Despite sequester, federal spending will grow

Knoxville News-Sentinel May 5, 2013 When Congress adopted the president’s idea of sequestration to force a budget compromise, the word from Washington was that its implementation would be a disaster. The cut in discretionary spending amounted to $85 billion dollars. Of course this is a piddling 2.4 percent of the federal budget. Nevertheless, the White House said the cuts would “threaten hundreds of thousands of jobs, and cut vital services for children, seniors, people with mental illness, and our men and women in uniform.” It further stated “these cuts will make it harder to grow our economy and create jobs by affecting our ability to invest in important priorities like education, research and innovation, public safety, and military readiness.” Of course this White House would regard any cut in government spending as having disastrous consequences, and to that end, the sequestration was a touch of genius. Because the government has an incentive to increase spending since that increases its power, there is a total disregard for cutting the federal budget. As a consequence, the sequester was designed to inflict as much pain as possible. Logically if faced with the decision as to where to cut spending, the typical household would select those expenditures that were the least vital. On the other hand, the government’s strategy would be to cut those programs that inflict the most pain to the public. Instead of trimming staff at the White House or Congress staffers or faceless bureaucrats, instead of rigorously attacking waste, the government will make the cuts both visible and painful. Thus, the sequestration mandated across-the-board cuts, leaving the agencies little discretion in which programs to cut. Thus, the agencies cannot be blamed for inflicting pain. The first case in point was the Federal Aviation Administration furloughing its air traffic controllers for two days a month, resulting in long flight delays. Naturally there was a hue and cry from airline passengers, and Congress rushed through a fix to restructure the $600 million cut to the FAA. Note that the fix does not increase the funding to the FAA. Rather, it allows the agency discretion in where it can cut. The House vote was 361 to 41, while the Senate was unanimous in its support. This was an opportunity lost. Instead of changing the sequester law to allow all the agencies discretion in where to cut, it only gave that power to the FAA. What the air traffic controller fix does is to show the public that the sequester is nothing more than a publicity stunt. This is not a serious attempt at budget reduction; rather, Washington is taking us all for fools. As to the budget reduction touted in the press and by our politicians, despite the sequester, federal spending will grow by $15 billion this fiscal year.

Elizabeth Warren: Too loose a cannon to be really dangerous

A couple of years ago I was working as an expert in a fairly high profiled banking case - we won. During that same time Harvard law professor, Elizabeth Warren was making the news pushing for a consumer protection finance agency. She won despite spouting generalities and mistruths. I was predictable critical but the lawyer that I worked with most closely on the case told me that when he was in law school, Warren was his best professor. He called her brilliant - if ignorant with regard to business and economics. Much like it was reputed that Einstein gave up studying economics because it was too hard and studied physics instead, Warren opted for the law. You may also remember that Elizabeth Warren was the source of Obama's ill-fated "You didn't build that" comment. Well the same Elizabeth Warren is now in the senate having defeated Scott Brown in Massachusetts. She recently made headlines advocating a tripling of the minimum wage to $22 an hour, pooh-poohing Obama's proposal to raise it to $10.10. Virtually all economists regardless of stripe recognize such a proposal as foolish and ignorant. However, there are those who support such a move. First, one would think that the few workers who work at the minimum wage would of course realize that such a move would lead to their being unemployed but not to worry, the intellectuals who make much more than the minimum are all for it. Consider the following: "Imagine the shock to the system $22.00 an hour would be to an employee. An immediate effect would be a reduction in two-income, lower income households. A single wage could afford the same lifestyle currently enjoyed by two people working three minimum wage jobs, even accounting for the inflationary reaction. This would relieve unemployment pressure across the board. In addition, it would create an improvement in the government budget, reducing pressure on programs such as Medicaid and Food Stamps, while also bringing in far higher tax revenue. It is a win-win scenario." No I did not make this up. It is from addictinginfo.org. and is too stupid to comment on.

So who is the welfare queen?

Many of the conservatives that I know believe that the welfare state exists to keep the poor beholden to the government. There is the image of the welfare queen, not working, eating bon bons, while pumping out kids. In return, the indigent is looked up as unmotivated – and in many cases lazy – and will vote to keep themselves on the dole. However, that raises several questions. The first is whether the poor vote in such numbers that would keep a party in power. Studying voter turnout it is not surprising that as income rises, so does voter turnout. In the lowest 20th percentile only 36 percent of eligible voters vote while in the next 20th percentile 52 percent vote. Voter turnout is also related to education. Those with no high school vote at 38 percent while college graduates vote at 79 percent. Race is also a factor with 56 percent of whites, 50 percent of blacks and only 27 percent of latinos voting. Age is a factor as is marital status. Therefore, when one looks at the likelihood of being poor – single, minority, uneducated – one is looking at the least likely group to vote. This is ironic since you would think that this would be the most likely group to vote if they are dependent upon the government’s largest. Indeed, since the bottom 50 percent of income earners in this country pay only 2.25 percent of federal income taxes, for the poorest of citizens it is a negative tax – that is they receive more in benefits than they pay in taxes. Again, more the reason to vote to keep the dole coming in. But the facts say that the poor are not so motivated that they go to the polls and vote. Rather voters are the nonpoor, the educated and mostly white (so far). When you look at party affiliation by income in 2012. For low income, 34 percent were democrats, 16 percent republican and 51 percent other. For middle income, democrats were 33 percent, republicans were 28 percent and independents were 40 percent. For high income where the folklore would think the republicans dominate, it was 31 percent republican, 31 percent democrat and 38 percent other. So one would have to conclude that nonpoor, educated whites have their reasons for keeping the welfare state intact. As a matter of fact, more welfare goes to the nonpoor than to the poor. We have education subsidies that have always been a disproportionate income transfer to the nonpoor from the nonpoor. The wealthy receive tax earmarks and deductions favored by both political parties. There are tax writeoffs on second homes, on yachts, business expenses, electric vehicle credits and huge agricultural subsidies for wealthy farmers. There are all sorts of business deductions and subsidies as well. In the bill signed by President Obama to avert the fiscal cliff there were accelerated tax write-offs for owners of NASCAR race tracks and a tax credit for companies operating in American Samoa. Distillers had a rum rebate. There were tax breaks for companies on indian reservations and more aid to the railroads. Certainly, in a capitalist laissez-faire economy none of this would happen because it distorts the market, limits competition and raises prices. In total the government spent $92 billion on corporate subsidies and about $52 billion on traditional social welfare programs. Of course as I have noted, for the social welfare recipients, it is a net gain. But what about for the nonpoor? Although I do not have the precise numbers, I suspect for the middle class who only get the mortgage deduction, there is a net income loss – although they might benefit from corporate welfare going to their employers. For the very wealthy who pay the bulk of the federal taxes, the arithmetic says that it is also a net loss. Regardless, welfare should be thought of in a broader sense than just some indictment of the poor. It is an indictment on us all, raising the cost of government, distorting markets and ultimately and ironically resulting in a net loss to society.

Dangerous consequences of quantitative easing

Knoxville News-Sentinel March 3, 2013 Increased deficits lead to increased debt. If financed by the Federal Reserve, it leads to increased money supply, a fall in bond interest rates, cheaper debt, decreased value of the dollar, currency wars, trade barriers, recession, increased inflationary fears, asset bubbles, recession. Simple isn’t it? The Federal Reserve through its QE1, QE2 and QE Infinity has given the federal government an unlimited budget. The government is politically constrained in its ability to raise taxes to finance its irresponsible deficits and is also limited in its sales of Treasury securities to the public. Sooner or later the public has enough Treasuries in its portfolios. However, the Fed has purchased $3 trillion of government securities, allowing the government to keep spending. Thus, the deficit continues to grow as well as the national debt. Moreover, the increased buying of securities causes their prices to rise and their yields to fall as well as increases the money supply. There are several consequences to this action. The first is truly ironic. With the rates on Treasuries low, the cost of borrowing by the government is low as well. This leads to the absurdity that the president can claim in the State of the Union address that there is $500 billion in interest savings, which leads to deficit reduction! Yes. He is saying that an increase in the deficit leads to a decrease in the deficit. The Fed’s policy of quantitative easing by increasing the supply of dollars results in a fall in its value. As the U.S. debt has grown the value of the dollar has shrunk. This is a key point: As a country’s debt increases, devaluation of its currency becomes more attractive because it makes its debt cheaper to service. Not surprisingly, governments throughout the world were not pleased. The Brazilian finance minister accused the U.S. of engaging in unfair trade practices since Brazilian exports to the U.S. were made more expensive and U.S. imports to Brazil cheaper. Of course he was right. Indeed, some have said that the Fed’s actions deliberately were intended to boost U.S. exports and decrease imports in an effort to lessen the impact of the recession on the U.S. Other governments, in particular Japan, have devalued their currencies also in efforts to try to spur growth. It is no coincidence that Japan’s debt is over 230 percent of its gross domestic product. This has led to a concern of “currency wars” as countries seek to protect themselves from adverse moves in their trading partners’ currencies. One real danger is that currency wars have in the past triggered trade protection measures that have led to global recessions. Another real danger is the creation of asset bubbles. Right now, as investors move away from low yielding financial assets and seek protection from the inflationary pressures of increased money supplies, the prices of real assets begin to rise. Thus, the stage is set for another bursting of asset bubbles leading to yet another severe recession. Although Fed chairman Ben Bernanke’s term as chairman of the Fed ends in a couple of years, there is no solace in knowing that his likely successor is vice chair Janet Yellen, who said in a recent speech that the Fed’s actions are “a policy that is not only good for output and employment and American workers, but also for the federal finances overall.” Heaven help us all. Get Copyright Permissions © 2013, Knoxville News Sentinel Co.

Still at War? Part 2

I had asked were we still at war since the confederacy never officially surrendered. It occurred to me that the answer is "no" simply because the Civil War was technically a police action. The north never recognized the succession by the southern states and the confederacy was not officially recognized as a country by any other country. Thus, there was no need for a formal surrender by the confederacy since technically it did not exist as a country.

Armen Alchian

There are many reasons why one becomes what one becomes. For me, it was honors principles of economics taken my sophomore year at Georgia. It was a small class taught by a legendary tough professor, Prof. William Miller. The regular sections of economics used Paul Samuelson’s now famous text. We, however, used Alchian and Allen’s University Economics. Prof. Miller was a free trade laissez-faire thinker and scoffed at Samuelson’s Keynesian economics. Alchian and Allen was the perfect text for teaching economic principles. Its free market approach applied basic supply and demand concepts to everyday problems, the political theater and international politics. It was humorous yet rigorous. It asked questions such as “what is the impact of minimum wages on poor wage earners?” While the popular knee jerk reaction – which still exists today – is raise them. Employing supply and demand yields the answer that an increase in minimum wages creates unemployment for those who work for the minimum. That example and countless others led us to apply basic economic principles and come up with answers that were definitely out of the mainstream. However, it gave us a logical basis for making decisions based on rational thought rather than raw emotions. Moreover, Dr. Miller added works by Thomas Sowell when I turned up in his class. Basically he was illustrating that free market thinking was not the sole province of whites and that its use would make us all better off. Alchian and Allen spoke to me and I became an economics major. I then when to Ohio State because one of their free market UCLA colleagues Karl Brunner had taken an endowed professorship there. I had decided I wanted to study monetary economics and wanted to write under Brunner, considered by many as the father of modern monetarism. I was fortunate enough to write under Brunner and spent my career teaching and practicing free market economics – yes even as a federal regulator. Fifty years later, I still have my copy of University Economics. It is on my list of favorite books. I owe a deep intellectual debt to Drs. Miller and Brunner but especially to Professor Armen Alchian who died on February 19th.

Still at war?

The Kingsport (TN) Times News runs on occasion a front page article on the civil war by Ned Jilton. In the Jan 29 issue (I tired to find a link but failed but found an earlier piece which is almost identical http://www.timesnews.net/blogger.php?id=10239&postid=7246) is a piece entitled "Gen. George Pickett, the man in charge". It is an excellent article on Pickett from the Mexican-American war to the incident with the pig in Oregon to the end where he was at a fish fry as his men were overrun at Five Forks. I sent him an email congratulating him on an otherwise excellent article. I said that it was mistitled since Pickett was far from "the man in charge". How could he be in charge when he was at the rear? Jilton said that being at the rear was protocol for division commanders but then why were the other commanders, Pettigrew (mortally wounded) and Trimble (wounded and captured) leading their troops? But mainly I was wondering if technically we still may be at war since I don't think the confederacy ever officially surrendered. Yes each confederate army on the field eventually surrendered and Jefferson Davis dissolved the government when he fled to Georgia but I don't think there was ever an official declaration of surrender. Was there?