Michael Gerson writes in the Washington Post The Mark of a Tired Nation, August 11, 2011.

Excerpt:

Yet the ultimate cause of the economic malaise is not a political failure but a political choice. Since the New Deal — and especially since the Great Society — America has chosen an accelerating transfer of wealth from young to old. Some of this was necessary and desirable. Many seniors face a period of economic struggle toward the end of life, which entitlements have effectively, compassionately eased.

But longer lives have extended this period of dependence, while health-care inflation has dramatically increased the cost of the Medicare entitlement. According to Andrew Biggs of the American Enterprise Institute, someone who retires today will pay for less than half of the Medicare benefits he or she is likely to receive over a lifetime — a subsidy given to even the wealthiest retirees. The balance of these costs is imposed on workers or added in debt.

The problem is that there are two periods of economic dependence in life — late and early. A healthy society not only cares for its elderly but also cultivates its children. Biggs estimates that the federal government now spends $6 on seniors for every $1 it spends on children, even though the poverty rate of children is much higher.

HKO Comments:

The small minds in the political debates look at current deficits and just the discretionary spending. The smallest minds fight a fruitless class war and refuse to acknowledge the real numbers.  It is not the “Bush wars” (which the Democrats overwhelmingly supported, and which the president continues); it is not the Bush tax cuts ‘for the rich’ (which did succeed in increasing revenues, especially from the rich); and it is not because of corporate jets.  These expenses may be right or wrong, but they are not the crux of the problem.

Gerson is spot on that the real problem is a choice we have made to enrich the old at the expense of the young.  This kind of thinking is where the real solutions lie.  The problem is not just that we are redistributing wealth, and thus often discouraging its creation; but that we are not distributing it based on need, but on perception and voting strength.

We need to grow the population to grow the economy and thus to grow our ability to provide benefits.  Yet our policy is a disincentive to producing children.  As the elderly live longer and health care costs grow, especially at the end of our lives, we get pushed to the point of a financial crisis where we now find ourselves.

There are lots of places to cut federal spending and we should look at all of them, but unless this fundamental problem of a humane idea taken to an inhumane extreme is addressed this economic problem will not be resolved.  It is inevitable that retirement ages will be increased and that benefits will be means tested.  We can whine and complain how unfair it is, but this problems has been decades in the making and those who tried to address it before faced political suicide and demagogues. Now we have no choice.

George Will writes in The Washington Post- April 29, 2011

Working Up a Tax Storm

excerpts

Storm, 42, is founder and chief executive of FatWallet.com. The company, until recently one of about 9,000 Illinois “affiliates” of Amazon.com, directs online shoppers to online retailers, which often pay affiliates commissions for referrals that result in sales. Storm’s company, which has 54 employees, used to be located in Rockton, Ill., but now is five miles up the road in Beloit, Wis.

Illinois, comprehensively misgoverned and ravenous for revenue, has enacted what has come to be called an “Amazon tax.” It requires Amazon and other online retailers to collect the state’s sales tax.

Storm responded by relocating to Beloit. No one knows how many other Illinois affiliates of the thousands of online retailers — transactions with Amazon are less than 1 percent of FatWallet’s business — will lose revenue, pay less in taxes, cut jobs or leave the state. When Texas sent Amazon a bill for $269 million because of the “nexus” of its Dallas warehouse, Amazon decided to close the warehouse.

HKO comments

It is practically intellectually retarded to expect to raise taxes and not have the tax payers respond in a way to counteract the tax increase. States have repeatedly seen the wealthy and the producers leave when they are overtaxed, and the resulting  tax revenues plummet.

When and if this tactic is reversed it is not likely that the company that just moved its plant will move it back.  The loss in revenue is often irreversible.

George Will  continues:

Federalism — which serves the ability of businesses to move to greener pastures — puts state and local politicians under pressure, but that is where they should be, lest they treat businesses as hostages that can be abused. According to the Tax Foundation, Illinois has not only the fourth-highest combined national-local corporate income tax in the nation but also in the industrialized world. In Peoria, Doug Oberhelman, chief executive of Caterpillar, has told Illinois Gov. Pat Quinn that he is being “wined and dined” by other governors and their representatives encouraging Caterpillar to invest in their states.

It recently picked Muncie, Ind., for a major manufacturing plant. Says Indiana Gov. Mitch Daniels of his neighboring state, “It’s like living next door to ‘The Simpsons’ — you know, the dysfunctional family down the block.”

In January, a lame-duck session of Illinois’ legislature — including 18 Democrats who were defeated in November — raised the personal income tax 67 percent and the corporate tax almost 50 percent. This and the increase — from 3 percent to 5 percent — in the tax on small businesses make Illinois, as the Wall Street Journal says, “one of the most expensive places in the world to conduct business.”

Tim Storm’s presence in Beloit demonstrates how American federalism gives force to a familiar axiom: Businesses go where they are welcome and stay where they are well-treated.

Final HKO comment:

Is it possible that it is more than ignorance?  Is it the crony capitalism of big companies like Walmart using legislative influence to hobble their competition?

The March 2006 Washington Post editorial that claimed real median wages had fallen for 25 years also concluded that “the rising tide helped only workers at the top [ 10 percent].” In 2003, a New York Times journalist likewise wrote, “[T]he bottom 80 percent of Americans have seen their incomes stagnate for three decades.” But if all but the top 10-20 percent had experienced no real income gains for 25-30 years, how could real consumption per capita possibly have doubled since 1973?   Although some would have us believe that most U.S. consumers simply got deeper and deeper in debt, year after year, such a claim implies that household net worth fell continually for decades. Yet, as Chapter 7 demonstrates, median household net worth (assets minus debts) has increased steadily and substantially.

Unless the top 10-20 percent could somehow consume unlimited numbers of houses, cars, shirts, and steaks, it is difficult to imagine how each American’s real consumption could have doubled if real wages and salaries had really been unchanged.  The average size of new homes rose from 1,500 square feet in 1970 to 2,349 square feet in 2004, and the national home ownership rate rose from 62.9 percent in 1970 to 69.2  percent by the end of 2004.  How could so many people be living in so much larger houses if only 10-20 percent had significant increases in income?

Could anyone believe that all those shopping malls that have sprung up since 1973, and all the new homes and restaurants, are really catering to just a fortunate few? How many cars and appliances could the top 10-20 percent have purchased?

From Income and Wealth by Alan Reynolds (published in 2006)

HKO comments:

Alan Reynolds’ book is a wealth of information about the statistical misinformation about the distribution of wealth and income in America.  While addressing a lot of statistics and data the book is still readable and incredibly illuminating.

Throughout this last downturn I have observed and noted how many restaurants and some  malls have seemed to remain busy.  I do not believe that all the people I see with shopping bags from high end stores are in the top 10 percent of earners.

Reynolds points out that the data used often compares weekly income rather than hourly, ignores benefits and transfer payments, excludes taxes, farm workers and many self employed.  The data confuses the fact that more people are entering the upper income brackets with the perception that those in the upper brackets are making more.

When you examine the total wages per hour worked or the consumption per capita you find that arguments for middle class income stagnation and the growth in the inequality of income distribution start to vaporize like a mirage.

In a New York Times Article Paul Krugman took exception to another who laid blame for the financial crisis on Fannie Mae.  In Contending with Paul Krugman, part II, Charles Lane takes exception to Krugman. An excerpt:

What is the point of trying to absolve Fan-Fred in the first place? To the extent that Krugman is merely trying to show that the real culprits are to be found elsewhere — on Wall Street — then I suppose this is a worthy exercise in some academic sense. But apportioning blame for the Great Panic of 2008 is a bit like trying to figure out “the” cause of World War I. If ever there was an overdetermined historical event, this was it. There’s more than enough blame to go around; everyone should be held accountable.

I can understand why a liberal would want the government to support housing opportunity for low-income people. But I cannot understand why a conscientious liberal would support Fan-Fred. What is “progressive” about a couple of megacorporations populated by highly-paid executives who enriched their shareholders and themselves by exploiting a boatload of special government breaks — from an implicit federal debt guarantee to exemption from state and local taxation? When anyone proposed tighter regulation, such as raising their capital requirements, limiting their product line or anything else, pretty much, Fannie and Freddie mobilized an immense and widely feared Washington lobbying operation, greased with campaign cash.

No, Fannie and Freddie, or their congressional enablers, did not “cause” our current predicament. But they were definitely part of the problem. Over many years, they directly and indirectly encouraged over-investment in single-family housing; and their activities during the bubble contributed to making the bust, when it came, both bigger and more costly to taxpayers than it might have otherwise been.

Fannie Mae alone was not responsible, but it is equally dangerous to absolve its roll.  The more we seek demons and partisan blame the more we miss the systemic causes that need correction, and the more we risk a repeat shortly down the road.

From Thomas Sowell’s Intellectuals and Society

“In short, many things that the Federal Reserve, Congress and the two Presidents did (during the market crash of 1929) were counterproductive.  Given these multiple failures of government policy, it is by no means clear that it was the market economy which failed.  There is of course no way to re-run the stock market crash of 1929 and have the federal government let the market adjust on its own to see how that experiment would turn out.  The closest thing to such an experiment was the 1987 stock market crash, similar in size but not in duration to the 1929 collapse.  The Reagan administration did nothing, despite outrage in the media at the government’s failure to act.”

“What will it take to wake up the White House?” the New York Times asked, declaring that ‘the President abdicates leadership and courts disaster.”  Washington Post columnist Mary McGrory said that Reagan “has been singularly indifferent” to the country’s “current pain and confusion.”  The Financial Times of London said that President Reagan “appears to lack the capacity to handle adversity” and “nobody seems to be in charge.”  A former official of the Carter administration criticized President Reagan’s “silence and inaction” following the 1987 stock market crash and compare him unfavorably to President Franklin D. Roosevelt, whose “personal style and bold commands would be a tonic” in the current crisis.”

“The irony in this was that FDR presided over an economy with seven consecutive years of double-digit unemployment, while Regan’s policy of letting the market recover on its own, far from leading to another Great Depression, led instead to one of the country’s longest periods of sustained economic growth, low unemployment and low inflation, lasting twenty years.”