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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 24 2012

Stimulus and Economic Growth?

C.M. Phippen

According to a recent interview with Larry Kudlow, Alan Greenspan admitted that, much to his surprise, the economic stimulus had a negative effect on the economy. The data showed that not only had it not been stimulative, it was actually detrimental to economic growth. Our government spent nearly $1 trillion and it not only did nothing to “stimulate” growth, it actually hindered it.

That makes sense, based on a little statement by Jared Bernstein a couple of years ago. I wrote about it at the time. Bernstein was the chief economic advisor to Vice President Joe Biden and he stated that the consensus among economists was that unemployment would not rise above 8 percent. This consensus ostensibly existed independent of any plans by the administration to pass a stimulus bill that amounted to nearly $1 trillion of borrowed money, as it existed in the fall of 2008 and prior to Obama entering the White House. Apparently the administration was as surprised as Alan Greenspan to find that the stimulus did precisely opposite what our president told us it would do.

One could expect any open-minded, non-idealogical leader to learn from the events of the past few years and change course; reconsider the policies that have stunted economic growth and harmed millions of Americans.

When asked recently by a reporter why President Obama hadn’t met with his jobs council in over six months, Jay Carney’s response was that the President “has a lot on his plate.” Of course, he has attended over 100 fundraisers and is a prolific golfer and entertainer of celebrities.

But back to the economic reality that the rest of the country must face every day, a recent study by Ernst & Young claims that we will experience a loss of over 700,000 jobs if the Bush tax cuts are not extended for upper income earners. If legislation extending those tax cuts for upper earners crosses his desk, Obama apparently will veto it.

On a number of occasions, when confronted with the evidence that raising certain tax rates reduces federal revenue and cutting those rates increases revenue, Obama’s response has been that he would still raise taxes on the rich for reasons of “fairness.” One must assume he just isn’t interested in the effect of such policies on the broader economy.

Then there’s Sen. Patty Murray’s recent comment that if the Republicans won’t cave to the Democrats by helping them to pass legislation that would exempt top earners from an extension of the Bush tax cuts (remember, costing our economy an additional 700,000 jobs) then the Democrats should allow all of the tax cuts to expire. According to Citigroup, if this were to happen we could expect a 4 percent hit to growth in 2013. Even if Congress extends the “middle-class” income tax cuts and allows all others to expire, we can expect a 2.9 percent decline in growth.

This in an economy that has only been growing at around 1.7 percent for the past two years. Either of these options would most likely swiftly throw us back into recession. But of course in this political machination (most likely non-idealogical), I’m sure Pres. Obama and Sen. Murray are only looking out for the middle class and poor, who actually need a job to get by.

Then there’s this remark from Alan Greenspan in the same interview, where he said that the largest problem with our debt (the Peter G. Peterson Foundation has been telling us this for a very long time) is entitlements, specifically Medicare. The solution to the debt problem for this administration was to add to our entitlements, specifically health care, in such a way that anybody who is capable of performing simple mathematical functions is completely aware will cost us multiple trillions of dollars every decade and most likely many times that.

I’m just wondering, after this administration has, through it’s policies of fairness, pushed more working-class Americans out of jobs, decimating the income of the average consumer as well as wiping out much of the tax base, who’s going to be left to pay for it all?


Jun 23 2012

Principles or People

C.M. Phippen

I happened to notice the other day someone blaming President Reagan for the recent recession. Back in 2009, this was a somewhat common liberal refrain, and Paul Krugman repeatedly exclaimed that Reagan was responsible for the economic crisis because he was behind legislation (co-sponsored and passed by many Democrats as well as Republicans) that allowed for home purchases without large down-payments and that freed up the consumer credit market.

Here is no better example as to why we must discuss and focus on principles rather than people. I’ve never met a Democrat who didn’t support affordable housing policies or legislation that would make credit more available for those whose behavior doesn’t merit it. Funny how when the other guy agrees with you and things go wrong, it’s the other guy who was wrong.

Here is a list of statements or actions of individuals from both sides of the aisle regarding housing policies prior to the bubble bursting; see if you can figure out who said or did what.

1.”The White House doesn’t think those who can afford the monthly payment but have been unable to save for a down payment should be deprived from owning a home.”

2. “Fannie Mae has expanded home ownership for millions of families in the 1990s by reducing down payment requirements. Yet there remain too many borrowers whose credit is just a notch below what our underwriting has required who have been relegated to paying significantly higher mortgage rates in the so-called subprime market.”

3. “In a move that could help increase home ownership rates among minorities and low-income consumers, the Fannie Mae Corporation is easing the credit requirements on loans that it will purchase from banks and other lenders . . . Fannie Mae . . . has been under increasing pressure from the X Administration to expand mortgage loans among low and moderate income people and felt pressure from stock holders to maintain its phenomenal growth in profits.”

4. There exists deep concern “about increased mortgage market fragility, which, combined with growing bank portfolios in high-risk products, pose serious potential problems that could occur with dramatic suddenness.” And failure to adjust bank underwriting, reserves and capital to account for this growing risk “means that downturns from credit and/or interest rate events – let alone shocks – will be far more severe than” if precautions are taken. What is “disturbing to us is the fact that recent trends could lead to sudden increases in foreclosures.”

5. “Fannie Mae and Freddie Mac have played a very useful role in helping make housing more affordable.” Critics “exaggerate a threat of safety” and “conjure up the possibility of serious financial losses to the Treasury, which I do not see.”

6. Congress should, “enact legislation to create a new Federal agency to regulate and supervise” Fannie and Freddie because of the risks they were taking. “The concern is, if something unravels, it could cause systemic risk to the whole financial system.”

7. If Congress doesn’t reign in Fannie and Freddie, “there will be a massive default with huge losses to the taxpayers and systemic effects on the economy.”

8. “Where once more-marginal applicants would simply have been denied credit, lenders are now able to quite efficiently judge the risk posed by individual applicants and to price that risk appropriately.”

9. “President X issued America’s Homeownership Challenge to the real estate and mortgage finance industries to encourage them to join the effort to close the gap that exists between the homeownership rates of minorities and non-minorities. The President also announced the goal of increasing the number of minority homeowners by at least 5.5 million families before the end of the decade.”

10. “Back in 2005 and 2006, I argued as forcefully as I could . . . that the mortgage market would melt down in the second half of 2007, causing substantial damage to the economy.”

11. “[W]e do not have a crisis at Freddie Mac, and in particular at Fannie Mae . . . What we need to do today is to focus on the regulator, and this must be done in a manner so as not to impede their affordable housing mission, a mission that has seen innovation flourish from desktop underwriting to 100 percent loans. . . . These GSEs have more than adequate capital for the business they are in: providing affordable housing. . . . we should not be making radical or fundamental change.”

While conservatives and liberals were both supporting the expansion of affordable housing programs which not only made housing less affordable but put those least able to afford homes into them, the voices of warning were mainly coming from those outside of government. Private businesses that knew the bursting of the housing bubble could destroy them or who could profit from it, were able to see and acknowledge the downside of decades of feel-good government giveaways. Those in government were possibly too invested in the sham to see its risks, or too inexperienced in economics to understand.

Will the next bubble look any different and will the blame game remain the same? Let’s not wait to have this discussion in another decade, after the bursting of the student loan bubble, driven by the astronomical rise in college tuition due to government intervention and subsidies. Are we listening to those trying to warn us this time?

1. John Weicher, Federal Housing Commissioner (2004)
2. Franklin D. Raines, Fannie Mae chairman and CEO, Bill Clinton supporter
3. The New York Times (1999) talking about the Clinton administration
4. Suzanne Hutchinson, executive at Mortgage Insurance Companies of America (2005); http://www.foxbusiness.com/markets/2010/02/02/housing-red-flags-ignored/#ixzz1yb1vJQiv
5. Congressman Barney Frank (2003)
6. US Secretary of the Treasury John W. Snow (2003 & 2005)
7. Peter J. Wallison, scholar at American Enterprise Institute, (2005)
8. Federal Reserve Chairman Alan Greenspan (2005); http://www.nytimes.com/2010/04/04/opinion/04burry.html?pagewanted=all
9. Bush administration (2002); http://www.dailykos.com/story/2008/09/23/607383/-George-Bush-proud-parent-of-the-mortgage-crisis
10. Michael J. Burry, investment advisor at Scion Capital (2010); http://www.nytimes.com/2010/04/04/opinion/04burry.html?pagewanted=all
11. Maxine Waters, Congressional Representative from CA (2003); http://www.discoverthenetworks.org/Articles/The%20Secondary%20Mortgage%20Market.html

Quotes without a weblink were taken from the Thomas Sowell book, The Housing Boom and Bust, New York: Basic Books, 2009.