Posted by Michael A. Kamperman on September 21, 2010
In a not-too-shocking-poll 60% of Americans believe that cutting federal spending will create jobs by freeing up the private sector. They could not be more wrong. It is true raising taxes will hurt the economy. But increasing spending and raising taxes are not synonymous, a fact lost on many. And since interest rates are near zero federal spending is not raising borrowing costs. For discussion purposes I will ignore Social Security, because there is no chance the Congress will vote to cut current Social Security checks no matter who wins the election. We will also ignore interest on the debt, which will not be cut by Congress. I will place everything else on the table. If Medicare is cut it will cost good-paying private sector health-care jobs. If defense is cut it will cost good-paying private sector manufacturing jobs as well as government jobs (soldiers and support staff). If we close the Department of Education it will cost government jobs. The point is no matter what the federal government cuts it will cost jobs. Increasing unemployment and lowering aggregate demand in a depression will simply not create jobs. It is a myth the populous will become more confident if federal spending is cut spurring private sector job creation. More foreclosures and more unemployment will make almost no one more confident. The real question is why have so many Americans come to believe such a false-hood?
The blame rest squarely at the feet of the Whitehouse economic team. They botched the stimulus plan making it poorly targeted and entirely too small. Then, they botched communicating its benefits by over-selling job creation and then claiming that saving jobs is equivalent to creating jobs. Furthermore they failed to articulate the need for further signifcant stimulus. Everything they now propose is at the margins.
The reason is President Obama, law professor from the University of Chicago, is a closet disciple of the austrian school of economics. At yesterday’s town hall meeting on CNBC he revealed his true beliefs. He believes everything needs to run its natural course and that only time will heal the economy. He balances this view with the political reality that people are hurting and he needs to be seen as trying to do something. He is wrong. The power of the Presidency could change the outcome of the economic downturn if the office-holder believed that it could. There is no limit to how much the federal government can spend, or print, if need be. He doesn’t believe that. He believes the deficit is more important than unemployment. Actions and attitudes speak much louder than words. President Hoover-Obama has thrown in the towel on having the federal government do anything significant to revive economic growth. He believes we should be patient. Maria Antionette said ”let them eat cake” and President Obama says let them eat off food stamps. Meanwhile, he enjoys the creations of the Whitehouse Chefs.
Posted by Michael A. Kamperman on June 12, 2010
The federal government of the United States does not owe $13 Trillion. It owes $8.5 Trillion. The other $4.5 Trillion is owed primarily to the Social Security and Medicare Trust Funds, along with some smaller Trust Funds. The Trust Funds are compromised of U.S. Treasury Bonds. Basically, the U.S. Government has printed an I.O.U. to itself. The higher than necessary payroll taxes collected all of these years to fund Social Security and Medicare have been spent. In truth, both of these programs are line items of the federal budget and the taxes collected specifically for these programs have been thrown into the general operating revenues of the federal government since they started collecting them. We are suffering from the unintended consequences of rhetorically establishing the Social Security and Medicare Trust Funds. It is time to officially end them. Those Trust Funds are nothing more than a smoke and mirrors sham and they were established for the express purpose of providing political cover for politicians who voted to establish the programs. Now that rhetoric is leading to new rhetoric that the U.S. government owes $13 Trillion and the debt burden is the biggest threat the country faces. This in and of itself is odd considering the U.S. Government owes everyone dollars, which it has the legal power to print.
It is also leading to rhetoric, depending on who does the counting, that the federal government also has unfunded Trust Fund liabilities of anywhere from $45 Trillion to $99 Trillion. This is based on calculations of assumed growth in Social Security and primarily Medicare spending for the next 75 years over and above the payroll taxes designated to fund the programs. These calculations are not worth the paper they are printed on. Either health care expenditures will slow down or we will raise the taxes to fund them. The world will not stay static for the next 75 years. The real danger is the concept the U.S. Government should have assets set aside to pay all future expenditures. We have exactly zero dollars set aside and no Trust Fund established for defense. The defense budget is more than $200 billion greater than the current Medicare budget. I don’t here anyone saying we have an unfunded defense liability and the U.S. will be unable to defend itself in the future. The reason is we have never had a defense Trust Fund. We simply expect to pay as we go and borrow if necessary. The same should hold true for Social Security and Medicare.
This anti-debt/anti deficit rhetoric has risen to a fever pitch. Hence, our already all but lame duck President is unable to get large majorities of Democrats in either chamber of Congress to pass an extension of health subsidies for the unemployed until the end of this election year. I never have believed this would be true, but it is. Without increased deficit spending the economy will stay mired in a deflationary depression. The logic that a nurse working for the VA, a public sector job, is not as valuable to the economy as a nurse working for a private non-profit hospital treating Medicare patients is simply another myth. Public sector jobs help the economy just as much as private sector jobs. The key is to have a way to make sure public sector programs are run efficiently and effectively. The spreading belief in these myths are killing any chance we have of escaping the depression we are in. The only solution is to end the Trust Funds and end the illusion that Social Security and Medicare have a future funding source other than federal taxes, borrowings, and if necessary money printing. Sadly, we have met the enemy and he is us. No wonder Rome fell from within.
Posted by Michael A. Kamperman on April 25, 2010
Former Sen. Alan Simpson, R-Wyo., and Erskine Bowles, former Clinton White House Chief of Staff are leading President Obama’s deficit cutting effort known as The National Commission of Fiscal Responsibility and Reform. This Commission is nothing but a Trojan Horse that offers the allusion of one thing but will deliver another. In a noble attempt to save American finances the Commission is going to prolong the current depression for decades and kill any hope of growing our way out of troubles. The Commission will try to sell us on the virtues of paying as we go, balancing the budget, and reducing our debts. They will argue this makes us safer in the long run and will be best for our grandchildren. Balderdash! Our children and our grandchildren will suffer disproportionately from such a fools errand. They are suffering now. New York City is looking to lay-off 8,500 teachers next year. Current state law requires them to honor union seniority rules. This means almost all of the Teachers let go will be in their 20′s. It also further dims the already bleak job prospects for soon to graduate and recent still unemployed college graduates. Not to mention the children in New York City Schools will be pushed into classrooms with higher student/teacher ratios despite all of the best research showing the single biggest factor in improving student performance is lower student/teacher ratios. New York Cities plans are being repeated all around the country. It is estimated that hundreds of thousands of teachers could get pink slipped this summer. Education is the most important way to make America safer, more prosperous, and more democratic in the future, not deficit reduction. And let’s face it, in the end the Commission will call for cutting future entitlement benefits while sticking our children and grandchildren with the bill for current benefits. Count me as one who already considers anything the Commission recommends as dead-on-arrival.
The U.S. is currently spending less than 2% of GDP on debt service. To achieve a balanced budget in the current debt-induced deflationary depression would require a combination of draconian spending cuts and tax increases that would cut GDP by 10%, or more. After we balance the budget we will still have the debt and we will still be spending 2% of GDP on debt service. Communities like New York would have to cut a lot more than just 8,500 teachers to achieve these goals. We need the national dialogue to go in the opposite direction it is now heading.
President Obama should be commended for showing leadership and appointing two well meaning leaders to tackle a difficult issue. But sheep are easily led over a cliff. Having the guts to lead and the vision to lead in the right direction are two different things. The country should be going in the opposite direction. We should be lowering the retirement age for Social Security and Medicare to 60 to open up jobs for those in their 20′s with so much to give who are left to sit at home with mom and dad. We should be lowering student/teacher ratios and setting a goal for America to have the number one primary education system in the world. We should not be worrying about paying off a 30 year mortgage in 3 years when one spouse in the house in unemployed. Especially when we have a trust fund know as the Fed that can print us a check anytime we need one. Austerity is wrong for Greece and it is definitely wrong for America.
Posted by Michael A. Kamperman on February 12, 2010
The time has passed to think in terms of temporary and targeted stimulus bills to create jobs. While gimmicks like cash for clunkers or the first time home buyers tax credit create a temporary boost in demand, they are simply too small to employ the 8.4 million Americans who have lost their jobs since the recession started. This doesn’t even count the additional 3 million Americans who have graduated from High School and College and entered the labor force. The country is down over 10 million jobs. To create jobs we need to start thinking big, not small. Employers in for-profit, not for-profit, and in government need a sense of permanency to be able make plans to expand. Aid that is here today and gone tomorrow will not encourage serious job creation efforts that involve spending money on buildings and new equipment. No one knows when the temporary stimulus will end. No one knows what the rules will be a year or two from now. Planning requires confidence, and confidence requires a sense of permanency. The New York Times pointed out that 15% of the nations workforce work for state and local governments, which includes schools. Another 15% are employed in the healthcare sector. In one fell swoop the federal government could stabilize one third of the workforce by taking over all Medicaid funding from the states and raising the bar on the quality of medical care provided to participants in most states.
According to the New York Times “Without more aid, states will have to cut spending and raise taxes to close an estimated $142 billion budget gap for fiscal year 2011, which starts on July 1 for most states. Last year’s gap was $125 billion. Next year’s is anticipated to be $118 billion.” The state budget gaps will not magically end in 2011. In fact, the more the states cut the worse the economy becomes. States are set to spend over $150 billion for Medicaid in 2010. By having the federal government assume all Medicaid spending the states would be able to divert those funds to close budget gaps, cut taxes, and fund local economic stimulus programs. The federal government could lower the eligibility requirements for Medicaid providing medical care and insurance to more low income Americans. While they are at it, Congress could pass a bill allowing anyone with a pre-existing condition who is denied insurance an option to buy in to Medicare. And, they could pass a law with criminal penalties for any health insurance company that attempts to skip out on paying from someone they collected health insurance premiums on. Every state would benefit.
The federal government can run budget deficits and most states are required to balance their budgets. The federal government can print money and the states cannot. The states are simply not able to provide economic stability in a depression as severe as the one we are in. State governments are being dragged down with the rest of us. The federal government can fulfill this function. The absurdity of the situation is Washington is not thinking big, it is thinking small, smaller, and smallest. The House wanted a $154 billion jobs bill, the Senate negotiated an $85 billion bipartisan jobs bill, but for some reason (re-election) majority leader Reid decided a $15 billion jobs bill that is targeted and paid for with tax and spending savings elsewhere is the right way to go. This is no way to instill confidence in employers to run out and hire more workers. We cannot cut our way to prosperity. We cannot cut our way to a balanced federal budget. Medicaid is an existing program and the state workers in the program can be transferred to the federal government. All that would happen is the Medicaid partner with the deep pockets that can handle the liability would handle it.
Posted by Michael A. Kamperman on August 23, 2009
Christina Romer, the chairperson of President Obama’s Council of Economic Advisers, says “Deficits do matter.” “No one believes that more than the president.” First we lost the Fed this week and now we lose the President. For those wondering how to interpret these comments let me translate. Ms. Romer is saying the President cares more about satisfying the bond vigilantes in China and on Wall Street than he does about whether or not the average American keeps their job or their home. First the Fed thinks keeping Zombie Banks that don’t go under, but don’t lend either, will eventually work even though it didn’t work in Japan. Now the President is assuring the balanced budget hawks the federal government is prepared to either raise taxes or slash spending in the middle of the greatest downturn since The Great Depression. Perhaps he can channel the ghosts of Herbert Hoover and FDR to find out that if they had a chance to do it all over again the last thing they would have done is worry about the deficits until the economy was strong enough to stand on its own. We are still hemorrhaging jobs and we have significant deflation. Washington needs a real stimulus plan, needs to fix the broken credit markets, and needs to print a lot more money. But it is obvious that this will not be happening anytime soon. Hence, the “Great Unraveling” will continue unabated.
The “Great Unraveling” is simply the process of the economic dominoes falling into each other one by one. A person loses their job, loses their home, and quits spending money at the local clothing store and restaurant. The local clothing store and restaurant go out of business and the owners default on their mortgages. These dominoes will continue to fall into each other until something stops them. In the Great Depression the domino stopper was World War II. In the Panic of 1873 the domino stopper was time. In the Japanese Lost Decade the dominos have not stopped falling into each other even though their crisis started 20 years ago. Do you know a family member or close friend without a job? Is there a home in your neighborhood that is vacant? Do you see local businesses closing their doors? These are the economic dominos that represent the “Great Unraveling.” That is what a debt-induced deflationary depression is all about. Those trapped in post World War II inflationary boom bust cycle thinking erroneously believe that the dominos will reverse on their on. They won’t.
Consider that we will enter September with more people unemployed than at anytime since the crisis began. Consider that we will enter September with more people delinquent on their mortgages than at time since the crisis began. Consider that those that lost their homes already and those that have been out of work for more than a year are not counted in these statistics. Consider that state and local governments enter September with lower spending levels and higher taxes than they entered last September. Consider that most for profit and non-profit institutions enter September with small budgets than they entered last September. We enter September weaker, not stronger. The consumer has shown no signs of opening their wallet, except for those with clunkers to unload. Homebuyers are scarce, except for first time homebuyers taking advantage of the $8,000 tax credit. To balance the budget the federal government has to end the few kernels of stimulus spending that have actually been working. However, I would like to suggest a budget cut that will have overwhelming bipartisan support amongst the American people. Until the unemployment rate is back under 8% as promised, let the President, every senior member of his Administration, and every member of Congress take a 50% pay-cut. We need to see an end to the “let them eat cake” policies Washington is sending us.
