The Country Is Over

america us-sinking-shipData are hard to deal with when your vision is on the wrong side of it. Those wanting to claim there is a recovery underway are having just this problem. These people either have no understanding of economics or they believe falsely that they can inflate “animal spirits” with their hyped reports and that will initiate a recovery.

There will not be an economic recovery given the economic policies of this country. A recovery is not unlikely, I would argue it is closer to impossible if not impossible. The reasons for this position are not complicated. In short, the nation has become an out-of-control welfare state that is rapidly destroying the incentives to work or create jobs. Government policies appear designed toward this end. One doesn’t need a high IQ or  an advanced degree in economics to understand the problems.

There are innumerable factors responsible for the decline of the US. Only three important ones will convey why the economy is dying:

1. The rule of law and property rights are under attack. cyprusbankrobbery(2)

What do you really own? The depositors in Cyprus believed they owned what was in their bank accounts. They found out otherwise. Bondholders of General Motors believed they were protected by bankruptcy laws when GM was bankrupted by the government. They found out otherwise. Do you own your pension plans and IRAs. Well you always believed you did except now there is talk about confiscating a portion or all of these funds.

How much of your income do you own? For those doing well, let’s say 60%. But that portion is under attack with the “need” for higher taxes and “fair share” gobbledegook. What about Social Security? Although the government sold it as a retirement policy and told you it is yours, the government says in fine print it is not. That is their excuse for not treating it as a liability on their balance sheet.

The fact is that the rules are being changed at will by the side who has lots of guns. The number of rules and laws that have been changed or ignored in the past several years makes one wonder what laws will remain. We are  approaching the point where there are no rules which means there can be no society. Without cooperation, markets will cease to function efficiently or perhaps at all. Millions of people will starve to death under such conditions.

2. Obamacare has raised costs

The costs associated with Obamacare are still not known or calculable. The rules are still being written. Already there are thousands of pages. Even though we passed it as Speaker Pelosi suggested as a means to find out what was in it, we still don’t know as the rules are still being made up.

For sure the program is driving up the costs of medical care and driving down the quality. That is exactly the opposite of what was promised. Business firms face great uncertainty as to what this mandate will do to their costs and operating procedures. Obamacare is rising the cost of employees. When you penalize something, you get less of it. That is a prime reason why there is no employment recovery in this country.

Employers have frozen their hiring until clarity develops. The development of clarity is no assurance that they will change their behavior. If the costs are too high (and they appear to be for many smaller businesses who create the most jobs), then hiring will not return.

The effect on hiring is only one negative. Full-time workers are being made part-time in order that they be exempted from the Obamacare mandate. These steps are not something business wants to do, it is something they must do in order to survive.

3. Government policies have made the dole more lucrative than work

As we make it easier to get unemployment benefits for longer time periods, more people take advantage of the system. So too with food stamps and disability. All programs are at or near record levels in what is supposed to be four years into an economic recovery. For many, the benefits of becoming a government dependent exceed what they can earn. One study reported that a family of four, collecting all the benefits for which they were entitled, would have to earn $65,000 per annum to have the same after-tax purchasing power.

If you are a product of the government schools and are legal to work (i.e., have skills enough that you are affordable at the minimum wage or higher), at what point do you realize that there is no need to go through the hassle of actual work. You can live pretty well by staying home and taking advantage of the entitlements available to you. That is exactly what a larger and larger percentage of the population are realizing. In many cases, it is economically irrational to work.

This behavior creates a social pathology that only worsens over time. Kids learn from their parents that work is not necessary and the many ways to game the system. In this regard, look for this problem to become worse over time unless these programs are cut back.

There Can Be No Recovery

Despite all you hear coming from the government’s media megaphone, there is no economic recovery underway, nor can there be one. The policies in place ensure that one will not happen. Economics is not a top-down science as Keynesians and politicians want you to believe. You can throw as many Fed dollars into the system or devise innumerable government stimulus programs. These are all top-down. Economics is a bottom-up process that starts with individual decisions and behavior. Individuals respond to available choices and incentives. They act in their own self-interest not in the manner in which some government planner wants them to act. Top-down programs do not affect the incentives of the individual decision-makers.

We raise the costs on those who work (higher taxes) and the businessmen who provide the jobs. One of the basic laws of human nature is that when you penalize something or make it less pleasant, people will want less of it. It is not a mystery why business is not hiring and the number of workers is declining. The return to both is declining as a result of government policies.

We raise the rewards for not working. Another basic law of human behavior is that when you increase rewards for a particular kind of behavior, you will get more of it. It is not a mystery why more people are choosing the dole than ever before. Government has encouraged them to do by providing higher rewards.

Add in the regime uncertainty associated with unstable or unpredictable laws and regulations and you have the perfect storm. There is no incentive to hire. Business hunkers down not knowing what is coming their way next. They understand they are targets of this Administration. It is unlikely that there will be any improvement on this fron while Obama remains in office. This behavior has nothing to do with politics. Even businesses headed by Democrats are behaving in this fashion. It is self-interest as in the desire to survive that motivates this behavior.

Why The Economy is Dying

As government grows the private sector shrinks. As the private sector shrinks there are fewer goods and services produced (government produces no goods and few services). I believe it was Dick Armey who described this situation with the wagon analogy: there are more people riding in the wagon and fewer pulling the wagon. As the wagon becomes heavier, the remaining pullers must work harder to move it.

The pullers must support the riders. Government does not support the riders or anyone else for that matter. Whatever government has it has taken from the pullers. Whatever it doles out it must get from taxes, borrowing or printing new money. Regardless of which means it uses, it is all coming from the pullers. They pay the borrowing back. They have less as a result of higher taxes. They are made poorer by the rising prices from the printing of money.

As the burdens increase on the pullers and the benefits increase for the riders, more pullers decide to ride. The truly creative and talented can always make enough money to continue to work rather than ride. However, when their efforts can be expended in other countries that penalize them less, at some point they no longer pull the wagon. They leave the country to climes where they are treated better.

Each increase in government spending means requires more money from the private sector. That means greater distortions in the incentive-disincentive calculus that produces fewer people pulling the wagon. Now fewer people must support more non-producers. Every time someone gets in the wagon, the burden on the productive sector increases. More must be extracted from a smaller group to serve the increasing riders.

That is what is happening in this country. If it is not reversed, the economy will stagnate and eventually implode. This conclusion is dependent upon nothing more than simple arithmetic. How bad is the imbalance today? Tyler Durden provides some information (my emboldening in red added):

The punchline: 110 million privately employed workers; 88 million welfare recipients and government workers and rising rapidly.

And since nothing has changed in the past two years, and in fact the situation has gotten progressively (pardon the pun) worse, here is our conclusion on this topic from two years ago:

We have been writing for over a year, how the very top of America’s social order steals from the middle class each and every day. Now we finally know that the very bottom of the entitlement food chain also makes out like a bandit compared to that idiot American who actually works and pays their taxes. One can only also hope that in addition to seeing their disposable income be eaten away by a kleptocratic entitlement state, that the disappearing middle class is also selling off its weaponry. Because if it isn’t, and if it finally decides it has had enough, the outcome will not be surprising at all: it will be the same old that has occurred in virtually every revolution in the history of the world to date.

But for now, just stick head in sand, and pretend all is good. Self-deception is now the only thing left for the entire insolvent entitlement-addicted world.

Mr. Durden’s article is worthwhile and informative. I encourage you to read it in its entirety, including the PDF attached.

 

lawrenceIs The Decline Inevitable?

Of course not. As Lawrence of Arabia stated: “Nothing is written.”

The Economic Solution

The solution to solving the problem is quite simple for an economist. Merely reverse the process. Make it attractive for people to jump out of the wagon and begin pulling. For businesses, make it attractive for them to hire. Make it unattractive to be on the dole. Reverse the growth of government and you increase the size of the private sector. More capital is made available for productive activities rather than being squandered by government. Talent stops leaving the country when they are treated more favorably here, whether this be via lower taxes or less onerous regulatory burdens. Then, get government out of the way and let markets solve the problem.

The Political Barrier

For the political class, the solution borders on the impossible. Politicians have bribed the citizenry with goodies for votes. They have sold the notion that government is responsible for all good things. The economic solution runs counter to everything that politicians have peddled. Further it reduces their power and ability to retain office, at least in a manner in which they are accustomed. It shrinks their perquisites. It shrinks their vote-buying ability. In short, it is virtually impossible for them to go along with such a solution.

What politicians thrive on is what created the current problems. Reversing this behavior is alien to them. They would not know how to behave under such conditions. Yet the economic solution is the only solution!

Do I expect politicians to change and save the country? No! Is it possible they could? Probably not, but “nothing is written.”

 

48 Comments

  1. This country is now way too far gone to save. I retired at age 49 (20 years ago)
    partly because I could see it coming. The main difference between me and my
    fictional doppelganger is that I am never coming back. Stick a fork in us.
    We are done.

    John Galt

  2. Well, if we got rid of the FED and the interest we pay on our own money, that would be a step in the right direction. The only other solution is local currencies, which seem to do well when they are implemented.

    I will be afraid to fly once they start building planes in China. I am already worried about cheap Chinese auto parts. We have something to offer, mainly quality.

    Capital has dissapeared overseas, along with the big ass sociopath corporations.

    American expats making money in Asia will usually defend their new home country to the death, mainly because the place gives them a job and seemingly unlimited access to poontang. I know, I used to live there. Don’t expect any common sense or support of the US from them.

  3. Please remember, our politicians are slaves to the central bankers (the Fed, the BIS, the BoE, and the IMF/World Bank).

    The central bankers do not care why the debt is created or how it is used. Their only concern is that the debt exists.

    So when Democrats (or Republicans) fund the welfare state; it creates debt, which enhances the wealth of central bankers and ensures their control. When Democrats (or Republicans) fund the police state; it creates debt, which enhances the wealth of central bankers and ensures their continued control. When Democrats (or Republicans) fund war; great, it creates debt, which enhances the wealth of central bankers and ensures their total control.

    Unfortunately, the Central bankers also own the instruments of the police state and the military industrial complex.
    Therefore, when it comes to debt, they prefer sweetheart government contracts to their police state and MIC corporations.

    While entitlements are debt, they are not as profitable to the Central Bankers as the war economy and the police state.

    Thus we are expected to accept austerity, while continuing to fund the police state and endless wars.

    The only benefit of entitlements to the Central Bankers is that they foster class warfare and ethnic hatred, which ensure that the public fights each other but never challenges the control of the Central Bankers.

    The sad truth is that they play is like cheap violins.

    1. How can the politicians be slaves to bankers when the politicians hold the near monopoly of violence? Bankers can’t force politicians, or anyone else, to do anything. Only politicians (the State) can steal your wealth and rights. Rather, it is through rent-extraction that politicians can extort others to “play” the Government’s game.

      1. marsouin…the politicians are bought. Every member of congress, every officer in the executive branch is a well dressed prostitute. They understand and abide by their masters.

  4. There is no secret why this is happening, except for those still caught up in the Left/Right paradym. One World Government is their aim above all else. You can argue what is or is not a welfare state, why there is no way out, etc, etc. all you care to. It doesn’t change the end result one whit.

  5. It does not take a rocket scientist to know that the jobs in the US went to countries that paid slave wages and that as the paper econoimy grew (Wall Street) it to sucked the life out of the government along with the Military Industrial Complex. How can anyone say that the working man who paid into social security for 30 to 40 years is draining the government purse because of a intitlement that he paid into.But what never gets mentioned is the billions of dollars in subsidies that are given to corporations even if it is to help them movement there businesses to other countries.
    Just remember this it is the politicians both Republican and Democrats that have sold out the USA for there own gain of power and wealth and should stand on trial in front of the whole country for treason and violating the oath of offic e by not standing behind the Constitution of the United States.It’s the workers of America that made this great country but it took just a handful of wealthy and powerful men to destroy it.

  6. The problem was caused by heavy borrowing and spending across the board, i.e., not just by government but also by corporations and households.

    We’re now looking at hundreds of trillions in unregulated derivatives.

    1. and households……………….Please…….

      what kind of criminal takes a substandard loan,
      packages it with other substandard loans to create mortgage backed securities and other collateralized debt obligations
      slices and dices the end-product
      works with friends to fraudulently give it a Triple A (AAA) rating
      criminally sells it not once, not ten times, but thousands of times to unsuspecting investors
      leverages the entire fiasco at 10,000 to 1 and truly believes house prices will go up forever
      and when it collapses (2006, 2008, 2013…hey I got some prime development land for you on the coast of Spain)
      runs to the taxpayer for the bailout, while keeping their illegally obtained salaries and bonuses

      ..this is not households that bought a flat screen tv and a new car.

      ..this is criminal conspiracy that involves private banks, central banks, and corrupt politicians

      ..this is evil.

      It must be dealt with as pure evil and eradicated.

  7. The U.S. is NOT welfare state. This is a myth that even well-meaning American truthers cannot comprehend. While America’s annual GDP is 14,000 billion dollars, she only spends a fraction of that on social security of her poorest citizens. The reason: most ‘white’ Americans are racist and do not want to pay for a safety net for blacks and hispanics. This is from a country that has spends around 700 billion dollars per year on her military.

    The majority of ‘white’ Americans are racist and they consider the phrases ‘wealth equality’, ‘income equality’, ‘welfare state’ dirty. The fact that Americans are racist is also a factor why they cannot abandon ‘white’ Jewish Israel in favour of Arab Christians.

    1. This statement by Junis would be funny if it were not a frightening example of the scope of the problem of a society destroyed by socialism. Junis is prima facie evidence that the problem will probably not be solved without another revolution. Voters like Junis are the freeloaders in the wagon. There are more of Junis than there are of us. We can leave the country and let it collapse then return and build on the ashes or we can fight for it and do the same.

  8. I am convinced that politicians will implement sane economic policies that will save the country, as soon as Hell freezes over. Meanwhile, expect the worst.

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