Business Insider checks in with Prof. Joshua Ruah, Exchequer’s favorite source for data on state-government pension shenanigans, and draws up a list of which states are going down in what order. My only beef with this analysis is that I think it relies on assumptions about investment returns that are slightly over-rosy, meaning that the pensions funds are liable to go toes-up sooner than projected.

No. 1 on the list is perennial fiscal offender and Obama career incubator Illinois, followed by Connecticut (no surprise), Indiana (uh, governor?), New Jersey (uh, governor?), Hawaii, Louisiana (uh, governor?), Oklahoma, Colorado, Kansas, Kentucky, and New Hampshire.

I count three states with Republican governors who are positioned to be national bigwigs and possible presidential contenders. The legislatures, of course, are the real problem, but state bankruptcy can be a real career-ender for a governor.

I like Hawaii’s odds: Surely there is some way to leverage the unquenchable interest in Barack Obama’s birth certificate and make some money. You know, a kook tax. As for the rest of these states — it looks grim. They cannot tax their way into solvency (the expenses are simply too heavy), they cannot borrow, and many of them, including Illinois, are constitutionally forbidden to reduce pension payments.

I think the odds are slightly better than even that we’re looking at a $1 trillion plus federal bailout of the state pension systems.

So David Cameron wants Barack Obama to know that Britain is still America’s “wingman,” as he put it. The reassurance was necessitated by Cameron’s announcement that the United Kingdom will be cutting its military budget by about 8 percent — a steep but endurable reduction in defense outlays.

Among the items lost to the budgeteers’ scalpel: MHS Ark Royal, the flagship of the Royal Navy, and the fleet of Harriers attached to it. The new, downsized British military would not be able to carry off its current supporting role in Iraq.

Some wingman: one who reduces his beer budget by 8 percent but assures you he’ll still be available to go out on the weekends — just so long as you buy an extra round. It is frustrating, to be sure, but we Americans really have no one to blame but ourselves: With our monster military budget, it is only natural that the nations residing safe (if occasionally resentful — we’re lookin’ at you, Canada) under our abundantly fortified security umbrella should choose military spending as the first target of opportunity when it comes to budget reductions. There are upsides to America’s overgrown national-security apparatus, to be sure, but the downsides, in addition to the walloping direct expense of the thing, is the indirect expense: Our over-large military is a shadow subsidy for the over-large welfare states of Europe, Canada, and our other allies around the world, including their protectionist corporate-welfare measures. American military protection helps to make South Korea, Germany, and Japan more effective global competitors — and also forces the United States to carry most of the political baggage for looking out after the West’s security interests around the world.

Why do we do this? Mostly because we regret what happened the last time we left the Europeans in charge of anything more consequential than Nokia.

Hypothetical: What happens if Atlas shrugs off his global military commitments? What if the United States decides that we’ve got Hitler and Stalin whipped and do not need all those troops in Germany? What if we decide that it’s too expensive to send American soldiers to do sentry duty just as easily performed by landmines in South Korea? (Seriously, I doubt the Norks could afford to buy enough diesel to get their army to the DMZ, much less to invade a civilized country like the Republic of Korea.) What if we take the Okinawans at their word that they want us out, and we get the hell out?

I do not pretend to be ready to analyze the military implications of a general (if minor) retrenchment of the global military presence of the United States. But it seems to me that it would carry with it some distinct political benefits — and save us a hell of a lot of money. If we followed Britain’s lead and reduced military spending by 8 percent, that’s $67 billion a year off the deficit, or . . . 4.7 percent off of the 2011 deficit, estimated to hit $1.4 trillion.

Okay, so tell your peacenik friends: Pentagon cuts won’t balance the budget. In fact, our deficit currently is running at about twice the size of the entire national-security budget. Trimming the military will do the Brits’ balance sheet a world of good — and will cost them very little other than a piece of their already diminished national self-respect — so why not? But it is going to take more radical moves to bring the American fiscal house into order.

– Kevin D. Williamson is deputy managing editor of National Review and author of The Politically Incorrect Guide to Socialism, to be published in January.

Over at Ricochet, David Limbaugh has a wise response to my post yesterday on Grover Norquist, VATs, Mitch Daniels, etc.

While I am a supply sider I agree that we should not allow our exuberance for pro-growth tax policies to intoxicate us into believing that spending doesn’t matter. While some starry-eyed supply-siders might have been irresponsibly negligent in their inattention to the spending side of the equation, it’s not fair or accurate to place all supply-siders in that quasi-utopian category. It’s a false choice. That is, there is nothing inconsistent between supply-side advocacy and relative spending austerity. That’s the best of both worlds. But an insidious VAT tax might be the worst of all worlds.

Praise to David Limbaugh for striking the right balance on the supply-side question: growth matters, spending matters. For the record, I do not think all supply-siders are crazy utopians: not Laffer, not Reagan, not Kemp. That is why I use the term “naïve supply siders” to distinguish those dealing in unreality.

I myself am more of a flat-income-tax guy than a VAT guy, though Andrew Stuttaford argues that we’d have to make the flat rate so high to make the numbers work out, even with some pretty ambitious spending cuts, that it would not fly. (He also thinks that consumption should carry some of the load.) I’m going to do the arithmetic on it here in a bit and see what it adds up to. I doubt very much that anything will cause me to conclude that the current system is defensible, wise, just, or the best way to fund the level of government spending that Americans seem (inexplicably!) to want.

The City of San Diego has an enormous deficit for a city its size — $73 million — and on Monday held a town-hall meeting to discuss it. The city went through all the usual steps, which are: 1. threatening to cut police and fire services first, as though there were no other opportunities for savings; 2. demanding a tax increase. (Do read the story here.)

Being a masochist, I took a peek at the City of San Diego’s budget. Here’s an example of the austerity under which poor San Diegan municipal authorities labor: The Office of the Mayor and COO in FY2010 made due with a mere $551,681 in compensation for its employees. In FY2011, that figure will increase by $115,911, to a total of $667,592. Here’s the kicker: The department has only three employees, meaning that each is compensated to the mean tune of $222,530 and change.

But, hey, a mayor-and-COO’s office with only three employees? A tight ship! That’s not too bad, right? Wrong: The mayor’s staff is part of another department, the Department of Community and Legislative Services, which for budget purposes is lumped in with the Commission for Arts and Culture (because, God knows, no city can get by without one of those). That’s another 46 employees, at an average total cost of $123,913. And there’s an assistant COO’s office with 116 employees at $100,000 a copy.

And non-personnel spending has climbed significantly: The city’s cost for “special consulting services,” whatever that means, climbed by nearly $1 million this year. The city hadn’t budgeted any additional money for increased costs of administering its property taxes, but spent nearly $5 million. Why should property-tax collection be getting more expensive? San Diegans might want to know. (Bear in mind: Lots of non-personnel spending probably ends up being in truth personnel spending, too, as it does in most cities: Certain benefits and retirees’ costs often are separated. It is not clear from San Diego’s budget statement whether that is the case here.)

One city councilman has a nose for what really drives city budgets, and demanded to know how taxpayers could be sure that a tax hike would actually go to funding police and fire services, rather than toward selling the already bloated pension-benefits system for city retirees:

City Councilmember Carl DeMaio called the proposition a “blank check tax increase.”  He said if passed, the revenue raised from Prop D [the tax increase bill] may not end up going to police and fire.

“Where we do know the money has been going is the city’s pension system to pay outlandish and unsustainable payouts for retired city employees,” DeMaio told NBCSanDiego.

Answer: Take our word for it.

And the city’s retirement system is one big kahuna indeed, a $43 million-a-year beast requiring 62 employees at an average cost of $113,000 each to administer it. Interestingly, the biggest chunk of its budget, more than $33 million, is dedicated to something simply described as “contracts.” Whether those are contracts to pay out retirement benefits or something else is not clear. A little detail, people! It’s $33 million!

Notice none of this even touches on the police and fire departments. I’ve seen a lot of city budgets in my life, and I’ve rarely seen a police or fire department that could not be trimmed. But there’s a lot of administrative fat in our cities, counties, states, school districts, and federal government. We are not going to balance the aggregate of the nation’s governmental books with cuts directed toward the usual cowardly trio of “waste, fraud, and abuse,” but there is a lot of waste, fraud, and abuse that can be cut, and a whole parasite class of political hacks in lifetime sinecures with fat benefits and pensions who need to be encouraged to find productive work.  

– Kevin D. Williamson is deputy managing editor of National Review and author of The Politically Incorrect Guide to Socialism, to be published in January.

So it turns out that the cure for “epistemic closure” is great quantities of crystal meth. The things you learn from Grover Norquist.

In case you missed it, Norquist came down like a runaway gravel truck on Indiana governor Mitch Daniels, a favorite around these parts. Governor Daniels’s offense was declaring himself open to the possibility that a value-added tax might be an acceptable part of a wide-ranging reform of the federal tax system. Norquist replied, in a Politico interview:

“This is outside the bounds of acceptable modern Republican thought, and it is only the zone of extremely left-wing Democrats who publicly talk about those things because all Democrats pretending to be moderates wouldn’t touch it with a 10-foot poll. Absent some explanation, such as large quantities of crystal meth, this is disqualifying. This is beyond the pale.”

Here’s the problem: The deficit is, by my always-suspect English-major math, about 36.3 percent of federal spending ($1.29 trillion deficit out of $3.55 trillion spending). For comparison: Defense accounts for about 18 percent of federal spending. So you could cut out the entire national-security budget, and another Pentagon-sized chunk of non-military spending, and not quite close that deficit. You could cut the Pentagon to $0.00 and eliminate Social Security entirely and just barely get there.

Even great heaping quantities of crystal meth would not be enough to convince me that is going to happen.

Don’t get me wrong: In a perfect world, Exchequer would love to see the budget balanced and some tax cuts enabled through spending reductions alone. Exchequer would also like to be dating Marisa Miller, driving a Morgan Aero, and running a four-minute mile,  developments that are about as plausible as Congress’s cutting 36.3 percent of federal spending. Not going to happen.

So, our choices are this: 1. Hold out for the best-case scenario, in which a newly elected Speaker Boehner gives President Obama the complete works of Milton Friedman and everybody agrees to cutting federal spending by more than a third. 2. Keep running deficits and piling up debt. 3. Raise taxes. My preferences, in order, go: 1,  3, 2. And No. 2 is not really acceptable.

Like it or not, taxes are going up: If not today, then in the near future. Even once the deficit is under control, that debt is still going to have to be paid down, lest debt service alone overwhelm the federal budget, necessitating even more tax hikes. If Grover Norquist thinks there’s a tax-free way out of this mess that is both politically and economically realistic, he is living in a fantasy. There’s an old joke that goes: Neurotics build castles in the sky; psychotics live in them. And Grover Norquist seeks tax protection for them.

Norquist’s outfit, Americans for Tax Reform, does a lot of good things. (And so has Grover Norquist, over the years.) But here’s how it describes itself:

Americans for Tax Reform (ATR) opposes all tax increases as a matter of principle.

That’s not a campaign against Big Government — it’s a campaign against math. As ye spend, so shall ye tax. Denying that is not a principle — it’s a tantrum. ATR’s pledge reads:

“I _____ pledge to the taxpayers of the __________ district, of the state of __________, and to all the people of this state, that I will oppose and vote against any and all efforts to increase taxes.”

And here is how it should read:

“I _____ pledge to the taxpayers of the __________ district, of the state of __________, and to all the people of this state, that I will oppose and vote against any and all efforts to increase spending.”

Spending is the issue, not taxes. Spending is the virus, taxes are the symptom. Norquistism, by focusing on the taxing side of the ledger rather than on the spending side, has for decades enabled Republican spending shenanigans of the sort that helped put the party in the minority and ruined its reputation for fiscal sobriety; it is of a piece with naïve supply-siderism. The Bush-era deficits, and the subsequent discrediting of Republicans’ fiscal conservatism, are the product.

Give me the grown-up despair of Mitch Daniels any day over the happy-talk daydream that says we’re getting out of this mess without  paying for it.

I suspect that, given a fighting chance and full political immunity, the Obama-Reid-Pelosi (ORP) machine would like to try some more fiscal stimulus. ORP rarely encounters a spending measure it does not like (except for a few military ones, from time to time). But the Elected Powers that Be are terrified, at the moment, of touching anything that smells like Stimulus VI. So they are making a hand-off to the Unelected Powers that Be, who are more than willing to run with that ball. Helicopter Ben laid it out this morning:

Treasurys are mixed after Federal Reserve Chairman Ben Bernanke said the central bank was ready to buy bonds to boost the economy.

In a speech Friday morning, Bernanke said the Fed has yet to figure out how the bond purchases would be paced. The effort would be aimed at lowering interest rates to stimulate spending and prevent prices from falling.

Exactly how much more of this does Chairman Ben intend to try? We’ve already had a 13-figure spending campaign for stimulus, and umpteen  rounds of “quantitative easing,” i.e. slowly debasing our money in the hopes that people will want to be quickly rid of their devalued dollars, thereby stimulating economic activity. (When you put it like that . . . ) To what end? Growth and jobs are a joke, and low interest rates have only encouraged government to borrow and spend even more recklessly than it usually does, sinking money into projects of negligible real economic value. We just basically set a $1 trillion pile of money on fire and roasted marshmallows over the flames. That is why Nancy Pelosi is about to become the first female ex-speaker of the House.

Bernanke is a scholar of the Great Depression, and he sees that inflation is currently at about  0.8 percent, which is basically nothing in the Fed’s view, and he fears the deflationary spiral above all things. That fear may be overblown, or at least in need of qualification. Deflation is a real risk, to be sure, but so is unexpected inflation. In fact, we’ve already had inflation, properly understood: Inflation is not a general rise in prices; inflation is an increase in the money supply (an inflation of the money supply) which often makes itself felt through higher general prices — but not always. Asset bubbles (dot-bomb, housing, etc.) are a particularly noxious expression of inflation. Since we are teetering on the precipice of Mortgage Meltdown 2.0, as $1 trillion or so in mortgage-backed securities are at risk of unraveling or experiencing radical revaluations, lots of money is looking for snug harbor. Meaning Treasuries.

The flight to U.S. government debt has enabled Washington to borrow tons of money (literally, tons: Put the Obama deficits in hundred-dollar bills stacked on pallets, and you’re talking tons and tons and tons of money) on easy terms at low, low interest rates. Big debt, easy terms, low rates, for now –  sound familiar? Welcome to subprime government. And just as the housing market came crashing down when interest rates inched up and all those variable-rate mortgages began to reset, the fact is that the world is not going to be in a financial crisis forever, and U.S. government debt is not always going to enjoy the implicit subsidy that comes from being the world’s safe haven in troubled financial times. When your balance sheet starts to look more Greek than Japanese, the market is going to start demanding Greek rates (about 10 percent, at the moment) to finance your fiscal shenanigans. And that is what Fiscal Armageddon means: The bills are due, the cupboard is bare, and all the money in the world won’t save you, even if you could borrow it, which you can’t.

So here’s a contrarian take: The Fed should stop trying to drive down interest rates. It should instead work to raise them. Why? Our economy needs savings and investment — but why save when interest rates are effectively zero? And where can funds for investment be had if not from savings? Answer: from borrowing — and more debt the last thing American businesses, American households, or American government needs right now. Interest rates are going to go up eventually, anyway, so we may as well get started now in order to avoid an especially disruptive transition when the time comes. Higher interest rates would encourage savings, encourage investment, discourage wanton borrowing, and help rebuild  the value of the dollar. Sure, we’d lose the value of the allegedly stimulative effects of zero interest rates — and a lot of good they’ve been doing us so far: 10 percent unemployment, growth that is as dynamic as molasses in February.

The United States should start acting like a dollar is worth something if it expects a dollar to be worth something. Otherwise, to borrow from a wise man, we are left with Barack Obama as the devalued head of a devalued government.

The story of budgetary politics: The necessary is the impossible, until it isn’t — then the impossible is the only alternative.

In the case of the state of New York, the impossible is the billions of dollars in spending cuts that Carl Paladino wants to make in the state,  which, among other excesses, spends 40 percent more per government-school student than the national average. Can the impossible be done? Governor Paterson has some unusually insightful words:

“Everybody talks about what they’re going to do when they get into the executive branch, then when they get there the Legislature shuts them down,” said Governor David Paterson, 56, a Democrat and 20-year senator who isn’t on the Nov. 2 ballot.

In politics, the impossible is what you do when the money runs out.

Thank you, Commander Obvious:

Comments from Janet Yellen, the vice chairman of the Fed, Monday reined in the most exuberant hopes in the markets.

In remarks to economists in Denver, Yellen warned that excessively easy monetary policy, involving ultra-low interest rates and an expansion in the Fed’s balance sheet, could create big problems down the line.

“It is conceivable that accommodative monetary policy could provide tinder for a buildup of leverage and excessive risk-taking,” Yellen said.

There is a buildup of leverage and excessive risk taking, complete with a speculative asset bubble, right in front of our noses: in the housing market, where it has been for years. The Obama administration is working night and day to try to reinflate the bubble, or at least to keep it from deflating much further, and the coming pause in foreclosures will only serve to further confuse the markets. If this is a sign that the Fed is coming to its senses, it is to be welcomed — but do not be too confident that it is.

But before I go: This important, Earth-shaking news just hit my desk, courtesy of Virginia governor Bob McDonnell. For reasons known only to God, the farm lobby (a.k.a Big Elmer), and Governor McDonnell, setting up Web sites to sell apples and the “Beautiful Gardens Plant Breeders Workshop” are pressing public priorities in the Old Dominion, requiring taxpayer subsidies. You Virginians need the government to help you build a Web site? What, they don’t have seventh-graders in Virginia?

Couldn’t Republican officeholders at least pretend to be ashamed of this stuff?

RICHMOND — Virginia Governor Bob McDonnell announced funding today for eighteen agriculture-related projects which will promote and enhance the competitiveness of Virginia’s specialty crops.  The projects resulted from the competitive grant process established by the Virginia Department of Agriculture and Consumer Services (VDACS) for the United States Department of Agriculture (USDA) Agricultural Marketing Service Specialty Crop Block Grant funds. 

Commenting on the grants, Governor McDonnell said, “These grants represent a half-million dollar investment in Virginia’s economy that will boost economic development and create jobs in agriculture, Virginia’s largest industry.  This is a diverse group of very innovative projects that include marketing, development, research and engineering projects, all of which are designed to increase the competitiveness of specialty agricultural crops in Virginia.  I congratulate these individuals, educational institutions, and organizations for advancing ideas that will help growers add value and enhance market and job creation opportunities across Virginia.”

The Specialty Crops Competitiveness Act of 2004 authorized the USDA to provide funds to the states to promote specialty crops including fruits, vegetables, tree nuts, dried fruits and nursery crops. When considering grants for the USDA Specialty Crop Program, VDACS gave priority to projects that included the following activities:  assisting farmers in transitioning into specialty, high value agricultural initiatives that address the eligible specialty crops; increasing net farm income through high-value or value-added enterprises; finding new ways to market or to add value to specialty agricultural products; and developing pilot and demonstration programs in specialty agriculture that have the potential for transferability within rural Virginia.

VDACS is awarding grants totaling $513,226.81, the largest amount ever for the block grant program, for the following projects:

Specialty Crops Cooling and Packing, Kevin Semones, Southwest Virginia Farmers Market, Hillsville 

Handling and Use of Poultry Litter Incineration Ash Byproducts as Organic Fertilizer in Fresh Market Tomato Production, Jane Corson-Lassiter, Eastern Shore Resource Conservation and Development Council, Accomac 

Performance of a Novel Solar Greenhouse Prototype, Naraine Persaud, Virginia Tech, Blacksburg  

Marketing Expansion Initiative Promoting Virginia Grown Christmas Trees, Jeff Miller, Virginia Christmas Tree Growers Association, Christiansburg 

Increasing the Competitiveness of Virginia Specialty Crop and Disadvantaged Farmers through a Statewide Situational Assessment of the VA Farm-to-School Program, Matt Benson, Virginia Tech, Blacksburg 

Educational Opportunities for Farm Direct Marketers and Farmers’ Markets, Cathy Belcher, Farmers Direct Marketing Association, Richmond 

Increasing the Competitiveness of Virginia Grown Strawberries , Gail Moody Milteer, Virginia Department of Agriculture and Consumer Services, Franklin  

Beautiful Gardens Plant Breeder Workshop, Alexander Niemiera, Virginia Tech, Blacksburg 

Increasing GAP Certification Readiness among Organic and Conventional Growers and Nutrition Knowledge and Consumption of Specialty Crops among Children and Adults in Southwest Virginia, Kathlyn Terry, Appalachian Sustainable Development, Abingdon 

Developing, Teaching and Promoting Sustainable and Organic Growing Practices at Maple Hill Educational Farm, Marisa Vrooman, Local Food Hub Inc., Scottsville

High Resolution Vineyard Site Suitability Mapping, Peter Sforza, Virginia Vineyards Association, Clifford 

Organic Management of Pest Predation in Commercial Production of Summer Squash, Kevin Damian, Virginia Association for Biological Farmers, Louisa 

Working Capital Grant to Develop a Broad Based Website for the Promotion of Virginia Apples, Diane Kearns, Virginia Apple Growers Association, Charlottesville

Connecting Southwest Virginia Farmers to Institutional Buyers through Local Food Processing and Preservation, Michal Burton, Sustain Floyd, Floyd 

Expanding Markets for Virginia’s Specialty Crops, Butch Nottingham, Virginia Department of Agriculture and Consumer Services, Onley 

Improved Management of Harlequin Bug in Cole Crops, Thomas P. Kuhar, Virginia Tech, Painter 

Stink Bug Populations, Injury and Control on Primocane-bearing Caneberries, Douglas G. Pfeiffer, Virginia Tech, Blacksburg 

Production and Marketing of High Tunnel Grown Ginger Roots In Virginia, Reza Rafie, Virginia State University, Petersburg

But Exchequer does. Despair will resume on Monday, October 11. Until then, hold onto your wallets, contemplate whether the Republicans have really got religion on spending, and check in with fellow worrywarts Steve Spruiell, Reihan and Josh, Andrew Stuttaford, and bossman Rich Lowry. And if these guys fail to fill your doom-and-gloom fix, and you absolutely need something else to worry about, Andy McCarthy is here for you, with a whole raft of trouble of the sort that even money can’t buy off.

A thought to add to today’s editorial on Michelle Obama’s child-nutrition program, which has stalled in the House because it would be funded, in part, by cuts to the food-stamp program. I’m no fan of the welfare state, but food stamps are not at the top of my list of things to cut. (Hey, vouchers work! I wonder to what other areas of government spending we might apply that model?) Cutting basic food stamps in order to put more tofu on cafeteria trays in the suburbs doesn’t seem like the right thing to do.

To their credit, 106 Democrats in the House protested this move in a letter to Speaker Pelosi; to their discredit, each and every one of those 106 Democrats already had voted for a bill that cut not $2 billion but $12 billion from the same food-stamp program to support a bailout for spendthrift public schools and relieve pressure for reducing spending on teachers’ and administrators’ salaries and lavish benefits. Which is to say: House Democrats are unwilling to raid the pantries of food-stamp recipients to put more kale in the Pleasantville cafeteria, but they are willing to take bread from the mouths of the poor to fatten an already overfed public-school bureaucracy.

People who still believe, against all evidence, that the Democrats are the party dedicated to looking after the interests of the poor should keep Mrs. Obama in mind.

As Larry Summers prepares to follow the rest of Obama’s economics team into richly deserved unemployment (okay, not really, they’ve mostly got tenured professorships to fall back on, Summers at Harvard, Romer at Berkeley), who is the president going to name as a replacement? The smart money apparently is on Anne Mulcahy, the former CEO of Xerox.

But that’s not all she’s done with her business career: She was, until a few months ago, on the board of directors at Citigroup, the $45 billion bailout baby that is still partly owned by Uncle Sam, who is desperately trying to dump the stock but keeps driving the price down every time he tries to offload it.

What, Lloyd Blankfein and Tony Hayward turned the job down?

That thundering sound you hear is Republicans across the fruited plains dropping to their knees praying that Obama appoints her.

Welcome to the U.S. Bureau of Public Debt. The fact that our liabilities are piling up in a hideous institutional cube in Robert Byrd territory seems eminently appropriate to me:

Also: Looking for a $60,000-$80,000-a-year job with great benefits? Guess who’s hiring? Somebody has to keep the printers running!

Oh, man: It’s going to be a long night down at the Goldbugs’ Secret Lodge.

Thomas Aquinas warned against homo unius libri — the “man of one book.” Harvard president Edward Everett followed that up, warning against “not only to the man of one book, but also to the man of one idea, in whom the sense of proportion is lacking, and who sees only that for which he looks.”

God defend us from man of one datum, particularly if that man is an economist, and particularly if the datum is wrong.

Exhibit A is the constantly repeated but entirely untrue statement that consumer spending represents 70 percent of the U.S. economy, and that it is therefore imperative that we give consumers some stimulus, in the form of tax rebates, more generous unemployment checks, or cocaine-monkey research grants, in order to put some schmundo in Joe Consumer’s hip pocket, the better for him to carry that seven-tenths of the economy he allegedly holds upon his shoulders like some debt-ridden Atlas chained to Mount Wal-Mart, his liver pecked by a winged and deathless Visa bill.

Who is guilty of repeating this? My occasional sparring partner Robert Reich, for one, who recently sent my head spinning all the way around by writing: “The problem is consumers, who are 70 percent of the economy. They can’t and won’t buy.” This is a problem, Reich argued, because Americans need to be driven further into debt: “Without consumers, businesses have no reason to borrow more. Except to speculate by buying back their own stock and doing mergers and acquisitions, which is exactly what they’re doing.”

The New York Times repeated the same idea in Sunday’s editorial denouncing the Republicans’ new Pledge. The Times’ editorialists probably heard it from Robert Reich, and they framed their argument similarly: “The pledge asserts that letting the high-end tax cuts expire would kill job creation. With the economy weak, letting all the tax cuts expire would be a big hit to consumer spending and, by extension, job growth. But richer Americans tend to save, not spend, their tax cuts.”

Reuters repeats this canard. Martin Crutsinger, the clueless economy reporter for the Associated Press, publishes it all the time. Fareed Zakaria and Pauly K. sing from this hymnal. Practically everybody saying the stimulus should have been bigger (and, for those of you outside New York and Washington: yes, such creatures walk among us) cites that datum.

It is not true.

As Michael Mandel documents copiously in his Bloomberg Businessweek column, what government statistics call “consumer spending” is not — get this! — consumer spending. Most of it isn’t, anyway. Lots of that so-called consumer spending is in fact government spending; Medicare and Medicaid, for instance, are lumped in there, as is most health-care spending, which amounts to, oh, $2 trillion a year, which might tend to throw the consumer-spending numbers off a bit. Health-care spending isn’t really driven by consumers (which is why our health-care market is so messed up, incidentally!), but by insurance companies, government, and other non-consumer enterprises. Something on the order of 15 percent of health-care spending actually comes out of consumers’ pockets. Chickenfeed, in the vulgate.

All sorts of other stuff is dumped into that category: the money spent by nonprofits, for instance, along with political parties and campaigns. Never mind, for the moment, that a big chunk of that actual consumer spending goes to things like clothes and electronics and shoes made abroad (and the consumption of which therefore has little direct impact on domestic economic activity), the truth is that consumer spending, in reality, represents less than half of U.S. economic activity, probably around 40 percent.

That’s a specific kind of error to make. But let’s take a step back from the specific to the categorical: Whatever fraction of our economy is represented by household consumption, 100 percent of our economy — and every economy — is represented by production. We cannot consume that which has not been produced. Consumption is not really the problem: People like to consume. Americans consume eagerly, even to excess. In fact, when the economy is good, these same liberal scolds fretting at present about our momentarily lean consumption will lecture us about the evils of over-consumption, which makes Americans obesely face-stuffing SUV-ridden despoilers of pristine rainforests and Makes Them Hate Us, etc.

The problem of economic policy is not getting people to consume. It is getting them to produce. You can train a monkey to consume. (In fact, he requires no training, especially once you get him coked up on the taxpayers’ dime.) Americans are extraordinarily productive people, but our economy has taken a hit because we have a couple of trillion dollars’ worth of capital locked up in dead real estate, dead securities, and the swelling sovereign debt upon which our pet Leviathan battens. If you have a trillion dollars locked up in residential real estate that still is over-valued — its inflated price being sustained by hook and by crook by the geniuses in Washington — that capital can’t be put to real productive uses. (Also, people who could otherwise buy or rent cheap real estate will be paying too much for housing, taking yet more potentially productive capital out of the markets.)

It’s worth revisiting the sage words of the New York Times and its horror of the fact that “richer Americans tend to save, not spend, their tax cuts.” But jobs don’t come from consumption; jobs come from production. People have jobs because they make useful things and provide useful services, which people want, in any event (but not at any price). You want people to produce, you need capital. You need investments.

And you know where investment capital comes from? Savings, geniuses. Real savings, i.e. the savings that come from consuming less than you produce. Reich, the Times, Krugman, and every stimulus-happy pundit on the Democratic side of the aisle is arguing for an economic policy specifically and particularly designed to discourage saving and discourage investment, while encouraging consumption and encouraging borrowing. That’s the ultimate in magical thinking: We’ll just borrow another few trillion dollars and consume our way out of what ails us! You want fries with that?

I’ve got some bad news for you, Sunshine, some ancient and unalterable and inescapable bad news: As ye sow, so shall ye reap. We’re presently sowing jack, and the Obama administration, the Pelosi-Reid Congress, the Krugmans and Reichs of the world are working hard to make sure that we sow even less. Real prosperity only comes from real productivity, which means real savings and real investment. Everything else is a Beltway full-employment program for social engineers, unicorn wranglers, and fairie-dust sprinklers.

I might point out that Robert Reich was secretary of labor, is presently a chancellor’s professor at Berkeley’s Goldman School of Public Policy, is a former Harvard professor, and a former Brandeis professor, and apparently does not know what is in the U.S. Bureau of Economic Analysis data. But he wants a government composed of wise men such as himself to spend your money on your behalf, because you are too stupid to invest it yourself. Hell, a rube like you — you might even save it, much to the horror of the New York Times.

– Kevin D. Williamson is deputy managing editor of National Review and author of The Politically Incorrect Guide to Socialism, to be published in January.

Some fellow at The Economist has taken me to task for my description of socialism and communism: “The difference between communism and socialism: Under communism, politics begins with a gun in your face; under socialism, politics ends with a gun in your face.”

Writes “M.S.” (am I supposed to know who this is? must confess I do not):

I have lived or spent time in several of the northern European social-democratic countries that are often described by American conservatives as “socialist”, and I don’t remember seeing anything like this going on. Let’s see, the Netherlands, Denmark, France . . . nope, don’t remember seeing The Man coming to anyone’s house with a gun to tell them to go serve the community.

Well, bully for northern Europe and journalists with anecdotes! It’s not as though gunpoint politics has no history in Europe: Wait for the next all-European war and let me know how the Dutch and the Danes do.

I, too, have lived in a socialist country, one of the hot and messy ones, and I saw plenty of gunpoint politics. Different kinds of states draw the line on violence in different places.

Never mind, for now, that there is a world of difference between having a large and expensive welfare state, such as Sweden’s, and having a socialist state, such as Venezuela’s or North Korea’s or pre-reform India’s; it’s fair enough to write that some American conservatives would call France “socialist.” They would be wrong, but they would do so. (Hey, I have some thoughts on that!) Socialist or otherwise, all states finally rest on force: You decline to participate in whatever is the Netherlands’ version of serving the community through the instrument of the state long enough, they send a guy to your house with a gun to seize your stuff or haul you off to jail; resist and there will be violence. That’s what states do, and it is not necessarily illegitimate.

The resort to violence is what makes the question of what kind of things it is legitimate for states to do an important moral concern. It seems to me perfectly reasonable to shove a gun in somebody’s face to stop him murdering, raping, or robbing. It seems to me entirely unreasonable to shove a gun in somebody’s face to extort from him money to fund a project to get monkeys high on cocaine. Those seem to me fairly reasonable distinctions. It is illegitimate for government to use force or the threat of force for projects that are not inherently public in character.

The question of how much illegitimacy a state may perpetrate before becoming generally illegitimate itself is of real interest and has been, of late, the subject of some spirited discussion between some of my colleagues here and me. (You probably can guess on which side of the fault line I stand.)

But I would like to make it clear that I am not indulging in a figure of speech: I think it’s a pretty useful heuristic: If you’re not willing to have somebody hauled off at gunpoint over the project, then it’s probably not a legitimate concern of the state.

This is the sort of talk that gives the (always well informed, excruciatingly sober, generally sensible) folks at The Economist the howling fantods, inasmuch as they seem to operate under a kind of distributed version of the divine right of kings — always asking whether the rulers rule wisely, seldom asking whether they have the right to rule at all, and never asking whether and how much we actually need them. That’s why The Economist is the in-house newsletter of The Establishment. That and those great classifieds.

UPDATE: William Saletan tosses off another response on the masturbation = socialism debate. He is having a hard time distinguishing between that which one does out of shame or pressure and that which one does out of fear of government violence. It is all social control, he argues, as though a tut-tut were a tank.  In other words, he is either morally and politically sophomoric or he is being intentionally thick.

– Kevin D. Williamson is deputy managing editor of National Review and author of The Politically Incorrect Guide to Socialism, to be published in January.

I have to admit that I am scratching my bald noggin over the fact that a fair number of my fellow right-wingers are dismissing “The Pledge” as pusillanimous, lacking sufficient specificity, etc. I do not get it.

I don’t think you can get to the militant side of me when it comes to debt and spending, and my distrust for Republicans — especially congressional Republicans — is longstanding and well-documented. That being written, if a new Republican majority can, in fact, pare back spending to 2008 levels (even if it is only non-defense discretionary spending, a small part of the overall budget nightmare) and enact caps, that will be an enormous victory, a hugely significant step in the right direction. If the Class of 2010 can get that done, they will have accomplished something worthwhile — even if they do not achieve a single thing beyond that.

On Fannie and Freddie, especially, the Pledge has been criticized for a lack of clarity. I think it’s suffering more from a lack of good writing: I take “shrink their portfolio” and “end their government bailout” to mean forcing the GSEs to offload a bunch of assets as a prelude to breaking them up and fully privatizing them, withdrawing both the federal line of credit and the federal guarantee backing them. I don’t know what else those words could mean, and the Republicans I have talked to suggest that is what they have in mind.

I agree that they could have been more robust on the entitlements and that defense spending will have to be addressed. As a matter of politics, entitlement reform is going to be a long and complex fight, and difficult to summarize in a short campaign document. (And, yes, I know, call it cowardice or call it the political survival instinct, nobody is eager to grab that third rail at this moment.) As for defense spending, I think we spending hawks can, at the risk of waking the ghost of Murray Rothbard, count on the Left to make that an issue before the Republicans do. There’s a lot of room to cut at in the kingdom of Pentagonia; I suspect that the Republicans, if they are smart (I know! I know! Caveat!) will allow the Democrats to propose those and will agree to some of them as a compromise.

And the budget-process reforms look pretty smart to me.

Also: Repealing Obamacare, enacting national medical liability reform, opening up a nationwide insurance market to replace the fragmented, oligopolistic state-by-state market, better HSAs — what’s not to like?

Cutting and capping domestic spending: You guys do appreciate that this would be more than President Reagan managed on the spending front, right?

And getting that done would do a lot to repair the Republicans’ reputation on fiscal prudence, laying the groundwork for the bigger and more difficult fight over entitlements. And there is no point in passing a bold entitlement-reform bill in the next year, anyway — it would be vetoed by President Obama, and it is extremely unlikely that such a bill would command anything like a veto-proof majority.

The Obama-Reid-Pelosi gang got into trouble for doing too much too quickly: stimulus (and stimulus, and stimulus), health care, attempting cap and trade, etc. The Class of 2010 is not going to: 1. Reduce and cap non-defense discretionary spending; 2. repeal Obamacare; 3. enact free-market health-care reform; 4. fix Social Security; 5. fix Medicare; 6. fix Medicaid; 7. reform national-defense policy and, consequently, national-defense spending; 8. reform the tax code — all at once. If they manage to do 1-3 in a single Congress, conservatives should take up a collection to build a statue of John Boehner — on horseback.

– Kevin D. Williamson is deputy managing editor of National Review and author of The Politically Incorrect Guide to Socialism, to be published in January.

I like the Young Guns, and I love a tax cut, but what’s missing from the agenda? Let us ask a grown man called Bobby.

Bobby Schilling, Republican candidate for Congress in the Illinois 17th District, discussed his positions on tax policy. Schilling signed a pledge with Americans for Tax Reform promising not to raise taxes on anyone in a recession. Schilling said he believes JFK, a Democrat, had it right when it comes to tax cuts.

“President Kennedy embraced tax cuts during a tough economy in the early 1960s because they work,” Schilling said. “The truth is that tax cuts stimulate the economy while high taxes discourage further growth. Putting money in people’s pockets will allow them to buy more goods and services. As businesses see more revenue, they’ll be more likely to expand and create new jobs. If we increase taxes in the manner my opponent wants to, we won’t see any new jobs and many businesses will actually be forced to cut back the amount of workers they employ. Some businesses may even give up on our business climate entirely and move their operations abroad. If we want to create jobs and stop outsourcing, we have to start by creating a positive business climate.” Schilling said we can’t afford tax increases while our economy experiences double digit unemployment.

“We have to extend the 2001 and 2003 tax cuts for every income bracket, and we need to repeal the 22 new taxes from the healthcare bill,” Schilling said. “Our economy can only recover if we keep taxes low, stop the out of control deficit spending in Washington, and work to foster a positive business environment so small business can expand and hire more workers. Anything else will make a bad economic situation much worse.”

Bobby Schilling, a native of Rock Island, graduated from Alleman High School and attended Black Hawk College. Schilling, a local business owner, is the Republican candidate for the 17th Congressional District in Illinois. Bobby is running on a platform of bringing jobs and real representation back to the 17th District. Earlier this year, Schilling conducted a 34-city “Bob’s for Jobs” tour, where he met with voters and employers all across the 17th District. Schilling was recently named an official ‘Young Gun’ by the National Republican Congressional Committee in their Young Guns program of top tiered races. 

The Republicans’ recent argument, which goes, roughly, “JFK Was One of Us When It Comes to Taxes, Yee-Haw!” is mostly right — and that is a bad thing. Tax cuts as economic stimulus for the most part amounts to short-term, naïve Keynesian claptrap — especially when the proposal is for temporary or one-time tax cuts. Bobs-for-Jobs says ‘putting money in people’s pockets will allow them to buy more goods and services,” and he even calls it stimulus. Well, Bobs-for-Jobs, your running mate is Brett-for-Debt. What’s the difference between a tax-cut stimulus and a spending stimulus? Some efficiency, sure, less rent-seeking and pork-barreling, no doubt. But if we cut taxes without cutting spending, we are not cutting taxes. We are deferring taxes. Taxes are not the problem; spending is the problem. Taxes are a symptom.

So, what we want is permanent, long-term, significant reductions in tax rates, along with a more sane and simple tax system, right? Which requires us to — sing along with me, Bobs-for-Jobs Schilling of Rock Island — cut spending. A lot. New Exchequer rule: Any Republican who sends me a press release talking up tax cuts without a word about spending cuts gets to be jackass of the day. (Democrats obviously are ineligible; you can’t be jackass of the day when you’re a registered jackass for life.)

Oh, and there’s a junk-bond bubble blowing up because we’re using ultra-low interest rates to combat the recession that was caused by the housing bubble enabled by ultra-low interest rates, which were used to combat the dot-com recession that was enabled in part by . . . .

Bobs-for-Jobs and the junk-bond bubble are not unrelated subjects: Both are the product of magical thinking, the quest for a get-out-of-jail card for economic troubles. Both are going to cost us in the end.

Here’s the problem: Real growth and real productivity cannot be magicked into existence or politicked into existence. Real growth and real productivity come from real investment, which comes from real savings. You want to discourage savings? You want a real good way to discourage savings? Try ultra-low interest rates and tax cuts that are specifically designed to encourage consumption rather than savings, brought to you by Bobby Schilling & Co. There is no substitute for consuming less than you produce, either at the individual level, the household level, or the national level. JFK never really understood that, very probably because he had servants to lift his fingers. Those days are gone. The sooner we start living in the real world, the better.

Now, Bobs-for-Jobs, it would be thrilling if you decided to go by a grown-up name: Mr. Schilling for Deficit-Killing. You’ve told us about your tax cuts. Let’s hear about the spending cuts. Because, I’ve been reading your web site, and I do not see one serious proposal for cutting a dime of federal spending, and do see lots of special pleading on behalf of favored constituents. How about we start with your precious farm subsidies?

– Kevin D. Williamson is deputy managing editor of National Review.

In the course of arguing that our real national debt is around $130 trillion — as opposed to the official number of $14.7 trillion — I have frequently encountered the argument that I’m wrong to include unfunded entitlement liabilities in the total. Here’s a typical example from the comments to this post:

Kevin Williamson, expected spending 75 years in the future, based on current policies and projects that are certain to change anyway, is NOT debt. No amount of calling it “debt” or calling it “our REAL debt” changes that fact. Project funding gaps are not debt. DEBT is debt.

About that, a few things.

The first and most obvious thing is that in much of the real world, liabilities of that type are defined as debt, as your favorite corporate accountant will tell you. One of the reasons that American companies started filing all those unhappy financial restatements after the passage of Obamacare was that they had a whole lot of new, measurable, real-world financial liabilities, and they are obliged to include those in their disclosures. As one of our commentators answered the above criticism:

Many promises to pay are categorized as debt according to GAAP and accounting body authorities. If government were required to report like public companies a lot of the promises would show as debt. So if you don’t believe that GAAP correctly classifies debt and that the thousands of SEC filings are wrong it’s your prerogative, but you’d better keep your day job and not become a CPA or one responsible to produce SEC financials.

Maybe you object to the word “debt,” but it’s still $100 trillion or so on the wrong side of the balance sheet.

But there is a more important reason to worry about the entitlement shortfall. To understand it, it’s helpful to take a look back at the housing meltdown and its effect on the current economy. While it is true that a shocking number of homeowners currently are upside down on their mortgages, it’s also true that a lot of homeowners experienced only “paper losses” — they bought houses for $100,000, saw the value rise to $200,000, and then watched as it fell back down to $100,000 (to take a simplified example). People often pretend that these paper losses are meaningless: If the money never hit your checking account, the argument goes, you haven’t really lost anything. (And it’s not just households; I recently heard the same argument made about the Harvard endowment fund and its “pretend losses.”)

Here’s the problem: Those “paper losses” were preceded by “paper profits,” meaning people thought that they had an extra $100,000 in assets, and they made consumption, borrowing, investment, saving, and working decisions accordingly. The simplest illustration: Your $100,000 house, which is paid for, has gone up to $200,000 on the market at the top of the bubble. If you took out a $50,000 home-equity loan against 100 percent equity in your (at the time) $200,000 house, you still had $150,000 of equity, no mortgage, $50,000 in cash, and a $50,000 equity loan to pay off. If the market value of your house crashes back to $100,000, you still have no mortgage, $50,000 in cash, and a $50,000 loan to pay off, and the same house; you haven’t really lost anything (other than opportunity cost), since the house is still worth what you paid for it; and you only make your paper losses real if you sell the house while the market is down.

But anybody who thinks your financial situation hasn’t changed is nuts. Your equity debt has gone from 25 percent of the value of your house to 50 percent. Your credit profile has changed. Any other debts have just become significantly larger relative to the value of your biggest asset. (And your other assets, like your 401(k), probably are not in great shape, either.)

Whatever you’d planned to do with that $50,000, you probably are going to think twice about doing. If it was straight-up consumption, you’ll probably forgo the bass boat and pay back your loan. If it was for home improvements, why sink another $50,000 into a house that’s worth half of what it was, making a $150,000 investment in a $100,000 house? Your economic decisions will change.

But it’s not just you. The bigger problem — bigger because it’s harder to solve — is that somebody was planning to sell you that bass boat and those home improvements. You can buy one bass boat, but the guy at Bob’s Bass Boats doesn’t manufacture them one at a time. He’s counting on selling hundreds or thousands of bass boats to guys like you (that is, guys who are cashing in some of the gains from their residential real-estate investments). The suppliers and contractors and workers who stock and run Bob’s factory, the container ships that bring components from around the world, the people who service them — the whole system gets thrown into disarray. The capital Bob invested in factory tooling and whatnot is lost or radically devalued, and he has to make new investments to create whatever products he is going to sell in the new economic environment, e.g., less-fancy bass boats, or maybe paddle boats. (Or, if the Democrats continue to spend us into penury, those little inflatable floaty things for your arms.) The Austrian economists call that problem “malinvestment” — capital has been dedicated to uses that appeared productive but are not actually viable — and they blame them for recessions.

The problem with the business cycle under this analysis, you’ll notice, is not the bust — it’s the boom. That’s when the bad investment decisions are made, largely because political influence in the markets (housing policy, tax breaks, artificially cheap money and other interest-rate subsidies, risk subsidies, etc.) distorts economic calculation.

Which brings us back to the entitlements. It’s easy to say: Well, we’ll just raise the retirement age, or cut benefits, or means-test them, or raise taxes on the wealthy who receive them (which amounts to means-testing, but Democrats like that version better). And, yes, that probably is what we will do, eventually. But that does not get us out of the economic pickle: People have been making decisions for years and years — decisions about saving, investing, consuming, working, and retiring — based at least in some part on what are almost certainly faulty assumptions about what sort of Social Security, Medicare, and other benefits they will receive when they retire. When those disappear, a lot of consumption is going to have to be forgone — and a lot of capital dedicated to producing those goods and services for consumption will be massively devalued. Businesses will have to retrench, probably in a way that is more disruptive and more expensive than the housing-bubble recession necessitated.

This is the boom. The bust is going to be a nightmare.

– Kevin D. Williamson is deputy managing editor of National Review and author of The Politically Incorrect Guide to Socialism, to be published in January.

The “Young Guns” — Paul Ryan, Eric Cantor, and Kevin McCarthy — paid National Review a visit today, and they give every sign of being serious about the deficit: no nonsense about relying on cutting earmarks, waste, or redundancy to get the deficit down and the budget under control. I put the two questions to them that normally trip up alleged budget hawks: Entitlement reform? Yes, absolutely, they are serious about entitlement reform. Take a look at defense spending? Yes, everything is on the table.

Ryan, who has been one of the few sane voices on the debt for some time now, says he expects the new crop of Republicans expected to be sworn in come January to be a rowdy bunch, with little respect for the seniority system or traditional congressional politics. Cantor, too, made it clear that he knows they are in for a long-term fight — no magic-bullet solutions were under consideration. McCarthy was the surprise for me, though — I did not know much about him and was impressed by his command of the data, relating both to politics and policy.

I have been, and remain, skeptical of congressional Republicans’ ability to head off Fiscal Armageddon; the political incentives are all wrong, and it probably will take a major economic crisis to realign those incentives. But I am a little less skeptical today than I was yesterday — maybe 5 percent less. I think there is a non-trivial chance that non-entitlement spending could be scaled back to 2008 levels — not exactly raging austerity, but a start; combined with sane entitlement reform and tax reform, that could get us several steps back from the ledge we’re on. Something good seems to be afoot among Republicans.

Here’s what to worry about: Chances are, the economy is still going to stink in January 2011. It may be worse then than it is today — and it is possible that it will be significantly worse. Ryan is worried about the dollar, and he is right to be. If things get really hideous economically, then there is going to be tremendous political pressure on the GOP to do the dumb thing that Republicans always do: cut the taxes and let the spending grow. That could happen. We can’t let it.

And young guns eventually become old bulls — restoring fiscal sanity in our country is going to be a decade(s?)-long project, and one fresh class of hotheaded congressmen, welcome as it would be, is not going to do it alone.