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Who's afraid of S&P?

S&P downgraded several European governments today. If anyone out there thought these governments were triple-A and bullet proof, they were surprised by the action. But for the vast majority of investors in the world, S&P was just playing catch-up. Anyone with money to manage and a brain has known for a long time that the risk of defaults in the Eurozone was rising, and they almost certainly took the appropriate measures to reduce their risk if they thought that was necessary. U.S. money market funds took their money out of French bank CP many months ago, for example.


Eurozone 2-yr swap spreads today fell to their lowest level in 2 months on the news, in a sign that S&P's decision was not only fully discounted but lagging, as usual, the facts on the ground. Swap spreads and euro basis swap spreads have been telling us for the past week or so that there has been some fundamental improvement in Eurozone liquidity conditions, and this is much more important than anything S&P might have to say.

If anything, the S&P announcement might be considered a positive, since it is equivalent to a public rebuke of governments that are reluctant to take the necessary steps to rein in spending.

The world's biggest hedge fund

John Cochrane stole the words out of my mouth—I was planning to write something very similar, but he beat me to it:

The world's largest hedge fund paid $79.3 billion dollars to its main investor last year, as announced to the press and reported by the Wall Street Journal this morning.
It followed classic hedge-fund strategies. It's leveraged about 55 to 1, meaning that for every dollar of capital it borrows 55 dollars to fund 56 dollars of investments. Its borrowing is mainly overnight debt. It used that money to make aggressive bets in long-run government bonds, as well as strong speculative positions in mortgage-backed securities and direct distressed lending. Lately it's been putting bigger bets on loans to Europe and currency swaps. (Balance sheet here.)

The payout was actually conservative, as it reflected only the greater interest payments earned on its portfolio of assets and realized gains, not the substantial unrealized capital gains it made over the last year as long-term bond prices rose.

Who is this miraculous fund? Why our own Federal Reserve of course!

He is absolutely right, and I'll take this opportunity to elaborate. The Fed borrows money by paying for what it buys with bank reserves. The current interest rate on bank reserves is 0.25%, and the Fed decides what that interest rate will be. Imagine having a hedge fund that had virtually no limit on how much it could buy, was not subject to any regulatory scrutiny, and also had the power to determine the rate at which it borrowed money? What a deal. And by the way, this most fantastic hedge fund we call the Fed has already bought close to $3 trillion worth of assets, three times as much as it held in early September 2008. What could possibly go wrong? Unfortunately for those of us in the private sector, the Fed's profits come at our expense, and to the benefit of our government (the Fed hands over its profits to Treasury). And should the Fed end up on the wrong side of rising interest rates, the Fed's losses will be paid for with our taxes and via higher inflation.

At the very least, this is one reason that the world's investors are willing to pay $1700/oz. for gold, an amount that is more than three times the average inflation-adjusted cost of gold over the last century.

I'm not saying that a disaster awaits us, only that there are plenty of reasons these days for investors to be worried about what's going on. And that's why so many things are so cheap.

This helps explain the lack of jobs

It takes a Hungarian to help us understand why the U.S. economy is not creating enough jobs. Bottom line: taxes are too high, regulations are too onerous, you can't fire anyone, it's easy for employees to sue you, the law favors employees over employers, those who skirt the law have the advantage, the press vilifies success, and the tax code punishes success and rewards slackers.

Read this rant, translated decently from Hungarian. HT: John Cochrane, whose recently-started blog is off to a great start. Excerpt:

I could hire 12 people with €760 net salary, but I don't. I'll tell you why. You could work for my service provider company in a nice office. It's not telemarketing, it's not a scam. You would do serious work that requires high skills, 8 hours a day, weekdays only. I would employ you legally, I would pay your taxes and social security. I could give such a job to a dozen people, but I will not, and here I'll explain why.
I wouldn't hire a woman.
The reason is very simple: women give birth to children. I don't have the right to ask if she wanted to. If I had the right, and she answered, she could deliberately deceive me or she could change her mind.
Don't get me wrong, I don't have any problem with women giving birth to children. That's how I was born and that's how my child was born. I wouldn't hire a woman because when she gets pregnant, she goes for 3 years maternity leave, during which I can't fire her. If she wants two children, the vacation is 6 years long.
Of course, work has to be done, so I would have to hire somebody who works instead of her while she is whiling away her long holiday years. But not only couldn't I fire her while she's away, I couldn't fire her when she comes back either. So I would have to fire the one who's been working instead of her the whole time. When a woman comes back from maternity leave, I would be legally forced to increase her salary to the present level in her position. Also, I would be required to give out her normal vacation days, that she accumulated during her maternity leave. When she finally comes back to work, she would start with 2-4 months of fully paid vacation.

Federal finances update

With today's release of December federal budget numbers comes good news and bad news. The good news is that federal spending is not growing very much and is shrinking relative to GDP. The bad news is that revenue growth has also slowed, and the deficit continues to be well north of $1 trillion per year.


Since the end of the last recession, federal spending (on a rolling 12-mo. basis) has increased only 4.1%. Revenues, in contrast, have increased 6.8%. Both have slowed down in the past six months.


In relation to GDP, spending has declined from a peak of 25.3% in Sep. '09, to 23.3% as of last month, by my estimates. Revenues have increased from a low of 14.5% in Mar. '10 to 15.1% as of last month.


As a result, the deficit relative to GDP has declined from a high of 10.4% in Dec. '09 to 8.1% as of last month. On a nominal basis, the 12-mo. deficit has fallen from a peak of $1.48 trillion in Feb. '10, to a current $1.25 trillion. If current trends continue, the deficit is likely to continue to decline—albeit slowly—relative to GDP. It will likely remain very high for the foreseeable future, but at least it is going to be less than the 9% which studies have shown is the critical level above which deficit-financed spending can lead to a weaker and weaker economy and an unstable outlook.


This chart shows federal debt outstanding owed to the public, which is a better measure than the oft-cited total federal debt which has now reached $15.2 trillion, almost the size of current GDP (which I estimate was about $15.4 trillion at the end of last year). That's because total debt includes about $4.8 trillion which is "owed" to social security; debt that the government owes to itself is not the same thing as debt that is owed to someone else—it's just an accounting fiction. The last datapoint in the chart is my estimate of what the true federal debt will be at the end of this year, based on current trends in spending and revenues. In the four years ending Dec. '12, I project that the federal debt will have increased by $5.47 trillion, or 86%, to $11.8 trillion. Federal government debt will have almost doubled in just four years. The only good thing that can be said about this is that the rate of growth in the debt is declining, albeit only slowly.

Retail sales remain strong


December retail sales were lower than expected, but hiccups like that are to be expected every now and then in this series. The bigger picture is still one of recovery, as the chart above shows. Adjusted for inflation, retail sales are up 3.9% in the past year, and have almost returned to their pre-recession highs, despite the fact that 6 million fewer people are working today than were at the peak. That's pretty impressive, and a sign of rising incomes, increased confidence, and strong productivity gains.

Labor market update


Weekly unemployment claims last week were higher than expected (399K vs. 375K), but the miss was well within the range of error at this time of the year, when claims always post their biggest increases and seasonal adjustments can be tricky. As the chart above shows, the 4-week average of claims is still firmly within a declining trend.


December claims represented only 0.28% of payrolls, a level that was better than most of the go-go years of the 80s. Employers are firing fewer and fewer people, which suggests that businesses have undergone most of the restructuring and cost-cutting needed to survive. The jobs market is thus less vulnerable to future disruptions.


The number of people receiving unemployment insurance always rises at this time of the year, but relative to the same time last year, the number is down 18%, or 1.5 million people. This is undeniable progress, even though the ranks of the unemployed are still extremely high.

More improvement in eurozone financial markets



As a follow-up to yesterday's post, I note that euro basis swaps and swap spreads continue to improve, and in rather convincing fashion. Liquidity conditions in the Eurozone financial markets are improving, and although this doesn't necessarily lessen the risk that one or more sovereign defaults will occur, it means that the impact of any eventual defaults will be less severe than markets had come to fear. As liquidity returns, the risk of catastrophic defaults or financial meltdowns has declined measurably.


Not surprisingly, Spain and Italy today had successful bond auctions that resulted in a significant decline in yields. With the exception of Greece, where 2-yr yields have soared to 170%, 2-yr yields in Portugal, Ireland, Italy and Spain haven't been this low for many months; Irish yields are back down to levels not seen since last February. With improved liquidity comes improved confidence, and with improved confidence, markets can function more normally and economic growth is less likely to suffer. All very positive developments.

European liquidity conditions appear to be improving

This may be somewhat esoteric for many readers, but the discussion here focuses on key indicators of Eurozone liquidity conditions which appear to be improving. If that is indeed the case, then systemic risk is declining and the likelihood of a Eurozone-led catastrophe may be lessening. Nevertheless, it remains the case that the fundamental problem facing the Eurozone—bloated government spending against a backdrop of struggling economies—has not been addressed, so what improvement we see here is unlikely to be definitive, and only partial (i.e., access to dollars is normalizing, but default risk remains).


This chart compares 2-yr Eurozone swap spreads (a measure of systemic risk and bank counterparty risk) with the cost that Eurozone banks must pay to access dollar liquidity (the Euro Basis Swap).

According to Macrostory, the Euro Basis Swap is "a derivative product that allows the holder in the case of a Euro swap the ability to swap EUR for US dollars. In simplest terms the more negative the value the greater the demand for USD." (HT: Mike Churchill) The rise in the blue line (note that the y-axis represents negative values) in the above chart illustrates how difficult it became for Eurozone banks to acquire dollar liquidity beginning in August. As my friend Brian McCarthy explains, one reason for this is that US-based money market funds have all but eliminated their holdings of French bank commercial paper. This entailed the repatriation of dollars, which left the Eurozone market very short of dollars, and it coincides with the Euro's weakness against the dollar since last August. In a more generic sense, it reflects the increased reluctance of U.S. investors to lend to the Eurozone financial community.

Swap spreads rise when banks and large institutional investors are reluctant to take on counterparty risk, and that usually happens when there is increasing stress on an economy and/or financial markets, since that means more default risk to any lending activity. In the case of the Eurozone, swap spreads have risen in lockstep with the increased risk over the past six months or so that one or more of the PIIGS will end up defaulting, since such an event increases the likelihood of widespread Eurozone bank failures and/or a financial market meltdown.

I note that the two variables are highly correlated over this period, and I also note a slight tendency for the basis swap to lead swap spreads. I don't know if this relationship is likely to hold, but it does suggest that the pronounced decline in the basis swap in the past week or so could be foreshadowing a welcome reduction in Eurozone systemic risk. That, in turn, could be the result of the Fed's new-found willingness to open swap lines with Eurozone banks, and also the result of the ECB's recent attempt to ease financial stress by offering in late December an almost unlimited amount of long-term financing (LTRO) to Eurozone banks, with an expanded list of collateral options.


All of this would help explain the significant decline in Italian and Spanish 2-yr yields (see chart of Spanish 2-yr yields above), in the past several weeks.

In short, the ECB and the Fed have been working hard to apply what might be termed by skeptics as "band-aid" solutions to the sovereign debt crisis, and the evolution of basis swaps and swap spreads noted above is evidence that their efforts have had some traction. At the very least this provides more time for the market to sort out and adjust to the fundamental risk presented by countries like Greece and Italy that have spent and borrowed more than they can easily repay. This doesn't mean that defaults are less likely, but it does suggest that they may be more easily absorbed by the market, and thus that the consequences of a PIIGS default might not be as catastrophic as the market has been fearing. And, as I noted yesterday, that brightens the outlook for risk assets in general.

Climbing walls of worry: update

There are two ways of looking at the upward progress of equity prices since last summer. For optimists, who see the glass as half full, the market is gradually shedding some of the panic that gripped the world when the risk of Eurozone sovereign debt defaults started to look inevitable. For pessimists, who see the glass as half empty, the market is once again levitating on the fumes of optimism, poised to crash once again as the global economy collapses in the wake of Eurozone defaults (or the second down leg of the US real estate market, or the collapse of the Chinese economy—or all three, take your pick). I'm in the optimists' camp, of course, because as I have been pointing out repeatedly there is plenty of evidence that the market is priced to some dire expectations. Like all true bull markets, this one has been climbing walls of worry for most of the past three years. This is not a market driven by optimism, it's a market that has had to overcome several major bouts of fear and trembling in recent years, and it's still plenty worried about the future.


To begin with, this chart shows how the level of unemployment claims—a proxy for the underlying health of businesses—has been leading the equity market higher. Businesses are firing fewer and fewer people because they have cut costs to the bone, leaving them well-prepared to cope with any future adversity. You can't have a legitimate rally if the fundamentals are not improving.


The Vix index, which measures how much investors are willing to pay to reduce their risk (because it reflects the cost of owning options, which is less risky than owning the assets underlying the options), is a good proxy for the market's level of fear. As the above chart shows, major selloffs in equity prices have typically been driven by increased fear, and rallies by decreased fear.


But even though the Vix has dropped significantly from last summer's peak, it is still elevated from an historical perspective. Plus, 10-yr Treasury yields, which are a good proxy for the market's expectation for long-term economic growth, are still trading at extremely low levels—lower even than at the end of 2008 or during the depths of the Depression. The combination of the two, shown in the chart above, reflects a market that is still somewhat fearful, while having given up almost all hope for a return to decent economic conditions. Call it fearful despair. Moreover, there is still plenty of room for fear and despair to fade away, before we might say that the market has become priced to something resembling optimism.



As the first chart above shows, the PE ratio of U.S. stocks is still at very depressed levels. That PE ratios can be substantially below their long-term average at a time when corporate profits are booming (after-tax corporate profits are now at record levels both nominally and in terms of GDP) can only mean that the market is priced to the expectation that profits will collapse in coming years.

In conclusion, the market is still priced to very pessimistic assumptions about the future. What this means for investors is that lots of very bad and terrible things would have to happen to undermine the current level of valuations. If the world can just avoid another calamity, then risk asset prices can continue to rise.

The U.S./Eurozone decoupling continues



With 2-yr swap spreads as a proxy for systemic risk, we see that conditions in the Eurozone have been deteriorating for the past two years, and especially since last July, thanks primarily to the growing risk of sovereign debt defaults in the PIIGS countries. Meanwhile, investors have been terrified that defaults in the Eurozone could lead to another global banking crisis and a global economic collapse. Those fears have depressed equity prices and economies everywhere, even as corporate profits have been very strong. But markets can only worry so long about the end of the world being right around the corner. 



Despite all the fears, the U.S. equity market has diverged significantly from Eurozone equities. The two charts above compare the S&P 500 index to the Euro Stoxx index, and here we see a significant divergence between the two starting in August of 2010. Since that time, U.S. equities have outperformed Eurozone equities by over 30%. This is a major difference between two huge players on the global stage. We've seen divergences of this magnitude before, but as the top chart shows, this is the first time that the Eurozone has underperformed the U.S. Whatever is happening in Europe is increasingly being contained in Europe.

I think this fits with my thesis that Eurozone sovereign debt defaults are not likely to be as destructive to the world as the market has feared. By staging a major divergence, equity markets are slowly coming to that realization. The impact of the Eurozone debt crisis has already hit the Eurozone economy: it doesn't take a default to cause a loss, because the market has already priced in defaults of $1 trillion, and because the money that the PIIGS borrowed was squandered long ago on unproductive activities that sapped the underlying strength of the Eurozone economy. All the losses are water under the bridge. Europe is foolishly trying to postpone the recognition of this reality, when it should instead be wiping the debt slate clean, recapitalizing its banks, and shrinking the size of its bureaucracy. While Europe dithers, the U.S. economy moves slowly ahead.

This is not to say that the U.S. is golden, of course. We have our own debt binge to worry about, with the federal government having borrowed $5 trillion in the past three years. That's an awful waste of money, but our debt/GDP ratio is still within the range of being payable, and we don't have the problem that Greece has of owing money in a currency we can't control. I believe the U.S. economy would be a lot stronger today if we had spent and borrowed less, because like the Greeks, much of what we have borrowed was spent on unproductive activities (e.g., transfer payments). At the same time, our federal debt was not concentrated in our banks, the way it was in the Eurozone.


Meanwhile, believe it or not, federal spending as a % of GDP has declined meaningfully in the past three years, thanks to a dramatic decline in the growth of spending. Amidst all the bad news there are some tidbits of good news to be found in the U.S.

Predictions for 2012 (bumped)

(For some reason my post on this subject showed up as having been made last Friday. I'm reposting it here so it won't get lost in the shuffle.)

As detailed here, the biggest source of error in my predictions for 2011 was my belief that the economy would be somewhat stronger than expected, and that this, coupled with higher-than-expected inflation, would force the Fed to raise interest rates sooner than the market expected. I got the inflation part right, but the economy proved weaker than both I and the market expected. That in turn prompted the Fed to promise very low rates for a very long time, thereby collapsing interest rates across the maturity spectrum. The weak economy coupled with the Fed's extreme measures to resuscitate it, plus the growing likelihood of sizable sovereign debt defaults in the Eurozone, helped convince the market that the situation was dire. So now the key question, from the market's perspective, is whether the economy can avoid a calamity.

I say this because I observe that the market today is even more fearful about the future than it was a year ago. I see that in 2-yr Treasury yields of 0.25%, which say that the market fully expects the Fed funds rate to be extremely low for at least the next two years; that is likely to happen only if the economy remains in miserable shape and inflation remains relatively low. I see it in 10-yr Treasury yields, which are as low as they were in the depths of the Depression, and lower even than they were at the end of 2008, when panic reigned. I see it in equity PE multiples that are only marginally higher than they were at the end of 2008, when the market was priced to a global depression and years of deflation. Equity multiples have declined over the past two years even as corporate profits have soared to all-time highs; the only way this makes sense is to assume that the market believes growth will be abysmal and profits will collapse in coming years. I see fear in credit spreads that are as high or higher than they have been prior to previous recessions. I see tremendous uncertainty in gold prices that have risen by a factor of 6.5 over the past 10 years, a sure sign that investors have lost almost all confidence in the ability of the global economy to grow, and in the ability of central banks to successfully negotiate the current financial straits without something spinning out of control. Finally, I note that the Vix index (implied equity volatility) continues to reflect an above-average level of risk-aversion.


I do see some light at the end of this gloomy tunnel, however, and I expect it will brighten over the course of the year as the presidential elections focus the country's attention on what has caused our economic funk and how best to get out of it. If there is any good that has come out of the trillions of dollars of wasteful government spending in the past several years, it is the growing realization that government spending can not stimulate the economy, and only does more harm than good, by squandering precious resources and promoting crony capitalism. It's been a very expensive lesson in how Keynesian economics not only doesn't work but doesn't make sense to begin with. Bureaucrats cannot spend money more efficiently than the people who earn the money, and politicians cannot make better investment decisions than private enterprise. Industrial policy has never worked anywhere, and we see multiple examples of its failure almost every day in the headlines (e.g., Solyndra). 

I believe the elections this year will reaffirm the message of the 2010 elections: the electorate wants less government, not more; lower and flatter taxes, not higher; a simpler tax code, not more complexity. The changes might not be dramatic or immediate, but the political winds are blowing to the right, and over time this will push policies in a direction that will be more favorable/less destructive to growth. I believe that government spending can be throttled back without harming the economy; indeed, I think that a reduction in the size of government can actually boost economic growth, because it means that the market and the private sector will regain a measure of control over the decisions of how best to utilize the economy's scarce resources.

I see important signs that the economy has undergone substantial adjustments that now pave the wave for continued growth: businesses are firing fewer and fewer people since they have already cut costs to the bone; productivity and profits have improved measurably; jobs have been growing for almost two years; housing prices have reversed all of their previous excess; residential construction is beginning to come back to life; banks are once again lending, and at a faster pace; the Fed has ensured that there is no shortage of money; business investment is on the rise. Left to its own devices, and given enough time to adjust to adversity, the U.S. economy is perfectly capable of growing—and that is what is happening now. No reason this can't continue.

One key assumption I'm making is that sovereign debt defaults in Europe—which appear quite likely to happen—are not likely to be as destructive to growth as the market assumes. (Imagine the boom in risk asset prices if the Eurozone sovereign debt crisis were to disappear overnight, and you understand what a pall this has cast over all markets.) I've explained why defaults shouldn't be catastrophic here, but the short answer is that debt defaults don't destroy demand or productive capacity, and they are better thought of as a zero-sum game in which wealth is transferred from creditors to defaulting debtors. Many banks may fail as a result of major defaults, but banks can be replaced and/or recapitalized, and there is no shortage of capital in the world to do so. The losses that are eventually confirmed by a default have, in an economic sense, already occurred—they are water under the bridge. Defaults will also dictate that bloated Eurozone governments have no choice but to change their ways, and that will improve the prospects for future growth. They also will likely help the U.S. understand that we cannot continue with our spend-and-borrow ways.

I am not a huge optimist about the prospects for U.S. economic growth over the course of this coming year, because I see important headwinds to growth continuing: bloated government spending which appropriates the economy's scarce resources for inefficient and unproductive ends; the promise of higher tax burdens implicit in the soaring federal debt; huge regulatory burdens; and tremendous uncertainty surrounding the long-term implications of the Federal Reserve's massively bloated balance sheet. In short, I think the economy is growing despite all the supposed "help" from fiscal and monetary policy stimulus. I think that's because the U.S. economy is inherently dynamic and most people have a strong desire to work hard and get ahead. If the economy grows only 3-4% this year, I think the market will be pleasantly surprised, even though 3-4% growth won't result in any meaningful decline in the unemployment rate. Even modest growth would be much better than what the market is currently expecting, and that makes me an optimist in a relative sense because the market is so clearly pessimistic.

So, having outlined my assumptions—which are the key to any forecast—here goes:

The economy will grow by 3-4% in 2012, and if there is a surprise it will be on the high side. I think this is a safe prediction, since jobs currently are growing at a 1.7% annualized pace, and the productivity of the average worker tends to average about 2% a year. Growth could pick up towards the end of the year if the market gains confidence that fiscal policy will be more conducive to growth in the future, and that Eurozone defaults are not likely to deal a lethal blow to the global economy.

Inflation will moderate in the first half of the year, but will be roughly unchanged or somewhat higher by the end of the year.

The Fed will not engage in another round of quantitative easing because it will not be necessary or justifiable. If the economy grows 3-4%, inflation doesn't collapse, and Eurozone defaults don't bring about the end of the world as we know it, the Fed will be hard-pressed to justify another round of QE no matter what form it might take. Before the year is out, I think the issue of how to unwind previous quantitative easings will be more important than whether we need another round of quantitative easing.

Interest rates are likely to rise across the board as the outlook for growth improves. It is inconceivable to me that any improvement in the long-term outlook for the economy would not be accompanied by higher interest rates.

The housing market is likely to improve gradually over the course of the year. I think this is a process that is already underway, but it's very gradual. Residential construction is slowly improving, and although housing prices have yet to make a definitive bottom, I think we'll see more evidence of one as the year progresses.

MBS spreads are likely to widen over the course of the year. (I'm repeating last year's forecast here.) The main impetus for wider MBS spreads next year is likely to come from an across-the-board increase in the extension risk of MBS as Treasury yields rise. Mortgages, which currently behave like intermediate-maturity bonds, are at risk of becoming long-term bonds as interest rates rise and refinancing dries up.
Equity prices are likely to rise by 10-15%. Even if, as I suspect, the growth in corporate profits slows down, there is plenty of room for an expansion of equity multiples driven by improving confidence/receding fears.

Investment grade, junk, and emerging market bonds are likely to deliver decent returns. If Treasury yields rise, it will be because the economic outlook is improving, and that will mean lower default rates. Thus there is plenty of room for credit spreads to contract if Treasuries run into trouble. Even if we remain in a muddle-through scenarios, spreads—particularly of the high-yield variety—are generous and offer a substantial cushion against defaults.

Commodity prices are likely to rise. This follows from my belief that activity is severely depressed by fears of a sovereign debt crisis, and that these fears should dissipate or prove exaggerated. It also is a bow to the very accommodative nature of monetary policy around the world.

Emerging market economies are likely to improve.

Gold prices are likely to be very volatile, with the potential for a major decline. I think gold has already priced in the expectation of so many bad things (e.g., a big increase in inflation, a global depression, collapsing currencies) that any improvement in the outlook should convince investors that equities and corporate bonds offer much more attractive long-term returns than gold.

The dollar is likely to rise as the prospects for the U.S. economy improve relative to other developed economies. The dollar is still quite weak against most currencies from an historical and inflation-adjusted perspective.

Cash and Treasuries will likely be very poor investments.

Quotes of the day

Chip Mellor, chief of the Institute for Justice, commenting on campaign finance laws in today's WSJ:

There continues to be the false premise that the problem in politics is too much money, when in fact the problem is too much government for sale ... these campaign finance laws are really treating only a symptom, not the disease. Until you get to the root cause, which is too much government, you are really not doing anything productive and in many cases you are doing harm.

George Will, writing in Government: The redistributionist behemoth:

Liberals have a rendezvous with regret. Their largest achievement is today’s redistributionist government. But such government is inherently regressive: It tends to distribute power and money to the strong, including itself. 
Government becomes big by having big ambitions for supplanting markets as society’s primary allocator of wealth and opportunity. Therefore it becomes a magnet for factions muscular enough, in money or numbers or both, to bend government to their advantage. 
When taxes are levied not to efficiently fund government but to impose this or that notion of distributive justice, remember: Taxes are always coerced contributions to government, which is always the first, and often the principal, beneficiary of them. 
... when government engages in redistribution in order to maximize the happiness of citizens who become more envious as they become more comfortable, government becomes increasingly frenzied and futile.