(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).
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.
Tags: American Civil War, Civil War, Clinton, Cold War, debt, defense, defense spending, deficit, FDR, federal debt, federal government, federal outlays, Founding Fathers, interest, Jefferson, Korean War, manly men, motherly, non-defense spending, Postal Service, Progressive, Reagan, Vietnam War, Wilson
Week in Review
The problem in America these days is the mass ignorance of the people. Thanks to a public school system that does not educate but programs our children to be good Democrat voters. Higher education taken over by the leftist radicals of the Sixties that forever changed the curriculum to teach our children to distrust capitalism and love government. When controlled by Democrats, of course. And people who are for some reason respected for their economic prowess who are absolutely clueless on things economic (see The Daily Show Nails Why Healthcare Will Never Work As A Free Market by Christina Sterbenz posted 1/18/2014 on Business Insider).
Steven Brill, author of Time’s in-depth healthcare analysis “Bitter Pill,” appeared on The Daily Show this week to discuss his opinion of Obamacare.
Brill’s work exploded his career into a love-hate relationship with Obamacare, now leading to a book. Speaking with Jon Stewart, Brill certainly made his criticisms known but we also feel like he pinpointed exactly why healthcare just can’t work as a free market.
Brill told the story of a cancer patient forced to pay $13,700 out-of-pocket, up-front for transfusion of a drug. And that cost only constituted part of a greater $83,000 payment. Brill claims, however, the drug only cost the pharmaceutical company $300.
Stewart came back at Brill with the typical, conservative argument — creating a free market for healthcare where patients pick-and-choose their coverage to create competition and therefore, better options.
“Everyone says, well it’s a marketplace. That guy [the cancer patient] has no choice in buying that drug. His doctor told him, ‘This will save your life. You don’t take it, you’re gonna die,'” Brill responded.
He further argued free markets must host two aspects — a balance between buyers and sellers and secondly, knowledge — neither of which the current U.S. system offers.
“That cancer drug has a patent. That is a monopoly that the government has given the drug company. There is no other drug. That’s the drug,” Brill said.
Jon Stewart is a comedian. So one can almost forgive his ignorance. But you’d think a person writing for a publication with the word ‘business’ in its name would actually understand business. But the author hasn’t a clue. It’s not her fault. It’s because of the politicizing of our educational system. As her dual degrees in journalism and public affairs would have taught her squat about the classical, Austrian or the Chicago school of economics. Instead filling her head with Keynesian nonsense. The one economic school embraced by power-hungry governments everywhere that has a proven track record of failure. For it was Keynesian policies that gave us the Great Depression, the stagflation of the 1970s, the dot-com bubble and recession of the late 1990s/early 2000s and the Great Recession. Where massive government spending did not pull the economy out of recession but only made things worse.
Why does this pharmaceutical company have a patent? Or perhaps a better question would be why do we have this one cancer drug? Why is it that this one pharmaceutical company developed a cancer drug that works that no other pharmaceutical company or government developed? Because of that patent. The only reason they poured hundreds of millions of dollars into research and development and paid massive liability insurance premiums for taking a huge risk to put a drug onto the market that may harm or kill people. They do this on the CHANCE that they may develop at least one successful drug that will pay all of their past costs for this one drug, the costs for the countless drugs that failed AND a profit for their investors. Who took a huge risk investing, giving this pharmaceutical company the money to pay all of their employees over the years it took to come up with at least one drug that wasn’t a loser.
Does the author of this article work for free? No. Of course not. She has bills. As we all do. Even the people working at pharmaceutical companies. Who don’t work there for free. Even if the vast majority of their work produces nothing that their employer can sell their employer still pays them. Thanks to their investors who give them the money to do so until they can actually sell something. But their investors do this only because of the CHANCE that this pharmaceutical will develop that miracle drug that everyone wants. A miracle drug that would never come into being if it weren’t for investors who were willing to risk losing huge amounts of money. Something only rich investors can afford to do.
Health care worked as a free market before General Motors made it an employee benefit thanks to FDR’s ceiling on wages. Once people stopped paying for what they received all free market forces left the health care system. And costs began to rise. This whole “healthcare just can’t work as a free market” is a product of the dumbing down of our educational system. One that produces people who don’t know the difference between insurance and health care. Insurance protects our assets against a catastrophic and UNEXPECTED loss. Like when Lloyds of London started selling marine insurance at that coffee shop. Every shipper paid a small premium to protect against a POTENTIAL sinking and loss of cargo. A POTENTIAL financial loss. Not every ship sank, though. In fact, most ships did not. Which is why that little bit from everyone was able to pay the financial loss of the few that did. For the ships that didn’t sink the shippers paid every other cost they incurred to ship things across those perilous oceans.
This is how insurance works. Which isn’t how our current health insurance works. Where people don’t expect to pay for anything out-of-pocket. Not the unexpected catastrophic costs. Or the EXPECTED small costs that everyone can budget for in their personal lives. Childhood vaccinations, annual checkups, flu shots, childbirth, etc. Even the unexpected things that have a low cost. Like the stitches required when a child falls off of a bike. Things that would cost less than someone’s annual cellular costs. Or things that people can plan and save for (like a house, a car or a child). When we pay these things out-of-pocket there are market forces in play. For a doctor is not going to charge someone they’ve been seeing for years as much as a faceless insurance company. Even today some doctors will waive some fees to help some of their long-time patients during a time of financial hardship. Because there is a relationship between doctor and patient.
When we pay out-of-pocket doctors can’t charge as much. Because they need patients. If they charge too much their patients may find another good doctor that charges a little less. Perhaps a younger one trying to establish a practice. These are market forces. Just like there are everywhere else in the economy. Even a cancer patient requiring an expensive wonder drug would contribute to market forces if there was true insurance in our health care system. Cancer is an unexpected and catastrophic cost. But not everyone gets cancer. Everyone would pay a small fee to insure against a financial loss that can result from cancer. Where that little bit from everyone was able to pay the financial loss of the unfortunate few that receive a cancer diagnosis. Because only a few from a large pool would incur this financial loss insurers would compete against other insurers for this business. Just like they do to insure houses. And ships crossing perilous oceans.
Health care would work better in the free market. It doesn’t today because government changed that. Starting with FDR putting a ceiling on wages. Which forced employers to offer generous benefits to get the best workers to work for them when they couldn’t offer them more pay. This was the beginning. Now the health insurance industry is so bastardized that it doesn’t even resemble insurance anymore. It’s just a massive cost transfer from one group of people to another. Instead of a pooling of money to insure against financial risk. For the few unexpected and catastrophic costs we could not afford and budget for to pay out-of-pocket.
Tags: cancer drug, catastrophic, competition, Democrat, doctor, drug, educational system, FDR, financial loss, free market, Health Care, ignorance, insurance, investors, Jon Stewart, Keynesian, market forces, miracle drug, monopoly, Obamacare, out of pocket, patent, patient, pharmaceutical, pharmaceutical company, premiums, risk, unexpected
What doesn’t Kill You Makes you Stronger
They say what doesn’t kill you makes you stronger. And you can see that in military basic training. There have been some good movies showing what military basic training is like. Perhaps one of the best is Full Metal Jacket. Where Gunnery Sergeant Hartman played by R. Lee Ermey wasn’t acting as much as reliving his days as a Marine Corps drill instructor. Watching it you may come to hate Sergeant Hartman for he was pretty sadistic. But they didn’t design basic training to be a pleasant experience. They designed it to prepare recruits for the worst thing in the world. War.
In the miniseries Band of Brothers we follow Easy Company, 2nd Battalion, 506th Parachute Infantry Regiment, 101st Airborne Division, from basic training through D-Day and to the end of the war. Airborne training followed basic training. And was harder. Fewer people make it through airborne training than they do basic training. Ranger training is even harder. And fewer people make it through Ranger training. But airborne units and Rangers get the more difficult missions in combat. Because they can do more. For their training is more difficult. But it didn’t kill them. So it made them stronger.
Perhaps the most difficult military training is the Navy’s SEAL program. Where if they get a good class of recruits they may have 1 in 10 complete training. For it is that hard. In fact, some have died in training because they refused to give up. That’s why you will find few tougher than a Navy SEAL. They are tough. And they never quit. Which is why we give them the most difficult missions to complete. Missions that others would find impossible. Proving that the more brutal and difficult training is the stronger and more able we get.
During the 20th Century the American Left has tried to replace Rugged Individualism with the Nanny State
Those who founded this nation were tough people who worked hard and never gave up. They provided their own housing, food, clothing, etc. If they needed something they figured out how to provide it for themselves. They worked long hours. Survived brutal winters and hostile environments. But they never gave up. In fact, they raised families while doing all of this. With no help from government. As there were no government benefits. Yet they survived. Even prospered. For what didn’t kill them only made them stronger. These rugged individuals could do anything. And did. Which is why the United States is the leader of the free world. And the world’s number one economy. Because of that rugged individualism.
This is the way America was before the progressives came and softened us. And made rugged individualism somehow a bad thing. Beginning with Woodrow Wilson. Then FDR. LBJ. And then President Obama. A long line of American presidents who eschewed individualism. And thought in collective terms. When the Americans rejected socialism they gave us progressivism. When we rejected communism they gave us liberalism. The 20th century has been a tireless attempt for those on the left to replace rugged individualism with the nanny state. With their brilliant selves in power. Managing the economy. And making life fair. To undo the unfairness of laissez-faire capitalism. To make the United States better. And more according to their vision. Just like the socialists did. And the communists did. Yet no socialist or communist state became the leader of the free world. Or the world’s number one economy.
Those who lived in those socialist and communist utopias learned one thing. It was better to live someplace else. And their ultimate destination? The United States. Yet those on the left refused to believe that life was worse in those states where they put people first instead of profits. Like that unfeeling and cruel laissez-faire capitalism did. Which is why Wilson, FDR, LBJ and Obama worked tirelessly to move the United States in the direction of socialism and communism. Because they cared for the people. Or the power they got by making so many people dependent on government.
Someone receiving a Comfortable Level of Benefits will not be pushed to Leave their Comfort Zone
So is it about the power or that thing about helping people? What is it exactly that progressives/liberals really want? Well, we can look at the historical record to determine that. By looking at a point in time when America really changed. With the assassination of JFK. JFK’s chances of reelection weren’t great. Which is why he went to Texas. As he needed LBJ to deliver Texas to the Democrats. Instead of electoral victory, though, he fell to an assassin’s bullet. The great outpouring of grief and love for their fallen president exceeded the love he got before the assassination. The heightened emotions allowed LBJ to pass the many programs of the Great Society into law. In the memory of JFK. The greatest expansion of the federal government since FDR’s New Deal. Making the welfare state the largest yet. In an attempt to put people first. Not profits. In fact, LBJ declared a war on poverty. By providing government assistance to lift everyone out of poverty. And he championed civil rights. LBJ was going to make the United States that utopia socialists and communists always dreamt about. For everyone. Blacks. And whites. Especially blacks. Who were suffering great discrimination then. But things would be different for them. Starting in the Sixties everything was going to get better. And how are blacks doing today? Well, if you use employment as a measure, not good (see Table A-2. Employment status of the civilian population by race, sex, and age by the Bureau of Labor Statistics)
The federal government has done a lot for blacks. More than any other minority group. Affirmative Action was to correct all past wrongs. By making it easier to get into college. And to get a job. Yet we don’t see that when looking at the unemployment numbers. In fact, the group the government does the least for—white men—is doing the best. They don’t need any help because they won life’s lottery. By being born white. According to liberals. So there’s no Affirmative Action for them. Yet they have half the unemployment rate black men have. While white women have half the unemployment rate black women have. And white 16-19 year olds have half the unemployment rate black 16-19 year olds have. Brilliant progressives/liberals have been trying to make life better for blacks for 50 some years now and have failed. Despite this blacks have never been more loyal to them. Which answers the question what the Democrats care more for. The people? Or the power the people give them. By getting them dependent on government. Who they tell over and over again that they would have nothing if it weren’t for them. The Democrats. For blacks just can’t make it on their own without help. Even though after receiving all of that help blacks are suffering the greatest levels of unemployment. Clearly something isn’t right here. And it goes back to that thing that made America great. Rugged individualism.
You know what the difference is between a white SEAL and a black SEAL? Nothing. Blacks have equality of opportunity in SEAL training. And that’s all they need. They don’t need special treatment. And the Navy doesn’t tell them that they do. All they need is the strength. And the will. Which will be there if you don’t keep telling people that they can’t succeed without the government’s help. Because if you keep doing that they will come to believe that. And they will keep voting Democrat. Looking for help. Whereas those who face adversity and overcome it grow stronger. Because what doesn’t kill them makes them stronger.
Handing out government benefits will make people like you. But it won’t get them a job. For someone receiving a comfortable level of benefits will not be pushed to leave their comfort zone. And while they languish in their comfort zone they will not gain work experience. Allowing others to gain experience and move up in their careers. Making them more employable. While those with less experience and less education are less employable. And that’s what Democrats do when they buy votes with government benefits. Make people less employable. And blacks have been especially useful to them. As they can stoke the fires of racism to drive blacks even further to the Democrat Party. By calling Republicans racists. Because they want to take away their benefits. Just because they hate black people. Or so goes the Democrat line. So they keep voting Democrat. While losing their rugged individualism. And suffering higher levels of unemployment than everyone else.
Tags: affirmative action, airborne, basic training, comfort zone, Communism, Communist, Democrats, FDR, federal government, government benefits, individualism, JFK, laissez faire capitalism, LBJ, liberalism, liberals, nanny state, Navy SEAL, President Obama, Progressives, progressivism, put people first, Ranger, rugged individualism, SEAL, socialism, socialist, unemployment, welfare state, what doesn't kill you makes you stronger, Wilson
Ford brought the Price of Cars down and Paid his Workers more without Tariff Protection
Andrew Carnegie grew a steel empire in the late 19th century. With technological innovation. He made the steel industry better. Making steel better. Less costly. And more plentiful. Carnegie’s steel built America’s skylines. Allowing our buildings to reach the sky. And Carnegie brought the price of steel down without tariff protection.
John D. Rockefeller saved the whales. By making kerosene cheap and plentiful. Replacing whale oil pretty much forever. Then found a use for another refined petroleum product. Something they once threw away. Gasoline. Which turned out to be a great automotive fuel. It’s so great that we use it still today. Rockefeller made gasoline so cheap and plentiful that he put the competition out of business. He was making gasoline so cheap that his competition went to the government to break up Standard Oil. So his competition didn’t have to sell at his low prices. And Rockefeller made gasoline so inexpensive and so plentiful without tariff protection.
Henry Ford built cars on the first moving assembly line. Greatly bringing the cost of the car down. Auto factories have fixed costs that they recover in the price of the car. The more cars a factory can make in a day allows them to distribute those fixed costs over more cars. Bringing the cost of the car down. Allowing Henry Ford to do the unprecedented and pay his workers $5 a day. Allowing his workers to buy the cars they assembled. And Ford brought the price of cars down and paid his workers more without tariff protection.
George Westinghouse decreased the Cost of Electric Power without Tariff Protection
George Westinghouse gave us AC power. Thanks to his brilliant engineer. Nikola Tesla. Who battled his former employer, Thomas Edison, in the Current Wars. Edison wanted to wire the country with his DC power. Putting his DC generators throughout American cities. While Westinghouse and Tesla wanted to build fewer plants and send their AC power over greater distances. Greatly decreasing the cost of electric power. Westinghouse won the Current Wars. And Westinghouse did that without tariff protection.
After losing out on a military contract for a large military transport jet Boeing regrouped and took their failed design and converted it into a jet airliner. The Boeing 747. Which dominated long-haul routes. Having the range to go almost anywhere without refueling. And being able to pack so many people into a single airplane that the cost per person to fly was affordable to almost anyone that wanted to fly. And Boeing did this without tariff protection.
Bill Gates became a billionaire thanks to his software. Beginning with DOS. Then Windows. He dominated the PC operating system market. And saw the potential of the Internet. Bundling his browser program, Internet Explorer, with his operating system. Giving it away for free. Consumers loved it. But his competition didn’t. As they saw a fall in sales for their Internet browser programs. With some of their past customers preferring to use the free Internet Explorer instead of buying another program. Making IE the most popular Internet browser on the market. And Gates did this without tariff protection.
Tariff Protection cost American Industries Years of Innovation and Cost Cutting Efficiencies
Carnegie Steel became U.S. Steel. Which grew to be the nation’s largest steel company. Carnegie had opposed unions to keep the cost of his steel down. U.S. Steel had a contentious relationship with labor. During the Great Depression U.S. Steel unionized. But there was little love between labor and management. There were a lot of strikes. And a lot of costly union contracts. Which raised the price of U.S. manufactured steel. Opening the door for less costly foreign imports. Which poured into the country. Taking a lot of business away from domestic steel makers. Making it more difficult to honor those costly union contracts. Which led the U.S. steel producers to ask the government for tariff protection. To raise the price of the imported steel so steel consumers would not have a less costly alternative.
During World War II FDR was printing so much money to pay for both the New Deal and the war the FDR administration was worried about inflation. So they put ceilings on what employers could pay their employees. With jobs paying the same it was difficult to attract the best employees. Because you couldn’t offer more pay. So General Motors started offering benefits. Health care. And pensions. Agreeing to very generous union contracts. Raising the price of cars. Which wasn’t a problem until the imports hit our shores. Then those union contracts became difficult to honor. Which led the U.S. auto makers to ask the government for tariff protection. To raise the price of those imported cars so Americans would not have a less costly alternative.
These two industries received their tariffs. And other government protections. Allowing them to continue with business as usual. Even though business as usual no longer worked. So while the foreign steel producers and auto makers advanced their industries to further increase quality and lower their costs the protected U.S. companies did not. Because they didn’t have to. For thanks to the government they didn’t have to please their customers. As the government simply forced people to be their customers. For awhile, at least. The foreign products became better and better such that the tariff protection couldn’t make the higher quality imports costly enough to keep them less attractive than the inferior American goods. With a lot of people even paying more for the better quality imports. Losing years of innovation and cost cutting efficiencies due to their tariff protection these American industries that once dominated the world became shells of their former selves. With General Motors and Chrysler having to ask the government for a bailout because of the health care and pension costs bankrupting them. Something Carnegie, Rockefeller, Ford, Westinghouse, Boeing or Gates never had to ask.
Tags: AC power, Boeing, business as usual, car, Carnegie, Current Wars, efficiencies, electric power, FDR, Ford, gasoline, Gates, General Motors, imports, innovation, Internet browser, Internet Explorer, jet, Rockefeller, steel, tariff, tariff protection, Tesla, U.S. Steel, union contracts, unions, Westinghouse
Week in Review
When it comes to liberal icons they don’t come bigger than FDR to the left. He is their god. His New Deal began the transformation of the country into the quasi social democracy it is today. And because of this they will never find any wrong with what the man did. And he did what the left would call some pretty horrible things. Like the internment of Japanese Americans during World War II. And this (see To crack down on gays in the Navy, FDR created a special unit that performed oral sex on men in order to out the gay ones posted 9/1/2013 on OMG Facts).
It’s incredibly ironic, but prior to his presidency, FDR signed off on a secret Navy unit to seek out homosexuals…
It later became known as the Newport Scandal. Newport, Rhode Island’s Naval Base had numerous complaints of sexual solicitation by males around the base. So, FDR’s Navy unit sought to entrap these men. Surprisingly, the unit was ordered to perform oral sex on suspected homosexuals on base, including a clergyman! Once the story broke, FDR claimed memory lapse and never admitted to signing off on the operation.
Apparently liberal icon FDR didn’t care for the homosexuals. He would have opposed having gays serving openly in the military. And he would have opposed Don’t Ask Don’t Tell. Because he hated homosexuals and didn’t want them serving in the military. Apparently. Based on his entrapment policy of seducing gay men. Even men who might only have thought about being gay. What a mean, horrible man FDR was.
But the left worships him. And will discount these things as being a part of those times. Just like Senator Byrd being a member of the KKK. It was just something that Democrats did back then. It didn’t mean that they were racists. And the fact that FDR persecuted homosexuals doesn’t mean that he was anti-gay. But if Paula Dean should say the ‘n’ word back in those times, well, it’s obvious that she’s a racist today. Because she’s not advancing the liberal agenda. So she should never be forgiven. And should burn in hell. Apparently.
Tags: FDR, gay men, gays, homosexuals, liberal icon, navy, racist
We do a Cost-Benefit Analysis before making a Buying Decision
We make decisions everyday comparing costs to benefits. Any time we go to a store. Any time we make a buying decision. We ask ourselves how much are we willing to pay to enjoy the benefit of the thing we’re thinking about buying.
For example, people love boats. For there is nothing like being on a boat on a beautiful summer’s day. Especially if you’re a guy. Because bikini-clad women love sunning themselves on boats. You could even say that a boat is a magnet for beautiful, bikini-clad women. But how much are you willing to spend to enjoy that benefit? Being around beautiful, bikini-clad women? For owning a boat is very costly. Especially if you live in a northern clime with a short boating season.
First of all, buying a boat is very costly. It could determine the size of your house or where you live if you’re making a boat payment. Then there’s insurance. Fuel costs. Transportation costs. And inconvenience. Of the time, effort and wear & tear on your vehicle to haul your boat to and from the water. Or you can spend even more money to dock your boat at a marina. And dry-store it over the winter.
Young, Healthy People do not buy Health Insurance because it has no Immediate Benefit for the High Cost
It takes a pretty healthy income to enjoy the benefit of boat ownership. Something business owners can afford. Because they earn a decent income. But they earn that income because they put in a lot of hours. So many that their boat may sit in their yard for most of the summer. Or in storage. So while a boat owner continues to pay the costs for the benefits of boat ownership he or she rarely enjoys those benefits. Especially if they get married. And the spouse gets seasick.
In an honest cost-benefit analysis few would buy a boat other than a business that needs a boat to do their business. Like a fishing boat. Or a harbor tug. For these people there is a financial benefit that comes from boat ownership. Income. Unlike earning enough money to be able to afford a boat these people use their boat to provide an income. Making the cost-benefit analysis completely different. Instead of rationalizing the value of having fun they look at the revenue their boat will be able to provide. And if it’s greater than the costs of owning that boat they will go ahead and buy that boat.
Sometimes we make these decisions based on impulse or desire instead of objective analysis. Buying a more costly car when a less costly one would do. But there are times when some go too far in the other direction. Deciding not to buy something because they can’t see or enjoy the benefit. Such as car insurance. Or health insurance. Things that have no benefit unless something bad happens. And a lot of those going happily through life see no reason to spend a lot of money for something that brings them nothing good now.
Obamacare and the Individual Mandate make Generational Theft Law
This is why health insurance is so expensive. Because FDR broke the health care system. At least, the money-side of it. When the FDR administration put in wage caps General Motors started offering a health insurance benefit. This got around FDR’s wage cap and allowed them to offer more to the best workers to get them to come and work at General Motors. And ever since we looked at health insurance as an employer benefit now instead of another cost in our everyday life. Like food and housing.
After this our employment decisions changed. People chose a job not based on what they would enjoy doing in life but by the size of their health care benefit. The owner-provided health insurance. At first the sky was the limit. Because the U.S. automotive industry could charge whatever they wanted for a car. And the price of cars began to climb to cover those very generous benefit packages. Undoing what Henry Ford had done. As the benefits pushed the cost of a car higher and higher it soon was not available to the average working man. As they could only be afforded by the upper middle class and above. Until competition entered and provided a lower-cost car that the less wealthy could afford. As the U.S. automotive industry lost market share their sales declined. So a smaller revenue had to pay for a growing number of pension and health care expenses of retired GM workers agreed to during the glory years. Who were living longer into retirement than originally assumed. And consuming a lot of medical services in those later years. All paid for by the health insurance companies. Causing health insurance costs to soar.
Young people are healthy people. They rarely go to the doctor. So when it comes to buying very expensive health insurance (to pay for the older generation consuming the bulk of health care services) they choose not to. Because of an objective cost-benefit analysis. Young, healthy people, today, are getting little benefit from paying an enormous amount of money for a health insurance policy. Their parent’s generation (or their grandparent’s) is getting the benefit. So they make a rational decision and NOT buy health insurance. Which raises the cost of health insurance for those who do. For today health insurance is not insurance. It’s generational theft. Stealing from the young to pay for the old because of FDR’s decision that made health care an employee benefit. And an aging population makes it worse. Enter Obamacare and the individual mandate. Which made this generational theft law. Forcing the young to pay for the old against their will. Leaving little for them on their meager incomes to support or start a family of their own. Preventing them from buying a new car. While the thought of owning a boat is now a distant dream.
Tags: benefit, benefit packages, buying decision, cost, cost-benefit analysis, employer benefit, expense, FDR, General Motors, generational theft, generous benefit packages, Health Care, health insurance, health insurance benefit, income, individual mandate, Obamacare, objective, revenue
The Mechanization of the Farm began a Migration from the Country to the Cities
Before the Industrial Revolution (1760-1830ish) if you worked you most probably farmed. For most everyone from the dawn of civilization on the Nile, the Euphrates & Tigris, the Indus and the Yangtze farmed. To produce food for the civilization for the good times. And food surpluses for the bad times. For having enough to eat was never a sure thing. And surviving the winter was a challenge.
What early civilizations needed were a lot of people to work the land. For large-scale farming could produce large harvests. Enough to feed everyone during the good times. During the winters. And even the occasional drought. But it could be a risky game to play. Because a lot of people to work the land also meant a lot of mouths to feed. Which meant everyone worked the fields. Men. Women. And children. Anyone who ate worked. As they did on the family farm. Which is why they had large families. For the more children they had the more land they could work. Allowing them to eat during the good times. During the winters. The occasional drought. While having large food surpluses to sell. Allowing them to build wealth. Just like the landowners in the Old World. The aristocracy. Only instead of peasants working the land it was family.
But with the Industrial Revolution came change. The steam engine mechanized farming. Allowing fewer people to produce more. Also, steam power allowed factories away from rivers. As they no longer needed moving water to turn a waterwheel. So factories filled our cities. Creating a lot of jobs. This and the mechanization of the farm requiring fewer hands to work the land began a migration. Of people from the country. To the cities.
The Migration from the Family Farm to the Big City got People used to Bigger Government and Taxes
The world modernized in the 1800s. Food was never more plentiful. Allowing more people to leave the farm. And think about other things. Like electrical engineering. Nikola Tesla gave us AC electric power. And the AC electric motor. Changing manufacturing forever. Those little spinning machines filled our factories. And operated the machines in those factories. Everything we ever made we made better and more efficiently thanks to the electric motor. Allowing us to manufacture more than ever. And manufacture more complex things. Factories grew. With many levels of manufacturing contained within. Packing more people than ever in these factories.
The common perception of this industrial world is of sweatshops. Child labor. Soot and smoke casting a pall over overcrowded cities. Where people packed into overcrowded housing. Thanks to that migration from the family farm to the big city factories. Which changed things. Instead of people raising a large family on a large farm where there was plenty of room and plenty of food to eat these families were living in cramped apartments in the crowded city. And they had to pay for the food they ate. And the more mouths they had to feed the more money it took. This was a big change. Whereas on the farm a large family meant more food. And more wealth. In the city, though, more children meant less food for everyone else to eat. And more poverty.
The growth of cities also caused another change. When people lived on scattered farms they didn’t need any government services. But in the crowded cities they did. Homes had utilities. And sanitation. Cities also had streets. Which the city needed to maintain. Eventually there was street lighting. And traffic signals. Police departments. Fire departments. Schools. And teachers. All of these things cost money. And we paid for them with taxes. Getting people used to bigger government. And bigger taxes. Then the progressives entered government at the federal level. Who wanted government to do at the federal level what it did at the local level. Be mother to the people. Instead of just doing those things the Constitution said it should do.
A Falling Fertility Rate forced the Government to go into ‘World War’ Debt just to pay for Social Security and Medicare
The fertility rate (the number of children a woman has during her child-bearing days) fell all during the 1800s. As large families went from being wealth producers on the farm to poverty inducers in the cities. While federal debt from the American Revolutionary War fell during the early 1800s. The debt fell because there wasn’t a lot of federal spending. So it wasn’t hard to retire that debt. But that federal restraint didn’t last. There was a spike in federal debt (as a percent of GDP) following American Civil War (1861-1865) as they had to borrow heavily to pay for that war. But after the war the debt level did not fall back to pre-war levels. A trend that would continue. As we can see here.
There was another spike in federal debt following World War I (1917-1918). But the debt level never fell back to pre-war levels. Then the Great Depression and the New Deal (1930s) began another spike in Federal debt. That World War II took to record highs. And once again after the war the federal debt did not fall back to pre-war levels. Then came President Reagan. Who had the guts to call communism what it was. A failed economic system that oppressed its people and was the greatest killer of the 20th century. To push the Soviet Union into the ‘ash heap of history’ Reagan forced them to spend more than they could afford. By ramping up defense spending to a level the Soviets couldn’t match. Which ultimately won the Cold War (1947-1991, with Reagan delivering the knockout blow during his presidency (1981-1989) ). But federal debt levels, once again, did not fall back to pre-war levels. In fact, despite the peace dividend President Clinton inherited he still raised federal spending. Just at a reduced rate than it was during the Cold War. President Bush gave us Medicare Part D (drugs for seniors). Then came 9/11. And the War on Terror. Then President Obama. Who despite ending the Iraq War had the greatest budget deficits of any president. As he spent more than any other president. As he tried to transform the country into a European social democracy. Sending out debt soaring to new heights.
FDR gave us Social Security in 1935. At the tail-end of a long decline in the fertility rate. Promising great benefits to future retirees. Which LBJ added to during the Sixties with his Great Society. During the post-war baby boom. Perhaps assuming that increasing fertility rate would provide a lot of new taxpayers in the future when the weight of all these new government programs (FDR’s and LBJ’s) would be felt. But then two things happened that they didn’t quite plan on. The birth control pill and abortion created a baby bust following the baby boom. Worse, thanks to modern medicine people were living longer into retirement. Consuming more Social Security and Medicare benefits than anyone had ever imagined. And just when the full force of those baby boomers was going to hit there were going to be fewer taxpayers around to pay for it. Thanks to that baby bust. More retirees paid for by fewer taxpayers. A recipe for disaster. Which is why debt soared towards World War II highs following the Cold War. Even though there was no world war. Because the cost of all those government benefits far exceeded the tax revenue. Forcing the government to go into ‘world war’ debt just to pay for Social Security. Medicare. And everything else the federal government was providing so they could play mother to the American people.
Tags: baby boom, baby bust, electric motor, electric power, factories, family farm., farmed, farming, FDR, federal debt, fertility rate, food, food surpluses, Industrial Revolution, large families, LBJ, manufacturing, mechanization, Medicare, Reagan, Social Security, Soviet, taxes
Week in Review
FDR was pro-union. He was all for tearing businesses a new one when it came to collective bargaining. For he didn’t like those royalists. Greedy businessmen who put their profits ahead of their employees. While making them work in horrible conditions. For long hours. For little pay. The greedy little profit whores they were. But FDR drew a line when it came to government workers. Because taxpayers pay government workers. And it just didn’t look right for government unions to call the taxpayers greedy little profit whores. So FDR opposed unionizing government workers. Because you just can’t have government workers tear the taxpayers a new one to enrich themselves at the taxpayers’ expense. Something was just wrong with that. But that was then. This is now (see San Francisco Bart rail strike ends as contract extended posted 7/5/2013 on BBC News US and Canada).
San Francisco Bay’s transit rail service has resumed after two labour unions called off a strike.
The four-day walkout came to an end after both sides in the Bay Area Rapid Transit (Bart) dispute agreed to a one-month extension of the current contract while bargaining continues…
Talks between the two sides had resumed as early as Tuesday, but key sticking points include salaries, as well as employee costs for pensions and healthcare…
Bart has said workers from the two unions earn on average $71,000 (£47,500) in base salary and $11,000 in overtime annually…
The president of one of the striking unions, the Amalgamated Transit Union, struck a defiant tone.
“We’re not going to let them hijack us and the riding public,” Antonette Bryant said, as she apologised to commuters for the disruption.
So these union workers make $88,000 between base salary and overtime. Being that train schedules are pretty fixed so must that overtime. That’s well above the median household income of about $50,000. Yet on top of that $88,000 they get pension and health care benefits. And some pretty nice ones at that. Which is why everyone wants to get into these unions. While most Americans have to put something aside for their retirement from that median household income. As well as pay a percentage of their health insurance premium. Unlike public sector unions. Who just have to go on strike to get the city to increase taxes on the taxpayers. So the city can afford to pay those generous pay and benefit packages.
Hijack the riding public? By opposing these union demands management is trying to prevent the unions from hijacking the riding public. For when you add in the pension and health care benefits they’re already making about twice what the riding public is earning. Making it difficult to call the taxpayers the greedy little profit whores here. Yet they are because they won’t consent to pay more. Which they can do by only having less in their personal lives. Which certainly isn’t fair. Especially considering that a lot of these people don’t even ride the damn trains.
Tags: Bart, FDR, government workers, greedy little profit whores, healthcare, pensions, San Francisco, taxpayers, union
Excessive Federal Taxes reduce Disposable Income which reduces New Economic Activity
The key to economic growth is disposable income. The more disposable income people have the more economic activity they will create. So the key to a healthy economy is maximizing disposable income. And we can do that in a few ways. First of all we need jobs. And we can create more jobs with fewer costly regulations. And lower taxes. If we make it less costly to hire people businesses will hire more people. Which they aren’t doing right now. Primarily because of Obamacare. Which is so costly to businesses that they’ve frozen new hiring. And are pushing some full time employees to part-time. As well as investing in capital equipment wherever they can. Replacing people with machines. Because machines don’t incur Obamacare costs, taxes or penalties.
For those lucky few who haven’t been replaced by machines they can earn some disposable income. Depending on their skill level. A low-skilled person who never graduated from high school cannot earn as much disposable income as a thoracic surgeon. So if you want stuff. And you want to stimulate the economy. Become a thoracic surgeon. Or something else that takes years of college and years of on the job training. And hundreds of thousands of dollars of student loan debt.
But earning a good income isn’t enough. Because from that income we must pay an enormous amount of taxes. Greatly reducing our disposable income. Some of the taxes we can see. Such as those itemized on our paycheck stubs. Federal and state income taxes. And Social Security and Medicare taxes. But there are a lot of taxes we don’t see. Such as excise taxes on the things we buy from gasoline to liquor to cigarettes. And then there are property taxes. Sales taxes. And the list goes on. All of which take a bite out of our disposable income. Siphoning away real economic activity over the years as the federal government added new taxes. And increased the tax rates of the old taxes.
The Federal Government came up with the Withholding Tax to Prevent an all out Tax Revolt
When the Founding Fathers ratified the Constitution there weren’t many taxes. Mostly custom duties and tariffs. Which was enough to fund the limited government they created. But ever since the Founding some in the federal government have been trying to destroy what the Founding Fathers created. And replace it with what they fought so long to get rid of. A very large government that reaches into all parts of our life. Like a monarchy. Where those in the federal government belong to a new aristocracy. Who are more equal than everyone else. And live a far, far better life. If you don’t believe this just check out property values around Washington DC.
With the American Civil War killing a generation of fathers a lot of boys grew up with over protective and doting mothers. When these boys came of age and entered politics they weren’t as manly as their father’s generation was. Because they grew up without fathers to teach them to hunt and fight. Instead, they grew up with mothers who taught them to be more nurturing. Giving us the progressive movement. Woodrow Wilson gave us a permanent federal income tax. And tried to expand the federal government to be more of a monarchy with a powerful executive that can govern against the will of Congress. And the people. After World War I we returned to normalcy. And Warren Harding and Calvin Coolidge gave us the Roaring Twenties. And the modern world. Then Herbert Hoover and other progressives caused the Great Depression. With a crisis too good to let go to waste FDR picked up where Woodrow Wilson left off. Exploding the size and reach of the federal government. And the great surge in federal taxes began. Over the years they added more and more. Such as these (see Table 2.1—RECEIPTS BY SOURCE: 1934–2017).
Some of these you are no doubt familiar with. The biggest bite is the individual income tax. Something most of us have received our W-2s for and have just prepared our federal income tax returns. Or are about to. Dreading it. Unless we’re getting a refund. Those who owe money will probably take their sweet time. As they hate writing a check to the federal government. Which is why the federal government came up with the withholding tax. For if people had to write a check for the full amount of their federal income taxes each year there would be an all out tax revolt. And probably a lot more imprisonment for people not paying their federal taxes. For no one has that kind of money sitting around. Which is why the government takes it from you before you can spend it yourself.
Excessive Federal Spending requires ever Higher Taxation and ever more Borrowing to Feed
The big debate in Washington now is the sequester. And the automatic cuts of the sequester. Which were proposed by President Obama. Which Congress wrote into a bill. And the president signed into law. In hopes that Republicans and Democrats would come together and find a way to reduce the record high deficit. The Republicans want to do the obvious. Cut the spending that caused the record deficit. Democrats want to do what they always want to do. Raise taxes. Saying that we don’t have a spending problem. That the four years of trillion dollar deficits isn’t because we’re spending too much. It’s because we’re not taxing enough to pay for that spending. That rich people aren’t paying their fair share. But that’s not what you see when you look at the numbers.
These taxes are identified in the above table. As government spending grew so did taxes. In particular personal income taxes which provide the majority of federal tax revenues. Which exploded after LBJ’s Great Society added a lot of new federal spending. And after President Nixon decoupled the dollar from gold in 1971. Unleashing inflation. Note that personal income taxes are greater than corporate income taxes. That’s because there are more people than corporations. For example, Siemens AG is an international corporation that employs about 360,000 people. Who all pay personal income taxes. After personal income taxes comes old-age and survivors insurance. Otherwise known as Social Security. And all of these taxes have continued to grow. Taking a bigger and bigger bite out of disposable incomes. Putting a drag on new economic activity. Note that the only falls in federal tax revenue were due to two Democrat-caused recessions. Bill Clinton’s dot-com bubble burst causing a bad recession in 2000. And his subprime mortgage lending bubble he started with his Policy Statement on Discrimination in Lending burst causing a bad recession in 2007. Apart from these, though, the pattern has been more spending. Not less. Which would suggest that we do have a spending problem.
Also included on this chart is the federal debt. Note how it spiked up during World War II. Then settled down at a constant rate for about 30 years. Until LBJ’s Great Society spending increased federal spending. But these massive new taxes weren’t enough. For that’s when the big deficits started. Adding on to a growing federal debt. With the only decline in this growth coming during President Clinton’s presidency. President Clinton’s dot-com boom (before the bubble burst), the peace dividend from President Reagan winning the Cold War, the Asian financial crisis and Japan’s Lost Decade all helped the American economy shower the treasury with cash. Putting the nation into a surplus for a year or so. But that didn’t last. As federal spending continued to outpace tax revenue. Culminating with President Obama’s trillion dollar deficits. With federal tax revenue at the highest since President Bush’s record high just before Clinton’s subprime mortgage bubble burst into the subprime mortgage crisis. And the Great Recession.
So yes, Virginia, we have a spending problem. A spending that requires ever higher taxation and ever more borrowing to feed. Taking an ever bigger chunk out of disposable incomes. Leaving less and less for new economic growth. Explaining why the economy has never recovered from the Great Recession. For President Obama’s policies only increase taxes and the cost of doing business. And do nothing to create disposable income.
Tags: Bill Clinton, bubble, debt, deficit, disposable income, excise taxes, FDR, federal debt, federal government, federal spending, Founding Fathers, Great Recession, Great Society, income, income taxes, jobs, LBJ, monarchy, Obamacare, personal income taxes, Progressive, recession, regulations, sequester, Social Security, spending, spending problem, subprime mortgage, tax revenue, tax revolt, taxes, withholding tax, Woodrow Wilson
Social Security is going Bankrupt because of an Aging Population, Inflation and Untrustworthy Politicians
Social Security introduced the era of Big Government. When the Roosevelt administration passed it into law it faced fierce opposition. For it wasn’t the job of the federal government to provide a pension. If it was the Founding Fathers would have included it in the Constitution. But they didn’t. Thanks to the Great Depression, though, a serious crisis FDR didn’t let go to waste, FDR was able to change America. By taking the federal government beyond the limits of the Constitution.
The fear was that it would grow into a massive program requiring more and more taxes to support it. Which the FDR administration refuted in a 1936 pamphlet (see The 1936 Government Pamphlet on Social Security).
…beginning in 1949, twelve years from now, you and your employer will each pay 3 cents on each dollar you earn, up to $3,000 a year. That is the most you will ever pay.
Of course, that wasn’t true. It was either a lie. Or a disbelief that anyone would ever decouple the dollar from gold. Or wishful thinking that we can trust politicians. Whatever the reason the Social Security tax rate is a long way from that 3% today. And the maximum earnings amount is a lot higher than $3,000. But despite the tax rate and the maximum earnings amount soaring from these promised lows it’s still not enough. For Social Security is struggling to avoid bankruptcy in the near future. Because it has become a massive program requiring more and more taxes to support it.
Social Security is suffering from three major problems. The first is an aging population (fewer people entering the work force to pay for the greater number of people leaving the workforce). The second is inflation. And the third is that politicians manage it. Who just can’t control themselves around big piles of money.
The Social Security Surplus increased in the Nineties thanks to the Peace Dividend, Japan’s Lost Decade and the Dot-Com Boom
Social Security is off-budget. Employers and employees pay into the program to provide for the program’s benefits. These are dedicated taxes. They are only to pay for Social Security benefits. That is why it is off-budget. They don’t mingle Social Security taxes with all the other taxes the government collects. To pay for all the things in the federal budget. Technically, those taxes are supposed to go into a retirement account that grows with interest. And this big, growing pile of money is supposed to pay the benefits. But in reality it doesn’t work this way. The government collects taxes. From these taxes they pay current benefits. And anything left over, the Social Security surplus, goes into the Social Security Trust Fund. We can see this graphically if we plot receipts, outlays and the surplus (see Table 2.1—RECEIPTS BY SOURCE: 1934–2017 and Table 3.1—OUTLAYS BY SUPERFUNCTION AND FUNCTION: 1940–2017 at FISCAL YEAR 2013 HISTORICAL TABLES).
For the first 30 years or so of this program it hardly made a dent in our lives. Small amounts were going in. Small amounts were going out. And small amounts were going into the trust fund. Then a lot of people started retiring. Just as birth control and abortion changed the family size. And President Nixon decoupled the dollar from gold. Allowing them to print money like never before. Which, of course, depreciated the dollar. This is why receipts and outlays started trending up after 1971 (when Nixon decoupled the dollar from gold). To get a better look let’s zoom in and look at the years from 1970-2012.
The Seventies were a horrible time economically. As the government went all in with Keynesian economics. Which resulted with high inflation and high unemployment. And stagnant economic growth. Stagflation. And Social Security was in trouble. Receipts were greater than outlays. But not by very much. Receipts and outlays may have been trending up but the surplus was pretty flat. Until President Reagan and the Democrat Congress fixed Social Security to avoid bankruptcy. After 1983 receipts trended up greater than outlays. Which caused the surplus to trend up. Thus saving Social Security. For awhile. Now let’s zoom in further to the years 1990-2012 to see what happened in the last two decades.
President Reagan won the Cold War by spending more on defense than the Soviets could ever match. At least not without starving her people to death. And the Strategic Defense Initiative (aka Star Wars) was the straw that broke the camel’s back. In 1991 the Soviet Union was no more. Creating a huge peace dividend for President Clinton. Which coincided with the dot-com boom. And Japan’s Lost Decade (Japan’s economic woes were America’s prosperity). Making the Nineties a very good time economically. And that healthy economic activity translated into a nice uptrend in the Social Security surplus. However, low interest rates and irrational exuberance fed the dot-com boom. It was not real economic growth. It was a bubble. And when it burst it gave George W. Bush one painful recession at the start of his presidency. Which was compounded by the tragedy of 9/11. Causing a fall in economic activity. Which caused Social Security receipts to fall. While outlays continued to grow. Causing a decline in the Social Security surplus. Once again cuts in tax rates restored economic activity. And the Social Security surplus. Which continued until another bubble burst. This one was a housing bubble. Caused by President Clinton with his Policy Statement on Discrimination in Lending. Where his justice department pressured lenders to qualify the unqualified. And when the housing bubble burst into the Subprime Mortgage Crisis giving us the Great Recession receipts fell while outlays increased. Sending the surplus into a freefall.
Social Security is Doomed to Fail because you just can’t Trust Politicians around Great Big Piles of Money
There is both a Social Security tax rate. And a maximum amount of income to tax. Both of which they have had to increase to keep up with inflation. To make up for that aging population. And to offset the corrupting influence of politicians around big piles of money. And contrary to that 1936 pamphlet those tax rates started rising early. And often (see Historical Social Security Tax Rates).
The Social Security tax rate rose as high as 12.4%. Which is a 313% increase from the maximum amount guaranteed in that 1936 pamphlet. And this great upward trend began in the Fifties. Continuing through the Sixties. In fact most of the increases came before Nixon decoupled the dollar from gold. Showing what a horrible job the government actuaries did in crunching the numbers for this program. As it turned into exactly what the opponents said it would. A massive program requiring more and more taxes to support it. And President Obama reducing the tax rate from 12.4% to 10.4% didn’t help the surplus any. Or the solvency of Social Security.
While the tax rate began rising in the Fifties the maximum taxable earnings amount didn’t. This amount was pretty flat and able to produce a surplus until 1971. When President Nixon unleashed the inflation monster by decoupling the dollar from gold. And the only way to produce a surplus after that was by continuously increasing the maximum earnings amount. Further proving what a horrible job the government actuaries did in crunching the numbers for this program. But why are they projecting Social Security will go bankrupt after raising both the tax rate and the maximum taxable earnings amount? For despite all of the ups and downs there has been a surplus throughout the life of the program. Some seventy years of a surplus and the miracle of compound interest should have built up quite a nest egg in the Social Security Trust Fund. But it hasn’t. Why? Well, we can see what it could have been. If we take each year’s surplus (starting in 1940) and add it to an account earning interest compounded annually at an interest rate of 3% through 1971 and 6% after 1971 (to account for inflation) it would look something like this.
Note that these amounts are in millions of dollars. So at the end of 2012 the ending balance in the trust fund would be $16.5 trillion. Which is large enough to wipe out the entire federal debt. From 1980 through 2008 the surplus grew on average 8% each year. If we assume this growth through 2050 that would take the trust fund to $184.5 trillion. In 2075 it would be $960.9 trillion. In 2076 it would be $1.03 quadrillion. Or $1,027.3 trillion. With this phenomenal growth based on a realistic 6% interest rate why is Social Security going bankrupt?
Because there isn’t a big pile of money in the Social Security Trust Fund earning compound interest. The money goes in. And the government takes it out. Leaving behind treasury securities. IOUs. They raid the Social Security trust fund to pay for other on-budget government expenditures. With the off-budget surplus. Hiding the true size of the federal deficit. And putting Social Security on the path to bankruptcy. Because you can’t loan money to yourself. You can only take money meant for one thing and spend it on another. Leaving that first thing unpaid. This is Social Security. And why it was doomed to fail from the beginning. Because you just can’t trust politicians around great big piles of money.
Tags: aging population, Bankruptcy, big piles of money, bubble, decouple the dollar from gold, dot-com boom, FDR, federal government, housing bubble, inflation, lost decade, maximum earnings amount, off-budget, outlays, politicians, President Clinton, President Nixon, President Reagan, receipts, Roosevelt, Social Security, Social Security benefits, Social Security Surplus, Social Security tax rate, Social Security taxes, Social Security Trust Fund, surplus
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