Secure America's Future Economy

SAFE’s “hit nail on head” blogs:   2010

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12/20/10 – Out with the old, in with the new

Some previous year-end entries – 2007: Fiscal visionaries at bay; 2008: The Grinch that stole Christmas; 2009: Two crises and a partridge in a pear tree – were grim in tone and/or conveyed forced cheerfulness. This year, the outlook seems a bit brighter.  How nice to look forward to a new Congress in which fiscal visionaries will have a chance to do something besides hanging on for dear life.

This entry will report some relatively encouraging developments for both taxes and spending and offer suggestions for the path forward.  But keep these caveats in mind:

Word of caution

Like the Titanic bearing down on an iceberg, this country is steaming towards fiscal catastrophe.  Disaster cannot be averted if our political leaders settle for minor course changes and/or fall back into bad habits.


The self-congratulation about bipartisan cooperation will evaporate long before the new (112th) Congress is over.  Not for nothing did the Wall Street Journal’s headline for the Dec. 18-19 edition read “Budget Brawl Looms in Congress;” that is precisely what is coming.

TAXES: The “tax cut” deal reviewed last week went through the Senate and House at warp speed and was signed by the president.  None of our suggested changes were made, too bad, but some suggestions from the left were also ignored. 

The primary merit of the deal was that it postponed a huge tax increase for a couple of years, and the “pork” that was added will at least go into the pockets of individual Americans, to be spent as they see fit, rather than directed into government-controlled initiatives.

On balance, like Rep. David Camp (R-MI), we can live with the results.  Tax cut package awaits Obama’s signature, Stephen Ohlemacher, Washington Examiner, 12/17/10.

"This is just no time to be playing games with our economy," said Camp, who will become chairman of the tax-writing House Ways and Means Committee in January. "The failure to block these tax increases would be a direct hit to families and small businesses."


Let it not be forgotten, however, that two major tasks remain to be addressed:

First, a comprehensive overhaul of the tax system is long overdue.  Whether conducted by a Tax Simplification Commission such as we have recommended or by the established committees of Congress, the review should be completed and if possible acted on before the 2012 elections. 

Many tax changes will be suggested, and SAFE’s ideas do not necessarily represent the best options.  Our SimpleTax proposal illustrates the goals and scope of this project, however, in a manner that may hopefully prove useful in future discussions.


Second, there should be a moratorium on new taxes or rate increases until the tax overhaul has been accomplished.  The “Paygo” rules of the last Congress, in which tax increases could be proposed to “pay for” a particular spending bill (never mind that the proceeds should have been dedicated to deficit reduction), fostered piecemeal tax changes that did not meet the tests of simplicity, efficiency, or fairness. A case in point: the excise taxes, fees, and Form 1099 reporting requirements included in the GovCare bill. 

Not that there is anything wrong with specifying how a particular spending bill will be paid for, but the offsets should be spending cuts in other areas – not tax increases.

SPENDING:  Everyone knew that legislation would be needed during the lame duck session to keep the government running until next year, but the omnibus spending bill unveiled in the Senate early last week caught many observers (including us) by surprise.

The bill would have approved generous overall spending levels through Sept. 30, 2011 (end of the fiscal year).  There were also thousands of earmarks, including funding to implement GovCare and pet projects of members of Congress on both sides of the aisle. 

The apparent purpose was to preempt Republican-sponsored spending cuts early in the next Congress, and Senator John Thune (R-SD), for one, was outraged.

The attempt by Democrat leadership to rush through a nearly 2,000-page spending bill in the final days of the lame-duck session ignores the clear will expressed by the voters this past election.  This bill is loaded up with pork projects and should not get a vote. Congress should listen to the American people and stop this reckless spending.

Some Republican senators were inclined to support the bill, however, which would have served to cut off debate and put it over the top.  Senate Dems unveil $1.1T spending bill, Alexander Bolton, The Hill, 12/14/10.


Conservative groups sounded the alarm, but it seemed unlikely, in the time available, that enough public opposition could be generated to block Senate passage.  See, e.g., A spending monstrosity, Jordan Forbes, National Taxpayer’s Union, 12/15/10.

The bill, released yesterday, contains $1.25 trillion in spending and 6,700 earmarks worth $8 billion. Just how much is $1.25 trillion? Try $575.13 million PER PAGE in the 2,000-page spending legislation. *** I still can’t seem to grasp the Majority’s notion of spending their way out of record deficits and a $13+ trillion debt.


Some of the contemplated Republican support was apparently based on earmarks, which should put to rest the notion that earmarks are too small to matter in the overall scheme of things.  DC feeding frenzy, Daniel Mitchell (Cato), New York Post, 12/16/10.

Exhibit A is the "omnibus" spending bill Harry Reid is trying to push through the Senate. This monstrosity contains about 6,500 earmarks — special provisions inserted on behalf of lobbyists to benefit special interests. The lobbyists get big fees, the interest groups get handouts and the politicians get rewarded with contributions from both.


Among the earmark payoffs to GOP senators:  Thad Cochran (Mississippi), $512M; Bob Bennett (Utah), $226M; Susan Collins (Maine), $114M; Kit Bond (Missouri), $102M; George Voinovich (Ohio), $98M; Lisa Murkowski (Arkansas), $80M.  Republicans and the spending dope, Kimberly Strassel, 12/17/10 (link not available).

Senate Minority Leader Mitch McConnell (R-KY), Senator John McCain (R-AZ), et al. buttonholed strays in the party with good results.   After recounting the votes, Senate Majority Leader Harry Reid (D-NV) withdrew the omnibus spending bill and sat down with McConnell to negotiate a continuing resolution that would carry the government over to 2011.  Reid pulls $1.1T omnibus spending bill, Stephen Dinan & Kara Rowland, Washington Times, 12/16/10.

The stunning turn of events - which was about as much drama as the Senate floor has seen in years - undercuts President Obama, whose White House on Thursday had backed the omnibus spending bill as the best of a bad lot of options.


The relief and delight of fiscal visionaries was summed up by a quip of Citizens Against Government Waste President Tom Schatz.  CAGW reacts to pulled pork bill, press release, 12/17/10.

Driving the omnibus over the cliff is the best Christmas present that Washington can give to the taxpayers.


All was sweetness and light at the “tax cut” bill signing on Friday.  And if anyone was thinking of the fate of the omnibus spending bill, which the White House had earlier supported, they kept it to themselves.  Obama signs massive-tax bill, hails compromise with Republicans, Kara Rowland, Washington Times, 12/17/10.

Mr. Obama on Friday echoed earlier pitches of the deal as the best bipartisan agreement both sides could hope for, holding it up as an example of putting the American people before politics. "That's the nature of compromise: yielding on something each of us cares about to move forward on something all of us care about," he said. "It's a good deal for the American people. This is progress, and that's what they sent us here to achieve."


As with taxes, the outcome of the tussle over the omnibus spending bill is just a start.  It is not enough to beat off spending increases in the lame duck session; current spending levels must be decisively cut starting next year. 

Many ideas will be offered for where spending cuts should be made.  Our ideas were offered earlier.  Getting down to brass tacks on spending, 10/25/10.

Some fiscal conservatives seem to view the events of last week as marking a decisive change.  Reaganomics 2.0 in the driver’s seat, Larry Kudlow, Townhall.com, 12/18/10.

Smaller government, low taxes, and less spending were key election themes in the Republican landslide. And those themes triumphed this week as a large tax-cut bill finally passed the House and a monstrosity [there’s that word again] of a spending bill was defeated in the Senate. In one fell swoop, Obamanomics is out the window. Reaganomics 2.0 is now in the driver’s seat.   


Bear in mind, however, that: (1) the Democratic party still holds both the Senate and the White House; (2) many Congressional Republicans are also enamored with government spending; and (3) while the American people can be counted on to oppose tax increases, their instincts about government spending are less reliable.

Re point 3, two-thirds of mainstream voters favor spending cuts over deficit reduction – a roundabout way of opposing tax increases.  72% of the Political Class (people connected with government) would look to deficit reduction versus spending cuts, however, and many voters doubt substantial spending cuts will occur.  Rasmussen Reports, 12/10/10.


Most voters are still not convinced, even with a new Republican majority in the House, that Congress will actually cut government spending substantially over the next year.  GOP voters are among the most doubtful.

Nearly half of likely voters fault Republicans for not being sufficiently cooperative with the president, while his ratings for cooperating with Republicans are more favorable. Rasmussen Reports, 12/16/10.


If Republicans push for spending cuts, they will need to play their hand skillfully.  It would be easy to paint themselves into a corner and get blamed by the public for the inconvenience or confusion resulting from any budgetary or debt limit impasse that may arise.  Democrats beat Republicans in poll with opposition to government shutdown, John McCormick, Bloomberg, 12/10/10.

By a 3-to-2 margin, respondents say they wouldn’t support the kind of impasse that brought the federal government to a halt in 1995, when President Bill Clinton and congressional Republicans couldn’t agree on a budget. *** The Republican Party, a month after an electoral triumph that netted 63 seats and control of the U.S. House, gains in the U.S. Senate, and increases in state offices, remains unpopular, with a plurality having a negative view.


If the Republicans do not push for spending cuts, no one is likely to do it for them.  Based on his statements to supporters, the president apparently envisions being able to blame the fiscal problem on the Republicans in 2012. Obama vows to fight Republicans – next year, the Oval, 12/13/10.


It is not our place to take sides in political disputes, but we do have some advice for all concerned:

Watch out for that iceberg, it is dead ahead and approaching fast.

It is time for decisive action, not playing the blame game.

There is no substitute for victory.

And with that, dear readers, we declare this blog officially closed until next year.  Let’s hope Congress has the good sense to follow our example in the near future.

Happy holidays to all!  

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12/13/10 – DC action: the tax cut deal is overloaded.     Read Replies

The results of the November elections were interpreted by some observers – perhaps with a touch of wishful thinking – as a repudiation of soaring government spending, deficits and debt.  Obama’s big spending days are over, Donald Lambro, Townhall.com, 11/5/10.

With Republicans gaining more than 60 seats in the House, their largest majority since the Truman years, they are going to be able to drive the budget process in Congress, and Harry Reid won't be able to block them in the Senate. Under the budget's reconciliation rules, there is no filibuster requiring 60 votes to take up the measure that needs only a simple majority to pass it.


“The era of debt denial is over,” proclaimed the Fiscal Commission in its 12/1/10 report (p. 7), and at another point (p. 12) said “we must end redundant, wasteful and ineffective federal spending, wherever we find it . . . including defense, domestic programs, entitlement spending, and spending in the tax code.”  Moment of Truth, 12/1/10 (download PDF).


So the last thing one might expect is another economic stimulus bill in the lame duck Congress, yet just such a bill is currently taking shape.

The starting point was extension of the Bush tax cuts for all taxpayers (including high earners), and a compromise on the estate tax (which had been phased out by 2010, but under existing law would be restored at a rate of up to 55% in 2011). 

Most Democrats wanted to hike existing income tax rates for high earners while leaving the Bush tax cuts in place for other taxpayers and proposed to scale back the estate tax. Republicans supported an across the board extension and/or making the tax cuts permanent, and wanted to kill the estate tax for good.

There was also a difference of opinion about another extension of federal unemployment benefits, with Republicans suggesting that the extension be offset by other spending cuts.

Given GOP gains in the mid-term elections and a jobless rate stuck at nearly 10%, the appropriate answer seemed obvious.  Extend all the Bush tax cuts temporarily, pending a top to bottom overhaul of the tax law to be completed by 2012.  Split the difference on the estate tax.  Reach some sort of understanding about unemployment benefits (which neither party wanted to block).

Feelings about the Bush tax cuts ran deep, however, and the political narratives of the two sides were far apart.  Rhetoric rides again, Thomas Sowell, Townhall.com, 12/7/10.

Let's face it, politics is largely the art of deception, and political rhetoric is largely the art of misstating issues. A classic example is the current debate over whether to give money to the unemployed by extending how long unemployment benefits will be provided, or instead to give "tax cuts to the rich."


A full extension of the Bush tax cuts was not ruled out when Congressional leaders of both parties met with the president on November 30, but neither was the point conceded.  The upshot was the designation of two Administration officials (Treasury Secretary Tim Geithner and Budget Director Jack Lew) to conduct further negotiations with the Congressional leaders.  Obama, GOP negotiating deal on Bush-era tax cuts, Susan Ferrechio, 11/30/10.


Ensuing developments have included the “framework” of a deal between the Administration and the Congressional Republicans, which added various sweeteners, notably a 2% payroll tax reduction (employees only) in 2011; bitter complaints by Congressional Democrats that they had been cut out of the process; a symbolic “no” vote in the House of Representatives; emerging reservations on the conservative side (including Senator Jim DeMint’s announcement that he intended to vote “no”); and a press conference at which President Obama introduced former President Clinton to laud the proposed package as a “good deal” for the Democrats. 

The following video (4 minutes) provides an overview of the tax deal from the Administration’s perspective.  The White House white board on the tax deal, chief economic adviser Austan Goolsbee, 12/11/10.

Republicans wanted to extend tax cuts for the wealthy and were holding the tax cuts for everyone else hostage – president agreed to a temporary extension in return for an extension of unemployment benefits, payroll tax cuts for all workers, various tax credits, etc. – the president’s tax cuts are more than twice as big as the income tax cuts for the wealthy over the period in question – no impact on long-term deficit – president will keep fighting to raise tax rates on the high earners – we can grow our way out of this problem.


We strongly disagree with Mr. Goolsbee’s statements about the lack of impact on the long-term deficit and the country’s ability to grow its way out of the fiscal problem.  As a professional economist (on leave from the University of Chicago no less), he should be ashamed to say such things, which are clearly at variance with historical experience.  This Time Is Different: Eight Centuries of Financial Folly, Carmen Reinhart & Kenneth Rogoff, Princeton University Press (2009).

This Time

Additional sweeteners have been added to the tax cut bill, including the extension of ethanol subsidies and renewable energy tax credits.  Tax plan extends favors to win favor: lawmakers working to preserve breaks, Frederic Frommer & Mary Jalonick, [Wilmington] News Journal, 12/11/10.

http://www.s-a-f-e.org/global_warming.htm (12/11/10 entry)

Even more obscure items are in play, such as the Indian employment tax credit, railroad track maintenance credit, and mine rescue team training credit.   Oh, Christmas tree!  Tax deal larded up with TARP special interest provisions, David Freddoso, Washington Examiner, 12/9/10.


From the foregoing, it would be hard to say our political leaders have finally accepted the necessity to cut spending and balance the budget.  Indeed, according to one observer, the prime lesson is that “no one really cares about the deficit.”  Tax-cut deal exposes inner workings (and non-workings) of D.C., Ezra Klein, Washington Post, 12/10/10.

No sooner had Alan Simpson and Erskine Bowles completed their work on the deficit reduction package than Democrats and Republicans reached a bipartisan accord to add $900 billion to the debt. Republicans wanted their unpaid-for tax cuts for the rich, Democrats wanted their unpaid-for stimulus measures and both sides wanted the unpaid-for tax cuts for income under $250,000.


The $900 billion price tag is unrealistic.  No one ever expected that the Bush tax cuts (or at least the bulk of them) would be allowed to expire during the midst of what has been billed as the greatest economic crisis since the Great Depression. And the revenue loss from not raising the tax rates on high earners for the two years is reportedly only $82 billion, which is hardly enough to justify all the controversy about this particular item. $860 billion tax-cut deal: Cost breakdown, Jeanne Sahadi, CNN Money, 12/10/10.


An Alternative Minimum Tax fix for two years to prevent millions of additional taxpayers from being subject to this perverse levy is clearly warranted in our opinion.  Filing tax returns is too confusing and complicated already. Why make things worse?

We would be inclined to accept the extension of federal unemployment benefits for another 13 months, although the GOP’s point was well taken that offsetting spending cuts (to the tune of about $57 billion) should be sought.

Regarding the estate tax compromise, which is estimated to cost $68 billion versus allowing the estate tax to resume at a top rate of 55% on estates over $1 million, we believe the federal government should cede tax jurisdiction in this area to the states.  See our SimpleTax proposal.  Perhaps the current proposal is an appropriate step on the path towards our suggested end point, but in any case we do not consider the revenue loss inappropriate.


A temporary payroll tax reduction would do little to boost employment, especially as the benefit would apply for workers only and not reduce employer costs.  Also, a payroll tax cut could create expectations of similar relief in the future.  Therefore, we view the $112 billion revenue loss as wasteful and inappropriate – not much of an improvement over dropping the same amount of money from airplanes.

We would also object to the business tax breaks ($69 billion) and personal tax credits ($8 billion) that have been added to the deal.  In addition to reducing tax revenues, such provisions inappropriately distort private sector decisions.

In sum, the cost of the tax cut deal can and should be cut by roundly $200 billion.  Barring such action, we think the Republicans should reject the deal and see if they can do better in the new Congress next year.

What do you think about this subject?  Please let us hear from you, dear readers, whether you agree with our reasoning or not.

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A SAFE member in Arizona reminds us that Wednesday, December 15, is Bill of Rights Day.  Imagine how James Madison would have felt about the current antics in Washington. http://bit.ly/g8x2fW

I agree with all of the points, especially the overhaul of our tax system. – SAFE director

Extension of the Bush tax cuts is fine, but the estate tax should not be revived (in any form) and government spending must be cut.  The bond markets have responded negatively to announcement of this larded-up deal, and Moody’s is warning of a potential downgrade of Treasury securities if it goes through. http://www.cnbc.com/id/40641123 - SAFE director

I liked the comments to Delaware members. http://bit.ly/hUyTjP How about including them in a news release: SAFE, an organization founded and headquartered in Delaware promotes smaller, more efficient government, etc. – SAFE director

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12/6/10 – Fiscal Commission sets stage for further discussion.      Read Replies

Skeptics said the Fiscal Commission could not possibly recommend a meaningful plan to address the fiscal problem, not with its bipartisan composition and a 14 of 18 votes requirement.

After watching the videotaped meeting on December 1 (all members except Senator Max Baucus and Representative David Camp were present), we thought the proposed recommendations might squeak through. C-Span video, 12/1/10.


But the voting deadline had been extended until December 3, and some commissioners had yet to commit themselves.  In the end, the outcome was 11 Yes/ 7 No (recap below).  C-Span video, 12/3/10.



Erskine Bowles (former investment banker, White House chief of staff, and university president); Alan Simpson (former senator, has served on various advisory groups including Iraq Study Group)

At large

David Cote (CEO of Honeywell, identified as a Republican); Alice Rivlin (former Federal Reserve vice chair, budget director in Clinton Administration, now with Brookings Institution); Ann Fudge (former CEO of Young & Rubicam Brands); Andrew Stern (former president of SEIU)

The Senate

Max Baucus (D-MT); Tom Coburn (R-OK); Kent Conrad (D-SD); Michael Crapo (R-ID); Richard Durbin (D-IL); Judd Gregg (R-NH)

The House

Xavier Becerra (D-CA); David Camp (R-MI); Jeb Hensarling (R-TX); Paul Ryan (R-WI); Janice Schakowsky (D-IL); John Spratt (D-SC).

Our reflections follow on what happened last week and where the fiscal issue now stands.

PLAN – The Fiscal Commission voted on a report entitled “The Moment of Truth,” which represented a modified but still recognizable version of the draft proposal released on November 10.  As previously reported, we thought the draft proposal had serious defects. Fiscal Commission: Co-Chairs’ Proposal, 11/15/10.

(1) Did not acknowledge the likelihood of state or local insolvencies, e.g., California, Illinois and/or New York, let alone say what should happen in such an event, (2) perpetuated distinction between “discretionary” and “mandatory” spending, (3) did not meaningfully address soaring healthcare outlays, (4) left minimum retirement age for Social Security at 62 and took too long to raise the normal retirement age (from 67 in 2027 to 69 by 2075), (5) did very little to identify unneeded, wasteful, or duplicative domestic spending programs, (6) did not address double taxation of corporate earnings, marriage penalty for two-earner households, high number of Americans exempted from individual income tax, and proliferation of federal excise taxes (including new GovCare levies), and (7) was not projected to balance the budget until 2037. 

The final report did a nice job of expressing the urgency of action, as illustrated by this extract from the preamble:

After all the talk about debt and deficits, it is long past time for America’s leaders to put up or shut up.  The era of debt denial is over, and there can be no turning back.  We sign our names to this plan because we love our children, our grandchildren, and our country too much to act while we still have the chance to secure a better future for all our fellow citizens.

As for substance, changes in the final report did more to aggravate our concerns about the draft proposal than to cure them.  We will have more to say about this in future entries, but here is an example.

A “Fostering an Economic Recovery” section was inserted in the report (page 43), which among other things recommends (a) waiting until 2012 to begin enacting programmatic spending cuts and waiting until fiscal year 2013 before making large nominal cuts, and (b) considering a temporary payroll tax holiday in the interim, to the tune of $50-100 billion in foregone tax revenue, as a means of supposedly promoting “short-term economic growth and job creation.”  If the time to act is now, why did the Commission go out of its way to suggest one more drink for the proverbial road?

DISCUSSION - At the December 1 meeting, Co-Chair Bowles summed up the provisions of the final report and invited each commissioner in turn to express their reactions.  Here is a brief recap.

There was much praise for the Co-Chairs, staff, and other commissioners, and everyone stated their views in a thoughtful and seemingly sincere way.  If the American public has truly been waiting for an adult conversation about spending, taxes, and debt, this session should have been welcome.

One commissioner after another said they did not like various aspects of the plan, but either intended to vote “yes” or would consider doing so.  Rep. Schakowsky was the only speaker to flatly declare opposition, and even she expressed appreciation for certain elements of the plan (scrutiny of tax expenditures, defense spending cuts).

Much satisfaction was expressed with the proposal to broaden the tax base, cut tax rates, and increase tax revenues overall.  Conservatives and liberals alike said lower tax rates should stimulate the economy, thereby speeding deficit reduction. 

With all due respect, we do not believe the economy can be stimulated by raising taxes – the best that can be hoped for is to minimize the economic damage.  Sorry, but there are no “painless” ways to raise taxes, 8/9/10.

. . . while it might be modestly better to eliminate tax deductions and credits than to raise tax rates, a tax increase by any means could be expected to cut into individual income, business profits, and the inclination of people in the private sector to work and invest.  Therefore, the anticipated increase in tax revenues would tend to dissipate over time – just as with any other type of tax increase. 

Rep. Ryan said his primary concern with the plan was that it did not adequately address soaring healthcare outlays.

Rep. Hensarling said quite enough tax increases were built into the baseline projection already.  History shows, he asserted, that tax increases in budget deals get implemented, whereas promised spending cuts often fail to materialize.

Rep. Becerra applauded the elimination of $1.0T in tax expenditures per year, but questioned why only 10% of this amount was applied to reduce the deficit while the rest would be dissipated in lower tax rates.

Andrew Stern stressed the need for “investment” expenditures, and expressed his support for a Value Added Tax to support new “investment” programs.

As a doctor, said Senator Coburn (sporting a goatee grown for the lame duck session), I tend to look for the real problem versus symptoms.  In this case, deficits are the symptom. The problem is erosion of fundamental principles, with the federal government expanding its influence over state issues and ever more people being put on the dole. Nevertheless, the report represented a down payment on a solution – and “history says we are not going to make it” unless everyone starts sacrificing.

Co-Chair Bowles invited everyone who was able to return for a meeting on December 3, or failing that advise of their votes.

Whatever the outcome, said Co-Chair Simpson, “this baby is stuck in the craw of America, and it’s indigestible.”

VOTES - At the meeting on December 3, the remaining question – would the Fiscal Commission officially approve the report – was put to rest.  There was also further discussion among the commissioners who were present (conspicuously excluding Senator Coburn, despite his “yes” vote, and the three Republican members of the House).

Co-Chair Simpson made a joke about the Commission’s process, which he said was like sticking a bunch of bananas in a gorilla cage.  The gorilla might play with the bananas, but eventually he would eat some of them.

Co-Chair Bowles expressed appreciation to everyone for working hard, in a nonpartisan way, predicted that the Commission’s report would have a real effect, and announced four of the “no” votes (seemingly leaving open the possibility of 14 “yes” votes).  He then called on the commissioners in attendance to comment.  They spoke in the following order: Senator Durbin (yes), Rep. Spratt (yes), Senator Conrad (yes), Rep. Becerra (no), Rep. Schakowsky (no), Andrew Stern (no), David Cote (yes), Alice Rivlin (yes), and Senator Crapo (yes).

All told, 5 of 6 of the president’s appointees and 5 of 6 from the Senate voted “yes.”  All of the House members except Rep. Spratt (a lame duck) voted “no.” 

Alluding to the Senate vs. House results, David Cote paraphrased a historical quote and expressed his hope that things would work out accordingly.

George Washington is said to have told Jefferson that the framers had created the Senate to "cool" House legislation just as a saucer was used to cool hot tea.


Speakers who were explaining “no” votes emphasized that action was needed, and that they simply happened to think there was a better way to go about it than the plan presented in the Fiscal Commission report. 

Thus, as Andrew Stern put it, the Commission had put to rest the question of whether there should be a plan to deal with the fiscal problem.  There were now five plans (the Commission’s, Alice Rivlin’s, Rep. Ryan’s, Rep. Schakowsky’s, and his own), and the president should outline his plan in the upcoming State of the Union Address. 

By garnering 11 of 18 votes, it was suggested, the report had exceeded the super majority standard in the Senate (60%).  14 of 18 votes would have represented 77% approval, a challenging requirement indeed for recommendations on such a controversial subject.

“Be ready,” said Co-Chair Simpson in closing.  Having underestimated the Commission’s chances of success, the zealots would pull out all the stops to attack its report.  The report was a matter of record, however, and he predicted it would prove influential in further discussions.

Co-Chair Bowles thanked everyone, said he was thrilled by the outcome, and urged all concerned to keep working together, make the tough choices, and eliminate those dreadful deficits.  “The Committee stands adjourned.”

PATH FORWARD – The Fiscal Commission’s efforts could be viewed as either a promising start or a bust.  On balance, we are inclined to the optimistic view.  

It was never likely that the Commission could offer a definitive solution to the fiscal problem, so no one should be surprised by deficiencies in the report.  There will be plenty of opportunity to make needed improvements.

The failure to secure 14 votes was not a big setback.  An 11 to 7 vote, coupled with general acknowledgment that the fiscal problem is for real, has taken this country’s leaders beyond the “denial” stage.  That is progress.

Also, we would not favor a fast track vote on this subject during the current “lame duck” session  – as the current Congressional leadership promised when the Fiscal Commission was established.  Time enough to pursue the matter after the new Congress takes office. 

We do worry, however, that many of the players will continue to mischaracterize the issues at stake and cite the fiscal problem as a rationale for misguided solutions.

Amidst all the rhetoric about “tough choices” and such, it would be easy to forget that the basic solution to the fiscal problem is rather simple – spending cuts.

Spending freezes, pay freezes, and other across the board measures never work for long – the only way to effectively cut spending is to identify departments, programs or activities that are wasteful or unnecessary and eliminate them.  But efforts along these lines have often failed in the past, and they will not be easy now.

As an example, some readers may remember that President Ronald Reagan recommended the elimination of two federal departments in his 1982 State of the Union Address. 

The budget plan I submit to you on February 8th will realize major savings by dismantling the Departments of Energy and Education and by eliminating ineffective subsidies for business. We'll continue to redirect our resources to our two highest budget priorities—a strong national defense to keep America free and at peace and a reliable safety net of social programs for those who have contributed and those who are in need.


Reagan’s proposal was spot on, in our opinion, but he was unable to sell it.  The Energy and Education Departments are still around – bigger than ever.  Fiscal visionaries who want to change the outcome (count us in) should be prepared for a tough fight!

Then there is the hand wringing over the recession, continued high rate of unemployment, and urgency of “creating jobs.” 

The economic stimulus package pushed through in February 2009 was a misguided effort, as SAFE and others said at the time.  We can’t spend our way to prosperity, John Stossel, Real Clear Politics, 2/4/09.

Washington never changes, no matter who's in power. Give a gang of politicians a chance to spend our money, and they will spend it -- the more the better. An economic downturn is hog heaven; for now they have a justification to spend big time: "economic stimulus." Anything and everything can be proposed as long as it can be said to "inject money into the economy" and "create jobs."


It seems clear at this point that the stimulus package has been a failure.  More generally, we believe that government meddling in the economy has done more harm than good and represents the chief obstacle to economic recovery.  Judging from the election results, many Americans agree with us. 

But some people continue to insist that more stimulus is needed and will eventually bring things right.  Consider the argument for continuing to extend jobless benefits: recipients would spend the money quickly and thereby stimulate the economy.  Tax cut fight highlights Democrats’ missing convictions, Eugene Robinson, Washington Post, 12/3/10.

. . it's hard to find any economist who believes that ending jobless benefits is a good idea, since this money gets spent almost immediately - recipients, after all, are without other income but still have to pay for housing, food, clothing, transportation and other necessities. That's why unemployment payments pack such a stimulative punch.


Unfortunately, long-term jobless benefits encourage unemployed workers to stop looking for jobs (or collect benefits while working on the side).  There is also a bigger misconception, which is that the economy can be raised by its own bootstraps.  Keynesian economics is wrong: economic growth causes consumer spending, not the other way around, Hiwa Alaghebandian, Center for Freedom and Prosperity (Cato), November 2010, video (5 minutes).


As several SAFE directors noted at our meeting on December 2, solving the fiscal problem is not a sprint, it is a marathon.  Be willing to start small.  Go for goals within our reach.  But there must be action, not just talking, if it only consists of researching the issues, posting this blog, issuing our quarterly newsletter, and communicating with anyone who might potentially listen.  

A saying of Justice Louis D. Brandeis was noted in a holiday e-mail from Martha Minow, Dean of the Harvard Law School: "Most of the things worth doing in the world had been declared impossible before they were done.”

Liberals/ progressives relish this mantra, but it could equally well apply to our agenda.  Why should fiscal visionaries throw up their hands in recognition of past defeats?  Why shouldn’t we look for new ways to make our points and win?

As the lame duck session grinds on towards an ignominious end (our topic next week), SAFE will be planning how to redouble our efforts.  Are you in?

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Looks like the Fiscal Irresponsibility Commission didn’t dare propose eliminating political schemes not authorized in the Constitution; that would cut the budget in half.  Keep up your good work, exposing the political elites who are destroying America.  Only 23 months to go until the 2012 elections, when maybe things will be put back on track.  –  SAFE Member, Arizona

Given past performances of Congress, any new revenues will go into new social programs and the cuts will never be enacted. Nothing substantial will happen until we have another financial crisis. –  SAFE director.

I will be surprised if anything comes of this Commission's recommendations, but I was encouraged today to hear Erskine Bowles say the spending must be curtailed (or something like that).  Coming from a Clinton adviser, that is significant. –  SAFE director.

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11/29/10 – Dear EPA: shape up or ship out      Read a Reply

Last week’s survey of the federal regulatory landscape might be summarized by a four-quadrant model.  The vertical axis is need for federal regulation; the horizontal axis is regulatory burden. 

Many federal agencies are in the lower left quadrant – while their services are marginal, they are not doing much harm.  A few tweaks may be in order, but not major changes.

In some cases (top left), necessary federal regulation is being provided effectively.  Support is in order; consider elimination of duplicative state efforts.

In other cases (bottom right), federal regulation of marginal utility is causing considerable harm.  Shut down the agency or program involved, e.g., dismantle the federal Department of Education.

Finally, there are instances (top right) in which federal regulation is necessary but has gotten out of control.  Here the agency or program needs to be redirected.


(e.g., NRC) 
(e.g., EPA)


(e.g., DOE)

                                      Burden  Þ

In lieu of an abstract discussion of reining in a necessary but overbearing agency, let’s consider a specific case – what to do about the Environmental Protection Agency (EPA).

BACKGROUND – Formed in 1970 to administer the Clean Air Act and assume responsibility for generally applicable environmental nuclear radiation standards, the EPA’s mission is to protect human health and the environment.  Today, the agency administers or plays a role under some 25 federal statutes, including the Atomic Energy, Clean Air, Clean Water, Resource Conservation & Recovery, Toxic Substances Control, Comprehensive Environmental Response, Compensation & Liability (Superfund), Energy Policy, and Energy Independence & Security Acts.

The EPA has some 17,000 employees.  Its $10 billion annual budget (FY 2011) goes for:  State & Tribal Assistance Grants ($4.8B), Environmental Programs & Management ($2.9B), Superfund ($1.3B), Science & Technology ($0.8B), and All Other ($0.2B). 

In addition to headquarters offices in Washington, D.C. and northern Virginia, the EPA has offices, labs, and other facilities around the country.  Its Region 3 office (located in Philadelphia) exercises jurisdiction over Delaware. 

The EPA is headed by an administrator appointed by the president with the advice and consent of the Senate, currently Lisa Jackson.  Jackson’s professional experience: 16 years as an EPA employee, headed New Jersey Department of Environmental Protection, served as former New Jersey Governor Jon Corzine’s chief of staff. 

Jackson’s bio states that she and the EPA staff are “working across the nation to usher in a green economy, address health threats from toxins and pollution, and renew public trust in EPA’s work.” 


UPSIDE – There may be people who would abolish the EPA and permit business and individuals to pollute the environment as they choose.  If so, SAFE is not among them.

It is not desirable for factories to belch SO2 into the atmosphere or discharge untreated industrial waste products into the nation’s waterways, for companies to sell lead paint of demonstrated toxicity, etc.  But if such practices were left to the discretion of the actors involved, they might prove profitable and/or convenient.  Sure, claims for damages and injunctive relief could be pursued in the courts, but litigation is a slow, expensive and uncertain way to set environmental policy.

Clearly, however, the EPA should regulate in a manner that will not cripple responsible economic activity.  The challenge is to strike a balance between environmental laissez faire on the one hand and unreasonably stringent regulation on the other.

The need for economic realism has been communicated to the EPA often enough, and the agency’s mission statement suggests it will be respected: 

EPA's purpose is to ensure that . . . environmental protection is an integral consideration in U.S. policies concerning natural resources, human health, economic growth, energy, transportation, agriculture, industry, and international trade, and these factors are similarly considered in establishing environmental policy . . .”. 


Other EPA documents are written in a similar vein, as indicated by this extract from the FY 2011-2015 strategic plan (red font added):

EPA is developing a strategy aimed at reducing toxic air pollution from stationary sources in a way that targets priority categories of sources, reduces pollution in communities, utilizes a more cost-effective “sector-based” approach; and provides tools to help communities and other stakeholders participate in rulemaking.  These priority categories include petroleum refining, iron and steel, chemical manufacturing, utilities, non-utility boilers, oil and gas, and Portland cement. 


Sounds OK.  After all, who could be against a cost-effective, “sector-based” approach?  Quite a few people as it turns out.  We will review this policy from another angle under the next heading.

Although believing that much work remains to be done, the EPA is delighted with its own performance thus far.  Check out this speech by Administrator Jackson on the 40th anniversary of the Clean Air Act.

[The Act] is literally a life saver. We estimate that it has prevented tens of thousands of premature deaths – each year. Along with lives saved, the Clean Air Act has reduced asthma attacks, heart disease, and numerous other health conditions Americans suffer from. ***

Those protections have added up to trillions of dollars in health benefits for our nation. Breathing cleaner air has kept people from needing expensive treatments and costly hospital stays. It has also kept our kids in school and our workers on the job, increasing productivity and economic potential. 
* * * For every one dollar we have spent, we get more than $40 of benefits in return. Say what you want about EPA’s business sense, but we know how to get a return on an investment. In short, the Clean Air Act is one of the most cost-effective things the American people have done for themselves in the last half century.

Naysayers predicted economic disaster at every step, according to Jackson, only to be repeatedly proven wrong.

In the 1970s, lobbyists told us that using the Clean Air Act to phase in catalytic converters for new cars and trucks would cause “entire industries” to “collapse.” Instead, the requirement gave birth to a global market for catalytic converters and enthroned American manufacturers at the pinnacle of that market.

In the 1980s, lobbyists told us that the proposed Clean Air Act Amendments would cause, quote, “a quiet death for businesses across the country.” Instead, the US economy grew by 64 percent even as the implementation of Clean Air Act Amendments cut Acid Rain pollution in half. The requirements gave birth to a global market in smokestack scrubbers and, again, gave American manufacturers dominance in that market.

The complaints have continued like a “broken record,” but they remain wide of the mark in today’s world.

We can take on the remaining challenges of pollution in our air. I know because the Clean Air Act took on big challenges – and it worked. We can come together in a collaborative effort, ignore the doomsday exaggerations, and build a commonsense plan together. I know because we’ve done it before – and it worked. And we can absolutely grow our economy at the same time we protect our environment, our health, and safeguard the planet for the next generation.


ANOTHER VIEW – We will now recap some reactions to recent proposals and actions of the EPA, which do not exactly add up to a vote of confidence. 

• Impractical – There has been considerable pushback against proposed limits on “coarse particulate matter,” e.g., dust clouds that farm machinery kicks up while in operation.  One wonders how the EPA would enforce such restrictions if they were imposed.  Farmers fear dust rules won’t reflect rural life, Rick Callahan, ABC News, 9/20/10.

Grain farmer Charles Schmitt, who farms about 2,000 acres of corn and soybeans near the southwestern Indiana town of Haubstadt, called the possibility of tougher rules on dust "ridiculous."  The 59-year-old, who's farmed for more than four decades, said there's little farmers can do to reduce dust, especially after a dry summer like this year's that left his fields parched.


• Incompetent – GAO reported that the EPA/ Department of Energy identified 15 of 20 bogus products submitted for testing as energy “efficient.”  Overall, the government made the correct decision on 11% of the tested products.  This should raise a few questions about whether the Energy Star program has saved Americans $17B on their electric bills to date.  Close enough for government work, Washington Times, 4/6/10.


• Inflexible – The EPA has designated the Gowanus Canal in Brooklyn as a Superfund site and announced plans to clean up more than a century’s worth of noxious pollutants.  This approach will supposedly guarantee the best results for the environment and ensure that the polluters cover all of the costs.  The project will take 10+ years and cost up to $500 million.  Say goodbye to an alternative plan, proposed by the city and private investors, which would have accomplished the cleanup more quickly and brought new investment ($250 million project for housing units and retail space) to the area as well.  Gowanus Canal gets Superfund status, Mireya Navarro, New York Times, 3/2/10.


• Draconian – New EPA restrictions on valley fills from mountaintop mining will be practically impossible to comply with.  Coal miners rally for mountaintop mining, Frederick Frommer, Washington Times, 9/15/10.

The coal industry has filed a lawsuit against the EPA’s new policy which tightened water quality standards for valley fills at surface coal mines in West Virginia, Kentucky, Pennsylvania, Ohio, Virginia and Tennessee. EPA Administrator Lisa Jackson has said the goal is a standard so strict that few, if any, permits would be issued for valley fills.


• Political – A decision to allow more (15% vs. 10%) ethanol in gasoline will create headaches for gasoline distributors and service stations, inflate food prices, and increase the cost of ethanol subsidies (assuming renewal by the end of 2010).  The only apparent justification was to gratify farmers and ethanol producers.  EPA approves more ethanol in gas, Mary Clare Jalonick, Washington Times, 10/19/10.

"Thorough testing has now shown that E15 does not harm emissions control equipment in newer cars and light trucks," EPA Administrator Lisa Jackson said in a statement. "Wherever sound science and the law support steps to allow more homegrown fuels in America's vehicles, this administration takes those steps."


Note: use of more ethanol in gas would be counterproductive from an environmental standpoint.  Administration caves in to Big Corn, Washington Times, 10/18/10.

Corn-based fuel is not only an economic disaster, it's an ecological nightmare as well. By the EPA’s own numbers, an across-the-board switch to E15 would "significantly impair the emissions control technology" if used in 74 million cars in America's fleet. That's because E15 burns 6 percent leaner than gasoline - often exceeding manufacturer design specifications - leading to higher exhaust temperatures, misfires and catalytic-converter damage. In addition to this problem, burning ethanol produces heightened levels of pollutants such as nitrogen oxides and deadly carcinogens such as formaldehyde.


• Inopportune – A protracted economic slump is no time to load the business community down with complex and expensive new regulations, yet the EPA and other agencies seem intent on doing just that.  In an interview on CNBC, Indiana Governor Mitch Daniels (R) suggested that the president should impose a moratorium on new regulations – drawing a “you must be joking” gibe from one of the commentators.  What EPA really stands for: “Employment Prevention Agency,” Mark Tapscott, Washington Examiner, 10/31/10.


• Relentless – Having reduced ozone limits in 2008 (under the previous Administration), the EPA is proposing to do so again – without any new scientific finding that might be thought to require action, and in the face of predictions of dire economic consequences.  EPA to drain $1 trillion from economy, Washington Times, 10/7/10.

Using NERA Economic Consulting data, the Manufacturers Alliance/MAPI last month predicted that implementing the technologies needed to meet EPA's proposed goal would cost the economy a staggering $1 trillion every year. [As might be expected, the EPA estimates of economic cost are much lower.]  A total of 7.3 million jobs would be lost along the way, adding 4.3 percent of the work force to the unemployment line by 2020.


• Ideological – The EPA’s fixation with cutting the emission of CO2, etc. assumes that global warming is taking place, driven by accumulation of human-produced carbon emissions in the atmosphere, and will have catastrophic consequences.  The EPA’s classification of carbon emissions as “pollution” for purposes of the Clean Air Act was based on the findings of US and international entities with an institutional interest in the human-induced global warming theory.  A survey of the scientific literature, which would have revealed contrary opinions and conflicting information, was not conducted.  SAFE comments on the proposed EPA finding, 6/4/09.


After Climategate broke, the EPA declined to reconsider its position.  Bad news for the economy: EPA refuses review of CO2 “endangerment” finding, Ted Hadizi-Antich, Pacific Legal Foundation, 7/30/10.


Remember the EPA’s “sector-based” approach to mandating reduction of “pollution” from stationary sources.  It relates to the proposed curbs on carbon emissions.  The strategy is to target big industrial installations while ignoring carbon emissions from schools, hospitals, offices, other factories, etc.  A court challenge is being mounted.  Texas fights global-warming power grab, Peggy Venable, Washington Times, 8/25/10.

The EPA . . . is attempting to rewrite the Clean Air Act administratively via a "tailoring rule," which would reduce the number of regulated sources. The problem with that approach? It's illegal. The EPA has no authority to rewrite the law. To pull it off, the EPA needs every state with a State Implementation Plan to rewrite all of its statutory thresholds as well.


True, guidelines have been issued that would require state and local authorities that issue pollution permits based on federal standards to use “Best Available Control Technology” in shooting to reduce carbon emissions 20% by 2020.  But many jurisdictions would be unable to meet the standards being proposed, so new investments in the affected facilities (principally refineries, power plants, and cement plants) might be brought to a grinding halt.  New EPA regs would kill jobs, stall economy, Washington Examiner, 11/11/10.


Some critics perceive an Administration (including the EPA) bias against the US economy and lifestyle.  Job-killing environmentalists, Jon Basil Utley, Reason, 11/10/10.

President Barack Obama seems more concerned with appeasing environmental extremists in his administration than he is with the lost jobs of poor Americans. He’s letting the environmentalists run wild with long pent-up schemes to force a change in the American way of life that includes small cars, small apartments and, for many, a return to an idealized 19th century lifestyle. It’s not China that’s responsible for American job losses; it’s Washington’s fault for shutting down whole industries and preventing new jobs from being created.


ASSESSMENT – Who is right, an agency delighted with its achievements to date that wants to impose even more stringent controls, or the EPA’s many critics?

Ignore the critics, says EPA Administrator Jackson. They have “cried wolf” before, only to cope with our regulations.  Everyone is better off as a result.

This reminds us of an argument that SAFE director Bill Morris has debunked in the past.  Just because a large dose of nuclear radiation (or medicine) would be extremely harmful, it does not follow that a small dose is somewhat harmful (linear relationship) – the small dose may actually be beneficial.  Nuclear radiation hormesis, letter, 4/22/10.


Similarly, the US economy’s survival of previous EPA regulations does not prove that ever more stringent standards will have no ill effect.  This would appear to be a case of hormesis in reverse, where a small dose is OK while a big dose is lethal.

One might also question the assumption that the US economy has suffered no ill effects from existing regulations.  This country’s industrial base has been steadily eroding over the past 40 years while manufacturing operations in China et al. have expanded greatly.  Perhaps regulatory burdens in the US have had something to do with the trend.

On balance, we think the EPA’s critics make a good case.  It is time for the agency to refocus on balancing environmental goals with economic costs.

ACTION – We would note at the outset that subtle adjustments to the regulatory process will not do the trick.

As previously discussed, the Administrative Procedures Act of 1946 accomplished less than conservatives hoped.  Regulatory common sense requires eternal vigilance, 11/22/10.

Although the rulemaking process is more deliberate and systematic now, it still fails to produce reasonable results – and ever more attorneys and judges are involved.  Death of Common Sense, pages 79-83.

Similarly, the Government Performance and Results Act of 1993 instituted a seemingly promising approach for holding federal agencies (including the EPA) accountable.  Mission statements – strategic plans – annual plans – performance measures - accomplishment reports.  Perhaps the results have been salutary in some cases, but by now the agencies have grown adept in preparing the paperwork to justify their respective purposes. 

There is little indication in the EPA’s strategic plan for 2011-2015, for example, that the persons affected are displeased with the agency’s intended direction.  Consider this extract from the box about “consultation efforts” on page 9.

Sent notification letters to over 800 organizations and individuals to request input.  These entities included . . . Congressional authorizing and appropriation committees – states and state associations – [Indian tribes and tribal associations] – local government representatives – other federal agencies – public health organizations – environmental, public interest and public policy groups – and representatives of the regulated community.


In 2001, the president issued an executive order re “energy action[s]” that are “likely to have a significant adverse effect on the supply, distribution or use of energy.”  In such cases, a Statement of Energy Effects must be prepared and submitted to a designated sector of the Office of Management and Budget. 


But if this requirement was intended to slow down regulations that might adversely affect the energy sector, it certainly does not appear to have worked.

In short, only direct and specific action could bring about real change in the EPA’s approach.

Thus, the president might announce disappointment with the direction that the EPA has been taking and nominate a new administrator with industry experience and different priorities.  Not that we expect this to happen, but it would have an impact.

Congressional action, which seems more likely at this point, might start with a statute (a) barring the EPA from regulating carbon emissions under the Clean Air Act without explicit Congressional approval, and (b) imposing a five-year moratorium on lower ozone limits. 

Then extensive Congressional hearings should be conducted on business and consumer complaints about the EPA, with the objective of  identifying other cases in which intervention is necessary.

Would such actions be controversial?  Absolutely, because environmental and public health zealots, companies and groups hoping to profit from “green” energy, and many academics and commentators support the path on which the EPA has been treading.

But saving the US economy is important, and we say “full steam ahead.” 

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Wow! I would love to be on the team with authority to start killing all of these stupid regulations.  –  Retired finance executive

top     close    ww3@atlanticbb.net

11/22/10 – Regulatory common sense requires eternal vigilance

SAFE has proposed a Regulatory Common Sense Commission to review the regulatory activities of government with a view to (a) improving the performance of necessary tasks, (b) eliminating unnecessary tasks, and (c) reducing regulatory burden on the private sector.  How might the RCSC go about such a review?

BACKGROUND: The primary focus would be on federal regulatory activity, but there are layers of state and local regulation as well.  From a business standpoint, it all adds up and the cost is passed on to consumers.

Estimates of the cost of federal regulations are inherently imprecise, but the overall burden is heavy. Thus, one study estimates the total cost of federal regulations in 2008 as $1.75 trillion, an average of over $15,000 per U.S. Household. The Impact of Regulatory Costs on Small Firms, Nicole & Mark Crain, Lafayette College (Easton, PA), SBA Office of Advocacy, September 2010, pages 51-55.

http://bit.ly/caHO7m (download PDF)

Another study estimates regulatory compliance costs in 2009 as follows: Economic $630B, Environmental $236B, Tax compliance $208B, Workplace $113B. The $1.2 trillion total about equaled annual revenues from individual and corporate income taxes. Ten Thousand Commandments 2010, Clyde Crews, Competitive Enterprise Institute, 4/15/10, pages 7-13.

http://bit.ly/dmhc8n (download PDF)

Government enforcement costs add to the overall burden.  They are running about $50B per year.  Id, page 12.

There is nonstop rulemaking activity.  Over 20,000 pages of final federal rules were published in 2009.  As of December 2009, 59 departments, agencies and commissions had 4,043 agency rules in the “unified agenda” pipeline (rules recently issued or in process).  The eight most prolific issuers were the Environmental Protection Agency (331), and the Departments of Treasury (528), Agriculture (327), Commerce (300), Interior (277), Homeland Security (237), Health & Human Services (231), and Transportation (230). Id, pages 16-21.

Due to passage of GovCare and GovFinance earlier this year, the pace of rulemaking activity is poised to accelerate. 

Feast your eyes on the process flow chart of the redesigned healthcare system. "This portrays only about one-third of the complexity of the final bill,” says Representative Kevin Brady (R-TX), “it’s actually worse than this."


The GovFinance legislation leaves numerous decisions to regulators.  No one will be sure what the bill accomplished until the implementing regulations are issued – over the next several years.  For financial activities, Congress seeks studies before cracking down, Jim Kuhnhenn, Washington Examiner, 7/8/10.

Time after time as Congress wrestled with contentious decisions on how to re-regulate the nation's financial industry, it opted for what often is the classic Washington punt: further study. In all, the 2,300-page overhaul of financial regulations requires more than 60 such studies, on everything from examining the presence of shoddy Chinese drywall in foreclosed houses to judging the financial literacy of U.S. consumers.


ISSUES: While continuing growth of the regulatory thicket strikes us as alarming, proponents of big government probably feel otherwise.  After all, they may reason, there are many problems to be solved and Congress is wise to leave the details to “the experts.”

Experience shows, however, that administrative rulemaking works better in theory than in practice.  See, e.g., The Death of Common Sense: How Law Is Suffocating America, Philip Howard [an attorney], Grand Central Publishing, 1994.


When asked to address a specific problem, a government agency will often prescribe a solution that gives inadequate recognition to cost and other practical considerations, e.g., by prescribing the “ideal daycare center.” Page 40.

Annual tuition costs over $4,000 [as of 1994] in Massachusetts.  What happens to the parents who cannot afford this Norman Rockwell vision? Approximately 80 percent of all children are cared for in unregulated facilities, many in illegal day care operations. 

Regulators tend to focus on preselected points while ignoring other possibilities.  Thus, after Amoco spent $31 million at its Yorktown, VA refinery to comply with EPA rules for waste pipes, it was discovered that the primary benzene pollution problem was on the loading dock and a much less expensive solution was possible.  Page 7.

The effort to cover all possibilities and leave no room for judgment results in regulations so long and cumbersome that they are disregarded in practice – unless and until agency inspectors bring them up. 

[OSHA inspectors] spend a lot of time upstairs in the office looking at paperwork; [A company] was recently cited because the wrong box was accidentally checked on some internal forms.  About 50 percent of OSHA violations across the nation are for not keeping the forms correctly.  [Page 13-14]

One observer has noted that it is common knowledge in the meat-packing industry, “denied only by USDA spokesmen, that if all meat-inspecting regulations were enforced to the letter, no meat-processor in America would be open for business.”  [Page 32]

Federal government intervention was appropriate to end racial segregation, but the recognition and enforcement of many other “rights” that are not to be found in Constitution has had unfortunate results.  Page 140.

Lose your job?  Consult the Yellow Pages.  The same lawyers who advertise for personal injury claims now seek out fired employees.  It’s just a business.  Defending the claim can easily cost an employer more than $100,000, so there is a powerful inducement to settle.  Even the most dedicated fighters of discrimination acknowledge, as one did to me, that “it is possible to create a discrimination claim out of almost any workplace dispute.”

And while seeking to tell everyone else what to do, government agencies are notoriously inefficient in running their own operations. Page 74

Fixing a $50 lock in a New York public school takes ten steps over a six-month period, including review by someone called the “supervising supervisor.”  *** The federal government has estimated that, annually, 289 million hours are spent complying with its procurement procedures.

For readers who might view a 16-year-old book as passé, here are some current examples of rulemaking run amok.

The San Francisco Board of Supervisors recently banned McDonald’s Happy Meals with toys on grounds that they promoted childhood obesity. Mayor Gavin Newsome vetoed the ban on grounds that it “went too far” in telling people how to spend their own money, but this may not be the end of the story.  San Francisco Sentinel, 11/16/10


The Pentagon has assembled 26 pages of regulations about making brownies.  Watch the video (3+ minutes) to gain an appreciation of the level of detail involved.  There is no common sense in government, David Freddoso, Washington Examiner, 11/10/10.


An SEC rule would require companies to subsidize the campaigns of director candidates nominated by as few as 3% of their shareholders.  The rule will allegedly “empower unions, animal rights activists, and other political special interest groups in the corporate boardroom at the expense of ordinary shareholders.”  A legal challenge is in process.  Getliberty.org, 9/30/10.


Then regulators have differences of opinion, such as about what the street signs in New York City should look like.  A federal proposal would force the state, already on the edge of bankruptcy, to replace 250,900 signs at a cost of $110 each.  $27 million to change NYC signs from all-caps, Jeremy Olshan, New York Post, 9/30/10. 


STRATEGY:  A generalized assault on government regulations would be pointless.  Every regulation has supporters – if only the government employees involved in its administration – and not all regulations are bad.

As for separating the wheat from the chaff, who has the time to review hundreds of thousands (perhaps millions) of pages of regulations?  The RCSC’s mission could become a 1,000-year study.

Therefore, the game plan would be to change attitudes, encourage cooperation, and home in on the worst offenders.  The following tactics might help the RCSC gain traction.

# Sell problem before offering solutions.  We are not in agreement with everything the Fiscal Commission has done this year, but they deserve credit for broadcasting a series of discussions – complete with expert testimony – about the scope and gravity of the fiscal problem.  The RCSC could conduct similar sessions about the dire consequences of regulatory bloat for businesses and the American public.

# Support “quick hit” results. Americans resent rules or programs that interfere with decisions they are accustomed to making for themselves.  If members of the new Congress are up for rolling back some “nanny state” regulations, emulating repeal of the 55 MPH national speed limit in 1995, this could set the stage for other gains.  A bright idea for Boehner: GOP majority needs to banish Big Brother from the bathroom, Washington Times, 11/11/10.

Unless Congress acts, Thomas Edison's greatest invention - the standard old light bulb - will become contraband in 2012, and American homes will be haunted by the pallor of deadly, mercury-filled fluorescent fixtures. Like so many "green" laws, this measure is corporate welfare for some manufacturers who stand to enjoy a tidy profit when the government forces the public to buy the more expensive curlicue bulbs.

Along the same lines, the GOP needs to repeal the foolish ban on high-flow toilets and functional shower heads. Past Congresses thought that by passing a law forcing Americans to use commodes designed by bureaucrats, water savings would magically appear. The reality is that Americans ended up flushing more often, using the same amount of water - or more.


Overbearing airport screening might be another target.  Whatever the best technique is, perhaps the Israeli airline El Al model (sophisticated profiling and questioning), the Transportation Security Administration (TSA) has surely yet to find it.  Amid airport anger, GOP takes aim at security, Byron York, Washington Examiner, 11/15/10.

"When the TSA was established, it was never envisioned that it would become a huge, unwieldy bureaucracy which was soon to grow to 67,000 employees," says Rep. John Mica (R-FL). "As TSA has grown larger, more impersonal, and administratively top-heavy, I believe it is important that airports across the country consider utilizing the opt-out provision provided by law."


# Attack programs or agencies.  The public is typically disinterested in regulatory legalese. The deficiencies of a program or agency are more tangible, and therefore easier to communicate.  Also, victory over a flawed regulation may prove temporary, as the responsible agency will likely propose a new one that is not much better.

Here are some regulatory arrangements that merit scrutiny.  The list is meant to be illustrative rather than exhaustive.

• U.S. Department of Education – DOE is involved in an area that has traditionally been managed at a state or local level.  Its role is only tolerated due to the provision of federal grants, and its provable contribution is meager.

• Nuclear Regulatory Commission – The NRC oversees a technological area in which the federal government has played the lead role.  State agencies are also seeking to regulate nuclear power plants, but they cannot do much except slow down progress.  Preemptive federal jurisdiction would seem appropriate.

• Securities & Exchange Commission; Commodity Futures Trading Commission – These federal agencies preside over the issuance and trading of securities in two segments of the financial markets.  Why not combine them?  Similarly, why have two antitrust watchdogs: Antitrust Division (Justice Department) and Federal Trade Commission?

• Programs that entail tinkering with the free market through the use of tax credits, import duties, direct subsidies, government financing, or punitive regulation of non-preferred activities.  Examples: farm subsidies, renewable energy, ethanol, proposed EPA regulation of greenhouse gas emissions.

• Programs premised on the inability of ordinary Americans to manage their own affairs, wherefore the government proposes to do their thinking for them.  Examples: GovCare definition of acceptable healthcare insurance coverage, Consumer Financial Protection Bureau created by GovFinance.

# Hold leaders accountable.  U.S. political leaders sometimes act as though they have no connection with the activities of regulatory agencies. In reality, however, the president and Congress between them set the ground rules, appoint (or remove) agency heads, and can clip the wings of an erring agency.  Control is a question of will, not of power.

Furthermore, administrative initiatives generally originate in Congress.  Witness the Commercial Advertising Loudness Mitigation (CALM) bill, which would direct the Federal Communications Commission to address a longstanding complaint that may not be as simple to resolve as it sounds.  Senate votes to turn down the volume on TV commercials, Andrew Taylor, Washington Examiner, 10/1/10.

Managing the transition between programs and ads without spoiling the artistic intent of the producers poses technical challenges and may require TV broadcasters to purchase new equipment.


Hmm, wonder who will pay for that new equipment – could mean more commercials – maybe viewers should use their remotes instead.  In any case, wouldn’t you think the US Senate would have more important things to think about? 

Another example is a proposed overhaul of the food safety laws, which would give the Food and Drug Administration greater authority to order food recalls.  Proponents say the FDA needs to get involved because “food-borne illnesses contribute to 76 million illnesses, 325,000 hospitalizations, and 5,000 deaths in the United States each year.” 

Food safety has improved over the years, however, and the states are already regulating in this area.  Is it truly desirable to saddle the food industry with two full-blown sets of regulators?  Lame ducks take on food safety, Jillian Bandes, Townhall.com, 11/17/10.


# Be flexible and pragmatic – There is no universal cure for the regulatory morass.  Conservatives thought they had one in 1946, but the results of the Administrative Procedures Act have been decidedly mixed.  Although the rulemaking process is more deliberate and systematic now, it still fails to produce reasonable results – and ever more attorneys and judges are involved.  Death of Common Sense, pages 79-83.

As already discussed, Congress may be prepared to tackle some regulatory programs that have aroused public ire – the so called “quick hits” – without much prompting.

In some areas, the most effective approach may be to cut spending.  That is how we would suggest trying to get federal bureaucrats out of U.S. schools and to end subsidies for renewable energy and ethanol.  Sorry, folks, these programs are simply not affordable.

The regulations in some areas may be OK, or close enough not to spend time and effort trying to fix them.

Organizational rationalization may sometimes be helpful, e.g., pushing to have one agency – versus two – involved in antitrust policy.

Then there are regulatory agencies that should not be eliminated or defunded, as they have valid reasons for existence, but are spiraling out of control and need to be redirected.  The only promising approach with such “hard core” offenders is intervention by Congress and/or the president.  As an example, tune in next week for our thoughts about reining in the Environmental Protection Agency.

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11/15/10 – Fiscal Commission: Co-Chairs’ Proposal      Read a Reply

Apr. 27

May 26

June 30

July 28

Sept. 29

Nov. 30

Dec. 1


On recently visiting the Fiscal Commission’s Website, we noted that the date of the sixth meeting had been changed from November 10 (eight days after mid-term elections) to November 30.  No explanation was provided, and it seemed curious that the next to last and last meetings of the Commission would take place on successive days.

Things became clearer on November 11, when it was reported that Co-Chairs Erskine Bowles and Alan Simpson had released a series of draft recommendations.  Apparently, a meeting of the Commission did take place on November 10, after all, but the proceedings were blacked out.

In any case, a detailed proposal is now in play.  It takes the form of two 11/10/10 documents: (a) Co Chairs’ Proposal (50-slide presentation), and (b) $200 billion in illustrative savings (a 24-page list of 58 ideas to save money, basically documenting suggestions in the presentation).

http://www.fiscalcommission.gov/news (click links to download PDF files)

SUMMARY: The Co-Chairs’ Proposal (CCP) begins with ten “guiding principles and values,” including:  Patriotic duty to come together on a plan . . . Washington must lead . . . a sensible, real plan requires shared sacrifice . . . tell Americans the truth . . . don’t disrupt a fragile economic recover, start gradually . . . protect the truly disadvantaged . . . cut [red tape and inefficient spending] and invest [education, infrastructure, high-value R&D] to promote economic growth and keep America competitive . . . cut spending we simply can’t afford . . . bring spending down to 22% and eventually 21% of GDP . . . set goal of 3% annual productivity growth in public sector . . . reform and simplify tax code . . . cap revenue at or below 21% of GDP . . . keep [entitlements] sound over the long run . . . reduce debt burden as a share of GDP.

Highlights: Nearly $4 trillion in deficit reduction through 2020 (see table below) . . . reduces deficit to 2.2% of GDP by 2015, exceeding president’s goal (about 3% of GDP) . . . reduces tax rates, abolishes AMT, cuts “backdoor spending” in the tax code . . . stabilizes debt [as a % of GDP] by 2014 . . . ensures lasting Social Security solvency.

DEFICIT REDUCTION ($ in billions)















Tax increases**







Interest savings














            *About 2/3 discretionary spending, 1/3 “mandatory” spending.

            **Includes “other revenue” (an increase in the gas tax).

Another chart projects the longer-term outlook, showing a downtrend in deficit spending that would balance the budget around 2037.


























[Public] Debt






Discretionary spending cuts: The basic mechanism to force spending discipline would be spending caps, to be enforced by (1) a point of order against legislation approving excess spending, and (2) a sequester triggered at end of session if final appropriations were above the cap. The dollar amount in 2015 would be $204B below the president’s budget request (FY 2011 budget).

Half of the cuts would come from defense spending, but with a “firewall” so that the defense percentage could not readily be raised or cut.  “New Congress will renegotiate firewalls beyond 2015.”  Move Transportation Trust Fund to mandatory.  Change to biennial budgeting.  “Establish bipartisan Cut-and-Invest Committee to de-authorize outdated, low priority and inefficient programs and recommend high priority long-term investments.”

Illustrative defense cut and domestic cut lists are presented ($100B each in 2015).  The military list is relatively specific, e.g., overhead savings Secretary Gates has promised ($28), reduce procurement by 15% ($20), freeze noncombat military pay for 3 years ($9.2), reduce overseas bases by one-third ($8.5), cut spending on R&D, etc. by 10% ($7), etc.  Listed domestic cuts are rather general, e.g., eliminate 250K non-defense contractors ($18.4), eliminate all earmarks ($16), freeze non-Defense employee compensation ($15.1), cut [non-Defense?] federal workforce by 10% ($13.2), Cut-and-Invest Committee activity ($11), 26 other options of $2 billion or less ($17).  The only functional non-defense cuts on the chart: reduce Congressional & White House budgets by 15% ($0.8), slow growth of foreign aid ($4.6), eliminate Rural Utility Service programs ($0.5), eliminate funding for commercial spaceflight ($1.2), and sell excess federal property ($1).

Tax reform: Goals: lower rates, simplify tax code, broaden tax base, reduce “tax expenditures”, improve compliance, “make America the best place in the world to start and grow a business,” and reduce the deficit.

Three approaches for reforming the income tax are offered: (1) “The Zero Plan”: set three individual tax rates and one corporate rate, eliminate AMT, eliminate all $1.1 trillion of tax expenditures, “dedicate a portion of savings to deficit reduction and apply the rest to reduce all marginal tax rates,” and then “add back any desired tax expenditures, and pay for them by increasing one or all of the tax rates from their zero-expenditure low.” (2) Wyden-Gregg plan (somewhat similar to the Zero Plan, except tax preferences would be eliminated on a case-by-case basis).  (3) Tax Reform Trigger: Call on Finance Committee in Senate, Ways & Means Committee in the House, and Treasury Department to “develop and enact comprehensive tax reform by end of 2012.” Enforce by escalating “haircuts” to itemized deductions, etc. starting in 2013.

Mandatory budget options: Planned healthcare savings ($282B total for 2011-20) to pay for the “Doc Fix” (payment increases necessary to keep doctors seeing Medicare patients): “expand cost sharing in Medicare and create a cap on catastrophic costs” ($85), enact comprehensive tort reform ($64), require drug rebate payments ($59), etc.

Beyond the Doc Fix:  basically assumes productivity improvements: (1) expand successful cost-containment demonstration projects by 2015, (2) identify an additional $200B [annually or over what period?] in federal health spending, and (3) strengthen the Independent Payment Advisory Board.  Alternatives to administratively determined savings would require affirmative Congressional approval.

A table of illustrative healthcare savings is provided, which sums to $47B in 2015 (over half of projected mandatory spending cuts for that year).  Of this total, $15B would be achieved at the expense of the states (convert federal share of Medicaid payments for long-term care into a capped allotment, reduce taxes that state may levy on Medicaid providers) and $5B (changes to Tricare to increase cost sharing for military retirees was also listed on the Defense spending cuts chart).

After 2020, federal healthcare expenditures would be monitored every 2 years.  If the rate of growth exceeded GDP+1%, “require president to submit and Congress to consider reforms to lower spending, such as: increase premiums . . . overhaul the fee-for-service system . . . add a robust public option and/or all-payer system in the exchange . . . further expand authority of IPAB.”

Other mandatory savings: (1) shift to “chained CPI” for all indexed programs because current measures of inflation [supposedly] overestimate increases in cost of living by failing to account for “substitution bias.” (2) Reduce farm subsidies by $3B per year. (3) Adjust the formula for calculating civil service pensions and increase federal worker contribution requirement.  Etc.  Aggregate savings: $23B in 2015.

“Enforcing the plan to ensure deficit reduction goals are met”: Annual review, action required by the president and Congress if: (a) before 2015, the budget is projected to be out of primary balance (revenues to cover all outlays except interest); (b) after 2015, if the debt has increased as a percentage of GDP from the prior year.  However, Congress and the president could waive requirement for corrective action “during years with low economic growth, unanticipated military conflict, or major disaster.”

Reforming Social Security: Treated separately on grounds that the goal in this area is to “reform Social Security for its own sake, not for deficit reduction.”  Proposed changes: (A) reduced benefits for well to do retirees, (B) raising the retirement age, currently being raised to 67 by 2027, so that it would reach 68 in about 2050 and 69 in about 2075 – with “hardship exemption for those unable to work beyond 62,” (C) “chained CPI” for cost of living adjustment of pension benefits, (D) “reduce elderly poverty by putting into place a new, effective special minimum benefit,” and (E) gradually increase the taxable maximum payroll tax basis to capture 90% of wages by 2050. 

Also, “promote smart retirement decision” by (1) giving retirees a choice of collecting half of their benefits early to minimize actuarial reduction; (2) direct Social Security Administration “to design a way to provide for the early retirement needs of workers in physical labor jobs,” and (3) improve information on retirement choices via “an education campaign.”  Also, a laundry list of other “alternative Social Security options,” including: uncap the disability insurance portion of FICA taxes (clearing the way for higher payroll taxes), reinstate college benefits for child survivors, etc.

REACTIONS:  What should one make of the CCP?  Before offering our assessment, let’s review some public statements by others.  Here goes (links omitted for brevity, in alphabetical order, Fiscal Commission members in red print):

#Andrew G. Biggs, American Enterprise Institute: “Congress should consider a reform that could increase retirement incomes while boosting the economy and federal tax revenues: gradually raising Social Security's early retirement age of 62.”

#Co-Chair Erskine Bowles: “This debt is like a cancer that will truly destroy this country from within if we do not address it."

#Senator Tom Coburn (R-OK): "In the real world, no family facing tough economic times has the luxury of treating portions of their budget as sacrosanct. Neither should Congress. The fact is, if our country is going to survive for another generation, Congress has to make the tough choices now that will put us on a sustainable path."

#Senator Kent Conrad (D-ND) on ABC’s Good Morning America: The nation faces the real possibility of becoming a "second-tier economic power" if it fails to address the trillion-dollar-plus deficit. Simply cutting waste and fraud will not solve the problem, and changes to Medicare and Social Security are needed because both programs are headed toward insolvency.  "People can say we want to keep what is. What is is not affordable."

#Jon Cowan, Third Way, says that it is “put our shut up” time for both conservatives and liberals.  Republicans failed to produce their often-promised deficit reductions when they controlled the government, while Democrats refuse to acknowledge that entitlement programs such as Social Security and Medicare must be trimmed.

#Senator Jim DeMint (R-SC) sees no need to trim Social Security. "If we can just cut the administrative waste," he said on NBC’s Meet The Press, "we can cut hundreds of billions of dollars a year at the federal level."

# Senator Richard Durbin (D-IL) said he would not vote for the plan. "There are things in there that I hate like the devil hates holy water."

#Allison Acosta Fraser, Heritage, called the proposal a good first step. “Like many such reports, there are good and bad policy elements. Indeed, there’s something for everyone to like and hate, though two issues have special importance. First, the co-chairs do not kick the can down the road but lay out some tough choices for cutting spending. Second, the co-chairs did not propose a value-added tax, or VAT.”

#Diana Furchtgott-Roth, columnist: “If Congress regularly overrides an existing law requiring Medicare payments to doctors to be cut when the program is in deficit, as it is today, why should the Commission's recommendations be taken more seriously?  What is needed is a radically new model for Medicare, one that lowers costs through competition and market forces, just as prices for cosmetic surgery and Lasik have declined over the past decade.”

#Senator Judd Gregg (R-NH) called the plan "a genuine product that deserves very serious attention." Overall, he said, federal spending would take a bigger hit than taxpayers.  Deficit reduction would supposedly be achieved “about 75% in spending reductions and about 25% on the tax side.”

#David Harsanyi, columnist: The $200 billion in proposed spending cuts are reductions in planned spending [increases]. “That's like promising to lose 10 pounds in two years -- after first gaining 20. And if politicians remain true to their calling, we know that discretionary budgets cuts will last until the first ‘emergency’ emerges. New taxes and spending programs, on the other hand, typically sunset when the sun actually runs out of hydrogen.”

#Scott Hodge, Tax Foundation: "Many pundits and lobbyists were expecting the deficit commission to suggest a value-added tax, which would have triggered many denunciations. The absence of a VAT makes everyone take a hard look."

#John Irons, research and policy director for the Economic Policy Institute: "By beginning austerity in 2012, the report does not allow enough time for the economy to recover, nor does it call for the policies necessary to get the economy back on track."

#David Limbaugh, columnist: “Our astronomical deficits are the result not of low taxes, but of profligate spending. So why do we accept the premise that the starting point for deficit and debt reduction discussions must be various tax hikes, tolerating unacceptably high levels of spending, and seeming to take off the table the eradication of programs the government was never intended or constitutionally authorized to establish in the first place?”

#Maya MacGuineas, president of the Committee for a Responsible Federal Budget: "In a period when there has been little good news on the deficit and debt front, this is truly a most encouraging sign. If this co-chair plan is meant to be the starting point, I'd say it would be a pretty terrific ending point.”

#Grover Norquist of Americans for Tax Reform: "[This] confirms what everyone has known—this commission is merely an excuse to raise net taxes on the American people.”

#President Barrack Obama, from Seoul, South Korea: “Before anybody starts shooting down proposals, I think we need to listen, we need to gather up all the facts.” 

#Representative Nancy Pelosi (D-CA) slammed the plan as “simply unacceptable.”

#Peter G. Peterson, Peterson Foundation: “It is critical that all viable reform options be on the table for consideration, and this draft proposal sets the table for a constructive dialogue.”

#Representative Paul Ryan (R-WI): “There ‘s things in here that are good, that can be built on.”

#Representative Janice Schakowsky (D-IL), commenting to reporters as the draft was being released:  “This is not a proposal I could support.  On Medicare and Social Security in particular, there are proposals I could not support."

#Co-Chair Alan Simpson: "We have harpooned every whale in the ocean, and some of the minnows. No one has ever done that before."

#Martin Sullivan, Tax Analysts: “The proposals are a major step forward and would help get the tax code out of business decision-making.”

#Eric Toder, Tax Policy Center: “In theory, a territorial tax system will help U.S.-based firms to compete more effectively in global markets.”  But, “it may also increase incentives for them to invest abroad.”

#Matt Towery, former aide to Newt Gingrich: “[The] Commission recommended treating capital gains at the same tax rate as ordinary income. Are they insane? It was the capital gains cut that . . . got the economy moving in the late 1990s.” 

#Richard Trumka, AFL-CIO president: "The chairmen of the deficit commission just told working Americans to drop dead. Especially in these tough economic times, it is unconscionable to be proposing cuts to the critical economic lifelines for working people, Social Security and Medicare."

#David Walker, former comptroller general: "In the end, the president is going to have to decide whether to incorporate some of this into the 2012 budget.  He's going to have to lead, because if the president doesn't lead on this, it goes nowhere fast."

#Robert Willens, independent tax expert, cautioned that if corporate tax rates were to drop, so would the value of deferred tax assets (such as tax loss carryforwards).  Thus, Citigroup might have to book a $14B charge to earnings.

ASSESSMENT: It should be acknowledged at the outset that the CCP represents a serious proposal, which stands in marked contrast to the irresponsible posturing on spending and taxes that has become all too common in Washington.  Co-Chairs Bowles and Simpson deserve credit for putting it on the table for discussion.

Despite strenuous objections at both ends of the ideological spectrum, there seems to be considerable support in the middle.  If the object of the exercise is to craft a political consensus, one would have to say that the CCP is shrewdly designed.

Other commentators have characterized the CCP as a bold and tough proposal, which cannot win majority support of the Commission.  Deficit plan matches $3.8 trillion math with tough politics, Heidi Przybyla and Brian Faler, Bloomberg News, 10/11/10.

A plan offered by the leaders of President Barrack Obama’s commission to reduce the federal deficit might work. It just won’t happen.


We are not convinced of the impossibility of lining up 14 Commission members in support of the proposal, particularly given the possibility of “horse trading” about the details.  Certainly, the Republican commissioners do not seem to be united in opposition.

There is far more at stake than reaching a consensus, however, because the Commission’s report will be for naught unless it proposes a workable solution for the fiscal problem.  We cannot agree that the CCP has “harpooned all the whales” (to use Co-Chair Simpson’s metaphor), nor even that it represents a bold and tough proposal.  Without getting into a detailed (and necessarily lengthy) critique, here are our basic concerns:

First, the analysis ignores the deteriorating fiscal situation of state and local governments around the country.  If California declared bankruptcy, say, who could doubt this development would be deemed to trigger the “low economic growth, unanticipated military conflict, or major disaster” exception that is specified on slide 41? 

A similar problem exists with SAFE’s spending ceiling, which could be exceeded in “a true national emergency.”  However, our proposals would provide some recognition of state fiscal problems by (a) ceding exclusive state tax jurisdiction over alcohol, tobacco, and estates, and (b) relieving the states of federally imposed requirements for education (federal grants would end) and Medicaid (federal block grants would continue).

Second, it is time to end the artificial distinction between “discretionary” and “mandatory” spending, which is perpetuated in the CCP.  Compare the approach in our recent analysis.  Getting down to brass tacks about spending, 10/25/10.

De-liberalizing benefit programs to which people have grown accustomed is a delicate matter, and the changes cannot be made overnight.  But if all these programs are regarded as “mandatory” expenditures, which cannot be adjusted, drastic cutbacks will be unavoidable down the line.

Third, the CCP does not address soaring healthcare outlays in a meaningful way.  Top-down driven productivity improvement is doomed to fail, and the only way to control costs without de facto rationing is by enhancing competition and individual choice.


Fourth, the proposed Social Security “reforms” would leave the minimum retirement age at 62, and a new increase (from 67 to 69) in the normal retirement age would not begin to take effect until after 2027.  We believe much faster action is needed. 

Also, the proposed “smart retirement” options represent an attempt to claim some of the advantages of converting Social Security into a businesslike retirement plan (with funded personal accounts) for younger workers.  The real thing would be far better.

Fifth, a successful program for cutting “discretionary” spending programs will necessarily involve a thoughtful review and pruning of government functions/programs so that unneeded, wasteful, or duplicative programs are eliminated while justifiable programs are adequately supported.  The illustrative domestic spending cuts in the CCP go to great lengths to avoid this reality – and are basically useless.

Our suggestion for a follow on Spending Reduction Commission has been perverted into a proposal for a “bipartisan Cut-and-Invest Committee” which would be charged with recommending new spending programs to replace the ones that it proposed for elimination.  Oh, please!

Sixth, the “Zero Plan” for tax reform has some attractive features, but it would leave several major problems unscathed – including the double taxation of corporate earnings, the marriage penalty for two-earner households, the high number of Americans who are exempted from the individual income tax, and the proliferation of federal excise taxes (including the new GovCare levies).

With all due respect, our SimpleTax proposal would be a better choice.  Also, we would prefer a 20% (versus 21%) of GDP target for federal revenues in tandem with greater discipline on the spending side.   

Seventh, the budget should be balanced by 2015, not 2037.


*   *   *   *

Many apologies, dear readers, for going on at such length this week.  But the subject is time critical, and we wanted to get our reactions out fast.

Your input would be greatly appreciated, so do let us know what you think.

*     *     *     This Blogs Reply     *     *     *

Maybe the draft Fiscal Commission proposal is better than nothing, but balancing the budget many years later is very unrealistic.  We do not know what the future will bring.  Your proposal for earlier balance is in the right direction.  However, we need much stronger as well as earlier action.
       I think the key is the American public.  We should make it clear that we will punish members of Congress who do not at least support the proposals and will reward those who work for more drastic action than described in the proposals.
      One example:  Stop payments from the bankrupt federal government to the states.  This includes Medicaid. –  SAFE director

My hat is off to you!  Hope our legislators are listening. –  IBM alumnus.

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11/08/10 – Internal Revenue Code 2.0 – part two

SAFE has developed a SimpleTax proposal that would streamline the tax law and also – together with a spending ceiling of 20% of Gross Domestic Product (GDP) – help to balance the budget.  Most revenue components (payroll taxes, corporate income tax, etc.) were discussed last week.  We now turn to the individual income tax, which accounts for 40+% of government revenue.

REVENUE GOAL: To bring total revenues up to 20% of GDP in 2015, the individual income tax would be increased as indicated in the following recap.

($ in billions)




2010 est.

2015 est.

2015 GOAL








% of GDP







% of revenues







INCIDENCE: As a result of a graduated tax schedule, plus applicable tax exemptions, deductions and credits, taxpayers in the top half Adjusted Gross Income (AGI) cohorts currently pay nearly all of the income tax.  The following IRS data are based on tax returns (roundly 140 million) for 2008.  

Adjusted Gross Income


Income tax (net)

Avg. tax rate

Top 5% ($160K+)




6-10% ($114K+)




11-25% ($68K+)




26-50% ($33K+)




51-100% (≤ $33K)









A progressive rate structure for the income tax is generally considered appropriate, and the average tax rates for high-income taxpayers do not appear excessive. The very low average tax-rate for bottom half taxpayers is due in large part to refundable tax credits, which allow some lower income Americans to receive net tax refunds while others are paying substantial income taxes.

PROPOSED CHANGES: (a) taxable income; (b) tax exemptions, deductions & credits; (c) Alternative Minimum Tax; and (d) tax rates.

a. Taxable income: To prevent duplicative taxation of corporate earnings, we recommend that dividends from standard corporations, and capital gains from investments in their stock, be excluded from the taxable income of shareholders.  Income of “pass through” entities (S corporations and partnerships), and capital gains from investments in such entities, would remain subject to individual income tax. 

Net gambling winnings should also be exempted from tax in the interests of simplification.  Since few gamblers come out ahead in the long run, the loss in tax revenue would be minor.

Certain employee benefits are deductible by employers, but not taxable to employees.  Such benefits represent economic income, and they should be taxed in the same manner as salaries and wages.  As a result, taxpayers with the same economic income would pay the same income tax without regard to their employment status.  

Would taxing the cost of employer-provided healthcare insurance (HCI) coverage disrupt the healthcare system?  Quite the contrary, and we have recommended that this tax preference be eliminated rather than “leveling the playing field” by providing a healthcare tax credit for individuals who do not receive HCI coverage through an employer. In search of real healthcare reform, May 2009, recommendation 2.


Gross taxable income after the foregoing changes would be marginally higher than AGI as presently reported.  That is, exempting corporate investment income and net gambling winnings from individual income tax would be more than offset by taxing currently exempt employee benefits. 

b. Tax exemptions, deductions and credits – Some tax preferences should be preserved, in our opinion, as follows:

* Personal tax exemptions are warranted so that people with de minimis income will not be required to file a return, but the present personal exemptions are too high.  We suggest a personal exemption of $1,000 per person, which once established would be indexed for inflation.

* Interest income on state and municipal debt has been held exempt from federal income tax on constitutional grounds; it should continue to be exempt on this basis. (However, the recently instituted program for subsidizing interest payments on taxable municipal bonds has no constitutional foundation; it should be allowed to expire at the end of this year.  “Build America” bonds up in the air after GOP victory, CNBC.com, 11/3/10.)


* Expenses for taxpayer businesses should continue to be deductible so that tax will be paid on business income rather than gross receipts.

* For U.S. taxpayers subject to foreign income taxes, e.g., workers on international assignments, foreign tax credit is appropriate to avoid double taxation of their income.

All other income tax exemptions, deductions (mortgage interest, charitable contributions, state and local taxes, childcare, casualty losses, etc.) and tax credits (Earned Income, Child, energy, etc.) would be eliminated.

While some of these tax preferences have arguable merit, a case-by-case review would trigger endless debate.  Note: the flat tax or Fairtax would also eliminate them. 

c. Alternative Minimum Tax – The AMT is an alternative calculation method for the income tax, not a separate tax. Originally enacted in an attempt to ensure that wealthy taxpayers could not use “loopholes” to avoid all tax liability, the AMT is becoming potentially applicable to more and more taxpayers because the specified income thresholds were not indexed for inflation.  Some 4 million taxpayers are currently subject to AMT, forcing them to calculate their tax liability twice and pay the AMT differential. 

But for a perennial AMT patch by Congress, nearly 30 million more taxpayers would be thrown in the same boat.  It is time to end this annual exercise by repealing the AMT for everyone.  Tax cuts to dominate lame-duck Congress, Damian Paletta, Wall Street Journal, 11/2/10.


d. Tax rates – There would be a single tax rate schedule with the SimpleTax (versus four schedules under current law: married & filing separately, single, head of household, and married filing jointly).  However, two-earner households would have the option of separate tax calculations for each spouse in order to prevent any “marriage penalty.”

With the foregoing pruning of tax preferences, income tax rates at all income levels could be cut by 5+ percentage points.  Here is an example, which compares the proposed SimpleTax rates to the 2009 actual rates for a married couple, filing jointly.


2009 actual

Income bracket

Tax rate

Avg. rate*

Avg. rate*





















                        *Calculated for income at bracket top.

Applying these rates to 2008 AGI cohort data (see earlier chart), the SimpleTax would produce marginally higher tax revenue than was paid for that year.

2008 Actual Income Tax ($B except in first column)

@ SimpleTax Rates

AGI Cohort


Inc. Tax

Avg. rate

Inc. Tax

Avg. rate

Top 5% ($160K+)






6-10% ($114K+)






11-25% ($68K+)






26-50% ($33K+)






51-100% (≤ $33K)












A further tax increase would result from recommended net additions to taxable income, as discussed above, which should bring total revenue to roundly 20% of GDP.  Matters would then stand as shown in the far right column of the following table.

Sources of revenue



2010 est.

2015 est.

2015 GOAL

Individual inc. taxes






Corporate inc. taxes






Payroll taxes, etc.






Excise taxes






Other receipts












ASSESSMENT: In reaction to last week’s entry, which began the rollout of the SimpleTax proposal, a SAFE director suggested more urgent action than we have envisioned.  Here is an extract from his comment.

Nibbling away at little features in the tax code does nothing in the medium run. Paying higher taxes is not helpful. The national aggregate budget must be cut more than 15% this next fiscal year to get close to a balanced budget [in all states and the fed] with the enormous tax load we currently carry. Then, taxes must be cut until new revenues come from new business growth in the private sectors.

You cannot ignore California, New York, Illinois, New Jersey and some others. They will continue to spend and beg Washington for alms, and sadly Congress is likely to give it to them in return for meaningless promises to do better in the future.

In defense of our suggestions (as presented in the 10/25, 11/1 and current entries) for balancing the federal budget by 2015, we would make the following points.

First, Congress can only directly control federal spending and taxes; the state and local fiscal situations are a separate matter.  But the proposed 20% of GDP spending ceiling assumes no exceptions for any situation short of a true national emergency.  If California (for example) cannot pay their bills, then let them declare bankruptcy.  (Although there is no formal procedure for this, a state could presumably repudiate selected obligations and defend its position based on inability to pay.) 

State and local fiscal problems have been concealed by the availability of federal stimulus funds (which will not continue), creative accounting (raiding trust funds, etc.), and underfunding ($1+ trillion) of pension and healthcare benefit obligations. Some securities analysts expect the municipal bond market to collapse.  States face crisis when fed funds dry up, Washington Examiner, 10/4/10.


Would Washington really stand firm in such a situation? Based on past performance, probably not – but with the federal government facing severe fiscal problems of its own, there may be no alternative.  The next big crisis: State bankruptcy, Dick Morris & Ellen McGann, Townhall.com, 6/23/10.

If it is the states and Obama that blink first, we will free our local governments of the grip of municipal unions, their rigid work rules and their unaffordable pensions. If the Republicans blink first, they will forfeit their right to represent the American people, having backed down from the challenge of our times.


Second, we did not tackle taxes with the idea of raising revenue, the idea was to help restore confidence in the private sector by simplifying the tax system and making it more business friendly.  The budget was to be balanced by cutting spending.

A 20% of GDP spending ceiling was selected after reviewing spending levels in past years because the exceptionally low spending level in 2000 did not seem an appropriate ceiling.  Note: the median spending level for 1990-2010 was 20.1% of GDP. 

When we got to the tax data, it became obvious that an increase would be needed to hit 20% of GDP (and thereby balance the budget). We incorporated one in the SimpleTax proposal, reasoning that any surplus could be used to reduce debt if Congress spent less.

No one wants to pay higher taxes, including us, but a moderate tax increase that affected all income levels (rather than being imposed only on high earners) seems acceptable so long as the accompanying spending ceiling would be strictly enforced.

Third, political realities cannot be ignored.  Although the recent elections shifted the balance of power in Washington, with the Republicans regaining a majority in the House, their opponents continue to occupy the White House and control the Senate. If the Republicans moved too aggressively in attempting to restore fiscal responsibility (a goal they have promised to pursue), this could pave the way for a big setback in 2012. 

Indeed, some political observers predict political gridlock for the next two years, which would prevent further action on the liberal agenda but also blunt efforts to address the fiscal problem.  Is the Dow right to be in such a celebratory mood?  Methinks not, Jeremy Warner, UK Telegraph, 11/4/10.

With the Hill paralyzed, there is now virtually no possibility of a credible deficit reduction plan being agreed at any stage in the next two years – or not unless fiscal crisis before then forces the House to come to its senses.


What strategy should fiscal conservatives (or hopefully visionaries) pursue?  One suggestion is to pursue limited goals, e.g., an earmarks ban, that they have a solid chance of winning. Big win, small opportunity: GOP still needs to win trust of voters for big change, David Mastio, Washington Times, 11/2/10.

You can hear it already from The Washington Post's Slate magazine: "If the new leaders make a big deal about banning 'earmarks' - which amount to less than 1 percent of federal spending - count it as a feint. If they propose means-testing Medicare or raising the retirement age, count them as serious." *** Such thinking is a trap.


With GOP victory, time for political compromise, Washington Examiner, 11/2/10.

Americans want less spending, less regulation, less government, but they also expect their elected leaders to forge ahead in that effort forcefully and with due regard for the difficulties along the way. That means they must compromise. The measure of how they perform will be the degree to which they accomplish what the people expect them to do, which is to send Washington to the fat farm.


Others say the Republicans must seek to defund GovCare and other initiatives because the Administration will be unwilling to rethink its agenda. Employ the power of the purse strings: GOP-led House must restore financial accountability, Tony Blankley, Washington Times, 11/3/10. 

Whether the GOP likes it or not, it may have its hand forced. We may well see a season of government shutdowns. And once that gets going, it may well be used to try to block various parts of Obamacare as well. The Tea Partiers may not be denied easily. Nor should we be.


Time will tell what happens in the new Congress, but we do not foresee any easy or total victories.  In our opinion, conservatives may do well to use several strategies.

If immediate spending cuts can be achieved, great, but we also like the idea of creating a Spending Reduction Commission to review the entire budget and report back before the next election.  There needs to be a specific goal, such as a 20% of GDP spending ceiling, and it would send the wrong message to ask the SRC to also review the tax system.

The Bush tax cuts must be extended, another AMT fix is due, and the 1099 reporting requirements in the GovCare bill have to go, but there is also a need for fundamental reform of the tax system.  Since Congress has shown itself incapable of dealing with taxes in a rational manner, a Tax Simplification Commission should do the job for them.  We  are ready, willing and able to testify for the SimpleTax.

As for what a Regulatory Common Sense Commission might accomplish, stay tuned – we will address this subject in a future entry.

top     close    ww3@atlanticbb.net

11/01/10 – Internal Revenue Code 2.0

If our proposal for a Spending Reduction Commission clicked, the federal budget could be balanced by 2015 – ideally without raising taxes.  Getting down to brass tacks on spending, 10/25/10.

Streamlining of the tax system could contribute to renewed business confidence, a robust economic recovery, and rising federal tax revenues over time. Accordingly, SAFE has also suggested a Tax Simplification Commission.

This analysis will (a) state some premises for tax simplification, (b) review three alternative approaches, and (c) present a specific proposal for consideration

PREMISES: What is the purpose of the tax system?  We take it to be collecting revenue in a manner that is simple, efficient, and perceived as fair – not achieving social goals or influencing economic decisions.

How much money should be collected?  Presumably the amount that is intended to be spent, or perhaps more (any excess can be used to reduce debt).  So with a spending ceiling set at 20% of Gross Domestic Product, as we have recommended, a logical target for tax revenue would be 20% of GDP as well.

The tax system is only collecting about 15% of GDP at present – but this percentage should rise as the economy recovers.  See the following revenue recap for selected years.  Source: Office of Management and Budget, Fiscal Year 2011, Historical Tables.


Sources of revenue



2010 est.

2015 est.

Individual inc. taxes





Corporate inc. taxes





Payroll taxes, etc.





Excise taxes





Other receipts










Note that tax revenue in 2000 was extraordinarily high.  Total revenue has not hit 20% of GDP or higher in any other year since World War II.  With a 20% of GDP spending ceiling, a marginal tax increase would probably be needed to balance the budget. 

ALTERNATIVE APPROACHES: Advocates of tax simplification often suggest a brand new system (options 1 & 2 below) instead of proposing changes to the current one (option 3), and with some logic.  Focusing on details of the current system might tend to inhibit the boldness of proposed changes due to a psychological phenomenon known as “anchoring,” which could reduce the overhaul to ineffectual tinkering.  On the other hand, defects of a new system could be overlooked in the push to get it adopted.

Option One – Replace the current income tax with a “flat tax,” as has been done in Russia, Hong Kong, and elsewhere.  Numerous tax deductions and credits would be abolished, ditto double taxation of business earnings, and there would be only one tax rate (17%).  Exempt interest income, dividends, capital gains, and employer fringe benefits from taxation.  Abolish the Alternative Minimum Tax (AMT).

Raise personal exemptions sharply (to $13,200 per adult, $17,160 for an unmarried head of household, and $4,000 per child or dependent), with the result that about half the population would pay no income tax.  Those who did owe tax could supposedly file their tax return on “a postcard.” 

The flat tax would not actually be “flat.”  Average tax rates would range from 0% (for people whose exemptions exceeded taxable income) to nearly 17% (for high earners).  Some people would continue to receive net tax refunds, as the Earned Income and Child tax credits would be retained.

Corporate income taxes would also be greatly simplified. There would be one tax rate, again 17%.  Interest income, dividends and capital gains would be exempted from tax. There would be no deduction for interest expense or employee fringe benefits.  Capital expenditures would be currently deductible (in lieu of taking depreciation). Numerous tax preferences would be eliminated, and also the corporate AMT.  Flat Tax Revolution, Steve Forbes, Regnery Publishing (2005). 


What’s not to like: (1) Refundable tax credits should be eliminated; there is no good reason for anyone to “pay” negative tax.  (2) A tax exemption for fringe benefits could result in different tax liabilities for taxpayers with the same economic income.  (3) A sharply reduced number of income taxpayers is not necessarily a plus; non-payers would be inclined (as is already evident with the current tax system) to favor expanding government programs that someone else was perceived to be paying for. (4) The corporate tax changes would predictably be labeled as a gift to business interests, making the flat tax proposal nearly impossible to sell.

Option Two – There has been growing interest in replacing all income (individual and corporate) and payroll taxes with a federal retail sales tax (aka “the FairTax”) levied at a rate estimated to raise the equivalent amount of revenue.  The necessary rate has been estimated at 30% of sales prices, which is equivalent to 23% of the sales prices + tax.  (Example: Sales price $100, tax $30; tax = 23% of $130.) 

The logic: It is economically beneficial to tax consumption instead of taxing income.  Also, undeclared income (the “hidden economy”) is currently escaping taxation, which is unfair to those whose income is fully declared.

FairTax advocates envisage that the 16th Amendment would be repealed to ensure permanent elimination of the income tax.  There would be no change in federal excise taxes or state & local taxes.

To minimize the burden of the FairTax on lower income Americans, all households would receive a monthly rebate on poverty level (as determined by the government for the household size) expenditures.  Thus, a person who consumed only the poverty level amount would wind up paying zero tax.

Some drawbacks: (1) There is little chance of the 16th Amendment being repealed, so the upshot might well be a federal sales tax and an income tax.  (2) Imposition of a sales tax of over about 10% of sales value could spark massive tax evasion, so the IRS would not be abolished as advertised (although it might be given a different name). (3) The monthly rebate program would represent a new entitlement program, which would require a bureaucracy to administer.  (4) Elimination of payroll taxes would break the existing linkage (however tenuous) between the amount of Social Security and Medicare taxes collected and the benefits these levies are supposed to cover, thereby heightening the perception that these programs are welfare plans rather than insurance arrangements. Forbes, Flat Tax, Chapter 5.

Only a few politicians have touted the FairTax, generally with negative results for themselves, and the prospects for FairTax candidates in the future appear bleak.  FAIR Tax Trap, Wall Street Journal, 10/29/10 (link not available).

Our advice to the FAIR taxers is that voters will start to take the idea seriously once the income tax is on the way to repeal.  Until then, our advice to candidates would be to avoid the FAIR tax and focus on goals that are more achievable and less politically self-destructive.

• Option Three – A thorough overhaul of the current tax system could achieve some of the same benefits as the flat tax or FairTax with less collateral damage.   Also, it would be nice to develop a proposal that all fiscal visionaries could support without an intramural debate about theoretical purity. 

Surely we could all get behind a proposal to slash tax rates, eliminate arcane tax preferences, and junk 80% of the Internal Revenue Code and associated regulations.  A specific proposal follows.

SIMPLETAX – We are not about to propose a truly flat tax, any more than Steve Forbes did.  Labeling our tax proposal as “fair” might seem presumptuous, and in any case that name is already taken.  Nor will our proposal be touted as the key to being competitive in the 21st Century global economy or whatever, because no tax system is truly beneficial from an economic standpoint.

The goal should be more modest, namely a tax system that will minimize the damage from withdrawing money from the private sector to pay for the agreed level of government spending. To this end, we should avoid favoring specific industries or economic activities, reduce the clerical burden for taxpayers and the government alike, and hopefully reduce the incidence of noncompliance.

Tax rules should be understandable, and, while not necessarily “permanent,” not in constant flux – which undermines confidence in the private sector.  Tax rates should be kept low.  The tax base should be broadened.  The vast majority of the population should pay taxes, even if the burden varies with ability to pay.  For lack of a better name, our proposal might be labeled the SimpleTax.

Existing taxes would be systematically reviewed vis-à-vis these principles, as suggested by the following review (which saves individual income taxes for last).

• Payroll taxes – Roughly 1/3 of total federal revenues come from social insurance and retirement receipts (SIRR), principally payroll taxes for Social Security, Medicare, and Unemployment Compensation (paid by employers only).  Here is an SIRR recap for selected fiscal years:

($ in billions)



2010 est.

2015 est.

2015 goal

Social Security












Unemployment Comp.






All other












% of GDP






Departing from the design of the FairTax, we do not advocate elimination of payroll taxes for Social Security and Medicare. Unemployment compensation benefits should be controlled more carefully than they have been recently, but covering them with payroll taxes seems appropriate.   Ergo, no changes are recommended.

Payroll taxes represent a drag on employment, however, and the current rates are at about the maximum tolerable level in our judgment.  Any proposed increases should be intently scrutinized.

In that regard, the OMB data series we are working away from does not reflect a sharp hike in Medicare taxes for high-income taxpayers, scheduled to take effect in 2013, and other GovCare tax changes.  Tax Foundation analysis, 3/21/10.

Broaden Medicare Hospital Insurance Tax Base for High-Income Taxpayers - additional HI tax of 0.9% on earned income in excess of $200,000/$250,000 (unindexed), and Unearned Income Medicare Contribution on 3.8% on investment income for taxpayers with AGI in excess of $200,000/$250,000 (unindexed).


This Medicare tax increase will hopefully be eliminated via repeal of GovCare, an action needed to clear the way for real healthcare reform.  Even if there is no such repeal, there are surely better ways to raise tax revenue than haphazardly increasing the tax bills of high earners (versus, say, the idle rich) as a means of pushing the cost of the GovCare legislation under the rug.

Excise taxes represent a comparatively small share of total revenue, as shown in the following table.

($ in billions)



2010 est.

2015 est.

2015 goal



















Air Transport#






All other*#












% of GDP






      *Federal funds, #Trust funds

To raise a more revenue in a much simpler fashion, we would suggest (a) hiking the federal tax on motor fuels to 50¢ per gallon (now 18.6¢ per gallon for gasoline and 24.4¢ per gallon for diesel fuel), crediting the added revenue to general revenues vs. the highway trust fund, (b) continuing air transport taxes at current levels, and (c) eliminating all other federal excise taxes. 

While it may be appropriate to impose special taxes on alcohol and tobacco, aka “sin taxes,” these taxes are highly regressive and in the case of tobacco products have been raised to unreasonable levels.  Exclusive jurisdiction in this area should be ceded to state and local governments, which are in dire need of more tax revenue these days.

Trust funds to cover anticipated outlays, e.g., black lung disability, inland waterway, superfund, oil spill liability, aquatic resources, leaking underground storage tanks, tobacco assessments, and vaccine injury compensation, could be eliminated or replaced with mandatory private insurance.

GovCare excise taxes are not reflected in the projected data, e.g., a 10% tax on indoor tanning (2010), annual fees on drug companies (2011), 2.3% tax on medical devices (2013), annual fees on healthcare insurance (HCI) providers (2014), and 40% tax on “excess” HCI coverage (2018). Tax Foundation analysis, 3/21/10.  As with the increase in Medicare taxes, we would recommend that these levies be stricken (via repeal of GovCare or otherwise).

Other receipts – Here is a recap of this catchall category:

($ in billions)



2010 est.

2015 est.

2015 goal

Estate & gift taxes






Customs duties & fees






Federal Reserve deposits






All other






Incremental leasing












% of GDP






*Includes “allowances” re proposed legislation of $(6) in 2010 and $74 in 2015.

Somewhat surprisingly, given the long-running debate about the “death tax,” the amount of federal revenue at stake is “only” about $30B a year gross (surely much less on a net basis).  It would make sense, in our opinion, to eliminate federal estate and gift taxes and cede tax jurisdiction in this area to the states.

We have no suggestions with respect to customs duties and fees or Federal Reserve deposits. 

“Allowances” of $74B have been purged from our 2015 goal data; these were merely placeholder entries and have no economic significance.  No breakdown of the “all other” category is available, but revenues from oil and gas leasing are probably included.  This activity brought in some $6B (principally from offshore leases) in 2000, and it is said to be one of the federal government’s largest sources of non-tax income.  American Petroleum Institute fact sheet.


The “incremental leasing” line for 2015 represents the additional revenues that could be realized from a more aggressive oil & gas leasing program.  Such a program would also increase corporate income tax revenues.   

Corporate income tax is one of the most complex areas of the tax law, creating a great opportunity for simplification.  It is also an erratic revenue producer, e.g., yielded only 1.1% of GDP in 2010 vs. 2.7% in 2006 & 2007.  A recap follows:

($ in billions)



2010 est.

2015 est.

2015 goal







% of GDP






In years past, the revenue from this tax was more significant than it has been lately, e.g., 6.1% of GDP in 1952 vs. 1.1% in 2010. Several factors have contributed to the relative decline.

     ü       About half of U.S. business income (up from about 20% in 1980) is not taxable at the corporate level, but rather at the individual level via “pass through” entities (S corporations and partnerships).

  ü      Much of the earnings of U.S.-based corporations is from international business activities, and as   such is subject to foreign income taxes – which are creditable against U.S. tax when the earnings are repatriated.  In cases where a substantial net tax would apply on dividends, U.S. companies typically defer repatriation.

    ü      The corporate tax rate is reduced by numerous special tax deductions and credits, with the result that the effective federal tax rate on new investments in the corporate sector is somewhat lower than 35%, e.g., 29% according to a recent Treasury study. Volcker tax study, 8/27/10, pp. 65-66. (For more about this report, see our 9/20/10 entry.)


Realistically, the potential for increasing corporate income tax revenues is limited.  For example, an attempt to tax worldwide earnings while allowing only a deduction for foreign income taxes or force repatriation of low-taxed international earnings would likely boomerang because U.S.-based corporations would be placed at a competitive disadvantage versus international competitors. 

The typical legislative response to requests for tax relief has been to enact narrowly defined tax preferences.  Accordingly, as the Volcker study (p. 67) dryly observes, “the current corporate tax system contains numerous provisions that encourage businesses to invest in certain kinds of assets or to engage in certain kinds of activities for tax reasons rather than for reasons of economic efficiency.”

The clearest way to improve matter without substantially reducing tax revenue would be to cut the corporate tax rate sharply, say to a top rate of 20%, while eliminating a host of special exemptions, deductions and tax credits (other than the foreign tax credit) that are currently in effect.

Don’t make the R&D tax credit permanent, eliminate it – a tax deduction for the expense should be good enough. Say goodbye to energy tax credits, percentage depletion for oil and gas, low-income housing tax credits, and the special domestic production deduction to subsidize US-based manufacturing. Also repeal corporate AMT, which forces many companies to calculate their taxes in two ways without raising much additional tax revenue.

Jettisoning tax preferences would offset much of the revenue loss from reducing the corporate income tax rate, and a permanent rate cut should encourage new investment and enhance tax revenue over time.  Nevertheless, we have assumed marginally lower corporate tax revenue in the 2015 goal data.

*   *   *   *

This discussion of tax simplification was envisioned as a one-entry topic, but the subject is complex and a second entry will be required to do it justice.

We started with a goal of identifying ways to raise overall 2015 tax revenues by 1.1% of GDP.  The analysis to this point has increased the apparent shortfall to 1.6% of GDP, and with only the individual income tax left to talk about it appears that many of us would wind up paying higher income taxes under the SimpleTax.

Tune in next week for a discussion of what the new income tax system might look like, and some reasons why the likely increase seems reasonable under the circumstances. 

top     close    ww3@atlanticbb.net

10/25/10 – Getting down to brass tacks about spending.      Read Replies

Three weeks ago, SAFE sent the Fiscal Commission some suggestions for its upcoming report.  Among them was a Spending Reduction Commission, to be created by the next Congress, which would be tasked with recommending ways to reduce government spending as a percentage of Gross Domestic Product (GDP) to 2000 levels.  Fiscal Commission: tough decisions in November, 10/4/10.

An op-ed column about our recommendations was published by the [Wilmington, DE] News Journal, and we forwarded the link – plus a companion note written by SAFE Director Bill Morris – to the Fiscal Commission and others. 


Offering such suggestions is one thing; demonstrating their practicality is another.  Here are some obvious questions:  (1) How much would spending be cut?  (2) In what areas would the cuts be made?  (3) Would Americans support such cuts?

1. MAGNITUDE OF CUTS – Let’s begin with some top-level fiscal data for selected years.  Source: Office of Management and Budget, Fiscal Year 2011, Historical Tables.



$ in trillions

% of Gross Domestic Product

Fiscal Year









































2010 est.







2015 est.







We proposed a goal of reducing spending to FY 2000 levels for two reasons: (1) the budget was balanced in 2000, and (2) selecting the 2008 spending level as the target would implicitly attribute current deficits to the Democratic Party (both parties are to blame). It turns out, however, that federal outlays in 2000 stood at the lowest percentage of GDP since 1966.  Accordingly, we would not be averse to rounding the spending ceiling up to 20% of GDP, to be phased in by 2015. 

Spending would  have to be cut by roundly 13% from projected levels – or from $4.4T to $3.8T in 2015.  Sounds like a challenging goal, but – subject to considering where cuts might be made – hardly an impossible one. 

Other countries with fiscal problems have reduced their spending by similar percentages, and they survived the experience.  Spending can be cut, Veronique de Rugy, Reason Magazine, Aug-Sept. 2010.

Other countries have managed to cut spending. According to the IMF study, over the last 30 years nine developed nations have cut their structural deficits by at least 10 percent of GDP. Ireland reduced spending by 20 percent from 1978 to 1989. Sweden and Finland both achieved cuts of 13 percent from 1993 to 2000, and Sweden pulled off another 13 percent cut from 1980 to 1987. Denmark managed a 12 percent reduction from 1982 to 1986; Greece, 12 percent from 1989 to 1995; Israel, 11 percent from 1980 to 1983; Belgium, 11 percent from 1983 to 1998; Canada, 10 percent from 1985 to 1999. 


The new coalition government in the UK has proposed spending cuts averaging 19% for most spending programs so as to shore up the nation’s credit standing.  Critics complain that the cuts will be more severe than necessary due to a preference for smaller government (the same motivation probably applied in reverse when government programs were being expanded to current levels).  UK government stakes its future on austerity plan, David Stringer, ABC News, 10/20/10.

As many as half a million public sector jobs will be lost, about 18 billion ($28.5 billion) axed from welfare payments and the pension age raised to 66 by 2020, earlier than previously planned.  Even Queen Elizabeth II will take a hit, asked to trim the budget the government provides for her staff by 14 percent.


So let’s accept a 20% spending ceiling for discussion purposes and proceed to the next question.

2. MAKEUP OF CUTS – You think we should cut spending.  OK, what do you want to cut?  If someone asks you this question, choose your response carefully.  The dialog could easily turn into an unwinnable “why not, yes but” game.  We couldn’t possibly do that to seniors, to the economically vulnerable, to small business, to farmers, to veterans, to the environment, to (fill in the blank).  Where to cut spending, Cal Thomas, Townhall.com, 10/19/19.

It's a loaded question, of course, and those who ask it follow it up with vitriolic assertions that any cuts will mean that children will go hungry, the elderly will be evicted from nursing homes and the federal government will be forced to close, meaning no more Social Security checks. This is precisely the approach taken in 1995 when the Clinton administration set a trap for the new Republican congressional majority and shut down the government, sending Republicans into a hasty retreat, from which they and their proposed spending cuts never fully recovered.


A starting point might to look for spending areas that have grown faster than the overall economy.  For example, here is the “super function” breakdown of spending for Fiscal Years 2000, 2010 est., and 2015 as projected. OMB tables. 


Percentage of GDP




2010 est.

2015 est.

Human resources





National defense





Physical resources





Net interest





Other functions





Offsetting receipts










Hmm.  The growth in national defense spending between 2000 and 2010 reflects two wars, and significant defense cuts are already projected (and being planned for).  Interest expense will go up, too bad, but that is the inevitable consequence of rising debt and interest rates.

The biggest opportunity for spending cuts appears to be in “Human resources” (HR), which has been growing faster than the economy for decades and now accounts for 2/3 of the total budget.  Given an aging population, moreover, the projected reversal of the HR growth trend between 2010 and 2015 seems optimistic. Let’s drill down a bit.


Percentage of GDP




2010 est.

2015 est.

Social Security















Other health





Education, training, etc.





Income security





Veteran’s benefits & services










The bulk of HR outlays go to seniors via Social Security, Medicare, part of Medicaid, federal retirement benefits (in Income security), and Veteran’s hospitals.  Demographic trends will continue inflating the costs of these programs barring changes that are not currently planned.  Notwithstanding the hoped-for economic recovery, we would question the projected decline of HR outlays vs. GDP in every area but Medicare.

De-liberalizing benefit programs to which people have grown accustomed is a delicate matter, and the changes cannot be made overnight.  But if all these programs are regarded as “mandatory” expenditures, which cannot be adjusted, drastic cutbacks will be unavoidable down the line.  Here are some changes that should be considered now:

• Social Security is a “pay as you go” (or unfunded) pension plan that will become increasingly costly as the number of beneficiaries grows.  The only way to stabilize the program is to convert it to a funded (individual accounts) retirement savings plan.  This could be accomplished over time by allowing younger workers to choose between an individual account and traditional Social Security benefits. 

We recognize that an individual accounts option was rejected in 2005, but the proposal offered was poorly designed (partial conversion to individual accounts, creating a plan that was neither fish nor fowl) and even more poorly explained.  The selling point should not have been purported cost savings, which were obscured by the upfront outlays required to fund the program, but rather ownership, inheritability and choice.  It would make sense to try again, and this time offer a complete conversion to individual accounts.   


Pending an opportune time to offer such a proposal, here are two suggestions for shaving Social Security costs:

ü      Raise the early retirement age from 62 to 65 and the normal retirement age from its current level (being raised from 65 to 67 by 2027) to 70, in recognition that Americans are living longer on average.  These changes would be phased in over the next decade.

ü      Tighten the eligibility requirements for disability benefit payments, which currently account for about one dollar out of six of Social Security outlays.  Clamor builds for another Social Security fix, 8/16/10.

• Medicare cost cuts are needed, but they should not be achieved by arbitrarily slashing reimbursement rates or rationing allowable care. The effect of such cutbacks would be to degrade the quality of care for patients, as has already happened with Medicaid.

Our suggestion would be to provide capped funding for private insurance coverage to future retirees.  Traditional Medicare coverage would be phased out as current retirees pass on.  For discussion of the rationale and expected benefits, see In Search of Real Healthcare Reform, proposal 6.


• Medicaid is worse off than Medicare, both fiscally and operationally, in part due to being jointly run by the federal and state governments. We find it hard to envision much improvement unless one level of government or the other takes charge.

Our suggestion would be for the states to assume full responsibility for Medicaid.  The federal government would provide block grant funding without attempting to dictate the coverage provided.  Once established, block grants would be indexed for general price inflation.  See In Search of Real Healthcare Reform, proposal 4.

The word “education” does not appear in the Constitution, and the founders doubtless expected that schools would remain a private or at most state area of responsibility.  With the notable exception of ending racial segregation in the schools, we believe that federal intervention in the educational arena has done more harm than good.  State school systems tend to be administratively top heavy already, and a federal overlay is clearly overkill.  Education page, this Website. 

Operating responsibility for schools is best vested in the administrators and teachers, who should then be held accountable for results.  To the extent that school district and state level personnel have tried to micromanage the details, issuing rules and regulations to cover every situation, they should step back. 

We see no need for another layer of monitoring at the federal level.  If there is going to be a U.S. Department of Education, we would suggest that it be charged with maintaining a data bank of best educational practices at the state and local level, sponsoring national and international educational contests, and the like.   

We have similar reservations about federal programs for higher education, which are projected to more than double between now and 2015. 

Accordingly, it is suggested that federal expenditures for secondary and higher education be eliminated by 2015, or nearly so, reducing spending by 0.5% of GDP in that year. 

There might be some hardship for state governments that have been receiving federal grants, but the impact would be softened by eliminating the federal strings and red tape that have accompanied these grants.  All things considered, we would not propose that the current federal grants be converted to block grants.

• “Income security” is a catchall term, and another table seems necessary (sorry) to convey what is in the category.

($ in billions)



2010 est.

2015 est.

General retirement & disability (ex Social Security)





Federal employment retirement & disability





Unemployment compensation





Housing assistance





Food & nutrition assistance





Other income security





TOTAL - $ in billions





TOTAL - % of GDP





Our off the top suggestions for this area are that (1) the federal government should follow the example of private industry and convert its defined benefit pension plans to defined contribution retirement savings plans (aka 401-Ks); and (2) eligibility requirements for food stamps should be tightened.  It would also be interesting to know the makeup of the “Other income security” category.

• Finally, while no one wants to skimp on veteran’s benefits, we can envision considerable savings from eliminating VA hospitals and covering the cost of treatment for veterans in private sector facilities.

Would the foregoing changes suffice to reduce total government spending in 2015 from the projected 22.9% of GDP to our proposed 20% ceiling?  Possibly, but it would seem prudent to make sure by diligently economizing in other areas. 

There are many potential targets, including corporate welfare, agricultural price supports, alternative energy subsidies, Amtrak subsidies, federal employee compensation (excessive vis-à-vis comparable positions in the private sector), selling the post office to FedEx or UPS, selling part of the huge federal landholdings, merging the Army & Marine Corps, and defunding National Public Radio (shame on them for firing Juan Williams).   

Cato’s recap of potential spending cuts on a department-by-department basis (currently under development) should be a handy resource, check it out.


3. PUBLIC SUPPORT – Having proposed a 20% spending ceiling and concluded that compliance is doable, we get to the really tough question – would such action be politically feasible?  One retired finance executive puts it this way:

Clearly, you are correct to promulgate balancing the budget, lower taxes, etc.  But, without really tackling the problem by politicians, which I believe will never happen, nothing else will matter.  With 50%+ of our voters not paying taxes, and looking for the proverbial free lunch, then I feel we (our children and grandchildren) are doomed. 

In a similar vein, over half the Democrat members of the House recently wrote the president threatening to torpedo the Fiscal Commission’s report if there are any recommendations to privatize or de-liberalize Social Security.  House Dems pressure Fiscal Commission against Social Security changes, Jordan Fabian, The Hill, 10/19/10.

"If any of the [fiscal] commission’s recommendations cut or diminish Social Security in any way, we will stand firmly against them," they wrote. "We urge you to join us in protecting and strengthening Social Security rather than letting it fall victim to a misguided attempt to reduce budget deficits on the backs of working families."


But let’s not be too quick to blame the politicians, because the general public has been lax too.  Sure, the Tea Partiers have shaken things up a bit, but many people are still sitting on the sidelines or even defending the status quo.  Economists question “tea party” push for drastic spending cuts, Patrice Hill, Washington Times, 10/20/10.

The tea party movement appears to be the only constituency for such drastic action in the U.S. While most American voters are focused on the economy and what the government can do to make things better, tea party supporters view the public debt — not the economy — as the most important issue facing the country.


Here is an example of the vagaries of public opinion.  A majority dislikes GovCare, based on what they know or have heard about this legislation, but there is considerably less support for urging its repeal.  AP-GfK Poll: Americans split on healthcare repeal, Jennifer Agiesta & Ricardo Alonso-Zaldivar, Washington Times, 10/22/10.

#Overall, Americans remain divided about the changes. Among likely voters, 52 percent oppose the legislation, compared with 41 percent who said they support it. Strong opponents outnumber strong supporters by 2-to-1.

#Among likely voters, 36 percent said they want to revise the law so it does more to change the health care system. A nearly identical share — 37 percent — said they want to repeal it completely.


Sorry, folks, but you can’t have it both ways.  Assuming that this huge and complex bill was a step in the wrong direction, as we believe, the only practical way to fix things is to repeal GovCare and start over.  If someone’s feelings get hurt in the process, too bad.Nixing – or “fixing” – health[care] law?  Don’t hold your breath, Carrie Dunn, NBCWashington.com, 10/21/10.

Some “fixes” could receive bipartisan support. Republicans are likely to target one particularly unpopular IRS reporting requirement that could add a hefty paperwork burden to many companies. But health policy experts and congressional aides on both sides of the aisle agree that the core pieces of the bill are so intertwined that it would be almost impossible to remove its most unpopular parts without collapsing the system on which the legislation is premised.


Building a consensus for spending cuts of the magnitude discussed in this entry seems well nigh impossible right now, and it may not look a whole lot easier after the elections.  Why a potential Republican majority shouldn’t excite fiscal conservatives, Timothy Carney, Washington Examiner, 10/20/10.      


But perhaps there is enough support to take the first step by creating the Spending Reduction Commission that we have recommended and giving it a crack at the job.

It might help to make clear that (a) taxes will have to be raised big time if the spending cuts are not made, and (b) 50% of the population is not going to be exempted.  In our experience, no one is real fond of paying taxes.  Tune in next week for a discussion of the role of the Tax Simplification Commission.

This could be this country’s last chance to avert a fiscal meltdown.  Let’s go for it!

*     *     *     *     This Blogs Replies     *     *     *     *

Would the politicians treat a spending ceiling like they did the debt ceiling?  Anyway, it sounds like worth trying to me.  -  SAFE member, California

Right on, right on, right on, & have the chairman represent the taxpayers, who are forced to pay the bills.  -  SAFE member, Arizona.

If you want to see what an ingrained entitlement attitude does to people, watch the unions in France rioting and bringing the country to a standstill solely because the government wants to (has to, if it doesn't want to go broke!) move the full retirement age for their equivalent of our SS up 2 years from 60 to 62.  We just did that; instead of 65, it's now 67 for anyone age 50 or younger, and the American public accepted it without a peep.  It probably needs to be moved to 70.  Heck, I'm 72, and still working (have my own consulting business), still cut my own grass, change the oil in my cars, fix shingles on my roof, climb my (large) Pin Oaks to cut limbs off with my chain saw, and see no reason to move to a "retirement community".  If my full SS payments hadn't started until I was 70, it would not have cramped my life style materially. – Climate Common Sense member

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10/18/10 – Surveying the path forward

In addition to substantive news and analysis, we occasionally muse about how to promote SAFE’s agenda. With mid-term elections that could alter the political balance of power only two weeks away, another strategy review may be in order. 

This entry will begin by reprising some earlier observations and then discuss a current challenge (promoting SAFE’s suggestions for the Fiscal Commission).

THE OPPOSITION Liberals believe the country will thrive under the aegis of big government, whereas free markets and competition are not to be trusted.  They tend to overlook any evidence to the contrary, such as the role of supply and demand. The Icarus syndrome: why the bad ideas keep coming, 4/28/08.

Instead of attacking high gas prices, in our opinion, the government should stand back and allow market forces to operate.  Better yet, it could help things along by removing barriers to U.S. petroleum production, scrapping ethanol mandates and subsidies, etc.

Such a strategy would work pretty well, we believe, but it is so simple that anyone could lead the charge. Promising to “stand up to big oil” or cure “America’s addiction to oil” has a more inspirational ring, never mind whether a tax & subsidy scheme would result in lower energy prices or push them up some more.

Given that higher energy prices are the all but certain result of tax & subsidy, politicians engage in a bit of fancy footwork. The idea is to point to a problem that “must be solved” and propose a solution without talking much about cost.  Enter the manmade global warming (aka climate change) theory.

Political self-interest is also a factor, and some politicians get in the habit of trading earmarks for support.  Here is an example from a 2008 television report (Bill Moyers, PBS).  What legitimate motive could there be in this case for making the military buy unneeded equipment? 

A $4.65 million patrol boat the Coast Guard hadn’t even asked for and decided it couldn’t use was eventually given away by the Coast Guard to a California sheriff’s office.

The sponsors of big government programs probably do believe in them, however, so let’s not be overly cynical.  Connecting the dots: earmarks matter, and words also, 3/3/08.

. . . we are not inclined to impugn the motives of those of a big government persuasion.  They sincerely believe in their vision of how the world should work, just as we believe in ours.  But this does not mean that our ideological opponents are above incomplete and/or misleading arguments, and when they make such arguments we should call them on it.

THE MUDDLED MIDDLE:  Most Americans lack strong convictions as to the appropriate size or role of the government. They focus primarily on how the government seems to be working for them.  If dissatisfied, they will likely switch their votes next time.  That seems fine, except for one thing: many voters have distorted perceptions and/or unrealistic expectations.

Thus, according to Professor Bryan Caplan (George Mason University, also affiliated with Cato Institute), the public’s thinking about economic policy issues is systematically biased in four identifiable ways: 

# Anti-market bias, or tendency to believe that prices and output should be determined by the government rather than by supply and demand.

# Anti-foreign bias, or tendency to underestimate the economic benefits to be gained from interactions with foreigners.

# Make-work bias, or tendency to underestimate the economic benefits of conserving labor.

# Pessimistic bias, or tendency to overestimate the severity of economic problems while underestimating the underlying strength of the economy.

As a result, Professor Caplan concludes, bad answers may quite possibly carry the day.  Getting through to “irrational” people, 9/17/07.

Another problem is that government benefits are addictive.  Although current entitlement programs (Social Security, Medicare, etc.) are economically unsustainable, Americans who have grown accustomed to being on the dole will not willingly agree to take less.  This promotes conflict between the makers and takers in our society, which Arthur Brooks of the American Enterprise Institute characterizes as a culture war. And never the twain shall meet: the Left/Right divide, 6/28/10.

[This is] a new struggle between two competing visions of the country's future. In one, America will continue to be an exceptional nation organized around the principles of free enterprise -- limited government, a reliance on entrepreneurship and rewards determined by market forces. In the other, America will move toward European-style statism grounded in expanding bureaucracies, a managed economy and large-scale income redistribution. These visions are not reconcilable. We must choose.

SAFE’S AGENDA: For those who dislike the way this country is headed, there are two basic strategies.  One approach is defensive, i.e., attempt to block anticipated changes.  The other is to propose changes to the status quo that would be more to their liking.

We believe that defensive strategies are ineffective.  Change is inevitable, remember the story of King Canute, and it is even less feasible to turn back the clock.  How to win: be proactive, not reactive, 10/29/07.

So we consider ourselves “visionaries” rather than “conservatives,” and when possible offer creative alternatives instead of simply saying “no.”  Thus SAFE did not content itself with opposing the proposals that led to GovCare, we offered our own plan, which would have steered the healthcare system in a very different direction.

Although the healthcare battle has been lost for now, the problems we identified still exist – and they need to be fixed. If enough people become disenchanted with GovCare, which was sold to a skeptical American public by promising far more than the plan is likely to deliver, our proposals remain available for consideration.  In search of real healthcare reform, May 2009.

There is general agreement that the U.S. healthcare system is in serious trouble, although the level of services available is perhaps the best in the world.  The problem is soaring costs, which if allowed to continue will make healthcare unaffordable for everyone except the wealthy – and also threaten the fiscal safety of the U.S. government.


PRESENTATION: There is an art to promoting one’s ideas, and we have offered many suggestions in this vein, including the following (in chronological order):

• Ask pointed questions that cannot readily be ducked.  Thus, we suggested a series of questions on healthcare in 2008 – too bad no one posed them to the candidates.   If you want good answers on healthcare, ask good questions!  2/11/08

Healthcare spending represents a higher percentage of GDP in the United States than in any other country, yet the outcomes in our country are less favorable in many respects, such as life expectancy at birth, than those in other leading countries.  Are we getting our money’s worth?  Why should we spend ever more on healthcare versus housing, food, transportation, education, national defense, and the other needs of life?

Do you agree that present and projected healthcare outlays by the government are unaffordable, raising the likelihood of a financial crisis within the next 5 to 10 years?

How much would your healthcare proposals cost the government over the next 20 years versus the cost of continuing present programs? If there would be added cost, how can your proposals be responsibly advocated when we will not even be able to pay for the existing programs? If there would be a net savings, how much and what would be done with the money?

If your proposals would both raise the quality of healthcare service and reduce costs, how would these seemingly contradictory goals be achieved?  How can we be sure that the costs of your proposal are not being underestimated by a wide margin, as has happened repeatedly with proposed healthcare initiatives in the past?

One criticism of the current healthcare system has been that insurance companies have too much power to make healthcare decisions versus patients and their families.  Do you think this is currently a valid criticism?  How would you propose to prevent this from happening in the future?  Would you agree that it would be equally unacceptable to empower government bureaucrats to make such decisions?

Some providers of healthcare prices and services are charging what seem to be extortionate prices, e.g., thousands of dollars per night for a hospital stay, $5 to $10 per pill for prescription drugs, etc.  What would you propose to do about this, if anything?

Do you think it is right for people without medical insurance to be charged substantially more for healthcare services and drugs than people with insurance, i.e., why shouldn’t the price be the same for everyone except to the extent justified by demonstrable cost differences?

• Remember Aristotle’s theory that a persuasive message has three elements: logos (reason), pathos (emotion), and ethos (credibility).  Logical arguments provide a starting point, but images and stories are needed to get people interested.  And unless you avoid overstated or misleading pitches, no one will give you “the time of day.”  Getting action on Social Security, 4/14/08.

• Do not hesitate to address hard-core opponents, even though there is little hope of changing their minds, as when SAFE challenged the EPA’s proposed finding that CO2 et al. are “pollutants” for purposes of the Clean Air Act.  But don’t stop there; leverage your efforts by letting others know of the position you have taken.  See our 6/8/09 letter to the members of Congress from Delaware, which advised of what we had told the EPA and urged that Congress call the agency to heel.


• No matter how complex the policy issues in question, focus on explaining them in a clear and understandable manner.  Among the ways to do this: shorter sentences, less jargon, and punchier conclusions.  Once again, this time in plain English, 12/1/08.

• Target logical people, weave some information pertaining to the target into your letter or call, be concise (one page letters are best), and provide sources for key points that are not a matter of common knowledge.  Pointers for the loyal opposition, 12/22/08.

• Be creative.  See our response to an inquiry from a member of the Fiscal Commission.  Such an inquiry is about as likely as a White House call to the red phone on the set of Glenn Beck’s TV show, but it enabled us to address some potential concerns that the commissioners are unlikely to talk about publicly. Resolving the fiscal mess: SAFE responds to a fictional inquiry, 7/19/10

CURRENT CHALLENGE:  Given a December 1 deadline, it is hard to visualize the Fiscal Commission coming up with satisfactory recommendations to address a fiscal problem that has been in the making for decades.  The Commission might do better to acknowledge the root cause and dimensions of the fiscal problem and recommend a process to tackle it during the next session of Congress (2011-2012). 

Our three-commission approach was proposed in this blog two weeks ago.  Fiscal Commission: tough decisions in November, 10/4/10.

We also e-mailed an executive summary to the Fiscal Commission with a link to SAFE’s blog entry for the details.  Note the invitation to readers to send their own e-mails to the Commission (there is still time to do this).


OK, what else should we or could we do to sell our proposal?

A threshold inquiry might be whether the proposal is aligned with SAFE’s general principle of being proactive rather than reactive.  After all, cutting spending to the levels of 2000 sounds like trying to go back in time instead of looking to the future.

The point is not to replicate the pattern of spending in the year 2000, however, but merely to match the overall level of spending (as a percentage of Gross Domestic Product) in that year.  Some spending programs that existed in 2000 might be eliminated entirely in meeting the goal, while other programs maintained current funding levels. The issue would be cost vs. benefits for all areas of the budget, which should be the key issue in any logical budgeting process unless political considerations are allowed to take precedence (as has often happened).

We had a specific reason for keying on spending levels in 2000, by the way, which was to blunt the partisan implication of the cutting spending to 2008 levels reference in the GOP’s Pledge to America.  So long as the two parties keep blaming each other for the fiscal problem instead of accepting joint responsibility, it will be tough to make any progress in solving the fiscal problem.

By way of follow-up, the blog entry about our suggestions for the Fiscal Commission was condensed into a story for the SAFE newsletter.  Opportunity knocks, Issue 59, October 2009.


We also submitted an op-ed column to the [Wilmington] News Journal, which was published on October 15.

Letters_ 2

Finally, dear readers, if you like our suggestions for the Fiscal Commission, we would appreciate it if you would pass them on with your endorsement to family members, friends, and public officials.  If enough people get on board, it just might be possible to get some constructive action in Washington for a change.

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10/11/10 – The bailout mentality puts us all at risk

There is something in the human psyche that does not want to accept losses.  Up to a point, resistance is admirable, but when carried too far it can block acceptance, adjustment, and renewed progress.  Thus, to use a simple analogy, “don’t cry over spilled milk,” clean it up and buy another bottle.

Some other examples:  It may make sense to scrap a damaged car and buy a new one.  You may do better to sell stock in Company X at a loss than hold on in hopes of a rebound.  Having lost a lucrative job, a lower-paying job may be your best option.  If you cannot pay your bills and debt service, bankruptcy may pave the way for a fresh start. 

The choice should be based on a rational evaluation of the alternatives.  You would be foolish to scrap the car because a fender is dented; get the problem fixed or live with it.  If there is good reason to consider Company X stock a bargain at the current price, be patient (or even buy more).  Having searched diligently for a comparable job, to no avail, this may indeed be the time to lower your sights or consider relocation.  Could you avert bankruptcy by pruning your spending?  

Businesses can face similar issues, as for example when the subprime mortgage and housing bubble burst in 2007-2008 and many firms were left holding substantially devalued assets.  Was it better to liquidate the assets for what they would fetch, claiming any applicable tax write-offs, or hold on hoping the housing market would recover?

So long as such choices are up to the individual or business concerned, the goal is relatively straightforward – make the best deal you can.  Things may get more complicated, however, if a third party with deep pockets intervenes. 

“Don’t take that analyst job,” says your rich aunt, “I’ll pay your rent until something better turns up.”  For better or worse, her support may induce you to keep looking for an executive position.

The would-be rescuer is more commonly the government, which seems increasingly wedded to the idea that people facing problems should be supported rather than left to their own devices. This entry will review several examples of this phenomenon, which we have dubbed the “bailout mentality.”  

Let it first be noted, however, that SAFE does not condemn government assistance in principle – the question is how much help, under what circumstances, and for how long. 

Thus, Tennessee fire fighters were justly criticized for watching a family’s house burn to the ground because the annual service fee had not been paid.  Probably they will keep their jobs, government workers are rarely held accountable for mistakes, but their inaction was inexcusable.  When Uncle Sam’s in charge, no one claims responsibility, Ashley Herzog, Townhall.com, 10/7/10.


TROUBLED ASSET RELIEF PROGRAM – TARP was launched in the fall of 2008 during a financial panic.  Many conservatives objected, but there were compelling arguments that the program was necessary under the circumstances.  Are we there yet: go to sleep, it’s another 500 miles, 9/29/08.

In Congressional hearings last week, Secretary of the Treasury Henry Paulson and Federal Reserve Chairman Ben Bernanke attempted to convince legislators of the need to authorize up to $700 billion in federal funds to buy financial assets that do not have a ready market and have led to a vicious circle of declining asset values, write-downs, capital increases, and further declines in asset values. 

Action was needed, it was said, to head off a panic in the global financial markets that could have disastrous consequences.  Needed changes in the regulatory scheme of things, tax policy, etc. could be dealt with later.

Paulson and Bernanke warned that global financial markets might collapse if action was not taken.  The initial idea was to purchase mortgage-backed securities at their estimated fair value, not shovel out cash to financial firms (as was actually done).  SAFE declined to oppose TARP, albeit resolving to be wary of any such proposals in the future.   Time to get real, 10/6/08.

Fast forward to the present.  The financial panic of 2008 has long since passed (although more financial turbulence may lie ahead), and it is easy for critics to label TARP as an unjustifiable handout to Wall Street.

Supporters say the Troubled Asset Relief Program rescued the country from another Great Depression. Critics counter that it simply handed money to the same Wall Street banks that plunged the country into recession in the first place and, moreover, it failed to help Main Street Americans.

The best thing anyone has to say about the program at this point is that it cost far less than $700B. R.I.P., TARP: Government rescue ends Sunday, ABC News, 9/30/10. 

The non-partisan Congressional Budget Office has estimated that the costs of the program will be 90 percent lower than the original $700 billion of taxpayer funds. On top of that, the Treasury Department has steadfastly said that taxpayers will earn a profit on the portion of the program that invested money in banks. To date, over half the money invested by Treasury has been repaid to the government.


Some observers question the TARP cost estimate, which is based in part on rosy expectations of how much money can be raised by selling the equity stakes taken in General Motors and AIG. But the key point is not whether the program cost $50B or $150B; it is the precedent that was set.  The “toxic” truth about TARP, Howard Rich, Townhall.com, 10/7/10.


If certain firms are deemed “too big to fail,” which was the justification for TARP, then their managers can assume excessive risks in the serene conviction that they will get rich if things go well and the government will step in if things go sour.  Many people resent this scenario, and their anger has had two important results:

# A sweeping financial regulation bill was enacted.  The legislation was touted as a means to prevent future bailouts, but it will actually institutionalize the procedure by granting sweeping new powers to the Financial Stability Oversight Council, Secretary of Treasury, and others.  GovFinance: too bad to fix, 5/10/10.

# Pressure built to even the scales with a bailout for “Main Street.”  This idea would come to fruition within less than six months.

ECONOMIC STIMULUS – In February 2009, the president and his party won approval for a two-year, roundly $800B economic stimulus package that was supposed to spark an economic recovery.  There were some short-term tax cuts in the mix, but the ESP was primarily a spending bill – and many of its provisions did not meet the “timely, targeted and temporary” criteria that are generally advocated in this context.  Economic stimulus program: what’s the rush?  2/2/09.

Many elements of the ESP (as passed in the House) were designed to promote agendas other than getting the economy back on track, and the effects are clearly not expected to be temporary.  Ergo, this is not a stimulus bill meriting fast track consideration – it is a spending bill that should be evaluated as such.

No matter, the stimulus bill was swiftly enacted to “put this economy back on track and put this country back to work.” Playing hardball, 2/16/09

In summary, the economic stimulus bill was rammed through without thoughtful consideration, and the press conference to explain it was a sham.  Americans have a right to expect more from the president and his party.  We suggest that they demand it.

This outcome might seem forgivable if the ESP had worked, but it did not – unless one accepts the lame argument that things would have been even worse without it.  Time to admit Obamanomics has failed, Washington Examiner, 8/8/10.

[Outgoing White House economic adviser Christina] Romer is best known for drafting the February 2009 report "The Job Impact of the American Recovery and Reinvestment Plan," which the White House used as an ammunition belt in the fight to gain passage of its $862 billion economic stimulus bill (the actual cost of which exceeds $1 trillion when interest is included). Romer predicted that following passage of the stimulus bill, unemployment would plateau below 8 percent last fall and by this month register at 7 percent. That's not close enough for government work, as unemployment stands at 9.5 percent today. It would be higher except that hundreds of thousands of frustrated job seekers have given up looking for new jobs and dropped out of the labor force.


Writing off the ESP solely because it has failed to create jobs would be simplistic.  After all, the goal was economic recovery and jobs are a lagging rather than leading indicator.

But although the National Bureau of Economic Research has now ruled that the recession ended in 2009, the rate of recovery has been slow and there is continuing concern that this may prove to be a “double-dip” recession.  Recession over, but recovery not felt, Patrice Hill, Washington Times, 9/20/10.


A pile of business cash (nearly $2T by some estimates) is sitting on the sidelines.  In addition to the normal risks associated with proposed investments, uncertainties about future government regulatory and tax policies are blocking a recovery of business confidence.  It’s not political, it’s common business sense, Tom Bell, U.S. Chamber of Commerce, 10/4/10.

They passed health care and financial reform legislation that will result in hundreds of thousands of pages of new regulations, more bureaucracy, and more government involvement in the private sector. Business leaders are certain that these laws will increase their health care costs and hinder their access to capital, but they don’t know when or by how much until all of the pending regulations are in place.

Further, Congress went home to campaign for the elections without extending marginal income, capital gains, and dividend tax rates that are set to expire at year-end, leaving many small business owners and investors wondering if they will face a massive tax hike.

In addition, businesses are warily eyeing a bevy of new workplace and environmental regulations being cooked up by the EPA, the Labor Department, the Department of Health and Human and Services and other agencies, once again adding to uncertainty and stalling job creation.


In sum: ESP has cost far more than TARP did, and there is very little to show for it. 

UNEMPLOYMENT – At the same time that it was attempting to promote economic recovery and create jobs with the ESP and other spending measures (the term “stimulus” is no longer in vogue), the government pursued other policies that foster unemployment.  Although not typically called “bailouts,” these policies stem from the same “we should help them” impulse.

Exhibit A is the minimum wage, which was being hiked to $7.25 an hour as the recession hit.  However well intentioned, this was a bad idea, particularly for youngsters seeking their first job.  Scrap the minimum wage, Art Carden, Forbes, 9/13/10.

The latest government stats show an unemployment rate of 9.7% among adult males and 7.9% among adult females. The teenage unemployment rate, however, is 26%. Unemployment for black teens is 40%. July's "underemployment rate," which includes discouraged workers and part-time workers who would like to have full-time work, is 16.5%. (Gallup puts it at 18.4%.) Removing labor market hurdles will reduce these numbers.


Then there are unemployment benefits, which have been repeatedly extended during the economic slump.  Jobless Americans can now be eligible for these benefits for up to nearly two years. Unemployment benefits to extend malaise, Washington Times, 7/21/10.

With each extension, the so-called insurance program becomes less and less "temporary" and closer to a typical welfare program intended to encourage permanent dependence on the government.


FORECLOSURES – When buyers borrow most of the money to buy houses and the housing market slumps, they wind up with negative equity and may be unable to continue making their payments.  This has become an all too familiar situation in the past couple of years, and millions of homeowners are in arrears.  That is bad for them and also bad for the holders of the mortgages, but the fact is that a loss of value has taken place that must somehow be recognized and worked out. 

Housing values may recover eventually, but this will take years to happen.  Maintaining the status quo in the meantime is not a viable option, and attempts to do so would slow the pace of recovery.  By way of proof, consider the results in Japan when the government shielded “zombie” banks from collapse during the 1990s.   Turning Japanese, Anthony Landazzo, et al., Reason, July 2009.

You can blame the length of Japan’s asset deflation, recession, and liquidity struggles on an unwillingness to choose hard but necessary policies, such as allowing banks to fail and the market to reset itself. Politicians bent on retaining their power and showing the public they were doing something took actions without regard to their long-term effects.

There was little effort to clean up the banking system or get rid of harmful regulations. The government refused to acknowledge the breadth of Japan’s economic troubles, and the Ministry of Finance went so far as to order banks to hide their toxic loans to create the appearance of success.


The situation here differs from Japan’s “lost decade” in important respects, e.g., our regulators have certainly not encouraged banks to hide toxic loans. But there are still some eerie parallels, including the efforts of the U.S. government to slow the wave of mortgage foreclosures – which are necessary to let housing prices find a natural bottom and set the stage for recovery. 

A program to encourage renegotiation of delinquent mortgages did not seem too bad, but it proved ineffective in practice.  Nearly 50 percent leave Obama mortgage-aid program, Martin Crutsinger, Washington Examiner, 8/20/10. 

Approximately 630,000 people who had tried to get their monthly mortgage payments lowered through the government program have been cut loose through July, according to the Treasury report. That's about 48 percent of [those] who had enrolled since March 2009. And it is up from more than 40 percent through June. Another 421,804, or roughly 32 percent of those who started the program, have received permanent loan modifications and are making their payments on time.

RealtyTrac reported that the number of U.S. homes lost to foreclosure surged in July to 92,858 properties, up 9 percent from June. The pace of repossessions has been increasing and the nation is now on track to having more than 1 million homes lost to foreclosure by the end of the year. That would eclipse the more than 900,000 homes repossessed in 2009, the firm says.


The new tactic is to challenge mortgage foreclosures based on technical defects in the paperwork.  And when Congress passed a bill that might have helped normalize the situation, the president used a “pocket veto” to kill it.  Obama vetoes bill on foreclosure documents, Stephen Dinan, Washington Times, 10/7/10.  

The legislation — a mere 334 words long — would have required states to recognize documents notarized in other states. Right now, backers said, some states reject documents from other states for reasons as mundane as the type of seal used by a notary. Some states require the seal to be in ink, while others require it to be embossed.

But Mr. Obama, seizing on recent reports that banks submitted fraudulent documents to push through home foreclosures, said Congress needs to be more cautious about changing notarization rules. [Passing 2,000+page bills that few people have actually read, on the other hand, is probably OK.]


As we go to press, it appears that attempts to foreclose on mortgages are taking a serious hit – and with Congress out of session until after the elections it is not clear how the situation can be cleared up.  Bank of America halts foreclosure sales in 50 states, Alan Zibel, Washington Times, 10/8/10.

Potential flaws in foreclosure documents are threatening to throw the real estate industry into a full-blown crisis, as Bank of America on Friday became the first bank to stop sales of foreclosed homes in all 50 states. *** In addition to PNC and Bank of America, Ally Financial's GMAC Mortgage unit and JPMorgan Chase & Co. have announced similar moves in the past two weeks.


Don’t blame it all on the president; other politicians have been grandstanding on this issue too despite little if any evidence of substantive bank errors.  The politics of foreclosure, Wall Street Journal, 10/9/10 (link not available).

Out of tens of thousands of potentially affected homeowners, we’re still waiting for the first victim claiming that he was current on his mortgage when the bank seized the home.  Even if such victims exist, the proper policy is to make them whole, not to let 100,000 other people keep homes for which they haven’t paid.

AN OPPORTUNITY – The solutions to the fiscal problem are relatively obvious in principle, but they would entail a dramatic departure from the trend to ever bigger, more protective (or intrusive, depending on one’s viewpoint) government.  Fiscal Commission: tough decisions in November, 10/4/10.

Our proposal to balance the budget without raising taxes may seem like moonshine to some people, but there is nothing impossible about it.  Check out this 7+ minute video by Dan Mitchell of the Cato Institute.  


The catch is that the Commission would have to abandon the bailout mentality that has become increasingly prevalent in Washington.  That would take real courage.  It remains to be seen whether the commissioners are up to the challenge.

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10/4/10 – Fiscal Commission: tough decisions in November      Read Replies

We last reported on proceedings of the Fiscal Commission after it July 28 meeting.  Fiscal Commission fiddles as budget burns, 8/2/10.

The first serious government-sponsored discussion of the fiscal problem in a decade – daunting task – smart people, who have agreed to work together – but allotted time dwindling, and players appear to be floundering.

Our assessment of the September 29 meeting is similar, and only two meetings now remain. That leaves little time for Commission members to develop meaningful recommendations for addressing a fiscal problem that has been brewing for decades.

Apr. 27

May 26

June 30

July 28

Sept. 29


Nov. 10

Dec. 1

Departing from our objective reporter role, this entry will offer specific suggestions for the Commission’s report.   First, however, here is a quick rundown on the last meeting.

SEPTEMBER 29 – Back from an August break, members of the Commission assembled once more.  There was little publicity, e.g., the Wall Street Journal had not noted the meeting on its list of upcoming events for the week. 

Does this mean that politicians and the American people lack interest in the issues that the Fiscal Commission is reviewing, e.g., government spending, entitlements, taxes, and debt?  Of course not, consider the war of words about the Bush tax cuts alone.  Obama eye-rolls GOP “pledge,” Julie Mason, Washington Examiner, 9/25/10.

Republicans have achieved some traction by claiming Obama's plan to roll back Bush-era tax cuts for the wealthiest Americans is a tax increase.  The White House is countering that by saying Republicans want to "borrow" the $700 billion that rolling back those taxes would add to the Treasury, and give it away to "millionaires and billionaires."


But the meetings of the Fiscal Commission have been low key, and party leaders on both sides of the aisle have been guarded in their comments about where things may be headed.  Fiscal Commission holds last public session before elections, CQ Politics, 9/28/10.

Commission members from both parties have been circumspect about their deliberations, with some, including Sen. Tom Coburn, R-Okla., refusing to comment on the panel’s work. Meanwhile, Senate Minority Leader Mitch McConnell, R-Ky., has kept his vow that the Republican Party would not make an issue of the commission’s efforts during the current campaign season.


The Sept. 29 meeting got underway at 9:30 a.m. with welcoming comments from co-chairs Alan Simpson and Erskine Bowles.  Among other things, Bowles urged members to keep their calendars open in November (after the mid-term elections) for some “tough decisions.” He would repeat this point as the meeting was ending. 

Our knowledge of the proceedings is based on the video – we have not found a transcript or summary in the public domain.  For readers who are not disposed to view the video (C-Span, 2 hours, 9 minutes), our summary follows.


There were presentations on the general theme of performance budgeting by (a) Dr. Paul Posner, Director of Public Administration Program, George Mason University; (b) Janet St. Laurent, Managing Director, Defense Capabilities and Management, Government Accountability Office; and (c) Patricia Dalton, Managing Director, Natural Resources and Environment, Government Accountability Office. Commission members asked questions and offered comments as the program proceeded. 

None of the presenters was disposed to challenge the growing role of government in the United States, offer radical ideas for closing the fiscal gap, or predict the consequences if action is not taken quickly.   The meeting lasted slightly over two hours (versus the two-and-a-half hour length of prior meetings), and ended without any reference to activities of the working groups. Here are some of the more important ideas that came up (we have taken some liberties as to their chronological order).

David Cote, CEO of Honeywell, asked why the government was not doing a better job of managing the budget.  Should be a matter of setting objectives, allocating resources, establishing metrics, measuring results, and holding people accountable.

Several participants offered thoughts on why managing the government is tougher than running a company.  Administrative appointees stay in place for 18 months on average, so the bureaucracies can “wait them out.” Members of Congress are more interested in “jobs in my district” than in optimal performance. GAO recommendations are typically at the program level, whereas the biggest issues may be at a higher level. 

David Cote requested a list of GAO reports over the past 5 years and what had happened as a result of each one of them.

Senator Coburn observed that members of Congress dislike oversight because it is hard work and there is no payoff politically.  What about a GAO report card on Congress?

As Senator Coburn also observed, “there is an interest behind every dime in the federal budget.” If Congress spent more time on oversight and less on appropriating money, things might work better.

Senator Conrad touted two-year budgets, so the second year in each session of Congress could be devoted primarily to oversight.  Alice Rivlin and Representative Ryan agreed, but it was noted that such an approach for the defense portion of the budget had spawned “supplemental” war spending requests.  Just goes to show, said Representative Hensarling, that one should “never underestimate the power of elected officials to circumvent the rules.” 

The discussion was civil and constructive, but with some jockeying over facts.  Thus, Representative Becerra cited statistics suggesting that defense spending has grown much faster than education spending.  A few minutes later, Representative Hensarling cited other statistics (it seems that most of the growth in federal expenditures for education is in state grants, which are separate from the Department of Education’s budget). 

“Torture statistics long enough,” quipped Co-Chair Simpson, and “they will confess.”  In other words, “you are both right, but so what?  Bring home the bacon, and the pig is dead.”

There was a reprise of comments at the July 28 meeting about the vast potential to raise revenue by eliminating tax expenditures (supposedly spending by another name) and closing the tax gap came up again.  It seems likely that this thrust will carry over to the Commission’s final report, although we believe the potential revenue gains are being overstated.  Sorry, but there are no “painless” ways to raise taxes, 8/9/10.  Raising taxes and a crackdown on cheating won’t solve the fiscal problem, 9/20/10.

Several participants made the point, in one way or another, that efforts to control the deficit are unlikely to work without spending discipline – which Congress cannot be expected to achieve on its own because the system simply does not work that way.  Maybe the public will demand spending discipline due to the growing threat of a fiscal meltdown, but do not expect performance budgeting or any other process reform to solve the problem.

OUR PERSPECTIVE – A natural inclination in communicating with the Fiscal Commission is to urge adoption of one’s own agenda.  We did just that in our May 18, June 21, July 26, and August 23 e-mails to the Commission. 


Is it realistic, however, to expect at least 14 of the 18 commissioners to (1) coalesce around smaller, more focused, less costly government, (2) recommend the radical spending cuts and restructuring of entitlement programs needed to get there, and (3) achieve the necessary buy-in.  Even assuming such changes are doable over time, they cannot conceivably be accomplished between now and December.

Given the urgency of the fiscal problem, could we live with less, i.e., a step or two in the right direction?   Maybe, but we would want to be sure that the proposed cure represented an improvement over the situation that would prevail if the Commission threw up its hands and offered no recommendations at all.  Resolving the fiscal mess: SAFE responds to a fictional inquiry, 7/19/10. 

A potential blind alley for the Commission would be to emulate the 2006 report of the Iraq Study Group (ISG), which Co-Chair Alan Simpson has cited as a model. 

By way of background, Simpson served on the ISG.  The 12 members grappled with a complex, highly controversial situation, and they all approved the resulting report.  So what’s not to like about that?

The report was long (142 pages) and convoluted, but it lacked a core message (this is the problem – here is what must be done about it).

There were 79 recommendations, with no clear indication as to which of them were deemed the most important.  Some of the recommendations were aspirational rather than actionable.  Recommendation 11: Diplomatic effort within the Support Group should seek to persuade Iran that it should take specific steps to improve the situation in Iraq.

Other recommendations smacked of special interest pleading or an attempt to micromanage.  Recommendation 58:  The FBI should expand its investigative and forensic training and facilities within Iraq, to include coverage of terrorism as well as criminal activity.

Few people recall much about the ISG report, which had little impact on the course of events and is now just another book gathering dust on the shelf. 

If the Financial Commission aspires to make a difference, it should forget about performance budgeting, closing the tax gap, etc., and present a handful of critical, clearly defined action points.  Here are our suggestions.

1. Quantify the fiscal problem realistically. – Do not present the baseline projection of the Congressional Budget Office (CBO) as the outlook, thereby understating the fiscal problem.  It appears that most if not all the Bush tax cuts will be extended for at least a couple of years, and that Congress will continue to patch the Alternative Minimum Tax. Congress is unlikely to permit currently scheduled cuts in Medicare reimbursement rates to take place.  And experience refutes the assumption that tax increases would not be partially offset by changes in taxpayer behavior and reduced economic growth. 

2. Set a goal of balancing the federal budget by 2015.  – The executive order establishing the Commission sets a goal of reducing the deficit to 3% of Gross Domestic Product (GDP) by 2015, and perhaps achieving further progress longer term. This leaves political leaders too much wiggle room.  There is no reason Congress cannot balance the budget, barring true national emergency, and the American people should expect no less. 

3. Pinpoint the cause of the fiscal problem. – Surging deficits and debt have not come about because of declining tax revenues, which except during the current economic slump have been remarkably stable over time.  Rather, the fiscal problem stems from growth in government spending – as the data clearly demonstrate.  Reining in runaway spending and deficits, Heritage Foundation, 8/17/10.

Even if all of the tax cuts are extended, revenues will exceed their 18% of GDP historical average by the end of the decade. The reason the budget deficit is projected to rise by 6% of GDP over its historical average by 2020 is that spending will exceed its historical average by 6% of GDP. Nearly all of this growth will occur in Social Security, Medicare, Medicaid, and net interest. And deficits will expand even further if lawmakers repeat the past decade’s 79% growth (adjusted for inflation) in discretionary spending.


4. Focus on fixing the problem. – If the problem is runaway spending, that is what should be fixed – but will persist if the Commission sticks to recommending budget process improvements.  Wasteful government programs, even entire departments, need to be put on the chopping block.  Entitlement programs must be restructured so that they will be sustainable over the long haul.

The Commission should recommend a process for accomplishing these goals, such as this illustrative scenario:  On or before 3/1/11, Congress (not the president) establishes a Spending Reduction Commission (SRC).  The SRC is given a goal of identifying how to reduce spending as a percentage of GDP to 2000 levels (not to 2008 levels, as in the GOP’s recently released “Pledge to America”). Its reporting deadline is 5/1/12, and Congressional leaders pledge an up or down vote on its recommendations before the 2012 elections.

5. Rejuvenate the economy. – Government spending is ultimately funded from the output of the U.S. economy, so steps to restore business confidence and support economic recovery could contribute to solving the fiscal problem.  We have in mind two major tasks, namely simplification of the tax system and a thorough pruning of the thicket of government regulations that has been created in recent decades.  Reviews of these areas would be assigned to two additional commissions – each to be created by Congress on or before 3/1/11.

The Tax Simplification Commission (TSC) would be charged with recommending an overhaul of the tax law, to be accomplished through radical simplification, a flat tax, or the so-called FairTax.  Goals would be to reduce the tax burden on business, to broaden the tax base, and to be revenue neutral overall.  Pending the TSC report, to be submitted by 6/1/12, there would be a freeze on any new tax levies. 

The Common Sense Commission (CSC) would be charged with identifying regulations that have outlived their usefulness altogether or impose an unjustifiable (considering cost versus benefit) burden on business operations.  Pending its report, to be submitted by 7/1/12, there would be a freeze on any new federal regulations unless certified by the president as of urgent national necessity.

All right, suppose that the Fiscal Commission balks at such a plan and declares itself deadlocked?  Too bad, but the setback would not necessarily be fatal.

If the new Congress was disposed to go along, or take equivalent action, there would nothing to stop it from doing so.  And if the November elections result in a shift of political power, stranger things have happened.

So we see no reason to settle for a wishy-washy compromise report.  How about you?

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I like the three commissions idea, which could reassure bondholders that the U.S. is on the right track.  Why not incorporate this idea in an op-ed piece for the News Journal and/or other publications in the region? – SAFE director

This may be a Hail Mary proposal because we have to deal with politicians, but if you and I were running the country these proposals would be implemented -- and faster than the suggested deadlines. It's a realistic proposal, when considered by people of principle. – Retired financial executive

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9/27/10 – The generational divide: two takes on the fiscal problem      Read Replies

There is a new book out on the coming fiscal meltdown, Boomergeddon, with a nuclear explosion depicted on the front cover.  The subtitle: “How runaway deficits will bankrupt the country and ruin retirement for aging baby boomers – and what you can do about it.”

Author James Bacon lives in Richmond, Virginia, where he publishes the Bacon’s Rebellion and Boomergeddon blogs.  He is 57 years old, making him one of the Baby Boomers talked about in the book.  Nowadays, per Bacon’s blogger profile, he has two primary concerns: family responsibilities and “saving the USA from fiscal disaster.”


The book tells of out of control government spending, an aging population, failed political leadership, and projected deficits that cannot conceivably be financed.  All true, hardly novel.  Compare our review of Boomergeddon to those for Comeback America, National Suicide, Running on Empty, and The Coming Generational Storm.


Boomergeddon was written this year, so the content is up to date, e.g., GovCare is reported as having been enacted and the Greek Debt Crisis is mentioned. No book can remain current for long in this fast moving world, however, so this plus will soon fade.  And if Bacon is serious about “saving the USA from fiscal disaster,” he could have done better than the disjointed suggestions in his chapter on “Salvaging the Future.”

• Bacon identifies the solution as cutting government spending by $1T per year out of a $3.5T and growing budget (page 267), yet his list of revenue enhancements adds up to only about $817B a year (page 303).

• $350B - Nearly half of these enhancements would be achieved by substituting a 23% national sales tax (or FairTax) for all federal income and payroll taxes (pages 274-278).  The revenue pickup is said to be [no footnote] as estimated by Americans for Fair Taxation.   [It has been our understanding that the FairTax proposal would be revenue neutral, and that it would only be implemented after the 16th Amendment was repealed – which Bacon fails to mention. Also, what about the effects of a tax increase of this magnitude on the economy?] 

• $100B - Eliminate corporate welfare and agricultural subsidies (pages 272-274).  [OK]

• $117B - “Bone-crushing, fiscal nihilist cuts to other domestic discretionary spending, including elimination of most of the Departments of Education and Energy (pages 278-280).  [The potential savings seem understated.]

• $100B - Reduce military spending by realigning the strategic priorities of the United States re the war on terror/ Middle East, Europe, Korea, and Taiwan (pages 280-292).  [Does this explain the nuclear explosion image on the front cover?]

• $100B – Streamlining government by cutting the number of presidential appointees, eliminating management layers, cutting back on contract work force, improving productivity, merging overlapping operations, and eliminating programs “that simply do not produce any results.”  Source: Paul C. Light, NYU (page 271). [Never mind; experience suggests that measures of this type are ineffective.]

• “As much as $60B a year on average in this decade” – Bacon advocates “real healthcare reform,” which would entail getting employers out of healthcare, promoting the right kind of insurance competition, creating market transparency, and eliminating barriers to business innovation The connection between the estimated savings and these vaguely-described reforms is not established (pages 292-303). [If the changes worked, the potential savings might be far larger, but we would suggest more emphasis on getting the government out of healthcare.]

• Zero - “Fix” Social Security by raising the retirement age for future beneficiaries and adjusting the formula for calculating retirement benefits.  No savings are reflected, apparently on grounds that Social Security is accounted for separately from the rest of the budget (pages 269-271).  [Logic error! Any savings achieved would improve the overall fiscal picture.]  

What does set Boomergeddon apart, we think, is its focus on how successive generations, with different social experiences in their formative years, have differing degrees of responsibility for, stakes in, and perceptions of the national tragedy that is in the making.  Call it the generational divide.

BACKGROUND – Some people find it instructive, or at least interesting, to characterize successive generations based on broadly defined experiences and social attitudes.  There is some dispute as to just when one generation ends and the next one begins – not to mention what sets them apart – but here is the general classification scheme as put together from several sources.  Take a look to see where you fit in.





Greatest Generation

Before 1930

World War I & Roaring 20s

Fought & won World War II

Silent Generation


Great Depression & WW II

Carried on soberly, did not rock the boat

“Baby Boomers”


Post-war economic and population boom

Broke mold and asked for more, sense of entitlement

Generation X


Cold War, economic turbulence

Reversion to the mean, tech savvy



Renewed prosperity, fall of the Soviet Union

Idealistic, mistrusting of elders, tech obsessed

Alpha Generation


Terrorism, new wars, and a financial bubble that burst

Time will tell

Bacon characterizes today’s seniors from the Silent Generation as “having come along at just the right time and in just the right numbers” to enjoy carefree retirement.  Reached adulthood when U.S. was the world’s strongest economy – employers could and did offer generous pension plans – the Silent Ones were restrained in their borrowing and disciplined in their saving – they bought low and in many cases sold high in the housing market – few enough of them that “politicians could raise Social Security and Medicare benefits without bankrupting the country [over the short term]” – retired at 62, on average, with “two decades of leisure to look forward to.” (pages 12-13)

No such luck for the Baby Boomers, who started off life like royalty, became addicted to high living and debt, experienced the slow disintegration of fixed pension plans, saw their investment and real estate values plummet when the market crashed in 2007-2008, and can now foresee that the government will be forced to renege on its senior safety net promises during their retirement years.  Some Boomers hope to make up the lost ground by working longer, but this may prove easier said than done. (pages 13-16) 

The prospects for generations coming after the Baby Boomers to enjoy a long and carefree retirement is also bleak, but at least they will have more time to adjust.

Assuming that the foregoing is a fair summary of how millions of Americans will be affected by the increasingly dire fiscal outlook, what should the response be?

TAKE ONE – For people concerned about the fiscal problem (many more now than in 1996 when SAFE was founded), the traditional assumption has been that the problem could be solved if Americans would just put their minds to it.  Furthermore, no one has started a generational blame game, e.g., “the Boomers created the fiscal mess that we younger folks are going to get stuck with cleaning up.”

As an illustration of such a problem solving mindset, consider an analogy suggested by SAFE Founder Bill Morris in a recent letter to the editor.

If there is a shipwreck, and we are in a lifeboat in heavy seas, the most important question is not who or what caused the shipwreck.  The most important question is, how do we survive?  We all must do what is necessary to survive.


This seems to be a fair minded way to look at things, and it has a basis in fact.  A fiscal meltdown would not simply penalize younger generations; almost everyone would be put through the financial wringer.  Greek debt crisis: a double-edged sword, 5/17/10.

A government gets into the habit of spending more than it collects in taxes and borrowing the difference.  Its debt grows faster than the underlying economy.  The government runs out of lenders at reasonable interest rates, its debt is down-rated, and interest rates soar.  The government winds up either defaulting (triggering recession and deflation) or “printing money” to cover its obligations (triggering rapid inflation).  This Time Is Different: Eight Centuries of Financial Folly, Carmen Reinhart & Kenneth Rogoff, Princeton University Press (2009).   

For more “can do” thinking, see Comeback America by David Walker, which was published earlier this year.  Would that we could bottle some of Walker’s optimism and put it in the water supply!


TAKE TWO – Bacon’s book has a quite different flavor, and his attitude may become predominant as time goes by.  It would be natural for younger Americans – the Generation Xers and Millennials – to resent a situation they did not create and yet stand to lose more from than their elders.

First, Bacon seems to be saying a fiscal meltdown will prove unavoidable from a practical standpoint.  While there are still ways to avert the rocks looming ahead, the changes required would be too wrenching (page 266).

We have passed the point where half measures will save us.  There is no “muddling through” the mess we have created.  While there be tens of billions of dollars of “waste, fraud and abuse” worth rooting out, we need to cut hundreds of billions of dollars.

Furthermore, the political will to make such changes may not exist (page 304).

But don’t bet your financial future on the naïve hope that our dysfunctional and myopic political culture would permit the changes I have described.  Too many vested interests would have too much to lose.

Neither of the established parties, nor the Tea Party for that matter, can be counted on to do the necessary (pages 307).

Tea Partiers may propel the Rs to electoral gains in November, but it’s not clear that the Elephant Clan has the will to defy the organized special interests in Washington, D.C., much less to make transformative reforms that can return the country to a sustainable fiscal trajectory.

Second, there is an edge of bitterness in Bacon’s writing about how the Baby Boomers brought this misfortune on themselves and others by being too numerous and neglecting to save for their retirements.  It is almost as though he was dedicating this book to future generations who, like it or not, may rebel when asked to shoulder responsibility for a rapidly growing horde of retirees (page 131).

If nations found that looking after busloads of school-bound children was expensive, it was nothing compared to the cost of looking after busloads of casino-bound old people.  The large number of disabled elderly require intensive care-giving just like babies do, [but it lasts longer and costs] up to $74,000 per year for long-term care.

Third, efforts that have been made to address the fiscal problem are basically ignored.  Notably, the book does not mention that the National Commission on Fiscal Responsibility and Reform is grappling with the fiscal problem and will offer its recommendations on or about December 1.  We doubt that Bacon was unaware of the Fiscal Commission, but perhaps he does not take the deliberations of this superannuated body (many members are in their 70s or 80s) very seriously.  He does, however, mention the ideas of forty-year-old Representative Paul Ryan (R-WI), who will probably be around longer than most of the other Fiscal Commission members.

AFTERMATH – For older Americans concerned about the coming fiscal meltdown, e.g., SAFE members, it is natural to envision the country waking up in time – making the necessary adjustments – and averting disaster.  Not that success can be assured, but if the effort failed our generation would not be around to help pick up the pieces. We have one last chance to make things right. Go for it!

A different mindset seems to be evidenced by Boomergeddon, which concludes that the fiscal meltdown will occur and says the real question is what will happen then (pages 310-311). 

How will Americans diagnose what went wrong?  Whom will they hold accountable?  Will Americans depose the political class, or will they bow to it?  What new institutions will rise from the ashes?  Will we move to a social contract based upon personal responsibility, free markets, stronger civic institutions and a smaller, more accountable government that focuses on doing a few things very well?  Or will we, as we did in the 1930s, move toward a corporatist state with the interests of business cartels, labor unions and other constituencies mediated by a powerful government?

Who will win out, in other words, “the Krugmans and Reichs of the 2020s” or “lovers of liberty” demanding a new contract between citizens and the government? 

Any answer to such questions would be highly speculative, of course, and Bacon allows that “no outcome is preordained.”  But if the battle for smaller, more focused, less costly government seems tough now, we see no reason to believe it would be easier to win after a fiscal meltdown decimated the middle class of this country.

Which would lead us to suggest that even for younger Americans, the time to act is now – not a few years down the road when the problems facing the country might look far worse than they do now.

By the way, the hypothetical Boomergeddon timeline (pages 142-152) extends all the way to 2027, at which point “the Treasury will find it difficult to find lenders at any price.”  That does it, party over!

Bacon does say “Boomergeddon could arrive far sooner than 2027,” however, and we would agree with that.

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Excellent!  This needs to be read by Carper, Kaufman & yes, Castle.  I want to discuss Thursday.  -  SAFE director

You almost have to be a policy wonk to read through this, but it’s worth it if you want to get a handle on why we have so many conflicting views on so many issues.

It's a coincidence, but just this morning I was discussing, with the principal of our school, how people who were born at different times have very different worldviews. People 70 and older think very different from the boomers and as for the under 30 crowd I have no idea just what their driving values are if any. On the other hand, history has given us lots of surprises and I am not ruling out the younger citizens. Sometimes I believe that they have escaped the brain washing that my generation received because we followed the rules. =  SAFE member, Maryland

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9/20/10 – Raising taxes and a crackdown on cheating won’t solve the fiscal problem

After talking about D.C. rallies and the Constitution for several weeks, let’s turn to a “bread and butter” issue: Should taxes be raised during a sputtering economic recovery, and if so how?

INTRODUCTION – On its face, the question sounds like a “no brainer.”  No doubt the country could not afford a tax cut right now, but higher taxes could abort the recovery – which no one really wants.  The Washington war on investment, Larry Kudlow, Townhall.com, 8/6/10.

. . . pulling out just one dollar from the private sector and rechanneling it through the government as a transfer to someone else creates nothing. At best it’s a safety net. At worst it may damage private-business activity and actually reduce employment.


Yet the question is far from academic, because taxes are poised to increase sharply unless Congress decides otherwise.  The increases fall under three headings:  (A) expiration of the Bush tax cuts at the end of 2010, (B) extension of the Alternative Minimum Tax to millions of additional middle class taxpayers (a result Congress has been avoiding by enacting annual AMT “patches”), and (C) numerous tax increases since January 2009, e.g., new tax levies embedded in the GovCare bill. 120 days to go until the largest tax hikes in history, Americans for Tax Reform, 9/3/10.


It is generally agreed that the Bush tax cuts should be extended for “middle class” taxpayers, but there is lively disagreement as to tax rates on high earner ($200K per individual, $250K per couple) and investment (dividends and capital gains) income.  Compare these statements:

Treasury Secretary Tim Geithner: Borrowing to finance tax cuts for the top 2 percent would be a $700 billion [over the next 10 years] fiscal mistake. It's not the prescription that the economy needs right now and the country can't afford it.  [Extending tax cuts for wealthy a mistake, Martin Crutsinger, Washington Examiner, 8/4/10.]


Senate Minority Leader Mitch McConnell (R-KY): Americans have had it. They're tired of Democrat leaders in Washington pursuing the same government-driven programs that have done nothing but add to the debt and the burden of government. We can't allow this administration to demand that small-business owners in this country pay for its own fiscal recklessness. [Republicans pledge to fight to preserve Bush-era tax cuts, Shailagh Murray & Lori Montgomery, Washington Post, 9/13/10.]


The Democrats would like a vote on extending the Bush tax cuts for the middle class only – leaving tax rates for high earners to be considered [and no doubt raised] separately.  They seemed to have House Minority Leader John Boehner (R-OH) going after he allowed on a Sunday talk show that he would vote for extending tax cuts for the middle class only if that was the only option available.  Boehner willing to limit tax cuts for wealthy, Seth McLaughlin, Washington Times, 9/12/10.


Other Republican leaders have taken a harder line, however, and some Democrats are wavering on the issue.  In a vote before the elections, all of the Bush tax cuts might be extended.  Hoyer, other Dems hint of willingness to extend all tax cuts, Seth McLaughlin & Kara Rowland, Washington Times, 9/15/10.


If the Democrat leadership lacks the votes to carry the day, however, they will probably defer action in hopes of prevailing in the lame duck session after the elections.  The McConnell Tax-Rate Freeze, Larry Kudlow, Townhall.com, 9/14/10.

Should a Republican November landslide include both the Senate and the House, the odds of extending the tax cuts would improve, but the outcome might still depend on overturning an Obama veto. That’s tough to do if the president stays on the left rather than embarking on a Clintonesque trip to the center. 


What is the right answer?  We are not wedded to the Bush tax cuts, for high earners or anyone else, they are just one layer of a creaky, outmoded income tax system that is in need of fundamental overhaul.  And we are mindful of the need to start reducing the deficit and in due course balance the budget (maybe even pay off some debt), as has been repeatedly stated in this blog and other SAFE publications.

But the most effective way to reduce the deficit is to cut spending, and that will be hard to do so long as tax increases are potentially available to keep the party going.  A line in the sand on taxes, 5/26/08.

People only fret about wasteful government spending, but they get excited about taxes.  Witness the Boston Tea Party and the French Revolution.  So while we do not advocate a tax revolt, there must be some way to tap into this energy for purposes of getting government spending under control.

Note that while the Administration is pushing to raise income taxes for high earners, it continues to propose spending increases, e.g., borrowing another $50 billion to spend on high speed rail lines, etc. Obama offers stimulus to stimulate Democrats, Washington Examiner, 9/7/10.


Also, our political leaders need to stop incessantly tinkering with taxes.  This habit has (1) fostered a climate of business uncertainty that discourages private investment, and (2) perpetuated existing flaws in the system while adding new ones, spawning a tax law of nightmarish complexity.  So even if taxes will eventually have to be raised, we would favor leaving the Bush tax cuts in place until there is a clear understanding of what kind of tax system will serve this country best over the long haul.

TAX COMPLEXITY – There was some talk at the July 28 meeting of the Fiscal Commission about the economic merits and revenue-raising potential of eliminating “tax expenditures” and closing the “tax gap” (revenue loss due to noncompliance). 

Our report questioned how much revenue could be painlessly raised from such measures.  We also noted that a White House tax task force had been organized in March 2009 under the leadership of former Federal Reserve Chairman Paul Volcker. It was charged with offering recommendations to reduce the tax gap, eliminate “loopholes,” and raise tax revenue.  For reasons unknown, the task force’s mission had been watered down and its report (initial due date 12/4/09) was missing in action.  Fiscal Commission fiddles as the budget burns, 8/2/10. 

Hmm, sounds like the Fiscal Commission is trying to “reinvent the wheel.”  Why not just obtain a copy of the draft report prepared by the Volcker panel? We have found no mention of the study since last November, but it must be around somewhere.

Also, it is time to stop talking about how tax increases would enhance this country’s ability to compete in the global economy.  Tax increases would have negative economic effects; they should be frankly recognized and factored into fiscal projections.

Maybe someone read our report; in any case, the Volcker tax force report has now been issued, and it makes for instructive reading. On the PERAB Tax Task Force Report, Austan Goolsbe [since named to chair the Council of Economic Advisers, vice Christina Romer], White House blog, 8/27/10.  Links to Volcker’s transmittal letter and the report.


The President’s Economic Recovery Advisory Board (PERAB) report presents the pros and cons of numerous “tax reform options relating to tax simplification, enforcement of existing tax laws and reforming the corporate tax system” – without recommendations. Board members who worked on the report included: Paul Volcker, William H. Donaldson (former SEC chairman), Roger W. Ferguson (former Federal Reserve vice-chairman), Martin Feldstein (Harvard economist), and Laura D’Andrea Tyson (chaired the Council of Economic Advisers during the Clinton years).  Transmittal letter.

As directed, the Board did not consider “options that would raise taxes for families with incomes less than $250,000 a year.”  It was also not asked to recommend any options for “overarching tax reform,” such as the introduction of a value added tax.  However, “we received many suggestions for broad tax reform, and some members of the PERAB believe that such reform will be an essential component of a strategy to reduce the long-term deficit of the federal government.”  Report, preface.

The report provides little support for the idea that major revenue gains are likely from eliminating “tax expenditures,” at least so long as middle class taxpayers are exempted from tax increases. There is no discussion of the mortgage interest deduction or the tax exemption of healthcare benefits.  The Earned Income Tax Credit options would merely harmonize this provision with the Additional Child Tax Credit (p. 17), etc.

Statistics are presented for the “tax gap,” which per IRS estimates amounted to $345 billion in tax year 2001 (primarily individual income and payroll taxes).  Unsurprisingly, noncompliance is thought to be concentrated in areas where income reporting and tax withholding requirements do not apply, e.g., small business operations. (pp. 53-54)

The estimated cost of tax compliance already exceeds 1% of the Gross Domestic Product.  Considerably more expense could be involved to improve tax compliance rates. Thus, Option 3, Small Business Bank Account Reporting, would force many sole proprietorships that use bank accounts and credit cards for both personal and business use to open and pay for additional accounts. (p. 60)

Some would say tax compliance spending by the IRS is justified so long as each dollar spent brings one additional dollar in tax revenue, but the report (p. 69) suggests a more stringent rule of thumb.  

Economists generally believe that most taxes reduce productive economic activity so that the true cost of raising a dollar of tax revenue through the tax system exceeds a dollar—typical estimates of the total cost range between $1.30 to $1.50.  From this perspective, enforcement efforts should be increased only to the point where an additional dollar of enforcement still brings in more than the cost of raising a dollar of revenue.  In addition, one must consider that the direct costs of additional enforcement are only one part of the total costs of increased auditing.  An increase in audits has its downside, as it could be viewed as intrusive and onerous for taxpayers.

Although the drawbacks of tax complexity are acknowledged, both in general terms (page 3) and with regard to the tax laws in specific areas, e.g., savings and retirement plans (page 23), no sweeping simplifications of the existing tax law are proposed.  For example: elimination of the Alternative Minimum Tax for individuals is discussed, but modifying and simplifying the AMT is presented as the preferred option. (pp. 49-50)

Only in the area of corporate income taxation is the word “reform” used, and even here the problem to be solved and preferred options are hard to pinpoint.  On the one hand, concern is expressed about eroding corporate income tax revenues.  On the other, it is recognized that our corporate income tax rate is high by international standards, which may be putting U.S. firms at a competitive disadvantage and encouraging offshore versus domestic investment.

The relative merits of reducing the corporate income tax rate and faster capital cost recovery for tax purposes are discussed (p. 69) without reaching a definite conclusion.  Either way, tax revenues would be reduced unless the corporate tax base was simultaneously expanded by eliminating currently available tax benefits (pp. 72-80), in which case the spur to business activity would be counteracted.

Finally, the report reviews this country’s international tax rules (p. 81-94), which encourage U.S. firms to invest in countries with low tax rates and defer repatriation of offshore profits.  The options presented would either (a) preserve the economic advantages of investing in countries with low tax rates, or (b) put U.S.-based firms at a competitive disadvantage vis-à-vis multinationals based elsewhere, take your pick.  

ENFORCEMENT – The Volcker report suggests (p. 53) that measures intended to force improved taxpayer compliance would require the dedication of substantial IRS resources and could entail “more intrusive enforcement measures than may be acceptable to Congress and the public.” 

Well said, and here is an example to make the point.  It involves a provision buried in the GovCare bill, not clearly connected to the healthcare system, which few people noticed until after the legislation had been enacted.

A massive expansion of tax information reporting on Form 1099 will be required for business firms, large and small, starting in 2012.  Stealth IRS changes mean mailing of millions of new tax forms, Neal deMause, CNN Money, 5/21/10.

The 1099 changes attached to the health care reform bill massively expand the requirements for filing the "1099-Misc" form, which companies use for recording payments to freelance workers and other individual service providers. Until now, payments to corporations have been exempt from 1099 rules, as have payments for the purchase of goods. *** All business payments or purchases that exceed $600 in a calendar year will [now] need to be accompanied by a 1099 filing. That means obtaining the taxpayer ID number of the individual or corporation you're making the payment to -- even if it's a giant retailer like Staples or Best Buy -- at the time of the transaction, or else facing IRS penalties.


Business groups howled. The National Taxpayer Advocate, an independent office within IRS, said the costs to businesses might outweigh any benefit the IRS gleans from the added information.  Republican members of Congress proposed to repeal the requirements; Democrats talked of minimizing them. And the truth came out as to why the provision had been shoehorned into the bill – fiscal finagling.  Democrats under fire over health[care]-law reporting mandate, Martin Vaughan, Wall Street Journal, 7/29/10.

The problem congressional Democrats face, if they make changes to the law, is how to replace the revenue that was [supposedly] to be generated for the healthcare overhaul.


“Even many Congressional Democrats and the White House are [now reportedly] conceding that the entire section should be tossed out over concerns that the byzantine logistical mess it creates isn't worth the roughly $17 billion in revenue it was originally designed to raise.”  However, a “pay for” replacement has yet to be identified.  Also, the Administration is believed reluctant to permit the repeal of these requirements lest such action establish a precedent for dealing with other GovCare provisions.  Democrats torpedo repeal of harmful Obamacare provision, Guy Benson, Townhall.com, 9/15/10.


While the outcome of this story hangs in the balance, the fad of stiffening tax reporting requirements to “pay for” new spending appears to be on the rise.  Thus, a new small business package that is poised to become law would (a) require rental property owners to file 1099s for service payments exceeding $600 in a calendar year, e.g., plumbing repairs or painting, and (b) sharply increase fines for any person or business who furnishes incorrect information to the IRS.  And all this to raise – at least on paper – “about $3 billion of the over $30 billion cost of the legislation.”

 “You’ve got to be kidding me,” said Tom Schatz of Citizens Against Government Waste when told about the provision.  “Honestly, it’s an outrageous burden for rental owners.”  Unfortunately, the story is quite real – and a similar requirement for all homeowners could be next (“Big Brother is watching you”).  New law creates IRS paperwork for rental owners, Susan Ferrechio, Washington Examiner, 9/18/10.


CONCLUSION – The assumption that current and projected spending can be paid for by raising taxes on the wealthy and corporations and tougher enforcement may be appealing for some of our political leaders, but it is false.  There are three reasons for this.

First, the fiscal gap is too big – and long term, as entitlement outlays and interest expense rise, it will keep growing.

Second, tax increases withdraw resources for hiring workers and making investments from the private sector, thereby cutting into economic growth.  Visualize the U.S. economy as the national “piggy bank,” the ultimate source of funds for government programs, and you will understand why sharp tax increases would be a bad idea. 

Third, taxes on the wealthy are unlikely to produce a bonanza of tax revenue. They will move their base of operations to some other country, hire clever tax attorneys to beat the system, and/or retire early. 

Corporations are overtaxed vis-à-vis international competitors as it is.  Notice that the “reform” options outlined in the Volcker Report appear to be primarily directed to cutting corporations a break, not raising more revenue.

So if taxes were to be raised significantly, the burden would fall primarily on middle class taxpayers – whom most politicians are petrified of offending because the votes of these taxpayers determine the outcome of elections.

Sounds like the Fiscal Commission may need a Plan B.

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9/13/10 – Long live the Constitution

Reader input is often helpful in deciding what issues to cover, and this week’s entry originated with a suggestion from SAFE Member Harry Thompson of Tucson, Arizona.

With Constitution Day approaching on September 17th, I hope that you will remind taxpayers how their 10th Amendment rights are being trashed by corrupt politicians, to subsidize half the federal budget, containing big government schemes, that are not authorized in the Constitution, the same Constitution that the president on down to rookie members of congress took an oath to support, hah!

It seemed like a timely and meaty subject, and we had not identified anything else to write about.  Done.

FORMAL RECOGNITION – Constitution Day falls every year on September 17, the anniversary of the signing of the then proposed Constitution in 1787.  There is no national holiday involved, which is just as well since we have quite a few already, but observance is encouraged and in some respects required.

This tradition originated in 1940, when Congress authorized a Citizenship Day on the third Sunday in May.  The date was changed to September 17 in 1952, and the purpose broadened to encourage commemoration of the signing of the Constitution, as well as of Citizenship Day, by state and local public and educational officials. The designation was changed to “Constitution Day and Citizenship Day” in 2004, and provisions requiring actions by certain persons were added.  Source: Law Library of Congress.

First, that the head of each federal agency provide each new employee with educational and training materials concerning the Constitution and also provide such materials to every employee on September 17 of each year; and

Second, that each educational institution that receives Federal funds shall hold an educational program on the Constitution for students on September 17 of each year.


As for oaths, the specific wording of the presidential oath (or affirmation) to “preserve, protect and defend the Constitution” is prescribed by Article II, Section 1, Paragraph 7 of the Constitution. 

A similar commitment is required of members of Congress, state legislators, and federal & state executive and judicial officers.  Article VI, Section 3. The specific words are prescribed by statute, including oaths for all military personnel.   Oaths of office in the United States, Rev. Bill McGinnis, LoveAllPeople.org.


MANY CHANGES – There have been debates about the scope and role of the federal government throughout this nation’s history.  See, the historical montage on the Website of the National Constitution Center, including:

1789 – Bill of Rights; 1801 (White House icon) – Two parties, two views of the Constitution; 1824 – Rise of the judiciary (John Marshall era); 1830 (Andrew Jackson) – Two toasts, two views of the Union; 1850-65 – Era at a glance (slavery impasse, Civil War); 1912 – Theodore Roosevelt pushes reforms for the “general welfare;” 1933 – A “New Deal” transforms American government; 1937 – FDR Court packing plan rejected (but Supreme Court caved weeks later); 1954 – Separate is not equal (Brown v. Board of Education); 1964 – Civil Rights Act; 2009 (protesting financial analyst) – Stricken financial markets rock the economy and raise questions about the role of government.  


Conservatives tend to believe the Constitution has been subverted by administrative, legislative, and judicial interpretations, with the powers of the federal government being expanded to “ just about anything goes” while the 10th Amendment was effectively nullified.  RX part two – a Constitutional Convention, 12/7/09.

The founders visualized that the activities of the federal government would be carried out pursuant to the powers given to Congress and the president by the Constitution, e.g., raising armies and fighting wars, regulation of commerce among the several states and with foreign nations, making treaties, coining money, borrowing money, raising taxes, etc., with all other functions of government reserved to the states. See Federalist Paper 45 on centralization or decentralization, authored by James Madison.

For their part, Liberals (aka Progressives) view the reinterpretation that has taken place as the natural consequence of the development of the United States into a modern, world-leading nation.    And realistically, whether one agrees with them or not, the enumerated powers doctrine appears to be dead.

Indeed, some politicians act as though no limits apply.  When challenged (and how!) about the constitutionality of GovCare’s mandate that individuals acquire prescribed healthcare insurance whether they want it or not, for example, Representative Pete Stark (D-CA) wound up saying “the federal government can do most anything in this country.”  Video (3:37), Bay Area Patriots, 8/2/10.


Was Representative Stark right?  Maybe not, for a serious legal challenge to GovCare is being mounted on grounds that the healthcare insurance mandate, etc. invade state and/or individual rights.  The argument is logical, in our opinion, although it remains to be seen how the U.S. Supreme Court will decide the case.  Legal challenges to GovCare, Daniel Kerrick, Spring 2010.


STILL RELEVANT – Although our political leaders and judges cannot always agree as to what the Constitution means, this statement of how the political system is supposed to work can be used in challenging overreaching by any of the players.  Ultimately, the point is not the precise meaning of the Constitution so much as the resolve of the American people to demand its reasonable interpretation and application.

For example, the president is the commander-in-chief, with control over the military forces.  What is to stop him from using this power to take over the country and assume dictatorial powers – as has happened in other countries from time to time? 

A power grab typically follows lesser steps that were allowed to go unchecked, so the best safeguard is to oppose deviations from accepted practice – by the president, Congress, or whoever – at an early stage.

We can think of many misguided government policies.  Sometimes the error reflects lack of understanding, which is forgivable, but in other cases the problem is political ambition (aka lust for power).  As reforming human nature is a tall order, there is much to be said for the checks and balances built into the Constitution. 

It might seem excessive for everyone to carry a Constitution around, as the late Senator Robert Byrd (D-WV) is said to have done, but it would not hurt if public officials stopped to reflect from time to time as to whether their contemplated proposals and actions were consistent with the provisions of that document.

For example, Senator Byrd was reportedly the architect of the 2004 amendments to the Constitution Day legislation that do not simply encourage, but – as already said – require educational institutions that receive federal funds to provide educational programs on the Constitution for their students on September 17 of each year.

In a lecture at Princeton University, Professor Stanley Katz suggested that this requirement – and the attitudes underlying it – could be viewed as infringing on academic freedom.  He went along, however, on grounds that no one had dictated what should be said about the Constitution, only that it should be discussed.  Who’s afraid of Senator Byrd?  9/17/07.      

I want to suggest to you this afternoon that while the constitutional basis for the Byrd legislation is somewhat problematic, that is not nearly so troubling as what the legislation implies both about how we think about the U.S. Constitution and how we think about the role of history teaching in undergraduate education.  That is, I am less concerned about the role of the federal government in mandating teaching requirements in higher education, than I am about it mandating the manner of teaching of U.S. history in particular.


MORE EXAMPLES – Building on the previous discussion, we will now discuss a series of cases in which government actors have cut constitutional corners with undesirable results.

#1 – If Congress had stuck to its enumerated powers, refraining from appropriating money for purposes not so much as mentioned in the Constitution, it would be a breeze to balance the budget.  But Congress did not do this, and the country is now drowning in debt.  Not for nothing has Co-Chairman Erskine Bowles of the Fiscal Commission likened deficit spending to a cancer that if left untreated will destroy the country.

There is no way to revive the enumerated powers doctrine at this late date, however, so fiscal visionaries will necessarily make their case on other grounds. Thus, we should focus on opposing wasteful or ill-conceived programs at either the federal or state level using arguments such as does more harm than good, costs exceeds benefits, overlaps with programs of other agencies or governmental units, or could be better addressed by the private sector. See the Budget Discipline page of this Website for further discussion.


#2 – In a 2005 decision, the U. S. Supreme Court held that the government taking of property by eminent domain could extend to cases in which the property would be used for commercial development.  Kelo v. New London, 545 U.S. 469 (2005).


The 5th Amendment provides, in relevant part, that private property shall not be taken for public use without just compensation. It says nothing about private property being taken for private use.  However, the majority opinion per Justice Stevens said the transaction amounted to public use due to its association with a city-approved development plan. 

The result, as Justice O’Connor stated in her dissent, was “effectively to delete the words ‘for public use’ from the Takings Clause of the Fifth Amendment.”  Despite the payment of allegedly just compensation, such a result strikes us as an inappropriate dilution of private property rights – based on deference to public oversight over economic development that might or might not prove beneficial in a given case – without bothering to follow the prescribed procedure for amendments.

Ironically, the anchor of the development plan – a corporate research center – was closed a few years later.  Pfizer to close New London headquarters, Hartford Courant, 11/9/09.


#3 – During the massive BP oil spill in the Gulf of Mexico, the Administration imposed a 6-month moratorium on deepwater drilling.  This action was challenged in court, and a district court judge ordered that the ban be lifted.  The 5th Circuit rejected the government’s appeal, at which point there were two legitimate courses of action – lift the ban or appeal to the U.S. Supreme Court. 

Instead of doing either of these things, the government issued a new moratorium that had the same basic effect as the first one.  Salazar puts new ban on deep-water oil drilling, Stephen Dinan and Kara Rowland, Washington Times, 7/12/10.

Trying to answer the judge's objections, the government's new ban applies to all floating drilling rigs. In practice, it amounts to about the same prohibition as the previous ban on drilling at depths greater than 500 feet, because floating rigs are generally used at those deeper depths. Gulf state lawmakers said the new moratorium is still "arbitrary and capricious" — the same criticism that led a judge to reject the initial ban.


In our opinion, the moratorium represented an inappropriate policy decision  – but let’s concede that reasonable minds might differ on this score.  Imposing the moratorium a second time, however, smacks of a willingness to defy judicial authority (which is grounded in the Constitution) as though the Administration was above the law.  All Americans should condemn this action.

#4 – Congress is empowered to make the federal laws under our Constitution, while the Executive Branch is responsible for enforcing them.  Inevitably, there is some need for judgment on the enforcement side – re the factual record, the appropriate use of valuable prosecutorial resources, etc. – but decisions not to enforce a given law based on policy differences, or to enforce policies without legal authority, are clearly inappropriate.

A case in point would be the decision of the Department of Justice (DOJ) to seek to block implementation of the Arizona immigration law (which would support the enforcement of existing federal statutes), while turning a blind eye to the anti-enforcement policies of “sanctuary” cities. 

Given the DOJ’s posture, it would be fair to infer that the Administration believes the immigration law should be changed and is unwilling to vigorously enforce the existing law in the meantime.  And never the twain shall meet: the Left/Right divide.

For what reason might the Administration take Arizona to court for supporting the enforcement of federal law, use law enforcement as a bargaining chip [in pressuring members of Congress to support “comprehensive immigration reform”], and contemplate administrative self-help [to grant immunity to illegal immigrants by executive fiat].  The most obvious answer is currying favor with Hispanic voters.

Similarly, the DOJ has been accused of failing to enforce the federal voter registration laws – primarily based on political considerations – leaving private party lawsuits as the only recourse.  There appears to be enough smoke to suggest a serious problem. Scandal at Justice: Enabling vote fraud, Washington Times, 9/3/10.


The problem of improper maintenance of voter lists is widespread:

Mr. Adams’ [former DOJ employee, now a whistle-blowing attorney] notice letters report that South Dakota, for example, has 17 counties with more registered voters than there are citizens of voting age living there. Mississippi has 17 such counties. Alabama has seven, and Indiana, Kentucky and Texas have 12 each. Most of the states threatened with suits have reported no cleaning of their voter lists for years. Multiple press accounts in Tennessee show a serious problem with convicted felons and illegal immigrants being registered and sometimes voting.  

The DOJ has allegedly washed its hands of the problem:

"We have no interest in enforcing this provision of the law," DOJ official Julie Fernandes reportedly told a roomful of employees of the department’s Voting Section in November. "It has nothing to do with increasing turnout, and we are just not going to do it."  

And there is other evidence of selective, politically motivated use of DOJ resources in the voting rights area.

This developing scandal of mystery voters and dead voters resurrects the story about the [DOJ’s] own website showing more substantial efforts to help felons reacquire voting privileges - even though the department has no statutory authority to do so - than to help ensure the opportunity for military personnel overseas to have their votes cast and counted on time.  

#5 – Paraphrasing Justice Marshall, “the power to regulate is the power to destroy.”  To maintain a vibrant yet socially responsible economy, it is imperative to strike the right balance (not too hard, not too soft).  Doing this is easier said than done, however, particularly if both the federal and state governments are involved.

One of the reasons for giving Congress the power to regulate interstate commerce under the Constitution was to prevent the states from unreasonably interfering with such commerce.  And Congress can clearly claim exclusive jurisdiction if it chooses.  In many cases, however, federal and state regulation have been permitted to co-exist.  This can result in regulatory overkill, which in our opinion reflects badly on both Congress and the state officials on the other side of the equation.

Thus, we have no problem with the robust regulation of nuclear power, but do not believe the industry should be required to satisfy two sets of regulators with the strictest view prevailing.  Just such a situation is developing in Vermont, which could potentially result in the shutdown of a nuclear power plant deemed compliant with federal requirements.  Vermont Senate votes to close nuclear plant, Matthew Wold, New York Times, 2/24/10.

The controversy in Vermont is viewed with deep apprehension and some anger by the nuclear industry. The Nuclear Regulatory Commission in Washington, which normally makes the decisions on safety issues, is poised to give the plant 20 more years. Commission officials declined to comment on Vermont’s action.


CONCLUSION – We should all think about the Constitution from time to time, and be thankful for the wisdom that went into its design.  And if some of our political leaders suggest that the subject should be left to staff attorneys, let’s politely remind them of their personal oaths to support this document.  Happy Constitution Day, everyone!

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9/06/10  – The path forward from August 28      Read Replies

As reported last week, the Restoring Honor rally was a patriotic/ spiritual event – and not openly political.  Glenn Beck rally in D.C., 8/30/10.

But everyone sensed the rally had great political significance.  Indeed, Chris Wallace asked afterwards whether Beck was by any chance thinking of running for president in 2012 with Sarah Palin as his running mate.  Rightly or wrongly, we were pleased by Beck’s answer.  Transcript of post-rally interview, Fox News Sunday, 8/29/10.

Not a chance. I don't know what Sarah is doing. I hope to be on vacation. I have no desire to be president of the United States. Zero desire. I don't think that I would be electable.  And there are far too many people that are far smarter than me to be president. I'd like to find one with some honor and integrity. I haven't seen them yet, but they'll show up.


So, what is the next step – both for people who think as Beck does and for his intellectual opponents? 

SUPPORTERS – Political conservatives, tea partiers, etc. like Glenn Beck’s ideas – including his oft-repeated warnings (not part of the 8/28 program) about out of control spending and the relentless expansion of government.  While applauding the Restoring Honor rally, they are hungry for a political agenda to go with it.  Time to get to work, Bill Wilson, getliberty.org, 9/1/10.

Rest assured, the means [to reclaim the nation and reinstate self-government] are indeed political, if even the rally was not. Americans who hope to restore a constitutional, limited form of government must participate in the nation’s political processes. They must continue to involve themselves with political primaries, in selecting candidates that best represent their values.

They must volunteer their time and resources to those campaigns, knock on doors, help raise money, and make phone calls. And once the elections have passed in November, they must hold their elected representatives accountable for their actions, and be ever vigilant in demanding policies that enhance liberty and limit government’s powers.


There will plenty of political proposals at a second big D.C. rally, organized by Freedom Works et al., on September 12 (this coming Sunday). 

In 2009 we rallied hundreds of thousands of people and marched right up to the capitol building in Washington. This year, we are coming back in full force, and we will be focused on one message - TAKE AMERICA BACK in 2010!


Oh, no, another D.C. rally so soon.  Attending these events takes time and energy, but then there is a lot at stake.  As one of the Cecil County Patriots put it in a recent e-mail:

Although we have not yet had to sacrifice anything even remotely close to what Washington's troops endured, we are in a battle.  Just like George Washington and many of our other founders, we need to get on our knees.  Like them, we cannot stay on our knees.  We must fight for liberty.  9/12 is a national tea party where you will have the opportunity to march with thousands of other Americans in protest of a heavy-handed government who continues to attack the individual liberties granted to us by our Maker.  We must be willing to continue to stand and speak out.  Last year's event was absolutely amazing.  If people are willing to participate again, it will be another amazing event. 

Beyond the rallies, serious thinking is needed about what policy changes are needed to get the economy back on track, both currently and for the longer haul. Stay tuned for future entries on this subject, which ultimately is where SAFE can make its highest and best contribution. 

OPPONENTS – Given the traditional and inclusive themes of the Restoring Honor rally, one might think that liberals (aka progressives) would be holding their fire or even saying something positive.  What’s not to like about an appeal for Americans to make this country better by improving their own thinking and behavior?  If political moves followed with which they disagreed, that might be the appropriate time to respond.

The idea that people should think for themselves and act based on their beliefs is inconvenient, however, to those trying to sell a Big Government agenda.  Indeed, the liberals would have us believe that many decisions in life are so complicated that only highly educated government experts can cope with them.

Autocratic regimes have often used the device of devaluing individual initiative to bolster their own power, and this tactic can be frighteningly effective if the population loses confidence in itself.  Escape from Freedom, Erich Fromm, 1941.

Fromm argues that the German masses (especially the lower middle class) were not tricked into supporting Hitler and his cohorts; they willingly succumbed to gain powerful psychic benefits.  In brief, by surrendering themselves to the great leader, they escaped the dilemma of surviving in a world that seemed threatening and beyond their control.


Even in this country, some U.S. government officials seem intent on treating people like children and telling them what to do. Consider a proposal to require fuel efficiency & emission “grades” on stickers for new cars and trucks.  GW microblog, 8/31/10.

. . . all electric vehicles would get an A+, plug-in electrics an A, gas-electric hybrids an A-, Toyota Camry a B or B- depending on the engine, Ford F150 truck a C+ or C depending on the engine, and a souped-up Ferrari would receive a D (the lowest grade). 

An EPA official (Gina McCarthy) assured that the letter grades were not meant to represent a judgment on the vehicles in question.  Environmental groups generally supported the plan on grounds that “you shouldn’t need a Ph.D. to buy a car,” and the grades would make it “much easier for consumers to comparison-shop.”  


Far from viewing the Restoring Honor rally as constructive, opponents came up with various strategies for minimizing it.  Here are some examples:

# Scorn – Columnist Kathleen Parker characterized the rally as Glenn Beck’s personal confession. Beck’s rally part religious revival, part AA meeting, Sacramento Bee, 9/2/10.

Saturday's Beckapalooza was yet another step in Beck's own personal journey of recovery. He may as well have greeted the crowd of his fellow disaffected with: "Hi. My name is Glenn, and I'm messed up."


# Indifference – In an MSNBC interview of the president, Brian Williams spoke of its supposedly hostile message. Transcript, 8/29/10.

What does it say to you that Glenn Beck was able to draw a crowd of perhaps north of 300,000 people on the anniversary of Dr. King's speech, on the site of Dr. King's speech? Message appeared to be, at times, anti-government, anti-spread of government. Anti-Obama administration. And in favor of — I guess — re-injecting God into both politics and the American discourse.

He had not watched the rally, said the president, but it was true that the country was going through “a very difficult time” which had arisen due to “years of neglect.”  Accordingly, his Administration was focused on addressing a host of issues in a manner that would be “good for the next generation.” 

Our schools not working the way they need to – a financial system [that was cheating people] – a healthcare system that was bankrupting families and businesses – two wars – a continuing battle against terrorists. – [So] it’s not surprising that somebody like a Mr. Beck is able to stir up a certain portion of the country.


# Rebuttal – Senator Mary Landrieu (D-LA) suggested in an MSNBC interview (Brian Williams again) that (1) the religious theme of Beck’s rally was old hat, and (2) concrete actions, not rhetoric, are needed to address the country’s problems (e.g., helping the poor and putting people back to work). “Glenn Beck is wrong,” video (1:50), 8/29/10.


As the Restoring Honor rally did not delve into policy issues, there were no specific points to attack.  It was perhaps no coincidence, however, that the New York Times chose this time to publish an editorial urging the president to double down on his faltering economic plan.  Waiting for Mr. Obama, 8/28/10 [8/29/10 print edition].

The NYT editors would have the president: (1) keep driving home that he is committed to addressing the deficit, and that he will call for widespread sacrifice to do so — starting with letting the Bush tax cuts for the richest Americans expire at year end;  (2) explain why too much sacrifice, too soon, especially from the middle class, would do more harm than good while the economy is weak; and (3) rally the nation around a big idea that is worth sacrificing for, paying for, and working for, such as a 21st-century infrastructure, including faster Internet access and high-speed rail, or “energy independence, with high-tech green jobs and a real chance for addressing global warming.”


To fully respond to this piece would take pages, it almost seems as though the NYT editors live in an alternate universe with different economic laws than we have observed in this one, but here are two key points.

First, 2011 looks like a particularly bad time to raise tax rates on high earners, thereby reducing their incentive to work and invest.  Extend Bush tax cuts to boost economy, Donald Lambro, Human Events, 8/26/10.

In a significant story that receive[d] scant attention from the national news media, [Congressional Budget Office] Director Douglas Elmendorf says that keeping the Bush tax cuts that affect upper-income taxpayers, small businesses and investors will give the weakened economy a "considerable" economic boost over the next several years and create jobs that will drive down unemployment.


According to the National Taxpayer’s Union, moreover, taxpayers in the top 5% of AGI bracket are already (tax year 2007 data) paying about 60% of all federal personal income taxes.  What’s the urgency for trying to make them pay more while requiring no sacrifices from anyone else?


Second, current spending and borrowing are unsustainable, and the day of reckoning may be closer than many people think.  Instead of proposing “investments” in expensive new programs, our political leaders need to get serious about slashing existing programs that are wasteful or redundant.  The “plan now, act later” idea is a nonstarter, 6/21/10.

The notion that the government can safely keep the spending party going now and seamlessly cut spending later is naïve.  As President Ronald Reagan famously said, “no government ever voluntarily reduces itself in size” and “a government bureau is the nearest thing to eternal life we will ever seen on this earth.”

As might be expected, the left is planning to counter the Restoring Honor and 9/12 rallies.  Their One Nation Working Together [ONWT] March on Washington will take place on Saturday, October 2.  Like Beck’s rally, the venue will be the Lincoln Memorial, but the similarities basically end there.

The ONWT march will demand government action to provide jobs and benefits, not the freedom to exercise individual initiative, and the event will be openly associated with the party in power. DemocratUnity.com, 8/21/10. 

We know that when Americans of all ages, sex, sexual orientation, gender identify, place of birth, race, color, beliefs or abilities work together we are victorious as we were with the Lilly Ledbetter Fair Pay Act, groundbreaking legislation protecting the rights of women in the workplace, or with the monumental healthcare reform law signed earlier this year. Both happened in no small part due to the hard work of a diverse coalition of organizations and individuals committed to investing in the American people.


Here is a sample from that coalition.  Note that labor organizations (shown in bold) will play a key role.  10.2.10 March on Washington, Daily Kos, 9/3/10.

AFL-CIO, 350.org [climate crisis], A. Philip Randolph Institute [Randolph was a black labor leader associated with the 1963 march on Washington], All Hands on Deck [environmental group], Amalgamated Local 171 UAW, American Federation of Teachers, American Friends Service Committee [Quaker organization], American Rights at Work [advocates of unionization], Americans for Financial Reform [advocates of more government regulation] . . .


With union membership steadily eroding in the private sector, big labor wants pro-labor legislation and expansion of the public sector.  A push for “card check” legislation (to eliminate secret ballot voting in union elections) has stalled, which ups the pressure to support liberal candidates rather than “going quietly into the night.” Between them, the AFL-CIO and SEIU reportedly have some $88 million to spend on the 2010 elections.  A desperate struggle for survival, Terrence Scanlon, Washington Times, 9/3/10.


SEIU’s mantra for the ONWT march is “Support the change that we voted for in 2008;” the union perceives tea partiers as their primary adversaries.  SEIU bulletin, 7/8/10.

“Our unprecedented political organizing helped elect President Barack Obama during the worst economic crisis in generations,” says Gresham. “We have not yet found our way out of the crisis, but those who have been making the most noise, such as the Tea Party advocates, are attempting to take us back and tear our country apart. We can’t let that happen.”


Similarly, AFL-CIO leaders characterize the tea partiers as favoring and/or being backed by big business. Union “mobilization” plans to blast GOP, Sean Lengell, Washington Times, 9/1/10.

AFL-CIO Executive Vice President Arlene Holt Baker took a shot at the growing conservative "tea party" movement, accusing its leaders of being more beholden to big business than to workers. "We're fighting for working families - and the tea party and its corporate backers are not going to get the final word," she said.

[AFL-CIO President Richard] Trumka said he doesn't perceive the tea party as a threat to workers and will gladly work with its followers to support workers' rights. But he added that the movement at times has included hateful rhetoric that poses a "threat to America and democracy."


Mr. Trumka has been particularly outspoken in denouncing Sarah Plain for attitudes that are more characteristic of his own record than hers.  Obama spending Labor Day with real thugs, Michelle Malkin, Townhall.com, 9/3/10.

Trumka warmed up his rhetorical muscles this past week with full-frontal attacks on former GOP vice presidential candidate Sarah Palin. He indignantly accused her of "getting close to calling for violence" and suggested that her criticism of Tea Party-bashing labor bosses amounted to "terrorizing" workers.


IN SUM – The current political scene is dominated by a “culture war” between people who are leery of Big Government and people who want more of it. Many of the arguments for expanding the size and role of government seem irrational, but proponents have a powerful weapon in their arsenal – the promise of “free” benefits.  And never the twain shall meet: the Left/Right divide, 6/28/10.

Dueling demonstrations by tea partiers and labor unions capture the essence of the dispute.  It is not so much a confrontation of haves and have-nots, as some would have it, as of doers and takers.  Consider the fable of the ants and the grasshoppers. 


Eventually, one side or the other will win – with far reaching consequences for this country and the world.  We hope to be on the winning side.  How about you?

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Candidate X has been talking about the choice of the future – state control or personal freedom.  I'm going to forward this piece to a contact at the campaign.  -  SAFE director 

Our political leaders must understand that upholding and defending the Constitution does not mean doing anything that suits their purposes, and if they don’t get it they should be voted out of office. Keep up your good work, exposing the corrupt politicians who are destroying our country.  -  SAFE member, Arizona

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8/30/10  – Glenn Beck rally in D.C.      Read a Reply

Many people turned out for the Restoring Honor rally at the Lincoln Memorial on August 28, including SAFE directors Steve McClain and Bill Whipple.  They drove in Steve’s sports car, parked at the Landover Metro station, and took the train from there.  This is an account of their experience, starting with some background information about the event.

BACKGROUND - The event organizer, commentator Glenn Beck, had said the rally would be apolitical.  No signs – no office holders on the platform (although Sarah Palin was invited) – no party labels or endorsements.  And the goal was not to take the country back a few years; it was a return to our founding principles.  Glenn Beck interview, Jillian Bandes. Townhall.com, 8/24/10.

I don’t mean restore it back 2000 or George Bush, I mean restore us back to where we belong and where we should be as a nation and where we have been very few times in our nation’s history. That is going to play in a big role the day after but also I am going to be asking people to fundamentally transform ourselves from who we have allowed ourselves to become to who we really are supposed to be.


According to the Washington Post, Beck was expecting “as many as 100,000 people.”  There were also reports, however, that local tea party organizers were chartering more buses than they had for the hugely successful 9/12 March on Washington in 2009.  And count on it, there would be widely varying estimates afterwards as to how many people turned out.

Republican Party operatives claimed “little or no knowledge of the event,” while Democrats were not “passing up the chance to tie the GOP to the rally.”

Controversy swirled about whether the Restoring Honor rally at the Lincoln Memorial was fitting, given that Dr. Martin Luther King had delivered his famous “I have a dream” speech at the same location on August 28, 1963. (Supposedly, Beck et al. had not realized this fact when they chose the date for their rally.)


Critics implied that Beck was trying to upstage or marginalize the civil rights movement, and the Reverend Al Sharpton planned a competing demonstration that would march from Dunbar High School to the site of the planned King Memorial (at the same end of the Mall as the Lincoln Memorial, bringing the two events into close proximity). 

Beck’s answer was that Dr. King does not belong to black Americans, he belongs to all Americans, and nothing to be said or done at the Restoring Honor rally would in any way challenge or dilute King’s message.  Glenn Beck rally will be a measure of the tea party’s strength, Amy Gardner, Washington Post, 8/25/10.


WHY GO? – For all the rhetoric about transcending politics, the Restoring Honor rally raises several “hot button” issues.  Consider these comments from Beck’s Townhall.com interview, after he had just finished castigating “the left” for being anti-American.

We need to start gathering together on the principles of the Constitution, small government, God and our founding principles. We need to unite on principles. We need to look and find those principles in ourselves and then find them in other organizations and start linking with people with like-minded principles and start demanding those principles from ourselves and each other.


In contrast, Al Sharpton has invited “progressive” organizations to march for “reform of immigration, healthcare, and other social justice issues,” giving a distinctly political feel to the coming battle for public attention.  Beck’s rally: What would MLK do?  Harry R. Jackson, Jr., Townhall.com, 8/26/10.

One group is ostensibly white, conservative, and largely Republican. The other group is predominately black, liberal, and largely Democratic. Both groups will have descendants of MLK as part of their presentation teams - Martin Luther King, III with Sharpton and Alveda King (MLK’s niece) with Beck. Both will claim that they represent the true spirit of King’s legacy. One group will label the other un-American, while the other claims its opponent is racist.


It is not exactly news, by the way, that many people view the president and his allies as leftists who are trying to radically change the country by expanding the size and role of government.  Some critics contend, therefore, that the Republican Party should stop worrying about picking its battles and oppose the liberal agenda across the board.  Half-measures won’t work against tyranny, David Limbaugh, Townhall.com, 7/20/10.


Hmm, it would not be much of a stretch to view the Restoring Honor rally as directed against the president and his allies – which certainly sounds political – and SAFE is not a political organization – so should we attend this event let alone others of an avowedly political nature (e.g., the 9/12 March on Washington last year)?

But SAFE can hardly hope to make a difference by simply evaluating the merits of alternative government policies and publishing our findings.  Sounds a bit like the old saw that “if you invent a better mousetrap, the world will beat a path to your door.”  No, to offer proposals that have any chance of adoption, we must keep abreast of public opinion and political strategies as well as the nuances of policy. 

Coming down from our ivory tower to observe events like the Restoring Honor rally can provide a sense of what is happening on the political front.  Sounds like a good idea!

This does not mean that we are invested in supporting either party.  During the 2008 presidential race, for example, we dispassionately evaluated where the presidential candidates stood on issues important to the SAFE agenda and faulted both of them in many respects.  What would you like, central planning or an eclectic mix?  10/27/08

Also, with all due respect to David Limbaugh, the Republicans need to do more than simply oppose the president’s agenda.  Otherwise, their anticipated gains in the mid-term elections this year could prove short-lived because the voters are looking for positive alternatives.  Republicans need to show beef or they’ll get the hoof, Chris Stirewalt, Washington Examiner, 7/22/10.

Running as the "anti" party this fall would surely produce substantial gains for Republicans. And even a very general policy outline risks turning off some voters, risks divisions in the party and allows Democrats to change the subject from their own failures.  But the Republican Party's credibility on issues like spending, ethics, and foreign policy is so battered, that 2010 needs to be a time for re-branding, not a parasitic consumption of America's Obama misery.


And here is a message for both parties:  If you are prepared to embrace smaller, more focused, less costly government, as you most certainly have not done in recent years, there are some policy ideas on this Website that you might do well to consider.

AUGUST 28 – Scanning the [Wilmington] News Journal before departure, we got a sense of how the rally would likely be covered by the mainstream media.

A3, Beck deflects criticism of time, location of rally: Activists bristle at holding event at King Landmark. Beck was described as a man who “has built an empire around his own voice” and “become a soundtrack for conservative activists and members of the tea party movement angry and frustrated with Obama and other Democrats in a highly charged election year.”  Among those quoted as being critical of his rally being scheduled on the same date as Dr. Martin Luther King’s “I have a dream” speech was Greta Van Sustren, also of Fox News, who said “it does not help the country on so many fronts if we poke a stick in eyes.”

A3, Activist: Beck confused about MLK: Rally opposes goal of original speech.  The Reverend Al Sharpton characterized Beck’s event as an anti-government rally advocating states’ rights. In contrast, he said, Dr. King was appealing for federal government intervention to ensure equality.  [The words “federal” and “government” do not appear in King’s speech, although there is a critical reference to the then governor of Alabama.]

A8, Talk is cheap, ideas are better, and action is best, editorial: Predicted that “today’s D.C. rallies” would “be long on rhetoric, bad alliteration and overblown promises about making America great again.”  But “do not expect many solutions.”

A9, Beck’s fearmongering DC. March laughable, Eugene Robinson: After loftily affirming Glenn Beck’s right to hold his “absurdly titled” rally, Robinson dismisses it as “an exercise in self-aggrandizement on a Napoleonic scale” that is “obviously intended to be a provocation.”  And by the way, Beck’s version of history is wrong because, lest it be forgotten, the full title of the event 47 years ago was the “March on Washington for Jobs and Freedom.”  Etc.

The drive south towards D.C. went smoothly until we pulled into the New Carrolton Metro station.  The parking lot was jammed, including many buses, and there was a long line just to get inside the station.  Someone gave us a good tip.  We drove on to the Landover station, where the situation proved much more favorable.

Arriving in D.C., we got off at the Federal Triangle station, made our way to Constitution Avenue, and walked west paralleling the National Mall and then West Potomac Park.  Turning left, we angled into the Lincoln Memorial, reaching a spot that was not only extremely crowded but behind the podium as well.  No good!

By retracing some steps and turning east, we reached a spot where it would be possible to follow the action on one of the jumbotrons (huge video screens) that had been set up.  The sound was excellent; the view was partially blocked by passersby and people in front of us but better than nothing.  There we stood for three hours (roughly 10:00 a.m. to 1:00 p.m.), as the rally progressed.

Being present in person gave one a sense of the crowd (variously estimated at from “tens of thousands” to half a million), which was certainly as many people as the available area (the reflecting pool took up a lot of room) stretching to the Washington Monument could reasonably accommodate.  Glenn Beck calls for national revival, James Hohmann, Politico.com, 8/28/10.

Many attendees had claimed seats the night before. Before 9 a.m., volunteers stood nearly 200 yards from the base of the steps of the memorial, telling people to turn around because the area was so densely packed, and struggling to clear an emergency exit lane as people pushed to get closer.


With minor exceptions, the program was apolitical, just as Glenn Beck had promised. Sarah Palin, the only politician on hand, spoke as the mother of a combat veteran and introduced a series of military heroes. Although the crowd was predominantly white (and younger than indicated in some write-ups, because many people brought their children), the participants were multiracial (including blacks, Hispanics, and native Americans) and Dr. Martin Luther King’s speech on the same site 47 years ago was movingly reprised.  Most of the speeches were about principles and values – faith, hope, charity, honesty, valor, etc.  There were numerous references to the need for imperfect humans to seek divine guidance.  In short, the event came across as a cross between a patriotic rally and a religious revival meeting.  It was authentic, moving, and well orchestrated.

In lieu of further description, here is an 187-minute video (C-Span), which covers the action on stage better than we were able to see it. 


There was no sign of Reverend Al Sharpton’s “Reclaim the Dream” march to the King Memorial site on the Tidal Pool (see map, Washington Post, 8/27/10).


Moreover, we are not sure what actually happened.  The map and map legend indicate that Sharpton’s march began at 1:00 p.m. at Dunbar High School and led to the Taft Memorial near the U.S. Capitol.  There was also supposedly a “Students Finding Solution” march, beginning at 8:00 a.m., which followed a different route to the King Memorial site.

In any case, demonstrators from the two sides reportedly crossed paths near the Washington Monument – with a bit of mutual heckling.  Al Sharpton leads activists near tea partiers, CBS News, 8/28/10.

Men in tri-cornered hats and people wearing tea party T-shirts looked on as marchers chanted "reclaim the dream" and "MLK, MLK" in reference to Martin Luther King Jr. Some marchers chanted "don't drink the tea" to people leaving Beck's rally. One woman shouted to the marchers: "Go to church. Restore America with peace."


REFLECTIONS – The crowd at the Restoring Honor rally looked a lot like the folks at the 9/12 March on Washington last year.  Although not carrying signs, many demonstrators were wearing shirts with pointed messages and there were a fair number of American flags and yellow “don’t tread on me” banners in evidence.  Simply by focusing on the powers and obligations of individual Americans, the event expressed the growing disillusionment with the Big Government agenda of the current Administration. 

Nevertheless, Beck’s rally was quite different from other tea party events – being more spiritual, more inwardly directed, and less goal directed.  At Lincoln Memorial, a call for religious rebirth, Kate Zernike et al., New York Times, 8/28/10. 

While Tea Party groups have said they want to focus on fiscal conservatism and not risk alienating people by talking about religion or social issues, the rally on Saturday was overtly religious, filled with gospel music and speeches that were more like sermons. 


The event was undeniably powerful, and it showed that conservatives could be a force to be reckoned with if they ever got their act together.  Faith, hope, and honor at Glenn Beck’s 8/28 rally, Jillian Bandes, Townhall.com, 8/28/10.

Glenn Beck's 8/28 rally delivered a swift kick in the rear to anyone who claims he or the conservative grassroots movement is irrelevant or idle.  "Welcome to Restoring Honor. You are standing on the banks of greatness, the banks of American dreams," said Beck, during his initial remarks. "America is a land of opportunity."  Beck's opening salvo set the tune for the rest of the day, which focused on the founding fathers, with a heavy dose of religious reverence and military pride.


Critics and belittlers who had characterized the event as a cynical political gimmick wound up looking a bit foolish.  Glenn Beck makes history: Washington rally shows power of conservatism in America, Niles Gardiner, UK Telegraph, 8/29/10.

Significantly, Dr. King’s niece, Alveda King, spoke at the rally, which she described earlier as “a celebration of who we are as a nation and a chance to stop for a moment, reflect, reorganize, and re-energize. It’s a chance to think about character; both our character as a nation and our character as individuals.”


In sum, it was a thrill to attend this historic event. We enjoyed the celebration of America’s heritage, national symbols, military service, and voluntary generosity. These elements constitute America’s cultural heritage, which is the glue that holds the country together. Beck is right, too, that America is badly in need of heroes – which he defines as ordinary people who do “the right thing” even when some other course might be easier. 

We did not necessarily agree with the heavy emphasis on spirituality.  Religion is a matter of personal belief and conscience, in our view, that does not need to be on constant display in the political sphere.  The rally served as a reminder that religious faith is an important part of many lives, however, and its public expression need not be regarded as inherently offensive to nonbelievers.

Policy specifics will be important if America’s government is to be straightened out, which is the type of thinking that SAFE tries to do.  But unless the American people coalesce around some common principles and values, a happy ending looks improbable. 

Glenn Beck and his associates are to be commended for a constructive effort to push the country in the right direction.  Let’s hope that their efforts will bear fruit.

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On the debate over the turnout, let the liberal press or the liberals underestimate the crowd at their own peril.  If they say it's a small turnout, then the event is not significant.  I think the 300,000 to 500,000 is probably more accurate.  The liberals better be running scared! – SAFE director

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8/23/10  – “Good news” about Medicare is much exaggerated

Last week we reviewed the fiscal outlook for Social Security as of its 75th anniversary. Here goes a similar review for Medicare and Medicaid, which recently marked their 45th anniversaries.  Proclamation of the president, 7/30/10.

President Lyndon B. Johnson signed Medicare and Medicaid into law on July 30, 1965 *** Today, Medicare provides over 47 million Americans with dependable medical insurance, and is the largest health care provider in our Nation.  State Medicaid programs provide health and long-term care coverage to more than 56 million low income Americans. *** No American should be one illness away from financial ruin, and we must continue to keep Medicare and Medicaid strong for the millions of beneficiaries who rely on these vital safety nets.


MEDICARE – As with Social Security, there is a recent report by the trustees of the Medicare trust funds.  The headlines are generally upbeat, but somewhat misleading. 

The Hospital Insurance (HI) trust fund will be exhausted 12 years later (2029 vs. 2017) than was reported last year.  And the fund’s actuarial deficit over the 75-year projection period has been reduced from 3.88% of taxable payroll to 0.66% of taxable payroll, principally due to “the lower expenditures and additional tax revenues instituted by the Affordable Care Act [aka GovCare].”  Medicare report, 8/5/10, pages 5-9.


The Supplemental Medical Insurance (SMI) trust fund for Medicare Part B (medical treatment & tests) and Part D (prescription drugs) benefits is described as adequately financed, i.e., is not projected to be exhausted at some point.  Why?  Outlays from the SMI trust fund are financed in part by general revenues and premiums, which “are reset each year to match expected costs.”  Medicare report, pages 8-9.

Hmm, the growth in outlays for Medicare and Medicaid has generally been seen as the biggest cause of the long-term fiscal problem.  Here is how the president put the point in an address to Congress on September 9, 2009.

Finally, our health care system is placing an unsustainable burden on taxpayers.  When health care costs grow at the rate they have, it puts greater pressure on programs like Medicare and Medicaid.  If we do nothing to slow these skyrocketing costs, we will eventually be spending more on Medicare and Medicaid than every other government program combined.  Put simply, our health care problem is our deficit problem.  Nothing else even comes close.  Nothing else.  (Applause.)


Could it be that the fiscal problems of Medicare have been exaggerated, or that GovCare will – contrary to our previous predictions – make a big dent in them.  That would be good news indeed.  The projected slowing in Medicare cost increases assumes productivity gains, however, that the government may be hard pressed to orchestrate.  A half-trillion-dollar delusion: bureaucratic obstruction will negate any savings, James Bacon, Washington Times, 8/6/10.

. . . the law creates as many as 159 new federal offices, agencies and directives. It's a basic rule of management: When everyone is in charge, nobody is in charge. Inevitably, the involvement of so many players will bog down decision-making. Some of these new entities will work at cross-purposes, breeding confusion among insurers, hospitals and physicians.


Uncertainties of the Medicare projections – due among other things to a complex healthcare bill that was just enacted and will take years to implement  – are frankly acknowledged by the plan actuaries.  See, e.g., Medicare report, page 8.

If Congress continues to override the statutory decreases in physician fees, and if the reduced price increases for other health services under Medicare become unworkable and do not take effect in the long range, then Medicare spending would instead represent roughly 11.0 percent of GDP in 2084 [vs. 6.4 percent of GDP based on our intermediate set of assumptions]. 

Moreover, we believe that (a) tax increases and realizable productivity gains should be reserved for deficit reduction, not used to pay for new spending programs (see next heading), and (b) Medicare funding cuts decreed by GovCare would reduce the quality and/or availability of healthcare for participants.  A tangled web: we must enact GovCare to reduce the deficit, 3/22/10.

TOTAL HEALTHCARE – Medicare is only one of several government healthcare programs, and the others – Medicaid, CHIP (children’s health insurance), and new GovCare benefits – are financed out of general revenues.  To meaningfully assess the fiscal outlook for the government’s “bet the ranch” investment in healthcare, one must consider all of the programs in combination (including state government spending for Medicaid and CHIP).

There are important connections between these programs, including an overlap in the beneficiaries served. Thus, while senior citizens look to Medicare re medical tests & treatment, pharmaceuticals, and hospitalization, long-term care (to the extent allowable) has been covered under Medicaid.  Now, following the passage of GovCare, there will also be a new long-term care program called the Community Living Assistance Support Act (CLASS Act). 

CLASS Act participation is voluntary.  The program should initially pull in a lot of cash as no benefits can be paid until a participant has been paying premiums for five years, but will likely become a “fiscal time bomb” over the longer term as a result of adverse selection (sick people will participate; healthy people will opt out).  Bad medicine: A guide to the real costs and consequences of the new healthcare law, Michael Tanner, Cato, 7/10/10, pp. 22-24.


By the way, Senator Kent Conrad (D-ND), a member of the Fiscal Commission, has labeled the CLASS Act “a Ponzi scheme of the first order . . . that Bernie Madoff would be proud of.”  The CLASS Act program fails to make the grade, Rep. Charles W. Boustany Jr., M.D. (R-LA), Washington Examiner, 8/18/10.


Projected savings in Medicare costs, to the extent they can be realized in practice, will likely be more than offset by increased outlays under other programs.  Therefore, overall GovCare will increase federal healthcare spending despite the improved outlook for the HI Trust Fund.

Accurately measured, the Patient Protection and Affordable Care Act will cost more than $2.7 trillion over its first 10 years of full operation and add more than $352 billion to the national debt. This doesn't even include more than $4.3 trillion in costs shifted to businesses, individuals and state governments.

Speaking of expanded HCI coverage, some 20 million Americans will reportedly still be uninsured when the dust settles.  Moreover, access to the healthcare system may be impaired for many others. Obamacare’s broken promises, Michael Tanner, New York Post, 7/20/10.

•[About half of the newly covered] are being added to the Medicaid program, with all of its attendant problems of access and quality.

•The RAND Corporation reports that the new law may result in severe overcrowding and longer waits in emergency rooms.

•The Centers for Medicare and Medicaid Services [CMS] warn that some of the mandated cuts in Medicare could result in the closing of up to 15 percent of US hospitals.

•We've already seen a near doubling in the waiting time to see a doctor under Massachusetts' universal health-care law, which is very similar to ObamaCare.


BUDGETARY PROCEDURES - Barry Anderson, a budget official in the Clinton Administration, told the Fiscal Commission on July 28 that healthcare and other entitlements should be “capped” as they are in Europe. Fiscal Commission fiddles as budget burns, 8/2/10.

Fiscal conservatives have advocated much the same idea, although the suggestion of a 30-year budget (Anderson suggested 5-year budgets) sounds impractical. Reining in runaway spending and deficits, Heritage Foundation, 8/17/10.

Rather than allow these programs to bankrupt us on autopilot, Congress should set firm and enforceable budget caps for Medicare, Medicaid, and Social Security. Put these programs on a firm, long-term budget—say 30 years—and require Congress to review these budgets regularly.


For budget caps to work, someone would necessarily be able to limit expenditures in some fashion.  It is difficult to see Congress wishing to play such a role directly!  And the predictable result of delegating the task to government bureaucrats would be healthcare rationing.  Bad medicine, Michael Tanner, p. 34.

With a few minor exceptions governing Medicare reimbursements would not directly ration care or allow the government to dictate how doctors practice medicine.  There is no “death panel,” as Sarah Palin once wrote about in her Facebook posting.  Even so, by setting in place a structure of increased utilization and rising costs, the new law makes government rationing far more likely in the future.  Indeed, this trend is already playing out in Massachusetts.


The “recess appointment” of Dr. Donald Berwick to head the CMS may be a sign of things to come.  Under normal Senate confirmation procedures, Berwick would have been grilled about his prior praise of nationalized healthcare systems, etc.  The deviation from standard protocol was calculated to avoid a bruising battle.  Obama appointee’s prescription for socialism, Washington Times, 7/9/10.

There's no mystery why the O Force is afraid to put the good doctor in front of a Senate panel. President Obama selected the man who best reflects his vision for Obamacare. Discussion of Dr. Berwick’s anti-capitalist idealism and his statements about rationing care to those "at the end of life" at a public hearing would open the president's ultimate plans to public scrutiny. However painful, such an inquiry needs to take place.


As an example of the type of issues likely to arise, patient advocacy groups are worried that CMS may block Medicare reimbursement for two FDA-approved anti-cancer drugs, Avastin and Provenge, which can extend lives to some extent but are quite expensive.  Obama’s Medicare czar faces life-and-death decisions, Washington Examiner, 8/16/10.

"Medicare must cover therapies that are 'reasonable and necessary,' while the FDA is instructed to approve drugs that are 'safe and effective.' Because of the conflicting federal coverage and approval requirements, there are some non-FDA approved drugs (called off-label drugs) that are paid for by CMS. However, with respect to Provenge, it appears that CMS is arguing that while the treatment is safe and effective, it may not be reasonable and necessary. For the first time, an FDA approved anti-cancer therapy may not be covered by Medicare."


Although the FDA is not supposed to consider cost in its decisions, moreover, it appears that an FDA panel may be doing just that in a follow-up review of Avastin, the world’s best selling cancer drug (global sales of $5.8 billion).  FDA considers revoking approval of Avastin for advanced breast cancer, Rob Stein, Washington Post, 8/16/10.

"It's hard to talk about Avastin without talking about costs," said Eric P. Winer, director of the Breast Oncology Center at the Dana-Farber Cancer Institute in Boston. "For better or worse, Avastin has become in many ways the poster child of high-priced anti-cancer drugs."


MORE CHANGE COMING – GovCare was rammed through after an extended, intensely partisan battle, and the final legislation did not please either side. 

Liberals wanted a government-run (single payer) healthcare system, or at least a public option to compete with private HCI arrangements, but they did not achieve it.  Despite polls showing that many Americans think GovCare went too far, there is already talk of new legislation to finish the job. The public option rises – again, Michael Tanner, Townhall.com, 8/4/10.

. . . liberals, who see the public option as the first step toward their goal of a single-payer government health care system, never truly abandoned the idea. Now, with the ink barely dry on the new health care law, 128 House Democrats have sponsored legislation to revive the public option. Meanwhile, Senate Majority Leader Harry Reid of Nevada, speaking at the annual convention of the left-wing organizing group, NetRoots Nation, promised support in the Senate as well "We're going to have a public option," he told the group. "It's just a question of when."


For their part, many conservatives are talking in terms of repealing GovCare and starting over on healthcare reform – although their ideas for an alternative are rather fuzzy.  Repealing Obamacare, John Graham (Pacific Research Institute), Washington Times, 5/17/10.


Realistically, any major extensions of GovCare appear unlikely in the next session of Congress.  Obama’s next act, Charles Krauthammer, Washington Post, 7/16/10.

Act One is over. The stimulus, Obamacare, financial reform have exhausted his first-term mandate. It will bear no more heavy lifting. And the Democrats will pay the price for ideological overreaching by losing one or both houses, whether de facto or de jure. The rest of the first term will be spent consolidating these gains (writing the regulations, for example) and preparing for Act Two.


There is no immediate prospect for repealing GovCare either.  Even if Republicans did very well in the mid-term elections, any such move could be filibustered in the Senate or blocked by presidential veto.

Longer term, however, we believe GovCare will be redirected in a major way – with the direction determined by the outcome of the 2012 presidential election.

Why?  As of now, this country is stuck with a public-private healthcare system that provides world class medical treatment at its best but overemphasizes treatment versus prevention and lacks meaningful incentives to keep costs under control (for which reason healthcare costs have risen inexorably).  GovCare was billed as addressing these problems, but it will actually make them worse.  And sooner or later, as we have said before, a choice must and will be made between government-run healthcare (single payer system with rationing) and market-based healthcare. The future of healthcare finance; choosing a path, 8/20/07.

Remember the saying . . . that “a camel is a horse designed by a committee.”  If we shoot for a system that harmonizes with everyone’s preconceptions about system design, a camel-like solution may result.  Perhaps the ideological debate needs to be [settled] before real progress can be made.  Whatever the outcome, it may be better than muddling along with the current healthcare model, which produces reasonable quality care at a very high cost.

CLOSING THOUGHTS – Last week we suggested that the Fiscal Commission “avoid rushing into an ill-considered Social Security fix.” The Commission is apparently thinking along other lines, however, as indicated by a subsequent report.  Social Security cuts weighed by panel, Laura Meckler, Wall Street Journal, 8/20/10 [sorry, no link available].

A White House-created commission [aka the Fiscal Commission] *** is looking for a mix of ideas that could win support from both parties, including concessions from liberals who traditionally oppose benefit cuts and from Republicans who generally oppose higher taxes, according to one member of the commission and several people familiar with its deliberations.

In contrast, the government’s healthcare programs are spinning out of control and require immediate attention – yet there appears to be no intention of addressing them.  We think the Fiscal Commission should shift gears and focus on the real problem.

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8/16/10  – Clamor builds for another Social Security fix      Read Replies

August 14 (last Saturday) was the 75th Anniversary of Social Security, and the 45th Anniversary of Medicare/Medicaid fell on July 30.  Seems like a good time to reflect on how these entitlement programs have developed, and where they may be headed.  We will talk about Social Security in this entry and the healthcare programs next week.

Let’s begin with a Social Security Administration photo album celebrating some milestones in the development of the government’s largest single program.  Notable pictures include:  #1 (FDR signs Social Security bill in 1935 with a throng of witnesses); # 7 (Eisenhower signs Social Security disability legislation in 1954); #14 (photo of the Greenspan Commission); #15 (Reagan signs bailout bill based on the Greenspan Commission recommendations in 1983); and #30 (Obama urges Congress to preserve this “reliable source of income for American seniors”).

Several pictures pertaining to Medicare appear in the album as well, perhaps to augment the bipartisan pantheon of leaders who have helped to turn this country into an entitlement state.  See, e.g., #10 (LBJ signing the Medicare bill in 1965, with Truman and others looking on), and #22 (Bush 43 approving prescription drug coverage for Medicare in 2003, with Senator Ted Kennedy and others in attendance).


A majority of Americans like the idea of receiving retirement benefits, plus the potential availability of disability benefits if they should happen to need them. And concerns about the program center on the sustainability of the promised benefits, not their desirability.  Social Security 75th Anniversary Survey Report: Public Opinion Trends, AARP, August 2010.

Consistent with previous anniversary surveys in 2005, 1995, and 1985, a majority of adults age 18 and older believe Social Security is one of the most important government programs and that it provides financial security to older Americans and helps them remain independent. While many are concerned about the future of Social Security, their lack of confidence does not diminish their support for it.


In other words, everyone is hoping for a bargain, but many people fear (with good reason) that a pay as you go system (aka Ponzi scheme) with a rapidly growing number of beneficiaries will wind up providing less or costing more than expected. Majority say they don’t count on Social Security, CNN, 8/13/10.

Six in ten Americans who don't already receive benefits through the program say they never will – 63 percent of Americans say the program won't last another 70 years – only about four in ten of current retirees believe Social Security will always be able to pay their full benefits.


Hmm, weren’t the changes made in 1983 (48 years after Social Security was established) supposed to put the system on a sound footing for at least 75 years? President’s message: Greenspan déjà vu, Cato Institute, January/February 1997.

Indeed, the famous Greenspan commission had in 1983 assured the American people that Social Security had been "fixed" for at least 75 years--through 2058. Fast forward just 13 years to 1996 and things are not so sanguine. Social Security is in crisis again. There is at least a $6 trillion unfunded liability, and the system's cash flow turns negative around 2010.


The Social Security outlook subsequently brightened, with cash flow projected to remain positive until 2017 or 2018.  Then came the current recession, which reduced payroll tax revenues and nudged many people into early retirement. Although they took actuarially reduced pensions, their decisions reduced current cash flow.  Forced to retire, some take Social Security early, Matt Sedensky (AP), Washington Examiner, 8/9/11.

More people filed for Social Security in 2009 — 2.74 million — than any year in history, and there was a marked increase in the number receiving reduced benefits because they filed ahead of their full retirement age. The increase came as the full Social Security retirement age rose last year from 65 to 66.


As a result, Social Security is again running in the red – only 27 years after the last fix. A summary of the annual reports:
Social Security and Medicare Boards of Trustees, 2010.

Social Security expenditures are expected to exceed tax receipts this year for the first time since 1983. The projected deficit of $41 billion this year (excluding interest income) is attributable to the recession and to an expected $25 billion downward adjustment to 2010 income that corrects for excess payroll tax revenue credited to the trust funds in earlier years. This deficit is expected to shrink substantially for 2011 and to return to small surpluses for years 2012-2014 due to the improving economy. After 2014 deficits are expected to grow rapidly as the baby boom generation’s retirement causes the number of beneficiaries to grow substantially more rapidly than the number of covered workers.


Technically, there are two trust funds, one for retirement benefits and the other for disability benefits.  Here is the current outlook for both from the 2010 annual report of the Social Security trustees (“SS Report”), page 3.

Under the long-range intermediate [base case] assumptions, annual cost for the OASDI [retirement + disability benefits] program is projected to exceed tax income in 2010 and 2011, to be less than tax income in 2012 through 2014, then to exceed tax income in 2015 and remain higher throughout the remainder of the long-range period. The com-bined OASI and DI Trust Funds are projected to increase in dollar level through 2024, and then to decline and become exhausted and thus unable to pay scheduled benefits in full on a timely basis in 2037. However, the DI Trust Fund is projected to become exhausted in 2018, so some action will be needed in the next few years. At a minimum, a reallocation of the payroll tax rate between OASI and DI would be necessary, as was done in 1994.


Some analysts have continued to talk about Social Security running a surplus. See, e.g., Social Security is sustainable, Monique Morrissey, Economic Policy Institute, 5/27/10.

Social Security is currently running a surplus, and the two and a half trillion dollar trust fund is projected to keep growing for at least another decade.


What’s up with this?  Perhaps Morrissey et al. are not up to date, as negative cash flow is a recent development, but more likely they are considering interest credited on trust fund assets as real rather than notional income. 

A similar issue applies for the $2+ trillion balance of the Social Security trust funds. While we see these trust funds as irrelevant accumulations of IOUs, others consider them a real store of value.  See, e.g., Top 5 Social Security myths, MoveOn.org.

The Social Security Trust Fund isn't full of IOUs, it's full of U.S. Treasury Bonds. And those bonds are backed by the full faith and credit of the United States.  The reason Social Security holds only treasury bonds is the same reason many Americans do: The federal government has never missed a single interest payment on its debts.


Who is right?  The trust funds symbolize promises by our political leaders over the years, which would suggest a day of reckoning down the road (e.g., in 2018 for the disability trust fund or 2037 overall).  As a matter of economic reality, however, Social Security benefits cannot be paid in bonds – recipients will expect cash.  Therefore, cash flow shortfalls hit the current year’s federal budget rather than simply depleting the trust fund(s). We rest our case.

By the way, it seems to us that the current projections for Social Security may be overly optimistic for two reasons.

First, although some observers predict a substantial degree of economic recovery by 2012, as is apparently assumed in the projections, others fear a protracted slump.  And while our crystal ball is a bit cloudy, we would certainly agree with Richard Fisher, Federal Reserve Bank of Dallas, that the economic and fiscal policies being followed by the Administration are ill chosen to promote a recovery.  2010s a “lost decade” or a temporary funk?  Patrice Hill, Washington Times, 8/11/10.


Second, the disability component of Social Security has been growing faster than retirement benefits, yet the Intermediate (base case) projection indicates a reversal of this trend. Program cost data (dollars in billions) from the SS Report, pp. 159-61.

Fiscal year




Disability %*








$ 118

$ 670













Perhaps the trend reversal is correct, given a surge of disability income applications during the recession plus the fact that currently disabled workers will be reclassified as retirees in time.  We worry that something else may have been going on that has not been taken into account, however, namely an erosion of eligibility standards. 

Certainly there are plenty of advocates available to help people who are inclined to seek disability benefits, e.g., the firm of Binder & Binder, which has run numerous TV ads about their services and evidently works on a contingent fee basis.

We get paid by the government when we win your case. This means that you don't have to hesitate to pick up the phone and call us. It means that you don't have to put off getting the help you need just because you're feeling strapped for cash.


In any case, one point is clear.  A mere 27 years after the last Social Security fix, another fix is under discussion and the rhetoric sounds familiar.  Social Security turns a frail 75: Politics perpetuate fiscal infirmity, Stephen Ohlemacher (AP), Washington Times, 8/11/10.   

Many Democrats adamantly oppose any cut in benefits to reduce cost, and some won't accept a gradual increase in the [“normal”] retirement age, something that was done in the last overhaul in 1983. Republicans say an increase in Social Security taxes is out of the question, even for the wealthier.


There have been plenty of suggestions that a Social Security fix should be a key component in the Fiscal Commission’s recommendations, e.g., Co-Chair Erskine Bowles’s plug (in his closing comments at the June 30 meeting) for a plan to keep Social Security healthy for the next 75 years. 

Hmm.  Based on what happened the last time, 75 years in theory might work out to considerably fewer years in practice.

Also, why focus on fixing the system for 75 years instead of looking for a way to fix it permanently?  The key would be to transition from a collective welfare system, which invites continual tinkering with benefits based on changing ideas about affordability and equity, to a funded insurance plan in which younger workers would acquire ownership of their accounts.  See the Social Security page of this Website.


OK, that is our concept of real Social Security reform, and we’re sticking to it unless and until a better idea comes along.  But we recognize that individual accounts would be a “tough sell” in the current political climate.  See, e.g., Social Security turns a frail 75.   

While Mr. Obama's [fiscal] commission was holding its latest meeting, dozens of House Democrats gathered on the steps of the Capitol to accuse Republicans of trying to wreck Social Security by creating private accounts, an idea with little support in Congress since President George W. Bush unsuccessfully tried it.


If the Fiscal Commission recommended a Social Security fix, it would probably take the form of a package of benefit cuts and tax increases. Consensus might prove more elusive than it did for the Greenspan Commission in 1983, however, because retirement benefits have already been subjected to income taxes and payroll taxes already raised to rather high levels.  A case could be made for raising the normal retirement age, but bear in mind that the two-year increase agreed to in 1983 will not be fully phased in until 2027. For further discussion, see Saving Social Security, Peter Diamond and Peter Orzag [since director of CBO and then, until recently, budget director], Brookings Institution (2004).


So what should be done?  Our suggestion for the Commission would be to observe the “do no harm” principle and avoid rushing into an ill-considered Social Security fix. 

• Social Security is not facing a major deficit currently, even on a cash flow basis.  Other components of the fiscal situation offer far greater potential for improvement, in our opinion, notably slashing wasteful government spending.

• In general, as has been previously argued, the Fiscal Commission should view raising taxes as the last resort – not the first idea to be considered.  Sorry, but there are no “painless” ways to raise taxes, 8/9/10. 

• And if there is any lesson to be learned from the 1983 deal, it is that taxes for Social Security should not be raised until actually needed.  In that case, $2+ trillion in taxes earmarked for Social Security were spent, over a period of years, for unrelated purposes.  Earth to Congress: “Fool us once, shame on you.  Fool us twice, shame on us.”

Some might see our stance as obstructionist, probably including Co-Chair Alan Simpson who has warned on several occasions that many people want the Commission to fail because they are too set on their pet agendas to brook any compromises.

And then there is our hometown newspaper, which lauds Social Security as “one of the great successes of the New Deal” and decries “the rhetorical battle between Democrats who will not accept any criticism of the system and Republicans who seem bent on doing away with it.”  Social Security fix requires acknowledgment of reality, [Wilmington] News Journal, 8/14/10.


The president sounded a similar note in remarks on the 75th Anniversary of Social Security, lambasting the alleged intention of Republicans to push for individual retirement accounts while offering no ideas of his own except a commitment to work “with anyone, Democrat or Republican, who wants to strengthen Social Security." Obama claims GOP trying to destroy Social Security, Erica Werner, Washington Times, 8/14/10.


SAFE is not aware of any Republicans who are scheming to do away with Social Security.  To be complete, however, Representative Paul Ryan (R-WI), a member of the Fiscal Commission, has suggested a partial phase-in of individual savings accounts (basically the proposal offered by the president’s predecessor in 2005).

As currently structured, Social Security will not be able to fulfill its promises to future retirees. Without reform these individuals will face substantial cuts in benefits in the coming decades. The Roadmap assures the solvency of our existing Social Security system by providing workers with the voluntary option of investing a portion of their FICA payroll taxes into personal savings accounts. Individuals under 55, if they want to, are able to choose whether to stay in the current system or begin contributing to personal accounts.


Sounds like a constructive step to us (albeit perhaps not bold enough), what’s wrong with freedom of choice, although the Republican Party leadership has declined to embrace Ryan’s “roadmap” to deal with the fiscal problem thus far.

More generally, we can see no urgent need to “fix” Social Security at a time when real reform is not feasible and there are far more urgent problems to worry about (e.g., hundreds of billions in wasteful federal spending, misguided healthcare policies, fouled up tax system, oppressive regulations).

How is that for acknowledging reality? 

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Thanks for this.  Best summation of the issues anywhere, rant-free. – Virginia attorney

Quoted comment by MoveOn.org about the $2 trillion of government bonds in the trust funds misses the point.  Congress spent the money, so the asset held by the trust funds is offset by a corresponding liability of the government – net balance zero.  If Social Security had used the temporarily excess funds to buy T-bonds, a real asset could have been created. – SAFE director

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8/9/10  – Sorry, but there are no “painless” ways to raise taxes.      Read a Reply

As reported last week, consideration is being given to eliminating “tax expenditures,” which some people characterize as spending by another name, as a means of increasing tax revenue.  We also took a stab at explaining what might fall under the rubric of tax expenditures.  Fiscal Commission fiddles as budget burns, 8/2/10. 

This term potentially encompasses all tax exemptions, deductions & credits, some of which are so broadly based as to arguably not be analogous to expenditures.

Well, not quite, but we were on the right track. Effects of Federal Tax Expenditures for Fiscal Years 2009-2013, Joint Committee on Taxation [JCT], 1/11/10, p. 3.

Thus, tax expenditures include any reduction in income tax liabilities that result from special tax provisions or regulations that provide tax benefits to particular taxpayers. *** The Joint Committee staff has used its judgment in distinguishing between those income tax provisions (and regulations) that can be viewed as a part of normal income tax law and those special provisions that result in tax expenditures.


To be complete, there is an alternative arbiter of tax expenditures.  The Treasury Department maintains a running tally on a somewhat different wavelength (Report, pages 19-20), but the differences do not appear significant for our purposes and we will focus on what is said in the JCT report.

COMPOSITION: The JCT does not consider all tax provisions that reduce liability to be tax expenditures, only most of them.

Here are some income tax provisions considered “normal” rather than “special”: one personal exemption for each taxpayer and each dependent, the standard deduction (itemized deductions are deemed tax expenditures to the extent they further reduce liability), investment and employee business expense deductions, and the reduced rates for lower income taxpayers that are built into the tax rate schedule.  Report, pages 5-8.

For corporate income tax, the benefit of accelerated depreciation is deemed a tax expenditure.  Ditto lower tax rates in the corporate income tax schedule, “because they are intended to provide tax benefits to small business.”  Tax provisions that permit earnings to be taxed only at the owner level, e.g., partnership and S corporation rules, are not considered tax expenditures, “because the tax benefits are available to any entity that chooses to organize itself and operate in the required manner.”   Report, pages 8-10.

Effects on taxes other than income taxes, e.g., the reduction of payroll taxes as the result of the exemption from taxable income of employer-provided healthcare insurance, are not included in the analysis.  Report, page 5.

SAME AS SPENDING: The rationale for treating a given tax provision as a tax expenditure is that the tax benefit to qualifying taxpayers serves purposes that might otherwise be accomplished by a spending program.  Report, page 3.

Special income tax provisions are referred to as tax expenditures because they may be considered to be analogous to direct outlay programs, and the two can be considered as an alternative means of accomplishing similar budget policy objectives.  Tax expenditures are similar to those direct spending programs that are available as entitlements to those who meet the statutory criteria established for the program.

Take the provision of tax credits for energy efficiency improvements to existing homes as a device for subsidizing such expenditures.  The effect is essentially identical to paying out the subsidies in the first instance.

The analogy seems less apt in other cases, however, where a spending program to accomplish the same purpose as the tax provision does not readily come to mind. 

The deduction for charitable contributions is considered a tax expenditure to the extent that tax deductions in excess of the standard deduction result.  Presumably this provision results in higher charitable contributions than would otherwise prevail.  Would the spending alternative be direct government payments to designated charities?  If so, how would the government know who should get the money?   

The logic seems even more strained in other cases, e.g., exclusion from income of gains on sales of principal residences.  As there is no way to know what the individuals concerned would do with the money they saved by not paying tax on such gains, what sort of spending program would accomplish the same purposes?

MAGNITUDE: Senator Max Baucus (D-MT) cited total tax expenditures of $1 trillion per year at the 7/26/10 Fiscal Commission meeting.  This figure compares to current income tax collections (FY 2011, individual + corporation income taxes combined) of $1.4 trillion, suggesting a potential 70% increase in collections if all tax expenditures were eliminated. The president’s FY 2011 budget, baseline projection.

The $1 trillion total does not appear in the JCT report.  See the lengthy tabulation (pages 28-47) of nearly 200 tax expenditures for individuals and some 150 for corporations, which is presented without totals.  Tax expenditures are not necessarily “bad,” says the report, and the tax expenditure estimates provided do not represent revenue estimates.  

If one did add up all the enumerated tax expenditure, however, the total might be roundly $1 trillion.  Thus, the largest items for 2009 in the JCT’s table of tax expenditures (see below) total about $840 billion.

• Income tax exemption of government benefits: Medicare benefits ($51B), untaxed portion of Social Security benefits ($24B) [If these benefits were taxed, the pre-tax payments might need to be increased to make up for it.]

• Exemption of private benefits: employer contributions for healthcare insurance ($94B) and benefits under cafeteria plans ($28B), net exclusion of pension contributions and earnings ($80B), investment income on life insurance ($28B).  [Taxing the foregoing would greatly complicate the tax law, not simplify it.  Also, we believe the pension and life insurance items relate to timing vs. permanent differences.]

• Exemption of capital gains at death ($24B), interest from state and local debt obligations ($20B). [The exemption of state and local interest income from federal taxation has been thought to be constitutionally required.]

• Benefit over the standard deduction of itemizing: mortgage interest ($86B), state and local taxes ($71B), charitable contributions ($36B). [Estimates are calculated for each category on a stand-alone basis; aggregating them would probably overstate the overall benefit from itemizing deductions.]

• Reduced tax rates on dividends and long-term capital gains ($90B).

• Tax credits: earned income credit ($53B), child credit ($53B), making work pay credit ($43B). [No problem with eliminating these credits, good idea.]

•Corporate tax expenditures: The biggest 2009 item is accelerated depreciation ($35B), which however is shown as reversing in later years.  Other significant items are inclusion of income from discharge of indebtedness ($11B), low-income housing tax credits ($8B), and tax credits for alcohol fuel ($7B). 

ASSESSMENT: We believe the potential for increasing government revenue by eliminating tax expenditures is far less than $1 trillion per year, for several reasons.

While there are certainly some exceptions, most of the tax provisions in question do not represent spending by another name, they are simply tax reductions.  Eliminating them is therefore a way to raise taxes, not the equivalent of cutting spending.

Tax credits and itemized deductions could be readily eliminated if Congress had the will to do it, but the taxation of income that is currently exempted would complicate the tax law rather than making it simpler.

And while it might be modestly better to eliminate tax deductions and credits than to raise tax rates, a tax increase by any means could be expected to cut into individual income, business profits, and the inclination of people in the private sector to work and invest.  Therefore, the anticipated increase in tax revenues would tend to dissipate over time – just as with any other type of tax increase.  More on this point later, but first let’s consider some other ideas for raising taxes.

One approach would be to allow the Bush tax cuts to expire at the end of this year, as they will unless Congress takes action to prevent it, resulting in a huge tax increase.

In the president’s FY 2011 budget, it was proposed to allow the Bush tax cuts to expire for upper income taxpayers (earning more than $200K per year, or more than $250K for couples) while extending them for everyone else.  The resulting upper-income tax increases were projected as totaling $678B for the period 2011-2020.

According to the Congressional Budget Office, there would be an additional tax increase of $2,154B for the period 2011-2020 if the Bush tax cuts were allowed to expire for all taxpayers.   An analysis of the president’s budgetary proposal for Fiscal Year 2011, CBO, March 2010, Table 1-3.


Thus, the overall tax increase from allowing the Bush tax cuts to expire would amount to nearly $3 trillion for the period 2011-2020.  And that is before factoring in the restoration of the death tax.

For many people, these numbers may seem rather abstract, so here is a model to estimate what expiration of the Bush tax cuts would mean for your own tax situation.  2011 income tax calculator, Tax Foundation.  The writer’s result was a 20%+ tax increase.


Ouch, but the country’s political leaders are not about to propose junking the Bush tax cuts across the board right now.  The president’s budget reflected expiration for upper income taxpayers only, as already stated, and the Administration is hewing to this line with Treasury Secretary Tim Geithner serving as the point man.  Republicans and a few Democrats would extend all of the Bush tax cuts on grounds that tax increases from partial expiration could imperil an already fragile economic recovery.  Thus, the issue shaping up for the November elections is a tax increase for upper income taxpayers.  

There has been talk of a compromise before the elections, whereby the Bush tax cuts would be made permanent for the lower echelon and extended one year for high earners.  Senator Kent Conrad (D-SD, a prominent member of the Fiscal Commission), for one, might support such an approach to avoid a fight.  Parties do battle over Bush tax cuts, Susan Ferrechio, Washington Examiner, 8/6/10.

"I don't think jiggering around with the current tax code is frankly worth a lot of time and attention, because this tax code is so broken," Conrad told The Washington Examiner. "I would do a temporary extension and then do fundamental tax reform because I think that is what the nation needs."


We predict, however, that the status of the Bush tax cuts will still be up in the air when the Fiscal Commission offers (or not) its recommendations for “fundamental tax reform.” 

Another approach would be to leave the income tax alone and impose new taxes.  Numerous possibilities exist, and some observers seem to like all of them.  See, e.g., Tax aversion syndrome and our deficit future, Peter G. Peterson, Wall Street Journal, 7/24/10, no link available.

. . . a progressive consumption tax . . . a simplified income tax that would combine lower rates with far fewer corporate and individual credits and deductions . . . a carbon tax . . . raising the payroll cap [for Social Security taxes].

Hmm, wonder how much of a tax increase these items would add up to.  Would it maybe be enough to meet the Fiscal Commission’s designated medium-term goal of cutting the deficit to about 3% of GDP by FY 2015 (an improvement of roundly $250B over the projection for that year in the president’s FY 2011 budget)? Here goes nothing, some thoughts about the Fiscal Commission, 2/22/10. 

If so, the Commission could recommend fundamental tax reform, token cuts in discretionary spending, and a plan to “do something” about entitlements over time.  Mission accomplished! 

But not so fast, because tax increases often bring in less revenue than anticipated  – while tax cuts wind up costing less than expected.  The reasons are not hard to understand, and they have been proven again and again. The Washington war on investment, Larry Kudlow, Townhall.com, 8/6/10.

[Pulling money] from the private sector and rechanneling it through the government as a transfer to someone else creates nothing. At best it’s a safety net. At worst it may damage private-business activity and actually reduce employment. Without saving there can be no investment. And without investment there can be no enhanced productivity, which is the ultimate source of long-term prosperity and wealth.


So if the Fiscal Commission recommends a raft of tax increases – labeling them as necessary, but claiming they will somehow make the U.S. economy stronger (“take this, it will make you better”) – our advice is to review the details very carefully.  It could just be a plan to keep the spending party going a little longer.

And while we are all in favor of tax simplification (see the “Simplify Taxes” page on this Website), this can be accomplished without raising taxes.  The key is to offset the effect of eliminated tax preferences with rate cuts.  Several members of Congress have suggested ways to do this.  How to create jobs, Diana Furchtgott-Roth, Washington Examiner, 8/6/10.

Rep. Paul Ryan, R-Wis., and the bipartisan team of Sens. Ron Wyden, D-Ore., and Judd Gregg, R-N.H., each has a tax bill that would restructure the tax code and prevent taxes from rising next January. [Senator Gregg and Representative Ryan are members of the Fiscal Commission.]


Conclusion: Raising taxes should be viewed as the last resort, as we have said before, not the first idea to be considered.  If you agree, pass it on!

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If all tax exemptions are removed, look out!  Homebuilding and charitable/non-profits will suffer greatly!  If the Bush tax cuts are allowed to expire, the economy will suffer greatly! – SAFE director

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8/2/10  – Fiscal Commission fiddles as budget burns.     Read Replies

Conservatives would balance the budget by reducing government spending and commitments, not by raising taxes in a doomed attempt to cover them.  Most members of the Fiscal Commission appear predisposed to the opposite course, which creates questions for both sides:

• Liberal commissioners: What if they are right, and we get our way?

• Conservative commissioners:  What if we are right, but knuckle under to avoid being labeled obstructionists?

Two weeks ago, SAFE offered some advice to all commissioners.  Consider the full range of options – debate your differences openly and honestly – take the time needed to do a quality job, even if this means turning in a status report on December 1.  Resolving the fiscal mess: SAFE responds to a fictional inquiry, 7/19/10.

A comment along these lines was submitted to the Commission on July 26.  We hope that our analysis will be read and considered, but realistically the inclination to meet the “deadline” will be strong whether the Commission has done a good job or not.


Shifting gears, this week’s entry will review the July 28 meeting of the Commission in an effort to determine how things are going.  Note that this was the fourth of seven scheduled meetings, as shown by the following timeline.

Apr. 27

May 26

June 30

July 28

Sept. 29

Nov. 2 elections

Nov. 10

Dec. 1

GENERAL: The meeting began with welcoming remarks from Co-Chairs Alan Simpson and Erskine Bowles, basically a pep talk, followed by two guest speakers: (a) Maya MacGuineas, president of the Committee for a Responsible Federal Budget, and (b) Barry Anderson, a Clinton Administration budget official now working with the OECD. 

Both speakers came across as deficit hawks inclined to the liberal end of the spectrum.  Come to think of it, the Commission members have yet to hear from a bona fide conservative, except at the marathon public hearing (some 100 witnesses testified) on the afternoon/evening of June 30.  

• MacGuineas expressed concern about reducing deficit spending too fast, e.g., before 2012, yet was sanguine about letting the Bush tax cuts expire at the end of 2010 for high earners.  She agreed with Rep. Janice Schakowsky that “income inequality” is a major problem, and that the principle of “shared sacrifice” does not justify cutting programs for the disadvantaged.   It might be in order to cut a few truly “wasteful” government programs (without identifying any), however, and people making less than $200K a year cannot necessarily be shielded from any and all tax increases.  She also referenced a “fiscal simulator” (more on this later). 

• Anderson repeated a line that he has jokingly used with Europeans curious about his political leanings.  “I’m not an R or a D, I’m an SOB.” He does not favor limiting overall spending to a given percentage of GDP (prefers 5-year nominal spending caps).  Sees tax expenditures as just another form of spending. Likes universal healthcare, single payer would be fine, but believes entitlement programs need to be capped, as they are in Europe (but so far not here).  Told a story about the Swedish disability system – there was an investigation when payments spiked over the cap, which revealed that doctors were qualifying applicants for disability pay by diagnosing them as “allergic to work.”

Members of the Commission addressed questions to the speakers, generally with answers from both.  After Q&A, there were 20 minutes left for reports from the three working groups and closing remarks. The content of the closing segment will be covered later.

For readers who would like to review the proceedings (or selected portions), here is a link to the C-Span video (2 hours, 27 minutes). 


• TAXES – As has been said often enough (notably by Co-Chair Simpson), tax increases are “on the table.”  The arguments to support them are now starting to come into focus.

Senator Kent Conrad and Rep. David Camp, the discussion leaders of the “Revenue Reform” group, gave a report.  Conrad spoke first.

The work of the group is being conducted on a “totally non partisan” basis, gushed Conrad.  Among the targets are tax expenditures ($1 trillion per year) and the tax gap ($300 billion per year). 

Meetings with outside experts on June 30 and July 24 were very illuminating.  “My own conclusion,” said Conrad, is that the U.S. tax system is “badly outdated,” as it (1) is not generating “the revenue that is necessary,” and (2) “does not contribute” to maintaining U.S. economic competitiveness (a much bigger concern now than 30 or 40 years ago).

Rep. Camp said this was a very good summary, to which he did not have much to add.  Simply put, our tax system does not equip us to compete in the 21st Century.

Co-Chair Bowles mentioned a 7/21/10 column by Martin Feldstein in the Wall Street Journal, which urged elimination of tax expenditures (this term potentially encompasses all tax exemptions, deductions & credits, some of which are so broadly based as to arguably not be analogous to expenditures) versus tax rate increases.  

The merits of cutting tax expenditures had previously been mentioned several times by others, e.g., Rep. Xavier Becerra, so obviously this idea is seen as a major point.

In addition, Maya MacGuineas had said the government should tax “things we need less of” (e.g., carbon emissions) vs. “things we need more of” (e.g., corporate profits).  So why not impose a carbon tax, say, while cutting the corporate income tax rate from 35% to 30% as a sweetener?

In our view, this attempt to sell tax increases as economically beneficial is over the top.

While eliminating “tax expenditures” would no doubt do less damage than hiking tax rates, the net economic effect would still be negative.  White House economics advisor Larry Summers, Tax Foundation, 7/22/10. 

Ideally, a plan to eliminate tax expenditures would be made revenue neutral by simultaneously lowering tax rates. This would make the tax code simpler and less distortive. But in the current fiscal and political climate, with the federal debt projected to grow larger and larger, some form of tax increase is likely on the way. If a tax increase is part of the solution, cutting many tax expenditures would be one of the least economically damaging revenue raisers and would still make the system simpler and less distortive.


A carbon tax would dramatically increase energy costs, which seems like a bad idea unless one accepts the manmade global warming theory as fact.  Many scientists regard this theory as dubious; so do we.  Why should the Fiscal Commission weigh in on the debate, when they have so many other things to worry about?

Re the “tax gap” mentioned by Senator Conrad, there may be some uncollected tax revenue to go after, but the potential gain is nowhere near $300 billion per year and beefed-up collection efforts would raise compliance costs for millions of honest taxpayers. Tax simplification would be a more effective way to improve compliance.  The cost of closing the tax gap, Scott Hodge, Tax Foundation, 3/18/07.

Even the best IRS estimates suggest strict reporting will only recoup a small portion of the tax gap. How much higher do we push that compliance burden in order to collect an indeterminate amount of tax revenues?


In March 2009, former Federal Reserve Chairman Paul Volcker was asked to head a blue ribbon panel (including Martin Feldstein) seeking to reduce the tax gap, eliminate “loopholes,” and raise tax revenues.  The reporting deadline was December 4.  Obama creates tax reform panel to reduce tax gap, Matt Moon, Tax Foundation, 3/26/09.


The tax force recommendations were delayed, however, and it has also been stated that the end product will be “an almanac of possibilities” rather than recommendations.  U.S. tax reform panel delays recommendations, Reuters, 11/30/09.


Hmm, sounds like the Fiscal Commission is trying to “reinvent the wheel.”  Why not just obtain a copy of the draft report prepared by the Volcker panel? We have found no mention of the study since last November, but it must be around somewhere.

Also, it is time to stop talking about how tax increases would enhance this country’s ability to compete in the global economy.  Tax increases would have negative economic effects; they should be frankly recognized and factored into fiscal projections.

DISCRETIONARY:  We have sensed from the start that there is little appetite for the Fiscal Commission to recommend aggressive cuts in government discretionary spending (with the possible exception of military programs).

One argument for delaying spending cuts is that they could jeopardize a fragile economic recovery.  We disagree.  The “plan now, act later” idea is a nonstarter, 6/21/10.

Income inequality can be cited to defend spending that flows to low income recipients, even though jobless benefits, food stamps, etc. may actually harm the poor in the long run by fostering dependency.  In this vein, Rep. Janice Schakowsky wants the Commission staff to develop “distributional tables” to show how spending (or tax expenditure) cuts that might be considered would affect taxpayers at various income levels.

Rep. Becerra raised the distributional tables idea again at the end of the meeting. Co-Chair Bowles agreed, saying he had not heard of anyone who did not think the tables were a good idea. 

As for Becerra’s further suggestion that big spending programs may not merit close scrutiny unless shown to have contributed to the recent surge in deficits, Bowles cautioned against getting involved in the “blame game.”

Another interesting comment came from Barry Anderson, who said spending targets are not a policy choice, they are a political choice.  Was this meant to imply that (a) spending levels are beyond the scope of the Commission’s review, or (b) no policy points need be considered in setting them?  We would disagree with either premise.

Even harder to swallow would be an artificial differentiation between levels of spending (politics) and levels of tax (policy), because both sides of the equation are highly political.  Thus, the anticipation of  tax increases to pay for soaring government spending has been one of the most potent issues fueling the Tea Party movement.  Tax protestors turn out for tax day, Jillian Bandes, Townhall.com, 4/15/10.


The report of the Discretionary group did not allay our concern that significant spending cuts will be hard to come by, but it did suggest the group harbors a range of opinions.

Unlike Revenue Reform, said Rep. John Spratt, Discretionary has met without guest speakers.  (We can think of several experts who might have been willing to help, e.g., Chris Edwards of Cato or Maurice McTigue of Mercatus.)  Nevertheless, the group had a free flowing discussion.

The primary focus is on overall budget limits, although some specific cuts may be recommended.  Spending for the wars in Iraq and Afghanistan is quite high, for instance.  In general, group members have clarity about what is at stake, but there is limited consensus about specific recommendations.

Senator Tom Coburn, the other discussion leader for Discretional, was absent due to a scheduling conflict. He had prepared a statement, however, which was read by Bruce Reed (head of the Commission’s staff).

Coburn’s perspective sounded quite different than Spratt’s, perhaps in part because he was not present to express it orally.  Yes, discussions had been open and fruitful, but a search is on for (a) at least $125 billion in spending cuts, (b) procedures to keep an exception from “emergency” spending from being abused, and (c) a firewall to ensure that savings realized as the Iraq and Afghanistan wars wind down will be applied to deficit reduction versus other spending programs. 

Co-Chair Bowles commented that Senator Coburn had been enormously helpful, as had Rep. Spratt.  Translation: this discussion is going nowhere fast.

MANDATORY – In one sense, the restructuring of entitlements is the most important issue on the Commission’s plate, as soaring outlays for these programs account for the lion’s share of projected deficits.  On the other hand, no one expects quick action – only a plan for future action – so the discussion may tend to be a bit more relaxed than in other areas.  There have been only a few hints as to what the Commission might come up with, and the July 28 meeting did not make the picture much clearer.

Rep. Paul Ryan asked Barry Anderson if he agreed with the recommendations of a 2008 paper signed by 16 fiscal experts (including Maya MacGuineas and Commissioner Alice Rivlin) – caps on entitlement programs, 5-year reviews versus caps with corrective action, and full transparency as to long-term costs.  Taking back our fiscal future, American Enterprise Institute, 4/1/08.  Anderson’s basic answer was “yes.”


Andy Stern asked what other countries have done with healthcare that the United States might find instructive.  In his response, Barry Anderson stressed that U.S. healthcare cost as a percentage of GDP is the highest in the world, primarily because government payments have not been capped.

Co-chair Simpson asked a question about the connection between Social Security disability and retirement benefits, which led to an anecdote about a college lecture in which Barry Anderson handed out lollipops to the “suckers” who were counting on Social Security for their retirement.  True, they would receive retirement benefits, he told them, but payroll taxes would go up, the retirement age would be raised, etc.

Re activity of the Mandatory group, Rep. Becerra (vice Alice Rivlin, who was absent) referenced a meeting with Richard Foster, chief actuary of CMS (re Medicare, Medicaid) and Mindy Lovett of the Congressional Research Service (re veteran’s benefits, the earned income tax credit, etc.), which had sparked a robust conversation.  (The group has also met with Stephen Goss, chief actuary for Social Security.)

Rep. Ryan concurred, adding that Foster had made clear – in an analysis prepared after passage of the healthcare bill – that healthcare outlays are the prime driver of the fiscal problem. No kidding!

PATH FORWARD: The Fiscal Commission will recess in August, but Co-Chair Bowles urged the commissioners to keep in touch because there were only four months left and “some of you have plans [election campaigns] in October.” 

During the break, with the benefit of input and requests from the commissioners, the Commission staff et al. would be developing options for consideration in September. 

Earlier, Bowles had commented on how rapidly students at the University of North Carolina (he is in the process of retiring as the university president) were able to achieve the deficit reduction goal using the “fiscal simulator” mentioned by Maya MacGuineas.

Trying out the simulator for ourselves, we concluded that it would be well nigh impossible to meet the deficit reduction goal without allowing the Bush tax cuts to expire (extend them all and projected deficits go up $3.3T) and gutting defense spending.

The designated options for cutting domestic spending are very limited, e.g., it is possible to trim certain federal programs for education but elimination of the federal Department of Education is not on the menu. 

GovCare can be repealed, but this option is shown as increasing the deficit (based on the tax increases and not necessarily realistic cost cuts that are embedded in the legislation).

There is no option to shift Medicaid back to the states or impose a cap on the federal match, only tinkering with the funding formula (one change would cut the deficit by $130B, another would increase it by $140B).


We are reminded of a game developed in 2008.  To win “Budget Hero,” raise taxes, 6/16/08.  Isn’t it about time that one of the big conservative think tanks developed a fiscal simulator of their own?

Assessment: Budget Hero is an unrealistic bust.  It would be interesting to see what sort of game one of the “conservative” think tanks (a number of which are listed as sources of “general budget information” in the “behind the numbers” write-up) would come up with if they were disposed to try their hand at such an enterprise.

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As noted in this week’s blog entry, SAFE recently submitted a comment to the Fiscal Commission.

7/26/10 – Urged the Fiscal Commission to seek best answers to the fiscal problem, avoid arbitrary solutions such as 75% spending cuts/ 25% tax increases.

Several contacts provided feedback, including these comments:

Many thanks for your email.  I'm pleased that you are commending my book to the Fiscal Commission. Let us all hope they are able to negotiate effectively!  Professor Robert Mnookin, Harvard Law School

I fear that the Commission was created with just one goal - to get key Republicans to surrender their no-tax-hike position. That doesn't mean we shouldn't try to educate them, so I'm glad you're sending info. Let's keep our fingers crossed.  Daniel Mitchell, Cato Institute

In addition, we sent a pointed message on this year’s activity in Washington to the members of Congress from Delaware. 

7/26/10 – It is time to recognize that the economic stimulus package was a mistake, slash wasteful government spending, extend the Bush tax cuts, and stop attempting to “take over” the private sector.

Dear readers, we would love to hear what you think.

We can only marvel and peer into the abyss to see what a  "tax expenditure" might be. Is this like a Clinton tax “investment?” – SAFE director

Thanks.  Here is my testimony to the Fiscal Commission at the public hearing on June 30.

http://www.cato.org/testimony/ct-ce-06302010.html – Chris Edwards, Cato Institute [Well put!  Makes our point that the Discretionary [Sending] work group could benefit from talking with Mr. Edwards in greater depth.]

The Commission’s official name – “National Commission of Fiscal Responsibility and Reform” – is not descriptive.  I hope the voters will restore fiscal sanity by voting out the big spenders/taxes/regulators this Fall and in 2012. – SAFE member, Arizona

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7/26/10  – D.C. update: the “green” energy push    

We predicted several months ago that passage of the “healthcare reform bill” (GovCare) would not mark the end of this year’s push for bigger, more intrusive, more costly government.  Raising the ante: America’s future is at stake, 3/29/10.

The rule of thumb that consequential legislation never gets enacted in an election year has been shattered, and the president’s party may see nothing to lose in pushing more leftist initiatives while it still has a big edge in both houses of Congress.

Other likely targets were identified as “immigration reform” and a cap-and-trade energy bill, but, as it turned out, “financial reform” (GovFinance) came first.

SAFE’s assessment of the GovFinance bills (House & Senate versions) was that (1) neither would reduce the risk of future financial crises, and (2) both addressed a host of irrelevant issues, notably consumer finance practices. “Reforming” the financial system: a play in three acts, 5/3/10; GovFinance: too bad to fix, 5/10/10.

A reconciled GovFinance bill squeaked through the Senate; it was signed by the president on July 21.  Among other things, this legislation will unleash a flood of new federal rulemaking, thereby contributing to the climate of business uncertainty that is delaying an economic recovery. U.S. Chamber says Congress “failed” in its attempt to reform financial system, press release, 7/15/10.

“Congress had a historic opportunity to fix a broken system and it failed,” [U.S. Chamber of Commerce President Paul] Donohue said. “For years – long before the markets collapsed – the Chamber has called for modernizing our capital markets. Instead of fixing the system, Washington just piled bureaucracies and massive new regulations onto a broken system. This will only exacerbate uncertainty and jeopardize job creation.”

A recent Chamber study pointed out that this financial reform bill creates 533 [233 per a 7/14/10 Wall Street Journal editorial] required regulatory rulemakings, 60 studies, and 93 reports.  By contrast, the Sarbanes-Oxley legislation passed in 2002 only had 16 rulemakings and six studies.


Intriguingly, the SEC accepted a settlement ($550 million fine, lesser charge) in a fraud proceeding against Goldman Sachs only two hours after the final Senate vote on GovFinance.  The SEC’s fishy deal with Goldman, Washington Examiner, 7/20/10.


Meanwhile, comprehensive “immigration reform” stalled, although there will be finger-pointing aplenty this fall.  Obama alienates GOP over immigration bill: Democrats, Republicans say bill won’t pass this year, Stephen Dinan, Washington Times, 7/1/10.


Which brings us to energy legislation, which is scheduled to come to the fore this week with the presentation of a major bill on the Senate floor. To understand the current situation, some back-story is required.

Recall the Waxman-Markey (W-M) bill, passed by the House in June 2009, which was designed to force a hugely expensive switch from fossil fuel to renewable energy by imposing a cap and trade regime for carbon emissions and much else.  The high cost of “green” energy, 5/25/09.

Senators John Kerry (D-MA) and Joe Lieberman (I-CT) developed a modified bill (K-L), which was thought to be more palatable to energy companies and others but set the same carbon emission reduction targets as the W-M bill.  Kerry, Lieberman say climate bill would reduce oil imports, create jobs, stem global warming, Matthew Daly, Washington Examiner, 5/12/10.

The legislation aims to cut emissions of carbon dioxide and other heat-trapping greenhouse gases by 17 percent by 2020 and by more than 80 percent by 2050. Both targets are measured against 2005 levels and are the same as those set by a House bill approved last year.


Unable to line up 60 votes for the K-L bill, Senate Democrats considered a pared-down version that would restrict the carbon emissions of large power plants only. Amid talk of jobs and the economy, Dems go for global warming, Chris Stirewalt, Washington Examiner, 7/14/10.

A ‘utility-only’ approach has emerged as a fallback as more sweeping plans covering more emissions sources — like factories, motor fuels, refineries and other sectors — ran into political headwinds.


It was ultimately decided to drop the K-L bill in favor of a “spill bill” that would increase the liability costs for oil companies in the event of future accidents like the BP oil spill [$20 billion wasn’t enough?] and create new subsidies for developing natural gas vehicles and products that reduce home energy use.  Lack of votes for Senate Democrats’ energy bill may mean the end, Perry Bacon, Washington Post, 7/23/10.


Majority Leader Harry Reid (D-NV) blamed the GOP for the decision to drop “a broad, comprehensive bill that creates jobs and breaks our addiction to foreign oil,” but there was also opposition within his own party.  Senate Dems retreat on global warming, Susan Ferrechio, Washington Examiner, 7/23/10.


Is the push to limit carbon emissions in the name of combating manmade global warming now over?  Don’t count on it, because the proponents of this concept are determined and resourceful.  Here are some things for the opponents to watch out for.

# Read the spill bill very carefully.  It has been rumored that there may be an attempt to slip in a limit on carbon emissions by public utilities, thereby imposing “a massive new tax on energy that will kill jobs and send electricity prices skyrocketing.” Punishing you for BP’s spill, Dan Kotman, American Solutions, 7/16/10.


# In the “lame duck” session of Congress after the November elections, cap and trade or a carbon tax could be supported without fear of near-term consequences. Other liberal issues might be taken up as well, including tax proposals recommended by the Fiscal Commission on December 1. The Obama-Pelosi lame duck strategy, John Fund, Wall Street Journal, 7/9/10.


While such a course might seem dishonorable if the Republicans do well in the elections, says Charles Krauthammer, shame should not be counted on.  His suggestion is to publicly raise the issue before the elections.  Don’t let Democrats get away with liberal legislation in a lame-duck Congress, Seattle Times, 7/23/10.

Every current member should be publicly asked: In the event you lose in November — a remote and deeply deplorable eventuality, but still not inconceivable — do you pledge to adhere to the will of the electorate and, in any lame-duck session of Congress, refuse to approve anything but the most routine legislation required to keep the government functioning?


# The Environmental Protection Agency (EPA) has the administrative power to shut down coal power plants without cap and trade legislation.

Smaller coal-powered power plants are doomed: they will be forced to close by tighter limits on conventional pollutants.  Why small coal-fired plants are going away, Jonathan Fahey, Forbes, 7/19/10.

. . . dozens of small and midsize coal plants nationwide [will] likely be shut down over the next several years. The back-and-forth in Washington for months has been all about carbon dioxide, whether and how to price it. But clean air regulations already in place, affecting pollutants like sulfur dioxide and nitrogen oxides, are becoming strict enough to beat carbon taxes to the punch.


State regulation may play a contributory role, as shown by a coal power shutdown plan recently announced in Delaware.  Closing 3 coal-fired boilers an environmental triumph, News Journal, 7/17/10 [microblog entry].

Editorial rehashes the news story on 7/16 of the shutdown of three of four reactors at the Indian River power plant and lauds the outcome.  Among other things, “the plan will cut carbon dioxide emissions by 50 percent and other pollutants by 80 to 90 percent.”  [No mention of how the power will be made up.  Also, one more time, CO2 is not a pollutant.]

http://www.s-a-f-e.org/global_warming.htm [Suggestion: bookmark this link now!]

To close down larger, cleaner coal power plants, the EPA is contemplating restrictions on carbon emissions pursuant to its 2009 finding that CO2, etc. are “pollutants” for purposes of the Clean Air Act.  Congress could block such a move, of course, but a recent Senate resolution (introduced by Senator Lisa Murkowski, R-AK) to rein in the EPA fell short (53-47).  Even if the resolution had passed and there had been a similar action in the House, a presidential veto would have been virtually certain.  Murkowski vote isn’t the end of the story, H. Sterling Burnett, Washington Times, 6/14/10.


Whatever one’s views about the manmade global warming theory, isn’t it evident that unelected bureaucrats of the EPA should not be allowed to force a wholesale restructuring of the nation’s electric power infrastructure, thereby usurping the legislative responsibilities of Congress?  We think so.

Senators who voted against the Murkowski resolution, however, apparently see the ends as justifying the means.  Here is what Senator Tom Carper (D-DE) said in a letter attempting to justify his vote.

I believe that the passage of Senator Murkowski’s resolution would have delayed the debate we should be having – which is how to move this country toward a cleaner energy future.  We must develop a long-term, comprehensive energy policy to achieve energy security and independence.  

# Finally, green energy mandates and subsidies can mask the cost disadvantage of alternative energy sources.

As a case in point, the U.S. Energy Information Administration (EIA) projects a relatively modest economic penalty for the K-L bill.  U.S. gross domestic product would be reduced by 0.2% over the next 25 years, with a reduction of some $200 in average household consumption levels, and little net effect on jobs.  EIA report, 7/16/10.


The EIA assumes that prescribed reductions in carbon emissions would be achieved by relatively sensible investments in natural gas, nuclear, and “clean” coal power plants, but this is not what is actually contemplated.  EIA ignores hidden costs of Kerry-Lieberman bill, James Taylor, Heartland Institute, 7/19/10.

In the real world there is no way environmental activists will allow the large increase in nuclear power, natural gas power, and clean coal power necessary to keep Kerry-Lieberman costs at “only” $200 per household per year. Relying on far more expensive wind and solar power instead, costs will “necessarily skyrocket” just as President Obama himself has admitted.


The preference for wind power, solar power, and biofuels (e.g., ethanol) is an article of faith with environmentalists and the business interests that would benefit.  Any argument that supports the desired conclusion goes – and will be slavishly reported by the mainstream media.  Energy microblog, SAFE newsletter, summer 2010.

Even if we could prove global warming is not a problem, [the Greens] would still have extreme weather events (2/9/10), biodiversity (3/12/10), coral reefs (3/26/10), rising sea levels (2/27/10), costly oil imports (7/5/10), risk of technology failures (7/11/10), and spiritualism (3/13/10) to fall back on.


Now you may be thinking the public is not anxious to pay more for the energy it consumes (monthly electric bill, motor fuel, etc.), and this is true.  Americans not inclined to pay more to fight global warming, Rasmussen Reports, 6/16/10.

Fifty-six percent (56%) of Americans say they are not willing to pay more in taxes and utility costs to generate cleaner energy and fight 
global warming *** Twenty-two percent (22%) of adults are willing to pay $100 more a year. 
Just 10% are willing to pay more than that.


With government mandates and subsidies, however, people may not realize how much extra they are paying (as consumers and/or taxpayers) for green energy. 

Thus, power companies face state-imposed requirements to sell increasing amounts of wind electricity, and wind power producers are queuing up for government loan guarantees. It has even been proposed that the Department of Defense, etc. should commit to buy major amounts of wind electricity, which could result in the cost penalty being buried in the federal government’s cost of doing business. Wind power pitched to Obama: Govs. Markell, O’Malley encourage federal commitment, Aaron Nathans, News Journal, 7/22/10 [microblog entry].

Meanwhile, unnecessarily burdensome regulations are imposed on fossil fuel and nuclear power plants, which drives up the cost of energy from these sources. See, e.g., Nuclear growth puts region at risk: With nine reactors 40 miles or less from Delaware, proposals to build more make safety a real concern, Jeff Montgomery, News Journal, 7/11/10 [microblog entry].

While it would be tough to quantify just how much energy costs are being inflated by these policies, one does not need an advanced degree in economics to figure out that the effect is significant

Are fiscal visionaries fighting an endless battle, and what can we do to regain the initiative? One idea might be to remind this country’s current and aspiring political leaders that the bigger, more intrusive, more costly government policies of recent years are ill suited to maintain a prosperous and growing economy.

Here is a letter that SAFE is sending to the members of Congress from Delaware. It will take many voices to make a difference, and we urge you to reach out as well.

Contacting Legislators 2010

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7/19/10  – Resolving the fiscal mess: SAFE responds to a fictional inquiry     Read Replies

Imagine yourself as a member of the National Commission on Fiscal Responsibility and Reform, which is supposed to recommend a cure for the government’s dire fiscal problem.

You have attended all of the meetings to date (April 27, May 26 and June 30), plus weekly sessions of one of the working groups, taking in a pep talk from the president and the testimony of a passel of fiscal and economic experts.  Sounds like the projected deficits are a huge problem, or, as Co-Chair Erskine Bowles put it in a July 11 talk to the National Governor’s Association, “a cancer” that “is truly going to destroy the country from within.” Debt commission leaders paint gloomy picture, Glen Johnson, Washington Examiner, 7/12/10.


Some members and witnesses are focused on out-of-control spending; others see higher taxes as the solution.  At least 14 of the 18 members must agree on whatever recommendations are offered, and the December 1 deadline is coming up fast.

You recently visited the Website of Secure America’s Future Economy, a group that seems to have given quite a bit of thought to the fiscal problem.  Their comments do not make things sound any easier.

Huge problem, must act soon – basic answer is to cut spending – disagreement about the proper size, scope and cost of government runs deep – Fiscal Commission seems to be floundering (tell me about it!) – zero tolerance for arbitrary compromises or keypad democracy.

Oh, my, if the Commission members cannot duck, split the difference, or shift the onus for a decision to someone else, what in the world are they going to do?  It was flattering to be appointed, but you did not envision this kind of responsibility. 

You impulsively contact SAFE.  Hey, nobody else is expecting us to develop a plan in 9 months to fix a problem that has been in the making for decades, particularly when some of the Commission members won’t even talk to each other.  Don’t you understand how politics work?  The group responds as follows:

Dear Member X:

As advocates of smaller, more focused, less costly government, we envision balancing the budget (not merely reducing projected deficits to some supposedly “sustainable” level) by spending cuts.  Even if tax increases ultimately prove necessary, they should be the last resort rather than the first idea considered.

We appreciate that some members of the Commission see things differently.  Indeed, our view may well be in the minority at this point. And never the twain shall meet: the Left/Right divide, 6/28/10.  Clearly, it will take sustained effort – asking tough questions and demanding solid answers – to arrive at a satisfactory solution.

Do the differences between liberals and conservatives run too deep for such an effort to succeed?  We think not.  Experience shows that parties who do not understand or like each other can still engage constructively to resolve their differences; it has been done under conditions far more extreme than exist here.  Bargaining with the Devil: When to Negotiate, When to Fight, Robert Mnookin (Harvard Law School), Simon & Schuster (2010).


Framework – Mnookin warns of negative mental “traps” that can convince people to reject negotiation out of hand. Examples: demonizing or dehumanizing opponents; seeing them as morally wrong; assuming no positive benefits can result from resolving the dispute, i.e., that the situation is a zero sum game.

Likewise, watch out for positive mental traps, which can lead to an unduly optimistic view.  Examples: overlooking the bad behavior or ill will of your opponent; underestimating the costs of negotiation; overestimating the positive benefits from a settlement.

If the costs of negotiation would be high, there are solid reasons to doubt the other side would honor a settlement, or compliance would be non-verifiable, a resort to other means (war, litigation, or economic pressure) may be in order.  Just be sure the decision is based on facts and logic rather than emotion.

In summary, one should be willing to negotiate when there is something to be gained by doing so. History offers many examples of missed opportunities, including both disastrous military undertakings (e.g., Napoleon’s invasion of Russia) and unwise appeasement (e.g., Munich agreement with Hitler). It takes courage, wisdom, and perhaps luck to find the right path under trying circumstances.

Consider the consequences, for example, if 71-year-old Nelson Mandela had refused to negotiate with the South African government that had been holding him prisoner for 23 years.  It would have been easy to continue dismissing the apartheid regime as corrupt, perverted, and/or evil. His supporters would have readily understood.  Yet Mandela began secret talks with his captors, as is well told in Bargaining with the Devil, and this decision almost certainly averted a national bloodbath.  Never was the Nobel peace prize more appropriately awarded!

Do not confuse a decision to negotiate with weakness.  A party should evaluate its interests, the best alternative to a negotiated agreement (BATNA), and the expected outcome of the BATNA.  Factor in the costs of negotiation, both direct (time and money) and indirect (delay and diversion of organizational energies). And consider the practicality of a possible settlement, e.g., would the other side be likely to honor it and what would happen if they didn’t.

If you decide to negotiate, moreover, never offer the other side more than your side’s expected BATNA outcome less negotiation costs.

Current situation – The foregoing principles probably sound sensible, perhaps even “obvious,” but how do they apply in the Fiscal Commission context?

The alternative to negotiation is not war or litigation, as in most of Mnookin’s cases, but there is a potential economic threat from both sides:  “Give us what we want or the Commission will fail, placing this country at risk.” 

Liberals are said to be using the current spending binge as a wedge for raising taxes, with the Commission slated to recommend this payoff.  America’s suicide attempt, Washington Times, 2/5/10.

Mr. Obama seeks to implement huge spending programs and runaway deficits to achieve one fundamental goal: permanent, massive tax increases that will empower the ruling liberal elite to exert greater control over the private sector. Mr. Obama is demanding $2 trillion in tax increases over the next decade. His soak-the-rich class-warfare strategy will strangle economic growth, curb capital formation and cripple job creation. Unemployment remains at 10 percent - and likely will rise over the next several years.


Conservatives have envisioned a “starve the beast” strategy, in which tax cuts would be used to cut the government down to size.  Being in the minority now, they would probably settle for avoiding tax increases (including expiration of the Bush tax cuts at the end of this year, so they had better get cracking).

What is the BATNA?  We see it as submitting a Commission report with meaningful discussion (the issues reviewed, what was concluded about them, and the decisions that apparently need to be made) and no recommendations. Such a report would not solve the fiscal problem, but it could set the stage for further study next year, whether by Congress or another commission.  That does not sound like a disaster such as might justify the recommendation of a negotiated “solution” that was deeply flawed.

A variation on the theme would be to offer recommendations on any issues on which both sides actually did agree.  Thus, political leaders on both sides of the aisle have suggested ideas to shore up the Social Security system.  If a consensus to push back the retirement age for younger workers is in the works, which might make some sense given lengthening human life spans, perhaps the Commission could take credit for brokering the deal.  Both parties mull raising retirement age: House leaders get frank about Social Security cost, Patrice Hill, Washington Times, 7/13/10.


While the parties need to negotiate in good faith, neither side should feel obliged to go along with compromises that ignore the applicable facts or cannot be justified on a logical (as opposed to ideological) basis.  It is far more important to start thinking in terms of finding the best answers, and not just the ones that seem the most saleable politically.

Path forward – Some of the negotiations described in “Bargaining with the Devil” took years to complete, such as the fiendishly complicated resolution of a software ownership dispute between IBM and Fujitsu.  Interestingly, the two companies originally negotiated a settlement of that dispute, but they failed to nail down the details and the agreement collapsed.  World class outside help was needed to resolve matters on the second try.

How long should we be prepared to invest in fixing the nation’s fiscal problems?  So long as the issues are being worked on diligently rather than shoved under the rug, our answer would be “as long as it takes.”

A measured approach would allow time for serious consideration of this question: Just how much of the country’s economic output (or Gross Domestic Product) should go into government programs, and if the current 40% level is “too high,” what functions should be eliminated or relegated to the state level only.  Never mind across the board budget cuts or freezes, they never accomplish much.


It would permit the deeply flawed healthcare legislation to be revisited in an orderly, logical way, and either fundamentally restructured or allowed to stand on the basis that government bureaucrats will control healthcare costs by rationing the services consumed.    


The reality that the country is currently headed for healthcare rationing without an open and honest discussion of the matter was underscored by the president’s “recess appointment” of Harvard Medical School professor Donald Berwick to head the Centers for Medicare and Medicaid Services. Obama’s appointee’s prescription for socialism, Washington Times, 7/9/10.

President Obama selected the man who best reflects his vision for Obamacare. Discussion of Dr. Berwick’s anti-capitalist idealism and his statements about rationing care to those "at the end of life" at a public hearing would open the president's ultimate plans to public scrutiny. However painful, such an inquiry needs to take place.


A measured and disciplined approach to fiscal reform would permit consideration of real reform of a tax system that is obscenely complex and riddled with inequities.  Otherwise, this challenge will continue to be ignored due to other, supposedly more critical priorities.


Also needed is a realistic assessment of proposed tax increases, in lieu of projecting tax collections on a rote basis.  Although the imposition of a VAT would produce a lot of revenue initially, the resulting drag on economic growth would largely offset this gain in later years.  The Value Added Tax: Too Costly for the United States, Randall Holcomb, Mercatus Center, 6/22/10.

This study projects that if a VAT were introduced in 2010, by 2030 the net effect on tax revenues would be small, because revenues collected by the VAT would be mostly offset by declines in revenues from other tax bases. Meanwhile, the introduction of a VAT would slow GDP growth, so government spending as a share of GDP would rise.


Are our political leaders (or any likely to take their place) up to the kind of logical, fact-based debate that we envision?  Sadly, many Americans doubt it – although it is not clear that they are necessarily making their point in an effective way.  68% say political class doesn’t care what most Americans think, Rasmussen reports, 7/15/10.

The perception that the Political Class doesn’t care what voters think helps explain much of the frustration displayed by those voters in recent years. It also helps explain why voters are evenly divided over the notion that a group of people randomly selected from the phone book could do a better job than the current Congress.


Perhaps the Fiscal Commission could set an example for our political leaders by conducting a real debate about fiscal policy in place of the talking points and slogans that have heretofore been employed.  It would be an interesting experiment, which might – just might – help in coming up with some better answers.



*     *     *     This Blogs Replies     *     *     *

Well put!  How can we get a reasonable chance that a Commission member will read it? – SAFE director [We are planning SAFE comment to the Commission that will summarize “take your time and do the job right” point and reference the blog entry. Other ideas for follow-up would be appreciated.]

I see little evidence of any intention to cut spending.  Although Co-Chair Erskine Bowles has talked about the need for spending caps and said he would not like to see federal tax revenues go much above 21% of GDP, he is also believed to favor a consumption tax and has likened tax breaks (which he would put on the chopping block) to “spending by a different name.”  Rising taxes to pay for gold-plated social programs will tank the economy, and it is imperative to break this pattern. – SAFE director

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7/12/10  – Re the cut spending/raise taxes debate: “There’s more than one way to skin a cat” – all likely to be messy.

Last week we reported on the Fiscal Commission’s meeting and public hearing on June 30, which revealed sharply divergent opinions as to what recommendations should be made.  How should this schism be resolved?  Several approaches will now be discussed.

RED ALERT - Robert Bixby, Concord Coalition, seems more concerned about averting an economic catastrophe than searching for an optimal solution.  6/30/10 testimony.

The real choices require scaling back future healthcare and retirement promises, raising revenues to pay for them, or some combination of both. This is not a matter of ideology. It is basic math. Americans may have very different views about whether it would be better if the federal government were both taxing and spending at 18 percent of GDP or taxing and spending at 25 percent of GDP.  No one, however, would advocate that the government tax at 18 percent of GDP and spend at 25 percent.  This would certainly shatter the economy. Yet, this is the future we are now embarked upon.


We share Bixby’s sense of urgency about getting something done sooner rather than later.  The “plan now, act later” idea is a nonstarter, 6/21/10. 

But the difference between the federal government taxing/ spending at 18% or at 25% of GDP is less than trivial, particularly when state and local government spending is also taken into account.  Overall government spending is currently over 40% of GDP – a record high except during World War II.  See the following chart.


Unless something is done, moreover, the percentage will keep rising due to anticipated growth in Social Security, Medicare and Medicaid outlays. Federal spending by the numbers 2010, Brian Riedl, Heritage, 6/1/10, “three major entitlements and tax revenues, 2000-2050” chart.


Some government spending is necessary and/or beneficial, of course, but common sense suggests that the law of diminishing returns will kick in. Beyond that point, there will be a negative effect on economic output for two reasons: (1) government spending is funded by resources diverted from the private sector via either taxes or borrowing, and (2) the private sector, not government, produces wealth in our society.

Even the president and his advisors concede that the private sector is the creator of jobs, witness a recent comment by Treasury Secretary Tim Geithner, although their policies and actions have often seemed inconsistent with this belief.  Geithner: President “understands deeply governments don’t create jobs, businesses create jobs,” J. P. Freire, Washington Examiner, 7/8/10.


Geithner’s comment was part of a concerted (albeit largely cosmetic) effort to counter perceptions that the Administration is anti-business.  W.H. works to flip anti-business rep, Ben White, Politico.com, 7/8/10.


Where does desirable government spending end and excessive spending begin?  It is hard to draw the line precisely, but economist Dan Mitchell says the current spending level is clearly excessive.  Note also Mitchell’s distinction between spending for security and a judicial system, which encourage business investment, and spending for other types of programs that consume wealth instead of creating it. The Rahn curve and the growth-maximizing level of government, Cato Institute, 6/29/10 (video, 5:43).


Ignoring potential harm from rising government spending would represent an inexcusable abdication of responsibility.  The members of the Fiscal Commission are intelligent people, and they should be able to “walk and chew gum” at the same time.

LET’S MAKE A DEAL - Some observers have suggested numerical targets for spending cuts versus tax increases.  Here is how Maya MacGuineas, Committee for a Responsible Federal Budget, put the point in her testimony.

One of the toughest points of contention is how much of the budgetary changes to make on the spending side of the budget versus the tax side. Budget imbalances are driven by spending growth. That said, it is virtually impossible to bring spending down to a sustainable [level] without increasing revenues, given political realities and politicians’ unwillingness to restructure certain programs [so everything isn’t on the table after all?] Accordingly, I would suggest a goal of closing the medium-term gap through at least 50% spending cuts, and the long-term gap through at least 75% spending cuts. It is worth noting that the most successful fiscal turnarounds in other countries have emphasized spending cuts over tax increases.


Setting numerical targets might be better than pretending that balancing the budget (or at least reducing the deficit) is the only important issue in play, but not by much. 

First, any targets set without reviewing the available options in detail first would be arbitrary.  On what basis would it be concluded that 50% (or even 25%) of a given reduction in projected deficits, which reflect past failure to keep a lid on government spending, should be funded by an increase in taxes? 

Second, the predictable outcome would be tax increases now (which would take place as agreed) with spending cuts promised later (which might prove illusory). Santa and Frank, Thomas Sowell, Townhall.com, 7/6/10.

What this political game boils down to is that Democrats get all the political benefits of playing Santa Claus to all sorts of groups and special interests, while Republicans who vote to raise taxes to pay for all this are cast in the role of Frank Nitti, the enforcer for the mob.


Speaking of taxes, the CBO baseline projection (which the Fiscal Commission is charged with recommending ways to improve on) already assumes sharply increased tax revenues due to (A) the expiration of the Bush tax cuts at the end of 2010 (which will happen under current law), (B) Alternative Minimum Tax being extended to millions of additional middle class taxpayers (a result Congress has been avoiding by enacting annual AMT “patches”), and (C) numerous new tax levies enacted since the start of 2009. 

In sum, the U.S. is facing a huge tax increase just six months from now – and here’s the chapter and verse to prove it.  Americans for Tax Reform, 7/1/10.


One might think the issue would be how much of the scheduled increases should be permitted to go into effect rather than the desirability and/or necessity of even more tax increases.  Do you get the feeling someone is playing us for suckers?

Remember that tax increases are not “free money.”  Taxpayers can and will change their economic behavior and tax reporting practices, with the result that rate increases beyond a certain point may actually reduce revenues over time.  The rich can’t [be expected to] pay for ObamaCare, Alan Reynolds, Wall Street Journal, 3/30/10.

[The] evidence is clear that when marginal tax rates go up, the amount of reported incomes goes down. Economists call that "the elasticity of taxable income" (ETI), and measure it by examining income tax returns before and after marginal tax rates claimed a bigger slice of income reported to the IRS.  *** the administration's intended tax hikes on high-income families [may] raise virtually no revenue at all. Yet the higher tax rates will harm economic growth through reduced labor effort, thwarted entrepreneurship, and diminished investments in physical and human capital. And that, in turn, means a smaller tax base and less revenue in the future.


CUT SPENDING ONLY – There is a school of thought that the Fiscal Commission should recommend only spending cuts, call it the “cut spending only” (CSO) approach.  We think several members of the Commission would be inclined to go along, e.g., Rep. Jeb Hensarling (R-TX), as might the experts from Cato, Heritage and Mercatus who testified on June 30.  Fiscal Commission: lots of input, little progress, 7/5/10.

SAFE is likewise a big believer in spending cuts, and we have offered our own suggestions for achieving them. 


It is very difficult to eliminate government programs, however, so radical spending cuts (never mind budget freezes, etc., which never work for long) cannot be made without widespread and sustained public support.

With all due respect to the “tea partiers,” generating and sustaining such support is likely to prove difficult.  Accordingly, fiscal visionaries may find that a CSO approach is a very tough sell.

WE THE PEOPLE – David Walker, CEO of the Peterson Foundation, referenced a “citizen engagement exercise” in his June 30 testimony to the Fiscal Commission.  Walker’s point was that the American people are capable of coming to grips with the fiscal problem, and the leaders of Congress should do likewise.

Carolyn Lukensmeyer, president of America Speaks (AS), the non-profit organization that conducted the exercise (aka “national town meeting”), covered the details in her testimony.  She began by introducing AS, which was founded in 1995 on the premise that “our democracy is deeply broken and has been for some time.”

On June 26, AS informed and facilitated face-to-face discussions of current economic recovery efforts and the longer-term fiscal crisis at sites around the country, functioning as an “honest, neutral broker.”  Technology was used to aggregate results (electronic keypads) and link the sites (via satellite TV and webcast).

The 3,500+ participants constituted a representative cross-section of the adult population, and their views spanned the political spectrum.

“At tables across the country, we had members of local Tea Parties sitting down with activists from MoveOn. Business owners sat with union members. Participants were young and old, liberal and conservative, rich and poor, and from every race and ethnic background.”

Lukensmeyer summarized the participants’ recommendations (see below) and concluded that “the American public cares about the fiscal challenges facing the country, is able to grasp the difficult trade-offs involved with resolving the challenges, and can offer policy makers strong guidance about the kind of policies they are willing to support.” 


A preliminary report on the exercise has since been issued, which provides more detailed information.  From the report, the Town Meeting participants were surprisingly receptive to tax increases to help meet the deficit reduction goal ($1.2 trillion annually by 2025) assumed for purposes of the exercise.


Roger Hickey, co-director of Campaign for America’s Future, lauded the recommendations, albeit complaining that participants were provided with misleading background information about the federal deficit and economic options.  In deficit “town meetings,” people reject America Speaks’ Stacked Deck, Huffington Post, 6/27/10.

[A] pretty progressive set of solutions emerged from the process many feared would be skewed to the solutions of conservative deficit hawks.


After searching for an analysis or critique from the conservative side, to no avail, we decided to write our own.  Here it is in the form of eight observations about the National Town Meeting:

(1) 54% of all participants were 55 or older, versus 30% per census data, while age cohorts below 45 were correspondingly underrepresented.  Perhaps younger people are less willing to give up a day of their weekends for this type of exercise, but realistically they have even more at stake than their elders do.

(2) 44% of participants were identified as “liberal” leaning vs. 33% identified as “conservative” leaning, with 23% classed as “moderate.”  This seems out of synch with polls indicating that “conservatives” are numerically predominant in this country.  Conservatives maintain edge as top ideological group, Gallup, 10/20/09.

Forty percent of Americans describe their political views as conservative, 36% as moderate, and 20% as liberal. This marks a shift from 2005 through 2008, when moderates were tied with conservatives as the most prevalent group.


(3) Most of the participants were said to be dissatisfied (31%) or very dissatisfied (58%) with the “tone of political dialogue.”  So what?  Partisan squabbling has been endemic since the beginning of the Republic – just read the Federalist Papers – and it is not likely to go away unless someone overthrows the government and installs a dictatorship. 

(4) Re the fragile economic recovery, it is said “people are very discouraged about the economy and don’t fully trust our elected officials to fix it.”  If so, why did 61% of the participants say the government should be doing “more” to strengthen the economy?  Again, this result clashes with polls showing widespread belief that the government is doing too much already, wasting 50¢ of every dollar it spends, etc.  See last week’s entry.

(5) There was strong sentiment to cut defense spending (51% favored a 15% cut), with considerably less support for cutting spending in other categories.  However, no way was provided to break down “all another non-defense” by functional category.

(6) Participants were not asked whether they would be willing to pay more taxes to support healthcare programs, nor were they asked whether they would accept spending cuts for these programs achieved through government-imposed rationing.  Accordingly, the healthcare recommendations seem basically irrelevant.

(7) Several meaningful options were voted on for Social Security, and the results show surprising willingness to accept lower benefits and pay higher taxes.  Acceptance of gradually phased-in payroll tax increases may be overstated, however, due to the under-representation of lower age cohorts.

(8) In general, the tax policy results may reflect the notion that tax increases are fine so long as “someone else” has to pay them.  Thus, 68% favored “an extra 5% tax for people earning more than $1 million a year,” 59% favored raising the top corporate tax rate to 40% from 35% (a stunningly bad idea, and by the way, corporate taxes are passed on to consumers), 64% voted for creating a carbon tax (although polls have shown Americans are not willing to pay higher taxes on gasoline), and 61% voted for a securities transactions tax (if you don’t have a securities portfolio, who cares).

So great, we can solve the nation’s big problems by keypad voting?  Well, this was an interesting experiment, but maybe not.  The following analogy suggests some pitfalls.

On “Who Wants to Be a Millionaire,” there are questions the studio audience handles unerringly (popular entertainers, TV shows, etc.) and other questions it is as likely to get wrong as right (history, economics, science, etc.).

Many people do not truly understand all the ramifications of the fiscal options under discussion, and they need to be brought up to speed before being expected to make decisions.  The question is, who will do the educating, and how can it be assured that this function will be performed in a wise and impartial way?

RECAP:  The Red Alert approach of accepting any answer to the cut spending/ raise taxes debate would represent a stunning abdication of responsibility; the Let’s Make a Deal approach would produce an arbitrary, probably unsatisfactory solution; and We the People are not ready for prime time.  So is there a viable way to proceed, or is the ship of state headed for the bottom?  

Once more, dear readers, we are out of space.  Join us next week for the conclusion of this series.

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7/5/10  – Fiscal Commission update: lots of input, little progress.

Last week’s entry expressed concern about the feasibility of resolving the profound disagreement in this country as to the proper size and role of government.  And never the twain shall meet: the Left/Right divide, 6/28/10.

We would welcome a debate based on facts and logic, and let the best ideas win.  But suppose the positions of our opponents are ideological, and they will willfully distort facts and ignore logic to win.

Perhaps those on the other side would agree in reverse, seeing themselves as occupying the intellectual and/or moral high ground.  In any case, it will be tough to sell our views based on facts and logic – as the following report should demonstrate. 

POLLING DATA – Let it be noted at the outset that SAFE is not advocating a hopelessly unpopular viewpoint.

• Americans are currently split into three segments of approximately equal size: Republicans (32%), Democrats (35%), and other (33%). Summary of party affiliation, Rasmussen, 5/31/10.


Members of the two major parties differ sharply about the role of government, with “independents” falling in between. Overall, 53% of Americans think the government is doing too much, 39% think it should be doing more, and 8% have mixed opinions.  Republicans, Democrats still fiercely divided on role of government, Gallup, 6/28/10.

A USA Today/Gallup poll finds that 81% of Republicans say the government is trying to do too much that should be left to individuals and businesses, while 63% of Democrats say government should do more to solve the country's problems -- underscoring what will certainly be one of the most contentious issues facing voters in this fall's midterm elections. Independents on average tilt in favor of saying the government is doing too much, making this also the majority view of all Americans.


• Two-thirds of Americans see tax cuts as more effective than increased government spending to create jobs.  Rasmussen, 4/30/10.

Sixty-five percent (65%) say decisions made by U.S. business leaders to help their own businesses grow will do more to create jobs than decisions made by government officials. Twenty-five percent (25%) say decisions made by government officials to create jobs will do more.


• In general, without getting into specific programs, skepticism abounds about the merits of government spending.  Uncle Sam wastes 50 cents on the dollar, Gallup, 9/15/09.

Americans are markedly cynical about the amount of waste in federal spending, more so than at several other times in recent history. On average, Americans believe 50 cents of every tax dollar that goes to the government in Washington, D.C., today are wasted. That's an increase from 46 cents per dollar in 2001.


• Despite expecting Congress to raise taxes, most Americans see overspending as the real problem.  69% oppose higher taxes to lower deficit, Rasmussen, 5/2/10.

Eighty-three percent (83%) of Americans say the size of the federal budget deficit is due more to the unwillingness of politicians to cut government spending than to the reluctance of taxpayers to pay more in taxes. 


Hmm, with polling results like these, why has the Right been so unsuccessful in resisting the growth in government spending over the years?  Well, fiscal battles are fought program by program, the general public is often not paying attention, and the strategists and foot soldiers of the Left are resourceful and tenacious.

FISCAL COMMISSION – As previously reported, the National Commission on Fiscal Responsibility and Reform was created by executive order to review the federal government’s fiscal situation and recommend (after the elections, natch) actions to improve it.  The Commission will consider spending cuts, structural changes to entitlement programs, and tax increases; “everything is [supposedly] on the table.”  The Commission’s recommendations must be approved by at least 14 of the 18 members, so the Republican minority could block recommendations with which it disagreed.

The third general meeting of the Commission took place on June 30, from 9:30 a.m. until noon, in a Senate hearing room.  Following introductory remarks by Co-Chairs Erskine Bowles and Alan Simpson, CBO Director Douglas Elmendorf presented an update of the Congressional Budget Office’s long-term budget outlook. 


Questions and comments by the Commission members, speaking in turn, consumed the remainder of the meeting.  (Working group reports had been planned, time permitting, but did not take place.)

The CBO presentation was well done, but it conveyed little new information.  Previous analyses have shown that the federal debt can be expected to grow faster than the Gross Domestic Product (GDP), with no end in sight, due to soaring “entitlements” and interest expense.  “Discretional” government programs, in the aggregate, face a growing squeeze – with defense spending certain to be targeted.  It is generally accepted that the projected deficits are unsustainable, but there is little agreement as to what corrective action to take.  

As though the baseline projection was not grim enough, the CBO presented an alternative projection that assumed certain things might not happen in accord with laws currently on the books.  Notably, (1) some of the Bush tax cuts would not be allowed to expire at the end of this year, (2) Congress would continue to patch the Alternative Minimum Tax every year rather than allowing millions more taxpayers to become subject to it, and (3) some cost-saving provisions in the recently enacted GovCare provisions, e.g., reductions in Medicare reimbursement percentages, would be blocked.

The tone was civil, with one exception. Representative Janice Schakowsky (D-IL) waspishly criticized the CBO for the alternative projection, especially insofar as it included “speculation” about healthcare costs.  Co-Chairs Bowles and Simpson jumped in to defuse the situation and discourage other comments of this nature.

Commission members repeatedly brought up elements of Elmendorf’s testimony that supported their own views. Thus, Representative Paul Ryan (R-WI) stressed the usefulness of the alternative projection and suggested that the Commission view it, not the baseline projection, as capturing the true dimensions of the fiscal problem.

Several members asked Elmendorf to reiterate that GovCare [our name for the recently enacted healthcare bill] will somewhat reduce projected deficits over the next 20 years if the costs for new programs, cost cuts for existing programs, and tax increases embedded in the legislation all come in as projected.  Other members requested confirmation that the net fiscal gain, even if achieved [which is quite unlikely in our view], would not substantially slow the projected growth in debt.

The timing of corrective action was much discussed, i.e., where should one draw the line between the short term during which deficits are supposedly necessary to maintain economic recovery and the medium term during which action is needed to start reining in the projected deficits?

Jeb Hensarling (R-TX) questioned whether stimulus spending is ever helpful, even in the short term, but he also said this was not the place for such a debate and it would be better to focus on the longer term.

There was some talk about restructuring entitlement programs and cutting spending, with few specifics.  If a move is afoot to identify and eliminate wasteful government spending programs, this was not apparent from the discussion.

Re tax increases, most of the discussion focused on eliminating tax expenditures (exemptions, deductions, and credits).  Former SEIU president Andy Stern threw in what was probably a veiled plug for a value added tax, saying a fiscal plan might have greater credibility if it included “a surcharge” to pay off debt quicker.

The closing comments of Co-Chairs Simpson and Bowles were particularly interesting.  For readers who might want to check out this portion of the proceedings, it begins at the 2:09 mark in the 2 hour, 28 minute video.


Simpson said he did not believe that any members want the Commission to fail, but that other people in this country do.  He characterized the attitude of the naysayers as follows: “Get out of our hair and we’ll solve this problem, but not right now.” 

Some Simpson critics invoke the tax-cutting legacy of Ronald Reagan.  However, tax increases are on the table, must be on the table, and Reagan – who Simpson remembers well – was a political realist who agreed to several major tax increases in his time (after the huge tax cut at the start of his first term).

Having been around the block a few times, Simpson knows Congress cannot make a meaningful commitment to do something in 10 years that it is unwilling to face now.

Enough said about the healthcare bill, be it good or bad, because there are no changes the Commission could recommend that will “get us there.”  Healthcare costs are going up, and there is nothing we can do about it.  Social Security we can solve, let’s work on that.

Stop torturing the statistics, that won’t help.  Let’s focus on where we want to be in 20 or 30 years.  Where is solvency, where is sustainability, and how do we get there?

And if the Commission fails, I’ll go back to the “high country” (of Wyoming) and “you can knock on my box in 20 or 30 years” and let me know how things are going.

“I do have the best partner in the world,” Bowles began.  And he proceeded to offer some guidance for the work of the Commission.

The current recession is a problem for Congress, said Bowles, not the Commission.  The longer-term, remedial phase is “our part.”  Yet he sees the Commission’s recommendations as starting with Fiscal Year 2012, which presumably means they should be reflected in the Administration’s next budget proposal (due in January 2011).

To have an impact, the Commission’s recommendations should be sensible and specific: (1) Continue protecting the disadvantaged, (2) Support “smart investments” that will help preserve a vibrant economy, (3) Keep the country safe and secure, but go easy on being the “world’s policeman,” (4) Simplify the tax law, broaden the base, work on closing the collection gap, eliminate or sharply curtail tax expenditures – but do not push tax revenues above 21% or so of GDP and aim to hold spending at about the same level (suggesting a balanced budget?), (5) Pay attention to current British fiscal austerity plan, which is based on 75% spending cuts and 25% tax increases, (6) Ensure Social Security solvency for the next 75 years, (7) The changes to healthcare access are great, in Bowles’s opinion, but offsetting cost reductions must be found.  

After a lunch break, some members of the Commission reconvened to hear testimony from interested groups and individuals.  The testimony began around 1:00 p.m., with streaming video coverage.  We watched a bit of what Alan Simpson had described as the “iron butt” session, and have since found some of the other testimony on the Internet. 

The protocol was to have people come to the witness table in groups of 3 or 4, introduce themselves, and testify for what appeared to be about 3 to 5 minutes per speaker. The Commission members briefly responded to the testimony in some cases, and in other cases just thanked the witnesses for their input.

David Walker, CEO of the Peterson Foundation, focused on “the myth” that it is impossible to address a fragile economic recovery and the longer-term fiscal problem at the same time, citing a June 26 “citizen engagement exercise” (more than 3,500 people in 19 cities and other communities participated in a series of real and virtual town hall meetings) organized by AmericaSpeaks (on the dime of the Peterson Foundation and others).   Peterson Foundation press release, 7/1/10.

When presented with the facts, the American people understand that we face a range of serious sustainability issues that threaten our country's future. And they see no reason why their elected leaders cannot meet the challenges of both our short-term economic recovery and our long-term fiscal crisis at the same time. To families across the nation, these are simply two sides of the same coin.


Many other witnesses testified, offering a wide range of views that one would be hard pressed to reconcile.  For example:

• Heritage Foundation (Brian Riedl) testified that welfare reform could save more than $2 trillion over the next decade, while at the same time causing no harm to the poor.


• Cato Institute (Chris Edwards) urged spending cuts in many areas including Social Security, Medicare, Medicaid, farm subsidies, transportation subsidies, education subsidies, and aid to the states.


• Veronique de Rugy of the Mercatus Center (George Mason University) used CBO data to show that soaring deficits have been fueled primarily by spending increases, which suggests that the solution might be to cut spending rather than increase taxes.


• Concord Coalition (Robert Bixby) advocated a balance between spending cuts and tax increases so as to attract and retain broad-based support, never mind whether the country would be better off with government spending at a lower or higher percentage of GDP.


• Center on Budget and Policy Priorities (Robert Greenstein) said the goal of reducing the deficit to 3% of GDP by 2015 could be allowed to slip a bit if this proved economically or politically expedient.  Also, “revenues can be increased to levels significantly above the historical average without harming the economy.” 


• Committee for a Responsible Federal Budget (Maya MacGuineas) suggested having tax increases contribute 50% of the deficit reduction in the medium term, with greater reliance on spending cuts in the longer term.  A comment about being as specific as possible was reminiscent of earlier comments by Commission Co-Chair Bowles.


• Business Roundtable (John Castellani) urged the Commission to (1) find ways to control spending, particularly mandatory spending, and (2) pursue comprehensive, growth-oriented reform of the tax system.  [Talk about meaningless generalities, and so far as we could determine the Chamber of Commerce did not even testify.  The U.S. business community seems to be missing in action on this issue.]


• Americans for Democratic Action (James K. Galbraith, the son of John K. Galbraith) lambasted the Commission for holding secret meetings, using unrealistic economic forecasts from the Congressional Budget Office, and discussing the future solvency of Social Security, Medicaid, etc.  Also, Co-Chair Alan Simpson should resign.


And there was much more.  When we checked after 5:00 p.m., a witness was advocating liberalization of a supposedly unfair feature of the Social Security law.  He was followed by an advocate for robust military retirement pay. No telling how long the action continued after that.

For those who may be wondering, SAFE did not offer to testify.  We did submit a statement, however, urging the Commission “to propose aggressive action to cut government spending now versus crafting a plan for a fiscal fix later.”


TO BE CONTINUED – Much remains to be said about the Fiscal Commission’s “mission impossible,” but we are out of space.  Please send us your comments and questions on what has been covered thus far and tune in again next week.

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6/28/10  – And never the twain shall meet: the Left/Right divide.     Read a Reply

For those who came in late, SAFE advocates smaller, more focused, less costly government.  Better a government that does a few things and does them well, we think, than one that attempts everything and achieves mediocre results – leaving the public without redress (aside from the possibility of voting for new political leaders in the next election).  Government “too big to fail” and too big to succeed, Jason Clemmons and Julie Kaszton, Washington Times, 6/24/10.

This pressure of having to satisfy customers while constantly facing competition and innovation from other firms does not exist with the government. Don't like your education, transportation, health care, etc.? Too bad. When the income tax, payroll tax, property tax and other bills from the government arrive, you don't have a choice because there are no other firms to take its place.


Our ideas for cutting government spending, simplifying taxes, restructuring entitlement programs, and streamlining regulations should not be construed as favoring one political party or the other.  They are based on analysis of how the status quo can be improved. 

Which is not to say SAFE is always right.  We would welcome a debate based on facts and logic, and let the best ideas win.  But suppose the positions of our opponents are ideological, and they will willfully distort facts and ignore logic to win? 

Such a possibility was alluded to in “The Icarus syndrome: why the bad ideas keep coming,” 4/28/08 (an inquiry as to why U.S. political leaders express concern about high gasoline prices, but offer “solutions” that would make the problem worse). 

It would be bad form to question the intelligence or impugn the motives of the tax & subsidy crowd, but we do see similarities between their approach and the exploits of a character in Greek mythology.

A similar line of reasoning led one observer to posit an American “culture war” between a majority (70%) that wants to preserve (or in some cases restore) free enterprise and a minority (30%) pushing for a government takeover. America’s new culture war: Free enterprise vs. government control, Arthur Brooks (American Enterprise Institute), 5/23/10.

This is not the culture war of the 1990s. It is not a fight over guns, gays or abortion. Those old battles have been eclipsed by a new struggle between two competing visions of the country's future. In one, America will continue to be an exceptional nation organized around the principles of free enterprise -- limited government, a reliance on entrepreneurship and rewards determined by market forces. In the other, America will move toward European-style statism grounded in expanding bureaucracies, a managed economy and large-scale income redistribution. These visions are not reconcilable. We must choose.


Note the closing thought that these visions are irreconcilable and one of them will prevail.  Despite the indicated majority for limited government, moreover, a government takeover – powered by the promise of “free” benefits – is quite possible.

Brooks’ analysis is spot on, in our opinion, and there is indeed a culture war raging between liberals and/or progressives on one side and conservatives (or, as we would prefer to think of ourselves, visionaries) on the other.  Witness the ideologically driven, basically irrational reasons often given to justify government policies.

This entry will present several examples, involving various flavors of irrationality, which demonstrate what SAFE and others who think like us are up against.

MYOPIA – For reasons previously discussed, we believe that the Administration’s resistance to starting now to reduce the federal government’s deficits (a) misreads the lessons of past financial crises, and (b) ignores the practical dynamics of fiscal management.  The likely result: a disastrous U.S. debt default, which could have been avoided.  The “plan now, act later” idea is a nonstarter, 6/21/10.  

A summary of our position was sent to the Fiscal Commission along with a link to the aforesaid blog entry.  SAFE e-mail, 6/21/10.


We subsequently ran across more evidence – a talk that Niall Ferguson (a noted economic historian) gave to the Peterson Institute (not to be confused with the Peterson Foundation) on May 13.  This is a great talk, with first-rate questions from a distinguished audience, on a timely and important subject.  The video runs about 1-1/2 hours, including Q&A, but it is well worth watching.


With his first slide showing a single Roman or Greek column, Ferguson makes the point that the adverse consequences of U.S. fiscal follies could hit much sooner and more suddenly than people think.  Just because the “rise and fall of the Roman Empire” took 1,000 years does not mean that our country, despite having already passed its zenith, can coast comfortably for hundreds of years before things turn ugly. 

As the presentation continues, one begins to worry that it may already be too late to head off impending disaster.  The notion that this country can afford to put off corrective action for several more years, e.g., until after the 2012 election, is not simply misguided, it borders on the ridiculous.

OPPORTUNISM – White House Chief of Staff Rahm Emanuel’s line about never letting a serious crisis go to waste has been oft quoted.  He was originally talking about the economic recession, but the same idea has been applied in other contexts. 

Thus, the Gulf oil spill provided a rationale for not only slamming BP, which was justified to some degree (albeit overdone), but also declaring a moratorium on all deep water (defined as at depths of over 500 feet) drilling in the Gulf of Mexico until the causes of the BP accident can be determined.  (Drilling in Alaskan waters was also banned.)

It is hard to see how an industry-wide moratorium, which would idle tens of thousands of oil workers and result in expensive offshore drilling rigs being redeployed to other parts of the world, could be thought justified by safety concerns associated with the BP blowout (the first serious offshore drilling accident since the Santa Barbara spill in 1972).  There was a firestorm of criticism from political and industry leaders in the area and a court challenge was filed.  However, “many environmental groups” are said to have applauded the action.  Obama under pressure on oil drilling ban, Julie Mason, Washington Examiner, 6/10/10.   


The president supported the moratorium in an address to the nation following his 4th visit to the Gulf region, characterizing it as one of “the steps we’re taking to ensure that a disaster like this does not happen again.”  He acknowledged the resulting “difficulty for the people who work on these rigs,” but did not mention the effect on oil industry profits or the likelihood of higher gasoline prices for consumers.   Speech transcript, 6/15/10.


The court challenge struck home.  Among other things, the judge noted that the experts consulted about the situation had not been asked to approve a blanket ban on drilling.  Judge lifting deep-water oil-drilling moratorium: Criticizes government report as misleading, Stephen Dinan, Washington Times, 6/22/10.

Judge Feldman said the Interior Department misstated the opinion of the experts it consulted. In his report to Mr. Obama, Interior Secretary Ken Salazar said the recommendations, including the six-month moratorium, were reviewed by experts from the National Academy of Engineering but the engineers said they never saw the final recommendations and don't support a blanket ban.


If the Administration had meant to operate in a fact-based, rational mode, this would have been a good time to reconsider its position.  Surely, the report from Secretary Salazar was out of step with the president’s 2009 statement that “political officials should not suppress or alter scientific or technological findings and conclusions.”  Our “Teflon” President, Dustin Danhoff, conservativeblog.com, 6/25/10.  


Instead, the White House quickly announced that the decision would be appealed (as it since has been).  Moreover, Salazar effectively flouted the court order by stating that he intended to ban deep water drilling based on new facts.  What would Saul Alinksky do?  David Limbaugh, Washington Examiner, 6/27/10.

Interior Secretary Ken Salazar said he intends to reimpose the drilling moratorium based on information that wasn't "fully developed" in May, when the six-month moratorium was imposed. Quite convenient.


All things considered, we believe the moratorium was imposed as a sop to environmentalists, who cannot abide the idea of offshore drilling, rather than representing a rational response to the BP oil spill.  An added payoff was the opportunity to fire a “we’re in charge” shot across the bow of the oil industry.

DUPLICITY – The longstanding muddle and drift in U.S. immigration policy reflects failure on both sides of the political aisle.  The issues involved are complex, and we see no simple or obvious solutions.  But we doubt it will help matters to ignore the laws of the land, as various government officials have effectively been doing.

Enforcement of the federal immigration law is the objective of the recently enacted Arizona statute that has engendered so much controversy. Despite claims about racial profiling, etc., this statute simply authorizes state employees to identify illegal immigrants (under federal law) arrested for other legal violations and turn them over to the federal authorities.  How Obama could lose Arizona immigration battle, Byron York, Washington Examiner, 4/30/10.

But what if the Obama administration argues that the law is a burden on the federal government? Or refuses to assist Arizona in determining a person's legality? The drafters thought of that, too. There's a federal statute -- 8 USC 1373, passed during the Clinton years -- requiring the feds to verify a person's immigration status any time a state or local official asks for it. The federal government cannot deny assistance to Arizona without breaking the law itself.


The Arizona statute may not be an effective solution to the presence of illegal immigrants in the state, but its passage reflects deep[ frustration with the federal failure to address the problem.  McCain tells Obama: Don’t like the new Ariz. Immigration law?  Then send Natl. Guard to secure the border, Mark Hemingway, Washington Examiner, 4/25/10.

McCain is not exactly known for his hawkishness on immigration. But he's exactly right -- Arizona's tough new law would not be necessary if the federal government fulfilled its responsibility to secure the border. I'm not sure that Arizona's law is as draconian as its made out to be though I am sympathetic to the underlying concerns about it. But the fact is that the violence on the border is escalating to the point it is an urgent national security matter, and it should be treated as such.


How has the Administration reacted? It is preparing to challenge the Arizona statute in court.  Moreover, the president allegedly told Senator Jon Kyl (R-AZ), in an Oval Office discussion, that he did not intend to secure the border because this would undermine the case for comprehensive immigration reform.  One might have expected the president to parse his words more carefully, and the statement has been denied.  However, Kyl is standing by his story.  Amid crises, Obama declares war – on Arizona, Byron York, Washington Examiner, 6/22/10. 


There have also been rumors of a plan to grant immunity to illegal immigrants by executive order due to the perceived difficulty in moving comprehensive immigration reform through Congress.  Whether the rumors were true or not, eight Republican senators (Grassley, IA; Hatch, UT; Bunning, KY; Chambliss, GA; Inhofe, OK; Isakson, GA, Cochran, MS; and Vitter, LA) contacted the president seeking written confirmation that there is no such intention.  Senator Chuck Grassley press release, 6/21/10.

While we agree our immigration laws need to be fixed, we are deeply concerned about the potential expansion of deferred action or parole for a large illegal alien population.   While deferred action and parole are Executive Branch authorities, they should not be used to circumvent Congress’ constitutional authority to legislate immigration policy, particularly as it relates to the illegal population in the United States.


For what reason might the Administration take Arizona to court for supporting the enforcement of federal law, use law enforcement as a bargaining chip, and contemplate administrative self-help?  The most obvious possibility is currying favor with Hispanic voters.  Obama Courts Latinos by suing Arizona, Dick Morris and Eileen McGann, Townhall.com, 6/26/10. 


Even if such a stance is smart politics, it will certainly not contribute to a reasoned solution of the illegal immigration problem.

INCONSISTENCY – There has been plenty written about the firing of General Stanley McChrystal in the wake of a story in Rolling Stone Magazine: “The Runaway General: Stanley McChrystal, Obama’s top commander in Afghanistan, has seized control of the war by never taking his eye off the real enemy: The wimps in the White House.”


Few have suggested that the firing was not justified, and General David Petraeus (who led the successful “surge” in Iraq) is seen as the best choice to replace McChrystal.  But the fact remains that General McChrystal’s actions stemmed from a policy schism about the war in Afghanistan, which had been publicly aired by others as well as by him and which will continue to fester after his departure. 

Should the U.S. make a serious effort to bring this war to a successful conclusion or get out?  (SAFE does not have a position about that, but we would strongly prefer victory if the war is to be continued.) After a protracted policy review in mid-2009, the issue was seemingly settled by the announcement of a “surge” strategy (basically in accordance with the recommendations of McChrystal and other military leaders). The strategy was cast into doubt, however, by the simultaneous announcement of a troop drawdown starting in July 2011.  A Sad Day, Thomas Sowell, Townhall.com, 6/24/10.

In no previous period of history has an American president announced a timetable for pulling out troops. They may have had a timetable in mind, but none of these presidents was irresponsible enough to tell the world-- including our enemies-- when our troops would be leaving.


The president did not clear the air in his McChrystal/Petraeus announcement, and the inconsistency that he has created will continue to weaken the war effort.  Afghanistan pullout deadline emboldens Taliban, Charles Krauthammer, presstelegram.com, 6/24/10.

What the Afghans hear from the current American president is a surge with an expiration date. An Afghan facing the life-or-death choice of which side to support can be forgiven for thinking that what Obama says is what Obama intends. That may be wrong, but if so, why doesn't Obama dispel that false impression? He doesn't even have to repudiate the July 2011 date, he merely has to say that it is the target date - but only if conditions on the ground permit. Obama has had every opportunity every single day to say that. He has not. In his Rose Garden statement firing McChrystal, he pointedly declined once again to do so. If you were Karzai, or a peasant in Marja, you'd be hedging your bets too.


Our take: There is no possibility that the war in Afghanistan will be effectively won by July 2011, and it is irresponsible not to tell the American people the truth.    

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Have you had enough of irrational, often dishonest governmental policies in these and other areas? If so, we invite you to join us in demanding smaller, more focused, less costly government.

*     *     *     This Blogs Reply     *     *     *

The SAFE blog provides good insightful info on very serious topics -- may not always agree with the positions taken -- but I learn a lot and it helps me reach a more informed understanding and point of view  -- keep up the good work.  –  Retired finance executive

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6/21/10  – The “plan now, act later” idea is a nonstarter

SAFE is not alone in worrying about the government’s fiscal situation.  Most people who have reviewed the numbers agree that the projected deficits are irresponsible and/or unsustainable.  

The need for big changes is under discussion in Washington, if only at meetings of the National Commission of Fiscal Responsibility and Reform.  See, e.g., Fiscal Commission update: off to a somewhat promising start, 5/24/10.

But whatever the Commission’s recommendations, they will not be offered until after the November elections.  For now, the government is operating on fiscal autopilot.

•The president’s budget projected nonstop deficits for the next 10 years, totaling $8.5 trillion.  Sorry, but the budget was dead on arrival, 2/8/10.   

•Congress has not challenged this projection; indeed, it appears that – for the first time in 37 years – Congress will not adopt a budget resolution.  Pass a budget or take a pass?  Ed Feulner (Heritage Foundation), Townhall.com, 5/25/10.

House Majority Leader Steny Hoyer recently announced that [the House] won’t bother even passing a budget resolution this year. “It’s difficult to pass budgets in election years, because they reflect what the [nation’s fiscal] status is,” Hoyer told FOX News last month.


•More spending yet is under consideration.  See, e.g., Obama pleads for $50 billion in state, local aid, Lori Montgomery, Washington Post, 6/13/10.

President Obama urged reluctant lawmakers Saturday to quickly approve nearly $50 billion in emergency aid to state and local governments, saying the money is needed to avoid "massive layoffs of teachers, police and firefighters" and to support the still-fragile economic recovery.


Some legislators are beginning to worry about a voter backlash, and on June 16 the Senate balked at this request. A revised bill will result, with more tax increases and cosmetic reductions in outlays.

•Three months ago, a similar bill passed the Senate with bipartisan support, but this time 40 Republicans, 11 Democrats and one independent voted against it.

•The major reductions to the measure's spending come from dropping a proposed $25-per-month increase in unemployment benefits, and shortening a boost in doctor payments under Medicare from 19 months to 16 months.

Deficit spending is still being touted, however, as a tool to stimulate the economy and avert a “double dip” recession.  Senate rejects more stimulus funding: Democrats join GOP in defeat for Obama, Stephen Dinan, Washington Times, 6/16/10.

Some economists say the stimulus spending is needed to stave off a double-dip recession. "If states don't get this aid, they will be cutting payrolls very aggressively and it is a serious threat to the recovery," Mark Zandi, chief economist at Moody's Analytics, told the Associated Press.


Even beyond 2010, some policy makers and observers warn against spending cuts. True, rising debt could trigger an adverse reaction by financial markets at some point, they reason, but the markets can be assuaged by a “credible” plan to reduce deficits in due course.  (No one is talking about balancing the budget; the idée fixe is to run deficit of 3% or less of Gross Domestic Product, which would supposedly suffice to demonstrate responsibility.) 

Consider how Fed Chairman Ben Bernanke threaded the needle in his testimony before Congress.  U.S. must start to rein in deficit, Fed chief says, Sewell Chan, New York Times, 4/14/10.

Although sizable deficits are unavoidable in the near term, maintaining the confidence of the public and financial markets requires that policy makers move decisively to set the federal budget on a trajectory toward sustainable fiscal balance. *** right now the markets are essentially signaling a lot of confidence that our political system will deliver a sustainable trajectory of fiscal policy [over the next few decades].


This makes no sense to us.  We believe that (1) massive deficits are doing little to shore up the economy, which basically means a recovery of the private (wealth-creating) sector, and (2) it is high time to start reducing them. See, e.g., Don’t just stand there, do something constructive, 2/15/10.

In a similar vein, over 100 economists signed a “rein in federal spending” statement, which was recently transmitted to the president by House Minority Leader John Boehner (R-OH).  Boehner press release, 6/10/10.

As last week's jobs report illustrates, action is needed now to begin to slow government spending and support the creation of new private-sector jobs.  For the sake of millions of Americans who remain out of work – and future generations of Americans, who will carry the debt burden we are accumulating today – we respectfully urge that the leaders of both parties take action immediately to eliminate unnecessary federal spending, prevent tax hikes, stop regulatory threats to job creation, and enact reforms to put our nation back on a true path to prosperity.


And former Fed Chairman Alan Greenspan, who no longer has to worry about keeping politicians happy, warns that U.S. fiscal woes may become acute if the federal borrowing binge continues much longer.  Greenspan says U.S. may soon reach borrowing limit, Jacob Greber, Bloomberg.com, 06/18/10.

“Perceptions of a large U.S. borrowing capacity are misleading,” and current long-term bond yields are masking America’s debt challenge, Greenspan wrote in an opinion piece posted on the Wall Street Journal’s website. “Long-term rate increases can emerge with unexpected suddenness,” such as the 4 percentage point surge over four months in 1979-80, he said.


So the experts (not including us in this category) disagree about an issue; that’s hardly a first.  How should the difference of opinion be resolved?  We would like to suggest two perspectives that might help.

HISTORICAL PARALLELS – In light of past experience, the current financial crisis should not have been surprising.  “Many red lights were blinking brightly well in advance” of the subprime bust and housing slump that morphed into a global financial panic.  Political leaders and financial experts alike chose to ignore the warning signs: massive U.S. balance of trade deficit and massive inflow of capital to fund consumption (not investment) expenditures, doubling of national housing prices in 5 years fueled by rising leverage, total value of mortgages hit 90% of GDP at the beginning of 2008, etc. They trusted in new government techniques for managing the economy and private sector techniques for distributing and hedging risk, all of which failed miserably.  This time is different: Eight centuries of financial folly, Carmen Reinhart and Kenneth Rogoff, Princeton University Press (2009), pp. 203-222.

But while there have been many financial crises over the years fueled by excessive private and/or public debt, the list of countries that have emerged there from without a default is relatively short. Often the choice boils down to political and social pain vs. the economic benefits of honoring debt, a calculation that increasingly favors default as debt levels rise.  The typical ending is default, which may take the form of a major bout of inflation (wiping out part of the debt), changes in terms to the disadvantage of lenders, or outright renunciation.  And one national leader who insisted that his country repay the full amount it had borrowed is depicted as downright eccentric. Id, p. 51 et seq.

Romanian dictator Nikolai Ceausescu single-mindedly insisted on repaying, in the span of a few years, the debt of $9 billion owed by his nation to foreign banks during the 1980s debt crisis.  Romanians were forced to live through cold winters with little or no heat, and factories were forced to cut back because of limited electricity.


In related research, Reinhart and Rogoff (R&R) have presented empirical evidence that a country’s economic growth will suffer if public debt hits 90% of GDP or above.  U.S. debt approaches the Reinhart-Rogoff line, Economic Policy Journal.com, 6/5/10.

Putting aside the fact that [R&R] are talking about a massive aggregated statistic, annual economic output, which is in reality impossible to calculate, there is something intuitively appealing about the [R-R] Line.  If a nation has debt equal to or greater than 90% of annual economic growth, it is a clear signal that the government is playing a large role in that nation's economy. This is always about moving assets away from the productive private sector and putting them in the bureaucratic sector, which is always a negative to annual economic output.


Hmm, so the U.S. is in the “red zone” already?  Well, maybe not, because federal government debt stands at only about 60% of GDP if intra-government debt (e.g., borrowing from the Social Security trust fund) is excluded from the equation.  On the other hand, adjustments could be made – such as counting Fannie Mae and Freddie Mac liabilities as federal debt or factoring in state and local municipal bonds (reportedly over 20% of GDP) – which would make matters look worse.  And if unfunded future liabilities for entitlement programs were considered, the reported numbers would represent merely the tip of the iceberg. 

R&R refrain from advice on how to get out of the financial crisis in their book. As for whether the U.S. government should pull in its fiscal horns or continue trying to stimulate the economy, for example, they say (page 290) “the surge in government debt following a crisis is an important factor to weigh when considering how far governments should be willing to go to offset the adverse consequences of the crisis on economic activity.”   

Reinhart was equally circumspect in her testimony before the Fiscal Commission on May 26, as when Co-Chairman Erskine Bowles asked (at the 1 hr., 4 minute mark), “what would you recommend to this Commission?”  Her answer (paraphrasing): don’t act too quickly, don’t wait too long, and this is a global problem, not just a U.S. problem. 

C-Span video (2 hrs, 40 minutes), 5/26/10.  


With all due respect, we think points can be drawn from the R & R analysis that argue strongly for acting sooner rather than later.

        1.      The current crisis began as a banking crisis, but it might well trigger a sovereign debt crisis.  This is certainly what seems to be happening in Europe right now, and there is no reason to believe the U.S. is immune.

        2.      A debt default by the leader of the global economy would be unprecedented (the U.S. defaulted by abandoning the gold standard in the 1930s, but its role was less prominent then), and the resulting disruption could prove far more serious than all that has happened since 2007. 

        3.      Even if U.S. public debt is not in the “red zone” yet, the margin of safety is rapidly diminishing. As noted (pp. xlii-xliii), the timing of  a financial crisis depends in part on psychological factors, e.g., the point at which lenders will lose confidence in a debtor’s ability or willingness to pay.  Why risk disaster by cutting things too close?

PRACTICAL DYNAMICS – We believe the best way out of the current fiscal problem is to cut spending and restructure entitlement programs, not hike taxes in a manner that would encourage even more government spending and hobble the U.S. economy.  See, e.g., The wrong way to defuse the debt bomb, 1/4/10.

The notion that the government can safely keep the spending party going now and seamlessly cut spending later is naive.  As President Ronald Reagan famously said, “no government ever voluntarily reduces itself in size” and “a government bureau is the nearest thing to eternal life we will ever see on this earth.” 11-second video.


Why?  Any government program benefits someone, if only the people engaged in administering it and/or receiving “free” services or other benefits.  Once the beneficiaries get used to being on the gravy train, they will fight to support perpetuation (if not expansion) of the program, never mind whether its cost/benefit ratio is favorable or not.

Not only is this true about the scope and makeup of government programs, but it also applies to employee compensation and benefits.  Government workers are typically better paid (and far more securely employed) than workers in the private sector, and the imbalance is growing.  There are too many bureaucrats and they are paid too much, Dan Mitchell, Cato Institute, video (6:40), 6/1/10.


The longer the government waits to tackle the buildup of wasteful programs and excessive pay packages, the harder it will be to correct these problems.  Much the same point applies for structural changes in entitlement programs and the tax law, to the extent that they become a part of the ultimate fiscal fix.

Other nations have seen the fury of people who would feel the sting of fiscal cutbacks, as was evidenced by recent demonstrations in Greece when the government proposed austerity measures.  Our own Greek tragedy, Mark Steyn, Washington Times, 2/26/10.

We hard-hearted, small-government guys are often damned as selfish types who care nothing for the general welfare. But, as the Greek protests make plain, nothing makes an individual more selfish than the socially equitable communitarianism of big government. Once a chap's enjoying the fruits of government health care, government-paid vacation, government-funded early retirement, and all the rest, he couldn't give a hoot about the general societal interest. He's got his, and to hell with everyone else. People's sense of entitlement endures long after the entitlement has ceased to make sense.


Similar activity may be expected in this country, probably starting at the local level in states and municipalities that are facing what Governor Arnold Schwarzenegger of California calls “terrible cuts” unless the federal government bails them out.  My big fat Greek bailout: Lessons for America, Meredith Turney, Townhall.com, 5/13/10.


The need to “act now” seems to be gaining acceptance in Europe, but so far not here.  It is almost as though our political leaders wanted to out-Europe the Europeans. Obama pleads with G-20 nations to seal economic programs at upcoming summit, Martin Crutsinger, Washington Examiner, 6/18/10.

In [his 6/18/10] letter, Obama said that the June 25-27 summit should also focus on efforts to stabilize public deficits in the "medium term," a reference to the administration's position that governments need to run huge deficits currently to provide the stimulus needed to ensure a sustained recovery but then move in future years to deficit reduction efforts.  But several European nations including Germany, France and Britain are already moving to attack high deficits in an effort to calm global financial markets which have stumbled in recent weeks over concerns that Greece or other highly indebted nations could default on their loans.


And from the president’s letter itself, which is posted on the White House Website.  

We must be flexible in adjusting the pace of consolidation [of what?] and learn from the consequential mistakes of the past when stimulus was too quickly withdrawn and resulted in renewed economic hardships and recession. *** we recognize the [importance] of setting a credible medium-term fiscal path: that is why my Administration will cut the budget deficit we inherited [!] in half by FY 2013 and work to reduce our fiscal deficit to 3 percent [of GDP] by FY 2015, which will stabilize the
debt-to-GDP ratio at an acceptable level [not really] in that year.


CONCLUSION: We believe the “plan now, act later” idea is misguided and should be scrapped. If you agree, dear readers, pass the message on; in any case, please let us know how you feel.

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6/14/10  – War on cheap energy grinds on. 

If the Gulf oil spill sparks a backlash against the oil industry, we suggested last week, this could provide new impetus for a radical overhaul of the energy sector.  Subsequent developments reinforce this concern.  And fiscal visionaries/ climate realists should expect multiple attacks that may look unrelated but are part of an overall power grab.  

GULF SPILL UPDATE - British Petroleum has succeeded in placing a “top cap” siphon over the leak, but there is still plenty of oil spewing into the Gulf.  Moreover, it is now thought that the leak may have been dramatically underestimated earlier.  Updated spill stats bad news for BP, nature, Brian Skoloff and Harry Weber, Washington Times, 6/12/10.


The Administration’s 6-month moratorium on all deepwater drilling in the Gulf (defined as in water more than 500 feet deep, including established projects as well as new projects) threatens to put a lot of people out of work.  Given a miserable overall employment picture, the timing could hardly be worse, and there has been some pushback.  Obama under pressure on oil drilling ban, Julie Mason, Washington Examiner, 6/10/10.


The government seems intent on blaming BP for all harm from the oil spill – while at the same time holding itself out as “in charge” and lording it over the oil company.  This is par for the course, according to economist Richard Rahn (Cato Institute), because government officials are seldom held accountable for failure.  Authority, responsibility and accountability, Washington Times, 6/8/10.

If you have noticed a lot of ambiguity in the statements of the government officials, that is because they want to be able to position themselves to take credit for whatever success occurs (no matter who is responsible for the success) yet be able to blame others for failure (if even their own).


What could be more natural, then, than to blame BP for job losses stemming from the government-imposed moratorium and pressure it to reimburse the idled workers for lost wages?  Interior Secretary Ken Salazar floated this idea initially, and the White House seconded it – despite the lack of a legal basis to hold BP responsible.  U.S. Ramps Up Tab on BP, Guy Chazan and Stephen Power, Wall Street Journal, 6/10/10.

Several legal experts said they couldn't think of any law or precedent that would allow the U.S. to try to recover damages from BP on behalf of rig workers thrown out of work by a government moratorium on deep offshore drilling.


Tough talk from the president has continued, including criticism of BP’s corporate advertising outlays to tell its side of the story and contemplated continuation of its regular dividend.  Similar points were made in a letter to BP from over 40 members of Congress.  The premise seems to be that BP should not be able to access its assets for such quite normal purposes until it has paid or provided for all claims arising from the Gulf oil spill of whatever nature or description. (At last word, deferral of the next dividend was expected.)

BP stock traded at about $60 per share (market cap of $188B) on April 20.  The stock price closed at $34 (market cap of $107B) on June 11, a decline of about 43%.  There is some concern that this formerly thriving company will be forced into bankruptcy, which could wipe out the value of its common stock.  Lawmakers Say BP Should Suspend Dividends, Ads, Jeff Plungis and Christopher Condon, Bloomberg.com, 6/9/10.


BP has been treated unfairly, we believe, but ours is probably a minority view.  Judging from a Rasmussen poll published on 6/2/10, the company is losing in the court of public opinion:

• 79% say that companies drilling for oil should pay cleanup costs (no discrimination indicated as to the nature of the claims);

• 72% view BP unfavorably; only 22% have a somewhat favorable view;

• 64% are at least somewhat concerned that offshore drilling will cause environmental problems;

• 58% believe offshore drilling should be allowed to continue, but this result is down six points from two weeks earlier.


Note that the moratorium on deepwater drilling and likely new regulations will affect the entire industry, not just BP.  So would a proposed quadrupling of the federal extraction tax on offshore oil revenues (from 8¢ a barrel to 32¢ a barrel) – as a means to pay in advance for future oil spills that may or may not occur.  The BP Oil Spill: State and Federal Revenue Impacts, Arushi Sharma, Tax Foundation, 6/8/10.


CAP-AND-TAX LEGISLATION – Some readers may recall our assessment of H.R. 2454, the Waxman-Markey energy bill (aka “American Clean Energy and Security Act”), which the House of Representatives passed on June 26, 2009. 

5/11/09EPA regulation of CO2: a bad idea from any angle

5/18/09 – A dubious case for cap and trade

5/25/09 The high cost of “green” energy

Manmade global warming theory unproven – choice of energy sources should be left to the free market – a cap-and-trade system would be very costly (like a carbon tax) and a nightmare to administer as well.

A Senate energy bill (the “Clean Energy Jobs and American Power Act,” or in this entry “APA”) is now in play.  Click link to the Thomas site; search for bill text of S. 1733, version 2 (go to page 821 of the PDF file).


In many respects, the APA tracks the House energy bill, e.g., identical targets would be imposed for reductions in greenhouse gas emissions.  Kerry, Lieberman say climate bill would reduce oil imports, create jobs, stem global warming, Matthew Daly, Washington Examiner, 5/12/10.

The legislation aims to cut emissions of carbon dioxide and other heat-trapping greenhouse gases by 17 percent by 2020 and by more than 80 percent by 2050. Both targets are measured against 2005 levels and are the same as those set by a House bill approved last year.


As with the House energy bill, much of the potential revenue from new restrictions on CO2 et al. would be rebated to favored interests as a sweetener to secure their support for the legislation.  However, the APA would replace a single cap-and-tax regime with differing rules for three sectors – power plants, manufacturers, and transportation.  The result:  something for everyone except the hapless consumers who would be forced to pay higher energy prices.  Cap-and-trade magic show, James Valvo (Americans for Prosperity), Washington Times, 5/21/10.

• Electricity producers would be swept under the cap immediately, but would receive free allowances for their emissions until 2026.

• Manufacturers would be covered starting in 2016, but would receive free allowances beginning in 2013 to pay for increased production costs due to higher electricity costs from covered utilities.

• Transportation sector emissions will be covered under the cap, but oil producers and refiners would buy their allowances at a fixed price outside of the auctions. ***this linked fee is essentially a gas tax [with the revenues] paid into the Highway Trust Fund.


The APA sales pitch downplays the alleged threat of manmade global warming while promising reduced oil imports, an economic bonanza, and millions of “green jobs.
Kerry, Lieberman press release, 5/12/10.

Senators John Kerry (D-Mass.), Chairman of the Foreign Relations Committee, and Joe Lieberman (I-Conn.), Chairman of the Homeland Security and Governmental Affairs Committee, today released the details of their comprehensive energy and climate change legislation that will create jobs, strengthen America’s energy independence, safeguard our national security, and restore our global economic leadership for decades to come.


In our opinion, this pitch is balderdash.  Among other things:

1. The job creation claim appears to ignore greater job losses in other areas.  Senate energy bill faces job-creating doubts, Sean Lengell, Washington Times, 5/13/10

. . . a recent CBO study casts doubt on the measure's job-creating potential. The May 5 report, which analyzed how policies to reduce greenhouse-gas emissions could affect employment, concluded that total employment during the next few decades "would be slightly lower than would be the case in the absence of such policies."


2. The global warming mantra has been downplayed (probably because the American public is getting tired of hearing it), not eliminated.  Note, e.g., this finding of Congress, which is recited in the APA text (pp. 828-829):

(11) if unchecked, the impact of climate change will include widespread effects on health and welfare, including— (A) increased outbreaks from waterborne diseases; (B) more droughts; (C) diminished agricultural production; (D) severe storms and floods; (E) heat waves; (F) wildfires; and (G) a substantial rise in sea levels, due in part to— (i) melting mountain glaciers; (ii) shrinking sea ice; and (iii) thawing permafrost;

3. Re alleviation of these concerns, achievement of the greenhouse gas reduction called for by the APA would have an insignificant effect on global temperatures unless other major countries, notably China and India, followed suit (which seems unlikely).  Kerry-Lieberman is a bad joke, Washington Examiner, 5/16/10.

Using the MAGICC/SCENGEN climate model originally developed for the U.S. Environmental Protection Agency and assuming no other nation adopts the same measure, climate researcher Paul Knappenberger found that Kerry-Lieberman would reduce the average global temperature 0.077 degrees Fahrenheit by 2050, compared with what it would be if the bill were not adopted.


4. The contemplated reduction in greenhouse gas emissions may not be technologically feasible.   Kerry and Lieberman Unveil Their Climate Bill: Such a Deal!  Patrick Michaels, Cato Institute, 5/12/10.

Just like Waxman-Markey, APA will allow the average American the carbon dioxide emissions of the average citizen back in 1867, a mere 39 years from today. *** the sponsors have absolutely no idea how to accomplish this.  Instead they wave magic wands for noncompetitive technologies like “Carbon Capture and Sequestration” (“CCS”, aka “clean coal”), solar energy and windmills, and ethanol (“renewable energy”), among many others.   *** no one knows the (enormous) cost.  How do you put a price on something that doesn’t exist?  We simply don’t know how to reduce emissions by 83%.  Consequently, APA is yet another scheme to make carbon-based energy so expensive that you won’t use it.


5. And far from creating an economic bonanza, the APA would depress the level of economic activity by raising energy prices.  American Power Act: Oil Spill Does Not Justify Wrecking the Economy, Nicolas Loris, Heritage Foundation, 6/8/10.

In the end, the economy would be trillions of dollars weaker with climate change legislation in place than without it, as Heritage Foundation analyses of past cap-and-trade bills have shown.


EPA REGULATIONS – As an alternative to legislation, the EPA has issued a finding that C02 et al. are pollutants for purposes of the Clean Air Act and proposed regulations on major power producers that would go into effect in January.

If anything, the regulatory approach is worse than the proposed legislation because government bureaucrats are even harder to hold accountable than the elected members of Congress.  And it has been suggested that the real purpose of the proposed EPA regulations is to pressure Congress into acting on this matter.

In our opinion, the EPA’s endangerment finding was ill considered.  We commented accordingly in June 2009, urging that the agency start over and conduct a real study. 


This letter was also brought to the attention of the three members of Congress from Delaware, with the suggestion that Congress take legislative action to clip the EPA’s wings in this area.

A resolution to this effect was recently introduced in the Senate by Senator Lisa Murkowski (R-AK), but it fell short of passage.  We were disappointed to note that Senators Tom Carper and Ted Kaufman voted against the resolution, but pleased that six Democrats crossed party lines on this issue.  Here’s the report from our energy and global warming microblog.

6/11/10, A3, “Senate squelches GOP bid to limit EPA air standards: Six Democrats join Republican effort,” Jim Abrams (AP) – By a 53-47 vote, the Senate rejected a resolution to stop the EPA from moving ahead with proposed regulations based on limiting CO2 emissions as a “pollutant” under the Clean Air Act.  The vote is described as “a signal of where lawmakers stand on dealing with climate change,” i.e., how they are likely to vote on the American Power Act (a cap-and-tax proposal rather similar to the House energy bill that was passed a year ago).  Delaware’s two senators (Tom Carper and Ted Kaufman) voted against the resolution.

[Carper and Kaufman should know better.  It is simply not true that CO2 is the main driver of global warming (assuming a warming trend will resume, which is far from certain).  Hopefully, the APA can be blocked (it only takes 41 votes) for now.  After the November elections, Congress may be even less disposed to proceed with the demonization of this beneficial gas, and perhaps another run can be taken at the EPA regulations.]

ASSESSMENT – Continued pressure for a cap-and-tax bill, equivalent EPA regulations, or measures to raise energy prices by penalizing the operations of conventional energy firms like British Petroleum can be expected.  Do not expect any help for nuclear power either, which is the logical alternative to fossil fuels, because at bottom the case for “renewable energy” is based on politics rather than science and logic.

We have been cheered by signs of progress in debunking the manmade global warming theory, as for example in a recent Oxford University debate.  Climate alarmists on the run: Oxford students lose faith in warming, Washington Times, 5/31/10.

During the debate, Lord Whitty, former environment minister under the Labor government, claimed 95 percent of scientists were in agreement that man was responsible for a coming climatic cataclysm. Lord Monckton, representing climate realists, asked him to provide a reference backing up the claim. The audience jeered Lord Whitty for having none beyond, "Everyone knows it's true."


But count on the foes of cheap energy to propose ingenious new arguments.  Thus, some believe that biodiversity could supplant global warming as a rationale for “massive changes in the way the global economy is run.”  UN says case for saving species “more powerful than climate change,” Jullette Jowett, UK Guardian, 5/21/10


So it will behoove fans of cheap energy and economic prosperity to stay alert and be prepared for a long, hard fight.

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6/7/10  – Disaster in the Gulf: environmental effects and political fallout.      Read A Reply

The Gulf oil spill has been going on since late April, and British Petroleum’s efforts to stop it have been unsuccessful thus far.  It is reckoned to have already surpassed the Exxon Valdez disaster in 1989, not to mention the 1969 Santa Barbara spill from a failed offshore drilling platform in relatively shallow water that jumpstarted the modern environmental movement and led to a long-term moratorium on offshore drilling in new areas (other than the Gulf of Mexico).  This moratorium was on the cusp of being softened when BP’s deepwater drilling platform in the Gulf exploded on April 20, as it was being converted into a working well, and two days later collapsed.  Catastrophe in the Gulf, Bryan Walsh, Time, 6/03/10.

By the end of May, according to the best estimates of the daily leakage rate, the well had poured at least 20 million gal. [75 million liters] of crude into the Gulf, perhaps much more, making it far and away the worst oil spill in U.S. History — nearly double the output of the Exxon Valdez disaster in 1989. But when BP's most recent attempt to stop the bleeding — the top-kill method — met with failure on May 29, it became clear that the crisis wouldn't end for weeks, maybe even months. Though BP announced it would try a cap over the well to divert the spewing oil, its officials admit that even if the new method is successful, about 20% of the oil will continue to leak, at least until a relief well is completed in August.


Without waiting for the leak to be plugged and its causes rigorously investigated, an effort is underway to determine who should be blamed and what should be done to make sure that “nothing like this” ever happens again.  Some observers want to penalize the oil industry; others would like to see the Gulf spill become the president’s Katrina (analogizing to the abuse heaped on former President Bush in the wake of Hurricane Katrina).  We do not agree with either of these viewpoints, and will suggest in this entry that both sides are focusing (at least in public) on the wrong questions.

MAKE THEM PAY: One school of thought is to blame the private sector firms who were involved in drilling and trying to start up the well on the floor of the Gulf, under some 5,000 feet of water.  Hmm, they must have cut corners, failed to test the failsafe devices that were provided, and neglected to develop contingency plans for responding to an event of this nature.

Executives from BP and contractor firms were haled before Congressional committees for hearings in which fault was assumed from the get go.  On Capitol Hill, outrage plays to cameras, Washington Times, 5/13/10.

Lawmakers walk into hearing rooms with a distinct home-field advantage. Every committee member gets a shot at the witnesses, who often are given no time to answer questions or are cut off midway through their replies. Members sitting up on their dais are free to hurl charges and insults, but witnesses are supposed to be deferential.


These firms have also been targeted by hostile rhetoric from the Administration, as illustrated by the president’s criticism of the conduct of energy executives at the hearings.  Obama slams oil companies’ fingerprinting, Rob Masson, Fox News, 5/14/10.

Let me also say, by the way, a word here about BP and the other companies involved in this mess. I know BP has committed to pay for the response effort, and we will hold them to their obligation. I have to say, though, I did not appreciate what I considered to be a ridiculous spectacle during the congressional hearings into this matter. You had executives of BP and Transocean and Halliburton falling over each other to point the finger of blame at somebody else. The American people could not have been impressed with that display, and I certainly wasn’t.


Moreover, Administration officials have seen fit to intervene in BP efforts to stop the leak – whether they had a basis for doing so or not.  Thus, BP was pressured to abandon its “top kill” approach (attempting to pump drilling mud, followed by cement, into the hole) on grounds that the procedure was “too dangerous.”  BP Seeks to Catch Most Oil as U.S. Exerts Spill Role, Steve Geimann and Carol Wolf, Bloomberg.com, 5/30/10.

U.S. engineers, led by Energy Secretary Steven Chu, yesterday told BP of “grave concerns” about drilling mud, and the company halted the process, White House energy and climate adviser Carol Browner said on CBS’s “Face the Nation” broadcast. “At the end of the day, the government tells BP what to do,” Browner said on NBC’s “Meet the Press.”


Not to be outdone, the Department of Justice has announced a civil and criminal probe of the causes of the spill and the private sector efforts to address it.  (The government’s role in terminating the “top kill” effort is not mentioned.)  Feds open criminal probe of oil spill: Obama, Holder vow legal justice, regulatory reform, Kara Rowland/ Jerry Seper, Washington Times, 6/1/10.

While on a tour of the area in New Orleans, Mr. Holder promised a "meticulous, comprehensive and aggressive" government probe to ensure that "the American people do not foot the bill for this disaster and that our laws are enforced to the full extent."

"That is our responsibility, and we will do nothing less," said Mr. Holder, revealing that a team of Justice Department lawyers from Washington had met with attorneys general and U.S. attorneys in the states and districts whose coastlines and residents have been affected by the spill. "We will not rest until justice is done."


PUSHBACK: Some observers have criticized the Administration for addressing the Gulf spill too tentatively, being overly deferential to BP, and above all not showing sufficient concern.  For example:

•James Carville, Obama supporter, blasts the president for his poor response to oil spill, Ruben Navarette, Sacramento Bee, 5/30/10.

"I have no idea why their attitude was so hands-offy here," Carville said of the White House [in an emotional TV interview]. "It's just unbelievable." He argued that Obama could have done several things such as deploying more people for cleanup work and not Cabinet officials looking to hold news conferences. After all, people are hurting, Carville said. "They're begging for something down here and (Obama) just looks like he's not involved in this. Man, you've got to get down here and get control of this, put somebody in charge of this thing and get this thing moving. We're about to die down here."


• Sean Hannity shows part of Carville’s remarks on Fox News, followed by footage of the president playing golf, shooting hoops, entertaining at the White House, etc. while oil continues to spew into the Gulf.  In ensuing discussion, Hannity and guests Sandra Smith & Deneen Borelli agree that the president’s approach has been too hands off.  Oil spill disaster: Where has the White House been, video (7:22), 5/26/10.


• [Sarah] Palin suggests Obama oil ties impede spill cleanup: The White House responds by questioning her information about oil, politics, and money, Lisa Mascaro, L.A.Times, 5/24/10.

Speaking on " Fox News Sunday," the former Alaska governor said she remained a "big supporter" of oil drilling but believed "these oil companies have got to be held accountable."  Pointing to what she termed the White House's relationship with "the oil companies who have so supported President Obama in his campaign and are supportive of him now," Palin questioned whether "there's any connection there to President Obama taking so doggone long to get in there, to dive in there, and grasp the complexity and the potential tragedy that we are seeing here in the Gulf of Mexico.


• Representative Darrell Issa (R-CA) releases Coast Guard logs that purport to show the White House initially downplayed the situation.  Congressional Republicans seize on oil spill crisis to attack Obama, Michael Shear, Washington Post, 6/4/10.

From their perch in Congress, members of the opposing party have seized on the oil spill crisis as a way to hammer Obama politically, moving aggressively to question the president's response to the environmental disaster.


OUR VIEW: Some of the rhetoric about the Gulf oil spill representing an environmental catastrophe that will persist for generations is overblown, to say the least, and it may be helpful to place this event in historical context.

This is not the first oil spill since human beings began to extract and transport oil, nor even the largest.  See the table posted on Wikipedia, which provides a list (probably far from complete) of spills, with supporting links, going back to the mammoth “Lakeview Gusher” (Kern County, California) circa 1909.   


Many lessons have been learned from oil spills, and tremendous advances in drilling, extraction and transportation technology have occurred, but risk cannot be completely eliminated.  There will continue to be spills – hopefully rare and quickly contained, but nevertheless some spills – so long as the oil industry is in operation.  This does not justify closing down the industry, in our opinion, any more than the impossibility of altogether eliminating airplane crashes should result in a ban on air travel. 

On the brighter side, nature appears to be more resilient than environmentalists give it credit for.  Thus, an intentionally created oil spill in the Persian Gulf at the start of the 1991 Gulf War, which was “at least five times the most recent estimate of the Gulf of Mexico spill,” has done less long-term damage than was feared.  Lessons learned from the largest oil spill in history, Mark Tutton, CNN, 6/4/10.

A 2008 joint German-Saudi research paper on the effects of oil pollution in the Persian Gulf stated that by 1994, fish and bird populations had returned to pre-spill levels. Whale, dolphin and turtle populations were largely unaffected, according to the same study. The fishing industry was decimated after the oil spill and Iraqi mines made the Gulf a no-go area for Kuwaiti and Saudi fishermen. But, it too, had started to show signs of improvement by 1994, the same study shows, and is widely considered to have made a full recovery from the after effects of the spill today.


As for efforts to demonize BP et al., what’s the point?  Perhaps their conduct was negligent, a determination will be made in due course, but in any case they will pay a heavy economic penalty for the Gulf oil spill and have every incentive to quickly stop the leak and help to contain and clean up the oil that has been released.  BP’s cost could spiral to $3bn if oil leak is not plugged, Rowena Mason, UK Telegraph, 5/30/10.


Efforts to turn the tables on the president by blaming him for an alleged lack of responsiveness are also wide of the mark.  A few political points may be scored, but at a heavy cost: inviting a government overreaction that could severely impede future operations of the oil industry.

At a minimum, the Gulf oil spill means a major delay and tightened scrutiny of deep water drilling operations – which some observers have attributed to inordinate restrictions on drilling onshore (notably in Alaska) or in shallower waters.  BP disaster darkens U.S., world fuel future, Patrice Hill, Washington Times, 6/3/10.

With the massive spill demonstrating that there is no foolproof way to safeguard the environment while drilling at such great depths - where no humans can reach and existing technology falls short - many analysts doubt that the oil spigot will ever be turned back on to more than a trickle in the U.S., despite the nation's heavy dependence on oil to fuel American lifestyles and to power economic growth.


And the Post Carbon Institute, which is quoted in the article, could not be more delighted.  Never mind the practicality, cost or effects on the U.S. economy, they believe it is time to end the nation’s “addiction to oil.”  Why? Pick your theory: global warming, unsustainable consumption, biodiversity, overpopulation, social justice, etc.


Some initially saw the Gulf oil spill as dooming a cap and tax energy bill this year.  The reasoning was that the president’s offer of offshore oil exploration in some areas, plus further study of nuclear power, was essential to attract a few Republican votes in the Senate.  Climate bill could be harmed by Gulf oil spill, AP, 5/1/10.


But if the end result of the spill is to spark a backlash against the oil industry, this could give new impetus for a radical overhaul of the energy sector.  Which illustrates the folly of visualizing the president as a superhero with mystical powers to solve any problem.  BP Oil Spill: Who’s Your Daddy?  Gene Healy (Cato), Washington Examiner, 6/1/10.

[The result] may be an expensive (and likely futile) Manhattan Project of new subsidies and restrictions aimed at getting us "beyond petroleum." In his Sunday New York Times column, Thomas Friedman urged Obama to "think like a kid," exploit the public's Malia-esque [a reference to 11-year-old Malia Obama] impulses, and push through a "game change on energy." "Daddy, why can't you even mention the words 'carbon tax'?" asks Friedman, who, according to his Times bio, is a grown man of 57.


A carbon tax would be too straightforward, so “liberals” see the real prize as getting cap and tax through the Senate.  And an “economy-crushing global warming legislation” is surely on the Administration’s agenda.  Let’s not allow ourselves to be stampeded into accepting such an outcome!  Obama and the Oil Spill, Heritage, 6/3/10.


Tune in next week for an update on the American Power Act (a repackaged version of the House cap and tax, etc. bill), which unfortunately is far from dead.

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The president denounced BP for damaging the Gulf coast environment, yet he says nothing about debris fields left in the Sonoran Desert by illegal aliens as they enter the country over the Southern Arizona border.  http://www.desertinvasion.us/  Me thinks there is a double standard at work! -- SAFE member, Arizona

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5/24/10  – Fiscal Commission update: off to a somewhat promising start.     Read Replies

We last wrote about the Fiscal Commission (FC) shortly before its first meeting on April 27 and a Fiscal Summit (FS) organized by the Peterson Foundation on April 28.  Fiscal Commission lifts off this week, but where is it headed? 4/26/10. 

These events took place, an FC Website has been launched, and the second FC meeting is coming up on Wednesday. 


Seems like a good time to reassess the makeup and likely accomplishments of the FC, as we will do in this entry.  Key points: the players, a recap of the April 27-28 kickoff, meetings scheduled, staff support, communications, and our assessment.

PLAYERS:  Here is a list in our format.  The president appointed the co-chairs and at large members; the twelve Congressional members were chosen by the majority and minority leaders of the Senate and House (three picks each).

The executive director does not have a vote, but may wield considerable influence. (He is listed directly below the co-chairs on the FC Website).


Erskine Bowles (former investment banker, White House chief of staff, and university president); Alan Simpson (former senator, has served on various advisory groups including the Iraq Study Group)

At large

David Cote (CEO of Honeywell, identified as a Republican); Alice Rivlin (former Federal Reserve vice chair, budget director in the Clinton Administration, now with Brookings Institution); Ann Fudge (former CEO of Young & Rubicam Brands); Andrew Stern (former president of the SEIU)

The Senate

Max Baucus (D-MT); Tom Coburn (R-OK); Kent Conrad (D-ND); Michael Crapo (R-ID); Richard Durbin (D-IL); Judd Gregg (R-NH)

The House

Xavier Becerra (D-CA); David Camp (R-MI); Jeb Hensarling (R-TX); Paul Ryan (R-WI); Janice Schakowsky (D-IL); John Spratt (D-SC).

Executive Director

Bruce Reed, Chief Domestic Policy Adviser in the Clinton White House and now CEO of the Democratic Leadership Council

KICKOFF: We wondered initially whether the FC proceedings would be accessible to the public.  As videos of the first FC meeting and the FS were broadcast on C-Span and are posted on the Internet, it appears that transparency will be the order of the day.

Here are links to videos of the FC meeting and the FS (morning and afternoon segments).  The good news is that you can see, not simply read, what is going on.  The bad news is that it would take nearly 8 hours to view all the videos, which most people will probably not choose to do.

FC http://bit.ly/br2kdl; FS1 http://bit.ly/clpACF; FS2 http://bit.ly/8XmsZs

Another question in our minds was the relationship between the two events, i.e., was a competitive dynamic in play? Having reviewed the videos, it is clear that the events were complementary.  The points made were harmonious, the rhetoric about the FC’s mission uniformly upbeat, and at least seven people participated in both events – Erskine Bowles; Alan Simpson; Alice Rivlin; Rep. Paul Ryan; Budget Director Peter Orzag (both times as a witness); Robert Reichshauer (witness/discussion leader), and Senator Judd Gregg. 

The FC meeting on April 27 began with a message from the president.  We found no video or transcript, but the president’s subsequent statement in the Rose Garden – flanked by Bowles on the right and Simpson on the left – is available.  The “Remarks by the President at the First Meeting of the Fiscal Commission” title implies that the president delivered essentially the same message to the FC.

Financial crisis, deep recession, short-term deficits necessary, but we must address long-term deficits – steps have been taken (e.g., pay as you go rule reinstated, budget scoured line by line, elimination of defense contracting waste, 3-year discretionary non-defense spending freeze, tax breaks ended for oil companies and the wealthy, healthcare bill will cut deficit by $1 trillion over the next two decades], but they are not enough –this Commission must be free to do its work –everything on the table – I will be standing with Alan and Erskine as they come up with the recommendations.


Following this 8-minute statement, which began at 9:50 A.M., the FC convened in a conference room for a 2 hour, 48 minute session that ended around 1:00 P.M.

No food or drink can be seen, only bottles of water.  No breaks are taken; none of the participants – other than witnesses – are shown standing up and moving around.  Here is the approximate timeline:

0:00 – Introduction by co-chairs

0:02 – Witness, Ben Bernanke, chairman of the Federal Reserve

0:10 – Witness, Peter Orzag, budget director

0: 17 – Witnesses (sitting side by side), former Congressional Budget Office directors Rudy Penner (1983-87) and Robert Reichshauer (1989-95) outline some potential approaches to the fiscal problem.  Unlike Bernanke and Orzag, they take questions and stay for the rest of the meeting.