Infamous Nazi Joseph Goebbels once said that if you tell and repeat a lie enough times, it will eventually become the truth. So it is with politicians and economic behavior and theory. We have been told so many lies so many times by the political class, that the lies become the reality in a lot of people's minds, preventing them from considering alternative approaches and alternative views of reality. This article will explore two of these myths as perpetuated by the political class. The following information needs to be viewed with an open mind since the findings to be revealed are likely in conflict with what you have been told over and over again by the political class. In other words, do not fall into the Goebbels trap: the repetition of a lie causing it to become the truth.
However, before preceding, we should consider the question of why would the political class lie about the truth relative to economic matters. There are a few theories, all or some of which are likely true. First, consider a quote from Ivern Ball: "A politician is a person who can make waves and then make you think he's the only one who save the ship." By making economics and the world seem more complicated than they are, the political class can step in to take over more control of our lives. They want to convince us it is impossible for us to understand how to fix the economy, we must leave it to the experts, namely the politicians. But consider what we have lived through the past two years: the biggest economic crash since the Great Depression but no one in the political class saw the crash coming until it hit them flush in the face. If they could not foresee the biggest collapse in decades, what makes anyone think they can manage the day-to-day doings of the economy? They want all of the control, which restricts our individual freedom, but have none of the expertise to do any kind of decent job.
By spreading lies about the economy, they can energize their base and demonize those with a different opinion. This helps to keep themselves in office by pitting different American groups or tribes against each other over myths that have nothing to do with reality and nothing to do with solving the economic problems facing the country. By throwing around myths like "the rich do not pay enough in taxes" or "governments can create jobs", we end up fighting with each other while the myth makers sit back and get re-elected regardless of how poorly they perform while in office.
Whatever the cause, political class myths about the economy divide America, restrict freedom, and prevent anyone from determining the root cause of economic problems and prescribing the right remedy. If the myths were shattered, the political class would lose control over a population that was finally thinking coherently about the reality of our economic situation.
Myth # 1 - The Bush Tax Cuts For The Rich Caused the Recession and Our Massive Federal Government Deficits
Let's first deal with the myth that the so-called "Bush tax cuts for the rich" caused the economic downturn, resulted in massive deficits, and they need to be restored in order to get our national debt under control. Now, I never voted for Bush or thought he was much of a President. However, this position of the political class is nothing but a myth:
1) The economic downturn started in late 2007. Until that year, the United States economy recovered nicely from the economic downturn left over from the Democratic Clinton administration and the 9-11 terror attacks. For most of the Bush Presidency, unemployment stayed between 4% and 6% (a performance that Obama would kill for today) and the GDP of the country grew every year during his Presidency. Also, remember that beginning in 2006, just before the onset of the economic collapse, the Democrats took over control of both houses of Congress. They have controlled Congress now for three and a half years and have controlled the White House for the past year and a half with the following results: a severe recession and unemployment hanging around 10%. Thus, there is no reason to believe the myth that the Bush tax cuts caused the economic downturn since the economic reality of the numbers, unemployment and GDP, do not support the myth.
2) The next component of the myth is that the Bush tax cuts caused massive deficits. While it is true that the highest dollar deficit during the Bush Presidency was also the highest dollar deficit up to that time, it was only about 3.6% as a percentage of GDP. When measured this way, the highest Bush deficit is only the third highest deficit of all time. Plus, the 3.6% is only slighter higher than the international benchmark 3% that is generally recognized as the maximum safe amount of deficit spending a nation should get to. Obviously, any deficit is bad but to say the Bush tax cuts resulted in massive deficits is must a myth.
And remember, the Democrats controlled both houses of Congress during the last two years of the Bush administration, when the highest Bush deficit was incurred. If they were so worried about deficit spending, they could have forced the government spending levels to be reduced and the deficit reduced, given they controlled that part of government where Federal budgets are developed, Congress. Compare the Bush deficit maximum at 3.6% of GDP with the 2010 Obama deficit of about 10%, three times the amount that should be incurred before a nation seriously starts heading towards insolvency. Bush tax cuts for the rich did not cause massive deficits, massive spending by the political class, both political parties, caused massive deficits.
3) Probably the most obnoxious part of this myth is that by raising the tax rates on the richest Americans to the pre-Bush tax cut levels, the current sky high deficits will be solved. This is nothing more than the Democrats demonizing the rich to cover up their wasteful spending and their attempt to blind most Americans to the reality that taxing the rich, at just about any level, does not get America out of the death spiral of escalating government deficit spending. Don't believe me, let's do the math:
- Obama has stated so many times that he wants to raise income taxes on those households making over $250,000 a year so let's take him at his word and assume the increased, restoration of pre-Bush tax cuts will begin at $250,000.
- The highest marginal tax rate reduced by the Bush administration was 3.6% (from 38.6% to 35%) so let's give Obama the benefit of the doubt and assume that he will raise the highest tax rate 4%.
- According to the IRS, the number of taxpayers in the highest Adjusted Gross Income bands for 2008 (the latest data available) are as follows:
$200,000 - $500,000: 3,476,747 taxpayers (2,897,290 adjusted)
$500,000 - $1,000,000: 577,618
$1,000,000 - $1,500,000: 140,635
$1,500,000 - $2,000,000: 59,460
$2,000,000 - $5,000,000: 86,329
$5,000,000 - $10,000,000: 21390
$10,000,000+ - 13480
- The lowest bracket above was reduced by one sixth in order to take out the number of people making less than $250,000 since they would not be affected by the Obama promise, i.e. raise taxes only for those making over $250,000 a year. Probably more than that should have been removed since it is likely that there are many more people in the $200,000 - $250,000 range than in the $450,000 - $500,000 range but the calculation assumed a uniform distribution across the whole $200,000 - $500,000 range. This uniform distribution assumption gives every benefit to the myth.
- Although a more accurate estimate would have been to have access to the raw IRS data, we can get a realistic estimate, and a statistically valid estimate, by assuming that the people in the above brackets earned, on average, the midpoint within each range. For example, for the calculations, assumption was made that the 86,329 taxpayers in the $2,000,000 - $5,000,000 range each earned $3,500,000, the midpoint of the range.
- The only open ended income estimate is the average income from those making over $10,000,000 since we do not have enough information from the IRS to do a viable estimate. Thus, lets started with a $30,000,000 estimate and then change it as a variable (see below).
- Once you make these assumptions and run them through a spreadsheet, you estimate that the Obama desire to tax the rich will result in an additional $68.7 billion in tax revenue for the government. Given that the Obama budget deficit in 2010 is about $1.4 TRILLION, restoring the Bush tax cuts by 4% will pay off only about 4.9% of one year's of Obama's budget deficits. Thus, the myth of taxing the rich is about as effective as a burp in a hurricane, it will not come close to offsetting the massive and wasteful spending of the political class. It will only help divide America across income lines or tribes.
- But hold on you might say. Those earning over $10,000,000 a year might be making closer to $50,000,000 a year. Okay, plug that in to the spreadsheet and you see that the rich would only pay off 5.7% of the Obama deficit. If you want to be truly ridiculous and take the average income to $100,000,000 million a year you see that this ludicrous number still only pays off 7.6% of the Obama deficit.
Remember, at $30,000,000 a year for the richest, the 4.9% estimate is a percentage of just the deficit, not the total Federal budget. It would be less than 2% of the total Federal budget.
Thus, myth destroyed: sticking it to the richest Americans does not significantly cure the out of control spending of the political class. It only postpones the inevitable insolvency of the country by insisting, incorrectly, that the rich can pay their "fair share" and economic miracles will happen. Now, if you believe that the rich do not pay enough in taxes, that is certainly your right. But please do not perpetuate the myth that this action will cure the national debt, that is a myth and the numbers above prove it.
Forget the myths for a second and consider a real life economic situation. I have a friend who operates his own financial services business and has done so for several decades. He sells and manages health care policies and life insurance policies and is also a licensed broker of mutual funds and other investments. He works very, very hard, probably putting in more than 60 hours a week at building his business. I do not remember the last time he took a real vacation. Thus, I do not begrudge him anything he earns from his hard working style.
However, in anticipation of Obama's economic policies when he was elected, this friend started to make some cuts in expenses. His one recreation outlet is to spend time fishing on his boat and maintaining a small vacation home at the New Jersey shore. Rather than sacrifice that part of his life to pay for the Obama tax increases, he decided to fire his housekeeper of many, many years and he and his wife have significantly cut back on the amount of money the spend on restaurant dining. Thus, as a result of this tax the rich myth, here is a real life example of how that myth worsens the unemployment rate in the housekeeping and restaurant industries while having a minimal impact on reducing the Obama budget deficits. This type of behavior and reality never seems to enter into the economic myths of he political class.
Combine these reality-based numbers with the recent and absurd Nancy Pelosi public quote where she stated that high unemployment is the best way to generate jobs, and you see how inadequate the political class is from an economic reality perspective. Their myths divide the country, worsen our economic condition, ignore real life economic decisions by individuals and businesses, and restrict our individual liberty without solving any problems. Certainly not a good economic deal for America
Myth #2 - Social Security Is The Best Retirement Approach For All Americans
Let's move onto another major and long standing political class economic myth, namely that the Social Security system is a great financial plan for Americans and that investment of our Social Security taxes in the stock market is a stupid idea. By keeping this myth alive, the political class can continue to plunder our paychecks and keep tight control over our retirement income, reducing every American's freedom.
However, if you look at your individual situation, you are likely to find the same results that I found. I took my entire Social Security history, as provided by the Social Security Administration, and developed a simple economic model to estimate what would have happened to my retirement savings if I had been in control of my life time historical Social Security payments and not the government. My assumptions in the model are quite straightforward:
- I calculated what I paid into the system every year from the first year I started earning a paycheck and then doubled it to account for the same amount that my employers paid into the system in my name.
- I assumed that I saved this entire sum in a non-taxable, IRA-type account from the very beginning.
- I assumed that this account took my earnings and invested them in an S&P stock index mutual fund that earned exactly the returns of the S&P index over the past four decades, i.e. horrors of horror, I invested in the stock market.
- I assumed that I saved in the S&P fund until I was 56 years old (2009) and then converted the accumulated funds into a conservative bond fund that earned 4% a year, a standard move to do, get more conservative as you approach retirement.
- As I withdrew money from the account, I assumed the remainder in the account would continue to conservatively earn 4% a year until there was no money left in the account.
- The Social Security Administration estimates that I would receive about $1,300 a month or $15,600 a year if I retired at age 62.
- I assumed I would start withdrawing money from my theoretical account at age 62.
The output of the model is very interesting. By ignoring the myth from the political class that investing my Social Security earnings in the stock market is a death knell economically, my simple model shows that by following the investment path above, I would be able to withdraw $31,200 a year, every year, from age 62 until I was 102 years old. Thus, I could have doubled what Social Security will be paying me if the political class had allowed me to control my own retirement plan from the beginning. Although my retirement savings would run out when I was 103 years old, that would be a chance I would be willing to take.
Another run of the model assumes that I withdraw $39,000 a year from this theoretical retirement account, or two and half times what the government will be paying me in retirement. In this case, I run out of money when I am 87 years old. I little riskier but other savings could more than make up the difference if I lived beyond 88 years old (personal savings, house equity, 401k plans, other IRA plans, etc.). Up until 88 years old, I have two and a times more money than what the government will pay.
Thus, the myth that Social Security investment in the stock market, the option that the political class loves to demonize, is a fraud and a lie, at least for me. Since I consider my self pretty typical middle class, I would bet similar results would occur for most Americans. Not only would I have more wealth in retirement, the wealth would be under my control and in my accounts. I would not be subject to the whims and actions of the political class as they manipulate the rules and payouts of the system. It's called freedom and the political class hates it when citizens have control of their personal destiny.
But someone might say that they find investing in a stock index fund as being too risky for them. Let's give them control of their money but invest it in one year T-Bills and see what happens. I reconfigured the model to include the annualized payout in one year T-Bill over the past four decades instead of the S&P index historical results. The model handles the calculation easily and shows that if I had been able to keep all of my Social Security earnings in a one year T-Bill account, and left the other assumptions the same as above, I could withdraw $20,800 a year, or 33% more than what Social Security will pay me, until I was 95 years old. I could withdrawal $23,400 or 50% more than what Social Security will pay me, until I was 88 years old. I could then use other savings to cover my expenses if I lived beyond 88 years old. In this case also, I would control my earnings in my account, and would get substantially more than what the government will pay me under he current system.
The other good thing about this approach is that in either case, S&P or T-Bills, if I should die before I use up my funds, I can designate where the remaining funds will go to (e.g. heirs, charities, etc.) since the remaining funds are in my account, the government is not holding onto them. In other words, I have the freedom to move my earnings to where I want them to go, not some government agency bottomless pit.
Alas, the government and the political class never gave me these options. They forced me to handover my earnings and the earnings of my employers in my name, to a government program that is rapidly approaching insolvency. In the process, they restricted the life style choices I would have been able to make in retirement, they control my retirement earnings, they pay me less than what I would have earned if I had kept my earnings, and they control my earnings even after I have passed away.
While we can now consider the myth destroyed, having control of our Social Security earnings for our own investment in either the stock market and/or T-Bills would have been much better option than participating in the Social Security program, the truth is we cannot go back. We need to fix what is causing the current system to lurch towards insolvency in order to preserve even the smaller amounts promised by the current Social Security arrangement. Once the current system stabilized, we can only hope that analyses like the above can be deployed and implemented to return control over Americans' lives and their retirements to themselves and break the contract with the political class that has enslaved and worsened the economic retirement lives of most Americans for decades.
Our new book, "Love My Country, Loathe My Government - Fifty Steps To Restoring Our Freedom and Destroying The American Political Class" is now available at http://www.loathemygovernment.com and online at Amazon and Barnes & Noble. Our daily blog at http://www.loathemygovernment.blogspot.com discusses the status of freedom in America from various perspectives.
No comments:
Post a Comment