Category Archives: political economy

Sound Currency Policy

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A Sound Dollar Act was introduced in the House of Representatives last month by the Vice Chairman of the House Joint Economic Committee, Congressman Kevin Brady (R, TX), and a companion bill was offered in the Senate by Senator Mike Lee (R, UT), who sits on, among other committees, the Senate Joint Economic Committee.

This bill has a couple of interesting aspects.  For one thing, it would limit the Federal Reserve Bank system  to a single mandate—to maintain price stability, i.e., control inflation.  It would eliminate the Fed’s current other mandate, that of maintaining full employment.

This simplified requirement would both eliminate the conflict inherent between those two requirements and reduce the government’s involvement in what is essentially a private economy imperative—the decision to expand a business, or not, and to employ more or fewer personnel (with a free market economy’s inherent bias toward more employment stemming from a prior inherent bias in favor of growth).

The bill also would reduce the Executive Branch’s political dominance of the Fed.  Currently, the Federal Open Market Committee, the instrument of the Fed that sets monetary policy, has as voting members seven men and women who are appointed by the President, the president of the New York Federal Reserve Bank (these eight are permanent voting members), and four presidents of the Fed system’s remaining eleven regional Federal Reserve Banks (the four rotate among the remaining eleven).  Thus, monetary policy is set by Presidential appointees.  Certainly, those appointees are nearly as independent as a President-appointed Supreme Court Justice, but still.  Under the bill, all 12 presidents of the individual Fed banks would become permanent FOMC voting members, so the regions collectively would outnumber the President’s appointees.  The advantage here is that the individual bank presidents are appointed by boards of directors made up of bankers and business leaders local to each of the Federal Reserve System’s regions.  In this way, the regions, which better understand their situations than can a remote government, would gain significant influence over FOMC decisions that impact those regions.

The Sound Dollar Act also would limit the Fed to purchases of Treasury securities.  This would reduce the ability of the Fed to make credit allocation decisions—to pick and choose which banks, for instance, it will “save” by buying from them the toxic asset du jour.  Bailout or bankruptcy is a free market decision; no government instrumentality, other than a bankruptcy court, has any legitimate role in the matter.

I’m not sure allowing the Fed even to buy Treasuries is a good idea, though, unless it’s done after the free market has bought what it wants, and then only at that just demonstrated set of prices.  If the Federal government is such a poor credit risk that it has trouble peddling its debt to private investors, or other governments, why should the American taxpayer be Dragooned into taking on that risk?

With some tweaks, this is a bill that would serve well.  We just need to get the Big Government types out of government and so out of the way.

Incidentally, the WSJ‘s op-ed also has some words on the Fed’s success rate with that other mandate, maintaining “full employment,” and why it’s useful to take that DOC away from the Fed.  RTWT.

An Object Lesson

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…in excessive national debt and bailouts.  Greece is an open laboratory that is demonstrating in real time the fallacy of borrowing ad lib. and then going the bailout route, coupled with pure austerity measures that ignore the mechanisms of growth.

After a number of rounds of austerity measures involving public spending cuts and tax increases, rewarded by the EU’s “lending” of billions of euros to help Greece pay off its debt by borrowing more, we have the following outcomes.

The Bank of Greece has revised downward its economic forecast for the Greeks: contraction of 5.0% for 2012, compared with a previous estimate of 4.5%, and compared with a 6.9% decline last year.  This makes the fifth straight year of recession for the country.  The cause of this steady contraction?  All that borrowing to cure an excessive debt problem (feed the addict methadone to “help” him with his heroin addiction.  As with the new lender, the methadone does nothing for the addiction, it’s just a supposedly easier means of maintaining it).  On top of the transfer of addiction from one pusher to another, retirees, public-sector workers, and most households have suffered deep cuts in their disposable income as the government cut spending and raised taxes.  Moreover, the government continued to fail to privatize nationalized enterprises or to sell off nationalized assets—€50 billion ($66 billion) of real estate and other assets such as the government’s stake in Thessaloniki’s port and water utility, the Piraeus port and the Hellenic Postbank, for instance.

The parallels of the United States’ economic policies these last three and more years, together with our own continued economic straits, is striking.

Faced with a similar economic threat some short years ago, Estonia took a different path: government thinned its bureaucracy and reduced healthcare and social services.  Businesses reduced wages by up to 40 percent, with the promise these would be increased as soon as the economy improved.  Most importantly, the government did not pump borrowed funds into the economic cycle.  These are not austerity measures—they’re a return of individual responsibility to the individual.  And the individuals and businesses cut deals to help each other survive the dislocation.  Today, Estonia has little public debt, a budget surplus for the first half of 2011, and an economy growing at an annualized 8% over that same half.

The once sick man of Europe, Germany, did much the same thing in much the same straits.  The Germans, in answer to high debt, high public spending, high taxes, and slow growth, cut welfare benefits and gave employers more flexibility in reaching agreement with their employees on hours and pay.  They also cut federal corporate income taxes to 15% from 1998’s 45%.  With state and local taxes added to the mix, and the effective corporate rate today is close to 30%, down from 50%+ in the 1990s. Today, Germany has an unemployment rate currently at 5.7%, and who’s propping up the EU in today’s debt crisis on the continent?

Government must achieve two things, and then a third, for a sound, free economy within which truly free men have an opportunity to show the best that there is in them.  Government must obtain a net positive income—that is, it must maintain its spending below its revenue intake (especially where the national debt has gotten excessive), and it must do so without raising tax rates.  The second thing it must do is commit that budget surplus to paying down the national debt until that value is at a properly low level.

After that, the surplus must be reduced by reducing the taxes yet further—after all, it isn’t the government’s money.  Money must be left in the hands of those who know best what to do with it—those who’ve earned it.

Budget Discipline, Part II

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In the last three years, the Progressive Do-Nothing Senate has passed zero budgets.  Even President Obama completed his stand-up routines in that time frame, offering two massive budget jokes.

Here are some things that grown, adult human beings who are serious about their purposes have accomplished in the space of three years or less.

  • Broad Group erected the 30-story Ark Hotel in Dongting Lake, Hunan, PRC in just 15 days late last year.  (As an aside, the Daily Mail reports that no worker was injured on this project.)
  • Gone with the Wind was filmed in just over 9 months.
  • Building the Empire State Building, then the world’s tallest, took a year and a quarter.
  • The Pentagon, still the world’s largest building in terms of floor space, took a year and a third.
  • The time from D-Day to Germany’s surrender at the end of WWII was 11 months.
  • Indeed, the time from Operation Torch, the British-American invasion of northern Africa in WWII, to Germany’s surrender and the liberation of western Europe was 30 months.

Hmm….

Budget Discipline

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In the House, a budget is passed that contains spending levels below the $1.047 trillion cap agreed in last summer’s Budget Control Act.  The Republicans are heavily scored by Progressives for violating the BCA’s agreement to cap spending by actually spending less than that cap.

In the Senate, a bill to increase spending on the Post Office is proposed.  If passed, this spending bill will increase the Federal deficit by $34 billion because it does not offer spending reductions elsewhere—thereby exceeding the $1.047 trillion cap.

Senator Jeff Sessions (R, AL), the Ranking Republican on the Senate Budget Committee (you remember that bunch—the Progressive dominated committee that’s been so well disciplined that it has produced zero budgets in the last three years, including a half-hearted effort of just a week ago that Senate Majority Leader Harry Reid (D, UT) ordered scotched before it was born), has announced that he’ll raise a number of points of order to block this bill of ill discipline.  (As an aside, it’ll take separate 60-vote majorities, under Senate rules, to kill each of the points of order.)  Sessions made a statement on the floor of the Senate Monday explaining his action; it can be found here.  Following is an excerpt.

Under Senate rules, no committee can bring a bill to the floor that spends even one penny more than is already going to be spent under current law, or increases the deficit more than it will increase under current law.

In other words, the spending and debt under the postal bill violates the debt limit agreement reached just last summer.

…

This is particularly odd since the President and the Senate Majority Leader have accused the House members, the Republican House, of breaking the budget agreement by trying to save a little more money than the Budget Control Act said that they should save.  This argument is not sound, of course, but that bill established basic spending caps, basic limits—the maximum amount that could be spent on discretionary accounts.  Not one word in that law prevents us, or any member of Congress, from doing the duty to try to save more money.  Not one word in that law requires Congress to max out and spend up to that cap, to that limit.  So this is not a matter of interpretation; caps are the maximum, not the minimum, you can spend.

Can we really afford any more Progressive budget discipline?

Entitlement Waste

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In the pouring taxpayer money down a rathole category, we have this and this.

In one of President Obama’s Chicago Way executive edicts, he pushed through a “demonstration program” of $8 billion to pay performance “bonuses” under the Medicare Advantage insurance program.  The bonuses were claimed to be incentives to improve performance; however, in fact they were targeted at average performers: out of a 5-star scale, Medicare Advantage plans that got 3.5 stars got bonuses.  In such a canonical “esteem is more important than performance” reward system, a reasonable person might ask after the incentive to do better when simply meeting standard is remarkable.  Moreover, the enormity of this program meant that the bonuses, in their aggregate, actually undid nearly two-thirds of the cuts in overall Medicare Advantage costs that Obama’s Patient Protection and Affordable Care Act supposedly provided.

The Government Accountability Office has recommended that this waste be done away with, and the bonus program be canceled.  This isn’t a lone recommendation.  The Medicare Payment Advisory Commission, an independent Congressional agency, also has a dim view of this administration “bonus” program.  MedPAC’s view is that the bonuses are just “a mechanism to increase payments,” and Commission Chairman, Glenn Hackbarth, wrote that the bonus plan

lessens the incentive to achieve the highest level of performance

It gets better.  A report released Monday by the Social Security Trust Fund’s trustees contained this bit of good news:

The Social Security retirement fund is projected to run out of money in 2035 while the Social Security disability fund is projected to run out in 2016.

Combined, the two funds will last all the way to 2033.  If they run dry, payroll taxes would only cover about 75 percent of current benefits.

These failure dates are closer in than claimed last year.  The program’s finances are worse, say the trustees, due to a couple of factors:

Workers are expected to work fewer hours than previously projected, even after the economy recovers.

High energy prices suppressed wages, a trend the trustees see as continuing.

Thus we see another effect of Obama’s destructive energy policy, as well of his failed economic policies generally.

But just try to rescue these entitlement programs from their failure.  On the one hand, we have the Ryan Plan, which the Progressives in Congress and the Executive Office timidly snipe at from the sidelines, and on the other hand, we have the Progressives’ plan.  Umm, what was their plan, again?  Oh—the do-nothing Senate and the do-nothing President don’t actually have one.  They just want to keep throwing money down this rathole, too.