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Tags: Fiscal Armageddon

Bring on the Draconian Cuts



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

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

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

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

Draconian cuts. Indeed.

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

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

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

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

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

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

Tags: Fiscal Armageddon , Corporate Welfare

Today in Fiscal Foolishness



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On the Corner: Delaware considers a bailout for casinos.

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

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

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

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

Tags: Fiscal Armageddon , General Shenanigans

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



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

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

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

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

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

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

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

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

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

Tags: Fiscal Armageddon

Today In Government Spending



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

Tags: Fiscal Armageddon

Wait . . . You Have Kids?



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Democrats Raise Taxes on Poor to Subsidize Millionaires



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

“Congress does basically nothing.”

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

But there is another possible headline:

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

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

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

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

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

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

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

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

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

Tags: Fiscal Armageddon

A Long Cliff-mas Break Comes to an End



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The first Morning Jolt of 2013:

Welcome back! I don’t know about you, but this holiday season seemed to stretch on forever — a school vacation that kept the kids at home for eleven days, an awful cold that kept getting passed around our family, a lost cell phone, a logistical and paperwork nightmare to replace the cell phone, and a steady stream of mostly miserable weather. On the bright side, I didn’t have to deal with covering the fiscal-cliff negotiations, so God bless Bob Costa.

Depress-equestration

The fiscal cliff drama is over — for now:

After exhaustive negotiations that strained the country’s patience, the House approved a bill to avert the dreaded fiscal cliff, staving off widespread tax increases and deep spending cuts.

In the 257-167 vote late Tuesday, 172 Democrats and 85 Republicans favored the bill; 16 Democrats and 151 Republicans opposed it…

While the package provides some short-term certainty, it leaves a range of big issues unaddressed.

It doesn’t mention the $16.4 trillion debt ceiling that the United States reached Monday.

It also temporarily delays for two months the so-called sequester, a series of automatic cuts in federal spending that would have taken effect Wednesday and reduced the budgets of most agencies and programs by 8% to 10%.

This means that come late February, Congress will have to tackle both those thorny issues.

Yuval Levin: “This deal is projected to yield $620 billion in revenue over a decade — increasing projected federal revenue by about 1.7% over that time. And that’s about it. The Democrats have made the Bush tax rates permanent for 98 percent of the public, which Republicans couldn’t even do when they controlled both houses of Congress and the presidency.”

The righty grassroots expressed a lot of anger, frustration, and dissatisfaction in the past few weeks. Over the past week I saw a lot of comments on Twitter in the vein of, “we have a spending problem! Why won’t Republicans insist we deal with that first!”

Fume at Speaker Boehner and Senate Minority Leader Mitch McConnell all you want, but here’s the problem: The chance to gain leverage in these negotiations was on Election Day, and the GOP came up with bubkes that day. Sequestration and the expiration of all of the Bush tax cuts presented an awful status quo to begin with, and there was really no better alternative that would get A) passed in a Senate controlled by Harry Reid and B) signed by President Obama. They don’t want what we want, and we don’t want what they want. And time was on their side in several ways, not least of which was that as of noon Thursday, a new Congress, with even more Democrats, is sworn into office.

There was and is no magic argument, anecdote, policy detail or chart that could change that dynamic. What was worse — or perhaps, if you look at it a certain way, liberating — was that Republicans were and are just about certain to get the blame from most of the public, either for the failure to reach a deal or for the unpopular parts of any deal reached. Some of this is because of the power of the presidential bully pulpit, and some of this reflects people’s enthusiasm for taxing somebody making more money than they do. But a lot of this dynamic is because a large segment of the public just doesn’t pay attention to budget fights and doesn’t want to pay attention to budget fights. So no matter what the numbers actually say, they’re inclined to blame the party they already consider to be the problem.

Allahpundit examines those who wanted the House to vote down the deal passed by the Senate about an hour and a half into the New Year:

It’s worth driving a hard bargain to get something important done, even at the price of a backlash. Just remind me again what “important” goal will be achieved by forcing a new round of negotiations. What sort of spending cuts do you expect to see here? A trillion dollars over 10 years when we’re running trillion-dollar deficits annually? Even if they got Obama to agree to that, why would you believe that future Congresses would allow those cuts to happen down the line? This entire process is an elaborate charade designed to postpone the ultimate reckoning on entitlement reform, and you’re simply not going to wring serious entitlement reform out of the Democrats given the two parties’ current postures. Obama just won reelection; the Democrats expanded their numbers in the House and Senate; entitlement reform remains depressingly unpopular among the public despite attempts to educate them about the role mandatory spending plays in driving the national debt. House Republicans aren’t going to hold out for weeks on end in the futile hope of revamping Medicare against that backdrop while middle-class voters stew over their new, higher tax brackets. Why risk some of the GOP’s small reserve of political capital on a deal that’s only negligibly less terrible than this one? I understand the “let it burn” strategy, to force the public to fully absorb the cost of big government. I don’t understand this one.

The Washington Examiner’s Phil Klein sees the conglomeration as a mix of some modest good and some considerable bad and ugly — but points out that perhaps nothing was uglier than how this mess came to be presented to the public as the best option:

Conservatives believe that higher taxes are a bad thing, that the tax code needs to be dramatically overhauled and that the true driver of long-term debt is out of control spending, particularly on entitlements. For those who thought it was possible to emerge from the “fiscal cliff” showdown without tax increases, with genuine tax reform and with real spending cuts that made fundamental changes to entitlements, this deal is obviously a nonstarter. For those who assumed that President Obama’s reelection and continued Democratic control of the Senate at a time when the nation was facing an automatic $4.5 trillion tax hike would inevitably mean higher taxes without actual tax or entitlement reforms, the deal is less bad.

. . . Beyond the specifics of the deal, the process was awful. Even though lawmakers knew this reality was coming for two years (on the tax side) and a year (on the sequester side), they waited until New Year’s Eve to strike a deal that passed through the Senate at 2 a.m. on New Year’s Day. The public has had no chance to review — let alone understand — the legislation. So much for transparency.

But since you deserve to hear dissenting voices, who loathe the agreement that passed the Senate, here’s Deroy Murdock:

President Obama repeatedly has called for a “balanced approach” to deficit relief and debt reduction. H.R. 8, the bill in question, is less balanced than the Leaning Tower of Pisa. Amazingly, as the Congressional Budget Office calculates, for every $1 that this proposal cuts spending, it hikes taxes by $41! In total, $15 billion in spending cuts are dwarfed by $620 billion in tax increases. Meanwhile, America’s $16.42 trillion national debt roars relentlessly on, since this measure does not even attempt to fill this Grand Canyon of red ink.

And Ben Howe: “My problem with ‘pass whatever as long as taxes don’t go up’ position is that it’s a shining example of the can-kicking that got us here.”

Tags: Barack Obama , Debt , Fiscal Armageddon , Harry Reid , John Boehner , Taxes

Teachers’ Pensions Are a Half-Trillion Short



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

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

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

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

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

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

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

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

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

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

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

NOTE: This has been corrected since first posting.

Tags: Fiscal Armageddon , Pensions

Obamacare, Taxes, and Wishful Thinking



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

Stop laughing.

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

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

Tags: Fiscal Armageddon

Does Anybody Besides Boehner Know What Boehner Is Doing?



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From the Tuesday edition of the Morning Jolt:

Remember, there’s just ten shopping days until the Mayan apocalypse!

Does Anybody Besides Boehner Know What Boehner Is Doing?

Everybody’s got advice for House Speaker John Boehner. I suspect Marc Thiessen represents a new level of urgency and frustration within the GOP grassroots, as they see days slipping by, the fiscal cliff approaching, and few if any good options for the party:

Go on the offensive. Immediately put forward a plan to fundamentally reform the tax code. You will be able to outbid Obama and the Democrats in any tax-cut fight. And the intellectual groundwork has already been done. During the supercommittee negotiations last year, Sen. Pat Toomey (R-Pa.) put forward a plan to lower rates, raise revenue and limit deductions. Sen. Rob Portman (R-Ohio) has a revenue-neutral corporate tax reform plan that lowers the rate to 25 percent and moves to a territorial system.

On the spending side, “soak the rich” by getting rid of the billions of dollars in government benefits, taxpayer subsidies and corporate welfare the wealthy receive each year and don’t need, and by means-testing government programs from unemployment benefits to farm subsidies.

On entitlements, put forward a plan to save Social Security and Medicare through structural reforms and by reducing benefits for well-off retirees and eliminating them entirely for the wealthiest seniors. Propose a “Buffett Rule” of your own: Warren Buffett does not need taxpayers to subsidize his retirement and health care.

On his radio program Monday, Sean Hannity was grinding his teeth over this aspect, arguing that it amounted to theft of wealthy people who had spent their lives paying into entitlement programs.

I suppose you could see it that way, but perhaps it’s good to go back and figure out the purpose of these programs in the first place. Why do we have Social Security? To provide income for retirees who can’t take care of themselves. Why do we have Medicare? To provide health care for retirees who can’t take care of themselves. Once you have a sufficiently high net worth, you can take care of yourself. So why shouldn’t Social Security benefits be eliminated for the wealthiest retirees? The left has always resisted this, fearing that if some citizens didn’t collect their benefits, they might not see it as a universal system and the public might be more amenable to additional reforms of the system.

Why yes, they would, wouldn’t they?

Anyway, back to Theissen:

STEP THREE: Pass your plans. If the president refuses to negotiate and no progress is made by February, inform him that you will attach all or part of your plan to legislation raising the debt limit and pass it in the House. Then do so. Obama will sign it. Here is why:

Unlike with the fiscal cliff, Republicans have all the leverage when it comes to the debt limit. Today, Obama is perfectly willing to go over the fiscal cliff and blame the GOP for the resulting tax increases on the middle class. But when it comes to the debt limit, he does not have that luxury. He can’t default on our debt — the consequences are too catastrophic. So in the end he will cave.

Raise your hand if you think you’ve spotted a flaw in the strategy here. Wow, lots of hands. Yes, you in the back.

“President Obama doesn’t fear catastrophic consequences, he embraces them! Because economic instability increases the general public’s dependency upon government, in a variation of the Cloward-Piven strategy to shift America to a more socialist system of economics!”

Yup, something like that. I don’t know just how committed Obama is to policies that undermine America’s economic health, but we know he doesn’t blink upon running up more than $5 trillion in debt in less than four years, $3.4 billion to $4 billion per day. We know he loves, loves, loves blaming Republicans for everything. We know he will blame Republicans for failure to pass immigration reform, bad jobs numbers, the deficit, the continuing housing crisis, gridlock in Washington, the debt panel’s failure to reach a deal, the difficulty of life for the unemployed, and the inability to build the Keystone Pipeline.

Now at some point, the public may get really tired of his “it’s never my fault” routine, and Obama might find himself in deep doo-doo. But so far, that hasn’t happened.

So if the House Republicans dig in their heels on a debt-ceiling fight, all the way up to the deadline, Obama might be okay with default and the ability to use them as a scapegoat for the remainder of his presidency, or embrace the various theories that there need not be a congressionally controlled debt limit at all:

If Obama should fail to secure a long-term solution to the debt ceiling in the context of the current fiscal-cliff negotiations, there is another way out –invoking the US Constitution.

In the wake of the Civil War, the government wanted to make clear that loans to the US government were still good (while Confederate debt would not be honored). Accordingly, the 14th Amendment includes the following provision: “The validity of the public debt of the United States, authorized by law . . . shall not be questioned.”

In a 1935 case (Perry v. US) the Supreme Court determined that Congress does not have the authority to renege on its obligations to its lenders. The president, then, could declare as unconstitutional the current debt-ceiling law — which requires congressional approval to raise the limit — or at least use such a threat as leverage.

Maybe I’m not privy to some sort of really brilliant strategy on the part of Speaker Boehner. But right now, doesn’t it look like . . . nothing’s happening?

I thought Guy Benson had a good idea with his Hail Mary pass of having the GOP adopt Simpson-Bowles.

(Leave it to Ezra Klein to spell out all the reasons conservatives might not want to do that, such as $2.6 trillion in tax increases over ten years and $1.4 trillion in defense cuts, worse than would be enacted under sequester. Still, as far as optics and negotiation leverage goes, this would probably do the most to blow up the “stubborn uncompromising Republicans” argument.)

So Boehner offered “the Bowles plan” and . . . Obama rejected it, with no discernible consequence.

Shouldn’t House Republicans be in session, and holding votes, one after the other, on all of these options? Would that be doing more to add to the argument that they’re taking actions to avert going over the fiscal cliff, and that Obama’s the one being unreasonable and stubborn and refusing to compromise?

Tags: Barack Obama , Debt Ceiling , Fiscal Armageddon , John Boehner

The Crisis of Fiscal Leadership



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

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

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

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

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

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

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

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

Tags: Fiscal Armageddon , House Republicans

A Presidency of Perpetual Crisis



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From the first Morning Jolt of the week:

A Presidency of Perpetual Crisis

So here are the headlines coming out of the Sunday shows . . .

Boehner ‘flabbergasted’ at fiscal cliff proposal

McCaskill: ‘I Feel Almost Sorry For John Boehner’

Sen. Ayotte ‘disappointed’ in initial White House proposal

Sen. Hatch: Obama fiscal proposal ‘classic bait and switch’

So predictable, isn’t it? During these seemingly-more-frequent showdowns, the purpose of every lawmaker appearing on a Sunday show, no matter the party, is to emphasize how committed they are to a sensible bipartisan compromise that puts the nation’s interest ahead of the special interests, and how the opposition is being extreme, divisive, unyielding, outrageous, et cetera.

This latest round is so irritating because A) it’s just like the campaign rhetoric that we were supposed to see ending on November 6, right down to the president doing rallies in Philadelphia; B) it’s a rerun of the players, issues, tone, and rhetoric of last summer’s debt-ceiling fight; and C) if every outcome to this fiscal cliff stinks, then this is the policy-debate equivalent of taking the Band-Aid off really slowly — like over the course of a month.

I don’t know when buyer’s remorse will kick in for any portion of the slim majority that voted for President Obama, but I look at this fight and wonder how many Americans will look at Washington and groan, “This stuff again? Already?”

This section of Peggy Noonan’s column from this weekend stuck out to me:

The election is over, a new era begins—and it looks just like the old one. A crisis is declared. Confusion, frustration, and a more embittered process follow. This is . . . the Obama Way. Nothing has changed, even after a yearlong campaign that must, at times, have looked to him like a near-death experience. He still doesn’t want to forestall jittery, gloom-laden headlines and make an early deal with the other guy. He wants to beat the other guy.

You watch and wonder: Why does it always have to be cliffs with this president? Why is it always a high-stakes battle? Why doesn’t he shrewdly re-enact Ronald Reagan, meeting, arguing and negotiating in good faith with Speaker Tip O’Neill, who respected very little of what the president stood for and yet, at the end of the day and with the country in mind, could shake hands and get it done? Why is there never a sense with Mr. Obama that he understands the other guys’ real position?

My best guess at the answer to “why it’s always cliffs with this president” is because he thinks he wins bigger that way, that the closer the country gets to the edge of disaster, the more likely it is his opponents will capitulate, concluding they have to give ground to avoid that disaster. It’s a game of chicken, really. Of course, Obama’s gotten so used to watching the Republicans swerve away in the game of chicken that he may be entirely unprepared for a time that they don’t.

Some might see this as the philosophy of the manufactured crisis. Or at least the unnerving Rahm Emanuel slogan, “never waste a crisis.” Although looking at how the Obama administration tackles these things, perhaps the slogan is better remembered as, “never solve a crisis.”

Conn Carroll looks down the road and sees four more years of this:

The Geithner proposal completely killed any chance House Republican leaders had of convincing their members that Obama was an honest partner for anything — let alone major tax and entitlement reform.

Now we are either going to go over the fiscal cliff, or Republicans will act to preserve the Bush tax rates for the middle class while giving Obama his return to the Clinton tax rates for the highest income earners.

But that is all Obama will get. He’ll get no entitlement reform now. No individual or corporate tax reform either. The rest of the second-term Obama agenda is also DOA. It is going to be all partisan scorched earth all the time, again, for four more years.

Obama will have changed Washington. But for the worse.

Brad Thor assesses the president’s offer in the fiscal-cliff negotiations: “Obama is like an angry spouse who wants everything: house, car, kids, & only scorched earth for other side. Did we have a divorce or an election?”

Well, at least the president looks relaxed:

JOINT BASE ANDREWS, Md.– President Obama and former President Bill Clinton hit the golf course on Sunday.

Obama is playing his round at Maryland’s Joint Base Andrews and it is the third presidential golf outing here since the Nov. 6 elections, under sunny skies with temperatures around 55 degrees.

Clinton went to bat for the president in the just-ended campaign, delivering an well-received endorsement at the Democratic National Convention in September. Their partnership, which was initially rocky in the early days of the Obama presidency, grew stronger after a September 2011 golf game.

Clinton is also the last Democratic president to strike a mammoth budget deal with Congress. Obama will likely be discussing the looming “fiscal cliff” of tax increases and spending cuts on the links.

Rounding out the presidential foursome are U.S. Trade Representative Ron Kirk and Terry McAuliffe, the former Democratic party chairman, who has announced his plans to run again for the governorship of Virginia.

Tags: Barack Obama , Fiscal Armageddon

A Fiscal-Cliff ‘Hail Mary’ Pass: Embrace Simpson-Bowles?



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I hope every Republican on Capitol Hill gives some serious thought to this last-ditch idea from Guy Benson: embrace Simpson-Bowles. Sure, it would include a lot of proposals that conservatives don’t like, but it would be better than almost any deal that Boehner and Obama come up with in the next month, and probably be preferable to going over the cliff.

I think President Obama and congressional Democrats would probably reject it, but if nothing else, this move by Republicans — and as Guy writes, they need to be unified on this — would enormously complicate Obama’s preferred “we went over the fiscal cliff because of those obstructionist Republicans” narrative.

Tags: Fiscal Armageddon

The State of the Fiscal Cliff Negotiations



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I discussed the Republicans’ options for the fiscal cliff negotiations on MSNBC’s “Morning Joe” this morning.

1. President Obama is convinced he will walk out of this crisis with an extremely sweet deal. His opening offer:

President Obama offered Republicans a detailed plan Thursday for averting the year-end “fiscal cliff” that calls for $1.6 trillion in new taxes, $50 billion in fresh spending on the economy and an effective end to congressional control over the size of the national debt.

The proposal, delivered to the Capitol by Treasury Secretary Timothy F. Geithner, mirrors previous White House deficit-reduction plans and satisfies Democrats’ demands that negotiations begin on terms dictated by the newly-reelected president.

The offer lacks any concessions to Republicans, most notably on the core issue of where to set tax rates for the wealthiest Americans. After two weeks of talks between the White House and aides to House Speaker John A. Boehner (R-Ohio), it seemed to take Republicans by surprise.

What is fascinating about the way the Democrats and the media discuss the tax-hike option is that these forces believe not only that Republicans should break their word on their explicit, oft-repeated pledge to oppose tax increases, but that they shouldn’t even act like it is a big deal. It’s bad enough to break a promise in exchange for some otherwise unthinkable policy concession from the opposition, but the Democrats and media believe the GOP should break their promise in exchange for really nothing.

I asked folks on the Right yesterday on Twitter whether there was any policy concession that Obama could offer that would make a tax hike worthwhile; some said no, some offered some extremely unlikely options (“repeal Obamacare!”). Probably the most realistic option would be some sort of significant cut to an entitlement program that Democrats once deemed sacrosanct and untouchable, something that infuriated their base as much as a tax hike would infuriate Grover Norquist and the GOP’s anti-tax-hike base. At least then Republican lawmakers could say to their base, “We broke our promise, but that concession got Democrats to accept cuts to entitlements they swore they would never accept, as well. We both had to accept things we didn’t want to save the country from a fiscal disaster.”

But for now, and for the foreseeable future, there is no indication that Obama thinks he’ll have to make a major concession to reach a deal.

2. Democrats are completely convinced that enough Republicans in Congress will cave and acquiesce to almost everything they want as the cliff approaches. They have some recent historical examples to provide encouragement in this belief.

3. Democrats are completely convinced that if no deal is reached, the Bush tax cuts expire, and sequestration takes effect, Republicans will get most of the blame. This is probably largely correct, but I think they’re whistling past the graveyard on the consequences to an Obama presidency if 2013 dawns with tax hikes, defense-spending cuts, and another recession.

This morning, MSNBC’s Richard Wolffe said that I am saying Obama wants to go over the fiscal cliff — either I was unclear in my wording or he’s reading something into my comments that isn’t there. I think Obama doesn’t really want to go over the cliff, but he’s convinced that if we do, his opponents will suffer the consequences worse than he does.

4. For the GOP, a deal on Obama’s terms is probably worse than sequestration. The middle will not suddenly like the GOP a lot more because they embraced tax increases for the rich. Even if they did, it’s unlikely they would gain enough ground to offset the damage such a move will do among a betrayed and enraged party grassroots. As I said this morning, “Once the Republicans become the party of tax increases, why do we need them? They become indistinguishable from the Democrats.”

The media is speaking increasingly loudly about the president’s mandate; what they fail to realize is that every member of the House GOP thinks he was reelected (or in the case of the new members being seated in January, elected) with a mandate to oppose all tax increases because they’re economically destructive.

The biggest obstacle to all of the options for real deficit reduction and real entitlement reform is that the public doesn’t really think they’re necessary; they think a few tax hikes on the rich will do the trick. Perhaps it’s best to let taxes go up for everyone, from the highest earners to the lowest earners, and let the public see how little that changes the numbers.

If the Bush tax cuts expire, the House GOP must introduce and pass one across-the-board tax cut bill after another, watching Harry Reid bottle them up in the Senate or Obama veto them. Obama will insist that he wants middle-class tax cuts, and the House GOP is holding them hostage . . . a very familiar argument. The voters had the chance to change this dynamic; they chose to keep everyone in place.

Tags: Barack Obama , Fiscal Armageddon , House Republicans

Obama, Tackling the Fiscal Cliff with Campaign Rallies



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From the Thursday edition of the Morning Jolt:

Obama Deals With the Fiscal Cliff with the Only Tool He Knows: Campaign Rallies

In light of this . . .

President Barack Obama plans to make a public case this week for his strategy for dealing with the looming fiscal cliff, traveling to the Philadelphia suburbs Friday as he pressures Republicans to allow tax increases on the wealthy while extending tax cuts for families earning $250,000 or less.

The White House said Tuesday that the president intends to hold a series of events to build support for his approach to avoid across-the-board tax increases and steep spending cuts in defense and domestic programs. Obama will meet with small business owners at the White House on Tuesday and with middle-class families on Wednesday.

The president will visit the Rodon Group on 2800 Sterling Drive in Hatfield. The president’s visit will cap a week of public outreach as the White House and congressional leaders negotiate a way to avoid the tax increases and spending cuts scheduled to take effect Jan. 1. The trip will mark Obama’s first public event outside the nation’s capital since winning re-election. 

. . . I’m not sure Obama really understands negotiating.

So, for the sake of argument, let’s assume that Obama’s rallies for the “balanced approach” — a.k.a. tax hikes, defense cuts, and the slightest of deck-chair rearrangement on entitlements — are a phenomenal success. Let’s assume he gets a decent number of tuned-in Americans — beyond his usual diehard supporters — to call in to Congress. Let’s assume that those folks don’t live in districts with House Democrats who are already aligned with the president’s view on this.

(Notice that Obama is attempting to sway House Republicans by heading to a district represented by a Democrat, Rep. Allyson Schwartz.)

Those Obama fans will be calling the offices of House Republicans who are:

1)      Safely reelected in a year when President Obama won nearly 65 million votes nationwide, thus looking pretty darn safe for a low-turnout midterm election in 2014, and thus unlikely to lose their seats anytime in the next few cycles;

2)      Defeated in this year’s elections, and thus free to vote however they like, not caring what those constituents are demanding; or

3)      Retiring, and thus free to vote however they like, not caring what those constituents are demanding.

Obama doesn’t seem to realize that the time he had leverage with the House Republicans was before these elections, when they might have felt some pressure to “get something done” and demonstrate that they can tackle tough problems like debt and entitlements. President Obama now has much, much less leverage than he did before the elections, and all of the rallies in the world aren’t going to change that.

What is Obama going to do, denounce Republicans for not acquiescing to his agenda? He’s been doing that for four years. What, is he going to put the GOP brand in the toilet? It’s already there!

If you’re a House Republican, what incentive do you have to give ground on tax increases that you think will be damaging to the country? The only significant one is the conclusion that going over the fiscal cliff will inflict worse damage on the economy. And that’s a pretty big one, but it may or may not be worth violating the Grover Norquist pledge, infuriating the base, and giving a diehard, no-holds-barred opponent in the White House exactly what he wants.

Here’s Keith Hennessey, arguing that economic reality will force Obama to accept a deal much less to his liking than he’s letting on:

If there is no bill, the U.S. economy will probably dip into recession for much/most/all of 2013, and it’s impossible to predict whether such a recession would be short-lived.

A 2013 recession would be terrible for the country and terrible for the Obama Presidency. It would limit the President’s options across his entire policy agenda, economic and non-economic.  And it could define and dominate his entire second term.

President Obama believes #1 and #2, and therefore avoiding the risk of triggering a recession with his veto is an even higher policy priority than his fiscal policy goal.

The President wants to get things done. He cares more about his own chances for policy success (across the entire breadth of his agenda, whenever he figures out what it is) than he cares about relative political blame.  A scenario in which Republicans get most of the blame for a veto-triggered recession is still a loser for him if it means he can’t accomplish his second term goals.

Here’s Erskine Bowles, arguing we have a two-in-three chance of going over the cliff:

Erskine Bowles, co-chairman of the bipartisan Simpson-Bowles commission assembled by the White House to deal with the national debt, said he believes that there’s only a one-in-three probability that Congress will reach an agreement on the so-called fiscal cliff before the Dec. 31 deadline.

“We have a real crisis, and I think it would be insane to reach the fiscal cliff, but I think that there’s only a one-third probability of Congress getting something done before Dec. 31,” Bowles said.  “You all know what it means if we don’t, if we go over the cliff — I think you’ll see economic growth slowed by as much as 3 to 5 percent. That’s obviously enough to put us back into a recession.”

Bowles was a bit more upbeat about the chances for a deal after the deadline passes.

“I’m certain we’ll get it done in the lame duck” session of Congress, he said. “I think it’s about one third that we’ll go over the cliff and people will come to their senses pretty quickly. But I think the real problem is if we go over the cliff and we don’t do anything immediately, and that’s also a one-third probability.”

Ed Morrissey looks at a new Washington Post poll on Americans’ views of dealing with the fiscal cliff and is left groaning at the scope and scale of the denial:

The only broad consensus for action is the populist tax-hike option which will solve less than 10% of the problem, and two-thirds won’t even take a basic step like mildly indexing retirement eligibility to life expectancy in order to reduce costs in the biggest fiscal train wreck of the federal budget.

If we could trade marginal tax-rate increases for real cuts in spending and actual entitlement reform that would end the long-term problems in Medicare, Medicaid, and Social Security, I’d take that trade, if somewhat reluctantly.  This poll shows that Americans still have not come to grips with the scope and size of the problem . . . or even basic math.

I heard this anecdote from Jonah, and Marc Thiessen summarizes it: “After he was defeated for re-election in 1989, New York Mayor Ed Koch was asked if he would ever run for office again.  ’No,’ Koch replied.  ’The people have spoken . . . and they must be punished.’”

Look, America, this year, you knew which candidate was the candidate of bigger government and higher taxes and which candidate was the candidate of smaller government and lower taxes. You voted for the tax-hike guy. Now all of our taxes will go up in January, because Republicans refuse to play along with the charade that our fiscal house can be put in order just by taxing “the rich.”

Think of the coming double-dip recession as a grand, national teachable moment.

Tags: Barack Obama , Fiscal Armageddon , House Republicans

Why I Am Not Too Worried about Obamacare



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While I had been hoping for an assist from the Supreme Court, my opinion about Obamacare today is the same as on the day it was passed: Don’t sweat it. We are going to see the law replaced with something more sensible, and we are going to get major entitlement reform in the deal to boot. That is going to happen regardless of who wins in November, or the Novembers after that.

If Obamacare were left in place (and even if we set aside our well-grounded suspicions about its real fiscal impact) and the other major entitlements remained unreformed, federal spending on these programs would in a few short decades hit 19 percent of GDP, meaning that we would be spending each year on a handful of entitlement programs about what the federal government spent in total in the average year in the decade leading up to President Obama’s election. Since we will presumably still have an army, the FBI, federal courts, etc., and since much of the rest of the federal budget is still going to be there, it seems to me unlikely that this spending will in fact be possible. CBO estimates of federal spending in 2050 run to 30 or 40 percent of GDP, with debt levels exceeding 200 percent of GDP. It seems to me implausible that the federal government is going to be able to sustain spending levels that are double the recent norm, especially considering that the rising ratio of debt to GDP is going to make deficit financing more difficult and expensive, forcing Congress to rely more heavily upon taxes.

We aren’t going to spend X trillion dollars on Obamacare, because we do not have X trillion dollars to spend. The trick is for voters to get that through Washington’s thick skull before the bond market does.

The Court may not have been on our side today, but the math still is.

Tags: Fiscal Armageddon , Obamacare

Real-Estate Roulette



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Foreclosures are down year-over-year but spiked sharply in May — up 9 percent. Both home sales and prices have recovered a bit recently, both up about 10 percent year-over-year. What seems to be happening is that a great number of foreclosures that were delayed in the past year are now getting under way as lenders begin to figure out how to prove that they own mortgages in default, having fecklessly failed to do so previously.

As usual, politics is making things worse, extending the problem rather than mitigating it. Nevada’s anti-foreclosure law, for instance, which increases documentation requirements, seems to be effective mainly in lengthening the foreclosure process, rather than in keeping people in their homes. (Though there is no excusing the mortgage industry’s shockingly shoddy documentation process.)

More houses going into foreclosure will put downward pressure on prices, because banks don’t like to be homeowners, and consequently dump properties ASAP. Bank-owned homes sell for a third less than other houses.

The underlying problem, as ever, is negative equity — which is increasing, in spite of all of the political attention focused on the problem. This has had some perverse consequences. A great deal of those recent gains in house prices have occurred at the bottom end of the market, where there is the highest level of negative equity. Simply put, people with significant negative equity can’t really sell their houses, so the number of low-end houses on the market has decreased, driving up prices for the remaining inventory. But negative equity also correlates with mortgage default. So a significant rise in housing prices could draw a lot of new product onto the market, possibly reversing recent housing gains, while a significant economic downturn — say the result of a worldwide financial crisis resulting from the collapse of European financial institutions — could send a lot of borrowers into default and houses into foreclosure. And if current free-money mortgage-interest rates should start going up, sales and prices are sure to suffer. Short version: We’re still playing real-estate roulette.

Negative equity has some other less obvious economic consequences, too, such as inhibiting labor mobility. If you are anchored in California because you cannot afford to take a $30,000 hit selling your house, it is more difficult to take that job in Texas.

The Obama administration’s response to the housing meltdown is widely held to have been a comprehensive failure (when you’ve lost Businessweek . . .), but then there was no ingenious idea from Washington that was ever going to have changed the fundamental problem: Lots of people bought houses they couldn’t afford, and lots of people irresponsibly lent them money to do so, in part as the result of a wildly popular bipartisan consensus that government should encourage people to buy houses. Remember that the next time some guy seeking elected office tells you he is going to fix the economy by legislating away economic facts.  

Tags: Fiscal Armageddon , Housing

Detroit: The Moral of the Story



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The Left’s answer to the deficit: raise taxes to protect spending. The Left’s answer to the weak economy: raise taxes to enable new spending. The Left’s answer to the looming sovereign-debt crisis: raise taxes to pay off old spending. For the Left, every deficit is a revenue-side problem, not a spending-side problem, and the solution to every economic problem is more spending, necessitating more taxes. The problem with that way of looking at things is called Detroit, which looks to be running out of money in about one week. Detroit is what liberalism’s end-game looks like.

And Detroit does in fact have a revenue problem, as I argued in the May 14 National Review (“Let Detroit Fail”): “Revenues declined by more than $100 million between 2007 and 2011. Income-tax revenue dropped by 18 percent, utility-tax revenue by 17 percent, property-tax revenue by 2.3 percent. Seeking a quick fix to its revenue problems, Detroit chartered several casino-gambling operations, only to see taxes from them begin to decline (by 1.5 percent last year) after a period of early growth. Detroit, once the wealthiest city in the United States by per capita income, is today the second-poorest major U.S. city.”

Detroit is evidence for the fact that the economic limitations on tax increases sometimes kick in before the political limitations do. The relationship between tax rates, tax revenue, economic incentives, growth, and investment is complex, to say the least, and deeply dependent on the historical and economic facts of particular places at particular times. We have theories of growth, but no blueprint. But Detroit was not reduced to its present wretched circumstances by historical inevitabilities or the impersonal tides of economics. It did not have to end this way, but it did, and understanding why it did is essential if we are to avoid repeating Detroit’s municipal tragedy on a national scale.

One lesson to learn from Detroit is that investing unions with coercive powers does not ensure future private-sector employment or the preservation of private-sector wages, despite liberal fairy tales to the contrary, nor do protectionist measures strengthen the long-term prospects of domestic firms competing in highly integrated global markets. We cannot legislate away comparative advantage or other facts of life. But the problem of unions’ coercing distortions in the private sector is at this point a relatively small one, given the decline of unionization outside of government. Organized labor being a fundamentally predatory enterprise, its attention has turned to the public sector, where there are fatter and more stable rents to be collected.

The second important lesson to be learned from Detroit is that there are hard limits on real tax increases, a fact that will be of more immediate significance in the national debate as our deficit and debt problems reach crisis stage. Even those of us who are relatively open to tax increases as a component of a long-term debt-reduction strategy must keep in mind that our current spending trend is putting us on an unsustainable course in which our outlays will far outpace our ability to collect taxes to pay for them, no matter where we set our theoretical tax rates. The IMF calculates that to maintain present spending trend the United States will have to nearly double (88 percent increase) all federal taxes to maintain theoretical solvency. Those tax increases are sure to have real-world effects on everything from investing to immigration. At some point, the statutory tax increases will not increase actual revenue.

Even the best tax regimes are cannibalistic: Every tax is an incentive for the taxpayer to relocate to a more friendly jurisdiction. But tax rates are not the only incentive: Google is not going to set up shop in Somalia. Healthy governments create conditions that make it worth paying the taxes — which is to say, governments are a lot like participants in any other competitive market (with some obvious and important exceptions). The benefits of being in Detroit used to be worth the costs, but in recent decades millions of people and thousands of enterprises large and small have decided that is no longer the case. It is not as though one cannot profitably manufacture automobiles in the United States — Toyota does — you just can’t do it very well in Detroit. No one with eyes in his head could honestly think that the services provided by the city of Detroit and the state of Michigan are worth the costs.

The third lesson is moral. Detroit’s institutions have long been marked by corruption, venality, and self-serving. Healthy societies have high levels of trust. Who trusts Detroit? This is not angels-dancing-on-the-head-of-a-pin stuff. People do not invest in firms, industries, cities, or countries they do not trust. Corruption makes people poor.

What is true of Detroit is true of the country. Our national public sector not only is bloated and parasitic, it is less effective, less responsible, and less honest than that of many other developed countries, including New Zealand, Canada, Australia, and Germany. I am not an unreserved admirer of Transparency International’s global corruption-perceptions index, but I believe that it is in broad outline accurate. Liberals are inclined to learn the wrong lessons from the relative success of countries such as Canada or New Zealand, concluding that what we need is a bigger welfare state, government-run health care, etc. (Conservatives, for our part, tend to overemphasize the role of comparatively low taxes and light regulation in the success of countries such as Singapore and Hong Kong. Those are important, but there are other equally important factors.) In reality, there is a great diversity of health-care arrangements and social-spending levels among the countries that have more effective institutions than ours, while many countries with the sorts of institutions liberals admire (take Italy, Spain, Greece, and Portugal for starters) are in crisis, in significant part because of plain corruption. What the more successful countries tend to have in common is a public sector that is less intent on looting the fisc.

Sure, Hong Kong and Singapore have lower levels of government spending (as a share of GDP) than does the United States. So do Switzerland and Australia. At 38.9 percent of GDP, our public-sector spending is indistinguishable from that of Canada (39.7 percent). It is not obvious that we have much to show for it. 

The city fathers of Detroit inherited one of the richest and most productive cities in the world, and they ruined it in a generation. The gentlemen in Washington have been entrusted with the richest and most productive nation in the history of the world, and the trendline does not look good. Those of us seeking to radically reduce the footprint of government must remind ourselves from time to time that our case is as much ethical as economic, that the ethical and the economic are indeed closely intertwined. 

Tags: Fiscal Armageddon

Romney, Day 1



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Mitt Romney has some big plans for Day 1. But where are the spending cuts? TBD, apparently.

Mr. Romney has promised a 5 percent cut in non-defense discretionary spending, which is to say: approximately squat. Non-defense discretionary spending runs around 15-17 percent of the budget. A 5 percent cut in that amounts to very little in terms of the big Fiscal Armageddon picture. We could cut non-defense discretionary spending to $0.00 and we’d still be running a big deficit. Not good enough.

We cannot turn around the fiscal picture (and consequently our long-term economic prospects) without cutting Social Security, Medicare and Medicaid, and defense. We do not have to cut them all in the same way or by the same amount, obviously, but to take any 20-percent slice of federal spending and declare it sacrosanct is the mark of fiscal unseriousness — and putting four such slices off limits (I’m including “other mandatory” and interest, which really is mandatory, as the fourth slice) is unseriousness times four.

Sure, that’s going to be hard to run on. But if there is such a thing as a Romney administration, there is still going to be a Congress. Maybe it will be a strongly Republican Congress. Maybe not. But it is not as though any of this gets easier after the election. I am increasingly of the opinion that if you won’t run on it you won’t do it.

Spending cuts on Day 1: Somebody put that on Mr. Romney’s Outlook calendar. 

Tags: Fiscal Armageddon

Extremism Is Not the Problem; Bipartisanship Is



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This weekend op-ed from AEI’s Norman Ornstein and Brookings’s Thomas Mann has drawn a great deal of criticism, much of it arguing that, contra the authors’ claims, Democrats are as ideological, as extreme, and as unbending as congressional Republicans, and are at least equally to blame for the current sorry state of affairs in Washington, if not more so.

That argument has a great deal of truth to it: It was Democrats, not Republicans, who ensured that the recommendations of President Obama’s bipartisan deficit-reduction panel were D.O.A. It is Democrats in the Senate, not Republicans, who have refused to pass a budget since FY 2009’s. It was Democrats, not Republicans, who turned the confirmation process into a pageant of bare-knuckles politics (consult Robert Bork about that). It is Democrats, not Republicans, who insist that any plan to balance the budget take more than half of all federal spending off the table. Etc.

But while the authors focus on the allegedly extreme partisanship in Washington, anybody who has been watching our national descent into insolvency must conclude that the problem has been too much bipartisanship, not too little. For more than a decade now, the operating model in Congress has been that Democrats more or less support Republicans’ tax cuts (though sometimes howling about it for the benefit of their base) while in return Republicans support Democrats’ spending (also howling about it). That is the substance of the national suicide pact that Congress has signed us up for.

Divided government can sometimes have good results, as it did during the Gingrich– Clinton years, but it can also have bad ones. When the government is divided, or when the majority party holds only a very small majority in one of the houses, there are very powerful incentives to accede to the least painful of the other side’s demands. Democrats have been energetic in condemning the “Bush tax cuts” and blaming them for the high deficits currently afflicting us, but they have made no serious effort to repeal the bulk of them, because the majority of the tax cuts went to households earning less than $200,000 a year. In fact, Democrats have touted the payroll-tax  deal as a key domestic achievement, as though talking Republicans into supporting an irresponsible tax cut were one of the labors of Hercules.

The sins on the Republican side of the ledger have been too thoroughly documented to require much revisiting here, but the spending chart from 2001–09 tells the story. As Vero reminds us:

During his eight years in office, President Bush spent almost twice as much as his predecessor, President Clinton. Adjusted for inflation, in eight years, President Clinton increased the federal budget by 11 percent. In eight years, President Bush increased it by a whopping 104 percent. 

Republicans had a lot of things they wanted to get done from 2001–09, and the easiest way to keep things moving was by talking a great deal about spending without actually doing much of anything about it. Likewise, if we judge them by their actions rather than by the speeches they make, Democrats are broadly content to go along with a great deal of the Republican agenda on taxes. I’m sure that if they thought they could get away with it Democrats would raise the top rate to 90 percent, but they know they can’t, and the ones who take the time to look at the numbers know that it is the bottom two-thirds of U.S. taxpayers who are unusually lightly taxed, not the top third. But there isn’t much juice in running against the interests of the middle class, which is why Mitt Romney has embraced President Obama’s magical $200,000 mark as the AGI above which many tax cuts will not apply.

Those who complain that there’s not a dime’s worth of difference between the parties are mistaken — there are a great many dimes’ worth of difference between Paul Ryan’s vision and Barack Obama’s — but the day-to-day reality suggests that there is a bipartisan modus vivendi in Congress, and it is killing us.

It is particularly galling that Ornstein and Mann cite the passage of No Child Left Behind as a worthy example of Democrats behaving in a bipartisan fashion. NCLB is not an especially good piece of legislation; bad legislation that has bipartisan support still is bad legislation. (Those of us who are skeptical of the wonders of bipartisanship might be forgiven for applying the hairy eyeball to anything that had the backing of both George W. Bush and Teddy Kennedy. I would not trust a Bush-Kennedy accord on pizza toppings.) Sometimes good ideas have bipartisan support, and sometimes bad ones do. We’ve seen more of the latter than the former in recent years, and Republican accommodation of Democratic priorities on entitlements, domestic spending, and tax-code shenanigans would have left the country worse off, not better off. By all means, the Republicans should embrace good ideas when Democrats offer them. You know who else should support good ideas offered by Democrats? Democrats. But as Erskine Bowles and Alice Rivlin know, when it comes to the budget the best and most responsible Democrat-backed initiatives are dead on arrival in Nancy Pelosi’s caucus.

Tags: Fiscal Armageddon

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