Economy

Why spending needs to be nipped in the bud

In London, there’s been protesting against government cuts.  Money is tight, and the government seeks to restore a little fiscal sanity.  Not much, this is England after all, but some.  The people, on the other hand, are bound and determined to get what they think they deserve.  This, more than anything else, is why it’s imperative to stop the fiscal insanity early.

Once an entitlement or program starts, people become attached to it quickly.  Nothing stirs the blood in politics more than the idea of a favorite program being cut, despite the necessity of it.  As more and more spending programs get trotted out, more and more money is needed to pay for it.  That means you need to actually get more money from folks, and when tough times like a down economy hits, it becomes even more important that you reign in the spending.

However, since you spend like crazy during the good times, people have gotten used to it.  They want their programs to stay, and they’re not going to just quietly let you take it away from them.  After all, they’re entitled to it!

Spending needs to be cut, and there will clearly be people who aren’t happy with it.  The cuts need to be drastic and nothing should be sacred and off the table.  However, that should be followed up in better times with more fiscal sanity.  Just because we might be in a boom time in the future doesn’t mean we should go back to spending like a drunken sailor on a three day pass.  Instead, we should hold onto any extra revenue as a cushion for further lean times.  This will help prevent need to take on more and more debt.

Of course, those people protesting usually don’t care about that.  So long as they get theirs.

Illinois increases taxes, Caterpillar may take 23,000 jobs to another state

As you may remember, Illinois recently increased taxes in order to close a massive budget deficit, which included a corporate income taxes that ranks among the highest in the nation. It was noted at the time that that job creators in the state would be less competitive:

The new corporate tax rate would bring the total percentage Illinois corporations pay on income, including a separate personal property replacement tax, to 9.5%, one of the highest in the nation.

That would make the corporate income-tax rate in Illinois the third-highest in the country when combined with an assumed 35% federal corporate income tax, following Pennsylvania and Minnesota, said Scott Hodge, president of the Tax Foundation, a conservative-leaning Washington research outfit. Illinois currently ranks 21.

As other states cut taxes and Illinois raises them, the state “will be even more of an eyesore by comparison,” Mr. Hodge said.

A spokesman for Caterpillar Inc., one of the largest manufacturers in Illinois with 23,000 employees in the state, said in a statement that “such a tax increase will make it more difficult for Caterpillar to compete in today’s global economy from our operations in Illinois.”

Caterpillar looks like they are seriously considering leaving the Land of Lincoln because of the desire for more revenues instead of spending cuts:

In a letter sent March 21 to Gov. Pat Quinn, Caterpillar chief executive officer Doug Oberhelman said officials in at least four other states have approached the company about relocating since Illinois raised its income tax in January.

Tim Geithner demagogues spending cuts

Despite recently calling the country’s budget problems “unsustainable,” including the budget presented to Congress by his boss, Treasury Secretary Tim Geithner is slamming spending cuts passed on Saturday by House Republicans.

Here is Geithner before the Senate Budget Committee just last week:

Here is what he said over the weekend:

U.S. Treasury Secretary Timothy Geithner said Saturday that the package of spending cuts the House of Representatives passed earlier in the day would “undermine and damage our capacity to create jobs and expand the economy.”
[…]
He said he was “very confident Democrats and Republicans are going to be able to come together on a program to not just reduce spending but reduce our long-term deficits.”

“The United States is going through the beginning of a very important national debate on how to make sure we are strengthening the economy, strengthening growth prospects by putting in place reforms that restore balance to our fiscal position, restore gravity to our fiscal position, and make sure we’re going back to living within our means as a country,” he said.

Obama presents a wallet busting budget to Congress

After a couple of weeks of wondering what spending cuts the Republican-controlled House would propose, President Barack Obama yesterday released a budget that spends $3.7 trillion, estimates a $1.6 trillion budget deficit for this year and $7.2 billion in deficits for the next 10 years.

Forget about the rhetoric, look at the numbers.

First, there’s the $1.6 trillion deficit. That figure is the same as the entire budget of the United States in FY1998 (FY1986 in real terms, which is interesting considering the tendency to compare Obama with Reagan). This deficit will supposedly be reduced to $1.1 trillion in FY2012, but that’s probably wishful thinking. As this chart shows, this administration hasn’t been very good at keeping its promises about deficit reduction: The blue line is what the president promised would happen with the deficit when he issued his first budget, and the red line is what he says will happen now.

Job growth anemic in January

As you’ve probably heard, the January’s unemployment numbers came out on Friday. According to the Bureau of Labor Statistics, unemployment fell last month to 9% (from 9.4% in December) and the economy only added 36,000 - less than what was expected:

The unemployment rate unexpectedly fell to 9 percent in January, the lowest level in nearly two years, but the economy added just 36,000 new jobs last month.

The Labor Department reported Friday that more than 500,000 Americans reported finding jobs in January, improving the jobless rate from December’s 9.4 percent to 9 percent. The last time it was that low was in April 2009.

Experts had expected that the unemployment rate would rise to 9.5 percent for January. In all, 13.86 million people looking for jobs couldn’t find work in January.

“The overall trend of economic data in recent months has been encouraging, as initiatives put in place by this administration are taking hold, but there is still considerable work to do,” said Austan Goolsbee, chairman of the Council of Economic Advisers. While “the 0.8 percentage point decline in the unemployment rate over the past two months is a welcome development,” he said, it still “remains unacceptably high.”

Indeed, the news isn’t all good — even as the unemployment rate shrank, non-farm businesses reported the creation of 36,000 jobs, far fewer than the 136,000 new jobs that had been anticipated for January. Bad weather throughout much of the country is likely to blame, with snowstorms hurting the construction industry especially hard, marked by 32,000 jobs lost last month.

EconStories needs your help!

If you enjoyed the video for “Fear the Boom and Bust,” which explains the decades old battle between ideas of F.A. Hayek and John Maynard Keynes, the guys at EconStories - Russ Roberts and John Papola - are looking for donations for their follow-up video.

They discussed the plans a couple of months ago at The Economist’s Buttonwood Gathering, So, if you want to see this happen, send them a few bucks.

In case you haven’t seen it, here is “Fear the Boom and Bust”:

Liberty Links: Morning Reads for Thursday, January 27th

Below is a collection of several links that we didn’t get around to writing about, but still wanted to post for readers to examine. The stories typically range from news about prominent figures in the liberty movement, national politics, the nanny state, foreign policy and free markets.

State of the Union address tomorrow, Paul Ryan to give GOP response

On Tuesday evening, President Barack Obama will deliver his State of the Union address to a joint session of Congress. We’re beginning to get an idea of what he will say - most of which will probably fall short of what Republicans want to hear:

President Barack Obama will call for new government spending on infrastructure, education and research in his State of the Union address Tuesday, sharpening his response to Republicans in Congress who are demanding deep budget cuts, people familiar with the speech said.

Mr. Obama will argue that the U.S., even while trying to reduce its budget deficit, must make targeted investments to foster job growth and boost U.S. competitiveness in the world economy. The new spending could include initiatives aimed at building the renewable-energy sector—which received billions of dollars in stimulus funding—and rebuilding roads to improve transportation, people familiar with the matter said. Money to restructure the No Child Left Behind law’s testing mandates and institute more competitive grants also could be included.

While proposing new spending, Mr. Obama also will lay out significant budget cuts elsewhere, people familiar with the plans say, though they will likely fall short of what Republican lawmakers have requested.

Obama Administration Delays Gulf Drilling

As gasoline prices head north of $3.00 per gallon, up nearly $0.41 cents from a year ago, the Wall Street Journal reports that new wells may not be drilled in the Gulf of Mexico until as late as 2012.  The effects are multifaceted, impacting fuel costs, jobs, and ultimately the economy.

The impact of the delays goes beyond the oil industry. The Gulf coast economy has been hit hard by the slowdown in drilling activity, especially because the oil spill also hurt the region’s fishing and tourism industries. The Obama administration in September estimated that 8,000 to 12,000 workers could lose their jobs temporarily as a result of the moratorium; some independent estimates have been much higher.

The slowdown also has long-term implications for U.S. oil production. The Energy Information Administration, the research arm of the Department of Energy, last month predicted that domestic offshore oil production will fall 13% this year from 2010 due to the moratorium and the slow return to drilling; a year ago, the agency predicted offshore production would rise 6% in 2011. The difference: a loss of about 220,000 barrels of oil a day.

In the wake of the BP disaster, I think it is safe to say that safety should play a prominent role in future.  That said, Rahm Emanuel’s philosophy of “never letting a serious crisis go to waste” seems to be guiding the Obama Administration’s actions in this case.

It is important to remember that there were laws and regulations before the Deep Water Horizon exploded last April.  In fact, the administration has filed suit charging BP and other companies with several violations.

Earth to Congress: It’s a SPENDING Problem

In recent weeks, the debate over the the retention of tax cuts initiated during the George W. Bush administration monopolized the political discussion, aside from a few politicians showing us that they care nothing for the First Amendment as they condemn Wikileaks and its founder, Julian Assange. What Congress and President Obama seem not to grasp is that regardless of tax policy, the underlying issue for our economic situation is spending, specifically our affinity to borrow money to pay for spending beyond revenue.

No matter what the Presidential Budget Commission recommends with regard to taxation, a value-added tax (VAT), a broader-based income tax with few exemptions, or a switch to a consumption-based tax system, the Federal Government has an addiction. That addiction is to spending taxpayer money.

Whether it is funding for our imperial efforts to expand the American reach across the globe in the name of democracy and fighting terrorism, to continue to fund Medicare, Social Security, and other entitlement programs, or a variety of other government programs, substantial cuts to spending MUST crop up in the debate over how to “right the ship.” The addiction to spend is not a Democrat problem, and it is not a Republican problem; it is a bipartisan problem, and the only answer lies in a nonpartisan solution to break the addiction.

I understand that there are significant obstacles to breaking any addiction, and the Federal Government committed funding to many people and programs. Currently, we are at a point that difficult choices must be made NOW to avoid necessary, drastic, and clumsy choices when the funding is no longer available.


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