FDR, Wage Ceiling, Arsenal of Democracy, Benefits, Big Three, Japanese Competition, Legacy Costs, Business Cycle and Bailouts

Posted by PITHOCRATES - February 14th, 2012

History 101

After the Arsenal of Democracy defeated Hitler the Wage Ceiling was Gone but Generous Benefits were here to Stay

FDR caused the automotive industry crisis of 2008-2010.  With his progressive/liberal New Deal policies.  He placed a ceiling on employee wages during the Great Depression.  The idea was to keep workers’ wages low so employers would hire more workers.  It didn’t work.  And there was an unintended consequence.  As there always is when government interferes with market forces.  The wage ceiling prevented employers from attracting the best workers by offering higher wages.  Forcing employers to think of other ways to attract the best workers.  And they found it.  Benefits.

Adolf Hitler ended the Great Depression.  His bloodlust cut the chains on American industry as they tooled up to defeat him.  The Arsenal of Democracy.  America’s factories hummed 24/7 making tanks, trucks, ships, airplanes, artillery, ammunition, etc.  The Americans out-produced the Axis.  Giving the Allies marching towards Germany everything they needed to wage modern war.  While in the end the Nazis were using horses for transport power.  This wartime production created so many jobs that they even hired women to work in their factories.  Bringing an end to the Great Depression finally after 12 years of FDR.

The Arsenal of Democracy defeated Hitler.  U.S. servicemen came home.  And the women left the factories and returned home to raise families.  With much of the world’s factories in ruins the U.S. economy continued to hum.  Only they were now making things other than the implements of war.  The auto makers returned to making cars and trucks.  The ceiling on wages was gone.  But those benefits were still there.  Greatly increasing labor costs.  But what did they care?  The American auto manufacturers had a captive audience.  If anyone wanted to buy a car or truck there was only one place to buy it.  From them.  No matter the cost.  So they just passed on those high wages and expensive benefit packages on to the consumer.  Times were good.  The Fifties were happy times.  Good jobs.  Good pay.  Free benefits.  Nice life in the suburbs.  All paid for by expensive vehicle prices.

The Big Three could not Sell Cars when there was Competition because of their Legacy Costs

But it wouldn’t last.  Because it couldn’t last.  For those factories destroyed in the war were up and running again.  And someone noticed those high prices on American cars.  The Japanese.  Who rebuilt their factories.  Which were now humming, too.  And they thought why not enter the automotive industry?  And this changed the business model for the Big Three (GM, Ford and Chrysler) as they knew it.  The Big Three had competition for the first time.  Their captive audience was gone.  For the consumer had a choice.  They could demand better value for their money.  And chose not to buy the ‘rust buckets’ they were selling in the Seventies.  Cars that rusted away after a few snowy winters.  Or a few years near the ocean coast.

The new Japanese competition started about 30 years after U.S. workers began to enjoy all those benefits.  So the U.S. car companies paid their union auto workers more and gave them far more benefits than their Japanese competition.  And those early U.S. workers were now retiring.  Giving a great advantage to the Japanese.  Because those generous benefits provided those U.S. retirees very comfortable pensions.  And all the health care they could use.  All paid for by the Big Three.  Via the price of their cars and trucks.

Well, you can see where this led to.  The Big Three could not sell cars when there was competition.  Because of these legacy costs.  Higher union wages.  Generous pension and health care benefits that workers and retirees did not contribute to.  (By the time GM and Chrysler faced bankruptcy in 2010 there were more retirees than active union workers).  The United Automobile Workers (UAW) jobs bank program where unemployed workers (laid off due to declining sales) collected 95% of their pay and benefits.  (You can find many quotes on line from a Detroit News article stating some 12,000 UAW workers were collecting pay and benefits in 2005 but not working.)  The Japanese had none of these costs.  And could easily build a higher quality vehicle for less.  Which they did.  And consumers bought them.  The Big Three conceded car sales to the Japanese (and the Europeans and South Koreans) and focused on the profitable SUV and truck markets.  To pay these high legacy costs.  Until the gas prices soared to $4/gallon.  And then the Subprime Mortgage Crises kicked off the Great Recession.  Leading to the ‘bankruptcy’ of GM and Chrysler.  And their government bailouts.

The U.S. Automotive Government Bailout cut Wage and Benefits once Set in Stone

The Big Three struggled because they operated outside normal market forces.  Thanks at first to a captive audience.  Then later to friends in government (tariffs on imports, import quotas, union-favorable legislation, etc.).  All of this just delayed the day of reckoning, though.  And making it ever more painful when it came.

During economic downturns (when supply and prices fall) their cost structure did not change.  As it should have.  Because that’s what the business cycle does.  It resets prices and supply to match demand.  With recessions.  Painful but necessary.  Just how painful depends on how fast ‘sticky’ wages can adjust down to new market levels.  And herein lies the problem that plagued the Big Three.  Their wages weren’t sticky.  They were set in stone.  So when the market set the new prices for cars and trucks it was below the cost of the Big Three.  Unable to decrease their labor (wage and benefit) costs, profits turned into losses.  Pension funds went underfunded.  And cash stockpiles disappeared.  Leading the Big Three to the brink of bankruptcy.  And begging for a government bailout.

Well, the bailout came.  The government stepped in.  Gave the union pension fund majority control of the bailed out companies.  Screwing the bondholders (and contract law) in the process.  And created a two-tier labor structure.  They grandfathered older employees at the unsustainable wage and benefit packages.  And hired new employees at wage and benefit packages that the market would bear.  Comparable to their Asian and European transplant auto plants in the right-to-work states in the southern U.S. states.  And put the market back in control of the U.S. auto industry.  For awhile, at least.

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Debt Limit Talks just Theatre, Obama Determined to Emulate Greek Spending and Debt

Posted by PITHOCRATES - July 18th, 2011

The Debt Limit hasn’t Stopped the Debt from Growing

The bond ratings agencies are getting nervous.  About the inevitable default of Greece.  And the possibility that the U.S. won’t be able to accumulate the unsustainable debt like the Greeks have (see Moody’s suggests U.S. eliminate debt ceiling by Walter Brandimarte posted 7/18/2011 on Reuters).

Ratings agency Moody’s on Monday suggested the United States should eliminate its statutory limit on government debt to reduce uncertainty among bond holders…

“We would reduce our assessment of event risk if the government changed its framework for managing government debt to lessen or eliminate that uncertainty,” Moody’s analyst Steven Hess wrote in the report…

In the United States, Moody’s said the debt limit had not effectively curbed the rise in government debt because lawmakers regularly raise it and because that limit is not related to the level of expenditures approved by Congress.

They have a point.  The Economist noted (see Down to the wire posted 7/18/2011 on The Economist) “Congress has acted a total of 91 times since June 1940 to either raise, extend or alter the definition of the debt limit…”  So it would seem that the debt limit is a limit in name only.  It hasn’t stopped the debt from growing.  As their little chart shows.  So why have it?

A Debt Default will be Bad, so will continued Out of Control Spending

Because, apart from World War II, the public debt hasn’t exceeded 100% of the GDP (see The Economist chart referenced above).  George W. Bush took it close to World War II heights to pay for two costly wars (Iraq and Afghanistan) and an expensive Medicare drug plan.  Obama has taken it beyond World War II levels.  At about 140% of GDP.  And Obama wants to borrow more, taking it to 150% of GDP.  Or beyond.  The European Central Bank is forecasting Greek debt to peak at 161% of GDP.  So you can see why having a debt limit is a little more important now.  Which makes the Moody’s recommendation a bit puzzling considering their concerns over Greece (see Senate Throws Obama a Debt Lifeline by Chris Stirewalt posted 7/18/2011 on FOX NEWS).

The bond-rating agencies have spelled out the two scenarios that would result in a downgrading of U.S. creditworthiness: either an unconditional increase to federal borrowing that shows Washington sprinting toward the fiscal abyss or an unbreakable stalemate on the debt ceiling.

A debt default will be bad.  But so will be continued out of control spending.  So it makes little sense solving one problem by making another problem bigger.  Besides, the U.S. has the money to service its debt.  The only question is will Obama service it?

But, here again, Obama is the one in charge of deciding who gets paid in the event of a shortfall. While his administration might send scare letters to senior citizens as a bargaining tactic with Republicans, it’s unlikely that the president would tell pensioners that they can’t have the money they paid into the system during their working lives.

Imagine the president keeping open national parks or green energy stimulus projects while telling America’s oldsters that they aren’t getting checks. Not going to happen.

Yes, if Social Security checks don’t go out to seniors, it will be because Obama chose not to send them.  And speaking of Social Security, this brings up another point.  That it’s a Ponzi scheme. 

The money we paid into the Social Security isn’t sitting in some lockbox collecting interest.  Like those Social Security statements we get imply.  The government spends that money, our money, as soon as they get it.  Which is why they viciously attack any plans to privatize Social Security.  They want your money now.  While you’re living.  And after you die.  For if we privatize Social Security, our heirs would get our unspent retirement money.  Not the government.  As the system is now designed.

This is just another good reason not to give the government more money.  They’re just going to blow irresponsibly.  Like using our retirement money deducted from our paychecks to pay for national parks.  Or green energy.

Obama and the Democrats don’t want Deficit Reduction

Washington can’t curb it’s appetite to spend.  Doesn’t want to.  And they don’t try to hide this fact (see Obama officially threatens to veto ‘Cut, Cap and Balance’ by Sam Youngman posted 7/18/2011 on THE HILL).

The White House on Monday warned President Obama will veto GOP legislation to “Cut, Cap and Balance” spending and the budget…

The administration lambasted the “Cut, Cap and Balance” proposal as setting out “a false and unacceptable choice between the federal government defaulting on its obligations now or, alternatively, passing a Balanced Budget Amendment that, in the years ahead, will likely leave the nation unable to meet its core commitment of ensuring dignity in retirement.”

The White House also blasted some of the cuts Republicans have suggested, saying the proposal would “undercut the federal government’s ability to meet its core commitments to seniors, middle-class families and the most vulnerable, while reducing our ability to invest in our future.

“[The bill] would set unrealistic spending caps that could result in significant cuts to education, research and development and other programs critical to growing our economy and winning the future,” the SAP said. “It could also lead to severe cuts in Medicare and Social Security, which are growing to accommodate the retirement of the baby boomers, and put at risk the retirement security for tens of millions of Americans.”

Business as usual.  Scare the old people.  So they can spend more.  This is an admission that there will be no deficit reduction.  Obama and the Democrats don’t want it.  It’s all just theatre.  To amuse the public.  And buy time.  For they plan to spend, spend and spend.  On programs that are ‘critical’ to winning the future.  Despite the fortune we’ve spent already on these programs that have won jack squat so far.

The American Taxpayer paying for Irresponsible Governments Here and Abroad

So it’s on to Athens.  Push that debt up to 160% of GDP.  I mean, what really can happen that’s so bad (see Gloomy Forecast for Europe’s Banks by Jack Willoughby published 7/16/2011 on BARRON’S)?

Sean Egan, co-founder and president [Egan-Jones Ratings], has a stunning prediction for Barron’s readers: Forget about things getting better in Europe, he says; they will actually get worse. And who might be one of the patsies in all this? The American taxpayer, who could feasibly be stung as the Federal Reserve aids an ailing European Central Bank already depleted by too many bailouts. The big question: Will Europe, worn down by bailout after bailout, finally be forced to bail out the bailer—the ECB?

Oh.  As bad as things are in Europe they’re going to get worse?  And the American taxpayer may ultimately pay for these bailouts?  Lovely.  Just when you thought things couldn’t get any worse.  Not only will the American taxpayer pay for their own irresponsible government.  But Europe’s as well.

Atlas can’t Shoulder the Weight of the World Anymore

That debt limit seems more important than ever.  This out of control spending has to stop.  Before it’s too late.  Because we can’t afford our debt and Europe’s debt.   America can’t be Atlas and shoulder the weight of the world on its shoulders.  At least, not anymore.  Not with the Obama administration running things.

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Team Obama Lying to Scare Americans to Increase the Debt Limit so they can Continue their Orgy of Spending

Posted by PITHOCRATES - July 10th, 2011

Talking up the Horrible Economy in 2010

Back in August of 2010, Timothy Geithner took to the New York Times to tell everyone how wonderful the economic recovery was (see Welcome to the Recovery by Timothy Geithner posted 8/2/2010 on The New York Times).

The recession that began in late 2007 was extraordinarily severe, but the actions we took at its height to stimulate the economy helped arrest the freefall, preventing an even deeper collapse and putting the economy on the road to recovery…

Private job growth has returned — not as fast as we would like, but at an earlier stage of this recovery than in the last two recoveries. Manufacturing has generated 136,000 new jobs in the past six months…

Wow.  In only 6 months their policies have created 136,000 new jobs.  And their swift and bold action prevented the freefall loss of gosh knows how many jobs.  That’s good.  So how bad was that freefall?

The new data show that this recession was even deeper than previously estimated. The plunge in economic activity started an entire year before President Obama took office and was accelerating at the end of 2008, when G.D.P. fell at an annual rate of roughly 7 percent.

Panicked by the collapse in demand and financing and fearing a prolonged slump, the private sector cut payrolls and investment savagely. The rate of job loss worsened with time: by early last year, 750,000 jobs vanished every month. The economic collapse drove tax revenue down, pushing the annual deficit up to $1.3 trillion by last January.

Okay, first he has to get the obligatory blame George W. Bush first out of the way.  So then we get to the good news.  The amount of damage they prevented.  We were losing 750,000 jobs every month.  Which would be 4,500,000 in a 6-month period.  Humph.  Getting back 136,000 of the 4,500,000 jobs lost is being on the road to recovery?  That’s like one job back for every 33 lost.  Are you sure this is a recovery? 

Oh, and that $1.3 trillion deficit?  It wasn’t from a lack of revenue.  It was from an orgy of spending.

The economic rescue package that President Obama put in place was essential to turning the economy around. The combined effect of government actions taken over the past two years — the stimulus package, the stress tests and recapitalization of the banks, the restructuring of the American car industry and the many steps taken by the Federal Reserve — were extremely effective in stopping the freefall and restarting the economy.

According to a report released last week by Alan Blinder and Mark Zandi, advisers to President Bill Clinton and Senator John McCain, respectively, the combined actions since the fall of 2007 of the Federal Reserve, the White House and Congress helped save 8.5 million jobs and increased gross domestic product by 6.5 percent relative to what would have happened had we done nothing. The study showed that government action delivered a powerful bang for the buck, and that the bank rescue on its own will turn a profit for taxpayers.

A powerful bang for the buck?  I don’t know.  Saying how great your actions were by what didn’t happen is a bit spurious.  I mean, I could say that thanks to George W. Bush and the policies he implemented after 9/11 he saved the lives of 8.5 million Americans that would have otherwise died in terrorist attacks.  Simply by scaring a lot of bad guys from trying anything now that there was a new sheriff in town.  It’s as plausible as that Blinder and Zandi report.  You can’t prove either.  Or disprove either.  So it’s a license to lie.

Still Talking up the Horrible Economy in 2011

It’s almost been a year since Geithner’s NYT piece.  If he was right things should be a whole lot better now.  The Obama administration took full credit then for the ‘recovery’.  So the current economic numbers are now theirs.  Which means they can’t blame George W. Bush anymore.  And how are those numbers?  Still horrible (see You are what your record says you are by Conn Carroll posted 7/10/2011 on The Washington Examiner).

Last month, David Gregory tripped up new DNC Chair Debbie Wasserman Schultz up with a chart detailing President Obama’s economic record. It showed unemployment up 25 percent since Obama was inaugurated, debt up 35 percent, and gas up more than 100 percent. Wasserman Schultz lamely tried to argue that the economy was getting better, to which Gregory replied: “Americans don’t believe that’s the case.”

This Sunday was Treasury Secretary Tim Geithner’s turn and he fared no better. At one point he even blamed the weather for Obama’s terrible economic record.

The numbers are horrible now.  And they were horrible a year ago.  There’s been no recovery.  And all of the administration’s actions haven’t done anything but explode the federal debt.  Which is at a record high.  As are the deficits under Obama.  And what does Team Obama want to do about that?  Why, borrow some more.  To spend some more.  Of course.

The U.S. isn’t close to Running out of Money

Despite the great economic news last August and the current great news (per the Obama administration, not per reality), things are pretty bad on the debt front.  In fact, those rascally Republicans with their opposition to raising the debt limit may place this glorious economic recovery into jeopardy.  Worse, they may destroy America as we know it (see ‘No delaying’ deadline to lift US debt ceiling posted 7/10/2011 on the BBC).

The US faces running out of money and defaulting if Congress does not allow the government to take on more debt.

If no agreement is reached, the government would be unable to pay civil servants, government contractors, pensioners or holders of government debt.

Economists and the White House have warned that such a default could push the US back into recession and have a global economic impact.

This is actually BS.  And I don’t mean Barbara Streisand.  The federal government is awash in cash.  Just not enough to further increase spending.  How much?  Well, let’s look at some of the numbers per the Tax Policy Center.  Tax receipts (i.e., actual cash dollars the government collects) for the years 2008, 2009 and 2010 were $2.5 trillion, $2.1 trillion and $2.2 trillion, respectively.  That doesn’t include any borrowing.  That’s pure cash on the barrelhead.  That’s a lot of cash that can pay a lot of bills.  It’s in the neighborhood of $180 billion a month.  And the projection for 2011?  Holding steady at about $2.2 trillion.  Again, that’s cash flowing into Washington from taxpayers.  Nothing borrowed.  Or printed.

Despite this staggering amount of cash raining down on Washington it’s not enough.  For the years 2008, 2009 and 2010, the deficits were $458 billion, $1.4 trillion and $1.2 trillion, respectively.  And the projected deficit for 2011 is $1.6 trillion.  Again, it’s the orgy of spending that is the problem.  It’s not a revenue problem.  The U.S. isn’t close to running out of money.  Team Obama is just lying to try and scare the pants off of people to get them to hate Republicans.  And to pressure them to raise the debt limit.  So they can borrow more.  And go on another spending bender.

Green Energy can only Survive when heavily Subsidized by the Government 

So what, exactly, did they spend all that money on?  Well, there was the stimulus.  The financial and auto bailouts (which should have been left to the bankruptcy courts).  And all their tweaking of the private sector economy.  Especially the green one.  For that’s America’s future.  Green energy.  And they were going to help make it happen.  By subsidizing the crap out of it (see Michigan town shows promise and pitfalls of job retraining by Don Lee posted 7/10/2011 on The Los Angeles Times).

Uni-Solar began with a hiring surge that by 2009 had climbed to 422 workers… But the Greenville plant’s primary market is Europe, and when sales in Italy and France declined as a result of the recession and other factors, Uni-Solar cut back…

Greenville and Uni-Solar also were hurt because state and federal policies simply weren’t in place to support them. Unlike the United States, for instance, Canada subsidizes consumers who adopt solar power, but only if they buy solar panels with domestically manufactured contents…

Canada is not alone in adopting comprehensive programs of subsidies, tax provisions and other incentives to foster domestic industries. Germany has an elaborate program to support automobile, electronics and other manufacturing and to discourage its companies from moving operations overseas.

That’s right, the green energy sector can only survive when heavily subsidized by the government.  To help the green energy market compete with the more reliable and less expensive fossil fuel market.  In the U.S.  As well as in Europe.  Worse, all this government help has only created a green energy bubble.  Created a lot of supply for a demand that wasn’t there.  Just like this plant in Greenville, Michigan.

The only way to make Green Energy practical is to make Consumers pay more for Electricity

The U.S. should consider itself lucky that their government is cutting subsidies.  Because it at least gives consumers a chance at a better economy.  Perhaps Washington will cut its spending.  And let the taxpayers keep more of their money so they can make it in an economy with rising prices.  Unlike in the UK (see Power bills to soar by 30% in ‘green’ reforms by Rowena Mason and David Barrett posted 7/9/2011 on The Telegraph).

Costly new incentives to encourage energy companies to invest in renewable power sources such as wind farms will put an extra £160 a year on the average household bill over the next 20 years…

Mr Huhne is expected to announce on Tuesday that energy companies, such as Centrica and EDF, will get a fixed price for electricity generated from nuclear power and wind farms, which will be higher than the market price.

The financial incentives will be funded by consumers, who will see their electricity bills rise by 30 per cent over the next 20 years from an average of £493 per year to £655 per year.

You see, renewable energy is a money losing investment.  It’s just too costly.  So power companies won’t venture into these green markets unless someone makes it worth their while.  And in the UK the government is doing just that.  By giving them lucrative cash incentives.  Which the government will pay for via higher electricity bills.  Leaving the consumer with less money to live on in an economy with rising prices.

The costly package due to be outlined in full this week is designed to reassure generation companies that Britain is an attractive place to build nuclear power stations and wind farms.

Mr Huhne admitted in an interview with The Sunday Telegraph last year that there was no money available for direct state subsidies for a new generation of nuclear plants, so this week’s announcement sets out how consumers will shoulder the cost of incentives directly.

Yes, the only way to make green energy practical is to make consumers pay more for electricity.

The changes to be outlined by Mr Huhne this week will hand billions of pounds in subsidies to the energy companies and kick-start a construction programme creating thousands of jobs.

But combined with further green taxes, such as the European emissions trading scheme, and upgrades to Britain’s national grid the measures could see Britain’s gas and electricity bills rise by 50 per cent – or £500 per average household bill – according to Ofgem, the energy regulator.

Create ‘thousands of jobs’ by making all consumers live on less.  At least those who use electricity.

By the time you factor in the other costs of green living the average Briton could see a 50% increase in their utility costs.  Which is a staggering cost to pay for a few thousand jobs.  The economy, and the consumer, would be better off with coal.  It’s more reliable.  It’s cheaper.  And one plant out of site can provide power to hundreds of thousands.  Which is better than dotting the landscape with windmills as far as the eye can see.  To produce power only when the wind blows.

The Government has a Spending Addiction

Team Obama has made a mess of things with their orgy of spending.  More than tripled the deficit since coming into office.  Requiring ever more borrowing to ‘save the country’.  Which is, of course, a lie.  Washington is awash in cash.  Over $2 trillion a year.  And if that isn’t enough to pay the bills then this administration should just resign.

The economy is stalled.  The recession never ended.  Money poured into the green energy sector was money wasted.  And is only creating a green energy bubble by building supply for demand that isn’t there.  Like in Greenville, Michigan.  Yes, supply can create demand per Say’s Law.  If that supply is something that people want.  And that’s the problem.  People don’t want more expensive and less reliable energy.  Especially in an economy with rising prices.

The facts and figures all confirm one thing.  The U.S. has a spending problem.  Not a revenue problem.  The government is like an addict with a spending addiction.  Who will lie and say anything to satisfy that addiction.  Only this addict is worse than your run of the mill junkie.  For if Team Obama overdoses it will take a nation with it.  In fact, this administration is in such denial that perhaps an intervention is in order.  Which is really what the budget debate is.  The Republicans need to be strong.  For Obama.  And the nation.  They have to hold the line on the debt limit.  Do not give them more money to spend.  Because with over $2 trillion a year, they have enough already.

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LESSONS LEARNED #51: “The longer you wait to balance your books the harder it will be to balance them.” -Old Pithy

Posted by PITHOCRATES - February 3rd, 2011

Almost half of a Plantation’s Value was its Slaves

Slave labor wasn’t cheap.  First there was the capital expenditure to purchase the slaves.  Then you had to feed them, clothe them, house them, etc.  It took money.  But that money made money.  Mostly on the big plantations.  Where the division of labor was minimal.  And large labor gangs could work a single crop profitably.

The more slaves on a plantation the more land they could work.  So the more slaves on a plantation the more valuable the plantation was.  Like a dairy farm with many dairy cows is worth more than one with fewer cows.  A productive dairy farm makes money.  And it can borrow money to grow.  Ditto for a cotton plantation. 

Now suppose we free dairy cows everywhere.  They’re free to walk off of their farms and pursue their own lives.  What will become of the dairy farm?  It won’t make money.  It won’t be able to pay back its loans.  The farm will lose value.  Because no one will buy it without the cows to make milk.  Dairy farmers everywhere will go broke.  And they will lose their farms.   

If not for the Civil War, Abolition would have been the Greatest of all Bailouts

When we discuss slavery, we focus more on issues of morality.  But the reason we had it for so long is partly due to the economics.  There was a large price tag attached to abolition.  And the question was who was going to pay?  Slavery, though immoral, was legal.  The plantations grew.  They purchased more slaves.  Worked more land.  Incurred debts to grow further.  All based on the collateral of their plantation.  Much of which was their slaveholdings.

Based on the 1790 census, there were just fewer than 700,000 slaves in America.  At the time, the nation’s finances were in a mess.  We were begging Europe to loan us money.  There was no money available to reimburse the slave owners.  And the North didn’t want to pay for this ‘southern’ problem.  There was no easy way to free the slaves without a huge financial hit.  For someone.  So we tabled the issue.  For another generation to consider.  And resolve.

But we didn’t.  By 1860, the slave population topped 3.8 million.  That’s over 5 times the number from the 1790 census.  The cost to reimburse these slave holders had grown to over $3 billion dollars.  That was almost 70% of the 1860 GDP.  In comparison, the total budget of George W. Bush reached as high as 69% of GDP.  Clearly, the cost of freeing the slaves was huge.  It dwarfed all other federal spending.  And this is one of the reasons that it took a war to finally resolve.  And it was our nation’s bloodiest conflict.  More died in the American Civil War than did in WWI and WWII combined.  And the war devastated the southern economy.  Besides the direct war damage, the South was impoverished.  And easy pickings for northern carpetbaggers.

The issue of slavery was less costly to resolve sooner than later.  But the price was always so great that the institution continued on because no one was willing to bear the costs at any time.  This only guaranteed that the final reckoning would be greater.  Which it was.  The final cost was so great it nearly destroyed the nation.  And bitter feelings linger to this day.

Never Let a Good Crisis Go to Waste

Woodrow Wilson and his fellow Progressives were going to change the world.  But that didn’t work so well.  In fact, a lot of their meddling just crashed the economy.  Secretary of the Treasury Andrew Mellon helped President Warren Harding fix the economy.  And we got the Roaring Twenties.

But the Progressives kept tinkering.  And Republican Herbert Hoover was even a bit of a Progressive himself.  Anyway, some government mismanagement (and inept Federal Reserve actions) gave us the Great Depression.  Our nation’s greatest crisis.   Which Franklin Delano Roosevelt (FDR) would exploit to transform the nation with his New Deal.

FDR’s economic policies failed.  Only capitalism re-unfettered for the war effort brought the nation back.  Even though he failed he is still remembered fondly by most Americans.  He stood fast with our allies and defeated Nazi Germany.  And he gave us Social Security.  Which, financially speaking, will cost the nation more than defeating the Nazis did.

The Great Ponzi Scheme Social Security

Social Security was originally intended to help poor widows who had struggled through the Great Depression.  It has subsequently grown to cover retirement and disabilities.  Not a big deal then.  The actuaries crunched their numbers.  They took into account immigration, birthrates, life spans, death rates and other important stuff.  Like actuaries are wont to do.  And they figured it would work.  Because we had a growing population.  With a lot more younger people entering the workforce than there were old people retiring and collecting benefits.

So, like a Ponzi scheme, Social Security was as sound as a pound.  As long as their assumptions held.  But they didn’t.  Immigration slowed.  Our life spans increased.  And worse, we just weren’t having as many babies as we once did.  Now we had more people retiring and collecting benefits.  And fewer entering the workforce to pay for these retirees.  The pyramid inverted itself.  The base was smaller than the tip.  And that just ain’t good for a Ponzi scheme.

Everyone predicts Social Security will go bankrupt.  They’ve been trying to fix it through the years.  To extend the solvency.  By reducing benefits.  Raising taxes.  And raising the retirement age (to decrease the years retirees collect benefits).  These ‘fixes’ have pushed insolvency out a few more years.  But it hasn’t addresses the elephant in the room.  Old people.  They’re living longer than the actuaries ever imagined.  Worse, because they’re living so long, they’re getting all kinds of medical problems that are costing Medicare and Medicaid a lot of money.  And, you guessed it, they’re going bankrupt, too.

Why Fix something Today that we can Leave for Future Generations?

Because there are so many seniors in these programs no politician wants to touch them.  They’re the ‘third rails’ of politics.  Seniors vote.  And if you cut their benefits, they’re probably not going to vote for you.  Every politician knows this well.  So, like slavery, they table the issue for a later generation to address.  But every day that passes, more seniors join the ranks of the retired and begin collecting benefits.  While fewer people enter the workforce to pay for their retirement.  Which guarantees that the cost to fix these problems will grow ever larger.

The day of reckoning will arrive.  It always does.  For the issue of slavery it was civil war.  Over in Europe as they struggle to control their out of control spending they’re having riots.  Which sometimes happens when you take away stuff from large numbers of people.  Let’s hope it doesn’t come to that here.  But one thing that we can be pretty certain about.  Fixing this problem is going to hurt someone in the wallet.  And the longer we wait, the greater that someone will hurt.

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Crushing Debt is Crushing Europe and the United States

Posted by PITHOCRATES - January 15th, 2011

The Republicans are Irresponsible for not Allowing the Democrats to Spend Irresponsibly

Washington has maxed out their credit card.  They do like to spend.  But now they need to increase their credit line.  And the Republicans aren’t playing nice (see US debt passes $14 trillion, Congress weighs caps by Tom Raum, Associated Press, posted 1/15/2011 on Yahoo! News).

Remarkably, nearly half of today’s national debt was run up in just the past six years. It soared from $7.6 trillion in January 2005 as President George W. Bush began his second term to $10.6 trillion the day Obama was inaugurated and to $14.02 trillion now. The period has seen two major wars and the deepest economic downturn since the 1930s.

With a $1.7 trillion deficit in budget year 2010 alone, and the government on track to spend $1.3 trillion more this year than it takes in, annual budget deficits are adding roughly $4 billion a day to the national debt. Put another way, the government is borrowing 41 cents for every dollar it spends.

In a letter to Congress, Geithner said the current statutory debt ceiling of $14.3 trillion, set just last year, may be reached by the end of March — and hit no later than May 16. He warned that holding it hostage to skirmishes over spending could lead the country to default on its obligations, “an event that has no precedent in American history.”

Such righteous indignation.  According to Mr. Geithner, holding the debt ceiling hostage is just irresponsible.  The Republicans are using the financial wellbeing of the nation for political gain.  But I see it differently.  I don’t see the refusal to raise the debt ceiling as being irresponsible.  I see the runaway spending that makes the debt ceiling an issue as irresponsible.  And, yes, you can blame Bush for adding $3 trillion in 4 years.  If you blame Obama for adding $3.42 trillion in two years.  And then for passing Obamacare which will make us pine for the gold old days when the deficit increased only $3.42 trillion in two years.

Debt-level brinkmanship doesn’t wear a party label.

Here’s what then-Sen. Barack Obama said on the Senate floor in 2006: “The fact that we are here today to debate raising America’s debt limit is a sign of leadership failure. It is a sign that the U.S. government can’t pay its own bills. It is a sign that we now depend on ongoing financial assistance from foreign countries to finance the government’s reckless fiscal policies.”

It was a blast by the freshman lawmaker against a Bush request to raise the debt limit to $8.96 trillion.

Bush won on a 52-48 party-line vote. Not a single Senate Democrat voted to raise the limit, opposition that’s now complicating White House efforts to rally bipartisan support for a higher ceiling.

Apparently, reckless fiscal policies that explode the debt are only a problem when a Republican is president.  Obama, a tax and spend liberal Democrat, opposed raising the debt ceiling to $8.96 trillion.  Then he outspends George W. Bush and approves a debt ceiling somewhere north of $14.3 trillion.  And to add insult to injury, they bitch with righteous indignation when the Republicans object to their reckless and irresponsible spending.  As if there is no hypocrisy in their actions.

The Debt Dominoes ready to Fall in Europe?

But there is hypocrisy.  Worse, Obama is putting the nation in financial peril.  The debt ceiling is dangerously high.  It’s nearing 100 percent of GDP.  What does that mean?  Well, let’s take a look at Europe.

Greece is drowning in debt.  Even after their bailout, they project her debt to reach 165% of GDP in 2014.  Italy is close behind.  France, Ireland, Belgium and Portugal have debt between 80-99% of GDP.  Britain, Spain, The Netherlands, Germany, Austria and Hungary have debt between 60-79%.

Some of these nations are on the brink of bankruptcy.  Greece had to make ‘austerity’ cuts.  And the people rioted.  France increased the retirement age a couple of years.  And the people rioted.  Britain made students pay more of their own university tuition.  And the people rioted.  They just bailed out Ireland.  Portugal and Belgium have crushing interest costs on their debt.  Spain is of concern.  And Germany, the fiscally responsible nation in the Eurozone, is picking up the tab for a lot of these bailouts.  Not out of altruism.  But a Euro problem anywhere is a Euro problem for Germany.  She doesn’t have much choice.  But how long can she continue to afford this generosity?

Will the Debt Crises be the end of the ‘Cradle-to-the-Grave’ Nanny State?

Not long, it would appear (see Time for Plan B posted 1/13/2011 in The Economist).

This newspaper does not advocate the first rich-country sovereign defaults in half a century lightly. But the logic for taking action sooner rather than later is powerful. First, the only plausible long-term alternative to debt restructuring—permanent fiscal transfer from Europe’s richer core (read Germany)—seems to be a political non-starter. Some of Europe’s politicians favour closer fiscal union, including issuing euro bonds, but they are unlikely to accept budget transfers big enough to underwrite the peripheral economies’ entire debt stock.

Things are so bad with some of these Social Democracies in Europe that the Economist is recommending they just ‘file bankruptcy’ and start anew.  Their financial holes are just too deep.  Of course, this means they’ll probably screw the debt holders.  But there will be fair-shared sacrifice.  They’ll eliminate some of that debt.  But they will also eliminate a lot of that spending that caused their debt crisis in the first place.  Some of their ‘cradle-to-the-grave’ nanny state will go bye-bye.  Considering how ugly it was when France tried to raise their retirement age and when Britain cut back on tuition subsidies, these austerity moves will take ugly to a new level.

But like any problem, the longer you wait to address it the worse it’ll get.

And the longer a restructuring is put off, the more painful it will eventually be, both for any remaining bondholders and for taxpayers in the euro zone’s core. The rescues of Greece and Ireland have increased their overall debts while their private debts fall, so that a growing share will be owed to European governments. That means that the write-downs in any future restructuring will be bigger. By 2015, for instance, Greece could not reduce its debt to a sustainable level even if it wiped out the remaining private bondholders.

And this is our future.  Especially with Obamacare waiting in the wings.

The Road to Serfdom – from Medicare to Obamacare

We shouldn’t be talking about raising our debt ceiling.  We need to be talking about spending cuts.  Geithner, Obama, et al are playing a dangerous game.  They want to grow government at any cost.  To get it so deeply entrenched no matter the cost so that people will riot when faced with austerity cuts.  And they’re coming.  Austerity cuts. 

It’ll start with Medicare doctor reimbursements.  Then when Medicare collapses, Obamacare will add a public option.  This will be the end of private insurance.  Obamacare will then evolve into a national health service.  Which will ration health care services.  Then they’ll raise the Social Security retirement age.  Just like in France.  By then we’ll be well along the Road to Serfdom.

And then the rioting will start.

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Tax and Spend and Raise Your Taxes: The Ultra-Left Liberal Agenda

Posted by PITHOCRATES - November 7th, 2010

Fiscal Extortion Responsibility:  Approve Our Millage to Raise Your Taxes or Else

Whenever the government wants to raise your taxes, they use fear.  What does the typical family in suburbia hear?  “If the city doesn’t get this millage approved, the city will have no choice but to lay off police officers and fire fighters.”  It’s never, “If we don’t get this millage approved, the city will have to cut pay and benefits of our bloated and overpaid city bureaucracy.  Or lay off some of the deadwood.”  No.  It’s always the cops and the fire fighters.  Because it’s more scary.  Mothers worry about the safety of their children.  And will do anything for them.  Even pay more taxes.  If it was anyone else talking like this, we’d call it extortion.  But when our government shakes us down for protection money, they call it fiscal responsibility.

The federal government works much in the same way.  Of course, there are no federal police officers or fire fighters protecting our communities day in and day out.  So they go for the jugular.  That third rail.  Social Security.  When the White House and Capitol Hill were staring each other off into a government shutdown in the 1990s, what did Bill Clinton do?  He threatened Social Security (see GOP to Use Debt Cap to Push Spending Cuts by Damian Paletta posted on The Wall Street Journal).

Eventually, the debt ceiling was raised, but only after a brief government shutdown and warnings from the Clinton administration that the government might temporarily stop mailing Social Security checks.

One thing not on the table was lawmaker pay and benefits.  Little old ladies would lose their Social Security checks before they would ever let that happen.  Fast forward to today.  Federal deficits and the debt have never been higher.  In the discussion of spending cuts, that discussion included the other third rail of politics.  Lawmaker pay and benefits.  There’s talk now about cutting their pay.  Of course, that will never happen.  Even though they could afford it (see Boehner under fire: First cut should be lawmakers’ salaries by Jordy Yager posted on The Hill).

Boehner is slated to receive a $30,100 pay increase next year when he becomes Speaker of the House. His annual salary will be $223,500. The base pay for House and Senate lawmakers is $174,000, while majority and minority leaders each make $193,400 per year.

And this doesn’t include any of their benefits or graft.  How does this make you feel?  These are the people that are bankrupting our country.  Destroying our jobs with their anti-business policies.  And forcing us to get by on less.  While they live the good life.  Yes, let’s cut their pay.  If we slash it by $100,000, they’d still be making more than the majority of their constituents.  Something just wrong with that.  Our servants living better than us.

President Obama:  Typical Tax and Spend Liberal Who Hates Tax Cuts

With the loss of the House in the 2010 midterm elections, President Obama’s FDR/LBJ spending has hit a snag.  Nancy Pelosi is not there to rubberstamp his ultra-left liberal agenda.  In fact, the new House leadership is talking about repealing some of that ultra-left liberal legislation to reduce that projected annual deficit of $4,125 billion (see Barack Obama Outspends George W. Bush and Ronald Reagan Combined from this same website). 

Front and center in this debate are the George W. Bush tax cuts scheduled to expire at the end of this year.  And all of a sudden, President Obama is concerned about deficit spending (see Obama calls for compromise, won’t budge on tax cuts by Kevin Cullum posted on The Hill).

“At a time when we are going to ask folks across the board to make such difficult sacrifices, I don’t see how we can afford to borrow an additional $700 billion from other countries to make all the Bush tax cuts permanent, even for the wealthiest 2 percent of Americans,” the president said. “We’d be digging ourselves into an even deeper fiscal hole and passing the burden on to our children.”

Oh, he’s concerned now.  He wasn’t with his bailouts to help fund union pensions.  Or the biggest explosion in federal spending ever.  The trillion dollar+ per annum Obamacare.  But he’s being a little devious here.  Earlier, he said that $700 billion cost of the Bush tax cuts was over ten years (see the above link to this same website).  That comes to $70 billion annually.  Compared that to his projected $4,125 billion annual deficit and he loses all credibility.  He doesn’t care about $4,125 billion in deficit spending but will put his foot down about a paltry annual $70 billion in tax savings.  Why?  He’s a tax and spend liberal.  Any spending (other than defense) is okay.  But any tax cut is simply irresponsible.

We Rejected Obama’s Ultra-Left Liberal Agenda on Tuesday

The message on Tuesday was that the people have rejected Obama’s ultra-left liberal agenda.  America is a center-right country.  That center-right is made up of conservatives, moderates and independents.  Obama, Nancy Pelosi, Harry Reid, et al, belong to that far left minority called liberal.  The clear message is that the 80% rejected the 20%.  Of course, Obama sees it differently. 

The president said that the “message was clear” from voters on Election Day, and that he was also “frustrated” by the sluggish pace of economic recovery. “You’re fed up with partisan politics and want results,” Obama said. “I do too.”

No, we’re not upset that Democrats and Republicans weren’t working together.  We were upset that the liberal Democrats used their majority in Congress to govern against the will of the people.  That is the true message.  It wasn’t the partisanship that bothered us.  It was the lack of it to stop the far-left liberal agenda that did.

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The Left Is Doing What They Do Best – Bankrupting the Nation

Posted by PITHOCRATES - October 16th, 2010

Ronald Reagan Knew How to End a Recession

The Left hates Ronald Reagan.  Perhaps hate is too weak of a word.  If the Left wasn’t so ‘separation of church and state’, a stronger and more accurate description of their sentiment would be to call Reagan their Antichrist.  In the last century or so, Reagan had to be Democrat enemy #1.  For he stood against what they hold most dear.  Big Government.  And big spending.

Reagan dared to say the unspeakable.  Government isn’t the answer; government is the problem.  The Left could not believe their ears.  This was heresy.  They must destroy this man.  They did everything within their power then.  And they continue to do so today.

Their favorite tactic is to lie.  Sure, the 1980s were prosperous, but at what cost?  An exploding deficit?  A mounting national debt?  That’s what they say.  They said his reckless defense spending and tax cuts impoverished our future generations.  But they left out one inconvenient truth.  Cuts in the tax rates INCREASED tax receipts.  And the Democrat controlled congress exploded non-defense spending.  (Okay, two inconvenient truths.)  The Republican in the White House brought more money into Washington with his fiscal policies.  But the Democrats in the House just spent more.  The deficit in Reagan’s last year?  About $150 billion.  And it was the apocalypse if you listened to the Democrats.

Jimmy Carter Knew How to Prolong a Recession

Well, that was then.  What about now?  Associated Press Writers Martin Crutsinger and Andrew Taylor note that the government reports the deficit for the just completed fiscal year at a staggering $1.3 trillion (see Government reports $1.3 trillion budget deficit on Yahoo! News).  That’s about a 750% increase from the apocalyptical Reagan deficit.  And what do the Democrats say?  It’s really not that bad.

Apparently, deficits are okay if Democrats are doing the spending.  A few bailouts/stimulus later, they’re still spending.  Why, it’s as if they have completely forgotten how they once excoriated Reagan for his measly little deficit of $150 billion.  Funny.  Their selective memory.  Crutsinger and Taylor note:

Outside of the bailout, the federal budget went up by 9 percent in the 2010 budget year to $3.5 trillion, the Congressional Budget Office reported last week. Food stamp payments rose 27 percent as record numbers of people took advantage of the programs, while unemployment benefits rose 34 percent as Congress extended benefits for the long-term jobless.

Even after all the ‘one-time’ expenditures to fix the worst recession since the Great Depression, they still increased the regular federal budget by 9%.  And if you count huge increases in food stamps and unemployment benefits as positive economic indicators, then their ‘fix’ fixed the worst recession since the Great Depression.  So then that money was money well spent.  So what if it will run up the national debt to record levels?

Leading officials with the National Association for Business Economics forecast this week that the 2011 deficit will total $1.2 trillion, only slightly better than the administration’s estimate. They cited excessive federal debt as their single greatest concern, even more so than high unemployment.

Oh, that’s what.  Servicing that debt could kill business.  Higher taxes.  Or, worse, monetization (i.e., printing money).  Either way the cost of business goes up.  Which means they can hire fewer people.  Which means more will be on unemployment.  Or collecting food stamps.  Humph.  This economic stuff is trickier than it seems.  So we’ll have to reduce that debt.  Simple.  We just cut spending.  Or raise taxes.  Well, we know what affect higher taxes will have on business (more people will be on unemployment and collecting food stamps).  So the answer seems clear.  We cut spending.

The recommendations of the commission need the backing of 14 of its 18 members to trigger a congressional vote. Building that level of consensus will be difficult. Republicans are strongly opposed to a plan that includes tax increases to chip away at the deficit. Democrats are less inclined to move a package that relies solely on spending cuts.

Well, maybe not so clear.  But we could keep the taxes at their current rates.  Extend the Bush tax cuts.  It may not help a lot, but it sure will prevent a lot of harm by avoiding a massive tax rate hike.  Surely we can agree to this.  Put aside partisan politics.  For the good of the people.  But no.  The Republicans want to extend them all.  The Democrats want to extend them only for those earning less than $250,000.  This will hurt small business, the largest job creator in America.  Yeah, $250,000 sounds like a lot, but it’s not when you’re running a business.  An increase in their tax rate may require that they lay off someone to afford those new taxes.  And it will be unlikely that they would be able to hire anyone anytime soon.  How can this NOT be clear?

The difference between the two parties amounts to $700 billion that would be added to projected deficits over the next decade if the tax cuts for the wealthy were extended along with the other tax cuts.

Oh, boy, here we go again.  Zero-sum Keynesian economics.  Economic activity is finite.  If businesses can keep more then the government must get less.  Right?  WRONG!  Lower taxes stimulate.  Entrepreneurs create wealth.  And jobs.  When Reagan cut the tax rates the amount of money the IRS collected almost doubled.   You’d think that if the Democrats were just spend-happy they’d put party politics aside.  But no.  The thought that government isn’t needed to make business hum is anathema to them.  They’d rather see the economy go into depression than admit that.  So, if they get their way, what’s likely to happen?

“If we get to 2013 and policymakers don’t look like they have a credible plan to deal with the deficit, then interest rates are likely to rise significantly and that will jeopardize the recovery we have under way at that time,” said Mark Zandi, chief economist at Moody’s Analytics.

High inflation and recession?  Egad, it’ll be like Jimmy Carter is back in office.  Stagflation.  Misery.  As bad as that may seem, and, trust me, that’s really bad (as anyone who lived during the Carter years can attest to), it’s worse.  As of now, there’s no Ronald Reagan out there to fix another Carter malaise. 

Woe is us.

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