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Exchequer

NRO’s eye on debt and deficits . . . by Kevin D. Williamson.

Bring on the Draconian Cuts



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Hark, unless mine eyes are cheated, it appears that the House has passed a bill — on energy and water development — that would spend less money than we spent last year. Indeed, that is the case: The $30.4 billion bill is $2.9 billion less than was appropriated for 2013. If my always-suspect English-major math is correct, that $2.9 billion represents a full 0.08 percent of 2012 federal outlays.

The White House has threated to veto these “draconian cuts.” Seriously — OMB put out a statement calling these “draconian cuts.” Does anybody over there know what “draconian” means?

Among the prize pigs being slaughtered by our beady-eyed Republican friends is a multimillion-dollar national propaganda campaign on behalf of alternative-energy interests, which went down thanks to Representative Tim Walberg of Michigan. It is bad enough that the federal government subsidizes these politically connected energy firms — spending millions of dollars of taxpayers’ money to push their wares as well is a bit much to stomach.

Representative Mike Burgess (R., Texas) offered an amendment that would block federal regulation of refrigerators and incandescent light bulbs, while Representative Marsha Blackburn (R., Tenn.) took aim at ceiling-fan regulations. ARPA-E, the Department of Energy’s answer to DARPA, would see its funding cut by $215 million — that’s millions with an “m,” there, out of a budget in the trillions — and various other programs would be trimmed and consolidated.

Draconian cuts. Indeed.

This is all very good, and it deserves to become law. But it also offers a dramatic illustration of how difficult it is to cut spending without cutting the areas where the spending actually happens. This may be a minuscule cut in terms of overall federal spending, but it’s an 81 percent cut for ARPA-E, and a 50 percent cut for the newly consolidated delivery/reliability/efficiency/renewables program. The people who receive grants and other financial benefits under those programs will howl, and — more important — those who earn their living staffing those programs will fight to the death to avoid the hunt for productive employment in the real economy. That is why spending reductions on those kinds of programs are never really enough: You have to eliminate the program entirely. Conservative populists sometimes get mocked for promising to cut entire cabinet agencies, but, in the long term, that is the most promising model for achieving a healthy fiscal balance.

Obligatory reminder: None of this matters very much without entitlement reform and controls on defense spending. Non-defense discretionary spending, i.e. the stuff everybody promises to cut or cap, is a small part of federal spending.

The Department of Energy, which like the Department of Education is a creature of the Carter administration, does some useful things: For historical reasons, it is entrusted with maintenance of the country’s nuclear arsenal, and it sponsors some worthwhile research. None of which justifies having a cabinet agency to tell us what kind of light bulbs to use. The best course of action would be to turn the department’s defense functions over to Defense and its research functions over to the National Science Foundation and to zero out most of the rest. That’s what real fiscal reform would look like.

Instead, we’ll probably be treated to a veto and drawn-out fight over a minuscule reduction in federal outlays simply because every dollar of federal spending eventually lands in the pocket of somebody with a powerful interest in receiving it. None of that is helped by the Obama administration’s apparent ideological commitment to maximizing the federal government’s control over the U.S. economy and its resources, a project that it pursues relentlessly while wondering why its more excitable critics describe its agenda as socialism.

Yesterday, I wrote about “Obamaphones for millionaires,” the federal program under which telephone companies serving Maui beach developments and Scottsdale golf communities receive subsidies amounting to thousands of dollars per year for every line they install. The comments were predictable: Self-identified conservatives wrote in to assure me that, while they agree that federal spending is out of control, these programs — just these — are really, truly necessary, and that the telecoms receiving those billions of dollars a year in subsidies are totally deserving. Every dollar in spending creates its own constituency, whether it produces cash in hand or a government-funded national ad campaign for your business. Representatives Walberg, Burgess, et al. will have worked a minor miracle if they can make the trivial reductions they have proposed a reality.

— Kevin D. Williamson is a roving correspondent for National Review and author of the newly published The End Is Near and It’s Going to Be Awesome.

Tags: Fiscal Armageddon , Corporate Welfare

Today in Fiscal Foolishness



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On the Corner: Delaware considers a bailout for casinos.

Texas plans to spend millions of dollars to replace thousands of new computers (via Pratt on Texas). 

Hey, let’s all have a big fight about a highly speculative forecast involving 3 percent of the federal deficit ten years hence!

Florida county pays $144,000 for phantom signage — but tips room service generously.

Quebec is worried about wasteful spending. Solution: Spending $500,000 on a committee to study wasteful spending.

Tags: Fiscal Armageddon , General Shenanigans

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Detroit Defaults



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The City of Detroit has defaulted on a portion of its bonds, specifically on payments to unsecured creditors. Those who invested in bonds with dedicated revenue streams attached have been spared, for the moment, but the reorganization plan drawn up by emergency manager Kevyn Orr envisions a great deal of “shared sacrifice,” which apparently is what they’re calling it these days.

Typically, bondholders in the past have lost interest due them, but not their principals. That is not going to be the case in Detroit. Specifically, Detroit is expecting its creditors to take less than 10 cents on the dollar for having been foolish enough to lend money to the collection of misfits, miscreants, and criminals who govern that poor city. That’s step one. Step two is . . . borrowing more money, in order to pay for a program meant to rebuild the city’s institutions, reinvigorate its economy, and improve basic services. Who, I wonder, would be foolish enough to lend Detroit money hot on the heels of a default? The answer is likely to include the unwilling taxpayers of Michigan and those of the United States.

Detroit’s tax revenues are declining, and the city already is at or near the legal limit for the various taxes it imposes. It has a city income tax, but that will not do it a tremendous amount of good: In 2000, Detroit had 353,813 employed persons; today it has only 279,960. In 2000, it had an unemployment rate of 7.3 percent; today, it has an unemployment rate of 18.6 percent. It is a blighted and crime-ridden city — now the second-most-dangerous city in the country, according to the FBI, with nearby Flint leading the pack — which in addition to being a broader social problem is specifically a tax problem: Property values, and hence property-tax collections, are declining. 

Kevyn Orr has also made it clear that reductions in pensions and health-care benefits for city retirees are a necessary part of any long-term solution for Detroit, which of course they must be: The city currently spends 40 percent of its revenue on so-called legacy costs, mostly retiree benefits.

That 40 percent number jumped out at me: Under current Congressional Budget Office projections, the federal government’s spending on its legacy costs (Social Security, Medicare, and interest on the debt) will be more than 50 percent of revenue in ten years. And, though the total impact will be small, you probably can add to those federal totals a little bit to account for the fact that Detroit plans to get out from under its health-care costs in part by dumping its liabilities onto Medicare and Obamacare. Thanks, Detroit!

As has been discussed at some length here, it is not entirely clear that Detroit, to say nothing of fiscally moribund states such as California or Illinois, legally can reduce its pensions and retiree benefits. In Michigan as in most states, those payments are protected by statute and/or constitutional provision. Orr is making it clear that he believes Detroit can reduce those payments — it simply does not have the money to make them and cannot raise sufficient funds through taxes. There are federal bankruptcy protections available to cities, though Detroit apparently plans to try to reorganize without a formal bankruptcy — Orr says there is a 50/50 chance that the city will not enter formal bankruptcy. But there are no such bankruptcy protections for states, and, unless the public-sector unions agree to a haircut for retirees (stop laughing) the pension mess probably is headed for the Supreme Court.

Detroit already is looking for federal assistance. For example, it is planning on spinning off the city water authority as a quasi-autonomous entity in the hopes that it will generate a nice revenue stream. It will be looking for federal loans to help make that happen. It will be looking for more federal funds to address its blight problems, to fix up the Coleman A. Young airport, to help fund services through grants, etc. It will be looking for money from the state of Michigan, too.

The problem is that the same political leadership that brought Detroit to this sorry pass remains in power. There probably is not much that can be done about that, and very little, short of mass seppuku in front of the Spirit of Detroit statue, that would convince me that they have mended their ways. Detroit cannot be trusted with its own money, it cannot be trusted with its creditors’ money, and it certainly cannot be trusted with federal taxpayers’ money.

— Kevin D. Williamson is a roving correspondent for National Review and author of the newly published The End Is Near and It’s Going to Be Awesome.

 

 

Tags: Bankruptcy , Bonds , General Shenanigans

Killing Pollyanna



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There has been an unfortunate outbreak of deficit naivety in the past few weeks. Ezra Klein declared the deficit “pretty much solved, at least for the next 10 years or so,” Daniel Gross greeted the news as a “bombshell,” and others have echoed that sentiment. He cites a recent Congressional Budget Office report on the subject, but the report itself is considerably less cheery, as is CBO director Doug Elmendorf, who has been bracingly honest in his dismissal of the happy talk that we can get the deficit under control without either cutting the benefits collected by middle-class Americans or raising their taxes.

That deficit that is “pretty much solved” for the next decade is the primary federal budget deficit, the Baby Deficit that adds to the Baby Debt, i.e., the official federal debt, which excludes the trillions upon trillions of dollars in unfunded liabilities related to Social Security, Medicare, and other entitlements. The deficit does look relatively small — only a few hundred billion dollars! — if you don’t count the real liabilities.

And if you take only the short-term view. The current reductions in the deficit are partly the result of unexpectedly large payments from Fannie Mae and Freddie Mac, which cannot be counted on to continue. They are also the result of recent tax increases and the modest brake on spending imposed by the sequester. Which is why Elmendorf is not dancing with Pollyanna, instead saying:

Federal debt held by the public is projected to remain historically high relative to the size of the economy for the next decade. . . . Such high and rising debt would have serious negative consequences: When interest rates rose to more normal levels, federal spending on interest payments would increase substantially. Moreover, because federal borrowing reduces national saving, the capital stock would be smaller and total wages would be lower than they would be if the debt was reduced. In addition, lawmakers would have less flexibility than they might ordinarily to use tax and spending policies to respond to unexpected challenges. Finally, such a large debt would increase the risk of a fiscal crisis, during which investors would lose so much confidence in the government’s ability to manage its budget that the government would be unable to borrow at affordable rates.

So the takeaway is not “Problem solved!” or even “pretty much solved.” What are the lessons to be learned?

1. Austerity works. Our little experiment with the most modest kind of austerity — small tax increases, the sequester — has produced the desired results, also modest. (Our approach has been so modest, I’m not even sure I’d call it “austerity,” though I like the sound of the word.) The enduring claim by some on the right that the negative economic effects of tax increases undercut their value as a tool of deficit reduction does not seem to be borne out. Conservatives do not like tax increases, but conservatives also do not like defense cuts or deficits. You can prioritize that list however you like, but your chances of avoiding all three are pretty slim. So far as I can tell, the only people really complaining about the sequester are a platoon of federal lifers and a handful of defense contractors in Virginia. They’re all nice people, I’m sure, but if it’s their interests or the national interest, my preference is that they start looking for a paycheck not financed by taxpayers. Can we afford more defense cuts? I suppose that depends on how you feel about a war with Syria. Can we afford real cuts in non-defense spending? Of course. But neither of those is going to get it done until everybody admits that . . .

2. Entitlement reform is not optional. Social Security and (especially) Medicare will be the major drivers of debt going forward. Left unreformed, those programs will, simply put, consume the federal budget and destroy the American economy.

3. We can’t forget about cities and states. Last week I had a conversation about matters budgetary with some congressional budget leaders (I gave them the short version of The End Is Near And It’s Going to Be Awesome), which was encouraging to me but would have been discouraging to California and Illinois if they had been listening in, and a few other states, too. California and Illinois are badly upside-down when it comes to retiree pensions and other obligations, and there is no obvious way for them to get out of the hole they have dug for themselves — save one. Members of Congress already are girding themselves for the bailout requests they expect to receive from insolvent states, and the answer they are preparing to give is: “No,” possibly “Hell, no!” Their people may elect jackasses, but the Port of Los Angeles, Silicon Valley, and Chicago are big pieces of the American economic picture. If something is not done about our worst states, and done soon, they will make the federal picture that much worse — not because Washington is likely to bail them out, but because . . .

4. Growth matters. A lot. The Obama administration has, unsurprisingly, failed to deliver a robust and sustained recovery from the 2009 recession. There are many reasons for this, and scholarly tomes will be written about the sorry economic history of the Obama years. The relevant fact for deficit hawks is that slow growth means fewer jobs, which means fewer people paying taxes and more people supported by them. It is a national scandal that work real employment rate — the labor-force-participation rate — is down to levels not seen since the Carter years. I remain skeptical of dessert-first conservatives who think we can grow our way out of this mess without serious spending cuts, entitlement reform, and changes in tax policy, but better growth does have to be a part of the solution: a necessary but not sufficient condition for the restoration of fiscal sanity.

I am pleased that CBO is forecasting deficits that will be measured in the middle hundreds of billions of dollars range than in the low trillions range, but if you think that this is an occasion for breaking out the Veuve Clicquot and the 23-carat-gold-dusted chocolate-covered bacon (how do you celebrate?), consider this via Kyle Wingfield: On our current trajectory, spending on health care will double by 2023 to nearly $2 trillion per year; Medicare spending will double; Obamacare subsidies will cost $1 trillion; Social Security will nearly double; interest on the debt will double, meaning that it will be the third-largest item on the budget, behind health care and Social Security.

So, unless you intend to spend the next ten years pretty much solving your problems by emigrating to Switzerland or Singapore, there is little if any cause for celebration.

Kevin D. Williamson is a roving correspondent for National Review and author of the newly published The End Is Near and It’s Going to Be Awesome.

The One Number You Need to Know in O’s Budget



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Here’s the number to keep in mind: $763 billion.

If enacted, Barack Obama’s latest budget would mean that in just ten years, interest payments alone on the national debt would begin pushing the trillion-dollar mark: $763 billion a year by 2023. That may be a rosy estimate: It assumes that interest rates, currently near historic lows, do not rise a great deal over the next ten years as the Treasury continues to pile up new debt. If interest rates do climb a bit higher — not even to their historical average, but higher than they have been of late — then those interest payments easily could be more than $1 trillion a year.

But let’s stay with that $763 billion a year for now. How much money is that? It is more money than the federal government spent on anything in 2011: The largest single spending item in 2011, Social Security, amounted to only $725 billion. Department of Defense spending was only (only!) $700 billion, and all nondefense discretionary spending combined amounted to only $646 billion. If you believe the welfare state is too expensive now, or that we spend too much money on the military, consider that President Obama proposes to spend more than that merely making interest payments on all the debt his budget would help pile up. How much debt? How about $8.5 trillion in new debt over the next decade, for a total of more than $25 trillion in national debt. At 6 percent interest, it would cost us $1.5 trillion a year to service that debt: about the size of President Clinton’s entire proposed budget for 1995.

Under Obama’s budget, in 2020 interest payments alone would amount to more than national-defense spending in that year. By 2023, interest payments alone would amount to more than all nondefense discretionary spending in that year.

As it is, interest payments on the national debt already amount to about 7 percent of all federal spending—that’s hundreds of billions of dollars a year spent on nothing but paying the price of failing to pay off previous spending, robbing today’s taxpayers to pay yesterday’s beneficiaries of government largesse.

That kind of spending on interest payments is not politically sustainable, and probably is not economically sustainable, either. American taxpayers are going to be none too eager to keep blowing a Pentagon-plus-sized hole in the budget, year in and year out, just to accommodate past spending.

Barack Obama has the luxury of knowing that there is not one person in Congress who takes an Obama budget proposal seriously. Put to the test, Senate Democrats have voted unanimously against an earlier Obama budget, and Democrats in both houses already have written off this latest fanciful proposal.

It does not stand a chance of being ratified into law, but it is worth noting the fact that the president of the United States has just proposed a budget that amounts to a national economic suicide pact. And he couldn’t even be bothered to do that on time. There may be a political case for his having done so, but as national economic leadership, this budget is grossly irresponsible.

— Kevin D. Williamson is a roving correspondent for National ReviewHis newest book, The End Is Near and It’s Going to Be Awesome, will be published in May. 

Tags: Fiscal Armageddon

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The Revelries of Baucus



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The New York Times on Sunday carried a heavy breathing report alerting the diminished newspaper-reading public to the fact that Senator Max Baucus (D., Mont.), who chairs the committee that shapes corporate-tax law, has many connections to corporations that would like to see the tax code shaped in ways that benefit them. Angels and ministers of grace, defend us! Reports the Times:

Restaurant chains like McDonald’s want to keep their lucrative tax credit for hiring veterans. Altria, the tobacco giant, wants to cut the corporate tax rate. And Sapphire Energy, a small alternative energy company, is determined to protect a tax incentive it believes could turn algae into a popular motor fuel.

To make their case as Congress prepares to debate a rewrite of the nation’s tax code, this diverse set of businesses has at least one strategy in common: they have retained firms that employ lobbyists who are former aides to Max Baucus, the chairman of the Senate Finance Committee, which will have a crucial role in shaping any legislation.

No other lawmaker on Capitol Hill has such a sizable constellation of former aides working as tax lobbyists, representing blue-chip clients that include telecommunications businesses, oil companies, retailers and financial firms, according to an analysis by LegiStorm, an online database that tracks Congressional staff members and lobbying. At least 28 aides who have worked for Mr. Baucus, Democrat of Montana, since he became the committee chairman in 2001 have lobbied on tax issues during the Obama administration — more than any other current member of Congress, according to the analysis of lobbying filings performed for The New York Times.

. . . Mr. Baucus is viewed as an important ally when it comes to including corporate tax priorities into legislation. Last year, he introduced a plan — most of which was eventually passed into law as part of the fiscal cliff deal in January — that contained more than a dozen tax breaks, some of them pushed by clients who had retained Washington lobbying firms that employ his former aides or political advisers. Shannon Finley, who served as a political consultant and fund-raiser for Mr. Baucus before joining a lobbying firm in Washington, was hired in late 2011 by Beam, the liquor industry giant, to protect a federal tax break that it gets a cut of for producing its Cruzan rum in the United States Virgin Islands. Despite protests from fiscal conservatives that it was a giveaway, the provision was included in Mr. Baucus’s package, costing $222 million over the coming decade. Ms. Finley declined to comment.

First of all: Thanks to Eric Lipton of the Times for an unusually forthright report, one that at least acknowledges exactly who it is — “fiscal conservatives” — standing in opposition to things like the great rum subsidy.

The Times has been maddeningly hit-and-miss on the subject, but in fairness, hit-and-miss is a 100 percent improvement for the Times, which is miss-and-miss on most important issues. For example, in a March editorial headlined “The Real Spending Problem,” the Times correctly identified the fact that special subsidies and giveaways written into the tax code are, as a ledger issue, fiscally indistinguishable from simply writing checks to favored interest groups. But the Times being the Times, it went on to argue for the repeal of three tax policies that collectively amount to basically nothing, and which are not targeted subsidies of the type it decries: the carried-interest treatment of certain private-equity investments, IRA rules that allow some investors to amass very large tax-deferred retirement accounts, and “like kind” exchange rules for farmers. Even if we accept the argument that the carried-interest rule is an unfair giveaway to Wall Street (and I do not), the revenue lost from that arrangement is chump change: less than $2 billion a year, as the Times acknowledges. The farm rule adds up to about $3 billion a year in forgone revenue. (There is no good estimate on the IRA rule, to my knowledge.)

Meanwhile, the fiscally significant tax giveaways find a stalwart defender in the editorial page of the New York Times. The deductibility of state and local taxes — a direct subsidy to tax-and-spend governments on the familiar blue-state model — costs the Treasury between $40 billion and $50 billion a year — 20 to 25 times the cost of the carried-interest exemption. Like the benefits assigned to investment income, this tax break primarily benefits higher-income people. Not coincidentally, they disproportionately benefit higher-income people in New York Times country: New York, Connecticut, New Jersey, and other high-tax states. Maintaining that tax giveaway is not bad fiscal policy, according to the Times, but rather a moral imperative.

The mortgage-interest deduction cost the Treasury some $76 billion in 2011, but do not expect that tax subsidy to knock carried interest off the top of the Times’s most-wanted list. The tax exemption granted to municipal bonds is a direct subsidy to big-spending states and cities, too, at a cost of some $30 billion a year.

Those three tax subsidies alone account for between $100 billion and $150 billion in forgone revenue annually, but the New York Times is worried about picayune billion-here, billion-there deductions. (Don’t get me wrong: I’d repeal those farm giveaways, too.) It is, as usual, a question of who is being subsidized at the expense of whom.

And keep in mind, the New York Times is the head varsity cheerleader for the Obama administration, which is a veritable factory of special-interest tax-credit proposals. Those McDonald’s credits mentioned in the Times story? The Obama administration proposes to make them permanent. Politically favored energy interests, certain small businesses, renewables, politically connected automobile companies: Obama’s economic strategy has a tax credit for everybody . . . everybody who fits into the administration’s political agenda, at least.

The corporate tax is not a very large source of federal revenue (about 10 percent) but it is a very large source of corporate welfare, conferring benefits on the favored at the expense of the unconnected. It should be repealed. Corporate revenues have only so many ways of hitting the pockets of investors, executives, and employees; ideally, they would be taxed at that point, as personal income, with all sources of income taxed in the same way, whether from salaries, bonuses, capital gains, dividends, or inheritances. If we did so, the New York Times, and the conventional wisdom it represents, would have a lot less to worry about when it comes to the career paths of Senator Baucus’s former aides. And the tax code could go back to being a revenue source rather than a favor factory. 

Today In Government Spending



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One of these things is a gigantic waste of money, the other two are just kind of gross.

Tags: Fiscal Armageddon

Public Health and Public Trust



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Congratulations to Texas and the Aggies on becoming the home of a new federally backed center for emergency vaccines. The $91 million project, a joint effort by Texas A&M University, the federal government, and GlaxoSmithKline, will be responsible for the development and manufacture of vaccines during pandemics and other emergencies. Governor Rick Perry is of course very excited about this: The project will mean as many as 7,000 new jobs in Texas, and billions in expenditures, largely from out-of-state private and public sources.

Is this good news or not?

There are two ways of looking at this. Government spending is rarely welcomed here at Exchequer, and that $91 million is another $91 million we’re down in the hole. And while Texas and the Perry administration deserve great credit for making the state remarkably attractive to a variety of enterprises and investors, it is no secret that Texas is not above sweetening the pot for potential investors, that its methods for doing so are not immune from politics, or that the state’s leaders have a talent for keeping federal money pouring into the state for sometimes questionable projects. Practically every state and a large number of cities have economic-development funds similar to Texas’s; my impression is that Perry & Co. are no more impure than any other state administration when it comes to goosing the free(ish) market with tax dollars — they’re just a little bit better at it.

On the other hand, when government spends money, it should spend money on public goods. “Public good” is a term with a fixed meaning in economics, and it is not synonymous with “stuff that is good for the public” or “stuff the public likes.” Most of what the federal government spends money on (entitlements) is clearly not within the category of public goods, while a few things (missile defense, border patrol) clearly are. Some things, such as the federal highway system, are in a grey area, and might be considered public or non-public goods, depending on your interpretation.

Some public-health measures, such as mosquito-eradication programs in malarial areas, are clearly within the definition of public good, and it seems to me that things like the Centers for Disease Control and the  Aggies’ new pandemic-vaccine center are, too. And at the risk of sounding like a home-state cheerleader for Texas, if that $91 million center performs as advertised, then that is a relatively small price to pay for a measure of insurance against otherwise unmanageable, unforeseeable infectious epidemics, which are on my list of underrated threats. And that $91 million is not only a good investment in the event of a sudden epidemic; it is a good investment even if such an event never comes to pass, for the same reason that accident insurance is a good investment even if you never get in a wreck: Risk mitigation is inherently valuable, even if the trauma you are insuring yourself against never materializes.

But that all points to the unending challenge of trying to get government to behave: Even if  we concede that such a center is a good investment and well within the purview of federal action, we still have to worry about a great many variables: Will the project be managed effectively and efficiently? Will Glaxo’s lobbying arm turn it into yet another opening on the corporate-welfare trough? Will the project overgrow its original mandate through the inevitable mission creep associated with such undertakings? Is it a better use of resources than all the others to which we might have dedicated those funds?

Amity Shlaes’s much-admired new book on Calvin Coolidge deserves all the praise that has been heaped upon it, not least because her Silent Cal is not merely a prudent and admirable figure but an inspiring one: President Coolidge, hunched over the federal accounts with his budget generals, is not just a penny-pinching puritan (though the world could do with a good deal many more penny-pinching puritans): He is a man expending every effort to ensure that Americans enjoy a government that is reliable and honest, a worthy steward of the wealth with which it has been entrusted. Self-government works well only when the people trust their institutions.

Progressives often complain that the contemporary Right is increasingly anti-government in both its rhetoric and its policy preferences; some moderate Republican types, such as David Frum, echo that criticism. But one possible reason that conservatives have arrived at a greater distrust of the government is that the government has become less trustworthy. The self-dealing and the friends-and-family appropriations that we now regard as business as usual in Washington may be entirely legal, but they are nonetheless wrong — not just ill-advised but immoral — and it is not surprising that Americans’ trust in public institutions (and many private institutions, such as Wall Street firms) is pretty low. This is a critical problem for a self-governing republic. Even when it comes to such core governmental functions as national defense and law enforcement, it is difficult to believe that all (or even most) of every $1 appropriated to the relevant agencies is used for the purpose intended.

It leaves us with a kind of double suspicion: We suspect that the federal government will often invest our resources in doing things that are none of its business, and we also suspect that it will manage to do a great deal wrong even when it is performing tasks that are appropriate to it. Progressives believe that our politics would be less toxic if conservatives were not so hostile to the public sector; conservatives believe that our politics would be less toxic if the public sector were less deserving of our hostility.

While Texas likes to boast of its economic performance in recent years, it has also made some important advances in the intangible area of public trust, for instance by making detailed information about government outlays easily available to the public. The state’s controller, Susan Combs, is something of a crusader when it comes to openness and transparency in government. And while the libertarian tendency is currently on the ascent among Republicans, rolling back government is only one part of the conservative agenda: Making sure that government operates with a sufficient probity and thrift is an important part, too, especially for conservatives who seek an active role in government. We’d like a smaller government, sure, but we also would like a government we can trust. That is something that has to be put to the test every day, whether there is $1 at stake or $91 million.

 Kevin D. Williamson is National Review’s roving correspondent. His newest book, The End Is Near and It’s Going to Be Awesome, will be published in May. 

Tags: Politics

Where’s Warren?



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Where is Senator Elizabeth Warren when we need her? Senator Warren — whose main mode of political operation is grandstanding during financial-oversight hearings — recently browbeat some feckless Treasury officials over the HSBC money-laundering case. HSBC was fined just under $2 billion in the settlement, but that was not enough for the crusading Senator Warren: She wanted to see bankers led off in leg irons. “Your company pays a fine,” she said, “and you go home and sleep in your own bed at night — every single individual associated with this — and I just think that’s fundamentally wrong.”

I am inclined to agree with Senator Warren in the case of HSBC. Somebody over there belongs in a prison cell, and possibly in stocks. When Larry Kudlow put the question to his bipartisan panel a while back, nobody, left or right, seemed to think that Senator Warren was being unfair to the bank. It was a rare moment of bipartisan agreement.

So I am hoping that Senator Warren will join me in asking: Why haven’t the powers that be in the ailing state of Illinois been dragged off to the hoosegow? Or at least given a $2 billion fine, as HSBC was?

The state of Illinois is a criminal enterprise engaged in securities fraud. Illinois this week became only the second state in history to be charged with fraud by the Securities and Exchange Commission. As I reported back in 2010, the state of Illinois is habitually underfunding its public-employee pensions, placing the state government’s finances in an ever more precarious state. And the Illinois government systematically misled the public about the state of its finances in order to allow it to keep selling bonds to witless investors. As the SEC puts it: “Time after time, Illinois failed to inform its bond investors about the risk to its financial condition posed by the structural underfunding of its pension system.”

Illinois is hardly alone in this. New Jersey was charged with fraud on precisely the same grounds — lying to investors about its pensions. Former prosecutor Kevin James, in the course of his campaign for mayor of Los Angeles, went so far as to compile a dossier on the city’s finances and file a complaint with the SEC. Shortly after the municipal bankruptcy of our friends in San Bernardino, America’s worst-governed city, the SEC came calling, asking the city authorities to be sure to hang onto bond documents and communications with underwriters, and by all means to forgo putting them in the shredder.

As Senator Warren put it in a different context: “They did it over and over and over again, across a period of years. And they were caught doing it, warned not to do it, and kept right on doing it.”

It is time to put some lying, defrauding bureaucrats in prison.

The U.S. municipal-bond market is enormous: between $3.5 trillion and $4 trillion, or about a quarter of GDP. It is a sensitive market: Most municipal debt is held by individuals, including a great many easily spooked older investors, but a great deal is held by banks and other financial institutions. A meltdown in that market — one possible result of widespread fraud — could bring down banks and investment companies along with cities and states, and decimate retirement savings across the fruited plain.

It is, in other words, a situation that cries out for an example to be made of wrongdoers.

But Illinois did not even get a fine — just a settlement in which it agrees to mend the error of its ways. Why is that? A cynic might be tempted to think that, because all this governmental book-cooking helps the authorities in Springfield and elsewhere keep their public-sector unions fat and happy — which in turn helps keep Democratic campaign coffers full — the Obama administration may be taking it a little easy on the president’s friends and colleagues back home in Illinois. Maybe it’s political self-interest. Maybe it’s laziness. I would not rule out haplessness or stupidity, either. But I cannot help noticing: Illinois, New Jersey, California — they have something in common politically, no?

It is a very bad thing when private-sector bankers commit crimes. It is a much more serious thing when government commits crimes, because criminal governments undermine the entire enterprise of law enforcement, weakening our institutions and thereby interfering with the operation of markets. If you are a victim of fraud in Illinois, to whom do you take your complaint? To a state that is itself guilty of fraud? That is a serious problem in a free society.

Senator Warren has been working hard to build credibility on these issues, and her baby was the new federal Consumer Financial Protection Bureau. Perhaps she could reach into that organization for some advice on how to proceed with the case of the state-organized fraud in Illinois. But if she does, she should probably forgo the counsel of Anthony Gibbs. Who is he? He is the former executive vice president of legal compliance . . . at HSBC. Of course he now works at the Consumer Financial Protection Bureau. Where else would he work?

— Kevin D. Williamson is National Review’s roving correspondent. His newest book, The End Is Near and It’s Going to Be Awesome, will be published in May. 

Children of the Corn



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Everybody loves the idea of the self-sufficient farmer — hardy, independent, working his own land to produce what he needs on his own terms. It is a romantic vision, unless you have the experience of having lived that way: In the modern parlance, we call that economic model “subsistence agriculture,” and it is associated with places like Afghanistan and Uganda, a neolithic standard of living, and intervals of famine.

But the nice thing about having a primitive economy is that the economics gets real simple real quick. Let’s say you live in Grainville, population 100, a village of self-sufficient corn farmers who among them produce 1,000 bushels of corn every year. Corn farming is their only form of organized economic activity — otherwise, they are reduced to foraging in the countryside in old-fashioned hunter-gatherer style. If they lack trade or economic diversification, we know precisely how much the people of Cornville can consume in any given year: exactly what they produce, i.e., 1,000 bushels of corn. In order to make the math easy, let’s say that Grainville’s corn consumption follows the same pattern every year: 800 bushels eaten, 200 bushels used as seed for the next year’s crop, producing the same 1,000 bushels for the next season. Over and over.

The same pattern holds true at Corntown, the nearly identical village down the road. They put 800 bushels in the granary and 200 bushels in the seed silo. On and on it goes, for generations, until one year somebody in Corntown gets a big idea: 1,000 bushels of corn minus the 200 needed for seed leaves eight bushels per person per year, which is by no means a lavish standard of living, but they know from bad crop years that they can, if absolutely necessary, live on a little less — 7.5 bushels per person per year is enough to get by, if only barely. So why not put 750 bushels in the granary and 250 in the seed silo? It would be a very lean year, but with a little luck, and perhaps a milder winter, they would have an extra 50 bushels of seed corn the next planting season.

People grumble when stomachs rumble. But when the next harvest comes around, Corntown is, if not exactly fat and happy, better off: Instead of 1,000 bushels of corn, they have 1,250—a better harvest than anybody can remember having seen. But this bumper crop brings with it a heated debate among the yeomen of the Corntown Growers’ Cooperative. Yeoman Smith says that they should declare a festival year, set aside the usual 200 bushels for seed, and distribute the remaining 1,050, giving everybody 10.5 bushels instead of the usual eight. Yeoman Jones says that they should return to their usual practice of putting 800 bushels in the granary and set aside the remaining 450 for seed, producing an even bigger crop next time around. And Yeoman Flint proposes an even more radical idea: Tough out one more year of putting only 750 bushels in the granary and set aside 500 bushels for seed. Nobody much likes Yeoman Flint’s proposal: The past year was pretty tough, and another year like it might lead to serious discontent in Corntown. But Yeoman Flint has a compelling argument: If the winter is especially tough or there is another unforeseen need, that corn sitting in the seed silo is still there for them — they could always eat some of the extra seed if things proved tough, dipping into their corn savings.

There are three possible scenarios for the next harvest:

1.     Under the Smith model, the harvest is 1,000 bushels, back to square one, with the one fat year a fading memory.

2.     Under the Jones model, the next harvest is an astounding 2,250 bushels — more than twice what the people of Corntown are used to having.

3.     Under the Flint model, the next harvest is 2,500 bushels, a truly mind-boggling harvest for Corntown.

The people of Corntown are mostly moderates. They know a good thing when they see it, but they do not want to go overboard, so the Jones model is the most popular — after all, when you are used to having only 1,000 bushels a year, the difference between 2,250 and 2,500 does not seem that vast. But the Flintists turn out to be hardcore, uncompromising ideologues, and they are not prepared to give way, so 20 of them decide to take their share of the year’s crop — 250 bushels — and go their own way, forming their own cooperative down the road a bit.

So, now we have three corn-farming villages: Grainville follows the Smith plan, planting 200, harvesting 1,000, eating 800 (or eight per person per year), planting 200, etc. Corntown now follows the Jones plan, modified for their new, smaller population: They set aside 640 bushels to eat (eight bushels for each of their 80 remaining residents) and plant the balance, which comes to 360 bushels. And the tiny new village of Flintstown, population 20, sets aside 150 bushels to eat (7.5 bushels per person) and plants its remaining 100.

The next year, then, the harvest looks like this:

1.     Grainville: 10 bushels/person

2.     Corntown: 22.5 bushels/person

3.     Flintstown: 25 bushels/person

People start to think of Grainville as kind of déclassé: With a per capita GVP (Gross Village Product) of only ten bushels, it is by far the poorest of the three villages. But almost nobody from Corntown is looking to move to Flintstown, either: Even though its GVP is slightly higher, life is kind of hard there, and its current standard of living — as measured by how much corn you get to eat — is slightly lower. The people of Corntown congratulate themselves on their moderation. The people of Flintstown come to think of the people of Corntown as high-living libertines. Which brings us to:

Year Two Per Capita GVP

Grainville: 10B (0.00 growth rate)

Corntown: 72.5B (322 percent growth rate)

Flintstown: 87.5B (350 percent growth rate)

Discovering the power of investment — forgoing a little consumption now in order to produce more in the future — was a powerful thing, indeed. Both corn-investing villages now are producing far more seed corn than corn to eat. But of course that kind of spectacular growth cannot last forever. There’s only so much land and water, only so many laborers — and only so much corn, cornmeal mush, hoecakes, and unsalted popcorn you can stomach. (Neither village has made contact with the far-flung communities of Pigtown, Cowtown, Avocadoville, or Tomatoburg yet.) And even with its higher level of investment, Flintstown’s growth rate is not going to be 8 percent higher than Corntown’s forever. But it will be higher.

After the initial boom, Corntown levels out at 6 percent growth, and thrifty Flintstown at 7.5 percent in Year Three and going forward. In the coming years, that does not make an earth-shattering difference in their per capita GVPs. In Year Eight, Corntown’s per capita GVP is 97B, while Flintstown’s is 126B. And Flintstown gets a little less flinty: Corn consumption goes up a little bit, meaning that the amount of corn replanted goes down proportionally, and so the difference in their growth rates is diminished, too: Corntown continues growing at 6 percent, and Flintstown, still relatively tight with a bushel, grows at 6.5 percent. That half of a percentage point does not seem like much to brag about — until you check in with the great-grandkids. In Year 100, Corntown’s per capita GVP is 19,481B — but Flintstown’s is a whopping 38,832B, meaning that Yeoman Flint’s great-grandkids are on average twice as wealthy as Yeoman Jones’s. (Grainville, of course, disappeared after the first serious drought. And since Flintstown hasn’t developed a market for domestic laborers, Grainvillians perish from the earth, and nothing is left of them but sad stories.)

And when the corn-investing villages finally get around to establishing trade ties with Pigtown and inventing the tamale, the merchants prefer trading with Flintstown — sure, Corntown is a bigger market, but Flintstown is twice as wealthy, and they can afford to pay more for pork, avocados, beef, cotton — and for farming tools that make their corn operations more efficient, helping them to sustain their growth edge. In Year 200, Flintstown still has only a quarter the population of Corntown, but its economy is equal to 80 percent of that of its neighbor, and its citizens are on average three times wealthier. In another 50 years, Flintstown’s total GVP will be greater than Corntown’s, and its per capita GVP will be four times as much — which is to say, the difference between Flintstown and Cornville will be more than the difference was between either of them and long-forgotten Grainville back in the early days of the corn-investing boom. And Flintstown will have so much capital accumulated that its citizens will have long been able to consume at higher levels than the once-proud residents of Corntown, even while their economy continues to grow at a faster pace.

You can imagine what happens from there. All the trade roads lead to Flintstown, which is home to the best markets. If you want to be an artist or a poet instead of a corn-trader, Flintstown is where you go — it is wealthy enough to support art and high culture. All the most enterprising and energetic residents of other villages dream of a better life in Flintstown. If invaders come from foreign shores, Flintstown has the resources to protect itself. And it has so much corn that it can experiment with new corn-growing techniques; if it loses a little in a bad experiment, nobody is going to starve. Corntown does okay, too, but it will never catch up with Flintstown — not unless it gets more serious about investing or Flintstown lets up.

And all that is possible because the Flintstowners decided, a long time ago, that they could make do with a half-bushel less of corn every year.

There are other ways to get your hands on that seed corn, of course. Perhaps some enterprising investors from another rich village saw an opportunity in Flintstown, admiring the thrifty ways of its residents, and lent them the extra seed corn in exchange for a cut of future harvests. That would work, too, but there is no way of getting around the fact that you can’t plant corn you eat, and you can’t eat corn you plant. Somebody, somewhere, had to consume less corn than they produced to make that growth possible.

And the worst-case scenario is borrowing corn to eat today to be paid back out of future harvests.

Tags: CrossroadsGPS , MoveOn.org

Wait . . . You Have Kids?



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The Facts about Gas Prices and Oil Profits



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Please spare a moment for this hilariously illiterate piece of “analysis” from the Union of Concerned Scientists, which apparently gets its best material from the Union of Half-Educated Sophomores.

The subject is gasoline retailing and the villain is Big Oil. And the shocking headline repeated by Doug Newcomb of Wired (whose editors really should know better) is this: Two-thirds of the cost of a gallon of gas is . . . oil. Gasp, shock, awe, etc. Newcomb quotes Joshua Goldman, the author of the UCS study: “I was actually surprised to learn how little gas stations make from selling gas.” You know who is not surprised to learn that gas stations earn only a few pennies on the gallon? People who work at gas stations. I myself uncovered that particular nugget way back in the summer of 1991, when I was enrolled in a fascinating econ seminar called “Working at 7-Eleven.” Goldman may not have my special academic insights as a former member of the smock-wearing elite — he probably doesn’t even know how to clean a Slurpee machine — but the fact that gas stations make very little money from selling gas is common knowledge. (How common? Even Matt Yglesias knows!)

UCS writes:

Your gas money doesn’t support your local gas station, nor does it benefit you financially, even if you own oil company stock. Most of the money you spend at the pump goes directly to one place: oil companies.

You have a choice when it comes to your oil use: Continue pumping your money into oil company profits or invest in fuel efficiency and keep the profits in your pocket instead.

This will take some unpacking. It is true that about 68 cents on the dollar of gas sales goes toward oil costs, but that is not the same thing as “pumping your money into oil company profits.” That 68 cents on the dollar is revenue, not profit. Oil companies could be posting profits of $0.00 and the cost of oil would still account for the majority of the cost of a gallon of gas. As it turns out, gasoline is made out of oil. Oil and gasoline are pretty much the definition of undifferentiated commodities, so it is no surprise that in a very competitive market the profit margin for selling them is low. If you do not know the difference between revenue and profit, you should not be writing in public.

The question of how much profit an Exxon or a Chevron actually makes off a gallon of gas is a complicated one; the short answer is: nobody knows. Exxon’s “downstream” earnings — the money it makes selling gasoline and other refined petroleum products — run about 7 or 8 cents a gallon. Critics point out that this figure does not include the money that Exxon makes from crude-production operations, and that is fair enough. In total, Exxon makes about 8 cents on the dollar for everything it does, soup to nuts: Its profit margin for the past 20 quarters averages 8.26 percent. That is, it is worth noting, a good deal lower profit margin than Wired parent company Conde Nast generally achieves, according to the company’s CEO, Charles Townsend. Apple’s profit margin runs about three times Exxon’s. Chip-maker Linear Technology’s profit margins routinely run four times those of Exxon. Energy is a high-volume business, not a high-profit-margin business. But regardless of the size of the margin, how much revenue goes where tells you nothing about profit.

The UCS argument that the structure of the gasoline industry ensures that fuel purchases do not “benefit you financially, even if you own oil company stock,” is also ground-poundingly absurd. UCS elaborates: “Say you have $20,000 invested in ExxonMobil, the largest publicly traded oil company in the world. If you spent $1,700 on gas from ExxonMobil over the course of a year, your fuel purchase would yield far less than a penny in stock earnings. Even if you had $1 million invested, you would still get less than one cent in return after spending almost $2,000 on gasoline.” Or, as Newcomb puts it: “The UCS says that even drivers who own shares in an oil company and buy that brand of gas won’t see a bump in their stock portfolio because of their loyalty.”

I myself do not own a car and rarely buy a tank of gas, but I do invest in oil companies on the theory that — pay attention, here, Goldman and Newcomb — lots of other people buy gasoline, billions of them, in fact. That my gasoline-buying habits have a very small impact on the performance of my oil stocks is the very definition of the fact that is trivially true. As for brand loyalty, somebody ought to let Newcomb in on the fact that Exxon-branded gas stations do not really have anything to do with ExxonMobil, which began selling off its U.S. gas stations back in 2008 and at the moment does not own a single gas station in the United States. They kept the Exxon name, but Exxon sold them to distributors and local oil companies, and is doing so in Europe as well. Why? Because — this is news to the people at UCS and Wired — it’s hard to make much money retailing gas. “[The] fuels marketing sector continues to be challenging, with reduced margins and significant competitive growth,” Exxon’s Premlata Nair told the Washington Post, five years ago. Five years is like 60 in Wired years, right?

Did UCS even consider the math behind its own argument? Did Wired? If $1,700 in gasoline purchases generates $1,156 in revenue for an oil company but far less than a penny in revenue for somebody who owns $20,000 worth of stock (or 225 shares in Exxon), what could that possibly mean? That revenue elves are running off with the money? That Exxon shareholders are suckers? What it mainly means, of course, is that there are lots of shares of Exxon stock on the market: 4.5 billion shares outstanding and a market capitalization of nearly $400 billion. So, yeah, your piece of the action on $1,700 worth of sales when you own 0.000005 percent (five millionths of 1 percent) of the company is apt to be quite small. Ingenious observation, guys! It also means that (cf. those profit margins cited above) getting oil out of the ground and into the high-test pump is not cheap. Your conclusion might be that you should buy less gasoline. Or your conclusion might be that you should buy more Exxon shares. It depends on what your goals are.

Also: If you ordered a hamburger and learned that 68 percent of the revenue went to a beef rancher, would that make you feel better or worse about your hamburger? Isn’t the point of things like local farm coops to send more revenue to the producers?

The economic illiteracy continues, both at UCS and at Wired. “Fuel efficiency is really what’s going to put more money back in your pocket and put more money back in our communities,” Goldman tells Wired, and Newcomb worries that “very little of the remaining cash goes into the local economy.” Can we please lay aside the primitive superstition that in the developed world in the 21st century there is such a thing as the “local economy”? Let’s say we took the Brooklyn farm coop approach to gas, and a quaint little store on my corner had a oil well in the back, a DIY-refinery in the garage, and a hand-lettered chalkboard outside advertising its artisanal gas. The bearded hipster inside runs the whole thing. Local economy, right? But I assume he lives in a house or an apartment, which is bound to be made of concrete and steel not locally sourced. He probably has a cell phone and a computer and may even shop at Trader Joe’s or Whole Food or — angels and ministers of grace defend us! — Walmart, thus sending the money I spend at his shop far and wide. You know who has a “local economy”? North Koreans and hunter-gatherers. Autarky is no way to live. Somebody should explain comparative advantage and gains from trade to these gentlemen.

And how exactly is fuel efficiency going to “put more money back into our communities”? I took a little walk around my neighborhood this morning, and I did not see a single Prius factory.

Finally, neither party seems to appreciate the importance of UCS’s “finding” that, after oil, the No. 2 contributor to the cost of a gallon of gasoline is taxes. UCS writes: “Of the remainder, 14 percent of the money spent on gasoline goes to taxes that help pay for roads and transportation services, 10 percent to refining costs, and 8 percent to distribution and marketing.” Think on that: For refined petroleum products, taxes cost more than refining, but less than petroleum. Which one of those seems out of whack?

This UCS “study” is almost entirely empty of intellectual content, reducible to: If you spend less money on gas, you spend less money on gas. It is a juvenile example of dressing up baseless preferences as empirical observation. UCS describes itself thus: “The Union of Concerned Scientists puts rigorous, independent science to work to solve our planet’s most pressing problems.” Wired describes itself as a literate magazine. Neither organization’s reputation should escape this kind of sophomoric intellectual fraud undamaged. Both of them have made the world a little dumber today.

Tags: English-Major Math

You Cannot Raise Taxes on the Rich



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Thanks to the fiscal-cliff deal and the Obamacare tax, we now have a tax code that is more “progressive” than at any time since Jimmy Carter was president. It will be interesting to see what long-term effect that has on household-income trends. The results may prove counterintuitive.

Tax increases on high-income people may be redistributive, but not always in the way intended. That is because we pay taxes individually in the short term, but in the long term we pay taxes collectively: Individuals and firms pass on tax costs to employers and consumers to whatever extent they can, just like any other cost. But the same factors that make any given worker a high-income wage-earner in the first place are likely to make that worker one who can most effectively pass on tax expenses. Likewise, the most profitable firms in many cases will be the ones that have the most power to pass on tax expenses to consumers or suppliers.

A high-income worker is one who by definition is in high demand. The same factors that make him a high-income worker also enable him to demand higher wages in response to tax increases or other factors that diminish his real income. You see this all the time with financial and tech specialists who are recruited to positions in high-tax areas such as New York or California: Workers in that position, or headhunters recruiting them, simply add taxes and other cost-of-living factors into the starting point of income negotiations. A $100,000-a-year job in Manhattan is not the same as a $100,000-a-year job in Muleshoe.

Likewise, companies with very in-demand products (Apple, Mercedes-Benz) have the most ability to pass costs along to consumers, while equally powerful but price-constricted firms (Walmart) have the most power to pass expenses on to suppliers and other business partners. A tax hike on Walmart is not necessarily a tax hike on Walmart — it’s likely to be a tax hike on, for example, Cal Maine Foods, which relies on Walmart for a third of its business. In business as in love, the power in a relationship is always in the hands of the party with the least to lose by walking away from it.

Which is to say, it is not clear that you really can raise taxes on the rich, even if you try.

At the other end of the spectrum, low-wage workers are those who by definition are not in very much demand and therefore have the least ability to negotiate tax offsets. The same is true for less powerful firms.

So, let’s say you’re Walmart, and your top hundred inventory-management, systems, and finance guys all come to you looking for a 10 percent bump because of the fiscal-cliff tax hike and the Obamacare tax hike. Walmart does not live and die by greeters or Cal Maine eggs — it lives and dies by logistics and finance, and it really needs people who are good at that. It will work as hard to keep its top talent as Apple will to keep its top engineering and design talent. So where does Walmart go to get that money to keep its top talent? If you have 100 high-wage specialists you really need to keep happy and tens of thousands of low-skilled greeters, cashiers, warehousemen, etc., all of whom you are pretty confident you can easily replace, you are going to be tempted to shift some money from the big, low-skilled pot to the small, high-skilled pot. Likewise, if Walmart has a supplier that represents 0.01 percent of its sales but relies on Walmart for 33 percent of its own sales, who do you think is going to prevail if Walmart decides it needs to knock prices down by a nickel?

We may not consciously plan that kind of thing down to the dime, but people know that there is a difference between their pre-tax income and their real income, and people with the market power to maximize the former also have the power to maximize the latter. Put another way: Even a very progressive tax code “does very little to alter the market distribution of income.”

It is transfers, not taxes, that really generate such progressivity as we have in the United States. As Lane Kenworthy shows, the overall U.S. tax system — federal, state, and local — is not all that progressive in its effects, despite a very progressive graduated federal income tax. What low-income workers don’t pay in federal taxes, they make up for in state and local taxes, particularly sales taxes, which are basically a flat income tax for the poor. Kenworthy finds that each quintile pays about 30 percent of its income in taxes. But the system becomes much more progressive when transfers are accounted for.

Tax hikes on the so-called rich may decrease the private sector’s share of income, but they probably will not do much to decrease the real income of high-wage workers and may in reality increase government revenue at the expense of low-wage workers in the long term, though it is very difficult to disaggregate the complex relationships between taxes, wages, and prices. But those who say that they are most interested in economic inequality would do well to follow Kenworthy’s example and look at transfers rather than taxes. Means-testing Social Security and Medicare would do more to make the total package of taxes and transfers more progressive than any tax hike likely to pass Congress in the foreseeable future. It is also a reform that many conservatives and deficit hawks could support. This should be persuasive to those on the Left whose interest in tax hikes on the high-income is not strictly punitive, but I am afraid they are a very small minority.

– Kevin D. Williamson is National Review’s roving correspondent. His newest book, The End Is Near and It’s Going to Be Awesome, will be published in May. 

Tags: Taxes

Democrats Raise Taxes on Poor to Subsidize Millionaires



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There are basically two ways of looking at the fiscal-cliff deal. One possible headline reads:

“Congress does basically nothing.”

For all of the operatic angst and wailing surrounding the negotiations, what was produced was essentially a status quo, kick-the-can extension of most current policies, with a few minor changes that will have very little impact on the long-term fiscal health of the country.

But there is another possible headline:

Democrats insist on raising taxes on poor to protect millionaires and billionaires.”

That is not how the New York Times put it, but it is true.

Of all the tax cuts of the Bush-Obama era, the income-tax cuts for the so-called rich (households earning $250,000 or more) were the least expensive in terms of forgone revenue. The Bush tax cuts for $250,000-plus were estimated by the CBO to deprive the Treasury of about $80 billion a year; the income-tax cuts for the middle class were estimated to cost $220 billion a year; the payroll-tax holiday, which disproportionately benefits the poor and middle class, cost about $120 billion a year.

Extending the payroll-tax holiday was on almost nobody’s radar during the fiscal-cliff debate. Why? The cynical answer is that nobody really cares very much about the interests of poor people, and there is something to that. But I think the answer is a bit more complex: Republicans believe (correctly) that temporary tax holidays are bad economic policy, contributing very little in the way of stimulus or long-term growth prospects but increasing uncertainly about future tax conditions. Democrats dislike payroll-tax reductions because they undermine the myth that Social Security is a self-funding investment (payroll taxes allegedly fund Social Security) rather than what it is: a deficit-expanding welfare program for the middle class. And everybody had a good reason to knock that $120 billion a year off of their CBO scoring.

The expiration of the payroll-tax holiday will reduce the real income of middle-class and working-poor households by around 1.5 percent on average. So while the fiscal-cliff deal raises taxes on those making $400,000 and up, it also raises taxes on workers in the bottom (0.00 percent) income-tax bracket, who do pay payroll taxes. Republicans would have been happy to extend all of those tax cuts into the future, but President Obama and his Democratic allies insisted on tax increases — knowing full well that would mean tax increases on the poor as well as on the high-income.

But not all the rich folks got a tax hike. As usual, well-connected special interest groups — from Hollywood to the booze lobby — secured sweetheart deals for their own narrow interests. So the industry that employs Sean Penn and Ed Asner gets a nice fat tax break, and poor people with jobs get the shaft. The people who rail against “corporate welfare” and “crony capitalism” took the time to cut a nice side deal for the rum industry. You will notice that the Bacardi family is not poor. That’s Washington.

My own preference is to eliminate the payroll tax and with it the myth that Social Security and Medicare are self-funding insurance programs rather than old-fashioned welfare programs with a largely middle-class constituency. That would also help to end the game of playing the “discretionary” budget off the “mandatory” budget — all spending is discretionary, and when you’re running trillion-dollar deficits, some real discretion is called for.

Not that you will get it from the incompetents in Washington.

– Kevin D. Williamson is National Review’s roving correspondent. His newest book, The End Is Near And It’s Going To Be Awesome, will be published in May. 

Tags: Fiscal Armageddon

CRA and Risky Lending



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I had assumed that the effects of the Community Reinvestment Act were overstated by its critics. This is one of those times when I do not mind being wrong:

Did the Community Reinvestment Act (CRA) Lead to Risky Lending?

 

Yes, it did. We use exogenous variation in banks’ incentives to conform to the standards of the Community Reinvestment Act (CRA) around regulatory exam dates to trace out the effect of the CRA on lending activity. Our empirical strategy compares lending behavior of banks undergoing CRA exams within a given census tract in a given month to the behavior of banks operating in the same census tract-month that do not face these exams. We find that adherence to the act led to riskier lending by banks: in the six quarters surrounding the CRA exams lending is elevated on average by about 5 percent every quarter and loans in these quarters default by about 15 percent more often. These patterns are accentuated in CRA-eligible census tracts and are concentrated among large banks. The effects are strongest during the time period when the market for private securitization was booming.

 

There is a great deal of interesting information in the paper, which you can read here. (What, this isn’t what you do with your Christmas break?)

Tags: Housing

Teachers’ Pensions Are a Half-Trillion Short



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The habitual overpromising and underfunding of government-employee pensions is a fiscal powder keg in an economy full of sparks — and a new report estimates that teachers’ pensions alone are underfunded by nearly a half-trillion dollars.

Strange, then, that the state of New York has decided to take about $1 billion out of its teachers’ pension system to “invest” in infrastructure projects related to recovery from Hurricane Sandy, an initiative announced by Bill Clinton. (Remember him?)

New York is one of the few states that can afford to roll the dice a little bit with its teachers’ pensions, because New York is one of the few states with pension systems that are not critically underfunded. (The few others include Idaho, Alaska, Wisconsin, South Dakota, North Carolina, Tennessee, and Washington.) City comptroller John Liu said yesterday: “This innovative plan could help us rebuild the city, create jobs, and yield solid returns on our pension funds,” but it is not yet entirely clear how that will happen, and the details of the particular investments remain murky. The pension fund may simply buy bonds related to infrastructure projects, or it may take a direct ownership interest in some of the projects.

I find this troubling inasmuch as mixing a pension manager’s fiduciary responsibility with political incentives invites conflicts. For example, the pension fund could face political pressure to make investments in the districts of influential elected officials, or to lend money on overly liberal terms. The public enterprises that perform well usually are those that do one thing and concentrate on doing it well, and it probably would be best for New York’s teachers if their pension manager focused exclusively on fiduciary concerns rather than try to act as a creator of jobs or an organizer of hurricane-recovery projects. It will be interesting to see what kind of returns these investments yield.

Beyond New York and the handful of funded-up states, the picture looks pretty grim. Key findings from “No One Benefits,” the report referenced above:

Pension systems are severely underfunded. According to the most recent data available, NCTQ estimates that teacher pension systems in the United States have almost $390 billion in unfunded liabilities. Funding shortfalls have grown in all  but 7 states between 2009 and 2012.

Pension underfunding is even worse than meets the eye due to unrealistic assumptions and projections about returns on investments. Even with states almost certainly overestimating how well funded their pension systems are, NCTQ finds that pension systems in just 10 states are, by industry standards, adequately funded.

Retirement eligibility rules add to costs. In 38 states, retirement eligibility is based on years of service, rather than age, which is costly to states and taxpayers as it allows teachers to retire relatively young with full lifetime benefits. In the just ten states—Alaska, California, Illinois, Kansas, Maine, Minnesota, New Hampshire, New Jersey, Rhode Island and Washington—that no longer allow teachers to begin collecting a defined benefit pension well before traditional retirement age, states save about $450,000 per teacher, on average.

Most pension systems are inflexible and unfair to teachers. Many assume that defined benefit pension plans are a clear win for teachers. But while most defenders of the status quo fight tooth and nail to preserve traditional pension plans, the reality is that these costly and inflexible models are out of sync with the realities of the modern workforce. Current National Council on Teacher Quality pension systems are built on a model that assumes low mobility and career stability and helps to put public education at a competitive disadvantage with other professions.

Note that the savings per teacher derived from the reform of eligibility rules runs $450,000, or more than two and a half times the average net worth of a retirement-age U.S. household. The real value of the average teacher’s retirement benefits in low-cost Wyoming is pushing the $1 million mark. The value of the average teacher’s retirement in Illinois is estimated at $2.4 million — and they were on strike over compensation not too long ago. Illinois has been issuing debt to meet its pension obligations, an unsustainable strategy.

The economics of the pension situation is of course worrisome (terrifying), but the political lesson is depressing, too: Government simply cannot be trusted to keep honest accounts.

NOTE: This has been corrected since first posting.

Tags: Fiscal Armageddon , Pensions

Obamacare, Taxes, and Wishful Thinking



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When Obamacare was being debated, all the bright young things insisted that it would reduce the deficit, or that it would prove at worst practically deficit-neutral. And they still do. And they are absolutely right: If Obamacare’s spending comes in on budget, if all of its savings measures are fully enacted, and all of its taxes are fully implemented and produce the expected level of revenue, it will be so.

Stop laughing.

Of course, Obamacare’s spending estimates go up practically every time somebody takes a look at it — the CBO added another $81 billion last summer — and almost certainly will continue to do so.

And now the tax side is in question, too: A group of Democratic senators is seeking to delay the implementation of new taxes on medical-device manufacturers, citing concerns about competitiveness for the industry. Other than what they believe to be temporary economic weakness, all of the arguments the Democrats make against implementing the tax now are arguments against implementing it ever. My prediction is that this one will be the first to go.

Tags: Fiscal Armageddon

The Crisis of Fiscal Leadership



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The prospects for serious fiscal reform in Washington look dire indeed, at least for the immediate future. Speaker John Boehner saw most of his caucus easily reelected, but he clearly was spooked by the Republicans’ drubbing in the presidential race and in key Senate races. The Republican steering committee announced its intention to strip key House conservatives of relevant committee positions. Senator Jim DeMint has concluded, not without reason, that he will be a more effective force for limited government as head of the Heritage Foundation than he could be as a leader in the Senate.

One of Rush Limbaugh’s key insights, and an oft-reiterated one, is that the Republican party functions best when the leader of the party also is acting as the leader of the conservative movement, e.g. Ronald Reagan in his day or Newt Gingrich in his. Right now, the Republican establishment is deeply at odds with conservatives, who once again find themselves playing the role of an insurgency in their own party. If my correspondence with National Review readers is any indicator, Boehner’s stock is not trading much higher than Barack Obama’s among limited-government true believers and deficit hawks. The coalition is indeed in disarray, and a crisis of leadership is upon us.

The implicit proposition of Boehner’s leadership has been that with President Obama in the White House and Harry Reid running the Senate, a go-along/get-along strategy was Republicans’ surest ticket to gaining the Senate, the White House, or both in 2012. When the party suffered a humiliating rout instead, conservatives’ already heated frustration came to a boil.

How to go about fixing this? As much as I admire Senator DeMint, he is mistaken that Republicans’ current troubles are the result of a failure to “clearly articulate the failures of liberalism and the common sense of conservative alternatives.” There is no shortage of conservatives who spend day and night clearly articulating the failures of liberalism and the good sense of conservative alternatives, from talk-radio populists to think-tank wonks and numbers geeks. While there have been some bad candidates, weak campaigns, and defective GOP leaders, that is always true. The fundamental problem is the Republican policy agenda.

A very large part of that problem is the focus on tax rates to the exclusion of many other economic goods. I do not wish to see a tax increase, on wages or on capital gains, for anybody. But if the top rate on incomes goes from 35 percent to 39.8 percent, that is not the end of the world. That is certainly not the hill Republicans should choose to die on. As policy, there are more important issues; as politics, it is worth noting that there are not very many voters who earn $388,350, the income at which the top rate kicks in. And many of the voters in that exalted bracket are not single-issue tax-rate voters. Single-minded and borderline fanatical insistence on this one issue, together with the pageantry of related pledges, has done a great deal to provide cover for the radicalization of the Democrats under Obama.

Compare the 2012 debacle with the conservative triumph of 2010. It is true that there were a great many anti-tax voters in 2010 — with some making the “tea” in “tea party” an acronym for “Taxed Enough Already” — but the proximate cause of the 2010 win was a very strong popular reaction against a radical increase in government spending and government intrusion into the economy: the stimulus, Obamacare, and the bailouts of Wall Street and Detroit (though this last reaction was slightly deferred). President Obama was at the time arguing for the preservation of the Bush-era tax rates, at least for the $250,000-and-under set, which, as Kate Trinko points out, means that Democrats then and now are defending the great majority of the Bush tax cuts. The Democrats were allowed to escape their reputation as tax-raisers, and Republicans put themselves in the position of cementing their reputation as the party of the rich. (Of course here “rich” means high-income people who didn’t make their money in Hollywood, in government, in ambulance-chasing, in academia, or, for the most part, on Wall Street, but let’s not let reality get in the way of a good political narrative.)

Republicans, as I have recently argued, have a great deal more to offer the country than tax cuts. They might ask: Do we wish to see our country’s energy sector continue to grow, and to see America displace Saudi Arabia as the world’s largest oil producer? The country will answer “Yes,” and Republicans should be ready with a list of specific policies to ensure that this happens. Republicans might ask: Do we wish to create a great many more solid career opportunities for the very large share of our young people who are not headed for MBAs, law degrees, or information-technology jobs? The country will answer “Yes,” and Republicans must be ready with a solid policy agenda. Ask the country if it wants to end subsidies to politically connected businesses, and it will answer “Yes.” Be ready. Instead, Republicans have been asking if the country is ready to put everything on hold to forestall a relatively small tax hike for households with incomes approaching $400,000 and up, and the country has answered “No.” The country is wrong to want to raise taxes for reasons having to do more with envy than economics, but certain human realities have to be accounted for in politics.

As for the more difficult questions, such as whether the country will protest if the Republicans attempt to reform entitlements by changing the indexation benchmark from wages to prices — a reform that would save billions of dollars without actually cutting the current benefits of one person — the answer is not obvious, but then that is the nature of hard questions. But it will be easier for conservatives to do the hard thing if they have an agenda that emphasizes the great many relatively easy and popular proposals that conservatives can and should support. But that is going to take deft and imaginative leadership of a sort that we have not lately seen from Republican leaders. John Boehner has not been the catastrophe that many fiscal hawks accuse him of being, but it is not clear that making the best of a bad hand is the most we can or should hope for. 

Tags: Fiscal Armageddon , House Republicans

Stimulus Before Keynes



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Everything you need to know about the economy and presidential politics, you can learn from Sir James George Frazer and The Golden Bough:

 

OF THE THINGS which the public magician sets himself to do for the good of the tribe, one of the chief is to control the weather and especially to ensure an adequate fall of rain. Water is an essential of life, and in most countries the supply of it depends upon showers. Without rain vegetation withers, animals and men languish and die. Hence in savage communities the rain-maker is a very important personage; and often a special class of magicians exists for the purpose of regulating the heavenly water-supply. The methods by which they attempt to discharge the duties of their office are commonly, though not always, based on the principle of homoeopathic or imitative magic. If they wish to make rain they simulate it by sprinkling water or mimicking clouds: if their object is to stop rain and cause drought, they avoid water and resort to warmth and fire for the sake of drying up the too abundant moisture. Such attempts are by no means confined, as the cultivated reader might imagine, to the naked inhabitants of those sultry lands like Central Australia and some parts of Eastern and Southern Africa, where often for months together the pitiless sun beats down out of a blue and cloudless sky on the parched and gaping earth. They are, or used to be, common enough among outwardly civilised folk in the moister climate of Europe. I will now illustrate them by instances drawn from the practice both of public and private magic.

Thus, for example, in a village near Dorpat, in Russia, when rain was much wanted, three men used to climb up the fir-trees of an old sacred grove. One of them drummed with a hammer on a kettle or small cask to imitate thunder; the second knocked two fire-brands together and made the sparks fly, to imitate lightning; and the third, who was called “the rain-maker,” had a bunch of twigs with which he sprinkled water from a vessel on all sides. To put an end to drought and bring down rain, women and girls of the village of Ploska are wont to go naked by night to the boundaries of the village and there pour water on the ground. In Halmahera, or Gilolo, a large island to the west of New Guinea, a wizard makes rain by dipping a branch of a particular kind of tree in water and then scattering the moisture from the dripping bough over the ground. In New Britain the rain-maker wraps some leaves of a red and green striped creeper in a banana-leaf, moistens the bundle with water, and buries it in the ground; then he imitates with his mouth the plashing of rain. Amongst the Omaha Indians of North America, when the corn is withering for want of rain, the members of the sacred Buffalo Society fill a large vessel with water and dance four times round it. One of them drinks some of the water and spirts it into the air, making a fine spray in imitation of a mist or drizzling rain. Then he upsets the vessel, spilling the water on the ground; whereupon the dancers fall down and drink up the water, getting mud all over their faces. Lastly, they squirt the water into the air, making a fine mist. This saves the corn. In spring-time the Natchez of North America used to club together to purchase favourable weather for their crops from the wizards. If rain was needed, the wizards fasted and danced with pipes full of water in their mouths. The pipes were perforated like the nozzle of a watering-can, and through the holes the rain-maker blew the water towards that part of the sky where the clouds hung heaviest. But if fine weather was wanted, he mounted the roof of his hut, and with extended arms, blowing with all his might, he beckoned to the clouds to pass by. When the rains do not come in due season the people of Central Angoniland repair to what is called the rain-temple. Here they clear away the grass, and the leader pours beer into a pot which is buried in the ground, while he says, “Master Chauta, you have hardened your heart towards us, what would you have us do? We must perish indeed. Give your children the rains, there is the beer we have given you.” Then they all partake of the beer that is left over, even the children being made to sip it. Next they take branches of trees and dance and sing for rain. When they return to the village they find a vessel of water set at the doorway by an old woman; so they dip their branches in it and wave them aloft, so as to scatter the drops. After that the rain is sure to come driving up in heavy clouds. In these practices we see a combination of religion with magic; for while the scattering of the water-drops by means of branches is a purely magical ceremony, the prayer for rain and the offering of beer are purely religious rites. In the Mara tribe of Northern Australia the rain-maker goes to a pool and sings over it his magic song. Then he takes some of the water in his hands, drinks it, and spits it out in various directions. After that he throws water all over himself, scatters it about, and returns quietly to the camp. Rain is supposed to follow. The Arab historian Makrizi describes a method of stopping rain which is said to have been resorted to by a tribe of nomads called Alqamar in Hadramaut. They cut a branch from a certain tree in the desert, set it on fire, and then sprinkled the burning brand with water. After that the vehemence of the rain abated, just as the water vanished when it fell on the glowing brand. Some of the Eastern Angamis of Manipur are said to perform a some-what similar ceremony for the opposite purpose, in order, namely, to produce rain. The head of the village puts a burning brand on the grave of a man who has died of burns, and quenches the brand with water, while he prays that rain may fall. Here the putting out the fire with water, which is an imitation of rain, is reinforced by the influence of the dead man, who, having been burnt to death, will naturally be anxious for the descent of rain to cool his scorched body and assuage his pangs.

Other people besides the Arabs have used fire as a means of stopping rain. Thus the Sulka of New Britain heat stones red hot in the fire and then put them out in the rain, or they throw hot ashes in the air. They think that the rain will soon cease to fall, for it does not like to be burned by the hot stones or ashes. The Telugus send a little girl out naked into the rain with a burning piece of wood in her hand, which she has to show to the rain. That is supposed to stop the downpour. At Port Stevens in New South Wales the medicine-men used to drive away rain by throwing fire-sticks into the air, while at the same time they puffed and shouted. Any man of the Anula tribe in Northern Australia can stop rain by simply warming a green stick in the fire, and then striking it against the wind.

In time of severe drought the Dieri of Central Australia, loudly lamenting the impoverished state of the country and their own half-starved condition, call upon the spirits of their remote predecessors, whom they call Mura-muras, to grant them power to make a heavy rain-fall. For they believe that the clouds are bodies in which rain is generated by their own ceremonies or those of neighbouring tribes, through the influence of the Mura-muras. The way in which they set about drawing rain from the clouds is this. A hole is dug about twelve feet long and eight or ten broad, and over this hole a conical hut of logs and branches is made. Two wizards, supposed to have received a special inspiration from the Mura-muras, are bled by an old and influential man with a sharp flint; and the blood, drawn from their arms below the elbow, is made to flow on the other men of the tribe, who sit huddled together in the hut. At the same time the two bleeding men throw handfuls of down about, some of which adheres to the blood-stained bodies of their comrades, while the rest floats in the air. The blood is thought to represent the rain, and the down the clouds. During the ceremony two large stones are placed in the middle of the hut; they stand for gathering clouds and presage rain. Then the wizards who were bled carry away the two stones for about ten or fifteen miles, and place them as high as they can in the tallest tree. Meanwhile the other men gather gypsum, pound it fine, and throw it into a water-hole. This the Mura-muras see, and at once they cause clouds to appear in the sky. Lastly, the men, young and old, surround the hut, and, stooping down, butt at it with their heads, like so many rams. Thus they force their way through it and reappear on the other side, repeating the process till the hut is wrecked. In doing this they are forbidden to use their hands or arms; but when the heavy logs alone remain, they are allowed to pull them out with their hands. “The piercing of the hut with their heads symbolises the piercing of the clouds; the fall of the hut, the fall of the rain.” Obviously, too, the act of placing high up in trees the two stones, which stand for clouds, is a way of making the real clouds to mount up in the sky. The Dieri also imagine that the foreskins taken from lads at circumcision have a great power of producing rain. Hence the Great Council of the tribe always keeps a small stock of foreskins ready for use. They are carefully concealed, being wrapt up in feathers with the fat of the wild dog and of the carpet snake. A woman may not see such a parcel opened on any account. When the ceremony is over, the foreskin is buried, its virtue being exhausted. After the rains have fallen, some of the tribe always undergo a surgical operation, which consists in cutting the skin of their chest and arms with a sharp flint. The wound is then tapped with a flat stick to increase the flow of blood, and red ochre is rubbed into it. Raised scars are thus produced. The reason alleged by the natives for this practice is that they are pleased with the rain, and that there is a connexion between the rain and the scars. Apparently the operation is not very painful, for the patient laughs and jokes while it is going on. Indeed, little children have been seen to crowd round the operator and patiently take their turn; then after being operated on, they ran away, expanding their little chests and singing for the rain to beat upon them. However, they were not so well pleased next day, when they felt their wounds stiff and sore. In Java, when rain is wanted, two men will sometimes thrash each other with supple rods till the blood flows down their backs; the streaming blood represents the rain, and no doubt is supposed to make it fall on the ground. The people of Egghiou, a district of Abyssinia, used to engage in sanguinary conflicts with each other, village against village, for a week together every January for the purpose of procuring rain. Some years ago the emperor Menelik forbade the custom. However, the following year the rain was deficient, and the popular outcry so great that the emperor yielded to it, and allowed the murderous fights to be resumed, but for two days a year only. The writer who mentions the custom regards the blood shed on these occasions as a propitiatory sacrifice offered to spirits who control the showers; but perhaps, as in the Australian and Javanese ceremonies, it is an imitation of rain. The prophets of Baal, who sought to procure rain by cutting themselves with knives till the blood gushed out, may have acted on the same principle.

What else but superstition can explain the belief that if the president (priest-king) only cared enough about (observed the ritual governing) health care or the economy (the rain and the crops), then scarcity will be abolished and we can consume more than we produce?

Tags: General Shenanigans

The Economic-Policy Debate: Not Rational, but Ritual



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One thing that is missing from the debate about economic policy is the critical ingredient of humility. Humility isn’t critical for moral reasons, although humility is a virtue, and we would like our politicians to be more virtuous. Instead, humility is a practical good in the economic-policy debate, because if the effects of economic policies were decisive and predictable, then there would never be a recession or non-trivial unemployment. But there are recessions and widespread unemployment, which means either that politicians’ ability to manage the economy is much more limited than our political rhetoric suggests (more likely) or that incumbents are intentionally enacting bad policies that they know will produce recessions and unemployment (less likely).

Politicians have obvious incentives to pretend that they have more knowledge and power than they do. Nearly as much damage is done by the priesthood of professional economists and journalists, who for their own narrow interests also exaggerate what politics can achieve, be those interests professional or political or some combination of the two (assuming they can be distinguished).

This lack of humility produces headlines and sound bites like this one on Sunday from The Atlantic: “Tax Cuts Don’t Lead to Economic Growth, a New 65-Year Study Finds.” The piece itself, by business editor Derek Thompson, isn’t terrible, and one has to assume that, like most writers, he probably isn’t responsible for his headlines. But the headlines dominate political discourse, which is by its democratic nature shallow.

In fact, correlating tax-rate changes to growth rates is very close to being meaningless. That’s because the relevant comparison isn’t between observed growth rates under various tax regimes but between observed growth rates and the growth rates that we would have observed under different tax regimes. That more meaningful comparison has the academically and journalistically undesirable quality of being unknowable. Social scientists frequently measure the wrong factor because it is measurable, when the right factor is not.

Further, the effects of tax changes probably are not immediate in the vast majority of cases. If our theory is that changes in the tax code change incentives for consumers, workers, investors, and firms, then you have a great number of factors that are going to have effects that become manifest over very different time intervals. If you eliminate the sales tax on computers for one month, then you might expect a spike in month-over-month sales for one month, and that is fairly easy to estimate. If you change capital-gains-tax rates, research-and-development credits, capital-investment-write-off rules, etc., then you have a whole different range of temporal variables, since developing a better artificial hip and building a factory to produce that improved artificial hip are very different enterprises, requiring different time commitments. In an economy as complex as ours, such factors probably are not predictable even in principle.

Which is why even very smart people, such as Atlantic writers, produce maddening paragraphs, such as this one from Mr. Thompson: “Well into the 1950s, the top marginal tax rate was above 90%. Today it’s 35%. But both real GDP and real per capita GDP were growing more than twice as fast in the 1950s as in the 2000s. At the same time, the average tax rate paid by the top tenth of a percent fell from about 50% to 25% in the last 60 years, while their share of income increased from 4.2% in 1945 to 12.3% before the recession.”

All of that is trivially true. The tax code in 2012 is different from the tax code in 1955. Lots of other things are different, too: Japan emerged from the postwar rubble to become a major economic power and then went into gentle decline during the subsequent years, the ruins of Europe were rebuilt, a European monetary union was created and then began coming unglued, Germany was reunited, the Soviet Union was disunited, China began to liberalize its economy, a globalized information economy emerged with India and South Korea winning significant places in it, the Internet became a critical economic reality, the population of the planet more than doubled, worldwide markets were integrated, standardized containerization revolutionized shipping, smallpox was eradicated, life expectancies grew in many parts of the world, U.S. birth rates declined . . . and so on. Telling us that tax rates were X in the 1950s and Y in 2012, while growth was A in the 1950s and B today, tells us something approximating nothing.

It certainly doesn’t tell us “Tax Cuts Don’t Lead to Economic Growth.” Try turning it around: What might the sentence “Tax cuts lead to economic growth” even mean? Maybe: “Tax cuts, independent of all other variables, consistently and predictably lead to economic growth”? I very much doubt that anybody who is not a political speechwriter or talking head would argue such a thing. How about: “In some well-defined circumstances, tax reductions may contribute to higher levels of economic growth than probably would have been observed had higher rates prevailed”? Here we have the opposite problem: Does anybody not believe that? Between the data and the headline falls the Shadow.

After 40,000 years of civilization, we very clever creatures still cannot predict the weather with any reliable degree of detailed accuracy more than about a week out. (But some of us still pray for rain.) Scientists who have spent their lifetimes working on extraordinarily specialized problems routinely are baffled by new and unexpected developments. (But some of us still believe the universe is turtles all the way down.) Our highest-paid stock-pickers routinely are outperformed by darts thrown at a board, by kindergartners, and by monkeys. (But some of us still believe in the sure thing.) On and on it goes: Executives reliably make disastrously bad decisions about their own businesses, and most entrepreneurs fail.

In spite of the massive piles of evidence surrounding them, politicians routinely tell us that if we will merely give them the power to do X, then Y surely will follow. The Obama administration predicted that if the stimulus and other policies were enacted, then unemployment would decline to 5.2 percent. (It isn’t 5.2 percent.) Mitt Romney says that if we enact his agenda, the result will be 4 percent growth. Personally, I think that politicians should be goosed with a Taser every time they use the word “percent” in a future-tense sentence. But to be more charitable, let’s instead conclude that such projections should be viewed skeptically.

Unhappily, many economists desire to play kingmaker and therefore lend the prestige of their discipline to the wishful thinking of politics, where arguments are oversimplified to a point that is indistinguishable from dishonesty. They are aided in this by journalists who provide a bridge from the rigorous world of academic research to the standards-free world of political discourse. The result is something like a fairy tale or just-so story. That voters choose to accept such fanciful promises is another piece of evidence that our politics is not rational but ritual.

Tags: Politics , Taxes

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