Political Perspective

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

Month: October, 2012

Obama’s supposed ‘balanced approach’ to debt reduction is actually 88% tax hikes

Obama’s supposed ‘balanced approach’ to debt reduction is actually 88% tax hikes

By James Pethokoukis @ AEI (October 4, 2012)

Several times during the first presidential debate, President Obama talked about taking a “balanced” approach to deficit reduction, meaning both tax hikes and spending cuts.

But Obama’s approach isn’t really balanced at all. Let’s take a look at his 2013 budget:

1. Obama says his budget would achieve $4 trillion in new savings, just like Simpson-Bowles. But he includes a lot of stuff in that $4 trillion that S-B do not. As the Committee for  a Responsible Federal Budget points out:

‘To reach his $4.3 trillion in savings through 2021, the President’s budget counts $1.6 trillion (excluding interest) of  already-enacted savings. In addition, it includes two elements which the Fiscal Commission  assumed in its baseline – a drawdown of the wars ($740 billion through 2021) and the expiration of the upper-income tax cuts ($830 billion through 2021). If the Commission’s plan were scored the  same way as the President’s $4.3 trillion, we estimate it would save roughly $6.5 trillion through  2021.

Compared  to CRFB’s Realistic Baseline, we estimate that all new policies in the President’s budget would save nearly $2 trillion through 2022.

2. OK, so the real savings are around $2 trillion, not $4 trillion. And of that $2 trillion, about $1.735 trillion comes from tax increases, $230 [b]illion come from spending cuts:

3. So, when you do the math, a whopping 88% of Obama’s debt reduction comes from tax hikes. What’s balanced about that? Even worse, that approach is directly counter to economic research showing successful debt reduction programs are heavy on spending cuts and light on tax increases — just the opposite of the Obama plan. AEI’s Andrew Biggs and Matt Jensen:

‘What constitutes a fiscal consolidation? We identified fiscal consolidations using two different methods. The average result of the two methods generated the 85 percent spending share, but each method by itself produced different results. One method showed an average spending share of 66 percent, the other showed an average spending share of 103 percent.

What constitutes success? Following the literature, we called a fiscal consolidation successful if it reduced the debt-to-GDP-ratio by 4.5 percentage points. There is nothing sacred about this threshold for success. We will note, however, that the higher the threshold for success, the larger the expenditure share of successful consolidations. For instance, if we set the bar for success at 6.5 percentage points of GDP, the expenditure share of the average successful fiscal consolidation rose from 85 percent to around 100 percent.’

4. We already have an example of how Obama-style austerity works. Just look at Europe where cash-strapped governments are relying heavily on tax hikes to balance their books. As taxes go up, growth goes down. The Financial Times:

Portugal announced sweeping new tax increases in an effort to keep the country’s faltering bailout programme on track amid a powerful public backlash against increased belt-tightening.

The new round of what the government described as “enormous” tax rises came as Lisbon revealed it would miss this year’s recently relaxed budget deficit target by the equivalent of 1.1 percentage points if it failed to take exceptional measures.

The Obama debt reduction approach is dangerously unbalanced.

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Bill Clinton is wrong. Barack Obama is wrong. This economy could be so much better

Bill Clinton is wrong. Barack Obama is wrong. This economy could be so much better

By James Pethokoukis @ AEI (September 28, 2012)

“No president — no president, not me, not any of my predecessors, no one could have fully repaired all the damage that he found in just four years.” – Bill Clinton, 2012 Democratic National Convention.

First things first: It’s unclear whether Bill Clinton has any special insight about dealing with recession and its aftermath. He inherited a nearly two-year-old recovery from his predecessor, George Bush. (In fact, U.S. GDP grew by 3.4% in 1992 vs. 2.9% in Clinton’s first year in office.) Clinton did, however, bequeath a recession to his successor, George W. Bush, after the Internet bubble popped. So there’s that.

More to the point, let’s look at Clinton’s New Normal claim. Repair all the damage? Has any of the damage been repaired?

1. If you take into account combined high unemployment, low labor force participation, and slow GDP growth, 2012 might well be the worst non-recession, non-depression year in the history of the United States. The only other challenger is 2011. Or maybe next year.

2. There has been no income growth during this recovery.

3. Indeed, by some measures, incomes have fallen sharply.

4. The only reason the unemployment rate has declined to near 8% from 10% (and isn’t over 11%) is that the labor force has collapsed and millions of unemployed are no longer being counted by the government. As a JPMorgan economist puts it, “There has been essentially no progress in repairing the labor market after the recent downturn.”

5. Growth has averaged only 2% in this recovery while it averaged 6% in the 1980s recovery. That, even though deep downturns are usually followed by strong rebounds.

6. And yet another year of sub-normal economic growth, below 3%, means the output gap between where GDP is and where it should be (if the economy were growing merely at trend) continues to grow.

7. And the growth gap is bad news for the jobs gap – the number of jobs the U.S. economy needs to create in order to return to pre-recession employment levels while also absorbing the people who enter the labor force each month. At last month’s pace, we would not close the jobs gap until after 2025.

8. There there’s falling U.S. competitiveness. As measured by the World Economic Forum, the U.S. was #1 in 2008. Now we are 7th. (Two growing problems, according to the analysis: a) wasteful and ineffective government and b) crony capitalism.)

9. And how about the weakening entrepreneur sector? There are fewer new firms being formed today than two years ago when the recession ended. In fact, the rate of startup jobs during 2010 and 2011, years that were technically in full recovery, are the lowest on record.

10. Also, no progress has been made the past four years on tax and entitlement reform.

11. Finally, debt as a share of GDP has exploded the past four years, and under Obama’s most recent budget would remain at dangerously high levels for a decade before exploding even higher.

There has been no recovery. Economic historians may well refer to the 2007-2012 period (and 2013, 2014 …) as the Long Recession or the Long Great Recession or some such.

Now to Clinton’s second point: No president could have done better. In other words, we are experiencing the optimal outcome.

To answer that, let me tell a wonderful story. Even better, it’s a true story.

In 1981, the U.S. economy was a shambles, a complete and utter mess. And that was bad news not only for Americans, but for the rest of the Free World. The decline in American economic power was leading to a decline in American military power and confidence. Our enemies no longer respected or feared us.

But it turns there was nothing wrong with America that couldn’t be fixed with what was right with Americans. Deregulation and tax cuts (under Reagan) and reduced spending (under Clinton) unleashed our inherent entrepreneurial and innovate talents. Our resources were shifted from government to the private sector where they could be used more productively and efficiently.

The wonder-working power of economic freedom in action. Instead of decline and diminished expectations, the end of the 20th century saw America ascend to new heights. Reagan’s Shining City on a Hill. From 1981 through 2000, the U.S. economy grew at an average annual rate of 3.4% and created some 42 million jobs.

But then we fell back. The old faith in big government slowly returned in Washington. During the 1990s, we started bailing out troubled banks, which only encouraged them to take bigger, more dangerous risks in the 2000s. And we decided it was government’s job to put every American in a house, whether he or she could afford it or not. And we started spending again. Big time.

When America was booming, we consistently had one of the freest economies in the world, according to a ranking of economic freedom from the Fraser Institute. But during this most recent period, our freedom ranking steadily declined to 8th in 2005, 15th in 2009 and 18th in 2010. The U.S. is now nestled between Qatar and Kuwait. Too many bailouts. Too much government. Too much spending. Too little economic freedom where markets decide winner and losers, not bureaucrats.

Bill Clinton is wrong. This is not as good as it gets. It could be better had we tried what worked in the past. Economic freedom. But Barack Obama doesn’t buy this story, doesn’t believe in it. He disparages it, mocks it:

‘There is a certain crowd in Washington who, for the last few decades, have said, let’s respond to this economic challenge with the same old tune. “The market will take care of everything,” they tell us. If we just cut more regulations and cut more taxes—especially for the wealthy—our economy will grow stronger. But here’s the problem: It doesn’t work. It has never worked.’

Some American president could have done a better job creating an environment that would have helped America return to prosperity.

Just not this one.

Tax Reform: Lessons from the Cayman Islands

Tax Reform: Lessons from the Cayman Islands

By Douglas Holtz-Eakin @ National Review (September 19, 2012)

The Cayman Islands have taken a public-relations beating this U.S. electoral season — a poor reward for developing a sensible business model in the complicated world of international finance. Rather than demonizing those who use Cayman subsidiaries, U.S. public policy should be informed by the facts.

Almost everybody with a global business has a Cayman subsidiary, as do many U.S. colleges and universities. Why? First and foremost, any venture interested in having the participation of foreign investors needs a location that has a strong rule of law, well-developed financial services, and is outside the reach of the IRS. International investors need the protections and financial services, and have no desire to have their investments entangled with the IRS. The Caymans, along with Bermuda, the Bahamas, and others fit the bill.

What does this tell us about tax policy? Well, certainly it has nothing to do with tax evasion. The moment an individual has a dollar of earnings in a Cayman venture, the appropriate tax is due on the interest, dividend, or capital gain. So there is no tax advantage for an individual.

For corporations, however, the tax treatment matters. In striking contrast to nearly every other developed country, the United States continues to tax worldwide earnings of corporations. Thus, for example, if an international investment headquartered in the Caymans earns $100 in Brazil, it will first pay the $15 in tax due to Brazil. For other international investors, that is the end of the story.

U.S. investors, however, must then pay a second layer of tax to the U.S. government, bringing their tax rate up to the U.S. level of 35 percent. This additional $20 is owed, however, only when the earnings are brought back to the United States (“repatriated”). If the funds merely flow back to the Cayman-based subsidiary, the tax is not yet due.

This has two major implications. First, the funds may be deployed from the Caymans to a new international opportunity without paying the second layer of tax. Second, the U.S. firm is able — at least temporarily — to compete on an even footing with other countries investing in Brazil.

There is the lesson. The existence, success, and scale of the Cayman financial sector should tell U.S. policymakers to look outward to opportunities around the globe as a way to enlarge the markets for U.S. workers and take advantage of the potential income from the 95 percent of the world’s consumers that live outside U.S. borders.

And second, the U.S. tax system should be configured so that its firms can compete permanently on a level playing field with companies from other countries. In practice, this means that the U.S. should bring itself into alignment with global best practice and adopt a territorial tax system. A territorial system would tax U.S. earnings at the U.S. rate, but not tax international earnings. Instead, those earnings would be subject to a single layer of tax at the host-country rate — allowing for a level playing field for competition. And those earnings should be repatriated tax-free so that the U.S. economy can benefit from global success.

 

Dems’ Favorite Lie: McConnell Wanted Obama to Fail from the Start

Dems’ Favorite Lie: McConnell Wanted Obama to Fail from the Start

By Ben Shapiro @ Breitbart (September 24, 2012)

Back in December 2010, two full years into Barack Obama’s presidency, Senate Minority Leader Mitch McConnell (R-KY) remarked, “Our top political priority over the next two years should be to deny President Obama a second term.” He was speaking after two years of Obama ramming through exponential spending increases, Obamacare, and a feckless foreign policy that had crippled United States policy in the Middle East. He also stated that he didn’t want Obama to fail, but to change.

Yet now the left uses McConnell’s words to show that Republicans were the true obstacle to Obama’s success. The truth is that Obama’s legislative success is the single greatest obstacle to his presidential success – his policies have been disastrous. But the media and the Democrats want to blame “partisanship” rather than the President.

So they lie about McConnell’s statement. Instead of placing it in the context of two years of Obama experience in steamrolling Republicans, they pretend that McConnell said it at the outset of the Obama presidency.

The President’s Trillion-Dollar Deficits

The President’s Trillion-Dollar Deficits

By Veronique de Rugy @ National Review (September 26, 2012)

Who remembers President Obama’s first budget? I do. It was called “A New Era of Responsibility.” Back then, the president promised that he would cut the deficit to $912 billion in 2011 and to $581 billion by 2012. But that’s another of the president’s promises that never come to pass. As Fiscal Year 2012 nears to an end, the data shows that the deficit for 2012 will surpass a trillion dollars for the fourth straight year in a row.

But according to the president, he has almost no responsibility in this sad state of affairs. In fact, he claims that “90 percent” of the deficit is due to President Bush’s policy:

‘Over the last four years, the deficit has gone up, but 90 percent of that is as a consequence of two wars that weren’t paid for, as a consequence of tax cuts that weren’t paid for, a prescription drug plan that was not paid for, and then the worst economic crisis since the Great Depression.’

That’s a remarkably bold statement considering that President Obama has been in office for four years, and that he has engaged in seriously expansive policies of his own. I am always happy to remind conservatives about the incredible fiscal irresponsibility that reigned during the Bush years, but for Obama to claim that he shares almost no responsibility (10 percent, to be precise) in this fourth trillion-dollar deficit is ridiculous.

In fact, Washington Post’s Glenn Kessler looked at the claim this morning and concludes that the president deserves four Pinocchios for it. Using data from my colleague Chuck Blahous, he breaks down the numbers for us:

2009:

  • Economic/technical differences: $570 billion (46 percent)
  • Bush policies: $330 billion (27 percent)
  • Obama policies: $325 billion (27 percent)

2010:

  • Economic/technical: $815 billion (51 percent)
  • Bush: $225 billion (14 percent)
  • Obama: $565 billion (35 percent)

2011:

  • Economic/technical: $720 billion (46 percent)
  • Bush: $160 billion (10 percent)
  • Obama: $685 billion (44 percent)

Now Obama’s solution for cutting the deficit is simple: Blame the deficit on the Bush tax cuts and raise taxes on the rich. While we can commend the president for his persistence in repeating the same thing over and over again, it doesn’t make it true and it certainly won’t fill our budget gaps.

It is simply incorrect to blame the deficit mostly on tax cuts. In fact, a few weeks ago, the CBO released a report that looks into the cause of the disappearing surpluses at the end of the 1990s and show that half of the blame goes to increased spending. Here is a chart:

As you can see, according to the CBO estimates, tax cuts contributed to 24 percent of the surplus’s disappearance (and some of these tax cuts were extended by Obama). Projection inaccuracy alone contributed even more than tax relief.

It is really unfortunate that President Bush’s 2003 tax cuts were not followed by serious spending cuts. I do believe that well-designed tax cuts have a very positive impact on the economy. However, no tax cuts can compensate for the damage caused by the dramatic increase in spending that we experienced during the Bush years (a 60 percent increase in spending above inflation over eight years, compared to Clinton’s 12.5 percent; two Keynesian stimuli in 2001 and 2008; bailouts; and more.)

And if spending is mainly responsible for our current deficit, it should play a large role in addressing the problem — there aren’t many other ways to go about it. Congress must cut spending and cut it fast. More important, it must reform Medicare, Social Security, and Medicaid, since they are the drivers of our debt crisis. The rule is simple: Reform the entitlements, save the world. Ignore them, and you can count on many more $1 trillion dollar deficits in our future. And please, don’t get fooled by the doomsday predictions that the world will end if sequestration – across-the-board spending cuts — is allowed to go into effect on January 2.

Mitt Romney Just Helped Create 52,000 Jobs

Mitt Romney Just Helped Create 52,000 Jobs

By Kevin D. Williamson @ National Review (September 18, 2012)

Forget every stupid thing you’ve ever heard a politician say about “job creation” — this is what it really looks like. Entrepreneurs have ideas, management teams seek incremental improvements, and investors invest. Sometimes it works out, sometimes it doesn’t. There’s nothing dramatic about it, no great speeches, no grand plan to create 140,000 jobs at a single firm. It just happens. Sometimes a company makes a big bet on a promising firm, like Bain with Staples or Morgan with Kohl’s. Sometimes it is a quiet, conservative bet, like Brookside with Kohl’s. Both are necessary in the marketplace, and that is where the money comes from to make a couple of stores into a national retail powerhouse that sometimes needs an extra 52,000 employees to see it through the busy season. Maybe a part-time job at Kohl’s is not what you’re looking for, but those jobs at Apple and Kinder Morgan are a result of the same process. They sure as hell aren’t the result of politics. In the world of politics, one guy — the president — has an outsized role in everything. In the real world, lots of people play lots of small roles in making big things happen.

That Mitt Romney has allowed himself to be put on the defensive over his role in this business says something about him, but it says more about the American electorate. Barack Obama gives speeches about job creation. But this is how it’s done. Obama’s demonization of investors and Romney’s unwillingness to offer a compelling defense suggests that both sides are betting that the American people are too stupid to understand what makes their economy work.

The Bush Economy: A needed reappraisal

The Bush Economy: A Needed reappraisal

By James Pethokoukis @ AEI (September 28, 2012)

This gives me a newshook to again point out the huge misperception of the Bush economy:

1. There was an eight-month recession in 2001 that officially began in March and ended in October. It was marked by a huge decline in business investment, while consumer spending stayed positive. Good luck explaining how his policies caused a stock and investment bubble to burst in 2000, months before he was elected.

2. The 2002-2006 period was the core of the Bush recovery after the 2001 recession. GDP growth averaged 2.7 percent a year, and the economy added an average of 102,000 jobs a month. Hardly a powerful rebound. But then again, we shouldn’t have expected one given how mild the downturn was. As a Fed study said late last year, recoveries “tend to be faster” after severe recessions, such as the one we just had. The deeper the downturn, the more robust the rebound. The 2001 recession was mild, and so was the recovery after.

3. Isn’t the most obvious explanation for the “weak” Bush recovery simply one of mean reversion? Things more or less returned to average. The Clinton boom veered too far above the real growth and job creating potential of the U.S. economy, so it was balanced off by a weak recovery after the 2001 recession.

From 1996-2000, GDP growth averaged 4.3 percent a year, and average monthly jobs growth was 240,000 jobs per month. Now, if you combine those five years with the 2002-2006 Bush recovery, what you end up with is average GDP growth of 3.3 percent and monthly job growth of about 170,000 a month. Both figures are right around the average for the U.S economy. The Clinton economy was a bit on the hot side, so the Bush years were a bit on the cool side. The U.S. economy reverted to its mean.

And again, the Bush polices didn’t cause the Great Recession, no matter what Obama campaign ads say.

ObamaCare’s Tax Raid on Medical Devices

ObamaCare’s Tax Raid on Medical Devices

By Evan Bayh @ WSJ (September 27, 2012)

The Supreme Court decision in June upholding the Affordable Care Act leaves in place a tax on medical devices that threatens thousands of American jobs and our global competitiveness. It will also stifle critical medical innovation in the industry that gave us defibrillators, pacemakers, artificial joints, stents, chemotherapy delivery systems and almost every device we depend on to save lives.

The 2.3% tax will be charged to manufacturers on each sale and takes effect in January. Many U.S. device companies, in response, have already announced layoffs, canceled plans for domestic expansion and slashed research-and-development budgets. This month, Welch Allyn—a maker of stethoscopes and blood-pressure cuffs—announced that it will lay off 10% of its global workforce over the next three years, but all of the jobs being cut are in the U.S.

All of this is now threatened by the only law that is guaranteed to pass in Washington: the law of unintended consequences.

A 2.3% tax on medical-device sales, not profits, was imposed under the theory that sales to medical-device companies would surge after patients newly insured by the Affordable Care Act poured into the system. What the industry lost in margins, it was supposed to make up in greater volume.

That calculation ignored the fact that the vast majority of medical-device consumers already are covered by Medicare, Medicaid or private insurance. So there will be little or no increase in sales volume to offset the added cost of $30 billion—according to the Congressional Budget Office—to the industry. This tax comes straight out of a company’s bottom line. Because many devices are sold to hospitals, physicians and other providers through multiyear contracts, the prices are already locked in, so the tax cannot be passed on to the buyer.

The hit will be severe. For a typical company, a 2.3% tax on revenues equals a 15% tax on profits. When combined with a 35% corporate tax and state corporate taxes, the tax rate for the medical-device industry will exceed 50% in most jurisdictions. Many marginally profitable businesses will then hemorrhage red ink, since they’ll have to pay the excise tax whether they are making money or not.

Especially hard hit could be the hundreds of small companies developing medical software applications. These apps promise to revolutionize the practice of medicine—for instance, by delivering blood-sugar test results for diabetics. The IRS is deciding now whether to treat apps as medical devices subject to the tax.

FYI, the author and former Senator (D-IN) Bayh voted twice for ObamaCare.

GDP collapse puts U.S. economy into recession red zone

GDP collapse puts U.S. economy into recession red zone

By James Pethokoukis @ AEI (September 27, 2012)

GDP growth for the second quarter was revised down to 1.25%.

U.S. economic growth is dangerously slow. I’ve frequently written about research from the Fed which finds that since 1947, when two-quarter annualized real GDP growth falls below 2%, recession follows within a year 48% of the time. And when year-over-year real GDP growth falls below 2%, recession follows within a year 70% of the time.

Citigroup has also taken a shot at determining the stall speed: “Specifically, when U.S. growth has cut below 1½ percent on a rolling four-quarter basis, it has tended to fall by nearly 3 percentage points over the following four quarters, and the economy has typically entered recession.

Welcome to the Recovery: 2012 may be the worst non-recession, non-depression year in the history of the United States

Welcome to the Recovery: 2012 may be the worst non-recession, non-depression year in the history of the United States

By James Pethokoukis @ AEI (September 27, 2012)

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There have been worse years for the American economy than this one, of course. For example: 2009, 1982, the entire 1930s.

But those years occurred during official recessions or the Great Depression. Right now we are supposed to be in the third year of a recovery.

But look how 2012 is shaping up: After a weak 2011 when GDP growth was just 1.8%, this year’s growth rate looks even weaker. Today the Commerce Department revised second-quarter GDP growth to just 1.3% (1.25%, actually). As a result, many banks are now looking for growth of around 1.5% for the rest of the year — with plenty of downside risk. Full year GDP might be less than 1.5%, putting the economy at heightened risk of falling back into recession.

And at the same time, unemployment remains stuck above 8%, and the labor force remains so shrunken that JPMorgan recently said “that there has been essentially no progress in repairing the labor market after the recent downturn.”

Given anemic growth and a dead-in-the-water labor market, could it be that this is the worst non-recession, non-depression year in modern U.S. economic history? Maybe even since the birth of the Republic?

Quite possibly. Here is my evidence:

– Commerce Department data goes back to 1930. Since then, there has been no single year with GDP growth as weak as 2012 that wasn’t in recession.

– The United States has not had this sustained level of 8%-plus unemployment since the Great Depression.

So based on those two data points, this is certainly the weakest non-recession, non-depression year since 1930, with the only year close being 2011!.

But what about earlier than that? Well, the data gets a little tricky. But here is what I have determined.

– 8% or higher unemployment is very rare before 1930 during times of generalized growth. For instance, from 1869 to 1899, there was only one year where unemployment averaged 8%. And there is also evidence that unemployment below 5% was typical earlier in America’s history. Also keep in mind that labor force participation from 1850- 1920 among males was around 90%. Today, labor force participation is around 64%. So it is rare that so many people who want jobs are idle, as is the case today.

–  As far as GDP growth goes, let’s break it down by decades. From 1790-1810, U.S. economic growth averaged about 5% a year. From then to the Civil War, it averaged around 4%. Same for the post-Civil War era through 1900. Then until 1930, growth averaged between 2% to 3%.

My conclusion: If you combine high unemployment, low labor force participation, and slow GDP growth, 2012 might well be the worst non-recession, non-depression year in the history of the United States. The only other challenger is 2011. Or maybe next year…