The Politics of the U.S. Economy and Global Trend Towards Socialism

By Victor Sperandeo with the Curmudgeon

Introduction:

To be effective, fiscal policy and monetary policy must work together and be united to create strong economic growth. That will then lead to new business formation, more jobs and higher wages. The result is an increase in wealth and the standard of living for those participating in a growing economy. Unfortunately, the economic philosophy of the Obama administration seems to be based on an ideology of redistribution of wealth, rather than creating new and more wealth.

The primary reason that the U.S. economy has experienced the lowest rate of recovery growth since WW II is due to President Obama's fiscal policy. No economist, especially John Maynard Keynes, would suggest raising taxes in a recession or slow growth economy. Yet it seems Obama's fiscal policy is based on raising taxes and increasing regulations, which results in increased costs to businesses and consumers.

Editor's Note: The CURMUDGEON believes that the "do nothing" Congress is equally at fault (or even more so than the Obama administration) for the failure of fiscal policy to stimulate the U.S. economy.

The Burden of Excess Regulations:

An April 16th Wall Street Journal editorial - "Regulator Without Peer"- (on-line subscription required) provides a sobering summary of the negative impact of over regulation. According to that WSJ opinion piece, Washington set a new record in 2013 by issuing final rules consuming 26,417 pages in the Federal Register. In 2013 the Federal Register contained 3,659 "final" rules, which means they now must be obeyed, and 2,594 proposed rules on their way to becoming orders from political headquarters. The Federal Register finished 2013 at 79,311 pages, the fourth highest total in history. Another 3,305 regulations are moving through the pipeline on their way to being imposed. One hundred and ninety-one of those are "economically significant" rules, which are defined as having costs of at least $100 million a year.

It's estimated that the overall cost of regulatory compliance and its economic impact is about $1.9 trillion annually. This means that the burden of complying with federal rules costs roughly the annual GDP of Australia, Canada or Italy.

"This regulatory tax makes U.S. businesses less competitive, but it also burdens every American because it is embedded in the prices of all goods and services. Mr. Crews estimates that "U.S. households 'pay' $14,974 annually in regulatory hidden tax," or 23% of the average income of $65,596. By far their greatest and most tragic cost has been slower economic growth, which has meant fewer jobs, lower incomes and diminished economic possibilities for tens of millions of Americans."

The Fed's Misguided Monetary Policy and the "Wealth Effect":

As U.S. fiscal policy has been negative for economic growth, the role of Federal Reserve Board monetary policy (ZIRP, Operation Twist, and QE) has been far greater than any time in history. I believe that one reason for the Fed's money printing (QE) is they believed it was needed to offset the negative effects of Obama's failed fiscal policies. In my opinion, the Fed's misguided monetary policies have planted the seeds for significant future inflation- much greater than the Fed's 2% target inflation rate.

The CURMUDGEON has repeatedly stated that the Fed's policies have boosted financial markets, but have done little or nothing to increase jobs or economic growth. In their just published Quarterly Review and Outlook Van R. Hoisington and Lacy H. Hunt, PhD seem to agree.

"The Federal Open Market Committee (FOMC) has continuously been overly optimistic regarding its expectations for economic growth in the United States since the last recession ended in 2009. If their annual forecasts had been realized over the past four years, then at the end of 2013 the U.S. economy should have been approximately $1 trillion, or 6%, larger. The preponderance of research suggests that the FOMC has been incorrect in its presumption of the effectiveness of quantitative easing (QE) on boosting economic growth. This faulty track record calls into question their latest prediction of 2.9% real GDP growth for 2014 and 3.4% for 2015."

The authors state that the FOMC incorrect view of the effectiveness of quantitative easing is their reliance on the so-called “wealth effect,” described as a change in consumer wealth which results in a change in consumer spending. After extensive research on this topic, Hoisington found the wealth effect to be much weaker than the FOMC presumes. They say that it's difficult to document any consistent impact with most of the research pointing to a spending increase of only one cent per one dollar rise in wealth at best. Some studies even indicate that the wealth effect is only an interesting theory and cannot be observed in practice.

Chris Low, Chief Economist of FTN (FTN Financial, Economic Weekly, March 21, 2014) wrote: “There may not be a wealth effect at all. If there is a wealth effect, it is very difficult to pin down." Indeed, since the FOMC began quantitative easing in 2009, its balance sheet has increased more than $3 trillion. This increase may have boosted wealth, but the U.S. economy received no meaningful benefit. Furthermore, the FOMC has no idea what the ultimate outcome of such an increase will be or what a return to a ‘normal’ balance sheet might entail. Given all of this, Hoisington does not see any evidence for economic growth as robust at the FOMC predicts.

A Few History Lessons for U.S. Fiscal Policy:

1. Ludwig Von Mises, philosopher and Austrian school economist once said:

"Some experts have declared that it is necessary to tax the people until it hurts. I disagree with these sadists."

After the Bush tax cuts expired in 2012, the highest marginal income tax rates went up from 35% to 39.6% - plus 3.8% for the Medicare tax (=43.8%) or a 25.1% increase. Capital gains and dividend taxes also went up - from 15% to 20% + 3.8% for Medicare tax making for a 23.8% increase. At that time, Obama said "we'll raise taxes A LITTLE MORE for those that can afford it." But who can or can't afford it wasn't addressed by our President.

2. Perhaps one of the top five economic books of all time was the Wealth of Nations (published in 1776) by Adam Smith. Inflation does not create jobs or wealth, so what does? Adam Smith answers:

"That state is opulent where the necessaries and conveniences of life are easily come at.… To talk of the wealth of nations is to talk of the abundance of the people. Therefore, whatever policy tends to raise the market price diminishes public opulence and the wealth of the state, and hence it diminishes the necessaries and of the people."

This is the exact opposite of the current U.S. fiscal and monetary policies. You can decide which one you think is most effective? The facts speak for themselves -loud and clear. Look at the very poor performance for the average worker and "saver” in the U.S. since at least June 2009 (when the "recession ended"). Meanwhile, U.S. government policies have certainly helped big companies, many of whom avoid paying corporate income taxes!

3. Ludwig Von Mises:

"Economics is the science of the means to be applied for the attainment of ends chosen. Ultimate decisions, the valuations and choosing of ends, are beyond the scope of any science."

Let's examine the "ends chosen," (and by whom) as that is a crucial issue for economic growth. An additional opinion may lead to a more insightful consideration. In 1971, a 153 page book titled: None Dare Call It Conspiracy by Gary Allen and Larry Abraham, sold over 1 million copies in several months.

Many things the authors wrote then are still true today:

"The conspiracy of internationalist manipulators is still in place. Its members continue to dominate the highest councils of our government - regardless of whether a "liberal" Democrat" or "conservative" Republican occupies the White House. These elitists occupy the most powerful positions in banking, network television, and more. They seek the same things: centralized power, planned economies, and redistribution of the wealth [with themselves (i.e. the elitists) doing the redistributing]."

Another important quote from the above referenced book:

"If the government controls all these areas it can eventually do just as Marx set out to do- destroy the right to private property" ....and "as we have said, socialism is not a share - the - wealth program, as the socialists would like you to believe, but a consolidate- and -control- the wealth program for the insiders."

More about "ends chosen" in the Conclusions section of this article.

Global Trend Towards Socialism:

The U.S. and most of the major world's big economies have been using politics to promote their desired ideology and agendas. This is euphemistically called "austerity," which translates into increasing taxes, along with slightly less government spending (than previous rates of spending growth). The premise is to reduce government deficits and debt. In effect, it is socialism.

The simple definition of socialism is the government owning the "Means of Production" and/or "Controlling" the means of production (as per Mussolini's method). But it's actually more than that as one may observe from the comments on the character and beliefs of Socialists. Let's take Cuba as an example.

Cuban Socialism - Philosophy and Results:

In an August 1985 interview in Playboy magazine, Cuba's Fidel Castro said:

"Socialism is just the opposite (of Capitalism). By definition (Socialism) expresses confidence and faith in man, in solidarity among men, and in the brotherhood of man--not selfishness, ambition, competition or struggle. I believe that cruelty is born of selfishness, ambition, inequality, injustice, competition and struggle among men."

The above quote is a quite revealing, especially that "cruelty is born of ambition and competition," which is the antithesis of capitalism. Do you believe that?

Has the standard of living in Cuba been raised as a result of Cuban socialism (AKA Communism)? Fidel Castro and his brother Raul have been in power since February 16, 1959. That's over 55 years. The economy of Cuba is a largely centrally planned economy dominated by state-run enterprises overseen by the Cuban government. Most of the means of production are owned and run by the government, and most of the labor force is employed by the state, although in recent years, the formation of cooperatives and self-employment has been encouraged by the Communist Party. In 2012, Cuba's mean salary was $22 per month. Food rationing still exists in Cuba and the 2012 Corruption Perceptions Index¹ gives Cuba a score of 48, indicating undesirable corruption. With those results, can anyone reasonably conclude that socialism has been a good economic model for Cuba?

Note 1. The Corruption Perceptions Index ranks countries and territories based on how corrupt their public sector is perceived to be. A country or territory’s score indicates the perceived level of public sector corruption on a scale of 0 - 100, where 0 means that a country is perceived as highly corrupt and 100 means it is perceived as very clean.

Victor's Conclusions:

The world's economies seem to be heading down the path of decline because (to different degrees) they have followed Castro's socialist philosophy. That has consistently resulted in a lower--rather than higher--standard of living for the people, with lots of corruption along the way.

Meanwhile, capitalist Singapore's median income in 2013 was $7,870 a month. That nation state believes in ambition, competition, self-interest, a certain amount of inequality (which means injustice as Marxists define it), a flat income tax with a zero capital gains tax, and a personal Social Security system called the Central Provident Fund (CPF). As a result of those highly effective economic policies, Singapore has achieved a 1.8% unemployment rate and an uncanny "real" GDP growth rate of 5.57% compounded from 1999 to 2012- or 14 years.

Singapore’s Gini coefficient² or "Inequality Index" is now 0.41, which is the lowest in 10 years (the lower the index the more equality). E.U. countries Spain, France and Italy all have had lower Gini scores (=0.32), but their economic performance has been dismal. Are the people in those countries happy about how they are doing?

The take away here is that a bit more inequality (due to pro-active and effective government economic policies) may increase the standard of living for the majority of people due to higher economic growth and lower unemployment.

Note 2: The World Bank's Gini index measures the extent to which the distribution of income or consumption expenditure among individuals or households within an economy deviates from a perfectly equal distribution. For more information and the Gini Index in various countries please visit here.

Ultimately, the goals of politics and government policies greatly affect the economy. Using Von Mises words about "the science of the means to be applied to the attainment of ends chosen," begs the question to our government representatives - what are the ends chosen?

Is it growth and the incentives offered and paid for by a work ethic that includes opportunity, innovation, and inventions? Where the Henry Ford's and Steven Jobs' among us create something the masses will buy, and therefore reap a larger reward?

Or is it more like a high school graduate who wants to be a bus driver and the rhetoric of envy from the catalysts of socialism that push for "equality" and redistribution of earnings? The latter has historically proven to be less effective in raising living standards for all.

Perhaps, our government officials should carefully consider the ends chosen when formulating fiscal policy. We believe a total rethink is in order at this time.

Till next time........................

The Curmudgeon
ajwdct@sbumail.com

Curmudgeon is a retired investment professional. He has been involved in financial markets since 1968 (yes, he cut his teeth on the 1968-1974 bear market), became an SEC Registered Investment Advisor in 1995, and received the Chartered Financial Analyst designation from AIMR (now CFA Institute) in 1996. He managed hedged equity and alternative (non-correlated) investment accounts for clients from 1992-2005.

Victor Sperandeo is a historian, economist and financial innovator who has re-invented himself and the companies he's owned (since 1971) to profit in the ever changing and arcane world of markets, economies and government policies. Victor started his Wall Street career in 1966 and began trading for a living in 1968. As President and CEO of Alpha Financial Technologies LLC, Sperandeo oversees the firm's research and development platform, which is used to create innovative solutions for different futures markets, risk parameters and other factors.

Readers are PROHIBITED from duplicating, copying, or reproducing article(s) written by The Curmudgeon and Victor Sperandeo without providing the url of the original posted article(s).