worked with a lady who did.  A devout liberal Democrat.  And part of the middle class.  I asked her if she reported all her tips so she could pay her fair share of taxes on those earnings.  Even though she was a steadfast liberal Democrat voter who always voted ‘yes’ to increase tax rates on others she said the government had already taxed her enough.  So that those supplemental earnings should be hers free and clear.  Of course, that’s not how the tax law works.  You make more you pay more.  She wouldn’t give me a definitive answer on whether she reported all her tips as income.  But it was interesting to hear her say that high tax rates were fair.  As long as she didn’t have to pay them.  Well, her taxes will be going up.  Fair or not.

And it’s going higher, thanks to the nearly $500 billion in tax increases for 2013 that some have called Taxmageddon. In January of next year, the federal income tax rate for middle-class taxpayers is scheduled to rise from 25 percent to 28 percent, and the payroll tax is scheduled to rise from 13.3 percent to 15.3 percent. This drives the marginal tax rate based on the aforementioned three taxes to 48.12 percent. Add in state and local property, corporate, excise, and other state and local taxes, and the percentage of each additional dollar that is taxed hovers around 50 percent.

When half of each additional dollar earned is taxed away, taxpayers experience a disincentive to start businesses or expand existing ones. This leads to fewer jobs being created.

It’s like we divorced our government in the state of California.  And we lost half of everything we earn to a spiteful ex.  Half!  Yeah, that really encourages you to work hard and build your business and hire more people.  So you can deal with the labyrinth of government regulatory compliance.  Lawsuits.  Insurances.  Drug testing.  Sexual harassment training.  All the while hearing the government tell you, “You didn’t build that.”  That you somehow won life’s lottery to riches.  And that you’re greedy for not wanting to pay more taxes.  And for what?  To keep half of every dollar you earn?  It would be a lot easier just to lay off all your workers. Shut down your business.  And go to work for someone else.  And let them deal with these headaches.  Like they did in the Roman Empire as it was collapsing under the weight of her welfare state.  Until the Romans passed laws forbidding people from quitting the work they were doing.

The sad thing is that so many people will vote to perpetuate this binge of taxation.  While they themselves will do everything within their power to avoid paying their own ‘fair share’ of taxes.  While demanding the rich pay more.  Even though the top 10% are already paying 70% of all federal taxes.  The truth is that the rich can’t pay these taxes.  There just aren’t enough of them.  Even if you take everything they earn.  Which leaves the middle class to make up this tax shortfall.  So they take half of everything they earn.  And will continue to take more as their spending continues to grow.  And if people begin to quit the hard jobs because they can’t keep their earnings perhaps the government will step in like the Romans did.  And force people to be doctors.  To run pharmaceutical companies.  To build the next new technology.  It’s happened before to an empire that began as a limited republican government.  So it can probably happen again.  Besides who would have ever thought that the country borne out of a tax rebellion would one day take half of every dollar a middle class worker made?  No one would have seen this coming.  And yet here we are.  Paying half of every dollar we earn to Uncle Sam.

The Founding Fathers would be flabbergasted.  Upset.  And saddened.  To see what had become of their beloved republic.  And their experiment in limited self-government.

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Half of Americans don’t Pay Taxes but can Vote to Increase Taxes on those who Do

Posted by PITHOCRATES - February 25th, 2012

Week in Review

No one likes paying taxes.  For workers want to keep their hard earned money.  So it’s always been puzzling how the tax and spend politicians keep getting elected.  And keep raising our taxes.  Or is it (see HALF of Americans don’t pay income tax despite crippling government debt posted 2/22/2012 the Daily Mail)?

In 2009, just 50.5 per cent of Americans paid any income tax to the federal government – the lowest proportion in at least half a century…

In 1984, the middle of the Reagan era, 85 per cent of Americans paid federal income tax, meaning just 34.8million people did not…

The conjunction of fewer taxpayers with higher welfare payments has led to intense pressure on the public purse, with the national deficit running at $1.3trillion per year.

The Heritage Foundation argues that the reduction in the number of taxpayers will create an electorate dominated by non-taxpayers, who will always support higher taxes and spending because their own money is not at stake.

About half of all Americans pay no federal income tax.  No wonder they vote for the tax and spend politicians.  Because it’s not their hard-earned money that they are taxing spending.  It’s other people’s hard-earned money.

We keep hearing everyone say that the rich need to pay their fair share.  It would appear they are.  In fact, it appears that they are paying more than their fair share.  They have to be.  Because if half of all Americans aren’t paying any taxes the rich must be paying more than their fair share.  For they’re paying for those who aren’t paying their fair share.  Half of all Americans.

The thing that made Britain great was Parliament.  Representative government.  Having the people who paid the taxes have a say in how those taxes were spent.  It kept the Crown from spending those taxes irresponsibly.  Which greatly influenced the Founding Fathers.  Who made it difficult for the new federal government to spend irresponsibly.  Back at the Founding you had to have skin in the game to vote.  In other words, if you weren’t a taxpayer you didn’t vote.  Since then things changed.  Now people who don’t pay taxes can vote to spend other people’s money.  And when someone else is buying people rarely say ‘no’ to more government benefits.  No matter the consequences.  And those who pay no taxes have no problem increasing tax rates on those who do.

This road we’re on can only lead to one place.  The end of the country as we know it.  Much like the Greeks are experiencing right now.  Which in inevitable when people have a say in spending other people’s money.

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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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LESSONS LEARNED #84: “The bigger and more complex government gets the more unintended the consequences.” -Old Pithy

Posted by PITHOCRATES - September 22nd, 2011

Prohibition had Popular Support from Wives, Progressives and Organized Crime

The Progressive movement began changing our lives in the beginning of the 20th century.  Thanks in large part to the American Civil War.  After a generation of American fathers were killed by the ravishes of war a lot of sons grew up without a manly role model in their lives.  They had no father to learn manly chores from.  To go hunting with.  To beat the crap out of them when they misbehaved.  To toughen them up for the real world.  Instead all they got was the loving and nurturing stuff from their mothers.  And when they grew up they wanted to be mothers, too.  And nurture the American people.  For mother knows best.

When these children grew up they changed government.  Instead of it being the limited government of their fathers they wanted an activist one.  To make our lives better.  More fair.  And safer.  Which is why they supported the temperance movement.  And took it to Prohibition.  To save the American family.  To stop drunken husbands from beating their wives.  To prevent poverty by keeping the money in the family.  And out of the saloons.   To stop the epidemic of venereal disease.  Spread by prostitutes who frequented saloons.  Trying to get some of that family paycheck.  Before the saloon owner got it all.  So Prohibition had popular support.  From wives.  Progressives.  And organized crime.

This was an unintended consequence of Prohibition.  For the law prohibited “the manufacture, sale, or transportation” of booze.  But not the drinking of it.  And when there’s a will there’s a way.  There were people who still wanted to drink.  And could without facing any consequences for it if caught by the law.  So they kept drinking.  And there was a booming demand.  And a willing albeit illegal supply network to meet that demand.  So life was good.  For those who liked to indulge in inebriating beverages.  And for those who provided those inebriating beverages.  Especially the providers.  Because when you make anything illegal that is in high demand means only one thing.  High profits.

There’s a Profit Incentive for Criminals because Illegal Stuff Costs More than Legal Stuff

At first everyone laughed as they flaunted the law.  It was, after all, a victimless crime.  People wanted to buy.  And the underworld wanted to sell.  No harm.  No foul.  For awhile.  Until the gang violence spilled over into the public streets.  When innocents saw this violence up close and personal.  Some even dying in the crossfire.  Like in Chicago.  Owned for a time by Al Capone.  King of the bootleggers.  Who killed off the competition.  The Valentine’s Day Massacre being the tipping point.  When the cops started fighting back.

The FBI eventually got Capone.  On tax evasion.  But it didn’t end the violence.  You know what did?  The repeal of the 18th Amendment.  And letting the people drink again.  Which they really needed during the depressing New Deal programs of FDR.

By decriminalizing alcohol they removed the profit incentive for criminals.  Because illegal stuff costs more than legal stuff.  So there’s no market for bootlegged liquor anymore.  So the gangs turned to another illegal substance.  Drugs.  Whose criminalization has far worse unintended consequences than Prohibition ever had.  We can trace most violent crime in the U.S. to drugs.  From theft to support a drug habit.  To Capone style gang warfare to protect turf.  To the unspeakable horrors on and south of the US-Mexican border.

The Decriminalization of Drugs:  Damned if We Do.  And Damned if We Don’t.

So what is one to do?  Decriminalize drugs?  Not quite the same thing as ending prohibition.  Drugs are a little more potent than alcohol.  Especially methamphetamine.  Crystal meth addiction destroys lives.  Which is why it’s such a lucrative drug.  You can manufacture it anywhere from chemicals.  And it’s addictive.  Addiction provides a steady demand.  And its chemistry provides a readily available supply.  That you can hide.  Unlike Coca fieldsPoppy fields.  Or marijuana fields.

Meth has a strong foothold in the drug-taking community.  Despite it being illegal.  One shudders what would happen if we decriminalized drugs.  Like meth.  It’s potent.  Addictive.  And popular with the kids.  It takes a fake ID to buy alcohol when underage.  Because there are few pushers selling cases of beer and wine coolers on the street.  But if an adult can buy it legally it could be hard for a drug dealer to pass up the underage market.  I mean, there are no empty bottles or cans to trace back to a store.  And if you’re caught carrying, hey, it isn’t illegal.

So we’re damned if we do.  And damned if we don’t.  The war on drugs has a devastating cost on society.  But the drugs are so harmful.  And helping users break their addiction also costs society.  Broken families.  Lost jobs and careers.  Children addicts can no longer provide for.  Infectious disease.  Overdose.  Violence.  Criminal activity.  And decriminalizing drugs won’t make any of that better.

The Poorer You are and the More Children You Have the More Money You Get on Your EBT

America has been fighting another war.  A war on poverty.  Which probably has been more destructive than the war on drugs.  Economist Thomas Sowell blames the welfare state for the destruction of the black family.  By subsidizing failure.  Providing incentives not to succeed.  A disincentive to be responsible.  The very programs to help the poor have destroyed the poor.  With unintended consequences that have destroyed generations.

This video was from 1980.  Fast forward to today and you can see this put in another way.  Perhaps a little less elegantly.  But it reinforces Dr. Sowell’s argument.  There’s a video on YouTube that praises the EBT card in California.  A program to help poor single people with children.  Depending on the number of children and your circumstances, the government loads a dollar amount on the EBT card.  You then use it like a debit card.  At any store that accepts EBT.  The government then reimburses the store owners.

So the poorer you are and the more children you have the more money you get on your EBT card.  As Dr. Sowell pointed out, this may be a disincentive to be responsible.  And the YouTube video shows this.  We should note, though, that the rapper who made this video said that “it was meant to be satirical and poke fun at a real issue.”  Some have called it inappropriate.  You can judge for yourself after you watch the video.  (NOTE:  If you’re at work or are in a public place you probably should wait until you get home to watch this video.  It contains very graphic language (as in the ‘f’ word).  And may be racially insensitive.  Please exercise due discretion when viewing It’s Free, Swipe Yo EBT.)

Government may have Meant Well but the Road to Hell is Paved with Good Intentions

Prohibition made it harder to manufacture and distribute alcohol.  But people still drank.  Because it wasn’t illegal to drink.  At first it was just a game.  Imbibing at the speakeasy.  Then buildings exploded.  And bodies littered the street.  Much like they are in Mexico today.  And along the US-Mexican border.  Because well organized enterprises are trying to meet a lucrative demand north of the border.  That our drug policies made lucrative.  Just like Prohibition made bootlegging a lucrative business.

Unintended consequences are a bitch.  And whenever government tries to fix something we often get something worse.  Prohibition and our war on drugs have given us organized crime to deal with.  And our war on poverty has destroyed poor families.  By incentivizing irresponsible behavior.   And making generations dependent on government.

At every time, though, government meant well.  They always say that they had nothing but good intentions.  But we should remember what they say about good intentions.  That the road to hell is paved with good intentions.

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LESSONS LEARNED #81: “Gross pay is a myth.” – Old Pithy

Posted by PITHOCRATES - September 1st, 2011

We Earn More than our Fathers but Can’t Buy as much as They Did

A paycheck just doesn’t seem like it goes as far as it used to.  And there’s a reason why it seems like that.  Because it really is like that.  Our paychecks can’t buy as much as they used to.  Not as much as our father’s paychecks.  And our father’s generation raised bigger families.  So why is that?  How can we earn more than our fathers.  But can’t buy as much as they did?

Two reasons.  Taxes.  And inflation.  One took our money away.  The other made what money we had worth less.

Big taxes came with Big Government.  Government went through some major spurts of growth.  The first being under Woodrow Wilson in the 1910s.  Then the New Deal era of FDR.  In the 1930s and into the 1940s (he was president for a very long time).  Followed by the Great Society era of LBJ.  In the 1960s.

During the 1950s a Gap began to Grow between Gross Pay and Net Pay

Abraham Lincoln gave us a federal income tax.  He did it to pay for the Civil War.  After it served its purpose, government repealed it.  Then Wilson brought it back.  And it was back to stay.

Then FDR gave us Social Security.  And a new payroll tax to pay for it.  Among other government programs.  Then LBJ gave us Medicare.  And a new payroll tax to pay for it.  Among other government programs.  This was a lot of new federal spending.  Paid for with a lot more federal taxes.

These taxes added up.  Especially for a young family starting out.  During the 1950s, a gap began to grow between gross pay and net pay.  And continued to grow through the 1960s.  Payroll taxes were growing.  And eating into our earnings.  There were federal, state and city income taxes (in some cities).  Social Security and Medicare.  Starting slowly.  Then taking off during the Seventies.  To pay for all those new government programs.

The Trend has been Less Money in the Working Man’s Pocket because of Higher Taxes

Let’s take a look at one city.  Detroit.  The Motor City.  Once the veritable capital of the industrial world.  Where a working man could once earn enough to raise a family of ten.  And many did.  They can’t do that anymore.  Not without a second income.

Let’s crunch some numbers.  And graph them.  Let’s look at gross pay and net pay from 1920 to 2010.  The following chart shows these results.  All dollars are constant 2010 dollars.  We started with a gross pay of $36,840 (see Center of Nutrition Policy and Promotion’s 2010 annual report, page 26) in 2010.  This represents a young family starting out.  At the beginning of both family.  And career.  Then we calculated this amount going back to 1920 in ten year intervals in 2010 dollars.  We then calculated annual amounts for income taxes (federal, state and city).  And Social Security and Medicare taxes (employee portion only).  We then graphed gross pay, payroll taxes and net pay (gross pay less payroll taxes).

This chart shows a general trend.  We did not factor in tax exemptions or credits.  Nor did we look at property taxes or the myriad of excise taxes consumers pay.  Some of these will put more money into a consumer’s pocket.  Some will take more out.  So even though the following trend analysis is not exact, it should be close enough.  The trends should fairly represent the end affect on the average working man.  Less money in his pocket over time.

(Sources: federal income taxes, state income taxes, city income taxes, Social Security and Medicare taxes)

Payroll Taxes really bit into Earnings after 1970

Payroll taxes kick in after 1940.  And they rise steadily until (about) 1970.  Note that net pay increases at a slower rate than gross pay.  In other words, paychecks were ‘shrinking’ during this time.  As pay increased workers kept less and less of the amount they earned.

This period included Social Security.  In 1940 the employee paid 1% of his earnings up to $3,000.  In 1950 he paid 1.5% of his earnings up to $3,000.  In 1960 he paid 3% of his earnings up to $4,800.  In merely 30 years the tax rate increased 200%.  While the amount of your wages subject to this tax increased 60%.  And this was during the period of ‘moderate’ growth.

After 1970 all of the graphs bend up steeply.  From 1970 to 2010, the Social Security tax rate went from 3% to 6.2%.  This is an increase of 106.67%.  The amount of your wages subject to this tax went from $4,800 to $106,800.  This is an increase of 2,125%.

This is but one example.  Other taxes increased, too.  Obviously.  For payroll taxes really bit into earnings during this period of extraordinary tax growth.  So much so that net pay grew at even a lesser rate (than gross pay) than it did in the previous 30 years.  Opening up the gap between gross pay and net pay even larger throughout this period.

Gross Pay may have stayed Ahead of Inflation, but Net Pay Hasn’t

But there is something else.  Employers weren’t just overly generous after 1970.  Something else happened to push gross earnings up at that rate.  The Nixon Shock.  When President Nixon took us off the ‘gold standard’.  And ignited inflation.

We can see this clearly if we add the Consumer Price Index to this chart.  Which we do here.

 

 (Sources: federal income taxes, state income taxes, city income taxes, Social Security and Medicare taxes, CPI)

Gross pay shot up to stay ahead of inflation.  In fact, the growth rate of gross pay has kept ahead of the growth rate in the CPI.  Net pay, on the other hand, hasn’t.  The net pay graph is not as steep as the CPI graph.

So payroll taxes are increasing.  As are prices.  Which is a double hit on real earnings.  We may have never earned more, but we’re keeping less and less of what we earn.  And what we get to keep can’t buy as much as it once did.

Higher Taxes and Higher Prices have Shrunk Real Earnings

So paychecks have been shrinking.  Thanks to the increase in payroll taxes.  And prices have been rising at a faster rate than our net pay.  Which answers the question.  Why do we earn more than our fathers and yet we can’t buy as much as they did?  Because of growing prices.  And shrinking real earnings.

 www.PITHOCRATES.com

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Chinese Women outperforming American Women in the Corporate World

Posted by PITHOCRATES - August 28th, 2011

Women are Thriving in Emerging Markets because things don’t Cost that Much

Corporations are the big bad in today’s world.  Everyone hates them.  They’re evil inhuman pariahs sucking the marrow of humanity.  They should be punished.  Taxed to the hilt and then taxed some more.  Those filthy, rotten, greedy corporations.  You just can’t say anything good about them.  Never.  Except, of course, when women climb the corporate ladder (see The daughter also rises posted 8/27/2011 on The Economist).

The emerging world is home to many businesswomen like Ms Zhang. Seven of the 14 women identified on Forbes magazine’s list of self-made billionaires are Chinese. Many firms in emerging markets do a better job of promoting women than their Western rivals, some surveys suggest. In China, 32% of senior managers are female, compared with 23% in America and 19% in Britain. In India, 11% of chief executives of large companies are female, compared with 3% of Fortune 500 bosses in America and 3% of FTSE 100 bosses in Britain. Turkey and Brazil come third and joint fourth (behind Finland and Norway) in the World Economic Forum’s ranking of countries by the proportion of CEOs who are women. In Brazil, 11% of chief executives and 30% of senior executives are women.

I wonder if these women are the ones Mitt Romney was referring to when he said corporations are people.  Or are these women just soulless scum of the earth, too?

Funny.  Corporations are evil.  But women climbing the corporate ladder is good.  Even though they’re climbing the ladder of evil.  As if there was something good about being in high places in these evil inhuman pariahs.  Perhaps people think that women will do away with the profit motive in business once they’re in charge.  Instead paying everything they earn beyond the cost of sales as income taxes.  They could.  But they will fall off of that ladder pretty darn quick if they do.

So why China?  Why is it there that feminism is flourishing?  Where women can bring home the bacon?  And fry it in the pan?  Is it because of the one-child policy giving them more time to work in a corporation?  Is it a greater drive due to all of the girls aborted because parents wanted their one child to be a son?  Or is child care just cheaper in China?

Living in emerging markets offers many advantages for female professionals. Most obviously, there are plenty of cheap hands to cook and take care of children.

So in other words women are thriving in emerging markets because things don’t cost that much.  Child care.  Parent care (it’s the daughters who take care of aging parents in China).  There’s a lesson here.  If you want a smoking hot economy with opportunity for everyone, don’t make it so expensive to live there.  And that’s what high taxes and costly regulatory compliance costs do. 

Democrats feel our Pain and want to do Everything they can do to Help Us

A lot of women vote Democrat.  For they feel that Democrats care about women’s issues.  Unlike the out of touch old white men in the Republican Party who just care about profits.  Everything is just too logical with them.  They don’t feel.  Democrats feel.  They feel our pain.  And want to do everything they can do to help us.  Give us that which we crave.  Love.  Understanding.  And a job.  So you’d think they hit the mother lode with Obama.  The media loved him.  But it’s been almost three years and he hasn’t really done anything substantial to help us in the here and now (see Obama’s Enablers by Fred Barnes posted 8/28/2011 from the 9/5/2011 issue of the weekly Standard).

It’s counterintuitive, but Obama has been hurt by the media’s leniency. Both his presidency and reelection prospects have suffered. He’s grown lazy and complacent. The media have encouraged him to believe his speeches are irresistible political catnip, though they aren’t. His overreliance on words hasn’t helped.

The kind of media pressure that can cause a president to sharpen his game, act with urgency, or take bolder steps—that has never been applied to Obama. If it had, I suspect he’d be a more effective, disciplined, energetic, and popular president today. Ronald Reagan is a good role model in this regard. When the media attacked him over gaffes in the 1980 campaign, “Reagan responded like all competitive men by working to improve himself,” says Reagan historian Craig Shirley. “Experience taught him to be better and try harder.” He took this lesson into the White House…

Absent pushing and prodding by the press, the Obama presidency has atrophied. His speeches are defensive and repetitive and filled with excuses. He passes the buck. With persistently high unemployment and a weak economy, Obama recently declared, in effect, “I have a plan. See you after my vacation.” The press doesn’t goad him to lead.

Three years.  Almost.  And we still have high unemployment.  And a weak economy.  Despite all those speeches about focusing on jobs.  With a laser-like focus.  Instead we get higher taxes.  And more costly regulations.  Nothing like those women in China have to deal with.

“Private sector job growth is good,” he said in Alpha, Illinois. In reality, it’s bad and getting worse. “The economy is now growing again,” he said. Barely. Obama said trade deals and patent reform would promote hiring, if only Congress would approve them. But it’s the president who has delayed the trade treaties, and both houses of Congress have passed patent reform measures.

The media routinely give Obama a pass on such stuff. On the tour, Obama insisted, as he has many times before, that he saved the nation from a “Great Depression.” So far as I know, the press has never challenged this dubious claim. But it is belied by the fact the recession came to an official end in June 2009, months before Obama’s policies could have played more than a minimal role.

This reminds me of an episode of Scrubs.  The Janitor was making some ridiculous claims.  So Carla asked the janitor if he is familiar with the term ‘delusions of grandeur’.  He replied, “I believe I coined that term.”

If you can’t Raise Revenue via Income Taxes because of a Bad Economy, go after Wealth

So what if anything is the Obama administration doing to address the problems of this nation?  Well, for one, they’re doing a pretty good job of transferring wealth from the private sector to the public sector (see Banks seeking relief from regulators as deposits swell by Bradley Keoun, Dakin Campbell and Dawn Kopecki posted 8/26/2011 on The Washington Post).

Deposits are flooding into the biggest U.S. banks as customers seek shelter from Europe’s debt crisis and falling stock prices. That forces lenders to raise capital for a growing balance sheet and saddles them with the higher deposit insurance payments. With short-term interest rates so low, it’s hard for financial firms to reinvest the new money profitably…

The extra deposits are problematic because they’re subject to withdrawal, so banks have to park the money in low-yielding short-term investments, Litan said. With few other choices available, banks have stashed their excess deposits at the Fed, which means the cash gets counted as assets.

Do you have a 401(k)?  If so, how did you pick your funds?  Well, if you’re young you probably leaned towards high-yield risky growth funds.  If you’re close to retirement, you probably leaned towards low-yield ‘safe’ income preservation funds.  Young people can ride a few boom and bust cycles and not lose money in the long run.  When you’re close to retirement you can’t.  So you park that money where it’s safe.  Knowing it will be there when you need to withdraw it.

In a volatile world, people and corporations with money act like people who are close to retirement.  They will sacrifice yield to keep their money safe.  Even pay a small fee.  For they don’t want to see their wealth disappear in a crashing stock market.  Or a collapsing bond market.

Now Keynesians attack this ‘hoarding’ of money.  This is the reason why there is no demand.  Which is keeping the economy weak.  Because no one is taking any chances with their money.  So what is a government to do?  Get rich.

If the FDIC agreed to forgive some fees, it would have to give up some of the extra premiums that it’s counting upon to rebuild the Deposit Insurance Fund, which covers customers for $250,000 per account in the event of a failure. That makes the agency unlikely to grant a waiver, one of the people said, adding that the existence of the insurance is one of the reasons banks are able to attract the deposits.

The FDIC’s fund, which fell into a deficit of almost $21 billion after a wave of bank failures, turned positive during the second quarter for the first time in two years, the agency reported this week. On April 1, the FDIC changed its formula for assessing premiums, increasing the cost for most large banks and adding to their deposit expenses.

Yes.  They saw all that money and said I’ll take some of that.  They increased their FDIC fees.  Which is ridiculous because the money is just sitting in the bank.  As if there was no such thing as fractional reserve banking.  Which is the very reason why they created FDIC.  In case banks loaned out too much money when faced with a lot of depositors demanding their money back.  At the same time. 

FDIC was a way to prevent a bank run.  If you know your money is insured even if a bank is going under, you won’t run to the bank to get your money.  But with virtually 100% of these deposits held in reserve, everyone could run to the bank and demand their money back.  And the bank could repay every depositor. 

So why raise the FDIC fee?  Why not?  If you can’t raise revenue via income taxes because of a bad economy, go after wealth.  Especially if it’s just sitting there.  For all intents and purposes, the FDIC fee on funds that a bank does not lend out is little more than a wealth tax.

A Growing Public Sector Oppresses Women whereas Capitalism Unleashes their Potential 

So women are climbing the corporate ladder in emerging countries.  While the world’s number one economy sputters and spits along.  Despite nearly three years of applying a laser-like focus on job creation.  Which in Washington-speak means writing more job-killing regulations.  And thinking of creative new ways to transfer wealth from the private sector to the public sector.

So what’s the big difference between the U.S. and these emerging markets?  Legacy costs.  The U.S. was once an emerging country.  But now it’s a Big Government social democracy like in Europe.  China doesn’t have long established entitlements growing greater than the government can ever hope to fund.  And it doesn’t have an established environmentalist movement choking the life out of free enterprise.  China doesn’t have these.  And their economy is booming.  And women are shattering the glass ceiling.

The lesson is a simple one.  A growing public sector oppresses women.  Whereas capitalism unleashes their potential.  And that is the lesson of the booming emerging markets.

www.PITHOCRATES.com

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LESSONS LEARNED #80: “A nation’s government spends too much when its spending increases at a rate greater than its population growth.” – Old Pithy

Posted by PITHOCRATES - August 25th, 2011

Exchanging Dollars for Gold at $35/ounce was a Strong Incentive not to Depreciate the Dollar

It’s no secret.  Government spending is growing out of control.  It’s producing record deficits.  That caused S&P to downgrade America’s AAA sovereign debt rating.  No one denies that it’s a problem.  This spending.  Those on the Right want to address this via spending cuts.  Those on the Left just want to keep raising taxes.

LBJ exploded government spending with his Great Society in the Sixties.  Back then the U.S. was still on a quasi gold standard.  The U.S. honored an exchange of dollars for gold.  The point of this was to prevent the government from printing too much money.  Print too much and you depreciate the dollar.  So when you promise to exchange dollars for gold at $35/ounce you have an incentive not to depreciate the dollar.  Because as that $35 will buy less and less everywhere else, it will always buy an ounce of U.S. gold.

Well, with the Vietnam War and the Great Society, President Nixon had an unpleasant decision to make.  Unpleasant for a politician.  Either cut spending.  Or print money.  Politicians don’t like cutting spending.  So he printed money.  Which depreciated the dollar.  And countries were taking those cheap dollars and exchanging them for lots and lots of U.S. gold.  There was so much gold flying out of the country that Nixon did something shocking.  We call it the Nixon Shock.  He said the U.S. would no longer honor the dollars for gold exchange.  That was in August of 1971.  And prices have never been the same since.

The Growth of the CPI took off following the Nixon Shock

Keynesian economists were happy to see the end of the gold standard.  Because they like printing money.  And they’ve been advising governments to do just that.  To put an end to the business cycle.  And recessions as we know it.  For when the signs of recession are apparent, the government can pump a lot of dollars into the economy.  Thus avoiding a recession.  This was the policy since the adoption of the Federal Reserve Act in 1913.  Which put the nation’s best and brightest in charge of the American economy.  Who were unable to prevent numerous recessions.  A Great Recession.  And a Great Depression.

So the Keynesians have failed in preventing recessions.  Of all sizes.  Worse, their inflationary policies of freely printing and spending money has increased prices.  Caused a sharp increase in the growth rate of the Consumer Price Index (an inflation indicator).  As you can see in the following chart.  Where we graph government spending (outlays) and the CPI.  Dollar amounts are in billions of constant 2005 dollars.  Data is plotted in 10 year intervals.

 

(Sources:  Outlays, CPI)

You can see that the rate of growth in the CPI took off following the Nixon Shock.  That was the price for government printing money to keep spending beyond its means.  To make everything cost more in real dollars for us.  The consumers.  This shrinking of our paychecks put an end to the single wage-earner as we knew it.  Today the norm is that it takes two incomes to raise a family.  The exception is when one can do it.

Even before the Nixon Shock you could see that government was spending beyond its means.  Increasing its spending greater than the rate of inflation.  That means the size and number of government benefits was growing.  And it continued to grow until the Nineties.  When a Republican House forced a liberal president to the center.  After the Republicans won the 1994 midterm electionsBill Clinton‘s welfare reform decreased the growth rate of government.  For the first time after World War II.  But George W. Bush liked to spend the money.  Barack Obama, too.  Even more so.  Who took government spending to new highs with his $800 billion stimulus.  And his Obamacare.

The Number and Size of Benefits are growing Faster than the Population

Of course, you have to be careful not to let those benefits grow faster than the population.  Because government revenue comes from the taxpayers.  An increasing population means increasing tax revenue.  Because more people are paying taxes.  A decreasing population means declining tax revenue.  Because fewer people are paying taxes.

Likewise, spending that grows less than the population growth rate means a government is spending within its means.  Spending that grows greater than the population growth rate means a government is spending beyond its means.  And most probably running deficits.

We can see this if we graph population with government spending (outlays).  And we do that in the following chart.  Population is in numbers of people.  Outlays are in billions of constant 2005 dollars.  Data is plotted in 10 year intervals (to correspond with the decennial census).

 (Sources:  Population, Outlays)

Up until the Nineties, government spending increased at a greater rate than the population grew.  Clearly indicating that the number and size of benefits was growing relative to the population.  In particular, you can see an upward bend in outlays with the onset of the Great Society. 

This new growth rate remained consistent through the heyday of Keynesian economics.  The Seventies.  And through Reaganomics.  The Eighties.  Democrat Bill Clinton reduced the growth rate of government spending during his two terms in office.  Thanks to a Republican House.   But George W. Bush liked to spend the money.  For a couple of wars.  And a new Medicare prescription drug program.  And then Barack Obama became president.  And made George W. Bush look like a cheapskate when it came to government spending.

We are Spending Money at a Greater Rate than we’re Creating New Taxpayers 

Currently, the rate of government spending is increasing far greater than the population growth rate.  Meaning we are spending money at a greater rate than we’re creating new taxpayers.  Which can only mean one thing.  Record deficits.  Which we have.

We cannot sustain this spending.  It’s not a matter of insufficient tax revenue.  We’re just spending too much.  If we continue to spend at this rate there won’t be enough money to tax away from the private sector to pay for it.  Unless we have another baby boom.   Far greater than the last one.  But babies take time to grow up.  Before they become taxpayers.  Some twenty years or more before they pay any significant taxes.  So that’s a long-term solution at best.

But with the high cost of raising a family that isn’t likely.  Thanks to permanent inflation.  Courtesy of Keynesian economics.  With the way they (Keynesians) bent the CPI graph upward, big families are a thing of the past.  So that’s not an option.  That leaves one thing.  Spending cuts.  Significant spending cuts.  The very thing that would have preserved America’s AAA credit rating.

And you know how politicians love spending cuts.

www.PITHOCRATES.com

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