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Posts tagged “Economy

It’s Time for the 21st Century


One of the things that’s driving me absolutely bonkers this election season is the focus all the candidates have on returning the USA to the economy of the 1950’s and 60’s. All of them, but especially Messers Trump and Sanders, seem to think that if we wall ourselves off from the rest of the world, we can return to those halcyon days.

It’s a pipe dream, and if you’re buying into it, you might be stuffing something other than tobacco in your pipe. I’m going to drop some knowledge on you that you might have heard whispers of, but never been forced to grasp. The “good ol’ days” are gone forever – and they’re never coming back. Labor-intensive work, requiring little to no skills that pays well, is a thing of your memories. Soon, many of the jobs that we kid ourselves about being in demand will have gone the way of the blacksmith, the cobbler and the typesetter.

It’s understandable that most of us do not want to hear this. We grew up being to ld that if we worked hard, kept out of trouble and were good citizens we could live the American dream. Then, one day we woke up to find that our jobs disappeared and they aren’t coming back. Nobody told us why, or what jobs would replace them. Then, we found out the jobs that did replace them required all kinds of skills that most of us lacked. It didn’t matter that we’d proven ourselves as good employees by every other measure: we simply didn’t qualify for these new jobs.

It would be wonderful if we could bring back those labor-intensive jobs that didn’t require much in the way of training or skills. But here’s the thing: anything that’s labor-intensive is now being done elsewhere, for much less than you would accept as a pay rate. No company in their right mind would bring those jobs back here. As an example, let’s take Apple Corporation’s outsourcing the manufacturing of iPhones to FoxConn, a Chinese company. What nobody told you (or apparently, Mr. Trump) is that FoxConn turns out those millions of units using fewer than 100 employees, and they’re mostly engaged in packaging and shipping. 85% of an iPhone’s manufacturing is automated: it’s built by robots. So, yes, I suppose you could force Apple to build a factory in the USA. But do you suppose they wouldn’t also build the doggone thing with robots? Of course they would.

This is the reality that the snake oil salesmen have avoided telling you this election season. What’s worse, they aren’t telling you that the move away from those jobs is accelerating. They aren’t telling you that by 2025, many of the jobs we currently take for granted will be gone, replaced by automation or cheaper competition from overseas. Think of it this way: the only place you find elevator operators today is in old movies. Fairly soon, anyone who drives for a living, works in the fast-food industry, works in a warehouse or does general office work will be looking for a new career. How can I say that with certainty? Because those jobs are already being slowly replaced. Amazon now has robots doing order picking. McDonald’s is rolling out ordering kiosks in their restaurants. Self-driving vehicles are already on the roads, and companies like Uber and UPS are already in partnerships with vehicle makers to implement driverless delivery systems.

In other words, you needn’t be prescient to realize that the jobs of today are disappearing and that the jobs of yesterday are not coming back. But rather than gird Americans for this reality, we get platitudes about “forcing” manufacturing jobs back to US shores. When future jobs are discussed at all, it’s usually with vague rejoinders about “getting the skills for the jobs of tomorrow.” The politicians are afraid to tell you the truth. It’s a truth I suspect most of you have already grasped, even if you haven’t acknowledged it.

This isn’t the first time we’ve undergone a dramatic shift in the workforce. Over a century ago, our great-grandparents were faced with the shift from an agrarian society to a manufacturing one. They didn’t handle it particularly well. Now it’s out turn, as we lurch from a manufacturing economy to a knowledge economy. But we can do one of two things: we can embrace it and lead the world once again. Or we can fight it and  get left behind, becoming a second-rate power.

 

 

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The Hangover


I’m pretty sure everyone reading this has experienced a bad hangover after a night of too much partying. You wake up with an oversized cotton ball in your mouth, your head is ringing like a fire bell, you have strange cravings for McDonald’s French fries and you can’t seem to move faster than a poorly fed snail. You want to kick yourself. Yeah, the party was awesome (and you still can’t find that missing lamp shade), but man, the hangover is more price than you wanted to pay.

I get the feeling many on the left are feeling something like that today. First, after the euphoria of Bill Clinton’s speech Wednesday night, they had to deal with a less than impressive performance from Barack Obama last night. Either Obama’s speechwriting team needs a shake-up or the President is out of ideas; most of what we heard last night is best summed up as “Hey, I want a do-over!” Most media outlets, including admittedly left-leaning publications like the NY Times and Politico, panned the speech as not one of his best efforts.

Then, along came this morning’s jobs report from the Bureau of Labor Statistics. No wonder the president wants a do-over.

By now, you probably read all of the doom-and-gloom reporting about it. Make no mistake, this was a pretty lousy report. But worse than the numbers themselves is what it all means when you actually dig into them a little.

First, the headline numbers: the economy only created 96,000 new positions in August, but the unemployment rate dropped to 8.1%. This should be good news for the President, right? The unemployment rate is dropping (if somewhat unsteadily) and may actually get under the magic 8% mark most pundits think is needed if Mr. Obama is to have a real shot at reelection. And 96,000 new positions is better than no new positions, right?

Well, yes, sort of. For a better picture of why the jobs report is foreshadowing a major problem, see figure 1. This is the raw BLS data for the past year. Before your eyes begin to glaze over, there are three numbers to pay particularly close attention to.
3,965,000
1,808,000
2,723,000

The first number is the increase in the working age population over the past year. The second is the number positions created in the past year. That last one? That’s the number of working age Americans who simply gave up looking for a job in the past year. To put it another way, more of your friends, relatives and neighbors gave up the hope of even finding a job than actually found one. Nearly a million more, in fact. That’s one million American’s who are now dependent on some outside source just for survival, be it a friend, relative or the handout machine that’s become the US government.

Most economists say we need between 110,000 and 175,000 new jobs each month just to keep up with population growth. But when you look at the actual increase in working age population, the average number actually needed is around 330,000. This is very bad news for team Obama, otherwise he could point to the average of 150,000 jobs created over the past year and claim that his policies are working, albeit slowly. But the reality is that his policies are, at best, creating jobs at only half the rate needed to bring the US back to full employment.

This is particularly troubling, given that every other indicator says we should have been creating jobs at a much faster pace over the past 24 months. If you look at hourly wages, those increased by an average of 3 cents per month between March 2010 and June 2012. Although not at the level of increase seen during the Reagan, Clinton or Bush recoveries, it is still stronger than historic wage growth. Worker productivity across all sectors is also nearing an all-time high and produced solid gains during the same period. Taken together, high wage growth and productivity gains always produced significant jumps in employment before – but not now. What could possibly be holding back the “jobs engine”?

The BLS publishes an “Employee Cost Index” on a quarterly basis, and a large part of the answer can be found there. While wages and productivity show considerable growth, the ECI is also growing – in fact, it’s grown by nearly 11% since March 2010. Of that, change only 18% is represented by increased wages and a 12% drop in non-cash benefits (things like health coverage and gym memberships) counterbalances that number. So, where is the additional 10.3% in employee cost coming from? The answer is a combination of regulatory costs and taxes, the results of 3 years of this administration’s ceaseless efforts to tie nearly every industry into a Gordian knot of inefficiency. New regulations and business taxes now exceed the productivity gains made by our nation’s workforce by a 4:1 ratio, effectively wiping out the need to hire. Indeed, those costs are probably now the single biggest impediment to real employment growth our nation faces. After all, if you owned a business, you would need to be looking at explosive growth potential, not just modest growth, before bringing that much excess on board.

Many of my friends on the left insist that breakneck pace of regulations passed by the Obama administration are not having a negative effect on the economy. I submit they’re not only negatively impacting the economy, but giving business owners throughout all 57 50 states a hangover of our own.


John Roberts is not a Villian


ObamaCare CartoonI’ve read today – far too often today – that Chief Justice of the United States Supreme Court John Roberts is a cross between Judas Iscariot, Pontius Pilate and Benedict Arnold. Or maybe something worse. Although I doubt Chief Justice Roberts needs me to come to his defense (or that he even cares, to be honest), I’m going to give it a shot. Let’s look into what the Supreme Court ruling on the PPACA actually means before passing judgement, shall we?

The Supreme Court ruled that the government cannot compel anyone to buy anything. Ever.

Big? You bet this is huge. We’ve heard for two years from academicians and progressives that under the Commerce Clause, Congress has the ability to force us to buy stuff. Their theory was that because everyone needs health care at some point, we all engage in commerce related to the health industry and the very act of not purchasing health insurance was an action. Well, not so fast.

“The individual mandate, however, does not regulate existing commercial activity. It instead compels  individuals to become active in commerce by purchasing a product, on the ground that their failure to do so affects interstate commerce. Construing the Commerce Clause to permit Congress to regulate individuals precisely because they are doing nothing would open a new and potentially vast domain to congressional authority…The Framers gave Congress the power to regulate commerce, not to compel it, and for over 200 years both our decisions and Congress’s actions have reflected this understanding. There is no reason to depart from that understanding now.”

So, the Obama administration’s argument (echoed by the same academicians above) got the royal smack-down. Chief Justice Roberts may as well have wrote, “What are you, a bunch of moe-rons?”. The result is the same. Rarely does a published opinion go this far (nearly 16 pages) to explain why an argument is so plainly stupid.

The Supreme Court ruled that ObamaCare is the biggest tax hike in US history.

Yes, they ruled the PPACA can move forward, but that the government can no longer try and hide behind the facade of an individual mandate. No, they ruled: ObamaCare is actually a tax increase. Or more precisely, a combination of 21 different tax increases that total $1.2 trillion in new revenue annually. How big is that?  It amounts to new taxes that consume 8% of the nation’s economic output. With only a little over 4 months until the election, I’m not sure how either the President or his minions in Congress feel about running for election on a platform of delivering the biggest tax increase in history. I doubt they’re relishing the chance to find out. Already the cries are being raised about the impending sequestration, with it’s 1.5% tax increase and strong possibility of pulling the economy back into recession. ObamaCare represents a tax increase more than 5 times that impact. By ruling as they did, the Court hand-delivered a gift-wrapped campaign theme for the Republicans this Fall. “If you thought the economy was bad before, just wait until ObamaCare sinks it forever.”

States cannot be forced to participate in ObamaCare. 

A big part of how ObamaCare delivers affordable insurance to the masses is through a massive expansion in Medicaid, by enrolling anyone at 133% of the federal poverty line or below in the program. A big part of how the administration covers up the cost of that expansion is by removing federal subsidies for it by 2017, but still compelling the states to pick up the tab. As of right now, 13 states are balking at the idea of pushing their budgets into the red to make good on this mandate. The Supremes issued another smack-down on this, ruling that unfunded mandates are unconstitutional, even if the mandate is to an existing program.

“It is enough for today that wherever that line may be, this statute is surely beyond it. Congress may not simply “conscript state [agencies] into the national bureaucratic army,” and that is what it is attempting to do with the Medicaid expansion.”

Either the administration can relent and pick up the entire tab for the Medicaid expansion, or live with fact that the original goal of covering more than 95% of Americans in some form of health plan is by the boards.

So, is this really a win for Team Obama? Only in Pyrrhic sense. Yes, the PPACA stands for now – but not all of it. The Medicaid smack-down means that a very large part of the administration’s base of support won’t see any benefit from the law. As for the rest of it, Team Obama is now left to campaign on the largest tax hike in history, in the middle of the worst economy in 80 years. It is also already galvanizing support for the Republican challenger as nothing else could have – especially given Mr. Romney’s own dubious record on health reform.

The President may be heading to bed this evening with a smile on his face. But I bet the one on the Chief Justice’s face come November 6th will be a bit bigger.


UPDATE: GDP Growth IS a result of government spending


I’ve heard from some of you, insisting I MUST have my facts wrong. After all, government spending has gone down over the past 3 years – not up. You know this because the esteemed Paul Krugman drills on this in every other column he writes and blogs about it daily. Besides, The Annointed One of 1600 Pennsylvania Avenue would NEVER LIE!!!

Funny, but I think those of you following that line of thinking are either (a) hoodwinked by the President or (b) Obama sycophants. The chart below was compiled by the Federal Reserve, and like most FEBR data, excludes inflation. But you’ll note that the increase in government spending as a share of GDP (and therefore, the commensurate reduction in GNP) eerily match the curve I developed.

So…..phhhhbbt. Stop listening to the liar-in-chief and his apologists. Learn how to do a little basic research on your own, people.

Oh, my…this IS the reason the economy hasn’t recovered!


GDP Growth & Government Spending


Obama’s Economic Hero

There are many things that puzzle me. For instance, why is the cold water tap always on the right-hand side of the faucet? It’s as if the guy who invented indoor plumbing arbitrarily decided to that cold water should come from the right and everyone since has followed suit. There’s no real reason for it. We could just as easily have cold water coming from the left and nobody would be any wiser for it.

A similar thought process seems to have occurred in regards to including government spending as part of a nation’s economic health, currently expressed as GDP. Once upon a time, we didn’t calculate GDP. We calculated GNP; the gross national product. That figure didn’t include government spending – because economists were interested in determining the productivity of a country’s economy. Governments simply do not produce anything; no goods, no services. In fact, government spending used to be regarded as a negative economic indicator. After all, the more governments spent, the more they had to raise revenue by confiscation (and yes, taxation is still confiscation – just with a prettier name). That pulled capital from the real economy – which lowers a nation’s GNP.

GNP remained the way the government and most economists measured economic output until 1993. The Clinton administration, swept to power on the mantra of “It’s the economy, stupid” was looking for a way to juice up the headlines. By switching from GNP to GDP, they found their way to reinforce the perception that the economy was improving. It didn’t matter that actual economic output barely increased from 1992 to 1993. By including government spending in the measure of the nation’ economic health, it seemed as if the economy had rebounded.

The Obama administration is relying on similar hocus-pocus to fool the American public in 2012. Yes, GDP is growing – but only because government consumes more of the national economy than at any time in history. Yes, more than during the New Deal of the 1930’s, more than the war spending of the 1940’s and more than during the profligate 80’s. In 2011, the US Treasury spent in excess of $6 trillion dollars and accounted for 41% of all economic activity recorded in the US GDP. By comparison, at the peak of World War II spending in 1944, the Treasury only accounted for 28% of GDP. Even at the height of the last major recession in 1983, the Reagan treasury only accounted for 36% of GDP. Yet, during the Obama administration, we’ve jumped from 36% in 2008 to 40% in 2009 – and haven’t fallen below that mark since.

Of course, there’s a flip-side to this coin: if government spending is what is driving perceived economic expansion, the reality must be that the real economy is shrinking. And after adjusting for inflation, that’s exactly the case: in 2008, GNP totaled $9.1 trillion dollars (that represented a $31 billion drop from 2007). But economic activity has continued to decline under the current administration’s tutelage. In 2009, GNP totaled $8.9 trillion and it has continued to drop since, all the way to $8.4 trillion in 2011.

This is the principle reason why job growth remains a real negative. The Obama team loves to pat itself on the back for “creating 4 million jobs over the past 18 months.” The sad truth is that the economy should have produced about 4.3 million jobs over the past 18 months just to keep pace with population growth. But the jobs picture makes sense when you compare it to actual economic growth. As the economy continues to contract, the demand for workers continues to decline. The only difference between 2012 and 2008 is that businesses don’t need to lay off workers to accommodate the reduced demand. They just simply don’t hire new employees.

I can summarize this with a very simple statement: if it seems to you that the recovery we hear so much about hasn’t ended the Great Recession, that’s because it hasn’t. There hasn’t been a recovery, except for those with direct ties to government spending. That’s the one component of GDP that has increased: by over $1 trillion over the past three years.

So, the next time you see a GDP number that trumpets economic growth, remember to dig into the numbers a bit. And remember, this is White House that replaced managing economic growth with managing spin.


And Now a Word about Gas Prices


Remember when "Sticker Shock" meant getting screwed by a car dealer?

Remember when "Sticker Shock" meant getting screwed by a car dealer?

Face it, you just went to fill up your tank this morning and discovered that it cost you $2 more this week than last to put 12 gallons into the tank. Last week, it was $1.80 more than the week before. And so on, all the way back to the first week in January.

You complain. You gripe. Your neighbors are equally disgusted. One of your coworkers seems to bring up the topic of exploding gas prices every day. In the meantime, you noticed that your wife spent $30 more on groceries this week but brought home less food. She’s half-heartedly joking that at this rate, it will be PB&J for dinner by summertime.

Everyone seems to be talking about the way prices are skyrocketing, but nobody seems to be doing anything about it. And I’m going to let you in on a little secret: there isn’t anything anyone can do about it.

The reason prices are taking off is the dirtiest word in economics: inflation (okay, maybe the second dirtiest word after recession). Why? People automatically assume inflation means rising prices. But rising prices are the symptom, not the problem. Inflation occurs when the money supply outgrows the demand for that money. It is classical, John Smith economics at work in its most basic form: supply and demand. When supply outstrips demand, prices fall. That’s true of any product. Build more cars than the public wants and the price of cars drops. Grow more wheat than you can sell and you slash the price to where you’re virtually giving it away. In those cases, the fix is relatively simple but usually takes time to implement. Build fewer cars. Grow less wheat. Of course, you’ll need to wait a full manufacturing cycle for production to drop to a point where the supply of cars matches the demand. You need to wait an entire year before wheat prices correct.

But what happens when you print too much money? Well, basically the same thing: you shrink the availability of money. You raise interest rates on the purchase of new capital, to make it less palatable to prospective buyers. You restrict international trade of currency. You can also do things to tinker around the edges, like demand banks hold more cash in reserve and prevent corporations from dumping cash into the market. But the reality is all of these things take time to work – a lot of time. In the meantime, the hangover effect of inflation – raising prices – hits everyone hard.

And again, the reason is simple. Wages are tied to productivity, not the price of money. In fact, inflationary periods result in reduced wage pressure because as money sloshes around in the economy, productivity declines. Not because people are working less (they’re usually working more, and harder) but because the value of work is declining along with the value of the currency. The net result is you work harder to bring home the same amount of money you were before – but that money has reduced purchasing power.

Now here’s why nothing can be done about inflation in the near term: the inflationary bubble was created between 2008 and 2010 and we’re just now beginning to feel the effects. Picture the way a tsunami moves – if you’re out on the ocean, you’ll hardly notice a ripple. As you get closer to shore, the pressure builds. Enough of a wave will swamp everything for miles inland once it reaches shore. Inflation is similar in that the pressure is created much further away than when the effects are felt – and like a tsunami, there is no way to stop the momentum once it’s put into motion. We created the current inflationary bubble when we decided to print money in order to escape the Great Recession. Most Keynesian economists (guys like Paul Krugman and Robert Reich) cheered on the printing presses and have been vocal in their calls for cranking them up even faster. They’ve pointed to the short-term pain felt throughout economies that chose to choke down on the money supply while disregarding the damage to our economy rampant inflation will cause. In short, they’ve forgotten the lessons of the 1970’s in the US and the 1990’s in Japan.

Under ordinary circumstances, their calls for greater government borrowing would make sense – given the insanely low current interest rates. But they either ignore or fail to understand how that borrowing is financed. In ordinary times, governments issue bonds which guarantee a certain return on the initial investment. Private markets purchase those bonds and new money is generated (i.e., printed) to cover the interest earned on the bonds. So long as the increase in the money supply roughly matches real growth in the economy, inflation is kept minimal. But the current spending spree ignored those basic rules of supply and demand. First, The US Treasury dumped about $3 trillion of the $5 trillion borrowed over that time directly into the finance sector. Besides the bank bailouts in 2008 and 09, there wasn’t enough demand for US Treasuries to absorb all of the new bond that were floated. So the Federal Reserve purchased them and then resold them through two round of “quantitative easing.” That direct infusion of currency outpaced real GDP growth by 5.6% alone. It doesn’t factor in the interest owed on those bonds or the effects of the nearly $2 trillion in cash the Federal Reserve created on its own. When you add all of it up, the economy now has roughly $2.5 trillion more in cash than needed to meet demand. That equates to 17% inflation – 17% more money supply than demand would allow.

This isn’t to say that we’ll actually see 17% inflation before all is said and done – there are other things that could keep the number lower. For instance, if the world’s other major currencies remain weak then the dollar will retain a semblance of strength and that would mitigate the effects of inflation. At the same time, a country with a relatively weak currency that holds large reserves of dollars (say, China) could decide they need to strengthen their currency’s relative strength against the dollar and start dumping our currency.

But until then we can conserve, or drill, or do some combination. While it will have a short-term effect of mitigating the price at the pump, the end result will be the same: gas (along with everything else) will cost more this time next year than it does today. The problem with gas prices is not supply (we have more than at any time in the past 40 years) or demand (the world is using less gasoline than at any time in the past decade). In fact, the cost per gallon of gas has actually decreased, relative to actual dollar value, over the past 5 years. But because the cost hasn’t dropped as fast as inflation has risen, the price continues to move upwards.

THAT is the dirty little secret no politician in either party wants to tell you.


SOTU? SNAFU


Tonight, President Obama will deliver his (hopefully final) State of the Union address. Since I imagine you have better things to do, I thought I would give you the Cliff’s Notes version now.

1. The economy, despite Tea Party intransigence, is gaining momentum. Only 21 million of you are looking for a real job now, when 13 million were doing that when I gave my first State of the Union speech.
2. Under my leadership, we’ve finally got the national debt under control. You might remember I promised to that back in 2008. Well, this year we’re projecting the deficit will only be $980 billion! Imagine that – the first sub-trillion dollar deficit ever (on my watch).
3. Of course, the economy still needs work. It’s very, very unfair to expect that when so many of you now need food stamps, that the other half of the country doesn’t pay their fair share. Why, my good friends Warren Buffet and George Soros were complaining they don’t pay enough in taxes! So, I’m asking you to pay up. Pay up A LOT, in fact.
4. Were making big strides in those green jobs I promised. Why, we’ve given billions of dollars to companies like Solyndra in the past year, and look how it’s paying off.
5. On a related note, I also bailed out the auto companies. Okay, Chrysler got bought by Fiat and it’ll take decades before GM’s stock price gets back to what we paid for it. But, did you notice GM actually sold a couple of Volts last month?
6. There was a Democratic president who once said, “The buck stops here.” Well, I’m happy to report that I’m passing that buck right back to you. Remember, I pointed out last summer that you’re all a bunch of whining, lazy do-nothings. So, this mess is yours – just reelect me in November. I kind of dig the free house that comes with the job. Oh, and getting the chance to sing at the Apollo without the risk of getting booed off was pretty cool, too.

We now return you to your regularly scheduled lives.


SOTU? SNAFU


Tonight, President Obama will deliver his (hopefully final) State of the Union address. Since I imagine you have better things to do, I thought I would give you the Cliff’s Notes version now.

1. The economy, despite Tea Party intransigence, is gaining momentum. Only 21 million of you are looking for a real job now, when 13 million were doing that when I gave my first State of the Union speech.
2. Under my leadership, we’ve finally got the national debt under control. You might remember I promised to that back in 2008. Well, this year we’re projecting the deficit will only be $980 billion! Imagine that – the first sub-trillion dollar deficit ever (on my watch).
3. Of course, the economy still needs work. It’s very, very unfair to expect that when so many of you now need food stamps, that the other half of the country doesn’t pay their fair share. Why, my good friends Warren Buffet and George Soros were complaining they don’t pay enough in taxes! So, I’m asking you to pay up. Pay up A LOT, in fact.
4. Were making big strides in those green jobs I promised. Why, we’ve given billions of dollars to companies like Solyndra in the past year, and look how it’s paying off.
5. On a related note, I also bailed out the auto companies. Okay, Chrysler got bought by Fiat and it’ll take decades before GM’s stock price gets back to what we paid for it. But, did you notice GM actually sold a couple of Volts last month?
6. There was a Democratic president who once said, “The buck stops here.” Well, I’m happy to report that I’m passing that buck right back to you. Remember, I pointed out last summer that you’re all a bunch of whining, lazy do-nothings. So, this mess is yours – just reelect me in November. I kind of dig the free house that comes with the job. Oh, and getting the chance to sing at the Apollo without the risk of getting booed off was pretty cool, too.

We now return you to your regularly scheduled lives.


Mr. Perry, Only serious candidates need apply


In a way, I feel sorry for Texas Governor Rick Perry.

Is Rick Perry really just another Bozo?

When Sarah Palin decided not to run for President, Perry was anointed as the only real conservative with any political heft running for President. After all, he is the longest serving Governor of the nation’s second largest state, a state that remains prosperous despite the national economy generally being in the tank for the past four years. He announced his candidacy to the thunderous roar of making the federal government “as inconsequential in your life as I can.” I’m hoping that statement isn’t a result of introspection – because right now, a Perry presidency looks like an even bigger disaster than the Obama presidency became.

First, Perry proved everyone right when they said he was a lousy debater. Along with the rest of the nation, I can handle a guy who flubs an occasional fact (it happens to everyone). I can stomach the person who comes across as a walking stiff; nobody should be overly confident on a debate stage. But Mr. Perry managed to come in even below the already low expectations set by his campaign and supporters. When Perry was awake enough to pay attention to what was happening on the stage around him, he demonstrated an incredible inability to articulate even the simplest thoughts, much less explain policy decisions a Perry administration would make. In the end, his only recourse was to lash out angrily (a lá Newt Gingrich, but without Newt’s wit) at his competitors. The resulting image is of a slightly dim-witted bully, not a future President of the United States.

Now, we have the Perry economic plan. In announcing this plan, Perry declared it to be “bold.” If by bold, you mean “schizophrenic,” then I agree with you, Mr. Perry. This is nothing more than pandering to various interest groups. If meant as a way to kick-start the conversation about the role of government, then it might be acceptable. But I think he actually meant it as an economic outline, in which case it will only work to drive millions of Americans into destitution and despair. Why? Look under the hood and here’s what you find:

  1. Tax policy: Perry proposes a 20% flat tax, except it isn’t. It is a 20% personal income tax policy, with deductions for mortgage interest, state and local taxes, and charitable gifts. Worse, for those with incomes under $500,000 the personal exemption increases to $12,500 per person. Taxes on business profits are also reduced to 20%, with no deductions – save for a one-time reduction on off-shore profits to 5.6%, intended to lure overseas profits here to spur job growth. Still, even if you get past the misnomer (a flat tax is just that; one tax rate without any exemptions) then you’re tempted to say this seems reasonable.The biggest complaints regarding the current tax code are the complexity and that the current distribution of the tax burden predominately falls on the middle class. How does the Perry Plan address these two problems? My best guess is by ignoring them. For starters, any taxpayer can opt to keep the current tax plan instead of the new one. Imagine running a business under those circumstances: now you have to track two different tax codes and try to determine which works best for your company (I suppose accounting firms will love it).An entire new level of complexity just got added into your business model, because no business I know is going to arbitrarily choose one plan over the other without doing a full cost-benefit analysis. As to the personal taxes, Perry is correct in assuming most Americans will opt for his single rate plan. After all, a full 50% of American households won’t pay any taxes under it. The remaining half will bear the brunt of the tax burden – which is roughly the same distribution as we currently have, just with less money coming in. Unless you’re in the middle class, in which case you’ll probably wind up paying more in taxes. Brilliant election year strategy (see: Cain, Herman for how well raising taxes on the middle works).

    This is no gain, all loss. (You can find the data used to compute tax distribution here).

  2. Social Security: Perry proposes relieving income taxes on those receiving Social Security, while making it an opt-in program for current workers. Sounds great, except the only people currently paying taxes on Social Security benefits are those with over $50,000 in personal income per couple (how many retired couples do you know with $50,000 in annual income?). As for making Social Security an opt-in program, there’s a very big problem with that plan: current workers actually pay for existing retirees. The. idea that the government takes your money, then invests it into a “trust fund” from which you draw your retirement benefits is patently false. What happens is the government takes those payroll taxes we all pay and uses those funds to pay current retirees. If there’s a surplus, then the government uses that money to purchase T-Bills and then uses those funds to help the general ledger; if there’s a shortage, then the reverse is true. This is a month-to-month accounting system, not an annual line-item budget item. So, imagine what happens if even half of current workers opt out of Social Security? Yes, you guessed it: the entire system goes belly up, threatening in one fell swoop to turn us into Greece, with a national debt ballooning by the billions every month and an unfunded national pension plan. Worse, you and your employer is still obligated to pay those pesky payroll taxes, but with an entirely new level of complexity. Is this now income, since it is being deposited into an investment account? What type of account is it? Who manages it? What level of accountability is there, and to whom?Social Security does need to reform to keep it solvent. But nuking the entire economy in order to do it isn’t very bright.
  3. Health Care: One of the greatest threats to economic growth, both now and in the future, is the dizzying rate of increase in health care costs. Nobody has yet to put forth a proposal that actually does anything to reduce that curve and Perry joins right in. His plan is little more than “reduce fraud in Medicare.” Lovely idea and it should certainly be part of the agenda. Except we’ve been hearing about that for 25 years now. It seems to me that with that much emphasis on reducing Medicare fraud, it should amount to $1.30 or so by now. 
  4. Balancing the budget: Well, of course. Everyone I know agrees the federal budget should be balanced (except for a few die-hard Keynesians, but they’ve been proven wrong on this so many times over the past 60 years I find it hard to believe they’re still around). But Perry doesn’t offer any specifics aver how he would do it. He does offer platitudes, such as “Pass a Balanced Budget Amendment” and “Cap Federal Spending at 18% of GDP.” He suggests freezing federal hiring – not a bad idea, but we’re not running $1.4 trillion deficits because of federal hiring. He also wants to do away with earmarks. While that is certainly an admirable goal, the President (as leader of the Executive branch) can’t do much about it: appropriations bills are still written by Congress. If some Congressman from Bum Rush wants $800 million for a road to nowhere and can convince a majority of his peers to go along with the idea, it’s getting added into an appropriations bill somewhere.

Frankly, the entire Perry candidacy so far has shown him to be a man whose ambitions far outstrip his talents, ability, intelligence and demeanor. As such, I think his current poll standing is about right (barely treading more water than Michelle Bachman or Rick Santorum). The American people are interviewing candidates for the Presidency, Mr. Perry. Only serious applicants will be considered.


Keynesian Kops


The Obama Economic Plan

Back in the silent movie days, a popular serial involved the escapades of the Keystone Kops. They were a frenetic bunch, but ultimately so incompetent they couldn’t do much of anything. They would run this way and that, stumbling about and generally more successful at running into walls and slipping on banana peels than solving crimes. As a vaudeville act, they were hilarious. As a police force, not so much.

Watching economists from the Keynesian school is a lot like watching those old silent films. They trip over each other in explaining why the economy is moribund and what should be done about it. Never mind that everything in the Keynesian playbook has been tried (and predictably, failed). Fiscal stimulus: over the past 30 months, the federal government has pumped in $2.5 trillion over and above previous spending levels – and GDP is declining after inflation, not growing. Monetary stimulus: the Federal Reserve burned through two rounds of pumping cash into the economy. No growth, but inflation is growing exponentially each quarter. Now the Fed is planning on QE3 – pumping even more cash into an economy that has more cash than can be spent.

Keynesians love to point out that their economic theories are borne out by their successes in the Great Depression. But that assumes that those policies were successful. It seems pretty doubtful that they were. For instance, here in the US, the government did manage to achieve an aggregate GDP growth rate of 9.68% between 1933 and 1940. But in order to achieve that growth, the federal government increased spending by 110% from 1932 levels. In raw numbers, the government spent just shy of $61 billion during those 7 years. But GDP only grew by $47 billion. Remove the government spending, and the economy actually shrank by 26%. That’s a pretty dubious success.

In fact, that’s exactly what happened in 1937: Congress slashed spending, and the economy promptly declined 4.64%. Rather than create sustainable growth, all that government largesse accomplished was an economy that was reliant on government largesse. Entrepreneurship, innovation and efficiency were replaced as keys to success by graft, corruption and political machines. (There was a reason Frank Capra’s Mr. Smith Goes to Washington struck a nerve when released in 1939).

Equally important – and hugely different – from today is the amount of debt headroom FDR had when deciding on a Keynesian approach. In 1932, total federal debt amounted to 51% of GDP. By 1940, that had risen to 71%. In 2008, total debt was already approaching 100% GDP and we’ve since surpassed that.

The liberal wing of politcracy wants a return to full-blown Keynesian economics. If we go down that path, by 2020 the federal government will account for 8 out every 10 dollars spent in the US – but the government will need to borrow 9 out of every 10 dollars it spends.

Maybe our President thinks that kind of vaudeville act is one worth emulating. But I doubt many other Americans agree with him.