Debt Ceiling Debate is Masking the Horrific Economic News

Posted by PITHOCRATES - July 29th, 2011

The Meaning of Bipartisan Depends on your Point of View; on the Right it means Compromise whereas on the Left it means Unconditional Surrender.

In the budget debate to raise the debt ceiling, both sides have dug in.  The Left says the Right is being intransigent.  Saying they are unwilling to compromise.  Even though they have done far less in the compromise department themselves.  They want to raise taxes.  They want to borrow more.  And they will not compromise on these positions.  They refuse to pass any Republican bill in the Senate (and President Obama says he will veto any bill that makes it through the Senate) unless it completely gives way to the Democrat position. 

All the while this theatre is playing out credit rating agencies are lining up to downgrade U.S. sovereign debt due to excessive deficits, debt and out of control government spending.  Unless they see at least $4 trillion in real spending cuts (not promised cuts that never happen or baseline ‘spending cuts’ that still increase spending), the downgrades are a fait accompli.  At least according to an S&P report.

If they’re that Bad at Analyzing Data do we really want them Tweaking the Economy?

As cheerful as all that is at least we can look forward to some upbeat economic news.  Just like Obama, Biden, Bernanke, Geithner, et al have been promising with all their economic tweaks to win the future.  And the result of all that vey extensive and very expensive tweaking?  Hmm.  What would be a good choice of words?  How about abject failure (see Economy in U.S. Grows Less Than Forecast After Almost Stalling by Shobhana Chandra posted 7/29/2011 on Bloomberg)? 

Revisions to GDP figures going back to 2003 showed that the 2007-2009 recession took a bigger bite out of the economy than previously estimated and the recovery lost momentum throughout 2010. The world’s largest economy shrank 5.1 percent from the fourth quarter of 2007 to the second quarter of 2009, compared with the previously reported 4.1 percent drop. The second-worst contraction in the post-World War II era was a 3.7 percent decline in 1957-58.

The Fed’s preferred price gauge, which is tied to consumer spending and strips out food and energy costs, climbed at a 2.1 percent pace, the most since the last three months of 2009, compared with 1.6 percent in the first quarter, as higher oil and food costs pushed up the prices of other goods and services. The central bank’s longer-term projection is a range of 1.7 percent to 2 percent.

“This is the worst of all worlds for investors, certainly the worst of all worlds for the Fed,” John Silvia, chief economist at Wells Fargo Securities LLC in Charlotte, North Carolina, said in an interview on Bloomberg Television. “A little too much inflation, not enough growth, that is a tough scenario in the U.S.”

Of course, they’ll say it was even worse than they thought.  Again.  Blame George W. Bush.  Again.  Which doesn’t fill one with a lot of confidence.  For if they’re that bad at analyzing data, do we really want them tweaking the economy?

Still, they keep telling us how bad things would have been if they didn’t act?  Why, there’d be dingoes running in the streets eating our babies.  To be honest, we’re tired of hearing about how many jobs they created and saved.  We’d probably be further ahead today if we’d taken the chance with the dingoes and they left the economy alone.

The Obama Social Engineering is giving us Carter Stagflation

Inflation.  And low GDP growth.  That is a horrible combination.  But it’s what you get when you try to use monetary policy to fix fiscal problems (see Forget About The Debt Ceiling Debate, Where’s The Economic Growth? by Kevin Mahin posted 7/29/2011 on Forbes). 

I recognize that the debt ceiling debate may make for interesting political theatre for some.  I also recognize that the spending and revenue issues underlying the debate need to be addressed sooner than later.  However,  the heightened threat of stagflation*, now present in the system, is of paramount concern to me.

*Stagflation is a financial term often used to describe an environment where inflation (i.e. prices) is high and economic growth is low.  Periods of stagflation have historically been accompanied by high unemployment as well.

We are fast approaching the malaise of the Carter stagflation.  We need fiscal policy that is conducive to creating jobs.  Instead, this administration is more concerned about social engineering at the expense of job creation.

Killing the American Automotive Industry and Killing Americans

For all the talk about the auto bailouts to save American jobs, the latest policy appears to want to kill American jobs.  When the auto industry is suffering anemic growth, the Obama administration just made it harder to be in the auto industry by raising fuel efficiency standards to 54.5 miles per gallon by 2025 (see Obama to unveil auto fuel rule deal by David Shepardson posted 7/29/2011 on The Detroit News). 

The deal would extend a May 2009 agreement that boosted fuel efficiency standards to 34.1 mpg by 2016, costing the auto industry $51.5 billion over five years.

In the current budget debates, Obama keeps saying that because of the slow economic recovery we shouldn’t go on a cost cutting spree.  That would only pull consumer spending out of the economy.  Of course he has no such empathy for the struggling auto industry.  He’s more than willing to raise their cost of doing business.  Killing jobs in the process.

Incidentally, there are only two ways to squeeze this kind of mileage out of a car.  Making it so light that it (and its passengers) would probably not survive most accidents.  Or being unable to build a car to meet this standard.

Gas Prices must Rise to between $4.50-$5.50 for the Electric Car to Succeed

But what on earth would be the reason to enact standards that automakers can’t meet?  Well, how about this (see Gas must hit $4.50 to make electric cars cost-effective by Joel Gehrke posted 7/29/2011 on the Washington Examiner)? 

Gas prices must rise to between $4.50-$5.50, the study authors suggest, for electric vehicles to become less expensive to own than gas-powered vehicles…

Of course, this omits the other method of making electric cars competitive — enact fuel efficiency standards that make gas-powered vehicles illegal to make or impossibly expensive. Given President Obama’s announcement today that fuel economy standards are set to rise to 54.5 mpg between 2017 and 2025, it seems that the electric vehicle industry is getting the government props necessary to make consumers buy the cars.

This is not how you increase domestic auto output.  Or create jobs.  This is how you change human behavior.  By forcing people to act against their will.  And in the process making us all poorer by increasing the cost of food.  How?  Gasoline and diesel are a big component of food costs.  For it takes fuel to grow food.  And to bring it to market.

The One Thing the Obama Administration is Good At

It makes you think.  Is all of this debt ceiling debate pure theatre to distract us from the destruction of the economy?  Because this destruction is pretty good as far as destruction goes.  You probably couldn’t have done a better job if you tried.  Which begs the question was this all planned?  A social reengineering of the United States brought about by the destruction of the U.S. economy? 

If so, at least you can say there was one thing the Obama administration was good at.

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

Posted by PITHOCRATES - July 28th, 2011

When is a Spending Cut an Increase in Spending? 

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

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

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

The Power of Baseline Budgeting

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

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

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

In Baseline Budgeting a Spending Cut is an Increase in Spending

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

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

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

The Government Shutdown of 1995 and 1996 

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

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

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

Baseline Budgeting helps you Govern against the Will of the People

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

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

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

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Using Class Warfare to raise the Debt Limit while the Chinese Love Chairman Mao

Posted by PITHOCRATES - July 16th, 2011

You just don’t create more Jobs by Raising Taxes

Long story short the economy sucks.  And it’s not getting better anytime soon (see Number of the Week: 5% Unemployment Could Be Over a Decade Away by Justin Lahart posted 7/16/2011 on The Wall Street Journal).

162: Number of months it would take at this year’s pace of job growth for unemployment rate to fall to 5%.

That’s 13 and a half years of more of the same.  High unemployment means fewer taxpayers.  This does not bode well for our current debt crisis or that out of control government spending.  Which has all of Washington in a panic as they desperately try to get the Republicans to cave and increase the debt limit so they can borrow more. 

Obama and the Democrats want tax hikes.  To take more from those who work.  The Republicans want to go the route of making more taxpayers (i.e., create more jobs).  And you just don’t create more jobs by raising taxes.  Unless you live in fairyland.

‘Shared Sacrifice’ means Taxing the Wealthy More

But the spending is so out of control and the economy so bad that the Obama administration is desperate for new taxes.  They’re willing to offer any deal.  And tell any tall tale (see Obama appeals to middle class on debt talks; GOP touts balanced budget by the CNN Wire Staff posted 7/16/2011 on CNN).

Obama cited budget deals forged by President Ronald Reagan and Democratic House Speaker Tip O’Neill and President Bill Clinton and Republican Speaker Newt Gingrich.

“Nobody ever got everything they wanted,” Obama said. “But eventually they worked together, they moved this country forward…”

“We’ve been down this road before,” he said. “In 1990 Congress and the president struck a deficit reduction deal that combined spending cuts with tax increases. Unfortunately, while the tax hikes remained, the spending restraint did not, and our debt has marched higher.”

There’s a little history revisionism.  The Democrats got their tax hikes.  And screwed Republicans on the spending cuts.  The infamous $3 in spending cuts for every $1 in new taxes promise in the Tax Equity and Fiscal Responsibility Act of 1982Tip and his Democrats reneged on that promise.  Just like the Democrats did on their 1990 promise. 

‘Working together’ to Obama means to do what the Democrats want and to stop being a pain in the ass.  So you can understand why the Republicans are a little gun-shy when it comes to making deals with them that require trust.  Because they have a history of being untrustworthy.

Evoking compromises of the past, President Barack Obama said Saturday that a commitment to shared sacrifice can break the current impasse on the debt ceiling…

He used his address to reach out to the middle class, reiterating his call for higher taxes on the wealthy and reforms to politically popular entitlement programs such as Medicare and Social Security. “We are all part of the same country. We are all in this together…”

One of the issues at heart of the current debate is Obama’s call for more tax revenue by allowing tax cuts from the Bush presidency to expire at the end of 2012 for families making more than $250,000. His plan would keep the lower tax rates for Americans who earn less.

Obama noted earlier this week he is not looking to raise any taxes until 2013 or later. In exchange, the president said, he wants to ensure that the current progressive nature of the tax code is maintained, with higher-income Americans assessed higher tax rates.

Shared sacrifice?  Higher taxes on the wealthy?  Clearly that’s not shared sacrifice.  That’s making the wealthy pay more.  Even though they are already paying a lot.  In fact, any poor person who wins the lotto will be shocked to see how much they will owe in taxes.  Say you won a million dollar jackpot.  Per the 2010 federal income tax table, you’ll owe $327,643.75.  Not to mention state or local taxes.  You’ll be lucky to keep half of your winnings by the time you’re done paying your taxes.  Is that fair?  If it’s you, no.  If it’s the ‘rich’ and you’re not rich, sure.  Why not?  Classic class warfare.  And it’s exactly what the Democrats are banking on.  

A Warm Love for Chairman Mao

And speaking of class warfare, you know who else is good at it?  The Chinese communists.  And it starts by indoctrinating their children (see Red State by Hannah Beech posted 7/16/2011 on Time).

Twelve-year-old Chen Le is a typical Chinese kid. He loves flying paper airplanes, plays Ping-Pong and dreams of becoming a scientist. And he aims one day to join the Chinese Communist Party (CCP) so, as Chen puts it, “I can puff out my chest and say I am a party member…”

…Then there’s the Red Army school program, which uses donations and other funds to instruct 1.15 million kids in academies named after the communist militia. “Our patriotism classes are even more patriotic than those of normal schools because loving our country is very important for our current society,” says Fang Qiang, the secretary-general of the National Red Army Construction Project Council. “Our students all have a warm love for Chairman Mao.”

A warm love for Chairman Mao?  Interesting.  Talk about history revisionism. 

[The] red revival is facing something of a backlash. For some Chinese, the color red brings back the bad memories of the 1966-76 Cultural Revolution, when frenzied Red Guards rampaged nationwide. The resurgent glorification of Mao, who even staunch supporters have grudgingly labeled “70% right and 30% wrong,” has alarmed others. As the red-culture campaign reached a crescendo this spring, economist Mao Yushi of Beijing think tank Unirule Institute of Economics wrote an online essay blaming Mao for overseeing the deaths of some 50 million Chinese. The Great Helmsman was “a backstage orchestrator who wrecked the country and brought ruin to the people,” the academic wrote. Censors quickly purged his comments.

There wasn’t a whole lot of love for Mao when he was killing those 50 million Chinese.  Just a lot of fear.  And suffering.  As China reformed and purged the rich and made everyone equal.  And poor.  And now the young are singing patriotic songs about the world’s greatest mass murderer.  To help keep everyone patriotic.  So they don’t see the rich getting richer.  And the poor staying poor.

For a nostalgic faction in the Chinese leadership, it is the market-oriented economic reforms of Mao’s successor Deng Xiaoping — which turned China into the world’s factory — that are responsible for having allowed ills such as graft and income inequality to flourish. In national surveys from 2005 onward, Chinese have expressed progressively less satisfaction with their lives, even as their incomes have surged. “We can’t stop divisions in society completely, but we can try to lessen the pain,” says Fang Ning, director of the Institute of Political Science at the Chinese Academy of Social Sciences in Beijing. “The central theme of red culture is to promote unity and equality in society. China has had economic growth. Now we want to pay attention to social growth as well.”

After some spectacular growth caused by allowing a little capitalism in, they will now be paying attention to social growth.  Much like in the United States.  And we see what that did for the Americans.  A 15 year or so recession.  And a debt crisis.  Which is now coming to China.  Who are no strangers to income redistribution.  Been there.  Done that.  Under Chairman Mao.  During his Great Leap Forward.  Which was more central planning disaster than moving the country forward.  In fact, it was capitalism that finally did move China forward.  As it moved America forward.  Until the Americans focused on social growth.   

If history repeats, as it usually does, perhaps their future will be our present.  Where they will be making speeches about shared sacrifice.  To avert a disaster.  And keep the peace.  Or they could just send the tanks in.  Which have proven to be pretty effective in shutting down an unhappy opposition.

Income Inequality sure pays the Tax Bills

The American economy won’t be getting better anytime soon.  Thanks to excessive government spending and debt.  Which the Obama administration is going to ‘fix’ by borrowing and spending more.  And increasing taxes.  Things that aren’t known for creating jobs.  Which is what we need.  Like in China.  They have a lot of them.  And see how well they’re doing?  They’re getting so rich that they have to get their young to sing patriotic songs to hide the income inequality.  So they don’t grow up and become dissidents.

Say what you want about income inequality, but it sure pays the tax bills.  China is buying U.S debt. The United States isn’t buying Chinese debt.  That should tell you a thing or two about letting the rich get rich.

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