Browsing the blog archives for April, 2011.

Mismanaging the economy

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Managing an economy effectively is an impossible task. This is precisely why Congress and the Fed should quit trying.

The recovery Vice President Biden has been referencing since summer ’09 just hasn’t materialized. There have been a few positive signs, but the pace of the recovery—if we’re really in one—has lagged far behind that of most recession recoveries. The best excuse the Democrats can muster is that Bush created more or a mess than was previously known and that things would have been worse today if aggressive action had been taken. They don’t mention the failed massive spending programs and entitlements promoted by Obama and the Democrat Congress.

They certainly don’t mention the Fed either. The Federal Reserve has been pumping money into the economy at a record pace over the past two years. From near zero interest rates to quantitative easing, the Fed has done everything is can to prop up the economy. It’s not working.

The details can be overwhelming, but the basics of the situation are clear. Congress and the Fed have been throwing so much money at the problem that we’re beginning to pay the price: 

  1. The current “official” unemployment rate is around 9% and the anticipated budget deficit this year is in the $1.7 trillion range.
  2. S&P is warning about a possible reduction in our credit rating. A reduction would substantially increase our borrowing costs.
  3. China is shifting its investments in foreign currency away from the US dollar and is taking steps to promote the RMB (yuan) as a major global currency. The US has enjoyed significant economic advantages because of the US dollar’s supremacy in world markets. This could be coming to an end soon.
  4. The value of the dollar is declining and inflation is on the horizon.

 Ironically, the Keynesians running our government treat these developments as surprises, but none of them were difficult to predict. Read Mises, Hayek, Hazlitt, and even Ayn Rand and you would have seen them coming. So where do we go from here?

With the President and the Dems in Congress lambasting the modest Ryan proposal as extreme, it’s going to be difficult to achieve meaningful budget reform. But the Fed faces a more serious challenge. Insiders expect the Fed to back off its ill-fated purchase of $600 billion in US t-bills to ease inflationary pressure. However, draining the credit already pumped into the economy will curb economic activity over the short term. Moreover, when the Fed stops buying t-bills, interest rates will likely rise. Higher inflation and interest rates will make real long term growth difficult. We could be seeing Jimmy Carter all over again.

Even Keynesian economists recognize that there’s no such thing as a free lunch. We’re paying dearly for yesterday’s lunch now. Unfortunately, neither Congress nor the Fed are willing to get out of the way and let the economy grow on its own. Don’t expect any real change until that happens.

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Read my lips…no tax hikes!

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When you hear the President talk about the need for a “balanced approach” to deficit reduction, he really means a combination of tax increases on the “rich” and modest if any real cuts in spending. There might be a few good ideas in his speech, but one thing is clear. Tax increases should not be a part of deficit reduction for 3 reasons:

1. Historically, per Hauser’s Law, tax revenues have always totaled approximately 19.5% of GDP, regardless of marginal tax rates. Hike the rates and people will earn less and/or hide more of their money. The Laffer curve warns that revenues can actually decline when rates are increased. If you want higher tax revenues, simplify and cut rates. Waging class warfare via the tax code is a recipe for weaker growth and lower government revenues. It might buy votes, but it destroys economies.

2. Raising tax rates to balance the budget—even if one assumes that tax increases will generate higher revenues—presupposes that the current level of government spending is not far out of line. But the current rate of spending is way too high. Washington should be forced to justify the essential need for the present level of spending in every government program from NPR and foreign aid to Social Security, Medicaid, Medicare, and even defense. A serious look at the spending side can solve the problem, if our politicians are willing to follow suit.

3. Any agreement to raise taxes and cut spending will just result in higher taxes. It always does. THE PROBLEM IS THE SPENDING. Washington is addicted to it, and no amount of tax revenues will satisfy its appetite.

Obama’s “tax the rich” card plays well with many voters who instinctively appreciate the notion that someone else is supposedly paying more for their government benefits. At some level, all of us need to break our addiction to the government largesse if this problem is ever to be resolved. My message to Congress is simple: CUT, CUT, and CUT.

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The Paul Ryan Dilemma

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I really like Paul Ryan. He’s bright, articulate, and is showing some leadership on the budget. He has demonstrated an ability to circumvent the media to get his message across to the American people. At times I see flashes of Reagan, particularly in style.

Ryan’s roadmap is in many ways a breath of fresh air. The cuts are significant, especially when compared to the numbers debated in the recent government shutdown scare. If implemented, his plan would represent a marked improvement over the status quo.

So what’s the dilemma? In a nutshell, Ryan’s proposal is only modestly conservative. As the key Republican figure on the budget, Ryan has defined what will be viewed by many as the “conservative position” on fiscal matters. Instead of challenging socialism at its core, he seeks to “reform” and modestly cut many of the programs introduced in the 1960s. In this sense, Ryan is giving Obama and the Democrats a victory by shifting the Republican response to the middle. The unfunded mandates associated with social security, Medicare, and Medicaid are massive. Ryan’s plan doesn’t address these programs aggressively. This is troubling.

I’m a pragmatist. I realize that many of my fellow Americans are not as conservative (or libertarian) as I am, so I recognize the need to compromise. With a divided Congress and Obama in the White House, Ryan’s roadmap might be seen as the best deal we can get at the moment—a move in the right direction. But by recognizing the legitimacy of the welfare state—albeit it slightly smaller one—Ryan and the Republicans who follow him will be left to argue only about size and scope. This is a losing battle. The creeping acceptance of wealth redistribution as a legitimate function of government is a root cause of our economic decline. Sorry Mr. Ryan—the current system doesn’t need reform, it must be dismantled and reconstructed on a Constitutional basis. We need a lot more than you have proposed.

So should we applaud the fact that someone in the Republican party is finally showing some leadership on the budget or should we lament the fact that Ryan’s roadmap fails to adequately address the core problems? Should be celebrate Ryan’s approach as politically feasible or conservative capitulation? I like Ryan, but I’m just not on board with him yet. I’m calling for conservatives in Washington to strengthen his plan before the Democrats start whittling it down.  I fear that many Republicans might not be up for the fight. I hope I’m wrong.

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