Friday, November 26, 2010

New Players, Same Game

I spent yesterday morning sharpening my wood chisels. It has been a while since I have been able to get into the workshop and they were in poor shape.

The thing about sharpening chisels is that it’s a low mental function kind of a job, so my mind gets to wander. So, it’s a win-win deal; I get sharp tools, and a sharper mind.

Yesterday I started with an interview I heard with Speaker-elect John Boehner on the radio recently, where he was talking about one of the first things the 112th Congress will need to do is raise the debt ceiling.


Didn’t we just elect this new crop of fools to PREVENT something like this?

Speaker Boehner was asked about maybe some spending cuts, and replied that right now we can’t afford to cut anything, or words to that effect.

Well, I can think of a lot of things we can cut. Just take any random collection of letters from the alphabet: NPR; EPA or TSA for starters.

But you have to remember what I’ve said in previous posts, and think about the difference between long term and short term solutions. A long term solution to a problem will not get you reelected. The whole point of the last 45 years was to solve a problem short term, by borrowing money, and then kick the real solution to the problem, and the new problem of massive debt, down the road.

Guess what? Now the massive debt is the problem.

Well, one of them anyway.

As I have noted before, war is the historical method for dealing with over-capacity. A people will attempt to take over the lands of another and it has a two-fold impact. First, more land means more room for the people to settle, and it also costs in production of war-making equipment and lives, ending a reason for the over-capacity. For example, look at the two worldwide booms that followed the two world wars in the last century; the Roaring Twenties and the Fabulous Fifties.

Government is then forced to come up with a way to establish this prosperity without killing people and breaking things. One of those methods was Unemployment Compensation, because statistics prove that when 5% of the workforce is unemployed, labor does not become a scarce commodity, and wages can be more competently controlled. So to ease the burden on that 5%, they pay them not to work. Just like they pay farmers not to grow certain crops, to avoid the overabundance that could lead to a reduction in the price those crops can command.

Then in 1965 the Johnson Administration went one step further with the Great Society; why worry about extra capacity, if we can just make sure this over abundance of people is feed, clothed, medicated and housed on the government dime?

So what if we have to borrow the money; somebody else will need to pay it back.

Of course, as the years went by, more and more people could not find a place in the workforce, especially as the Environmental Laws and high workforce compensation costs started driving manufacturing overseas. Coupled with the massive entry into the workforce of women in the 1970’s meant that just to maintain a 5% unemployment rate, millions of new jobs would need to be created, something government controls made difficult for the private market.

So government picked up the slack.

And borrowed more money to pay the bill. But since only the Federal Government can consistently run at a deficit, the Feds were borrowing money and transferring it to the states, counties and cities, which are now very dependent on the federal largesse.

So this is where we’re at; the Federal Government is broke, but risks total collapse if they stop paying Unemployment Compensation, Welfare, Food Stamps, Medicare and Medicaid, and the transfer payments to the states, counties and cities. They also risk collapse if they stop paying the interest on the debt (something like 40% of the annual budget; a lot of which goes to the Social Security fund they have been-and continue to- raid), or worse, since a substantial portion of our debt is owed to China.

Everyone in Washington knows this; which is why Donkeys or Elephants in control the government grows bigger, the debt grows larger and nothing changes.

Now comes the hard part; fixing it.

First and foremost, we need jobs. Only individuals pay taxes, basically because we have nowhere else to pass them onto. Corporations don’t pay taxes; they add the cost of the tax into the product, and as long as all producers of good pay the same amount of tax, it doesn’t affect the final cost of the product in a way that makes it unsalable. And the tax is then paid by whoever purchases the product. Thus is why Value Added Taxes are so popular with governments; when the cost if your Pepsi goes up, you don’t blame the government, you blame Pepsi.

We need jobs so the individuals can pay taxes. In order to create these jobs we need to drop the minimum wage laws and curtail the EPA to 1968 levels. Yep; it will be painful, but it has to be done.

Why will people take these jobs? Because Food Stamps, Welfare and Medicaid are gone. It’s work or starve. Yep; it will be painful, but it has to be done.

Nationally our standard of living will drop. It has to. There are only two ways to make manufacturing in this country pay: Our production technology has to be capable of making our wage rate worth it as a business cost, or our wage rate has to be competitive on a world market.

We were able to live on number one for years. Our ability to have one man produce what it took 6 elsewhere could support our wages. Now the rest of the world, including China, has caught up with us. We have not been able to maintain our technological edge. We either need a massive production technology leap, akin to Henry Ford’s production line, or we need to lower our wages to an internationally competitive point. Yep; it will be painful, but it has to be done.

This will cause an across the board wage reduction. Probably not all at once, or immediately, but over the course of several years positions will start to pay less, as someone qualified and making $4.00 an hour moves into what was a $15.00 hour job to get a raise to $10.00. Or $7.00. Yep; it will be painful.

The decrease in wages will lead to a decrease in the cost of certain goods and services, in a deflationary spiral. Less money chasing an abundance of housing means housing values will decrease. Personally, I see housing at 1980 prices. Not adjusted for inflation, but actual dollar values. People will be making 1980 wages after all.

Food will remain high for a while, and certain things will become luxuries that are now commonplace in the diet. Meat for instance, and fresh fruits and vegetables. Are you ready, as a middle class American to have the same diet as your average 2nd world country? Yep; it will be painful.

And Washington knows all of this. They know that if half of what I have described comes to pass there will be violence in every corner of the nation. The chances of anyone involved getting reelected to anything will be gone.

So Congress will raise the debt ceiling, borrow more money from the Chinese and pass it around like always. Kick the issue another year or two down the road.

But just like any other problem, the further the issue is kicked down the pike, the harder it will be to fix, and the more painful the cure.

All to avoid another world war. One where both sides, and some renegades, are armed with nuclear weapons.

I’m going back to sharpening chisels. At least that has an endgame.

When they cut wood, your done.

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