I am often amazed by the amount of disinformation that is spread by politicians, activist organizations and members of the media. Today we’re going to look at the fuzzy math behind the Medicare debate. But before we get to Medicare, there are a couple other concepts we need to understand.

The Federal Budget
We have recently discussed how raising taxes will not fix our federal budget problems. It’s important to know how our money is spent, and the impact the entitlement programs have on the budget. Let’s split the budget info four categories:

1. Mandatory Spending: The ONLY spending that is truly mandatory is servicing the debt.
2. Entitlement Programs: social security, Medicare and Medicaid.
3. National Defense
4. Everything Else: This is often referred to a “non-military discretionary spending” but I don’t like that phrase. In my opinion, entitlements should also be considered “discretionary spending”.

Keep in mind the recent disagreements between the two parties in passing a budget, and the discussions of what can be cut from “discretionary spending”. They’re arguing over pennies. The reality is this — if we reduce “Everything Else” (the “non-military discretionary spending”) to $0, we would still be running a deficit of more than a $1 trillion this year. Reducing spending on an assortment of “discretionary” programs cannot fix the problem. And entitlements will only continue to grow  — both in a literal sense, and as a proportion of our federal budget. There is no path to fiscal responsibility that does not include reforming military spending and entitlement programs. (Here’s a good read on Politifact about the budget.)

ObamaCare Math
Now before we dive into Medicare, we also have to look at the math behind ObamaCare because it’s directly related to the recent discussions on the solvency of Medicare. According to its supporters, ObamaCare has been estimated to cost $1 trillion over the first ten years. To pay for ObamaCare, Congress plans to reduce payments to Medicare by $500 billion, and increase taxes by $500 billion, over these same ten years. I have said all along that this math is bad. That ObamaCare will cost more than $1 trillion. That Congress will not achieve $500 billion in cuts to Medicare. And that we would not likely see $500 billion generated in new tax revenues. But for today, that’s beside the point. Let’s assume that all of these numbers are golden. That we can and will pay for the first ten years of ObamaCare as explained through these cuts in Medicare and increased taxes.

So what does this have to do with Medicare math? Everything.

Medicare Solvency
As of today, the federal government receives more in Medicare tax revenues than it pays out in Medicare coverage. But as we move forward, this will no longer be true. We will continue to have a smaller percentage of people paying into the system with their Medicare taxes, and an increasing number of people receiving Medicare benefits. Expenses will soon surpass revenues.

People who oppose Medicare reform point out that the CBO says that ObamaCare extends the solvency of Medicare. That Medicare is not an impending problem and does not need to be fixed. But this is an inaccurate portrayal of what is going on, and what the CBO has said.

If you ONLY look at Medicare expenses and revenues generated from Medicare taxes, then we have indeed extended the solvency of Medicare with ObamaCare. It will take longer for Medicare to become insolvent — meaning that we’re paying out more in services than we’re bringing in in taxes. But that’s if you don’t use these savings and revenues on anything else. You can’t pay for ObamaCare AND use this money for Medicare. This is clarified by the CBO in this memo. Here’s the key part of the explanation:

The key point is that the savings to the HI trust fund under the PPACA would be received by the government only once, so they cannot be set aside to pay for future Medicare spending and, at the same time, pay for current spending on other parts of the legislation or on other programs. Trust fund accounting shows the magnitude of the savings within the trust fund, and those savings indeed improve the solvency of that fund; however, that accounting ignores the burden that would be faced by the rest of the government later in redeeming the bonds held by the trust fund. Unified budget accounting shows that the majority of the HI trust fund savings would be used to pay for other spending under the PPACA and would not enhance the ability of the government to redeem the bonds credited to the trust fund to pay for future Medicare benefits. To describe the full amount of HI trust fund savings as both improving the government’s ability to pay future Medicare benefits and financing new spending outside of Medicare would essentially double-count a large share of those savings and thus overstate the improvement in the government’s fiscal position.

So you can either use this money to pay for Medicare OR you can use this money to pay for ObamaCare. But it cannot be used for both. So either we have not extended the solvency of Medicare, or a significant portion of ObamaCare is unfunded. Take your pick.

Medicare Reform
Medicare under its current form will soon become insolvent and must be reformed. Is the Paul Ryan plan a good plan for fixing Medicare? I don’t know yet. I’m still trying to fully understand it. What I can tell you is that Ryan is well intentioned. Tackling entitlements is risky politically, and may cost the Republicans in 2012. Ryan and the Republicans will continue to be demonized and demagogued (I’m not sure that’s actually a word but I like it) over Medicare.

The arguments that are being made to oppose Medicare reform are much like the arguments made by those opposing welfare reform in the ’90s. The GOP fought for welfare reform, and it was eventually signed into law by President Clinton. Today, welfare reform is viewed as highly successful. And it appears that President Clinton supports the idea of Medicare reform as well:

UPDATE 6-5-2011: As I continue to research Medicare, I’ve found that I made a pretty glaring mistake in this article shown above. Though the mistake only further illustrates our need for Medicare reform. A significant portion (about half) of the revenues used to pay for Medicare already come from other sources. A quote from PolitiFact: “Medicare, which provides health care to about 50 million elderly or disabled Americans, is financed through a combination of funding streams: a Medicare payroll tax; general revenue (mostly from federal income taxes); premiums paid by Medicare users; and a tax on Social Security benefits and state payments toward the prescription drug benefit.” I am unclear how anybody can claim that Medicare is “solvent” when half of the costs are paid for by revenues outside of premiums and the Medicare payroll tax. Read this post on PolitiFact.

A quote from President Obama: “The fact that we are here today to debate raising America’s debt limit is a sign of leadership failure. It is a sign that the U.S. Government can’t pay its own bills. It is a sign that we now depend on ongoing financial assistance from foreign countries to finance our Government’s reckless fiscal policies. … Increasing America’s debt weakens us domestically and internationally. Leadership means that the buck stops here. Instead, Washington is shifting the burden of bad choices today onto the backs of our children and grandchildren. America has a debt problem and a failure of leadership. Americans deserve better.”

On this I’m in complete agreement with our President. But unfortunately, do you know who does not agree with this statement? Our President. He spoke these words in 2006 while a member of the Senate.

Now the President says he was wrong. Well, he doesn’t say it. His press secretary Jay Carney says that the President regrets his vote against raising the debt ceiling in 2006:  Obama “thinks it was a mistake,” presidential spokesman Jay Carney told reporters. “He realizes now that raising the debt ceiling is so important to the health of this economy and the global economy that it is not a vote that, even when you are protesting an administration’s policies, you can play around with.” (Yahoo News)

The administration has gone so far as to explain that a failure to raise the debt ceiling would result in “Armageddon-like” consequences for the economy. They have also suggested that we should raise the debt limit in a “clean” bill, which means “no strings attached”.

Personally, I’m hoping for plenty of strings. Our continuing deficits and national debt are the albatross hanging around the neck of our economy.

Will The Senate Release a Budget Plan Please?
And in a related story, the democrats in the Senate were getting close to finally releasing a budget proposal to counter Paul Ryan’s budget plan. But many democrats remain leery of putting a plan on paper that can be scrutinized by the public. This is of course why they failed to present or pass a budget last year. So what happened? The President has preempted the release of the plan and called for ANOTHER bipartisan commission to discuss a compromise on the budget. How can a “compromise” be discussed when the democrats won’t release a budget proposal? (Townhall.com)

Wow. Good start for the Chiefs. They trade back, pick up a high third round pick, and fill one of their most glaring needs. How can you not like that?

And best of all? They didn’t draft a right offensive tackle in the first round.

Here’s what you need to know about Baldwin. He’s big — almost 6’5″ and 228 pounds. He can stretch the field. He’s fast — he runs a 4.5 40. He’s got great hands and is known for making spectacular catches. And he’s explosive, averaging more than 18 yards per catch in college. He will be a great complement to Dwayne Bowe and Tony Moeaki in the red zone. Matt Cassell should be a happy man today.

Some of the “experts” have labeled Baldwin with some potential character issues. We know how much importance general manager Scott Pioli puts on character. And if Pioli is satisfied with Baldwin’s character, then so am I. (Until proven differently.)

Some may also call Baldwin a “reach” to be taken late in the first round. There were two wide receivers with very high draft grades — A.J. Green and Julio Jones. They were among the first six taken in the draft. Then there was a whole group of receivers with similar grades expected to go in the second round. Baldwin was in this group. Most of the others were under six feet tall. Baldwin was the one that stood out to me as the freak athlete with size, speed and hands. He wasn’t likely to make it to the Chiefs pick in the second round. And the Chiefs obviously had the highest draft grade on him of all the remaining receivers.

Should give some kudos to Nick Wright at 610 Sports who talked about Baldwin as a great choice for the Chiefs prior to the draft. He was hoping that Baldwin would fall to the Chiefs with their second pick, but didn’t expect him to last that long on the board.

The Chiefs have three picks tonight — numbers 55 (round 2), 70 and 86 (round 3). Would like to see the Chiefs find an outside linebacker and interior offensive lineman tonight. GO CHIEFS!

I have a confession to make. I’m not excited about the NFL draft this year. I think my brain is still waiting for free agency. And I’m definitely behind in my research. So take this for what it’s worth. It seems that most mock drafts have the Chiefs selecting an offensive tackle in the first round. If they do, I’ll be shocked.

Let’s review the Chiefs’ biggest needs. And when you think of the team’s needs, don’t just focus on this year. Think about the next three years, and what contracts will be expiring among the current players. And what players are nearing the end of their careers.

1. Nose Tackle: This is where the lack of free agency makes this draft even more interesting than normal. Ron Edwards and Shaun Smith are both free agents. If the Chiefs played a game today, their starting nose tackle would probably be Anthony Toribio. Who? Exactly. Now the Chiefs might feel good that they’ll get Edwards and Smith signed, but there are no guarantees. And neither of them are long-term solutions at nose tackle. This is the biggest hole in a young and developing defensive unit.

2. Wide Receiver: Not only do the Chiefs have a big hole in the starting position opposite Dwayne Bowe, but I believe that Bowe has only one year left on his contract. If they lose Bowe next year, what do they have left? Not much.

3. Offensive Center / Guard: Starting center Casey Wiegmann is a free agent, and he’s 37 years old. Left guard Brian Waters is 34, and nearing the end of his career. The only guy on the roster that looks like a future replacement is Jon Asamoah. The Chiefs need at least one more projected starter for the future interior of their offensive line.

4. Cornerback: Starter Brandon Carr is a free agent, and is inconsistent. Rookie Javier Arenas is good in the slot, but does not project to be a starting cornerback. And you can never have enough good cornerbacks on your team.

You can argue that the team needs more talent at linebacker and at offensive tackle. I won’t argue that point. They do. I just don’t list either as one of their top four needs. Though that doesn’t mean that they won’t find value here with the 21st pick in the draft.

Now back to offensive tackle. When the Chiefs pick late in the first round, the available tackles will likely all be projected as right tackles, not left tackles. Why would you draft a right tackle in the first round when you clearly have other, more important needs? The Chiefs want to find the right fit for the person, the position in the draft, and team need.

So who will the Chiefs draft this year? I would love to see the Chiefs have the opportunity to draft center Mike Pouncey from Florida, who is widely regarded as the best interior offensive lineman available. Most mock drafts have him picked just a few spots in front of the Chiefs. He could slide to the Chiefs, but it’s not likely. The draft appears pretty deep along the defensive line, and I wouldn’t be shocked to see the Chiefs draft a pass rushing defensive end who they can move to the outside linebacker position opposite Tamba Hali. Late in the first round there’s usually good value for an inside linebacker, and I can imagine the Chiefs looking for some competition for Javon Belcher in the middle. And there are a couple of cornerbacks who are projected to go late in the first round. Corners often seem to go a little higher than they’re ranked, so keep on eye on players such as Aaron Williams and Brandon Harris. The general consensus is that their won’t be a wide receiver on the board worthy of picking when the Chiefs pick. So unless the Chiefs trade down, they’re not likely to grab a receiver with their first pick.

Prediction: If Pouncey is on the board, he’s our man. But that seems unlikely, and he’s the only interior offensive lineman worth taking with this pick. The Chiefs decide they don’t find enough value among the available wide receivers, nose tackles and outside linebackers. They try to trade down but can’t. Wanting a bigger cornerback to partner with Brandon Flowers, the Chiefs pick Aaron Williams from Texas. He’s got good size, and is good against the run and the pass. Does anybody know if he’s a team captain?

In my last post I pulled data from our history to illustrate how even very high tax rates on the rich do not lead to larger tax revenues compared to GDP. We’re tried it and it doesn’t work.

Another argument I’ve heard from the far left is that our country is not broke. We have plenty of money. It’s just that all of the money is being hoarded by the few at the expense of the many. I am open to the discussion that a large portion of our wealth is held by just a few people. And we badly need tax reform in this country. No, not just reform. We need a tax overhaul. But that discussion will wait for another day. Today we need to discuss this myth that if only we could take all this money from the rich we could afford our current level of spending. We could afford health care, Social Security, Medicare, Medicaid and much more. If you believe economists like Paul Krugman, we could afford to exponentially expand the government to take care of even more people if only the rich didn’t have all of our money.

You must watch this video from conservative Bill Whittle:

Now I haven’t fact checked every piece of information in here, but it’s certainly inline with the data I know about our wealth, our resources, the size of our federal government, and tax collections. I did some googling to see if I could find articles about the inaccuracy of this information. I didn’t find any.

Matter of fact, here’s an article from Walter E. Williams, a professor of economics from George Mason University discussing the facts in this video.

On a personal note, I do have one issue with this video. I’m not big into political correctness, but why is it OK to bash fat people? We can’t make fun of Jews or Muslims. We can’t make derogatory comments about blacks or Hispanics. As Kobe found out, we can’t use gay slurs in regards to officials. So how come it’s OK in our country to bash fat people? Whittle could have made this same argument without the personal comments about Michael Moore.

And thanks to Bruce for sending me a link to this video.

I’ve had a number of conversations recently about tax policy and our federal deficits. I have many friends who would have liked to have seen the Bush tax cuts expire on the rich. It was estimated that this would generate $700-800 billion over the next ten years, not including any economic repercussions from the tax increases. The math is pretty easy on this one. That’s $70-80 billion per year (we’ll pretend as if there are no economic effects from the tax increases). And with a projected deficit this year of approximately $1.65 trillion, that extra revenue from the increased taxes on the rich means we still have a $1.57 trillion deficit this year.

Matter of fact, if you increase the top tax bracket from 35% (the current marginal tax rate on the highest income earners) to 100%, you still cannot collect enough in tax revenues to run a balanced budget.

The math doesn’t work. You cannot increase taxes and solve our nation’s budget crisis. But that’s just part of the story.

As I mentioned in my last post, too often we ignore history. Too many people believe that tax rates determine tax revenues. They do not. Proof? How’s this:

This table shows the top marginal tax rates since the mid-’40s (the tax rate paid by the “rich”). Tax rates have been as high as 94%, and as low as 28%. And the table shows total tax revenues collected by the federal government as a percentage of GDP.

During this time, tax revenues have remained extremely stable as a percentage of GDP — varying from a low of 14.4% to a high of 20.6%. So no matter how high we have made the tax rates, or how low, we still have not collected much more than 20% of GDP. Ever.

Maybe the rich should pay a higher percentage than they do today to be “fair”. That’s a discussion for another day. The point today is that no matter what tax rate you pick, you don’t ever collect much more than 20% of GDP through taxes. And on average you collect less.

Why? That’s an easier answer than you might expect. Higher taxes are a disincentive to work. Let’s say we reverted to the tax rates of 1970, where the “rich” were paying a marginal rate of 71.75%. And let’s say you’re earning $250,000. For every extra dollar you earn, you have to pay almost 72 cents to the federal government. Then kick in a little more to your state government. Why would you waste your time earning more money? If you’re a small business, such as an S-corp or an LLC, and the company profits are reported on your personal taxes, why would you want to grow your business? What’s the incentive? It’s no longer money, because the government is taking almost every additional dollar of profit you make. Why would you create more jobs? Create new products? Once you hit $250k, it’s time to kick back and head to the beach. High tax rates kill productivity, creativity, and economic activity.

Federal Spending
Do you know how big the federal government is compared to GDP? How about one more table (I almost excluded 1945 because the war spending made this a statistical outlier, though I found it interesting so I left it in):

This table shows total GDP in billions of dollars. And the percentage of GDP that was spent by the federal government. Think of it as the relative size of the government compared to the economy.

Historically the size of our government has been less than 20% of GDP until about 1970. From 1970 until the mid-’90s we were in the low 20s. It’s no coincidence that the last budget surplus we had seen was in 1969. It wasn’t until the mid-’90s when we restrained government spending that government expenditures fell below 20% of GDP. The result? Budget surpluses from 1998-2001.

Now let me state the obvious. If our government spends more than about 20% of GDP, we will have a budget deficit. If we spend less than 20% of GDP, there’s a good chance we’ll run a budget surplus.

How have we done the last couple of years?
2009: Government expenditures were 25% of GDP.
2010: Government expenditures were 23.8% of GDP.
2011 (estimated): Government expenditures will be 25.3% of GDP.

And in these three years alone we will have added approximately $4.35 trillion to our national debt.

Our government doesn’t have a tax revenue problem. It has a spending problem.

Source: these numbers are from the White House’s website.

I’m going to take a quick detour from economics, to talk about, the economy. Too often we forget about our past. We can learn a lot just by looking back.

During the ’80s, President Reagan was spending lots of money building up our military. And a democratically controlled Congress was spending lots of money on everything else. By the early ’90s we were drowning in debt, deficits, a struggling economy, and unemployment was pushing 8%. Sound familiar?

Much of the 1992 presidential election campaigns were focused on these issues. As then Governor Bill Clinton so eloquently described, “It’s the economy, stupid.” And who can forget Ross Perot and his famous charts? As a third party candidate and founder of the Reform Party, Perot garnered almost 19% of the popular vote with his simple themes. For Perot, the math was simple. To get out from under the deficits and debts, we must increase taxes, and decrease spending. He also talked about tax reform, and entitlement reform, as necessary steps for fixing our economy.

In ’92 we elected Bill Clinton, who came into office having won only 43% of the popular vote. Dick Morris has often told the story about how Clinton wanted to work with the republicans to pass bipartisan legislation. But the democrats in Congress told him no. That this was their chance to pass their agenda. After two years, the people were fed up, and voted in a new Congress filled with the likes of Newt Gingrich and his fiscal conservatives.

It was the fiscal conservatives in Congress and Bill Clinton who created the prosperity of the late ’90s. How did they do it? They constrained government growth. They passed pro-business legislation. And they tackled entitlement reform — in this case, welfare reform.

The result? Unemployment dropped to its lowest rates since the ’60s. And budget deficits became budget surpluses for the first time since the ’60s.

So how does this compare to today? We have surpassed $14 trillion in national debt. We have a projected budget deficit this year alone of more than $1.6 trillion. And unemployment remains well above 8%.

The president says that he’s concerned about our debt and our deficits. He went so far as to put together a bipartisan debt commission headed up by Alan Simpson and Erskine Bowles. Much like Ross Perot in the ’90s, the debt commission has recommended budget cuts, tax increases, tax reform and entitlement reform.

President Obama has completely ignored the recommendations of his own commission. He has provided us with a long-term budget plan that will double our national debt. And today, Congress can’t agree on a few billion in cuts. We’re still negotiating over the 2011 budget because the democrats never bothered to pass a budget LAST year when they controlled both houses in Congress and the White House!

So how do we fix our problems? Constrain government growth (cut spending). Develop pro-business legislation, which should include repealing ObamaCare. Entitlement reform. And tax reform. Sound familiar? It’s worked before.

Enter the Paul Ryan budget plan. I have not read it yet, and am not endorsing it. But he is on the right path from what I have seen.

Much like the left did during the ’90s over welfare reform, liberals will demonize the right over entitlement reform. A member of Bill Clinton’s staff, Peter Edelman, resigned under protest over welfare reform, decrying that it would throw a million children into poverty. On the contrary, within five years, child poverty declined by more than 2.5 million. Welfare reform is now championed by the left as a great accomplishment under Clinton.

Similarly, expect the left to accuse Ryan of throwing the poor and elderly under the bus with his “extreme” budget cuts and entitlement reform. It’s already started. It will get loud. It will get messy. But entitlement reform is necessary if we want to fix our short-term and our long-term economic problems. We can’t cut enough “discretionary” spending to dent the deficits. We need smart, long-term solutions. And we need them now.

Today let’s discuss the stimulus package, and the predictions made by the CBO. And in particular, how supporters of the stimulus bill continue to cite the CBO for writing that the legislation created millions of jobs. This will all tie into Eldridge Economics. Eventually.

First let’s go back to the beginning. In late 2008 during the election, the economy was stumbling. We were headed into a recession. Politicians from the left and the right agreed that something needed to be done. The President developed his economic stimulus plan. It was originally estimated that the bill would cost $787 billion. Two of the President’s key economic advisers, Christina Romer and Jared Bernstein, famously predicted that the stimulus bill would keep the unemployment rate below 8%. There were critics of the bill.

Hardcore Keynesians: There were those on the far left, including the New York Time’s chief economist and columnist Paul Krugman, who advocated for a $2 trillion stimulus package. Remember, according to Keynesian Economics, the more money the government spends, the more the GDP will grow, and the more jobs are created.

Free Market Economists: There was a group on the right, like some of  the economists at the Wall Street Journal and Investor’s Business Daily, who warned that the stimulus package would hurt the economy and make things worse. That we would be better off doing nothing than passing the President’s bill. Critics also explained that the bill was more about big government spending than economic stimulus. Here’s one example from the WSJ.

The CBO: And then there was the CBO somewhat in the middle. Using their Keynesian model, they predicted that the stimulus bill would indeed create millions of jobs. But they ALSO warned that by the end of 2011, there would be little NET job growth. In other words, we were going to spend nearly $1 trillion to end up at the same place a year and a half later.

President Obama said that the stimulus was the right bill at the right time. It was necessary, and must be passed immediately. Congress obliged and passed the bill.

So what happened? Things got worse. Unemployment escalated towards 10%, and has continued to hover around 9.5% for months.

The President and the White House did what all politicians do. They engaged in revisionist history. They had to admit they were wrong to prove that they were right. How were they wrong? Because the economy was worse than they thought. How were they right? Because their stimulus plan created millions of jobs and kept us from a depression.

How can they do this with a straight face? Because Keynesian Economics says that government spending creates jobs. And to admit that it did not would be to admit the Keynesian Economics is wrong.

But the CBO Says That It Created Millions of Jobs!
Defenders of the White House continue to quote the CBO who wrote as late as this last November that the stimulus bill “Increased the number of full-time-equivalent jobs by 2.0 million to 5.2 million compared with what would have occurred otherwise.” The quote is from this CBO report.

The problem with citing the CBO? They don’t research and attempt to determine whether or not the bill actually created these jobs. So how did they come to their conclusion? Because they continue to plug the numbers into the same Keynesian formula. The CBO uses multipliers to predict how government spending increases GDP. They have different multipliers for different ways the money is spent. Brian Riedl from The Heritage Foundation (a rightwing organization) has explained this in detail. Here’s a link to one of his articles.

With the CBO’s most recent report they adjusted their predicted cost for the bill to be $814 billion. They plug the government’s expenditures into their model. And they predict the growth in GDP, and predict how many jobs are created FROM the growth in GDP.

So in other words, the stimulus bill lives in a vacuum. If the model predicts that the bill will create two million jobs, and the economy loses four million jobs, then their conclusion is that without the bill the economy would have lost six million jobs. Or if the economy creates five million jobs, their conclusion is that the economy would have only created three million jobs without the stimulus bill. So no matter what happens in real life, they continue to predict that the stimulus bill creates jobs.

If you read the entire report, they explain their methodolgy: “The Congressional Budget Office (CBO) based its estimates of the economic effects of the American Recovery and Reinvestment Act of 2009 (ARRA) on information from various sources: macroeconometric forecasting models, general-equilibrium models, and direct extrapolations of past data.”

They go on to explain, “However, the reported number of jobs funded is not a comprehensive measure of ARRA’s effect on overall employment, or even of those provisions of ARRA for which recipients’ reports are required. The actual impact could, in principle, be significantly larger or smaller than the number of jobs reported.”

So who was right? The economists from the WSJ and IBD made the most accurate predictions, though this doesn’t inherently prove that the stimulus bill was bad, or that it made things worse. The economy does not exist in a vacuum. You cannot plug the same numbers into the same formulas and expect the same results when the economic environment is constantly changing. And there are times that government spending will NOT grow the GDP and create jobs, despite what Keynesians would like you to believe.

Next we’ll discuss the role of government in our economy.

While Wisconsin politics and union protests dominate the news, there’s still an underlying and equally important story. The economy is struggling. Nothing new about that, but a few stories have recently caught my attention.

1. Supporters of the White House continue to insist that the stimulus bill was effective. Why? Because the CBO says that the bill created millions of jobs. But that’s not really what the CBO said. We’ll come back to this later.

2. New stories have been warning us that budget cuts (from the GOP) will hurt the economy and could send us into another recession.

3. And a twist on this same story, that a government shutdown will hurt the economy. And that hurting a fragile economy could have dire consequences.

All of these stories have a common component — the belief in Keynesian Economics. And whenever you point out the problems with Keynesian Economics, you get blasted as a lover of Trickle Down Economics. Here’s a quote from a conversation I had with some friends on Facebook yesterday: “That trickle you feel is Boehner pissing on your leg and tell(ing) you it’s raining.”

It will take me more than one post to get through some thoughts on the economy. I’m not proclaiming to be an economist. More of an econo-hobbyist. Here’s part one.

Keynesian Economics
I will try not to bore you too much, and keep this as simple as possible. Keynesian Economics advocates a mixed economy, predominantly private sector, but with a large role of government and public sector. And for the most part, the theory is pretty simple. You can read more about it here on Wikipedia.

What we’ll focus on today is what Keynes viewed as the primary reason for a recession, and his recommendations for getting out of a recession. Keynes viewed a recession as a result of shaken consumer confidence that causes consumers to save instead of spend. Excessive savings (beyond typical savings during a normal economy) from consumers slows the exchange of money thus creating the recession.

Keynesian theory recommends stimulating the economy through government spending and/or adjusting the money supply (printing money and/or lowering interest rates). Our federal government has been engaging in increased government spending and expanding the money supply. Keynes was one of the first economists to advocate deficit spending as part of a fiscal policy to cure an economic contraction.

Keynesians believe that if you increase government spending during a recession, what you’re really doing is taking the consumer’s money that they were saving (and not spending due to shaken consumer confidence) and injecting it into the economy. And that every dollar spent in the economy is subject to the “multiplier effect”. Basically, that when a dollar is spent by either the public or private sector, it increases total spending by a multiple of that increase. So when the government spends a dollar, it increases GDP (gross domestic product) by MORE than a dollar. And increases in GDP lead to increases in employment. (This will be important when we discuss the CBO’s statements on the stimulus bill.)

And reversely, if you cut government spending through budget cuts or closing the government, you are reducing GDP, and ultimately reducing employment (increasing unemployment).

Theory vs Reality
I’m not in complete disagreement with Keynes. But more in it’s application. So let’s start with a simple example. Let’s say the multiplier is 2.5 times. So if the government spends $1, we add $2.50 to GDP. If the government spends $800 billion, we add $2 trillion to GDP (that’s $800 billions x 2.5).

So if you subscribe to this theory, you get the same outcome from the stimulus no matter what else is happening in the economy. Does the country have $1 trillion or $14 trillion of debt? Doesn’t matter. Is the federal government imposing thousands of new regulations on the business community or streamlining regulations for business? Is the government viewed as anti-business or pro-business? Doesn’t matter. Do we have strong exports or decades of trade imbalance? Nope, doesn’t matter. Are we importing billions of barrels of oil at $100 per barrel or are we energy independent? Still doesn’t matter.

This theory doesn’t account for the decrease in GDP when an extra dollar is taken out of the private sector. And this theory doesn’t account for the repercussions of borrowing money.

Nothing matters but the multiplier and how much additional money the government injects into the economy.

The problem is that the economy doesn’t exist in a vacuum. There are forces, including other government policies, that are impacting the economy simultaneously. I think it’s entirely possible that in a different economic climate, that the outcome of the stimulus bill could have been considerably different. Or at least viewed differently.

But that will have to wait. Still more topics to cover, and we’ll try to cover them soon. The CBO’s projections. Understanding the deficits. The stimulus package. And what role the government should play in the economy.

Until next time.

The Chiefs’ defense took a significant step forward under new defensive coordinator Romeo Crennel in 2010. After years of struggling on defense, the Chiefs became competent in 2010. But the Chiefs must continue to improve on defense if they want to make a run in the playoffs. While the Chiefs were comparable in offense to the four teams in the AFC and NFC Championship Games this year, they weren’t comparable on defense.

First let’s look at some of the Chiefs’ primary defensive statistics:
Total Defense: #14
Points Allowed: #22
Rushing Defense: #14
Passing Defense: #17

Now let’s look at the final four teams in the playoffs this year.

Pittsburgh Steelers
Total Defense: #2
Points Allowed: #1
Rushing Defense: #1
Passing Defense: #12

New York Jets
Total Defense: #3
Points Allowed: #6
Rushing Defense: #3
Passing Defense: #6

Green Bay Packers
Total Defense: #5
Points Allowed: #2
Rushing Defense: #18
Passing Defense: #5

Chicago Bears
Total Defense: #9
Points Allowed: #4
Rushing Defense: #2
Passing Defense: #20

It’s not a coincidence that the two teams that made it to the Super Bowl, the Steelers and the Packers, had two of the top defenses in the league, and were the top two in points allowed. When you prevent teams from scoring, you can win a lot of games.

So let’s take a quick look at the Chiefs by position group on defense.

Defensive Line: Glenn Dorsey, Ron Edwards (free agent), Tyson Jackson, Shaun Smith (free agent), Wallace Gilberry (free agent), Anthony Toribio, Dion Gales

The Chiefs developed a nice rotation among their defensive linemen. We’ve seen Dorsey and Gilberry make good strides, and I’m still hopeful that Jackson can as well. Smith was a nice surprise this year, and helped the defense considerably. But the Chiefs need to continue to improve their line. They need a player who can collapse the middle of the pocket on a more consistent basis. I’d really like to see the Chiefs retain Gilberry for his pass rushing skills, who was second on the team with seven sacks. While I’m not opposed to resigning Smith and Edwards, eventually the Chiefs need to find a true nose tackle who can clog up the middle and generate a little pass rush in the pocket. I would expect that the Chiefs will consider a nose tackle high in the draft.

Linebackers: Tamba Hali (free agent), Derrick Johnson, Jovan Belcher, Mike Vrabel (free agent), Corey Mays (free agent), Andy Studebaker, Demorrio Williams, Cameron Sheffield, Charlie Anderson (free agent), Cory Greenwood (free agent), Justin Cole

I have similar feelings about the linebackers as I do the defensive line. We have a good unit, but not a great unit. Hali has become an exceptional pass rusher, and must be resigned. Johnson has become much more consistent, but he’s not the impact player we had hoped. And he drops too many potential interceptions. The Chiefs have been grooming Studebaker to replace Vrabel, but don’t count out Sheffield for this role. He spent the season on injured reserve, and it sounds like the Chiefs really like this kid.

The Chiefs are lacking that guy with the killer instinct like Green Bay’s Clay Matthews or Pittsburgh’s James Harrison. Would love to see the Chiefs target a linebacker in one of the top two rounds, either a pass rushing linebacker to replace Vrabel, or a hard-nosed playermaker in the middle to play with Johnson. An upgrade here would help the Chiefs considerably.

Cornerbacks: Brandon Flowers, Brandon Carr (free agent), Javier Arenas, Travis Daniels (free agent), Maurice Leggett (free agent, can also play safety), Donald Washington (can also play safety)

In 2009, the Chiefs were awful when they went into their nickel package utilizing three cornerbacks. Arenas really solidified the nickel spot this year and allowed the Chiefs to play Flowers on the outside. But you can never have enough good corners. Even if they resign Carr, don’t be surprised if the Chiefs draft another cornerback.

Safeties: Eric Berry, Kendrick Lewis, Jon McGraw (free agent), Ricky Price, Reshard Langford (free agent)

The Chiefs appear to have their two safeties of the future with Berry and Lewis. One of the primary reasons the Chiefs improved on defense this year was because of Berry and Lewis, who will only get better.

The Chiefs are strong in their defensive backfield, but a few key improvements to the line and among the linebackers could help the Chiefs reach that next level defensively.