After the Civil War Men became less Manly and the Federal Government became more Progressive

Posted by PITHOCRATES - March 25th, 2014

History 101

(Originally published February 12th, 2013)

Prior to 1900 the Role of the Federal Government was primarily to Provide for the Common Defense

In 1800 the new federal government didn’t do a lot.  It spent only about $11 million (in nominal dollars).  With 55% going to defense.  About 31% went to pay interest on the war debt.  About 2% went to the postal service.  And about 12% went to other stuff.  Defense spending and interest on the war debt added up to about 86% of all federal outlays (see Government Spending Details).

In 1860, just before the Civil War, spending increased to $78 million (in nominal dollars).  Defense spending fell to 37%.  Interest spending fell to 4%.  And postal service spending rose to 19%.  While spending on other stuff rose to 40%.  Just over 60 years from the founding the federal government had changed.  It was less limited than the Founding Fathers designed it to be.

In 1900 spending increased to $628.6 million (in nominal dollars).  With defense spending coming in at 53%.  The postal service at 17%.  Interest went up to 6.4%.  And other spending fell to 24%.  Again, defense spending consumed over half of all federal spending.  For the role of the federal government was still primarily providing for the common defense.  Running the postal service.  Treating with other nations.  And trading with them.  As well as collecting duties and tariffs at our ports which paid for the federal government.  There was a lot of graft and patronage.  And long lines for government jobs.  Primarily because government was still somewhat limited.  With a limited number of government jobs to reward campaign contributors.  But that was about to change.

The Progressives expanded the Role of the Federal Government in our Lives and made it more Motherly

The American Civil War killed about 625,000 men.  With an 1860 population of 31,443,321 those deaths amounted to about 2% of the prewar population.  To put that into perspective if 2% of the U.S. population died in a war today that would be approximately 6.2 million people.  And to put that into perspective the total population of the state of Missouri is about 6 million people.  So the American Civil War claimed a very large percentage of the population.  Leaving a lot of children to grow up without a father.  Which had a profound impact on the size of the federal government.

Prior to this generation American men were some of the manliest men in the world.  Tough and rugged.  Who could live off of the land.  Completely self-sufficient.  These are the men that made America.  Men who fought and won our independence.  Who explored and settled the frontier.  Farmers who worked all day in the field.  Men who dug canals by hand.  And built our railroads.  Men who endured hardships and never complained.  Then came the Civil War generation.  Sons who lost their fathers.  And wives who lost their husbands, brothers, fathers and uncles.  Who lost all the men in their lives in that horrible war.  These women hated that war.  And manly displays of aggression.  For it was manly displays of aggression that led to fighting.  And war.  Having lost so much already they didn’t want to lose the only men they had left.  Their sons.  So they protected and nurtured them.  Taught them to shun violence.  To be kinder and softer.  To be not so tough or rugged.  To be less manly.  And when these men grew up they went into politics and started the progressive movement.

The federal government was no longer just to provide for the common defense.  To run the postal service.  To treat with other nations.  To trade with other nations.  Run our custom houses.  No.  Now the federal government grew to be kinder, softer and more motherly.  The progressives expanded the role of the federal government in our lives.  Woodrow Wilson wanted to turn the country into a quasi monarchy.  With a very strong executive branch that could rule against the wishes of Congress.  The Federal Reserve (America’s central bank) came into existence during Wilson’s presidency.  Which was going to end recessions forever.  Then came the Great Depression.  A crisis so good that FDR did not let it go to waste.  FDR expanded the size of the federal government.  Putting it on a path of permanent growth.  And it’s been growing ever since.

They decreased Defense Spending and increased Borrowings to increase Non-Defense Spending

The federal government grew beyond its Constitutional limits.  And the intent of the Founding Fathers.  Just as Thomas Jefferson feared.  It consolidated power just as all monarchies did.  And that was Jefferson’s fear.  Consolidation.  Seeing the states absorbed by a leviathan federal government.  Becoming the very thing the American colonists fought for independence from.  So that’s where the federal government changed.  In the early 20th Century.  Before that it spent money mostly for defense and a postal service.  Now it spends money for every social program under the sun.  There is great debate now in Washington about reducing the deficit.  With the Democrats blaming the deficit problems on too much defense spending.  And too little taxation on the rich.  But if you look at the history of federal spending since 1940 the numbers say otherwise (see Table 3.1—OUTLAYS BY SUPERFUNCTION AND FUNCTION: 1940–2017 and A History of Debt In The United States).

Federal Spending and Debt

As defense spending (including Veterans Benefits and Services) rose during World War II non-defense spending (Education, Training, Employment, Social Services, Health, Income Security, Social Security, Energy, Natural Resources, Environment, Commerce, Housing Credit, Transportation, Community and Regional Development, International Affairs, General Science, Space, Technology, Agriculture, Administration of Justice and General Government) fell as a percentage of total federal outlays.  And the federal debt rose (federal debt is in constant 2012 dollars).  After the war defense spending fell to 50% while the percentage of non-defense spending rose.  And the federal debt dropped slightly and remained relatively constant for about 30 years.

This tug of war between defense spending and non-defense spending is also called the guns vs. butter debate.  Where those in favor of spending money on guns at the federal level are more constructionists.  They want to follow the Constitution as the Founding Fathers wrote it.  While those who favor spending money on butter at the federal level want to want to buy more votes by giving away free stuff.

Defense spending ramped back up for the Korean War and the Cold War during the Fifties.  After the armistice ended hostilities in Korea defense spending began a long decline back to about 50% of all federal outlays.  Where it flattened out and rose slightly for the Vietnam War.  After America exited the Vietnam War defense spending entered a long decline where it dropped below 30% of all federal outlays.  Reagan’s defense spending raised defense spending back up to 30%.  After Reagan won the Cold War Clinton enjoyed the peace dividend and cut defense spending down to just below 20%.  After 9/11 Bush increased defense spending just above 20% of all federal outlays where it remains today.

During this time non-defense spending was basically the mirror of defense spending.  Showing that they decreased defense spending over time to increase non-defense spending.  But there wasn’t enough defense spending to cut so borrowing took off during the Reagan administration.  It leveled off during the Clinton administration as he enjoyed the peace dividend after the defeat of the Soviet Union in the Cold War.  Non-defense spending soared over 70% of all federal outlays during the Bush administration.  Requiring additional borrowings.  Then President Obama increased non-defense spending so great it resulted in record deficits.  Taking the federal debt to record highs.

So is defense spending the cause of our deficits?  No.  Defense spending as a percentage of all federal outlays is near a historical low.  While non-defense spending has soared to a record high.  As did our federal debt.  Clearly showing that the driving force behind our deficits and debt is non-defense spending.  Not defense spending.  Nor is it because we’re not taxing people enough.  We’re just spending too much.  In about 50 years non-defense spending rose from around 22% of all federal outlays to 74%.  An increase of 223%.  While defense spending fell from 76% to 22%.  A decline of 245%.  While the federal debt rose 619%.  And interest on the debt soared 24,904%.  The cost of favoring butter in the guns vs. butter debate.  The federal government has been gutting the main responsibility of the federal government, defense, to pay for something that didn’t enter the federal government until the 20th Century.  All that non-defense spending.  Which doesn’t even include the postal service today.

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Democrats will Condone any Bad Behavior if it advances their Power

Posted by PITHOCRATES - January 4th, 2014

Week in Review

The government has long warned us not to eat or drink things that are bad for us.  They banned Saccharin after mega doses in rats caused cancer.  They then determined that a rat’s physiology is different from humans.  And removed their ban.  They banned the use of Alar (used in apples and other fruits to provide a better harvest) when mega doses proved to be carcinogenic.  The consumption of healthy apples fell.  They told us not to eat eggs as they had cholesterol.  Even though no study showed egg cholesterol was bad for you.  So people quit eating eggs.  And many lost an excellent source of protein.  And it turned out saturated fats play a larger role in our cholesterol levels.  And that eating eggs really doesn’t affect our cholesterol levels.  So we’re eating eggs again.  Because they are good for you.

Mayor Bloomberg wanted to make large sugary beverages illegal in New York.  There have been bans on trans-fats.  They have tried to take toys out of McDonald’s Happy Meals to make them less attractive to children.  And let’s not forget the war on smoking.  They have put pictures of diseased lungs on the packaging to get us to quit.  They have made it illegal to smoke a cigarette pretty much everywhere to protect others from second-hand smoke (though no studies exist showing that there is even a risk due to second hand smoke just as there was no study showing egg cholesterol was bad for you).  They have even discussed bans on third-hand smoke (the ashtray smell you leave behind after smoking).

Government is regulating our lives to save us from ourselves.  Because we engage in behavior too risky for our own good.  Except for two behaviors.  Drugs.  As Colorado has decriminalized marijuana (without any regard to our diseased lungs, second-hand smoke or third-hand smoke).  And sex.  As they give out free birth-control to encourage our young people to have as much sex as they so desire.  And provide access to abortion when that fails.  Despite the slew of venereal diseases all that sex has given our young people.  Including AIDS (see A Resisted Pill to Prevent H.I.V. by DAVID TULLER posted 12/30/2013 on The New York Times).

Over a cup of tea at a downtown Starbucks, Michael Rubio recalled how four friends became H.I.V. positive through unprotected sex, all within a year…

The very existence of that option represents a startling turn in the too-long history of the AIDS epidemic. Many health experts hoped that the medication — Truvada, a combination of two antiviral drugs that has been used to treat H.I.V. since 2004 — would be exuberantly embraced by H.I.V.-negative gay men. Instead, Truvada has been slow to catch on as an H.I.V. preventive in the 18 months since the strategy’s approval by the Food and Drug Administration. In some quarters, the idea that healthy gay men should take a medication to prevent infection — an approach called pre-exposure prophylaxis, or PrEP — has met with hostility or indifference…

For 30 years, public health officials have aggressively promoted condom use during every sexual encounter as the only effective method, apart from abstinence, for preventing H.I.V. transmission. Still, 50,000 new infections are occurring annually in the United States; sexual transmission between men accounts for more than half of them, and a disproportionate number among African-Americans and other minorities.

Many experts hailed Truvada as an opportunity to reduce new infections among high-risk groups like young gay men, people in relationships with H.I.V.-positive partners, and prostitutes. The F.D.A. called for prescriptions to be accompanied by counseling, frequent H.I.V. testing, and continued promotion of safer sex, although research suggests that daily use of the pill alone confers close to full protection.

But a generational shift in attitudes toward H.I.V. among gay men may also be playing a role, some experts say. With advances in treatment, many younger men who did not experience the worst years of the epidemic are less fearful of the consequences of infection. Moreover, current medications can lower viral levels in H.I.V.-positive people to the point where the risk of transmission is negligible, further reducing the perceived need for PrEP among H.I.V.-negative partners…

Certainly, “condom fatigue” among gay men is real. The proportion who reported unprotected anal sex in the previous year rose to 57 percent in 2011 from 48 percent in 2005, according to the Centers for Disease Control and Prevention.

Obamacare will pay for AIDS and HIV treatment.  But will people with AIDS/HIV pay more for their Obamacare?  Probably not.  Smokers will pay more, though.  Despite it being easier to prevent AIDS/HIV than lung cancer from smoking.  For you can still have anal sex without being at risk for catching AIDS/HIV if you wear a condom.  But you can’t smoke without putting yourself at risk every time.  Because when you smoke you pull in that cancer-causing smoke into your lungs.  Yet as preventable as AIDS/HIV is 57% of gay men have unprotected sex.  Which you can’t define as anything but willful and dangerous behavior.

But the left has no harsh words for the gay community.  Unlike they do for smokers.  Why?  Because the gay community votes Democrat.  As do young people.  Who believe that 30% or more of the population is gay.  While a 2010 study by the Williams Institute put the number at 3.5%.  But the young believe that 3 out of every 10 people (instead of 3.5 out of 100) identify themselves as lesbian, gay, or bisexual.  And want to be progressive and enlightened and cool and so unlike their parents that they want to show their enlightened support for them.  Which is another reason why they vote Democrat.  In addition to the sex and drugs the Democrats encourage.

Until gay men wear condoms all of the time or abstain from willful and dangerous unprotected anal sex AIDS/HIV will spread.  (If these young gay men were in monogamous relationships they wouldn’t be spreading AIDS/HIV).  And it won’t be just in the gay community.  Thanks to bisexuals, intravenous drug users and prostitutes the disease will migrate to others who think they are being progressive and enlightened to have as much sex as the Democrats encourage them to have.  Guaranteeing a large voting block for the anti-parents (i.e., Democrats) come Election Day.  And they don’t care how many lives they destroy in the process.  But if you want to enjoy a cigarette or a big juicy burger look out.  They are coming after you and your reckless lifestyle.  Unless, of course, you’re smoking a marijuana cigarette.  And eating that big greasy burger afterward because you have the munchies.  Because there’s nothing wrong with that lifestyle.  Because you’re likely a Democrat voter.

The temperance movement took off in large part due to the STDs husbands brought home to their wives after drinking away their paychecks at the local saloon.  And then making bad decisions when drunk.  Like spending what money they didn’t spend on alcohol on prostitutes.  Bringing home syphilis to many an unsuspecting wife.  Who passed it on to their unborn children.  It was the progressives that try to put a stop to that with Prohibition.  Including women like Susan B. Anthony.  Now look at the progressives.  Who are a far cry from those who once wanted to protect women and children.  Who now champion some of the most dangerous behavior women and children can face.  Sex and drugs.  Just to win elections.  Something Susan B. Anthony would not likely approve of if she were alive today.

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The IRS targeted 100% of Conservative Groups filing for Tax Exempt Status but only 30% of Progressive Groups

Posted by PITHOCRATES - June 30th, 2013

Week in Review

Many were shocked that President Obama won reelection.  What with the horrible economy.  And the Benghazi scandal.  But what was even more shocking was why Mitt Romney lost.  And it wasn’t because of the Hispanic vote.  It was because conservatives sat at home on election night.  Instead of voting.  Baffling many.  Especially with the huge conservative turnout during the 2010 midterm elections.  Thanks to the Tea Party movement.  Which seemed strangely quiet during the 2012 campaign.  Now we know why they were quiet during that election.  Because the IRS was actively silencing their voice.

Whoa, whoa, said the Democrats.  Now hold on a minute.  The IRS is politically neutral.  And the fact that 95% of the policy-makers at the IRS donated to the Obama campaign doesn’t make the IRS politically biased.  Besides, progressive groups were targeted just as much as conservative groups.  So there.  Of course, the Treasury Department Inspector General for Tax Administration begs to differ (see Treasury: IRS targeted 292 Tea Party groups, just 6 progressive groups by PAUL BEDARD posted 6/27/2013 on the Washington Examiner).

Refuting Democratic suggestions that progressive groups were also swept up in the IRS probe of the tax status of Tea Party organizations, the Treasury Department’s inspector general has revealed that just six progressive groups were targeted compared to 292 conservative groups.

In a letter to congressional Democrats, the inspector general also said that 100 percent of Tea Party groups seeking special tax status were put under IRS review, while only 30 percent of the progressive groups felt the same pressure.

The Wednesday letter to the top Democrat on the House Ways and Means Committee punched a huge hole in Democratic claims that progressive groups were targeted as much as the Tea Party groups from May 2010-May 2012, the height of the Tea Party movement.

The letter from the Treasury Department Inspector General for Tax Administration revealed that there just weren’t many progressive groups who even sought special tax exempt status. A total of 20 sought it, and six were probed. All 292 Tea Party groups, meanwhile, were part of the IRS witchhunt.

Well, well, well.   The IRS influenced the 2012 election by suppressing the Tea Party’s ability to raise money to pay for political ads.  As some in the Tea Party suffered onerous IRS audits in response for their tax-exempt status request.  While others wanted to avoid an onerous IRS audit.  By keeping their name off of any Tea Party fundraiser list.  Resulting with a subdued Tea Party voice in the 2012 election.  Allowing the IRS to prevent a repeat of the 2010 midterm election.  By abusing the power of their office.  And getting the man they supported with donations 95% of the time return to office for a second term.  But the IRS isn’t politically motivated.  For they are politically neutral.

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Disposable Income, Federal Taxes, Federal Debt and our Spending Problem 1940-2012

Posted by PITHOCRATES - February 27th, 2013

History 101

Excessive Federal Taxes reduce Disposable Income which reduces New Economic Activity

The key to economic growth is disposable income.  The more disposable income people have the more economic activity they will create.  So the key to a healthy economy is maximizing disposable income.  And we can do that in a few ways.  First of all we need jobs.  And we can create more jobs with fewer costly regulations.  And lower taxes.  If we make it less costly to hire people businesses will hire more people.  Which they aren’t doing right now.  Primarily because of Obamacare.  Which is so costly to businesses that they’ve frozen new hiring.  And are pushing some full time employees to part-time.  As well as investing in capital equipment wherever they can.  Replacing people with machines.  Because machines don’t incur Obamacare costs, taxes or penalties.

For those lucky few who haven’t been replaced by machines they can earn some disposable income.  Depending on their skill level.  A low-skilled person who never graduated from high school cannot earn as much disposable income as a thoracic surgeon.  So if you want stuff.  And you want to stimulate the economy.  Become a thoracic surgeon.  Or something else that takes years of college and years of on the job training.  And hundreds of thousands of dollars of student loan debt.

But earning a good income isn’t enough.  Because from that income we must pay an enormous amount of taxes.  Greatly reducing our disposable income.  Some of the taxes we can see.  Such as those itemized on our paycheck stubs.  Federal and state income taxes.  And Social Security and Medicare taxes.  But there are a lot of taxes we don’t see.  Such as excise taxes on the things we buy from gasoline to liquor to cigarettes.  And then there are property taxes.  Sales taxes.  And the list goes on.  All of which take a bite out of our disposable income.  Siphoning away real economic activity over the years as the federal government added new taxes.  And increased the tax rates of the old taxes.

The Federal Government came up with the Withholding Tax to Prevent an all out Tax Revolt

When the Founding Fathers ratified the Constitution there weren’t many taxes.  Mostly custom duties and tariffs.  Which was enough to fund the limited government they created.  But ever since the Founding some in the federal government have been trying to destroy what the Founding Fathers created.  And replace it with what they fought so long to get rid of.  A very large government that reaches into all parts of our life.  Like a monarchy.  Where those in the federal government belong to a new aristocracy.  Who are more equal than everyone else.  And live a far, far better life.  If you don’t believe this just check out property values around Washington DC.

With the American Civil War killing a generation of fathers a lot of boys grew up with over protective and doting mothers.  When these boys came of age and entered politics they weren’t as manly as their father’s generation was.  Because they grew up without fathers to teach them to hunt and fight.  Instead, they grew up with mothers who taught them to be more nurturing.  Giving us the progressive movement.  Woodrow Wilson gave us a permanent federal income tax.  And tried to expand the federal government to be more of a monarchy with a powerful executive that can govern against the will of Congress.  And the people.  After World War I we returned to normalcy.  And Warren Harding and Calvin Coolidge gave us the Roaring Twenties.  And the modern world.  Then Herbert Hoover and other progressives caused the Great Depression.  With a crisis too good to let go to waste FDR picked up where Woodrow Wilson left off.  Exploding the size and reach of the federal government.  And the great surge in federal taxes began.  Over the years they added more and more.  Such as these (see Table 2.1—RECEIPTS BY SOURCE: 1934–2017).

Income Payroll Excise and Other Taxes Key

Some of these you are no doubt familiar with.  The biggest bite is the individual income tax.  Something most of us have received our W-2s for and have just prepared our federal income tax returns.  Or are about to.  Dreading it.  Unless we’re getting a refund.  Those who owe money will probably take their sweet time.  As they hate writing a check to the federal government.  Which is why the federal government came up with the withholding tax.  For if people had to write a check for the full amount of their federal income taxes each year there would be an all out tax revolt.  And probably a lot more imprisonment for people not paying their federal taxes.  For no one has that kind of money sitting around.  Which is why the government takes it from you before you can spend it yourself.

Excessive Federal Spending requires ever Higher Taxation and ever more Borrowing to Feed

The big debate in Washington now is the sequester.  And the automatic cuts of the sequester.  Which were proposed by President Obama.  Which Congress wrote into a bill.  And the president signed into law.  In hopes that Republicans and Democrats would come together and find a way to reduce the record high deficit.  The Republicans want to do the obvious.  Cut the spending that caused the record deficit.  Democrats want to do what they always want to do.  Raise taxes.  Saying that we don’t have a spending problem.  That the four years of trillion dollar deficits isn’t because we’re spending too much.  It’s because we’re not taxing enough to pay for that spending.   That rich people aren’t paying their fair share.  But that’s not what you see when you look at the numbers.

Income Payroll Excise and Other Taxes

These taxes are identified in the above table.  As government spending grew so did taxes.  In particular personal income taxes which provide the majority of federal tax revenues.  Which exploded after LBJ’s Great Society added a lot of new federal spending.  And after President Nixon decoupled the dollar from gold in 1971.  Unleashing inflation.  Note that personal income taxes are greater than corporate income taxes.  That’s because there are more people than corporations.  For example, Siemens AG is an international corporation that employs about 360,000 people.  Who all pay personal income taxes.  After personal income taxes comes old-age and survivors insurance.  Otherwise known as Social Security.  And all of these taxes have continued to grow.  Taking a bigger and bigger bite out of disposable incomes.  Putting a drag on new economic activity.  Note that the only falls in federal tax revenue were due to two Democrat-caused recessions.  Bill Clinton’s dot-com bubble burst causing a bad recession in 2000.  And his subprime mortgage lending bubble he started with his Policy Statement on Discrimination in Lending burst causing a bad recession in 2007.  Apart from these, though, the pattern has been more spending.  Not less.  Which would suggest that we do have a spending problem.

Also included on this chart is the federal debt.  Note how it spiked up during World War II.  Then settled down at a constant rate for about 30 years.  Until LBJ’s Great Society spending increased federal spending.  But these massive new taxes weren’t enough.  For that’s when the big deficits started.  Adding on to a growing federal debt.  With the only decline in this growth coming during President Clinton’s presidency.  President Clinton’s dot-com boom (before the bubble burst), the peace dividend from President Reagan winning the Cold War, the Asian financial crisis and Japan’s Lost Decade all helped the American economy shower the treasury with cash.  Putting the nation into a surplus for a year or so.  But that didn’t last.  As federal spending continued to outpace tax revenue.  Culminating with President Obama’s trillion dollar deficits.  With federal tax revenue at the highest since President Bush’s record high just before Clinton’s subprime mortgage bubble burst into the subprime mortgage crisis.  And the Great Recession.

So yes, Virginia, we have a spending problem.  A spending that requires ever higher taxation and ever more borrowing to feed.  Taking an ever bigger chunk out of disposable incomes.  Leaving less and less for new economic growth.  Explaining why the economy has never recovered from the Great Recession.  For President Obama’s policies only increase taxes and the cost of doing business.  And do nothing to create disposable income.

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After the Civil War Men became less Manly and the Federal Government became more Progressive

Posted by PITHOCRATES - February 12th, 2013

History 101

Prior to 1900 the Role of the Federal Government was primarily to Provide for the Common Defense

In 1800 the new federal government didn’t do a lot.  It spent only about $11 million (in nominal dollars).  With 55% going to defense.  About 31% went to pay interest on the war debt.  About 2% went to the postal service.  And about 12% went to other stuff.  Defense spending and interest on the war debt added up to about 86% of all federal outlays (see Government Spending Details).

In 1860, just before the Civil War, spending increased to $78 million (in nominal dollars).  Defense spending fell to 37%.  Interest spending fell to 4%.  And postal service spending rose to 19%.  While spending on other stuff rose to 40%.  Just over 60 years from the founding the federal government had changed.  It was less limited than the Founding Fathers designed it to be.

In 1900 spending increased to $628.6 million (in nominal dollars).  With defense spending coming in at 53%.  The postal service at 17%.  Interest went up to 6.4%.  And other spending fell to 24%.  Again, defense spending consumed over half of all federal spending.  For the role of the federal government was still primarily providing for the common defense.  Running the postal service.  Treating with other nations.  And trading with them.  As well as collecting duties and tariffs at our ports which paid for the federal government.  There was a lot of graft and patronage.  And long lines for government jobs.  Primarily because government was still somewhat limited.  With a limited number of government jobs to reward campaign contributors.  But that was about to change.

The Progressives expanded the Role of the Federal Government in our Lives and made it more Motherly

The American Civil War killed about 625,000 men.  With an 1860 population of 31,443,321 those deaths amounted to about 2% of the prewar population.  To put that into perspective if 2% of the U.S. population died in a war today that would be approximately 6.2 million people.  And to put that into perspective the total population of the state of Missouri is about 6 million people.  So the American Civil War claimed a very large percentage of the population.  Leaving a lot of children to grow up without a father.  Which had a profound impact on the size of the federal government.

Prior to this generation American men were some of the manliest men in the world.  Tough and rugged.  Who could live off of the land.  Completely self-sufficient.  These are the men that made America.  Men who fought and won our independence.  Who explored and settled the frontier.  Farmers who worked all day in the field.  Men who dug canals by hand.  And built our railroads.  Men who endured hardships and never complained.  Then came the Civil War generation.  Sons who lost their fathers.  And wives who lost their husbands, brothers, fathers and uncles.  Who lost all the men in their lives in that horrible war.  These women hated that war.  And manly displays of aggression.  For it was manly displays of aggression that led to fighting.  And war.  Having lost so much already they didn’t want to lose the only men they had left.  Their sons.  So they protected and nurtured them.  Taught them to shun violence.  To be kinder and softer.  To be not so tough or rugged.  To be less manly.  And when these men grew up they went into politics and started the progressive movement.

The federal government was no longer just to provide for the common defense.  To run the postal service.  To treat with other nations.  To trade with other nations.  Run our custom houses.  No.  Now the federal government grew to be kinder, softer and more motherly.  The progressives expanded the role of the federal government in our lives.  Woodrow Wilson wanted to turn the country into a quasi monarchy.  With a very strong executive branch that could rule against the wishes of Congress.  The Federal Reserve (America’s central bank) came into existence during Wilson’s presidency.  Which was going to end recessions forever.  Then came the Great Depression.  A crisis so good that FDR did not let it go to waste.  FDR expanded the size of the federal government.  Putting it on a path of permanent growth.  And it’s been growing ever since.

They decreased Defense Spending and increased Borrowings to increase Non-Defense Spending

The federal government grew beyond its Constitutional limits.  And the intent of the Founding Fathers.  Just as Thomas Jefferson feared.  It consolidated power just as all monarchies did.  And that was Jefferson’s fear.  Consolidation.  Seeing the states absorbed by a leviathan federal government.  Becoming the very thing the American colonists fought for independence from.  So that’s when the federal government changed.  In the early 20th Century.  Before that it spent money mostly for defense and a postal service.  Now it spends money for every social program under the sun.  There is great debate now in Washington about reducing the deficit.  With the Democrats blaming the deficit problems on too much defense spending.  And too little taxation on the rich.  But if you look at the history of federal spending since 1940 the numbers say otherwise (see Table 3.1—OUTLAYS BY SUPERFUNCTION AND FUNCTION: 1940–2017 and A History of Debt In The United States).

Federal Spending and Debt

As defense spending (including Veterans Benefits and Services) rose during World War II non-defense spending (Education, Training, Employment, Social Services, Health, Income Security, Social Security, Energy, Natural Resources, Environment, Commerce, Housing Credit, Transportation, Community and Regional Development, International Affairs, General Science, Space, Technology, Agriculture, Administration of Justice and General Government) fell as a percentage of total federal outlays.  And the federal debt rose (federal debt is in constant 2012 dollars).  After the war defense spending fell to 50% while the percentage of non-defense spending rose.  And the federal debt dropped slightly and remained relatively constant for about 30 years.

This tug of war between defense spending and non-defense spending is also called the guns vs. butter debate.  Where those in favor of spending money on guns at the federal level are more constructionists.  They want to follow the Constitution as the Founding Fathers wrote it.  While those who favor spending money on butter at the federal level want to buy more votes by giving away free stuff.

Defense spending ramped back up for the Korean War and the Cold War during the Fifties.  After the armistice ended hostilities in Korea defense spending began a long decline back to about 50% of all federal outlays.  Where it flattened out and rose slightly for the Vietnam War.  After America exited the Vietnam War defense spending entered a long decline where it dropped below 30% of all federal outlays.  Reagan’s defense spending raised defense spending back up to 30%.  After Reagan won the Cold War Clinton enjoyed the peace dividend and cut defense spending down to just below 20%.  After 9/11 Bush increased defense spending just above 20% of all federal outlays where it remains today.

During this time non-defense spending was basically the mirror of defense spending.  Showing that they decreased defense spending over time to increase non-defense spending.  But there wasn’t enough defense spending to cut so borrowing took off during the Reagan administration.  It leveled off during the Clinton administration as he enjoyed the peace dividend after the defeat of the Soviet Union in the Cold War.  Non-defense spending soared over 70% of all federal outlays during the Bush administration.  Requiring additional borrowings.  Then President Obama increased non-defense spending so great it resulted in record deficits.  Taking the federal debt to record highs.

So is defense spending the cause of our deficits?  No.  Defense spending as a percentage of all federal outlays is near a historical low.  While non-defense spending has soared to a record high.  As has our federal debt.  Clearly showing that the driving force behind our deficits and debt is non-defense spending.  Not defense spending.  Nor is it because we’re not taxing people enough.  We’re just spending too much.  In about 50 years non-defense spending rose from around 22% of all federal outlays to 74%.  An increase of 223%.  While defense spending fell from 76% to 22%.  A decline of 245%.  While the federal debt rose 619%.  And interest on the debt soared 24,904%.  The cost of favoring butter in the guns vs. butter debate.  The federal government has been gutting the main responsibility of the federal government, defense, to pay for something that didn’t enter the federal government until the 20th Century.  All that non-defense spending.  Which doesn’t even include the postal service today.

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Tax Cuts, Roaring Twenties, Farm Prices, Smoot-Hawley Tariff, Stock Market Crash, New Deal, Great Depression and the Great Recession

Posted by PITHOCRATES - November 6th, 2012

History 101

(Originally published March 20, 2012)

Tax Cuts and the Small Government Policies of Harding and Coolidge gave us the Roaring Twenties

Keynesians blame the long duration of the Great Depression (1929-1939) on the government clinging to the gold standard.  Even renowned monetarist economist Milton Friedman agrees.  Though that’s about the only agreement between Keynesians and Friedman.   Their arguments are that the US could have reduced the length and severity of the Great Depression if they had only abandoned the gold standard.  And adopted Keynesian policies.  Deficit spending.  Just like they did in the Seventies.  The decade where we had both high unemployment and high inflation.  Stagflation.  Something that’s not supposed to happen under Keynesian economics.  So when it did they blamed the oil shocks of the Seventies.  Not their orgy of spending.  Or their high taxes.  And they feel the same way about the Great Depression.

Funny.  How one price shock (oil) can devastate all businesses in the US economy.  So much so that it stalled job creation.  And caused high unemployment.  Despite the government printing and spending money to create jobs.  And to provide government benefits so recipients could use those benefits to stimulate economic activity.  All of that government spending failed to pull the country out of one bad recession.  Because of that one price shock on the cost of doing business.  Yet no one talks about the all out assault on business starting in the Hoover administration that continued and expanded through the Roosevelt administration.

Herbert Hoover may have been a Republican.  But he was no conservative.  He was a big government progressive.  And believed that the federal government should interfere into the free market.  To make things better.  Unlike Warren Harding.  And Calvin Coolidge.  Who believed in a small government, hands-off policy when it came to the economy.  They passed tax cuts.  Following the advice of their treasury secretary.  Andrew Mellon.  Which gave business confidence of what the future would hold.  So they invested.  Expanded production.  And created jobs.  It was these small government policies that gave us the Roaring Twenties.  An economic boom that electrified and modernized the world.  With real economic growth.

If an Oil Shock can prevent Businesses from Responding to Keynesian Policies then so can FDR’s all out War on Business

The Roaring Twenties was a great time to live if you wanted a job.  And wanted to live in the modern era.  Electric power was spreading across the country.  People had electric appliances in their homes.  Radios.  They went to the movies.  Drove cars.  Flew in airplanes.  The Roaring Twenties was a giant leap forward in the standard of living.  Factories with electric power driving electric motors increased productivity.  And reduced air pollution as they replaced coal-fired steam boilers that up to then powered the Industrial Revolution.  This modernization even made it to the farm.  Farmers borrowed heavily to mechanize their farms.  Allowing them to grow more food than ever.  Bumper crops caused farm prices to fall.  Good for consumers.  But not those farmers who borrowed heavily.

Enter Herbert Hoover.  Who wanted to use the power of government to help the farmers.  By forcing Americans to pay higher food prices.  Meanwhile, the Federal Reserve raised interest rates.  Thinking that a boom in the stock market was from speculation and not the real economic growth of the Twenties.  So they contracted the money supply.  Cooling that real economic growth.  And making it very hard to borrow money.  Causing farmers to default on their loans.  Small rural banks that loaned to these farmers failed.  These bank failures spread to other banks.  Weakening the banking system.  Then came the Smoot-Hawley Tariff.  Passed in 1930.  But it was causing business uncertainty as early as 1928.  As the Smoot-Hawley Tariff was going to increase tariffs on just about everything by 30%.  Basically adding a 30% tax on the cost of doing business.  That the businesses would, of course, pass on to consumers.  By raising prices.  Because consumers weren’t getting a corresponding 30% pay hike they, of course, could not buy as much after the Smoot-Hawley Tariff.  Putting a big cramp in sales revenue.  Perhaps even starting an international trade war.  Further cramping sales.  Something investors no doubt took notice of.  Seeing that real economic growth would soon come to a screeching halt.  And when the bill moved through committees in the autumn of 1929 the die was cast.  Investors began the massive selloff on Wall Street.  The Stock Market Crash of 1929.  The so-called starting point of the Great Depression.  Then the Smoot-Hawley Tariff became law.  And the trade war began.  As anticipated.

Of course, the Keynesians ignore this lead up to the Great Depression.  This massive government intrusion into the free market.  And the next president would build on this intrusion into the free market.  Ignoring the success of the small-government and tax cuts of Harding and Coolidge.  As well as ignoring the big-government free-market-intrusion failures of Herbert Hoover.  The New Deal programs of FDR were going to explode government spending to heights never before seen in peace time.  Causing uncertainty like never seen before in the business community.  It was an all out assault on business.  Taxes and regulation that increased the cost of business.  And massive government spending for new benefits and make-work programs.  All paid for by the people who normally create jobs.  Which there wasn’t a lot of during the great Depression.  Thanks to programs like Reconstruction Finance Corporation, Federal Emergency Relief Administration, Civilian Conservation Corps, Homeowners Loan Corporation, Tennessee Valley Authority, Agricultural Adjustment Act, National Industrial Recovery Act, Public Works Administration, Federal Deposit Insurance Corporation, Glass–Steagall Act, Securities Act of 1933, Civil Works Administration, Indian Reorganization Act, Social Security Act, Works Progress Administration, National Labor Relations Act, Federal Crop Insurance Corporation, Surplus Commodities Program, Fair Labor Standards Act, Rural Electrification Administration, Resettlement Administration and Farm Security Administration, etc.  Oil shocks of the Seventies?  If an oil shock can prevent businesses from responding to Keynesian policies then an all out war on business in the Thirties could do the same.  And worse.  Far, far worse.  Which is why the Great Depression lasted 10 years.  Because the government turned what would have been a normal recession into a world-wide calamity.  By trying to interfere with market forces.

Only Real Economic Growth creates Jobs, not Government Programs

The unemployment rate in 1929 was 3.1%.  In 1933 it was 24.9%.  It stayed above 20% until 1936.  Where it fell as low as 14.3% in 1937.  It then went to 19.0%, 17.2% and 14.6% in the next three years.  These numbers stayed horrible throughout the Thirties because the government wouldn’t stop meddling.  Or spending money.  None of the New Deal programs had a significant effect on unemployment.  The New Deal failed to fix the economy the way the New Dealers said it would.  Despite the massive price tag.  So much for super smart government bureaucrats.

What finally pulled us out of the Great Depression?  Adolf Hitler’s conquering of France in 1940.  When American industry received great orders for real economic growth.  From foreign countries.  To build the war material they needed to fight Adolf Hitler.  And the New Deal programs be damned.  There was no time for any more of that nonsense.  So during World War II businesses had a little less uncertainty.  And a backlog of orders.  All the incentive they needed to ramp up American industry.  To make it hum like it once did under Harding and Coolidge.  And they won World War II.  For there was no way Adolf Hitler could match that economic output.  Which made all the difference on the battlefield.

Still there are those who want to blame the gold standard for the Great Depression.  And still support Keynesian policies to tax and spend.  Even today.  Even after 8 years of Ronald Reagan that proved the policies of Harding and Coolidge.  We’re right back to those failed policies of the past.  Massive government spending to stimulate economic activity.  To pull us out of the Great Recession.  And utterly failing.  Where the unemployment rate struggles to get below 9%.  The U-3 unemployment rate, that is.  The rate that doesn’t count everyone who wants full time work.  The rate that counts everyone, the U-6 unemployment rate, currently stands at 14.9%.  Which is above the lowest unemployment rate during the Great Depression.  Proving once again only real economic growth creates jobs.  Not government programs.  No matter how many trillions of dollars the government spends.

So much for super smart government bureaucrats.

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2012 Endorsements: Woodrow Wilson, FDR and Joseph Stalin

Posted by PITHOCRATES - October 30th, 2012

2012 Election

A Strong President and a Few Judges could defy Congress and the State Legislatures and Govern as They Please

Woodrow Wilson became president in 1913.  He was a progressive.  And didn’t much care for our Founding Fathers.  Or our Founding Documents.  The Declaration of Independence.  And the Constitution.  He referred to our inalienable rights as a “great deal of nonsense.”  Preferring to think of them as privileges granted by the government.  Like kings once did.  And as kings did not like limits on their power so did Wilson not like limits on his power.  For government was a living thing that could grow and do great things.  But to do great things it needed great men in leadership positions.  Like him.  Not hindered by the checks and balances of the Constitution.  Or state legislatures.  Or people clamoring about their inalienable rights.

This was the age of progressivism.  When smart people were in government.  Smarter than they ever were before.  People who graduated from the finest institutions of higher learning.  Or ran them.  Like Wilson.  Who was president of Princeton.  Progressives were smarter than the average American.  Who could take America to such great heights.  If they could only keep the dumb people from interfering with their vision.  And foolishly try to limit the power of the federal government.  So, as president, Wilson got a lot of legislation passed that helped make the federal government more powerful.  Such as creating the Federal Reserve System.  A central bank that could print money as the government needed it.  And enacting the first federal income tax since the American Civil War.  With this new found wealth the federal government only needed one other thing to take America to great heights.  Getting rid of the Constitution.

As much of what Wilson wanted to do exceeded his Constitutional authority he needed a way around that particular nuisance.  The checks and balances of the Constitution.  Especially after the Framers made it so difficult to add amendments.  Requiring a 2/3 supermajority in both houses of Congress.  And then ratification by three-fourths of the state legislatures.  Not a promising way to make radical changes in the structure of the federal government.  So Wilson’s solution was not to amend the Constitution.  But to go around the Constitution.  With judicial activism.  The president should appoint federal judges who share his views of abandoning the intent of the Framers.  Thus consolidating power into fewer hands.  So they could do more of what they wanted and less what the people wanted.  A strong president and a few judges along the way could defy the Congress and the state legislatures and govern as they please.  Reshaping America into their vision.  Not the Founders’ vision.  A progressive vision.  Where these few enlightened and very smart individuals would do what was best for us.  Even if we didn’t know what that was.

The New Deal was a Revolution made not by Tanks and Machine Guns but acts of Congress and Decisions of the Supreme Court

Franklin Delano Roosevelt (FDR) saw things the way Wilson did.  FDR was all for radical change.  And breaking away from the constraints of our Founding Documents.  And his New Deal did just that.  A radical change and expansion of the federal government.  And to help get the people to embrace these changes in the long-term he introduced Social Security.  To get even more people dependent on the federal government.  A program so convoluted he reportedly said that it would be impossible to overturn.  He empowered unions.  He introduced payroll taxes to fund Social Security.  He raised income taxes.  Even tried to implement a heavy progressive tax that topped out at 100% for the very rich.  And he introduced the withholding tax.  As people’s tax bills were to grow so large there would have been push back had they had to write a check at the end of the year for the full amount.  But if you took a little bit each pay period the total tax bill didn’t seem so high.

In FDR’s 1944 State of the Union speech he proposed a Second Bill of Rights.  However, when talking about our Constitutional rights he called them “inalienable political rights.”  By inserting the word ‘political’ those God-given rights of the Declaration of Independence became privileges granted by the government.  Which was similar to the way Wilson saw those rights.  As privileges granted by government.  And privileges that government could take away.  Thus emphasizing the power of the federal government over the individual.  Making it easier to impose those new federal taxes.  So what were those new rights?  A good-paying job, adequate food and clothing, recreation, high farm prices for farmers, freedom from unfair competition, a decent home, medical care, a pension, unemployment insurance and a good education.  Sound familiar?  If you’re an old Soviet communist they do.

Chapter X of the 1936 Soviet constitution included a list of Fundamental Rights.  Which included a right to a good-paying job, adequate food and clothing, recreation, medical care, a pension, and a good education.  Among others.  No surprise, really.  As FDR was a fan of Joseph Stalin and what he was doing in the Soviet Union.  The same kind of things he wanted to do.  But he didn’t have the same freedoms Stalin had.  There were such similarities that Whittaker Chambers, a Soviet spy in the US during the time of the New Deal wrote in his book Witness “the New Deal was a genuine revolution, whose deepest purpose was not simply reform within existing traditions, but a basic change in the social and, above all, the power relationship within the nation.  It was not a revolution of violence.  It was a revolution by bookkeeping and lawmaking…made not by tanks and machine guns, but acts of Congress and decisions of the Supreme Court…”  Just like Wilson envisioned.

If Woodrow Wilson, FDR and Joseph Stalin were Alive Today they would likely Endorse Barack Obama and Joe Biden

Alexander Hamilton believed in a strong central government.  Partly because he saw what a weak central government did to the Continental Army during the Revolutionary War.  And partly because he admired the greatness of the British Empire.  He wanted an American Empire.  Trusting that only men of virtue would serve in a republican government, he did not fear a federal government from overreaching, and abusing, their power.  Thomas Jefferson and James Madison thought Hamilton was mad.  And fought against him with every last fiber of their bodies.  Because they knew that they couldn’t trust future members of their republican government to be men of virtue.  As proven by Aaron Burr.  Who lived during the time of the Founding Fathers.

The modern Democrat Party traces its roots back to Woodrow Wilson and FDR.  Men hungry for power.  And having little virtue.  Today we call people like them Big Government liberal Democrats.  Who have continued to advance the growth and power of the federal government.  Approximately 20% of the population identifies themselves as liberals.  And yet the liberals have greatly advanced their agenda.  How?  In large part through judicial activism.  Using the courts to give them what the state legislatures or Congress won’t.  Such as when a state passes a referendum on a liberal issue, such as redefining gay marriage, the liberals use the courts to overturn that act of democracy.  Or any other that they disagree with.

Now that’s the kind of governing that Wilson and FDR would approve of.  Even Joseph Stalin.  More and more power centralized in the federal government.  The ability to overturn legislation you don’t like.  A revolution without violence.  It doesn’t get any better than that.  If Woodrow Wilson, FDR and Joseph Stalin were alive today they would likely endorse the Democrat candidates Barack Obama and Joe Biden.

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Sixteenth Amendment, Revenue Act of 1913, Progressive Tax, Marginal Tax Rate, Tax Shelter, Tax Cuts and Decade of Greed

Posted by PITHOCRATES - July 10th, 2012

History 101

Americans find Taxes Repugnant and have a Long History of Making this Repugnance Known

American independence began with a tax revolt.  The ratification of the U.S. Constitution happened only with safeguards against the new federal government from growing too powerful.  And great efforts went to limiting the amount of money it could spend.  For a long time all federal tax revenue came from import tariffs.  Then from sales of federal lands as the population moved west.  It took a civil war for us to impose an income tax.  Our first income tax was 3% on incomes over $800 (or about $20,000 today).  The first income tax was a flat tax.  They passed this income tax to pay for the war.  They repealed the income tax following the war.  Americans wouldn’t see another federal income tax until 1913 when we ratified the Sixteenth Amendment.  And President Woodrow Wilson signed into law the Revenue Act of 1913.

Woodrow Wilson was a progressive.  The precursor to today’s liberals.  Who thought beyond the limited government of our Founding Fathers.  They wanted to expand government.  To make it a part of our everyday life.  Where the brilliant progressive politicians would make better decisions for us than we ever could.  And their changing of society included the funding of the federal government.  For their income tax was a progressive tax.  Everyone paid a flat tax of 1% on income of $3,000 or more.  About $66,100 today.  Then the progressive taxes came into play.   Adding another percentage to the income tax rate for increasing amounts of income.  The thresholds for these increases were as follows: $20,000 (roughly $440,400 today), $50,000 ($1,101,000 today), $75,000 ($1,651,600), $100,000 ($2,202,100), $250,000 ($5,505,300) and $500,000 ($11,010,700).  The top marginal tax rate on the super rich (earning $11,010,700) was 7%.

Our second income tax was quite controversial.  A lot of people hated it.  For Americans find taxes repugnant.  And have a long history of making this repugnance well known.  But thanks to the American Civil War a generation of men was lost.  And a generation of boys grew up without fathers.  Tended on by doting mothers.  Smothering them with love and affection.  And these boys grew up without knowing the manly hardships of life.  And they entered politics.  Becoming those early progressives.  Who wanted to change the government into a great doting mother.  And now they could.  For they had their income tax.

Few paid the Confiscatory Tax Rates of the Seventies by Hiding their Income in Tax Shelters

The rich paid our first federal income taxes after the Revenue Act of 1913.  And these were very small percentages we had them pay.  Back then the top marginal tax rate was lower than our lowest income tax rate today.  Think about that.  The richest of the rich paid only 7% of their income ($11,010,700 or more today) in federal income taxes.  While today single people earning the lowest bracket of taxable income (from $0 to $8,700) pay 10% of their income in federal income taxes.  Clearly the growth of government exploded thanks to the Sixteenth Amendment.  Much as our Founding Fathers feared it would if they had too much money to spend.

Of course, this is ancient history.  Few know about this today.  For few could even tell you why we fought for our independence.  Or even who we fought for our independence from.  (We fought for our independence from Great Britain because of their policies to tax us despite our having no representation in Parliament.  That’s where the phrase taxation without representation came from).  Today high taxes are sadly just an accepted part of life.  In fact, we have referred to our paychecks as take-home pay.  Our net pay.  Because gross pay is a myth.  No one sees their gross pay.  About a third or more of that disappears in withholding taxes.  So gross pay is a meaningless expression for us today.  (It wasn’t before the Sixteenth Amendment or before the progressives came to power).  Something that we sadly accept.  And we now fund our lives on the take-home pay the government allows us to keep.  All the while accepting these high tax rates.

Government spending took off in the Sixties and the Seventies.  As did our taxes.  If we had once thought that a 7% tax on incomes of $11,010,700 or more was an outrage, we didn’t see anything yet.  In 1978 the top marginal tax rate was 70% on incomes of $351,712 or more.  And there were 25 marginal tax rates.  As shown here adjusted for inflation (sources: Tax Rates, Tax Receipts, and Celebrity Incomes).

 In this example we calculated the average of some top celebrities.  And the top celebrities on average earned about $30,000,000 in 2010.  Using the 1978 tax brackets they would have owed $20,936,506 in federal income taxes.  Or approximately 69.8% of their total income.  Which is pretty much equal to the top marginal tax rate.  Of course, few paid these confiscatory tax rates.  They hid their income as best as they could in the Seventies.  In tax shelters.  And you know they did because despite these confiscatory tax rates the federal government still ran budget deficits.  Having to print money to pay for their explosion in government spending. 

The Low Tax Rates of the Eighties created so much Economic Activity the Opposition called it the Decade of Greed

The heyday of Keynesian economics was in the Seventies.  After Richard Nixon decoupled the dollar from gold the Keynesians were free to print money to stimulate the economy.  Which was their answer to ending a recession.  Stimulus spending.  Have the government print money to create economic activity that wasn’t happening in the private sector.  Their policy tool to end a recession was inflation.  By pouring money into the economy people would borrow it and buy cars and houses and furniture.  And everything else under the sun.  Creating a surge of economic activity.  And creating jobs in the process as businesses must hire new workers to meet that government stimulated demand.  With the dollar decoupled from the ‘cross of gold’ the Keynesians were finally able to prove their mettle.  And solve all the country’s economic problems.  It was the dawn of a brave new world.

And that world sucked.  For the implementation of Keynesian economic policy proved those policies did not work.  Instead of replacing high unemployment with inflation they just added high inflation to the high unemployment.  Something that was impossible to happen in Keynesian textbooks.  But it happened.  Stagnant economic activity.  And inflation.  What we called stagflation.  We added the unemployment rate to the inflation rate to come up with a new economic indicator.  The misery index.  The economy was so miserable during Jimmy Carter’s 4 years in office that he lost in a landslide to Ronald Reagan.  Who was a proponent not of Keynesian economics but of the Austrian school.  Or supply side economics.   And the Austrians believed in low tax rates.  For low tax rates would stimulate economic activity.  And the greater amount of economic activity would generate a greater amount of tax revenue even at lower tax rates.  Let’s look at that same celebrity paying taxes a decade later under Ronald Reagan.

 Much simpler.  And more in keeping with the Founding Fathers.  Instead of paying 70% of their earnings in federal income taxes they will only pay 28% (again, equal to the top marginal tax rate.  Which is pretty much the only tax rate the rich pay).  That’s still a lot of money to give to the federal government.  But it’s so much smaller that in many cases it was cheaper and easier to pay Uncle Sam than trying to hide that income.  So economic activity took off in the Eighties.  It was so great that the opposition called it the Decade of Greed.  Out of sour grapes because their policies could never produce anything like it.  But what about tax revenue?  Those on the Left say this economic activity came at a price.  Exploding deficits.  Well, the deficits did grow.  But it wasn’t because of the cuts in the tax rates.

Higher Tax Rates do not Necessarily Increase Tax Revenue 

In 1978 total tax revenue was $1,113.6 billion.  In 1988 total tax revenue was $1,421.1 billion.  So Reagan’s cuts in the tax rates produced $307.5 billion more in tax revenue.  An increase of about 27.6%.  Dropping the top marginal tax rate from 70% to 28% actually increased tax revenue.  So the cut in tax rates did not cause the deficits.  It wasn’t a revenue problem.  Revenue went up.  Spending just increased more.  And it was this excessive government spending that caused the deficits.  Not the tax cuts. 

The lesson here is that higher tax rates do not necessarily increase tax revenue.  Because changes in tax rates changes behavior.  Higher tax rates discourage people from investing in businesses.  They discourage businesses from expanding.  Or hiring new workers.  Higher tax rates may decrease the opportunity costs for hiding income.  The cost and inconvenience of hiding income in tax shelters and offshore accounts may become less that the cost of paying higher taxes.  Like it was during the Seventies.  Where despite confiscatory tax rates the government could not generate enough tax revenue to meet their spending obligations.

Income tax rates grew from a very small percentage on only the largest of incomes to high tax rates on very modest incomes.  And yet our deficits have never been larger.  Proving that our tax rates are either too high and dampen economic activity (as well as encouraging people to avoid paying their taxes).  Or that government spending has just grown too large.  More than likely it’s a combination of the two.  A fact that would shock and dismay the Founding Fathers were they alive to see what we did with the republic they gave us.

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Marx, Engels, Communist Manifesto, Capitalists, Bourgeoisie, Proletariat, Private Property, Soviet Union, Iron Curtain and East Berlin

Posted by PITHOCRATES - May 1st, 2012

History 101

Nationalism, Socialism and Communism forced a more Fair, Just and Equitable Society onto the People

Karl Marx and Friedrich Engels published the Communist Manifesto in 1848.  Launching a war against capitalism.  And private property.  Intellectuals and those in academia loved this stuff.  And labor leaders.  Because it was a path to power.  Especially for those who could not create wealth.  Unlike the great wealth producers.  Like the industrialists.  The entrepreneurs.  Small business owners.  The productive middle class.  That is, the capitalists.  Who work hard and achieve success.  By using their talent and ability to create wealth.  Moving up the economic ladder.  Creating income inequality.  The ultimate sin of capitalism.  According to Marx and Engels.  Intellectuals.  Academia.  And labor leaders.

In the Communist Manifesto Marx and Engels single out the accumulation of private property as the source of all our problems.  The capitalists, the bourgeoisie, have an insatiable appetite for private property.  They just can’t get enough of it.  And therefore oppress their workers, the proletariat, to maximize their property.  By paying them less and less to maximize their profits.  So they can use those profits to buy more and more property.  Which keeps the proletariat in perpetual and abject poverty.  And concentrates all the wealth into the few hands of the bourgeoisie.  And the only way to correct this great inequity was through a worker’s revolution.  Where the proletariat rises up and takes the private property of the bourgeoisie and gives it to the state.  So it belongs to everyone.  Especially to those who did not create it.  A very popular idea among those mired in perpetual and abject poverty.  Who are easily swayed to support this more fair, just and equitable distribution of other people’s wealth.

These progressive views enthralled Europe.  Especially after the Industrial Revolution created some appalling conditions for workers.  And they took this opportunity to put them into practice.  It was the 19th century that gave us the ‘fair’ political systems of nationalism, socialism and communism.  That began the process of transferring wealth from the capitalists to the anti-capitalists.  Precipitating the economic decline of Europe.  Making America the new economic superpower.  Which still maintained the principles of free market capitalism throughout the 19th century.  Until the anti-capitalistic teachings of Marx and Engels took hold in the progressive government of Woodward Wilson.  Bringing back the federal income tax Abraham Lincoln used to pay for the Civil War.  But unlike Lincoln Wilson had no intention of repealing it.  The federal income tax was here to stay.  As progressives began building that more fair, just and equitable society.

The Soviet Union Depended on the West for Food because their Forced Collectivized Farms couldn’t Feed their People

But the equitable movement in America was not as intense as it was in Europe.  Or Russia.  Which was taking the teachings of Marx and Engels to their logical end.  They had a worker’s revolution.  They became communist.  And forced that more fair, just and equitable society on their people.  Whether they wanted it or not.  And those who objected they systematically killed.  Or exiled to a Siberian gulag.  For Joseph Stalin’s rise to power was brutal.  As was the Soviet Union.  Even making a deal with Adolf Hitler to split Poland after the Nazi-Soviet invasion of Poland that launched World War II.  Then Hitler double-crossed their Soviet ally and attacked the Soviet Union.  And the Nazis nearly overran them.  The Nazis were in Leningrad (present day St. Petersburg).  At the gates of Moscow.  And in Stalin’s city.  Stalingrad.  The Soviets were unable to resist the Nazi onslaught.  The only thing that saved them was material aid from the capitalist West.  The Soviet T-34 tank (the best in the war).  And, of course, the millions of Soviet people the Soviet generals could throw into the Nazi killing machine to wear the Nazis down.

No one suffered like the Soviet people did during World War II.  The US and the UK each lost about a half million people.  A terrible loss.  The Soviets, though, lost about 25 million people.  A number that just numbs the mind.  This was the second Russian invasion that had brought an enemy to the gates of Moscow.  The first were the French a century earlier under Napoleon.  There wasn’t going to be a third.  Wherever their armies were at the end of World War II they pretty much stayed.  Turning Eastern Europe into a communist bloc.  And to make the Soviet Union a mightier nation they embarked on a rapid industrialization program.  To make it a modern power like those great nations in the West.  But unlike them they were going to do it the ‘smart’ way.  With their command economy.  Where their brilliant state planners would marshal their resources and do what the free market economies did in the west.  Only instead of taking about a century their Industrial Revolution would take only 5 years.

With no industrialists, entrepreneurs, small business owners or a middle class it fell upon the state planners to industrialize the Soviet Union.  As well as feed the Soviet people.  Well, they industrialized the Soviet Union.  But never brought it up to par with the industrialized West.  Worse, they couldn’t feed their people.  Despite having some of the most fertile farmland in all of Europe in the Ukraine.  The Soviet Union depended on the West for food.  Because their forced collectivized farms didn’t work like Marx and Engels said they would.  And they didn’t work in China, either.  Where another brutal communist dictator, Mao Zedong, killed tens of millions of his people by starving them to death.  By forcing a more fair, just and equitable society onto the Chinese.

Time Froze behind the Iron Curtain and People Lived pretty much Forever in the 1940s

At the end of World War II, like at the end of World War I, no one wanted to think about war anymore.  Winston Churchill, though, did.  For he saw what the Soviet Union was doing.  And saw the spread of their communism as a threat to Western Civilization.  He gave a speech at Westminster College in Fulton, Missouri, in 1946.  And said, “From Stettin in the Baltic to Trieste in the Adriatic an iron curtain has descended across the Continent. Behind that line lie all the capitals of the ancient states of Central and Eastern Europe.”  There was now an Eastern Europe.  An East Germany.  And an East Berlin.  All behind the Iron Curtain.  All in the Soviet sphere.  All communist.  Where they all suffered under a more fair, just and equitable society.  Whether they wanted it or not.  And they clearly did not.  For the Soviets had to build a wall in Berlin to prevent those in East Berlin from escaping to West Berlin.

The intellectuals, academia and labor leaders loved Joseph Stalin and the Soviet Union.  They thought communism was the enlightened future.  Probably because they didn’t have to live in it.  But what is surprising is that a lot of college students have this affection with communism.  To this day they still wear t-shirts emblazed with the beret-wearing Che Guevara.   Who helped Fidel Castro bring that more fair, just and equitable society to the Cubans.  Who have been trying to escape it ever since by practically swimming to Florida and free market capitalism.  But the college students and their professors still yearn for a Soviet-style economy in the United States.  And condemn capitalism as they sit in coffee bars sipping their lattes.  Enjoying social media on their smartphones.  Wearing the latest fashions.  Enjoying the latest movies.  The newest music.  And dream of that more just society.  Where they redistribute wealth fairly and equitably.  And the rich pay their fair share.  Just like in East Berlin.  Where life was fair.  But it was nowhere as enjoyable as in the unfair West.

Time froze behind the Iron Curtain.  When West Berlin enjoyed the best Western Civilization had to offer in music, fashion, food, entertainment, etc., East Berlin didn’t.  For they were frozen in the 1940s.  Western music was decadent.  So instead of rock and pop music you listened to classical music.  Instead of the latest Hollywood movies you went to the ballet.  You didn’t watch Western television.  Read Western books.  Or newspapers.  No.  You only saw things approved by state censors.  And that were patriotic.  Why?  To prevent their people from seeing how much better life was on the other side of the Iron Curtain.  Where they enjoyed the latest and the best of everything.  Whereas inside the Iron Curtain you went to the black market for any real luxuries.  Like a pair of blue jeans.  Which they didn’t sell in East Berlin.  Because they were decadent.  Why, they wouldn’t even sell a t-shirt with a communist icon on it.  Because you just didn’t wear something like that in the 1940s.  But college kids will attack capitalism.  And support the fairness of socialism and communism.  Even though the things they enjoy come from free market capitalism.  And are simply not available in the communist command economy.  Because the accumulation of private property is the greatest sin of capitalism.  And not allowed under communism.

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Tax Cuts, Roaring Twenties, Farm Prices, Smoot-Hawley Tariff, Stock Market Crash, New Deal, Great Depression and the Great Recession

Posted by PITHOCRATES - March 20th, 2012

History 101

Tax Cuts and the Small Government Policies of Harding and Coolidge gave us the Roaring Twenties

Keynesians blame the long duration of the Great Depression (1929-1939) on the government clinging to the gold standard.  Even renowned monetarist economist Milton Friedman agrees.  Though that’s about the only agreement between Keynesians and Friedman.   Their arguments are that the US could have reduced the length and severity of the Great Depression if they had only abandoned the gold standard.  And adopted Keynesian policies.  Deficit spending.  Just like they did in the Seventies.  The decade where we had both high unemployment and high inflation.  Stagflation.  Something that’s not supposed to happen under Keynesian economics.  So when it did they blamed the oil shocks of the Seventies.  Not their orgy of spending.  Or their high taxes.  And they feel the same way about the Great Depression.

Funny.  How one price shock (oil) can devastate all businesses in the US economy.  So much so that it stalled job creation.  And caused high unemployment.  Despite the government printing and spending money to create jobs.  And to provide government benefits so recipients could use those benefits to stimulate economic activity.  All of that government spending failed to pull the country out of one bad recession.  Because of that one price shock on the cost of doing business.  Yet no one talks about the all out assault on business starting in the Hoover administration that continued and expanded through the Roosevelt administration.

Herbert Hoover may have been a Republican.  But he was no conservative.  He was a big government progressive.  And believed that the federal government should interfere into the free market.  To make things better.  Unlike Warren Harding.  And Calvin Coolidge.  Who believed in a small government, hands-off policy when it came to the economy.  They passed tax cuts.  Following the advice of their treasury secretary.  Andrew Mellon.  Which gave business confidence of what the future would hold.  So they invested.  Expanded production.  And created jobs.  It was these small government policies that gave us the Roaring Twenties.  An economic boom that electrified and modernized the world.  With real economic growth. 

If an Oil Shock can prevent Businesses from Responding to Keynesian Policies then so can FDR’s all out War on Business

The Roaring Twenties was a great time to live if you wanted a job.  And wanted to live in the modern era.  Electric power was spreading across the country.  People had electric appliances in their homes.  Radios.  They went to the movies.  Drove cars.  Flew in airplanes.  The Roaring Twenties was a giant leap forward in the standard of living.  Factories with electric power driving electric motors increased productivity.  And reduced air pollution as they replaced coal-fired steam boilers that up to then powered the Industrial Revolution.  This modernization even made it to the farm.  Farmers borrowed heavily to mechanize their farms.  Allowing them to grow more food than ever.  Bumper crops caused farm prices to fall.  Good for consumers.  But not those farmers who borrowed heavily.

Enter Herbert Hoover.  Who wanted to use the power of government to help the farmers.  By forcing Americans to pay higher food prices.  Meanwhile, the Federal Reserve raised interest rates.  Thinking that a boom in the stock market was from speculation and not the real economic growth of the Twenties.  So they contracted the money supply.  Cooling that real economic growth.  And making it very hard to borrow money.  Causing farmers to default on their loans.  Small rural banks that loaned to these farmers failed.  These bank failures spread to other banks.  Weakening the banking system.  Then came the Smoot-Hawley Tariff.  Passed in 1930.  But it was causing business uncertainty as early as 1928.  As the Smoot-Hawley Tariff was going to increase tariffs on just about everything by 30%.  Basically adding a 30% tax on the cost of doing business.  That the businesses would, of course, pass on to consumers.  By raising prices.  Because consumers weren’t getting a corresponding 30% pay hike they, of course, could not buy as much after the Smoot-Hawley Tariff.  Putting a big cramp in sales revenue.  Perhaps even starting an international trade war.  Further cramping sales.  Something investors no doubt took notice of.  Seeing that real economic growth would soon come to a screeching halt.  And when the bill moved through committees in the autumn of 1929 the die was cast.  Investors began the massive selloff on Wall Street.  The Stock Market Crash of 1929.  The so-called starting point of the Great Depression.  Then the Smoot-Hawley Tariff became law.  And the trade war began.  As anticipated.

Of course, the Keynesians ignore this lead up to the Great Depression.  This massive government intrusion into the free market.  And the next president would build on this intrusion into the free market.  Ignoring the success of the small-government and tax cuts of Harding and Coolidge.  As well as ignoring the big-government free-market-intrusion failures of Herbert Hoover.  The New Deal programs of FDR were going to explode government spending to heights never before seen in peace time.  Causing uncertainty like never seen before in the business community.  It was an all out assault on business.  Taxes and regulation that increased the cost of business.  And massive government spending for new benefits and make-work programs.  All paid for by the people who normally create jobs.  Which there wasn’t a lot of during the great Depression.  Thanks to programs like Reconstruction Finance Corporation, Federal Emergency Relief Administration, Civilian Conservation Corps, Homeowners Loan Corporation, Tennessee Valley Authority, Agricultural Adjustment Act, National Industrial Recovery Act, Public Works Administration, Federal Deposit Insurance Corporation, Glass–Steagall Act, Securities Act of 1933, Civil Works Administration, Indian Reorganization Act, Social Security Act, Works Progress Administration, National Labor Relations Act, Federal Crop Insurance Corporation, Surplus Commodities Program, Fair Labor Standards Act, Rural Electrification Administration, Resettlement Administration and Farm Security Administration, etc.  Oil shocks of the Seventies?  If an oil shock can prevent businesses from responding to Keynesian policies then an all out war on business in the Thirties could do the same.  And worse.  Far, far worse.  Which is why the Great Depression lasted 10 years.  Because the government turned what would have been a normal recession into a world-wide calamity.  By trying to interfere with market forces.

Only Real Economic Growth creates Jobs, not Government Programs

The unemployment rate in 1929 was 3.1%.  In 1933 it was 24.9%.  It stayed above 20% until 1936.  Where it fell as low as 14.3% in 1937.  It then went to 19.0%, 17.2% and 14.6% in the next three years.  These numbers stayed horrible throughout the Thirties because the government wouldn’t stop meddling.  Or spending money.  None of the New Deal programs had a significant effect on unemployment.  The New Deal failed to fix the economy the way the New Dealers said it would.  Despite the massive price tag.  So much for super smart government bureaucrats.

What finally pulled us out of the Great Depression?  Adolf Hitler’s conquering of France in 1940.  When American industry received great orders for real economic growth.  From foreign countries.  To build the war material they needed to fight Adolf Hitler.  And the New Deal programs be damned.  There was no time for any more of that nonsense.  So during World War II businesses had a little less uncertainty.  And a backlog of orders.  All the incentive they needed to ramp up American industry.  To make it hum like it once did under Harding and Coolidge.  And they won World War II.  For there was no way Adolf Hitler could match that economic output.  Which made all the difference on the battlefield.

Still there are those who want to blame the gold standard for the Great Depression.  And still support Keynesian policies to tax and spend.  Even today.  Even after 8 years of Ronald Reagan that proved the policies of Harding and Coolidge.  We’re right back to those failed policies of the past.  Massive government spending to stimulate economic activity.  To pull us out of the Great Recession.  And utterly failing.  Where the unemployment rate struggles to get below 9%.  The U-3 unemployment rate, that is.  The rate that doesn’t count everyone who wants full time work.  The rate that counts everyone, the U-6 unemployment rate, currently stands at 14.9%.  Which is above the lowest unemployment rate during the Great Depression.  Proving once again only real economic growth creates jobs.  Not government programs.  No matter how many trillions of dollars the government spends. 

So much for super smart government bureaucrats.

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