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The Independent Investor: Power Shift Part II
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Depending on whose sound bite you are listening to, government spending has gotten bigger or smaller over the last few years. Oddly enough, both sides are correct. It all depends on what statistics you are quoting.
President Obama claims that federal spending, under his administration, has risen at the lowest pace in nearly 60 years. His statement is accurate, as long as you remember that the 2009 fiscal budget is considered part of his predecessor's legacy. As such, the $700 billion TARP bailout and the $831 billion stimulus package occurred at the end of President Bush's term, even though Barack Obama signed the stimulus bill and voted as a senator for TARP. How does that work?
Part of the confusion lies in calendar versus fiscal year accounting. Before 1842, the federal fiscal year was the same as the calendar year. Since then it has changed several times and since 1977 the government's fiscal year begins on Oct. 1 and ends on Sept. 30, so the spending in 2009 was pinned on Bush since he was president on Oct. 1, 2009. I guess that is fitting since the cause and result of the financial crisis that continues today occurred while the Republican Party was in power.
Despite the administration's double talk, the fact is that 2010, 2011 and 2012 are three of only four fiscal years since 1945 that the federal government spent more than 24 percent of GDP in a single year. The Office of Management and Budget predicts that this year federal spending will hit 24.3 percent of GDP. That is about what the government spent in fiscal 1942, when the Japanese attacked Pearl Harbor and America went to war in both Europe and the Pacific.
Before we look at spending today, readers need to understand that there are at least two measures of government spending. The one most quoted by the economic journals and politicians we'll call "G," which is how much federal, state and local governments directly contribute to economic activity measured as a share of Gross Domestic Product (GDP). It is the sum of all the goods and services they provide.
There is also a broader measure that captures all the spending in government budgets. This figure includes all of "G" plus interest payments on our debt, transfer payments through programs like food stamps, social security, Medicare and Medicaid, unemployment insurance, housing vouchers, Veterans benefits, et al. As you might imagine, when you add all this into "G," government spending, as a percentage of GDP, turns out to be closer to 37 percent. In comparison, the average spend since 1960 is about 32 percent.
Now that is down from the 39 percent that it hit in the second quarter of 2009, when the financial crisis was at its peak. If we confine our analysis of government growth since then, government spending has decreased whether you use "G" or the broader measure.
However, if you measure government growth from the beginning of the decade, when government spending totaled just 30 percent of GDP, then yes, government has grown by a whopping 6 percent in the last 12 years.
Beneath the statistics we can see that the government's economic role has clearly grown larger and with it the power it welds. Its historical role as provider of public goods and services remains but is shrinking as more and more of government's budget is spent on transferring cash and in-kind payments to taxpayers directly through programs like Social Security, Medicare and Medicaid.
This is no accident. Remember that an entire generation of Americans is close to or already in retirement. Baby Boomers are tapping Social Security while experiencing mounting health issues as they grow older. They are turning to Medicare to answer their needs. And why shouldn't they?
Throughout their working careers, these hard-working Americans, (who fought three wars for this country in their lifetime along the way), have contributed paycheck after paycheck to guarantee that when the time came, Social Security and Medicare would be there for them when they needed it. So, yes government has grown larger. It is the "why" of it that so many politicians conveniently forget.
As the government's role in the economy gains force, so does its power. But power is agnostic. It can be used for good or for evil. We have seen how Wall Street has abused power. In my opinion, government spending that is used to honor its contract with America's retiring workers is a proper use of that power. Whether this country can afford to honor its commitments is another story and a question we will answer in a forthcoming column.
Bill Schmick is registered as an investment adviser representative with Berkshire Money Management. Bill’s forecasts and opinions are purely his own. None of the information presented here should be construed as an endorsement of BMM or a solicitation to become a client of BMM. Direct inquires to Bill at 1-888-232-6072 (toll free) or email him at Bill@afewdollarsmore.com.
The Independent Investor: Power Shifts from Wall St. to Washington
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The financial crisis of 2008-2009 turned the economy and the private sector on its head. Hobbled by the largest crisis in generations, Wall Street was drowning. With the banking sector about to implode, the Street had no choice but to ask the U.S. Treasury for an unprecedented bailout. As one corporation after another (think the auto industry) faced the threat of bankruptcy, the center of financial decision making shifted to Washington, D.C. It remains there today.
Government's role in the economy is nothing new. For many years it has guided the overall pace of economic activity, attempting to maintain steady growth, high levels of employment and price stability. For decades after the Depression of the 1930s, it relied a great deal on fiscal policy to combat the recurring recessions the nation faced.
During the 1960s, the heyday of fiscal policy, the president and Congress played a leading role in directing the economy. However, ideas about the best tools for stabilizing the economy changed after that as a period of high inflation, high unemployment and huge government deficits undermined the country’s faith in fiscal policy. Enter monetary policy (the control of the nation’s money supply) administered by the Federal Reserve Bank and its tools of interest rate manipulation.
In the midst of the panic of 2008-2009, as giant banks went broke and insurance companies teetered on the edge, the government was firing both monetary and fiscal barrels at the problem. The combined policies worked in the sense of staving off a worldwide financial meltdown and another Great Depression. Since 2008, however, because of partisan politics, fiscal policy has fallen by the wayside. Today only the monetary policy option remains to prevent another recession.
In this election year, opposing forces are criticizing the Fed for doing too much or too little to grow the economy. Conservatives say the Fed is creating inflation down the road by its stimulus policies while driving down the value of the dollar. Some have actually accused the Fed of treason in even considering further quantitative easing. Liberals have argued the opposite: criticizing the Fed for being overly worried about inflation and not doing enough to lower the unemployment rate.
Since 2007, the Fed has been engaged in a historical and largely uncharted area of economic manipulation that transcends anything attempted in our country's past. They have been at the center of propping up or selling huge institutions, making loans to banks and others in entirely new and radical ways and buying upward of $2 trillion in government debt and mortgage-backed securities. There is no question that the Federal Reserve Bank, in my opinion, has assumed the throne of financial power in this country by default.
Its power, unlike the private sector, is concentrated in a handful of individuals with considerable independence from the President and the Congress. Both the President and the Congress have all but abdicated their own power to control the economy if not in words, certainly by their actions. The polarization of both parties since the 2008 elections has made fiscal policy initiatives impossible.
The Federal Reserve Bank, through its chairman Ben Bernanke, has on numerous occasions begged the president and both parties to at least share the power via new fiscal policy initiatives. To date that call has been rejected in the name of politics. In my next column I will examine just how big the government has grown as a percentage of GDP and how power could become even more concentrated within our nation's capital in the months and years to come.
Bill Schmick is registered as an investment adviser representative with Berkshire Money Management. Bill’s forecasts and opinions are purely his own. None of the information presented here should be construed as an endorsement of BMM or a solicitation to become a client of BMM. Direct inquires to Bill at 1-888-232-6072 (toll free) or email him at Bill@afewdollarsmore.com.
The Independent Investor: Presidential Power in an Election Year
| "Executive power has been regarded as a lion which must be caged. So far from being the object of enlightened popular trust, far from being considered the natural protector of popular right, it has been dreaded, uniformly, always dreaded, as the great source of its danger."
— U.S. Sen. Daniel Webster of Massachusetts, 1834
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In the heat of this year's presidential election campaign, voters usually lose sight of one of the most important facts surrounding that office. American presidents, for the most part, have much less power than we think.
Recall the high hopes you may have had in 2008 when candidate Barack Obama promised that "Yes we can" fix the economy, get Americans working again, etc., etc. In his first two years in office. there was plenty of action in translating his vision into reality. We had the stimulus package, Obamacare, clean energy initiatives and a rising deficit as a result. Of course, his party controlled both houses of Congress so passing legislation was a breeze.
But the Tea Party and the mid-term elections of 2010 revealed just how little power the Obama presidency (or any presidency) can muster in the face of a divided Congress. Sure, blame Obama. After all, some of his predecessors managed to get legislation passed despite a hostile Congress, but not many. The historical truth is that the founding fathers designed the office to disappoint those of us who want a powerful leader. You see, those Colonial revolutionaries distrusted government in general and the presidency in particular and our political system evolved accordingly.The Supreme Court, the Federal Reserve Bank, Congress and don't forget the states all detract from the power this one individual might have held over our life. In order to change anything, let alone move the country in a new direction, the president must create a coalition of interests throughout the other branches of government. This is exactly what the founding fathers, fresh from their battle with King George and the British monarchy, intended.
Yet we still expect the person who succeeds to the presidency to be someone with the power of Superman, the charisma of the Messiah and the personal life of Mother Theresa. The candidates understand this. They are forced to promise us the world knowing full well that they do not have the power to deliver it. If they actually told us the truth — that the office holds little power and voters should not expect much of them — would anyone vote for them?
In foreign policy, the president does have somewhat more authority, but once again it is limited by public opinion, Congress and geopolitical realties. As an example, George W. Bush, despite his adversity to nation-building, became an unwilling hostage to a strategy he appalled thanks to 9/11. As for the Obama presidency, it has failed to change public opinion in any decisive manner despite the great expectations of many around the globe when he was first elected.
Mitt Romney appears to want to take a more proactive stance in foreign policy, citing the re-emergence of Russia as a threat as well as viewing China as both an economic and military adversary of sorts. Like his predecessors, if elected, how well he will do in actively balancing the various chess pieces on the world board is far more dependent on what other parties do.
Presidents are far more successful as messengers; some might say visionaries, who can guide the nation along a path while orchestrating the various political players in the band to acquiesce (via compromise) to his point of view. The problem with that role in today's politics is that both parties now reflect the increasing polarization of American society. Neither side is willing to compromise, believing deeply that their way is the right way. The next president might well achieve history but not on his own terms. It would be wise if we all remember that when we vote.
A note to my readers in the Berkshires:
I have volunteered to teach a course this fall at Berkshire Community College at the Osher Lifelong Learning Institute (OLLI). The classes will be on Mondays from 2:45-4:15 p.m. throughout September and October. The course, "America's Future: Buy, Sell or Hold?" will teach students to think critically about such events as this year's presidential elections, wealth and women, our education system and much more. For more information or to sign up for the course call the OLLI office at 413-236-2190.
Bill Schmick is registered as an investment advisor representative with Berkshire Money Management. Bill’s forecasts and opinions are purely his own. None of the information presented here should be construed as an endorsement of BMM or a solicitation to become a client of BMM. Direct inquires to Bill at 1-888-232-6072 (toll free) or email him at Bill@afewdollarsmore.com.
The Independent Investor: Looking Beyond Election Speak
| "If you tell a lie big enough and keep repeating it, people will eventually come to believe it." — Joseph Goebbels, Nazi Propogandist
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Republicans warn of impending disaster if the federal government's house is not put in order. If we continue to do nothing about it, Romney, Ryan and the Republicans will most certainly be right. The question is whether the economy can survive the harsh medicine that these doctors prescribe.
The way to balance the budget, according to the GOP plan, is to cut income and corporate taxes, eliminate at least some tax deductions (no details), preserve defense spending (already larger than the next five nations combined), cut Medicare spending in the 2020s, trim other government spending and gradually shrink the deficit and balance the budget sometime over the next 10 years (yeah, right).
In my last column, I examined the fallacy of believing today's promises by politicians that don't come to fruition for a decade or more. Liberal economists argue that the Romney plan would boost unemployment by slashing public spending next year and the year after and most likely drive the economy into recession. But Mitt Romney knows this as well.
In an interview this spring with Time Magazine's Editor–at-Large Mark Halperin, Romney said, "... if you take a trillion dollars, for instance, out of the first year of the federal budget, that would shrink GDP over 5 [percent]. That is by definition throwing us into recession or depression. So I'm not going to do that, of course."
There is election speak at its finest. How far apart therefore are the candidates on what they truly intend to do about the economy?
In comparison, President Obama also wants to cut income and corporate taxes. Where they differ at all is in those who make over $250,000 a year. Obama wants to raise taxes on them while Romney doesn't. In the grand scheme of things, the amount of money that taxing the rich will generate will hardly be enough to make a dent in the budget. The real value is in generating drama and stoking voter sentiment with an "us against them" mentality. Occupy Wall Street would be proud.
Both candidates want to revitalize manufacturing, improve job training, make America energy independent and expand free trade. How they differ is on the margin. Whoever wins will most likely implement the same policies as their opponent.
Take energy independence as an example. The candidates would have you believe that if the U.S. were energy independent, pump prices would go down or at least the volatility in energy prices would disappear. Nothing could be further from the truth. Global markets set oil prices not the U.S. All energy independence would mean is that on the margin, U.S. companies would experience higher profits (and our government higher taxes) from higher oil and gas prices. Romney indicates he would rely on domestic oil and gas exploration including off-shore drilling to accomplish that independence. Obama would focus on fossil fuel exploration and development as well as alternative energy sources.
Where they differ the most is in how to reduce spending. Romney wants to cut government domestic programs that will ultimately impact lower and middle-class Americans on the margin more than wealthier Americans, while keeping defense spending the same. Obama would rather cut spending in both areas so that declines in spending would be a bit more modest.
As for regulation, Obama wants to enforce the Dodd-Frank financial regulations while Romney wants to repeal them. However, in the face of on-going wrong-doing by the nation's financial sector, the Romney campaign has been curiously absent in furnishing an explanation on how they would stop these continued abuses by the financial sector.
The point of this exercise is to separate fact from fiction, rhetoric from reality, in what I see as an increasingly confused and jingoistic campaign. Both sides seem to be relying more on one-liners than substantive explanations of policy. The use of misleading data, deliberate falsehoods and confusing statements intended to incite and confuse voters seems to be on an increase as well.
As such I feel obligated to try and make some sense out of this nonsense. In my next column, we'll look at how much power the president really has in implementing the grand visions they promise.
A note to my readers in the Berkshires:
I have volunteered to teach a course this fall at Berkshire Community College at the Osher Lifelong Learning Institute (OLLI). The classes will be on Mondays from 2:45-4:15 p.m. throughout September and October. The course, "America's Future: Buy, Sell or Hold?" will teach students to think critically about such events as this year's presidential elections, wealth and women, our education system and much more. There are only a few seats left. For more information or to sign up for the course call the OLLI office at 413-236-2190
Bill Schmick is registered as an investment advisor representative with Berkshire Money Management. Bill’s forecasts and opinions are purely his own. None of the information presented here should be construed as an endorsement of BMM or a solicitation to become a client of BMM. Direct inquires to Bill at 1-888-232-6072 (toll free) or email him at Bill@afewdollarsmore.com.
The Independent Investor: Separating the Forest From the Trees
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| "We're not going to let our campaign be dictated by fact-checkers." — Neil Newhouse, founder of Public Opinion Strategies
and GOP presidential candidate Mitt Romney's pollster |
Billed as a choice between two distinct and opposing futures for America, the November presidential election candidates are neck and neck. At the center of the battle are two issues: the economy and jobs. Rhetoric aside, how far apart are these men on the issues?
Up until Aug. 12, the media was hard pressed to find much difference between Barack Obama and Mitt Romney. The president was a democrat defending his track record of moderate economic growth while grappling with his unsuccessful efforts to whittle away at an extremely stubborn unemployment rate. Romney, on the other hand, promised change, towing the typically conservative line of less government, less regulation and more reliance on the private sector for job growth.
Cutting taxes and reducing spending were on both candidates' agendas, although the degree of cuts and increases differed. Both candidates were woefully short on detail on just when and how these changes would be implemented once elected. Enter the game changer, Congressman Paul Ryan.
From the moment Romney announced Ryan as his vice presidential selection, emphasis has shifted from Romney's "me too" economic plan to Ryan's "Roadmap for America." The Ryan plan has been touted as both the best and the worst program response to the nation's economic wounds ever created. The Magna Cartae it is not, nor is it anything like Ayn Rand's "Atlas Shrugged."
For those who have read all three (I have) , Ryan's plan presents a conservative point of view that has been largely espoused by the Republican tea party over the past few years. There is a lot of truth in what Ryan writes and believes, but many of his policy recommendations are in the wrong place at the wrong time, in my opinion. The best that can be said for the document is that it provides a solution to our fiscal issues, something the Democrats are sorely lacking in their own platform.
The problem for conservatives is that Ryan isn't running for president. In fact, if one looks back through history, vice presidents have had little impact on policy once their boss has captured the White House. So those who focus on Ryan's proposals are missing the point. Ryan's appointment to the ticket is meant to rally the hard-core conservatives, the tea party, if you will, to Romney's side. It does not mean that any of Ryan's suggestions will ever become part of a Romney economic plan.
In the meantime, the Democratic predictions of the end of Medicare and Medicaid as we know it if the Romney/Ryan "Comeback Team" is elected are not true. Ryan's plan to move Medicare from a defined-benefit fee-for-service system (where government is your insurance) to a defined-contribution system (where government writes you a check to help you pay someone else for insurance) is a long-term plan.
At the earliest, it won't take effect until sometime in the 2020s. Now, come on, do these politicians really expect us to believe that for the next 8-10 years every administration, regardless of party affiliation, is just going to sit by and agree to abide by Ryan's proposed Medicare changes in the 2020s?
There is no longevity in policy-making. Remember last year's deficit ceiling battle? The bi-partisan Super Committee failed to come up with a compromise in cutting the deficit in exchange for a higher national debt limit. So both parties agreed to automatic cuts in defense spending and entitlement programs. They are scheduled to be enacted on Jan. 1, 2013. Here it is less than a year later and both parties are already planning to change the agreement after the elections.
Nonetheless, the notion that Medicare and Medicaid will end "as we know it" if the Republicans are elected have the elderly up in arms. In a recent Pew Poll, over 55 percent of respondents, 65 years and older, were dead set against Ryan's plan. Over 51 percent of respondents said it was more important to leave Social Security and Medicare alone than it was to reduce the budget deficit.
In my next column, I will continue to separate the wheat from the chaff, as I see it, in the hope that readers will benefit from a little critical thinking as it applies to November’s elections.
A note to my readers in the Berkshires:
I have volunteered to teach a course this fall at Berkshire Community College at the Osher Lifelong Learning Institute (OLLI). The classes will be on Mondays from 2:45-4:15 p.m. throughout September and October. The course, "America's Future: Buy, Sell or Hold?" will teach students to think critically about such events as this year's presidential elections, wealth and women, our education system and much more. For more information or to sign up for the course call the OLLI office at 413-236-2190.
Bill Schmick is registered as an investment advisor representative with Berkshire Money Management. Bill’s forecasts and opinions are purely his own. None of the information presented here should be construed as an endorsement of BMM or a solicitation to become a client of BMM. Direct inquires to Bill at 1-888-232-6072 (toll free) or email him at Bill@afewdollarsmore.com.
