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Posts tagged with Election 2008

Has Stimulus Failed? Take Two

The newly elected president was left with an economic mess. The bad policies of the previous administration and unwisely taking the country to war had left the economy in trouble, with high unemployment and declining GNP. The new president decided to implement a drastic change in economic policy not long into his first year in office and was roundly criticized by his opponents. However, by August signs of recovery were already visible. August of 1921, that is. By the next year unemployment had been cut in half, and a year after that it was down to 2.4 percent after being 12 percent in 1921. The Harding administration had cut government spending in half, cut taxes and reduced the national deficit. Meanwhile the Federal Reserve kept interest rates high, thus keeping inflation down.

It's almost been a year and a half since Obama's stimulus package was passed, and have we seen comparable results? Not even close. At what point in time are stimulus supporters going to admit this policy was a mistake? The thing is, there's a playbook out there that worked. Cut down the size of government, reduce the tax burden and quit crowding out private investment with government debt. The Obama administration has gone the exact opposite direction and we aren't seeing the results. The gains in the stock market and housing prices are being offset by the declining value of the dollar. Private investment and savings continue to decline while public debt soars to new and frightening highs.

The excuse for failure so far has been that Obama was handed such a mess that recovery is difficult. Certainly that is true, but at some point in time the policies we are following will have to be examined and declared successful or failures. I would like to know how long it will take. I am suggesting two years, since that is how long it took the Harding administration to arrive at complete recovery from the depression of 1920-21.

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Getting Used to Socialism

Reading the comments regarding the state-wide smoking ban in Kansas I came across one particularly poignant comment, the gist of which was that smokers will complain, maybe a few will boycott, but eventually they'll get over it and get used to it. This is the sometimes sad, but true, nature of human beings. Getting used to things is a key to our species success--we can adapt to all kinds of conditions. We can get used to all kinds of hardships, and the incremental creep of government control is made possible because of this.

We get used to filling out required paperwork, we get used to taxation, we get used to our dollar losing value, we get used to the rising cost of health care, we get used to increased government control of our businesses, property, lives and bodies. Only instead of adapting to natural problems like droughts and diseases, we are coping with infringements upon our liberty by our fellow man.

In Libertarian circles there is a belief that the recent increase in interest for libertarian ideology, free market economics, the rising popularity of Ron Paul and the discussion about the importance of liberty and the threat posed by government signal a changing wind which will move the country back towards increased freedom and away from increased government. I, however, am not so optimistic. I think this is only a temporary uptick but that people will get used to the changes being made to our country and "get over it," so to speak. In the Soviet Union people got used to cold apartments and waiting in line for food. In the UK people have gotten used to waiting for health care. In the US, we too have gotten used to the hardships brought about by the creep towards socialism.

I think history has shown that it is only when the government is weak or the people begin to starve that revolution occurs. Our government certainly isn't getting any weaker, and considering the main problem with US agriculture has always been overproduction, it will take a long time before our economy is so ruined that we begin to run out of food. The cycle of boom and bust economics will continue, our economy will deteriorate further as the government increases control and spends its way into more and more debt. People will get upset when the next big economic crash comes, but not as upset as they were before. Eventually we'll all just get used to high unemployment, lower wages, and a lower standard of living. As government continues to take control of more sectors of our economy, starting out with healthcare, education and transportation it will spread to other sectors. Shortages will become common and people will get angry, but then they'll get used to it.

It'll only be when food starts running short that people will finally stand up for themselves, because you can't get used to starvation.

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Repeal the 17th Amendment

The 17th Amendment changes how US Senators are elected. Prior to 1913, Senators were selected by state legislatures, but now they are elected by popular vote. There were several reasons for the change, one being that occasionally different houses in state legislatures could not agree on who to send, and thus senate seats would be vacant, sometimes for several years. Also, the idea was to be closer to democracy by holding direct elections.

However, the purpose of the Senate as originally envisioned was to represent the several states' interests in the Federal Government. The House of Representatives was there to represent the people. The 17th Amendment basically makes the Senate a "Super House." The result has been that the Senate no longer acts to promote federalism since the Senators are not beholden to the state legislatures for their office. Thus the burden of protecting state's rights and state interests has fallen to the Supreme Court instead. Hence instead of increasing democracy, it has decreased since the Supreme Court has taken a larger role in restricting federal power, and that branch of government is not democratically elected at all.

In addition, the founders did not imagine that the Constitution would be simply a paper wall holding back federal power. The Senate was envisioned to be a check on that federal power since Senators would be chosen by the state legislatures to represent state interests. This helped to ensure that when there was a conflict over whether the Federal government or the various state governments should carry out some policy, if the states could do it just as well as the Federal government, they would.

These days the Senate has become very politicized and now we have ideological battles over things like Supreme Court nominations where we should not. Also it has become very difficult for states to challenge federal power. The states can sue the federal government in federal courts, but one can clearly see the problem with that. The only other thing the states can do is threaten nullification or even secession, hardly a peaceful method as this will lead to a direct confrontation between state and federal power.

The founders knew what they were doing in setting up a government of checks and balances, and removing this vital one has resulted in the present imbalance we see between state and federal power.

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Support or Reject the Tea Party?

The Tea Party movement is primarily an anti-tax one. The supporters don't mind big government if it's for warfare or welfare like medicare and social security. So they like government, they just don't want to pay for it. Debt is generational theft--this generation lives high on the hog off of government goodies, while the next generation gets stuck with the bill. Of course now that bill is becoming so large that it will soon be no longer possible to pay it off. Eventually people will stop lending the US government money, at which point either the spending spree will be over, or the Fed will try to monetize the debt causing hyperinflation, and the spending spree will be over just a little bit later. Either way, the US as we know it will be over.

The question is, should supporters of Liberty and Small Government support or reject the Tea Party? On the one hand, the Tea Party movement is the closest thing we have to a large-scale anti-government movement going in the US right now, and the statist interests have lined up to denounce it. Certainly they may help propel some Libertarian candidates into office, or support a Ron Paul bid for the Presidency. But on the other, they support most of the government institutions that generate the need for heavy taxation and intrusion into liberties, both economic and personal. Can they, over time by spreading information through public figures like Ron Paul, come to see that they can't have their cake and eat too, that they can't have low taxes and the warfare/welfare state? I think the answer is no.

The reason for this is looking at the demographics of the movement--I believe the average person is over 50. With people at the end of their working careers and about to enjoy the fruits of government programs to assist older people with health care and living expenses for retired people, they really have no economic incentive to reduce the apparatus of Big Government but cutting spending. They are at their peak earning years, and therefore want low taxation but no reduction in benefits, shifting that cost to someone else--namely future generations. The great hope for true believers of Liberty is on college campuses--young people who are about to enter the job market, who will be most affected by the national debt and, with the least experience, most likely to suffer from the high unemployment rates that govenrment intervention causes. I just don't think the Tea Party, with people like Palin as speakers, has much hope of morphing from an anti-tax movement into an anti-big government movement.

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The Most Powerful Man on the Planet: Ben Bernanke

http://worldonline.media.clients.ellingtoncms.com/img/blogs/entry_img/2010/Apr/21/ben-bernanke-time-cover.jpg

[Skip to the last paragraph for the main point if you don't want to read it all]

First of all, how does the Fed work? Let's say Congress wants to spend a million dollars, but raising taxes is unpopular, and if it borrows too much from people in the private sector or other governments, interest rates go up and eventually it becomes too expensive or people will stop lending to us because they worry about our ability to repay. So instead the Treasury sells bonds for a million dollars to private investors. The Fed can then come in and buy those bonds from the person who lent the money to the Treasury, so that the bonds that the Treasury issued end up on the balance sheet of the Fed. Now where does the Fed get the money? Is Bernanke out mowing lawns and babysitting? No, he just writes a check drawn on the Federal Reserve, basically creating money out of thin air.

What's the point of all this? Well, as I said before, the problem with borrowing a lot of money is that interest rates will go up, and eventually Congress will have to stop spending (and we can't have that!). When the Fed buys up the Treasury debt, it keeps interest rates low so that Congress can afford to spend a whole lot more money. In addition, while the Treasury is paying interest on the bonds that are sitting on the Fed's balance sheet, whatever earnings are left over after the Fed pays its expenses are remitted to the Treasury. Hence it's almost a free loan, meaning even more money can be issued for more governemnt spending.

Not only is the Fed creating a million dollars out of thin air, but this money is often going to banks, and under fractional reserve banking this million can become ten million in bank loans, hence driving up inflation and giving a free nine million to the banks. That’s why the banks love this system which is basically fraud. The bank doesn’t really have ten million which it is lending out. Of course the problem is that if the bank makes too many bad loans, it’s going to be in trouble since there isn't any real money backing the loans up, and we've seen over the past couple years what can happen.

Now, however, the Fed will come in and save them by buying the bad loans, again by simply writing a check with money coming out of thin air. This is completely unprecedented, as before the Fed almost exclusively bought government debt. Now Bernanke has the power of life and death, choosing which banks he wants to save from their own mistakes by buying their bad assets at face value.

When you are guaranteed to be saved from bad choices in a system like this, is it any wonder we had a banking crisis? For all the talk about reform, nothing has been done about the underlying causes of the banking crisis, but instead only more perverse incentives have been created since now Bernanke and the Fed will step in and buy up your bad assets if you take too many risks. Where's the incentive to be a prudent banker if you have a safety net based on money created out of thin air?

What's worse is that all this is done entirely in secret. Bernanke has been asked time and again where all the billions of dollars are going and he has refused to divulge that information. Think about that: this man can write checks for billions of dollars, give them to private individuals, and he doesn't have to tell anyone, even Congress, who he's writing the checks to and for how much. Obama doesn't have that kind of power. Congress doesn't have that kind of power, but Bernanke does. This is the most powerful man on the planet.

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Social Security: The World’s Greatest Ponzi Scheme

In the movie Dumb & Dumber the two main characters have a briefcase full of money they are trying to return to the owner. They open the briefcase and discover the money, thereupon deciding that they should spend some of it to compensate themselves for their trouble. When the bad guys finally get them they open the briefcase to discover a bunch of pieces of paper with IOUs written on them. Lloyd tells them that "That's as good as money, sir. Those are I.O.U.'s. Go ahead and add it up, every cent's accounted for. Look, see this? That's a car. Two hundred seventy-five thou. Might wanna hang onto that one."

This is exactly the state of the Social Security fund. It has no real money in it, just a bunch of worthless IOU's from the treasury department. Right now, conservative estimates have it that SS's unfunded liabilities are $17.5 trillion ^1. Social Security is a pay-as-go program thanks to the fact that Congress already took all the money that was supposed to be in the "trust fund." With the rising number of retirees the program will soon be collecting less revenues than benefits paid out. When this inevitably happens, the likely result will be a call to raise taxes to cover the difference. Indeed that's already the case as seen in this article about the "fake crisis" by Dave Lindorff ^2, who thinks we can just get the money by increasing employers' contributions, as if that won't have any effect on unemployment or compensation rates!

Instead what we need to do is realize that Social Security is nothing more than a ponzi scheme and that that is why it will run out of money. The very idea of it is fundamentally unsound and it needs to be scrapped. Raising taxes further to support this scheme will only cause to bring down the economy with it. A better idea would be a phase-out of the program where we pay out benefits to those who are dependant on them but phase out the program for future generations.

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Economic Myths: The Broken Window Fallacy

Late one night a young miscreant throws a rock through a bakery's front window. The next day the baker arrives to find a crowd standing outside his store, lamanting for the poor baker. The cost of replacing the broken window will be $500. However, one bright fellow decides to find the positive in the situation and points out that the glazier will benefit with $500 in extra income, and he will spend that $500 on perhaps a television etc. down the line, thus creating an economic benefit. The crowd approves of the fellow's intelligence and agrees that the baker's broken window, while a hardship for the baker, is actually a net benefit for society since all the spending and economic activity it will create.

This demostrates one of the two main economic fallacies: seeing only the affects on certain groups of people. What is not seen is what doesn't happen. Before the baker had a window and $500. Now he only has the window. What is not seen is what the baker would have done with the $500 had his window not been broken. Let's say he would have bought a new suit. Thus while the glazier gets the $500 and then spends it, creating economic activity, what is not seen is that the tailor will not get the $500 and he will not create the economic activity caused by how he would turn around and spend the $500. Hence there is no net economic benefit, only the loss of the window.

There are many other economic myths that are just bigger versions of the broken window fallacy. One common example is the idea that war is economically beneficial. What is seen is the factories making tanks, planes, bombs, guns and bullets. What is not seen is the cars, radios, stoves, televisions etc. that are not being produced since the money is being spent on the war materials. Not only is there no net benefit, society actually loses since the end result is used bombs and bullets, and destroyed tanks and planes.

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Has Stimulus Failed?

The newly elected president was left with an economic mess. The bad policies of the previous administration and unwisely taking the country to war had left the economy in trouble, with high unemployment and declining GNP. The new president decided to implement a drastic change in economic policy not long into his first year in office and was roundly criticized by his opponents. However, by August signs of recovery were already visible. August of 1921, that is. By the next year unemployment had been cut in half, and a year after that it was down to 2.4 percent after being 12 percent in 1921. The Harding administration had cut government spending in half, cut taxes and reduced the national deficit. Meanwhile the Federal Reserve kept interest rates high, thus keeping inflation down.

It's almost been a year since Obama's stimulus package was passed, and have we seen comparable results? Not even close. At what point in time are stimulus supporters going to admit this policy was a mistake? The thing is, there's a playbook out there that worked. Cut down the size of government, reduce the tax burden and quit crowding out private investment with government debt. The Obama administration has gone the exact opposite direction and we aren't seeing the results. The gains in the stock market and housing prices are being offset by the declining value of the dollar. Private investment and savings continue to decline while public debt soars to new and frightening highs.

The excuse for failure so far has been that Obama was handed such a mess that recovery is difficult. Certainly that is true, but at some point in time the policies we are following will have to be examined and declared successful or failures. I would like to know how long it will take. I am suggesting two years, since that is how long it took the Harding administration to arrive at complete recovery from the depression of 1920-21.

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Repudiate the Debt

Our growing national debt is eating up our economy. Every year we pay more and more of our GDP just for interest on our national debt. We were told in the 1980s that the debt didn't matter because "we owe it to ourselves." Of course your perspective might be altered depending on which pronoun you fall under--the "we" who has to pay for the debt, or the "ourselves" who is collecting money from the plunder of the public.

I remember comedians suggesting that if we owe it to ourselves, why don't we just let it slide? In truth, this might not be such a bad idea. To handle public debt we have three options: 1. Place heavy taxes on the public and confiscate the wealth of the present generation to pay for the reckless spending of the past generations. 2. Create money out of thin air via the federal reserve and use it to pay off debts (see results of Weimar Republic and various third world nations that tried this). 3. Repudiate the debt (my suggestion).

Now there are three main arguments against repudiating the debt: it would be breaking a debtor/creditor contract, it would be immoral, it would be economically ruinous. Going first to the idea of breaking a contract, something supposedly sacrosanct, public debt is not like private debt. When I borrow money from the bank, I have made a contract to make future payments to the bank. In a sense, the bank is the true owner of the money, and if I don't pay I've robbed the bank by keeping the money. When the government borrows money, however, it doesn't pledge it's own life, fortune or sacred honor to repay it but ours. Hence this contract is really between two over the property of others. Cancelling the contract would be no different than cancelling a contract between two thieves on how they are going to split the loot.

That brings me to the moral argument. The creditors who lend money to the government are not innocent parties who are just lending money to whoever will pay--they know full well that their profits will not be paid for by the politicians who use the money but from tax-coercion--from the loot plundered from us, the hapless taxpayers. In short, these creditors are willing to hand over money to the state now in order to get a share of the loot in the future. What is immoral is that both parties are making agreements to violate the property rights of citizens in the future.

Regarding the economic consequences, one might argue that if the government repudiates the debt, no one will lend money to the government. Oh the horror! That our leaders might actually have to restrain themselves and maintain balanced budgets is a positive outcome. Repudiating the debt would have the immediate effect of freeing up money that was previously being used to service that debt to be now put to more productive uses. It would remove a long-term anchor tied around the neck of our economy and force the government to live within its means.

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Social Security COLA Assessment is Wrong

Recently it was in the news that seniors who collect social security will not be getting a cost of living adjustment (COLA) for 2010. (see www.ssa.gov/cola) Their explanation is that the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W), one of the government's measurements of inflation, did not increase, and so there will be no corresponding increase in benefits. This decision is incorrect because the CPI is not an accurate measure of inflation.

How do we measure inflation? By looking at the prices of various goods and services to see how much they go up or down. The CPI takes the prices of goods and services from several categories-- food and beverages, housing, apparel, transportation, medical care, recreation, education and communication--and weights them differently to come up with the index. However, there are two problems with using these types of commodities to measure inflation:

  1. Increases or decreases in quality are difficult to measure. If the price of an average car goes up, how much of that is due to inflation and how much do to improvements in the quality of the average car? For that matter, how do we determine what the average car is? What about when prices go down, like for personal computers? That's not due to deflation, but to improving technology, competition and economies of scale. Even though really smart people try very hard to separate the effect on prices that changes in quality have, they can only make educated guesses at best.

  2. Price fluctuations can also be due to variations in supply. For example, imagine a drought that decreases the amount of fresh drinking water. The quality and usefulness of one gallon of water hasn't changed, but the supply has decreased, causing an increase in prices. Again, the problem comes when measuring inflation, how much of the price fluctuation is due to changes in supply, and how much is due to inflation?

So how should we measure inflation? We need a commodity that is of stable quality and supply. Precious metals fit that description, and that's why they were chosen to represent money in the first place. One ounce of gold today isn't going to improve in quality over time, and while gold is still being mined, the overall supply remains relatively stable. Looking at the price of gold we see that it has gone up dramatically this year (18% so far). By that measure we have had considerable inflation.

Well, I'm sure you are asking: so Mr. Amateur Economist, if you're so smart why doesn't the government measure inflation the way you suggest? Good question. If this were a private company lying to us about their product, I imagine 100% of the people would agree they are lying to cover some unethical behavior. Some people, however, have trouble seeing any possible unethical behavior when it comes to actions taken by the government, but that is what I propose is going on. They intentionally under-report inflation for personal benefit. After all, wouldn't you be upset to learn that you've taken an 18% pay cut in 2009? Considering the problems I've laid out with measuring inflation by various goods and services, there's a clear opportunity to "game the system" and get a desired result. So here we have opportunity plus the motivation to be dishonest, and evidence of dishonesty.

Our senior citizens are getting the shaft here. The CPI-W is not an accurate measure of inflation and not how COLAs should be determined. But the government has the motivation to hide the true amount of inflation in order to avoid having to pay these increases, but at the same time using the extra dollars it is printing to pay out trillions to TARP and for the stimulus.

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