Economy/Fiscal Issues « TruPolitics

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

Filed under Economy/Fiscal Issues Tagged with Bush Era Tax Cuts, Economy/Fiscal Issues, Taxation, Taxes, TruPolitics, TruPolitics.net

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

Filed under Economy/Fiscal Issues Tagged with Economy/Fiscal Issues, Fiscal Responsibility, Redistribution, TruPolitics, TruPolitics.net

TruPolitics Podcast Episode 6: Obama’s Econ. Proposals; Causes of Financial Crisis; Healthcare Costs

September 13, 2010 Leave a comment

The sixth TruPolitics podcast. Episode 6 explores President Obama’s Recent Economic Proposals; Causes of the Financial Crisis; and Health Care’s Rising Costs. Listen to the podcast directly through iTunes for the best sound and playback quality. Search “TruPolitics” in iTunes and hit “Subscribe.” Or, you can listen by hitting “save” on the link below.

TruPolitics Episode 6: Obama’s Econ. Proposals; Causes of the Financial Crisis; Healthcare Costs

**Subscribe through iTunes for the best sound quality**

Filed under Podcasts Tagged with Economy/Fiscal Issues, Healthcare, Podcast, Politics, TruPolitics, TruPolitics Podcast, TruPolitics.net

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

Filed under Conservatism, Economy/Fiscal Issues Tagged with Conservatism, Economy/Fiscal Issues, Redistribution, TruPolitics, TruPolitics.net

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 Spending 2009—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

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

Filed under Economy/Fiscal Issues Tagged with Amercian Recovery and Reinvestment Act, Economic stimulus, Economy/Fiscal Issues, Keynes, Keynesianism, Recession, Stimulus, TruPolitics

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 change downturn.

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

Filed under Economy/Fiscal Issues Tagged with Economic stimulus, Economy/Fiscal Issues, Obama Stimulus, President Obama, Stimulus, TruPolitics, Unemployment

The President’s Budget – A Defining Moment

March 26, 2009 1 Comment

This article was featured in The Bulletin (Philadelphia-area newspaper) on 3/26/09. See the newspaper version here.

“The practical implication of this is bankruptcy for the United States.”

-Senator Judd Gregg on President Obama’s Budget Proposal

Imagine that you are thirty years old, have a steady job, a house you worked to afford, and a beautiful family to support. Now imagine that your father comes to you and asks if he can take your children out for ice cream. You agree, but you don’t want him to feel burdened to pay for your children, so you give him your no limit American Express Centurion Card. President Obama Defends His Budget

A few hours later, your father returns with your children. “How was the ice cream?” you ask. “Fantastic,” he answers. “Oh, and while we were out I used your card to pay for $10,000 in medical treatments for a man who couldn’t pay for himself-he really needed the help. And I bought a $300,000 house for a lady who had wanted a house all her life. Doesn’t everyone deserve to own a house?” His voice begins to quiver with excitement. “And then there was a poor student who said he couldn’t quite pay for his college education. No one should have to take out a loan just to learn, right? So, I paid his tuition up front in full-it was only $90,000. Isn’t that wonderful?! Besides, you make a lot of money; why not help some other people out?”

Sure it’s wonderful; medical treatments, housing, and education are all admirable and important for society. But your father just spent $400,000 of your money on someone else. That was money you worked for and were saving for your children. Now, you are saddled with debt that will take decades to repay.

Last week, President Obama began the defense of his landmark budget proposal, taking a West Coast trip that began with two town halls and finished with an appearance on The Tonight Show with Jay Leno. When he returned, he was the feature interview on 60 Minutes. His tour culminated Tuesday night, where he held his second prime-time news conference in the last two months (President Bush and President Clinton held only four each during their entire Presidencies). It is clear President Obama knows he’s in for a tough fight. Obama's Budget Breakdown

And justifiably so. Over the next decade, the Obama budget proposal increases spending by over $1 trillion, raises aggregate taxes on all Americans by $1.4 trillion, and doubles the publicly held national debt to $15 trillion. These are unprecedented numbers, extending the burden on American taxpayers, encouraging hyper-inflation through debt, increasing foreign leverage in our financial markets, and pulling money out of the private economy and into government bureaucracy. Said House Minority Leader John A. Boehner, “[Obama's budget] may be the most irresponsible piece of legislation I’ve seen in my legislative career.” John McCain famously called the budget a form of “generational theft,” as we trade pet projects and policy initiatives now for massive debt for our children later.

What has the President’s response been to the criticism? First, as he said Tuesday, he deserves an excuse from the criticism because of the debt he inherited: “I suspect that some of those Republican critics have a short memory, because, as I recall, I’m inheriting a $1.3 trillion deficit.” Nobody disputes that point-President Bush was hardly a fiscal conservative, and his liberal Congress spent wildly. But that does not excuse President Obama from prudent governance. We are already seeing the damages of such a wide deficit, and now he simply wants to double down? That is akin to saying that since your wife spent $5,000 on a new dress, sending you deep into consumer debt, you should then spend $5,000 on new golf clubs even though you can’t afford it.

President Obama’s second, and perhaps more indicting response, has been that he is spending on things that Americans need and deserve. This includes a $634 billion move toward socialized healthcare, as well as billions more in promises to finance student debt, expand welfare, lower mortgage payments, and fund an environmentalist cap-and-trade program. To pay for this expansion, President Obama says he will hike taxes on the wealthy (including thousands of small businesses), up the cost of investment through capital gains taxes, reduce key defense initiatives, and increase our debt to foreign nations.

Like the grandfather who thought he was justified in spending his son’s money on other people, President Obama wants to put the debt for his social programs on the American taxpayer. He wants to redistribute wealth, and force Americans who earn money to pay for those who do not. And what we cannot pay for now, we will simply pass onto our children in the form of exorbitant national debt. In many ways, his budget proposal closely mirrors his stimulus package: Billions in pet projects, social policy initiatives, and government expansion.

At a time when we desperately need fiscal conservatism and economic answers, this budget speaks only of partisan politics. This may be a defining moment in American history. Will we set the stage for a socialized America for the next decade?

I sure hope that ice cream was worth it.

-Matt Benchener from TruPolitics.net

Filed under Conservatism, Economy/Fiscal Issues Tagged with Budget, Budget Proposal, Deficit, Economy/Fiscal Issues, Financial Crisis, News, Obama Budget, Politics, TruPolitics.net

The True Story of AIG

March 18, 2009 2 Comments

This article was featured in The Bulletin (Philadelphia-area newspaper) on 3/19/09. See the newspaper version here (go to pg. 23).

AIG Building Last October, we watched with shock and fear as the stock market began its sharpest downturn since The Great Depression. Market indices, which normally fluctuated between .25% and 1%, were suddenly thrown into whipsaw-like volatility, with shifts of 6% and 7% often occurring in the final hour of trading alone. Financial titans and landmark American companies once thought too large to fail fell almost daily: Bear Sterns; Lehman Brothers; Merrill Lynch; Wachovia; Washington Mutual, to name a few. At the bottom of the rubble was insurance giant AIG, a company that, just a year earlier, had been praised by analysts for its dominant cash flow and surplus capitalization. AIG’s stability was its hallmark (in 2007 it was ranked as the 47^thmost valuable brand in the world), building its brand around the now ironic tagline, “The Strength to Be There.” The story behind its collapse is more telling than a simple $165 million bonus payout. What happened?

AIG, like many other financial companies, got caught in the complex web of derivatives trading. With real estate and housing investment booming, investors were scrambling to grab a piece of the profit. For an insurance company like AIG, this meant trading credit default swaps. Essentially, AIG would agree to take on the default risk of a group of mortgages (called a tranche) in exchange for a highly profitable payment from the investor. Investment banks would approach AIG with a group of AAA rated mortgage bonds, and would buy what equates to an insurance policy against the group’s default. This allowed investment banks and traders to buy up mortgages and loans without absorbing any of the risk–all of the risk was in AIG’s hands, and all of the profit was with the investment banks. Or so they thought. The problem was that once the housing bubble burst, and the underlying sub-prime mortgages came to bear, AIG owed billions of dollars in insurance payments to cover the defaults. The loss was so large and so sudden, that AIG did not have the capitalization to pay for the losses. Add to this the fact that the derivatives traders had leveraged the risk at a near 20:1 ratio ($1 million dollars of loss now equated to $20 million), and the powerful titan of AIG suddenly owed substantially more than it was worth.

AIG was unable to pay those investors it had promised to insure, so its investors had to scramble to cover their own losses. No one had the capitalization to do so, and the fabric of Wall Street was ripped to shreds in a few short months. Government officials felt they needed to do something, so they quickly passed the Troubled Asset Relief Program (TARP). The goal was to give taxpayer money to banks to help recapitalize them, allowing them to cover their losses or pass off toxic assets. AIG was seen as essential to this process, as it owed so much to so many–it was too important to fail. The government rushed in, took an 80% ownership stake, and poured billions of dollars into reviving the company.

Now, AIG has been thrown back into the spotlight for the recent revelation of its $165 million bonus payouts to the derivatives traders that invited all the risk. Why the outrage? Because people hate to see their money given away indiscriminately, especially to those who contributed first hand to the economy’s decline. AIG

But where was this outrage when the government issued more than one thousand times this amount to failing companies in TARP I and TARP II? This misallocation was equally egregious–taxpayer money was paying for someone else’s indiscretion. We were taking on billions of dollars of debt to bailout companies that placed bets with worse odds, and nearly equal consequences, to a game of Russian roulette. All because the government felt it would be for our greater good; that a bailout would lead to stabilization, stabilization to economic growth, and economic growth to a return of taxpayer money.

The AIG story unveils a company, and its web of financial partners, who took unprecedented risk and fell because of it. It also unveils a government that was willing, for the supposed good of the public, to pour its citizens’ money into a broken financial system. But if capitalism is to run its course, companies that take unwise risk must be allowed to fail. By placing taxpayer money into the inefficient hands of companies like AIG, the government has only prolonged the downturn at the expense of capitalism.

Perhaps most significantly, however, we have invited in the moral hazard of government control in the marketplace, and government control of consumer investment. As an investor, you would never pour your own money into a company like AIG, carrying such a toxic balance sheet that you would be assured long-term loss. The true outrage, then, should not be about the $165 million paid in bonuses, but instead about the nearly $1 trillion taken from taxpayers and poured into faulty investment. AIG and its financial partners fell because they took foolish financial risk–taxpayers should not be asked to pay for their mistake. The true sin came long before the bonus payouts; it was berthed the moment capitalism died.

-Matt Benchener from TruPolitics.net

Filed under Other Tagged with AIG, AIG Bonuses, Bailout, Economy/Fiscal Issues, Financial Crisis, News, Politics, TARP, TruPolitics, TruPolitics.net

The Bush Paradox

March 16, 2009 Leave a comment

Budget Increase per Presidential Term

This article was featured in The Bulletin (Philadelphia-area newspaper) on 3/20/09. See the newspaper print version here (go to pg. 22).

When President Obama was on the campaign trail, his message was simple and clear: Hope and change. But no one ever asked him, “Change from what?” The answer from most liberal circles, which persists with venom today, was that we needed to depart from the hated Bush Administration and its conservative ideology. Now, as debate over President Obama’s radical agenda rages, supporters of his agenda dismiss conservatism as tried and failed under the Bush Administration. The argument goes as follows: If President Bush embodied conservatism, and the majority of the country wanted him out of office, then surely we ought to try liberalism. If conservatism failed, then its opposite must succeed. But did conservatism really fail under President Bush? Was President Bush even truly conservative?

During the Bush Administration, something very strange happened to conservatism: It became inextricably linked with President Bush and the whole of his policies. Conservatism came to mean pro-war, anti-homosexual, anti-abortion, pro-guns, anti-environment, anti-global warming, anti-Europe, anti-science, pro-God (and only the evangelical version), pro-big oil companies, pro-wealthy Americans/anti-poor Americans and minorities, and pro-Israel. To most Americans, this is what made a conservative a conservative. And with the incredible polarization of the last eight years, you had to either support or hate each facet of the ‘conservative’ agenda. If you were conservative, it was unthinkable to believe global warming might be a legitimate problem, or that the Iraq War was possibly founded on faulty ideology. If you were liberal, it was necessary to bash President Bush, and the thought of tax cuts or welfare reform was supposed to make you cringe. As often happens in politics, conservatism was dismissed along with its headline leader as a failed and unpopular ideology. It was time for a change, it seemed, and in came President Obama with an agenda sharply departed from his predecessor’s.

One of the great political tragedies of recent memory is the demonization and polarization of conservatism in its tie with President Bush. Issues that have little or no relevancy to conservatism, such as climate change or the Iraq War, now color an ideology that has bred success in our country since its founding. The sad irony of the situation is that President Bush, while he accomplished many great things–national security and strong judicial nominations, to name a few–was not a true conservative. He expanded government programs, deeply widened agency bureaucracy, and spent more than any President since WWII. He came into office with a surplus, and left with a gaping deficit. President Bush was a part-time conservative, cutting taxes while spending heavily. In conservatism, tax cuts are the result of small government, not the driver. Small government means less government spending; less government spending means less need for tax revenue; less need for tax revenue means lower taxes. President Bush, however, widened government while still cutting taxes. What does that do? It creates the type of inflation and instability that debunks efficient markets.

It is even more troubling that people look back on Bill Clinton and hail him as proof of liberalism’s success. Clinton was one of the most fiscally conservative presidents in our nation’s history (many argue the most), slashing budgets and restoring prudent spending to Congress. He left President Bush with a $120 billion surplus by keeping spending low and government relatively small. His restraint was indeed helped by a strong Republican Congress led by Newt Gingrich, but you cannot ignore the bottom line results. At least in fiscal matters, Clinton was indisputably more conservative than Bush.

This all leads to two important points: 1. Conservatism should not be tied with the Bush Administration’s practice of “neo-conservatism”; 2. When practiced correctly, conservatism drives growth, liberty, and prosperity. Consider the four simple principles of Reagan-era conservatism: 1. Small government; 2. Low taxes; 3. Personal responsibility; 4. Strong national defense. These ideals brought the country roaring back under President Reagan, reinvigorating a stalled economy and downtrodden public spirit following the sharply liberal Carter era. Besides, who can’t stand behind low taxes and strong national defense? Who doesn’t want people to take responsibility for their actions, and for government to resist wasteful handouts? Who doesn’t want money to be in the hands of the efficient consumer and marketplace? Who doesn’t support individual liberty and the pursuit of happiness?

Conservatism was never meant to be tied with a controversial Iraq War, Creationism, Christianity, or big oil. Those issues all have merit, but are not debated here. Conservatism was never meant to be polarizing or divisive, or even political. Rather, conservatism is meant to be the unifying answer to the undying question of government’s proper role in society. For conservatives, that answer is simple: Small and limited. And that type of government has never failed–it is the underpinning of what has differentiated our great nation since its founding.

-Matt Benchener from TruPolitics.net

Filed under Conservatism Tagged with Bush Budget, Bush spending, Conservatism, Economy/Fiscal Issues, News, Obama, Politics, TruPolitics, TruPolitics.net

Cramer’s Revelation

March 9, 2009 6 Comments

CNBC's Jim Cramer

This article was featured in The Bulletin (Philadelphia area newspaper) on 3/12/09, and in the Bucks County Courier Times on 4/6/09. See The Bulletin version here.

“I favored Obama over McCain because I thought Obama to be a middle-of-the-road Democrat, exactly the kind I have supported all my adult life.”

-Jim Cramer, host of CNBC’s Mad Money

A little over two years ago, then-Senator Barack Obama stormed onto the American political landscape as a breath of fresh air in a tired partisan environment. Democrats vowed to oust a Republican Party led by an unpopular president, while Republicans scrambled to defend their quickly fading majority. Emerging behind the scenes was a new voice, a powerful and charismatic orator named Barack Obama. As the Democratic primary edged closer, most commentators wrote off Obama as too young and inexperienced to be a serious contender in 2008. Popular wisdom penned him as the rising star of the party, who would likely be ready in 2016. But with Republican strategists and pundits focusing the entirety of their firepower on the larger perceived threat of Hillary Clinton, Barack Obama brought his dazzling message to the national scene as the beloved underdog, ready to make history and promising hope.

The rest, of course, is history. Senator Obama soon became President Obama, and carried with him feelings of good will and hope for prosperity reminiscent of John F. Kennedy’s Camelot. He had more political capital than any president in recent memory, wielding the weapons of anti-Bush sentiment, powerful rhetoric, and far-reaching promises. Some hoped he would be a savior of sorts, paying off mortgages and rescuing the poor. Most, however, viewed him as a brilliant and historic leader, a Clinton-JFK hybrid that would mend the domestic divide, rebuild international diplomacy, and move away from a now-demonized Bush Administration.

Like much of America, that is what Jim Cramer thought about Barack Obama. Cramer, a respected financial commentator for TheStreet.com, and famous energetic host of CNBC’s Mad Money, has been a Democrat all his life. He admits to millions of dollars in donations to the party, and gave his full backing to President Obama in the recent election. Now, however, like many others, Cramer is starting to have acute buyer’s remorse. In a recent and now very famous article (Cramer: My Response to the White House), Cramer expressed his dismay at President Obama’s recent policy initiatives:

“Look at the incredible decline in the stock market, in all indices, since the inauguration of the president, with the drop accelerating when the budget plan came to light because of the massive fear and indecision the document sowed: Raising taxes on the eve of what could be a second Great Depression, destroying the profits in healthcare companies (one of the few areas still robust in the economy), tinkering with the mortgage deduction at a time when U.S. house price depreciation is behind much of the world’s morass and certainly the devastation affecting our banks, and pushing an aggressive cap and trade program that could raise the price of energy for millions of people.”

Obama 2008 Financial Meltdown Cramer would later note that he thought Obama would be like Clinton, a centrist Democrat who wanted a balanced budget, with a mix of social and environmental programs, all under an umbrella of prudent governance. Instead, said Cramer, President Obama is unwisely pushing a far left agenda at a time of economic crisis.

The middle-of-the-road Clinton-JFK hybrid was not to be; instead we have a politician with a far left agenda, bordering on a type of European socialism not yet seen in this country. President Obama has made it clear that he wants to fundamentally change our nation, to move away from the ideals of capitalism, small government, and American opportunism that have defined us for centuries. He wants to redistribute wealth, raise taxes, and spend at unprecedented levels. He wants to pull back on defense spending, widen welfare, and nationalize the health care industry. He wants tight government control and regulation of the free market, strict environmentalist policy, and liberal judicial governance. America is no longer to be the land of opportunity, but is instead to be the land of equal results ensured by the government. America is no longer to be about the pursuit happiness, but instead about the government guarantee of happiness.

And maybe you’re okay with that. There are many Americans who believe in socialism, and believe that the government has the right answers and should control societal results. That is not today’s debate. Rather, it is vitally important to see what people like Jim Cramer are now seeing: President Obama is a man of extreme liberal policy. He wants to fundamentally change America–he is not John F. Kennedy or Bill Clinton; he is not even Jimmy Carter. It is telling that David Brooks, a famous columnist for the New York Times and staunch Obama supporter recently wrote, “Barack Obama is not who we thought he was. His words are responsible; his character is inspiring. But his actions betray a transformational liberalism that should put every centrist on notice.” As you watch his incredible speeches, rich with intelligent prose and brilliant rhetoric, look past the style and to the substance. Read his stimulus package and budget, and carefully study each executive order. He made it clear in the Senate, when his voting record was the most liberal in the history of Congress, and he is making it clear now–he promised change, and that is indeed what we are getting.

-Matt Benchener from TruPolitics.net