Keynesian Policies and Obamacare reduce Household Incomes

Posted by PITHOCRATES - August 25th, 2013

Week in Review

President Obama is a horrible president.  Why?  Because he’s black?  No, that’s not it.  He’s a horrible president who just happens to be black.  One of the big reasons why he is a horrible president is because he is a Keynesian.  And has tried the same failed Keynesian policies of the past to turn the economy around.  And just as they failed in the past they have failed consistently during the Obama presidency.

Keynesian economics states that during a recession when people aren’t spending money the government should do something about it. They should start spending money.  And they should implement policies that put more money into consumers’ pockets.  So they go out in the economy and spend it.  Thus generating economic activity.  And pulling the nation out of recession.  The government could cut taxes to put more money into consumers’ pockets.  But they don’t like cutting taxes.  Preferring to add more welfare programs.  Which give money to consumers.  So they can spend it.  That’s how President Obama has chosen to pull the nation out of the worst recession since the Great Depression.  And as expected by every non-Keynesian, his Keynesian policies have been an abject failure (see Incomes Have Dropped Twice as Much During the ‘Recovery’ as During the Recession by JEFFREY H. ANDERSON posted 8/23/2013 on The Weekly Standard).

New estimates derived from the Census Bureau’s Current Population Survey by Sentier Research indicate that the real (inflation-adjusted) median annual household income in America has fallen by 4.4 percent during the “recovery,” after having fallen by 1.8 during the recession.  During the recession, the median American household income fell by $1,002 (from $55,480 to $54,478). During the recovery—that is, from the officially defined end of the recession (in June 2009) to the most recent month for which figures are available (June 2013)—the median American household income has fallen by $2,380 (from $54,478 to $52,098).  So the typical American household is making almost $2,400 less per year (in constant 2013 dollars) than it was four years ago, when the Obama “recovery” began.

Importantly, these income tallies include government payouts such as unemployment compensation and cash welfare. So Obama’s method of funneling ever-more money and power to Washington, and then selectively divvying some of it back out, clearly isn’t working for the typical American family. Nor would his proposed immigration bill help the income prospects of the median American.  And perhaps it’s just a coincidence, but the span of time over which the typical American household’s income has dropped by about $2,400 a year (during an ostensible “recovery”) corresponds almost exactly with the span of time that we’ve been living with the looming specter of Obamacare—which began to be debated in earnest around June 2009.

Another reason why President Obama is a horrible president is that he is more interested in transforming the nation than he is in improving people’s lives.  He wants to make it what it was before President Reagan made the nation great again.  President Reagan followed President Carter.  Who was another horrible president.  Because of his Keynesian economic policies.  While President Reagan wasn’t a Keynesian.  Which is why the economic recovery following Carter’s malaise was one of the strongest economic recoveries in history.  Making President Reagan a great president.  Because he made life better for people.  Unlike Carter and Obama.  Who made life worse.  Because of their Keynesian economic policies.

Obamacare, the pathway to national health care, is a big driver of the fall in household incomes.  The plan for Obamacare was to put the private health insurance business out of business.  So Obamacare can evolve into full-blown national health care.  And to do that they forced businesses to spend more money on their health insurance for full-time employees.  Of course, the idea was for businesses to avoid this additional cost by pushing people to part-time.  And taking away their health insurance.  Advancing the nation further down the Obamacare pathway to national health care.  Which is more important to him than household incomes.  Which he will gladly trade away to transform the country.  Not to just what it was before Ronald Reagan.  But even further left.  Because, for President Obama, what he wants is more important than what the people want.  Jobs, a rising household income and private health insurance.  Which makes him a horrible president.  Just as his Keynesian economic policies make him a horrible president.

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Labor Force Participation Rate

Posted by PITHOCRATES - March 11th, 2013

Economics 101

The Official U-3 Unemployment Rate doesn’t count Everyone who can’t find a Full-Time Job

The unemployment rate fell in February 2012.  Yet more people are out of the workforce than they were in January.  Odd.  For the two seem to contradict each other.  For how can the workforce shrink when the unemployment rate falls.  Easy.  It just depends on who you count.  The federal government has a few ways to count unemployed people.  Specifically, they have six ways.

U-1  Persons unemployed 15 weeks or longer, as a percent of the civilian labor force.

U-2  Job losers and persons who completed temporary jobs, as a percent of the civilian labor force.

U-3  Total unemployed, as a percent of the civilian labor force (official unemployment rate).

U-4  Total unemployed plus discouraged workers, as a percent of the civilian labor force plus discouraged workers.

U-5  Total unemployed, plus discouraged workers, plus all other persons marginally attached to the labor force, as a percent of the civilian labor force plus all persons marginally attached to the labor force.

U-6  Total unemployed, plus all persons marginally attached to the labor force, plus total employed part time for economic reasons, as a percent of the civilian labor force plus all persons marginally attached to the labor force.

As you can see they count more people at each of the six levels.  And the official U-3 unemployment rate doesn’t count a lot of people.  By the time you add in discouraged workers, the marginally attached and those working part-time because they can’t find a full-time job the unemployment rate increases.  With the U-6 number giving a truer picture of the employment picture.  Which currently stands at 14.3%.  And is a long way from the official 7.7%.  So even though the news reports are celebrating that the economy is improving because the unemployment rate fell from 7.9% to 7.7%, the U-6 unemployment rate stands at 14.3%.  Down from 14.4% in January 2012.  Which is pretty bad.  And little to celebrate about.

The U-6 Unemployment Rate counts all of the People who can’t find a Full-Time Job

To better understand these numbers we need to understand exactly who the people are that they are counting.  Who are the people that could be working.  Who are the people working.  And who are the people not working.  Which is all defined at Civilian Noninstitutional Population and Associated Rate and Ratio Measures for Model-Based Areas.  And summarized here:

The civilian noninstitutional population consists of persons 16 years of age and older residing in the 50 States and the District of Columbia who are not inmates of institutions (for example, penal and mental facilities and homes for the aged) and who are not on active duty in the Armed Forces.

Employment consists of all persons who, during the reference week (the calendar week including the twelfth day of the month), (a) did any work at all (at least 1 hour) as paid employees, worked in their own business or profession or on their own farm, or worked 15 hours or more as unpaid workers in an enterprise operated by a member of the family, or (b) were not working but had jobs or businesses from which they were temporarily absent because of vacation, illness, bad weather, childcare problems, maternity or paternity leave, labor-management dispute, job training, or other family or personal reasons, whether or not they were paid for the time off or were seeking other jobs.

Unemployment consists of all persons who had no employment during the reference week, were available for work, except for temporary illness, and had made specific efforts to find employment some time during the 4-week period ending with the reference week. Persons who were waiting to be recalled to a job from which they had been laid off need not have been looking for work to be classified as unemployed.

The civilian labor force consists of all persons classified as employed or unemployed as described above.

The labor force participation rate represents the proportion of the civilian noninstitutional population that is in the labor force.

The unemployment rate is the number of unemployed as a percent of the civilian labor force.

The civilian labor force, then, equals the total of employed and unemployed people.  But note who they count as unemployed.  Only people who were looking for work during a 4-week period.  And those on a layoff subject to recall.  (Who didn’t have to look for work during that 4-week period.)  Which excludes everyone who gave up looking for work not subject to recall who can’t find a job.  People who are living on their savings, their credit cards, their spouse’s income, their retirement nest egg or even moving back in with their parents.  Or are working a part-time job or two because they can’t find a full-time job.  The U-6 rate counts all of these people.  Which is why it’s almost twice the official unemployment rate.  And why it’s a much better indicator of the employment picture.

The most Accurate Read of the Employment Picture is the Labor Force Participation Rate

So you now can see how the official unemployment rate can fall even though fewer people are working.  They calculate the unemployment rate by dividing unemployment by the civilian labor force.  And the smaller unemployment is the smaller the unemployment rate is.  Which it is when you don’t count all of the people who can’t find a job.  Which brings us to the labor force participation rate.  Which they calculate by dividing the civilian labor force (the employed plus the unemployed) by the civilian noninstitutional population (the total of the civilian population that could be working).  Which, like the U-6 unemployment rate, provides a truer picture of the employment picture.

The U-3 and U-6 unemployment rates improved in February.  Showing an improving employment picture.  While the labor force participation rate fell from 63.6% to 63.5%.  Which means those not in the labor force increased.  Going from 89,008,000 to 89,304,000.  An increase of 296,000 people who disappeared from the labor force.  Which is greater than the 227,000 new jobs created.  So even though the unemployment rate fell there was a net loss in jobs.  Which means the economy got worse.  Not better.

Mark Twain said facts don’t lie but liars figure.  And this is what he meant.  The employment picture is not improving.  But the government reports the 227,000 new jobs and the falling unemployment rate as signs of an improving economy.  But the most accurate read of the employment picture, the labor force participation rate, shows the economy is getting worse.  As everyone who is struggling in the private sector already knows.  So someone is lying.  And it isn’t the facts.  It is those who want to hide the damage the government’s policies are doing to the economy.  So they can keep trying the same failed policies of the past.  Keynesian economic policies.  Favoring more government intervention into the private economy.  While dragging out the worst economic recovery since the Great Depression.  Another period of failed Keynesian economic policies.  For Keynesian policies are anti-business policies.  But pro-government growth policies.  Which is why liars figure.  And the labor force participation rate falls.

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Bad Keynesian Policies cause influx of Romanian and Bulgarian Migration into Germany

Posted by PITHOCRATES - February 10th, 2013

Week in Review

It is interesting that countries that get into trouble using Keynesian economic policies tend to go to countries that relied on Keynesian policies less for help.  States with high government spending and bloated public sectors turn to countries with less government spending and less bloated public sectors for help.  Yet Keynesian economic policies are still the dominant polices of many nations.  Including the US, the UK, China, countries within the Eurozone, Bulgaria and Romania (see German warning over Romanian and Bulgarian migration by Rosa Silverman posted 2/6/2013 on The Telegraph).

German cities have warned that an influx of Romanian and Bulgarian economic migrants will cost them dear and put the “social peace” at risk…

Berlin, Hamburg, Dortmund and Hanover have seen a six-fold increase in economic migration from the two countries since 2006, which they say has left them struggling to cope…

The warning comes amid fears in Britain that tens of thousands more Romanians and Bulgarians will come here each year after formal restrictions on the numbers of low-skilled workers from the two countries end next year.

A report by the campaign group Migration Watch UK warned last month that up to 70,000 migrants could arrive annually from then.

Of course the question that just begs to be asked is why are Romanians and Bulgarians leaving their countries in the first place?  The Cold War is over.  The communists are gone.  These are beautiful countries.  Blessed with farm land.  And natural resources.  With some great people.  And a lot of history.  So why leave?  Because they caught the Keynesian contagion during the Nineties.  Their central banks kept interest rates artificially low to stimulate economic activity.  Which they did.  But a lot of that economic activity was artificial.  A bubble.  Times were good.  They expanded government employment.  And government pay and benefits.  And then the 2007-2008 financial crisis came along.  Bursting that bubble.  Leaving these nations with budget deficits.

Both nations were on track to join the Eurozone.  Working hard to meet the Maastricht criteria.  Conditional for entry into the common currency of the Eurozone.  After the financial collapse meeting the Maastricht criteria became more difficult.  As the fall in economic activity and the rise in the unemployment rates of these countries caused tax revenue to fall.  Creating deficits that approached or exceeded those permitted under the Maastricht criteria.  And the Keynesian cure for a recession, easy credit and more government spending, just made those deficits worse.  And it caused inflation to rise to or above that permissible under the Maastricht criteria.  They had to borrow money to meet their spending obligations.   And a condition of those loans was to bring their spending down to acceptable levels.  Like that to meet the Maastricht criteria.

Long story short the damage these Keynesian policies caused required very painful austerity to fix.  High unemployment and austerity makes people want to leave home for sunnier economic climes.  As Germany has been the bedrock of the Eurozone because of their more responsible governing and restraint in government spending these people went to Germany.  And to the UK.  Who didn’t join the Eurozone.  And aren’t mired in the Eurozone sovereign debt crisis.  Though they are implementing a little austerity of their own to bring down their budget deficits.

High government spending and large deficits cause trouble.  The U.S. has numbers worse than both Bulgaria and Romania.  Which means there is trouble ahead.  But unlike other nations the United States’ population won’t be able to travel to sunnier economic climes.  For no country will be able to absorb that amount of migration.  Not even Germany.  Or the UK.  Combined.

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Welfare State, Tax Revenue, Tax Base, Abortion, Population Gains, Keynesian Policies, Communism and Capitalism

Posted by PITHOCRATES - January 22nd, 2013

Week in Review

Their Welfare Programs continued to Expand even while their Tax Revenue was Falling

Many of the world’s mature economies are having financial issues.  Including chronic deficits, growing debt and skyrocketing spending obligations.  The Eurozone has been mired in a sovereign debt crisis for years.  The UK is trying to slash billions from their costliest entitlement.  The National Health Service.  France tried to raise the top marginal tax rate to 75%.  Japan is spending twice their GDP and their aging population will require even more spending.  And in the United States Democrats and Republicans are getting ready for another round of debt ceiling debates.  To raise the debt ceiling once again.  To yet another record high.

What causes these problems?  A couple of things.  A growing welfare state.  And falling tax revenue.  Not because tax rates are too low.  But because they are too high.  Creating a business-unfriendly environment.  Reducing economic activity.  Which reduces tax revenue.  They further compound their problems with Keynesian economic policies.  Which include massive borrowings to pay for deficit spending.  And expanding the money supply.  Which devalues the currency.  This creates inflation.  Further reducing economic activity.

These countries have a spending problem.  Their welfare programs continued to expand even while their tax revenue was falling.  Often introducing new programs based on the best of economic times with the rosiest projections of continued economic good times.  But once a recession hits, and they always do when using Keynesian economic policies, these governments run massive deficits.  That said there is a revenue component to their financial problems.  Abortion.

An Expanding Welfare State needs an Expanding Population Growth Rate

To increase tax revenue you need to expand the tax base.  To get more taxpayers paying taxes.  And where do taxpayers come from?  Babies.  There is no other way to get a taxpayer.  Even with immigration.  Because those immigrants first have to be born.  So the more babies you have the more taxpayers there will be paying taxes.  The more abortions you have, though, the fewer taxpayers there will be paying taxes.  The following table summarizes population gains and abortions for the years 1970 through 1990 for 12 countries.

Sources: Historic, current and future population of Europe; Abortion statistics and other data;

These dates are important for had these abortions not happened they all would be in the workforce today.  Just to get an idea of what that means to tax revenue consider the United States.  During these 20 years there were 26.7 million abortions.  Assuming a median salary of $50,000 and 33.3% in federal taxes (18% effective federal income tax rate, 12.4% for Social Security taxes and 2.9% for Medicare) that comes to $444 billion in one year.  Or $4.44 trillion over ten years.  It may not have been enough to pay for the massive new spending of President Obama.  But it would have prevented the credit downgrade from S&P.  Who were looking for $4 trillion in spending cuts over ten years.

It’s these aborted taxpayers that are pressuring these welfare states.  For an expanding welfare state needs an expanding population growth rate.  And abortion doesn’t help populations grow.  And if the population doesn’t grow then tax revenue doesn’t grow.  In fact, if you divide the population gain by the number of abortions you can get a feel of a country’s financial health.  And their future health.

A Command Economy cannot Provide for the People like Laissez Faire Capitalism Can

Abortions reduce population gains.  So when you divide population gains by the number of abortions the higher the resulting number the better.  For higher population gains and fewer abortions mean more tax revenue.  The lower the number indicates a high level of abortions that reduces tax revenue.

Spain is one of the countries in trouble in the Eurozone.  With a rich Catholic history that frowns on abortion.  So it is no surprise to see such a large number when dividing population gains by abortions.  But their debt crisis is.  For this number indicates a lot of taxpayers.  Which Spain has.  Yet they have some serious financial problems.  Why?  Because they also have very high unemployment.  Their economic woes began with Keynesian policies keeping interest rates artificially low.  Creating a housing bubble.  And when it burst it created a very bad recession.  So having taxpayers is important.  But they also have to have jobs.  With some good economic policies (i.e., non-Keynesian policies) Spain should be able to rebound into an economic juggernaut.  For if all those taxpayers find employment they can reduce tax rates to very low levels.  Which will explode economic activity.

Greece went on a spending binge.  Including lavish spending for the 2004 Olympic games.  Their problem is a bloated public sector.  And a large welfare state.  That their private sector can no longer fund.  Like Spain Greece may be able to rebound with some sound economic policies (i.e., non-Keynesian policies).  A little privatization.  And a little weaning from the public teat.

At the other end you have the United Kingdom.  Whose abortions exceeded their population gain.  Which wasn’t much for 20 years.  They are currently going through a baby boom.  But it’s this baby dearth from 20-40 years earlier that is depressing tax revenue today.  Requiring those spending cuts in the NHS.  And higher tax rates on the fewer remaining taxpayers in the workforce.  Which, of course, leaves people with less spending money.  Further depressing the economy.

China’s economic miracle is not as miraculous as it once was.  And their Keynesian policies will catch up to them.  As they have with every other country using them.  Their authoritarian regime has been able to keep wages down to help their export economy.  And they have no social safety net despite a rapidly aging population.  Which they will have to take care of.  Eventually.  Either by expanding the money supply so the government can spend more money.  Which will create inflation and hurt economic activity.  Or they will have to raise taxes.  Which will also hurt economic activity.

China has had 171 million abortions from 1970 to 1990.  Which even exceeds the number of deaths in the Great Chinese Famine.  Not uncommon in a communist regime.  Survival.  As their command economy cannot feed or provide for the people like laissez-faire capitalism can.  In a command economy those abortions are seen as a good thing.  A kind thing.  For that’s fewer mouths to feed.  Hence China’s one-child policy.  While in laissez faire capitalist countries their children have obesity problems.  And look at these abortions and see loss tax revenue.

While China is enjoying prosperity in their eastern cities thanks to their export economy fueled by low wages little has changed for the hundreds of millions of peasants in the rural interior spaces.  Where famine is still a real concern.  Some will cite China as an example of out of control population growth.  Like locusts the people will consume all of the available resources.  And leave behind a scorched earth.  Of course what these people don’t understand is the power of laissez faire capitalism.  For across the water from China is Hong Kong.  An Island with no natural resources.  A barren rock.  Yet they were part of the British Empire.  They embraced-laissez faire capitalism.  And flourished while mainland China suffered under communism.  Hong Kong is one of the world’s strongest economies.  With some of the greatest population gains.  During these 20 years their population grew by 43.67%.  The greatest of these 12 countries.  While having the lowest number of abortions.  Yet despite having this massive population gain and few resources this crowded special administrative region (SAR) of the People’s Republic of China (since 1997) prospers.  Suffers no famine.  And is one of the best places in the world to live.

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Microeconomics and Macroeconomics

Posted by PITHOCRATES - September 10th, 2012

Economics 101

Keynesians cannot connect their Macroeconomic Policies to the Microeconomic World

Economics can be confusing.  As there are actually two genres of economics.  There’s microeconomics.  The kind of stuff most people are familiar with.  And is more common sense.  This is more of the family budget variety.  And small business budget.  Where if costs go up (gasoline, commodities, food, insurance, etc.) families and businesses make cuts elsewhere in their budget.  When revenue falls (a decline in sales revenue or a husband/wife loses their job) people cut back on expenses.  They cancel the family vacation.  Or cancel Christmas bonuses.  Straight forward stuff of living within your means.

Then there’s macroeconomics.  The big economic picture.  This is the stuff about the national economy.  GDP, inflation, recession, taxes, etc.  Things that are more abstract.  Unfamiliar.  And often defy common sense.  Where living beyond your means is not only accepted.  But it’s national policy.  And when some policies fail repeatedly those in government keep trying those same policies expecting a different outcome eventually.  Such as using Keynesian economic policies (stimulus packages, deficit spending, printing money, etc.) to get an economy out of recession that never quite works.  And then the supporters of those policies always say the same thing.  Their policies only failed because they didn’t spend enough money to make them work.

Keynesian economics focuses on macroeconomics.  And cannot connect their macro policies to the micro world.  There is a large gap between the two.  Which is why Keynesians fail.  Because they look at the macro picture to try and effect change in the micro world.  To get businesses to create jobs.  To hire people.  And to reduce unemployment.  But the politicians executing Keynesian policy don’t understand things in the micro world.  Or anything about running a business.  All they understand, or all they care to try to understand, are the Keynesian basics.  That focus on the demand side of economics.  While ignoring everything on the supply side.

When the Economy goes into Recession the Fed Expands the Money Supply to Lower Interest Rates

Keynesians have a few fundamental beliefs.  And one of the big ones is the relationship between interest rates and GDP.  In fact, it’s the center of their world.  High interest rates discourage people from borrowing money.  When people don’t borrow money they don’t build things (like factories).  And if they don’t build things they won’t create jobs and hire people.  So the higher the interest rates the lower the economic output of the nation (GDP).

Low interest rates, on the other hand, encourage people to borrow money.  So they can build things and create jobs.  The lower the interest rates the more people will borrow.  And the greater the economic output of the nation will be.  This was the driving factor that caused the Great Recession.  The central bank (the Fed) kept interest rates so low for so long that people bought a lot of houses.  A lot of expensive houses.  The demand for housing was so great that buyers bid up prices.  Because at low interest rates there was no limit to how much house you could buy.  All this building and buying of houses, though, oversupplied the market with houses.  As home builders rushed in to fill that demand.  They built so many houses that there were just so many houses available to buy that buyers had a lot of choice.  Making it a buyers’ market.  So much so that people had to slash their asking price to sell their house.  Which popped the great housing bubble.

The Fed lowers interest rates by increasing the money supply.  They create new money and inject it into the economy.  By giving it to bankers.  Banks have more money to lend.  So more people can borrow money.  This is what lowers interest rates.  Things that are less scarce cost less.  More money to borrow means it’s less scarce.  And the price to borrow it (i.e., the interest rate) falls.  If the Fed wants to increase interest rates they pull money out of the economy.  Which makes it a little harder to borrow money.  Because more people are trying to borrow the limited amount of funds available to borrow.  And this is the basics of monetary policy.  Whenever the country enters a recession and unemployment rises the Fed expands the money supply to encourage businesses to borrow money to expand their businesses and create jobs that will lower unemployment.

Keynesian Economic Policies hurt the Higher Stages of Production where we Create Real Economic Activity

If low interest rates create greater economic activity why in the world would the Fed ever want to raise interest rates?  Because of the dark side of printing money.  Inflation.  Increasing the money supply gives people more money.  And when they have more money they try to buy what everyone else is buying.  As the money supply grows greater than the amount of economic output there is more money trying to buy fewer goods and services.  Which raises prices.  Just like those low interest rates did in the housing market.  The fear is that if this goes on too long there will be an economic crash.  Just like after the housing bubble burst.  From boom to bust.  Higher prices reduce consumer spending.  Because people can’t buy as much when prices are high.  As consumers stop spending businesses stop selling.  Faced with overcapacity in a period of falling demand they start cutting costs.  Laying off people.  People without jobs can buy even less at high prices.  And so on as the economy settles into recession.  This is why central bankers raise interest rates.  Because those good times are temporary.  And the longer they let it go on the more painful the economic correction will be.

This is why Keynesian stimulus spending fails to pull economies out of recession.  Because Keynesians focus only on the demand curve.  Consumption.  Consumer spending.  Not supply.  They ignore all that economic activity in the higher stages of productions.  That activity that precedes retail consumer sales.  The wholesale stage (the stage above retail).  The manufacturing stage (above the wholesale stage).  And the furthest out in time, the raw commodities stage (above the manufacturing stage).  As economic activity slows inventories build up.  Creating a bulge in the middle of the stages of production.  So manufacturing cuts back.  And because they do raw commodities cut back.  These are the first to suffer in an economic downturn.  And they are the last to recover.  Because of all that inventory in the pipeline.  When Keynesians get more money into consumers’ pockets they will increase their consumer spending.  For awhile.  Until that extra money is gone.  Which provided an economic boost at the retail level.  And a little at the wholesale level as they drew down those inventories.  But it did little at the higher stages of production.  Above inventories.  Manufacturing and raw material extraction.  Who don’t expand their production or hire new workers.  Because they know this economic activity is temporary.  And because they know all that new money will eventually create inflation.  Which will increase prices.  Throughout the stages of production.

The Keynesian approach focuses on the macro.  By playing with monetary policy.  Policies that ultimately hurt the higher stages of production.  At the micro level.  Where we create real economic activity.  If they’re not hiring then no amount of stimulus spending at the retail level will get them to hire.  Because giving the same amount of workers (i.e., consumers) more money to chase the same amount of goods and services only causes higher prices in the long run.  And it’s the long run that raw commodities and manufacturing look at.  They are not going to invest to expand their businesses unless they expect improving economic conditions in the long run.  All the way up the stages of production to where they are.  When new economic activity reaches them then they will expand and hire people.  And when they do they will add a lot of new consumers with real wages to go out and spend at the retail level.

One of the most efficient ways to achieve this is with tax cuts.  Because cuts in tax rates shape economic activity in the long run.  Across the board.  Unlike stimulus spending.  Which is short term.  And very selective.  Some benefit.  Typically political cronies.  But most see no benefit.  Just higher prices.  And continued unemployment.  Which is why Keynesian policies fail to pull economies out of recessions.  Because politicians use them for political purposes.  Not economic purposes.

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Hiring Prospects Improving despite no one Hiring Anyone unless they Absolutely have To

Posted by PITHOCRATES - June 17th, 2012

Week in Review

The economy is horrible.  And it has been horrible for the last three and a half years.  Despite the Recovery Summer.  And all the reporting of an economic recovery that has never materialized yet other than in the wishful thinking of government planners and their economic advisors whispering sweet-nothings in their ears.  Telling them more Keynesian economic policies can fix the previous Keynesian economic policies that have failed to do anything but make things worse.  Despite everything they have done the past three and a half years no one is hiring yet (see Around world, companies loath to add jobs: survey by Nick Zieminski posted 6/12/2012 on Reuters).

Hiring prospects have improved slightly in the United States and other major economies but companies are only adding workers when they have to, according to a survey by Manpower Group (MAN.N), the global employment services giant.

Manpower in a quarterly survey describes a vicious circle in which stronger consumer spending is being reined in by weak hiring, and vice versa. Spooked by Europe’s ongoing debt crisis and a slowdown in China, hiring managers in large economies are reluctant to invest in staff until they see a rebound in demand for their goods and services.

“Companies are in tune with their demand and surroundings,” Manpower Chief Executive Jeff Joerres said. “Hiring has been put into only-if-necessary mode. They can spring back, but there were too many times in the last 36 months when they thought it was safe to go in the water and only found out it wasn’t…”

Its poll of 18,000 U.S. hiring managers follows two months of disappointing U.S. jobs growth. The U.S. economy added just 69,000 jobs last month, less than half what was expected, and the unemployment rate ticked back up to 8.2 percent.

Two months of disappointing U.S. job growth?  Try three and a half years.  The official unemployment number (U3) was under 8% for only a short part of President Obama’s first year in office.  It was below 8% when he promised that if we passed his stimulus plan it would never go above 8%.  For the year or so after Congress passed his stimulus plan the official unemployment rate (U3) flirted with 10%.  Which if you’re keeping score is above 8%.  The U6 unemployment rate (which counts the underemployed and those who gave up looking for work) has been north of 16% for about 2 years of his administration.  Again, if you’re keeping score, that’s above 8%.  And closer to Great Depression unemployment.  The U6 rate is still north of 14%.  So, no, it hasn’t been 2 months of disappointing job growth.  It’s been three and a half years of disappointment in the Obama economic recovery.  Or lack thereof.

This is why no one is hiring unless they absolutely have to.  Because no one has any faith in the economy.  And everyone is expecting things to get worse when Obamacare goes into full effect.  At 2,000+ plus pages and a lot of ‘as the secretary directs’ included in that law leaves business owners with nothing but apprehension.  They have no idea how to plan with these kinds of unpredictable variables.  These are just not days to be hiring employees if you’re a business owner. 

This is part of the reason the employment picture is so horrible in America.  The other reason is the anti-business Keynesian economic policies of the Obama administration.  Which lead to high taxes, high spending and high debt.  Which has killed job creation in America.  And throughout the Keynesian world.  Because Keynesian policies do not favor business.  They favor activist, interventionist, tax and spend government.  Who intervene actively in the private sector to raise money via taxes to spend in the public sector.  And yet the government’s economists are always surprised by the poor economic data their Keynesian policies produce.  Which begs the question if they are so blind to the obvious should they really be advising the government?

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FT92: “If government spending stimulates economic activity and tax cuts are government spending then tax cuts stimulate economic activity.” -Old Pithy

Posted by PITHOCRATES - November 18th, 2011

Fundamental Truth

The Keynesian School says when in Recession the Government should step in and Spend Money

Politicians lie.  Because they can’t do the things they want to do if they tell the truth.  And what do they want to do?  Accumulate money.  Our money.  To tax.  And spend.  To reward friends and cronies.  To make people dependent on government benefits.  To buy votes.  To secure their power.  And to live very comfortably on the taxpayer’s dime.

This comes at a cost.  The U.S. has accumulated a debt greater than most countries’ GDP.  And the deficit has surpassed the trillion dollar mark.  This irresponsible spending has caused Standard and Poor’s to downgrade the U.S. sovereign debt rating for the first time in U.S. history.  And the loose monetary policy to help put people into houses they couldn’t afford (to buy more votes) created the mother of all housing bubbles.  Leading to the Subprime Mortgage Crisis.  And the worst recession since the Great Depression.  The Great Recession.  That lingers on despite officially ending in 2009.  Economists no doubt fudged the numbers so they could call the Obama stimulus a success.  Which they did in the premature Recovery Summer.

Obama’s economic policies are Keynesian economic policies.  And the Keynesian school says when the economy goes into recession the government should step in and spend money.  To replace the economic activity that isn’t happening in the private sector.  This is supposed to prime the economic pump.  And restore the economy to good times.  But it doesn’t work.  It never has.  And it never will.  So why are they so insistent on Keynesian economic policies?  Because they empower the government to tax.  And spend.  And that’s what government wants to do.  Tax and spend.

If Keynesian Stimulus Spending Stimulates Economic Activity then so must Tax Cuts

Of course, this spending runs up massive deficits.  And debt.  As noted above.  And what do they want to do?  Well, they want to do the responsible thing.  And live within our means.  By cutting spending?  No.  By raising taxes.  To pay for this orgy of spending.  Because cutting spending would be irresponsible.  And hurt the economy.

Cutting taxes gives people more money to spend.  Which is good.  Because that is what stimulus spending does.  Gives people more money to spend.  But they oppose tax cuts.  Because the money doesn’t pass through their sticky fingers.  So they attack tax cuts.  Play with the meaning of words.  They call ‘tax cuts’ government spending.  Because spending reduces the amount of money in the national treasury.  Just like tax cuts.  Ergo tax cuts equal government spending.  And the only way to pay for government spending is, wait for it, with taxes.  That’s right.  The only responsible way to pay for tax cuts is with more taxes.  Circular logic of the first order.  But they use it.  And get away with it.

I say fine.  Let’s give them this perversion of the English language.  Tax cuts are government spending.  Just like Keynesian stimulus spending is government spending.  And if Keynesian stimulus spending stimulates economic activity then so must tax cuts.  Because they’re the same thing.  According to them.

100% of Tax-Cut Stimulus Stimulates Economic Activity

If spending and tax cuts are both spending then they’re both stimulative.  Given the choice I say choose tax cuts.  At least the bureaucrats won’t create the resulting debt by buying votes.  The private sector will.  As it generates more economic activity.  Which will create new jobs.  And new taxpayers.  Ultimately resulting in new tax revenue for the government.

Which is something Keynesian stimulus spending just won’t do.  For 100% of tax-cut stimulus stimulates economic activity.  And not a dime of it passes through a politician’s hand to a friend or crony to buy a single vote.

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Obama’s Economic Policies have Failed because they’re Keynesian Economic Policies

Posted by PITHOCRATES - September 2nd, 2011

Government Spending and Easy Monetary Policy haven’t created any Jobs 

The new jobs report is in.  It’s not good.  Surprise, surprise (see ‘No confidence’ sparks rush to safety by Blake Ellis posted 9/2/2011 on CNNMoney).

The Labor Department reported that the economy added no jobs in August, while the unemployment rate remained at 9.1%. That was the worst reading since September 2010, when the economy lost 27,000 jobs.

Economists had been expecting a weak report given the recent debt ceiling gridlock, plunging consumer confidence and the downgrade of the United States’ credit rating in August. But what they got was even worse than expected.

These Keynesian economists have been predicting every kind of wonderful they could with every new Keynesian policy.  But government spending and easy monetary policy haven’t created any jobs.  If they did we’d have them.  Jobs.  But we don’t have them.  After close to 3 years of trying.  I mean, the economy is so bad that oil prices are falling.

Since a healthy economy typically spurs demand for oil, fears that another recession is around the corner are causing traders to worry about waning demand, said Flynn.

“Crude oil is looking at demand destruction right now,” he said. “With a lack of people going back to work and economic data as a whole as it is, it’s just not a supportive environment for higher prices.”

So the Obama administration has spent the U.S. to record deficits.  And record debt.  But because so many people are unemployed demand for oil is destructing.  What a terrible tradeoff for cheaper oil.

Oil is the lifeblood of a healthy economy.  So you know an economy is not healthy when people aren’t buying oil.  In a country where chronically insufficient domestic supplies once raised the price of gasoline to over $4/gallon.  Now any spikes in gas prices seem to have more to do with a depreciating dollar (thanks to all that easy monetary policy) than demand.

Keynesians see no Downside to Excessive Government Spending or Inflation

Still there are some who say the problem is not excessive spending.  But spending that was not excessive enough (see Fatal Distraction by Paul Krugman posted 9/2/2011 on The New York Times).

Zero job growth, with unemployment still at nosebleed levels. Meanwhile, the interest rate on 10-year US bonds is down to 2.04%, and it’s negative on inflation-protected securities.

Aren’t you glad we pivoted from jobs to deficits a year and a half ago?

Krugman is a Keynesian.  So by ‘jobs’ he means government spending.  And by ‘deficits’ he means responsible government.  He sees no downside to excessive government spending.  Or inflation.  As if the 1970s never happened.

A lot of People hate the Rich and Successful, especially Ivy League Elitists

But the 1970s did happen.  And we had double-digit inflation at the end of that decade.  Didn’t help.  It didn’t make a dent in the unemployment numbers.  Yet there are those who want to take that very dangerous road again (see View: Inflation Is Easy to Free, Hard to Control by the Editors posted 9/1/2011 on Bloomberg).

…But now, a growing number of voices, mainly on the left wing of the Democratic Party but also in the Federal Reserve, are calling for what is in effect default in slow motion. It goes by the name of inflation.

Inflation decreases the value of debts, like the $14 trillion owed by the federal government to lenders such as the government of China (and a lot of ordinary American savers, too), and it increases the value of assets, like houses. Thus it helps all debtors, from the federal government to individual homeowners who can’t pay their mortgages. Inflation has been running at an average of 2.4 percent over the past decade. After a couple of years of, say, 6 percent inflation, that $14 trillion would be worth closer to $12 trillion in current dollars. A $400,000 mortgage would be worth about $350,000.

Some may say, shrinks debt?  Increases asset value?  Well where’s the problem with that? 

We call it class warfare.  Of the worse kind.  Creditors versus debtors.  The poor versus the rich.  The poor hate the rich because they have to borrow from them to buy a house.  And they would love to not pay them back.  But if you start doing this eventually the rich won’t loan their money anymore.  So there will eventually be no more home ownership.  Except for the rich. 

It’s a story as old as time.  And the U.S.  The states were passing debtor laws.  Favoring debtors.  Harming creditors.  And destroying legal contracts in the process.   Which a nation built on the rule of law could not have.  For if there are no contracts there is only force.  Where the most powerful get what they want.  And those not powerful enough to fight them off simply lose what they have. 

This is one of the reasons why the Founding Fathers called for the Philadelphia Convention in 1787.  To save what they just fought 8 years to get.  A nation where no man is above the law.  And contracts are legal binding.  Still, there are a lot of people who hate the rich and successful.  Who think contracts are merely suggestions.  Especially Ivy League elitists who have no ability but arrogance and condescension.  Who could never become rich and successful on their own.  Preferring privilege over hard work.  And have no problem trampling over people’s contract rights.  Or Constitutional rights, for that matter.  But that’s another story.  For another time.

As it happens, a couple of years of 6 percent inflation is exactly what the leading economist advocating this approach — Kenneth Rogoff at Harvard — recommends. He is joined by Paul Krugman and by a growing number of economic journalists and commentators. Some of these people have been saying that inflation is no threat worth worrying about, because it has not appeared despite circumstances that ordinarily would have produced it. Now they say inflation is no threat because a little of it would actually be a good thing.

At Bloomberg View, we think that doing anything to encourage increased inflation is a very bad idea. People who advocate it are either too young or too old to remember our last adventure with inflation, in 1979 and 1980…

You can’t easily pencil in two years of 6 percent inflation and then go on your merry way. Inflation is self-feeding and takes on a life of its own. And it works only by surprise. If lenders all know that the government is going to induce or at least tolerate something like 6 percent inflation, they will demand something like 8 percent interest from borrowers. There goes the grease on the wheels. And it’s not just lenders: Labor negotiators will have their backs stiffened if they know that any dollar figure they negotiate will buy less and less. Manufacturers who know their inputs are going to be getting more expensive, in dollar terms, will raise their prices in anticipation, thus making inflation a self-fulfilling prophecy. Long-term planning becomes difficult to impossible.

This is what happened in the Seventies.  It’s why there were double-digit interest rates.  Inflation was depreciating the dollar so fast that it took near usury rates before anyone would loan money.  It was great for people with money to loan.  But horrible for people who had to borrow.

There is no Record of increasing Taxation and Regulation increasing Economic Activity

This is not just a condemnation of the Obama economic policies.  This is a condemnation of Keynesian economics as a whole.  They only lead to a bloated federal government.  That grows at the expense of the job-producing private sector (see Needed: A Reagan Moment To Stop Our Decline by Lawrence Kudlow posted 9/2/2011 on Investors).

During the Bush years, the federal government increased from 18% of GDP to 21%. The debt went up $2.5 trillion, from roughly 32% of GDP to 40%. And now, during the Obama period, spending has moved even higher to at least 24% of the economy, while total federal debt has ballooned near 100% of GDP.

It’s almost a mirror image: The expansion of the public sector and the decline of the private sector. This is completely inimical to the American peacetime experience…

And all while jobs, the economy and stocks slumped over the past 10 years, the dollar dropped 37% and gold increased by nearly 500%, from $250 to nearly $1,900 an ounce.

We don’t have the kind of inflation today that we experienced in the 1970s. But it is certainly worth noting that a collapsing currency and a skyrocketing gold price are key barometers of a loss of confidence in the American economic story.

But the Keynesians aren’t worried.  Mr. Paul Krugman belittles those ‘responsible’ people who worry about phantom demons like inflation.  When it comes to spending, their constant refrain is to flame on.  And only worry when inflation is burning white hot.  Then they can simply tap their monetary breaks and make everything good again.  Or so they think.

But there is a bigger problem.  This ‘limited’ government of the Founding Fathers is growing into a leviathan. 

My key thought is that the U.S. in the last decade has adopted a wrongheaded policy of government expansion — primarily spending and regulating — financed by ultra-easy monetary policy and rock-bottom interest rates.

Tax rates haven’t moved much. But the whole tax system is badly in need of pro-growth flat-tax reform and simplification. However, the expansion of spending and regulating is robbing the private sector of its entrepreneurial vitality. Here’s the new fear: More big-government spending stimulus from Obama’s jobs plan. More EPA. More NLRB. More Dodd-Frank. More ObamaCare.

And as the policy mantle for growth has swung to Federal Reserve stimulus, we are learning once again what Milton Friedman taught us 40 years ago: The central bank can produce new money, but there is no permanent production of jobs and growth from that pump-priming.

Big government financed by easy money is a lethal economic combination. It must be reversed. We should be reducing the regulatory and spending state while keeping money predictably stable (and even re-linked to gold).

The supply-side nostrum that worked so well for 20 years, beginning with Ronald Reagan, was low tax rates, light regulation, limited government, and a hard dollar. Gold collapsed between 1980 and 2000 as stocks, jobs, and the economy roared. The last ten years? We’ve gotten the policy mix completely backwards. The results show it.

And that’s something that the Keynesians can’t point to.  When they had full legislative power (as they had since the Democrats won the House and Senate back in 2006), they can’t point to a historical record of success.  Like the tax-cutting supply-siders can. 

JFK cut taxes and saw economic growth.  Reagan cut taxes and saw economic growth.  George W. Bush cut taxes and saw economic growth.  But there is no record of increasing taxation and regulation increasing economic activity.  You know why?  Because it doesn’t.  If it did the economy would be booming now because the government has never spent or regulated more.

Let’s hope the Keynesians Concede Failure while there is still an Economy to Save

How many bad economic reports will it take before the Keynesians will finally concede failure?  When will the Ivy League elitists stop hating people who are more talented and successful than they are?  And when will the people that put them into power see that it’s only the power they’re interested in?  Not the economy.  Or our well being?

I hope these people come to their senses soon.  While there is still an economy to save.

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The Debt Limit Debacle goes on, Obama and the Democrats unable to Govern Responsibly like Responsible State Governors

Posted by PITHOCRATES - July 17th, 2011

An Explosion of Government Spending will require an Explosion of New Taxes, Borrowing and/or Printing

Blah, blah, blah.  And the budget debate goes on.  It is interesting that it is the Republicans that are being intransigent.  They’re the reason why there is no deal.  But the Democrats aren’t intransigent when they’re being intransigent.  Funny how that works.  Well now there’s a fallback plan.  In case the Republicans refuse to compromise and agree to all of the Democrat’s terms.  Here it is (see Five questions on the debt-ceiling debate posted 7/15/2011 on The Washington Post).

The third, and increasingly likely, option is a fallback proposed by Senate Republican leader Mitch McConnell (Ky.). Congress would allow Obama to raise the debt limit in three increments totaling $2.5 trillion. It would also vote on resolutions disapproving of the debt increases, letting Republicans formally blame the increases on Obama.

To get House Republicans behind the deal, McConnell and Senate Majority Leader Harry Reid (D-Nev.) are revising it to include $1.5 trillion in cuts to government agencies and a new bipartisan committee to produce a framework for long-term debt reduction. Obama signalled Friday that he could live with the McConnell-Reid fallback.

So they will agree to disagree and let Obama do what is ‘best’ for the country.  And let him have full blame for doing it.  It’s a trap.  So when the nation implodes under unsustainable debt and a destroyed economy, the Republicans can point at Obama and say, “He did it.”  The Republicans may win the battle.  But they will lose the war.

A new bipartisan committee?  Didn’t we already do this?  The president’s own bipartisan committee of Erskine Bowles and former-Sen. Alan Simpson already did this.  And Obama promptly ignored their recommendations.  Then Joe Biden gave it a whirl.  And failed.  Then the president sat in meetings himself.  And failed. 

Another committee?  Why?  It’s just going to fail, too.  They need to cut government spending.  They know it.  All of these bipartisan committees know it.  Even the Chi-Coms know it.  But Obama and the Democrats just aren’t going to do it.  They’ll just keep wasting time with these meetings until they can get the Republicans to cave.  Because that’s their idea of compromise.

A “grand bargain” would mean settling for smaller tax increases on the wealthy than if Obama simply let the George W. Bush-era tax cuts expire at the end of 2012. And it could impede the economic recovery by ratcheting back government spending, thus reducing demand.

A bargain implies two competing viewpoints reconciled to best satisfy both sides.  It doesn’t work well when the Democrats simply reject the Republican’s views in toto.  And hold on to failed, dogmatic Keynesian economic policies.  For if government spending worked there would be no recession.  Or a budget debate to raise the debt limit. 

This pervasive view that these Keynesian policies are accepted as the only viable policies by the Democrats is the reason why we’re in the mess we’re in.  It appears that no amount of empirical evidence discrediting Keynesian economics will ever dissuade the Democrats from their reckless spending ways.  Thickheaded, stubborn and imbued with an air of all-knowing condescension and infallibility, they will let the country crash and burn before ever considering the idea that maybe they aren’t as brilliant as they think they are.

But as Obama sees it, the debt-ceiling crisis has offered an opportunity to fulfill his grand if nebulous campaign promise to get serious about attacking the nation’s fundamental problems. Being able to campaign on a major debt deal could outweigh giving up the chance to attack Republicans over Medicare. Settling now for a smaller tax increase on the wealthy would spare Obama a divisive fight over the Bush tax cuts. And getting the nation’s fiscal house in order could make it easier to win support for spending on education, research and infrastructure in a second term.

As for the economy, Obama seems to have adopted, at least to some degree, the Republican theory that businesses will invest more if they see Washington getting a handle on the debt. And a 10-year debt deal could be arranged so that few of the cuts went into effect immediately — there could even be some upfront stimulus included in the deal.

More spending?!?  You’re going to get your fiscal house in order (i.e., reduce the deficit) by spending more?  Well there’s only one way of doing that then, isn’t there?  With massive new taxes.  And not just on the wealthy.  These are going to have to reach deep into the middle class.  Because Obama has increased the deficit by a trillion dollars.  He’s the king of deficit spending.  He’s taken deficit spending to uncharted heights.  And it will take trillions in new taxes to reduce his deficits.  And this is the problem.  He is spending too much.

The Reagan Revolution was animated by “supply side” theory, but Ronald Reagan himself presided over several tax increases after his initial big cuts of 1981. He escaped GOP opprobrium, but George H.W. Bush caught his party’s ire when he signed a 1990 deficit-reduction deal with higher taxes. George W. Bush passed two big tax cuts, which nonpartisan budget experts now say were a major factor in today’s deficits.

Those ‘budget experts’ are no doubt Big Government Keynesian economists who love stroking their egos by advising governments on macroeconomics.  Talk to an Austrian School economist and you will hear a far different story.  And one that better stacks up against history.

Reagan made a deal with Tip O’Neil and the Democrats to cut $3 dollars of spending for every new $1 in taxes.  Of course, the Democrats lied.  They never honored their spending cuts promise.  Still his tax rate cuts nearly doubled tax receipts.  So tax rate cuts can and have increased tax revenue.  It was the out of control spending of Tip and company that gave Reagan those $200 billion deficits.  Chump change by Obama’s deficit standards. 

Bill Clinton fell ass-backwards into an economic boom thanks to the irrational exuberance of the dot-com bubble.  Money from capital gains tax from all those exercised stock options poured into federal coffers.  Then the bubble popped.  And George W. Bush started his presidency with the dot-com recession.  So, in response to the recession, Bush cut taxes in 2001 and 2003 to stimulate the economy.  In 2003 federal tax receipts were $1.782 trillion.  In 2008 they increased to $2.524 trillion.  That’s an increase of $742 billion.  Or an increase of 41.6%. 

So, no, the Bush tax cuts did not cause the deficit.  It was TARP (caused by the Democrat’s poor oversight of, and profiting from, Fannie Mae and Freddie Mac and their great subprime mortgage scam).  Obama’s stimulus.  And Obamacare.  An explosion of federal spending that will require an explosion of federal taxes, borrowing and/or printing to pay for.  No, this isn’t George W. Bush’s deficit.  This is Obama’s deficit.

A Shortage of Health Care Workers in Canada?

And speaking of national health care, let’s take a look at how well it is working in Canada (see Interactive Billboards: Bringing Billboards To Life by Misty Belardo posted 4/24/2011 on Bit Rebels).

An example of a great interactive campaign is this interactive billboard placed at bus stops. The campaign’s objective was to raise awareness about careers in public service. The challenge for the ad agency was to create enough interest in people so that they might seriously consider pursuing a career in public health. The big idea was to give people the feeling that they are capable of saving a life.

The billboard consisted of a huge interactive screen that illustrated a patient dying (as morbid as that may be). When a passerby pushed the hand marks on the sign, the electrocardiogram beeped, indicating that the man came back to life. Right at that moment a message read “Choose a career in public health, visit SaveLives.com.” It would be interesting to find out how many people interacted with the billboard, and even more importantly, how many of those registered and inquired about that career. Usually for campaigns like this it takes a couple months to find out the results.

The ad is apparently to attract health care workers in the province of Québec, Canada.  Which means they must have a shortage of health care workers.  And must be rationing care.  For that is an expensive way to advertise.  And you don’t do that unless the need is critical.  Whereas in America, it is one of the few growing sectors of employment.  Until the government takes it over under Obamacare, that is.  Then the Americans, too, no doubt, will be advertising to get more people to work in the bloated bureaucracy that American health care will become.

And it’s going to be bad in America.  The debate over raising the debt limit so they can pay their current bills?  Those bills don’t even include the explosive costs of Obamacare.  Those costly benefits are yet to kick in.  When they do there will be a whole lot more people covered by the same amount of health care workers, thus creating a shortage of them.  Which will require the rationing of limited health care resources.  (Unless the government finds an extra trillion dollars in some old coat in the closet.)  And then Obamacare will limp along like Medicare.  Chronically in the red.  And forever threatening to cut providers’ pay.

The State Governors know how to Govern

Part of Obama’s grand plan is to pass a lot of costs along to the states.  Because they can.  And states have to bite the bullet and absorb these costs.  Because they can’t pass them onto anyone else.  Or print money.  We call them unfunded mandates.  State governors call them bull [deleted expletive].

You see, states don’t have the options of the federal government.  They can’t be forever silly and irresponsible.  They can’t bluster in hyperbole, thump their chests with pride for a job not done and then just kick the can down the road.  They have to do what Obama and the Democrats in Washington won’t do.  Govern (see For governors, a personal toll from budget battles by Dan Balz posted 7/16/2011 on The Washington Post).

Talk to state executives gathered here at the summer meeting of the National Governors Association and it quickly becomes clear that the budget fights this year have not just left political scars, but some personal ones as well. As Washington Gov. Christine Gregoire (D) put it, “I’ve just come through a session in which I made rotten decisions.”

In Gregoire’s view, those decisions weren’t bad because they failed to solve the state’s budgetary problems or left her budget hopelessly out of balance. To the contrary, Gregoire oversaw cuts of more than $4 billion that balanced her biennial budget.

Like many governors, Gregoire cut pay for state workers, reformed the state pension system, asked state employees to pay more for health care and retirement, eliminated cost-of-living increases for some retired state employees and revamped the state’s worker compensation system.

She cut education spending and raised college tuition.

Now that’s governing.  Doing the right thing no matter how much it pains you.  This is the way it’s supposed to be.  Politics just isn’t a game, a path to riches and a fat pension.  It’s doing what’s best for the people you govern.  Even when it goes against your own personal philosophy.

We’ve come a long way from the Intent of the Founding Fathers

It’s just more of the same from Washington.  And this is what Thomas Jefferson feared.  And why he hated Alexander Hamilton so.  Permanent government debt is a dangerous thing.  It can give you an out of control federal behemoth.  Intruding ever more on our individual liberties to feed it’s appetite for ever more revenue.  Which is what Washington is today.

Jefferson cut federal spending so much he could hardly defend American shipping.  Today the federal government collects in taxes enough to pay for one Apollo moon program each month and it still isn’t enough. 

We’ve come a long way from the intent of the Founding Fathers.  Lucky for them they didn’t live to see what we’ve done to their beloved republic.

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LESSONS LEARNED #74: “When negotiating it’s important to understand the ‘time value’ of promises. The longer out in time something is promised the less likely that promise will be kept.” -Old Pithy

Posted by PITHOCRATES - July 14th, 2011

Slaying the Inflation Beast

In Washington promises would make a poor currency.  Because they’re very inflationary.  Politicians make a lot of promises.  And they break almost as many as they make.  Promises just don’t hold their value over time.  Especially when it comes to spending cuts.  Any promise for future spending cuts will be worthless by the time that ‘future’ arrives.  Because things change.  The economic picture may change.  And they’ll write new legislation to eliminate those spending cuts.  To adjust for these unforeseen changes in the economy.  Just as those promising those spending cuts knew they would.  That’s why politicians (i.e., Democrats) can be generous when offering future spending cuts in any budget debate.  Because they have no intention of ever keeping those promises.  So Democrats can be very generous in offering ‘future’ spending cuts.  In exchange for tax hikes in the here and now.  It’s a con.  And one of the biggest such cons was the Tax Equity and Fiscal Responsibility Act of 1982 that Ronald Reagan fell for.

Reagan’s poor economy had its roots in the Sixties and LBJ‘s Great Society.  LBJ was a tax, borrow, print and spend liberal.  And he spent.  He exploded government spending for his Great Society.  On top of the massive war spending for Vietnam.  The economy limped into the Seventies.  A bad economy and high taxes left few options to pay for that spending.  So the Fed just printed money.  Which devalued the dollar.  The dollar then was still convertible to gold at $35/ounce.  With the depreciation of their dollar assets, foreign nations converted their dollars to gold, depleting U.S. gold reserves.  To stem this loss of gold Nixon suspended the dollar’s convertibility into gold (the Nixon Shock).  Free from the restraint of a quasi gold standard, Nixon turned the printing presses on high.  Devaluing the U.S. dollar in the process, giving us high inflation. Then the 1973 oil embargo came and made everything worse.

Gerald Ford did little to change things.  Or Jimmy Carter.  They were little more than Keynesians themselves.  And believed in the power of government spending to stimulate the economy out of recession.  So their policies remained Keynesian.  Tax rates were high.  As was government spending.  And then another oil crisis came thanks to the Iranian Revolution.  Things just went from bad to worse for Carter.  Inflation was killing the economy.  Until Paul Volcker came on board after a cabinet shakeup.  He slew the beast.  Eventually.  Starting in the Carter administration.  And finishing the job in the Reagan administration.  For one of the tenants of Reaganomics was a sound currency.  Which Volcker gave him by slaying the inflation beast.

Reagan was not a Keynesian

Inflation is the great big bad side affect of Keynesian economics.  For it’s the only economics system that tells governments that counterfeiting money is a good thing.  So governments do.  And find justification for their actions by the sweet nothings Ivy League economists whisper in their ears.  But once the inflation beast is unleashed it is not easily subdued.  Because the only true antidote for runaway inflation is a good, deep recession.  And a bit of a deflationary spiral to put prices back to normal.  So this was where the economy was in 1982.  In deep recession.  With high unemployment.  And double digit interest rates (reaching as high as 20% on occasion).

Tax receipts fell.  As you would expect them to during a deep recession.  Which increased the deficit.  And this was just a calamity.  The country was facing economic ruin.  They just had to raise taxes.  For it was the only cure.  And the Democrats demanded that Reagan do just that.  Raise taxes.  But being that it went against another tenant of Reaganomics, Reagan refused.  He was not a Keynesian.  His Reaganomics was more of the Austrian School variety.  Low taxes.  Less regulation.  Sound money.  And little government spending.  He believed that the massive government spending was the problem.  And you didn’t fix that problem by giving the government more money to spend.  No, Reagan wasn’t going to abandon principles easily.  They needed something to sweeten the deal.  To make him abandon his principles more easily.  And they came up with a pretty sweet lie.

“Okay,” they said to Reagan.  “You’re right.  We need to cut spending.  We’re all in agreement here.  But the recession is hurting the people.  We can’t hit them with spending cuts now.  We’ll have to ease them in over time.  To make it easier on the people.  So we’ll give you your spending cuts.  A lot of them.  Just not right now.  In the future.  When the people are back on their feet.  You win.  All we ask for in return is that we increase taxes now before this deficit causes some damage that we won’t be able to walk away from.”

Democrats are Liars

And they made a deal.  Tax hikes now.  For spending cuts later.  And a lot of them.  For every new dollar in taxes they would cut $3 of spending.  It was some unprecedented spending cuts.  So Reagan accepted the deal.  Tax hikes now for spending cuts later.  He signed the Tax Equity and Fiscal Responsibility Act of 1982 into law.  He only made one mistake.  He trusted the Democrats.  And didn’t see them twisting their evil mustaches while they were making their deal.  Nor did he see them rub their hands together as they made a sinister laugh.

A Democrat’s promise to cut taxes isn’t worth the paper it’s written on.  For it starts to depreciate before the ink even dries.  And the numbers prove this.  According to CBO, tax revenue in 1982 (the year of the tax hikes) was $617.8 billion dollars.  At the end of Reagan’s second term in 1988, tax revenue rose to 909.1 billion.  For an increase of $291.5 billion.  Supply-siders (of the Austrian School) will say it was Reagan’s massive tax cuts in 1981 (Economic Recovery Tax Act of 1981) and 1986 (Tax Reform Act of 1986) that that generated this tax revenue by creating more taxpayers.  Keynesians will say it was the Tax Equity and Fiscal Responsibility Act of 1982 that generated this revenue by taking more from each taxpayer.  For the sake of argument, let’s say the Keynesians are right.  And all that new tax revenue is from the higher taxes.  So, according to the deal he made with Democrats to get this tax increase, government spending for the same period should have gone down by three times this amount, bringing total outlays at the end of that period to a negative $128.8 billion. 

Now we know that didn’t happen.  Government spending didn’t go to less than zero.  So if they didn’t honor their 3-1 pledge, how much did they cut spending?  Well, in 1982 government outlays were $745.7 billion.  In 1988 that increased to $1.06 trillion.  For an increase in spending of $318.8 billion.  Clearly something is amiss here.  For this is not spending reduction.  It’s a spending increase.  For every new tax dollar Congress collected they increased spending by $1.10.  That’s not the promised spending reduction.  It’s quite the opposite.  More spending.  A lot more spending.  That $3 gain in spending cuts turned out to be a $4.10 loss.  The Democrats lied.  And Reagan would never fall for this trick again.  For he learned the hard way that there are no such things as future spending cuts with Democrats.  And that Democrats are liars.

Don’t trust Democrats when they Promise to make Spending Cuts 

Of course, we could say that the supply-siders were right in regards to that increase in tax revenue.  The reason the Democrats failed to follow through on their promise was due to the success of Reagan’s tax cuts.  It just created so much money above and beyond what the tax hikes brought in.  They may have delivered their promised cuts but you can’t see them looking at the aggregate numbers.  Because Reaganomics created such great economic activity that it showered Washington with dollars.

It is an interesting choice.  Either the Democrats are liars and renege on their promises.  Or they are incompetent and follow failed Keynesian economic policies.  Perhaps it’s a little of both.  They’re both liars.  And incompetent.  For it would explain a lot.  Such as how their policies never make the economy any better.

Either way the lesson learned is for certain.  Don’t trust Democrats.  Especially when they promise to make spending cuts.  Because whatever may happen, one thing is clear.  What won’t happen are the spending cuts.

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