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“Our practical choice is not between a tax-cut deficit and budgetary surplus. It is between two kinds of deficits: a chronic deficit of inertia, as the unwanted result of inadequate revenues and a restricted economy; or a temporary deficit of transition, resulting from a tax cut designed to boost the economy, increase tax revenues, and achieve . . . a budget surplus.” John F. Kennedy

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Dec 10 2012

“The Age of the Unserious”

C.M. Phippen

Our president claims that he is making an honest effort to negotiate with Republicans to avoid the fiscal cliff. He wants us to believe that they are the ones who simply won’t budge on their positions and won’t allow him to fix the horrific fiscal issues we face.

This is the president whom Tim Geithner claims is willing to go off the fiscal cliff if the Republicans don’t agree to his plan to raise taxes on the richest 2% because, in Geithner’s words, “remember, it’s only the top two percent.” Doesn’t unequal treatment under the law become a civil rights issue at some point!? Anyway . . .

This is the same president who has had his past two budgets shot down in Senate votes of 99-0 and 97-0, one of which looked an awful lot like Obama’s current proposal from which he is negotiating. He apparently expects Republicans to support the plan that his Democrat allies in the Senate refused to support?

In addition to major entitlement spending cuts, the greatest priority our government should have is that of allowing/encouraging/stimulating economic growth, which will in and of itself lead to the President’s desired revenue increases.

In fact, Bill Whittle recently made the point that “if you destroyed the entire government, burned every [public] building, fired every government worker, sank every aircraft carrier, even with no government to pay for – none – we’d still pay the same taxes that we’re paying today and still have to borrow or print money just to pay for entitlements.”

I would argue that if we do indeed have a shortage of money for schools, teachers, police and other government services, it is entitlement spending that is draining those resources, not tax cuts or wars.

Even Austin Goolsbee, former president of Obama’s Council on Economic Advisers, recently stated that any solution to America’s economic ills “cuts on discretionary and entitlement spending.”

In addition, Peter Orszag, former OMB director, recently came out urging his fellow Democrats to support reforming entitlements and putting “crucial programs on a sounder footing.”

I must assume that our president is well aware of the fact that nothing in his rejected budget plans or spending priorities will stimulate growth. And he has made it very clear that, despite his repeated declarations to the contrary, he is never going to cut any real spending.

Thus, his only plan to decrease the rate of growth of our historically unprecedented federal deficit seems to be an increase in revenue coming from the already over-burdened taxpayer. Unfortunately, the proposal on which he is willing to risk our entire economy, that of increased taxes on the top 2%, leads to enough revenue to cover expenses for about eight days! Brilliant!

Even the Obama-touted Buffet Rule, if implemented, would pay for about 28 hours of government spending. If you want to close the deficit through increased taxes on the two highest tax brackets – 33% ($178,650 – $388,350) and 35% (over $388,350) – it would be necessary to hike those rates to 159% and 166% respectively. I’m assuming most liberals would tell us that such rates would have absolutely no impact on economic growth or the willingness of those individuals to work!

AEI economists recently looked at the effect of tax increases v. entitlement reforms on fiscal crises management over the nearly three-decade period of 1970-2007. They found that countries that were able to successfully reform did so mainly with spending cuts; in fact, on average 85% of their budget gaps were closed this way. On the other hand, those with failed reforms were the countries that, on average, relied at least 50% on tax increases.

Just ask Jim Sinegal, co-founder of Costco, if those tax increases will most likely lead to greater or reduced revenue next year. He’s a supporter of Obama who preached the moral imperative of Obama’s tax plan, and of businesses large and small all “following the same set of rules . . .” while risking Costco’s credit rating to take on an additional $3.5 billion in debt in order to pay out dividends this year before Obama’s tax hikes kick in. Oh, and he is apparently the biggest beneficiary of this move.

Or ask Great Britain how a plan of tax increases worked for them last year when they raised rates on those making over £1 million (about $1.6 million) to 50%. The result was that they saw a £7 billion treasury loss as nearly two-thirds of the high earners were suddenly missing from the country or finding ways to shelter income.

Funny though, that even after the manifestation of the result of such policies, political supporters of the increased tax are now calling any reduction a “tax cut for millionaires,” as though resentment toward the wealthy is more important than the amount of money the government actually has for programs which benefit the less well-off.

Yes, Mr. Whittle, I think you’re right; this truly is “The Age of the Unserious.”


Jul 26 2012

Obama’s Plan Worked?

C.M. Phippen

What plan was it that “worked”?

The plan where the debt held by the US government increased by an amount greater than the debt accumulated from George Washington’s presidency all the way to Bill Clinton’s?

The plan where US competitiveness fell from 1st to 5th?

The plan where unemployment went up as rapidly as the federal deficit and 700,000 more workers lost their jobs during the Obama recovery (I’d certainly hate to see an Obama recession)?

The plan where already unaffordable worker health insurance costs increased 23 percent?

The plan where the number of Americans in poverty rose by 6.4 million, to the highest level since the start of the war on poverty in 1965; and that is with the safety nets in place that were created by that war?

The plan where the number of Americans on food stamps increased 44%, to the highest rate EVER, all while the government runs ads touting dependence on food stamps to help you “look amazing“?

The results of the plan which lead Henry Waxman to declare this?


Jun 15 2012

Austerity: A Balanced Approach?

C.M. Phippen

Concerns are spreading that Germany is on the verge of losing its safe-haven status for investors. According to Bill Blain, co-head of the special situations group at Newedge Group Ltd, “[Germany] isn’t a pure safe haven anymore.” As it finds itself potentially on the hook for an additional 100 billion euros ($125 billion) after the EU bailout of Spanish banks earlier this month, investors are starting to see the cracks in the foundation of what has been a star in the EU economies.

Not only does the most recent bailout scare off private investors from Spain, who know they will be the last in line if the country does eventually default, but most analysts fear this bailout is only one of many. Estimates of future liquidity injections in Spain alone are as high as 700 billion euros, which would decimate the EU rescue funds.

Despite German fiscal restraint, high worker productivity and relatively low levels of unemployment, apparently a system where a minority put in the serious work and everybody else lives off of their largess while sipping margaritas, is an unsustainable system.

As Angela Merkel recently stated, “Germany’s powers are not unlimited,” and “All the (aid) packages will ring hollow if you overestimate Germany’s strength.” Even the German economy can be dragged down by too many dependents pulling at it for too long.

It’s time for the rest of the European countries to start playing by the rules of success, the rules of true austerity.

In Britain, promises to reform social programs and cut taxes and spending were made by Gordon Brown just before leaving office, but instead he increased the top marginal income tax rate. In 2011-2012, spending increased, the public pension system is still not reformed and “the government increased the capital gains tax, national insurance tax and value-added tax along with other fees and duties.”

In Spain, while the retirement age was increased from 65 to 67, no structural reforms have been made to entitlements. Additionally, myriad tax rates have been increased, from income and property taxes to tobacco taxes (up 28 percent). While the current budget calls for spending cuts as well as tax increases, there is little chance that the tax increases will bring in the expected revenue because of a lack of economic growth. With entitlement spending unchecked, deficits are projected to continue rising.

France’s spending increased $33.4 billion between 2009 and 2010, and $29.5 billion in 2011. The Socialist government there also plans to implement a new 75% top marginal income tax rate for anyone earning over $1.3 million, in addition to an increase in the corporate income tax rate. At the same time, they are promising significant public sector hiring, a decrease in the retirement age and an increase in the minimum wage, which has been shown to price the least skilled workers out of the labor market.

According to recent research, a “balanced approach” to austerity (isn’t that the new progressive catch phrase?) doesn’t end well. An austerity program that involves both tax increases and spending cuts does not successfully stabilize debt and leads to economic contractions in the marketplace.

Harvard economists Alberto Alesina and Silvia Ardagna looked at 107 examples of austerity in developed countries over a period of 30 years and found that spending cuts without tax increases were the key to significant debt to GDP ratio reductions. They also discovered that when those spending cuts were accompanied by structural reforms, easy monetary policy and a liberalization of markets, economic expansion was most often the result.

Across the ocean here at home, the story is, unfortunately, much the same. While we could continue down our current path of demonizing the rich and blaming them for not paying their fair share (who can possibly believe that the top 5 percent paying 59 percent of federal income taxes while earning only 35 percent of total national income is somehow not their “fair share”?!), all the while threatening onerous taxes and regulations, we wonder why corporations are sitting on massive amounts of cash and refusing to hire new workers.

President Obama’s claim that his policies would “have this done” (fixing the economy) within three years and Clinton’s encouragement in 2010 to “vote ‘em out” if the economy weren’t fixed in two years lead me to think that this administration is honestly and genuinely surprised that their understanding of the economy just isn’t reality.

Welcome to the world the rest of us live in . . .


Aug 6 2011

Household Debt, Washington Debt

Here’s the explanation of Dave Ramsey – the guy who’s built a business helping people get their finances under control – putting the Washington debt debate in terms the average guy can understand:

If their household income was $55,000 per year, they’d actually be spending $96,500—$41,500 more than they made! That means they’re spending 175% of their annual income! So, in 2011 they’d add $41,500 of debt to their current credit card debt of $366,000!

And S&P was the only one of the three rating agencies to downgrade our debt?


Jul 23 2011

The Party of No, Stop Now!

C.M. Phippen

Does anyone remember how just a few months back, the Democrats and the media kept referring to the Republicans as the “Party of No”? Democrats had been frustrated with the conservative ideal of limited government, translating into less government spending and fewer regulations. Now, frustrated with John Boehner’s unwillingness to continue the out-of-control spending of this administration that would increase the debt $4.9 trillion between 2010 and 2016, the president asked just yesterday if they (Republicans) can “say yes to anything?”

Of course, we all know that what everybody really wants is “new programs or the NFL season getting resolved,” but unfortunately for this president, somebody has to grow up and do the things that no one really wants – stop spending money we don’t have and can’t afford to borrow. That requires a whole lot of saying, “No!” to politicians who are accustomed to winning reelection by the very act of spending our money foolishly.

In 2009, 51% of American households paid no income tax; one out of every three dollars earned in the US goes to “pay for or comply with federal laws or regulations,” and this is before the implementation of new health care and financial services regulations; and “social welfare benefits make up 35 percent of wages and salaries this year, up from 21 percent in 2000 and 10 percent in 1960.”

Maybe Steve Wynn has it right when he complains that Obama keeps making speeches about redistribution and punishing successful businesses that don’t do what he wants them to do. Maybe we need to slow down entitlement spending to a sustainable level, like that advocated in 2009 by Obama, when he said that long-term economic recovery couldn’t be attained without reforming costly entitlement programs.

Just last week Moody’s acknowledged that having access to more money by raising the debt ceiling will not assure a continuation of the AAA rating for the US; the deficit must also be reduced. In order to just get transfer payments down to pre-recession levels, “wages and salaries would have to increase $2.3 trillion, or 35 percent, to $8.8 trillion, or social welfare benefits would have to decline $500 billion, or 23 percent, to $1.7 trillion.”

The key is job growth and reduced spending. The party of Obama would like to raise taxes, thus stunting growth, and keep spending at record levels. It should be obvious at this point that the stimulus did nothing to change our fortunes or, as an economist at a liberal think tank claimed in 2009, to have “caused a sharp change in the path of the economy, which had been in steep decline.”

All we’ve done is to have kicked the can a little further down the road, something our president claimed would end with him. So yes, if the options are between supporting the Party of No Solutions or the Party of No More Spending, sign me up for the latter, along with the rest of the 49% who are paying the bill.


Apr 19 2011

Signs of Destruction

C.M. Phippen

As I’ve tried to better understand the events leading up to the financial crisis of 2007-2008, I’m haunted by a comment made by Charles Gasparino in The Sellout. He stated that as corporate bond prices lost value in the rapidly declining market of June 2007, there was a dramatic “flight to quality of investors selling corporate bonds and snapping up supersafe Treasuries” (Gasparino, p 265), the bonds considered the safest available.

At about the same time, in June of 2007, the rating agencies (Standard and Poor’s, Moody’s) began downgrading mortgage-backed securities, despite the fact that they had been showing signs of deterioration for a year or two prior while still maintaining consistent AAA ratings.

One-and-a-half years earlier, in late 2005, AIG made the decision to no longer insure CDOs underwritten by US financial institutions because of the lax standards in US subprime lending (Gasparino, p 226). At about the same time, Bill Gross of PIMCO was warning about falling housing prices and defaults.

Now let’s jump to 2011. Over the past two years, the Fed has pumped nearly $3 trillion into the economy by purchasing US treasuries (QE1, QE2, and reinvestment of maturing treasuries). This in addition to all those purchased by private investors fleeing toxic CDOs.

In February, Bill Gross of PIMCO, “one of the largest investors in the Treasury market,” announced that he would be selling Treasuries and just one month later, with no holdings of US government debt, began shorting them.

In a major shift, China has begun pouring money into hard assets and away from US government debt.

A former advisor to China’s central bank, Yu Yongding, recently “likened the U.S. Treasury market to a ‘giant Ponzi scheme,’ arguing that Federal Reserve buying of Treasuries has artificially kept bond prices high, but that they would eventually fall to levels which reflected fundamentals of the U.S. economy.”

S&P just lowered the outlook on US debt from stable to negative, signaling the potential eventual loss of the AAA credit rating and “a sign that the ratings agency has doubts about prospects for taking effective action to curb deficits and debt.”

To argue that deficits and debt can be reduced by raising taxes as opposed to cutting spending would be to ignore the realities of history. Regardless of marginal federal tax rates, revenue raised has always remained fairly consistent, at about 18% of GDP. In fact, raising capital gains rates could likely have the opposite effect, as more people have historically sold more assets during lower-rate periods than higher-rate, when taxes collected on gains have historically plummeted. Interestingly, lowering capital gains tax rates in a high-growth business environment has been one of the only ways shown to actually create outliers in this equation – increased percentages of revenue above the 18% norm.

All the while, President Obama’s budget would add $9.5 trillion to the debt from 2011-2021, a near doubling in just 10 years! Just as many of the major players on Wall Street spent the years leading up to their firms’ meltdowns playing golf and entertaining, we seem to have a president equally oblivious to the eventual destruction being sown all around him. While it looks like many of the American people have learned from the mistakes of the past decade and are willing to accept the changes that entails, the lack of foresight and leadership emanating from the capitol is the very essence of Nero fiddling while Rome burns.


Aug 12 2010

Debt Monetization and Solutions (courtesy of The Onion)

C.M. Phippen

Anyone competent enough to figure a few simple math problems must have already come to the conclusion that our government is headed down a road of utter financial armageddon. Recently, a friend mentioned to me that he thinks taking a long-term approach to analyzing our economic state as a nation can only lead to extreme conclusions, and thus not realistic for the United States. Just what is it that makes us so different from all the other nations that have defaulted on their debts over the years?

It seems as though Sheldon Finger, over at the Huffington Post (presidentially approved news source, BTW) is agreeing with me on the very conclusions I’ve drawn, and which were viewed by my friend as “extreme” – that we are being led down a path that is looking more and more like Zimbabwe or the Weimar Republic, and it’s time for hard choices.

The Onion has a solution to our debt problems and I think it might work better than the recently-announced policy of federal debt monetization, which is precisely the next step on the path to the aforementioned armageddon. Take a look and let me know if you agree or if you have any ideas for a better way!


U.S. Government Stages Fake Coup To Wipe Out National Debt


Jul 29 2010

70/30 Nation

C.M. Phippen

So, 36% of the American public thinks Obama is doing a good job on the deficit. In fact, 23% didn’t think the stimulus package added to the deficit at all. That level of miseducation is astounding to anyone even the slightest bit economically informed. The federal deficit for the 2010 budget is projected to be 10.6% of GDP, with an expected increase even higher next year. This, even though according to our President, we’re in the middle of recovery.

Federal discretionary spending increased over 80% from 2008 to 2010, thus resetting the baseline at an extraordinarily high level. Every new budget going forward starts at that point and goes upward from there; any reductions are considered cuts – something that almost never happens in Washington. What does tend to happen is that spending will increase each year, thus ensuring greater and greater deficits, and an exploding national debt as far as the eye can see.

Deficits under George W. Bush were in the 1-3.5% range until 2009, for which President Bush and President Obama were both responsible. Most of us believed spending was out of control under Bush, only exacerbated by the $800 billion (ten year) price tag on Medicare Part D.

President Clinton was elected to his first term in office with a minority of the popular vote, which had been split by Ross Perot with 19%. What was the issue that so divided fiscal conservatives and was the basis of Perot’s campaign? Concern over a deficit of approximately 4% of GDP.

A quick review of articles written during the Bush administration attests to the fact that liberals have been consistently concerned with out-of-control deficits during periods of time when they’ve been a fraction of what they currently are. I certainly hope this concern is genuine rather than political and we’ll soon see wide-ranging support for massive spending cuts in order to meet the historically consistent level of spending at 18-20% of GDP.

Politicians from both parties have been selling out the future of our country in order to buy votes in the here and now, and the rest of us just can’t afford this party any more.

In The Battle, Arthur C. Brooks outlines a consistent 70/30 split among the American population. That is pretty much what we see in this support for current policies dealing with budget and spending issues.

Nearly 70% of Americans agree that they’re better off in a free market economy than not, “despite its severe ups and downs.” Fifty-six percent of Americans believe their income taxes are too high, while 33% believe they’re just right. Astoundingly, while many Americans believe that the rich should pay more taxes, 69% believe that the top tax rate should be 20% or lower! Seventy-six percent believe the strength of America is based on the success of American business and 66% believe that when “big business” earns a profit it helps the economy; alternately, 18% believe it hurts (where did they go to school?) When asked if they would prefer larger government with more services and higher taxes or smaller government with fewer services and lower taxes, only 21% of Americans chose larger, more expensive government while 69% preferred smaller.*

There is a minority of the population, the 30%, who will, due to lack of understanding or pure ideological drive, charge ahead in attempts to completely redefine and transform this nation of freedom and wealth which was unimaginable in the world just a few centuries ago. It is the rest of us, the 70%, the mainstream of America, who stand in their way. It’s time for the politicians to represent us.

(Polling data excerpted from The Battle by Arthur C. Brooks, Basic Books, 2010, pp. 3-12)