Tag: economy

The Half-Life of the Welfare State

by Helping Families Flourish, posted in Flourishing Article

Originally Published in Flourishing August/September 2011

Social Security is projected to exhaust its trust fund in 2036. Medicare will be out of cash in 2024. Technically speaking.

In reality, both systems are already in the red, because there are no actual assets in those trust funds; only government IOU’s. As Social Security and Medicare begin to pay out more than they take in from payroll taxes, they’ll scarf up virtually the entire federal budget and guarantee a steady increase in our already dangerous national debt. Add to that the current low interest rate environment (0-2%), and ask yourself what happens when we’re paying a more normalized 5% rate on upwards of $17 trillion.  Why else do you think the Federal Reserve is determined to keep rates so low?

Everyone already senses this, of course, but most people don’t yet understand that the current budget crisis heralds the beginning of the end of the Era of Entitlements.  Though Social Security has been around since 1935, the growth of cradle-to-grave entitlements accelerated in the 1960’s and ’70’s, when we decided that we  could subsidize everything for everybody. From education, to housing, to medical care, to food stamps, to the arts and entertainment, to retirement; a consensus of Americans decided that a policy of “from each according to his ability, to each according to his need” would be a fine thing. The wealthiest among us would somehow pay for it all.  Or most of it, anyway.  But it was an illusion. The 2009 Patient Protection and Affordable Care Act  (PPACA) was the last gasp grasp of that philosophy, and because the American people—having finally realized who would really pay—overwhelmingly opposed PPACA, it had to bullied through Congress in the dark of night.  That Act, following hard upon the government-led bums’ rush into housing (1995-2006), and the subsequent $trillions wasted on bailouts and stimulus packages have pulled back the curtain.

So, we’re now intimately acquainted with the life cycle of the entitlement hoax. Benefits, bailouts, and tax breaks are passed by the Congress and millions rush to claim them.  Marginal taxes rates can never be raised fast enough to keep up with an unending stream of entitlement promises without triggering a recession, so Congress makes up the difference with massive deficit spending and an ever-increasing debt burden—and we get a recession, anyway.  The Federal Reserve sops up the government’s debt with an increasing supply of inflationary electronic dollars—until we reach the point where we are now.  Over a (pork) barrel.

The task of our generation, and perhaps the next, is to preside over the dismantling of the voracious entitlement monster we’ve created.  We can now see that it was the unprecedented wealth created by the entrepreneurs, savers, and investors of our parents’ generation that made the welfare state seem plausible. In particular, the post-World War II boom in Americaand Europesupported the fantasy that we were rich enough to afford such an immoderate system of cradle-to-grave entitlements.  But, despite the incredible wealth creation of the past sixty years, the Age of Entitlement is now kaput.  We are living in the Age of Recompense.  Without explanation—since none should be needed—let me just assert that that’s a good thing.  It means that working, saving, and personal responsibility will soon be in vogue, and not just for those formerly willing, but for everyone.  Well, I guess that is the explanation, isn’t it?

The science of Physics tells us that a radioactive isotope decays perfectly according to first order kinetics.  For example, the half life of the Carbon 14 isotope is 57.3 centuries, which means that in 5,730 years, one half of any given quantity of Carbon 14 will have decayed into its surroundings.  By its nature, Carbon 14 is physically unsustainable.

As an extreme, and, therefore, educationally valuable case, consider the PIIGS (Portugal, Italy, Ireland, Greeceand Spain).  Over the last forty years, they were all built on the self-same ideal of cradle-to-grave entitlement; and here they are, begging the world for bailouts.  The entitlement philosophy is economically unsustainable, because compound interest, being mathematically akin to radioactive decay, guarantees that sooner or later entitlements will consume all of a country’s capital, and then destroy its credit, too.  With the demonstration and dissemination of that knowledge provided by the sad spectacle of the PIIGS, the remaining half-life of our own welfare state will not be measured in centuries, perhaps not even in decades.  mh

Ad Astra Per Aspera

by Helping Families Flourish, posted in Flourishing Article

Originally published in Flourishing September 2007.

It has been six years since Islamic terrorist hijackers flew two commercial jetliners into the World Trade Center towers in New York City, and another into The Pentagon.  They were thwarted by heroic passengers in their attempt to fly a fourth jetliner into the U.S. Capital Dome.  We must never forget that day.  We must never be deterred in seeking justice, I, for one, will never forgive.  But, that’s not the point of this article.

The day after those inexcusable attacks, I placed an ad in the Winfield Courier urging investors to maintain their poise and to keep faith with the future.  In that ad, I quoted Thomas Paine, the voice of The American Revolution:

These are the times that try men’s souls:  The summer soldier and the sunshine patriot will, in this crisis, shrink from the service of his country; but he that stands it NOW, deserves the love and thanks of man and woman.

Panic is not a strategy, and pig-headed persistence in the face of difficulty is a virtue.

In the intervening six years, our nation has made deliberate, if excruciatingly slow, progress in the effort to defeat Al-Qaeda and related Islamic terror organizations.  In that effort, I am merely a spectator with a powerful vested interest in the outcome.  My real passion, though, and what I am compensated for—by you and people like you—is helping people achieve progressively greater goals over the entire course of their lifetimes.  I am very proud to say that in the aftermath of 9/11, our clients did not shrink from their goals or undermine their own strategic interests.  Like Washington’s army, they continued to march steadfastly in the direction of their dreams.

What has been the reward for their faith in the future?

America’s economy is still the world’s strongest and most resilient.  American markets are still the deepest, best capitalized, and most transparent in the world.  Since September 11, 2001, real (inflation adjusted) Gross Domestic Product (GDP) has risen by more than 16%—$1.65 trillion.  American business has produced twenty-three consecutive quarters of economic growth.  As Larry Kudlow recently pointed out, the U.S. economy has added the equivalent GDP of five Saudi Arabias, eight Irans, thirteen Pakistans, or fifteen Egypts.

Real (inflation-adjusted) annual after-tax income is up more than $2400 per person, the national unemployment rate has fallen from 5.7% to 4.6%, and at last check, continues to fall in thirty-two of the fifty states.  Housing construction—as who could not know—has fallen on hard times, but the median price of an existing home in America is still 45% higher than it was six years ago.

Take note, Osama bin Laden:

By your sponsorship of those evil acts six years ago, you tried to bring the American economy to its knees, and to destroy our way of life.  You failed.

Since 9/11, total after-tax profits in the United States are up 104%.  The Dow Jones Industrial Average is up 39%, the S&P 500 Index is up 33%, and the Nasdaq Composite Index is up 51%.  The Freedom Tower is rising to celebrate the benevolent and resourceful spirit of America.  America:  The land of the free and the home of the brave, and the engine of the Global Capitalist Revolution.  We take pride in knowing that success is the best revenge—you cold, cringing, degenerate bastard!

Have all of our challenges disappeared?

No, of course not!  The war on terror grinds on.  The credit markets are re-pricing risk, correcting a too loose monetary policy by the Federal Reserve.  Oil prices have skyrocketed.  Politicians still do stupid thins and then lie.  It is certain that tomorrow, we will be confronted with new and unexpected challenges.  But, come what may, let us not be summer soldiers in the service of our dreams.  Let us not change who we are in the land of the free and the home of the brave.  We are proud Americans

Ad Astra per Aspera!  mh

Jefferson’s First Principle of Association

by Helping Families Flourish, posted in Flourishing Article

Originally Published in Flourishing July/August 2010

“To take from one, because it is thought his own industry and that of his fathers has acquired too much, in order to spare to others, who, or whose fathers, have not exercised equal industry and skill, is to violate arbitrarily the first principle of association, the guarantee to everyone the free exercise of his industry and the fruits acquired by it.”  

—Thomas Jefferson, letter to Joseph Milligan, April 6, 1816.

Larry Summers served briefly as a Secretary of the Treasury under President Clinton, and later as President of Harvard University, where he got into trouble for inadvertently hinting that boys might have a greater natural aptitude for math and science than girls. He is now a key, behind-the-scenes economic advisor to President Obama, having lost out to Tim Geithner as Obama’s Treasury Secretary.

In a New York Times article, The Return of Larry Summers, published on November 26, 2008, David Leonhardt told his readers about one of Summers’ favorite economic arguments: Require every household in the top 1% of American income earners, who as a group have an average annual income of $1.7 million, to write a check for $800,000. This money could then be pooled and used to mail a $10,000 check to every household in the bottom 80 percent of income distribution, those making less than $120,0001.

Leonhardt’s story may only be symbolic, but it is instructive. I see several problems with Summers’ idea.

First is the fact that the $1.7 million is an average. Many households earning less than $500,000 are also in the top 1%. The threshold income to be in the top 1% was $410,096 in 2007, the latest year for which data is available2. Their tax rate would not be the roughly 47% envisioned by Mr. Summers; it would approach 195%. (It’s an important fact, too, that the makeup of the top 1% is constantly changing, as people with new ideas and special talents migrate from the lowest levels of income distribution to the top.)

Second, I believe that Mr. Summers is advocating government-sponsored armed robbery on a heroic scale. I suspect that many among the top 1% might resist having their earnings from whatever source – intellectual and artistic endeavors, business interests, professional practices, or investment, for example – snatched so imperiously. After all, does Summers’ proposal differ in any basic respect from private citizens taking the matter of income inequality into their own hands? It’s probably true that rich people won’t draw their six-shooters to defend their income from the government, but they might well vote with their feet. Talent and Capital tend to reside where they’re treated best.

Third, it’s widely known that Warren Buffett, the world’s third richest man, is very conservative in his personal spending habits, as was Sam Walton, the founder of Walmart.3 Those two may be exceptions of a sort, but the few hundred mansions, yachts, and airplanes belonging to others among the top 1% pale into insignificance alongside the total consumption of the general population. Moreover, a significant portion of the consumption of the wealthy, who are so often demonized as greedy fat-cats, takes the form of support for universities, hospitals, research facilities, theater and music companies, museums, libraries, and churches; to name just a few of their non-profit pursuits.4

Finally, contrary to the myth of conspicuous consumption, most of the wealth owned by the top 1% is held in the form of business, financial, and industrial assets.5 The wealthy and their productive capital can serve consumers throughout the world by producing a vast array of goods and services, or by financing that production, or by paying the wages, salaries, and benefits of a substantial percentage of America’s workforce. The intended beneficiaries of Summers’ scheme should already enjoy a magnificent range of benefits derived from the savings and investments of all Americans, including the invested wealth of those at the top.

I believe that widespread understanding of this issue is critical for America’s return to lasting prosperity; and that economists like Larry Summers and politicians like Barack Obama simply do not appreciate (or care?) that their redistribution policies may limit the formation of productive capital and the creation of well-paying, private-sector jobs. The history of forced wealth and income redistribution is replete with examples.6

In my opinion, Summers’ favorite economic argument does not really benefit the bottom 80%. Rather, forced redistribution of wealth and income consumes the savings and capital of America’s most productive citizens, or drives it and them offshore. My reading of history indicates that such policies have no lasting beneficiaries, only victims. And, most importantly, I believe Thomas Jefferson observed correctly that the forced redistribution of wealth and income is a first-order violation of human rights. mh

1 http://georgereismansblog.blogspot.com/.

2 http://www.ntu.org/tax-basics/who-pays-income-taxes.html.

3The World’s Billionaires, Forbes Fact and Comment, March 10, 2010. 

All the Money In the World, Peter Bernstein (editor), Knopf, 2007.

4 Caroline Bermudez, “Wealthy Are Making Bigger Gifts to Charitable Causes”, Chronicle of Philanthropy, July 1, 2010. (http://philanthropy.com/article/Wealthy-Are-Making-Bigger/66112/).

5http://sociology.ucsc.edu/whorulesamerica/power/wealth.html

6 The Ascent of Money: A Financial History of the World, Niall Ferguson, Penguin, 2009.

A Brief Economic Update on Oil

by Helping Families Flourish, posted in eFlourishing Article

Originally Published in eFlourishing Issue 10, May 30, 2010

The theory of “Peak Oil”, like the theory of “anthropogenic global warming”, is, I believe, factually unsustainable. Both theories conveniently discount the scope and effects of natural phenomena and the unlimited potential of the liberated human mind. Fortunately, as Mrs. Cunningham taught her history students nearly fifty years ago, the truth will out. According to a recent Gallup poll (http://www.gallup.com/poll/126716/Environmental-Issues-Year-Low-Concern.aspx) , the number of people who take “Global Warming” seriously has fallen to 28%. “Peak Oil” is headed for the dust-bin of science, too.

Oil production increased in the Gulf of Mexico and North Dakota last year. Those increases more than offset declines elsewhere in the U.S. for the first annual increase in U.S. oil production since 1991. The U.S. Energy Information Administration (EIA) reported in its March 2010 Short-Term Energy Outlook that U.S. oil production in 2009 averaged 5.32 million barrels a day, up from 4.95 million in 2008. That’s an 8% increase.

Several weeks ago, a subscriber/client sent me a link to some information about the Bakken Formation in North Dakota. I checked it out. According to a 2008 report by the U.S. Geological Survey, Bakken could increase technically recoverable reserves by up to 4 billion barrels. Though newsletter and stock promoters often exaggerate the potential of the Bakken Formation, the recent EIA Outlook shows that Bakken does add significantly to production. The increases in production in both the Gulf of Mexico and North Dakota’s Bakken Formation show – yet again – how oil company investments in rapidly developing technology can increase both known reserves and current oil production.

As the economist Dr. Reisman reminds us, from its surface to its center – a distance of four thousand miles – the Earth is nothing but a solidly packed ball of natural resources. Even with the scientific and technological progress we’ve made during the 150-year history of the oil industry, we’ve succeeded in drilling in just a few places to a depth of only about seven miles – a pin prick.

The Catallaxy Revisited

by Helping Families Flourish, posted in eFlourishing Article

Originally Published in eFlourishing Issue 19, June 15, 2010

 “We see in almost every part of the annals of mankind how the industry of individuals, struggling up against wars, taxes, famines, conflagrations, mischievous prohibitions, and more mischievous protections, creates faster than governments can squander, and repairs whatever invaders can destroy.”

– Thomas Babington Macaulay (1800 – 1859), quoted in The Rational Optimist, by Matt Ridley.

Because I am a confirmed optimist, some of you may think that I don’t understand how bad things are out there. I assure you that I do, and this article is offered in evidence.

According to Neil Barofsky, special investigator general for TARP (Troubled Asset Relief Program), the United States has now spent approximately $3 trillion on programs designed to heal our financial system and replace jobs lost during the recent financial crisis and recession.

As I mentioned a couple of weeks ago, the European Union (EU) has created a loan fund of almost €1 trillion (Euros). The fund’s purpose is to rescue euro zone countries like Portugal, Italy, Greece, and Spain – unfortunately, but accurately, referred to in the media as “the PIGS”. The European Central Bank (ECB) has announced that it’s ready to buy both government and private bonds “to ensure depth and liquidity” in the market for deadbeat debt. The Federal Reserve, the Bank of Canada, the Bank of England, the European Central Bank, and the Swiss National Bank have all agreed to help facilitate this bailout. This is a spendthrifts’ consolidation loan, complete with austerity mandates that, in my opinion, will ultimately lead to violence. In Europe, I believe that that’s the good news.

Just as in our mortgage meltdown, banks are at the epicenter of the current European debt and currency crisis; and German banks are some of the most highly leveraged institutions in the world.

I could go on, but I think the point is made. Ballooning budget deficits, already out of control prior to the orgy of bailout and stimulus spending, are beyond ineffective; in my opinion. (I have intentionally omitted the $100 trillion of unfunded liabilities associated with Social Security and Medicare, and the truly negative budget implications of Obamacare that don’t kick in until 2014. What would be the point?) We should learn from the poor Europeans, whose cradle-to-grave entitlement dogma is rotting their once-great civilizations.

I get all that, and I understand why people are concerned.

Nevertheless, I remind you that some American non-financial corporations have more cash on their balance sheets than at any time in more than fifty years. That does not mean that there are no opportunities for businesses to expand and profit; there are many. Rather, with interest rates on savings still less than 1%, increasing corporate cash may be a measure of the irrationality and unpredictability of government policy. Prudence trumps profit.

Last week, I suggested that you read The Rational Optimist: How Prosperity Evolves, by Matt Ridley. That recommendation stands, and will stand; it’s an important book, and one that is destined to become a classic. It reveals that throughout human history, voluntary exchange in the marketplace has been the golden goose of human progress. Exchange is to human nature as nest building is to birds – it’s what we do. Over the past two centuries, exchange has been greatly facilitated by advancements in transportation and communication technologies. Progress has gone viral. Today, American business represents humanity performing its highest functions at an extraordinary level of proficiency; it is the most rational, most innovative, most life-serving, most achievement oriented, and the most forward-looking institution in the history of the world.   

Be an optimist.

*Deficits: 2008 = $680.469 billion; 2009 = $1.471 trillion; 1Q2010 = $328.929 billion.

Sources:

Heflin, Jay, The Hill, May 20, 2010. http://thehill.com/blogs/on-the-money/banking-financial-institutions/93285-government-has-spent-3-trillion-and-counting-on-financial-crisis

Bureau of Economic Analysis, March 26, 2010. http://www.bea.gov/newsreleases/national/gdp/2010/gdp4q09_3rd.htm

Council of Economic Advisers. http://www.whitehouse.gov/administration/eop/cea/estimate-of-job-creation/

McPheters, Lee, February 3, 2010. http://knowledge.wpcarey.asu.edu/article.cfm?articleid=1857

Bureau of Labor Statistics, U.S. Department of Labor, May 7, 2010. http://www.bls.gov/news.release/pdf/empsit.pdf