What Do You Do When a War Has Failed?

If 50 years ago you started a war that failed to achieve its objective while consuming ever increasing amounts of money, what would you do? 

The US IS Not Planning to Reduce It's Debt Burden. Ever.

It's official. The United States has no plans to reduce the burden of debt they have placed on the economy. They just plan to keep borrowing more and more and more until . . . ?

Private Versus Public Debt

Since the onset of the last recession the private sector has behaved prudently and reduced its borrowing. The public sector has been decidedly imprudent and continued to run up huge amounts of debt -- that the more prudent private sector will eventually have to pay. This is precisely how Greece got into the fix they are in.

Elefantes Blancos del Gobierno

It never ceases to amaze me that, despite all of the contrary evidence, people tend to think that government is wiser than they about how to spend their money, and that it acts in the best interests of the people rather than the government.

Exhibit A: Cuidad Real International Airport



Now, if you don't know where this is, you have a lot in common with the people of Spain (it;s about 100 miles form Madrid). You see, it's the brainchild of all those brilliant people who work in government. It's a €1 billion airport project, which the Spanish government recently sold to a Chinese consortium for -- ready? -- 10,000 Euros. And it's in pristine condition because it's never been used.

There are, of course, a few people who are quite happy about this. Like the friends of Spanish politicians who run the construction companies that were paid to create this white elephant. But the people of Spain? They're just next in line to slide into the same morass that the Greek government created for its people. For the same reasons.

If Everyone Spent Like the Government

If you're having trouble relating to the huge numbers involved in government budgets, this chart might put it in perspective. The only thing that's misleading about this is that no lender would increase your credit line every year if you had $300,000 in unsecured debt. They would tell you to be responsible with your spending and learn to live within your means.

Tax Day: Where Your Income Tax is Spent

Today is a day to reflect on what all the tax you pay (at least for the half of us who pay income tax) goes for. Pay attention to the note at the bottom. As much as you might be paying today, you'd have to pay about 25% more to cover all of what the Federal government actually spends.

The Great Government Mutual Fund Investment Opportuntiy

Imagine there was a new mutual fund with the following proposition. We want you to take money out of your current investments and give it to us. Here's our plan. First, we're going to impose a 20% load on your investment up front, so that you will have to take $1.20 out of your current portfolio for every dollar we invest. Then, we're going to invest your money in companies and projects that have such low return prospects that ordinary investment funds refuse to fund them.

Does that sound like something you'd be anxious to do? You're probably saying, "Why, the only way they could raise money for that fund would be to threaten to put you in jail if you didn't invest!" And you'd be right.

In fact this is a good approximation of the prospectus the Federal government should publish for it's spending operations.

1. Government raises the money it spends from taxes -- mostly income taxes. Compliance costs for administering this tax are about 20% of the revenue collected. That means that effectively the government takes $1.20 out of the economy for every $1 it plans to spend.
2. While in theory, government could spend most of it's money on things that have good economic returns, in practice it doesn't. It invests in things like Solyndra and Cash for Clunkers, but mostly it sends checks out to subsidize people who aren't producing much right now.

This is the fundamental reason why government spending is not, and really cannot be economically productive (or "stimulative") -- any more than the mutual fund we've described can produce better results than the ones in which you already invest.

Spending and Spending On Creating More and More Poverty

Over the last five years, the federal government has spent a total $3.7 trillion on approximately 80 different means-tested poverty and welfare programs. And yet the government tells us that poverty is increasing, Usually if you spend a lot of money on projects to reduce something and that something keeps increasing, it's called a FAILURE. In Washington that's grounds for spending even more money.  Because in Washington, doing the same thing over and over and expecting different results is the norm. Everywhere outside the Beltway it's called insanity. 

America's Bridges Are Falling Down?

How many times have you heard a story like this one: “America’s road to recovery may face a costly detour due to a fraying transportation network. One in nine of the country’s 607,380 bridges are structurally deficient …”  This is immediately followed by a call for higher taxes and more Government Spending (remember the Stimulus?). Just another case of those mean Republicans cutting spending at the expense of your safety. Except . . .  here's an inconvenient chart. 




Whatever those dastardly Republicans have been doing, it seems to be working. Or maybe the call for more government spending is like a broken record that just plays over and over and over.

The CBO is a Useful Idiot

The Federal Reserve Bank of St. Louis recently asked an interesting question. "Congress relies on projections supplied by the Congressional Budget Office to make decisions. How good are those projections?" It turns out the answer is, "Pretty poor". In fact the CBO's projections are consistently worse than those generated by a simple Random Walk model! So why would anyone keep citing anything the CBO said? It turns out that the CBO errors have a consistent bias toward underestimating deficits and overestimating surpluses. In other words, the CBO is a "useful idiot" if your objective is to justify government spending or tax increases.

Actual and CBO-Projected 5-Year Cumulative Budget Surplus/Deficit as a Percent of GDP

 

Projected

Figure 7

Cumulative 5-Year Random Walk and Actual Deficit as a Percent of GDP