Obama Nation: Lower Living Standards, Rising Poverty

The Dow ended down almost 400 points today. But that’s not the real measure of prosperity or how the U.S. economy is doing. The real measure is per-capita income – i.e. income per person or the quantity and quality of goods and services per person. That’s what separates us from third-world countries. Our per-capita income of course is a lot higher, and over the decades it has increased faster. It’s also what separates us from Europe. Western Europe’s average per-capita income is equivalent to that of our lowest-income state (Mississippi). Europe’s per-capita income used to be equal or higher than ours, 40 years ago. But their welfare state has taken its toll – slower economic growth over the decades since, which really adds up.

But the welfare state is really taking hold here in the U.S., especially under Obama who has raised government’s share of the GDP from about 20 percent to 25 percent, and who has added more to our national debt in two-and-a-half years than George Bush did in eight years (which was bad enough as it was).

And it shows: our per-capita income here in 2011 has fallen to 1996 levels. That’s scary – usually per-capita income rises over time. It may fall during recessions, but then during the rapid economic growth that usually follows recessions, per-capita income spikes up.

In this Obama economy, however, post-recession growth is anemic. It was less than 1 percent at last count, which is slower than population growth, meaning there are fewer and fewer goods and services per person. Normally after deep recessions, growth is in the neighborhood of 5 to 8 percent. But when it comes to the economy, Obama doesn’t know what he’s doing (assuming he genuinely wants to help the economy, in contrast to many hard leftists who want to see growth come to a halt).

What more evidence do we need to show that big government solutions don’t work? They only make our standard of living decline. The main driver of rising per-capita income isn’t government, but the people outside of government who are producing the goods and services. It’s government’s job to make sure there are good ground rules. But too often, they go overboard on the rules, and coerce too much out of the private sector.

Another frightening bit of news: the percentage of Americans living below the poverty level is the highest since 1993.

What more evidence to we need to show that poverty is alleviated by private-sector-driven economic growth, and not clumsy government programs? It’s the latter that exacerbate poverty.

If government programs were the main alleviators of poverty, then practically all third world countries would now be first world, given that most of them have socialist governments. But they’re third world precisely because of their bloated governments. It takes months or years to just get permission to open a business in many of those countries.

So poverty in America reaches an all-time high, even though Barack Obama was expected by the economically naive to bring it to an all-time low.

Hopefully the Obama experience will squeeze that naïveté out of some of them.

Yes, the main cause of poverty is a shortage of goods and services in society. That’s what separates us from a third world country like Haiti. Yet now, goods and services per person are decreasing. Of course we’ll never become like Haiti (except perhaps in certain pockets like Democrat-controlled inner cities), but our standard of living will be a lot lower than what it could have been, had we had fewer economically illiterate people running our country.

 

 

Bill Clinton: Don’t Raise Taxes Now

Even Bill Clinton disagrees with Obama’s desire to raise taxes now. In a Face the Nation interview, he indicated that we shouldn’t raise taxes when the economy is so sluggish. He said to wait “a year or two” for economic growth to return, and then tackle the deficit by raising taxes.

The best plan of action is to not raise taxes at all across the board, or if you’re going to raise taxes, do so by closing loopholes like the mortgage interest deduction (which drives up interest rates and penalizes renters). And close loopholes in exchange for an across the board rate cut, which will help spur economic growth. Economic growth is the biggest generator of tax revenue.

Lest there be any doubt that tacking the deficit is best achieve through spending cuts and not through tax increases, two Harvard economists analyzed 107 separate attempts at fiscal reform in OECD (developed) countries from 1970 to 2007. The goals in each case was to lower debt-to-GDP ratios.

Their study confirmed the obvious: Instances that failed mainly relied on large tax increases and only modest spending decreases, if any.  Instances that succeeded mainly relied on large spending decreases and only modest tax increases, if any.

They also found that instances that relied on spending cuts rather than tax increases are less likely to create recessions.

Obama is setting us up for failure yet again.

The country needs a new CEO. Fast.

Explaining Econ 101 to a Big Labor Fan

In a mass-recipient e-mail that I received today from a labor union advocate, the writer lamented that employers don’t pay employers more. I e-mailed him back shedding light on why employers can’t pay their employees more than they or the writer would like.

An employer hired an employee to make widgets. The employer paid her $11 per hour. But he found that the amount he was paying her was more than the revenue he was generating from the widgets. So when she quit, he decided not to hire a replacement, because paying someone to do it would be the same as giving away money. Why not instead give away money to charity? Meantime, the employer just resorted to making the widgets himself.

Why not just charge higher prices to customers in order to cover the salary of an employee and hopefully have a little left over for the employer, one may ask. Well the employer already charges $13 for a widget, and customers already think that’s too high, especially when they want a lot of them. Were he to charge a higher price the customers likely would disappear and his revenues would be even less. (This is based on a real-life experience. Names have been changed to protect the innocent.)

So that’s a microcosm of why employers can’t pay more money to employees than they or labor union advocates would like.

The writer of the e-mail also lamented that welfare benefits aren’t higher. I replied that that would be tough now because the federal government is borrowing over 40 cents of every dollar that it spends, up from a historical average of about 15 cents, pre-Obama. That’s just not sustainable. Raising taxes wouldn’t help much because even confiscating all of the top 1 percent’s earnings would net about a trillion dollars, which wouldn’t even cover a year’s deficit. And a 100 percent tax rate wouldn’t be workable in any event because no one would work if they couldn’t keep any of their earnings. In fact, economists are saying that we’re headed for a 70 percent marginal tax rate (i.e. marginal tax rate is the rate on the additional income you earn, e.g. if you earn $50,000 per year and decide to work a little extra harder to make an extra $1,000, you’d have to pay $700 of that in taxes.) Few people would be willing to work that additional amount, and tax revenues would be way lower than projected, and you’d still be $14 trillion or more in debt.

People are only willing to pay so much in taxes before they either 1) find loopholes to avoid those taxes or 2) refuse to work because the tax rate makes it not worth it to work. So jacking up tax rates won’t result in much additional revenue, if any. And certainly not enough to even make a dent in the deficit and debt. For that, you need to cut spending. A good place to start is to reduce or eliminate the welfare benefits (i.e. government payments to individuals, including entitlements) that go to the upper middle class and rich. Often Republicans try to reform that (“means-testing”), but it always gets shot down by Democrats.

For example, instead of giving rich people Social Security and Medicare money, how about phase out that system so that they finance their retirement and medical benefits out of their own savings – where they’d be mandated to set up a Social Security and/or Medicare savings account during their working lives. (Oh but we can’t have that! That would be “privatization!” – the anti-reformers would howl.)

It’s a tragedy, and a gross injustice, that the Social Security and Medicare contributions of low-income workers are being transferred to middle-class, upper-middle-class, and rich retirees. Instead, the latter should fund their own retirement through their own savings. They tried fixing that a few years ago, but too many people howled “privatization!” so it never got anywhere.

 

NPR’s Welna: Spend with Abandon … Until We’re Like Greece?

At least two things stuck out at me while listening to a portion of the Diane Rehm radio show yesterday as I drove home from a football game: the lack of economic literacy of a lot of people in America, the fact that some of those same people are reporters for taxpayer-funded National Public Radio.

(And, it’s a safe assumption that these people are good proxies for discerning the thought processes for many if not most people in the Obama administration – which explains our 9 percent unemployment and pathetic economic growth – only 1 percent currently, which is lower than our population growth, which means our per capita standard of living is declining, at least for now. Yesterday morning it was reported that no net new jobs were created for the latest quarter.)

One guest on the show in particular stands out. He’s a voice commonly heard on NPR, named David Welna. He doesn’t think that we have a deficit problem because, based on what I discern from his comments, we’re not yet facing a debt crisis like Greece. Welna seems to think that you can keep borrowing money with abandon. It’s only when the day comes when you’re so manifestly profligate that no one wants to lend to you anymore (or only lend to you at high interest rates), like what Greece is going through now, that you should think about reining in your spending.

David Welna: there (is) no deficit crisis because borrowing (is) very easy. Interest rates are extremely low. I’ve been in countries where there definitely was a debt crisis, and they couldn’t borrow any money….But that is not the case in the United States right now. …We haven’t had a recovery that’s adequate enough and that requires further government stimulus.

Diane Rehm: So you’re saying that Republicans succeeded in making the case for an artificial debt crisis?

Welna: They really set the narrative that we are broke when, in fact, right now, this is the best time the government has actually had to borrow money …

Actually the goal is to avoid a situation like what Greece is going through now, for obvious reasons (obvious to everyone except for people like Welna). We’re headed that way with current levels of spending, even without the additional trillions of dollars in additional money that Welna wants to borrow.

The federal government used to regularly borrow about 15 percent of what it spends. Now under Obama, it’s regularly borrowing about 40 percent of what it spends. Three trillion in additional debt in Obama’s first two years as president (compared with three trillion in eight years under Bush II, which was bad enough as it was). Welna, and probably Rehm, think all this is an “artificial” crisis – all a sham, and that there’s actually nothing to worry about because we’re not like Greece yet. If they had their way, we’d be borrowing 50 or 60 percent of what we spend.

While listening to the radio show, I was thinking that what if they were talking about, say, some complicated surgical procedure, even though they had no training in medicine whatsoever. They’d be laughing stocks. Well it’s the same thing – only it’s the American economy they were talking about with no training in economics whatsoever. Or, if they ever did have any training, they deserved an F.

 

NPR Should At Least Pretend To Be Impartial

You know when you and another person or persons generally agree on things and you want to test your arguments by playing devil’s advocate – i.e. pose a question that you think your opponents would ask? Stating you’re asking a devil’s advocate question almost always implies that you and the other person are in agreement.

That’s the question a National Public Radio reporter asked a New Yorker reporter. The latter, one James Surowiecki, argued that the debt ceiling should be scrapped. The NPR reporter, Mary Louise Kelly, said, “Let me play devil’s advocate….many would argue that having a sort of ceiling in place fosters accountability.”

Mary Louise, you work for a taxpayer-subsidized radio corporation that is supposed to be for all Americans, not just left-leaning ones who are sympathetic to scrapping the debt ceiling. Your taxpayer subsidies don’t just come from lefties but righties as well. You can at least try to convey the appearance that you’re speaking on behalf of Americans of all political stripes. You should have dropped the “Let me play devil’s advocate.” That implies that you’re on Surowiecki’s side in the matter and that you don’t want him to think that you aren’t.

No, a hard-nosed reporter should in no way be worried about putting the  person he or she is interviewing in a tight spot provided the question is a legitimate one. And asking about the accountability issue is very legitimate.

Meanwhile, Surowiecki at first dodged the question. So Kelly asked it again. The only thing Kelly could muster up was that because Congress has raised the debt ceiling so many times in the past without a fight, it shows that the debt ceiling is a weak way to foster accountability.

Hey James – it appears that that’s changing. Congress is now starting to take the debt ceiling issue seriously as a way to foster accountability. In fact what’s happening now in Congress – a deal to raise the ceiling in exchange for spending controls – is unprecedented as far as I know.

So finally, the debt ceiling is fostering accountability! That kind of destroys Surowiecki’s argument that the debt ceiling is unnecessary because it has never worked in fostering accountability in the past. Well now, it is! And hopefully this will start a good precedent for the future.

One other note. Surowiecki said we’re one of the only developed countries that have a debt ceiling. “And, you know, most other countries, developed countries, seem to do reasonably well in terms of keeping their books in order without one.”

Yeah. Like Greece.

 

Putting the brakes on rising living standards

GDP growth was revised upward for the first quarter of 2011, from 1.8 percent to a whopping 1.9 percent.

When looking at living standards, the GDP growth rate is practically meaningless if you don’t take population growth into account. And considering that the population growth rate of the U.S. is about 1 percent, that means per-capita GDP growth was a measly .9 percent.

This is scary stuff. The single biggest indicator of a country’s standard of living is the per-capita GDP average growth rate over the long term. There have been plenty of times when recessions put GDP growth way below average. But typically during the immediate-post-recession period, GDP growth skyrockets, making up for the negative growth during the recession. For example after the deep recession of the early 1980s, GDP growth shot up to 8 percent.

Yet now, post-recession (nominal) growth has been 2 to 3 percent. That’s way too slow to bring up our average economic growth rate to historical levels.

It can’t be emphasized enough how important long-term GDP growth is. It is what separates first-world countries from third-world countries. The difference between 2 percent and 3 percent GDP growth may not sound like much, but over the long term, it really adds up. Over 40 years, growing 1 percentage point higher means 50 percent higher per-capita income.

A seemingly small difference in GDP growth really manifests itself when comparing per-capita income of the United States vs. western Europe.  Some 30 years ago per-capita income was about the same. But since that time U.S. GDP growth has been slightly higher, as Europe’s massive welfare state has taken its toll. That has resulted in big differences in per-capita income; in 2010 it was $47, 200 in the U.S., whereas in Germany and France it was $36,000 and $34,000 respectively.

Regarding our slow post-recession growth, what’s going on? Obama’s economic policies, no doubt. They’re stifling economic growth, at at time when it should be flourishing. In a word, Obama is making our economy more like that of slow-growth, massive-welfare-state Europe.

The trillion-dollar “stimulus” has been a big stifler. It’s the same sort of policy that Japan tried during the 1990s in futile attempts to jump start its economic growth. But it only put itself deeper and deeper in debt, with the result that now its living standards are stagnant or falling. See this NYT article on what today’s Japan looks like, after spending itself into a hole, like Obama is now doing for the USA.

Such anemic growth post-recession is unprecedented in modern U.S. history as far as I know. And it’s because we have a president whose been successful in implementing a growth-inhibiting agenda, mainly such huge government spending. It just goes to show that government spending doesn’t spur growth. Keynesianism, as they call it, is unfortunately alive and well, but it only results in sickness.

 

Can I Start the Job When My Unemployment Benefits Expire?

 

Yep, Obama’s economy is here. Employers are having difficulty hiring because people would rather stay on unemployment than work.

See this article. It’s stark evidence that the unemployment rate goes down when unemployment benefits run out.

Chris Pompeo, vice president of operations for Landscape America in Warren, said he has had about a dozen offers declined. One applicant, who had eight weeks to go until his state unemployment benefits ran out, asked for a deferred start date. “It’s like, you’ve got to be kidding me,” Pompeo said. “It’s frustrating. It’s honestly something I’ve never seen before.”

There are a lot of things we’ll start seeing that we’ve never seen before, now that Obama is here. And little of it’s good.

Obama and the leftist majorities in Congress keep passing extensions of unemployment benefits. Will they do so indefinitely? We seem to be getting the Euro-sclerosis-like structural unemployment where the unemployment rate is so high because government benefits are so lavish. (Note: the word “generous” is normally used there, but when you’re lavish with other people’s money, that’s not generosity. It’s only generous when you give away your own money.)

As in Europe, people choose to be a ward of the state rather than work.

For more on this, see the Nov. 9, 2009 entry below: “More Unemployment Benefits = More Unemployment”.

A Love-Hate Relationship With Spending. And Spending Wins Out.

I’m no stand-up comedian, but I can’t help but run by you this one: Washington Post syndicated columnist David Ignatius is crying out, Spending, No! Obamacare, Yes!

(Audience laughter.)

Yes folks, Ignatius is positively appalled by the U.S. government’s massive spending sprees, and desperately wants someone to do something about it. But first, there’s just one little thing he’d like the government to do: put through the most massive spending spree in the history of the United States.

He does add the caveat that it would be great if the politicians would arrange it so that Obamacare cuts costs – i.e. results in less government spending. (At first his article seemed like he was advocating higher taxes to offset the spending, but then he writes “cuts costs”, which by definition means reducing spending.) But if politicians did that, then it wouldn’t be Obamacare. It would be something far, far different from Obamacare – more along the lines of true healthcare reform like substantially reducing healthcare regulations, decoupling health insurance from employers, and instituting health savings accounts for all combined with high-deductible insurance. (Obamacare is the opposite of all that.)

Gotta love all the folks who express shock – shock! at all the gambling going on in the house, and then happily proceed to hit the blackjack tables themselves.

More Revenue = More Spending

In the fall of 2008 during the discussion to implement the $700 billion bank bailout, even free-market types assured us the move would be OK because, as happened in Hong Kong, the money would be paid back to the taxpayers.

They were only half right. The money is being paid back, but not to the American taxpayers. Faster-than-expected repayments by banks is giving the government an estimated $200 billion windfall. Instead of using it to reduce our gi-normous deficit, the Obama administration wants to spend it on a “jobs program.”

So the next time there’s a government bailout, assume that it will result in permanent government spending – even on programs unrelated to the original bailout purpose.

Another lesson learned: Whenever the government gets extra revenue, it most likely will spend it rather than reduce the deficit with it. That means raising taxes will result in more government spending.

Another case in point was the SCHIP program during the late 1990s. Extra tax revenue and a smaller deficit prompted the Clinton administration to start a new entitlement program, rather than pay down the debt or cut taxes.

People who think they’re being fiscally responsible, like New York Times economics columnist David Leonhardt, want to raise taxes in order to pay for our unprecedented government spending. But that’s fiscally irresponsible, because once the government gets its hands on any extra tax revenue, it will spend even more.

More Unemployment Benefits = More Unemployment

One of the biggest differences between liberals and conservatives is that the latter have a better understanding of human behavior than the former. Take unemployment benefits. The longer they’re in place, the longer people go without jobs.

Many if not most recipients would rather keep collecting that free money rather than accept a job that pays lower than their previous job, or that has a tough commute, or that they wouldn’t particularly enjoy compared with the laid-back life at home.

Don’t believe it? Then look to none other than Larry Summers, the director of the National Economic Council under President Obama, who co-authored a paper in 1995 titled “Unemployment insurance lengthens unemployment spells.” He’s an anomaly among Democrats – someone who actually does understand that aspect of human behavior.

President Obama’s apparent lack of understanding thereof is getting him into trouble politically. As explained by columnist and economist Alan Reynolds, it’s no coincidence that the lengthening of unemployment benefits to an unprecedented 79 weeks in more than half the states is resulting in a 10.2 unemployment rate.

To be sure, it’s OK to have unemployment benefits for a certain amount of time to help people get back on their feet. But when they go on for too long, human nature dictates that persistent high unemployment is the end result.