Drill Here, Drill Now

March 4, 2011 Leave a Comment

This post was written by Edward Mahee. Writing under a pen name, Mr. Mahee is a legal expert and political analyst.

The recent turmoil in the Middle East has given rise to all manner of speculation concerning the future of that region.  With the revolutions in Tunisia and Egypt, as well as uprisings in Iran, Bahrain, Yemen and Jordan, and with rumblings in Saudi Arabia, the world watches with a mixture of awe, hope and apprehension.  But nowhere is there more immediate concern than in Libya, where Moammar Gaddafi is facing the prospect of the end of his four-decade dictatorship.

While much of the impact of these uprisings in the Middle East remains unclear, one effect is already being felt: In the last ten days, the price of oil has risen from $87/barrel to over $100/barrel.  With the price of crude oil likely to remain elevated for the foreseeable future, higher gasoline, energy, and transportation prices are taking hold. As the economy continues to struggle, even the most modest increase in the price of energy can have a huge impact, and risks driving the economy back into recession. 

Few people realize how dependent we are on oil and its distillates. Every person who drives to work, buys food at a super market, or ships anything, in one way or another pays for it through the price of oil.  Without oil, much economic activity would grind to a halt. 

It is therefore striking that Americans tolerate a system where so much of our livelihood is dependent on oil, when so much of that oil comes from places that are unfriendly to the United States and/or extremely unstable. While the majority of oil consumed by Americans comes from domestic sources, Canada, or Latin America, the interruption of the production of oil anywhere affects the price everywhere since oil is priced on commodity exchanges.  It is basic supply and demand. 

There are thus two ways to reduce oil’s price – increase supply or decrease demand.  Since the 1970s, when President Carter’s advice to the American people was to wear sweaters in response to an oil crisis, we have been encouraged to reduce our demand for energy. Fine. But to keep the economy moving, we need to move things, and to move things we need oil.  At some point, we can only reduce demand so much.

It’s time for the American people to seriously consider increasing the total supply of oil by easing restrictions on drilling, oil shale production and other methods of oil production and distillation.  This will bring jobs, secure our energy supply, and bring the price of oil down over time.  While some get upset over the prospect of increasing domestic oil production, we must face the facts: Short of a major technological breakthrough, American productivity will demand oil. Meaningfully curbing oil demand is difficult, if not impossible—we now must embrace the other side of the equation. As the debate is brought home to struggling Americans paying close to $4 per gallon and facing rising food prices, it is time we take a sober look at supply. 

-Edward Mahee for TruPolitics.net

Filed under Economy/Fiscal Issues, Environmentalism Tagged with , , , , , ,

The Roots of the Tax Debate: Why Tax At All?

December 6, 2010 Leave a Comment

This post was written by Edward Mahee. Writing under a pen name, Mr. Mahee is a legal analyst and political commentator. This is his 13th posting for the site.

On November 30, President Obama invited leaders of both houses of Congress, including the leadership of the incoming Republican majority, to discuss whether and to what extent current tax rates should be extended beyond December 31, 2010.  Leaving aside the last minute timing of such an important issue, it is surprising that with anemic economic growth, persistently high unemployment, and general malaise, that some would even consider raising taxes. But, when viewed through the prism of a fundamental philosophical divide, the issue becomes clear.

Andrew W. Mellon, Treasury Secretary from 1921-1932, stated unambiguous principles he felt ought to guide tax policy: “The problem of the Government is to fix rates [of taxation] which will bring in a maximum amount of revenue to the Treasury and at the same time bear not too heavily on the taxpayer or on business enterprises. A sound tax policy must take into account three factors.  It must produce sufficient revenue for the Government; it must lessen, so far as possible, the burden of taxation on those least able to bear it; and it must also remove those influences which might retard the continued steady development of business and industry on which, in the last analysis, so much of our prosperity depends.”  The underlying principle, then, is very simple—the purpose of taxation is to raise revenue for the maintenance and operation of the government, but in a manner that does not inhibit personal liberty or private enterprise. 

Mellon’s principle is sound, given that the role of taxation is only to raise essential and necessary revenue for the government.  There are many, however, including the current Administration, that fundamentally disagree with that premise.  Rather than raise revenue for the government, taxation provides a vehicle by which the government can control behavior, payoff special interests, and punish or reward certain constituencies as the political class sees fit.  For proof, look no further than the debate of candidates for the Democratic presidential nomination in 2008, featuring then-Senator Barack Obama: When informed that his policy of raising the capital gains tax rate may actually reduce revenue to the federal government, Senator Obama retorted that raising the rate of taxation on capital gains was a question of fairness, not just revenue.

With the United States running more and more into the red, and consequently closer and closer to bankruptcy, the primacy of revenue among the purposes of taxation has reemerged as a lodestar concerning tax policy.  Economist W. Kurt Hauser, a leading thinker on the subject, recently observed that since the end of the Second World War, tax revenues as a percentage of gross domestic product (“GDP”) have averaged fewer than 19% regardless of the top marginal income tax rate.  This is an astonishing observation, since during the period in question the top marginal tax rate on personal income was anywhere between 28% and 92% (currently the top marginal rate is 35%).  How can this be?  According to Mr. Hauser’s November 26 article in the Wall Street Journal:

“Higher taxes discourage the ‘animal spirits’ of entrepreneurship.  When tax rates are raised, taxpayers are encouraged to shift, hide and underreport income.  Taxpayers divert their effort from pro-growth productive investments to seeking tax shelters, tax havens and tax exempt investments.  This behavior tends to dampen economic growth and job creation.  Lower taxes increase the incentives to work, produce, save and invest, thereby encouraging capital formation and jobs.”

Which brings us back to Mr. Mellon’s principle of taxation.  Given that the federal government’s intake of funds from personal taxation is roughly 19% of GDP, shouldn’t its tax policy be aimed at maximizing GDP?  That is, its policy should be able to raise revenue for the government while at the same time not “retard[ing] the continued steady development of business and industry.”  If the government is going to take in 19% of the GDP pie regardless of the top rate, its focus should be on growing the pie, not trying to take a larger slice of a shrinking pie.  Meaning, the government’s tax policies should encourage investment, enterprise and profit. 

Of course, this all hinges on the belief that the goal of the federal government’s tax policy is revenue for the maintenance and operation of itself. Unfortunately, for many on the progressive left, the goal of tax policy is not revenue, but societal control and redistribution.  Which is why, even as it becomes more and more clear that the government is sinking into bankruptcy and the country into malaise, the progressive left will continue to argue that some people “deserve” to have their taxes raised.  If progressives succeed in raising taxes on the “rich”, they can be satisfied that they were able to use the weapon of class warfare successfully.  As more people lose their jobs and capital dwindles, the progressives will look over the decaying world they helped create and console themselves by saying that at least they stuck it to the “rich” man.

-Edward Mahee for TruPolitics.net

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The $700 Billion Price Tag

September 15, 2010 Leave a Comment

This article was featured in The Bulletin (Philadelphia-area newspaper) on 9/19/10. You can read the newspaper version online here or catch the print column every other week.

During his recent speech in Ohio, President Obama made it clear his administration will soon raise taxes on those in the top marginal income tax bracket. While not surprising given the administration’s penchant for redistribution, the manner in which President Obama made his declaration brings cause for concern: “This isn’t to punish folks who are better off – it’s because we can’t afford the $700 billion price tag.” Not only will such tax-the-rich policy hamper U.S. economic growth, principally among small businesses, but the statement itself is a clear indictment of the president’s broader philosophical belief: Earned income is the Government’s, not the Peoples’.

Practically, the looming tax increase will hamper the already-struggling recovery. The wealthiest earners spend the most, especially on the margins. Their spending helps fuel demand, drive profits, and thus create jobs. This group also invests more, providing capital to companies seeking cash and driving long-term growth. But the debate over trickle-down economics has been well documented.

Perhaps more significant is the acute degree to which the tax hikes will damage small businesses. Small businesses comprise over 99% of all U.S. businesses, employing 70 million Americans, or half of the total private work force.  According to recent IRS data, an astonishing 48% of the net income of these businesses—sole proprietorships, partnerships and S corporations—went to those earning above $200,000. In other words, the tax hike will directly hit companies that drive a considerable portion of economic growth and job creation.

Significantly, a pair of studies published by economists at the National Bureau of Economic Research show exceptionally high responsiveness of sole proprietors’ business activity to tax rates. When applied to President Obama’s proposed hike, the study shows a projected 7% drop in total gross taxable revenue. Adding to this data is a study from R. Glenn Hubbard of Columbia University showing that as the progressivity of the tax code increases, entrepreneurs are further discouraged from starting new businesses. Finally, when the National Federation of Independent Business recently asked small business owners to list the most important problem they faced, a full 20% cited taxes, making it the second most named concern behind only weak sales. Perhaps this is why just 21% of economists recently surveyed by the Wall Street Journal favored the president’s decision to raise taxes on the wealthiest earners.

Beyond economic implications, it is odd that the administration expresses concern for a potential $700 billion revenue loss from extending tax cuts for top earners, but is seemingly unconcerned about the revenue loss of $2 trillion from extending tax cuts for the rest of the population. Moreover, such concern was conspicuously absent when passing the two largest fiscal budgets in U.S. history, the Cash for Clunkers program, mortgage and corporate bailouts, the wasted $800 billion stimulus, the $1 trillion healthcare bill, and massive increases in social welfare programs. With the deficit having grown 300% under its watch, the administration ought to have a difficult time claiming fiscal restraint as its driving motivation.

So, in absence of fiscal responsibility and with the economic data so exceptionally clear—falling small business revenue; increased job loss; discouraged entrepreneurs; less consumer spending—why would the administration champion such a policy? Because it believes income belongs to the government, not the people. To them, letting the tax cuts expire would be like turning away a lottery ticket.

The progressive movement, unveiled over the past 18 months, believes firmly that the potential success of the collective trumps the rights of the individual. A guided economy, redistributive tax policy, and a slew of federally dictated entitlement programs are the means by which progressives seek to accomplish an elusive social utopia. As Frank J. Goodnow, one of the founders of modern progressivism once noted, “Social expediency, rather than natural right, is thus to determine the sphere of individual freedom of action.” When the collective comes before the individual, when liberty is trumped by statism, government claims the product of your labor. If, in its great beneficence Government offers you the gift of 60% of your earned income, you ought to be thankful. Or so the story goes.

The Founding Fathers saw things quite differently. They established a Constitutionally-constrained government, centered on the idea that government should exist only where necessary. Property, earned income, and the product of private labor were the peoples’ right to keep. The people, after all, had worked for it. Government confiscation of earned wealth, they felt, should only take place with the utmost discretion and for limited, enumerated purposes.

With such clear economic implications and a marked departure from America’s original values, the Founders might have issued a clear retort to the president’s statement: “No, Mr. President, the People can’t afford the $700 billion price tag.”

-Matt Benchener is Supervisor of Newtown Township and Found of TruPolitics.net

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The Rising Tide That Carries All Ships

August 5, 2010 Leave a Comment

This article was featured in The Bulletin (Philadelphia-area newspaper) on 8/18/10. You can read the newspaper version online here or read the print column every other week.

At the age of 18, I took a job as a janitor at a local private middle school. The job paid just above minimum wage and involved extremely difficult physical labor. Worse, some might say, I was doing this menial labor for the rich kids in town. But I needed to save money for college, and this was the best job I could find. So for that summer, in the thick Pennsylvania heat, I scrubbed floors, shoveled dirt, and cleaned bathrooms. It was terrible, but it was a job—and I was thankful for it.

Looking back, I was never resentful of the students who attended that school. Their attendance meant they needed a janitor, and the steep tuition their parents paid funded my modest wages. Without that school I probably wouldn’t have had a job.

My small story demonstrates a truth that is critical to the current national debate: The economy is a rising tide that carries all ships. In other words, in a free market economy, success for some leads to opportunity for others. The entrepreneur who becomes wildly rich through the success of his venture also creates thousands of jobs for others at his company. Those jobs create income. That income is then used to purchase products throughout the economy, increase demand, and boost growth, all of which create more jobs. The cycle continues.

To make it concrete, consider the world’s richest man, Bill Gates. Did Microsoft’s success make Bill Gates wealthy? Yes—his net worth is over $50 billion. Did his company better the lives of millions? Yes—not only has Microsoft created thousands of jobs (it currently employs over 100,000 people), it has also helped lead a technology revolution that’s made business more efficient, information more accessible, and quality of life much higher. Bill Gates’ success was, in many ways, the world’s success.

Oddly enough, however, progressive policy discourages this type of prosperity. The more you make, the argument goes, the more government ought to confiscate. The U.S. already has the highest corporate tax rate in the industrialized world, and the Obama Administration is planning sharp increases in the top marginal income tax rate, despite the fact that many small businesses are organized as “individuals” and will feel the increased burden directly. If taxes can be used as disincentives (high taxes on tobacco, for example), and tax breaks as incentives (first time home-buyer tax credit; environmental product purchases etc.), why disincentivize success through exceptionally high corporate and income taxes?

Because liberal pundits and politicians see a much different world. For them, the economy is a fixed game, where the wealth of the rich increases the poverty of the poor. Rather than a rising tide, the economy is seen as a finite pie—if one person takes more, there is less for another.

This type of thinking has given rise to divisive rhetoric that forwards class warfare and demonizes industry. Proponents of this theory say they “favor the little guy,” will attack the “fat cat rich,” and call for us to “spread the wealth around.” Sound familiar? Or, consider recent comments by Howard Dean, former head of the Democratic Party: “In contradistinction to the Republicans…[Democrats] don’t believe kids ought to go to bed hungry at night.”

This, however, is an unfortunate distortion of both economic and philosophical reality. Study after study demonstrates that broad economic growth benefits everyone through technological advancements, creation of jobs, and specialization of labor (through which each worker’s value is increased). On tax policy, a recent study of 91 fiscal stimulus programs in 21 developed economies from 1970-2007 by Harvard economist Alberto Alesina found tax cuts are far more simulative than redistributive government spending. Christina Romer, in a study she conducted prior to joining the Obama Administration, found large economic multipliers from tax cuts, which she concluded “have very large and persistent positive output effects.” Tax increases, she also found, hurt growth. This of course has all been proven out through the exceptional growth in GDP and economic output following John F. Kennedy’s tax cuts in the 1960s and Ronald Reagan’s in the 1980s.

The common liberal retort is that, while the economy may grow, the rich simply get richer. But they ignore that the poor and middle class also get richer. Their relative increases may be less than that of the rich, but a better life is a better life.

Even putting considerations of liberty and property rights aside, low taxes are necessary catalysts and incentives to encourage the kind of growth that helps the whole of society. There exists, however, cognitive dissonance: The “rich” benefit directly from tax cuts; the poor benefit indirectly from resulting economic growth. Not understanding this nuance, many mistakenly throw the baby out with the bath water. They must realize there is simply no progressive utopia where the economy grows despite excessive redistributive fiscal policy.  

Conservatism believes the best way to care for the poor is through a free, open, and prosperous society where success for one leads to opportunity for another. It is a beautiful, unifying philosophy.  If you’ve ever traveled the world, you’ve witnessed the power of free, market-driven societies—someone at the current poverty line in the United States is richer than 87% of the world. China, India, and a host of emerging nations learned this lesson quickly when quality of life boomed after adopting free market principles (though they still have a long way to go).

John F. Kennedy said it best in 1963 when facing the difficult choice to cut taxes in the midst of declining federal revenues: “Tax reduction thus sets off a process that can bring gains for everyone, gains won by marshalling resources that would otherwise stand idle.” The free economy is a rising tide that carries all ships, a powerful mechanism for broad prosperity, opportunity, and more importantly, unity for all.

-Matt Benchener is Supervisor of Newtown Township and Founder of TruPolitics.net

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It’s The Economy, Stupid

June 16, 2010 1 Comment

This article was featured in The Bulletin (Philadelphia-area newspaper) on 6/20/10 and the Bucks County Courier Times on 8/17/10. You can read the Bulletin version here or the Courier Times version here.

The United States recently reached an ominous milestone: The national debt surpassed $13 trillion. Numbers with “illions” attached to them are thrown around so regularly that debt of this magnitude is numbingly abstract to the average American. But consider it this way: How long would it take to pay off just $1 trillion if we paid back one dollar every second? 5 months? One year? Politicians use the term “trillion” rather casually when they discuss a new national program or our mounting debt, but they never make it concrete. The answer: It would take 31,688 years to pay off just $1 trillion of the national debt if we paid off a dollar a second. Now multiply that number by 13.

Nine years ago, President Bush took office with a national debt of $5.73 trillion, a number that was rapidly shrinking following the Clinton Administration. Between 1998-2000, the publicly held debt was reduced by $363 billion—the largest three-year pay-down in American history—and President Clinton left office with a $237 billion budget surplus (debt is the accumulation of past deficits). So how has the national debt nearly tripled in the decade since?

Those on the far right will tell you we didn’t cut taxes enough. Those on the far left will say we didn’t raise taxes enough. They are both wrong. The Bush Administration saw the national debt rise 72% under its watch, and turned a multi-billion dollar surplus into a nearly half-trillion dollar deficit. The Obama Administration, in just 18 months, has grown the national debt by over 30%, and widened the deficit by nearly 300%. If President Obama truly ushered in “change,” why are the results so strikingly similar?

Because both sides shared the deadly common denominator of profligate spending. The Bush Administration embraced the philosophy of “compassionate conservatism”—focusing on select social and entitlement programs—under which its non-discretionary spending was the most since 1977. President Bush was a part-time conservative, cutting taxes but spending heavily.

President Obama doubled down on the spending habits of his predecessor. He passed the largest spending bill in U.S. history (the $787 billion so-called “stimulus”), a 2010 budget of $3.5 trillion (at the time a record high), and a 2011 budget of $3.8 trillion, marking the first ever post-World War II  budget set at 25% of GDP. This, of course, all came on the heels of a $1 trillion healthcare bill, various bailouts of large corporations, massive expansions of domestic entitlement programs, and the TARP program for Wall Street. For President Obama, spending is justified through faulty Keynesian economics and funded through redistributive taxation.

The result for both administrations has been the same: Explosion of the national debt and with it, economic volatility. That’s because massive spending, no matter what the tax policy, grows deficits.

In the 1990s, the Hoover Institution’s W. Kurt Hauser demonstrated that tax cuts and tax increases have no correlation with revenue growth or deficit reduction. According to economist David Ranson, head of research at H.C. Wainwright & Co. Economics, Hauser’s work shows that, “Changes in marginal tax rates do not make a perceptible difference to the ratio of revenue to GDP.” In other words, according to “Hauser’s Law,” tax policy in either direction cannot reduce the deficit.

So what can reduce the deficit? Hauser’s study also found an empirical link between GDP growth and revenue growth. Simply put, the only predictor of increased federal revenue is economic expansion. So, to get more revenue to reduce the deficit, government must grow the economy.

To do this, it must aggressively reduce federal spending. Harvard economist Alberto Alesina recently found that strong deficit reduction policies have been followed by large increases in GDP growth: “Spending cuts adopted to reduce deficits have been associated with economic expansions rather than recessions.” That’s significant. Alesina is saying that spending reductions actually grow GDP, while Hauser’s Law demonstrates that GDP growth reduces deficits. The formula, then, is simple: Cut spending; GDP grows; revenues increase; deficits fall; the economy expands. Repeat.

Why? Because fiscal restraint does two important things: First, it allows for tax relief (when the government spends less, it can tax less). Low tax rates keep more money in the free market for investment, consumption, and spending. Second, it balances the budget by keeping spending within its means. A balanced budget creates long-term economic stability by removing uncertainty, volatile interest rates, and leveraged debt from the marketplace. That combination fuels powerful growth.

This was something the Clinton Administration (and its Republican-lead Congress) understood exceptionally well. President Clinton’s stated theory upon taking office was that growth would come through stability. Get rid of the deficit, he said, and the economy will have stable interest rates, higher bond ratings, and a strong foundation of financial certainty.

To get there, he started where his successors did not: By cutting government spending. Congress implemented a “pay-as-you-go” system that enforced strict fiscal discipline, reformed government entitlement programs to reduce waste, and reduced federal spending to its lowest level since 1966. The administration held the line on taxes to encourage investment and consumption from the private sector, placing more dollars into a dynamic capitalist economy. By doing what neither President Obama or President Bush did—shrink government, reduce spending, and moderate taxes—the Clinton Administration encouraged an economic environment that created 22 million new jobs, brought unemployment and inflation to their lowest levels in 30 years, and turned a deficit into a multi-billion dollar surplus. For all the Clinton Administration did wrong, it got the economy and deficits right.

The lesson for our leaders is clear: To reduce the deficit, you must grow the economy. To grow the economy, you must first embrace fiscal restraint. As James Carville once told then-Governor Clinton, “It’s the economy, stupid.”

-Matt Benchener is Supervisor of Newtown Township and Founder of TruPolitics.net

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An Unsubsidized Life is Not Worth Living

May 18, 2010 Leave a Comment

This post was written by Edward Mahee. Writing under a pen name, Mr. Mahee is a legal analyst and a political commentator. This is his ninth posting for the site.

In his famous work Apology, Plato quotes his mentor Socrates as saying, “An unexamined life is not worth living.”  While I believe the sentiment is properly translated from the Greek of Plato into modern English, I do not believe it was properly translated into modern Greek.  The behavior of the people of Greece in the last weeks as its government has finally begun the process of coming to grips with its financial trouble, seems to indicate they were raised with the notion that “an unsubsidized life is not worth living.”  The Greek citizens’ reaction to government cutbacks (“austerity measures”) required under the terms of its $110 billion bailout is a window into a potentially harrowing future.

First, some background.  Greece has been ruled by socialist governments since 1974, when the Third Greek Republic was established.  These governments spent freely.  The money for this spending came from heavy taxes and prodigious borrowing.  It has been suggested that part of the current crisis comes from the Greek habit of not paying taxes, which may be true, but when just 2/3 of workers in a country are in the private sector, there is only so much money a government can hope to raise in taxes. 

Let me emphasize that:  Just 2/3 of Greek workers are private sector employees.  One out of every three workers is employed by a public instrumentality supported by taxation and borrowing.  And those public sector employees have a sweet deal.  Each public sector employee receives 14 (not 12) monthly payments.  For many of them, the work day ends at 2:30 p.m.  And, when they retire, their annual defined benefit pensions come in the form of 14 (again, not 12) monthly checks.  This, along with guaranteed employment (a Greek public employee cannot be fired) made for a pretty nice life … until now.

In the wake the current global financial crisis, Greece has had to come to grips with its debt problems.  As things stand, the Greek national debt of approximately €300 billion ($378 billion) is bigger than the country’s economy of $333 billion. Greece now owes more than its economy can produce, or to put it another way, Greece owes more than it is worth. 

In response to this crisis, the Greek government has implemented austerity measures, including slashing government spending, aimed at reducing its annual budget deficit.  The Greek government has hiked taxes on fuel, tobacco and alcohol, raised the retirement age by two years, imposed public sector pay cuts and applied tough new tax evasion regulations.  Many of these measures were required by Greece’s neighbors, principally Germany, in exchange for a promise to loan much needed cash to Greece in an effort to avoid default. 

The current Greek crisis brings to mind three thoughts.  First, the public response to austerity measures is striking for its fantasy quality.  It’s almost as though they do not realize, or don’t care that there is no more money to support their government-subsidized cushy life.  Margaret Thatcher is famous for having said the problem with socialism is that “you always run out of other peoples’ money.”  The Greek people can march all they want, but no matter how many buildings are burned, businesses destroyed, property vandalized or chants recited, nothing can change the fact that the money is gone.  The Greeks can rage against reality, but it doesn’t matter any more than if they raged against gravity.

Second, there has been significant talk of a bailout of Greece in order for it to avoid default and the subsequent consequences it would have for the viability of the Euro currency.  But while the focus has been on Greece as the recipient, not much thought has been given to the sources of the loaned money.  What of the German or American taxpayer who is now on the hook for Greece?   Are frugal people who are careful, or at least less profligate with their money, ultimately suckers?  Why be the ant, if in the end you’re just going to end up subsidizing the grasshopper?

Third, what is happening in Greece may be a window into the future for the United States should it, like Greece, lose control of its finances.  All current projections regarding government expenditures in the United States—federal, state and local—are troubling to say the least.  California is already thought to be on the verge of bankruptcy, having been forced to suspend cash payments to its employees last summer.

For now, we should contemplate the sorry state of our own financial house and wonder, “If the United States follows the path of Greece, who will bail us out?” Once we lose complete control of our finances and depend on the largess of others to pay our bills, we will have truly lost our independence.  And with independence, our precious individual rights will quickly follow.

-Edward Mahee for TruPolitics.net

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Greece: A Cautionary Tale for the United States

May 13, 2010 2 Comments

This article was featured in The Bulletin (Philadelphia-area newspaper) on 5/15/10 and the Bucks County Courier Times on 5/27/10. You can read the online Bulletin version here and the Courier Times version here.

Margaret Thatcher once famously noted, “The problem with socialism is that eventually you run out of other peoples’ money.” Over the past two weeks, the world has watched her words personified in the near collapse of Greece. Living well beyond its means and wrought with debt, Greece now suffers from decades of broad-based collectivism, welfare programs, and massive public entitlements. Its liabilities have become so heavy that it faces default—a fate both the Euro-Zone and world economies cannot withstand—so it recently accepted a $110 billion bailout. Its people are now revolting, it will be repaying its debt for decades, and its economy will teeter on the precipice for years. It’s a lesson in socialism. It’s a lesson for America.

Greece’s story is one that has been told time and time again: A sharply liberal government that believed it could and should provide for all its citizens. It is the tragic but predictable tale of the Nanny State. Nearly one-third of Greek citizens work directly for the government, comprising a massive public sector union funded by taxpayers. The government guaranteed lifetime jobs, provided nearly 100% payout pensions, and had mandated raises and bonuses regardless of individual performance. When it comes to socialism, direct and bloated public employment epitomizes big government.

Layer on top of that federally-controlled healthcare, transportation, and energy (to name a few), and you have a wildly liberal government trapped beneath a debt burden of $388 billion, or 113% of GDP. To fund the liabilities driving this debt, the Greek government knew it needed to drastically raise revenues. So, it adopted the classic liberal archetype: Tax and spend. And tax it did. Again. And again. The government created a 21% value-added tax, income taxes as high as 40% (for those making the U.S. equivalent of just $150,000), a 25% tax on corporations, and a litany of special excise taxes.

Only, as history has always shown, the excessive taxation didn’t generate necessary revenue. The private sector became unattractive because of the high tax rates, and the lure of steady pay increases and fat pensions drove most Greeks to civil service. The 33% of workers employed by the government was notoriously unproductive—guaranteed pensions, bonuses, and raises, paired with a no-layoff promise stripped away incentive to produce. Through huge taxes and bloated public jobs, Greece had added liability to its balance sheet while taking tax paying productive workers out of the private sector.  

Caught in a socialist system, the remaining 2/3 of the population had little incentive to succeed. The small slice that did become wealthy evaded taxes at record rates, a pattern proven to repeat worldwide as nations raise taxes to unsustainable levels. Financial analysts suggest Greece has some of the highest rates of tax fraud in the world. So much for soaking the rich.

So how did Greece get to this point? Democratically. Since 1981, the socialist party in Greece has won nearly every major election. The more extreme communist party has come in at least third 28 out of the past 29 years. The Greek people bought into the notion that government provision and redistribution would drive prosperity and happiness. Socialization was something the people wanted, and they chose a societal malaise that destroyed private industry, risk taking, and production. Greece was a nation decimated by the World Wars, and it emerged heavily dependent on foreign aid. But rather than look to its own innovation, ability, and ingenuity, it looked to government to save it.

In America, in the wake of a difficult financial crisis, many hope to take us down the same path.  Elected officials in Greece gradually built up public sector payrolls in order to provide jobs (the stimulus?), deemed socialized healthcare a “human right” (sound familiar?), and absorbed massive private sectors of the economy in order to regulate some and bailout others (GM? AIG?). Its aggressive redistributive tax rates (spread the wealth around?) and value added tax (a proposal now on the table) crushed private industry and personal consumption. The United States should learn from these mistakes.

When it comes to debt, the U.S. is not far from Greece. In 2009, Greece’s budget deficit was 13.6% of its gross domestic product; the U.S. budget deficit stands at close to 10% of GDP. Greece’s debt, the accumulation of past deficits, is 113% of its GDP; U.S. debt is 53% of GDP. Under President Obama’s multi-trillion dollar budget and healthcare plan, these numbers will quickly skyrocket.

Socialism is a philosophy of good ideas and good intentions, but of desperately failed outcomes. Government provision, social programming, and handouts sound wonderful. But what about debt at 113% of GDP? What about 20% unemployment? What about revolts in the streets, uncompetitive businesses, and broad economic collapse?

America’s exceptional success was bred of a beautiful confluence of values: Capitalism, Liberty, and Pursuit. Our nation was founded by a passionate group of revolutionaries, forged by daring explorers willing to take risks, and sustained by resilient workers relentlessly pursuing progress. Capitalism allows for Liberty; Liberty means limited government involvement; both drive Pursuit. Socialism chokes away the individual pursuit necessary for success, and puts in its place a societal malaise that leverages debt and encourages complacency. Those who do not understand history are bound to repeat it.

-Matt Benchener is Supervisor of Newtown Township and Founder of TruPolitics.net

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Voters Deserve Fiscal Responsibility

August 10, 2009 1 Comment

This article was featured in The Bulletin (Philadelphia-area newspaper) on 8/19/09. You can read the online newspaper edition here, or check out the print column each week.

I serve on my township’s finance committee, and recently had the chance to review the tax revenue projections for the upcoming years. The projection for our township, which has not been hit nearly as hard as most of the country, is a revenue decline of approximately 10% over the next year and a half. Since tax proceeds typically trail the economy, we expect that rate to increase through 2010.

This got me thinking. If we expect a decline of over 10% in revenues, shouldn’t we be cutting spending at the same rate?

In business, decreased earnings mean decreased spending and investment. Budgetary control is the core of financially sound organizations. In personal finance, decreased wages mean decreased consumption. Families across the nation are facing the harsh reality of a prolonged recession, and wise families are reducing spending, scaling back lifestyle, and investing for the future. The most prudent saved enough during times of prosperity to sustain during the downturn. If principles of financial prudence are clear for business and personal finance, why don’t we expect the same from government?Government Spending

In reality, quite the opposite has occurred. Across the country, local and state governments are scrambling to raise emergency taxes to prevent bankruptcy. They failed to plan and save, and locked themselves into unsustainable spend heavy budgets. The federal government, similarly, has a projected year-end deficit of $1.84 trillion, in spite of which the current administration forwarded the largest non-wartime budget in U.S. history. That $3 trillion budget does not yet include the President’s proposed $1.6 trillion health overhaul. Tax-and-spend policies have always been controversial, but massive spending without regard to mounting debt is more than controversial, it’s foolish.

Why does fiscal irresponsibility persist with such severity in government? Though varied and complex, there are two primary causes. The first is best summed up by a classic political science axiom: Government spends money for political purposes; citizens spend money for economic purposes. That is, a politician is incentivized by the political outcomes of his spending, while an individual is incentivized by the personal outcomes of his spending.

In a democracy, the desired political outcome is often reelection or increased power. Politicians face a near constant cycle of elections, and often make promises to secure voter loyalty. Political action, not stagnation, draws attention and votes, and politicians feel they must spend to demonstrate that action. As a result, the local politician who promises $150,000 to improve local parks will spend that $150,000 even in a downturn. He dare not slash it from the budget, or he breaks his promise and faces voter backlash. So, rather than constrain spending like a wise family or business, he will simply raise taxes. I see it firsthand in local government all the time.

On a national level, the examples are too numerous to recount. An obvious and egregious example, however, occurred recently in the passage of the so-called stimulus package. Only 35% of stimulus money was allocated toward growth producing spending (tax cuts plus infrastructure investment), while the remainder was simply earmarked for political agenda items ($4 billion for ACORN; $400 million for global warming research; $150 million for the Smithsonian, to name a few). Not to mention the projected $2.5 million being spent on new temporary road signs with the red, blue, and green stimulus logo, touting construction projects funded by the bill. Why do you think the Obama Administration wants to use taxpayer money to advertise its construction projects? For political purposes, or for economic purposes?

The second issue is in part a cause of governmental structure. Politicians are in the unique position of spending someone else’s money without significant accountability. Because of the nature of funding through taxation, politicians draw from an extremely large pool of payers. So, when the stimulus authorizes $2.5 million for propaganda road signs, it averages out to approximately 20 cents per taxpayer—hardly enough to stage a protest over.

The taxation process also separates taxpayers from feeling the direct impact of government spending. The money comes from you (often automatically deducted), goes to the IRS, is sent to thousands of government agencies, and is then sent back out the door. Imagine what it would be like if instead you were directly and proportionately billed for each government spending initiative. You would feel the impact directly—that would certainly be cause for protest.

In the end, most politicians will spend money out of personal political interest, the affects of which will not be directly felt by taxpayers. They have little incentive to adhere to fundamental budgetary principles, and extraordinary incentive not to. The resulting action is an intellectually dishonest process of political finance. When revenue increases, government claims it can afford to increase spending. But when revenue decreases, rather than decrease spending at the same rate, government claims it must raise taxes.

Simply because this process exists, however, does not mean that it should. Government officials have a responsibility to act in the interests of their constituents. No voter ever casted a vote to serve the self-interests of a candidate. Elected officials have a fiduciary duty to serve those they represent, and that duty ought to compel fiscal responsibility and budgetary prudence.

We need leaders committed to constrain spending, who treat each dollar as if it is their own. We need leaders that realize every dollar they spend is a dollar taken from their constituents. We need leaders that save, rather than spend, during times of prosperity in order to prepare for times of scarcity. It is time we demand fiscal responsibility.  

-Matt Benchener from TruPolitics.net

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Why The Stimulus Failed

July 22, 2009 5 Comments

TruPolitics.net is proud to welcome writer Edward Mahee. Mr. Mahee boasts an extensive legal background, and is an emerging conservative thinker. Expect articles from Mr. Mahee every other week.

For the last two years, and especially since last Fall, the struggling economy has been the most pressing issue facing the nation.  A number of efforts have been undertaken to revive the economy, but with unemployment at 9.5% and rising, and no sign of economic recovery on the horizon, nothing seems to have worked. 

The most public and most colossal effort yet undertaken was by the federal government in the form of the American Recovery and Reinvestment Act of Government Spending2009—the so-called “Stimulus Plan”—passed in February at the insistence of President Barack Obama. The Stimulus Plan, totaling $787 billion, was sold to the American public as essential to protect the economy from further trouble.  According to the president last February, “This is not your ordinary, run-of-the-mill recession.”  It’s “the worst economic crisis since the Great Depression.” 

Why was such a stimulus necessary?  The principal underlying the Stimulus Plan is derived from the work of British economist John Maynard Keynes. Keynes asserted that in an economic downturn, when the private sector is unwilling to spend or invest, government should step in and spend in order to keep the economy afloat until private sector spending recovers.

The trouble with Keynes’s formula is that the government is not a producer of wealth or value. All the money the government has it acquires through taxes, borrowing or printing. 

Therefore, when the federal government spends $100, it takes $100 from the private economy.  When the government raises $100 in taxes, it is $100 less that a private person or entity has to save, invest, hire, build, or otherwise dispose of.  If the government chooses instead to borrow that $100, that money is not being invested in other capital markets. When the government instead chooses to print $100, it inflates the currency.  For every extra dollar the government prints, every other dollar in circulation depreciates in its purchasing power—the value of each individual dollar is diluted.  Inflating the currency is in effect a tax, as the government takes value away from the dollars held by private parties.

Because government can only spend by taking from the private economy, Keynesian stimuli focused on government spending have never worked.  In this country, we have had two runs of the Keynesian experiment, both of which predictably ended in disaster. 

During the 1930s, Presidents Hoover and Roosevelt massively increased the level of spending by the federal government. The effort was a failure. Roosevelt’s Treasury Secretary, Henry Morgenthau admitted in 1939, “We are spending more money than we have ever spent before and it does not work.  I want to see this country prosperous.  I want to see people get jobs.  We have never made good on our promises.  I say after eight years of this administration we have just as much unemployment as when we started and an enormous debt to boot.” 

The second Keynesian experiment was tried during the 1970s, during which President Nixon declared, “We are all Keynesians now.”  The result was again a

John Maynard Keynes

John Maynard Keynes

disaster, culminating in the creation of the Misery Index, the combination of the inflation and unemployment rates.

Why then are many in Congress and the Administration insistent that we walk down this path again?  The answer is not

about economic recovery, but about power.  Left to its own devices, any free market economy will recover from trouble.  We only need look to our own history.  The American economy has suffered a number of setbacks and has always recovered without resorting to massive intervention by the federal government (see the recession of the early 1890’s, 1920’s and 1980’s). 

But an economy recovering on its own is no way for a politician to increase his power or reward favored constituencies.  Under the intellectual cover provided by Mr. Keynes, politicians will tax and spend.  In the name of aiding economic recovery, politicians will take from the private, productive economy and give that money in exchange for votes.  The effect of this is to keep unemployment high and dependence on the federal government for largess higher still. 

The Stimulus Plan is not and never was about recovery, but about control by the government over individuals.  The government will happily take from you what is yours and give to another in exchange for that person’s vote.  But that largess will not effectively create jobs or produce wealth.  And maybe that is the point in the end.  When individuals have jobs and can rely on their own friends and families in times of need, they don’t need politicians—and politicians will always do everything they can to remain needed.  Mr. Keynes has given those politicians their excuse.

-Edward Mahee from TruPolitics.net

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President Obama’s Bridge to Nowhere

July 2, 2009 Leave a Comment

“This is President Obama’s economy now”

-Congressman Eric Cantor

At the beginning of his term in January, President Obama warned the nation that it faced an economic crises not seen since the Great Depression. Without swift action, he said, the downward spiral would continue and the American economy would suffer the consequences. His solution was a $787 billion stimulus plan, which the administration claimed would rescue the economy by injecting it with new, job creating spending. The Obama Administration admitted that the legislation was full of earmarks, but said it was a price the nation simply had to pay for immediate action. Bridge to Nowhere

That immediate action, the administration promised, would keep unemployment below 9%, and would spur a broad recovery in the stock market. Thursday, the unemployment rate hit 9.5%, its highest level in 26 years. The stock market closed at 8,280.74, down nearly 6% for the year. It appears the $787 billion “stimulus” was anything but.

The ineffectiveness of the stimulus is not surprising. Only a little over one third of the money was allocated toward growth producing spending (tax cuts plus infrastructure investment), while the remainder was simply earmarked for political agenda items. Among the waste were the following:  1. Nearly $4 billion to ACORN (the far-left group that helped President Obama get elected); 2. $400 million for global-warming research; 3. $20 billion for food stamps and $36 billion for expanded unemployment welfare (welfare expansion policies long hoped for by Democrats); 4. $50 million for the National Endowment for the Arts; 5. $150 million to the Smithsonian museum. Did anyone actually expect items such as these to stimulate the economy?

And for all of the rhetoric surrounding the need for swift action—a favorite of the Obama Administration (see healthcare; the mortgage, financial, and auto bailouts; cap-and-trade environmentalism)—only 23% of the total spending is slated to be spent this fiscal year. The rest will be spent through 2011, long after most economists expect the natural market rebound to occur.

Democrats have been understandably silent on economic issues in the past month, and the administration has been hesitant to offer a defense of its now failed policy. Its only argument to date: 150,000 have been “saved” because of stimulus spending. When asked how that number was determined, the Obama Administration said it was based on theoretical statistical modeling that predicted job savings through spending initiatives. Since the President took office, the economy has shed over 2 million jobs. Unemployment now stands well beyond the levels the administration promised the stimulus would help maintain. Unfortunately for the administration, fact has inconveniently trumped theory.

President Obama needs to be held accountable for the failure of his policy and lack of economic leadership. At a time when the country desperately needed serious, thoughtful action, his administration forwarded a highly partisan pork-filled bill. The portion of the bill that legitimately sought stimulus spending was based on unproven and controversial Keynesian economic theory. No country has ever used government funds to spend its way out of a recession–ever. Not to mention that the stimulus greatly expanded an already dangerous deficit which will only prolong the obama's changedownturn.

And all of this waste for what? Democrats saw an opening (“never let a serious crisis go to waste”) and were able to push forward a political wish list they had been holding for decades.  The Obama Administration decided that it could allocate resources and use consumer money better than consumers themselves could. They failed to realize a powerful economic axiom: Every dollar the government spends will be spent for political purposes; every dollar the economy (businesses and consumers) spend will be spent for economic purposes. Now the economy, and American citizens, are suffering the consequences.

With the country now focused on healthcare, Justice Sotomayor, and cap-and-trade, the egregious error of the stimulus may be left behind. But perhaps not. According to a Rasmussen Reports poll, 45% of Americans believe the remainder of the stimulus spending should be canceled, and close to 40% now hold President Obama responsible for the nation’s economic struggles. Those numbers have accelerated greatly in the past two months alone.

Perhaps the nation is beginning to realize that not all “change” is good change. Many Americans were frustrated with the Bush Administration and the Republican Party. But I doubt that aggressive partisan politics, radical government expansion, and socialist policy were the change they had “hoped” for.

-Matt Benchener from TruPolitics.net

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