Tags: Fiscal Armageddon

How Much Credibility Does the GOP Have on Taxes?


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

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

Here’s Cantor:

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

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

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

So, how’s that looking?

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

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

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

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

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

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

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

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

But: How much?

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

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

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

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

Tags: Debt , Deficits , Despair , Fiscal Armageddon , Taxes

Growth vs. Austerity


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

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

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

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

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

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

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

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

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

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

Tags: Debt , Deficits , Fiscal Armageddon

Hope Is Not a Policy


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

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

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

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

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

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

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

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

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

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

Don’t bet the Treasury on it.

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

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

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

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

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

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

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

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

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

An aside . . .

I very much enjoyed this little bit of snark:

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

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

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

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

Tags: Debt , Deficits , Despair , Fiscal Armageddon , General Shenanigans

Two Ways to Approach a Deficit


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

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

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

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

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

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

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

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

Tags: Debt , Deficit , Despair , Fiscal Armageddon , Municipal Bonds

The Federal Fire Sale


The federal government wants to sell some old buildings and vacant land. This is not a bad idea, so far as it goes. What it is not, though, is a plan for reducing the federal deficit — though in some quarters it has been embraced as such. That is ridiculous.

The proposed Civilian Properties Realignment Commission, modeled on the old Base Realignment and Closure Commission, which was charged with rationalizing our military-installation footprint starting back in the 1980s, would identify underused federal real-estate assets to offload, if buyers could be found. Federal holdings are a mess: George W. Bush was the first modern president to even order an accurate inventory of them to be taken. Federal waste in asset management is of course vast and deep — but neither vast enough nor deep enough to make much of a hole in the deficit if it is redressed. The Obama administration reckons that about $3 billion could be saved in the first year. (The real savings come from avoiding the cost of maintaining the buildings, not in generating revenue from their sale; i.e., these are permanent reductions in spending rather than one-time revenue gains, a fact that is to be celebrated.)

So, $3 billion saved: Cheers to that. In 2011, the federal government is spending about $3 billion every seven hours or so.

I am not opposed to finding efficiencies. Thrift is a great American virtue (or was once). But these sorts of penny-ante projects, which generate a lot of happy talk about belt-tightening and prudence and sobriety as often as not end up being a way to not talk about the serious budget reforms that must be enacted.

Our friends at the Heritage Foundation have identified a larger asset they’d like to see the government liquidate: its gold holdings. These are worth a couple of hundred billion dollars — real money, but still only a few months of this year’s $1.6 trillion deficit. As much as I’m for downsizing Leviathan and doing what it takes to reduce the deficit, I’d advise against selling off the gold: If the United States should ever need to rebuild its currency — say, in the wake of a dollar collapse from hyperinflation resulting from incontinent spending and the monetization of the resulting deficits (Crazy, right?) — some gold might come in handy, particularly since Standard & Poor’s and the big bond investors are not convinced that the “full faith and credit” of the United States is what it once was.

Repeat as necessary: Medicare, Medicaid, Social Security, and national defense is where the spending is. Raising taxes enough to cover that spending and stabilize the debt would mean an 88 percent increase in every federal tax — not just for “the rich,” but for everybody, according to IMF estimates. Raising taxes on the middle class to support Social Security and Medicare for the middle class is a shell game. You may as well just cut the benefits: essentially the same outcome, but more cleanly executed.

You are not going to balance the budget on tax hikes only on people you do not like. You are not going to balance the budget on pulling out of Afghanistan (wise as that might be) or on eliminating foreign aid (desirable as that is) or on shuffling Uncle Sam’s real-estate portfolio (prudent though that may be). You are not going to balance the budget on eliminating waste, fraud, and abuse.

There is a caveat to that last one: We spend most of our money (more than half) on entitlements and welfare, and those are rife with abuse. Prof. Malcolm Sparrow of Harvard estimates that net health-care fraud in the United States runs $100 billion to $500 billion a year, with a great deal of that paid out by the federal government. (Miami alone is estimated to account for $3 billion in Medicare fraud annually.) Peter Orszag has estimated that 30 percent of Medicare spending (which totals more than a half-trillion dollars a year) is wasted, largely through overpayment for services. Sen. Orrin Hatch has put combined Medicare-Medicaid fraud at $200 billion a year. For comparison, the Iraq War cost $140 billion in its most expensive year.  

Getting a hold on entitlement fraud is not going to balance the budget, either, not alone, but it will do a heck of a lot more than a federal garage sale — and it’s something that should be done even if we were running a surplus.

—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 , General Shenanigans

The World Is Not Going to End in May



Have you heard about these nuts who think that the world is going to end in May?

Not those nuts. These nuts.

Which is to say, Austan Goolsbee is full of it. He told the Chicagoland Chamber of Commerce: “If we hit the debt ceiling, we default.”

No, we don’t.

Debt service accounts for about 7 percent of federal spending. Current revenues will more than cover that, regardless of whether the debt ceiling is raised. We can pay our debts  — and our troops, too — out of present revenues. But if we fail to raise the debt ceiling, we’re going to have to economize on some other things: discretionary spending, for sure, but probably also Social Security, Medicare, and Medicaid. But here’s the thing: Any meaningful budget-reform deal is going to have to address discretionary spending, Social Security, Medicare, and Medicaid, in the long term. There is no way around that. (Defense spending needs to be cut, too, but defense is a different thing from farm subsidies and NPR money: a core national priority. You don’t lump national defense in with national embarrassments such as the Small Business Administration or research grants for Obama’s magic unicorn-powered economy.)

Default? No.

In truth, the federal government expects to collect $2.2 trillion in revenue this year. The problem is that it wants to spend $3.8 trillion.

You can do a lot with $2.2 trillion. You can fund Social Security, Medicare, Medicaid, SCHIP, debt service, unemployment, welfare, and national defense at their 2008 levels. My recollection of 2008 is that it was not exactly a time of Spartan fiscal discipline.

Funding the majority of the federal government at 2008 levels is not “default.” It’s not anything like default. It’s not in the same category of things, events, or concepts as default.

So, don’t buy what Austan Goolsbee is selling.

What Republicans should do from here is to follow up on present plans to enact legislation ensuring that spending is properly prioritized — debt service first, then defense, then everything else — and take their sweet time about moving the official debt ceiling. They probably won’t get entitlement reform before 2012 — sorry, I wish it were otherwise, but I don’t think so — but they can get serious cuts and, more important, procedural limits on future borrowing and spending. And that’s what they should hold out for.

If a temporary return to 2008 spending levels is going to throw this country into shock and horror, then deficit hawks may as well pack it up and go home now, and just wait for the bond market to cut up Uncle Sam’s credit card — because what really has to be done is going to be more painful than that. But I don’t think there’s going to be blood in the streets.

I’ve heard responsible people on both sides of the aisle concede that they have a pretty good idea of what a deal probably will look like: a watered-down version of the Ryan entitlement reforms combined with something like the Simpson-Bowles tax increase — which is structurally a lot like the Ryan tax cut (lower rates, fewer exclusions and deductions). (For whatever it’s worth, Wall Street expects taxes to go up, and nobody seems terribly distraught about it.) Grover Norquist will scream that Republicans have violated their pledge — and he’ll probably be right, and it will still be the right thing to do if it balances the budget and constrains the future growth of the government.

And that’s the fight conservatives still have not won: We like to think that the American people are on our side when it comes to the size and scope of government, but they aren’t. Reforming entitlements is still going to be hard. Even reforming stupid spending is going to be hard: We all had a good laugh at Harry Reid’s federally subsidized cowboy poetry festival, but there are a million morsels of pork just like it, not to mention big non-pork spending that has to be addressed, too. And now, with a weak economy and a gloomy near-term outlook, conservatives are stuck doing the job we really should have done back in 1994–2000. But it’s not going to get any easier.

But on the debt ceiling? Let them sweat.

—  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

Raising the Debt Ceiling


I have some tongue-in-cheek thoughts about the debt ceiling over on The Corner. But here’s a serious one: The statutory debt ceiling is not the only debt ceiling. There’s a real debt ceiling, too. Who wants to find out where it is?

(If you are interested in Jim Rogers, you can read my interview with him, “Jim Shrugged,” here.)

Tags: Debt , Deficit , Despair , Fiscal Armageddon

A Credibility Deficit


Among sentences I do not like to write: Andrew Leonard is mostly right about this one. Tax cuts do not generally increase revenue, and Republicans should stop saying otherwise.

But he’s not quite right to treat all these statements as equivalent:

Here’s Rep. Joe Walsh, (R-Ill.) the self-styled “conservative Tea Party activist” who upset Democrat Melissa Bean in the 2010 midterms, on ABC’s “This Week.”

“In the ’80s, federal revenues went up,” said Walsh. “We didn’t cut spending. Revenues went up in the ’80s. Every time we’ve cut taxes, revenues have gone up. The economy has grown.”

Walsh may be a freshman in Congress, but he’s got the party line down pat. Here’s Senate Minority Leader Mitch McConnell saying in July that the Bush tax cuts “increased revenue, because of the vibrancy of these tax cuts in the economy.” Here’s Speaker of the House John Boehner saying last June that “over the last 30 years . . . lower marginal tax rates have led to a growing economy, more employment and more people paying taxes,” he said.

Walsh’s statement is false if you read it as having an implicit “because.” It is true that revenue went up in the 1980s, that we did not cut spending, and, as Mr. Leonard himself points out, that revenue has gone up following tax cuts, etc. One could make a useful (and true) argument that we can in many situations expect revenue to increase following tax cuts — but, in most cases, not by as much as it would have without the tax cuts. For instance, if the U.S. government were not laboring under a crippling deficit and debt (Imagine!), one might plausibly argue that we could both cut taxes in a given situation and maintain current levels of spending without increasing the deficit. (Might! Might! You’d obviously want some high-grade forecasting on that.) But our current straits suggest that the longstanding Washington compromise — Democratic rates of spending and Republican rates of taxation — produces very large deficits.

McConnell’s statement is false.

Boehner’s statement, like Walsh’s, depends on how much implicit causality you read into it. That is not a trivial distinction: Low tax rates really can and do contribute to a growing economy, which can and does contribute to growing tax revenue. What is not true is that income-tax rate cuts pay $1.30 on the dollar, and that revenue has risen mostly because of (rather than despite) tax cuts — and Republicans should stop claiming otherwise.

The scale of the growth effects of tax cuts is important inasmuch as the naïve supply-siders’ argument credits tax cuts with basically 100 percent of economic growth. But we probably were going to have some economic growth in the 1980s or 2000s without the tax cuts. We’ll probably have some growth from 2011–20 with or without tax cuts (or tax increases).

I am all for having the budget police take revenue effects into account when scoring tax policies, but those effects are not as dramatic as Republican rhetoric would have it. And we should also take into account the possibility that large and persistent deficits may diminish economic growth (this seems to have occurred to a few Republicans already) and consequently that tax cuts that contribute to such destructive deficits have doubly negative effects on revenue. (I do not know that to be the case; I believe that it is a possibility that should be kept in mind.)

There are no free lunches in taxation, or anywhere else.

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

Tags: Debt , Deficits , Despair , Fiscal Armageddon , Taxes

Enron Writ Large


Standard & Poor’s decision to downgrade the long-term outlook for U.S. sovereign debt came as a shock. It shouldn’t have. Credit-rating agencies (CRAs) such as S&P are a government-chartered cartel, with constraints on competition and a customer base guaranteed by statute. They are the sleepy backwaters of the financial world — and they are always the last to know. As one investment strategist put it to me this morning: We’ve been watching this train go by for a while now, and this is the caboose.

The textbook example of this is the case of Enron. All of the credit-rating agencies had Enron rated like stacks of solid gold until a few weeks before Jeff Skillings’s financial underpants finally hit his ankles. But long before the CRAs woke up, the markets had driven Enron’s stock price down to almost nothing. The ratings agencies aren’t the opening act — they’re the fat lady sweating out the final aria in our national fiscal Götterdämmerung.

A little over a year ago, the markets already were telling us that the government’s story about how it is finally going to fix its finances is pure fiction. Yields on U.S. Treasury bonds went higher than those on a number of blue-chip corporate bonds, leading your obedient servant to remark:

Who has better credit than Uncle Sam? If you ask the bond market, that elite list includes Berkshire Hathaway, Procter & Gamble, Lowe’s, Johnson & Johnson, and a host of other blue-chip corporate borrowers. The U.S. government has the ability to levy taxes on the largest national economy in the world, a vast and fearsome revenue-collection apparatus, and more than two centuries of constitutional government under its belt. P&G has Tampax.

As in the case of Enron, the smart money gets gone long before credit downgrades start hitting the headlines. As noted in this column, PIMCO, the world’s largest bond fund, got clear of U.S. Treasuries some time ago, following the lead of a number of hedge funds. The oil-exporting countries are dumping U.S. debt, too. Perhaps they know something we don’t?

Actually, they know something we do: Nothing about this is a secret. In the phrase adopted by Rep. Paul Ryan, what is coming is the most predictable economic crisis in our history: a nominal national debt of more than $14 trillion, a real national debt ten times that, and Barack Obama standing between the reformers and the needed reforms with a veto pen and excellent chances of being reelected in 2012. This isn’t sophisticated macroeconomic analysis; this is that anvil falling out of the sky onto the head of Wyle E. Coyote, and you don’t have to be a super-genius to figure out that it’s going to hurt like hell when it hits him. Even S&P gets that.

And that’s probably the reason this announcement hasn’t really sent big-time shock waves through the markets: It’s just confirming what everybody already knows: Washington’s finances are Enron writ large.

But unlike Enron, Washington has the power to tax, the power to print money, and an executive able to resist financial realities for a remarkably long period of time. Thus we have Obama administration officials lashing out at S&P today — as though it were the agency’s fault that Obama delivered an entirely implausible speech about deficit-control last week. Austan Goolsbee declared: “I don’t think that the S&P’s political judgment is right.” (What about their financial judgment?) Taking the prize for mealy-mouthed politics-speak is Treasury official Mary Miller, who said, “We believe S&P’s negative outlook underestimates the ability of America’s leaders to come together to address the difficult fiscal challenges facing the nation.” Never mind the vacuousness of her claim and the banality of her language — “come together,” indeed — did she not watch the president’s speech last week? Because he made it pretty clear that coming together with fiscal reality is not on his agenda, never mind coming together with Republicans to do something about the entitlement bomb or even discretionary spending. Look for more kill-the-messenger rhetoric from the Obama administration as the meltdown heats up.

Here’s the thing to watch: Nobody really knows what interest rate the bond market is going to demand to finance U.S. debt in the future. Right now, the Fed is buying most of the bonds Treasury puts up for sale, and simply printing money to do that. This “quantitative easing” is scheduled to end this summer, at which point Washington will find out what it is really going to cost to finance its debt. In FY2010, we spent $164 billion just on interest payments on the debt — up 18 percent from the year before. And that’s at historically low interest rates. If rates should go back up to their 1970s or 1980s levels, we could easily end up spending more on debt service than we spend today on big-ticket items like Medicare or national defense. That’s the hidden landmine on our national balance sheet: We don’t have to be worried only about the trillions of dollars in new debt that Obama proposed to load upon our backs, but also about what that proposal is going to do to the cost of paying interest on the debt we already have. We already know that we cannot afford the new debt that Obama would have us endure, but the real crisis will come when we find out that we cannot afford the debt we already have.

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

Tags: Fiscal Armageddon

About Those Medicare Savings


Our current unfunded entitlement liabilities run about $100 trillion.

President Obama proposes to “strengthen” Medicare through a price-fixing panel called the Independent Payments Advisory Board (IPAB).

CBO took a look at IPAB and estimated that it might save us $28 billion over the next ten years, i.e., next to nothing.

And then it took another look and lowered its estimate from next to nothing to nothing:

For 2015 and subsequent years, the IPAB is obligated to make changes to the Medicare program that will reduce spending if the rate of growth in spending per beneficiary is projected to exceed a target rate of growth linked to the consumer price index and per capita changes in nominal gross domestic product. CBO’s projections of the rates of growth in spending per beneficiary in the March 2011 baseline are below the target rates of growth for fiscal years 2015 through 2021. As a result, CBO projects that, under current law, the IPAB mechanism will not affect Medicare spending during the 2011-2021 period.

You have to admire the president: To go out and give a morally preening speech like that, with IPAB front and center, on the assumption that nobody’s reading the footnotes.

Tags: Debt , Deficit , Despair , Fiscal Armageddon

Yes, Entitlement Spending Must Be Cut


A question for the young ones: Perhaps you’d like an 88 percent tax increase? Perhaps not. If not, then the United States government must spend less on the major entitlement programs — Social Security, Medicare, and Medicaid. And that has to happen approximately now.

Rep. Paul Ryan’s budget addresses Medicare and Medicaid spending, and the Democratic whining about that fact already is under way. Representative Ryan’s budget would cut some $4 trillion off the deficit in ten years. And we cannot get spending under control without reforming the entitlements — they are the main drivers of spending. Axing NPR and foreign aid is not going to balance the books.

The Democrats’ plan will be to make Paul Ryan the most hated man in America, if not the world. The campaign will be — and already is — personal. It will be personal because the facts are not on their side. Our choices are: 1. raise taxes severely, and pretend that that is not going to have catastrophic economic consequences; 2. court a national fiscal crisis on the Portugal model but on a significantly larger scale, and pretend that that is not going to have catastrophic economic consequences; 3. cut spending.

If I were a Republican strategist, I’d be preparing to make sure that the number 88 is on the tip of every tongue. Ryan’s entitlement reforms are intelligent and they are reasonable — an 88 percent tax hike is neither. And that’s the choice.

Tags: Debt , Deficit , Despair , Fiscal Armageddon

What 2 Percent in Cuts Looks Like


“An outrage!”

So says the guy who was once elected as a Republican about the very reasonable budget proposed by the Democrat. Strange times.

“Proportionally, the cuts that are inflicted on New York City are an outrage,” [NYC mayor Michael] Bloomberg said a day after Gov. Andrew Cuomo announced a tentative $132.5 billion state budget deal that is expected to restore more than $136 million of threatened education money to the metropolis.

Governor Cuomo has turned out to be a pleasant surprise so far. (Don’t worry — I’m sure he’ll get worse!) The budget is getting balanced with no new taxes or borrowing. Not too shabby, especially for New York. Other governors should be tipping their hats — he isn’t doing this in Montana.

Perhaps Cuomo has noticed that Texas is now home to more Fortune 500 headquarters than New York is, and has decided that it would be a lot easier to balance future budgets with a healthier tax base, one with higher levels of employment and better wages. Perhaps the mayor should take a subway ride up to the Bronx, where the nominal unemployment rate is 12.5 percent (and the real unemployment rate God alone knows how much higher) and ask himself if weighing the city and state down with more taxes and more debt is really the best way to turn things around.

Either way: Can we call this the official end of Bloomberg for President? The great manager is looking overwhelmed.

But three cheers for Andrew Cuomo. For now.

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

Tags: Debt , Deficit , Despair , Fiscal Armageddon , Taxes

You Can’t Reframe $14.3 Trillion


Let me introduce you to the Worrell Professor of Anglo-American Studies (really!) at Wake Forest University, Prof. David Coates, the even dimmer Democrat’s George Lakoff. Professor Coates, writing in the Huffington Post, is interested in (can you guess?) “Reframing the Deficit Debate,” as his headline puts it. “Reframing” means “engaging in rhetorical obfuscation,” or hoodwinking the proles, which is fun to do but doesn’t make the numbers come out any different.

Yeah, I know, all this panicky deficit talk is just part of the Vast Right-Wing Conspiracy — the one apparently headed by former Clinton chief of staff and Obama deficit-panel appointee and dyed-in-the-wool Democrat Erskine Bowles, who co-authored a warning that the country is headed for “the most predictable economic crisis in its history.” Predictable by whom? Not by Prof. David Coates of Wake Forest U.

(Okay, before I go on: “Professor of Anglo-American Studies”? What in hell is that? I picture a guy spending long, fruitless, frustrated grad-school afternoons poring over ancient Brooks Bros. inventory lists and real-estate listings in Greenwich, Conn.)

The guy’s a professor, but he writes like an undergraduate circa 1993, one who has just discovered the words “dominant discourse”: “The dominant discourse in national American politics these days is a discourse on deficits.” The phrase “dominant discourse” reappears, and it is Professor Coates’s goal to correct it. He proposes to do this by repeating things that are at best half true and at worse less than half true. Item No. 1 on his rhetorical agenda is declaring: “We are not broke.” You’ve heard that one a lot lately, no? It’s like there was a memo or something.

Here’s Coates: “We are not broke. We are certainly not broke in the sense of facing any immediate problem of financing public debt. On the contrary, the federal government is currently able to borrow at a historically low rate of interest — lower indeed now than immediately before the 2007–8 financial melt-down.” He does not write, though I assume he knows, that one very large factor influencing those currently low interest rates is that the federal government is not selling a lot of bonds to the real bond market. The Fed, under the “quantitative easing” program, is buying most of what Uncle Sam is selling, and it is simply printing the money to do so. As readers of this column know, players in the real bond market already are saying that they will not finance U.S. borrowing until interest rates go up. Which means that we probably will face an “immediate problem of financing public debt” at the current artificially low rates once the government has to actually, you know, sell all those bonds to willing investors. But if you define “Not Broke” as “Ben Bernanke can still exnihilate money into existence, can’t he?” then, true, we’re not broke, and never will be. And neither will Zimbabwe.

Coates “reframing” ploy No. 2:  Cutting spending won’t really reduce the deficit. Here’s our man: “Cutting programs is not the best way to cut the deficit. . . . At least 75 percent of the current shortfall in government revenues is a product of the recession. Another 11 percent is a product of decisions taken, by this administration and its predecessor, to wage a series of Middle Eastern wars. The best way to cut the deficit is to end those wars and to retrigger sustained economic growth, not least by greater public expenditure on infrastructure and human capital.” But we were running a deficit before the recession, and the recession does not explain the generally negative fiscal outlook that preceded it. Neither do tax cuts for “the rich.” As the CBO puts it: “The sharp rise in debt stems partly from lower tax revenues and higher federal spending related to the recent severe recession and turmoil in financial markets. However, the growing debt also reflects an imbalance between spending and revenues that predated those economic developments.” Spending on what? At the height of the Iraq War, the federal government was spending more on education than it was on the war. (And state and local governments spent far more on education than Washington did.) The Iraq War, CBO reports, cost $709 billion; the Obama stimulus will cost more than that ($814 billion) by the time it has run its course, CBO finds. (An excellent exploration of all this and more is here.) Coates complains about the Bush tax cuts and says we need tax increases on “the rich” to balance things out; in reality, Bush’s tax cuts for the middle class ($2.2 trillion) cost far more in forgone revenue than the cuts for “the rich,” which can be measured in measly billions, rather than trillions.

You see how this reframing thing works, right? You get tenure for this stuff, which is awesome.

Given the obvious deceit of the deficit hawks’ campaign, it is “little wonder then,” as Professor Coates puts it, “that public opinion polls regularly put deficit reduction low on the list of the nation’s pressing issues.” Except for the 40 percent of Americans who listed it as their No. 1 or No. 2 concern (as opposed to 56 percent for jobs).

How broke are we, really? This broke:

Our national debt is $14.3 trillion or so. Our GDP in 2010 was about $14.7 trillion. On the more commonly cited metric of publicly held debt to GDP, the United States, at 59 percent, is closer to European bailout-bait such as Spain (63 percent), or even basket case Portugal (83 percent), than it is to responsible countries like Australia (22 percent), New Zealand (26 percent), or Canada (34 percent). Under CBO’s most realistic scenario, our debt would hit 185 percent of GDP by 2035. I write would because, of course, it won’t: Unsustainable levels of U.S. debt will cause a major global financial crisis well before reaching that level. Probably more like the 110 percent CBO sees us hitting by 2025. The year 2025 is not some Buck Rogers date in the sci-fi future; that’s fourteen years from now.

All of this could be dealt with, and dealt with good ’n’ proper, Coates thinks, if our stumbling president would just learn how to reframe it. (Question: If a professor of Anglo-American studies says our first black president suffers mostly from failure to heed the advice of professors of Anglo-American studies, does that make him a racist? Discuss among yourselves.) 

Coates: “The President would do well to remember that the important thing about legacies is that they have to be defended. Given the accommodatory strategy now prevalent in his White House, there is a genuine and growing danger that his administration may yet be the first in U.S. history to have surrendered its legacy before it has even left office.” (Confession: I included that last bit only as a pretext to note that “accommodatory” is a word unknown to the rascals who edited my Webster’s Third. Maybe it’s not English, but Anglo-American.)

But never mind all that: No problem here, nothing to see, move along, we’ve got reframin’ goin’ on! And when those Social Security checks stop showing up (or when you start cashing them for radically devalued dollars), remember that Professor Coates of Wake Forest U. assured you that it was only a matter of reframing.

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

Tags: Debt , Deficit , Despair , Fiscal Armageddon , Nutty Professors

Why the Union Machine Must Be Dismantled


Holy crow: A former SEIU executive spells out his plan for destroying JP Morgan, creating a new financial crisis, and destabilizing the American economy, via Glenn Beck’s Blaze.

Listen to the tapes and make your own judgment.

Tags: Fiscal Armageddon

Biggest Bond Fund Dumps U.S. Debt


So, the guy behind the world’s largest bond fund is dumping U.S. government debt.

Got your attention yet?

Bill Gross of Pacific Investment Management Co. (PIMCO) is no great fan of  U.S. government debt to start with: His fund also zeroed out its holdings of Uncle Sam’s IOUs back in 2009, but had added some back into the portfolio. No more. He’s not buying what Washington is selling, and he’s urging others to dump U.S. bonds, too. Bloomberg reports:

Gross in his February commentary urged investors to reduce holdings of Treasuries and U.K. gilts and buy higher-returning securities such as debt from emerging-market nations. “Old-fashioned gilts and Treasury bonds may need to be ‘exorcised’ from model portfolios and replaced with more attractive alternatives both from a risk and a reward standpoint,” Gross wrote.

So, what’s wrong with U.S. government debt? With deficits running at insane levels but interest rates still low, the risk-reward ratio is out of whack, even compared to “emerging-market” countries — read: those Third World regimes whose farcical finances we used to regard with a mixture of scorn and pity, until we began emulating them. All the money-printing down at the Fed is taking a toll:

Gains in so-called headline inflation matter more for the U.S. economy than Fed Chairman Ben S. Bernanke suggests and rising oil prices may cut U.S. gross domestic product by a quarter to half a percentage point, Gross said March 4 in a radio interview on “Bloomberg Surveillance” with Tom Keene.

“Bernanke tends to think this doesn’t matter — at least in terms of headline versus the core — we do,” Gross said.

What this means, of course, is pressure on the U.S. government to offer higher interest rates on its bonds. Gross says that the rates need to go up about 1.5 percent to reflect market realities. And market realities, ignored for the past few years, are going to start reasserting themselves as “quantitative easing” ends and the Fed stops buying U.S. debt that the markets don’t want.

As things stand, interest on the debt (at about 6 percent of all federal spending) is equal to about one-third of all discretionary spending combined (about 19 percent of the budget). Current forecasts have debt-service costs alone amounting to nearly $1 trillion by 2020, consuming 20 percent of all federal tax revenues. That’s a vicious circle: Bigger deficits add to the total debt, which drives up the cost of debt service, which creates bigger deficits, shampoo, rinse, repeat, and wake up in Argentina circa 1999–2002.

Which gets us back, as usual, toward the one inevitable, undeniable fact of American life at this moment: The major entitlement programs — Social Security, Medicare, Medicaid — other “mandatory” spending, national defense, and interest on the debt make up more than 80 percent of federal spending. Everything else put together accounts for less than $1 in $5 of government outlays. Assuming we don’t default on our national debt, interest on the debt is the one spending item that is truly off the table. Even if we cut national-defense spending to zero, that would only get us just over halfway toward eliminating the trillion-dollar deficit headed our way in 2012. (We aren’t cutting national-defense spending to zero.) Meaning that major reform of the entitlement programs is not optional. It is do or die.

Bernanke & Co. have baked inflation into this cake, and catastrophic state and local finances mean that Washington really can’t pass off its spending schemes onto the governors, mayors, and state legislatures.

You may think the Ryan Roadmap looks harsh and disruptive. But we simply must start dealing with these things right now, while we have some resources, some options, and some time. It will be much more harsh and disruptive to try to deal with these things after the fiscal crisis is upon us, when inflation is skyrocketing, unemployment is through the roof, and the markets start demanding a very high premium to finance the debt of Washington, the states, and the cities, if indeed investors are willing to do so at all.

We are in an extraordinarily dangerous period, one that calls for real leadership in Washington, where the geniuses in charge are currently locked in a death struggle over whether to cut nothing or next to nothing.

NPR? Foreign aid? Food stamps? That isn’t going to do it. The fact that we’re even having a discussion about whether we have to federally subsidize experimental opera companies in Topeka suggests that the message has not quite hit home. Maybe when the Social Security checks stop coming, Americans will notice. Which is to say, when it’s too late.

To be clear, PIMCO in and of itself is not disastrous — it is just a mile marker on the road to Fiscal Armageddon. But it is one worth noting.

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

Tags: Debt , Deficits , Despair , Fiscal Armageddon

Gangster Government, Pinocchio Government, Whatever


Michele Bachmann  (and I) call it “gangster government.” The Washington Post calls it “three-Pinocchio” government, assigning the Democrats’ most recent budget claims a credibility rating of roughly You’ve Got To Be Kidding Me. Seriously: Even the Washington by-God Post is getting the message about Fiscal Armageddon.

At issue are Democratic claims that they are offering the Republicans a meaningful compromise on spending cuts, that they are meeting them “halfway.” Which, as the Post points out, is true, if your baseline is an imaginary budget that was never enacted. Congressional Democrats never could be bothered to actually pass a budget on their watch (and, seriously, if you were them, would you want to put all those numbers together in one handy place? Or would you rather spread the spending out so it’s hard to see?), so Obama’s 2011 proposal was never enacted. That means that the only real numbers we have to go on are actual 2010 spending, from which Democrats propose to trim a grand total of approximately nothing.

Quoth the Post:

The Democrats’ posturing that they have met Republicans “halfway” on budget cuts does them no credit. Either they should take a stand and say they won’t accept any further cuts, or they should begin a real negotiation that leads to a higher number. Obama signaled he was willing to deal when he said he was “prepared to do more.” But the persistent claims of going “halfway” when in fact Democrats have done little to engage Republicans on the issue will only hurt their credibility in the long run.

Given the uncertain constitutional status of Obamacare, and given the sneaky way it’s been budgeted for, how about we hold onto that $105 billion in implementation spending that Michele Bachmann is so excited about until we’ve got a Supreme Court ruling on the mandate, etc? That does not seem to me unreasonable, and making the Republicans’ $60 billion in cuts $165 billion would move us that much closer to national solvency.

If somebody isn’t already planning the next rally on the Mall to remind Republicans of why they’ve got a House majority and what we expect them to do with it, it’s time to get moving. The Republicans have been properly wary of overreach thus far, but this is the point at which political momentum can easily be dissipated. Spending-cut precedents have to be established, with real credibility, before we move on to the next — and significantly harder — task, which is straightening out the entitlement mess. (By which I mean straightening out the Medicare mess, mostly. Social Security and Medicaid are relatively easy fixes, but Medicare is going to be a beast.)

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

Tags: Barack Obama , Budget , Debt , Deficit , Despair , Fiscal Armageddon

The Conservative Case for Raising Your Taxes (And I Mean: You)


Here is an exercise that requires some assumptions. Just thinking out loud, here.

First: Assume a simple universe, one in which public finances operate according to simple, Newtonian physics–type rules: Higher tax rates mean precisely proportional higher taxes, lower tax rates mean precisely proportional lower taxes, government spending comes in on budget, etc. (Yes, I know — imagine.)

Second: Assume a world in which public policies, to be enacted, must represent, at some level, a compromise between John Boehner, Harry Reid, and Barack Obama. (Assume a political world that is very much like the present political world.) Or between: Boehner, Reid, and a Generic Republican president;  or between Boehner, Mitch McConnel, and Obama.

Third: Assume we as a nation in fact want to balance the budget, and want that deeply enough to do uncomfortable and unpleasant things to make it happen. (That most implausible assumption of these, I reckon.)

Fourth: Assume that we can conduct policy without sending the economy back into recession. (Assume that the positive effects of our budget-balancing discipline equal or outweigh the negative effects of changes in taxing and spending levels.)

Some conditions: We have a very large deficit — 40 percent of federal spending, last time around. We have very large hidden liabilities — unfunded entitlement obligations that will prove massively expensive if we try to pay them and massively disruptive if we do not. There are limitations on our ability to act, and limitations on our ability to not act.

Our issues are taxing and spending. We have some choices, and they are, in the order I prefer them on this particular evening in January:

1.   Cut spending, raise taxes.

2.   Cut spending, maintain taxes.

3.   Cut spending, cut taxes.

4.   Maintain spending, raise taxes.

5.   Maintain spending, maintain taxes.

6.   Maintain spending, cut taxes.

7.   Raise spending, raise taxes.

8.   Raise spending, maintain taxes.

9.   Raise spending, cut taxes.

You may notice a readily identifiable pattern at work here. The Party of Option 1 in Washington in a very small one. Nobody will admit to being a member of the Party of Option 9, but I fear they are in control of the government. (Somebody wants a huge deficit. Is it you?)

The real-world reasons for not raising taxes are many. The ones I find most persuasive are these: 1. Tax hikes have unpredictable effects on taxpayers’ behavior, but one very likely consequence is higher levels of tax-avoidance strategies, resulting in economic inefficiencies; 2. If you succeed in raising revenue, you will simply encourage Congress to engage in higher levels of spending. Okay. I will grant the power of both of those arguments, but I am writing here about a simpler model, in a simpler exercise.

Under my assumptions, I would prefer to cut spending and raise taxes right now, to reduce the deficit as quickly as possible, to eliminate the deficit as quickly as possible, and to begin paying down the debt as quickly as possible. There are many prudential reasons for this, one of which is that I believe the risk of a major crisis in American public finances is very dangerous, more dangerous than is widely appreciated, and ameliorating that risk is worth the price of higher taxes. But I also have simpler reasons for this: We can cut the budget now, and we can raise taxes now. We can cut the NEA and we can cut the military and we can cut Medicare spending. But the debt is piling up, and debt service is, basically, non-negotiable.  As debt service takes up a bigger and bigger share of our budget, that is a bigger and bigger piece of the budget that we cannot cut in the future. The worst kind of fiscal crisis is the one that we can neither tax nor cut our way out of, and avoiding that — avoiding even an elevated risk of that eventuality — seems to me worth the price of firing with both barrels against the deficit now.

Here is the thing: All books must eventually balance. We are going to pay $1 in taxes for every $1 in spending, and for every $1 in borrowing we are going to pay $1 plus interest — very, very low interest, at the moment, but who knows if that will be the case in a year? In five years? If you think interest rates for U.S. sovereign debt will remain low — and I hear from those of you who believe so all the time — what are you willing to risk against the possibility that you are wrong? How did you do predicting the 2008 financial crisis, and do you believe government finance, in the United States, is less complicated than bank finance, or insurance-company finance? My view is that the price of being wrong about that risk is potentially very high.

What kind of tax hike would I endorse? I remain very much in favor of the Simpson-Bowles tax proposal. (And “Simpson-Bowles” already sounds like ancient history, doesn’t it? Like Smoot-Hawley? Like the Great Compromise?) Which is to say, I am sympathetic to a tax increase that reduces overall income-tax rates but eliminates most (I would prefer all) deductions, including the destructive mortgage-interest deduction. Many Americans would pay lower taxes under such a reform; many would pay higher taxes, but the net effect would be a tax increase, albeit a modest one. (My very strong preference is for a flat, no-deductions tax, one rate for all forms of income: personal income, dividends, capital gains, inheritances, whatever.) Simpson-Bowles contemplated a 3:1 ratio of spending cuts to tax hikes. Some conservatives I spoke with said they would prefer 5:1 or 10:1. I think I would prefer 5:1, too, but I would take 1:1.

I believe that restoring order to our public finances is not an issue but the issue, the thing that will be the source of endless contentious post-facto debate forever if we get it right — but will define our era if we get it wrong. (And not in a good way.) I believe our public finances are a more important issue than Islamic terrorism or Chinese mercantilism, and a more pressing threat to our national well-being. (I do not believe that those are unimportant; I believe they are less important.)

That being the case, I cannot agree with those who say, for instance, that military-spending cuts should be off the table, or those who say that tax increases, even modest ones performed in the course of simplifying and improving our tax code, are off the table. (Hello, Ryan.) And I will argue that this is a conservative position, conservatism being rooted in prudence and a certain amount of risk-aversion when it comes to political institutions and their grand plans, such as ending poverty or eradicating evil.

I also have in mind a kind of Pascal’s wager for the debt. If those of you who believe that the debt and deficit are basically manageable problems rather than a clear and present danger to the republic are wrong, finding out you are wrong is really, really going to hurt. If I am wrong — what? We shift taxes forward, paying them ourselves instead of foisting them onto our children and grandchildren. No doubt that will do some economic damage. But we also cut the size and scope of government, which will provide some economic benefits, and which is, separately, something that I regard as desirable regardless of how much government we can afford. (The cost is not my only reason for opposing an expansive state.)

Given that the real-world politics of getting this done are difficult and imperfect, and given that at the real policy level rates of change matter more than absolute levels, am I wrong in my fundamental argument that we should throw everything we can at the debt, as fast as we prudently can?

And if I am wrong, why?

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

Tags: Debt , Deficit , Despair , Desperate Measures , Fiscal Armageddon , Taxes

State Budget Shenanigans Monday


Two big things in the news today:

1. California is expected to reveal its state budget. I cannot imagine that there is going to be any good news in there.

2. Texas will reveal its revenue forecast, meaning the state will learn how big a shortfall it is actually looking at.

Should be an interesting compare-and-contrast exercise as the two big guns work out their fiscal woes.

Tags: Debt , Deficit , Despair , Fiscal Armageddon , The States

No, Ezra Klein, Obamacare Will Not Reduce the Deficit


Ezra Klein, he of recent “the Constitution’s old, and stuff” fame, is one of the great and most persuasive cheerleaders for the belief that Republicans cannot repeal Obamacare and remain fiscally responsible since — as everybody knows! — Obamacare reduces the national debt by $100 billion over the next ten years. He makes his case here. Taking a slightly different but in many ways similar view in National Review Online, Avik Roy concedes that, purely as a matter of parliamentary process, Obamacare’s deficit-reduction features have to be taken into account. (Roy is no doubt correct in his analysis of the process questions.)

Klein makes a persuasive case, in the same way that a lawyer who knows his client is guilty makes a persuasive case. Yes, if we confine ourselves to a very narrow range of debate and a very narrow selection of possible outcomes, then Obamacare does reduce the deficit over the next ten years, and its repeal would add to it over that time.

But there is a bit more to the story than that.

First, it is worth asking how complete and how accurate the CBO’s estimates are. You know who has some useful insights into that question? The CBO. For instance, CBO director Douglas Elmendorf readily concedes that “estimates of the effects of comprehensive reforms are clearly very uncertain, and the actual outcomes will surely differ from our estimates in one direction or another.” One direction or another. (Guess!) It will not come as a shock to observers of federal activities ranging from the ethanol program to the Iraq war that — unthinkable as it may seem — a government program may under some circumstances exceed its budget. If Obamacare spends not a nickel more than the CBO estimates, and if Obamacare produces every dime of the revenue promised, then it will prove a deficit-reduction tool over the next decade, by definition: That’s $411 billion in spending and $525 billion in revenue. I wonder if Ezra Klein would like to place a very large bet with his own money on the possibility of that happening. I would. In fact, I am willing to bet not only that there will be significant variation, I am willing to bet on the direction of that variation, at least insofar as the spending goes. (I would not be surprised if revenue projections fell short, too: Those tax increases are going to be even less popular when people start paying them.)

You know who seems sympathetic to my position? Douglas Elmendorf of the CBO, who writes: “CBO’s cost estimate noted that the legislation maintains and puts into effect a number of policies that might be difficult to sustain over a long period of time. For example, the legislation reduces the growth rate of Medicare spending (per beneficiary, adjusting for overall inflation) from about 4 percent per year for the past two decades to about 2 percent per year for the next two decades. It is unclear whether such a reduction can be achieved, and, if so, whether it would be through greater efficiencies in the delivery of health care or through reductions in access to care or the quality of care. The legislation also indexes exchange subsidies at a lower rate after 2018, and it establishes a tax on insurance plans with relatively high premiums in 2018 and (beginning in 2020) indexes the tax thresholds to general inflation.”

Take a look at the 1965 cost and revenue projections for Medicare and compare them to the reality of Medicare today. In 1965, Medicare was going to be totally solvent on a 1 percent payroll tax. How’d that work out?

And it is worth noting that Obamacare does not vanish into the legislative ether after this ten-year window we’re talking about. What happens in 75 year? In 100 years? There are very reasonable estimates that Obamacare will add many billions of dollars to the national debt over a longer timeline, even assuming that the bill is not monkeyed with piecemeal to reduce the taxes and increase the benefits — which is to say, assuming Washington suddenly is populated by saints and stoics.

This discussion, as framed by Klein, also rewards the Democrats for engaging in dishonest parliamentary shenanigans. As Klein well knows and the CBO reminds us, the Medicare “doc fix” was spun off into a separate bill specifically in order to keep some costs from being counted on Obamacare’s tab. As Cato’s Michael Tanner notes, “In a letter to Congressman Paul Ryan (RWI), the Congressional Budget Office confirms that if the costs of repealing the payment reductions, known as the “doc-fix,” as reflected in HR 3961, were to be included in the cost of health care reform, the legislation would actually increase budget deficits by $59 billion over 10 years.” This is a cheap accounting gimmick, conveniently excluded from the discussion. But it certainly is convenient to be able to account for the costs of Obamacare without having to account for the cost of bribing the doctors, and the congressmen who are most sensitive to them, to accept it. That is, of course, far from the only cost-shifting mechanism at work.

More broadly speaking, what the Obamacare-reduces-the-deficit argument neglects is this: Repeal is not the end of the story. Repeal need not be followed by . . . the void. If we want to reduce the federal deficit by $100 billion over ten years, there are lots of ways to cut $10 billion a year from spending. The federal government in 2004 estimated that it spent $10 billion a year on services for illegal aliens. Cut it. Done. Color me skeptical that we have to spend nearly $1 trillion over a decade to get $10 billion a year in spending cuts. If I’m reading the budget right, HUD spent $45 billion in 2007. And Republicans have some very good ideas for health-care reform that also will reduce federal outlays, thereby reducing the deficit. It is not as though the choice is Obamacare or nothing.

Treating the CBO ten-year estimate as though it is the alpha and the omega of the Obamacare-deficit discussion is a debater’s trick, one that we should not fall for. We have a good deal of history and experience on our side, and good reason for skepticism — if only we had a word for a political philosophy grounded in history, experience, and skepticism, in standing athwart history . . .

– Kevin D. Williamson is a deputy managing editor of National Review and author of The Politically Incorrect Guide to Socialism, wherein you can learn more about the socialistic intrusions of Obamacare, and which now available at You can buy an autographed copy through National Review Online here.

Tags: Debt , Deficit , Despair , Fiscal Armageddon , Obamacare

National Debt Tops $14 Trillion


Or so they say.

I say: You wish.

– Kevin D. Williamson is deputy managing editor of National Review and author of The Politically Incorrect Guide to Socialism, now available at You can buy an autographed copy through National Review Online here.

Tags: Debt , Deficit , Despair , Fiscal Armageddon


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