Life before the social welfare state

In 1779, before the advent of the welfare state or even a federal government in the US, when taxes were virtually non-existent, François de Barbé-Marbois wrote: “Begging is unknown in America. There are, in almost all towns, hostels which take in old people or those who are unable to work. As for the unemployed, there are other institutions where care is taken that they lack neither work nor food.” Barbé-Marbois, Our Revolutionary Forefathers 71

Bush got things done, Obama takes credit for doing nothing.

Regardless of your opinion of President George W. Bush, there is no denying that he knew how to get things done. Unfortunately for him, much of what he did was vilified by the media. The Bush tax cuts, for instance, were portrayed as “tax cuts for the rich” even though the rich’s share of the tax burden rose and the tax cuts helped spur economic growth. In the words of Rodney Dangerfield, Bush “got no respect.”

Along comes President Barack Obama. As candidate and President, Obama attacked the “tax cuts for the rich” that Bush gave out. But then, suddenly, President Obama compromises with the Republicans and extends the Bush tax cuts. CNN, who heeped no praise on Bush for his tax cuts, is now praising Obama for extending the tax cuts:

Most Americans like the new tax cut law that President Barack Obama signed into law on Friday, according to a new national poll.

And a CNN/Opinion Research Corporation survey released Monday also indicates that while the tax cut compromise the president struck with congressional Republicans didn’t spark Obama’s overall approval rating, it may have given him a boost as “Triangulator in Chief.”

The poll also indicates that 55 percent of the public thinks Obama’s policies will move the country in the right direction, with just over four in ten saying the president’s policies will move the nation in the wrong direction. Obama’s 55 percent is 11 points higher than the 44 percent who say the policies of congressional Republican leaders will move the country in the right direction. Americans are split at 48 percent on whether what congressional Democrats are proposing will move the country along the right path.

“Since the GOP just picked up 63 seats in the House, what’s not to like about their policies? The tax bill may be a good place to start,” says Holland.

According to the poll, 56 percent of the public say that the bill does too much for wealthy Americans and six in ten don’t like extending the tax cuts for families making more than $250,000 or the changes in the estate tax. And less than one in four believe that their personal situation will improve as a result of the tax bill. Only four in ten favor an increase in the federal deficit to pay for tax cut compromise.

But despite those figures, three-quarters of all Americans approve of the tax bill overall, including the extension of jobless benefits for the long term unemployed.

If you are keeping score at home:

• President Bush and the Republicans were wrong to pass the tax cuts in 2001 and 2003.
• President Obama was right to extend them in 2010.
• Republicans were wrong to extend them in 2010.

Government says it’s OK to break social security agreement, but not pension agreements.

Barack Obama’s debt commission proposed several changes to Social Security to help reduce the deficit. The New York Times reports:

The plan would reduce cost-of-living increases for all federal programs, including Social Security. It would reduce projected Social Security benefits to most retirees in later decades, though low-income people would get higher benefits. The retirement age for full benefits would be slowly raised to 69 from 67 by 2075, with a “hardship exemption” for people who physically cannot work past 62. And higher levels of income would be subject to payroll taxes.

I have no idea how much these measures will contribute to reducing the deficit or paying off the debt. My complaint is more ideological.

When employees contribute to social security, they are doing so with the understanding that they will receive certain benefits starting at a certain date. Currently, an American expects to pay a certain amount each year into the system, retire at age 67. and receive cost of living adjustments (COLA) each year. The proposals by the debt commission would violate this agreement, forcing people to pay more each year if they earn over a certain amount, retire at a later date than originally agreed to, and receive less in benefits than promised as the COLA is reduced. In effect, the government is unilaterally canceling its contract with each American and replacing it with a less attractive one.

In reality, I am not opposed to these changes, especially the retirement age which will not fully take effect for 65 years, thus having little effect on anybody working today. The reduction in COLA would have a much greater effect on everybody starting in the near future while the removal of the cap on social security taxes would have an even larger effect, but only the wealthy. But while these are necessary changes, contrast this with the government’s stance on pension funds.

In a Q&A titled The pension time bomb, The Week asks:

Can benefits be scaled back?

Only for future employees. New Jersey Gov. Chris Christie recently signed legislation reducing pension benefits for new state employees. In California this month, voters in nine municipalities approved ballot measures to limit benefits for future public employees. And governments are starting to take a harder line in collective bargaining with public unions. “I’ve seen a sea change in the local collective bargaining process,” said Dwight Stenbakken, deputy executive director of the League of California Cities. Some analysts recommend following the lead of Georgia, which requires that prior to being enacted, any changes to retiree benefits be studied for long-term impacts. According to the Pew Center on the States, the policy has helped Georgia avoid “costly and irreversible” mistakes.

These pension liabilities have already been promised to employees and retirees. The government has a contractual obligation to pay the pensions as promised.

So why are the pension obligations sacrosanct while money can be taken from Social Security beneficiaries? Social security is just as much a contractual obligation as public union pensions. If social security benefits are to be reduced for those who have already paid in, public union pension benefits should be as well.

* Though I have not yet read this (too busy writing my next book), Robert Graham discusses this topic in much more detail in his Job Killers: The American Dream in Reverse. How Labor Unions are Destroying American Jobs and the Economy. If you’ve read it, leave a comment here or send me an email, tweet, or facebook message letting me know what you think of it.

Tax and intervention uncertainty killing the economy.

Everybody is talking about the impending largest tax increase in history due on January 1, 2011. In addition to the cost this imposes on the economy, there is the uncertainty this creates. The Giant Wakes writes:

The Bottom Line: Until the uncertainty surrounding the future Federal tax rates is resolved, it will remain yet another factor conspiring to keep businesses sitting in the economic sidelines, waiting for clear signals before committing capital to growth – and, the uncertainty had better be resolved in favor of sustaining the current rates rather than increasing them, if we hope to see an end to the ‘jobless recovery’ and any kind of broad-based improvement in consumer economic circumstances any time soon.

While The Giant Wakes may write about government intervention in a future post within his ten-part series called “Ten Tyrants of Uncertainty,” I thought I’ll jump ahead and add to the discussion.

Which is a bigger deterrent to economic activity: tax uncertainty or the uncertainty of government intervention? When government steps in to bail out one company at the expense of another, economic calculation is thrown out the window. And this does not just apply to corporations where our government may bail out GM thus hurting Ford or give billions to large banks while letting small banks fail. It also applies to each of us an individual. Those of us who are responsible, paying our mortgages each month or not buying a house knowing we cannot afford one, are now paying for those who irresponsibly bought more house than they could afford but whose mortgages have been “modified” by the government.

As a result, we now have a bipolar economy. We have those who have abandoned all risk taking, not knowing what the government will do. And we have those who take extreme risks, believing the government will bail them out if they fail. In the mean time, nobody is taking the reasonable calculated risks that are essential to a productive and profitable economy.

Enumerated Powers Amendment for the Constitution

In addition to repealing the 16th and 17th Amendments and getting rid of the Federal Reserve (all of which began in 1913), I propose this new Amendment:

The federal government shall have no powers beyond those specifically enumerated in the Constitution or absolutely required for the enforcement of those enumerated powers.

The general welfare and commerce clauses do not give the federal government any powers beyond those specifically expressed elsewhere in the Constitution.

All commitments and liabilities of the United States must be honored and paid out either immediately or in their due course. No new commitments or liabilities from unconstitutional programs may be added after the ratification of this amendment.

If anybody has suggestions to improve this amendment, feel free to comment below or email me from the contact page.

Sovereign debt crisis spreading to first world countries.

I’ve written about the sovereign debt crisis numerous times already. See here, here, here, here, and here. But so far, I’ve only written about those “at-risk” countries such as Portugal, Greece, Spain, and Ireland or individual states such as Illinois. In other words, the sovereign debt crisis has so far been limited to “small” countries or states. Debt defaults among these countries or states certainly would cause problems and a sharp decline in financial markets, but likely wouldn’t break the bank. But if this crisis spreads to larger, more financially important countries, it would obviously have a much larger impact, possibly one similar to the stock market crash of 1929.

Marketwatch reports that the sovereign debt crisis may in fact be spreading to a first world nation:

There’s no ‘B’ in PIIGS, but Belgium could eventually cause headaches of its own for the euro zone if a bitter and protracted political fight prevents the country from hitting its deficit-reduction targets.

Belgium, in northern Europe, has seemed an unlikely candidate for sovereign-debt troublemaker. From a fiscal perspective, the country, whose capital Brussels is the home of the vast EU bureaucracy, has been associated more with the so-called core of the euro zone than the troubled “periphery.”

But an increasingly bitter political divide along linguistic lines has left Belgium without a government since April and is beginning to raise some concerns.

Belgium, which has enjoyed solid growth, appears on track to reduce its budget deficit to 4.8% of gross domestic product this year from 5.6% in 2009, economists said. The nation’s deficit is among the lowest in the euro zone and compares well with other core countries, including Germany at 4.5% of GDP, France at 8% and the Netherlands at 6%.

But if a government isn’t formed soon, the 2011 fiscal target of a reduction to 4.1% could be in jeopardy, said Philippe Ledent, an economist at ING Bank in Brussels. That in turn would make it all the more difficult for Belgium to meet its target of bringing its deficit down to 3% of GDP, the EU limit, in 2012.

In reality, a 4.1%, 4.8%, or 5.6% don’t seem too bad, especially considering the 10.6% deficit here in the US for 2010 and 8.3% deficit expected for 2011.

Belgium’s deficit figures raise few alarms, but government debt stands at around 100% of GDP, which compares more closely with Greece and Italy.

U.S. debt, by comparison, also stands at about 100% of GDP.

The financial markets are starting to notice Belgium’s problem:

Belgium has had no problems selling its government bonds. Borrowing costs have risen, however, with the yield premium demanded by investors to hold 10-year Belgian debt over benchmark German bunds standing at around 0.8 percentage point, up from around 0.4 percentage point around the same time last year.

But borrowing costs are far from problematic, Ledent said. Belgium’s premium remains nowhere near comparable to Spain’s, for example, which is at around 1.6 percentage points, much less Ireland’s at around 4 percentage points.

The cost of insuring Belgian debt against default is up sharply since the April elections, but well off the peak seen in mid-June. The spread on five-year sovereign credit-default swaps was at 119 basis points last Thursday, according to data provider CMA. That means it would cost $119,000 a year to insure $10 million of Belgian government debt against default for five years.

The spread stood at around 60 basis points in mid-April before the latest round of political turmoil and peaked at 149 basis points in late June.

“Up to now, there has been no strong impact [on borrowing costs], but I’m not sure it will continue like that,” Ledent said. “If in two, three, four months we still don’t have any government, financial markets will consider that we won’t reach the [budget] target and then there could be an impact on the spread.”

How long can countries like Belgium or the United States continue to borrow at low interest rates? These are countries with deficits exceeding 4% of GDP, in Belgium’s case, or 8-10%, in the United States, with debts equal to 100% of GDP. Logic tells us that in these countries, either taxes have to rise significantly or government spending has to fall sharply. Neither Belgium nor the U.S. is doing much to reduce their deficits and even less to cut government spending. Both countries, along with all other nations, are hoping for and relying on an economic recovery to lift their finances. What if we enter another recession? What if the recovery is slower than they expect, as it has been so far? All this talk of deficit reduction will be gone and we’ll be looking at even larger deficits and debt levels.

Worse yet, what happens when investors demand higher interest rates? As mentioned above, Belgium is already paying an extra 0.4% interest on its debt. That does not sound like much, but with government debt at 100% of GDP, the deficit increases by 0.4% just from the interest payment. This is an additional cost on government at a time when it needs to reduce its costs. It increases the deficit just as the country is trying to reduce it. Furthermore, this creates a self-fulfilling prophecy: worries of a debt crisis will cause a country’s interest payment to rise and deficit to increase, thus increasing the chances of a crisis.

So I will repeat what I’ve written many times: The sovereign debt crisis is far from over. In fact, it is just beginning.

Should we return to the Clinton years? Hell yes!

I often hear from those on the left about how much better the Clinton years were than the Bush years and today. Well, let’s compare the size of government during the Clinton years (1993-2000) to the Bush years and today.

First, my favorite chart again to get a general idea of where we are now versus the Clinton years. Clearly, government spending is much higher now:

Total government spending (federal, state, and local) during the Clinton years averaged 34.3% of GDP. During the Bush years, it averaged 35.0%. During the fiscal year just completed (2010) it was 43.9%. Are those on the left really arguing for a 9.6 percentage point reduction in government spending? And what 21.9% (9.6 divided by 43.9) of government will the cut?

Let’s look at the tax side of the equation. Total government revenue (federal, state, and local) averaged 35.2% of GDP during the Clinton years. It was 34.4% during the Bush years. Today (FY 2010), due to the recession, it stands at 30.4%.

What is remarkable is the similarity between the Clinton years and the Bush years, on average. The Bush years saw total government spending 0.7 percentage points higher than during the Clinton years, but total government revenue 0.8 percentage points lower. However, not all this credit and/or blame can be assigned to these Presidents or even to the Congresses because these figures include state and local government, as well. On the balance though, these periods were remarkably similar.

Another interesting factor is that government spending fell 4.5 percentage points during the Clinton years, yet rose 4.4 percentage during the Bush years. Government revenue saw the reverse, up 3.9 percentage points under Clinton but down 4.2 percentage points under Bush. Much of this is simply the result of economic cycles. Clinton started after a recession and ended with a bubble. Bush started with that bubble and ended with a recession.

But the most notable thing is what is occurring today. Under President Obama, government spending as a percentage of GDP has risen 6.9 points while revenue has fallen 2.6 point. Again, President Obama and Congress cannot take all the credit/blame because most of this change has been due to the recession. However, government spending has risen more under Barack Obama in just two years than it did under Bush in eight. In fact, government spending as a percentage of GDP in 2009 alone rose more than it had in the previous 36 years. During the previous recession (2000-2003), total government spending rose 2.7 percentage points and we recovered from that recession just fine. In this recession (2007-2010 so far), government spending as a percentage of GDP has risen 8.9 points and the recession continues.

All this raises a few questions:

• What have we to show for this 8.9 percentage point increase in the size of government?
• Do the liberals really want to return to the Clinton day? Are the liberals willing to reduce government spending by 21.9% (9.6% of GDP)?
• Will conservatives trade a tax increase equal to 4.8% of GDP in exchange for cuts to government equal to 9.6%?

As for me, I’d gladly trade the tax increase for smaller government because we are already paying for the tax increase. To fund our budget deficit, government is issuing debt and printing money. Instead of charging us taxes, they are devaluing the Dollar. Instead of paying for our large government through taxation, we are paying for it with reduced value of our wealth and increasing foreign ownership of our country. Therefore, taxes are much less important than government spending. So yes, I’d certainly support an increase in taxes equivalent to 4.8% of GDP IF AND ONLY IF we reduce government spending by 9.6%, returning us to those much hallowed days of the Clinton Presidency and Contract With America Congress.

* This does not reflect my opinion of Clinton as a person or his policies. Likewise, much of the above talk of “Clinton years” was the result of general economic trends and the Republican Congress. As always, I am a firm believer that history moves in trends and our leaders reflect those trends. (See my book, The Path to Tyranny. Additionally, I plan to write an entire book on this subject in the future.)

Biggest increase in dependence on government in 2009 since 1976

According to The Heritage Foundation’s 2010 Index of Dependence on Government, dependence on government rose 13.62 percent in 2009. That is the largest single year increase since 1976.

Heritage included a lot of detail in its reports and many cool graphs. I suggest you go to the full report. I would like to comment on one more chart of theirs.

Many conservatives lament the fact that so many Americans pay no taxes. As you can see below, the percentage of Americans who paid not income tax rose from 12.0 percent in 1969 to 43.6 percent in 2008. I actually wish that many more Americans were exempt from paying taxes. However, we cannot have a situation where nearly half of Americans pay no income tax while the size of government grows. The wealthy are seeing their burden doubly rise from the growing cost of funding government and their increased share in paying for it. While this will satisfy the “soak the rich” crowd, it only pushes the wealth to hide their income and wealth from the government or move overseas entirely.

Democrats think US corporations should pay US income taxes on foreign income. Are they crazy?

Democratic candidate for US Senate Richard Blumenthal attacked Republican candidate and former WWE CEO Linda McMahon on Twitter:

STAFF: 2009: WWE Didn’t Pay U.S. Income Taxes On $4.1 Million In Earnings From It’s International Subsidiaries.

Why should US corporations pay US income taxes on foreign income? They already paid taxes on that income in the country in which it was earned. Foreign corporations don’t pay US income taxes on foreign income, so why should US corporations? Charging US income taxes on earnings in foreign countries makes US corporations less competitive.

The US already has the second highest corporate income taxes among industrialized countries. The United States should be lowering corporate tax rates, not making it more expensive to be a US corporation.

Richard Blumenthal is encouraging US corporations to close up shop, move overseas, and save million of dollars in taxes.

Sovereign debt crisis continues. Irish debt rating cut by Fitch.

A follow-up to yesterday’s blog titled “Sovereign debt crisis far from over. Moody’s may downgrade Ireland again.”

Fitch Downgrades Ireland’s Rating on Cost of Banking Bailout

Fitch Ratings lowered Ireland’s credit grade to the lowest of any of the major rating companies and said there’s a risk of a further reduction.

Ireland was cut to A+ from AA-, reflecting the “exceptional and greater-than-expected cost” of the nation’s bailout of its banking system, Fitch said in a statement today.

The move comes a day after Moody’s Investors Service said it may cut the country’s rating. Ireland may have to spend as much as 50 billion euros ($69 billion) to repair its financial system, pushing the budget deficit this year to 32 percent of gross domestic product. Fitch said the rating could be lowered again if the economy stagnates and political support for budgetary consolidation weakens.

…

Ireland has injected about 33 billion euros into banks and building societies, including 22.9 billion euros into Anglo Irish Bank Corp. Anglo Irish may need up to an additional 6.4 billion euros of capital and a further 5 billion euros in the event of unexpected losses. Irish Nationwide Building Society may need a further 2.7 billion euros.

Fitch said the “timing and strength” of the recovery is critical to reducing the budget deficit. While the economy is rebalancing, “ongoing distress” in real-estate markets and uncertainty over the global economic outlook “weigh on growth prospects and fiscal outlook,” it said.

Irish consumer confidence plunged the most in more than four years last month due to the mounting burden of bailing out Anglo Irish and the surge in sovereign borrowing costs.

“Ireland has experienced a great panic,” said Austin Hughes, chief economist at KBC Ireland. There is a “risk that a sense of apocalyptic gloom may trigger a freeze in spending.”