UK Budget Cuts Ignite Riots, Gives Glimpse of USA Future

Posted by PITHOCRATES - March 26th, 2011

Unruly Mobs Attack the Police…in London

The riots in the Middle East were ignited by high unemployment, high food prices and little government relief for either.  Some countries have all but degenerated into civil war.  But violent unrest is not limited to the Middle East.  Even some of the most advanced Western economies are having their problems (see TUC protest march: anarchists on the rampage in London by Patrick Sawer and David Barrett posted 3/26/2011 The Telegraph).

Police fought mobs of masked thugs who pelted officers with ammonia and fireworks loaded with coins.

The anti-capitalists started fires, smashed their way into banks, hotels and shops, bringing chaos to Britain’s busiest shopping street.

The violence began as Ed Miliband, the Labour leader, addressed a TUC rally of at least 250,000 peaceful protesters in Hyde Park who had marched from Westminster to demonstrate against government spending cuts.

Yeah, you read that right.  London, England.  Unbelievable, isn’t it?  The violence against the police?  And property?  Wow.  And look who’s doing it.  Bloody anti-capitalist anarchist thugs. 

After five hours of running battles, there were 75 arrests. At least 30 people, including five police officers, were injured. Police said the anti-capitalists threw lightbulbs filled with ammonia at them…

They ordered limited use of “kettling” to contain the rioters but admitted that such was the scale of the violence, they could not protect property.

The UK has big time budget problems.  High taxes are hurting the economy.  Ever increasing public benefits require more and more tax revenue.  And increases the debt.  They cannot sustain this spending without crashing the economy.  Or bankrupting the nation.  But the anarchists don’t care.  Because they’re anti-capitalists.  And simply don’t understand rudimentary economics.  Or numbers with a ‘£’ in front of them.

From Rich Empire to Bankrupt Nanny State

So just how bad are things in the UK?  Bad.  The country is at a crossroads.  It may forever change if it doesn’t change course.  During World War II it was the Nazis threatening their survival.  Today it’s their own spending (see Britain’s leaders should come clean on the true depth of the fiscal crisis by Liam Halligan posted 3/26/2011 on The Telegraph).

The UK’s fiscal crisis is of monumental historic importance. The future of the free world may not be at stake as it was in Churchill’s day. What is in the balance, though, is the prosperity of the British people for at least the next few decades and our status as a top-ranking nation.

This is a common theme among great nations that fall from greatness.  Out of control government spending.  It brought down the Roman Empire.  And the British Empire.  But the great nation that built it remains.  For now, at least.  But the government spending is burdening Britain more than her empire ever did.

Over the last 12 months, then, this country’s “on-balance-sheet” liabilities have risen by £147bn. That’s roughly what we spent on the NHS and defence combined in 2010 – and that was merely, during this last year of “austerity”, the incremental increase in what Britain has put “on tick”.

That’s my point – and I will keep making it until it fully enters the public discourse. It is the total debt numbers that Osborne, the Tories and our politicians in general should focus on, not the size of the annual deficit.

This is another common theme with great nations.  They have big military forces.  To protect what is theirs.  And to maintain the peace.  The Royal Navy built the British Empire.  And maintained world peace.  As did the Roman Legions.  That’s why there was a Pax Romana.  And a Pax Britannica.  These empires ushered in great periods of peace.  And their rule of law and free markets provided great prosperity.  But the prosperity led to entitlement.  And state benefits.  Such as the NHS (National Health Service).  State spending increases to meet the desires of voters.  And that spending is now unsustainable.  They have to cut something.  Because they just can’t borrow anymore.

In 2009, the UK spent £31bn – around 6pc of total tax receipts – on debt interest payments. That’s money down the drain. By 2015, we won’t have reached, in Churchill’s words, some “broad sunlit upland”. After four more years of deficits, debt services costs, according to last week’s Budget, will by then be £67bn a year – or almost 10pc of total tax receipts. These shocking numbers are also likely to be under-estimates, given the UK’s massive “off-balance-sheet” liabilities and the Treasury’s benign assumption of future gilt rates.

These interest costs are staggering.  Any meaningful cuts will have to be greater than the annual debt cost if they have any hope of bringing down deficits.  Or the debt.  And they were trying to make some meaningful cuts.  Almost £100bn.  And we saw what happened.  People took to the streets in violent protest.

All of us – politicians, commentators and voters – should compare the quality of our current national debate, its utter detachment from reality, with the statesmanship and candour of Churchill’s “blood, toil, tears and sweat“. For such hard truths inspired a nation, while winning Churchill untold respect.

Of course, during Churchill’s time, there wasn’t a nanny state.  After enduring World War I and the Great Depression, austerity was an all too familiar way of life.  It isn’t like that today.  Today students protest if they don’t get a free college education.  It is questionable even if Winston Churchill himself could inspire today’s entitlement culture.  They’re just too spoiled, lazy and greedy.

A Look into America’s Future

All right, so that’s what’s happening in the UK.  How about the USA?  We have our problems.  But we’re not as bad off.  Obamacare is not quite the NHS.  Yet.  But we have the same entitlement culture.  Out of control state spending is plunging us into record deficits and debt.  High taxes and regulatory compliance has drawn out the Great Recession.  And when some governors start cutting their budgets to balance their budgets, the people protested.  Our day of reckoning is coming.  And N. Gregory Mankiw wrote how a future president might inspire the American people ala Churchill in 2026.  It’s an interesting look at what could very well be our future (see It’s 2026, and the Debt Is Due by N. Gregory Mankiw posted 3/26/2011 on The New York Times).

The seeds of this crisis were planted long ago, by previous generations. Our parents and grandparents had noble aims. They saw poverty among the elderly and created Social Security. They saw sickness and created Medicare and Medicaid. They saw Americans struggle to afford health insurance and embraced health care reform with subsidies for middle-class families.

But this expansion in government did not come cheap. Government spending has taken up an increasing share of our national income.

Today, most of the large baby-boom generation is retired. They are no longer working and paying taxes, but they are eligible for the many government benefits we offer the elderly.

Our efforts to control health care costs have failed. We must now acknowledge that rising costs are driven largely by technological advances in saving lives. These advances are welcome, but they are expensive nonetheless.

If we had chosen to tax ourselves to pay for this spending, our current problems could have been avoided. But no one likes paying taxes. Taxes not only take money out of our pockets, but they also distort incentives and reduce economic growth. So, instead, we borrowed increasing amounts to pay for these programs.

This part of the story we know.  It’s how we got here.  Or there, as it were, in this tale from the future.  Now comes the debt spiral.  Which will force us to act.  And make decisions no one wants to, or is willing to, now.  Which will be even more painful hence.

For years, the United States government borrowed on good terms. Investors both at home and abroad were confident that we would honor our debts. They were sure that when the time came, we would do the right thing and bring spending and taxes into line.

But over the last several years, as the ratio of our debt to gross domestic product reached ever-higher levels, investors started getting nervous. They demanded higher interest rates to compensate for the perceived risk. Higher interest rates increased the cost of servicing our debt, adding to the upward pressure on spending. We found ourselves in a vicious circle of rising budget deficits and falling investor confidence.

When the treasury tried to auction off some bonds in this tale there were few takers.  So this future president secured a loan from the International Monetary Fund (IMF) with some draconian strings.  The IMF required big cuts in spending (Social Security, Medicare, Medicaid, Obamacare and subsidies – farming, ethanol production, public broadcasting, energy conservation and trade promotion).  And big tax increases. 

We will raise taxes on all but the poorest Americans. We will do this primarily by broadening the tax base, eliminating deductions for mortgage interest and state and local taxes. Employer-provided health insurance will hereafter be taxable compensation.

We will increase the gasoline tax by $2 a gallon. This will not only increase revenue, but will also address various social ills, from global climate change to local traffic congestion.

AS I have said, these changes are repellant to me. When you elected me, I promised to preserve the social safety net. I assured you that the budget deficit could be fixed by eliminating waste, fraud and abuse, and by increasing taxes on only the richest Americans. But now we have little choice in the matter.

If only we had faced up to this problem a generation ago. The choices then would not have been easy, but they would have been less draconian than the sudden, nonnegotiable demands we now face. Americans would have come to rely less on government and more on themselves, and so would be better prepared today.

Even in the future presidents will be making the same promises that they cannot keep.  And make the same lament.  If only we continued the policies of Ronald Reagan.  Kept government small.  And relied on ourselves.  Had we, we’d never be in this financial mess now.  Or hence.

Dead People haven’t a Care in the World

Our own greed will do us in.  Insatiable want of government benefits kills great nations.  Even the UK and the USA are not immune from this.  But the easy political road is to pander to the people.  Give them what they want.  To get their votes.  They do this knowing full well they are destroying the future.  So why do they do it?  Because most of those in government are old.  And when it comes time to pay the piper, it will be a moot point.  Because they will be dead.  And dead people haven’t a care in the world.

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Out of Control State Spending – Greece, France, the U.K. and the U.S.A.

Posted by PITHOCRATES - December 15th, 2010

Greece Burning – Public Sector Pay and Pensions Bankrupting the Nation

Things got ugly in Greece during their 2010 financial crisis.  At least three died one day during rioting (see Greek financial crisis explained posted 5/6/2010 on The BBC).

Three people, including a pregnant woman, have been killed during riots in Athens.

And why were the Greeks rioting?

Many of the protesters are public service workers, whose salary comes from the tax payer…

They object to their government’s plan to get Greece’s economy back under control.

It includes a freeze on public sector pay, raising the tax on fuel, and cutting pensions.

And why did Greece find herself in a position to take these austerity measures?

For years, Greece has been spending money it doesn’t have.

The government there took advantage of the economic good-times to borrow money and spend it on pay-rises for public workers and projects such as the 2004 Olympics.

France Burning – Early Retirement Age Bankrupting the Nation

Things weren’t much prettier in France.  They, too, were facing out of control state spending.  So they, too, tried to cut their spending.  And it didn’t go over well with the people (see Proposed retirement age change prompts riots in France by The Associated Press posted 11/4/2010 on The Chicago Sun-Times).

Workers opposed to a higher retirement age blocked roads to airports around France on Wednesday, leaving passengers in Paris dragging suitcases on foot along an emergency breakdown lane.

Outside the capital, hooded youths smashed store windows amid clouds of tear gas.

Riot police in black body armor forced striking workers away from blocked fuel depots in western France, restoring gasoline to areas where pumps were dry after weeks of protests over the government proposal raising the age from 60 to 62.

And what was their greatest fear of these austerity cuts?

Many workers feel the change would be a first step in eroding France’s social benefits – which include long vacations, contracts that make it hard for employers to lay off workers and a state-subsidized health care system – in favor of “American-style capitalism.”

The United Kingdom Burning – Cheap College Tuition Bankrupting the Nation

Meanwhile, in the U.K., they’re having their own riots.  And the rioters attacked the Royal Family.  Fortunately for Prince Charles, his car took the brunt of the attack (see Prince Charles’s car kicked in tuition riot by The Associated Press posted 12/9/2010 on CBC News). 

“We can confirm that the royal highnesses’ car was attacked by protesters on their way to their engagement at the London Palladium this evening. The royal highnesses are unharmed,” a statement from Prince Charles’s press secretary said.

And why were the people rioting?  Much like in Greece and France, the U.K.’s generous social benefits are bankrupting the nation.

Cameron’s government describes the move as a painful necessity to deal with a record budget deficit and a sputtering economy. To balance its books, the U.K. passed a four-year package of spending cuts worth $129 billion, which will lead to the loss of hundreds of thousands of public sector jobs and cut or curtail hundreds of government programs.

The government proposed raising the maximum university tuition fees in England from $4,780 a year to $14,000. Students reacted with mass protests that have been marred by violence and have paralyzed some campuses.

Not Burning Yet – Social Security and Medicare Bankrupting the Nation

Social Security and Medicare are going broke.  And will.  It’s just a matter of time.  When they came into being, there was an expanding birth rate.  Actuaries counted on those birth rates to continue.  But they didn’t.  The baby boom generation had only about 3 children per family.  Whereas their parent’s generation often had 10 kids or more.

Social Security is like a Ponzi Scheme.  There are no retirement accounts.  Payroll taxes from workers today pay the retirees of today.  Think pyramid scheme.  As long as the base of the pyramid (those workers paying taxes) grows at a greater rate than the tip of the pyramid (those collecting benefits) the scheme works.  But with the reduction in birth rates and our aging population, the pyramid has inverted.  The tip of the pyramid is growing at a greater rate than the base is.  As the ‘size’ of the tip and the base approach each other, eventually one worker will support one retiree.  And if a retiree lives on, say, $30,000 a year, do the math.  In a two-income family, one income will support a retiree.  And nothing else.  And that just ain’t sustainable.  Ergo, Social Security will go broke.

Ditto for Medicare.

Obamacare – Tinder, Gasoline and a Match

All right, we’ve seen how out of control state spending has led to austerity measures throughout Europe.  And rioting.  We have two huge entitlement programs pushing our county down the same path.  Europe is cutting costs (even when cities are burning in the process).  And what do we do?  We double down.  We add a third entitlement behemoth that will make Social Security and Medicare look tiny in comparison.

Obamacare.  Affordable health care for everyone.  Because the government is going to force everyone to buy health insurance.  Because the more people who pay premiums, the lower each premium needs to be.  Think pyramid scheme.  You need more to pay in (the base) than collect benefits (the tip).  Because this ain’t insurance.  It’s the mother lode of welfare entitlements.  And it’s also something else.  Unconstitutional (see Opposition to Health Law Is Steeped in Tradition by David Leonhardt posted 12/14/2010 on The New York Times).

On Monday, a federal judge ruled part of the law to be unconstitutional, and the Supreme Court will probably need to settle the matter in the end.

But that doesn’t stop the Obamacare cheerleaders.

We’ve lived through a version of this story before, and not just with Medicare. Nearly every time this country has expanded its social safety net or tried to guarantee civil rights, passionate opposition has followed.

The opposition stems from the tension between two competing traditions in the American economy. One is the laissez-faire tradition that celebrates individuality and risk-taking. The other is the progressive tradition that says people have a right to a minimum standard of living — time off from work, education and the like.

Yes, the two competing traditions.  The individuality and risk-taking that has defined America until Woodrow Wilson and the Progressives came along.  And the entitlement mentality.  Also known as European Socialism.  Like they have, had, have in Greece, France and Great Britain.  And we’ve seen how that has worked.  But we don’t learn from the lessons of history, do we?

The federal income tax, a senator from New York said a century ago, might mean the end of “our distinctively American experiment of individual freedom.” Social Security was actually a plan “to Sovietize America,” a previous head of the Chamber of Commerce said in 1935. The minimum wage and mandated overtime pay were steps “in the direction of Communism, Bolshevism, fascism and Nazism,” the National Association of Manufacturers charged in 1938.

When my dad worked gross pay meant something.  Today it’s all about net pay.  What’s left after taxes.  Taxes have grown so great that a single wage earner has trouble raising a family.  Unlike those families back before the baby boom.  When a single wage earner could raise 10 kids.  So, yes, the federal income tax has greatly changed the American experiment in individual freedom.

Social Security has ‘Sovietize’ America.  Retirees live in fear of losing their state benefits.  And they know that it’s in their ‘best interest’ to support the state.  And they do.  At the voting booth.  Potato.  Tomato.  The only difference is that we don’t have gulags in Siberia here.  But we don’t need them.  Because the threat of cutting a retiree’s benefits scares them enough to toe the party line.

And now we want to add national health care to the mix.  Because every other rich country has jumped off that bridge.

It is clearly one of the least radical ways for the United States to end its status as the only rich country with millions and millions of uninsured.

There’s a reason why the U.S. does not pay for millions and millions of uninsured here.  Why?  See Greece, France and the U.K. above. 

Guaranteeing people a decent retirement and decent health care does more than smooth out the rough edges of capitalism. Those guarantees give people the freedom to take risks. If you know that professional failure won’t leave you penniless and won’t prevent your child from receiving needed medical care, you can leave the comfort of a large corporation and take a chance on your own idea. You can take a shot at becoming the next great American entrepreneur.

With every previous major expansion of the safety net, history has had a chance to prove the naysayers wrong. It may yet in the case of universal health coverage. But the decision now seems to rest with the nine members of the Supreme Court.

Again, see Greece, France and the U.K. above.  As nice and compassionate as it sounds, it just doesn’t work.  European Socialism.  If it did, it would have worked in Greece, France and the U.K.  But it didn’t.  And that should scare the hell out of us here.  Because we’re heading down the same road.

And history may just prove the naysayers were right.

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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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