FT167: “When we lived more austerely there was no need for painful austerity to cure a bloated government.” —Old Pithy

Posted by PITHOCRATES - April 26th, 2013

Fundamental Truth

Wise Men in Governments can Do Anything but Pay for their Nanny States

Economics changed in the early Twentieth Century.  America once again had a central bank.  Progressives were expanding the role of government.  And a new economist entered the scene that the progressives just loved.  For he was a macroeconomist who said government should have an active role in the economy.  A role where government tweaked the economy to make it better.  Stronger.  While avoiding the painful corrections on the downside of a business cycle.  Something laissez-faire capitalism caused.  And could not prevent.  But if wise men in government had the power to tweak the private sector economy they could.  At least this is what the progressives and Keynesian economists thought.

That economist was, of course, John Maynard Keynes.  Who rewrote the book on economics.  And what really excited the progressives was the chapter on spending an economy out of a recession.  Now there were two ways to increase spending in an economy.  You can cut tax rates so consumers have bigger paychecks.  Or the government can spend money that they borrow or print.  The former doesn’t need any government intervention into the private sector economy.  While the latter requires those wise men in government to reach deep into that economy.  Guess which way governments choose to increase spending.  Here’s a hint.  It ain’t the one where they just sit on the sidelines.

Governments changed in the Twentieth Century.  Socialism swept through Europe.  And left social democracies in its wake.  Not quite socialism.  But pretty close.  It was the rise of the nanny state.  Cradle to grave government benefits.  A lot of free stuff.  Including pensions.  Health care.  College educations.  And a lot of government jobs in ever expanding government bureaucracies.  Where wise men in government made everything better for the people living in these nanny states.  And armed with their new Keynesian economic policies there was nothing they couldn’t do.  Except pay for their nanny states.

According to John Maynard Keynes raising Tax Rates reduces New Economic Activity

The problem with a nanny state is things change.  People have fewer babies.  Health care and medicines improve.  Increasing lifespans.  You put this together and you get an aging population.  The death knell of a nanny state.  For when those wise men in government set up all of those generous government benefits they assumed things would continue the way they were.  People would continue to have the same amount of babies.  And we would continue to die just about the time we retired.  Giving us an expanding population of new workers entering the workforce.  While fewer people left the workforce and quickly died.  So the tax base would grow.  And always be larger than those consuming those taxes.  In other words, a Ponzi scheme.

But then change came.  With the Sixties came birth control and abortion.  And we all of a sudden started having fewer babies.  While at the same time advances in medicine was increasing our lifespans.  Which flipped the pyramid upside down.  Fewer people were entering the workforce than were leaving it.  And those leaving it were living a lot longer into retirement.  Consuming record amounts of tax money.  More than the tax base could provide.  Leading to deficit spending.  And growing national debt.

Now remember those two ways to increase spending in the economy?  You either cut tax rates.  Or the government borrows and spends.  So if cutting tax rates will generate new economic activity (i.e., new spending in the economy) what will a tax increase do?  It will decrease spending in the economy.  And reduce new economic activity.  Which caused a problem for these nanny states with aging populations.  As the price tag on their nanny state benefits eventually grew greater than their tax revenue’s ability to pay for it.  So they increased tax rates.  Which reduced economic activity.  And with less economic activity to tax their increase in tax rates actually decreased tax revenue.  Forcing them to run greater deficits.  Which added to their national debts.  Increasing the interest they paid on their debt.  Which left less money to pay for those generous benefits.

President Obama’s Non-Defense Spending caused a Huge Spike in the National Debt not seen since World War II

It’s a vicious cycle.  And eventually you reach a tipping point.  As debts grow larger some start to question the ability of a government to ever repay their debt.  Making it risky to loan them any more money.  Which forces these countries with huge debts to pay higher interest rates on their government bonds.  Which leaves less money to pay for those generous benefits.  While their populations continue to age.  Taking you to that tipping point.  Like many countries in the Eurozone who could no longer borrow money to pay for their nanny states.  Who had to turn to the European Union, the European Central Bank and the International Monetary Fund for emergency loans.  Which did provide those emergency loans.  Under the condition that they cut spending.  Money in exchange for austerity.  Something that just galls those Keynesian economists.  For despite all of their financial woes coming from having too much debt they still believe these governments should spend their way out of their recessions.  And never mind about the deficits.  Or their burgeoning debts.

But these Keynesians are missing a very important and obvious point.  The problem these nations have is due to their inability to borrow money.  Which means they would NOT have a problem if they didn’t need to borrow money.  So austerity will work.  Because it will decrease the amount of money they need to borrow.  Allowing their tax revenue to pay for their spending needs.  Without excessive tax rates that reduce economic activity.  Making the nanny state the source of all their problems.  For had these nations never became social democracies in the first place they never would have had crushing debt levels that cause sovereign debt crises.  But they did.  And their populations aged.  Making it a matter of time before their Ponzi schemes failed.  Something no nation with a growing nanny state and an aging population can avoid.  Even the United States.  Who kept true to their limited government roots for about 100 years.   Then came the progressives.  The central bank.  And Keynesian economics.  Putting the Americans on the same path as the Europeans (see US Federal Debt As Percent Of GDP).

Debt as Percent of GDP and Wars R2

With the end of the Revolutionary War they diligently paid down their war debt.  Which was pretty much the entire federal debt then.  As the federal government was as limited as it could get.  Then came the War of 1812 and the debt grew.  After the war it fell to virtually nothing.  Then it soared to pay for the Civil War.  Which changed the country.  The country was bigger.  Connected by a transcontinental railroad.  And other internal improvements.  Which prevented the debt from falling back down to pre-war levels.  Then it shot up to pay for World War I.  After WWI the Roaring Twenties replaced progressivism and quickly brought the debt down again.  Then Herbert Hoover brought back progressivism and killed the Roaring Twenties.  FDR turned a bad recession into the Great Depression.  By following all of that Keynesian advice to spend the nation out of recession.  From the man himself.  Keynes.  The massive deficit spending of the New Deal raised the debt higher than it was during World War I.  Changing the country again.  Introducing a state pension.  Social Security.  A Ponzi scheme that would struggle once the population started aging.

Then came World War II and the federal debt soared to its highest levels.  After the war a long decline in the debt followed.  At the end of that decline was the Vietnam War.  And LBJ’s Great Society.  Which arrested the fall in the debt.  Its lowest point since the Great Depression.  Which was about as large as the debt during the Civil War and World War I.  Showing the growth in non-defense spending.  Then came Reagan’s surge in defense spending to win the Cold War.  Once the Americans won the Cold War the debt began to fall again.  Until the Islamist terrorist attacks on 9/11.  Halting the fall in the debt as the War on Terror replaced the Cold War.  Then came the Great Recession.  And President Obama.  Whose non-defense spending caused a huge spike in the national debt.  Taking it to a level not seen since World War II.  When an entire world was at war.  But this debt is not from defense spending.  It’s from an expanded nanny state.  As President Obama takes America into the direction of European socialism.  And unsustainable spending.  Which can end in only but one way.  Austerity.  Painful austerity.  Not like the discomfort of the sequester cuts that only were cuts in the rate of future growth.  But real cuts.  Like in Greece.

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FT153: “The two things you need to pass liberal policies are uninformed people and heightened emotions.” —Old Pithy

Posted by PITHOCRATES - January 18th, 2013

Fundamental Truth

The Girls in the “In” Crowd focus on their Appearance and try to be the Kind of Girl the Boys in the “In” Crowd Want

After puberty the attractive people start noticing each other.  Boys become jocks and get physically fit.  Girls start dieting and develop eating disorders.  The jocks tend to come from more well-to-do families because it’s expensive to participate in sports.  So not only are the jocks physically attractive to the girls they also have the nicer stuff.  The attractive girls try to date the good looking boys with the nicer stuff.  And they do.  When these attractive people get together they form the “In” crowd.

I’m in with the “In” crowd
I go where the “In” crowd goes
I’m in with the “In” crowd
And I know what the “In” crowd knows

The “In” crowd attends the best parties.  They wear the finest clothes.  They have the latest toys.  Everyone wants to be part of the “In” crowd.  But most only see it from the outside.  For they aren’t attractive enough or rich enough to be in with the “In” crowd.

We breeze up and down the street
We get respect from the people we meet
They make way day or night
They know the “In” crowd is out of sight

The girls in the “In” crowd focus on their appearance.  And try to be the kind of girl the boys in the “In” crowd want.  The blonde stereotype.  Young and dumb.  And beautiful.  If they please these rich boys they get jewelry, clothes, recreational drugs and great nights out at the best parties at the best clubs.  And all they have to do is look beautiful.  And put out.  To hook up with these rich boys and give them what they want.  Sex with beautiful girls.  Which they readily give up thanks to birth control.  And when that fails, abortion.

I’m in with the “In” crowd
I know ev’ry latest dance
When you’re in with the “In” crowd
It’s easy to find romance

Being in the “In” crowd is where it’s at.  That small clique in school everyone wants to be a part of.  The nerds and the geeks.  The poor.  The overweight.  The short.  Those with horrible acne.  The losers.  They all look at the beautiful people in the “In” crowd and dream of being asked to join them.  But they never will.  So life goes on for them.  These losers.  Some work on their grades and go on to college.  Become doctors, chemists, engineers, etc.  Others get a factory job.  Learn a skilled trade.  Go into journalism.  Or politics.

Once in with the “In” Crowd you become Part of the Upper Class and Live like Royalty and are Treated like Royalty

The rich guys in the “In” crowd like their women young and dumb.  In fact, a lot of the people in the “In” crowd make fun of the smart kids in school.  Calling them chumps for learning stuff.  Some of the “In” crowd go on to great success in sports, music, movies and television.  Some go on to great success for nothing more than being part of the “In” crowd.  Such as Paris Hilton.  And Kim Kardashian.  But a lot of girls who were in with the “In” crowd lose the affections of the boys they once had.  As other young and pretty girls displace them.  Even marry these rich guys.  With nothing but their looks to go on some end up dancing in strip bars.  And when their youth fades some enter prostitution.  Or collect government benefits.  Because instead of hitting the books when they were in high school they went to the best parties.  And travelled with the “In” crowd.

Some of those who did hit the books in high school learned some things.  Some useful things.  Things that helped them get into college.  But they primarily learned how to be Democrat voters.  Because public education is controlled by the teacher unions.  And their Democrat friends in government.  When they go on to college their liberal college professors pull them even further left.  They learn to not like or trust capitalism.  And to love government unconditionally.  When they get their degrees some go into journalism with a liberal bias.  Some become elected politicians.  Liberal Democrats.  Where they have a lot of money pass through their hands.  Which gives them a lot of power.  And what does money and power give you?  Access to the best parties.  Where you can actually meet and rub shoulders with the stars of sports, music, movies and television.  Yes, these losers from high school finally get to travel with the “In” crowd.

And once in they never want to leave.  Because it is great being in with the “In” crowd.  You become part of the upper class.  You live like royalty.  And are treated like royalty.  Because of all that power you hold.  So they want to protect their elevated status.  By protecting their government jobs.  And creating more government jobs.  As many as possible.  So there is always some place for them to go in case their ungrateful constituents vote them out of office.  And these ungrateful constituents are a problem.  Because they believe in limited government.  Low taxes.  Little government spending.  Fewer regulations.  The very things that are anathema to those who have entered the “In” crowd via big liberal government.

A Serious Crisis gets People Emotional and makes them willing to do things they weren’t willing to do Before

American kids are getting their behinds handed to them by Indian and Chinese kids.  Who are blowing them away on test scores.  Why?  Because of the liberal control of public education.  Instead of being introduced to differential calculus in high school American kids are learning multicultural things.  Instead of learning about Adam Smith and laissez faire economics they’re learning about America’s original sin.  Slavery.  Even though the American economy took off in the free North.  Which is why the North defeated the South in the American Civil War.  But they teach our kids that we stole the land from the Native Americans and got rich by exploiting African slaves.  Because of the evils of capitalism.  And the profit incentive.  Which steals from everybody.  And exploits everyone.  This is what they teach our kids.  Instead of math and science.

Of course, dumbing down the curriculum has a very positive side affect.  For liberals.  The less these kids know the easier it is to lie to them.  Making it easier to turn them into good Democrat voters.  Who keep voting for liberal candidates.  And their liberal policies.  Which keeps expanding the size of government.  And the amount of government spending.  Which they pay for by increasing the taxes on those who can afford to pay more.  And they add layer upon layer of new regulations on businesses.  Enforced by a growing number of bureaucrats.  Creating ever more jobs in the federal government.  To help level the playing field.  To help the little guy.  And to punish those who have too much wealth.  Because it is the fair thing to do.  The just thing.  Especially in a country with so many wrongs to right.

But eventually these kids grow up.  Get jobs.  And raise families.  They become moderates.  Even conservatives.  Who tend to vote against the liberal agenda.  Which is why the Left can’t rely on just dumbing down people.  Because dumb can wear off.  So they have to tug on people’s heartstrings.  Get people’s emotions working for them.  And nothing does that better than milking a crisis.  For as Rahm Emanuel said, “You never want a serious crisis to go to waste.”  Because a serious crisis gets people emotional.  Makes them willing to do things they weren’t willing to do before.  Like the massacre at Sandy Hook Elementary.  Twenty dead children really made people emotional.  And the Left hopes emotional enough to get these people to support something that they normally wouldn’t support.  Gun control.  Which the Left is hell-bent on passing.  Just as they were hell-bent on passing Obamacare.  Despite the masses opposing it.  Just as they oppose gun control.  But they were able to tug enough at people’s heartstrings to pass Obamacare into law.  Just as they hope to pass gun control into law.  For when it comes to passing an unpopular liberal agenda nothing helps more than uninformed people and heightened emotions.  And the more of that liberal agenda they pass the more the government grows.  Creating more jobs in an expanding federal government.  Giving these politicians more money.  And more power.  Getting them into the best parties.  Where they meet and rub shoulders with the stars of sports, music, movies and television.  Letting these one-time high school losers continue to be in with “In” crowd.

(The “In” Crowd by Billy Page performed by Bryan Ferry.)

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FUNDAMENTAL TRUTH #20: “It is never a consumer that complains about ‘predatory’ pricing.” -Old Pithy

Posted by PITHOCRATES - June 29th, 2010

LOW PRICES.  GOD help me, I do hate them so.  I hate them with every fiber of my body.

Who says this?  Do you?  I don’t.  Of all the times I’ve spent shopping, I have never heard anyone bitch about low prices.  I’ve heard people bitch about high prices.  But never about low prices.  When gas approached $3/gallon, people bitched about that being too high and drove 10 miles to find ‘cheap’ gas to save a few pennies per gallon.  Let it approach $4/gallon and they’ll want Congress to take action.  To attack Big Oil.  To seize their oil and their profits and give us cheap gasoline in return.  But when gas was cheap, no one ever bitched about it being ‘too’ cheap.  It just doesn’t happen that way.  People bitch about high prices.  Not low prices.

So who bitches about low prices?  Competitors.  There’s a saying that competition makes everything better.  And it does.  It lowers prices.  And raises quality.  And who is looking for lower prices and higher quality?  Consumers.  Who isn’t?  Competitors.  Especially competitors with political connections.

WHEN THE BIG 3 were putting out crap in the 1970s, they did so because they could.  I mean, who else were you going to buy a car from?  So what if your car breaks down and the fenders and quarter panels rust away?  That just means you gotta buy another car sooner rather than later.  A pretty sweet deal.  Especially when there are only three places to go to buy a car.  And each of the Big 3 is selling the same crap.

Then the Japanese had to go and ruin a good thing.  They started selling cars in America.  These cars were smaller than your typical American car.  But there were other differences.  They didn’t rust like the American cars.  They didn’t break down as much.  And the imports were cheaper than the American cars.  Lower price and higher quality.  More bang for the buck.  Exactly what consumers were demanding.

So what was the response of the Big 3?  Did they rise to the level of their new competitors and deliver what the consumer wanted?  No.  They ran to government for help.  For protection.  And they got it.  Voluntary Export Restraints (VER).  The government negotiated with the Japanese to ‘voluntarily’ limit the number of cars they exported to the United States.  Or else.  So they did.  To avoid worse protectionist policies.  Problem solved.  Competition was limited.  And the Big 3 were very profitable in the short run.  Everyone lived happily ever after.  Until the Japanese refused to play nice.

The problem was what the Big 3 did with those profits.  Or, rather, what they didn’t do with them.  They didn’t reinvest them to raise themselves up to the level of the Japanese.  Protected, they saw no incentive to change.  Not when you have Big Government on your side.  And how did that work for them?  Not good. 

So look, the Japanese said, the Americans like our cars.  If the American manufacturers won’t give them what they want, we will.  While honoring the VER.  We won’t export more cars.  We’ll just build bigger and better cars to export.  And they did.  The Big 3 were no longer up against inexpensive, higher quality subcompacts on the fringe of their market share.  Now their mid-size and large-size cars had competition.  And this wasn’t on the fringe of their market share.  This was their bread and butter.  What to do?  Build better cars and give Americans more bang for their buck?  Or run to government again?  What do you think?

The Big 3 assaulted the Japanese under the guise of ‘fair trade’.  The cry went out that unless the Japanese opened up their markets to American imports (in particular auto parts), we should restrict Japanese imports.  To protect American jobs.  To protect the American worker.  To protect the children.  This was code for please make the Japanese cars more unattractive to purchasers so they will settle for the more costly and lower quality cars we’re making.  (Let’s not forget the reason Americans were buying the Japanese cars in the first place).

The Japanese response?  They took it up a notch.  They entered the luxury markets.  They launched Acura, Lexus and Infiniti.  They competed against Cadillac and Lincoln.  And well.  The quality was so good they even affected the European luxury imports.  More attacks followed.  Americans were losing their jobs.  Soon there would be no more American manufacturing left in the country.  So the Japanese built plants in America.  And Americans were now building the Japanese cars.  The Japanese actually created American jobs.

SON OF A BITCH!  So much for the loss of American jobs.  The Japanese threw a wrench in that argument.  So now the argument became about the loss of ‘high paying’ American jobs.  For the Japanese plants were non-union.  Didn’t matter that their workers were making better pay and benefits than many in their region.  No.  What mattered was that they were building a better product.  And they didn’t want THESE jobs in America.  But if they couldn’t get rid of these new workers, they should at least unionize them so their cars cost more.  To make them a little less appealing to the American consumer.  So far they have been unsuccessful in this endeavor.  The workers are happy as they are.

Well, these cars just weren’t going away.  So the Americans surrendered car manufacturing to the Japanese.  They couldn’t beat them.  (Of course, it’s hard to do that when you don’t even try).  They, instead, focused on the higher profit truck and SUV markets.  Then the Japanese entered those markets.  And at every level they competed with the Americans, the Japanese gave more bang for the buck.  And the consumers responded.  With their hard-earned wages.  It just wasn’t fair.  The Japanese kept giving the American consumer a better product.  No matter what political action the Big 3 took or demanded.

And there’s the problem.  They sought their answers from government.  Instead of making a better car.  They wanted to stop the Japanese from giving the American consumer what they wanted so they could force Americans to pay more for less.  All the while the economy was forcing the majority of consumers to get by on less (the majority of consumers do not have the wage and benefit package the ‘select’ few had in the Big 3). 

Fast forward to 2008 and we see the ultimate consequence of their actions.  Bankruptcy.  GM and Chrysler had to grovel for a federal bailout and in the process become Washington’s bitch.  Ford survived on her own.  As did the Japanese.  You can bitch all you want about costs, but if you have the revenue you can pay your costs.  And the Americans just couldn’t sell enough cars to maintain the revenue they needed for their cost structure.  By refusing to address the core problem (they weren’t making cars Americans wanted to buy), they only made their competition stronger and more entrenched in the U.S. market.

IT’S ALL POLITICS.  Political cronyism.  And crony capitalism.  It all comes down to political spoils and patronage.  That’s what happens when politics enter capitalism.  Big Business partners with Big Government and they enter into relationships.  You scratch my back and I’ll scratch your back.  But when government protects a business for political expediency, the industry suffers in the long run.  As the U.S. automobile industry has.  Ditto for the U.S. textile industry.  And the U.S. steel industry.

So what goes wrong?  When you protect an industry you insulate it from market forces.  You can build crap.  The problem is, consumers don’t buy crap.  So, for awhile, politics intervene and makes the crap more favorable.  Whether it’s predatory pricing, monopolistic pricing or collusion, business can’t win.  Big Government is there.  If your prices are too low, government will intervene.  If prices are too high, government will intervene.  If prices are too similar, government will intervene.  To make things ‘fair’.  And by fair they mean to reward those who play the game and to punish those who don’t.  And the spoils go to those large voting blocs they need.  And in return for their votes, they can count on patronage.  Government jobs.  Political positions.  Favorable legislation and regulation.  If you got the vote out, you were rewarded quite nicely. 

And consumers be damned. .

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