UPDATE: GDP Growth IS a result of government spending
I’ve heard from some of you, insisting I MUST have my facts wrong. After all, government spending has gone down over the past 3 years – not up. You know this because the esteemed Paul Krugman drills on this in every other column he writes and blogs about it daily. Besides, The Annointed One of 1600 Pennsylvania Avenue would NEVER LIE!!!
Funny, but I think those of you following that line of thinking are either (a) hoodwinked by the President or (b) Obama sycophants. The chart below was compiled by the Federal Reserve, and like most FEBR data, excludes inflation. But you’ll note that the increase in government spending as a share of GDP (and therefore, the commensurate reduction in GNP) eerily match the curve I developed.
So…..phhhhbbt. Stop listening to the liar-in-chief and his apologists. Learn how to do a little basic research on your own, people.
Oh, my…this IS the reason the economy hasn’t recovered!
GDP Growth & Government Spending
Obama’s Economic Hero
There are many things that puzzle me. For instance, why is the cold water tap always on the right-hand side of the faucet? It’s as if the guy who invented indoor plumbing arbitrarily decided to that cold water should come from the right and everyone since has followed suit. There’s no real reason for it. We could just as easily have cold water coming from the left and nobody would be any wiser for it.
A similar thought process seems to have occurred in regards to including government spending as part of a nation’s economic health, currently expressed as GDP. Once upon a time, we didn’t calculate GDP. We calculated GNP; the gross national product. That figure didn’t include government spending – because economists were interested in determining the productivity of a country’s economy. Governments simply do not produce anything; no goods, no services. In fact, government spending used to be regarded as a negative economic indicator. After all, the more governments spent, the more they had to raise revenue by confiscation (and yes, taxation is still confiscation – just with a prettier name). That pulled capital from the real economy – which lowers a nation’s GNP.
GNP remained the way the government and most economists measured economic output until 1993. The Clinton administration, swept to power on the mantra of “It’s the economy, stupid” was looking for a way to juice up the headlines. By switching from GNP to GDP, they found their way to reinforce the perception that the economy was improving. It didn’t matter that actual economic output barely increased from 1992 to 1993. By including government spending in the measure of the nation’ economic health, it seemed as if the economy had rebounded.
The Obama administration is relying on similar hocus-pocus to fool the American public in 2012. Yes, GDP is growing – but only because government consumes more of the national economy than at any time in history. Yes, more than during the New Deal of the 1930′s, more than the war spending of the 1940′s and more than during the profligate 80′s. In 2011, the US Treasury spent in excess of $6 trillion dollars and accounted for 41% of all economic activity recorded in the US GDP. By comparison, at the peak of World War II spending in 1944, the Treasury only accounted for 28% of GDP. Even at the height of the last major recession in 1983, the Reagan treasury only accounted for 36% of GDP. Yet, during the Obama administration, we’ve jumped from 36% in 2008 to 40% in 2009 – and haven’t fallen below that mark since.
Of course, there’s a flip-side to this coin: if government spending is what is driving perceived economic expansion, the reality must be that the real economy is shrinking. And after adjusting for inflation, that’s exactly the case: in 2008, GNP totaled $9.1 trillion dollars (that represented a $31 billion drop from 2007). But economic activity has continued to decline under the current administration’s tutelage. In 2009, GNP totaled $8.9 trillion and it has continued to drop since, all the way to $8.4 trillion in 2011.
This is the principle reason why job growth remains a real negative. The Obama team loves to pat itself on the back for “creating 4 million jobs over the past 18 months.” The sad truth is that the economy should have produced about 4.3 million jobs over the past 18 months just to keep pace with population growth. But the jobs picture makes sense when you compare it to actual economic growth. As the economy continues to contract, the demand for workers continues to decline. The only difference between 2012 and 2008 is that businesses don’t need to lay off workers to accommodate the reduced demand. They just simply don’t hire new employees.
I can summarize this with a very simple statement: if it seems to you that the recovery we hear so much about hasn’t ended the Great Recession, that’s because it hasn’t. There hasn’t been a recovery, except for those with direct ties to government spending. That’s the one component of GDP that has increased: by over $1 trillion over the past three years.
So, the next time you see a GDP number that trumpets economic growth, remember to dig into the numbers a bit. And remember, this is White House that replaced managing economic growth with managing spin.
The Little Red Hen
In case you’re wondering why so many Americans are dependent on the government for subsistence today, I thought returning to our childhood might be a good place to start. When I was a wee lad, I was told the story of the Little Red Hen. It goes something like this:
*****
Once upon a time, there was a little red hen who lived on a farm with her friends, the dog, the cat and the duck. One day when she was scavenging for food (for that’s what hens do), she found some seeds laying on the ground. Being a bright hen, she had an idea. She would plant the seeds and see what grew.
“Who will help me plant these seeds?” asked the little red hen.
“Not I” said the dog. “Not I” said the cat. “Not I” quacked the duck.
So, the little red hen tilled the ground and planted the seeds by herself. But she knew from watching the farmer that the seeds needed to be watered.
“Who will help me water the seeds?” asked the little red hen.
“Not I” said the dog. “Not I” said the cat. “Not I” quacked the duck.
So, every day the little red hen watered the seeds by herself. Soon, she had big stalks of wheat ready for harvest.
“Who will help me harvest the wheat?” asked the little red hen.
“Not I” said the dog. “Not I” said the cat. “Not I” quacked the duck.
So, the little red hen harvested all the wheat by herself. She was tired, but proud that her hard work had paid off with such a handsome harvest. But what to do with the wheat? The little red hen thought she could grind the wheat into flour.
“Who will help me grind this wheat into flour?” she asked.
“Not I” said the dog. “Not I” said the cat. “Not I” quacked the duck.
So, the little red hen ground the wheat into flour. It was wonderful flour, pure and white, perfect for baking a cake. The little red hen, being hungry from all of her hard work, decided to do just that.
“Who will help me bake the cake?” asked the little red hen.
“Not I” said the dog. “Not I” said the cat. “Not I” quacked the duck.
So, the little red hen baked the cake. When it was done, it smelled soooo good that the little red hen decided to eat the cake.
“Who will help me eat the cake?” asked the little red hen.
“Oh, I will” barked the dog. “Yes, I will, too!” purred the cat. “I will eat the cake” said the duck.
The little red hen looked at her friends in amazement. “When I asked your help in planting the wheat, none of you would” she said. “When I asked your help to tend and harvest the grain, none of you would. When I asked for your help to grind the wheat into flour and to bake the cake, none of you would. So, I will give each of you as much cake as you have earned.”
And with that, the little red hen sat down and ate the whole cake by herself.
*****
Today, I see a lot of people acting like the dog, cat and duck in the story, but very few little red hens. Once upon a time, this was the American ethos. But the dual ideals expressed in the “Little Red Hen” are apostasy to many of our countrymen these days. The ideals of earning you own way in the world, and the that diligence in your labors enable greater gains in the future. Rather, today the story is seen as an example of greed and avarice: how dare that little red hen keep that cake all to herself when those around here are asking for their “fair share?”
How old is the story of the little red hen and her barnmates? Nobody knows for sure, or even knows the origin. Some say it began in Russia, others in Germany. What we do know is that the principles exhibited by the characters and the results of their work (or lack thereof) are found in texts that predate the Persian Empire. In the Bible, the Book of Proverbs (also known as the Wise Sayings of King Solomon) has several passages that refer to laziness. Among them is Proverbs 10:4, “He becometh poor that dealeth [with] a slack hand: but the hand of the diligent maketh rich” and Proverbs 19:15, “Slothfulness casteth into a deep sleep; and an idle soul shall suffer hunger.” The current idea that your “fair share” is determined by need, not effort is a relatively new phenomenon, first expressed by Karl Marx. You know, “from each according to his ability, to each according to his need.”
I often wonder if the folks protesting at OWS encampments are aware of the story of the Little Red Hen. I’ve no doubt they’re aware of the Marx quote (although I would be willing to wager a small sum that most would confuse its origin). If we want to fix what’s wrong with the country, perhaps we should return to teaching more “Little Red Hen” and less “Critique of the Gotha Program.”
And Now a Word about Gas Prices
Remember when "Sticker Shock" meant getting screwed by a car dealer?
Face it, you just went to fill up your tank this morning and discovered that it cost you $2 more this week than last to put 12 gallons into the tank. Last week, it was $1.80 more than the week before. And so on, all the way back to the first week in January.
You complain. You gripe. Your neighbors are equally disgusted. One of your coworkers seems to bring up the topic of exploding gas prices every day. In the meantime, you noticed that your wife spent $30 more on groceries this week but brought home less food. She’s half-heartedly joking that at this rate, it will be PB&J for dinner by summertime.
Everyone seems to be talking about the way prices are skyrocketing, but nobody seems to be doing anything about it. And I’m going to let you in on a little secret: there isn’t anything anyone can do about it.
The reason prices are taking off is the dirtiest word in economics: inflation (okay, maybe the second dirtiest word after recession). Why? People automatically assume inflation means rising prices. But rising prices are the symptom, not the problem. Inflation occurs when the money supply outgrows the demand for that money. It is classical, John Smith economics at work in its most basic form: supply and demand. When supply outstrips demand, prices fall. That’s true of any product. Build more cars than the public wants and the price of cars drops. Grow more wheat than you can sell and you slash the price to where you’re virtually giving it away. In those cases, the fix is relatively simple but usually takes time to implement. Build fewer cars. Grow less wheat. Of course, you’ll need to wait a full manufacturing cycle for production to drop to a point where the supply of cars matches the demand. You need to wait an entire year before wheat prices correct.
But what happens when you print too much money? Well, basically the same thing: you shrink the availability of money. You raise interest rates on the purchase of new capital, to make it less palatable to prospective buyers. You restrict international trade of currency. You can also do things to tinker around the edges, like demand banks hold more cash in reserve and prevent corporations from dumping cash into the market. But the reality is all of these things take time to work – a lot of time. In the meantime, the hangover effect of inflation – raising prices – hits everyone hard.
And again, the reason is simple. Wages are tied to productivity, not the price of money. In fact, inflationary periods result in reduced wage pressure because as money sloshes around in the economy, productivity declines. Not because people are working less (they’re usually working more, and harder) but because the value of work is declining along with the value of the currency. The net result is you work harder to bring home the same amount of money you were before – but that money has reduced purchasing power.
Now here’s why nothing can be done about inflation in the near term: the inflationary bubble was created between 2008 and 2010 and we’re just now beginning to feel the effects. Picture the way a tsunami moves – if you’re out on the ocean, you’ll hardly notice a ripple. As you get closer to shore, the pressure builds. Enough of a wave will swamp everything for miles inland once it reaches shore. Inflation is similar in that the pressure is created much further away than when the effects are felt – and like a tsunami, there is no way to stop the momentum once it’s put into motion. We created the current inflationary bubble when we decided to print money in order to escape the Great Recession. Most Keynesian economists (guys like Paul Krugman and Robert Reich) cheered on the printing presses and have been vocal in their calls for cranking them up even faster. They’ve pointed to the short-term pain felt throughout economies that chose to choke down on the money supply while disregarding the damage to our economy rampant inflation will cause. In short, they’ve forgotten the lessons of the 1970′s in the US and the 1990′s in Japan.
Under ordinary circumstances, their calls for greater government borrowing would make sense – given the insanely low current interest rates. But they either ignore or fail to understand how that borrowing is financed. In ordinary times, governments issue bonds which guarantee a certain return on the initial investment. Private markets purchase those bonds and new money is generated (i.e., printed) to cover the interest earned on the bonds. So long as the increase in the money supply roughly matches real growth in the economy, inflation is kept minimal. But the current spending spree ignored those basic rules of supply and demand. First, The US Treasury dumped about $3 trillion of the $5 trillion borrowed over that time directly into the finance sector. Besides the bank bailouts in 2008 and 09, there wasn’t enough demand for US Treasuries to absorb all of the new bond that were floated. So the Federal Reserve purchased them and then resold them through two round of “quantitative easing.” That direct infusion of currency outpaced real GDP growth by 5.6% alone. It doesn’t factor in the interest owed on those bonds or the effects of the nearly $2 trillion in cash the Federal Reserve created on its own. When you add all of it up, the economy now has roughly $2.5 trillion more in cash than needed to meet demand. That equates to 17% inflation – 17% more money supply than demand would allow.
This isn’t to say that we’ll actually see 17% inflation before all is said and done – there are other things that could keep the number lower. For instance, if the world’s other major currencies remain weak then the dollar will retain a semblance of strength and that would mitigate the effects of inflation. At the same time, a country with a relatively weak currency that holds large reserves of dollars (say, China) could decide they need to strengthen their currency’s relative strength against the dollar and start dumping our currency.
But until then we can conserve, or drill, or do some combination. While it will have a short-term effect of mitigating the price at the pump, the end result will be the same: gas (along with everything else) will cost more this time next year than it does today. The problem with gas prices is not supply (we have more than at any time in the past 40 years) or demand (the world is using less gasoline than at any time in the past decade). In fact, the cost per gallon of gas has actually decreased, relative to actual dollar value, over the past 5 years. But because the cost hasn’t dropped as fast as inflation has risen, the price continues to move upwards.
THAT is the dirty little secret no politician in either party wants to tell you.
SOTU Dissected
Trust Me
Last night President Obama delivered his constitutionally-mandated State of the Union address. It was, of course, little more than the official start of his re-election campaign. Still, the 65 minutes he spent in the House well delivered more than a few interesting tidbits. I thought we could have some fun digging into the speech‘s rhetoric and laying bare the facts.
Obama: “We have subsidized oil companies for a century. That’s long enough. It’s time to end the taxpayer giveaways to an industry that’s rarely been more profitable, and double-down on a clean energy industry that’s never been more promising.”
This is the third SOTU address in which he floated the idea of ending oil subsidies. It’s also going to be the third time this falls on deaf ears. He couldn’t get this passed in 2009, when his party controlled the House and had a filibuster-proof majority in the Senate – and that was with a specific legislation calling for $36.5 billion in energy taxes over ten years. The administration never followed up a similar proposal in last year’s SOTU with draft legislation. It seems equally doubtful that a candidate who received nearly $3 million in campaign donations from the oil industry (thus far) is in any rush to see this put into law. Further, we’ve seen the results of the investment in “green energy” companies like Solyndra. In blackjack, that’s the equivalent of “doubling-down” on a 9 when the dealer is showing an ace.
Obama: “Our health care law relies on a reformed private market, not a government program.”
Perhaps the President needs to go back and re-read that health care law. First of all, the reform relies primarily on an individual mandate, enforced through the IRS. If that enforcement doesn’t qualify as the biggest government program in history, then obviously I’m not as good a student of our nation’s history as I thought. And there are other, already existing programs that will be greatly expanded should the Supreme Court not throw the whole thing out this summer. For instance, Medicaid grows to cover anyone up to 138% of the official poverty line, which the CBO scored as requiring a funding increase of $434 billion per year. In and of itself, that would make Medicaid the single largest line item in the federal budget – and most state budgets, too.
Obama: “Take the money we’re no longer spending at war, use half of it to pay down our debt, and use the rest to do some nation-building right here at home.”
This is a wonderful assertion, except that it ignores the reality of the federal budget. The Iraq campaign was financed entirely on debt. Ending that war doesn’t actually result in any savings, except in the strange and convoluted world of Washington finance. It just means we’re able to borrow less money and keep everything else funded at the same levels. Of course, the President largely ignored the problem of the federal debt, so I suppose he thinks keeping deficits at staggeringly high levels in order to score a few rhetorical points is money well spent.
Obama: “Through the power of our diplomacy a world that was once divided about how to deal with Iran’s nuclear program now stands as one.”
I’m not sure which world he meant by this, but it obviously wasn’t this one. Yes, the European Union seems likely to join the US in applying stringent sanctions. But Russia and China have no intention of doing so, and both countries used their veto power in the UN to prevent that body from enforcing them. Besides, the sanctions will have limited effect on the Iranian economy, since the Iranians switched from accepting dollars and euros to rials or rubles. Just for good measure, Israel seems hell-bent on taking unilateral military action if they deem it necessary. It’s hardly the unified front the President presented.
Obama: “The Taliban’s momentum has been broken, and some troops in Afghanistan have begun to come home.”
Apparently, the President failed to read his latest NIE. In that document, the Taliban is expected to gain strength by using the ongoing talks to re-establish their legitimacy in the Afghani countryside while stalling until we pull out. This assertion is as hollow as LBJ’s that “the Government of South Vietnam has grown steadily stronger.” Of course, we all know well that turned out.
An overarching theme last night was the idea of economic “fairness.” As described by Mr. Obama, fairness is “an economy where everyone gets a fair shot, everyone does their fair share, and everyone plays by the same set of rules.” Yet, at no point did he actually outline how to make that a possibility. He suggested that millionaires aren’t paying their fair share of income taxes – yet according to the IRS the effective rate for those people is 26.5%. Only 10% of people making under $100,000 per year are paying a higher effective rate – and less than 5% of millionaires pay a lower rate. Thanks to that disparity, millionaires accounted for 36.5% of the federal government’s income. Unfair? You bet it is – but I doubt asking the 47% of Americans whose effective tax rate is negative to pony up is what the President had in mind when talking about “fairness.”
Finally, one thing was ominously missing from the speech: any discussion of individual freedom and liberty. The entire speech was a discussion of increasing the role and prominence of the federal government in our lives. “With or without this Congress, I will keep taking actions that help the economy grow,” declared the Mr. Obama. Quite frankly, I can’t think of a scarier statement by any President in our recent history. Putting aside the obvious constitutional questions raised by a President acting unilaterally, consider that some 13 million more Americans are looking for work since he assumed office and real GDP growth (accounting for inflation) is -7.3% over the same period, I don’t want this President touching the economy. Especially when he has demonstrated an incredible desire to amass power in the West Wing and during an election year.
When Governments Fail
One of my pet peeves – ok, my biggest peeve – is that government doesn’t understand it’s role in society. In particular, one of the overarching themes I find disturbing is how government thinks it knows how best to serve the citizenry. The reality is that government, even when it means well, generally manages to get things wrong. Bureaucrats being bureaucrats, the law of unintended consequences is never taken into account. People’s lives are destroyed in a sort of ”collateral damage.”
It doesn’t only happen at the Federal level, where the Great Society ushered in the era of society-killing programs. (Think how many families end up dissolving so the mother can receive food stamps). No, it happens all the way down to the local level. Consider the case of the Lakewood (NJ) “Tent City.” I realize most of you reading this have no idea what I’m talking about, so here’s a little background. In 2006, before the Great Recession hit the nation as a whole, Ocean County experienced a dramatic increase in the homeless population. A largely rural area where the principle economic driver is tourism, there are neither facilities nor public funds available to assist the homeless. The nearest homeless shelter is located in Atlantic City; they don’t have the ability to house people except in the short-term and most of their resources are dedicated to the types of problems found in inner-city homeless populations (things like rampant drug and alcohol abuse, for instance). A local pastor, Steve Brigham of the Lakewood Outreach Ministry, saw a need in his community and took action. With a few tents set up in the woods, the Lakewood Tent City was born. With no public funding, Pastor Steve has established a community that at times has housed as many as 76 people. The rules are simple and direct: no drugs, no alcohol, everyone pitches in and everyone has to be actively looking for work (or working).
Lakewood Tent City Chapel
Why local government feels the need to get involved in this ministry is still an open question. The tent city is located in the woods and doesn’t infringe on anyone’s property rights. Nor is it located on public parklands or other facilities. The town has attempted several time to evict the campers, with the most recent rejection of their efforts coming earlier today. Their court pleadings have included the usual, such as health and safety concerns. Yet, by all accounts, this hasn’t been an issue at the tent city – as opposed to most of the “Occupy” encampments from this past fall. No, I suspect the real issue here is that a sole individual used a bit of initiative and with a few hundred dollars of private fundraising accomplished something the county said for years it couldn’t: established a viable homeless shelter. No, it’s far from an ideal solution. These are still tents pitched in the woods, without electricity, running water or heat. But it has provided a sense of community and support for those people that would otherwise fall through the cracks.
And I wasn’t kidding about a few hundred dollars in private donations. A perfect example is Heather Skolsky, who became involved after her cousin stayed at the tent city in 2006. (He now lives in New York and works for the Salvation Army). Her first fundraising effort yielded about $300, a few blankets and other supplies. This weekend she’s organized a benefit concert. These are the types of results that government can’t seem to replicate – and remains dedicated to stopping.
So, what can you do? For starters, look around your own communities. Odds are, you’ll find similar organizations in need of help and under assault from local officials. Of course, if you want to help out Pastor Steve in his mission, you can click here to give a donation. If you’re in the Lakewood area, you can always stop by to lend a hand. And if you’re interested in attending the benefit, I’ve included those details below.
The point is this: too often we’ve forgotten the meaning behind JFK’s inaugural address in 1961. While we all remember the words, “Ask not what your country can do for you; ask what you can do for your country,” the reality is that the socialist left still prefers government action to citizen initiatives. In the process, they’ve made programs like the Lakewood Tent City persona non grata in the eyes of the public – even though they create far better results at far less cost than similar government programs. Something to keep in mind the next time someone tells you that government assistance programs are “needed.”
To attend the Lakewood Tent City Benefit tomorrow night:
High Velocity Sports Bar, Rte 166, Beachwood NJ
Doors open 9:30pm. Cash bar, cash donations and/or donations of winter camping gear. For more info, call 732-600-7432 or email Laurens72882@comcast.net
About that Payroll Tax Cut…
Remember when I was begging and pleading with lawmakers to reject President YOYO’S inane payroll tax cut? My worry is that doing so dramatically underfunds Social Security. Well, guess what. Independent analysis is confirming that those worries are justified. Read more at this Washington Post article. My question is, where was this article two weeks ago? Oh, that’s right. The Post, like the rest of the MSM, remains an Obama sycophant.
Fuzzy Math & the Payroll Tax
There I go again...
If there’s one thing we should have learned from this recession, it’s that politicians may not know how to fix it – but they sure know how to play politics with it. So, you’ll pardon me if my eyebrows arched up when the Great Obama proclaimed the House’s refusal to go along with the payroll tax compromise was “stealing $1,000 from hard-working middle class Americans.” The President has told some whoppers during his time in office (seems becoming President imbues the office holder with that ability), but where on earth did he come up with that number?
The compromise reached in the Senate only covers two months. Given the typical American earns $34,720 a year and we’re talking about 2% of pre-tax income, that $1,000 seems a pretty big number. So I ran some quick calculations and didn’t come near the $1,000 promised by the President. Over 8 weeks, the typical American would see a “whopping” $106.83 extra in take-home pay – or $13.35 per week. I don’t know about you, but $13.35 doesn’t buy me very much. It won’t fill my gas tank. It also doesn’t fit the bill on the “What $40 Means to Me” White House website. Even the TWO months of extra take home pay wouldn’t cover ONE month’s cell phone bill. So, I thought that perhaps the President simply got the two month compromise bill and the extra cash from a full year of the payroll tax reduction confused (could happen; I’m sure he’s busy fielding calls from Michelle about how sunny Hawaii is right now). Nope, wrong again – that only comes to $694.40, or about ½ of 1 month’s mortgage payment. Could it be he was talking about the top-end earner under the plan, the guy making $110,000 a year? Not really – he still only comes home with an extra $338 in his pocket over the course of the compromise. (See chart below for details)
While the extra take-home money is welcome by pretty much everyone, I don’t think if people stop to consider the implications of this tax cut they’ll be so anxious to get that extra $13 or so in their pockets. Hey, here’s a novel idea, one that gets the same amount of money into everyone’s pockets without annihilating the Social Security system: why not pass an income tax cut for everyone earning under $110,000 per year? Too simple an idea? Too broad based to get real support? Probably.
In the meantime, I’m not sure what they’re smoking during these White House – Senate confabs. But they better legalize it before Eric Holder catches a whiff.
Payroll Tax Reduction
Don’t Pass the Payroll Tax Cut
FDR Signing the Original Social Security Act
Yesterday, the House of Representatives may have given the American people an early Christmas present – although the majority of my fellow citizens won’t realize it and (urged on by the President) will cry bloody murder. And yes, the motives of the House members are hardly pure. Those are certainly little more than angling for political gain. But the result is the same; an end to the insanity that is the payroll tax cut.
It isn’t that I’m opposed to tax cuts, in general principle. Anything that reduces the inflow of money from the private sector to the public is usually a good thing. But the consequences of reducing this particular tax levy amount to far more than the few pennies saved by the average taxpayer. Why? Because this is a targeted tax, whose revenue is designed purely to keep the Social Security system afloat.
Okay, some background here. The payroll tax amounts to 12.4% of the earned income of every wage earner in the country, up to $100,000. Of that, you normally pay 6.2% and your employer pays 6.2% (unless you’re self-employed, in which case you pay the full 12.4%). For 2011, Congress and the President reduced the amount paid by employees to 4.2%. That cost the Social Security system $117 billion. Now, here’s the rub: most people think there’s this massive social security trust fund, into which new revenues get deposited and from which existing current beneficiaries receive their monthly stipend. Reducing the amount coming for a year or two won’t matter, because the trust fund is earning interest on past deposits and there is plenty of time to make up the current shortfall. The reality is there isn’t a trust fund. There never was one; there never will be. Rather, the money you pay in is turned right around to retirees. Smart people realized that the system as it existed was untenable back in the 80′s; they worked out some changes in the ways benefits are paid and increased the payroll tax. Depending on who you talk to, the system was saved from insolvency until 2037 or 2052.
Except the $117 billion that came out of this year’s Social Security funding left us with an $83 billion shortfall, either 26 or 41 years before it was supposed to happen. If the payroll tax remains at 4.2% for this year, the CBO expects the shortfall to top $105 billion. (Actual reduction in revenue amounts to approximately $120 billion). The folks in the Senate came up with some neat trickery to “pay” for the reduced payroll tax, mostly relying on forecasting budget cuts 10 years down the road to pay the difference. That’s not exactly a reliable funding formula, but it is what passes for budget restraint these days.
What I find really amazing about the whole thing is the way Democrats – supposedly the guardians of the Social Security system from all assaults – have caved on this issue. Most of them probably haven’t realized yet that by breaking the essential funding formula created by the original Social Security Act and relying on general revenues to keep the system solvent, they’ve subjected their sacred cow to the whims of future Congresses. I can’t imagine they actually thought through the idea that Social Security is now on the general budgeting table, open to political negotiation on funding – and payments.
I think most people realize that Social Security needs to be revisited, if for no other reason that retirees are living longer and collecting more. Pro-rating payments, delaying the official retirement age, means testing, even incorporating private retirement accounts should all be on the table. But if Congress continues reducing the inflow of funds in to the Social Security system, the idea that we can address the topic later rather than sooner will be gone.
A Word About Class Warfare
This post began as a reply to a thread on Facebook. Some friends and I were debating the essence of what constitutes class warfare. At one point, one of them reiterated the ageless ism that “class warfare is painting poor people who are struggling as lazy, shiftless and hopeless.”
I do not consider people who do not have as much wealth as I as being lazy, hopeless or shiftless. Some are, but most are indeed, very hard-working individuals. Their great disadvantage is they lack certain talents that I do have. It might simply be that they lack the drive to succeed that I have – I know more than a few people who look at a “work week” as being 40 hours, maybe 50 – but the idea of working 24 hours a day, 7 days a week to make an enterprise successful isn’t what they want from life. And that’s fine, but they shouldn’t expect the same financial results as those of us who do put in that type of time and effort.
I can’t say their circumstances are a result of a lack of education. After all, I never finished grad school but have been more successful in my business career than many of my friends who have MBA’s. And people like Steve Jobs, Steve Wozniak, Bill Gates and other celebrated tech purveyors don’t even have undergrad degrees. This isn’ t to knock formal education. Certainly, for most people a great formal education is a key stepping-stone to career advancement. But given the choice between hiring a Harvard MBA and a kid with no more than a CTIA+ certification and a dream to be the next Woz, I’ll hire the kid. Every time – even though I know he won’t be around long; he’s going places I can’t take him.
I respect what those gentlemen (and hundreds of other entrepreneurs) have accomplished as a reflection of their particular talents, abilities and willingness to take risk. Being successful isn’t a matter of being “fortunate” so much as it is the residue of effort. I think most of us agree on that point (at least, I hope we do). A friend of mine recently launched a taxi company – and he has my ultimate respect. He saw a need, took a chance, made the investments in time, energy and capital and now have something he can call his own. And I’ve no doubt that if he wanted to grow further, expanding his market and footprint, those same qualities would guarantee his success.
Certainly, there are people of great wealth who arrived at their fortunes by dumb luck. Lottery winners, trust fund babies and the like. And if they don’t work hard at maintaining those fortunes, they generally wind up destitute - without any help from anyone. Just think of the stories you read about people blowing a $100 million lottery prize in a few years or the rich kid who partied his inheritance away. Life has an interesting way of dealing with the truly lazy in our society.
Class warfare has been a symptom of our political discourse far longer than the current administration, though this one has embraced it more fully than any since FDR. In fact, what started the entire discussion thread was when I posted this blog post from Ted Leonsis. Leonsis is one of the Obama administrations biggest supporters; he admits maxing his contributions to the Obama campaign. But even this stalwart has had enough with the administration’s bashing anyone with a dollar in their wallet. As Leonsis points out, “Why do we devalue success in the US when the rest of the world is trying to emulate what we have created as an economic system?”.
In the US, we’ve never fully accepted the idea that the general citizenry should pay for their government. Originally, the federal finances would funded by a mix of tariffs and fees, along with specific taxes placed on interstate commerce. By the dawn of the 20th Century, populists such as William Jennings Bryant and Theodore Roosevelt were agitating for a more expansive role for the federal government. Then, as now, there was a general hue and cry against men of wealth and the political ethos of the day demanded a “progressive” tax system. The original formulation was such a drastic change from the nation’s founding ideals that it required the 16th amendment to the Constitution. Prior to then, taxes levied directly on the citizenry had to be apportioned according to the most recent census. The charge among progressives was that the existing system was regressive – in that everyone had to pay the same share. They first attempted to circumvent this by passing a progressive income tax in 1894, the Supreme Court (in Pollock) ruled it unconstitutional in 1895.
There is a perception that those of us with means are opposed to paying taxes. We don’t enjoy paying them (nobody I’ve ever met actually does), but we understand that some government is a necessary evil. To that extent, we realize somebody has to pay for it and in a republic, it falls on the citizens to ensure the government is funded properly. If taxation were truly fair and equitable, there would undoubtedly be less grousing. However, there are two issues that have been brought to the fore with the recent debate (and devolution into class warfare) but not addressed:
First, those of us with means are not in the habit of tossing our money down the sewer in the vain hope that it eventually comes out the drain. We’re accustomed to being able to get a full accounting of where our money is, what it’s doing and when it’s doing it. (Well, most of us, anyway. There are always Bernie Madoff types). Our current budget morass lends itself to no such accounting. In fact, quite the opposite. As just the most recent example, consider the recent flap over FEMA funding. Once it became apparent that the government was about to shut down over the relatively small pittance, the administration suddenly “found” $780 million of funding that they had misplaced. The same thing happened over the summer, when the deficit mysteriously shrunk by $400 million. When you are a nation that is taking in 20-23% of national income as taxes, it is only fair to ask where the heck all of that money is going before asking anyone for more.
Secondly, we constantly hear the refrain that “the rich don’t pay their fair share.” I’m not quite sure what that refers to, but when nearly 1/2 of the nation doesn’t pay any income tax – and the bottom 1/5 receive more in federal benefits than they pay through any form of taxation – it seems that the rich are certainly paying at least their fair share. The greatest share of the tax burden is well-known by now, but in case you missed it – the top 10% of all earners (which begins with a family of 4 earning $114,000) pay 70% of all taxes. Not just income taxes, but all federal revenues. Those in the 11 – 50% bracket provide 22.3% of the nation’s revenue. So, once again, who isn’t paying their fair share?
What class warfare of this type does is inflame passions. The only reason the “progressive” wing of American politics uses it is for one reason: to shake us down, so that they can grow government even further. If you don’t think so, then consider this. In 1937, at the height of FDR’s New Deal, the federal government consumed 16% of total GDP. In 1970, as LBJ’s “Great Society” took hold, that increased to 31%. Last year, it rose to the highest peacetime level ever at 39.55%. Now ask yourselves: Is the government really doing anything in 2011 that it didn’t do in 1937? And then ask yourselves why.
When you arrive at the answer, you’ll understand why the Obama Administration is resorting to class warfare and striving to divide us as a nation.
So Much For That
President Obama’s “Son of Stimulus” (aka the American Jobs Act) is already dying the slow, tortuous death of a thousand paper cuts. And for good reason: the majority of Americans don’t buy the President’s latest smoke-and-mirrors plan. After all, stimulus was tried in 2009 and failed miserably. We were assured that spending nearly $800 billion in direct stimulus, plus billions more for “cash-for clunkers,” the automotive industry bailouts and banking industry bailouts would curb unemployment to 8% and have us under 7% by this point. More telling than the fact that was a terrible overshoot, is that nobody in the administration is willing to put any kind of number on how many jobs this latest round of stimulus would create. I doubt anyone in the White House actually believes this would really do much for the economy.
Americans intuitively understand that stimulus spending doesn’t really do much, except exacerbate the underlying cause of our economic malaise. Economists will tell you that the reason we’re in such a mess is because consumer demand – which fuels around 70% of total economic activity – is depressed. If only that were true.
The real cause for depressed sales is much more basic: people can no longer afford to buy consumer goods. They still want iPads®, flat-screen TV’s and new cell phones. But when they sit down with their bills each month, they aren’t willing to incur new debt to purchase them. After all, the debt frenzy that drove the last 20 years of economic growth met its inevitable end with the financial collapse of 2008. We’re still busy digging our way out from that mess and until the typical household reduces their debt burden, don’t expect them to begin spending again.
The same goes for government. The massive expansion of federal debt leaves Americans feeling equally queasy – after all, we just learned a valuable lesson about what happens when people and companies are over-leveraged. When public debt exceeds the total value of the economy and projected spending continues to go up, not down… Well, let’s just say we aren’t interested in finding out if an over-leveraged government can suffer the same fate as an over-leveraged household.
Death Spiral Debt Deal
As I’m sure we’re all aware, the major political players in Washington agreed to debt ceiling deal last night. Reuters has a terrific breakdown of the final deal here. I’m not happy with this “deal” at all and if I were in Congress, would certainly vote “No” on passage.
Why? Simply put, this agreement does absolutely nothing about either the current deficit or the even larger problem of the national debt. In fact, passage guarantees that the debt will double over the next decade. And just for grins and giggles, there are also some really rosy ideas about anticipated economic growth baked into the framework – ideas that in light of last week’s GDP reports are proven to be a complete sham.
Let’s start with the sham of an idea that this deal somehow trims the deficit. The only guaranteed cuts in the whole package are for FY2012 – and they total all of $6 billion. Even if you use the overly-optimistic CBO estimate of “only” a $1.049 trillion deficit for FY2012, that amounts to about ½ of 1% of the deficit. To put this in perspective, it’s the equivalent of the average American cutting their total annual spending by $37.85, or the typical price for a dinner for two. This is every bit a dog-and-pony show, not budget cutting.
Secondly, this deal does little to curb long term spending, either. The final total of $2.4 trillion takes place over the remaining 9 years. However, the combined deficits over the next decade are forecast to equal another $13 trillion. That would bring the national debt to a total of around $28 trillion by 2020. Even if future Congresses don’t reduce that $2.4 trillion in deficit reduction (good luck with that), the federal debt will amount to $25.6 trillion in 2020. This package doesn’t do anything to actually begin reducing the debt. Only in Washington could a package that will grow the federal government’s debt obligation by 77% be considered a “debt-reduction plan.”
Finally, there’s the kabuki-theater method of arranging these “cuts.” Part of the reduction comes from presupposing that the Pentagon can find $350 billion in cost savings as a result of the wars in Iraq and Afghanistan ending. The deal-makers completely ignored the fact that we recently got involved in another war in Libya and also imagine that we won’t get involved in any others before 2020. I would like to go on record now as believing in the tooth fairy and unicorns, since those are less farfetched assumptions. There is a “super committee” that’s supposed to recommend budget cuts on a straight up-or-down vote; failing that, across the board reductions in all government programs. Well, almost all – federal employee pay, Medicaid, Social Security, welfare and veteran’s benefits are excluded. Considering we’ve already had 16 deficit committees in the past 20 years, each of which has said that the principle way to reduce the debt is to transform entitlement programs – and this deal exempts most of them from automatic cuts – how successful do you suppose this one will be? Expect another political dog-and-pony show, only this one should be a spectacle that would make PT Barnum proud. After all, it’s taking place during an election year. The posturing and grandstanding over recommendations that have no chance of passing both Congressional houses will liven up campaign ads and the evening news, but mean nothing.
So, no, I can’t support this deal. It just lends further proof that Washington is run by inept morons and snake-oil salesmen.
Keynesian Kops
The Obama Economic Plan
Back in the silent movie days, a popular serial involved the escapades of the Keystone Kops. They were a frenetic bunch, but ultimately so incompetent they couldn’t do much of anything. They would run this way and that, stumbling about and generally more successful at running into walls and slipping on banana peels than solving crimes. As a vaudeville act, they were hilarious. As a police force, not so much.
Watching economists from the Keynesian school is a lot like watching those old silent films. They trip over each other in explaining why the economy is moribund and what should be done about it. Never mind that everything in the Keynesian playbook has been tried (and predictably, failed). Fiscal stimulus: over the past 30 months, the federal government has pumped in $2.5 trillion over and above previous spending levels – and GDP is declining after inflation, not growing. Monetary stimulus: the Federal Reserve burned through two rounds of pumping cash into the economy. No growth, but inflation is growing exponentially each quarter. Now the Fed is planning on QE3 – pumping even more cash into an economy that has more cash than can be spent.
Keynesians love to point out that their economic theories are borne out by their successes in the Great Depression. But that assumes that those policies were successful. It seems pretty doubtful that they were. For instance, here in the US, the government did manage to achieve an aggregate GDP growth rate of 9.68% between 1933 and 1940. But in order to achieve that growth, the federal government increased spending by 110% from 1932 levels. In raw numbers, the government spent just shy of $61 billion during those 7 years. But GDP only grew by $47 billion. Remove the government spending, and the economy actually shrank by 26%. That’s a pretty dubious success.
In fact, that’s exactly what happened in 1937: Congress slashed spending, and the economy promptly declined 4.64%. Rather than create sustainable growth, all that government largesse accomplished was an economy that was reliant on government largesse. Entrepreneurship, innovation and efficiency were replaced as keys to success by graft, corruption and political machines. (There was a reason Frank Capra’s Mr. Smith Goes to Washington struck a nerve when released in 1939).
Equally important – and hugely different – from today is the amount of debt headroom FDR had when deciding on a Keynesian approach. In 1932, total federal debt amounted to 51% of GDP. By 1940, that had risen to 71%. In 2008, total debt was already approaching 100% GDP and we’ve since surpassed that.
The liberal wing of politcracy wants a return to full-blown Keynesian economics. If we go down that path, by 2020 the federal government will account for 8 out every 10 dollars spent in the US – but the government will need to borrow 9 out of every 10 dollars it spends.
Maybe our President thinks that kind of vaudeville act is one worth emulating. But I doubt many other Americans agree with him.
The debt ceiling is falling!
One thing that the popular media keeps forgetting about in their reporting about the debt ceiling negotiations: the sky will not fall and the US has no reason to default if a deal isn’t reached by August 2. That date was created out of thin air by Tim Geithner and I’ve been wondering what, exactly, his criteria is for that date. Aside from trying to get the story off the front pages of the newspapers before September, that is –which is traditionally when the general populace begins to seriously pay attention to the world of politics.
The chart below (courtesy of the Treasury Department) outlines the projected cash flow for the United States during the month of August:
The black line represents the money coming into the treasury, assuming they can’t borrow another dime. The bars represent the cumulative day-by-day expenditures. Note that on every single day for the month, spending on Social Security, Medicare, Defense and the debt interest is covered. What isn’t covered is what we commonly refer to as discretionary spending. There is a reason for that – discretionary spending isn’t necessary. Just like you might eliminate dining out or your Netflix subscription if your personal budget didn’t have the cash to cover them, these are the programs that are nice to have – but aren’t essential to a functioning country.
So when the President dramatically raised the stakes yesterday by suggesting that old-age pensioners won’t receive their Social Security checks, he prioritized a chunk of discretionary spending over Social Security. If you or I did that, we’d have to answer for that in a bankruptcy court. This is President Obama at his finest: threatening the most vulnerable – and vocal –constituency when he isn’t getting his way and looking to score political points.
Based on the Treasury’s own cash-flow predictions; we wouldn’t face the prospect of a default until mid-October. Even then, the federal government could do what a large number of the states are doing now: put off paying federal contractors for 180 days (among other programmatic delays), which would allow Washington until next April to hammer out a budget. (Irregardless of the fact one was due two weeks ago for FY2012 – and we still don’t have one for FY2011). I’m not sure where Geithner is getting his information, but I’m beginning to think it’s directly from David Plouffe.
This isn’t to say raising the debt ceiling won’t be required at some point. It will. But the Republicans should stick to their guns and insist that any rise in the ceiling be accompanied by budget cuts, both immediate and long-term.
Spending is the problem
Now, Wait a Minute!
President Obama has finally realized the federal debt is a real problem, not something that can be pushed off for another decade or so. I’m not certain what woke him to a fact millions of Americans already understood, but welcome to the party, anyway. Unfortunately for the country, he seems obsessed with the idea that the reason our debt problem is crucial is because the federal government doesn’t have enough money.
On the one hand, the President is right when he says that federal revenues are lower than at any point in a generation. In 2011, the government is on pace to gather less than 30% of the nation’s GDP in revenue for the first time since 1983. But the reason for that isn’t because tax rates are too low – it’s because despite all of those reassurances that the economy is recovering, it isn’t. After adjusting for inflation, real GDP growth has fallen to less than 1% and is in real danger of turning negative. Add in the fact that that the economy is now 14 million jobs short of full employment (vs. 8 million when he took office), and it becomes pretty easy to see where the revenue shortfall comes from.
In traditional Democratic fashion, the President’s answer to the economic malaise has been to throw as much money as possible into the economy. The results have been disastrous. Deficit spending as a percentage of GDP during his tenure is running higher than at any point since the closing days of WWII. Since 2009, the federal deficit has averaged 9.91% of GDP, the second highest three year average over the past century. Only the period from 1944-1946 saw a higher level of deficit spending, at 24.02%. But besides the obvious (we were spending to save the world then), there are two marked differences between that period and this one:
- The US GDP accounted for close to 80% of the world’s total economic output. Europe and Asia were bombed out ruins and wouldn’t actually see real recovery for another 15 years. Africa and South America were not industrial or economic centers. Much of that debt was racked up as loans to our allies and repaid by the mid-1960′s. Today, the US is now less than 30% of world GDP and projections show us steadily losing share over the next decade. We face the prospect of having to pay much of our debt to overseas lenders, while at the same time having fewer assets with which to pay them.
- All of this new spending is taking place on top of what was already a huge debt burden to begin with. At the advent of WWI, the total federal debt – even with New Deal spending – stood at 67.62% of GDP. When the current recession began in 2007, debt stood at 85.53% of GDP. Today, we’re at 129% of GDP –the only time it was higher was from 1946-48. But by 1950, debt was down to 97.7% of GDP and by 1960, 70.51%.
The President has spent much of his time screaming from the mountain that the tax cuts enacted under his predecessor (which he voted for, by the way) are the leading cause of our current deficits. But he should re-check his math: in the 6 years after their passage prior to his assuming office, federal deficits averaged 2.04% per year – roughly one-fifth of the deficit spending under Mr. Obama. And federal revenues averaged 33% of GDP, slightly higher than the average for the previous 20 years (32.7%). So where is the discrepancy? If those tax cuts actually produced more revenue, why are deficits exploding?
The answer is completely on the spending side of the equation. Under President Bush, federal spending averaged 35.08% of GDP. Under Presidents Reagan, Bush Sr., and Clinton, federal spending averaged 34.83% of GDP. Under President Obama, federal spending has averaged a whopping 40.72% of GDP. For historical perspective, under President Roosevelt spending averaged 27.62% and under President Johnson (who also fought an unpopular war and greatly expanded social services) federal spending averaged 29.82% of GDP. In fact, the US government didn’t begin spending more than a third of our GDP consistently until the Carter administration.
In short, the President can stop with all his nonsense about needing to raise taxes. If he wants the nation to take him seriously when he says he wants to balance the budget, then he should start by simply bringing spending back down to the historical levels for the previous 30 years. That won’t solve all the nation’s economic ills, but at least that’s the starting point for a rational discussion.
Local Economics, Local Politics
When I moved my family to the NYC metro area 8 years ago, this seemed like the perfect neighborhood. Housing was relatively inexpensive, the neighborhood mix in terms of blue-collar and white-collar types, and a true representation of the American melting pot. Crime was low, the schools were better than average. In short, my town (and my neighborhood, especially) are about as representative of as you can find, with one glaring exception: this place is as solidly Democratic as anywhere in the country. The Republican party is virtually non-existent in the county and there is no local Republican organization.
I got to thinking about this yesterday after seeing one of my neighbors put a Mitt Romney sign in his yard and reflecting on recent conversations with others. There is palpable anger and despair with the current administration – anger and despair that emanates from the economic morass that Kearny, like so many other towns, finds itself stuck in. There’s a well-worn adage, coined by former House speaker Tip O’Neill, that “all politics is local.” There’s another equally well-known political saying, created by political consultant James Carville, that says “it’s the economy, stupid.” And after listening to my friends and neighbors, I found myself wondering just how exactly President Obama can win re-election. In a town where he holds an irrefutable edge in organization, he’s losing the local citizenry. And he’s losing that edge for one simple reason: the economy.
President Clueless
There’s the guy who owns the local bodega. He scrimped and saved to send his son to Columbia Law School. Despite graduating with honors and clerking at the Bronx DA’s office, his son cannot find permanent work. And thanks to the fact that nearly half of my neighbors are unemployed, his business is foundering. Where once he used to hire one or two local kids to help stock shelves, he hasn’t hired anyone. Instead, he has his cousin – an out-of-work software engineer – doing those tasks.
There’s a guy on my block who lost his job a month ago, because the company he worked for hasn’t had any new business in over a year. Despite more than 20 years working as a master stonemason, he is collecting unemployment for the first time in his life. He can’t find work. He’s falling behind on his mortgage. And he’s worried.
Around the corner, there’s a Brazilian restaurant that has cut back on their hours of operation and laid off half the staff. The woman who owns the place is in shock – three years ago she had a booming business ( you couldn’t even get a table without an hour wait) and even opened a second restaurant. Last week, she had to borrow money from her son just to turn the lights back on. She fully expects to have to shutter her business by September if conditions don’t improve.
Two doors up is a guy who owns a bakery. Every night, he leaves for work around 9pm. Last summer, he laid off his delivery driver and took to doing the deliveries himself. This summer, he’s been handing out free bread throughout the neighborhood – because orders are getting canceled at the last minute. While I’m grateful for the free bread, I wonder how much longer he can keep his ovens fired up at this pace. So does he.
After being vacant for two years, the house next door to me finally sold in May. The previous owner paid $378,000 for the property. The bank initially offered it at $290,000. The final selling price: $118,000. The new owners are excited. The rest of us looked at that selling price and weren’t quite so happy.
Down the street is an accountant I know. He got laid off in the bloodbath that was the Fall of 2009 and hasn’t found permanent employment since then. He’s surviving by taking much lower paying, no-benefit contract positions – a far cry form his former $100K salary. Where once he dreamed of sending his daughter to Princeton, the recent graduate is now headed to Hudson County Community College. And without a car – they had to sell her 17th birthday present back to the dealer, since they couldn’t make the payments.
These are just a few of the stories from my neighborhood. And as the anger seethes and despair grows, I can’t help but wonder if the President realizes he’s on a path to be remembered in the same vein as Jimmy Carter and Herbert Hoover. All because he forgot that all politics is local, and it’s the economy, stupid.
Where are the jobs?
Something to chew on over the next few days:
According to Keynesian economics, all of this government spending over the past few years should have led to an explosion of job growth. After all, since 2008 the US Government has ballooned the debt by an annualized rate of 17.47% or about twice the rate of growth over the previous decade. But the jobs aren’t coming. This first graph shows the rate of employment vs. total working age population:
Table 1: May Total Employment Ratio
Notice that the percentage of working age people now working has dropped and kept dropping like a stone, despite all of that spending. In fact, the last time this few people had jobs was in 1982 – and prior to that, 1956, when farm payrolls were significantly higher than they are now. Now for the second half of the equation, part time employment vs. full time:
Table 2: May Employment Type Ratio
Fulltime employment has also continued to decline. Of course when you realize most of this recovery job “gains have been in retail or service industries, that shouldn’t come as a surprise. Still, the ratio now has dropped below4 FT employees per PT employee, territory we’ve never seen before. You can’t sustain a recovery on the back of McJobs. Right now, if you run the numbers, only 47% of working age Americans have a full-time job. If you’re shocked, you should be. The last time the number fell below 50% was in 1933.
If Barack Obama thinks this is the way towards recovery, he needs a new navigator.
Whither the Recovery?
For an economy in recovery, depressing economic news is all around us, it seems. In the past few weeks we’ve been told our home values have declined to 2002 levels. Unemployment ticked up to an official 9.1%, although the majority of non-governmental analysts tell us the real unemployment number is closer to twice that. More Americans are losing their jobs, as 7 of the past 9 weeks have seen new unemployment claims exceeding 400,000. For the fortunate few who are able to find work, they are winding up in the McJob industries. Of the 54,000 jobs created in May, 62,000 were actually McDonald’s hires.
You do the math: McDonald’s hired 62,000. Take away those menial, low-paying, no benefit jobs and the economy actually lost 8,000 jobs. For anyone aspiring to middle class, a McDonald’s job is not exactly high on the career path, either.
We’re told that economic growth has been muted. The truth is, there hasn’t been any real economic growth during the Obama administration. What we’ve experienced is a decline in the rate of recession. In other words, we’re still in an economic slump, it’s just not as bad as it was at the end of 2008. Let me explain, using the charts below. First, is quarterly GDP or the net worth of all goods and services produced:
Yes, that’s right. In the 6 quarters the US economy has been recovering, the net gain in GDP amounts to $900 billion. Under the technical definition of a recovery, even this paltry real rate of growth (about 1% per quarter) qualifies. Yet, inflation over that period remained higher than the growth in GDP. Mind you, these are the Fed’s own numbers:
Why is this notable? If inflation is growing faster than the value of goods and services, then GDP growth has come as a direct result from inflation. In fact, if you readjusted GDP growth to account for inflation, you get this:
And if you look at the growth curve over this same period, you get the dreaded upside-down smiley face:
We’ve never actually any real growth, despite what the spinmeisters in Washington would have you believe. When accounting for the effects of inflationary fiscal policy by both the government and the Federal Reserve, the best the economy has managed is two quarters without decline. The next time you find yourself wondering where the “recovery” is and why it’s left you behind, don’t feel so bad.
There never was one.
Why is Everyone Afraid of the Debt Ceiling?
One of the things we keep hearing from “establishment” politicians, economists and others is that the US entered into the Great Abyss yesterday afternoon. “The sky is falling” they cry. “We’re doomed” they yell.
This guy is broke - and so are you!
You see, the United States of America just crossed the Rubicon. The debt ceiling – the amount of debt Congress authorizes the Treasury to accumulate – has been reached. The great fear is that the US government is about to default on our public debt, sending the world into an economic vortex never before witnessed. Every talking head and government official in DC is warning against not raising the debt ceiling. “We’ve never defaulted on our debt” is the common cry of alarm.
I would certainly be alarmed at this outcry, except for one thing. It isn’t true. Not a single word of it. In fact, the nation has defaulted on the debt at least twice in our history. The first was in 1790, when we couldn’t service the debt we accrued during the Revolutionary War, among other things. The second was in 1933.
In 1790, the Treasury realized it could not possibly repay the outstanding loans the Federal government assumed after the ratification of the Constitution. The solution was to unilaterally rewrite the terms of those loans, reducing the interest owed and deferring payments for ten years.
The scenario most applicable to today is the one enacted by FDR in 1933. The government, faced with a debt it could not repay unless taxes were raised to incomprehensible levels and wanting to inject some life (i.e, capital) into a lackluster economy, devalued the dollar by more than 40%. The problem was that US bonds were issued in gold: you bought x amount of bonds in dollars and in return you received y amount of gold when the bond matured. The US didn’t own enough gold to cover the debt. The solution was Executive Order 6102, later codified as the Gold Reserve Act of 1934. It essentially confiscated all of the private gold holdings in the US (private citizens were allowed to have 5 troy ounces in their possession; or about $7500 worth in today’s standards).
The exact opposite of what we’ve been told by economists and politicians of all stripes happened: rather than market chaos and depression, the economy stabilized. Freed of the uncertainty spawned from over-indebtedness, the business community actually began expanding again. Yes, the Great Depression was so deep that it took additional government spending to make up for the slack in employment. But contrary to popular myth, it wasn’t the massive infusion of government capital with the outbreak of WWII that jolted the US to full productivity. By 1939, the nation’s economy was growing at 1928 levels again and by the end of 1940 had grown private sector employment to higher numbers than at the outset of the Great Depression. In fact, all of that debt from 1941-1945 precipitated a debt crisis in 1946 comparable to the one we’re now facing. Oh, and Congress took the appropriate actions then, too: they enacted a debt reduction plan that was adhered to by Presidents of both parties until LBJ’s “Great Society” spending in 1967.
Simply put: the US has defaulted on debt obligations before and the world went on as always. Look around you: the debt limit has passed, yet everything continues as on Monday. The real threat is that we continue to spend as profligately as a drunk sailor without any plan to tackle the debt. We can argue about the means to do so. We can inflate it away, as Russia, Argentina, Brazil – and the US in 1933 – did; we can unilaterally reorganize bond terms, as in 1790. We can reserve a greater share of federal revenues for debt service, as in 1946. We can even place tax increases and restructuring on the table. But scaring the citizenry about the implications of failing to to raise the debt ceiling is ludicrous, when raising the the ceiling is the most irresponsible thing the politicians now in Washington can do.
