Wednesday, April 18, 2012

“It’s All About the Math”

Sydney M. Williams

Thought of the Day
“It’s All About the Math”
April 18, 2012

Mr. Obama clearly and cleverly understands that 99 is larger than 1. So, there is little surprise in his decision to associate his re-election with the ninety-nine percent and let the one percent dangle. Who wouldn’t? And he even attracts a few sanctimonious one percenters, like his pals Warren Buffett, George Soros and myriad stars and starlets from Tinseltown. But when it comes to the federal debt and on-going deficit spending, Mr. Obama starts doing arithmetical gymnastics. He understands that the more people become dependent on government, the more entrenched is his own future as President. Looking a gift horse in the face is a concept Mr. Obama clearly understands. People express their gratefulness for gifts received; no concern is registered by either grantor or grantee that bankruptcy may be the end game. The yellow brick road, to these people, has no terminus.

The vote Monday in the Senate on the “Buffett Rule” was pure theater. The President knew the outcome ahead of time, as did the Senators. Professor Allan Meltzer has estimated that the U.S. unfunded healthcare liability is $72 trillion. Suggesting that the Buffett Rule will help solve it is an insult to the American public. The President preaches that class warfare is not class warfare. Instead of platitudes about “fairness” and debating the math when it comes to taxes, Mr. Obama would be better off listening to Daniel Mitchell of the Cato Institute. Mr. Mitchell recently wrote a much needed lesson on behavioral economics (which in matters like taxes is more relevant than math): “When the government taxes income, it raises the price of work compared to leisure. And because the tax code penalizes capital gains with higher rates, it also raises the price of savings and investment compared to consumption.” Newton’s Law applies. For every action, there is an equal and opposite reaction.

Combined U.S. household and government debt added up to more than $30 trillion at the end of 2011, according to an article in yesterday’s Investor’s Business Daily. “By that measure,” the paper notes, “debt was 50% higher in real terms than at the start of the recovery in 2001. Compared to the 1991 and 1982 recoveries, debt was, respectively, 88% and 230% higher.” If the President wants to focus on math, he would be wise to turn to the deficits – and not persist with his preference, which is spending. Never for a moment did I sense that the President actually believed his own rhetoric that the Affordable Care Act would allow for debt reduction. Even this President who seems numeracy-challenged is capable of such simple extrapolation that providing healthcare to more people increases costs. And, sure enough, over the past few months, the independent Congressional Budget Office (CBO) persists in raising the cost estimates of Obamacare, both in terms of services to be provided and the taxes needed to pay for it.

Europe provides exhibit ‘A’ when it comes to the ugly mathematical reality of promising and spending more than one has. Nations such as Greece, Italy, Spain, Portugal and Ireland are in a death spiral. They cannot spend their way out and austerity would condemn them to years of poverty. They must, somehow, revalue their currency, which definitionally means leaving the Euro as we know it. The culprit, no matter what we call it, is socialism. Of course, there are exhibits closer to home. California is one. With an income tax rate of 10.55%, California has the highest rate behind only Hawaii and Oregon, both at 11 percent. For the first time in its history California lost residents, according to the most recent census. Three demographic profiles were identified by Arthur Laffer that characterizes those leaving the state: higher intelligence, younger adults, and business owners & high earners – hardly a vote of confidence for the “nanny” state. Mr. Laffer estimates that California has lost $44 billion in tax revenues from the 869,000 people who have left the state over the past sixteen years. Texas, with no income tax, attracted the most residents, which is another lesson in behavioral economics. Austin is my personal bet to be the fastest growing city in the U.S. during the 21st Century.

The President is correct; the problem we face is all about math. We spend more than we take in and have done so for years. It as simple as that. The fundamental choice we face is the size of government we want. More costs more. For those who desire government to provide an increasing level of services, they must understand it cannot come on the back of the one percent. They don’t have enough money. It can only come by raising taxes on the middle class. The math does not lie. And, as Professor Meltzer makes clear in his new book, Why Capitalism?, the price we pay will be a lower standard of living for all. A table in his book makes the point clearly. The comparative economic growth rates for France and Germany noticeably slowed from the 1980s to the years between 1990 and 2006. Socialism impedes economic growth.

Economist Dr. Lacy Hunt, president of Hoisington Investment Management in Houston, recently wrote of the negative feedback loop arising from the unproductive nature of government debt: “First, United States government spending carries a zero expenditure multiplier, as do operating expenditures of state and local governments. Thus each dollar spent by the federal government creates no sustainable income, yet the interest payment incurred with each borrowed dollar creates a subtraction from future revenue streams of the private sector.”

David Brooks, in a somewhat Milquetoast-like, “something for everyone” column in yesterday’s New York Times entitled The White House Argument, wrote: “According to the Committee for a Responsible Budget, by 2050 , Representative Paul Ryan’s budget would cut total public debt to 10% of GDP. Current law would put debt at 42% of GDP. Under the Obama budget, debt would skyrocket to 124% of GDP. Mr. Brooks also notes that annual interest expense will be $915 billion in 2022, a number I presume he arrives at using projected deficits and current interest rates. However, should government relax its rules, reform the tax code and attempt to stimulate investment by the private sector, the deficit could well be smaller. On the other hand, raising taxes and increasing regulatory and environmental restrictions would likely cause the deficit to expand. Additionally, interest rates are at artificially low levels. Should they rise to more normal levels, as seems highly likely over the next ten years, interest costs could well be double what they are expected to be.

It is, as the President likes to repeat, about the math. But policy decisions also affect behavior, something that needs remembering.

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