Opposing Goals: Budget Deficit Reduction vs. Expanding the Economy

Reading news about reducing the federal deficit may leave you thinking this is a black and white issue. But the budget is part of the economy. Whatever is taken from the budget ultimately comes out of the larger economy. To further complicate the issue, we are setting up opposing goals. One goal is to grow the economy out of recession. The other goal is to tackle the deficit with a plan that will shrink the economy. It seems at least one goal is doomed to failure. If you look at my earlier post on the Great Depression, you see the lesson of history; the recovery will be jeopardized.

The House deficit reduction proposal is now $6T over ten years. This means shrinking the economy $600B every year for ten years. Further, the House budget targets domestic spending. This will mean federal lay offs. This will in turn mean other layoffs as the economy shrinks. Further, money for programs which would have been spent in the economy will also be gone. We don't know the harm that will be done by taking money from education, our seniors, etc. We really don't know what the ripple effect will be to shrink the economy $600B per year.


The House budget does reduce taxes to stimulate the economy. But can we really expect business to both pick up the slack of $600B a year for ten years and also expand while the economy shrinks in order to take advantage of tax breaks? Even if a business wants to expand, how likely is a bank to make a loan during a down economy? This is wishful thinking.

The President's budget may possibly work. According to his plan, the deficit will be reduced $4T over 12 years ($300B per year). Already this is a smaller hit on the economy by half. Further, $1T will be saved by lowering interest payments. Another $1T is made up for by increasing revenue by eliminating the Bush era tax cuts. Now we're down to a $150B annual hit on the economy. What works for me is federal layoffs are reduced. Layoffs may even be eliminated since the social engineering of the House budget is not in the President's budget.

To my mind this is more palatable. It will still shrink the economy but might be manageable. We might still get through the crisis without seriously damaging the recovery. The matter of a fine point is I have been unable to find these budgets. At this time, I can only write about what I can find in the media.

Dad's Investment Thoughts

When I was entering my teens, my mother was interested in investing. She bought some stocks. We did not get rich. In those days, the mid fifties, the Great Depression happened, as it were, just yesterday. People knew money could be made in the stock market. They also knew the market was a gamble. No one bought stocks unless they had a little money they could risk losing. No one risked retirement income in the stock market.

Now this was also the time when there were tales of people buying Xerox or IBM in the thirties and ending up millionaires. I frankly don't recall these stories as much more than urban legends. Yet they persisted. I even dated a young woman during college who bought Sears Roebuck stock with part of her pay because of the story of a woman retiring from Sears with $1M in stock. Yet during this time people still considered stocks as too risky to be counted on for retirement. If they increased in value, that would be gravy. Pension funds and Social Security were the meat and potatoes of retirement.

What changed? About the eighties, the Hippie generation became the Yuppie generation. We had come through the inflation of the late seventies and realized having a lot of money was a good hedge against inflation. We were starting families and wanted our children to be economically secure. We also didn't want to depend on just a pension check and Social Security if inflation reared it's head again. About this time, companies wanted to secure good corporate officers and tie them to the company they headed, as well. Companies petitioned the government to allow the formation of IRA accounts. These were tied to the company's stock. If a CEO wanted to increase the value of his or her holdings, s/he had to grow the business.

Somewhere in all of this, lower level managers and workers wanted to set up IRA accounts. It was well known that diversification was a good hedge against stock fluctuation. These new IRAs' used mutual funds to simplify diversification. As you can imagine, Wall Street was all over this idea. They had long wanted the billions in Social Security. The IRAs' were a great access point to the money set aside for retirement. They could continue the fight to get Social Security money turned over to them, as almost happened during the last Bush Administration. In light of the meltdown in 2008, that was a catastrophe narrowly averted.

Now consider being at retirement age in 2008. Pensions are gone, long ago converted to IRAs. The IRAs lost value in 2008 and have yet to regain their value. That leaves Social Security. It is not a pretty picture. If you lost your job just before retirement, you're in even worse condition. While there are recommendations to raise retirement age for Social Security, the reality is if you're an older worker, it is difficult to get a job. It is interesting those making this recommendation are mostly retired law makers and not dependent on Social Security. I wonder if they'd be willing to give up part of their Congressional retirement to help out Social Security.

So this brings us back to the economic philosophy of my parents' generation. They weren't smarter than us. They simply lived closer to reality. Their philosophy was pragmatic. Invest in the market only if you can adjust to the loss of the money invested. Don't put your retirement into the market. It may not be there when you need it. Just ask any boomer getting ready to retire if this is so. When I hear a financial planner talk about IRAs' and stocks, I wonder how closely s/he examined their recommendation, if at all. They parrot the accepted investment philosophy. Do they really understand what they are recommending as they continue to advocate the same policies that brought about the current financial crisis?

The current crisis happened because the captains of business ignored basic business practices. They bought out Congress and changed the rules that made our economy the envy of the world. Then they bought the tax structure that shifted the tax burden from the wealthy to the average American. In the wake of the devastation Wall Street brought on the nation, Wall Street continues to advocate the same policies! There is a saying that continuing to do the same thing while expecting different results is insanity.

One last point. The talking heads complain Americans don't save enough, particularly for retirement. This point of view needs perspective. Since the eighties, middle class income has been in decline. There is less money to save after expenses are paid. Expenses are, well, more expensive. Commuting, health care, heating, the list grows every year. Consider health insurance. More of the cost is shifted to the individual. Co pays are also rising. Health insurance is more expensive and the money spent buys less coverage. It can cost $5,000.00 a year for coverage that doesn't kick in until an additional $5,000.00 is paid out. How many people can save for retirement when paying out $10K a year just for health care? Especially when fully 50% goes into the deep pockets of the health insurance industry. I would love to have a group of people pay me $5k a year with little expectation of even a reasonable return. Actually, I would have pangs of conscience. Can health insurers say as much?

Another condition to encourage savings is a decent rate of return. The rate has been under 1% for many years, even during the good times. The rate is so low as to discourage saving. Now examine your situation. You set aside for health care, retirement, perhaps a child's college fund. You pay a mortgage or rent. You pay utilities, food, clothing, taxes and shelter. How do you live? What do you live on? Like most people, you just don't save money you don't have.

So what is my investment philosophy? First, if you can't afford to lose the money, you should not invest in stocks. This is especially true for retirement and college funds. Talk with your financial planner by all means, closely question all recommendations to invest in stocks or mutual funds. If market investments are strongly advised they should be willing to indemnify all market losses. After all, if the market is such a good investment there ought to be a guarantee. Financial planners should be willing to share your risk at taking their advice. (I will be fascinated if you share their response.) Ask about an alternate investment to stocks. Also talk with your insurance agent about annuities and other policies. Finally, look at e-savings. The last time I investigated, admittedly a while ago, the interest was above 6%. When I mentioned e-savings to my bank, they brought out a packet for their version of e-savings. Funny they don't advertise the program. Remember, even financial instruments offered by insurers are dependent on the stock market. There are o guarantees. Your own prudence is what should govern investing, not the current fad of mutual fund IRAs'.

Here is an interesting discussion about stock investments on Ted.com by Halla Tomasdottir of Iceland. http://www.ted.com/talks/halla_tomasdottir.html

Addendum: Listening to radio reports, I am troubled a number of states are contemplating the end of pension funds in favor of stock market based retirement plans. It is certain financial institutions are encouraging this change and likely lobbying for it. The boldness of their action in this economy is stunning.

On a brighter side, I speak with more and more people who are moving retirement funds out of stocks. Many are young adults who see their grandparents struggle because of the stock market. Others are adults with IRA's and 401K's who lost money in the stock market. This seems to be a growing trend and one I applaud.

Government and Business: Myth vs, Reality

Government and Business: Myth vs. Reality

Like most people since Ronald Reagan, I accepted as truth that government is the biggest obstacle to business, a sound economy and full employment. What got me thinking about this happened during the health care debate. I was at a seminar about health care when a woman got up and said she was afraid of the government running health care because the government can't do anything right. No one could answer her. That bothered me because the charge just didn't make sense. It was way over the top not fair and balanced.
The first thing that came to mind was health care. People on Medicare are more satisfied than people with health insurance. Mortality rates, dollars spent vs. value received, on too many fronts the numbers just don't add up. There are too many areas where insurance hasn't kept up with the demands of the market. Here's an interesting link with data and graphs on healthcare around the world. http://www.gapminder.org/ Now, as for government competence, it's not as if only stupid or incompetent people work for the government. What happens when people move from one to the other? It's not as if government workers become smart and competent just by changing jobs and working for a business. Or the other way around, business people don't become stupid and incompetent by taking a government job. It's a big insult to the millions of government workers to say the government is incompetent because that's saying all government workers are incompetent.
As for government being an obstacle to business, think about all of the tax breaks we give to big corporations. Think about leases on federal land and about government contractors. Let's look at some quick examples:

• We all know oil companies receive tax breaks to search for and drill oil wells. Why is this when the oil companies are making record profit? http://go.ucsusa.org/publications/report.cfm?publicationID=149
• What about farm subsidies that are given to agribusiness while family farms struggle to survive?

From a Congressional Budget Office report

• Corporations even get federal money to take our jobs overseas. http://www.eagleforum.org/column/2007/may07/07-05-02.html
• Then there are the mineral rights on federal lands sold to mining companies. A lot of these prices were  set in the 1800's! Reform efforts have been blocked by both parties. http://en.wikipedia.org/wiki/Mining_law
• And contractors like Xe (formerly Blackwater) wouldn't even exist without federal money? All of their riches, weapons, espionage material, even personnel come courtesy of the U.S. taxpayer. http://en.wikipedia.org/wiki/Blackwater_USA

While this list barely scratches the surface, it represents billions of taxpayer dollars. How would business even exist without government? Government gives them roads, police, fire protection, even a legal structure to operate in; not to mention that government educates most of the people that business hires. While business uses more infrastructure than the average citizen, infrastructure it depends on just to exist, it doesn't want to pay it's fair share of the cost to maintain infrastructure. Talk about free ride! You'd think they might want to give some of those federal dollars back for the services they take for granted. Besides, if government supposedly doesn't support business, why is so much corporate money spent on the shadow government, i.e. lobbyists, for these kinds of breaks? It looks to me that government is more a partner to business than an obstacle. What do you think?

You may want to read David Cay Johnston. His book "Free Lunch: How the Wealthiest Americans Enrich Themselves at Government Expense (and Stick You with the Bill)" discusses both corporations and wealthy Americans. A search of  "government ands business" will provide a list of books and articles. A while back I discovered a series in the Wall Street Journal. For the record, my posts are my own thoughts. The graphs and photos can also be found on Wikipedia. If I discuss other information, I will source it.

Government and Business: Myth vs. Reality II

 Bank runs were common throughout the 1800's and into the Great Depression. The Roosevelt Era reform that created the Federal Deposit Insurance Corporation (FDIC) ended bank runs. Although banks failed during our current recession, they did not create much news because the FDIC functions so well. This is another fallacy disproven, namely that government is incompetent.  (from http://en.wikipedia.org/wiki/The_great_depression)

I get really frustrated listening to the news. I have never heard, seen or read an interviewer challenge anyone to back up statements that only business creates jobs and drives the economy. Yet in living memory, during the Great Depression government created jobs with the WPA, CCC the TVA, etc. These programs filled the vacuum left by private enterprise. Millions of Americans were directly hired by government and indirectly in partnership with private enterprise. There was no regulation outside the Sherman Antitrust Act, most businesses provided no benefits. There were no taxes for the vast majority of Americans!  Yet unemployment was 1/3! That is, one in three Americans actually held a job. Where was business? It was not creating jobs to take us out of the Depression. It was laying off.

Today, businesses say they need lower taxes and no regulation to create jobs. How can they even say this with a straight face? Depression era business had these advantages, and the government still needed to bail them out! The lack of taxation and regulation created anarchy in the economy. Only federal jobs creation prevented the anarchy from spreading to the streets. Only federal jobs creation prevented fascism, which was taking hold in Europe, from spreading to the United States. Business has two criteria for jobs creation. First, there must be a need. Second, there must be an opportunity to make a profit. Government doesn't need to make a profit. In the thirties government funded the jobs that needed doing.

In 1937, the Roosevelt Administration and Congress decided to begin paying down the national debt. As a result, the economy began falling back into anarchy. After eight years, business still couldn't carry the load. What finally pulled us out of the Great Depression was government, again. Massive government spending in WW II finally ended the Great Depression. It was the government that ended the Depression. Business was helpless.

The overall course of the Depression in the United States, as reflected in per-capita GDP (average income per person) shown in constant year 2000 dollars, plus some of the key events of the period.[33]

When you enlarge this chart, you see the effect of trying to pay down the deficit. In 1938, the blue curve falls off as GDP per person drops. This is where the economy began to move back to anarchy. (From http://en.wikipedia.org/wiki/The_great_depression )

 After WW II, we had a stable economy until the eighties. When President Reagan began dismantling Depression Era regulations, the economy sank into recession. It was the worst since the end of WW II. As we derugulated, the economy see-sawed from bigger bubbles to even bigger busts. It was economic hedonism with the rich transferring their tax burden to the middle class and poor. They are wealthy at our expense. We need taxes and regulations for a fair and balanced economy.

Look at our current Great Recession. Other economies are doing better than ours. Canada and Europe tell us it's because they kept their regulations in place. Those economies doing less well mourn their own deregulation. Other nations, China, Russia, Brazil, Argentina, etc. are also examining unregulated capitalism. All of these nations are working with their business communitites provide a dynamic capitalism like ours after WW II and into the eighties. Our model, the Roosevelt model of capitalism, works better than any before or since. We risked everything when we trashed it. Returning home to Depression Era regulations and taxation with restore a fair and balanced economy.

Government and Business: Myth vs. Reality III

After accepting a statement such as, "government hurts business", as fact it can be startling to consider whether it's even a true statement. As I examined the statement, I was totally surprised to realise I lived during the most dynamic period of peacetime government market action in U.S. history. In 1958, the USSR launched the Sputnic satellite. I remember going into the crisp, fall evening with family and neighbers to glimpse a light racing across the dark sky. We were mesmerised! This event forever changed our lives when President Eisenhauer formed NASA in 1958. The President created an entirely new industry, aerospace.

National Aeronautics and Space Administration





NASA seal





NASA insignia


Motto: For the Benefit of All


The inaugaration of a new president, John F. Kennedy, shifted the world into a new gear. President Kennedy challenged the country to send men to the moon and bring them back before the end of the decade. That challenge in the early sixties, in partnership with private enterprise, put a generation of Americans into good paying jobs. Government gave us the challenge and financed it. We enjoy continued benefits from that partnership. Todays computers became more powerful and useful because of federally financed research that accelerated with NASA. Today's technological marvels can all trace their birth to the seed money and needs dictated by NASA. Tax dollars funded the beginnings of the new aerospace industry, just like they funded our roads and bridges infrastructure. The needs of government laid the foundation for todays businesses to thrive. Only after government funded the heavy lifting did private business go into space.

Federal research funded and founded the internet. The number of businesses that rely on the internet is astounding. How would your life be without the internet? It's not just the way you use your computer, it's also your cell phone. And what about your GPS? It relies on satellites put up by the government. I'm sure you can come up with your own list of benefits from government and taxes. These changes would have come about in time. But would we have come so far and fast without government "intervention"? It's a sobering thought.

*********

Let's return to market regulation before we finish. We hear a lot about the "invisible hand" that moves markets. It's like the Hand of God is guiding our commerce. In fact, many people seem to believe just that when talking about markets given the way markets are discussed. In actuality, the better description is one of mob rule. When a business or financial market is profitable a mob forms and there's a riot of buying into that business or market. Once too many people overprice the business or market, the mob runs away. This is a lawless enterprise. It leaves room for lawless action in the markets. Think Bernie Madoff and Key Lay. And these are the tip of the iceberg. How many got away? Regulation brings law and order into markets. We know businesses need management. Doesn't it make sense to manage markets, too?

I've exploded the myth about business. government, regulation and taxes. Please share your insights.

Corporate Power and Government

When I began blogging about the mythology of government interfering with business, my son sent me this perspective. "Government in its present form is dependent on big business dollars for it's existence. I think international corporations that exist beyond political boundaries and the dollars that they spend are in tighter control of the government then we the people who elect those very officials. This can be seen in Oil, and Tobacco, and the lack of any infrastructure to support electric vehicles. Where are the subsidies in support of wind farms? Solar power? Why are we so invested in using corn as a source for alternative fuel? etc. etc."

I believe the problem is like the elephant in the living room. Everyone sees it. Everyone walks around it. Everyone pretends it's not there. That elephant is corruption. We all know about the shadow government of lobbyists. They raise huge amounts of corporate money for election campaigns. The money they raise buys them access to elected officials. They control the economy because of the revolving door between Wall Street bankers, particularly Goldman Sachs  I had a professor who graduated from the college where he taught, He called it intellectual incest. We have economic incest in this country. We all know that incest raises the incidence of abnormalities. We have seen many abnormalities in the economy since deregulation. Yet the Wall Street bankers still call the shots. It's hard to ignore the money they represent. Recall how easy it was for bankers to receive TARP money while the auto makers had to beg for for help. The auto makers represent real jobs where people make real things. Wshouldn't feel sorry for them. They are also part of the shadow government.

I could give a laundry list of Washington lobbyists and the special breaks they receive. I'm sure you could fill in a lot of the gaps, too. The way they work is hardly a secret. Just look at the battle over health care since it was proposed by that great Progressive Republican, President Theodore Roosevelt over 100 years ago. But it's not just the shadow government lobbys, it's also the recent Supreme Court ruling on election spending. The conservative, original doctrine Constitutionalists on the court created an entirely new class of "corporate" citizen. There is no artificial person mentioned in the Constitution. Since 85% of the population agree the Supremes got it wrong, I wonder just how much corporate money interests influenced this decision.

Corruption. We really need to talk about this elephant named Corruption. The government set up by the Constitution is balanced among three branches. It does not also balance today's large corporations and the way they spin the news to push their own agenda. Unfair, unbalanced news destabilizes government. Most people can cite their own examples so I need not get into them now. While corporate news outlets are a major problem, we can't overlook the system itself.

I like to believe most people go into politics to help their fellow citizens. Others, like the current crop of "retired", wealthy CEOs' may be open to question. Regardless, it takes a lot of money to run a campaign. Fielding rich candidates doesn't resolve the problem. Campaign finance reforms haven't worked as intended for a variety of reasons. Mostly, however, when one door to the big corporate donors closes, another one is found. Barak Obama's appeal to small donors made a huge difference in his campaign. I wonder if it will be a reliable model for future campaigns. Even when people make small donations, there is still the problem of media and ballot access. Agenda driven media limits access by definition.

As for ballot access, the two main partys raise the bar for third party candidates while keeping it low for themselves. It takes more signatures for a third party candidate to get on the ballot than it does for main party candidates. Once on the ballot, it is not a gimme they will even be part of a debate. Ross Perot bought his way. Ralph Nader, even with significant name recognition, couldn't get into the debates. This is unfortunate as most third party candidates bring substance and new perspectives to voters' attention. I recently decided that voting the two major party candidates is like the definition of insanity where you do the same thing over and expect a different result. We seesaw between the two major partys and gridlock just gets worse every election cycle. The only way to break gridlock is to vote in new people who really are independent of the major party leadership and not dependent on corporate money to stay in office. It may be our only choice to end political corruption.