Government’s Benevolence Equals Higher Costs

July 31, 2009

Have you ever noticed that our federal government is always venturing out of its jurisdiction in trying to make things more affordable for all of us?  Our paternal/maternal leaders in D.C. never pass up a chance to try to do something to make our lives easier.  Their examples of benevolence are many and always end up in disaster.

Take education for instance.  Uncle Sam has lavished grants and loans on us in an effort to make a college education affordable for most Americans.  However, has the price of college decreased? Ever?  The answer is no and in fact it can be argued that government grants and loans have actually contributed to the perennial increase in college tuitions.  When students qualify for federal largess it makes them less likely to comparison shop based on cost.  By eliminating cost competition in the college market institutions of higher learning have less incentive to lower costs.  Perhaps this is why the rate of defaults on student loans is so high.  Like subprime mortgages, instead of shopping around for economy, people commit to loans that they ultimately can’t afford to pay. 

Then, there is Washington’s attempt to make retirement years more affordable.  Social Security checks are mailed to millions of Americans every month to provide supplemental income to seniors.  Because the program has been played up as the greatest thing since sliced bread by the Establishment many Americans have been deluded into believing that they can retire on Social Security alone.  They forego saving for retirement and find when they retire that the monthly payment hardly makes ends meet.  Perhaps this is the reason why many elderly folks sell their homes because they just don’t have the funds to pay the ever increasing costs of property taxes.  Taking into account that the Social Security Trust Fund is empty and estimates for future obligations are about $45 trillion imagine the inflation that will eat further into Social Security income when the Federal Reserve must print dollars to monetize government checks.

By now, we should all be familiar with Uncle Sam’s attempt to make home ownership more affordable for all of us.  This has been primarily attempted through cheap money from the Federal Reserve and loan guarantees from Fannie Mae and Freddie Mac.  But, believe it or not, low rates and easy guarantees increased the demand for housing thereby raising prices and shutting out millions of home seekers.  Of course, in the end, artificially low interest rates and the benevolence of government caused the bubble which popped and placed millions more Americans into foreclosure.

Lastly, and more germane to the topic of this article, is the attempt of Washington to make medical care more affordable for many Americans.  The two major programs to deliver this service since 1966 have been Medicare and Medicaid.  Coincidently, since 1966, healthcare costs have skyrocketed by an incredible 1800 percent!  Naturally, all the costs cannot be blamed on these government programs – our population has aged and new technologies are expensive. But, certainly, since healthcare is the biggest expenditure as a percentage of GDP of the federal government, Washington’s payments through Medicare and Medicaid have required the printing of new dollars which in turn have bid up the price of medicines and medical care.

Now Obama and his fellow statists in Congress want to implement a total takeover by Uncle Sam of our healthcare system in order to make healthcare affordable for every person in the U.S.  The plan would cover everyone including the slothful and those in the country illegally.  It would cost at least $2 trillion over the next decade and probably more given demographics and the inefficiencies inherent in all government programs. As usual, the politicians are talking compassionately while totally ignoring the real causes of the problem.

The fact is that there are tens of thousands of regulations and mandates that health providers and insurance companies must follow.  The costs of adhering to these regulations are staggering.  For instance, all states mandate coverage of certain diseases and disabilities in insurance plans.  This raises the costs of coverage and limits choice for consumers.  Regulations should be reduced and coverage mandates repealed to help contain healthcare costs.

The Food and Drug Administration (FDA) is a major culprit contributing to the healthcare crisis.  To get a drug approved for consumption takes on average twelve years and over $350 million.  This cost and time commitment squelches competition because many small drug firms do not have the long term funding to survive the process.  The FDA should be abolished and replaced with a private Underwriters Laboratories type rating organization.  A private system would encourage efficiency, increase competition, and lower costs.

The third party payer system has not served us well.  Because either the government or insurance companies pay most of the costs of our healthcare there is no incentive for us to shop around for the most efficient health services.  Medical savings accounts (MSA) would allow taxpayers to save money tax free and be able to withdraw it to pay for medical bills.  These plans could allow individuals to save up to $7500 (the per capita amount government spends on healthcare) a year tax free.  Individuals would be responsible for their own medical expenses up to that amount and could opt for a catastrophic plan beyond that.  This would ensure comparison shopping, thereby lowing costs.  Additionally, consumers could save premium dollars by only needing to purchase insurance that covers hospitalization and long-term care.

Lastly, it is no surprise that an article by this writer would not be complete without a call for sound money.  A commodity backed currency would restrain costs in healthcare because the government would be forced to live within its means.  The Federal Reserve would not be able to monetize infinite amounts of debt and this would contain price inflation especially in high demand sectors like healthcare.

Yes, Washington has failed miserably at making anything affordable for Americans.  From education to retirement to housing, everything the politicians touch increases in cost.  You would think Obama, Conrad, Reid, and Pelosi would realize this and scrape their grandiose plan to make healthcare more affordable.


The Minimum Wage is Subterfuge, Repeal It!

July 22, 2009

The Greenspan/Bernanke recession has made things bad all over.  Last Tuesday, I drove to my local Convenience Center for Collecting Residential Trash and Recycling only to find it closed.  In an effort to further cut costs during these economic hard times, my county has cut back on the number of days these centers are open from five to four.  I am sure that many Americans have similar stories whether it has to do with government services, the number of tellers in your local bank, or the number of folks flipping burgers at your local fast food shop.  Spending is down and revenue is scarce so government and business are cutting back on expenses.

The cause of this current circumstance is well known.  For too long Americans and their government spent money like crazy – money neither group had.  To their credit, many Americans seem to have learned their lesson.  The national savings rate is at an all time high somewhere around seven percent.  These Americans have sobered up and are paying down loans and building nest eggs for the future.  In spite of Washington’s irresponsible spending to coax the American people to spend our way to recovery, they haven’t and as a consequence prices for everyday items have generally fallen.  This is what happens when a Federal Reserve induced bubble pops.  The prices of overvalued items and assets fall.  Logically, what should happen as well is that wages should fall by a comparable amount.  As companies were “doing well” during the boom, wages rose as a consequence.  Thus, as prices decline so should wages as a consequence.

But, thanks to our ever benevolent leaders in Washington, wages are about to go up this week.  On Friday, the federal minimum wage will increase from $6.55 per hour to $7.25 per hour.  Of course, this increase is meant to help the economically underprivileged among us cope with the ever increasing price of things.  But, three questions immediately arise: 1. Hasn’t the rate of inflation as reported by the Bureau of Labor Statistics actually gone down in the last year?  Seems like an odd time for a raise in the base wage? 2. Given the current unemployment rate, should Uncle Sam be raising the cost by more than ten percent on business to hire and retain employees?  3.  Why do we need a minimum wage in the first place?

As to the first question, prices have generally fallen in the last year according to government statistics, but official Washington doesn’t care because it believes that if people have more money they will spend it and lift us out of recession.  What they don’t take into account is that the minimum wage hurts employment and thus income.  In our current market high wages have caused a surplus of workers.  Consequently, many are getting laid off.  An increase in the minimum wage at this time will only aggravate unemployment because the base wage is artificially high and not determined by the market.   

Think about this, isn’t it better to have 20 people working at $3.63 per hour than 10 people at $7.25?  Those 10 unemployed folks would be on the public dole in some form – unemployment benefits, food stamps, direct payments, Medicaid – these government expenditures forces the Fed to print more money which causes price inflation thereby hurting not only those on minimum wage but those receiving the welfare.  This puts political pressure on Congress to raise the minimum wage again.  A vicious circle ensues and that is the problem with government central planning of the economy – it needs to enact new programs to offset the unintended damages of its old programs.

Agreed, there is no way of knowing exactly how many more people would have jobs without the minimum wage.  But, one thing is clear there would be more.  Simple mathematics validates this point.  Another thing is that hard workers would be rewarded and sloths would be punished without a government mandated base wage.  As a former business owner I was frustrated that I couldn’t pay my most valuable employees more because scarce resources were needed to pay others a minimum wage.

As to the second question, it seems particularly stupid to raise the minimum wage at a time when businesses are struggling, unemployment is up, and we need wages to adjust down with prices so as to bring recovery.  Small business must eventually lead the way when the circumstances are right for economic recovery.  Raising costs on small business is going to delay those circumstances further.

Lastly, and most importantly, generations of politicians have socialized us to believe that the minimum wage is just, compassionate, and necessary to help millions of Americans provide at least a minimal existence for themselves and their families.  According to minimum wage apologists, millions of Americans would be naked, on the streets, and on the brink of starvation without the benevolent mandate from the government.  What they fail to understand is that government policy causes the price increases that make in their words the minimum wage necessary to live a minimal existence.  Murray Rothbard has pointed out that from the mid-eighteenth century until 1940 prices actually fell on average from year to year with the exception being during war years.  A couple of conditions were at play then that don’t exist today.  The regulatory state had not been born yet thus industries produced an ever increasing supply of goods to keep price inflation at bay and the gold standard restrained the government’s propensity to devalue the dollar through deficit spending.

Since 1940, the Federal Reserve which is responsible for maintaining price stability and the value of the dollar has actually been responsible for the dollar losing more than 93 percent of its value.  The bottom line is that minimum wage laws are a reaction to the government’s historical bungling of our economy.  If policymakers really wanted to help the poor in America they would eliminate most regulations on business and institute a sound money system.  In particular, a commodity backed currency would alleviate the ability of politicians and central bankers to devalue the dollar and cause price inflation by printing money and running deficits.  In short, we would return to the days when prices remained at the very least truly stable.

On Friday, when the minimum wage increases by more than 10 percent it will be applauded by politicians and pundits alike.  But, keep in mind, if the policymakers were really doing their jobs, there would be no need for the minimum wage in the first place.  Time will only tell how high the Congress and president will raise the minimum wage in the future to offset all the inflating that has taken place over the last two years.  It will be a lot and it will hurt as many people as it purports to help.

Uncle Sam is a Subprime Deadbeat

July 13, 2009

As of this month, California is insolvent.  It does not have enough money to pay its bills and has resorted to covering its expenses by issuing IOUs to creditors.  Washington is also insolvent.  It has been for a long time – since at least 1971 when Richard Nixon defaulted on America’s debts by closing the gold window to foreign creditors.  The only difference between the two entities of course is that Washington can simply print more money, as much as it needs and then some, to keep the federal gravy train also known as the welfare/warfare state rolling.  California cannot.  Anyway you look at it, both California and Uncle Sam are in the same boat and it’s headed for the poor house. 

I know, this is just more hyperbole by a bitter, resentful, much maligned for his political and economic views blogger.  That is the beauty of the internet.  Millions of people like me can vent online about the stupid choices American voters make when they pull the lever every election day.  Agreed, many American voters are hoodwinked by the so called “mainstream media” and political advertisers during campaigns.  We have all heard the same nonsense spewed each cycle about how the American political system is a two party system and a vote for any minor party is a wasted vote. Then there are the exclusion tactics of the Republicrat Establishment.  These include archaic ballot access laws, no debate inclusion for those outside their exclusive club, and downright illegal conduct.

But, it is no wonder that a society that has personally spent itself into oblivion would elect similarly irresponsible representatives that have bankrupted them nationally.  This current financial depression was initially brought on by the defaults of individual subprime borrowers.  Plain and simple, many people that already had bad credit, encouraged by “easy money” from the Federal Reserve, entered into mortgages and other loans that they inevitably could not afford.  The fact of the matter is that Uncle Sam is no different than these subprime borrowers.

Generally speaking, bank regulators classify subprime borrowers as those with: 

  • a foreclosure or charge-off in the past 24 months;
  • two or more 30-day delinquent payments in the past 12 months;
  • any bankruptcy in the last 60 months;
  • qualifying debt-to-income ratios of 50 percent or higher; and

a limited capacity to pay monthly living expenses

Uncle Sam meets each criterion.  Because Washington allows the Federal Reserve to simply print money to meet current expenses essentially means the government has been foreclosed on, been delinquent in its payments, and has a limited capacity to meet its monthly expenditures.  According to the Peter G. Peterson Foundation, the total federal debt of the United States is really $56 trillion.  This figure includes the official $11 trillion debt plus $45 trillion in unfunded future obligations through Social Security and Medicare.  If Uncle Sam had a conventional mortgage at 5 percent for thirty years his yearly payment would be $3.6 trillion per year.  Given that he collects about $2.5 trillion per year in taxes his qualifying debt to income ratio is way more than 50 percent at 140 percent!  What this means is that no respectable bank would give Uncle Sam any future loans given his deadbeat borrower status.

That’s the point.  The United States’ government is broke propped up only by a cabal of legal counterfeiters.  The politicians tell us on a daily basis that the debt is not what is important right now, that stimulating the economy must come first.  They say that without their interference the economy would have imploded a long time ago.  But, how do they know that?  There is no empirical evidence to support their belief.  As this blogger has maintained all along, none of their spending will work.  And in fact, after trillions have been injected unemployment continues to rise, foreclosures, and bank failures continue, and the latest Fed induced bubble since March – the stock market – is popping as I write.  These policies didn’t work during the Great Depression and only an unread person would believe they will work today.

So, why should we be concerned that our federal government is a subprime borrower?  At some point creditors will be less inclined to buy its debt; the rates on Treasury bills have already begun to rise.  As the value of our dollar falls against other currencies the rest of the world will no longer be willing to sell us their goods in exchange for our debt.  With our own goods increasing in price because of the Fed inflating the dollar our standard of living will fall.  Lastly, as the dollar is replaced as the world’s reserve currency Washington’s credit will dry up further forcing the politicians to raise taxes to finance their largess.  With tens of trillions in debt, grab your wallets because if inflation doesn’t do you in taxes will.