Let’s say you’re a top-tier presidential candidate, and you want to steal the best ideas from the lower-tier candidates to buttress your own position and siphon away what support they have on the issues. You want to make sure you steal the best ideas from the also-rans, not the dumb ones. Here’s my picks:

1. Hijacking Herman: Herman Cain is wrong about two very important questions: Who the Republican nominee is going to be in 2012, and who the next president is going to be. “Herman Cain” is not the answer to either question. He’s also way too optimistic about our growth prospects, which has led him to inadequately think out some of the big economic questions. But here’s what he is 100 percent right about: Uncertainty is an investment killer and the bane of capital. When Cain calls for massive tax cuts, he always ends his pitch with: “. . . and make the rates permanent!” I suspect that the question of whether the top income-tax rate is 35 percent (the George W. Bush model) or 38.6 percent (the Barack Obama model) matters a good deal less than whether tax rates and rules are stable over the long run. This is even more true, I suspect, of capital-gains tax rates and business-tax rates. Citizen Cain has called this one. Give him credit — and run with it.

2. Mugging McCotter: Last weekend in Iowa I had a chance to ask McCotter what he thinks we ought to do about the banks. He gave the most persuasive answer of any politician I’ve asked so far: Force them to capitalize for real, enforce stronger leverage limits and capital requirements, get rid of taxpayer support for the GSEs, etc. Michele Bachmann likes to talk about repealing Frank-Dodd, and Newt Gingrich talks about repealing Sarbanes-Oxley. That’s all great, but repealing legislation alone does not get everything done we need to get done. We’re still dangerously out on a limb with our financial system, and a second financial crisis would be another excuse to expand Leviathan and deepen the state’s reach into the economy. Real reform can preempt this, and McCotter is on the right track. And stealing from McCotter is easy: Nobody knows who he is, anyway.

3. Nicking from Newt: Newt Gingrich, the first politician whose career I really cared about, now makes me shake my head. Lean Six Sigma? Grants for Alzheimer’s research? Egad. But ask Newt about congressional procedure and he’s a lion. Newt’s finest moment in Iowa was his call for pre-empting the deficit-reduction supercommittee, calling the House back into session right now, forcing every subcommittee to come up with spending cuts, and sending the Senate, and Obama, critical economic-reform legislation. John Boehner should be listening, and so should Mitt Romney, Rick Perry, and Michele Bachmann. Newt’s got so many ideas that he won’t notice if one goes missing.

4. Raiding Rick: When asked what’s keeping the economy back, Republicans most often answer “taxes.” Rick Santorum emphasizes regulation, and he’s right to do so: Regulatory compliance costs American businesses more than they pay in corporate taxes every year, and most of those regulations do questionable good when they’re not doing active harm. Regulatory reform gives the economy many of the same benefits as tax cuts without putting additional pressure on the Treasury. Putting it at the top of the agenda is a win-win from a candidate who won’t-won’t.

5. Hustling Huntsman: Remember free trade? Huntsman does, and for the right reasons: “It has allowed the average family to save in terms of what they pay for goods, products that would otherwise carry a higher cost.” A new free-trade agenda is worth keeping in mind, even if Huntsman’s campaign isn’t.

6. Robbing Paul to Pay Everybody: Ron Paul is obsessed with the Fed, monetary policy, and national-security spending. The world is bigger than that — but, you know what? The Fed is an occasional menace, our monetary policy is a mess, and we spend a ton of money on national-security enterprises that don’t necessarily make the nation more secure. While it is dangerous to get Congress involved with the Fed’s business — Congress would almost certainly make an even worse hash of things than Bernanke & Co. — narrowing the Fed’s discretion to engage in freelance monetary shenanigans while radically expanding its balance sheet may be an idea whose time has come. Competitive devaluation of the dollar is no kind of long-term strategy, and a Republican presidential nominee ought to point that out. And Libya has finally given at least a few Republicans a war that doesn’t seem like a AAA investment — perhaps that could be the starting point for a longer conversation about our military footprint. Just don’t start that conversation with a true-believing Ron Paul guy lugging around a copy of Man, Economy, and State if you want to get the ball rolling in this decade.

So, that’s what I’d steal. And here’s some unsolicited advice for the top three:

1. Michele Bachmann needs to stop saying that we can turn the economy around in one quarter. If ever she gets the chance to test out that theory, she’s going to look stupid 90 days later. Rebuilding our economy is going to be a decade-long, or decades-long, project. Optimism is not a policy, and conservatives’ first duty is to reality.

2. Rick Perry needs to talk about crony capitalism. Economic-development subsidies of the sort that Texas (and every other state) offers at best distort markets and at worst lead to graft. You don’t have to be a Ron Paul purist to see that there’s an important difference between being pro-business and being pro-these-businesses.

3. Mitt Romney: I really wish he’d quit saying things like: “I’m afraid the president is just out of his depth when it comes to understanding how the private economy works.” So is Romney. Being successful in one line of business doesn’t mean you understand how other businesses work. Indeed, the private economy is so complex that nobody actually understands how it works — not businessmen, and certainly not politicians. That’s why businesses sometimes fail and why economic policies don’t produce the desired results. The president isn’t the CEO of America Inc., and Romney can’t manage a national economy the way he managed Bain Capital.

—  Kevin D. Williamson is a deputy managing editor of National Review and author of The Politically Incorrect Guide to Socialism, published by Regnery. You can buy an autographed copy through National Review Online here.

From S&P:

On Monday, we will issue separate releases concerning affected ratings in the funds, government-related entities, financial institutions, insurance, public finance, and structured finance sectors.

If the U.S. government isn’t AAA, then government-backed securities aren’t AAA, either. There’s a lot of them.

To begin with, there’s a $5 trillion market in “agency” mortgage securities, meaning Fannie/Freddie products.

Add to that  Ginnie Mae securities and more than $1 trillion in student-loan debt, which is securitized and sold.

Beyond this, as I wrote a week or so ago: “The ten major holders of U.S. Treasury debt are, in order: 1. the Fed, which has more than doubled its holdings of U.S. sovereign debt in the past few years; 2. individual investors, mostly in the United States; 3. the Chinese; 4. the Japanese; 5. pension funds; 6. mutual funds; 7. state and local governments; 8. the Brits; 9. the banks; and 10. insurance companies.” All are likely to experience some turbulence, though not necessarily downgrades.

Stocks were pummeled this morning by a rumor that Standard & Poor’s would downgrade the United States, making the announcement after the close of markets Friday. When asked about this, S&P’s John Piecuch gave me the standard (and poor) answer: “We do not comment on market rumors about our ratings.”

Okay, so they don’t. I do. And so does everybody’s favorite source, the anonymous federal official.

The financial types I talked to today didn’t put much stock in the rumor, and, indeed, stocks largely recovered from their earlier plummet in day of whiplash volatility.

The consensus view, so far as I can tell: A downgrade is coming — S&P said about $4 trillion in spending cuts were needed, and Congress couldn’t deliver that — but there’s no reason to think it will come this weekend. (Not to say it couldn’t.) (UPDATE: It did.) S&P put the United States on its negative watchlist on July 14, and its practice is to make a decision within 90 days of such a designation. With Moody’s and Fitch having reaffirmed the U.S. AAA, S&P may hesitate to stand out from the crowd, and the view inside the firm is that markets already have priced in the downgrade risk. So, what’s the hurry?

The credit agencies also are surely taking into account the fact that Europe’s crisis has left the United States with even lower borrowing costs, which makes the nation’s debt, swollen and grotesque as it is, slightly more manageable. That’s Tim Geithner’s argument, for what it’s worth. (Your call.)

Point to ponder: We know, more or less, how a downgrade will affect the U.S. government. We know less about how it will affect all of the financial institutions — banks, pensions, insurance companies — that hold lots of Treasuries, or the state and local governments and pension funds that hold them.

In one of the most awkward and vapid performances I can remember his having given, Pres. Barack Obama yesterday made it clear that he has learned absolutely nothing from the debt-ceiling debate — that he may be incapable of learning. He continued to talk nonsense about government “investing” in this, that, and the other, and said that was how the nation creates jobs. It was a self-discrediting performance.

He also promised to raise taxes. For Obama, taxes plainly are not in the main a fiscal issue, but an emotional one. He remains fixated on general-aviation consumers and energy companies, and he promises to stick it to them. (Economic reality: Oil is scarce, speeches are plentiful.)

“You can’t close the deficit with just spending cuts,” he declared. And he’s almost right about that. John Boehner can’t close the deficit with just spending cuts. Paul Ryan can’t do it. Senate Republicans can’t do it. President Obama can. That is because Barack Obama is at present the most important reason why you can’t close the deficit with just spending cuts.

The Congressional Budget Office estimates that the 2012 deficit will amount to 7 percent of GDP, or about $1.1 trillion. At 16.6 percent of GDP, federal tax revenue is 1.3 percentage points off its historical average of 17.9 percent of GDP; spending, at 23.6 percent of GDP, is significantly farther off the trendline, 2.9 percentage points more than its historical average of 20.7 percent of GDP. Spending, not revenue, is the real outlier.

What would a cuts-only balanced budget look like? There are lots of options. Eliminating Social Security would almost get you there by itself. Eliminating Social Security and Medicare would put you well into the black. But that isn’t going to happen. Neither is what I’m going to propose, but here’s my back-of-the-envelope balanced budget, with no tax increases:

1.      Social Security: Yeah, they’ll say you’re throwing Granny off the cliff. But it’s her or the grandkids. So implement aggressive means-testing and other reforms to cut 20 percent of spending for $150 billion in savings.

2.      Medicare: Ditto, for $100 billion in savings.

3.      Keep on going and reduce Medicaid and other health-care services spending by 10 percent: $33 billion.

4.      National defense: Republicans will howl, but there’s room for a 10 percent cut to all national-defense spending, including non-DoD activities such as DoE’s work maintaining our nuclear arsenal. That nets $74 billion in savings. Surely we can slaughter hapless desert barbarians more cheaply.

5.      “Other income security.” That’s the welfare state bits and pieces not included in Medicare, Medicaid, Social Security, food stamps, etc. Welfare of the checks-from-Uncle variety. Eliminating it entirely saves $159 billion. 

6.      Welfare for bureaucrats: Making federal-employee retirement and disability systems totally self-funding saves $123 billion.

7.      Eliminate federal education spending entirely: elementary, secondary, and higher-ed. Leaving it to the states and to the market saves us $106 billion. Harvard will figure something out.

8.      Eliminate “community and regional-development” spending, a.k.a. boondoogles and slush funds, except for disaster relief: $15 billion.

9.      Get farmers off welfare: $19 billion. Suck it up, Elmer.

10.  Foreign aid, international development, international-security assistance, etc. Quit meddling abroad and propping up Third World potentates, and save $44 billion.

11.  Cut all the “energy” spending on “energy information,” “energy emergency preparedness,” etc. — all the energy spending that doesn’t actually produce any energy. And throw federal energy-conservation spending on the fire, too. Cutting the bureaucratic answer to Jimmy Carter’s sweater saves $12 billion.

12.  “Advancing commerce” doesn’t. We’re looking at you, SBA et al.: $23 billion.

13.  Federal law enforcement: Cut spending by 10 percent. Legalizing it saves us $3 billion.

14.  Space flight: We aren’t flying in space anymore. Staying grounded saves $17 billion.

15.  Downsize Smokey the Bear: Cutting land-management, recreation, natural resources, etc., by half saves $21 billion.

16.  Quit subsidizing suburban sprawl: Cutting transportation spending by 10 percent saves $10 billion.

17.  Save $36 billion by cutting health research and training. Let Pfizer do it.

18.  The real-estate market isn’t going to make a comeback. So eliminate federal housing assistance and save $60 billion.

19.  Cut food stamps by 10 percent, save $11 billion.

20.  I know, I promised no tax increases, so that’s a 19-point plan to balance the budget: Just over $1 trillion in savings. No. 20 is a bonus tax hike: Eliminate the stupid and destructive mortgage-interest deduction and have the national debt paid off by the time the kids being born this year graduate from college.

Don’t like my version? Get your 2012 estimates from OMB here and tell me how you’d balance the budget.

—  Kevin D. Williamson is a deputy managing editor of National Review and author of The Politically Incorrect Guide to Socialism, published by Regnery. You can buy an autographed copy through National Review Online here.

So, assuming this debt-ceiling deal gets done, are we out of the woods? Not by a long shot. Let’s revisit what Standard & Poor’s said on July 14:

Since we revised the outlook on our ‘AAA’ long-term rating to negative from stable on April 18, 2011, the political debate about the U.S.’ fiscal stance and the related issue of the U.S. government debt ceiling has, in our view, only become more entangled. Despite months of negotiations, the two sides remain at odds on fundamental fiscal policy issues. Consequently, we believe there is an increasing risk of a substantial policy stalemate enduring beyond any near-term agreement to raise the debt ceiling.

As a consequence, we now believe that we could lower our ratings on the U.S. within three months.

We may lower the long-term rating on the U.S. by one or more notches into the ‘AA’ category in the next three months, if we conclude that Congress and the Administration have not achieved a credible solution to the rising U.S. government debt burden and are not likely to achieve one in the foreseeable future.

How good a deal do we have before us? Does it rise to the level of credible solution to the rising U.S. government debt burden?

Let’s assume perfect execution, meaning $2.5 trillion in deficit-reduction over the next decade. Under current Congressional Budget Office projections, debt held by the public will amount to about $10.35 trillion in 2011 (69 percent of our $15 trillion GDP) and will grow to $20.1 trillion in 2021 (101 percent of an expected $19.9 trillion GDP). That’s under the CBO’s less-rosy “alternative fiscal scenario,” meaning that the Bush tax cuts are not allowed to expire, that the deep Medicare spending cuts that consistently have been put off continue to be put off, etc. (Couple of notes: 1. These figures are in constant 2011 dollars. 2. Debt held by the public, rather than total debt, including such intragovernmental debt as the money owed to the fictitious Social Security trust fund, is not my favorite measure of debt, but I’ll stick with it here, since the CBO is using it. 3. Have a look at the CBO numbers here.)

So, one way of looking at this is that we’ll shave off the equivalent of about 26 percent of the additional public debt we are expected to accumulate in the next decade. That’s not nothing.

Another way of looking at this is that, even with this deal in place, the public debt will grow by about 70 percent in the next decade in dollar terms, and about 47 percent in terms of GDP share.

Which means: Even if this deal is done, and even if it is perfectly executed, we continue to press toward national insolvency. At the very least, that means we can probably kiss that AAA credit rating goodbye, and soon. If losing the AAA drives up the cost of borrowing, that will make the deficits that much worse, which will put additional pressure on our credit rating.

Conclusion: Republicans should begin work on the next deficit-reduction plan as soon as the president signs this one (if he signs it). It will need to address entitlement reform, since entitlement spending will be the major driver of deficits going forward; there really is not much of a choice.

The debt-ceiling debate is only coincidentally related to the underlying issue of deficit reduction: The statutory debt ceiling provided a political opportunity to force a deal. But it is not the only such opportunity, and Republicans should continue to make the most of every choke point in the legislative process to press for additional spending cuts. They are making gains, but the gains are insufficient.

The Wall Street Journal passes on a memo from Bank of America:

Although the market had completely discounted [a default scenario] until a few days back, we are now seeing some probability of this being priced in. Aug 4 bills (the first Treasury maturity after the Aug 2 drop-dead date) have cheapened nearly 4bp to July 28 bills, indicating some risk that the Treasury may postpone this payment. Furthermore, the U.S. CDS curve has inverted for the first time, with 1-year CDS spreads trading nearly 20bp higher than 5-year CDS spreads. Although not a very liquid product, we see this as indicating that the market is pricing in a small probability of a postponed payment.

Granted, I was never very good at playing chicken, but I think it is time to get a deal done.

Question: How many U.S. banks and insurance companies do you think will remain rated AAA if the U.S. government gets downgraded?

That is not a rhetorical question.

The direct consequences of a downgrade of Uncle Sam’s credit on U.S. public finances would be pretty bad. But, as with natural disasters, the aftershocks of this man-made catastrophe might prove more devastating than the main event. In this case, imagine a tsunami of rolling corporate downgrades following the earthquake of a Treasury downgrade, a run on the banks, a discredited FDIC, frozen money-market funds, and a plunging dollar.

It’s not Beijing that’s going to take it in the shorts — it’s our still-fragile financial system.

Standard & Poor currently gives AAA ratings to six major insurance companies: New York Life, Northwestern Mutual, etc. Those companies already are on the watch-list for a downgrade, simply because of their extensive holdings of U.S. Treasury securities — regardless of the fact that Treasuries themselves have not yet been downgraded.

Many banks could find themselves downgraded as well, just because of all the U.S. government debt on their balance sheets. One of our old friends from the bailout days, the AAA-rated Temporary Liquidity Guarantee Program, could get downgraded as well, along with Fannie Mae, Freddie Mac, the Federal Home Loan Banks, and, critically, the FDIC. And Fannie and Freddie still prop up a bunch of mortgage-backed securities. What happens to them? Here’s what Fitch says: “Ratings on bonds with direct credit enhancement provided by Fannie Mae, Freddie Mac, or other GSEs would generally reflect the ratings of the credit enhancement provider.” In English: If the government isn’t AAA, nothing that the government backs is AAA, either.

Fitch also warns that money-market funds could face “liquidity pressure,” something to keep in mind if there’s a run on downgraded banks backed by a downgraded FDIC.

So, who’s who in this world of hurt?

The ten major holders of U.S. Treasury debt are, in order: 1. the Fed, which has more than doubled its holdings of U.S. sovereign debt in the past few years; 2. individual investors, mostly in the United States; 3. the Chinese; 4. the Japanese; 5. pension funds; 6. mutual funds; 7. state and local governments; 8. the Brits; 9. the banks; and 10. insurance companies. (More here.) The national governments have worries of their own already — some of them are in pretty dire straits (the Japanese national debt is 200 percent of GDP) and some of their situations are basically unknowable (China). God alone knows what the Fed will do.

Even if the banks and insurances companies don’t get downgraded, a Treasury downgrade is still going to be enormously disruptive to their businesses. Typically, regulated financial institutions are required to hold “investment grade” assets, which does not limit them to AAA bonds. AA is still “investment grade.” So they don’t have to dump all their Treasuries. (Which is not to say they won’t.) But capital-requirement rules — which govern the amount of money a financial institution has to hold in reserve — naturally take into account whether bonds are AAA, AA, or something else. That’s because $1 worth of Exxon debt is not really worth the same thing as $1 worth of debt from Barney’s Subprime Bait-’n’-Tackle, and $1 million in Swiss bonds is not the same thing as $1 million in Haitian bonds. A downgrade of U.S. Treasuries would mean that basically every bank and insurance company of any stature would immediately have to raise a great deal of capital to offset the downgrade of the more than $1 trillion worth of U.S. Treasury debt they are holding. They’ll have to try to raise that capital in a market suffering a jacklighted panic over that sovereign downgrade, scrambling for investment in an environment in which the U.S. government is no longer considered a gold-plated, top-shelf safe haven. In terms of a “credit event,” that’s probably going to make 2008 look like a day relaxing upon the sandy beaches of Calais with tropical-themed umbrella-garnished drinks.

State and local governments are holding another $1 trillion or so in Treasuries, meaning that the credit profile of our already struggling states and cities would have about as much credibility as Dominique Strauss-Kahn’s wedding vows. A lot of that pension-fund exposure to Treasury debt is for state and local government retirees, too, so Austin and Sacramento and Boise and Augusta will be right between the hammer and the anvil, getting pounded. And so will Springfield — the Typhoid Mary of fiscal contagion at the state level. As I’ve written before, I suspect that Illinois will be the first state to go into something like a full-blown insolvency, largely due to its unfunded pension liabilities. Just Monday, Ben Bernanke confessed himself worried about the situation in Illinois and California. And if I may be forgiven for repeating myself: Most states have either statutory or constitutional obligations to pay those pensions, so they cannot just reduce them or walk away. There’s really no such thing as a state-bankruptcy law, so nobody knows how a default would unfold. How’s that for uncertainty in the markets?

Back to those banks and insurance guys: Contrary to what our dear leaders in Washington have claimed, the world’s financial system has not been reformed. In fact, a great deal of the bailouts and the legislation that followed them was designed specifically to prevent the kind of fundamental reforms that are needed. A global financial system brought to its knees by a raft of bad mortgages is going to be knocked ass-over-teakettle by a downgrade of U.S. Treasury debt.

I was in Washington Monday, debating Cato’s erudite Dan Mitchell about the no-new-taxes pledge. Mr. Mitchell and I agree on the fundamentals and differ on the politics. What I found mildly despair-inducing, however, was the question-and-answer session, during which the predominant concern expressed by the audience was how to ensure that our guys “win” the debt-ceiling debate. While I understand that you have to win elections to get things done, we simply must head off a downgrade, even if at great political cost. Nobody is going to “win” a downgrade.

The thing that has not been sufficiently understood,  I think, is this: The United States is not on a downgrade watch because the markets fear we won’t raise the debt ceiling in time to avoid a default; the United States is on a downgrade watch because the markets believe the debt-ceiling debate presents the last real opportunity for the government to enact a meaningful fiscal-reform program before it is well and truly too late to avoid a national crisis. The credit agencies, wisely or not, aren’t worried about the short-term political fight leading to an immediate default, but about the near- to medium-term fiscal situation, which is plainly unsustainable.

I sincerely hope that in five or ten years, I will have to sheepishly admit that I was among the alarmists back in 2011. But right now, I believe that the question isn’t how to “win” the debt-ceiling fight, but how to survive the underlying economic disorder it represents.

—  Kevin D. Williamson is a deputy managing editor of National Review and author of The Politically Incorrect Guide to Socialism,published by Regnery. You can buy an autographed copy through National Review Online here.

Tim Geithner says there’s no “creative financial solution” to the debt-ceiling problem, but don’t believe him. Gimmicks are what these guys do: With the government having spent most of the Obama years “selling” most new Treasury bonds to the Fed — in effect, with the government selling bonds to the government — while the Fed is still holding trillions of dollars worth of “assets” that are more like liabilities (nearly $1 trillion in mortgage-backed securities, a bunch of Fannie and Freddie garbage, etc.), and while some $100 trillion in entitlement liabilities are being magicked away through the wizardry of government accounting, these guys make Enron look like the financial citizen of the month. It’s not hard to imagine all sorts of “creative financial solutions” to keep these plates spinning for another election cycle or two.

But the debt-ceiling debate in Congress is not about the real issue. As the oracle says, “The debt ceiling that can be lifted by Congress is not the One True Debt Ceiling.”

I have a feeling that we’re going to look back on this debt-ceiling “crisis” as the good ol’ days within a year or two, and maybe sooner. When the bipartisan negotiators started thinking big, they talked about cutting $4 trillion off of new deficit spending over the next ten years, or just a tad more than the national debt has increased since Pres. Barack Obama was sworn in. That $4 trillion over ten years isn’t exactly chump change, but it’s not a game-changer, either. If that’s the best we can do, our best probably is not going to be good enough.

The debt ceiling we’re talking about right now is statutory. There’s a law that says the government can only borrow so much. But, as I have argued before, there’s another debt ceiling — the real debt ceiling, the One True Debt Ceiling, the one that you cannot raise with a vote in Congress. There are signs that we’re getting ready to bump up against it.

The Mister Magoos at Standard & Poor, Fitch, and Moody’s are making worried noises. More important, the market is not so eager to buy U.S. Treasury debt as it was a few months ago. This may be a temporary condition, or it may speak to the fact that the world’s lenders no longer believe the financial story being told by the world’s biggest borrower. Even though the Fed plans to continue acting as the world’s largest buyer of U.S. Treasuries (even after QE2 ends, by reinvesting its returns), the market for Washington’s debt is contracting. Bidders aggressively drove up yields in the last bond auction, and the government will be pushing another $32 billion out the door on Tuesday. How the market will react is anybody’s guess.

The government’s cost of borrowing is right now remarkably low. If the interest paid on Treasuries should return to its historical average, then the cost of debt service would soon run into hundreds of billions of dollars more each year, adding about $5 trillion to our financial obligations by 2020. And that’s just interest: We haven’t paid down a dime of of the national debt since 1961.

Keep all that in mind when Secretary Geithner points out that we have to roll over some $500 billion in Treasury debt in August alone. “Rolling over” debt means paying off old bonds and immediately issuing new ones, in effect transferring the government’s debts from one old bondholder to a new one. That only works if investors keep buying the bonds. Not enough new buyers, no rollover. And then you’ve discovered the real debt ceiling.

The Webster’s Legal Dictionary contains this definition: “an investment swindle in which early investors are paid with sums obtained from later ones.” It’s called a Ponzi scheme, and it keeps working and working and working, until it doesn’t.

—  Kevin D. Williamson is a deputy managing editor of National Review and author of The Politically Incorrect Guide to Socialism, published by Regnery. You can buy an autographed copy through National Review Online here.

Andrew Leonard’s column is called “How the World Works,” and there is some unintended irony in that. It ought to be called, “How Andrew Leonard Wishes the World Would Work.” Where to start with his latest, “The final nail in the supply side coffin”?  

The theory of supply-side economics tells us that if you cut taxes on rich people and corporations, the newly liberated moguls and businessmen will take their windfall and invest it, creating jobs and accelerating the rate of economic growth. The benefits of a light hand on the upper class, therefore, will “trickle down” to the working man and woman.

Ever since Ronald Reagan first attempted to make supply-side economics a reality and proceeded to inaugurate an era of persistent government deficits and growing income inequality, it has become harder and harder to make the trickle-down argument with a straight face. But we’ve never seen anything quite like the disaster that’s playing out right now.

This is tendentious even by Mr. Leonard’s standards. I’d define supply-side economics as the esoteric doctrine that you can’t eat an omelet made from theoretical eggs. Which is to say, you can’t consume what hasn’t been produced, production logically precedes consumption, you cannot consume your way to prosperity but must instead produce your way to prosperity, etc.  

(And is it true that “we’ve never seen anything quite like the disaster that’s playing out right now”? I suppose it depends on whom you mean by “we.”)  

It’s always worth making the correction — even if it is for the 10,000th time — that “supply side” is not synonymous with “trickle down.” “Trickle down,” in fact, is a term largely devoid of meaning; it is merely rhetorical and pejorative, a way of trying to introduce old-school class warfare into the debate, and does not describe much of anything about how supply-side economists or policy thinkers think. Supply-side isn’t about privileging the privileged, but privileging production: Low tax rates on capital gains, for instance, benefit investors of modest means as well as wealthy ones, and in fact help make future gains from investing more attractive to the non-wealthy than present consumption. Helping producers produce more efficiently benefits workers by making their labor more profitable, which is the only sustainable source of real wage gains. Etc.  

That being said, Leonard is particularly wide of the mark here:

What makes this “recovery” so different? Perhaps the simplest answer is that labor has been broken as a force that can put pressure on management, so there’s little incentive for employers to turn profits into wage hikes or new jobs. Instead, employers are squeezing more out of the workers that they’ve got, and investing in equipment upgrades and new technology instead of human assets — labor productivity has risen sharply since the end of the recession.

Angels and ministers of grace defend us, businesses are investing in equipment and technology — in capital. Mr. Leonard is seemingly oblivious to the fact that this is an excellent, desirable thing. He stops just short of bemoaning these gains (squeezing!) in labor productivity.

This is an interesting window into the Left’s worldview. Mr. Leonard probably would not put it this way, but his view is that “labor” (as though there were a real entity in the world to be called  “labor”) can bring jobs and wage raises into existence through extortion (“pressure on management”) and that this is not only a substitute for real investment but is in fact preferable to it.

In reality such extortion has created acute incentives for businesses to invest in substitutes in order to avoid high U.S. labor costs, and to develop complex global production chains that allocate labor-intensive production to markets where labor prices are low. Extortion may be profitable, at least in the short term; being victimized by extortion is unprofitable, immediately, and firms respond to it. (Washington State’s machinists’ unions are creating lots of Boeing jobs — in South Carolina.) 

The United States led the world in manufacturing for 110 years (China is estimated to have surpassed the United States in manufacturing output in 2011) but employment in manufacturing steadily dropped as worker productivity went up but rising labor costs made substitutes for U.S. labor more attractive.  Gains in productivity need not necessarily lead to fewer jobs; but lower labor productivity usually will not lead to more jobs and most assuredly will not lead to sustainable, long-term jobs — it will lead to less output and lowered standards of living. (How does your theoretical omelet taste, Mr. President?)

American labor unions and their friends in Washington could learn something about productivity from their German counterparts. Consider the fact that of the world’s largest exporting nations, only a few are low-wage countries: Among the world’s 15 top exporters, only one is a truly poor country (China). The rest are mostly wealthy, high-wage countries, including the United States, Canada, Singapore, Belgium, etc. Prominent on that list is Germany, the world’s No. 2 exporter, a manufacturing powerhouse that ships out more goods than the United States with less than one-third of the population. As Matthew Yglesias points out, German unions have been engaged in the opposite of the profit-destroying extortion favored by their American counterparts, working closely with firms to practice what Yglesias calls “very severe wage restraint,” which is another way of saying “improving labor productivity.” Germany’s median household income is not as high as the U.S. median, but Germany is hardly a poor country, and many a job-seeking industrial worker would, I suspect, be happier with German opportunities at German wages than with American opportunities at American wages. If U.S. labor leaders were as intelligent as they are power-hungry, they’d be encouraging both Washington and Wall Street to create conditions favorable to even more capital investment, especially investment in hard capital such as equipment and facilities. That is where jobs and wage growth come from.

Mr. Leonard is distressed that most of the income growth in the United States during this feeble recovery has come in the form of corporate profits (88 percent) rather than wages (1 percent), as though wages would be higher if profits were lower. In fact, the labor market is like any other market in that, ultimately, consumers rule. (If you don’t believe it, ask a guy who’s been out of work for two years.) Sellers who don’t have a product and a price that the market wants don’t make sales. That’s true whether you are selling software or an hour’s worth of work.

A great deal of our present unemployment is long-term and structural, and the only way those workers are coming back into employment is through greater productivity, which means either higher output or lower wages, or some combination of the two. Lower wages are not wildly popular, so higher output is where we probably want to go.

How do you get productivity gains? Stop treating productivity gains like a sin, for starters.

And perhaps start thinking about the uncomfortable fact that U.S. unemployment and wage stagnation probably is in no small part the result of the declining quality of our work force. Producers want to produce, and there is a reason they are not buying labor on the U.S. market.

Highly skilled and highly educated workers thrive in the United States, even though most of them do not work in industries in which “labor” extorts management for higher wages, relying instead on competition to bump up their compensation. This is a pretty great place to be an engineer or a pharmacist and a rotten place to be an unskilled high-school dropout, a non–English speaking job-seeker, or a 30-odd-year-old man looking for his first regular job. But we are getting more of the latter workers every year. Critical public-policy failures have left the United States with a large population of low-quality workers who are only marginally employable at U.S. wages, if employable at all. Those key failures include catastrophically inept government-monopoly schools, an immigration policy that pays little or no attention to worker productivity, and a welfare state that discourages early-life labor-market entry, which all together have left us with a population in which one-third of adults are illiterate or barely literate, have negligible skills, and in many cases lack even the basic competence to reliably perform routine tasks. We’re all stocked up on farmhands and off-the-books dishwashers, but good engineers are hard to come by. Ask a Democrat how to change that, and the answer will be to dump another $1 trillion into the criminally negligent education system that helped get us here in the first place, a second $1 trillion into training the unemployable for work on newly dreamt-up “shovel-ready” projects that don’t exist, etc.

When it comes to the woes of the American labor market, the problem may indeed be on the supply side, and all the political tinkering in the world isn’t going to make unproductive workers productive. Neither will union extortion or wasting money on government-subsidized make-work projects. And only the most lumpen of the lumpenleft could believe that the answer to stagnant wages and scarce job opportunities is to make businesses less profitable.

—  Kevin D. Williamson is a deputy managing editor of  National Review and author of The Politically Incorrect Guide to Socialism,published by Regnery. You can buy an autographed copy through National Review Online here.

A thousand apologies for continuing to bore everybody with this, but Forbes’s Ralph Benko now protests that the problem with my growth piece (discussed here) is that it was not clear that I was talking about per-capita GDP.

Here is what I wrote:

“If you chart the growth in real per capita GDP of the United States — the growth in economic output relative to the size of the population — you will see a remarkably straight line indicating about 2 percent real growth per year.” What followed was a chart labeled “Real Per Capita GDP.”

What part of “per capita GDP” do the financial sophisticates at Forbes not understand?

I have written to Forbes’s Lewis D’Vorkin seeking a correction, to no avail. 

There are two possible explanations. One is that the editors of Forbes do not read Mr. Benko’s work. For this I would not blame them, as it is tedious and intellectually dishonest. (I do blame them for publishing it.) The second possibility is that they are aware of these errors and simply do not care about them, in which case it is a sad day for a once-proud name in American journalism.

There is so much thick-headedness and tendentiousness in Stephen Metcalf’s anti-libertarian tirade in Slate that one could write a very long response to practically any paragraph.

Because I do not  hate myself that much, I am not going to do so, but this bit particularly stuck in my craw:

Libertarians will blanch at lumping their revered Vons — Mises and Hayek — in with the nutters and the shills. But between them, Von Hayek and Von Mises never seem to have held a single academic appointment that didn’t involve a corporate sponsor. 

As an attempt to impeach the intellectual integrity of two great thinkers, this is fairly lame, not to mention crude. It is also an invitation to mockery: Mr. Metcalf’s work at Slate is supported by worthies pitching their products thus: “57 Year Old Mom Looks 27!” and “Vacuums on eBay.” I didn’t click through to check out that 57-year-old mom, but I’m pretty sure that Mr. Metcalf ought to retire this sort of ad pecuniam argument, and especially the word “shill,” which really ought not to be used unselfconsciously by any former employee of the Clinton clan.

For the record, Mises taught for twenty years at the University of Vienna and then for six at the Graduate Institute for International Studies in Geneva, where he held a chair in international economic relations. When he arrived in the United States in 1940 — a refugee from the Nazis — he was nearly 60 years old, an age when many academics are wrapping up their careers rather than launching new ones. Mises went on to teach, notably at New York University, until he was 87 years old, and retired as the oldest active professor in the United States. It is true that he was not a salaried and tenured professor in any of these roles. In Vienna, he was secretary of the chamber of commerce and later worked for the government. In the United States, he worked also for the government, in the National Bureau of Economic Research, and later at the National Association of Manufacturers. His work in the United States was also supported by a number of nonprofits, including the Volker Fund and the Earhart Foundation.

F. A. Hayek — not von Hayek, incidentally — was on the faculty at the London School of Economics. He taught in various capacities at the University of Chicago, the University of Freiburg, UCLA, and the University of Salzburg. He also won the Nobel Prize in economics, for what it’s worth.

Does Mr. Metcalf of Slate seriously believe that all of these academic institutions (and the Nobel committee) were somehow corrupted by filthy lucre to such an extent that they allowed themselves to be used by “nutters and shills”? (And, if so, why would a regular academic appointment at one of these corrupt institutions be desirable?) I have my reservations about the academic establishment and its merits, but that theory still seems to me preposterous. Mr. Metcalf also seems blind to the possibility that the fact that neither Mises nor Hayek became a Harvard don or similar, and that their work was supported in no small part by businessmen, speaks very poorly of the midcentury academic establishment and very well of midcentury businessmen. I am reminded of the case of Prof. F. A. Harper of Cornell, who quit his professorship when a trustee of the university tried to forbid him from having his students read Hayek’s The Road to Serfdom, on the grounds that it was reactionary and that everybody knew — everybody! — that economic central planning was the wave of the future.

But, hey, Stephen Metcalf of Slate says that’s not good enough. So, there! 

—  Kevin D. Williamson is a deputy managing editor of National Review and author of The Politically Incorrect Guide to Socialism, published by Regnery. You can buy an autographed copy through National Review Online here.

How you know the White House is not taking the bipartisan deficit-reduction talks seriously: Joe Biden is in charge. I’ve made that observation before, and people think it’s a quip, but I mean it. The vice president is a fundamentally unserious figure, especially on fiscal issues. Barack Obama is a lot of things, many of them regrettable, but he is not a buffoon. This is a crisis that requires direct presidential leadership and top-level congressional leadership. It requires Barack Obama, John Boehner, and Harry Reid locked in a room. A small, uncomfortable room would be best. No pizza.

The Biden effort is disintegrating. Eric Cantor walked on the talks today. He says he wants the president to step in and “resolve” the question of tax increases. There are two ways to read that word “resolve”: One is: Obama should step in and hand the Republicans a victory by taking tax increases off the table. The other is: Obama should step in and hand Democrats a defeat by volunteering to take all the flak from the tax increases that almost certainly are going to be part of any bipartisan deficit deal.

Here’s Cantor:

“Each each side came into these talks with certain orders, and as it stands the Democrats continue to insist that any deal must include tax increases,” Cantor said in a statement. “There is not support in the House for a tax increase, and I don’t believe now is the time to raise taxes in light of our current economic situation. Regardless of the progress that has been made, the tax issue must be resolved before discussions can continue.”

“Given this impasse, I will not be participating in today’s meeting, and I believe it is time for the president to speak clearly and resolve the tax issue. Once resolved, we have a blueprint to move forward to trillions of spending cuts and binding mechanisms to change the way things are done around here.”

And that is the heart of the thing: If Cantor & Co. can in fact achieve “trillions” in cuts — tens of trillions, really — then they have a credible case for taking tax increases off the table.

So, how’s that looking?

The most ambitious deficit-reduction plan so far has been the Ryan Roadmap, which the House passed and then sent to its death in the Senate. I like the Roadmap, and I would be surprised to see a significantly more aggressive plan gain any traction in Congress. But even under the Roadmap, spending as a share of GDP would continue to rise through 2037 and would stay above 19 percent of GDP until 2063. Publicly held debt would hit 100 percent of GDP in 2043, which could very well prove catastrophic. (Tables here.) But while spending continues to grow as a share of GDP under the Roadmap, tax revenue is projected never to exceed 19 percent of GDP. That is by design, as Mr. Ryan’s team has made clear:

Eventually, as economic activity picks up, revenues in the Roadmap plan rise back up above 18 percent of GDP, finally reaching the intended maximum amount of 19 percent of GDP in 2029.

Intended maximum. Which is to say, the most aggressive deficit-reduction plan yet produced by Republicans by design holds tax revenues below projected spending. For decades to come, the deficit-reduction plan is a plan for deficits. The turnaround year of 2037 is a long way’s away. That means that even if the Roadmap were enacted, further deficit-reduction measures would be needed, and needed sorely.

So, the question for Eric Cantor is: What evidence do you have that you can get something even more aggressive than the Roadmap through Congress and past Barack Obama? My guess is that his case sounds a lot like one hand clapping. And if my guess is correct, then the Republicans’ anti-tax stance is just that: a stance, another word for which is a posture.

So, fine, posture, do your political calculating, whatever. Meanwhile, children being born today will be cursing our names for the burdens we have left them.

Political posturing is a question for Eric Cantor and Barack Obama. The question for the rest of us is: Where lies the consensus? I don’t mean that in a touchy-feely sense. I mean: What balance of taxation and spending are we prepared to accept? (And “we” describes an electorate that elected Barack Obama after twice electing George W. Bush, that has made both Newt Gingrich and Nancy Pelosi speaker of the House. That “we.” That inexplicable, maddening “we.”)

Federal spending in 2012 is expected to hit 23.6 percent of GDP, but tax revenue is only going to hit 16.6 percent. That’s bad. (Real bad.) But these are poison years. Let’s revisit happier days: From 1980–2000, federal outlays averaged 21.3 percent of GDP, taxes averaged 18.5 percent, deficits 2.8 percent. So, if there’s a post-recession return to historical norms, one or both of those factors still has to move by total of 2.8 percent of GDP to balance the budget. That would mean cutting about $400 billion from the 2012 budget or adding $400 billion in taxes, or a bit of both. (Assuming we get back to historical norms is a big assumption.)

Is there a consensus for cutting spending to 18.5 percent, the level we might expect taxes to hit? That’s a big drop from the forecast level of 2012 spending, about a 22 percent cut. The last time federal spending was only 18.5 percent of GDP was . . . 1999, not exactly the Dark Ages or a time of notable national austerity. So, it’s not impossible to imagine a consensus for 18.5 percent spending. On the flipside: Is there a consensus for taxation at 21 percent? That’s pretty high — higher than it has ever been, in fact, even during World War II, when taxes topped out at 20.9 percent of GDP in 1944. The last time it’s been close — 20.6 percent — was in . . . 2000, not exactly the Dark Ages or a time of notable national austerity. Those variations show that, Democratic protestations aside, currently high spending is the larger abnormality, and so suggest that spending cuts should make up the bulk of the deficit-reduction plan.

But: How much?

I don’t want taxes or spending at 21.3 percent of GDP. I don’t want them at 18.5 percent, for that matter. I might go for spending at 14.2 percent and taxes at 16.1 percent as a good start, which would take us to the savage Darwinian conditions of . . . 1951, not exactly the Dark Ages or a time of notable national austerity. As I hear it, 1951 was a pretty good year. From 1950 to 1955, our average real GDP growth exceeded that magic 5 percent threshold that Tim Pawlenty and Larry Kudlow and the optimists are talking about, and that includes a little recession in 1954. (Granted, there are excellent reasons to believe that the postwar boom is not easily replicable. Here’s one. Here’s another. And one more. Not a unicorn in the bunch.)

But here’s the thing: If you want spend 21 percent, you really need to tax 21 percent. If you want to tax only 18.5 percent, you can only spend 18.5 percent. So far, Republicans have been pretty insistent about taxes, and not without reason (this probably is not the optimum moment to announce a large tax increase). But if you are not willing to move one variable, then you have to show yourself willing and able to move the other variable far enough to bring things into balance. The Republicans have been moving in the right direction, but they aren’t quite there. You want to take taxes off the table, then show me you can get the job done with cuts alone — not on paper, but in Congress.

Why haven’t I mentioned the Democrats? They control the Senate and the White House, holding a far stronger hand than do the Republicans. The reason is that the Democrats are a lost cause. Their commitment to maintaining the current path of entitlement spending and public-sector expansion will ensure national bankruptcy at virtually any level of taxation. (Don’t believe me? Have a gander at what a $30 trillion deficit looks like.) Removing Democrats from power probably is a precondition for averting a national fiscal meltdown. A necessary condition, but not a sufficient one.

—  Kevin D. Williamson is a deputy managing editor of National Review and author of The Politically Incorrect Guide to Socialism, published by Regnery. You can buy an autographed copy through National Review Online here.

For my sins, and in hopes of clarifying the debate, I will respond again to the criticism of Forbes’s Ralph Benko, though I am no longer much inclined to do so, inasmuch as I believe him to be either incompetent or intellectually dishonest, if not both, and in any case a stain upon the Forbes name, which is one I have long admired.

Mr. Benko and some of his Forbes colleagues are displeased with your obedient servant for declining to adopt what I view as overly optimistic assumptions about economic growth. Taking too rosy a view, I have argued, allows congressional Republicans and presidential candidates to evade hard choices; wishful thinking is not a wise policy, or a conservative one. Assuming that atypically strong growth will do the hard work of getting our public debt under control is irresponsible, a fact attested to by the fiscal failure of the Gingrich revolution and the Bush administration. Better to make real cuts today based on plausible economic forecasts, and then treat any growth that exceeds our modest, realistic expectations as a pleasant surprise.

Mr. Benko responds:

Williamson goes so far as to state, shockingly, “Two percent average real GDP growth is far from disaster: It doubles the national economic output every 35 years. That’s not so bad.”

Zero per capita GDP growth — what 2% constitutes — was the very recipe that produced the Dark Ages. This embrace of secular stagnation is an invitation to return to medieval times.

Williamson’s bumper sticker for the GOP: Dungeons and Dragons, Not Just a Board Game Any Longer!

Set aside the puerile attempt at cleverness. (Also the fact that Dungeons & Dragons is not a board game.) Here’s what I wrote: “If you chart the growth in real per capita GDP of the United States — the growth in economic output relative to the size of the population — you will see a remarkably straight line indicating about 2 percent real growth per year.” What follows is a chart helpfully labeled: Real Per Capita GDP. Which is to say, Mr. Benko is upset that I have written something I did not write. Mr. Benko is not the first critic to have misstated my argument here. (Charles Kadlec, also of Forbes, has made the same error.) I have corrected their misstatement already. To make a false statement in ignorance is only error, but to continue repeating it after being corrected is plain dishonesty, something that ought to be of concern to Mr. Benko’s editors at Forbes, if not to Mr. Benko himself. Given that this is a matter of fact, not one of opinion, I invite Forbes to publish the appropriate correction.

I hope readers will forgive me for writing so much about myself here, but most of the argument has been ad hominem, necessitating that I reply ex hominem.

Mr. Benko adds: “Williamson is among the most irredentist living, soi-disant conservative, champions of the pro-stagnancy policies of Bob Michel and Gerald Ford. . . . Williamson’s stand for Progressive, stagnation-inducing, economic prescriptions is not just wrong. It is irresponsibly, dangerously wrong.” Neither Mr. Michel nor Mr. Ford to my knowledge advocated, as I do, reducing federal spending below 10 percent of GDP, ending the federal monopoly on currency, instituting a single flat tax, abolishing the departments of commerce, education, and energy, privatizing Social Security and Medicare, etc. If the word “progressive” has any meaning, it does not mean that. There is no scenario under which that is a plausible interpretation of what I have written or the policies I advocate. That, too, should be of concern to Mr. Benko’s editors at Forbes.

Which really gets to the heart of the matter: If Mr. Benko and his Forbes colleagues believe that our current forecasts of economic growth are flawed, they have not offered any rigorous argument for an alternative forecast. I suspect that this is because they simply are unable to do so. What that leaves them with is the argument (“argument”) that anybody who disagrees with them must be a secret progressive — which, I think I can say without immodesty, is in my case fairly ridiculous.

The deeper problem with the rosy growth scenario as advanced by Tim Pawlenty and articulated by Larry Kudlow is that it is treated as a self-fulfilling prophesy: None of them has made a rigorous case that we can in the immediate future expect real growth rates significantly in excess of our historical experience. No credible forecast predicts such growth. What they have said instead is that by adopting a high-growth target we are more likely to achieve higher levels of growth. But many of the polices they seek to advance — notably, tax cuts in the face of continuing unprecedented deficits — are potential fiscal catastrophes unless we build into our accounting the very unlikely growth assumptions that the policies are intended to produce: We can cut taxes without aggravating the deficit if we have 5 percent growth. How do we get to 5 percent? Cut taxes. (This is, at heart, only a variation on the tax-cuts-pay-for-themselves canard.) The argument is, in the end, circular: The policies intended to produce historically atypical levels of growth make sense only if we assume that atypical growth in the first place. If that sounds to your ear a lot like “Clap loud enough and Tinkerbell will come back to life,” then we are on the same frequency.

How unlikely is that 5 percent number? During the Reagan boom — the template for Mr. Benko et al. — growth failed to hit 5 percent in seven out of eight years. Real growth never hit 5 percent during the millennial boom. And the naïve partisans of the Unicorn Caucus are asking us to assume something on the order of a decade of 5 percent real growth, something that has never happened in this country. In the postwar era, we had a two-year run exceeding 5 percent from 1950–51, a three-year run from 1964–66, and another two-year run from 1972–73. (Figures here.) That’s it. These are facts, not products of theoretical speculation. Conservatives ought not be carried away on the pleasant breezes of theory when we have real experience to ground our expectations.

Mr. Benko, and the constellation of cranks, illiterates, and charlatans who amplify him, have mischaracterized my views and misrepresented my arguments. Well, boo-hoo, etc. What’s much worse than that is that their naïve, dessert-first approach to fiscal policy enjoys substantial support in the Republican establishment and helped to create the Republican-led spending-and-debt fiasco of 2002–06, which climaxed with the Republicans’ losing their House majority in a well-deserved thrashing before getting crushed in the 2008 elections, the results of which will weigh upon our debt-ridden republic for a very long time. That is an abysmal record as policy and as politics. Conservatives should not hope to repeat the experience.

— Kevin D. Williamson is a deputy managing editor of National Review and author of The Politically Incorrect Guide to Socialism, published by Regnery. You can buy an autographed copy through National Review Online here.

The apocalyptic drumbeat continues:

A Chinese ratings house has accused the United States of defaulting on its massive debt, state media said Friday, a day after Beijing urged Washington to put its fiscal house in order.

“In our opinion, the United States has already been defaulting,” Guan Jianzhong, president of Dagong Global Credit Rating Co. Ltd., the only Chinese agency that gives sovereign ratings, was quoted by the Global Times saying.

Washington had already defaulted on its loans by allowing the dollar to weaken against other currencies — eroding the wealth of creditors including China, Guan said.

Guan did not immediately respond to AFP requests for comment.

The US government will run out of room to spend more on August 2 unless Congress bumps up the borrowing limit beyond $14.29 trillion — but Republicans are refusing to support such a move until a deficit cutting deal is reached.

Ratings agency Fitch on Wednesday joined Moody’s and Standard & Poor’s to warn the United States could lose its first-class credit rating if it fails to raise its debt ceiling to avoid defaulting on loans.

Question: Who has stronger financial incentives to accurately gauge the path of the dollar? Chinese sovereign-debt investors or Paul Krugman?

Here’s another clunker of an economic-revitalization proposal from the rump of Barack Obama’s quickly dissipating economy team: a temporary payroll-tax cut.

We’ve already had one of those: We’re enjoying the fruits of it right now — or hadn’t you noticed? As part of the December 2010 tax deal that prevented an increase in income-tax rates above those established in the Bush administration, 2 percent of the employee-paid payroll tax was temporarily cut. (Look for that “temporary” cut to live a long, long time.) Now the Obama administration is considering doing the same for the employer-paid part of the payroll tax, because the White House is beside itself with fear over the climbing unemployment rate.

Progressives are tearing out their dreadlocks and little wispy pony tails: The payroll tax is an essential part of the legislative fiction that Social Security pays for itself. Of course, Social Security does no such thing — the payroll-tax revenues go into the same big pot as every other tax dollar, and general funds already are being used to subsidize Social Security’s deficit — but it is essential to the leftist project to pretend that Social Security is a sort of pension system that you “pay into” in exchange for future benefits, rather than a simple welfare program supported by the destructive taxation of income. Progressives know full well that if the payroll-tax fiction is diminished and the bulk of Social Security ends up being paid out of general funds, then, as the Ponzi scheme gets ever more upside-down, there is going to be tremendous pressure to means-test the program, reducing benefits for the well-off. The Left fears and loathes that outcome: They want full, universal buy-in, because the welfare state is at its most powerful when everybody is on welfare.

As much fun as it would be to watch President Obama once again stick it to the hippies and basically dare them to withhold their votes (Gitmo! Rendition! Enhanced interrogations! War on Drugs! War in Pakistan! War on Libya! War on Yemen! You guys are suckers!), a temporary tax holiday is a pretty dumb idea, and conservatives should resist it.

The temporary tax-cut stimulus is basically the same Keynesian wolf dressed in supply-side clothing: Dump some money into the economy and hope that the sound of it sloshing around distracts the rubes from the fact that real economic productivity has taken a shot to the solar plexus. Milton Friedman explained, with something he called the “Permanent Income Hypothesis,” that such temporary measures have little meaningful effect on consumption behavior, and it’s not hard to see why: If you make an extra $100 this week, you don’t act as if you’re going to make an extra $100 a week from here on out if you know for a fact that it’s a one-time thing. If you get a short-term tax cut, or one that is supposed to be short-term, you don’t go hiring a bunch of people at your business based on that. Hiring is a long-term commitment.

All of this ignores the deeper underlying fact that jobs are not the real problem. Sure, they’re the real problem for politicians, but not for the economy. Jobs are not an end unto themselves: They are a result of the fact that real production is happening in the economy. If you want real productivity, you need real investment, which comes from real savings, i.e. consuming less than you produce and using the difference to expand production. Everything else is just playing around with little pieces of green paper.

Would you make a major investment decision — say, starting a company, launching a new product line, or expanding a factory — if doing so were profitable only because of a temporary tax? Probably not.

And, it bears repeating, when you are running a deficit, a tax cut without a spending cut is not a tax cut — it’s a tax deferral. So we’re just dragging some consumption back from the future to the present. (You’re welcome, future!)

Here’s what you want to do instead: Adopt a balanced-budget plan. It doesn’t have to balance the budget today, or tomorrow, or even in five years. It just has to stop the growth of the debt as a share of GDP and then shrink it. You adopt a simple, intelligent tax code (broad base, only a few brackets, few or no exemptions) and you set the rates at what you need to cover your spending. And then comes the important part: You leave it the hell alone.

With taxes (and, especially, with regulations) it’s not just the outright burden that destroys investment and undercuts employment — it’s the instability. Real entrepreneurs, the people who start firms, build factories, and buy equipment, have to make long-term plans. Only Wall Street can operate profitably on a microsecond timeline. Entrepreneurs need stable rules and a stable tax regime. They need predictability. I’d love to make radical changes in our society — public schools, you’re outta here! — but from the point of view of long-term material prosperity, it is probably better to have good institutions that are imperfect but stable than to have unstable institutions that aim at perfection.

Reform, when it is necessary, needs to be far-seeing. But far-seeing is the opposite of what Obama & Co. are up to just now: They cannot see past the next election and the heavy shadow that rising unemployment casts across this president’s prospects. Thus, the cheap gimmicks, which ought not be mistaken for real progress.

—  Kevin D. Williamson is a deputy managing editor of National Review and author of The Politically Incorrect Guide to Socialism, published by Regnery. You can buy an autographed copy through National Review Online here.

Is there a debate within the conservative movement between the partisans of economic growth and those of austerity? Our friends at Forbes continue to think so:

But then, in a column entitled “Hope is Not a Policy,” NRO Deputy Managing Editor Kevin Williamson criticized  Forbes columnist Ralph Benko and CNBC’s Larry Kudlow for emphasizing the need to pursue policies that could lead to 5% growth, calling such efforts “magic unicorns.” Instead, he advised, we should be comfortable with a 2% per year growth rate, pointing out such a growth path would lead to a doubling of GDP in the next 35 years.  What he fails to explain is why the American people should be satisfied with anything less than the 3.2% average rate of growth since 1950 – which includes all of the recessions and periods of sub-par growth through 2010.

I did not write, and do not believe, that Americans should be satisfied with 2 percent real growth. I wrote that they probably should expect it. If government had a magical formula for creating growth in the economy, it would be deployed, and I would endorse doing so. I want strong growth. Barack Obama wants strong  growth. With the exception of a few environmentalist kooks and Shining Path adherents, everybody wants strong growth. But government has no such formula for growth. 

What I believe is this: We have a serious fiscal imbalance, one that should be addressed immediately with policies based on current plausible projections of economic growth — not on what we wish growth would be. If you cut spending to get the deficit down to a manageable size and do so based on an assumption of 2 percent real growth or thereabouts, what happens if you get growth well beyond that? I do not see a downside: You will see higher-than-expected tax revenues, lower-than-expected spending on things like unemployment benefits, etc. Consider the opposite scenario: You adopt an overly optimistic assumption about growth, and then real growth comes in well below that. What happens then? Lower-than-expected revenues and higher-than-expected spending, meaning a bigger-than-expected deficit. Plan for the worst and bless Providence if it doesn’t come to pass. (That is one possible definition of conservatism, no?) 

There are indications that we do not have as long to get this done as we would like. The ChiComms just dumped their short-term Treasury debt. They’re reducing their long-term holdings, too. The deficit is 43 percent of federal spending, and possibly going up: A couple of hundred billion dollars have just been added to the cost of the Fannie-Freddie bailout. 

U.S. Treasury bond rates currently are quite low, but the key question for U.S. government bonds, as Bill Gross puts it, is, “Who will buy them?” Not Bill Gross: He runs PIMCO, the world’s largest bond firm, which famously has dumped its Treasury holdings and is now short the bond. China is selling, not buying. Japan, the No. 2 foreign holder of U.S. government debt, is in a crisis of its own and desperately trying to raise money in the wake of an enormous natural disaster and in the face of a possible credit downgrade. Next comes the United Kingdom, which is busy thanking its lucky stars it didn’t give up the pound but still will feel the pinch of the European credit crisis. The next biggest buyer is the bloc of oil-exporting countries, a collection of largely unstable and/or hostile regimes that comprises Ecuador, Venezuela, Indonesia, Bahrain, Iran, Iraq, Kuwait, Oman, Qatar, Saudi Arabia, the United Arab Emirates, Algeria, Gabon, Libya, and Nigeria. Which of those looks like a reliable financier for the world’s largest debt? So, who is going to buy — at the current low interest rate?

I’d be a gazillionaire if I could predict which direction bond rates will move with any accuracy, but I don’t see how the current low rates endure indefinitely — not when the big players in the market already are saying they’re too low. So, what happens if they go up, and go up suddenly? We have trillions of dollars in debt to roll over, on top of the new debt being issued. Who will buy it?

In 2007, the U.S. budget deficit was a grand total of $161 billion, or just over 1 percent of GDP. The U.S. budget deficit in 2011 is going to be ten times the 2007 deficit, $1.65 trillion, or about 3 percent of GDP — not 3 percent of U.S. GDP, but 3 percent of the entire world’s GDP. How long do you imagine we can keep financing that much borrowing at concessionary rates?

The choice is not between growth and austerity. God knows we need a dose of both. The difference is this: Congress can impose a balanced budget (or, more realistically, a less-imbalanced one); Congress cannot impose growth. So enact a balanced-budget plan, already, or a near approximation of one, it being understood that the goal need not be a zero deficit tomorrow but an arrest of the debt pileup and a smooth and steady decline of the debt as a share of GDP. I suspect (but do not know) that a sensible fiscal-reform plan, adopted with bipartisan consensus, would encourage growth, calm markets, encourage investors and hiring managers, and make reducing the proportional size of the debt that much easier. But talking about growth is, I fear, a way for politicians to avoid talking about cuts – and we cannot afford to put them off. Conservative happy-talk is still happy-talk. And I would not bet the future of the republic on it: If our marker gets called in, it’s going to be a rough time making good on it.

— Kevin D. Williamson is a deputy managing editor of National Review and author of The Politically Incorrect Guide to Socialism, published by Regnery. You can buy an autographed copy through National Review Online here.

The word “denier” has had a strange political career. It began with Holocaust deniers, that execrable little group of closeted Nazis. Next, in order to libel global-warming skeptics with an echo of Holocaust denial, environmentalists began to call them “deniers” — global-warming deniers, climate deniers, etc. Now comes Forbes writer Ralph Benko with “prosperity deniers,” a group of miscreants that includes, according to Mr. Benko, your obedient servant.

At issue is a recent exchange between the great Larry Kudlow and yours truly on the issue of economic growth. Jack up economic growth, Mr. Kudlow argues, and all this budget-balancing stuff gets easier. Not so fast, says I. If we had the ability to know in advance how much growth particular economic policies would produce — or even whether they would produce growth at all — then we would never have a recession. We would always be at the sweet spot of maximum real growth. But we are limited and fallible creatures, and right-wing political macroeconomic management is no more reliable, or predictable in its outcomes, than is Keynesian political macroeconomic management. The economy is not a machine, and any time a politician says, “If we will adopt Policy X, we are sure to achieve Statistical Abstraction Y,” he is talking through his hat. The best government can do is maintain stable rules and liberal institutions and try to stay out of the way.

One can hope for growth beyond the trend line, but counting on it is something else. (And the something else it is is foolishness.)

Mr. Benko summarizes the exchange thus: “Now, the obvious if ambitious goal of bringing economic growth rates from under 2% to 5% has been charmingly attacked by NRO’s erudite Kevin Williamson as ‘magic unicorns’. This ridicule was elegantly and decisively repelled by his host, Larry Kudlow, who stated, factually and fairly, ‘I did it once, Kevin, and I can do it again.’”

My impression is that Mr. Kudlow was making a joke there. (But do watch the video and decide for yourself.)  My chief piece of evidence for that hypothesis is the fact that Mr. Kudlow is a bull, not a jackass. But if this is to be taken as an “elegant and decisive” refutation, a few facts are relevant.

If you chart the growth in real per capita GDP of the United States — the growth in economic output relative to the size of the population — you will see a remarkably straight line indicating about 2 percent real growth per year. There are ups and downs, of course, but the consistency is notable. Thanks to Jake at Econompic Data for charting it:

The period of 1929–2009 includes a great variety of economic policies without proportionally varied outcomes in the big picture. The most plausible explanation of that consistency is that, short of the Great Depression or World War II, the effects of incremental policy changes in the relatively consistent political environment of the United States are small relative to other factors affecting economic growth. Add to that the fact that the outcomes of economic policies are not known in advance or necessarily consistent over time: Nobody wanted a financial crisis or a real-estate meltdown, but we got them. We probably credit politicians too much for good economic outcomes and blame them too much for bad economic outcomes. The economy is big and complex; public finances are less so, and we could, right now, enact policies that would address the imbalances in those public finances, and do so in an orderly and largely predictable way. But that means making very unpleasant choices of the sort that are bound to be keenly unpopular with voters in New Hampshire, Iowa, Florida, etc.

Mr. Benko himself sees the same data but makes something else of it, writing: “Last week Eric Cantor produced a piece of a sure-enough path to prosperity, some of the real deal after several GOP false starts. The GOP has forfeited its credibility with us mere voters. How? Every Republican administration since Reagan has provided economic stagnation: GDP growth averaging around 2%. That is economic and political disaster. Every American has been, on average, treading water for the past decade.”

Two percent average real GDP growth is far from disaster: It doubles the national economic output every 35 years. That’s not so bad. More would be better, of course, but we can get government finances in order on 2 percent real growth. 

Mr. Cantor’s plan is based around what he calls “gazelles,” innovative early-stage startup companies. Mr. Cantor likes them because they are responsible for a disproportionate number of new jobs. So, let’s have some more gazelles, then, herds of them, which will supercharge growth and employment — and, in the process, spare Mr. Cantor and his colleagues the pain of making some very hard decisions they would really rather not make. Well, okay, fine: Let’s let the entrepreneurial geniuses in Congress put their heads together (it’ll sound like a bowling alley) and inspire a bunch of new startups. See what they come up with. After we’re done laughing, we can go back to arguing for the usual dose of regulatory liberalization, tax reductions, and fiscal prudence that Dr. GOP prescribes for every malady. (First we cut taxes, afterward we cut taxes, and next we cut taxes. Clysterium donare, postea seignare, ensuita purgare.) But here’s the thing: Fiscal prudence, deregulation, and a lighter federal hand are good things in and of themselves. Conservatives would be arguing for those if the growth rate were 1 percent, 5 percent, or 105 percent. Will they lead to 5 percent growth driven by early-stage startup firms under present economic conditions? Nobody could possibly know. (Not even the guys at Forbes!)

Don’t bet the Treasury on it.

The conservative economic arsenal is familiar enough. But Mr. Benko has a killing stroke to add, a policy proposal from the very bleeding edge of innovation: a return to the gold standard. I’d like to quote him at some length in order to give you the full flavor of his thinking:

Spending, regulatory and tax reform are necessary but not sufficient. To get to 5% we need a trustworthy monetary policy. As Kudlow suggests, there’s only one way tried, true, with Tea Party constitutional integrity: the gold standard. Avoiding it just got monumentally harder.

The second shift: Prof Robert Mundell is the ur-guru behind Reaganomics with the “Mundell-Laffer Hypothesis.” He is the father of the euro, the holder of a Nobel Prize in Economics. This writer has called him “the greatest living humanitarian since the death of Norman Borlaug.” Mundell broke silence on May 25th and issued a public endorsement of the gold standard.

On Pimm Fox’s Bloomberg Television “Taking Stock” Mundell joined his authority with Elder Statesmen Lewis E. Lehrman, Steve Forbes, Larry Kudlow, Jeffrey Bell, William Kristol and Charles Kadlec, and young turks Sean Fieler, Judy Shelton, Brian Domitrovic, John Tamny, and others — all gold standard proponents.

Breakthrough. The sound you heard? The hinge of history turning.

(Miscellany: I am not sure what an ur-guru is. It sounds like something for which you would want penicillin. And I wonder whether Professor Mundell (or anybody) still wishes to claim paternity of the euro, which is not a model of sound money at the moment. Also, there is no Nobel Prize in economics, really. It’s kind of made up. No, don’t ask me to explain it; ask Jay. But I am sure that next to his medal for the Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel, Professor Mundell has a brass plaque reading: “Greatest Living Humanitarian Since the Death of Norman Borlaug—Ralph Benko.”)

A return to the gold standard is unlikely. I expect to see a very large herd of magical unicorns galloping across the Third Avenue Bridge into the Bronx, kicking up rainbows in their wake, before I see the United States government choosing to return to a gold standard. And I do not think that a gold standard would solve all the problems gold-standard enthusiasts think it would. It would have economic consequences that are not predictable. But, yeah, that is the plan: unusually high growth rates and a gold standard. If that fails, maybe the Growth Fairy will leave $14.3 trillion under our pillow.

I recently got a bit grumpy about a similar argument from the George W. Bush Institute, published here, that argued, in essence: “Hey, all we have to do so solve our fiscal problems is achieve and maintain a level of growth that is substantially higher than that in our historical experience.” Okay, great: What’s Plan B? Hope is not a policy. Wishful thinking is not a substitute for mindful thinking.

It is important to work toward growth, of course, and to adopt good economic and monetary policies that we think will encourage it. (Gold standard? I would prefer privatizing the money supply.) But counting on optimistic assumptions about growth beyond current projections is, for the most part, a way to evade the very difficult business of reconciling our public income with our public spending. We have to work with what we have, with the reality before us. By all means, encourage production wherever you can, but stop trying to sell us a free lunch.

An aside . . .

I very much enjoyed this little bit of snark:

Mr. Williamson. You have succumbed to an optical illusion: mistaking gazelles for magical unicorns. Understandable. The Reagan architects of such growth did their “voodoo” when you were in grade school in Lubbock. Consistent Gazelle-like growth in the economy has been so rare that it’s easy for a youth to confuse a glimpse of a gazelle with a claim of a unicorn.

True enough: During the 1984 election, I was the lead Reagan guy for the mock-election debate in my sixth-grade class. I ambushed poor Mike D., to this very day a misguided Mondale man like his father before him. “Tell me the truth, Mike: Is your family better off than you were four years ago?” They were, so he had to answer in the affirmative. The Gipper carried the day at E. J. Parsons Elementary School, in a landslide that prefigured the actual election. (Recount Minnesota!) I failed to work in a “There you go again, Mikey.”

But Mr. Benko is entirely correct that gazelle-like growth in the economy has been quite rare — which ought to suggest that it is not so easy to achieve as Mr. Benko thinks it is. Like Reagan in ’84, I will not make age an issue in this debate, though I’ll thank Mr. Benko for pretending that I still am a “youth” and lament that his hoary locks and reverend age do not proclaim a fiscal sage.

—  Kevin D. Williamson is a deputy managing editor of National Review and author of The Politically Incorrect Guide to Socialism, published by Regnery. You can buy an autographed copy through National Review Online here.

A thing you can do if you really want to go off the deep end for about twenty minutes: Go to regulations.gov and have a good hard look at politics in action. You want to tuck into the federal regulations dealing with migratory birds? Review, in all its glory, Kathleen Sibelius’s mandatory obesity rating for every American (another gem tucked into the stimulus bill)? It’s all in there, and the reasoning for making a federal issue out of your fat can is documented in excruciatingly precise language.

Just take a random sample for the flavor, if you can bear it:

Proposed subparagraph (h) also proposes to require the importer to maintain these records in an organized manner and either electronically or in a central location, at or in close proximity to the NHP facility, to allow CDC to inspect the records during CDC site visits during regular business hours or within one hour of such visits. Before distributing or transferring an imported NHP, an importer must communicate to the recipients of NHPs, in writing, the restrictions and definitions of permitted purposes and obtain written certifications from the intended recipient that the NHPs will be used and distributed for one of the permitted purposes before the NHPs are sent to them. CDC is soliciting public comments on these proposed requirements.

That’s from the regulations touching what Americans are and are not allowed to do with an imported monkey. (Approved purposes for monkeys include getting them high on cocaine, another project funded by the stimulus.) I’m not sure whether that monkey in The Hangover 2 is a domestic NHP (that’s non-human primate) or an imported one, but you can be sure that, either way, the handling of it is subject to regulation from more than one federal entity. (The bananas, too.)

If you go to regulations.gov and do a search for all of the existing and proposed rules, the listing of headings alone runs more than 6,000 pages, containing more than 61,000 items. That’s not the whole shebang, of course — just what’s available on the web site. The Federal Register, within living memory about the size of a family Bible, today takes up about 30 feet of shelf space.

Out of these millions of words of small-print lawyerese, Obama’s regulatory czar, Cass Sunstein, has identified about 30 regulations he’d like to see repealed, as part of a review of regulations mandated by an executive order. That’s nice. In 2010 alone, Mr. Sunstein and his colleagues inflicted 43 new “final rules” (which is what regulators call regulations), on the country, half again as many as the total number of regulations he has sifted of the vast galaxy of administrative law. The trend is against us.

And more regulations are on the way. A surprising number of our regulations are intended to improve regulation, reduce paperwork, enhance transparency, etc. If you want to pull all your hair out, read the federal regulations about improving regulatory practice.  

Some of the regulations Mr. Sunstein has targeted are nice candidates for repeal. For instance, because milk contains fat, it is regulated the same way as petroleum is — milk fat being an organic oil. That means that people who ship and package milk have to be prepared to clean up the Exxon Valdez, basically, spilt milk being the same thing as spilt crude in the eyes of the bureaucrats, costing the dairy industry about $67 million a year. This has led to a lot of “crying over spilt milk” jokes, and it is easier to repeal regulations that make people laugh. So, there’s one down.

Mr. Sunstein shares his thoughts on the matter in the Wall Street Journal today. You would think that the attention he has lately paid to the millions of wasted man-hours and trillions of wasted dollars entailed by our gigantic regulatory apparatus would have him rethinking the scope of the regulatory enterprise. You would be wrong.

You’ll note I wrote “trillions of wasted dollars” above, not billions. That’s not a typo: The annual cost of regulatory compliance in the United States runs about $1.75 trillion a year. As the Heritage Foundation points out, that means that regulations cost Americans more than do individual income taxes.

With that in mind, I cannot honestly write, “Thanks for nothing, Mr. Sunstein.” Instead, I’ll offer: Thanks for the functional equivalent of nothing, Mr. Sunstein.

—  Kevin D. Williamson is a deputy managing editor of National Review and author of The Politically Incorrect Guide to Socialism, published by Regnery. You can buy an autographed copy through National Review Online here.

Pres. Barack Obama’s stimulus is a bit like an Easter egg: It was first experienced as a brightly colored bauble intended to signify a new beginning, then it got lost somewhere along the way, and now it’s stinking so badly that we have to revisit the issue.

One can always tell what the Obama administration is not taking seriously — it’s the stuff it puts Joe Biden in charge of. Biden’s in charge of meeting with congressional leaders to identify deficit-reduction measures, for one thing, but, before that, he was put in charge of stimulus oversight. You remember: “Don’t mess with Joe,” and all that rot. While Joe was being messed with, billions of dollars in stimulus contracts went to deadbeats who owe a total of three-quarters of a billion dollars in taxes. It would have been no surprise if one or two tax scofflaws had sneaked by — even by the ever-watchful Joe Biden — but, in fact, it was more than one or two, or three or four, or a few hundred: 3,700 firms awarded stimulus contracts owe taxes — $757 million worth.

If you’re like me, the first thing you wondered was: Which firms? And how much money did their executives donate, and to which politicians? Which leads me to the worst part of the scandal: The Government Accountability Office (bitterly ironic name if ever there was one) is refusing to release the names of the miscreants. GAO argues that, because it is a tax matter, they cannot make the names public. So much for the most transparent administration in American history.

This is not simply a tax matter. It is, presumably, a law-enforcement matter, potentially a criminal matter, and unquestionably a matter of government accountability. Insofar as this subject is concerned, the GAO is helping the Obama administration to evade accountability rather than take it up.

Interestingly, several of these deadbeat contractors are nonprofits, community organizers of a sort. (Which? Don’t ask GAO.) Here’s what GAO has to say about one of these organizations:

• Nonprofit organization primarily owes payroll taxes from the mid to late 2000s. Nonprofit organization did not make any federal tax deposits for several periods.

• On multiple occasions, the nonprofit organization defaulted on installment agreements with IRS. IRS records also indicated that the nonprofit organization may have submitted an offer in compromise to delay IRS collection efforts.

• An executive was assessed a TFRP [trust fund recovery penalty]. IRS records indicated that this executive was responsible for numerous questionable business expenses. In addition, the executive had numerous transactions with casinos totaling hundreds of thousand [SIC] of dollars each year. IRS records also indicated that IRS assessed a TFRP on this executive for another entity that went defunct.

• IRS records indicated that the nonprofit organization failed to meet employee payroll obligations on numerous occasions in the late 2000s.

• According to one executive, the nonprofit received millions of dollars in government grants.

• IRS filed federal tax liens against this organization.

Lots of financial transactions with casinos, dodgy expense-account activity, questionable business practices, deadbeat executive — and millions in government grants: but GAO is not saying who.

Oddly, government isn’t always so close-lipped about tax investigations. I happen to know that the kabbalah center favored by Madonna is under tax investigation. How did I come across that top-secret information? It was in the newspaper. If memory serves, the IRS wasn’t exactly secretive about tormenting the Christian Coalition back in the day. But these deadbeats get shielded.

We spent more trying to stimulate our economy out of recession than we spent on the Iraq and Afghanistan wars combined, and the American Recovery and Reinvestment Act was a big piece of that. It was an obvious rip-off from Day One, and the rip-off is looking worse the closer it is studied. That this rip-off enriched tax cheats makes it a double rip-off, perpetrated by an administration with a famous tax cheat in the cabinet.

Release the names, and let’s see who’s connected to whom and how.

— Kevin D. Williamson is a deputy managing editor of National Review and author of The Politically Incorrect Guide to Socialism, published by Regnery. You can buy an autographed copy through National Review Online here.

Detroit, the standard specimen of urban dysfunction, has, you will not be terribly surprised to learn, a serious municipal deficit. The numbers and trends will be familiar to anybody who has monitored the evolution of that fascinating modern parasite, the government employee: Having destroyed the city’s economic base and rendered most of the city proper unlivably dangerous, the political powers of Detroit have maintained a consistently large government work force, which subsequently has grown entirely out of proportion to its declining population. Detroit today employs one city worker for every 55 residents, as opposed to one city worker for every 109 residents in Charlotte, which is just barely bigger than Detroit (the Motor City has indeed declined so much) and one city worker for every 101 residents in El Paso, which is one spot down from Detroit on the population rankings. And on its Spartan city budget, El Paso maintains the nation’s second-lowest crime rate among large cities (behind Honolulu), despite its being conjoined to besieged Juarez, Mexico, one of the world’s most dangerous cities. Detroit was found to be America’s most dangerous city in a 2009 Forbes study.

Detroit maintains 13,000 government workers but has 22,000 government retirees burrowed into the body politic, and their health-care subsidies alone account for nearly $200 million of the city’s budget. Pensions alone already account for a quarter of city spending; in three years, they will account for half. Pensions and city workers’ health-care subsidies account for $561 per year from every resident of Detroit, which has a very poor population — average monthly income of barely $1,200 before taxes, a fifth of the population in poverty, etc. The official unemployment rate is 30 percent; the real rate is much higher.

One would think that a city in that condition would engage in some austerity measures, if only small and largely symbolic ones. But then one would fail to appreciate the sort of willful malevolence that put Detroit into its current condition. Rather than cut corners, the city recently finished a multimillion-dollar renovation of a single library branch, installing designer chairs from Allermuir at $1,000 a copy. That’s a lot of library for a city in which about half of the adult population was estimated to be functionally illiterate in a 1998 National Institute for Literacy study. (I was not able to find a more recent estimate, but I cannot imagine that the numbers have much improved, especially since Detroit mayor Dave Bing is pressing to include Detroit natives currently resident in out-of-town abodes of the sort with armed guards and doors that don’t unlock from the inside as part of the city’s population. (That is not purely a matter of civic pride; with its population fallen below 750,000, Detroit is not legally entitled to collect a city income tax.)

Having exhausted all its other options, Detroit’s nominal city government finally is turning to the root of its fiscal problem, and is asking for concessions from the labor unions, which are the city’s real government. The main targets are pensions and health-care costs, along with sheer  work force size. The unions are not inclined to budge. The city council is poised to make things worse by reducing its payments to the city’s pension fund, which will not save money — the pension payments still will be made – but will simply hasten the day on which those pensions will either be rendered insolvent or will require even more direct taxpayer support, i.e., it’s fiscal nonsense on stilts.

Dartmouth College faced a big deficit this year, too, its endowment having been double-decimated (it declined by one-fifth) as a result of the market turbulence of 2009 and after. Dartmouth enjoys many benefits not available to the city of Detroit: Its governance is democratic in only the very loosest sense, and its left-wing maniacs are of the variety who mostly know how to count money. But it also has disadvantages: It cannot levy taxes, for instance, nor issue tax-free bonds on the muni market.

This is how Dartmouth closed its deficit: It fired about 40 employees outright and bought out more than 100 more. It eliminated 82 more positions through attrition, cut raises, and reduced health-care benefits. Dartmouth does not have the ability to levy taxes, but it did raise the cost of attendance (by replacing some grants with loans). The faculty howled and no doubt will continue howling. But Dartmouth acted more or less as if the school believed that its main obligation is to the students, present and future, that it will educate, and not to its employees, whose professional duty is to serve that obligation. Detroit, on the other hand, like most cities (and states and other government groupings) proceeds as though its main obligation is to its employees; in Detroit, that probably is the politically intelligent thing to do, since the citizens are fleeing as fast as they can, while the bureaucrats are staying put.

If there is a lesson to be had from these examples, which admittedly are very different, it is this: Matters of essential fiscal prudence should be isolated from democratic pressures to the extent that it is possible to do so. The main reason that our states run balanced budgets (other than their ability to mask their deficits) is that they are not legally able to do otherwise. While I remain skeptical of the model of problem-solving that says, in essence, “Pass a constitutional amendment saying the problem is solved,” I am increasingly sympathetic to the case for a balanced-budget amendment, and for attaching one to the debt-ceiling bill. True, it would take years for such a thing to become law, if ever it did. But it would be worth the wait.

—  Kevin D. Williamson is a deputy managing editor of National Review and author of The Politically Incorrect Guide to Socialism, published by Regnery. You can buy an autographed copy through National Review Online here.