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SAFE’s “hit nail on head” blogs: 2012
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5/21/12 – Coming attractions: lame duck session Read a Reply
If Congress meets between the November elections and early January of the following year, legislators on the way out (aka “lame ducks”) can potentially vote for bills their successors would block.
This transitional period creates opportunities for postponement of votes on controversial issues until after elections and/or attempts to push through legislation that might face tough sledding in the new Congress. Elgin Hushbeck, 1/3/11.
Lame duck Congresses can be measured on two factors, the number of members changed, and the significance of the legislation passed. Insignificant legislation, with little change in Congress, results in a pretty innocuous lame duck session, while significant legislation passed when Congress is changing hands, is highly undemocratic, and should be considered illegitimate.
http://hushbeck.com/blog/?p=508
If there is also a “lame duck” president (a possibility this year), the potential for political shenanigans is compounded. What will happen in the lame-duck session? Ryan Beckwith, Congress.org, 4/27/12.
President Jimmy Carter and a lame-duck Democratic Congress enacted a number of major bills before the Reagan revolution began in earnest. [We aren’t convinced that any serious damage was done.]
And however this year’s presidential race turns out, a perfect storm of fiscal issues is scheduled to hit at year end.
(1) Will Congress establish a budget for fiscal year 2013 or continue to fly by the seat of its pants subject only to the dreaded sequesters?
(2) Will Congress renew the expiring Bush tax cuts and other tax provisions or allow them to expire, and is the tax system going to be overhauled or not?
(3) What will be the terms for the next debt level increase, which is coming up within a few months because the government has not curbed its spending habits?
It might be nice to address some of these issues now, but is this possible? Let’s review where matters stand and critique the efforts of some of the key players.
Budget – Prior entries have tracked this situation, which we summed up as follows in early April. Bitter budget battle building, 4/9/12.
#A budget stalemate will last until after the elections (or longer), while the national debt keeps growing rapidly.
# [The situation] has developed fast and turned nasty (almost personal). The Republicans have the better argument on the merits; the Democrats will attempt to discredit their motives or change the subject. Fiscal visionaries should demand a fact-based, logical debate. If you agree, please help us spread the word.
Senate Majority Leader Harry Reed’s wanted to sideline the House-passed budget, but he was maneuvered into allowing a vote on it and several other budget proposals. The results are recapped below. Democrat-led Senate votes down 4 GOP budgets for 2013, Stephen Dinan, Washington Times, 5/16/12. Senate kills five budget proposal[s] in a single day, Susan Ferrechio, Washington Examiner, 5/16/12.
|
Plan |
Description |
Vote (for-against) |
|
House budget (aka Ryan plan) |
Cut spending by $5T over 10 years, no tax increases |
41-58 |
|
Pat Toomey’s budget |
Cut spending more sharply than House budget |
42-57 |
|
Mike Lee’s budget |
Cut spending and replace income tax with 25% consumption tax, balance the budget |
17-82 |
|
Rand Paul’s budget |
Eliminate departments of Energy, Education, Commerce, & Housing and Urban Development, balance the budget |
16-83 |
|
President’s budget |
Key numbers from the budget proposed by the president in February 2012 |
0-99 (earlier rejected 0-414 in House) |
|
Bowles-Simpson plan |
Plan proposed by co-chairs of the Fiscal Commission in 2011 |
Not introduced, but the House rejected a version 38-382 |
http://bit.ly/L8s35w [WT story] & http://bit.ly/JIh5Xp [WE story]
Instead of admitting their many contributions to the fiscal problem, Senate Democrats attempted to discredit the exercise and the tactics used by the Republicans.
“Democrats won’t agree to a one-sided solution that lets the superwealthy off the hook while forcing the middle class to bear all the hardship,” said Senate Majority Leader Harry Reid, Nevada Democrat. “These four stunt budgets all take that one-sided approach.” [WT story]
"This is not the president's budget [as only the key budget numbers were presented], so of course we are not going to support it because it is not what the president proposed," said Sen. Kent Conrad, D-N.D.
Some members implied that resolution might be easier after the elections, but Senator Joe Lieberman (I-CT), who will retire soon, suggested otherwise. WE story.
"I know everybody says we are going to come back here after the election and there is going to be a burst of courage, I guess, because the election is over," Lieberman said. "What I'm sort of hearing in the wind around here is don't count on it."
Two House leaders, Representatives Paul Ryan (chairman, Budget Committee) and Chris Van Hollen (ranking minority member), likewise sought to lower expectations for a year-end breakthrough. US Rep. Ryan doesn’t expect permanent fiscal fix in lame duck session, Michael Crittenden, nasdaq.com, 5/17/12.
Both Ryan and Van Hollen suggested the most-likely outcome would be some form of short-term extension putting off the tough decisions on taxes and the spending cuts until 2013.
For his part, the president seems to have little interest in spending cuts. He is currently advocating a mélange of ideas to boost spending while further complicating the tax law. President’s weekly address: Congress must act on “To-Do List,” 5/12/12.
(1) Impose tax penalties on “companies that ship jobs overseas” and provide subsidies for “companies that bring jobs back to America;” (2) Subsidize mortgage refinancing by “millions of Americans who have worked hard and made their mortgage payments on time;” (3) Give small business owners “a tax break for hiring more workers and paying them higher wages;” (4) Renew subsidies for clean energy companies so they will not “be forced to lay off employees;” (5) Create a Veterans Job Corps to help military personnel returning from Iraq and Afghanistan.
SAFE to DC: You will never solve the fiscal problem unless you start working for smaller, more focused, less costly government vs. the reverse. Please see our 5/8/12 letter to selected members of Congress. http://bit.ly/JZMHFR
We also recommend an interview of Senator Tom Coburn, author of “The Debt Bomb,” concerning the inexcusable inaction of this nation’s political leaders. “US has 2-5 years before fiscal meltdown,” video (4 minutes), 5/15/12. http://thedc.com/K2yLLv
Taxes – The tax situation remains basically unchanged from January. A slew of tax provisions are set to expire at the end of this year, notably the Bush tax cuts that have been in place for a decade and the more recent “temporary” payroll tax cuts. Happy 2012, and why it’s time to focus on taxes, 1/2/12.
SAFE believes Congress should overhaul the US tax system, not continue tinkering with the tax law on a piecemeal basis. The overhaul would require months of work, so it should be started on a timely basis rather than deferred until after the elections. Letter to all members of Congress, 2/1/12.
Don’t argue about the expiring Bush tax cuts in December; overhaul the tax system now. Revenue should be collected in a manner that is simple, efficient, and fair. Our tax plan (http://www.s-a-f-e.org/the_simple_tax.htm) may represent a useful template.
Others have begun to suggest that decisions about the tax system should ideally be made before the elections. There seems to be more concern about impending tax increases, however, than about the potential benefits of a tax overhaul. Taxmageddon coming? Answer could cost Americans $500 billion, Jim Angle, Fox News, 4/18/12.
# "Almost the entire tax code has been put on a year-to-year lease, and in some cases, month-to-month lease, which is no way to run a tax system," Scott Hodge of the Tax Foundation said.
#"Taxmageddon falls 70 percent on middle and low income families. That's because 60 percent of the Bush tax cuts were for middle- and low-income taxpayers," [Curtis] Dubay [of the Heritage Foundation] said. The payroll tax cut was aimed at the same taxpayers.
# All this raises the stakes for the economy, because until Congress acts, businesses can't know what their tax rates are going to be, making it hard to hire more workers or plan for the future and leaving both taxpayers and the economy awash in uncertainty.
How can the logjam be broken? The typical answers contemplate a politics as usual approach, e.g., extending all of the Bush tax cuts now while deferring a tax overhaul until later. Congressional GOP pushes for action on taxes, Alan Fram, Real Clear Politics, 5/17/12. http://bit.ly/LmY9kh
Forty-one Senate Republicans wrote to Majority Leader Harry Reid in this vein. Text of 5/17/12 letter.
It is essential that Congress and the President address these coming tax increases this summer, rather than creating additional uncertainty for families and job creators by waiting until the last possible minute.
And House Speaker John Boehner urged extension of the Bush tax cuts in a speech at the Peterson Foundation’s 2012 Fiscal Summit . . .
Any sudden tax hike would hurt our economy, so this fall – before the election – the House of Representatives will vote to stop the largest tax increase in American history.
. . . with a tax overhaul to follow next year. Text of prepared remarks, 5/15/12.
[Our] bill to stop the New Year’s Day tax increase will also establish an expedited process by which Congress would enact real tax reform in 2013 *** something like how we handle Trade Promotion Authority, where you put in place a timeline for both houses to act. *** The Ways & Means Committee will work out the details, but the bottom line is: if we do this right, we will never again have to deal with the uncertainty of expiring tax rates. We’ll have replaced the broken status quo with a tax code that maintains progressivity, taxes income once, and creates a fairer, simpler code.
Focused as they are on hiking taxes for high earners, Democrats are unlikely to embrace the Republicans’ approach on taxes. Obama loses vote on “Buffett [Rule],” gains tool; Democrats vow to bring it up repeatedly, Stephen Dinan, Washington Times, 4/16/12.
Mr. Obama has spent much of the past month pushing for the tax to be imposed as part of his campaign-year message that the wealthy must be made to pay more taxes in order to fund the promises that the federal government has made over the years on Medicare and Social Security. [The estimated revenue gain would be minor in relation to the projected growth in the costs of these and other “entitlement” programs.]
Too bad, because concerns about the taxmageddon scenario may be impeding economic recovery. Extend the Bush tax cuts now, Larry Kudlow, Townhall.com, 5/18/12.
The uncertainty over the Bush tax cuts already has caused a number of business leaders to threaten a hiring freeze and a dampening of investment until they can figure out the after-tax cost of capital and rate of return on investment. Hiring has slowed noticeably in recent months. And a number of Wall Street economists are marking down the anemic recovery even more, suggesting that the 3 percent growth at the end of last year, which faltered to 2 percent growth in the first quarter, could be even less in the period ahead.
Debt limit – Speaker Boehner’s comments on this topic at the Peterson Foundation conference attracted a lot of attention even though he was not staking out a new position. Text of prepared remarks, 5/15/12.
When the time comes, I will again insist on my simple principle of [spending] cuts and reforms greater than the debt limit increase. This is the only avenue I see right now to force the elected leadership of this country to solve our structural fiscal imbalance.
The need for another debt limit increase is still months away (current debt $15.7T, debt limit $16.4T). No one knows who will be president when it arises. But the fight over the last increase was exceptionally bitter, and the key players have not forgotten it.
Claims were soon flying that Republicans planned to shut down the government. Boehner vows showdown over debt ceiling, Susan Ferrechio, Washington Examiner, 5/15/12.
Congressional Democrats quickly refuted the Republican leader for reviving demands that nearly shut down the government last summer and eventually [led] to a downgrading of the nation's AAA bond rating. Senate Majority Leader Harry Reid, D-Nev., said Boehner's ultimatum is further evidence that House Republicans are captives of a conservative Tea Party faction that is "driving them over a cliff."
Congressional leaders met with the president the next day. The president’s “to do” list for Congress was supposed to be the main topic, but the discussion veered off course. Obama, Boehner clash at White House meeting over raising debt ceiling, Russell Berman & Alicia Cohn, The Hill, 5/16/12.
Boehner asked Obama if he was proposing that Congress increase the debt limit without corresponding spending cuts, according to a readout of the meeting from the Speaker’s office. The president replied, “Yes.” At that point, Boehner told Obama, “As long as I’m around here, I’m not going to allow a debt-ceiling increase without doing something serious about the debt.”
Shortly after the meeting, White House press secretary Jay Carney told reporters that the president warned the leadership that he would not allow a repeat of last August’s debt-ceiling “debacle,” which led to a downgrade in the U.S. credit rating.
We see nothing wrong with the line taken by Speaker Boehner – but doubt it will prove effective. After all, what did the last debt limit deal accomplish? Boehner’s bluff, Robert Romano, NetRightDaily, 5/16/12.
All the American people got in return for the $2.1 trillion increase in the borrowing limit, the largest such hike in the nation’s history, was a slight reduction in the growth rate of spending via sequestration — which Congress is busy crafting legislation to overturn — and the ill-fated Supercommittee that achieved exactly nothing.
In effect, trying to control spending by freezing the debt limit is like “locking the barn door after the horse has been stolen.” Fiscal discipline can only be achieved by controlling spending before the fact.
Synthesis – There does not appear to be a fiscal breakthrough on the horizon – and the outlook will not necessarily improve after the election.
It does no harm for the nation’s leaders to discuss the fiscal problem, and some observers have suggested that such an effort could speed up action later. Boehner’s early stand sets up second round of debt limit battle, Russell Berman, The Hill, 5/19/12.
Boehner and his allies argue that the push for substantive talks over the summer are a necessity, and not merely wishful thinking. “Anybody who thinks with all the things that are coming due between the election and Jan. 1 of next year that we can do in 45 days what we haven’t done in 10 years is crazy,” Rep. Steve LaTourette (R-Ohio) said. “It only works if we’ve built consensus over the last several months.”
But we do not see the debt limit as much of a “trump card” for Side B, nor do we envision a consensus on either budgets (Side A does not want one; neither side is keen on cutting spending) or taxes (Sides A & B have incompatible goals).
The main potential benefit would be to educate Americans about the fiscal problem. What a concept: an election in which the voters actually knew where the candidates stood on budgets, taxes and debt before voting instead of finding out later.
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No spending cuts and the debt soars. Get set for a major fiscal event in 2-3 years; buy gold. – SAFE director
5/14/12 – What about the Export-Import Bank? Read a Reply
In reviewing government programs on a comparative basis, one can easily get confused. Hey, this program may be unnecessary, but it achieves some useful results and has been reasonably well managed. Don’t we have more important battles to fight?
On the other hand, as the saying goes, “the road to hell is paved with good intentions.” Start accepting unnecessary programs and the “approved by exception” category will tend to expand over time. It is easy to rationalize a program, for example, if the beholder values the program beneficiaries. And never underestimate the risk that programs that seem OK now will be expanded and perverted in the future.
Take the Export-Import Bank of the United States (“EIB”), whose current charter will expire on May 31. Despite an unusual level of “conservative” opposition, the House voted last week to keep the EIB going for another 2+ years and the bill appears headed for enactment. Would this be an appropriate outcome, and why?
Background – The EIB was founded in the 1930s to ensure the availability of financing for US export deals. It makes direct loans in some cases, but more commonly guarantees loans or provides credit risk insurance.
We do not compete with private sector financing, the EIB says, but “assume credit and country risks that the private sector is unable or unwilling to accept.”
Another talking point is “level[ing] the playing field for US exporters by matching the financing that other governments provide to their exporters.”
Most of the “success stories” posted on EIB’s website involve export financing for small businesses. Thus, Delaware Intercorp, an 11-employee service firm in Newark, DE, has grown its revenues by about 5% since it started working with EIB in 2008. The company was most recently authorized a $100K multi-buyer insurance policy and has seen growth in its major export markets, China and Taiwan.
"What [EIB’s] insurance policy has done for us,” says the company’s president, “is extend more competitive terms to buyers and mitigate our risk and it has absolutely contributed to our growth."
Over the years, the EIB has supported more than $456 billion of U.S. exports, primarily by Boeing and other big companies.
Arguments against – The EIB has become something of a target this year, as already noted, with serious calls for winding down the 77-year-old bank. Its pledge of financial support for deepwater oil drilling off the coast of Brazil, even as similar projects in US waters were being blocked or delayed (by decisions of the president, the Interior Department, etc.), may have been a contributing factor. After all, how does favoring Brazilian over US oil development serve our national interests?
But the financing will encourage Petrobras (Brazil’s national oil company) to purchase US goods and services, not drill for oil per se, and the $2 billion preliminary commitment was announced a year before the Deepwater Horizon explosion in the Gulf of Mexico. EIB press release, 5/9/09. http://1.usa.gov/1s6Ozn
By the way, Petrobras apparently asked for up to $10 billion in EIB financing, but the EIB only committed $3 billion to Brazil ($2B re offshore oil development and $1B re infrastructure for the 2014 Soccer World Cup & 2016 Olympics). InvestinBrazil, 3/22/11. http://bit.ly/eXkppw
All of the EIB board members who approved the Petrobras financing were appointees of the previous president, and only a fraction of the commitment had been utilized (to support exports by some 150 US companies) as of May 2011. EIB statement, 5/27/11.
To date, Ex-Im Bank has approved a request from JP Morgan Chase, acting as lender, for a more than $300 million, medium-term guarantee. This facility was made operative on May 27, 2011 and is being used to finance the Petrobras's general purchases of U.S. manufactured oil and gas equipment and services.
Although this is not as well known, the EIB has approved an even bigger commitment for a natural gas project in Australia. US Ex-Im Bank, nearing House vote, OKs $2.9 bln. loan, Doug Palmer, Reuters, 5/8/12. http://bit.ly/ISDinq
Leaving aside the Brazilian offshore drilling controversy, which seems to have been blown somewhat out of proportion, the best argument against the EIB is very simple. US business firms could get along without government-supported export financing if necessary – as they did before the 1930s. If one supports smaller, more focused, less costly government, therefore, it would seem logical to close the bank down.
The lobbying arm of Citizens Against Government Waste notes that the bulk of EIB financing supports exports by large, well-established companies, i.e., is simply “corporate welfare.”
In many years, the majority of [EIB’s] guarantees and loans have gone to Boeing, which is one of the world’s largest and most profitable firms, rather than a high-risk borrower. [EIB] has also made or guaranteed loans to Halliburton, Dell, Caterpillar, Chevron, and Emirates Airlines [as a customer of Boeing].
Thanks to this selectivity, the EIB has had favorable loan payment experience and operated profitably. But why couldn’t private banks provide the export financing that EIB’s customers need? Press release, CCAGW, 5/8/12.
“[EIB] often justifies its mandate by pointing out that it operates at no cost to taxpayers,” said CCAGW President Tom Schatz. “While it is true that the bank makes a profit in some years, that is only possible because it does so much business with successful firms with excellent credit ratings. If [EIB] were truly focused on filling ‘gaps in private export financing,’ those profits would disappear. If Congress disagrees, and [EIB] can operate profitably and at no cost to taxpayers while doing work shunned by existing firms, it should be privatized.”
Similarly, columnist Tim Carney complains about the willingness of both parties to do favors for political allies (aka crony capitalism). Just as Democrats support financing and other subsidies for renewable energy firms who are near and dear to environmentalists, Republicans and Democrats alike – heeding requests of the US Chamber of Commerce et al. – support government-supported export financing for the EIB’s customers. Republicans thereby fail to draw a clear distinction between their policies and those of the Democrats. GOP joins Obama in embracing crony capitalism, Washington Examiner, 5/9/12. http://bit.ly/LgHXgI
Some members of Congress do say the EIB should be terminated as a matter of principle, such as Representative Justin Amash (R-MI). It appears to us, however, that they are in a distinct minority. Export-Import Bank is case of corporate welfare, Alison Meyer, Heritage, 5/4/12.
[This is] the kind of corporate welfare we should do away with. We should have a free-market system; taxpayers shouldn’t be on the hook for subsidized loans to anyone. I see it as just another Fannie Mae, Freddie Mac in the making and I have a bill to end it.”
Arguments for – Although the EIB could probably be dispensed with, backers insist that its operations have paid off in practice and there is no significant downside.
Other countries support their export industries. Don’t US companies deserve similar support? As for Brazilian offshore oil drilling, the Australian natural gas project, etc., China has promised financing support too. Wouldn’t it be foolish for this country to stand idly by and let the Chinese government sew up natural resources around the world?
Remember too that the EIB’s operations have been well managed. They have therefore contributed to US exports that create jobs in this country without any resulting cost to taxpayers. Shaky Export-Import Bank deal no portent of progress, Norman, Omstein (American Enterprise Institute), Roll Call, 5/9/12.
The [EIB] is a huge success story through numerous administrations of both parties and is under particularly strong management now. The [EIB] not only does not cost taxpayers a dime, it turns a dandy profit (almost $2 billion during the past five years) from its careful management of the fees it charges companies for loans and assistance.
Such pragmatic and political considerations underlay an agreement to renew the EIB charter through September 2014 (a four-year extension was initially proposed) and raise the bank’s commitment limit from $100B to $140B. As a sop for conservative opponents, the bill calls for the Treasury Department to engage in “multilateral negotiations with foreign countries that have similar banks to reduce or end all export subsidies.” The House bill passed last week by a 330-93 margin (all the “no” votes were cast by Republicans). House OKs bill to reauthorize Ex-Im bank, Tim Devaney, Washington Times, 5/9/11. http://bit.ly/K5x6EG
This outcome delighted the business community, as evidenced by a statement of the National Association of Manufacturers. Export-Import Bank deal reached, David Rogers, Politico, 5/7/12.
Leaders on both sides of the political aisle came together today to prevent the unilateral economic disarmament of the United States on the issue of export financing. Our international competitors are aggressively promoting exports and capturing markets, while some in Congress have been working to eliminate a vital tool for job creation. Today, Rep. Cantor and Rep. Hoyer displayed much-needed leadership to bring both parties together to save the Ex-Im Bank and protect nearly 290,000 jobs.
A dynamic situation – So far we have implicitly assumed that the EIB will continue to operate as it has in the past. This is not necessarily true, and indeed changes have been proposed that could significantly affect the EIB’s operations.
First, the president has proposed that the EIB and several other trade-related organizations be combined into a new department, supposedly to achieve operating efficiencies.
The proposal would reportedly combine some of the functions of the Office of the U.S. Trade Representative, the Small Business Administration, the Export-Import Bank, the Overseas Private Investment Corporation, the Trade and Development Agency, and certain trade functions of the Commerce Department into a single government entity. The White House says the move would save $3 billion over 10 years—barely a rounding error in Washington. The White House also says it would trim 1,000 people—again, a blip in the 2.1-million-person federal workforce, but not negligible.
Experience shows, however, that reorganization savings often fail to materialize unless programs or activities are eliminated (which does not appear to have been proposed). Obama’s trade agency consolidation proposal, Alison Acosta Fraser, 1/18/12, Heritage.
. . . Congress and the public should keep a sharp eye on the proposal, as government reorganizations have a way of starting out as plans to reduce costs and cut the size of the federal workforce and end up adding to both spending and head count.
It also occurs to us that the proposed “department of trade” (or whatever it would be named) might facilitate politicization of the EIB’s operations, which are currently said to be managed so well, e.g., by blurring the distinction between export (EIB) and small business (SBA) loans.
Suppose it was decided, for example, that “green” energy companies, companies located in urban development zones, or the like – which already receive government support of other types - should enjoy preferential access to EIB financing as well? The question is not hypothetical; some biases of this nature have already crept into the EIB’s operations.
The bank has special programs for certain types of industries — green energy, for example — and certain groups of people (women, minorities). The conditions and preferences that the bank sets in its activities compound the market distortions stemming from the bank's intervention in credit markets, leaving the economy less efficient and less prosperous than it would be overall, even if certain firms or groups happen to benefit.
Second, there is reportedly a move afoot for the EIB to support domestic sales of US products as a means to offset the support of imported products by governments of other countries. No longer limited to supporting exports, the EIB would have virtually unlimited discretion to determine who it would help to obtain financing. Expanding Ex-Im’s mandate is a big mistake, Sallie James, Cato Institute, 3/14/12.
Any firm put at what [EIB] and treasury bureaucrats consider a "competitive disadvantage" by imports could conceivably apply for [EIB] assistance. It all sounds like a license to dole out favors.
We understand that the EIB guaranteed a $10M export loan for Solyndra, which presumably is uncollectable now. And it recently provided $80M in financing for a solar power project in India, which most likely would not be proceeding otherwise due to “a general lack of available long-term financing at commercially feasible terms for solar projects in India.” Clean Edge News, 4/26/12. http://bit.ly/Kve7FH
If the protection of domestic sales were also on the EIB’s radar screen, the opportunities for politically motivated loans would be that much greater.
Conclusions –If one supports smaller, more focused, less costly government, as SAFE does, the EIB seems to belong in the category of government operations that should be eliminated.
But there are many battles brewing in the budget war, and the EIB has not done much harm thus far.
We would be concerned about alterations to the EIB’s charter or structure that could make the situation worse, e.g., by empowering the bank to defend domestic sales.
But so far as we know, the current renewal bill would not have this effect.
On to more pressing problems . . .
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The Ex-Im Bank is just another federal subsidizer for all sorts of unsavory institutions, plus part of the bailout network. It's a taxpayers' nemesis, and a counterforce to stable economic policy. If the Republicans support continuation of the EIB, they are part of the problem. Abolish the EIB and all like it. They are millstones around the neck of legitimate enterprise. – SAFE member (Georgia)
5/7/12 – The student loan iceberg
The latest issue in the budget war is about a proposed extension of the halving of student loan rates that was enacted in 2007 and is scheduled to lapse on June 30. Both parties have declared support for a one-year extension of the 3.4% interest rate, and the estimated cost is a trifling (by Washington standards) $6 billion. However, the players can’t seem to agree on how to “pay for” the extension.
The situation illustrates several points: (A) Government programs that start small, with seemingly good intentions, can spiral out of control. (B) Anticipated benefits tend to be outweighed by unintended consequences. (C) Political battles are often fought over seemingly minor details instead of the real issues.
America’s political leaders need to raise the level of their game, and it is up to “We the People” to demand that they do so. Going beyond the immediate issue, fiscal visionaries should demand that the student loan program be terminated or dramatically pruned. The idea may not be politically feasible right now, as the ensuing discussion will make clear, but it never hurts to ask.
A brief history: Federal government support for low cost student loans dates to the National Defense Education Act of 1958, which was enacted after the USSR’s launch of Sputnik raised concerns that this country was falling behind in science and engineering.
Then came the Higher Education Act of 1965, which among other things created a guaranteed student loan program (later known as Stafford Loans). Under this program, the government paid interest accrued while borrowers were in college and also subsidized the interest rates they paid after graduation.
When reauthorizing the Higher Education Act in 1972, Congress rounded out the program to create “the basic charter of today’s federal student aid system.” A history of college student loans in America, RandomHistory.com, 3/15/08. http://bit.ly/n1RmrR
One 1972 change was to create the Student Loan Marketing Association. Like Fannie Mae and Freddie Mac in the housing industry, “Sallie Mae” was a publicly owned, for-profit company. It facilitated the student loan market by acquiring loans that lenders were not anxious to hold. SLM Holding Corp., FundingUniverse.com, circa 2000.
Since collection procedures made carrying student loans costly once they reached the repayment phase, many lenders sold student loans to Sallie Mae when the student graduated. Student loans were costly not because student default rates were high (defaults were guaranteed by the government anyway), but because they were relatively small loans that required a lot of work. In addition to the federal collection and reporting requirements that had to be followed to qualify for the government guarantee in the case of default, student loans were often complicated to keep track of. For example, students had to be granted deferments for unemployment, a return to school, or any of a host of other reasons. *** by 1988, Sallie Mae held 24 percent of all outstanding student loans.
In 1993, President Clinton proposed that the government take over the issuance of subsidized student loans on grounds that direct issuance would be more efficient and less costly than guaranteeing loans from private issuers. Due to Republican opposition, it was agreed to phase in the new approach. Time to end costly direct student loans, Matthew Spaulding, Heritage, 9/20/95.
[The agreed phase-in schedule]: 5 percent of loan volume in 1994-1995, 40 percent in 1995-1996, 50 percent or more in 1996-1998, and 60 percent or more in 1998-1999. The U.S. Department of Education in July 1994 began making direct loans to 104 schools, representing 5 percent of the loan volume. In a sign that schools are hesitating to participate, the 1995-1996 loan volume will end up at around 28.7 percent- far short of the 40 percent target.
The educational institutions enthusiastically participating in the direct loans program were not necessarily top tier schools. Budget watch: President and Congress agree to prop up failing student loan program, NCPPR, 7/30/97.
Seventy-eight percent of all schools choose to use privately-run loan programs exclusively while only 8% of schools choose to use the direct lending program exclusively. In 1996, just 32 new schools joined the direct lending program. Of that number, 10 had student default rates of 20% or more. Only 10 of the new program participants this Fall will be four-year institutions. The program has instead become popular with such proprietary schools as the Desert Institute of Healing Arts (Tucson, AZ), the Chic University of Cosmetology (Warren, Michigan) and the Hypnosis Motivational Institute (Tarzana, California).
The student loan program continued to grow with a mix of lenders. A history of college student loans in America, RandomHistory.com, 3/15/08.
In its present state, the system of federal financial aid is “an amalgam of state programs, federal programs and tax credits, practices of private institutions, and programs of some private foundations and charities” (Archibald 2002). The consequence of this ramshackle architecture is “a bewildering maze of programs and options” that is chronically under-performing and in a constant state of deterioration (ibid 2002).
Still the student loan leader, Sallie Mae was taken private in a leveraged buyout. Builder of Sallie Mae deal has a daring history, Michael Merced & Peter Edmonston, New York Times, 4/18/07. http://nyti.ms/IEu3ow
In 2008, amid growing concerns about the health of the financial markets, legislative proposals blossomed to “put taxpayers on the hook to finance increased student aid no matter what happens with lending companies.” Inventing a student loan crisis, Neal McCluskey, American Spectator, 4/21/08.
[However], no students have actually reported an inability to get federal loans. And while several large firms, including HSBC and CIT Group, have recently stopped originating federal loans, J.P. Morgan Chase and other companies reportedly plan to expand their student lending operations. So while a shortfall in federal loan funding is possible, it's far from a clear and present danger.
The student loan rescue idea matured into a proposal that the government directly issue all subsidized student loans. In addition to ensuring that everyone who wished to borrow for higher education could do so, it was said this change would save the government billions of dollars versus having guaranteed loans issued and serviced by for profit lenders. Student loan fix will prove costly, Neal McCluskey, Cato, 8/29/09. http://bit.ly/Kqx7SU
Enacted in 2010 as part of the GovCare legislation, the new student loan approach was credited by the Congressional Budget Office with “reductions in direct spending of $61 billion over the 2010-2019 period.” How so when roughly $500B [other sources indicate new loans of more than $100B per year so this figure may have been understated] in direct loans would be going out the door? Congress had previously required that a net present value estimate of the future cost of guaranteed student loans be charged to the budget in the year the loans were guaranteed, but this requirement did not apply for directly issued loans. Also, an estimated $5B increase in administrative costs was ignored as the funds would be subject to future appropriation by Congress. Letter of CBO Director Douglas Elmendorf to House Speaker Nancy Pelosi, 3/20/10, pages 6-7. http://cbo.gov/publication/21351
Few members of Congress protested the government takeover of student loans; the focus was on the bitter battle over GovCare. Private lenders did express concern about the effect on their operations, however, which going forward would be limited to issuing private student loans over and above loans issued by the government. Student-loan reform slipped into health[care] law, Washington Times, 3/29/10.
Edamerica’s Ms. Lubimtsev estimated the industry could see some 30,000 jobs lost because of the changes. Student-loan giant Sallie Mae has said that the overhaul law will lead to major internal consolidations and layoffs of more than a quarter of its 8,600 employees.
Note to Delawareans: In the process of retrenching, Sallie Mae moved its corporate headquarters from Virginia to Delaware. Go, First State! http://1.usa.gov/cayV3v
Assessment: Outstanding student loan debt has grown rapidly over the years as a result of more students attending institutions of higher learning, colleges hiking their tuition rates faster than inflation, and rising delinquency rates. Student-loan debt tops $1 trillion, NCPA, 3/26/12. http://bit.ly/HaxGyw
And even based on the more conservative estimates of the New York Federal Reserve, outstanding student loans now exceed either credit card debt or auto loans. Daniel de Vise, Washington Post, 3/6/12. http://wapo.st/wkssxg
Many student loans are repaid with interest, so the cost to taxpayers – although substantial – is a fraction of the loans issued. Likely losses can be estimated based on interest charged, historical default rates, etc. It is difficult, however, to anticipate “changing default risks or future increases in federal loan forgiveness programs.” What we spend on, and get from, higher education, Neal McCluskey, Cato, 10/27/11, page 4. http://bit.ly/HBWFwh (download PDF)
It was seemingly not enough to abandon the practice of charging the budget for estimated loan losses. By some fiscal sleight of hand that we do not fully understand, direct student loans are now being shown as moneymakers. See, e.g., the president’s proposed budget for fiscal year 2013, pages 98-100.
|
Fiscal year, dollars in billions |
2011 |
2012 |
2013 |
|
Student aid administration |
1 |
1 |
1 |
|
Legislative proposal: Federal student loan programs |
(47) |
(34) |
(32) |
|
TOTAL BUDGET OUTLAYS |
$(46) |
$(33) |
$(31) |
|
CREDIT ACTIVITY: Direct loan disbursements |
$136 |
$178 |
$150 |
http://www.whitehouse.gov/omb/budget/Overview (download PDF)
Fans of big government happily tout the benefits of encouraging young people to attend college and thereby enhance their lifetime earning potential. And isn’t it great that no one will be barred from even the most elite schools based on their (or their parents’) inability to pay the applicable tuition (currently $50K+ per year)?
But the cost to taxpayers is real, while the benefits from subsidized student loans and other forms of government assistance for higher education have been considerably exaggerated. McCluskey study, op cit. http://bit.ly/HBWFwh (download PDF)
# Despite the statistical correlation between college or advance degrees and higher income, it does not follow that “the college wage premium” applies to all students. “Looking at averages, one can miss a lot of data, and many people with college degrees might not get much economic value from them.”
This is certainly true for millions of student who sign up for higher education, “perhaps lured by the promise of government aid to pay for it,” but fail to graduate. Note that (A) only 57% of 2001 starters on a four-year program completed it within six years, and (B) only 28% of 2005 starters on a two-year junior college or trade school program finished it within three years.
It is also true for students who migrate into training that is not highly valued by the marketplace. Certain engineering degrees can lead to lucrative careers, for instance, but “degrees in the arts or social work tend to lead to very low earnings.” Pages 12-16.
#Subsidized student loans are thought to be fueling “credential inflation.” If most job applicants have degrees, employers may “screen out job seekers without degrees” whether the degree matters for the given job or not. One study found that about 33% of bachelor’s degree holders are placed in jobs that do not require a degree.
Also, a mere bachelor’s degree carries less weight than it used to. As competition for managerial positions stiffened, for example, some employers began to “expect” an MBA degree for access to corporate jobs.
Enhanced skills and knowledge probably are needed in the 21st Century for certain functions. But if so, the additional expertise may be better acquired through on the job training and/or employer development programs than through ever more years of academic study. Having young people stay in school through much of their twenties before going to work does not seem clearly desirable. Pages 12-14.
#Subsidized student loans are supposed to make higher education more affordable, but they also make it possible for colleges to charge higher tuition, inflate faculty salaries, and “gold plate” their operations. Thus, according to “Bowen’s Law” (named after economist and multiple-college president Howard Bowen), “colleges raise all the money they can, and spend all the money they can raise.”
Even if one rejects this somewhat cynical view, skyrocketing college tuition charges have undeniably created pressure to keep expanding the student loan program. Page 17.
In sum, the costs of the student loan program to taxpayers are being obfuscated while the benefits for students have been exaggerated. Doesn’t it follow that the program should be reexamined, particularly with the government facing a grave fiscal problem?
There is something to be said for young people making their own decisions about whether to attend college and where to apply. Government subsidies may encourage decisions that are not grounded in economic reality.
After years of cultural bombardment, a college education has gone from being a means to an end - a successful career - to an end in itself. Parents who don't send their children to college lose status. American kids feel both entitled and pressured into getting a college education regardless of whether they have the intellectual capacity to profit from it, the work ethic to manage it, or the money to pay for it.
But instead of acknowledging the distortions created by subsidized student loans, advocates see opportunities for further government action. Before we know it, the government will be not only be encouraging students to go to college but trying to tell them – as the Chinese government is said to be doing now – what to study. The root cause of market failure in higher education, Bill Frezza, Real Clear Politics, 11/28/11. http://bit.ly/vwSxTz
In a similar vein, the US Department of Education has proposed a program for “aggressive new government involvement in American higher education.” Federal overreach into American higher education, Matthew Denhart, Heritage, 11/4/10.
One regulation would require higher education institutions to obtain authorization from their state governments in order to participate in federal financial aid programs. Historically, nongovernmental accrediting agencies have played the leading role in this certification process. A second would require certain educational institutions to demonstrate that their graduates find gainful employment, and a third regulation would impose a federal definition of what constitutes a “credit hour” in higher education.
Current skirmish: The College Cost Reduction and Access Act of 2007 cut the student loan rate from 6.8% (probably about the market rate at the time) to 3.4% (clearly below market given the likelihood that students who fail to graduate or find good paying jobs after graduation will default). For whatever reason, the change was made for five years, with the higher rate to resume as of July 1, 2012.
Rising college tuition rates have inflated loan balances for recent graduates and borrowing requirements for students now in school. Meanwhile, good paying jobs after graduation are in short supply; some half of recent graduates are said to be either unemployed or working in areas unrelated to their degree. College, loans and the road to success, Cal Thomas, Townhall.com, 5/3/12. http://bit.ly/IGLqo6
Predictably, younger Americans are disenchanted with student loans, etc. Here is how SAFE director Daniel Kerrick describes the mood in his age cohort:
Most of the 30 year old crowd I talk to is saddled with student loan debt, they're working harder wherever they're employed, and their wages have been static for Obama's entire presidency. So they're not happy. I have not heard anyone specifically address the interest rate situation, but the general theme I hear is uncertainty. 30 year olds don't know what the next year will bring, and they can't plan anything.
Well aware of the potential clout of young voters (who decisively affected the 2008 election results, but have sat on the sidelines in other elections), the president et al. are gunning for their support. And as student loans (unlike most debt) is not dischargeable in bankruptcy, the government faces no competition if it chooses to play Santa Claus.
One step was administrative action (made possible by the previous federal takeover of the student loan sector) to place new limits on collection of student loans. Obama taps taxpayers for student stimulus, Chris Stirewalt, Washington Examiner, 10/26/11.
Take this example: If Suzy Creamcheese gets into George Washington University and borrows from the government the requisite $212,000 to obtain an undergraduate degree, her repayment schedule will be based on what she earns. If Suzy opts to heed the president’s call for public service, and takes a job as a city social worker earning $25,000, her payments would be limited to $1,411 a year after the $10,890 of poverty-level income is subtracted from her total exposure. Twenty years at that rate would have taxpayers recoup only $28,220 of their $212,000 loan to Suzy.
Championing a freeze on student loan rates is another step to court this voting bloc, especially if Republicans can be painted as opposing the idea. Obama struggling to win back the under-30 crowd, Susan Ferrechio, Washington Examiner, 4/28/12.
Last week, Obama traveled to college campuses in [Colorado, Iowa and North Carolina] to promote legislation that would freeze student loan interest rates. The president used the trips to denounce Republicans as indifferent to the struggles of young people and unwilling to act to prevent Stafford Loan rates from doubling to 6.8 percent on July 1.
By way of illustration, here are some snippets from the president’s North Carolina speech. Transcript, 4/24/12.
Five years ago, Congress cut the rate on federal student loans in half. That was a good thing to do. But on July 1st -- that’s a little over two months from now -- that rate cut expires. And if Congress does nothing, the interest rates on those loans will double overnight. *** So stopping this from happening should be a no-brainer. Helping more of our young people afford college, that should be at the forefront of America’s agenda. *** And yet, the Republicans who run Congress [actually just the House of Representatives] right now have not yet said whether or not they’ll stop your rates from doubling. We’re two months away. Some have hinted that they’d only do it if we cut things like aid for low-income students instead.
Republicans quickly announced support for an interest rate freeze – never mind policy, it would have been politically difficult to do anything else – and passed a bill in the House to prove it. The bill included a “pay for” provision, however, that the president had already threatened to veto. House defies Obama to pass student loan bill; GOP needs Democratic support [13 votes, due to 30 Republican defectors] to push bill through, Stephen Dinan, Washington Times, 4/27/12.
The 215-195 vote puts the House GOP on a collision [course] with the Senate, where Democrats also want to extend the subsidies — but would rather raise taxes on a type of income from business partnerships to fund the new spending.
Suggesting elimination of a prevention fund in GovCare was politically maladroit, and House Minority Leader Nancy Pelosi pounced.
In order for your [child] to go to college … we’re not going to be able to have preventative care, in terms of screening for breast cancer, cervical cancer, the list goes on and on.
Reporter Emily Miller concluded that the Republicans had been outplayed again, as they were on the payroll tax cut extension, and predicted Senate Democrats would be slow to let them off the hook. Obama’s loan trap; Republicans will lose the youth vote without a better strategy, Emily Miller, Washington Times, 5/27/12.
The Republican misstep has set up a fight during the last week in June over who cares more about young people. Instead of focusing on which party platform would create economic conditions most likely to encourage future success, the debate is now over who can dole out the most freebies - a game Democrats know how to play best.
Hmm, might it actually have been safer to block the student loan interest freeze based on policy consideration instead of pandering to the youth vote?
First, the alleged harm to student lenders was grossly exaggerated by the president and his supporters and college graduates would not be affected at all.
While the president tells college students their loans will go up $1,000 unless Congress acts, the truth is only new loans taken after June 30 would be affected. Even then, those students won’t have to start making loan payments for at least four-and-a-half years. By then, they’ll pay an extra $7 or so per month. If Mr. Obama fails in his re-election bid, these new graduates most likely will have an easier time of landing a job that will allow them to pay back this amount.
Second, Miller’s idea of establishing an inventory of “pay for” offsets that are not subject to political attack is a pipe dream. All spending programs have supporters who will fight to the last breath, so votes for any spending cut are subject to political attack.
As a political matter, our suggestion to Republicans would be to stick to the bill they passed. If it was blocked in the Senate or vetoed by the president, the GOP could legitimately say Democrats were responsible for doubling student loan rates.
OK, they would have to stand up to rhetoric like the president uncorked in a Virginia speech last Friday. Obama slams Congress during Virginia visit, Hayley Peterson, Washington Examiner, 5/4/12.
“The House Republicans are saying they are only going to prevent these rates from doubling if they can cut things like preventive health care for women,” Obama told a crowd of high school students and parents at Washington-Lee High School in Arlington. "We shouldn't have to choose between women having preventive health care and young people keeping their student loan rates low."
But politics is not a game for the faint-hearted, and it is imperative that the nation’s leaders stop justifying ever more government spending and start cutting the programs that are in place. Otherwise, a fiscal meltdown is inevitable – and it will be far worse than most people imagine.
What do you readers think? We’d love to hear from you.
4/30/12 – Beware the Debt Bubble Read replies
Most observers would agree the current economic situation is dismal, but there seems to be some confusion about what to call it.
One name in vogue is “the Great Recession.” This conveys the idea that the current economic slump is not so deep as the Great Depression that blighted the 1930s, yet is graver – and should therefore be expected to take longer to deal with - than other recessions since World War II. Great Recession sounds a bit contradictory to us, however, like talking about a “great” Category 2 hurricane.
Or one could reference the period of economic instability that began with the subprime crisis and bursting of the housing bubble in 2007-2008 and has continued ever since, but this is rather a mouthful. Besides, the situation has evolved over time and no longer seems like the financial system panic that it started out as.
Our suggestion would be to call the current economic situation “the Debt Bubble.” Like the term “stagflation,” which was coined to describe the economic malaise of the late 1970s, this name is short, catchy, and identifies the key economic problem of our time.
It could even influence the outcome, as will be explained later, but let’s start at the beginning.
September 2008: There was consternation in the nation’s capital when Treasury Secretary Henry Paulson and Federal Reserve Chairman Ben Bernanke lobbied Congress for a $700B bailout package. The stated purpose for the funds was to buy complex financial securities because, after a sharp fall in the values of mortgage-backed securities and housing, no one could figure out what the collateralized debt obligations, credit default swaps, etc. held by financial firms and investors around the world were worth. Without the package, warned this redoubtable duo, the financial markets might collapse.
The House voted down the package, was intensely pressured, and capitulated. For reasons that were never explained to our satisfaction, most of the $700B was loaned to banks and other firms rather than being used to buy distressed financial securities.
SAFE supported the bailout package, unlike many fiscal conservatives at the time, on grounds that a global financial collapse was too dire a risk to run, but we stressed the necessity of also facing up to the next financial crisis. Are we there yet? 9/29/08.
We think a fiscal meltdown is on the horizon, and that it is time to have an adult national conversation about it. If the public continues to sit back and rely on the folks up front to steer the ship of state towards the Promised Land, periodically asking “are we there yet,” the result may be a calamity too big for anyone to fix.
If US political leaders or the mainstream media were aware of our suggestion, they paid no attention to it. Time to get real, 10/6/08.
Vice-presidential debate: There were no questions – let alone answers – about the longer-term fiscal crisis looming on the horizon.
The first presidential debate was similarly devoid of content in this regard, and there are only two presidential debates left.
Several months later, it seemed timely to reconsider our conclusion that the longer-term inability of the government to continue servicing its debt on acceptable terms was the critical problem. We acknowledged having underestimated the gravity of the immediate economic slowdown (now retroactively classified as a recession), but stressed the need to proceed with caution. Recession plus: could this be the big one? 3/9/09.
The current recession arguably justifies massive government intervention, including actions already taken and actions that have been proposed. But such intervention could speed the onset of another crisis – the fiscal meltdown that SAFE and others have been warning about.
Picture a gymnast on the balance beam, whose right foot comes down partly off the beam. Over compensating, she winds up toppling to the left.
So while it would be unrealistic to sit back and let the recession run its course, there is every reason to intervene with surgical precision and a clear recognition of the challenges that lie ahead.
Far from being surgically precise, however, the economic rescue efforts were massive and haphazard. Federal government spending soared, with some $6 trillion in debt added between 9/30/08 and 9/30/12 (estimated). The Federal Reserve Bank pursued extraordinarily relaxed monetary policies without regard to the risk of igniting double-digit inflation. And withal, the US economy has remained in the doldrums.
Where things stand: The housing bubble and mortgage-backed securities bust that began in the US and sent shock waves around the globe have not yet fully run their course, but there is no longer an apparent danger that major private sector firms will collapse. The key challenge has morphed into coping with a rapid run-up in government debt. The rising burden of government debt, Brookings Institution, 11/1/10.
The level of aggregate net government debt in the world rose from $23 trillion in 2007 to an expected $34 trillion in 2010. IMF forecasts indicate the level will reach $48 trillion in 2015. The ratio of world debt to world GDP rose from 44 percent in 2007 to 59 percent in 2010, and is expected to climb to 65 percent in 2015.
For the most part, debt is concentrated in countries with advanced economies and large social welfare programs (figures 2-3):
|
Global distribution |
2007 |
2010 |
2015 |
|||
|
Country/Area |
Net Debt |
GDP |
Net Debt |
GDP |
Net Debt |
GDP |
|
US |
26% |
27% |
29% |
26% |
32% |
24% |
|
Japan |
16% |
9% |
19% |
9% |
20% |
8% |
|
Other advanced economies |
41% |
40% |
38% |
36% |
34% |
33% |
|
Emerging (China, India, et al.) |
17% |
24% |
14% |
29% |
14% |
35% |
|
Total |
100% |
100% |
100% |
100% |
100% |
100% |
In terms of net debt to GDP, the number of developed countries in the 80%+ red zone is on the rise (figure 6). And focusing specifically on this country, gross US debt (including trust fund IOUs, which although notional are dwarfed by unfunded liabilities) has risen from 71% of GDP as of 9/30/08 to an estimated 105% as of 9/30/12. Ouch!
|
2007 |
2010 |
2015 |
|
Four (Italy, Greece, Singapore, Japan) |
Six (Greece, Japan, Italy, Belgium, Singapore, Portugal) |
Nine (Japan, Greece, Italy, Portugal, Belgium, US, France, Spain, UK) |
http://www.brookings.edu/articles/2010/1101_government_debt_prasad
Once debt rises into the red zone, it is difficult to reverse the trend. Governments find it politically convenient to keep borrowing to support their spending habit until lenders demand painfully high interest rates, at which point an explicit or implicit (e.g., expansion of the money supply causing rapid inflation) default on the debt is the typical result. This time is different; eight centuries of financial folly, Carmen Reinhardt & Kenneth Rogoff, Princeton University Press (2009). http://www.s-a-f-e.org/this_time.htm
An intense debate is now in process as to whether the US government should start reducing its deficit (forecast as $1.3T for the current fiscal year) or continue present policies in hopes that massive deficit spending will revive the economy and lead to an improved long-term outlook. Bitter budget battle building, 4/9/12.
The budget showdown has developed fast and turned nasty (almost personal). The Republicans have the better argument on the merits; the Democrats will attempt to discredit their motives or change the subject. Fiscal visionaries should demand a fact-based, logical debate.
In our view, the budget can and should be balanced – as soon as may be reasonably possible – to minimize the damage from the reckless spending and borrowing spree that was begun in 2009. We see little resulting risk of tanking the economy.
Others disagree, claiming that continuing economic stimulus will be required to reboot the economy. See, e.g., letter to the editor, [Wilmington, DE] News Journal, 4/28/12.
[The stimulus package in 2009] was not really large enough to patch the gigantic hole that had been created, but at least it turned us around so that we emerged from the recession within a few months, and ever since, the economy has been improving and jobs have been added, albeit far too anemically. [Fie on the Republican Party, which has] succeeded in turning the national conversation – just like in Europe – to deficit reduction instead of economic recovery, long before it made any economic sense to do so.
But our concern that a fiscal meltdown could strike unexpectedly and do a great deal of damage is generally acknowledged by informed liberals as well as conservatives – if only in the interests of self protection. [Federal Reserve Chairman Ben] Bernanke points to increased “possibility of a sudden fiscal crisis,” Matt Cover, CNSnews.com, 2/7/12.
Even the prospect of unsustainable deficits has costs, including an increased possibility of a sudden fiscal crisis. As we have seen in a number of countries recently, interest rates can soar quickly if investors lose confidence in the ability of a government to manage its fiscal policy.
There is a similar split of opinion about the policies of the Federal Reserve, with monetary doves stressing the overriding importance of juicing the economy. Time to reset the central bank, 4/16/12.
A bit of inflation must be accepted to ensure a sustained recovery, coo some economists, notably Paul Krugman of Princeton, while glossing over what level of inflation might be thought excessive.
Fed Chairman Bernanke has shied away from Krugman’s enthusiastic advocacy of inflation, albeit implicitly toeing the same policy line. Bernanke calls Krugman “reckless,” Mike Shedlock, Townhall.com, 4/28/12.
“The question is, does it make sense to actively seek a higher inflation rate in order to achieve” a slightly faster reduction in the unemployment rate, Bernanke said yesterday to reporters after a Federal Open Market Committee meeting. “The view of the committee is that that would be very reckless.”
The economic situation is darker in Europe than here, at least in the short term, and absent continuing action to prop up half dozen governments with heavy debt the Eurozone may contract or collapse. Even France is on the rocks, with a Socialist victory expected in the May 6 runoff election. United States of France, Jeffrey Kuhner, Washington Times, 4/26/12.
The French economy is stagnant, weighed down by a bloated welfare state. High taxes and runaway spending have led to economic sclerosis, severe unemployment and soaring deficits. France’s debt-to-gross-domestic-product (GDP) ratio is at 90 percent - the tipping point at which it is almost impossible for a nation to avoid bankruptcy.
There has been a chorus of demands to relax the pressure on improvident governments to get their fiscal houses in order. Why can’t everyone see that the European Central Bank should start providing unlimited monetary resources to bail everyone out instead of forcing reliance on halfway expedients such as having the International Monetary Fund pass the hat for an anti-speculation fund? IMF encourages Europe’s economic suicide, Ambrose Evans-Pritchard, UK Telegraph, 4/22/12.
Central banks have to take the risk onto their own balance sheets, not fob it off onto distressed lenders. They must act with overwhelming force, taking the possibility of sovereign defaults off the table entirely. The ECB has not done so.
The strongest resistance to this siren song resides in Germany, where the hyperinflation that decimated the middle class in 1923 and sowed the seeds of World War II has not been forgotten. Austerity’s advocate: a date with Dr. Nein (Jen Weidman, president of the Deutsche Bundesbank), Peter Coy, Business Week, 4/25/12.
#Backers of “growth now” warn that austerity is plunging Europe into a depression in which fiscal stringency reduces growth, drying up tax revenue and forcing even deeper spending cuts, and so on in a downward spiral.
#[Weidmann] rejects the argument that the European Central Bank is “the last man standing” in the euro zone and must therefore bend its rules to make money easier and credit more freely available. His prescription for growth is “structural reform”—exercise and diet for an out-of-shape patient, not more medicine.
It remains to be seen whether German support for fiscal responsibility will prevail or be overcome. Miracles do happen: someone in Brussels accurately analyzes Europe’s fiscal crisis, Daniel Mitchell, Townhall.com, 4/24/12.
Frederik Erixon of the European Centre for International Political Economy: Europe’s crisis economies will now have to radically reduce their welfare states. State spending in Spain will have to shrink by at least a quarter; Greece should count itself lucky if the cut is less than a half of the pre-crisis expenditure level. *** [Longer term,] the cost of pensions will rise and providing health care for the elderly will be an even bigger cost driver. This demographic shift will be felt everywhere, including in the Nordic group of countries that has been saved from the worst effects of the sovereign-debt crisis.
Mitchell: While I agree that current trends are unsustainable, I fear that the “optimistic” scenario is for governments to semi-stabilize their finances with both taxes and spending consuming about 50 percent of gross domestic product. That’s obviously far beyond the growth-maximizing size of government, which means European nations – on average – would be condemned to permanent economic stagnation.
The path forward: Those who succeed in framing the issue have the best chance of winning a debate. So long as we are thought to be experiencing “the Great Recession,” there will be a tendency to think of rising government debt as an unavoidable by-product of government efforts to promote full employment. Such a view is unlikely, however, if government debt is seen as the primary problem.
If a Debt Bubble is in process, the natural policy response would seem to be cutting government spending before a lot of people get hurt. Bingo! We think this would clearly be the best policy response on both sides of the Atlantic.
Remember that there is more at stake than the economic need to balance the budget, important though that may be. The independence and self-respect of millions of productive citizens being conditioned to rely on government handouts also hangs in the balance. Christie the prophet, Michael Tanner, National Review, 4/18/12.
This is the real danger of the welfare state. It’s not that it will bankrupt us — though it will. It is that it slowly and insidiously destroys our national character, saps our will to be great, and makes us content with the way things are rather than how they could be. We have seen where this road ends. As Governor Christie warns, it “will not just bankrupt us financially, it will bankrupt us morally.”
So let’s hope the Debt Bubble is deflated before it is too late!
* * * This Blogs Replies * * *
Rapid elimination of the budget deficit would tank US economy in the short run; it’s simple math (40% deficit x 25% of economy = 10% hit to GDP). On the other hand, soaring debt has reduced the potential economic growth rate by two percentage points and this drag effect will keep getting worse. There being no apparent will to make material spending cuts in any area other than defense, I see no hope for a “soft landing.” – SAFE director
Yale economist Robert Shiller sees the world in a “new age of austerity,” which is akin to “the late Great Depression.” Quantitative Easing “might help,” but is unlikely to offset the general mood of austerity. The outcome will not be simply a matter of economic variables, but how people react to the situation. http://bit.ly/IIDsZH (9+ minute video of Shiller interview on Squawk Box Europe.)
Generally, the debt for other countries reflects their total debt. In our case, we have all the state debt over and above national debt. I don't know what our total state debt is, but I'll bet that it plus national debt would be even more staggering. Can we ever repay? – SAFE director
Well worded - I like it. – SAFE director4/23/12 – Fiscal visionaries should be positive when possible
Americans may understand that the budget needs to be balanced, we recently commented, but they don’t appreciate incessant “we can’t afford it” responses to the relentless litany of stories about deserving and/or needy people who will suffer if spending programs are cut. Bitter budget battle building, 4/9/12.
Then we chanced to re-read a classic little book about advertising, which advocates presenting one’s wares as a positive solution to the public’s interests and concerns. Lessons from Madison Avenue, SAFE newsletter, Spring 2012.
It is not what you think you can do for your prospective “customer” that counts; it is what your prospective “customer” thinks you can do for him!
http://www.s-a-f-e.org/nwsltr/nwsltr65.htm
Eureka! Maybe fiscal visionaries would do better to offer some positive ideas for a change instead of harping about out of control spending and debt.
There is an issue in play that makes the point, namely the donnybrook over the Keystone XL Pipeline since the president chose to delay approval until after the elections to avoid offending environmentalists who oppose this energy project (or any other that would promote the efficient use of fossil fuels). Obama faces choice on Keystone pipeline: big labor or big green, Washington Examiner, 11/7/11. http://bit.ly/JmDta5
Republicans say the Keystone project would create jobs, boost the economy, and contribute to reducing the fiscal problem – which is more than can be said for the government’s renewable energy programs. The GOP has pushed for expedited approval, forcing the president to say “no” repeatedly, and Democrats seem increasingly reluctant to support the president’s position.
Provisions in the pending transportation bill would transfer Keystone from the president’s purview to that of the Federal Energy Regulatory Commission. Having no sound reason to do otherwise, FERC would presumably approve this long studied project. The House passed the transportation bill last week by a veto-proof majority, and it will be nip and tuck whether the Keystone provision can be stripped out in the Senate. If not, the president will either sign the bill or make good on his veto threat – taking a political hit either way. Obama faces defeat on Keystone pipeline, Byron York, Washington Examiner, 4/20/12. http://bit.ly/Jc9lKP
How sweet to be able to say “yes” for a change and win a policy victory anyway! But the other side is seldom as politically tone deaf as they seemed in this case, and the tactic of making positive public promises should be used judiciously. Here are three suggestions for either party in the fiscal area: don’t waffle – don’t pander – don’t squabble.
Don’t waffle: When “no” is the right answer, there is no substitute. Still, there may be better ways to explain your position than to keep apologetically mumbling that “we can’t afford it.”
Ever notice how few federal government programs get terminated or even decisively pruned? No wonder, when would-be budget cutters typically start from the premise that the overall program or activity is of value and cuts must be justified on a by exception basis. How not to make the case for terminating federal programs, Tad DeHaven, Townhall.com, 4/9/12.
Yes, we should cut spending instead of going deeper into debt. Yes, a program’s ineffectiveness is a reason to cut it. But even if the federal government was running budget surpluses and a particular program wasn’t a complete disaster, there’s a darn good chance that the program in question should still be terminated.
Instead of putting all the weight on budgetary constraints, fiscal visionaries should be willing to explain that some major government programs – such as the federal Department of Education - are not worth the taxpayer money being “invested” in them.
Once that point has been made, one should be able to propose bold action to solve the fiscal problem without being accused of having a “Chicken Little” complex. And maybe, just maybe, support would develop from folks who are not overly fond of the tax increases that will inevitably be proposed to pay for the ever larger and more intrusive government that is being created.
Don’t pander: It is human (or chimpanzee) nature to emulate high status leaders. Thus, instead of differentiating themselves from Democrats by supporting limited government, the GOP has at times exhibited a big government mindset of its own.
The political results have been mediocre; one doubts Republicans will profit from betraying their political base in search of votes from the other side. Leviathan on the Right, Michael Tanner, Cato Institute (2007).
The Republican Party lost Congress in 2006 [and the White House in 2008] at least partly due to fiscal laxity, and it will not regain traction without returning to its small government principles. “If [the American people] come to believe that the choice is between liberal Democrats who will give them lots of things and big-government conservatives who will give them a little bit less,” says Tanner, “they will choose the liberal Democrats.”
http://www.s-a-f-e.org/leviathan.htm
Fast forward to the present, when the prime fiscal initiative of the president et al. seems to be the so-called Buffett Rule. You know, it’s just common sense that a billionaire like Buffett should pay a higher tax rate than his secretary, so why not enact a new version of the Alternative Minimum Tax to make this happen? Sounds reasonable, except -
First, the Buffett Rule would have a miniscule impact on the overall fiscal problem – even if all the projected increase in tax revenue (some $50B over ten years) materialized and was applied to reduce the deficit (the actual plan seems to be using the funds to support spending programs).
Second, Buffett’s income consists primarily of dividends and capital gains from investments that are also taxed at the corporate level. We believe such double taxation of business income is inappropriate, for which reason we eliminated it in SAFE’s SimpleTax proposal (instead of making the problem worse as the Buffett Rule would do).
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
Moreover, Buffett’s income and assets are dependent on continued business success, whereas his secretary’s salary is assured so long as she is employed.
Third, the timing is patently political. There was nothing to stop Democrats from enacting the Buffett Rule before they lost control of the House in 2010, so why didn’t they do it then. The Republicans will block the proposal now, so the proposal no longer has real world significance. The unanswerable question about the Buffett Rule, Michael Medved, Townhall.com, 4/18/12. http://bit.ly/HXRY0H
We think these points should be sufficient to dismiss the Buffett Rule as a cynical political ploy. But some strategists believe the issue will help Democrats because many Americans favor requiring the wealthy (perhaps including Mitt Romney) to pay higher taxes. Obama loses vote on “Buffett,” gains tool; Democrats vow to bring it up repeatedly, Stephen Dinan, Washington Times, 4/16/12.
The Buffett tax has failed in the Republican-controlled House multiple times. *** Still, the tax has proved to be popular with voters, according to pollsters, who say support stands at better than 50 percent.
If House Republicans were working on a comprehensive tax overhaul, thereby attempting to convert a negative into a positive by showing leadership in the tax area, we would be delighted. That is exactly what we said they should be doing earlier in the year. House Ways and Means should get moving, 2/27/12.
Don’t argue about the expiring Bush tax cuts in December; overhaul the tax system now. Revenue should be collected in a manner that is simple, efficient, and fair. Our tax plan (http://www.s-a-f-e.org/the_simple_tax.htm) may represent a useful template.
Instead, the Republicans have developed a phony tax proposal of their own. It is a one-year tax reduction for small businesses (500 employees or less), which would increase the current deficit by some $46B without any discernible effect on job creation. (Business investment tends to be driven by long-term expectations about revenues, costs, regulations and taxes, not one-year tax cuts.) House Republicans proposing 20% small business tax cut, Richard Rubin, Bloomberg Businessweek, 3/22/12. http://bit.ly/Jn99w4
The president has rightfully announced his opposition to the bill, which in any case stands little chance of passage in the Democrat-controlled Senate. Obama threatens to veto Cantor’s small business tax cut, calls it a “giveaway,” Peter Schroeder, the Hill, 4/17/12.
By emulating the Buffett Rule proposal, Republicans missed an opportunity to show they were taking a more serious approach to taxes than their political opponents. Too bad!
Don’t squabble: In the budget area, Republicans have a distinct edge in terms of substance. Thus, the House has passed a budget framework that, while not exactly austere, would compare very favorably to the FY 2013 budget that the president submitted in February. House budget opponents circle the wagons, 3/26/12.
Senate Democrats appear intent on ignoring the House budget (or any other budget proposal) lest they might be blamed for current and projected deficits. What a concept, that members of Congress might be held accountable for the damage they do!
True, Budget Chairman Kent Conrad has started hearings on the Bowles-Simpson plan (2010, not adopted by the Fiscal Commission), but committee members will not be allowed to propose any amendments nor will any votes be taken before the elections. Democratic senators on the committee have demonstrated their disdain for the proceedings by showing up only to make statements. Democrats not even attending budget meetings anymore, Conservative Byte, 4/20/12. http://bit.ly/JcS7iN
For his part, the president has threatened to veto any appropriation bills that may be proposed on grounds that the House budget calls for a $19B (1.7%) reduction in overall discretionary spending versus the overall cap spending cap specified in the August 2011 debt limit increase deal. Really, the leader of the free world is threatening to shut down the US federal government over a budget cut of this magnitude? Such a position borders on the surreal! New spending clash looms: Obama threatens veto on House bills that would raise caps, Rosalind Helderman, Washington Post, 4/18/12. http://wapo.st/Jxz3sz
If most of the players are ducking the fiscal problem or hiding behind phony, politically motivated proposals, one would think they could at least interact with each other like adults. But apparently, even this is too much to ask. This country is in real trouble!
One more thing: We noted a recent report about “the huge amounts of debt pilled onto American citizens by an irresponsible government and politicians.” The description sounded like the federal situation, but the author was talking about the state finances of Pennsylvania – which in theory should have been fixed by the Republican regime that was voted in two years ago. Joe Hilliard, Leadership in Liberty newsletter, 4/19/12.
For those who believe that mere elections and changing party labels is enough to “fix things,” I hope you begin to wake up. We no longer have Governor Ed Spendell to blame and the Republican Party is in firm control in Harrisburg. And in two years, they will add $2.97 Billion of debt in Harrisburg. THREE BILLION DOLLARS!
The federal election results in November may have a salutary effect, let’s hope so, but experience shows it would be unwise to rely on this. There is no substitute for Americans starting to pay attention to the fiscal problem and rejecting phony or ill-advised solutions.
If that is not what people want to hear, too bad, because it’s the truth.
4/16/12 – Time to reset the central bank
Switching gears, let’s talk about an area of government that tends to operate under the radar because it is viewed as outside the political (shudder!) process.
We’re referring to decisions of the Federal Reserve System re creating money, setting short-term interest rates, and buying or selling securities (which makes it possible to influence long-term interest rates). For all the Fed’s claims of independence and impartiality, such decisions impact the interests of the haves versus the have-not. They are therefore inherently political.
The Fed was created to maintain monetary stability, but Congress has seen fit to give the central bank responsibility for promoting full employment as well. The potential for conflict in this dual mandate is obvious. Even if it would be highly inflationary, easy money policy can be justified in the name of promoting economic activity and job creation.
Moreover, under Chairman Ben Bernanke, the Fed seems to have developed a savior complex that could promote ill-advised decisions. Consider this rumor, which surfaced last summer shortly before a deal was struck on raising the debt limit. Bernanke to bail out Obama debt, John Ransom, Townhall.com, 7/29/11.
One Wall Street source has told me that . . .the Federal Reserve will stand in as the buyer of record on maturing Treasuries, therefore taking care of principal payments. The Treasury Department would then presumably only have to pay interest on the debt. *** As far fetched as it may seem, politicians have already gone to desperate measures in order to avoid taking responsibility for the debt mess the country is in. And nothing would surprise me now as debt turns to desperation.
Bernanke insists the Fed can and will keep inflation under control, but we are not convinced. Gas and food prices are already spiking up (despite efforts to downplay them) – to combat a sharp inflationary uptick it would be necessary to slam on the monetary brakes – that would inconveniently kill the “good news” of an economy on the mend. A tale of two videos, 3/19/12.
Even if nothing major goes awry between now and November, excessive monetary ease could cause serious problems over the longer term. The dangers include asset bubbles, artificial stimulation of consumption vs. investment, and double-digit inflation (last seen in the US under President Carter). So why is the Fed doing this?
Theory 1: insurance - It is imperative to prevent deflation, the public has been told, so the Fed must err on the side of caution by accepting a bit of inflation. We were never sure what was thought to be so dreadful about falling prices, isn’t that Wal-Mart’s business mission, but at least the issue sounded like a proper central banker concern. What’s this “QE2” all about? Bill Butos, Christian Science Monitor blog, 10/18/10.
Chairman Bernanke’s October 15 speech on “Monetary Policy Objectives and Tools in a Low-Inflation Environment” at the Boston Fed Conference argues that deflation will seriously handicap implementing countercyclical monetary policy given the zero bound on nominal short term rates. The Fed’s current (and implicit) inflation target of 2% is meant to ensure adequate maneuverability for Fed discretionary monetary policy.
In November 2010, following massive securities purchases in 2009, the Fed embarked on a second round of Quantitative Easing (QE) to buy $600B in securities. Chairman Bernanke announced QE2 on the day after the elections and the program was completed by mid-2011.
Over the past year, the Fed has refrained from injecting additional liquidity into the financial system. Bond purchases continue, but they are being offset by selling shorter-term Treasury obligations; the program is known as “Project Twist.” The Fed has announced it will hold interest rates very low for several years (now until late 2014), and officially acknowledged a 2% “target” for inflation. Forrest Jones, MoneyNews, 1/25/12.
. . . the Fed [held] its key benchmark lending target, the federal-funds rate, at 0.25 percent, citing a "depressed" housing market and high unemployment as reasons for brushing inflationary fears aside and opting for loose policies to keep consumer prices and unemployment rates at more dynamic levels.
With the passage of time, invocation of the Great Depression of the 1930s as a rationale for current policies has worn thin. One might wonder why, with all the efforts that have been made, the so-called “Great Recession” of 2008 has lingered on. In any case, additional reasons are now being suggested for the Fed’s highly relaxed monetary policy.
Theory 2: collateral damage - A bit of inflation must be accepted to ensure a sustained recovery, coo some economists, notably Paul Krugman of Princeton, while glossing over what level of inflation might be thought excessive. Krugman’s “private sector,” Bill Wilson, Net Right Daily, 4/9/12.
Writes Krugman, “large parts of the private sector [basically the banks] continue to be crippled by the overhang of debt accumulated during the bubble years; this debt burden is arguably the main thing holding private spending back and perpetuating the slump.” *** “Modest inflation would, however, reduce that overhang — by eroding the real value of that debt — and help promote the private-sector recovery we need.”
But the banking sector won’t start recovering, according to Wilson, until housing prices bottom out. And there has not been much progress in that regard, because the Fed reduced the pressure on banks by pumping huge amounts of money into the financial system while the federal and state governments came up with one scheme after another to impede mortgage foreclosures. Now it’s the public’s turn to help.
. . . Krugman wants you to pay some more, too, through higher prices, to inflate the bad debts of the banks away. It’s a plan that has not worked so far as home values continue to drop. So, why should it work now? It won’t. The only thing that all this inflation is accomplishing is we’re all paying more — at the pump, the grocery store, and elsewhere.
Another facet of the collateral damage argument is that the US economy will benefit if its currency gradually depreciates vis-à-vis others by virtue of trimming imports while promoting exports. And if US interest rates remain very low, currency depreciation should happen.
Such an argument clashes with the America is number one tradition, and Bernanke is on record as favoring a strong US dollar, but the important point is not his rhetoric – it is his policies. What could drive the dollar higher? John Stepek, MoneyWeek, 9/17/09.
. . . the markets couldn't care less about what Bernanke is saying. Instead they focus on what he's doing. And what he's doing says that he's very much in favour of a weak dollar. Because while many investors are increasingly focusing on the threat of inflation and hopes of economic growth, the Fed chairman is keen to talk down any expectations that interest rates are going to rise in the near future.
Then there is the argument that if interest rates available on federal securities are kept very low, investors will be motivated to find investments offering higher returns – thereby pushing stock and commodity prices higher, making investors feel wealthier, and promoting more consumption and investment. Really, we are not making this up!
Chairman Bernanke believes that by creating a bubble in speculative assets, people will "feel" wealthier and keep consuming - regardless of the fact that real incomes are stagnant and debt burdens are already intolerable, and despite the fact that there is extremely weak evidence for any such "wealth effect" in the historical record.
There is already excessive liquidity in the financial system; trillions of dollars are on deposit with the Fed because of a perceived shortage of attractive investments. The Fed has taken longer-term securities (e.g., 10-year Treasury bonds that currently pay a return of about 2%) out of circulation as a means of nudging investors to move their money to higher risk investments. The game will continue until all speculative assets are priced “so richly and precariously” that everyone holding excess cash opts to put it in idle, zero interest accounts. QE appears to work until it’s obvious it never did, Mike Shedlock, Townhall.com, 4/11/12.
So is US economic recovery dependent on clever financial engineering? Maybe, but there may be a more compelling explanation for the current Fed policies.
Theory 3: in plain sight – Forget about inflation as insurance or collateral damage. Bernanke et al. know the Fed’s policies will promote inflation, and that is why the policies are being followed.
The supposedly noble motive is to bring government debt levels back into line with economic reality by creating a wave of inflation, thereby solving a problem that elected officials lack the will or support to attack directly. Hmm, sounds a bit like Paul Krugman’s debt reset argument (except he only talked about the private sector).
Too bad about the pension funds and investors who will lose out in the process, but their interests must be sacrificed for the greater good. Heaven help America if someone tried to cut government spending instead. Fortunately, the Fed can lance this nettle without public discussion or anyone having to face an election, so long as it acts circumspectly. Ben Bernanke’s secret inflation plan, Richard Lehmann, Forbes, 4/4/12.
Fed Chairman Bernanke may not be an elected official, but he’s also not immune to political criticism. His rhetoric must focus on deflation fears, disagreements on the true rate of inflation and the need to stimulate the economy and create jobs. He can even promise stable rates for the next three years in pursuit of this effort and thereby show how Fed policy is really quite transparent. When inflation finally reaches levels that can no longer be ignored, interest rates will be raised. But those raises will continually lag the rate of inflation on the rationale that we don’t want to hurt the economy.
What next? Unless the Fed truly wants to promote inflation (theory 3), one would think they would realize QE has been counterproductive and avoid further extraordinary policy moves. Modest improvement in the economy, e.g., a declining jobless rate, supports such a view. QE3 in 2012? “Only as a last resort,” Hiba Yousef, CNNMoney, 1/5/12.
. . . the verdict is still out, but most of the investment experts surveyed by CNNMoney largely agree on one thing: the U.S. economy will have to get worse before Fed chief Ben Bernanke will even consider launching yet another round of asset purchases, a policy known as quantitative easing or QE.
A similar conclusion was suggested by a poll of economists last week, reportedly on grounds that the economic recovery is proceeding in a satisfactory way. Economists don’t see Fed action this year, Phil Izzo, Wall Street Journal, 4/13/12 (no link available).
Thirty-six of the 51 economists surveyed . . . say the central bank will refrain from another round of large-scale bond buying in 2012.
There is appetite for more Quantitative Easing in some quarters, however, notably the investment community. Investors (and the Fed) are addicted to liquidity, Paul LaMonica, CNNMoney, 10/26/11.
"People believe, despite all evidence to the contrary, that there is this omnipotent being at the Fed who can push the right buttons and get the best outcome for the economy," said Bob Gelfond, CEO of MQS Asset Management, a global macro hedge fund based in New York. "There is a refusal to just let things in the economy play out."
Speculation continues that the QE lever will be pulled when the time is right, say in the wake of more financial turmoil in Europe, which judging from recent reports is a near certainty by this summer, and/or a US stock market correction. Marc Faber (aka Doctor Doom, author of the Gloom, Boom and Doom Report): Bernanke has shirked obligations, will ease again, Dan Wall, Money News, 4/11/12.
At some point, [Bernanke] will implement additional quantitative easing (QE3) in an attempt to buoy the economy and financial markets, Faber says. "If I were in his shoes, I would wait for the markets to sell off to get some sympathy for implementing QE3.”
Faber’s view is reinforced by the alliance between Chairman Bernanke and the Administration. Although Treasury Secretary Tim Geithner reportedly refrains from giving Bernanke advice on monetary policy, the two men meet for lunch almost every week. Bernanke, Geithner: A one-two punch against critics, Rich Miller, Business Week, 12/3/10. http://on.msnbc.com/HEeEFe
QE2 was welcomed by the Administration in 2010, while Republicans (including Tea Partiers) lambasted it. Another round of monetary stimulus, which would not require Congressional approval or increase the federal deficit, might be politically convenient for the president this year. Ergo, QE3 is likely to happen.
Before any such step was taken, we would urge a frank discussion of the ravages of inflation. Even a seemingly innocuous 2% inflation rate (the Fed’s target) would reduce the value of the US dollar by 1/3 over the next 20 years. More pronounced inflation would erode people’s savings, and fixed dollar pensions more rapidly.
|
Inflation Rate |
In 10 years |
In 20 years |
|
2% |
-18% |
-33% |
|
4% |
-32% |
-54% |
|
6% |
-47% |
-71% |
Also, the alleged inflation plan has a major design flaw. Social Security and other government “entitlement” outlays, which are the prime driver of projected deficits, are indexed for inflation.
Any ideas? The Fed has drifted off course, in our view, and it should be redirected. At a minimum, this would suggest nominating a new leader when Chairman Bernanke’s second four-year term expires in 2014.
Another indicated step would be to eliminate the Fed’s dual mandate, which has provided an excuse for risky policy moves in the name of fostering full employment, aka “discretionary activism.”
Some critics would also require the Fed to monitor the value of the US Dollar versus the price for gold, as a pending House bill would provide, perhaps as an initial step towards bringing back some kind of gold standard. The idea is reportedly anathema to the Left. Why Rep. Kevin Brady’s Sound Dollar Act worries Barney Frank, Ralph Benko, Townhall.com, 4/11/12.
The hard left reacts to monetary reform and the gold standard as a vampire does to a crucifix. *** ThinkProgress’s Marie Diamond: “Tea Party groups are determined to make returning to the gold standard a litmus test for GOP presidential candidates.” Paul Krugman: “Gold bugs have taken over the GOP.” *** Nouriel Roubini: supporters of gold are “lunatics and hacks.” *** Yet so bad has discretionary activism proved that even the center-left New York Times ran a column last August that “A Gold Standard is Unthinkable No More.”
While a gold standard could usefully limit the discretion (and propensity to error) of central bank officials, it might be a tough sell in the international community. (Just think of all those influential central bank officials being reduced to a clerical role.) We would cheerfully settle for eliminating the dual mandate.
But Representative Brady et al. deserve high marks for proposing the Sound Dollar Act; it should set the stage for a constructive debate.
4/9/12 – Bitter budget battle building
After House Republicans unveiled a spending cut and tax reform package on March 20, the other side quickly lined up in opposition. “If Democrats stonewall the House budget,” we wrote, “the GOP presidential nominee (probably Mitt Romney) will present it to the voters this fall.” House budget opponents circle the wagons, 3/26/12.
Based on subsequent developments, there is no longer any “if” about it. A budget stalemate will last until after the elections (or longer), while the national debt keeps growing rapidly. http://www.usdebtclock.org/
This entry will review the state of play and consider a crucial question: Who will Americans hold responsible for the fiscal problem in November? The answer should depend on which side has the better plan, but other considerations may prove more important.
Update: Here is a recap of relevant developments since our March 26 report:
•March 28-29: The House approved (228-191, no Democrats voted “yes”) the budget plan recommended by the House Budget Committee chaired by Rep. Paul Ryan. This vote came after rejection (136-285) of a Republican Study Committee budget that was designed to eliminate deficits in 5 years. House GOP passes budget plan, Susan Ferrechio, Washington Examiner, 3/29/12. http://bit.ly/Hu6pZk
Several other budget proposals fell flat, including (1) a “balanced” (including tax increases) deficit reduction plan endorsed by Erskine Bowles and Alan Simpson (co-chairs of the 2010 Fiscal Commission) (38-382); and (2) the president’s budget (0-414). House rejects Bowles-Simpson, Obama budgets, Stephen Dinan, Washington Times, 3/28/12. http://bit.ly/H0V33J
•March 30: The Senate parliamentarian, Elizabeth MacDonough, issued a ruling that may make it tough to avoid a vote on the House budget and other budget proposals. Harry Reid loses procedural ruling on budget vote, Scott Wong, Politico.com, 4/3/12.
The written opinion, shared late last week with a handful of Democratic and GOP senators, gives Republicans significantly more leverage to push for votes on budgets of their choosing. It could mean roll calls on Rep. Paul Ryan’s House-passed GOP budget plan and others offered by Sens. Pat Toomey (R-Pa.) and Rand Paul (R-Ky.).
•April 2: During a press conference with the heads of state from Canada & Mexico, the president commented on the constitutional challenge to GovCare. Although oral arguments before the Supreme Court oral had reportedly gone poorly for the government, he stated that the law would be upheld. Some observers criticized him for appearing to tell the justices how they should decide the case. Obama warns “unelected” judges on healthcare, Susan Crabtree & Stephen Dinan, Washington Times, 4/2/12.
Mr. Obama, who taught constitutional law at the University of Chicago and once [in 2010] attacked the justices at a State of the Union address, said it would be “unprecedented” for the court to overturn a popular congressional act and raised doubts about the legitimacy of such a move by “activist” and “unelected” justices.
Although the healthcare case and the budget battle are not directly related, the House budget assumes that GovCare will not go into effect. And it has been speculated that the president is teeing up the current makeup of the Supreme Court as a campaign issue. AP story, Anne Gearan, 4/5/12. http://apne.ws/HXVPd3
•April 3: In a speech to the American Society of Newspaper Editors (ASNE) convention, the president assailed the House budget and the purportedly extreme Republican leaders who support it. Transcript, Washington Wire, 4/3/12. http://on.wsj.com/I8Ybrx
April 4: Presidential candidate Mitt Romney urged the ASNE convention attendees to probe the president’s second term agenda. He also denied that today’s Republicans are “extreme” while Democrats remain in the mainstream. Romney tells press to uncover Obama’s secrets, Stephen Dinan, Washington Times, 4/4/12. http://bit.ly/HglYVa
President’s budget: The president could have responded to the House budget with some sort of deficit reduction rhetoric. That is what happened in 2011, when he attacked the Ryan plan in a speech at Georgetown University but acknowledged a possible need to “trim waste out of our discretionary budget” and “get serious about entitlement reform.” Stay alert: this will be a long, tough ride, 4/18/11.
Not this time! In his April 3 speech to the ASNE, the president likened his budget proposal to the Bowles-Simpson plan.
The bipartisan Simpson-Bowles commission that I created *** proposed [the co-chairs’ proposal actually fell short of the required vote] about $600 billion more in revenue and about $600 billion more in defense cuts than I proposed in my own budget. But Bowles-Simpson was a serious, honest, balanced effort between Democrats and Republicans to bring down the deficit. That’s why, although it differs in some ways, my budget takes a similarly balanced approach: Cuts in discretionary spending, cuts in mandatory spending, increased revenue.
In other words, the president implied that he had already proposed an appropriate response to the fiscal problem. He reiterated the point during a softball Q&A session that followed his prepared remarks.
So at a time when the recovery is still gaining steam, and unemployment is still very high, the solution should be pretty apparent. And that is even as we continue to make investments in growth today — for example, putting some of our construction workers back to work rebuilding schools and roads and bridges, or helping states to rehire teachers at a time when schools are having a huge difficulty retaining quality teachers in the classroom — all of which would benefit our economy, we focus on a long-term plan to stabilize our revenues at a responsible level and to deal with our healthcare programs in a responsible way. And that’s exactly what I’m proposing.
Really? In our view, the president’s budget proposal was clearly a nonstarter. Budget lands with a thud, 2/20/12.
# Although supposedly reflecting $4 trillion in deficit reduction (more on that later), the budget still projects continuing growth in spending and substantial deficits over the next decade.
# The budget is said to be fiscally sustainable because deficits are projected to fall “below 3 percent of GDP by the end of the decade,” but this would leave no margin for error if things went less favorably than assumed – as they well might.
# Proposed initiatives would reduce [the claimed deficit reduction] to about $3 trillion on a net basis – all from tax increases on the upper crust & businesses plus defense cuts.
No wonder the House vote for the president’s budget was 0-414.
House budget: We are not convinced the House budget represents an adequate response to the fiscal problem, but it would be a step in the right direction.
Versus the president’s budget, spending over the next decade would be cut by $5.3 trillion (see table below). A major tax increase would be avoided, which could quite possibly put a crimp in the economic recovery, and the 2022 debt level vs. Gross Domestic Product would be reduced 14 percentage points. House budget opponents circle the wagons, 3/26/12.
|
Mandatory spending reductions vs. president’s budget ($ in billions) |
10 yrs. |
|
|
Social Security |
Continue studying how to cope with projected shortfalls |
(8) |
|
GovCare |
Repeal & replace |
1,572 |
|
Medicare (net) |
Begin phasing in private plan option for future participants (no effect on current participants) |
205 |
|
Medicaid & other health |
Block grant to states, index benefits for inflation and population |
770 |
|
Other mandatory programs |
Various, e.g., block grant food stamps, tailored for each state’s low-income population; focus Pell Grants on low income students who need help the most; consolidate dozens of overlapping job-training programs |
1,895 |
|
Discretionary programs |
Cut subsidies for alternative energy projects, enhance royalties by permitting more exploration for domestic energy supplies, phase out Fannie Mae & Freddie Mac, reduce farm subsidies, etc., partly offset by increased defense spending vs. the president’s budget |
352 |
|
Interest exp. |
Projected savings based on lower debt |
514 |
|
Total |
|
5,299 |
As the bottom line of the president’s budget is uncompetitive, adherents will try to avoid talking about it. Their preferred line will be to trash the House budget, as the president did in his speech to the ASNE.
The first claim will be that the House budget would force drastic cuts of many supposedly vital spending programs. An underlying premise is that spending cuts would be “spread out evenly.” Never mind that it would make more sense to eliminate unnecessary programs or activities while fully supporting worthy programs.
10 million college students would see their financial aid cut ***1,600 fewer medical [research] grants *** 4,000 fewer scientific research grants *** 200,000 children would lose their chance to get an early education in the Head Start program *** two million mothers and young children would be cut from a program that gives them access to healthy food *** 4,500 fewer federal grants at the Department of Justice and the FBI to combat violent crime, financial crime, and help secure our borders *** hundreds of national parks forced to close for part or all of the year *** [no] capacity to enforce the laws that protect the air we breathe, the water we drink, or the food that we eat *** cuts to the FAA would likely result in more flight cancellations, delays, and the complete elimination of air traffic control services in parts of the country *** weather forecasts would become less accurate because we wouldn’t be able to afford to launch new satellites [so] governors and mayors would have to wait longer to order evacuations in the event of a hurricane *** the largest cut to Medicaid that has ever been proposed — a cut that, according to one nonpartisan group, would take away healthcare for about 19 million Americans [including] poor children . . .middle-class families who have children with autism or Down’s Syndrome . . . kids with disabilities so severe that they require 24-hour care *** seniors who retire a decade from now would get a voucher that equals the cost of the second cheapest health care plan in their area. If Medicare is more expensive than that private plan, they’ll have to pay more if they want to enroll in traditional Medicare. *** The net result is that our country will end up spending more on healthcare, and the only reason the government will save any money — it won’t be on our books — is because we’ve shifted [costs] to seniors.
The second claim is that the wealthy would receive huge tax cuts while the middle class was forced to pay for it.
[The proposal is to] spend $4.6 trillion over the next decade on lower tax rates. We’re told that these tax cuts will supposedly be paid for by closing loopholes and eliminating wasteful deductions. But the Republicans in Congress refuse to list a single tax loophole they are willing to close. Not one. And by the way, there is no way to get even close to $4.6 trillion in savings without dramatically reducing all kinds of tax breaks that go to middle-class families — tax breaks for health care, tax breaks for retirement, tax breaks for homeownership.
Lower tax rates would benefit moderate-income taxpayers, however, not just high earners. And the tax rate cuts would presumably be contingent on agreement as to the offsetting changes to tax exemptions, deductions and credits.
Public perceptions: One might expect political disputes to be settled on the merits, but the outcome is often a function of the personalities involved. Homo Politicus: Why Washington never learns, Ralph Benko, Townhall.com, 4/6/12.
The core problem is not lack of good ideas, or lack of evidence for such ideas. Nor is the problem partisanship. (Democratic elected officials like job creation too.) Nor, even, is elitist venality at the core. The real problem [as has been indicated by research with chimpanzee behavior] is that members of homo politicus “copy only higher-ranking members of their species.”
No matter how good their arguments may be, therefore, the Republicans will face serious problems in the upcoming battle of the budgets.
FIRST, the president is extremely glib and his GOP opponent (probably Mitt Romney) may be hard pressed to out-talk him. Thus, consider this insightful analysis of the president’s pitch to Congress in September 2011 for a $450B stimulus bill at a time when stimulus was no longer in vogue. (The “American Jobs Act” went nowhere as a package, but the Republicans did wind up going along with some of its components including a costly one-year extension of the payroll tax cut.) The five biggest sacrifices Obama wants us to make “right away,” PJ Media, 9/9/11. (copied link won’t open; find article with browser)
SECOND, Americans may understand the budget needs to be balanced, but this is not a message they enjoy hearing. If the president et al. keep harping on the deserving and/or needy people who will purportedly suffer if spending is cut, forcing the Republicans into one “we can’t afford it” response after another, the general public may start dismissing the naysayers as unimaginative and/or uncaring.
Consider how ready some observers have been to infer that liberals are superior to conservatives by virtue of being imaginative, caring, and more intelligent.
Thus, there has been research on genetic traits that supposedly influence the development of political attitudes, even of identical twins reared in the same household. Liberals seem to come out ahead in the comparison. Born this way? Jonathan Haidt, Reason Magazine, May 2012 (link not available).
Future liberals were described as more curious, verbal and self-reliant, but also more assertive and aggressive, less obedient and neat.
It would seem to follow, although the article does not explicitly say so, that future conservatives only excel in being obedient and neat. No wonder, as the president declared at a San Francisco fundraiser during the 2008 campaign, that small-town conservatives in Pennsylvania, etc. “cling to guns or religion or antipathy toward people who aren’t like them.” Ben Smith, Politico, 4/11/08. http://politi.co/aa9Hma
As for intelligence, conservatives are seen as a bit dull and/or intellectually lazy – but not necessarily incapable of reaching liberal conclusions. Is conservatism our default ideology? Tom Jacobs, Miller-McClure, 3/29/12.
#A research team led by University of Arkansas psychologist Scott Eidelman argues that conservatism — which the researchers identify as “an emphasis on personal responsibility, acceptance of hierarchy, and a preference for the status quo” — may be our default ideology. If we don’t have the time or energy to give a matter sufficient thought, we tend to accept the conservative argument.
#“The bad news for liberals is we’re saying that conservatism has a certain psychological advantage,” Eidelman said. “The bad news for conservatives is that someone who has a knee-jerk conservative reaction may change their mind about an issue after giving it more thought.”
Maybe so, a conservative pundit says with tongue in cheek, because the liberal mindset demands more sophisticated thinking. New study suggests you might have low IQ if you are conservative, Gary DeMar, Godfather Politics, 3/31/12.
If you spend more money than you earn, you will be in debt. That didn’t take much brainpower, therefore, I must be a conservative. Liberals will use a lot of brainpower to argue that deficits don’t matter, and all you have to do to get more money to take care of a deficit is to print more pieces of paper or enter a few more zeros into a computer.
THIRD, hope springs eternal that painless solutions (e.g., hiking Warren Buffet’s taxes) exist for the fiscal problem, or that corrective action can be deferred a bit longer. Politicians fiddle while fiscal crisis burns, John Stossel, Townhall.com, 2/22/12.
The politicians are spending us into oblivion. But I can't blame only them. The American people are complacent. We like the goodies. We think we're getting something for nothing. We are like alcoholics who know we have a problem but just can't resist one last fix. One more infrastructure bill or jobs plan will jumpstart the economy. Then we'll kick our spending addiction once and for all.
So it’s quite possible the Democrats will be able to escape the voters’ ire by continue to tell them what they would like to believe. True, the fiscal time bomb will keep ticking, but it probably won’t explode before November.
In sum: The budget showdown has developed fast and turned nasty (almost personal). The Republicans have the better argument on the merits; the Democrats will attempt to discredit their motives or change the subject. Fiscal visionaries should demand a fact-based, logical debate. If you agree, please help us spread the word.
4/2/12 – A real world skirmish over energy policy
In advocating smaller, more focused, less costly government, SAFE has traditionally concentrated on national policies. Some might question such an approach for a grass roots advocacy group based in one small state (Delaware). As roundly 2/3 of all government expenditures take place at the federal level, however, it is hard to imagine achieving our goals without changing the mindset in Washington, D.C. To paraphrase Willie Sutton, “that’s where the money [and power] is.”
Still, State and local issues remain important for several reasons. (A) 1/3 of all government expenditures in this country is a lot of money. (B) Federal and state (or local) policies often overlap in a way that compounds problems, e.g., regulatory drag on business activities. (C) Members of Congress are elected at a state level, so efforts to educate them at a national level are unlikely to work.
Moreover, sallying forth from the ivory tower can serve as a reminder that good policy proposals are useless without a practical strategy for implementation. And it’s easier to toggle between theory and practice here than it would be in Washington.
As a case in point, this entry will recap a March 28 hearing on a bill to begin a change in state energy policy. There was no sound objection to HB 247, yet in a couple of hours the defenders were able to demolish it.
Too bad! Now let’s review the “game tape” with the objective of coming up with some ideas for doing better next time.
Background – Several years ago, Delaware and most of the other northeastern states (not Pennsylvania and West Virginia) entered into a “cap and trade” agreement called the Regional Greenhouse Gas Initiative (RGGI). The stated purpose was to encourage a switch from fossil fuel power plants to renewable energy, e.g., wind and solar power.
Under current Delaware law, utilities selling power in the state are subject to a Renewable Portfolio Standard (RPS) – other RGGI states have similar requirements. The utilities must buy a rising percentage of the power they sell from renewable energy sources or acquire renewable energy credits (issued to renewable energy producers who can sell them) to cover the shortfall.
It would have been far simpler to impose a tax on fossil fuel power, but an identifiable levy could have sparked public opposition. It was probably assumed that the phased-in cost of complying with the RPS would escape public notice. Who among us, after all, takes the time to study their electric bills and figure out exactly how they are calculated?
Plan designers may have assumed the RGGI would soon be folded into the national “cap and trade” regime that was under discussion at the time. The national proposal was defeated, however, leaving the RGGI to sink or swim on its own.
The RGGI & RPS provisions will hike the cost of electricity in Delaware for no good reason. The manmade global warming theory is dubious, and in any case regional (or even national) reductions in carbon emissions would have an insignificant effect on global climate. Bloom Energy could be the last straw, 10/17/11.
House Bill 247 – In 2011, a bill to force Delaware’s withdrawal from the RGGI was blocked. This year, House Minority Leader Greg Lavelle and other Republican legislators introduced a bill to halt the phase-in of the RPS at the current level pending evaluation of the merits of this program. Here is the official synopsis.
This bill freezes the minimum percentage of renewable energy (Renewable Portfolio Standard - RPS) a retail-electricity supplier or municipal electric company must provide to customers at the proportion achieved as of January 1, 2012. The intent of the freeze is to give policy-makers a chance to reassess the state’s energy strategy in light of the many changes that have occurred over the last several years including the failure of the Bluewater Wind off-shore wind farm project; the decrease in natural gas prices; and actions that have made Delaware power plants significantly cleaner.
The freeze will also allow for an examination of the high cost of electricity in The First State. According to the U.S. Energy Information Agency (EIA), Delaware has the 13th highest residential and commercial electricity rates in the nation and the seventh highest residential average monthly bill.
The RPS mandate is scheduled to increase annually, from 7 percent in compliance year 2011-2012 to 25 percent in 2025, which will export jobs out of Delaware and potentially increase electricity rates as the standard rises.
Additionally, while the RPS is frozen and the state’s energy strategy is being reassessed, the bill encourages the use of renewable energy by requiring utilities to notify their customers as to how they can increase their purchase of renewable electricity on a voluntary basis.
Although a straightforward repeal of the RPS might have been even better, HB 247 seemed like a step in the right direction.
3/28 Hearing: SAFE member John Nichols and your faithful scribe drove to Dover for the House Energy Committee hearing, which was scheduled to take place at 4:00 p.m. Nichols was to testify on the bill; I would be an observer.
The word was that there would be a lot of interest in the hearing and it had been moved to a larger room. There was also supposed to be a hearing on another high profile bill, Senate Bill 169 (the Dream Act, providing in-state college tuition and scholarships to children of undocumented immigrants), before the Senate Education Committee.
The SAFE team arrived at Legislative Hall well before 4:00, negotiated the security checkpoint, and dived into the scrum. Several hundred (guesstimate) people were milling around the interior of a two-story 18th Century style building (built in the 1930s, since expanded and renovated several times) with a big staircase, corridors, etc. There was very little seating space in the public area, and no clear indication as to where visitors were supposed to go for whatever purposes they had in mind.
Nichols knew the routine. We proceeded to an office on the second floor, where he registered on the witness list, and then came back downstairs. He introduced me to a number of people that we encountered en route. We also spotted, but did not talk with, some students who had come for the Dream Act hearing (it wound up being postponed according to a 3/30 story in the News Journal) and Governor Jack Markell.
The doors opened at last, and the House legislative chamber filled quickly. It was announced that anyone without a seat should relocate to the balcony on the second floor (a busload of supporters from Sussex County wound up there, minimizing the impact of their presence). There were precious few unclaimed seats downstairs, but I located a big padded chair next to Father Tom Flowers and gratefully sat down.
The room was an architectural gem, but it did not look like a 21st Century meeting room. Too cut up – lots of wasted space – not enough seating – no TV monitors or recording devices. Oh well, we were here, it was nearly 4:00, and the action was about to begin.
Representatives John Kowalko (chair), Dennis Williams (vice-chair), and Quinton Johnson (also a Democrat) of the Energy Committee were seated on an elevated dais in front where they could survey the room.
Rep. Kowalko said witnesses would be given 2 minutes to speak unless they were acknowledged as speaking for an organization. in which case they might be granted 5 minutes. Witnesses for and against SB 247 would be called in alternating order until the list was exhausted. Please, everyone, keep it brief and avoid duplication.
Rep. Lavelle (minority House leader and main sponsor of the bill) spoke briefly. A lot of things had happened since the RPS was put in place, he said, so a substantive review of these subsidies would probably be appropriate. He also lamented the tendency to introduce proposals (such as the Bloom Energy bill in 2011) for action in June. Was he implying that the majority party might have another last minute proposal up their sleeve this year?
How could RPS be putting Delaware at a competitive disadvantage, asked Rep. Kowalko, when other states had similar or more stringent standards? Cheap natural gas was a fluke, and fossil fuel costs would soar again. The proposed “pause” was actually a “shutdown,” and Delaware needed to keep moving forward.
Rep. Williams said the RPS was resulting in lower energy prices [possibly taking credit for the impact of low natural gas prices brought about by the shale gas boom] and creating jobs. He also predicted huge costs if the program was stopped.
Did any of the other members of the Energy Committee (5 Democrats, 3 Republicans) wish to make an opening statement? None of them were called on to do so, nor would they play any apparent role in the proceedings. It looked like the outcome was assured, and the calling of witnesses would be strictly for show.
A corporate representative of the DuPont Company introduced Dr. Tom Ernest of DuPont’s solar power business. The gist of Ernest’s testimony (he was apparently allowed 5 minutes) was that 1,000 people in Delaware are employed in solar power and state support for this sector should continue in hopes that solar power can eventually become cost competitive with conventional power.
David Stevenson of the Caesar Rodney Institute, an energy expert, asked for and was granted five minutes. He testified that the best way to reduce CO2 emissions, and also avoid the need for government subsidies and lower Delaware energy costs, would be to install more natural gas burning power plants in the state. We’re ten years behind Europe, which is in the process of dropping renewable power subsidies.
All of the subsequent witnesses were supposedly limited to 2 minutes, although some of them ignored the signs held up by a young woman with a watch that their time was expired or begged the chair for an extra minute. After all, what can be said about a complicated topic like this one in two minutes?
My name is John (or Jane) Doe. Thank you for the opportunity to testify. I am concerned (or knowledgeable) about this proposal because (tell a story). HR 247 should (or should not) be passed because (in 25 words or less). Please do the right thing.
Finnian McCabe of Flexara Industries (solar power installation and leasing) reported that Delaware is ahead of schedule in installing solar power capacity, for which reason it is imperative to keep phasing in the RPS and also to increase the solar power share of it.
Rep. Jack Peterman, a co-sponsor of HR 247, spoke out of order by permission of the chair. He had changed his mind about the bill, said Peterman, after receiving several calls from people who were concerned that the value of their stream of solar renewable energy credits (SRECs) might be undermined.
John Seitz of Delaware Interfaith Power and Light lamented air pollution health issues, lambasted coal as evil, and lauded the RPS as part of the solution.
John Nichols spoke as a member of the 9/12 Patriots. His remarks about “real science” and the lack of a proven foundation for the RPS program may have been too sophisticated for the occasion. In any case, the chairman pointedly asked Nichols to “sum up.” (This did not happen with any other witness, including several whose remarks were clearly out of bounds.)
The parade of witnesses droned on, including additional support for HR 247 from a Delaware Municipal Electric Corporation representative (DMEC does not support an overall freeze on the RPS, but would like the solar component reduced), Rich Collins of the Positive Growth Alliance (whatever happens, cheap natural gas will bankrupt renewable energy in the end), and Father Tom Flowers (a rising number of his parishioners have needed help in paying their electric bills).
Father Flowers was the last witnesses in favor of HR 247; over a dozen people who opposed the bill remained to be heard from.
After a bit more – sea level rise, how long are we going to wait - cannot imagine any good reason for this legislation - today is the 33rd anniversary of the Three Mile Island tragedy and now we are sitting on a “fossil fuel bomb” - renewable energy has nothing to do with current economic problems and it’s time to accelerate the program - we’re installing solar systems at our site and they work – the SAFE team departed.
We subsequently heard that HR 247 had been tabled by a 5-3 (straight party line) vote, effectively killing it for this year.
Assessment – According to one report, the decision was made after a “lengthy debate.” Not so! The word “debate” implies engagement on the issues; this proceeding served to obfuscate them. Energy purchase standards will stand, Doug Denison, the [Wilmington, DE] News Journal, 3/29/12.
As the reporter’s synopsis demonstrates, the two sides simply talked past each other: “Proponents of freezing the RPS percentage say the program has increased the cost of electricity, since utilities have been required to buy energy from more expensive sources. The program’s supporters say it has made alternative energy cheaper and fostered renewable industry growth. Much of the discussion . . . zeroed in on solar energy.”
http://www.s-a-f-e.org/delaware_chatter.htm
Another source put it this way: The massacre at Little Big Horn was a walk in the park compared to yesterday’s event. Notwithstanding the fact that the fate of HB-247 was established before the committee convened, the public show was about as ugly as it can get for our team.
From a process design standpoint, we would note the following deficiencies in the conduct of the hearing:
No effort to involve or acknowledge the other members of the Energy Committee (we’re not sure they were actually present).
Inattention of the chair and vice-chair, who on several occasions engaged in whispered conversations while witnesses were testifying.
Confusion about whom the witnesses were addressing. Some faced the dais with their backs to the room; others did the reverse. It didn’t seem to matter.
Zero effort to balance the time available to the respective sides – as is expected in a debate – or screen the witnesses who signed up to make sure they had something to say.
No questions of any witness, even though some of them seemingly contradicted each other.
If this is typical of how the state’s legislative process works, it is not hard to see why the legislature’s output is erratic at best. What an opportunity for political candidates of either party who might want to run on a reform platform!
Lessons learned (our ideas at least):
# If people want their views considered in the legislative process, they need to work together.
Had someone on the pro side monitored the signup sheet, they could have noted the disparity of enrollment and recruited more witnesses to speak in favor of the bill. Anyone on the bus from Sussex should have been able to do this using the “my name is, etc.” outline provided earlier.
Someone (say one of the Republican members on the committee) should have challenged the 2-minute limit, which muzzled witnesses with real points to make by pretending that all opinions were of equal value.
#It is a mistake to put too much weight on the spoken word – with a long list of witnesses - in a room with poor acoustics, late in the afternoon – when the testimony is not being transcribed or reported.
Some witnesses did turn in copies of their prepared testimony, but there is no need to stop there. Why not submit memos making their case in detail, with sources, which members of the committee might find more difficult to ignore? Or submit the memos on a follow-up basis, and also post them on the Internet?
#Finally, it’s important to keep things in perspective. Our intellectual opponents are convinced their positions are right, just as we are, so one cannot expect to win all the arguments.
But that’s no excuse for not trying. Thus, if the RPS makes no sense for most of the population (excluding solar power firms, etc.), there must surely be a way to win people over eventually.
3/26/12 – House budget opponents circle the wagons Read Replies
Spending cut proposals from last year’s House budget report generally carried over in the new version of the “Path to Prosperity” that was unveiled last week, and proposals for a tax overhaul represented a welcome bonus. Hats off to Budget Chairman Paul Ryan, Ways and Means Chairman Dave Camp, and the members of their respective committees – maybe someone reads our letters after all.
The House budget would not eliminate deficits over the next decade, at least on paper (things might go better if the economy was boosted into overdrive), but it would cut them substantially. As a result, public debt (excludes securities held by the Social Security, etc. trust funds) is projected as 62% of GDP in 2022 versus 76% in the president’s budget. What’s more, this improvement would be accomplished in the right way, namely by cutting spending rather than hiking taxes. Here is a comparative recap of the two plans from the House report. http://1.usa.gov/GEIREh (has link to full report)
We are not convinced that the House budget represents a sufficient answer to the fiscal problem, but it beats the president’s plan by a country mile. There is no reason to demand a perfect plan versus a good step in the right direction. Ryan’s budget restrains spending growth, Daniel Mitchell (Cato), Townhall.com, 3/22/11.
I am frustrated and nauseated by all the people who are fixating on whether Congressman Ryan’s plan balances the budget in 10 years, 20 years, or whenever. What matters is shrinking the burden of government. I hereby bestow the Bob Dole Award on all the people who are mistakenly focusing on the symptom of red ink rather than the underlying disease of bloated government.
If Democrats stonewall the House budget, as appears likely, the GOP presidential candidate (probably Mitt Romney) will present it to the voters this fall. Paul Ryan revises his blueprint for economic recovery, Emily Miller, Washington Times, 3/20/12.
Assured of support from all the Republican presidential candidates, [Ryan’s] budget is essentially the party’s platform as it seeks to retake control of the White House and Senate in November. *** Those who want actual change will know which lever to pull on Nov. 6.
Instead of critiquing the House budget, this entry will focus on the defenses being thrown up against it. These points may seem unimpressive, but they say a lot about the mindset of the defenders – who must be won over, outsmarted, or pushed out of the way if fiscal visionaries are going to get anywhere.
President’s budget is better: This claim was stoutly asserted in a White House press release (Dan Pfeiffer) on March 20.
. . . the President believes we cannot return to a failed theory [ idea that the Bush tax cuts would stimulate the economy?] that didn’t lead to the growth of jobs, incomes, or the economy. That’s why he put forward a balanced approach that reduces the deficit by over $4 trillion. It’s an approach that asks the wealthiest to pay their fair share, makes tough cuts to programs we can’t afford, and strengthens Medicare with reforms that would reduce overpayments to drug companies, improve the quality of care, and protect Medicare’s commitment to America’s seniors.
We see a different picture. Big deficits would not be eliminated under the president’s budget, and they could very well come in higher than expected. The $4T deficit reduction claim is overstated, and it would be achieved primarily by hiking taxes on high earners and businesses (which would put a damper on the economy). The existing Medicare program is unsustainable. Etc. Budget lands with a thud, 2/20/12.
The president takes credit for $4 trillion in deficit reduction, including “tight discretionary spending caps that I signed into law in the Budget Control Act of 2011 [that] will generate approximately $1 trillion in deficit reduction over the next decade.” Proposed initiatives would reduce this figure to about $3 trillion on a net basis – all from tax increases on the upper crust & businesses plus defense cuts.
Big government fans will predictably prefer to attack alleged shortcomings of the House budget instead of defending the president’s approach.
It’s a waste of time: Why make this point? If defenders can convince people that the House budget is doomed because it is radical, outside the mainstream, or whatever, they may be able to avoid talking about their own lack of solutions for the fiscal problem.
In this vein, consider the 4-paragraph AP story (House GOP plan seeks deeper cuts to spending) that the [Wilmington, DE] News Journal ran on page 2 of its March 21 issue.
The GOP plan doesn’t have a chance of becoming law this year – the Democratic-controlled Senate has no plans to even take it up – but it provides a sharp election-season contrast to the budget released by Obama last month.
http://www.s-a-f-e.org/delaware_chatter.htm (3/21/12)
The logical counter is that the government’s fiscal problem cannot be solved without a major change in direction. One would therefore hope for a budget proposal that differs greatly from the president’s.
Also, what justification would the Senate Democrats have for not taking up the House’s budget resolution? None, really, unless they can lull the public into thinking it would be OK to let the fiscal problem continue to slide. Ryan tries to break Reid’s grip on budget, Byron York, Washington Examiner, 3/19/12.
The bottom line is that there is no way Ryan can sell his plan, or even part of his plan, unless he can convince a majority of Americans that the country, and not anyone's grandmother, is headed over a cliff. The message of the Democrats' 1,056-day stall is that nothing needs to be done. Ryan has risked a lot to argue that that is wrong, and this could be the year his message is finally heard.
It’s unbalanced: Rep. Chris Van Hollen (D-MD), ranking minority member of the House Budget Committee, has disassociated himself and his Democrat colleagues from the House budget on grounds that it would only benefit the wealthy and well connected. March 20 statement.
To govern is to choose, but the Republican budget presents a false choice that further divides our country. They provide a gilded path to prosperity for the already wealthy, while leaving working Americans and future generations behind. Instead of more of the same, we must work together on a balanced path forward that protects the promise and opportunity of the American Dream for all.
But the House budget would not cut taxes; it simply would not raise them as proposed in the president’s budget. House GOP lays down marker with new budget plan, Jonathan Weisman, New York Times, 3/20/12. http://nyti.ms/GHtMwA
And does insisting that all reasonable spending cut options be exhausted before resorting to tax increases suggest a lack of balance? Not in our book. The fiscal problem is far too big to solve by raising taxes, so it is time for many politicians to reconsider their knee jerk resistance to spending cuts. Plumbing the depth of the fiscal hole, 2/13/12
We don’t think huge tax increases will be imposed, remember the Tea Party slogan of “taxed enough already,” nor should they be as the effects on the US economy would be devastating. A far better idea would be to face reality and start eliminating wasteful government spending (no shortage of targets) and restructuring entitlement programs so they will be affordable after all.
Moreover, high earners already pay most of the individual income tax collected (e.g., top quartile pays 87.3%) while the lower half pays a nominal 2.3% share. National Taxpayer’s Union, based on IRS data for tax year 2009. http://bit.ly/csK6FU So what is the basis for the oft-repeated claim that high earners do not pay their fair share?
It’s mean spirited: Some critics see the spending cuts in the House budget as being at the expense of the poor and disadvantaged. Paul Ryan’s budget: should the poor pay for deficit reduction? Ezra Klein, Washington Post, 3/20/12.
Changes for seniors don’t begin for a decade, the tax breaks Ryan will close to pay for his tax cuts go unnamed, and, of course, there are no tax increases at all. When such choices need to be made for programs that the poor depend on, however, Ryan is considerably more specific, and considerably more willing to inflict real budgetary pain on current beneficiaries.
Admittedly, spending cuts in the House budget would be mainly from entitlement programs, which are supposed to benefit the poor and disadvantaged. See this high spot recap of the spending cuts by component.
|
Mandatory spending reductions vs. president’s budget ($ in billions) |
10 yrs. |
|
|
Social Security |
Continue studying how to cope with projected shortfalls |
(8) |
|
GovCare |
Repeal & replace |
1,572 |
|
Medicare (net) |
Begin phasing in private plan option for future participants (no effect on current participants) |
205 |
|
Medicaid & other health |
Block grant to states, index benefits for inflation and population |
770 |
|
Other mandatory programs |
Various, e.g., block grant food stamps, tailored for each state’s low-income population; focus Pell Grants on low income students who need help the most; consolidate dozens of overlapping job-training programs |
1,895 |
|
Discretionary programs |
Cut subsidies for alternative energy projects, enhance royalties by permitting more exploration for domestic energy supplies, phase out Fannie Mae & Freddie Mac, reduce farm subsidies, etc., partly offset by increased defense spending vs. the president’s budget |
352 |
|
Interest exp. |
Projected savings based on lower debt |
514 |
|
Total |
|
5,299 |
Bear in mind that some 70% of the budget consists of “mandatory” programs plus interest expense, while “discretionary” spending represents a declining remainder. So while it may well be desirable to cut discretionary programs more deeply than the House budget proposes, there is no way to solve the fiscal problem without addressing entitlement programs.
Taking a go-slow approach on Social Security and Medicare, while acting more quickly on Medicaid, food stamps, etc., is probably politically motivated to some extent.
And it would be hard to evaluate the overall $1.9T reduction in “other mandatory programs” without more information on the cuts being proposed. (This total may include reversal of a proposal in the president’s budget to reclassify certain infrastructure programs as mandatory rather than discretionary, although we have not been able to pin this point down.)
But the proposals for reining in Medicaid and other low-income support programs seem solid. Indeed, SAFE recommended indexed block grants for Medicaid and SCHIP several years ago. Such a change would not only save federal dollars, but also improve healthcare services by putting the states fully in charge of (and accountable for) their respective programs. In search of real healthcare reform, proposal 4, May 2009.
. . . there are major problems with the Medicaid and SCHIP programs as presently constituted, not the least of which is that joint funding by the federal and state governments creates an incentive for states to keep expanding their programs in order to qualify for more and more federal funding. On finding that they have underestimated costs, states often attempt to rein in their Medicaid (and probably SCHIP) expenditures by cutting reimbursement rates to the bone, thereby jeopardizing the delivery of adequate healthcare services for participants.
http://www.s-a-f-e.org/healthcare_reform.htm
Furthermore, it is no kindness to provide welfare benefits that the recipients could reasonably do without – thereby undermining their sense of personal responsibility. Not that assistance should be cut off for people who truly need it, but overly expansive support programs are a recipe for fiscal and social disaster. Misleading words, part II, Thomas Sowell, Townhall.com, 8/3/11.
The whole future of the welfare state depends on how poverty is defined. "The poor" are the human shields behind whom advocates of ever bigger spending for ever bigger government advance toward their goal.
At least one major welfare program may have been overlooked in preparing the supposedly heartless House budget. Thus, we see no mention of tightening the standards for disability benefits.
A recent flood of disability claims has come from unemployed workers whose extended unemployment benefits are running out. Another factor is marginal workers who want to “retire” but do not meet the age requirements (at least 62) for regular Social Security retirement benefits. Jobless disability claims soar to record $200B as of January, Janet Whitman, New York Post, 2/19/12.
As of January, the federal government was mailing out disability checks to more than 10.5 million individuals, including 2 million to spouses and children of disabled workers, at a cost of record $200 billion a year, recent research from JPMorgan Chase shows.
(Note: The 2011 Social Security Trustee report projects disability program outlays of $138B – about 1/5 of total Security outlays – for fiscal year 2012. Therefore, although the New York Post figure is more recent, it may be overstated.)
As to whether disability benefit beneficiaries are truly disabled, note that disability claims are reviewed on a case by case basis by administrative law judges – with widely differing approval rates. ALJs in Delaware with relatively high disapproval rates have taken a good deal of flak lately, suggesting that the path of least resistance is to be relatively liberal. Delaware legislators push for deep look at denials; Dover office rejects high level of disability claims, [Wilmington] News Journal, 3/1/12.
Administration law judges of the Social Security Administration (SSA) office in Dover have denied 57% of the disability claims they have heard since October, compared to a national average of 41%. Moreover, the denial rates of the five individual judges during this period ranged from a high of 75% (Benitz) to a low of 28% (Banas). The News Journal has reported on the Dover office’s stinginess before, and now Senator Tom Carper, Senator Chris Coons, and Representative John Carney have all asked the SSA Commissioner to order an investigation. The implication is that claims of disability are being improperly denied, e.g., Rep. Carney said, “the wide disparity of approval rates among the judges justifies a more thorough analysis of whether every claim is getting fair consideration.” And Senator Coons reported receiving more complaints about the Dover judges during his first year in office than about any other issue, including the federal budget and the war in Afghanistan.
http://www.s-a-f-e.org/delaware_chatter.htm
All things considered, we can see no reason to dismiss the House proposal to rein in low-income welfare programs as mean spirited. However, the proposed changes should and would be reviewed in detail.
It’s a disguised tax cut: The basic assertion is that tax rates would be reduced as promised while the envisioned widening of the tax base – which has not been spelled out in detail – would fall by the way side. Ryan’s tax reform plan is all ice cream and no spinach, Ruth Marcus, News Journal, 3/23/12.
Would Ryan and his fellow Republicans require people to “pay tax on the value of their health[care] insurance,” give up “their tax-free retirement savings” and “the mortgage interest deduction,” and/or lose deductions for charitable contributions, state and local taxes, and “the tax-free treatment of capital gains at death?” They “should stop [making] glittery, expensive promises without showing how they plan to deliver.” Also, the House budget treats lower rates for investment income as a “sacred principle” and “recoils” from the idea of broadening the tax base to raise revenue.
http://www.s-a-f-e.org/delaware_chatter.htm
In part, this attack is motivated by angst at the mere suggestion of not using an overhaul of the tax system as cover for a tax increase. We have noticed similar thinking in the past. Sorry, but there are no “painless” ways to raise taxes, 8/9/10.
Marcus is right, however, that every tax break in existence has supporters who will fight to preserve it. Accordingly, a case-by-case review of which exemptions, deductions, and credits to eliminate might prove quite arduous.
To expedite matters, we would suggest a different approach: identify a handful of tax preferences that are truly necessary, e.g., individuals running a business should be allowed to deduct business expenses, and eliminate ALL the others. SimpleTax proposal.
All other income tax exemptions, deductions (mortgage interest, charitable contributions, state and local taxes, childcare, casualty losses, etc.) and tax credits (Earned Income, Child, energy, etc.) would be eliminated. While some of these tax preferences have arguable merit, a case-by-case review would trigger endless debate. Note: the flat tax or Fairtax would also eliminate them.
With such an approach, it should be possible to cut tax rates more deeply on average than is proposed in the House budget. Here is an example, which compares our proposed SimpleTax rates to the 2009 actual rates for a married couple, filing jointly.
|
SimpleTax |
2009 actual |
||
|
Income bracket |
Tax rate |
Avg. rate* |
Avg. rate* |
|
$0-30K |
5% |
5.0% |
12.2% |
|
31-70K |
10% |
7.9% |
14.0% |
|
71-140K |
20% |
14.0% |
19.6% |
|
140-300K |
25% |
19.8% |
25.7% |
|
300K+ |
30% |
<30% |
<35% |
*Calculated for income at bracket top.
http://www.s-a-f-e.org/the_simple_tax.htm
A curious omission: Given the gravity of the fiscal problem, one might think critics of the House budget would at least be giving Representative Ryan et al. credit for offering a serious proposal to address it. There is little indication of this, however, in the commentary that we have seen (and cited in the foregoing discussion).
One explanation might be that the defenders are more intent on their political agendas than on promoting the general welfare of this country. Liberal opposition to Ryan plan is delusional demagoguery, David Limbaugh, Townhall.com, 3/23/12.
How catastrophic would the nation's fiscal condition have to be before liberals recognized its urgency? Is there any scenario under which they'd consider setting aside their partisan populism to come to the nation's rescue? Are they capable of even temporarily setting aside their redistributionist myopia long enough meaningfully to address the main drivers of the national debt?
Or maybe some of the defenders are deluding themselves that the fiscal problem isn’t really serious after all. There may be a chance of convincing people in this category. We and other fiscal visionaries need to redouble our efforts.
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I think that Paul Ryan intends for his plan to be a serious one and he deserves credit for putting it out. It's better than his last proposal but still not comprehensive enough. In addition, it has no bipartisan support. Therefore, it's going nowhere for now. – David Walker
Looks like a small step in the right direction. We must rally as many as we can. Thanks for your leadership. - Member of Leadership for Liberty (PA)
I’m OK with supporting cuts in any federal program, in any amount, and for any length of time. – SAFE director
This week’s entry shows a lot of work and a good understanding of the real situation – which really alarms me. If we don't take our medicine, we won't recover. – SAFE director
3/19/12 – A tale of two videos Read s Reply
A week before Americans went to the polls in 1980, candidate Ronald Reagan addressed a question to them: “Are you better off than you were four years ago?” In large part, he was understood to be talking about the economy.
Look for a similar appeal by the Republican presidential challenger this year, although an economic uptick could limit its effectiveness. According to electoral pundits, voters are more concerned about current pocketbook issues than almost anything else.
Historically, nothing — not campaign advertisements, social issues or even wars — has influenced voters more heavily than the direction of the economy in an election year.
Say the unemployment rate falls to 7.9% by October. That would still be high by historical standards, but recent improvement might be perceived to trump the absolute number. If soaring gasoline prices or other factors caused the economy to sputter anew, on the other hand, the outlook for the Republican candidate might be better.
In short, the long-term direction of this country may turn on short-term economic fluctuations over which this president or any other has limited control. Muddled economic picture muddles the political one, too, David Leonhardt, New York Times, 3/13/12.
[If] job growth remains above 200,000 a month, many polling analysts and political scientists view Mr. Obama as a favorite. If oil prices rise much further, or something else causes job growth to fall close to 100,000, he becomes the underdog. In the middle — if job growth slows a bit, to something like 175,000 a month — the 2012 election has the makings of one of the closer races in recent history.
We would prefer to see the candidates debating policy issues that will matter in the longer run, such as the size and reach of government or how to balance the budget. Isn’t there some way to get Americans thinking along these lines?
The answer is unclear, but one thing seems certain. If fiscal visionaries do not get the right issues on the nation’s radar screen, nobody is likely to do the job for them. To this end, here are three points that need to be made.
Consider the record:
The
president
should be held accountable for the results since
he took office in
January 2009 –
not just
whatever
is perceived to be happening currently
or
is promised
for the future.
Notice
Reagan’s
continuation
in 1980
after he posed the “are you better off” question.
The “great communicator” ticked off some specific issues – inflation, unemployment, respect for Americans abroad (the Iranian hostage crisis), and military strength. Then he invited voters to think about where things might be headed. Videotape (1:07)
If you don’t think that this course that we’ve been on for the last four years is what you would like to see us follow for the next four, then I could suggest another choice [to vote for Reagan] that you have.
In recent months, the president has hammered two themes: he inherited a mess and the country is now “on the right track.” Little is said about the events in between, which represent what he has actually done. Obama is running from his record, but he can’t hide it, Dick Morris, the Hill, 12/13/11.
The president is determined to run as a non-incumbent, abandoning all but a pro forma defense of his record and instead running as he would were there an open seat. He wants it to be 2008 all over again, where he is free to float ideas without taking any responsibility for his performance in office or that of the economy on his watch.
Another point: few if any US presidents have done better in their second term than in their first; to the contrary, things usually go downhill. Obama and the second-term curse, Michael Medved, Townhall.com 1/25/12.
As with movie sequels, the second time around generally provides a pallid repetition of what made the franchise popular in the first place, or else heads off in some bizarre and unsatisfying new direction.
Kick the tires: In the business world, excessive emphasis on any given financial measure can lead to misguided decisions. R&D budget slashed to meet short-term earnings targets; assets leased to juice return on investment; liabilities moved off balance sheet to lower debt ratio, etc.
Similarly, in the political world, it is important to understand how the economic results on which many observers seem to be focusing came about.
To the extent this country is now experiencing an economic recovery, for example, one might well ask what took so long. After all, it’s been four years since the financial panic that kicked off the current recession – during which period the federal government ran record deficits and the Federal Reserve cut interest rates to very low levels.
Despite the negative effect of a tsunami of new regulations, such massive and protracted stimulus is finally starting to boost the economy – although the apparent gains may not last long.
The new danger is a wave of inflation, set in motion by deficit spending and cheap money, which would threaten the financial positions of most Americans.
(No one would be entirely safe, but employees or retirees whose compensation and/or benefits are effectively indexed for inflation – notably government workers, including the members of Congress and employees of the Fed – would be in the best position to weather the storm. No wonder they seem less worried about inflation than the rest of us.)
Federal Reserve Chairman Ben Bernanke has stated repeatedly that the Fed can and will keep inflation under control, but his assurances have limited credibility for three reasons:
1. Inflation has already started to pick up; it could quickly get worse. A king dollar GOP? Larry Kudlow, Townhall.com, 2/11/12.
Over the past year the CPI has increased 3 percent. Energy prices have grown 6.6 percent, while food is up 4.7 percent. This is a big pinch on consumer pocket books and a drag on the economy.
2. To stop a wave of inflation, the Fed would need to slam on the monetary brakes; doing so would bring the economic recovery to a screeching halt. We saw this movie before when Paul Volcker took dramatic action in the early 1980s to bring interest rates and inflation under control. Paul Volcker slays the inflationary dragon, dickinson.edu.
In 1979 at the onset of his term at the FED, Volcker faced an annual average inflation rate of 9%. The inflation rate peaked in early 1980 at 11%. During Volcker's tenure, the economy of the United States experienced the largest business cycle declines since WWII, as the unemployment rate rose considerably and output fell.
3. The Fed is in a box; the monetary policy it has been following has minimized US Treasury borrowing costs on short-term obligations (a growing percentage of total federal debt). Tight money would mean much higher interest rates, which would cause the government’s borrowing costs to skyrocket. Uncle Sam’s teaser rate, Wall Street Journal, 3/12/12 (no link available).
The Obama Administration has added to close to $5 trillion to the US debt. So it much prefers to finance all of this at a rate, say, of 0.3% in two-year notes than at 2% in 10-year notes. *** If the government had to pay the 5% rate that it was offering before the financial crisis on today’s debt, the annual interest payment would be $535 billion, twice CBO’s projection for total federal spending on Medicaid this year.
So to those who may feel the US economy is back on track, we would suggest that whatever improvement has resulted from “brute force” stimulus will prove fleeting. As for the longer-term situation, assuming present policies are continued, it may make the financial turbulence experienced in 2008 look tame by comparison.
Use whatever terms you wish – financial crisis, national bankruptcy, fiscal meltdown – this country must change course or it is headed for a big fall. Economic chaos, Walter E. Williams, Townhall.com, 2/8/12.
The Congressional Budget Office estimates that it's possible to sustain today's level of federal spending and even achieve a balanced budget. All that Congress would have to do is raise the lowest income tax bracket of 10 percent to 25 percent and the middle tax bracket of 25 percent to 66 percent and raise the 35 percent tax bracket to 92 percent. That's a static vision that assumes that people will have no response and they'll work just as hard and send more money to Washington. [But] if Congress did legislate such tax increases, it would be the economic equivalent of committing national hara-kiri.
Propose alternatives: Many politicians talk about the fiscal problem, but neither party has seriously tackled it. Striking a compromise between the Democrat and Republican positions to solve the problem would not work, therefore, or even come close.
We suspect most politicians realize at some level how serious the fiscal problem is – they simply do not want to take the heat for proposing the tough actions that would be needed to fix it.
But the American public has a sense that something is seriously wrong, and there could be a political opportunity for leaders who had the courage to propose real solutions. Here is how we put the point in a recent entry. Plumbing the depth of the fiscal hole, 2/13/12.
Message to both parties: It is time to start telling the truth. The government’s spending spree must stop, entitlement programs must be restructured, and the illusion that it is possible to tax our way out of this situation must be abandoned.
It is hard to visualize the president acknowledging that the policies he and his party have been following for the past four years are foolish and misguided. As a practical matter, therefore, this opportunity exists primarily for the Republican challengers.
To be effective, the Republican pitch should be positive. Here is what must be done, not just here are the mistakes that have been made or we would do less damage than they did. And for goodness sakes, don’t blame the voters (no matter how much they may deserve it) for not paying attention earlier. What now for Republicans? Cal Thomas, Townhall.com, 3/15/12.
Voters want to know where the country has gone wrong, but they don't want to believe they are responsible for steering it in that direction, or that they made a mistake four years ago in putting so much faith and trust in President Obama. They want more of John F. Kennedy's 1960 slogan "we can do better" and less of "you could do worse than elect me."
Would the voters be willing to accept deep spending cuts, entitlement program changes, and a loss of cherished tax preferences (even if offset by tax rate cuts)? Public opinion polls suggest that such acceptance may be far more likely than most politicians are inclined to believe. To create jobs, voters want to cut while Washington wants to spend, Scott Rasmussen, Townhall.com, 3/16/12.
To connect with voters, those who hope to become political leaders will have to break with the Washington orthodoxy. A candidate who says job creation is the goal and spending cuts is the way to get there will be considered a laughing stock in Washington, but he or she will be right on target as far as the American people are concerned.
That is not to say there is anything wrong with harping on high gas prices, etc., especially if the attackers identify policy changes that could help improve matters. Armey: GOP must use high gas prices to win in 2012, Paul Scicchitano and Ashley Martella, Newsmax.com, 3/15/12. http://bit.ly/zWPYgP
But if the Republicans are serious about recapturing the Senate and the White House, they need to offer a broader vision. Our suggestion would be smaller, more focused, less costly government.
And here is a video clip (1:19) in which Representative Paul Ryan (R-WI) explains why “America deserves a better path” with disarming candor. Reagan could hardly have said it better! http://bit.ly/x6aAze
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Why is the president running as a non-incumbent? As a community organizer, that’s what he knows how to do. – SAFE member
3/12/12 – Don’t believe everything you hear Read replies
There are known knowns. These are things we know that we know. There are known unknowns. That is to say, there are things that we know we don't know. But there are also unknown unknowns. There are things we don't know we don't know.
Former Secretary of Defense Donald Rumsfeld (1975-77 & 2001-06)
The foregoing quote was brought to mind by a series of developments that tend to undermine the government’s credibility and could impact the course of national and world events. At the risk of straying too far from SAFE’s normal concerns, we will discuss some of these developments, such as a report that certain presidential documents appear to be forgeries.
But let’s begin with an update on a familiar topic, namely SAFE’s efforts to educate Congress about the urgency of tackling the fiscal problem.
THE OLD COLLEGE TRY: With the intent of summarizing the last three entries (Budget lands with a thud; House Ways and Means should get moving; Can this country be saved?) we wrote to 30 members of Congress (Senate and House leaders, chairs and ranking minority members of the appropriations, budget and tax committees, and others). Our one-page letter read in part:
The president’s budget and tax “reform” proposals are nonstarters, in our opinion, so we would urge Congress to take up the slack. See our 3/7/12 memo and the underlying analyses it references. http://bit.ly/yUwaJ6
#The House should work up a detailed budget resolution, as it did last year, and also propose a comprehensive overhaul of the tax system to make it far simpler, more efficient, and fairer than it is now.
#The Senate should given serious consideration to the House proposals, and either pass them or offer specific alternatives.
Even if agreement proves elusive on these difficult issues, the voters deserve to know where your respective parties stand before they go to the polls in November – and right now neither side has stepped up to the plate.
Will this effort bear fruit? Probably not, at least before the elections, but if a fiscal meltdown does happen it will not be due to lack of vigilance on SAFE’s part.
We do not plan to send any more unsolicited letters to Congress for a while, that would be overkill, but we will continue to monitor and report on the action in Washington.
PRESIDENTIAL DOCUMENTS: Questions about the president’s background have been given short shrift by the mainstream media, in our opinion, but a few dogged critics keep bringing them up. Among other things, it has been claimed that Mr. Obama is not a “natural born citizen,” as required by the Constitution, and therefore is not legally qualified to serve as president.
Without going into all the whys and wherefores, we are unaware of any persuasive evidence that the president was born outside the US, e.g., in Kenya. As for the claim that a “natural born citizen” must have two US citizen parents, we doubt the courts would so hold (never mind the Supreme Court decision in 1875) if the issue was brought before them today.
The president’s supporters have rebuffed numerous requests for the release of his long form Hawaiian birth certificate, from which one might infer that the official narrative of the president’s family background is inaccurate. Thus, it has been theorized that the president’s father might have been someone other than Barack Obama Sr. from Kenya. Deconstructing Obama, Jack Cashill, Threshold Editions (2011). http://amzn.to/yFO8ym
A year ago, while he was supposedly mulling the idea of becoming a presidential candidate, Donald Trump made a lot of noise about how the president should resolve all doubts by making his birth certificate available. An image of the certificate was ultimately posted on the Internet. White House releases president’s birth certificate, Kara Rowland & Stephen Dinan, Washington Times, 4/27/11. http://bit.ly/gPOfC3
Critics noted possible flaws in the birth certificate image and urged production of the paper document for authentication. When this request was rebuffed, they persuaded Sheriff Joe Arapaio in Arizona (who has also clashed with the Feds re enforcement of the US immigration laws) to undertake an official investigation. Posse certificatus: Sheriff probes Obama birth document, Jerome Corsi, wnd.com, 9/16/11. http://bit.ly/ytex70
Arapaio’s team of investigators concluded that the image of the birth certificate image was created on a computer rather than being scanned in from a paper document as had been represented. Similar problems were noted with the president’s purported selective service (draft) card. Obama’s eligibility – not one shred of authentic verifiable evidence, Craig Andresen, nationalpatriot.com, 3/4/12. http://bit.ly/AgV31S
The comments about the birth certificate image released by Arapaio are very specific and sound credible (we do not have the technical expertise to say more). Sheriff Joe Arapaio suggests Obama’s birth certificate is a forgery, Brian Montpoli, CBSNews.com, 3/1/12. http://bit.ly/zSMSTa (link to the report is at the end of the article)
OK, say these documents were fake, so what? First, the forgeries could have hardly been an innocent mistake. Second, if the people responsible were willing to lie about such matters, what else might they be willing to lie about?
Yet there has hardly been a ripple about Arapaio’s report from the media; it is almost as though it did not happen. Whether the original inquiry into the president’s background was warranted or a “fishing expedition,” the forgery issue needs to be resolved.
AN UNTIMELY DEATH: Blogger Andrew Breitbart had broken some high profile stories in his time, such as investigations of Acorn and the Internet postings of former Representative Anthony Weiner. On the evening of February 29, after leaving a bar, he collapsed and died. Andrew Breitbart, conservative blogger, dies at 43, Jeremy Peters & Brian Stelter, New York Times, 3/1/12. http://nyti.ms/Ag3Z62
Given Breitbart’s age, no indications of recent medical problems, and his controversial profile, speculation about his sudden death was inevitable.
Adding fuel to the fire, Breitbart had stated only three weeks earlier that he was in possession of damning videos of the president as a student activist at Harvard Law School that would be released on March 1. Breitbart: Wait ‘til they see what happens March 1st, Paul Watson, infowars.com, 3/2/12. http://bit.ly/AqGQsg
There was a delay due to Breitbart’s death, but the video (or one of the videos if there are any more) has been released; it shows Mr. Obama speaking at a 1991 rally in support of a black law school professor named Derrick Bell. Here’s the background:
Bell was the first black tenured professor at the school, and a pioneer of "critical race theory," which insisted, controversially, on reading issues of race and power into legal scholarship. His protest that spring was occasioned by Harvard's denial of tenure to a black woman professor, Regina Austin, at a time when only three of the law school's professors were black and only five women. He told Harvard he would take a leave of absence — a kind of academic strike — "until a woman of color is offered and accepted a tenured position on this faculty," and he launched a hunger strike to dramatize his point.
Although the video (1:17) is not necessarily damning, it does suggest that the president’s support for Bell was more than casual. At Harvard, Obama dived into diversity fight, Andrew Kaczynski, BuzzFeed, 3/7/12. http://bit.ly/A8nSrw
There is some additional footage, omitted from the clip, which would have tended to support this impression. Harvard mentor [Professor Charles Ogletree] admits hiding video of Obama hugging radical professor, Mytheos Holt, BuzzFeed, 3/7/12.
We don’t mean to claim that Andrew Breitbart actually was assassinated, perhaps using a sophisticated weapon of some kind. This event falls into the “known unknowns” category as far as we are concerned. Breitbart and the CIA’s heart attack gun, Kurt Nimmo, Infowars.com, 3/7/12. http://bit.ly/y6f60C
But people can react viciously when their ideas are under attack, and Breitbart surely was a thorn in the side of the liberal establishment. Let’s hope the Coroner’s Office investigates the circumstances thoroughly before ruling that his was a natural death.
BIN LADEN’S BODY: Americans (including us) were fascinated by the details released about the daring raid that resulted in the killing of Osama Bin Laden. We did feel that more operational details than necessary were disclosed, probably for political purposes, but it never occurred to us that any portion of the account might be flatly untrue – such as the body being buried at sea in accordance with Islamic tradition.
Ten months later, WikiLeaks published e-mails - stolen by hackers from Stratfor (an intelligence analysis group) - that contained some contrary information. Bin Laden WAS NOT buried at sea, but flown to the U.S. for cremation at secret location, claims intelligence boss in leaked email, Thomas Durante, [UK] Daily Mail, 3/7/12.
#The hackers said Stratfor, based in Austin, Texas, were “clueless” when it came to database security.
# . . . in a particular set of emails given to WikiLeaks, [Stratfor] vice president for intelligence, Fred Burton, says he doubts the official White House version of what happened to bin Laden's body. [He] says the body was “bound for Dover, [Delaware] on [a] CIA plane” and “onward to the Armed Forces Institute of Pathology in Bethesda [Maryland].”
This report raises some disturbing questions. For starters, how could the database of a firm involved in highly sensitive matters be so easily accessed, and are government databases equally vulnerable?
Were Mr. Burton’s doubts well founded or mistaken? Were the published e-mails authentic or altered?
If Bin Laden’s body was indeed cremated, will there be an adverse reaction in the Islamic world? Whether well founded or not, this concern may have shaped the initial report. Body politics: White House terrorist policy dictated by pandering to Islam, Anneke Green, Washington Times, 3/8/12. http://bit.ly/wkUNpx
And finally, if false public statements were actually made about such a high profile matter, how much trust can Americans place in statements by government officials on other matters?
A COMING WAR: The threat of a war with Iran has been building for several years, fueled by the fanatical regime’s drive to produce nuclear weapons, and time seems to be running short.
Two months ago, the prime focus was on Iranian threats to close the Straits of Hormuz in reaction to proposed economic sanctions that would interfere with the marketing of Iranian oil. Such action by Iran would clearly trigger a swift US military response. Cut defense spending with care, 1/23/12.
Racing to develop nuclear weapons, Iran has threatened to close the Strait of Hormuz (which might send oil to $200 a barrel) if the international community imposes severe economic sanctions that could stop them. The US would use military force to reopen this critical waterway, and there is a strong possibility that the US and/or Israel would strike at targets in Iran if deemed necessary to cripple its nuclear program. Panetta: We will “stop” Iran’s weapons program, Newsmax.com, 1/8/12. http://bit.ly/w7MmjG
More recently, Iran has offered to enter into negotiations about its nuclear program. There is reason to suspect, however, that the regime is simply trying to buy time until it can finish developing the nuclear weapons that it so desperately desires.
For one thing, the negotiations card has been played several times before – without any apparent intention of abandoning the goal of developing nuclear weapons. See, e.g., Iran nuclear offer “falls short,” BBC News, 8/23/06. http://bbc.in/zJaOuX
The Iranian position is also inherently contradictory. “They claim they aren’t making a nuclear bomb. But they still want to talk.” Iran offers to negotiate over nukes, the Jewish Reporter, 2/16/12. http://bit.ly/xGSMgc
Nevertheless, the tension has eased. The president and other US leaders are now stressing the need to give diplomatic efforts and/or sanctions time to work, albeit not ruling out military action if all else fails. And last week, a multinational bloc under the auspices of the European Union accepted the Iranian offer.
“I have offered to resume talks with Iran on the nuclear issue,” said Catherine Ashton, the European Union’s foreign affairs chief, who represents the United States, Russia, China, France, Britain and Germany in dealings with Iran. “We hope that Iran will now enter into a sustained process of constructive dialogue which will deliver real progress.”
The six bloc members have divergent views and interests, and the negotiating process will be neither swift nor sure. World powers agree to resume nuclear talks with Iran, Nicholas Kulish & James Kanter, New York Times, 3/6/12.
The resumed talks represent a significant step forward because all six parties agreed to participate. But that may have been the easy part. One senior French official said that a desire to avoid a military confrontation could lead some parties to take a softer stance on Iran, looking for any small concession that could be interpreted as success.
Meanwhile, Israelis fear Iran is reaching the point at which its nuclear ambitions cannot be stopped. And they are properly mindful of threatening statements made by Iranian leaders, whether a determination to take military action has been explicitly stated or not. Did Ahmadinejad really say Israel should be “wiped off the map”? Glenn Kessler, Washington Post blog, 10/5/11.
[Karim] Sadjadpour [an Iranian specialist at the Carnegie Endowment for International Peace], who has closely studied the statements of Khameni, said that the supreme leader has spoken more on the question of Israel than any other issue, which is remarkable given that Iran shares no border with Israel and that the Jewish state has virtually no impact on the daily lives of Iranians. Sadjadpour said Khamenei has been consistent, stating repeatedly that the goal is not the military destruction of the Jewish state but “the defeat of Zionist ideology and the dissolution of Israel through a ‘popular referendum.’”
Given a past pattern of tense relations between President Obama and Israeli Prime Minister Benjamin Netanyahu, it seems entirely possible that Israel may decide to launch a preemptive strike on Iranian nuclear facilities at some point rather than relying on US assurances that Iran will not be allowed to have nuclear weapons.
The president stated in a recent speech to the American Israel Public Affairs Committee, delivered the day before a meeting with Netanyahu at the White House, that the US will use military force if necessary to prevent Iran from acquiring nuclear weapons. He also quoted the “timeless advice” of President Theodore Roosevelt: “Speak softly: carry a big stick.” Speech transcript, 3/4/12.
I have said that when it comes to preventing Iran from obtaining a nuclear weapon, I will take no options off the table, and I mean what I say. That includes all elements of American power: a political effort aimed at isolating Iran, a diplomatic effort to sustain our coalition and ensure that the Iranian program is monitored, an economic effort that imposes crippling sanctions and, yes, a military effort to be prepared for any contingency.
No deadline for a decision was stated, however, and Iran may need only a few more months to make some operational nuclear weapons. Also, in the run-up to the November elections, the president may have little desire to launch a military strike unless he is convinced that it would help to ensure his reelection. Rightly or wrongly, we doubt Americans would react favorably to such a move unless Iran took overt military action that forced it – which would be pretty dumb on Iran’s part.
Israeli leaders were reportedly underwhelmed by the president’s speech and his comments at the subsequent White House meeting. They are well aware that Iran’s nuclear facilities are dispersed and deeply dug in, for which reason a strike to take them out would not be quick, easy, or assured of success. And based on the president’s past actions, they do not trust him. Iranian leaders may be unimpressed as well, which would not bode well for the success of diplomatic efforts. Obama’s very small stick; president’s strong rhetoric on Israel rings hollow, Washington Times, 3/5/12.
U.S. credibility is critical in the nuclear face-off with Iran. A strong president may be able to dissuade the mullahs from pursuing nuclear-weapons capability. A credible leader could give the Israelis the necessary sense of security to persuade them not to take pre-emptive unilateral military action. Neither side sees Mr. Obama in this light. He says he “does not bluff,” but few think the administration that invented the concept of “leading from behind” has the mettle to face a military crisis with Iran.
It is not hard to imagine the US sliding into a policy of containment, especially if the Iranian situation was not addressed before November and the president was reelected. One observer has drawn a parallel to the British and French miscalculations that led to World War II. Iran and Obama, Thomas Sowell, Townhall.com, 3/7/12.
Time was never on our side. The risks go up exponentially the longer we wait. When the Iranian nuclear program was just getting started, it could have been destroyed before it became so big, so dispersed and so deeply dug in underground. Now, if we wait till they actually have nuclear bombs, the same kinds of arguments for inaction will carry even more weight, when the price of an attack on Iran can be the start of a nuclear Holocaust.
There have been many reports that Israel would strike Iran over the years, none of which were borne out by events, but the outcome may be different this time. Fear that Iran is about to join the nuclear club coupled with lack of confidence in the US could impel the Israelis to a military effort that is at or perhaps beyond the limits of their capabilities, with unforeseeable consequences for Israel, Iran, the region, and the world.
IN CLOSING: Is there a connection between the developments we have discussed, from apparently forged documents of long ago to potentially disastrous miscalculations in the Middle East today. If so, it is the corrosive consequences of a loss of confidence that the nation’s leaders can be trusted to tell the truth.
It may pay to have some people around, like the members of SAFE for example, who like to think things through for themselves.
* * * This Blogs Replies * * *
Excellent work. - Financial executive
What do we do if a nuke goes off in Manhattan or Haifa? Start diplomatic talks? - SAFE director
Holy moley! What a blog. - SAFE director
3/5/12 – Can this country be saved?
We began this week’s entry with some seemingly random thoughts on topics ranging from Charles Ponzi’s birthday to a pending court case and the partisan divide in Washington. But as it turns out, the various subjects are related at a deeper level.
We hope the nation’s political leaders will take our conclusions to heart.
Ponzi remembered: Day before yesterday (March 3rd) was the birthday of Charles Ponzi, a con artist who achieved great notoriety in the 1920s. Thanks to SAFE member Harry Thompson of Tucson, Arizona for reminding us.
In his day, Ponzi promoted investments with guaranteed returns that seemed (and in fact were) “too good to be true.” Early investors were paid off with funds invested by later investors; when the supply of “suckers” dried up, the scheme would collapse.
Ponzi was convicted of fraud, imprisoned, and eventually deported. Yet there is a distinct parallel between his investment schemes and the “pay as you go” funding arrangements for Social Security, the crown jewel of FDR’s New Deal. Social Security is burnt out, now what, 3/7/11.
The day of reckoning for Social Security was postponed by a 1983 bailout featuring major tax increases, but the fix was only temporary and such an approach will not work again. Most people understand this. Six in 10 workers hold no hope of receiving Social Security; Americans aged 18 to 34 are least likely to believe they will ever see benefits, Frank Newport, Gallup, 7/20/10. http://bit.ly/bibieq
The newest scheme: One might think the politicians would have learned a lesson from the bleak outlook for Social Security and the other entitlement programs that followed it, namely don’t promise benefits that won’t be affordable over the long term, but apparently they have not. In 2010, on a basically party line vote, they created a brand new GovCare (aka ObamaCare) entitlement program.
Healthcare insurance (HCI) premiums have risen sharply since this legislation was enacted (so much for the claim that people who were satisfied with their HCI plan could keep it and just pay less), as noted by a Wilmington attorney.
If the reform was intended to increase HCI premiums, it's been very successful. Over the past two years, my firm has been forced to raise employee deductibles 100% ($2,000 before GovCare to $4,000 in 2012).
Leaders of the loyal opposition are vowing to repeal the legislation before its full implementation in 2014, but this would require a Republican sweep in the November elections – which is far from a sure thing.
There are also legal challenges pending. Several cases have made their way to the US Supreme Court, and oral argument (five hours worth!) is scheduled in late March. Supreme Court will hear healthcare case, Paige Winfield Cunningham, Washington Times, 11/14/11. http://bit.ly/vue507
We think the argument against GovCare boils down to this: If the federal government can require citizens to obtain HCI meeting government-prescribed requirements, then it can do just about anything. The scheme of “enumerated powers” in the Constitution and the 10th Amendment, already greatly weakened by past decisions of the Supreme Court, would be reduced to artifacts of the founders’ original intentions.
One would be hard pressed to read the power of Congress to regulate interstate commerce as authorizing the GovCare mandate, but remember that the Supremes relied on the taxing power and general welfare clause in upholding Social Security 75 years ago. Helvering v. Davis, 1937. http://1.usa.gov/dOpZHj
It could and presumably will be argued that fines imposed for noncompliance with the HCI mandate represent a “tax,” thereby invoking the Helvering v. Davis precedent. This would ignore the usual understanding, however, that a “tax” is levied primarily for the purpose of raising revenue. The healthcare individual mandate is beyond Congress’s taxing power, Laura Lieberman & Joseph Henchman, Tax Foundation, 2/13/12. http://bit.ly/yPatcQ
The Supreme Court will be under heavy pressure on the GovCare decision, and the justices may be inclined to tread lightly. Our only prediction at this point is that the case will be decided by a 5-4 margin.
Tax reform: Comments on the president’s tax proposals continue to roll in, generally supporting the views we offered last week.
It is not “reform” to raise tax rates or to further complicate the current tax system. Obama’s tax proposals would make the tax code more complicated, less fair, Chris Edwards, Cato Institute, 2/24/12.
Serious economists know that tax reform means lower marginal tax rates, simplification and a neutral tax base that doesn’t distort investment. Those were the goals of the bipartisan Tax Reform Act of 1986 and of many reform proposals since. However, that basic understanding of tax reform has eluded the Obama administration.
Some polling results contradict the claim that most Americans believe affluent taxpayers should pay more than they now do. Poll: vast majority of likely voters think rich already pay their fair share, Washington Free Beacon, 2/27/12. http://bit.ly/xwzbyl
And one observer suggests that avid supporters of the president’s tax proposals have something other than reducing deficits in mind, namely bolstering the state’s power by cutting private sector leaders down to size. Puzzling cheers for higher taxes, Michael Barone, Washington Examiner, 2/28/12.
This election is a contest between a Democrat who wants to make this country more like Tocqueville's France and Republicans who want to keep it more like Tocqueville's America. The liberal bloggers are rooting for France.
A big assumption: SAFE seeks to present the best answers to key policy issues. This results in longish blog entries, replete with dry facts, data tables, and numerous references, which at times may strain the patience of even the most loyal readers. Sorry!
Our approach implicitly assumes that politicians are concerned with finding the best answers, and may therefore be swayed by logical, fact-based arguments. But to use a famous line from Porgy & Bess, “it ain’t necessarily so.”
Suppose (as one reader suggests) that most politicians are primarily interested in feathering their own political nests.
Our entire system of government works by buying votes with government programs funded by taxes, debt (which will promote inflation), or regulatory mandates that shift costs to the private sector. Supported by an “army of stooges,” the politicians claim to be following the best advice available. They will not stop until some catastrophe happens.
Such a mindset would help to explain why the questionable Social Security program was launched, why it has been followed by other entitlement programs, and why “liberals” hope to perpetuate the welfare state as long as possible by hiking taxes (openly on the “rich,” stealthily on everyone else).
Concerned that a catastrophe might prove fatal (rather than serving as a national wakeup call), we prefer to believe that “while there’s life there’s hope.” Still, there is no denying that some very tough battles lie ahead.
Possible responses: Some observer say truth lies in the ideological center and political leaders must compromise their differences if progress is to be made. Thus, former Army general and Secretary of State Colin Powell blames divisive Washington politics for many national problems. Breaking the partisan fever, Tony Blankley, Washington Times, 11/28/11.
Republicans and Democrats are focusing more and more on their extreme left and extreme right. And we have to come back toward the center in order to compromise. *** So what we have to do is sort of take some of the heat out of our political life in terms of the [media] coverage of it, so [members of Congress] can get to work quietly.
Or consider the comments of Senator Olympia Snowe (R-ME), who deplores “the partisanship of recent years in the Senate” and after 33 years in Congress will not run for a fourth Senate term. Snowe announces she won’t seek re-election, Fox News, 2/28/12.
It is time for change in the way we govern, and I believe there are unique opportunities to build support for that change from outside the United States Senate. I intend to help give voice to my fellow citizens who believe, as I do, that we must return to an era of civility in government driven by a common purpose to fulfill the promise that is unique to America.
Other observers sharply disagree. What this country needs, they say, is a fundamental shift in the direction established during the New Deal, which is leading us further and further away from the founders’ vision of limited government and individual liberty. The myth of bipartisanship, Thomas Tripp, Washington Times, 11/24/11.
Liberals want to maintain power; conservatives want to right what citizens see as wrong. The liberal call for bipartisanship - exemplified in the supercommittee debate - is not a policy. It is the last refuge of scoundrels who created this disaster in the first place. The Democrats took partisanship to an untenable extent that has created so many decades later the massive debt our children and grandchildren are expected to repay, while making it worse by denying a hearing of any rational solutions.
Tripp’s analysis works for us, and in fact we have offered similar conclusions. The path forward from August 28 [Glenn Beck rally in DC], 9/6/10.
The current political scene is dominated by a “culture war” between people who are leery of Big Government and people who want more of it. Many of the arguments for expanding the size and role of government seem irrational, but proponents have a powerful weapon in their arsenal – the promise of “free” benefits. *** Dueling demonstrations by tea partiers and labor unions capture the essence of the dispute. It is not so much a confrontation of haves and have-nots, as some would have it, as of doers and takers. Consider the fable of the ants and the grasshoppers.
For those who may question the culture war view, here is some partial corroboration from academia. Professor Robert Bordone, a Harvard Law School professor and director of the Harvard Negotiation and Mediation Program, was interviewed in December during the fracas over the payroll tax cut extension. Asked to rate the negotiation skills of Congressional leaders, he gave them “a really bad grade.”
Basically, it seems to me that both sides are engaged in a classic game of chicken where they head on a collision course and look for who’s going to swerve first. It’s stunningly childlike. While these are tough issues where the parties have genuine differences, the truth of the matter is there’s probably a lot more shared ground than there seems to be and relatively little effort to find [it].
Professor Bordone’s key point is that Washington politicians treat disputes as a zero sum game in which one party will win and the other will lose, while ignoring the importance for the country of choosing the best answers. Grading the negotiation skills of Congress, Nancy Cook, National Journal, 12/19/11.
I think [the negotiating style of Congress compares] least to business because businesspeople want to reach a deal, and they often are thinking creatively. One really critical difference is that there is more of a zero-sum mentality in Washington, at least right now. It seems like instead of thinking what would be good for the American people or the nation, people are thinking what will be good for my election. There is always self-interest in every negotiation, but it seems like it trumps it at such a high level.
As for distinctions between the parties, Bordone says Congressional Republicans have been somewhat successful at playing the “hard bargainer” role, whereas the Democrats tend to set up situations in which “the president is the one who blinks.” [Sorry, we disagree with this characterization of what has been going on.]
One more thing: Everything in this world happens for a reason, and it may be instructive to consider why the partisan divide seems to have grown deeper in recent years.
Some of the usual complaints – 24/7 news cycle, talk radio, the Internet, political corruption, etc. – do not really explain anything. Partisan politics go back to the founding of the Republic, and we suspect that recollections of a “golden age” when the politicians all got along are considerably exaggerated.
Something that has changed, however, is the nation’s ability to simultaneously support what both sides want, e.g., ever-expanding welfare programs for the Democrats and a big military/ moderate taxes for the Republicans. As the National Debt soars, it is becoming increasingly clear that the days of kicking the can down the road are numbered and some real choices will need to be made pretty soon.
The current situation is a bit like playing a game of “musical chairs,” in which the tension rises as the number of chairs is reduced. And if our view of the fiscal outlook is realistic, things will keep getting tenser until something snaps.
We do not think voters know all the answers, and in fact criticized Scott Rasmussen’s new book for suggesting they do. The People’s Money; How voters will balance the budget and eliminate the federal debt, Scott Rasmussen, Simon & Schuster (2012).
But we do believe voters can figure out which candidates are more likely to steer this country in the direction they want it to go if they are doing their civic duty by paying attention.
To this end, we would encourage politicians in both parties to outline their respective visions clearly this year instead of bobbing and weaving like they usually do.
2/27/12 – House Ways and Means should get moving
Rushing in “where angels fear to tread,” SAFE sent a February 1 letter to the members of Congress suggesting four points for action in 2012. http://bit.ly/wcMHT8 A month later, it’s time for a status report.
In summary, here is where things appear to stand and our reactions.
1. The payroll tax cut has been extended for the rest of 2012 on the most favorable terms that Congressional Republicans could negotiate. OK.
2. A reaction to the four recess appointments is in process, albeit not along the lines we suggested. Sigh.
3. A Congressional budget appears to be out of reach, but a House budget/Senate response will tee the issue up for debate on the campaign trail this fall. Follow closely.
4. There has been lots of talk about overhauling the tax system, but the president’s “reform” proposals would make things worse. Push House Republicans to propose real reforms.
The particulars follow . . .
1. Extend the payroll tax cut for the remainder of this year – it’s a bad idea, but a deal is a deal – with appropriate offsets to minimize the fiscal damage. Perhaps something can be done about limiting unemployment benefits; 99 weeks is too long!
Congress has acted. There were no spending cuts to offset the loss of payroll tax revenue. The cost of extending longer than normal unemployment benefits will be partially offset, and the maximum period for benefits was cut from 99 to 73 weeks. A proposal to expedite the Keystone XL Pipeline was dropped from the deal, but the House may insert it in the pending transportation legislation.
Although the terms of the payroll tax extension were viewed as a Democrat “victory,” Republicans put the best spin on things that they could. Deficit is loser in payroll tax deal, Stephen Dinan, Washington Times, 2/17/12.
“This agreement shows Congress can govern, and Washington can work,” said Rep. Dave Camp, Michigan Republican and chairman of the Ways and Means Committee.
Come December the payroll tax will be back in the headlines, with liberals demanding that the rate cut (originally agreed to for 2011 only) be extended again so as to avoid a “tax increase” for working Americans and/or stimulate the economy. This is a good example of how short-term political deals tend to live on year after year.
2. Recess appointments are a historical anachronism, and presidents of both parties have abused this privilege. It’s time for Congress to stop the games by proposing a Constitutional amendment to terminate Article II, Section 2, Paragraph 3.
Republicans are still angry about the president’s recess appointments (new consumer finance czar, three NLRB members) while Congress was technically not in recess. About those recess appointments, 1/9/12. But what are they going to do about it?
On February 15, the House Judiciary Committee heard testimony about the recess appointments from two attorneys (one pro, one con) and a law school professor (con). Chairman Lamar Smith (R-TX) simultaneously issued a press release characterizing the recess appointments as dubious – “with these recess appointments, the President may have violated the constitution by disregarding the rule of law” - and part of a pattern of presidential disdain for congressional authority. http://1.usa.gov/y0JKuT
OK, fine, but we are not aware of any Democrats who have conceded that the president acted improperly. Without such support there is little chance of prevailing in the court of public opinion.
Forty Republican senators will reportedly support one or more of the lawsuits being filed by private groups to challenge the recess appointments. Senators join suits on recess appointments, Stephen Dinan, Washington Times, 2/2/12. http://bit.ly/wbj9TB
So what? The lawsuits smack of “locking the barn door after the horse is stolen,” and the officials in question will probably be out of office (they can only serve until the end of the current session of Congress) before the litigation is resolved.
Meanwhile, further recess appointments have been threatened – and in theory could be attempted the next time Congress turns its back. Reid urges recess appointments, Jennifer Steinhauer, New York Times, 2/17/12.
#Senate Majority Leader Harry Reid: “Nominees on the executive calendar have been pending an average of three months, waiting for the Senate to act. *** If we don’t have some significant action during the next work period, I am going to ask the president – I mean, I can ask if I want to, and he doesn’t have to respond affirmatively – but I’m going to ask him to appoint them all.”
#Eric Schultz, a White House spokesman: “It is becoming more and more apparent that Republican obstructionism is an overtly political maneuver to thwart the president’s agenda. These posts are important to fill, these individuals are exceptionally well qualified, and we will push for their confirmations.”
We view such threats as inappropriate. The president can directly challenge delays on nominees that he deems unreasonable; he should not resort to dubious procedural maneuvers as a means to evade the “advise and consent” requirement. Also, a bigger public outcry might result if there was a repeat performance.
Presidents of both parties have abused the recess appointment power over the years, leading to game playing (e.g., pro forma sessions during breaks, a tactic first used by Senator Reid a few years back) that weakens public respect for our political leaders. By proposing a Constitutional amendment to rescind the recess appointment power (which would become effective once state approvals were obtained), Congress could eliminate a long standing bone of contention and bolster its standing in the political firmament.
If such a proposal was properly explained, legislators on both sides of the aisle should support it. No one has picked up on our idea to date, however, and the tone of discussion about recess appointments remains bitterly partisan.
3. Approve a budget for fiscal year 2013, hopefully cutting spending in the process. We cannot imagine why Congress has stopped complying with its own budget rules and seems to have so little concern about running up the National Debt.
The president’s budget proposal would ideally have served as a starting point for a Congressional budget, but it was so bad that no one will be inclined to support it. Budget lands with a thud, 2/20/12.
The House passed a constructive budget proposal in 2011, and they will hopefully repeat the feat this year. The likely stumbling block will be in the Senate.
Last year, the Senate killed the House budget on a party line vote (and unanimously rejected the president’s budget) without offering an alternative. A similar pattern is developing now. Reid says he won’t bring budget to floor this year, Philip Klein, Washington Examiner, 2/3/12.
Though Senate Budget Committee Chairman Rep. Kent Conrad, D-N.D., said he expects his committee to produce a budget document, Reid said he wouldn't bring it to the floor. [Reid’s] argument is that last summer's debt ceiling deal already set the spending levels for the year, so there's no need to pass a resolution that is non-binding anyway. Money is typically spent during the year through the appropriations process.
The real point, we think, is that Senator Reid et al. are allergic to meaningful spending cuts in any area except defense. Accordingly, their strategy will be to avoid offering budget proposals for which they might be held accountable while sneering at the supposedly deficient ideas of their political opponents.
Given his reputation as a deficit hawk, Senator Conrad's
legislative catatonia is particularly disappointing. Not for nothing did
Citizens Against Government Waste single him out for their porker of the month
award in January.
http://bit.ly/y3wk5r
It is
hard to visualize much progress on this issue before the election, but hopefully
the differences between the fiscal policies on offer will be debated on the
campaign trail in enough depth that voters can make informed decisions as to who
has “the right end of the stick.”
4. Don’t argue about the expiring Bush tax cuts in December; overhaul the tax system now. Revenue should be collected in a manner that is simple, efficient, and fair. Our tax plan (http://www.s-a-f-e.org/the_simple_tax.htm) may represent a useful template.
Leaders in both parties claim to favor tax reform, yet the US tax system grows more complex and burdensome every year. What’s the problem?
There are sharply divergent ideas about how the tax system should be “reformed,” it seems, perhaps because most people consider themselves and their friends overtaxed already but can accept the idea that others should pay more.
The timing never seems quite right either, e.g., an overhaul of the tax system was not started in 2010 because the party in power had limited interest in the issue and elections were coming up.
In 2011, with Republicans in control of the House, the Ways and Means Committee sat around and waited for the “Super Committee” to pull a rabbit out of the hat – which did not happen – instead of getting started on a tax overhaul.
In 2012, election year or not, we believe Congress should make up for lost time. Our rationale was spelled out in the 1/2/12 entry (“Happy 2012, and why it’s time to focus on taxes”). The three arguments (timeliness, relevance, politics) still apply.
But House Republicans do not appear to be working on a tax overhaul proposal. They are reportedly planning to lie low, hope for election gains, and push for tax changes to their liking in December. Republicans will fight hard to make Bush tax cuts permanent, Donald Lambro, Townhall.com, 2/22/12. http://bit.ly/zrxm3l
There may have been no alternative for Republicans in 2010, when Democrats controlled the White House and both houses of Congress, but such a strategy seems dubious now.
•From a policy standpoint, piecemeal tinkering cannot substitute for the comprehensive overhaul needed to get the tax system back on track.
•Politically speaking, Congressional Republicans are feeding into the president’s claim that they champion the interests of the well to do over those of everyone else.
While Congress has been doing nothing, the president has offered a slew of ideas for tax legislation. Indeed, his budget proposal (page 39) endorses making “our tax code simpler, fairer, and more efficient.”
Hmm, is this a bit like SAFE’s thinking? Simple Tax Proposal, November 2010.
What is the purpose of the tax system? We take it to be collecting revenue in a manner that is simple, efficient, and perceived as fair – not achieving social goals or influencing economic decisions.
http://www.s-a-f-e.org/the_simple_tax.htm
Absolutely not, because the president’s prime objectives seem to be increasing tax revenue (at least on paper) and furthering his political agenda. Thus, according to page 37 of the budget proposal:
. . . the president is calling on the Congress to undertake comprehensive tax reform to cut rates, cut inefficient tax breaks, cut the deficit, and increase jobs and growth in the United States—while observing the “Buffett Rule” that people making over $1 million should not pay lower taxes than the middle class.
•Cut the deficit: Taxes would be cut for some individuals and businesses, increasing the deficit by $352B over 10 years. Others (high earners and big businesses) would pay more, however, resulting in a net revenue pickup of $1.5 trillion. (page 206)
•Cut inefficient tax breaks: The value of itemized deductions and other tax preferences would be reduced to 28% for families with incomes over $250,000 and “a number of tax preferences available for fossil fuels” would be repealed. (page 38)
• Increase jobs and growth in the United States: Taxes on domestic operations would be lowered somewhat, but the key idea is new tax burdens on offshore operations. Eleven technical changes to the current international tax rules are proposed, which in the aggregate would supposedly raise $148B over the next 10 years. (pages 220-1)
http://www.whitehouse.gov/omb/budget/Overview (download PDF)
The plot thickened when the president unveiled a corporate tax plan on February 22, three hours before Republican presidential candidate Mitt Romney’s tax plan was rolled out. The basic thrust was to cut the top corporate tax rate from 35% to 28% (25% for manufacturing profits) and offset the revenue loss by eliminating tax preferences. Obama will cut taxes? Emily Miller, Washington Times, 2/22/12. http://bit.ly/yit6tT
Reactions ranged from tepid (“tiny step in the right direction,” Dan Mitchell, Cato, http://bit.ly/z5ukAy) to vitriolic (“house of horrors,” Steve Forbes, http://bit.ly/AhE75v).
We were intrigued by the approach suggested for equalizing the taxation of business income of corporations (income taxed at both the corporate and, when distributed, shareholder levels) and “pass through” entities (income taxed once), an issue that is addressed very differently in our SimpleTax proposal. Double taxation is not viewed as a problem, apparently, but only the inequality. Obama’s tax reform proposal – are small and medium businesses on the menu? Dean Zerbe, Forbes, 2/22/12,
#President’s plan: Tax Reform Proposal released today is laying down the tracks for potentially levying a new corporate tax on all pass-thru businesses that have greater than $10 million in receipts. This will be a huge tax increase for tens of thousands of successful small and medium businesses employing millions of Americans. The billions of dollars that will be raised from this new tax on small and medium businesses will be used to . . . wait for it . . . lower taxes for the Fortune 500.
#SAFE plan: 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.
To complete the picture, the president’s tax proposals would reverse the reduction in double taxation that was built into the Bush tax cuts by sharply hiking the top tax rates on dividends (and also capital gains).
Mr. Obama is proposing to raise the dividend tax rate to the higher personal income tax rate of 39.6% that will kick in next year. Add in the planned phase-out of deductions and exemptions, and the rate hits 41%. Then add the 3.8% investment tax surcharge in ObamaCare, and the new dividend tax rate in 2013 would be 44.8%—nearly three times today's 15% rate.
Other investors would be adversely affected too, given the predictable effects on dividend payouts, and the proposed rate increases would not even necessarily increase tax revenues. Obama’s dividend assault, Wall Street Journal, 2/23/12.
#Historical experience indicates that corporate dividend payouts are highly sensitive to the dividend tax. Dividends fell out of favor in the 1990s when the dividend tax rate was roughly twice the rate of capital gains. When the rate fell to 15% on January 1, 2003, dividends reported on tax returns nearly doubled to $196 billion from $103 billion the year before the tax cut. By 2006 dividend income had grown to nearly $337 billion, more than three times the pre-tax cut level.
#The question is how this helps anyone. According to the Investment Company Institute, about 51% of adults own stock directly or through mutual funds, which is more than 100 million shareholders. Tens of millions more own stocks through pension funds. Why would the White House endorse a policy that will make these households poorer?
In summary, the president’s tax plan would represent a big step in the wrong direction – there is no chance of it being taken seriously unless he wins the election. So we would love to see someone set the stage for a meaningful debate on this topic by proposing a serious and constructive alternative.
All four of the Republican presidential candidates have offered tax proposals at this point, but their respective plans differ substantially and some observers believe the assumed economic benefits of their proposed tax cuts are overstated. Study tests claims of Republican candidates’ debt plans, Jackie Calmes, New York Times, 2/23/12.
The finding [of the Committee for a Responsible Federal Budget] that all four candidates might be expected to add to projected annual deficits reflects the fact that all of them propose additional deep tax cuts for individuals and corporations on top of an extension of the Bush-era tax cuts, which otherwise expire Dec. 31. They also would end estate taxes. And the tax cuts in most scenarios exceed the deep spending cuts each Republican proposes.
Realistically, we see no reason to expect any of the candidates to come up with a detailed and credible tax overhaul plan in coming months given all the demands on their time. So if such a plan is to come into being, someone else must do the heavy lifting.
Hmm, what about the House Ways and Means Committee? This group should have the background, the staff and the expertise for this job, and they seem to have a lot less on their plates than the presidential candidates do.
Here would be the basic steps: (1) review the various tax plans that have been proposed (we would be glad to testify about the SimpleTax); (2) agree on a plan (by majority vote); (3) secure House approval (by majority vote); and (4) transmit the Comprehensive Tax Simplification and Reform Bill of 2012 to the Senate for action by September 1.
Not that we envision the Senate approving such a bill, no matter how brilliantly designed, but – just like the House budget resolution that is understood to be in the works – it would help get the American public engaged in determining the path forward on some crucial issues that have been deferred far too long.
If not now, when? If not the members of the present Congress, who?
2/20/12 – Budget lands with a thud
The president’s budget proposal for fiscal year 2013, including an updated projection for the years through 2022, was delivered to Congress a week ago. Check out the picture of the staff assistant unpacking cartons of the blue cover, 4-volume tome (full disclosure: we did not read every word). Obama $3.8 triln. Budget taxes rich, adds spending, Brian Hughes, Washington Examiner, 2/14/12. http://bit.ly/zvLbyV
Republicans and others lost no time in proclaiming the budget would not solve the fiscal problem. Romney, Ryan, Rubio rip Obama’s new budget, Newsmax.com, 2/13/12.
•Presidential candidate Mitt Romney called the budget an “insult” to American taxpayers because it would not “take any meaningful steps towards solving our entitlement crisis.”
•Rep. Paul Ryan (WI) indicated that an alternative proposal would be offered. "We feel we owe the country a solution, a plan, to lift the burden of debt to get us back to prosperity, a fiscal policy to grow the economy and get our debt under control."
•Senator Marco Rubio (FL) said the president’s proposal was merely a campaign document. “In no way does he intend for it to be passed or [to] live under it.”
Not content to label the president’s budget as “dead on arrival,” talk show host Rush Limbaugh wondered “why they bothered to print this thing.” Rush: Obama’s budget is “deader than dead on arrival,” Amy Woods, 2/13/12. http://bit.ly/xorMg7
OK, enough of this, the proposal is on the table and it deserves thoughtful consideration – followed, if the verdict is negative, by a decent burial.
http://www.whitehouse.gov/omb/budget/Overview (download PDF)
PRIORITIES: In substance, the president’s introductory statement tracks his State of the Union message. SOTU finesses fiscal responsibility, 1/30/12.
Income redistribution in favor of the “middle class” and those “fighting to get there” is identified as “the defining issue of our time.” Why? Well, “countries with less inequality tend to have stronger and steadier economic growth over the long run.”
The president calls deficit reduction “a necessary step to rebuilding a strong foundation so our economy can grow and create good jobs,” but not “an end in itself.”
If one believes income redistribution is job one, it arguably makes sense to propose that “the rich” pay higher taxes, more money be “invested” in social programs & public works, and the defense budget be slashed to the bone. Throw in a few cost reduction proposals as window dressing, and that’s the budget.
But should income redistribution (equality of outcome) really be the government’s top goal, versus, say, fostering a vibrant economy (equality of opportunity), preserving personal liberty, and keeping the world safe for democracy? Many observers would beg to differ! Obama’s great redistribution; remaking our economy through government is a road to ruin, Representative Thaddeus McCotter (R-MI), Washington Times, 9/9/10.
In this age of globalization, we interact across the globe in seconds. The communications revolution’s expansion of individual freedom and self-government spurs the decentralization and democratization of once highly centralized and bureaucratized organizations. And it dooms big government. Thus, our task during this restructuring is to match the consumer-driven economy with a citizen-driven government.
NUMBERS: Although supposedly reflecting $4 trillion in deficit reduction (more on that later), the budget still projects continuing growth in spending and substantial deficits over the next decade. Here are some illustrative data:
|
Fiscal years, $B |
2012 est. |
2013 |
2017 |
2022 |
|
Receipts |
2,469 |
2,902 |
3,919 |
5,115 |
|
Outlays |
3,796 |
3,803 |
4,532 |
5,820 |
|
Surplus (Deficit) |
(1,327) |
(901) |
(612) |
(704) |
|
(Deficit) as % of GDP |
(8.5)% |
(5.5)% |
(3.0)% |
(2.8)% |
This dismal outlook is attributed to the fiscal gap inherited by the president rather than to any mistakes that may have been made on his watch. “When I took office 3 years ago, my Administration was left an annual deficit of $1.3 trillion, or 9.2 percent of GDP, and a projected 10-year deficit of more than $8 trillion.”
The deficits projected in 2009 were inflated by the president’s proposals for increased government spending, however, as well as by slumping tax revenues due to the recession. Compare the projections from the 2008 & 2009 budgets:
|
Fiscal years, $B |
Budget submitted in 2008 (Bush) |
Budget submitted in 2009 (Obama) |
||||
|
Receipts |
Outlays |
Surplus (deficit) |
Receipts |
Outlays |
Surplus (deficit) |
|
|
2009* |
2,700 |
3,107 |
(407) |
2,186 |
3,938 |
(1,752) |
|
2010 |
2,931 |
3,091 |
(160) |
2,381 |
3,552 |
(1,171) |
|
2011 |
3,076 |
3,171 |
(95) |
2,713 |
3,625 |
(912) |
|
2012 |
3,270 |
3,222 |
48 |
3,081 |
3,662 |
(581) |
|
2013 |
3,428 |
3,399 |
29 |
3,323 |
3,856 |
(533) |
*First budgeted year in 2008; estimate for current fiscal year (partially completed) in 2009.
http://www.gpoaccess.gov/usbudget/browse.html (download PDFs for past year budgets)
This is not to say the budget submitted in 2008 was necessarily realistic (the ensuing recession was surely not anticipated), but it is unrealistic to claim that a series of trillion dollar deficits was inevitable. The president has had a lot to do with the deficit spending since he took office, and he cannot properly duck responsibility.
Remember that all budgets are informed guesses beyond the first year or two (the switch from five-year to ten-year projection periods in 2009 accomplished very little), which are often colored by wishful thinking and/or the dictates of political expediency. As a case in point, consider how the outlook for fiscal year 2013 has deteriorated over time.
|
|
Fiscal year 2013 as projected in |
||||
|
$B |
2008 |
2009 |
2010 |
2011 |
2012 |
|
Receipts |
3,428 |
3,323 |
3,188 |
3,003 |
2,902 |
|
Outlays |
3,399 |
3,856 |
3,915 |
3,771 |
3,803 |
|
Surplus (deficit) |
29 |
(533) |
(727) |
(768) |
(901) |
|
% of GDP |
0.2% |
(3.0)% |
(4.2)% |
(4.6)% |
(5.5)% |
One could easily think of reasons why there might be similar deterioration in the fiscal results now being projected for 2017 and beyond.
Thus, the inflation rate (as measured by the Consumer Price Index) might exceed the 2.1% per year average assumed for 2013-2022. (It was 3.2% in 2011.) If so, one would expect the government’s interest expense to exceed expectations (net interest expense is currently projected to grow from $225B in 2012 to $850B in 2022; this assumes the expected rise in borrowing rates for the US government will top out at about 5%).
Or the nominal GDP growth rate assumption of 5.3% (3.6% real) by 2014 might be undershot – particularly if proposed tax increases had adverse effects on economic growth – leading to lower revenues and higher outlays than are projected
The budget is said to be fiscally sustainable because deficits are projected to fall “below 3 percent of GDP by the end of the decade,” but this would leave no margin for error if things went less favorably than assumed – as they well might. Obama has no Plan B; budget fantasy won’t help us cope with coming disaster, Richard Rahn, Washington Times, 2/13/12.
Think about the following scenario. A war erupts involving Iran, most Iranian oil shipments cease, and shipping in the Persian Gulf is disrupted. As a result, oil prices soar, driving up the cost of almost everything. With the spike in inflation, bondholders refuse to lend at close-to-zero interest rates. The cost of financing government debt then also soars, and the government is forced either to reduce spending greatly or to print dollars (greatly reducing their value and making everyone poorer).
Based solely on its projected results, therefore, we would assess this proposal as a nonstarter.
DEFICIT REDUCTION: The president takes credit for $4 trillion in deficit reduction, including “tight discretionary spending caps that I signed into law in the Budget Control Act of 2011 [that] will generate approximately $1 trillion in deficit reduction over the next decade.” Proposed initiatives would reduce this figure to about $3 trillion on a net basis – all from tax increases on the upper crust & businesses plus defense cuts.
•Reduction in discretionary spending of about $1T, all from defense spending - Roughly half the spending cap cuts were imposed on the defense side, and in compliance the president has proposed a new strategy that would save $487B over the next 10 years. We believe defense cuts of this magnitude are potentially acceptable, but would prefer cuts in other areas of the budget that have so far not been seriously considered. Cut defense spending with care, 1/23/12.
For an instructive discussion of the risks of slashing US military capabilities, see The World That America Made, Robert Kagan, Alfred A. Knopf (2012).
History shows that any world order depends on the existence and if necessary use of military power; the leading nations will not voluntarily subordinate their ambitions to someone else’s notion of the greater good. Likely results of US decline would be less democracy in the world, more barriers to trade, and far more risk of major wars. Ergo, the costs involved could far outweigh the potential benefits of slicing defense spending by, say, $100 billion a year.
http://www.s-a-f-e.org/free_world.htm
The budget projection also reflects a 10-year, $848B reduction in “overseas contingency operations” due to withdrawal of US forces from Iraq and drawdown/mission change in Afghanistan. This would leave a $450B multi-year OCO cap in place, presumably to cover limited operations in Afghanistan and elsewhere.
A portion ($231B) of the OCO reduction would be reserved for surface transportation (highways, bridges, high speed rail, etc.) expenditures. Of this amount, $125B is utilized in the budget projection and should be counted as an offset. It is unclear to us what would happen to the remaining $106B of the reserve.
As for nondefense cuts in discretionary spending, various possibilities are discussed but none seem to be included in the budget projection. To the contrary, “short-term measures for jobs growth” would boost nondefense spending by $176B (principally in 2013).
Overall, it is said, the spending caps plus OCO drawdown “would bring discretionary spending to its lowest level as a share of the economy since Dwight D. Eisenhower sat in the Oval Office.” Given that government spending has grown faster than the GDP, we wonder whether this reflects the conversion of discretionary programs into mandatory programs.
In recognition of the foregoing, the spending cuts provided in the Budget Control Act (programmatic effects $966B, debt service $229B) would be lifted.
•Net tax increases of $1.5T - Expiration of high income tax cuts would supposedly raise $1.4T over 10 years. A long list of other changes, designed to raise taxes for some taxpayers (principally wealthy people and businesses) by $482B and cut taxes (or increase unpaid refunds) for others by $352B, would net $0.1T more. Suffice it to say for now that the president’s proposals conflict with our vision of making the tax system simpler, fairer, and more economically neutral. We envision a future entry on this topic.
•Mandatory program savings of $0.5T – A long list of technical changes would reduce Medicare, Medicaid, etc. outlays by some $360B billion over 10 years, representing about 3% of the budgeted outlays for these programs. The savings would include: $155B, “align Medicare drug payment policies with Medicaid policies for low-income beneficiaries,” i.e., authorize price controls; $57B, adjust payment updates for certain post-acute care providers; $36B, reduce Medicare coverage of patients bad debts; $27B, increase income-related Medicare premiums starting in 2017; and $51B, seven enumerated changes to Medicaid.
Changes in other areas, from trimming agricultural subsidies to new efforts to extract more revenue from mineral development proposals, would supposedly save $217B over the next decade.
RHETORIC: To recap the discussion thus far, we have questioned the priorities reflected in the budget, concluded that the projected results are irresponsible, and found the deficit reduction claims to be overstated and deceptive. Is there anything else about the budget that should be taken into account?
One point that comes to mind is how this document repeatedly bashes “congressional Republicans” while lauding the president’s tireless efforts to reboot the economy and narrow the fiscal gap. For example (page 10):
. . . the President pursued significant, balanced deficit reduction throughout calendar year 2011: first, in his 2012 Budget; then, in the Framework for Shared Prosperity and Shared Fiscal Responsibility released in April that built over extending the debt ceiling during the summer; and finally in the President’s Plan for Economic Growth and Deficit Reduction that was presented to the Joint Select Committee on Deficit Reduction in September. It also is why the President proposed the American Jobs Act (AJA) last September, a plan to put more people back to work, put more money in the pockets of working Americans, and do so without adding a dime to the deficit. This combination of tax cuts, infrastructure investments, and aid to those seeking work would give the economy a needed boost through this difficult time.
Unfortunately, at each step, partisan divides and unwillingness by Republicans in Congress to ask the wealthiest among us to pay their fair share through any revenue increases prevented a comprehensive deficit reduction agreement or measures in the AJA to boost demand from being enacted. Indeed, this lack of real progress on both the AJA and deficit reduction actually became a drag in and of itself on an economy already struggling to recover from a severe recession and battling significant headwinds from events around the globe.
That is not our perception of what was happening during this period – from the president’s budget for fiscal year 2012 (The budget: a “lowball” offer, 2/21/11) through his American Jobs Act proposal (A tempting offer: spend now, pay later, 9/12/11).
As for the Republicans, we have been more inclined to fault them for making deals than blocking progress. Thus, they went along with an extension of the payroll tax cut despite its lack of economic merit. Bin the payroll tax cut, 12/5/11.
And for all the talk about finding ways to “pay for” the payroll tax cut extension, even this did not happen – once again showing that “bipartisan” deals often err on the side of fiscal irresponsibility. Deficit is loser in payroll tax deal, Stephen Dinan, Washington Times, 2/17/12.
It’s just the latest time that a bipartisan deal has given each party some of what it wanted, but at the expense of future taxpayers who will eventually have to pick up the tab for the higher debt.
Most people realize this “kick the can down the road” game cannot continue indefinitely, but the day of reckoning may be closer than they think. Did you know, for example, that the recently negotiated debt ceiling increases (totaling $2.1T and taking the debt limit to $16.4T) may be reached by mid-October? Don’t worry, though, because Treasury Secretary Tim Geithner should have enough tools in his bag of tricks to avoid another debt limit request before the elections. US to hit debt limit before Election Day, Conn Carroll, Washington Examiner, 2/17/12. http://bit.ly/yRnyi0
Back to the one-sided narrative in the budget proposal, we would suggest that this type of rhetoric promotes the very partisanship that the president claims to deplore. In addition, some observers perceive a veiled threat.
What did Chief of Staff Jacob Lew mean by saying on a Sunday TV show, for example, that “if we were to put in austerity measures right now, it would take the economy in the wrong way?” One possibility: watch out, or the “Occupy” crowd may start acting like the rioters mobilizing to protest austerity measures in Greece. Obama’s occupy austerity budget, John Ransom, Townhall.com, 2/15/12.
Class warfare might no longer simply be a political metaphor for taxing the rich. Instead it might be a budget tactic where real violence is employed to give politicians cover to do what they normally would not do, like passing the suicidal 2012 Obama budget.
Lew also raised eyebrows by attributing the Senate’s failure to pass a budget since 2009 to the requirement for at least 60 votes to overcome presumed Republican opposition. As he should have known, a 51-vote majority is all it takes under Senate rules to pass a budget. Obama’s new budget will put America in the poor house, Washington Examiner, 2/14/12. http://bit.ly/yrHE9T\
CONCLUSION: May the president’s budget rest in peace! Let’s hope Congress can come up with something better.
2/13/12 – Plumbing the depth of the fiscal hole
The president’s budget proposal for fiscal year 2013 et seq. is expected today. Rather than repeating the rumors (aka leaks) of what will be in it, e.g., a $1.3T deficit for fiscal year 2013, we will await the gory details and present an analysis next week.
In the meantime, let’s consider a fundamental question: how bad is it really? Our primary metric will be the aggregate present value of the government’s explicit debt and unfunded liabilities, which was also invoked by SAFE founder Bill Morris in his latest letter to the editor. http://www.s-a-f-e.org/letters_2012.htm#February_11,_2012
“Figures don’t lie,” as the saying goes, so one might think fiscal experts would all come to basically the same answer. The total liabilities estimates diverge considerably, however, ranging from about $60T (4X current GDP) to $120T (8X current GDP).
Hmm, that’s quite a difference, wonder what is driving the numbers. And by the way, what in the world are we going to do about this huge burden?
Data: Publicly held federal debt stands at about $10.6T. Add government obligations held by trust funds for Social Security, etc. and the total debt is $15.4T. http://www.treasurydirect.gov/NP/BPDLogin?application=np
The obligations held by trust funds should arguably be ignored; they only exist on paper, and the government cannot very well owe money to itself. But unfunded liabilities (projected payout vs. dedicated revenues) for entitlement programs (notably Social Security & Medicare) dwarf the trust fund liabilities, and they are clearly real.
True, Congress could amend Social Security, etc. to reduce future payments. But millions of plan beneficiaries are expecting to receive the projected benefits, and there could be serious political consequences if the cuts were viewed as unnecessary or unfair.
When unfunded liabilities are factored in, the total liabilities estimates diverge as shown by the following examples (dollars in trillions):
#Comeback America Initiative (David Walker), FY 2010, Fiscal Facts Presentation – Publicly held debt $9.1, government employee & military retirement plan liabilities $5.7, other explicit liabilities $3.7, future Social Security benefits $8.0, future Medicare benefits $35.1 (actuary’s alternate scenario, trustee’s estimate $22.8), total “financial hole” $61.6 ($49.3 with trustee’s estimate). http://tcaii.org/ (download PDF)
The $61.6T figure has been reported elsewhere using various terminology. Thus, one observer called it “the total of financial promises not paid for.” US funding for future promises lags by trillions, Dennis Cauchon, USA Today, 6/13/11. http://usat.ly/lzwPnX
#Cato Institute (Michael Tanner), Bankrupt: Entitlements and the federal budget, 3/28/11. National Debt of $14.1 as of 1/31/11, Social Security unfunded liability of $16.1, and Medicare unfunded liability of up to $89.3 bringing total debt to roundly $120. http://www.cato.org/federal-budget-policy (download PDF).
Both the CAI & Cato data are based on government actuarial projections. However, Cato apparently uses the “infinite horizon” projections instead of 75-year projections, which produces larger numbers. Annual Report of Social Security Trustees, 5/13/11, p. 74.
Last year’s report projected the infinite horizon unfunded obligation at $16.1 trillion in present value.
http://www.ssa.gov/oact/TR/2011/ (download PDF)
In addition, the unfunded liability estimates for Medicare are complicated by conflicting opinions as to whether the GovCare legislation will or will not make a big dent in future Medicare outlays. Tanner comments as follows on this point:
In 2009, Medicare’s trustees estimated that the program’s unfunded liabilities were $89.3 trillion. In the wake of the healthcare bill, though, these projections declined dramatically to just $28.7 trillion. But there is reason to be skeptical of that revised figure. The Centers for Medicare and Medicaid Services (CMS), for example, believes that the spending reductions projected under healthcare reform are unrealistic.
Cato’s top and bottom figures were cited in a recent book as establishing a $60-120T range for “the actual total debt of the US government.” The People’s Money, Scott Rasmussen, Simon & Schuster (2012). http://www.s-a-f-e.org/peoples_money.htm
In a January 2012 video identified as the Libertarian State of the Union Address, Tanner refers to $120T as the “actual indebtedness that this country faces.” Based on this figure, he characterizes the US debt load as the greatest proportionally of any country including Greece. http://bit.ly/xBvfDC (10 minutes)
Implications: Which total liabilities figure is “right,” $60T or $120T? Arguments can be made either way, but we doubt it makes much difference. Never mind the “infinite horizon,” the government will become insolvent long before the 75-year mark if government spending and debt continues to grow faster than the economy.
As for whether the enactment of GovCare improved the outlook for Medicare, Treasury Secretary Tim Geithner says “the Affordable Care Act reforms are projected to reduce the cost of providing healthcare for seniors substantially over the next two decades.” Letter accompanying 2011 Financial Report of the United States Government. http://www.fms.treas.gov/fr/index.html (download PDF).
The comments offered in the 2011 Medicare trustee’s report are more guarded, however, because, among other things, it is dubious that legislated cuts in Medicare reimbursement rates can be sustained in practice.
We recommend that the projections be interpreted as an illustration of the very favorable financial outcomes that would be experienced if the physician fee reductions are implemented and if the productivity adjustments and other cost-reducing measures in the Affordable Care Act can be sustained in the long range—and we caution readers to recognize the great uncertainty associated with achieving this outcome.
http://bit.ly/zKU12q (download PDF)
Even if the GovCare legislation did improve the outlook for the Medicare trust fund, moreover, it would also boost enrollment in Medicaid and in the newly created healthcare insurance subsidies. These programs do not come with trust funds so there are no unfunded liabilities to worry about, but they will contribute to future budgetary pressures nevertheless.
As we have said before, there is only one way a government-run healthcare system could provide greater access to subsidized medical services for millions of people while reducing costs for everyone who has healthcare insurance already. Such a result would require de facto rationing of healthcare services by government bureaucrats and/or insurance companies. Promises of an all gain, no pain solution were and remain highly dubious. Healthcare plan will not pay for itself, 3/23/09.
To sum up: (a) the alleged savings from the president’s healthcare plan have not been explained (let alone quantified), and (b) the costs of his plan would be covered primarily by tax increases. It is far from clear the tax increases would be borne only by “the rich.” Claiming that this plan would “pay for itself” seems absurd, and we decline to buy into the deception.
Action: One reaction to the actual and projected fiscal hole into which the government has gotten this country is that the time has come to hike taxes and start paying for the promises that have been made. But the total liabilities in question amount to at least $60 trillion, and possibly much more, so the tax increases required would be huge.
We don’t think huge tax increases will be imposed, remember the Tea Party slogan of “taxed enough already,” nor should they be as the effects on the US economy would be devastating. A far better idea would be to face reality and start eliminating wasteful government spending (no shortage of targets) and restructuring entitlement programs so they will be affordable after all.
Our proposals along these lines have been spelled out; there is no need to repeat them. See the Spending, Social Security, Healthcare, and Education pages of this Website.
The real question is not what needs to be done, but how to overcome the resistance to doing it. Currently, the leaders of both political parties seem reluctant to step up to the plate. Republicans and Democrats equally to blame for standing of Congress, Washington Examiner, 1/19/12.
#Democrats are focused exclusively on getting themselves and President Obama re-elected in November. Their every move between now and election day will be calculated to advance their selfish political interests, not the public interest of the country.
#Despite their historic Tea Party-inspired victory in the 2010 congressional election, too many Hill Republicans still suffer from the disease that led to their undoing in 2006. They talk, endlessly, about cutting federal spending and limiting government, but they don't walk the walk when they have the power.
If the Republicans won both the White House and the Senate in November, which is far from a sure thing, they would still find it difficult to tackle the fiscal problem. The temptation to postpone the day of reckoning would be strong, especially if no groundwork had been laid for the tax overhaul that is so sorely needed. Happy 2012, and why it’s time to focus on taxes, 1/2/12.
Progress may prove even more difficult if the elections result in a continuation of divided government. CBO solution to budget crisis – everyone bend over! Bruce Krastiny, Wall Street All-Stars, 2/7/12.
As of today, there is an economic firestorm that is programmed to hit on January 1, 2013. It’s the kitchen sink - the Bush tax cuts (all of them), the payroll tax cuts, the AMT patch, the ending of extended unemployment benefits, the Sequestered Amounts (11’ budget deal), the debt ceiling, the need to pass a continuing resolution to fund the government and a bunch of other landmines. *** If there is a hostile mood in D.C. (there will be) this list of “must fix” issue[s] will be impossible to tackle following the election.
Congressional approval ratings have sunk to an abysmal level, e.g., 10% approval, 86% disapproval, 4% no opinion according to Gallup in early February. http://bit.ly/xqpYvX
Some observers conclude from these ratings and other evidence that the only answer is for the two parties to put aside their differences and work together. What’s wrong with Washington? [reporting perspectives of two leaders of the “no labels” movement], Jonathan Capehart, Washington Post, 10/17/11.
# Former Rep. Mickey Edwards (R-OK): We want decisions made on the basis of what’s good for the country not what [party] label you wear on your forehead *** Why do we allow these two private clubs to tell us who we are allowed to choose between when we go to the polls? We are not going to solve any of these problems until we break the ability of our political clubs to dictate to us in our political governance.
# David Walker, president and CEO of Comeback America Initiative: Our politics have been taken over by the wingnuts — on both ends. And they are dominated by career politicians who may or may not have had a real job in their life but once they get elected they don’t have one and they want to keep it for life. And so the fact is that we’re going to need political reforms, too.
Bear in mind, however, that purported moderation can mask unproductive gamesmanship. The limited government of half the agenda and double the price, John Ransom, Townhall.com, 11/3/11.
. . . the Washington dodge: You don’t really have to solve problems in DC or state capitals - actually you can even try to make them worse - you just have to wrap “solutions” into a complicated system. Now your job is to convince everyone that the system doesn’t work because it’s someone else’s fault.
And if a big change in direction is needed, i.e., maintaining the free enterprise system rather than transforming into a European-style welfare state with sky-high taxes and a stagnant economy, then compromising between the current Democrat and Republican policies cannot and will not get us there. America’s time for decision and definition, Star Parker, Townhall.com, 11/14/11.
Some would have us believe that compromise is what has always defined our political process. But compromise works only between parties that are essentially on the same page to begin with. When what we’re dealing with are fundamentally, irreconcilably different views of the world, resolution is what is needed, not compromise. This is a time for decision and definition. Not a time for splitting the baby.
As the discussion shifts to specifics, overall principles tend to get lost in the shuffle. Witness the controversy concerning a decision to require that “free” contraceptives and birth control services be provided for women under government-approved healthcare insurance (HCI) plans.
Based on objections of Catholic-affiliated institutions, this requirement was assailed as violating the constitutionally guaranteed freedom of religion. Boehner vows to stop Obama contraceptive rule, Newsmax, 2/8/12. http://bit.ly/xbv1St
Recognizing the issue would have political legs, the president announced a “compromise” rule that would require insurance companies to pay for the contraceptives and services out of their own pockets and supposedly make up the difference from the resulting healthcare savings. Under fire, Obama adjusts his birth control policy, AP, Washington Examiner, 2/10/12. http://bit.ly/xaTvq4
Critics lambasted the “compromise rule as a sham. See, for example, this press release of the National Center for Public Policy Research, 2/10/12. http://bit.ly/x8wtU3
But the revised rule probably muddied the waters sufficiently to get the religious freedom claim off the front page – which is what the president wanted to do. Meanwhile, not enough people seem to be saying the government has no business (1) requiring employers to provide HCI or pay a fine for not doing so (the constitutionality of such a mandate has been challenged, and is expected to be decided by the Supreme Court later this year); (2) dictating the particulars about what an acceptable HCI policy should provide; and (3) in effect treating insurance companies as vassals, to be ordered around as suits its convenience.
We were disappointed by the tenor of Team Boehner’s immediate response to the president’s “compromise,” which was that the revised rule had been issued without sufficient consultation with the Catholic Church. Speaker’s office rightfully not satisfied, Kathryn Jean Lopez, NationalReview.com, 2/10/12. http://bit.ly/zKxKfa
It is a mistake to allow concerns about “sensitivity” to crowd out the basic principle that the government should not be allowed to take over the healthcare industry – with the “free” birth control requirement representing but one of many examples of the loss of liberty we should all expect under the new regime.
Message to both parties: It is time to start telling the truth. The government’s spending spree must stop, entitlement programs must be restructured, and the illusion that it is possible to tax our way out of this situation must be abandoned.
The first party to embrace these points and offer credible plans for implementing them would deserve to sweep the elections.
2/6/12 – Spreading the word and achieving impact
Following last week’s entry, SAFE sent a one-page call for action to every member of Congress. http://www.s-a-f-e.org/contacting_legislators_2012.htm#020112
Our letter was timely, and we would like to think it makes sense. Some 50 reviewers got a shot at the draft before it was sent, and the responses were supportive.
•SAFE members – great letter – I am fully on board – looks good – looks fine – looks great – let’er rip – go ahead – thanks – looks “right on”
•Conservative Caucus – a grand slam – excellent letter
•Citizens Against Government Waste –hits the nail on the head
•National Taxpayer’s Union - We don't get involved in presidential appointments generally, but all the other points are right on target with what we've advocated. I think the tax reform message is especially key. We could obviate the need to extend the Bush tax cuts by passing a good revenue-neutral tax reform that lowers rates and broadens the base before the end of the year.
But here’s the big question: Will SAFE’s letter be read by enough people to have an impact, either in isolation or in combination with other communications, on what Congress does this year?
Realistically, the members of Congress are a tough sell, our mode of delivery was imperfect, and many conflicting messages are in play.
In short, we are fighting an uphill battle. A positive outcome would be tough under any circumstances, and without sustained follow-up it looks to be impossible. So here’s what we propose to do . . .
Tough sell – Pollster Scott Rasmussen perceives a growing divide between the thinking of Americans in general and members of what he calls the “Political Class.” The general public feels they are overtaxed already and want something done about ever-rising government expenditures, according to his surveys, while politicians want to raise taxes and keep growing the government.
In a just published book, Rasmussen predicts that voters will save the day by lowering the boom on the politicians. The People’s Money, Scott Rasmussen, Simon & Schuster (2012)
Voters are the solution, not the problem. There is a way out of the fiscal crisis: their way. It’s a path that the Political Class won’t want to take, but voters shouldn’t be too concerned with what the politicians want. If every member of Congress gave up in disgust and quit tomorrow, it wouldn’t be hard to fill the members’ shoes.
http://www.s-a-f-e.org/peoples_money.htm
Is Rasmussen right? We are not so sure this story will have a happy ending, as noted in our review of The People’s Money, but his description of the Political Class mindset is spot on.
Politicians have for decades placed their bet on the belief that they could someday convince voters to support tax increases big enough to support their view of the world *** [they] always lag behind the public *** [they] are more likely to hear complaints about change from donors and lobbyists than they are to hear from entrepreneurs about the benefits of change *** the Political Class is now isolated in a fantasy world where it thinks the credible policy options run from defending the status quo to increasing the role of government and government spending.
For all the discussion in Washington lately about the dangers of massive deficit spending and the rapidly growing National Debt, there has been remarkably little accomplished in terms of actually cutting spending – with the sole exception of proposals to slash spending for the US military. Cut defense spending with care, 1/23/12.
As the latest case in point, consider SAFE’s suggestion (item 3 in our letter) that Congress should follow its own rules and approve a budget for fiscal year 2013.
Approve a budget for fiscal year 2013, hopefully cutting spending in the process. We cannot imagine why Congress has stopped complying with its own budget rules and seems to have so little concern about running up the National Debt.
To us, this seems like common sense, but Senate Majority Leader Harry Reid evidently thinks otherwise. Reid says he won’t bring budget to floor this year, Philip Klein, Washington Examiner, 2/3/12.
His argument is that last summer's debt ceiling deal already set the spending levels for the year, so there's no need to pass a resolution that is non-binding anyway. Money is typically spent during the year through the appropriations process.
Mode of delivery – It’s easy to send e-mails to the members of Congress and cost-free as well, but the messages may or may not get read – especially if sent from outside the state or district of the member in question. As an illustration of Congressional reactions to unsolicited communications, consider these acknowledgments that we received:
We receive thousands of e-mails from all over the country every day and cannot read all of them. We do read all e-mails from the San Fernando Valley or those with business directly affecting our office. *** If you do not have an address in the San Fernando Valley, but have business that affects the people of the 27th District, please send a postal letter [which can take weeks due to screening procedures instituted after 9/11] or call my office. – Rep. Brad Sherman (CA, 27th district).
This mailbox is public and monitored daily by my staff. In an effort to better serve you please submit all comments and casework online through my website [to do this for all 535 members of Congress would take a lot of time and effort; also, member Websites are typically programmed not to accept e-mails from non-constituents] – Rep. Dale Kildee (MI, 5th district)
I receive over a thousand phone calls, letters and e-mails every day. While I make it a point to read every contact that comes through my office, I cannot always respond to each one, but I certainly will do my best. Rep. Pete King (NY, 3rd district)
Thank you for taking the time to get in touch and share your views with me. *** Unfortunately, due to the large amount of correspondence, I can only respond to constituents. Rep. Jan Schakowsky (IL, 9th district)
Bottom line, few of our e-mails actually reached the intended recipients. The best that can be hoped for is that they caught the attention of some Congressional staffers.
Other messages – Members of Congress receive a high volume of messages, no doubt, and the predominant theme is probably not fiscal responsibility. Even if Scott Rasmussen is right and a majority of Americans want government spending cut, the advocates of this, that and the other program are vocal and persistent.
Consider the experience of SAFE directors Jerry Martin & Bill Whipple at a listening session organized by Senator Tom Carper on the then-proposed GovCare legislation. SAFE Newsletter, Fall 2009.
Two representatives of the Delaware Tea Party provided welcome support, but most of the invited guests [about 15] seemed to view the desirability of the president’s healthcare plan as a given (and some of them urged additional benefits).
http://www.s-a-f-e.org/nwsltr/nwsltr55.htm#DIRECTORS
There is no way we can outdo the other side in quantity, nor are we offering campaign contributions (other than on a personal basis once in a while). Our only hope is to submit messages that are more coherent and convincing than the requests from our intellectual opponents for more, more, more.
Perhaps SAFE’s Feb. 1 letter met that test, and with luck some readers realized it. But even if this is so, one e-mailed letter from a grassroots advocacy group cannot be expected to have an impact without lots of reinforcement.
Follow-up – Whatever one’s message, repetition can help to sell it. We need to find ways to keep reminding people of the action points SAFE has proposed for 2012.
Shortly after sending the letter to the members of Congress, we posted it on the Website. That will make it easy for SAFE members and others to access the letter, and hopefully bring it to the attention of contacts in their respective networks.
We sent a letter to the editor suggesting that even though it is an election year, Congress should get cracking on a budget and tax overhaul. http://bit.ly/xlxYJq
We will cover the letter to Congress in the next SAFE newsletter, and provide updates on the four action items in this blog as the year progresses.
We will send follow-up letters to Congress as developments warrant.
We will keep networking with contacts at like-minded groups in hopes that they will support our efforts or help to upgrade our ideas.
We would love to receive suggestions from readers as to how this campaign can and should be conducted.
The one legal thing we do not intend to do is give up!
1/30/12 – SOTU finesses fiscal responsibility
Did a White House speechwriter stumble across SAFE’s “to do” list for Congress (see our 1/16/12 entry) and decide to contradict every point in the State of the Union (SOTU) address? Probably not, but they might as well have, because the two messages are irreconcilable.
Having thoughtfully considered what the president had to say, we would urge Congress to get started on SAFE’s list – right away! Here are our proposals again, updated to reflect the SOTU remarks and other recent developments.
1. Honor a deal – Extending the temporary payroll tax reduction (two percentage point rate cut for employees) for the full year of 2012 will not really stimulate the economy, but the president et al. pushed this idea and the loyal opposition agreed to go along.
Expedited approval of the Keystone XL Pipeline was a hoped-for consolation prize, but the 2-month extension bill enacted before Christmas empowered the president to say “no” and he proceeded to do just that. Grumble though they may, Republicans cannot very well back out now.
The president took credit for favorable developments on the energy front in the SOTU address, although they had little to do with his policies, while neglecting to mention the pipeline decision. Transcript, 1/24/12. http://nyti.ms/yUjy75
A full-year extension of the payroll tax cut was treated as a fait accompli. The president even reported this prospective action – which will add some $120B to the deficit (any offsetting tax increases or spending cuts should be earmarked for deficit reduction) – under the heading of “[paying] down our debt and [investing] in our future.”
Right now, our most immediate priority is stopping a tax hike on 160 million working Americans while the recovery is still fragile. People cannot afford losing $40 out of each paycheck this year. There are plenty of ways to get this done. So let’s agree right here, right now: No side issues. No drama. Pass the payroll tax cut without delay. Let’s get it done.
The Republicans will have a few cards to play when the House/Senate panel to reconcile the conflicting House & Senate bills gets down to business. (There has been one session to date, basically a meet and greet session.) Perhaps their best bet for a partial win will be to prune unemployment benefits (which are also up for extension). Help the unemployed off the rolls; time to end 99-week unemployment subsidies, Emily Miller, Washington Times, 1/26/12. http://bit.ly/xwxL6t
2. Propose a Constitutional amendment – As previously discussed, we believe the president’s four “recess” appointments (Richard Cordray to head the newly established CFPB, three new members of the NLRB) were “reckless and inappropriate.” About those recess appointments, 1/9/12.
A legal challenge is expected, but all of the appointees will probably have left office before it is resolved. And we doubt that legislation to strip the appointees of power is going anywhere either.
One might think the president would have attempted to smooth things over in the SOTU address, but instead he pointedly introduced Richard Cordray as the new “watchdog” for American consumers of financial services.
And if you’re a mortgage lender or a payday lender or a credit card company, the days of signing people up for products they can’t afford with confusing forms and deceptive practices — those days are over. Today, American consumers finally have a watchdog in Richard Cordray with one job: To look out for them
In addition, the president sought to shift the blame to Congress by proposing a change in Senate rules on the confirmation of all nominees, no matter how controversial.
Some of what’s broken has to do with the way Congress does its business these days. A simple majority is no longer enough to get anything -– even routine business –- passed through the Senate. Neither party has been blameless in these tactics. Now both parties should put an end to it. For starters, I ask the Senate to pass a simple rule that all judicial and public service nominations receive a simple up or down vote within 90 days.
To demonstrate disapproval for what was done and prevent similar abuses in the future, we would suggest amending the Constitution to eliminate the recess appointment provision (Article II, Section 2, Paragraph 3).
This is not a partisan proposal. Recess appointments may have been needed in the 18th Century, but with modern modes of transportation and communication they serve no useful purpose. Presidents of both parties have made recess appointments of nominees unlikely to win Senate approval. Legislators on both sides of the aisle should support the amendment as a means of maintaining respect for Congress as an institution.
A contact at Cato says a constitutional amendment is “certainly worth considering.” We would urge Congress to get the ball rolling.
3. Follow Congress’s budget rules – The Congressional Budget and Impoundment Control Act of 1974 requires Congress to adopt an annual budget resolution, but this was not done for either fiscal year 2011 (both houses were at fault) or 2012 (House developed a creditable budget proposal; the Senate buried it). It seems like a “no brainer” that something different should happen this year.
We would suggest that: (1) The president submit a proposed budget for fiscal year 2013 et seq. (a 10-year projection period is customary), which would hopefully be more responsible than his proposal last year; (2) Working away from this input, the House prepare a budget resolution as it did last year; and (3) The Senate either approve the House’s handiwork or propose an alternative so that differences of opinion can be hashed out in public. The Congressional budget resolution should be in place well before the start of fiscal year 2013 on October 1.
It was recently announced that the president’s budget proposal will be submitted on February 13, about ten days late. This delay may be due to a staff transition (Jack Lew will become chief of staff, vice outgoing Bill Daley; Jeff Zients will move up to budget director); there has been no indication, in the SOTU or otherwise, that the president is finally getting serious about deficit reduction.
Nothing was said in the SOTU about the dearth of Congressional budgets lately. What Obama won’t say tonight, Washington Examiner, 1/24/12.
[House Budget Chairman Paul] Ryan [of Wisconsin] and Sen. Jeff Sessions of Alabama, the top Republican on the Senate Budget Committee, challenged Obama on Monday to "hold his own party accountable for its dogged refusal" to produce a budget. Don't hold your breath, gentlemen.
Likewise, there was no mention of trillion dollar plus deficits, the $16 trillion and growing National Debt, or top-heavy entitlement programs. Obama’s proposals evasive and irresponsible, Rich Lowry, Fox News, 1/24/12.
You would never know we are accumulating debt at a $1.3 trillion annual clip. You would never know that healthcare costs are soaring and a vast political and constitutional fight is ongoing over his healthcare law (mentioned once, only very briefly, in passing). You would never know that Medicare and Social Security will soon be groaning under the coming wave of baby boomer retirements.
Although recent/projected deficits were not quantified, the president used the word “trillion” three times when talking about possible deficit reductions.
•Together, we’ve agreed to cut the deficit [over the next 10 years, nothing has happened yet] by more than $2 trillion.
•When it comes to the deficit, we’ve already agreed to more than $2 trillion in cuts and savings.
(Interestingly, the president slammed the spending cut agreement at another point in the speech. “The greatest blow to our confidence in our economy last year didn’t come from events beyond our control. It came from a debate in Washington over whether the United States would pay its bills or not. Who benefited from that fiasco?”)
•Right now, we’re poised to spend nearly $1 trillion more on what was supposed to be a temporary tax break for the wealthiest 2 percent of Americans.
In general, the president characterized the state of the Union as “getting stronger” instead of acknowledging the bleakness of the current situation and outlook. Former Comptroller General David Walker says president’s State of the Union short on substance and leadership, Comeback America Initiative, 1/24/12.
. . .the president did not admit that America's financial condition was poor and deteriorating, and he failed to provide a clear path forward to restore fiscal sanity.
http://www.tcaii.org/ (download PDF)
Never mind, though, because the president views the fiscal gap as a housekeeping matter. The gap should be narrowed over time, as circumstances permit, but income redistribution represents a higher priority.
The defining issue of our time is how to keep that promise alive. No challenge is more urgent. No debate is more important. We can either settle for a country where a shrinking number of people do really well while a growing number of Americans barely get by, or we can restore an economy where everyone gets a fair shot, and everyone does their fair share, and everyone plays by the same set of rules.
The fiscal gap was not introduced until 2/3 of the way through the speech, and the words used were slippery. We have seen no evidence that the president supports balancing the budget, let alone repaying the federal debt, so the words “pay down our debt” must be code for slowing the rate of increase.
Now, a return to the American values of fair play and shared responsibility will help protect our people and our economy. But it should also guide us as we look to pay down our debt and invest in our future.
The president’s main proposals in the fiscal area were to hike taxes on upper income taxpayers, cut military spending, and “invest” in America’s future.
•Hike taxes: Do we want to keep these [Bush] tax cuts for the wealthiest Americans? Or do we want to keep our investments in everything else –- like education and medical research; a strong military and care for our veterans? Because if we’re serious about paying down our debt, we can’t do both.
•Cut military spending: Take the money we’re no longer spending at war, use half of it to pay down our debt, and use the rest to do some nation-building right here at home.
•“Investments”: a national commitment to train 2 million Americans with skills that will lead directly to a job *** extend the tuition tax credit *** give more young people the chance to earn their way through college by doubling the number of work-study jobs in the next five years *** pass clean energy tax credits *** allow the development of clean energy on enough public land to power 3 million homes *** Navy purchasing enough capacity to power a quarter of a million homes a year *** [rebuild] crumbling roads and bridges; a power grid that wastes too much energy; an incomplete high-speed broadband network that [bypasses] rural America.
Very little was said about eliminating wasteful domestic spending programs, which in our opinion would offer major opportunities for saving with far less risk than big cuts in the defense budget. Cut defense spending with care, 1/23/12.
Nothing of note was said about the elephant in the living room: entitlement programs (Social Security, Medicare, Medicaid, etc.). Perhaps the president wants to set up his political opponents to take the blame for any political backlash.
As I told the Speaker this summer, I’m prepared to make more reforms that rein in the long-term costs of Medicare and Medicaid, and strengthen Social Security, so long as those programs remain a guarantee of security for seniors. But in return, we need to change our tax code so that people like me, and an awful lot of members of Congress, pay our fair share of taxes.
The president’s retreat from 2008 campaign promises about restructuring entitlement programs was consistent with prior actions. Thus, he appointed a bipartisan Fiscal Commission in 2010, only to ignore its recommendations. Obama’s promises, John C. Goodman, Townhall.com, 1/28/12.
The president didn’t merely lose interest in entitlement reform; he went over to the other side! When House Budget Committee Chairman, Republican Paul Ryan, made proposals similar to Bowles and Simpson, the president invited him to a nationally televised White House speech in which he accused Ryan of abandoning the elderly and even of being un- American.
In short, the president is not keen on addressing the fiscal problem. If Congress intends to do so, they should get started on their own. Agreeing on a budget would be a logical first step.
4. Overhaul taxes – The US tax law is a complicated mess; it needs to be overhauled from stem to stern. See our SimpleTax plan. http://bit.ly/etlOxX
Instead of debating whether high earners are paying their “fair share,” which cannot be meaningfully evaluated in a vacuum, Congress should ask whether we are imposing the right tax rates at all income levels (many lower tier taxpayers pay zero income taxes or even receive net refunds). And there won’t be time for a comprehensive review if the conversation is put off until December when the Bush tax cuts are about to expire.
The Alternative Minimum Tax should be repealed, ending the dreary annual drill of enacting an AMT “patch” to shield millions of additional taxpayers from calculating their tax liability two different ways and paying the higher amount.
Business taxes should be vastly simplified without loss of revenue, reducing compliance costs and avoiding economic distortions inherent in the current system.
The president talked a lot about the tax system in the SOTU address, but his ideas for “reform” are very different from ours.
•We see tax revenues growing as the result of a vibrant economy. In the name of “fairness,” the president is determined to raise tax rates on the well to do (which, experience suggests, would not be limited to “millionaires”).
Tax reform should follow the Buffett Rule. If you make more than $1 million a year, you should not pay less than 30 percent in taxes. *** On the other hand, if you make under $250,000 a year, like 98 percent of American families, your taxes shouldn’t go up.
•We want to make the tax system simpler and more economically neutral; the president’s proposals would make it more complicated. For instance, consider his ideas for penalizing companies that move operations overseas while subsidizing companies with domestic operations.
First, if you’re a business that wants to outsource jobs, you shouldn’t get a tax deduction for doing it. That money should be used to cover moving expenses for companies like Master Lock that decide to bring jobs home.
Second, no American company should be able to avoid paying its fair share of taxes by moving jobs and profits overseas. From now on, every multinational company should have to pay a basic minimum tax. And every penny should go towards lowering taxes for companies that choose to stay here and hire here in America.
Third, if you’re an American manufacturer, you should get a bigger tax cut. If you’re a high-tech manufacturer, we should double the tax deduction you get for making your products here. And if you want to relocate in a community that was hit hard when a factory left town, you should get help financing a new plant, equipment, or training for new workers.
Such proposals underscore the need for overhauling the tax law rather than weighing it down with more and more special provisions that distort the normal functioning of the free market.
It would be a travesty to give serious credence to “a basic minimum tax” for multinational companies, etc., while once again failing to overhaul the tax system as a whole.
1/23/12 – Cut defense spending with care Read Replies
It is a myth that conservatives agree about everything, ask anyone who has attended a SAFE board meeting or two, particularly when it comes to defense spending.
The libertarian wing tends to think the US should adopt a modest international posture focused on defending our national borders. Here’s how CATO puts it on their Website:
Cato's foreign policy scholars question the presumption that an interventionist foreign policy enhances the security of Americans in the post-Cold War world, and maintain instead that interventionism has consequences, including the formation of countervailing alliances, the proliferation of weapons of mass destruction, and even terrorism. The use of U.S. military force should be limited to those occasions when the territorial integrity, national sovereignty, or liberty of the United States is at risk.
http://www.cato.org/foreign-policy-national-security
Other conservatives fear a primarily defensive posture would invite aggression and see positive value in the US keeping order around the globe. Adapting to the threat dynamics of the 21st century, Donald Winter, Secretary of the Navy (2006-2009), Heritage Foundation, 9/15/11.
Today, the U.S. faces a disturbingly diverse set of national security challenges ranging from Somali pirates to transnational terrorist organizations to rogue nations with nuclear weapons. In the 21st century, the only viable approach to national security is to maintain an adequately sized, trained, and equipped force that is capable of dissuading, deterring and--if necessary--defeating a diverse set of future adversaries.
Who is right? Your faithful scribe favors a strong military, able to handle whatever challenges are likely to arise. Other SAFE directors have a somewhat different view. But we could probably all agree that (A) national security is important, and (B) defense programs should not be cut hastily without evaluating the likely consequences.
This entry will put the current level of defense spending in context, review several proposals for reducing it, and offer suggestions for the path forward.
CURRENT STATE – Is it true that the prior Administration recklessly ramped up defense spending, as some critics have claimed?
Clearly, the military budget was increased by the Afghanistan and Iraq wars that were undertaken in the wake of 9/11. And outlays in nominal dollars have risen steadily.
In real economic terms, however, current spending is in line with defense spending over the past several decades – and it is projected to shrink now the US has withdrawn its forces from Iraq and is lowering its profile in Afghanistan.
Here are some data from the OMB historical budget charts to make the point that defense spending is not soaring out of control.
|
Total National Defense Outlays (excluding Veteran’s Benefits) |
||||||
|
Fiscal Year |
1980 |
1990 |
2001 |
2006 |
2011est. |
2016est. |
|
$B |
$134 |
$299 |
$305 |
$522 |
$768 |
$680 |
|
% of outlays |
22.7% |
23.9% |
16.4% |
19.7% |
20.1% |
15.2% |
|
% of GDP |
4.9% |
5.2% |
3.0% |
4.0% |
5.1% |
3.4% |
http://www.whitehouse.gov/omb/budget/Historicals/ (download tables as PDF)
POTENTIAL CUTS – Although they probably overlap to some extent, three different rounds of defense cuts are now in play.
#Round One (“frills” elimination) – As requested by the president, Secretary of Defense Robert Gates (2007-2011) organized an effort to trim expenditures that were not deemed mission critical.
The F-22 Raptor fighter jet program was stopped at 187 aircraft even though the military need for these stealthy, radar-evading planes is apparent and expected to grow. Obama and Gates gut the military, Thomas Donnelly & Gary Schmitt, Wall Street Journal, 4/8/09. http://on.wsj.com/80Xlg
Recommendations were developed for trimming design extras for new weapons systems, such as an alternative engine for the F-35 Joint Strike fighter, streamlining procurement procedures, closing the Joint Forces Command in Norfolk, VA, etc. Gates starts outlining cuts to save $100 billion for defense [over the next five years], Washington Post, Dana Hedgpeth, 9/14/10. http://wapo.st/9PivT3
Roundly 6% cuts in Army and Marine Corps ground forces were planned, to take effect around 2015. And in public statements, Gates made clear that he viewed the cuts being proposed as the largest that could prudently be made. Pentagon seeks biggest military cuts since before 9/11, Thom Shanker & Christopher Drew, New York Times, 1/8/11.
This plan represents, in my view, the minimum level of defense spending that is necessary, given the complex and unpredictable array of security challenges the United States faces around the globe: global terrorist networks, rising military powers, nuclear-armed rogue states and much, much more.
http://www.nytimes.com/2011/01/07/us/07military.html
Without attempting to delve into the details, we would be inclined to view defense cuts of this magnitude as acceptable. No government agency can count on getting all the money it would like to have – and that includes the military services.
But some observers felt the cuts would reduce inter-service coordination (mission of the Joint Forces Command) and military effectiveness. Gates is turning America’s defenses into a boutique military, James Carafano (of Heritage), Washington Examiner, 3/13/11.
Gates' ballyhooed initiative to realize "savings" through efficiencies has turned out to be mostly just an exercise in across-the-board budget cuts within agencies. The result is less capability and less efficiency. The net effect of all these "reforms" is to turn a marvelously effective joint force into a collection of boutique military forces.
#Round Two (strategic retrenchment) – In mid-2011, just before stepping down from his post, Secretary Gates stated that the “base defense budget” (excluding add-ons for foreign contingency operations) was in line and should not be targeted by would-be budget cutters. Gates confirms talks with Taliban, Ben Wolfgang, Washington Times, 6/19/11.
Mr. Gates warned the Republican candidates not to zero in on the defense budget when looking for places to cut spending. “I worry people whose primary worry and concern is the economy and the deficit will see defense as a way to reduce those obligations and that deficit,” he said on “Fox News Sunday,” adding that “the base defense budget is not part of the deficit problem.”
Many observers expected the incoming defense secretary, Leon Panetta, to support additional budget cuts. The thinking was that Panetta, a career Democrat politician, would view getting the president re-elected in 2012 as his priority mission. Panetta to carry political baggage to the Pentagon, Rowan Scarborough, Washington Times, 6/22/11. http://bit.ly/kjExJv
In early January 2012, the president visited the Pentagon to announce a plan for shrinking the military and redefining its mission. Defense officials and the military brass stood behind the president and listened, stony faced, before filling in a few details.
The gist of the “Sustain US Global Leadership” plan was to reduce the ability of our standing military to fight large land wars. As an alternative, the military would reportedly be expected to “rely more on special operations and counterterrorism, air and sea power, and build up and train foreign militaries.” Obama to shrink armed forces, Rowan Scarborough & Sean Lengell, Washington Times, 1/5/12. http://bit.ly/A49gU5
Defense spending was to be reduced by about half a trillion dollars over the next decade, as mandated by the Budget Control Act of 2011. (The BCA set the terms for raising the debt limit, including a mandated spending cut of $0.9T over 10 years to be split 50/50 between defense and other discretionary spending.)
The president’s remarks made it sound as though nothing of value was being given up. Transcript, 1/5/12.
We need a start -- we need a smart, strategic set of priorities. The new guidance that the Defense Department is releasing today does just that. I want to thank Secretary Panetta and General [Martin] Dempsey for their extraordinary leadership during this process. I want to thank the service secretaries and chiefs, the combatant commanders and so many defense leaders -- military and civilian, active, Guard and reserve -- for their contributions. Many of us met repeatedly -- asking tough questions, challenging our own assumptions and making hard choices. And we’ve come together today around an approach that will keep our nation safe and our military the finest that the world [has] ever known.
Secretary Panetta acknowledges the new strategy has some downside, but he calls the risks “acceptable.” Some independent observers are skeptical; others tend to agree. Defense chief admits there is “some risk” to slashing military, Sara Carter, Washington Examiner, 1/5/12.
#Retired Army Maj. Gen. Timothy Haake, formerly with the Special Forces: "It makes it a much more dangerous world when you declare that you can only handle one war at a time. If you're going to reduce your deficit it shouldn't be on the back of the military."
#Michael O'Hanlon, defense expert with the Brookings Institution: New strategy will allow the Navy and Air Force to be strengthened without piling up deficit spending. He sees it as appropriately focused on meeting new threats (terrorism, cyber-warfare) and countering Chinese and Iranian air and sea power.
Re increased reliance on air and sea power, remember that advanced US aircraft development programs (F-22 & F-35) had already been seriously dented by Round One cuts. And it’s not impossible that the F-35 program will be further cut or delayed as the details of the new strategic plan are hammered out.
There are also reports that the Navy will be forced to shrink its fleet as the funds to support it evaporate. New Navy budgets may sink plans for aircraft carriers, Rowan Scarborough, Washington Times, 1/15/12.
. . . the Navy has been in a furious fight behind the scenes to protect only 10 carriers, sources familiar with the issue told The Washington Times. The sources say that, while the fiscal 2013 budget may well continue 11 carriers, the Navy will be down to 10 or even nine carriers within the next five years.
Update: Aboard the US Enterprise, Secretary Panetta announced to the crew that an 11 carrier Navy will be maintained and that the “Big E” will soon be sailing through the Strait of Hormuz to visit the Persian Gulf. Afterwards, Panetta told reporters that the Defense Department will be looking for cuts in other areas. US will keep 11 aircraft carriers to project sea power in Pacific, Middle East, Washington Post (AP), 1/21/12.
Bottom line, critics of the new plan see it as budget-driven vs. strategy-driven. Obama’s strategic retreat; new defense guidance codifies America’s military decline, Washington Times, 1/5/12.
President Obama’s new defense strategic-guidance document sends a clear message to America’s adversaries: Go for it.
The critics may be right. Certainly it would be unwise to count on a dawning era without significant military conflicts, as implied by the president’s statement that “even as our troops continue to fight in Afghanistan, the tide of war is receding,” given warning signs such as these:
#The situation in Iraq has swiftly deteriorated since US forces were completely withdrawn instead of leaving a garrison of 20,000 or so troops as recommended by military commanders. The claim that all troops were withdrawn because the Iraqis wanted it that way is improbable. Who lost Iraq? Charles Krauthammer, Washington Post, 11/3/11. http://wapo.st/uHw2Vw
#Racing to develop nuclear weapons, Iran has threatened to close the Strait of Hormuz (which might send oil to $200 a barrel) if the international community imposes severe economic sanctions that could stop them. The US would use military force to reopen this critical waterway, and there is a strong possibility that the US and/or Israel would strike at targets in Iran if deemed necessary to cripple its nuclear program. Panetta: We will “stop” Iran’s weapons program, Newsmax.com, 1/8/12. http://bit.ly/w7MmjG
Despite recent Iranian denials of any intention to close the Strait of Hormuz, it seems doubtful that Iran’s drive for nuclear weapons can be stopped by either tough US talk or economic sanctions. And if Iran does acquire nukes, this threat to cut off 20% of the world’s oil supply will become far more credible than it is at the moment. Meaningless “red lines” won’t stop Iran’s nuclear program, Oliver North, Washington Examiner, 1/21/12. http://bit.ly/zlz5Y8
#Longer term, China is building up its military forces to challenge US domination of the western Pacific, which could threaten the independence of Taiwan, Japan, and many other nations in the area. China outgunning the Pentagon; the red dragon is rising and preparing for war, Brett Decker, Washington Times, 8/25/11. http://bit.ly/pwZFXK
OK, why should the US be the policeman of the world? It’s a fair question, but notice that no one has said our country plans to give up this role, let alone that we want someone else (such as China) to assume it. If this country intends to honor its longstanding international commitments, the military power required to do so must be maintained. The most dangerous thing we could do, to recast a famous saying of President Theodore Roosevelt, is “speak loudly and carry a little stick.”
By the way, the idea of defending US interests far outside our national borders goes back much further than Teddy Roosevelt. Take a look at President Thomas Jefferson’s first annual message to Congress (12/8/1801), in which he expounded on the necessity of dealing with the Barbary pirates that were threatening US commerce at the time.
Tripoli, the least considerable of the Barbary States, had come forward with demands unfounded either in right or in compact, and had permitted itself to denounce war, on our failure to comply before a given day. The style of the demand admitted but one answer. I sent a small squadron of frigates into the Mediterranean, with assurances to that power of our sincere desire to remain in peace, but with orders to protect our commerce against the threatened attack.
http://millercenter.org/president/speeches/detail/3471
#Round 3 (arbitrary cuts) – Further defense cuts are required under the BCA, to the tune of another $600B over ten years (starting in 2013), because the Joint Select Committee on Deficit Reduction failed to come up with the package of at least $1.2T in deficit reductions (spending cuts, tax increases, or a combination) that it had been tasked with recommending. Tax cuts for rank and file now; tax increases for the wealthy in 2013, 11/28/11.
Defense Secretary Panetta had previously stated that such additional cuts would undermine the effectiveness of the US military. Panetta warns against sweeping budget defense cuts, David Alexander & Jim Wolf, 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” [and] “would do real damage to our security, our troops and their families, and our ability to protect the nation.”
To some extent, these comments may have had an ulterior motive, namely to pressure the Joint Committee into a deal that would include major tax increases. And this theory was reinforced by Panetta’s subsequent assertion that a defense spending sequester would necessarily be applied uniformly to every element of the defense budget. Panetta’s political defense cut threat, Bill Wilson, NetRightDaily, Nov. 2011.
Panetta is threatening to slash across-the-board every single “program, project, and activity,” when it is actually up to Congress to set up spending levels via the appropriations process within the context of the budget caps starting with Fiscal Year (FY) 2013.
Still, we agree with Panetta’s point that the Round 3 cuts would be foolish and irresponsible. And they were not so much as mentioned by the president in his January 5 remarks on the new strategic plan.
As but one “for instance,” consider this informative column about the dangers of a cutback in missile defense programs. Budget mess threatens missile defense, Mead Treadwell, Washington Examiner, 1/19/12. http://bit.ly/ytpnD2
It is now said the president will urge Congress to replace the $1.2T sequester of discretionary expenditures (half defense, half civilian) with other deficit reduction measures. His proposals are likely to include taxes and fees that Republican members of Congress will oppose. Obama to urge Congress to revisit $1.2T in cuts, FoxNews.com, 1/20/12. http://fxn.ws/AjEFUO
PATH FORWARD – The president’s emerging strategy of setting up the GOP to take the rap for undermining the US military seems deeply cynical, but if the loyal opposition wants to avoid that charge they had better come up with a game plan for shrinking the budget deficit in other ways.
Our suggestion to both sides in the budget standoff would be to get back to first principles.
#The key to successful budget cutting is to prioritize spending programs and eliminate programs or activities that are unnecessary, redundant, or wasteful. It is not true that all government programs are of more or less equal value and deserve to be perpetuated.
#Congress needs to identify programs that should be supported at current or even increased spending levels, programs that should be consolidated or slashed, and programs that don’t pay their way on any rational cost/benefit basis and should be eliminated. There are numerous programs in the third category.
#It would seem logical to closely scrutinize areas of the budget where the most money is spent and which have grown the most rapidly. Getting down to brass tacks about spending, 10/25/10.
The biggest opportunity for spending cuts appears to be in “Human resources” (HR), which has been growing faster than the economy for decades and now accounts for 2/3 of the total budget. *** The bulk of HR outlays go to seniors via Social Security, Medicare, part of Medicaid, federal retirement benefits (in Income security), and Veteran’s hospitals.
Yet over the past several years, defense is the only area in which there has been any apparent zeal for cutting spending. In 2010, to cite but one example, the draft report of the Bowles-Simpson Commission was notably more specific in talking about defense cuts than non-defense cuts. Fiscal Commission: Co-Chairs’ Proposal, 11/15/10.
Illustrative defense cut and domestic cut lists are presented ($100B each in 2015). *** The only functional non-defense cuts on the chart: reduce Congressional & White House budgets by 15% ($0.8), slow growth of foreign aid ($4.6), eliminate Rural Utility Service programs ($0.5), eliminate funding for commercial spaceflight ($1.2), and sell excess federal property ($1).
So without ruling out “smart” defense cuts, because there probably could be some of them, it would seem timely to get serious about cutting spending in other areas. For example, here is a punch list of targets that we sent to the Joint Committee members in August 2011. http://www.s-a-f-e.org/contacting_legislators_2011.htm#082211
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.
These cuts would not be nearly enough to solve the fiscal problem, but they would represent a good beginning. It would be great if the president suggested them in his State of the Union Address tomorrow night, but if not (and we’re not holding our breath) then let’s hope the Republicans get on the ball.
* * * Replies for this Blog * * *
This is a good overview of our current picture. If we cut much more out of defense, we will have to rely on air and naval power or long-range missiles to get the job done. Missile involvement will restart the nuclear discussion, which has been relatively quiet for a while. Air power will rekindle the fires of military terrorism opponents. Both of these will have a public relations effect upon our government. Therefore, I think we should add to our list of necessities for elected officials a requirement for a very thick skin. – SAFE director
Thoughtful analysis as usual. Undertaking a cost/benefit analysis is entirely logical, but requires dealing with noises from those affected at their respective feeding troughs. – Former IBM executive, South Carolina
1/16/12 – SAFE offers DC a “to do” list for 2012
The nation’s legislators are returning to Washington, but it appears unlikely that Congress will get down to business before, say, the week of February 6. In the meantime, several pieces of the puzzle (State of the Union address, proposed budget for FY 2013, and possibly the outcome of the GOP presidential primary) will fall into place.
Here are some dates to keep in mind: January 17: Call of the House, formally marking start of second session; January 19-21: House GOP Issues Conference; January 21: GOP primary in South Carolina; January 23: Senate convenes for second session; January 24: President delivers State of the Union (SOTU) Address; January 25-27: House Democratic Issues Conference; January 31: GOP primary in Florida; Early February: President sends proposed budget for FY 2013 to Congress.
The legislative agenda bogged down in partisan wrangling last year, and knowledgeable observers are not expecting great things in the run-up to the election. We hope the nation’s political leaders will not write off 2012 as a lost cause, however, because progress may be possible in some areas.
We would like to propose a “to do” list for Congress; it focuses on several issues that would probably be acted on in some manner anyway. Honor a deal - Propose a Constitutional amendment – Follow Congress’s budget rules – Streamline taxes. In each case, the idea would be to address the issue squarely instead of kicking the can down the road as usual – without asking either party to betray its core principles.
If both parties follow our advice, the legislative output in 2012 will almost certainly be more impressive than it was last year. And if one party follows the advice while the other flouts it, Americans should bear this in mind when casting their votes in November.
1. HONOR A DEAL – In principle, there is no good reason to extend the temporary payroll tax reduction (2 percentage point rate cut for employees). This action won’t stimulate the economy; it will simply run up the deficit by some $120B (subject to whatever offsets may be provided for). Bin the payroll tax cut, 12/5/11.
The president and his allies pushed this proposal very hard, however, and the Republicans agreed on the understanding that the cut would be “paid for” in some manner. Shortly before Christmas, a stopgap extension through February 29, 2012 was enacted into law. The Republicans will have little choice but to make good on their promise to support a payroll tax cut for the full year.
The Democrats expect to hold the whip hand in the upcoming negotiations, witness House Minority Leader Nancy Pelosi’s suggestion that negotiations of the conference committee – unlike proceedings of the late Joint Select Committee on Debt Reduction – be open to the public. House Democrats say they want open, transparent payroll tax committee, Felicia Sonmez, Washington Post, 1/5/12.
“This [payroll tax extension] is a completely different scenario. The supercommittee, I had hoped, would be more transparent and open, but they wanted to lay some foundations that they could do privately. And, you see, they did not succeed.”
We won’t attempt to parse the differences between the Democrat and Republican positions; suffice it to say that the House bill for the payroll tax cut extension and other matters (HR 3630) ran 369 pages, while the stopgap bill substituted by the Senate (and enacted into law as the Temporary Payroll Tax Cut Continuation Act of 2011) is about 90% shorter. No doubt the conferees will have a lot to talk about.
The Republicans’ key demand in the payroll tax negotiations was conditionally accepted. A presidential decision on the Keystone XL Pipeline will be required within 60 days after enactment of the stopgap bill, i.e., by February 21, 2012, or approval “shall be in effect by operation of law.” However, the president can block the pipeline by concluding that it “would not serve the national interest,” to be followed within 15 days by a report to Congress explaining his adverse determination.
We do not know whether the president will approve or block the pipeline, but it does seem that he should indicate his disposition sooner (perhaps in the SOTU Address) rather than later (say on February 20). If the answer will be “no,” it would seem only fair that the Congressional conferees know this before they make a final decision on the payroll tax cut extension.
Perhaps Republicans should make this point in informal communications with Democrats rather than surrendering whatever leverage they may have by making a deal while the pipeline decision remains up in the air.
2. PROPOSE A CONSTITUTIONAL AMENDMENT – For reasons discussed last week, we believe the president’s four “recess” appointments (Richard Cordray to head the newly established CFPB, three new members of the NLRB) were “reckless and inappropriate.” About those recess appointments, 1/9/12.
The White House has now released a Department of Justice opinion that the appointments were legal. A legal challenge is expected; it would likely take years to resolve. Who will benefit other than the lawyers involved?
All sides agree the issue is likely to end up in court, though a final decision could come well after the recess appointments will have expired.
Another idea for challenging the appointments, reportedly suggested by Republican candidates on the campaign trail, is legislation “stripping the appointees of power.” That is probably a nonstarter. Justice Department backs Obama on recess appointments; Republicans complain ruling on four postings smacks of politics, Stephen Dinan, Washington Times, 1/12/12.
Such legislation is unlikely to advance given that Democrats control the Senate and, while most [of them] have been silent on the legality of Mr. Obama’s use of recess powers, [they] still praised the nominees.
We could envision a negotiated settlement along the following lines: (1) The president agrees to walk back the appointments and entertain the possibility of converting the CFPB into a five-member board. (2) Senate Republicans agree to expedited consideration for the four nominees, and in the interim Terrence Flynn (whose nomination was submitted in January 2011) is designated as an acting member of the NLRB so the agency will have a quorum and can function.
Such terms seem reasonable to us, and the Republicans would probably accept them. We strongly doubt, however, that the president would agree.
Another approach would be to acknowledge that the recess appointment power (A) was included in the Constitution for reasons that no longer apply (see last week’s entry), (B) has been used by presidents of both parties to make appointments that could not win Senate confirmation, and (C) serves no useful purpose. Accordingly, this provision of the Constitution (Article II, Section 2, Paragraph 3) should be eliminated by a constitutional amendment.
Granted, it would take several years to obtain the necessary approvals of 38 states, but Congress could get the ball rolling by proposing the amendment this year. Resolving the controversy about recess appointments for the future is far more important than attempting to undo the four disputed appointments.
Legislators on both sides of the aisle should support the amendment as a means of maintaining respect for Congress as an institution. It would not necessarily favor the interests of one party over the other. And we would challenge anyone to present a plausible reason why the recess appointment power is needed in the 21st Century.
3. FOLLOW CONGRESS’S BUDGET RULES – The Congressional Budget and Impoundment Control Act of 1974 requires Congress to adopt an annual budget resolution, but lately this requirement has been more honored in the breach than in the observance. Both houses ignored the requirement for fiscal year 2011, and the Senate blocked a budget resolution passed by the House for fiscal year 2012 without proposing an alternative. Tax cuts for rank and file now; tax increases for the wealthy in 2013, 11/28/11.
For a nearly $4 trillion a year cost center to operate without a budget is indefensible, in our opinion, violating the principles of rational planning and managerial accountability.
So what should be done differently this year? Well, for starters, we would hope that the president chooses to submit a more fiscally responsible budget than he did in 2011. The budget: a “lowball” offer, 2/21/11.
But for all its heft and highfalutin rhetoric, the new budget offers no solutions for the fiscal problem, is loaded with ideological baggage, and dodges responsibility.
The House should proceed to prepare a detailed budget resolution for fiscal year 2013 (following the example set last year), tracking or diverging from the president’s proposed budget as it sees fit.
The Senate should respond in kind by either approving the House budget resolution or proposing an alternative so that any differences of opinion can be hashed out in public.
In sum, the time has come for members of Congress to start acting responsibly. If any of the key actors flouts the Congressional rules, they should be held accountable for their actions.
4. OVERHAUL TAXES – The US tax law has evolved into an increasingly complicated mess. Piecemeal changes will not do the trick; the system needs to be streamlined and remodeled from stem to stern. For a detailed analysis of the problems and our suggested solutions, see SAFE’s SimpleTax plan. http://www.s-a-f-e.org/the_simple_tax.htm
Overhauling the tax system would be a major undertaking, many of the details would be controversial, and we do not claim that our recommendations are the only way to go. But we are convinced of two things.
#First, the job must be started in a timely manner and worked on systematically, or it will never get done. Someone will always be able to think of a reason to delay the undertaking just a bit longer.
#Second, tax changes can be made that both parties will see – at the end of the job – as a plus. The basic strategy should be to eliminate tax preferences, lower rates, and collect the same amount of revenue (or perhaps a bit more). Some special interests may lose out, but over all the country will be better off.
Consider that the Bush tax cuts (all of them) are scheduled to expire on January 1, 2013, which would result in a huge tax increase. It is time to start planning while there is an opportunity to address the issues comprehensively, instead of deferring the subject until after the election and quite possibly being forced into bad decisions under time pressure.
Instead of arguing about whether high earners are paying their “fair share,” Congress should ask whether we have the right tax rates in place at all income levels (including on lower tier taxpayers, who in many cases are paying no income taxes at all or even receiving net refunds).
It is also high time to repeal the Alternative Minimum Tax, thereby dispensing with the dreary annual drill of enacting an AMT “patch” to shield millions of additional taxpayers from calculating their tax liability two different ways and paying the higher amount.
There is nothing to stop the president from proposing a tax overhaul in the SOTU Address, but we don’t see much chance of action unless the House Republicans get behind the idea and push – hard.
So far they have simply been blocking demands that taxes on high earners be increased, which sets up the Democrats’ argument that the Republicans don’t care about “the 99%.” In the longer run, this is almost guaranteed to be a losing strategy.
Maybe the House tax overhaul package would be blocked in the Democrat-controlled Senate, but if so the Republicans would be left with a good answer as to what should be done about the expiring Bush tax cuts after the election.
And there is always the possibility that Congress would surprise the doubters and get the tax overhaul done, thereby making the system simpler, more economically neutral, and fairer. That would be a genuinely noteworthy accomplishment, in which all concerned could take pride.
1/9/12 – About those recess appointments
As anyone who has been paying attention knows, the president saw fit to appoint four individuals to high-ranking positions while Congress was out of town for the holidays. Did this represent bold leadership or an unconstitutional power grab?
The aforesaid appointments set a new low in the president’s relations with Congress, and they diverge sharply from his earlier rhetoric about reaching across the partisan divide, being the president of all Americans rather than just the voters who elected him, etc. Compare the president’s inaugural address on January 20, 2009.
On this day, we come to proclaim an end to the petty grievances and false promises, the recriminations and worn out dogmas, that for far too long have strangled our politics.
http://millercenter.org/president/speeches/detail/4453
Most “liberals” and many “independents” seem willing to accept the appointments without much regard for the longer-term implications. Many “conservatives” are up in arms, but without broad-based support they won’t get far.
We think it is a mistake to allow the president to start acting like a dictator. The basic principle – confront violations of the spirit or letter of the Constitution before they spiral out of control – was pointed out in a prior entry. 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.
On the other hand, it is only fair to inquire whether the Republicans brought on the situation by acting in an obstructionist manner. And if so, did that somehow justify the president’s actions?
This entry will cover the issue step by step: Rules – Stakes – Arguments – Conclusion.
The rules – In general, the president must act “with the advice and consent of the Senate” in appointing “ambassadors, other public ministers and consuls, judges of the Supreme Court, and all other [high ranking] officers of the United States.” Art. II, Section 2, par. 2 of the Constitution.
However, Art. II, Section 2, par. 3 provides an exception. “The President shall have power to fill up all vacancies that may happen during the recess of the Senate, by granting commissions which shall expire at the end of their next session.”
Although the concept of “original intent” has been eroded over the years, it is worth considering why the recess appointment power was provided. As we understand it, the framers anticipated that Congress would function on a part-time basis.
In the early years under the Constitution, intersession recesses typically lasted between 6 and 9 months and therefore recess appointments were needed to prevent important offices from remaining unfilled during these long recesses.
If a vacancy arose during a recess, it made sense that the president should be able to make a stopgap appointment in order to keep the government going until the Senate was back in session and had an opportunity to consider the matter.
It was not envisioned that the president would use the recess appointment power to appoint nominees who could not win Senate confirmation although this practice came into vogue later. The original meaning of the recess appointments clause, Michael Rappaport, University of San Diego Law School, 2004.
By comparison with the existing interpretation of the Clause, the original meaning confers quite narrow recess appointment authority. While the original meaning of the Clause allows the President to make the most necessary recess appointments – those needed to avoid long unfilled vacancies that could not otherwise have been filled through advice and consent appointments – it places strict limits on the President’s ability to use his power to recess appoint individuals in order to avoid having to secure senatorial consent.
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=601563 (download PDF)
If it were understood that recess appointments could only be made to fill vacancies arising during an extended recess, this power would be reduced to an historical anachronism.
More expansive views have prevailed, however, and presidents of both parties have often found it convenient to make recess appointments – particularly since appointments are deemed subject to filibuster in the Senate.
In time, anger about the recess appointment loophole led to a new defense, which was originally used by the Democrats. The idea was keep the Senate formally in session during periods of Congressional inactivity. Reid to keep Senate in session to prevent recess appointments, Erin Billings, Roll Call, 11/16/07.
Senate Majority Leader Harry Reid (D-Nev.) has decided to keep the chamber in session over the Thanksgiving break to block President Bush from making any unsavory recess appointments while Senators are out of town. In a statement inserted in the record Friday, the Majority Leader said he will hold the Senate in a series of pro forma or nonvoting sessions to prevent the controversial practice.
http://www.rollcall.com/news/-21044-1.html
With a Democrat president in the White House, the Republicans want to use the same tactic. They do not control the Senate, but the Senate cannot technically adjourn without consent of the House. Over the current holidays, Congress has been conducting pro forma meetings every three days even though no legislative business is being done.
Do the pro forma meetings have any substance? No. But the idea that the president must make recess appointments in an era when Congress is in session most of the year – and reachable via modern communication devices at any time – is equally fanciful.
The technical issue boils down to this: Does the president have the power to make recess appointments on grounds that the Senate’s pro forma sessions are a sham? In our view, neither a “yes” nor “no” answer is compelling, so let’s move on to substance.
The stakes – The four appointees involve a variety of factual circumstances, as recapped in the following table.
|
NAME & POSITION |
NOMINATED |
CONTROVERSY (details below table) |
|
Richard Cordray to head Consumer Financial Protection Bureau |
Mid-July 2011 |
GOP wants charter for the newly created CFPB to be adjusted so that it will be headed by a 5-member commission and subject to Congressional budget control. |
|
Terrence Flynn as a member of NLRB |
January 2011 |
President wants to pack the NLRB (five members at full strength) with pro-labor members.
|
|
Sharon Block & Richard Griffin as members of NLRB |
Dec. 14, 2011 |
#The CFPB was authorized by the Dodd-Frank Bill enacted in mid-2010. This huge new agency will serve no useful purpose, in our opinion, and it has only a tenuous connection to the financial crisis that prompted legislation to “reform” the financial markets. GovFinance: too bad to fix, 5/10/10.
It is hard to see why a CFP Bureau is needed. There are numerous federal agencies involved in regulating financial activity already, not to mention state agencies that also get in the act.
But as there will be a CFPB, Republicans wanted it (a) run by a board rather than a single person (or “czar”), and (b) removed from the ambit of the Federal Reserve (which shields it from Congressional budgetary control). Senate Republicans plan to block consumer bureau while seeking changes, Phil Mattingly & Carter Dougherty, Bloomberg.com, 5/6/11. http://bloom.bg/iOpQBO
This request was anathema to the Democrats, and Senate Majority Leader Harry Reid endorsed the president’s action on grounds that the Republicans were “trying to make an end run around the law by denying this watchdog [the CFPB] a leader." Reid backs Obama after using pro forma sessions to block Bush, Peter Schroeder, The Hill, 1/4/12.
# The attempt to shift the posture of the NLRB, making it pro-labor versus an arbitrator between labor and management, has been cooking for some time.
We previously reported on a questionable NLRB proceeding about Boeing’s establishment of a factory in right-to-work South Carolina. One of the key figures in the action was Commissioner Craig Becker, a recess appointee whose term was set to run until 12/31/11 (there being little chance that the Senate would confirm his permanent appointment). An administrative blitz: taking cover is not enough, 5/9/11 (example 6).
The Boeing controversy has since been settled with a payoff for the union. The same ploy – pressing “retaliation” charges to challenge the location of factories in right to work states – may well be used in other cases. Labor board drops complaint over Boeing’s nonunion SC plant, Sam Hananel, USA Today, 12/9/11. http://usat.ly/vGxZnT
As for why there were three interim appointments for the NLRB, with two individuals so recently nominated there hadn’t even been time for Senate background checks, note that the NLRB would have been cut to two members with the departure of Mr. Becker – forcing it to suspend operations for lack of a quorum. Senate Republicans seek to block unconfirmed appointments to labor board, Fox News, 12/28/11. http://fxn.ws/vbFwIg
Although the Republican positions about the proper role of the CFPB and the NLRB may not be unassailable, they are hardly so “obstructionist” as to justify an extreme response by the president and his supporters.
Thus, it would have been quite possible for the president to nominate one or more NLRB members with a business orientation. He simply did not choose to do so.
The arguments – The president announced Cordray’s recess appointment (with Cordray present) in a speech at Shaker Heights High School in Ohio. His basic argument was Republican obstructionism, and the more vulnerable NLRB appointments were not mentioned until hours later. Transcript, 1/4/12. I want to work with Congress to get [these ideas] done. But when Congress refuses to act, and as a result, hurts our economy and puts our people at risk, then I have an obligation as President to do what I can without them. (Applause.) I’ve got an obligation to act on behalf of the American people. And I’m not going to stand by while a minority in the Senate puts party ideology ahead of the people that we were elected to serve. (Applause.)
House Minority Leader Nancy Pelosi ducked the issue of constitutionality as though it was not worth talking about. Pelosi on nullifying Constitution’s confirmation mandate, Elizabeth Harrington, CNSnews.com, 1/5/12.
A reporter then followed-up, asking, “The Senate, however, was in a pro forma session yesterday and critics are saying the president was not able to make those recess appointments because Congress was not actually in recess –”
Pelosi said, “Well, let that be the public debate with the Senate. Fortunately or unfortunately for us we do not have a role in the confirmation process, but we’re glad that the president took the lead, went out there, was bold and made the appointments.”
Other supporters rushed to validate the appointments. Thus, for example, the Brookings Institution hosted an appearance by Richard Cordray the very next day (presumably prearranged) to present his vision for the CFPB.
http://www.brookings.edu/events/2012/0105_cordray.aspx
Liberal media outlets channeled arguments that the recess appointments were probably OK, even though unprecedented, because Senate “meetings” every three days were a sham. Obama tempts fight over recess appointments, Charlie Savage, New York Times, 1/4/12.
The question of whether Congress can block a president from making recess appointments by staying in pro forma session turns on what counts as a recess — and who gets to decide, legal specialists say.
Republican leaders expressed anger and disgust. McConnell, Boehner rip Obama for “recess” consumer appointment, Newsmax.com, 1/4/12.
Senate Minority Leader Mitch McConnell accused Obama of an
unprecedented power grab that "arrogantly circumvented the American people."
House Speaker John Boehner: "It's clear the president would rather trample our
system of separation of powers than work with Republicans to move the country
forward. This action goes beyond the president's authority, and I expect the
courts will find the appointment to be illegitimate."
Senator John Cornyn (R-TX): “Today’s appointment of another
unaccountable czar is an arrogant abuse of presidential power. *** [we] wonder
why the president is unwilling to work with Congress to adopt common-sense
improvements in accountability and transparency that would protect small
businesses from more job-killing regulations and red tape.”
Rep. Jim Jordan (R-OH): “Both the Clinton and Obama administrations have
acknowledged that recess appointments are not allowed if Congress has met in the
last three days. The House and Senate both met yesterday. This questionable
appointment does not give Richard Cordray any legitimate legal authority to run
a federal agency. I fully expect the courts to overturn this unprecedented power
grab."
And a rash of conservative observers lambasted what they viewed as an unwarranted and probably illegal action.
Washington Examiner editorial: If Obama doesn't like getting the Senate's advice and consent to his nominees, he should take his case to the American people and ask them to amend the Constitution. What he can't do is make up his own rules to suit his re-election campaign strategy. http://bit.ly/xeIPqF
Diana Furchtgott-Roth, Manhattan Institute: What Obama is saying is that he is above the law. He does not need to bother with the Constitution. He's deciding this on his own. http://bit.ly/wepiQP
Robert Knight, Washington Times: The Obama administration’s lawlessness is becoming so obvious that nearly everyone outside the liberal mainstream media has caught on. Many Americans are appalled, but hard-core leftists are delighted. They regard the Constitution as a sham document that enables an oppressive, racist, sexist, homophobic society of the rich to oppress college students. http://bit.ly/zTjrVo
Roger Pilon, Cato Institute: [After saying the recess appointments are unconstitutional, Pilon makes a statutory point.] . . the language of Dodd-Frank is clear: "The Secretary is authorized to perform the functions of the Bureau under this subtitle until the Director of the Bureau is confirmed by the Senate in accordance with section 1011." Cordray has not been "confirmed by the Senate." Therefore, he has no authority "to perform the functions of the Bureau under this subtitle." http://bit.ly/yzer9y
Talk show host Rush Limbaugh: Why don't the Republicans do something here about, you know, we got a guy, recess appointments when there's no recess. The Senate is not in recess. We've actually got Republicans saying, "It's not that big a deal. We don't want to make a big deal. It's not really that big a deal." Oh, it isn't, behaving outside the Constitution is not that big a deal? When's it gonna become a big enough deal to do something about? http://bit.ly/yng8qg
Conclusion – In our view, the four recess appointments were reckless and inappropriate. Yes, arguments can be made that the appointments were technically permissible, but the situation did not justify this break with longstanding precedents.
In essence, the president has presented the Republicans with a fait accompli and dared them to do something about it. If they do nothing, he may win by claiming to be a stalwart champion of the “middle class.” If they respond ineffectually, he could win even more by painting his opponents as losers.
A direct judicial challenge to the appointments seems problematic. The courts are characteristically reluctant about venturing into the political thicket to referee disputes between Congress and the president, and they already have a lot on their plates with the pending challenge to GovCare.
The appointees may be haled before one or more House committees to ask questions, but what would likely be accomplished? After all, it was the president who did the appointing. Obama and Cordray enjoy their recess, Al Kamen, Washington Post, 1/5/12.
Just hours after Obama named Cordray to the post, Cordray got what might be his first missive as head of the Consumer Financial Protection Bureau. Rep. Patrick McHenry (R-NC), who heads a subcommittee of the oversight committee, chaired by Rep. Darrell Issa (R-Calif.), issued a none-too-friendly summons. And there wasn’t even an RSVP card included.
There may be litigation down the road in which plaintiffs seek to challenge actions of the CFPB or NLRB on grounds that the members were invalidly appointed, but by then most people will have forgotten about the issue.
There could be a constructive outcome if mainstream America united in opposition to the recess appointments and demanded that they be cancelled. We would love to see that happen, but so far the public does not seem to be sufficiently concerned about the issue.
One has to worry what the president and his supporters will do for an encore if this brazen action is not effectively confronted.
1/2/12 – Happy 2012, and why it’s time to focus on taxes Read a Reply
Our last entry (12/19/11) counseled fiscal visionaries to disdain “grandiose plans for future action” and “start demanding real corrective action in the here and now.” Why? For all the rhetoric about promoting economic recovery and fiscal responsibility, consider how little got done in Washington last year.
#A deal was struck to hike the debt limit by $2 trillion. True, offsetting spending cuts were mandated over the next decade, but future Congresses can easily reverse them.
#Trade agreements with Colombia, Panama and South Korea, signed in 2008, were belatedly submitted to Congress for approval.
#The U.S. patent system was overhauled without addressing its biggest problem, the filing of overly broad patent claims in an attempt to stifle competition.
#Congress even failed to stop the mandated phase-out of incandescent light bulbs; its temporary ban on enforcement funding will not do the trick. Light bulb changes to begin on Sunday, [Wilmington, DE] News Journal, 12/29/11. http://bit.ly/ghPVOu
#A down-to-the-wire skirmish over extension of the 2% payroll tax cut put an exclamation point on this feckless record. We’ll update that story in a minute.
As for the path forward, many observers are focusing on the 2012 race for the White House and the Congressional seats up for grabs. It is already time for the Iowa caucuses (tomorrow), closely followed by the New Hampshire primary (January 10).
But whatever the election results, leadership changes are at best a first step. Whoever is put or left in charge will bear watching because most politicians tend to get distracted (or worse) after they win office. And some observers question whether the required level of public engagement is worth the effort.
#Retired financial executive: I wish we could toss all the folks in Washington out and start over. That won't happen so my only hope is to not live past 100! I think we can hold on for a few more years; then we are toast!
#Retired attorney: I’m 73 (soon) and will be checking out before our demise is completed. Hope the Grandkids can speak Mandarin Chinese or Arabic.
If one considers what future generations have at stake, the case for staying engaged may seem stronger. If it is possible to leave the country in at least as good shape as we found it, don’t we have an obligation to do so?
In any case, getting engaged in policy discussions could be just as interesting as playing golf, doing crossword puzzles, or losing money at casinos.
For reasons to be explained, the top fiscal issue on the 2012 board looks like tax reform. This could be a fun fight; we invite you to pitch in!
Payroll tax extension - A one-year extension of the payroll tax cut was a bad idea from the start, although the Republicans arguably had to go along with the president’s proposal for political purposes. Bin the payroll tax cut, 12/5/11.
Our policy views were sent to about 60 members of Congress in early December – with zero responses. http://www.s-a-f-e.org/contacting_legislators_2011.htm#120511
The House Republicans decided to support a one-year extension of the payroll tax (and also unemployment benefits), provided that other provisions (not to include income tax increases for high earners) would be included to “pay for it.” A further condition was expedited review of the Keystone XL Pipeline, which had previously been put on hold until after the 2012 elections. (If the president decides against the pipeline, he must now submit a report saying it “would not serve the national interest.”)
In the Senate version of this bill, the payroll tax cut extension was shortened to two months, presumably due to difficulties in finding enough mutually agreeable offsets (or possibly due to a Democrat desire to force the Republicans to vote against tax increases on the upper echelon again in 2012). With both parties committed to a full year extension, the two-step approach was patently phony.
House Speaker John Boehner and his caucus balked, even though Senate Republicans had voted for the deal, asking that the members of the Senate (which had dispersed for the holidays) be recalled so the terms for a full year extension could be negotiated.
Senate Majority Leader Harry Reid refused to do this, and the president supported him. It quickly became apparent that the media and the general public would favor the Democrat position (silly or not). The House GOP was forced to accept the two-month extension bill, leaving the Democrats looking like clear winners on the issue.
About a dozen members of Congress were present when the actions were taken to speed this bill and a year-end spending bill to the president. Billions of dollars passed through Congress’ empty coffers, Stephen Dinan, Washington Times, 12/23/11.
The Senate went first, gaveling into session at 9:30 with just Majority Leader Harry Reid on the floor and Sen. Mark Warner presiding. Mr. Reid read out a preapproved agreement that automatically gave Senate approval to a two-month payroll tax cut once the bill made it over from the House later in the morning. Mr. Warner then gaveled closed the session just 70 seconds after he opened it.
Across the Capitol a half-hour later the House acted. In the space of 90 seconds Rep. Jo Ann Emerson, a Missouri Republican, asked that a bill be introduced, it be excused from going through the regular committee process, the required reading of the legislation be waived and the measure be considered to have passed. House Minority Whip Steny H. Hoyer, a Democrat who came to see the proceedings, took a moment to praise the agreement, and then House Speaker John A. Boehner announced the deal's passage.
Upcoming elections – The 2012 elections could result in a new president (presumably one of the candidates currently vying for the GOP nomination), give the Republicans control of the Senate, give the Democrats control of the House, or perpetuate the status quo.
Rightly or wrongly, we are persuaded that the Republicans will pick up control of the Senate, in large part because the Democrats have more than twice as many seats at risk. Political predictions for 2012, Karl Rove, Wall Street Journal, 12/29/11.
Even if Republicans lose one of the 10 seats they have up, they will have a net pickup of four to six seats, for a majority of 51 to 53.
We also agree with Rove that the Republicans will hold the House, albeit probably by a narrower margin than at present.
Rove ducked predicting the Republican nominee for president; we see Romney as the probable winner. Among other indications, the probability of Romney’s nomination is 77% based on transactions in the intrade.com prediction market. http://bit.ly/fJHE9c
As for Rove’s prediction that the president will be ousted in the general election due to the anemic economic recovery, there are many uncertainties. Thus: (1) Will Romney actually get the nod, and if so how will he stack up against the president (a formidable opponent) on the campaign trail? (2) Will the president’s strategy of focusing on wealth distribution versus the economy resonate with the public? (3) Will some candidate, e.g., Ron Paul, run a third party campaign that cuts into Republican votes? (4) How will the Supreme Court decide the constitutional challenge to GovCare, and how will its decision affect the presidential race? (5) Will a war with Iran erupt, which might tend to rally support for the president? (6) Will a financial crisis in Europe divert attention from US economic weakness? (7) Will the US economy recover faster than is currently expected?
As of now, the general election outcome strikes us as a 50/50 proposition. And for what it is worth, the intrade.com activity to date indicates a 52% probability that the president will be reelected. http://bit.ly/dHvhlM
If the president was reelected, we believe a Republican takeover of the Senate would have only a marginal impact. He would lose the convenience of having the Senate block legislation for him so that he need not exercise vetoes for which he could be held accountable. However, the current effort to ram through policy changes by administrative action would continue. And as the president would no longer have to worry about being reelected, he could afford to use his veto power aggressively.
Even if the Republicans won the White House as well as the Senate, they would not necessarily make major changes in current fiscal policies. The Democrats would still be able to stall legislative initiatives in the Senate, and Mitt Romney is a relatively moderate candidate with big government instincts.
Yes, Romney has promised to throw out GovCare, but he backed the enactment of a quite similar system at the state level while he was governor of Massachusetts and he has yet to suggest an alternative to GovCare.
The fiscal measures outlined in Romney’s book-length campaign platform are generally rather vague, e.g., he offers no convincing explanation of how government spending would be cut to 20% of GDP. Believe in America, Romney for President, Inc. (2011).
It is said the first step towards “getting the federal debt under control” will be “admitting we have a problem and refusing to allow any more irresponsible borrowing.” In, other words, “just say no.” Fine, but how would President Romney propose to get the members of Congress on board?
http://www.s-a-f-e.org/romney_2011.htm
So without minimizing the importance of the upcoming elections – everyone should by all means support the candidates of their choice (and SAFE will contrast the respective policy positions as in 2008) – we would caution against optimism that the results could lead to a quick turnaround.
When the Republicans last controlled both the White House and Congress, they managed to dissipate a budget surplus – not so much by cutting taxes (which is what the other side always complains about) as by allowing spending to balloon out of control. Leviathan on the Right: How Big-Government Conservatism Brought Down the Republican Revolution, Michael D. Tanner, Cato Institute (2007).
In recent years, elements of the Republican Party (neoconservatives, religious right, supply siders, etc.) have adopted a more expansive view of what the federal government should be doing. This goes a long way towards explaining why federal spending has grown faster (real annual growth of 4.9% per year) on George W. Bush’s watch than under any president since Lyndon B. Johnson.
http://www.s-a-f-e.org/leviathan.htm
And we are not the only ones who worry about whether Romney, if elected, would reverse the decline instead of simply slowing it down. The pointlessness of Mitt Romney, Theo Caldwell [apparently a Newt Gingrich supporter], Daily Caller, 12/29/11.
Getting the nation back to where it was in, say, 2007, is not a realistic option. The unfunded liabilities of the country, including Social Security and Medicare, total in the tens, and perhaps hundreds of trillions of dollars. As for debt and deficits, these have taken on a life of their own, rocketing to unheard-of peacetime levels.
http://dailycaller.com/2011/12/29/the-pointlessness-of-mitt-romney/
Focus on taxes – Given the urgency of getting government spending under control, why should fiscal visionaries worry about tax reform? We would suggest three reasons – timeliness, relevance, and politics.
TIMELINESS - Efforts to cut spending are played out for now. Congress never did pass a budget for fiscal year 2012, but the yearend spending legislation closed the door on significant spending cuts before Fiscal Year 2013 (starts on October 1, 2012, a month before the elections). Ergo, nothing much can be done to cut spending before 2013.
On the other hand, taxes must be taken up soon to provide some semblance of guidance to taxpayers and the IRS alike. Among the issues on the docket are the following:
# Extension of the payroll tax cut for the last ten months of 2012, since Congress did not manage to resolve this point in December.
# The annual Alternative Minimum Tax fix to prevent millions of additional taxpayers from becoming subject to this ill-conceived scheme – it’s hard enough to understand one’s taxes when they are only calculated one way.
# Whether individual tax breaks that expired at the end of 2011 should be reinstated, e.g., $500 energy-efficient home improvement tax credit, higher education tuition deduction, state and local sales tax deduction, teacher expenses deduction. 2011 expiring tax breaks, savetoinvest.com. http://bit.ly/v8umcj
# Whether business tax breaks that expired at the end of 2011 should be reinstated, e.g., research and experimentation tax credit, one-year write-off of capital expenditures for small businesses, “a menagerie of alternative energy credits,” and much else.
Traditionally, such deliberations have been almost wholly political. Who has the most public clout, who contributed to my campaign, etc? Whatever happened to all those expiring tax breaks? Howard Gleckman, Forbes, 12/29/11.
Delaying the decision on what to do about these provisions is a glorious annuity for lobbyists and creates more work for the IRS and private lawyers and accountants. But it creates nothing but confusion for taxpayers and reduces whatever small economic benefit many of these subsidies offer.
Why not break the traditional pattern and demand that the list of tax preferences be reviewed and either made permanent or cancelled? It would take less time and effort than the traditional process and yield better results. OK, the payroll tax cut will be extended for the full year because that was the deal, but the AMT should be abolished (not fixed again) and most (maybe all) of the special tax breaks should disappear.
And once these points are settled, Congress should move on to a comprehensive overhaul of the tax law. The review should logically start in the House and be conducted by the Ways and Means Committee.
RELEVANCE – Stop and think what point was made again and again by the Democrat negotiators during the tortuous deficit reduction negotiations last year. There must be a “balanced” solution, they said, meaning they would not discuss meaningful spending cuts unless there were substantial tax increases to go with them.
Whatever one thinks of the balanced solution argument, fiscal visionaries need a position on taxes that goes beyond “cut them” or “no increases.” In other words, we need to be in favor of something in the tax area – and the logical candidate is reform that will make the system simpler, fairer, and more efficient.
While the collection of taxes is never stimulating, the reformed system should do less collateral damage (compliance and enforcement costs, business uncertainty, perverse favoring or penalizing of certain firms or activities) than the unstable, inordinately complicated system that is currently in effect. Both sides should be happy about this.
In short, tax reform cannot solve the fiscal problem, but it could facilitate a more rational discussion of the need for spending discipline than has been seen in recent years.
POLITICS – Not for nothing have the president and his allies been painting the Republicans as opposing proposals for upper echelon taxpayers, aka millionaires and billionaires, to pay their “fair share.”
That’s how the Democrats proposed to pay for a one-year extension of the payroll tax cut, and the tactic worked like a charm. The GOP’s payroll tax debacle, Charles Krauthammer, Washington Post, 12/22/11.
[It was] the perfect campaign ploy: an election-year bribe that has the additional virtue of seizing the tax issue for the Democrats.
The issue will be reprised during the further negotiations over the payroll tax extension, and it will be brought up again later in the year as the January 1, 2013 expiration of the Bush tax cuts (for everyone, not just the upper echelon) draws nigh.
Lacking an affirmative response in this area, the Republican will look like they are defending the right of the wealthy to pay inordinately low taxes. That’s a hopeless position to be in; they should come up with a winnable argument or prepare to lose again.
Our suggestion is simple. There is no way to tell whether the rich are paying “their fair share” without considering the tax system as a whole. The Republicans should start the comprehensive tax reform ball rolling promptly rather than waiting until there is no time available for the task.
As an example, see the SAFE Simple Tax proposal (especially Part Two). Coincident with the elimination of numerous tax preferences, we concluded that income tax rates at all income levels could be cut by 5+ percentage points while still meeting overall revenue goals. http://bit.ly/s2TGde
Reasonable minds could differ as to the details, but reviewing the entire tax system would facilitate a meaningful discussion. Let’s roll!
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Good analysis. I'm not sure it will matter which presidential candidate wins. We will have 4 years of gridlock. - Dan Mitchell, Cato