The High Tax Higher Spend Government Model

The following post was written on October 25, 2012:

If you are part of the official Manhattan groupthink, you read the New York Times, and particularly its tribune of matters economic, Paul Krugman, and so you know for a certainty that there is nothing wrong with the American economy that cannot be fixed by higher taxes and even more government spending.

Of course others have tried the high tax higher spend massive deficit approach, so from time to time we need to look at results from other locations to see how their policies are working out. Here are just a few recent examples:

Here’s a report from Walter Russell Meade on the state of California, Illinois and New York relative to the rest of the United States.  It’s more about Illinois than the other two.  My favorite part is that Illinois has issued close to $40 billion of pension bonds because they basically make lavish pension promises and then don’t fund them at all.  Even with the $40 billion of phony borrowed contributions, they have an $85 billion shortfall in pension funding.  Good luck with that!

Here’s an up-to-date report on the slow motion collapse of Greece:

Well, how about Japan.  Massive deficits and zero interest rates for over 20 years.  Accumulated debt now is over 200% of GDP.  Demographic collapse such that there is effectively no hope that anyone will be around to pay off those debts.  How’s it working out?  Stagnation!  So what’s the solution?  According to today’s [Oct 25, 2012] Wall Street Journal, Japan is planning a new “stimulus package.”

You can’t make these things up.  The Keynesian fallacy is so powerful that it seems to make it completely impossible to learn from experience.

The Hydrogen Economy

The following post was written on October 24, 2012:

The area of energy and the environment provides a constant stream of idiotic pronouncements that will be a recurring topic for this blog.

For a starter, consider the so-called “hydrogen economy.”  For the past 25 years we have been in the grip of the "global warming" scare, whereby environmental activists advocate that the burning of hydro-carbon-based fuels will lead to a rapid warming of the earth that will quickly imperil civilization.  But what are the alternatives to hydro-carbon based fuels (coal, oil, natural gas)?  Burning a hydro-carbon involves oxidizing both carbon and hydrogen, thus releasing not only water (H2O) into the air, but also carbon dioxide (CO2), which is claimed to be the main culprit in warming.  Why don’t we stop burning hydrocarbons and just burn hydrogen for energy?  According to advocates, that will completely solve the global warming problem!  When you burn a hydrocarbon like natural gas (CH4) or gasoline (mainly C8H18) you get both CO2 and H2O.  When you burn just hydrogen, you get just water.  Voila, the CO2 problem is gone!

Who can see the flaw in this?

Here’s an article from a British source (Telegraph) that gives a relatively balanced account.

The “balance” includes quotes from hucksters promoting government-funded hydrogen energy schemes.  This is an area where balance is totally the wrong approach and only ridicule is appropriate.

Here’s what’s wrong with hydrogen energy:  there is no free hydrogen gas available on earth.  There’s plenty of hydrogen, but not in the form of a free gas that can just be taken from the air.  (By contrast, nitrogen or oxygen can just be taken from the air.) 

So where can you get hydrogen?  Two places:  natural gas (CH4) and water (H2O).  You can separate the hydrogen from the carbon in natural gas by running steam through it in a process called reformation.  The carbon combines with oxygen and dissipates off as CO2, leaving the free hydrogen.  Easy!  This is in fact how most free hydrogen is obtained, to be used for purposes such as fertilizer (main ingredient - NH3).

Wait a minute!  The whole idea was to avoid getting CO2 into the atmosphere.  So now, in order to avoid burning natural gas for energy, you have used up some energy separating off the hydrogen, dissipated the CO2 into the air without getting any energy in return, and now you have hydrogen to burn, which is very tricky to transport and store, even trickier to use, and generates less energy on burning than does the burning of the original natural gas.  Congratulations!  No decrease in atmospheric CO2, a lot less energy output, and a bunch of hydrogen canisters everywhere that can blow up at the slightest spark.

Well, how about getting the hydrogen from water?  Easy!  Just use electrolysis.  Run electricity through the water, and it just disassociates into hydrogen and oxygen.  Nothing to it.  Oh, wait.  The amount of energy that you use up separating the hydrogen from the oxygen is less than the amount that you get back when you burn the hydrogen back to make water again.  It has to be that way.  Otherwise you would have a perpetual motion machine.  In other words, there is no possible way that hydrogen generated from water by electrolysis can be a better way to get energy than just using the electricity (generated from another source, usually burning hydrocarbons) that was the input to the electrolysis.  It’s the second law of thermodynamics.

If somebody has a third way of getting large amounts of hydrogen, I’d love to know about it.  Send a spacecraft up to mine the sun?

Well, if use of hydrogen fuel is such an obvious non-starter, surely no one of any intelligence would fall for it.  For example, how about our president?  Sorry, he has fallen for it.

To his credit, he and his Energy Secretary started out being against hydrogen as fuel, but came to the hydrogen party only this year as it became more and more obvious that the electric car thing was dying.   I’d like to be able to say something good about them for their earlier stance, but I just can’t, given that it is so obvious that hydrogen is a non-starter as a major energy source (at least until they figure out nuclear fusion); and also given the president's many other energy idiocies, about which I will have much more to say later.

GW Bush?  Even worse.  He touted the “hydrogen economy” to anyone who would listen.  Here’s the GW Bush White House energy agenda, including the “Hydrogen Fuel Initiative” with $1.72 billion of federal funding.

Romney?  The verdict is still out.  Can he resist this ridiculous groupthink?

The Achievement of Perfect Social Justice

The following post was written on October 17, 2012

If you could actually implement “social justice,” what does it look like?  By “social justice,” I mean that the government controls all economic goods and can pass them out to achieve complete fairness.  Nobody can have more than anyone else.  But of course the judgment as to what constitutes fairness is now made by the government.  And in order to get to this world where the government can achieve perfect fairness, you have had to give up your right to achieve beyond what the government will give you.  Now your only access to anything – from the most frivolous luxuries down to the most basic necessities, such as food – comes from the government, through its benevolence, or its whim.  Surely the government – particularly a government that by all its public statements is totally devoted to the achievement of fairness and justice -  will pass the goods out in a fair and just manner!

Lacking a Stalinist Soviet Union or a Maoist China at the moment, the closest we have to the perfect social justice state is North Korea.  And they are very restrictive about who can get in and write about them.  Every so often there is a crack, but they are usually careful to choose as visitors those who won't embarrass them.  The linked article resulted from one of their rare mistakes.

You really have to read this article to believe it.  It was written in 1991 by a British physician by the name of Anthony Daniels (who also uses a pen-name Theodore Dalrymple).  Actually the amazing thing is that Dalrymple is one of the very few writers with a grain of understanding of totalitarianism who has actually penetrated into North Korea and turned on some critical powers of observation to see what is going on.  Dalrymple looks at a department store in North Korea and asks, what is the reason that this thing exists in this form and that people created it and devoted the work to make it as it is?  It turns out that despite a superficial physical resemblance, a department store in North Korea bears almost no resemblance by these “why?” criteria to a department store in a free society.   It doesn’t take very much observation to figure it out, but that doesn’t mean that many people have been able to figure it out.  (Part of that is that few westerners get in; another part is that the few who get in are vetted for likely devotion to the “cause” of social justice or international socialism or whatever; and not a small part is the general lack of curiosity of most people.)  I’m reminded of a credulous NPR crew that was given access to North Korea a few years ago and actually conducted and broadcast an interview with a North Korean family.  The idiots had no idea that they were putting this poor family in mortal danger, where even the slightest mis-statement would get them killed.

So that's perfect social justice in practice:  you must demonstrate humiliating and servile loyalty to the government at all times, failing which they can take away your job, or your home, or your food, or send you to a prison camp, at their complete whim.

Well, at least surely nothing like that could ever happen in the United States!  We certainly don't have anything at the North Korean level right now, but do we have examples where the government uses its access to resources taken through the tax (or borrowing) system to buy loyalty of the citizenry to its existing programs?  Yes.  Here are two (of many):

(1) In the U.S., the federal criminal system has become so complicated that literally the only way to gain the expertise necessary to be in private practice in the area is to work several years as an assistant U.S. Attorney, that is, as a prosecutor.  There are only a handful of practitioners in the area who are not former AUSAs, and they are all older guys and will be retired soon.  Suppose you think (as I do) that the federal drug war is unconstitutional; or maybe you think it’s constitutional but just a bad idea.  Well, here’s how you can be completely excluded from participation in the federal criminal system.  The AUSAs are all required on entry into the job to spend the first couple of years on drug cases.  Don’t want to do it?  You can’t get the job.  To get entry into a job as AUSA you must demonstrate loyalty to the drug war and operate as a soldier in the war for several years.  The AUSA credential is so valuable, and for some purposes so necessary, that absolutely no one would dare, or even think,  to raise a question.

(2) Another example of the government's purchase of the citizen's loyalty through its control of resources: the government will not pay a social security check to anyone who has declined to sign up for Medicare.  Signing up for Medicare means, among other things, giving the government blanket access to all information about our health.

I could give many other examples that are more or less close analogies.  My point is that we can all be bribed out of our freedom much more cheaply than we think.

Is there a relationship between high social spending and low birth rates?

The following post was written on October 16, 2012:

Do high social spending and low birth rates seem related or unrelated?  I’ve mentioned this subject to a quite a few people.  Some react like any relationship is completely ridiculous.  Others think it’s totally obvious that it’s cause and effect.  Opinions?  Here’s an article (a few years old) from the Mises Institute making the case that low birth rates follow from high social spending, particularly from the existence of generous state-supported pensions that obviate the need for children to provide for your old age.

Is it completely implausible that lots of people don’t have children just out of pure love for the little tykes?  And, given the chance, that some would live a life where all the money they make can be spent on themselves and then their retirement paid for by someone else?

Here are some European “fertility” rates (expressed in terms of average number of births per woman per lifetime – 2.1 is needed to maintain stable population): 

Germany – 1.36 (According to the Guardian 9/21/12 it’s “the lowest in Europe – and falling fast”)  http://www.guardian.co.uk/world/2012/sep/21/germany-birthrate-low-falling

Spain – 1.47 (from Wikipedia )

Italy -  1.4 (from IndexMundi )

Japan is in the same boat – 1.39 (from Google public data )

Here’s an article by the very smart Megan McArdle on how this low fertility makes paying for the social security and other promises completely impossible.

In fact, all of these countries (and lots more, including most of the EU, China, Korea, etc.) are going to have collapsing populations by the mid-21st century.

So how is the U.S. doing?  Compared to just about all the other advanced countries, the U.S. has had a fertility rate in the neighborhood of replacement level for the last 20 years or so (before that it was higher).  But wait!  The U.S. birth rate has just had four straight years of decline and now for the first time is below replacement level:

Four years?  Hmmmmmm.  A recent time of hugely increased government deficits and spending, particularly on transfer programs from social security to Medicare, Medicaid, food stamps, social security disability.  Cause and effect?  You be the judge.

The Walter Duranty Prize

The following post was written on October 11, 2012:

While I was at the Federalist Society event last night (topic: National Security Challenges Facing the United States), James Taranto, who usually comes to our events, was at something even more important:  The dinner awarding the annual Walter Duranty Prize for Journalistic Mendacity.

Who was Walter Duranty, you ask?  He was the New York Times Moscow correspondent during the 1930s, the time of the worst crimes of Stalin, from the Ukrainian mass starvation known as the holodomor through the staged purge trials.  Duranty made it his job to cover for Stalin’s crimes, and write lies and propaganda that he knew to be completely false.  For this he won the Pulitzer Prize in 1932.

Here is a report of John Hinderaker from last night’s Duranty Prize dinner, including a number of pictures.  You can see that James Taranto was the master of ceremonies.

The dinner was sponsored by the New Criterion magazine and PJ Media.   Roger L. Simon of PJ Media has the full text of the remarks at his web site:

That one is rather long, but really deserves to be read in full.  I’ll give you a few snippets.  This year’s winners were Anna Wintour and Joan Juliet Buck of Vogue Magazine for the story “Asma al-Assad: A Rose in the Desert.”  It’s a story on how chic and stylish is the first lady of Syria.  The story came out just before the dictator/husband started slaughtering his own people (now up to about 30,000 killed).  Wintour and Buck wrote that Asma was “glamorous, young, and very chic,” "the freshest and most magnetic of first ladies . . . breezy, conspiratorial, and fun . . . a thin long-limbed beauty with a trained analytic mind who dresses with cunning understatement,” etc., etc., etc.  The magazine is still in business.  Oh, wait, Anna Wintour was co-hostess with Sarah Jessica Parker of the big Barack Obama fundraiser that took place at Sarah’s house around the corner from us just a few weeks ago.

One of the runners up for the prize was Andrew Sullivan, a fairly prominent blogger who blogs at the Atlantic site.  Sullivan got his award for  his endless pursuit of Trig Palin birtherism, that is, the idea that Sarah Palin is not the mother.  How’s that one going?  Like OJ, still looking for the real killer.

Here’s the Wikipedia article on Duranty.  Example:  From the New York Times of March 31, 1933:  “Russians Hungry, But Not Starving”  “In the middle of the diplomatic duel between Great Britain and the Soviet Union over the accused British engineers, there appears from a British source a big scare story in the American press about famine in the Soviet Union . . .”  From the New York Times of August 23, 1933: “Any report of a famine in Russia is today an exaggeration or malignant propaganda.”  The truth:  at least 10 million dead.  OK, I guess Anna Wintour isn’t quite that bad.

New York City's Plans to "Tax the Rich"

The following post was written on October 9, 2012:

Here are a couple of things on a serious collision course.

This morning’s WSJ reports on the tax proposals of the various Democratic mayoral hopefuls in New York City.  (The election for the next mayor of NYC is next year, not this year;  the current mayor, Bloomberg, is term limited and can’t run again.)  The article is behind a pay wall, so I won’t link it, but basically there are five announced Democratic candidates to replace Mayor Bloomberg, and all of them have put forth plans to raise the New York City income tax rate on “the rich.”  Meanwhile, there are no announced Republican candidates, and none really in the wings.  It is highly likely that we are going to get one of these Democrats come Jan 1, 2014.  They are all competing to see who can shout the class warfare cry the loudest.

Current NYC top income tax rate is 3.876%.  (That’s separate from NY State, with a top rate of about 9%, and of course Federal, with a top rate of about 39%.)  The WSJ points out that the top 1% of filers, about 30,000 families, pay fully 43% of the NYC income tax.  Bloomberg has been a consistent foe of raising the NYC rate, arguing that it only takes a tiny number of people to leave for the suburbs to wipe out any increased revenue from the higher rates.  The Democratic candidates have different ideas.  Here are the candidates and the proposals:

Bill DeBlasio (currently “Public Advocate” – a citywide elected office with no particular responsibilities and no purpose that anyone can identify):  Raise top rate to 4.3% on income above $500,000, and use it to fund a pre-school education initiative.

John Liu (currently Comptroller):  Raise top rate to 5.1% on income above $5 million annually.

Christine Quinn (currently Speaker of the City Counsel and representative of our district in Greenwich Village) – Previously proposed to raise taxes on the wealthy sufficient to generate $1 billion in revenue; now says she no longer supports that, but is “open” to a tax increase.

Scott Stringer (currently Manhattan Borough President – another job with no particular responsibilities or purpose) – Raise to rate to 4.332% on income above $1 million.

Bill Thompson (former NYC Comptroller who left due to term limits in 2009; also was Democratic candidate for mayor and lost to Bloomberg in 2009):  Had a proposal in 2009 to increase taxes on income above $500,000; now says he wants to “reassess” that.

But here’s something coming from the other direction that nobody’s paying much attention to.  Romney’s tax plan is to lower rates on all incomes, including high incomes, and make up for that with decreased deductions.   There has been a lot of back and forth between the campaigns in the last few days (including at the debate) as to what that means – Would taxes paid by the high income go down?  Would that force taxes paid by the middle class to go up?  Romney has insisted that rates would go down, but total taxes paid by the high income would not go down.  So it must be something about deductions. 

In an interview the day before the debate, Romney fleshed out his proposal, proposing to put a dollar limit on itemized deductions, for which he tossed out a number of $17,000.   That $17,000 would be a “bucket” for all deductions, including mortgage interest and charitable contributions.  Although Romney did not mention it, I presume that the cap would also cover the deduction for state and local income tax.

Most of the talk is about the mortgage interest deduction, but that’s not where most of the money is for high income New Yorkers.  You can only deduct interest on a mortgage up to $1 million.  At today’s 4% or less interest rates, that’s only $40,000 a year at most.  The real money for us is in the state/local income tax deduction.

Currently a New Yorker with about $1 million annual income pays over $100,000 in state and local income tax, and deducts that from his Federal tax, saving about $40,000 of Federal tax in the process.  This is a huge subsidy by the Federal government to the high income tax states, which are largely the same as the Democrat-controlled states (California, New York, Illinois, New Jersey, Connecticut, etc.).  New York City is already right at the top when you add state and city income taxes together.  The mayoral candidates think they can increase the rates still further.  Meanwhile, seven states have no income tax at all, including two of the biggest, Texas and Florida.

The elimination of deductability of state and local income taxes would immediately increase the burden of these taxes by close to 40% and increase the competitive advantage of the low/no income tax states dramatically.

Our former Senator Moynihan was the great protector of the state/local income tax deduction.  Today, Schumer is the guy.  Will he really be able to hold the line?  I think Romney completely realizes that the highest tax states are never going to vote for him and he might as well stick it to them.  Even though I live in New York, I think he’s right.  Anyway, even if not enacted, if a proposal to eliminate or even reduce the deductibility of state and local income taxes gets any traction, it will quickly make us realize the precariousness of our existing tax structure.