Don’t Believe Me? Listen to the Democrats.

Tuesday, June 30, 2009



Despite Paul Krugman’s assurances that there is no such thing as inflation, despite Christina Roemer’s predictions that a V-shaped recovery is not that hard to believe, and despite Barack Obama’s insistence that there are “green shoots” in the economy, I have long maintained that our economy is in big trouble if Spend Big policies continue unchecked.

When conservative congressional leaders talk about how runaway spending will damage the economy, lefties across the country roll their eyes. However, ignoring the gravity of the situation doesn’t make the truth any less of a reality. If you are one who can’t bring yourself to listen to an amateur conservative blogger, or a select few of the congressional conservative representatives, maybe you’ll be willing to hear it from a Democrat.

I came across an article by Dr. Charles Wheelan, a.k.a. the Naked Economist. I’ve been a long time reader of his; his articles often grace the pages of Yahoo! Finance. Though I’ve had my disputes, I’ve always appreciated his irreverent approach toward economics. Dr. Wheelan is not just a finance writer; he recently ran to replace Rahm Emanuel’s seat in Congress...and lost. Now, don’t take this post as an endorsement of Wheelan’s political views, I haven’t looked into them. I simply felt like his article was making sense, although I'm sure his ideas of raising taxes drastically differ from my own. So, without further ado, here is some common sense from one of the Democrats’ own.

“We need to stop bickering about who got us here. Was it the Bush tax cuts (yes) or the Obama stimulus (yes) or profligate Congressional spending (yes) or voters who continually reward pork more than parsimony (yes)? But analyzing just overcomplicates things. We are deeply in debt because we have routinely spent more than we collect in taxes. That's just a mathematical reality that has become needlessly confounded with politics.”


I’ve been trying to make this point since February! Wheelan points out that it is ridiculous for either side to bicker whose fault our deficit’s woes belong to (it's Obama's if you were wondering ;). It is a simple fact that we are here and we need to do something about it- a fact that hasn’t sunk in with the Obama administration’s agenda of “Spend Big.”

“Chinese officials aren't worried about bankruptcy because the U.S. has an easier and more insidious option -- we can print our way out of the problem. Our debt is denominated in dollars, and the U.S. government has the authority to print those dollars. We could take a page from the Zimbabwe policy manual and just print money to pay our bills -- thereby debasing the currency, creating inflation, and devaluing the real value of what we owe.

Is that a sensible solution? No, as it imposes the costs of inflation on all of us. I don't know anyone eager to revisit the 1970s (in terms of economic performance or fashion).”


I might add that printing money is Obama’s solution at the moment. Wheelan points out that there are very real repercussions to Obama’s twelve trillion dollar budget. Namely, 1970s-style inflation (which I’ll remind you Paul Krugman thinks is a myth).

“The solution to all this is straightforward: Spend less than we take in, and use the surplus to pay down debt. At the risk of lapsing into economics jargon, yes, this is going to suck. Think about it: Americans don't like their current tax bills -- which aren't even high enough to pay for our current spending, let alone the bills we've run up from the past. In the future, we will have to pay more and get less.

But we've done it before. We paid off the debt accumulated during World War II. In fact, the ensuing decades saw some of the most impressive gains in wealth and productivity in American history. But it will require a radical change from what we're doing now…

…Will that dampen economic growth in the short run? Yes. Will it jeopardize important social programs? Yes. Will it compromise our ability to make important public investments? Yes. Does it limit what we can spend on healthcare reform? Yes.”


I’d like to some up Wheelan’s conclusion by addressing what the Obama administration should have done day one in office. Enact a stimulus plan with the biggest bang for the smallest cost. Then go line by line, like was promised by Obama and cut. Instead, we enacted a liberal wish list of programs, hoping the sheer magnitude would shock the economy back to life. We got pay-go promises twice, so long as it doesn't apply to executive or congressional spending. This attitude sending global investors away in droves. We bet big on bad odds; it's not too late to call off the bet.

Wheelan wasn’t the only Democrat seriously talking fiscal reality today. Roger Altman and former deputy secretary to Clinton had this to say today in the Wall Street Journal:

“Yes, the President's Council of Economic Advisors is still forecasting a traditional cyclical recovery -- i.e., real growth of 3.2% next year and 4% in 2011. But the latest data suggests that we're on a much slower path. Probably along the lines of the most recent Goldman Sachs and International Monetary Fund forecasts, whose growth rates average about 2% for 2010-2011…

…The problem is the deficit's sheer size, which goes way beyond potential savings from cuts in discretionary spending or defense. It's entirely possible that Medicare and Social Security will already have been addressed, and thus taken off the table. In short we'll have to raise taxes….

… We all know the recent and bitter history of tax struggles in Washington, let alone Mr. Obama's pledge to exempt those earning less than $250,000 from higher income taxes. This suggests that, possibly next year, Congress will seriously consider a value-added tax (VAT). A bipartisan deficit reduction commission, structured like the one on Social Security headed by Alan Greenspan in 1982, may be necessary to create sufficient support for a VAT or other new taxes…"

Tea Party naysayers I hope you are reading! All those crazy hicks protesting taxes, how silly did you think they were when they were really getting $13/month from Obama? Perhaps those bitter clingers saw something you yourself were blind to see.



I’ve posted the graph above in a previous post to show the price tag on Obama’s Spend and Tax policies. The littlest bar is Obama’s proposed tax on the rich. There are many that believe Barack Obama is the Messiah; however, I seriously doubt he’ll be able to work a Loaves and Fishes miracle on his puny tax revenue model. You see, there is a bar that is missing from the graph and it is the future legislation of Barak Obama to make tax revenues as big and gaudy as the gigantic spending bar. Obama’s budget is $4 trillion and we are getting $2 trillion in tax revenues. Logically, to meet Obama’s whims we need to double taxes. I mean double all taxes…double everyone’s income taxes; everyone’s gas taxes; everyone’s social security taxes; everyone’s medicaide/medicare taxes; everyone’s corporate taxes; everyone’s excise taxes.

The only thing missing from the mouths of Wheelan and Altman is yet another startling but true reality. The only thing going for Barack Obama’s economy for the last few months is perception- confidence from the consumers and investors that the economy would be turning around. According to new numbers, consumer confidence has dropped unexpectedly. The last hinge of Obama’s “green shoots” is breaking.

So, for those of you still following the cap and trade, government health care Obama parade- my only words are: the clock is ticking.

11 comments

Nick said...

The only point I'd personally disagree with is the need to raise taxes to solve the budget problems. As I've pointed out before, raising taxes never solves budget problems, because politicians always spend more than they take in, no matter how much they take in. The myth that raising taxes ever helps, ever, is just as large as the myth that we can keep spending forever without repercussions, or any other gargantuan lie which is oft-repeated as the justification for any number of horrible policies.

The country would be significantly better off if there was a Constitutional amendment specifying an absolute maximum value for taxes, total, as a percentage of income, paid to all government sources. Sure, we'd almost certainly be at the maximum always, but at least that way politicians and pundits alike would be forced to stop considering raising taxes as a solution to anything; then just maybe we'd get real solutions to fiscal problems, instead of more repeated lies based on myths touted as "solutions".

June 30, 2009 at 9:29 PM
bluepitbull said...

I would agree with Nick on this.

I also agree with you on the fact that democrats never saw something they didn't think needed a tax.

June 30, 2009 at 10:43 PM

Nick,

Absolutely! My goal here is to point out that all these magical Obama promises are going to lead to taxes. It's the dirty secret the liberal elites don't want the rank and file catching wind.

Blue,

Thanks for stopping by. If only thier creativity in creating taxes were used for something constructive like cutting spending.

June 30, 2009 at 11:09 PM
The Law said...

I don't disagree with you, but I'm not totally on board either. It is important to understand why we're in this mess, because history will, and has repeated itself.
The author mentions how we got out of debt after WWII. He forgets to mention that we engaged in probably the largest government spending program next to the current administration. And those programs were helping the economy then too. The only time there was a dip in the curve was when the New Deal was briefly suspended for a year due to concerns similar to what is posed here. What expedited our economy recover was the war. We were a war economy in WWII. There was a huge emphasis in government and manufacturing jobs for the war effort. The result was a well oiled economic engine.

Bush on the other hand is a near mirror of LBJ and Vietnam. Bush, like LBJ did not transform America into a war economy – that is putting an emphasis on manufacturing, production, and government jobs. What happened was the EXACT opposite: Bush deregulated businesses, and gave tax breaks to the top 1%, which includes private military contractors. So instead, the top 1% fattened their pockets because of the war effort, and on top of that, paid less taxes! (when liberals say the rich get paid at the expense of the poor, this is exactly what we mean!) So PMCs were getting paid big time, while Middle America felt the squeeze of higher costs of living with lowering wages. To add to the comparison, the war is very unpopular, and it is debatable whether or not we actually won the Iraq war.

Now, the war cost just under 800 Billion dollars. So we can forget Fannie, Freddie, The housing crisis, the credit crunch, the bailouts… all of that combine would have been a relatively manageable deficit. It is the war that single handedly destroyed this nation’s economy. Forget whether or not we should have been in Iraq, had we been running this war with a WWII like economic mentality, I wager that we wouldn’t be in this mess now. I’ll also double my bet and say if not for 9/11 we’d see economic prosperity (though of the false “bubble and bust” kind) under Bush as well, because Americans stopped consuming after 9/11. Somewhere in a cave in Pakistan, Osama bin Laden is smiling, because he knew you don’t need suicide bombers in the US; one careful strike scared us so bad, we self-destructed.

July 1, 2009 at 4:43 AM
The Law said...

We know the history, and why everything happened, so how do we solve it… we solve the problem by placing an emphasis on middle America again. When Middle America is engaged, we will see a rise in consumer spending again. You spend some money on them for healthcare. Improve education and make it easier to go to college. You build a foundation for high paying American jobs to engage the working class and academic class alike. Thus I disagree with every model that doesn’t help the middle class. Tax breaks don’t do anything but give cash strapped Americans free money. The responsible person saves it or pays off debt. The irresponsible person spends it and creates a larger debt (which of course helps big business). To engage the middle class, we have to help out the private sector, because they employ the most number of people. So by taking healthcare off their backs, then the private sector can spend their money on better things like their company or investments. (btw, if you don’t like your employer’s government plan, don’t take it!). Tax breaks, really only help the top 1% which is big business. They generate more revenue than several hundred private enterprises combined, but their profits are based on greed. It’s not about making great products or offering amazing services. It’s about building the best portfolio which is again, making the rich richer and the poor poorer.

Don’t get me wrong, while I agree with Obama’s course of action, I don’t always agree with the pacing and the dollar amounts… some things are too expensive, while others aren’t expensive enough. With the right emphasis on the middle class in America, however, I am confident we will see gains unlike anything we can possible predict under the current model. That’s Obamanomics… the long view, not the short bubble/bust haul.

July 1, 2009 at 4:43 AM

I'll start off with what I agree with. The war was expensive and the most important thing, Bush never stopped or rethought his economic policies when we realized, "hey we may be in this for the long haul, how are we going to pay for it!" The war is a big part of Bush's role in today's debt. I am also glad to see that the price tag of Obama's policies is not lost on the political left.

I'm pretty much in disagreement with everything else you point out.

Recovery after WWII:
I believe Wheelan was being simplistic here. In truth, our economic growth after WWII had nothing to do with government spending. No, it was the fact that we were the only economy left standing after WWII and the fact that the US instituted many policies that made the US economy so attractive for investment that foreign dollar came rolling in. Crazy Ron Paulish ideas like pegging our currencies value to gold.

The view that big business benefited from Bush tax cuts? I honestly don't know where you guys on the left managed to make this one up. Bush cut the personnal income tax, big business is taxed under corporate income taxes. I fail to see how big business benefited. Most deregulation happened under Reagan and Clinton. The most destructive one in my opinion was the repeal of Glass-Steagal, which was Clinton. That's the one that prevented banks from being in other financial institutions and helped create these trillion dollar financial conglomerates. Also, there has never been a decade of lower unemployment rates. This at a time period where the EU and their Obama policies sustained an average of 9% unemployment.

Bush and Republicans fought for new regulations on Fanny and Freddie in 2005, their concerns were scoffed at by Democrats and when 2006 democrat congress rolled in, the issue was dropped.

I thought private health care was sticking around? Not really likely if government is removing health care off the backs of business? Just a thought for you.

This brings me back around to the point of my post. All this spending on the middle class sounds nice, but it has a price tag. It's a huge one. It's one that is not going to be paid by the rich. I believe you've come around to that conclusion as well. So who is going to pay for it? Are you serious about enriching the middle class? Will you cut entitlements to the poor and tax them to redistribute wealth up? After the rich, that's the only other socioeconimic group left. Nope, we are going to tax the middle class. We are going to tax them big. Far more than the cost of private health care. I pointed it out in my piece, all taxes need to double.

What's the benefit of getting healthcare that cost $800/month for $100/month if the government needs to increase your taxes $1,000/month to do it? Especially if most middle class America was paying the $100/month to begin with?

Not too mention, you continue to forget that government does not increase the efficiency of the economy when they tax and redistribute wealth. This is why the USSR failed. It costs $30 billion to redistribute $100 billion. There is a huge price tag on government waste when you try to funnel money through the government like that. It makes no sense.

The truth is that Obama's price tag is so huge it will engulf the middle class as well. If Bush lined the pockets of the rich, then Obama is bankrupting the middle class and you think it was Bush that was worse.

July 1, 2009 at 6:26 AM
Andrew33 said...

The problem with Bush's tax cuts were simple. A tax cut without a spending cut is a credit card. Bush successfully cut taxes which put off economic collapse, but the congressional spending spree negated the Bush tax cuts. Then Bush let Cheney take his veto pen hunting so Bush never vetoed a single pork laden bill till 2006.

Here's a "ghetto" explanation of inflation. Let's say that on 14th street there are 2 houses selling crack. there are no cops around and business is good. The dope dealers get lots of money for their crack. A few months later there are 6 houses selling crack. Now those dealers are competing for the money from the crackheads. The various dealers have to lower prices, offer extra drugs or maybe throw in a prostitute, because there is more crack readily available while there are no new buyers. That makes the crack worth less. So how does this compare to inflation you ask....With the Obama/ Fed and Treasury printing more money, each bank has a larger supply of money to use. There are no more customers utilizing the banks but they have all this extra money. Now to compete, the banks have to offer deals, special incentives and offer higher interest rates to sell long term bonds. The interest rate is already ZERO which means when you buy a long term bond as an investment you are promised nothing as a return. This extra supply of money is on the sidelines, not in the economy yet. When this money comes off the sidelines and into the economy, it will make the money already there such as what you are getting paid be worth less. Maybe the banks will throw in a prostitute with a $1000 5 year bond.

July 1, 2009 at 4:07 PM
Andrew33 said...

I hope everybody understands that my "ghetto" inflation post was a joke. An accurate joke, but a joke nonetheless.

July 1, 2009 at 4:10 PM

Andrew,

You're absolutely right on Bush, but I'd sum it up this way. When you make promises, you also need to make sacrifices. Tax cuts didn't initially cause a problem fiscally, but he never rethought his economic policy after he started going to war. What was supposed to be stimulating the economy became a giant earmark.

Your analogy more closely describes a market in perfect competition than inflation. Although, I'd say you are extremely close. In your example, competition is driving prices down. With inflation, an oversupply of money drives prices up. So in your ghetto scenario, what happens is a bunch of movie stars move in next door and they are looking to buy crack. All the drug dealers say hey, these guys have so much money in their hands, they'd pay anything and so they all start charging $1 million/dime bag.

July 1, 2009 at 9:03 PM
The Law said...

See, my argument I make has very little to do with the current credit and housing crisis, baliouts, I'm talking more about political philosophy.

It is simple... Bush didn't run the economy as if we were in war time. I have interviewed our soliders on this topic, regarding private military corporations. Rather than increase the manufacturing and production core of the US economy to fuel the war effort, breaks were given to PMCs which allowed them to get access to the best gear and weaponry. Conversely in WWII, every American in one way or another was involved with the war effort, which means everyone was working. Before Obama's ARRA, the last big government spendign measure was the New Deal. My point is we engaged in significant government spending, and had a strong war economy. After WWII, America didnt go to hell in a hand basket. With Bush, we also had signigicant government spending, but it was mainly military spending that was spent outside of the US so we never saw the fruits of that money (on this point I beleive we are in agreement).

Thus, part one of Obama's plan is government spending. Unlike tax cuts which will go towards paying bills or saving money, government spending alliviates stress on middle class family budgets. This create an indirect way of putting extra money in the middle class pocket. You mentioned having to pay $200/mo on health care. Well now you can use that extra $200 for savings, or a college fund, or maybe a date night once in a while. For exchange for community service, your college aged student can get a $4000 tax credit. If your child is going to a state school, then that in many cases can cover a semester's tuition. You can use that $4000 to put into savings, or take that vacation you always wanted, or do some kitchen remodeling (which of course increase consumer spending).

So the last thing missing is a mass economic vehicle. I'm not much for enabling the military industrial complex, so instead we get middle America churning again by laying the foundation for innovative private enterprises.

The progressive plan is not really that outlandish. And while I 100% understand what inflation is, and do not support printing money to erase debt, I think the overall democrati agenda is the better bet to get America back on track, and make us stronger. But it is far from perfect. Slowly however, I notice more people coming together to debate for real in Washington. I think when we find the common ground, we will have a solution that works for the majority of Americans.

July 1, 2009 at 9:59 PM

tL,

You are still missing the tax bill. I will have far less money because I pay taxes and my taxes need to go way up to pay for all of those that don't want to pay for their health care. I'm fairly certain that I will not be one of the many getting free health care under Obama.

Here are my options under Obama so far: $1400-$4000 in my energy bill, God knows how much for a VAT, or $2800-3600 minimum if they start calling our employer offered health care imputed income. I am the middle class. On top of all this we are making bigger grander promises to everyone and I'll be responsible to pay for it.

I just don't see how is policy is going to end up putting money in my wallet. I only see it going out.

July 2, 2009 at 8:35 PM

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