Category archives: Economics

What an Overview of the President’s Budget can Tell Us about our Country

by Henry Potrykus

April 10, 2013

The chart above gives the change in federal outlays (spending) and receipts (taxation in normal times) in constant dollars. The use of constant (i.e. not-inflated) dollars allows us to compare these fiscal changes to realGDP growth.

GDP growth gives the overall baseline for where we are going economically - including, relative to the overall economy, where we are going fiscally. GDP growth gives an absolute marker for the above trends: Grow outlays faster than GDP growth and you are guaranteeing to the outlays’ recipients (federal program participants) a larger and larger part of the economy’s produce. Grow receipts faster than GDP growth and you are banking on taxes (or other mechanisms for transferring a monetary share to the government; in the past governments used seigniorage) taking in a larger and larger part of the economy.

For these cases, outlays or receipts grow faster than the overall economy itself sustains.

GDP growth was 3 percent in the past; in our new economy it is now 2 percent. See our recent paper for why.

Now let us prove our bottom line – that things are not getting better for the United States.

Here’s how to know: First, the hoped-for receipts are: A) calling for a lot more taxes, B) based in wishful thinking, or C) some of both.

For (A), see the chart for tax growth over 2013 to 2014: 15 percent + 10 percent = 25 percent total growth in taxes.

On (B), the “longer term” numbers (2015 et seq.) – 5 percent increases in revenue – are not anywhere near what our new economy can deliver from its growth (2 percent increase per year).

Combining the periods 2013 to 2014 and 2015 et seq., we notice some of both the phenomena we listed: Massive tax growth (A; 25 percent) is hoped to begin to put us back into fiscal alignment (that is, tighten down our massive deficit), but (B) longer term calibrations (5 percent growth in receipts) are not aligned with the anemic economic reality the United States now finds itself in (because of the “second demographic transition” – see, again, the hyperlink above and here). Thus, taxes or other means (like seigniorage) must continue to grow and grow and all the while our fiscal picture must continue to degrade and degrade. This signals calamity.

Second, the [weak] receipts recovery seen in 2010 and 2011 (the “real,” not estimated numbers of the chart) is in actuality worse than presented. In the wake of fiscal 2009, the Federal Reserve has been buying up and claiming interest payments on a few trillion dollars in US government debt (through “quantitative easing,” “twists,” and buying other securities). Yes, interest payment [to the Fed] is an outlay. But this payment is remitted back to the Treasury, so it is also a receipt. This has been explained in congressional testimony. Interest that the Fed is paid goes back to the Treasury, after a dividend is paid to certain banks. If this weren’t enough, there is plenty of ambiguity as to who may claim what (this is called “exposure” or “delta” and is a consequence of complicated derivative agreements on this debt – including repos and swaps – between the Reserve and its primary trading partners). Anyway, call this debt $3 trillion Fed-owned paper at 2 percent interest (our Treasury has been paying exceptionally low interest rates), or a $60 billion outlay-receipt per year. This $60 billion is a large share of the receipt growth seen in 2010 and 2011. Receipts are right around $2 trillion. The charted receipt growth of 2 percent in 2010 is $40 billion; the receipt growth of 4 percent in 2011 is $80 billion. Over those years the Fed has been buying more government debt hence claiming more interest payments hence remitting more interest payments. Splitting this growth in remittance, $60 billion, as $20 billion (2010) + $40 billion (2011), it is not hard to see half of the growth in receipts (the “recovery” in receipts) as coming through an act involving money movements (Fed buys debt, remits interest).

Receipts from the economy have not recovered. They cannot reach the levels hoped-for through growth of the economy. Massive (and increasing) taxation is how the current proposal hopes to close an ever-widening chasm in the fiscal landscape. It is, however, the opening of this chasm that exposes the real problem, the weakness of the State: http://marri.us/fiscal.

A Nice Summary of the College Debt Mess

by Chris Gacek

March 9, 2013

Charles Blow of the New York Times has written a very helpful analysis of recent statistics and realities pertaining to the College Debt Crisis.  His column appeared in the March 9th print edition (“A Dangerous ‘New Normal’ in College Debt.”)  See the online article with excellent links to a number of studies, reports.  He begins with the observation, “We are reaching a crisis point in this country’s higher education system.”  A statement that is undeniable. 

He concludes as follows: “Our national educational aspirations and the debt crisis that they’re creating are colliding. We are on an unsustainable track. This will not end well.”  Again, undeniable.

I don’t know if this is sequester-driven brinksmanship or part of a larger budgetary trend, but the Army Times writes that “[t]he Army’s popular Tuition Assistance program is being suspended because of the budget squeeze, although the many thousands of soldiers currently enrolled in courses will be allowed to complete those courses.”  The shutdown began at 5 p.m. EST on March 8th.  If it is the former, it is despicable.  However, I fear that even if sequester-driven politics is in play, the long-term outlook for military budgets keeping up with ever-escalating college tuition is not great.

Debt Doesn’t Take a Holiday

by Chris Gacek

January 24, 2013

I don’t think we are even approaching the point at which American government’s love of debt will shatter, but a couple of noteworthy events took place this week that may indicate that a new day is dawning.

First, the New York Times article described a bond-ratings agency’s actions this way:

Standard & Poor’s removed the United States government from its list of risk-free borrowers for the first time on Friday night, a downgrade that is freighted with symbolic significance but carries few clear financial implications.

If this had happened ten years ago, this announcement would probably have meant more and produced a greater effect.  Maybe.  Unfortunately, the bond-rating agencies’ credibility was shattered after their complicity in the mortgage debt debacle of the late-2000s was exposed. Now, so much of what they say sounds like Charlie Brown’s teacher: Wah-wah-wah-wah…. That will change eventually.

The second event was described in an AP article by Justin Pope:

Moody’s Investors Service on Wednesday downgraded its outlook for the higher education sector to negative across the board, saying even prestigious, top-tier research universities are now under threat from declining enrollment, government spending cuts and even growing public doubts over the value of a college degree.

There has been a great focus on student indebtedness, but much less attention is given to the decades-long binge of building and bureaucracy construction that has taken place at institutions of higher learning.  That doesn’t appear to be Moody’s focus either – or the article’s.  That is why did tuition increases need to exceed inflation for decades?  Moody’s is looking at revenue shortfalls as if spending levels were set atop Mount Sinai.  That’s OK, we will figure it all out, and many schools are going to go broke.  To borrow a phrase: Academia’s chickens are coming home to roost.

It just may be that debt is not so harmless as the Keynesian ethos would lead us to believe.

Strolling Along the Fiscal Cliff

by Rob Schwarzwalder

January 2, 2013

Of all the onerous provisions of the just-passed “fiscal cliff” legislation, one of the most aggravating is the lifting of the “tax holiday” on the payroll tax. This tax is used to supply daily infusions of cash into the Social Security system.

The Social Security program is badly broken. Instead of even discussing how to remedy the program’s devastating fiscal maladies, Congress and the Administration instead have given it another emergency transfusion that briefly forestalls urgently needed change.

As of October 2012, median household income in the United States was $51,378. Households with this income will be paying more than $1,000 in new taxes as the payroll tax. Whatever your income is, the payroll tax hike means you will realize two percent less of it in the coming year (find your own payroll tax hit courtesy of the Wall Street Journal here.

Additionally, the new law will result in a severe penalty on marriage and massively higher deficits, according to the Congressional Budget Office. It will impose new burdens on families and businesses of all types.

America’s political leaders did not punt on the economy – they drop-kicked fiscal integrity, sustained economic growth, and fairness to taxpayers far out of sight, employing their legislative might not to fix problems but to propel them down the road. They did not address how to improve our collapsing entitlement programs or even breathe a word about a question that requires true political courage: What should the federal government be doing, according to the U.S. Constitution?

Until this is answered definitively, we will continue to tax and spend our way into oblivion. If we cannot have an honest national debate about government’s role and what it should fund, how can we determine what revenues are needed?

As FRC President Tony Perkins put it, “President Obama and Congress have had months to take care of what has been dubbed the fiscal cliff of massive tax increases, the looming debt crisis and devastating cuts to our U.S. military. This dysfunctional Congress literally waited until the last minutes of 2012 to propose a deal that fails to address these real concerns.”

For a brief but thorough review of the whole “American Taxpayer Relief Act” – who needs George Orwell when you have the U.S. Congress, right? – read my colleague Tom McClusky’s assessment here.

Important Article on the College Debt Scene & Is the Bubble Exploding

by Chris Gacek

December 3, 2012

Recently released statistics by the Federal Reserve are causing some to wonder if the rapidly escalating rate of troubled college loans indicate a bursting debt bubble. Tyler Durden of Zero Hedge has this post; John Hayward at the Human Events Blog has this excellent comment on the Zero Hedge analysis.

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Student debt is a problem that is hurting many people over age sixty:

In the first three months of this year, the number of borrowers of student loans age 60 and older was 2.2 million, a figure that has tripled since 2005. That makes them the fastest-growing age group for college debt. All told, those borrowers owed $43 billion, up from $8 billion seven years ago, according to the Federal Reserve Bank of New York.

Almost 10 percent of the borrowers over 60 were at least 90 days delinquent on their payments during the first quarter of 2012, compared with 6 percent in 2005. ….

Some are losing part of their Social Security retirement benefits. Read about a “boomerang” parent – in this case, a mother who had to move in with her daughter due to college loans assumed by the parent on behalf of the child. See the story. (The focus here is “Parent Plus” loans not co-signed loans.)

* * *

Another story discusses the drag that student loan debt may have on the housing market:

Naroff said another major factor weighing on young adults is student loan debt, which is approaching $1 trillion by some estimates. The burden of those monthly payments may be keeping some younger adults from paying the rent on their own, let alone buying a house, even if they do have a job.

You have a lot of the kids coming out with debt, and they’re not going out and buying houses, and that may be pushing out the whole process,” he said.

Naroff said it’s not yet clear how much of the problem is a cyclical one, caused by the high unemployment rate among young adults, and how much is a structural problem caused the increased burden of student loan debts leaving less money for things like homes.

You can find the NBC News story by Alison Linn here.

Is Capitalism Over?

by Krystle Gabele

November 15, 2012

Elise Amyx at Values and Capitalism writes about how Christian hipsters are declaring the demise of capitalism. Perhaps, it would be good to know what a Christian hipster stands for and how is capitalism over?

According to Brett McCracken, author of Hipster Christianity: When Church and Cool Collide, a Christian hipster is a young evangelical who strays from the typical stereotypes of the evangelicals of the 80s and 90s and prefers the progressive viewpoints, as well as intellectual Christianity. While most evangelicals prefer to help Republicans, the Christian hipster prefers Barack Obama.

Therefore, it should not surprise you that a Christian hipster might consider capitalism over.

Young Protestants today seem to be rebelling against the traditional Protestant work ethic because they associate it with a greedy, selfish, superficial version of the American Dream. Evangelical hipster culture implies that Christians should oppose capitalism and adopt pro-regulation, pro-environmentalism, pro-universal health care political positions to truly live a Christ-like life. (Source)

There is something wrong here. I am pretty certain that many Christian hipsters work hard. In fact, they might even embrace capitalism more than they think. Take for example, increased government regulations would squash freedom and innovation. This is surely something they might be against.

Whether or not they realize it, capitalism is all around them. After all, many of the products they use — whether it be Apple products or Starbucks coffee — began in a capitalist society. It was the free market and innovation that brought many of the modern conveniences they rely upon.

Is Profiting from Hurricane Sandy Ethical?

by Rob Schwarzwalder

November 1, 2012

There is a telling story today in one of the nation’s premier business publications, Barron’s, called “Playing a Superstorm.” In it, we read about some home repair-oriented companies whose stock is rising in the wake of Hurricane Sandy. Of course, this makes perfect sense: Given the hurricane’s devastation, the value of firms with the resources needed to rebuild is at a premium. However, as the article notes, “These opportunities to scalp some profits out of the aftermath of the hurricane are likely fleeting, so act fast or do not act at all.”

Scalp some profits” - yikes! Profiting from disaster seems untoward. Yet in a market-based economy, such investments can animate economic growth in regions where it is most needed - places such as those destroyed by this week’s massive “Frankenstorm.”

Every action has three ethical dimensions: Its motivation, its implementation, and its effect. Those on the Left who insist on evaluating every action based on motivation (“greedy capitalists!”) rather than outcome (renewed businesses, reconstructed neighborhoods, etc.) are looking at only one aspect of a larger picture.

I’m not suggesting that motives are unimportant. Rather, at a time of national crisis, aspersing the intentions of those whose investments can help transform extensive damage into rebuilt lives seems a tired and useless exercise. The alternative - a government-run, command-and-control economic system - would never provide the diversity, quantity, or quality of products and services needed when disaster strikes. As scholar Jay Richards wrote in his book Money, Greed, and God, we must be wary of “contrasting capitalism with an unrealizable ideal rather than with its live alternatives” (watch Jay’s thoughtful FRC lecture on this theme here).

Ultimately, it’s about what the Founders called “ordered liberty,” the freedom to make reasonable, moral decisions in an open marketplace. To deny such liberty to image-bearers of God is an affront to human dignity. Our Founders understood this, which is why they valued the right to private property ownership so highly. We should maintain their commitment to free enterprise and opportunity with intentionality and energy; unless we do, when a future “Sandy” hits, we will lack the means to respond with the rapidity and resources they require.

Whither the Horror of Dependency?

by Cathy Ruse

October 29, 2012

Its worse than you think. Read George Will on demographer Nick Eberstadts recent study on changes in how the government transfers wealth over the last 50 years, especially under the rubric of disability.

Here are a few of the eye-popping particulars:

  • During most of FDRs 12 presidential years, income transfers were a third or less of federal spending. But between 1960 and 2010, entitlements exploded from 28 percent to 66 percent of federal spending.
  • The growth of entitlement spending over the past half-century has been distinctly greater under Republican administrations than Democrat.
  • The normalization of dependency helps explain the unprecedented exit from gainful work by adult men. Since 1948, male labor force participation has plummeted from 89 percent to 73 percent labor force participation ratios for men in the prime of life are lower in America than in Europe.
  • One reason for this is the gaming (defrauding) of disability entitlements: In 1960, 455,000 workers were receiving disability payments; in 2011 that number was 8.6 million nearly half of the 8.6 million were disabled because of mood disorders or ailments of the musculoskeletal system and the connective tissue.
  • In 1960, 134 Americans were engaged in gainful employment for every officially disabled worker; by December 2010 that number had dropped to just over 16.

Want More Jobs? Lets Build Stronger Families

by Rob Schwarzwalder

September 7, 2012

Strong families lead to a strong economy.

This thesis is proven substantially and repeatedly by FRCs Marriage and Religion Research Institute in studies of the effects of family formation on economic growth (see, for example, The Divorce Revolution Perpetually Reduces U.S. Economic Growth).

We are now witnessing the results of family dissolution inAmericas troubling employment situation. The intact family, in which a married mom and dad raise children and worship together weekly, results in a better education for the children and a higher incentive for a Dad, or if need be, for both parents, to provide for their family.

These facts augment this mornings disappointing job numbers, not only because those numbers reflect more than 25 percent fewer new jobs than had been anticipated, but also because a closer look shows them to indicate a growing undercurrent of hopelessness among job-seekers.

Heres how the Wall Street Journals Phil Izzo explains it:

The unemployment rate is calculated based on the number of unemployed people who are without jobs, who are available to work and who have actively sought work in the prior four weeks. The actively looking for work definition is fairly broad, including people who contacted an employer, employment agency, job center or friends; sent out resumes or filled out applications; or answered or placed ads, among other things. That number declined by 250,000 in August, but it was overwhelmed by a 368,000 drop in the size of the labor force. That suggests that many of those 250,000 stopped looking for work not because they found a job, but because they dropped out of the labor force … (the labor force participation rate of) 63.5% is at the lowest levels since women first started entering the labor force in large numbers.

This interpretation is based not on partisan projections, but data from the Bureau of Labor Statistics (BLS). Heres what the BLS said this morning about the true nature of the unemployment situation:

In August, 2.6 million persons were marginally attached to the labor force, essentially unchanged from a year earlier … There were 844,000 discouraged workers in August … Discouraged workers are persons not currently looking for work because they believe no jobs are available for them. The remaining 1.7 million persons marginally attached to the labor force in August had not searched for work in the 4 weeks preceding the survey for reasons such as school attendance or family responsibilities.

According to the BLS, there minimally are 23.1 million persons unemployed, underemployed, or too discouraged to look for work. These are federal, not conservative or Republican, statistics.

To bring it back to families: As Drs. Pat Fagan and Henry Potrykus demonstrate in their new paper, Non-Marriage Reduces U.S. Labor Participation:

The long decline of adult male labor participation represents a withdrawal of able-bodied workers from productive employment. A persistent ‘gap’ exists between the employment rates of married men and unmarried men … Given the cultural-demographic drift away from marriage the risk of (economic) depression will be exacerbated over time.

This paper shows how among working-age men, half of the current labor drop-off is caused by this gap and the population shift away from marriage.

Marriage and children incentivize work. Cohabitation, divorce, and fatherlessness create dependency on government, a fact born out by the fact that now roughly one in seven Americans are receiving food stamps.

Are there other factors, such as tax and trade policies? Sure. But even if we somehow get them completely right, we cannot we meet our need for stable growth, and cannot foster the intangible but essential belief that families and individuals can have a brighter financial future, without a family unit that is sound, secure, and vibrant.

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