Category Archives: political economy

Magical Thinking

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Well, that didn’t take long.  President Barack Obama already has failed his test.

The Progressives’ idea of a budget is out of the Senate Budget Committee, now, and on the Senate floor, where Senate Majority Leader Harry Reid (D, NV) will do his best to thrust it home with as little debate allowed as he can achieve.  Here’s the summary table (and scroll down a bit to this table; sorry you have to crane your neck); the whole thing can be viewed, in piecemeal form, on the Senate’s site:

Notice that.  Aside from continuing to gut Defense, overall spending continues apace, President Barack ObamaSenator Patty Murray (D, WA), the Budget Committee’s Chair, demands even more taxes from working Americans than he got in January, and our national debt explodes.

The Democrats want, with an absolutely straight face, to increase spending every year–$3.6 trillion in FY 2014, $4.05 trillion in FY 2016, and so on to $5.7 trillion in FY 2023, a 62% increase over the current level for FY 2013.

Reading the fine print in one of those piecemeal parts at the Senate site, we see that the Progressives want to create a(nother) $100 billion program aimed at generating new jobs, again by funding infrastructure work.  Of course, we know Obama already tried this, repeatedly, throughout his first term.  As he’s already confessed, “Shovel-ready was not as shovel-ready as we expected,” and as those earlier programs demonstrated, the jobs aren’t there at any time in his government programs.  This is magical thinking.

And it turns out Murray lied about those taxes, too, cynically understating them at “only” an additional $975 billion.  The Weekly Standard has this table, provided by a staffer for the Senate Budget Committee’s (Murray’s committee) minority membership:

Murray cynically understated Obama’s tax demands by fully one-third.  These $1.5 trillion in new taxes, combined with the $600 billion in new taxes Obama got at the start of the year, adds up to $2.1 trillion in new taxes being demanded in just these two and a half months.

Progressives just can’t stand to not raise taxes.  Their addiction to OPM is palpable.

And that debt.  The Progressives fully intend to explode it to $24 trillion by 2023, with annual interest payments running nearly to $800 billion.  This also assumes the market would be willing to buy such risky debt at those rates.  But then Obama denies, ostrich-like, that there’s any urgency to our debt fiasco.  This is more magical thinking.

All of this is predicated, too, on Obama’s/Murray’s pipedream of a GDP annual growth rate over the next 10 years of 4.2%-6.6% each year—rates we’ve never sustained in any 10 year period in our history.  With all of this taxing and spending taking money out of the private economy—the economy in which Americans actually live, work, and die—positing such rates is…wrong.

Matched with the $975 billion in claimed spending cuts, this isn’t even the balance about which he’s been yammering.  This is more…magical thinking.

This proposal is a disaster waiting to happen.

Federal Government’s Current Policies

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…and our future.  David Greenlaw, James D Hamilton, Peter Hooper, and Frederic Mishkin, in an op-ed in last Friday’s Wall Street Journal had some thoughts.

Research we have recently presented at the US Monetary Policy Forum leads us to conclude that, as debt grows relative to GDP, rising interest rates could bring the debt-to-GDP ratio up to 176% in 25 years, and even higher under less favorable assumptions about unemployment and the current-account deficit.

They explain:

[C]ountries with gross debt above 80% of GDP and persistent current-account deficits—as is currently the case in the United States—face sharply increasing risk of escalating interest payments on their debt.  This means even higher budget deficits and debt levels and could lead to a fiscal crunch—a point where government bond rates shoot up and a funding crisis ensues.

And

Given the Federal Reserve’s greatly expanded balance sheet…more than $3 trillion today, there is an additional factor that could exacerbate inflation expectations—Fed remittances to the US Treasury.  If interest rates climb higher over the next few years, this could lead to substantial losses on the Fed’s holdings of Treasurys and mortgage-backed securities, losses that could approach several times the size of Fed capital.

Never mind that this bust of capital would violate the Fed’s own rules imposed on non-government banks.  And it would violate Dodd-Frank rules.

But President Barack Obama wants to keep borrowing and to keep inflating private lending—the housing market “recovery,” you see.

Which brings up another risk that Greenlaw, et al., didn’t mention—all that pushed-for private/commercial lending at today’s artificially low rates.  That’s generally long-term lending (those mortgages, and business lending for construction and plant expansion). But when interest rates rise, as they must, those private/commercial lenders will be forced to borrow at tomorrow’s rising interest rates while still locked into today’s low rates on the loans they’ve let.  Can you say, “S&L collapse?”

We really need adult leadership in the White House.

Regulatory Reform

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The eyes of Texas are upon us….

Competitive Enterprise Institute‘s OpenMarket.org describes regulatory reform, Texas style.  In 1977, Texas enacted legislation that automatically kills state-level agencies after a named duration unless a subsequent legislature explicitly votes to extend that agency.  More, the question of extension isn’t even permitted to come up for a vote unless a Sunset Advisory Commission favorably recommends it first.

OpenMarket notes the results:

Through this process, the commission [10 legislators and 2 members of the public] has abolished 78 state agencies and saved $945.4 million in a 29-year period [through 2006].  Since the Sunset Commission’s expenditures over this time period were just $32.8 million, every dollar spent on this program has yielded about $29 in return.

We don’t have a bloated government here.  And surviving agencies exist because they actually do their jobs, and so they’re capable of justifying their existence to the commission—and to the Texas citizenry through those two public members.

Maybe the Federal government needs a similar Act—not addressing only the agencies, but the Cabinet Departments, as well.

Texas’ law can be read here.

Progressive Policies and the Middle and Poorer Classes

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I’m picking on California here, but only for concreteness’ sake—there’s nothing unique about California’s Progressivism.

  • [California’s] zoning laws, which liberals favor to control “suburban sprawl,” have constrained California’s housing supply and ratcheted up prices.  …land restrictions became common in high-income enclaves during the 1970s—coinciding with the burgeoning of California’s real-estate bubble—and have increased income-based segregation and inequality.
  • California’s staggering labor and energy costs—it has the nation’s most stringent fuel and renewable standards—have helped kill hundreds of thousands of manufacturing jobs in California’s interior.  Note: Those are jobs that traditionally served as entry points to the middle class. The Golden State has shed a third of its manufacturing base over the past decade.
  • California’s non-manufacturing businesses are also moving or expanding operations where labor, land, energy, and capital are cheaper.  Comcast announced in the fall that it is moving 1,000 call-center jobs out of California because of the “high cost of doing business.”  Facebook, eBay, and LegalZoom have opened up Texas offices in the past few years, while PayPal, Yelp, and Maxwell Technologies have pushed into Phoenix.
  • California’s small businesses that can’t leave…so easily have been slow to invest because they are financially squeezed.  Rents are prohibitive, and Sacramento takes 9.3% of every dollar over $49,000—and 13.3% over $1 million—that an individual or small business owner earns.

There’s more.

Suppose that the Fed raises interest rates to 5% over the next few years.  This is a reversion to normal, not a big tightening.  Yet with $18 trillion of debt outstanding, the federal government will have to pay $900 billion more in annual interest.

That’s money that could have been committed to actually paying down the debt Progressives have saddled our middle and poorer class grandchildren with: of those $18 trillion, nearly a third was added in the last four+ years.  That’s money that could have been committed to lower tax rates so our middle and poorer class families could keep more of what they earned for their own purposes.  That’s money that could have been committed to transitioning our Social Security and Medicare programs to defined contribution plans rather than defined benefit ones, so that our middle and poorer class families could have more control over their own families’ future and their own families’ retirement and health expenses.

But wait—there’s still more: consider our Social Security and Medicare programs.  They’re going broke—Social Security will be forced to reduce benefit payouts to 75% of current levels by 2035 because the Social Security Trust Fund will run out of money by then, and payouts will come entirely from then-current payroll taxes.  Or the government will borrow more (and so raise future taxes) to cover the difference.  Or it will raise taxes currently to cover that difference.  Either way, those taxes are money taken away from the middle and poorer classes, thereby preventing them from seeing to their own goals and needs as fully as they could.  And those future taxes, to cover present borrowing, will rob our children and grandchildren similarly.

Medicare’s Hospital Trust Fund will run dry by 2024, reducing hospital payments to 87% of their current level since these will be entirely dependent on current payroll taxes.  Unless the government borrows or raises taxes, with the same deleterious impact on our middle and poorer classes as with Social Security.

Progressives, though, won’t allow any reform for these programs, other than raising taxes on an already overtaxed American citizenry.

Market Indexes and Economic Strength

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The Dow Jones Industrials closed at a new high last Tuesday, running over 14,250.  This performance is being touted as having put the vicissitudes of the Panic of 2008 behind us.

Certainly, the stock market has been good for investors like me, which I hinted at a while ago.  And guys like Chief Investment Officer Jack Ablin, of BMO Private Bank, which manages about $66 billion think so, too.

It really does represent an achievement that we have climbed out of this crater.

There is a dangerous misapprehension in this, though.  In fact, the damage done by the Panic remain with us in our failed recovery:

  • unemployment remains near 8%, and higher than when President Barack Obama took office
  • total lack of employment, in which term I include underemployed and those who’ve given up, remains near 14%
  • our labor force participation rate 63.8% which is down from 65.8% in Dec 2008
  • 12 million Americans remain without jobs, an historic high for “recoveries” as old as this one
  • 4.7 million Americans remain long-term unemployed; this is 38% of our total unemployed
  • nearly 48 million Americans are on food stamps today, a 70% increase over the roughly 28 million of us in Dec 2008
  • Americans below the poverty level number 46 million, or 15% of us, as of 2011, compared with 13%, or 39.5 million, at the end of the pre-Obama years
  • $6 trillion have been added to our national debt

And so on.

The failed recovery, the damage from the Panic, the real economy of real Americans are all still with us.  Pay no attention to the market behind the curtain.

Update: Today’s jobless report has the unemployment rate falling to 7.7%, the lowest in nearly five years.  Looking behind this number, though, the labor force participation rate, which governs the denominator in the unemployment rate calculation, fell to 63.5%.  This represents a loss of 130,000 Americans from that participation rate.  The fall in the unemployment rate seems a smaller drop when put in context.