• “The growing deficits are caused by ever increasing cost of the military and two wars.”
• “The immense military, bigger than [fill in the blank] causes most of the deficit.”
• “Military spending crowds out ‘investments’ in our people.”
• “Over time, Military spending has grown and grown to the point that we can no longer afford it.”

The chart compares the cost, over time, of National Defense to the cost of entitlements.

Government accountants include veterans’ benefits in the entitlement category, but we believe they belong in the military category.

The chart demonstrates that Obama’s campaign slogans are simply false, that the major growth segment of the federal government over the past half-century has been social programs.  Most of the social programs that now consume more than 65% of federal spending were created after 1960.  As spending grew each year to pay for ever expanding benefit programs the fraction of the total spent on National Defense, the federal government’s most fundamental responsibility decreased sharply.

Congress has recently enacted two bills that together call for almost $1 trillion in cuts to defense spending over ten years.  Maybe that’s the right amount.  Maybe it isn’t.  The problem is they did not begin with a review of military budget line items to discover those that might be unnecessary.  They began with a dollar amount to be cut, based on political considerations.

Anyone who has served in the military probably remembers seeing some waste.  I certainly do.  But the current, politically inspired drive doesn’t even attempt to identify waste.  It begins with a reduction in the number of soldiers and Marines.  Apparently there will be layoffs.

The chart compares  GDP growth in recent quarters with the first ten quarters of the decade of strong economic growth, prosperity and job creation that began after President Reagan’s 1982 tax cuts and deregulation initiatives.

In the forth quarter (October, November, December) of 2011 Gross Domestic Product, the value of all the goods and services the economy produced, rose 2.8%, the Commerce Department reported on Friday. This was better than the previous three quarters, but compared to typical post recession recovery periods it was disappointing at best.

Over the past 50 years quarterly growth has averaged 3.2% but has always been above average during the initial quarters of recovery from recession.  This is the first post-recession period in 66 years, since the end of World War II, with such anemic growth.  The most visible result is the continuing tragedy of high unemployment.

The economy will not replace the millions of lost jobs until much more robust growth begins.

From the first day of his Administration President Obama and his advisers promised that the biggest Keynesian “stimulus” ever attempted, in the form of Trillions in deficit spending and massive government intervention in the private sector economy would somehow bring America back to prosperity.   If Keynesian stimulus worked as Obama and the progressives promised it would, America would now be enjoying prosperity with full employment and rising wages.  Instead this recovery from recession has significantly underperformed compared to previous recoveries, especially the Reagan recovery of the 1980s.  President Reagan’s strategy was to lower taxes, deregulate and allow liberty to work.

Presidents Reagan and Obama inherited recessions that were similar in their length and severity.  By objective measures, including the unemployment rate, Reagan inherited a worse crisis in the 1980s than Obama inherited in 2009.  The current recession has become worse and longer lasting than the 80s recession because of government’s massive deficits and destructive interventions into the private sector economy.

The Bottom Line

The urgent message in this GDP report  is clear.  Congress must put an immediate end to Obama’s Keynesian experiment.  As the chart shows, quarterly GDP growth is has been intolerable under the Obama-Keynesian approach.  There is no reason to believe that continuing to run massive deficits, threaten tax increases, hyper-regulate the health insurance business,  subsidize blue-sky “green” energy schemes and restrict the production of conventional energy will ever result in prosperity.

These achievements are a testament to the courage, selflessness, and teamwork of America’s Armed Forces. At a time when too many of our institutions have let us down, they exceed all expectations. They’re not consumed with personal ambition. They don’t obsess over their differences. They focus on the mission at hand. They work together.

The troops don’t argue about their mission because the authors of the Constitution (largely scorned by Obama and the progressives) created a brilliant system of civilian control over the military so the arguments – and there are always passionate arguments about any war – take place in election campaigns and in Congress. (An exception was Obama’s Libyan operation, launched without seeking approval from Congress in order to silence dissent.)

The President skipped over the recent decade of acrimonious debates in Congress and on the campaign trail about the troops’ mission.  Indeed, Senator and Candidate Obama was one of the most bitter debaters of all, as he tried his best to bring about failure in Iraq because, as an Illinois State Senator, he had opposed the invasion.

Imagine what we could accomplish if we followed their example. Think about the America within our reach: A country that leads the world in educating its people. An America that attracts a new generation of high-tech manufacturing and high-paying jobs. A future where we’re in control of our own energy, and our security and prosperity aren’t so tied to unstable parts of the world. An economy built to last, where hard work pays off, and responsibility is rewarded.

Translation: Utopia is within reach if only those Obstinate Republicans (and even some Democrats) would follow orders like the troops do, and enact Obama’s sweeping agenda of government expansion and regulatory tyranny.  The speech continued:

We can do this. I know we can, because we’ve done it before. At the end of World War II, when another generation of heroes returned home from combat, they built the strongest economy and middle class the world has ever known.

Since the President brought it up, let’s review what happened at the end of World War II.  The American People – not the government – did indeed build the strongest economy and middle class the world has ever known. [continued below the chart]

But Obama did not mention the most important fact: That economic success coincided with the most rapid downsizing of government in US history.

To pay for the war and hyper regulation of the civilian economy, federal spending had exploded from $9 billion to $91 billion in four years.  Thirteen million young men became soldiers, sailors and Marines.  Over 100,000 women also served in the military.  Millions of civilians were employed manufacturing guns, tanks, ships, aircraft, uniforms, boots, etc.

When the war was over in 1945 the government immediately ceased buying war material and quickly discharged more than ten million from military service within two years.  Federal spending dropped 68% in three years.

A 68% spending cut now would transform our trillion dollar deficits into trillion dollar surpluses!

If President Obama and today’s political-media “economists” had been there in 1945 they would have warned that any spending cuts would spell disaster for the economy, that unemployment would skyrocket.  They would have been wrong.  The number of jobs increased by 21% over the same three years.   Never before or since have job seekers enjoyed such a sudden increase in demand for their services.

A 21% increase today would be enough new jobs for:

• All of 13.1 million currently unemployed,

Plus

• All of the 6.4 million who want jobs but are not officially classified as unemployed,

Plus

• 8.2 million more!

Today’s chronic unemployment would turn into a labor shortage.  Employers would be competing for workers.

This historic surge in employment and prosperity happened before our wise overseers in Washington created any of the following to regulate our lives:

• Department of Energy
• Department of Education
• Department of Housing and Urban Development
• Department of Transportation
• Environmental Protection Agency
• New regulatory boards and commissions mandated by Dodd-Frank
• ObamaCare to dictate the coverages and terms of all health plans

Indeed, there was massive DEregulation as the wartime rationing and price controls were lifted. There was no government “investment” in politically selected energy technologies.  This was a decade before the beginning of the Interstate highway building program.

President Obama should learn from his own post World War II example that liberty, not authoritarian government intervention, brings about prosperity.

The government has run deficits every year since the wars began, but it has also collected some $22 trillion in revenue. This Report from the Congressional Research Service lists all the costs of the wars from 2002 through 2011, totaling $1.3 trillion.

Military operations are a core responsibility of government, specifically authorized by the Constitution.  On the other hand, the government pays for hundreds of other programs and functions that are not authorized by the Constitution.  Apparently Obama determines what is and is not “paid for” based on what is and is not consistent with his latest campaign themes.

With that criteria in mind he reversed his position on the wars in his State of the Union address:

In the next few weeks, I will sign an Executive Order clearing away the red tape that slows down too many construction projects. But you [Congress] need to fund these projects. Take the money we’re no longer spending at war, use half of it to pay down our debt, and use the rest to do some nation-building right here at home.

How easy was that!  The wars weren’t paid for for ten years, but now that they’re almost over and Obama wants to pretend there is money available for a new construction initiative he acts as if the wars were  paid for.

This chart puts war spending in perspective. Assuming Constitutional functions should be paid for first, the wars were more than covered by tax revenue.

But, Obama’s deficits have been ten times as much as the annual cost of Iraq and Afghanistan.  Thus, winding down the wars can not generate funds for other purposes.  Indeed, the Administration’s own budget office projects deficits of nearly a trillion dollars every year for the next decade without any war spending.

Since his first day in office the Obama government has borrowed about 40¢ of every dollar it has spent.  We’re a very long way from a budget surplus that would generate money to pay for new spending.

When President Obama steps up to the State of the Union teleprompter Tuesday evening his challenge will be obvious: Try to convince us that our continuing economic stress results from too much liberty, that government, rather than individuals, small businesses and corporations should make more of the economic decisions and “invest” more of the resources.

These ideas will be wrapped in emotionally loaded, focus-group tested phrases about the middle class and “fairness.”  He’ll call on “the rich” to “do their fair share,” code for a  heavier tax burden and a more invasive regulatory burden on businesses, entrepreneurs, and investors.

One of Obama’s likely State of the Union bragging points will be “success” in promoting his “new energy economy,” based on government “investments.”  But in Obama’s world a  government investment is not limited to putting a competitive product in the market place, like a new computer or cell phone, giving customers another option.

Because Obama’s “investments” are prohibitively expensive and therefore uncompetitive energy sources he must, at the same time, reduce the supply and drive up the cost of conventional energy sources.

Just last week Obama once again exercised illegitimate, unconstitutional power to block construction of the Keystone XL oil pipeline, a project that would have been funded entirely by private investments, would have created tens of thousands of jobs, and would have reduced the price of energy in the future by bringing crude oil from Canada to existing refineries in Oklahoma and Texas.  As the fact sheet shows, gasoline has doubled in price in three years and there is no reason to believe it will go down as long as government continues to distort the energy market.

Of course there will be no mention of Solyndra, Obama’s half-billion dollar “investment” in a solar power scam gone sour.

The elephant in the room on State of the Union night will be ObamaCare, the President’s most consequential legislative achievement, and the one he almost never mentions in public.  He probably won’t want to sour the festive mood in the House Chamber by attempting to justify it.   ObamaCare is a major cause of our economic hardships because employers and investors are reluctant to risk their capital to expand and create more jobs until they can better understand its costs and evolving, regulatory horrors.

So far health insurance prices have gone up, and long forgotten by the media and the Washington establishment are the promises Obama made dozens of times in dozens of forums:

• If you like your current health plan you can keep it
• ObamaCare will save every family an average of $2,500.

Some 1,400 politically connected companies and unions have been granted temporary waivers from the law’s more odious requirements.  Most of the mandates insurance companies will be compelled to incorporate into their policies and budgets do not become effective until 2014 so it isn’t possible to know how high prices will go.

Barack Obama loves making speeches.  The State of the Union is a majestic showcase for a President to speak before a joint session of Congress, continuously interrupted by applause from partisans seated before him in the historic hall.  He has a staff of talented speech writers will pick just the right words and phrases to smear a thick coat of lipstick on the pig that is his Presidency.  But even with these advantages he must be reluctant to be the front man for such massive failure.

As the State Department made clear last month, the rushed and arbitrary deadline insisted on by Congressional Republicans prevented a full assessment of the pipeline’s impact, especially the health and safety of the American people, as well as our environment.

The timeline below was copied from, and still appears today, on the State Department website. Don’t expect it to remain there very long because it contradicts Obama’s assertion. We added the red arrow to point out that the timeline apparently has not been updated since August.

Under current law, the company that wants to build a pipeline across an international border, TransCanada Keystone Pipeline, LP (Keystone) must apply for a “Presidential Permit.”  Keystone submitted it’s application 39 months ago, in September, 2008.  The permit review process shown in the timeline is set forth in a Presidential Executive Order issued by President Bush in 2004 to “expedite” approval.  President Obama has the authority to change or amend any Executive Order issued by any previous President but he has not amended this one.

The timeline shows all required processes, approvals and comment periods have been completed and a final State Department decision should have been issued in December.  But in November the President announced that he would delay a decision until 2013 to allow more time for review.  Not even the White House spin machine could silence the snorts of derision from all across the political-media establishment dismissing the delay as a cowardly act to avoid blow-back from one of two powerful, wealthy special interests whose support Obama needs in the 2012 campaign:

1. Environmental pressure groups who always oppose any and all efforts to increase the supply of oil, and,
2. Labor unions who would collect millions in dues from thousands of workers hired to build the pipeline.

This pipeline is the means for American oil refineries to access millions of barrels of Canadian crude oil, lowering domestic energy costs and reducing oil imports from the volatile Middle East and Hugo Chavez’s Venezuela which is now an ally of Iran.  Cheaper energy in America, would help American manufacturing companies Vs their foreign competitors.

Jobs

Pipeline construction would require hundreds of millions dollars worth of equipment and materials, mostly purchased from American companies, creating an estimated 7,000 jobs.  There would be almost 13,000 direct, on-site construction jobs and thousands more ancillary jobs.

Safety and Environmental Concerns

Legislation passed in December by the Republican controlled House and the Democratic controlled Senate required Obama to make a decision by the end of February, two months past the deadline in the timeline above.  Obama claims he had to decline the pipeline permit application because the new deadline…

…prevented a full assessment of the pipeline’s impact, especially the health and safety of the American people, as well as our environment.

However the required Environment Impact Statement was completed on schedule and published back in August.  Included is a full analysis on safety and environmental concerns.   It turns out that In 2009 Keystone applied to The Pipeline and Hazardous Materials Safety Administration (PHMSA), for special permission to operate the pipeline at slightly higher pressure than allowed under existing regulations.  In response, the regulators worked up “Special Conditions.”  A year later Keystone decided to withdraw its application for the higher pressure permit, but agreed to comply with the enhanced regulations anyway.  As a result, in the words of the State Department Environmental Impact Statement, this pipeline…

“…would have a degree of safety greater than any typically constructed domestic oil pipeline system under current regulations and a degree of safety along the entire length of the pipeline system that would be similar to that required in high consequence areas as defined in the regulations.”

There are millions of miles of existing pipelines in America.  Keystone would be the safest of all.

Obviously, President Obama’s only consideration was political.   He believes preventing construction of this pipeline will benefit his reelection prospects more than allowing it to be built.

Considering the sum total of Gingrich’s life, he has done more than almost any modern politician to advance the cause of  limited government and greater economic liberty.  For these accomplishments, and for his sincere contrition, he has earned a measure of forgiveness for some of his sins, including his inexplicable but apparently expired romance with the global warming/climate change movement, his association with Freddie Mac and his personal moral failings.

But with his attack on Mitt Romney’s tenure at Bain Capital Mr. Gingrich has crossed the line.  A week of  innuendo ended with release of a half-hour video smear of Romney and Bain.  The subtle-as-a-jackhammer video includes all the lurid, emotion-evoking techniques ever used in the most vile, leftist propaganda.

To the right are some samples of the  2 – 5 second, grainy, flickering, clips showing:

• an attache case full of cash, like the one the hit man receives as payment in a movie about the mob;
• several vacant and boarded-up industrial buildings (with no connection to Romney);
• a junk yard;
• an ugly closeup of a man (not Romney) smoking a cigar;
• a closeup of someone’s hands counting hundred dollar bills;
• scary winter snow storms (Did Bain control the weather?);
• Unflattering, black and white photos of Romney, with grainy effects added to make him look sinister, with the voice-over alleging he defrauded investors and gleefully, sadistically laid off hapless employees;
• absurdly out of context, Romney soundbites, five to eight word sentence fragments snipped from TV interviews and speeches.

These crude devices surround brief clips of individuals who lost jobs, describing their misery and blaming Romney.  There is of course no effort whatsoever to present relevant facts or data or context.  And no testimony from people whose jobs were at risk but saved by an investment from Bain Capital.

Appearing on Sean Hannity’s radio show Gingrich said, in part:

There are three or four places where the record is pretty bad and [Romney] needs to explain…I’m totally pro free enterprise, I’m totally pro entrepreneur, I’m totally pro the Capitalist model.  It’s the only one that works. We’re not talking about defending the model. were talking about the character, the judgment of one particular person who seeks to be the President…I’m not questioning free enterprise…It’s his character, his judgment his decisions that I find it interesting that he’s so unwilling to talk about.

But the video does attack free enterprise by ignoring the way markets discipline business owners and investors.  The video supports the false narrative of the Left, that business owners are not subject to market discipline and thus are free to abuse customers, investors and employees without consequences.  But no business owner can survive and attract more investors by buying a business and then willfully destroying it.

In fact if this video weren’t such naked propaganda, if it were a bit more clever, one might mistake it for the Obama campaign’s 2012 strategy of shifting from hope and change to demonizing American business as the weapon of “the top one percent.”

When Romney was in charge of Bain Capital it was (and still is) a private equity (PE) firm. PE firms combine the resources of several investors to buy a business and manage it, usually for several years.  The goal is to make the business more valuable so it can be sold for a gain, which is then split between the PE firm and the investors.  Businesses become more valuable when their sales, profits and future potential improve.  More often than not value-adding improvements involve hiring additional employees.  But sometimes there are obsolete product lines, inefficient production processes or unprofitable divisions that reduce the value of the business and must be streamlined or shut down, resulting in layoffs.

Sometimes PE firms buy seriously troubled businesses that are at risk of imminent bankruptcy that would force layoffs of the entire work force.  The PE firm will employ some combination of investment of new capital and limited downsizing/layoffs to bring the business back to profitability, thus preserving the jobs of the remaining workforce.

It’s not easy to find objective data about Bain’s investments during Romney’s tenure, party because a private equity firm was not required to publish quarterly financials as are publicly traded corporations.  But the only reasonable conclusion one can reach from what information is available is that Bain took risks on dozens of companies and tried to profit from improving their performance.

Drew, an adviser, occasional contributor, and good friend to Liberty Works is a partner in another private equity firm and knows the business from an insider’s perspective.  When asked his opinion of Bain he replied:

The truth is Bain is a tremendously successful and well regarded PE firm and was one of the few that employed the combination of operational and financial expertise.  Great returns.  We all wanted to work for Bain.  It will never ever be portrayed in the press correctly because of the narrow focus on a few unsuccessful transactions, but Bain was and is one of the best.

Obviously, people who are laid off and suffer varying degrees of hardship may become bitter.   The former employees in the video are posed with insufficient light and other video techniques used by propagandists so they come across as pathetic sad sacks.

The underlying message is that the net result of business operations in a free market is misery.  The viewer is left with the impression not only that Romney is a bad man but there is too much liberty in America, and businesses must suffer even more draconian regulation, justified by the false promise that bureaucratic control can somehow keep them all profitable and thus make layoffs unnecessary.

On a personal level, I’m deeply troubled by the GOP primary campaign and Gingrich’s attacks.  I realize he has been the target of Romney’s ruthless and relentless smear campaign, sanitized by the media that gave it the innocuous “negative ad” label.  But Romney’s political record is target rich with material for critical ads.  There was no reason to give aid and comfort to the anti-free market progressives and their current leader, Barack Obama.

Unreported by the media was the misery of the men and women whose individual lives make up the tragic statistic that lowered the unemployment rate.

Here is how the Labor Department computes the unemployment percentage:

Not everyone who is without a job should be classified as “unemployed.”  Some adults, such as stay-at-home parents and college students don’t want jobs.  Thus, to be counted as “unemployed” in the monthly government survey one must be actively looking for a job.

To be counted as part of the labor force one must either have a job or qualify as “unemployed” by actively seeking a job.

There are two possible routes to a lower unemployment rate:

Route 1.  Expand Job Opportunities: Business owners and investors take risks and generate start-ups, innovations and expansions, creating enough new jobs to keep up with the average 125,000 per month growth in the working age population and to replace some of the millions of jobs lost in the recession.   Government’s role is to enhance and protect economic liberty by removing bureaucratic, regulatory barriers and reducing taxes.

OR

Route 2.  Downsize the labor force by demoralizing  job seekers: People who have lost their jobs become so discouraged they quit looking for employment and are thus no longer classified as unemployed and are no longer included in the labor force.   Government’s role is always the same: In the name of benefits to the environment or to the poor or to the middle class or to implement a politicians vision of a “new energy economy” it erects regulatory barriers and tax disincentives that block or discourage investors and small business employers.

Guess which is the Obamanomics route.

These two charts track the unemployment rate and the size of the labor force.

The upper chart shows the first 26 months of the current recovery.  The unemployment rate has declined from 10.1% to 8.5%.  But the size of the labor force is virtually unchanged, even though the working age population has grown, because millions of unemployed people have become discouraged and quit looking for jobs.

The lower chart tracks the first 25 months of the Reagan recovery of the 1980s. President Reagan inherited a sick economy and a deep recession that by most measures was worse than what President Obama inherited.  Yet, as the chart shows, there was a steep drop in the unemployment rate even as the labor force grew by 4.3 million!  People did not give up looking for jobs during the Reagan boom because there was robust growth in the economy and employers were creating hundreds of thousands of jobs every month.

Since the beginning of 2008 the working age population has grown by 7.2 million people.  Yet the labor force which is normally about two-thirds of the working age population has shrunk over the same period by 49,000.

Thus, 4.8 million men and women who should be included in the unemployment rate calculation as both in the labor force and unemployed are not counted at all because they have become t0o discouraged to look for jobs.

If those men and women were included in the unemployment rate calculation the December rate would have been 11.3%, higher than any time since 1940.

The upper, Obama chart represents despair as job growth fails to keep up with population growth and millions of working-age people drop out of the labor force.  The lower, Reagan chart is what a successful economic recovery looks like, with employers who are free to grow and expand, adding jobs at a much faster rate than the growth of the working age population.

The jobs data from the eighties confirms the success of the Reagan approach:

• Tax cuts
• Deregulation
• Allowing insolvent businesses to be liquidated in bankruptcy

The current jobs data reflects the failure of the Obama approach:

• Some tax increases have already begun and major increases that will hit small business are scheduled to begin in 12 months;
• New ObamaCare mandates and regulations that are still being written will distress employers over the next three years;
• New financial regulations are restrict bank lending to small business;
• Obama’s energy policies and environmental regulations are designed to restrict domestic production of oil, coal and natural gas, increasing the price of energy;
• Bailouts of insolvent banks and companies have benefited politically connected executives and unions at the expense of healthy businesses.

There is a potential downside that could blow up Obama’s propaganda campaign.  If the “good news” about the unemployment rate encourages several million people to come back into the labor force and seek  jobs, the number officially classified as “unemployed” will increase and the unemployment rate will tick back up as the November election approaches.

Hopefully someone will show Mr. Krugman the data displayed in this chart.  [continued below the chart]

Of all the recession/recovery cycles over the past five decades the Obama spending surge was by far the largest, 303% more than the second largest increase in 2002.  Yet the current, post-recession growth in private sector jobs turns out to be the smallest.  The second smallest coincided with the second largest spending increase.  In stark contradiction with Krugman/Keynesian dogma there was greater job growth in the 1960-62 cycle in the face of spending cuts than in the current cycle with it’s unprecedented increase.

Krugman claims that “those of us who did the math knew right from the beginning” knew that the Obama spending binge was “halfhearted,” and not nearly enough.  But he offers no statistical record to support his assertion that the American economy would have grown more rapidly had government spending surged even more.

Krgman is right about one thing:

President Barack Obama has finally gone back to fighting against premature austerity — and he seems to be winning the political battle.

Spending in 2011 went up, not down, in spite of all the fury over debt ceilings and possible shut-downs.  There are no plans for spending cuts in 2012 or any future year.  The political establishment has made Obama’s towering spending the new “baseline” or the floor upon which, according to the government’s loony budgeting processes, future annual increases will be built every year, forever, or until the world is no longer willing to loan America any money and hyper inflation prevents the Federal Reserve from creating any more money.

Astoundingly Krugman tries to portray himself and other Keynesian believers as the underdogs:

In declaring Keynesian economics vindicated, I am, of course, at odds with conventional wisdom.

This is so absurd it’s comical!  The political-media conventional wisdom is, if nothing else, nearly unanimous in the assertion that government spending, especially deficit spending “stimulates” prosperity and job creation.  Conventional Wisdom authored the Obama stimulus with it’s promise of thousands of “shovel ready projects” that would sop up all of America’s surplus construction workers, filling their pockets with cash which they would shower upon the rest of us, creating 3-4 million new jobs immediately and driving unemployment below 6% by the end of 2011.

Krugman concludes with a bit of sarcasm:

One of these years we might actually end up taking Keynes’ advice, which is every bit as valid now as it was 75 years ago.

Where, Mr. Krugman is there any data to back up your sarcasm?  Please show us some examples of U.S. government borrowing and spending escalation that was even larger than Obama’s 2009-11 tsunami, that brought about full employment and prosperity?  We’re waiting.

First the debt. [continued below the chart]

In 2011 Government debt grew just over $1 trillion.  The President has just notified Congress that once again, he has hit the debt ceiling and must have authorization to borrow another $1.2 Trillion.  By the end of March President Obama will have increased the debt as much in three years and two months as President Bush did in eight years.

The government’s Soaring debt is driven by an unprecedented surge in spending.  Obama and the Democratic Congress increased 2009 spending 18% over 2008, the biggest one year jump since the military build up for the Korean War in 1952.  The biggest component of the increase was the so-called “stimulus” that Obama promised would create millions of jobs and hold unemployment below 8%.  It was supposed to be temporary.  But as of 2011 this new, higher level of spending is now the “baseline” or the spending floor, upon which perpetual future spending increases will be built.  [continued below chart]As long as the existing budgeting process continues spending will grow every year from now on, mostly on auto-pilot, until we reach a Greece-style crisis and nobody in the world is willing to loan the government any more money.

Gas prices increased again in 2011, the intended effect of the Obama Administration’s various restrictions on the production of crude oil.

The long term goal is to raise the price of petroleum fuels so high that Obama’s “green” energy sources become cost competitive.  Just a month ago the President used his regulatory authority to block a the Keystone XL pipeline that would have brought Canadian crude oil to American refineries in Texas. creating tens of thousands of jobs along the way.  This month gasoline is 102% higher than it was when Obama was sworn in, January, 2009.

Recently the President told CBS News that he has been more successful than any previous President with the possible exceptions of Abraham Lincoln, Franklin Roosevelt and Lyndon Johnson.  His claim calls for  a comparison of his third year with the third year of to a truly successful President, Ronald Reagan, who like Obama inherited a deep – by most measures even worse – recession.

First, jobs.  Obama has claimed 2011 as a success in creating private sector jobs. [continued below chart]

But, as the chart shows the Reagan era produced much more robust job growth.

Economic growth took off in Reagan’s third year as his policies liberated the private sector from high taxes, inflation, record high interest rates and oppressive regulations.  The Obama strategies of attempting to diminish liberty and rule over the private sector with taxes, subsidies and bailouts for politically connected unions and companies, and a tsunami of new regulations have dragged down the economy, depressing growth.  [Continued below chart]

The GDP report for the fourth quarter of 2011 will be published on January 27 and we’ll complete the chart then.  For now, government and Wall Street economists are predicting about 3%, well below the fourth quarter of Reagan’s third year.

Luke 1:

26-28 God sent the angel Gabriel to the Galilean village of Nazareth to a virgin engaged to be married to a man descended from David. His name was Joseph, and the virgin’s name, Mary. Upon entering, Gabriel greeted her:

“Good morning!
You’re beautiful with God’s beauty,
Beautiful inside and out!
God be with you.”

^29-33She was thoroughly shaken, wondering what was behind a greeting like that. But the angel assured her, “Mary, you have nothing to fear. God has a surprise for you: You will become pregnant and give birth to a son and call his name Jesus.

He will be great,
be called ‘Son of the Highest.’
The Lord God will give him
the throne of his father David;
He will rule Jacob’s house forever—
no end, ever, to his kingdom.”

³⁴Mary said to the angel, “But how? I’ve never slept with a man.”

³⁵The angel answered,

The Holy Spirit will come upon you,
the power of the Highest hover over you;
Therefore, the child you bring to birth
will be called Holy, Son of God.

Luke 2:

1-5: About that time Caesar Augustus ordered a census to be taken  throughout the Empire. This was the first census when Quirinius was governor of Syria. Everyone had to travel to his own ancestral hometown to be accounted for. So Joseph went from the Galilean town of Nazareth up to Bethlehem in Judah, David’s town, for the census. As a descendant of David, he had to go there. He went with Mary, his fiancée, who was pregnant.

6-7: While they were there, the time came for her to give birth. She gave birth to a son, her firstborn. She wrapped him in a blanket and laid him in a manger, because there was no room in the hostel.

8-12: There were sheepherders camping in the neighborhood. They had set night watches over their sheep. Suddenly, God’s angel stood among them and God’s glory blazed around them. They were terrified. The angel said, “Don’t be afraid. I’m here to announce a great and joyful event that is meant for everybody, worldwide: A Savior has just been born in David’s town, a Savior who is Messiah and Master. This is what you’re to look for: a baby wrapped in a blanket and lying in a manger.”

13-14: At once the angel was joined by a huge angelic choir singing God’s praises:

Glory to God in the heavenly heights,

Peace to all men and women on earth who please him.

15-18: As the angel choir withdrew into heaven, the sheepherders talked it over. “Let’s get over to Bethlehem as fast as we can and see for ourselves what God has revealed to us.” They left, running, and found Mary and Joseph, and the baby lying in the manger. Seeing was believing. They told everyone they met what the angels had said about this child. All who heard the sheepherders were impressed.

19-20: Mary kept all these things to herself, holding them dear, deep within herself. The sheepherders returned and let loose, glorifying and praising God for everything they had heard and seen. It turned out exactly the way they’d been told!

If you followed this week’s drama in Washington you know the House passed a bill that would extend the temporary payroll tax reduction for another year.  The Senate responded with a bill that would extend it for only two months.  Republicans finally rolled over and passed the Senate bill ensuring that we’ll endure another two months of controversy over the same issue.

Two months is better for Obama and the Democrats because the issue serves as a pretext for them to renew demands for  a permanent tax hike on “the rich,” mostly small business employers, to “pay for” the temporary payroll tax reduction.  Obama wants to divert blame for America’s continuing economic crisis from his massive deficits and bureaucratic interference in the private economy to “the rich.”

A year ago this month was the “Lame Duck Session” of Congress.  Outraged voters had just swept out the House Democrats’ 98 seat majority, replacing it with a new 43 seat Republican majority.   But last December Democrats were still in control until the new Congress began in January.  One of their final acts was a reduction in the Social Security payroll tax paid by employees from 6.2% to 4.2% temporarily, for one year.

A month ago Obama began howling that the expiration of the payroll tax discount – as required by the legislation he and the Democrats enacted when they still held commanding majorities – would be “a tax increase on hard working middle class Americans,” to be blamed on heartless Republicans. 

On Thursday Obama ramped up the theatrics and gave us a preview of his New Year strategy for diverting attention away from his manifest failures.  He stepped to the microphones to prove he identifies with the struggles of the helpless against those cruel Republican Scrooges (transcript).  His tone dripping with pious solicitude, he began:

We’ve been doing everything we can to make sure that 160 million working Americans aren’t hit with a Holiday tax increase on January First…If you’re a family making about $50,000 a year this is a tax cut that  amounts to about a thousand dollars a year.  That’s about forty bucks out of every paycheck.

So far the President’s math is correct, since most employees are paid either bi-weekly or semi-monthly.

It may be that there are some folks in the House who refuse to vote for this compromise because they don’t think forty bucks is a lot of money.  But anyone who knows what it’s like to stretch a budget knows that at the end of the week or the end of the month forty dollars can make all the difference in the world…

So on Tuesday we asked folks to tell us what it would be like to lose forty bucks every week.

Wait a minute! “Every week?”  He just changed it from $40 out of every paycheck to $40 every week! But the temporary tax cut is worth only $19 every week to his hypothetical $50,000 per year family.

You’d have to earn $104,000 a year for Obama’s Social Security tax markdown to be worth $40 every week.

Obama then quoted some of the emails from his “folks” about how they would deal with the loss of $40 per week.

Joseph from New Jersey would have to sacrifice the occasional pizza night with his daughters.  My 16 year old twins will be out of the house soon – I’ll miss this.

Richard from Rhode Island wrote to tell us that having an extra $40 in his check buys enough heating oil to keep his family warm for three nights. In his words, and I’m quoting, If someone doesn’t think that 12 gallons of heating oil is important invite them to spend three nights in an unheated home.

Pete from Wisconsin told us about driving more than 200 miles each week to keep his father in law company in a nursing home.  $40  out of his paycheck would mean that he could only make three trips instead of four.

Dinner out for  child who’s home for Christmas, a pair of shoes – these are the things that are at stake for millions of Americans.  They matter a lot.

Obviously these emails are absurd.  If you earn $104,000 and have to give up $40 per week, are you really going to have to deny your kids a pizza or a pair of shoes?  Will you shiver for three nights without heating oil?

Of course, there are some folks to whom $40 every week would be make a real difference:

• A hotel maid who works full time for $8.50 per hour
• A construction worker who has been cut back to half time work at $17 per hour
• A self employed business owner whose customers were hammered by the recession and now barely survives by depleting his savings.  He generated only $17,700 profit this year after paying his employees and the employer’s half of the payroll tax which was not reduced by the Obama payroll tax markdown.

To each of these people Obama’s temporary payroll tax cut is worth not $40 but $6.80 per week.

But much of the media have already begun to help Obama plant a false perception in the minds of uninformed voters that Republicans would deny everyone $40 per week.  (For example, see the headline here.)

Obama knows that informed voters will figure out the deception.  But he doesn’t care about informed voters.  They won’t vote for him anyway.

Mitt Romney’s criteria, for deciding which government programs to eliminate is a meaningless sham.

His editorial in USA Today says a lot that should please liberty loving people who long to diminish the power and cost of the federal government.  He is appropriately critical of President Obama for “one of the most dramatic expansions in Washinton’s power in our nation”s history.”  He reminds us that the 2012 election will be “of great moment.”  Voters will decide if America is to be “an Entitlement Society” or an Opportunity Society.”

In an Entitlement Society, government provides every citizen the same or similar rewards, regardless of education, effort and willingness to innovate, pioneer or take risk. In an Opportunity Society, free people living under a limited government choose whether or not to pursue education, engage in hard work, and pursue the passion of their ideas and dreams. If they succeed, they merit the rewards they are able to enjoy.

So far, so good. Obama’s drive to implement the progressive movement’s dream if an Entitlement Society has culminated in the current, intractable economic crisis.  The 2012 election may indeed be our last chance to reverse the trend.  But in what is perhaps the most important paragraph, Romney’s action plan is a deep disappointment.

The first step in returning to an Opportunity Society is scaling back our vast federal government. I will put every single government program to a simple test: Is this program so critical to our nation’s future that we should borrow money from China to pay for it?

Romney hopes to appeal to the reader’s emotions with what seems like bold and decisive criteria for sorting unworthy from “critical” programs.   Unfortunately it’s a trick.  It’s the same trick Barack Obama used to win the support of millions of voters who are now appalled by his Presidency.

In the prologue to his second book Barack Obama wrote what would become the conceptual foundation of his Presidential campaign:

“…I am new enough on the national political scene that I serve as a blank screen on which people of vastly different political stripes project their own views.”

Candidate Obama went on to exploit his blank screen concept with promises of undefined “change.”  Thus, Millions ended up projecting their own views upon his blank screen and then voting for those views without realizing Obama had not disclosed his views or plans for controlling our lives from Washington.

If the Romney version of the trick succeeds he’ll pick up primary votes from people who don’t realize their list of non-critical programs to defund comes not from Romney, but from inside their own heads.

Romney’s critical-for-our-nation’s-future criteria is meaningless because Each one of hundreds of federal programs has a lobbyist, a constituency of dependents, and friends in Congress who will summon up compelling, emotion-driven reasons why it’s critical to our nation’s future.  Thus, Romney’s criteria will not shrink government, and will not result in any significant change from Obama’s policies.

The Founders vision, as expressed in the Declaration of Independence and the Constitution, is that The People, not the government or its bureaucrats, are “the nation.”  The People decide for themselves, as individuals, what is critical to their future.  This is how liberty works!

The founders gave these matters a lot of thought and wrote a Constitution limiting the powers of government to a very few that were “enumerated” in Article I, Section 8.  After the Constitution was ratified by the states and became the law of the land many citizens expressed fear that the government would overreach and take on powers not enumerated.  So the founders followed up two years later with the Tenth Amendment to make sure there was no doubt in anyone’s mind that…

“The powers not delegated to the United States by the Constitution, nor prohibited by it to the States, are reserved to the States respectively, or to the people.”

The problem today is that over the past century the government has assumed upon itself myriad powers and functions not authorized by the Constitution.

The best campaign promise Romney or any candidate could make would be to start phasing out or canceling  Unconstitutional programs in an orderly fashion, shrinking government back to it’s core Constitutional functions within a specified number of years.  Of course we won’t hear that promise because each candidate is afraid of the inevitable blow-back from the media and his adversaries as soon as he mentions any specific program by name.

Even Ron Paul, who tries to sound like a true believer seems to favor hanging on to some of the largest programs that are clearly Unconstitutional.  For example, instead of offering a plan to wind down and phase out Medicaid and Medicare over time, Paul promises that taxes collected for those programs won’t be spent elsewhere.  This promise is utterly meaningless because no tax is collected specifically for Medicaid, and Medicare already spends every dollar of its dedicated tax plus billions more from the general fund.

If Romney or any other candidate were serious about liberty and smaller government he/she would hold up the Constitution as the criteria for deciding which programs to eliminate.

Encouraging voters to blame their anxieties, fears and financial stress on the rich is one of progressive movement’s oldest and crudest campaign themes.

Obama can probably count on more enthusiasm from his emotion-driven base if he succeeds with millionaire tax increases.  But a review of history does not lead to the conclusion that government would collect more tax revenue or that non-millionaires who need jobs would be better off.  In fact, the opposite is more likely.

The chart above tracks both the effective tax rate and total tax revenue from millionaires who, like most of us pay taxes at different rates, for different categories of income.  One’s effective tax rate is the total dollar amount of tax paid (at various rates) divided by adjusted gross income.

The chart shows that tax revenue was falling before, and then increased dramatically after the Bush tax rates were enacted in 2003.   As the red line shows, the average, effective tax rate paid by all millionaires went down because the Bush tax cuts of 2003:

• lowered the top tax bracket rate for “ordinary income” (salaries and business profits) from 39.6% to 35%
• Lowered the top rate for capital gains from 20% to 15%
• Lowered the top rate for stock dividends from 39.6 to 15%.

But the rest of the story, as the above chart shows, is that the government collected more, not less tax revenue from taxpayers with million-dollar-plus incomes.

The “Bush tax cuts” were enacted in 2003 and are still in effect.  Revenue from millionaires grew an astonishing 128% from 2002 to 2007.  In 2007 more tax revenue was collected from millionaires than any previous year ever.

Then the recession hit and from 2007 to 2009 the number of taxpayers with incomes over $1 million dropped by 40%.   Revenue from millionaires fell by 43% but was still more than had been collected in 2002, the year before the current tax rates were enacted.

So what do Obama and his progressive friends want?  Shouldn’t they want to maximize tax revenue to the government to pay for all their various programs?  Shouldn’t they embrace the current tax rates as – to use one of their favorite words for government policy – “smart”?

Revenue from millionaires went up rather than down after the tax rates were lowered because:

• The capital gains tax is voluntary.  It comes due only when an asset that has appreciated in value is sold.  Obviously, people are more likely to sell when the tax is lower.
• Stock dividends are the investors’ share of corporate profits remaining after payment of corporate income tax which is usually 35%.  The investor’s individual tax is in addition to the 35%.  When the individual tax rate on dividends was higher companies paid smaller dividends or no dividend at all because investors wanted to avoid taxation and preferred that profits to be deployed in ways that might enhance the market value of the stock.  After the individual rate was reduced investors wanted stocks that paid dividends and companies responded by paying more to attract those investors.  Thus, the government is now collecting taxes on dividend income that did not exist when tax rates were higher and would disappear if the rates went back up.

In addition to generating more revenue to the government, lower tax rates on dividends and capital gains also benefit the economy in general and those who seek jobs in particular:

• When people sell an asset they look for new investments for the funds they receive, including business start-ups and business expansions that generate jobs.  If the capital gains tax rate is higher they are less likely to sell and those new start-ups are less likely to come into existence.
• When investors receive dividends they seek new investment opportunities for those funds, including job creating business start-ups and expansions.

By the way, taxpayers in all brackets pay lower rates on capital gains and dividends than they do on ordinary income.  In fact capital gains are tax free for taxpayers whose ordinary income rate is 15%, which would include most families who earn less than about $80,000, and some who earn even more.

Finally, the chart below tracks jobs and millionaire tax rates.  In 2007 there were more jobs than ever before at the same time millionaire tax rates reached their lowest.

As we disclosed in our previous post, fully 76% of millionaires are owners of small businesses. Increasing their taxes leaves them with less to invest in job creation.  History shows the most likely results of a surtax on millionaires will be less tax revenue and fewer jobs.  So why would Obama and the Democrats bet their futures on campaigning for such increases? We can only assume their pollsters tell him they’ll will win more votes by appealing to envy and resentment than by revealing the truth.

Senate Republicans…oppose our plan [for] a tiny sur-tax on on a tiny fraction of America’s highet earners…Republicans call our plan a tax on job creators, but I say so-called job creators…Millionaire Job creators are like Unicorns – they don’t exist.  That’s because only a tiny fraction of people who make over a million dollars, probably less than one percent, are actually business owners.

The pie chart displays data available to anyone who takes the time to look on the IRS website.  Seventy six percent of taxpayers who reported more than $1 million in adjusted gross income were owners of small businesses that must report income and expenses on the owners’ personal tax return.

There are only two possibilities:

• The most likely possibility is that Reid is fully aware of this IRS data and simply lied through his teeth.
• The other possibility is that Harry Reid, Majority Leader of the Senate, arguably the second or  third most powerful position in Washington really is ignorant of the truth and repeated something he heard from an unreliable source (MSNBC?).

Either way, he is wrong.  Surprisingly he did not repeat the economic theory of the political-media establishment, that a tax hike on small business owners would have no effect on job creation.  Apparently, the Democrats have polling data that tells them what is only logical, that a tax increase transfers resources from the business owner to the government, making her less able to add new employees to her payroll.