More of the Same from the Fed means more Housing Bubbles and Great Recessions

Posted by PITHOCRATES - April 14th, 2013

Week in Review

Those who wanted to get away from the United States’ limited government past and grow government had to do away with the gold standard.  Those who favored a large and expansive federal government needed fiat money.  They needed the power to print money at will.  To fund deficits when they continually spend more than they have.  Despite continuously raising taxes.  When Nixon decoupled the dollar from gold in 1971 the fiat money people got their way.  Now the Keynesians could tax, borrow, print and spend to their heart’s content.  With the federal government in the driver’s seat of the U.S. economy.  With their Keynesian economists advising them.  Who said government spending was just as good as private spending.  So go ahead and tax, borrow and print.  Because all you need to create economic activity is to print money.

Of course they couldn’t have been more wrong.  As the Seventies proved.  Printing money just created inflation.  Higher prices.  And asset bubbles.  With no corresponding economic activity.  Instead there was stagflation.  And a high misery index (the inflation rate added to the unemployment rate).  Because there is more to economic activity than monetary policy.  Tax rates and regulations matter a whole heck of a lot, too.  As well as a stable currency.  Not one being depreciated away with double-digit inflation.  Rich people may get richer buying and selling real estate and stocks during periods of high inflation but working class people just see both their paycheck and savings lose purchasing power.

It was these Keynesian policies that caused the S&L Crisis.  The dot-com bubble.  And the subprime mortgage crisis.  Giving is the Great Recession.  The worst recession since the Great Depression.  But have we learned anything from these failed policies of the past?  Apparently not (see Blind Faith In The Fed Is Not Enough by Comstock Partners posted 4/12/2013 on Business Insider).

The move of the S&P 500 into new all-time highs is based on neither the economy, nor earnings, nor value, but almost completely on the blind faith that the Fed can single-handedly flood the market with enough funds to keep the illusion going.  In this sense the similarity of the current stock market to the dot-com bubble of the late 1990s or the housing bubble ending in 2007 is glaring…

Real consumer spending has been growing at a mediocre 2% rate over the past year despite growth of only 0.9% in real disposable income over the same period.  This was accomplished mainly by decreasing the savings rate to only 2.6% in February, compared to rates of 7%-to-11% in more prosperous times.  With employment growth diminishing and the negative effects of the January tax increases and the sequester yet to kick in, consumer spending is likely to slow markedly in the period ahead.  While March year-over-year comparisons may benefit from an earlier Easter, the reverse will probably be true in April.  Keep in mind, too, our over-riding theme that consumers, still burdened with most of the debt built up in the housing boom, are in no shape to jump-start their spending…

In sum, the lack of support from the economy, earnings or valuation leaves the Fed as the only game in town.  Although the old adage says “Don’t fight the Fed”, it did pay to fight the Fed in 2001 and 2002 and again from late 2007 to early 2009.  In our view, the Fed can only try to offset the tightness coming from the fiscal side, but cannot get the economy growing on a sustainable basis.

The only real growth we had was from a tax cut.  Surprise, surprise.  Of course that cut in the tax rate of the Social Security payroll tax decreased the Social Security surplus.  Moving the Social Security funding crisis up in time.  That along with Medicare and whatever Obamacare will do will cause a financial crisis this country has yet to see.  Which will cause great suffering.  Particularly because people are saving less because they have less.  Which is the only way they can compensate for the horrible economy President Obama and his Keynesian advisors are giving us.  So they won’t have private savings to replace their Social Security benefits that the government will spend long before they retire.

And what does the government do?  Why, spend more, of course.  Because of the sweet nothings their Keynesian advisors are whispering into their ears.  Saying the things big government types want to hear.  Spend more.  It’s good for the economy.  If you wonder what got Greece into the mess they’re in this is it.  Spending.  And anti-business policies to pull more wealth out of the private sector so the government can spend it.

All the countries reeling in the Eurozone sovereign debt crisis are there for the same reason.  None of them got into the mess they’re in because they had low taxes and low regulatory costs.  Because countries with business-friendly environments create private sector jobs.  And private sector jobs don’t cost the government anything.  So they don’t have to tax, borrow, print and spend like they do when they listen to their Keynesian advisors.  Because that is what causes chronic deficits to fund.  And growing national debts.  Things that don’t happen when you leave the economy in the private sector.

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We’d do better Emulating Bourbon Country than China

Posted by PITHOCRATES - June 25th, 2011

A Generous Government robs the Private Sector

The economy.  It’s bad today.  It’ll be bad tomorrow.  And probably will still be bad when many are thinking about retiring.  I say thinking.  Because that’s all they may be able to do about retirement.  Think about it.  As they keep working well into retirement age (see Retirement As We Know it Is “Dead”: EuroPacific’s Pento by Peter Gorenstein posted 6/22/2011 on Yahoo! Finance).

“Americans are have negligible savings, the real estate market is still in secular decline, stock prices are in a decade’s long morass, real incomes are falling, public pension plans are insolvent and our entitlement programs are bankrupt.”

Pento believes these issues could be resolved if the government takes the right steps. What might those be? He recommends lowering taxes, reducing inflation and balancing the budget as a means to increase the value of the dollar. If the dollar had more purchasing power and interest rates were higher, retirees would be able to live off their fixed income, he says.

Please note the common theme in the resolution.  Less government.  Less government spending.  Les government taxing.  Less government quantitative easing (i.e., stop depreciating the dollar).  Because it is all of this government intervention into the private sector that has killed so many private sector jobs.  Reduced our real incomes.  Bankrupted our entitlement programs.  And destroyed our pensions (because fat pension funds are just too tempting to ‘borrow’ from to pay for more spending.  And by borrow I mean steal).

A generous government is a government that robs the private sector to pay the beneficiaries of the public sector.  But they have taken so much that they have given the private sector the worst recession since the Great Depression.  Which, in turn, has starved government coffers.  Talk about killing two birds with one stone.

There’s no Recession in Bourbon Country

Despite being in the worst recession since the Great Depression thanks to all that government intervention into the private sector, there is some positive economic activity out there.  One area in particular that is near and dear to my heart.  Bourbon (see Bourbon’s popularity feeds growth of Kentucky distilleries by Bruce Schreiner, Associated Press, posted 6/25/2011 on USA Today).

The producers are aiming to quench a thirst for bourbon — especially premium brands — that is steady in the U.S. and rapidly expanding overseas, thanks in part to the comeback of cocktails appealing to younger adults, lower tariffs, robust marketing and a larger middle class in emerging markets.

A tariff is a tax on an import.  To protect the domestic competition.  Or so goes the theory.  Protective tariffs destroyed a lot of American industry that had no incentive to improve (textile, steel, automotive, etc.).  But that’s another story.  Thankfully, bourbon is an American spirit.  All proper bourbon hails from Kentucky.  Thanks to those freshwater streams through the limestone bedrock of those rolling hills.  So there are no foreign bourbon markets to protect.  Keeping tariffs lower than they may be otherwise.  Thus providing a healthy export market. 

Industry observer F. Paul Pacult, editor of the quarterly newsletter Spirit Journal, said bourbon makers are showing an adventurous side with premium offerings that reflect an “intramural competition.”

“There’s more innovation happening in Kentucky right now than any other place in the world,” Pacult said.

Now Kentucky is bourbon country.  There are a lot of distillers competing against each other.  And yet the bourbon market as a whole is growing.  There’s no recession in bourbon country.  Which just goes to prove the old maxim.  Competition makes everything better.

The industry’s biggest boost, though, has come from exports.

Producers of bourbon and Tennessee whiskey reaped $768.2 million in export sales in 2010, up from $303.8 million in 2000, according to the spirits council, citing statistics from the U.S. Department of Commerce and the U.S. International Trade Commission.

The biggest overseas customers include Australia, Japan, the United Kingdom and Germany, but the industry is looking at two seemingly bottomless markets — China and India — along with other emerging markets in Asia and Africa.

China and India.  Those two countries driving up the price of oil.  Because of exploding demand in their emerging middle classes.  Countries that gave up much of their communist/socialist ways.  Who turned their disdain for capitalism to ‘dain’ (which I think means the opposite of disdain).  And they have smoking hot economic growth.  Hard to believe that a communist country, China, is schooling the United States in free market capitalism.

Crony Capitalism and Corruption in China

Or are they?  Oh, they are getting more Western.  But not like the UK or the USA during the Industrial Revolution or the booming times that followed.  But after the growth of Big Government in those counties (see The long arm of the state posted 6/23/2011 on The Economist).

Chinese students used to aspire to a job with a foreign company. Now they are more likely to want one with an SOE [state-owned enterprises].

This may seem an odd choice, since the dynamism in China’s economy is mostly generated by non-state firms… In 1999 government-controlled firms owned 67% of industrial capital; a decade later their share had fallen to 41%. But in the industries that pay the highest salaries, state firms dominate.

A new shorthand has entered common parlance: guojin mintui, meaning the state [sector] advances and the private retreats. ..It has been tightening its grip on some industries it considers “strategic”, from oil and coal to telecommunications and transport equipment. It has been devising market-access rules that favour state firms. And to the chagrin of private businesses, it has allowed state companies to remain active in a surprising range of palpably non-strategic sectors, from textiles and papermaking to catering. In recent years property development has become a lucrative sideline for government businesses. “The tentacles of state-owned enterprises extend into every nook where profit can be made,” writes Zheng Yongnian of the National University of Singapore.

Already the young people are choosing the public sector over the private sector when it comes to their career.  Because the bloated public sector pays more.  With this higher pay they must be attracting the best and brightest to these SOEs.  So these SOEs must be kicking the non-state firms’ asses.

Some Chinese economists worry that the government’s response to the global financial crisis will bolster state enterprises and their bad habits at a time when they urgently need reforming. As the confederation’s researchers put it, much stimulus spending has involved “swapping from the left hand to the right hand”: the state lending to the state…

Unirule noted that the profits of state-owned industrial companies had increased nearly fourfold between 2001 and 2009. But their average return on equity was less than 8.2%, whereas that of larger non-state industrial enterprises was 12.9%. Factor in the low cost of borrowing enjoyed by SOEs and their access to land at below-market prices, the report said, and their real return on equity between 2001 and 2009 was minus 1.47%. They are, in effect, destroying capital.

Apparently not.  They actually have a negative return on investment.  So the SOEs are just deadwood propped up by government spending and special privilege.  Reminds me of another Asian country awhile back.  Where there was private sector/public sector partnering.  Where capital was shuttled from the left hand to the right hand.  Anyone like to guess the country I’m thinking about?  Anyone?  No?  Here’s a hint.  China and this other country hate each other.  Bitterly.  Which makes it rather ironic that they’re now following their example.  That Asian country is Japan.  During the Eighties.  A decade of spectacular growth.  That was more bubble than growth.  And we all know what happened in Japan in the decade that followed.  Not a whole hell of a lot.  Because the bubble popped.  And they suffered a devastating deflationary spiral similar to the Great Depression.  It was so bad that they called the Nineties the Lost Decade.

Some foreign businesspeople complain that market-opening measures initiated in the 1990s and early 2000s have run out of steam.  Many saw China’s accession to the WTO ten years ago as a great impetus for reform. But when the country reached the end of its transition period in 2006, its will faltered. Many foreign companies still report doing good business. But especially since the global financial crisis, the government has been widely accused of twisting rules in favour of its state-owned or, sometimes, private-sector favourites…

Local governments sometimes play a decisive role in determining which firms succeed and which fail. Take Himin, a manufacturer of solar water heaters based in the city of Dezhou in the northern province of Shandong. Himin is a private company, but it is the local government’s champion. Together Himin and the government have devised a branding strategy for Dezhou as China’s “solar city”. The government has helped Himin to grow by requiring apartment buildings to be equipped with solar water heaters and by subsidising solar-heated bathhouses in villages.

This is not capitalism.  This is crony capitalism.  Not much different from mercantilism.  And not a sustainable economic model.  Unlike entrepreneurism.  Like they’re doing in Kentucky.  While the nation is suffering the worst recession since the Great Depression, distillers are investing and innovating, competing against each other as they book record exports.  Without any partnering with their government.  While Himin is in bed with government.  A government that giveths.  And can just as easily taketh away.  And with business dependent only on their relationship to government, you can bet that there isn’t a lot of investing and innovating going on at Himin.  Because they don’t have to.  So why would they?

This scheme to encourage what the government calls “indigenous innovation” focuses on seven “strategic” industries, from alternative energy and low-carbon-emitting vehicles to information technology. First Financial Daily, a Chinese newspaper, reported that investments by these industries could amount to as much as $1.5 trillion over five years, of which the state is likely to contribute 5-15%. Mr McGregor says the scheme involves creating new Chinese technologies on the back of foreign ones supplied by companies eager for a share in the government’s massive spending. Some Chinese scientists have complained about the likely waste involved in state-directed R&D, but the party loves big projects too much to listen.

Good innovation doesn’t need government money.  Investors are more than willing to finance a good thing.  What investors don’t like to invest in are bad investments.  Which is typically what the government invests in.  Because a good investment can attract private capital.  So that leaves the bad investments for government to fund.

People flocking to the government for financing are just like ants at a picnic.  They just want to get in while the getting is good.  But they have little of value to offer.  They’ll just pull a lot of money out of the private sector that could have been put to better use.  By producing real economic growth.  With a positive return on investment.

Worse is the state directing private investment.  People risking capital know what good R&D is.  People risking other people’s money don’t.  And they’re far more tempted to consider political reasons than good science.

China’s state-sector reforms in the 1990s went for the low-hanging fruit. A decade ago angry workers were easily cowed into submission by police or bought off with handouts. But any further reform would affect the interests of people in the top echelons of the party as well as their families, who have extensive connections with state-owned firms.

Zhu Rongji, the former prime minister whose reforms obliterated many of China’s state-owned firms in the late 1990s, has also gone on the attack. In April he made a rare public appearance at his alma mater, Tsinghua University. He handed over copies of a four-volume collection of his speeches, due to be published later this year, and pointedly invited readers to “make comparisons with the situation today”. To his supporters, the present looks grim.

Top echelons of the ruling communists, as well as their families, are well connected with state-owned firms?  No wonder they have negative returns on equity.  They’re stealing money from these SOEs.  This is everything the communists said the capitalists did.  And here the wealthy communist elite are doing it themselves.  Exploiting the poor working class.  How ironic.

Maybe the Chinese are just drunk with power.  Or on that fine Kentucky bourbon.

You’re going to Work until you’re Dead

The Chinese economy is a house of cards.  Much like it was in Japan in the Eighties.  And it will crash.  One day.  Just as the Japanese economy fell.  And no doubt a round of deflation will follow.  Like in Japan.  The Chinese are already raising interest rates to stamp out inflation.  To try and stop a bubble in their economy.  Much like the rest of world is.  Well, pretty much everyone but Ben Bernanke in the U.S.  Who may still try another round of quantitative easing.  Silly Americans.  Adding inflation to high unemployment only gets you the misery of the Seventies.  Carter‘s stagflation.

Although some of that economic activity may be somewhat artificial, it is producing surpluses.  Enough for the Chinese to buy U.S. debt.  So the Americans can continue to pay for their entitlement programs.  Such as Social Security.  And Medicare.  Which everyone and their brother knows will go bankrupt in the not so distant future.  Just as the Baby Boomers start retiring en masse to stress these programs like they’ve never been stressed before.  Now imagine the Chinese economy crashing.  And their surpluses turn to deficits.  And they can’t buy U.S. debt anymore.  That’d be one painful scenario.  Unable to borrow money, the U.S. would have no choice but to cut spending.  In a big way.  As in all those entitlement programs.  Which account for almost half of all federal spending.  Ouch.

Retirement as we know it dead?  You better believe it.  You’re going to work until you’re dead.  Even if you saved for your own retirement.  Because a broke government is a desperate government.  And if they can’t raise enough money taxing income, and the Chinese aren’t buying our debt, they’ll start taxing your wealth.  Your savings.  Your assets.  Your retirement.  Some nations already do.  So it’s not unprecedented.  Which would make a Chinese crash rather depressing. 

Gee, I’d hate to be in our shoes.

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The Federal Debt and Public Sector Grow, American Exceptionalism Declines

Posted by PITHOCRATES - April 4th, 2011

Obama sets Spending Record, Maxes out Uncle Sam’s Credit Card

As Congress battles over a budget, Timothy Geithner goes back to Congress and warns them that the world as we know it will end unless they increase the debt ceiling.  I’m paraphrasing, of course (see U.S. will hit debt ceiling by May 16, Geithner warns Congress by Jim Puzzanghera posted 4/4/2011 on the Los Angeles Times).

The Treasury Department had estimated that the nation would reach its $14.29-trillion debt limit between April 5 and May 31…

The Obama administration is pushing Congress to increase the debt limit, as it has done 75 times since 1962. The nation has never failed to increase the limit, Geithner said.

But the nation has never spent money it doesn’t have like the Obama administration has.  After some 2 years in office Obama has added about $4.3 trillion to the national debt.  That’s pretty impressive for just two scant years.  And how does that compare with his predecessors?  George W. Bush‘s added $4.2 trillion in eight years.  Bill Clinton added $1.4 trillion in his eight years.  Ronald Reagan added $1.6 trillion in his eight years.  And Reagan is always attacked with the ‘sure he saved the economy and increased GDP but at what cost’ line implying he did it with reckless and irresponsible spending by mortgaging our future.  But Reagan’s debt was chump change compared to the Obama $4.3 trillion added in only 2 years.  Yet the Reagan debt was bad.  While the Obama debt is nothing to worry about.  Funny how that works. 

One thing for sure, Obama sure likes to spend other people’s money. 

Renewable Energy Subsidies are a Slush Fund for Democrats

So what are we spending so much money on?  Oh, lots and lots of things.  Some big (Obamacare).  Some small.  So small that when you look at it as a line item you say, sure, that’s a lot of money, but in the grand scheme of things, it’s chump change.  Like the debt Reagan added rebuilding the American economy and winning the Cold War.  Or solar energy subsidies (see Get A Tax Break For Going Green In 2011 by Ashlea Ebeling posted 4/1/2011 on Forbes).

When [a retired couple], N.J., both 73, file their 2010 tax return this spring, they’ll be getting a $15,000 federal tax credit for going solar. They were expecting to get an additional $11,000 state rebate too, but newly-elected Republican Gov. Chris Christie raided the N.J. Clean Energy Fund last year to help balance the state budget, so the pot of rebate money ran dry. Yet even without the promised state rebate, [they] calculate that their $50,000 investment will be paid off in five years thanks to the federal tax credit and other incentives.

He’s already watching his meter send electricity he generates back to the power company; he figures he’ll save $1,600 a year in electricity bills. And he stands to get up to $6,500 a year for 15 years in state-legislated solar renewable energy certificates…

Okay, so we have a retired couple who could afford to spend $50,000 on solar panels that will never pay for themselves in energy savings unless they live another 32 years in retirement.  You know, that is an awful return on investment.  Which explains why no one is making this investment.  Unless the government gives them about $100,000 in the next 15 years on top of the $15,000 federal tax credit.  And the $11,000 state benefits.  All to save $1,600 a year.  What a scam.

This may stimulate the economy locally for a short time, but it just adds to the debt.  And the long term problems will be far greater than the short term benefits.  Then again, 73 year old people won’t be around to face those problems.  But you can bet that they will be voting for the party that just dropped a boatload of money into their laps to spend in their retirement years.  Let’s not forget that the senior population is growing greater than the younger population.  And they vote more.  So you can see that although the return on investment on solar energy is awful, it pays huge political dividends.  And that’s what it’s all about.  Not the environment.

Obamacare is a Slush Fund for Democrats

And speaking of really enjoying those retirement years, here’s a little pork buried in Obamacare just coming to light (see Uncovered: New $2 billion bailout in Obamacare by Byron York posted 3/31/2011 on The Examiner).

Investigators for the House Energy and Commerce Committee have discovered that a little-known provision in the national health care law has allowed the federal government to pay nearly $2 billion to unions, state public employee systems, and big corporations to subsidize health coverage costs for early retirees.

The legislation called for the program to spend a total of $5 billion, beginning in June 2010 — shortly after Obamacare was passed — and ending on January 1, 2014, as the system of national health care exchanges was scheduled to go into effect.

In other words, if you support Obamacare, we’ll take care of you.  As we always do.  And that’s why they fight for the public sector workers like they do.  They get a lot of union dues and foot soldiers.  In return the government throws them a bone.  Like an additional $5 billion in health care subsidies.

Where is the money going?  According to the new report, the biggest single recipient of an early-retiree bailout is the United Auto Workers, which has so far received $206,798,086.  Other big recipients include AT&T, which received $140,022,949, and Verizon, which received $91,702,538.  General Electric, in the news recently for not paying any U.S. taxes last year, received $36,607,818.  General Motors, recipient of a massive government bailout, received $19,002,669.

The program also paid large sums of money to state governments.  The Public Employees Retirement System of Ohio received $70,557,764; the Teacher Retirement System of Texas received $68,074,118; the California Public Employees Retirement System, or CalPERS, received $57,834,267; the Georgia Department of Community Health received $57,936,127; and the state of New York received $47,869,044.  Other states received lesser but still substantial sums.

But payments to individual states were dwarfed by the payout to the auto workers union, which received more than the states of New York, California, and Texas combined.  Other unions also received government funds, including the United Food and Commercial Workers, the United Mine Workers, and the Teamsters.

Remember the GM bailout?  Obama screwed the GM bond holders.  He called them greedy.  Humiliated them for trying to keep their contract rights.  The Obama administration sent these ‘first in line’ in bankruptcy to the end of the line.  Even behind the UAW who had no investment in GM.  Obama gave the UAW free shares of stock just for being who they were; contributors to the Democrat Party.  When the company went public again, the UAW was able to reap a fortune on that stock gift and fund their poorly funded pension fund.  And now this.  More tax dollars gifted to them for being good Democrat Party contributors.  This time to pay for health care costs of early retirees.  Lovely. 

Privileged life is good.  Obama takes care of the privileged.  And all you have to do is vote for him.  And give him a piece of your union dues.

The Public Sector Grows, the Private Sector Shrinks

But this government generosity is getting out of control.  People see the gravy train.  And they’re getting on it (see We’ve Become a Nation of Takers, Not Makers by Stephen Moore posted 4/1/2011 on The Wall Street Journal).

If you want to understand better why so many states—from New York to Wisconsin to California—are teetering on the brink of bankruptcy, consider this depressing statistic: Today in America there are nearly twice as many people working for the government (22.5 million) than in all of manufacturing (11.5 million). This is an almost exact reversal of the situation in 1960, when there were 15 million workers in manufacturing and 8.7 million collecting a paycheck from the government.

It gets worse. More Americans work for the government than work in construction, farming, fishing, forestry, manufacturing, mining and utilities combined. We have moved decisively from a nation of makers to a nation of takers. Nearly half of the $2.2 trillion cost of state and local governments is the $1 trillion-a-year tab for pay and benefits of state and local employees. Is it any wonder that so many states and cities cannot pay their bills?

The problem with this trend is that the government doesn’t pay for these government workers.  The taxpayers do.  The people with private sector jobs.  And as the public sector (i.e., government) grows, the smaller the private sector gets.  Which has to fund an even greater public sector by ever greater taxes.  But the more taxes we pay the more sacrifices we have to make.  Our lives grow more austere.  While the public sector lives a far more comfortable life than ours.  The government will be the first to condemn this income disparity when they can attack some corporation.  But it’s a different story when the well-to-do are their own people.  So they try to hide this wealth transfer.  Well, they try to hide it from the makers.  Not the takers.

Don’t expect a reversal of this trend anytime soon. Surveys of college graduates are finding that more and more of our top minds want to work for the government. Why? Because in recent years only government agencies have been hiring, and because the offer of near lifetime security is highly valued in these times of economic turbulence. When 23-year-olds aren’t willing to take career risks, we have a real problem on our hands. Sadly, we could end up with a generation of Americans who want to work at the Department of Motor Vehicles.

Public sector workers will bitch and moan about their jobs.  How they can earn more in the private sector.  Of course, they never leave the public sector.  Because the pay and benefits in the private sector suck compared to what they get in the public sector.  And no one ever fires them or lays them off.  That’s why they don’t ever give up those jobs.  Even college graduates have learned this.  And to guarantee those sweet jobs you know they will become lifetime Democrat voters.

Over the period 1970-2005, school spending per pupil, adjusted for inflation, doubled, while standardized achievement test scores were flat. Over roughly that same time period, public-school employment doubled per student, according to a study by researchers at the University of Washington. That is what economists call negative productivity.

Why, then, is the answer to our educational woes always more spending?  Because there are a lot of teachers.  Who pay a lot of dues.  That go straight to the Democrat Party.  In exchange for more government spending on education.  Always for the children.  Yet the money never seems to make it to the classroom.  Based on the test scores.  But the money keeps flowing.  So the Democrat Party can always count on the teachers’ vote.

Most reasonable steps to restrain public-sector employment costs are smothered by the unions. Study after study has shown that states and cities could shave 20% to 40% off the cost of many services—fire fighting, public transportation, garbage collection, administrative functions, even prison operations—through competitive contracting to private providers. But unions have blocked many of those efforts. Public employees maintain that they are underpaid relative to equally qualified private-sector workers, yet they are deathly afraid of competitive bidding for government services.

So you could say these public sector workers are 20% to 40% overpaid, couldn’t you?  I mean, in the private sector, it’s the rare person who can demand 20% to 40% more than the going market salary or wage.  People just don’t choose to pay more.  Do you?  Do you hire a plumber whose rates are 20% to 40% higher than the going rate?  No, I doubt you do. I’ve even known union construction workers who hire nonunion workers to work at their house.  Because they, too, don’t want to pay more than they have to.  But public sector workers think they deserve this higher pay and benefits.  As does the federal government.  Who steps in to fight a governor (Scott Walker) who is trying to balance his state’s budget.  Why?  Because public sector workers are loyal Democrat voters.  And donors.  Via their automatically deducted union dues.

The Shining City upon a Hill to become Ordinary?

The national debt is growing out of control for a good reason.  Spending.  Now we’ve had spending in the past that was necessary.  But much of the spending in the last 2 years has had a higher purpose.  To fund the growing public sector.  And to buy loyal Democrat voters.  With the growth in entitlements consuming an ever larger part of the budget, that leaves little for the business of politics.  So they must borrow.  And borrow they do.  More than ever before.  They’ve added more in 2 years than George W. Bush, Bill Clinton and Ronald Reagan did in their 8-year terms.  And they’re begging Congress to raise the debt ceiling so they can keep on spending.

The future isn’t looking so bright.  Perhaps this marks the beginning of the end of American Exceptionalism.  The point on the historical timeline when we stopped being that shining city upon a hill.  When we became ordinary.  With our best days long behind us.  I hope not.  But it’s been done before.  Great civilizations have come and gone.  Done in by an ever growing public sector that bankrupts nations.  Even empires.  No one is immune.  Not even that shining city upon the hill.

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FUNDAMENTAL TRUTH #54: “Every dollar the government spends is a dollar that the consumer can’t spend.” -Old Pithy

Posted by PITHOCRATES - February 22nd, 2011

An Increase in Economic Activity Creates Jobs

Economic activity in a free market is win-win.  A buyer and seller come together.  They each have something the other wants.  One has a product or service.  The other has money.  Each values more what the other has.  So they trade.  And each feels they are better off after the trade.

Millions of such trades make up the economy as a whole.  And this goes on all by itself.  No one manages it.  No one steps into each trade to make sure it’s fair.  There’s no need.  If it’s not a fair trade one of the parties simply won’t trade.  They’ll go elsewhere to find a better deal.

As more people come together to make trades economic activity increases.  This activity creates more jobs (to meet growing demand).  Giving people more money.  So they can go out and make more trades.  Further increasing economic activity.

High Taxes and Government Spending Fell the Roman Empire

Many things made the Roman Empire a great empire.  Among these was the aqueduct.  And the Roman legions.  Fresh water allowed cities to grow.  And the army protected the cities from its enemies in other civilizations.   And the raiding barbarians beyond civilization.  But water and the army were costly, though.  It took a lot of money.  A lot of which came from the spoils of war.  And when the empire was expanding and there were always new lands to conquer there were always spoils to send back to Rome. 

But eventually the Romans saw their borders fixed.  And there was peace.  The Pax Romana (Roman Peace).  The problem with peace, though, is that you’re not waging war.  And when you’re not waging war you’re not sending home any spoils of war.  But the empire still had bills to pay.  Aqueducts to build.  And soldiers to pay.  So the Romans had to turn to other funding sources.  The citizens.  Taxes replaced spoils.

And the taxing and spending began.  The state grew.  The army grew.  And the government grew.  All required more and more taxes.  Then they debased the coinage (i.e., inflated the money supply by using less precious metal in each coin so they could make more coins out of the same amount of precious metal).  Silver coins contained more and more lead.  And were worth less and less.  Eventually Rome wouldn’t accept tax payments in silver coin.  You had to pay with gold.  Or taxes in kind (a wheat farmer gave a portion of his wheat to satisfy his tax obligation).  This got so bad that farmers quit being farmers because they couldn’t make any money with so much of their crops going to Rome to pay their taxes.  Then Rome passed laws preventing farmers from quitting farming.  The Roman citizen became an unhappy citizen.  Few wanted to serve in the Roman legions.  So Rome had to hire soldiers.  Which cost more money.  And on and on it went until tax and spend became tax and spent.  The empire spent itself into collapse.

The Key to Economic Activity is Private Sector Jobs

Every time taxes went up the Roman citizen had to pay more of his silver coins in taxes which left him with less to spend on his family.  When Rome debased their silver coins the Roman citizen’s money was worth less and bought less.  When more of a farmer’s crops went to Rome to satisfy their tax obligation they had less to sell at market.  Every time the government spent more the private sector spent less.  Because Rome transferred more of the private sector wealth to the public sector.

When the government takes more money out of the private sector, the private sector has less money to spend.  That means people are spending less when they go to the store.  Which means the store is selling less.  And when a store sells less they buy less.  And when they buy less manufacturers produce less.  So manufacturers cut back on production.  Lay people off.  Which means these people have less money to spend in stores.  So sales at stores decline further.  So stores buy less.  And manufacturers produce less.  Cut back on production.  Lay off people.  Who have less to spend.  And round and round it goes until the economy crashes into a recession.

The key to economic activity, then, is jobs.  We need jobs to get the money we need to make trades with other people.  If we don’t have a job we have no money.  And can’t trade for anything.  So we need jobs.  And who creates jobs?  Businesses.  And how do they do that?  By selling something.  The more they sell the more jobs they create.  The less they sell the fewer jobs they create.  And what helps them sell more?  Lower taxes.  What prevents them from selling more?  Higher taxes.  For the more money in the private sector the more money the private sector can spend.  And the more people can trade with each other.  Which increases economic activity.  Which creates more jobs.  Giving more people money to trade with other people.  And round and round it goes.  Until we all live happily ever after. 

An Economy Works Best when Government Intervenes Least

John Maynard Keynes was an economist that said that government could stimulate the economy by spending money during a recession.  Governments love this man.  Because it’s like a license to spend.  Never mind that it never worked.

Here’s why.  The government doesn’t earn any money.  They have to take it from someone else before they can spend it.  That’s like me giving you $20 out of my wallet so you can stimulate the economy.  And how much will you stimulate the economy by spending my $20?  Will it be more than if I spent that $20 myself?  No.  Because, in the end, someone is spending only $20.  Either you.  Or me.  The net spending doesn’t change.  Only who’s spending it.

This is the fundamental flaw in Keynesian economics.  Tax money comes from taxpayers.  Who work.  Stimulus spending only transfers the money to someone else to spend.  Leaving the taxpayer with less to spend.  Either now through higher taxes.  Or later through higher taxes to pay for past deficit spending.  Which is a very common feature of Keynesian economics.  Deficit spending.  And huge debts created by all that deficit spending.

Contrary to Keynes, an economy works best when government intervenes least.  This keeps the money in the private sector where it belongs.  Where it does what it does best.  Create jobs.

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