Monthly Archives: June 2011

Our Wiley Coyote Moment Has Arrived

The country is imploding under the weight of fourteen trillion dollars of debt, sixty trillion dollars of unfunded entitlement programs, and a monetary policy bent on destroying the currency and economy.  Government intervention in private citizens’ lives and the economy has failed.  The eighty year old Keynesian economics experiment that started under President Roosevelt is nearing an end.

The current state of affairs reminds me of the Saturday morning cartoon where the Roadrunner is chased by Wiley Coyote.  The clever Roadrunner leads Wiley to the edge of the cliff, maneuvers quickly to safety, and Wiley runs off the edge of the cliff.   Wiley remains suspended momentarily in mid-air before realizing his fate and plummets to the canyon floor.

Government has lied and deceived several generations of Americans.  Politicians and bureaucrats will say and do anything to save themselves regardless of the consequences to the country or the economy.  Citizens have been led over the cliff by the government and are in a state of suspended disbelief.  This is our Wiley Coyote moment!

Consider two questions; how does government repay fourteen trillion dollars of debt, and how does government pay for sixty trillion dollars of unfunded entitlement program obligations?  To address these questions you must understand how government raises revenue.  Government has three options; to tax, to borrow, or to inflate.

Taxation

The debate over tax rates is an argument used by politicians to garner support and votes for their ideology.  The so-called rich are demonized by politicians and the regressive media to pit one group of Americans against another.  The rich are too small a constituency for politicians to concern themselves with when compared to the lower and middle income earners.  The data tells quite a different story than politicians or the regressive media leads people to believe.  The Internal Revenue Service released Publication 1304 – Individual Income Tax Returns 2008 last year.  The data is summarized below (click on image to expand):

  • A mere 2/10ths of one percent of tax returns filed had an AGI > $1 million. Yet, 24.1% of the entire tax burden is paid by this group.
  • Those filers with an AGI > $200,000 represent 3% of all tax returns filed.  Yet, 52% of the entire tax burden is paid by the top two groups.
  • Compare the top bracket with the bottom bracket and you’ll find the per filer AGI ratio from the top to bottom bracket is 177 to 1.  A filer in the top bracket has an AGI 177 times that of the lowest bracket.  However, the per filer tax paid ratio between the two brackets is 936 to 1.  A filer in the top brackets pays 936 times that of the lowest bracket.
  • 47% of all income tax returns filed had no tax liability.  That is 67 million income tax returns filed that paid nothing in federal individual income taxes.

If the government taxed every dollar above the $250,000 AGI threshold at 100% it would generate roughly $1.37 trillion of additional revenue.  This still leaves a deficit of $250 billion dollars for fiscal year 2011.  More importantly, people would simply stop working once government confiscated all earnings beyond a certain threshold.  There is no point in working if government is simply going to confiscate your earnings to redistribute to government designated recipients.

Borrowing

The government borrows money to fund deficit spending.  When expenses exceed revenues the government sells U.S. securities through the Federal Reserve to borrowers.  The borrowers become creditors as the U.S. owes other governments, institutions, and private investors their principal plus some amount of interest.  Every time the government borrows money to fund deficits the national debt increases.

Foreign governments have reduced their holdings in U.S. securities and are reluctant to continue funding deficit spending.  The Federal Reserve is suppressing interest rates which means those investing in U.S. securities receive a low rate return.  As with any investment there is a risk and reward, and many investors are not willing to risk their principal investment for such low returns on their investment.  Eventually, interest rates must rise if the government wants to attract buyers of government securities.

Inflation

The government’s great equalizer is inflation.  Policymakers in Washington decide to create money out of thin air.  New money is printed by the Treasury, at the request of the Federal Reserve, and used to purchase U.S. securities previously sold to investors.  This is referred to as monetizing the debt.  The inflow of new money results in inflation.  Policymakers create terms like Quantitative Easing to not alarm the public to their actions.

Moreover, government deceives us by referencing the Consumer Price Index (CPI) as a measure of inflation.  The CPI is based solely upon a basket of ever-changing, government defined goods and services.  However, the CPI is the nominal inflation rate because it does not include currency devaluation.  The real inflation rate is substantially worse than the CPI because it accounts for the growth in printed money.

We know this as purchasing power and every time the Federal Reserve prints money it erodes purchasing power.  In other words anyone holding dollars becomes poorer every time the Federal Reserve expands the money supply.

Two leading economists of the twentieth century had opposing views on economics and the role of government in free markets.  However, both shared a common view on inflation.

Milton Friedman said, “Inflation is taxation without legislation.”

John Maynard Keynes said, “By a continuing process of inflation, government can confiscate, secretly and unobserved, an important part of the wealth of their citizens.”

Another unpleasant effect of current monetary policy is it penalizes lower income earners.  The Federal Reserve is keeping interest rates artificially low while monetizing the debt thus reducing purchasing power.  Those who do not have the means to invest in equity or debt markets, commodities, etc. have no other options other than simple interest bearing checking, savings, or money market accounts.  Interest is a pittance before inflation, and once you factor in the real inflation rate those lower income earners actually lose wealth by saving.  The little guy that government proclaims to protect is the first to feel the negative effects of the Fed’s inflationary monetary policy.

The simple truth is government cannot tax or borrow its way out of the current situation.  Moreover, austerity programs can only go so far as discretionary spending amounts to $1.3 trillion, or 36%, of the entire federal government budget this year.  The remaining 64% covers entitlement programs and interest on the debt.  By 2020, the federal budget is projected to be $5.6 trillion with $4 trillion for entitlement programs and interest on the debt.  This is before Obamacare is implemented.

Government is left with two unpleasant choices; sovereign default, or erode the purchasing power of the currency in which the debt is denominated.  Technically, the latter is another form of default.  Practically, politicians will proceed with the latter option while trying to disguise their actions as necessary, or for the benefit of this or that class of people.  Eventually, the economy and country will collapse.  It’s not a question of whether a collapse will happen, rather a question of when it will happen.

Citizens have been lied to and deceived by our government.  This is our Wiley Coyote moment.  Will citizens remain in a suspended state of disbelief and continue the farcical game?  Or, will citizens wake up and do something about it?

Hat Tip:  Joshua Lyons for the Wiley Coyote analogy

Originally Published on American Thinker:  http://www.americanthinker.com/2011/06/our_wiley_coyote_moment_has_arrived.html

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Check Your Morals at the Door

A few weeks ago I visited our nation’s capital.  While waiting to enter the halls of Congress I overheard a conversation between a new congressman and a doorkeeper.  What I learned is those entering the halls of Congress must check their morals at the door. 

Doorkeeper:  Welcome Congressman, please check all morals and virtues here with us before entering these hallowed halls.

Congressman:  Why would I do that?

Doorkeeper:  Don’t be silly this is a corrupt institution.  There is no place for morals and virtues here.

Congressman:  What do you mean it’s corrupt?  I thought the Senate was the most deliberative, most revered institution in the world. 

Doorkeeper:  Too funny!  Son, that’s not how it works here.  You see morals to congressmen are like crucifixes to vampires.  Morals will be the end of your political career, just like crucifixes are deadly to vampires.  If you have any morals in these halls you will implode and burst into flames. 

Congressman:  If I do check my morals at the door, what happens next?

Doorkeeper:  You’ll be subjected to human nature, to your own ambition and avarice.  You will be asked to support legislation that confiscates more money from the people, to increase regulations on businesses, to create government programs to enslave entire classes to make them dependent upon you and your party. Rest assured, the citizenry is stupid enough to vote for you again.  God forbid if you oppose any legislation your party wants to pass.

Congressman:  Why, what would happen to me?

Doorkeeper:  Well, everyone’s initial action is your party will vilify you.  But contrary to all logic and common sense, your party will attempt to buy your vote.  They’ll offer you “free” things to entice you.  They’ll say it’s for the good of the country and your constituents.  In return you mustn’t have any morals about supporting the legislation. 

Congressman:  I may be naïve by asking this, but can you give me a recent example of this type of behavior.

Doorkeeper:  Yes.  Do you recall when Senate majority leader Harry Reid needed 60 votes to end debate on health care legislation.  He was one vote short and the remaining Democrat was Nebraska Senator Ben Nelson.  Senator Nelson opposed the legislation due to government funded abortions.  Eventually, Harry Reid, Barbara Boxer, and Charles Schumer met privately with Nelson.  They worked out a deal to create an imaginary fence between those health insurance plans that covered abortions and those that did not.  In addition, they gave Senator Nelson a sweetheart deal.  They promised to make all the other states and people of those states to pay for all the Medicare costs for the state ofNebraska. 

Congressman:  What did Senator Nelson do?

Doorkeeper:  Senator Nelson did not have the testicular fortitude to stand up for his beliefs.  Nelson folded like a wet paper bag. 

Congressman:  What have I gotten myself into.  It sounds like a den of vipers!

Doorkeeper:  To call congressmen a den of vipers would be an insult to vipers.  In this institution it’s more like those species of animals that eat their young.  Nobody is safe in these halls unless you check your morals at the door.

Congressman:  That’s it.  Just check my morals at the door.  Has everyone that entered the hallowed halls of Congress checked there morals?

Doorkeeper:  Yes, but for one exception.  The only reason he didn’t check his morals at the door is because he never possessed any morals.

Congressman:  Who was that?

Doorkeeper:  None other than the biggest clown of them all, Senator Al Franken.  He fits right in under the Big Top known as Capital Hill.

Congressman:  I’m having second thoughts about this.

Doorkeeper:  Don’t sell yourself short.  Without morals it makes it much easier to navigate.  You don’t want morals to become an obstacle to your career or screwing over the American people.  Just check your morals at the door and you’ll fit right in.

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Public Housing, Education & Welfare: A Recipe for Disaster

Proponents of government mandated health care falsely portray the “public” option as necessary for the common good.  The statement, and subsequent conclusion, based upon arbitrary opinions rather than empirical evidence conjures up images and feelings that a public option must result in good.  Empirical evidence from other uses of the word “public” prepended to any other government created program such as public housing, public education, and public assistance results in less than desirable outcomes; in fact those programs are abject failures.

Public Housing

How well has the three trillion dollars spent on public housing worked out for America, especially poor Americans?   In the book, American’s Trillion-Dollar Housing Mistake, author Howard Husock of the Manhattan Institute for Policy Research examines the reasons public housing failed:

Why is government in the housing business?  The standard answer is because the market fails to provide adequate supply, particularly to house the nation’s poor.  Thus an array of government programs from vouchers, mammoth housing construction, favorable tax policies, and top-down mandates on cities and towns take up the slack caused by “market failure…

How did we get here?  Husock says that three “remarkably tenacious” myths perpetrate the government as “houser” arguement:  1) the market will not provide housing for the poor; 2) by taking the profit motive out of the equation the state can do better than small property owners in providing housing; and, 3) the moral qualities of the poor are a product of their housing environment.

Eliminating the profit motive from the equation is eerily similar to the arguments for health care reform and the public option.  The government incorrectly and brazenly assumes that as a non-profit provider of goods and services they are more competitive than a private insurer, and better suited to meet the needs and demands of the consumer or marketplace.  The government interjects itself as housing provider, subsidizer, landlord, and property management company.  Public housing results failed miserably to meet market needs, reduce costs, or eliminate poverty.

Furthermore, specific government intervention through the Community Reinvestment Act and government sponsored entities (GSE) Fannie Mae and Freddie Mac were culpable in the sub-prime mortgage debacle in the housing market which greatly contributed to the financial industry problems in 2008 and the current economic situation.  Government mandates placed upon lending institutions modified industry business practices that required down payments, decent credit, and verifiable income from mortgage applicants.  Instead, the mandates forced lenders to provide sub-prime loans to unqualified applicants.  Fannie-Mae frequently bundled those loans and sold them to investors; which in turn used them as collateral against other securities.  All perfectly legal, and under the careful and watchful eye of numerous Congressional committees and federal agencies, led the housing market and the economy into a free fall.  All these well-intentioned regulations resulted in numerous unintended consequences.

Public Education

In 1979, President Jimmy Carter signed into law the Department of Education Organization Act.  On the day President Carter signed the bill he said…

The Department of Education bill will allow the Federal Government to meet its responsibilities in education more effectively, more efficiently, and more responsively…

Fourth, a Department of Education will save tax dollars. By eliminating bureaucratic layers, the reorganization will permit direct, substantial personnel reductions. By enhancing top-level management attention to education programs, it will earn improved educational services at less cost.

The budget appropriated for the Department of Education from 1980 through 2008 as well as the high school graduation rates are summarized below.

Appropriation Year

Amount
(in Thousands)

Constant
2000 Dollars
(in Thousands)

On-Time Public High School Graduation Rate

1980

14,011,052

29,190,219

72.20%

1990

24,345,321

31,986,872

73.70%

2000

38,447,366

38,447,366

71.70%

2008

68,574,592

55,368,173

73.40%

Sources:  National Center for Education Studies, Department of Education – Budget History  Note:  2008 graduation rate is from 2006 as that is the last actual, non-projected year available.

Any fair-minded person would generally accept high-school graduation rates as a reasonable barometer to measure the impact of federal government education spending.  In 2000 constant dollars the Department of Education budget has nearly doubled from 29 billion dollars in 1980 to 55 billion dollars in 2008, while the on-time public high-school graduation rate is flat. According to the goals outlined in President Carter’s statement I categorically state they have not eliminated bureaucratic layers, they have not substantially reduced personnel, nor have they improved services at less cost.  On a side note, the American Recovery and Reinvestment Act of 2009 appropriated an additional 98 billion dollars to the Department of Education. 

Furthermore, the educational landscape is the cluttered with two major labor unions; the National Education Association (NEA) and the American Federation of Teachers (part of the AFL-CIO).   According to the NEA’s 2007 LM-2 filing with the Department of Labor they had nearly $353 million in receipts, expended $32 million in political activities and lobbying, and expended $80 million in contributions, gifts, and grants.  A partial list of recipients include; ACORN, Campaign for America’s Future, GLSEN (Gay, Lesbian and Straight Education Network), National Council of La Raza, USAction, and Women’s Voice, Women Vote.  The NEA’s Oregon affiliate stated…

The major purpose of our association is not the education of children, rather it is, or ought to be the extension and/or preservation of our members’ rights.

Undoubtedly, the only correlation between federal education spending levels and public high-school graduation rates is increased spending doesn’t improve graduation rates.  Union leadership obstructs real meaningful educational reforms as the union’s primary objectives are counter to improving our children’s education.  The political reality aligns union leadership with high-level government politicians and bureaucrats to control and define society through the auspices of better education for our children, while confiscating more of our hard-earned money.  Quite simply, parents working within their local communities and states are better equipped to address educational needs and implement appropriate solutions.  Lastly, there is the unconstitutionality of federal involvement in education, but that is an entirely beyond the scope of this article.

Public assistance (a.k.a. Welfare) is a monumental government failure.  A Heritage Foundation Report titled “Obama to Spend $10.3 Trillion on Welfare:  Uncovering the Full Cost of Means-Tested Welfare or Aid to the Poor” by Robert Rector, Katherine Bradley, and Rachel Sheffield states this on welfare spending…

There are 70 federal welfare programs across 14 different federal agencies (one of which was public housing).  In fiscal year 2008, total government spending on means-tested welfare or aid to the poor amounted to $714 billion.  This equates to roughly $16,800 for each poor person in theUnited States.  Welfare spending was 13 times greater in FY 2008, after adjusting for inflation, than it was when the War on Poverty started in 1964.  Means-tested welfare spending was 1.2 percent of gross domestic product (GDP) in 1965 and in 2008 it is 5 percent of GDP

Since the beginning of the War on Poverty, government has spent $15.9 trillion (in inflation-adjusted 2008 dollars) on means-tested welfare.  In comparison, the cost of all other wars in U.S. History was $6.4 trillion (in inflation-adjusted 2008 dollars).

Under President Obama, government will spend more on welfare in a single year that President George W. Bush spent on the war inIraq during his entire presidency.  While campaigning for the presidency, Obama lamented that “the war inIraqis costing each household about $100 per month.”  Applying the same standard to means-tested welfare spending reveals that welfare will cost each household $560 per month in 2009 and $638 per month in 2010.

According to President Obama’s budget projections, federal and state welfare spending will total $10.3 trillion over the next 10 years (FY 2009 to FY 2018).  This spending will equal $250,000 for each person currently living in poverty in theU.S., or $1 million for a poor family of four. 

Call me skeptical, pessimistic, or simply a right-wing nut job, but if the public option is enacted under the auspices of health care legislation the government “cooks” new recipe won’t be palatable; in fact I believe the American public will spit it out after they taste it.

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