The Infinite Credit Card Just Got More Infinite

Hurricane Sandy is giving us a chance to see whether there is anyone left other than the Manhattan Contrarian to dare to mention the issue that the Federal fisc is not infinite.

A little history.  In the nineteenth century, there were plenty of hurricanes, let alone other destructive storms and natural events, like earthquakes and tornadoes.  In that era, it never seems to have occurred to anyone that restoration of the pre-disaster situation was even a permitted function of the Federal government., let alone a good idea.

As just one example from the very end of that century, here is a brief history from the Texas Almanac of the response of Galveston, Texas to the devastating hurricane that literally wiped out the city in 1900.  At the time, Galveston was the fourth largest city in Texas, with a population of 37,789 in the 1900 census.  The storm of September 8 killed an estimated 6000 - 8000 people and destroyed the large majority of the buildings in the town.  To recover, the city formed a Central Relief Committee to collect donations, both monetary and in-kind. 

Donations poured in from cities around the United States and several foreign countries.

Money came from millionaires in New York, from black churches in Georgia, and from a little girl in Chicago, who sent 10 cents. Donations came from religious groups, labor and fraternal organizations and thousands of individuals. Relief funds were raised by an organ recital in Scranton, Pa., and by a baseball game in Anaconda, Mont. Money was sent by the German Turnverein of St. Louis, Mo., and the Rough and Ready Fire Company of Montrose, Pa. Sunday school classes sent their collections of pennies, nickels and dimes.

In all, donations exceeded $1.25 million. By far the most generous state was New York ($228,055), followed by Texas ($66,790), Illinois ($55,544), Massachusetts ($53,350) and Missouri ($52,116). Donations also arrived from foreign countries – among them, Canada, Mexico, France, Germany, England and South Africa.

Missing from that list:  the Federal government.  The State of Texas also did not assume responsibility for replacing people's lost private property.

Galveston then undertook a project to protect the city by building a gigantic sea wall and also the elevation of all buildings onto stilts.  Who paid for that?

The county agreed to pay for the seawall through a bond issue. Initially reluctant, the Texas Legislature finally agreed to a combination of tax abatement and sales of bonds to finance the grade elevation.

No mention that the Federal government paid a dime.

Fast forward to the modern era, where Federal contributions to disaster relief started as modest grants and gradually escalated.  By the time of Katrina in New Orleans in 2005, all constraints had been lost.  According to this article from USA Today a year after the storm, the Federal government had spent $122 billion, and that wasn't necessarily the end.

And now Sandy.  We know from Katrina that if you just demand loud enough the Federal government will pay for everything you can think of.  In fact, now is the time to make your wish list of anything you would like, because if you can come up with even the slightest connection to the hurricane, you can get the Feds to pay, and probably double, because the last thing they will want to do is to be seen cross-examining some victim.

From Crain's New York Business today, we have Governor Andrew Cuomo of New York putting forth his demand for Federal aid:  $40 billion.  "The governor said their estimates were conservative and may rise as the cost of recovery from Sandy continues to be tabulated."  And don't forget New Jersey.  Governor Christie there issued a number on Friday of $29.4 billion as what he will be seeking in Federal disaster aid.  Something tells me that that number is going to jump dramatically when he realizes that he has been topped in the bidding by New York.

And we thought it was a lot of money when the Federal government handed out a $20 billion blank check to New York for recovery from 9/11, plus the right to issue some tax exempt "Liberty Bonds" in excess of normal limits.  That money paid for such desperately-needed projects as a new $3 billion (!) station for the PATH subway to New Jersey, and the financing of new headquarters towers for Goldman Sachs and Bank of America.

So on Sandy, will the Obama administration or the Congress actually push back?  I'm dubious.  Is there anyone but me who thinks that this just can't continue?

Guest Post: It is Possible to be a Republican and an Equal Rights Supporter

I am 23 years old, a woman, a Republican, and a gay marriage supporter. And, yes, I believe it is possible to be all of these things at the same time. However, over the course of this last election, it has come to my attention that my generation does not believe a Republican can be socially liberal. As a result, many of my peers are voting Democrat based on social issues alone. This needs to stop, now.

Democrats try to claim the spotlight as the supporters of the movement for equal rights for gays. They have added a provision for gay marriage into their Official Party Platform for the first time this year. It may come as a surprise, then, that we can thank a few wealthy, Libertarian-minded Republicans for the legislative approval of gay marriage in New York. 

While fiscal issues often lead Libertarians to vote for Republican candidates, the principles of Libertarianism are those of ultimate liberty and personal freedom -- values which also lead to support of marriage equality. And, Republicans who support both fiscal conservatism and social liberalism can be the game changers and the tie breakers when it comes to social issues. The New York Times writes of Republican Hedge Funder Paul Singer, 

He was pivotal in rounding up about $250,000 apiece for the Republican state senators in New York whose votes for same-sex marriage provided its margin of victory in the Legislature.

Although Singer could not convince every Republican, particularly socially conservative Republicans, to vote for equal rights, he found the ones who would and he made sure their vote counted.  And, as we all know, in politics it’s the swing votes that really matter. 

Ultimately, Republicans need to spread the word that they, too, have a voice in the equal rights movement, no matter how small it is.  Republicans like Paul Singer continue to support gay marriage campaigns across different states, recently in both Maryland and New Hampshire. Additionally, Singer has also recently started a pro-gay Republican Super PAC to promote this issue. Meanwhile, Republicans should thank him for starting to change the perception of the party as die-hards for the Defense of Marriage Act.

My generation tends to be very socially liberal. A CNN poll found that 73% of those aged 18-34 support marriage equality.  Republicans need to show that they understand this trend and are willing to get in the game, or else risk losing the youth vote permanently. Plus, the sooner we get social issues signed, sealed, and out of the way, the sooner we can get back to talking about what really matters: the economy and how to fix it.

People Start To Notice The State/Local Income Tax Deduction

Here at Manhattan Contrarian, we try to pay attention to where the big money is.  When the talk turns to raising Federal revenue and avoiding or minimizing increases in marginal tax rates, then that must mean limiting deductions; and as soon as you start to look at limiting deductions, you realize that the real money is in one place:  the state and local income tax deduction.

Today Charles Lane of  the Washington Post has the story, also linked by Instapundit.  (Manhattan Contrarian was first on this story back on November 6, although the post was originally written as an e-mail newsletter on October 9).  From Lane:

What’s the least defensible special break in the U.S. tax code? With so many distortions to choose from, it’s hard to name just one. If forced to pick, I might say the deduction for state and local taxes, which cost $67 billion in fiscal 2011, according to the congressional Joint Committee on Taxation.

This one overwhelmingly benefits upper-income households in a handful of upper-income states, while rendering the entire nation’s finances less transparent.

$67 billion per year is only about 7% of the current annual deficit; but it's the most you will find in any one place.  Also, as Lane points out, this one benefits the highest income people way disproportionately.

The interesting tension will arise from the fact that the benefits of this deduction go mostly to a very small number of states.  And those states are almost entirely the "big blue" states:  California, New York, New Jersey, Connecticut, Illinois, etc.  According to Lane, residents of "California and New York reaped almost 30 percent of the deduction's value in 2009."  If you don't have an income tax (Florida, Texas, Nevada, Washington, etc.) you won't even notice when they eliminate this deduction.

The Republicans in Congress have the potential with this one to corner the left-wing Democrat California and New York delegations as defenders of the rich, which they are.  That could be fun.

I have mixed feelings about what elimination of this deduction would mean for New York and for me.  When I first moved here (1975), New York, and particularly New York City, were wildly non-competitive in income tax relative to everybody else, although most notably New Jersey and Connecticut, which then had no income tax at all.  Combined New York State/City income tax at that time was 18%, starting at income as low as about $25,000.  As I have mentioned elsewhere, in the 70s New York City lost over 10% of its population in a decade; the Bronx was burning; businesses were leaving; and New Jersey and Connecticut were booming.  After that bad time, New York State and City struggled to regain tax competitiveness, and the City has returned to prosperity (although it could be far better if we could get taxes and spending further under control). 

The elimination of the state/local income tax deduction would greatly exacerbate the uncompetitiveness of our current tax levels, not so much as against the immediate neighbors, but definitely as against the large no-income-tax states like Texas and Florida.  Our high-income investment community is substantially more mobile today than it was in the 70s.  Erosion of this business base could happen with a speed that could surprise everyone.  That would be terrible for everyone in New York who lives off the wealth generated by these businesses.

On the other hand, New York needs a kick in the pants to move it toward competitiveness.  Right now we are wastefully way overspending on things that other states somehow provide for far less.  It can't go on forever, and it's actually well time to get started on getting our costs in line.

Oh, and did I mention that I'm one of the people paying the big state/local income taxes?  Well, not for too many more years.

Update On Fire Island

Only a few weeks after the big storm, and the push is already on to get the Federal taxpayers to back a big beach repair project on Fire Island.  I'm sure this is no different from the other barrier islands, but I follow Fire Island more closely because we used to own a house out there.

Yesterday's New York Times  has the story, along with the pleas/presumption that of course the Federal government is going to have to pay for this with the infinite credit card.  Here is Suzy Goldhirsch, President of the Fire Island Association:

“We’re the first line of defense for Long Island, and the dunes are our first line of defense,” said Suzy Goldhirsch, president of the Fire Island Association, an umbrella group of community associations. “We’re self-reliant. We’re island people. But we need support.

“We won’t ask for more than anyone else, but we don’t want to be forgotten.”

(Suzy Goldhirsch was a neighbor and an acquaintance during our Fire Island days.)

And then of course the ever-present Senator Schumer:

On Monday, Senator Charles E. Schumer of New York called for the quick repair of the breach, saying it put the mainland at greater risk of flooding.

You don't even really have to mention Federal funding explicitly; it's just assumed.  "We don't want to be forgotten" is code for "We think we are entitled to a multi-million dollar Federal handout."

Exactly how big of a handout?  Well, it's not too hard to figure out.  Turns out that there was just a big beach restoration program in Fire Island in 2009!  The cost of that one, according to Wikipedia, was "between $23 and $25 million ($6,020 per housing unit)."  The home owners established taxing districts to pay for some of it, but according to this from the Army Corps of Engineers, the Federal government picked up an astonishing 75% of the cost.  With about 4000 homes on the island, that was a Federal handout of over $4000 per home.  And these are not poor people.  When we had the house there, residents included the likes of Mel Brooks and Calvin Klein.

Well, too bad, it's only three years later and the sand has been washed away by the next storm.  Time for another $4000 handout per homeowner!  Actually, I suspect that this new one will cost quite a lot more.than $4000 per house.

Ms. Goldhirsch is ready for the critics with this line, "We are the first line of defense for Long Island."  With all due respect, I don't buy it.  The storms do not eliminate the barrier island; they just move it around, knock some of the houses down and leave others in the water.  The amount of protection to the mainland is not really changed by any storm.  The benefit of a beach restoration goes almost entirely to the homeowners on the barrier island, and even within that group disproportionately to the ocean-front homeowners, who are of course the wealthiest of the bunch.  Sorry, but if they want a beach restoration, they should pay for it themselves.

And while we're at it, how about actuarially sound flood insurance premiums?

Government Spending Cuts And Fallacious Keynesianism

As the so-called "fiscal cliff" approaches, can we count the number of articles foretelling grave economic harm from the impending cuts in government spending?  (Of course, the "fiscal cliff" involves much more of tax increases than spending cuts, but that's for other posts.)

Here's John Crudele in today's New York Post:  "[Either the Republican or Democratic prescription] will result in less spending.  And less spending -- no matter where it's cut from -- will tip an already fragile economy over the edge."

From MediaMatters in September:  "[E]conomic experts agree that cutting spending during weak economic growth damages recoveries and depresses employment."

From the [execreble] Paul Krugman of the New York Times in October:  "Recent spending cuts appear to have done even more harm than most analysts -- including those at the I.M.F. itself -- expected."  (Did you realize that the U.S. government had undertaken "recent spending cuts"?  From what possible set of data can that statement come?)

I could go on, but you get the point.

Those authors speak like they know what they are talking about, but they are completely, totally wrong.

What's the actual evidence in the U.S. economy from massive government spending cuts?  Perhaps you think that the U.S. government has never actually undertaken massive spending cuts within a short period of time.  You would be wrong.  It turns out that the Federal government cut its spending by around 50% or more within a short period twice in the twentieth century, once in 1944-48 and the other time in 1921.  The result both times was a spectacular boom.

Here's a great article from June 2012 by  economist David Henderson about what happened after World War II.  Key quote:

In a 2010 study for the Mercatus Center at George Mason University, I examined the four years from 1944, the peak of World War II spending, to 1948. Over those years, the U.S. government cut spending from a high of 44 percent of gross national product (GNP) in 1944 to only 8.9 percent in 1948, a drop of over 35 percentage points of GNP. The result was an astonishing boom. The unemployment rate, which was artificially low at the end of the war because many millions of workers had been drafted into the U.S. armed services, did increase. But between 1945 and 1948, it reached its peak at only 3.9 percent in 1946. From September 1945 to December 1948, the average unemployment rate was 3.5 percent.

Henderson points out how the disciples of Keynes, most notably Paul Samuelson, predicted disaster would occur when the war ended and were proved spectacularly wrong.  Henderson quotes this prediction of Samuelson from 1943:

[W]ere the war to end suddenly within the next 6 months, were we again planning to wind up our war effort in the greatest haste, to demobilize our armed forces, to liquidate price controls, to shift from astronomical deficits to even the large deficits of the thirties—then there would be ushered in the greatest period of unemployment and industrial dislocation which any economy has ever faced.

The spending cuts of 1921 tell the same story.  Here is a good article from the Mises Institute in 2009.  Note that, unlike the post World War II cuts,  the 1921 spending cuts did not immediately follow World War I, which had ended in 1918.  But President Woodrow Wilson kept the government spending inflated at wartime levels.  By 1920, the economy was in depression, with 12% unemployment.  In 1921, new President Harding's prescription was to cut government spending in half.

Instead of "fiscal stimulus," Harding cut the government's budget nearly in half between 1920 and 1922. The rest of Harding's approach was equally laissez-faire. Tax rates were slashed for all income groups. The national debt was reduced by one-third.

Result:

By the late summer of 1921, signs of recovery were already visible. The following year, unemployment was back down to 6.7 percent and it was only 2.4 percent by 1923.

And then came the Roaring 20s!

What we have going on is a delusion that I call Fallacious Keynesianism, to be distinguished from real Keynesianism.  I have my disagreements with real Keynesianism too, but Fallacious Keynesianism is completely unsupportable, and, to his credit, Keynes himself recognized that and distinguished his theory from the Fallacious variety.  Nevertheless, essentially all of mainstream media, government, and the liberal commentariat has fallen completely for Fallacious Keynesianism.

The essence of Fallacious Keynesianism is that government spending increases the economy as measured by government GDP statistics, whereas cuts in government spending decrease the economy as measured by those statistics.   Therefore Fallacious Keynesians advocate increasing, or not decreasing, government spending in all circumstances.

To understand the fallacy of Fallacious Keynesianism, you must understand that the government economic statistics, such as the measure of GDP, do not have any good way of measuring the benefit or harm of government spending.  They simply assume that a dollar spent by the government is of equal value to a dollar spent in the private economy, theorizing that if the people choose to make this expenditure through the government they must find it to be of equivalent value to the private alternative.  This assumption is probably reasonable when the government is a small part of the economy.  When the government becomes a large part of the economy and spends vast amounts on wasteful things, the assumption breaks down completely.

Keynes himself in the General Theory considered the obvious example:  suppose the government pays everyone to dig holes and then fill them back in.  Everyone will work hard all the time but will starve.  Meanwhile the government GDP statistics will count the payments to the laborers as of equal value to what they could have produced in a private economy.  If the government cuts spending on the hole digging and filling, its GDP statistics will initially record a decline until the laid off workers find new employment in the private economy. But output of any real value has not declined, and only by cutting the wasteful spending can the resources of the economy be unlocked to produce real wealth in the private economy.

The simple lesson is that excessive and wasteful government spending is harmful, and if government GDP statistics do not initially show a benefit when the spending is cut, that is a defect in those statistics, and does not mean that the economy is not harmed by wasteful spending or benefited by cuts.

I was thinking of trying to explain real Keynesianism, but this post has gotten too long.  Try reading the General Theory.  It is really impenetrable.  My takeaway:  even if there is any real benefit from real Keynesian government spending, it can only work over the shortest term, in trivial amounts, and will always be co-opted into Fallacious Keynesianism by corruptocrats.

It's Good To Have An Infinite Credit Card

The alarming figure of $16 trillion for the debt of the United States has been much in the news.  That's the amount of actual bond debt outstanding, now somewhat exceeding the entire GDP and growing rapidly.  But aren't there also contingent liabilities out there?  For those who don't know that term, that is the amount that the Federal government has guaranteed, or insured, or otherwise put its credit behind, although not yet actually spent.  It's not so easy to come up with any kind of comprehensive numbers, but I'll make a start.  Also, I'll save the big ones (Medicare, Social Security) for last.

The Federal government insures almost all bank deposits through the FDIC.  In May 2012 the Wall Street Journal put the total amount of U.S. bank deposits at $10.26 trillion.  Could we ever have a systemic banking crisis where essentially all of the banks become insolvent at once?  We almost had one just a couple of years ago.  How about the S&L crisis in the 80s, where all the S&Ls became insolvent at once? And can we think of examples from other countries?  How about Japan in the 1990s?  Russia in 1998?  And don't even get started on Latin America!

What's the total of Federal housing guarantees?  According to Forbes a few days ago, the FHA (which has stepped into the breach to guarantee mortgages given the weakness of Fannie and Freddie) is up to $1.08 trillion.  Oh, and almost 10% of that is in default and they look to be needing a bailout soon.  But don't worry, they have an infinite right to just draw on the Treasury, so no need to go to Congress for an appropriation.  Here's an article in the American Thinker that puts the total of guarantees and debt of Fannie and Freddie at $7 trillion.  Supposedly the Treasury is ending its open checkbook to Fannie and Freddie as of December 31, 2012.  Do you believe it?

Do you know that the Federal government guarantees all private pensions?  The agency is called the Pension Benefit Guaranty Corporation, PBGC.  And by the way, what is the possibility that any private pension plan can meet its obligations when the Federal Reserve keeps interest rates at zero and nobody can make a dime on any investment?  So how is the PBGC doing?  Here's the latest from Fox News on November 16:  they just ran a $34 billion deficit for the year ended September 30, up from a mere $26 billion last year.  

If the trend continues, the agency could struggle to pay benefits without an infusion of taxpayer funds.

What a surprise!

How about flood insurance?  If you didn't know it before Sandy, you surely know now, that the Federal government issues essentially all flood insurance to those in the path of hurricanes.  Turns out that after Katrina the flood insurance program didn't have nearly enough money to pay its debts, so the Feds gave them a line of credit of $20 billion.  They then borrowed $18 billion to pay claims, and haven't repaid any meaningful amount.  Now we have Sandy.  Oops!  The cost of that is projected at $6 - 12 billion according to the Chicago Tribune.  So we are about to blow through the $20 billion cap by multiple billions.  Time for another bailout!  My idea is that we'll spend the money building bigger and better on the same barrier islands.  It's not a problem as long as you have the infinite credit card at your back.

Let's get away from these little numbers and back to something noticeable.  Virtually all student loan debt is backed by the government.  How much is that?  According to this from the New York Times, the total of student loan debt passed $1 trillion in 2011.  Likelihood of getting that back?  Remember, these borrowers are the same people who are supposed to pay for the retirement income and medical benefits of the baby boom generation.

Skipping over a few trivialities (crop insurance, terrorism insurance) let's get to some real numbers.  What is the unfunded liability of the Medicare program?   To be fair, Medicare is different from the other programs above in that the Federal government reserves the right to cut it.  But if you think it should be continued at least as is, or that it would be politically "impossible" to cut, then these numbers are highly relevant.  According to this from the Cato Institute, the Medicare trustees themselves put the number for the unfunded liabilities at $38.6 trillion.  Tanner of Cato thinks $90 trillion is more like it:

Let's try to put the ongoing debate over the future of Medicare into a little bit of context. Last year, Americans paid $274 billion in Medicare taxes and premiums. At the same time, the program paid out $564 billion in benefits. That amounts to a shortfall of roughly $290 billion. Looking into the future, even the most optimistic estimate by the program's trustees puts Medicare's future unfunded liabilities at more than $38.6 trillion. More realistic projections suggest the shortfall could easily top $90 trillion.

Faced with this ocean of red ink, the Obama and Romney campaigns are busy claiming that the other guy wants to cut Medicare. They, on the other hand, would never think for a moment about cutting anyone's Medicare benefits. Hello. Can anyone out there do math?

And yet one more:  Social Security's unfunded liability, according to this from Bloomberg News in July 2012, is $20.5 trillion.

Medicaid?  They don't even put out a number for that one, at least that I can find.  It may be the biggest of all!

The bottom line:  you either believe that it's possible for a big borrower with the infinite credit card to take on all the downside risk of life for everybody, or you don't.  I just predict, when this ends it's not going to be pretty.