A Fed President says there is no Inflation while the Price of the Big Mac says Otherwise

Posted by PITHOCRATES - April 13th, 2014

Week in Review

Inflation is bad according to Rep. Chris Van Hollen.  And, therefore, we need baseline budgeting (taking last years’ spending and automatically adding more to it to arrive at the budget for the following year) to overcome the corrosive effect of inflation on government spending.  And he illustrated this by showing how inflation has increased the price of a Big Mac over the years (see Members of Congress debate budget with Big Macs by Eric Pfeiffer posted 4/8/2014 on Yahoo! News).

On Tuesday, two members of Congress got into a detailed discussion over inflation, with Rep. Chris Van Hollen using pictures of hamburgers  to argue that inflation estimates are necessary to undercut future budgets.

Holding up a chart that showed the average cost of a McDonald’s Big Mac in 2004 ($2.71) compared with its cost today ($4.62), Maryland Democrat Van Hollen argued that not adjusting budget numbers for inflation equates to a net cut.

But while arguing that we need baseline budgeting to counter rampant inflation we have someone whose job is to keep inflation from rearing its ugly head in the economy saying quite another thing (see Fed’s Evans ‘exasperated’ by inflation warnings by Greg Robb posted 4/9/2014 on MarketWatch).

Many people who argue that inflation is just around the corner have been repeating the same warning for the past five years, said Charles Evans, the president of the Chicago Federal Reserve Bank, on Wednesday. “I confess that I am somewhat exasperated by these repeated warnings given our current environment of very low inflation,” Evan said in a speech at an economic policy conference in Washington D.C. Evans said he still sees the economic environment pointing to below-target inflation “for several years.” Evans debunked current arguments that inflation is just over the horizon. He said that there is “substantial room” for stronger wage growth without inflation pressures building and added the Fed’s large balance sheet is not a “classic warning sign” of inflation. Commodity prices also seem to be an unlikely propellent of inflation at the moment, he said.

So while Rep. Chris Van Hollen is wringing his hands over the rampant inflation everywhere that we can only counter with baseline budgeting the president of the Chicago Federal Reserve Bank gets exasperated by people like Rep. Chris Van Hollen.  Because there is no inflation that he can see.  And it’s his job to find inflation.  So he can stop it.  So who’s right?  They can’t both be right.  Of course, the price of the Big Mac has gone up through the years.  But there is only one problem with Rep. Chris Van Hollen presentation in Congress (see the Yahoo! News article linked to previously).

Regardless of which side of the debate you fall on, there was one falsehood on display at the House committee hearing on Tuesday. As The Washington Post noted, those hamburgers used in Van Hollen’s charts weren’t actually Big Macs.

That’s right.  With all the resources our representatives have at their disposal they could not even take the time to get a picture of the right hamburger.  Perhaps because the only beef our representatives eat is the tenderloin and wouldn’t be caught dead ‘slumming’ it at a McDonald’s.  Food the vast majority of Americans find delicious.  But then again, we’re not a bunch of pompous, arrogant, condescending prima donnas like our representatives, are we?

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Baseline Budgeting, Sequestration and Lies

Posted by PITHOCRATES - February 21st, 2013

Politics 101

The Sequester Automatic Spending Cuts equal about 2% of Current Federal Spending

If you heard the president speak recently we’re all doomed.  The automatic spending cuts in the sequestration he proposed and signed into law will take food away from children.  And lead to the collapse of society as we know it.  Ushering in the end of the world.  For he warned…

Border Patrol agents will see their hours reduced. FBI agents will be furloughed. Federal prosecutors will have to close cases and let criminals go. Air traffic controllers and airport security will see cutbacks, which means more delays at airports across the country. Thousands of teachers and educators will be laid off. Tens of thousands of parents will have to scramble to find child care for their kids. Hundreds of thousands of Americans will lose access to primary care and preventive care like flu vaccinations and cancer screenings.

President Obama gave this speech in front of some first responders.  Police officers.  And firefighters.  Always the first they threaten with layoffs when the government can’t raise taxes.

Amazing what $85 billion can buy today.  And if it can buy all that you’d think we wouldn’t have to spend $3.8 trillion at the federal level.  For if we can get all of that for a little over 2% of all federal spending it makes you wonder what else that 98% is buying.  What’s even more remarkable is that the federal government doesn’t even pay police officers, fire fighters or teachers.  We pay for these with property taxes.  At the city and county level.  Which the federal government cannot cut.  Because they don’t pay for these.  Yet the president says the sequester will even cut these.  Remarkable.

The Important Thing to understand about Baseline Budgeting is that Spending Cuts don’t Cut Spending

To understand sequestration you have to first understand baseline budgeting.  Which goes back to the Congressional Budget Act of 1974.  When we stopped being responsible.  And set government outlays to forever increase.  The baseline is the starting point for the following year’s budget.  And the baseline is last year’s outlays.  This year’s spending will be last year’s spending plus an additional amount based on inflation and population growth.

So spending always increases from year to year.  Automatically.  No one has to request an increase in appropriations.  And no one has to cut spending elsewhere for new spending someplace else.  Because all of last year’s spending is approved.  No matter how wasteful and pointless it may have been.  And on top of that spending there is new spending.  Always.  Guaranteeing that federal spending will always grow greater.  There will always be deficits.  And always a growing federal debt.

Now the important thing to understand about baseline budgeting is the meaning of ‘spending cuts’.  In a household if a family decides to cancel the family vacation because things are a little tight that is a spending cut in the real world.  Because it results in less spending.  But a cut in baseline budgeting doesn’t result in less spending.  For the only thing they cut is the amount they will increase future spending by.  For example, if spending for ‘X’ is scheduled to increase by $100 million but will only increase by $75 million that is a $25 million spending cut.  Even though spending will still increase by $75 million.

The President’s Sole Objective now is to destroy the Republican Party

President Nixon decoupled the dollar from gold in 1971.  Taking American off the gold standard.  Unleashing the inflation monster.  Allowing government to spend more.  As they paid for that additional spending by printing money.  And with the addition of baseline budgeting added in 1974 they spent more.  A lot more.  Total federal outlays from 1974 to 2008 increased on average 7.5% each year.  Total federal outlays in 2012 were approximately $3.8 trillion.  So the scheduled increase in spending (thanks to baseline budgeting) for 2013 is approximately $284.7 billion.

The spending cuts of the sequester are $85 billion.  Which President Obama says will usher in the end of the world as we know it.  But these ‘cuts’ are not cuts per se.  They are not like the cuts a household makes when they cancel the family vacation.  These are cuts that reduce the increase in future spending.  So instead of increasing future spending by $284.7 billion they will only increase by $199.7 billion.  Which is 2.3 times greater than the amount of the sequester.  Now President Obama said the sequester cuts would be the end of the world as we know it.  Even though total federal outlays will actually increase by an amount 2.3 times the sequester.  So one cannot but ask the question how will this sequester usher in the end of the world as we know it when we are actually increasing spending?

Because it is not the end of the world.  The president is lying.  Everything that we can pay for today we can still have after the sequester.  Because there are no real spending cuts.  We’re just increasing spending less than the original baseline projection.  Which means all the jobs we will lose will be future jobs.  But talking about losing future jobs doesn’t put the fear of God into people like telling them they won’t have any police or fire protection anymore.  Or telling them that their children’s teachers will lose their jobs.  You see, the president’s sole objective now is to destroy the Republican Party.  The only thing standing between the country and the liberal agenda he wants to impose on the country is the Republican opposition.  Which is why the sequester that he proposed and signed into law is now the fault of the Republicans.  This is the reason for all of this theater.  To get people to hate Republicans.  For why else would the president call a spending increase a spending cut?  If it wasn’t to demonize the people who keep demanding spending cuts?

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LESSONS LEARNED #76: “You know they’re governing against the will of the people when they play with the meaning of words to fool the people.” -Old Pithy

Posted by PITHOCRATES - July 28th, 2011

When is a Spending Cut an Increase in Spending? 

I have a riddle for you.  When is a spending cut an increase in spending?  “Well, that’s when…, hey, wait minute,” you say.  “That’s not a riddle.  That’s a paradox.  It’s like saying draw a square circle.  Or a name an objective journalist.  You just can’t do these things.  Just as a ‘cut’ can’t be an ‘increase’.  They are the very opposite of each other.”

Yeah, you would think.  Not that much of a riddle, then, is it?  For a true riddle is solvable.  Or should be.  Like, say, I have two coins that add up to thirty cents.  One of them isn’t a nickel.  What are they?  You’re a bit stymied, aren’t you.  Because a quarter and a nickel are the only two coins that add up to thirty cents.  So what’s the answer?  A quarter and a nickel.  “But you said one of them wasn’t a nickel,” you say.  “Right,” I say.  “One of them isn’t a nickel.  But the other one is.”

Now that’s a riddle.  Clever.  But solvable.  So now back to my first riddle.  When is a spending cut an increase in spending?  The answer is when you use baseline budgeting.

The Power of Baseline Budgeting

Politicians lie.  And they love to spend our money.  Put the two together and what do you get?  Baseline budgeting.   Which in a nutshell is government spending on autopilot.  Next year’s spending is this year’s spending plus a little extra.  That ‘little extra’ is the amount in all budget negotiations. 

For example, let’s say there is an item in the budget with a billion dollar budget amount this year.  That’s the baseline.  That’s where we start budgeting for next year.  Next year’s budget will be one billion dollars plus or minus that ‘extra amount’.

Typically they set this ‘extra amount’ to be equal to or greater than the rate of inflation.  And/or changes in legislation for that budgetary item.  Let’s say there is no change in the program legislation.  And they set the program’s budget so that next year’s budget equals this year’s budget plus 10%.  So this budget item will be $1 billion this year.  And $1.1 billion next year.  Projecting this out for 10 years, this will automatically add $1.36 billion to this budgetary item.

In Baseline Budgeting a Spending Cut is an Increase in Spending

A couple of things should jump out at you.  For one you see why government programs never die.  Once they add them to the budget they stay in the budget.  And grow.  Always.  Forever.  And the bigger the starting budget amount the bigger the program will grow over time.  Again, automatically.  So you can see why baseline budgeting has been a godsend to Big Government.  It guarantees the growth of government.  Now.  And forever.

Now let’s look at a spending cut.  Let’s say spending is getting out of control.  Deficits are growing.  (As hard as that is to imagine.)  So there’s a budget deal to ‘cut’ the budget by 2%.  But this is a 2% cut in baseline budgeting.  So we’re not reducing the budget amount.  We’re only reducing the amount above the baseline.  Spending was going to increase 10% the following year.  But with this 2% cut, that 10% increase becomes only an 8% increase. 

This is where the language play comes in.  The budget is increased by 8%.  But in baseline budgeting it is a 2% decrease.  Instead of increasing the budget by $100 million, they only increase it by $80 million.  The budget is increased by $80 million but they count it as a $20 million cut.  Because future spending was cut $20 million.  So it’s a cut even though no spending was actually cut.  Spending still increases.  Just not as much as previously budgeted.  And that’s the wonderful world of baseline budgeting.  Where a spending cut increases spending.

The Government Shutdown of 1995 and 1996 

When CBO takes these projections out to 10 years it makes these spending ‘cuts’ look draconian.  As originally budgeted, this item would have been increased by $1.36 billion over 10 years.  Because of the reduction in the size of future spending, it will only increase $1 billion over 10 years.  But instead of calling this a $1 billion increase (which it is), they will call it a draconian cut of $359 million (which it isn’t).  Instead of saying this budget item will increase by 99.9% (which it will), they say it will be cut by 26.4% (which it obviously won’t).  Now politicians understand this baseline doublespeak.  But the average American doesn’t.  They hear ‘26.4%’ cut in some program for single mothers or hungry children and think what vicious, heartless bastards Republicans are.

And this was the stage for the government shutdown of 1995 and 1996Bill Clinton campaigned as a moderate in the 1992 presidential election.  After winning, though, he governed as a tax and spend liberal.  The people expressed their disapproval and gave both houses of Congress to the Republicans in the 1994 midterm electionsNewt Gingrich became Speaker of the House.  Gingrich and the Republicans saw their election as a mandate to stop the out of control government spending.  And that’s what they were trying to do in the budget battles beginning in 1995.

The Republicans were trying to reduce the rate of growth of government spending per the will of the people.  Spending would still increase.  But at a slower rate.  Clinton, though, fought against the will of the people.  Using baseline budgeting newspeak to mislead the people.  Clinton called these reductions in growth rates draconian spending cuts.  Even though there were no real cuts in spending.  But being a tax and spend liberal, he wasn’t about to cut the rate of growth.  So they squared off in budget battle.  It all came to a head when the government hit its borrowing limit.  The Republicans tried to get some spending cuts in exchange for increasing the debt ceiling.  Clinton refused.  Unable to pay its bills, the government shutdown.  And the United States collapsed.

Baseline Budgeting helps you Govern against the Will of the People

Not really.  Few people even noticed the shutdown.  Everyone still went to work.  Collected their pay (unless you worked in a national park).  And life went on.  Social Security checks went out.  Interest on the national debt was paid.  The credit rating on U.S. sovereign debt remained AAA.  So there was little damage.  Clinton came out okay from the crisis.  Newt Gingrich not so well.  Many believe that this helped Clinton’s reelection in 1996.  Of course a lot of that had to do with Dick Morris.  Who pulled Clinton to the center.  And became the moderate the people thought they elected.

Clinton may have won reelection, but he paid a price.   Republicans still held both houses of Congress.  Who ultimately won in the long-run.  Their Balanced Budget Act of 1997 did cut the growth rate of government spending.  And then the dot-com boom of the late Nineties produced a windfall of tax revenue that, with the ‘spending cuts’ of the Balanced Budget Act, actually balanced the budget.  For a few years.  But it turned out that the dot-com boom was actually a dot-com bubble.  Thanks to a lot of irrational exuberance.  And the bubble popped.  With the resulting recession tax revenue fell.  And those balanced budgets were no more.

Unwilling to concede to the will of the people, Clinton played with the meaning of words.  Called a spending increase a spending cut.  Because he knew the average American didn’t understand baseline budgeting.  And politicians continue to this day scaring people about draconian spending cuts where there are no spending cuts.  Not in the world of baseline budgeting.  Which makes it easy for them to continue to govern against the will of the people.  As they continue to do.  As they always have done.  Because nothing is more important than growing government.  And spending as much of our money as possible before we get a chance to spend it ourselves.

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