Category: economy

WHAT IS BASELINE BUDGETING? IT IS A LIE WITH THE FORCE OF LAW.

On By Citizen TomIn economy, taxes17 Comments

Trump just submitted his budget for next year. Of course bunches people immediately trashed it. One of the complaints is all the cuts. We need to look at this complaint in particular.

Do you wonder why Congress cannot balance the budget? The answer is that our political system is now so corrupt it is almost illegal to do so. Here is how Rush Limbaugh once described the situation on his show.

CALLER: Okay. So it seems like those one-time things like TARP and bailouts and I don’t know what all, somehow got added into the annual spending, and I don’t understand that.

RUSH: Well, it’s a great question. It really is. You know, I shouldn’t say the answer is complicated because it makes sound intimidating. It really isn’t. But the reason why those one-time expenditures seemed to build on themselves is because of the budget process that’s known as “baseline budgeting,” which was begun in the 1970s, I believe. The simplest way to explain the baseline budget is the federal budget is not like your household budget.

In your household budget, if you do one (let’s hypothetically say that you do), you look at what you spent last year, you look at this current year, and you estimate as close as you can what your income is going to be. You then budget what your spending is going to be, and every year you do that starting from zero. That’s not how the federal government does it. There is a thing in the federal government called “the Current Services Baseline,” and that is the starting point every year, not zero.

There is not one government department or agency that looks at what it was given to spend every year, and then what it did spend, and is then budgeted accordingly. So let’s say that agriculture was budgeted X. I’m just gonna make up some numbers here. Let’s say the agriculture department was budgeted $100 billion and they spent $70 billion. You would think, “Okay, next year they’ll be budgeted $70 billion.”

No. Because of baseline budgeting, the more they spend, the more they will be allowed to spend or budgeted to spend the next year. The Current Services Baseline essentially — and I’m gonna cut through a bunch of legalese to explain this to you. The Current Services Baseline requires, mandates, whatever, that every line item in the federal budget be increased by anywhere from three to 10% every year, no matter what is spent on that line item.

(from here)

Think Limbaugh was joking? Check it out.

So what happens when the news media and the Democrats tell us that President Trump or some budget hawks are cutting the budget? Well, we need to know whether those honorable so and so’s are talking about a cut in comparison to last year’s budget or the “baselined” budget increase. That is, what the political class and the news media usually calls a budget cut is outright lie.

You care about the country? You care about the prosperity of your children and grandchildren? You care about honest government and a balanced budget. Then write your congressmen. We have Republican majorities in the House and Senate. We have a Republican in the White House. What is their excuse for not getting rid of the deceit perpetuated with baselined budgeting?

You can find your representative in the House at house.gov.

You can find your senators at senate.gov.

Please correct a delusion that these ladies and gentlemen seem to acquire inside the Beltway. Money does not grow on trees. Spending more and more and more just makes us poorer and poorer and poorer.

HOW WE GET THE GOVERNMENT TO DO OUR DIRTY WORK

On By Citizen TomIn economy, Frédéric Bastiat, Humor, Philosophy, religion3 Comments
"The protectors of our industries". Cartoon showing Cyrus Field, Jay Gould, Cornelius Vanderbilt, and Russell Sage, seated on bags of "millions", on large heavy raft being carried by workers. (from here)
“The protectors of our industries”. Cartoon showing Cyrus Field, Jay Gould, Cornelius Vanderbilt, and Russell Sage, seated on bags of “millions”, on large heavy raft being carried by workers. (from here)

Were the gentlemen pictured above robber barons? I am not in a position to say. I just think that if we changed the names and faces that cartoon would be even more relevant today.

Frédéric Bastiat was a first-rate satirist of Crony Capitalism. Here is an example from Essays on Political Economy.

M. Prohibant (it was not I who gave him this name, but M. Charles Dupin) devoted his time and capital to converting the ore found on his land into iron. As nature had been more lavish towards the Belgians, they furnished the French with iron cheaper than M. Prohibant; which means, that all the French, or France, could obtain a given quantity of iron with less labour by buying it of the honest Flemings. Therefore, guided by their own interest, they did not fail to do so; and every day there might be seen a multitude of nail-smiths, blacksmiths, cartwrights, machinists, farriers, and labourers, going themselves, or sending intermediates, to supply themselves in Belgium. This displeased M. Prohibant exceedingly.

At first, it occurred to him to put an end to this abuse by his own efforts: it was the least he could do, for he was the only sufferer. “I will take my carbine,” said he; “I will put four pistols into my belt; I will fill my cartridge box; I will gird on my sword, and go thus equipped to the frontier. There, the first blacksmith, nail-smith, farrier, machinist, or locksmith, who presents himself to do his own business and not mine, I will kill, to teach him how to live.” At the moment of starting, M. Prohibant made a few reflections which calmed down his warlike ardour a little. He said to himself, “In the first place, it is not absolutely impossible that the purchasers of iron, my countrymen and enemies, should take the thing ill, and, instead of letting me kill them, should kill me instead; and then, even were I to call out all my servants, we should not be able to defend the passages. In short, this proceeding would cost me very dear, much more so than the result would be worth.”

M. Prohibant was on the point of resigning himself to his sad fate, that of being only as free as the rest of the world, when a ray of light darted across his brain. He recollected that at Paris there is a great manufactory of laws. “What is a law?” said he to himself. “It is a measure to which, when once it is decreed, be it good or bad, everybody is bound to conform. For the execution of the same a public force is organised, and to constitute the said public force, men and money are drawn from the whole nation. If, then, I could only get the great Parisian manufactory to pass a little law, ‘Belgian iron is prohibited,’ I should obtain the following results:–The Government would replace the few valets that I was going to send to the frontier by 20,000 of the sons of those refractory blacksmiths, farriers, artizans, machinists, locksmiths, nail-smiths, and labourers. Then to keep these 20,000 custom-house officers in health and good humour, it would distribute among them 25,000,000 of francs taken from these blacksmiths, nail-smiths, artizans, and labourers. They would guard the frontier much better; would cost me nothing; I should not be exposed to the brutality of the brokers; should sell the iron at my own price, and have the sweet satisfaction of seeing our great people shamefully mystified. That would teach them to proclaim themselves perpetually the harbingers and promoters of progress in Europe. Oh! it would be a capital joke, and deserves to be tried.”

So M. Prohibant went to the law manufactory. Another time, perhaps, I shall relate the story of his underhand dealings, but now I shall merely mention his visible proceedings. He brought the following consideration before the view of the legislating gentlemen.

“Belgian iron is sold in France at ten francs, which obliges me to sell mine at the same price. I should like to sell at fifteen, but cannot do so on account of this Belgian iron, which I wish was at the bottom of the Red Sea. I beg you will make a law that no more Belgian iron shall enter France. Immediately I raise my price five francs, and these are the consequences:–

“For every hundred-weight of iron that I shall deliver to the public, I shall receive fifteen francs instead of ten; I shall grow rich more rapidly, extend my traffic, and employ more workmen. My workmen and I shall spend much more freely, to the great advantage of our tradesmen for miles around. These latter, having more custom, will furnish more employment to trade, and activity on both sides will increase in the country. This fortunate piece of money, which you will drop into my strong-box, will, like a stone thrown into a lake, give birth to an infinite number of concentric circles.”

Charmed with his discourse, delighted to learn that it is so easy to promote, by legislating, the prosperity of a people, the law-makers voted the restriction. “Talk of labour and economy,” they said, “what is the use of these painful means of increasing the national wealth, when all that is wanted for this object is a decree?” (from here)

Was the law that M. Prohibant had passed to protect the profitability of his mines a bad law? Bastiat goes on to explain that it was. So if M. Prohibant’s idea strikes you as fine and excellent, please click on the link and read about the consequences of M. Prohibant’s law.

What is the lesson here? We like to blame others, but we have a republic. By themselves robber barons cannot gain the passage of restrictive trade legislation. By themselves they don’t have enough votes.

Consider.  Was M. Prohibant the only gainer from the law he proposed? Like M. Prohibant we each tend to think the laws we benefit from are good. It is the law that other people use to restrict us that we dislike. It is that self-interest that our leaders use to pit us against each other. It is that self interest that allows robber barons to buy our leaders. Instead of electing honorable men and women who refuse to be bought, we elect people who give us what we want.

What we need to do is consider the laws we want from the point of view of others. If what we want is intended only to help “me”, then we are not being neighborly. We are just being selfish.

Jesus gave us a challenging assignment.

John 15:12-14 New King James Version (NKJV)

12 This is My commandment, that you love one another as I have loved you. 13 Greater love has no one than this, than to lay down one’s life for his friends. 14 You are My friends if you do whatever I command you.

How do we love one another as Jesus loved? We can debate that, but is it not safe to say we should not use the law to gain privileges from each other that we do not deserve?

THE GROWING POWER OF GOVERNMENT AND THE THREAT TO LIBERTY: ELECTION 2016

On By Citizen TomIn 2016 Election, Constitution, economy, Health Care Nationalization, Hillary Clinton, Laws, Philosophy, schools, taxes, unraveling28 Comments

declaration of independence

OF A POST TO COME promised to compare the governing approaches of Donald Trump and Hillary Clinton with respect to two issues.

  • The growth of the power of government.
  • The protection of our rights.

The Growth Of The Power Of Government

Why is it a problem when government is powerful? Government exists to protect our rights. Yet the power we give our government makes government itself a threat to our rights. Therefore, we must choose between giving the government just enough power and giving it too much.

  • To give our government the resources it needs to defend our rights, we must give our leaders the authority to tax us and spend our money. Nevertheless, the more we allow our government to tax and spend, the more we work for government instead of ourselves. At some point, we risk slavery.
  • Some decisions which effect a people must be made jointly. Thus, government must sometimes make decisions we would otherwise make for ourselves. So it is that in a nation of free men and women, we have laws that restrict us from harming each other (traffic laws, for example). In a nation of slaves, however, the laws just list a few trivial decisions that the leaders permit the people to make for themselves.

Here is a table that summarizes where the candidates stand.  Not certain the information is correct? Then check their web sites. I have only provided links where their positions are not available on their own websites.

ISSUE Donald Trump Hillary Clinton
Taxing and Spending Favors tax simplification and reduction Favors increased taxation and spending (inferred from lengthy list of proposals)
Healthcare Private market solution Doubling down on Obamacare
School Choice For School Choice. Will end Common Core Against School Choice. Favors Common Core.
Immigration Favors extreme vetting Open borders/put new immigrants on the dole
Government Regulations Committed to reducing regulations Defends the current regulatory regime
Free Trade Opponent of the big trade bills Helped to craft TPP

To be continued: The Protection Of Our Rights

WHEN ECONOMISTS BECOME THE COURT MAGICIANS — PART 1

On By Citizen TomIn economy, Philosophy, taxes, unraveling17 Comments
The Pharaoh watches as the rods of Aaron and his magicians become snakes. (from here)
The Pharaoh watches as the rods of Aaron and his magicians become snakes. (from here)

Long ago Moses visited Pharaoh and told him God’s command: Let my people go! The Pharaoh disobeyed. So through Moses God brought ten plagues upon Egypt. Even though Pharaoh’s magicians, Jannes and Jambres, could not undo what God had done, they “duplicated” the first plagues God brought upon Egypt, and for some strange reason, Pharaoh took comfort in that.

What is magic, that thing magicians do? More often than not “magic” is just sleight of hand. The magician just fools us into believing he is doing something he is not actually doing. Sometimes, however, even the magician does not know what he doing.

That thing we call the economy is one of the most mysterious things in the world. That is, even though we depend upon it for our food, clothing, and shelter, none of us know exactly how it works. Therefore, when what is going on in the economy concerns us, we consult “experts,” economic magicians, to find out what we should do.

Economic magicians? Does that seem excessively derisive? Then consider these two stories.

Will negative interest rates come to the United States? Probably. Sadly, what economists recommend these days often does not make much sense. Our economy is becoming too contrived, like a house of cards. The problem? Well, let’s begin that discussion by considering a magic trick we call fiat money.

What is ‘Fiat Money’
Fiat money is currency that a government has declared to be legal tender, but is not backed by a physical commodity. The value of fiat money is derived from the relationship between supply and demand rather than the value of the material that the money is made of. Historically, most currencies were based on physical commodities such as gold or silver, but fiat money is based solely on faith. Fiat is the Latin word for “it shall be”. (from here (www.investopedia.com))

Because it is not backed by anything, fiat money has no intrinsic or innate value. That is not to say financial analysts do not have formulas to calculate the intrinsic value of fiat money. Nevertheless, fiat money has no utility of its own.

The value that we get from goods and services is innately apparent from the simple, most basic acts of living. We need food to survive, so food has value. The value for tradeable goods and services is predicated on utility and relative scarcity.

For financial assets, and money is the world’s first financial derivative, there is no direct utility. It does not satisfy any basic demand of survival or continued existence. Therefore, any value attached to financial products does not come from utility. It comes from faith. (from here)

What does Jeffrey Snider, the author of the above, mean by “faith.”

Value itself is nothing more than the outward expression of individual faith. The traditional value of money is really just an outgrowth of its historical reputation, earned through so many actions and consequences. Money may seem to add a level of objectivity into the discussion of value, but that is only because of a more universal “faith” in the transactional price discovery process it allows. (from here)

So why do we believe our money has value? There is actually a little more to it than merely believing fiat money is “real” money. Remember that our government uses its power to define fiat money as legal tender, that is, the government says we can legally use fiat money to pay off our creditors.  That includes the government itself. Don’t we pay our biggest bill, our taxes, with fiat money?

Thus, using its power, the government prints money and creates a demand for it. So it is that even though fiat money has no actual value of its own, the value of fiat money still follows the law of supply and demand.

  • Supply equates to scarcity. How much labor or how many goods and services are required to obtain a certain amount of money?
  • The demand for fiat money depends upon the bills we must pay. What is the amount of money we need to pay off our creditors?

Therefore, to make its fiat money serve as an appropriate means of exchange, our government must regulate both the supply of and the demand for its fiat money. That’s what we will talk about in the next post.

Note: that I don’t claim to have a huge amount of economic expertise.  I am sharing my observations in the hope of promoting a discussion. Hence corrections and comments are welcome. If you want your comments to include what you think of the economic proposals of the presidential candidates, that is okay with me.