“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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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)

Jul 27 2010

Jobs and Tax Cuts

C.M. Phippen

As earnings reports come out, several companies are beating expectations, not only in bottom-line profits but also in sales. While corporations have had to cut back and trim down in order to pull back on expenditures, many are finally starting to experience some real growth.

Why, then, are they still not hiring? Last week I wrote about the fact that the political environment seems to be less than reassuring for business expansion and hiring. A comment was made by a reader that corporate tax rates are lower now than they were under Ronald Reagan, and I can only assume he was alluding to his belief that the current rates ought to then be good enough to do the trick.

The solution, though, seems to be all about the trajectory, and confidence in the political class going forward. Sir Martin Sowell, Chief Executive Officer of WPP, when asked by Larry Kudlow yesterday how the US can become a “re-emerging” market (in other words, attractive to investors as are the BRIC nations currently), his response was that the US must deal with our upcoming tax increases set for 2011 and our deficit, looking not at increasing taxes, but rather “looking at government spending.”

In a paper written by Christina and David Romer in 2008, they come to the conclusion that “a tax increase of 1% of GDP reduces output over the next three years by nearly 3%.” Christina Romer is the chief economic advisor to President Obama.

Why then, would this Congress allow the Bush tax cuts to expire at the end of this year, and why would the administration not support across-the-board tax cuts? According to Larry Kudlow, when Bill Clinton decreased the capital gains tax rate from 28% to 20%, revenue increased by $80 billion, and when George W. Bush reduced the rate even further, to 15%, revenues went up $85 billion. Couple that with the fact that Obama’s own chief economic advisor recently came to the conclusion that “tax increases have a large negative effect on investment.”

Timothy Geithner has recently stated that the White House would like to see tax rates for the top 2-3% of Americans increase in order to demonstrate to the world our commitment to dealing with our trillion dollar deficit. Heaven forbid we actually cut spending and allow private business expansion through reductions in taxes not only for corporations, but also for top earners. This encourages investors to invest, which thus encourages businesses to expand and ultimately hire more workers.

Is that really so difficult?

Jul 21 2010

I’ll be heading out tomorrow for the Americans for Prosperity RightOnline conference in Las Vegas. I’ll possibly check in while I’m there, if I have a free moment, to share any interesting information. Otherwise, see you all next week!

Jul 20 2010

Blame and Discipline

C.M. Phippen

I heard our president today, complaining that the Republicans are standing in the way of the Democrats’ desire to extend unemployment benefits without paying for it through spending reductions elsewhere or by diverting unused money already set aside for the stimulus. Democrats are refusing; they only want to pass a benefit extension bill that is paid for with newly borrowed funds. In fact, Obama today said, “It’s time to stop holding workers laid off in this recession hostage to Washington politics.” Nice . . .

Am I the only one who remembers 1995? The Republicans controlled Congress for the first time in 40 years and true to the conservative principle of fiscal responsibility (which they adhered to for at least a couple of years), refused to accept the Clinton budget. The Republicans wanted to see more spending cuts, and forced Clinton into a battle of frugality which eventually ended when the administration finally submitted a budget that proposed to eliminate the federal deficit within seven years.

The ensuing firestorm in the media, which blamed the Republicans for victimizing the government workers who were temporarily out of work, never gave them credit for the result of that shutdown – a balanced budget. In fact, most liberals I know love to use that very budget as their greatest (and only) example of fiscal restraint.

Now we have a president who wants to play the same little game, accusing those who are listening to the voice of the people crying out for fiscal responsibility of “holding hostage” the American people. This, from the party which clamored for spending restraints under George W. Bush (most conservatives did, as well) but which has been more than willing to triple our federal deficit, as a percent of GDP, to nearly 11%.

Unless we stop calling names and start controlling the checkbook, we’re going to have a whole lot more to worry about than not being able to pay multi-year unemployment benefits.

Jul 16 2010

Napoleon, Rothschild, and Unintended Consequences

C.M. Phippen

During the conquests of Napoleon Bonaparte, intermittent war raged between France and Britain for over twenty years. One of the major difficulties faced by Great Britain during those years was the issue of supplying resources to troops spread out in battlefields throughout the continent. Faraway merchants were reluctant to accept bills of exchange offered by the Duke of Wellington and his troops, and the only answer seemed to be to transport actual gold coins across Europe during a time of war.

This proposition was expensive and extremely risky. The British government turned to Nathan Rothschild, who had spent a decade in the textile industry, dealing mainly with Britain and Germany. Napoleon had placed a blockade on trade between England and mainland Europe, which had allowed Rothschild to gain vast experience smuggling gold out of England in order to conduct his business, but also in violation of that blockade. Rothschild’s knowledge and experience allowed the British to carefully and expertly move vast quantities of gold coins across the continent to their troops in need of sustenance.

Napoleon assumed that the blockade would bring Great Britain to its knees, but it actually led to them being able to access the vitally important experience which was necessary to sustain their troops in battle and continue fighting. This act of oppression created the very situation which allowed for eventual British victory.

Government actions often tie the hands of the productive and the wealth-producing members of society, whether that is the goal or not. The ingenuitive, though, will always find a way to continue on. A friend of ours recently decided to incorporate his international company far from the US or Europe because of the corporate restrictions and smothering tax rates found here.

Our new government of hope and change, our Napoleon, can do its best to control the actions of everyone in society through oppressive policies of redistribution and forced equalization, but the end result will be a population where all may be “equal” (to a bureaucrat, anyway) but none will be wealthy and few will be productive. In fact, it won’t be long before the most productive will go elsewhere to make their money. I think I’ve seen this all somewhere before, but hey, this time is bound to be different . . .

(Historical information excerpted from Niall Ferguson’s The Ascent of Money, Penguin Books, 2008, pp. 82-84)

Jul 7 2010

Cash and Corporations

C.M. Phippen

My husband was recently speaking with a friend who works for a large venture capital firm. His friend informed him that while companies have mountains of cash right now, no one wants to invest and he’s never seen anything like it in his industry before. The uncertainty of the financial markets, brought on by fear of increased taxes on investments as well as income, is so disconcerting that a state of paralysis has overtaken much of our economy and made growth nearly impossible.

Joe Biden has admitted that “There’s no possibility to restore 8 million jobs lost in the Great Recession.” During the presidential campaign, a common complaint was that Obama had no business experience. I’m afraid that when our country elected a man who, despite all protestations to the contrary, exhibits through his actions the belief that only government can save us, we got exactly what we voted for. Further, this is a man who never had to innovate, never had to make a payroll, and never had to worry about the bottom line; instead, he organized victims in the community, probably paid for by government grants, and then worked as an adjunct college professor with a guaranteed salary. Of course he and Joe can’t figure out how to create jobs (other than those short-term census gigs, but that might have more to do with the founders than this administration).

I know businesspeople who would be glad to hire more workers but they see absolutely no incentive or benefit in taking risks right now. If their gamble is successful, they’ll soon be paying nearly 40% of their increase in income to the federal government, and there’s always the pretty good chance that the economy really isn’t turning around and workers will need to be laid off, resulting in penalties to the employer through increased unemployment premiums. Why bother?

According to Karl Denninger at The Market Ticker, corporations are hoarding cash because they see things getting worse; if they saw growth opportunities, they would certainly be investing in them.

So, buckle up and hold on because this market indicator tells us that it’s going to get a whole lot worse.

Jul 2 2010

Investments, education, and government policy

C.M. Phippen

A lot of exciting things are going on in my personal life right now, from a son not yet old enough to drive being accepted into college, to major overseas business opportunities which could significantly impact our family. I’ve been off the radar lately as I spend more time diverted by such matters, but I’ve noticed how one issue after another intersects pointedly with public policy.

Through our son, we’ve seen first-hand the benefits to the community when public university and school funds are used in ways that encourage greater educational attainment (as opposed to teaching to the mean), business development, and scientific research and achievement. After many years in private school, our son was able to attend a public charter school that was allowed to innovate and develop a nationally renowned science and engineering program which partners with a public research university. This university has also been blessed with state legislators and a former governor who were willing to use funds in a way that encouraged the proliferation of new high-tech industry in a state desperately in need of such. As a result, this university rivals MIT in business startups. Not bad for a public university, which just recently accepted my 14-year-old son as a full-time student.

As the financial industry my husband has been involved in for over fifteen years has faced more and more government hostility and constantly evolving regulation that repeatedly fails to address the issues that could actually solve some real problems, we’ve been forced to look outside our traditional avenues of income for some sense of economic stability. Our desire to invest resources overseas is encouraged by the fact that we’ve watched the Chinese begin shifting much of their capital from the US to some of the same developing nations and industries we’re investigating; nations whose governments are interested in encouraging economic growth throughout all strata of society and who have learned through hard experience the dangers of attempting to turn classes against each other in order to increase their own power. These lessons will serve them well in the coming years if they can remember them better than we have.

Government has a place. When our resources, those that belong to us the taxpayers but which have been entrusted to a government charged with serving all of society, are used to encourage job creation, innovation, and education we will all be better for it. In a country where “73% of the political class say the country is heading in the right direction, but 84% of mainstream voters say it’s going in the wrong direction,” we’d all better hope our politicians figure it out before too many more American businesses and workers simply give up and decide our best days are behind us – and take their dollars and education somewhere else, where government appreciates and encourages their contributions.