Deficits and Debt Do Matter

Keynesian economics encourages deficit spending by government to address the problems of a recession. So we get (after the massive bank, insurance, and auto manufacturer bailouts), the big “stimulus” plan, which has accomplished some political rewards for favored interests, and several large but not particularly useful pork projects (Murtha’s airport, for instance). What is the reward to the American taxpayer for such spending? In general, not much. Unemployment is at its highest level since 1983 and won’t be coming down much for the next year or so. But Obama is getting action on his cap and trade and Obamacare programs, which together, if finally passed, will greatly increase unemployment as well as the deficit.

Current Conditions
As I write this, the national debt of the United States is $12,020,893,013.17, or an estimated $39,106.98 per person. [1] The federal budget deficit for the fiscal year ended September 30, 2009 was a record $1.42 trillion. “In addition, future deficits are currently projected to total $9.1 trillion in the coming decade.” [2]

The $9.1 trillion figure is overly optimistic, since it assumes low interest rates throughout the period, which appears to be impossible as more massive spending comes on stream.

These deficits alone, in my opinion, make a convincing argument against Obamacare and cap and trade. Not to mention the unemployment rate. But what are the consequences of such spending and debt?

Consequences of Large Deficits
As the national debt increases, the cost of financing it increases, not only because of the greater principal, but also because of the higher interest rates that will be required. Other interest rates must rise in order for other (non-government) debt instruments to remain competitive. Thus, we’ll see higher interest rates in general, which will increase the costs of buying houses and cars, taking out bank loans, etc.

As Roger W. Garrison pointed out, in a 2003 article (when the U.S. faced a deficit of $304 billion), “…At that level of borrowing, the effect of the deficit will be:
• higher interest rates (if the government borrows domestically) OR:
• increased inflation (if the Federal Reserve monetizes the debt) OR:
• weakened export markets (if the government sells debt abroad) OR:
• tax hikes (possibly in the form of a Johnsonesque "surtax") OR:
• all the above in some combination. …” [3]

Of course, each of these things represents a kind of tax on the citizens and reduces purchasing power and the ability to save. None of them tends to encourage higher employment.

He also mentions that deficits introduce a good deal more uncertainty into things, since it is initially unclear how they will be dealt with. [4]

These uncertainties become greater at the much higher spending levels we’re seeing now.

The Way Forward
Douglas Holtz-Eakin (former director of the Congressional Budget Office) at Wall Street Journal reminds us that Barack Obama promised action on big problems and has expended a lot of political capital on health care reform. But the big problem is not health care, but the deficit. “Recently, the White House signaled that it will get serious about reducing the deficit next year—after it locks into place massive new health-care entitlements. This is a recipe for disaster….”

Holtz-Eakin says that despite the claims of Obama and his advisers that they understand the concerns over the deficit, “the administration's policy choices are the equivalent of steering the economy toward an iceberg….” [5]

Here’s the President speaking on the deficit in March 2009:



More spending on Obamacare, climate control, education, etc. will neither promote economic growth nor help with the deficit. Also, he wants to blame the Bush Administration for his troubles. The deficit he inherited was greatly enlarged, more than doubled, by the massive bailouts that he supported.

None of this would surprise Richard Ebeling, who commented as follows for National Review Online symposium, “Obama Money Talk: The New Administration and the Economy” in November 2008:

“In spite of the impression in the media, that President-Elect Obama’s economic team reflects an underlying “pro-market” orientation, they in fact are advocates of manipulating markets to generate outcomes more to their interventionist and welfare redistributive liking… That is not the free market. They will manipulate the markets to bring about the “green” and pro-labor union outcomes that will have nothing to do with the outcomes we as consumers would have desired in a more competitive environment….

“In addition, they are all on board to design and implement a vast deficit spending package that will end up doing far more harm than any good ….” [6]

The solution involves looking at the deficit as an immediate problem, not something to be dealt with only in future years. There will have to be some hard decisions about serious budget cuts, including entitlements, and some revision of the tax structure. The recession and unemployment situation need to be substantially improved before the deficit can be effectively reduced, because until then, revenues will be too low. But this needs to be dealt with in the very near future.

Political difficulty in fixing these problems is preferable to the alternatives: downgrading of America’s credit rating, and possible national bankruptcy. Printing money has its limits. We need to avoid finding out what they are.


[1] U.S. National Debt Clock, 11/30/2009, 9:27 PM CST, at http://www.brillig.com/debt_clock/

[2] David Jackson, “Obama team makes it official: Budget deficit hits record. By a lot.”
USA Today.com, 10/16/2009, at http://content.usatoday.com/communities/theoval/post/2009/10/620000005/1

[3] Roger W. Garrison, “The Trouble with Deficit Finance,” Ludwig von Mises Institute, 02/04/2003, at http://mises.org/daily/1158

[4] Ibid.

[5] Douglas Holtz-Eakin, “The Coming Deficit Disaster,” Wall Street Journal – Opinion Journal, 11/20/2009, at http://online.wsj.com/article/SB10001424052748704888404574547492725871998.html

[6] “Richard Ebeling Comments on the Obama Economic Team for National Review Online,” American Institute for Economic Research, 11/26/2008, at http://www.aier.org/about-aier/news/853-richard-ebeling-comments-on-the-obama-economic-team-for-national-review-online

Photo: Dreamstime.com

PLEASE NOTE: As you may have noticed, the national debt figure above is missing three places. As of December 5,2009, 11:51 PM CST, the debt is $12,096,353,549,537.00. So because of my typo, the amount I stated was roughly one one-thousandth of the correct amount. Sorry I made this error. If the figure I gave were correct, our situation would be a lot better!

How Much Ridiculous Government Control Are We Willing To Put Up With?

“…the law is a ass – a idiot….” – Mr. Bumble in Oliver Twist, by Charles Dickens, Chapter 51.

When it comes to the Nancy Pelosi so-called “health care” bill, the above statement is much, much too true. Under the worse-than-worthless so-called leadership of Pelosi and Reid, Congress is looking to pass the worst legislation ever presented in Congress.

Not only is the would-be law in question “a ass,” but so is each of the congressional leaders proposing it. And that is being too kind to them. They deserve to be removed from office. If we, the American people, are willing to accept this stuff, I guess we deserve what we get.

First, hear Pelosi “justifying” prison terms for refusal to buy insurance:



When government takes over, watch out! Your money and freedom are in danger.

Just check one of the sections that have been sneaked into the bill, Section 2572 (H.R. 3962, page 1,511 and following). This section requires chain restaurants to provide calorie and nutrient information on all menus for “standard menu items.” For salad bar and self-service items displayed, calorie and nutrient information must be displayed adjacent to each food item. [1]

This is simply an unconstitutional destruction of freedom. Big Brother rules like this undermine all our liberties and generate disrespect for legislators and such stupid laws.

For vending machine operators, the requirements are just as onerous if not more so:

“Section 2572 of the bill (H.R. 3962) says, “In the case of an article of food sold from a vending machine that – (I) does not permit a prospective purchaser to examine the Nutritional Facts Panel before purchasing the article or does not otherwise provide visible nutrition information at the point of purchase; and (II) is operated by a person who is engaged in the business of owning or operating 20 or more vending machines, “the vending machine operator shall provide a sign in close proximity to each article of food or the selection button that includes a clear and conspicuous statement disclosing the number of calories contained in the article.” (See page 1,515 of H.R. 3962 Section 2572 (H) (viii).” [2]

Does that sound innocent and simple? It is vicious. It is an affront to liberty. It is an insult to every American. Besides the fact that it is on its face a reprehensible requirement in terms of liberty, it is extremely costly to the vendors affected. This is only one relatively small part of the extremely high cost of these proposals.

“[The National Automatic Merchandising Association] NAMA estimated that the first year start-up cost to comply with the basic disclosure would be $56.4 million.” [3]

I see these requirements as more reasons to view the legislation as a great government power grab, and more reasons to believe that the less the government does, the better. I just wish Congress could reduce their work week to four hours or less so they could do less harm to America.

Of course the “health care” bill is a basic foundation of Obama’s fascist regime. I and many others have written many articles arguing against it. It is supported by only a minority of the American voters, and that number is steadily decreasing.

I have argued against this legislation as against policies I oppose. This goes deeper than a mere difference of opinion. This is part of a socialist-fascist regime that must be stopped or America as we have known it is going to be destroyed and our freedom lost. Obama, Pelosi, Reid and company are working hard to wreck our economy and freedom. That is the aim of the gigantic deficits and resulting unpayable debt, added to already unsustainable government programs, and liberty-destroying proposals, one after another. The 2010 and 2012 elections may be the most important ever.

It is unfortunate that so many people only see “benefits” as described by the lying government officials, and care nothing (as the officials care nothing) for the Constitution and the disastrous consequences, economic and other, of these evil proposals. I cannot state strongly enough my belief that the Obama Administration and Democratic congressional leadership are among the worst ever in our history. Such laws cannot be justified legally or morally. I wish them success in their constitutionally enumerated responsibilities but not in their unconstitutional ventures.

Are we to be a free people, or are we to be led about by the nose by the would-be fascist masters of the Democratic Party leadership?

The American people deserve better than this.


[1] H.R. 3962 text available at http://www.centerforpolicyanalysis.org/id57.html

[2] Christopher Neefus, “Pelosi’s Health Care Bill Would Regulate Snack Machines at Estimated Cost of $56 Million the First Year,” CNS News.com 11/26/2009, at http://cnsnews.com/news/article/56572

[3] Ibid. NAMA represents the vending machine industry.


Photo: Cover page of Oliver Twist by Charles Dickens, 1838. Source: The New York Public Library, Berg Collection of English and American Literature.

Remembering the Forgotten Man

In this article, I quote rather freely from William Graham Sumner’s essay, “The Forgotten Man.” It is well worth reading the whole essay, and whether you agree with Sumner or not, you can see that his position is reasoned and consistent. He describes the person who is truly forgotten in all the government’s glorious spending programs to benefit the “less fortunate,” the various “petted classes,” as Sumner called them.

William Graham Sumner (1840-1910) was born in New Jersey, moved with his family to Connecticut, where he attended public schools and Yale College. “After graduation, he studied ancient languages and history at Göttingen (1864) and theology and philosophy at Oxford (1866). The following year he was appointed tutor at Yale and then was ordained in the Protestant Episcopal Church. In 1869 he left Yale to be rector of churches in New York City and Morristown, N. J. In 1872 he became the first professor of political and social science at Yale - a position he long held.” He was a sociologist and a proponent of free-market capitalism and severe critic of government social programs and imperialism. His major work was Folkways, analyzing social life in terms of mores, institutions and values. [1]

The Forgotten Man (1883) is described in his essay of that name. His Forgotten Man is still very much the forgotten one today, the one, C, who, when A and B get together to decide what should be done for the suffering X, is compelled by the resulting law to also do for X what A and B have determined. He is never thought of, yet he is the one who sacrifices and pays for the “help” that is to be given to X.

Who Are We “Helping”? And Who Pays for It?
Sumner writes:
“The notion is accepted as if it were not open to any question that if you help the inefficient and vicious you may gain something for society or you may not, but that you lose nothing. This is a complete mistake. Whatever capital you divert to the support of a shiftless and good-for-nothing person is so much diverted from some other employment, and that means from somebody else. I would spend any conceivable amount of zeal and eloquence if I possessed it to try to make people grasp this idea. Capital is force. If it goes one way it cannot go another. If you give a loaf to a pauper you cannot give the same loaf to a laborer. Now this other man who would have got it but for the charitable sentiment which bestowed it on a worthless member of society is the Forgotten Man. The philanthropists and humanitarians have their minds all full of the wretched and miserable whose case appeals to compassion, attacks the sympathies, takes possession of the imagination, and excites the emotions. They push on towards the quickest and easiest remedies and they forget the real victim.

“Now who is the Forgotten Man? He is the simple, honest laborer, ready to earn his living by productive work. We pass him by because he is independent, self-supporting, and asks no favors. He does not appeal to the emotions or excite the sentiments. He only wants to make a contract and fulfill it, with respect on both sides and favor on neither side. He must get his living out of the capital of the country. The larger the capital is, the better living he can get. Every particle of capital which is wasted on the vicious, the idle, and the shiftless is so much taken from the capital available to reward the independent and productive laborer. But we stand with our backs to the independent and productive laborer all the time. We do not remember him because he makes no clamor; but I appeal to you whether he is not the man who ought to be remembered first of all, and whether, on any sound social theory, we ought not to protect him against the burdens of the good-for-nothing. In these last years I have read hundreds of articles and heard scores of sermons and speeches which were really glorifications of the good-for-nothing, as if these were the charge of society, recommended by right reason to its care and protection. We are addressed all the time as if those who are respectable were to blame because some are not so, and as if there were an obligation on the part of those who have done their duty towards those who have not done their duty. Every man is bound to take care of himself and his family and to do his share in the work of society. It is totally false that one who has done so is bound to bear the care and charge of those who are wretched because they have not done so. …” [2] (emphasis added)

Do Sumner’s Arguments Apply Today?
The injustice of overburdening the Forgotten Man is obvious, yet it is the pattern of all legislative welfare and philanthropic programs. People today are taught to have a sense of entitlement to government assistance. If they decide not to fulfill their duties to work for their living and live responsibly, it must be society’s fault, and the C’s of the world must be ordered to help them.

As I mentioned in a previous article, during FDR’s reign, the “forgotten man” label was applied to the aggrieved X, leaving C as forgotten as ever. [3]

The current Administration, under Barack Obama, is trying to squeeze everything possible out of C to transfer much of his substance to government, thence to Obama’s favored X’s, the permanent government-dependent underclass the government has created, as well as socialist activist groups like ACORN, big labor unions, big banks, trial lawyers, environmental activists, etc. Some of the C’s of our society are beginning to band together in protests such as Tea Parties, marches, and so on. They will either have influence or be wiped out economically and socially. It should be noted that in the rare event that C raises any objection or complaint, he/she is criticized by government and their media lackeys as a member of an “unruly mob,” too unsophisticated to understand what the elites know is good for society.

The liberals’ conception of fairness is “equality” which, if it were realized, would result in all being impoverished in every way. We already have too much of the socialists’ “trickle-up poverty.”

Most Americans really do not mind paying taxes for the legitimate functions, i.e., constitutional responsibilities, of government, but are not nearly so much in favor of the socialist welfare state, and the enabling of people addicted to irresponsible behavior. The main people in favor of the welfare state are those who would receive benefits, those who would administer the system, certain politicians, and those who want to be helpful, but neglect to consider the social and human costs, as well as the economic costs of government social welfare. That said, almost all agree that a (at least) minimal safety net is needed to help those who are actually unable to support themselves. The problem arises when this is exaggerated.

As for government relief efforts, one might point to the government’s efforts after Hurricane Katrina. No, I don’t mean FEMA’s slow response at the beginning, but their continuing efforts to provide help for years afterward to people who should have been left to care for themselves sooner. Also, while the Katrina victims were truly suffering, many other people were suffering in an equally bad or worse way, who received no government help whatsoever, nor did they ask for any.

Similarly, the families of those lost in the 9/11 attacks were (I think) very generously compensated by the government. Money can’t replace a lost loved one, but on any given day, a number of people die tragically and their families get nothing from the government, nor do they ask for anything.

I don’t mean to suggest that it was wrong to want to help these people, but that it should be seen in perspective.

Government entitlements that are well-established threaten to greatly damage our economy in future years, because these obligations are unsustainable and can never finally be met. In addition, they unjustly burden the taxpayers every year. Younger payers of these taxes cannot realistically expect to benefit from these programs. They are among the forgotten men and women.

Conclusion, Again Quoting Sumner
“It is plain enough that the Forgotten Man and the Forgotten Woman are the very life and substance of society. They are the ones who ought to be first and always remembered. They are always forgotten by sentimentalists, philanthropists, reformers, enthusiasts, and every description of speculator in sociology, political economy, or political science. If a student of any of these sciences ever comes to understand the position of the Forgotten Man and to appreciate his true value, you will find such student an uncompromising advocate of the strictest scientific thinking on all social topics, and a cold and hard-hearted skeptic towards all artificial schemes of social amelioration….” [4]


[1] William Graham Sumner biography, Answers.com, at http://www.answers.com/topic/william-graham-sumner

[2] William Graham Sumner, “The Forgotten Man,” 1883, The Forgotten Man and Other Essays, The Online Library of Liberty, at
http://oll.libertyfund.org/index.php?option=com_staticxt&staticfile=show.php&title=1654&search=%22Forgotten+Man%22&chapter=108194&layout=html#a_2270750.

[3] Henry Hazlitt, Economics in One Lesson, Ludwig von Mises Institute, 2008. Originally published by Harper & Brothers, 1946, page 179

[4] Sumner, see [2].


Photo: Portrait of William Graham Sumner from The Warren J. Samuels Portrait Collection at Duke University. Licensed under the Creative Commons Attribution 2.5 License.

On Wealth and Income Inequality

“Those who would give up essential liberty to purchase a little temporary safety deserve neither liberty nor safety.” — Benjamin Franklin [1]

When tougher economic times come, as at present, we hear more about how we need to redistribute wealth and income to help those who have less. This is especially true under Barack Obama, who is on record as favoring redistribution. For him, this should have been part of the Supreme Court’s decrees during the civil rights movement of the 1950’s and 1960’s. We are fortunate that it wasn’t, because that would have brought on a constitutional crisis and, if serious redistribution happened, the collapse of our economy.

Equality of wealth and income in a nation has never been and never will be a fact. It is a grasping at straws and striving after wind to attempt to realize it. If it could be made real, it would result in universal poverty, economic depression and degradation of everyone’s standard of living.

When people observe the different economic levels among people, their sympathy for those at the lower part of the spectrum sometimes leads them to believe that wealth should be confiscated from those at the upper end, and distributed to the less wealthy. Sometimes this motive drives political movements and tax policy. In some people’s religious efforts to help and serve the poor, they call upon government to help in their projects through grants, tax changes, etc.

We do not wish poverty on anyone, but we do recognize that some people are going to be poorer and some richer than others. Poverty is not necessarily a permanent or long-lasting condition, nor is wealth. There are opportunities and hazards which can sometimes change things quickly. I want to discuss reasons that forced redistribution of wealth, as advocated by some left-wing or liberal activists is a terrible and destructive idea.

Safety Net
To start, I will say that we need some kind of safety net to prevent and correct conditions of life-threatening poverty, i.e., hunger and homelessness. For those unable to work and support themselves, we rightly have programs to help them. For the homeless, the focus should be, not only on helping them in their homeless condition, but also in striving to help them to earn their way out of that condition. Most welfare help, other than for those permanently disabled, should be of a temporary and emergency type.

A High Standard of Living
According to distinguished Austrian School economist Ludwig von Mises:
“Inequality of wealth and incomes is an essential feature of the market economy. It is the implement that makes the consumers supreme in giving them the power to force all those engaged in production to comply with their orders. It forces all those engaged in production to the utmost exertion in the service of the consumers. It makes competition work. He who best serves the consumers profits most and accumulates riches …

“This country enjoys the highest standard of living ever known in history because for several generations no attempts were made toward ‘equalization’ and ‘redistribution.’ Inequality of wealth and incomes is the cause of the masses’ well-being, not the cause of anybody’s distress. Where there is a ‘lower degree of inequality,’ there is necessarily a lower standard of living of the masses.” [2]

In general, it is unjust for the government to take the fruit of a person’s labor and give it to someone who has not earned it. It is, in fact, legalized thievery if it goes beyond a minimum reasonable amount. The best role of government in preventing and dealing with poverty, beyond a minimum safety net, is to maintain an environment of free market competition and to punish fraud and abuse.

Capitalism Is Not the Problem
Here is a brief conversation between Milton Friedman and Phil Donahue about the supposed drawbacks of capitalism:



There are so many examples of government interference and manipulation in the markets today that hardly any transaction completely escapes. Thus we have constant cost overruns, extreme tax rates, overbearing regulation and low incomes for many.

Any serious attempt to equalize wealth or income requires the imposition of socialism and the loss of economic freedom:
“The only alternative to this financial pressure as exercised by the market is direct pressure and compulsion as exercised by the police power. The authorities must be entrusted with the task of determining the quantity and quality of work that each individual is bound to perform. As individuals are unequal with regard to their abilities, this requires an examination of their personalities on the part of the authorities. The individual becomes an inmate of a penitentiary, as it were, to whom a definite task is assigned. If he fails to achieve what the authorities have ordered him to do, he is liable to punishment.” [3]

Inequality Is Not Unjust, and Is Necessary
The market economy requires an inequality of wealth and income. The pressures of the market serve as incentives to work, save, improve, advance, learn, and innovate. Without these incentives, under a socialist system, the incentives are toward gaining political power by exercising more control over others. The tendency is always to “innovate,” not by research, and more efficient production and marketing methods, but by more onerous requirements and expanding government power. This is always the tendency of bureaucracy. Bureaus try to perpetuate themselves by finding more things to regulate and more ways to control people.

Consider the fact that when the authorities determined that environmental pollution was a problem needing attention (as it was), the number and kind of regulations grew rapidly. Having achieved a good deal of cleaning up, government sought ever more authority to regulate and rule, and more hazards were “discovered,” even to the point that carbon dioxide, the gas we breathe out, has now been declared a pollutant, and the objectively stupid cap and trade legislation is actually being considered. We have reached the point where the “cure” is truly worse than the disease.

The same kind of bureaucratic growth tends to happen whenever government can take authority over activities that under capitalism are part of the private sector.

Private Sector Abuses Involve Government
The main abuses by the private sector have occurred when companies, professional associations, and unions and others have succeeded in getting government to enforce their economic interests, to the disadvantage of others, and in defiance of market forces, as discussed here by Ayn Rand with Mike Wallace in 1959:



Because of private-sector interests colluding with government, we have a lot of large and smaller evils such as:

1. Abuse of eminent domain: Taking property from citizens to provide to other citizens for their private gain, including spending public funds to finance sports arenas and events.
2. Handing out government funds to lure businesses to locate in a particular area.
3. Using the power of the Fed and the Treasury Department to bail out large private banks and take over private companies.
4. Government granting authority over a given profession such that a private association’s pronouncements have the force of law (e.g., AICPA, AMA, and ABA).
Also, these groups can restrict education and practice in these professions.
5. Labor unions employing government help to shake down employers for more benefits, beyond what the market alone would warrant.

If these entities could all operate without the force of government, outside of dealing with crime and abuse, the market would determine the results of economic activity. And the market can do a much better job than government. The more government control we have in any area, the less freedom. “That governs best which governs least.”

Liberal Offers
A major mistake people make when they accept the liberals’ claims that the government must provide what they need, is that they somehow trust politicians more than they trust private enterprise. Politicians are definitely not more trustworthy, nor, as a group, better-motivated than businessmen. Nor are they more knowledgeable, and generally they are much less knowledgeable about running a business operation of any kind. So when they set about to determine everyone’s income (think: pay czar), and wealth (IRS), we need to be prepared to work at gunpoint. Remember, current government officials think it will be all right to imprison people who refuse to buy insurance. That’s how much respect they have for our freedom.

Low-income people have many opportunities in this country. True, a lot of better opportunities are open to people who have inherited wealth or who are especially talented in some high-paying skill. There is always someone who has more and who does more than his fellows. But these are among the differences that make life interesting, and encourage people to strive for improvement, and to appreciate their accomplishments.

Many of the poorer people have items considered luxuries not long ago. Many items people of modest means have are of comparable quality to items rich people have. Even after all the liberals’ attempts to destroy incentive, most people want to try to succeed on their own, and don’t want a handout unless life leaves them no other choice. For those who need help, many charitable operations are at work. The Obama Administration hurts this by planning to reduce income tax deductions for charitable contributions, and allowing the economy to languish, making it harder for people to contribute to charities anyway.

Liberals buy votes by promising government benefits to “victimized” groups. People in these groups are often willing to give over control of much of their lives to the authorities in order to receive these promised benefits. The benefits prove to be less than expected, and less as time goes by, but these voters are trapped into thinking that they must rely on government, so they keep voting for those who make the promises.

Conclusion
The demagoguery about “income and wealth inequality” is appealing to some people who think they should be entitled to what others have, and that government should give it to them. It also appeals to people who want to be in charge of the redistribution, whether to gain power over others, or to feel good about themselves. Class envy is the very lifeblood of liberalism, as it is with communism. The exploitation of the “class struggle” is the whole process. Clinging to that narrow and misguided view is what has produced much of the economic and social failure in our society. The sense of entitlement and victimhood encouraged by liberals, their false promises, and exploitation of the powerless drive much of the feeling of helplessness and despair around us. People who should know better, including politicians, fall for the liberal premises that lead to frustration and discontent. Liberals have little to offer as economic solutions. The results of their tax-and-spend and welfare-state policies can be seen in places like Michigan and California, and are coming soon to a state near you.

[1] Quoted at Goodreads.com.

[2] Ludwig von Mises, “Inequality of Wealth and Incomes,” Ideas on Liberty, No.1. Irvington, N.Y.: Foundation for Economic Education. (May 1955) 83-88. Reprinted in Essays on Liberty, III. Irvington, N.Y.: Foundation for Economic Education. (1958)123-31. Reprinted on Mises.org, at http://mises.org/EFANDI/CH9.ASP

[3] Ludwig von Mises, Human Action: A Treatise on Economics, Scholar’s Edition, Ludwig von Mises Institute, Auburn, Ala., 1998, 285-286. Ebook available at Mises.org. Excerpt at http://mises.org/humanaction/chap15sec7.asp.

Photo: Portrait of Ludwig von Mises

Unemployment and Deficit Increase: What Should Be Done?

“THE EMPLOYMENT SITUATION -- OCTOBER 2009

“The unemployment rate rose from 9.8 to 10.2 percent in October, and nonfarm payroll employment continued to decline (-190,000), the U.S. Bureau of Labor Statistics reported today. The largest job losses over the month were in construction, manufacturing, and retail trade.

“Household Survey Data

“In October, the number of unemployed persons increased by 558,000 to 15.7 million. The unemployment rate rose by 0.4 percentage point to 10.2 percent, the highest rate since April 1983. Since the start of the recession in December 2007, the number of unemployed persons has risen by 8.2 million, and the unemployment rate has grown by 5.3 percentage points….” (Source: U.S. Bureau of Labor Statistics)
* * *
“I have always been a great supporter of Winston Churchill's statement about the United States. The United States can be counted on to do the right thing, after having tried all other conceivable alternatives.” – Former Federal Reserve Chairman Alan Greenspan [1]

Unemployment to Remain High
From all indications, including the White House’s own projections, unemployment is expected to remain high through much of 2010. Depending on the legislative results of the current Congress, a lot of variation is possible, but with policies now in place, things are bad, with the potential of getting much worse if we get Obamacare and cap and trade.
I and many others have made suggestions for improving the economy. The following are some I have made before, but here, I have added some detail and support.

Deficits to Increase
The situation is difficult at best, but is not being helped by the $787 billion stimulus. The overall business environment discourages business expansion and hiring. In general, what is needed are policies to encourage private sector economic activity. Also, in general, this can be done best by reducing taxes and pulling back on some regulations. Reducing the deficit will happen if these things are done, because increased production will lead to more employment, more taxpayers and more revenues to government.

Part of the answer to huge deficits is to reverse some of the things that have brought them on. Also, the government and the Fed need to consider the magnitude of their actions. Trillions of dollars, amounts hardly comprehensible, should not be handled so carelessly. This is the stuff of economic ruin.

Martin Crutsinger, in an Associated Press article, says:
“What is $1.42 trillion? It's more than the total national debt for the first 200 years of the Republic, more than the entire economy of India, almost as much as Canada's, and more than $4,700 for every man, woman and child in the United States.
“It's the federal budget deficit for 2009, more than three times the most red ink ever amassed in a single year.” [2]

Also, the national debt could rise to $17 trillion by 2019. [3]

Crutsinger also points out that increasing deficits will make it harder to sell this debt to investors, resulting in higher interest costs. He has the following quote:
“We should be desperately worried about deficits of this size,” says Mark Zandi, chief economist at Moody's Economy.com. “The economic pain will be felt much sooner than people think, in the form of much higher interest rates and much higher rates of inflation.” [4]

First Things First
First priority ought to be to get America back to work. The Administration’s priority is not this, but rather, putting in place their socialist agenda of Obamacare and cap and trade, etc. They say that huge government spending and deficits are justified for the purpose of boosting the economy, but their fiscal “stimulus” is not particularly stimulating to the economy, and must be paid for by taxpayers.

The economy is going to be a serious political problem for Obama as time goes on. Already, he has lost a significant amount of favor among voters. According to Rasmussen’s survey of likely voters, 49 percent at least somewhat approve of Obama’s performance, and 50 percent disapprove (11/09/2009). [5]

Suggestions:
1. Forget Obamacare. Take up health care issues later and forget nationalizing it. If this was done, our nation could breathe a large sigh of relief. This plan, in whatever final form it takes, will definitely increase the deficit. It also will not meet the goal of insuring everyone. The resulting tax increases will slow the economy. It might be hard to measure how much the deficit would increase, since one bundle of a trillion dollars of deficit looks pretty much like another. The people in charge now don’t mind throwing around trillions.

2. Forget cap and trade. Recognize it as the fraud and hoax that it is. Cap and trade is a great job killer and will result in hardship for many Americans. There will be more foreclosures, more bankruptcies, lower tax revenues in a fairly short time (not higher as the government expects), and the number of “green jobs created” will be small compared to the number of better-paying jobs lost. Also, the creation of a new “carbon credits” market is an invitation to a great amount of fraud and abuse. Trading in credit default swaps has been a huge mistake (and a failure of government regulation), and carbon credits would probably be worse. Not to mention that all this would do nothing to help the environment. It’s a nightmare waiting to happen.

3. Keep the Bush tax cuts in place, and don't reduce tax deductions. If businesses and individuals knew in advance that taxes would not be raised, they could confidently spend and invest. Tax increases are a strong disincentive to economic activity. The Reagan and Bush tax cuts were a major factor in the 25-year economic recovery, and proved their worth. Higher taxes would not help the deficit, but would actually increase it. Also, Obama wants to decrease tax deductions for medical care and charitable deductions. Both of these would penalize the people he supposedly most wants to help.

Forget the notion that tax cuts only benefit the rich. About 47 percent of Americans don’t pay income taxes. High taxes for “the rich” translate to fewer jobs and therefore less tax revenue to the government. Taxpayers are over-taxed at best from federal, state, and local taxes.

“Those who argue that the Bush tax cuts were a ‘give-away’ to the rich assume that incomes grow at a constant rate, regardless of how heavily they are taxed. That is the fallacy of the recent [2004] CBO [(Congressional Budget Office)] study. The report concedes: ‘Our analysis does not account for incomes changing in response to the tax cuts.’ It’s like assuming that you’re not going to take off any weight if you stop eating hot fudge sundaes with whipped cream and cherries on top. This is the same whimsical logic that compelled the tax accountants on Capitol Hill to famously estimate that a 100 percent income-tax rate would bring in billions of dollars in federal revenue….
“The CBO estimate says that the share of income taxes paid by the richest 20 percent of earners fell from 82.5 percent to 82.1 percent in 2004. The report also states that the top 10 percent of earners will pay ‘only’ 66.7 percent of 2004 taxes, with the top 1 percent paying 32.3 percent. Fully 80 percent of Americans pay less than 18 percent of total income taxes….” [6]

As of 2005, the latest year for which I found data, the top 25 percent of earners paid 85.99 percent of federal income taxes. The top 1 percent paid 39.38 percent. [7]

4. Reduce corporate tax rates to 15 percent or less. The U.S. has a higher corporate tax rate than other industrialized countries, which puts us at a competitive disadvantage. If businesses could have lower tax rates, they could more readily hire people and buy new equipment. Unemployment would quickly decrease if businesses could be confident about continuing lower tax rates. And another result would be increased tax revenues to the government. While we’re at it, reduce capital gains tax rates, too.

5. Sell government interests in GM, Chrysler, AIG, etc. Recover as much as possible of the billions that were spent on these transactions.

6. Recover all TARP funds possible as quickly as possible. Don’t do any more bailouts, period. If a business fails, it fails. That’s why we have bankruptcy courts and established processes for failed banks. Why should taxpayers be on the hook paying for big banks’ big mistakes? There is no bank or business firm that is “too big to fail,” or that government should bail out at taxpayer expense. If some big banks or other businesses fail, this will discourage the kind of behavior that led to their failure, and the market will adjust.

It is unjust and unnecessary to force the taxpayers to bail out banks that failed. Capitalism is based on the principle of risk-taking. Risk involves the possibility of failure. With the massive Fed and Treasury bailouts, Americans are on the hook for such huge amounts that the taxpayers are now the ones at risk. If large banks are assured of being bailed out in case they have large losses, they lose incentives to operate efficiently and the system loses competitiveness. The large banks, already lacking a good level of competition, will operate even more like a cartel.

I have said that the financial meltdown is largely the fault of government, in that the government forced banks to make bad mortgage loans, and Congress stood in the way of regulation of the misbehaving Fannie Mae and Freddie Mac. Common sense about loans, and proper regulation, could have prevented much of the problem. That said, the big banks did take extreme undue risks by issuing and trading in derivatives that never should have been created or traded. This is a failure of the banks, but also a failure of government regulation. The SEC should have seen the danger and acted.

The Bush Administration, to their credit, tried, though unsuccessfully, to regulate Fannie and Freddie, but they erred terribly in yielding to the bullying tactics of Henry Paulson as well as the Fed. To approve legislation of the magnitude of the TARP bailouts, handing over virtually a blank check for $700 billion to Paulson, and doing so without significant debate or discussion was foolish at best. The Fed and the Treasury Department decided the winners and losers of this “bailout bingo,” dividing and distributing bank assets at will. There should be a full accounting and public disclosure of who got what and under what circumstances with all the bailouts.

An inspector general’s report concluded that banks were forced to take money even when they didn’t need or want it. [8] To hand out money like that is nonsense.

A Federal Reserve Board book states that according to the Federal Reserve Act, the Fed’s purpose is “to promote effectively the goals of maximum employment, stable prices, and moderate long-term interest rates.” [9] It appears that the Fed is also interested in bailing out favored large banks at taxpayer expense. I support the proposed legislation to audit the Fed.

7. Get out of foreign financial entanglements. The U.S. should not participate in any international financial bailouts nor contribute to any kind of international bailout fund. The world’s central banks are infatuated with bailouts. Foreign banks got a considerable chunk of the TARP money and Fed bailouts. These things threaten not only national solvency, but national sovereignty, and ultimately, national security.

8. Back off on “stimulus” bills. Repeal the remainder of the $787 billion stimulus and don’t do any more of them. If tax rates are made more reasonable and the high-cost, job-destroying Obamacare and cap and trade proposals are defeated and discarded, the private sector will be “stimulated” to the point that the recession will soon be over and employment will soon be back to normal.

But the Administration is apparently about ready for a second stimulus:
“There is growing recognition in the White House that the stimulus package wasn’t enough. The White House is considering further stimulus measures -- a combination of more infrastructure investments, more money to weatherize homes and businesses, more tax cuts for businesses, and/or more steps to promote lending. This will be a matter of weeks not months. They know they have got to turn this job cycle around.” [10]

Dealing with the longer-term problems
Even if the changes mentioned above could be made, after our economy began to look normal, we would still have very serious longer-term problems with unsustainable entitlements.

Phasing out Social Security and Medicare over a 25 to 30-year period should be considered, because these programs are not sustainable, and are in themselves capable of toppling our economy. These entitlements currently represent unfunded liabilities of about $83 trillion. [11] It is, arguably, impossible for this to ever be paid.

Younger people should be encouraged to finance their own retirements and provide their own health care. The welfare system should be reduced to a basic safety net, not permanent incentives to refrain from working. This seems to be a problem that is beyond anyone’s expertise to solve, and something politicians routinely pass along to their successors. But it’s going to be a “sudden” big crisis in not many years if nothing is done.

Unless significant changes in direction are made, the actual current economic outlook is not encouraging. There is a likelihood of a second “stimulus,” and the Administration is pushing hard for Obamacare and cap and trade. More taxes are on the horizon. More international arrangements that entangle the U.S. in banking and climate commitments will add to the problems.

Conclusion
My own view is that if the Administration were more concerned about the unemployed, and the suffering of American families in this time of economic hardship, more concerned about restoring long-term prosperity, and less concerned about getting their socialist-fascist program in place, they would take steps similar to what I have described above, and many others have suggested. That would improve the economy fairly quickly. Their own political fortunes will ultimately depend on the economy.

But Obama is determined to fundamentally change American government and social structure, and that is his priority. Other considerations must serve that objective. This kind of “change” is destructive and unconstitutional, and, I believe, will ultimately be rejected by the American people. The more successful this agenda is, the more that economic “hope” will decline.

[1] Martin Crutsinger, Associated Press, “2009 federal deficit surges to $1.42 trillion,” 10/16/2009, at Google News, http://www.google.com/hostednews/ap/article/ALeqM5iPlbcTnWEfuKimEaDq0UdU2Uxk1gD9BCG27O0.

[2] – [4] Crutsinger, see [1].

[5] “Daily Presidential Tracking Poll,” 11/09/2009, Rasmussen Reports, at http://www.rasmussenreports.com/public_content/politics/obama_administration/daily_presidential_tracking_poll.

[6] Stephen Moore, “Killing the Class-Warfare Argument,” 08/19/2004, National Review Online, at http://www.nationalreview.com/moore/moore200408191201.asp
The CBO study cited was touted by the Kerry-Edwards campaign as finding that the Bush tax cuts unduly favored the rich.

[7] Rush Limbaugh.com, at http://www.rushlimbaugh.com/home/menu/irs_screen_grab.member.html

[8] Matt Cover, “Inspector General: Treasury Secretary Forced Banks to Surrender Ownership Interest to Government,” 10/05/09, CNS News.com, at http://www.cnsnews.com/news/article/55017

[9] The Federal Reserve System: Purposes and Functions, Board of Governors of the Federal Reserve System. Ninth Edition, June 2005, page 15. Ebook available at
http://www.federalreserve.gov/pf/pf.htm

[10] Jake Tapper, “Wave After Wave of Bad News,” 11/07/2009, ABC News at
http://blogs.abcnews.com/politicalpunch/2009/11/wave-after-wave-of-bad-news.html

[11] Gary North, “Social Security and Medicare: The Twin Disasters That Will ‘Break the Bank,’” Gary North’s Specific Answers, at http://garynorth.com/public/department30.cfm

FDR and the Great Depression, Barack Obama and the Great Recession

Ted Roelofs of The Grand Rapids [MI] Press reported as follows on a debate between authors Joseph Alter of Newsweek and Bloomberg columnist Amity Shlaes on the effectiveness of FDR’s Depression-era policies.

“Alter conceded Roosevelt made missteps.
But he argued there is no alternative to ‘massive’ government stimulus
when an economy is plunging.

“‘It would be nice if there was an alternative,’ he said.

“Shlaes maintained virtually nothing Roosevelt did helped pull the
United States out of the Depression, short of entry into World War II in
1941.

“Unemployment stood at 19 percent in 1938, despite the flurry of social
engineering Roosevelt spearheaded in the preceding years. By 1942 with
the massive war effort under way, it stood at about 5 percent.

“In her book [The Forgotten Man: A New History of the Great Depression], she argued Roosevelt's biggest failing was a ‘lack of faith in the marketplace….’” [1]

Examples for Obama?
President Franklin Delano Roosevelt wasted no time getting to work on the Great Depression problem after taking office in 1933. He immediately declared a bank holiday, an idea he had rejected three days earlier when Herbert Hoover had suggested it. [2]

FDR’s policies worsened and prolonged the Depression. In spite of a strong and sustained effort, the remedies were mostly misguided, ineffective, and counterproductive. They were also short-sighted, not giving adequate consideration to other factors outside the immediate environment of a particular issue, or longer-term effects.

Of course, FDR inherited the Great Depression and Barack Obama inherited a recession and a financial meltdown. Obama’s was and is a difficult situation but there are some lessons that could be taken from history. He need not repeat all the previous mistakes.

Barack Obama’s economic policies have been referred to as “The New New Deal,” and Obama is apparently an admirer of FDR’s policies. In the numbered items below, I mention some of FDR’s policies (italicized) and make applications to current policies (non-italicized).

President Roosevelt was supposedly attempting to help the unemployed and the poor. His policies did economic injury to many workers and others in the following ways:

1. Minimum wage laws froze many workers, especially African-American, out of hiring possibilities.

Minimum wage laws still hamper employment today. Teen unemployment is the highest since the government started keeping records of this in 1948, over 25 percent. [3] Factors other than minimum wage laws have more effect, but minimum wage requirements exacerbate the problem.

2. Many lawsuits, anti-trust and the like were filed against large employers which undermined their ability to hire and pay workers. [4]

Left-leaning governments always want to go after large companies that might be commercially successful, wanting to assert power over them and tax them if they are profitable. Witness the government’s vendetta against Microsoft in recent years. The failing companies, such as Wall Street banks and the auto manufacturers, they want to “bail out,” i.e. take control at great taxpayer expense, saying they are “pulling the economy back from the brink,” and “restoring stability” to the financial system. Really? More likely, they have set the financial system and the American economy up for disastrous failure through unpayable debt.

We are a long way from seeing the “stability” they talk about. Also, The Obama Administration is greatly endangering national sovereignty through international arrangements on finance, “climate change,” etc. I do not like conspiracy theories, but the one about the international banking cartel, starting with the Rothchilds and the Rockefellers plotting to take over the world’s money and reduce the population to serfdom begins to have some plausibility. I don’t endorse it, but what would be different if it isn’t true? It is true that we are in danger of a massive economic collapse simply because of our national debt and endless deficits. Not all Obama’s fault, but he was on board with the bank bailouts and was the principal operator in the auto company takeovers.

According to The New York Times, “Beyond the $700 billion bailout known as TARP, which has been used to prop up banks and car companies, the government has created an array of other programs to provide support to the struggling financial system. Through April 30, the government has made commitments of about $12.2 trillion and spent $2.5 trillion — but also has collected more than $10 billion in dividends and fees.” [5] (emphasis theirs).

3. Under FDR, increasing tax rates put potential employers in a difficult position for hiring. Also, they could see that if they were successful, their profits would be largely taxed away. [6]

Every dollar a company pays in taxes is a dollar that is unavailable for hiring or investment in plant and equipment. Today’s employers face some of the highest corporate tax rates in the industrialized world, and see more coming as the Bush tax cuts expire. Also, they could hardly be blamed for waiting to see what happens with the Obamacare and cap and trade proposals before deciding on major hiring or investments. The business environment is very difficult and hardly improving in terms of employment.


4. Excise taxes were placed on many consumer goods. This especially hurt the poor.

We still have a lot of “hidden” taxes, on products and services. But the Democratic Congress also wants to tax sugar-sweetened drinks and other popular consumer items in connection with Obamacare. This would take more money out of the pockets of people they claim they’re trying to help. And these taxes are just the beginning. Even if they don’t pass their health care bill, they’ll still try to control everyone’s diet and shopping habits through costly taxes. And then there’s VAT that seems to be up for discussion.

5. FDR destroyed much food while millions were hungry. In an ill-advised attempt to create artificial shortages and thus raise prices, the government paid farmers to plow under 10 million acres of crops and to slaughter and discard six million farm animals. Then they paid farmers for not producing. [7]

Well, the Obama Administration hasn’t yet sunk to the level of destroying farm products. They do, as their predecessors did, still cling to unwarranted farm subsidies and government controls on farming. And they continue the previously existing harmful practices of mandates and subsidies for ethanol.

Bad Economics
According to Robert Higgs, “In their understanding of the Depression, Roosevelt and his economic advisers had cause and effect reversed. They did not recognize that prices had fallen because of the Depression. They believed that the Depression prevailed because prices had fallen. The obvious remedy, then, was to raise prices, which they decided to do by creating artificial shortages. Hence arose a collection of crackpot policies designed to cure the Depression by cutting back on production. The scheme was so patently self-defeating that it’s hard to believe anyone seriously believed it would work.” [8] (emphasis his).

FDR went a long way toward nationalizing industry, in effect, through the National Industrial Recovery Act, which was later struck down by the U.S. Supreme Court:
“Chief Justice Charles Evans Hughes wrote that, ‘extraordinary conditions do not create or enlarge constitutional power.’ Congress ‘cannot delegate legislative power to the President to exercise an unfettered discretion to make whatever laws he thinks may be needed.’” [9]

FDR unconstitutionally confiscated gold by an Executive Order, which also made it illegal to own most kinds of monetary gold. It did nothing to help, and amounted to legalized thievery. [10] This harmed individual savers and investors, and, more indirectly, workers. And it threatened and reduced everyone’s freedom. If gold can be confiscated, what’s to stop government confiscation of other things (over and above taxes), in the interest of “fairness,” of course.

Liberal governments see a problem and they think the federal government must act to correct it. Their corrections may benefit, temporarily, some group experiencing hardship, but what is usually ignored is the effect on others, and what their actions mean down the road. This recalls the “Forgotten Man” of William Graham Sumner:

“As soon as A observes something which seems to him to be wrong, from which X is suffering, A talks it over with B, and A and B then propose to get a law passed to remedy the evil and help X. Their law always proposes to determine what C shall do for X or, in the better case, what A, B and C shall do for X. As for A and B, who get a law to make themselves do for X what they are willing to do for him, we have nothing to say except that they might better have done it without any law, but what I want to do is to look up C. I want to show you what manner of man he is. I call him the Forgotten Man. Perhaps the appellation is not strictly correct. He is the man who never is thought of. He is the victim of the reformer, social speculator and philanthropist, and I hope to show you before I get through that he deserves your notice both for his character and for the many burdens which are laid upon him.” [11]

Henry Hazlitt quotes this and observes that in the 1930’s, the “forgotten man” label was applied to X. C was still forgotten [12] (Amity Shlaes uses this phrase in the title of her book.)

The Congress is currently considering legislation to mandate a week of annual sick pay for all employees, as a result of the swine flu scare. Many companies cannot afford to pay employees when they aren’t working, so if this passes, unemployment or underemployment will likely increase. But the squeaky wheel gets the grease. More government micro-management. Another reason to believe the government is less concerned about the economy than with finding excuses for expanding government power.

Unemployment was 3.1% before the stock market crash of 1929 and 24.8% when Franklin D. Roosevelt took office. The rate was in double digits until 1941. [13] The published rates do not count people who have given up looking for work or have taken part-time jobs.

Well, the Great Depression is over. World War II lifted America out of it. But the current recession is not over, except perhaps in some narrow technical sense according to some “experts.” And over or not, its ill effects linger, and from all indications will linger for some time. There are too many instances of Obama following FDR’s ill-advised prescriptions, when we should have learned better. FDR didn’t have a previous great depression in memory to serve as his example. Previous depressions were left to the market and recovery was fairly quick. But Obama has the example of the Great Depression. Circumstances and technologies change, but the laws of economics still apply. The sooner the government ends its love affair with deficit spending and embraces something more oriented toward free markets and individual liberty, the sooner things will begin to improve. But don’t hold your breath.


[1] Ted Roelofs, The Grand Rapids Press, “Authors debate: Did FDR’s social programs make the Great Depression worse?” 10/12/2009, at http://www.mlive.com/business/west-michigan/index.ssf/2009/10/authors_debate_did_fdrs_social.html.

[2] Robert Higgs, “How FDR Made the Depression Worse,” Feb. 1995, Ludwig von Mises Institute, at http://mises.org/freemarket_detail.aspx?control=258.

[3] Catherine Rampell, The New York Times, “Teen unemployment at record level,” 09/08/2009, SF Gate, at http://www.sfgate.com/cgi-bin/article.cgi?f=/c/a/2009/09/07/BU6H19IVRT.DTL&type=business.

[4] Jim Powell, “Tough Questions for Defenders of the new Deal,” 11/06/2003, Cato Institute, at http://www.cato.org/research/articles/powell-031106.html.

[5] The New York Times, “Adding Up the Government’s Total Bailout Tab,” 02/04/2009, at http://www.nytimes.com/interactive/2009/02/04/business/20090205-bailout-totals-graphic.html.

[6] Powell, see [4].

[7] Ibid.

[8] Higgs, see [2].

[9] Ibid.

[10] David J. Heinrich, “FDR’s Heinous Crimes,” 10/21/2004, Mises Economics Blog,
at http://blog.mises.org/archives/002627.asp. Text of the Executive Order is here.

[11] William Graham Sumner, “The Forgotten Man,” 1883, The Forgotten Man and Other Essays, at The Online Library of Liberty, at
http://oll.libertyfund.org/index.php?option=com_staticxt&staticfile=show.php&title=1654&search=%22Forgotten+Man%22&chapter=108194&layout=html#a_2270750.

[12] Henry Hazlitt, Economics in One Lesson, Ludwig von Mises Institute, 2008. Originally published by Harper & Brothers, 1946, page 179

Photo: Dreamstime.com. FDR statue