Many Americans are confused and depressed about the level of spending by President Obama and Congress and are understandably concerned because we have heard few explanations regarding how Obama and Congress intend on paying for all of these “reforms,” other than by increasing the marginal tax rates for the “rich Americans” that can afford to “pay their fair share.” The Obama Administration has boldly proclaimed that the Bush Administration tax cuts will be allowed to expire, the capital gains tax will be increased by 5%, and cap and trade policies will enact a heavy burden on all Americans (including the poor). In addition to the exploding deficits and the mind-boggling increases to the national debt, one must consider the additional consequences that rampant spending will have on everyday Americans. Once such consequence the Obama Administration has not warned Americans about is the upcoming tax that will plague most of us: the taxation without representation created as a direct result of inflation.
A number of economists, business leaders and the CBO (Congressional Budget Office) have addressed the reality that the current unprecedented spending will likely result in an overwhelming amount of inflation. So what does inflation have to do with taxation? We must first look at the concept of inflation and why we are headed down that path to understand how inflation affects taxation.
Milton Friedman described that “inflation occurs when the quantity of money rises appreciably more rapidly than output, and the more rapid the rise in the quantity of money per unit of output, the greater the rate of inflation.” Friedman explained that output is necessarily limited by the available human and physical resources and by the “improvement in knowledge and capacity to use them.” However, the ability of the Federal Reserve to print more money or to make bookkeeping entries that result in the increase in the quantity of money is subject to no real limits. Friedman’s comments are illustrated by the recent developments by the Federal Reserve, Pres. Obama and Congress regarding the printing of $1 trillion (in addition to the purchasing of outstanding government bonds through newly printed money), the multi-trillion dollar spending on the bank bailouts, the auto industry bailouts, the stimulus spending, the overwhelming spending proposals in Pres. Obama’s proposed budget (which would triple the national debt in 10 years), and discussions regarding additional bailouts and stimulus plans. Such questionable actions by Washington bureaucrats make it clear that Washington can only fund such spending through the printing of money. When the Federal Reserve establishes a policy of funding government spending through increasing the quantity of money, the value of the dollar is debased, resulting in higher prices for all products and services and lower buying power for all consumers (your money will buy less now than in the past because it is worth less). As John Maynard Keynes (Obama claims to be adhering to his economic philosophy) stated, “There is no subtler, no surer means of overturning the existing basis of society than to debauch the currency. The process engages all the hidden forces of economic law on the side of destruction, and does it in a manner which not one man in a million is able to diagnose.”
Now to the tax implications related to all Americans. Inflation raises taxes in two ways: (1) increasing the quantity of money in the system forces Americans to increase the amount of money they have in savings or earn in income in order to buy the same amount of goods and services required to maintain their standard of living. Friedman explained, “The people who spent less than their income in order to maintain the purchasing power of their money balances (savings) have given up these goods and services in order that the government could get the resources (arguably for the government’s funding of spending projects); (2) inflation benefits and funds the government by effectively raising citizen’s tax rates. As inflation increases the cost of goods and services, employers are required to increase employee’s dollar incomes. As all American’s incomes are increased, more and more American’s (presumably middle-class Americans) are forced into higher tax brackets resulting in higher tax liabilities for American’s that have less buying power. Additionally, inflation creates higher prices for consumers due to the negative effects it has on corporate income – “Corporate income is artificially inflated by inadequate allowance for depreciation and other costs. On the average, if income rises by 10% simply to match a 10% inflation, federal tax revenue tends to go up by more than 15% - so the taxpayer has to run faster and faster to stay in the same place.” The cumulative effect of such taxation results in taxation without representation and produces damaging effects for each American.
Why would any politician advocate such policies that almost certainly would result in rampant inflation? Perhaps Washington should consult history and the past attempts to implement similar strategies in order to realize such policies end in serious problems. Consider what UK Prime Minister James Callaghan said in a conference in September 1976 regarding government spending to fight recessions – “We used to think that you could just spend your way out of a recession and increase employment by cutting taxes and boosting government spending. I tell you, in all candor, that that option no longer exists; and that insofar as it ever did exist, in only worked by injecting bigger doses of inflation into the economy followed by higher levels of unemployment as the next step. That is the history of the past twenty years.” Do these failed policies PM Callaghan mentioned sound familiar? We must all realize that such policies create the effect of funding government policies through hidden taxation (taxation without representation) that greatly limits economic growth and seriously affect each American’s standard of living.
Monday, March 23, 2009
Thursday, March 19, 2009
Understanding Why Obama and Members of Congress Never Read the Stimulus Bill
Everyone already knows that Pres. Obama and many members of Congress did not take the time to read the text of the $787 billion Stimulus Plan that was passed last month. The real question we must explore is why is it so easy for many of our elected officials to pass legislation spending billions of taxpayer dollars while proudly claiming they didn’t read the legislation? Many people throw this issue to the side and treat it lightly. I believe this acceptance by politicians to pass “emergency” legislation without reading the legislation is a symptom of the greater problem that exists in government.
Before I begin, let’s establish some context and perspective to what our elected officials are doing. Ask yourself what would happen to these individuals in the real world of private industry: (1) a CEO or business executive intentionally fails to read or study his company’s financials and performs no research or fails to consult research provided to him regarding his industry and the affects of certain prospective decisions the CEO is contemplating on implementing. As a result, certain monies from the company are misappropriated due to the CEO’s failure to notice/research/read information related to his business decisions; (2) a lawyer is hired by his client to create an estate plan. The lawyer asks his legal assistant to compile the information provided by the client and draft an estate plan. The lawyer then fails to read the estate plan but informs the client that the estate plan is in place and will be in his best interest to have the plan as soon as possible to ensure his affairs are in order. Ultimately, the lawyer failed to notice the legal assistant omitted certain provisions that would cause the client undue tax obligations. In both scenarios I have described, not only would the CEO and lawyer lose their job/client, they would face possible professional discipline, civil liability and criminal charges as a result of their incompetence and lack of discipline.
Unfortunately, politicians and government entities are held to a different standard and expectation level. This different standard and expectation level explains why the American electorate allows bureaucrats to be re-elected term after term, despite our federal government running dangerously high deficits with no attempts to reform such deficits through a balanced budget. So what is it about a politician, who may have had good intentions when he/she was first elected, that changes internally when they obtain the power of their position that allows them to justify spending OUR money so irresponsibly? Milton Friedman’s principle regarding the “Fallacy of the Welfare State” perfectly explains the dilemma by illustrating the spending and decision-making process using four different scenarios:
(1)It is a natural law that no one spends your money better than you because you have an incentive to spend as little as possible and get as much value as possible from each dollar you spend. (2) When you spend your money on someone else, you have an incentive to pay as little as possible, but little incentive to get as much value as possible from each dollar you spend. (3) Spending someone else’s money on yourself creates a strong incentive to receive high value but no incentive to keep the spending in check. (4) Finally, spending someone else’s money on someone else is the worst of all possible combinations because you have no incentive to keep the spending down and no incentive to take the time to ensure you receive as much value as possible from each dollar you spend.
As Friedman noted, “legislators vote to spend someone else’s money . . . Legislators are inclined to regard someone else as paying for the programs the legislator votes for directly and the voter votes for indirectly. Bureaucrats who administer the programs are also spending someone else’s money. Little wonder that the amount spent explodes. Bureaucrats spend someone else’s money on someone else (Scenario #4 above). Human kindness, not the much stronger and more dependable spur of self-interest, assures that they will spend the money in the way most beneficial to the recipient. Hence the wastefulness and ineffectiveness of the spending.”
Friedman’s insight illustrates why we see politicians constantly passing costly legislation that sounds good on the surface, yet those same politicians never take the time and effort to follow up and ensure the legislation is effectively administered or provide oversight regarding its effectiveness. Hence the modern era of people judging politicians by their intentions, not their results. Obama and members of Congress failed to read the legislation because they knew they would be judged on their intentions, not their results: Who cares if we read the bill if we are spending money on programs that sound good, regardless of their effectiveness or the possible unintended consequences such programs and spending may create.
Let’s apply Friedman’s insight to the most recent scandal: If a bailout of AIG and other banks were really needed, it would be imperative that Congress and the President read the text/language of the bill and be responsible with taxpayer money. Bailouts were allowed under the premise that they would benefit every American by securing our economy. Ironically, the decision by members of Congress and Pres. Obama to not read the language of the bill allowed them to pass a bill endorsing $165 million in bonus payments to AIG employees (many more bonuses are on the way, including Fannie Mae and Freddie Mac) and $20 - $35 billion in bailout funds for overseas banks (admittedly, this issue was dealt with primarily by the Federal Reserve bailout of AIG).
All of this brings me to the hypocrisy and arrogance we witnessed when members of Congress excoriated Ed Liddy, CEO of AIG. Watching members of Congress question Liddy was remarkable. They acted as though they were sinless and had the credibility to pass judgment on private citizens of a company who received bonuses under a contract, when such politicians themselves misused and abused their duties as an elected official when they deliberately chose not to read a bill that effectively cost the American taxpayer $165 million, thus far (with many more bonuses due from bailed out companies this year). We all expect private citizens to accept a retention bonus that is paid to them by their employer but do we expect our politicians to blame and threaten private citizens with 90% taxation for accepting compensation under a contract that those same politicians could have prevented if they had just READ THE BILL they voted into law? Power corrupts and absolute power absolutely corrupts. Perhaps the audacity of arrogance and hypocrisy was illustrated when Senator Dodd indirectly claimed that the reason they didn’t know about the bonus provisions was because they didn’t read the final version of the bill – like that is supposed to be a valid excuse for this mismanagement.
Next time you want to take out a loan or a mortgage and don’t feel like paying it, just tell the company that you didn’t read the contract and that is why you didn’t realize you couldn’t afford it. See how that works out for you. Then again, in this bailout environment, you might just get a bailout for your incompetence. Who will bail out Congress and Obama for their incompetence? Taxpayers for generations into the future. Last question – do you really want to trust Washington to run your healthcare, energy, and our already broken education system when they can’t even manage the details of a bailout or a stimulus plan? Why is there so much faith in government when government consistently fails us?
Before I begin, let’s establish some context and perspective to what our elected officials are doing. Ask yourself what would happen to these individuals in the real world of private industry: (1) a CEO or business executive intentionally fails to read or study his company’s financials and performs no research or fails to consult research provided to him regarding his industry and the affects of certain prospective decisions the CEO is contemplating on implementing. As a result, certain monies from the company are misappropriated due to the CEO’s failure to notice/research/read information related to his business decisions; (2) a lawyer is hired by his client to create an estate plan. The lawyer asks his legal assistant to compile the information provided by the client and draft an estate plan. The lawyer then fails to read the estate plan but informs the client that the estate plan is in place and will be in his best interest to have the plan as soon as possible to ensure his affairs are in order. Ultimately, the lawyer failed to notice the legal assistant omitted certain provisions that would cause the client undue tax obligations. In both scenarios I have described, not only would the CEO and lawyer lose their job/client, they would face possible professional discipline, civil liability and criminal charges as a result of their incompetence and lack of discipline.
Unfortunately, politicians and government entities are held to a different standard and expectation level. This different standard and expectation level explains why the American electorate allows bureaucrats to be re-elected term after term, despite our federal government running dangerously high deficits with no attempts to reform such deficits through a balanced budget. So what is it about a politician, who may have had good intentions when he/she was first elected, that changes internally when they obtain the power of their position that allows them to justify spending OUR money so irresponsibly? Milton Friedman’s principle regarding the “Fallacy of the Welfare State” perfectly explains the dilemma by illustrating the spending and decision-making process using four different scenarios:
(1)It is a natural law that no one spends your money better than you because you have an incentive to spend as little as possible and get as much value as possible from each dollar you spend. (2) When you spend your money on someone else, you have an incentive to pay as little as possible, but little incentive to get as much value as possible from each dollar you spend. (3) Spending someone else’s money on yourself creates a strong incentive to receive high value but no incentive to keep the spending in check. (4) Finally, spending someone else’s money on someone else is the worst of all possible combinations because you have no incentive to keep the spending down and no incentive to take the time to ensure you receive as much value as possible from each dollar you spend.
As Friedman noted, “legislators vote to spend someone else’s money . . . Legislators are inclined to regard someone else as paying for the programs the legislator votes for directly and the voter votes for indirectly. Bureaucrats who administer the programs are also spending someone else’s money. Little wonder that the amount spent explodes. Bureaucrats spend someone else’s money on someone else (Scenario #4 above). Human kindness, not the much stronger and more dependable spur of self-interest, assures that they will spend the money in the way most beneficial to the recipient. Hence the wastefulness and ineffectiveness of the spending.”
Friedman’s insight illustrates why we see politicians constantly passing costly legislation that sounds good on the surface, yet those same politicians never take the time and effort to follow up and ensure the legislation is effectively administered or provide oversight regarding its effectiveness. Hence the modern era of people judging politicians by their intentions, not their results. Obama and members of Congress failed to read the legislation because they knew they would be judged on their intentions, not their results: Who cares if we read the bill if we are spending money on programs that sound good, regardless of their effectiveness or the possible unintended consequences such programs and spending may create.
Let’s apply Friedman’s insight to the most recent scandal: If a bailout of AIG and other banks were really needed, it would be imperative that Congress and the President read the text/language of the bill and be responsible with taxpayer money. Bailouts were allowed under the premise that they would benefit every American by securing our economy. Ironically, the decision by members of Congress and Pres. Obama to not read the language of the bill allowed them to pass a bill endorsing $165 million in bonus payments to AIG employees (many more bonuses are on the way, including Fannie Mae and Freddie Mac) and $20 - $35 billion in bailout funds for overseas banks (admittedly, this issue was dealt with primarily by the Federal Reserve bailout of AIG).
All of this brings me to the hypocrisy and arrogance we witnessed when members of Congress excoriated Ed Liddy, CEO of AIG. Watching members of Congress question Liddy was remarkable. They acted as though they were sinless and had the credibility to pass judgment on private citizens of a company who received bonuses under a contract, when such politicians themselves misused and abused their duties as an elected official when they deliberately chose not to read a bill that effectively cost the American taxpayer $165 million, thus far (with many more bonuses due from bailed out companies this year). We all expect private citizens to accept a retention bonus that is paid to them by their employer but do we expect our politicians to blame and threaten private citizens with 90% taxation for accepting compensation under a contract that those same politicians could have prevented if they had just READ THE BILL they voted into law? Power corrupts and absolute power absolutely corrupts. Perhaps the audacity of arrogance and hypocrisy was illustrated when Senator Dodd indirectly claimed that the reason they didn’t know about the bonus provisions was because they didn’t read the final version of the bill – like that is supposed to be a valid excuse for this mismanagement.
Next time you want to take out a loan or a mortgage and don’t feel like paying it, just tell the company that you didn’t read the contract and that is why you didn’t realize you couldn’t afford it. See how that works out for you. Then again, in this bailout environment, you might just get a bailout for your incompetence. Who will bail out Congress and Obama for their incompetence? Taxpayers for generations into the future. Last question – do you really want to trust Washington to run your healthcare, energy, and our already broken education system when they can’t even manage the details of a bailout or a stimulus plan? Why is there so much faith in government when government consistently fails us?
Tuesday, March 17, 2009
Socialist Platform of 1928 vs. US gov't (2009)
I came across a summary of the Socialist Platform of 1928 and couldn't help but notice the striking resemblance to many of the policies being advocated, enacted or previously enacted by our federal government. I have included a few of the most relevant policies of the Socialist Party that have become part of our society and our expectation of government.
1. "Nationalization of our national resources, beginning with the coal mines and water sites..."
(The Obama administration is clearly pushing to heavily regulate or ultimately nationalize the energy industry through the goal of "energy independence." Obama has made it clear that coal and oil are the enemy and through cap and trade policies, he will dictate pricing and supply of our natural resources)
2. "A publicly owned giant power system under which the federal government shall cooperate with the states and municipalities in the distribution of electrical energy to the people at cost."
(The Tennessee Valley Authority took care of this)
3. "National ownership and democratic management of railroads and other means of transportation and communication."
(Railroad passenger service is nationalized through Amtrak and the FCC clearly controls communications by telephone, TV and radio - watch out "fairness doctrine" and local controls)
4. "Immediate governmental relief of the unemployed by the extension of all public works and a program of long range planning of public works. . ." "All persons thus employed to be engaged at hours and wages fixed by bona-fide labor unions."
(Obama's attempt to ease unemployment by creating jobs solely funded through direct government spending on public works is an example; similar to the WPA and PWA enacted during FDR's administration during the 1930's. Also, the recent push by the Obama administration to pander to the labor unions even if it means a trade war with Mexico and other countries illustrates Obama's allegiance to trade unions.)
5. "Loans to states and municipalities without interest for the purpose of carrying on public works and the taking of such other measures as will lessen widespread misery."
(This point by the Socialist Party summarizes large portions of the "Stimulus Plan" recently passed. The main difference is that the Stimulus Plan gave states and municipalities hand-outs to be spent "to lessen widespread misery." However, as SC Governor Mark Sanford learned, you will only be given such a hand-out if you spend the money on lessening the widespread misery the federal government believes should be lessened. Otherwise, you can't have the money.)
6. "A system of unemployment insurance. . ." "A system of health and accident insurance and of old age pensions as well as unemployment insurance."
(This goal of the Socialist Party sounds very similar to Pres. Obama's goal of universal health care/socialized medicine and his expansion of the welfare state through broad expansion of entitlements by providing unemployment to part-time workers, etc.)
7. "Increase of taxation on high income levels, of corporation taxes and inheritance taxes, the proceeds to be used for old age pensions and other forms of social insurance."
(This point perfectly illustrates the Marxist theory on taxation and redistribution of wealth - "From each according to his ability, to each according to his need." How many times have we heard President Obama say that he wants to spread the wealth around and that everyone should get or pay their "fair share?" Obama is intending to raise taxes on the wealthy to fund a host of social insurance programs - another blog posting on this one for another day)
I decided to add this to make the point that socialism and socialist philosophy enacted into policy is still socialism, regardless of what you call it. Let me know what you think and any ideas you have on my musings.
1. "Nationalization of our national resources, beginning with the coal mines and water sites..."
(The Obama administration is clearly pushing to heavily regulate or ultimately nationalize the energy industry through the goal of "energy independence." Obama has made it clear that coal and oil are the enemy and through cap and trade policies, he will dictate pricing and supply of our natural resources)
2. "A publicly owned giant power system under which the federal government shall cooperate with the states and municipalities in the distribution of electrical energy to the people at cost."
(The Tennessee Valley Authority took care of this)
3. "National ownership and democratic management of railroads and other means of transportation and communication."
(Railroad passenger service is nationalized through Amtrak and the FCC clearly controls communications by telephone, TV and radio - watch out "fairness doctrine" and local controls)
4. "Immediate governmental relief of the unemployed by the extension of all public works and a program of long range planning of public works. . ." "All persons thus employed to be engaged at hours and wages fixed by bona-fide labor unions."
(Obama's attempt to ease unemployment by creating jobs solely funded through direct government spending on public works is an example; similar to the WPA and PWA enacted during FDR's administration during the 1930's. Also, the recent push by the Obama administration to pander to the labor unions even if it means a trade war with Mexico and other countries illustrates Obama's allegiance to trade unions.)
5. "Loans to states and municipalities without interest for the purpose of carrying on public works and the taking of such other measures as will lessen widespread misery."
(This point by the Socialist Party summarizes large portions of the "Stimulus Plan" recently passed. The main difference is that the Stimulus Plan gave states and municipalities hand-outs to be spent "to lessen widespread misery." However, as SC Governor Mark Sanford learned, you will only be given such a hand-out if you spend the money on lessening the widespread misery the federal government believes should be lessened. Otherwise, you can't have the money.)
6. "A system of unemployment insurance. . ." "A system of health and accident insurance and of old age pensions as well as unemployment insurance."
(This goal of the Socialist Party sounds very similar to Pres. Obama's goal of universal health care/socialized medicine and his expansion of the welfare state through broad expansion of entitlements by providing unemployment to part-time workers, etc.)
7. "Increase of taxation on high income levels, of corporation taxes and inheritance taxes, the proceeds to be used for old age pensions and other forms of social insurance."
(This point perfectly illustrates the Marxist theory on taxation and redistribution of wealth - "From each according to his ability, to each according to his need." How many times have we heard President Obama say that he wants to spread the wealth around and that everyone should get or pay their "fair share?" Obama is intending to raise taxes on the wealthy to fund a host of social insurance programs - another blog posting on this one for another day)
I decided to add this to make the point that socialism and socialist philosophy enacted into policy is still socialism, regardless of what you call it. Let me know what you think and any ideas you have on my musings.
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