Tags: Fiscal Armageddon

Drip, Drop, Drip, Drop


Pennsylvania’s capital city cannot pay its bills:


(Reuters) – Pennsylvania’s distressed capital city, Harrisburg, will skip $5.3 million of debt payments due next week, the first time the city has defaulted on its general obligation bonds, to ensure there is enough cash to fund vital services.

Pennsylvania’s capital of 50,000 people is mired in $326 million of debt due to the expensive retrofits and repairs of its troubled trash incinerator.

There is something poetic about a trash incinerator bringing down Harrisburg. If only they’d put more spending measures into it.

And in Rhode Island, the pension tsunami is rolling ashore:


The smallest city in the nation’s smallest state — Central Falls, Rhode Island — is bankrupt. The main reason is it can’t afford the pensions for its retired city workers. How the city is digging out of its financial hole may have consequences for city pensions in other cash-strapped towns across the country.

For years, city officials promised robust union contracts and pensions without raising revenue to pay for them. Last August, the math caught up with them. Central Falls was broke, its pension fund short $46 million. It declared bankruptcy.

I wonder how many states and municipalities will be insolvent on Election Day, 2012. Guesses?

Tags: Fiscal Armageddon

Who Won the Payroll-Tax Fight?


Who has the power in Washington? Who won the payroll-tax battle? Not Republicans, not Democrats — government employees.

The new deal on the payroll-tax extension (which will do little or nothing to benefit the economy) was held up by a largely unrelated matter: requiring federal workers to contribute more toward the costs of their own pensions. (More, Congress? How does 100 percent strike you?) The original proposal would have required all federal workers to bear more of the costs of their own retirements, but Democrats representing Maryland, that tony little suburb of Leviathan, shrieked. The compromise instead will cover only new hires.

I’m still tickled that the Obama administration’s great political victory here is getting Republicans to agree to a stupid tax cut with no offsets — stupid tax cuts with no offsets being a Republican specialty — but the outcome is grim: The combination of stupid spending and stupid tax cuts is a potent one, and it may be an indicator of worse things to come. If we should revert to the Bush-Hastert-Pelosi model, in which Republicans and Democrats simply swap tax cuts and spending increases between themselves to keep the machinery moving, the consequences for our national debt will be, in a word, terrifying.

But as the ship takes on water, you can bet that federal workers will continue to loot the fisc until the last rapidly depreciating U.S. dollar has been spoken for.

Tags: Fiscal Armageddon

Mr. Watts, Mr. Gingrich, and Mr. Deficit


Newt Gingrich has received the endorsement of J. C. Watts, a former member of Oklahoma’s delegation to the House and an influential conservative even after nearly a decade in political retirement. The endorsement speaks well of Gingrich.

Among other things, Watts had this to say:

When you consider where we are today, and you think about the good old days — of balanced budgets, entitlement reform, and paying down our national debt, getting tax relief — as a Republican majority, Newt Gingrich was the speaker. We haven’t seen things like that in the last thirteen years.

No, we sure haven’t. I am pleased that Watts put the balanced budget at the center of his case for Gingrich (even though the budget was not really balanced, once you account for the debt held by the so-called trust funds associated with Social Security and Medicare — it still was a good start).

But I wonder if Watts has considered all the implications of his argument. As speaker, Newt Gingrich superintended a real reduction in federal spending as a share of GDP: It was 21 percent in 1994, and down to 18.2 percent by 2000. That is, in my view, his most praiseworthy legislative accomplishment. But, as I argue in the current edition of National Review, the notional surpluses of the Gingrich era were the result of a double-barreled approach to fiscal balance, built in part on two significant tax increases. Gingrich et al. opposed those tax increases, but did not rescind them.

In 2000, the year of our largest notional surplus, tax collections hit nearly 21 percent of GDP. In 2011, they’ll be about 14.4 percent of GDP, according to the Congressional Budget Office, only about 70 percent of their 2000 level.

Economic conditions and tax policy are of course quite different in 2011 from what they were in 2000. Consider the longer-term picture: From 1994 to 2000, taxes averaged 19.2 percent of GDP, hitting a high of 20.6 percent in 2000. Even accounting for the surpluses, we ran a net deficit during that period, with the average annual deficit at 0.3 percent of GDP. In contrast, 2000–11 tax collections averaged 16.8 percent, a difference of 2.4 percent compared with the Gingrich era. The average deficit from 2000–11 was 4.2 percent of GDP. Put another way, the difference in tax collections during those two periods was 2.4 percent, and the difference in deficits was 3.9 percent. Spending increased during the post-Gingrich era, and increased radically in recent years: From 1994–2000, spending averaged 19.6 percent of GDP; from 2000–11, spending has averaged 20.8 percent of GDP. That’s a significant difference, but not an earth-shaking one. On the other hand, consider that from 2009–11, spending has averaged a much larger 24.7 percent of GDP, a level that would be sustainable at no level of tax collections in American history, including the years of World War II. 

As a share of GDP, Americans paid higher taxes in the Gingrich years than they pay now — significantly higher. Likewise, government spending as a share of GDP was substantially lower. So, my fancy new economic theory goes like this: higher taxes + lower spending = smaller deficits. Democrats might recall that the 1990s were not a time of Dickensian austerity or a national policy of Social Darwinism; Republicans ought to remember that the 1990s, despite the higher taxes, did not result in the Swedenification of America. For comparison, consider that the average tax level of the Reagan years was 18.2 percent of GDP, closer to the Gingrich years than to the present.

A balanced budget is the result of tax policies and spending policies. If Watts is calling for a return to the taxing-spending balance of Gingrich’s speakership, he is calling for a significant tax increase, which puts him at odds with the man he just endorsed. Practically speaking, anybody who is calling for a balanced budget who has not proposed something on the order of $1.5 trillion in annual spending cuts is calling for a tax increase. That does not mean that he is calling for a tax increase of the sort that Barack Obama and his congressional allies wish to see implemented. But it does mean that he is calling for a tax increase of some sort.

Gingrich, of course, is not calling for a tax increase, but for a very large tax cut. Which is to say, he wishes to return to the attractive fiscal outcomes of the 1990s without returning to the policies that produced them. This does not seem very sensible to me.

It bears repeating — daily — that taxing and spending is in the main the outcome of decisions made in Congress, not in the White House, which is why it makes sense to write about the Gingrich surpluses, rather than the Clinton surpluses. And which is why an intelligent Republican presidential candidate might want to begin his fiscal agenda with this guiding principle: “I shall be joined at the hip with Paul Ryan.”

A final thought: Those Gingrich supporters who dismiss Jon Huntsman on the grounds that he served as an ambassador under the Obama administration should take to heart this 2008 Associated Press report:

J. C. Watts, a former Oklahoma congressman who once was part of the Republican House leadership, said he is thinking of voting for Obama. Watts said he is still a Republican, but he criticizes his party for neglecting the black community. Black Republicans, he said, have to concede that while they might not agree with Democrats on issues, at least that party reaches out to them.

“And Obama highlights that even more,” Watts said, adding that he expects Obama to take on issues such as poverty and urban policy. “Republicans often seem indifferent to those things.”

Now, who wants to call J. C. Watts a RINO? Anybody?

Tags: Fiscal Armageddon , Politics

Governor Cuomo Backslides


New York’s fiscal situation is so dire that Gov. Andrew Cuomo was doing a pretty good Rick Perry impersonation there for a bit: cutting spending and generally behaving like a fiscal adult. Deroy Murdock voiced the pleasant surprise shared by many conservatives: “Cuomo’s performance thus far has advanced the cause of limited government in the Empire State far more than did his past three predecessors — the hapless David Paterson, the pantsless Elliot Spitzer, and the clueless Republican, George Elmer Pataki.”

Unhappily, that golden hour was not destined to last. Governor Cuomo is under pressure from union goons and other progressive groups, and probably from his own hereditary inclinations, to make the New York State tax code more “progressive,” meaning more redistributive and therefore more amenable to political manipulation. Rather than the current system, which applies a single rate to all taxable income — an arrangement that puts all taxpayers on the same side of the fight — the Left wants a graduated, class-warfare income tax. Putting taxpayers at odds with one another, rather than at odds with the tax-consumers, is a necessary step in the progressive divide-and-conquer campaign. And Governor Cuomo is obliging.

The deal being hammered out in Albany right now will be presented as an across-the-board tax cut for everybody in the state. And, technically, that’s true. The sneaky part is that the highest income group is currently paying a surcharge on top of the regular state income tax, and that surcharge was due to expire. Under the nascent deal, the top bracket will pay a lower effective tax rate than it is paying today, but not as low a rate as it would have had the surcharge simply expired. Basically, the surcharge has been reduced but made permanent.

As Capital Tonight puts it:

An overhaul of the state’s tax code will likely see five different brackets that will generate $1.9 billion in revenue for New York, a source with knowledge of the plan said.

The brackets under consideration are $40,000 and lower; $40,000 to $150,000; $150,000 to $300,000; $300,000 to $2 million and $2 million and higher.

There would be no change for those making less than $40,000, while the rate for those making $2 million and higher will decrease from 8.97 percent to 8.82 percent.

Those high earners would actually be in store for a larger cut if a surcharge is allowed to expire at the end of the month, but pushing this plan through now would allow lawmakers and Gov. Andrew Cuomo to claim they are slashing taxes for nearly everyone.

So, that’s a $2 billion tax increase, roughly, over current law — about half of what the progressives wanted.

Tax increases are not a categorical evil: Budgets have to be balanced, and spending has to be paid for. If you’re going to buy yourself an aircraft carrier, a highway, or a splendid little war in the Congo, you’re going to collect taxes to pay for it. What’s bothersome to me in this story isn’t the tax increase per se: It is first and foremost the revision of the tax code in a destructive way, and, secondarily, the fact that the additional revenue is going to be used not for essential and necessary services but for such Democrat-enrichment schemes as a stimulus-spending campaign and, as the New York Times puts it, “new programs to train poor urban youths,” i.e., using the unemployed to employ the unemployable through employment programs employing those who administer employment programs for the unemployed who are going to stay unemployed.

But long after the fiscal damage is done and the fruitless (at best) spending has been forgotten, the graduated tax system will remain as a cudgel in the hands of the political class.

Why should New York State have graduated income-tax brackets? Why should the country, for that matter? Here’s what Governor Cuomo has to say: “In New York under the permanent tax code, an individual making a taxable income of only $20,000 pays the same marginal tax rate as an individual making $20 million. It’s just not fair.” If Governor Cuomo were taking my writing course, I’d knock ten points off for question-begging. Why is a single rate inherently unfair?

A single rate is not only progressive, it is perfectly progressive: One’s income-tax liability is perfectly proportional to one’s income: At 10 percent, that means $10 on $100 in income, and $10 million on $100 million in income. Income taxes progress proportionally to income. What would be onerous would be a capitation tax, meaning that if government spending averages $25,000 per capita, then everybody owes $25,000 in taxes, regardless of income. (There is, in my view, an excellent moral case for precisely that kind of tax, but that’s an argument for another day.) Under a flat tax, if my income is 20 times yours, my tax liability is 20 times yours. I do not see how that is unfair, or why a tax liability 25 or 50 times as large would be more fair, or why the definition of “fair” necessitates that one’s tax liability be disproportionately increased relative to one’s income. Governor Cuomo has not made that case, probably because nobody ever has challenged him to do so. The “fairness” of graduated tax rates is just part of the intellectual weather, something that progressives present as though it required no argumentation or explanation. Conservatives should take the opportunity to force them to make the case — they’ll still get away with the robbery, of course, but maybe not the glibness.

Governor Cuomo deserves the thanks of his constituents for the good work he did in his first months in office, and he deserves the thanks of the nation for demonstrating the life expectancy of fiscal rectitude among Democratic governors: about the same the life expectancy of a robin, and there’s a long winter ahead before New York can expect to see another one of those.

—  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.

Tags: Fiscal Armageddon , General Shenanigans , States , Taxes

Bailing Out the Bail-Outers



Next up on the bailout parade? The FHA, probably:

The Federal Housing Administration, which backs about a third of U.S. home loans, could require billions of dollars in taxpayer aid if the housing market continues to deteriorate, a Republican lawmaker said.

The agency, which provides liquidity by protecting lenders against borrower defaults, could follow in the footsteps of Fannie Mae and Freddie Mac, the mortgage companies that were taken into government conservatorship in 2008, Representative Jeb Hensarling said at a House hearing today.

“FHA is a disaster in the making and if we don’t do something it may become the next Fannie and Freddie,” said Hensarling, the fourth-ranking House Republican. “If the FHA was a private financial institution, likely someone would be fired or fined and the institution would find itself in receivership.”

As somebody once put it: FHA is the new sub-prime. And whatever’s below subprime, that’s where it’s headed. Why? Congress is authorizing the FHA to up the size of the mortgages it will back from  $625,500 to $729,750 (which many Republicans rightly opposed), and it’s doing the occasional near-billion-dollar deal, including building a hospital in Trenton, N.J. (Yes, you’re right, FHA stands for Federal Housing Administration, not Federal Hospital Administration. No, I couldn’t begin to guess how they justify that.)

So, a growing portfolio, increasing its risk exposure, expanding its operations: FHA must be flush with cashola, right? As it turns out . . .

Last month, an independent actuarial analysis concluded that the net worth of the fund stood a 50 percent chance of falling to zero or near zero, which could force it to seek taxpayer support for the first time.


The Obama administration is going to spend the next week trying to convince you that today’s employment numbers are good news rather than bad news. But keep the housing market in mind when the president tells you the sun is shining on the job market: What coordinates highly with mortgage defaults isn’t being upside-down or seeing a large drop in your home value — what coordinates highly is being unemployed. Housing continues to tank, and it is tanking hardest in those cities that had the worst reversals in the job market. Reports the Financial Times:

The worst house price falls were in those areas scarred the most by high unemployment and foreclosures. Three cities posted new lows since the first reading of the index in 2006 – Las Vegas, Atlanta and Phoenix.

“It is a bit disturbing that we saw three cities post new crisis lows. For the prior three or four months, only Las Vegas was weakening each month,” said Mr Blitzer. “Now Atlanta and Phoenix have fallen to new lows too.”

Hey, Barack Obama voters in Atlanta, Phoenix, and Las Vegas: Are you better off than you were four years ago? I think not.

But conservatives should remember to ask the follow-up question: Hey, constituents of Harry Reid, John McCain, and Saxby Chambliss: Are you better off than you were four years ago? Conservatives are focused, with good reason, on Barack Obama, but it’s Congress that writes the budgets, Congress that writes the regulations, and Congress that is going to have to take the lead in getting the economy back where it needs to be. And it’s Congress that just upped the FHA loan limits, which are now higher than Fannie Mae’s and Freddie Mac’s — something John Boehner never should have let see the light of day.

A republic, guys — not a bank, not an insurance company, not a hedge fund: a republic. If we can keep it.

Tags: Debt , Deficits , Fiscal Armageddon , Housing

Is the Fed Pursuing Our Interest or Banks’ Interests?


The Fed signals that it intends to hitch our national wagon to Europe just as Europe is going over the edge, and the Dow jumps 4 percent. Maybe I’m missing something.

All that Bernanke & Co. did yesterday was to lower the dollar-financing cost for banks in Europe, where inter-bank lending is locking up — for good reason. But Europe’s problem is not its banks and their access to dollars. Europe’s banks are in trouble because European government bonds are in trouble, and European government bonds are in trouble because European governments are in trouble. European governments are in trouble because they spend too much money. The Fed can’t change that, and hasn’t tried.

The question is: What is the Fed thinking? Is it looking out for the United States, or is it looking out for the banks?

The generous interpretation of the Fed’s action goes like this: The Fed hasn’t really risked anything — it’s just making it easier for them to borrow from one another, because a European banking crisis would cause a 2008-style credit crisis worldwide. With U.S. economic indicators improving modestly, the main worry of U.S. policymakers right now is economic events outside our own borders. The Fed can’t work out the Europeans’ finances for them, but it can soften the blow to international credit markets, and thereby do a service to the American economy.

The ungenerous interpretation of the Fed’s action goes like this: Everybody knows the jig is up, but lo these many years after the 2008 crisis, trillions in bailouts later, the banks are still in weak shape, we haven’t really reformed our financial rules, there’s insufficient transparency to really know what kind of shape everybody is in, and the world’s biggest banks just got downgraded on Tuesday. We’re buying time and hoping for the best, and giving all our favorite bankers an extra little margin of error to get their acts together before the big kaboom gets heard ’round the world.

I’m open to either interpretation, and to other interpretations.

But here is what is beyond debate: Europe has not solved its fiscal problems. Europe shows no sign of being on the verge of solving its fiscal problems. Europe shows no sign that it wants to solve its fiscal problems. If Ben Bernanke is having “in for a penny, in for a pound” thoughts, he needs to think again: We do not have the resources to bail out Europe, and nobody has the resources to bail out the United States.

Congress should make it clear — today — that the Fed’s mandate does not extend to bailing out Europe’s banks and Europe’s governments. This is especially true after the secrecy and unaccountability with which it conducted the $7.7 trillion shadow bailout on top of TARP.

Market indicators suggest that investors are expecting interest rates to go lower and money to remain easy — even the ChiComs loosened up a little bit yesterday. And why had Beijing been so tight up until now? Inflation. In a poor country such as China, a little inflation can cause civil unrest. But rich countries aren’t any different, just richer. Years of low interest rates and loose money haven’t solved our fundamental economic problems, but they have created the potential for seriously disruptive inflation, and you’ll notice that gold prices and oil futures have been going up, too. That isn’t a sign of confidence in the dollar or the euro.

One of the big problems at MF Global (as at Lehman Bros.) was off-balance-sheet accounting, using various bookkeeping shenanigans to hide the fact that liabilities were dwarfing assets. The United States government does that both in the obvious sense — pretending that future entitlement liabilities don’t really exist — but in a more subtle sense, too: Wealth isn’t abstract numbers. Wealth is real stuff: food, oil, steel, houses, people performing useful services, etc. You can flood the world’s financial systems with liquidity and create the impression of economic activity, but that does not create one automobile, pair of shoes, or bag of coconuts. You can finesse the economic metrics, but that doesn’t make you any richer.

Government spending in the United States (at the federal, state, and local level) is about 40 percent of GDP, and we’re borrowing 40 cents of every dollar we spend. We’re spending the money now, with promises of future benefits that amount to (literally) more than all the money in the world, and promising to pay off today’s spending out of future taxes, as though the future is not going to want to spend the money on itself. That is not a program for stability. Not in Europe. Not here.

—  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.

Tags: Debt , Deficits , Europeans , Fed , Fiscal Armageddon

Of German Bonds and American Prosperity


The question I am asked most often is: What will it take to get the government to stop running up the debt? A Republican president? A Republican president with a Republican House and a Republican Senate? A Republican president named Ron Paul?

My guess is that none of these is sufficient. The government will continue to borrow money for as long as the market remains willing to lend it money. Which is why Germany’s failed bond auction is of interest. From the Financial Times:

Germany saw one of its poorest debt sales on Wednesday in what was seen as a failed auction by many market participants amid fears the eurozone’s debt crisis is spreading all the way to Berlin.

Marc Ostwald, at Monument, said “I cannot recall a worse auction … If Germany can only manage this sort of participation, what hope for the rest. Yields are at completely the wrong level.”

Germany is suffering because of pan-European problems, not because of specifically German problems. But when Europe’s most solid economy is having a hard time raising money in the marketplace, that should be a wakeup call.

When governments take bonds to market and the market doesn’t want them, governments have two options: One, stop borrowing money. Two, raise interest rates in order to make bonds a more attractive investment. The ability to borrow money is the thing that makes being in politics fun and rewarding, so No. 2 is the go-to option.

In the United States, we have historically low interest rates right now. We’re also monetizing a great deal of debt, which is an invitation to inflation, and governments also raise interest rates to fight inflation. So there is good reason to suspect that interest rates will go up in the future. (No, I’m not guessing when or by how much. If I could forecast that with any accuracy, I’d have Lloyd Blankfein skimming the bubbles off my Moët-filled swimming pool.) But we do have some historical precedents to consider. As recently as June of 1984, interest rates on 30-year Treasury bonds went to 13.44 percent. To do a little thought experiment: What would happen if it suddenly cost Washington 13.44 percent to finance our deficit spending?

At an interest rate of 13.44 percent, it would cost just a little over $2 trillion a year to finance our current $15 trillion or so in debt — not counting future borrowing. Total federal revenue in 2010 was also just over $2 trillion. Which is to say that if financing costs should return to what they have been within recent memory — hardly a historically unprecedented level — then the cost of financing our debt could equal or exceed all federal revenues combined. If you’re in a position necessitating that you borrow money just to pay interest on your current debts, you’re in a pretty weak credit position, and so there will be pressure for interest rates to go even higher. A government isn’t a household, but to use the household comparison: If your income is $5,000 a month and the minimum on your credit cards is $5,500 a month, you’re going to have a hard time getting new loans.

In that situation, we could cut all federal spending beyond debt service to $0.00 and still not be able to pay our bills. No turkey on our national table that Thanksgiving.

There are two ways of looking at American prosperity. One way is say: Wow, Americans are only 5 percent of the world’s population, but they get to divvy up nearly 25 percent of the world’s economic output — lucky Americans! The other way is to say: Wow, Americans are only 5 percent of the world’s population, but they produce nearly 25 percent of the world’s economic output — lucky world! Thanks, Americans!

Both are valid. But however you look at it, it is absurd that a country with 5 percent of the world’s population and a quarter of its economic output cannot responsibly manage its public finances. As we count our blessings this week — and our national cup truly runneth over — it is worth keeping in mind that American prosperity is neither random nor accidental, nor is it a fixed state of affairs. This didn’t just fall out of the sky: We are prosperous in no small part because we had good ancestors — and we should work to be better ancestors ourselves, that future Americans may continue to count the prudence of their forefathers among their many blessings.

—  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.

Tags: Bonds , Debt , Deficits , Europeans , Fiscal Armageddon

Ten Things to Keep In Mind for 2012



Between the candidates’ debates and my conversations with the Occupy Wall Street protesters, it seems to me that there is a persistent, dangerous disconnect between our political conversation and reality. On the right, we’re still too focused on taxes, rather than on the spending that drives taxes. On the left, they’re . . . the Left, still, unfortunately for them.

With an eye on 2012, here are ten important but sometimes counterintuitive facts to keep in mind:

1.      There is no austerity.

2.      There was no deregulation.

3.      You can’t trust Republicans on spending.

4.      Wall Street loves Democrats.

5.      People who voted for Barack Obama on civil-liberties grounds are fools.

6.      If you aren’t for massive entitlement reform, you’re for massive tax hikes.

7.      But taxing the rich won’t close the deficit.

8.      The housing bubble was largely a political creation.

9.      Well-meaning politicians are just as dangerous as self-serving ones.

10.  There’s no way out of this jam without big cuts to popular programs.

The real debate isn’t whether to cut, only what and how much and when. (My preferred answers: almost everything, a lot, now.)

Tags: Fiscal Armageddon

The Bankers’ Panic Starts in 3, 2, 1 ...



The banks still aren’t alright:

Wells said delinquencies of more than 90 days in its main portfolio of consumer loans – including mortgages and credit cards — rose 4 per cent to $1.5bn, the first increase since 2009. Early stage delinquencies in its retail business remained flat at 6.13 per cent after falling for three quarters. The bank increased its provision for consumer-banking losses for the first time in two years.

“The economic recovery has been more sluggish and uneven than anyone anticipated,” said John Stumpf, Wells chief executive. [Editorial note: Not anyone, chief.]

Citi said the percentage of mortgages that were 90 days delinquent rose for the first time in almost two years — from 3.87 per cent in the second quarter to 3.88 per cent in the third. John Gerspach, chief financial officer, said the bank was seeing “re-defaults” on mortgages that had been modified to make them more affordable. “We could begin to see increased delinquencies and net credit losses,” he said.

About this, a few thoughts:

1.      We are going to have a mortgage and credit-card delinquency problem for as long as we have an unemployment crisis. Being upside-down on the mortgage is not why borrowers default: Unemployment correlates strongly with mortgage defaults.

2.      Frank-Dodd is not going to bring stability to the financial-services sector. It does all of the wrong things and few of the right ones.

3.      We have some very weak state finances, in California, Illinois, and New Jersey, for instance. But the credit-default market thinks that the biggest U.S. banks are even weaker than these basket cases.

Politicians promise the moon on the economy, and it is fair to hold them to the standard they set for themselves. Barack Obama, in particular, must be judged harshly when one considers the difference between his economic promises and his economic delivery. But in the real world, we have to keep in mind that public policy is only one factor affecting growth, employment, trade, etc. — an important one, to be sure, but not the only one. We’ve seen some good ideas coming out of the Republican leadership: Ryan’s entitlement-reform proposals, Ron Paul’s $1 trillion in cuts, Rick Perry’s energy-liberalization program, and more. Getting even one or two of those done would be a real career-making achievement for any president or congressional leader. Government can’t fix every economic problem, or even most of them, but it can fix its own finances and rationalize regulation. It is imperative that it do so.

We have a lot to do, and the time available for doing it diminishes daily. The banks aren’t really the problem, but a symptom of a larger and deeper problem that has been afflicting the U.S. economy for decades.

Tags: Fiscal Armageddon

Ghost in the TelePrompTer



Ladies and gentlemen, the president of the United States . . .

Mr. Speaker, senators, members of the House, distinguished colleagues, legions of the unemployed, my fellow Americans:—

Let me begin by saying—Wait, legions of the unemployed? Is somebody messing with my TelePrompTer? Can I, uh, wait . . . okay—sorry. Yes, sorry, let me begin by saying, “I’m sorry.” Really, truly, sincerely sorry. About this. About all this. But, hey, it’s not like I don’t have some skin in the game, here. Quite a bit, in fact: I’m guessing that if unemployment goes up much in the next ten to twelve months, I’m, uh, basically done. That’s all she wrote, as I might say if I were trying to be folksy. Would that help? Folksiness?

Look, I don’t know what you want me to do. I gave a speech. I gave several speeches. Beautiful speeches. I’m here to give a speech again. You know how beautifully I speak, especially compared to George W. Bush. Remember him? Remember that guy? Awful times, right? But it’s okay. I’m here. I’m in charge. And I’m speeching, er, speaking, giving a speech, as it were. Let me be clear about that.

You know, you learn a lot on this job. There’s no real preparation for it. I mean, there’s some preparation you can get, like being a governor or a mayor, or an executive in charge of a large enterprise of some sort. Uh, yeah. But, you know, as things turned out, I didn’t. And I think I may have made a little strategic error, here, to the extent that I’ve in a way conflated the significance of giving a speech with the significance of actually doing something about the thing you’re giving a speech about. It’s mostly a communication problem, meaning that I’ve done a lot of communicating about the problem, the problem of unemployment, but my communication hasn’t been effective, at least not in the sense that might show up in the unemployment data, or, for that matter, in your paychecks and bank accounts. But I have made it very clear: I am opposed to unemployment. Unequivocally so. I have a vision, and in my vision unemployment is very low, especially around October and  November of next year. That’s my vision. Now, some people don’t share that vision. Because they like unemployment. Or something. I’m pretty sure my vision is mine, and shared by the members of my party, and of course the top experts I was in grad school with and that guy over at the New York Times who always writes what I’m already thinking. That’s our vision. A vision for America.

Except . . . and let me be clear, I’m putting it all out there, since, really, at this point I don’t have much left to lose that I’m not pretty darned likely to lose next year, anyway. So, I’ve decided to set aside the proposal I was going to make, which was—surprise!—extending the payroll-tax cuts, some make-work spending on stuff I’m still going to call infrastructure and clean energy, but which I’m sure as heck not going to call “stimulus” anymore—lesson learned!—and extending unemployment benefits, and more or less the same stuff I’ve been doing for a while now, but more so, or still more so, or, compared with the original stimulus, less so, but less in a way that is more on top of the more we did before, if you get my meaning. No?

Okay, so this is it: Armageddon. Really, is this the prepared text? I don’t think this is the prepared text. Okay, whatever. So, since the speeches aren’t really working, here’s what I’m going to do.

First, I’m putting a cap on federal spending. I’m not talking about any baseline shenanigans. I mean that I will veto any spending bill that goes one thin dime beyond what we spent this year. I’ll leave it to Congress to figure out how to do that. Yeah, Paul Ryan: I’m a big-picture president, now. You can figure out the details, tough guy. Good luck with that Medicare reform.

Second, I’m raising your taxes. Sort of. Since I’ve deleted Nancy Pelosi from my iPhone contacts list, I have a strange feeling of liberation. So, I’m asking Congress to pass the Simpson-Bowles tax plan: Cut the rates, eliminate the deductions, net tax increase, but I can make it look like a tax cut. I’m really that clever. In fact, if nobody has any use for Jon Huntsman — and I’m pretty sure nobody has any use for Jon — he’s got basically the same idea, so I’m going to put him in charge of it, and that’s the closest he’s going to get to the White House. You guys want bipartisanship? He’s still a Republican, and it’s too late to kick him out. So, there you have it. But we’re not doing this Bush-style: no “sunsetting” the changes so we have to fight over them every couple of years. This is one and done, at least as far as I’m concerned.

Third, I’m calling for the repeal of Sarbanes-Oxley and Frank-Dodd. I know: counterintuitive, right? Instead, we’re going to impose stricter old-fashioned capital requirements and limits on leverage, with the particulars specific to each class of financial firm — banks are one thing, insurance companies are another. You guys like simple, straightforward regulation, right? It doesn’t get much simpler than that. And speaking of things financial, we’re selling the Fannie and Freddie portfolios on a ten-year schedule, and then we’re closing them down.

Fourth: Lisa, Tim, Hilda, Steve, Rebecca, and Lisa — did I already mention Lisa? Well, Lisa twice, then. You’ve served your country honorably. Really. A fine crew. But you’re fired. It’s a bottom-line issue, guys. It’s not like you were going to keep your job in a Romney administration, and God knows what Perry would do with you. “Treat you pretty mean,” I believe the saying is. Also . . . Ben? Ben, I can’t fire you, you know, but keep that CV fresh, is all I’m saying.

So, now, I’ll pretend to take your questions, and try not to roll my eyes . . .

Tags: Fiscal Armageddon , Unemployment

Kill the USPS


The pending default of the United States Postal Service is our national fiscal crisis in miniature: a collection of self-interested government employees working desperately to save their salaries and benefits, with the actual service provided by the agency — if, indeed, “service” is the right word — a distant second, if it is considered at all.

We ought to close down the USPS. It was a government agency created to solve a problem, and today that problem is solved, and we no longer need a centralized federal monopoly to facilitate intercity communication, the delivering of parcels, etc. News stories reporting the travails of the USPS invariably note that the agency has been ravaged by e-mail, but this gets things precisely wrong: E-mail has relieved us, nationally, of the burden of maintaining a postal service for delivering letters. The emergence of private couriers, FedEx, UPS, et al., have likewise rendered USPS’s delivery services obsolete. Letters and other “household to household” mail accounts for less than 10 percent of USPS’s volume, most of which is junk mail.

Funny thing about junk mail: The average American household receives more than 40 pounds of it a year (and God help you if you ever give Restoration Hardware your mailing address!), and more than a third of that goes directly into the trash, unread. At Chez Williamson, I’d estimate, the junk:mail ratio runs at least 50:1 by weight or volume. Whereas my frontier ancestors no doubt looked forward to the arrival of the mail, for me it is a chore: sort through five pounds of rubbish for the odd freelance paycheck or wedding invitation. Since Social Security deposits went electronic, even the aged have lost their main reason for looking forward to the mail delivery. Which is to say, the United States Postal Service is now the opposite of a service — it’s a nuisance. If we are forced to bail it out, at the very least we should force it to change its name to U.S. Department of Distributing Worthless Woodpulp, Filling Up Landfills, Destroying Untold Acres of Woodland, and Keeping Surly Postal Clerks Fat.

Like our public-school systems, and other government enterprises such as General Motors, the USPS is not so much being crushed by the expenses of its current personnel as by its retirees. It has a $5.5 billion retiree payment due, it’s running up against its $15 billion debt limit, and it doesn’t expect that it will even make payroll next year. It has cut costs significantly, reduced its headcount, etc., but it is still in the business of selling a product that nobody wants. It has a monopoly on a now-worthless service: Call it the curse of Lysander Spooner!

All of which is excellent news, really: We, as a society, have solved a problem, and no longer need (if we ever needed it) the government monopoly to provide this service for us. Hurray for us!

But the USPS doesn’t see it that way. It’s an “independent” (ho, ho!) federal agency, but the regular ol’ federal agencies, you can be sure, would act exactly the same way. Let’s imagine, for a moment, that some ingenious scientist suddenly cooked up a cheap, plentiful, inexhaustible source of energy that could be easily mass produced and impose no externalities on the environment. The world would celebrate — except at the Department of Energy, where they’d be working around-the-clock to figure out how to save their jobs. Likewise, vast swathes of the government exist either to solve problems that already have been solved or that will be solved shortly, one way or the other. USDA programs created to save the family farm have long outlived the era of the family farm and merrily make payments to gigantic agribusiness consortiums. The Rural Electrification Administration was created by FDR, who could always picture himself saying, “Let there be light!” But the lights have been on in the sticks for a long, long time, and still the agency’s offspring, the Rural Utility Service, chugs on and on, never to pass away. Until quite recently, we were still paying the emergency tax to fund the Spanish-American War of 1898. We haven’t sent a blimp into battle in God knows how long, but the nation maintains the National Helium Reserve near Amarillo, Texas, presumably for the strategic imperative of making our enemies talk like Mickey Mouse.

And that brings us back to the Mickey Mouse outfit in question, the United States Postal Service. USPS had a good run, neither snow nor rain nor gloom of night and all that. Job well done! But the job is over, and it is time to move on. It is time to either shutter the USPS or fully privatize it and let nature run its course.

—  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.

Tags: Fiscal Armageddon

The Burden


There are about 12.4 million local-government employees in these United States, with a monthly payroll of about $51 billion. There are about 4.4 million state-government employees, with a monthly payroll of about $19.4 billion. And there are about 3 million federal employees, with a monthly payroll of about $15 billion. (For detailed figures, the Census: The federal numbers are from 2009; it’s worse now.)

More than 50 million Americans are on Medicaid. More than 100 million Americans receive health-care benefits at public expense, either through entitlement programs such as Medicaid and Medicare or through benefit programs for government employees.

So that’s a public sector of about 20 million government employees administering a welfare state with at least 100 million clients (and here I’m just combining Social Security and Medicaid, to avoid double-counting). Another way to say that is that 40 percent of the U.S. population is living at the expense of the other 60 percent (and it probably is more like half and half). More than a third of working-age U.S. adults are unemployed, and the central government is the largest employer. Economically speaking, we’re a fighter with one hand tied behind his back.

I recently spoke with a charming young woman who is a Ron Paul supporter. She said Representative Paul’s ideas have “universal appeal.” I asked her why, if his appeal is universal, he is so unpopular. She responded: He hasn’t had a fair chance to get his message out. Earlier this week, I spoke with a charming older gentleman, who is a former member of Congress. He said the solutions to our national fiscal problems are obvious. I asked him why, if the solutions are obvious, implementing them is so unpopular. He said it was a question of educating the American people. Both of these explanations are preposterous.

The American people are excruciatingly well educated about the relevant fact: the checks hitting their bank accounts, monthly or fortnightly. They will not be educated out of them. A generation ago, they might have been shamed out of it, but shame is now impotent. They will not willingly give up those checks, and there will always be a Barack Obama out there to profit by pretending that pillaging half of the country to bribe the other is a kind of moral crusade, rather than a lightly disguised form of armed robbery. Bear in mind that most of this money does not go to help the poor: This is not a country in which 40 percent of the people are poor. Government workers are routinely overcompensated, often lavishly so. This is not government inefficiency; this is corruption, on a scale that is vast and grotesque.

Pres. Ronald Reagan was fond of citing this passage, misattributed to Alexander Fraser Tytler, Lord Woodhouselee:  “A democracy cannot exist as a permanent form of government. It can only last until the citizens discover they can vote themselves largesse out of the public treasury. After that, the majority always votes for the candidate promising the most benefits from the public treasury with the result that the democracy always collapses over a loose fiscal policy, to be followed by a dictatorship, and then a monarchy.” And here we are, at the inflection point — not at the brink of becoming undemocratic, but at the brink of becoming a deeply dysfunctional democracy with a loose fiscal policy indeed.

Some 35 cents out of every dollar in take-home pay in this country comes in the form of a welfare benefit, and about 10 percent in the form of government salaries: The total burden is about 45 percent of personal income. I propose we make that a standard metric for judging the seriousness of small-government programs: Reduce that burden, and you’ll have done something worthwhile.

—  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.

Tags: Fiscal Armageddon , General Shenanigans

Steal These Ideas


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.

Tags: Debt , Deficits , Fiscal Armageddon

What Happens Monday


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.

Tags: Debt , Deficits , Fiscal Armageddon

Downgrade Watch: Weekend Edition



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.

Tags: Debt , Deficits , Fiscal Armageddon

Back-of-the-Envelope Balanced Budget


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.

Tags: Balanced Budget , Debt , Deficit , Fiscal Armageddon

The Next Deficit-Reduction Deal


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.

Tags: Debt , Deficits , Fiscal Armageddon

Uh, Guys?


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.

Tags: Fiscal Armageddon

The Democrat Downgrade: Reality and Repercussions


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.

Tags: Fiscal Armageddon

The One True Debt Ceiling


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.

Tags: Debt , Deficits , Fiscal Armageddon


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