Posts tagged with: economics

In this week’s Acton Commentary, “Do Less with Less: What the History of Federal Debt and Tax Leverage Teaches,” I reflect on how the federal government has lived beyond its means for decades. This reality is especially important to recognize as we approach Tax Day this year as well as in the context of debates about how to address the public debt crisis.

There are many who think we need to raise taxes in order to close the historic levels of deficit spending. In theory I would consider raising taxes as a viable option, or at least preferable to continued deficit spending, since it would at least make the real cost of government more visible. Roughly 40% of what the government spent last year was beyond what it took in.

But without structural connections between increased taxes and balancing the budget, there’s nothing at all to give us hope that the government wouldn’t simply continue to leverage the greater revenue into greater deficit spending. In this vein I note the conclusions recently updated by Richard Vedder and Stephen Moore, that “over the entire post World War II era through 2009 each dollar of new tax revenue was associated with $1.17 of new spending. Politicians spend the money as fast as it comes in—and a little bit more.”

Calvin College philosophy professor James K. A. Smith doesn’t take this reality into account, I don’t think, when he recently argued that the current situation calls for raising taxes, both on the rich and the middle-class. Thus, he writes,

But only a lazy, unimaginative take on this would assume that “low taxes” is a given. So sure, one strategy to reduce debt would be to slash spending, which inevitably happens on the backs of the poor and vulnerable, particularly women and children.

The alternative to such an unattractive option as Smith sees it is to raise taxes, particularly on the rich. Smith thus points to the idea that America needs to adopt a “graduated tax like most other North American countries.”

The fact is, though, that the US already has a progressive tax system, and indeed places a much higher relative burden on the top decile of household incomes than other developed nations.

One of the next big fights will be over raising the debt ceiling, as Smith points out. Perhaps we can link balanced budgets with increases on the debt ceiling (something more feasible than passing a balanced budget amendment). The idea would be that we only increase the debt ceiling on the condition balancing the annual budget, and that we only think about raising taxes to balance that budget if we actually commit to balancing it.

Simply raising taxes won’t do anything but give the federal government more money to leverage into higher levels of deficit spending.

Bill Whittle at Declaration Entertainment uses a recent Iowahawk post, Feed Your Family on $10 Billion a Day, to figure out how an “Eat the Rich” economics program would work as a solution to our fiscal ills.

A commentary by Acton Research Director Samuel Gregg titled “Deficit Denial, American Style” which was published in Acton News & Commentary on March 9th appeared today in the Detroit News as “It’s time to curb welfare growth” and was also picked up by RealClearPolitics. Gregg provides an enlightening examination on the growth of the welfare system, and with our current budget problems, the need to also reform it:

If, however, the results of a much-discussed Wall St Journal-NBC News poll released on March 2 indicate what Americans really think about fiscal issues, then much of the country is clearly in denial – i.e., refusing to acknowledge truth – about what America needs to do if it doesn’t want to go the way of many Western European nations.

While the poll reveals considerable concern about government debt, it also underscores how unwilling many Americans are to reduce those welfare programs that, in the long-term, are central to the deficit-problem.

Here are the raw facts. America’s federal social security program has become the largest government pension scheme in the world in terms of sheer dollars. It is also by far the federal budget’s single greatest expenditure item.

According to the Office of Management and Budget, “human services” ― Social Security; Medicare; Health-expenditures; Education, Training, Employment, and Social Services; Veterans benefits; and the euphemistically-named “Income Security” (i.e., unemployment-benefits) ― were consuming 4 percent of America’s GDP in 1949. By 1976, this figure had increased to 11.7 percent. In 2009, it was consuming 15.3 percent of GDP.

During the same period, human services began consuming a steadily-increasing size of federal government expenditures. In 1967, human services spending was 32.6 percent of the federal budget. By 2009, this figure had increased to 61.3 percent. It is predicted to rise to 67 percent by 2016. In 2010, 75 percent of human services spending was on Social Security, Medicare, and Income Security ― in short, the core welfare state.

These disturbing numbers make it clear any serious federal deficit reduction must involve spending-cuts to federal welfare programs. That doesn’t mean other areas of government-spending should be immune from cuts. But the deficit simply can’t be properly addressed without a serious willingness to reduce welfare-expenditures.

The original Acton commentary by Samuel Gregg can be read in full here.

Kenneth P. Green, of the American Enterprise Institute (AEI), recently examined green energy in Europe in an essay titled, “The Myth of Green Energy Jobs: The European Experience.” Green thoroughly analyzes the green industry in Europe while seeking to discover the reasons behind its current downward spiral. As readers discover, this is largely due to the green industry being unsustainable while heavily relying on government intervention and subsidies.

Green uses the failing green industry in Europe to forewarn the United States that its policies, if continued, will bring the same unfruitful results. If the green industry is going to succeed it should not be a government supported industry, as Green states:

…governments do not “create” jobs; the willingness of entrepreneurs to invest their capital, paired with consumer demand for goods and services, does that.

All the government can do is subsidize some industries while jacking up costs for others. In the green case, it is destroying jobs in the conventional energy sector—and most likely other industrial sectors—through taxes and subsidies to new green companies that will use taxpayer dollars to undercut the competition. The subsidized jobs “created” are, by definition, less efficient uses of capital than market-created jobs. That means they are less economically productive than the jobs they displace and contribute less to economic growth. Finally, the good produced by government-favored jobs is inherently a non-economic good that has to be maintained indefinitely, often without an economic revenue model, as in the case of roads, rail systems, mass transit, and probably windmills, solar-power installations, and other green technologies.

Spain, according to Green, destroys an average of 2.2 jobs for every green job created, and since 2000, it has spent 571,138 Euros on each green job which includes subsidies of more than 1 million Euros per job in the wind industry. Italy also is experiencing problems. If Italy spent the same amount of capital in the general economy as it does in the green sector, then that same amount of capital that creates one job in the green industry would create 4.8 to 6.9 jobs for the general economy.

Green further explains a feed-in law instituted in Germany which requires utilities to purchase different kinds of renewable energy at different rates. The feed-in law requires utilities to buy solar power at a rate of 59 cents per kilowatt-hour when normal conventional electricity costs between 3 and 10 cents, and feed-in subsidies for wind power were 300 percent higher than conventional electricity costs. The implementation of wind and solar power did not even save German citizens money in energy rates because the household energy rates actually rose by 7.5 percent.

Denmark is also experiencing its fair share of problems. According the CEPOS, a Danish think tank that issued a report in 2009:

[the] CEPOS study found that rather than generating 20 percent of its energy from wind, “Denmark generates the equivalent of 19 percent of its electricity demand with wind turbines, but wind power contributes far less than 19 percent of the nation’s electricity demand. The claim that Denmark derives 20 percent of its electricity from wind overstates matters. Being highly intermittent, wind power has recently (2006) met as little as 5 percent of Denmark’s annual electricity consumption with an average over the last five years of 9.7 percent.”

Denmark currently has the highest electricity prices in the European Union, but while Danes are paying such high prices, one would imagine that there is a cost benefit factor occurring, such as great environmental benefits and a lower carbon footprint.  However, Green explains that the greenhouse gas reduction benefits are actually slim to none: “The wind power consumed in Denmark does displace some fossil-fuel emissions, but at some cost: $124 per ton, nearly six times, the price on the European Trading System.”

With large inefficiencies and high costs in subsidies being paid in Europe, Green warns American policy makers not to follow in Europe’s footsteps. So the question is what should the U.S. Government do? The answer, according to the Las Vegas Review-Journal, is nothing.

In an editorial recently published the Las Vegas Review-Journal examines the costs of subsidies and support dollars per megawatt hour the U.S. spent in 2008. According to the Energy Information Administration, oil and natural gas received 25 cents per megawatt-hour, coal received 44 cents, Hydroelectric received 67 cents, nuclear power received $1.59, wind power received $23.37, solar power received $24.34 and refined coal received $29.81. The editorial also published comments from John Rowe, CEO of Chicago based Exelon which is the nation’s biggest nuclear power producer. In the editorial Rowe articulates a resonating message to President Obama and Congress concerning green energy policy:

…in trying to boost “clean” energy — wind, solar, nuclear and natural gas — Congress and the states have enacted or proposed bills that would burden consumers, cripple markets and increase federal debt but do little to clean up the air.

In a speech to the conservative-leaning American Enterprise Institute, Mr. Rowe said his message to lawmakers is simple: “I’m asking that Congress do nothing.”

Mr. Rowe said utilities across the country are turning to “cheap” natural gas to generate electricity and do not need a clean energy standard proposed by President Obama.

In a new essay for Public Discourse, Acton Research Director Samuel Gregg explains why we shouldn’t only focus on public sector unions as examples of organizations that seek government power and taxpayer dollars to advance their ends. “A considerable portion of the business community is equally culpable,” Gregg writes. Excerpt:

The attractions of business-government collusion are enhanced when the state’s involvement in the economy grows. This is partly a question of incentives. The larger the scope of government economic intervention, the more businesses are incentivized to cultivate politicians in much the same way that public sector unions have.

As a result, consumers become displaced as the focus of business activity. Nor do the incentives for people of an entrepreneurial bent lie with creating something that the entrepreneur thinks consumers will value.

Instead the incentives become increasingly aligned with successful political entrepreneurship. Competition becomes less about a company’s ability to offer new and better products for consumers at lower prices. Instead, it become a struggle among businesses to secure state subsidies, to lobby legislators to establish tariffs that stack the deck against foreign competition, or to persuade governments to provide one company with exemptions from regulations that apply to every other company in the same industry.

It’s a form of soft corruption that produces higher prices for consumers, undermines value creation in the marketplace, and facilitates unwholesome relationships between politicians and businesses. It also represents the gradual subversion of the market economy by mercantilist arrangements. Smith identified the core of the problem in his Wealth of Nations (1776): “in the mercantile system, the interest of the consumer is almost constantly sacrificed to that of the producer; and it seems to consider production, and not consumption, as the ultimate end and object of all industry and consumption.”

In the end, however, everyone loses.

Read Samuel Gregg’s “Business vs. the Market” on the Public Discourse website.

My first reaction to “What Would Jesus Cut?” is that it tends to reduce Christ to a distributor of material goods through government programs. Jesus is not a budget overseer or a dispenser of government largesse. Sojourners founder Jim Wallis has already countered this accusation with his own post saying, “We haven’t been trying to get Jesus to be the head of any budget committee, or think that he would ever want that job!”

But still, to use Christ as an example of a legislator writing budgetary law is facile when we recognize Christ as the fulfillment of the law (Romans 10:4). It reduces and trivializes Christ at a time when there is already too much theological confusion about the person, nature, and mission of Christ in this country. And while Christ certainly relates and guides us on the day to day questions as we work to uplift the social witness, this practice reduces the Word of Life to moralism when done in a frivolous manner.

As for how we help the poor, as we are commanded to do as Christians, we shouldn’t confuse the Kingdom of Christ with the power and agenda of the state. Evangelicalism, and proclamation of the person of Christ should not be reduced to baptizing and sanctifying the budget.

In October 2009, I wrote “America’s Uncontrolled Debt and Spending is the Real ‘Waterloo,’” agreeing with Jim Wallis that budgets are moral documents, but focusing rather on the immorality of chaining a nightmare of debt to future Americans. The Speaker of the U.S. House of Representatives, John Boehner, waxes eloquent on budget morality, too. He offered this sound byte in an address just last week to the National Religious Broadcasters Association in Nashville:

It is immoral to bind our children to as leeching and destructive a force as debt. It is immoral to rob our children’s future and make them beholden to China. No society is worthy that treats its children so shabbily.

I also agree with Jordan Ballor here and here in his aptly written remarks about the similar “A Call for Intergenerational Justice: A Christian Proposal on the American Debt Crisis.”

Wallis, who is a signer of “A Call for Intergenerational Justice” has a very disappointing record when it comes to fiscal responsibility. He is on record of already opposing social security reform, welfare reform in the 1990s, slowing the rate of growth of government spending in the 90s, and even checking the rate of growth for SCHIP, as my 2007 commentary points out.

I wore “What Would Jesus Do” apparel for a short time during the fad, and obviously it is good to ask WWJD. But I stopped wearing it when I realized that I already knew what Christ would do, and I should be asking myself deeper questions about what I am really doing to magnify my relationship with Christ and my witness to others.

I think that is what bothers me with “What Would Jesus Cut?” It’s a reduction of the witness of Christ, with no greater context of his redemptive mission. This is a flaw of some, but not all, on both the religious right and religious left. There is a danger in over-politicizing the name of Jesus in the public square, especially when the Church in America is crying out for sound Biblical doctrine. He is the way, the truth, and the life, and to continually reinsert him into the budget debate, which are clearly prudential arguments, shrinks his real power and authority.

For PowerBlog readers around New York City, Rev. Robert A. Sirico will be speaking tonight, Wednesday March 2nd.  The event, Business and Compassion: Rehumanizing Our Economy, is hosted by Heart’s Home, International Center for a Culture of Compassion, and the American Bible Society.  Rev. Sirico is one of four members speaking on a panel.  The event will be from 7:00pm-9:00pm (EST) at the American Bible Society National Headquarters (1865 Broadway, New York, NY 10023).  The cost of admission is $15 for students and $30 for general admission.  Any questions regarding tickets and admission can be directed to Heart’s Home.

Economies across the globe are struggling, and rising food prices are not going to make life any easier.  The Acton Institute raised concern for rising food prices, especially corn, in 2007, when Ray Nothstine wrote a commentary on, and at the time, record prices for corn, resulting in revolts in Mexico due to rapidly rising prices for tortillas.  The commentary brought to light unintended consequences of ethanol and its subsidy, including rising food prices.

And again, with food prices on the rise, and the subsidy for ethanol up for renewal, the debate has been given new life.

Corn prices are dramatically rising and are currently more than $6 per bushel.  Compare that to a few years ago in 2005, when corn was less than $2 per bushel.  Also, in November of 2010, corn prices reached a two year high.  However, corn is not the only food stock on the rise.  The past year wheat on Chicago Board of Trade was up 74 percent, and both soybean and cotton futures have already jumped.  Although, these rising food prices have had an adverse effect across the world, and according to the World Bank, since June of 2010, the rising food prices have pushed 44 million more people into extreme poverty in developing countries.

The debate over the cause of rising food prices, especially corn has centered around whether current adverse weather conditions are the culprit, or if it can actually be contributed to ethanol subsidies from the United States.

Weather conditions have recently been less than ideal for growing crops in many parts of the world.  Last year drought in Russia and Argentina, along with torrential rains in Australia and Canada caused numerous problems for farmers, and crop production was less than expected.  Furthermore, a cool wet summer in the United States resulted in a delayed harvest.  China’s current wheat crop is being threatened by a drought which may result in even higher food prices especially because China produces more wheat than any other country.  It is estimated approximately 42 percent of China’s winter wheat crop has been hurt by the drought.

While the unfavorable weather conditions have contributed to rising food prices, critics of the ethanol subsidy claim that the subsidy has played a major role in the rising food prices.  The ethanol subsidy, which is up for renewal, places a 54 cent tariff on imported ethanol and a 45 cent tax credit for every gallon of ethanol blended with gasoline.  Current federal law also mandates the use of ethanol.  Oil companies must use a designated amount of ethanol each year, 12.6 billion gallons in 2011, which will rise to 15 billion gallons by 2015.  The ethanol subsidy is paying oil companies to abide by a mandate required by federal law.

The use of corn in ethanol is continuing to rise.  The oil industry uses more ethanol each year because of the federal mandate, and as of November 2010, ethanol production consumed 40 percent of the corn crop produced in the United States.  If the United States decides not to renew the ethanol subsidy it will not only  save 40 percent of its corn crop, but will also save $25-$30 billion over the next five years.

The United States is a major exporter of food, supplying over half the global corn exports and over 40 percent of soybean exports.  However, with more and more corn produced in the United States being used for ethanol, less corn is used for food; thus, by the law of supply and demand, increasing the price of corn.  With the ethanol subsidy creating an increase demand for corn and raising the price, more and more farmers will gravitate to growing corn instead of other crops that are also needed for food supplies around the world.

With food prices on the rise, it is imperative to think long term when deciding if the ethanol subsidy should be renewed.

Not only are the economic arguments to the ethanol subsidy important, but so are the moral arguments.  Tomorrow I will evaluate the morality of rising food prices and the ethanol subsidy.

Acton On The AirKishore Jayabalan, Director of the Acton Institute’s Rome office, made an appearance today on Vatican Radio to discuss efforts by the G-20 nations to address the growing problem of rising food prices around the world.  Jayabalan discusses how natural events and bad policy are both contributing to the sharp rise in prices seen of late.  Listen to the full interview using the audio player below:

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Budget battles have heated up recently throughout the United States, and President Obama’s budget proposal has not been exempted from the intense discussion.

The current proposal by the President pushes our national debt to $15.476 trillion or 102.6 percent of our GDP.  Furthermore, there are no cuts to entitlement spending which consist of 57 percent of the spending in the budget, or approximately $2.14 trillion.

While it is imperative to our economic recovery to have a budget that is fiscally sound, it is also crucial to have a budget that is morally sound.  There are critics to cutting entitlement programs, however, a fiscally sound budget which may require a look at entitlement cuts and reforms, will help the poor and vulnerable.  If we continue the spending trend the United States has been fostering under previous budgets than economic recovery will be hampered which means less job opportunities.  The poor and vulnerable will be dependent on entitlement programs, violating the principle of subsidarity.

A fiscally responsible budget also abides by stewardship principles.  To be good stewards we must look long term and create a strong and stable prospering economy not just now, but for our children and grandchildren.  Monsignor Ignacio Barreiro-Carámbula addresses this issue in his blog post:

…we are leaving our debts to future generations. We are asking them to pay the principal and the interest on our debt with their labors. This is akin to forcing them into a form of indentured servitude to us, and it will last long after we have gone to meet our Maker. By law, one can reject an inheritance if has more liabilities than assets, but a citizen cannot reject public debt if he wants to remain a citizen…

Rev. Sirico also articulates the necessity of morality in the Federal Budget during his recent interview with Raymond Arroyo on EWTN’s World Over.