A budget has two components – revenues and outlays. In the past three years revenues have fallen as a result of economic activity dropping in the wake of the housing implosion and resultant economic malaise, a malaise perpetuated of course by the country deciding that it would be good to put an economic idiot and his minions in charge of the executive function of our government, but that’s a story for another day. Such a reduction in revenues can be expected to recover along with economic activity to the 18 percent or so it has averaged over the last 70 years.

Outlays on the other hand have ballooned from 20% of GDP to 25% of GDP as a result of having the two worst presidents in modern history in a row and Nancy Pelosi, who is in fact insane, and Harry Reid, who is in fact a scumbag who thinks congress can take whatever it likes, in charge of the Legislative function from 2006-2010. The Wall Street Journal warned at the time that Congress was ratcheting baseline spending up 3 times as fast as growth in the economy that later on they would say “Well, there is nothing for it but to raise taxes”. That was the plan all along.

The economist has a piece in their most recent weekly edition which is basically a head-scratching piece wondering why Americans hate taxes so much.  They attribute this to people near the bottom of the economic pile not wanting to see those just below them helped so that they are now equal with the bottom of the pile.  I find this pretty cynical.  In light of the blowout in spending in recent years it is more that people are a little miffed at the mismanagement of the budget.  So let us be plain. The idiots in charge need to come up with something like $1 Trillion in ANNUAL spending cuts first. Then and only then will people be willing to say “OK, now that REAL spending cuts are on the board, we can talk about making up the difference with some revenue.” The recent compromise that got us past the debt ceiling problem cuts a few tens of billions in the first two years. It is NOTHING like what is necessary. Spending cuts first, then taxes to fill any gap. Say it again: Spending cuts first, then revenue to fill any gap.

The Simon Johnson piece on Bloomberg recognizes that growth is the problem on the revenue side but then posits essentially that we just need new taxes and all will be well, otherwise we are giving succor to millionaires and billionaires and sticking it to the poor. To paraphrase Al Gore, b*llsh*t. Bring the troops home from Europe. Untangle ourselves from Afghanistan, where we have been for more than 10 years(!!!) and Iraq where we have been for 8 years (!!!), cut the Department of Energy in half, cut the Education Department in half, fire the czars and one could go on. This does not stick it to the poor.

Another article was written by Warren Buffett somewhere pleading for higher taxes on rich people. The guy who used to be known as the Oracle of Omaha, but is now known as the old guy who got bailed out by taxpayers and screwed his children out of their inheritance, has become a soft peddler of collectivist ideas in his support of the Great Lefty we elected in 2008 as noted above. On the other hand, to address Warren’s points, I would see nothing wrong with making capital gains taxable at ordinary rates. Why does income from capital get taxed a preferential rate compared to income produced from labor anyway? Maybe have a threshold taxed at lower rates, like $100k or something so you do not stick it to pensioners. If you do that though, the tradeoff is that losses need to be able to be taken against income as well. And dividends should not be taxed at all.

Finally, we would all do well to realize that there has been a widening disparity in the percentage of national income going to capital rather than labor, and that this is unhealthy. Largely this has resulted from the globalization of labor and goods markets which tilted the playing field in favor of capital. Labor has had very little leverage to press for wage increases in the face of the Chinese export juggernaut. A couple of thoughts on this. First, a new equilibrium is forming as the cheap labor abroad is becoming less cheap. So the problem is not going to get much worse. Labor in China has actually been increasing demands for higher wages.  As a result capital has been looking for other labor pools, like Viet Nam, but honestly, China was the big deep pool and it has been tapped.  Of course the other big bottleneck for growth which is causing stagnation in the US is the high and rising cost of regulation at both the federal and local level.  At the federal level we could relieve a great burden by having a top to bottom review of regulation by all departments with the goal of thinning the federal register by half.  At the local level, well heeled interests have succeeded in greasing enough palms in the state legislatures that more and more activities that were once open for people to pursue as sources of income are now behind walls of licensing requirements and fees.  I am not sure how we can attack this but until it is attacked, the wage disparity and general malaise will continue.  But there ARE ways to ameliorate the problem without resorting to the expedient of raising taxes to confiscatory levels.  I would really like Republicans to ask when pressed on the revenue issue “After all Mr. Demunist, how much is enough for the government to take? 30%, 40% 50%, more?”

So the question is, did someone on the Obama team or at the Fed apply pressure to the CME or conspire with the ECB or pressure the USDA to achieve these drops in commodities to spike the commodity inflation the Fed has engineered? In other words did they use the fist of government to move markets to overcome the effects of their other wrong-headed policies? A couple of years ago few would have taken this idea seriously. But now that the Fed has acknowledged it is outright manipulating stocks and bonds, why not commodities? If so, it is both sad and dangerous. Markets need to function freely. They undershoot and overshoot, but for the government to manipulate them openly as they seem to be doing would be a further signal of the tragic demise of American leadership and culture. It would or should also be grounds for impeachment or dismissal. Though we will likely never know if it is the case, I would not put it past the statists now in control.

So before we go squawking about how MORE government intervention is necessary, why don’t we try removing government intervention first so that the utterances of single individuals do not have such massive influences and then see how things play out.

China was closed to the west until Nixon “opened” it some 3 decades ago.  But what really set the current state of affairs was its accession to the WTO in 2002, a scant 9 years ago.  Their inclusion in the global trading framework of low tarriffs is what allowed China to become the producer to the world and creditor to America, resulting in what some now call Chimerica.  There are serious arguments that China has gotten the better of this deal.  They have been able to start building a middle class.  Note that other internal reforms aided this transformation, but trade with the US and Europe was the sine qua non for lifting a billion people out of poverty and creating massive wealth in Asia.  In the US, we have been able to have low prices and greater availability of goods for consumption.  But we have also offshored a great deal of labor, resulting in downward pressure on wages and a downward adjustment to the quality of labor available to workers here.  We have also had very low interest rates as a result of the recycling of trade dollars into US Treasuries.  As a result we have had asset bubbles that have subsequently burst and our profligate leaders have run up the US debt to staggering levels.

One wonders whether the tradeoff between sending jobs involved in the making of stuff abroad and being able to pay less for consumer goods is a good one.  That is the gamble the West made in the creation of Chimerica.  As the high-paying work is now more and more intellectual in nature, we are witnessing a widening rift between those who have and those who have not.  This is not a healthy development.  Is there enough mental firepower in our population, or any population, to provide meaningful standard of living when the jobs that provide such livings pass some high threshold of requiring mental acuity rather than physical?  The early results are not promising.

Finally the other positive outcome that was supposed to result from the gamble of engaging an authoritarian state like China was that increasing wealth there would lead to liberalization.  How long will we run this experiment?  Will it take more than a generation or two to assess whether such liberalization has occurred?  For it has not occurred to date.  I said at the time (2002) that rewarding a state like China with GATT membership was not going to end well.  In fact there has been an dangerous emerging concensus that maybe China has the better system, as opposed to the United States.  And the world is less free.  Is this a blip down which will resolve into greater freedom once China reaches some threshold of wealth?  Or have we passed the peak.  Time will tell.

The paranoid left believes the recent protests are orchestrated, when they clearly are mostly not orchestrated.  They profess to wonder why we cannot have a rational debate.  The president bemoans the fact that there is so much misleading information and gosh-darned erroneous rhetoric out there;  please just report it to us when you see it.

What you do not see in the press is any acknowledgment of WHY reasoned debate is pretty much impossible, on either side.  Talking to a member of Congress or the Administration is like talking to a brick wall.  They show up with canned and irrelevant politic-speak.  They are not really going to listen to you or take account of your views or even think, much less actually READ the history changing legislation on which they are casting votes.  They, almost without exception, speak from a talking point sheet composed by their leadership.  In other words, it is all bullshit.  And then Claire McCaskill (D-MO) asks, apparently in all seriousness, “Don’t you trust me?”  Bwah ha ha ha ha ha ha (tears rolling down cheek and falling heavily to the floor).  You have got to be kidding.

It is no wonder then that the only reasonable approach to changing the outcome is just to shout the loudest.  Just say No, No, No or some other slogan that can be chanted over, and over, and over….  Pelosi and her ilk have only themselves to blame.

The tired policies of the past are precisely the kind of ideas with which Obama is going to try to saddle us;  statist ideas whose implementation will still be impeding the growth of our economy when my children’s children’s children start to vote or the great American experiment has finally come to an end, crushed by the burden’s of promises blithely made and obligations flippantly incurred in the distant past, our near future.

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I have been meaning to write about this for about 5 years, but the installment of the Obama administration with what should be a compliant Congress is as good a time as any.  In the sweep of history as viewed from the scale of years to a few decades, we are about 8 to 10 years into a swing away from increasing levels of freedom globally and toward greater statism, or state control of economies and of people’s personal lives.

While there are a few notable exceptions like China which maintained momentum toward greater market orientation, most instances from Asia to Latin America have been swinging the other way.  Like markets, these things do not go in a straight line, but oscillate, sometimes waxing, sometimes waning.

At close scales the change from waxing to waning (if plotted as a curve this would be when the slope of the curve went from positive to negative, not the inflection point from more positive to less positive, ie the change in convexity) is chaotic, messy and jagged, but if you zoom out sufficiently far, it becomes smoother.  I place the changeover in late 1998 with the election of Hugo Chavez in Venezuela.

Prior to 1999, it was clear that there was something magical happening in the world.  The first sign was perestroika in the late 1980s, then the fall of the Berlin Wall in 1989 and the coup in Moscow in 1991.  In 1994 the Uruguay Round of GATT talks concluded, setting the stage for expanded world trade.  In 1995, the Internet became available to a large part of the public.  Large numbers of countries in Eastern Europe, Asia and Latin America were adopting western democratic institutions and opening their economies along market lines.  By 1998 the Internet was a phenomenon, energy was cheap and productivity was galloping forward.  You could find music in any genre from classical to hard core by  any artist on services like Napster and Audiogalaxy.  Open source software blossomed; multitasking operating systems allowed computing to become mainstream.  Prices of things seemed to fall as labor was globalized and living standards around the world brought more people out of poverty than ever before.  It seemed anything was possible as the world headed into the millenium.

Some warning signs had already started to appear.  Late in 1998 Hugo Chavez was elected in Venezuela and started down the path of his self-styled Bolivarian socialist revolution.  At the end of 1999, Putin became President of Russia.  Early in 2000 the asset bubble in technology and other stocks burst.  The major labels put an end to open access to music when Napster was forced to shut down.   The RIAA started suing people for sharing music.  9/11 happened.

After a brief recession, it seemed as if things were going to get back on track.  Home ownership and home prices rose to incredible levels as the stock mania was transmuted by the Fed and a world awash in wealth into the housing bubble.  Commodities began an incredible 6 year bull run in late 2002.  Saddam fell in 2003.  Prices continued falling as manufacturing and service labor was rationalized.  However the forces of statism were resurging and eclipsing the brief flowering of freedom.

Russia jailed Mikhail Khodorkovsky in late 2003.   It was this that really set Crude Oil prices on fire.  Russia also reinstated the practice of sponsoring the murder of political critics.  Russia has returned to a state in which elections are held but they are pretty meaningless as the outcome is known in advance and largely controlled by the party in power, methods that Hugo Chavez and others in Latin America are now also seeking to employ.  More states in Latin America have also turned left;  Bolivia, Argentina, even Brazil.  Other states have also become less free in the last 8 years such as Zimbabwe and Burma (Myanmar).

Now with the bursting of the housing and commodities bubbles and the implosion of the world financial system, even America has elected a congress and a president who are more sympathetic to statism than it has had since Reagan beat Jimmy Carter in 1980.  On the Sunday talk shows this weekend, I heard some idiot (probably Stiglitz) say with relief how the nightmare of the last 25 years has finally come to an end.  Yes.  The ‘nightmare’ that was the greatest period of global wealth creation ever known has finally come to an end.  The question is, is this really the end?  Will the curve of freedom (change) continue below the abscissa?  Or is this a downstroke that will soon reverse?  In other words, will we discard the lessons of history and embrace increasing state control over every aspect of political and economic life?  Or will we remember, pull ourselves together, and return to the path of progress we were on?

“Last week, Rush Limbaugh actually said that he ‘hopes’ President Obama fails to meet America’s challenges.”

That would be mean spirited if it were true.  The problem of course is that that is not what Rush Limbaugh said.  He did say “I Hope he fails”.  He did not say “to meet America’s challenges”.  This is a major difference.  He really said he hopes Obama fails IF success would mean setting America on the path of increased state participation in the economy, one form of which is socialism.

This is why it is so hard to have an honest discussion of issues.  Here is the DCCC, which according to their own web site “is the official campaign arm of the Democrats in the House”, and they are willfully misrepresenting the speech of one of their opponents.

And they frame this page on their site as a petition.  A petition?  A petition for what?   What is the action for which they are petitioning?  This is somewhat dangerous because they are a subgroup of the House of Representatives.  They have the power to create Law.  They do not actually say what action the petition is intended to achieve.  But if the action is to silence a voice of criticism, it is a very dangerous thing, the more so as it is coming from an official organ of our government.

To be clear, I am no fan of Rush Limbaugh.  I do not listen to his radio show.  I find him to be a bit of a blowhard.  But it is curcially important that voices of criticism be heard.  This is what seprates us from states that silence the critics of government such as Viet Nam, China, Russia and Islamic states in the Middle East among others.  If Al Franken could have made a success of Air America, I would have applauded that too.  When you talk of freedom and how our soldiers have died for freedom, the most important of those freedoms by far is the freedom to criticise the government.   The DCCC should take this page down from their site immediately.

They had some clown on to comment on this – he wasn’t actually dressed as a clown obviously but he must secretly yearn to be a clown given the quality of his thought processes – and this clown said “Obviously the reason this is happening is that the [government] programs in place are having no effect [on supporting the housing market]“.  Come again?

First let’s get one thing straight.  The reason that foreclosures are so high is that many many people have signed up for mortgage loans that they can in no way afford to pay.  This inability to pay on the part of large numbers of mortgagees was estimable a priori.  Anyone who did not see it coming should join the CNBC commentator in the circus.

This perversion of thinking is a dramatic illustration of why it is a bad idea to have people come to believe that the government should or must be involved in matters of the economy that were previously left to private actors.  They then also come to believe that when things do not go well it is because the government is not doing enough and that of course the solution is for the government to do more.  They do not then understand that markets have to clear before they can work cleanly again.  Anything that prevents markets from clearing only delays the fact and prolongs the pain, almost certainly increasing the aggregate pain.  There may be slight things that can be done with a light touch that will not perturb this process too much.  But the more the mindset takes hold that government is an acceptable and even necessary economic actor, the more likely it is that the hand will be far too heavy, and therefore ultimately damaging.

Did we not learn this lesson in the 70’s?  There is a reason that the popularity of clowns has waned over the years.  Clowns represent a mask on reality.  They are creepy -  viz. the etrade commercial where the baby underestimates the creepiness of the clown he hires with his trading winnings.  My kids have no time for clowns.  Clowns try to appear to be something they are not.  Like the government trying to be an economic actor.  Something it is not.   Apparently we have already forgotten this lesson which we had apparently learned only 30 years ago and now we have elected people who are ideologically inclined to have the government do more and more.  We will pay the price.   Beware of scary government-is-the-answer clowns.

Microsoft is a hard-nosed, money-grubbing company that had the good sense to create a structural monopoly and the audacity to keep it.  They are not an inside part of the internet community.  And they do not give anything away for free.

Yahoo! is very much West Coast, the promise of America’s frontier.  Microsoft and Mr. Icahn are very much East Coast, America’s past.  I hope Mr.  Icahn fails in his proxy fight to unseat Yahoo!’s board of directors.  I do not want to change my home page from My Yahoo! in the event Microsoft causes Yahoo! to cease to exist.  But if they do, I will change my home page address the next day.