Mark W. Hendrickson
Mark W. Hendrickson is a faculty member, economist, and contributing scholar with the Center for Vision and Values at Grove City College, Grove City, Pennsylvania. These articles are from V & V, a web site of the Center for Vision & Values.
The Governing Elite vs. the Rest of Us
The truly revolutionary American idea of government as the servant of the people may be fading away. Many of today's so-called "civil servants" are a protected, privileged class. While Middle America struggles through a difficult recession, a lot of government employees have lived on the gravy train.
Here are some facts to buttress that assertion:
Since the recession began in 2008, a period during which approximately eight million private-sector workers lost their jobs and millions more saw their income decline, the number of federal employees is increasing at a 7 percent per-year rate and their income is holding up quite nicely. According to the Cato Institute, the average federal worker's pay and benefits now approximates $120,000 per year, or roughly double the compensation of the average private-sector employee. Factor out the lavish government fringe benefits and look at salary only, and the civil servant is still far ahead: $71,197 vs. $49,935.
During this recession, the percentage of federal employees earning annual base salaries above $100,000 increased from 14 to 19 percent. The number of Defense Department employees being paid more than $150,000 per year increased from 1,868 to 10,100. Before, the Department of Transportation had one employee with a salary above $170,000, but now has 1,690.
As a gesture toward fiscal responsibility, President Obama reduced what was supposed to be a 2.4 percent raise in federal salaries this year to 2.0 percent. That still compares quite favorably to the zero-percent cost-of-living increase that Social Security recipients have received.
Also on tap are handsome pay raises for the employees of the Federal Housing Administration. The FHA has distinguished itself recently by incurring a loss of $54 billion in a mismanaged home-loan business. And of course we can't neglect to mention the CEOs of Freddie Mac and Fannie Mae, who have been cleared to receive as much as $6 million in salary this year while being subsidized to the tune of over $100 billion in monetary transfusions from the Treasury and the Fed.
Other federal agencies may not be losing money by the tens and hundreds of billions of dollars in such an obvious way, but money appropriated for them by Congress still seems to vanish into a black hole. For example, statistics from 2006 showed that if all the federal dollars spent by antipoverty programs had been given directly to Americans below the poverty line, a poor family of four would have received $67,000. The actual aid received by poor Americans is less than half that amount. What explains such glaring inefficiency? Most of those funds are consumed by the cushy pay packages of the army of bureaucrats who administer those programs. And let's not even get into the Department of Agriculture, which has one bureaucrat for every nine or ten full-time farmers.
The preferential treatment received by government employees was also reflected in how last year's stimulus money has been spent. According to ProPublica, the District of Columbia received more than four times as much money per capita as the average of the 15 states that received the most money. (Oh, did I mention that members of the Pelosi/Reid Congress voted themselves a 6 percent increase in funds for their staffs and other support?)
It isn't just the federal government workers who have an unusually lucrative setup. Governor Christie of New Jersey recently announced his intention to reform the pension plan for the Garden State's public employees. Consider an incredible fact: According to Christie, a 49-year-old state employee who had contributed $124,000 toward his retirement is eligible to receive $3.3 million in pension payments and another half million dollars in heath care benefits over the rest of his life; and a retired teacher who had put $62,000 toward her pension and not a penny for health care is scheduled to receive $1.4 million in pensions and $215,000 in health care benefits. Taxpayers pay for this.
This story is repeated over and over in a number of states that now teeter on the brink of bankruptcy due to billions of dollars of obligations to state employees. It's hard to refer to these people -- many of whom, of course, are wonderful, decent human beings -- as civil "servants" when their salaries and/or benefits are so much higher than those of the taxpayers who pay for the generous compensation packages of their government "servants."
Abraham Lincoln's ideal of government "of the people, by the people, for the people" seems to have become government of the governing elite, by the governing elite, and for the governing elite. The current imbalance can't continue. Something's got to give.
The VAT-Man Cometh?
Recently, progressives have made noise about introducing a value-added tax (VAT) in the United States. The VAT is an indirect tax -- that is, Americans wouldn't pay the tax directly to government, but would pay it to businesses as part of the retail price of things we buy, and businesses would then remit the tax to Uncle Sam.
A VAT is set at a fixed rate -- say, 10 or 15 percent -- added to the price of a good at every step of production, with a deduction allowed for the amount of VAT paid during earlier stages of production. The more steps there are in transforming raw materials into complex consumer goods, the higher the resulting consumer price as a result of those multiple layers of taxation.
Many countries have VATs, including Canada, Mexico, and the European Union. One might say that a VAT is an emblem signifying that a country's government consumes a large percentage of its GDP, for VATs seem to go hand-in-hand with big-budget nanny states.
The reason for this phenomenon is simple: Any government that seeks to be all things to all people, and therefore seeks to spend ubiquitously, must inevitably seek to tax ubiquitously. Such governments have insatiable appetites for revenue. Because VATs are cash cows, diverting huge sums of money from consumers to government, they are favorites of big-spending governments.
Unfortunately, though, VATs have significant negative economic consequences. Because they inflate consumer prices, quantities demanded fall. Most often, the marginal buyers who can no longer afford to pay the higher price are poorer citizens. When government policy raises prices, the first victims are poor people.
The second victims of a VAT are the workers who will lose their jobs as a result of falling demand for the newly higher-priced goods.
Many affluent Americans may not curtail their consumption, but because more of their money is diverted to the government treasury, their savings must correspondingly decline. This results in decreased capital accumulation, which, in turn, slows business expansion, development, and formation. It also slows the growth rate of labor productivity, hence retarding economic progress for workers.
The desire of today's big spenders in Washington to greatly increase their revenues is reminiscent of how FDR financed his spending binge during the Great Depression. During the 1930s, federal revenues from the income tax fell the more tax rates were raised. (Congress, take note.) To raise more revenue, FDR and Congress increased excise taxes -- taxes embedded in the price of common consumer goods like gasoline, milk, and cigarettes. The effectiveness of those taxes as generators of government income derived from the fact that those taxes are difficult to avoid, unless you can live without milk, gasoline, etc.
VATs are essentially excise taxes. They are economically destructive and hit society's most vulnerable members the hardest. Here let me offer both a political strategy to resist the imposition of a VAT and an alternative proposal for opponents of a VAT to rally around:
The strategy is a recommendation to Republicans to not obsess about or campaign for balanced budgets. This is not to say that deficits don't matter. They do, and they've got to go.
The problem with focusing on a balanced budget is that it sets up a dynamic of balancing spending cuts and tax increases. Tax increases, as we have already seen, depress economic conditions. Who can get excited about that kind of economic plan? Deficits need to be eliminated by cutting spending, however unpopular that may be in certain quarters.
As economists for the past two centuries have made plain, the real burden of government is not what it taxes but what it spends, because whatever it spends comes at the expense of citizens, whether via taxes, borrowing, or creating additional Federal Reserve Notes. Reducing the burden of government means slashing government spending, not raising taxes.
Here is a counterproposal: Instead of adding yet another "stealth" tax -- the VAT -- to the many excise taxes already in place, let's have Congress pass a truth-in-labeling law.
Let's require all excise taxes and all other hidden taxes (e.g., payroll, real estate, franchise, excise) that are embedded in the price of consumer goods to be listed in plain sight. Put the dollar amount of those taxes on price signs, price tags, and at the point of sale. Then, Americans will be able to clearly see how much they are paying in indirect taxes to government.
What's holding you back, Congress? You aren't afraid of the truth, are you?
Sen. Dodd's Financial Reform Bill: The Problem of Leverage
Trying to keep up with all the changes in U.S. Sen. Chris Dodd's (D-Conn.) financial reform bill has been a daunting task. Two weeks ago, it was described in the press as "the 1100-page bill." Last week, it became "the 1400-page bill." And within a day or two -- voila! -- we were reading about "the 1600-page bill." The Dodd bill has been morphing at a rapid rate. Shades of health-insurance reform!
Most Americans support a government attempt to regulate exotic, esoteric, unregulated, and nontransparent financial derivatives. Warren Buffett calls such exotica "financial weapons of mass destruction."
Derivatives shook the country's financial system to its foundations in 1998, when Long-Term Capital Management's derivatives pyramid imploded, and then again in 2008-9 with AIG's portfolio. Despite these near-death experiences, published guestimates of the total notional value of derivatives held by U.S. banks remain in the $200-billion range. (Total U.S. GDP is only about $14 trillion.)
The Dodd bill aims to reduce risk by placing stricter limits on financial leverage. The irony -- and, I believe, the danger -- of the bill is that, while seeking to reduce financial leverage, it seems designed to increase political leverage; that is, the government's power and control over financial firms.
President Obama, Sen. Dodd, and other supporters of the bill say that the bill will protect Americans from the financial fallout of major bankruptcies by authorizing federal regulations to shut down financial institutions in an orderly fashion when they start to fail. In theory, that sounds commonsensical and innocuous. In practice, it could be problematical.
Who decides when a firm is starting to fail? Like the heavenly emissary in the movie "Heaven Can Wait," who took a man's soul prematurely, only to later discover that the man would have survived and shouldn't have died, financial regulators may pull the plug on institutions that could find ways to come back from the precipice of failure.
Worse, think of the leverage that regulators could wield over private companies if they held life-and-death power over them: "Listen, Ms. CEO, the guys at Treasury think you should do A, B, and C. Do what you want, but if you don't do them, they may pull the plug on you." The Dodd bill could make vassals and serfs out of all financial institutions. A president could effectively cartelize the industry.
Another provision of the bill desired by President Obama and Sen. Dodd is for the SEC to be given increased influence in elections for corporate boards of directors. The SEC already is a politicized agency. Many of us suspect that the SEC's recent charges against Goldman Sachs were not based on solid legal grounds, but were announced when they were to drum up support for the Dodd bill. I'm no fan of Goldman Sachs, but neither do I believe that a politicized attack dog like the SEC should gain more leverage over private companies.
Lastly, there is the question as to whether this alleged financial reform halts or codifies taxpayer-funded bailouts of financial institutions.
President Obama flatly denies that the Dodd bill includes bailout provisions. Speaking in New York on April 22, he said, "a vote for reform is a vote to put a stop to taxpayer-funded bailouts. That is the truth."
Contradicting the president are two members of Congress from the president's own party. Sen. Ted Kaufman (D-Del.) worries that the bill expands "the safety net . . . to cover ever-larger and more complex institutions heavily engaged in speculative activities," thereby "sowing the seeds for an even bigger crisis." Rep. Brad Sherman (D-Calif.) categorically states, "The bill contains permanent bailout authority."
You decide for yourself who is telling the truth. The Congressional Budget Office seems to side with Kaufman and Sherman. CBO examined the budgetary impact of the bill's $50-billion resolution fund for large insurance and securities companies, hedge funds, and other non-bank firms deemed "systemically important."
This language raises serious questions: Which firms, exactly, will be deemed "systemically important?" Will they be told ahead of time, thereby increasing moral hazard? Are there specific guidelines that will be transparent and available to all so that they know where they stand, or will the requirements for "systemically important" status be kept secret? Would regulators be constrained by fixed rules, or would they be free to arbitrarily decide which firms are the ones anointed for rescue?
Judging by his track record so far, President Obama likes to play Big Brother to private businesses, rewarding his friends while stiffing others. The Dodd financial reform could bring us more of the same.
The "Social Justice" Fallacy? Wolves in Sheep's Clothing
Many Christians over many years have been beguiled by the Religious Left's use of the term "social justice." This is because Christians rightly love justice and hate injustice. But "social justice" -- or, at least, how it's often used by liberal Christians -- isn't necessarily biblical justice.
The standard of biblical justice is equal treatment by law: "Thou shalt not respect the person of the poor, nor honour the person of the mighty." (Leviticus 19:15) Justice not only means that nobody is to be picked on because he is poor or favored because he is rich, but that (contrary to the doctrine of "social justice") nobody is to be picked on because he is rich or favored because he is poor. Everyone's rights deserve the same protection. Thus, nobody should be taxed at a higher rate than his neighbors, nor should anyone receive special government handouts.
The modern left's "social justice" strives for economic equality. It endeavors to reduce, if not erase, the gap between rich and poor by redistributing wealth. This is "justice" more akin to Marx and Lenin, not according to Moses and Jesus. It is a counterfeit of real justice, biblical justice. Modern notions of "social justice" are often wolves in sheep's clothing.
The fundamental error of today's "social justice" practitioners is their hostility to economic inequality, per se. "Social justice" theory fails to distinguish between economic disparities that result from unjust deeds and those that are part of the natural order of things. All Christians oppose unjust deeds, and I'll list some economic injustices momentarily. First, though, let us understand why it isn't necessarily unjust for some people to be richer than others:
God made us different from each other. We are unequal in aptitude, talent, skill, work ethic, priorities, etc. Inevitably, these differences result in some individuals producing and earning far more wealth than others. To the extent that those in the "social justice" crowd obsess about eliminating economic inequality, they are at war with the nature of the Creator's creation.
The Bible doesn't condemn economic inequality. You can't read Proverbs without seeing that some people are poor due to their own vices. There is nothing unjust about people reaping what they sow, whether wealth or poverty.
Jesus himself didn't condemn economic inequality. Yes, he repeatedly warned about the snares of material wealth; he exploded the comfortable conventionality of the Pharisaical tendency to regard prosperity as a badge of honor and superiority; he commanded compassion toward the poor and suffering. But he also told his disciples, "ye have the poor always with you" (Matthew 26:11), and in the parable of the talents (Matthew 25:24-30) he condemned the failure to productively use one's God-given talents -- whether many or few, exceptional or ordinary -- by having a lord take money from the one who had the least and give it to him who had the most, thereby increasing economic inequality.
The Lord's mission was to redeem us from sin, not to redistribute our property or impose an economic equality on us. In fact, the Almighty explicitly declined to undermine property rights or preach economic equality when he told the man who wanted Jesus to tell his brother to share an inheritance with him, "Man, who made me a judge or divider over you?" (Luke 12:14).
All that having been said, there is much injustice in our world, much needed reform that all Christians can unite in accomplishing. Around the world, many people are poor and will never realize their God-given potential due to lack of freedom and opportunity. Let us never be on the side of those who reject man's God-given rights and biblical justice, and who oppress and impoverish in the name of a spurious economic equality.
In relatively free societies such as our own, we must continue to combat the economic injustices of theft, fraud, deceit, trickery, etc. We should strive to undo the injustices perpetrated by unethical public policies, such as the subtle theft of citizens' purchasing power via central bank inflation; the corrupt government practice of doling out earmarks, subsidies, and myriad special favors, often to big businesses and wealthy individuals; destructive tax policies that decapitalize society, thereby retarding growth in labor productivity, wage increases, and higher standards of living; runaway government spending that imposes an incalculable and unconscionable debt burden on the next generations, etc. We should be charitable.
By all means, let us tackle these persistent injustices. But let us be careful to abide by the biblical standard of impartiality and equal treatment by law, lest we create additional injustices.
Financial Intrigue in Greece: Should We Care?
The intertwined worlds of government and finance are swirling with drama not seen since the fall of Lehman Brothers in 2008. The epicenter of the current crisis is Greece. The Aegean nation's sovereign debt has been downgraded to "junk" status while talk of outright default by the Greek government has arisen. The very survival of the euro -- the 11-year-old currency used by Greeks and over 300 million other Europeans -- has been brought into question.
Yields on the Greek government's two-year notes have soared from 2.1 percent to 18.9 percent in the last few months, producing what one analyst termed "bond market Armageddon." The Secretary General of the Organization for Economic Co-operation and Development (OECD) has likened the bond market panic to the Ebola virus; the head of the International Monetary Fund (IMF) has warned of "contagion"-- the potential for Greece's sovereign debt crisis to spread to other heavily indebted European states.
How did Greece get into this mess? The primary cause has been fiscal irresponsibility. Sovereign governments that join the European Union pledge to keep their budget deficits below 3 percent of GDP. Greece's most recent deficit is estimated to be almost 14 percent. It didn't get there in one year. It turns out they have been lying about their deficits for years, employing those financial bad boys at Goldman Sachs to devise devious schemes for disguising the extent of their deficits.
Greece's total indebtedness approximates 120 percent of GDP. Combined with this year's 14 percent deficit, such massive quantities of red ink suggest that Greece is essentially broke and its currency is due to take a tumble.
Here is where it gets complicated: Greece shares the euro with 15 (officially) or 20 (unofficially) other European countries. A devaluation of the euro makes no sense for European Union members with sounder fiscal policies. The inherent, perhaps fatal, flaw of the euro currency is that each member country pursues its own fiscal policies, some of which inevitably must be incompatible with the European Central Bank's monetary policies.
Greece clearly needs to get its fiscal house in order if it is to regain financial credibility and stability. It lacks the political will to do so. Proposals to reduce government spending have caused Greek Air Force pilots to go on strike, anarchists and students to throw Molotov cocktails, and unions to call for a nationwide strike beginning May 5.
One raging debate has been whether Germany, the economically dominant European state, would bail out Greece. On the one hand, many Germans still resent the immense costs of re-integrating East Germans into the German economy after the dissolution of the Soviet bloc. If hard-working, industrious, fiscally disciplined Germans are fuming about helping their fellow Germans, who developed an entitlement mentality during their decades under socialism, they surely won't want to bail out profligate Greeks.
Ah, but again there is a complicating factor: German banks, it turns out, own nearly half of Greece's debts. Thus, German politicians are wrestling with the vexing question of whether they will incur greater voter wrath by bailing out undeserving Greek deadbeats or by doing nothing and possibly precipitating a major crisis in the German financial system.
Should Americans care about all this? Not long ago the euro was being touted as a possible competitor with the dollar for global foreign currency reserves. Not today. But if you are tempted to gloat, here are two reasons why you shouldn't:
1) We Americans have become a significant player in the stopgap Greek bailout. That is because the IMF has been like the cavalry riding to the rescue, promising big bucks to the Greek government. Since the largest contributions to the IMF come from the American taxpayer, we find ourselves once again picking up the tab for a bailout -- this time, not for rich American financiers, but for corrupt and profligate foreign governments and special interest groups.
2) Our own debt and deficit figures are not too far from being as parlous as Greece's. At $1.6 trillion, this year's federal debt is over 11 percent of our GDP, while our total (explicitly acknowledged) national debt is pushing the 90 percent-of-GDP threshold. Greece may be giving us a sneak peak at our own sovereign debt crisis in the not-so-distant future.
These are historic times. We may be at the beginning stages of a great unraveling of several widely believed political myths -- that democratic governments can exercise sufficient fiscal restraint to preserve their ongoing financial viability; that unbacked paper currencies imposed by governments and central banks can provide a long-lasting, sound medium of exchange; that countries can't go broke; and that government debt is a relatively safe investment.
The current Greek tragedy shows us that democratic welfare states, predicated on the belief that citizens have the right to live at the expense of fellow citizens, are economically untenable and inherently suicidal. *
"Where is the security for property, for reputation, for life, if the sense of religious obligation deserts the oaths . . .?" --George Washington
Some of the quotes following each article have been gathered by The Federalist Patriot at: http://FederalistPatriot.US/services.asp.
