Category Archives: Cato Institute

The federal reserve is contributing to inflation

September 6, 2011 – 12:58 am

Take a look at the figures below and you will see that the Fed is now causing inflation and we are all going to pay more for our products:

The Fed vs. the Recovery

by Alan Reynolds

 

This article appeared in The Wall Street Journal on August 26, 2011.

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One year ago, on Aug. 27, 2010, Federal Reserve Chairman Ben Bernanke explained the rationale for a second round of quantitative easing. “A first option for providing additional monetary accommodation is to expand the Federal Reserve’s holdings of longer-term securities,” he said, thereby supposedly “bringing down term premiums and lowering the costs of borrowing.”

Yet the bond market promptly reacted by raising long-term interest rates. The yield on 10-year Treasurys, which was 2.57% at the time of his Jackson Hole, Wyo., address, climbed to 3.68% by February 2011 and did not dip below 3% until late June when QE2 was coming to an end. The price of West Texas crude oil, which was $72.91 a year ago, remained above $100 from March to mid-June and did not come down until QE2 ended and the dollar stopped falling.

When Mr. Bernanke spoke, the price of a euro was less than $1.27. By the week ending June 10, 2011, 15 days before QE2 ended, the dollar was down about 15% (a euro cost $1.46). In that same week, The Economist commodity-price index was up 50.9% from a year earlier in dollars—but only 22.8% in euros. How could paying much more than Europe did for imported oil, industrial commodities, equipment and parts make U.S. industry more competitive?

In the end, quantitative easing turned out to be an anti-stimulus which stimulated nothing but the cost of living and the cost of production.

The chart nearby subtracts the contribution of government purchases (such as hiring and construction) from real GDP growth to gauge the growth of the private economy. The generally negative contribution of government purchases (column two) does not mean government spending has slowed, as some contend. Instead it reflects the fact that federal and state spending has been increasingly dominated by transfer payments (such as Medicaid, food stamps and unemployment benefits) which do not contribute to GDP, and in some cases reduce GDP by discouraging work.

The chart also shows that growth of private GDP was also much faster before QE2 than it has been since, and the increase in producer prices (i.e., U.S. business costs) was much more moderate. And that is no coincidence.

Former Obama adviser Christina Romer, writing in the New York Times in late May, said that “a weaker dollar means that our goods are cheaper relative to foreign goods. That stimulates our exports and reduces our imports. Higher net exports raise domestic production and employment. Foreign goods are more expensive, but more Americans are working.”

Well, foreign goods certainly did become more expensive during the second round of quantitative easing, but it is doubtful that “more Americans are working” as a result. Industrial supplies and materials accounted for 34.5% of U.S. imported goods so far this year, according to the Census Bureau, and capital equipment and parts accounted for an additional 23%. As Fed policy pushed the dollar down, higher prices for imported inputs such as oil, metals and cotton meant higher costs (producer prices) for U.S. manufacturing and transportation.

In demand-side theorizing, monetary stimulus means the Fed buys more bonds. The Treasury has certainly been selling a lot of bonds, and the Fed has been buying (monetizing) a huge share of those bonds. That helped push the broad M2 money supply up at a 6.8% rate over the past six months. Yet the only thing we have to show for all that stimulus over the past year has been rapid inflation of producer prices and a simultaneous slowdown in the growth of the private economy. Consumer price inflation also accelerated to 5.2% in the first quarter and 4.1% in the second, from just 1.4% in the third quarter of 2010.

Imported goods did indeed become more expensive while the dollar was falling, rising at a 15.1% annual rate over the past three quarters according to the government’s report on GDP. But exported U.S. goods also became more expensive, rising at an 11.4% rate over that same period.

The fourth column in the chart shows that net exports were a subtraction from GDP in early 2010 when the private economy was growing most briskly, thus raising the demand for imported materials and components. The rise of dollar commodity costs and producer prices in the wake of QE2 reduced the growth of real imports because it reduced the growth of real GDP.

Many journalists credit QE2 with raising asset prices, which was certainly true of precious metals but not of housing. It is also true that stock prices generally rose over the past year, but it is implausible to link that to quantitative easing.

Operating earnings per share for the Standard & Poor’s 500 companies rose to an estimated $24.86 by June 30, up from $20.40 a year earlier. Fed policy cannot possibly explain that rise in earnings because domestic output slowed and producer prices rose under QE2, while more than 46% of the sales of S&P 500 companies have come from foreign countries.

Berkeley economist Brad DeLong, writing in the Economist, suggests that, “Aggressive central banks can shift expected inflation upward and thus make households fear holding risky debt and equity less because they fear dollar devaluation more.” But individual investors often react to such fears by dumping equities and speculating in gold and silver. What good does that do?

Alan Reynolds, a senior fellow at the Cato Institute, is author of Income and Wealth(Greenwood Press, 2006).

More by Alan Reynolds

In short, the Fed’s experiment with quantitative easing from November 2010 to June 2011 was accompanied by a falling dollar and inflated prices of critical industrial commodities, including oil. The net effect was to reduce the profitability of manufacturing and distributing products in the United States, and therefore to shift such activities (and jobs) to other countries which were less handicapped by the dollar’s weakness.

Every postwar recession but one (1960) has been preceded by a spike in oil prices of the sort we experienced when the dollar fell and oil prices doubled from August 2007 to July 2008 (reaching $142.52), and to a lesser extent when the dollar fell and oil prices rose to $112.30 at the end of April 2011 from $72.91 in late August 2010. Conversely, during the 1997-98 Asian currency devaluations (and soaring dollar), the U.S. experienced a booming domestic economy as the dollar price of oil dropped to $11 by the end of 1998.

Those who are now looking backwards at how poorly the U.S. economy performed under QE2 in order to “forecast” the future appear to be neglecting the potentially beneficial effects of a firmer dollar in deflating the bubble in U.S. commodity costs. In the end, quantitative easing turned out to be an anti-stimulus which stimulated nothing but the cost of living and the cost of production. Good riddance.

By Everette Hatcher III | Comments (0)

Stimulus plans do not work but liberals like Brummett and Obama do not get it

September 5, 2011 – 11:44 pm


John Brummett in his article, “Will we stimulate with schools, not roads?,” Arkansas News Bureau, September 5, 2011, suggested that the Republicans have several reasons for opposing President Obama’s latest idea to stimulate the economy. However, the real reason is that none of these stimulus programs has ever worked in the past.  Many years ago Frederic Bastiat explained the “broken window fallacy,” but people still go believing they can ignore this fallacy

Hurricane Irene as Economic Stimulus

Posted by David Boaz

Oh, dear. Oh, dear. No matter how many times economists debunk the broken window fallacy, not a natural disaster goes by that journalists don’t try to cheer us up by saying “at least it will stimulate economic growth.” This time it’s Josh Boak (no relation!), the economics reporter (!) at Politico, who was “educated at Princeton and Columbia.” And Sunday afternoon he posted this story:

Irene: An economic blow or boost?

The power outages and shuttered airports may stop the engines of commerce for several days, but Hurricane Irene might have provided some short-term economic stimulus asbillions of dollars will likely be spent to repair the damage to the East Coast over the weekend.

Cumberland Advisors Chairman David Kotok saw the storm as likely jolting employment in construction, an industry paralyzed by the bursting of the real estate bubble in 2008.

“We are now upping our estimate of fourth-quarter GDP in the U.S. economy,” he said in an email Sunday. “Billions will be spent on rebuilding and recovery. That will put some people back to work, at least temporarily.”

Kotok expects GDP growth — which limped along at less than a percentage point for the first half of the year — to exceed 2 percent in the last three months of the year and potentially reach 3 percent.

Mark Merritt, president of crisis-management consulting firm Witt Associates, said the hurricane should provide a bump in economic activity over the next few months.

“After a disaster, there’s always a definite short-term increase,” Merritt said. “There will be furniture bought, homes repaired, new carpet, new flooring, all the things affected by flooding.”

The story quotes no economist, who might have pointed out that the destruction of homes, businesses, and other property cannot actually be good for the economy. As economist Sandy Ikeda summed it up last year, the argument is that “paying $100 to replace a broken window somehow creates more prosperity than having an intact window and spending that $100 on something else.” He goes on to ask, as many economists have: If destruction is so good for an economy, why wait for a hurricane or a bombing raid? Why not just bomb your own cities?

As Frederic Bastiat explained the “broken window fallacy,” a boy breaks a shop window. Villagers gather around and deplore the boy’s vandalism. But then one of the more sophisticated townspeople, perhaps one who has been to college and read Keynes, says, “Maybe the boy isn’t so destructive after all. Now the shopkeeper will have to buy a new window. The glassmaker will then have money to buy a table. The furniture maker will be able to hire an assistant or buy a new suit. And so on. The boy has actually benefited our town!”

But as Bastiat noted, “Your theory stops at what is seen. It does not take account of what is not seen.” If the shopkeeper has to buy a new window, then he can’t hire a delivery boy or buy a new suit. Money is shuffled around, but it isn’t created. And indeed, wealth has been destroyed. The village now has one less window than it did, and it must spend resources to get back to the position it was in before the window broke. As Bastiat said, “Society loses the value of objects unnecessarily destroyed.”

In the comic strip “Pearls Before Swine,” the nefarious Rat used the destruction-as-stimulus argument to defend his client’s blowing up downtown:

But that’s a comic strip. Journalists should do better. Please, call one of these economists. They can tell you that destruction is destructive. When property is destroyed, people have less wealth. The money they had been saving for a new business or a new computer or a college education, now they have to spend it on rebuilding what they had. That is not “a bump in economic activity.”

By Everette Hatcher III | Also posted in President Obama | Tagged , , , , | Comments (0)

Cato’s Jeffrey Miron: “The liberal hatred of the rich is a minority view…”

September 2, 2011 – 11:43 pm

Maybe the tide is turning. Americans do not hate the rich like liberals would have us believe. Take a look at this article:

Soaking the Rich Is Not Fair

by Jeffrey A. Miron

This article appeared on The Huffington Post on September 2, 2011.

What is the “fair” amount of taxation on high-income taxpayers?

To liberals, the answer is always “more.” Liberals view high income — meaning any income that exceeds their own — as the result of luck or anti-social behavior. Hence liberals believe “fairness” justifies government-imposed transfers from the rich to everyone else. Many conservatives accept this view implicitly. They oppose soak-the-rich policies because of concern over growth, but they do not dispute whether such policies are fair.

But high tax rates on the rich are not fair or desirable for any other reason; they are an expression of America’s worst instincts, and their adverse consequences go beyond their negatives for economic growth.

The liberal hatred of the rich is a minority view, not a widely shared American value.

Consider first the view that differences in income result from luck rather than hard work: some people are born with big trust funds or innate skill and talent, and these fortuitous differences explain much of why some people have higher incomes than others.

Never mind that such a characterization is grossly incomplete. Luck undoubtedly explains some income differences, but this is not the whole story. Many trust fund babies have squandered their wealth, and inborn skill or talent means little unless combined with hard work.

But even if all income differences reflect luck, why are government-imposed “corrections” fair? The fact that liberals assert this does not make it true, any more than assertions to the contrary make it false. Fairness is an ill-defined, infinitely malleable concept, readily tailored to suit the ends of those asserting fairness, independent of facts or reason.

Worse, if liberals can assert a right to the wealth of the rich, why cannot others assert the right to similar transfers, such as from blacks to whites, Catholics to Protestants, or Sunni to Shia? Government coercion based on one group’s view of fairness is a first step toward arbitrary transfers of all kinds.

Now consider the claim that income differences result from illegal, unethical, or otherwise inappropriate behavior. This claim has an element of truth: some wealth results from illegal acts, and policies that punish such acts are appropriate.

But most inappropriate wealth accumulations results from bad government policies: those that restrict competition, enable crony capitalism, and hand large tax breaks to politically connected interest groups. These differences in wealth are a social ill, but the right response is removing the policies that promote them, not targeting everyone with high income.

The claim that soaking the rich is fair, therefore, has no basis in logic or in generating desirable outcomes; instead, it represents envy and hatred.

Why do liberals hate the rich? Perhaps because liberals were the “smart” but nerdy and socially awkward kids in high school, the ones who aced the SATs but did not excel at sports and rarely got asked to the prom. Some of their “dumber” classmates, meanwhile, went on to make more money, marry better-looking spouses, and have more fun.

Liberals find all this unjust because it rekindles their emotional insecurities from long ago. They do not have the honesty to accept that those with less SAT smarts might have other skills that the marketplace values. Instead, they resent wealth and convince themselves that large financial gains are ill-gotten.

Jeffrey A. Miron is Senior Lecturer and Director of Undergraduate Studies at Harvard University and Senior Fellow at the Cato Institute. Miron blogs at JeffreyMiron.com and is the author ofLibertarianism, from A to Z.

More by Jeffrey A. Miron

The liberal views on fairness and redistribution are far more defensible, of course, when it comes to providing for the truly needy. Reasonable people can criticize the structure of current anti-poverty programs, or argue that the system is overly generous, or suggest that private charity would be more effective at caring for the least vulnerable.

The desire to help the poor, however, represents a generous instinct: giving to those in desperate situations, where bad luck undoubtedly plays a major role. Soaking the rich is a selfish instinct, one that undermines good will generally.

And most Americans share this perspective. They are enthusiastic about public and private attempt to help the poor, but they do not agree that soaking the rich is fair. That is why U.S. policy has rarely embraced punitive income taxation or an aggressive estate tax. Instead, Americans are happy to celebrate well-earned success. The liberal hatred of the rich is a minority view, not a widely shared American value.

For America to restore its economic greatness, it must put aside the liberal hatred of the rich and embrace anew its deeply held respect for success. If it does, America will have enough for everyone.

By Everette Hatcher III | Tagged , , , | Comments (0)

Social Security a Ponzi scheme?

September 1, 2011 – 7:42 am

Uploaded by on Jan 8, 2009

Professor Williams explains what’s ahead for Social Security

Dan Mitchell on Social Security

I have said that Social Security is a Ponzi scheme and sometimes you will hear someone in the public say the same thing.

Yes, It Is a Ponzi Scheme

by Michael D. Tanner

Michael Tanner is a senior fellow at the Cato Institute and coauthor of Leviathan on the Right: How Big-Government Conservatism Brought Down the Republican Revolution.

Added to cato.org on August 31, 2011

This article appeared on National Review (Online) on August 31, 2011.

Texas governor Rick Perry is being criticized for calling Social Security a “Ponzi scheme.” Even Mitt Romney is reportedly preparing to attack him for holding such a radical view. But if anything, Perry was being too kind.

The original Ponzi scheme was the brainchild of Charles Ponzi. Starting in 1916, the poor but enterprising Italian immigrant convinced people to allow him to invest their money. However, Ponzi never actually made any investments. He simply took the money he was given by later investors and gave it to his early investors, providing those early investors with a handsome profit. He then used these satisfied early investors as advertisements to get more investors. Unfortunately, in order to keep paying previous investors, Ponzi had to continue finding more and more new investors. Eventually, he couldn’t expand the number of new investors fast enough, and the scheme collapsed. Ponzi was convicted of fraud and sent to prison.

Social Security, on the other hand, forces people to invest in it through a mandatory payroll tax. A small portion of that money is used to buy special-issue Treasury bonds that the government will eventually have to repay, but the vast majority of the money you pay in Social Security taxes is not invested in anything. Instead, the money you pay into the system is used to pay benefits to those “early investors” who are retired today. When you retire, you will have to rely on the next generation of workers behind you to pay the taxes that will finance your benefits.

As with Ponzi’s scheme, this turns out to be a very good deal for those who got in early. The very first Social Security recipient, Ida Mae Fuller of Vermont, paid just $44 in Social Security taxes, but the long-lived Mrs. Fuller collected $20,993 in benefits. Such high returns were possible because there were many workers paying into the system and only a few retirees taking benefits out of it. In 1950, for instance, there were 16 workers supporting every retiree. Today, there are just over three. By around 2030, we will be down to just two.

As with Ponzi’s scheme, when the number of new contributors dries up, it will become impossible to continue to pay the promised benefits. Those early windfall returns are long gone. When today’s young workers retire, they will receive returns far below what private investments could provide. Many will be lucky to break even.

Eventually the pyramid crumbles.

Of course, Social Security and Ponzi schemes are not perfectly analogous. Ponzi, after all, had to rely on what people were willing to voluntarily invest with him. Once he couldn’t convince enough new investors to join his scheme, it collapsed. Social Security, on the other hand, can rely on the power of the government to tax. As the shrinking number of workers paying into the system makes it harder to continue to sustain benefits, the government can just force young people to pay even more into the system.

In fact, Social Security taxes have been raised some 40 times since the program began. The initial Social Security tax was 2 percent (split between the employer and employee), capped at $3,000 of earnings. That made for a maximum tax of $60. Today, the tax is 12.4 percent, capped at $106,800, for a maximum tax of $13,234. Even adjusting for inflation, that represents more than an 800 percent increase.

In addition, at least until the final collapse of his scheme, Ponzi was more or less obligated to pay his early investors what he promised them. With Social Security, on the other hand, Congress is always able to change or cut those benefits in order to keep the scheme going.

Social Security is facing more than $20 trillion in unfunded future liabilities. Raising taxes and cutting benefits enough to keep the program limping along will obviously mean an ever-worsening deal for younger workers. They will be forced to pay more and get less.

Rick Perry got this one right.

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On the Arkansas Times Blog the person using the username “the outlier” noted: Saline, leave SS out of the mix. It is solvent through 2037, and can be made solvent indefinitely with minor tweaks. So many people think that the Social Security is a great investment plan and it may only need a few tweaks. […]

Milton Friedman called Social Security a Ponzi Scheme, but liberals keep praising it

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By Everette Hatcher III | Also posted in Milton Friedman, Social Security, spending out of control | Comments (0)

Obama and Fannie and Freddie

August 30, 2011 – 6:51 am

President Obama doesn’t get it. He still wants to force the government to get poor people into the housing market even though they can not make the payments.

The New Fannie and Freddie: Flim and Flam

by Jagadeesh Gokhale

 

This article appeared in Forbes on August 29, 2011.

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As the economy remains stalled, and the election draws closer, the Obama administration seems increasingly willing to consider proposals that will further distort the housing market and seem to have the ultimate goal of preserving a major role for Fannie Mae and Freddie Mac — the two giant government sponsored enterprises at the core of the housing finance debacle that caused the Great Recession.

This is not really surprising considering we’re at the start of another election season when politicians are scrambling for goodies to sell for votes. Under the slogan of preserving the American Dream, the Obama election campaign is promising to resurrect the old policy of extending implicit government backing to Fannie and Freddie — if the President is re-elected.

The Obama Administration has outlined major policy initiatives to preserve a role for the same mortgage-lending giants that have had to be bailed out repeatedly since 2008 at taxpayer cost of $130 billion to date. The latest proposal would allow homeowners with underwater mortgages backed by Fannie and Freddie to refinance. This would be expected to transfer money from taxpayers to homeowners and, by increasing expected taxpayer burdens, is likely to delay economic recovery in consumer spending.

Jagadeesh Gokhaleis a senior fellow at the Cato Institute, member of the Social Security Advisory Board, and author ofSocial Security: A Fresh Look at Reform Alternatives, University of Chicago Press.

More by Jagadeesh Gokhale

 

It is worth noting that the Administration’s recent report on housing policy begins by blaming the private sector for initiating riskier lending practices: To wit:

Initially, Fannie Mae and Freddie Mac were largely on the sidelines while private markets generated increasingly risky mortgages. Between 2001 and 2005, private-label securitizations of Alt-A and subprime mortgages grew fivefold, yet Fannie Mae and Freddie Mac continued to primarily guarantee fully documented, high-quality mortgages.

This reveals a fundamental misunderstanding of how private markets work — one that needs to be exorcised before we can move to better policies. The Administration’s statement assumes that private lenders’ business decisions and risk-taking activities occur in a vacuum. On the contrary, the very existence of Fannie and Freddie to subsidize and support home lending probably triggered private risk taking at the margin in that sector.

The long-standing and profitable operation of housing GSEs — their purchases of home-loans financed out of bond sales to the public at cheap rates because of the implicit government backing they enjoyed — generated a long-sustained upward spiral in home prices, reduced aggregate risk perceptions in home finance among private lenders, and attracted capital including foreign savings. That made Fannie and Freddie a part of the constellation of government policies that promoted a steep home price bubble — that eventually burst to deliver the Great Recession.

The correct policy prescription under a buoyant housing market would have been to withdraw the GSEs from the market, and transition to a self sustaining home finance sector. Such a policy, had it commenced during the early 2000s, could have injected caution and countered the growing perception of a risk-free bonanza in home lending that fed the housing price bubble. Instead, Fannie and Freddie’s appetite to preserve market share and profits was only whetted — as the historical record of their massive portfolio expansion by purchasing subprime loans clearly shows.

The Administration is now proposing to “wind down Fannie and Freddie on a responsible timeline,” (that is, remove the old names), to “address fundamental flaws in the mortgage market to protect borrowers, help ensure transparency for investors, and increase the role of private capital,” (that is, increase lending regulations that stifle the private market), and “target the government’s vital support for affordable housing in a more effective and transparent manner” (that is, create new government sponsored home-lending institutions and increase its role in home-finance).

Instead of admitting that the lesson of the housing debacle is that some segments of the population do not deserve and cannot sustain home purchases financed through government subsidized mortgages, the Obama administration’s proposals, including this latest one, seek to “serve the needs of families, lenders, and investors” (but not taxpayers, of course) to “makes us all better off” (again, taxpayers excluded).

Sometimes, when a company fails for reasons unconnected to its business model, its operators attempt to preserve it via cosmetic changes — a new name, new location, or different front-office personnel. Accenture, the business consulting firm — formerly a part of Arthur Andersen that was tainted in the Enron scandal — is now thriving. So is “Sunshine Financial,” the formerly failed “People’s First” home lending business in Florida. Look for something similar to happen to Fannie and Freddie — even though that “business model” has clearly failed.

By Everette Hatcher III | Also posted in President Obama | Comments (0)

Brantley and Brummett: Government needs to stimulate economy

August 29, 2011 – 8:51 am

John Brummett in his article, “More stimulus? Seriously?,” Arkansas News Review, August 29, 2011, observed:

The general point, though, is simple yet profound: We are in a self-perpetuating fix of serious proportion, and when you have only one tool in the box that might work, you need to figure out how best to use it.

Max Brantley on Arkansas Week in Review on August 26, 2011 said that he agreed with Paul Krugman that we don’t need to cut back on government spending now because the economy needs to be stimulated.

Brantley and Brummett will continue to say that the first stimulus did not work because it did not have enough money, but the private sector will have to get us out of this recession not inefficient government. Over and over you hear about political leaders saying that we must spend our way out of this recession, but that does not work. Below is an excellent article on this:

Is Obama Really Going to Propose Another Keynesian Stimulus?

Posted by Daniel J. Mitchell

Just last week, I made fun of Paul Krugman after he publicly said that a fake threat from invading aliens would be good for the economy since the earth would waste a bunch of money on pointless defense outlays.

Yesterday, there were rumors that Krugman stated that it would have been stimulative if the earthquake had been stronger and done more damage, but he exposed this as a prank(though it is understandable that many people — including me, I’m embarrassed to admit — initially assumed it was true since he did write that the 9-11 terrorist attacks boosted growth).

 But while Krugman is owed an apology by whoever pulled that stunt, the real problem is that President Obama and his advisers actually take Keynesian alchemy seriously.

And since President Obama is promising to unveil another “jobs plan” after his vacation, that almost certainly means more faux stimulus.

We don’t know what will be in this new package, but there are rumors of an infrastructure bank, which doubtlessly would be a subsidy for state and local governments. The only thing “shovel ready” about this proposal is that tax dollars will be shoveled to interest groups.

The other idea that seems to have traction is extending the current payroll tax holiday, which lowers the “employee share” of the payroll tax from 6.2 percent to 4.2 percent. The good news is that the tax holiday doesn’t increase the burden of government spending. The bad news is that temporary tax rate reductions probably have very little positive effect on economic output.

Lower tax rates are the right approach, to be sure (particularly compared to useless rebates, such as those pushed by the Bush White House in 2001 and 2008), but workers, investors, and entrepreneurs are unlikely to be strongly incentivized by something that might be seen as a one-year gimmick. Though I suppose if the holiday keeps getting extended, people may begin to think it is a semi-durable feature of the tax code, so maybe there will be some pro-growth impact.

In any event, we will see what the President unveils next month. I’ll be particularly interested in how his supposed short-run jobs proposal fits in with his long-run plan for dealing with red ink. He has been advocating for a “balanced approach” and “shared sacrifice” – but that’sObama-speak for higher taxes, and we know that’s a damper on job creation and new investment.

As you can tell, I’m not optimistic. The best thing for growth would be to get the government out of the way. The Obama White House, though, thinks bigger government is good for the economy.

This stimulus video was produced last year and was designed for another jobs plan concocted by the Administration, but the message is still very appropriate.

Daniel J. Mitchell • August 24, 2011 @ 10:44 am
Filed under: General; Government and Politics; Tax and Budget Policy

By Everette Hatcher III | Tagged , , , , | Comments (0)

2nd stimulus is a bad idea

August 24, 2011 – 9:16 pm

Over and over you hear about political leaders saying that we must spend our way out of this recession, but that does not work. Below is an excellent article on this:

Is Obama Really Going to Propose Another Keynesian Stimulus?

Posted by Daniel J. Mitchell

Just last week, I made fun of Paul Krugman after he publicly said that a fake threat from invading aliens would be good for the economy since the earth would waste a bunch of money on pointless defense outlays.

Yesterday, there were rumors that Krugman stated that it would have been stimulative if the earthquake had been stronger and done more damage, but he exposed this as a prank(though it is understandable that many people — including me, I’m embarrassed to admit — initially assumed it was true since he did write that the 9-11 terrorist attacks boosted growth).

 But while Krugman is owed an apology by whoever pulled that stunt, the real problem is that President Obama and his advisers actually take Keynesian alchemy seriously.

And since President Obama is promising to unveil another “jobs plan” after his vacation, that almost certainly means more faux stimulus.

We don’t know what will be in this new package, but there are rumors of an infrastructure bank, which doubtlessly would be a subsidy for state and local governments. The only thing “shovel ready” about this proposal is that tax dollars will be shoveled to interest groups.

The other idea that seems to have traction is extending the current payroll tax holiday, which lowers the “employee share” of the payroll tax from 6.2 percent to 4.2 percent. The good news is that the tax holiday doesn’t increase the burden of government spending. The bad news is that temporary tax rate reductions probably have very little positive effect on economic output.

Lower tax rates are the right approach, to be sure (particularly compared to useless rebates, such as those pushed by the Bush White House in 2001 and 2008), but workers, investors, and entrepreneurs are unlikely to be strongly incentivized by something that might be seen as a one-year gimmick. Though I suppose if the holiday keeps getting extended, people may begin to think it is a semi-durable feature of the tax code, so maybe there will be some pro-growth impact.

In any event, we will see what the President unveils next month. I’ll be particularly interested in how his supposed short-run jobs proposal fits in with his long-run plan for dealing with red ink. He has been advocating for a “balanced approach” and “shared sacrifice” – but that’sObama-speak for higher taxes, and we know that’s a damper on job creation and new investment.

As you can tell, I’m not optimistic. The best thing for growth would be to get the government out of the way. The Obama White House, though, thinks bigger government is good for the economy.

This stimulus video was produced last year and was designed for another jobs plan concocted by the Administration, but the message is still very appropriate.

Daniel J. Mitchell • August 24, 2011 @ 10:44 am
Filed under: General; Government and Politics; Tax and Budget Policy

By Everette Hatcher III | Also posted in spending out of control | Tagged , , , , | Comments (0)

Liberals like Krugman and Brantley want another stimulus

August 24, 2011 – 12:50 pm

Max Brantley posted on the Arkansas Times Blog the words of Paul Krugman, “As the stimulus has faded out, so have hopes of strong economic recovery…” (Arkansas Times Blog, June 3, 2011).

The video clip above by Dan Mitchell goes over some of the past attempted stimulus plans as does the article below. Every stimulus plan in the history of man has failed but we keep on TRYING TO MOVE MONEY FROM THE PRIVATE SECTOR TO THE PUBLIC SECTOR AND SOMEHOW WE THINK IT WILL NEXT TIME. IT ALWAYS FAILS.

Stay on Vacation

by Michael D. Tanner

Michael Tanner is a senior fellow at the Cato Institute and coauthor of Leviathan on the Right: How Big-Government Conservatism Brought Down the Republican Revolution.

Added to cato.org on August 24, 2011

This article appeared on National Review (Online) on August 24, 2011.

As the economy continues to teeter on the precipice of a double-dip recession, there is a growing demand for the president and Congress to rush back from their vacations and do something. But why?

What is it that we really think the president can do?

While the president’s latest economic plan remains a deeply held secret until after his vacation, pretty much everyone in Washington expects him to call for … drumroll please … a stimulus plan.

Now why haven’t we thought of that before? Oh, that’s right. We have.

We’re not the first country to rely on this stale brew of Keynesian economics.

In fact, we have now had at least five — or is it six? — stimulus plans since this recession started.

The first of these came back in February 2008 under the Bush administration: a $152 billion measure, featuring a $600 tax rebate, several incentives for businesses, and loan guarantees for the housing industry. Then, as the recession picked up steam in September 2008, Congress passed the $61 billion Job Creation and Unemployment Relief Act of 2008. This bill pumped money into federal “infrastructure projects” and extended unemployment insurance.

And of course, immediately after taking office, President Obama pushed through the giant $787 billion stimulus. He followed that up with an additional $26 billion bill in August of 2010, aimed at helping states retain teachers and make Medicaid payments. On top of that, in September 2010, Congress created a $30 billion fund to provide small businesses with low-interest loans. Finally, the December compromise that extended the Bush tax cuts included another extension of unemployment benefits and a reduction in the Social Security payroll tax, both heralded at the time as stimulus measures.

We’re not the first country to rely on this stale brew of Keynesian economics. When Japan’s asset bubble collapsed in the late 1980s, its economy went into freefall. In response, Japan pursued three major fiscal-stimulus packages, totaling 6 percent of GDP, between August 1992 and September 1993. When those failed, Japan tried still more stimulus, a total of eight different packages over eight years. The Japanese government has spent $6.3 trillion on construction-related projects alone. It also increased subsidies and social-welfare payments.

Japan began the 1990s with a budget surplus. A decade later it had a budget deficit equal to 7.9 percent of GDP. Today, its budget deficit is 8.3 percent, and its debt exceeds 200 percent of GDP. The result has been minimal economic growth. For all this spending, Japan’s industrial production in 2008 was only 2.9 percent larger than it had been in 1991. Over the past decade, Japan’s economy has grown by less than a quarter of one percent.

Now President Obama prepares to call for another extension of unemployment benefits, more infrastructure spending, and an extension of the payroll-tax cut.

The real drags on our economy have nothing to do with the failure of government to spend enough. The federal government is now spending roughly 24 percent of GDP. State and local governments are spending another 10 to 15 percent, meaning government at all levels is spending around 40 percent of GDP. If government spending brought about prosperity, we should be experiencing a golden age.

The reasons we are not growing are simple and clear:

Debt: Several studies show that high levels of government debt slow economic growth. The seminal study by Carmen Reinhardt of the University of Maryland and Kenneth Rogoff of Harvard concluded that countries with a debt totaling more than 90 percent of GDP have median growth rates 1 percent lower than countries with a lower debt, and average growth rates nearly 4 percent lower. Our national debt now tops 102 percent of GDP.

Taxes: Businesses are forward-looking. They hear the president and congressional Democrats calling for tax hikes, and they become worried about taking the risks inherent in investing, expanding, and hiring. Even if the president doesn’t sock them with any new taxes, they are facing some $569 billion in new taxes by the end of the decade as a result of Obamacare. And virtually everyone acknowledges that our corporate tax rates, the second highest in the developed world, are putting American businesses at a competitive disadvantage.

Regulation: Obamacare is coming, including a mandate for businesses to provide workers with health insurance. Making hiring more expensive is not an inducement to increased employment. The EPA is planning new carbon-emission regulations. The NLRB is telling Boeing where to locate its plants. This is not a pro-jobs agenda.

Here’s a different idea. More than two centuries ago, Adam Smith wrote that “little else is requisite to carry a state to the highest degree of opulence from the lowest barbarism but peace, easy taxes, and a tolerable administration of justice.”

President Obama could try that approach — and he wouldn’t even have to come back from vacation.

By Everette Hatcher III | Also posted in spending out of control | Tagged , , , , | Comments (0)

I wish the Republican Presidential Candidates will give us specifics concerning where they would cut spending

August 19, 2011 – 10:01 am

I am not too happy with the budget deal because I WANT TO SEE REAL CUTS. I knew when I heard President Obama say that there would be no cuts during this sensitive time that meant till after his Presidency was over. That means these are mythical cuts that are scheduled for 2013 and may never happen.

Ron Paul seems to be the only Republican Presidential Candidate that gives us specific examples of where he would cut spending. Why can’t the others give us any examples.

I would like to start by eliminating the Dept of Education and then reducing the weeks a person can draw unemployment. 99 weeks is a crazy amount!!! How did we ever get to that point?

Here is an excellent article below that got me to thinking.

Now Answer Some Questions

by Michael D. Tanner

This article appeared on National Review (Online) on August 17, 2011.

Wth the Ames Straw Poll behind us, the race for the Republican presidential nomination is starting to pick up speed. That means it is more important than ever that we know just where the candidates stand.

Unfortunately, we can expect much of the media attention over the coming weeks to be focused on the “horse race” aspects of the campaign. Will Perry or Bachmann become the conservative alternative to Romney? Is there a dark horse out there somewhere? Who will make the next gaffe?

The candidates are not likely to make things easier. If what we have seen so far is any indication, we can expect lots of Obama-bashing, promises to be the most conservative candidate in the race, and platitudes about American greatness.

So, with that in mind, here are a few questions I’d like to see them answer:

What three programs (at least) would you cut or eliminate? Every Republican candidate has called for balancing the federal budget. Every candidate is also, justifiably, opposed to raising taxes. Since the federal government will spend $1.1 trillion more this year than it takes in, that means spending will have to be cut. Of course, everyone is against “fraud, waste, and abuse.” But the last time I looked, there is no line item called “fraud, waste, and abuse” in the federal budget. Across-the-board spending cuts are another type of cop out. They preserve worthless or wasteful programs, albeit at lower levels, while cutting programs that are actually useful. Balancing the budget without raising taxes is going to require cutting specific programs, so tell us which ones you would cut. And promising to “go through the budget line by line” or the equivalent doesn’t count. Surely by now you have figured out some specific programs that you are willing to cut — even if it means offending that program’s supporters.

How would you reform entitlements? Answering the first question was actually the easy part. Domestic discretionary spending makes up less than 20 percent of the federal budget. If you eliminated it all — the Department of Education, the Department of Commerce, the FDA, the FBI — we would still be running a deficit. Ultimately, dealing with our deficit and debt requires dealing with entitlements, particularly Medicare and Social Security. But so far we’ve heard little more than vague generalities. Do you support Paul Ryan’s plan for Medicare reform? If not, what would you do? What about Social Security? Would you cut benefits? Should young workers be allowed to save a portion of their payroll taxes in personal accounts?

Are you a fair-weather federalist? Republicans have become fond of quoting the Tenth Amendment recently: “The powers not delegated to the United States by the Constitution, nor prohibited by it to the States, are reserved to the States respectively, or to the people.” But we’ve heard that before. President Bush was all for states rights until a state did something he didn’t like, such as legalize medical marijuana or physician-assisted suicide. What happens now if a state, say, chooses to permit gay marriage? Already former Pennsylvania senator Rick Santorum has attacked Minnesota congresswoman Michele Bachmann and Texas governor Rick Perry for even hinting that states have that authority. And Bachmann and Perry have started to go wobbly on the issue.

Are there any limits to our military commitments? We are now fighting at least three wars, not counting drone attacks and covert actions. We have troops in more than 100 countries and are still guarding South Korea from North Korea and Germany from, well, something. Are all these military commitments still necessary? Under what circumstances would you commit U.S. troops to combat? It’s not enough to say you would protect U.S. vital interests. What are those vital interests? Promoting democracy? Human rights? Fighting every last terrorist in any country that they pop up in? Ensuring “stability” in every area of the globe?

What is the proper role of government? It’s not possible to think of every possible issue that may come up during your presidency. That’s why it’s so important to know your animating principles when it comes to government. Is it government’s role to “create jobs”? Should government enforce moral values?  What things can only government do, and what should be left to civil society? Is there anything that you think is a good idea, but still shouldn’t be government policy?

By Everette Hatcher III | Also posted in spending out of control | Tagged , , , , | Comments (0)

In England the welfare state has eroded respect for property rights

August 17, 2011 – 3:39 pm

If the riots in Britain have taught us anything, it is that when government fails in its most basic function — protecting persons and property — civil society ends, and warfare begins. The rise of the welfare state has eroded respect for private property rights and fostered a socialist mentality that dulls individual responsibility.

The welfare state in the USA is almost as big as it is in Europe. Therefore, we may be in for some riots here soon. Take a look at the Founding Fathers had to say about the purpose of government and then compare to what it is doing today.

The Welfare State’s Road to Riots

by James A. Dorn

This article appeared on Orange County Register on August 17, 2011.

The U.S. is quickly catching up with European welfare states. Entitlement spending has skyrocketed since the Great Society programs of the mid-1960s, especially Medicare and Medicaid. Those two programs along with Social Security now account for more than 40 percent of federal spending, which itself has risen to 25 percent of GDP, or nearly $4 trillion. If all entitlement spending is included, payments to individuals account for 66 percent of federal spending.

The transformation from limited government (true liberalism) to the welfare state has no constitutional basis. The three branches of government have failed in their solemn duty to uphold the Framers’ Constitution, or what F. A. Hayek called “the constitution of liberty.”

The lesson from the British riots is that when government overextends itself, it will fail to do what it is supposed to do: protect persons and property.

It is not free enterprise and limited government that led to the riots in Britain; it is rather their demise. The U.S. should wake up and recognize the danger the welfare state poses to property — broadly understood as rights to life, liberty, and the pursuit of happiness.

The most fundamental question facing any society is the role and scope of government. The Framers of the Constitution accepted the idea that the primary role of government is to safeguard private property. In 1792, James Madison, the chief architect of the Constitution, wrote, “Government is instituted to protect property of every sort. … This being the end of government, that alone is a just government, which impartially secures to every man, whatever is his own.”

The Preamble to the Constitution states that the purpose of the charter is to “establish justice, insure domestic Tranquility, provide for the common defence, promote the general Welfare, and secure the Blessings of Liberty.” To “establish justice” means to prevent the violation of an individual’s natural rights or property rights; it does not give the federal government an unlimited power to take private property and interfere with freedom of contract.

Madison and the other framers would not have enumerated — and therefore limited — the powers of the federal government in Article 1, section 8, if they thought a redistributive state was just. Nor would they have added a Bill of Rights.

James A. Dorn is vice president for academic affairs with the Washington, D.C.-based Cato Institute and editor of theCato Journal.

More by James A. Dorn

Amendments to the Constitution — notably the Thirteenth, Fourteenth, and Fifteenth — further strengthened property rights. But the Progressive Movement (1890s–1920s) began to erode the Framers’ Constitution. Today, the broad interpretation of the General Welfare Clause, the Commerce Clause, and other clauses have expanded the powers of the federal government far beyond that envisioned by the Framers. In doing so, the meaning of justice has been turned on its head: from its legitimate meaning of safeguarding property to its modern meaning of using taxes, regulation, and laws to redistribute income and wealth to achieve “social justice.”

The problem is that when government is seen as an instrument for “doing good” rather than a force for preventing harm, there is no end to government mischief. By its very nature government operates by coercion, not consent; and as Milton Friedman liked to remind us, when government spends other people’s money, it will naturally want to do more and more.

The lesson from the British riots is that when government overextends itself, it will fail to do what it is supposed to do: protect persons and property. If an anti-market and socialist mentality replace an ethos of liberty and responsibility, then the harmony that results from limited government and free markets will disappear — and hooligans will gain the upper hand.

The massive U.S. debt is a reflection of the rapid growth of entitlements and a do-good vision of government. Next year’s elections will be a referendum on the size and scope of government. If Americans return to the Madisonian principle of justice that underlies the Constitution — and is the foundation of morality — the future of peace and prosperity will be bright. If they adhere to the illiberal principle of “doing good with other people’s money,” the welfare state will grow and eventually put out the light of liberty.

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