Economics and Scrambled Eggs

Admittedly, I am a cynic towards government data.  Government is about power and money. Bureaucrats and politicians retain their ability to keep both by making us believe they can solve any problem. When you are the controlling the data, you make anything appear possible.

On Friday, the government released its statistics on employment for the month of January.  According to the report, the economy created 243,000 jobs and the unemployment rate dropped another couple of notches to 8.3%. The President took a victory lap claiming that his policies have put Americans back to work. Stock market gamblers cheered the news by throwing more money into stocks resulting in hefty gains across all major indices.

Instead of celebrating, some analysts dug deeper into the data behind the joyous headlines. What they discovered as best described by CNBC commentator and free market advocate Rick Santelli was “shrinkage”. The labor participation rate has steadily decreased over the last few months to a January reading of 63%. The unemployment rate is calculated by dividing the number of people actively looking for work by the sum of the people working and those actively looking for employment.  The unemployment rate can be magically lowered by narrowing the definition of actively looking for work. Individuals giving up in the search for a job or returning to school are no longer considered looking for a job. And neither is an individual working part-time due to perhaps a lack of full-time jobs. It does not appear to be logical for the labor participation rate dropping to a historic low point while the employment picture shows improvement.

http://video.cnbc.com/gallery/?video=3000071275

http://www.zerohedge.com/news/record-12-million-people-fall-out-labor-force-one-month-labor-force-participation-rate-tumbles-

Tthe folks at www.zerohedge.com do a good job of investigating the numbers behind the government statistics.  The following summarizes a few treasures buried in the employment data.

·         The labor participation rate implies that 1,200,000 dropped out of the job market in the month of January

·         Tax withholding data prior to Friday’s release indicated an addition of only 40,000 jobs instead of the 243,000

·         The discrepancy could be the result of low paying and part time jobs accounting for a good portion of the 243,000 added to the payrolls

·         The numbers reported by the Bureau of is not raw data. The numbers are massaged for seasonal adjustments and the birth-death ratio. In other words the employment figures are mathematically cleansed

http://www.zerohedge.com/news/explaining-yesterdays-seasonally-adjusted-nonfarm-payroll-beat

I still scratch my head over why people throw money into stocks over employment reports and why they would take at face value anything the government says, especially in an election year. Some will rationalize the correlation between more jobs and the stock market in two ways. First, an improving jobs pictures means the economy is doing better, and therefore, companies are bound to report better earnings. Secondly, an increase in people working results in more disposable, which a portion can be used to invest in stocks.

Such commonly held beliefs fall victim to an error in causality. Stock prices move up or down for only one reason, net money moving in or out. It is a simple exercise in supply and demand. If the demand for a stock during any given time is greater than the shares for sale, then the price must rise or vice-versa when the supply of stock for sale is greater than the demand. Company earnings or any other news does not cause price changes.

Secondly, it is true a job will increase income for a previously unemployed person. But it is quite a leap to say a portion of the new wages will end up in stocks. Money used for the purchase of any investment comes from savings. It cannot be said with any degree of certainty that an individual will save, especially if as the data suggests a portion of the increased employment came from either low paying or part-time jobs. Additionally, many are still highly indebted. Before savings can take place the debt has to be retired.

The pundits will sing Happy Days Are Here Again.  They ignore the fact that the government is the one handing out the song sheets.

Apparently the military has lobbied for special expedited security measures at the nation’s airports.  In addition to members of the armed forces receiving preferential security treatment, I also heard on Freedom Watch hosted by Judge Napolitano that the police and fire unions are lobbying for the same type of screening.  Why is it we believe people in government issued uniforms, which in the case of the police and fire personnel comes with a badge, are beyond malicious intent.

Examples of individual policeman committing heinous crimes that include murder stretch back in the history of law enforcement to the time cops first started walking the beat. Some have been trained in using special types of weaponry and even plastic explosives.  I would also suspect that elite police personnel have also been educated  onhow explosives and arms can be transported past security checkpoints.

The same argument can be made about military personnel.  Individuals particularly in the Special Forces certainly know how to hide and proficiently use different types of explosives.  The military or for that matter any government enforcement agency is not foolproof from an individual or a small group with destructive intentions blending in among their ranks.

On November 9, 2009, Army Major Nidal Milek Hasan opened fire at the Fort Hood base outside of Killen, Texas. When the shooting ended, thirteen people lay mortally wounded and another twenty-nine fell wounded. Hasan is an American born Muslim of Palestinian descent.  Internal Army reports showed for four years concern over Major Hasan’s radical Islam tendencies. Imagine what the Major might have done if airport security gave him a pass. If the Army could not stop a person like Hasan from creating mayhem, then what makes anyone think that the mental midgets of the TSA can?

This brings up a second point. In the age of computers and digital replication, what is the chance of a dumb-eye TSA person spotting a phony military ID.? Considering how often airport security misses weapon breaches during internal test runs, I would estimate the odds to be next to none.   I personally know a person that mistakenly had a knife in his carry-on bag. Despite going through all the security show, the knife made it through.

Finally, the laws of the land are supposed to apply to everyone equally. No one gets a pass or differential treatment because of their lot in life, including members of Congress and the President. Members of the military, police, fire departments, and public officials all take an oath to defend the Constitution. Instead of protecting individual rights, people in uniform and politicians have demonstrated an allegiance toward government power. I see everyday more reasons to trust people in uniform less and less.

The other week I wrote about the concept of “could happen” laws. My post referred to the opponents of conceal and carry gun laws because allowing a citizen to pack heat could result in someone getting shot.  A number of laws today, including the ones covering drugs and prostitution, are based on the possibility that somebody could be harmed.

William Anderson posted a story about a man charged on the basis of “could happen”. One of the weapons citizens have against laws that inhibit liberty is to nullify or ignore government edicts. In the case of a trial for instance of a person charged with drug possession, a jury contrary to all evidence can vote the defendant not guilty on the basis that the law is wrong. I believe it was Jefferson that once declared people have a duty to ignore bad laws. The civil rights movement was an example of people turning their backs on “Jim Crow” laws.

Summarizing the story relayed by Anderson, a man in New York City stood outside a courthouse passing out leaflets arguing for jury nullification. Federal prosecutors had the man arrested and charged him with jury tampering even though he was not on trial or had any personal benefit in a specific court case, which is usually necessary to prove to find an individual guilty of trying to influence a juror or the jury.

http://www.lewrockwell.com/blog/lewrw/archives/99621.html 

What is the man guilty of in the eyes of federal prosecutors? The people receiving the leaflet could happen to sit on a jury one day. The next thing you know there will be a law against team sports because the coach could happen to become a child rapist.   

In a rebuttal to an editorial opinion by the staff of the Hudson Star-Observer the other week over the recent passage of conceal and carry, Saint Croix County Supervisor Steve Hermsen talks about what I call the “could happen” society.  The encroachment of government force outside of our constitutionally protected rights is a direct result of this mentality. No longer does a crime need to be committed in order for government forces to conduct searches without warrants or prosecute an individual for what they could do.

http://www.hudsonstarobserver.com/event/article/id/45254/

Opponents to conceal and carry gun law chew their finger nails down to a nub worrying that a person packing heat with a legal permit might shoot someone. The whole purpose for an individual absent of criminal intent for carrying a weapon is to shoot a person when threatened with deadly harm. We do have the right to self-defense. If we do not protect ourselves when threatened, then who will? The police arrive well after the other person shoots or robs you. Admittedly a person carrying a gun could run into a situation where they are called upon to fire the weapon. But could is a long way from actually doing it and furthermore, it is a huge leap to believe a citizen legally carrying a gun will do so without provocation.

In our modern “worry about the possibilities” culture, laws have been created to assume guilt without a criminal act because the person could commit an illegal act. Drug crimes are based on the presumption that a person strung out on drugs could commit a crime to support a habit; maybe or maybe not. If the person does rob or murder, then we have laws that punish the act. Ironically if the victim to be is carrying a gun, then the crime might be stopped beforehand.  But what about the person that does not commit a crime against another’s property or life while smoking or popping. They are guilty of nothing but minding their own business.

As Steve Hermsen asks, where do you draw the line when it comes to possible danger? On our roads 30,000 to 40,000 people die annually in automobile accidents, which mean a chance exist every time we get into a car that somebody could die. Why don’t we outlaw cars? Of course people have been known to suffer serious injuries involving motorcycles, bicycles, or skateboards. Why don’t we outlaw all means of transportation outside of our own feet? Of course a person could run into another causing an individual to fall and suffer an injury. Because a person could hurt another anytime movement is involved, perhaps we should make it illegal to move.

A person can imagine hundreds of “could happen“ scenarios. Taking all possibilities to a logical conclusion results in only one law; it is illegal to live.

On several occasion I have posted the story about Indiana House Bill 246 introduced in 1897. The legislation would have effectively altered the mathematical value of Pi. Fortunately for the students of Indiana the bill died in the Senate. Though some may think that the “Indiana Pi Bill” is just an isolated case of legislative craziness back in an unsophisticated era, it shows the real danger of government sponsored education.  But the debate over a few governmental decrees this week show that education insanity is not just reserved for farmers at the turn of the last century.

http://www.agecon.purdue.edu/crd/localgov/second%20level%20pages/indiana_pi_bill.htm

In a rules debate over school lunches, the USDA is arguing over whether the tomato paste used in government education lunchrooms is a vegetable.  Tomato paste provides the base for pizzas. Bureaucratic created logic states that if tomato paste is a vegetable, then the pizza has to be a vegetable under the nutritional guidelines of the USDA.  Do not be surprised to eventually see a new federal program giving farmers a subsidy for growing pizza.

http://www.newjerseynewsroom.com/healthquest/congress-declares-pizza-a-vegetable-for-school-lunches

Any parent or a child above the age of two would call you insane for thinking that a pizza is a vegetable. But all of this ignores the science classification of tomatoes. A tomato is not a vegetable at all; it is a fruit.

 For the millenniums man and animals have drank water to naturally supply hydration to the body. The European Union this week ruled that water, more specific, bottled water does not prevent dehydration.  I guess according to this line of reasoning water hydrates when you lap it from a stream or the end of a hose or in a container with an open mouth like a glass. But when the same water is put in a bottle it loses the qualities of hydration.  Talk like this from an individual would get them a room at the insane asylum.

http://www.inquisitr.com/160958/water-doesnt-prevent-dehydration-says-european-commission/

A few years ago in an effort to push the nonsense of global warming, the Environmental Protection Agency ruled that CO2 is a pollutant. Many though it nutty to call the one of the gases necessary for life on this planet to be called a poison. Some joked that eventually it would be illegal for humans and animals to exhale.  Tragically, legislation based on this false premise now threatens to destroy the very fabric of the modern economy.

Of course most of this craziness is driven by agendas from one group or another seeking to gain advantage through bureaucratic rulings, though I would not totally rule out the possibility that people in government are just idiots.

The danger of all this is what happens to the process of critical thinking that we call education. If the “Indiana Pi Bill” had passed then math outside of simple arithmetic for Indiana students would have disintegrated into calculated rubbish. Great engineering programs at schools like Purdue would not exist.  In the era of government run education, it is folly to think that bureaucratic decrees to the contrary of scientific fact will not be placed as the truth in textbooks and curriculum material.

Government has no place in telling us what to eat, drink, or even how to breathe. And government with its illogical reasoning has no place in science or education.

 Presidential hopeful Herman Cain claims that his 999 tax plan where businesses and individuals are federally taxed at a flat rate of 9% in addition to a 9% national sales tax will be revenue neutral.  I am always perplexed by so-called trumpeters of limited government that want to change tax policy while at the same time ensuring the government will haul in the same or more tax receipts. Since taxes are the food for big government, how can you continue to feed the beast and expect to limit its size? This is like putting a 400 pound person on a diet by letting them eat the very things that made them fat.

In 2000 federal tax receipts amounted to nearly $1.8 trillion. The amount in 2010 exceeded $2.1 trillion, which is nearly a 17% increase over the decade. According to Mr. Cain the right size for government is bigger than it was 10, 20, 30, 40, 50 or 100 years ago. Apparently Cain and his supporters are satisfied with the level of federal intrusion in this country and around the world. What happens when the economy grows? The government brings in more tax money and increases its bureaucracy, which means even more intrusion.

This is the problem with many flat tax proposals floating around.  They all premise the virtue of the various plans in that government receives more money.  I would personally endorse a national sales tax plan with the preface that all other taxation is eliminated and a receipt cap is placed on the federal government plus restrict the ability of Washington D.C. to borrow money.  For example, a national sales tax of 15% is placed on all goods, which allows an individual to keep all of their income up front and then decide how they want to be taxed.  Once the federal coffers reach $500 billion the sales tax is suspended until the beginning of the next fiscal year.

You cannot have limited government if you do not limit the flow of funds into the Treasury or limit the amount on the credit card.  Herman Cain’s math is a little conflicted along with his idea of smaller government.

The financial news this morning left me dumbfounded as one of the last bastions of monetary sanity folded. The Swiss National Bank announced today the pegging of the exchange rate with the Euro at 1.2 Swiss Francs to 1 Euro. The policy involves the purchase of foreign currencies including the Euro, US Dollars, and Japanese Yen. As the main players in the currency arena travel down the failed road of inflation, the move by the Swiss almost ensures the same for the Franc. It is akin to a ship tying a line to the Titanic.

In a move mimicking Ben Bernanke and company, the European Central Bank in early August began purchasing Spanish and Italian bonds at rates lower than offered by the market. With a no confidence vote looming in Germany, banks in Deutschland may no longer finance European debt, which means increased easing by the ECB.  Eurozone decimation results in further Euro printing that eventually drags the Swiss Franc down in the whirlpool of a sinking ship.  The history of monetary intervention never ends well.

But like all economic actions, currency transactions are not a static equation.  A rapid appreciation in the Yen may force the Japanese Central Bank to take steps toward further easing. In addition, a spike in the dollar may cause Bernanke to accelerate QE3 or whatever the Federal Reserve wishes to call it. What we may be witnessing is the beginning of a currency war.

Where does one put their money since the Swiss removed the Franc from the safe-haven list?  Countries rich in resources will likely gain the most from a monetary tit-for-tat. Over the last couple of months I have been moving money into the Aussie Dollar and buying Australian Certificates of Deposits. The Canadian Dollar still remains a harbor of safety.  

 As some of the world’s major currencies swirl down the toilet, gold and silver are gaining as an alternative to debasing monetary units. Gold and silver are also the currency of liberty.

Thomas Jefferson, in a letter written to John Taylor in 1798, urged the avoidance of public debt.

“I wish it were possible to obtain a single amendment to our Constitution.  I would be willing to depend on that alone for the reduction of the administration of our government to the general principles of the constitution:  I mean an additional article taking from the Federal Government the power of borrowing.”

One thing in common that the Boehner Plan or Reid Plan or the much heralded Cut, Cap, and Balance have is that none of the proposals cut one red cent from the federal budget. As I pointed out the other week with help from the Cato Institute, all the so-called cuts in spending come from future base line expenditures. The projections call for government spending to increase by 7% annually or double over the next ten years.  A 2.5 trillion dollar snip to the base line over the next ten years results in a federal budget in excess of $5 trillion, which means the national debt  by some estimates will climb to over $20 trillion.

A budget-balance amendment does nothing to shrink the debt since it only dictates that fiscal year government spending equals the takings. In addition a balance-budget amendment says nothing whether specific areas of federal spending are constitutional or if so, the spending is effective toward accomplishing the intended goal.  This should be the real issue in the debate over raising the debt ceiling.

The only true way to cut government spending and the exploding national debt is through an amendment that does not allow government to borrow in the first place.  If this was now the case, then Congress would be forced to choose between slashing spending by 40% or raising tax collections over 70&, which would not happen as the economy grounded to a complete stop.

It is easy for politicians to play Santa Claus when they can steal from the piggy banks of children and those yet to be born.  

As I have pointed out before, the federal budget talks that include the Ryan Plan take what amounts to a giant leap of faith. The national government currently spends annually around $1.4 trillion more than what it takes in taxes and fees. Projections over the next ten years show the present national debt of $14.475 trillion growing to over $20 trillion by the end of the decade.

Even the most aggressive spending reduction plans seem to fall woefully short of balancing the budget let alone reducing the size of the debt. A $2 trillion cut over the next 10 years still results in $5.5 trillion of projected government spending for the year 2021. The government currently takes in less than $2.5 trillon. In order to have a balanced budget that would mean federal tax receipts would have to more than double.

How could that possibly happen?

http://www.theblaze.com/stories/debt-ceiling-cato-institute-says-2-trillion-in-cuts-will-increase-spending-by-1-8-trillion/

Last week I gave a short presentation on the question whether the federal debt ceiling should be raised. While preparing my remarks, it entered my mind why individuals or governments borrow in the first place.

As with most analysis, I started my logic trail with the individual. When posing this question of debt to my economic classes, several students responded in an obvious tone that we borrow to buy stuff immediately. They correctly pointed out from previous discussions that debt is borrowing future income (labor) from the future and spending it in the present.

Though this is quite true, I challenged to find the real reason we borrow.  The laws of economics teach us that human exchange involves tradeoffs. For example a family may spend their present income on a mortgage, utilities, clothes, a winter vacation to a warm climate, birthday presents, piano lessons, dance class, savings for college and retirement, plus a host of other items. The need for a new car presents the age-old economic problem of choice. In order to buy a car some expenditure in the current budget must be deleted or someone needs to get a second job.  Either way, the result will be a measure of unhappiness. We can avoid displeasure by borrowing from the future and buying a car;  thus delay the problem of choice for a later date.

Government is no different where elected officials must choose how to allocate tax dollars. When a new role for government is created in the minds of an interest group, bureaucrat, or politician, the choice comes down to eliminating an item in the budget or raising taxes; decisions that most in the political caste want to avoid. The answer like the example of the family is to debt, which for the government entails borrowing future tax receipts.

With a federal debt already over $14 trillion and tax receipts historically averaging a little over $2 trillion, the US Treasury to date has borrowed about six tax years so far for just operational purposes.  And projected budget deficits show the debt climbing to over $20 trillion in the next ten years if not sooner (10 tax years).

The result of government avoiding choices allows its role in society to expand without the risk of economic revolution. Debt not only allows government at all levels to delay inevitable economic laws, but debt also gives government the opportunity to function outside the limitations of the Constitution and for the time being avoid the economic consequences of doing so. Imagine promoting a war for example in Libya and asking the taxpayers for money to fund it or cutting out a bureaucratic department beholden to a special interest group. You can easily conclude the war would not happen.

The idea of limited government with enumerated roles cannot be sustained unless the government’s has no allowance to debt.