When It Makes Sense to Print Money

This post may seem incompatible with previous items but there are times when the data is just so startling that it changes the math.  Recently I learned that M4, a broad measure of the country's money supply which is no longer published by the Federal Reserve but is still tabulated by private sources, may have fallen by as much as 4% during the latest 12 months.  Such a number implies that not only is the American economy not on the verge of recovery but it is actually most certain to double-dip into recession next year.

That being the case, I will suggest the following:  one of the few times that printing money makes sense is when the overall money supply is actually declining.  In such an instance, the inflationary effect of printing would simply offset the deflationary effects of the decline.

Years ago, believe it or not, I used to correspond with Milton Friedman.  What I enjoyed most about Dr. Friedman was his openness to discussion with a non-academic like myself.  One of the major topics we discussed was which measure of the money supply was appropriate to follow insofar as monetary policy is concerned.  He felt that M2, which is the broadest measure the government now discloses and is directly influenced by government policy, was appropriate.  I felt that M3 or M4, which the government disclosed until 2005 and includes monetary measures that are less influenced by the government--primarily credit related--should be used.  He liked to use M2 as a shorthand way to look at monetary policy because the relationship between M2 and broader measures like M4 had always been fairly stable.  

While that may have been true, the relationship has clearly been broken.  Recent M2 growth figures show a nearly 10% year-over-year increase and M4. as stated earlier, may have fallen by 4% in the same period.  To have such a dislocation implies that the components that make up the difference between the two measures--primarily credit--must have fallen precipitously.  Since housing demand--the major source of credit expansion--has collapsed, this makes perfect sense.

The Fed has tried to increase the money supply through "quantitative easing" but the so-called "multiplier" that would be expected to result in expanded credit has failed to function.  The Fed has literally been pushing on a string because credit is contracting faster than money has been printed!  This is the recipe for deflation, i.e., prices actually falling, which we may not have seen at the gas pump, but we sure as well have seen in the prices of our homes.

Which gets us back to the point of this post.  Home prices are in a death spiral that needs to be reversed if people are to regain confidence in their future.  And the way to do that now is to increase M2 by an amount large enough to offset the decline in M4.  How does the Fed actually do this?  Deficit funded stimulus--taking money from one person and giving it to another--won't work because it yields no net increase.  That leaves more--significantly more--of the dreaded quantitative easing, which in the current situation would act to stabilize M4 rather than expand it.  And until the money supply--the broad M4 money supply--stabilizes, the economy can't restart.  Expanding M2 is easily accomplished--the Fed buys and buys and buys U.S. government treasury bills until M4 stops declining and begins to expand.  [This would yield a secondary benefit of reducing  the country's total debt, helping to reduce the annual deficit as well.]

The problem with addressing the M4 decline in this manner, however, is that the Fed has never shown an ability to do so without going too far in the other direction, i.e., increasing past the point of stability into the realm of inflation.  It's likely that long bond yields will begin to rise once M4 has stabilized and that credit will expand as well.  At that point, to counteract increasing inflationary forces, the Fed would have to act quickly in the other direction.  That is when its independence would truly be tested.

Alan Greenspan kept the punch bowl on the table far too long and helped contribute to our current economic and fiscal malaise.  Ben Bernanke needs to put an even bigger bowl on the table--and then pull it away just as the party gets started.  Whether he can do that will be the real test.      



 

Government Support Leads to Dangerous Economic Distortions

By now one consistent theme should have become clear to readers of this blog:  if you want to increase something like employment, you make it less costly.  The country is struggling because the President doesn't understand that simple concept.

But this post is not once again about the negative effects of increasing the cost of doing business above those imposed by the market--it is about the perils of reducing them.  For while many industries, like manufacturing and energy, have been hamstrung by government imposed (or sanctioned) costs others, like banking, healthcare and education, have grown much too large because the government has removed costs that would otherwise have been imposed on them in a true market-based economy.  

Let's look at banking.  From 1933 to 1991 commercial banks were restricted from investment banking activities by the Glass-Steagall Act.  The rationale for this was that since banks were insured by the FDIC it was appropriate that the federal government restrict their activities.  In 1999, the Republican-controlled Congress and President Bill Clinton repealed Glass-Steagall, having been convinced by the banking industry's arguments (and campaign contributions) that it would otherwise be unable to compete against investment banks and foreign banks.  The banks were supposed to keep their new activities separate from their older, stodgier commercial banking businesses so that depositors' funds remained safe.  What happened instead nearly blew up the world.

What happened was the banks took more risk than they could or would have otherwise in their new businesses because the depositors' funds in their traditional businesses were insured by the federal government!  Insurance essentially eliminated the banks' risk so they took much more of it!  Heads I win, tails you lose.  Who wouldn't play that game?  So bankers, with little to lose and much to gain, rolled the dice.  And when they finally--and quite predictably--lost, Uncle Sam had no choice but to bail them out; they had bet so much that not only would they have killed themselves, but quite possible the world's financial system, as well.  

Glass-Steagall kept the banks under control by prohibiting them from jeopardizing insured deposits on high-risk activities.  It was only after its repeal that the banking industry's share of our economy became so large.  Permitting commercial banks to undertake investment banking activities essentially extended deposit insurance to those activities as well.  Investment banks, at that point themselves not able to compete with the commercial banks--since they weren't insured!--took on far too much risk.  Lehman, Bear Stearns and Merrill Lynch blew up.  Goldman Sachs and Morgan Stanley are still stumbling along.  But the big banks, JPMorgan, Citibank and Bank of America are too big to fail?  They're the ones that caused the crisis in the first place!

Insurance helps decision makers limit risk when they undertake an activity.  However, insurance does not function unless there are restrictions on the activities of the insured.  By repealing Glass-Steagall, a Republican Congress and a Democratic President did just the opposite--and in so doing encouraged an increase in risky activity that would never have occurred otherwise.  Health insurance that doesn't restrict health choices has the same effect and so do below market student loans.  Each of these increases the demand for the underlying service by reducing the cost to the individual of using them.  Of course, the costs don't disappear--they're just transferred to society.  

Trying to pick winners, the government never fails to do the opposite.  In doing so it has distorted our economy to the point where certain industries--like banking--have become so large that they are either too big to fail or--in the case of education and healthcare--too expensive too succeed.  Without government actions favoring them, this would never have been the case.  

Insuring Predictable Events Predictably Increases Cost of Healthcare

There's a very simple reason why America's healthcare costs continue to soar:  TOO MUCH INSURANCE.

Insurance is meant to protect us from the cost of UNEXPECTED occurrences like getting cancer, breaking an arm or getting hit by a car.  Society insures things that don't happen to everyone--unexpected occurrences--so that their cost is reduced for the person who is actually affected.  But is death from old age unexpected?  Of course not, yet an extraordinarily large portion of the nation's healthcare expense occurs in the very short time period immediately before that point.  Why?  Because insurance enables us to use other people's money to pay for it!  The trouble is, those other people are doing the same thing!  My question to you is, how much would you spend of your own money for an extra week of Grandma's time?  Or better yet, how much would Grandma want you to spend?  I'm guessing that you would spend more than Grandma but that you wouldn't spend your family's last cent.  Insurance throws that question out the window:  you spend all of my money and I spend all of yours, and together we go bankrupt while insurance company executives buy vacation homes.

Similarly, imagine how much an oil change for your car would cost if it were covered by insurance.   Seven layers of bureaucrats (exaggeration) would have to be hired to manage the paperwork!  The same analysis applies when we pay for our annual physical or dental cleaning--which are entirely predictable--with insurance.  Why would we do something so stupid?  Because most of us get our insurance from our employers, who are able to deduct the cost from their tax bill while we as individuals cannot.  What this does is encourage us to get as all-encompassing a policy from our employer--like one that covers annual checkups--as possible.  Of course that distorts the cost of a doctor's visit since half the people they employ are in collections!

Both death from old age and annual checkups are entirely PREDICTABLE events and insuring them PREDICTABLY results in higher medical costs and insurance company profits.  The answer to rising medical costs is not to insure MORE events--it's to insure LESS!  Doing so also might encourage a little more personal responsibility--like better eating, more exercise and weight loss.  Of course, why do those things when--as things are currently--someone else picks up the tab?

Income Disparity Simplified

To President Obama and OWS:

Income disparity in a nutshell:

1.  When the cost of running/starting a business increases, fewer businesses remain/are started.
2.  With fewer businesses, there is less overall demand for employees.
3   With less demand for employees, employees income declines.
4.  With fewer businesses, existing businesses face less competition.
5.  Less competition means that remaining businesses can raise their prices.
6.  Higher prices and lower wages mean more profits for the owners of remaining businesses.
7.  Lower wages to employees and higher profits for owners means increased income disparity.

Now let's reverse the process:

1.  When the cost of running/starting a business decreases, more businesses remain/are started.
2.  With more businesses, there is more overall demand for employees.
3   With more demand for employees, employees income rises.
4.  With more businesses, remaining businesses face more competition.
5.  More competition means that remaining businesses must lower their prices.
6.  Lower prices and higher wages mean less profits for the owners of remaining businesses.
7.  Higher wages to employees and lower profits for owners means reduced income disparity.


So, the net-net is that anything that increases the cost of running/starting a business (say Obamacare, 10 years of wars,...etc.) increases income disparity and increases prices and anything that reduces the cost of running/starting a business will reduce income disparity and reduce prices.  With that in mind, it should be noted that practically everything the Occupy Wall Street crowd and our President would like to impose on the rest of us would increase the cost of running/starting a business so much that income disparity in the United States would eventually be expected to resemble that of the Soviet Union and Communist China, where party bosses lived like Kings and the rest like serfs.  [Granted, with the huge income disparity already seen in America, that may not seem like much of a change but at least no one is standing in line for toilet paper yet.]

The Journey Back to Prosperity

In the current environment, the likelihood that the United States turns its ship around and re-embraces the Reagan message of smaller government and greater individual freedom and responsibility is nil; long-term unemployment will change the mind of even the most ardent Tea Party-er as to the benefits of Big Government.  That being the case, I've been asking myself what actions the President could actually take to put us back on the right path, that is to increase employment and economic growth, and have the support of both Democrats and Republicans--or at least enough of them to get the actions passed.  The following would be my initial suggestions:

1.  Bring ALL American combat troops home.  Too many Americans have died in an unwinnable war against an idea.  Victory in the first Gulf War was easily defined--purge Saddam Hussein from Kuwait.  The same is not true in Afghanistan.  Bush and Obama have flushed a fortune down the drain on 10 years of war and its time for it to stop.  After 9/11 the country was in shock; taking offensive action was the easiest course--but it was the wrong choice.  If we wanted to protect our nation from future attack, spending a fraction of that money on actual defense (i.e., at the borders, ports, in our cities,...etc.) would have been far more productive and would have given us lasting security.  As it is, for all of our offensive forays we are still vulnerable.  Have the wars made us safer?  Maybe, but not as safe as we should be.

2.  The Army Corps of Engineers ("ACE") should be engaged to develop ALL major energy resources on public lands.  Franklin Delano Roosevelt put Americans back to work on a myriad of public infrastructure projects that were needed.  More important to the country right now, though, than whether new highways are built is energy security and wasting money on uneconomic sources like solar and wind is ill-advised.  The ACE could work with American energy companies to engage many of the unemployed to work on this project.  The lower energy prices which such a program would produce would benefit everyone in the world and lead to significant job creation as we stop sending our money to the Middle East (which has then, historically, funneled a portion of it to terrorist organizations) and spend it at home.

3.  Throw out Obamacare.  Providing healthcare to all Americans is expensive and will only get more expensive under this legislation.  What we should be concerned about is the cost of care, not insurance.  If every American is to have access to care, let's make it happen without enriching the insurance companies who have continually shown a willingness to cheat consumers.  Insurance is supposed to be about covering unforeseen occurrences.  Annual checkups and the like are entirely predictable and should be outside of insurance coverage.  [Insurance companies actually love to cover certain events since they know exactly how much they will cost and then only have to add a profit when they calculate the premium.  Insurance is about risk-taking and there is no risk when covering certain occurrences.]  Take insurance companies out of the equation and develop a pervasive system of free clinics to handle routine check-ups and procedures.  Exempt doctors who are employed in these clinics from malpractice unless there is gross negligence and pay for the education of all medical students subject to working a term (say a minimum of 4 years) in the clinics.  [The same type of system can be developed for emergency and major medical though on a smaller scale because fewer occurrences can be expected; doctors would get the same deal--eliminate malpractice (except for gross negligence) and eliminate the insurance middle-man.]  Unlike Obamacare, which gives doctors no reason to come to work (and will drive many from the profession due to the significant restrictions on their pay), this plan would eliminate much of their stress and relieve them of financial burdens, encouraging more of them to continue practicing and many more to become doctors in the first place.  [The ridiculous thing is that at the time Obamacare was passed everyone already had access to emergency healthcare, it's just that people with insurance were subsidizing those without.  Obamacare basically requires everyone to get insurance that covers everything (including certain events) and if they can't afford to do so the government will subsidize it--by taking money, essentially, from the people with insurance, yielding no real change except that government has more control.  Ironically, the only thing that kept the cost of insurance under a semblance of control was that people without insurance couldn't get non-emergency care for free.  By releasing millions of additional people upon general practitioners who don't exist, Obamacare was a recipe for the huge price increases already being put through in anticipation by insurance companies.]

There are many more actions that could and should be taken to put the country back on the path to prosperity, but these are three with which I would start.  Stopping the wars and bringing our soldiers home would boost the country's morale and significantly reduce our spending.  The money freed up by doing so could then be spent developing our resources, a project that would have a lasting benefit and employ many of the unemployed.  Lower energy prices would ripple through the economy, leading to the employment of even more.  Replacing Obamacare with an improved public health system would accomplish the goal of healthcare and would reduce costs by encouraging more men and women to take the Hippocratic Oath.  None of these actions would require tax increases or spending cuts.

I may be fooling myself in thinking that both Democrats and Republicans could agree to any of these suggestions.  But at some point something has to give.  A journey of a thousand miles begins with a single step.  Its time to start walking.

Spending is THE Problem

Possibly the greatest miscalculation ever made by Republicans was the idea championed by Ronald Reagan and Milton Friedman that by reducing taxes, rational forces would take hold and cause government spending to decline.  Those two men realized that the increasing size of the government trampled on individual rights, limited economic growth and would, unless checked, eventually lead to collectivism, which has resulted in declining standards of living whenever it has been tried.

What Reagan and Friedman failed to realize, though, is that there is more than one way to feed the Beast.  The debt markets' insatiable appetite rendered their method moot--so long as the government could sell bonds to cover any revenue shortfall, cutting taxes would have no impact at all on government spending.

While Reagan was able to slow Leviathan's growth, he could not stop it completely, let alone reverse it.  After Reagan, the Republican understanding that the size of government is the problem and that the success of tax cuts was dependent on follow-on spending cuts, somehow was transmuted into a belief that lower taxes on their own would spur economic growth.  George W. Bush clearly didn't understand that cutting taxes without cutting spending was a recipe for disaster since it would yield no net increase in the capital available to grow the economy--government just sucked the proceeds of the tax cut right back up on the debt markets.  Furthermore, by significantly increasing the government's spending--primarily on the Iraq and Afgan wars--he only made things worse.

The problem, as Reagan and Friedman discovered, is that its really hard to take something away once it has been given.  It's easy to cut taxes when you control both houses of Congress.  But cutting spending is almost impossible.  [Even now under President Obama all of the talk of spending cuts is a fraud.  The only thing proposed to be cut is the rate that spending grows.]

So Reagan and Friedman put the cart before the horse in thinking that responsible parties would prevail.  They realized that government spending was the problem but tried to indirectly finesse the issue by taking away its fuel through tax cuts rather than face it head on.  Their vision failed because they had no concept that the United States could continue to operate in such a fiscally irresponsible manner even if its revenue was constrained.

Cutting taxes only makes sense when it is combined with spending cuts; cutting taxes without cutting spending is a recipe for disaster.  Unfortunately for the Left, using the same understanding of money and capital flows, it is also clear that their prescription, increasing taxes without cutting spending, would be just as bad, as any purported impact on the budget deficit would be negated by the impact on the economy.  There is no getting around the fact that the size of the government is the problem.  Whether it is funded by taxes or debt is largely irrelevant.

"Educated" Wall Street Protesters

Nationwide Americans have swallowed the notion that a college education is necessary for success in life, a notion fed to it by the education establishment and promoted by the government, which numbers as one of its largest supporters the education establishment!

How do the supposedly educated people protesting on Wall Street not see or question this conflict? Did none of them wonder what they were going to do after graduation with a degree in Sociology or English and $150k in debt? Was there any thought involved when they decided what and where to study?

Why would any bank lend money to them for such ill-conceived investments? Here's a clue: for the same reason that so many unqualified persons were able to purchase homes they could not afford--the government guaranteed the loans. So, just like with the housing crisis, banks threw judgment out the window when they lent them money, since the banks had no risk. When banks lend money to a business they consider whether it is strong enough to pay them back. Did the banks that lent the protesters money even ask what they were majoring in?

The key to capitalism is that capital acts rationally in its determination of where it is allocated. When the government gets involved you end up with dislocations--in the form of soaring tuitions and housing prices. The system being protested is certainly not capitalism, and calling it that only shows shows how completely the protesters been taken by the double-speak of the Left.

So to all these kids protesting that they can't afford the loans they took out for their liberal arts degrees (my guess is that there aren't too many engineering students in that crowd), I say you have been fooled into thinking that no price is too high for an education, though its clear that many of you now understand that not  to be the case.  

On Innovation and Income Disparity

(another excerpt from the past)

The costs of implementing, enforcing, and complying with every government action are significant.  Any tax on businesses or individuals, any social program, any regulation that mandates safety or health benefits, any environmental legisla­tion, any action at all has the same effect.  The costs of these actions are borne by businesses, as well as by everyone who relies on being employed by business or on the products created by business--i.e., by all members of society.  Any business which cannot support the higher level of costs will fail. Any prospective business which is unable to earn the higher rate of return that is re­quired because of the increased cost level will never even be created.                       

            

As the number of business failures rises, a nation's total output must fall.  This reduction will result in higher prices for those goods still available.  The cost of government actions to offset these price increases (e.g., cost of living increases for retirees and government employees, unemployment compensation) will speed the decline.  

            

By reducing the number of viable enterprises, the cost of every government action reduces the amount of competition faced by a nation's remaining businesses.  Competition, however, supplies the pressure which prompts the innovations that any society requires to manage its scarce resources.  Without this pressure, enterprises are allowed to continue using inefficient processes.  By increasing the costs which businesses must bear in order to survive, governments effectively reduce the number of new technologies which can be afforded, technologies that would have improved the living standard of its citizens.  When the evolutionary pressure of competition is completely checked, innovation will stop and society will deplete its usable  resources. 

            

The problems which plague a nation will worsen as the competition faced by its industries decreases and the investment they make in innovative technologies declines.  Government's predictable reaction--to further its "resolve" by implementing additional mandates--will only make matters worse.  This is the vicious cycle which is already being experienced in the socialized nations of the world.

            

As the socialized economy spirals downward, the nation's wealth will become concentrated in a small group of citizens--the owners of those businesses which are still able to cover the high costs that government imposes upon them.  As the cost level rises, fewer and fewer of these businesses will survive, concentrating the wealth even further. 

            

Fewer businesses mean fewer jobs, thereby increasing the competition for those jobs that remain--and forcing the nation's wage level ever lower.  The citizens of a socialized nation, whose purchasing power declines due to rising prices, will find that their earnings follow the same downward path. 

            

This cycle will result in an accentuated disparity between the ever-decreasing number of the extremely rich and the ever-increasing number of the extremely poor.  The so-called "dichotomy" between rich and poor is an inevi­table result of the costs which government imposes on the crea­tion of opportunity, and will only worsen as government's scope of influence grows.  [In a nation which does not limit the opportunities of its citizens a normal distribution of earnings can eventually be expected;  every time the rate of return required by businessmen is reduced their incomes will decline as well.  At the same time, by increasing the demand for laborers, reductions in the required rate of return act to increase the wages businessmen must pay.  Any limitations whatsoever will increase the required rate of return and skew the distribution, reducing the number of affluent citizens and increasing the number of impoverished ones.]

Should the Federal Government be in the Business of Should?

This country began as a democracy with significant limits and has evolved into a democracy with virtually none.  How did this happen?  If healthcare, education and housing are all rights, how could the Founders have overlooked them?  Didn't Thomas Jefferson and James Madison have these rights?  Maybe they weren't rights when the Constitution was written but became rights later on?  When exactly was that and what makes them different from cell-phones or cable television?  Or are having cell-phones and cable television now rights too?  

If healthcare is a right, why does anyone have to pay for it?  Why isn't it free?  Freedom of speech and freedom of association are rights under the Constitution.  They are free.  No one has to pay to speak or to hang out.  So what makes healthcare different?  Oh yeah, healthcare doesn't just exist, you need someone else, a doctor or nurse who has spent years of his or her life training and studying, to provide it.  Likewise with education and housing.  How can anything that requires someone else to act be considered a right?  Do doctors and nurses have rights?  What if they decide not to act?  Where do you get your healthcare from then?

Which leads to the point of this post:  the United States and other "enlightened" countries around the world have confused rights with shoulds--everyone should have healthcare insurance, everyone should have a home, everyone should be educated, everyone should have cable television, everyone should have a cell-phone (and, believe it or not, the government does provide cable television and cell-phones for those in "need").

Now, if a large group of society gets healthcare, housing, education, cable television and cell-phones for free what do you think that does to the prices of those items for everyone else?  Or to overall employment?  Here's a hint--prices for all of these items are distorted higher than they should be causing other people to spend more on them than they would have otherwise leaving them with less money to spend on other things, which reduces employment outside of the chosen shoulds.  Of course spending on the shoulds has resulted in many more people being employed in those areas than there should be leading to big problems (witness Fannie Mae which, at the behest of Barney Frank et al, created a massive housing bubble by financing millions of unfit borrowers because everyone should own a home).  

While I most certainly agree that everyone should have housing, education and healthcare, the problem is that relying on the federal government to provide these things has invariably resulted in dislocations that are worse than the initial problem.  Medical care was expensive before Obamacare.  Does anyone really believe that creating an additional bureaucracy and mandating that small businesses, many of which already barely make enough to justify their own existence, pay an additional healthcare tariff will reduce the overall cost?  Won't businesses at the margin just close, leaving their employees without jobs?  Isn't employment more important to a family than lack of health insurance?  In the first instance, at least you can eat and pay your rent.  Likewise, why is owning a home, which we all now understand is not the investment we were led to believe, so important?  Isn't the issue housing, not home ownership? [If Congress had understood this distinction we might not be in our current economic situation.]  


Before the federal government was involved in housing, did the poor all live on the street?  Before it was involved in healthcare, did they get no care?  Were they ignorant before it became involved in education?  The answer is no to all of these questions.  Communities, local and state governments handled each situation.  What has the federal government added besides bureaucracy and inefficiency?  New Orleans was devastated by Hurricane Katrina as it waited for federal action.  Where was Louisiana's emergency response? Atlanta schools have cooked their books in order to qualify for federal education aid.  Medicare fraud has driven the cost of healthcare skyward.  How have these helped the poor?  Whatever happened to local accountability?  


Churches have long been known to provide healthcare, education and housing for a fraction of the cost of their government provided alternatives. How can that be?  The simple answer is that they don't have thirty layers of bureaucracy sucking up most of the money before spending what's left on the actual service.  The more subtle answer is that churches actually care, care about the actual people receiving their aid, as opposed to the faceless bureaucrat in Washington who knows them as little more than numbers.

So while I firmly believe that all of the shoulds really are shoulds, I also believe, for one simple reason, that the federal government should not be the one to address them--and that reason is that the federal government is just no good at it.  Finally, as I've written previously, when you venture into the land of should--a word that flashes BELIEF in my head--it's my opinion that you've crossed into the realm of religion, the one place where the federal government is specifically prohibited from entering.  (See previous post, Church of the United States.)

Thoughts on Gasoline

Last weekend it cost me $80 to fill up the tank of my car, much more than it used to.  As the parent of a travel hockey player, the increase has been very significant to my family's overall expenses.  Just for the fun of it I searched the web for a chart of historical gasoline prices and found the following:  http://www.randomuseless.info/gasprice/gasprice.html  

As you can see, the price rise has been extraordinary, from an average of approximately $1.20 per gallon for premium from 1980-2000 to the present price of approximately $3.80, it has more than tripled.  And since gasoline is a relatively inelastic part of many of our lives (like I said, travel hockey), the crowding out effect on other purchases, at least in my case, has been very meaningful.

Now what's particularly pernicious about this situation is that it's not like it takes any more people to sell gasoline that costs three times as much--and we're not letting oil companies search or drill to any great extent in the lower United States (and most definitely not in Alaska).  So even though they reinvest most of what they earn in exploration and development, most of that reinvestment--and the employment that goes with it--is occurring in places like Russia, Brazil, Canada and the Middle East.

So, in a nutshell, we're paying more for gasoline and shipping the jobs that go with producing it to other places.  Now that would be understandable if we were like Japan, which has no local energy sources.  The United States, though, has purposefully decided NOT to fully use much of its ABUNDANT energy resources and in so doing has done not only itself, but the entire rest of the oil consuming world, a huge disservice--because we are not the only ones paying the new high prices.  By reducing the total supply of oil, we raise the price of energy worldwide!  [Imagine what would happen tomorrow to oil prices if Russia, which is actually the world's largest single nation producer of oil suddenly decided to stop all exploration and production because it wanted to save the planet. I imagine that the world might not be happy--so much so that China might, with our blessing, decide to make an extended visit.]

If we can agree that a major oil producer shuttering its production wouldn't be a good thing at the current time (maybe solar power is viable in 25 years--it ain't now), can we also agree that another major oil producer--say the United States--purposefully producing far less than its own needs when it has the ability to meet them is also not a good thing?  It's certainly not very neighborly.

It's also not very smart.  How many jobs would be created if we permitted our own companies to drill on our own public land?  What would happen to the price of gasoline?  Or the businesses where you and I spend the money we don't spend on gasoline?  Or the businesses which themselves spend less on gasoline?  How much money would the government receive from royalties?  Wouldn't becoming less reliant on Russian thugs and Middle East dictators be a good thing?  

Environmental concerns are obviously legitimate.  But having concerns doesn't mean we give up on producing the most economically viable energy source now available.  It just means we look for ways to solve them.  And besides, aren't we being selfish by using oil produced in other nations while holding back our own production, driving the price up for everyone else in the world?  We need them to produce as much as they can yet we won't reciprocate?  Don't other countries have environments too?  With its current energy policy the United States is behaving like a little kid hoarding his own piece of cake and eating everyone else's.  And no one likes that kid.

On the Verge of Anarchy

(this is excerpted from a short book I wrote nearly 20 years ago, never imagining that it would come true so soon, as is most certainly the case right now in Greece at least)

There is only one system which can maintain world peace and eco­nomic prosperity.  That is the system which requires each man to bear the responsibility for his own life and property:  Capitalism.  Climbing onto Capitalism's invisible stairway, though, is an intimidating prospect.  To do so requires citizens to exchange lives that may seem comfortable for the unknown voyage of responsibility.

The choice is made easier, however, when one realizes that the benefits provided by socialized nations do not have long lives.  Unless the governments of socialized nations loosen the grip of regulation and taxation, they will be left distributing an ever diminishing economic pie.  Only free market Capitalism expands a nation's wealth.  By rewarding men for their efforts, this system motivates the creativity which leads to the rising standard of living that has historically characterized Capitalist nations.

The Social Democracies of the world may, however, have already reached the point where their decline is irreversible.  When the number of citizens that receive benefits at government's behest is larger than the group that produces those benefits it will be too late.  The recipients will perceive that they must maintain this system simply in order to preserve their own welfare--and their numerical strength will ensure them the power to do so.  This segment of the population, which gains from government action, will never act on its own to reduce the benefits that it receives.  That said, unless the citizens who produce the benefits provided by Social Democracies soon unite to force their nations back towards Capitalism, the citizens that consume those benefits will, most certainly, drag society down into anarchy.  

Who's Afraid of the Big Bad Spending Cuts?

Front and center to the debate regarding whether or not government spending should be cut is the notion that doing so at this time would be dangerous for the economy.  Once again, failure to look at both sides of the equation leads to an erroneous conclusion.

If cutting government spending meant that overall spending was reduced that might be a problem, but money doesn't just disappear.  If the government doesn't take as much money--either by taxes or borrowing--more money/purchasing power stays in people's pockets!  People who will spend it (and maybe even save a little)!

The difference is that people making their own choices where to spend their money do a much better job of it than the government.  Think of the legendary $500 hammers bought by the Defense Department.  Or the Big Dig in Boston that was supposed to cost $2.6 billion and ended up costing almost $15 billion!

Of course, right now pundits like Paul Krugman are saying that the problem is people aren't spending enough so the government has to pick up the slack.  Can you see why that argument makes no sense?  First, any money the government spends has to be taken from consumers--either via taxes or inflation (anyone notice prices rising the last couple of years?)--eliminating an equal amount of purchasing power.  Second, government employees actually do the spending, and history has shown that they're really not that good at their jobs.  Once again, just think of the hammers.

If, on the other hand, we assume that individuals are only 5% more efficient at spending their money than the government, then even if individuals save 5% of any money the government doesn't spend--and spend the rest--the effect on the economy would be the same.  [I used 5% because that is estimated to be the current savings rate in the United States.]  If they are more than 5% more efficient (i.e., they can buy hammers for less than $475) then the economy is net-net better off, disregarding the increase in savings!!  Since I'm pretty sure that individuals are better at buying hammers--or just about anything else--than the government, what's so scary?

Further, since individuals making rational purchase decisions can buy a lot more goods and services--goods and services that are produced and provided by people employed to do so--for the same amount of money as a government that spends too much on everything it buys, you can see why taking spending out off government's hands would actually increase employment!  And why increased government spending has had the opposite effect!

So, instead of Americans spending (or saving) their money as they would like, the government takes it and spends it on the wages of government employees and overpriced goods and services.  Is it any surprise this strategy hasn't worked for President Obama the first five times he's tried it?  Or that government workers and unions say that spending cuts would be harmful?  To them maybe, but not to anyone else.

Vote for Me!

Well, it turns out the President couldn't leave bad enough alone.  Instead of simply being satisfied with raiding Social Security to fund his so-called "Jobs" plan, he decides to double-down and raise taxes as well on everyone making more than $200k per year--you know, the Millionaires and Billionaires!  [I guess he thinks that anyone making less than that is too stupid to realize that $200k doesn't make you a Millionaire--"Ooooh, you make $200k, you must be a Millionaire!"]

So now the net effect, if you can believe it, is a tax increase!  You can't make this stuff up!  Here's how it works:  (1) reduce payroll taxes and thereby reduce amount going to Social Security so Social Security liability increases--net effect zero, then (2) reduce deductions for anyone who is a Millionaire--you know, the guys making more than $200k--which, to anyone with a brain, is the same as raising taxes and would predictably result in job losses.

If the tax increase was going back to Social Security, then the whole charade would just be a thinly veiled "tax the Republicans, bribe my base" strategy.  But nothing has been said about returning anything to SS, so I'm not really sure what the strategy is--my best estimation is that it's a "fool my base by telling them I'm going to give them money that I will take from rich people but will really be taken from their own Social Security and use the money that I actually take from the middle-class, which by this point is mostly Republican, to pay for more Democrat pet projects--you know, vital ones like repaving the Delaware Turnpike for, what, the 10th time in the last 10 years using, of course, union labor" strategy.

The sad thing is that if the President hadn't passed Obamacare, the country would by now be well into a recovery (just look at long bond yields, which began to fall immediately after its passage, for evidence).  And now he wants to raise taxes as part of a Jobs plan!  Is he really that clueless about how economies work?

Ultimately, my take on the President's Jobs program is that it's all just a show anyhow.  Like I've said before, it appears to me that he really has just given up.  He likes the perks but by now knows he's in over his head.  Weeks of vacation while the country waits for his Jobs pronouncement?  80+ rounds of golf in less than three years?  Is this guy President or King?  [Any golfers out there? Even for the President it probably takes most of a day to play a round (motorcade to and from golf course, 4+ hours to play, lunch...etc.).  At that rate, 80+ rounds is nearly 3 months of golf!  If I hadn't seen his swing I'd swear he was practicing for the Senior Tour!]

All that being said, at this point, I think that the only thing President Obama really cares about is being re-elected (like I said, he likes the perks) and that he's gone back into the one mode he understands:  election mode.  He knows the Republicans won't accept higher taxes and is just using the whole situation to support his new campaign slogan:  "I tried."

Are you kidding me?

So the President finally revealed his new "Jobs" bill last week and it's even worse than I suspected.  The payroll tax cuts that make up most of the bill and are supposed to encourage hiring don't even go to employers!  Instead, the cuts are simply a reduction of the Social Security tax paid by employees.  What part of lowering the cost of hiring don't the Democrats understand?  Are they so antagonistic towards employers that they won't do anything to encourage them to hire?

What's ironic about the President's proposal is that it's a clear example of the trickle-down economics that the Democrats have mocked for years--writ very, very teeny.  The problem, in this instance, though, is that the money is coming out of a program that's already in danger of failing and will just push it a little closer to the brink.  Since the reduction in payroll taxes will be exactly offset by an increase in Social Security's liabilities, how exactly is that supposed to boost the economy?  [When tax cuts are actually offset by spending cuts, that's a different ballgame.  Then spending shifts to the private sector, which is far more efficient at producing goods and services--and the jobs that go with them--than the government.  Tax cuts that aren't offset by spending cuts, whether made by Republicans or Democrats, have the same incremental utility:  NONE.]

While the President's plan may boost spending in the short-run it's very unlikely that any meaningful increase in employment will result.  Business people look past this sort of short-term manipulation when they decide whether or not to hire.  They aren't as stupid as the President thinks they are and he isn't as smart as he is constantly told.

Party of the Not Working Man

In my opinion, the Democrat Party should be redefined as the party of the Not Working Man since nearly everything it does or supports is destined to increase their number.

The Democrats seem to have forgotten the basic concept that in order to have employment you have to have employers!  And successful employers make money!  Employers that don't are not employers for very long!  If Democrats were truly the party of the WORKING Man, they would want to increase the number of successful businesses so that the demand for employees (i.e., the Working Man) would increase as well.  If that were the case, the law of supply and demand would take over and, breathe deeply Democrats, wages of the Working Man would actually rise!  [The ironic thing is that by increasing the number of businesses competing for the Working Man, the proportional profits of employers would also decline.  The great income inequality that Democrats bemoan so much can be laid at the steps of their own policies!]  

If you wanted to reduce the number of Working Men, you would do things like raise taxes, make businesses pay for increased benefits, pile on regulations.  All of those things make it less profitable for a businessperson who might actually have wanted to hire them, reducing demand for employees and driving down wages.  Oh yeah, isn't that the Democrat Party's economic platform??!!

Who are the Democrats biggest supporters, without whom no Democrat would ever be elected?  Unions, the most anti-employer, anti-Working Man group ever conceived.  "Wait", you say, "you are crazy, Unions are the defender of the Working Man."  Nothing could be further from the truth.  Unions are the defenders of no one but their own self-interest.  By demanding usurious wages and benefits, Unions single-handedly drove nearly all of American manufacturing off-shore, destroying millions of jobs that used to be filled by the Working Man.  Now they are bankrupting our cities and states.

The few unionized manufacturers who remain are mere shadows of their former greatness, a greatness that for the likes of General Motors and United States Steel was forged in the shadow of World War II when demand for their products exploded and supply was constrained due to the fact that their competition in Germany and Japan had been destroyed in the War.  When those countries rebuilt and their heavy industrial capacity was brought back on line, they thrashed America's unionized manufacturers for one simple reason--their companies were not saddled with the same onerous labor costs as in the United States so they could actually invest in technology and innovation.

The math is very simple:  union wages at double the norm could employ twice as many if halved.  Twice as many employees would mean more production which would mean more competition which would lower prices for consumers.  Lower prices for consumers would mean more consumption.  More competition also means more innovation to manage scarce resources (n.b., in my opinion John D. Rockefeller probably did more for the environment than any environmental group ever has or will.  By innovating, Mr. Rockefeller's company eliminated nearly all waste from the oil refining process, waste which had previously been dumped in Lake Erie and is now sold as by-products.  He didn't do this because he was a nice guy.  He wasn't.  He did it because it made him money.  He also employed a LOT of Working Men.).

Now reverse the process and you'll understand the true impact of unions:  higher wages for the fewer employed, less production, less competition, higher prices, less consumption and less innovation.  And this is the group that the Democrats have allied themselves most closely with!      

So while the Democrats advertise themselves as the party of the Working Man, nothing could be further from the truth.  Party of the Not Working Man is how I see it.

The Church of the United States

When the Founding Fathers wrote the Constitution, keeping religion out of government was deemed so important that it was codified as the First Amendment.  Which begs the question, what is religion? 

One definition found in Webster's dictionary is  "the service and worship of God or the supernatural."  The definition I am more interested in, however, is "a cause, principle, or system of beliefs held to with ardor and faith."  Essentially if a belief requires its adherents to have faith that it is true (i.e., it cannot be proven), I would suggest that it really should be considered religious in nature.

That being the case, it seems to me that while the Democrats have fought so hard to keep the Religious Right at bay, they themselves constitute a Religious Left, a sort of anti-religion religion, and all of the beliefs that they so passionately espouse are themselves religious in nature and should be as separate from government as any policy of the Religious Right.  

Let me give you an example: while the Religious Right opposes abortions, the Religious Left is not satisfied for the Supreme Court to have simply permitted them.  No, the Left requires the Federal Government to pay for abortions with public money, a portion of which is necessarily taken from members of the Religious Right!  Could there be any clearer violation of the First Amendment?  

But abortion is not the only issue that has crossed the divide.  Schools spend as much time teaching social policy, which is simply beliefs, as they do mathematics.  Services historically provided by the Church (e.g., feeding and caring for the poor) now are now the domain of government.       

All of these issues involve questions of belief.  And beliefs are religious in nature, whether in the service and worship of God or not.  Freedom of religion means not only that no one imposes their beliefs on you, but that you don't impose your's on them.  However if your Religion, like the Left's, is Government, its not surprising that the rights of everyone else get trampled.  

The pilgrims left England to escape the Church of England.  How disappointed they would be to find a new Church of the United States in its place.  

The Fed's Gun is Empty

According to Ben Bernanke, the Fed stands ready with additional potential undisclosed policy responses if the economy continues to struggle.  My question is to what effect?

As noted several times, the Fed's powers are limited to those of monetary impact; essentially it controls the money supply, historically by raising and lowering short-term interest rates that it charges banks, thereby encouraging or discouraging them from lending and speeding or slowing the economy as the case may be, and more recently by "Quantitative Easing", which is simply printing money.  With rates now at nearly 0% the Fed’s lending power is essentially spent; Quantitative Easing has produced the specter of inflation, nothing else. 

Under normal circumstances, rates this low would have already spurred the economy. But instead of giving the system time to reset and take advantage of the low rates, our President decided that the Great Recession was “too good to waste” and passed Obamacare, the most onerous piece of legislation in history, more than cancelling out the positive interest rate effect. 

That being the case, can anyone truly be surprised that the economy is still bumbling along.  I'm surprised it's not worse.  What's really amazing is that the President does seem to understand the basic reason why since his coming so-called "jobs speech" is rumored to contain a number of reductions, albeit small ones, to business taxes and possibly some regulatory easing.  Duh!  I guess he's not totally clueless regarding the impact of Obamacare!

But the point of this post is not, once again, that the President made a huge mistake by passing Obamacare. It's that counting on the Federal Reserve to do anything else beyond what it's already done is like believing in the Wizard of Oz.

When Lehman Brothers failed, the Fed arguably saved the world from a catastrophic meltdown by providing liquidity and backstopping the survival of American banks.  That's what it didn't do in 1929 and no doubt pushed the country into the Depression.   Beyond providing liquidity, however, which is really just a fancy term for printing money (or making sure everyone knows it will), the Fed can't do anything!  Everything it does--or has ever tried to do--is just some variant on that power. So when the Fed says they still have options, all they mean is that they have other ways of printing money, which would really only be useful if the system threatens to lock up again—not for creating jobs or growing the economy.  It has no secret job or growth creating powers.  And I'm not sure that either the President or the Congress realizes that. 

Why Big Business loves Big Government

In a nutshell, Big Business loves Big Government because the cost of Big Government always falls most heavily on Small Business.  The most egregious recent example of this is Obamacare, which imposes healthcare obligations across the board on big and small businesses.  The marginal impact, however, falls most heavily on small businesses since most big businesses already provide healthcare to their employees!  [Now you may say, that is only fair, why shouldn't Small Business provide healthcare as well?  But that's a question for another discussion.]

If Big Business already provides healthcare then it will incur virtually no incremental costs from Obamacare.  Small Business, on the other hand, finds itself with a new costly mandate.

One of the main ideas that this blog will continually stress is that if you increase the cost of something you will get less of it.  [I think this is a very simple concept, but for some reason Washington doesn't seem to understand it.]  So here you have a situation where the cost of operating a small business will clearly rise--meaning you will end up with less small businesses than you would have otherwise expected.  Since Small Business competes with Big Business, less Small Business means less competition!!  And less competition means higher profits for Big Business!!  Of course less competition also means less overall employment, but that's not the concern of Big Business.

And this is true not only for Obamacare but for any government action that imposes costs or regulations on business:  Big Business can always spread the cost of Government mandates out over a much bigger base than Small Business.  [My usual example is to imagine two basketball players, one 7 feet tall and one 6 feet tall.  If you put 100 lbs of weight on each of their backs, which one is more likely still to be able to dunk?]

So, whenever you hear CEOs of Big Businesses supporting Big Government programs you should always take it with a grain of salt.  They really aren't doing the country any favors.  Like Br'er Rabbit, they're usually just asking for what's good for them--less competition and higher profits.    

Pushing on a String

Readers of this blog should now understand why Keynesian stimulus and Quantitative Easing haven't worked to restart the American economy (see How to Grow an Economy).  Numbers released by the government last week showed an increasing inflation rate and a continuing high unemployment rate--stagflation--the result we've projected from these policies.

That being the case, with none of his actions able to stir the economy from its torpor, it appears that the President has actually given up.  He's taken his family on an all-expense-paid vacation for 10 days to Martha's Vineyard and said "I'll talk to you when I get back."  These are not the actions of a man who "has the answer."  And clearly he doesn't, for if he did why wait so long into his administration to reveal it?

But this post is not meant solely to berate the President.  He has been in over his head since the minute he was inaugurated and has, with his failure to stand up to the extremists in his own party, made himself irrelevant.    Nixon had to go to China, and Obama could have brought the Far Left into the fold.  The problem is that Obama is truly the Left's leader and his beliefs in big government and wealth redistribution are simply anathema to a thriving economy.  He would have made a good union boss or even Speaker of the House but he should never have been elected President.

Accordingly, when the President finally makes his "jobs" speech in September you can expect more of the same--the leaks already indicate increased aid for the unemployed, short-term reductions in payroll taxes, government infrastructure projects, blah, blah, blah.  All of these have been tried continuously since he became President and none of them have worked--or ever will.  To review, here is why:  (1) extending unemployment compensation not only discourages the unemployed from accepting available jobs but takes money from the still employed thus discouraging them from working so hard and reducing overall production, (2) new companies will not be formed nor employees hired in response to short-term reductions in payroll taxes because the amounts involved are not nearly as large as the additional costs that the President has already imposed (e.g., Obamacare) on job creation, and (3) the government cannot build any bridges unless it first takes the money needed to do so from its citizens, thus ensuring that any employment benefit from the new bridge is offset by an employment loss elsewhere.

It is simply astonishing to me that, even though all of these policies have been tried and failed, all the Democrats can come up with is more of the same.  Paul Krugman, the New York Times "economist" would have the government double-down on spending and I'm sure, when that didn't work, he would spend more.  To him and other Liberal "economists" the fact that Keynesian policy has not worked simply means that not enough has been spent!   [They are True Believers, more akin to religious zealots than scientists, which is why when I use the term "economist" with them it is bracketed in quotation marks.]  One definition of insanity is doing the same thing over and over even though it does not work.  Democratic economic policy certainly qualifies.

In light of his economic policy's abysmal failure, a President that truly represented all Americans would be flexible enough to realize that his advisers have been wrong and that a new strategy needs to be adopted.  One that realizes that the government is not the salvation, but that its citizens are America's greatest strength.  Millions of our relatives came to the United States, not for a handout, but to escape intrusive governments and to forge their own path--they came for freedom.  To succeed, America needs to return to its roots.  And to do that, what is needed is a policy that enables individuals to create opportunity by.getting government out of the way.

Continuing the redistributionist policies of the Left may help Obama to be reelected, but it will also ensure that the country continues to stagnate.  Bill Clinton changed course and the economy thrived.   President Obama needs to learn from President Clinton.  He can't have it both ways--he can't save the economy and continue to back every tax and spending increase and regulatory program advanced by the Left.  Until he realizes that to be the case, anything he does will be as effective as pushing on a string.

How to Grow an Economy

People treat economics like it's some kind of mystical thing, but it's really not rocket science.  In fact, in my opinion, all you really need to understand about economics can be boiled down into one concept:  supply and demand.  Practically the entire subject is derived from that.

Markets determine prices based on supply and demand.  If demand exceeds supply prices rise to the point that the two are once again in balance.  If the return (i.e., profit) to suppliers at that point is higher than the risk that the endeavor requires then new supply can be expected, resulting in a new equilibrium.  The reverse is also true.

With that in mind, let's look at the two policy responses that United States government officials have employed while trying to restart the economy:  Keynesian stimulus and Quantitative Easing.

The theory behind Keynesian stimulus is that, by government increasing its spending at times of reduced private demand, prices will rise to the point that supply follows (i.e., that higher prices result in increased supply) and employment will rise with it.  As pointed out in a previous post, Keynesian-ism fails for the simple fact that the government can't spend what it doesn't take--any demand increase from government spending has to result in an equal demand decrease by private spending.  [It would be funny if it weren't so tragic that the other side of the transaction is so often ignored by "economists" making the case for their own policy preferences.  I can't tell you how many economics classes I sat through in college where that was the case.]  And, as also pointed out previously, the cost of the bureaucrats who run the government programs further act to reduce supply, resulting in higher prices and less productive employment.  Stagflation is the expected outcome and is the situation now found in the United States.

So Keynesian stimulus doesn't work.  What about Quantitative Easing  (i.e., printing money)?  Once again, the reason it cannot work is easily grasped if one understands the concept of supply and demand.  Printing money shifts a country's aggregate demand curve higher, which results in higher prices.  Unfortunately no supply response (i.e., supply increase) can be expected because once inflation is subtracted, the return to producers will not have changed.  All printing money does is increase prices, nothing else.

It's clear that both Keynesian stimulus and Quantitative Easing have failed to restart our economy and now you at least know why.  What, on the other hand, would work?  If we think about it from a supply and demand perspective, there really is only one answer and it's so simple it almost leaps out at us:

If you want to increase demand for workers you make it more, not less, profitable for people to hire them--it's that simple.  Make it more profitable to hire people and you will increase hiring!!!  That means you don't impose new healthcare costs or higher taxes or new regulations.  Doing this only makes sure that fewer people are hired.

As more people get hired, more goods and services are produced and the economy grows.

Like I said in the first sentence, economics is really not that complicated.

Jobs, Jobs, Jobs, blah, blah, blah

Now that the President has obliterated America's credit and credibility he has set his sights on jobs!  Watch out below!

This is a man who forced through the greatest job-killing piece of legislation in history, the abomination known as Obamacare, who has pushed continual extensions of unemployment compensation (which rewards people for not working), who has threatened continuously to increase taxes.  And now he has set his sights on jobs!  My first thought is, what took so damn long?  Why wasn't this his only focus when he was elected in the middle of a recession?  Because the Democratic party platform is basically an anti-jobs platform, that's why!  And they've bought everyone off with promises of a free lunch.  "No jobs?--its rich guys' fault, tax them more!!"  That's not a jobs program--its class warfare.

Nothing the Democrats have proposed since Obama was elected (or as far back as I can remember for that matter), from a policy standpoint, has had any chance of increasing employment.  The problem for the Democrats is that they've been completely co-opted by their core base and forgotten (if they ever knew) how economies actually work.  Well, here's a reminder--big companies are always looking to become more productive, as they do so they need fewer employees per amount of output.  If output goes down, like in a recession, big companies lay people off. In a normal environment, some of the people who get laid off from big companies go out and form little companies, which hire other people who are looking for jobs and the economy starts growing again.  That is the normal cycle.

Of course, people who start little companies do so in order to make MONEY.  They don't do it for charity.  So if it costs too much to start a new company they won't do it--its not worth the RISK.  That is the key understanding that the Democrats lack.  Otherwise would they have passed Obamacare in the middle of the worst recession (the President's own assessment) since the Great Depression?  Didn't they realize that all of the Obamacare mandates make it more costly/risky for any entrepreneur to start a new business?  And they also wanted to pass tax increases, which were thankfully prevented by the Republicans, that only would have made things worse!!

To date, the Democrats sole attempt to increase hiring has been based on the ridiculous Keynesian "if you spend it they will hire" Policy of Dreams.  Trillions of dollars of stimulus have been spent to no effect.  How can that be?  The reason is so simple its pathetic:  money doesn't grow on trees!  Every dollar of stimulus has to be taken from someone, either in the form of taxes or borrowing, both of which take an equal amount away from spending!  It is literally robbing Peter to pay Paul.  But its worse than that actually since every dollar that is taken in this robbery is first sent through Washington where the bureaucrats take their cut before sending it on.

So the net-net is that money that could have been efficiently spent by Peter on goods produced by Paul is instead taken from Peter and given to Paul by a Bureaucrat and then, Paul and the Bureaucrat, use Peter's money to buy the same goods that Peter is trying to buy which drives the price up for those goods since there is less of them available since, instead of making goods, Paul and the Bureaucrat are living off Paul who can only make so much.  So the glorious outcome, which is entirely predictable, is that prices rise and employment falls.  And this is the policy the Democrats have hung their hat on.  

If the President wants to increase non-government jobs, and those are really the only ones that matter since I cannot think of one non-defense job where a product is made that actually adds to the country's well-being (that is probably a gross exaggeration but you get the point), then he has to suck it up and make it easier for businesses to hire people.  And that means reducing the cost of doing so--and that means lower taxes and less regulation.

America in Triage

Yesterday the Dow Jones plummeted more than 600 points, over 200 of which came after President Obama tried to reassure the world that the United States should still be considered a AAA credit.  Both the drop and the President's speech came in response to S&P reducing America's rating below AAA.

This shouldn't have been a surprise--S&P had warned it would do so if the U.S. didn't reduce its deficit over the next 10 years by an aggregate amount of at least $4 trillion.  Of course Congress didn't come close to that kind of number--better to let the country go down the tubes with half-assed solutions than to risk their jobs!  Instead Congress and the President trumpeted a deal where only $900 billion would be cut --most of which is back-end weighted--primarily by increasing spending less than planned (!!) with an additional $1.5 trillion of unspecified cuts to be enacted by the end of 2011.  So instead of the $4+ trillion that S&P said would be required for it to consider the U.S. AAA-rated, Congress came up with a very dubious total of $2.4 trillion, most of which will probably never happen.

And Congress and the President have the nerve to question S&P?  Amazing.  Its as if they have absolutely no clue what is at stake for our country.  Which gets me to the title of this post:  America in Triage.

In war, doctors treat the most serious wounds first.  That saves lives.  Wounds that are not life-threatening are treated afterwards.  To save the United States, the same must hold true.  And the biggest wound afflicting our country is entitlements.  To try to fix our budget problems without addressing Social Security and Medicare is like clipping a patient's toenails while he is bleeding to death from a gunshot wound.

Unless we address entitlements soon there really will be no way to save the United States.  This is true for one simple reason--the Baby Boom generation has begun to retire.  On a simplified basis, the math of Social Security should be straight forward:  $-in = $-out.  Historically there has been a surplus of $-in due to the fact that the population and employment were growing.  Unfortunately that excess was used to expand other government spending--it was never saved.  [There is no "lockbox" Mr. Gore.]  Now, due to the tidal wave of approaching Boomers the $-in and the $-out will soon go into significant deficit unless something is done.  And that deficit will dwarf the deficits that now have the world so worried.

Examining the root cause of the coming Social Security deficits (Medicare is saved for a later post) yields a clear solution to the problem.  Social Security was never intended to be a universal retirement plan for Americans.  As such, the age at which people became eligible for it originally was very close to their life expectancy!!  Meaning that while there was a safety net available if they lived long enough, chances were they wouldn't!!  Unfortunately, from the perspective of having a balanced system, life expectancy in the United States has increased far faster than the eligibility age for Social Security, meaning citizens that were expected to die are collecting Social Security for many years more than the actuaries could have guessed.  In a nutshell, that is the entire issue with regard to Social Security.

Understanding that, the solution to this problem is obvious--even France has seen it--raise the age of eligibility until it approaches life expectancy thereby bringing the $-in and $-out back into balance.  In fact, solving the Social Security time-bomb in this way would ignite our economy like no Keynesian prescription ever could.  

The Failure of Unfettered Democracy

We in the United States are now witnessing the death of yet another form of government, our own.  The Founders created a Federal government with limited power, realizing that unfettered democracy would only result in tyranny and that any government that permitted the majority to vote themselves benefits at the expense of minority would eventually fail.  Thanks to activist courts that is the state in which the United States now finds itself.

The ongoing debt /deficit drama has clearly demonstrated one thing--that Congress has neither the will nor the desire to solve the country's problems.  Neither party is willing to reject the will of their extremists for to do so is to risk re-election.  There is a path back to prosperity but it will not be an easy trek....