The Fiscal Cliff Diversion

The US economy is already over the “fiscal cliff” and falling at an increasing rate.  Today’s economic questions should be focused on its rate of descent; will the rate increase or can it be arrested before the rocks below are reached.  After the election the economy has continued to implode, yet its downward plunge has been largely ignored by the mainstream media (MSM).  Apparently the MSM’s economic orthodoxy is now only centered on “fiscal cliff” narratives.  The MSM’s focus on the “cliff” gives Obama, their hero, economic “cover” since the “cliff” story is the economic story and not the terrible economic results occurring weekly and monthly.

Currently it is difficult to find economic data related to the past two months (or past three years) which is positive; whether it is meaningful growth in employment, an increase in the labor participation rate, a consistent uptick in GDP, a reduction in the workforce dropout rate, a reduction in government spending or a reduction in the deficit et. al.  

Many “fiscal cliff” narratives have incessantly talked about tax increases/decreases, spending, debt, deficits and the intransigence of the President or the Republicans (mainly Republicans) to compromise.  With compromise a deal to move the country forward on important economic issues can be attained.  Certainly future economic performance will be significantly affected by many of the outcomes related to the “cliff” negotiations.  Yet the narratives seldom mention the Obama administration’s past or current record on economic issues…a dismal report card that demonstrates no sustainable success on any level over the past four years. 

A sampling of statistical evidence that the Obama economy is already in a free-fall includes: 

Economic Statistics
Employment Statistics
	Jul	Aug	Sept	Oct	Nov
Tot. Unemployed (U3) (000)	12,794	12,544	12,088	12,258	12,029
Monthly Job Growth (000)	141	192	132	138	146
Unemployment rate-%	8.3	8.1	7.8	7.9	7.7
Discouraged workers (000)	1,037	844	802	813	979
Workforce dropouts (000)				360	540
Pop. Not in workforce (000)	88,340	88,921	88,710	88,341	88,883
Labor participation rate-%	63.7	63.5	63.6	63.8	63.6
all employment stats per BLS
National Debt	$16,351 trillion
Deficit 2009-2012	each year in excess of $1.1 trillion
GDP (2011, qtr I to 2012, qtr III)-%	1.3	4.1	2	1.3	2.7
Gov. spending as a % of GDP normally <20% of GDP…under Obama up to 25%
all other economic stats per BEA

The above statistics when added to the fact that over 23 million Americans are unemployed, underemployed or discouraged, a 14.4% rate; that 47 million Americans are utilizing food stamps; that the number of citizens below the poverty line is increasing at an increasing rate; and that the unemployment rate has declined to 7.7% because the workforce dropout rate has exceeded 900 thousand workers in the last two months can be described as both tragic and scandalous.  This is the kind of information the MSM has largely ignored or chosen to soft pedal after the election.    

Further, an explanation of government accounting practices such as baseline verses zero based budgeting has received little attention.  This silence leaves the average American believing that a cut in spending is a real reduction in outlays when it usually means only a decrease in the rate of growth in the spending.  Finally articles detailing the lack of a Federal budget and its consequences over the last four years have also disappeared from media coverage.    

Instead the MSM has touted Obama’s “fiscal cliff” position centered on $1.6 trillion in new taxes, $1.2 trillion in new spending, an added stimulus of at least $50 billion, taxing the already overtaxed evil rich, ignoring the realities of crushing debt, and dancing around nearly bankrupt entitlement programs.  In contrast the stingy Republicans want up to $3.0 trillion in guaranteed spending reductions, care taken to not gut the defense of the country, assured deficit and debt reduction, and modifications to entitlement programs to restrain their growth, cost and preserve their future…thereby insuring that the underprivileged are hurt (sarcasm intended).    

Yet maybe the most telling informational deficiency is the shortage of reporting on the economic stimulative effects of previous income tax and capital gain tax reductions.  Reductions that then resulted in growing tax revenues and appreciable increases in prosperity for the American people.  In fact MSM stories have tried to debunk the realities of the Coolidge, JFK, Reagan, Clinton and Bush 43 tax reductions that kick started past sagging economies.  The media’s reluctance to discuss tax cutting or the subsequent economic surges that followed their execution has largely removed these strategies from public debate.

The strategic use of tax policy to enhance economic activity and revenue growth began during the Coolidge administration.  President Coolidge and his Treasury Secretary, Andrew Mellon, passed three revenue acts, in 1924, 1926 and 1928 designed to spur economic growth and revenues after WWI.  Coolidge’s and Mellon’s rationales were that changes in marginal income tax rates would cause individuals (and companies) to change their behavior.  Taxpayers, they believed, would reduce taxable income by working less, reduce plans to expand businesses, restructure companies to avoid tax and even transfer some activities to the “underground economy” if taxes were high (and increasing) and exhibit the opposite behavior when taxes were reduced.  Studies of the effects of the three revenue acts demonstrated that revenue, economic activity and the share of taxes paid by the well-to-do soared.

Thirty-five years later President Kennedy presented the notion that marginal tax rate reductions would instigate increased economic activity in his 1963 State of the Union address (the act would be known as the Revenue Act of 1964).  He postulated a 20% across the board decrease in individual rates, modest declines in corporate rates and a minimum standard deduction to help a somewhat lackluster economy.  Kennedy’s objectives were to increase consumption, up personal income and increase capital investments. 

President Johnson signed the Revenue Act of 1964 into law in February of that year.  The legislation cut the top individual tax rate from 91% to 70%, lowered the corporate rate from 52% to 48%, and created a standard deduction of $300 + $100 exemption. The economic consequence of these actions was a reduction in the unemployment rate from 5.2% in 1964 to 3.8% in 1966, and material increases in both personal income and federal tax revenues in 1964 and 1965.

Less than twenty years later President Reagan inherited an economy in crisis; one characterized by very slow growth, high unemployment, very high interest rates, high inflation and low consumer confidence.  President Reagan introduced Americans to supply side economics (at times derisively named “trickle-down” economics).  Reagan’s tax concept simply stated mirrored the beliefs of Coolidge and Kennedy, i.e. people’s behavior would be affected by marginal tax policy.  Reagan also embraced many of the ideas fostered by Arthur Laffer, an economist, who developed a theory that posited the existence of an ideal marginal tax rate (using the Laffer curve) that balanced growth, revenues and economic stimulus for a point in time. Thus Reagan introduced a broad-based plan, the Economic Recovery Tax Act of 1981, aimed at concurrently promoting economic growth through tax reductions coupled with expensing property using depreciation, incentives to increase savings and incentives to help small businesses.  The tax changes were phased in over three years.   

The economic outcome was a dramatic turnaround over the next three years.  Capital gain tax revenues alone grew from $12.5 billion to $18.0 billion in 1983 and to an astonishing $80.0 billion by 1986.  In sum a moribund economic performance was transformed into one of vibrancy…featuring high growth, low unemployment, and low inflation and growing individual prosperity for a record number of Americans.  Revisionist critics (usually hardcore Keynesian economists) insist that the Reagan recovery’s historical record is misleading and point to Reagan’s deficit growth as a component of that truth…believing deficit spending created much of Reagan’s economic success.

The merit of using marginal tax rates and capital gain tax reductions as an economic analgesic have been tested more recently by both Presidents Clinton and Bush.  Clinton, after the Republican Revolution’s election victory, moved towards the political center and supported the Taxpayer Relief Act of 1997.  The act transformed the Clinton economy into a much stronger entity and produced much higher tax revenues by appreciably reducing capital gain taxes and by removing some of the negative effects of his earlier Omnibus Budget Reconciliation Act of 1993. 

Finally the much maligned (read evil) Bush tax cuts bear mention.  In 2001 G.W. Bush using the pretested logic and the successful experience of the presidents noted above passed the Economic Growth and Tax Relief Reconciliation Act of 2001.  This legislation’s purpose was to mitigate the recession inherited from Clinton and promote economic prosperity not seen since President Reagan.  Just as positive economic signs began to appear the World Trade Center disaster occurred.  Nevertheless once the tax reduction effects took hold over 50 consecutive months of strong economic activity were realized.  That activity abruptly ended due to the mortgage crisis and the following financial collapse.  

Given the above realities, a fair hearing on an alternative approach for an economic resurgence using marginal tax rate reductions deserves discussion.  But sadly the MSM will continue to emphasize only statistics that highlight the positives of the torpid Obama economy (as will Obama) and continue to anesthetize the public to the magnitude of this administration’s failed economic policies rather than report on or discuss a time tested tax strategy.  The truth is that the economy is already over the “fiscal cliff”.  Obama’s incompetence did the pushing and his “fiscal cliff” strategy will accelerate the economy to destruction on the fast approaching rocks below.    

Does Character Still Matter?

Is a person’s character important today given our culture, our society?  Is a person’s, a leader’s or politician’s character a variable that should be considered in measuring the individual?  Is measuring or evaluating a person’s character a subjective exercise and therefore a judgmental endeavor?  An increasing number of liberals in our evolving culture claim that, ‘nothing is black and white, everything is relative’, so how can anyone ask such a question? 

Numerous famous and respected Americans have commented on and emphasized the need for character.  Many have also insisted that Americans ‘need to know’ about character.   Eleanor Roosevelt opined that, “Only a man's character is the real criterion of worth”; and Albert Einstein posited, “Most people say that it is the intellect which make a great [man]. They are wrong: it is character.” John Adams said, “Liberty cannot be preserved without a general knowledge among the people, who have the right…and a desire to know; but besides this, they have a right, an indisputable, unalienable, indefeasible, divine right to the most dreaded and envied kind of knowledge, I mean of the characters and conduct of their rulers”.  Abraham Lincoln commented, “Character is like a tree and reputation like its shadow.  The shadow is what we think of it; the tree is the real thing.”  And Winston Churchill stated, “Character may be manifested in the great moments, but it is made in the small ones.”

Many on the left will say these views are not applicable to society today which is much more diverse, multicultural and complicated. Each quotes’ validity depends on one’s point of view or perspective...thus the statements are clearly judgmental.  Thankfully some people reject this response as elitist nonsense.  They continue to believe there is good and evil, there are truths and there are lies...that an individual who knows honor, truth, good disposition, and caring are some of the important components of character will serve America with greater distinction than someone who doesn’t.  

Character is the combination of traits and qualities that distinguishes one individual from another.  Character can be either good or bad or on the continuum between good and bad; it is a set of ethic-based values that are not affiliated with any particular culture, or religion, class of people or even a political party.  Character’s most desired traits can’t be bought; i.e. honesty, trustworthiness, courage, kindness, loyalty, caring, decency, accountability, fairness, and responsibility.  Leaders can recognize and attract these positive traits only if they recognize, practice, believe in, and understand the traits themselves.  In other words, at core, an individual or leader must be guided by a moral code, and a stringent set of ethics that they practice daily.

So how do we critically evaluate and determine character?  In the past Americans seemed to instinctively know good character from bad, and understood that “good” character was important. We understood that Franklyn Roosevelt, Jack Welch, Billy Graham, Ronald Reagan, Golda Meir and Pope John Paul II have or had very positive character traits, strong moral codes and solid ethical foundations even if we didn’t always agree with their philosophy, decisions, or politics. 

We Americans learn about an individual’s or a leader’s character “over time” in “bits and pieces” or when something “gets our antenna up”, causing us to pay attention if only for a short period of time.  But when we choose a friend, a leader or a candidate, we somehow determine whether the necessary character traits reside in that person...or do we?  Have we decided to place on hiatus our ability to assess character or have we discounted its importance?   

A careful examination of our interaction with a person or their record; their actions, demeanor, statements, decisions, history and the focus of those with whom they associate is a solid starting point for determining character.  Americans ask themselves questions such as “does the individual appear to be responsible…do they hold themselves and others accountable…are they trustworthy…do they exhibit loyalty…are they fair and caring…do they listen and consider other points of view…are they plain spoken or always obfuscating, pettifogging and spinning…are they honest and factual in their statements…and will they treat friends, adversaries and acquaintances with integrity and fairness?

Yet Americans have apparently lost some of their ability to critically evaluate with confidence the character of individuals and potential leaders when confronted with a choice between a person’s character and material/financial benefits…i.e. stuff.  But Americans are also beginning to understand that many with a deficit in positive character traits were elevated to influential positions only to quickly and selfishly succumbed to the prestige, perks, power and other trappings associated with their office.   

To continue…good character is an anathema to many of our leaders…the components of good character and these leaders reside in separate universes.  It’s difficult to reconcile their actions with the tragedies they have inflicted on our country without considering their character and finding it wanting.  The knowledge of millions of Americans is now informing us “over time”, in “bits and pieces” of  significant character deficiencies in these office holders.  This budding knowledge will send many of them into retirement in the future.  Yes, character is important…and Americans are hopefully beginning to again recognize its importance.

FEMA, Another Federal Disaster

After the less than stellar performance of the Federal Emergency Management Agency (FEMA) during the hurricane Sandy natural disaster, Americans may well wonder if any federal agency can be counted on to successfully accomplish its designated mission efficiently.  Particularly when we also read that the U.S. Postal Service is expecting a net loss of $15.9 billion this year due to declining mail volume and associate revenue.  We learned almost simultaneously that the Federal Housing Authority, another self-funding agency, is expected to lose $16.8 billion and will probably require a bailout.

Coupled these facts with the knowledge that Fannie Mae and Freddie Mac are broke, Medicare and Medicaid are close to bankrupt and numerous other federal agencies suffer from redundancy, are mismanaged (e.g. the Government Services Administration), have appreciable inefficiencies and also suffer from funding issues justifies the public's cynicism. Thus citizens begin to legitimately question the federal government’s ability to successfully accomplish even simple tasks on time and on budget through many of its agencies.

FEMA, however, was a department enacted with a high purpose…to address the twin concerns of civil defense and disaster mitigation.  Specifically its two core missions are, (1) to improve the federal government’s ability to survive a foreign attack (ergo a nuclear war), and (2) to assist state and local authorities in responding to natural disasters.  From its inception FEMA has been a study in evolution of purpose, organization, usage and politicization.  FEMA has often attracted negative attention during natural disasters…attention that triggered in-depth investigations, initiated mission adjustments, caused revisions in organizational structure and better strategies and tactics to improve its responsiveness.  Each change has seemingly exacerbated FEMA’s disaster resolution problems.  The changes have also heightened its politicization, its use of patronage as a reward and the distribution of “pork-barrel” funds to cronies of the sitting president. 

FEMA was created in March of 1979 by executive order under President Carter to bring order to a complicated array of overlapping jurisdictions in essentially three governmental fiefdoms, Commerce, Housing and Urban Development, along with the executive branch.  In theory the objective was to rationalize organizational structure and streamline the decision making to enhance implementation of the two core missions.  Prior to FEMA’s formation natural disasters were dealt with in a one-off manner with legislation enacted to deal with each individual crisis up and until roughly 1930. 

In 1932 President Hoover developed the Reconstruction Finance Corporation (RFC).  The RFC was initially designed to lend money to banks to energize economic activity and to distribute federal funds (often outright grants) in the wake of disasters.  From this tiny beginning the RFC grew and matured into the agency now known as FEMA.  With President Carter’s order FEMA became an independent agency until 2003.  After its birth in 1979 the agency has even responded to man-made problems such as the dumping of toxic waste into Love Canal in Niagara Falls, NY and the Three Mile Island partial nuclear meltdown in Pennsylvania.

Yet major natural disasters beginning with hurricane Andrew in 1992, the South Florida Hurricanes of 2004, and Hurricane Katrina in 2005 exposed material deficiencies in FEMA’s response capabilities.  In fairness a number of the criticisms cited were a function of a misinterpretation of FEMA’s charter and mission.  FEMA’s core mission was to “assist local and state agencies” in responding to natural disasters…not to function as the primary or secondary responder.  Nevertheless, FEMA clearly was not structured to deal with mega disasters and an in-depth review after Katrina in 2005 exposed appreciable shortcomings; shortcomings that had already been revealed in at least three assessments subsequent to hurricane Andrew in 1992.  These deficiencies included:

• Fast reaction forces which could be quickly added to the trained personnel already on staff in each of FEMA’s 11 preparedness districts throughout the country that respond to area disasters.

• No workable budget.  FEMA’s budget allocates 60% of the available funds to each state equally, not on a risk basis, therefore leaving a funding amount too small to deal with a specific major problem in any jurisdiction.

• No ability or technology to communicate within and/or outside the area of destruction during or immediately after an incident.

• Lack of clear, predetermined lines of communication between local and state governments and the specific individuals representing each of the responding entities.

• No ability and necessary equipment/supplies to preposition in advance of a pending disaster…water, generators, fuel, food, blankets, temporary shelter etc…and, if you will a super group deployable into ground zero of the natural disaster to enhance the district team’s supply capabilities.

• No clear standards for interacting with the victims of a tragedy and a tested methodology for setting realistic expectations regarding future actions and interactions.

During 2003 FEMA was incorporated into the newly created Department of Homeland Security (DHS), therefore losing its independence and adding complexity.  Its organizational structure became so complicated that only a PhD in structural engineering could understand the lines of authority.  Additionally, FEMA never received the funding necessary to prepare for catastrophic disasters and satisfy its daunting responsibility. 

At the inception of the DHS, Michael Chertoff reviewed the entire department and surfaced the reality that preparing for, protecting against, and managing disasters was scattered all over the new department.  And that DHS countered FEMA’s legal purpose which boiled down to a one-stop shop for natural disaster relief and civil defense.  Nevertheless the good intentioned review essentially did not repair many of the defects the assessment identified and then Katrina occurred.

Prior to the founding of DHS, FEMA had begun to morph into a highly politicized entity since it retained the ability to grant large sums of funding (read pork) to state and local governments (and cronies), and its staffing was largely by appointment at both the federal and district levels.  Funding to states and local entities followed the number of disaster declarations cited by the administration in power.  During the G.H.W. Bush years an average of 43.5 declarations per year were made.  Under W.J. Clinton the number grew to 89.5 per year, then to 129.6 per year under G.W. Bush and to an incredible 153.0 per year (thru 2011) under B.H. Obama.  In addition, from March 2009 to October 2011 FEMA employment grew from 4,400 to 7,474 an increase of 70%.  (The Obama record is astonishing since within this time-frame no terrorist attacks occurred, no Category 2 or higher hurricanes happened, and no earthquake with a force of 6.0 or more on the Richter Scale struck.  FEMA during the same period seemed to have been utilized as a tool or mechanism to build reelection support.) 

After the founding of DHS and its detailed reviews of FEMA, after the Katrina FEMA collapse and many more reviews and adjustments, after Irene, a $20 billion disaster, and further FEMA investigations, FEMA has shown little or no improvement in dealing with the Sandy recovery.  Events suggest that two conclusions can be drawn…first, the inadequacies described above and identified pre-Katrina remain embedded in the organization, and second, the agency has become a corrupt, pork-barrel delivery vehicle for the administration in power.  FEMA remains incapable of satisfying its core missions.  Americans have every right to be cynical but also have an obligation to demand the elimination of agencies and/or departments that can no longer perform as designed and promised.  A possible solution would be a return to one-off funding of each disaster by Congress as they occur.