Tuesday, February 15, 2011

Monday Morning Outlook
The Federal Budget: It's a Mess
Brian S. Wesbury - Chief Economist
Robert Stein, CFA - Senior Economist

If the US federal government were a bank, the FDIC would close them down this Friday night. Earlier today, President Obama submitted next year’s budget. The new budget, despite “cutting” the deficit by $1.1 trillion, will require Congress to pass a large increase in the “debt ceiling.”
In February 2010, the US raised the debt ceiling to $14.3 trillion (up $1.9 trillion) and then promptly borrowed every dime it could. Even with the “cuts” proposed by the President (or those being talked about by Congress), the government will spend roughly $7 trillion more than it receives in income over the next 10 years. Bottom line: The US federal budget is a mess. It’s on an unsustainable course. And that’s a view that takes all the “spin” at face value.

And believe us, there is a ton of spinning taking place. The president’s budget director Jacob Lew says the new budget will “save” $1.1 trillion over the next ten years. But about 1/3 of the “savings” will come from higher taxes. Under this budget, spending will be 49% higher in 2021 than it is in 2011.

In other words, even after tightening its fiscal belt and confiscating more private resources, the federal government will remain huge and out of control. The President’s budget for 2012-2021 forecasts that federal spending will never fall below 22.3% of GDP. Never before in history has the level of non-defense spending been so high for so long.

In effect, the budget proposed by President Obama locks in, like many European states, a deficit of at least 3% of GDP for as far as the eye can see. As a result, growing spending more slowly than GDP or freezing spending is no longer enough. The only way to get government under control is to cut spending outright.

The last time spending grew more slowly than GDP was under President Clinton, when spending fell from over 22% of GDP in 1992 to 18.2% in 2000. The end of the Cold War gave the US a peace dividend, which allowed for defense cuts.

But since President Bush took power in 2000, federal spending has increased by 93% and if we can believe the budgets being proposed in recent days, this spending binge will be locked in place and not reversed.

That’s why we’re cheered by the open rebellion of many newly elected members of the House to both their leadership’s plan and Obama’s plan to slow spending. They know that, after the government binge of the past decade, simply slowing the growth of spending or even “freezing” it is not good enough. They are not looking for excuses to cut spending slowly.

Claiming budget savings by freezing spending at today’s levels is like an alcoholic who says he’s sober because he’ll never drink more than yesterday’s bender. Trouble is, this alcoholic doesn’t even pay his own tab.




The mainstream media does not cover the full extent of the damage the Obama Administration has inflicted on this country. Even FOX News often doesn't have the time to go into sufficient depth to explain what is happening.

From our friend Ruth S. King comes a chart which all of us should read and absorb, sobering though it may be:

January 2009 Today % chg Source
Avg. retail price/gallon gas in U.S. $1.83 $3.104 69.6% 1
Crude oil, European Brent (barrel) $43.48 $99.02 127.7% 2
Crude oil, West TX Inter. (barrel) $38.74 $91.38 135.9% 2
Gold: London (per troy oz.) $853.25 $1,369.50 60.5% 2
Corn, No.2 yellow, Central IL $3.56 $6.33 78.1% 2
Soybeans, No. 1 yellow, IL $9.66 $13.75 42.3% 2
Sugar, cane, raw, world, lb. fob $13.37 $35.39 164.7% 2
Unemployment rate, non-farm, overall 7.6% 9.4% 23.7% 3
Unemployment rate, blacks 12.6% 15.8% 25.4% 3
Number of unemployed 11,616,000 14,485,000 24.7% 3
Number of fed. employees, ex. military (curr = 12/10 prelim) 2,779,000 2,840,000 2.2% 3
Real median household income (2008 v 2009) $50,112 $49,777 -0.7% 4
Number of food stamp recipients (curr = 10/10) 31,983,716 43,200,878 35.1% 5
Number of unemployment benefit recipients (curr = 12/10) 7,526,598 9,193,838 22.2% 6
Number of long-term unemployed 2,600,000 6,400,000 146.2% 3
Poverty rate, individuals (2008 v 2009) 13.2% 14.3% 8.3% 4
People in poverty in U.S. (2008 v 2009) 39,800,000 43,600,000 9.5% 4
U.S. rank in Economic Freedom World Rankings 5 9 n/a 10
Present Situation Index (curr = 12/10) 29.9 23.5 -21.4% 11
Failed banks (curr = 2010 + 2011 to date) 140 164 17.1% 12
U.S. dollar versus Japanese yen exchange rate 89.76 82.03 -8.6% 2
U.S. money supply, M1, in billions (curr = 12/10 prelim) 1,575.1 1,865.7 18.4% 13
U.S. money supply, M2, in billions (curr = 12/10 prelim) 8,310.9 8,852.3 6.5% 13
National debt, in trillions $10.627 $14.052 32.2% 14

Just take this last item: In the last two years we have accumulated national debt at a rate more than 27 times as fast as during the rest of our entire nation's history. Over 27 times as fast! Metaphorically, speaking, if you are driving in the right lane doing 65 MPH and a car rockets past you in the left lane 27 times faster . . . it would be doing 1,755 MPH!

(1) U.S. Energy Information Administration; (2) Wall Street Journal; (3) Bureau of Labor Statistics; (4) Census Bureau; (5) USDA; (6) U.S. Dept. of Labor; (7) FHFA; (8) Standard & Poor's/Case-Shiller; (9) RealtyTrac; (10) Heritage Foundation and WSJ; (11) The Conference Board; (12) FDIC; (13) Federal Reserve; (14) U.S. Treasury

In our new book, Revolt! (Due out March 1 – you can pre-order autographed copies now at DickMorris.com) we explain how Obama has wrecked our economy and chart a path to reverse the damage and defeat him in 2012.

These numbers make it crystal clear how crucial these two tasks really are!

What Is Wrong With The U.S. Economy?

What Is Wrong With The U.S. Economy? Here Are 10 Economic Charts That Will Blow Your Mind

The 10 economic charts that you are about to see are completely and totally shocking. If you know anyone that still does not believe that the United States is in the midst of a long-term economic decline, just show them these charts. Sometimes you can quote economic statistics to people until you are blue in the face and it won't do any good, but when those same people see charts and pictures suddenly it all sinks in. What is great about charts is that you can very easily demonstrate what has been happening to the economy over an extended period of time. As you examine the economic charts below, pay special attention to what has been happening to the U.S. economy over the last 30 or 40 years. The truth is that what is wrong with the U.S. economy is not a great mystery. All of the economic problems that we are experiencing now have taken decades to develop. Hopefully the charts in this article will help people realize just how nightmarish our economic problems have become, because until people start realizing how incredibly bad things have gotten they will never be willing to accept the dramatic solutions that are necessary to fix our financial system.

The sad fact of the matter is that we have been living in the biggest debt bubble in the history of the world over the last 40 years. All of this debt has purchased a wonderful standard of living for the vast majority of us, but all of this debt has also destroyed the economic future of our children and our grandchildren. Someday future generations will look back on what we have done in absolute horror.

The 10 economic charts posted below are meant to shock you. Most Americans today need to be shocked before they will be motivated to take action. Please share these charts with as many people as you can. Hopefully we can wake enough people up that something will be done about all of these problems while there is still time.

1 - Government spending is expanding at an exponential rate. As you can see from the chart below, federal spending is almost 18 times higher than it was back in 1970. Now Barack Obama has proposed a budget that would increase U.S. government spending to 5.6 trillion dollars in 2021. Just imagine what the following chart would look like if that happens....

2 - U.S. government debt is absolutely exploding. The U.S. national debt is currently $14,081,561,324,681.83. It is more than 14 times larger than it was back in 1980. Unfortunately, the national debt continues to grow at breathtaking speed. In fact, the Obama administration is projecting that the federal budget deficit for this year will be an all-time record 1.6 trillion dollars. Can we afford to continue to accumulate debt at this rate?....

3 - Unless something changes right now, the outlook for U.S. government finances in future years is downright apocalyptic. The chart posted below is from an official U.S. government report to Congress. As you can see, it is projected that interest on our exploding national debt is absolutely going to spiral out of control if we continue on the path that we are currently on....

4 - Household debt has soared to almost unbelievable levels over the last 30 years. The sad truth is that it is not just the U.S. government that has a massive debt problem. U.S. households have also been accumulating debt at a staggering rate. Total U.S. household debt did not pass the 2 trillion dollar mark until the mid-1980s, but now total U.S. household debt is well over 13 trillion dollars....

5 - The total of all debt (government, business and consumer) in the United States is now well over 50 trillion dollars. For the past couple of years this figure has been hovering around a level that is equivalent to approximately 360 percent of GDP. This is a debt bubble that is absolutely unprecedented in U.S. history....

6 - As tens of thousands of U.S. factories get shut down and as millions of our jobs get shipped overseas, the number of unemployed Americans continues to go up and up and up. As you can see from the chart below, there has been a long-term trend of increasing unemployment in the United States. In fact, there are about 3 and a half times as many unemployed workers in the United States today as there were when 1970 began. These jobs losses are going to continue as long as we allow our corporations to pay slave labor wages to workers on the other side of the globe. All of the major trends in global trade are very bad for the U.S. middle class. For example, the U.S. trade deficit with China for 2010 was 27 times larger than it was back in 1990. How long will our politicians stand by as our nation bleeds jobs?....

7 - The median duration of unemployment in the United States is in unprecedented territory. For most of the post-World War 2 era, when the median duration of unemployment in America reached 10 weeks that was considered a national crisis. Well, today competition for jobs is so intense that the median duration of unemployment is now well over 20 weeks....

8 - Since the Federal Reserve was created in 1913, the value of the U.S. dollar has declined by over 95 percent. One of the reasons given for the existence of the Federal Reserve is that the Fed helps control inflation. But that is a huge lie. The truth is that the United States never had consistently rampant inflation until the Federal Reserve took control. In particular, once the U.S. totally went off the gold standard in the 1970s inflation really started escalating out of control....

9 - Now the Federal Reserve says that the solution to our current economic problems is to print even more money out of thin air. The games that the Federal Reserve is playing with our money supply are simply inexcusable. Just look at what the Federal Reserve has done to the monetary base since the beginning of the recession....

10 - All of this new money is creating tremendous inflation. In particular, the price of oil is now ridiculously high. A high price for oil is very, very bad for the U.S. economy. Our entire economic system is based on being able to use massive quantities of very cheap oil. Unfortunately, that paradigm is starting to break down and the consequences will be very bitter. Back in mid-2008, the price of oil hit an all-time record of $147 a barrel and subsequently the world financial system imploded a few months later. Well, the price of oil is on the march again and that is very bad news for the U.S. economy....

Needless to say, if the economic trends documented by the charts above continue the U.S. economy will be totally wiped out. The U.S. economy as it currently exists is unsustainable by definition. It is only a matter of time before we slam into an economic brick wall.

We have developed an economy that cannot function without debt, and at this point it seems like almost everyone is drowning in red ink. The federal government is massively overextended, most of our state and local governments are massively overextended, most of our major corporations are massively overextended and the majority of U.S. consumers are massively overextended.

The only way that the game can continue is for the Federal Reserve to print increasingly larger amounts of paper money out of thin air and for everyone in the economic food chain to go into increasingly larger amounts of debt.

But no debt spiral can go on forever. At some point this entire house of cards is going to collapse.

When that happens, there is going to be economic pain that is greater than anything that this country has ever seen before.

Someday we will all desperately wish that we could go back to the "good times" of 2011. A great economic collapse is coming, and all of us had better get ready.

Barack Obama’s Budget For 2012

Barack Obama’s Budget For 2012: A Complete And Total Joke

Is Barack Obama trying to play a joke on all of us? The budget that the Obama administration has submitted for fiscal 2012 is so out of touch with reality that it may as well be a budget for "Narnia", "Fantasy Island", "Atlantis" or some other mythical land. You can view the hard numbers for Barack Obama's 2012 budget right here. Obama's budget assumes that the U.S. will experience economic growth of over 5 percent for most of the coming decade. That is so far-fetched that "optimistic" is not the right word for it. It also assumes that U.S. government income (primarily made up of taxes on all of us) will more than double over the next ten years. For 2011, the budget projects that the U.S. government will take in a total of 2.1 trillion dollars, and for 2021 the budget projects that the U.S. government will take in a total of 4.9 trillion dollars. For the Obama administration to assume that the federal government will be able to drain an extra 2.8 trillion dollars per year out of the American people by the year 2021 is ridicul0us beyond belief. In his new budget Barack Obama does propose some very, very modest spending cuts that he knows have no chance of getting through Congress. Barack Obama's budget for 2012 also does not even attempt to make any cuts to entitlement programs such as Social Security and Medicare. In essence, you can sum up Barack Obama's budget proposal for 2012 by saying that it is a complete and total joke. This budget is so delusional and so out of touch with reality that it is hard to imagine anyone taking it seriously.

Oh, but Obama is really trying to sell it hard. When Obama unveiled this new $3.7 trillion budget for 2012 at a middle school in Baltimore, he insisted that his plan will make it "so that every American is equipped to compete with any worker anywhere in the world."

Well, that is a nice sound bite, but as I have written about previously, unless Barack Obama suddenly finds a way to stop multinational corporations from paying slave labor wages to their workers on the other side of the globe the job losses in America are going to continue.

But that is a topic for another day. Getting back to the 2012 budget, Obama is proposing to cut more than a trillion dollars from federal budget deficits over the next ten years.

That sounds really good until you figure out that means that the cuts only amount to about $100 billion a year. Considering the fact that Obama's budget is projecting that we will have a $1.6 trillion budget deficit this year alone, that really is not a whole heck of a lot to be cutting.

The truth is that Barack Obama should be proposing spending cuts that are at least ten times as large if he was actually serious about addressing our budget woes.

But at least Obama is not proposing an increase in spending.

Oh wait, he actually is.

In fact, under Obama's budget, U.S. government spending will soar from 3.8 trillion dollars this year to 5.6 trillion dollars in 2021.

But the mainstream media is solely focusing on the budget cuts that Obama is proposing.

Apparently they are trying to cast him as some sort of "fiscal conservative".

Try not to laugh.

But the modest cuts that Obama is proposing are at least some place to start.

Under Obama's budget, approximately half of all government agencies will have their funding decreased from 2010 levels.

In fact, approximately 33 billion dollars would be saved by scaling back or shutting down 200 federal programs.

Of course Obama's fellow Democrats in Congress will never go along with many of these cuts, but at least it is something.

However, this is where most in the mainstream media stop their analysis.

They don't take a closer look at the numbers in Obama's budget.

They don't question the wacky economic growth assumptions.

They don't question the bizarre government income projections.

But even with the Obama administration's crooked numbers, the federal deficit still never drops below 600 billion dollars over the next decade and a total of 7.2 trillion dollars is still added to the national debt over the next decade.

If economic growth ends up being much lower, or if the U.S. government is not able to get twice as much money out of the American people by the end of the decade then the projections would look much, much different.

So where does the Obama administration assume all of that extra money for the government is going to come from?

Oh, from raising taxes of course.

The Obama budget assumes that there will be significant tax increases starting in the year 2013.

A recent article on CNBC summarized some of the tax increases that the Obama budget calls for....

The plan unveiled Monday includes tax increases for oil, gas and coal producers, investment managers and U.S.-based multinational corporations. The plan would allow Bush-era tax cuts to expire at the end of 2012 for individuals making more than $200,000 and married couples making more than $250,000.

Wealthy taxpayers would have their itemized deductions limited, including deductions for mortgage interest, charitable contributions and state and local taxes.

There are many liberals (such as my friend Gary) that would love to see these tax increases go into effect, but Obama knows that there is no chance that they will ever see the light of day unless the Democrats retake the House of Representatives.

But most of Obama's budget for 2012 is based on things that simply never even have a chance of happening.

The reality is that Obama's budget for 2012 is a great work of fiction.

Meanwhile, the U.S. government continues to accumulate staggering amounts of debt.

In fact, Obama's budget admits that we will witness the biggest one year debt increase in history this year.

In 2011, the gross federal debt with surpass 15 trillion dollars. In fact, it is being projected by some analysts that this will be the year when the debt finally becomes larger than the size of the entire U.S. economy.


But Obama insists that he is taking this debt problem very seriously.

Obama insists that he is committed to making "deep" cuts.

In fact, as he announced this new budget Obama stated that these budget cuts hit "many programs whose mission I care deeply about, but meeting our fiscal targets while investing in our future demands no less."

Do any of you actually believe him?

Not that the Obama administration is in an easy position. The truth is that the U.S. government (both Republicans and Democrats) have been horribly irresponsible with our money for decades.

The 14 trillion dollar national debt problem that we have now did not develop overnight.

Neither will it be solved overnight.

But Obama is not even trying to address the tough issues such as Social Security and Medicare.

The truth is that the federal debt problem cannot be solved without addressing our out of control entitlement programs.

So why didn't Obama address them in his budget?

Well, the reality is that Obama is not stupid. Social Security and Medicare are political sacred cows. Obama is not going to do anything at this point that would cost him millions of votes in 2012.

So Barack Obama ignored most of the $4 trillion in budget cuts recommended by the White House-appointed deficit commission.

It kind of makes you wonder why Obama ever appointed a "deficit commission" in the first place.

One area that Obama does attempt to cut in his new budget is military spending. Obama's budget for 2012 sets military spending at 5 percent below what the Pentagon requested for 2011.

In fact, Obama's defense budget would slash military spending by $78 billion over the next five years.

His budget also assumes that we are not going to get involved in any more wars, which is not necessarily a safe assumption.

So will these military spending cuts actually get through Congress?

Not likely.

The Republicans control the House of Representatives, and they are not likely to take too kindly to large cuts to the defense budget.

In fact, the truth is that not too many of Barack Obama's spending cuts are likely to survive in Congress.

As a recent article on CNN explained, Barack Obama's budget plan must navigate a vast array of congressional committees in the coming months and by the time it emerges it is likely to be radically changed from its current form....

Before it gets back to Obama’s desk for a signature, the spending blueprint will go through no less than 40 congressional committees, 24 subcommittees, countless hearings and a number of floor votes in the House and Senate.

As our Congress critters have demonstrated over and over and over, they love to spend our money on some of the most wasteful things imaginable.

For example, a total of $3 million has already been granted to researchers at the University of California at Irvine so that they can play video games such as World of Warcraft.

Something seems to happen to people who get elected to Congress. Almost all of them seem to develop an addiction to spending our hard-earned money.

Let us hope that something changes in that regard, because right now government debt is completely and totally out of control.

In fact, the U.S. national debt is currently increasing by approximately 4 billion dollars every single day.

In the end, if something is not done about all this debt it will destroy the entire U.S. financial system.

But our politicians just keep putting it off and putting it off.

Eventually we will reap what we have sown. Debt is a very cruel master, and nobody can run from it forever - not even the U.S. government.

George Soros on India, China growth

Nassim Nicholas Taleb Complains About Bailout Hazard

Economy & Egypt & Chemtrails 1

Reflections on the Revolution in Egypt

Reflections on the Revolution in Egypt

By Gideon Rachman

Wael Ghonim has been appointed by the US media as the face of the Egyptian revolution. Younger than Mohamed ElBaradei, less scary than the Muslim Brotherhood, articulate in English, married to an American and an employee of Google, Mr Ghonim is the perfect figure to sell the romance of the revolution to a western audience. As the administrator of the Facebook page that first drew demonstrators to Tahrir Square, he was imprisoned for a spell, until emerging from captivity in time to articulate the frustrations of young Egyptians.

Yet some caution about the “Facebook Revolution” is in order. The commentary about the role of social media in Egypt has become so breathless that it is easy to forget that the French managed to storm the Bastille without the help of Twitter – and the Bolsheviks took the Winter Palace without pausing to post photos of each other on Facebook.

The Egyptian revolution was driven, not just by the internet, but by many of the same forces that have sparked revolutions throughout the ages: hatred of a corrupt autocracy and its secret police; the frustrations of a rising middle class; the desperation of the poor.

This matters because the Facebook class – the young, educated and articulate demonstrators who became the international face of the revolution – are just one social strand in Egypt.

This is a country where 44 per cent of the population is illiterate or semi-literate and where 40 per cent live on less than $2 a day. Low wages, rising food prices and high youth unemployment mean that there are plenty of frustrated people, whose voices will now be heard in a freer political climate. The government is already running a big budget deficit, so has few resources to buy off the discontented.

Thanks to the efforts of the Mubarak regime, the institutions of civil society are very weak. The press has been muzzled, the judiciary largely controlled, opposition political parties barely exist. The military, which has assumed control in the post-Mubarak era, by far the most powerful state organisation. The Muslim Brotherhood, whose commitment to Islam is stronger than its commitment to democracy, the most organised social force. And yet, against this background, Egypt now has to allow political parties to form and hold parliamentary and presidential elections.

Unlike the eastern European revolutionaries of 1989, who could look to western Europe, Egypt’s democrats have no regional models to emulate. But there have been many democratic transitions in other parts of the world, that give an idea of the challenges Egypt now faces.

The wealth of a society matters a lot to the sustainability of democracy. One study suggested that democracies rarely fail in countries with a per-capita gross domestic product of $6,000 or more, but rarely survive when per-capita income is below $1,500. Egypt’s per-capita GDP is currently $2,800 – a similar level to Indonesia, which has managed to maintain a democratic system over the past decade, albeit one marred by corruption and religious intolerance.

Turkey, Pakistan and Thailand, as democracies with strong militaries, offer some parallels. All three saw many years in which democratic rule was regularly punctuated by military coups. Turkey and Thailand now seem to have moved beyond that stage. Pakistan, a poorer nation, is still vulnerable.

But Egypt has witnessed a more dramatic display of “people power” than anything ever seen on the streets of Karachi or Istanbul – which may make the Egyptian army wary of ever overthrowing a civilian government.

If the army now keeps its promise to hold clean elections in Egypt, the disposition of social and political forces in the country will become much clearer. Over the past 30 years, the population of Egypt has nearly doubled to more than 80m. This is a very young society, it is also an increasingly urbanised country, and one that has seen a visible religious revival in recent years.

One recent Pew opinion poll showed 80 per cent support in Egypt for the idea that adulterers should be stoned, the kind of figure that bolsters the fears of those who worry that Facebook Egypt will be outvoted by fundamentalist Egypt.

The experiences of Pakistan, Thailand and Turkey suggest that the educated urban middle classes are often unhappy with the outcome of democratic elections that empower their poorer and less-educated compatriots.

In Thailand, over the past year, it has left the country in the grip of civil conflict, as countryside-based Red Shirts battle the more urbanised wealthier Yellow shirts. In Turkey, much of the secular elite are deeply suspicious of the governing, mildly Islamist AKP party. And many educated Pakistanis seem to be in a state of permanent despair about their dysfunctional and violent political system.

If Egypt is lucky, the country’s future may look most like Turkey – a functioning democracy with a strong Islamist party and a booming economy. If things go really badly, Egypt’s future might look more like Pakistan – an impoverished and dysfunctional democracy, torn between fundamentalists, secularists and a powerful military. Egypt has not yet achieved the wealth of Turkey, but it is significantly richer and less rural than Pakistan. Perhaps its future will lie somewhere in between.

Sessions, Ryan: President failed on budget

Sessions, Ryan: President failed on budget

By Jeff Sessions and Paul Ryan

At a time when strong leadership is needed in the White House, President Obama has disappointed us with a budget that punts responsibility for America's greatest fiscal challenges. Lasting solutions will require a willing partner in the White House — and we don't appear to have one right now.

It is disappointing that the president would put forward another budget that spends too much, taxes too much and borrows too much. It is a budget that destroys jobs today and would leave future generations a diminished country.

Under his plan, the federal government would spend $46 trillion over the next 10 years, doubling the national debt by the end of his term and tripling it by the end of the decade. The president's much-hyped "spending freeze" for a small fraction of the budget simply locks in the elevated spending levels of the last two years. By contrast, congressional Republicans are working to chart a new course — one that restores confidence to the private sector by getting government spending under control.

Federal Reserve Chairman Ben Bernanke recently testified before the House Budget Committee that one of the best things Congress can do to get businesses to start hiring and the economy to start growing again is to demonstrate that we have a serious plan that will fix our government's deep fiscal problems.



In addition to its own editorials, USA TODAY publishes a variety of opinions from outside writers. On political and policy matters, we publish opinions from across the political spectrum.

Roughly half of our columns come from our Board of Contributors, a group whose interests range from education to religion to sports to the economy. Their charge is to chronicle American culture by telling the stories, large and small, that collectively make us what we are.

We also publish weekly columns by Al Neuharth, USA TODAY's founder, and DeWayne Wickham, who writes primarily on matters of race but on other subjects as well. That leaves plenty of room for other views from across the nation by well-known and lesser-known names alike.

Last year, the president punted these problems to a commission instead of putting forward his own ideas for balancing the budget. This commission issued its report in December, and while we didn't agree with all of its recommendations, we took the seriousness of its proposal as a hopeful sign, and stood ready to build on its good ideas. To us, the commission's work represented a step forward.

'A step backward'

Unfortunately, the president's budget incorporates virtually none of the commission's recommendations. Instead of moving us forward, the president's budget takes a step backward.

Rebranded as "investment," the spending spree would continue for several agencies and programs that have already received budget increases of 30%, 40%, and in some cases up to 100% over the last two years — and those numbers don't even include the cost of the failed stimulus.

At a time when millions of Americans remain out of work, the president's budget would impose a $1.6 trillion tax hike that would destroy jobs and stifle economic growth. This massive tax hike would leave American families, businesses and entrepreneurs with fewer dollars to save for their kids' education, or to pay their employees, or to spend on a service that employs someone else.

Our debt problem is caused not by taxing too little but by spending too much. We cannot continue to chase ever-higher spending with ever-higher tax rates. An ever-expanding government smothers economic growth, making our debt problem worse and bringing us closer to the day when even bigger tax hikes are sold to us as the solution to a debt crisis that spending caused. The American people can see this coming from a mile away — no wonder they are concerned.

Sacrificing our future

In his weekly radio address, the president said that it would be a mistake to balance the budget by sacrificing government investments for our children. We think it would be a mistake to accept his budget because it sacrifices our children's future. The most important action we can take is to protect our children's future by tackling head-on the crushing debt they are poised to inherit. It would be a mistake to bequeath to them a nation crippled by debt. We owe it to them to meet and overcome this challenge, leaving them with a more prosperous future.

Where we find common ground in this budget, we will certainly work with the president. But where he has fallen short, we will instead seek a new course: one that restrains spending, restores confidence and puts our nation back on the path to prosperity.

Sen. Jeff Sessions represents Alabama in the U.S. Senate and serves as ranking member of the Senate Budget Committee. Rep. Paul Ryan represents Wisconsin's first congressional district and serves as chairman of the House Budget Committee.

Mitch Daniels Is No Panderer

Mitch Daniels Is No Panderer
By Rich Lowry

Indiana governor Mitch Daniels did not get the memo about CPAC, the annual gathering of conservatives in Washington. The etiquette is that presidential wannabes should hew to a narrow band of harsh and harsher denunciations of liberalism, or anything suspected of having a liberal taint.

Last year, the impressively earnest and bright former governor of Minnesota, Tim Pawlenty, resolutely denounced brie-eating, although he had not hitherto been known for his hostility to the French-derived soft cheese.

That's what pandering does. Daniels, in contrast, seems temperamentally incapable of unseriousness; he is the anti-panderer. He gave a speech at CPAC that was characteristically thoughtful, standing out in his willingness to tell hard truths about the nation's fiscal condition and to challenge his audience.

Daniels spoke in favor of principled compromise - "should the best way be blocked," he argued, "then someone will need to find the second-best way." He called for reaching beyond the conservative base to voters "who surf past C-SPAN to get to SportsCenter." He said the Right "should distinguish carefully skepticism about Big Government from contempt for all government." He plugged civility.

This was not a typical CPAC speech, in fact not a typical speech for any politician anywhere. Daniels struck these admonitory notes not to lecture friends, but to prepare them to summon all the persuasiveness and coalition-building necessary to fight "the Red Menace," his phrase for "the debts our nation has amassed for itself over decades of indulgence."

Everyone knows and everyone says popular entitlement programs imperil the country's fiscal health. Then, the conversation usually ends.

Freshman congressman Bobby Schilling, (R., Ill.) appeared on Meet the Press during the weekend to say that "everything is on the table," before mumbling and looking at his shoes when asked for details. Pres. Barack Obama took the bold step a year ago of appointing a fiscal commission to study the issue. He hid behind the commission while it was at work, saying he couldn't pre-empt it; now that it has issued a specific report, he simply ignores it.

Out of this miasma of evasion, Mitch Daniels strides purposefully, walking all over the third rail in his deliberate, plainspoken Hoosier style. At CPAC, he said it's time to bid "an affectionate thank-you to the major social-welfare programs of the last century." If the Democratic National Committee doesn't have this sound-bite already filed away for a negative ad should he run for president, someone should be fired.

Daniels advocates "new Social Security and Medicare compacts." Over time, he wants to change the programs so that they focus on the neediest, grow with inflation but not faster, and feature more flexibility and choice. In pursuit of his overall vision of fiscal rectitude, Daniels is willing to put defense on the chopping block and relegate cultural issues to the far back burner. Conservative sacred cows, too, must go to the slaughterhouse.

As a former Office of Management and Budget director, Daniels lets his green eyeshade occasionally obscure his vision. The idea of a culture-war "truce," as he once put it, is preposterous. A basic conflict of visions about the meaning of virtue and justice can't be suppressed, no matter how devoutly budget wonks might wish it.

Daniels spoke compellingly at CPAC about the need for economic growth and about the struggles of the middle class, but made them subordinate to the overriding question of the debt. This has it backward. Growth and middle-class vitality should be the foremost goals of our economic policy, with debt reduction merely a means to help achieve them. For all their worship of Ronald Reagan, Republicans sound at times as if they are reverting all the way back to Eisenhower-era deficit phobia.

To all of this, Daniels the anti-panderer would surely say, "Here I stand, I can do no other." At CPAC, he again proved himself centered, clear-eyed, and honest. He's the kind of guy who makes you think, "He should run for president - and probably won't."
Rich Lowry is the editor of National Review.


"When plunder becomes a way of life for a group of men living together in society, they create for themselves in the course of time a legal system that authorizes it and a moral code that justifies it."

Frederic Bastiat


Neal Boortz

The more details we come to learn about the ObamaBudget, the less enthused I become. Not that I was all that impressed to begin with, but it truly seems like we have another Obamanation on our hands. Considering this moment in our history - considering the Tea Party movement's call for fiscal reform, considering the monumental election on 2010, and considering our unprecedented level of spending - you would think that Obama's budget would somehow reflect our urgent need for big change. Wasn't that his word, after all -- Change? Well it seems as though the change that Obama imagined is not the type of change that we need. We need to change the course of programs in this country that are running us dry and crippling our future. Instead, we get even more government, more regulations and more spending. This is not change .... this is simply the George Bush administration on steroids.

So what kind of goodies are we learning as we weed our way through Obama's budget? Let's start with this one from CNSNews: "If the federal budget released by President Barack Obama today is implemented, it will double the national debt over the next 10 years. The current national debt is $13.56 trillion (end of FY 2010). By the end of 2021, that debt would rise to $26.3 trillion under the White House budget."

Or, here's another way to look at it. This from the Washington Times: "President Obama projects that the gross federal debt will top $15 trillion this year, officially equaling the size of the entire U.S. economy, and will jump to nearly $21 trillion in five years' time." Read that again, folks ... our federal debt will equal the size of our entire economy. How can we be expected to grow our way out of something as daunting as that? Or you can think about it like this: The president's budget said debt as a percentage of GDP will top out at 106 percent in 2013 and will stabilize at about 105 percent in the middle of this decade. However ... and this is a big "however" ... this assumes economic growth levels significantly above those projected by the CBO. In other words, those are low-ball figures unless something seriously kick-starts in our economy.

Here's another goodie for you! From the Cato Institute ... Since 2001, spending has skyrocketed in almost every part of the budget. Even with the supposed "cuts" in Obama's budget, here's what the spending increases in some federal bureaucracies will look like:

· 112 percent more spending for the Department of Agriculture;

· 100 percent more spending for the Department of Education;

· 154 percent more spending for the Department of Energy;

· 110 percent more spending for the Department of Health and Human Services;

· 175 percent more spending for the Department of Labor; and

· 82 percent for the Department of Transportation.

Still not getting the picture? Chris Edwards of the Cato Institute takes a look at Obama's budget compared to 2008 ...

· Total federal spending jumped from $2.98 trillion in 2008 to $3.82 trillion in 2011. Obama's budget has outlays at $3.73 trillion in 2012, but that's still up 25 percent from 2008. Spending in 2011 is the highest share of GDP since WWII at 25.3 percent.

· Non-defense discretionary spending jumped from $522 billion in 2008 to $655 billion in 2011. Spending is supposed to fall to $611 billion in 2012, but that's still up 17 percent from 2008.

· Defense spending jumped from $612 billion in 2008 to $761 billion in 2011. Spending is supposed to fall to $730 billion in 2012, but that's still up 19 percent from 2008.

· Entitlement spending jumped from $1.59 trillion in 2008 to $2.19 trillion in 2011. The budget has entitlement spending at $2.14 trillion in 2012, which is up a huge 35 percent from 2008.

You would think that considering the elections of 2010, PrezBo would have changed his budget to fall more in line with the demands of America ..... you would be wrong. Again, Chris Edwards of the Cato Institute explains that Obama's 2011 budget is essentially exactly the same as the one proposed last year (that never passed).

· Last year, Obama proposed total spending for 2012 of $3.76 trillion. His new budget proposes 2012 spending of $3.73 trillion. So, in response to huge and growing concerns about overspending in Washington, the administration has essentially not changed next year's spending target at all.

· Last year, Obama projected spending in 2020 at $5.71 trillion. His new budget has spending in 2020 at $5.42 trillion. So the new focus on fiscal restraint in Washington has convinced the administration to trim just 5 percent off of its previous budget by the end of the decade. The new proposal for spending in 2020 is 42 percent higher than spending this year.

· Last year, Obama's budget showed public debt rising to 77 percent of GDP by 2020. Yet despite all the administration's expressed concern about rising debt, the new budget has exactly the same debt target in 2020 of 77 percent.

· Last year, Obama proposed 2012 discretionary outlays of $1.30 trillion. This year, Obama proposed 2012 discretionary outlays of $1.34 trillion.

Barack Obama must think that the ObamaMedia isn't going to call him out and the American people are too ignorant to know otherwise.

Will Multiculturalism End Europe?

Will Multiculturalism End Europe?
By Pat Buchanan

Multiculturalism has "totally failed," says German Chancellor Angela Merkel.

"State multiculturalism has had disastrous results," says Britain's David Cameron.

Is multiculturalism a failure in France? "My answer is clearly yes, it is a failure," says President Nicolas Sarkozy.

Ex-Prime Minister Jose Maria Aznar has declared multiculturalism a failure in Spain, saying it divides and debilitates Western societies.

Only in Canada and the U.S., it seems, is the issue still in dispute.

Yet these European leaders are not leading anyone. They are far behind the people, and their belated appreciation of the idea of national identity is but a product of political panic. Take Merkel in Germany.

Last summer, Thilo Sarrazin published a book the title of which may be translated as "Germany Abolishes Itself."

Sarrazin argued that Germany's gastarbeiters, guest workers -- Turks, Kurds, Arabs -- are dumbing down the nation. While Germany's birth rate fell below replacement levels decades ago, these foreigners with less intelligence and much higher dropout, welfare and crime rates are rapidly replacing the declining German population.

"It is a matter of culture," said Sarrazin, and "Islam is the culture." This is why Muslim immigrants are "socially, culturally and intellectually inferior to most everyone else." Yet Sarrazin did use the phrase a "genetic minus" to describe migrants from the Middle East.

Were these the ravings of a neo-fascist intellectual and closet admirer of the late Fuhrer? Not at all. Sarrazin was a proud member of the Social Democratic Party of Willy Brandt and a board member of the Bundesbank.

With Merkel and the German establishment howling for his head, Thilo resigned, unrepentant. Two-thirds of Germans said he had a right to speak his mind, a third said they agreed with him, and "Germany Abolishes Itself" has sold over a million copies.

It was in response to the firestorm of the Sarrazin affair that Merkel discovered that multiculturalism was a failure. Her EU colleagues have since been falling all over one another to agree.

Another factor has contributed to the sudden awakening of the EU's elite -- an explosion of anti-immigrant parties that are siphoning off working-class voters from socialist parties and nationalist voters from conservative parties.

Among these are Jean-Marie Le Pen's National Front in France, the British National Party, the Vlaams Belang in Belgium, Geert Wilders' Freedom Party in Holland, the Swiss People's Party of Christoph Blocher, which won the battle to ban the burka, the Austrian Freedom Party and Alliance for Austria's Future, the Jobbik Party of Hungary, the Lega Nord in Italy, which favors secession, the Danish People's Party, and the Sweden Democrats, who just won a toehold in parliament.

What these parties share is that all are anti-immigrant, anti-Muslim and ethnonational. They want to retain, or restore, a nation of, by and for their own kind, with its own history, holidays, heroes, language, literature, music and art. They are fiercely resistant to any dilution of the ethnic composition or cultural character of their countries.

What is the menace of multiculturalism these people see?

From Moscow to Marseilles, from Stockholm to Sicily, they see the Muslims pouring in and creating tiny nations within the nation, and being unwilling to embrace a new identity as Englishmen, French or German.

And their fears are not unjustified.

For just as the populist parties are deeply ethnonational, proud of their identity as Swiss, Austrian, German, English, Dutch or Flemish, the newcomers, too, are deeply ethnonational: Turkish, Arab and African.

And Islam is a faith that is itself anti-multicultural.

Devout Muslims do not believe all religions are equal. They believe there is one God, Allah, and submission to his law is the path to paradise. They do not believe in freedom of speech and the press if it means mocking the Prophet. They do not believe in Western dress codes or mixing men and women in schools and sports. They do not believe all lifestyles are equal. Some think adulterers should be stoned and honor killings are justified for girls who disgrace the family.

They wish to live their faith and their culture in our countries, to live alongside us but to dwell apart.

"If you come to France," said Sarkozy last week, "you accept to melt into a single community, which is the national community, and if you do not want to accept that, you cannot be welcome in France."

A little late for that. Some 5 million to 8 million Arabs and Muslims are in France, their birth rate is higher, and more are on the way.

The real questions: Whose idea was it to bring these people in? And what do France, Britain and Germany do if they say: This is a democracy, we will live as we wish to live, according to our beliefs, not yours.

How does a liberal, permissive society that celebrates diversity impose its values on a militant immigrant minority that rejects them?

Answer: It doesn't. All the rest is chatter.

This is what James Burnham meant when he wrote that liberalism is the ideology of Western suicide.

Niall Ferguson Explains How Obama "Blew It" With Egypt

Niall Ferguson Explains How Obama "Blew It" With Egypt

Niall Ferguson joins "Morning Joe" to discuss his recent Newsweek cover story.

Brzezinski: Yeah I want to hear more about how you think he blew it with Egypt, because looking at all the different reports coming in, and the pictures, and the peacefulness on the streets of Cairo, so far so good. It actually seems like it went pretty damn well.

Ferguson: Well you could be forgiven for thinking that, but it’s very early days and can I just remind you that the army is officially in charge of Egypt, which is not what one usually expects from a triumphant democratic revolution. The only thing that seems to not be getting pointed out is this completely took the administration by surprise. And I mean completely. They admitted that they had not planned for this scenario. I find that absolutely astonishing. This is a man who made a speech in June 2009 in Cairo, a speech which was distinctly touchy-feely, and since then nobody’s seemed to consider for five minutes in the State Department or in the White House that Mr. Mubarak would be overthrown. This was a scenario that was being considered in Israel last year, and I think a question has to be asked about why it wasn’t being considered by the National Security Council. What are these people paid to do?

Brzezinski: So you’re not talking about the actual execution of negotiations during the crisis. You’re talking about the lack of preparation and perhaps preemptive action.

Ferguson: Well I think the execution during the crisis was flip followed by flop followed by flip. I mean, how many times did the president’s position change? One minute he wanted Mubarak out, the next he wanted him to be part of an orderly transition. There were at least four different people saying four different things. In fact, I came to the conclusion that the United States had two foreign policies running concurrently. If it was Monday, it was Secretary Clinton’s. If it was Tuesday, it was back to President Obama’s. It was a shambles.

Brzezinski: But let me just challenge you on that. Niall, flip followed by flop followed by flip, to use your words, seems to have worked. Did it not?

Ferguson: It’s worked, has it? I wish I shared your confidence. Right now, we have a six-month period of military rule. Right now, we have, as far as I can see, virtually no organization on the part of secular Democrats. The only organized opposition force in Egyptian politics right now is the Muslim Brotherhood. Now if you look closely at what the Muslim Brotherhood stands for, it is for the imposition and enforcement of Shariah law and the restoration of the Caliphate. Anybody who counts this as a major breakthrough for United States foreign policy hasn’t got a clue about what happens in the wake of a revolution like this. It is far too early to say that this is a triumph. On the contrary, the risks are extremely high. Between now and the end of the year, the Muslim Brotherhood will get into power, and then we will be staring at something comparable, in its magnitude, to 1979 in Iran.

Brzezinski: I think you may be right. It may be far too early to say it’s a triumph. I also think though, Jonathan Capehart, that it might be far too early to say it’s a disaster too.

Capehart: Right, I think it’s far too early to say it’s a disaster. I think it’s far too early to say that the president had no strategy, and what I want to ask Niall is, you know, what would you have done if you were in that situation? Reading your piece, I got the distinct impression that you have this view that foreign policy, and this particular situation, is a very static event. Events are rolling all the time, so what would you have done differently than the president did?

Ferguson: Well there are two things. First of all, you have to have some kind of strategic concept. If the concept is the democratization of the Middle East, which of course was the last administration’s concept, then you have to prepare for that. If that’s not the concept, then you have to recognize that you are committed to non-Democratic regimes, not only in Egypt but also in Saudi Arabia and elsewhere in the region. There was a failure to choose there. The second thing you have to do is you have to build scenarios. Mubarak was old and sick, and yet nobody seems to consider the possibility that there would not be an orderly transition to his son Gamal taking over. So you have to have a strategy, which means prioritizing, and you have to scenario build. And they did neither, which is why they had to make it up on the hoof, and frankly that’s not good enough. You cannot make the foreign policy of a superpower up as you go along.

Capehart: But Niall, so do you think that the Obama administration, the president, was overly sensitive to looking like it was intervening in foreign affairs in a sovereign country’s decisions?

Ferguson: No, they just looked like they hadn’t a clue. It’s as simple as that. Let me put it this way, if we want to see secular democratic forces prevail in a country like Egypt, which is overwhelmingly a Muslim country, which has a tradition of Islamic radicalism in the form of the Muslim Brotherhood, it is not going to happen by itself. The lesson from Eastern Europe, going right back to the Cold War, is that the United States had to very actively support democratic forces until finally the moment came in 1989 when they could step forward into the limelight and they were ready. Just take the example of Czechoslovakia. Vaclav Havel comes into the foreground in 1989, but he had been receiving support from the United States and other western allies since 1977. We haven’t got a plan here, and if we don’t have a plan to build a secular democracy in Egypt, it’s not going to happen.

Halperin: Professor, do you see any foreign policy stars or big-thinkers in this administration, and if so who are they?

Ferguson: None, none. The national security advisers have been mediocrities. Right now we have a national security adviser whose biggest claim to faith is that he was a lobbyist for Fannie Mae. It’s embarrassing, and the previous incumbent, who’s responsible for this debacle, General Jim Jones, is I’m sure a very nice man. I’ve always had a good impression of him personally. But as a strategic thinker, he is a C minus and that is the problem. President Obama is one of the least experienced men in terms of foreign policy ever to occupy the White House. And yet he has advisers around him who are, frankly, second if not third-rate. And you just can’t do that. It’s far too risky, it’s far too dangerous a world, and some of us said this when he ran for election, that it was a huge risk to put somebody with that kind of inexperience into a position like Commander-in-Chief of the United States. I think what we’re seeing unfold in Egypt reveals the truth of that statement.

Halperin: Do you think Secretary Gates, Secretary Clinton are second or third-rate foreign policy strategists?

Ferguson: Well, to be perfectly honest, compared with the people that we’ve seen in the past, your guest tomorrow Zbigniew Brzezinski or his predecessor Henry Kissinger, yes I do not think they’re in that league.

Scarborough: So we have heard on this and off a recurring complaint about the Obama administration by foreign policy leaders over the past two years, and that is that there doesn’t seem to be a grand strategic plan. That the president believes he can go deliver a speech and that is not a means to an end, but that is an end in and of itself. Mika…

Brzezinski: Or that maybe there is a vision, but there’s a complete disconnect in carrying it out.

Scarborough: So I guess the question is, do you hear similar concerns and criticisms across the globe?

Ferguson: Yes I do. Last week I was in Tel Aviv at the Hertzeliyah Security Conference, and I have to tell you that the conversation at that conference was one of dismay about the complete amateurishness of American policy. I do think that the president regards making touchy-feely speeches as a substitute for having a strategy, and I want to emphasize the risks that are currently being run in that region. If you look at history, and remember I’m historian, most revolutions lead not to happy clappy democracies but to periods of internal turmoil, often to periods of terror, and they also lead to external aggression because the simplest way to mobilize people in a relatively poor and not very well educated country like Egypt is to point to the alleged enemy within and then, of course, the enemy abroad. The scenarios that the Israelis are looking at involve a transition not to some kind of peaceful and amicable democracy, but to a Muslim Brotherhood-dominated regime, which then pursues an aggressive policy towards Israel. This is not a zero probability scenario. This is a high probability scenario, and as far as I can see the president isn’t considering it.

Geist: Niall, it’s Willie Geist. It sounds like you would rate the Obama administration’s foreign policy as an F. I don’t want to put words in your mouth, but it sounds that way. Is it better or worse than that of the previous administration under George W. Bush?

Ferguson: Well I think it’s a little early to judge it, but it has the potential to be worse. Remember, Bush got a C if not an F from a great many people, not the least because the execution of the operation in Iraq was so very poor. And I think one has to look back and recognize the great mistakes that were made there. But at least George W. Bush, after 9/11, had a grand strategy. And the strategy was to use American power to promote democratization in the greater Middle East. And to fight a war on terror, which he fought with some success in Afghanistan and with mixed success in Iraq. But there was a strategic concept there, whereas as far as I can see President Obama’s strategic concept is, I’m not George W. Bush, love me.

Brzezinski: Next time you come on, Niall, tell us how you really feel.

Scarborough: Niall actually did wrap up the president’s foreign policy plan, at least on the campaign trail. So I’m wondering as you talk about George W. Bush’s grand strategy and as we bring up the president’s Cairo speech in 2009, is it not possible that both American presidents did have some influence over the events in Egypt over the past month?

Ferguson: Well I think Mr. Obama’s influence has been almost completely absent, whereas I think there’s no question that his predecessor had a great deal of influence in the region. Remember what was said in that Cairo speech incidentally, going back to 2009. Mr. Obama said that in his view, Islam was a religion of peace and tolerance. Well we’ll just see how peaceful and tolerant the Muslim Brotherhood is if it is successful in getting into power in the months ahead. I think those words will come back to haunt Mr. Obama.

Obama's Unserious Budget

AM Report: Violence Heating Up in Iran

Rumsfeld Admits Iraq War Regrets

Clinton Calls for Global Internet Standards

The Rise of Statism

The Rise of Statism

Mises Daily: by

[Crisis and Leviathan • By Robert Higgs • Oxford University Press, 1987 • 350 pages. This review was originally published in Liberty, 1987.]

Crisis and Leviathan

Crisis and Leviathan is a blockbuster of a book, one of the most important of the last decade. It is that rare and wondrous combination: scholarly and hard-hitting, lucidly written and libertarian as well. To Professor Higgs, being thorough and erudite does not mean timorously qualifying every statement, or torpidly and "judiciously" picking one's way through the minefields of ideology. Higgs's depth and breadth of learning has only intensified his commitment to truth, liberty, and the identification its enemies.

Robert Higgs, a noted economic historian, set about to answer a longstanding and vital question: why has the State grown so ominously in power in the United States during the 20th century? Why did we begin as a quasi-laissez-faire country in the 19th century and end up in our current mess? What were the processes of change?

The orthodox answer, the answer given by statist apologists, is all too simple: the world grew more complex, the increasing need for statism was perceived by intellectuals, statesmen, and farsighted businessmen; hence government expanded in response to those needs. Of course, no one who is not a naïve apologist for the status quo will fall for such pap.

Robert Higgs was a student of the Chicagoite school of "cliometrics" fathered by Douglass North, of the University of Washington. The Northian approach to economic history is marked by several features:

  1. a roughly free-market approach, but strongly tempered by the "Whig" notion that whatever existed in the past had to exist;
  2. a strict economic determinism that everyone is only out for his own economic self-interest; and
  3. the view that all of economic history can be encompassed by a few mathematical equations.

It should be pointed out that c is totally fallacious on its own, but only gains seeming plausibility if you hold b, and then add whopping assumptions about measurement of determined behavior. It is patently impossible, even for cliometricians, to embody ideology, people's values and ideas into mathematical equations.

We can also see that a, the Whig determinism that no status quo can be changed, combined with b, strict economic determinism, leads to total pessimism about changing any situation, past or present, in behalf of liberty. If ideas or principles are unimportant and can have no influence on history, as the public-choice wing of Chicagoites has emphasized, then there is no hope to overcome the more pointed and intense economic interest of groups clamoring for special privileges from the State.

The special delight of Crisis and Leviathan is that Higgs has worked himself loose from Northian cliometrics. Much of the beginning of the book is a knowledgeable and trenchant assault on its assumptions and procedures. The key to historical change, and specifically to the growth of statism, North points out, was a change in ideology, in the ruling set of ideas in society. The crucial watershed was the adoption of statism by the American intellectuals during the Progressive period. As a result, any economic or political crisis could give a major thrust to statism that it could not do before.

One great accomplishment of Professor Higgs is to vindicate the role of ideas in history; more specifically, the role of ideology in bringing about statism in the 20th century. He has rescued the discipline of economic history from the Chicago variant of economic determinism.

But this is scarcely all. For in virtually every free-market economist of our time, there is one great big hole, one big gap in his critique of statism: war. War is sacrosanct, considered necessary, inevitable, and good; and so while free-market economists will devote a great deal of energy to the evils of government intervention in oil, or forestry, or the retail trade, there is little or nothing said about the horrors and distortions imposed by the Pentagon and the war-making Leviathan State.

In Crisis and Leviathan, Higgs identifies war as the critical key to the growth of statism, making his achievement all the more remarkable. World Wars I and II, coming on top of the adoption of statist ideology, were the critical thrusts for the triumph of statism, in economic and social affairs. Higgs points out that World War I, in contrast to previous American wars, was used to impose a collectivism that became a cherished model for all statists as a permanent feature of American life; and that World War II completed the job.

Usually, free-market economists, ever wary of making value judgments, restrict their critique of conscription to a mere argument that it is an inefficient way of mobilizing manpower: hence their call for a volunteer army as a more efficient means of allocating labor and imposing social costs. Robert Higgs, in contrast, argues that the draft is central to the development of statism in the 20th century. In an important contribution, Higgs points out that once conscription was adopted, the statists were able to use the draft as a powerful weapon for the control of the economy and society. Essentially, they argued that "if our boys are drafted, then surely property must be controlled and conscripted as well."

Already, alert conservatives have denounced Crisis and Leviathan for its pinpointing of war and militarism as a key to statism. The reviewer for the American Spectator denounced Higgs for his "libertarian" leanings. When conservatives are faced with a choice between war and freedom, we all know which they invariably choose.

Not the least of the joys of Crisis and Leviathan is the love of liberty and the hatred of its enemies that shines through the scholarly apparatus of the book. In Yeats's famous phrase,

The best lack all conviction, while the worst
Are full of passionate intensity.

What a treasure, then, when an erudite scholar and distinguished economic historian such as Robert Higgs, conveys a passionate intensity in favor of liberty and against the depredations of the State!

We live in an age of outrageous hype, when publishers and book dealers tout every other book in print as "the greatest of all time." So what are we to do when a book of genuine greatness comes along? I say this about very few books: make this your top priority this year; rush out and read the book. And then proclaim it throughout the land.

Merger Monday and the Destruction of Wealth

Merger Monday and the Destruction of Wealth

Mises Daily: by

[This article was adapted from a talk delivered at the Mises Circle in Houston, Texas, January 22, 2011.]


The stock market has been on a tear and it's all about mergers and acquisitions (M&A).

Last year ended up being a blockbuster for global mergers and acquisitions, with the total number of deals and values both rising by over 20 percent for 2010, hitting $2.4 trillion. Private equity buyouts meanwhile rose 7.2 percent, marking the strongest year for buyouts since 2007. Activity in M&A more than doubled in Australia; the Asia-Pacific region saw M&A deal value reach its highest value on record; and M&A deals also jumped 37 percent in Europe.

But of all regions, it was the emerging markets (EM) that posted the most impressive year. In 2010, the EM group saw 2,763 deals, worth approximately $557 billion. That marked a 20 percent increase in deal volume and a nearly 60 percent jump in total deal value.

But it wasn't exactly deals, deals, deals here in the States. The total value of American M&A only rose 3 percent year-over-year. But now M&A talk is really heating up in the United States.

The Fast Money Traders on CNBC say M&A is a major market theme — in tech, retail, mining, even deals in the financial services and real estate. "We would be remiss if we didn't disclose that we are somewhat surprised by the speed at which M&A transaction multiples have improved toward the sellers' favor," Keefe, Bruyette & Woods said in a research note concerning bank mergers. "We believe the market may be signaling that the buyers are being overly generous in sharing the economics with the sellers this early in the cycle."

Byron Wien, vice chairman of Blackstone Advisory Partners, listed as one of his "Ten Surprises for 2011," "Merger and acquisition activity becomes intense and the market reaches a blow-off euphoria."

With the announcement of AOL buying Huffington Post for $315 million, February 7 was referred to as Merger Monday. Danaher also announced it was buying Beckman Coulter for $6.8 billion, while oil driller Ensco Plc said it would buy Pride International Inc. for $7.3 billion.

But every Monday in 2011 has seemed liked "Merger Monday."

Jack Ablin, who is chief investment officer with Harris Private Bank in Chicago, says that "investors are coming in with the attitude, if these business leaders are confident enough to buy other companies, then I'm confident enough to buy stocks."

So what's driving M&A other than CEO ego?

First of all, it's cheap money. Wall Street began to fall apart in the summer of 2007 with the M2 money supply standing at $7.3 trillion. The Fed has hit the monetary gas — we've had TARP, TALP, and who knows what all, and by November of 2010, M2 was just short of $8.8 trillion, a more than 20 percent increase.

The prime lending rate was 8.25 percent back in the summer of 2007; now it's 3.25 percent. Six-month Libor (the London interbank offered rate) was 5.37 percent in July 2007; last month it was 45 basis points. No wonder someone on CNBC said recently that at these low interest rates, all of these "deals" (mergers and acquisitions) will be accretive to earnings.

A lot of deals will work on paper with rates this low.

Second, firms have lots of cash on their balance sheet and it's not earning anything. US treasuries with less than a year term are kicking off 13 to 27 basis points. Bank CD rates are somewhere around 1 percent for 12 months.

Rates are not low because people are delaying consumption and keeping high cash balances. It is the central bank that is keeping rates low, thinking businesses will begin borrowing and then start hiring. So rates are low, and everyone with cash from corporate CEOs to retirees wants to earn something besides 1/2 percent.

CEOs especially have money burning a hole in the pockets of their corporate balance sheets. They could pay the money out to current shareholders in the form of dividends, but they must figure, "what would the shareholders do with the money?"

The CEOs could hire more people and produce more goods and services, but, no matter what the Business Cycle Dating Committee of the National Bureau of Economic Research says, it's still a recession. Demand isn't that good. People are expensive to hire and especially to fire (if you can fire them at all).

The Capitalist and the Entrepreneur

Finally, there is increased government interference. Professor Peter Klein has found that firms make acquisitions when faced with increased uncertainty, citing regulatory interference and tax changes as major causes of uncertainty. When faced with increased regulatory interference, firms respond by experimenting, making riskier acquisitions — and consequently more mistakes.

Klein found that unprofitable acquisitions tend to come in industry clusters and that these clusters are likely to arise from intensified regulation. So, while money's cheap and government keeps getting more intrusive, CEOs figure, "Let's roll the dice and buy another business."

But according to Max Landsberg and Dr. Thomas Kell at the consulting firm Heidrick & Struggles, 74 percent of mergers fail. "Two-thirds of the newly formed companies perform well below the industry average," according to the Harvard Management Update. Although "up to 70 percent [of mergers] failed to create value, it seems clear that the end is not yet in sight," claims Financial Executive. And the Journal of Property Management says "60 percent to 80 percent of all business combinations undergo a slow, painful demise."

While CEOs think that when they do a deal two plus two will equal five, the fact is it often turns out that two plus two ends up equaling three.

Leadership consulting types claim a large company needs more effective leadership than a smaller one, and companies must consider their leadership capacity when confronted by change or contemplating an acquisition.

Human resources consultants say these mergers don't work because most executives manage the business integration but do not manage the human integration. Eager for the gains anticipated, they treat the acquisition like a series of financial reports, instead of organizations comprised of human beings.

Companies call these things "mergers," "acquisitions," "buyouts," and "takeovers," but what are they really doing? Buying stocks and typically at a premium to what the stocks had been trading for — forget volume discounts. These guys aren't just buying a cow or two but the whole ranch and paying a premium to the market price to boot.

Why is that? Unfortunately, government regulations cause this anomaly. Companies acquiring large blocks of stock in other companies must register their intentions with the government, thus alerting the market to those intentions. The government protects targeted firms from hostile takeovers and raises the price of buyouts.

And where do acquirers come up with the numbers that they pay for these acquisitions?

A former director of Coopers & Lybrand told author Mark Sirower, "Lotus is the culprit in failed acquisitions. It is too easy to assume anything you want in perpetuity without any understanding of the economics of an industry, and package it in a beautiful report."

In his book The Synergy Trap, Sirower says valuation models turn on three things: free-cash-flow forecasts, residual value, and a discount rate.

The cost of capital is integral to making these assumptions. The lower the assumed interest rate or cost of capital, the higher the price for the acquisition that the models will justify.

And if anyone is assuming today's Fed-induced microscopic interests rates will last forever, well, now would be the time to be selling instead of buying. Once interest rates go up, these valuation models will be blown up along with the government-employee pension-plan assumptions.

It's hard to make something work out economically if you overpay in the first place. And that is most often what happens. Companies overpay for the firms they acquire.

Or, as Warren Buffett put it in the Berkshire Hathaway 1982 annual report,

The Market, like the Lord, helps those who help themselves. But, unlike the Lord, the market does not forgive those who know not what they do…. A too high purchase price for the stock of an excellent company can undo the effects of a subsequent decade of favorable business developments.

Although he isn't writing about a stock-market boom driven by M&A, Ludwig von Mises could have been when he wrote that

the moderated interest rate is intended to stimulate production and not to cause a stock market boom. However, stock prices increase first of all. At the outset, commodity prices are not caught up in the boom. There are stock exchange booms and stock exchange profits. Yet, the "producer" is dissatisfied. He envies the "speculator" his "easy profit." Those in power are not willing to accept this situation. They believe that production is being deprived of money which is flowing into the stock market. Besides, it is precisely in the stock market boom that the serious threat of a crisis lies hidden.

Many mergers have been spectacular failures. Daimler Benz's had the great idea to buy Chrysler for $37 billion. The companies merged in 1998, and by 2007, Daimler Benz was selling Chrysler for just $7 billion.

Mattel bought the Learning Company for $3.5 billion in 1999. Less than a year later, the Learning Company lost $206 million, taking down Mattel's profit with it. The Learning Company was sold by the end of 2000.

"When faced with increased regulatory interference, firms respond by experimenting, making riskier acquisitions — and consequently more mistakes."

Hedge-fund king Eddie Lampert bought Sears and Kmart in 2005 and merged them to create Sears Holdings. However, by 2007, Lampert was named the America's Worst CEO because the combination was floundering.

Quaker Oats purchased Snapple in 1994, for $1.7 billion. After just 27 months, the food giant sold Snapple for $300 million, losing $1.6 million for each day that the company owned the drink company.

Who can forget the AOL/Time Warner merger? In 2001, old-school media giant Time Warner consolidated with American Online (AOL), the Internet and email provider of the people, for a whopping $111 billion.

In May 2009, the CEO of Time Warner, Jeff Bewkes, announced that the marriage of AOL and Time Warner was dissolved. And now AOL is buying the Huffington Post for reportedly five times revenues. But we don't know the multiple to profits. If there are any at all.

With upwards of three-quarters of all mergers destined to fail, just what is the problem? Personnel and business culture-clash issues or just plain overpaying?

The Austrian School has determined that there are limits to the size of a firm. As much as those on the Left wring their hands about giant corporations taking over the world, it doesn't work out that way.

Mises famously determined that socialism can't function because there are no market prices in a socialist economy to distinguish more- or less-valuable uses of social resources.

But Peter Klein points out in his book The Capitalist and the Entrepreneur that Mises wasn't just talking about socialism. Mises was addressing the role of prices for capital goods. Entrepreneurs make guesses about future prices and allocate resources accordingly to satisfy customer wants and turn a profit while doing it.

If there is no market for capital goods, resources won't be allocated efficiently whether it's a socialist economy or otherwise. The market economy requires well-functioning asset markets. Without these prices, decision making is destroyed.

If one can't calculate and compare the benefits and costs of production using the structure of monetary prices determined at each moment on the market, as Joe Salerno points out,

the human mind is only capable of surveying, evaluating, and directing production processes whose scope is drastically restricted to the compass of the primitive household economy.

Mises explained that

one cannot play speculation and investment. The speculators and investors expose their own wealth, their own destiny. This fact makes them responsible to the consumers, the ultimate bosses of the capitalist economy.

Murray Rothbard extended Mises's analyses to considering the size of firms, and the problem of resource allocation under socialism to the context of vertical integration and the size of an organization. He wrote that the

ultimate limits are set on the relative size of the firm by the necessity of markets to exist in every factor, in order to make it possible for the firm to calculate its profits and losses.

To make implicit estimates, there must be an explicit market. "When an entrepreneur receives income, in other words, he receives a complex of various functional incomes," Rothbard wrote. "To isolate them by calculation, there must be in existence an external market to which the entrepreneur can refer."

As firms get too big, economic calculation gets muddied because firms do not receive the profit-and-loss signals for their internal transactions. Managers are lost as to how to allocate land and labor to provide maximum profits or to serve customers best.

As these firms grow (especially by acquisition), one part of the company is often the provider and another part of the company is the customer, yet there are no market prices to allocate resources efficiently.

Rothbard wrote,

Economic calculation becomes ever more important as the market economy develops and progresses, as the stages and the complexities of type and variety of capital goods increase. Ever more important for the maintenance of an advanced economy, then, is the preservation of markets for all the capital and other producers' goods.

Professor Klein makes the point that

as soon as the firm expands to the point where at least one external market has disappeared, however, the calculation problem exists. The difficulties become worse and worse as more and more external markets disappear, as [quoting Rothbard] "islands of noncalculable chaos swell to the proportions of masses and continents. As the area of incalculability increases, the degrees of irrationality, misallocation, loss, impoverishment, etc, become greater."Download PDF

When firms expand, company overhead expands. And there is difficultly in allocating overhead or any fixed cost for that matter amongst various divisions of a firm. "If an input is essentially indivisible (or nonexcludable), then there is no way to compute the opportunity cost of just the portion of the input used by a particular division," explains Klein. "Firms with high overhead costs should thus be at a disadvantage relative to firms able to allocate costs more precisely between business units."

You know what overhead looks like. It's what Scott Adams describes as organizations "riddled with hamster-brained sociopaths in leadership roles," sitting around having meetings and looking at Powerpoint presentations. M&Ms kill productivity — not the candy: managers and meetings.

Too much management is required when firms get too big. If managers knew how to manage, there wouldn't be dozens of new management books constantly for sale — like Who Moved My Cheese? Who Made My Cheese?, Who Moved My Secret?, Who Moved My Soap?, and Who Moved My Church?.

People trying to manage are so desperate they look to Rudy Giuliani, Attila the Hun, and George W. Bush for management secrets.

The results of CEO buying sprees spurred by cheap Fed-produced money and credit are not new jobs and new products that make our lives better. These corporate shopping extravaganzas are just wasteful malinvestments that destroy capital.

Federal Reserve monetary policy over the last couple decades has not produced real economic growth but instead bubble after bubble — with each bubble (or each group of contemporaneous bubbles) being bigger in aggregate and more damaging than the one that preceded it.

As economist Kevin Dowd explains, these bubbles destroy part of the capital stock by diverting capital into economically unjustified uses. The central bank's artificially low interest rates make investments appear more profitable than they really are, and this is especially so for investments with long-term horizons, i.e., in Austrian terms, there is an artificial lengthening of the investment horizon.

And there is nothing more long term than buying a company, which is not just a group of employees and the current inventory of products or services but a package of previously made, long-term capital investments.

"These distortions and resulting losses are magnified further once a bubble takes hold and inflicts its damage too: the end result is a lot of ruined investors and 'bubble blight' — massive overcapacity in the sectors affected," Dowd explains. "This has happened again and again, in one sector after another: tech, real estate, Treasuries, and now financial stocks, junk bonds, and commodities — and the same policy also helps to spawn bubbles overseas, mostly notably in emerging markets right now."

The Fed's printing press is destroying the capital base of the American economy in so many ways that most don't realize.

Savers are punished and encouraged to risk capital on ventures that don't make economic sense. And CEOs, fooled by the faulty assumptions buried in their valuation models, see cheap money as the path to building empires.

However, these empires inevitably crumble and destroy precious capital in the process.

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