Higher Taxes Won't Reduce the Deficit

Politicians claim we need to raise taxes to reduce the deficit, but history shows that higher taxes have always lead to even higher spending.

In the late 1980s, one of us, Richard Vedder, and Lowell Gallaway of Ohio University co-authored a often-cited research paper for the congressional Joint Economic Committee (known as the $1.58 study) that found that every new dollar of new taxes led to more than one dollar of new spending by Congress. Subsequent revisions of the study over the next decade found similar results.

We've updated the research. Using standard statistical analyses that introduce variables to control for business-cycle fluctuations, wars and inflation, we found that over the entire post World War II era through 2009 each dollar of new tax revenue was associated with $1.17 of new spending. Politicians spend the money as fast as it comes in—and a little bit more.

The only option left is to cut spending, but we already knew that, didn't we?

Walking the Walk

Politicians in Washington are great at talking the talk. It gets them elected, it gets them soundbites on TV news, and it convinces their constituents to continue supporting them.

But now it is time to walk the walk. The conservative swing in this year's election has been an indictment of overspending in Washington. The Tea party formed in direct response to corporate giveaways and budget busting entitlements. The mission for Congress this session is clear:

CUT SPENDING.

And now it is time for them to walk the walk. It is easy for a conservative to call for lower taxes and spending, but the process of actually cutting things from government is anything but simple. It will be an uphill battle with deep political consequences. Nobody wants to lose their access to the Federal Gravy Train. But it must be done.

So let's do it.

This Sounds Awfully Familiar

Obama signs the federal debt commission into existence today with an executive order. I'm not sure why, because Ronald Reagan did the same thing 28 years ago with the Grace Commission, and Congress has yet to take any of the commission's debt reducing suggestions.

I am confident that the latest debt commission will be just as successful as the last one.

The Depression That Wasn't

In 1920-21, America's GNP plunged 24%, from $91.5 billion in 1920 to $69.6 billion in 1921, in one of the worst economic downturns in history. In response, President Warren G. Harding cut taxes on business, and held personal income tax rates steady at 8% for top earners.

Harding vetoed spending bills, including one that would give bonuses to veterans. He saved billions.

Harding also cut billions from the existing budget. The Federal budget went from $6.3 billion in 1920 to $5 billion in 1921 to $3.2 billion in 1922. Federal taxes also fell, from $6.6 billion to $5.5 billion to $4 billion, respectively. In this time, Harding paid off a significant portion of America's World War I debts.

By 1922, the GNP had rebounded to $74.1 billion and unemployment dropped to 6.7%. Unemployment continued to decline through the roaring twenties.

Without debt, by simply cutting taxes and slashing government spending, Warren G. Harding prevented a Great Depression and turned an ailing economy around in under 18 months.

Suck it Keynes.

Fareed Zakaria: Budget fixes are simple -- and unthinkable

Fareed makes some reasonable points:

If he were to cut spending at this point, the economy would quite likely go into a second recession, a double-dip, and then frankly everything collapses. If you don't have growth, you have no prospect of getting out of this budgetary situation. ... But he must in a year begin really to address the serious issues that make up the budget crisis that we have.

The most significant one is health care costs. ... Obama's health care plan, while it has some cost control measures, is mostly about expansion and adding to the costs. ... There has to be a much, much more serious focus on costs.

The second is a number of sacred cows in the federal budget which are very large but which frankly make no sense. We have a $250 billion a year hole in the federal budget because employers are given a tax deduction for health care plans. This is actually bad for health care, because it is one of the factors that contributes to these out of control costs, because it's an invitation to have inflation in the system.

Fareed has a solid plan for bringing down the deficit, but he is disingenuous about the macro economic effects of doing so. He understands and says that cutting spending would hurt the economy in the short term, but in the next breath he proposes tax increases, which would have almost the same net effect.

Not that I disagree with his proposal, because a little short term pain is going to be necessary. But he should be honest about it, or the pundits and partisans will tear it apart for raising taxes.

[via Raven]

America Jumps the Shark

The Federal government is pulling out all the stops to save our suffering economy, and it's going to send us all to the poor house.

[via Glas]

Douchebag of the Week: Senator Richard Shelby (R-AL)

Richard Shelby, Senator from the great state of Alabama, is a flaming douchebag. He refuses to vote on Obama's presidential appointments until his home state receives billions of dollars in pork.

Senate Majority Leader Harry Reid, D-Nev., said Shelby's move is holding up about 70 appointments, including a critical top Defense Department position overseeing deployments to the war in Afghanistan.

Senate Republican Leader Mitch McConnell of Kentucky offered little defense, saying Thursday that he didn't know much about Shelby's concerns and that he would try to hash them out "sooner rather than later."

Senators frequently block individual appointments, but Shelby's blanket hold is unusual. His spokesman issued a statement about the holds Friday, citing concerns about a contract for an Air Force refueling tanker that could be built in Alabama and a new FBI explosives center that Shelby wants built there. Shelby argues the projects are critical national security priorities.

The value of the Air Force contract could reach $35 billion, plus $45 million for an FBI research facility in his home state.

Shelby argues the projects are critical for our national security. Democrats have shot back, claiming 'There are empty chairs at the Pentagon.'

Democrats are scrambling to not screw this up. Shelby's claims of fiscal conservativism leave him and the GOP wide open to justifiable criticism, exposing his intense hypocrisy, and expose him for the enormous douchebag that he is.

Shovel Ready My Ass

The $787 billion dollar Stimulus Bill is doing nothing and I couldn't be less surprised. Take California for example:

Figures from the California Department of Transportation show that, as of late October, over $2 billion in federal highway funds had been allocated to the state when the American Recovery and Reinvestment Act passed in February. Of that sum, only $837 million had been awarded in construction contracts. Even more surprising, only $51 million, or about 2.5 percent of the total, had actually been disbursed. Given all the talk when the ARRA was passed about the many projects that were “shovel ready” and primed for construction, this is perhaps a bit disheartening. After all, this spending was pitched as a way to pump immediate life into a collapsing economy.

The Stimulus is a complete failure. Actually, it's worse than a failure, since it's pushing capital to be invested inefficiently.

We would be better off and in less debt if we had just done nothing.

Can Someone Tell Me

What the FDA actually does?

WASHINGTON — Federal health regulators have found tiny particles of trash in drugs made by Genzyme, the second time this year the biotechnology company has been cited for contamination issues.

The Food and Drug Administration said Friday that bits of steel, rubber and fiber found in vials of drugs used to treat rare enzyme disorders could cause serious adverse health effects for patients.

Despite those problems, the FDA said the products would remain on the market, because there are few alternative treatments.

The FDA has an annual budget of $3.2 billion, plus Cato's estimated societal cost of $49 billion, and it can't even keep garbage out of our medicine.

What are we paying for exactly?

Health Bill's Medicare Cuts are Wishful Thinking

The Democrat Health Plan now working its way to the Senate is being marketed as deficit reducing, despite its $1.2 trillion price tag. The plan will be paid for by increased taxes and reduced Medicare payments.

Specifically, the plan calls for $426 billion in spending cuts and $572 billion in taxes, and is projected to net a $104 billion deficit reduction over 10 years.

The proposed cuts are likely to be short lived, as Congress has a history of proposing Medicare spending cuts, then abandoning them as medical interest groups turn up the heat.

Under both Democrats and Republicans, Congress repeatedly has waived curbs it has tried to place on spending. It has given back other savings from the 1997 law to hospitals, skilled nursing facilities and other providers, most notably in 1999. More recently, Congress has twice switched off a cost-saving trigger that was contained in a 2003 bill establishing a Medicare prescription-drug benefit. Congress also frequently has waived budget resolution limits, as well as pay-as-you-go rules requiring offsets for tax cuts and entitlement spending.

Since 1997, Congress has passed five Medicare spending cuts, only to repeal all five shortly after they went into effect.

A plan that cuts Medicare spending by half a trillion dollars is wishful thinking. Do not be fooled.

The Man Who Predicted The Depression

The Great Depression and our current Great Recession were both predictable and preventable, at least if you're Ludwig von Mises:

The 1920s were marked by the brave new era of the Federal Reserve system promoting inflationary credit expansion and with it permanent prosperity. The nerve of this Doubting-Thomas, perma-bear, crazy Kraut! Sadly, poor Ludwig was very nearly alone in warning of the collapse to come from this credit expansion. In mid-1929, he stubbornly turned down a lucrative job offer from the Viennese bank Kreditanstalt, much to the annoyance of his fiancée, proclaiming "A great crash is coming, and I don't want my name in any way connected with it."

We all know what happened next. Pretty much right out of Mises's script, overleveraged banks (including Kreditanstalt) collapsed, businesses collapsed, employment collapsed. The brittle tree snapped. Following Mises's logic, was this a failure of capitalism, or a failure of hubris?

Mises's solution follows logically from his warnings. You can't fix what's broken by breaking it yet again. Stop the credit gavage. Stop inflating. Don't encourage consumption, but rather encourage saving and the repayment of debt. Let all the lame businesses fail—no bailouts. (You see where I'm going with this.) The distortions must be removed or else the precipice from which the system will inevitably fall will simply grow higher and higher.

The system we have today is destined for failure. Our government thinks it can just do more of the same and achieve a different result.

With interest rates at zero, monetary engines humming as never before, and a self-proclaimed Keynesian government, we are back again embracing the brave new era of government-sponsored prosperity and debt. And, more than ever, the system is piling uncertainties on top of uncertainties, turning an otherwise resilient economy into a brittle one.

The take away from all this? Stay out of the stock market.

Millionaires in Congress

A new report finds that of the 535 members of Congress, 237 of them are millionaires.

That’s 44 percent of the body – compared to about 1 percent of Americans overall.

CRP says California Republican Rep. Darrell Issa is the richest lawmaker on Capitol Hill, with a net worth estimated at about $251 million. Next in line: Rep. Jane Harman (D-Calif.), worth about $244.7 million; Sen. Herb Kohl (D-Wis.), worth about $214.5 million; Sen. Mark Warner (D-Va.), worth about $209.7 million; and Sen. John Kerry (D-Mass.), worth about $208.8 million.

I find it hopelessly ironic that the 5 4 of the 5 richest people in Congress are Democrats. I guess I shouldn't be surprised.

It's funny how the people most able to directly help the poor refuse to do so, and instead wish to pass the check to taxpayers. Hey Kerry, instead of supporting this draconian health reform, why not use a few thousand dollars and buy insurance for a poor family?

But that's not even the best part:

Some lawmakers have profited from investments in companies that have received federal bailouts; dozens of lawmakers are invested in Wells Fargo, Citigroup, Goldman Sachs and Bank of America.

I'm sorry, but HOW THE FUCK IS THIS LEGAL? This country is being bankrupted so our "representatives" can profit on their investments? This is torch and pitchfork stuff here.

This only reaffirms my belief that government debt is bad, and government involvement in the marketplace is worse.

[Politico via rastian77]

Facts About Health Spending

America spends more than any other country on health care, and this spending rises every year. So here's a breakdown of our National Health Expenditure (NHE).

• NHE grew 6.1% to $2.2 trillion in 2007, or $7,421 per person, and accounted for 16.2% of Gross Domestic Product.
• Medicare spending grew 7.2% to $431 billion in 2007, or 19 percent of total NHE.
• Medicaid spending grew 6.4% to $329 billion in 2007, or 15 percent of total NHE.
• Private spending grew 5.8% to $1.2 trillion in 2007, or 54 percent of total NHE.
• Hospital expenditures grew 7.3% in 2007, up from 6.9% in 2006.
• Physician and clinical services expenditures increased 6.5% in 2007, the same rate of growth as in 2006.
• Prescription drug spending increased 4.9% in 2007, a deceleration from the 8.6% growth in 2006.
• At the aggregate level in 2007, businesses (25 percent), households (31 percent), other private sponsors (4 percent), and governments (40 percent) paid for about the same share of health services and supplies as they did in 2006.

Many people claim we need a larger government presence in health care to control costs, but the government programs of Medicare and Medicaid already account for 34% of all health spending, and costs continue to spiral out of control. In fact, spending by the government increases significantly faster than private spending.

We already have a third of our health care industry supported by the government, how much more do we need before we accept that more government is not the answer?