A streetcar undesired

Much to the chagrin of Atlanta area commuters like me, Atlanta will be getting a new streetcar line rather than improving the capacity of the metro area's roads. Officials from Atlanta and the US Department of Transportation this week announced the grant of $47 million in federal funds to build the streetcar line. The grant will be matched by $20 million in local money.

To read the rest of this article, please go to:

http://www.associatedcontent.com/article/5926230/a_streetcar_named_undesired.html?cat=9

Candidate Profile: Roy Barnes for Governor

Roy Barnes is a Mableton native and a life-long resident of Cobb County, where his family owned and operated a general store. He is a graduate of the University of Georgia law school. He became the youngest member of the Georgia state senate at 26 years old when he was elected in 1974. He served eight terms in the senate, before leaving to run for governor in 1990. He was defeated by Zell Miller in the Democratic primary.

In 1992, he returned to politics when he was elected to the Georgia House of Representatives. He served there until 1998, when he ran again for governor. This time he was elected.

A major achievement of Barnes’ term as governor was the removal of the Confederate battle emblem from Georgia’s state flag. In 2001, the flag was changed to a field of blue with a large state seal in the center, above five flags representing Georgia’s history and the words “In God We Trust.” This was an unpopular move that many believe was instrumental in his re-election defeat. Nevertheless, the move earned him a Profile in Courage award from the John F. Kennedy Library in 2003.

Education reform was also a hallmark of Barnes' tenure as governor. His administration resulted in more centralized control of Georgia schools. He also ended tenure for new teachers and required students to pass a graduation test to advance to the next grade, effectively ending social promotion. His website also notes that he reduced classroom sizes and increased pay for teachers. Many of these reforms were also unpopular.

Additionally, Barnes passed tax cuts for family farms and homes. He also created a sales tax holiday for Georgia. Additionally, he passed patient’s rights and anti-predatory lending laws. While he was governor, Barnes was known as “King Roy.”

After losing his re-election bid in 2002, Barnes devoted six months to pro-bono legal work for the Atlanta Legal Aid Society. He also established a consumer rights website, before founding a new family law firm, Barnes Legal Group.

More recently, Barnes argued before the Georgia Supreme Court against Georgia’s voter ID law. The law, passed in 2005, required that Georgia voters show a photo ID to vote. Barnes claimed the law was unconstitutional because some voters did not have driver’s licenses and paying for an ID would cause a burden on the poor. The case was dismissed by Georgia’s Supreme Court since the only plaintiff in the case had a photo ID and therefore had no standing to sue. The United States Supreme Court upheld the law in 2008 (http://www.answers.com/topic/roy-barnes#Governor_of_Georgia ).

Also, Barnes was recently appointed co-chairman of a nonpartisan commission on No Child Left Behind. The commission, sponsored by the Aspen Institute, is designed to seek improvements in federal education policy.

Some of Gov. Barnes’ stances on key issues are noted below:

Jobs: Barnes would issue an executive order to retrofit state and public buildings for energy efficiency. He would also create incentives for medical research in Georgia. Barnes believes that agriculture remains an important part of Georgia’s future and wants to increase the number of finished agricultural products, as opposed to raw materials, that Georgia exports. He believes that Georgia’s agriculture could make the state a leader in green jobs and the production of biofuels.

Taxes: Barnes supports property tax relief.

Education: Barnes is critical of recent cuts in the education budget, cuts in teacher salaries, and teacher furloughs. He would focus on math, science, language and special education and work to reduce class size. Barnes would have two classroom teachers on his staff as governor to ensure that all policy discussions stay grounded in classroom reality. He would also convene teacher panels provide communications between teachers and policymakers. Barnes wants to minimize the number of class days devoted to standardized testing. Finally, he would like to integrate Georgia’s high schools and technical colleges to promote more vocational training.

Transportation: Barnes would like to implement an elevated light-rail system to move commuters from Atlanta to outlying suburbs, much farther than the existing MARTA system. He would also connect Georgia’s major cities with light-rail systems, while working to improve Georgia’s roads.

Life: Barnes’ website makes no mention of his position on life or abortion.

Gun Rights: Barnes’ website makes no mention of his position on second amendment rights.

Sources:
http://www.roy2010.com/
http://www.answers.com/topic/roy-barnes#Governor_of_Georgia
http://myconsumerrights.com

FDR's Folly - and what Obama should learn from it

Franklin Roosevelt has for years been given credit for shepherding the nation through the Great Depression. For decades, FDR’s New Deal policies were believed by many economists to have prevented a total collapse of the United States economy until the markets and industry could recover as they geared up production to supply the US and its allies with war material to fight the Axis powers.

More recently, a close examination of FDR’s programs has revealed that the opposite may be true. In FDR’s Folly, Jim Powell shows that many of Roosevelt’s New Deal programs did far more to hurt the economy and delay recovery than they did to help. Higher taxes, strict regulation, and centralized economic planning all combined to keep unemployment high and the economy stagnant for the entire decade of the 1930s.

The recession that became the Great Depression had its roots in the Federal Reserve’s monetary policy. In 1928 and 1929, the Fed increased interest rates and caused a severe monetary contraction. Powell estimates that the money supply actually decreased by 1/3 (chapter 2).

Powell also notes that many states had banking laws that prohibited banks from having branches. This prevented diversification and made banks weaker. Approximately 10,000 US banks failed between 1929 and 1933 [1]. In Canada, where there were no such restrictions on bank branches, there were no bank failures. Most of the failed banks were rural single-office banks (chapter 4).

Herbert Hoover, who was president when the stock market crashed in 1929, took aggressive steps to save the economy, many of which are similar to steps taken by congress and President Obama over the last few years (chapter 3). Hoover encouraged industry to keep wages high in spite of falling sales and demand. He tried to put people back to work with public works projects and signed the Davis-Bacon Act which required local governments to pay union wages, which helped keep labor costs artificially high. He also backed farm subsidies, which led to overproduction and low prices.

Further, Hoover signed the Smoot-Hawley Tariff in 1930, which raised prices on imported goods. Many other countries retaliated by raising prices on American goods. The Revenue Act of 1932 also raised taxes. Other Hoover policies included restrictions on short sales of stocks and revisions to bankruptcy law that limited the rights of creditors. Hoover’s responses, and Roosevelt’s adoption of many of his policies, turned a recession into the Great Depression.

When FDR became president in 1933, he initiated a series of policies called the New Deal. Many of FDR’s policies took Hoover’s government actions and expanded them. One of FDR’s first actions was to declare a series of bank holidays, in which banks were ordered to close. Powell argues that the bank holidays actually contributed to the bank runs. People knew that the banks were going to be closed. They also knew that, in the days before credit cards, they needed cash. Their response was to rush to the bank and withdraw money while it was open… and solvent.

Another early action of FDR was to sign the Glass-Steagall Banking Act of 1933. This law (repealed in 1999) created a wall between investment banks and commercial (lending) banks. It also established the FDIC to insure bank deposits. The separation of banks prevented diversification and required many of the strongest banks in the country to split into smaller – weaker - parts.

Deposit insurance eased the minds of depositors, but Powell argues that it also made people more risk tolerant. If people knew that their funds were insured by the government, they would pay less attention to what the banks were doing with their deposits. In turn, it encouraged the banks to be more risky with their depositor’s money because they knew that it was guaranteed by the government.

FDR also raised taxes dramatically. The Revenue Act of 1936 increased federal taxes on income, dividends and estates, while limiting deductions. The Undistributed Profits Tax of 1936 raised corporate tax rates and limited deductions for business losses (chapter 6). By the end of FDR’s tenure, the top marginal rates for both personal and corporate taxes were in excess of 90% (chapter 18). These high tax rates discouraged corporate investment and further slowed economic growth.

At the same time that federal tax rates were rising, local and state taxes were also increasing. Many states saw dramatic increases in their income taxes for individuals and businesses as well as higher sales taxes.

Congress actually passed the legislation in 1939 which would have reversed the higher tax trend. The Revenue Act of 1939 would have lowered corporate taxes to a flat 18% and eliminated the Undistributed Profits Tax. However, FDR refused to sign the bill into law.

Another massive New Deal tax increase was passed into law as the Social Security Act of 1935 (chapter 13). As originally passed, Social Security established a payroll tax that would go into an Old Age Retirement Account. Benefits for retirees would begin after January 1, 1942 (although this was later changed to 1940). This was meant to allow funds to build up to pay out benefits, although the program quickly became pay-as-you-go after FDR and congress depleted the trust fund in 1940.

The passage of Social Security slowed the recovery for several reasons. First, it obviously depleted the purchasing power of employees since the tax decreased their take-home pay at a time when wages were already depressed. Since employers were also taxed, it made hiring more expensive and discouraged businesses from adding employees. Finally, it removed money from circulation that could have been spent on goods and services because the tax receipts went into a trust fund for several years before they were paid out to retirees. The ultimate legacy of Social Security is an unfunded entitlement that is expected to go bankrupt by 2037 [4].

Since the US was on the gold standard in the 1930s, FDR could not finance his New Deal programs by unlimited borrowing and printing money as President Obama does. If people saw that inflation was rising, they could exchange their paper dollars for gold. One way that avoided this problem was by amending the Trading with the Enemy Act of 1917 to be effective in times of national emergency. Under the authority of this law, FDR issued an executive order (EO 6102) forcing people to turn in all but a small amount of gold to the government. After seizing the gold, FDR increased the price of gold from the free market price of $20 to $35 per ounce [2].

Another intervention in private contracts was the Wagner Act (chapter 14), which established closed shops and banned company (in-house) unions. The Frazier Lemke Farm Bankruptcy Act of 1934 (chapter 15) limited the rights of creditors in an attempt to stem the tide of farm foreclosures. The Supreme Court ruled in West Coast Hotel v. Parrish (1937) that the government could impose limits on the freedom of contract, such as establishing minimum wage laws. The assault on business was so intense that a 1941 Fortune magazine poll showed that 91% of respondents believed that a dictatorship and a loss of many property rights was imminent (pp. 86).

The New Deal also made use of vast public works projects to stem unemployment. The Civilian Conservation Corps (CCC) and the Public Works Administration (PWA) hired large numbers of Americans for make-work projects. According to Powell (chapter 7), these agencies concentrated their efforts on western swing states where FDR stood to gain the most politically. He also points out that many of the jobs that the government created were for skilled workers. Unskilled workers, who would have had a harder time finding employment, were left out. Additionally, government competition for workers kept wages artificially high, which prevented the market from reaching an equilibrium in which workers could have real jobs.

Another upward pressure on wages came in the National Industrial Recovery Act of 1933 (chapter 9). This law contained a host of centralized economic planning measures. The law set minimum wages and minimum prices as well as production quotas. The law also made it easier for workers to unionize.

The effect of the NIRA was to push wages above market rates. Higher labor costs in a tight economy led many businesses to become more automated, which means that the price and wage controls actually cost many workers their jobs. Blacks were especially hurt because, at the time, they were excluded by many unions. If the company was a closed shop, where employees were required to be union members, blacks were effectively barred from employment.

Eventually, the NIRA was ruled unconstitutional by the Supreme Court [3]. The Supreme Court viewed the NIRA as an unconstitutional delegation of legislative authority to the president and industrial groups. The Court also pointed out that while the constitution grants congress the power to regulate interstate commerce, the NIRA’s codes attempted to regulate and control intrastate and local commerce as well.

There were other New Deal laws that attempted to fix prices and reduce competition as well (chapter 17). The Robinson-Patman Act of 1936 foreshadowed modern demonization of Wal-mart by making it illegal for wholesalers to give large chain stores cheaper prices than small retailers. The Miller-Tydings Retail Price Maintenance Act of 1937 also meant to protect small stores against chains by setting minimum prices. The Civil Aeronautics Act prevented new airline competition requiring licenses for airlines to operate. No new licenses were issued until 1978. The war against competition ultimately hurt consumers by keeping prices higher.

More price controls were found in FDR’s farm policy (chapter 10). The Agricultural Adjustment Act of 1936 included price controls as well as output limits designed to reduce food supplies and prop up prices. Under the Agricultural Adjustment Act, the federal government was responsible for literally destroying perfectly good food at a time when hundreds of thousands of Americans were going hungry.

Ultimately, the AAA was also ruled unconstitutional in 1936, but it was replaced by the Soil Conservation and Preservation Act which reduced the acreage for food crops by paying farmers to grow grasses and legumes. Market orders (quotas) for farmers were revived by the Agricultural Market Agreement Act of 1937.

Another attempt to bail out farmers was the Commodity Credit Corporation, which made loans to farmers using their crops as collateral. If the price of their crops fell, the farmers had the option of keeping their money and forfeiting their crops. This arrangement chiefly benefitted wealthy farmers who owned more land. The Farm Security Administration also made loans to farmers. Powell notes that the FSA concentrated its loans, not in poor areas, but in swing states. Powell also points out that in spite of these programs, farm foreclosures remained high throughout the depression. There were simply too many farmers in the post-WWI period.

Eventually FDR was so angered by the Supreme Court decisions ruling his pet programs unconstitutional that he tried to remake the court (chapter 15). The court-packing scheme, formally known as the Judiciary Reorganization Bill of 1937, would have allowed FDR to add more (friendly) justices to the Supreme Court. The bill ultimately failed, but the justices, particularly Hughes and Roberts, were apparently so intimidated that they stopped opposing New Deal laws. Many New Deal programs were blatant violation of the commerce and general welfare clauses of the Constitution, as well as the 9th and 10th amendments.

One of the most celebrated organizations of the New Deal era was the Tennessee Valley Authority (chapter 11). The mission of the TVA was build dams and bring electricity to rural communities. While it was long considered successful, the TVA had its down side. For example, the TVA took property from private utilities and individuals through eminent domain. Powell also found that TVA states were slower to exchange agricultural economies for more profitable manufacturing jobs. The lower wages found in farm states reduced the demand for electricity.

Another perceived benefit of the TVA was flood control. The dams built by the TVA were supposed to help control the natural cycle of flooding by rivers. However, Powell points out that areas permanently flooded by TVA lakes covered an even larger area than that typically flooded by the rivers.

With the unprecedented expenditures aimed at reviving the economy, what was the result of the New Deal spending? FDR’s Secretary of the Treasury, Henry Morgenthau, said it best when he told the House Ways and Means Committee in 1939, “We are spending more money than we have ever spent before, and it does not work…. I say after eight years of this administration, we have just as much unemployment as when we started and an enormous debt, to boot” [5].

In fact, in 1938 the United States had entered a depression within a depression (chapter 16)! New Deal policies favored labor unions resulting in increased labor costs as well as disruptions from strikes. In response, many businesses replaced their workers with machines. Tax increases decreased the amount of money available to both businesses and consumers. In 1942, the government started income tax withholding in order to get money into the government’s hands faster.

If the New Deal programs exacerbated the Great Depression, what did help the US recover? Conventional wisdom has been that World War II and the massive production needed by the Allies ended the depression. In reality, this spending was similar to the stimulus bill of our own day. It did put people to work for a limited time, but at the cost of a skyrocketing national debt. And when the government spending stopped, the jobs went away.

As the Wall Street Journal noted, both FDR and his successor, Harry Truman, wanted more New Deal policies after WWII [6]. This new New Deal would have included federal health care, government subsidies for housing, more make-work project, and “the right to a useful and remunerative job.”

Instead, led by Georgia Senator Walter F. George, then chairman of the Senate Finance Committee, congress cut taxes. The top individual tax rate was reduced from 94% to 86.45% and the amount exempt from taxation was increased. This change meant that an additional twelve million Americans paid no income tax at all. Further, the excess profits tax was repealed and corporate tax rates were reduced from 90% to 38% [6]. Additionally, FDR’s price controls were eliminated.

Senator George’s claim that the tax bill “will so stimulate the expansion of business as to bring in a greater total revenue” [6] proved correct. The US began collecting more revenue than it had when tax rates were higher and budget deficits turned to budget surpluses. Unemployment rates fell to a fraction of what they had been during the 1930s.

Powell points to other instances in which cuts in taxes and government spending helped heal economic problems (chapter 19). During the Panic of 1837, Martin Van Buren cut spending and taxes. In 1892, Grover Cleveland cut government spending to resolve a decline in prices. In 1920, Warren G. Harding faced the sharpest price decline prior to the Great Depression. Prompted by Treasury Secretary Andrew Mellon, he resolved it by cutting government spending.

There have been other instances of tax and spending cuts stimulating economic growth. Tax rates were cut by Presidents Kennedy, Reagan, and Bush and in each case led to a period of economic growth and increased tax revenues [7]. Other presidents, such as Lyndon Johnson, Richard Nixon, Jimmy Carter, and our own Barack Obama found that high levels of taxes and regulation led to economic stagnation, high unemployment, and rising inflation.

We can learn from the economic successes and mistakes of the past. President Roosevelt’s New Deal programs, while well intentioned, were costly and ultimately not only ineffective, but counterproductive. The New Deal programs caused fifteen years of economic stagnation. The US economy did not fully recover from the Great Depression until after WWII when tax rates were cut and freedom returned to the markets. This success was replicated (and foreshadowed) many times in US history by spending and tax cuts in the face of economic problems. If the federal government continues to follow the example of FDR, we can expect a long period of economic stagnation until a future administration is willing to embrace free market concepts.

Notes:
1. http://www.econreview.com/events/banks1929b.htm
2. http://www.fff.org/freedom/fd0609d.asp
3. http://www.answers.com/topic/schechter-poultry-corporation-v-united-states
4. http://www.usnews.com/money/blogs/the-best-life/2009/05/12/social-security-medicare-busts-move-closer
5. http://www.cnsnews.com/public/content/article.aspx?RsrcID=41784
6. http://online.wsj.com/article/SB10001424052702304024604575173632046893848.html
7. http://www.heritage.org/Research/Reports/2001/05/Lowering-Marginal-Tax-Rates

Powell, Jim, FDR’s Folly. Crown Forum, New York, 2003.

Manassas VA
April 24, 2010

Easter egg economics: a health care parable

This weekend my town, Villa Rica, Georgia, had a public Easter egg hunt at the local recreation park. As I stood among the multitudes with my family, it occurred to me that this was similar to what we will soon be experiencing in our health care system.

To begin with, the Easter egg was free of charge on the surface. Of course, it wasn’t really free, but there was no charge at the gate and there was no fee for the games and activities. The cost was paid by local tax dollars. As the law of supply and demand dictates, since the price was low, demand was high. There were hundreds of kids lined up to hunt the eggs. So many in fact, that when the hunt actually started, it was over within minutes. Each child was lucky to get a handful of eggs.

There were also bouncy rides, face painting, balloon animals, and other activities. Because these were also free, there were long lines. The lines were also partially due to the fact that there were few volunteers who were running the activities. These people were dedicated and you could tell that most of them enjoyed making kids happy, but as the day wore on and the lines became never-ending, some of them understandably became a little frazzled.

My son stood in line for quite a while to get a balloon T. Rex. The girl who was making the balloon animals was very patient and talented (I had never seen a balloon tyrannosaur before!). Nevertheless, I noticed that the first balloon animals were very intricate and decorated with magic marker fur, eyes, and teeth. By the time that my son got his T. Rex, the product was a little more hurried and little less detailed. She was very nice, but I could tell that she wanted us to hurry so that she could get to the next balloon and, hopefully, to the end of the line before dark. Similar circumstances were found at the face painting booth and other activities.

The healthcare system will be under similar stress as the government begins to subsidize health insurance. The apparent price of health insurance will be zero to many people. This will fuel a sharp increase in demand. More people will be competing for a finite amount of resources, in this case, appointments with doctors. There simply won’t be enough doctors to go around and some people will likely have to wait weeks or months for care. When you do get an appointment, the doctor will likely hurry you though to get to the next patient and quality of care will suffer.

As people see that medicine is no longer the profitable and rewarding career that it used to be, fewer and fewer people will make the long and difficult commitment to finish medical school. There will ultimately be fewer doctors (supply) for an increasing number of patients (demand). When this happens, economic law dictates that the price should rise to reduce demand. (In fact, Investor’s Business Daily reported that 45% of doctors would consider quitting if Obamacare passed [1]. This would reduce supply even further and cause more of an imbalance with demand.)

The government is unlikely to let prices rise sharply. Over the past few years, Medicare’s reimbursement rate for doctors has been below market rates. In essence, if a doctor visit costs $100, Medicare might only authorize reimbursement of $60. The remaining $40 has to be passed along to patients with private insurance, driving up insurance rates. As a result, many doctors are not accepting Medicare patients [2].

The only alternatives to letting prices rise is to either increase supply (more doctors) or keeping prices artificially low (price controls). Since it takes a lot time to train a doctor, the supply of doctors is unlikely to increase in the short term, no matter what incentives the government provides. To cut corners on medical training would decrease the quality of care.

If the government chooses price controls, the effect will be further shortages. Demand will not be reduced, but the limited supply will doled on either a first-come-first-served basis or some sort of rationing scheme. In either case, not all of the people trying to get medical care will get it.

An obvious way to resolve these problems would be to charge more. Even an admission price of a dollar to the Easter egg hunt would cause some people to forgo the egg hunt for other activities. Only the people who really wanted to hunt Easter eggs would come. Similarly, having people pay more of the cost of their own health care would encourage people not to go to the doctor if they don’t really need to go.

Some of the proceeds from the admission fees could be used to pay the volunteers who paint faces and make balloon animals. This would encourage more people to learn these skills. More volunteers would mean fewer and shorter lines. If the volunteers were allowed to charge a dollar per face or balloon, they would make even more money and people who didn’t really want a painted face or balloon T. Rex would be provided with an incentive to stand aside in favor of those who did.

Finally, imagine that the community rose up and 60% of Villa Rica and Carroll County told their elected officials in a loud, strong voice that we do not want our local government to pay for further Easter egg hunts. Some people might be philosophically opposed to publically funded Easter egg hunts in general. Others might simply feel that in the current economy, public dollars should be saved to spend on projects that are absolutely necessary.

I hope that if a strong majority spoke in a clear voice, the city and county would reconsider spending money on the Easter egg hunt. In contrast, when almost 60% of Americans stood up to tell congress to junk Obamacare and start over [3], the government ignored them and proceeded to ram an unpopular plan down the throat of the country.

President Obama ignored signs of public discontent in numerous elections since he took office. Strong Republican victories in New Jersey and Virginia, plus Scott Brown’s senate victory in Massachusetts (which already has government-run health care), should have encouraged President Obama to seek a bipartisan solution. Instead he did the opposite. Seeing the writing on the wall that he would likely lose his Democratic congressional majorities in November, he pushed through his plan against the will of the people in hopes that the Republicans would not become strong enough to repeal it.

Election Day, judgment day for the Democrats, is less than eight months away. Currently signs are pointing to devastating Democratic losses at the hands of an angry electorate. Our democracy depends on a government that is subject to the will of the people. When a party in power so blatantly disregards the will of the people, they do not deserve to hold power. They deserve to be discarded like a rotten Easter egg.
Sources:
1. http://www.investors.com/NewsAndAnalysis/Article.aspx?id=506199
2. http://www.nytimes.com/2009/04/02/business/retirementspecial/02health.html
3. http://www.rasmussenreports.com/public_content/politics/current_events/healthcare/september_2009/health_care_reform

Thoughts on the passage of health care reform

Freedom is inversely proportional to the size of government. Last night, our government suddenly grew in size to control almost one-fifth of the national economy. We will surely notice the loss of freedom as soon as the “benefits” of this new law go into effect in 2013. First, we will see fewer choices in our health care options and higher taxes. Later, our children will see a large loss of economic freedom as taxes are raised even further to pay for this “free” health care and Big Government makes even more of our personal choices for us.

We can see what is likely to happen in the next few years by looking at government run health care that already exists in this country. In Massachusetts, RomneyCare has caused health insurance costs to increase at a higher rate than the rest of the country [1]. Increased demand for health care with no corresponding increase in supply is causing shortages in the form of long wait times to see a doctor. Nationally, many doctors refuse to see Medicare patients because of the price controls and bureaucracy associated with the program [2]. In the future, many doctors will likely leave the profession rather than submit to restrictive regulations.

Insurance companies will be forced to cover patients with pre-existing conditions but without charging these sick people more. This means that rates will rise for everyone to pay for those who elect not to buy insurance until they are sick. Eventually many insurance companies will decide that the new rules are unprofitable and may withdraw from the marketplace entirely.

This will lead to an additional health care crisis. Depending on the party in power, further government “fixes” will be needed, which may consist of the longed-for “public option” – fully nationalized health care – of the Democrats.

Ayn Rand described this process her novel Atlas Shrugged. The government enacts regulation to fix perceived flaws in the free market. The government fix causes more problems, which require further government fixes since the marketplace is failing. Eventually, the government totally controls the market.

As both Speaker Pelosi [3] and President Obama [4] pointed out, none of us will know exactly what is in this monstrous law until it is in force. That alone should be sufficient reason to throw from congress each and every Democrat who voted for the bill, but there are plenty of other reasons as well.

The passage of the law directly contravened the will of the people. A recent poll [5] showed that 54% of Americans opposed the plan, while only 41% favored it. Moreover, only 26% strongly favored it, while 45% strongly opposed it. This is not democracy in action. Conversely, ramming the plan through will do more to erode the confidence of the people in government, especially when their worst fears are confirmed and things get worse.

This health care plan will also bust the budget in spite of claims that it will save money [8]. Analysts put the cost of Obama’s health care reform at over $1 trillion dollar, boosting the already record-breaking deficit to its highest point since WWII. Back then, we had a plan to reduce the deficit: win the war. Today, the deficits will keep rising until the government can either no longer, raise taxes or print more money. The true cost of health care reform will be measured in lost jobs, or jobs never created, as higher taxes and new regulations strangle the economic recovery.

Furthermore, the hyper-partisanship of Obama’s first year will likely become the norm. The health care battle is not over; in fact, it is just beginning. The next step, after a massive Democratic loss this November, will be to start the battle to either repeal or reform the reform. Obama is almost certain to veto any attempt to repeal his signature legislation. While Republican gains are not likely to be enough to override an Obama veto, they may win enough seats to at least make positive changes. Off the top of my head, I cannot think of any entitlement that has ever been repealed.

The battle will also move to the courts and the states over the next few years. There will certainly be lawsuits filed over the constitutionality of the government forcing people to buy insurance. I am not optimistic about this avenue since a large number of judges have questionable views about what the constitution actually says. After all, 4/9 of the justices on the Supreme Court don’t believe that “the right of the people to keep and bear arms shall not be infringed” actually means that the right of the people to keep and bear arms shall not be infringed.

At least thirty states have proposed or passed legislation that will allow their citizens to opt out of federal health insurance mandates [6]. Georgia’s senate passed a proposed opt-out constitutional amendment last week, and it should go to the house this week [7]. There is some question about the effectiveness of such measures since federal law typically trumps state laws. However, the tenth amendment to the constitution says “The powers not delegated to the United States by the Constitution, nor prohibited by it to the States, are reserved to the States respectively, or to the people.” This issue will probably have to be settled by the courts as well. Even if the courts decide in favor of the states, opt-out laws will not be able to mitigate all of the damage of the federal regulations.

The first step on the road to recovery will be to remove as many Democrats who voted for the bill from office. With a few exceptions, Democrats have controlled congress since the days of FDR. The country now has a federal budget bloated with entitlements and restricted freedoms to show for it. To begin correcting this problem, we must throw the spenders out of congress, and then hold the Republicans who replace them accountable.

Sources:
1. http://online.wsj.com/article/SB10001424052748703625304575115691871093652.html?KEYWORDS=romneycare
2. http://www.bloomberg.com/apps/news?pid=20601087&sid=aHoYSI84VdL0
3. http://www.usnews.com/blogs/peter-roff/2010/03/09/pelosi-pass-health-reform-so-you-can-find-out-whats-in-it.html
4. http://patriotpost.us/edition/2010/03/19/digest/
5. http://www.rasmussenreports.com/public_content/politics/current_events/healthcare/september_2009/health_care_reform
6. http://www.ama-assn.org/amednews/2010/02/15/gvsb0215.htm
7. http://wsbradio.com/localnews/2010/03/bill-to-opt-out-of-health-care-1.html
8. http://www.csmonitor.com/Money/Donald-Marron/2010/0320/Hold-on.-Healthcare-reform-will-cost-more-than-1-trillion

Trickle Down

In the 1980s, opponents to President Reagan’s policy of cutting taxes to stimulate economic growth coined the term “trickle down” economics. His policies were also popularly known as “voodoo” economics. Reagan’s belief in tax cuts was ultimately justified as the US economy began a long period of strong economic growth.

Today we are seeing a trickle down of a different sort. Our current economic crisis began with a banking crisis last fall. Bad mortgages led to a rise in foreclosures. As these bad loans metastasized like a cancer throughout our financial system, banks were unable to borrow or lend and the economy was in danger of grinding to a halt.

Several prominent banks failed or were forced to merge to avoid failure. Thousands of Wall St. financial workers lost their jobs. At this point, many Americans believed that the crisis was a Wall St. crisis that did not affect them.

Over the next few months, this belief was shattered as the economic pain trickled down. At the same time that the credit markets froze, the stock market crashed. Companies could not find financing to expand and, in many cases, could not even make their payroll. 401(k), pension trust funds, and other retirement accounts were halved in value.

As demand for goods and services plunged, companies began to lay off workers. A friend who is an architect was one of the first victims after it became difficult to fund construction projects. Almost a year later, he still out of work. As layoffs increased, there were more foreclosures and demand dropped further.

My own industry provides a good example of the economic carnage of the past year. I work in the fractional aviation industry. My company sells shares of private jets to individuals and companies who need to fly, but don’t want the hassle and expense of owning their own airplane. We manage the airplane and provide crews for the owners. All the owners have to is let the company know when and where they want to fly… and make sure they pay their ownership fees. Before last fall, this was a thriving and quickly growing business.

After the onset of the crisis, paying the fees became a problem for many owners. Many had lost their shirts in the calamity and could no longer afford even part of an airplane. Owners began selling back their shares. Prospective owners, worried about the state of the nation and the markets, elected not to buy into an airplane. To top it off, government officials began demonizing corporate aircraft as a waste of investor’s money. Suddenly, we had too many airplanes and not enough flying to do.

Not surprisingly, my company decided that it had to lay off employees. As the economic situation continued to deteriorate, approximately one quarter of the company’s pilots were laid off, furloughed in aviation parlance, along with a large number of office employees. The most recent furlough was announced last week. Older airplanes were grounded and deliveries of new airplanes were canceled or deferred to a later date.

Similarly, other general aviation companies were also ravaged. Cessna, a manufacturer of private jets, shut down many production lines and laid off over 8,000 workers, over half of the company. FBOs, private aircraft terminals, also went out of business, or laid-off employees. Charter companies that depended on companies like mine for much of their business folded or downsized. Startup companies like small jet manufacturer, Eclipse, and air-taxi operator, Day Jet, went completely out of business. The aircraft market, both new and used, collapsed.

As employees of these and other companies lost their jobs or portions of their income, other businesses and workers were affected. They weren’t able to buy cars, leading GM and Chrysler into bankruptcy. When they couldn’t pay their mortgages any longer, more banks failed. Their lack of disposable income meant that other businesses, from restaurants to boutiques, had to lay off employees or close their doors entirely.

As the economic situation spiraled out of control, the government passed a stimulus bill. Four months later, the unemployment rate has continued to rise and will continue to rise even further in coming months as more workers, my friends among them, lose their jobs. In fact, many believe that the real unemployment rate is much higher than the official 9.5% because many unemployed workers have dropped off the rolls after not finding a job even after their unemployment insurance runs out. If many companies had not cut pay and hours, many other workers would be totally out of a job.

So trickle down economic theory has worked several times in recent years. Under Presidents Reagan and George W. Bush we saw examples of positive trickle down in which wealthy people and businesses had more money. They used this money to invest in other businesses and buy things. This created more jobs and wealth for the middle and lower classes.

Under President Obama, we are witnessing a negative example of trickle down. The wealthy and businesses have lost millions of dollars in a matter of months. They are frightened of the future and, in any case, have little money left to spend. Consequently, lower and middle-income workers are suffering.

If we can acknowledge the reality of trickle down, then we can make appropriate choices that will enable good things, rather than bad, to trickle down in the future. The option that Presidents Reagan and Bush chose was to put more money in the hands of the American people. They cut taxes. With the government withholding less of each worker’s pay in taxes, they had more money to spend. As businesses paid less money in taxes, they had more money to grow and hire new workers. In both cases, the economy grew, jobs were created, and the government collected more money in spite of taxing at a lower rate. Presidents Harding, Coolidge, and Kennedy also successfully used this strategy.

In contrast, the Obama Administration is taking the opposite tack. President Obama had said last January that without the stimulus bill unemployment could exceed 10%. In reality, the stimulus bill passed shortly after Obama took office, but unemployment is still at 9.5% percent (citation). Much of the stimulus money has not been dispersed. Much of the money that has been spent has been wasted on pork barrel projects. Even worse, the American public has become alarmed at the ballooning deficit.

People realize that the Obama spending spree has a hefty price tag. The money to pay for all of this spending has to come from somewhere. It is widely expected that taxes will be increased on 100% of Americans to pay the bills. In recent weeks, members of Congress have been discussing the possibility of a national value-added tax, which is similar to a national sales tax. The administration is also proposing a national health plan and a cap-and-trade energy tax. Both of these plans would add new taxes that would ultimately be borne by American consumers.

As taxes rise to pay for the increased government spending, consumers find themselves with less money to spend. Businesses find themselves with less capital with which to expand, hire new workers, pay shareholders, and develop new products. As a result, the economy inevitably contracts and more people lose their jobs.

To turn the economy around, we need to put more money in the hands of the private sector. Tax cuts for everyone is the easiest way to do that. If workers and businesses have more money, they will spend and invest more. Banks will, in turn, have more money to loan and credit will become easier to get. Demand for cars and other consumer items will increase and companies will need more workers.

To put it in real terms, if tax cuts for the wealthy enable them to buy an airplane share from my company, then that will put people back to work throughout the economy. Pilots and office staff will need to be recalled to meet the increased demand for flights. Aircraft manufacturers like Cessna will need to reopen production lines to build more airplanes. FBOs around the country will need to hire more workers to service the increased numbers of airplanes flying in. And that is just the immediate impact.

Beyond the aviation industry, the affect would be felt throughout the nation. Newly recalled or rehired workers would need new houses and cars. They would need work clothes and food. They would have more money to spend on entertainment. And their increased income would mean that they would pay more income taxes and sales taxes, helping all levels of government. People would also have more money to donate to charity.

The future depends on President Obama and Democratic majorities in Congress since the Republicans are not able to introduce and pass legislation. Neither do they have the votes to stop the spending and taxes without help from Democratic defectors.

Sources:
http://www.aopa.org/aircraft/articles/2009/090615cess.htm
http://www.heritage.org/Research/Taxes/BG1086.cfm
http://www.heritage.org/Research/Taxes/BG1443.cfm
http://www.politico.com/news/stories/0109/17208.html
http://www.bloomberg.com/apps/news?pid=20601103&sid=ahfK709b4uds

Newark NJ

Obama and the New Deal

President Obama's economic policies, while vastly different from what most Americans have seen, are not new. Many of the president's policies are very similar to the policies of another American president. Much of what is in the news today is eerily similar to President Franklin Roosevelt's New Deal policies of the 1930s.

First, the New Deal focused on heavily regulating the US economy. Many of President Roosevelt's advisors were influenced by the apparent success of communist central planning in the Soviet Union and fascism (national socialism) in Italy. They hoped that an American version of a centralized economy would help lift the United States out of the Great Depression.

The Democratic congress of the 1930s passed a succession of acts that regulated the US economy. FDR's belief was that keeping wages high was the key to restarting the economy. To that end, the federal government enacted laws that made it easier for employees to form unions. As unions formed, they negotiated wages that were above market rates. The federal government also set minimum wages for workers. To help enable companies to pay these high wages, the government also set minimum prices.

Ironically, these policies hurt many of the people that they were intended to help. The price controls kept prices high and made many products unaffordable to the millions of Americans who were unemployed. FDR's administration went so far as to destroy food to keep prices high at a time when millions of Americans were going hungry. John Steinbeck protested this policy in his novel The Grapes of Wrath.

High wages also provided an incentive for companies to automate and eliminate jobs. Minorities such as blacks were hurt because they were not allowed in many of the unions. This kept them out of the highest paying jobs and limited them to unskilled labor at low wages.

While the Obama Administration has not enacted wage and price controls, they are providing employees with incentives to unionize. The Employee Free Choice Act, if passed, would allow unions to form without the traditional secret ballot elections. The United Auto Workers also got favorable treatment in Chrysler's bankruptcy, including a seat on the board and a better settlement than Chrysler's secured creditors.

The Obama Administration is moving in the direction of central planning. Obama is exerting a large influence on bailed out industries such as auto manufacturers and banks. The president's new auto standards requiring auto companies to build cars that are lighter and more efficient are the best example. Consumers have rejected these cars in the past because they are typically smaller and less safe in an accident.

More central planning is likely to come soon. Two pieces of legislation that are coming are healthcare reform and carbon cap-and-trade. Healthcare reform would drastically increase regulation in the medical fields and would likely eventually lead to a government monopoly on health insurance. Cap-and-trade would regulate and tax much of the economy through taxes on carbon use, which would include practically all energy production and use in the United States.

FDR also focused on public works projects as a means of getting people back to work. The Civilian Conservation Corps (CCC) and the Public Works Administration (PWA) are two of the best-known New Deal make-work programs. These programs paid above market wages so they directly competed with private employers for labor. Additionally, the PWA primarily used skilled tradesmen, such as architects, and did little to help poor unskilled laborers.

President Obama's stimulus program had a similar goal and only lacked acronyms. The stimulus bill passed February 2009 contained vast amounts of money for "shovel-ready" construction projects. These projects were intended to provide jobs to reduce unemployment.

In reality, FDR's job programs were ineffective. Unemployment reached a high of over 25% in 1933. Even though the unemployment did fall after that, it never fell below 10% until after the entry of the US into WWII (http://www.econlib.org/library/Enc/GreatDepression.html). In contrast, the unemployment rate prior to the onset of the Depression was only 4.2% (http://www.infoplease.com/ipa/A0104719.html). FDR's make-work policies did not appreciably reduce unemployment rates and President Obama's stimulus program will most likely have the same result.

The New Deal also dramatically increased federal spending on entitlements. The Social Security Act created the Social Security program in 1935. This did not help the poor of the 1930s however, since payments were not scheduled to begin until 1942 even though withholding began immediately. The act was later amended to begin payments in 1940. The initial consequence of Social Security was to take even more money from the paychecks of those workers who still had jobs, as well as their employers.

At its inception, Social Security benefits were to be paid from the Old Age Retirement Account. This account was depleted in 1940, however, and Social Security became a pay-as-you-go program where working taxpayers directly supported retirees. As Baby Boomers retire, the trustees of the Social Security program say that its current unfunded liability is greater than $25 trillion. This means that Social Security is expected to have a negative cash flow by 2017 and be insolvent by 2041 (http://www.socialsecurity.org/daily/04-01-02.html).

Medicare, another entitlement began by President Johnson, is in even worse shape. Medicare's unfunded liability is $74 trillion. Medicare's hospital trust fund is already in the red and will be insolvent by 2017 (http://www.news-medical.net/news/2009/05/13/Medicare-hospital-fund-will-be-insolvent-by-2017-two-years-earlier-than-expected-trustees-say.aspx). To resolve the issues, benefits will have to be cut or the taxes that fund these programs will have to be dramatically increased. The government can do this because there is no contract that guarantees contributions or benefits for either program.

To this debt, President Obama proposes to add a new healthcare entitlement. The cost for this massive new bureaucracy will be added to Obama's already staggering deficit spending. It will also require a large infusion of tax dollars. As government healthcare becomes a reality, it will invariably crowd private insurers out of the marketplace, costing more jobs.

That brings us to another parallel between the New Deal and President Obama. FDR presided over some of the most draconian tax increases in the history of the United States to fund his social programs. The Revenue Act of 1936 included a variety of new taxes including higher income taxes, dividend taxes, estate taxes, and taxes on undistributed profits. FDR also limited the deductions available on corporate and personal income taxes. By the end his term, the top personal tax rate was 91%. The state tax burden also doubled with increases in state income, corporate and sales taxes. The Social Security Act added social security withholding to the tax burden.

Barack Obama has already announced his intention to allow the Bush tax cuts to expire for the wealthiest five percent of Americans. It is unlikely that the other 95% of Americans will escape the taxman unscathed. President Obama has already signed a sixty-two cent increase to the federal tobacco tax. This tax will disproportionately affect lower income people, a segment of the population that Obama had vowed to not tax more " even one dime" (http://blogs.wsj.com/capitaljournal/2009/05/12/the-promise-that-could-come-back-to-bite-obama/).

Congressional Democrats seem intent on raising taxes on all Americans even further. Already there have been proposals to increase taxes on soft drinks, snack foods, employer-paid health insurance, an increase to the estate (death) tax, as well as cap-and-trade tax on energy. Obama has also followed in FDR's footsteps by eliminating corporate tax deductions. This is effectively a tax increase on corporations.

In following the example of the New Deal's increases in both spending and taxes, President Obama is likely prolonging the current recession. Tax increases remove money from the economy that could be better spent and invested by individuals and businesses. Increasing taxes paid to the government will guarantee that consumers have less money to spend and that businesses have less money to expand, hire workers, and keep their doors open.

President Roosevelt's onerous regulations, heavy-handed taxation, and unfriendly business climate prolonged the Great Depression rather resolving it. His methods have been tried and failed numerous times in the years since including in Japan, Michigan, and California. As President Obama repeats these same mistakes, we can only hope for different result.

Sources:

FDR's Folly, Jim Powell, Crown Forum, New York, 2003.

http://www.foxnews.com/politics/2009/05/04/united-auto-workers-chief-union-sell-chrysler-stock/

http://www.econlib.org/library/Enc/GreatDepression.html

http://www.infoplease.com/ipa/A0104719.html

http://www.socialsecurity.org/daily/04-01-02.html

http://www.news-medical.net/news/2009/05/13/Medicare-hospital-fund-will-be-insolvent-by-2017-two-years-earlier-than-expected-trustees-say.aspx

http://www.wkrg.com/financial/article/federal_cigarette_tax_going_up/23323/

http://blogs.wsj.com/capitaljournal/2009/05/12/the-promise-that-could-come-back-to-bite-obama/http://money.cnn.com/2009/05/04/news/economy/obama_corporate_tax_proposals/?postversion=2009050411