Archive for February, 2013

The Sequester

Friday, February 22nd, 2013

As we count down to March 1, we are hearing more and more about the dreaded sequester. The left is confused about its history.

How did this become Obama’s fault? It started with Mitt Romney, a once-influential Republican Party politician and its 2012 nominee for president. In the third debate with President Obama, Romney fretted that “a trillion dollars in cuts through sequestration and budget cuts to the military” would weaken America’s defenses. The president literally dismissed this with a wave of his hand. “The sequester is not something that I proposed,” he said. “It’s something that Congress has proposed. It will not happen.”

How did this get to be the story ?

The accidental Bible of Sequestration is The Price of Politics, Bob Woodward’s history of the debt-limit wars, and one of the least flattering portrayals of the president this side of Breitbart.com. In it, Woodward recounts a July 27, 2011, afternoon meeting between Senate Majority Leader Harry Reid and White House negotiators. Reid wanted a “trigger” as part of a debt deal, some way to force more cuts in the future without defaulting on the debt that summer. Chief of Staff Jack Lew and adviser Rob Nabors proposed sequestration, as a threat that could be averted if/when Congress passed a better deal.

OK. The White House staff suggested it. Why ? Because they assumed that Republicans would cave in rather than accept cuts in the defense budget.

Republicans have “twice passed legislation” to replace the sequestration cuts. Who told you that? It’s a common Republican talking point, but it’s misleading in two ways. The House passed two bills related to sequestration replacement, but the first one, in May 2012, didn’t offer specific cuts. It moved the total amount of defense cuts over into the non-defense budget, like a croupier moving chips into the winner’s pile. The actual replacement cuts were only spelled out in the Spending Reduction Act of 2012, passed by a razor-thin, Republicans-only vote on Dec. 20, 2012. The Congress that passed it expired on Jan. 3 of this year, so the bill is dead.

Oh, OK. The House bill passed with “Republican only” votes so it doesn’t matter ? The real story is the Obama and Democrats’ gamesmanship. What is their position?

The Senate plan would replace the $85 billion of cuts this year with $110 billion of cuts and taxes, reducing the defense cuts to $27.5 billion and raising (hopefully) $54 billion with the “Buffet rule,” the new millionaire income tax.

I thought we passed a “millionaire tax” last January 1 ? Well, that was only the first “millionaire tax” which affected those with incomes above $200,000. Now they want another one. Why ? Because that’s what Democrats do.

To reduce the deficit in a weak economy, new taxes on high-income Americans are a matter of necessity and fairness; they are also a necessary precondition to what in time will have to be tax increases on the middle class. Contrary to Mr. Boehner’s “spending problem” claim, much of the deficit in the next 10 years can be chalked up to chronic revenue shortfalls from the Bush-era tax cuts, which were only partly undone in the fiscal-cliff deal earlier this year. (Wars and a recession also contributed.) It stands to reason that a deficit caused partly by inadequate revenue must be corrected in part by new taxes. And the only way to raise taxes now without harming the recovery is to impose them on high-income filers, for whom a tax increase is unlikely to cut into spending.

Even the New York Times people have to know that tax increases on high income people adds to unemployment and causes the really rich to flee to other countries. Unless, of course, they have bought favors from Obama. As for “revenue” the government’s share of the GDP is the highest since World War II and well above historic norms, no matter what the tax rates were

As for entitlements, Republicans mainly want to cut those that mostly go to the middle class and the poor, while ignoring nearly $1.1 trillion in annual deductions, credits and other tax breaks that flow disproportionately to the highest income Americans and that cost more, each year, than Medicare and Medicaid combined. Clearly then, there is both ample room and justification to reduce the deficit by curbing tax breaks at the high end, as Mr. Obama has proposed and Republicans have rejected.

Those “tax breaks” are the home mortgage deduction and other deductions that are of long standing (like state and local taxes and tax exempt municipal bonds). What the Democrats want is to have no limits on spending. I don’t believe that the Times’ people are so stupid and ignorant that they do not realize we are asking for the situation of Japan, which used Keynesian spending twenty years ago to deal with a real estate bubble collapse. They are still mired in a stagflation economy after a generation.

I will be very disappointed but not particularly surprised if the GOP caves in once again to the old tax now and cut spending later routine that we have seen before. It might be enough to get a third party started if it happens again. The Whigs got too far from their base in 1854. It could happen again.

For an important and entertaining history of the Whigs, read this.

The three most important components of that political culture were the Whig commitment to “improvement” (including both self-transformation as well as national economic improvement), to morality and duty rather than equality and rights, and to national Page [End Page 74] unity rather than local diversity.[4] Their opposition to Andrew Jackson and Jacksonian Democracy did not follow the lines of Schlesinger, which pitted progressives who wanted to use an expansive government to help farmers and the victims of robber-baron capitalism against monied exploiters who wanted to keep government small and impotent against their greed. Instead, it was the Whigs who advocated an expansive federal government—but it was a government that would seek to promote a general liberal, middle-class national welfare, promoting norms of Protestant morality and underwriting the expansion of industrial capitalism by means of government-funded transportation projects (to connect people and markets), high protective tariffs for American manufacturing, and a national banking system to regulate and standardize the American economy. Howe’s Whigs were the embodiment of Horatio Alger, of upward striving, of the triumph of reason over passion, of the positive liberal state, [5] and the counterparts of Disraeli’s “one nation” conservatism.

Arthur Schlesinger libeled more than just Calvin Coolidge.

An excited basset hound

Friday, February 15th, 2013

My companion is a basset hound who has been my closest friend for about 6 years. Here he is.

winston

There he is and he is showing his usual state of attention.

I decided to add a couple of additional pics.

Winston and Bradley

Here is Winston with Bradley Fikes.

Baby Winston

Here he is as a puppy with his owner taking a nap.

Bassets don’t like water and can’t swim but snow is OK as long as it isn’t too deep.

w snow

He doesn’t mind but it can be cold out there.

Winston

Then, it can be really deep.

winston snow 2

It can be too deep and it’s tough to lift a leg then.

Here is a great basset hound story. The owner lost the dog for ten years after a divorce and then, looking for a new dog, he found her in the shelter web site. They are back together. I’d post the video but it can’t be copied.

The future of Islam and its absence

Tuesday, February 12th, 2013

Spengler has a new column that points out the coming collapse of Islam as a demographic entity. I have thought for years that Iran, if the population ever succeeds in overthrowing the regime, will abandon Islam as its first priority. Spengler points to a column by David Ignatius that belatedly recognizes a phenomenon that has been noted by others for years.

Something startling is happening in the Muslim world — and no, I don’t mean the Arab Spring or the growth of Islamic fundamentalism. According to a leading demographer, a “sea change” is producing a sharp decline in Muslim fertility rates and a “flight from marriage” among Arab women.

Nicholas Eberstadt, a scholar with the American Enterprise Institute, documented these findings in two recent papers. They tell a story that contradicts the usual picture of a continuing population explosion in Muslim lands. Population is indeed rising, but if current trends continue, the bulge won’t last long.

The second class status of women in the Muslim world has led to important changes in their beliefs, especially about the religion that oppresses them.

Eberstadt’s first paper was expressively titled “Fertility Decline in the Muslim World: A Veritable Sea-Change, Still Curiously Unnoticed.” Using data for 49 Muslim-majority countries and territories, he found that fertility rates declined an average of 41 percent between 1975-80 and 2005-10, a deeper drop than the 33 percent decline for the world as a whole.

Twenty-two Muslim countries and territories had fertility declines of 50 percent or more. The sharpest drops were in Iran, Oman, the United Arab Emirates, Algeria, Bangladesh, Tunisia, Libya, Albania, Qatar and Kuwait, which all recorded declines of 60 percent or more over three decades.

The present fertility rate in Iran is about equal to that of irreligious Europe.

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Where we are headed, I fear

Tuesday, February 5th, 2013

UPDATE: An an article at Belmont Club describes interest in alternative money creation as a way of anticipating inflation. It also goes further into a discussion of general competence.

The idea that Virginia should consider issuing its own money was dismissed as just another quixotic quest by one of the most conservative members of the state legislature when Marshall introduced it three years ago. But it has since gained traction not only in Virginia, but also in states across the country as Americans have grown increasingly suspicious of the institutions entrusted with safeguarding the economy.

What has changed is faith in the federal government, not just in Virginia but in a growing number of places. The lack of faith in the competence of government — and the soundness of the dollar — has been growing leading some states to create contingency plans in case the currency goes bust.

Once again, I apologize for my pessimism but this is what I see. First, there is this article, which quotes a well known financier.

There may be a natural evolution to our fractionally reserved credit system that characterizes modern global finance. Much like the universe, which began with a big bang nearly 14 billion years ago, but is expanding so rapidly that scientists predict it will all end in a “big freeze” trillions of years from now, our current monetary system seems to require perpetual expansion to maintain its existence. And too, the advancing entropy in the physical universe may in fact portend a similar decline of “energy” and “heat” within the credit markets. If so, then the legitimate response of creditors, debtors and investors inextricably intertwined within it, should logically be to ask about the economic and investment implications of its ongoing transition.

Certainly “growth” seems to be fundamental to our economic health. That, of course, presumes a growing population but it also would be affected by a stagnant population with a growing age disparity. The obvious example of the latter is Japan.

The creation of credit in our modern day fractional reserve banking system began with a deposit and the profitable expansion of that deposit via leverage. Banks and other lenders don’t always keep 100% of their deposits in the “vault” at any one time – in fact they keep very little – thus the term “fractional reserves.” That first deposit then, and the explosion outward of 10x and more of levered lending, is modern day finance’s equivalent of the big bang. When it began is actually harder to determine than the birth of the physical universe but it certainly accelerated with the invention of central banking – the U.S. in 1913 – and with it the increased confidence that these newly licensed lenders of last resort would provide support to financial and real economies. Banking and central banks were and remain essential elements of a productive global economy.

The effect of asset bubbles on such a system is worrisome as the history of Japan and the recent history of the US have shown. The Panic of 1907 was largely responsible for the creation of the Federal Reserve. That financial crisis is thought, by a recent book, to have been a consequence of the 1906 earthquake in San Francisco, which destroyed a large amount of real assets and the insurance costs that were associated. The immediate cause was financial speculation but the real losses had added to the fragility of the system.

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