A SURVEY OF THE US ECONOMY

August 2013

 

 

 

 

This survey consolidates our August 12, August 19 and August 26 blog entries.  Minor changes have been made, e.g., adjusting connective passages and the use of images.

 

INTRODUCTION In a March 2013 study, SAFE noted that the pickup in economic activity and jobs growth since 2009 seemed relatively modest, with no apparent reason to expect further improvement.  Was this country in for a big crisis now (economy starts to perk up - inflationary surge - Federal Reserve tightens monetary policies and interest rates soar, aborting the recovery), we wondered, or an even bigger crisis later (economic stagnation – unsustainable deficits – roof caves in when lenders lose faith in government’s ability to meet its financial obligations)?  Threats survey,  http://bit.ly/1707Ryg.

 

Five months on, the outlook remains murky.  Compare (1) [Peter] Schiff: We’re heading for a crisis worse than 2007 [big surge in inflation – Fed slams on monetary brakes], Money Morning, 7/28/13. http://bit.ly/19ivx1R, and (2) Fed balance sheet vs. stock market; Will QE cause inflation? [System flooded with idle cash, expect protracted economic malaise] Mike Shedlock, Townhall.com, 8/8/13. http://bit.ly/177sf1s

 

SAFE will continue to monitor and report on the risk of such developments. Most Americans tune out predictions of future financial crises, however, focusing primarily on  economic results in the here and now.  If we hope to get their attention, it might pay to look at things from their point of view. 

 

Accordingly, this survey will (a) review five distinct (but related) facets of the economic picture: growth, jobs, inflation, basic government services, and taxes.  Following the individual reviews, we will evaluate the findings, and offer some thoughts about the path forward.

  

 

 

ECONOMIC GROWTH – According to Department of Commerce, Bureau of Economic Analysis data, US Gross Domestic Product has been growing at an annual rate of less than 2% in recent years versus a long-term historical growth rate of about 3.5%.

 

1929-2012 avg.

3.3%

2002-2012 avg.

1.8%

1929-2001 (by extrapolation)

3.5%

1st. Qtr. 2013 (revised)

1.1%

2nd Qtr. 2013 (8/29 estimate)

2.5%

 

 

 

 

 

 

 

GDP data since 1929 were recently restated, notably by capitalizing R&D and other outlays for intangibles.  The adjustments increased reported GDP, e.g., by $560B for 2012, but supposedly did not have a major effect on year-to-year trends.  BEA release, 7/31/13. http://1.usa.gov/1reZhC

 

The difference between a 3.5% growth rate (1929-2001) and a 1.4% growth rate (average for first two quarters of 2013) may seem minor, but would have a big impact over time.  Here is an illustrative example, showing the 10-year effect of three assumed growth rates. 

 

Current GDP

Growth rate

2023 GDP

GDP gain

$16.6T

7.5%*

$34.2

$17.6

$16.6

3.5%

$23.4

$6.8

$16.6

1.8%

$19.8

$3.2

·         Currently estimated economic growth rate for China.

 

(Side comment: There are serious questions as to whether a 7.5% growth rate for China is accurate and/or sustainable.  Nevertheless, this estimate is a prime element in projections that the Chinese economy will surpass the US economy within a relatively few years.)

 

Economists are big fans of economic growth, which serves to increase national wealth and thereby provide productive employment for a growing population, a rising standard of living, and more funding for government programs. 

 

Similarly, political leaders promise to promote economic growth, create jobs, and support the middle class that made this country great.  Witness these lines from the president’s remarks at Knox College (Galesburg, Illinois) on July 24. http://1.usa.gov/145cg0q

 

The first cornerstone of a strong, growing middle class has to be, as I said before, an economy that generates more good jobs in durable, growing industries.  That's how this area was built.  That's how America prospered.  Because anybody who was willing to work, they could go out there and they could find themselves a job, and they could build a life for themselves and their family.
 
Now, over the past four years, for the first time since the 1990s, the number of American manufacturing jobs has actually gone up instead of down.  That's the good news.  But we can do more.  So I’m going to push new initiatives to help more manufacturers bring more jobs back to the United States. We’re going to continue to focus on strategies to make sure our tax code rewards companies that are not shipping jobs overseas, but creating jobs right here in the United States of America. 

 

Yet current economic growth is only a bit faster than population growth.  The US resident population is projected to grow from 314M to 400M by 2050, which works out to a 0.638% annual growth rate. Census Bureau lowers U.S. growth forecast, mainly due to reduced immigration and births, D’Vera Cohn, Pew Research.  http://bit.ly/VFnm8T

 

And all too often, productive business investment is being deterred by dubious policies, sclerotic decision-making, or destructive legal proceedings.  It is almost as though the “rule of lawyers” is being substituted for the “rule of law.” How America lost its way, Niall Ferguson, Wall Street Journal, 6 /13/13. http://on.wsj.com/11xYWVn

 

Nearly all development economists agree that good institutions—legislatures, courts, administrative agencies—are crucial. When poor countries improve their institutions, economic growth soon accelerates. But what about rich countries? If poor countries can get rich by improving their institutions, is it not possible that rich countries can get poor by allowing their institutions to degenerate? I want to suggest that it is.

 

The drag effect on business reflects the combined effect of legislation, regulations and litigation at the federal, state and local levels.  Heretofore, the results have been mitigated by the ability of businesses to choose where to locate new investments, e.g., in Texas versus California.  But the current push to regulate more and more activities at the federal level threatens to close that door – leaving investments in other countries as the only effective escape hatch.   Regulations: the stealth economic killer, Bob Beauprez, Townhall.com, 8/9/13.  http://bit.ly/1bhGFiu

 

Obama Administration has been promulgating regulation at unprecedented levels – 2013 Federal Register is on track to hit 78,989 pages (record of 81,405 pages was set in 2010) – 17 regulations classified as “economically significant” (compliance costs of $100M or more) have been issued so far this year.

 

Generally, the drag effect of government is obvious to the people who are directly affected but less apparent to the general public.  As Niall Ferguson observed in his previously cited column, it might have a salutary effect if everyone played the role of entrepreneur – if only once – by trying to start a business. “There is [something] uniquely educational about sitting at the desk where the buck stops, in a dreary office you've just rented, working day and night with a handful of employees just to break even.”

 

Here is a case, however, in which government drag is so obvious that one can’t miss it.  If and when completed, the Keystone Pipeline will transport Canadian crude oil (primarily produced from the Alberta tar sands) all the way to refineries along the Gulf Coast.  The economic effects would be highly favorable, in our opinion, and the environmental objections carry little weight.  Note that the oil will not remain in the ground if the pipeline is not built; it will be shipped to China instead. 

 

We earlier predicted that the president would give the go ahead for this hotly-debated project, which requires federal approval due to the international ramifications (in theory, the State Department might conclude that it would be in the nation’s best interests to keep buying oil from Venezuela), but demand “a major environmental win of some kind” in return that would give his political opponents heartburn. An update on the Keystone Pipeline, 2/25/13.

 

After nearly 5 years and over 15K pages of State Department studies, however, the project remains in administrative limbo.  It’s hard to see any excuse for the delay, or to square the handling of this matter with the president’s professed zeal to promote economic growth.  Unleashing the power of Keystone, Rep. Fred Upton (R-MI), Washington Times, 8/7/13.  http://bit.ly/13MjtUn

 

It should be an easy decision for the Obama administration to embrace the project’s thousands of jobs and $7 billion infusion into the American economy, yet the president has resisted. Although the president famously vowed to “do whatever it takes” to create jobs, he seems to be doing all he can to avoid approving Keystone’s presidential permit. With the stroke of a pen, he could support the creation of thousands of private-sector jobs as well as advance our energy security by allowing nearly 1 million additional barrels of North American oil to flow to U.S. refineries each day.

 

For his part, the president has scoffed at the economic benefits of the Keystone Pipeline, arguably painting a picture that is seriously misleading.  Obama doubles down on low Keystone XL jobs creation estimate, Oil & Gas Journal, 8/6/13. http://bit.ly/1exA6rX

 

# The president: "They keep on talking about this—an oil pipeline coming down from Canada that's estimated to create about 50 permanent jobs—that's not a jobs plan."

 

# Karen Harbert, US Chamber of Commerce’s Institute for 21st Century Energy: “[The] president continues to ignore his own administration's analysis and demean the value of thousands of American jobs for those that badly need them.  There are many ways to create jobs, including allowing for energy development on the 85% of federal land that is currently under lock and key," she continued. "But we know that an easy way to start creating jobs is to approve the Keystone XL pipeline and put 42,000 Americans to work, according to the US Department of State."

 

 

 

JOBSHow many people lie awake at night, worrying about the rate of US economic growth, government regulation of business, or the National Debt?  But being unable to find a job, or scraping by in a part-time or low-skills position, can impact the person concerned – and his/her family and friends – in a direct and very personal way.  See, e.g., The Dinner Table, 2012 campaign video (30 seconds). http://bit.ly/RMmVeq

 

There is general agreement that faster economic growth would improve the jobs picture, but with stiffening international competition and ever-faster advances in technology the linkage is far from perfect.  Job loss killing middle class; Technology shapes the global economy, Bernard Condon & Paul Wiseman (AP), News Journal, 1/23/13.

 

Five years after the start of the Great Recession, millions of “middle-class jobs” have disappeared – and the jobs won’t be coming back.  What’s more, millions of additional jobs will vanish according to experts who study the labor market. Whole employment categories, from secretaries to travel agents, are starting to disappear.  And down the road, software will threaten the livelihoods of doctors, lawyers and other highly skilled professionals.  History shows that technology advances eventually create jobs elsewhere, but it’s hard to see where the new jobs will come from this time because of the pace at which information technology is upending whole industries and occupations.

 

Other job creation/retention strategies that have been suggested include: (A) hike the minimum wage, so lower level employees will earn a “living wage” and can boost the economy with their added spending; (B) retrain people for presumed jobs of the future, e.g., wind and solar energy; and (C) expand the social safety net for people who are not employable, to be paid for by raising taxes on high earners. 

 

In this vein, the president is advocating “a long-term American strategy, based on steady, persistent effort, to reverse the forces that have conspired against the middle class for decades.”  His pitch sounds pretty reasonable, too, until one starts thinking about the implications. Transcript of remarks at Knox College on July 24. http://1.usa.gov/145cg0q

 

Question 1:  What will happen if the nation’s leaders stop worrying about “out-of-control government spending”?  In our opinion, the fiscal meltdown currently brewing is all too predictable – and decisive cuts in non-essential spending is the only way to stop it. 

 

Question 2: Who would pay for all the president’s proposed initiatives?  Here is a partial list: rebuild the transportation system, power grids and communication networks – connect all American students to high-speed internet – upgrade educational system to meet global competition - ensure college is affordable for every American who is willing to work for it – full speed ahead with GovCare – shore up retirement income.

 

Question 3: Where is the evidence that a government-run economy will produce better results than free enterprise with an appropriate (but not excessive) degree of government regulation?  All the evidence we have seen tends to support the opposite conclusion.  

 

Granted that the current employment picture is unsatisfactory, however, and indeed we think the president sugarcoated it in his Knox College remarks. “Over the past 40 months [since March 2010], our businesses have created 7.2 million new jobs.  This year, we’re off to our strongest private sector job growth since 1999.”

 

It’s not enough to look at the unemployment rate (peaked at 10% in 2009; fell to 7.4% in July 2013), as a big factor in this statistical improvement has been Americans who stopped looking for jobs. Also, many of the added jobs are part time (a trend encouraged by GovCare, which does not require employers to provide healthcare insurance for employees working less than 30 hours a week).  Fewer than 50% of adult Americans currently have a full-time job.  The great Obama depression, Judson Phillips, Washington Times, 8/3/12. http://bit.ly/13aOuBh

 

Adjusted for these factors, critics say, a realistic unemployment rate would be at least 14% and arguably a good bit higher.  Moreover, the magnitude of unemployment has been officially understated for years although the gap seems to be widening.  $6.1 trillion in stimulus later, economy not bigger, faster or stronger, John Ransom, Townhall.com, 8/10/13. http://bit.ly/13NmWWp

 

 

In particular, unemployment and/or underemployment is widespread for young adults.  A record number (some 21 million) of people in this age cohort are still living with their parents because they cannot afford to buy or rent their own living quarters and – as a result – are not getting on with their lives. Young Americans left out of Obama’s “jobs recovery,” Investors.com, 8/2/13. http://bit.ly/16hGtg9

 

What lessons will millions of young men and women learn as they while away their time playing computer games in their parents' basements? And this is the generation we're counting [on] to shoulder the increasing entitlement costs for the nation's elderly. With $70 trillion in current liabilities, who's kidding whom?

 

OK, as we don’t agree with the president’s approach, what are our ideas?

 

Two years ago, SAFE recommended that Americans be encouraged to take responsibility for finding employment rather than expecting others to take care of them.  To this end, the minimum wage would be repealed or frozen at the current level, unemployment compensation would be of limited duration, and disability awards would not be granted as a form of long-term unemployment compensation.  A lower unemployment rate would probably result, and while the added jobs might not be glamorous or lucrative, the people hired would be getting their foot in the door and could hopefully progress.  (Also, the need for a continuing influx of immigrants to perform jobs that Americans don’t want to do might be obviated.) Jobs: do not let the perfect be the enemy of the good, 2/14/11.

 

Subsequently, during the run-up to the 2012 election, we compared the jobs plans of the president and the challenger – finding both wanting - and proposed our own approach.  SAFE’s job manifesto, 10/15/12. 

 

MORE JOBS will be available when the federal government changes its behavior.  Without delay, the government must stop piling more and more requirements on business.

To lighten the burden, simplify the tax system and eliminate unnecessary regulations & red tape.  The result will be faster economic growth, MORE JOBS, and more revenue to the federal government without raising taxes.

In addition, significant changes are needed to cut spending, eliminate deficits, and start paying off debt.  That will reduce the present risk of financial disaster and provide fairness to coming generations. 

INFLATION – Some observers believe the current rate of inflation is “benign,” and that speeding it up a bit could boost the economy.  Indeed, the Federal Reserve has set a target inflation rate of 2% and launched aggressive monetary initiatives, e.g., Quantitative Easing 3 (bond purchases), designed to get there.  Fed frets over high mortgage rate, “low” inflation rate, moneynews.com, 7/31/13. http://bit.ly/13W1sXq

 

In a post-meeting statement, the Fed's policy-setting committee signaled some concern about the low level of inflation. "The committee recognizes that inflation persistently below its 2 percent objective could pose risks to economic performance, but it anticipates that inflation will move back toward its objective over the medium term."

 

The Fed’s primary measure of inflation is the “core” Consumer Price Index (ex changes in food and energy prices), which is less volatile than the “all items” CPI but may also understate aggregate inflation. Thus, for the 12 months ending July 2013, the core CPI rose 1.7% versus an all items increase of 2.0%. Bureau of Labor Statistics, 8/15/13 news release. http://1.usa.gov/x86JJ.

 

Longer term, the CPI has risen at an average rate of about 4% – and it hit double digits during the 1970s due to the oil price shocks of that decade before the Fed under Chairman Paul Volcker got the situation back under control.  http://1.usa.gov/16tDmH (access CPI history table)

 

Average annual increase in CPI index

1960s

1970s

1980s

1990s

2001-12

1961-2012

2.8%

7.9%

4.7%

2.8%

2.4%

4.0%

 

At the rate of inflation that has been reported, currency value erodes substantially over time.  Thus, a current dollar is the equivalent of about 75¢ in 2001, 57¢ in 1991  . . . 13¢ in 1961. If the reported rate of inflation is understated, which is a real possibility (as will be discussed), the loss of value would be correspondingly greater.

 

The prices of specific goods and services don’t necessarily track the overall price trend.  Some products (e.g., desktop computers) are cheaper (and also better) today than they were 20 or 30 years ago.  Other prices (e.g., for college tuition) have risen considerably faster than the CPI.  Accordingly, the effect of inflation for an individual will vary depending on his/her pattern of consumption.

 

Canny spenders may worry about the speed at which prices are rising, which is particularly inconvenient for folks living on a fixed income.  Smaller packages, vanishing discount offers – big prices for little bottles of medicine, not to mention even a brief hospital stay – new car sticker shock – and so forth.

 

When a big price increase does takes place, moreover, government action is often involved.  Consider these examples: 

 

• Government mandates on blending ethanol in gasoline are driving up motor fuel prices without adding value.  And if E-15 gas starts being sold, it may damage car motors.  The ethanol tax, Wall Street Journal, 7/20/13 (link not available).

 

. . . under federal law refiners must comply with a complicated system of buying renewable energy credits to make up for the ethanol they don’t use [due to lower gas consumption than was projected in 2007].  These credits are called Renewable Identification Numbers, or RINs.  Demand for RINs has soared, and so their price has exploded . . .it is now $1.40, [which] translates into a roughly $14 billion a year gas tax, or 10 cents a gallon more for consumers.

 

• Incandescent light bulbs are being phased out, so everyone will have to buy more expensive CFL bulbs (which contain mercury that in many cases will wind up in landfills) for use in their own homes. 

 

• In Delaware, trash pickup costs recently jumped about 60% due to a legislative mandate that everyone pay for recycling pickups whether they use them or not. 

 

Estimating an overall price level index is a complex task, with many decisions re prices to be tracked, data sources, and computational procedures.  It would not be difficult to manipulate the data so as to understate inflation, and some skeptics believe the government is doing just that. 

 

Walter J. (“John”) Williams, a Dartmouth-trained economist, has had a professional interest in the quality of government statistics for decades.  He publishes alternative CPI indices based on (A) calculation procedures used in 1990 (indicating a current inflation rate of about 5%), and (B) calculation procedures used in 1980 (current inflation rate of about 9%).  Shadow Government Statistics, shadowstats.com. http://bit.ly/83I42h

 

Could one of these data sets be a better indicator of price inflation than the official CPI?  Maybe, maybe not, but Mr. Williams makes some interesting points. Public comment on inflation measurement and the chained-CPI, 4/18/13. http://bit.ly/KdqwKx

 

• The government has an incentive to understate inflation so as to: (i) reduce upward adjustments of Social Security, etc. benefits (with the traditional CPI, “Social Security checks would be more than double what they are today”); and (ii) minimize revenue loss from indexation of the income tax rate tables, standard exemption, etc.

 

• Understated inflation makes economic output data look better. Compare charts of GDP since 2001, showing inflation-adjusted output based on alternative measures of inflation. With the official GDP deflator (similar to CPI, but not identical), there has been steady recovery since 2009 and current output is 124% of the level in 2000.  Using an adjusted GDP deflator (roundly 2% points higher) as the measure of inflation, output has stagnated since 2009 and is currently lower than in 2000.

 

• Traditionally, the CPI (originally named the Cost of Living Index) was meant to represent purchasing power versus a fixed basket of goods and services.  But over time, without much public discussion, it has been repurposed to track purchasing power versus a theoretical level of satisfaction.  This permits substitutions in the market basket, e.g., hamburger for steak, and giving credit for product improvements whether a given consumer wants them or not.

 

• There is a growing gap between government reporting of inflation, as measured by the CPI, and the perceptions of actual inflation held by the general public.  Anecdotal evidence and occasional surveys have indicated that the general public believes inflation is running well above official reporting, and that public perceptions tend to mirror the inflation experience that once was reflected in the government’s formal CPI reporting.

 

Perhaps inflation is inevitable given the current debt level – and it will predictably accelerate if the government keeps ignoring the fiscal problem and the Fed keeps printing money.  Like anemic economic growth and a shortage of jobs, however, inflation is a disturbing phenomenon that Americans are rightly worried about. 

 

  

 

GOVERNMENT SERVICES – Far be it from us to suggest that overall government spending is insufficient, but there is some worrisome “robbing Peter to pay Paul” going on.  Thus, expenditures for welfare programs, employee benefits, and new initiatives are surging, while basic government services are being shortchanged to a degree that is hard to miss.  Some illustrative examples follow.

 

Federal level: There are reports that the nation’s transportation infrastructure has been allowed to deteriorate. Thus, the American Society of Civil Engineers recently projected an “investment gap” of $1.1T over the next few years, mostly for surface transportation. The cost of America’s crumbling roads and bridges, Michelle Caruso-Cabrera, CNBC, 1/15/13.  http://www.cnbc.com/id/100381132

 

How about supporting national parks?  Even as Delaware politicians lobby to get a new national park created for the First State, a $12B deferred maintenance backlog is reported for existing parks.  National Parks Conservation Association, press release, 7/25/13. http://bit.ly/13dQabV

 

. . . in today’s dollars, funding for national park operations is down 13%  from where it was only three years ago, and the construction budget has declined by nearly two-thirds over the last decade.  As a result, places like Yellowstone, Acadia, and Independence Hall have been forced to close visitor centers and campgrounds, shorten park hours and seasons, and eliminate ranger positions.

 

Then there is a disturbing shrinkage of the defense budget, which may force sharp cuts in US military capabilities.  Reviewing the situation in early 2012, we concluded that piling across the board defense spending cuts on previously planned cuts could endanger national security.  We also noted many opportunities for cuts in domestic spending programs. Cut defense spending with care, 1/23/12.

 

Congress did not agree on selective spending cuts to meet agreed reductions in overall spending, however, so sequestration (across the board cuts in “discretionary spending”) – supposedly only a failsafe mechanism – has been triggered. The effects on the armed services may be dire.  Hagel: Budget cuts could force Navy to sideline 3 [out of 11] aircraft carriers, Fox News, 7/31/13. http://fxn.ws/18Sy7Bb

 

Speaking to Pentagon reporters, and indirectly to Congress, Hagel said that the full result of the sweeping budget cuts over the next 10 years could leave the nation with an ill-prepared, under-equipped military doomed to face more technologically advanced enemies. 


Meanwhile, the international threat level has risen, especially (but not exclusively) in the Middle East.  Let’s see: civil war in Syria (with the current regime being backed by Russia and Iran), chaos in Egypt, a resurgence of Al Qaeda in Iraq following US withdrawal, and Iran’s continuing drive to develop nuclear weapons. Like it or not, it may be difficult for our nation to avoid getting embroiled in any of these situations.

 

One might think US political leaders would suspend their differences long enough to boost military funding to a level recommended by Secretary Hagel et al., but the Democrats do not seem inclined to do so.  Knowing that Republicans want to boost military spending, they apparently intend to hold the defense budget hostage until the GOP abandons sequestration and/or swallows a big dose of tax increases. 

 

Thus, Senator Patty Murray (D-WA) effectively proposed termination of sequestration as a precondition for a $54B defense spending increase envisioned by House Republicans.  Murray presses for pre-August bipartisan budget talks, Paul Krawzak, Roll Call, 7/1/13. http://bit.ly/17AMwxX

 

More recently, the White House served notice that a House defense appropriations bill would only be accepted in the context of an overall spending deal “that supports our recovery and enables sufficient investments in education, infrastructure, innovation and national security for our economy to compete in the future.” White House issues veto threat of defense funding bill, Rick Maze, Navy Times, 7/22/13. http://bit.ly/15e8N3C

 

State level: Other states have bungled their fiscal and economic affairs as well, but let’s focus on California. 

 

The Golden State reportedly has a negative net worth of $127B, about half of which was racked up by “issuing general obligation bonds and then giving the money to local governments and school districts for public works projects.” And counting unfunded pension and healthcare liabilities for state employees, this figure would be “several hundred billion dollars” higher. State auditor: California’s net worth at negative $127.2 billion, Sacramento Bee, 3/28/13. http://bit.ly/XkYJo3

 

New reporting requirements are expected to boost the state’s estimated unfunded liability to $328B, and they could also impair the credit standing of Los Angeles, San Francisco, San Jose, Azusa, Inglewood, Stockton (which has already filed in bankruptcy), etc. California on the brink: Pension crisis about to get worse, Elizabeth MacDonald, Fox Business, 6/12/13. http://fxn.ws/14YA6w0

 

California voters approved sales and income tax increases last November, notes the Sacramento Bee article, which Governor Brown says will balance the operating budget and allow debt to be gradually reduced.  But some well-heeled taxpayers may not be disposed to cooperate.  Massive revenue loss follows California tax hike vote, Ted Cronn, godfather.com, 12/8/12. http://bit.ly/RLiGCJ

 

State Controller John Chiang announced . . . that the state's revenue for November came in $806.8 million under projections. That's more than 10% under budget for the month. Whoops. Although Chiang's office did not comment on the whole "rich flight" issue, the breakdown of the trouble is an $842.5 million plunge in personal income taxes, $187.8 million decrease in corporate taxes, offset by an increase of $99 million in sales taxes.

 

In brief, California and its cities have been spending and making commitments that are beyond their means.  What’s more, a disproportionate share of the money has gone to feather the nests of government employees, while basic government services like police, education, and roads have been neglected.  This pattern will apparently continue with the latest round of tax increases.  California, unsaved, speeds toward a wall of debt, Steven Greenhut, Bloomberg, 1/16/13. http://bloom.bg/ZZ56d7

 

State Senate Republican Leader Bob Huff, writing in the Republican-leaning Flash Report, accused Brown of playing a shell game with the tax-increase funds, which were promised to public schools but are now being used to reward public employees. “Pay raises and lifting of the monthly personal leave day without pay for state employees certainly is a payback to the state unions who helped pass Prop 30,”said Huff.

 

Judging from the exodus of residents (“3.6 million more Americans have moved out of California than have moved in” over the past 20 years), the state’s misplaced priorities have not gone unnoticed. “Rich States, Poor States,” Arthur Laffer et al., American Legislative Exchange Council (ALEC).  http://bit.ly/rXDuWT (download PDF)

 

Local level: Once one of the nation’s great cities, Detroit has been laid low by a combination of adverse economic trends (decline of complacent American car companies, with onerous labor contracts) and decades of municipal mismanagement. It is the largest city to declare bankruptcy in American history.  A summary of the current situation follows based on several sources.

 

Population has dwindled from 1.85 million in 1950 to less than 700,000 today – official unemployment rate is 16% (closer to the true employment rate?) - blocks of buildings have been abandoned because occupants could not afford to maintain them or pay assessed taxes – currently 78,000 abandoned and blighted houses in the city – 40% of the street lights don’t work – most city residents no longer rely on even basic services like police (response time to 911 calls is about an hour) or the fire department – only 7% of 8th graders score proficient in reading – city tax revenues inadequate to cover current obligations, including debt service and benefit payments to current and retired city employees – city has more than $18B in unfunded liabilities and its estimated deficit in June was $237M.

 

One might infer from the foregoing that the city’s borrowing capacity is entirely used up, but a previously approved ice hockey arena will reportedly be built.  The project is seen as creating jobs and contributing to renewal of the downtown area, and it will be financed by a $450M bond issue payable over 30 years.  Perhaps repayment is secured by revenues from the arena and/or state government guarantees, but in any case everyone seems to be assuming the bonds can be sold. New $444 million hockey arena is still a go in Detroit, Chris Isidore, CNN, 7/26/13. http://cnnmon.ie/15krXoG

 

The crucial issue in Detroit’s filing under Chapter 9 (municipal bankruptcy) of the federal bankruptcy law is whether the aggregate loss that creditors are facing (barring a federal or state bailout, neither of which currently seems likely) will be (1) apportioned between current and retired Detroit employees (the unfunded portion of their future pensions is at risk) and bondholders, or (2) borne solely by bondholders (up to 100% of the money owed to them).  If the answer turned out to be (2), this would encourage municipal workers everywhere to reject any proposed pension reductions and support municipal bankruptcy filings.  Interest rates on future state and local borrowing would presumably soar as lenders took this outcome into account. Facing up to America’s pension woes, David Skeel (Penn Law School professor), Wall Street Journal, 7/25/13 (no link available).

 

According to Wall Street Journal columnist Stephen Moore, the Detroit bankruptcy filing may be just the tip of the iceberg.  His list of 20 cities to watch includes Harrisburg, PA; Irvington, NJ; Oakland, CA; Philadelphia School District, PA; & Providence, RI.  Also, even Chicago and New York City are not necessarily “too big to fail.”  20 cities that may face bankruptcy after Detroit, Newsmax.com, 8/8/13. http://bit.ly/19chctq

 

 

 

TAXES – No one likes to pay taxes, and the political discourse reflects this fact.  Notice how our political leaders claim credit for tax cuts, no matter how temporary, while resisting spending cuts.  And when tax increases become unavoidable due to constantly growing spending, the proponents characterize them as levies on upper crust folks who should be glad to pay “a little bit more.”

 

Anything but tell people that they will have to pay, in one way or another, for all the programs undertaken or supported by the government.  As an example of how the game is played, consider this presidential rhetoric.

 

Scranton, PA, 11/30/11.  Obama: “Since I’ve taken office, I’ve cut your taxes,” Fox News. http://bit.ly/uPHIQU - We have cut taxes for small businesses, not once, not twice, but 17 times.  The average family’s tax burden is among the lowest it’s been in the last 60 years.  So the problem is not that we’ve been raising taxes.  We’ve been trying to give families a break during these tough times.

 

Galesburg, IL, 7/24/13, transcript. http://1.usa.gov/145cg0q - Now, today, five years after the start of that Great Recession, America has fought its way back.  *** We changed a tax code too skewed in favor of the wealthiest at the expense of working families -- so we changed that, and we locked in tax cuts for 98 percent of Americans, and we asked those at the top to pay a little bit more. 

 

There have been many tax increases, however, and the rank and file has hardly been exempt.  Let’s review the record, starting with a bill enacted shortly after the president took office.  Looking ahead to the Fiscal Responsibility Summit, 2/9/09

 

. . . a bill signed into law on February 4 will authorize a major expansion of the Children’s Healthcare Insurance Program (CHIP) and increase the federal tax on cigarettes by 62¢ per pack to pay for it. ***Raising taxes during a recession is generally recognized as folly, and this particular tax increase is regressive (disproportionately paid by lower-income people) besides.  Not to mention that the federal tax increase (on top of already high state and local taxes) will promote more cigarette bootlegging. 

 

Numerous tax increases are embedded in GovCare, which was enacted in 2010. They will total about $90B per year when fully phased in.  Some of the provisions target high earners, e.g., hiking the Medicare tax rate from 2.9% to 3.8% and applying it to investment income as well as compensation, but the threshold levels aren’t indexed for inflation so a growing number of taxpayers may be affected. Taxes upon taxes upon . . ., Wall Street Journal, 7/11/11. http://on.wsj.com/n2Orkz

 

And don’t forget the GovCare fines for nonparticipation, which are the functional equivalent of taxes and have been classified as such by the US Supreme Court. Assessing the GovCare decision, 7/9/12.

 

In early 2013, after a prolonged debate about expiration of the Bush tax cuts (enacted in 2001 & 2003), the American Taxpayer Relief Act hiked income taxes for high earners only.  Democrats hailed the outcome as a step in the direction of requiring high earners to pay their “fair share,” while Republicans emphasized that most Americans would be permanently shielded from previously scheduled increases in their income taxes.  Expiration of the temporary (2011-2012) reduction (by two percentage points) in employee payroll taxes boosted taxes for all workers, but neither party said much about that. Fiscal cliff debacle is over, but other issues loom, 1/7/13.

 

ATRA was a bitter pill for Republicans to swallow, and the GOP has ruled out more tax increases any time soon.  McConnell and Boehner: Republicans united on sequester, Ben Wolfgang, Washington Times, 3/3/13. http://bit.ly/Z7qoUV

 

“I’m going to say it one more time: The president got his tax hikes on January the 1st. The issue here is spending. Spending is out of control,” Mr. Boehner said on NBC’s “Meet the Press,” an interview that was taped Friday. Senate Minority Leader Mitch McConnell, Kentucky Republican, echoed those sentiments on CNN’s “State of the Union.” He said no Republican is “willing to raise a dime in taxes to turn off the sequester.”

 

For their part, Democrats want a “balanced” solution to the fiscal problem (code for more tax increases).  There is plenty of money in the economy, they think, and the only problem is accessing it.  Idea: a financial transactions tax might be nice, hopefully no one would notice it.  “What, me worry?”  Washington Times, 8/7/13. http://bit.ly/1cMxgRz

 

Senators Harry Reid and Chuck Schumer went out of their way to throw cold water on the efforts of Senator Max Baucus (D-MT) and Rep. Dave Camp (R-MI) to promote income tax reform.  The project was a waste of time, they said, unless a major increase in tax revenue – say $1 trillion over 10 years - would be involved.   Tax reform in Senate?  Not so fast, says Reid, Bernie Becker, The Hill, 7/25/13. http://bit.ly/12nnwez

 

Recently, in one of a series of campaign-style speeches, the president suggested a “grand bargain.”  He would be “willing to simplify our tax code,” especially if “incentives for manufacturers bringing jobs back to the United States” (compatible with tax simplification?) were involved, but only if a big portion of the savings would be plowed back into government spending programs, e.g., infrastructure initiatives, high-tech manufacturing hubs, community college training programs, etc.  Heaven forbid that investors and business leaders should decide how the applicable funds would be utilized.  Chattanooga, TN, 7/30/13, transcript. http://1.usa.gov/1644neY

 

Summing up, the government has raised taxes repeatedly over the past four years.  And while Party B opposes any more tax increases for now, Party A will have considerable leverage (by virtue of controlling the Senate and the White House) in the fall budget battle.  One might reasonably conclude that more tax increases are likely. 

 

Some Americans may believe that any further tax increases would be borne by the top echelon, e.g., big business and the wealthy, but stop and think. When businesses are required to pay more taxes, where do they get the money?  And if asked to pay more taxes, do the wealthy have other options, such as investing their wealth outside the tax jurisdiction or simply not working as hard? So as John Donne wrote, “Ask not for whom the bell tolls, it tolls for thee.”

 

Also, future tax increases will not necessarily take the form of income taxes.  A slicker idea is to impose excise taxes or fees earmarked for feel good purposes that “no reasonable person” could oppose.  Here are two proposals that are in play.

 

# A new levy on cell phone bills – of which there are a good many already (10 separate city, state and federal fees and charges, not including sales taxes, in New York City) – has been suggested to underwrite high speed internet access in schools.  Instead of being voted on by Congress, which is “dysfunctional” after all, the new “fee” would be imposed by the Federal Communications Commission at the president’s direction.  Obama wants to tack on a $5-a-year phone tax, Geoff Earle, NY Post, 8/15/13. http://bit.ly/14Ajmuk

 

# A big hike in federal taxes on cigarettes (on top of the CHIP increase in 2009) would help fund the president’s universal access to preschool proposal.  As is typical for new programs, benefits are played up while costs are back-end loaded.  Moreover, the proposed revenue source is inappropriate.  Cigarettes and preschoolers don’t go together, Scott Drenkard & Noah Glyn, Tax Foundation, 8/14/13. http://bit.ly/1cDx4GP

 

. . . the administration plans on paying for universal preschool by increasing the federal cigarette excise tax from $1.0066 to $1.95 a pack. While it might be politically expedient to isolate a small unpopular group (smokers) to pay for a service to a popular group (preschoolers), universal education would in fact be universal—and therefore should be paid for with broad based (universal) taxes.  But even if the principle of broad-based taxation is not persuasive, funding pre-kindergarten education with tobacco tax revenue will not work in the long run, as tobacco use has steadily declined since 1963.  

 

EVALUATION – Basically in line with economic trends since mid-2009, when the “Great Recession” officially ended, the current US economic situation looks something like this:

 

GROWTH 

JOBS

INFLATION

GOV’T SVCS

TAXES

Economic growth (GDP): 1929-2001 (3.5%); 2002-2013 (1.8%); 1st half of 2013 (1.8%). Realism of GDP deflator used to purge inflation has been questioned.  If inflation adjustments are too small, growth rates are  overstated.

Unemployment rate of 7.4% in July 2013 compares to 10% peak in 2009, but other measures may be more meaningful.  Millions of people have stopped looking for work, and many added jobs are part time.

Inflation estimates (CPI): 1961-2012 (4.0%); 2001-2012 (2.4%); last 12 mos. (2.0%). Without changes in methodology made since 1990, however, current estimate might be about 5%.

Some examples (federal, state & local): roads & bridges, parks, schools, police & fire fighters, and potentially crippling cuts to defense (per Defense Secretary Chuck Hagel).

Taxes have been raised during an economic slump, and further increases are demanded.  All Americans would bear the burden, not just big business and the wealthy.

 

Dismal as the picture looks using official numbers for economic output and inflation, the real situation may be worse.  The government class has every incentive to make economic results look good, and there is some evidence of data manipulation.

 

• As previously discussed, calculation procedures for the Consumer Price Index have been greatly changed since 1990 (and even more so since 1980).  The revised procedures provide more flexibility for product substitution, e.g., hamburger for steak, and giving credit for product improvements.  There is some logic in the changes, but many Americans feel the prices they pay are rising faster than the CPI – and they may be right.

 

• The GDP Deflator is used to put nominal GDP for different periods on a comparable (inflation-adjusted) basis.  We characterized the GDP Deflator earlier as “similar to [the] CPI, but not identical.”  As it turns out, however, the CPI has risen 40% more than the GDP deflator since 1977.  Unless the CPI overstates inflation, which seems unlikely, the GDP deflator is too low and real economic growth is being overstated. The GDP distractor, Peter Schiff, Townhall.com, 8/21/13. http://bit.ly/172tteJ

 

• A recent restatement of GDP data (back to 1929) will produce higher numbers, e.g., a $560B increase for 2012.  The changes will supposedly not have a major effect on year-to-year trends, but certain fiscal ratios – notably spending, tax revenues, and debt as a % of GDP – will be lowered.  Hmm, wonder if anyone thought of this when the GDP changes were under consideration.

 

The lackluster economic results of recent years are unsurprising given the policies being followed.  Indeed, we cannot recall agreeing with a single major economic proposal of the current administration.  Nothing personal, but the president seems to think the government should run just about everything, while SAFE favors smaller, more focused, less costly government. 

 

In comparing the economic plans of the presidential candidates a year ago, we saw the challenger’s plan as clearly better than the president’s “stay the course” proposals – but wanted even bigger changes.  SAFE’s Jobs Manifesto, 10/15/12.

 

MORE JOBS will be available when the federal government changes its behavior.  Without delay, the government must stop piling more and more requirements on business.

 

To lighten the burden, simplify the tax system and eliminate unnecessary regulations & red tape.  The result will be faster economic growth, MORE JOBS, and more revenue to the federal government without raising taxes.

 

In addition, significant changes are needed to cut spending, eliminate deficits, and start paying off debt.  That will reduce the present risk of financial disaster and provide fairness to coming generations.

 

The president won the election, our ideas gained no traction, and the economic situation remains dismal.  There is not much solace in being able to say, “we told you so,” but for what it’s worth that’s what SAFE did.

 

Is Side A willing to admit error at this point?  Apparently not! Consider these ringing lines from the president’s July 24 speech in Galesburg, Illinois. Transcript. http://1.usa.gov/145cg0q  

 

# He inherited an economic mess, which simply could not be fixed in four years – even though steps have been taken to get the country headed in the right direction.

 

Now, today, five years after the start of that Great Recession, America has fought its way back. We fought our way back.  Together, we saved the auto industry; took on a broken health care system.  We invested in new American technologies to reverse our addiction to foreign oil.  We doubled wind and solar power. *** So you add it all up, and over the past 40 months, our businesses have created 7.2 million new jobs.  This year, we’re off to our strongest private sector job growth since 1999. 

 

# His political opponents, who are obsessed with unwise, mean-spirited spending cuts, are blocking progress.

 

 But right now, what we’ve got in Washington, we've seen a sizable group of Republican lawmakers suggest that they wouldn’t vote to pay the very bills that Congress rang up.  And that fiasco harmed a fragile recovery in 2011 and we can't afford to repeat that. Then, rather than reduce our deficits with a scalpel -- by cutting out programs we don’t need, fixing ones that we do need that maybe are in need of reform, making government more efficient -- instead of doing that, we've got folks who’ve insisted on leaving in place a meat cleaver called the sequester that's cost jobs.  It's harmed growth.  It's hurt our military.  It's gutted investments in education and science and medical research.  Almost every credible economist will tell you it's been a huge drag on this recovery. 

 

# The need to bring down the deficit has not been forgotten; it’s just being taken care of without a lot of drama.

 

And if you ask some of these folks, some of these folks mostly in the House, about their economic agenda how it is that they'll strengthen the middle class, they’ll shift the topic to “out-of-control government spending” –- despite the fact that we've cut the deficit by nearly half as a share of the economy since I took office. 
 

Revisit the 2012 campaign rhetoric, and you will find that the president and his supporters were saying much the same things a year ago.  So if a majority of voters bought the arguments then, why would they feel any differently now?

 

Even SAFE sized up the presidential race as a choice between competing economic visions. “This country is facing a fundamental choice about its future,” we wrote, “which may be made by this year’s elections.” Decision 2012, http://bit.ly/Rucudb

 

And in a book published before the 2012 elections, which vaulted to number one on the New York Times best seller list, a distinguished, right-leaning American urged voters to educate themselves on the issues and pay close attention to what the candidates were saying.  Thus, citizens should put “at least as much effort into selecting their representatives as they do into to buying a new car.” America the Beautiful, Dr. Ben Carson, Zondervan, 2012. http://bit.ly/16MbA7B

 

We would be thrilled if everyone did study the issues as Dr. Carson suggests, but elections don’t necessarily work in such a logical fashion.  For the 2012 elections, at least, Rush Limbaugh’s lament about the dominance of “low information voters” may be closer to the mark.  And whatever the reason(s) that Americans reelected the president, it was probably not based on what they thought of his economic policies.

 

Only 35% of Americans currently view the president’s handling of the economy with approval, according to Gallup, while 62% disapprove.  And his disapproval score on the economy has been in 60%+ territory most of the time since 2010, with one notable exception – the disapproval/approval spread narrowed to 7 percentage points in November 2012 only to snap back to 20 percentage points by January 2013. Obama’s economic approval slips to 35%, Lydia Saad, gallup.com, 8/15/13. http://bit.ly/13CcUnu

 

Congressional approval ratings are also in the basement, and it would be a mistake to read too much into the presidential poll results.  Nevertheless, there is growing disenchantment with the economic situation – even though many observers seem reticent about blaming the president.  Still missing: the economy, Donald Lambro, Washington Times, 8/23/13. http://bit.ly/1795NHx

 

In virtually all of the news media’s reporting about the economy’s decline, one name is hardly ever mentioned: Mr. Obama. He is to blame, though, for the economic pain millions of Americans are going through. It all stems from his anti-growth policies, which have given us higher taxes, oppressive gas prices, crushing federal debt, unending economic uncertainty and costly regulatory obstacles.

 

It’s not going to end until his term is over, and a pro-growth, pro-free enterprise president occupies the Oval Office and declares that America is “open for business.”


We do not agree with the last sentence, which would rule out a solution to the economic problem until at least 2017 – with no assurance of better luck then. By the time a “pro-free enterprise president” was elected, there might not be a country left – so if corrective action is going to be taken it should start now.

 

Assuming that Side B has some policy changes in mind, therefore, this might be a good time to bring them up.  Any takers for the SAFE jobs manifesto? 

  

 

 

 

ONE MORE THING – A notable aspect of the current political landscape is the defeatist attitude of some Republicans/conservatives.  If a politician starts with the intention of placing political expediency over principle, never taking on an “unwinnable” battle, and burnishing his or her legacy, what’s the point of being in public life?  Go home and let someone else take a turn!

 

Here is a video (4:46) that makes the point.  The speaker mentions several issues, but the main thrust is how far the GOP should go in seeking to defund GovCare implementation.  Irish John on legacy, unwinnable battles, and doing the right thing, libertyalliance.com. http://bit.ly/16x38Xa

 

Interestingly, there are indications that Side A is made of sterner stuff.  Fight like a Democrat, Elizabeth Meinecke, Townhall.com, 8/20/13. http://bit.ly/168KgKt

 

. . . that “impossible to implement” roadblock never stops Democrats. They work to change the political and cultural climate so such things can pass. Recent voting and court ruling on gay marriage are a prime example of that. Democrats’ constant battle to make illegal immigration more palatable by any other name is another example. Whether or not Democrats’ legislation fails, they labor to create a climate conducive to legislation finally passing at a future date.

 

Yet when pundits talk about the need for political accommodation, their comments are generally directed at Republicans.  See, e.g., “Does Sen. John McCain hate Republicans,” Catherine Poe, Washington Times,  7/29/13. http://bit.ly/16dEUNW

 

Is this the new, improved John McCain, having banished his other self, the vitriolic McCain, who, still smarting after his defeat by Obama in 2008, was  determined to take down Obama? What changed besides time passing and that Obama won again?  *** Perhaps it isn’t that Sen. McCain hates Republicans, as so many on the Right subscribe, but that he actually loves the Republican Party and is trying to save it from itself. Or is it already too late for the GOP? It’s beginning to look that way.

 

Politicians do need to pick their battles at times, just like the rest of us, and there is much to be said for reaching across the aisle when a chance of making real progress exists.

 

Even when agreement is impossible, moreover, we are all in favor of civility.  Just because people don’t agree on something, there is no need to be disagreeable.  Stick to the facts, logic and conclusions – never mind the personalities.

 

But subject to these caveats, the time has come for Side B to speak very plainly about the economy – and probably some other things as well.  Symptoms – diagnosis – solutions.

 

Would there be a fight?  You bet!

 

Does it need to happen?  Absolutely.

 

When should Side B throw down the gauntlet?  It seems to us that they should do it on September 9, when the members of Congress return to Washington – if not before.

 

A suggested punch list will be offered next week.  In the meantime, dear readers, let us know what your ideas are so we can work them into the mix.

 

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