The Emperor Has No Clothes

[Note: This is a recent Martenson Insider post that I am making public. A couple of members thought this topic deserved wider attention and conversation, and I agreed.  Thanks go to MikeP for the title change idea.] 

The NYT had an editorial this past weekend (Feb 6, 2010) that trotted out some dangerous mistruths about the deficit and framed the issue as a left vs. right political game.

I hardly know where to start, but I will note that we've had massive accumulations of new debts under every single administration since the early 1980s, and that it hasn't seemed to matter which party has controlled which branches of government.  One could be forgiven for suspecting that, when it comes to deficit spending, there aren't two parties, but only one.

The real truth is that we have a culture of reckless spending in DC that transcends either or both parties, and I always lose a bit of trust in those who attempt to paint it otherwise.  This is simply not a partisan issue.

The second objection I have to this editorial rests with its attempt to step past our deficit by painting it as self-evidently necessary (emphasis mine):

The Truth About the Deficit

When the White House released its new budget last week, including more spending to create desperately needed jobs, Republican leaders in Congress denounced President Obama for driving up the deficit and demanded that the Democrats halt their “reckless” ways.

The deficit numbers — a projected $1.3 trillion in fiscal 2011 alone — are breathtaking. What is even more breathtaking is the Republicans’ cynical refusal to acknowledge that the country would never have gotten into so deep a hole if President George W. Bush and the Republican-led Congress had not spent years slashing taxes — mainly on the wealthy — and spending with far too little restraint. Unfortunately, the problem does not stop there.

Americans should be anxious, for reasons including the huge deficit. But the cold economic truth is this: At a time of high unemployment and fragile growth, the last thing the government should do is to slash spending. That will only drive the economy into deeper trouble.

I disagree.  I happen to think that that an economic crisis is an excellent time to take a good hard look at spending habits, and, if they aren't serving you, to slash them mercilessly.

The cold economic truth is that spending wildly beyond your means doesn't make sense in any economic environment.  All it does is trade temporary relief today for deeper economic pain later on.

But there's another assumption baked into this editorial that is desperately off the mark.  It is the idea that government spending is helping to lower unemployment and stabilize fragile growth, which implicitly assumes that the spending is both necessary and appropriately directed.

What if neither were actually true?

For the record, I would have an entirely different view of government spending if it were spent on different things.  For example, I am really taken by the new high speed trains (and stations) that China has received for its government expenditures:

(Source

Now that's a good use of public monies!  Awesome.  I would love to see such modern investments being made in my own country.

Instead, as we gaze across the federal budget pie, it's pretty obvious that our major expenditures have relatively little to do with long-term investments or capital improvements:

(Source)

More than half of our money is being spent on mandatory entitlement distributions, which simply means money going towards providing basic living expenses and health care.  Both are important to the recipients, but these expenditures are centered on current consumption, not long-term prosperity.

Now take a look at the remaining parts of the pie, specifically defense spending.  As enormous as that $744 billion wedge is, it understates the true extent of our security expenditures, because black-book spending and portions of the DOE, DHS, and other budgets that are dedicated to defense activities are hidden over there in the "Nondefense" pie wedge.

Some estimates suggest that our yearly defense outlays now approach $1 trillion.

Let's put that in context.  Here are the projected revenues for the 2011 fiscal year:

(Source)

If we divide defense spending of $744 billion by projected individual income taxes ($1,121 billion), we find that 66%, two-thirds (!) of all such receipts, are consumed by defense spending.

It pretty much goes without saying that a nation cannot be prosperous in the long run if it is spending two-thirds of its individual income tax receipts on defense expenditures.

Of course, we've managed to hide this over the years by going deeper and deeper into debt, so most people are not directly aware that two-thirds of their April 15th contributions are mainly headed either overseas or into the coffers of defense contractors.

Only 17% of our entire 2011 budget is going to go to nondefense spending, and the lion's share of that is for programs and hires that are already in motion or in place.

84% of all receipts are going to go towards mandatory spending in 2011.  Let that sink in for a moment.  84%.  Let me type that slowly:  e.i.g.h.t.y. f.o.u.r. p.e.r.c.e.n.t. 

And 94% of all revenues are entirely consumed by mandatory spending plus the interest payments (also arguably "mandatory").  So no matter how much politicians say they want to "cut spending', rest assured that they have backed themselves into a very sharp corner.  There's no maneuvering room left.

In FY 2011 expenditures are slated to exceed revenues by 49%.  Forty-nine percent.  49% (!).  Okay, now I am scaring myself.

Now matter how you slice these expenditures, they are unsustainable.

Think of how intense the future budget battles would be if the government had to live within its means.  Imagine if each wedge of the budget had to be shrunk by a third to bring expenditures in line with revenues.  Politically, I just can't see this happening, which is why I continue to believe that every effort will be made to print our way out of the problem.

As a side note, I somehow missed this article from Friday, notable because it is the first public trial balloon that I've seen floating the idea that the Fed might not stop its thin-air money-printing program:

Official says Fed might buy more mortgage-backed securities

Friday, February 5, 2010

The Federal Reserve would consider reopening its program to support the mortgage market if interest rates spiked or the economy showed new weakness, Federal Reserve Bank of New York President William C. Dudley said in two new interviews.

Remember, I thought that the end of March would be the time when we would get our read on whether the program would involve renewed efforts at borrowing and printing our way out of our easy-money debt pile-up.  Looks like we're right on track.

Now, back to the editorial.

The idea that there's no room to cut government expenditures without seriously impacting the economy is pure bunk.  We could easily trim defense spending without impacting our economy in the slightest, if we chose to reduce the amount of money we are sending overseas to maintain 700+ foreign military bases and prosecute two wars.

Next, we might also imagine that if we diverted money being spent on military expenditures into, say, high speed trains, wind farms, natural gas pipelines and distribution stations, and an upgraded electrical smart grid (for example), we'd get far more immediate and lasting economic benefit (and improved national security too, I might point out) than we would out of so-called "defense spending."

The cold economic truth is that we are slowly bankrupting our country.  And we are spending our money on things that do not contribute to our collective long-term prosperity.

Instead, I wish that this editorial, and dozens of others like it in other newspapers, would take a deep breath and ask the deeper and harder questions about our national priorities, challenges, and opportunities, and then call for a significant departure from the business-as-usual budget fiasco that is slowly but steadily leading us towards a vastly diminished future.

In short, somebody has to say it:  The emperor has no clothes.

Until we can have a legitimate discussion about the true economic costs and opportunities lost associated with our current expenditure regime, I do not see much hope that we'll magically navigate ourselves to a better, more prosperous future.

That's the real truth about the deficit.

This is a companion discussion topic for the original entry at https://peakprosperity.com/the-emperor-has-no-clothes-2/

CM wrote

"Next, we might also imagine that if we diverted money being spent on military expenditures into, say, high speed trains, wind farms, natural gas pipelines and distribution stations, and an upgraded electrical smart grid (for example), we’d get far more immediate and lasting economic benefit (and improved national security too, I might point out) than we would out of so-called “defense spending.”

From the horse’s mouth

Q&A with Amtrak President Alex Kummant

Q: How much of that $14 billion authorized by the House do you expect to reach Amtrak?

'A: “To give you a sense of the capital flow, we today get between $500 million and $600 million a year on capital. We asked for the coming year for $800 million. We could easily spend twice of that if you look at the state of the repair backlog. And if you look at the appropriation, the kind of sliding scale here, the capital grants range in 2009 from $1.2 billion to $1.4 billion. The states themselves in the state grant actually end up having access to about 40 percent of that. So in round terms that moves our number from $600 million to a $1 billion. That’s an important and significant increase. But it still doesn’t leave that much headroom for additional equipment. So if you are still talking about a multi-billion type of acquisition program to replace all the equipment in the Northeast Corridor I think we have to look at more than that.”

Q: Nationwide, what are the barriers to high-speed rail in the United States?

A: "Clearly, we would all love to have TGV-style 200 mph trains. But there are a couple of things there. Those are tens of billions of dollars of investment. So the question becomes: How do we find the public, financial and political lift for that’. We get beaten up every day over raising an appropriations request for $40 million. And in the next breath we are asked Well, when are you going to go high-speed?’ And the answer is If you have $40 billion we will talk about it’.’

http://www.reuters.com/article/idUSSIB27628520080612

Looks like a financial sinkhole to me, isn’t this similiar to EROEI? You put in 40 billion and then never get a return on the money invested, but a constant  yearly deficit instead.

 

 

 

When you see the pie chart, you cannot deny we as a nation have made many poor choices. With the exception of Ron Paul, there is no one in Congress that has the balls to say “The Emperor Has No Clothes”. The more people that see this article the better. Thanks Chris.
Larry

The NYT had an editorial this past weekend (Feb 6, 2010) that trotted out some dangerous mistruths about the deficit and framed the issue as a left vs. right political game.
There is no Left vs. Right paradigm in a feudal system.  Lords and Serfs. Top and Bottom.  The Parasitic vs. Productive.

This fellow seems to get it right:

http://www.youtube.com/watch?v=igbBItLemsM

Seems to me that any time you allow the politicians to spend money, their first priority will be to take care of their friends. This does not seem conducive to wise investment. If you allow the productive classes to keep and invest their own money you will probably end up with much better choices being made. I am no economist though.

I think the country elected our current prez as he promised a ‘change’ in the way things are done.  So far, our executive has been an abysmal failure, and seems to be just like all the others.

Personally, I can no longer concern myself with the affairs of the government anymore. At the end of the day, what have I achieved by doing so? Not a damn thing.
Dr. M, with all respect, why are you wasting your considerable brainpower on this black hole of distraction? I’m not worried about whether the emperor has no clothes, I’m worried about whether my daughter has no clothes.

SingleSpeak,
+1.

Discretionary “defense” spending is really a very poor move at this point, as Chris pointed out.
Much of the investment we’re making right now is going to ultimately remove the necessity for humans in many military capacities (which brings both moral and ethical issues to the table) and replace them with drones and robots that are “disposible”.
Much like Chris’s point on war-time spending in the Crash Course, the resources we’re putting our R&D into go overseas and blow up. Further, they can be associated with the same costs as Human troops, but lack the reintegration into the civilian populace with both experience and knowledge.
I can think of several stupid teenagers that came out of the military capable men.

Robots… not so many.
So, better investment? Probably not.
While China is busy taking strides forward, we’re debating how best to ruin our economy.
Pretty strange.

Cheers, and thanks for the great report Chris.
Aaron

[quote=Sam]
 I am no economist though.

[/quote]I wouldn’t listen to an economist. They are almost all trained Keynesian. They didn’t see this massive credit bubble. They don’t see the depression we have entered into. I’m sure they are smart in other ways but when it comes to economics they are morons.

Chris,
Is there a difference between MONEY and POWER? What I mean is that there really is no need to keep a balanced budget when the US has a military capable of stealing all the resources it desires. Why would you cut military spending when it affords our country it’s immense power?

Countries like China hold a considerable amount of our debt and hold bargaining chips financially speaking but militarily they are not a threat. So who has the power in this relationship; the one holding the debt or the one holding the gun?

Steve

Remnant,
That clip was excellent… excellent. He captured me for 16 minutes… how did he do that?

Steve

We will always have war. We will go down spending our last penny on war. If you wish to know why, watch Why We Fight and or Superpower. We as a country are not fighting over very many resources. What do we need with nickel, copper, chromium, etc. We don’t make anything here anymore. The only resource we need is oil. In 1973 Kissinger cut a deal with the house of Saud that we would be the “beat cop” and they would take USD for oil. Essentially this made oil the commodity backing the world’s reserve currency.
We are too far down the path to turn it around. How many Congressional districts do not have a defense contractor paying campaign contributions? ( Now  that is a chart I would like to see) If we do away or drastically reduce defense spending we have to answer some questions. What do we do with all the graduates of the military academies and enlisted lifers who produce nothing of value yet get compensated by the taxpayer? What do we do with all the workers at the defense plants? What happens to the investors in corps like Lockheed, Marietta Martin, Raytheon? ( of course no one on this site would invest in those companies anyway) What happens to all the little towns in this country and around the world whose entire economy is dependent on the military bases we have built?.

The Emperor has a fine suit of clothes…  G.I camo.

You want to change? Opt out of the system anyway you can. Get out of the banks and into local credit unions. get out of stocks and bonds. Create local currency. Support local business and farmers. You have to starve the beast.

Of course I am thrilled the Saints won.

V

ps Steve in answer to your question " Give me control of a country’s money supply and I care not who makes its laws"

Nice point Kemo. However, the gun that the U.S. holds requires constant input of capital to maintain. Is it sustainable in the long run?

Simple.
He simply told you what you already knew.  Nothing more.

We all inherently know this.  However, most of us are not always honest with ourselves.

Glad you liked it.

Interesting how the author gets off on a tangent about defense spending and concludes that is the problem since it represents 66% of income tax reciepts.  Here is news for you, the entitelment/wealth transfer programs consume 200% of income tax reciepts. 
Yes we can cut spending on defense but it will mean nothing if we do not cut entitelments. 

Our constitution gurantees your right to “prusue happiness”  it does not gurantee it will be provided to you with money borrowed from China.

 

 

The best video I’ve seen in some time. For the past few months I have been in the “acceptance” phase of “modern” civilization’s downfall. Luckily around December of last year I stumbled upon the “Ravenwild” project which has kept my mind busy since then. The Ravenwild project will be due out later this year.Laughing

From http://www.the-privateer.com/

Stein's Law.

This law is named for Mr Herbert Stein, the Chairman of the Council of Economic Advisors in the first

half of the 1970s under Presidents Nixon and Ford. The law is simplicity itself and very useful when

contemplating “unsustainable trends”. It goes like this:

 


 


“If something cannot go on forever - it will stop.

So it will. The great global problem today is the manner in which “it” DOES stop.

[quote=V]
What happens to the investors in corps like Lockheed, Marietta Martin, Raytheon? ( of course no one on this site would invest in those companies anyway) [/quote]

Really, why not?  Not only do I have a small amount invested in one such aerospace company, I also happen to an employee.  Does that somehow make me a bad person?

I think it’s worth mentioning that most such big companies do much more than just defense contracts; their businesses also cover a wide range of commercial projects such as building commercial spacecraft and launch systems, communications systems, alternative energy R&D, designing and building commercial aircraft, etc.  These are things that produce a lasting economic and societal benefit, are they not?  And second, while I personally do not rank most of the defense-related projects being as important as the ones I highlighted above in the grand scheme of societal usefulness, there in fact are some such defense and military endeavors that do support a useful service i.e. self-defense.  I would argue that the scale of defense spending is obscenely out of control as are most of the contracting practices and inefficiencies, but that doesn’t mean that there is no value to be found. 

This is not an argument for a ‘business-as-usual’ approach (I personally want to see my company and the others much less entrenched in the defense arena), but rather for re-examining priorities and drawing new boundaries on which defense spending to fund and how much.  My personal thoughts/opinions are that the best way forward in regards to the military and defense industry is to effect a major change in mindset and priorities; de-emphasizing the ‘global beat cop’ role, emphasizing cost-effective efforts that maximize our ability to defend our nation against attack, and abolishing government cost-plus contracting.  All preferably with a budget much less than half of what’s being spent now.  Chris’ editorial seems to point towards the same thing, that the way forward involves pushing these issues of overspending and the inefficient use and misallocation of resources into the national spotlight so we can better prioritize.  It’s not too late to turn this around, not if you have true grassroots support… without the apathy of the majority, those ‘in charge’ will find their power, money, and influence suddenly become much less effective.

  • Nickbert

As I assume most of you are aware, Alexander Hamilton was a believer in statism, monarchy and a strong central government. He persuaded George Washington that it was consistent with the Constitution to establish a central bank. His argument was that the authority to do so resided in Article 1 Section 8 under the necessary and proper clause as an “implied power!” George Washington was president and trusted Hamilton who fought with him in the Revolution. 
To this day our government has grown based on the implied powers interpretation of the necessary and proper clause. If the Congress considers that a power sought is in the interest of the country the Supreme Court has upheld it. Notice that Congress is the seeker of the power and the entity which is relied upon to determine if that power sought fulfills the criterion of being in the interest of the country. 

So much for checks and balances!

I will not list them all. Try as you might you will not discover among the enumerated powers in Article 1 Section 8 the power to establish a central government retirement plan (Social Security), single payer medical system for the poor (Medicaid), medical care for those over 65 (Medicare), a central bank with authority to create paper currency (Federal Reserve System), antitrust laws, military draft, direct tax on labor, direct tax on inheritance, taxation on sales, federal “regulations” of business transactions, labor laws such as minimum wage laws, departments of energy and education, health and welfare, prohibition of possession, distribution and manufacture by citizens of chemical or plant products, control of weapons and ammunition for self defense, hunting, target shooting or in order to defend against a tyrannical government, etc.

I am sure that all of the above have been sanctioned by interpretations of the Constitution which amount to sophistry by any rational, thinking person with common sense who can read.

Neither political party addresses these issues on Constitutional grounds. 

There is a pro individual freedom movement whose mission is to educate themselves and their neighbors regarding these issues involving economics, history, philosophy and the Constitution, in the hope that enough citizens will see the wisdom of restoring  our Constitutional Republic. It is called the Campaign For Liberty and there is no cost to join. 

Membership grew exponentially since its creation in July 2008 and there are now 227,525 members in this country and around the world. A primary objective is to simply make others aware of its existence. Most people agree that the politicians in Washington take an oath to preserve the Constitution which they proceed to ignore. In time we intend to replace them with those who will keep the oath.

www.campaignforliberty.com

Its sister organization Young Americans For Liberty is on over 170 college campuses:

www.YALiberty.org

Join us!

 

 

Chris,
I’d have to take issue with you about your remarks on China’s high speed trains. I hope you weren’t simply dumbstruck by the beauty and vastness of it all. Why does any country need high speed trains? Why does any country need the vast rail stations shown in the image? Yes, they’re beautiful, but utterly inconsistent with living sustainably. Why do you need to get anywhere in such a hurry and in large numbers? Can you imagine the resources sucked up by operating high speed trains and enourmous stations?

Are you interested in sustainable societies, Chris?