The government would have to double income tax rates and not see any tax avoidance or evasion to close the deficit.

Did you know? The government would have to double income tax rates and not see any tax avoidance or evasion to close the deficit.

• 2011 Deficit: $1,299 billion
• 2011 Income tax revenue: $1,273 billion

UPDATE: Europe is paying for its past excesses: European interest payments as % of GDP.

With news out today of a weak German bond auction and troubles with the Dexia bailout, I thought it time to update my table of European interest payments as % of GDP. But first, the news:

• Germany auctioned 6 billion euros of 10-year government bonds, but attracted just 3.889 billion euros of bids, a bid-to-cover ratio of just 0.65. Six of the last eight bond auctions have seen bids below supply. In these cases, the Bundesbank has bought the remaining debt. German yields are rising as a result. Germany’s 2-year yield is up 0.06% to 0.44% and 10-year yield is up 0.13% to 2.12%.
• Belgian yields are soaring to new highs on reports that the bailout of Dexia was failing. Belgium’s two-year yield rose 0.69% to 4.98% and 10-year yield increased 0.40% to 5.47%. In France, also a partner to the Dexia bailout, the 2-year yield rose 0.14% to 1.86% and the 10-year yield jumped 0.15% to 3.68%.
• No news other than the above is pushing up rates across most of Europe. Greece’s 1-year yield skyrocketed 38.6% to 306.7%. The 2-year rate jumped 4.6% to 117.9% and the 10-year year yield rose 0.18% to 29.04%. All are record highs. Over in Italy, 2-year yields rose 0.17% to 7.15% and 10-year yields increased 0.15% to 6.97%.

So now, let’s see an updated table of where Europe stands in its ability to pay the interest on its debts.

	2-year interest rate	Debt-to-GDP	Interest payment %age of GDP	Change in Interest payment
Greece	117.88%	144.9%	170.8%	+14.4%
Portugal	14.62%	83.2%	12.2%	-3.1%
Italy	7.11%	118.1%	8.4%	-0.1%
Ireland	9.96%	64.8%	6.5%	+0.5%
Belgium	4.94%	96.6%	4.8%	+1.9%
Spain	5.82%	63.4%	3.7%	+0.8%
France	1.88%	83.5%	1.6%	+0.5%
Germany	0.45%	78.8%	0.4%	+0.1%
Great Britain	0.47%	62.6%	0.3%	———
United States	0.26%	99.7%	0.3%	———

As you can see on the above table, only Portugal had a significant decrease in interest payments going forward. In contrast, Greece, Ireland, Belgium, Spain, and France all say significant increases. Whereas previously, only four countries had interest going forward exceeding 3 percent of GDP, six nations now face that situation.

Clearly, as anybody watching the stock market decline here knows, the European debt crisis is getting worse and the European leaders have yet to find a solution. Unfortunately, with the budget mess in Washington and debt-to-GDP ratio of about 100%, higher than most of those “risky” European nations, the United States will soon be facing the same problem.

New bank fees the result of Fed policies

We all remember Bank of America’s recent attempt to initiate a debit card fee of $5. It failed because of bad publicity. However, BofA and the other banks are not giving up. The New York Times reported yesterday:

Banks Quietly Ramping Up Costs to Consumers

Even as Bank of America and other major lenders back away from charging customers to use their debit cards, many banks have been quietly imposing other new fees.

Need to replace a lost debit card? Bank of America now charges $5 — or $20 for rush delivery.

Deposit money with a mobile phone? At U.S. Bancorp, it is now 50 cents a check.

Want cash wired to your account? Starting in December, that will cost $15 for each incoming domestic payment at TD Bank. Facing a reaction from an angry public and heightened scrutiny from regulators, banks are turning to all sorts of fees that fly under the radar. Everything, it seems, has a price.

“Banks tried the in-your-face fee with debit cards, and consumers said enough,” said Alex Matjanec, a co-founder of MyBankTracker.com. “What most people don’t realize is that they have been adding new charges or taking fees that have always existed and increased them, or are making them harder to avoid.”

Banks can still earn a profit on most checking accounts. But they are under intense pressure to make up an estimated $12 billion a year of income that vanished with the passage of rules curbing lucrative overdraft charges and lowering debit card swipe fees. In addition, with lending at anemic levels and interest rates close to zero, banks are struggling to find attractive places to lend or invest all the deposits they hold. That poses another $8 billion drag.

Put another way, banks would need to recoup, on average, between $15 and $20 a month from each depositor just to earn what they did in the past, according to an analysis of the interest rate and regulatory changes on checking accounts by Oliver Wyman, a financial consulting firm.

For consumers, the result is a quiet creep of new charges and higher fees for everything from cash withdrawals at ATMs to wire payments, paper statements and in some cases, even the overdraft charges that lawmakers hoped to ratchet down. What is more, banks are raising minimum account balances and adding other new requirements so that it is harder for customers to qualify for fee waivers.

…read the rest of the story here…

While consumer blame the “greedy” banks and Occupy Wall Street whines and complains about how this is another example of the one percent sticking it to the ninety-nine percent, this is really a story of government policies. As mentioned in the article, the banks “are under intense pressure to make up an estimated $12 billion a year of income that vanished with the passage of rules curbing lucrative overdraft charges and lowering debit card swipe fees. In addition, with lending at anemic levels and interest rates close to zero, banks are struggling to find attractive places to lend or invest all the deposits they hold. That poses another $8 billion drag.”

The first change–new rules on overdraft and debit card swipe fees–come straight from new government regulations. The latter–low interest rates–come from the Federal Reserve. I will focus on how low interest rates hurt banks and consumers because it is not easily observed.

Interest rates near zero give banks little room to make money. In the good old days, banks would take deposits and use the proceeds to lend or buy bonds. Just a few years ago, banks could easily buy short-term debt yielding two or three percent. Now, it earns less than one percent. Banks today could choose to take on risk and earn about four percent lending money to a home buyer, if it can find a credit-worthy borrower. Just a few years ago, mortgages yield seven or eight percent. The spreads banks earn have clearly declined, giving them less opportunity to earn a profit or even to cover expenses.

Look at money market funds, for example. With the government’s 3-month T-bill yielding 0.01 percent, money markets that invest in those securities lose money even when it pays no interest because of fund expenses. Even the 3-month interbank rate at 0.46% makes it difficult for money markets investing in commercial paper to earn a profit.

Normally, banks make money using the risk spread or the time spread. With the risk spread, banks borrow cheaply and lend to riskier clients, booking a profit on the risk taking. With the time spread, banks pay out lower short-term interest rates and collect higher long-term interest rates. With the current environment of low rates all around–a result of deliberate Federal Reserve policies–earning a profit in normal banking operations has become impossible. Instead, the banks are forced to initiate or raise fees.

Of course, the government loves this. The government creates this problems, consumers blame the banks for the new fees, and then the government steps in to further regulate the banks. Government creates the problems without taking the blame, then solves it and takes all the credit.

– Michael E. Newton is the author of the highly acclaimed The Path to Tyranny: A History of Free Society’s Descent into Tyranny. His newest book, Angry Mobs and Founding Fathers: The Fight for Control of the American Revolution, was released by Eleftheria Publishing in July.

Call me a ‘conservative liberal’ please.

Up until now, when people have asked me what is my political philosophy, I’ve said that I’m a libertarian republican, both lowercase. In other words, I believe in a republican form of government (representative government with the different classes and powers balancing each other) and that this government should have powers limited by a constitution. While this still describes me, I will now be calling myself a conservative liberal.

In Angry Mobs and Founding Fathers, I wrote about how the Founding Fathers were conservative liberals. Here is what I wrote:

Eighteenth-century Britain was both conservative and liberal. Britain was conservative with its constitutional monarchy and traditional system of peerage and honours. Britain was also the most liberal nation in the world, with the people’s rights guaranteed by the Magna Carta. This conservative-liberal synthesis was brought over to the colonies, where it flourished for more than a century. Edmund Burke explains that the American colonists were “not only devoted to liberty, but to liberty according to English ideas, and on English principles.”

Unlike most revolutions, the goal of the American Revolution was not to change society. In fact, the Founders and most Americans fought to maintain society as it was. The Declaration of Independence opens with:

When, in the course of human events, it becomes necessary for one people to dissolve the political bands which have connected them with another…

With the Declaration of Independence, America was dissolving the political bands connecting it to Britain. America was not dissolving the bands that held its society together. Not once does the Declaration of Independence mention society or changing the social system. One Founding Father even lamented that, amid the chaos of the revolution, “For the want of civil government the bands of society are totally disunited, and the people…have become perfectly savage.” This destruction of the bands of society is not what the Founding Fathers wanted and they worked hard to prevent it.

If Britain were to overthrow its monarchical government, that would be a radical change in its society. However, for Americans, who had no inherited classes or titles, dissolving the political bands between Britain and America would leave society virtually untouched. Although the signers of the Declaration of Independence could not be considered conservative from a British viewpoint, they certainly were from an American perspective.

These leading men were also liberal in the classical sense of “a commitment to the liberty of individual citizens,” “the proper role of just government as the protection of the liberties of individual citizens,” and “a commitment to a system of free markets.” As Frederick Douglass said about the signers of the Declaration of Independence: “They loved their country better than their own private interests… In their admiration of liberty, they lost sight of all other interests… They believed in order; but not in the order of tyranny.”

Therein lay the delicate balance. The Founding Fathers wished to protect the liberties of the American colonists and stop British tyranny while still maintaining law and order.

I have the same goals as our Founding Fathers. I want to promote liberty by removing the tyranny of an abusive and unresponsive government. That makes me a classical liberal. (Modern liberals, or neo-liberals as I call them, believe in something entirely different.)

However, unlike many libertarians, and this is why I am abandoning that moniker, I do not want overly rapid change. While I would love to see a dramatically smaller government, I do not believe we can go from a government spending 40% of GDP to one spending just 10% of GDP overnight. It will take many years. Drastic changes in the nature of our government done overnight would create so much chaos that it would give demagogues the opportunity to seize power. This makes me a conservative in the classical sense of the word.

So please, call me a conservative liberal. More so, learn what it means to be a conservative liberal and we can follow in the footsteps of our Founding Fathers.

– Michael E. Newton is the author of the highly acclaimed The Path to Tyranny: A History of Free Society’s Descent into Tyranny. His newest book, Angry Mobs and Founding Fathers: The Fight for Control of the American Revolution, was released by Eleftheria Publishing in July.

Congress can learn from ancient Rome’s laws for both good and bad

Congress has gone crazy. The House of Representatives and Senate write and pass thousand-page bills with little debate and sometimes before the bill is even released. As Nancy Pelosi once said, “we have to pass the bill so that you can find out what is in it.”

A couple of laws are often proposed to stopped these huge bills from being rushed through Congress. One proposal is to establish a waiting period for all bills. The Republicans in Congress established a three-day waiting rule on all bills, but this rule has no legal binding. The second proposal that is often heard of is to limit bills to a single item. This would make bills easier to understand and would also stop Congress from inserting unpopular items into popular bills to sneak them through Congress.

If only we had some sort of precedent to establish a waiting period and ban omnibus bills… But in fact we do. Back in ancient Rome (98 BC), the Lex Caecilia Didia established a 17-day or 24-day waiting period (there is some debate on this) between the publication of a law and voting on it in the assembly. It also banned bills that included many unrelated provisions.

Thus, about two-thousand years ago, the Romans found a solution to our current problem. Unfortunately, laws like this did not save the republic. Similarly, a law like this for America might help, but cannot solve our problem: the desire for more government.

– Michael E. Newton is the author of the highly acclaimed The Path to Tyranny: A History of Free Society’s Descent into Tyranny. His newest book, Angry Mobs and Founding Fathers: The Fight for Control of the American Revolution, was released by Eleftheria Publishing in July.

Europe is paying for its past excesses: European interest payments as % of GDP.

With interest rates rising in Europe and heavy debt-to-GDP ratios, I decided to look at how much interest each European country must pay going forward as a percentage of its economic output. I threw in the United States for fun. (Table sorted by interest payment %age of GDP.)

	2-year interest rate	Debt-to-GDP	Interest payment %age of GDP
Greece	107.97%	144.9%	156.4%
Portugal	18.40%	83.2%	15.3%
Italy	7.20%	118.1%	8.5%
Ireland	9.16%	64.8%	5.9%
Belgium	3.00%	96.6%	2.9%
Spain	4.56%	63.4%	2.9%
France	1.33%	83.5%	1.1%
Great Britain	0.52%	62.6%	0.3%
Germany	0.35%	78.8%	0.3%
United States	0.23%	99.7%	0.2%

Now, these debt figures account only for federal government spending. Many countries, most notably the United States, also has state, provincial, and local governments with their own debts. Additionally, many of the debt-to-GDP estimates are from 2010. Thus, most of the above countries have debt-to-GDP ratios and interest expenses even worse than calculated above.

Clearly, we can see why Greece is in trouble. If it were to refinance its debt at market rates (it has been refinancing through Euro-zone subsidized loans), its interest payments would exceed its GDP by a half.

Italy is also paying for its problems. So far, Italy has received no help from any bailout fund and, as of now, will have to refinance its debt at market rates. As such, it will cost Italy 8.5% of its GDP to do so. If it had a more reasonable debt level and interest rates, say those of France, Italy would have an additional 7.4% of GDP to spend or save.

Most surprising is how everybody is ignoring Portugal. Portugal has already received bailout funds, but that won’t last forever. If Portugal were to return to normal by accessing the market, interest payments would eat up 15.3% of its GDP. That’s a lot to pay for past mistakes.

Belgium is another sleeper. It’s problems are just as bad as Spain’s, yet nobody is talking about them. Furthermore, Belgium has not been able to form a ruling coalition since elections were last held on June 13, 2010, breaking all records. Furthermore, the New Flemish Alliance party is Belgium’s largest political party with 17% of the vote. This party favors the “peaceful and gradual secession of Flanders from Belgium.” Lots of problems there, but nobody seems to be talking about it.

So far, Europe has paid for the mistakes of Greece, Portugal, and Ireland. However, Italy’s debt is 2.7 times the combined debt of those three nations that are already receiving bailout funds. That makes Italy both too big to fail and too big to bail out.

Europe is facing problems on multiple fronts: Greece, Italy, Portugal, Ireland, Belgium, and Spain, to name a few. So far, Europe has successfully staved off depression by bailing out the smaller, weaker countries. But as the problem spreads to more countries, and bigger ones at that, Europe is running out of room and options.

– Michael E. Newton is the author of the highly acclaimed The Path to Tyranny: A History of Free Society’s Descent into Tyranny. His newest book, Angry Mobs and Founding Fathers: The Fight for Control of the American Revolution, was released by Eleftheria Publishing in July.

Review of Ken Burns’ Prohibition

Ken Burns’ newest documentary, Prohibition, is a great look at this very important but poorly understood national test of government’s ability to legislate morality. I found the movie absolutely fascinating, especially the first two parts (there are three parts), which was primarily about how Prohibition was enacted. Here are some interesting things I learned:

• School systems taught little children the evils of drinking. When those kids came of voting age, many voted for prohibition.
• The leadership role taken by women’s group in passing and then repealing Prohibition.
• Prohibition would never have been possible without the income tax amendment ratified in 1913. Prior to 1913, the federal government got much of its revenue from excise taxes on liquor. With the income tax, the government no longer needed that revenue stream and was willing to go along with Prohibition.
• Anti-German sentiment during World War I helped push Prohibition because most of the beer brewers were owned by German immigrants.
• While the documentary focuses on Prohibition, it also clearly reveals the dramatic political change that was taking place in the United States at the time: a switch from small-government republicanism to democratic progressivism.

I watched most of this series on my iPod while riding the NYC subway, so was unable to take notes. Therefore, I offer no full review. Hopefully, the interesting tidbits listed above will convince you that this documentary on Prohibition is worth watching.

Review of Cicero’s The Republic and The Law with some of my favorite quotes

 

The Republic and The Laws by Marcus Tullius Cicero

 

I really enjoyed Cicero’s writing and insight into politics and government, but too much of Cicero’s Republic is missing to make it a compelling read. What parts do exist are reminiscent of Plato’s Republic, Aristotle’s Politics, and Polybius’s Histories and Cicero certainly built upon those sources. It is interesting to read what this great man who fought against Cataline, Julius Caesar, Mark Antony, and Octavian/Octavius/Augustus has to say on the topic. I certainly recommend Cicero’s Republic to anybody interested in Roman history or the history of political thought. However, to the more casual reader or those more generally interested in political thought, there is little benefit to reading this book if you already read or plan to read Plato, Aristotle, and Polybius. If we had all of Cicero’s Republic, I’d likely be giving it four or five stars, but it deserves only two or three stars as it exists to us today.

Turning to the second half of the book, The Laws, which appears to be more complete and thus easier to read and review, Cicero argues that laws come from nature, not men. Cicero explains, “Law was not thought up by the intelligence of human beings, not is it some kind of resolution passed by communities, but rather an eternal force which rules the world by the wisdom of its commands and prohibitions… That original and final law is the intelligence of God, who ordains or forbids everything by reason.” In this respect, I found sections of Cicero’s The Laws to be quite similar to Frederic Bastiat’s The Law.

Cicero explains that the Latin word for law, lex, comes from the word for choosing, lego. [Pages 103 and 125. But there is much uncertainty whether this is the actual etymology of the word law.] Thus, the book is primarily designed “to provide a code of living and a system of training for nations and individuals alike.”

Cicero then makes the case that “the highest good is either to live according to nature or to follow nature and live, so to speak, by her law.”

Cicero then describes Rome’s legal code and proposes some changes. This section is sometimes interesting from a historical perspective, but less so in terms of political philosophy. However, it becomes extremely tedious and dull at times when Cicero describes certain aspects of Rome’s laws in depth.

All in all, very insightful, though a bit tedious at times. But the worst aspect is the incongruous nature of the work because of all the missing text. I also wish the notes were put on the bottom of each page rather than in the back. I for one enjoy reading every note and found it difficult to flip back and forth four or five times per page.

In total, I am giving Cicero’s The Republic and The Laws just three stars (out of five). I am sure this would disappoint Cicero greatly, but I place little blame on him. If his writing existed in full, I’m sure he would easily earn four stars and possibly five, though Cicero himself admitted in The Laws that he could not compete with Plato’s writings on the same subject, which is why it would likely earn just four starts while Plato’s Republic and Aristotle’s Politics deserve five stars.

Some great quotes (besides those above) from the book:

History is “the witness of the times, the light of truth, the life of memory, the teacher of life, the messenger from the past.” [From De Oratore 2.36]

“You cannot start a history without setting free time aside; and it cannot be finished in a short period. Moreover, I tend to become confused if, after starting a project, I have to turn to something else. And it’s not so easy to pick up the threads again after breaking off as to take a thing through from start to finish.”

“Without that [authority], no house or state or clan can survive–no, nor the human race, nor the whole of nature, nor the very universe itself. For the universe obeys God; land and sea abide by the laws of the universe; and human life is subject to the commands of the supreme law.”

“Nothing is more damaging to a state, nothing so contrary to justice and law, nothing less appropriate to a civilized community, than to force through a measure by violence where a country has a settled and established constitution.”

Photos of the recently moved Hamilton Grange

On my recent trip to New York, I had the pleasure of visiting Hamilton Grange, the Harlem house built by Alexander Hamilton in 1802. I had visited the Grange before when it was located just a block away tucked in behind a church. It now sits in St. Nicholas Park, where its beauty shines.

In its new location, the inside of the Grange also looks much brighter and more colorful. The windows sport better views.

A statue of Alexander Hamilton with some quotes about his greatness still stands at the location where the Grange had previously stood.

I highly recommend a visit to Hamilton Grange if you live in New York City or planning a visit.

Writing a book is a marathon, not a sprint

I saw the last mile of the New York Marathon today on 59th Street. I was very moved to see all those dedicated and hard-working people accomplish their goals. It was also great to see all the friends, families, and complete strangers cheering them on.

However, we spectators near the finish line witnessed just the final mile of the marathon, which itself was just the final 26 miles of a much longer journey. Before the final race, the marathoner runs countless miles and hours alone. While many friends and family members support the marathoner on race day, fewer do so during the months of training and many think the marathoner is crazy for participating.

Authoring a book is much the same. When the book debuts, the author receives much congratulations and, God willing, rave reviews as well. But before that, the author works tirelessly, often in obscurity and with little support, for months or years researching, writing, re-writing, editing, and publishing the book.

After the marathon is over, the runner must maintain his health and fitness or the marathon will just be a footnote in his life. Similarly, an author who stops working on his book once it is published will see no long-lasting results. Like the marathoner who wishes to maintain the physical and psychological gains from all the training, the author has to work just as hard after the book is published as before. The author must promote, market, and publicize his book. He needs to write more for his audience in blogs, newspapers, magazines, and more books. (How many successful or famous authors can you name who wrote just one book?)

If you think that writing and selling a book is a sprint, you will quickly tired and give up. The author must be prepared for a never-ending marathon or writing, promoting, and marketing.

– Michael E. Newton is the author of the highly acclaimed The Path to Tyranny: A History of Free Society’s Descent into Tyranny. His newest book, Angry Mobs and Founding Fathers: The Fight for Control of the American Revolution, was released by Eleftheria Publishing in July.