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SAFE’s “hit nail on head” blogs:   2011

(please direct feedback to ww3@atlanticbb.net)

12/19/11 – Beware the planning disease; it takes action to get things done

Last December, in the wake of the mid-term elections, we said it was “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.”  Out with the old, in with the new, 12/20/10.

The top projects we envisioned were (1) a comprehensive overhaul of the tax system, to be completed and if possible acted on before the 2012 elections, and (2) decisive cuts in current spending levels, starting in 2011.

Are these projects now underway?  Nope! The tax system is more muddled than ever, with a “temporary” payroll tax cut in prospect for 2012 and a huge tax increase looming for 2013 et seq.  Spending rolls on essentially unchecked.  Gross federal debt stands at $15.1 trillion, some 100% of Gross Domestic Product (GDP).

http://www.usdebtclock.org/

The gap between outlays and revenues has widened in recent years.  Deficits for Fiscal Years 2009, 2010 and 2011 each exceeded $1 trillion; as a percentage of GDP, they were the three highest deficits since the end of World War II.  The FY 2012 deficit is expected to be roundly $1 trillion, only a bit better.  Congressional Budget Office director’s blog, 10/7/11.

http://cboblog.cbo.gov/?p=2857

Why don’t our political leaders balance the budget?  The concept is not all that complicated, i.e., outlays should not exceed the amount of money coming in.

But instead of effective action, we see posturing and pontificating.  Even at closed sessions of the Joint Select Committee on Debt Reduction, for example, the discussion of spending cuts never got down to cases.  Supercommittee a super dud, Emily Miller, Washington Times, 11/14/11.

“Frankly, there are no real spending cuts on the table,” [Rep. Jeb Hensarling, one of the two co-chairs] said. “All we are talking about here is slowing the rate of growth.”

http://bit.ly/tCOgjQ

What’s wrong?  We reject the idea that most of the nation’s political leaders are stupid or corrupt, although exceptions certainly exist.

Would all be well if bipartisan cooperation was somehow restored in the nation’s capital?  We doubt it.  The main reason US political leaders disagree about how to solve the fiscal problem is that the voters they represent are themselves deeply divided on the issues, e.g., should spending be cut (and for what) or taxes be raised (and on whom)?   Breaking the partisan fever, Tony Blankley, Washington Times, 11/28/11.

It is not only reductionist, but fundamentally undemocratic to believe, as Mr. [Colin] Powell argues, that if the people would just stop paying attention to what goes on in Washington (helped along by the media refusing to report the political news) politicians could get back to the business of compromising over their differences.

http://bit.ly/uYUzmf

Nor does it seem likely, hard as SAFE and others may try, that policy solutions can be crafted which are so manifestly correct no one will find reasons to quarrel with them.

But here is a suggestion that might help.  Because grandiose plans for future action can provide an excuse for allowing issues to fester, the public should start demanding real corrective action in the here and now.

Three recent examples follow of the mischief to which the planning disease (our shorthand reference) can lead – in each case with a moral based on the situation.  European financial crisis - Climate summit - Deficit reduction.

European financial crisis – Problems in supporting government debt levels have surfaced in one European country after another – e.g., Ireland, Greece, Spain, Italy – leading to rising borrowing rates and the threat of default. 

One possible response is drastic austerity measures of the host governments, triggering social and political unrest.  Another is a “bailout” from the more prosperous European countries, either directly or through international organizations such as the European Central Bank or International Monetary Fund.

None of the “rescue” plans to date has calmed the markets for long.  There seems to be an irreconcilable tension between Eurozone countries that are faring well economically (notably Germany) and laggards within the 17-nation currency bloc.

The Laggards are unwilling or politically unable to embrace austerity, and they do not have a local currency that can be allowed to depreciate.  They would therefore like a bailout.

The more prosperous countries are unwilling to commit massive financial resources to rescuing the Laggards, to the detriment of their own credit standings and economic performance, with no assurance that the funds provided would be sufficient.

This impasse may result in the demise of the Euro, with the Laggards reverting to national currencies.  One observer recently inferred from German vs. UK debt yields that investors believe this is how things will go.  Death of a currency or eurogeddon approaches, Jeremy Warner, UK Telegraph, 11/24/11.

http://tgr.ph/vYosxe

Key European leaders huddled again and a new deal was announced – or more accurately an understanding that such a deal would be implemented in the future – which would subject the Eurozone countries to some degree of externally enforced fiscal discipline.  Given this understanding, it was hoped, Germany et al. would be willing to provide more support for the Laggards and the financial markets would calm down. 

The UK (a member of the European Union, which has retained its own currency) complicated matters by voting “no.”  This meant the understanding could not be implemented through an amendment to the European Union treaty, but would require a side agreement between consenting members.  Many other obstacles to saving the Euro existed as well.  23 European Union leaders agree to fiscal curbs, but Britain blocks broad deal, Anthony Faiola & Michael Birnbaum, Washington Post, 12/9/11.

http://wapo.st/vHVF4h

Time will tell, but we doubt Germany will support an outcome that betrays its national interests.  If not, the Euro will likely collapse.  Merkel’s Teutonic summit enshrines Hooverism in EU treaty law, Ambrose Evans Pritchard, UK Telegraph, 12/11/11.

The tension would not exist if Germany and its satellites had their own hard currency, reflecting their hard economy and the tastes of their own hard-working peoples. A free float would restore equilibrium by natural means, consistent with Kultur.

 

At the end of the day, it always comes down [to] one core problem, the euro itself. Monetary union itself blocks any plausible solution. We have not advanced [an] inch.

http://tgr.ph/ubNreo

Moral: Sometimes it is best to face problems instead of trying to paper them over.

Climate summit – The Kyoto Protocol (negotiated in December 1997; approved by most countries of the world, with the notable exception of the US) was set to expire in 2012.  This threw into question the future of the international compact to reduce greenhouse gas emissions in the name of combating global warming. 

Over 190 nations sent representatives to Durban, South Africa in late November for an UN-sponsored conference (an annual event since 1997) to discuss the path forward. 

Numerous poor countries were demanding action, to include the creation of a climate change action fund (to the tune of $100B a year by 2020) that would be paid for in some fashion by the rich countries, managed by the UN, and doled out for programs to alleviate suffering allegedly caused by climate change and/or help combat it.  

Several countries were threatening to repudiate the Kyoto Protocol, notably Canada (which has since withdrawn).  The European countries wanted to extend the pact, but only if the three biggest carbon emitters (China, the US and India) would match their level of sacrifice.

The big three were resisting binding limits on their carbon emissions, albeit professing concern about the global warming issue.

The upshot of 10+ days of meetings, including two all-night negotiating sessions at the end of the conference, was a commitment to start negotiating a new accord that would be entered into by 2015 and become effective by 2020.  In the interim, the Kyoto agreement was to be extended.  Durban climate change: the agreement explained, Louise Gray, UK Telegraph, 12/11/11.

http://tgr.ph/vlGrhI

UN bureaucrats and bottom tier countries had hoped for far more, including the creation of an International Climate Justice Court in which western countries (only) could be sued for contributing to the buildup of greenhouse gases, wildly impractical restrictions on carbon emission levels, and a reduction in current global temperatures.  Lord Christopher Monckton reports from UN climate summit, Climatedepot.com, 12/9/11.

http://bit.ly/sahiPz

This 138-page draft agreement was not executed, however, and the two-page document that was signed had limited effect.  For those who buy into the manmade global warming theory, the outcome was a big disappointment.  The Durban climate agreement “is almost useless,” Spiegel-on-line, 12/12/11.

The climate talks in Durban ended with an agreement to agree on a new agreement on emissions cuts in coming years. The outcome was hailed as historic by the organizers, but German commentators say the pledges remain too vague and the progress too slow -- while global warming is accelerating.

http://bit.ly/ttNVaP

On the other hand, a decision to put this contentious issue to rest and worry about something else would have made perfect sense to those who do not buy into the manmade global warming theory.  No unusual warming trend – warm is better than cold – human activity not shown to be the main influence.  Chilling thoughts for global-warming alarmists, James Taylor, Forbes. 12/5/11.

Proponents of an imminent global warming crisis may present interesting theories about catastrophes that may occur if the Earth returns to the warmer temperatures that predominated during most of the past 10,000 years, but such theories are strongly contradicted by thousands of years of real-world data and real-world climate observations. The scientific method dictates that real world observations trump speculative theory, not the other way around.

http://onforb.es/tvPSRy

Although climate research should and will continue, we can see no reason to rebuild the world’s energy infrastructure at enormous cost to cope with what may well prove to be a nonexistent problem.  It would have been a good thing, in our opinion, if the delegates at Durban had allowed the Kyoto Protocol to vanish without a trace.

Moral: Don’t waste a lot of time and effort on hypothetical problems.

Deficit reduction – During its deliberations this fall, the Joint Committee was urged by many politicians (including all three members of Congress from Delaware) to “go big” and propose a deficit reduction package of some $4 trillion over 10 years including major tax increases, adjustments to entitlement programs, and spending cuts of some kind. 

Recommendations along these lines were typically vague, however, and it seemed to be assumed that the committee could outline its recommendations and leave the details for someone else to figure out.  Big cuts the right solution; Bipartisan group calls for $4T target, Nicole Gaudiano, [Wilmington, DE] News Journal, 11/17/11.

http://www.s-a-f-e.org/members_microblog_2011.htm

In a similar vein, there has been a series of votes in Congress on various balanced budget amendment (BBA) proposals.  None of the proposals came close to the required 2/3 margin, even in the House of Representatives, despite being watered down to defuse “liberal” objections.

Perhaps a BBA would be a good idea after the budget is balanced – like locking the barn door after the horses have been recovered – but it hardly seems like a high priority at this point.  Note that BBA advocates characteristically fail to specify how and when they would propose to balance the budget if a BBA was actually adopted.  We don’t need a balanced budget amendment, Tad DeHaven, Townhall.com, 12/11/11.

. . . the purpose of the balanced budget amendment is to put an end to budget deficits, and deficits are only a symptom of the real problem: too much spending. Therefore, Republicans [or Democrats if applicable] who support the balanced budget amendment cannot cite it as evidence that they're serious about cutting spending unless they're prepared to detail what they would cut in order to bring the budget into balance.

http://bit.ly/sPSmvR

So when you hear politicians say how committed they are to fiscal responsibility, ask them where, when and how much they believe spending should be cut. 

Also, remind them that the envisioned savings should be applied to reduce the deficit – not used to ramp up spending in other areas.

Moral: If one puts the cart before the horse, the cart will not go anywhere.

In closing, dear readers, we wish all of you a joyous holiday season. Tune in two weeks from now for our thoughts about the path forward in 2012.

top     close    ww3@atlanticbb.net


12/12/11 – Jobs, jobs, jobs, but how?

The latest US employment data were seen as encouraging, with the seasonally adjusted unemployment rate falling from 9.0% to 8.6% in November.  Or to state things in a positive fashion, the employment rate rose from 91.0% to 91.4%.

However, this reported uptick was largely due to the growing portion of the working age population that is not counted as looking for work.  And employment as a percentage of working age population (a ratio of our invention) was 58.5% - only one tenth of a percentage point higher than the previous month and unchanged from January 2010. Bureau of Labor Statistics (BLS), 12/2/11, Table A (seasonally adjusted data).

In millions

Jan. 2010

Nov. 2010

Oct. 2011

Nov. 2011

Population*

236.8

238.7

240.3

240.4

Labor force**

153.4

154.0

154.2

153.9

Employed

138.5

138.9

140.3

140.6

Employed %

90.3%

90.2%

91.0%

91.4%

Unemployed %

9.7%

9.8%

9.0%

8.6%

% of Pop. employed

58.5%

58.2%

58.4%

58.5%

*16 and over, excluding people serving in the military or incarcerated.

**Members of the population seeking employment.

http://www.bls.gov/news.release/empsit.nr0.htm

Bottom line, the real improvement was modest – as has been generally recognized.  US jobless rate fell to 8.6 percent in Nov., Patrice Hill, Washington Times, 12/2/11.

The dramatic drop in the unemployment rate was concentrated among whites and adult men. It was due not only to people finding more jobs, but to about 300,000 discouraged workers dropping out of the labor force. *** Average hourly wages actually declined by 2 cents to $23.18, and were up by only 1.8 percent over the last year.

http://bit.ly/tHbirE

Politicians on both sides of the aisle proclaim their support for an economic rebound and more jobs.  But they disagree on the plan of attack, and there has been much posturing and debate in the nation’s capital and elsewhere. 

Some of the job creation proposals on offer seem unsound.  Thus, as discussed last week, a temporary payroll tax cut would not do much to help the economy –particularly if it was paired with permanent tax increases on the well to do.   

This entry will review some other dubious ideas for boosting employment, which fall under the headings of income maintenance and “green” jobs.

Income maintenance – The core logic for a minimum wage is that all workers should be paid enough to support themselves, basically a fairness issue.  In addition, it is suggested that there will be economic benefit for all concerned.

The scenario: Congress raises the minimum wage; workers receive more money; they quickly spend it, boosting economic demand and driving up the Gross Domestic Product (GDP). Unlike tax cuts and economic stimulus spending, moreover, this idea can be implemented without running up the deficit. What could be better than that?

Lest it be thought that we are making this up, here is what one observer said in 2009 when the minimum wage was boosted to $7.25 an hour in the middle of a recession.  Can increasing the minimum wage boost GDP? Political calculations, Townhall.com, 12/7/11.

Some of those increased-pay workers will choose to spend -- perhaps buying a washer or drier, making a down payment on a used car, or paying down a debt. It's quite possible -- although in these "frugal consumer" economic times no one is certain- - that the wage hike will increase U.S. GDP, serving as a small engine of growth as the U.S. economy inches back toward health.

http://bit.ly/ux2bjH

The counterarguments are obvious. Businesses must cover their costs; if they were forced to pay higher wages this would drive up prices, thereby dampening aggregate output.  Worse, a higher minimum wage would result in fewer people employed (witness the very high unemployment rate for young people, particularly those with limited education) and more people on the government dole.

Another form of income maintenance is unemployment benefits for people who are unable (or unmotivated) to find jobs, not to mention means tested programs such as Medicaid and food stamps.  Once such welfare benefits are made available, it gets increasingly difficult to limit their availability – particularly in a weak economy. 

Like the minimum wage, welfare benefits can be seen as augmenting funds of low-income people who will quickly spend the funds at their disposal and thereby help to prop up economic demand.  But is paying people not to work really likely to boost employment?  Pelosi: Unemployment checks fastest way to create jobs, FoxNews.com, 7/1/10.

Talking to reporters, the House speaker was defending a jobless benefits extension against those who say it gives recipients little incentive to work. By her reasoning, those checks are helping give somebody a job. "It injects demand into the economy," Pelosi said, arguing that when families have money to spend it keeps the economy churning. "It creates jobs faster than almost any other initiative you can name." 

http://fxn.ws/b1vTgB

As a thought experiment, let’s say it was proposed to boost the economy by raising the current minimum wage to $15.00 per hour.  Lower income workers would have more money in their pockets, they would spend it, say hello to an economic boom? 

Most people would expect this suggestion to backfire based on the counterarguments outlined above. But left-leaning politicians still tend to blame economic problems on income disparities, and to see income redistribution as a big part of the solution.

The president has increasingly taken this line, as in a much-discussed speech last week.  Transcript, 12/6/11, Osawatomie, Kansas.

Now, this kind of inequality -- a level that we haven't seen since the Great Depression -- hurts us all. When middle-class families can no longer afford to buy the goods and services that businesses are selling, when people are slipping out of the middle class, it drags down the entire economy from top to bottom. America was built on the idea of broad-based prosperity, of strong consumers all across the country. That's why a CEO like Henry Ford made it his mission to pay his workers enough so that they could buy the cars he made. It's also why a recent study showed that countries with less inequality tend to have stronger and steadier economic growth over the long run.

The president went on to tout his proposal for a temporary payroll tax cut before yearend, with a permanent tax increase for the upper echelon to follow (after the election).  The proceeds of that tax increase were not linked to deficit reduction either, but rather to “investments . . . in things like education and research and high-tech manufacturing.”

http://1.usa.gov/RoXWlg
 

In their search for a defensible reason to accede to an extension of the payroll tax cut and unemployment benefits, the Republicans hit on the idea of linking these items – which the president has advocated relentlessly – with a legislative “green light” for the Keystone XL Pipeline.

In terms of creating jobs and reducing US oil imports from unstable areas, the Keystone Pipeline has much to offer.  Also, no government subsidies would be needed.

The objections come primarily from environmentalists who would like to drive up the price of oil by limiting its availability.  Environmental “gut check time” for Obama?  Thom Patterson, CNN.com, 10/7/11.

On a cloudy day last month [Courtney] Hight, a former member of the White House Council on Environmental Quality, took a huge career risk and joined more than 1,200 protestors who were demanding that President Obama deny a building permit for Keystone XL, a planned oil pipeline that would stretch from Alberta, Canada, to Texas.  The project, the protesters say, threatens to poison ground water across the heartland and extend America's reliance on climate-changing fossil fuels.

http://bit.ly/nUhgWf

If the president was truly focused on creating jobs, he would have approved the project.  Instead, it was put on hold until 2013.  “We can’t wait” campaign is a farce, 11/14/11.

The Republican proposal is anathema to the president, and he has characterized the number of jobs the pipeline would create as inconsequential in comparison to the purported job gains from the measures he favors.  GOP ties payroll-tax cut to pipeline, Naftali Bendavid & Janet Hook, Wall Street Journal, 12/9/11 (no link available).

Mr. Obama said Republicans were trying to extract a political price in exchange for the tax cut.  He said that jobs created by the pipeline paled besides those that would be generated by the payroll-tax cut and by extending unemployment benefits.

House passage of the GOP bill is expected early this week, perhaps tomorrow.  Senator Majority Leader Harry Reid says the bill will not get the required 60 votes in the Senate, but we think it will at least come close.

Green jobs – Environmentalists do not all think alike, but in general they have the following preferences as to energy sources:

Best

Good

OK

Poor

Awful

Conservation

Wind, Solar

Expensive natural gas

Cheap natural gas, nuclear power

Coal, oil

Energy from preferred sources is labeled green, clean, and/or renewable; other energy sources are considered to be hazardous, dirty, and/or unsustainable.

For some environmentalists, economic considerations are secondary.  They decry the current lifestyle of the human race, particularly in advanced countries, as excessive – and therefore prefer conservation to energy development.  Time to turn down our thermostats, stop eating meat, relocate to more compact housing in urban areas served by public transportation, get rid of pet dogs, and even stop having so many children.  Population control in an aging society, Ken Connor, Townhall.com, 11/1/09.

Their argument is simple enough: fewer people put less strain on natural resources, use less energy, and generate less pollution.  Wealthy countries, so the thinking goes, are particularly suited to implement this strategy because they have ready access to birth control and legalized abortion.  

http://bit.ly/vrA3N1

The general public tends to be complacent about environmental claims, but that does mean people want to alter their life styles or pay more for the energy they consume.  Witness the adverse public reaction to the Bloom Energy tariff that was imposed on Delmarva ratepayers not so long ago. Bloom Energy could be the last straw, 10/17/11.

Perhaps it was thought ratepayers would not notice a dollar or two a month charge on their electric bills, while taxpayer-funded payments from the state might attract more attention.  But we and others have done our best to publicize the ploy.” *** News Journal, 10/15/11, carried 8 letters to the editor about the Bloom Energy deal & tariff – FOR: Andy Grove, Santa Clara, Calif.  AGAINST: Gary Myers, Rehoboth Beach; Susan Klinefelter, Newark; Alex Garcia, Magnolia; Edmund Dohnert, Wilmington; Eric Bodenweiser, Georgetown; Andrew Cohen, Wilmington; Marilyn Costas, Lewes.

In an honest showdown between environmental purity and cheap energy, the latter goal is likely to win – and the environmentalists know it.  Accordingly, they have developed arguments calculated to skew the debate in their favor.

One approach is exaggerated claims about perceived dangers, which may frighten potential opponents enough to shut them up.  Catastrophic global warming, national security, extreme weather events, health risks, whatever works.  For example, check out the recent series of red baby carriage ads of the American Lung Association to counter efforts to reassert Congressional authority over the EPA.  Video, July 2011.

http://www.lungusa.org/assets/video/red-carriage-dont-480p-16x9.mov

Another strategy is to claim that compliance with ever-tighter regulation of conventional energy producers will produce win-win outcomes, boosting the economy/creating jobs at the same time that environmental goals are achieved.  

Such claims characteristically focus on projected growth of renewable energy producers and the creation of “green” jobs, while ignoring associated losses in the conventional energy sector and the effects of higher energy costs on the overall economy. The False Promise of Green Energy, Morriss, et al., Cato Institute (2011).

http://www.s-a-f-e.org/green_energy.htm

By glossing over the inherent conflict between “feel good” environmental goals on the one hand and economic growth & jobs on the other, the green jobs mantra seemingly makes it possible to support both goals at once.

Sometimes no “green” jobs can be indentified.  Thus, as previously discussed, the president found it necessary to punt on the Keystone XL Pipeline.  But savvy politicians will talk about “green” jobs when they can, even though the claims are not truly realistic, rather than alienating one segment of the electorate or another.

Here in Delaware, Governor Jack Markell has supported policies designed to phase out the conventional energy base of the state and replace it with subsidized wind, solar, and now fuel cell (the Bloom Energy venture) power.  Our Global Warming microblog (http://www.s-a-f-e.org/global_warming_2011.htm) contains many examples.

At the same time, the governor has repeatedly underscored his commitment to creating jobs in Delaware – with “green” jobs being stressed.  We have “will, fight, focus,” Jonathan Starkey, (Wilmington, DE] News Journal, 12/9/11.

Jobs summit hosted last night at UD (Clayton Hall) drew nearly 300 people.  Governor Markell talked about the Delaware City refinery, Fisker, and Bloom Energy investments, saying Delaware must capitalize on its ability to move quickly – and in unison  – when an opportunity arises.  The governor also stressed the need to invest in public education so Delaware can offer businesses a high-quality work force.  *** Bill Thayer of Bloom Energy alluded to recruiting problems in California due to the high cost of living there, and said the new fuel cell factory should be up and running by the end of 2012.  In part, Bloom wanted to come to Delaware because of a sense that its needs and interests are not likely to get lost as they might in a much larger state.  [This meeting was basically a political pep rally.]

And while the governor claims credit for creating green jobs, there seems to be no acknowledgment that the resulting higher energy prices will make the state a less attractive venue for other industrial firms.  Regional cap-and-trade revenue is wasted, David Stevenson (Caesar Rodney Institute), News Journal, 5/2/11.

The writer urges that Delaware withdraw from the Regional Greenhouse Gas Initiative [RGGI] for the following reasons: (1) DE greenhouse gas emissions have already been cut by 40% vs. the RGGI goal of 10% due to generator shutdowns and conversions from coal to natural gas.  (2) Consumers have to pay more for power under RGGI -- $10 per year in 2010 for average consumer, $10K for large industrial customer, could increase over the next decade to $50/ $50K.  (3) Auctions have raised $21M cumulative thus far, $2M for administration and most of the remaining $19M turned over to private nonprofit organizations.  Low-income weatherization program was a proven mess; low energy programs of the Sustainable Energy Utility (SEU) have produced no documented results and SEU has yet to issue a required progress report despite a pending Freedom of Information lawsuit.  (4) Meanwhile, investments by individuals and businesses have been increasing energy efficiency by almost 2% a year (which dwarfs the results that might have been achieved if all the RGGI money had been invested effectively). (5) The entire 10-year RGGI goal for carbon emission reduction “is replaced by unregulated increases in Third World countries every 30 seconds.”

In sum, the schemes we have reviewed - a temporary payroll tax cut for workers, unemployment benefits for non-workers, and mandates & subsidies to further the environmentalist agenda – amount to political payoffs. Possibly some jobs will be created as a result, but we wouldn’t bet on it.

The basic problem is placing too much reliance on government management of the economy instead of allowing the market system to work.  Our four-prong approach is spelled out in Jobs: do not let the perfect be the enemy of the good, 2/14/11. 

ONE: Outright elimination of the minimum wage might be considered “extreme,” but at least the federal and state governments should refrain from any further increases.  Over time, inflation would erode its economic effect.  Meanwhile, the minimum rate could be lowered for teenagers to help them get started in the workforce.

TWO: Abandoning unemployment compensation benefits would be a tough sell, and on a short-term basis they may have a constructive effect. We would recommend against extending them for long periods, however, lest they come to be seen as an “entitlement” versus temporary assistance.

THREE: Eliminate the federal role in education.  Support educational choice, including a robust network of charter schools.  See the Education page of this Website.

FOUR: Rationalize taxes and government regulations that are imposing an inappropriate burden on business firms, and in the process reduce the government’s fiscal problem.  See the Energy and Taxes pages of this Website for detailed discussion

Follow these policies and stand back.  The US economy will boom again!

top     close    ww3@atlanticbb.net


12/5/11 – Bin the payroll tax cut           Read Replies

Until Americans recognize the urgency of the fiscal problem and demand corrective action, there is little hope for a solution.  Meanwhile, as Congress lurches toward adjournment for the year, a costly and irresponsible payroll tax cut is under consideration that would make things worse.

It may be unrealistic to expect progress on the fiscal front right now, in a divided Congress with the politicians already going into campaign mode. 5 ways the 2012 election has changed since the Super Committee’s failure, Matt Mackowiak, Townhall.com, 11/30/11.

From now until the election next year, only the most mandatory business will be acted upon. That means action on expiring tax credits, temporary spending bills, nominations but little else. Capitol Hill will not be where the action is for the next year.

http://bit.ly/vnWFOT

And some observers doubt things will improve after the elections, as they believe Americans will never face up to the fiscal problem until the roof caves in.  Save Europe by budget reform, not debt, Peter Schiff, Townhall.com, 11/30/11.

In contrast, the U.S. is crystal clear in its intention to ignore its debt problems. With the failure of the Super Committee this week it actually became official. American politicians will not, under any circumstances willingly confront our underlying debt crisis.

http://bit.ly/tDo2rj

But no matter, we think the proposed payroll tax cut is a dumb idea – like most elements of the American Jobs Act that the president harangued Congress to pass right away in his September 8 jobs speech – and it should be dealt with accordingly.

Perhaps this sounds surprising; don’t “conservatives” always support tax cuts?  SAFE did not take the bait 2+ years ago (Never mind the “tax cut,” 1/19/09), however, and we certainly don’t plan to do so now. 

If the Republicans are truly concerned about fiscal responsibility, let’s hope they will block this proposal instead of negotiating about (1) how big a cut, and (2) how would it purportedly be paid for?

Background:  There have been “temporary” cuts of one sort or another for every tax year since 2007.  Rightly or wrongly, they were justified as a means to put money in peoples’ pockets (e.g., $100-200 billion per year) and thereby stimulate economic demand.

For tax years 2007 and 2008, it was income tax rebates (not limited to the recovery of income tax paid).  The details of who qualified under what circumstances were rather involved, as illustrated by this Tax Credit Resources description of the 2007 rebate (claimed on tax returns filed in 2008). http://bit.ly/vjKdLZ

For tax years 2009 and 2010 it was the “making work pay” tax credit, touted by the president in the campaign of 2008 and included in the 2009 economic stimulus package.  As previously noted, SAFE opposed this proposal in January 2009.

If a huge ESP does go through, someone will have to pay for it – either through higher taxes or inflation – per the iron law of economics (“no free lunch”).  Ditto for the huge deficits that are already projected.  *** anyone who buys into the ESP for a tax cut may find they have made a poor bargain.  “Never mind the tax cut,” we say.  How about you?

For tax year 2011, as part of the post-election deal to extend the Bush tax cuts until 2013, thereby avoiding a huge tax increase in the middle of a recession, the payroll tax rate for individuals was cut by two percentage points (overall cost $110B). 

In summary, a pattern has been established of doling out yearend tax favors to tens of millions. The favors are gratifying to recipients, of course, and the longer this practice is continued the harder it will be to stop.  Game show government, James Arlandson, American Thinker, 12/2/11.

Never [underestimate] the seductive power of Game Show Government, all in the name of social and economic justice.  When I ask students what such justice looks like in specific terms, they draw a blank.  I suggest to them that over the decades, it boils down to "Vote for us; we'll send you a check!"  Now our checks are no good because our account is overdrawn.

http://bit.ly/s01Uol

Current situation: The president proposes to double down on the payroll tax cut for 2012.  Workers would get a tax rate reduction of 3.1 (versus 2.0 in 2011) percentage points; payroll taxes for small businesses (previously not reduced) would be cut in half.  The resulting revenue cost would be about $240B.  White House Fact Sheet, 9/8/11.

http://1.usa.gov/pPEeo4

And the best part is that the tax cuts would be “paid for” by future tax increases on wealthy taxpayers.  How’s that for fiscal responsibility?

Pretty bad, we would say, but Congressional Republicans do not want to alienate anyone if they can help it, and several political considerations are complicating their response. 

#As already noted, tax cuts are popular with recipients – making it awkward to denounce this proposal as an unwarranted extravagance. 

#Republicans have traditionally supported tax cuts, and they do not want to be one-upped.  GOP is losing payroll tax fight, Conn Carroll, Washington Examiner, 12/2/11.

If Republicans want to get up off the mat and win this fight, they need to get back in touch with their tax-cutting roots. See the Democrats temporary payroll tax cut and raise them to a permanent cut.

http://bit.ly/vDd7R9

#Blocking a payroll tax cut for the rank and file to avoid tax increases for the wealthy (anathema to the Republican base) would be political suicide.  The less-than-thrilled case for extending the payroll tax holiday, Daniel Mitchell, Townhall.com, 11/30/11. 

. . . if GOPers paint themselves into a corner such that they can be accused of supporting tax cuts for the “rich” while opposing tax cuts for workers, that will set a new record for being tone-deaf and brain-dead.

http://bit.ly/ttWFrq

So what to do?  The GOP game plan is to acquiesce in extending the current tax cut for 2012 – while maneuvering to derail the expansion that has been proposed – and demanding spending cuts to pay for it.

The talk thus far has been about spending cuts in future years, to be imposed on an overall basis instead of targeting wasteful programs or activities. House GOP looks to extend tax cut, jobless benefits, Susan Ferrechio, Washington Examiner, 12/1/11.

Top House aides confirmed that the proposal in the works would be similar to one offered this week by Senate Republicans. That Senate plan would pay to extend the payroll tax cut and make up for the lost revenue by freezing federal workers' pay and limiting entitlement benefits [paid] to those earning more than $750,000 a year.

http://bit.ly/vBViWd

Last Thursday, the Democrat plan for a souped-up payroll tax cut failed in a Senate vote.  A Republican alternative also failed, by a wider margin.  Senate rejects, for now, extending payroll tax cut, AP report, NPR.com, 12/1/11.

http://n.pr/trjCBx

The action will now switch to the House, where a reported split among Republicans could complicate Speaker John Boehner’s efforts to get a Republican version of the payroll tax cut passed.  GOP split slows push for payroll [tax] cut extension, Steven Sloan & Richard Rubin, Bloomberg.com, 12/3/11.

House Budget Committee Chairman Paul Ryan, a Wisconsin Republican who said in June that the payroll tax cut is a “sugar high,” said yesterday that he thinks a deal will be worked out to extend the break. “We’ll figure it out,” he said. “It’s all good.”

http://bloom.bg/vqyRs0

Meanwhile, the president stepped up the pressure on what he paints as a “no brainer” proposal to boost the fragile economy.  Weekly address, 12/3/11.

Over the last few months, [too many Republicans in Congress] said “no” to most of these jobs bills. “No” to putting teachers and firefighters back to work. “No” to putting construction workers back on the job. And this week, they actually said “no” to cutting taxes for middle-class families. *** And we’re going to keep pushing Congress to make this happen. They shouldn’t go home for the holidays until they get this done.

http://1.usa.gov/sVdNwT

Getting serious – We have viewed the president’s economic plan as recklessly irresponsible from the get go.  “We can’t wait” campaign is a farce, 11/14/11.

But when it comes to pushing for action on the fiscal problem, which first and foremost would require serious spending cuts, the Republican performance has also been deficient.  GOP economic plan offers some good ideas, but weak execution, 11/21/11.

OK, with control of only one house of Congress, there is just so much the Republicans can do.  But they do have the power to block the proposed payroll tax cut for 2012, and such action would be well justified for the following reasons:

1. As we see it, the proposed tax cuts would not effectively boost the economy.  Similar measures in prior years failed; why should they work now?  And well-known economic theory suggests that temporary tax cuts are ineffective in boosting demand. Academic research suggests that the American Jobs Act will produce few jobs, David Logan, Tax Foundation, 9/19/11. 

The Permanent Income Hypothesis tells us that individuals take the future into account when they decide how to consume or spend. This theory suggests that if a consumer perceives a change in income to be temporary, the increased amount of money in their pocket will not lead to a change in spending behavior.  In other words, people are not likely to purchase a big-ticket item or make a long-term commitment because of a one-time cash windfall. 

2. Even if the payroll tax cuts did prove mildly stimulative, this effect would be “swamped” if they were financed by permanent tax hikes in later years.

http://taxfoundation.org/news/show/27632.html

3. As for paying for the tax cuts with spending cuts, it would be foolish to increase the deficit in 2012 by $110B (let alone $240B) based on spending cut promises that could be ignored or evaded by future Congresses.

4. If and when real spending cuts are made, the proceeds should be applied to reducing the deficit – not used to justify tax cuts or new spending programs.  Here is a 12/1/11 letter to the editor, which makes an analogous point with respect to Senator Tom Carper’s proposal for financing a national park in Delaware.

http://www.s-a-f-e.org/members_microblog_2011.htm

5. The assumption that the payroll tax cuts for 2012 would be a one-off deal is belied by yearly tax handouts since tax year 2007.  The longer this habit continues, the more difficult it will be to break. 

Thus, a message currently displayed on the White House website - IF CONGRESS DOESN’T ACT, MIDDLE-CLASS TAXES WILL GO UP – would be equally applicable a year hence.

6.  Finally, it will never be possible to fix the tax system unless Congress stops tinkering with this element of the system or that and overhauls the entire structure for the long term.  This is a project that could have a big payoff for the US economy, and we cannot imagine why the politicians never seem to get around to it.

No tax system will boost the economy, for the essence of taxes is to move money from the private sector that creates wealth to the government that consumes it, but the damage can be minimized by eliminating a host of tax preferences (exemptions, deductions and tax credits) and lowering tax rates.

In terms of setting tax rates, we would think it advisable to consider the system as a whole and not simply focus on the supposedly inadequate burden on the upper echelon.  Thus, if everyone is to pay a “fair share,” why should nearly half the workforce pay little if any income tax? 

True, lower income workers pay payroll taxes, but these taxes only cover a portion of the cost of the benefits (Social Security and Medicare) they have been promised and in no way prove that they are paying their fair share of the cost of government.  Accordingly, we reject the notion that payroll taxes should be reduced or eliminated – which is precisely the expectation that a continuation of the payroll tax “holiday” could be expected to foster.  SAFE’s SimpleTax proposal, November 2010.

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.

http://www.s-a-f-e.org/the_simple_tax.htm

In conclusion: Our political leaders need to stop talking about the fiscal problem and start doing something about it.

Rejecting the proposed payroll tax cut would be a start.

“Just do it.” (Nike logo)

*        *        *        This Blogs Replies        *        *        *

Update: a letter summarizing the “bin it” viewpoint was sent to about 60 members of Congress, on both sides of the aisle, this morning.  Here’s the link: http://www.s-a-f-e.org/contacting_legislators_2011.htm#120511.

I hate to say this, but to continue the tax reduction or not is a very political decision.  I think the Republicans are really forced to continue.  I like what I heard this morning about tying the continuation to building the Keystone pipeline.  If the GOP stops this, I think we will see negative results next Nov. – SAFE director [This is admittedly a tough call for the Republicans.  What do the rest of you readers think?]

It’s fine to push for fiscal responsibility, but Congress will NOT STOP SPENDING. – SAFE director

top     close    ww3@atlanticbb.net


11/28/11 – Tax cuts for rank and file now; tax increases for the wealthy in 2013

Last Monday, the Joint Select Committee on Deficit Reduction announced it had deadlocked due to “significant differences.”  The hope was expressed, however, that “Congress can build on this committee’s work and can find a way to tackle this issue in a way that works for the American people and our economy.”  Joint statement of co-chairs (Representative Jeb Hensarling and Senator Patty Murray), 11/21/11.

http://bit.ly/v5DJQf

This outcome was disappointing, but not surprising. As we noted in August, deadlock could be expected if “Side A says tax increases are essential/ Side B says tax increases are a nonstarter.” Debt limit deal settled nothing, 8/8/11.

And by most accounts, that sums up what the Joint Committee spent the better part of three months arguing about. See, e.g., Deficit gridlock looms, David Espo & Andrew Taylor, Washington Examiner, 11/18/11.

Democrats have long demanded that Republicans agree to significant amounts of higher taxes on the wealthy as part of any deal, and they quickly rejected [a new Republican] offer, according to officials in both parties. "Where the divide is right now is over taxes, and whether the wealthiest Americans should share in the sacrifices," said Washington Sen. Patty Murray, the Democratic co-chair of the panel.

http://bit.ly/UxT5b0
 

Hmm, how likely is it that Congress will find a way to build on the Joint Committee’s work?  Perhaps they should try a different approach, such as a comprehensive public debate of the competing viewpoints.  But don’t count on that either.

The problem that led to the debt limit fight and creation of the Joint Committee was long-term deficit spending.  Fiscal experts of all political hues say this problem must be addressed lest there be disastrous consequences. The Joint Committee deadlock did not cure the projected deficits.  Yet somehow the focus has shifted to tax policy.

One clue is a message that has popped up on the White House website – prominently displayed on multiple pages.  IF CONGRESS DOESN’T ACT, MIDDLE-CLASS TAXES WILL GO UP.

http://www.whitehouse.gov/

Another is the proposal to pay for a payroll tax extension and other goodies by allowing the Bush tax cuts for high earners (only) to expire in 2013, as has been demanded ad nauseam by the president and his party.

Read on for answers to three questions about the budget battle and a suggestion that could lead to a meaningful debate if, but only if, the American public demands action.

Did the Joint Committee fail? - The JC did not solve the country’s fiscal problem.  Most of its members made an earnest effort, however, and they also deserve credit for not compounding the problem by offering a bogus solution.

Perhaps the JC exercise was only a ploy designed to spread the blame around for the reckless spending spree that began in 2009.  If so, says one astute observer, it may have succeeded all too well.  Failure or success?  Thomas Sowell, Townhall.com, 11/23/11.

Splitting the blame with the Republicans for what Democrats alone had done was a political victory, in terms of making the Obama administration less vulnerable at the polls in 2012. With the help of the media, the big issue was no longer the big spending that drove the national debt up to the legal ceiling, but the failure of the Republicans to help solve the debt ceiling crisis.

http://bit.ly/vIpiEP

In any case, no one involved with the fiscal problem has made much headway in solving it. Should the others be labeled “failures” as well?  All things considered, we would not be inclined to condemn the JC members for letting the country down without knowing far more about what happened behind closed doors.

Who or what caused the Joint Commission deadlock? – Side B’s view is closest to being right, in our opinion, although Side A’s view is entitled to respect. The ideas being peddled by independents seem mushy and potentially dangerous.

Side A says the Democrat members of the JC wanted to “go big,” backing a plan that would go far beyond the $1.5T goal that had been assigned and include significant adjustments to entitlement programs.  The Democrats expected a “balanced” solution with additional tax revenue, however, and the Republicans refused to cooperate.  Rhetoric turns political after Super Committee failure, John Stanton & Meredith Shiner, Roll Call, 11/21/11.

Senate Majority Leader Harry Reid: “I am disappointed that Republicans never found the courage to ignore Tea Party extremists and millionaire lobbyists like Grover Norquist.” On the other hand, “Democrats were prepared to strike a grand bargain that would make painful cuts while asking millionaires to pay their fair share, and we put our willingness on paper. But Republicans never came close to meeting us halfway.”

http://bit.ly/uIID1f

Side B says more tax revenue was offered by Republican members of the JC, primarily through tax reform but also including a cutback of tax preferences primarily availed of by upper income Americans. The other side rejected these proposals out of hand, and demanded at least $1T in tax increases. Why the Super Committee failed, Representative Jeb Hensarling, Wall Street Journal, 11/22/11.  

http://on.wsj.com/sLrVMn

Independents tend to blame both sides indiscriminately, as though the fiscal problem could be readily solved if the parties would just put their partisan [ugh!] differences aside.  See, e.g., Comeback America Initiative, statement by David Walker on the Supercommittee’s failure, 11/21/11.

Both political parties are to blame for the failure of the Supercommittee. It is just another example of the huge leadership deficit that exists in Washington today. Americans are tired of partisanship and political rhetoric. They want progress and results. 

http://tcaii.org/ (download PDF)

A corollary is a focus on Executive Branch leadership.  It seems to be thought that the president should call the shots, with the members of Congress following like sheep lest they be considered obstructionists.  The goal is to “do something;” the wisdom of the contemplated policy choices is deemed secondary.    If our summary sounds unfair, consider this footage from a MSNBC interview of David Walker by Andrea Mitchell, et al. Morning Joe, video (skip the first minute, cuts off after 9 minutes), 11/22/11.

Largest failure of a political committee in recent history – things are worse than we thought – special interests trumping public interest – plenty of plans the JC could have patched together, but they chose to do nothing – New York Mayor Michael Bloomberg says president should have backed recommendations of the Bowles-Simpson Fiscal Commission in 2010 – time for another public education and engagement campaign like the one Ross Perot organized in 1992 (as a third party candidate for president) – no moderate Democrats or Republicans any more – stop pledges to special interest groups such as Grover Norquist or the AARP – the “no labels” group (with which Walker is affiliated) plans to propose Congressional rule changes, redistricting reform, election finance reform [the McCain-Feingold Act wasn’t bad enough?], and term limits.

http://on.msnbc.com/ucydaA

Partisanship is nothing new in American politics, and the solution of forcing everyone to agree with each other has not been seen as desirable in this country – and hopefully never will be. Federalist Papers, no. 10, Factions: Their Cause and Control, James Madison.  

There are two methods of curing the mischief of faction.  The one, by removing its causes; the other, by controlling its effects.  There are again two methods of removing the causes of factions.  The one, by destroying the liberty which is essential to its existence; the other, by giving to every citizen the same opinions, the same passions, and the same interests.

http://1.usa.gov/M2RVc

What’s the connection between deficit reduction and a 2012 payroll tax cut? - If there is a logical connection between these subjects, it goes like this: The proposed payroll tax cuts in the president’s job plan would increase current deficits, but they would also help to promote economic recovery with the result that tax revenues in later years would be higher and the long-term fiscal effects would be positive. 

This sounds a bit like the claim that the previous economic stimulus package would keep the unemployment rate under 8%.  We did not buy that argument in 2009, and it was quickly disproved by events.  We don’t buy this one now.

But the president made the argument in his September 8 jobs speech, and he went on to urge that Congress find a way to pay for the stimulus. Transcript.

The agreement we passed in July will cut government spending by about $1 trillion over the next ten years.  It also charges this Congress to come up with an additional $1.5 trillion in savings by Christmas.  Tonight, I’m asking you to increase that amount so that it covers the full cost of the American Jobs Act.  And a week from Monday, I’ll be releasing a more ambitious deficit plan – a plan that will not only cover the cost of this jobs bill, but stabilize our debt in the long run. 

http://bit.ly/qAMshK

Fast forward to last week’s reminder that unless Congress acts, taxes on the middle class will go up.  The message as stated is literally true, albeit misleading (letting a one-year reduction in payroll taxes lapse would hardly represent a tax increase), and it was not necessarily related to the Joint Committee deadlock.

The timing of the “unless Congress acts” statement was no coincidence, however, as shown by a front-page story in the [Wilmington, DE] News Journal on November 23.

Economic growth in peril, Christopher S. Rugaber (AP) – A tax cut that reaches 160 million Americans and government aid for the long-term unemployed will expire at the end of the year – and suck $165 billion out of the economy next year – unless Congress takes action. *** On Monday, White House press secretary Jay Carney suggested that renewing or deepening the tax cut could be paid for by increasing taxes on the wealthy.

It is well known that the coveted tax increases are anathema to Side B – but the president has acquired a devastating weapon that he is apparently willing to use.

Under the Budget Control Act, the Joint Committee deadlock will trigger automatic cuts in discretionary spending of $1.2T over the next 10 years, half from the defense budget.  On top of defense cuts already being planned, the implications for US military capabilities would be seriously prejudicial (some would say catastrophic).  [Defense Secretary Leon] Panetta warns against sweeping defense budget cuts, Reuters, 8/3/11.

Panetta said a potential second round of cuts in security spending estimated at about $600 billion from fiscal 2012 to 2021 would be "completely unacceptable."

 

"If that happens, it could trigger a round of dangerous across-the-board defense cuts that would do real damage to our security, our troops and their families, and our ability to protect the nation," he said in a message to Defense Department personnel.

http://reut.rs/nIMBhp

Congressional defense hawks say a way must be found to spare the military from a second budget hit, but the commander in chief has promised to veto any legislation that would defuse the automatic spending cuts.  Transcript of remarks on the JC deadlock, 11/21/11.

I will veto any effort to get rid of those automatic spending cuts to domestic and defense spending.  There will be no easy off ramps on this one.  We need to keep the pressure up to compromise -- not turn off the pressure.  The only way these spending cuts will not take place is if Congress gets back to work and agrees on a balanced plan to reduce the deficit by at least $1.2 trillion.  That’s exactly what they need to do.  That’s the job they promised to do.  And they've still got a year to figure it out. 

 

In other words, the president will stop at nothing to beat the Side B legislators, who he claims “continue to insist on protecting $100 billion [others estimate as about $80B per year] worth of tax cuts for the wealthiest 2 percent of Americans at any cost, even if it means reducing the deficit with deep cuts to things like education and medical research.  Even if it means deep cuts in Medicare.” 

http://1.usa.gov/s73pT9

Granted that politics is not for the faint of heart, this kind of “bare knuckles” tactics seems like a poor substitute for an informed debate about reforming the tax system.  Nor will any change in tax policy solve the fiscal problem; the only solution is large, thoughtfully considered spending cuts.  SAFE letter to JC members et al., 8/22/11.

http://bit.ly/on2sFD

We don’t claim to have all the good spending cut ideas by the way.  Be sure to check out the suggestions of Cato Institute, CAGW, NTU, and others.

A SAFE suggestion for getting things back on track - Congressional rules call for a budget resolution for each fiscal year, to be finalized by April 15.  Congressional Research Service memo (updated in 2007). 

The Congressional Budget and Impoundment Control Act of 1974 . . . requires Congress to adopt an annual budget resolution. The budget resolution is Congress's response to the President's budget. The budget resolution must cover at least five fiscal years: the upcoming fiscal year plus the four subsequent fiscal years.

http://bit.ly/ubQYhE

However, both houses of Congress chose to ignore this requirement for Fiscal Year 2011. Democrats are hiding deficits, Washington Times, 4/15/10.

. . . the party in power is reluctant to acknowledge its stewardship of worsening budget problems with midterm elections coming in November. As a result, congressional Democrats are shying away from a vote on this year’s budget resolution, causing chaos to the federal budgeting process.

http://bit.ly/cyjXpt

This year, the House passed a budget resolution in mid April and sent it to the Democrat-controlled Senate.  The Senate avoided proposing an alternative, and the House budget was tabled in late May.  The Dems’ “breathtaking” refusal to pass a budget, Byron York, Washington Examiner, 5/23/11.

“There’s no need to have a Democratic budget, in my opinion,” Reid told the Los Angeles Times last week. “It would be foolish for us to do a budget at this stage.” Instead, Reid wants to wait to see if the deficit-reduction meetings led by Vice President Biden bear any fruit. Before that, Reid wanted to wait for the Gang of Six — now nearly defunct — to come up with something.

http://bit.ly/in8xqv

Two month into the fiscal year, a nearly $4T a year cost center is still operating on continuing resolutions. Such a course would never be accepted in the private sector and there is no reason to believe spending discipline is being maintained. New spending bill, more fiscal stupidity, Lurita Doan, Townhall.com, 11/21/11.

This hodgepodge of appropriations manages to simultaneously delay, once again, the painful necessity of confronting excessive spending, while simultaneously eroding the little fiscal discipline that does exist.

http://bit.ly/tfl3Uq

If the Senate generated a budget resolution, it could be compared in detail to the House version and set the stage for a meaningful debate.  Most likely that is why Side A has been ducking the requirement, while casting stones at Side B’s proposals.  Think tank project shows why Dems won’t offer a budget, Washington Examiner, 5/25/11.

http://bit.ly/kN3L6Q

In any case, the Senate should “end its incomprehensible fiscal abdication by doing one of two things: (A) Approve the budget passed by the House in April; or (B) Offer its own budget proposal so Americans can compare the two visions and weigh in as to which of them they would prefer.”  SAFE letter to Congressional leadership et al., 11/22/11.

http://bit.ly/tVIjQ0

If enough people make this point, something will happen.  Otherwise, the tawdry and vicious altercation now in process will continue.  Pass it on!

top     close    ww3@atlanticbb.net


11/21/11 – GOP economic plan offers some good ideas, but weak execution

Our review of Democrat proposals to promote economic recovery was not complimentary.  “We can’t wait” campaign is a farce, 11/14/11.

But are the Republicans offering something better? To explore this question, we reviewed the “House Republican Plan for America’s Job Creators,” which has the stated purpose of “empowering families, small businesses and entrepreneurs.” http://bit.ly/niTlFr

The plan seems fine off the top.  We agree that the private sector - not government – “is the foundation for economic growth and job creation in America.”  For sure, “more taxation, regulation, and litigation will not create more jobs."  And, yes, we favor common sense, pro-growth policies “to give small businesses [big businesses too, don’t forget them] and entrepreneurs renewed confidence in our economy.”

The six stated objectives sound sensible, or at least benign.  Who wouldn’t want to (1) reduce government barriers to job creation, (2) fix the tax code, (3) make American manufacturers more competitive . . . and (6) pay down America’s unsustainable debt burden?

As for implementation, it is alleged that many “bipartisan jobs bills passed by the Republican-led House” have been blocked in the Senate. GOP jobs plan better than Obama’s, Aamen Madhani, USA Today, 11/8/11. http://usat.ly/rIEUCh

House Republicans have associated 22 bills (see Thomas, http://1.usa.gov/bKFheF, for description and status) with the GOP jobs plan.  Only 5 of them have been enacted to date.  The inference is there has been production in the House and delays in the Senate (hardly unprecedented). Pocket Card.  http://bit.ly/k1aQjv

But the 22 bills do not constitute a coherent legislative agenda, and the Republicans must raise the level of their game if they hope to convince Americans that Democrats are primarily to blame.  Read on for our analysis and suggestions.

MODEST VICTORIES – Under three of the six stated objectives, all bills listed have been enacted – without discernible progress towards the objective.  This suggests that either (a) much more remains to be done, or (b) the objectives are impracticable.

2. Fix the Tax Code to Help Job Creators

• H.R. 4 - Small business paperwork mandate elimination: Repeal IRS reporting requirements e.g., (1) payments of $600+ to corporations and to purchase any type of property, and (2) payments made with respect to rental property. (Signed 4/14/11.)

If Republicans envision making the tax law flatter, fairer, and simpler, they need to propose extensive legislative changes.  H.R. 4 seems constructive, but it does not address the major problems.  SAFE’s SimpleTax proposal illustrates the type of action we believe is needed.  http://bit.ly/etlOxX

3. Increase Competitiveness for American Manufacturers

• H.R. 3078 – US-Colombia Trade Promotion Agreement Implementation

• H.R. 3079 = US-Panama Trade Promotion Agreement Implementation

• H.R. 3080 - US-Korea Trade Promotion Agreement Implementation

(All three acts were signed 10/21/11.)

The three treaties were negotiated by the previous Administration.  They were not submitted for ratification by Congress until recently, however, due, among other things, to differences of opinion about retraining assistance programs for displaced US workers.

Republican may be entitled to take credit, but Democrats will claim credit too.  Thus, in his 9/8/11 jobs speech, the president lauded the treaties and urged swift Congressional action – without mentioning the 3-year delay.  Speech transcript. 

If Americans can buy Kias and Hyundais, I want to see folks in South Korea driving Fords and Chevys and Chryslers. I want to see more products sold around the world stamped with three proud words: “Made in America.”  

http://bit.ly/qAMshK

The trade agreements with Colombia, Panama, and Korea will have a marginal effect on overall US exports, and there are no other trade agreements in the queue for now.  Perhaps other actions could be taken to increase competitiveness for domestic manufacturers, but we question whether the government can be of great help in this regard – aside from removing negative burdens on US manufacturers (strategies 1 & 2).  We do not favor more tax subsidies for domestic manufacturing and research, nor erection of new trade barriers to protect US manufacturers.

4. Encourage Entrepreneurship & Growth

• H.R. 1249 - America Invents: Overhauls US patent law, converting it from a “first to invent” system to a “first inventor to file” system like other countries. (Signed 9/16/11.)

The America Invents Act was several years in the making, and politicians on both sides of the aisle have claimed responsibility.  Here is what Senator Chris Coons (D-DE) said, for instance, in commenting on the president’s jobs speech (which briefly mentioned the AIA).  Obama exhorts Congress, Doug Denison, News Journal, 9/9/11.

The sweeping changes to our nation’s patent system that [the bill] makes will help create jobs in Delaware and throughout the country, which is why I co-sponsored the measure and worked aggressively for its passage.

http://www.s-a-f-e.org/members_microblog_2011.htm

The AIA may cut the backlog in patent applications and put America in synch with the rest of the world, but it will benefit big companies that can afford to hire patent attorneys more than startup businesses.  Also, little if anything has been done to fix a deeper problem – the US patent system encourages overly broad patent claims versus true innovation.  Patently absurd, Timothy Lee, National Review, 10/3/11.

Most patent trolls target large companies such as Microsoft or Apple. But more recently, smaller firms have been hit as well. Lodsys has become famous in the mobile-software industry for threatening dozens of small developers. As with most patent trolls, there's no allegation that the defendants specifically copied Lodsys's technology. Rather, Lodsys patents, which are related to purchasing electronic content from mobile phones, are simply so broad that dozens of companies have (allegedly) infringed them by accident.

http://bit.ly/nfG3i1

TOUGH BATTLES – Some 2/3 of the 22 bills involve attempts to alter the policy or procedures of various administrative agencies, in most cases relating to the extraction or use of fossil fuels.  And none of them have been enacted so far.

1. Empower Small Businesses & Reduce Government Barriers to Job Creation

• H. Res. 72 - Review of Federal Regulations: Set up a House review process for existing & proposed regulations.  The resolution was passed and follow-up work is being done in the House.  No Senate action required.

• H.R. 872 - Reducing Regulatory Burdens: Would ban (with certain exceptions) EPA or state regulation of discharge into navigable waters of pesticides approved under federal law as a result of application.  In Senate since June.

• H.R. 910 - Energy Tax Prevention: Would ban (with certain exceptions) EPA regulation of greenhouse gas emissions “to address climate change.” (In Senate since April)

• H.J. Res. 37 - Disapproval of FCC’s Net Neutrality Regulations: Block FCC regulations adopted in Dec. 2010 re “preserving the open Internet and broadband industry practices.” The regulations became effective on 11/20/11. (In Senate since April)

• H.R. 2018 - Clean Water Cooperative Federalism: Limit EPA discretion to override state regulatory determinations re applications of Clean Water Act in various situations. (In Senate since July)

• H.R. 1315 - Consumer Financial Protection & Soundness Improvement: Rein in Consumer Financial Protection Bureau established by the Dodd-Frank Act by designating a 5-person commission to run it vs. a director. (In Senate since July)

• H.R. 2587 - Protecting Jobs from Government Interference: Would ban NLRB interference in work location decisions (presumably related to Boeing situation). (In Senate since September)

•H.R. 2401 - Transparency in Regulatory Analysis of Impacts on the Nation: Mandates analysis and report on “cumulative and incremental impacts of covered rules and actions” of the EPA for 2016, 2020, and 2030. (In Senate since September)

•H.R. 2681 - Cement Sector Regulatory Relief: Invalidates EPA emission standards for portland cement manufacturers, and directs agency to adopt new standards meeting specified criteria. (In Senate since September)

• H.E. 2250 - EPA Regulatory Relief: Invalidates EPA emission standards for large boiler and process reactors, solid waste incineration units, and directs agency to adopt new standards meeting specified criteria. (In Senate since October)

• H.R. 2273 - Coal Residuals Reuse and Management: Empowers states to adopt and implement coal combustion residuals permit program meeting certain standards: EPA can act if state does not. (In Senate since October)

Congress created the agencies concerned through legislation, and it has the power to rein them in.  The targets selected seem generally appropriate, and indeed many of them have been discussed in prior entries.  See, e.g., Dear EPA, shape up or ship out, 11/29/10.

Congressional action, which seems more likely [than presidential action] 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.

Such a plan is easier said than done, however, when Congress is sharply divided and the party controlling the Senate and the White House identifies with the objectives of the regulators.   Not only are delays to be expected for anti-regulation bills passed by the House, but if the bills are brought to a vote they will likely be defeated.

True, Congress may be dooming itself to institutional irrelevance by failing to consider such issues on the merits, but few politicians are known for long-range thinking.

Consider the outcome when a bill to block tighter EPA restrictions on interstate emissions from fossil fuel power plants (not on the GOP list of 22 bills, but of a similar nature) was put to a vote.  Block on EPA rule rejected, Raju Chebium & Nicole Gaudiano, [Wilmington, DE] News Journal, 11/11/11.

[The bill] was defeated by a 56-41 vote margin, leaving intact a cross-border pollution rule that will reportedly require “coal plants in 27 states to cut emissions that drift across state lines.”  Senator Tom Carper’s floor remarks, ending with “enough is enough,” are quoted. *** EPA officials reportedly “estimate the rule will prevent up to 34,000 deaths a year linked to respiratory illness – including an estimated 140 in Delaware – and tens of thousands of nonfatal illnesses and symptoms.”

http://www.s-a-f-e.org/global_warming_2011.htm

This is not to say the EPA’s health claims are solid (we suspect their statistics are wildly exaggerated), let alone that reliable and economical power will be available from other sources if coal-fired plants are shut down by unduly restrictive regulations.  But with superficially plausible arguments being offered to support the EPA rule, it would be tough to prove that the real motive was a rosy vision of restoring the world to a pre-industrial state or windfall profits for “green” energy ventures that cannot compete on a level playing field.

Another victory for regulators occurred when the Senate voted on the bill [H.J. Res. 37] to block the FCC “net neutrality” regulations.  The outcome was painted as a victory for free speech in that Interstate service providers should not be allowed to discriminate between “similar websites.”  Senate in party-line vote rejects measures to overturn FCC net-neutrality rules, Gautham Nagadesh et al., The Hill, 11/10/11.

“Without net neutrality, Americans’ access to the Internet would hinge not on our right to free speech but on the whims of the corporations that would control it," said ACLU legislative counsel Christopher Calabrese.

http://bit.ly/u1ffy0

Critics suggest, however, that the net neutrality rule offers a government-run solution to a non-existent problem.  Why shouldn’t ISPs be permitted to offer differential pricing based on bandwith usage, etc. that will appropriately charge big content providers and keep the Internet from sludging up? Misnamed “net neutrality” merely picks winner and losers, Rachel Alexander, Townhall.com, 1/17/11.

Leading proponents of Net neutrality include Google, no doubt due to its recent purchase of YouTube, one of the heaviest users of bandwidth on the internet. Companies like Microsoft, IBM, and Amazon have gone along with Net neutrality, believing it was inevitable and hoping to have some say in how the rules were drafted.

http://bit.ly/dOilLJ

Some speculate that the real objective of the FCC (or at least the three commissioners who voted for net neutrality) is a government-controlled ISP that could censor Internet content.  How’s that for protecting free speech?  US government about to control Internet, Godfather Politics, 11/14/11.

They refer to it as net neutrality when in fact it is anti-neutrality.  It’s like getting people to drink poison by calling it Kool-Aid.  The name sounds safe but the contents will kill you.

http://bit.ly/tAmuyV

Let’s hope not, for SAFE’s one-sided advocacy of smaller, more focused, less costly government might not be appreciated by a “fairness” czar.

5. Maximize American Energy Production

• H.R. 1229 - Putting the Gulf of Mexico Back to Work; expedite offshore oil exploration and production by cutting Dept. of Interior review periods, etc. (In Senate since May)

• H.R. 1230 - Restarting American Offshore Leasing Now; expedite offshore oil exploration and production by cutting Dept. of Interior review periods, etc. (In Senate since May)

• H.R. 1231 - Reversing President Obama’s Offshore Moratorium: Force Dept. of Interior to begin granting leases on the outer continental shelves (both coasts) offshore of consenting states. (In Senate since May)

• H.R. 1938 - North American-Made Energy Security: Expedite Keystone XL pipeline, among other things directing the president, by or before 12/1/11, “to issue a final order granting or denying the “Presidential Permit” (In Senate since July)

• H.R. 2021 - Jobs and Energy Permitting: Prescribes treatment of emissions from ships servicing offshore drilling sites, and establishes a 6-month deadline for permitting reviews. (In Senate since June)

We would surely favor opening more offshore acreage for exploration and development, allowing the Keystone pipeline to proceed, etc. but the House Republicans cannot realistically hope to force through such policy changes right now.

Far from deciding on the Keystone XL pipeline by December 1, for example, the president recently decided to put off the decision – which would inevitably disappoint either labor unions or environmentalists – until after the 2012 elections.  “We can’t wait” campaign is a farce, 11/14/11.

DROPPED BALL – It would be great to see the Republicans distinguish themselves from Side A by becoming true champions for fiscal responsibility, and they got off to a pretty good start.  Side A has proven adroit in changing the subject, however, and the GOP seems uncertain as to how to move the ball forward.  They need to figure this out!

6.  Pay Down America’s Unsustainable Debt Burden, Start Living Within Our Means –

The House budget for Fiscal Year 2012 (H.CON. RES. 34) provided for substantial deficit reduction, a marked departure from other recent budget documents.  Government shutdown: a temporary reprieve, 4/11/11.

House Budget Chairman Paul Ryan rolled out a proposed FY 2012 budget that reflected some $6 trillion less spending in the 10-year projection period than the president’s FY 2012 budget.  The cuts included GovCare repeal, conversion of Medicare coverage to subsidized private insurance plans for future retirees, and conversion of Medicaid to a block grant program.  Fiscal realists hailed the package as a serious proposal.

The Senate tabled the House budget without proposing an alternative.  When October 1 rolled around, marking the start of Fiscal Year 2012, the government was kept open with continuing resolutions. The resolutions were extended last week, with very little fanfare, and no doubt they will be extended again before December 17 – who wants to shut down the government just before Christmas.  The occupiers won yesterday, Conn Carroll, Washington Examiner, 11/18/11.

The $128 billion bill is bad enough since it increases spending above 2011 levels. But even worse is the fact that buried inside the bill was a provision that increases the size of home loans the Federal Housing Administration can insure from $625,500 to $729,750. This is the exact type of corporate welfare housing subsidization that caused the housing bubble and the Great Recession of 2008. And thanks to the Occupy Wall Street distraction, conservatives were not able to rally support on Capitol Hill to stop it.

http://bit.ly/v8s3OP

In related news, the National Debt broke the $15T mark – only months after the $14.3T limit was hit.  With the government borrowing about 40¢ of every dollar it spends, these milestones roll around fast.  As for what to do, Side A says raise taxes and Side B says cut spending.  Federal debt tops $15 trillion, Stephen Dinan, Washington Times, 11/16/11.

Mr. Obama has proposed several debt-reduction plans this year, but Republicans have rejected each of them for not tackling the long-term growth of entitlement programs and instead relying too heavily on taxes. In contrast, House Republicans’ budget this year focused on entitlements and didn’t increase any taxes. Senate Democrats haven’t brought a budget to their chamber floor in more than two years.

http://bit.ly/rAnbno

A similar pattern has marked proceedings of the Joint Select Committee on Deficit Reduction, which as we went to press was nearing its November 23 deadline.  One of the sticking points is Democrat insistence that any deal include higher taxes for “the rich,” who are supposedly not paying their fair share.  Deficit gridlock looms, supercommittee deadlocked, David Espo & Andrew Taylor, Washington Examiner, 11/18/11.

Democrats have long demanded that Republicans agree to significant amounts of higher taxes on the wealthy as part of any deal, and they quickly rejected [a new Republican] offer, according to officials in both parties. "Where the divide is right now is over taxes, and whether the wealthiest Americans should share in the sacrifices," said Washington Sen. Patty Murray, the Democratic co-chair of the panel.

http://bit.ly/rWwX35

Will a last minute deal be reached?  If so, it will probably be an ugly one.  Might as well settle for the $1.2T sequester of discretionary spending (starting in 2013), which Congress could always reshape to its liking next year.

To complete the picture, a watered-down Balanced Budget Amendment (no spending limits; would not have gone into effect until 2017) missed House passage by the requisite 2/3 margin – making clear that the idea is dead for now.  In contrast to 1995, when a BBA passed in the House and failed by only one vote in the Senate, Democrat support was meager.  House says no to mandating balanced federal budget, John Abrams, Washington Examiner, 11/18/11.

In all, 235 Republicans and 25 Democrats voted for the amendment, four Republicans and 161 Democrats opposed it. *** The House passed a similar measure in 1995, with the help of 72 Democrats.

http://bit.ly/vGGEi2

Will there be further downgrades of US debt if the JC cannot agree, thereby demonstrating once again that the two parties do not seem able to agree on much of anything?  Maybe, there have certainly been rumors to that effect.

But here is another point that worries us more; the growing amount of US debt held by the Federal Reserve.  Fed now largest owner of US government debt – surpassing China, Terrence Jeffrey, CNS News, 11/16/11.

Holders of total National Debt (in public hands) - $ in trillions

Date

Federal Reserve

China

Total

9/28/11

1.7

1.5

10.1

9/29/10

0.8

1.5

9.0

http://bit.ly/sC41JJ

What would happen to interest rates for the US Treasury if the Fed was not a heavy buyer of its securities, and how long can the Fed continue “printing money” like this without triggering a sharp increase in the rate of inflation?

If our instincts are sound, the economic situation may soon get a whole lot worse.  And frankly, we think both parties are at fault for not demanding decisive corrective action.

It was a mistake to accept “closed door” meetings for the Joint Committee, a mistake not to push harder for targeted spending cuts, and a mistake to allow the Senate to duck its responsibility to either accept the House budget resolution or put its own proposal on the table.

The American people know the truth at some level, but they have been waiting for someone with the courage to do something about it.

top     close    ww3@atlanticbb.net


11/14/11 – “We can’t wait” campaign is a farce

History does not repeat itself, but certain patterns keep recurring.  Take the clash between individual liberty and collective authority, which has played out many times in different places and cultures.  Keeping the Republic, Mitch Daniels, Sentinel (2011).

To my knowledge, no one has pinpointed either the originator or the birth date of the word “democracy.”  But it seems likely that, within days of the first Greek’s coinage of the term, the scoffing began, and a long, unbroken line of cynics arose to disparage and dismiss the silly notion that average people, with all of their failings and selfish urges, could actually govern themselves for long.  [Thus, Plato said,] “Democracy leads to anarchy, which is mob rule” and “Dictatorship naturally arises out of democracy.”

http://www.s-a-f-e.org/keeping_the_republic.htm

Well-educated people in other lands have been known to voluntarily surrender their freedom for a mess of potage – witness the rise of Fascist regimes in Europe during the 1930s.  Escape from Freedom, Eric Fromm, Rinehart & Company (1941).

http://www.s-a-f-e.org/escape_from_freedom.htm

Our Constitution provides ingenious checks and balances to keep the federal government in check.  But these safeguards have been compromised over the years in the name of meeting social needs, primarily by reinterpretation versus amendment, and they could wind up being subverted entirely.  Keeping the Republic, Daniels.

A growing near-majority of citizens is now dependent on government for a substantial percentage of their livelihood.  Increasingly, the burdens of a growing public sector are paid for by a dwindling percentage of the population.  It is now reaching the point where society’s ability to generate new wealth is being threatened and the non-payers have nothing to lose by demanding still more from their richer neighbors.

The 2012 elections may determine the path forward, and all but the least controversial government initiatives are being suspended as the two sides prepare for a showdown.  The central issue: Who is to blame for this country’s sorry economic situation, fraying social fabric, and fading international prestige?

Side A will offer more centralized planning and action.  Its slogan, “We can’t wait,” simultaneously blames Side B for obstructionism and expresses its own determination to prevail.  We think the obstructionist shoe is actually on the other foot, but time will tell which arguments prevail.

BACKGROUND – Executive Branch overreaching is hardly a new subject for us; here are some prior entries about it.

#Series on “Government Run Amok” disease: The Executive Branch might be likened to the motor in our federal system of government and Congress to the brakes.  As the scope of government expands, more effective Congressional oversight may be needed to hold presidents accountable – including the ability to ask questions on the record versus simply listening to presidential speeches.  RX, part two,  12/7/09

#Constitution Day essay:  To this day, the Constitution provides “a statement of how the political system is supposed to work [that] can be used in challenging overreaching by any of the players.”  Long live the Constitution, 9/13/10.

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.

# Series on administrative power grabs:  Most of the examples (by presidential staff, DOJ, EPA, et al.) took place in recent years, with an accelerating trend after Side B regained control of the House in 2010. An administrative blitz, 5/9/11.  

With legislative gridlock likely over the next 18 months, we expect big government supporters to concentrate on advancing their agenda through administrative action.

# Coverage of negotiations on raising the debt limit: When this exercise ended on a sour note, the president shifted to a sharply confrontational mode that has been evident ever since.  Debt limit deal settled nothing, 8/8/11.

In his Rose Garden remarks on August 2, the president closed by implying that the members of Congress, or at least his political opponents, only did their jobs because a crisis for which they might be blamed was staring them in the face.

#Jobs bill address to joint session of Congress: The president laid out a series of economic and fiscal proposals in his September 8 speech that was not intended to change minds or win support.  A tempting offer: spend now, pay later, 9/12/11.

The president displayed no interest in reaching out to political adversaries. His tone was blunt, overbearing, at times angry.  Given his plan to take “the American Jobs Act” on the road (starting with an event in Richmond, VA the very next day), one might well regard this televised address as a campaign speech on the taxpayer’s dime. 

#Noted in passing: The president’s jobs panel wanted more federal funding for renewable energy, but Congressional support seemed uncertain.  The president exhorted his advisers to “get it done” anyway. Real Clear Politics, video (23 seconds).  Bloom Energy could be the last straw, 10/17/11.

http://bit.ly/pgYzoz

RATIONALE – Aggressive administrative action was already afoot, with more of the same planned, but how could it be explained?  “We love power” would not have sounded good, so the president’s team came up with “We can’t wait.”  Obama’s new slogan, USA Today, 10/24/11.

President Obama heads West today with some new executive orders and a new slogan: "We can't wait." Obama plans to argue that he is taking action on such items as housing and education while Republicans in Congress block his $447 billion jobs plan.

http://usat.ly/oLQyyS

Perhaps the overlap of language was coincidental, but our guess is that “We can’t wait” was taken from the title of a book by Martin Luther King, Jr., originally published in 1964 (a reprint came out in January 2011).  Never mind that the prime slogan of the civil rights movement was “We shall overcome” (the title of a protest song).

Often applauded as Dr. Martin Luther King, Jr.’s most incisive and eloquent book, “Why We Can’t Wait” recounts the Birmingham campaign in vivid detail, while underscoring why 1963 was such a crucial year for the civil rights movement.

http://amzn.to/vJNhid

If so, the decision seems contextually inappropriate.  See the following table, which compares the situations of civil rights protestors in the 1960s and Side A today.

We

They

Issue

Strategy

Alternative

Black Americans

Governments of several states

Fundamental human rights

Peaceful demonstrations

Endless litigation

US president & inner circle

Congressional Republicans

Legislative delays

Administrative  action

Negotiate differences

But hold on, our comparison may reflect a misperception.  Perhaps the current “we” in “We can’t wait” refers not only to the president and his inner circle, but also to any American with an economic grievance?  Add in the people who fall in any of these categories – unemployed or not looking for a job, employed but having problems making ends meet, retired on a fixed income that buys less every year, or envious of upper echelon affluence – and the class would encompass most of the adult population.

If that’s the idea, the people concerned might do well to read the fine print and consider what Side B has to say before signing up.  The notion that Side A is necessarily right will not wash, no matter how many speeches the president gives.

CONTENT – Enough of the high-level abstractions; let’s consider some of the matters that have been said to require immediate action.

#JOBS – A slow economy and high unemployment are surely serious problems.  But there was never much reason to believe that the president’s American Jobs Act (AJA) – coupling short-term economic stimulus with long-term tax increases – would solve them. 

Certainly, the results of the 2009 stimulus package provided little support for the AJA proposals. Tiny, targeted and temporary, Larry Kudlow, Townhall.com, 9/10/11.

In very round numbers, the package comes to $250 billion of temporary payroll tax cuts of one kind or another, with another $200 billion in new spending on infrastructure, unemployment benefits, and direct aid to state and local governments. But didn’t we learn from Obama Stimulus One that more government spending doesn’t grow the economy or reduce unemployment?

http://bit.ly/qotfeX

And although some conservatives tend to automatically favor tax cuts, a meticulous review by the Tax Foundation concluded that (A) the core tax incentives of the AJA would “have little, if any impact on either job creation or improved GDP growth,” and (B) whatever benefits were achieved would be “swamped by the long-term impact of the permanent tax increases.”  Academic research suggests that the American Jobs Act will produce few jobs, David Logan, 9/19/11. 

http://taxfoundation.org/news/show/27632.html

It was no big loss when the AJA was blocked in the Democrat-controlled Senate, therefore, for all the claims of obstructionism.  Obama blames Senate GOP for killing jobs plan. Susan Ferrechio, Washington Examiner, 10/11/10.

The bill, needing 60 votes to clear a procedural hurdle, failed on a 51-48 vote, with only Democrats supporting it.

http://bit.ly/qmBZmG

After its initial defeat, the $447B bill was cut into pieces.  Most of the pieces seem doomed as well, at least without major changes, but the Senate did approve “a $30 billion package that promotes the hiring of veterans and ends an unpopular withholding requirement for government contractors.”  Small part of jobs stimulus clears Senate, may be the last, Stephen Dinan, Washington Times, 11/10/11. 

http://bit.ly/ubMwBk

Never say die!  AJA is still prominently posted on the White House website, along with statements decrying Congressional inaction.

"Without a doubt, the most urgent challenge that we face right now is getting our economy to grow faster and to create more jobs…. we can’t wait for an increasingly dysfunctional Congress to do its job. Where they won’t act, I will." – President Barack Obama, October 24, 2011

http://www.whitehouse.gov/economy/jobsact

#EVERYTHING ELSE – Even before the president’s jobs speech, a series of administrative orders was being planned. The thrust would be steps to boost the economy that could be taken without Congressional approval, and some observers warned about the implications.  Beware: Obama’s fiat, Washington Times, 9/5/11.

Mr. Obama has a profound resistance to the Constitution’s separation of powers, whereby the legislature is the lawmaking body and the executive branch implements the laws passed on the other side of Pennsylvania Ave. He’s overstepped his bounds on numerous issues already, ignoring the law to further his liberal agenda through federal agencies. Oppressive environmental regulations against businesses and property owners jump to mind.

http://bit.ly/ozBAQv

The “We can’t wait” orders are now coming out – in some cases announced by the president and in others by subordinates.  Here is a probably incomplete list together with high spot comments.

#Sept. 23 – No child left behind flexibility http://1.usa.gov/sGv8AV

NCLB law has lost favor as more schools are at risk of being identified as failing; legislative changes were previously proposed and Congress probably has been slow to act. Query, however, whether the Administration is entitled to say “we’re tired of waiting” and restate the law’s requirements on its own.  ABC News report, 9/23/11.

http://bit.ly/plifHq

#Oct. 11 – Cutting red tape http://1.usa.gov/n51xCy

The envisioned savings are dwarfed by the drive to tighten and expand administrative controls over the entire economy.  Obama’s regulatory tsunami is drowning business growth, Washington Examiner, 8/27/11. http://bit.ly/potZfc

#Oct. 18 – Reducing regulatory burdens in healthcare http://1.usa.gov/pS33Ui

Estimated savings of nearly $1B per year would be achieved by “giving hospitals more flexibility in deciding how to best treat their patients.”  Brilliant! And Cass Sunstein’s comments about changing the “regulatory culture in Washington” seem ludicrous.  

#Oct. 24 – Help homeowners refinance mortgages http://1.usa.gov/rVijUG Synopsis: Eligibility requirements for the Home Affordable Refinance Program would be relaxed for most homeowners with a mortgage backed by Fannie Mae or Freddie Mac who are current on their payments, etc.  In addition, the Federal Housing Finance Agency, which administers the program, would waive “a set of unnecessary costs and fees.”  As a result, “millions of individuals could see up to $2,500 in savings every year.” 

As there would be no adjustment in the principal amount, the program would not promote a bottoming out of housing prices, which must occur before recovery begins.  Also, it is anticipated that the changes would facilitate refinancing at lower rates by one million homeowners (not “millions”).  Expansion of mortgage program is limited in scope, Binyamin Appelbaum, New York Times, 10/24/11. http://nyti.ms/tHJuPg

Oct. 25 – Lower student loan payments http://1.usa.gov/t63akG

This is about government-guaranteed student loans, which were taken over by the US Department of Education in 2010 (previously, some of these loans were issued by banks) – supposedly generating savings for taxpayers. The current change is “to allow students to reduce their student-loan debt payments and seek loan forgiveness at 20 instead of 25 years after graduation,” which supposedly can be done with “no additional cost to taxpayers.” Query: don’t the debits and credits need to balance any more?  Also, experience suggests that government subsidies for student loans are pushing up the prices charged by colleges. Out-of-control college tuition; president fiat will only make earning a degree more expensive, Washington Times, 10/26/11. http://bit.ly/ugN0pT

Why isn’t Congressional authorization required?  One assertion is the costs will be offset with savings from the student loan takeover; another is that these changes represent fine-tuning of the terms promulgated administratively in 2010.  Obama taps taxpayers for student stimulus, Chris Stirewalt, Fox News, 10/26/11 .http://fxn.ws/v9FYG9

Oct. 31 – Reducing prescription drug shortages http://1.usa.gov/unuaKv


Synopsis: The FDA is directed to (1) seek “adequate notice” from drug manufacturers of manufacturing discontinuance, (2) expedite regulatory review of new manufacturing operations, and (3) advise the Department of Justice of the stockpiling or sale at “exorbitant prices” of critical drugs.

Critical drug shortages are a growing problem, no doubt, but these measures ignore the government policies that are largely responsible – notably price fixing.  As a result, the “unilaterally imposed ‘solutions’ promise to do more harm than good.” Obama’s drug shortage demagoguery, Michelle Malkin, Townhall.com, 11/4/11.  http://bit.ly/sX7OX6

Nov. 9 – Promoting efficient spending http://1.usa.gov/rBRkXh

Synopsis: Every federal agency is directed to set 20% reduction targets for spending on travel, IT devices, motor fleet efficiency, and “extraneous promotional items.”  The anticipated savings are reportedly on the order of $4B a year, and the president was quoted that “we haven’t seen as much action out of Congress as we’d like, and that’s why we launched our own initiative in the campaign to cut waste.”  O vows fall of $wagdad, Geoff Earle & Chuck Bennett, New York Post, 11/10/11. http://nyp.st/s6qHWK

ASSESSMENT – On the whole, it would be hard to characterize the components of the “We can’t wait” campaign as an administrative power grab, but they hardly represent an impressive effort to address the country’s problems either.

The American Jobs Act offers an assortment of fiscal proposals, which Congress can accept or reject.  So far, the nays are carrying the day.  Let’s hope things stay that way.

Some of the administrative orders are inconsequential in the overall scheme of things, and the more important ones are probably legal albeit close to the line.  Earlier administrative actions by the EPA, NLRB, et al., reviewed in our 5/2/11-5/9/11 series on administrative power grabs, seem more shocking. 

On the other hand, the We can’t wait (WCW) objectives seem far less urgent – and the alleged obstruction by Side B less apparent – than has been so relentlessly proclaimed.  See, e.g., “We can’t wait” to strengthen the economy and create jobs, president’s weekly address, 10/29/11.

#Unfortunately, Republicans in Congress aren’t paying attention.  They’re not getting the message.  Over and over, they have refused to even debate the same kind of jobs proposals that Republicans have supported in the past – proposals that today are supported, not just by Democrats, but by Independents and Republicans all across America. 

#This week, we announced a new policy that will help families whose home values have fallen refinance their mortgages and save thousands of dollars.  We’re making it easier for veterans to get jobs putting their skills to work in hospitals and community health centers.  We reformed the student loan process so more young people can get out of debt faster.  And we’re going to keep announcing more changes like these on a regular basis.

# Tell Congress to stop playing politics and start taking action on jobs.  If we want to rebuild an economy where every American has the chance to get ahead, we need every American to get involved.  That’s how real change has always happened, and that’s how it’ll happen today.

http://1.usa.gov/rGvmik

All of the WCW components seem to involve the delivery of “goodies” to targeted segments of the electorate: college students and young adults, homeowners, veterans, workers, small businesses, state governments, public sector unions, etc.  Sounds like the intent is to buy votes, especially as some of the benefits would be temporary.

And who would pay for this largesse?  No one, apparently, except perhaps millionaires and billionaires.  As the president’s weekly address put it:

These jobs proposals [would be] paid for by asking folks who are making more than a million dollars a year to contribute a little more in taxes.  These are the same folks who have seen their incomes go up so much, and I believe this is a contribution they’re willing to make.  One survey found that nearly 7 in 10 millionaires are willing to step up and pay a little more in order to help the economy.

It is not acknowledged that spending is already out of control.  To the contrary, the fiscal prudence of the Administration is proclaimed in the 11/9/11 executive order re “promoting efficient spending.” http://1.usa.gov/rBRkXh

. . . I have pursued an aggressive agenda for reducing administrative costs since taking office and, most recently, within my Fiscal Year 2012 Budget.  Building on this effort, I direct agency heads to take even more aggressive steps to ensure the Government is a good steward of taxpayer money.

Side A’s sense of urgency about promoting economic recovery and jobs seems rather selective.  Thus, consider the protracted delay in approving the Keystone XL Pipeline that would transport oil from Canada to Texas refineries.

The pipeline would (1) help to reduce oil imports from the Middle East and other volatile areas of the world, (2) employ workers to construct the pipeline and run the facilities involved after it went into operation, (3) be built with private capital, and (4) generate tax revenues for public coffers.  Sounds good!

Yet the pipeline has been held up by a seemingly endless series of hearing, impact studies, etc., and it will almost certainly be challenged in the courts if it does get approved.  The record graphically illustrates why this country has become an increasingly difficult place in which to do business.

Given that the pipeline is strongly supported by labor and fervently opposed by environmentalists, the president apparently decided to punt.  In any case, the fate of pipeline will now be resolved after the 2012 election.  Obama faces choice on Keystone pipeline: Big labor or big green, Washington Examiner, 11/7/11. http://bit.ly/sVOkRX

“This is not a political decision,” said one government functionary, re a 15-month delay to assess an alternative route, but some observers were skeptical.  The Obama uncertainty machine, Conn Carroll, Washington Examiner, 11/11/11. http://bit.ly/rNqEQQ

Finally, re obstructionism, Speaker John Boehner has echoed the president’s sentiments – in reverse. Boehner, House GOP agree with Obama, John Parkinson, ABC News, 10/25/11.

“The president says we can’t afford to wait,” the Ohio Republican said. “Well guess what? I agree with the president. We’ve got 15 bills that are sitting over in the United States Senate. After we finish this week, there’ll be 16 bills sitting over in the United States Senate waiting for action.”

http://abcn.ws/sFdYJD

More recently, 22 House bills were said to be in the Senate queue and Speaker Boehner released an endorsement by 132 economists of the GOP jobs plan.  Economists: GOP jobs plan better than Obama’s, Aamen Madhani, USA Today, 11/8/11.

http://usat.ly/rIEUCh

CONCLUSIONS – Side A’s “We can’t wait” campaign appears to be a political exercise motivated almost exclusively by a desire to hang on to power.

Side B may have some better ideas, but it lacks the political leverage to implement them.

Our only hope is the 2012 elections, if the American people have not been completely bamboozled in the meantime.

top     close    ww3@atlanticbb.net


11/7/11 – Flattering and cajoling the “Super Committee”         Read Replies

Another meeting took place on November 1, perhaps the most revealing public meeting yet of the Joint Select Committee on Deficit Reduction. 

The witnesses did their best to sell the JC on a big ($4T) and “balanced” (including tax increases) deficit reduction approach, which is reportedly what Democrat members want and Republican members are resisting. 

No minds appeared to be changed, but the competing viewpoints were well expressed.  There were also some notable comments about the JC’s procedural options, and the meeting had a dramatic ending that has not been widely reported.

Tuesday, November 1 – Shortly after 1:30 PM, Representative Jeb Hensarling gaveled the meeting to order in the ornate hearing room of the House Ways and Means Committee.  “Overview of previous debt proposals” was the subject, and the JC would hear about two such plans from four of the principals:

ü      Fiscal Commission plan: Co-chairs Erskine Bowles (White House Chief of Staff in the Clinton Administration) and Alan Simpson (former US senator, R-WY).

ü      Bipartisan Policy Center plan: Pete Domenici (former US senator, R-NM) and Alice Rivlin (White House budget director in the Clinton Administration)

After brief opening statements by the co-chairs (Representative Hensarling & Senator Patty Murray), each of the witnesses spoke for five minutes about their respective plans.  Despite various design differences, the FC and BPC plans were of similar size (about $4T in deficit reduction) and composition (mix of spending cuts and tax increases). 

The JC members had ten minutes apiece for questions, which could be directed to any of the witnesses.  They went in the following order: Rep. Jeb Hensarling, Sen. Patty Murray, Sen. Jon Kyl, Rep. Xavier Becerra, Rep. Fred Upton, Sen. Max Baucus, Sen. Rob Portman, Rep. James Clyburn, Rep. Dave Camp, Sen. John Kerry, Sen. Pat Toomey, and Rep. Chris Van Hollen.

Erskine Bowles was allowed to offer a closing pitch – more on this later – after which the meeting was adjourned.  Video (3 hours, 2 minutes)   

http://www.deficitreduction.gov/public/index.cfm/

In reporting on an event like this, the natural tendency is to focus on comments that support one’s own ideas at the expense of other viewpoints.

To make things more interesting, we will present the other side’s arguments and interject comments (in red) as counterpoint.

Spending cuts – One reason cited for being cautious about spending cuts is that they could derail a fragile economy.  This point was considered in devising both the FC and BPC plans, and wisely so, said the witnesses, as the economic outlook is even more uncertain now than it was a year ago.  Weak consumer demand - business on its back – government support needed.   Accordingly, as Erskine Bowles put it, the JC should avoid recommending anything “overtly stupid” – such as large, immediate spending cuts.

The stimulus package in 2009 was a bust.  It’s time to try something else; let’s unleash the private sector by dialing back regulations and reforming the tax system.  Also, there is little chance of big spending cuts in 2012.  The real question is whether additional economic stimulus should be injected – as the president and his party have proposed – and our answer is “no.”

Then there are perceptions of social equity.  Representative Clyburn cited statistics showing the “wealth gap” widening over the past 30 years - especially in poorer areas of the US (analyzed by county) - and expressed concern that further spending cuts would gut social welfare programs to the detriment of lower income Americans.

This was too much for the witnesses, who were quick to deny that their deficit reduction plans would have the effect of hurting the poor.  It was never proposed to cut welfare programs, such as unemployment assistance, food stamps, or Social Security benefits for the less affluent. Besides, if the deficit problem is not addressed quickly and a fiscal meltdown results, the people hurt the most will be the very people whose interests Representative Clyburn is trying to represent.

Many desirable spending cuts would primarily impact the more affluent, e.g., canceling corporate welfare programs, block-granting Medicaid to end bureaucratic overlap, and eliminating federal programs that cannot pass muster on a cost/benefit basis.

Tax increases Why does the point keep coming up that a deficit reduction plan must include tax increases?  A threshold consideration is that tax revenues are running about 15% of GDP, well below the average of recent decades, and it would be unrealistic to envision reducing government expenditures to this level. 

The currently low tax harvest is not due to the Bush tax cuts; it developed because of the recession.  The witnesses agreed that the ratio of taxes to GDP should rise to a more normal level of 18-19% as the economy gradually recovers.

Another argument is political practicality.  As liberals insist on getting something from a deficit reduction deal, they must be placated with tax increases. 

Fiscal policy issues should be settled based on facts and reason versus political expediency. Regardless of which side makes them, “we want it because we want it” arguments should carry little weight.

With the senior population soaring as Baby Boomers age and human life spans are extended, said Dr. Rivlin, the government will be unable to provide adequate retirement and healthcare benefits without collecting more income tax revenue. And although this is “not the time” to propose one, a Value Added Tax might also be a good idea.

If all reasonable steps for cutting spending and restructuring entitlements had been taken already, we might agree, but such efforts are at best still in the talking stage.  Also, what about the drag effects of tax increases on economic output? 

By the way, what counts as a tax increase?  That depends on whether the baseline is considered to be (a) current law (e.g., all Bush tax cuts will expire on 1/1/13), or (b) the CBO’s notion of current policy (e.g., keep Bush tax cuts for the middle class but let them expire for high earners).

Both the FC and BPC plans called for future taxes falling between the current policy and current law projections.

So were the witnesses proposing tax increases or tax cuts?  That depends on which baseline is used.  As the Bush tax cuts have been in effect since 2001/2003, we think the tax increase label fits. 

On the other hand, a decision to let the one-year (2011) reduction in employee payroll taxes lapse would hardly seem like a tax increase.

The witnesses and JC members generally agreed that revenue-neutral tax reform (cut rates and eliminate tax preferences to pay for it) could promote economic growth that would lead to higher tax revenues.  However, several arguments were suggested for actual tax increases (raise rates and/or eliminate tax preferences).

Senator Simpson savaged Grover Norquist, who has famously pressed conservative politicians to pledge that they would not support tax increases. “You know what you have to do,” he told the JC members, and that was “forget Grover.” (In a similar vein, Simpson slammed the AARP’s “disgusting” ad campaign against entitlement changes.)

Given the urgency of the situation, said Senator Domenici, it would be unthinkable to let things slide until 2013.  The market would expect “sustainable new revenues.”  Although taxes have been averaging 18-19% of GDP, this relationship is not graven in stone, and it would be OK to boost the take to 21%.

Senator Murray called the handwringing about tax increases “a lie” in that both sides are calling for lower taxes than are prescribed under current law.

“Everyone wants to reform the tax code,” said Senator Baucus, but eliminating all the current tax preferences would be far easier said than done.   

We take Senator Baucus’s point.  Whatever tax overhaul plan was agreed on, it would likely be watered down in the ensuing legislative process.  The other arguments do not seem sufficiently weighty to merit discussion.

Healthcare – Everyone agreed that the biggest deficit reduction target is Medicare, Medicaid, etc., although some JC members expressed opposition to solutions that would shift costs from the government to consumers without slowing the rate of increase in overall healthcare costs.

The witnesses outlined the healthcare changes they envision, e.g., the BCP plan would offer seniors an option to continue traditional Medicare coverage or enroll in one of several competing Medicare “exchanges.”   Hopefully, competition between the exchanges would bend the cost curve down, said Dr. Rivlin, but there would be a “failsafe” cap on outlays of GDP growth + 1% a year.  Medicare premiums for well-to-do participants would be raised as required to enforce the cap.

To me, said Senator Toomey, fundamental healthcare reform would mean getting away from the fee for service model.  The basic aspects of this model are: (a) the government fixes prices for specified medical services, (b) doctors depend on volume to make money, and (c) patients have little financial incentive to limit their consumption of services. 

The healthcare adjustments advocated by Dr. Rivlin would amount to tinkering, in our view, when a basic system redesign is needed.  Intelligent planning will be impracticable until the future of GovCare is determined, so let’s put this project on hold until after the 2012 election.

There is no reason to delay block-granting Medicaid, however, which would end the inefficient overlap of state and federal management of this program.  The estimated savings would be $770B over the next 10 years.  A list of targeted spending cuts, 8/22/11.

Magnitude – Deficits of some $10T are in prospect over the next 10 years (see discussion last week); reducing them by only $1.5T would be inadequate.  The witnesses recommended a $4T plan as the minimum amount. 

Think there would be lots of time for further action.  Maybe not, as investors could offset $1.5T in spending cuts just by demanding higher interest rates on government debt. 

Interest rates would be spiking already, suggested Senator Domenici, but for the European debt crisis that is artificially boosting demand for US debt.  He offered an analogy: this country is currently able to rent out the best house in a rundown neighborhood, but it will be out of luck if some of the neighbors improve their properties or the entire neighborhood burns down.

No argument, these points are true!

On the other hand, said the witnesses, you should not cut spending too quickly – or precipitously raise taxes either.  The market will not demand instant action so long as the US government enacts a credible plan for solving its fiscal problem over time.

Does this view elevate form over substance?  And how does anyone know what the market thinks?  There have been wild market swings in Europe lately as one save-the-Euro plan after another was announced. The pattern: a plan is hailed, security prices firm a bit, and then there is renewed panic as the details sink in and investors conclude that no one is truly committed to implementing it.

A deficit reduction plan should be judged on the merits, not on some notion of how the market might react.  And if the imperative is to cut wasteful spending and restructure entitlements, as we believe, the government should get specific and start implementing instead of assuming that a plan for future action will suffice.

True, $1.5T in targeted spending cuts would not solve the fiscal crisis.  But it would represent a solid first step that could be followed by additional steps.  We fail to see why investors would prefer a big plan to set things right, details to be provided later, to concrete action now.

Special powers – Three weeks remained for the JC members to reach agreement, get their recommendations translated into legislative language, and have the CBO score the package. Even if disposed to “go big” and recommend an overhaul of the tax system, Medicare, and other entitlement programs, how could they possibly get all this done?

Fortunately, said the witnesses, the JC has been granted special powers under the Budget Control Act that would permit it to dictate the basic changes and give the Congressional committees concerned a date certain to convert the changes into legislation, which would then be subject to an up or down vote in the two houses of Congress with no possibility of a filibuster.

“Pete, you’re a Republican,” said Senator Kerry during his question time.  “Have you ever heard of any committee that has been granted the powers we have?”

“Never” said Senator Domenici.  In effect, the JC could extend the deadline and direct others to finish the job based on its specifications.  Problem solved!

The foregoing is probably correct from a technical standpoint; we certainly have no basis to say otherwise.  But it is one thing to have power, and another to be smart about using it.  Policy considerations aside, we would hate to see the JC members blow the mission by overplaying the hand they have been dealt.

Accordingly, we believe the JC should concentrate on producing a menu of targeted spending cuts adding up to, say, $1.5T. It would be perfectly appropriate to suggest follow-up in other areas, such as revenue-neutral tax reform, but the JC should not attempt to dictate the timing or terms.

A plan – Erskine Bowles wanted to offer some closing thoughts.  Although all time for asking questions had expired, the co-chair allowed him “a couple of minutes.”

Despite his high regard for the JC members as individuals, the witness had testified earlier, he was concerned that they might collectively deadlock and thereby fail the country. 

Having tried to put himself in their shoes, he now continued, it seemed the JC could craft a “big” plan that both sides would be able to accept.

Bowles proceeded to outline a potentially doable compromise based on information he had gleaned from various sources, as follows (dollars in trillions, 10-year totals):

Cuts already made – contingency resolution [?]

$0.4

Cuts already made – Budget Control Act

0.9

Discretionary cuts identified by JC to date

0.3

Healthcare (Democrats said they could accept)

0.5

Healthcare (start raising eligibility age for Medicare)

0.1

Other mandatory

0.3

Technical adjustment to CPI formula

0.2

Revenue increase per Speaker Boehner comment*

0.8

Interest savings

0.4

TOTAL SAVINGS

$3.9

        *In addition, it was assumed that the Bush tax cuts would expire for high earners as of 1/1/13.

Such a plan, the witness concluded, might put the US on a sounder fiscal path and generate “some excitement in the country” as well.

Bowles is a senior statesman with lots of heavy-duty experience on his resume, including co-chairing the Fiscal Commission in 2010.  As such, he spoke with considerable authority.

Twelve years junior to Bowles, Hensarling had served on the Fiscal Commission and cast one of the seven “no” votes that blocked Congressional consideration of the report drafted by Co-Chairs Bowles and Simpson. 

Now, eleven months later, Bowles’s pointed suggestions were aligned with the position of the Democrats on the JC and primarily directed at the Republicans.  The situation seemed to call for a rejoinder from Hensarling, and he found a way to deliver it.

“You certainly created some excitement with the press,” observed the co-chair laconically, but “don’t necessarily believe everything you read and hear about the work of this committee.”

After all the witnesses had been thanked and other formalities taken care of, the meeting was adjourned. 

What will happen next?  We have no idea, but it will be interesting to follow along as the countdown to November 23 continues.

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I fired off my thoughts to the Joint Committee, thanks for the link. The cry to raise taxes is absurd . . . the members of Congress already squander the tax revenues that flow into Washington, whereas they should be reducing spending, because the federal budget contains political schemes not authorized by the Constitution, the same Constitution they took an oath to support.  –  SAFE member, Arizona

I don’t believe the Joint Committee members will propose real spending cuts unless there is a huge fiscal emergency.  Could happen, witness the burgeoning Italian debt problem with the premier on the brink of being forced out, but probably not before 11/23. – SAFE director  [Response: We remain hopeful, but skepticism about the JC doing anything constructive is growing – and may well be vindicated by events.] 

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10/31/11 – Decision time for the Joint Committee            Read Replies

What a surprise!  The Joint Select Committee on Deficit Reduction is deadlocked over spending cuts vs. tax increases, with its November 23 deadline just around the corner.

SAFE offered some suggestions to break the impasse several weeks ago.  First, we reiterated our August 22 advice (be open, stop digging, taxes can wait, be selective on spending).  We then urged the JC members to, in effect, stop acting like politicians. SAFE letter, 10/10/11.

To get back on track, the JC members – from both parties – must rise above politics as usual.  Instead of searching for the most expedient answers from their respective political standpoints, they need to find the best answers for the country. 

http://www.s-a-f-e.org/contacting_legislators_2011.htm#101011

And there matters stood until last week, when: (1) the JC held a public meeting (the first in over a month) on October 26, and (2) there was a series of leaks about the JC’s private meetings.  The information revealed is not encouraging, but at least the state of play is clearer now – as this entry will report.

OCTOBER 26 – The JC meeting began at 10:00 a.m. and ran 102 minutes. Senator Patty Murray presided (she and Representative Jeb Hensarling, the two co-chairs, have been alternating in this role).  The subject was discretionary spending, and Congressional Budget Office Director Douglas Elmendorf testified (as he previously had at a September 13 meeting of the JC). 

In his formal testimony, Elmendorf hit the highlights of his 28-page report. Each JC member was then allotted six minutes for questions and comments.  They spoke in the following order: Sen. Patty Murray, Rep. Jeb Hensarling, Rep. Xavier Becerra, Sen. Jon Kyl, Sen. Max Baucus, Rep. Fred Upton, Rep. James Clyburn, Sen. Rob Portman, Sen. John Kerry, Rep. Dave Camp, Rep. Chris Van Hollen, and Sen. Pat Toomey.

Without attempting to summarize the entire discussion, it would probably be fair to say that substantial disagreement exists about several points.  A recap follows, with our comments noted in red.

1. Given the need to promote economy recovery, which would shrink welfare outlays and boost tax revenues, can the government afford to start cutting spending before the economic outlook improves?

Elmendorf accepts the premise that government spending fuels demand, which typically undershoots supply in a slack economy.  He even agreed with Rep. Van Hollen that but for the economic stimulus package in 2009, the economy would be weaker than it currently is.  Likewise, a failure to renew the payroll tax reduction that was only supposed to apply for 2011 would have a negative effective on the economy, etc.

When cross-examined by Senator Toomey, however, the witness agreed that the question about the 2009 stimulus package is purely hypothetical.  Accordingly, no one can prove how the economy would have fared without the package.  He also conceded that the government is incapable of creating private demand; it can only substitute public demand (quite possibly resulting in a misallocation of economic resources).

SAFE: The claim that the economy needs another shot of stimulus is questionable, and the JC should not allow itself to get drawn into that argument.  Let the president and Congress debate the matter, as they are in the process of doing.

2. The JC is supposed to find ways to cut budget deficits over the next 10 years, but what are the deficits in question?   

One measure is the CBO’s current-law baseline, which indicates cumulative deficits over the coming decade of $3.5T.  This takes credit for the minimum of $1.2T in deficit reduction that the JC is supposed to propose, and which will otherwise be achieved through a “sequester” (further mandated cuts to discretionary spending) that everyone wants to avoid, so the pre-reduction deficit would be $4.7T.

The CBO’s alternative scenario is based on “changing the provisions of current law so as to maintain major policies that are in effect now.”  Assuming that the Bush tax cuts were made permanent (all of them, not just cuts for the upper echelon, are scheduled to expire on 1/1/13 under current law), that Congress continued to index the AMT for inflation so that millions of additional taxpayers would not become subject to it, and that Medicare payment rates of physicians’ services were held constant rather than being cut, the deficit over the next decade would be roundly $10T on a pre-reduction basis.  Testimony of Dr. Elmendorf to the JC on 9/13/11, pp. 2-3.  http://1.usa.gov/thhLgq

The CBO director alluded to the difference between the two projections at the 10/26 meeting without follow-up discussion.  Senator Kyl did make an issue about the baseline allowance for “overseas contingency operations” (wars), however, suggesting that it should be adjusted to reflect the president’s announced decisions to withdraw all US troops from Iraq by 12/31/11 and proceed with phased draw-downs of forces from Afghanistan.  

SAFE: It’s hard to decide where to go if you don’t know where you are.  We think the JC should establish a realistic projection against which its deficit reduction recommendations would be applied, e.g., the $10T deficit projection adjusted downward for the war allowance.  Then termination of any portion of the Bush tax cuts would be counted as a tax increase, currently planned troop withdrawals would not be counted as fresh spending cuts, etc.

3. Isn’t it apparent that the JC should be adjusting mandatory entitlement programs, which represent a dominant and growing share of the overall budget?

Almost everyone seemed to acknowledge that entitlement changes are essential for a long-term solution to the fiscal problem, yet here the JC members were homing in on discretionary spending as though it was the only game in town. 

Some members (mainly Republicans) justified the meeting’s focus by citing substantial dollar increases in the outlays of various agencies and saying all areas of spending need to be scrutinized. 

Others (mainly Democrats) decried the continuing pressure on discretionary spending, already reduced to historically low levels (on an appropriations basis as a percentage of GDP, never mind the level of actual outlays), which supposedly threatens the welfare of middle and lower class Americans.

SAFE: Mandatory spending for entitlement programs must be cut, no doubt about it, but if this is politically difficult before the 2012 election then Congress should get started on what can be accomplished currently.  Notwithstanding suggestions to the contrary at the 10/26 meeting, discretionary spending has not been “cut to the bone” or anything close to it.  The way to proceed is targeted spending cuts, which would eliminate programs or activities of marginal value while continuing to support higher value functions.    

4. There was no discussion of targeted spending cuts; it was as though neither the JC members nor the CBO director had ever heard of the concept.  What gives?

The answer is surely not a lack of information, as the prevalence of waste and duplication in the government is well known, so the apparent lack of interest in targeted spending cuts must reflect a lack of will.  Unsurprising gridlock in the budget “supercommittee,” Donald Lambro, Townhall.com, 10/21/11.

The programs ripe for the ax have been richly detailed by watchdog agencies like the Government Accountability Office, the Congressional Budget Office, the Inspector Generals offices, and in sweeping earlier reports like the Grace Commission in the 1980s that dug into every nook of the federal behemoth, uncovering a mountain of waste, fraud and abuse that is larger than ever.  These reports are all still there, gathering dust on the shelves of Congress. The programs they targeted are still there, getting budget increases year after year, and worse, being enlarged and duplicated with new programs when the old ones do not work or are not needed.

http://bit.ly/sjOrtJ

SAFE: Perhaps the old reports have been forgotten or are viewed as obsolete, but plenty of current information is available. Thus, we sent a list of targeted spending cuts (adding up to roundly $2T in savings over the next 10 years) to the JC on August 22. 

http://www.s-a-f-e.org/contacting_legislators_2011.htm#082211

In its 2011 “Prime Cuts” analysis, Citizens Against Government Waste offers “691 recommendations that would save taxpayers $39l.9 billion in the first year and $1.8 trillion over five years.” http://bit.ly/aaichh

And “hundreds” of duplicative and overlapping government programs were identified by the GAO in a March 2011 report. http://1.usa.gov/qIjrbF

5.   There was obvious disagreement re the role for tax changes.

Some members (mainly Democrats) seemed attracted to the idea of tax increases, perhaps in the form of closing loopholes versus raising rates, to achieve a “balanced” deficit reduction approach.

Others (mainly Republicans) touted revenue-neutral tax reform (lower rates while eliminating tax preferences) that could be expected to boost the economy. 

Like most economists, Dr. Elmendorf agrees that positive economic effects and enhanced tax revenues could be expected from revenue-neutral tax reform. However, the CBO has traditionally used a static model for scoring the effects of tax law changes (if the rate is doubled, twice as much revenue is assumed, and vice versa).  

One eminent economist says the JC should “insist” on a different approach this time.  Supercommittee urged to pursue tax reform, Martin Feldstein, Wall Street Journal, 10/24/11.

With personal income-tax revenue in 2011 of about $1 trillion, that 4% increase in net revenue would be $40 billion at the current level of taxable income, or more than $500 billion over the next 10 years. The Joint Select Committee should insist on counting that revenue as the starting point for a serious deficit reduction plan.

http://bit.ly/t9brJZ

SAFE: Big tax increases would merely postpone the spending cuts that are needed, while increasing the risk of a devastating fiscal meltdown. We do not favor tax cuts either, whether short term (extend the 2011 payroll tax reduction) or permanent (flat tax proposals under which almost everyone would pay less tax than at present).

Our idea would be to stop tinkering with the tax system and overhaul it to be simpler, fairer, and more economically neutral, without creating any new taxes.  This work should ideally be completed by 2012 to eliminate continuing acrimony and uncertainty about the future of the Bush tax cuts, AMT fixes, etc.  Our SimpleTax proposal illustrates the concept, although the tax table and other details could certainly be adjusted if this was deemed desirable.  http://www.s-a-f-e.org/the_simple_tax.htm

Finally, for those who would like to watch the JC proceedings and draw their own conclusions, here is the link.

http://www.c-spanvideo.org/program/JointDef

BEHIND THE SCENES – Since the 10/26 meeting, thanks to a series of increasingly specific leaks, the basic positions of the two sides have been disclosed. Democrats envision a “big” deficit reduction plan with major tax increases, seemingly rather similar to what the president proposed earlier, while Republicans envision a smaller plan without tax increases.  For numerical parameters, see the following table.  Taxes remain stumbling block for deficit panel, Janet Hook, Wall Street Journal, 10/28/11. http://bit.ly/ukwPIu

Over 10 years, $ in trillions

DEMOCRATS

REPUBLICANS

Cut Medicare & Medicaid

$0.5

 

1.96**

Other spending cuts*

1.2

Tax increases

1.3

.04

Revenue neutral tax reform

-

0.2

Total deficit reduction

$3.0

$2.2

*By difference, e.g., $3.0 less (0.5 + 1.3) = $1.2.

** No breakdown between mandatory & discretionary spending available.

House Speaker John Boehner appears to be following the JC negotiations closely and calling some of the Republican signals, as suggested by his recent remarks:

#“I expect that it’s going to be very difficult to get to an outcome, but I am committed to get to an outcome.  We’re into the really tough time and it is going to take a lot more work.” Wall Street Journal, 10/28/11. http://bit.ly/ukwPIu

#Defense spending was cut substantially – the Pentagon is planning on 10-year reductions of about $450B – in the debt accord this summer.  "I would argue that they've taken more than their fair share of the hits." Politico, 10/28/11. http://bit.ly/uRdkGX

#Re the BBA vote that will take place before yearend, “the House Republican leadership is not ruling out the possibility that it will support a balanced budget amendment that does not cap federal spending as a percentage of Gross Domestic Product or require a supermajority in Congress to increase taxes.” Vision to America.org, 10/27/11.  http://bit.ly/u05r2R

All of which should belie claims that the Republicans have been either inflexible or obstructionist in the budget negotiations.  Indeed, Speaker Boehner’s position on the BBA strikes us as downright mushy, although he may be assuming that the Senate would never support passage of even a watered-down BBA by the requisite 2/3 margin. 

PATH FORWARD – At the end of the October 26 meeting, Senator Murray announced another public JC meeting on November 1.  The subject will be an “Overview of previous debt proposals,” and there will be three witnesses:

#Former Senator Alan Simpson was a co-chair (along with former White House Chief of Staff Erskine Bowles) of the 2010 Fiscal Commission.  The FC report failed to get the super majority vote (14+ of the 18 commissioners) required for Congressional consideration.  Fiscal Commission sets stage for further discussion, 12/6/10.

#Former Senator Pete Domenici and former budget director Alice Rivlin collaborated on an outside task force report that was also published last November.  Politico, 11/17/10.

http://www.politico.com/news/stories/1110/45284.html

Although Simpson and Domenici are both Republicans, they will probably attempt to nudge the JC in the direction of the Democrat deficit reduction approach.  After all, it looks more like the plans they respectively backed last year (in terms of amount of deficit reduction and the inclusion of tax increases) than the current Republican approach.

The JC will also reportedly be getting a letter from 100 members of the House of Representatives, which will urge a “grand bargain” including entitlement cuts and tax increases.  Bipartisan plea for $4 trillion in deficit cuts: why it could work, Gail Russell Chaddock, Christian Science Monitor, 10/27/11.

After weeks of private discussions, the group settled on a plan to reach out to colleagues to build support for a big deal along the lines that President Obama and Speaker Boehner discussed and appeared close to agreeing to until talks collapsed in July.

http://bit.ly/sLsNuE

There will also be guidance from Speaker Boehner, Senate Majority Leader Harry Reid, et al., who began meeting with the JC co-chairs on October 13.  Roll Call, 10/14/11.

As far as the super committee negotiations have gone, leaders have been relatively hands-off to date, with Reid even telling reporters late last month that he was “leaving the super committee alone.” But if Wednesday’s meeting is any indication, time is running out for members of the bipartisan, bicameral panel to find their own solutions without the heavy influence of leaders.

http://bit.ly/ohyQhP

Last but not necessarily least, there have been rumors of a further US credit downgrade if the achievements of the JC are not viewed as satisfactory – which the politicians would obviously prefer to avoid.  On 10/22/11, Business Insider quoted a BOA analyst as follows:

The credit rating agencies have strongly suggested that further rating cuts are likely if Congress does not come up with a credible long-run plan. Hence, we expect at least one credit downgrade in late November or early December when the super Committee crashes.

http://read.bi/nBJacF

Maybe, who knows, our crystal ball is a little cloudy.  However, we question the assumption that the bond markets are necessarily insisting on a $3-4 trillion “grand bargain” at this point.  It is not hard to imagine that rumors of this type could be politically motivated, with the sources hoping to stampede Congress into raising taxes – after which the promised spending cuts over the next 10 years might or might not materialize. 

From an economic standpoint, we are convinced that the only real solution to the fiscal problem is to start cutting spending.  Why not get started now? All in favor say aye.

Also, take time to post a comment – however you choose to word it – on the JC’s Website. http://bit.ly/vM1zTq

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Governments attain their powers by spending and buying votes from an ignorant polis. Governments never pay down the debt and will never agree to cut spending except at some later date or on some remote asteroid. All governments will default on the debt in a variety of ways. – SAFE director

[Response: Generally true, but there have been exceptions, e.g., New Zealand halved its government spending in the 1990s.  This audiotape (3 segments, 1.25 hours, .WAV files, compatible with Windows XP and Mac OS X) by Maurice McTigue (now with the Mercatus Center) explains how it was done. McTigue1, McTigue2, McTigue3.]

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10/24/11 – Wasteful spending: the EEOC has outlived its usefulness

SAFE member Alan Richter, PhD of Spokane, Washington, recently offered two suggestions for reducing the deficit – abolish the EEOC, “which is a waste of taxpayer money,” and disenfranchise voters who do not pay income taxes.  “I have the feeling,” he added, “that my ideas are too conservative for SAFE.”

Actually, we would support abolition of the EEOC, as will be discussed in this entry.  Richter’s point about the disconnect between voting rights and paying taxes is well taken too, although our proposed solution is different.  Perhaps we could do a better job of communicating our viewpoints – in any case, we appreciate the feedback.

1. If Herman Cain is elected president, he would be able to abolish the Equal Employment Opportunity Commission (EEOC), which is a waste of taxpayer money, contributor to lawyers and the public debt.  No white man would dare to accomplish that!

We have no comment as to whether Herman Cain will or should be elected president; it is not our practice to weigh in on such matters. SAFE will be evaluating the policy positions of the presidential candidates (including Cain, whose 9-9-9 tax plan has sparked a lot of interest) in coming months, however, as we did in 2008.  See, e.g., What would you like, central planning or an eclectic mix? 10/27/08.

Senators McCain and Obama have endorsed essentially the same economic goals, but offered quite different approaches for achieving them.  For details, see the following entries: [10/10/08, taxes; 10/15/08, financial turmoil; 10/20/08, healthcare; 10/23/08, energy policy].  A wrap-up discussion follows, in which our concept of good policy (in italics) is contrasted with the proposals on the table.

Mr. Cain might be in a better position to support abolition of the EEOC than a white president, but to our knowledge he has not indicated such an intention.  Bear in mind too that black conservatives can face withering fire in the public arena, as shown by the 1991 battle over Justice Thomas’s appointment to the Supreme Court.  My Grandfather’s Son, Clarence Thomas, Harper (2008). 

http://bit.ly/pewjEA

Turning to the merits of this proposal, let’s begin with some basic facts: The EEOC is a five-member commission created during the Johnson Administration – DC headquarters, 53 field offices around the country – $385M budget requested for FY 2012 – mission: “promote equality of opportunity in the workplace and enforce federal laws prohibiting employment discrimination” – investigates charges of discrimination, tries to settle them, and files lawsuits if settlement efforts fail. http://www.eeoc.gov/

Title VII of the Civil Rights Act of 1964 prohibited employment discrimination based on “race, color, sex, religion or national origin.” Although this prohibition did not create affirmative obligations for employers, the need for adjustments would quickly become apparent as the rights were asserted and enforced.

The creation of affirmative rights to be enforced by the federal government was somewhat novel; the rights guaranteed by the Constitution limit rather than authorize government action. This tack seemed appropriate, however, at a time when certain states were supporting or tolerating overt racism in employment, education, housing, etc.  The Death of Common Sense, Philip K. Howard, Grand Central (1994), pp. 121-24.

http://www.s-a-f-e.org/commom_sense.htm

“The Civil Rights Act broke huge holes through barriers of employment discrimination that had stood for centuries,” and “in industry after industry, either voluntarily or by class-action suits, blacks and then women were admitted into areas of endeavor where they had never been allowed.”  But “by 1980, most obvious barriers were down and affirmative action offices were commonplace.”  Death of Common Sense, p. 123.

Would the government now declare victory and disband the EEOC, and if not what would happen to the agency?

No surprise, the EEOC continued to pursue an increasingly marginal agenda –growing disorganized and demoralized in the process.  By 1982, when Clarence Thomas reluctantly took over as chairman at the request of President Reagan, it was on the verge of collapse.  The headquarters was “a converted hotel that was filthy and poorly maintained.” It had not “reconciled its books in ten years and lacked an accurate accounting system.”  Bills were being “paid so late that vendors would only do business with EEOC on a cash basis.” And the agency had acquired a reputation of operational ineffectiveness.  Grandfather’s Son, pp. 148-53.

The EEOC was closing lots of cases, but this activity was basically a numbers game based on extracting settlements.  Its biggest cases at the time were against General Motors and Sears.  Both cases were based on statistical analyses of hiring and promotion patterns – with little direct evidence of discrimination.  Grandfather’s Son, pp. 158-60.

#Sears refused to settle and ultimately prevailed, winning part of its demand for legal fees.  There were no winners in that case.

#GM was in basically the same legal posture as Sears, “but it preferred not to waste millions of dollars defending itself in court.”  There was a settlement, and the company funded numerous scholarships at various institutions including historically black colleges and universities.  At least this case wound up doing some good, Thomas felt, versus merely enriching the attorneys and experts involved in the litigation.  

During his time at the EEOC, Thomas shaped it up. “Fully investigated charges had been the exception when I arrived at EEOC in 1982; they were the rule when I departed eight years later.”  Grandfather’s Son, p. 187. But greater administrative efficiency did not address the fundamental issue of whether the agency’s job needed doing.

Congress has contributed to this issue by periodically creating new employee rights  – as reflected in the EEOC’s current ambit.

The [EEOC] is responsible for enforcing federal laws that make it illegal to discriminate against a job applicant or an employee because of the person's race, color, religion, sex (including pregnancy), national origin, age (40 or older), disability or genetic information. It is also illegal to discriminate against a person because the person complained about discrimination, filed a charge of discrimination, or participated in an employment discrimination investigation or lawsuit.

http://www.eeoc.gov/

One obvious omission, sexual preference, may represent the next frontier.  Senate confirms open lesbian to EEOC, Baptist Press, Townhall.com, 12/29/11.

http://bit.ly/qCgYad

Now we have no wish to advocate discrimination against any of the aforementioned groups, indeed anyone in the workplace should be judged and treated based on his or her individual merit, but administrative action is a blunt instrument that is ill-suited to achieving subtle social goals and can cause plenty of collateral damage.  Death of Common Sense, pp. 126 (since 1994, the situation has probably gotten worse).

After thirty years of expanding rights against workplace discrimination, Congress has succeeded in “protecting” over 70 percent of all American workers.  *** Many people have multiple potential claims: an Asian woman over 40 with a physical ailment, like a bad back, enjoys four protections.  Aaron Wildavsky calculated that if you apply all the protected categories, they add up to 374 percent of the American population.  Only one group has no protection against employment discrimination: employees of Congress.

Even if the government chooses to ban various forms of workplace discrimination, why have a federal agency to investigate complaints and file suits?  There are presumably plenty of private attorneys available to represent employees with plausible complaints.

Finally, consider some cases the EEOC has been pursuing in recent years. Looks like the numbers game noted by Clarence Thomas in 1982 lives on, and that the burden on the private sector far exceeds the EEOC’s $385M annual budget.

#EEOC: Discrimination claim at Bloomberg failed, AP News, Townhall.com, 10/18/11. Suit against news company founded by NY Mayor Michael Bloomberg alleged a company-wide pattern of discrimination against pregnant women and mothers.  The evidence consisted of “isolated remarks by a handful of executives.”  Class action dismissed; individual complaints can proceed. http://bit.ly/pc6ml5

# Work, pray, sue, Wall Street Journal, 10/17/11 (no link available) – The case of Hosana-Tabor Evangelical Lutheran Church and School v. EEOC centers on a parochial school teacher who took a medical leave from her job in 2004 and was not allowed to return eight months later.  The EEOC sued for back pay, damages, and rehiring. Ms. Perich’s duties were partly secular and partly religious.  Although school considered her part of the school’s mission to offer a “Christ-centered education based on biblical principles,” the EEOC maintained that she did not qualify for the “ministerial exemption” from normal rules re employees with disabilities and “a wide variety of other generally applicable laws.”  The Sixth Circuit upheld the EEOC theory; the case is now before the US Supreme Court.  At oral argument, Chief Justice John Roberts questioned the government’s position: “The Pope is a head of state and has important administrative functions, so he’s not a minister?”  http://bit.ly/r2IjAg

#EEOC alleges age discrimination at Texas Roadhouse, AP News, 10/3/11.  Suit against a restaurant chain (350+ restaurants in 46 states).  Some managers were allegedly told to hire younger job applicants for positions such as servers, hosts and bartenders. [Should companies be required to hire seniors in preference to juniors, and if so why?]  http://bit.ly/mUIZzI 

#Outdoor retailer accused of racial discrimination, AP News, Townhall.com, 9/11/11.  EEOC charged Bass Pro Outdoor World of discriminating against qualified black and Hispanic job applicants and retaliating against employees who complained about the practice.  To make the identified persons “whole,” the agency sought “back pay, fair hiring and reinstatement.”  Bass denied the allegations and accused the EEOC of stereotyping outdoor enthusiasts.  It also pointed out that it had provided over 250,000 pages of documents during the investigation, which presumably supported its position or at least did not contradict it.  http://bit.ly/rmeSBo

#EEOC alleges discrimination at Maine Kohl’s store, AP News, Townhall.com, 8/23/11. This federal lawsuit, in Portland, Maine, claims Pamela Manning’s rights under the Americans with Disabilities Act were violated by refusal of requests for a set schedule to prevent complications from diabetes. Kohl’s was supposedly more receptive to other employees' schedule requests re day care and transportation needs. http://bit.ly/nvl0gH

#EEOC: 3M agrees to settle age discrimination complaint, AP News, 8/22/11.  Class action suit based on layoff of 290 older workers; 3M agreed to pay what amounted to a nuisance settlement of $3M.  An employee e-mail is mentioned that described the CEO’s vision: “we should be developing 30-year-olds with General Manager potential.”  This settlement was separate and distinct from a settlement with a larger group of employees, which had been negotiated by a private law firm. http://bit.ly/qe8bpT

#Verizon to pay $20M to settle discrimination suit, AP News, 7/6/11.  It was reportedly the largest disability discrimination settlement in EEOC history; Verizon agreed to (a) pay $20M to resolve a lawsuit over treatment of employees who [claimed to have] missed work due to their disabilities, and (b) change its absence policy. Verizon should supposedly have accommodated the employees instead of disciplining or firing them. Verizon denied any ADA violations, but said it was in the company’s interest to avoid litigation.  http://bit.ly/osuUcA

#US sues over treatment of workers from Asia, Alex Dobuzinkis, Reuters, 4/20/11.  500+ workers from India were recruited to work at shipyards in Mississippi and Texas, and 200+ Thai farm laborers were brought to Hawaii and Washington state.  According to the EEOC, the Asian workers were forced to live in substandard housing and exploited with recruitment fees so that “some had net earnings of nearly nothing.”  In addition to filing suit, the EEOC had the head of the labor firm that recruited the Thai workers arrested on forced labor conspiracy charges.  [This case has more apparent substance than the others discussed, but the Department of Justice could have been handled it if there was no EEOC.]  http://bit.ly/nQrzoR

#Got monks!  Get the monks!  Ken Blackwell, Townhall.com, 10/29/10.  The EEOC sued a small Catholic college in North Carolina because its healthcare insurance plan did not provide contraceptives to female employees.  The college denied sexual discrimination, pointing out that they did not provide contraceptives to monks (all male) or male lay employees either, but the EEOC claimed the provision of contraceptives to female employees was mandated under Title 7 of the Civil Rights Act and another federal statute.  http://bit.ly/mUEwnP

#Ninth Circuit plays Father Knows Best, William Pendley, Townhall.com, 6/1/07. – Richard and Shauna Kidman operate RD’s Drive In and Exxon in Page, Arizona. On learning that some employees were sexually harassing fellow employees in the Navajo language (which the Kidmans did not speak), they adopted an English language workplace policy. The EEOC filed suit in 2002, claiming this policy represented “racial discrimination.”  The ensuing proceeding was long, tortuous and expensive – ultimately resulting in a Kafkaesque appellate decision that the Kidman’s were bound by the terms of a “settlement” agreement they had refused to sign. http://bit.ly/qNNiiY

#When sexism claims are a real hoot, John Stossel, Townhall.com, 6/28/06 – The EEOC sued Hooters for hiring only female servers.  After an exhaustive four-year investigation, the agency demanded a $22M settlement for alleged sexual discrimination against male applicants plus ongoing “sensitivity training.”  Public demonstrations by Hooters waitresses turned the tide, and the case was settled for $3.75M. http://bit.ly/qPKS7b

Despite the historic role that the EEOC played in its early years, we would conclude from the foregoing that the agency has outlived its usefulness – and should therefore be abolished.  The assumption that government agencies should continue indefinitely is one of the root causes of a top-heavy, hugely expensive government.

Likewise, federal administrators played a vital role in ending school segregation, but that job has been done and it is high time to terminate federal intervention in the nation’s school system. Centralized control of education may be overrated, 4/12/10.

The current role of the federal government in education can be traced to the 1960s, when the racial segregation of many of the state school systems was ended by federal intervention.  This action was necessary and appropriate, but it led to other initiatives that were not. 

2. There should be a new requirement for voters.  If you don’t pay income tax, you don’t vote.

About half of working age Americans pay little or no income tax, which probably dulls their concerns about how income tax revenues are spent.  We agree this is a problem, and SAFE’s tax overhaul proposal (unlike either the flat tax advocated by Steve Forbes or the FairTax) is designed to fix it by requiring many more people to pay income tax.

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.

http://www.s-a-f-e.org/the_simple_tax.htm

While it would be arguably be possible to take non-taxpayers off the voting rolls instead, we do not favor this idea for two reasons.

First, it would create a permanent underclass in American society – to put a face on them, visualize the current “occupy” demonstrators camping out in locations around the country – who would feel cut off from the upper tier of society.  To some extent such a separation already exists, but there would be no merit in reinforcing it.

Second, the idea of sharing the tax burden more equitably is appealing.  Why should half of the population be exempted from this duty?

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10/17/11 – Bloom Energy could be the last straw        Read Replies

If you think the push for wind, solar, etc. power is all about manmade global warming (MMGW), think again.  Renewable energy is also touted, among other things, as a means to (a) reduce oil imports (by conservation or substitution), (b) reap an economic bonanza from renewable energy investment, (c) avoid wicked weather patterns resulting from “climate change,” and (d) foster biodiversity.  War on cheap energy grinds on, 6/14/10.

The MMGW theory may prove partly correct; carbon emissions from burning fossil fuels probably are contributing to a modest warming trend.  Our guess would be, however, that natural factors, e.g., fluctuating solar activity, will continue to play a dominant role in determining the Earth’s climate – as they have done for billions of years.

At first blush, the other arguments seem silly.  While it would be nice to reduce oil imports, this could be done by ramping up domestic oil production instead of switching to electric cars.  The vision of “green jobs” is alluring, but an overall economic loss should be expected from switching to more expensive power sources.  Climate change could mean just about anything, and the term only came into vogue because the global warming trend appeared to be stalling. Biodiversity, oh please!

Presenting a range of arguments has proven useful, however, in garnering support for renewable energy – which by now has become deeply entrenched at both the national and state level (even here in Delaware).

Environmentalists support renewable energy for idealistic reasons.  At bottom, they don’t care about the cost, feeling that a less developed society would be more “natural.” Reclaiming the Republic, [Indiana Governor] Mitch Daniels, Sentinel (2011).

Some environmentalists appear to nurture the visceral illusion that a less developed, less wealthy society would be a cleaner one.  *** Their view seems to be that if we could just stop building things, stop expanding things, stop developing things, we would be healthier and so would Mother Nature.

http://www.s-a-f-e.org/keeping_the_republic.htm

Other people support renewable energy for more practical reasons. Meet the lobbyist who turns “green” into greenbacks, Timothy Carney, Washington Examiner, 3/5/11.

Environmental policy is not driven by tree-hugging activists, earnest liberal bloggers, or ecologically minded citizens. Instead, it flows from the lobbyists and executives of well-connected multinational corporations and built-for-subsidy startups that see profit in the loan guarantees, handouts, mandates, and tax credits Congress creates in the name of saving the planet.

http://bit.ly/hxan7f

Is it too late to stop the eco-lobby?  This entry will present some examples (Marketing, Research, Competition, and Subsidies) to convey the scope of the challenge.

MARKETING – Renewable energy proponents seek to raise public consciousness of alleged problems, e.g., manmade global warming, which their product could arguably address.  One means to this end is repetitive, one-sided news coverage – which represents essentially cost-free advertising for their cause.  Here are two examples from SAFE’s global warming & energy policy microblog.

#A recent article presented nearly a full page about the MMGW theory, essentially a rehash of prior reports, while painting critics of the theory as misguided idiots. Despite evidence, US desire to deny global warming deepens, Charles Hanley (AP), [Wilmington, DE] News Journal, 9/25/11.

“In the face of years of scientific findings and growing impacts, the doubters persist.  They ignore long-term trends and seize on insignificant year-to-year blips in data to claim all is well.  They focus on minor mistakes in thousands of pages of peer-reviewed studies to claim all is wrong.  And they carom from one explanation to another for today’s warming Earth: jet contrails, sunspots, cosmic rays, natural cycles.”  Most of them are Republicans and/or conservatives, and denial “feeds into their basic narrative that all government is bad.”

http://bit.ly/ghPVOu (Except where noted,  other cited News Journal articles may be found at the same link.)

Although the article did not say so, several of the reported trends could have redeeming features. For example, a summertime sea passageway through the Arctic might come in handy.  As for cosmic rays, this theory recently received a major boost from research at the CERN particle physics lab in Switzerland.  Washington Times, 8/30/11.

http://bit.ly/oI0nMH.

#There was a 20-page section in the News Journal on Earth Day. All green to me: Guardians of the earth, 4/22/11.

Summary: (1) Churches putting solar panels on their roofs; (2) “Decoupling demystified” – controversy is presented in a neutral fashion by Aaron Nathans, who among others quotes John Nichols, “a citizen activist with Tea Party allies,” as saying decoupling “turns Delaware into a ward of the state;” (3) Gas prices too high?  Don’t pay them – Innovative mechanics power cars through vegetable oil, electricity; (4) Is nuclear energy dead in Japan?  Oh dear, “the country will need to rely on nuclear power for some time to come, despite the risks.”  And speaking globally, the “EarthTalk” authors utter the heresy that “while solar and wind power can take up some of the slack, these and other renewables are at least decades away from the scalability needed to power a significant share of a modern industrial society’s energy requirements;” (5) More, including plaudits for the “green advertisers.”

RESEARCH – The next step is research programs to develop renewable energy technologies, which often seem somewhat haphazard in nature. University of Delaware’s Energy Institute: Power for the people, Ken Mammarella, News Journal, 4/20/11.

The theme of this two-page, color-photo spread is responding to “a country eager to lessen its dependence on foreign oil.”  Alternative energy research is being conducted in many areas: (A) Catalysis (enzyme aided transformation of glucose to fructose); (B) Vehicle-to-grid (create electric cars with batteries that could send power back to the grid during peak demand periods); (C) Industrial processes (if all US industrial boilers were painted with low-emissivity paint, $420 million a year in heat loss could be avoided); (C) Fuel cells (hydrogen-burning buses); (D) Magnets (stronger magnets would be more energy-efficient); (E) Solar cells (Department of Energy’s SunShot initiative aims to reduce the cost by roughly 75% to $1 per KWH); (F) at least eight wind power projects (corrosion resistance, bird impacts, construction issues, and even government planning issues, e.g., advice as to “what fees and tariffs encourage wind power”).

Academic freedom is wonderful, but many of the UD projects are funded by federal government grants – with the enthusiastic support of Delaware members of Congress.  UD researchers make case in DC: Trip to Capitol Hill lets feds look closer at value of funding, Wade Malcolm, News Journal, 3/19/11.

Photo of Senator Chris Coons chatting with two guests from UD at the Senate Office Building function, which is described in the story as “a science fair combined with a cocktail hour.”  Senator Tom Carper and Representative John Carney “also stopped by to express support for continued funding.”

Various projects are described in the article, which supposedly show the value of federal research funding.  Note that 2/3 of UD’s research spending in 2010 was funded by federal agencies.  Thus, for example, Jeremy Firestone, who studies offshore wind policy, has received federal grants totaling more than $3 million.  And it is said that “building relationships with federal officials can be critical to preparing competitive grant applications.”

http://bit.ly/dPuWOJ

COMPETITION – Renewable energy is far more expensive than conventional power sources for most applications, and no one wants to pay the applicable cost penalty.  Terrestrial Energy, William Tucker, Bartleby Press (2008).

http://bit.ly/mQCHMn

#One solution is to mandate a minimum (and growing) usage of renewable energy sources, with the hope that no one will notice as the cost penalty phases in and/or that said penalty can be reduced over time.

Such was the vision of the national “cap and trade” legislation passed by the US House in 2009, but the bill died in the Senate and it is not likely to be revived any time soon.

The “cap and trade” concept exists in Delaware, however, through (a) state participation in a multi-state Regional Greenhouse Gas Initiative, and (b) a statutory requirement (aka the Renewables Portfolio Standard) that utilities operating in Delaware purchase a growing volume of renewable energy (5% by compliance year 2010-11 . . . 10% by 2013-14 . . .   16% by 2017-18 . . . 20% by 2020-21 . . . 25% by 2025-26) or acquire renewable energy credits to make up the deficiency. 

http://bit.ly/nBH4wg

Under these provisions, the development of wind, solar, etc. power in the Northeast would be forced – whatever the cost penalty.  Legislation to take Delaware out of the RGGI was blocked earlier this year after a rigged hearing.  Tips for fiscal visionaries: policies and politics are closely connected, 5/23/11.

#Another idea is to burden conventional power sources with onerous environmental requirements and/or taxes.  Thus, the EPA has been considering regulations that could shut down a significant portion of the nation’s coal-fired power plants. How Obama Spent His Summer Vacation- Day One: Kill Power Plants, Kill Jobs, John Ransom, Townhall.com, 8/20/11. (The regulations in question have been moderated somewhat since Ransom’s column was written, but could still do a lot of damage.)

Under new interpretation of old rules, the EPA will shortly be forcing the shutdown of about 20 percent of coal-generated electric capacity in the United States. Since coal generates about half the electricity demanded in the US, the country will have to find other, more expensive ways of making up about ten percent of electric capacity . . .

http://bit.ly/qt1Mnl

Similarly, the proposed American Jobs Act (which failed in the Senate) would sharply hike taxes on oil and gas companies by ending current expensing of drilling costs, eliminating the US manufacturing tax deduction for oil & gas companies only, etc.  Obama jobs plan silly or sinister?  Marita Noon, Townhall.com, 9/25/11.

http://bit.ly/qCgYad

There are even proposals to curb the “fracking” technique, which has sparked a lot of new drilling activity and driven down natural gas prices.  What the frack is going on here?  Paul Driessen, Townhall.com, 10/1/11.

Environmentalists used to support “clean natural gas.” Whence the intolerant new attitude?   *** Natural gas, specifically shale gas, is essential for powering backup generators for unreliable wind and solar installations. However, low gas prices make wind and solar even less competitive. *** People want and need reliable, affordable power. [But] many environmentalists support Paul Ehrlich’s opposite sentiment that “giving society cheap energy is like giving an idiot child a machine gun.”

http://bit.ly/pDFPxB

SUBSIDIES – Last but not least, there are a host of government subsidies for renewable energy projects, infrastructure, and in some cases end products. 

#Fisker Automotive has received a $529M federal loan and $21M in state grants and loans to support its conversion of the Boxwood Road GM plant to make electric cars.

There are also federal subsidies for development of charging station networks (in various areas of the countries), better batteries, etc. not to mention tax credits for the purchasers of electric cars.

But even with all this assistance, it remains uncertain that the Fisker venture will be a commercial success. Fisker to hire 120 this year; workers will retrofit old GM plant for reopening in 2012, Jonathan Starkey, News Journal, 6/23/11.

 . . . analysts at JD Power & Associates and IHS Global Insight have characterized Fisker’s sales goal (100,000 cars to be produced at the site in 2014) as lofty. 

Other reports suggest that electric cars in general will be a tough sell.  See, e.g., Bob Beauprez, Obama blunders on batteries badly, Townhall.com, 6/23/11.

In the March issue of A Line of Sight we documented that sales of the Chevy Volt and Nissan Leaf were happening by the dozens per month rather than the tens of thousands some had predicted. Consumers are hard pressed to warm to a $41,000 four seat compact that needs to be plugged in every 30 miles to recharge the battery. Even the $7,500 taxpayer subsidy can't pump up sales.

While the urge to be the first early adopter on the block will spur a few sales, even the liberal Slate.com says the Volt is "a rich man's ride," not the working man's transportation solution of Obama's dreams. [And now,] it looks like electricity rates – the plug-in fuel source – is about to go up dramatically.

http://bit.ly/mtBU2f

#Some renewable energy subsidies that were sold as temporary economic stimulus may not be renewed due to growing concern about federal deficits.  This uncertainty seems to be affecting a wind power project off the Delaware coast.  Bluewater’s contract delay proves futile in changing law, Aaron Nathans, News Journal, 9/12/11.

The three-month extension for an NRG payment under the Bluewater contract will expire in two weeks, and guess what.  Congress remains divided, the loan guarantee program is still up in the air, and it is unclear whether NRG will make the $2.75M commitment or back away from the contract. Governor Jack Markell reportedly supports moving forward with the project, “but recognizes that decision largely rests with NRG and Delmarva.”

Two required payments by NRG have since been consolidated into a single $4M payment that will be due by Dec. 31.  NRG is reportedly confident of being able to proceed.  Delmarva gives wind developer extension, Aaron Nathans, News Journal, 9/16/11.

#Last week, the president’s jobs panel proposed more federal funding for renewable energy – which reportedly would benefit GE et al.  Crony capitalism is not an economic plan, National Center for Public Policy Research, 10/11/11.

http://bit.ly/osHSJD

Congressional support for the panel’s recommendations is uncertain, but there may be ways to implement some of them anyway. Obama tells advisers to find how to approve stimulus projects without additional Congressional authorization, Real Clear Politics, video (23 seconds), 10/11/11.

http://bit.ly/pgYzoz

#A similar willingness to improvise exists at the state level.  Thus, the bulk of subsidies promised to attract the Bloom Energy fuel cell venture would take the form of a non-cancellable, long-term tariff on Delmarva Power ratepayers. Fuel cell boondoggle, SAFE newsletter, Summer 2011.

http://www.s-a-f-e.org/nwsltr/nwsltr62.htm#Fuel_cell

Why is such a tariff appropriate?  Ratepayers get no benefits as electric consumers, and if there are economic benefits for the state as a whole – which we doubt – Delawareans who are not Delmarva ratepayers would get a free ride.  Ergo, the tariff appears to be a discriminatory tax.   SAFE analysis, 9/28/11.

http://bit.ly/q8GX0B

Perhaps it was thought ratepayers would not notice a dollar or two a month charge on their electric bills, while taxpayer-funded payments from the state might attract more attention.  But we and others have done our best to publicize the ploy.  Bloomin’ tariff, SAFE newsletter, Fall 2011.

http://www.s-a-f-e.org/nwsltr/nwsltr63.htm#Bloomin%92

And our efforts have apparently had an impact.  News Journal, 10/15/11.

Eight letters to the editor are all about the Bloom Energy deal & tariff – FOR: Andy Grove, Santa Clara, Calif. writes that the scariest moment for technology ventures is at the front end when the costs & risks are obvious while the rewards are further away.  “Will Delaware, having worked hard and long to attract an American energy company to ramp up its manufacturing in its home country, blink or step on the accelerator.  As former CEO of Intel Corp. and an investor in venture funds that have invested in [subsidized] clean energy initiatives, including Bloom Energy, I hope it will be the latter.”  AGAINST: Gary Myers, Rehoboth Beach (Proposed Bloom subsidy is not shared fairly); Susan Klinefelter, Newark (Bloom deal too rushed, may be next Solyndra); Alex Garcia, Magnolia (Delaware taxpayers may be stuck with bad deal); Edmund Dohnert, Wilmington (Bloom should try to make it on its own); Eric Bodenweiser, Georgetown (Energy policy should focus on free market); Andrew Cohen, Wilmington (Put Bloom boxes close to sites of electricity use); Marilyn Costas, Lewes (If Bloom was that great, it wouldn’t need subsidy). 

The official Public Service Commission hearing will take place on October 18 (tomorrow), and the PSC could conceivably reject the tariff despite intense pressure from the governor, et al. – it will be interesting to see what happens.

But even if the tariff is approved, that will not be the end of the story.  The Bloom Energy venture is just a sample of the costs to Delawareans of the state’s renewable energy regime. To ensure the continuation of reliable and economical electric power service, it is imperative to extricate Delaware from the Regional Greenhouse Gas Initiative and terminate the Rewewables Portfolio Standard.

And given the unwise economic commitments being made based on RGGI and RPS, we would urge that action be taken as soon as possible. 

What do you think, dear readers?  Please let us hear from you.

*        *        *        This Blogs Replies        *        *        *

You do not mess around. This is outstanding! – Financial executive

I’d like to expand on several points: (1) Proceeds from the auction of carbon allowances by the Regional Greenhouse Gas Initiative (RGGI) are not remitted to the Delaware treasury, they are primarily used to fund a nongovernmental organization called the Sustainable Energy Utility (SEU), which in turn advocates the renewable energy cause and subsidizes various renewable energy initiatives, all without effective public supervision; (2) The SEU and the Center for Energy and Environment Policy (CEEP) at the University of Delaware are headed by the same individual.  On the CEEP Website, “cheap energy” is characterized as “simply a form of subsidy to the status quo at the expense of future generations.”  It is therefore proposed to “take the necessary actions to build a sustainable and equitable energy regime.” http://www.ceep.udel.edu/energy/index.html; (3) Speculators have fled the RGGI market due to New Hampshire's attempt to escape, Delaware's failed effort to end participation and New Jersey's unilateral withdrawal.  The auction revenue has fallen from $2.5M per quarter to $400K. –  SAFE member and citizen activist

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10/10/11 – Joint Committee must get back to basics        Read Replies

On October 6, the SAFE board reviewed our position vis-à-vis the proceedings of the Joint Select Committee on Deficit Reduction. 

The conclusion: SAFE’s August 22 suggestions to the JC members are sound, but they are being ignored. The JC appears to be headed for either deadlock (triggering more across-the-board cuts in “discretionary” spending) or a pointless political deal.

Meanwhile, the economic outlook continues to deteriorate.  It is urgent to start addressing the fiscal problem now, as a means of restoring public confidence, instead of blindly hoping that a solution will be easier after the next election.

The JC is being bombarded by suggestions from players and observers across the political spectrum who are far more powerful than SAFE.  What if anything could we say that might actually get through to the JC members and change some minds?  Here is the best answer that we could come up with:

To: JOINT SELECT COMMITTEE ON DEFICIT REDUCTION

From: SECURE AMERICA’S FUTURE ECONOMY

In August, we offered several suggestions to the JC – in summary: be open, stop digging, taxes can wait, and be selective on spending. These are solid ideas, in our opinion, and we stand by them.

http://www.s-a-f-e.org/contacting_legislators_2011.htm#082211

Alas, the JC appears to be slipping into secret meeting mode, calls for another round of fiscal stimulus have not been rejected, time and effort is being wasted discussing possible tax changes, and we see no signs of targeted spending cuts being considered.  “JC update: hunting for a painless solution,” 10/3/11.

In our opinion, a major course change is needed. It is hard to envision this happening, however, unless the JC members – from both parties – are able to rise above the politics as usual culture that is so prevalent inside the Beltway. 

Given that the JC is composed of career politicians, some members will surely have reservations about the idea of rising above politics.  Let’s see if we can anticipate and respond to some of the likely questions.  

What’s wrong with politics?  Surely it is better for people to compromise their differences than come to blows over them.  That does not necessarily justify government intervention in the economic sphere, however, which involves an inherent conflict.

Politics is local and limited in time; economics is global and long term. Accordingly, interventionist policies often create more problems than they solve.   Politics vs. economics, Thomas Sowell, Townhall.com, 9/28/11.

All politics may be local but the repercussions reach around the world, and even extend to generations yet unborn, who will be left to cope with the national debts resulting from this debacle.  Quick fixes for the economy now are unlikely to get investors to make job-creating investments, which depend on long-term factors ignored by politicians who are focused on the 2012 elections.

http://bit.ly/qW16tj

In addition to the examples cited by Sowell, consider the statutory restrictions on bank charges to merchants that have sparked proposals to levy new credit card fees on consumers.  How shocking; who could have possibly expected this to happen?  “Durbin fees” are coming, thanks to “progressives,” Washington Examiner, 10/1/11.

http://bit.ly/n2NUq4

The alternative to making economic decisions based on politics is to limit government intervention in the economic sphere and allow decisions to be made by buyers and sellers in a free market.  Such a system is called capitalism, and it generally works quite well. 

We do not advocate anarchy.  The government is needed to defend against external enemies, maintain order, restrain private cartels, run the judicial system, and do many other things.  But we would caution against placing too much authority in the government’s hands, thereby sapping individual initiative and increasing social rigidity. The rise and decline of nations, Mancur Olson, Yale University Press (1982).

http://www.s-a-f-e.org/rise_and_decline.htm

So what trumps politics?  Most political leaders agree that it is imperative to start (after the next election, at least) reducing the deficit.  The argument is about how to go about it, notably whether to cut spending or raise taxes. 

One answer is political compromise, with spending cuts and tax increases seen as two sides of the same coin.  In this frame of reference, a “balanced” solution might include both elements in roughly equal measure, with spending cuts to be spread across the board.  Anyone attempting (like SAFE) to rule out tax increases and target specific spending programs would risk being labeled a political extremist.

Opinion polls support such a “balanced” approach to deficit reduction.  Americans blame wasteful government spending for deficit, Frank Newport, Gallup, 4/29/11.

. . . some emphasis on tax increases is part of the solution for almost half of Americans. Thus, it appears Americans would most likely tell their elected representatives to attack the federal deficit primarily using spending cuts, but with a secondary reliance on raising tax revenue.

http://bit.ly/kPv6UY

But suppose a different question is asked: Which will be more effective in shrinking the deficit, spending cuts or tax increases?  Now the objective is not negotiating a balanced answer, it is determining the right answer, which might well be to place primary reliance on spending cuts. 

Start with the fact that there is extensive waste in the federal budget, as illustrated by a recent Government Accountability Office study that identified “hundreds” of duplicative and overlapping government programs.  GAO report, 3/18/11.

http://1.usa.gov/qIjrbF

Add the side effects of tax increases; they reduce incentives to work and to invest while fostering changes in behavior (investment outside the US, lobbying for special tax preferences, etc.).  No wonder that revenue gains from tax increases frequently under-run expectations, while tax cuts tend to boost the economy.  Diving into the rich pool, Economist, 9/24/11.

http://econ.st/rp8RVk

Finally, empirical studies demonstrate that countries seeking to shrink their debt in relation to Gross Domestic Product have generally failed unless they relied primarily on spending cuts.  The right way to balance the budget, Biggs, Hassett & Jensen, American Enterprise Institute, 12/29/10.

The data also clearly indicate that successful attempts to balance budgets rely almost entirely on reduced government expenditures, while unsuccessful ones rely heavily on tax increases. On average, the typical unsuccessful consolidation consisted of 53% tax increases and 47% spending cuts.  By contrast, the typical successful fiscal consolidation consisted, on average, of 85% spending cuts.

http://bit.ly/fRoi7J

This is not to suggest that the current US tax system is satisfactory; it is not. But a comprehensive overhaul of the tax system would not help to meet the JC’s deficit reduction goal, at least given the current scoring system of the Congressional Budget Office, so we would suggest that some other committee(s) undertake this worthy project.

What’s the market saying?  Our last reading on the US economic and financial outlook was far from optimistic. Who cut my credit rating?  8/1/11. (Note: several days after this entry was posted, hypothetically justifying a credit downgrade, Standard & Poor’s cut the rating on US debt for real.)

Subsequent developments in brief:  Gasoline prices are down, primarily due to growing uncertainty about the global economic outlook.  Stock prices have fallen, signaling concerns about future business profits.  The deficit for FY 2011 came in at $1.3T, an awful result but slightly lower than expected.  The unemployment rate remains stuck above 9%; the underemployed rate is considerably higher than that. 

Some experts are warning of a double dip recession, but others (ourselves included) expect the US to muddle along in an anemic recovery mode.  A twisted outlook, Larry Kudlow, Townhall.com, 9/23/11.

Europe is unsolved. U.S. finances are a mess. All this is being discounted by slumping stocks.  *** The Obama $1.5 trillion tax-hike plan, and his veto threat for any deficit package that doesn’t include big tax hikes on successful earners, investors, and businesses, is another sword of Damocles hanging over the economy and the stock market. *** Business profits will slow significantly, but are still likely to rise a bit. And with oil dropping to about $80, a price shock that was a key slowdown factor is going away. *** Housing is still in the tank, and consumer spending looks very iffy. And we had zero jobs and zero retail sales in August -- two very bad signs. On the other hand, exports and business investment are still rising.

http://bit.ly/pTNqWT

The big unknown is how the US will be impacted by developments in Europe.  Bonds issued by several countries (notably Greece, Italy, and Spain) are selling well below face value, thereby pushing up borrowing rates and creating as yet unrealized losses for the European banks holding these securities.  El-Erian [of Pimco bond funds] says world is on eve of next financial crisis over sovereign debt, Shamim Adum, Bloomberg, 9/22/11.

“There has been a significant increase in the financial requirements of international intervention,” El-Erian said. “You need a lot more firepower in order to be a circuit breaker. Look at how much the ECB has put in and ask yourself the question: has it created a circuit breaker? The answer is no, even though the amounts involved have been massive.”

http://bloom.bg/nHukqJ

There appears to be no exit plan for Europe. The deficits of the aforesaid debtor countries (and possibly others) are out of control; these countries are not prepared to correct matters through the political process; and no one is willing and able to bail them out.  NEIN, NEIN, NEIN, and the death of EU Fiscal Union, Ambrose Evans-Pritchard, UK Telegraph, 9/30/11. 

http://tgr.ph/qtsUdD

Here at home, the case being made for another shot of fiscal stimulus seems farfetched and unconvincing. “Happytalk” revisited and what to do about it, 9/26/11.

On the other hand, the sovereign debt crisis brewing in Europe suggests that this country’s government might be do well to start getting its fiscal affairs in order while there is still time to do so.  Granted that the fiscal problem cannot be solved over night, do the JC members really think it is OK to wait until 2013 to start working on a solution?

Do you understand the pressure we are under to raise taxes?  Yes, it would be hard to miss – but hopefully the JC members can deal with it.

The president has given speech after speech about how Congress must pass his American Jobs Act quickly and sign on to a deficit reduction approach that relies heavily on hiking taxes on the well to do and corporations.  See, e.g., his weekly address on October 8.

There are too many people hurting in this country for us to simply do nothing.  The economy is too fragile for us to let politics get in the way of action.  The people who represent you in Washington have a responsibility to do what’s best for you – not what’s best for their party or what’s going to help them win an election that’s more than a year away.  So I need you to keep making your voices heard in Washington.  I need you to remind these folks who they work for.  And I need you to tell your Senators to do the right thing by passing this jobs bill right away. Thank you.

http://1.usa.gov/nhqqc1

Meanwhile, “occupy Wall Street” protests in New York City have morphed into demonstrations around the country that seem generally animated by envy and perceived grievances.

Who are the protestors, what do they want, and who is directing their efforts?  The answers to these questions are not entirely clear, but the movement seems to be well outside the political mainstream. 

The protestors complain of being unemployed, which is blamed on corporate greed.  Hope behind occupy Wall Street, Donald Lambro, Townhall.com, 10/5/11.

This dispirited movement appears to be composed of a confused collection of leftist 20-somethings who blame globalism, trade, the Federal Reserve Bank, investment brokers, corporations, and capitalism in general for all of our economic ills and rampant unemployment.

http://bit.ly/nV4ULR

They congregate in public areas for extended periods and refuse to leave when ordered to do so, thereby forcing police to make arrests.  Some “occupy Sacramento” protestors lash out at questioners, CBS Sacramento, 10/7/11.  

http://cbsloc.al/p7c1Hu

Among other things, big surprise, they have demanded tax increases for the well to do and corporations.  Occupy Wall Street protestors post manifesto of “demands,” Kerry Picket, Washington Times, 10/3/11.

CONGRESS PASS THE BUFFETT RULE ON FAIR TAXATION SO THE RICH AND CORPORATIONS PAY THEIR FAIR SHARE & CLOSE CORPORATE TAX LOOP HOLES AND ENACT A PROHIBITION ON HIDING FUNDS OFF SHORE. No more GE paying zero or negative taxes. Pass the Buffet Rule on fair taxation so the rich pay their fair share. (If we have a really had a good negotiating position and have the place surrounded, we could actually dial up taxes on millionaires, billionaires and corporations even higher...back to what they once were in the 50's and 60's.Vote Here #4

http://bit.ly/odG2Y7

They demonstrate for weeks on end, which requires a well-organized support network.  Here is an interview with one of the organizers, an articulate young member of the Working Families Party.  She speaks of the need to change the “infrastructure of the system that hasn’t worked for us,”  and bring “revolutionary change to the states.”  Labor is described as being under “complete and utter attack by corporate America.” Video (4:41), the Blaze, 10/7/11. 

http://bit.ly/mV91po

At least one high-ranking political leader has expressed support for the protestors.  [House Minority Leader Nancy] Pelosi: “God bless” Wall Street protestors, Charlie Sperling, Washington Examiner, 10/7/11.

God bless them for their spontaneity. It's independent ... it's young, it's spontaneous, and it's focused. And it's going to be effective.

http://bit.ly/nUoudt

The president himself has expressed a tolerant attitude towards the protestors, if not necessarily support for their activities.  Obama: Occupy Wall Street protests show Americans’ frustration, Michael Memoli, Los Angeles Times, 10/6/11.

I think it expresses the frustrations the American people feel, that we had the biggest financial crisis since the Great Depression, huge collateral damage all throughout the country ... and yet you're still seeing some of the same folks who acted irresponsibly trying to fight efforts to crack down on the abusive practices that got us into this in the first place.

http://lat.ms/mW7s0s

So, OK, there is a lot of pressure – but we would urge the JC members to resist it.  The hour is late, there is a great deal at stake, and they need to forget about politics and propose a deficit reduction package that would actually make things better.  In this vein, we would submit that SAFE’s suggestions merit thoughtful consideration.

Finally, Americans have contributed importantly to the fiscal problem by accepting more and more spending without worrying about how it was going to be paid for – and at some level they realize this.  So maybe, just maybe, there could even be a political payoff for those who have the courage to do the right thing for a change.

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UPDATE: one-page summary of this entry sent to  Joint Committee and JC members. http://www.s-a-f-e.org/contacting_legislators_2011.htm#101011 

Don’t expect any requests for further help.  The JC members can do nothing but stall.  – SAFE director

top     close    ww3@atlanticbb.net


10/3/11 – JC update: hunting for a painless solution        Read a reply

The members of the Joint Select Committee on Deficit Reduction have been given a unique opportunity to work across the House/Senate divide in a bitterly split Congress.  If anyone is in a position to start chipping away at the fiscal problem before the elections next November, they are the ones.

Either party can veto the JC recommendations, however, so a truly successful outcome depends on finding “common ground.”  How likely is that?

To assess how things are going, we compared (A) our initial vision about what the JC should be doing, to (B) what the JC appears to be doing.  The indicated gap suggests a need to adjust either the JC’s thinking or our own.

The situation will be reviewed at the SAFE board meeting on October 6 (this Thursday).  In the meantime, dear readers, we invite your feedback. Unless we are aware of your ideas, we cannot represent them. 

http://www.s-a-f-e.org/contact_us.htm

Our vision – SAFE has offered four suggestions to the JC on how to meet its assigned goal of proposing at least $1.5 trillion (over 10 years) of deficit reduction (spending cuts and/or tax increases) by the November 23 deadline.  A list of targeted spending cuts, 8/22/11; summary letter to JC members, 8/22/11.

(1) Be open: We would urge that your committee follow the example of the Fiscal Commission in 2010 by posting videotapes of its general meetings and a draft of its report before the report is voted on.

(2) Stop digging: This country does not need another round of fiscal stimulus; far more effective ways to promote economic recovery are available.

(3) Taxes can wait: The tax changes that have been proposed to date are of debatable merit, and the JC does not have enough time for the system overhaul that is needed.

(4) Be selective on spending: Across the board spending cuts treat all government programs as equally worthy, thereby undermining support for the limits imposed.  It would be far more effective to eliminate or restructure ailing programs.  The following spending cuts are recommended to save the US Treasury roundly $2 trillion over the next 10 years: Medicaid $770B, Education $500B, Corporate Welfare $180B, Agricultural Subsidies $130B, Energy $60B, and resultant reduction in Interest Expense $328B.

Further spending cuts will be needed, including adjustments to both Social Security and Medicare, but the foregoing would represent a solid start on the fiscal problem.

http://www.s-a-f-e.org/contacting_legislators_2011.htm#082211

Other input – Money has been described as “the mother’s milk of politics.” Predictably, given the power entrusted to it, the JC has been deluged with requests and suggestions.  Among those heard from: top political leaders, commentators, advocacy groups across the liberal/conservative spectrum, and hordes of lobbyists. 

There has been lots of buzz about tax changes, with less discussion about how to reduce spending.  Indeed, the president is pushing a stimulus package (aka the American Jobs Act) that would increase the 2012 deficit in hopes of jumpstarting the economy.

In theory, the president’s $4.4T deficit reduction plan is nearly three times bigger than the target assigned to the JC.  However, (A) the $1.1T in war savings is essentially fictitious, and (B) the $1.2T in discretional spending cuts was already mandated by the Budget Control Act.  The new elements in the plan are (1) $1.6T in permanent tax increases for the well to do and corporations, and (2) about $150B in net spending cuts ($600B over 10 years minus the $450B cost of the American Jobs Plan). “Happytalk” revisited and what to do about it, 9/26/11. 

Congressional Republicans question the need for economic stimulus and reject the proposed tax increases. They support a tax overhaul, which would eliminate tax preferences and lower rates.  It is reasoned that lower marginal rates would boost the economy, thereby increasing revenue over time. Boehner offers a jobs plan of his own, Susan Ferrechio, Washington Examiner, 9/16/11.

Boehner called for the newly appointed congressional debt-reduction committee to reform the tax code by closing loopholes that favor certain groups while lowering overall tax rates for individuals and corporations.

http://bit.ly/qrtJ8H

Phased-in changes to Medicare and Medicaid were built into the FY 2012 budget resolution passed by the GOP-controlled House in April, but the Democrat-controlled Senate rejected the House budget without offering a counterproposal.  FY 2012 will begin with a continuing resolution that maintains current spending levels through November 18, thereby kicking the can down the road a bit.

If there are plans to push for acceptance of the House budget, or components thereof, we do not know about them.  Speaker Boehner raised the subject in his Sept. 15 speech to the Economics Club of Washington, D.C., but only in a general way. Transcript.

Most of the entitlement reforms in the House GOP budget are phased in over time.  And that’s the way the Joint Committee should do them as well. *** The United States Senate needs to act, too.  The Senate cannot continue to sit idle on jobs and the budget.

http://bit.ly/olTvDg

Speaker Boehner’s lack of specificity about entitlements is no surprise; frank talk about the need to cut specific programs is unusual inside the Beltway because no one wants to be labeled as an extremist or killjoy.  Washington’s budget theater, Steve Chapman, Townhall.com, 7/31/11.

Everyone is talking about cutting the overall budget, without actually doing it.  Our leaders are not even saying exactly which programs will be trimmed. Neither party wants to reveal which constituents will lose their spots at the federal trough.  The publicized changes are mere promises to reduce projected spending -- by some formula that we don't know, because it has yet to be determined. For that matter, there is no guarantee the cuts will ever happen.

http://bit.ly/nquy6B

Here is another example of spending cut apathy.  In March, the Government Accountability Office (GAO) issued a report identifying “hundreds” of duplicative and overlapping government programs. List of selected federal programs that have similar or overlapping objectives, provide similar services, or are fragmented across government missions, GAO, 3/18/11. 

http://1.usa.gov/qIjrbF

One might expect such a report to galvanize would-be deficit hawks into action – and several statements along these lines were made – but nothing constructive has happened.  Senate appropriators’ secret war against oversight, Senator Tom Coburn (R-OK), Washington Examiner, 9/28/11.

Seven months ago, the non-partisan Government Accountability Office released a landmark report identifying at least $200 billion in wasteful, duplicative, and fraudulent government programs. *** Yet, in the last seven months, Congress has failed to send a single cut identified by GAO to the president’s desk.  Even worse, instead of cutting the spending identified by GAO, the Senate Appropriations Committee is now proposing to slash funding for GAO itself.

http://bit.ly/pjAzQq

Then there was the dispute over whether offsets should be required for disaster relief funds, with Senate Democrats apparently willing to go to the mat over $1.6B in “green” energy subsidies.  We reported on this then developing “crisis” last week. 

As it turned out, the Federal Emergency Management Agency had enough unspent appropriations to cover disaster relief payments through September 30, and Congress will apparently (House action will be required this week) pass the aforementioned continuing resolution to keep the government (including FEMA) going until mid-November.  Senate reaches deal to avert government shutdown, Jennifer Steinhauer, New York Times, 9/27/11.

http://nyti.ms/nv6IC7

On balance, with the exception of our own comments (everyone tends to believe their ideas are right and we are no exception), it is hard to say much for the advice that the JC seems to be getting.

JC activity –  There have been three public sessions to date: (A) Sept. 8 – Each member gave opening statements and the previously negotiated rules for the JC were adopted. (B) Sept. 13 – Congressional Budget Office Director Douglas Elmendorf testified about the fiscal problem. (C) Sept. 22 – Thomas Barthold, chief of staff for the Joint Committee of Taxation, testified about tax “reform.” Videos of each session are available.

http://deficitreduction.senate.gov/public/

Now what?  The publicly displayed calendar shows no further meetings scheduled.  It does not even indicate the November 23 deadline for JC action.

At least two private meetings have taken place to date, and perhaps the JC will have more of them.  Supercommittee “made progress” in second closed-door meeting, co-chairs say, Felicia Sonmez, Washington Post, 9/20/11.

Addressing reporters after the 2 1/2 - hour meeting, the panel’s co-chairs, Sen. Patty Murray (D-Wash.) and Rep. Jeb Hensarling (R-Tex.), said only that the 12-member group was making progress.

http://wapo.st/otVUli

Despite our “be open” suggestion, there are advantages in permitting negotiators to meet in private – with greater flexibility to say what they want without risking scorn or retribution.  After all, the US Constitution was drafted in secret sessions; why not take the same tack for a deficit reduction deal?

But inquiring minds will want to know what is going on behind closed doors, and excessive secrecy can impede buy-in for a deal when it is announced.    Debt panel trade-off: exposure vs. efficiency, Stephen Dinan, Washington Times, 8/23/11. 

http://bit.ly/qkoLG6

Viewing the first two public sessions (9/8 and (9/13), we were not sure what was going on.  Everyone seemed on their best behavior; there were no brush-off responses or personal zingers.  The members demonstrated familiarity with the issues.  It was agreed that the fiscal problem is serious, and that a decisive response is needed.  And yet –

There seemed to be no sense of urgency.  The action reminded us of an “organizational effectiveness” exercise – spelling doesn’t count, every opinion has equal value, everyone should have an equal opportunity to speak – rather than a serious problem-solving meeting.

The September 22 meeting ran longer than the other two meetings put together, nearly 4 hours without a break.  Although the proceedings were tedious, we found them somewhat revealing.  Here is a link to the video (only the truly dedicated will want to watch it).  Our observations follow (times, where indicated, are approximate).

http://www.c-spanvideo.org/program/CodeOv

10:05 a.m. - Rep. Jeb Hensarling (R-TX) calls the meeting to order.  Today’s subject is tax “reform,” with the chief of staff for the Joint Committee on Taxation on tap.  Thomas Barthold’s testimony will be in two segments, business taxes and individual taxes. 

There will be opening statements from the members, and rounds of questions after each segment – plenty of opportunity for everyone to have their say. 

10:10 a.m. - Rep. Hensarling suggests the JC should focus on reforming entitlements, not raising taxes which could tank the economy.  But if we were able to promote some tax reform too, he adds, that would create jobs and boost tax revenues.

10:15 a.m. – Senator Patty Murray (D-WA) says Americans are tired of the political bickering; they want to know how we propose to improve their lives.  Spending cuts alone will not put Americans back to work.  We need to do the hard work of facing the issues honestly and negotiating a balanced approach.

The members interact in a dignified fashion, despite obvious differences of opinion, and their questions and comments reveal a surprisingly (to us) good knowledge of the tax code.  If their efforts fail, it will not be for lack of preparation or talent.

There is considerable talk about a general tax overhaul to eliminate tax preferences while cutting tax rates, as has been advocated by congressional Republicans. 

The witness agrees a tax overhaul that lowered marginal tax rates should have positive economic effects, and that the resulting economic recovery might boost tax revenues.  However, only actual tax increases (whether from elimination of preferences or rate increases) would be “scored” as revenue increases by the Congressional Budget Office.

11:10 a.m. - Senator Rob Portman (R-OH) speaks of “smart tax reform” as a potential “sweet spot” for the JC.  For example, slash corporate income tax rates and impose a value added tax.  After all, economists like the idea of taxing consumption – don’t they?  He presses the witness on the feasibility of changing the rules so that the CBO could give credit for assumed positive effects on the economy.

11:16 a.m. - Rep. James Clyburn (D-SC) says comparisons of the US corporate tax rate to tax rates elsewhere is meaningless because all the other countries have value added taxes and the US does not.  Why couldn’t the US have a VAT too?

The idea of crafting a comprehensive tax overhaul is beginning to sound like a major undertaking.  Several members suggest there will not be enough time before November 23 to do the job right.

12:07 p.m. – Given the time problem, says Rep. Fred Upton (R-MI), perhaps the JC should advocate tax reform and propose a follow-up effort of some sort. 

1:20 p.m. - Sen. Patty Murray (D-WA) suggests the JC should develop a list of tax preferences meeting the “spending by another name” criterion and recommend that they be axed instead of waiting for overall tax overhaul.  She references an intense discussion (presumably at one of the private meetings) of spending “earmarks.” (Co-Chair Murray is a tough, shrewd operator.  She has periodically communicated her impatience with the leisurely pace at which the JC is moving.)

1:45 p.m. – Rep. Chris Van Hollen (D-MD) is the final speaker.  He observes that the double taxation of corporate earnings does not apply to partnerships, Subchapter S Corporations, etc.  The meeting is then adjourned.

The foregoing is a highly selective representation of a long discussion, but it may help to convey the essence of what took place.  Rather than focusing on spending cuts, which are only popular in the abstract, the JC members are looking for an easy out. 

Is our conclusion a bit harsh?  Maybe, although the habits and ideas that we observed are shared by many people in the government class.  Does it apply to all the JC members?  No.  But here is its basis, see what you think.

1.  Judging from the public record, the JC has spent more time discussing taxes than spending thus far. The panel will ultimately act on the problems that it studies.   

2. In theory, a comprehensive overhaul of the tax system could help fuel economic recovery.  Hammering out the details would take more time than has been allotted to the JC, however, and the benefits of such an overhaul would not count as confirmed “savings” for purposes of the $1.5T deficit reduction goal.

3.  Any concrete action by the JC in the tax area will probably take the form of ad hoc elimination of tax preferences or rate increases, either or both of which would count as “savings.”  The tax increases involved might have adverse economic effects, but such effects would not be reflected in the CBO scoring.

4.  We observed a similar outbreak of wishful thinking during a session of the Fiscal Commission last year, and concluded after a detailed review that the commissioners were off track.  Sorry, but there are no “painless” ways to raise taxes, 8/9/10.

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.

5.  If Co-Chair Murray’s reference to an intense discussion of “earmarks” is descriptive of what has been going on behind the scenes, then even when the JC has discussed spending it has not explored the type of targeted spending cuts we think are needed to make a real difference. 

Finally, as though to confirm our analysis, we have just become aware of rumors that the JC members are split on spending cuts versus tax increases.  Imagine that!  Democrats push tax hikes first in deficit talks, Reuters, 10/1/11. 

The tough stance by Democratic members of the powerful 12-member congressional panel reflects the party's wariness that Republicans might try to sideline the issue of revenue increases in the negotiations.

"They've raised the idea of doing taxes first," a Republican aide involved in the discussions said on Friday on condition of anonymity.

http://reut.rs/qVTC5v

OK, where should things go from here, and what can SAFE do to help?

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Compromising to get things done re the fiscal crisis is not the answer.  The only thing that could come out of that would be less socialism.  We don't want ANY socialism.  It is killing Europe and will surely kill us as well. We don't need Democrats or Republicans per se, we need conservatives. – SAFE member in PA

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9/26/11 – “Happytalk” revisited and what to do about it      Read a Reply

Some readers may recall an entry deploring one-sided political rhetoric, which at the time seemed well nigh unstoppable. “Happytalk” blossoms in the nation’s capital, 7/6/09.

A huge government program is proposed to deal with a problem (whether current or forecast).  The purported benefits are touted relentlessly, without discussion of drawbacks or costs.  There is such a rush to enact legislation that members of Congress may not have time or inclination to read the final bill before voting.  And anyone who complains runs the risk of being labeled a diehard extremist.

Our suggested response to such pitches (don’t worry, there is a new sheriff in town – this proposal will take care of the problem – take XYZ action now) was healthy skepticism.

We are not buying the Happytalk about economic stimulus, healthcare, or energy policy.  Shame on the proponents; they should present their proposals honestly and be open to other viewpoints – including the dictates of fiscal responsibility. Help us hold them to a higher standard!

Two years later, public sentiment has shifted on these issues – as demonstrated by the 2010 mid-term election results.  But divided government has not led to more constructive engagement, and the tone of political discourse seems more strident than ever. 

Now there is a lot of Scarytalk about jobs and deficit reduction (do worry and it’s the other side’s fault – these proposals will take care of the problem – take XYZ action now).  If the pitch sounds familiar, it should, and healthy skepticism remains advisable – plus positive alternatives (of which SAFE has offered several).

2009 UPDATE – Our first example in the Happytalk entry was the $787B economic stimulus bill enacted in February 2009.  Despite its hefty cost, this bill failed to prevent the US unemployment rate from rising to over 9% and staying there.  Those who favor another jolt of stimulus in 2012 seem out of touch with reality. Desperate Democrats jump the stimulus shark, Washington Examiner, 6/23/11.

That Democrats now demand yet another stimulus program, plus tax increases, is a Hail-Mary reprise of a failed policy. All they can think of is more spending, more tax increases, more federal bureaucracy.

http://bit.ly/l2f48j

Example two was a proposal to provide healthcare insurance coverage for tens of millions of Americans, supposedly without cost or inconvenience for those already insured. This “something for nothing” claim was never credible, and disillusion set in after GovCare was rammed through Congress in early 2010.  Many would support repealing this legislation before it goes on line in 2014. Rasmussen, 9/19/11.

Fifty-two percent (52%) of voters think the healthcare law will be bad for America. Thirty-four percent (34%) view the legislation as good for the country. Two percent (2%) feel it will have no impact, and 12% remain undecided about it.

http://bit.ly/cunKep

The third proposal was a “cap and trade” bill in the name of combating global warming.  It had squeaked through the House, in June 2009, but subsequently died in the Senate.  The current legislative focus is whether the EPA’s efforts to curb carbon emission by regulation should be blocked.  House is moving forward on American energy solutions, Rep. Fred Upton, Washington Examiner, 9/21/11.

The Energy Tax Prevention Act will prohibit the Environmental Protection Agency from imposing a cap-and-trade-style national energy tax under the Clean Air Act. With as many as 1.4 million jobs by 2014 estimated to be at risk under a new greenhouse gas regulatory regime, the Energy Tax Prevention Act is essential to protect our economy from massive job losses and the higher energy costs that would accompany these costly new rules.

http://bit.ly/o3rfju

THE RECKONING – As a result of the economic slowdown, the 2009 stimulus bill, and a general failure to rein in government spending, the fiscal problem – which was already serious – has gotten steadily worse.

Some observers blame trillion dollar deficits and skyrocketing debt on the previous president, but this claim is growing threadbare.  SAFE letter, [Wilmington, DE] News Journal, 8/25/11.

http://bit.ly/qqoTV0

SAFE advocates bringing the deficits down and balancing the federal budget within 4 or 5 years.  Never mind the 10-year plan; cut spending now, 5/30/11.

One SAFE director, a former pilot who has flown military aircraft all over the world, suggested an analogy for the current situation.  Imagine we are flying in a C-133, and three of the four engines have conked out. 

If the last engine dies, the plane will crash and burn.  Or the pilot can attempt to bring it down in a controlled fashion, which would probably be the best course of action. 

SAFE to Congress: This is not a drill; it is the real deal.  Mayday, Mayday . . .

But with the president and his party pushing for temporary tax cuts and spending increases, ostensibly to fight the continuing economic slump, it will be difficult to start cutting deficits. What’s more, the political window of opportunity will soon slam shut until after the 2012 elections.

Inaction might be tolerable if money had to be appropriated before being spent, but remember that “mandatory” spending (roughly 2/3 of the federal budget) is on autopilot. Also, there will be huge tax increases in 2013 unless “temporary” reductions in tax rates are extended or made permanent.

We have previously reported on a series of budget battles – the skirmish over FY 2011 spending, the debt limit showdown, the organization of the Joint Select Committee on Deficit Reduction, and the president’s jobs proposal (economic stimulus by another name).  Last week, two more pieces of the puzzle were in play.

ROSE GARDEN – The time is 10:56 a.m.  Viewers see some well-dressed people (from the back) standing until the president tells them to “please have a seat.” Everyone quickly sits down.  The president proceeds to speak for 20 minutes, with the only evidence of audience reaction being muffled laughter at two lines: (1) a gibe directed at House Speaker John Boehner, and (2) “This is not class warfare.  It’s math.”  The “thank you very much” conclusion is followed by dutiful applause.  Preparing to depart, the president loftily waves in acknowledgment.  White House, transcript and video, 9/19/11.

http://1.usa.gov/pPSO6T

The president’s remarks associated (A) the debt reduction deal (roughly $1T in across-the-board cuts in discretionary spending over 10 years plus the Joint Committee mission to find additional deficit reductions), (B) his American Jobs Act ($450B in economic stimulus for 2012), and (C) his suggestions on how to pay for the AJA (by tax increases in ensuing years), with (D) the deficit reduction plan he was now announcing.

Many elements of the speech marked the president’s plan as a sales pitch rather than a serious proposal.  Let’s have a look (speech extracts in red; comments in black).

It’s a plan that reduces our debt by more than $4 trillion, and achieves these savings in a way that is fair -- by asking everybody to do their part so that no one has to bear too much of the burden on their own.

The supporting memorandum from the Office of Management and Budget indicates $4.4 trillion in deficit reduction, but residual deficits of about half a trillion dollars a year would continue throughout the 10-year projection period.  The basis for the debt reduction claim: public debt as a % of Gross Domestic Product is shown (based on economic assumptions that may be overly optimistic) declining modestly after FY 2013.  Living Within Our Means and Investing in the Future: The President’s Plan for Economic Growth and Deficit Reduction, OMB, 9/19/11, Table S-1.

http://www.whitehouse.gov/omb/ (download PDF).

Now, as I said before, Congress should pass this bill knowing that every proposal is fully paid for.  The American Jobs Act will not add to our nation’s debt.

As the proposed payment would take the form of future tax increases, such a statement defies logic.

During this past decade, profligate spending in Washington, tax cuts for multi-millionaires and billionaires, the cost of two wars, and the recession turned a record surplus into a yawning deficit, and that left us with a big pile of IOUs.

The Bush Tax cuts benefit many people besides “multi-millionaires and billionaires;” roughly 3/4 of the benefits accrue to middle class taxpayers. Obama makes last-ditch push for agenda, Julie Mason, Washington Examiner, 11/25/10.

The White House believes it has deficit hawk Republicans boxed in on tax cuts with the argument that extending the tax break for the rich would cost $700 billion.  The Treasury Department estimates that making all tax cuts permanent would cost $3.7 trillion over 10 years.

http://bit.ly/eLMgp8

All told, this plan cuts $2 in spending for every dollar in new revenues.

Among other things, the referenced spending cuts include (A) $1.2T reduction from discretionary spending caps imposed by the Budget Control Act, (B) $1.1T savings from winding down the wars in Iraq and Afghanistan versus continuing them indefinitely, and (C) $0.6T in imputed interest.  Only $0.6T in new spending cuts are proposed, which over 10 years works out to about $60B per year.

We would omit the war savings pickup + associated interest, which is largely fictitious as no one had any intention of keeping the two wars in question much longer anyway, and allocate the other interest savings between spending cuts and tax increases.  On our basis, the ratio of spending cuts to tax increases would be about 1:1.  OMB report, Table S-1.

 

BCA caps

American Jobs Act

Healthcare

Other mandatory spending


Tax

increases

Interest expense

Total

 

Spending cuts

992

(200)

320

257

0

260

1629

Tax increases

0

(247)

0

0

1573

252

1578

Deficit reduction

992

(447)

320

257

1573

512

3207

Finally, this plan includes structural reforms to reduce the cost of healthcare in programs like Medicare and Medicaid.  *** [It] reduces wasteful subsidies and erroneous payments while changing some incentives that often lead to excessive healthcare costs.  It makes prescriptions more affordable through faster approval of generic drugs.  We’ll work with governors to make Medicaid more efficient and more accountable.  And we’ll change the way we pay for healthcare.  Instead of just paying for procedures, providers will be paid more when they improve results -- and such steps will save money and improve care.

The proposed 10-year, $320B reduction in healthcare outlays would be achieved primarily by reducing payments to healthcare providers.  The biggest single savings ($135B) would be from cutting Medicare payments for pharmaceuticals to the Medicaid standards. OMB report, Table S-5.

In the context of huge and rapidly rising government outlays for healthcare, the proposed changes do not loom very large.  Furthermore, top-down limits on Medicare, Medicaid, etc. outlays would inevitably morph into healthcare rationing.  So while there is still time, we think the country needs to change direction and implement real healthcare reform.  Here’s our plan.

http://www.s-a-f-e.org/healthcare_reform.htm

[The president quotes House Speaker John Boehner that] there is “only one option.”  And that option and only option relies entirely on cuts. That means slashing education, surrendering the research necessary to keep America’s technological edge in the 21st century, and allowing our critical public assets like highways and bridges and airports to get worse.  It would cripple our competiveness and our ability to win the jobs of the future.  And it would also mean asking sacrifice of seniors and the middle class and the poor, while asking nothing of the wealthiest Americans and biggest corporations.

This mischaracterizes Boehner’s 9/15/11 speech to the Economic Club of Washington, D.C.  Basically, Boehner said the best way to promote economic recovery would be to restore business confidence.  He advocated reining in government regulators.  He rejected the idea of hiking tax rates, but supported tax reform, possibly under the aegis of the Deficit Reduction Committee, via eliminating tax preferences and lowering tax rates.  Boehner offers a job plan of his own, Susan Ferrechio, Washington Examiner, 9/15/11.

http://bit.ly/qrtJ8H

. . . I am eager, to work with Democrats and Republicans to reform the tax code to make it simpler, make it fairer, and make America more competitive.  But any reform plan will have to raise revenue to help close our deficit.  That has to be part of the formula. 

The president’s ideas for raising revenue boil down to raising tax rates or eliminating “loopholes” for high bracket taxpayers and corporations.  Nowhere in the speech did he concede that such changes might prolong the economic slump, although this is a distinct possibility.  Obama’s bizarre tax attack, Larry Kudlow, Townhall.com, 9/21/11.

Reagan was branded a class warrior for the Kemp-Roth tax cuts, and he was overwhelmingly reelected. Why? Because low tax rates reignited economic growth and job-creation. Today, the president’s militant tax-hike threats, along with Obamacare and unmanageable regulatory costs, are holding back job-creators.

http://bit.ly/pegJ3E

And any reform should follow another simple principle:  Middle-class families shouldn’t pay higher taxes than millionaires and billionaires.  That’s pretty straightforward.  It’s hard to argue against that.  Warren Buffett’s secretary shouldn’t pay a higher tax rate than Warren Buffett.  There is no justification for it.

This dog will not hunt.  Almost all of Buffet’s cash income comes in the form of dividends and capital gains, and the business entities involved (assuming they are C corporations) also pay tax at the corporate level.  On a rolled-up basis, the tax on Buffet’s income is almost certainly higher than that of his secretary’s.  Also, the secretary’s salary is tax deductible to the payer, whereas Buffet’s investment income is not.

A proper objective would be to eliminate the double taxation of corporate earnings, as SAFE has recommended, not create a new version of the ill-fated Alternative Minimum Tax.  This sort of tinkering for political purposes has made a mess of the US tax system, and we need to put a stop to it.  SimpleTax proposal, November 2010.

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.  

http://www.s-a-f-e.org/the_simple_tax.htm

#Either we ask the wealthiest Americans to pay their fair share in taxes, or we’re going to have to ask seniors to pay more for Medicare.  We can’t afford to do both.  

#Either we gut education and medical research, or we’ve got to reform the tax code so that the most profitable corporations have to give up tax loopholes that other companies don’t get. We can’t afford to do both.

#And I will veto any bill that changes benefits for those who rely on Medicare but does not raise serious revenues by asking the wealthiest Americans or biggest corporations to pay their fair share. 

Posing such either/or choices may be effective from a rhetorical standpoint, but many other choices are possible. Thus, none of the foregoing options made the debt reduction menu SAFE proposed for the Debt Reduction Committee, with the arguable exception of a $500B, 10-year cut in federal spending on education that would actually improve results.  A list of targeted spending cuts, 8/22/11.

State school systems are administratively top heavy as it is, and a federal overlay is not needed.  If there is to be a federal Department of Education, its functions should be limited to maintaining a data bank of best educational practices at the state and local level, sponsoring national and international educational contests, and the like.

CAPITOL HILL One might think the big story would be that Congress is once again about to start a fiscal year without having put a budget in place, a mistake we have been warning about for some time.   SAFE letter to Delaware members of Congress, 9/6/11.

In our opinion, Congress should reverse course on spending (cut vs. increase), taxes (overhaul vs. tinker), and regulations (rein in overly zealous regulators like the EPA).   As a first step, why not establish a budget before the fiscal year 2012 begins on October 1st?  Running a roundly $4 trillion-per year operation on continuing resolutions represents the height of irresponsibility.

http://bit.ly/nPfxDq

But no, the big story is a fight about funds for disaster relief (which both parties support in principle) and the extent, if any, to which the outlays should be offset by spending cuts in other areas. 

The issue was teed up several weeks ago, with liberal pundits pummeling fiscal conservatives as heartless for their suggestion that disaster relief might need to be paid for. Leveraging a hurricane, Wall Street Journal, 9/3/11.

This week the left-wing press has been attacking House Majority Leader Eric Cantor for holding disaster relief funding "hostage." A more accurate way to put this is that Senate Democrats won't approve new funding for disasters unless they get the funding they want for corporations that make electric cars.

http://on.wsj.com/nYsv1D

Matters have since progressed to the point where the possibility of a “government shutdown” is front-page news. 

Around 1:00 a.m. on Friday, Sept. 23, the House passed (219-203) a “continuing resolution to keep the government going after October 1 (until November 18).  But the dueling sound bites were not about the Senate’s failure to propose a budget for FY 2012, they were about disaster relief (the resolution authorized $3.65B through 11/18; Senate Democrats had proposed $7B) and the extent (if any) to which it would be offset by spending cuts (the resolution cut “green energy” subsidies by $1.6B).  House passes stopgap spending bill, Sean Lengell, Washington Times, 9/23/11.

#House Appropriations Chairman Harold Rogers (R-KY): “This [bill] lives up to the Republican commitment to responsible and reduced levels of spending, and helps right our fiscal ship while still supporting essential government programs and services.”

#House Minority Leader Nancy Pelosi (D-CA): “Assistance at a time of a natural disaster should not be a controversial issue. *** We’re not going to balance the budget on the backs of people who have already been hit by a disaster.”

#House Speaker John Boehner (R-OH), urged the Senate to quickly pass the bill “so we can send it to the president and keep our focus on the American people’s top priority: jobs.”

http://bit.ly/njjnKv

Before the House vote, Senate Majority Leader Harry Reid (D-NV) had already drawn a line in the sand.  House approves stopgap funding but Reid says Senate will block measure, Russell Berman, The Hill, 9/23/11.

The bill the House will vote on tonight is not an honest effort at compromise. It fails to provide the relief that our fellow Americans need as they struggle to rebuild their lives in the wake of floods, wildfires and hurricanes, and it will be rejected by the Senate.

http://bit.ly/oRso2i

Hours later, the House measure was tabled (59-36), but Majority Leader Reid deferred a vote on an alternative measure (which would reportedly accept the House level of disaster relief with no spending offsets) until Monday – while House members left town with only an abbreviated session scheduled for the next week.  The dueling sound bites flew back and forth. Senate blocks emergency disaster money, Sean Lengell & Stephen Dinan, Washington Times, 9/23/11.

#Majority Leader Harry Reid: “Cool off a little bit. Work this through. There’s a compromise here.”

#House Majority Leader Eric Cantor (R-VA): “Harry Reid is holding a bill up with full funding for what is needed right now for no reason — for no reason but for politics. This is why the people just don’t have the respect for this institution and this town anymore.”

#Senator Mary Landrieu (D-LA) said that offsets had never been required for emergency disaster funds. “That is not right. That’s what this debate is about.”

#Senate Minority Leader McConnell suggested the growing fiscal problem required a change in practice. “The American people won’t accept that excuse any longer.”

http://bit.ly/qvqWCA

We could see a government shutdown until the Senate proposes a FY 2012 budget; at least the sanction would be in proportion to the problem.  But a government shutdown over $1.6B in “green energy” subsidies would be ridiculous.

SAFE to Congress: Lighten up, compromise this issue, and move on.  There are far more important issues to address.

NEXT WEEK – The members of the Joint Select Committee on Deficit Reduction have a unique ability to work across the House/Senate divide in a bitterly split Congress.  If anyone can start chipping away at the fiscal problem, they are the ones. Tune in for an update on the JC proceedings and our assessment of the likely results.

*        *        *        This Blogs Reply        *        *        *

I hope they [the members of Congress] are watching the TV reports about the financial crisis in Greece, where the citizens are protesting the austerity measures and increased taxation -- AND calling for a drastic review of government expenditures, to be based on value-received criteria.  Or so the reporter indicated. – former IBMer

top     close    ww3@atlanticbb.net


9/19/11 – Elementary, my dear Holmes

There are 16 pieces in a chess game, which can only make certain moves, and 64 spaces on the board.  Yet the number of possible combinations is staggering, e.g., over 288 billion positions after only four moves apiece. Chess-poster.com.

http://bit.ly/bJNhmo

The complexity of life on this planet, with billions of players, etc., is far greater.  No wonder that humans make decisions based on limited information and using simplistic rules of thumb; doing otherwise would result in “analysis paralysis.”  But such shortcuts have two notable drawbacks: (1) many suboptimal decisions are made, and (2) even if the parties in a shared decision agree on the facts, their use of different rules of thumb may lead to disagreement and gridlock.

Thus, the deliberations of the Joint Select Committee on Deficit Reduction (“JC”) figure to be tortuous, which leads us to speculate about an alternative approach. The results of asking Watson might be about the same as those from current methods, and the computer program could generate them a lot faster.

Here is the plan of attack for this entry: update our coverage of the deficit reduction negotiations; evaluate the process in use; and discuss how Watson might be able to help.

UPDATE: A debate is underway about whether to stimulate the economy in the name of creating jobs or start tackling the fiscal problem.  Last week we covered, among other things, the first meeting of the JC on September 8 and the jobs plan that the president pitched to a joint session of Congress that evening.  A tempting offer: spend now, pay later, 9/12/11.

A constructive outcome seemed dubious then, and subsequent developments have reinforced our skepticism.

#The president sent the American Jobs Act to Congress on September 12.  This package includes details as to how the proposed one-year, $450B stimulus package would be “paid for.”  The basic thrust would be to raise taxes on the prosperous over the next 10 years, e.g., by attacking their deductions of mortgage interest, state & local taxes, and charitable contributions.  Obama’s latest tax proposal, Washington Times, 9/13/11.

http://bit.ly/pxanBu

It is hard to keep track of all the things the president has said about his jobs plan, but the hard sell is clearly on.  Obama declares “national emergency” for acting on his jobs plan, Carrie Brown, Politico.com, 9/14/11.

We’re in a national emergency. We’ve been grappling with a crisis for three years, and instead of getting folks to rise up above partisanship in a spirit that says we’re all in this together, we got folks [congressional Republicans] who are purposely dividing, purposely thinking just in terms of how does this play out just in terms of this election.

http://politi.co/omWez8

There will also be a proposal for $2T in deficit reduction (over and above cuts mandated by the debt limit deal), which is scheduled to be published today.  As of late last week, the White House was reportedly considering “higher premiums for the wealthiest Medicare recipients and [more] reductions in reimbursement rates for doctors.” Obama decides against Social Security cuts, Brian Hughes, Washington Examiner, 9/16/11.

http://bit.ly/qPBpEo

Congressional Republicans may accept some of the president’s proposals, but they are not about to go along with the bulk of them.  In a September 15 speech to the Economics Club of Washington, D.C., House Speaker John Boehner rejected the temporary tax cuts/ permanent tax increases that have been proposed in favor of a tax system overhaul to be taken up by the JC.  He also advocated support for increased energy production in the United States and rollbacks of other regulations that are contributing to business uncertainty.  Boehner offers a jobs plan of his own, Susan Ferrechio, Washington Examiner, 9/16/11.

Let's be honest with ourselves, the president's proposals are a poor substitute for the pro-growth policies that are needed to remove barriers to job creation in America.

http://bit.ly/qrtJ8H

It remains to be seen how the president’s proposals (and the Republican counterproposals for that matter) will influence the deliberations of the JC, but we suspect they will serve to deepen the partisan divide on the committee rather than facilitating a solution.

Consider Co-Chair Jeb Hensarling’s reaction to the president’s plan.   On jobs bill, White House bets on Boehner’s support, Carrie Brown & Jake Sherman, Politico.com, 9/13/11.

I don’t know how one could assert that you could promote job growth by simultaneously giving job creators a one-year temporary tax relief coupled with permanent tax increases. I don’t understand the logic, and I have found no historic example to indicate that would promote job growth in any way, shape or form.

http://politi.co/rkc8BC

#The JC met for the second time on September 13, this time in a Senate meeting room with Co-Chair Patty Murray presiding.  The main order of business was to hear from Congressional Budget Office Director Douglas Elmendorf on “The history and drivers of our nation’s debt and its threats.”

The session ran about 2 hours and 40 minutes.  There were three rounds of comments from the 12 members:  statements before the witness was introduced – questions of the witness (often statements rather than questions) – and closing comments.

Dr. Elmendorf’s statement had been distributed in advance, and the members seemed familiar with its contents.  His oral presentation hit the highlights, some of which seemed rather obvious.  For example, there are basically three ways for Congress to reduce the deficits that are projected: cut discretionary spending, restructure entitlements, or raise taxes.  As a matter of arithmetic, the deficit reduction goal could be met by pulling only one of the levers, but in that case the changes in the area selected for attention would likely be bigger than if two or three levers were pulled.

During the Q&A that followed, the witness repeatedly resisted invitations to favor any particular approach (e.g., spending cuts vs. tax increases).  It was not CBO’s role to recommend policy choices, he said, as opposed to estimating the economic and fiscal effects of proposals suggested by the JC members. 

Either spending cuts or tax increases might slow the economic recovery in the short term, it was said, while spending increases or tax cuts might stimulate the economy.  And without getting into specifics, some spending increases or tax cuts might conceivably work better than others.

Elmendorf agreed with several questioners that the fiscal situation has deteriorated since the Clinton Administration.  He also agreed that the currently low percentage of revenues to GDP (about 15%) is primarily a function of the weak economy rather than, say, the Bush tax cuts in 2001 and 2003.

http://cs.pn/o7cSI9

PROCESS CHECK: The JC meeting on September 13 seemed like a re-run, and no wonder. A very similar session with Dr. Elmendorf took place a year ago. Fiscal Commission update: lots of input, little progress, 7/5/10.

The CBO presentation was well done, but it conveyed little new information.  *** Commission members repeatedly brought up elements of Elmendorf’s testimony that supported their own views.

Very little was said about targeted spending cuts, with the possible exception of fraud & waste and the US military.  There was at least as much talk about changing the tax system as about cutting spending or restructuring entitlements. 

After the session, we posted two comments on the JC’s recently established Website.

1. The JC does not have sufficient time to consider a thorough overall of the US tax system, and many of the tax law changes under discussion would represent tinkering – which is what Congress has been doing with the tax system for years. Rather than continuing this unfortunate practice, it would be best to recommend that a comprehensive tax overhaul be undertaken soon.

2. There was little if any discussion of targeted spending cuts. Such cuts would represent the most effective and credible way to meet the JC’s deficit reduction quota.  Here is a list of candidates that would save roundly $2T over the next 10 years: Medicaid $770B, Education $500B, Corporate Welfare $180B, Agricultural Subsidies $130B, Energy $60B, and resultant reduction in Interest Expense $328B.  The particulars may be found in our 8/22 letter to JC members and references cited therein. http://bit.ly/on2sFD

Whether or not these comments will make a difference, it was easy (and satisfying) to submit them.  Accordingly, dear readers, we would encourage you to contact the JC (which says “We want your input”) and offer your own deficit reduction suggestions.

http://bit.ly/qcaYaL

Based on past experience and the tenor of the first two meetings, there is little hope that the JC members will agree on a solid deficit reduction plan.  Indeed, this does not seem to be what they are aiming to do.

The real objective appears to be a  solution that will achieve (at least in theory) the assigned deficit reduction goal with a minimum of political angst.  And in that sense, the outcome of the JC negotiations may well be perceived as successful. 

Even a political solution could prove elusive, however, particularly as the JC has only about seven weeks left to complete its work, have its proposals translated into legislative language, and secure the CBO stamp of approval. 

Would that there was a better way to do things!

WATSON: As already stated, maybe there is.  Probably too much prep time would be required for the JC to use IBM’s natural language processing system, but we can envision Watson or a sibling being used in future political negotiations.

On reading that Watson had beaten some human champions in a game of Jeopardy, we thought of Dr. John Watson, the colleague of Sherlock Holmes.  However, the system was actually named after IBM founder Thomas J. Watson Sr. Behind-the-scenes, John Sutter, CNN Tech, 2/7/11.

http://bit.ly/gRw8Aw

Watson can input a trickily worded Jeopardy question, process millions of possibilities, and produce an answer in less than 3 seconds. The humans truly did not stand a chance.  The science behind an answer, IBM, video (about 7 minutes, fascinating). 

http://bit.ly/qj5sMk

IBM has now entered into a contract with Wellpoint, a leading healthcare insurer.  Watson will provide diagnoses and supporting reasons to human doctors, hopefully for the purpose of providing better service rather than denying treatment. IBM’s Watson computer to work in health[care] insurance, CBC News, 9/12/11.

The WellPoint application will combine data from three sources: a patient's chart and electronic records that a doctor or hospital has, the insurance company's history of medicines and treatments, and Watson's huge library of textbooks and medical journals.

IBM says the computer can then sift through it all and answer a question in moments, providing several possible diagnoses or treatments, ranked in order of the computer's confidence, along with the basis for its answer.

http://bit.ly/r42YvK

Could something similar be done in the political arena?  Load Watson up with reams of information about the fiscal problem from various sources: the CBO and OMB data bases, academic tomes, related content from the Wall Street Journal and other leading periodicals, studies of the top think tanks, transcripts of prior proceedings, presidential speeches, and whatever else might be deemed relevant.  

Then ask what the most politically palatable package of fiscal adjustments would be to reduce federal deficits by $1.5 trillion over the next 10 years.

Whirr, whiz, bang . . . the indicated answer is __________ because ___________.

And if such an application is not technically feasible just yet, we would be glad to have someone from SAFE stand behind a curtain and send in the answers.

top     close    ww3@atlanticbb.net


9/12/11 – A tempting offer: spend now, pay later

With apologies to the People’s Court, this week’s entry might be summed up like this: “The problems are real, the proposed solutions political, and the prognosis uncertain.”

Which could help explain why so many Americans are losing faith in this country’s political leadership.  Congress’s ratings hit new lows, 8/29/11.

Some political leaders think the answer is to do a better job of “educating” the public, but we believe the opposite is true.  SAFE letter to Delaware members of Congress, 9/6/11.

In our opinion, Congress should reverse course on spending (cut vs. increase), taxes (overhaul vs. tinker), and regulations (rein in overly zealous regulators like the EPA).   As a first step, why not establish a budget before the fiscal year 2012 begins on October 1st?  Running a roundly $4 trillion-per year operation on continuing resolutions represents the height of irresponsibility.

http://bit.ly/nPfxDq

Realistically, smaller, more focused, less costly government figures to be a tough sell. So if you agree with this agenda, dear readers, we could really use your help.  Looking at things in a different way, 7/25/11.

Let’s not give up on the politicians who have been ignoring us, no matter how tempting this seems.  They are people too, and some of them are trying to do the right thing.  What’s more, if they hear from enough fiscal visionaries, it is always possible they will change their minds. One letter means little; twenty letters might give them pause; swamp the switchboards with calls and they will panic.

But first, some recent developments may illuminate the likeliest lines of attack.  We will start with the problems (there are basically two of them), take a look at some proposed solutions, and offer a tentative prognosis.

PROBLEM ONE is a depressed economy, which to some observers suggests a need for government-provided economic stimulus or the equivalent.

The unemployment rate stands at 9.1% (and would be higher if people who have stopped looking for work were considered), with “zero” jobs created per the latest monthly report.  Job growth, unemployment stall in August, Patrice Hill, Washington Times, 9/2/11. 

The fall in job growth to zero from 85,000 in July, reported by the Labor Department Friday morning, represents the sharpest deceleration of job gains since the Great Recession, and was influenced by a strike of Verizon workers that subtracted nearly 50,000 jobs during the month. Reflecting the static jobs picture, the U.S. unemployment rate was unchanged at 9.1 percent, the department said.

http://bit.ly/pwSyP2

Overall economic output is likewise growing anemically.  GDP report shows economy even weaker than expected, Philip Klein, Washington Examiner, 7/29/11.

In another sign of economic weakness, the gross domestic product grew at a lower than expected 1.3 percent [annualized rate] during the second quarter, and the already weak first quarter number was revised downward to an anemic 0.4 percent, the Commerce Department reported today.

http://bit.ly/r5YEzE

Going beyond recent headlines, some analysts point to ominous longer-term trends.  Thus, Craig Steiner, a professed member of “the vast right-wing conspiracy now active in this country,” sees little if any progress in addressing the financial crisis that exploded on the national consciousness in the fall of 2008 by the president who was elected to fix it.  Obama’s schizophrenic reality, Townhall.com, 9/7/11.

Our federal government is closer to bankruptcy, as are many of our states, counties, and cities. *** unemployment rate [has risen since] Obama was elected, and appears to be going higher [yet] *** millions of homes in or near foreclosure, [many] abandoned and falling into disrepair *** Obama's stimulus failed to create jobs. So did QE1. And QE2 [“quantitative easing” programs of the Federal Reserve] *** Even as Social Security enters deficit territory we've created a new unfunded entitlement with Obamacare.

http://bit.ly/okZInz

Larry Kudlow, a usually upbeat financial pundit, fears the US economy may have “entered into a long-term economic decline.”  A Reagan moment, Townhall.com, 9/3/11.

[O]ver the past 10 years, the U.S. has actually lost jobs on a net basis. In August 2001, non-farm payrolls calculated by the Bureau of Labor Statistics stood at 132 million. Through August 2011, payrolls stand at 131.1 million. *** Following the Bush tax cuts of 2003, 8 million new jobs were created. But in the aftermath of the financial meltdown, those jobs have disappeared. *** And through this whole period, our economy has barely grown at a sub-par 1.6 percent yearly rate for real gross domestic product *** [while] the government has grown fat [increasing its expenditures, funded in significant part with borrowed money].

http://bit.ly/rfI61h

Economic results have also been dicey elsewhere, notably in Europe, and the global financial markets appear increasingly unstable.  Some experts fear a return of the market turmoil experienced in 2008, or even something worse.  Global slowdown to hasten new financial crises, Moneynews.com, 9/6/11.

Three years after the collapse of Lehman Brothers Holdings Inc., financial shares in Europe are under assault and the cost of insuring bank debt is at records as the global recovery falters and the euro-region crisis weighs on the economy. 

There’s a 60 percent probability that most advanced economies will fall into a recession, while authorities are running out of options to provide emergency support, said [Nouriel] Roubini, also a professor at New York University’s Stern School of Business. ***“In the short term, we need to do massive stimulus, otherwise there’s going to be another Great Depression. Things are getting worse and the big difference between now and a few years ago is that this time around we’re running out of policy bullets.”

http://bit.ly/oSFE8l

PROBLEM TWO is skyrocketing government spending and debt, which are threatening the government’s creditworthiness.  No need to say much more; we recently reviewed this situation in detail.  Who cut my credit rating? 8/1/11

If the US were any other country, their securities would merit a single A rating at best.  Total US debt is too high, fiscal deficits are staggering, and the economic outlook is mediocre.

Only days after the 8/1/11 entry was posted, Standard & Poor’s cut the US credit rating to AA+ and placed Treasury securities on its “negative” watch list for a further downgrade. 

Our reaction: what took them so long?  The Administration seemed surprised, however, if not downright displeased.

The president spun the downgrade as a statement about political wrangling in Washington, not a financial judgment based on the merits.  We will always be a AAA country, BarrackObama.com, 8/8/11.

“Markets will rise and fall, but this is the United States of America. No matter what some agency may say, we’ve always been and always will be a AAA country.

http://bit.ly/oN3gJg

Treasury Secretary Tim Geithner claimed S&P had made a $2T mistake, although the issue was actually one of interpretation vs. math.  Obama, Geithner have math problem, Bill Tatro, Townhall.com, 8/10/11.

http://bit.ly/qIY04k

There were reports of a Justice Department probe into S&P’s rating procedures, and the firm’s president left about a month later to pursue “new challenges.” Federal actions were not linked to the US downgrade decision, but who knows? S&P president Deven Sharma steps down, UK Telegraph, 9/8/11.

[Parent company McGraw Hill’s announcement about Sharma’s departure] did not refer to recent reports that the Justice Department was investigating whether S&P improperly rated dozens of mortgage securities in the years leading up to the financial crisis in 2008. Those reports sent McGraw-Hill's shares tumbling last week.

http://tgr.ph/ogyF6j

PROPOSED SOLUTIONS: The two problems we have described are overlapping.  An economic slump has clearly deepened the fiscal problem, and arguably vice versa.

Let’s see how this works before reviewing some of the specific plans on offer.

As indicated earlier, a frequently proposed cure for a recession is economic “stimulus.” The stimulus can be delivered in the form of deficit spending, tax cuts, and/or expansive monetary policy, whatever it takes to put more money in people’s pockets, thereby encouraging consumers to spend and entrepreneurs to invest.  If one attributes economic weakness to a loss of confidence, this idea sounds logical.  And now a word from a job creator, Mike Whalen, Washington Times, 9/5/11.

As government money starts to ripple through the economy, consumers and businesses will be encouraged and cautiously respond with limited increases of their own. Vroom! The economic engine steadily revs up in billions of responsive steps until happy days are here again. This pump-priming reaction is termed the “multiplier effect.”

http://bit.ly/noZxun

Suppose, however, that the real problem is restrictions on economic activities imposed by economic cartels and/or government agencies.  Fighting fire with gasoline is not very effective.  It might be better to remove the restrictions than to inject economic stimulus.  The rise and decline of nations, Mancur Olson, Yale University Press (1982).

http://www.s-a-f-e.org/rise_and_decline.htm

Economic stimulus loses credibility, moreover, when the government is obviously nearing its financial limits.  And now a word from a job creator, op cit.

. . . it appears as though everyone except Uncle Sam is working like mad to strengthen his balance sheets. The legitimate fear across the country is that Washington’s refusal to join our common-sense parade will result in higher taxes, more regulations, more inflation and Japanese-style stagflation. In other words, Washington’s attempts at stimulus through spending are having the opposite effect. Businesses and consumers stay hunkered down.

http://bit.ly/noZxun

Bottom line, even if economic stimulus may be helpful to fight a recession under certain conditions, it is certainly no panacea.  In the current situation, we believe there are much better ways to promote economic recovery and job creation. 

Most Americans have heard the economic stimulus mantra repeated so often, however, that they hesitate to dismiss it as nonsense.  And politicians have learned from experience that spending money and doling out favors wins more plaudits from their constituents than playing Scrooge.

Everyone knows that deficits and borrowing cannot keep growing at the current rate without disastrous consequences, of course, but such awareness does not necessarily result in corrective action.  Many politicians try to have it both ways by advocating (1) economic stimulus now, and (2) a plan that will supposedly reduce the deficit (or even balance the budget) in years to come.  See, e.g., Pair raising of debt limit with a long-term debt plan, Representative John Carney, [Wilmington, DE] News Journal, 5/26/11.

http://www.s-a-f-e.org/members_microblog_2011.htm

Politicians who want to start cutting spending and rescinding regulations right here, right now are not especially popular, and neither are their core supporters. Politics turns dangerously rougher, Tony Blankley, Townhall.com, 9/7/11.

In the last few weeks, leading Democrats in Congress have called Tea Party constituents terrorists, said they should go to hell and accused them of wanting to lynch black people. Last weekend, at an event attended by President Obama, the head of the Teamsters Union, Jimmy Hoffa Jr., attacked the Tea Party, screaming, "President Obama, this is your army. We are ready to march. Let's take these son of bitches (Tea Party members) out and give America back to an America where we belong." (Note: the president was not on the platform when Hoffa spoke.)

http://bit.ly/qfvJZU

Keeping this background in mind, let’s now consider some solutions suggested at three important events that took place during the space of 24 hours.

GOP presidential candidates debate, Reagan Library, 8:00 PM (EST), 9/7/11 – Eight avowed candidates (Michele Bachman, Herman Cain, Newt Gingrich, Jon Huntsman, Ron Paul, Rick Perry, Mitt Romney, and Rick Santorum) were standing at their respective podiums, with Brian Williams (CNBC) and John Harris (Politico) peppering them with questions.  One minute to respond, 30 seconds for rebuttal or follow-up at the discretion of the moderators, no opening or closing statements.  The running time (including two breaks for commercials) was about 1-3/4 hours.

Despite many differences in other areas, the candidates agreed on two points.  First, the current president has not been a good steward of the US economy or much of anything else.  Second, more jobs must be created.  (Whether due to their priorities or the questions asked, the candidates said considerably less about balancing the budget.)

If you were president, how would you propose to go about creating jobs?  A frequent answer was personal qualifications, e.g., Romney and Cain referenced their private sector experience, while Perry and Huntsman pointed to their records as governors of two states that have weathered the economic slump better than most. 

There were promises to repeal GovCare, roll back regulations, promote more domestic oil and gas production, hold down taxes, and pick someone other than Ben Bernanke when the Federal Reserve Chairman’s second term expires in 2014. If anyone proposed more economic stimulus, we missed it.

Romney referenced his economic plan, unveiled a day before the debate, which includes some 59 proposals and some rather bold (probably unrealistic) targets.  Romney predicts 4% growth, 11.5M [more] jobs, Stephen Dinan Washington Times, 9/6/11.

http://bit.ly/oKAgmN

We agree with some criticisms of Romney’s plan.  He should have been more specific about how to cut spending to 20% of GDP; real choices are needed, not just procedural reforms.  His tax proposals do not sound like the sort of comprehensive restructuring of the tax system that is needed.  And the idea of imposing trade sanctions on China is unrealistic (as former ambassador to China, Jon Huntsman, suggested during the debate).  Mitt Romney’s flawed economic plan, Washington Post, 9/7/11.

http://wapo.st/qqj36e

The former Massachusetts governor deserves credit, however, for putting his ideas on paper and making them available for review.  Furthermore, his ideas are closer to the mark than the plan that has since been offered by the president (read on).

Kickoff meeting of Joint Select Committee on Deficit Reduction, 10:30 AM, House meeting room, 9/8/11 – Co-Chair Rep. Jeb Hensarling gaveled the Joint Committee (JC) meeting to order.  (He and Co-Chair Sen. Patty Murray will alternate in presiding over the JC’s meetings.)   The 12 members were seated behind a long, raised dais like judges on a court.  The agenda was to (a) hear opening statements from each member, and (b) ratify the rules that had been agreed to.

In general, the session went smoothly.  Reasonable sounding statements, suggesting a willingness to consider all points of view – cooperation with time constraints – pledges to put the interests of the country before political calculations, and to exceed the JC’s deficit reduction target ($1.5T over 10 years) if possible.

The sole exception was an eruption of shouting, which sounded like “jobs now, jobs now, jobs now,” in the hall outside the room.  Whether by coincidence or otherwise, this outburst began during the statement of Rep. Dave Camp (R-MI).  Hensarling suspended the proceedings for several minutes, and then asked staff members to shut the door so the meeting could resume (muffled shouting continued for several minutes).  We would think building security could have dealt with the situation more quickly; hopefully, the demonstrators (whoever they were) will be prosecuted.

The JC meeting was not a debate, and it would serve little purpose to recap all the viewpoints expressed.  Here are three points, however, that seem noteworthy.

#Several members noted that boosting economic growth could contribute to reducing the deficit.  The Congressional Budget Office (CBO) has apparently suggested as a rule of thumb that a 0.1 percentage point increase in the 10-year economic growth rate would cut the 10-year deficit by $300M (which one member extrapolated to a one percentage point increase resulting in a $3T cut).  Here is a potential rationale for the JC to get involved in attempting to solve the jobs problem, which might divert its attention from finding provable ways to reduce the deficit, e.g., spending cuts.

The CBO has traditionally declined to factor in the drag or stimulative effects of tax law changes.  It would seem inconsistent to attribute stimulative effects to added spending.  This point will bear watching as matters progress.

#Under the rules adopted by the JC, we understand that general meetings will be open to the public and the JC report will published before being  voted on.  However, there will also be some closed-door meetings. The approach described is consistent with SAFE’s “be open” recommendation, which was meant to provide the greatest practicable degree of transparency. (8/22/11 letter)

http://bit.ly/on2sFD

#The next meeting of the JC will take place tomorrow, September 13.  There will be one witness, CBO Director Douglas Elmendorf, who will testify at length about his perspective on the fiscal problem.

For those who would like more details about the JC kickoff meeting, here is the C-Span videotape (1 hour, 2 minutes).  The JC members spoke in the following order: Rep. Jeb Hensarling, Sen. Patty Murray, Sen. Rob Portman, Rep. Xavier Becerra, Rep. David Camp, Sen. Max Baucus, Sen. Patrick Toomey, Rep. James Clyburn, Rep. Fred Upton, Sen. John Kerry, Sen. Jon Kyl, and Rep. Chris Van Hollen.

http://cs.pn/qkpGY5

Do not be misled by the show of civility.  Many disagreements are simmering below the surface.  Thus, shortly after this session, Senator Jon Kyl expressed his intention to resign from the JC if there is any move for defense cuts beyond those ($350B over 10 years) already mandated by the Budget Control Act of 2011.  Congressional debt reduction [sic] panel kicks off work, David Espo, friends of US Chamber, 9/9/11.

"I'm off the committee if we're going to talk about further defense" cuts, Arizona Sen. Jon Kyl said he told panel members. Speaking at a defense forum [sponsored by several conservative groups], Kyl said the military "has given enough already, and any further hit would be inimical to our national security around the globe."

http://bit.ly/pLbq11

Presidential address to a joint session of Congress, 7:00 p.m., 9/8/11 – A great deal has been written about this speech, much of it unfavorable.  See, e.g., The speech that broke the patience of the country? Hugh Hewitt, Townhall.com, 9/8/11.  

His repetition of long-overused talking points combined with his repeated attacks on job creators and his incessant demand to “pass it right now” produced a mixture of arrogance and absurdity so transparently political that it lacked any capacity to cause political movement or to change anyone’s opinion on any issue.

http://bit.ly/nuFDh7

Fair enough.  The president displayed no interest in reaching out to political adversaries. His tone was blunt, overbearing, at times angry.  Given his plan to take “the American Jobs Act” on the road (starting with an event in Richmond, VA the very next day), one might well regard this televised address as a campaign speech on the taxpayer’s dime. 

The president’s plan was forcefully expressed, however, and the members of Congress will surely remember the main elements. So let’s forget style points and focus on the substance – with our comments shown in [brackets]. Speech transcript.

http://bit.ly/qAMshK

#“I am sending this Congress a plan that you should pass right away.  It’s called the American Jobs Act.”  [Based on a subsequent report, the AJA will be sent to Congress on September 12.]
 

More jobs for construction workers – repair badly decaying roads and bridges all over this country – repair and modernize at least 35,000 schools – rehabilitate homes and businesses in communities hit hardest by foreclosures – no earmarks, no boondoggles, cut the red tape, set up an independent fund to attract private dollars and issue loans based on two criteria: how badly a construction project is needed and how much good it would do for the economy.

More jobs for teachers – thousands of teachers in every state will go back to work.

More jobs for veterans – companies will get extra tax credits if they hire America’s veterans.

More jobs for the long-term unemployed – companies will get a $4,000 tax credit if they hire anyone who has spent more than six months looking for a job.

Extend unemployment insurance for another year [query whether that will give the recipients an incentive to get back to work].

Tax cut for companies that hire new workers or raise workers’ wages – thousands of disadvantaged young people will have the hope and dignity of a summer job next year – low-income Americans will have more ladders out of poverty.

Cut payroll taxes in half for every working American by extending payroll tax reduction put into effect for 2011 – Would mean a $1,500 tax cut for the typical working family.

Cut payroll taxes in half for every small business.

[Overall, these proposals sound quite similar to the economic stimulus package enacted two years ago.  The 2009 plan proved ineffective; why should anyone expect a similar plan to work now?]

#The basically one-year price tag (tax revenue foregone + added spending) would be roundly $450B.  [This detail was not mentioned in the speech, but has been provided by the Administration.]

Not to worry, the bill will be paid in full and here is how.  The July debt reduction agreement charges Congress with coming up with an additional $1.5 trillion in savings by Christmas – tonight I’m asking you to increase that amount to cover the full cost of the American Jobs Act – a week from Monday [i.e., on September 19], I’ll be releasing a more ambitious deficit plan that will not only cover the cost of this jobs bill, but stabilize our debt in the long run.

[With all due respect, the fiscal problem is more urgent than the president lets on.  This country cannot afford “another drink for the road,” to be paid for over the next 10 years.  It is time to start bringing down the deficit right now.]

Some hints about the forthcoming deficit [reduction?] plan – reform Medicare to strengthen it – raise taxes on “those who are most fortunate and can best afford it – reform corporate tax by lowering one of the highest corporate tax rates in the world and eliminating pages of loopholes and deductions (especially for oil companies) – give an advantage to companies that invest and create jobs in America.

[What about the need to repeal GovCare, block grant Medicaid, and restructure Social Security?  Our proposals are spelled out on the SAFE Website. 

As for tax changes, Congress should stop tinkering and overhaul the system. See SAFE’s SimpleTax proposal. http://bit.ly/etlOxX]

#And we must also act to improve US competitiveness over the long term, through both administrative and legislative action, so that “America will be number one again.”

Administrative action: pay small businesses that do business with the government faster – cut red tape that prevents too many rapidly-growing start-up companies from raising capital and going public – work with federal housing agencies to help more people refinance their mortgages at currently low interest rates – look for ways to work side-by-side with American businesses, e.g., in the Jobs Council that “I’ve brought together” – mobilize business leaders to train 10,000 American engineers a year by providing company internships and training – make sure our trading partners play by the rules.

Legislative action: Today you passed patent reform legislation, which will permit entrepreneurs to turn a new idea into a new business as quickly as possible.  Now it is time to clear the way for the Panama, Colombia, and South Korea trade agreements by passing legislation to help workers whose jobs have been affected by global competition.

[The patent reform legislation sounds sensible from what we have read, although we are not sure how much the Administration had do with it.  A three-year holdup in submitting the trade agreements for ratification seems inexcusable; let the proposed liberalization of worker retraining programs be considered on its own merits.  The other ideas mentioned do not amount to much.]

# Finally, for those who sincerely believe the only solution to our economic challenges is to simply cut most government spending and eliminate most government regulations, here’s the deal.

I will continue to work with Congress to get rid of wasteful spending.  And I agree that there are some rules and regulations that put an unnecessary burden on businesses at a time when they can least afford it.  So far, we’ve identified over 500 reforms, which will save billions of dollars over the next few years.

But I reject the notion that we should ask people to choose between their jobs and their safety, or roll back protections that ban hidden fees on credit card companies, or discard rules that keep kids from being exposed to mercury, or prevent the health[care] insurance industry from shortchanging patients, or strip away collective bargaining rights.

[We find these arguments unpersuasive. The hit list of regulatory reforms is a drop in the proverbial bucket.  No one is proposing to compromise worker safety, expose children to mercury, etc., but a balancing of risks and costs is definitely in order.  And what, pray tell, is the basis for the reference to stripping away collective bargaining rights just because the NLRB has been justly criticized for hyperactivity?]

PROGNOSIS – We are not confident that Congress will adopt a budget on a timely basis, i.e., before Fiscal Year 2012 begins on October 1.

It is unclear whether the Joint Select Committee on Deficit Reduction will refrain from dabbling in extraneous matters, e.g., economic stimulus, and propose a deficit reduction plan that would actually work.  A list of targeted spending cuts, 8/22/11.

The American Jobs Act is a spend now, pay later scheme.  It does not deserve serious consideration.  But the president has made a forceful pitch for it, and the House Republicans have expressed willingness to consider at least some of its elements.  GOP wants Obama plan a la carte, Jonathan Allen, Politico.com, 9/10/11.

http://politi.co/pX46qd

Perhaps the net result of all this activity will be positive, we certainly hope so, but don’t bet the ranch on it.

top     close    ww3@atlanticbb.net


9/5/11Federal Family Flim Flam        Read Replies

The week of August 22-28 brought two natural disasters in the eastern United States, an earthquake and Hurricane Irene. Not a good week, for sure, but did the media coverage and government reactions make things worse?

We say “no” for the earthquake, despite some question marks, but handling of the hurricane provides a textbook example of “what is wrong with big government.”  Our reasoning follows. Your feedback would be appreciated as always.

EARTHQUAKE: A major earthquake by East Coast standards occurred on August 23.  It was centered about 90 miles southwest of Washington, DC, and the shockwaves were felt from Florida to Maine.  Magnitude 5.8 earthquake hits Virginia, Fox News, 8/23/11.

http://fxn.ws/pSULoH

The quake lasted only a minute or two and many people did not immediately recognize its nature.  See, e.g., the account of Senator Chris Coons of Delaware.

Having arrived at Union Station, Coons was on foot in a park facing the Capitol when he felt the tremor.  “The ground around me shifted sharply several feet in both directions.  All the people who were walking around me sort of froze and looked around and tried to figure out what was happening.”  His first thought was that the ground might be swaying due to a terrorist attack or an accident at a nearby construction site, but he reportedly “learned it was an earthquake when he got on the phone for an MSNBC interview.”  The pro forma session that Coons was to preside over had been scheduled for 2:30 PM, but the Capitol had been evacuated and no one was allowed back inside.  Accordingly, the session was convened in a basement conference room of the nearby Postal Square Building, which is designated for congressional use in an emergency. 

http://www.s-a-f-e.org/members_microblog_2011.htm (8/24 entry)

The quake response was particularly vigorous in the DC area.  Numerous buildings were evacuated, ranging from the US Capitol and the Pentagon to a nursing home in Alexandria, VA (first person account, only minor damage to the building but residents were kept outside for about 30 minutes in case of aftershocks).  Many employees were sent home early, causing considerable traffic-related congestion. Earthquake shows difficulty of evacuating from DC, Eric Tucker, ABC3340, 8/25/11.

http://bit.ly/mVner5

Several public landmarks were damaged, notably the Washington Monument (cracks near the top) and the National Cathedral (3 of 4 spires atop the central tower broke off).  DC area evaluates earthquake damage, Andrea Noble, Washington Times, 8/24/11.

http://bit.ly/n8Wj2J

Most property owners did not have earthquake insurance, or had coverage with a high deductible, so there will probably never be an accurate estimate of the aggregate losses in DC and elsewhere.  Few homeowners’ earthquake damage covered by insurance, Hayley Peterson, Washington Examiner, 8/26/11.

http://bit.ly/p5nyq4

Two nuclear reactors at the North Anna, VA site (a few miles from the epicenter) automatically shut down.  Pending review by Dominion Power and the Nuclear Regulatory Commission, they will stay closed.  Regulators [call] for further investigation at earthquake-affected plant in Virginia, Shushannah Walshe, ABC News, 8/29/11.

http://abcn.ws/mXZSNK

More generally, the NRC plans to review seismic risks at nuclear power plants nationwide.  The timing of the announcement was said to be coincidental, although the Virginia quake and Fukushima will surely spark public interest.  NRC requires new look at quake risk for nuclear reactors, Pam Sohn, timesfreepress.com, 8/29/11.

“We have been re-evaluating seismic issues since long before the [Fukushima Dai-ichi] event in Japan, much less the Virginia earthquake,” [an NRC spokesman] said. “This long-standing initiative was launched when new data became available indicating that seismic risks in the eastern and central parts of the country might be greater than earlier estimates.”

http://bit.ly/nzsMZO

Reflecting on the foregoing, we are not inclined to be critical. No one knew an earthquake was coming, so there was no advance hype. Many building evacuations may have been unnecessary, but they were understandable under the circumstances.  At least that is what DC worker Emily Varanay thinks. Farmer’s Almanac: DC is wimpiest weather city, Liz Essley, Washington Examiner, 8/31/11.

It was silly for everyone to be so angry for the way we reacted to the earthquake because our buildings aren't built like they are on the West Coast.

http://bit.ly/nrVW7h

Fiscal visionaries should stay alert, however, lest alarmist thinking about the Virginia quake spawn future problems.  Here are two issues to watch for:

ü      When will the North Anna nuclear power plant reopen, and will any unreasonable restrictions be imposed?  Similarly, will this event reinforce the backlash against nuclear power already set in motion by the quake and tsunami-induced damage at the Fukushima nuclear plant in Japan?  We view nuclear power as a vital element in the US energy sector, which must not be sacrificed on the altar of superstition and political expediency.  Japanese nuclear plant damage: a big setback for nuclear power, 3/21/11.

ü      About earthquake insurance, let’s hope the government will not move to supplement private insurance arrangements – as previously happened with federal flood insurance and hurricane insurance in Florida.  Better to let property owners absorb their own losses if earthquake coverage is not available at a price they are willing to pay than to put taxpayers on the financial hook.  

HURRICANE IRENE made landfall in North Carolina on August 27 and moved up the coast from there.  Although less intense than expected, it caused widespread flooding, billions of dollars in property damage, and over 40 fatalities.  Irene forecasts on track; not up to speed on wind, Seth Borenstein & Christine Armario, myway.com, 8/28/11.

http://bit.ly/njiPVF

Ever since the bungled handling of Hurricane Katrina in 2005, there had been talk about the need for the Federal Emergency Management Agency (FEMA) and other government units to do a better job of handling the next big hurricane – wherever it might happen to strike.  So a connection was predictably drawn – by the media and political leaders alike – between the developing Hurricane Irene and Katrina.

No purpose would be served by rehashing the Katrina situation, which reflected mistakes of the Mayor of New Orleans and Governor of Louisiana as well as federal miscues.  Suffice it to say that the results did little to burnish anyone’s reputation, and that the preceding president was harshly criticized for not cutting his vacation short, surveying the affected area from Air Force One without landing, etc.  Decision Points, George W. Bush, Crown Publishers (2010), pp. 308-333.  

Politicians currently in office were not about to be accused of failing to respond decisively to Hurricane Irene.  Massive evacuations of coastal areas were ordered, including an unprecedented order for the evacuation of a quarter million people in the New York City area.  Mayor Michael Bloomberg also shut down the subway system and urged all New Yorkers to stay indoors throughout the storm.  NY mayor orders evacuation ahead of Hurricane Irene, LA Times, 8/26/11.

"We don't have the manpower to go door to door to drag people out of their homes.... Nobody is going to get fined, nobody is going to jail," he said. But if they didn't leave [reportedly there were many holdouts], he added, "people are just going to die."

http://lat.ms/r7Caay

Similarly aggressive measures were taken elsewhere.  In Delaware, for instance, state workers were sent home at noon on Friday – 36 hours before the storm was expected to hit.  The following day, key bridges were closed and a driving ban was imposed for nonessential travel.  Delaware bans driving; closes major bridges, John Mussonik, newswatch.org, 8/27/11.

The Governor had been leaning away from an all out driving ban earlier in the day. His order suggests he had to adjust to the changing conditions [but the storm outlook was improving, not getting worse].

WHEREAS, as a result of the continued dangers posed by Hurricane Irene, the Delaware State Police has requested that reasonable driving restrictions be instituted statewide.

http://bit.ly/qqJtXy

Television service continued for those with power (most of the population), but with frequent break-ins by the National Weather Service that conveyed little useful information.  Besides, the graphics are ugly and the klaxon horn is annoying. 

Sample warning: A tornado advisory has been issued for the ABC area until X time; everyone should stay away from windows and relocate to a closet or the basement.  Some people probably took this advice, the first time at least (remember the story of “the boy who cried wolf”), but this writer chose to ignore it. 

A tornado did touch down in Lewes, DE, but it was a relatively minor one (uprooted trees and destroyed a garage) as tornados along the East Coast usually are.  F-1 tornado confirmed: investigation by weather service says twister hit Lewes area, Doug Dennison, [Wilmington, DE] News Journal, 9/1/11.

"When a hurricane comes close, it's actually not that rare of an event," [a NWS meteorologist] said. "These are very weak ones, though, and embedded in the overall winds of the hurricane."

http://bit.ly/oFnEky

Backstopping state and local efforts, FEMA and other federal agencies were also on the job – including the president who had cut his vacation short by about 12 hours so as to be seen as personally engaged.  His comments sounded ominous.  Obama takes charge at hurricane command center, Yahoo.com, 8/27/11.

This is going to be a tough slog getting through this thing . . . a long 72 hours . . . a lot of families are going to be affected . . . an enormous strain on a lot of states . . .

http://yhoo.it/qpxWto

On Sunday afternoon, with the weakening tropical storm then well past New York, the president attributed lighter than forecast damage to an effective government response.  Obama on Irene: “This is not over,” Julia Pace, Washington Examiner, 8/28/11.

While Irene was far weaker than expected, at least 18 people died in the storm and early damage estimates were in the billions of dollars. But Obama said the toll could have been much higher had it not been for preparation and coordination by FEMA and other emergency personnel.

http://bit.ly/q9Ko17

A likelier explanation is that the forecasts were wrong.  Although Hurricane Irene covered a huge area, it lacked the punch of the storm to which it had been initially compared.  How Hurricane Irene stacks up vs. Katrina, Mike Wall, MSNBC, 8/29/11.

It was a Category 1 hurricane when it hit North Carolina, with maximum sustained wind speeds around 85 mph. By the time it hit the Northeast, Irene had weakened to a tropical storm again, with top winds of about 60 mph.

http://on.msnbc.com/nUiVCj

One might accept the use of “conservative” forecasts on grounds that the authorities were right to err on the side of caution.  Stop criticizing officials for ordering evacuations, [Wilmington, DE] News Journal, 9/1/11.

As bad as it was in this area, the hurricane could have been worse. But since it wasn't as bad as predicted, the officials ordering evacuations are being criticized in some quarters as overreacting. *** The same critics would be screaming at the top of their lungs if an official hesitated and something went wrong.

http://bit.ly/rc9IX3

If the media and politicians were simply being cautious, however, they neglected to let the public in on their thinking. 

Preparation for the worst-case scenario makes sense and could have saved hundreds during Katrina. But the worst-case scenario [for Irene] was largely portrayed as inevitable. Some of the footage of television reporters putting themselves in the most extreme position possible just to get the best “stand-up” live shot was beyond parody.

Consider the account of a CNN reporter.

“We are in, right, now…the right eye wall, no doubt about that…there you see the surf,” he said breathlessly. “That tells a story right there.”  Stumbling and apparently buffeted by ferocious gusts, he took shelter next to a building. “This is our protection from the wind,” he explained. “It’s been truly remarkable to watch the power of the ocean here.” The surf may have told a story but so too did the sight behind the reporter of people chatting and ambling along the sea front and just goofing around. There was a man in a t-shirt, a woman waving her arms and then walking backwards. Then someone on a bicycle glided past.

Politicians acted in their own interests, which generally meant making a show of being in charge.  New Jersey Governor Chris Christie, for example, had been lambasted for taking a holiday during one of the worst snowstorms in the state’s history.  Seeing a chance for political redemption, he ordered an aggressive evacuation before Irene hit. Perfect storm or hype: politicians, the media and the Hurricane Irene that never was, Toby Harnden, UK Telegraph, 8/28/11.

After the storm had passed, Christie insisted that his evacuation of the Jersey Shore was “a pre-emptive measure that I am confident saved lives” and there could still be damage worth “tens of billions” of dollars.

http://tgr.ph/oHy7pT

Commentator Rush Limbaugh suggests that the media and politicians were disappointed when the storm did not measure up to the picture they had painted.  Media hyped Hurricane Irene to boost Obama, Newsmax.com, 8/29/11.

There wasn't any wind. It was a rainstorm and there was a lot of flooding and there were deaths associated with it, but the hype, folks, I'll tell you what this was. It was a lesson, if you pay any attention to this, the hype, the desire for chaos, I mean literally, the media desire for chaos was a great learning tool, this was a great illustration of how all of the rest of the media in news, in sports, has templates and narratives and exaggerates beyond reality, creating fear so as to create interest.

http://bit.ly/pfYwqi

Perhaps Limbaugh’s comments went too far, but we think the handling of Hurricane Irene does illustrate some of the flaws of big, pervasive, cost is no object government.

#Issues are reported in a one-sided way, with candor being the exception rather than the rule.  Thus, as we have seen, Hurricane Irene’s impact was exaggerated considerably.

#Politicians overestimate their own knowledge while underrating the intelligence of the general public, as evidenced by their condescending communications.  Group A, evacuate now (by the way, the roads will be closed soon).  Group B, stay inside and we will inform you when the problems are over. 

#Government infallibility is implied despite a great deal of historical evidence to the contrary.  See, for example (emphasis added), the statement of the president et al. on Hurricane Irene, 8/28/11.

Now, the Department of Homeland Security will continue working to coordinate the federal response through FEMA, making sure that the entire federal family is working as one to support the affected states.

http://1.usa.gov/nfc4ZJ

#Fans of big government seem to have no sense of limits, and anyone concerned about the cost of protective measures is derided as a Neanderthal. Politicizing hurricanes again, Brent Bozell, Townhall.com, 8/31/11.

Then [Al Sharpton] turned to former Democratic Gov. Ed Rendell and asked, "What is your take on this anti-government rhetoric in the middle of this crisis, unprecedented crisis for people on the East Coast?"

Unprecedented? Hurricane Irene was frightening and had a death toll that stands at 37. But compared to hurricanes like Katrina and Rita, she was a nuisance. Hysteria politics were definitely overcoming the reality that had yet to occur. Rendell replied: "It is absolutely stunning, Al. It reminds me of the saying, 'The inmates are running the asylum.' It's lunacy."

http://bit.ly/oolSDj

Actually, House Republicans have proposed to increase funding for disaster relief, but they want offsetting cuts in other areas – such as funding for electric car companies.  What’s wrong with that?  Leveraging a hurricane, Wall Street Journal, 9/3/11.

http://on.wsj.com/nYsv1D

#While obsessing about the problems du jour, politicians fail to address longer-term issues – typically arising from unwise government policies – such as the drug-fueled calamity along this country’s southern border.  Deadlier than Irene, Oliver North, Townhall.com, 9/2/11.

Illicit drug trafficking and human trafficking across our southern border have reached unprecedented levels. Violent criminal gangs directly connected to Mexican drug and extortion cartels kill and maim nearly 1,000 Mexican citizens every month -- a level of violence well beyond that experienced in Iraq or Afghanistan. The carnage is wrecking any hope for normal life or economic activity in Mexican society and prompting a new flood of desperate "refugees" across our border.

http://bit.ly/o13yBm

Other examples would include the fiscal problem (it’s so much fun to spend other people’s money) and US economic decline (private sector falters under a perverse tax and regulatory regime).

#Finally, government takeover of one activity after another that supposedly involve issues too tough for “ordinary people” to cope with is eroding the sense of personal responsibility in this country. The essential rules of tyranny, Brandon Smith, market.com, 7/29/11. 

People who are easily frightened are easily dominated. *** [Tyrants] instill apprehension in the public; a fear of the unknown, or a fear of the possible consequences for standing against the state.  

http://bit.ly/q1uD9P

If you agree, join us in speaking up before it is too late.

*        *        *        This Blogs replies        *            *        *

As usual I agree with your outlook, not that it helps me sleep better.  –  College classmate

A result of global warming to be sure.  –  SAFE director

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8/29/11 – Congress’s ratings hit new lows: some thoughts about the stats         Read Replies

Other observers are still talking about the debt limit deal and the Joint Committee it spawned, but we are up to date on that story for now and will shift to another topic.

Results vary depending on how the question is asked, but Congress as an institution fares poorly in public opinion polls.  See, for example, New low: 6% think Congress is doing a good or excellent job, Rasmussen, 7/26/11.

June 24-25, 2011

How would you rate the way Congress is doing its job?

Excellent

1%

Good

5%

Fair

31%

Poor

61%

http://bit.ly/jJX1bc

What accounts for such low ratings?  This entry will present more polling data, discuss possible explanations, and consider some implications.

DATA:  Gallup asks the question like this: “Do you approve or disapprove of the way Congress is handling its job.” An excess of disapproval over approval has been typical since Gallup began its series in 1974, with the notable exception of a few months after 9/11. The approval rating hit a record low of 13% in December 2010, which was recently matched. Summer Doldrums: Congressional approval rating ties all-time low, Erik Hayden, Atlantic Wire, 8/16/11.

http://bit.ly/ngv5iP

Other pollsters report similar results, e.g., a 6-poll average during the period June 9-August 14: Approve 16%, Disapprove 78%.  Based on an historical chart, the narrowest spread during the current Administration was on 3/9/09:  Approve 33%, Disapprove 55%.  Congressional Job Approval, Real Clear Politics.

http://bit.ly/aHdpnM

People apparently think better of their own representatives in Congress.  Consider these results.  Congress job ratings, Polling Report.com.

Date

Poll

Performance of

Approve

Disapprove

Unsure

10/25-28/10

ABC/ Wash. Post

Congress

23%

74%

3%

Your representative

53%

40%

7%

10/1-5/10

CBS News

Congress

18%

71%

11%

Your representative

40%

40%

20%

http://bit.ly/d9vEdM

EXPLANATIONS: One interpretation of the foregoing results is that Congress is in fact doing a poor job.  But there also reasons why Congress might be expected to receive lower than warranted ratings.

#Lack of empathy: The members of Congress are people; Congress as a whole is a big group.  One may hesitate to “disapprove” of an individual’s performance unless he or she is obviously doing a bad job; it is easier to “disapprove” of a group’s performance.

People do rate their elected representatives more highly than they rate Congress, as we have already seen, even though the overall performance of the House of Representatives (and the same goes for the Senate) should logically equal the average performance of its members.

Likewise, approval ratings run higher for the president than for Congress – as might be expected since everyone knows a bit about the president and many people voted for him (or her).  Ignoring “somewhat” responses, the spread between presidential approval and disapproval currently stands at 21 percentage points (versus a reported spread of about 60 percentage points for Congress).  Count “somewhat” responses and the presidential spread falls to 12 percentage points. Daily presidential tracking poll, Rasmussen, 8/26/11.

Strongly approve

Somewhat approve

Somewhat disapprove

Strongly disapprove

23%

21%

12%

44%

http://bit.ly/IhrCW

#Performance criteria: What does it mean to say one “approves” or “disapproves” of the performance of Congress?  Approved legislation (the stimulus package, GovCare, etc.) presumably counts; so should blocked proposals (such as “Cap and Trade” or comprehensive immigration “reform”).  There also style points, e.g., the manner in which hearings are conducted and whether the members of Congress are perceived to be debating or bickering. 

With 535 members of the two houses, many essentially cancelling each other out, impressions of Congress become a generalized blur.  We would therefore posit that the overall ratings should be similar to responses to another well-known poll question: Do you think this country is headed in the right direction?

Recent results (65 percentage point spread in favor of the country being on the wrong track) seem to support our supposition, although Rasmussen relates them to presidential versus congressional popularity.  Such a view is logical.  After all, the members of Congress are elected to represent the interests of their respective constituents – not the entire country.  A national president can speak with one voice; Congress rarely does so on matters of substance.  Right direction or wrong track: 14% say US heading in right direction, Rasmussen, 8/24/11.

When President Obama assumed office in January 2009, optimism rose to 27% and climbed to the low to mid 30s – peaking at 40% -- until May 2009.  That figure has steadily declined since. 

Seventy-nine percent (79%) of voters say the country is heading down the wrong track, down slightly from last week.  From January 2009 until the end of July, voter pessimism had ranged from 57% to 75%.

http://bit.ly/K3paH

Another observer suggests, however, that the low ratings for Congress reflect the economic slump rather than any particular thing Congress has done.  Congressional job approval nears “lowest ever” levels: What can turn it around?  Mark Blumenthal, Huffington Post, 8/5/11.

http://huff.to/oZ7BnI

This suggestion may be based in part on a desire to blame someone other than the president for currently disappointing economic results, e.g., a jobless rate of over 9%.  Efforts are also being made to attribute said results to the previous president, although that claim may lose potency as time goes by.  Obama escapes blame for economy, Brian Hughes, Washington Examiner, 8/25/11. 

More than 85 percent of adults surveyed describe the economy as "poor" and nearly half say the situation has been exacerbated in the past month. Sixty-three percent disapprove of Obama's handling of the economy, with 48 percent saying they "strongly" disapprove.

http://bit.ly/qYzP2P

IMPLICATIONS: Two interesting questions emerge from the foregoing, one relating specifically to Congress and another of a more general nature.

#If there is so much disappointment with the performance of Congress, why do incumbents keep getting reelected? 

Even in 2010 (when many Americans were fired up about reckless spending, GovCare, bailouts, etc.), incumbents won over 80% of both House and Senate races.

The CRP notes that incumbents typically have an advantage in name recognition and campaign cash.  We would add that House electoral district lines tend to be drawn in ways that make for safe seats. Reelection rates over the years, Center for Responsive Politics, opensecrets.org.

http://www.opensecrets.org/bigpicture/reelect.php

The residents of any given state rate their representatives (and probably senators) higher than Congress as a whole.  Not only are the local members identifiable people, as previously suggested, but also the fate of important legislation will rarely be decided by their individual votes.  Accordingly, their prowess in “bringing home the bacon” may take precedence over their voting records.  Lawmakers: earmarks ban would not – should not – end spending on local projects, Susan Ferrechio, Washington Examiner, 11/23/10.

Rep. Jo Ann Emerson, R-Mo., sponsored 38 earmarks last year totaling more than $30 million for projects back home, according to the Center for Responsive Politics. She now worries that there won't be enough money to repair crumbling roads and bridges in her state. Without earmarks, decisions about how to spend those federal dollars will be left to the executive branch.

"The earmarks that I previously have done are not because of lobbyists, but because the Missouri Department of Transportation comes with a list of all the highway projects or the water and sewer district asks for funding," Emerson said. "Unless you consider a mayor in a community a lobbyist and I don't."

http://bit.ly/dtoZ5d

Finally, low ratings mask underlying conflict.  Some voters are upset because Congress took actions they dislike; others feel Congress did not go far enough.  An incumbent who straddles the issue may represent a consensus choice.

While one might infer from the current ratings for Congress that it is time to fire all the members and start over, such an outcome seems unlikely.  A more practical objective might be to vote out enough incumbents to give the members of Congress a scare and keep pushing for desired changes in policy.

Whatever the future holds, many members of Congress (on both sides of the aisle) are concerned by the forthright and in some cases angry public feedback they have been encountering of late.  Members of Congress avoid town hall brawls this recess, Lisa Mascaro, L.A. Times, 8/26/11.

Lawmakers seem to prefer meeting constituents in more controlled venues, avoiding rabble-rousers or amateur videographers who may turn them into the next online spectacle. Some events are hosted by groups that charge entrance fees, another way to filter who is in the audience.

http://bit.ly/qVSmBc

#If most Americans disapprove of (a) Congress, (b) the president, and (c) the direction in which the country is headed, where does that leave us?

One answer might be that you cannot please everyone.  Human beings are seekers by nature and rarely satisfied for long.  As a famous general once said (going on memory here), “When griping in a unit stops, the commander better start worrying about morale.”

On the other hand, Americans may correctly sense that this country is in a long-term decline.  If so, it would be natural for them to disapprove of what is going on and blame some or all of the nation’s leaders.  National Suicide: How Washington is destroying the American dream from A to Z, Martin Gross, Berkley Books (2009).

http://bit.ly/o5jYew

Here is a variation on the national decline theme.  Let’s assume Americans are unhappy with themselves for allowing the current situation to develop, and should therefore be willing to devote some serious effort to setting things right. To quote the immortal bard (but without advocating violent action as Cassius did):

The fault, Dear Brutus, is not in the stars,
But in ourselves . . .

http://bit.ly/FoONg

Do not expect plaudits from the “government class,” which is basically satisfied with current policies and allergic to suggestions from the general public. No partisan divide, just parallel partisan universes, David Keene, Washington Times, 8/23/11.

They are so sure of themselves that “Meet the Press” host David Gregory, a charter member of Mr. Rasmussen’s political class, dumbfounded by Michelle Bachmann’s vote against raising the debt ceiling, asked her after the Iowa straw poll how she could possibly defend her position when “virtually everyone in a leadership position” disagreed with her. When she responded that 80 percent of the country disagreed with those leaders, Mr. Gregory dismissed that by saying, “What does that matter?”

http://bit.ly/ojHpsQ

As for the “special interests,” they have sold their souls for a bunch of government pottage and will fight to protect their turf.  The big ripoff: how big business and big government steal your money, Timothy Carney, John Wiley & Sons (2006).

http://www.s-a-f-e.org/big_ripoff.htm

In addition to being unfair, the machinations of the special interests serve to undermine the national economy.  The rise and decline of nations, Mancur Olson, Yale University Press (1982). 

The gist of Olson’s theory is that special interest groups (producer cartels, labor unions, etc.) rig prices and/or output so as to advance their own interests, typically with the approval or support of the government. This leads to misallocation of resources and lower economic output than would otherwise be realized, but group members will be better off.

The economic system gradually sludges up, with less effort devoted to profitably boosting economic output and more to dividing the economic pie (aka “rent seeking”). 

When changes in economic conditions occur, e.g., unexpected deflation or inflation, the painstakingly negotiated arrangements of the special interests take time to adjust.  In the meantime, needed economic adjustments are not made, which Olson posits as one of the reasons for the length of the Great Depression in the 1930s and the emergence of stagflation (a previously unknown occurrence) in the 1970s.

http://bit.ly/o4pNYL

Thirty years after Olson’s book, a similar situation has developed – and the government elite is floundering.  Print money, borrow for more stimulus spending, unleash an avalanche of new regulations, do anything but reform the tax code, cut government spending, and put the brakes on government regulators so business leaders will get back to trying to make money the old fashioned way (“earn it”).  Out of touch on economy, Salena Zito, Townhall.com, 8/21/11.

The president and his team have a poor understanding of how to get the economy going and to create jobs, said Stanley Block, chairman of the finance school at Texas Christian University: “You really keep regulation low and taxes low and keep things predictable, and you don't change things in a major way.”

“If he really wanted to create jobs, he would eliminate what he has done in the first two-and-a-half years,” said Block, all of which has been “counterproductive to growing jobs.”

http://bit.ly/oLMtqP

Will the general public speak up about the current situation in such a way that its wishes cannot be ignored?  Possibly, but there are some major obstacles.

#Self-interest: It is not just business groups and unions that have a vested interest in sub-optimal economic arrangements, so do many other people.   We have in mind the recipients of a host of government benefits – Social Security, Medicare and other government healthcare programs, long-term unemployment benefits, food stamps, etc. – which in the aggregate promote idleness and dependency.

No disrespect is intended for the recipients of any of these benefits, your faithful scribe accepts Social Security benefits himself, but they will prove unaffordable over the longer term (as suggested by current and projected deficits).  They are also far broader than would have been necessary to protect the disadvantaged.  Misleading Words, Part II, Thomas Sowell, Townhall.com, 8/3/11.

If government programs were confined to people who were genuinely poor in some meaningful sense, that would shrink the welfare state to a fraction of its current size. The left would lose their human shields.  *** It is one thing to keep people from suffering from unforeseeable things beyond their control. But it is something else to simply subsidize their necessities so that they can spend their money on other things and leave a larger estate to be passed on to their heirs.

http://bit.ly/qPcja3

When a government shifts from promoting the general welfare to serving the interests of special interests or defined classes of people, battle lines get drawn. Some observers may attribute the resulting “partisan divide” to fiscal conservatives, but the big spenders are really responsible.  Rise and Decline, Olson, p. 47.

The common interests that all or most of the people in a nation share can draw them together, as they are drawn together when they perceive a common interest in repelling aggression.  In distributional struggles, by contrast, none can gain without others losing as much or (normally) more, and this can generate resentment.  Thus when special-interest groups become more important and distributional issues accordingly more significant, political life tends to be more divisive. *** The divisiveness of distributional issues, and the fact that they make relatively lasting or stable political choices less likely, can even make societies nongovernable.

Nor is this just a theory; we are seeing just such a situation in the United States and most Americans sense it.  Partisan politics: 68% expect DC politics to become even more divisive, Rasmussen, 8/18/11.

Only 12% believe politics in the nation’s capitol will grow more cooperative during [the next year], the lowest finding since March 2009. Another 19% are undecided.

http://bit.ly/RDDU4

#Different opinions: Self-interest is one reason for disagreement amongst the ranks of Americans who believe this country is headed in the wrong direction.  Another factor is genuine differences of opinion.

Few would really want the poor starving in the streets or perishing for lack of medical care.  And once a duty to help has been recognized and the government (federal or state) gets involved, where does one draw the line? 

There is no definitive answer to that question, of course, but we appreciated the thoughtful comments of Senator Marco Rubio (R-FL).  People who truly need help should get it, he suggests, but the assistance must not be allowed to become a “way of life.” Speech at the Reagan Library, 8/23/11, 23-minute video (and worth the time). 

http://bit.ly/mR1VoJ

#Apathy: Based on expected effort versus payoff, people may conclude that being politically active is a great idea – for someone else.  Rise and Decline, Olson, p. 26. 

Since the probability that a typical voter will change the outcome of the election is vanishingly small, the typical citizen is usually “rationally ignorant” about public affairs.  Often information about public affairs is so interesting or entertaining that it pays to acquire it for these reasons alone – this appears to be the single most important source of exceptions to the generalization that typical citizens are rationally ignorant about public affairs.

But if everyone thinks that way, nothing constructive will get done.  So how can fiscal visionaries break through the apathy and get something going?  If you have suggestions, please share them with us.

*        *        *        This Blogs Replies        *        *        *

Re the latest "Nail on the Head" blog, I think the only "Hammer" that might work--and Mancur Olson, whom I knew, would probably agree with me – is a proposed 28th Amendment to the U.S. Constitution.  It would bar Congress from (a) restricting the rest of us while exempting itself, or (b) providing special rights and benefits for its members that no one else gets.  – Richard Timberlake, Georgia 

[We agree with the spirit of the proposed amendment, but it might not prove to be a panacea.  http://bit.ly/cXbCao]

House Speaker Tip O'Neil: “All politics is local.”  –  SAFE director

top     close    ww3@atlanticbb.net


8/22/11 – A list of targeted spending cuts       Read Replies

Last week’s entry offered four suggestions for the Joint Select Committee on Deficit Reduction (JC), which may be summarized as follows:

(1) Be open: The JC should follow the example of the Fiscal Commission in 2010 by posting videotapes of its general meetings and a draft of its report before the report is voted on.

(2) Stop digging: This country does not need another round of fiscal stimulus; far more effective ways to promote economic recovery are available.

Update: the president will propose a new economic plan after Labor Day, calling for new “middle class” tax cuts and more (not less) spending.  JC support will probably be solicited.  AP Source: Obama to give major jobs speech, Ben Feller, AP, 8/17/11.

http://apne.ws/n5FMub

(3) Taxes can wait: The tax changes that have been proposed to date are of debatable merit, and the JC does not have enough time for the system overhaul that is needed.

(4) Be selective on spending: Across the board spending cuts treat all government programs as equally worthy, thereby undermining support for the limits imposed.  It would be far more effective to eliminate or restructure ailing programs.  A recess was taken due to space limitations, but we committed to provide more input on spending cuts this week.  Here goes.

GOAL: Getting down to brass tacks about spending, 10/25/10, proposed that federal government spending be cut to 20% of GDP (higher than in 2000, about equal to the 2005 level, considerably lower than projected).  If spending cuts to meet this goal were phased in by 2015, the 5-year savings would be roundly $1.3T.

Fiscal yrs - $B

2012

2013

2014

2015

2016

Total

OMB Projection

 

 

 

 

 

 

Outlays

$3,728

$3,771

3,977

$4,190

$4,467

$20,133

GDP

15,813

16,752

17,782

18,804

19,790

88,941

% of GDP

23.6%

22.5%

22.4%

22.3%

22.6%

22.6%

Adjusted Projection

 

 

 

 

 

 

Outlays

$3,650

$3,685

$3,734

$3,761

$3,958

$18,788

GDP

15,813

16,752

17,782

18,804

19,790

88,941

% of GDP

23.1%

22.0%

21.0%

20.0%

20.0%

21.1%

http://www.whitehouse.gov/omb/budget/Historicals/

The 2016 savings level of $509B should be at least equaled in ensuing years, achieving a 10-year savings total of $3.9T in program cuts plus, let’s say, $0.8T in interest savings.

The Budget Control Act shaves total outlays by $0.9T (including interest savings) over the next 10-years.  That leaves $3.8T to go.

Fiscal year, $B

2012

2013

2014

2015

2016

2017-21

2012-21

Spending

(22)

(41)

(56)

(69)

(77)

(498)

(761)

Interest

0

(1)

(3)

(6)

(10)

(134)

(156)

Total

(21)

(42)

(59)

(75)

(87)

(634)

(917)

http://cbo.gov/doc.cfm?index=12357

If the JC proposed additional cuts of $1.5T, thereby meeting the goal stated in the BCA, the government would still be $2.3T short of our spending cut target (which if anything was not set high enough, but let’s go with it for now).

Although hardly sufficient, spending cuts of this magnitude would mark a change in direction that could hopefully be continued in the future.  As the saying goes, “ well begun is half done.”

WHERE TO CUT:  One might start by looking for spending areas that have grown faster than the overall economy.  For example, here is the “super function” breakdown of spending for selected years (from Fiscal Year 1990 to 2016). OMB tables.  

 

Percentage of GDP

 

1990

2000

2010

2016 est.

Human resources

10.8%

11.4%

16.4%

15.1%

National defense

5.2%

3.0%

4.8%

3.4%

Net interest

3.3%

2.3%

1.4%

2.8%

Physical resources

2.2%

0.9%

0.6%

0.8%

Other functions

1.2%

1.2%

1.2%

0.9%

Offsetting receipts

-0.7%

-0.4%

-0.6%

-0.6%

TOTAL OUTLAYS

21.9%

18.2%

23.8%

22.6%

The biggest opportunities for spending cuts presumably reside in “Human resources” (HR), which has been growing faster than the overall economy for decades and currently accounts for 2/3 of the total budget.  Drilling down, here is a breakdown of HR.

 

Percentage of GDP

 

1990

2000

2010

2016 est.

Social Security

4.3%

4.2%

4.9%

4.8%

Medicare

1.7%

2.0%

3.1%

3.2%

Medicaid

0.7%

1.2%

1.9%

2.1%

Other health

0.3%

0.4%

0.6%

0.9%

Education, training, etc.

0.6%

0.5%

0.9%

0.6%

Income security

2.6%

2.6%

4.3%

2.7%

Veteran’s benefits & services

0.5%

0.5%

0.7%

0.8%

TOTAL HR OUTLAYS

10.8%

11.4%

16.4%

15.1%

National defense was at a higher level in 1990 than now.  The growth between 2000 and 2010 reflects two wars that are winding down, and significant cuts are already projected.   

Interest expense will grow due to rising debt and higher borrowing rates as the economy recovers.  Deficit reduction could help, but this outlay is not subject to direct control.

Net spending for the other super functions totals only 1.1% of GDP in 2015, suggesting lesser opportunities in these areas.

SOME OPTIONS: Here is a “punch list” of spending cuts, which by no means exhausts the possibilities but includes some of the best choices (conceptually and politically) at this point.  The 10-year savings of roundly $2 trillion handily exceeds the JC’s deficit reduction goal of $1.5T.  An explanation of each line item follows the table.

2012-21, $ in billions

Spending Cuts

Interest Expense*

Total Savings

Medicaid

770

154

924

Education

500

100

600

Corporate Welfare

180

36

216

Agricultural Subsidies

130

26

156

Energy

60

12

72

TOTAL

1,640

328

1,968

*Savings imputed at 20% of 10-year spending cuts.

Medicaid is in trouble, both fiscally and operationally, in part due to being jointly run by the federal and state governments. It is 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.  In Search of Real Healthcare Reform, proposal 4, 2009.

http://bit.ly/cRkruZ

A similar proposal was offered in the Ryan Plan (approved by the House in April), with the exception that block grants were be indexed for population growth as well as general price inflation. Projected 10-year savings vs. the CBO baseline: $771B. 

http://wapo.st/fA8UZg [download PDF)

Education: This word does not appear in the Constitution, and the founders probably expected that education would remain a private or state responsibility.  With the notable exception of ending racial segregation in the schools, federal intervention in the educational arena appears to have done more harm than good. 

State school systems are administratively top heavy as it is, and a federal overlay is not needed.  If there is to be a federal Department of Education, its functions should be limited to maintaining a data bank of best educational practices at the state and local level, sponsoring national and international educational contests, and the like.

http://www.s-a-f-e.org/education.htm

Accordingly, we would suggest that outlays for the Department of Education be cut 80%, with the cuts to be phased in by 2015.  Current federal grants (accompanied by federal strings and “red tape”) should be eliminated, not converted to block grants. Estimated 10-year savings: $ 500B.

Fiscal yrs - $B

2012

2013

2014

2015

2016-21

Total

Education Department*

71

67

70

76

 

 

Education Division

56

37

25

15

 

 

Spending Cuts

15

30

45

61

366

517

* OMB projection (p. 87)

Corporate welfare – No “corporate welfare” category may be found in the budget, any more than there is a line for “fraud, waste and abuse.”  Nevertheless, some government programs exist for the benefit of relatively narrow business constituencies –  and such programs should be eliminated.  The following list is just a start.  Estimated 10-year savings: $180B.

Fiscal yrs - $B

2012

2013

2014

2015

2016-21

Total

Commerce Dept.*

13

11

11

11

66

112

Ethanol Subsidies (est.)

6

6

6

6

36

60

SBA*

1

1

1

1

6

10

Export-Import Bank, Maritime Administration, OPIC, etc.

#

#

#

#

#

#

Total savings

20

18

18

18

108

182

*OMB projection (p. 87)  #Data not readily available.

Agricultural Subsidies – Support payments for certain crops represent a burden on taxpayers, and contribute to higher food prices as well.  If these subsidies were ever justified, they have outlived their usefulness.  We would urge that they be phased out by 2015.  Estimated 10-year savings: $130B.

Fiscal yrs - $B

2012

2013

2014

2015

2016-21

Total

Farm income stabilization*

14

18

17

15

 

 

Residual amount

10

8

5

0

 

 

Spending Cuts

4

10

12

15

90

131

* OMB projection (p. 78)

Energy – Established to work for energy independence, the Department of Energy has become a green energy venture fund without marketplace accountability.

http://www.s-a-f-e.org/energy.htm

DOE cannot be eliminated as it has other responsibilities, notably managing the military nuclear program, but its energy venture fund activities should be phased out by 2015. Estimated 10-year savings: $60B.

Fiscal yrs - $B

2012

2013

2014

2015

2016-21

Total

Energy programs*

23

15

11

9

 

 

Residual amount

20

10

4

0

 

 

Spending Cuts

3

5

7

9

40

64

* OMB projection (p. 78)

TO BE CONTINUED: No spending cuts have been proposed for either Social Security or Medicare.  Lest it be thought that we are ignoring the proverbial “elephant in the living room,” an explanation seems in order.

Social Security is the government’s biggest program, in terms of cost, and it is currently paying out more than the tax revenues earmarked to pay for it. The existence of the Social Security trust funds does not assure that this program can continue operating in the current mode until 2037; there is nothing in these funds except IOUs. 

There are two basic options for Social Security: (A) Convert it to a funded (personal accounts) retirement plan.  The change would require several decades and substantial up front outlays, which would be a “tough sell” under current circumstances. (B) Make adjustments to benefits and/or contributions that would extend the life of the current program.  Social Security belongs on the table with everything else, 6/27/11.

If Plan B was chosen, we would recommend the following changes: (1) Raise the early retirement age from 62 to 65 and the normal retirement age from the current level (being raised to 67 by 2027) to 70 over the next decade, inasmuch as Americans are living longer on average.  (2) Tighten the eligibility requirements for disability benefit payments, which currently account for about one-sixth of Social Security outlays.

But such changes would be quite controversial, and we believe Social Security reform – like tax reform – should be taken to the voters.  There will be time enough to make the decisions that are needed in 2013.

Medicare is commonly thought to be in worse shape than Social Security because (1) its trust fund is scheduled to be exhausted more quickly (this difference is merely cosmetic), and (2) the cost of healthcare is growing faster than the general rise in price levels.

It is essential to slow the growth of Medicare outlays, but slashing reimbursement rates and/or rationing allowable care is not the way to do it. The effect of such measures 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, 2009.

http://www.s-a-f-e.org/healthcare_reform.htm

A similar proposal for Medicare was included in the Ryan Plan; it would have been phased in more slowly than our proposal.  As a result, Medicare outlays over the next ten years would have been reduced by only $30 billion vs. the CBO Baseline – truly “a drop in the bucket” for a program of this size.

That did not stop the Medicare proposal from drawing more fire than any other element of the Ryan Plan, in marked contrast to the lack of reaction to the Medicaid proposal (discussed above).  The general theme was that Medicare costs should not be shifted “onto the backs of senior citizens.”  GOP running political risks with Medicare reform, Susan Ferrechio, Washington Examiner, 4/18/11. 

http://bit.ly/epImSO

As far as we are concerned, the conversion of Medicare into subsidies for private insurance coverage is the best way out of the Medicare mess, but such an approach does not appear to be politically feasible for now.  The same goes for repealing GovCare (the healthcare “reform” bill enacted in 2010), as was also proposed in the Ryan Plan.

So again, the JC would be well advised to focus on matters that can potentially be agreed on at this time.  They cannot expect to solve the fiscal problem that way, but at least they can make a respectable start on it.

*   *   *   *

Will the Joint Committee members pay any attention to our recommendations?  Maybe not, but we are sending them a summary for consideration.  SAFE letter to JC members and others, 8/22/11.

http://bit.ly/on2sFD

If you agree with our recommendations, dear readers, we would urge you to reinforce them.  Forward this link to friends and acquaintances, post it on Facebook, write a letter to the editor or to your elected legislators, or whatever approach occurs to you.

What we must not do is to once again let the big fiscal decisions be made by default, in reaction to the demands of those who are fixated on demanding more, more, more based on the assumption that someone else will pay for it.  The national piggy bank is empty, and efforts to keep the spending spree going can only end in disaster.

Sorry to end on such a somber note.  Have a good week, everyone.

*        *        *        This Blogs Replies        *        *        *

SAFE note: In addition to posting this entry and our letter to the Joint Committee, we brought them to the attention of a number of contacts.  The feedback was generally positive, but we did not hear from everyone and there were few comments on details of our proposals let alone offers to reinforce them.  Moral: it is comparatively easy to show the fiscal problem is real, but getting people to join in supporting a concrete solution is a “different kettle of fish.”

“Suggestions well thought out” (SAFE),  “I sure hope they’re listening” (SAFE), “the specifics are excellent” (SAFE), “thanks for this thoughtful piece”  -  (Princeton professor).

SAFE director: My approach is to propose more drastic changes, because they are needed, and a good bargaining tactic.  Thus: Give Medicaid to the states without grants, make the goal debt repayment vs. balancing the budget, and institute a “temporary” tax for each overseas military action.

[Lest we forget, a telephone excise tax imposed to help pay for the Spanish-American War was in effect for 108 years. http://usat.ly/uEPQ4]

”I agree completely,” said a Cato expert, but “of course, the Dems won't agree to a package of spending reforms, so a sequester is the best option.”

#Prof. Larry Kotlikoff, Boston University thinks the “purple” tax (http://bit.ly/p1wDix), health[care] (http://bit.ly/eMGPbV) and Social Security (http://bit.ly/oPCqj8) plans “are the ways to go.”

[We will review them as time permits.]

 

#“Never happen” said a SAFE director re our suggestion that the JC should emulate the Fiscal Commission in 2010 by conducting a relatively open process (videotapes of general meetings, publish draft report before voting).

He sees no chance of joint recommendations for real spending cuts.  “The House has to just stand firm on the Appropriations committee and cut spending apart and different from any joint votes for a budget. This will raise great fires and anger.”

top     close    ww3@atlanticbb.net


8/15/11 – And so it begins: a “Super Committee” is born

For those who came in late, the US government has a spending problem, not a deficit problem.  And the logical solution would be to spend less, not raise taxes or keep on borrowing. Making sausage in DC: haggling over a debt limit increase, 7/15/11.

The Budget Control Act (BCA) provides for deficit reduction of at least $2.1 trillion over the next 10 years.  The amount may sound impressive, but it is only a down payment on the total problem.  And as discussed last week, there are many obstacles to achieving even this much progress. Debt limit deal settled nothing, 8/8/11.

The initial round of spending cuts is imposed across the board (rather than targeting specific programs) and backend-loaded besides.

Fiscal year, $B

2012

2013

2014

2015

2016

2017-21

2012-21

Spending

(22)

(41)

(56)

(69)

(77)

(498)

(761)

Interest

0

(1)

(3)

(6)

(10)

(134)

(156)

Total

(21)

(42)

(59)

(75)

(87)

(634)

(917)

 http://cbo.gov/doc.cfm?index=12357

Many Americans (including us) wonder whether these cuts will actually be made. 62% think Congress unlikely to cut spending as promised by one trillion dollars over next 10 years, Rasmussen Reports, 8/5/11. 

http://bit.ly/r6vdhd

The Joint Select Committee on Deficit Reduction (JC) will now be asked to propose further deficit reductions.  Again, the prospects for success are uncertain, but all concerned have an obligation to support the JC’s efforts and SAFE intends to do just that.

STEP ONE: We began by offering suggestions re appointments to the JC. Letter to Representatives Boehner & Pelosi, Senators Reid & McConnell, et al. on 8/8/11. 

http://bit.ly/qqfijg

Four of our six House picks (highlighted) were appointed; we struck out in the Senate.

REPRESENTATIVES

SENATORS

Jeb Hensarling (R-TX)*

Patty Murray (D-WA)*

Dave Camp (R-MI)

Max Baucus (D-MT)

Fred Upton (R-MI)

John Kerry (D-MA)

 

 

Xavier Becerra (D-CA)

Jon Kyl (R-AZ)

James Clyburn (D-SC)

Rob Portman (R-OH)

Chris Van Hollen (D-MD)

Patrick Toomey (R-PA)

* Co-chairs

Without getting into personalities, here are several comments on the JC members.

# All are career politicians, accustomed to the ways of Washington.  Most of them voted for the BCA; the exceptions were Becerra and Toomey.

# Representatives Becerra, Camp, & Hensarling and Senator Baucus served on the Fiscal Commission in 2010.  Representatives Clyburn & Van Hollen and Senators Baucus & Kyl participated in the Biden talks earlier this year.

#Representative Hensarling is Paul Ryan’s deputy on the House Budget Committee; Camp chairs Ways and Means; Upton chairs Energy and Commerce; Van Hollen is the ranking minority member on the Budget Committee.

#Senator Murray chairs the Democratic Senatorial Campaign Committee; Baucus chairs Finance; Kerry chairs Foreign Relations and ran for president in 2004; Kyl is Republican Whip; Portman served as budget director in the latter days of the Bush Administration.

#Baucus, Murray, Portman, and Upton have ties to numerous special interest groups.  How many seats does K Street have on super committee?  Timothy Carney, Washington Examiner, 8/10/11.

http://bit.ly/qZFs3z

#Based on National Taxpayer Union ratings (for 2010 or most recent year available), most of the GOP members are fiscally conservative (Kyl 97%, Hensarling 94%, Camp 88%, Upton 86%, Toomey 85% - 04 House). Portman 60% - 04 House appears to be a “centrist.”  All Democrat members are reliably liberal (Baucus 9%, Becerra 6%, Murray 6%, Van Hollen 4%, Clyburn 2%).

http://bit.ly/aI7md0

All things considered, were the JC members chosen wisely?  Time will tell, but for now we are inclined to give them the benefit of the doubt.

STEP TWO:  Here are some suggestions for the JC members on their legislative “Mission Impossible.”  We will also send them a one-page summary of our suggestions before Congress returns to Washington.

Congratulations on your appointment to the Joint Select Committee on Deficit Reduction (JC).   You and the eleven other members will have an extraordinary opportunity to work on the federal government’s fiscal problem – but the task will not be easy.

As you know, the objective is to reduce the deficit (over the next ten years) by at least $1.2 trillion, over and above the $900 billion in discretionary spending cuts already mandated.

Limited time has been provided, no extensions are likely, and a painful sanction will apply in the event of failure.  A recap of the timetable follows.

BY

EVENT OR ACTION

RESPONSIBILITY

Sept. 16

First Joint Committee (JC) meeting

JC Co-Chairs

Oct. 14

Submission of wish lists for deficit reduction to JC

Each committee of the House and Senate

Nov. 23

JC votes (7 “yes” votes required) on a report of its findings, conclusions & recommendations (including “legislative language”)

JC Co-Chairs

Dec. 23

Expedited consideration of and vote on JC report

House & Senate

1/15/12

(a) Legislation enacted to reduce deficit by at least $1.2T, or (b) further cuts to discretionary spending will be mandated to cover the shortfall.

House, Senate & President

1/31/12

Termination of JC

Automatic

A majority of Americans doubt the initial spending cuts in the Budget Control Act (BCA) will be effective, so why should anyone expect the JC to make further progress?  But take heart!  There is a good chance of a constructive outcome if you follow these simple suggestions:

1. BE OPEN: Are Americans the ultimate decision-makers in our society, or should they meekly follow the lead of the “political class,” which supposedly has the expertise to make the best decisions?  Random thoughts, Thomas Sowell, Townhall.com, 8/9/11.  

Three little words -- "We the people," the opening words of the Constitution of the United States -- are the biggest obstacle to achieving the political goals of the left. For that, they must move decisions away from "We the people" -- from individuals to government; from elected officials to unelected judges; and from national institutions to international institutions like the United Nations -- all safely remote and insulated from "We the people."

http://bit.ly/pZkGGp

Without necessarily placing the question in a left/right context, we have a bias in favor of people making their own decisions rather than being told what to do by government.  Not only is this consistent with the nation’s political traditions, but there are many historical examples of blunders made by leaders who amassed too much power.

Even politicians who favor a big government model typically invoke American self-reliance and innovation, albeit going on to suggest that the government should take over the economy and much else because business firms and individuals are no longer up to the task. To win the future, do not let the government do it, 1/31/11.

“Our free enterprise system is what drives innovation,” but basic research is not always profitable so the government must lend a hand at times.  From this seemingly modest starting point, the president touts one government funded or inspired program after another.  Obama uses language of capitalism, tools of government, Timothy Carney, Washington Examiner, 1/26/11.  http://bit.ly/iaJmHv

When it comes to choosing between cutting government spending and raising taxes, for example, there is no apparent reason why the issue should be discussed in private by the leaders who presume to be speaking for Americans.  What have they got to hide?  Let there be light on the budget super committee, Washington Examiner, 8/5/11.

It is said that laws and sausages ought not be seen in the making, but such thinking creates a screen that hides the very dark things that the public most needs to see in the full light. As Patrick Henry said in 1787, "the liberties of a people never were, nor ever will be secure so long as the transactions of their rulers may be concealed from them." Let's not conceal the deliberations of this super committee.

http://bit.ly/rd1lvF

The BCA requires public notice of the scheduling of and agenda for meetings and publication of the JC report after approval, and it would not appear to bar greater transparency.  Following the example set by the Fiscal Commission in 2010, we would urge your committee to provide videotaped coverage of its general meetings and publish a draft of its proposed report before the members vote.

http://bit.ly/rd1lvF

2.  STOP DIGGING: With the government running trillion dollar deficits, there is no warrant for new “investments” in infrastructure improvements, extension of the one-year (2011) payroll tax reduction, or other measures that would serve to widen the fiscal gap.  Yet some of these ideas appeared in the president’s now rejected FY 2012 budget, and they continue to come up in one form or another. Obama calls for more federal money for roads, bridges and airports to create jobs, Terrence Jeffries, CNS News, 8/7/11.

http://bit.ly/oHmtfk

We appreciate the need to foster economic recovery, but the best way to do so would be to remove government obstacles to progress rather than relying on the US Treasury to “stimulate” investment. To this end:  

#Unblock worthwhile projects that have been studied to death by government agencies. For example, approval of the Trans-Canada pipeline (which has been bottled up by the State Department for three years) could reportedly create some 20,000 high-paying jobs and bolster US energy security as well.  Obama urged to OK Canada-Texas pipeline, Tim Deveaney, Washington Times, 8/8/11.

http://bit.ly/rmHn14

#Challenge the Administration’s drive to impose anti-business regulations that could not possibly be approved in Congress and are undermining business confidence.  Meanwhile on the administrative front, 5/2/11; An administrative blitz, 5/9/11.

Here is an update on one of the worst offenders.  Killing jobs, cost won’t stop Obama EPA, Bob Beauprez, Townhall.com, 8/12/11. 

The Obama EPA is preparing to implement two major new air quality regulations that will cost consumers hundreds of billions of dollars more in their energy bills and destroy great numbers of American jobs.  *** [Because] of higher costs and power plant closures by 2020 these two new regulations [Cross-State Air Pollution Rule and the Mercury and Air Toxics Standards] could destroy another 1.4 million jobs, and drive up electricity costs for consumers by 11.5% and some businesses could see as much as a 35% increase.  

http://bit.ly/oONw58

#Stop pushing big tax increases, which is likewise detracting from business confidence, unless they are truly needed to cut deficits.  As discussed under the next heading, we do not believe this is so.

Not that your committee needs to take up all these issues, but do not fall for the claim that economic recovery is dependent on more “stimulus” programs. The Keynesian approach has received an ample trial already, with little to show for it.  Obamanomics drives Americans out of the workforce, Washington Examiner, 7/10/11.

Having thrown nearly a trillion dollars at an economic mess, nearly every penny of which is spent, Obama now finds himself facing continued deterioration with no end in sight. Having run up an unsustainable debt in the vain hope of creating lasting jobs in the United States, he finds himself out of ammunition and with no clear plan to forge ahead.

http://bit.ly/qCzaCD

3. TAXES CAN WAIT: Perhaps the thorniest debt reduction issue is what to do about taxes.  Side A demands a “balanced solution” that includes more “revenue.” Side B insists that this is no time for tax increases.  Despite the passion with which these views have been stated, neither side has done a good job of justifying its position.

It is generally agreed that the US tax system is a complicated mess.  Some would scrap the existing system and replace it with a flat tax or FairTax.  The other option would be to radically simplify the existing system, e.g., by implementing SAFE’s SimpleTax proposal.  Limping along with the present system comes in dead last.

http://www.s-a-f-e.org/the_simple_tax.htm

Side A seems more interested in hiking taxes for selected taxpayers, however, than in true tax reform.  Indeed, their approach smacks of the ad hoc tinkering with taxes Congress has indulged in over the years, which has produced the current mess.

It is argued that high earners (aka “millionaires and billionaires”) are either not paying their “fair share” of the total tax bill or are making so much money that they should be happy to pay the government a “bit more.”  Big corporations (especially oil companies) are likewise said to be under-taxed.

Neither claim has been solidly supported.  The facts contradict Obama’s calls for higher taxes on the rich and corporations, Scott Hodge, Tax Foundation, 8/9/11.

#Recently released IRS data for 2009, shows that taxpayers earning over $200,000 paid 50 percent of the $866 billion in total income taxes paid that year, or $434 billion. Skeptics will say, "That's because they earn the majority of the income in America. Not so. These taxpayers earned 25 percent of the $7.6 trillion in total adjusted gross income in the country that year.

#In 2008, the roughly 1,900 largest corporations paid $152 billion in income taxes. This amounted to 67 percent of the $227 billion in total corporate income taxes paid that year.

There is also considerable evidence that lower earners are getting a free ride in that they receive plenty of government benefits without helping to pay for them.  Id.

#The 2009 IRS data also shows that a record 58.6 million tax filers had no income tax liability that year. This means that 42 percent of the 140 million Americans who filed tax returns that year contributed nothing to the basic cost of government.

http://bit.ly/pl6jJ8

Should the JC wade into this thicket, attempting to decide who should pay more or less taxes?  One could make an argument for doing so.  Super-committee is a chance for tax reform, Hugh Hewitt, Townhall.com, 8/12/11.

As the new "Super Committee" of 12 sets to its work it confronts a unique opportunity to rethink the basic approach to federal taxation. Whether it proposes an overhaul depends on many factors, but it ought to at least consider the upside to slashing rates on income, both personal and corporate, and introducing a national sales tax to make up for those lost revenues.

http://bit.ly/qCct7S

With all due respect to Mr. Hewitt, the JC will not have enough time to tackle comprehensive tax reform.  Nor would the current balance of power in Washington permit a mutually agreeable solution, i.e., here is an issue that must be thrashed out on the campaign trail.  And we would reject the idea of having both an income tax and a national sales tax.

Rather than going off half-cocked on taxes, we would urge your committee to focus on the spending side of the equation.  By following our next suggestion, you should find it relatively easy to meet the assigned deficit reduction goal in a constructive way.

4.  BE SELECTIVE ON SPENDING: Across-the-board spending cuts can undermine programs that deserve support, thereby fueling demand for exceptions.  Before long, the budget restrictions give way like a dam with seepage around the edges.  Debt plan spending-cut “trigger” has failed in past, Heidi Przybyla, Business Week, 7/29/11.

“Anything Congress does, Congress can undo,” said Bob Bixby, executive director of the Concord Coalition, an Arlington, Virginia-based group that advocates for balanced budgets. “They can’t really bind themselves. You really have to have a political will to make these things work or they won’t.”

http://buswk.co/nkaY42

For an effective spending reduction program: (a) identify wasteful programs or activities, and (b) eliminate, consolidate, or restructure them.  Reaching consensus on the targets may not be easy, but there is really no substitute.  Downsizing the Federal Government, Chris Edwards, Cato Institute (2005)

http://bit.ly/etcbDC

The merits of being specific are particularly evident in the present situation, as the BCA has already mandated $917B in across-the-board cuts (next 10 years) on discretionary spending (a modest and shrinking share of the overall budget). Further across-the-board cuts to discretionary spending would simply not make sense.

Major cuts in defense spending are already reflected in round one, and there is ample evidence that it would be unwise to go further. Panetta warns against sweeping defense budget cuts, David Alexander & Jim Wolf, Reuters, 8/3/11.

[Defense Secretary] Leon Panetta [who has solid budget experience on his resume, and is hardly considered a “military hawk”] said a potential second round of cuts in security spending estimated at about $600 billion from fiscal 2012 to 2021 would be "completely unacceptable."

http://reut.rs/nIMBhp

Across-the-board cuts to nondefense spending could do harm as well, and it would be far more productive to look for discretionary programs that could be eliminated and make a start on restructuring entitlements. 

Some of the needed changes would be very controversial, and like tax reform should be left to be debated on the campaign trail.  But with all the opportunities to shrink the government that exist, surely your committee could find $1.2T in targeted spending cuts that would make sense.

Yikes, this is getting too long! Tune in again next week, when we will conclude our suggestions to the Joint Committee with a “punch list” of spending cut alternatives.  If any of you readers have suggestions in the meantime, please let us hear from you.

top     close    ww3@atlanticbb.net


8/8/11 – Debt limit deal settled nothing         Read Replies

There was a feeling of closure as the votes on the Budget Control Act of 2011 were shown taking place on national TV, first the House (269-161) in the early evening of August 1 and then the Senate (74-26) the next day. After signing the bill, the president walked out of the White House to a podium in the Rose Garden at 1:06 p.m. on August 2. 

Presumably, the US political leader would now thank the members of Congress for their long hours of thoughtful consideration, passionate debate, and ultimate willingness to compromise their differences.  This is what the voters sent us to Washington to do, this is what makes our democracy works, etc.  But the speech did not come out that way.

No one was praised except the American people for “keeping up the pressure on their elected officials to put politics aside and work together for the good of the country.”

The president stressed that he wants to see tax increases on “the wealthiest Americans and biggest corporations” in phase two of the deficit reduction package, not spending cuts alone.  There was also a call to extend the one-year reduction of payroll taxes (referred to as “tax cuts for middle-class families”) into 2012, which would increase the deficit and make the need to raise taxes on the “rich” that much greater.

He closed by implying that the members of Congress, or at least his political opponents, only did their jobs because a crisis for which they might be blamed was staring them in the face.  Transcript.

It shouldn’t take the risk of default -– the risk of economic catastrophe -– to get folks in this town to work together and do their jobs.  Because there’s already a quiet crisis going on in the lives of a lot of families, in a lot of communities, all across the country.  They’re looking for work, and they have been for a while; or they’re making do with fewer hours or fewer customers; or they’re just trying to make ends meet.  That ought to compel Washington to cooperate.  That ought to compel Washington to compromise, and it ought to compel Washington to act.  That ought to be enough to get all of us in this town to do the jobs we were sent here to do.

http://on.wsj.com/o2pcBD

Apparently, the budget brawl is just getting started.  It will continue until the 2012 elections and beyond.  And the principals may or may not address the basic issues: cutting government spending, streamlining taxes, and rationalizing regulations, before a top-heavy government tanks the US economy.

THE DEAL: The basic terms have been amply reported.  (A) Debt limit increase of $2.4 trillion (or maybe $2.1T); (B) Spending over the next 10 years cut by $900B; (C) a “joint committee” (JC) will look for another $1.5T in deficit cuts, and if the JC deadlocks then a $1.2T spending cut trigger kicks in; (D) Congress will vote on a Balanced Budget Amendment.  But the details are important, so let’s drill down a bit.

A. There will be a debt limit increase of at least $2.1T, all right, but it will be in three installments with the second and third installments subject to the theoretical possibility of Congressional disapproval – much as Senator Mitch McConnell suggested several weeks ago – which may serve to keep this subject in the news.  The following timetable can be inferred from the provisions of the “Budget Control Act of 2011” (BCA), pages 30-43.

Debt limit increase

President requests

Congress can disapprove

Timing of increase

$400B

Now

No

Now

$500B

Now

Yes* 

By October

$1,500B, but not less than $1,200B

After $900B debt limit increase

Yes*

By early 2012

*But subject to veto, so a 2/3 majority of both houses would be required.

http://bit.ly/naCubl (download debt-bill PDF)

Over half of the initial debt limit increase was used to reverse the “extraordinary measures” the Treasury Department had been using to hold Total Debt under the $14.3T limit.  The debt now stands at $14.5T or 100% of Gross Domestic Product.  US eats up most of debt limit in one day; $239 billion spike uses up 60% of funding OK’d on Tuesday, Stephen Dinan, Washington Times, 8/3/11.

http://bit.ly/r8QNKZ

B.  Spending cuts of $917B versus the March 2011 Baseline were claimed by setting year-by-year ceilings for new budget authority (no impact on entitlements except $17B added for Pell Grants); about 50% of the cuts would be allocated to defense and the remainder to all other discretional spending.  BCA, pages 2-26.

The cuts are backend-loaded, with no indication (beyond the split between defense and other) of where they would be made. Congressional Budget Office, August 1, 2011.

Fiscal year, $B

2012

2013

2014

2015

2016

2017-21

2012-21

Spending

(22)

(41)

(56)

(69)

(77)

(498)

(722)

Interest

0

(1)

(3)

(6)

(10)

(134)

(153)

Total

(21)

(42)

(59)

(75)

(87)

(634)

(917)

 http://cbo.gov/doc.cfm?index=12357

 C.  A Joint Select Committee on Deficit Reduction (aka “Super Committee”), composed of twelve members of Congress, will be assigned the goal of reducing the deficit by at least $1.5T more for fiscal years 2012-21.  BCA, pages 52-72.

Six joint committee (JC) members will be from the House.  The Speaker of the House will appoint three of them (and designate one of the two Co-Chairs); the House Minority Leader will appoint the other three. 

Six JC members will be from the Senate.  The Senate Majority Leader will appoint three of them (and designate the second Co-Chair); the Senate Minority Leader will appoint the other three.

The deadline for appointing JC members and designating the Co-Chairs is August 16 (fourteen calendar days after enactment of the BCA).  The ensuing timetable is:

BY

EVENT OR ACTION

RESPONSIBILITY

Sept. 16

First JC meeting

JC Co-Chairs

Oct. 14

Submission of wish lists for deficit reduction to JC

Each committee of the House and Senate

Nov. 23

JC votes on a report of its findings, conclusions & recommendations (including “legislative language”)

JC Co-Chairs

No deadline specified

Approval of JC report

Majority of JC (7 of the 12 members)

Dec. 23

Expedited consideration of and vote on JC report

House & Senate

1/31/12

Termination of JC

Automatic

We infer that the JC may meet behind closed doors (unlike the Fiscal Commission of last year, which published videotapes of all its general sessions).  Although the JC Co-Chairs are to publicly announce the “date, place, time, and subject matter of any hearing to be conducted” (BCA, p. 61), there is no provision regarding access to meetings. Also the JC report is only to be published “upon the approval or disapproval of the joint committee report.” (BCA, p. 56)

“Secret” proceedings are not required, however, and some observers (including us) would prefer more transparency.  Let there be light on the budget super committee, Washington Examiner, 8/5/11.

http://bit.ly/rd1lvF

If the JC report results in at least $1.2T in deficit reductions being enacted by 1/15/12, all will be well.  This could result from spending cuts (including entitlements), tax increases, or a combination of both.  If the JC process falls short, however, discretionary spending cuts would be triggered to cover the shortfall. 

Half of the additional cuts would be from the defense budget, giving rise to justifiable concerns about gutting the US military. Panetta warns against sweeping defense budget cuts, David Alexander & Jim Wolf, Reuters, 8/3/11.

[Defense Secretary] Leon Panetta said a potential second round of cuts in security spending estimated at about $600 billion from fiscal 2012 to 2021 would be "completely unacceptable."

"If that happens, it could trigger a round of dangerous across-the-board defense cuts that would do real damage to our security, our troops and their families, and our ability to protect the nation," he said in a message to Defense Department personnel.

http://reut.rs/nIMBhp

And even in the case of non-defense programs, it would be hard to make a case for single-mindedly slashing discretionary spending while giving spending for entitlements a pass.   Medicare, Medicaid spending continue to rise, NCPA, 8/4/11.

The debt limit and spending package approved by Congress and President Obama doesn't restrict the costs of Medicare, Medicaid and other entitlement programs.  The rapidly escalating costs of the healthcare programs will challenge lawmakers seeking to rein in federal spending in the future, especially in 2014, when coverage expands to people who are uninsured now.

http://www.ncpa.org/sub/dpd/index.php?Article_ID=20946

True, the mandated spending cuts to cover a deficit reduction shortfall might include a cut of up to 2% in reimbursement rates for Medicare providers – which are already considerably lower than rates charged to the general public.  Although no reduction in benefits would result in theory, overuse of this tactic can be expected to undermine the quality of care provided and/or patient access.  New debt deal leads to more Medicare cuts, Manny Fantis, USA9.com, 8/2/11.

If the debt committee hits a dead end, the agreement between President Barack Obama and congressional leaders decrees an automatic 2 percent cut to Medicare providers. That's on top of a 6 percent cut already enacted to finance the president's health care law, according to the nonpartisan Kaiser Family Foundation. And the earlier cut is still being phased in.

http://www.wusa9.com/news/local/story.aspx?storyid=161187

However difficult it might be to agree on more deficit cuts, the members of Congress may see the mandated spending cut alternative as even less attractive.

D.  A Balanced Budget Amendment (BBA) will be voted on between September 30 and December 31. The only stipulation as to substance is that the resolution be titled “Joint resolution proposing a balanced budget amendment to the Constitution of the United States.” BCA, pages 27-30.

If a BBA passed both houses of Congress by the requisite 2/3 margin and was sent to the several states for ratification, this could theoretically substitute for the JC process in clearing the way for a full third installment ($1.5T) debt limit increase.  BCA, page 33.

As the current Congress is unlikely to approve a BBA, however, the vote is primarily of symbolic significance.

WHO WON: Commentary about the political fallout is all over the lot, and we could cite opinions for just about any point of view.  The tea partiers changed the national conversation, the president enhanced (or booted) his election chances, progressives set a tax increase trap, etc.

The real answer, we think, is that none of the political players has lost yet – and the survivors will be decided in phase two.  If there is a big tax increase without any entitlement reform, the president and his supporters are likely to be perceived as the winners.  Otherwise, the GOP may be seen as having played its hand (control of one house of Congress) pretty well.  

Final judgments about the substance of the deal should await the outcome of the second (JC) phase, but we are not optimistic at this point.  Far bigger spending cuts are needed than have been provided for, and the cuts need to be surgical versus across-the-board or haphazard. Giving in to the demand for tax increases on the well-to-do would further complicate the tax system without making it fairer, and such increases would tend to work against economic recovery.

Did the debt limit deal appease the gods of the financial markets?  Apparently not, since Standard & Poor’s has cut the US credit rating to AA+ and placed Treasury securities on its “negative” watch list as well. S&P downgrades US credit rating from AAA for the first time since 1917, Henry Jackson (AP), Washington Times, 8/6/11.  (Aside from the timing, this development is in line with our 8/1/11 entry.)

http://bit.ly/pYrWym

And although last week’s stock market carnage may reflect other factors, it hardly represents a vote of confidence in the US political leadership either.  Dow takes worst hit since 2008, Patrice Hill, Washington Times, 8/4/11.

http://bit.ly/oALtmu

In short, the only way to view the BCA with favor is by comparing it to what might have happened otherwise.  As John Kenneth Galbraith put it, “Politics is not the art of the possible. It consists in choosing between the disastrous and the unpalatable.”

WHAT’S NEXT: Perhaps the most important decision concerning implementation of the BCA is who will be on the JC.  As noted earlier, the deadline for appointing the 12 members is August 16 (Tuesday of next week).

We would hope that the appointed members will be smart, well versed in the policy issues, and inclined to seek constructive engagement.  If the two sides staked out rigid ideological positions – Side A says tax increases are essential/ Side B says tax increases are a nonstarter – the likely result would be activation of the spending cut trigger (not the optimal outcome). 

Another consideration, especially given the short period for the JC to act, is participation in prior efforts of this type.  Thus, Delaware’s two senators have suggested that the “Gang of Six” – which has just the right number of members and party mix – should represent Senate on the JC.  Deficit focus turns to super committee: support for the “Gang of Six,” Nicole Gaudiano, [Wilmington, DE] News Journal, 8/3/11.

“They know how to get to an agreement,” said Carper.  If the leadership of the Senate “chooses to appoint six different senators who haven’t gone through that time working together,” said Coons, “I think we just start 20 yards back off the field.” 

http://www.s-a-f-e.org/members_microblog_2011.htm

In a similar vein, ten members of the 2010 Fiscal Commission who are currently seated in Congress might be considered for the JC. Note that 4 of the 5 senators in question (the exception is Senator Baucus) also participated in the Gang of Six discussions this year. 

The House

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

The Senate

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

But we would think that some of the new members of Congress deserve a chance too, lest it be felt that the outcome of the 2010 elections was ignored.  Also, we were not blown away by the recommendations of either the Fiscal Commission or the Gang of Six.

Another rumored criterion is that no senators will be appointed to the JC who voted against the BCA.  Opponents of debt hike to be barred from “super Congress,” Paul Watson, Prisoner Planet.com, 8/2/11.

http://bit.ly/nPnmB4

What a bad idea!  In addition to ruling out some talented newcomers, e.g. Senators Ron Johnson and Marco Rubio, such a litmus test approach would bar two of the three Republican members of the Gang of Six (Senators Saxby Chamblis and Tom Coburn).  

Suggestion for fiscal visionaries: Consider who you would like to see on the JC and share your thoughts with the leaders who will make the appointments and others.  SAFE has already submitted a letter in this vein, but many letters are needed – and some of you may have your own ideas as to the best candidates.

Contacting Legislators 2011

You might also wish to ask why there is still no budget for the roundly $3.7T to be spent in Fiscal Year 2012.  Both the president’s proposed budget and the Ryan Plan have been rejected by the Senate, yet that body has yet to propose an alternative. As for the BCA, it provides $21B in unidentified cuts for Fiscal Year 2012, representing a paltry 0.6% of total expenditures.

NEXT WEEK: Some suggested “dos” and “don’ts” for the Joint Commission.

*     *     *     This Blogs Replies     *     *     *

At the rate things are going, this could become the new national anthem. http://bit.ly/EPgNz  - SAFE member, Arizona

The only real questions in the wake of S&P cutting the U.S. debt rating to AA+ are: (a) What took so long? & (b) Why isn't the rating lower?  -  SAFE member, Delaware

Too true.  All too true.  -  Michael Tanner, Cato Institute

The stock market predictably plummeted on August 8, the first trading day after the S&P downgrade announcement.  The president et al. will continue touting tax increases and “stimulus,” while some economists (including Ken Rogoff) call for more QE (bond market purchases by the Fed).  This will only ramp up the debt and speed the dollar’s decline.  -  SAFE director

top     close    ww3@atlanticbb.net


8/1/11 – Who cut my credit rating?

We had planned to review the debt limit “deal” today, but the terms were still being debated when we went to press. Congressional leaders struggle to work out bipartisan debt deal, Lori Montgomery et al., Washington Post, 7/30/11, 3:19 PM.

The House voted around 3 p.m. to reject the Reid plan, but the vote was on Reid’s original plan, not the re-worked version he presented in the Senate on Friday night. But the revised plan was faring no better Saturday, when Senate Minority Leader Mitch McConnell (R-Ky.) delivered a letter to Reid, signed by 43 Republicans, declaring it unacceptable.  Needing 60 votes to clear a filibuster hurdle, Reid’s current draft is assured of failure in a Senate [vote] scheduled for 1 a.m. Sunday.

http://wapo.st/q48XSc

Accordingly, this entry will focus on a broader point – whatever the specific terms for raising the debt limit, much more would need to be done to solve the fiscal problem.

Today’s discussion will be cast in the form of a hypothetical internal memo from XYZ rating agency recommending that US treasuries be down-rated to AA.

To: John P. Bigshot

Debt Rating: US Treasury securities

1.  The Numbers: If the US were any other country, their securities would merit a single A rating at best.  Total US debt is too high, fiscal deficits are staggering, and the economic outlook is mediocre.

DEBT: Total debt is $14.4 trillion (being artificially held to $14.3T by “extraordinary measures” of the Treasury Dept.).  This represents about 96% of current dollar GDP of $15.0T at the end of the second quarter of 2011.    

An alternative debt figure that is sometimes referred to, debt in public hands (excludes obligations to Social Security and other government trust funds), is currently $10.3 trillion (about 69% of current dollar GDP).  It can be argued that Public Debt is the true measure of the US government’s obligations since the debt securities held by the trust funds are legally unenforceable IOUs. 

http://zfacts.com/p/461.html

On the other hand, Public debt + the present value of unfunded future liabilities of the US government total over $60T.  Citizens’ Guide, Peterson Foundation, April 2010.  If US leaders were truly committed to honoring Social Security and their other existing entitlement programs, this could be taken as the true measure of the “financial hole” that the US government has dug for itself. 

http://www.s-a-f-e.org/

Additionally, some US states are in severe financial straits, notably California, Illinois,  and New York.  If one or more of them defaults, there would be strong pressure for a federal bailout – just as is happening in Europe for Greece et al.

All things considered, I believe the Total Debt numbers – about 96% of current dollar GDP – represent a realistic measure of the US federal government’s obligations.

DEFICITS: The US government is borrowing about 40¢ of every dollar that it spends this year.  CBO: Gov’t ran $929B deficit in first 8 months of [Fiscal Year] 2011, on track to hit $1.4T, Terrence Jeffries, CBS News.com, 6/22/11.

http://bit.ly/k49VzF

The president’s FY 2012 budget proposal, as submitted on February 14, 2011, projected deficits of $7.2T over the next 10 years.  The budget: a “lowball” offer, SAFE, 2/21/11.

http://bit.ly/rfxpmC

Based on its review of the president’s budget, the Congressional Budget Office upped the 10-year deficit estimate to $9.5T.   Obama’s budget doesn’t reach primary balance, Stephen Dinan, Washington Times, 3/18/11.

http://bit.ly/fKdBMD

Various proposals have been offered to improve matters.  Thus, the Ryan Plan (approved by the House of Representatives in April; later rejected by the Senate) would pare the 10-year deficit of $9.5T to $5.1T via $6.2T in spending cuts less a $1.8T reduction in tax revenues (including those in GovCare, which would be repealed).  Government shutdown: a temporary reprieve, SAFE, 4/11/11.

http://bit.ly/pnmiPW

Assuming the Ryan Plan could be implemented and enforced, projected deficits would persist over the next decade but with a gradual improvement in the US financial position.  The following recap substitutes Total Debt for Public Debt in the Ryan Plan presentation, and assumes nominal GDP growth of 5% per year (more on that in a minute).  The path to prosperity, House Budget Committee, FY 2012 budget resolution.

http://budget.house.gov/fy2012budget/

$ in Trillions

2011

2012

2013

2014

2015

2016

2017-21

Revenues

2.2

2.5

2.9

3.1

3.2

3.4

19.8

(Outlays)

(3.6)

(3.5)

(3.6)

(3.6)

(3.7)

(3.9)

(21.8)

Deficit

(1.4)

(1.0)

(0.7)

(0.5)

(0.4)

(0.5)

(2.0)

Total debt (end of period)

14.5

15.5

16.2

16.7

17.1

17.6

19.6

GDP (nominal dollars)

15.0

15.8

16.5

17.4

18.2

19.1

24.4

Total debt as % of GDP

97%

98%

98%

96%

94%

92%

80%

But let’s be realistic.  The Ryan Plan has no chance of being adopted given the current balance of power in Washington.

Consider what the president had to say about the Ryan Plan, for example, in a speech about the fiscal problem on April 13.  Transcript.

The fact is, their [the Republicans] vision is less about reducing the deficit than it is about changing the basic social compact in America. As Ronald Reagan's own budget director said, there's nothing "serious" or "courageous" about this plan. There's nothing serious about a plan that claims to reduce the deficit by spending a trillion dollars on tax cuts for millionaires and billionaires. There's nothing courageous about asking for sacrifice from those who can least afford it and don't have any clout on Capitol Hill. And this is not a vision of the America I know.

http://bit.ly/fkuCa6

The passage of a balanced budget amendment, which would require a 2/3 vote in both the House and Senate followed by approval by 3/4 of the states is even less likely.

ECONOMIC GROWTH:

Relatively fast economic growth has typically been assumed for purposes of projecting the US fiscal position.  See, e.g., the president’s FY 2012 budget (p. 202).

Calendar Years (GDP growth)

  2011 2012 2013 2014 2015 2021
Nominal 4.0 5.2 6.1 6.1 5.6   4.3
“Real” (inflation-adjusted) 2.7 3.6 4.4 4.3 3.8   2.5

In my opinion, this outlook is far too rosy because: 

#It assumes substantially faster economic growth than the US has experienced in recent years, e.g., 1.6% per year real GDP growth on average from 2002-2010, with the highest growth rate during this period being 3.5% in 2004. Bureau of Economic Analysis, 7/29/11 release, download PDF, Table 1A.

http://1.usa.gov/1reZhC

#A shortfall in the trend line is already developing, with an annualized real GDP growth rate of 0.4% in the first quarter and 1.1% in the second quarter.  These results compare unfavorably to those during the recovery phase of prior recessions. GDP report shows economy even weaker than expected, Philip Klein, Washington Examiner, 7/29/11.  

In a typical economic recovery, GDP growth is supposed to be a lot higher, because comparisons to the prior period are easier. For instance, during the comparable quarters of the Reagan presidency in 1983, the recovering economy grew at 5.1 percent and 9.3 percent, respectively.

http://bit.ly/r5YEzE

#The Administration has been pursuing policies that are certain to put a damper on business investment and economic growth. Draconian emission standards, a hold on the Trans-Canada gas pipeline, obstacles to US oil production, higher mile per gallon standards for cars and light trucks, and a flood of regulations to implement the GovCare and GovFinance legislation come to mind.  There seems to be very little concern about the economic consequences.  See, e.g., New EPA regulations to improve the environment [will] tank the economy, Rebecca Difede, NetRight Daily, 6/15/11.

Utility giant American Electric Power (AEP) announced that it was going to have to shut down five [coal-fired power] plants and spend upwards of $8 billion by 2014 in order to comply with the EPA’s new proposed rules for the limiting of toxic emissions and waste, including mercury.  *** Ironically, the new EPA proposed rule under their definition of an “appropriate and necessary” standard is far more aggressive than the original rule that was struck down by the Courts.

http://bit.ly/iBYCkv

#If the president and his party were able to get their way and hike taxes, this would further undermine the US economy.  Far from representing a solution to the fiscal problem, higher taxes would make it worse. 

In my opinion, average real GDP growth of 1.6% per year (2002-2010 average) is about the best that can be expected.  The nominal rate of GDP growth depends on the rate of inflation, which could turn out to be far higher than economists expect, but if this happened government borrowing costs would skyrocket.  For convenience, I accepted the projected interest costs and assumed a nominal GDP growth rate of 5%.

ECONOMIC HISTORY:  Experience has shown – for many countries under a wide range of circumstances – that it is very tough to escape a deficit-debt spiral once the debt to GDP percentage hits about 90%.  (As discussed, the US is already past this point.)  Not that paying the debt is impossible, but there is so much built-in resistance to making the required sacrifices that political leaders will opt for some kind of default, from stiffing creditors to promoting relatively rapid inflation to shrink the debt in real economic terms (e.g., hyperinflation mitigated Germany’s debt problems in the 1920s, but also decimated the country’s middle class and facilitated the rise of Nazism). This Time is Different: Eight Centuries of Financial Folly, Carmen M. Reinhart & Kenneth S. Rogoff, Princeton University Press (2009).

http://www.s-a-f-e.org/this_time.htm

2.  Special Circumstances:  We are, of course, not talking about just any country.  The United States is the richest and most powerful nation in the world.  But that does not make it immune to the laws of economics.  And if the US hits the wall, there is clearly no one around who will be able (or at least willing) to bail them out.

Here is how Professor Lawrence Kotlikoff put it in a University of Delaware seminar –  at a time (2004) when the US fiscal problem was far more manageable than it is now. 

Government spending has ratcheted up, taxes have been cut, and our senior entitlement programs (Social Security, Medicare & Medicaid) will explode because the baby boomers are about to start retiring and people will be living longer and longer.  We face a fiscal gap of $51 trillion (including $6 trillion for the recently enacted prescription drug benefit for Medicare).  Never mind that the Federal debt in outside hands is less than $5 trillion at this point, “our country is bankrupt right now.” Indeed, as Professor Kotlikoff sees it, we are in worse shape than Argentina. If the problem is allowed to continue, look for hyperinflation and a fiscal meltdown.  It’s happened in many other countries, we are not immune.

http://www.s-a-f-e.org/generational_storm.htm

3. Policy considerations: You would know better than me, but I doubt this firm would want to suddenly down-rate US securities to single A.  Such action could raise questions.  If the situation is so clear-cut, why wasn’t there any down-rating action previously?  What do we know that the other rating firms do not know?  Are we irresponsibly creating turbulence in the financial markets?  Etc.

If we wait too long to act and there is real debt default, however, you can bet that everyone and his sister will blame us for being asleep at the switch. And the current debt limit showdown has created an opportunity to start moving in the right direction without making a lot of waves.

In June there were warnings of a possible downgrade, presumably to AA, if there was a delay in raising the debt limit.  Can’t create too much anxiety, after all, or investors will start expecting a downgrade.  Debt-limit clock ticking, Washington Times, 6/6/11.

Moody’s Investors Service added urgency to the congressional debate over the debt limit by threatening to downgrade the nation’s credit rating unless a deal is struck in the coming weeks making a “substantive change in the debt trajectory.” That was Thursday. On Monday, more than 100 of the most conservative Republicans in the House insisted such an agreement would have to be big.

http://bit.ly/iWVZ4l

More recently, there have been hints that a downgrade may be necessary unless an “adequate” amount of deficit reduction is agreed to.  Maybe this was an attempt to curry favor with the Administration, which wanted a “grand bargain” to ensure the debt limit issue would not come again until after the 2012 elections, but the warnings have been given nevertheless. S&P says US downgrade “at least a 50 percent possibility,” Larry Kudlow, Townhall.com, 7/29/11.

KUDLOW: Does it matter to you if the debt ceiling is raised in one or two tranches? In other words, if they raise, let's say for argument sake, half this year and the rest next year. How does that affect your thinking?

Mr. BEERS: Well, we'll look at it. But we've also said on the 14th of July that we would be concerned if we thought that the debt ceiling debate would come back and be open and we'd have to go through all this again and again and again.

KUDLOW: And that would be a negative in your view.

Mr. BEERS: That would be a negative in our view.

http://bit.ly/nOsHee

It seems to me that we are now in a position to take issue with the debt limit deal, whatever the precise details, and down-rate the US debt to AA in September.

It also wouldn’t hurt to start creating a record that a further down-rating may be needed if the politicians don’t get a grip on things.  As I said at the outset, the numbers do not objectively warrant anything better than a single A rating.

Cassandra

*   *   *   *

Tune in next week for a detailed evaluation of the deal that our political leaders will presumably have struck by then.  Whatever happens, it will not be the end – but only a rather modest beginning.

top     close    ww3@atlanticbb.net


7/25/11 – Looking at things in a different way

Gary Neil Asteak, Esq., a criminal defense attorney in Easton, PA, presented a session at the Criminal Law Symposium (6/2/11, Harrisburg) entitled “The Four Noble Truths – Dharma for the Defense.”  The aim was to transcend conventional thoughts and practices and explore the essence of productive and satisfying criminal defense work.  

It struck us that a similar inquiry might be useful for other fields of endeavor.  Also, the debate (to the extent revealed by competing statements to the media about what has been said behind closed doors) over a deal to raise the debt limit before the purported August 2 deadline seemed to be going in circles.  OK, a dharma entry it would be.

7/11

T-22

Strategies of Sides A & B

7/15

T-18

Spending cuts & tax increases

7/25

T-8

The dharma of budgeting

8/1

T-1

Assessing the outcome

Now, before going any further, what is dharma?  The word has several definitions, including the teachings of Buddhism, but we will take it to mean “essential quality or character, as of the cosmos or one’s own nature.”  Random House Dictionary. That may seem vague, but should become clearer as we proceed.

FOUR NOBLE TRUTHS FOR FISCAL VISIONARIES

ONE: Suffering exists – There is a fundamental duality in existence, which is manifested by the pairings of opposites. 

Some pairings are absolute, such as alive/dead or top/bottom.  There is generally little controversy involved.

Some pairings are relative but based on verifiable measurement, such as short/long or hot/cold. Issues there may be as to frames of reference and normative values.

Pairings based on value judgments are inherently controversial – especially as applied to human beings.  Some observers (not us!) reject the good/evil pairing, for example, on grounds that even the most extreme antisocial behavior can be explained by an unhappy childhood, brain chemistry, etc. 

The existence of suffering is readily accepted, and it has become trendy to classify the people involved as “victims.”  There is a tendency to belittle happiness, however, as though it was unfair that some people should be happy while others suffer.

Suffering can be experienced in many ways, but here is how it typically works for fiscal visionaries. 

We hold certain principles to be self-evident.  If you want to do something, do it right. Don’t make promises you cannot keep.  If you borrow money, pay it back.

Our government’s leaders have flouted these principles in thought, word and deed.  The Constitution has been distorted from its original intent.  A host of programs have been launched that are not truly needed and cannot be sustained. 

Spending, deficits and debt are soaring out of control.    The roar of the falls is growing louder; the sky is inky black; something wicked this way comes. 

We have sounded the alarm repeatedly, in every way we know, and no one seems to be paying attention.  To foresee disaster and be ignored, that is true suffering.

TWO: There are causes of suffering – Everything in the cosmos happens for a reason, and this case is no exception.

Politicians need money and support to get elected. They often make promises that will attract money and support, even if they know or should know that they will not be able to keep the promises.  Tax & tax, spend & spend, elect & elect.

Big corporations, unions, and non-profit organizations are willing to kick in campaign cash and/or political support with reasonable assurances that the favor will be returned with interest if their candidate wins.  Some hedge their bets by supporting candidates on both sides of the aisle.

Other visionaries have their own doomsday scenarios.  Thus, some of them rationalize the torrent of government spending as “social justice” or an “investment.”

The general public likes government programs and handouts so long as someone else is paying for them.  This is sometimes referred to as looking for a “free lunch.”

Fiscal visionaries fantasize about how politicians, special interests, their intellectual opponents, and the general public would behave in an ideal world rather than trying to better understand the world that exists. How foolish, when as has been truly said we cannot control anyone’s behavior except our own.

THREE: Suffering can end – Perceptions of reality are powerfully affected by the way in which one looks at things. It is within our power to look at the world differently and choose a new path.  

Examine this image. http://www.mindfake.com/illusion_25.html One minute it looks like a duck; the next it resembles a rabbit.  Back and forth – duck, rabbit, duck.

We must abandon perceptions and strategies that are not working.  “If you always do what you have always done,” as the saying goes, “you will always get what you always got – and that’s just not good enough.”

FOUR: The path forward – No one can guarantee success in this world, and suffering will always exist.  However, there should be many ways to improve on our track record.  The key is to escape from mindsets that are holding us back.

Life is complicated and fast moving.  Things are not always what they seem.  No man is an island.  There are no do-overs.  Consider the haunting lyrics of “Both Sides, Now,” which ends with the following lines.

I’ve looked at life from both sides now
From up and down, and still somehow
It’s life’s illusions I recall
I really don’t know life at all

http://bit.ly/xtF7q

Many things we have been doing are right, such as seeking to represent the interests of future generations who may not be able to speak for themselves.  That said, let’s work harder on connecting with the Millennials.  These young people have been unaccountably sitting on the sidelines; they could bring tremendous energy to the fiscal debate.

Have we paid enough attention to what motivates our intellectual opponents? With a better understanding of “where they are coming from,” we might be able to combat their arguments more effectively or possibly even find a bit of common ground now and then.

Do we get so wound up about the intellectual purity of our principles that we miss opportunities for creative collaboration?  Most of us have encountered conservatives who seemed more interested in promoting their own ideas than considering inputs from potential allies. “Yeah, thanks, but you should read the memo I wrote.”  Certainly, this is not the way we want to act.

Let’s not give up on the politicians who have been ignoring us, no matter how tempting this seems.  They are people too, and some of them are trying to do the right thing.  What’s more, if they hear from enough fiscal visionaries, it is always possible they will change their minds. One letter means little; twenty letters might give them pause; swamp the switchboards with calls and they will panic.

Without dumbing down our message, we need to find ways of communicating it to the general public that are clearer, more obviously relevant to the public’s needs, and more compelling.  Easier said than done, but without setting such goals we are unlikely to achieve them.

Remember, it’s not about us.  We need to look beyond ourselves.  And as Ronald Reagan said, “you can accomplish much if you don’t care who gets the credit.”

*   *   *   *

One thing we will not do is to regard the fiscal debate as simply a matter of political accommodation, e.g., finding the precise mix of spending cuts and tax increases that will minimize the opposition to taking action to avert (at least for now) financial disaster.

Whether the picture is a duck or a rabbit, one may be sure it is not a rab-uck or duc-bit. A choice must be made, and there is a great deal at stake.

top     close    ww3@atlanticbb.net


7/15/11 – Making sausage in DC: haggling over a debt limit increase

Many Americans are against raising the $14.3 trillion debt limit, including a majority of Republican and independent voters. Newsmax/Insider Advantage poll, 7/8/11.

http://bit.ly/rmbKW9

Public sentiment could shift, however, as the August 2 “deadline” nears.  Also, the reported results may reflect how pollsters are asking the question.  No trust in debt ceiling, [Wilmington, DE] News Journal, 7/12/11.

Ralph Begleiter, director of the Center for Political Communication at the University of Delaware, predicts that “it will come down to the Friday night before the debt ceiling hits, and they’ll work into the wee hours to get something done.” Begleiter attributed polls showing widespread opposition to a debt limit increase to a lack of public understanding.  “If you asked Americans, ‘Should America not pay its bills and default on its obligations?’ you would get a different answer.

http://www.s-a-f-e.org/members_microblog_2011.htm

And the major rating agencies warn that a delay in raising the debt limit could lead to a down-rating of US debt.  Such action would increase the government’s interest expense (unless the Federal Reserve stepped in to buy bonds, which would fuel inflation).  Moody’s reiterates credit-rating threat, Patrice Hill, Washington Times, 7/14/11.  

http://bit.ly/qZMNWv

All of the principals in the debt limit negotiation say the limit should be raised, but they cannot seem to agree as to the appropriate terms.  We will present our views in this entry, and also provide some updates on the negotiations. Right size – real spending cuts – no tax increases – plot thickens.

RIGHT SIZE: Given the magnitude of the fiscal problem (projected deficits of $9.5T over the next decade, after which the outlook deteriorates), it is natural to yearn for bold and decisive action.  We are Americans, after all, and, to borrow a line from this year’s State of the Union address, “we do big things.” 

OK, why not balance the budget?  Doing so would take a few years, but it is possible – and the nation would be better off than if deficits were simply reduced.  However, the two sides do not trust each other.  There is no common understanding about how to balance the budget.  And it is inherently difficult to ensure that future spending reduction promises will be honored. 

Doing a big deal in a big hurry, leaving many details to be worked out after the fact, would ensure future disappointment and discord.

For a couple of days in early July, there was a flurry of talk about a $4T deficit reduction deal that would include cuts in discretionary spending, trimming of entitlement programs, and tax increases.  Think of it as a watered-down version of the Ryan Plan, which called for bigger spending cuts and no tax increases.  Obama, GOP inching toward debt deal, Susan Ferrechio, Washington Examiner, 7/8/11.

http://bit.ly/pTwSCj

Many conservatives feared Team B’s leader, House Speaker John Boehner, would get snookered on the $4T deal, and they let him know how they felt.  Boehner thought better of the idea and the conversation shifted back to a $2.5T deal – which is what the Biden task force had spent two months talking about.

But there is a problem with pairing an immediate $2.5T debt limit increase (the estimated amount to keep the government going until after the 2012 elections) with a like amount of spending cuts over ten years.  How could Side B be sure the promised spending cuts would materialize?

Some fiscal conservatives are advocating a “cut, cap and balance” approach as the answer.  Cut short-term spending – impose spending caps for ensuing years – adopt a Balanced Budget Amendment (BBA) to the Constitution.  See this memo from the grassroots action team of the National Taxpayer’s Union.

http://bit.ly/pRJOT6

The first part is fine.  By all means, Congress should cut spending for FY 2012 et seq., as discussed under the next heading.

Spending caps are another matter.  They could be readily evaded if the zeal to cut spending faded.  The big taxpayer scam, Larry Kudlow, Townhall.com, 7/7/11.

. . . big budget deals say they “cut” (there's that word again) a couple of trillion dollars over ten years. But most of it is targeted for the last couple of years, as in years eight, nine, and ten. So basically it'll never happen. It's four or five congresses from now. Laws change. Deals are broken.

http://bit.ly/pBq1Mt

As for a BBA, good luck obtaining approval of (a) 2/3 of both houses in the current Congress, and (b) 38 of the 50 states. If we ever do get a BBA, it will probably be as a means to preserve a balanced budget rather than to balance the budget in the first place. RX, part one – Reform Congress, 11/30/09.

http://www.s-a-f-e.org/government_run_amok.htm

Another approach would to raise the debt limit in installments of say $500B, with clearly defined commitments to pay for each installment.  If that meant the debt limit would be revisited several times between now and the 2012 elections, so be it.  The White House and Congress should agree to a hard cap on spending, James Baker, Wall Street Journal, 6/17/11.

http://bit.ly/mEKvul

We like Mr. Baker’s idea. Better for fiscal visionaries to hit some singles than swing for the fences and strike out.  If the 2012 election results permit a more aggressive strategy, appropriate changes can be made then.

REAL SPENDING CUTS: Politicians on both sides of the aisle acknowledge the need for spending restraint, but they often take a powder when the discussion starts getting specific.  The frustration of SAFE directors was evident at our last board meeting, and with good reason given the government’s fiscal track record.  Never mind a 10-year plan; cut spending now, 5/30/11.

Everyone agreed on eliminating the Departments of Energy and Education, most government grant programs, corporate welfare, etc.  By comparison, ideas offered by Delaware’s Congressional delegation have been timid at best.  See, e.g., these News Journal columns: Rep. John Carney, Pair raising of debt limit with a long-term debt plan, 5/26/11; Senator Tom Carper, US must learn how to spend smarter, 5/12/11; Senator Chris Coons, Reckless budget cuts passed by House threaten citizens’ welfare, 2/28/11

The fiscal problem cannot be solved with freezes, caps, triggers, etc., which treat all spending programs alike.  A corollary of our “smaller, more focused, less costly government” agenda is that “good” programs should be adequately supported and “bad” programs eliminated.  Better the government take on a limited number of functions and do them well than undertake a host of functions with mediocre results.

Over the years, the federal government has become a huge bureaucracy with hundreds (maybe thousands) of wasteful and/or overlapping programs. National Suicide: How Washington Is Destroying the American Dream from A to Z, Martin L. Gross, Berkley Books (2009).

http://www.s-a-f-e.org/national_suicide.htm

Reasonable minds could differ as to the specifics, but it seems clear that huge savings (of both taxpayer dollars and regulatory compliance costs) could be achieved by eliminating wasteful programs and overhauling the rest of the government’s portfolio.

Our recommendations are three-fold: Cut spending, overhaul the tax system, rationalize regulations.  The details are posted.  SAFE to Congress: you need to do much, much better, 2/7/11. 

Over $1T of mutually agreeable spending cuts have reportedly been identified in the debt limit negotiations thus far, but they would be spread over 10 years and probably back-end loaded.  At best, this sounds like a drop in the proverbial bucket. 

One basis for our skepticism is informed speculation, such as the Karl Rove column that was cited in the 7/11/11 entry.

Also, we have not detected serious efforts to shrink the projected deficit for FY 2012 (begins on 10/1/11).  The president’s budget projected a $1,101B deficit; the Ryan Plan said $995B; the Democrat-controlled Senate has yet to offer a budget resolution. Sharp spending cuts in 2012 could be crucial to longer-term success.  The Tea Party is ceiling the deal, Larry Kudlow, Townhall.com, 7/13/11.

The public wants deep spending cuts. That’s their first priority and that’s why polls overwhelmingly show opposition to a debt-ceiling increase. So regarding those spending cuts, the only thing that matters is the first-year spending decline. That would be 2012. If the spending baseline is brought down significantly in year one, then the out-years will follow suit. The government’s cost curve will ease down.

http://bit.ly/pAf2I1

If anyone is thinking about eliminating the Department of Energy, corporate welfare programs, etc., we have not heard about it. 

True, the ethanol tax credit may be allowed to expire, but the effects would be modest.  Ethanol subsidy likely to end; even without $5B in federal aid, experts say industry would be fine, David Mercer, News Journal, 7/3/11.

How could “the industry be fine” and corn continue to be burned for high cost energy while food prices are artificially boosted? (1) Most likely the steep tariff on imported ethanol will remain, which prevents competition from ethanol produced from sugar cane in Brazil. (2) There is no thought of ending the federal mandate that a steadily rising amount of ethanol be blended into motor fuel. (3) Even if the current 45¢ a gallon tax credit was given up, the corn ethanol lobby would work for “a smaller credit to encourage sales when economic conditions dictate that ethanol producers really need it and money to pay for the installation of gas pumps that would let drivers fill up with fuel containing up to [15%] ethanol.” Welcome to Washington!  Killing government subsidy programs will never be easy; without relentless pressure it won’t happen at all.

Another bad sign, which relates to regulatory policy rather than spending, was the defeat of a House bill to block a mandated phase-out of incandescent light bulbs.  A two-thirds vote was sought for procedural reasons, and we understand that the bill will be presented again.  But even if the bill clears the House, it will probably be blocked in the Senate.  House turns out light on old-style bulbs, Stephen Dinan, Washington Times, 7/13/11.   

http://bit.ly/nxdHyU

What about the suggestions for pruning entitlements, e.g., changing the cost of living formula (would reduce future Social Security benefits while increasing future income taxes) and raising the eligibility age for Medicare to 67?

These ideas were apparently a part of the president’s pitch for a $4T deal, and if so they are no longer in play.  It is also unclear whether they ever represented anything more than rhetorical window dressing. See, e.g., Democrats oppose talk of cuts to Social Security, Robert Pear, New York Times, 7/7/11.

As word spread that Mr. Obama was considering large savings from the use of a different measure of inflation to reduce the annual cost-of-living adjustment in Social Security benefits, Democrats joined with lobbyists for older Americans to reject the idea.

http://nyti.ms/rqJ8A7

In short, real spending cuts will be hard to come by.  All the more reason to seek a smaller debt limit increase, which might make it easier to monitor spending cut promises.

NO TAX INCREASES: The fiscal problem has arisen primarily due to government spending growing faster than the economy, not a shortfall in revenue caused by the Bush tax cuts in 2001 and 2003.  See this Heritage Foundation chart, which tracks spending versus revenue on a historical and projected basis.

http://www.heritage.org/BudgetChartBook/runaway-spending-tax-revenue

Not that we oppose tax reform.  To the contrary, the tax system is a mess and a complete overhaul is needed. See SAFE’s SimpleTax proposal for discussion.  Note the assumption that tax revenues should total 20% of Gross Domestic Product, about five percentage points above the currently reduced (by the economic slump) level.

http://www.s-a-f-e.org/the_simple_tax.htm

Side A’s suggestions for raising tax revenue are illustrative of the ad hoc tinkering that has degraded the system.  It is high time for Congress to get its tax writing act together.

And Side A’s obsessive insistence on tax increases can only be understood as ideological or political.  Why Obama must raise taxes, John Ransom, Townhall.com, 7/2/11.

Without a tax hike, Obama will have to admit that it’s been his poor handling of the budget that’s led to the largest deficit ever. Without a tax hike, he’ll have to admit that his stewardship of the economy has been a lot of sound, but the only fury created has come from fleeced taxpayers.

http://bit.ly/kXrb3L

Taxpayers in the top 1% percentile paid 38% of individual income taxes in 2008, while taxpayers in the lower 50% percentile paid 3%.  Who is to say top earners are not paying their fair share?  Perhaps lower income taxpayers should pay a bit more of the tab.

http://www.ntu.org/tax-basics/who-pays-income-taxes.html

Other complaints about the current tax rules are even lamer, e.g., the president’s slap at corporate jets.  “Balanced” deal with more taxes misses the point, News Journal, 7/8/11.

Granted that the government needs more tax revenue, the most effective way to get it would be to promote economic recovery. Raising the depreciation life for corporate jets from 5 to 7 years, repealing LIFO accounting for oil companies, phasing out tax exemptions and deductions for “millionaires and billionaires,” etc. would complicate our already Byzantine tax system without significant revenue gain.

http://www.s-a-f-e.org/letters_2011.htm#July_8,_2011

Now is the time for a comprehensive overhaul of the tax system.  Rates should be cut, but also preferences (exemptions, deductions and credits), to make the system simpler, fairer, and economically neutral.  Revenues would probably increase overall, but that should not be the primary objective.  And there should be no ad hoc tax increases, once again kicking the can of tax reform down the road.   

THE PLOT THICKENS:  Herewith several updates to the 7/11/11 entry on the Side A and Side B strategies.

#The president has threatened to veto any short-term debt limit extensions.  Obama’s flattery of Boehner goes nowhere, Dave Boyer, Washington Times, 7/11/11.

Mr. Obama said he would veto any short-term pact to raise the debt ceiling, arguing that an agreement must cover government borrowing through the November 2012 elections.  “I will not sign a 30-day, or a 60-day, or a 90-day extension,” Mr. Obama said. “This is the United States of America. We don’t manage our affairs in three-month increments.”

http://bit.ly/plU9qT

In so doing, the president arguably overreached.  If he vetoed a $500B debt limit increase tied to spending cuts, or the Democrat-controlled Senate blocked it, how could any resulting problems be blamed on Side B?  Obama’s Waterloo, Jeffrey Kuhner, Washington Times, 7/12/11.

http://bit.ly/noMgSH

#The president has warned that Social Security payments might be delayed if the debt limit was not raised by August 2.  GOP says Obama resorting to scare tactics, Kara Rowland & Sean Lengell, Washington Times, 7/13/11.

“I cannot guarantee that those checks go out on Aug. 3 if we haven’t resolved this issue. Because there may simply not be the money in the coffers to do it,” he told CBS News.

http://bit.ly/prHRaR

Side B might counter this threat by enacting legislation requiring Treasury to pay debt service, military pay, Social Security, and Medicare on a priority basis.  Memo to Hill GOP: How to take the Social Security card out of Obama’s hands, Mark Tapscott, Washington Examiner, 7/13/11.

http://bit.ly/paarOx

But with the government currently borrowing 40¢ of every dollar it spends, many obligations could not be paid  – no matter what legislation was passed.  Surely the Administration would try to delay the payments most embarrassing for Side B.

#Senate Minority Leader Mitch McConnell has suggested a plan that would empower the president to keep running up debt in $800B increments, subject to offering spending cuts (which would not need to be enacted).  Congress could block the debt limit increases, but the president could veto its refusal.

The rationale was that the Senate wanted no part of triggering a debt default, yet the impossibility of making a reasonable deal for raising the debt limit had become evident.  McConnell offers “last choice option,” Susan Ferrechio, Washington Examiner, 7/13/11.

We have become increasingly pessimistic that we will be able to reach an agreement with the only person in America who can sign something into law, and that's the president of the United States.

http://bit.ly/pKRUEk

Most conservatives lambasted McConnell’s proposal, but the Wall Street Journal warned that Side A holds more cards than Side B and would exploit its position ruthlessly in a default context.  Debt-Limit Harakiri, 7/13/11, link not available.

 [The president] and Mr. Geithner will gradually shut down government services, the more painful the better.  The polls that now find that voters oppose a debt-limit increase will turn on a dime when Americans start learning that they won’t get their Social Security checks.  Republicans will then run like they’re fleeing the Pamplona bulls, and chaotic retreats are the ugliest kind.  By then they might end up having to vote for a debt-limit increase and a tax increase. 

With all due respect to Senator McConnell and the Wall Street Journal, we believe it would be a grave mistake to implement this proposal. 

First, such action would blur the lines of Constitutional responsibility. Congress, not the president, is responsible for authorizing borrowing.  Plan B and limited government’s future, Washington Examiner, 7/14/11.

http://bit.ly/pXdbZw

Second, Side B has a sound position on the policy issues.  Right size (they are coming around to the idea of raising the debt limit on the installment plan, which is the only practical way to proceed, while the president is threatening a veto) – real spending cuts (the Ryan plan is available for inspection; Side A’s ideas are not) – no tax increases (we agree, especially as Side B is open to a review of the overall system).

Third, Americans would see the implementation of Senator McConnell’s plan as a copout, losing all respect for Side B as a result.  Republicans must vote against raising debt ceiling or face political annihilation, Matt Towery, Townhall.com, 7/13/11.

http://bit.ly/ocImix

# A White House meeting on July 13 was terminated by the president’s departure from the room after a testy exchange.  Eric Cantor: Obama abruptly walked out of debt meeting, Jonathan Allen & Jake Sherman, Politico, 7/13/11.

http://www.politico.com/news/stories/0711/58937.html

The next day, House Speaker John Boehner declined the president’s invitation to conduct a weekend meeting in a more relaxed setting. Boehner rejects Camp David summit with Obama, Susan Ferrechio, Washington Examiner, 7/14/11.

http://bit.ly/pUFMLf

Just as well there will be no Camp David meeting.  We had a vision of the president telling the Secret Service to put Representative Cantor in time out for talking back.

*  *  *  *

And now, at 5:30 p.m., July 14, 2011, your faithful scribe is signing off so this second entry in our series on the debt limit showdown can go to press. 

7/11

T-22

Strategies of Sides A & B

7/15

T-18

Spending cuts & tax increases

7/25

T-8

The dharma of budgeting

8/1

T-1

Assessing the outcome

 The 7/25 entry will review certain aspects of this subject at a deeper and more fundamental level, and the 8/1 entry will complete the story (assuming it ends on schedule) in a conventional manner. 

top     close    ww3@atlanticbb.net


7/11/11 (T-22) – When worlds collide: two very different strategies        Read a Reply

Rumor has it that the world as we know it will end on August 2 unless an agreement to raise the $14.3 trillion federal debt limit is reached by then.  No doubt the point has been overstated, but negotiations over the next three weeks could still determine what, if anything, gets done about the fiscal problem before the 2012 elections.

SAFE will be providing updates and analysis as matters progress.  We envision a four-part series, as follows:

7/11

T-22

Strategies of Sides A & B

7/18

T-15

Spending cuts & tax increases

7/25

T-8

The dharma of budgeting

8/1

T-1

Assessing the outcome

The debt limit showdown is subject to varying interpretations, which can lead to simplistic conclusions.  Hey, Side A is trying to do the right thing.  But Side B makes some points too.  So the true answer must lie somewhere in the middle.  See, e.g., President gets it right: Both sides must bend, [Wilmington, DE] News Journal, 6/30/11.

The reality is the nation needs both: to cut spending levels and to eliminate some tax breaks and other special favors to the "millionaires and billionaires" and corporations the president mocked at Wednesday's press conference.

http://bit.ly/nvLDGB

But why focus on a snapshot of the current situation when a video is available?  Let’s go back in time a bit.

CHRONOLOGY OF EVENTS: The president and his party could probably have raised the debt limit last December, while they still controlled both the House and Senate, but chose to wait for the new Congress.  Here is a recap of what has happened since.

January 6 - Treasury secretary sends a letter to the Senate majority leader, with copies to all members of the new Congress, advising that a failure to swiftly raise the debt limit “would precipitate a default by the United States” with dire consequences.

Never in our history has Congress failed to increase the debt limit when necessary.  Failure to raise the limit would precipitate a default by the United States.  Default would effectively impose a significant and long-lasting tax on all Americans and all American businesses and could lead to the loss of millions of American jobs.  Even a very short-term or limited default would have catastrophic economic consequences that would last for decades.  Failure to increase the limit would be deeply irresponsible.  For these reasons, I am requesting that Congress act to increase the limit early this year, well before the threat of default becomes imminent.

http://1.usa.gov/g5KXqG

February 14 - The president submits a FY 2012 budget showing a 10-year deficit of $7.2T.  The budget: a “lowball” offer, 2/21/11.  Based on its review, the Congressional Budget Office ups the 10-year deficit estimate to $9.5T.   Obama’s budget doesn’t reach primary balance, Stephen Dinan, Washington Times, 3/18/11.

http://bit.ly/fKdBMD

April 5 - The House publishes an alternative budget (aka the Ryan Plan), which would pare the 10-year deficit to $5.1T.  The indicated $4.4T deficit reduction reflects $6.2T in spending cuts less a $1.8T reduction in tax revenues  (including those in GovCare).  Government shutdown: a temporary reprieve, 4/11/11.

Meanwhile, House Budget Chairman Paul Ryan rolled out a proposed FY 2012 budget that reflected some $6 trillion less spending in the 10-year projection period than the president’s FY 2012 budget.  The cuts included GovCare repeal, conversion of Medicare coverage to subsidized private insurance plans for future retirees, and conversion of Medicaid to a block grant program.

April 13 – The president outlines an alternative proposal (with few details and no documentation) for reducing the projected deficit by $4T over 12 years.  He sharply attacks the Ryan Plan as an extreme and unbalanced approach. Speech transcript.

A 70% cut to clean energy. A 25% cut in education. A 30% cut in transportation. Cuts in college Pell Grants that will grow to more than $1,000 per year. That's what they're proposing. These aren't the kind of cuts you make when you're trying to get rid of some waste or find extra savings in the budget. These aren't the kind of cuts that Republicans and Democrats on the Fiscal Commission proposed. These are the kind of cuts that tell us we can't afford the America we believe in. And they paint a vision of our future that's deeply pessimistic.

http://bit.ly/fkuCa6

April 15 – The lower chamber approves the Ryan Plan.  House passes $6 trillion spending cut plan, Andrew Taylor, Washington Examiner, 4/15/11.

http://bit.ly/nvLDGB

May 25 – Despite not having offered its own budget proposal, the Senate rejects the Ryan Plan (57-40).  The president’s FY 2012 budget is also rejected (97-0) on grounds that it is no longer in play. President’s budget sinks 97-0, Alexander Bolton, The Hill, 5/25/11.

Democratic aides said ahead of the vote that the Democratic caucus would not support the plan because it has been supplanted by the deficit-reduction plan Obama outlined at a speech at George Washington University in April.

http://bit.ly/iombJH

April/June – The Biden talks identify $1T+ in spending cuts on which the two sides can supposedly agree, but deadlock over tax increases.  Taxes take top Republicans out of deficit-paring talks, Sean Lengell, Washington Times, 6/24/11.

Republicans say the federal red ink should be reduced through spending cuts, while Democrats argue tax increases should also be on the table. After 11 meetings, Republicans said the talks have gone as far as they can without Mr. Obama becoming personally involved.

http://bit.ly/mNwFiC

June 29 – The president slams Republicans at a press conference for refusing to accept tax increases. Transcript.

It would be nice if we could keep every tax break there is, but we’ve got to make some tough choices here if we want to reduce our deficit.  And if we choose to keep those tax breaks for millionaires and billionaires, if we choose to keep a tax break for corporate jet owners, if we choose to keep tax breaks for oil and gas companies that are making hundreds of billions of dollars, then that means we’ve got to cut some kids off from getting a college scholarship.  That means we’ve got to stop funding certain grants for medical research.  That means that food safety may be compromised.  That means that Medicare has to bear a greater part of the burden.  Those are the choices we have to make.

http://on.wsj.com/l4zOF5

June 30 – Republicans say they will consider tax reform, but not selective tinkering with the tax code designed to raise revenue.  They also object to the “class warfare rhetoric” being employed.  GOP pushes back at Obama over debt talks, Susan Ferrechio, Washington Examiner, 6/30/11.

http://bit.ly/jrYUly

July 5 – The president says he is unwilling to consider a short-term extension of the debt limit and wants a comprehensive deal by August 2 at the latest.  Obama prods Congress on debt deal, Dan Boyer & Stephen Dinan, Washington Times, 7/5/11.

“I’ve heard reports that there may be some in Congress who want to do just enough to make sure that America avoids defaulting in the short term, but then want to kick the can down the road when it comes to solving the larger problem of our deficit,” Mr. Obama said. “I don’t share that view.”

http://bit.ly/os56fX

July 7 – The president and Congressional leaders meet at the White House.  There is a flurry of reports afterwards, the gist being that consideration will be given to pairing a debt limit increase with a $4+ trillion deficit reduction deal.  The talks are described as “constructive,” and there is to be another meeting over the weekend.

http://bit.ly/qc3nPN

July 10 – (Sorry, but our entries have to cut off at some point and the Sunday evening session happened after we went to press.  Any notable developments will be posted as a “comment” on this entry.)

Would it be fair to conclude from the foregoing that the two sides are simply trying to find the best answer to the fiscal problem (toxic deficits & debt increases)?  If anyone believes that, we have some beachfront property in Arizona for sale.

SIDE A: Let’s start with the president and his supporters, who made the first moves and seem to be following the more devious strategy.  What are they aiming for, and how do they hope to achieve it?

Based solely on his recent remarks (the snapshot), it might seem that the president is a fiscal moderate who is trying to prod the extremists on both sides into reaching a constructive solution. Hey, they might be willing to make a short term deal and keep kicking the can down the road, but he wants no part of that.

Notice, however, that the president habitually portrays himself as a moderate even though his political record indicates otherwise.  Also, the claim that he does not intend to keep kicking the can down the road is stale – he made the same point in January 2009 to a group of Washington Post reporters and editors.  Mr. President, stop straddling the fence and decide, William Whipple, News Journal, 8/24/09.

http://bit.ly/mVS8TX

If the president truly wanted to solve the fiscal problem, he could have submitted a more austere FY 2012 budget.  Or shown greater appreciation for the thinking that went into the Ryan Plan, even if he differed with various aspects of it.  Or presented details of the alternative deficit reduction “plan” that most of the media has credited him with offering instead of simply giving a speech.

In short, as the saying goes, “actions speak louder than words.”  The president has done little to address the fiscal problem, and indeed contributed to making it worse during his first two years in office.  So what is Side A really up to? 

We see the main goal as preparing for the 2012 elections by either (a) winning the debt limit tussle decisively, or (b) blaming Side B for unpopular spending cuts and/or any adverse fallout from an alleged default.

“Winning” would mean raising taxes on the well to do, while agreeing to the minimum in real spending cuts (except for defense).  And every substantive move by Side A thus far has been guided by these criteria.

What about the spending cuts agreed to in the course of the Biden talks?  When the details become available, they are likely to prove unimpressive. Obama’s debt-ceiling opportunity, Karl Rove, Wall Street Journal, 7/7/11 (no link available).

Thus, in backroom negotiations recently, the Administration offered roughly $1 trillion in phony savings – mostly money that would never have been spent in Iraq and Afghanistan over the next 10 years anyway, along with $500 billion in interest savings on the trillion.  It has also offered another supposed trillion in domestic and entitlement savings, but with cuts starting in 2014 and unlikely ever to be realized.

And if Side B demands more substantive spending cuts than Side A is willing to accept, there is a meticulous record (Treasury Secretary Geithner’s letters to Congress, the president’s speeches, etc.) that Republicans were warned of the dire consequences of default yet refused to accept a “balanced” deal.

There is even a school of thought that Side A might choose to ignore the debt limit on grounds that it is unconstitutional, citing the necessity of saving American from a default brought about by Side B’s failure to act responsibly.  Really, we are not making this up, and Secretary Geithner has articulated the claim publicly.  Obama Administration may just ignore the debt limit, Conn Carroll, Washington Examiner, 7/1/11.  

I think there are some people who are pretending not to understand it, who think there’s leverage for them in threatening a default. I don’t understand it as a negotiating position. … can I read you the 14th amendment? … “The validity of the public debt of the United States, authorized by law, including debts incurred for the payments of pension and bounties for services in suppressing insurrection or rebellion” — this is the important thing — “shall not be questioned.” So as a negotiating strategy you say: “If you don’t do things my way, I’m going to force the United States to default–not pay the legacy of bills accumulated by my predecessors in Congress.” It’s not a credible negotiating strategy, and it’s not going to happen.

http://bit.ly/ikGhSZ

Most conservative observers see this theory as so patently lacking in legal merit that Side A would never invoke it.  (Maybe, but after the manner in which the president ducked compliance with the War Powers Resolution for Libya, we are not so sure.)  Obama’s empty 14th Amendment ploy on the debt ceiling, Bill Wilson, Washington Examiner, 7/6/11.

. . . there is no legal right or claim of the president to overturn Article I, Section 7 of the Constitution, which gives the House of Representatives the sole power to originate "the raising of revenue." And let's be clear, adding new debt is new revenue. The president has no role.

http://bit.ly/n4avQY

SIDE B: The strategy of Republicans has been comparatively straightforward.  They have demanded spending cuts exceeding the amount of any increase in the debt limit, while rejecting demands for net tax increases. 

Side B’s rationale is that (1) it is imperative to tackle the fiscal problem, and (2) the measures they advocate will help to restore business confidence and promote economic recovery.  In other words, they are trying to do the right thing. Representative Paul Ryan’s speech to the Economics Club of Chicago, 5/16/11, transcript.

#You can’t get real, sustainable growth by continuing to pile on the debt. More debt means more uncertainty, and more uncertainty means fewer jobs. *** We cannot get our economy back on track if Washington tries to tax its way out of this mess.

http://bit.ly/kRGJ53

While generally agreeing with these sentiments, we would offer three criticisms of Side B’s position.

#The Ryan Plan did not cut spending enough.  Our idea would be to balance the budget over the next decade (or less), not simply cut projected deficits in half.  Still, the proposal represented a step in the right direction and Side B deserves credit for offering it.

#It seems lame to rule out tax increases on grounds they “cannot pass the House,” as House Speaker John Boehner has done on several occasions. The claim is not demonstrably true, and it invites the equally lame response that a deal without tax increases “cannot pass the Senate.”

#Side B is relying on the president to accept real, verifiable spending cuts and no net tax increases.  If he balks, they may find themselves in a weak bargaining position.  Debt cutting discussions lack backup plan, Jake Sherman & John Brensahan, Politico.com, 7/6/11.

The House GOP leadership isn’t drafting alternative bills to boost the debt ceiling, and they’ve ruled out any short-term agreement to forestall a default by the U.S. government on its $14.4 trillion debt, an option that one House Republican lawmaker said could not muster more than 100 GOP votes.

With 12 legislative days before the White House’s deadline for a deal — and three weeks before Treasury’s Aug. 2 default date — House Republicans are counting on someone they haven’t had much faith in in the past: President Barack Obama.

http://politi.co/mShZaW

CONCLUSION: The debt limit showdown is between a unified, slick, bare-knuckles political machine, and opponents that are smart and well intentioned, but less cohesive and ruthless. 

Side B’s only chance is to convince the American public that their ideas are better than those being offered by Side A, e.g., that their thinking about spending cuts is sound and this would be a bad time to raise taxes.  Can they succeed?  Tune in next week for a discussion of the policy issues that have been put in play.

http://bit.ly/l7us7R

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7/11 UPDATE: The grandiose idea of a $4T deficit reduction deal collapsed over the weekend, and the principals in the debt limit showdown are reportedly back to discussing $2T+ deficit reduction to pay for a debt limit increase of equal side with continuing disagreement as to whether tax increases will or will not be included in the mix.  Yet another meeting of the principals is scheduled today.

Multi-year tax agreements are untrustworthy.  Whatever Congress agrees on this year will change next year, when a new budget is presented and debated.  The time has come to face the facts.  We cannot continue to spend at the rate we have without disastrous results, so there must be no INCREASE IN THE DEBT CEILING! As for concerns about the consequences of default on our debt obligations, there is plenty of revenue to meet those obligations if we pay them first. – SAFE director

Both sides must bend, so let’s put half the federal budget on the table along with a copy of the U. S. Constitution.  It will be seen that half of the budget is for political schemes, not authorized by the Constitution, which serve to keep corrupt politicians in office. – SAFE member, AZ

The bond markets will not tolerate the US deficit and debt spree much longer.  When they balk, we will see interest rates hit double digits hard and fast.  Plus which, just wait until CA, IL, or NY comes to Washington looking for a bailout.  Neither Side A nor Side B seems to appreciate the gravity of the fiscal problem and the urgency of acting decisively. Get set for a disaster. – SAFE director

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7/4/11 – Remember the past to save the future

“Those who cannot remember the past are condemned to repeat it,” wrote philosopher George Santayana, which is generally taken to mean that a failure to remember past mistakes may result in making them again.

We agree.  Everyone should be mindful of the lessons of the past – including what worked as well as what failed – especially on Independence Day.  So please join us for a thought experiment in three parts: Past – Present – Future.

PAST: Imagine that it was possible to travel back in time to July 4, 1776.  There you would encounter antiquated technology, quaint apparel, and a Spartan standard of living by today’s standards.  However, the complaints about a powerful government, being run without regard for the desires or interests of the citizenry, might sound familiar.

The Declaration of Independence alleges abuse and manipulation of the legislative and judicial processes, bureaucracy run amok (“swarms of officers to harass our people, and eat out their substance”), and taxes imposed “without our consent.” All true, no doubt, but are things much better 235 years on?  We now have a rather imperious president, legislators who seem to avoid taking responsibility for anything, unelected judges who aspire to be legislators, virulent bureaucracy (it would be hard to do more damage than the EPA), and taxes higher than the founders ever imagined.

http://www.archives.gov/exhibits/charters/declaration_transcript.html

Not for nothing did the signers pledge to each other our lives, our fortunes, and our sacred honor.”  They were taking some major risks, which are not always appreciated in hindsight.

ü      Many colonists were loyal to the British Crown; many more would stay on the fence until it became clearer what the outcome was likely to be. 

  ü      Years of war lay ahead, under the best of circumstances, and military defeat by the powerful British forces was a definite possibility.

  ü