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Archive for the ‘Deficits’ Category

California Taxing and Regulating Itself into Bankruptcy

Posted by Steve Markowitz on October 26, 2015

Victor Davis Hanson published a piece in the nationalreview.com titled “Can California be Saved?”.  This article offers a clear indication that California is a canary in the mine for the social and economic decay in America.  Hanson shares the following facts for the State:

  • Los Angeles’s violent crime is up nearly 21% for the first half of 2015 with an 11% increase in property crimes. One cause is California’s Proposition 47 passed in 2014 that released thousands of prisoners.  Proposition 47 was an attempt by California to its costs for the prison system.  Costs may be down, but crime is skyrocketing.
  • California is in the fifth year of a significant drought. This could be alleviated had the State followed through with a new reservoir system approved under California Water Project.  Lack of funding caused projects to be unfinished.
  • California’s traffic accidents have increased by 13% during in last three years. A significant cause is deteriorating roads that are not properly maintained.  It is hard to imagine why a state that includes some of the highest taxes in the country cannot repair its own roads.
  • California is awash with natural resources, yet its gasoline and electricity costs are amongst the highest in the country. Progressive policies inflicted by wealthy liberals who can bear these expenses are the cause.  However, these high costs devastate lower income brackets, a typical unintended consequence of Progressive policies.
  • Approximately 33% of America’s welfare recipients reside in California with nearly 25% of the State’s residents falling below the poverty line. This is unconscionable considering where that state was economically just a few decades ago.

Who is responsible for this sad state of California’s economics?  It is politically expedient to blame the wealthy or nasty conservatives.  However, given that many of the wealthy in California are liberals and all major government offices in the State are controlled by Democrats, this dog just doesn’t hunt.

California can be considered one of the great experiments for American Progressives.  Liberal politicians promised to fix societal ills with all sorts of interventions.  The fact that these ills are larger today than when the liberals started their experimentation and have spent trillions implementing the policies is proof they failed.  In addition, a significant portion of these poorly spent funds were but a form of crony capitalism, benefiting the social services, education and other industries

Adding insult to injury, Progressive policies distorted the economic diversity of the State.  Those considering starting businesses are likely to leave California in search of more business friendly environments.  Those wanting to build wealth for their families moved to states with less aggressive tax policies.  In addition, immigrants found California’s easy to obtain social benefits and naturally matriculated to this environment.  The result; California is top-heavy with those who being pulled in the cart then those pulling it.  The cart is now being bogged down in a quagmire.

California needs to change its political and economic ways if it is to remain solvent.  Before a plan can be created to implement change, it is necessary that the State become introspective and ask why and how California has deteriorated so much over the past five decades.  The answer will be painful for many.

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America’s Disintegrating Financial Condition

Posted by Steve Markowitz on October 29, 2013

Only those who believe in alchemy can come to the conclusion that America’s financial trajectory is sustainable.  Both political parties have been responsible for the exploding US debt and deficits.  While the constituents who they pay off with the printed (borrowed) money have been different, this is agnostic to the damage deficit spending has caused to the Country’s economic health.

No matter who has been in office, presidents and their allies in Congress make excuses for the reckless spending.  Often Republicans will justify this action based on national security.  Democrats, on the other hand, feed their pets entitlement programs.  Both are but excuses to redistribute wealth in favor of the constituents who will keep the politicians in power.

As shown in the graph below we are in a death spiral of deficit spending.  Each president’s deficit spending creates a greater need for future spending.  This reality has led to Barack Obama to become the largest deficit creator in US history.  While Republicans rail at the current deficits, there was not a peep out of them when they controlled both houses of Congress and were led by President George W. Bush and his reckless spending habits.  Those now calling for controlling America’s debt spending do not discuss the pain such a process would cause in the short to midterm.  This omission is so grotesque as to be disingenuous.

American politicians in both parties have a vested interest in continuing the deficit spending.  By borrowing from future generations they have the ability to hand out “gifts” to their constituents, the key to their remaining in power.  The only answer to this political reality is a balanced budget amendment.  Only then can scarce resources be distributed in a democracy without robbing from future citizens.

Jon Gabriel’s recent article titled The Reality of America’s Finances is posted below to further this discussion.

The Reality of America’s Finances, By Jon Gabriel

When Washington raised the debt ceiling this week, the Beltway media breathlessly reported that the fiscal crisis had ended.  Lawyers danced in hallways, bureaucrats twerked on the Metro, congressional aides kissed strangers in the streets – the Tea Party has been defeated!  It was like VJ day for wonks.

As our political class exchanged high fives and reporters praised a return to “sanity,” I wondered how these odd creatures defined insanity. 

America’s fiscal crisis is not that our debt ceiling was too low, the fiscal crisis is that our debt is too high.  When I mentioned this to left-leaning folks, they seemed indifferent.  “Obama lowered the deficit.”  “I think Bush spent more.“  “It’s Reagan’s fault!”

So I made this infographic: 

America's Finanace

Since most graphs look like this, I focused on just three big numbers: Deficit, revenue and debt. 

The analogy is imperfect, but imagine the green is your salary, the yellow is the amount you’re spending over your salary, and the red is your Visa statement.  Then imagine your spouse runs into the room and shouts, “great news honey, our fiscal crisis is over.  We just got approved for a new MasterCard!”  Your first call would be to a marriage counselor or a shrink.

The chart is brutally bipartisan.  Debt increased under Republican presidents and Democrat presidents. It increased under Democrat congresses and Republican congresses.  In war and in peace, in boom times and in busts, after tax hikes and tax cuts, the Potomac filled with red ink.

Washington likes to talk about sustainability.  Forget sustainable – how is this sane?

Yet when a conservative hesitates before raising the debt ceiling, he’s portrayed as a madman.  When Paul Ryan offers a thoughtful plan to reduce the debt over decades, he’s pushing grannies into the Grand Canyon and pantsing park rangers on the way out.

Since posting this chart to Twitter, the reaction has been intense.  Some on the right think I’m too tough on the GOP while those on the left say it doesn’t matter or it’s all a big lie.  Others tell me that I should have weighted for this variable or added lines for that trend.  They are free to create their own charts to better fit their narrative and I’m sure they will.  But the numbers shown above can’t be spun by either side.

Math doesn’t care about fairness or good intentions.  Spending vastly more than you have isn’t good when done by a Republican or a Democrat.  Two plus two doesn’t equal 33.2317 after you factor in a secret “Social Justice” multiplier.  And if our current president accumulates debt at the rate of his first four-plus years, the national debt will be $22 trillion by the time leaves office.

So post this chart to Facebook, Pinterest or on your local grocery store’s bulletin board.  If enough people see it, maybe – just maybe – those who want to increase the debt will be viewed as the “crazy” ones.

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Obama Claims Raising Debt Ceiling does not Increase Nation’s Debt

Posted by Steve Markowitz on September 25, 2013

ObamaBarack Obama is known to be an eloquent speaker.  At the same time he is prone to make statements that do not meet the smell test of reality.  Last week, while speaking at day Business Roundtable headquarters in Washington, DC, the President took this separation from reality to a new level saying:

“Now, this debt ceiling – I just want to remind people in case you haven’t been keeping up – raising the debt ceiling, which has been done over a hundred times, does not increase our debt; it does not somehow promote profligacy.  All it does is it says you got to pay the bills that you’ve already racked up, Congress.  It’s a basic function of making sure that the full faith and credit of the United States is preserved.”

This statement is so outrageous that it brings into question either the President’s intellectual capabilities or the degree of honesty that he speaks to the people he is supposed to be working for.  Creating spending programs that include his $787 billion stimulus package and new entitlements programs including Obamacare have real costs.

Raising the debt ceiling to pay for them and the interest on previous commitments raises the nation’s debt.  Anyone with a basic understanding of finance is in touch with this reality.  It is only the knuckleheads in Washington who live in alternative universe.

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Federal Workers Lobbying Congress Concerning Potential Fiscal Cliff Deal

Posted by Steve Markowitz on November 21, 2012

The Nationaljournal.com posted an article at the heart of America’s deficit problem.  A group called the Federal-Postal Coalition that represents two dozen federal employee unions is lobbying Congress to spare its members from any budget cuts agreed to in negotiations to forestall the so-called Fiscal Cliff.  A Coalition letter to Congress states:

Federal and postal employees and their families are hardworking, middle-class Americans who are struggling during these tough times just like other Americans.  No other group has been asked to financially contribute the way they have, and it is time our nation’s leaders found other ways to reduce the deficit than continually taking from those who have dedicated their lives to public service.”

These letter is incredible.  There are many “hard-working, middle-class Americans who are struggling”.  Many have “been asked to financially contribute” to their businesses’ problems.  As for “dedicating their lives to public service”, given the pay scales and benefits offered government employees, that dog no longer haunts

This stance by the federal employees’ unions exemplifies the real fiscal challenge facing the United States, as well as other Western countries.  The issue is not complicated.  No group wants to or is willing to give up their piece of the pie.  Asking politicians in Washington who retain power by serving special interest to cut cost is like asking an alcoholic to manage a liquor store.

If the Country is truly desirous and willing to attack its fiscal crisis that was decades in the making, the pain will have to be spread across all sectors of society including those that are receiving from the government and those are paying into it.  That requires less benefits and entitlements, as well as overall government spending, and yes, higher taxes.  A good place to start would be the bipartisan Simpson-Bowles recommendations.

President Obama ran for office promising to take care of government workers and his union buddies.  Given that this promise cannot be fulfilled, it will be interesting to see how the Teflon president handles this matter.

Posted in Deficits, Unions | Tagged: , , , , , | 2 Comments »

Defining the Fiscal Cliff

Posted by Steve Markowitz on October 25, 2012

The term “Fiscal Clift” is being used to give a face to an impending self-inflicted economic crisis that will occur in 2013 should the politicians in Washington not act on the budget.  Beyond general comments that this will lead to increasing taxes and lower government spending, specifics are not often not discussed.  Economist John Mauldin this week posted The Perils of the Fiscal Cliff that succinctly explains the issues.

In 2011 the Republican Congress and President Obama were at odds over the budget.  The President wanted to raise taxes on wealthier Americans to cut the deficit and Congress demanded spending cuts.  Both sides took the disagreement to the brink that could have led to America stop paying on its debt obligations to bondholders.  At the last minute a half-baked compromise was reached and in typical Washington form they kicked the can down the road.  A Congressional committee was set up with members of both parties tasked with coming up with a compromise budget with the caveat that if they did not succeed within a certain time period draconian tax and budget cuts, especially for defense, would automatically occur.

The bipartisan Congressional committee failed to reach agreement.  As Mauldin points out, without Congressional action this will mean a $650 billion hit to the economy next year as follows:

  • $265 billion with the end of the Bush tax cuts, $55 billion will come from Obama’s “millionaires and billionaires” and $210 billion from others.
  • The automatically cuts from debt-ceiling deal that will be about $160 billion, of which $110 billion will come from sequestration, mainly from defense.
  • About $140 billion with the end of the 2% Social Security tax break and extended unemployment benefits.
  • Another $24 billion from a tax increase on wealthier Americans required under Obamacare.
  • The temporary fix of the Minimum Tax expires that will increase taxes by about $105 billion.

While arguments can be made as to whether each action is fair or appropriate, the economic realities are not.  The removing of $650 billion from the US economy while it is so weak will have serious economic consequences.  This equals about a 4% drop in GDP while the economy is only currently growing at about a 2% rate.  The would mean that the economy would contract by about 2%, i.e. a serious recession.

Both political parties own responsibility for the problem.  It has occurred not because the people in Washington are inherently bad.  Instead it results from a corruptive system the rewards politicians (reelects them) based on promises and handouts offered to the electorate, no matter how outrageous.  Resolution of this systemic problem requires only two relatively straight-forward actions: 1) term limits for the Congress and Senate and 2) curtailing Congress from spending annually more than the revenue the Country brings in each year.  It is telling that neither party advocates these actions.  For such common sense Tea Partiers are called radicals.  It does not take a great deal of imagination to determine who promotes that narrative.

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US Deficit Must be Addressed

Posted by Steve Markowitz on October 23, 2012

Much of America’s attention is understandably focused on the upcoming presidential election.  However, the outcome either way, will not change the serious economic issues that America faces.  Whether either candidate chosen is willing or able to address the unsustainable deficits will determine the long-term economic vitality of the Country.

Earlier this year an important op-ed was posted in the Wall Street Journal titled, The Magnitude of the Mess We’re In.  It was penned by four notable economic experts who are fellows at the prestigious Stanford University’s Hoover Institution; George P. Shultz, Michael J. Boskin, John F. Cogan, Allan H. Meltzer and John B. Taylor.  They also served in various government policy positions in the Treasury Department, the Office of Management and Budget and the Council of Economic Advisers.  Their warning included: “The next Treasury secretary will confront problems so daunting that even Alexander Hamilton would have trouble preserving the full faith and credit of the United States”:

  • Federal government spending now exceeds the 2007 level by over $1 trillion annually.  However, during the same period government revenues remained nearly unchanged.  Since 2007 the federal budget deficits have been, $1.4 trillion in 2009, $1.3 trillion in 2010, $1.3 trillion in 2011, and another $1.2 trillion estimated for 2012.  This four-year increase alone amounts to a $55,000 for every U.S. household.
  • The raw amount of the debt is only one problem.  As with any debt interest must be paid on it.  The US Treasury holds most of the debt in short-term duration loans.  For example, during 2012 the Treasury will borrow about $4 trillion. Obviously, when interest rates go up United States’ debt burden will rise significantly.
  • While Americans believe foreign governments own much of our debt, there is another sinister issue.  America has been monetizing its debt by having the Federal Reserve purchase it.  For 2012 the Fed is purchased about three quarters of our new debt (Quantitative Easing).  With the Fed buying so much of the debt it has gained control over the economy in ways it was not intended to have.  For example, the Fed gives banks money, effectively circumventing the appropriations process that was supposed to be within the purview of the Congress.
  • The Fed’s policy of low interest rates has significantly cut into the real income of those who have saved for retirement.
  • Under President Obama, the federal debt-to-GDP ratio increased to 80%, about double its 2008 level.  This is a larger percentage increase than Greece had during the same period.  With current projections the total US debt is projected to expand to approximately $19 trillion by 2018.  In addition, the interest costs on it by that year is projected to be $740 billion.  That is more than the Country currently spends on Social Security, Medicare or national defense, and it assumes that interest cost do not increase significantly.  The authors point out that for every percentage point increase in interest rates, the debt service costs increase by approximately $100 billion.

The authors concerns are magnified if unfunded governmental liabilities including Social Security, Medicare, or Medicaid are taken into consideration.  Some estimate that this amount is in excess of $60 trillion.

Through various mechanisms the Fed has printed money.  So far these actions have not created inflation, mainly because of low product and services demand and the fact that banks are not lending money.  Ultimately the Fed’s expansion will have to be unwound.  Historically such actions have led to unintended consequences that likely will include significant amounts of inflation.

Negative consequences from the Fed’s actions already are showing themselves.  The authors point out that various markets including equities no longer respond to real economic activity.  Instead they await the next Fed action.  This has created a negative feedback loop.  When economic activity seems weak, the equity markets head downward until the Fed intervenes with its shot of heroin that then gives the markets a boost.  Not only does this give the Fed too much power, but it distorts the markets which are supposed to govern supply and demand.  While the unintended consequences of this distortion must be left the speculation, they will be significant and problematic as were the consequences of their previous interventions including the low interest rate policies of the late 1990s and early 2000’s.

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Obama’s Deficit Spending Used for his Reelection

Posted by Steve Markowitz on August 5, 2012

President Obama has proven to be a master at spending borrowed money.  During his first term in office he has increased the Country’s debt by over $5 trillion, more than all of his predecessors combined.  This spending promoted his vision for fundamentally changing America by significantly increasing the size, power and scope of the federal government.  However, with all of the spending the economy remains weak and we could be heading into a double-dip recession.

Obama’s deficit spending is not confined to America’s finances.  The New York Times in Record Spending by Obama’s Camp Shrinks Coffers reports that the President’s reelection campaign is using a similar spending strategy.  According to the Times, his reelection team has spent more at this point than any other incumbent running for reelection.  Through June his campaign spent $400 million.  During June alone the campaign spent over $70 million, an amount significantly higher than the dollars brought in during the month, i.e. deficit spending.

What was once a commanding dollar advantage over Romney is now a deficit.  Significantly, most polls still show the race to very close.

President Obama has used failed deficit spending to manage America’s economy.  He has not learned from the experience, using a similar spending approach for his reelection campaign.

Once again the President is proving that problems can often not be resolved by spending.  Should he lose the election, he will likely leave the Democrat Party broke.  He certainly has shown no favoritism when spending other people’s money.

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United State’s Financial Cliff

Posted by Steve Markowitz on August 3, 2012

For years the United States has been on a path of fiscal irresponsibility.  Irrespective of where the funds went or who benefited from the spending, the Country has spent more than it can afford and has been charging future generations for this greedy behavior.  The Country has also made promises for future benefits and payments it cannot afford.  This latter issue involves tens of trillions of dollars that are not included in the Country’s published $16 trillion deficit.

Both political parties are responsible for the financial mess that United States finds itself.  Barack Obama has only accelerated this problem with even greater deficit spending.

Dogmatic Republicans indicate that there can be no increase in any taxes nor will they stand for spending cuts to their pet projects.  Dogmatic Democrats refuse to address the entitlement spending issue, cutting the size of government, and yes also refuse to cut spending on their pet projects.

Ultimately, the bond markets will have their way.  At some point lenders will significantly increase their demand for interest received on loans to the United States.  When this occurs, taxes will increase and services will be cut severely.

The video below offers a simple and concise presentation of the financial problems of the United States.  It helps explain why the politicians in Washington are not able to address the real issues.  No one has ever been elected to office for sharing bad news.

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States’ Deteriorating Finances

Posted by Steve Markowitz on July 31, 2012

Much of the focus on America’s budget problems concerns the federal government which now has on the books about $16 trillion in debt.  However, like the federal government, states are up to their eyeballs in debt with one major difference; states cannot print money.

Earlier this month a non-partisan group chaired by former New York Lt. Gov. Richard Ravitch and former Fed chairman Paul Volker released a report of the State Budget Task Force.  It wasn’t pretty!  The group studied the finances of six states including California, Illinois, New Jersey, New York, Texas and Virginia that together represent about a third of the population in the United States.  The report made the following conclusions:

The threats and risks vary considerably from state to state, but the storm warnings are very serious.  Only an informed public can demand that the political systems, federal, state and local, recognize these problems and take effective action.  The costs, whether in service reductions or higher revenues, will be large.  Deferring action can only make the ultimate costs even greater.”

The State Budget Task Force’s report addresses an issue that can no longer be ignored.  Resolving the budgetary problems of state and municipal governments will not be simple or painless.  Politicians and bureaucrats with similar motivations as those that President Obama would turn over America’s healthcare to have ruined the finances of local and state governments.

Pres. Obama and his Progressive allies wrongfully vilified Gov. Scott Walker for addressing Wisconsin’s real financial problems.  The states mentioned by the Task Force will need to follow Walker’s lead.  There are no other solutions including Obama’s class warfare.

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$1 Trillion of Debt

Posted by Steve Markowitz on July 25, 2012

When the United States runs a deficit, i.e. spends more than its annual revenue, it borrows assets from future Americans.  In times of national crisis like World War II, such deficits are defensible.  However, when deficits are run for the benefit (greed) of a current generation, the act is criminal.  Such is the situation that the United States currently finds itself with the Baby Boomer generation attempting to improve its mature years at the expense of future generations.

As the chart shows, the United States total debt adjusted for inflation was relatively flat through the mid 1990’s.  It has since exploded with on the books debt now at about $16 trillion.

During his presidency, George W. Bush ran what were then historic deficits of up to $400 billion annually.  Since then Barrack Obama has made Bush look like an amateur, running annual deficits in excess of $1 trillion.  Given that deficit spending is stealing from future generations, Obama has proven to be a bigger thief than Bush.

This morning Lee sent in the photos below that help show just how much we are robbing form future Americans.  Multiple the money in the lowest photo by 16 to understand the magnitude of America’s current debt.

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