Political Perspective

"The facts are unmistakably plain, for those who bother to check the facts." – Thomas Sowell

Month: September, 2012

Sorry, New York Times, tax cuts do lead to economic growth

Sorry, New York Times, tax cuts do lead to economic growth

By James Pethokoukis @ AEI (September 17, 2012)

And one thing policymakers and journalists — and voters — should be sure of is that cutting tax rates can be a pretty effective way to boost economic growth. And raising tax rates hurts economic growth. I could point to numerous studies and historical examples. But here’s just one, a study from Christina Romer, President Obama’s former top economist: ”Tax increases appear to have a very large, sustained, and highly significant negative impact on output … [and] tax cuts have very large and persistent positive output effects.”

Now some folks, mostly found on the left, would like to believe this economic reality isn’t so. They would like to believe that America can pay for the coming deluge of entitlement spending by raising taxes on the rich with no impact on economic growth.

Example: this opinion piece from liberal New York Times columnist David Leonhardt, which suggests tax cuts don’t lead to higher economic growth. Basically, his whole argument is one of simple causality. There have been times when high taxes rates and high economic growth have peacefully coexisted. In fact, growth has been higher in the U.S. when taxes have been higher. Leonhardt seems to think this conclusion from a Congressional Research Service is an argument ender:

‘The top income tax rates have changed considerably since the end of World War II. Throughout the late-1940s and 1950s, the top marginal tax rate was typically above 90%; today it is 35%. Additionally, the top capital gains tax rate was 25% in the 1950s and 1960s, 35% in the 1970s; today it is 15%. The average tax rate faced by the top 0.01% of taxpayers was above 40% until the mid-1980s; today it is below 25%. Tax rates affecting taxpayers at the top of the income distribution are currently at their lowest levels since the end of the second World War.

The results of the analysis suggest that changes over the past 65 years in the top marginal tax rate and the top capital gains tax rate do not appear correlated with economic growth. The reduction in the top tax rates appears to be uncorrelated with saving, investment, and productivity growth. The top tax rates appear to have little or no relation to the size of the economic pie.’

But this a very old, very tired argument.

1. Yes, from the late 1940s though the early 1960s, economic growth averaged 3.7% even though top tax rates were around 90% (though effective tax rates were much lower). From 1983 through 2007, when top tax rates were 50% or less, GDP growth averaged around 3.3%.

2. But as I have written frequently, the post-World War II decades were affected by many one-off factors, not the least of which was that they occurred right after a devastating global war that left America’s competitors in ruins. A National Bureau of Economic Research study described the situation this way: “At the end of World War II, the United States was the dominant industrial producer in the world. … This was obviously a transitory situation.”

And as former Bain Capital executive Edward Conard notes in his new book, Unintended Consequences:

‘The United States was prosperous for a unique set of reasons that are impossible to duplicate today, including a decade-long depression, the destruction of the rest of the world’s infrastructure, a failure of potential foreign competitors to educate their people, and a highly restricted supply of labor. For the sake of mankind, let’s hope those conditions aren’t repeated. It seems to me anyone who makes comparisons between today’s economy and that of the 1950s and 1960s without fully disclosing their differences is deceiving their readers.’

3. Starting in the early 1970s, economic growth slowed in advanced economies (perhaps because the benefits from great innovations from the Second Industrial Revolution had run their course.) But growth slowed less in nations that embraced pro-market reforms such as deregulation and lower marginal tax rates. For instance, while U.S. per capita GDP grew by 55% from 1981-2000, French per capita GDP grew by just 39%.

4. Then there are the Clinton years. Clinton raised taxes and the economy did just fine. What about that?

Well, a) when Clinton signed that tax hike bill, the economy had been growing for 9 straight quarters, including by 3.4% annually over the previous six quarters; b) the ’90s saw a big drop in oil prices, from $23 a barrel in 1991 to $12 in 1998, boosting real disposable incomes; c) government spending declined from 22.3% of GDP in 1991 to 18.2% in 2000, meaning fewer resources as a share of the economy were being used unproductively by Washington; d) the late 1990s saw a big cut in the capital gains tax rate to 20% from 28%; e) the late 1990s also saw a big surge in private investment, particularly in the software and business equipment category which contributed a full point to GDP during those years. Did the Clinton tax hikes cause that or was it a combo of the Internet Bubble, Year 2000 preparations, the cap gains cut, and the beginning of a computer networking and communications revolution? My bottom line on the 1990s:

‘The U.S economy entered the 1990s after undergoing a huge revamp in the 1980s: marginal tax rates were lowered from 70% to 28%, the inflation menace slayed, regulations reduced, and businesses got restructured and way more efficient. Then in the 1990s, government spending and debt were reduced, investment taxes cut, and a technological revolution kicked into high gear. Plus the Soviet Empire collapsed and the cloud of possible nuclear holocaust was lifted. Market capitalism was on the march. People were optimistic as heck about the future. And in the midst of all that, taxes were raised in 1993. So that means taxes should be raised now — and Obama wants to do so in the most economically harmful and inefficient ways — in a time of economic stagnation and pessimism?

Taxes and tax rates aren’t the only things that matter to economic growth, of course. And every tax cut won’t pay for itself. Moreover, government needs enough revenue to pay for defense, basic research, and a safety net.

But taxes are pretty important. And pro-growth tax reform – particularly if the U.S. shifted from an income tax to a consumption tax – could boost employment and income growth and give government more revenue to pay down debt.

Have mercy on the nation that doubts that.

Advertisements

Missing in Action: Growth

Missing in Action: Growth

By Steve Connor @ The American (September 17, 2012)

Neither party denies that our growing debt is rapidly taking us in the wrong direction, but neither party is giving the best remedy—economic growth enhancement—the top billing it deserves.

In the economic policy debate, there are two elephants in the room: The size and growth of our national debt, and the size and growth of our national economy. They belong together; when we address one, we should address the other at the same time. Unfortunately, that hasn’t been happening.

Nonetheless, the size and growth of our overall economy deserves more attention than the debt, and more attention than the middle segment of our society’s income distribution. Why? Because the larger our overall economy, relative to the debt, the less of a debt problem we face, and the better off all income classes will be. Sufficient growth solves many problems, and that is why it deserves top billing in the policy debates. (This has been the subject of previous essays of mine, such as “What Does Fiscal Responsibility Mean?” and “The Debt Ceiling Distortion,” but the theme is worth repeating.)

One elephant: The growing national debt

The national debt is large and growing. During political campaigns, it always gets plenty of attention from the party trying to recapture the White House, but seldom gets much airtime from the incumbent party. For example, prior to the crash in 2008, candidate Obama pointed to the increase in the debt as a major failure of the Bush presidency. But four years later, the roles have been reversed. It is now the Republicans’ turn to draw everyone’s attention to the federal debt. As a result, the Republican convention in Tampa dutifully featured an in-our-face debt clock, while the Democrats’ convention in Charlotte dutifully ignored the subject.

That reversal is no surprise; it’s politics. “Debt” is a scary word, and “16 trillion” is a scary number. The Democrats are avoiding the subject of our $16 trillion federal debt for good reason: They want to retain the White House, and avoiding that issue is smart politics. Likewise, the Republicans want to recapture the White House; pressing the debt as an issue is smart politics for them.

The other elephant: Growing the national economy

Similar to the national debt, the national economy is also large and growing. But it was at best a secondary theme at both parties’ conventions. Economic growth received honorable mention in a few speeches, but got nowhere near the top billing it deserves. That’s too bad, because the biggest benefits of economic growth include its ability to offset any problems caused by the federal debt—even if the debt continues to grow and grow—as well as its ability to boost incomes in all classes, not just the middle class. John F. Kennedy said it succinctly: “A rising tide lifts all the boats.” As an example, President Obama submitted a budget in 2009 that forecasted a real growth rate that would climb to 4.2 percent  by 2013; of course, that trajectory hasn’t panned out, but if it had, the deficit and debt would not be major issues today. (The current growth rate is less than half of that estimate, by the way, and that’s the main reason the deficit and debt are major issues.)

Although neither party denies that our growing debt is rapidly taking us in the wrong direction, neither party is giving the best remedy—economic growth enhancement—the attention it deserves. Why? Because short-term politics trumps long-term economics. Inequality anecdotes play better to the Democrats’ base; fear of debt plays better to the Republicans’ base. The Democrats’ focus on reducing inequality to correct perceived economic injustice crowds out the growth discussion. Likewise, the Republicans’ error of equating the debt “level” with the debt “burden” tends to narrow the debate to “cutting spending,” which also crowds out the growth discussion.

When growth is crowded out of the debate, its major benefit fades into our past. The presidencies of Kennedy, Reagan, and Clinton revealed the economic bonanza that growth can yield: A surprisingly large increase in federal tax receipts without the need for any increase in tax rates, and reduction or elimination of the burden of debt. Growth lifts all boats, and it deserves top billing in economic policy debates.

Tax Rates Impact Economic Performance, but other Policies also Matter

Tax Rates Impact Economic Performance, but other Policies also Matter

By Daniel J. Mitchell @ CATO (September 17, 2012)

…even though I’m a big advocate for better tax policy, the lesson from the Economic Freedom of the World Index…is that adopting a flat tax won’t solve a nation’s economic problems if politicians are doing the wrong thing in other areas.

There are five major policy areas, each of which counts for 20 percent of a nation’s grade.

  1. Size of government
  2. Regulation
  3. Monetary Policy
  4. Trade
  5. Rule of Law/Property Rights

Now let’s pick Ukraine as an example. As a proponent of tax reform, I like that lawmakers have implemented a 15 percent flat tax.

But that doesn’t mean Ukraine is a role model. When looking at the mix of all policies, the country gets a very poor score from Economic Freedom of the World Index, ranking 125 out of 141 nations.

Conversely, Denmark has a very bad tax system, but it has very free market policies in other areas, so it ranks 15 out of 141 countries.

In other words, tax policy isn’t some sort of magical elixir. The “size of government” variable accounts for just one-fifth on a country’s grade, and keep in mind that this also includes key sub-variables such as the burden of government spending.

Yes, lower tax rates are better for economic performance, just as wheels matter for a car’s performance. But if a car doesn’t have an engine, transmission, steering wheel, and brakes, it’s not going to matter how nice the wheels are.

Not let’s shift from theory to reality. Here’s the historical data for the United States from Economic Freedom of the World. As you can see, overall economic policy moved in the right direction during the Clinton years and in the wrong direction during the Bush-Obama years.

To be more specific, the bad policy of higher tax rates in the 1990s was more than offset by good reforms such as lower trade barriers, a lower burden of government spending, and less regulation.

Similarly, the good policy of lower tax rates last decade was more than offset by bad developments such as a doubling of the federal budget, imposition of costly regulations, and adoption of two new health entitlements.

This is why I have repeatedly challenged leftists by stating that I would be willing to go back to Bill Clinton’s tax rates if it meant I could also go back to the much lower levels of spending and regulation that existed when he left office.

Paul Ryan’s Neocon Manifesto

Paul Ryan’s Neocon Manifesto

By Bret Stephens @ WSJ (August 14, 2012)

What Mr. Ryan’s speech really tells us, however, is that he knows how to think.

Most foreign-policy speeches by American politicians take the form of untidy piles of verities and clichés. Here, for example, is Barack Obama on China: “As we look to the future, what’s needed, I believe, is a spirit of cooperation that is also friendly competition.” Here he is on the U.N.: “The United Nations can either be a place where we bicker about outdated differences or forge common ground.” Here he is to the British Parliament: “The time for our leadership is now.”

Mr. Ryan doesn’t have the president’s reputation for eloquence. Nor do his speeches ride on the windy drafts of “Yes We Can.” But unlike Mr. Obama, his speeches communicate ideas and arguments, not pieties and emotions.

Thus this speech begins not with a cliché but with a contention: “Our fiscal policy and our foreign policy are on a collision course.” It proceeds, briefly, to demonstrate the point quantitatively: Defense spending in 1970 consumed 39% of the federal budget but takes only 16% today. In the proverbial guns-to-butter ratio, our veins are already clogged.

The ‘Clinton bounce,’ the sour economy and Romney’s challenge

The ‘Clinton bounce,’ the sour economy and Romney’s challenge

Washington Examiner (September 15, 2012)

Depending on which poll you look at, President Obama received anywhere between a 3-point (according to Gallup) or 4-point (according to CNN) bump in his lead over Mitt Romney in the race for the White House following the Democratic National Convention.

A deeper look at the numbers shows that it was former President Clinton who gave Obama his bounce. According to Gallup, only 43 percent of adults thought Obama’s convention speech was “excellent.” The rest of America either thought it was “OK” (17 percent) or “terrible” (16 percent), or had no opinion (24 percent). Independents had even lower opinions of Obama, with just 35 percent rating the speech “excellent” and 39 percent saying it was “OK” or “terrible.”

Clinton’s speech was rated “excellent” by 56 percent of American adults. That is 13 points better than Obama’s performance. To the extent that Democrats got a bounce out of their convention, it was a Clinton bounce.

What about Clinton’s speech is driving voters into the Obama column? Just look at the “right track”/”wrong track” numbers from polls that have shown Obama taking the lead. Before Clinton’s speech, only 29 percent of respondents told Rasmussen Reports that the United States was headed in the right direction. Now 37 percent do. NBC News, ABC News and Reuters all picked up similar changes in how Americans feel about the direction of the country.

Which was exactly the theme of Clinton’s convention speech, in which he said, “No president — not me or any of my predecessors — could have repaired all the damage in just four years. But conditions are improving, and if you’ll renew the president’s contract, you will feel it.”

The thing is, Clinton is dead wrong. “Conditions” are not improving. The Commerce Department released data this week showing that median household income dropped again last year and has fallen to its lowest level since 1994. Last month, the same department released numbers showing that American incomes declined more during the Obama recovery than they did during the recession.

And according to the Labor Department, the number of jobs created by U.S. employers has not only fallen from just 153,000 a month last year to an anemic 139,000 a month this year, but has basically flatlined at just 96,000 new jobs last month. A different Labor Department survey also found that the number of Americans with jobs has actually declined the last two months by more than 300,000. And more than 500,000 Americans became so discouraged, they exited the workforce entirely.

Looking forward, the economy would get even worse if Obama were re-elected. Americans face nearly $500 billion in tax hikes, some signed into law by Obama and others set to take effect automatically this coming January. Along with $100 billion in spending cuts, this fiscal cliff is expected to send unemployment skyrocketing above 9 percent.

Is this really the path Americans want their country to go down? If Romney wants to win this November, not only must he remind Americans that we are suffering through a truly terrible economy, he must also explain exactly how he will defuse the short-term fiscal time bomb Obama has created.

The Mummy Walks!

The Mummy Walks!

By Mario Loyola @ National Review (September 15, 2012)

“The ideal of self-reliance in America,” he writes, “has always been attended by a corollary of indifference to others, of nastiness.” That may well be the view among American liberals, but I once met a French graduate student who was researching why rich people give so much more to charity in America than in Europe. Go figure.

Anyway, conservatives very much believe in the social safety net. That is no mere “pander,” it is a matter of philosophy, indeed of faith and responsibility. But conservatives rightly insist that the safety net should be tailored to the most needy; that it should avoid unintended social consequences; and that family and charity are better sources of succor from both the giver’s and the beneficiary’s point of view. Charity works because those who take it feel an obligation to pay it back in some way, at least by improving themselves. But the whole concept of an entitlement is that you’re entitled to it, because of your circumstances — regardless of how you got there. That is far more enfeebling and dehumanizing than charity, a topic that deserves more attention than it has received.

“The problem for Ryan’s steely vision,” Wieseltier tells us, “is that many people do need help, and they are usually not responsible for the circumstances that have driven them to seek help. They suffer through no fault of their own. Sometimes they suffer through the fault of people who have more money and more power than they do.”

I wholeheartedly agree with this assertion. It’s true even in the case of children born to unwed mothers in low-income neighborhoods who wind up failing at school and leading a life of drug abuse and violent crime. In Detroit, 80 percent of children are born to deeply uneducated unwed mothers. Among the 15 percent or so of the population that is below the poverty line, the typical household consists of an unemployed single mother and her children. As a widespread family unit, that demographic didn’t even exist before the 1960s. Now millions of children are born into it every year, condemned to a life of poverty — by the Great Society’s anti-poverty programs.

You decide whether it is critics or supporters of these devastating welfare programs who are the more heartless. But before you point the finger at Ryan, recall that it was Daniel Patrick Moynihan who lamented that welfare subsidies were destroying low-income families by eliminating the need for a father and eliminating the need for any adult actually to work. In fact, this 1977 article by Moynihan is as damning an indictment of the welfare state as anything you’ll hear from Paul Ryan. It appeared in The New Republic.

How Republics Fall

How Republics Fall

By Michael Knox Beran @ National Review (September 17, 2012)

The weird ecstasy of the media-political complex at the convention in Charlotte last month was the first sign that its attachment to President Obama, always fawning, had become morbid.

In spite of the anemic economy and a real unemployment rate above 11 percent, the high priests of pontificating liberalism were giddy with euphoria. The Democrats “put on a nearly flawless convention,” Paul Begala opined, and it was soon all but incontrovertibly established that, come November, the president — beautiful, magical, and lovable as he was — would vanquish his boring opponent.

The media savants sympathized with the delirium of Charlotte because they worship at the same altar and feed at the same trough. Two and a half centuries ago Edmund Burke said the reporters’ gallery in Parliament was an estate “more important far than” the other three put together. Today America’s Fourth Estate is not merely predisposed, as it has been for generations, to favor a particular political party: It is deeply engaged in the hero worship of a particular political leader.

The closeness of mainstream journalists to President Obama has debauched their integrity. Some of them give the White House veto authority over their stories. Others look to be rewarded with plum jobs or stimulus-funded ads. This abasement before power presages a return to a time when political writers, among them Swift and Defoe, were the professed protégés of statesmen and relied on Whig or Tory patronage for their bread; it also leaves the country vulnerable to the distortions of ostensibly neutral journalists who are too fervently committed to the leader to tell the truth about him.

Obama worship, once the quaint foible of Grub Street liberalism, has become its opium, perhaps its bath salts. The unhinged quality of its analysis was painfully evident during the interval of bounce-talk that followed Charlotte. When, after days of media cheerleading, Obama rose modestly in the polls, the acolytes instantly sounded the death knell for Romney. The election was all but over, the princes of palaver declared. Time’s Mark Halperin spoke of the Romney campaign’s “death stench,” and MSNBC’s Steve Benan said that the president was now “exactly where he wants to be.”

Would a less prejudiced observer claim that the president was exactly where he wanted to be in early September, with a credit downgrade looming, a miserable jobs report on the wires, and a strike by Chicago schoolteachers trash-talking the generous, even lavish deal they had been offered, the kind of deluxe package that induced liberal Wisconsin to rise in revolt against public-sector irresponsibility?

Then came Cairo and, still more terribly, Benghazi. The “Gang of 500,” as Halperin styles the bigwigs with whom he shares the liberal soapbox, was duly outraged . . . by Mitt Romney. The Republican nominee had the lèse-majesté to criticize Obama’s foreign policy.

The president’s own statement on Benghazi, which he delivered in the Rose Garden before departing for a campaign event in Las Vegas, went largely unscrutinized by the media gang: “Libyans helped some of our diplomats find safety, and they carried Ambassador Stevens’s body to the hospital, where we tragically learned that he had died.”

The president’s air of certainty contrasted sharply with the reticence of his underlings. The State Department has consistently said it does not know what happened to Ambassador Stevens that night, and grim photographs cast doubt on the notion that he had been innocently conveyed from the bloody scene.

The Beltway clerisy failed to ask the obvious question: Was the president’s version of his emissary’s death a self-serving attempt to salvage a failing foreign policy? Three years ago Obama went to Cairo “to seek a new beginning between the United States and Muslims around the world.” Should we learn that the men in the Benghazi photographs were not good Samaritans generously carrying an American to safety but thugs snapping trophy pictures of a Yankee infidel, Obama’s “new beginning,” if it came at all, will not have made much of a difference. The “new” Middle East in which American diplomats are abused and murdered and black flags fly over American embassies may prove to look a lot like the Old Middle East.

Which raises another question: If the administration’s Islamic policy has failed to pacify Islam and “make us safer,” why didn’t the president act forcefully in the months preceding the tragedy to protect American diplomats? Yet other than the British Independent and Matt Drudge, no big journalistic enterprise pressed for an explanation. Rather than probe the most devastating assault on the diplomatic corps since 1979, the media-political complex blithely turned its collective attention to happier matters, among them the president’s rising poll numbers in the swing states.

Like the decadents of France’s ancien régime, the liberal literati of mainstream journalism are convinced that the party will go on forever. Islamic zealots can be talked out of making nuclear bombs; stagnant growth and high unemployment can be counteracted with a Caesarian policy of bread and shows, free food and even free cell phones; a moribund economy can be propped up with the saline drip of Ben Bernanke’s liquidity transfusions.

As detached from reality as Marie Antoinette milking cows with Sèvres buckets, liberal journalists fail to grapple in any serious way with the“crisis of liberalism” at home and abroad, preferring instead to compose billets-doux to Barack praising his basketball prowess and panegyrics on Michelle’s dexterity as a horticulturalist.

In the unreal city of progressive punditry, a charismatic leader uncommonly gifted in the preaching of sermons really can build a brave new world in which benevolent planners use other people’s money to mold a better life for the masses. If the same Comtean model bankrupted Europe, that’s because European regulators failed to master the esoteric arts of “quantitative easing,” which magically does away with the need for intelligently invested private capital.

Having been corrupted into a semi-official state press, America’s mainstream media is now transforming the most important election in a generation into the political equivalent of an episode of The Bachelor. Liberalism’s scribal class is actually pleased that the contest has become a referendum not on the president’s record or his plans but on his charisma and popularity. In the kingdom of vapor, substance has no place.

This is how republics die, in thrall to the inane, the frivolous, and the inconsequential. A liberalism incapable of persuading the public to embrace its policies has been converted by its media tribunes into a publicity stunt. As a result, the nation that gave the world the Federalist Papers and the Lincoln–Douglas debates may very well reelect a flawed chief executive for no other reason than that he has been continuously portrayed as a super-nice guy by the media lackeys who tend the Obama cult.

Is it later than we think? Very possibly.

The Magnitude of the Mess We’re In

The Magnitude of the Mess We’re In: The next Treasury secretary will confront problems so daunting that even Alexander Hamilton would have trouble preserving the full faith and credit of the United States.

By George P. Shultz, Michael J. Boskin, John F. Cogan, Allan H. Meltzer and John B. Taylor @ WSJ (September 16, 2012)

Sometimes a few facts tell important stories. The American economy now is full of facts that tell stories that you really don’t want, but need, to hear.

Where are we now?

Did you know that annual spending by the federal government now exceeds the 2007 level by about $1 trillion? With a slow economy, revenues are little changed. The result is an unprecedented string of federal budget deficits, $1.4 trillion in 2009, $1.3 trillion in 2010, $1.3 trillion in 2011, and another $1.2 trillion on the way this year. The four-year increase in borrowing amounts to $55,000 per U.S. household.

The amount of debt is one thing. The burden of interest payments is another. The Treasury now has a preponderance of its debt issued in very short-term durations, to take advantage of low short-term interest rates. It must frequently refinance this debt which, when added to the current deficit, means Treasury must raise $4 trillion this year alone. So the debt burden will explode when interest rates go up.

The government has to get the money to finance its spending by taxing or borrowing. While it might be tempting to conclude that we can just tax upper-income people, did you know that the U.S. income tax system is already very progressive? The top 1% pay 37% of all income taxes and 50% pay none.

Did you know that, during the last fiscal year, around three-quarters of the deficit was financed by the Federal Reserve? Foreign governments accounted for most of the rest, as American citizens’ and institutions’ purchases and sales netted to about zero. The Fed now owns one in six dollars of the national debt, the largest percentage of GDP in history, larger than even at the end of World War II.

The Fed has effectively replaced the entire interbank money market and large segments of other markets with itself. It determines the interest rate by declaring what it will pay on reserve balances at the Fed without regard for the supply and demand of money. By replacing large decentralized markets with centralized control by a few government officials, the Fed is distorting incentives and interfering with price discovery with unintended economic consequences.

Did you know that the Federal Reserve is now giving money to banks, effectively circumventing the appropriations process? To pay for quantitative easing—the purchase of government debt, mortgage-backed securities, etc.—the Fed credits banks with electronic deposits that are reserve balances at the Federal Reserve. These reserve balances have exploded to $1.5 trillion from $8 billion in September 2008.

The Fed now pays 0.25% interest on reserves it holds. So the Fed is paying the banks almost $4 billion a year. If interest rates rise to 2%, and the Federal Reserve raises the rate it pays on reserves correspondingly, the payment rises to $30 billion a year. Would Congress appropriate that kind of money to give—not lend—to banks?

The Fed’s policy of keeping interest rates so low for so long means that the real rate (after accounting for inflation) is negative, thereby cutting significantly the real income of those who have saved for retirement over their lifetime.

The Consumer Financial Protection Bureau is also being financed by the Federal Reserve rather than by appropriations, severing the checks and balances needed for good government. And the Fed’s Operation Twist, buying long-term and selling short-term debt, is substituting for the Treasury’s traditional debt management.

This large expansion of reserves creates two-sided risks. If it is not unwound, the reserves could pour into the economy, causing inflation. In that event, the Fed will have effectively turned the government debt and mortgage-backed securities it purchased into money that will have an explosive impact. If reserves are unwound too quickly, banks may find it hard to adjust and pull back on loans. Unwinding would be hard to manage now, but will become ever harder the more the balance sheet rises.

The issue is not merely how much we spend, but how wisely, how effectively. Did you know that the federal government had 46 separate job-training programs? Yet a 47th for green jobs was added, and the success rate was so poor that the Department of Labor inspector general said it should be shut down. We need to get much better results from current programs, serving a more carefully targeted set of people with more effective programs that increase their opportunities.

Did you know that funding for federal regulatory agencies and their employment levels are at all-time highs? In 2010, the number of Federal Register pages devoted to proposed new rules broke its previous all-time record for the second consecutive year. It’s up by 25% compared to 2008. These regulations alone will impose large costs and create heightened uncertainty for business and especially small business.

This is all bad enough, but where we are headed is even worse.

President Obama’s budget will raise the federal debt-to-GDP ratio to 80.4% in two years, about double its level at the end of 2008, and a larger percentage point increase than Greece from the end of 2008 to the beginning of this year.

Under the president’s budget, for example, the debt expands rapidly to $18.8 trillion from $10.8 trillion in 10 years. The interest costs alone will reach $743 billion a year, more than we are currently spending on Social Security, Medicare or national defense, even under the benign assumption of no inflationary increase or adverse bond-market reaction. For every one percentage point increase in interest rates above this projection, interest costs rise by more than $100 billion, more than current spending on veterans’ health and the National Institutes of Health combined.

Worse, the unfunded long-run liabilities of Social Security, Medicare and Medicaid add tens of trillions of dollars to the debt, mostly due to rising real benefits per beneficiary. Before long, all the government will be able to do is finance the debt and pay pension and medical benefits. This spending will crowd out all other necessary government functions.

What does this spending and debt mean in the long run if it is not controlled? One result will be ever-higher income and payroll taxes on all taxpayers that will reach over 80% at the top and 70% for many middle-income working couples.

Did you know that the federal government used the bankruptcy of two auto companies to transfer money that belonged to debt holders such as pension funds and paid it to friendly labor unions? This greatly increased uncertainty about creditor rights under bankruptcy law.

The Fed is adding to the uncertainty of current policy. Quantitative easing as a policy tool is very hard to manage. Traders speculate whether and when the Fed will intervene next. The Fed can intervene without limit in any credit market—not only mortgage-backed securities but also securities backed by automobile loans or student loans. This raises questions about why an independent agency of government should have this power.

When businesses and households confront large-scale uncertainty, they tend to wait for more clarity to emerge before making major commitments to spend, invest and hire. Right now, they confront a mountain of regulatory uncertainty and a fiscal cliff that, if unattended, means a sharp increase in taxes and a sharp decline in spending bound to have adverse effect on the economy. Are you surprised that so much cash is waiting on the sidelines?

What’s at stake?

We cannot count on problems elsewhere in the world to make Treasury securities a safe haven forever. We risk eventually losing the privilege and great benefit of lower interest rates from the dollar’s role as the global reserve currency. In short, we risk passing an economic, fiscal and financial point of no return.

Suppose you were offered the job of Treasury secretary a few months from now. Would you accept? You would confront problems that are so daunting even Alexander Hamilton would have trouble preserving the full faith and credit of the United States. Our first Treasury secretary famously argued that one of a nation’s greatest assets is its ability to issue debt, especially in a crisis. We needed to honor our Revolutionary War debt, he said, because the debt “foreign and domestic, was the price of liberty.”

History has reconfirmed Hamilton’s wisdom. As historian John Steele Gordon has written, our nation’s ability to issue debt helped preserve the Union in the 1860s and defeat totalitarian governments in the 1940s. Today, government officials are issuing debt to finance pet projects and payoffs to interest groups, not some vital, let alone existential, national purpose.

The problems are close to being unmanageable now. If we stay on the current path, they will wind up being completely unmanageable, culminating in an unwelcome explosion and crisis.

The fixes are blindingly obvious. Economic theory, empirical studies and historical experience teach that the solutions are the lowest possible tax rates on the broadest base, sufficient to fund the necessary functions of government on balance over the business cycle; sound monetary policy; trade liberalization; spending control and entitlement reform; and regulatory, litigation and education reform. The need is clear. Why wait for disaster? The future is now.

Wait, Who’s Political?

Wait, Who’s Political?

By Stephen F. Hayes @ The Weekly Standard (September 13, 2012)

Mitt Romney is being accused of crass political opportunism for speaking up about the attacks on U.S. interests in Egypt and Libya on the eleventh anniversary of 9/11. And not just by his political opponents. By Wednesday evening Reuters, in a straight news piece, reported that Romney’s comments “had become a public relations debacle for the Republican’s presidential campaign” and risked being seen as “unsavory political opportunism.”

The lede of the Washington Post story read: “Crises overseas tend to create moments of joint resolve back home, a time to pause from the daily bickering of partisan politics. But as news was streaming in from attacks on U.S. diplomatic missions in Egypt and Libya, Mitt Romney broke from that protocol.” Other news outlets echoed these sentiments.

The unstated assumption is that Mitt Romney got political while Barack Obama was busy being presidential. That’s not what happened. Overlooked in the media rush to condemn Romney for his comments is the extent to which the Obama campaign – and White House – continued its political activities.

So, some context.

In the early morning hours of 9/11, before any recognition of the solemnity of that day, a tweet went out from Barack Obama’s account that noted: “The election is in 8 weeks. Sign up to volunteer. http://OFA.BO/s3tXFz.” He later tweeted a brief statement acknowledging the anniversary. “As painful as this day is and always will be, it leaves us with the lesson that no act of terrorism can ever change what we stand for – bo.”

A short time later, Obama adviser David Axelrod took to Twitter point out that Sheldon Adelson, a major Romney contributor, would benefit under a Romney presidency. “Yowza! Adelson bets big on Romney, and under Mitt’s tax scheme, the casino mogul would walk off with a $2 billion pot.”

In the early afternoon, after a report from Ha’aretz that Obama had rejected a request for a meeting from Israeli Prime Minister Benjamin Netanyahu, a senior administration official acknowledged on background that with an election six weeks away the president had political interests and obligations that would be keeping him busy.

Later in the day, Politico reported that the Obama campaign was releasing a blistering new ad accusing the Romney-Ryan ticket of being “dangerous” for women. The ad opens in Obama’s voice: “I’m Barack Obama and I approved this message.” Then, young woman wearing her concern on her face, says: “Mitt Romney’s position on women’s health – it’s dangerous.” She accuses Romney and Ryan of seeking to “take away our basic health care.”

Tuesday evening, as news was streaming in from attacks on U.S. missions in Egypt and Libya, Bill Clinton offered harsh attacks of Republicans to a crowd of more than 2,000 at an Obama campaign rally in south Florida. Clinton spent much of his speech demagoguing Medicare. But he also accused Romney and his party of a “militant, bitter anti-govermnent strategy.”

(Romney, meanwhile, gave a speech to the National Guard that largely avoided politics, and Paul Ryan dropped by a fire station in Oak Creek, Wisconsin, and a campaign office in Waukesha.)

Shortly after midnight, just a few hours after the Bill Clinton’s event was finished, Obama campaign press secretary Ben La Bolt responded to the Romney campaign statement criticizing Obama. “We are shocked that, at a time when the United States of America is confronting the tragic death of one of our diplomatic officers in Libya, Governor Romney would choose to launch a political attack.”

On Wednesday morning, Romney gave a press conference and reiterated his critique of Obama’s handling of the situations in Libya and Egypt. A short time later, President Obama read a statement from the Rose Garden, lamenting the loss of life in the attack on the consulate in Benghazi. It was but a short pause from the daily bickering of partisan politics.

Not long after his Rose Garden statement, Obama sat for an interview with Steve Kroft of 60 Minutes. Kroft asked Obama for his thoughts on Romney’s criticism. Obama said: “I think most Americans, Democrats or Republicans, understand that there are times where we set politics aside, and one of those is when we’ve got a direct threat to American personnel who are overseas.”

A few hours later, shortly after 2:00 p.m., Obama boarded Air Force One for Las Vegas, the first stop in a two-day campaign swing that includes a stop in Golden, Colorado, on Thursday. The campaign that never really stopped was back on. At a press gaggle en route, a reporter asked a question of White House press secretary, Jay Carney.

“This is not a time to try to score political points. As the President said, as a general practice, politics should be put aside when the lives of American personnel are at risk, as they were last night.”

So, when Clinton was speaking or when the campaign was unveiling its abortion ad? Carney didn’t say.

Another reporter asked a question of Jen Psaki, a spokesman for the Obama campaign. “Can you just elaborate a little bit more of what we can expect from the president at the event later today? Should we still be thinking of this as a campaign rally?”

So as the media pound Mitt Romney for allegedly violating the inviolable space around 9/11 and difficulties overseas, remember this about Barack Obama. He sought campaign volunteers and his top adviser launched a harsh attack on Romney early on 9/11. His top surrogate, Bill Clinton, let loose a tough attack on Romney and entitlements that evening. Obama rejected a meeting with a key ally potentially on the verge of war at least in part because he might need to be campaigning at the end of the month. And after a pause of his campaign activities that lasted approximately 14 ½ hours, the president resumed his normal campaign schedule with a trip to Las Vegas, where gave a speech that echoed his address to the Democratic National Convention in Charlotte last week.

Who’s being political?

The White House’s Medicare Hypocrisy

The White House’s Medicare Hypocrisy

By Grace-Marie Turner @ National Review (September 13, 2012)

Top Obama administration advisers must justify their hypocrisy over criticisms of the Romney-Ryan Medicare proposal after internal memos have surfaced showing they advised the White House to adopt a similar approach in 2010, according to Manhattan Institute health-policy expert Avik Roy.

Even worse, the advisers wanted President Obama to go around Congress to turn Medicare into a “voucher.”

Roy reports in a piece for Forbes entitled “Top Obama Advisers Proposed Voucherizing Medicare Way Back in . . . 2010?”:

‘Meghan McCarthy of National Journal obtained internal White House emails documenting that two key Obama health-care advisers—David Cutler of Harvard and Jonathan Gruber of MIT—proposed that Obama privatize the Medicare program as part of the negotiations surrounding the Bowles-Simpson deficit commission in 2010, in ways that were well to the right of what Mitt Romney has proposed.

‘“How about this…removing the special status of [traditional] Medicare,” Cutler wrote, according to McCarthy. Obama’s fiscal commission should support “moving the Medicare population into the [Obamacare] exchanges…that would be the same as the voucher” proposed by Rep. Paul Ryan and former Clinton budget Chief Alice Rivlin, in what became known as the Rivlin-Ryan plan.’

Roy — who is a solid analyst and also an outside adviser to the Romney campaign — writes:

What’s even more remarkable about Cutler’s suggestion, according to McCarthy, is that Cutler proposed enacting this reform by going around Congress. Cutler proposed using Obamacare’s new Medicare rationing board, the Independent Payment Advisory Board, to impose such a reform upon seniors without Congressional amendment.

‘I happen to think that privatizing Medicare is a good thing. But imposing that change upon the country—without going through the normal democratic channels—is certainly aggressive, and takes Cutler’s change of heart to another level. As McCarthy noted, “That is a proposition you won’t hear in talking points from either Cutler or the Obama campaign.”’

This is the same David Cutler, we must note, who three weeks ago published a blistering and factually inaccurate critique of the Romney-Ryan plan, claiming that it would “harm all seniors” by bringing modest and well-established reforms to the program.

Cutler wasn’t alone with his advice that the White House support the privatization of Medicare.  He was joined by MIT health economist Jonathan Gruber, who also backed the Rivlin-Ryan “premium support” plan. “So overall I like this proposal for Medicare,” Gruber wrote. When interviewed by McCarthy, he explained, “In theory, [premium support] is not wrong” then explained what would need to happen for it to work.