Why Is The US Going Broke?
you are like many middle-class Americans today, you probably
feel like something is going wrong but you do not really know
just what or why it is happening. In other words, you
feel things have changed economically speaking, but you cannot
quite understand why. When you grew up (if you are from
the baby-boomer generation), your father worked and provided a
decent lifestyle for the family, your mother stayed home and
was there when you came home from school, and in general the
future looked bright. Today, it takes two people working
in a household (both husband and wife) just to try and break
even. Now in 2016 the latest phenomenon is recent
college graduates are having troubling finding a job and many
are moving back home with mom and dad, so it is all in the
family but this is no television sitcom. Housing prices had
crashed as a result of the housing bubble in 2008, but even as
some markets have rebounded they still remain very far from
the previous highs. They tell you that Social Security
is possibly on the rocks (maybe you will get a check, maybe
you will not - maybe you will retire at 67, maybe they will
tell you to must wait until you are 80 years old), and you
might even now have to make the choice of paying for the
college education of your kids or plan for your own retirement
- but cannot do both. Sound familiar? Let us
assume that it does. Let us also assume you want to
understand why this happened and what you can do about
it. And there is a connection to Globalization, believe
it or not.
In order to figure something out, it usually helps to start at the beginning. So, let us take a walk down economic history lane to really understand what has gone on, and even where things might be going. Also, let us discuss some options or an action plan for the future as well. Some of the ideas presented may seem a bit radical, and many of the things you will learn here today may surprise you. Regardless, you need to know if you want to make a better future for yourself and your family.
The Great Socialist Experiment That Failed
During the period from about 1940 through or up until the decade of 1970, the major industrialized nations (and democracies) of the world got it into their head that an economist named John Maynard Keynes (a British Economist) and John Kenneth Galbraith (an American disciple of Keynes) were pure geniuses. Their idea was that capitalism and the free market was an untamed monster and that government ownership of major industries and or strict government control over the economy plus a new social welfare state was the way to go. For a short while, it seemed to work, especially as way to pull some countries out of the Great Depression (although in reality World War II served this purpose, at least for the victors). In the case of many European nations, many industries were nationalized (utilities, railroads, coal, airlines or other transportation industries, etc.) In the US, while not as drastic as outright state ownership, there was a new idea that government should severely regulate many industries and even dictate what prices can be charged (and punish those companies that try to offer lower prices if that were the case).
Coupled with that, the idea of the great social welfare state came into being as well. Meaning, government run pension programs (Social Security), health care and other kinds of social insurance (such as unemployment insurance or as the say in Ireland and the UK, the dole). All well and good, as the government takes care of everything. However, the question is how to pay for it? Well, you take a portion of money out of workers income in the form of contributions or taxes, and as a government, you periodically run deficits, or in other words you borrow the money in the times when the cash flow coming into the government coffers does not match up with expenditures. The logic to this idea is that when things are not so good with the economy, the government is pumping money in and running red ink. When the economy is doing well, in theory, the government is supposed to cut back on spending, move back to the plus column and save the excess funds they are taking in for the next when it is needed (assuming the politicians have the discipline to do so). In other words, the idea that the government could and should artificially tinker with the free market in order to smooth out the rough edges, so to speak.
In addition to all this, it was decided some time before to develop a central banking system that issued fiat paper money, and that the central bank was really the controller of these economic tinkering mechanisms. So, the longer-term result was that we also ended up with monopoly money if you like, or little scraps of paper with fancy engraving. It did not start out this way of course, and up until 1933 it was the case that even private citizens could redeem the paper money for gold (it was nice while it lasted). In reality, you now could take something without much inherent value in and of itself, namely paper, print some nice pictures on it and voila - something that some people are now willing to risk their life for. Whereas in the past, and throughout human history, a number of different actual commodities that offered some utility or value were used as a medium of exchange or money (gold, silver, wheat, beads, shells, cattle, whatever), now we have paper. And this is no to say that there is anything inherently wrong with that, but there are some consequences that occur as a result (the Chinese, by the way toyed with paper money 1,400 years ago, so it is nothing new at all).
The number one problem with socialism as an idea and the printing of fiat paper money as well is the human nature factor. Which is to say, the human beings that control all of these things are the politicians, who are people just like you and me with all the same prejudices, greed, selfishness, corruption and other qualities we humans can posses (along with all the other good things about us as well). So, if we humans have the tendency to spend more than we make, to seek excess instead of caution or thrift, to look at the short-term rather than the long-term, and to possibly be tempted to do things for our own personal benefit when we have control over the means to do so in terms of the public coffers - what does that say or mean about those in control and how can we combat that tendency? Democracy is supposed to offer a system of checks and balances to keep this from happening, but does that truly happen in the real world? Are politicians more tempted to do things for their own gain (re-election) using the central bank and government policies towards that purpose or are they more likely to do the right thing for the country and the economy, even though some people may not like it?
This is a very important point simply because those people that believe in socialism or the welfare state do not say so, but they do assume that all citizenry get religion, so to speak, at the same time and keep it. Meaning, the idea behind welfare state beliefs and socialism is that we are all working towards the benefit of our fellow man, but are we? Is it in our nature? We are not corrupt or evil in general as individuals or a society, but then again, we are not exactly getting up at 5:00 AM in the morning to work so someone thousands of miles away can get the benefit of what we do - for free or because of our own goodwill. We work, we toil and we sweat in order to provide a comfortable life for our family. This is normal and human nature. We want to help other people and do so if we possibly can, but we are working to obtain things for our own direct benefit first. Hopefully we are not doing someone else harm in our daily pursuit of earning a living, but we are of course working with our own benefit in mind, and this is normal in terms of what motivates us.
Socialists would like to convince you that you should work for the greater society and sacrifice yourself for others. Again, a nice idea, but this is sort of like believing in and even more to the point, practicing the tenants of a religion. However, even religious institutions have trouble convincing members to follow the true dictates of the Bible, Torah or the Koran 24 hours a day, seven days a week. Which is to say, as a client of mine has reminded me, the good book has been around for a very long time and many people even have a copy in their home - but do they read it? Even better, do they follow what it says ALL the time? Once again, we are human and socialists have the tendency to forget that very important point (if we work harder or work less and get the same amount of salary regardless - why bother going above and beyond?). If we as Christians, Jews and Muslims always followed what was preached all the time, what a wonderful world it would be. If we as citizens truly always did things and engaged in self sacrifice all the time for the constant benefit of others, what a wonderful world that would be. However, that is not reality, and that is surely why socialism has failed (no financial incentives, no way to better oneself under such a system).
Why You Need To Know About Austrian Economics
Most of you probably never heard of a man called Frederich Von Hayak, Milton Friedman, or Ludwig Von Mises either for that matter (but you should). There are some of the gentlemen that have been clamoring for a truly free market, limited government kind of society for some time. These are the gentlemen that have been the champions of Libertarian thought and related economic ideas, which supposedly were embraced finally in the 1980s by Ronald Reagan, Margaret Thatcher and even a number of other foreign governments at the time - and the forerunner to globalization policies in general. But with that said, believing in free markets is NOT the same thing as practicing corporate welfare and other very non free market policies. Which is to explain that politicians often like to wrap their policies around a certain cloak, or claim they are championing a particular idea when in fact they are doing something else in practice. We will explore and examine this a bit further as we contend the idea of truly free and competitive markets is not what we have at the moment, even though it was sold as such by the politicos (and why many unemployed young people protesting Globalization are really protesting the perverted practices of bank bailouts, unfair tax codes that benefit certain groups and penalize others, and so on - that they equate with the word Globalization, but not what Globalization was meant to be).
While it is true former President Ronald Reagan delivered on his tax cut promises, the reality was that most of the tax cuts and new loopholes applied to large incorporated companies. Incredibly enough, it is also true that while US government tax revenues went down (the government collected less money than before due to the tax cuts) they actually kept on spending even more - increasing the national debt. This was really the time the national debt started to balloon and it has kept going ever since. So during the course of the next twenty years (1980 until today), in the long run it has not mattered what political party was in control. Corporate income taxes have gone down (and tax loopholes for offshore ventures permitted to shelter corporate income), the middle class tax burden and especially payments for social security as a percentage of income has gone up, government spending has gotten out of control, AND the US government now owes more money to foreign governments than probably any time during its history as a formal republic. That is the quick cliff notes version, even though I forget to mention that Clinton did actually make somewhat of an attempt to address the Social Security issue by raising your FICA payments, or the payroll deduction tax which is of course is broken out separately in your paycheck (and not formally calculated as part of your so-called tax rate bracket). But, let us move on to what the net overall affect has been up to this point.
Back in 2003 The Center on Budget and Policy Priorities Said the Following: Corporate tax revenues have fallen to historically low levels as a share of total federal revenues and of the economy. Despite the weakening of corporate tax revenues, and despite the fact that the Congressional Budget Office and other organizations now project very large federal budget deficits over the coming decade and beyond, Congress appears poised to shower costly new tax breaks on corporations. Corporate tax revenues are at historically low levels and are projected to remain low for the coming decade. Preliminary CBO estimates show that in 2003, corporate income tax revenues were smaller, both as a share of the Gross Domestic Product and as a share of all federal tax receipts, than in any year since the 1930s except for 1983. Total corporate tax revenues fell by more than one-third between 2000 and 2003. A study by the Institute on Taxation and Economic Policy of 250 large corporations, which together pay about 30 percent of all corporate income taxes, found that one in six paid no corporate income tax whatsoever in at least one of the three years examined (1996-1998). The corporate tax rate has declined in recent decades. During the 1990s, non-financial corporations as a group paid an average of 25.3 percent of their profits in federal corporate income taxes, according to new Congressional Research Service estimates. By contrast, they paid more than 49 percent in the 1950s, 38 percent in the 1960s, and 33 percent in the 1970s. This decline reflects reductions in the statutory tax rate as well as corporations' expanded use of deductions and other tax benefits.
And what did the US politicians do in 2009? They gave tax-payer money in the form of bailouts to General Motors, Chrysler, American International Group (a multinational insurance company founded in 1919 in Shanghai, China) and a laundry list of banks too large to print here. But the real problem is yet to come in the form of future unfunded spending. The US Federal Government is projected to spend almost US$4 Trillion Dollars in 2015, which would be very nice if they had it to spend (they do not). Social Security, Unemployment & Labor, Medicare & Health plus Military Spending and current interest on the national debt makes up 81 percent of the entire budget. But wait, budgetary discretionary spending in 2015 is estimated to total US$1.16 Trillion Dollars (of the total US$4 Trillion), while TAX BREAKS are estimated to tally up to US$1.24 Trillion (the tax breaks are higher than the discretionary spending, so the government is going to have to borrow this amount in full). Mandatory spending for 2014 is estimated at US$2.56 Trillion, but the tax receipts are tallied up to US$2.2 Trillion, which means another shortfall of almost US$600 Billion Dollars there. A Billion here, a Trillion there, and we are talking about some very serious numbers.
Middle Class Crisis: Out of Control Spending and Socialism
The socialists got it wrong, you cannot regulate morals, work ethic or motivate people via central planning. In short, socialism does not work, as it does NOT encourage people to work harder, be innovative and creative, nor does it allow for upward social mobility in society either (which is a very strong incentive for people to save, invest and so on). In addition, socialism calls for a planned economy whereby the government is in charge of absolutely everything - and we know how that always pans out. Worst of all, socialism discourages people to think for themselves, take care of themselves, and truly be free in the process. Instead, if every citizen knows or believes the government will always take care of them - then why bother taking care of yourself or even being worried about it? Why bother saving and investing your own money for retirement when the government will give you a pension in old age? Why bother saving money and taking care of your own personal finances, when you know the government will always bail you out? Why bother taking care of yourself when someone else, such as a bureaucrat thousands of miles away will do it for you - or will they? Are government bureaucrats really that good and competent when it comes to taking care of you? As stewards of the economy and the well being of the nation, are they leading down the path to prosperity or ruin?
Free market capitalism does work, but the critics will tell you (correctly so) that it creates inequality in a society. Which is to say, the entire idea behind free market capitalism is that you let the free markets do their thing and you let people have the freedom to invest or do whatever they want (for better or worse). Some will win, and some will loose. So, it is correct to say that a truly free market system certainly does punish some people who will suffer the consequences of bad choices or ideas, or inefficiency as well (if someone else makes a better product and also cheaper). The people that make wise choices with their personal finances and investments will be rewarded. It is that simple. If you work hard, use common sense, save and invest wisely - chances are the free market capitalist system will be good to you (but there are of course no guarantees). If you run up the credit cards, do other foolish things with your money and otherwise run your economic personal life like a run away freight train - the free market will let you fall flat on your face - no doubt about it. Free markets require personal responsibility, and in fact encourage it out of necessity.
However, if we look back at history and historical economic divisions in a free market society (Ancient Rome was a free market), there is always a pyramid effect in terms of percentage of very wealthy, percentage of what are called middle-class and of course percentage of the poor. Why is it that throughout history, this is the case? It can be hard to say what the exact reasons are and just about every political or economic philosophy has already been tried out. Socialists will tell you that the free market guarantees those at the top stay at the top and those at the bottom stay at the bottom (which is why they argue that government needs to even things out). On the other hand, the free market does allow for social mobility, which the socialist system does not. There are many cases of poor people or shall we say, non-wealthy people that come up with an idea and create a new business venture that allows them to become wealthy. So, there is social mobility and opportunity for movement in a free market. Some will argue that in the free market not everyone has equal access to such opportunities either due to lack of education or access to capital. Of course, as well, there are both wealthy and middle-class people that have the opportunity to make some poor investments or do some foolish things with their money that causes them to loose it (possibly moving them down in the ranks as well). This is what the detractors of the free market are of course concerned about (the people that move downward). This is a very interesting philosophical argument between these two schools of thought. The liberals and socialist believe you as a private citizen cannot think or behave responsible for yourself, and there government must do so for you. The conservatives and libertarians think you should be allowed to do whatever you want without the government on your back, and let the chips fall where they may. In this regard, capitalism is unforgiving in that it will punish and root out inefficiency, poor planning and foolish habits in terms of your personal finances. So, if you fail to save and invest money for your own retirement - you for sure will be broke in old age. It would seem then that the socialist solution is to salvage all the people that are behaving foolishly, thus in effect, rewarding inefficiency and non-positive behavior. Free market capitalism by nature, on the other hand, encourages sound personal financial principals and teaches citizens to take care of themselves. Which is better? It is really true that you need a bureaucrat to save your money for you, and generally speaking take care of you - Or are you more than capable of taking care of yourself? This is the blunt question to answer in order to decide if you favor socialism or the free market approach.
However it is very interesting to note that most Americans considered in the past that their own country to be the wealthiest and most prosperous nation on earth (actually Qatar, Luxembourg, Norway, Singapore, and Hong Kong are wealthier on a per capita basis). It is also very interesting that in 1967 former US President Johnson declared a co-called war on poverty. Now some fifty years later, more or less the same percentage of the American population, remains in poverty. According to some very recent (2014) statistics for the US, there are 50 Americans living in poverty. The US Census report from November 2013 claims that 16 percent of the American population is poor. However, if we add in the so-called working poor, that percent gets bumped up to about 25 percent. However, if we calculate the number of US Citizens in the United States dependent upon some kind of government assistance (Social Security, Food Stamps or SNAP, and other types of social welfare benefits) then the numbers indicate that possibly half of the working age population. In other words, an income distribution chart that pretty much mimics statistics for other capitalistic free market societies throughout history (once again, a study in the economic differences in ancient roman society may surprise you in the similarities of what seems to be a sort of natural wealth distribution).
Some countries with a capitalistic system do of course have larger amounts of so-called poor people. President Vincente Fox of Mexico has made the comment that probably up to 40 percent of Mexicans are classified as poor, as in contrast to 15 percent or 25 percent (pick a number depending upon the statistics) of American society as being poor. However, the point is, 60 percent of Mexicans then are supposedly middle class, or at least something other than poor (or much wealthier of course in terms of the top rung). This also means Mexico, and countries with similar statistics have no-where to go but up, in terms of the possibility of the future economic mobility of the population. This is also important because this is where the economic growth has and will come from. As more and more of these multitudes of people slowly move into the middle-class, the pent up demand for consumer goods in these nations will be enormous (and US corporations know this, as opposed to the very low single digit, almost stagnant growth in the US). This also in part was the undeclared driving force behind NAFTA, CAFTA, etc.
The thing in terms of the US though is the idea of the welfare state thrown into the mix. What happened to the war on poverty? Is it true that socialism cures all ills, or is it true you cannot fight natural outcomes in terms of disparity of wealth? Can we really have both a true capitalistic free market and socialism together at the same time, or will one always cancel the other out? The Keynesian School of Economics says the government is supposed to help (save) the losers in the free market or the downtrodden, and often enough at the expense of the winners (or through higher taxation of the winners in order to support the losers). Is this fair? Well, it probably all depends on which side of the fence you are on. If you are a person that has NOT gone into debt, that has saved or invested your money, you will be very angry at the idea of a government taking away your money in order to hand it over to someone else that did not do what you have done. If you are the person that spent every penny that you made, incurred tremendous personal debt and put the well being of yourself (and your family) in jeopardy as a result, you will clamor for whatever government handout you can get. Will you not?
The Western Democracies: A Case Of Schizophrenia
Most people that are crazy do not know that they are crazy - that in part is why they are crazy, and we can say it would seem to be the same with governments also. They often have multiple personalities or hear conflicting voices - one that says turn left, and another that says turn right. This is the current political and economic problem with the United States at the moment, both in terms of government and the general population at large. In fact, this in general is probably going to be the case with most democratic welfare states going forward. How so, you want to ask?
Well, we know that many countries decided to take the mantle of free market theories discussed by Frederich Von Hayak, Milton Friedman, Ludwig Von Mises and others starting more or less in 1980. Ronald Reagan in the US was the first to really get on the microphone and expound the ideals of less taxes, less government, less regulation and so on. Same thing was the case with Margaret Thatcher. For the most part, this argument of free markets, free trade and lower taxes has been the political theme for some time now. Even supposed liberals have taken up the calling to some extent. The problem is they have not practiced what they preached.
Everyone is always in favor of lower taxes and more money in your pocket, me included. However, if you as a government, company or individual have lower income - guess what? You need to spend less too. You cannot reduce your income and expect to spend the same amount as you had before - because the truth is you no longer have it. You must cut costs or expenses. These things go hand in hand. Otherwise, if you continue to spend the same amount, or even worse if you increase spending - you for sure will go broke. How can you manage to spend more than you make? Quite simple, you borrow it. But then you have another problem, which is how to pay back all the money you have borrowed. None of the options are really pleasant or beneficial, including the printing of even more money to pay such debts. This is common sense and anyone with common sense will understand it.
The problem is, the politicians seem to have no common sense, or if they do, they ignore it because they have another problem, namely politics. Which is to explain, a whole lot of folks out there that were promised a free lunch, and that were also promised the government would take care of them. Because these persons were brought up to believe or think that the government would provide, they did not do the many things they should have done. Such as: stay out of debt, save money, and become responsible for their financial welfare. In fact, this is really the biggest crime of socialism - teaching the citizens to become irresponsible, lazy and foolish with their own finances. That is a fact, and if you want even more proof of it, go and visit a former communist country to see how well some people there are making the switch. However, the citizens of a former communist country can at least be excused to some extent - but the people living in a democratic free market capitalist society their entire lives? How foolish can someone be to believe that lead is really gold (metaphorically speaking), that paper with nice engravings on it is worth something (and that printing even more of it will miraculously create even more wealth), and that any government can really borrow or spend their way out of trouble? How foolish can someone be to believe that the banks offering all those free credit cards with 5 digit credit limits and no money down mortgages are a good thing for their own long-term finances? What most Americans should have done is to have taken Nancy Reagan's advice - just say no. She was talking about drugs, but easy credit and bank debt is pretty much the same vice for many people. It has also been the same problem for the politicians - albeit they have been spending your money instead of their own.
In any event, here is the paradox or problem. What to do, what to do? Well, while it can often be difficult to predict the future exactly, generally speaking we can be fairly sure of some possible outcomes. Which is to say, human nature is pretty much predictable. We as human beings have been on this planet for a very long time, and while HOW we live and the electronic gadgets we use might have changed - we have NOT changed. Also, even though some people will try and convince you that one plus one equals seven, the laws of economics and physics are fairly concrete. So then, logically thinking this problem out, we have come up with the following possible outcomes, ideas and comments we think will apply in the future:
NUMBER ONE: Unless any governments STOPS spending more money then they take in, and do it right now, they will eventually go broke. Spending (and borrowing) even more money that is taken in will only aggravate the problem much sooner and for the worse. Plus, the longer you wait and the more you become indebted, the less manageable the problem becomes. And so, the real answer is to cut spending, increase taxes or do both. Do you think it is more likely that the politicians will cut spending or somehow increase taxes? The argument that a new national sales tax will eliminate the IRS and do way with the income tax is a folly. Even though US income tax rates are currently at some of the lowest levels they have ever been historically over the past 70 years (although most Americans do not believe it, and the reason they do not believe it is because they see themselves struggling financially and do not know who or what to blame other than tax rates), income tax increases are a hot potato politically. If anything, a new national sales tax will probably be put into place as a revenue source instead of increasing income taxes. If there are any increases in term of money taken out of salary paychecks, it will be an increase in FICA (social security payments), and more on that later.
NUMBER TWO: The price of commodities must go up, you can count on it (they must debase or devalue the US Dollar at some point, and the result will be inflation and higher costs in US Dollar terms). This will almost guarantee higher food prices for consumers' worldwide as the devaluation of the US Dollar affects almost everything we buy or consume, unless world commodities are removed from the US Dollar in terms of payment for trade. Where as only a very short time ago, the fear was deflation (and inflation was chosen as the cure to combat deflation) now we have inflation coming back as a problem once again. Interest rates will also have to go back up in order to compensate for continued deterioration of the US balance sheet (Debt versus GDP, etc.). It will also increase the costs to service the growing national debt as new higher interest rates are presented for renewed US Treasury Securities (another problem).
NUMBER THREE: Social Security remains to be a very serious issue and it is not going away. In addition, no one has nor wants to confront the problem. Sure they talk about it, and then it gets brushed under the rug because a storm came through (an act of God, not a man made storm). The fact remains, it is a pay as you go system, which means for years the citizens have paid - and the money went. It was a system based on demographics and the demographics have changed (when it was started 70 years ago, roughly eight or ten people were paying in for each single person taking a check, now it is the case of roughly two or three to one and very soon one to one). The people that have paid into this system all these years want their check when they retire - and who can blame them? On the other hand, the money does not exist to keep this PONZI scheme going. There are not enough new people coming in to pay for all the people promised a check on the back end, which is what happens often enough in such a scheme. They claim the government will never let it fail. Probably not, they will just print more money (giving you back US$1,000 per month in the future that really will be worth US$500 in purchasing power) or they will increase payroll contributions from the people currently paying in or they will cut the amount you will receive in the future or they will extend the eligible age to get a check, or some convoluted combination of all these things.
There is a fear among many people that the government might be tempted to nationalize all the private pension accounts or retirement plans. In other words, a confiscation scheme involving privately saved money to shore up the government social security program. Other people are fearful that the government will refuse to allow those people with a private pension to take a check from the social security program, arguing that they do not need it (because they were in fact smart enough and disciplined to save money for retirement, thus penalizing this group of people as a result). Who knows, but certainly anything is theoretically possible. Using the Great Depression as one example of what the average citizen will tolerate in terms of government abuse, most people did not question a forced government confiscation of gold in 1933. The reason? Most of the people that thought it to be a wonderful idea were broke and had no gold. Socialist thinking is that the few must suffer for the benefit of the masses. Socialist thinking also says that if you were forward thinking enough to save your own money - too bad, we need it to pay for the people that were not.
THIS IS THE REAL CRISIS: The symptom will end up being economic, but the disease or problem is psychological or political. Which is to say, many governments NOW claim to be champions of the free market, now subscribe to libertarian school of thought and have even cut taxes or privatized previously nationalized industries in the process. HOWEVER, they are still operating under Keynesian (Socialist) ideals in terms of deficit spending, welfare state programs and so on. You cannot have it both ways. The politicians are going to have a very difficult time selling this new concept to the masses (completely and explaining the full impact all the way around), so we believe they will not even bother. Instead, they will continue to ignore the paradox and keep on doing the same thing - talking about globalization and free markets, while operating financially as disciples of John Maynard Keynes. Talk about confusing? When a government comes down with a case of schizophrenia, it is not a good sign.
About The Author: This article was written by John Schroder of Ascot Advisory Services. John's firm has been helping clients in the Dominican Republic for the last 17 years with residency application services, naturalized citizenship filing, banking assistance and legal services pertaining to real estate (title transfers, legal representation at closing, sales contract review). You can contact him by telephone at 809-756-1917 or click the about the author link above to reach a contact page to send an email directly.