We Can’t Afford the Payroll Tax Cut Extension

December 22, 2011

Americans should be used to the high political drama coming out of Washington.  Oh, there are the stories of marital infidelities, disappearing Congressional aids, toe-tapping senators and the like.  Then there are the great debates where both sides of an issue scrap and claw their way to political pay dirt.  Healthcare reform and the recent battles on raising the debt ceiling come to mind.  Funny how things always come together at the 11th hour?

Currently on the docket is the payroll tax cut extension. Passed in 2011, the payroll tax cut reduced a taxpayer’s contribution toward Social Security from 6.2 percent to 4.2 percent.  The goal of the legislation was to put more money in taxpayers’ hands in order to stimulate the economy.  The measure expires on December 31, 2011.

Now, the drama comes in because the Democratic controlled Senate approved a two month extension to the measure while the Republican controlled House rejected the Senate plan in favor of a one year extension.  Democrats are bent on their bill and Republicans on theirs with time quickly running out.  If an extension is not approved by December 31, 148 million Americans will see their taxes go up – at least that is the story coming out of the White House.

In the first place the name of the measure is a bit of a misnomer intended I am sure to confuse many taxpayers.  The payroll tax cut is not a cut to a worker’s income tax amount.  It is a reduction in the amount that workers pay into the so-called Social Security Trust Fund.  In other words, it is akin to paying less on a retirement annuity each month but still maintain eligibility for full retirement benefits under the original policy.  An annuity holder would never expect this allowance.  For the life of me, I can’t understand how the average taxpayer would – unless they have been confused.

Secondly, the propaganda pundits on the MSM are claiming that if the tax cut is not extended it will potentially push the U.S. economy into a recession.  Of course, that is the knee-jerk reaction of all Keynesians when it comes to government intervention in the economy.  They believe in the more the better with no regard for tomorrow since “in the long run we are all dead”.

And essentially this tax cut extension is a Keynesian spending program because the tax pays for an entitlement that has to be paid to retirees.  With a drop in tax revenues the government will have to print money in order to meet Social Security obligations.  Those obligations simply aren’t going away and have to be met.

The problem with more spending is that it doesn’t work to stimulate the economy out of recession.  Since January 2009 the federal government has spent $4.5 trillion. Unemployment is higher, food stamp rolls are at an all-time high, and many Americans are still losing their homes.  When is enough enough?

Lastly, how smart is it to cut funding for a program that is already bankrupt?  The Social Security Trust Fund already pays out more than it receives in tax revenues.  Future unfunded obligations for both Social Security and Medicare are over $50 trillion.  Given the program is not going to end anytime soon, putting it in even worse fiscal condition borders on the criminal.

The payroll tax cut is nothing more than another something for nothing proposition.  It has not helped the economy so far and an extension would further devastate the fragile balance sheet of Social Security and Medicare.  Once again Washington is offering the world – more free money, Social Security intact, no spending cuts, and a blind eye to trouble down the road.  It is amazing that Congress and the President can’t find a measly $100 billion to cut from the enormously bloated federal budget to pay for the plan.  With leadership like that in Washington it will be a miracle if the economy doesn’t eventually fall over a cliff.  But have no fear, I am sure Congress and the President will get together at the 11th hour to produce the tax cut extension.

Article first published as We Can’t Afford the Payroll Tax Cut Extension on Blogcritics.

Kenn Jacobine teaches internationally and maintains a summer residence in North Carolina

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Gingrich Plan Has Been Tried Before

December 21, 2011

In the debates for the Republican nomination for president, it is no accident that Newt Gingrich constantly invokes the name of conservative icon Ronald Reagan.  Gingrich continually reminds us that he was in Congress fighting for Reagan’s tax cuts and his military budgets in the early 1980s.  Naturally this is a calculated political strategy   on the part of Gingrich since the most faithful Republican primary voters are Reaganites.  But, the strategy is more than political; it is an indication of how he would govern if elected president.

According to Gingrich’s official campaign website, the former Speaker of the House of Representatives is essentially proposing the same program that Reagan foisted on America in the 1980s.  The key elements of which are huge tax cuts and military spending.

In terms of taxes, Gingrich’s plan would lower individual tax rates, lower the corporate tax rate from 35 percent to 12.5 percent and eliminate the capital gains tax.  Any lover of small government should love these proposals, however Gingrich never addresses how he would pay for the tax cuts.  On his site, he proposes no specific spending cuts and claims he will balance the budget by “growing the economy” through tax cuts.

For his part, Ronald Reagan based his entire economic platform to get the economy moving again on tax cuts.  He also claimed that lowering taxes would grow the economy and balance the federal budget.  After eight years in office he managed to triple the federal debt.  The problem with Reagan wasn’t that he cut taxes (he also was the biggest tax raiser in history to that point) it was that he didn’t cut spending.  He proposed cuts when he ran for president, but didn’t follow through on his rhetoric.

At least Gingrich is not being dishonest about his intentions not to cut federal spending, but his overall policy will have the same effects as Reagan’s – an enormous increase in the national debt.  Given that our debt has already reached a critical point, we can ill afford a return to 80s style economics; thus we can ill afford a President Newt Gingrich.

Gingrich is also proposing Reaganesque militarism if he is elected president.  Of course that is the path we have been on since the 1980s anyway.  He has no intention of making any military cuts a part of debt reduction.  In fact, according to his campaign website, under President Gingrich the U.S. would continue to be the world’s military policeman:

“America’s foreign policy must begin by understanding who we are as a country.  We are, as Ronald Reagan said, the world’s “abiding alternative to tyranny.” Therefore, America’s foreign policy must be to ensure our own survival and protect those who share our values.”

So while he proposes to cut taxes drastically and offers no spending cuts, he also would seek to at the very least keep spending enormous amounts of money on military adventures that don’t contribute to our safety and security.  In fact, by defending Israel unconditionally his policy would make us much less safe.

There is no doubt that Ronald Reagan’s legacy is still very much with us today.  Indeed, Newt Gingrich has co-opted the Reagan governing plan as his own.  It is a simplistic plan that set us on the road to an astronomical national debt.  We are currently at a breaking point with that debt and all Newt Gingrich can do is propose more of the same?


Obama is Correct but for the Wrong Reason

December 17, 2011

In a recent interview with 60 Minutes’ Steve Kroft, President Obama was asked if he felt he overpromised during the last presidential campaign when it came to fixing the economy.  The President responded:

“I didn’t overpromise. And I didn’t underestimate how tough this was gonna be…Reversing structural problems in our economy that have been building up for two decades — that was gonna take time. It was gonna take more than a year. It was gonna take more than two years. It was gonna take more than one term. Probably takes more than one president.”

It is uncommon, but I must admit that I totally agree with Obama.  However, my agreement with him is for a reason that he did not intend with his remark.  He was espousing the view that it would take many more years of Keynesian economic policies to dig ourselves out of the economic ditch.  I am saying his position is precisely why it will take many years to recover from the Great Recession.  Essentially history proves that Keynesian economic theory does not work.  In fact, it has been proven to make things worse.

An often forgotten (either intentional or not) economic depression took place in 1920.  It was in 1920 that the spending of Congress and the inflation of the dollar by the Federal Reserve in order to fight World War I finally caught up with the U.S. economy.  After the artificial boom brought on by government policy busted, unemployment increased from 4 percent to 12 percent.  At the same time, GNP contracted by 17 percent.  Relatively speaking, the depression of 1920 was as severe as any in U.S. history.

In those days America still believed in free market capitalism.  President Harding’s response was to slash the federal budget almost in half between 1920 and 1922.  He also reduced tax rates for all income groups and decreased the national debt by one-third.  Additionally, the Federal Reserve did not use its powers to increase the money supply to fight the contraction.

No, the federal government and the central bank’s response were to let the economy liquidate the mal-investments that had built up during the spending and inflating of the war years.  It wasn’t to try to “stimulate” the economy back to growth and the Federal Reserve did not attempt to re-inflate the economic bubble.

By 1922, unemployment was back down to 6.7 percent and it was only 2.4 percent by 1923.  Recovery occurred within two years of the onset of depression and opened the gate for a decade of enormous economic growth.

 

Now fast forward to the Great Depression of 1929-1946.  The common myth is that Franklin Roosevelt brought us out of the Great Depression with his New Deal policies.  The New Deal represented the first time in our country’s history that the federal government attempted, in a robust way, to remedy an economic downturn with “stimulus” spending and other bureaucratic interventions.  Roosevelt’s program included make work schemes, industrial codes of fair competition, guaranteed trade union rights, the regulation of working standards, minimum price fixes on agriculture, petroleum and other products, and other assorted welfare programs.  Essentially Roosevelt had taken over the U.S. economy and then over time he found it necessary to raise excise taxes on business to pay for his schemes.

The result was a prolonged depression.  The New Deal did not allow the mal-investments of the previous boom to liquidate.  It discouraged entrepreneurs from investing and the artificially high prices it imposed squelched consumer demand.  It was such a failure that in 1939 Henry Morgenthau, Roosevelt’s confidant and Secretary of the Treasury, proclaimed:

“We have tried spending money. We are spending more than we have ever spent before and it does not work…We have never made good on our promises. … I say after eight years of this Administration we have just as much unemployment as when we started.…and an enormous debt to boot.”

And this is why Barack Obama was correct in his statement that it will take many more years to turn the economy around.  History proves that government intervention in an economic downtown only worsens the situation.  Since taking office in 2009, Obama has spent trillions through make work projects, Cash for Clunkers, First Time Homebuyers’ credits, extensions to unemployment benefits, and other schemes.  He reappointed Ben Bernanke to Chairman of the Federal Reserve precisely because he favors the Fed’s long term quantitative easing program which has pumped trillions more new cash into the economy.

What do we have to show for it? – an economy still in shambles 4 years after the downturn with real unemployment north of 16 percent, a lackluster GDP, 46 million Americans on Food Stamps, and $4.3 trillion more in debt.  Obama is right, it will take years to undo the damage caused by his policies.  The question is, why doesn’t Timothy Geithner have the same honesty that Henry Morgenthau Jr. did?

Article first published as Obama is Correct But for the Wrong Reason on Blogcritics.


Gun Sales are a Sign of Things to Come

December 6, 2011

While the so-called “mainstream” media is reporting with great glee that 2011 Black Friday retail sales was up 6.6 percent over last year to a record $11.4 billion one other tidbit of data was ignored that probably says more about our social condition than anything: the FBI reported that background check requests for prospective gun buyers on the same day shattered the single-day, all time high by 32 percent.  According to Deputy Assistant FBI Director Jerry Pender on November 25th, 129,166 checks were submitted far exceeding the previous high of 97,848 on Black Friday 2008.

Now it could be argued that the record gun sales are a result of more Americans all of sudden taking an interest in hunting or gun collecting.  But this explanation seems far-fetched as these two things are not normally associated with fad behavior.  Furthermore, the recent surge in gun sales is part of a larger trend in gun ownership.   According to the Gallup Organization, 47 percent of Americans report they keep a gun on their properties.  This is up 15 percent from a year ago and the highest Gallup has reported since 1993.

Make no mistake about it, the massive increase in firearm purchases has everything to do with the miserable shape America is in socially.  For one thing, as the economy continues to deteriorate with rising price inflation and chronic high levels of unemployment, Americans know that it is only a matter of time before they could become the victims of crime.

Americans also understand that social unrest like has been seen in Europe is possible in the U.S.  Even though it has been relatively peaceful, the Occupy Wall Street Movement is seen by many as a harbinger of things to come.  Given that there are many Americans who feel betrayed, disenfranchised, and totally frustrated by a system that has taken their sustenance in order to bailout those that produced the Financial Crisis of 2008 and the resulting prolonged depression, it is possible that as a society we could be one financial shock away from social upheaval.  This may sound paranoid, but given the recent surge in gun sales I may not be alone in my thinking.

So while robust retail sales on Black Friday is being construed as a hopeful sign for the economy, the surge in gun sales on the same day is an indication that many Americans don’t feel the optimism.  Things are bad everywhere and they are going to get a lot worse before they get better.  Black Friday gun sales are proof that this commentator is not alone in his prognostication.


Price Controls Never Work

December 3, 2011

When Richard Nixon signed the so-called Economic Stabilization Act of 1970 into law the hope was that wage and price controls would put a halt to rising price inflation.  The program was a reaction to the spendthrift ways of the federal government in the 1960s that attempted to finance both the Vietnam War and Lyndon Johnson’s so-called Great Society.

Nixon’s plan to impose his will on the economy ended in utter failure.  For instance, his price ceiling on red meat did not stabilize the price of beef, it kept rising.  What it did do was put many small plants out of business because they found themselves selling on smaller and smaller margins.  No amount of price controls could remedy the overall price inflation of the 1970s.  It wasn’t until the double-digit interest rates of the early 1980s that it finally subsided.

The President’s economic advisors should have known better.  Besides many instances throughout history where price controls have caused much more harm than good, all they had to do was study rent control effects in New York City since World War II.  Again, the effects of price controls have been an utter failure.  While stabilizing prices at the proscribed government level, rent price controls negatively affect the very low-income renters they are meant to help.  Because landlords are required to rent their properties at below market prices, they provide inferior dwellings in short supplies.  While a 7 percent vacancy rate is considered normal and non-rent control cities like Dallas, Houston, and Phoenix often have vacancy rates about 15 percent, New York City has not had a vacancy rate above 5 percent since World War II.  Any way you look at it, government price controls distort the market and cause much more harm than good.

The reason is because they abrogate the important relationship between supply and demand.  Economics 101 tells us when government mandates a price for a product that is above market value a surplus results.  Since the 1920s, government farm price supports have caused prolonged surpluses in agricultural goods.  Conversely, when government mandates a price below market value shortages arise because consumers are willing to buy more than what suppliers are willing to provide.  At the end of the day, price supports always disrupts the link between supply and demand that the market relies upon to run efficiently.

Even most mainstream economists agree that government price controls are bad because they cause dislocations in the economy.  However, what’s funny is they don’t see how the actions of the Federal Reserve Bank are essentially price controls of our money that also cause much more harm than good.  When the Fed sets interest rates, buys and sell assets, monetizes federal debt, or simply creates money or credit out of thin air it is setting a price level for the cost of money either directly (interest rates) or through the supply of money in circulation.  In other words, mortal men and women are fixing the price of money not the market.

The result of monetary price fixing by the Fed has been no less damaging than government’s price fixing of goods.  It is responsible for a continuous cycle of booms and busts in our economy.  The scenario that is repeated time and again is as follows:  usually in response to a downturn, a sluggish economy, or a crisis, the Fed sets interest rates artificially low; a cheap and abundant money supply promotes mal-investment into unproven enterprises like the dot.com bubble of the 1990s; a cheap and abundant money supply also promotes irresponsible investment and speculation like the housing bubble of the 2000s.  The fake boom ends when bank credit expansion ends.  That is to say, the bust begins when adequate returns on investments can no longer be found at prevailing interest rates.  What is then needed is a liquidation of all the mal-investments made during the boom.  This is referred to as a recession.  The ensuing recession starts the cycle over again with the Fed lowering interest rates to stimulate growth.

The booms and busts caused by Fed price fixing of the dollar have serious consequences.  Besides the up and down economy, savings rates remain low because it doesn’t pay to put your money in a low-interest bearing bank account.  This in turn denies start-up capital to the markets.  The Fed then prints more money and its member institutions use fractional reserve banking to increase the money supply.  This accelerates general price inflation.  To put it in perspective, the dollar has lost over 95 percent of its value since the Fed began operations in 1914.  Much of that erosion has taken place since Nixon closed the gold window to foreign redemption in 1971.  The result has been a declining standard of living for most Americans and an ever widening gap between rich and poor.
What is needed is a free market approach to money where the market dictates the price of a dollar, not central bankers.  Thus, the Federal Reserve should be abolished and with it the practice of fractional reserve banking.  In its place should be a 100 percent gold convertible currency.  Since market forces push the market to equilibrium, boom and bust cycles would become a lot less pronounced.  A gold backed dollar would protect savings and investments from the ravages of price inflation and provide an ample pool of capital for entrepreneurship.  At the end of the day, Washington abandoned product price controls because they failed to end the price inflation of the 1970s.  Now, it should abandon monetary price controls because they have failed to give us a prosperous economy.