CATO Video on Short-Comings of Debt Deal

It is critical that the American people understand the lip-service paid by the debt deal both between Democrats and Republicans and from Washington to the taxpayer.  As this video points out, the deal actually fails to cut spending.  The claim that the deal cuts spending by almost $1 trillion is not a cut at all.  In Washington-speak, a slowing of the rate at which spending grows is in itself considered a spending reduction, and that is precisely what the debt deal says.  Moreover, the cuts are not immediate, occurring over the next ten years under a completely different Congress not beholden to the policies of the present Congress.

The second major point CATO makes is that the additional $1.5 trillion in cuts to be determined by a bipartisan committee later this year acts simply to defer the “tough decisions” that have come to characterize Washington rhetoric in recent years. Washington speaks of the need to come together, to compromise.  Well it seems that Washington has succeeded in compromising itself into fiscal oblivion.

Regardless of party affiliation, please share this video to all you know.  It affects the future of all Americans, Republican or Democrat.

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What is it About Economics…The Debt Deal Examined

via Google Images

Government spending is out of control.  The national debt is almost equal to GDP (97%).  Unemployment is at 9.6% officially, almost 20% unofficially.  The debt ceiling game in Washington leaves little room for comfort among middle class Americans and investors.  A U.S. credit downgrade is imminent.  The future is not bright.  So what is it about economics that leaves so many people (on many occasions myself included) confused and bewildered into a state of apathy?  After all, are we not taught the fundamental aspects of economics, namely that competition preserves ingenuity, the law of demand determines fair (market) prices, and that a market free of government encourages investment for future growth because the market is the amalgamation of millions of choices – for America approximately 311 million.  So long as these phenomena are allowed to occur unimpeded, the path toward prosperity continues.  As more jobs are created and more products enter new markets, economic growth occurs both vertically (established markets grow) and horizontally (new markets emerge). The net result is a forward-moving economy and a growing people. So how is it the average American has ended up in the ditch, given only the choice to take the hand to his Left or Right?  The Cato Institute’s Daniel Mitchell discusses just how Keynesian economics has contributed to the growing bewilderment surrounding economic analysis, namely the misdirected attention given to GDP as a measure of the health of an economy.  He engages in useful analogy, using the finances of an individual home in place of an entire economy.  In economics, models are often used to simplify economic variables, rendering understanding of the fundamental more prevalent.  Mitchell has done this beautifully.  He demonstrates two key points contrary to the Keynesian solution.  

  1. Government expenditure crowds out the private sector.  That is, as government spends more, less is left for private consumption and investment, the driving forces for economic growth.
  2. As taxes increase, spending (as measured by GDP) stays the same, while less expenditures are free for things that improve our lives because more of our total income (fixed in the analogy) is redistributed as a tax expenditure.

Mitchell’s message is this: “government is capable of redistributing how national income is spent, but it isn’t a vehicle for increasing national income.”  The wealth of a nation is not determined, nor can it be significantly increased, by government spending (as shown in GDP).  Rather, wealth is determined by gross national income (GNI).  While GDP reflects higher levels of spending, an actual increase in GDP is only a product of increased national income. This point is particularly important given the debt deal just passed by the House.  It incorporates “enforcement mechanisms” built into what I would call a debt deal that pays only lip service to the people.  Besides the fact that the deal only trims a “projected” $1 trillion from the national debt over the next ten years (this is paltry and means very little), President Obama rejected any proposals that would enact cuts from entitlements after 2013.  Here is a passage from the White House fact sheet:

“In Securing this Bipartisan Deal, the President Rejected Proposals that Would Have Placed the Sole Burden of Deficit Reduction on Low-Income or Middle-Class Families: The President stood firmly against proposals that would have placed the sole burden of deficit reduction on lower-income and middle-class families. This includes not only proposals in the House Republican Budget that would have undermined the core commitments of Medicare to our seniors and forced tens of millions of low-income Americans to go without health insurance, but also enforcement mechanisms that would have forced automatic cuts to low-income programs. The enforcement mechanism in the deal exempts Social Security, Medicaid, Medicare benefits, unemployment insurance, programs for low-income families, and civilian and military retirement.”

via Google Images

Although tax-reform is on the agenda upon the expiration of the Bush tax cuts at the end of 2012, which according to the President would require higher earners to help pay for deficit reductions, the reality of exempting entitlements entirely will necessitate either higher taxes for everyone or continued growth in the debt.  Moreover, although the debt deal reduces the rate of spending, discretionary spending still projects upward over the next ten years.  Consequently, the debt deal will most likely result in higher taxation and less disposable income for the people – an additional and significant detractor from economic recovery.  In short, it is my contention that the deal does nothing for the long-term financial solvency of the U.S. government and will result in tax increases and spending allocations that will surely out pace our weak recovery, leaving less for private consumption and investment. Despite often conflicting ideologies regarding issues such as entitlement spending, foreign wars, and tax reform, our dual-party system hardly represents differing views when it comes to economics, namely spending.  That is, they both prescribe to a school of economic thought that has led America to where we now kneel.  Whether you have heard of Keynesian economics or not, you have felt its impact via stagnant wages, lost jobs, and growing government.  The new debt deal only reinforces this. While typically associated with the Left, Keynesian economics, whether in the name of stimulus, tax reform, or entitlements, promotes government expenditure at the expense of the private sector, stifling growth and rendering competition, demand, and the free-market mute.  These trends have grown beneath both parties in recent decades.  Consequently, more spending for entitlements and foreign wars is rendering the welfare-warfare state an increasingly stark reality.

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As Dollar Plummets, Deficit Spending Still a Reality

Via Google Images

The Associated Press reported on the latest failure of the Senate to reduce oil subsidies to the five largest producers, something they say President Obama has tried to accomplish since entering the executive chair.  What is the rationale besides the typical Washington attacks on the market and its subsequent bureaucratic rhetoric to “doing what is right and what is fair?”  Plainly stated: our leaders know our fiscal situation is in dire straights, but none of them will openly admit to the imminent reality of government default on Treasury obligations.  The only solution they see are those that include retention of their Congressional seats, i.e. to continue borrowing.  Yet, continued borrowing will only perpetuate the problem by driving the dollar down further and effectively burying the American public.  The absurdity of the situation is highlighted by two facts.  First, the government has increased the debt ceiling 10 times since 2001.  If that does not sound some bells and whistles in one’s head, then think of this way.  Our federal government has grown so large, that it has voted to increase the debt ceiling every year in the last 10 just to meet its so-called obligations to the people.  Now ask yourself how your life has changed for the better over the last decade.  Secondly, much of America’s intellectual elite and policy researchers are not in opposition. Howard Gleckman, a resident fellow at the Urban Institute, stated, “Having voted to run up the bill, it is utterly irresponsible to prohibit the government from borrowing the money to pay it.”  What?!  Not only do they see borrowing as the only means to economic recovery and meeting government obligations (i.e. Keynesian deficit financing), many go so far as to advocate borrowing to pay off borrowing.  So much for sustainable government or fiscal restraint.

That said, while it would appear that the last few months has put our bureaucrats on edge regarding America’s credit score, what they should be worried about is how increased borrowing will affect the viability of our currency and the global markets.  Instead, Democrats try to gain political clout by cutting subsidies that never should have been, while Republicans spout the same old lies of higher taxes on oil producers translating to higher prices, fewer jobs, and delayed recovery.  Either alternative is aimed at unrestricted spending.  While the Democrats argue cutting subsidies to big oil will ease pressure off making cuts to the welfare state and thus allow borrowing to continue, the Republicans argue that such subsidies should stay, while offering no workable solution to the welfare state problem. So once again, the American public is left with no rational solution. Rather, we are forced to take sides along ideological lines that have been blurred long ago, not on open discourse and rational thought.

Article also Published on Technorati  (M9EZ497NU9QH)

Under Washington’s Watch, America Insolvent

Washington Capitol, DC

Image by Francisco Diez via Flickr

Characterized over the past decade as expansionary, increasingly centralized and oppressive, manipulative, and fraught with propaganda, Washington is becoming a safe haven for our rich elite to spend their way into absolute control over the American public.  This is deficit spending (Keynesian economics) and the welfare state, and Treasury Secretary Timothy Geithner was forced to acknowledge its shortcomings in a January 6th letter to Congress requesting the debt ceiling be raised, lest America default on its obligations.

With spending out of control, the dollar will collapse and Americans will see hyperinflation similar to that in post-WWI Germany where mothers pushed wheelbarrows full of currency to the bakery for a single loaf of bread.  Financial insolvency is a real threat, yet, Americans are inundated with false data and promises of a better future given a larger government.  Do not fall into the trap.  Stop sitting idly by.  Inform yourself, but avoid mainstream media outlets.  You can start by taking a look at Quinn’s argument below.

German marks became so worthless some used them as wallpaper.

Pump It Up

Do you remember when the politicians of both parties were making dire predictions of Great Depressions, economic collapse and 10% unemployment if we didn’t pass their ”save an investment banker” rescue package and the $800 billion “jobs creation” stimulus package? They assured the American people that these expenditures were temporary and were only being made to save the country. Before the crisis, Federal spending was $2.7 trillion. The talking heads at the Fed and in the White House assure us they saved the world. GDP is growing and Obama told me we’ve added over 1 million jobs in the last year. Sounds like the emergency is over.

As you can calculate yourself, Federal government spending surged by 124% between 1999 and today. Have you noticed a doubling in service level, competence, educational scores, new energy solutions, or safety and security? What did we get for an extra $2.1 trillion of spending?  What we got was exhausting wars of choice, less freedom, less liberties, less safety, more rules, more regulations, more bureaucrats, more corruption, a financial collapse, and a government that has put us on a path to fiscal ruin. We’ve almost tripled spending on Defense. Are we safer? We’ve more than doubled spending on healthcare. Are we healthier? We’ve more than doubled spending on welfare. Are the poor less impoverished? We’ve more than doubled spending on education. Are our children smarter? The Federal government is out of control….

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Update:

The following shows that our annualized inflation rate is actually 10.6%, which contrasts CPI data, a common economic indicator used by the Fed to gauge inflationary pressures.  The connection to Quinn’s argument is that deficit spending results in massive inflation, which devalues the dollar and acts as a hidden tax – usually referred to as an inflation tax. Take a look!

MIT “Billion Price Project” Confirms US Prices Surging (In Case There Was Any Confusion)

Submitted by Tyler Durden on 02/11/2011 14:05 -0500

Just in case there was still any lingering doubt that prices in the US are surging far above whatever the CPI may indicate, we present the MIT Billion Price Project. Unlike the CPI which is a gross misrepresentation of what is really happening on the ground in price terms, MIT actually compiles real time price data about a universe of products. From the methodology section: “our data are collected every day from online retailers using a software that scans the underlying code in public webpages and stores the relevant price information in a database. The resulting dataset contains daily prices on the full array of products sold by these retailers. Our data include information on product descriptions, package sizes, brands, special characteristics (e.g. “organic”), and whether the item is on sale or price control.” The attached chart confirms what anyone (but not Ben Bernanke) who actually buys goods and services in the US knows all too well.

Annualized Inflation: 10.6%

 

    Defense Cuts Not Part of Elite Neoconservative Agenda

    The Pentagon, looking northeast with the Potom...

    The Pentagon (Wikipedia)

    Google “defense cuts” and what do you get?  A myriad of articles from various sources arguing for or against cuts to the DOD. Some espouse the familiar line that cuts will damage American jobs, while others hold the myth that defense spending is crucial in maintaining our role as global police state.

    According to CNN, the FY 2012 budget increases the National Security budget, including an extra $4 billion for the Defense Department and a 1% increase for the State Department.  The Wall Street Journal reported the opposite, namely that defense outlays are targeted at $671 billion, which is less than that requested for FY 2011 and spent in FY 2010 – $708 and $691 billion respectively.  So why the conflicting report from two major news sources?  It’s all in the numbers and how you crunch them.

    The Center for American Progress reported that the projected $78 billion cuts first proposed by Defense Secretary Gates are attributable to “management and acquisition reforms,” that will not impact the defense budget until 2016.  In other words, these cuts in defense are simply cuts in spending growth only.  The implication of this is subtle, yet, fundamentally important for understanding Washington politics.  2016 is a long way off for a politician, and America may have a new President and/or Secretary of Defense with new priorities.  In short, if these discretionary cuts in spending growth do not happen, who will the voters have to hold accountable?  Possibly no one.  The reality is cloaked by smoke and mirrors.  According to Benjamin H. Friedman:

    Neither Obama nor Secretary Gates has ever proposed cutting actual defense spending. In the unlikely event that the administration’s new five-year spending plan holds up, the non-war portion of Pentagon spending will cost taxpayers $2.918 trillion from fiscal year 2012 to 2016, rather than last year’s proposed $2.994 trillion, a reduction of 2.5 percent. We will still spend more on the non-war Pentagon budget, even adjusting for inflation, than we did in the prior five years, which was the most ever. Some cut.

    In fact, the baseline defense budget of $553 billion excludes funding foreign wars.  The wars in Iraq and Afghanistan will add $118 billion.  This, coupled with a 1.6% increase in defense spending resulting from the Republican-proposed continuing resolution for FY 2011 (to begin in March when the current resolution expires) will balloon the defense budget for FY 2012 to well over $700 billion.  This is 20% of the entire federal budget and accounts for over half of all discretionary spending.

    So after all this talk of spending cuts, according to Brett Arends every American household will hold not only $125,000 of the national debt, but what is equivalent to a $7000 defense tax.  Not many would call that a fiscally responsible budget that matches the rhetoric coming from Washington since the midterms last year.  The following excerpt from Klein’s article in the Washington Post  raises an interesting question concerning that rhetoric versus the reality behind the curtain.  He states:

    The military made out quite nicely in the 2012 budget proposal. The administration is cutting $78 billion from the Defense Department’s budget — known as “security discretionary spending” — over the next 10 years. That’s a bit of a blow, but compare it to the $400 billion they’re cutting from domestic discretionary spending — that’s education, income security, food safety, environmental protection, etc. — over the next 10 years. And keep in mind that the domestic discretionary budget is only half as large as the military’s budget. So if there were equal cuts, the military would be losing $800 billion….

    If this is a fiscally responsible budget, then cutting $500 billion — forget $800 billion — from the Defense Department would’ve opened room for much more domestic investment. It also could’ve gone to pay down the debt. As it is, we’re pumping that money into sustaining a fighting force that’s orders of magnitude larger than anything retained by any other country. The theory implicit in that decision suggests that the fight to win the future might be rather different than the Obama administration is letting on.

    My emphasis

    So what is missing?  The general voice coming from Washington speaks of using fiscal responsibility to “win the future,” yet, pressures to increase defense spending at the cost of domestic programs such as education and research and development won out again.  To understand this, one must first understand the elite neoconservative philosophy that dominates not only our foreign policy, but our domestic spending.  Much of it is leftover propaganda from the post 9-11 Bush-Cheney years and amounts to an America bent on global military hegemony.  Immediately preceding 9-11, the Project for a New American Century issued a report that called for a sustained defense budget of at least 3.5 to 3.8 percent of GDP with an annual increase of $15 to $20 billion. The report states, “The program we advocate [is] one that would provide America with forces to meet the strategic demands of the world’s sole superpower” (p. 75).  It established four primary objectives for U.S. military forces:

    1. defend the American homeland;

    2. fight and decisively win multiple simultaneous major theater wars;

    3. perform the “constabulary” duties associated with shaping the security environment in critical regions;

    4. transform U.S. forces to exploit the “revolution in military affairs” (p. iv)

    Moreover, it opens with the following: “This report proceeds from the belief that America should seek to preserve and extend its position of global leadership by maintaining the preeminence of U.S. military forces” (p.iv).  The project’s statement of principles is as follows:

    •we need to increase defense spending significantly if we are to carry out our global
    responsibilities today and modernize our armed forces for the future;

    • we need to strengthen our ties to democratic allies and to challenge regimes hostile to our interests and values;

    • we need to promote the cause of political and economic freedom abroad;

    • we need to accept responsibility for America’s unique role in preserving and extending an international order friendly to our security, our prosperity, and our principles.

    This elitist rhetoric is still very much alive in Washington politics today: increases in defense spending, challenging other sovereign regimes, spreading democracy abroad, building an International Order.  Of course, none of this is possible without military spending.  Chairman of the House Armed Services Committee Buck Mckeon stated,  “A defense budget in decline portends an America in decline.” It is worth noting that his top 4 campaign contributors for 2009-2010 were Lockheed Martin, Northrop Grumman, Boeing Co and General Electric, all beneficiaries of the elite neocon agenda.  The result is defense spending reaching a new high of nearly 5% of GDP in 2010.  Defense Secretary Robert Gates concedes that “the military needed to prepare for an era in which defense dollars don’t flow as freely.”  However, he immediately reverts back to the neocon philosophy that makes defense spending sacrosanct.  The debate, he said, was “becoming increasingly distant from strategic and operational reality—distant, in other words, from the real world.”  Whose real world, the elite neoconservative that believes American prosperity rests on government controlled defense contracts instead of domestic stability, or the middle school teacher trying to pay back student loans while juggling a second job?

    An interesting lesson you would think Washington had learned by now is the primary factor in the Soviet Union’s downfall. Any Stern makes the point that economic weakness can and has been an Achilles heel.

    Russia’s competition to succeed militarily at the expense of its domestic economy is cited as a key factor in its demise. In the end it was not a lack of military prowess, but rather economic weakness, that accelerated the collapse of the Soviet Union.

    Now nearly 20 years later that lesson is seemingly ignored in our economic thinking represented in this year’s budget proposals.

     

    Everyone who is awake knows that defense spending accounting for over half of all discretionary spending, 54%, is not conducive to any degree of domestic stability short of dependence on government.  Benjamin H. Friedman states the misconstrued dilemma most eloquently: “Strategy is a product of our making, not a landscape we passively confront. National security threats to Americans are quite limited in historical context, and mostly avoidable.  A less activist stance would avoid the peril we now increase by having defense commitments in so many unstable places.”

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