FT217: “If you want to know what it was like living under an absolute monarchy just think of the IRS.” —Old Pithy

Posted by PITHOCRATES - April 11th, 2014

Fundamental Truth

Thomas Jefferson wanted to keep the New Federal Government and Money Apart

Thomas Jefferson did not trust government.  And he didn’t trust moneyed men.  Because when the two come together they cause nothing but trouble.  That’s why he hated and distrusted Alexander Hamilton.  Hamilton wanted a strong central government.  A central bank.  And an economic system favoring merchants and bankers.  With big city moneyed men financing the government in return for special favors.

This is why the nation’s capital isn’t in New York City.  It once was.  But one of the first deals the Hamilton and Jefferson camps made was the relocation of the nation’s capital to a mosquito-infested swamp on the Potomac River.  A long, long way from the moneyed men in New York City.  To try to keep the new federal government and money apart.  To restrict the influence of the moneyed men on the government.  And to prevent the government from having easy access to big money.

Why did Jefferson want to do this?  Well, they fought for their independence from Great Britain.  Which was a constitutional monarchy.  Where some in Parliament were no friends of British America.  And got the king to agree with them rather than the pro-British America faction in Parliament.  Ironically, the Americans got help in their War of Independence from France.  Which had an absolute monarchy.  Whose king ruled with no check on his power.  Both governments were in the big cities.  London.  And Paris.  Where the moneyed men were.  In the big cities.  Allowing these monarchies to do a whole lot of mischief all around the world.  And a fair amount of mischief inside their own countries.  Because the money and the government were in the same city.

Government + Money = Corruption

Great Britain and France were forever at war with each other.  And with other countries.  Requiring a lot of money.  Which they got from the moneyed men.  In return for special privileges that allowed them to get ever richer.  Of course the mischief grew greater as they fought a world war or two.  Requiring ever more money.  Which they got from, of course, taxing the rest of the people.  Even those who could little afford it.  And once this starts, once the government starts accumulating debt, that taxation will only get greater.

This is what Jefferson was worried about.  And why he so distrusted Hamilton.  The Founding Fathers were all gentlemen of the Enlightenment.  Disinterested public servants.  Honorable men who would never take advantage of their position in government for personal gain.  Because for these men honor was everything.  Some even fought duels to protect their honor.  As Hamilton did.  And died.  Washington, Adams, Hamilton, Jefferson, Madison, Jay and Franklin were men of exceptional integrity.  Men who could be trusted.  But here is where Hamilton and Jefferson differed.  Hamilton believed only men like them would ever enter government.  While Jefferson believed that government service would one day attract mostly scoundrels and knaves.

Of course, Jefferson was right.  For as the nation grew so did the size of government.  And the need for great big piles of money.  Which the moneyed men provided.  In exchange for special privileges.  Patronage.  Lucrative government contracts.  Etc.  Big piles of money flowed into Washington.  And favors flowed out from Washington.  With many a politician getting rich in the process of getting rich moneyed men richer.  Politicians who used their position in government for personal gain.  Corrupted politicians.  As government + money = corruption.  Which is why politicians always leave office richer than when they entered office.

Power + Corruption = Tyranny

This is how it started.  As the size of government grew corruption grew.  Just as Jefferson feared.  All that money flowing into Washington corrupted ever more politicians.  Who were not gentlemen of the Enlightenment.  But the scoundrels and knaves Jefferson knew would come.  Who used their position in government for personal gain.  Whose corruption grew so great it exploded federal spending.  So great that taxes from the moneyed men AND the middle class were unable to fund it.  So the taxation grew more aggressive.

The government created by the Founding Fathers had no income taxes.  They funded the few things the new national government did with tariffs for the most part.  People lived from day to day without any fear of the taxman.  The United States even did away with debtors’ prison.  Prison where people were sent who could not pay their debts.  A relic of the 19th century.  Sort of.  For there is one debt people can still go to prison for not paying.  Past-due taxes.  For the IRS can take everything you have and imprison you if you don’t pay your taxes.  And those taxes have grown great as of late.  As the tax code has grown convoluted.  Requiring businesses to hire armies of accountants and lawyers to comply with.  So the government can help the moneyed men who help the government.  In return for special privileges, of course.  Leaving the masses dreading April 15.  As they dread opening any letter from the IRS.

If you want to know what it was like living under an absolute monarchy just think of the IRS.  People fear the IRS.  Just as people feared the arbitrary power of an absolute monarchy.  A king could take your property and lock you away.  Just like the IRS.  And if you spoke out against the monarchy the king could make your life really unpleasant.  Just like the IRS.  During the 2012 election the IRS targeted conservative political groups to stifle their free speech.  Delayed their tax-exempt status approval.  And harassed them with costly tax audits.  And now their tyranny has extended to people in the middle class.  Who unbeknownst to them had a family member owe the federal government.  Years earlier.  Even a generation earlier.  And the IRS is arbitrarily seizing the tax refunds from these debtors’ distant relatives to pay these debts.  Even though they are in no way responsible for these debts.  And the government has no documentation for this debt.  Doesn’t matter.  Because they have the power to do this.  And these people are powerless to stop them.  Just like people living under an absolute monarchy were powerless to stop their king from doing anything to them.  And this is what Jefferson feared.  For after corruption comes tyranny.  For power + corruption = tyranny.  (Just look at every tin-pot dictator that has oppressed his people).  Which is why people fear the IRS.  And the federal government the IRS is beholden to.  Because they have become everything Jefferson feared they would.

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After the Civil War Men became less Manly and the Federal Government became more Progressive

Posted by PITHOCRATES - March 25th, 2014

History 101

(Originally published February 12th, 2013)

Prior to 1900 the Role of the Federal Government was primarily to Provide for the Common Defense

In 1800 the new federal government didn’t do a lot.  It spent only about $11 million (in nominal dollars).  With 55% going to defense.  About 31% went to pay interest on the war debt.  About 2% went to the postal service.  And about 12% went to other stuff.  Defense spending and interest on the war debt added up to about 86% of all federal outlays (see Government Spending Details).

In 1860, just before the Civil War, spending increased to $78 million (in nominal dollars).  Defense spending fell to 37%.  Interest spending fell to 4%.  And postal service spending rose to 19%.  While spending on other stuff rose to 40%.  Just over 60 years from the founding the federal government had changed.  It was less limited than the Founding Fathers designed it to be.

In 1900 spending increased to $628.6 million (in nominal dollars).  With defense spending coming in at 53%.  The postal service at 17%.  Interest went up to 6.4%.  And other spending fell to 24%.  Again, defense spending consumed over half of all federal spending.  For the role of the federal government was still primarily providing for the common defense.  Running the postal service.  Treating with other nations.  And trading with them.  As well as collecting duties and tariffs at our ports which paid for the federal government.  There was a lot of graft and patronage.  And long lines for government jobs.  Primarily because government was still somewhat limited.  With a limited number of government jobs to reward campaign contributors.  But that was about to change.

The Progressives expanded the Role of the Federal Government in our Lives and made it more Motherly

The American Civil War killed about 625,000 men.  With an 1860 population of 31,443,321 those deaths amounted to about 2% of the prewar population.  To put that into perspective if 2% of the U.S. population died in a war today that would be approximately 6.2 million people.  And to put that into perspective the total population of the state of Missouri is about 6 million people.  So the American Civil War claimed a very large percentage of the population.  Leaving a lot of children to grow up without a father.  Which had a profound impact on the size of the federal government.

Prior to this generation American men were some of the manliest men in the world.  Tough and rugged.  Who could live off of the land.  Completely self-sufficient.  These are the men that made America.  Men who fought and won our independence.  Who explored and settled the frontier.  Farmers who worked all day in the field.  Men who dug canals by hand.  And built our railroads.  Men who endured hardships and never complained.  Then came the Civil War generation.  Sons who lost their fathers.  And wives who lost their husbands, brothers, fathers and uncles.  Who lost all the men in their lives in that horrible war.  These women hated that war.  And manly displays of aggression.  For it was manly displays of aggression that led to fighting.  And war.  Having lost so much already they didn’t want to lose the only men they had left.  Their sons.  So they protected and nurtured them.  Taught them to shun violence.  To be kinder and softer.  To be not so tough or rugged.  To be less manly.  And when these men grew up they went into politics and started the progressive movement.

The federal government was no longer just to provide for the common defense.  To run the postal service.  To treat with other nations.  To trade with other nations.  Run our custom houses.  No.  Now the federal government grew to be kinder, softer and more motherly.  The progressives expanded the role of the federal government in our lives.  Woodrow Wilson wanted to turn the country into a quasi monarchy.  With a very strong executive branch that could rule against the wishes of Congress.  The Federal Reserve (America’s central bank) came into existence during Wilson’s presidency.  Which was going to end recessions forever.  Then came the Great Depression.  A crisis so good that FDR did not let it go to waste.  FDR expanded the size of the federal government.  Putting it on a path of permanent growth.  And it’s been growing ever since.

They decreased Defense Spending and increased Borrowings to increase Non-Defense Spending

The federal government grew beyond its Constitutional limits.  And the intent of the Founding Fathers.  Just as Thomas Jefferson feared.  It consolidated power just as all monarchies did.  And that was Jefferson’s fear.  Consolidation.  Seeing the states absorbed by a leviathan federal government.  Becoming the very thing the American colonists fought for independence from.  So that’s where the federal government changed.  In the early 20th Century.  Before that it spent money mostly for defense and a postal service.  Now it spends money for every social program under the sun.  There is great debate now in Washington about reducing the deficit.  With the Democrats blaming the deficit problems on too much defense spending.  And too little taxation on the rich.  But if you look at the history of federal spending since 1940 the numbers say otherwise (see Table 3.1—OUTLAYS BY SUPERFUNCTION AND FUNCTION: 1940–2017 and A History of Debt In The United States).

Federal Spending and Debt

As defense spending (including Veterans Benefits and Services) rose during World War II non-defense spending (Education, Training, Employment, Social Services, Health, Income Security, Social Security, Energy, Natural Resources, Environment, Commerce, Housing Credit, Transportation, Community and Regional Development, International Affairs, General Science, Space, Technology, Agriculture, Administration of Justice and General Government) fell as a percentage of total federal outlays.  And the federal debt rose (federal debt is in constant 2012 dollars).  After the war defense spending fell to 50% while the percentage of non-defense spending rose.  And the federal debt dropped slightly and remained relatively constant for about 30 years.

This tug of war between defense spending and non-defense spending is also called the guns vs. butter debate.  Where those in favor of spending money on guns at the federal level are more constructionists.  They want to follow the Constitution as the Founding Fathers wrote it.  While those who favor spending money on butter at the federal level want to want to buy more votes by giving away free stuff.

Defense spending ramped back up for the Korean War and the Cold War during the Fifties.  After the armistice ended hostilities in Korea defense spending began a long decline back to about 50% of all federal outlays.  Where it flattened out and rose slightly for the Vietnam War.  After America exited the Vietnam War defense spending entered a long decline where it dropped below 30% of all federal outlays.  Reagan’s defense spending raised defense spending back up to 30%.  After Reagan won the Cold War Clinton enjoyed the peace dividend and cut defense spending down to just below 20%.  After 9/11 Bush increased defense spending just above 20% of all federal outlays where it remains today.

During this time non-defense spending was basically the mirror of defense spending.  Showing that they decreased defense spending over time to increase non-defense spending.  But there wasn’t enough defense spending to cut so borrowing took off during the Reagan administration.  It leveled off during the Clinton administration as he enjoyed the peace dividend after the defeat of the Soviet Union in the Cold War.  Non-defense spending soared over 70% of all federal outlays during the Bush administration.  Requiring additional borrowings.  Then President Obama increased non-defense spending so great it resulted in record deficits.  Taking the federal debt to record highs.

So is defense spending the cause of our deficits?  No.  Defense spending as a percentage of all federal outlays is near a historical low.  While non-defense spending has soared to a record high.  As did our federal debt.  Clearly showing that the driving force behind our deficits and debt is non-defense spending.  Not defense spending.  Nor is it because we’re not taxing people enough.  We’re just spending too much.  In about 50 years non-defense spending rose from around 22% of all federal outlays to 74%.  An increase of 223%.  While defense spending fell from 76% to 22%.  A decline of 245%.  While the federal debt rose 619%.  And interest on the debt soared 24,904%.  The cost of favoring butter in the guns vs. butter debate.  The federal government has been gutting the main responsibility of the federal government, defense, to pay for something that didn’t enter the federal government until the 20th Century.  All that non-defense spending.  Which doesn’t even include the postal service today.

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Scotland wants to Keep the Pound in a (somewhat) Independent Scotland

Posted by PITHOCRATES - March 8th, 2014

Week in Review

The Greek crisis happened because there was a currency union without a political union.  The Eurozone set some pretty strict limits on deficits and debt to join.  Why?  Because people in the Eurozone would all be using the same Euro.  So they didn’t want one country running up deficits or their debt.  Because if they did they wouldn’t just be messing with their economy.  They would be messing with the entire Eurozone economy.

Well, that’s what Greece did.  They were spending so much money that they had large deficits that added to a large debt.  A euro-denominated debt.  Which meant a default would raise borrowing costs for other euro-denominated debt.  Raising the borrowing costs for the Eurozone.  So to avoid that required other Eurozone nations to help Greece with their debt.  Requiring higher taxes in the more responsible countries of the Eurozone to pay for the irresponsible spending of Greece.  Neither option (default or rescue package) being a popular option.  Especially for the Greek people.  For the rescue package came with strings.  And the big one was austerity.  They had to stop spending so much.  Which meant a lot of people lost some of their government benefits.  Making them very unhappy.  Leading to some rioting in the streets.

Had there been a political union this would not have happened.  For there would have been only one entity borrowing and spending Euros.  One entity taxing the Eurozone nations.  And one entity printing money.  Much like the federal government in the United States.  And London in the United Kingdom (see Scotland’s referendum: Salmond says independence will benefit whole UK posted 3/4/2014 on BBC News Scotland Politics).

An independent Scotland with a strong economy would benefit the whole of the UK, First Minister Alex Salmond has told a gathering in London…

“I believe George Osborne’s speech on sterling three weeks ago – his ‘sermon on the pound’ – will come to be seen as a monumental error.

“It encapsulates the diktats from on high which are not the strength of the Westminster elite, but rather their fundamental weakness.

“In contrast, we will seek to engage with the people of England on the case for progressive reform.”

But Tory MP Mr Mundell said that Mr Salmond was saying that a choice to leave the UK and become independent “means staying exactly the same as we are now”.

He added: “By definition, that simply cannot happen.

“No one should be under any illusion that voting for independence means getting independence, which means becoming a new country outside the UK.

If the Eurozone sovereign debt crisis has taught us anything it’s that a currency union without a political union is not a good thing.  An independent Scotland would eliminate the political union there is now.  And the reason why England does not want a currency union with an independent Scotland is because of what happened in the Eurozone.  It doesn’t work.  At least, it doesn’t work well.  Which begs the question why do they want independence but not complete independence (keeping the pound)?

One can only surmise so they can have more autonomy over their taxing, borrowing and, of course, spending.  Perhaps to spend more.  Creating larger deficits.  And a greater pound-denominated debt.  Which would be of great concern to other holders of pound-denominated debt.  The rest of the United Kingdom.

It is unlikely that independence would lead to a stronger Scottish economy.  Or a stronger UK economy.  If it did then the whole point of the Eurozone would be a lie.  To create a larger economic zone to compete with the large economic zone that is the United States.  Because bigger is better.  At least in terms of GDP.  The British Empire was bigger than the United Kingdom is now.  And the United Kingdom is bigger than a United Kingdom without Scotland.  And an independent Scotland would be smaller than all of the above.  So if you want to maximize GDP you would want to maximize the size of your economy.  Not shrink it.  Which leads one to believe that the reason for independence is something other than economic.  Because the UK is too English?  Perhaps.  Whatever the reason let’s just hope everything works out for the best.  For the United Kingdom did make the world a better place.  With great people like Adam Smith from Scotland.  And John Locke from England.  To name only two of the greats to come from the United Kingdom.

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The Austrian School of Economics

Posted by PITHOCRATES - March 3rd, 2014

Economics 101

(Originally published February 27th, 2012)

Because of the Unpredictable Human Element in all Economic Exchanges the Austrian School is more Laissez-Faire

Name some of the great inventions economists gave us.  The computer?  The Internet?  The cell phone?  The car?  The jumbo jet?  Television?  Air conditioning?  The automatic dishwasher?  No.  Amazingly, economists did not invent any of these brilliant inventions.  And economists didn’t predict any of these inventions.  Not a one.  Despite how brilliant they are.  Well, brilliant by their standard.  In their particular field.  For economists really aren’t that smart.  Their ‘expertise’ is in the realm of the social sciences.  The faux sciences where people try to quantify the unquantifiable.  Using mathematical equations to explain and predict human behavior.  Which is what economists do.  Especially Keynesian economists.  Who think they are smarter than people.  And markets.

But there is a school of economic thought that doesn’t believe we can quantify human activity.  The Austrian school.  Where Austrian economics began.  In Vienna.  Where the great Austrian economists gathered.  Carl Menger.  Ludwig von Mises.  And Friedrich Hayek.  To name a few.  Who understood that economics is the sum total of millions of people making individual human decisions.  Human being key.  And why we can’t reduce economics down to a set of mathematical equations.  Because you can’t quantify human behavior.  Contrary to what the Keynesians believe.  Which is why these two schools are at odds with each other.  With people even donning the personas of Keynes and Hayek to engage in economic debate.

Keynesian economics is more mainstream than the Austrian school.  Because it calls for the government to interfere with market forces.  To manipulate them.  To make markets produce different results from those they would have if left alone.  Something governments love to do.  Especially if it calls for taxing and spending.  Which Keynesian economics highly encourage.  To fix market ‘failures’.  And recessions.  By contrast, because of the unpredictable human element in all economic exchanges, the Austrian school is more laissez-faire.  They believe more in the separation of the government from things economic.  Economic exchanges are best left to the invisible hand.  What Adam Smith called the sum total of the millions of human decisions made by millions of people.  Who are maximizing their own economic well being.  And when we do we maximize the economic well being of the economy as a whole.  For the Austrian economist does not believe he or she is smarter than people.  Or markets.  Which is why an economist never gave us any brilliant invention.  Nor did their equations predict any inventor inventing a great invention.  And why economists have day jobs.  For if they were as brilliant and prophetic as they claim to be they could see into the future and know which stocks to buy to get rich so they could give up their day jobs.  When they’re able to do that we should start listening to them.  But not before.

Low Interest Rates cause Malinvestment and Speculation which puts Banks in Danger of Financial Collapse

Keynesian economics really took off with central banking.  And fractional reserve banking.  Monetary tools to control the money supply.  That in the Keynesian world was supposed to end business cycles and recessions as we knew them.  The Austrian school argues that using these monetary tools only distorts the business cycle.  And makes recessions worse.  Here’s how it works.  The central bank lowers interest rates by increasing the money supply (via open market transactions, lowering reserve requirements in fractional reserve banking or by printing money).  Lower interest rates encourage people to borrow money to buy houses, cars, kitchen appliances, home theater systems, etc.  This new economic activity encourages businesses to hire new workers to meet the new demand.  Ergo, recession over.  Simple math, right?  Only there’s a bit of a problem.  Some of our worst recessions have come during the era of Keynesian economics.  Including the worst recession of all time.  The Great Depression.  Which proves the Austrian point that the use of Keynesian policies to end recessions only makes recessions worse.  (Economists debate the causes of the Great Depression to this day.  Understanding the causes is not the point here.  The point is that it happened.  When recessions were supposed to be a thing of the past when using Keynesian policies.)

The problem is that these are not real economic expansions.  They’re artificial ones.  Created by cheap credit.  Which the central bank creates by forcing interest rates below actual market interest rates.  Which causes a whole host of problems.  In particular corrupting the banking system.  Banks offer interest rates to encourage people to save their money for future use (like retirement) instead of spending it in the here and now.  This is where savings (or investment capital) come from.  Banks pay depositors interest on their deposits.  And then loan out this money to others who need investment capital to start businesses.  To expand businesses.  To buy businesses.  Whatever.  They borrow money to invest so they can expand economic activity.  And make more profits.

But investment capital from savings is different from investment capital from an expansion of the money supply.  Because businesses will act as if the trend has shifted from consumption (spending now) to investment (spending later).  So they borrow to expand operations.  All because of the false signal of the artificially low interest rates.  They borrow money.  Over-invest.  And make bad investments.  Even speculate.  What Austrians call malinvestments.  But there was no shift from consumption to investment.  Savings haven’t increased.  In fact, with all those new loans on the books the banks see a shift in the other direction.  Because they have loaned out more money while the savings rate of their depositors did not change.  Which produced on their books a reduction in the net savings rate.  Leaving them more dangerously leveraged than before the credit expansion.  Also, those lower interest rates also decrease the interest rate on savings accounts.  Discouraging people from saving their money.  Which further reduces the savings rate of depositors.  Finally, those lower interest rates reduce the income stream on their loans.  Leaving them even more dangerously leveraged.  Putting them at risk of financial collapse should many of their loans go bad.

Keynesian Economics is more about Power whereas the Austrian School is more about Economics

These artificially low interest rates fuel malinvestment and speculation.  Cheap credit has everyone, flush with borrowed funds, bidding up prices (real estate, construction, machinery, raw material, etc.).  This alters the natural order of things.  The automatic pricing mechanism of the free market.  And reallocates resources to these higher prices.  Away from where the market would have otherwise directed them.  Creating great shortages and high prices in some areas.  And great surpluses of stuff no one wants to buy at any price in other areas.  Sort of like those Soviet stores full of stuff no one wanted to buy while people stood in lines for hours to buy toilet paper and soap.  (But not quite that bad.)  Then comes the day when all those investments don’t produce any returns.  Which leaves these businesses, investors and speculators with a lot of debt with no income stream to pay for it.  They drove up prices.  Created great asset bubbles.  Overbuilt their capacity.  Bought assets at such high prices that they’ll never realize a gain from them.  They know what’s coming next.  And in some darkened office someone pours a glass of scotch and murmurs, “My God, what have we done?”

The central bank may try to delay this day of reckoning.  By keeping interest rates low.  But that only allows asset bubbles to get bigger.  Making the inevitable correction more painful.  But eventually the central bank has to step in and raise interest rates.  Because all of that ‘bidding up of prices’ finally makes its way down to the consumer level.  And sparks off some nasty inflation.  So rates go up.  Credit becomes more expensive.  Often leaving businesses and speculators to try and refinance bad debt at higher rates.  Debt that has no income stream to pay for it.  Either forcing business to cut costs elsewhere.  Or file bankruptcy.  Which ripples through the banking system.  Causing a lot of those highly leveraged banks to fail with them.  Thus making the resulting recession far more painful and more long-lasting than necessary.  Thanks to Keynesian economics.  At least, according to the Austrian school.  And much of the last century of history.

The Austrian school believes the market should determine interest rates.  Not central bankers.  They’re not big fans of fractional reserve banking, either.  Which only empowers central bankers to cause all of their mischief.  Which is why Keynesians don’t like Austrians.  Because Keynesians, and politicians, like that power.  For they believe that they are smarter than the people making economic exchanges.  Smarter than the market.  And they just love having control over all of that money.  Which comes in pretty handy when playing politics.  Which is ultimately the goal of Keynesian economics.  Whereas the Austrian school is more about economics.

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Britain and Scotland disagree over Scottish Currency in an Independent Scotland

Posted by PITHOCRATES - February 16th, 2014

Week in Review

The Eurozone was a grand idea to make an economic zone that could compete against the United States.  A United States of Europe, if you will.  But the Eurozone has suffered a sovereign debt crisis that was unavoidable.  As many analysts have identified the problem causing the Eurozone all its sovereign debt woes.  The lack of a political union.

The solution they say is for member states to give up some of their sovereignty and allow a Eurozone government have more control.  Like the United States of America has.  Which means putting even stricter controls on member states when it comes to their spending.  Which, in turn, would limit their deficits.  And their borrowing needs.  Which brought on the sovereign debt crisis in the first place.  Excessive spending beyond their ability to pay for with taxes.  Normally not a problem for other countries when another country spends itself into oblivion.  Unless, of course, there is a currency union with that country.  Which makes their problems your problems.  Problems that are impossible to solve without a political union.

The Eurozone sovereign debt crisis illustrates that a currency union without a political union will not work.  Which makes the movement for Scottish independence very interesting (see Britain warns Scotland: Forget the pound if you walk away by Belinda Goldsmith, Reuters, posted 2/13/2014 on Yahoo! News).

Britain warned Scotland on Thursday it would have to give up the pound if Scots voted to end the 307-year-old union with England, declaring the currency could not be divided up “as if it were a CD collection” after a messy divorce…

The message was aimed at undermining the economic case for independence and one of the Scottish National Party’s (SNP) key proposals – that an independent Scotland would keep the pound…

The debate has intensified in recent weeks with Bank of England chief Mark Carney cautioning that a currency union would entail a surrender of some sovereignty…

The SNP [Scottish National Party] has indicated that if London prevented a currency union, an independent Scotland could refuse to take on a share of the UK’s 1.2 trillion pounds ($1.99 trillion) of government debt which Britain has promised to honor…

Osborne said the nationalist threat to walk away from its share of UK debt would mean punitively high interest rates for an independent Scotland and was an “empty threat”.

“In that scenario, international lenders would look at Scotland and see a fledgling country whose only credit history was one gigantic default,” Osborne said.

Currently there is a political union between Scotland and England.  The United Kingdom (UK).  And Scottish independence would go contrary to what some analysts say is needed to save the Eurozone.  Political unity.  The problem in the Eurozone is that no one nation wants to give up any of their sovereignty and have some distant power tell them what they can and cannot do.  The way some in Scotland feel about London.  That distant power that governs the United Kingdom.

The British pound is one of the world’s strongest currencies.  A product of the powers in London.  Because they have political control across the UK.  If they lose their political control over Scotland will it damage the British pound?  If the Eurozone is any measure of a currency union without a political union, yes.  So it will be interesting to see what happens between these two great nations.  Whose people made the world a better place.  People like the great Scotsman Adam Smith.  And the great Englishman John Locke.  To name just two.  So whatever happens let’s hope it’s in the best interest of both countries.  For countries everywhere enjoying economic freedom and human rights can thank these two countries for their contributions to the British Empire.  Which helped spread the best of Western Civilization around the world from the United States to Canada to Australia to Hong Kong.  And beyond.

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We are in the Worst Economic Recovery since that following the Great Depression because of Keynesian Economics

Posted by PITHOCRATES - February 15th, 2014

Week in Review

We are in the worst economic recovery since that following the Great Depression.  Why?  Because of Democrats.  Who are all Keynesians.  And that’s a big problem as all of our worst economic times were given to us by those who adhere dogmatically to Keynesian economics.  That school of economics that gave us the Great Depression.  The stagflation of the Seventies.  The dot-com bubble.  The bursting of the dot-com bubble.  And the dot-com recession.  As well as the subprime mortgage crisis and the Great Recession.  In all of these events the Keynesians in power followed Keynesian economic policies to avoid recessions.  And then to pull us out of recessions when their avoidance didn’t work.  Then doubling down on the things that didn’t work previously.  In particular artificially low interest rates.  Which have been around zero for the last 5 years.  And massive federal spending to stimulate the economy when the private sector wasn’t spending.  Two pillars of Keynesian economics.  Neither of which have done anything to help improve the worst economic recovery since that following the Great Depression.

This is the problem with all the ‘noted’ economists the government likes to cite.  They embrace poor economic principles.  Proven wrong over and over again.  They can come up with some impressive looking charts and graphs but their analysis is all wrong.  And the fact that we’re in the worst economic recovery since that following the Great Depression proves it better than any chart and graph.  They’re wrong.  And continue to be wrong.  Yet they provide the economic policies for our country.  Some of the greatest nonsense you will ever hear.  Things you wouldn’t do in your business.  Or in your personal life (see Student Loans Are A Drag On The Economy And Society by Josh Freedman posted 2/11/2014 on Forbes).

While loans are intended to expand college access to a broader population, the nature of risk that they entail also produces the opposite result. Low- and middle-income students worried about the consequences of taking out a loan will be more likely to decide that college attendance is not worth the risk…

Studies have found that high debt levels not only deter access at the beginning, but can also drive students away from completing college once they have already started… students who start college but do not graduate are stuck with loan repayments and no college degree. They still have to repay their loans but do not have the economic boost of a college degree to help them have enough income to cover this cost.

First of all, why is it when it comes to a college education no one ever demands that we lower the cost.  Like we do with greedy oil executives who keep the price of gasoline high.  Why is it no one attacks the greedy people in higher education that keep education so costly?

The problem is too many people are going to college for the wrong reason.  There is a reason why there is a list of the best party colleges every year.  Because a lot of these kids want to go to these schools.  Which explains why colleges in Colorado are seeing a spike in out-of-state applications.  Because these kids want to go to a college where they can party with legal marijuana.  And to make that partying easier they’re majoring in easier degree programs that the college assured these kids would provide them a comfortable living after graduation.  So they can get that profitable tuition out of these kids.  Often times paid for by these kids’ student loan borrowings.  So the colleges are misleading a lot of these kids to make a buck.  Leaving them saddled with a lot of student loan debt if they quit.  Or even more student loan debt if they stay in until graduation.  While getting a degree that can’t get them a job.

A second issue with increasing levels of student loan debt is the effect on the economy… Individuals with more student loan debt were less likely than individuals without student loan debt to purchase homes or cars.

Yes, having too much debt is a bad thing.  It reduces your disposable income.  Preventing you from purchasing a house or a car.  Yet these same economic advisors have no problem with raising taxes and devaluing the currency (i.e., printing money) to pay for all of the government’s stimulus spending.  Higher taxes reduce our paychecks.  And devaluing the currency raises real prices.  Reducing what we can buy with our smaller paychecks.  No, a Keynesian has no problem with debt at the federal level that affects everyone.  But student loan debt is just a terrible thing for those kids who dropped out of college or who didn’t get a degree that an employer could use.

In the wake of the financial crash, households have been trying to deleverage, or pay down their debt so they can have a healthier financial outlook, reduce the amount of their income that they use to service their debt, and begin investing and consuming again…

A look at the data suggests that student loans have slowed down households in the process of paying down debt. Since 2008 — the peak level of household debt — households lowered their levels every type of debt except student loan debt. Student loans have continued to grow throughout this process of deleveraging.

Of course the one thing missing from this analysis is the horrible economy President Obama’s Keynesian policies have given us.  Since he became president he has destroyed some 10,948,000 jobs.  Based on the number that were out of the labor force in the January 2014 BLS jobs report (91,455,000) and how many were out of the labor force when he entered office (80,507,000).  This is why people are struggling with debt levels.  There are no jobs.  If there was a robust economy flush with jobs people wouldn’t worry about taking on debt to invest in the future.  As long as they got a useful college degree in a high-tech economy.  And not something useless like women’s studies or poetry.

But aren’t people facing poor job prospects just taking out more loans to avoid working as baristas at coffee shops that drip the coffee super slowly for no apparent reason? This does not appear to be the case from the debt data. Student loan debt has grown at almost exactly the same rate since the crash as it had been the previous five years — i.e. steadily and without fail.

Student loan credit level has been steadily rising because the cost of a college education has been steadily rising.  Again, where is the outrage at our greedy educators getting rich by loading up these kids with student loan debt for a degree they can’t use in a high-tech economy?

…the loan system allows colleges to raise prices, which causes more students to take out loans. States, facing budget pressures, have also pulled back on investment, putting even more risk on students and further increasing the need for loans.

Again, where is the outrage at our greedy educators who keep raising tuition, forcing these kids to take out more and more student loan debt?

The risk and burdens that come from forcing students to take out debt up front and pay it back later is problematic from head to toe (tassel to hem, one might say). To create a better system of higher education, we need to look at alternatives to the current debt-financed model.

So the solution is for the taxpayer to foot the bill for these useless college degrees at these party colleges?  How is that going to solve any problem?  All that will do is allow more people to go to a college in Denver where they can get high for 4 years.  And then go to work as a barista at a coffee shop that requires no 4-year degree.  How does that make anything better?  Other than get more young people to vote Democrat.  Then again, perhaps that is the only objective of Keynesian economics.  Which is why those on the left embrace these failed policies with a religious fervor.  Because it helps them win elections.  Even while they’re destroying the economy.

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Is Chicago the Next Detroit?

Posted by PITHOCRATES - February 9th, 2014

Week in Review

Another big American city is having ‘Detroit’ problems.  And may soon follow Detroit down the Road to Serfdom.  The warning signs are all there.  But will this big American city—Chicago—listen?  Well, Chicago like Detroit is a big Democrat city.  So, no.  They will not heed the warning signs.  And will make things even worse by going more ‘Detroit’ (see Chicago Votes to Go the Way of Detroit by Michael Auslin posted 2/6/2014 on National Review).

Chicago mayor Rahm Emanuel is increasingly a textbook example of how far the Democratic party has moved to the left since Bill Clinton’s day.

Emanuel, who cut his teeth in Clinton’s administration, just presided over a $1.9 billion increase in Chicago’s debt, only months after Moody’s downgraded the city’s bond ratings three notches based on its growing and unsustainable spending and debt obligations…

Old-line Democratic cities, it seems, have learned nothing from Detroit’s collapse. Wishful thinking, ignorance of the parallels, and misleading excuses are the common defenses trotted out by city administrators who have no intention of having to deal with the mess they have either made or worsened. Indeed, Emanuel explicitly rejected the Detroit comparison, arguing that, unlike the Motor City, which was fatally dependent on the auto industry, Chicago has “an extremely diverse economy where no one sector is more than 13 percent of the employment.”

That may be true now, but surely Emanuel knows that Illinois’s and Chicago’s high tax rates are causing a business exodus. The Chicago Tribune recently highlighted ten major companies threatening to leave Illinois and the Chicago area, including the Chicago Board of Trade, U.S. Cellular, and CME Group, the world’s biggest futures exchange company. Part of Chicago’s problem is being stuck in Illinois, which has the country’s third-highest unemployment rate, a dysfunctional state government, and crippling taxes that have led over 30 companies to cross over the state line to Indiana recently. But Chicago’s own borrowing and profligate pension promises will continue to eat away at its credit rating and desirability of doing business there. All this will help hollow out the city and its tax base, and eventually could lead to an all-too-familiar downward spiral once the productive elements of the city decide the benefits of staying don’t outweigh the costs of moving.

Of course the reason why Emanuel is throwing Chicago into this black hole of debt is because he is a Democrat.  And that’s how Democrats win elections.  By buying votes.  With a lot of good-paying jobs in the public sector.  Jobs with generous benefits.  Especially in retirement.  Thanks to profligate pension promises.  Requiring a large portion of city taxes to go to pay these underfunded pension obligations.  That are so underfunded they need to borrow money in addition to those high taxes to meet those pension obligations.

This is exactly what happened in Detroit.  The massive cost of their public sector became harder and harder to pay for.  So they began to fleece businesses as much as they could.  With higher taxes, fines, fees, regulations, etc.  Which only chased businesses out.  Making their problem worse.  For they never cut their spending.  Even though half of their tax base had disappeared they still tried to spend as if their tax base never shrunk from its high in the Sixties.  And we see where that led to.  Bankruptcy.  Something Chicago is now flirting with.  And a fate they will share if they don’t cut back their spending to what they can support without fleecing businesses out of the city.

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Abortion is Good in the United States but Bad in China

Posted by PITHOCRATES - January 26th, 2014

Week in Review

Advanced economies with expansive welfare states are incurring large budget deficits and growing national debt.  Why?  Because of birth control.  And abortion.

These massive welfare states were implemented before the Sixties.  When people were having more babies than they are now.  Following World War II there was a baby boom.  Following the baby boom, though, there was a baby bust.  Fast forward to today and a lot of those baby boomers are leaving the workforce and collecting taxpayer-financed benefits in retirement.  While the smaller baby bust generation is paying the taxes for those benefits.  Resulting in less money going into the welfare state than is going out in benefits.  Giving those deficits.  And that growing national debt.

A declining birthrate is the death knell of a welfare state.  So if you want a healthy welfare state you need people to have more babies.  So each generation is bigger than the one before it.  So there is always more money going into the welfare state than is going out.  Allowing the state to pay for those generous benefits without going bankrupt.

So birth control and abortion can bankrupt advanced economies with generous welfare states.  But abortion can do something else (see One-Child Policy Is One Big Problem for China by Susan Scutti posted 1/23/2014 on Newsweek).

Late last year, China’s National People’s Congress eased the one-child policy. The government didn’t exactly admit it was a mistake; according to Chinese officials, the guidelines helped avert 400 million births and in so doing, accelerated modernization…

Enforcement of the one-child policy during the early 1980s was controversial not only in China but around the globe. Early stories emerging from the rural villages focused on coercive practices, including forced late-term abortions and involuntary sterilization, as well as the “neighborly” snitching on pregnant couples who dared to conceive a second child…

…In China, there are currently 32 million more boys under the age of 20 than girls.

Medical advancements and technology have played a key role in creating this surplus of boys. “The Chinese government contracted with GE to provide cart-mounted ultrasound that could be run on generators so that the most obscure village had access to fetal sex determination,” said Hudson. Given the ability to know the sex of their unborn children, many parents aborted female fetuses…

It appears that the outraged cries from within and without have been heard. The Chinese government has spent millions of dollars in recent years to fund research into the implications of this radical skew in gender population numbers.

Having more men than women has led to a lot of single men who want to marry but can’t.  As there are not enough women to match up with men.  Which has caused a lot of these men to turn to prostitutes.  Something human traffickers are more than happy to supply them with.  Sending women there from neighboring countries to work in the sex industry.

The world is outraged over the number of aborted female fetuses in China.  Including the American left.  Yet they have no problem with abortion.  Aborting female fetuses is wrong.  But aborting male AND female fetuses is fine.  Apparently.  As abortion is sacred to those on the left.  Just mention that you want to revisit Roe v. Wade and see them go apoplectic.  For that is settled law.  And anyone who wants to take away a woman’s right to have an abortion is waging a war on women.  While in China abortion itself is the war on women.  So on the one hand abortion is the great liberator of women (outside of China).  While on the other hand it is the great exterminator of women (inside of China).  So it’s both good and bad.  When you use the imaginary logic of liberals, that is.

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Alberta Health Services privatizes some Pensions to Cut Health Care Costs

Posted by PITHOCRATES - December 14th, 2013

Week in Review

Public sector pensions are pushing cities and states to bankruptcy.  The Detroit bankruptcy was due in large part to the staggering debt the city took on to meet current pension obligations (and health care cost for retirees).  While the pension fund remained woefully underfunded.  The Detroit bankruptcy may set a precedent for other debt-laden cities.  Who are drowning under the costs of their bloated public sectors.  As they’ve run out of room to raise taxes any further.  Which wasn’t a problem during the initial surge of public sector growth.  But now that those retirement rolls have grown so large cities and states have found those generous pensions to be just unsustainable.  Even in Canada (see Alberta Health Services privatizing Edmonton labs posted 12/11/2013 on CBC News).

Alberta Health Services is going ahead with its plan to privatize all of its diagnostic lab services in Edmonton…

The new lab will replace hospital labs operated by AHS and Covenant Health as well as the services provided by DynaLIFE…

No jobs will be lost and all staff positions will be protected by the new employer, AHS says.

The Health Sciences Association of Alberta represents about 75% of the 2,000 workers affected by the changeover.

Even though AHS claims wages won’t change, the union believes pensions will take a hit.

“This is going to a private provider,” said HSAA president Elisabeth Ballermann.

“The private provider by definition cannot participate in the pension plan that our public sector members are currently part of and that’s an enormous loss for those workers.”

A loss perhaps for 2000 workers.  But a win for the health care system in Alberta and the people who use it.  As the cost savings from privatizing these pension obligations will free up money to spend on health care.  Something to think about as Obamacare continues to rollout and destroy the private health insurance industry on its way to establishing national health care.  Nationalizing one-sixth of the U.S. economy.  Creating a windfall of new public sector workers to vote Democrat.  And unsustainable pension costs that will increase the cost of health care.  Which will lead to longer wait times and rationing.  As well as adding to the deficit and debt.  Which will, in time, lead to the same cost-cutting actions like Alberta is taking.  Or something a little more painful like they did in Detroit.

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Debt, Jobs and Criticism—Carter, Reagan, Clinton, Bush and Obama

Posted by PITHOCRATES - November 19th, 2013

History 101

The Democrats used the Power of the Purse to oppose the Reagan Agenda wherever they Could

The left hated President Reagan.  They called him just a “B” movie actor.  With many references to Bedtime for Bonzo.   With the implication that Reagan was a chimpanzee.  He was called stupid.  Senile.  And they said he hated the poor.  The usual stuff when it comes to Democrats calling the opposition names.  But as about as demeaning as it gets.  For the Democrats hated Ronald Reagan with a passion.  They may have hated him even more than George W. Bush.  Another president they called stupid.  Even making similar chimpanzee references.

They fought Reagan tooth and nail.  The Democrats held the House and they used the power of the purse to oppose the Reagan agenda wherever they could.  So Reagan had to compromise on some things.  Especially tax hikes.  But for the most part he kept his word to the American people.  And maintained high approval ratings.  Making it harder for the Democrats to block all of the Reagan agenda.  Which just made the left hate him more.

It’s funny the short memories Democrats have.  For any criticism of President Obama is met with charges of racism.  And because of that few criticize him.  Because no one wants to be called a racist.  Giving President Obama a free pass for most if his presidency.  Something neither George W. Bush nor Ronald Reagan ever enjoyed.  Yet the left says the right says the most vile things about President Obama.  Unprecedented things.  Like calling him a liar when he lied during the State of the Union Address.  Which must be different from saying ‘Bush lied people died’ over and over again.

President Obama is on Pace to add more Debt than Ronald Reagan

Among the terrible things the left said Ronald Reagan was doing was running up the debt to unsustainable levels.  And he did run up the debt.  About 99.4% during his 8 years.  Or about 12.4% a year.  Much of that spending, though, was to reverse the damage Jimmy Carter did to national defense.  He had gutted defense spending so much (cancelling bombers and missile programs) that the Soviet Union thought for the first time that they could win a nuclear war against the United States.  At least with Jimmy Carter as president.  They actually started drafting nuclear first-strike plans to replace the deterrence of mutually assured destruction (MAD).  Anyway, that spending led to the collapse of the Soviet Union.  Allowing the U.S. to win the Cold War.  Giving Bill Clinton a huge peace dividend during his presidency.

Bill Clinton wanted to nationalize health care.  And it didn’t go over well.  His big spending liberal agenda got neutered at the midterm elections.  As he angered the people so much the Republicans won both the House and Senate.  Forcing Clinton to the center.  Dropping any thoughts of national health care.  With Republicans even forcing welfare reform on him.  The Republican Revolution kept spending down.  And the debt only grew 13.6% during Clinton’s 8 years.  Or about 1.7% a year.

After the 9/11 terrorist attacks George W. Bush ramped up military spending.  For national security.  And two wars.  He also ramped up domestic spending.  Giving us Medicare Part D.  A program to subsidize the prescription drugs for Medicare recipients.  In the 8 years of the Bush presidency he added about 41.4% to the national debt.  About 5.2% a year.  Which sounded like a lot until President Obama came along.  A near trillion dollar stimulus bill that stimulated little.  Investments into failed solar power companies and electric car companies.  Automotive (i.e., union pension fund) bailouts.  In his 5 years in office Obama has raised the debt by 53.8%.  Or 10.8% each of his 5 years.  A little more than twice the rate of George W. Bush.  At this pace he will even add more debt than Ronald Reagan.  Adding up to 18.3% per year (over 8 years) if no one stops his spending.

Under President Obama the Gap between Black and White Unemployment grew Greater

President Obama said those ‘wise’ investments and higher taxes on those who could afford to pay a little more would generate economic activity.  His income redistribution would balance the playing field.  And raise the poor out of poverty.  While people everywhere celebrated the first black president.  For it would bring the races together.  This is why some on the right joked that President Obama was the messiah.  Because he was going to do all of that.  As well as make the ocean levels fall.  Black America especially loved the nation’s first black president.  As 95% of the black vote went to Obama in 2008.  Though the enthusiasm waned a bit in 2012.  As only 93% of the black vote went to Obama.  And how has black American done under the Obama economic policies.  Well, not as good as they did under the Bush economic policies (see archived data from Table A-2. Employment status of the civilian population by race, sex, and age in the Employment Situation Archived News Releases by the Bureau of Labor Statistics).

Unemplyment Rates by Race Age Sex 2003-2013 R2

The Great Recession officially ran from December 2007 to June 2009.  Which corresponds to the transition from George W. Bush to Barack Obama.  People often call the Great Recession the worst recession since the Great Depression.  Of course they say that primarily because the current economic recovery is the worst since that following the Great Depression.  And the reason for that is President Obama’s economic policies.

Unemployment was lower for everyone under Bush.  On average the unemployment rate for white/black men, women and 16-19 year olds under Bush was 4.2%/9.3%, 4.0%/8.2% and 14.7%/31.1%, respectively.  Under President Obama these numbers jumped to 7.8%/15.7%, 6.7%/12.2% and 21.8%/40.3%.  Which should give black America cause for concern.  For under President Obama the gap between black and white unemployment grew greater.  The gap between black and white men went from 5.1 to 7.9.  An increase of 55.6%.  The gap between black and white women went from 4.2 to 5.5.  An increase of 32.9%.  And the gap between black and white 16 to 19 year olds went from 16.5 to 18.5.  An increase of 12.7%.  So whatever President Obama is doing it isn’t helping America find work.  Especially black America.

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