Debunking Keynesian Economics

Below is a video I came across courtesy of Daniel Mitchel of the Cato Institute.  This is an excellent presentation of a basic misinterpretation of Gross National Product (GDP) that so many fall into.  In short, the argument demonstrates that focusing on GDP as a measure of economic growth via government expenditures is very much a bit of Keynesian smoke-and-mirrors. Rather than focusing on how national income is distributed (government expenditure), we should focus on how national income is earned as expressed in Gross National Income (GNI).  As the video states, the point is to grow the pie, not devise new ways of slicing it.  Enjoy and please pass this along to all you know.

I also highly recommend Mr. Mitchel’s article on the Cato Institute’s blog: Basic Economics for Financial Journalists and Other Dummies

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Congressional Policy Leads to Inefficient Taxation

The following is a short article on tax fraud and abuse from an affiliate site of the Cato Institute.  Its message is simple, yet fundamental in recognizing the inefficiencies of government outgrowth.

Congressional Candy (via

IRS Handing Out Free Candy

“While it is easy to castigate the IRS, it’s important to remember that the monstrous tax code it administers is a creation of Congress. Our absurdly complex and complicated tax code is a direct result of policymakers engaging in social engineering and economic micromanagement. While there are murmurs that Congress might take up tax reform this year, policymakers need to understand that it is the federal government’s excessive involvement in our personal and economic affairs that fuels this tax code insanity.”

Click for full article→

Ignoring Florida Court Ruling, ObamaCare an Affront to Liberty


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The Cato Institute’s Michael F. Cannon and Ilya Shapiro discuss uncertainty surrounding the debate over Judge Vinson’s ruling on ObamaCare and the mixed reactions among state officials.  Whereas Wisconsin’s Attorney General feels a sense of relief at Vinson’s decision, Alaskan Governor Sean Parnell is looking for advice. However, one thing is clear: as of now ObamaCare is unconstitutional on grounds of the individual mandate. Below is a passage stating what Vinson’s ruling means and its impact on specific areas of the Patient Protection and Affordable Care Act.

Moreover, it is not unreasonable to argue that Vinson’s ruling applies to the nation as a whole. After all, this lawsuit facially attacked the law rather than just challenging its application to particular parties. This interpretation of Vinson’s ruling would stop ObamaCare dead in its tracks. Under that reading, and absent further judicial action:

ObamaCare’s so-called “consumer protections” — which are driving premiums higher, pushing Americans out of their health plans, and exposing patients with pre-existing conditions to medical underwriting — are now invalid.

ObamaCare’s tax hikes, including the 10-percent tax on indoor tanning services and higher taxes on consumer-directed health plans, are now void.

The federal Department of Health and Human Services may no longer distribute grants to states to fund ObamaCare’s high-risk pools, review premium increases, or set up health insurance exchanges.

ObamaCare’s political payoffs, including the $250 checks Medicare is sending to millions of seniors, the direct subsidies to employers who offer retiree coverage, and the infamous “Louisiana Purchase,” must now cease.

HHS must stop implementing the long-term care entitlement program that Senate Budget Committee Chairman Kent Conrad (D.-N.D.) called “a Ponzi scheme of the first order.”

Click here for article→

As Cannon and Shapiro argue, ordinary citizens, employers, and insurance companies are at a loss.  It could be at least six months before the 11th Circuit Court of Appeals rules on the Obama administration‘s appeal.  With billions of dollars and the entire restructuring of the health care system at stake, many feel the only constitutionally and fiscally prudent avenue is to rescind all aspects of the legislation until the judicial process plays out.

However, the Justice Department is not sitting down without a fight.  Peter Suderman points out that Vinson’s failure to issue an injunction has prompted clarification.  Tracy Schmaler spoke on behalf of the Justice Department: “We believe it is important to put to rest any doubts about the ability of states and other parties to continue to implement these critical programs and consumer protections provided under this statute.”

The seal of the United States Department of He...

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In addition, the brief submitted by the United States Department of Health and Human Services calls on issues of instability and uncertainty:

“The Court’s declaratory judgment potentially implicates hundreds of provisions of the Act and, if it were interpreted to apply to programs currently in effect, duties currently in force, taxes currently being collected, and tax credits that may be owed at this time or in the near future, would create substantial uncertainty. Because of the sweeping nature of the declaratory judgment, such an interpretation would pose a risk of substantial disruption and hardship for those who rely on the provisions that have already been implemented.”

As the Obama administration reinforces its familiar consumer-protection line of reasoning along with the fear-mongering associated with “substantial disruption and hardship,” it says nothing to the effects of such legislation on rising premiums and increased patient exposure to medical underwriting (see first bullet above).  Again, Tracy Schmaler of the Justice Department made it abundantly clear that the Obama administration has no intention of following Vinson’s ruling.

“We are analyzing this opinion to determine what steps, if any — including seeking a stay — are necessary while the appeal is pending to continue our progress toward ensuring that Americans do not lose out on the important protections this law provides.”

Perhaps the Obama administration should have thought about issues of uncertainty before implementing a law creating that very reality.  The act of requesting states to follow a judgment contrary to their case renders the Obama administration desperate to say the least.  Perhaps the only avenue left to the President is to follow the voice of the people.  As Cannon and Shapiro emphatically conclude:

“If President Obama shows contempt for court orders that go against him by pretending that ObamaCare still enjoys the full force of law, public antipathy toward the legislation will only grow. The course that shows respect for the Constitution, the courts, and the American people is for the administration to cease implementing the law’s regulations, taxes and new bureaucracies immediately.”

To the people and to the courts, I suspect, the issue is simple.  Is ObamaCare constitutional?  Judge Vinson says no, so for now the Obama administration ought to honor that decision while pursuing their next course of action.

Amidst Budget Cuts, Defense Department Akin to its Own Economy

Seal of the United States Department of Defense

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Amidst a $17.4 billion cut in labor, health, and education, an undisclosed senior defense official responded to criticism of the Defense Department‘s fiscal accountability by playing a familiar line of reasoning.  He stated, “What’s being suggested is just not practical for an entity of our size and complexity.  We’re not just some company; we’re more akin to our own economy.  This is not an argument about our accounting procedures.  It’s an argument about priorities.”  In 2008, banks were too big to fail so the government bailed them out.  The decision was based from fear and claims on ignorance, namely that the trillions of dollars of toxic assets on the books of numerous banks could not be traced. Consequently, allowing a single troubled bank to go under as the free-market would naturally dictate, might cost millions of jobs and destroy the economy.  This fear mongering among big banks, prominent politicians, the media, and our own Treasury Department led to the US government spending our future earnings on a life raft that was destined to sink.  The Troubled Asset Relief Program (2008) and the American Recovery and Reinvestment Act (2009) cost roughly $1.5 trillion.  Yet the economy produced only 36,000 jobs last month,  the worst growth figure since the end of the third quarter last year,  and unemployment is still at 9% .

The aftermath of such lavish stimulus spending is of course budgetary cuts.  Perhaps the US military industrial complex feels vulnerable.  Since 2001, US military spending has increased nearly 60% in real terms.  Moreover, defense spending accounted for 45% of global arms production in 2007, the highest since the end of World War II. Over the last decade (1999-2008), defense spending has increased as a percentage of GDP from 3% to 4.3%, partly as a result of waging multiple campaigns in Iraq and Afghanistan. And according to the Heritage Foundation, it reached nearly 5% in 2010.  However, other areas of the US economy have not faired nearly as well.  Education is just one example, which has taken a huge hit in federal funding, having its appropriations cut from just over $1 billion in 2006 to $68.5 million two years later.  And with entitlement spending and interest payments on the debt increasing yearly, Congress may have no choice but to cut defense spending.

That said, perhaps the “too big to fail” argument is now entering the public sector as a last-ditch effort to stave off defense cuts.  As the Defense Department is too big to be held accountable, even the consideration of budget cuts should pass them over because they are incapable of producing an expense report.  I find it hard to believe that the defense department is incapable of balancing its checkbook.  Rather, I find it likely that they desire to remain behind the curtain.  Huffington Post’s Amanda Terkel reported on a recent defense audit, whereby the Pentagon paid $285 billion to over 100 contractors engaging in fraudulent behavior with taxpayer money.  An additional $270 billion was paid to 91 contractors involved in civil fraud, and $682 million was paid to some involved in criminal fraud.

Such indiscretion with taxpayer money, coupled with the argument from complexity rationale – “too big to count”- is leading some to question the efficiency of defense spending.   Senator Tom Colburn, R-Okla., commented: “I will continue to push for a budget freeze of all base budget nonmilitary personnel accounts at the Defense Department until it complies with the law regarding auditable financial statements.”

However, the final results could go either way.  While defense cuts are still viewed as a symbolic form of American hegemonic appeasement by many, some see the deficit as a threat to national security.  Chairman of the House Armed Services Committee Buck Mckeon says, “A defense budget in decline portends an America in decline.”  He also stated that he would “oppose any plans that have the potential to damage or jeopardize our national security.” This fiscal philosophy could lead America down a familiar road, one that has characterized our philosophy behind foreign aid since the decolonization of the British Empire sixty years ago – spending money without transparency and accountability toward efficient outcomes is simply throwing good money after bad.

Open-ended statements like Mckeon’s are building concern that modest reductions may not make the cut.  The Washington Bureau’s Carolyn Lockhhead points to a deficit commission headed by former Republican Senator Pete Domenici (NM) and former Clinton budget chief Alice Rivlin.  The commission reported that the deficit is on track to hit $1.5 trillion this year, pushing the debt to nearly 90% of GDP by 2020. Consequently, interest payments will cost $1 trillion, nearly 28% more than the entire Pentagon budget.

The lesson is this.  Mandatory spending programs such as Medicare and Social Security will only rise, and everyone is well aware that we are to the point of no return.  That is, these programs will dramatically increase in costs sooner rather than later.  This is not a time for ideological partisan politics.  It is a time to use sound reasoning and judgment to move America back to the table of solvency.  The Pentagon’s budget accounts for roughly 50% of domestic spending.  This, coupled with a nearly $1 trillion interest payment will effectively squeeze out other important domestic spending programs such as education, law enforcement, energy, and agriculture, all of which contribute to a growing workforce and a more promising future for Americans.  If we refuse to cut spending now while we still have an opportunity to do so prudently, we may be forced to do so in the near future in an atmosphere of panic.


If you recently tried to find my first quote reading, “What’s being suggested is just not practical for an entity of our size and complexity.  We’re not just some company; we’re more akin to our own economy.  This is not an argument about our accounting procedures.  It’s an argument about priorities,” I apologize for it not being there.  It seems as though POLITICO has moved the original post from its primary page.  I responded to them with the following comment:

I find it discouraging that you will simply omit part of your post, replacing it with a message of appeasement that has little or no value in public discourse.  I recently used a quote from you in my blog post, only to come back to the site the next day to find it missing.  The quote was as follows:

–A senior defense official: “What’s being suggested is just not practical for an entity of our size and complexity.  We’re not just some company; we’re more akin to our own economy.  This is not an argument about our accounting procedures.  It’s an argument about priorities.”

The statement was replaced with the following update:

–UPDATE — Pentagon Press Secretary Geoff Morrell: “We acknowledge that the Department has a legal obligation to achieve fully auditable statements and we are committed to doing so by the congressional deadline of 2017. In fact, we have already established a clear governance process (CMO in the lead with CFO and DCFO overseeing day-to-day management) and are spending more than $200 million per year to achieve our short and long term goals towards fully auditable statements. Secretary Gates has been personally briefed on these efforts and supports the plan.”

Perhaps the statement has been moved.  If so, I would like the link, as I must provide the sources for my writing.  I find it difficult to stomach that a professional organization engages in deliberate omission, so I will give you the benefit of the doubt.  However, replacing such a statement like this that characterizes our government’s lack of transparency and inadequate fiscal policies with a statement that simply places your readers on the bench is quite disheartening.

It is your responsibility to account for what you publish, so please repost the original statement along with the update so that Americans can continue engaging in meaningful and constructive dialogue.


Jeremiah Dow

So there it is.  If POLITICO’s post is still not fixed, try this link.  It seems as though they kept the original post in the POLITICO Forum.  If you Google the entire quote, you will pick up the link above along with Randy Forbes’ Facebook page.

A Second Update (02/24/11)

The following video from the Cato Institute’s Christopher A. Preble makes the case better than I can.  Notice his emphasis on a common statistic used – defense spending as a percentage of GDP.  Important to realize is that such figures negate inflationary effects.  When accounting for these, U.S. military spending is much higher than the government reports.  Mr. Preble also reiterates my point above concerning cuts being only a decrease in spending growth, not a decrease in dollars spent from the previous year.

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