There is much that I do not like about the new bipartisan deal on tax rates. One of those things is the extension of unemployment-benefit spending without compensatory cuts elsewhere in the budget. I think unemployment insurance is one of the better social safety-net programs, but that $56 billion still has to come from somewhere. There’s a $161 million NEA budget, the $600 million a year that ethanol subsidies put in the pockets of BP alone, $16.5 billion in 2010 earmarks . . . that failed $50 billion foreclosure-prevention program would have just about covered it. It’s not like there are no cuts to be made.

What is worse is this: It is yet another product of consumer-driven economic policy, premised on the mistaken belief that robust consumer spending, which is alleged to (but does not) account for 70 percent of the nation’s economy, is the key to recovery. Buying stuff does not make you rich; making stuff makes you rich. Investing in the capacity to make stuff and provide needed services makes you rich. What does the tax deal do for people who want to save and invest their money in productive enterprises that create real wealth and real jobs? Not much.

The payroll-tax holiday will probably mean that the average American family goes out to dinner once a month more often: If a guy earning $50,000 gets a temporary income boost of $84 a month for two years, that is walking-around money. If you want to put some cash in Americans’ pockets, better to give them the whole $2,000 at once — they might use it for something more useful, like paying off a credit card (or catching up on a late mortgage payment or two). They might even pop it in an investment account, which would be an excellent use of the money. Dribbling it out means it will get dribbled away, which is counterproductive.

Nobody is launching a new business or hiring a full-time employee on a temporary 2-point payroll-tax cut. What about the people who are in a position to make large investments and create new enterprises? If anything, this deal makes their lives even more complicated: It uglies up the fiscal picture, further complicates the tax code, and necessitates another tax fight in 2012. Which is to say, it increases uncertainty. As Edmund Andrews and Jim Tankersley put it over at National Journal:

Those who place high importance on being able to plan ahead—corporations planning billion-dollar capital investments or individuals deciding how much of their income to save or spend—still don’t know what to expect two years down the road.

Precisely.

There is room in politics for these kinds of piecemeal, go-along-get-along deals — I advocate them on spending cuts, for example: A nearly perfect scenario would see Republicans trading $1 in cuts reducing spending on things that they like for $1 in cuts to spending Democrats favor — lather, rinse, repeat, 1.4 trillion times or so. But there is a deeper problem that is not getting addressed: All of this effort to pump up consumer spending is the crystal meth of economic policy, a collection of short-term feel-good measures that serve mostly to camouflage deeper problems in the economy. We are directing our efforts at spending — at the depletion of savings and capital — rather than measure to encourage the accumulation of savings and capital, which is to say, at investment. Real investment only comes from real savings — forgoing present consumption for future gains — but that takes a deeper policy game and a time horizon longer than two years.

Meaning, do not expect this to do a lot of good. I have my differences with the supply-siders on some specifics, but  they are correct on a crucial insight: You treat investment poorly and subsidize consumption, you get less investment, more consumption.

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

Do conservatives want a government shutdown over spending? Should we want a government shutdown over spending?

Grover Norquist wants one:

The head of the influential Americans for Tax Reform is encouraging the new House Republican majority to adopt a take-no-prisoners approach to federal spending — and if that leads to a 1995-style government shutdown, so be it.

Midterm voters “were voting to stop the Obama spendathon, and that’s what people were sent to Washington to do,” Norquist said in an interview for POLITICO’s “Taxing America” video series.

“That’s what all the freshmen are going to do. That’s what the fight’s going to be about,” he said of the party’s majority-makers, who are spoiling for a showdown with President Barack Obama. The president “will be less popular if — in the service of overspending and wasting people’s money — he closes the government down, as opposed to now, when he’s just wasting people’s money.”

But veterans of that 1995 fight — and in particular incoming House Speaker John Boehner — are ambivalent about Norquist’s shut-it-down push. They saw what a setback the shutdown turned out to be for the party, and Boehner in particular doesn’t sound eager for the same thing to happen to his Republican caucus.

Dick Morris also has predicted a shutdown. And this time, he says, Republicans will win the debate. Why? “Because you have me on your side.”

I like Dick Morris a lot. I think Dick Morris is a hoot. I also think Dick Morris predicted that Republicans would win the Senate this time around:

The Democrats will lose both the Senate and the House. They will lose more House seats in 2010 than the 54 they lost in 1994 and they will lose the Senate, possibly with some seats to spare.

I would not bet much of my own money on predictions made by Dick Morris.

Most conservatives have been hostile to the Simpson-Bowles deficit-reduction plan, and there are reasons to be cautious: We could end up with a big tax hike and no real spending cuts. On the other hand, we could end up with a tax hike that takes the form of significantly lower personal-income tax rates combined with the end of a bunch of deductions and special tax breaks in the code, which would be, in my view, preferable to the current system. I’d rather see a top rate of 28 percent with no deductions than a top rate of 35 percent with lots of deductions. Simplification of the tax code is a good thing. Flat is great, flatter is good.

The main problem with Simpson-Bowles is that it establishes too high a baseline for both revenue and spending. But it would substantially reduce the deficit, and a stronger conservative congressional caucus — if such a thing materializes in 2012 — would be much better positioned to reduce both taxes and spending if Republicans have already pushed forward with deficit reduction under a plan endorsed by the bipartisan chairmen of  President Obama’s deficit panel.

Simpson-Bowles goes to a vote on Friday. I expect it to go down in flames. Conservatives basically have a choice to go in the Simpson-Bowles direction, to go in the Grover Norquist/Dick Morris/scorched-earth direction, or to do nothing. Keep this in mind: If you think Simpson-Bowles doesn’t go far enough with spending cuts, you can always enact more cuts down the road. There’s nothing about Simpson-Bowles that forecloses further conservative reform. If you shut down the government and get your head handed to you at the next elections, you lose the opportunity to enact further reform. If you do nothing and coast, you get what we’ve been getting for the past ten years or more and invite the question: What is the point of having a Republican majority?

Nothing about our current fiscal situation is simple or obvious. But it seems to me that there’s a pretty persuasive case to be made that the Simpson-Bowles framework represents the best politically achievable course of actions for conservatives at the moment. If we can actually get a smaller deficit, a simplified tax code, and meaningful controls on spending, that’s a victory — not just a political victory, but a real victory.

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

A gazillion-dollar deficit, but we still find the money to help underwrite a little gay incest porn at the Smithsonian.  Egad.

The American cultural establishment may be the only national institution more fraudulent than congressional bookkeeping.

The Committee to Reinflate the Bubble — the National Association of Realtors, the builders’ lobby, and the rest of the gang committed to using government policy to artificially increase real estate prices, enriching themselves while undermining the economy and imperiling the nation — is now the Committee to Increase the Deficit. The Simpson-Bowles panel has released its deficit-reduction report, and, to nobody’s great surprise, the proposal to reduce bubblicious tax subsidies for homeowners has drawn a pledge of resistance from the most self-interested parties. Reports the WSJ:

Joe Stanton, chief lobbyist for the National Association of Home Builders, said his organization would use “the full weight of our grass roots” to prevent any reduction of the mortgage-deduction tax break. “You are already talking about an industry that is completely battered, and this will kill us,” he said.

If your industry cannot survive without special benefits from the government, then it deserves to die, whether you’re an ethanol huckster or the National Association of Home Builders. Never mind that Mr. Stanton is totally full of beans — lots of builders will survive, and houses will continue to be built, when it makes economic sense to do so — but consider this: During the boom, Stanton’s crew got rich in part because of government policies that artificially drove up the price of houses and the incidence of homeownership. Nobody profited from the housing bubble like the builders — ask Bruce Toll. It being inescapable that unsustainable trends will not be sustained, the builders now are suffering from the results of the very same policies that once padded their profits, and they are willing to sacrifice the good of the nation, which is critically threatened by our enormous deficits, for their own narrow financial self-interest. So much for Ask not what your country can do for you . . . .

In public-choice theory, these kinds of problems are described as concentrated benefits vs. dispersed costs. The nation’s need to reduce the deficit is real and it is acute, but it is also general and diffused. A deficit-reduction measure that costs 1 million people $1 million will get nobody’s attention, but if the same program costs one person $1 million, he’ll pay very close attention, indeed. The Committee to Reinflate the Bubble has a very concentrated interest in doing everything possible — including irresponsible, economically destructive things that are bad for the country and impoverish their neighbors — to keep housing prices artificially high. People with concentrated interests will dedicate a lot of capital and energy to politics, so they are apt to get their way, and they generally don’t give a fig about the consequences for anybody else.

That, to me, is the real case for limited government. I’m a sucker for misty talk about our ancient liberties, at least as much as the next conservative, but set aside the philosophical ruminations and bear this in mind: Every time the government does something — anything – some apple-stealing miscreant will find a way to use that to rip off his neighbors. That is what the National Association of Home Builders is promising to do here: to fight necessary fiscal reforms to ensure that the price is paid by anybody but the very people who profited from the bubble in the first place. And they don’t even have the decency to be ashamed of themselves.

That’s just one little example in one little panel, the recommendations of which probably will be ignored, anyway. But it is an epidemic — and it’s a big part of the reason we’re in this debt mess to begin with.

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

That’s gonna sting!

The additional €35bn (£29.8bn) being ploughed into Ireland’s banks has shocked experts, who have expressed concern that tonight’s bailout would not contain contagion in the eurozone.

Brian Lucey, associate professor of finance at Trinity College Dublin said he was “stunned”, adding: “We’ve already put at least €32bn into them, so that’s going to be €67bn, which is 50% of GNP, that’s a world record”.

He also warned that a new government next year could rip up the deal. “Sovereign governments have a right to effectively do whatever they want,” he said.

The EU authorities had hoped that the Irish bailout would draw a line in the sand and halt the threat of Spain and Portugal needing international assistance. But tonight, investors and analysts were far from certain that this would be achieved.

Ashok Shah, chief investment officer at investment firm London & Capital, said Ireland might now enjoy some “temporary relief”, but that bond investors’ concerns could now switch to Portugal and Spain.

“Portugal is already in the borderline, it will have to be rescued soon, maybe within a matter of weeks. The market will also focus on Spain. It will remain very volatile.”

A bigger-than-expected bailout for Ireland — does anybody expect Portugal or Spain (or Italy) to do any better? And what if it’s not just the PIIGS?

Years ago, a fellow calling himself Gekko wrote a column for National Review, called “Random Walk.” He predicted that the euro would be inherently unstable, because the economies it covers are so different from one another. I suspect Gekko is starting to feel vindicated, and I hope he has invested accordingly.

Prediction: The fiscal imbalances about to be worked out, probably violently, in the markets and budget committees will change our lives more than Islamic terrorism has or will.

The European disease is headed to these shores. As Michael Barone points out today, California, Illinois, New Jersey, and possibly New York are headed toward insolvency. Once you look at the crisis in public-employee pensions, twenty or thirty U.S. states may be headed for insolvency. We may end up in a situation in which 35 states are looking to the other 15 to bail them out. And when the house of cards starts to tumble, it will happen faster than anybody expects. Texas isn’t going to be able to carry the Union by itself.

I am surprised to find myself writing so many agreeable words about Erskine Bowles lately, but the former Clinton man hit it right upside the head with this one:

“The markets will come. They will be swift and they will be severe and this country will never be the same.”

On the other hand, once politicians are cut off from the endless stream of free money that has made being in government so much fun for the past couple of generations, maybe they will make less trouble. I find that possibility inspiring.

Less inspiring is this from Mark Zandi of Moody’s:

It may seem odd given all this, but I’m optimistic. Our problems are big, but they are manageable. As the economy improves (believe me, it will) the deficit will narrow, tax revenue will grow, and the extraordinary government spending used to combat the Great Recession will wind down. Under reasonable assumptions, the annual deficit will shrink from its current $1.3 trillion to $800 billion. Unfortunately, this isn’t good enough. We have to knock an additional $350 billion off our annual deficit, otherwise the interest payments on our outstanding debt will swamp us. This will be difficult – for context we spend more than $100 billion a year in Iraq and Afghanistan – but it is doable.

Particularly encouraging is the intellectual consensus now forming. You can see it happening around recent proposals from two different bipartisan commissions formed to tackle long-term federal budget issues. While the proposals will not become law, they lay down important benchmarks and establish the basis for a healthy and ultimately successful debate.

What part of “unacceptable” is eluding Mr. Zandy, I wonder? That’s how Nancy Pelosi described the bipartisan proposal around which he believes a consensus may be forming. The Democrats are standing by her, the unions are howling, and President Obama is showing no signs of getting behind the chairmen of the deficit commission he appointed.

There will be reform. It may come from Republicans, over the protests of Pelosi, Reid, et al. I think more likely it will come from the bond-market vigilantes, and that it will be “swift and severe, and this country will never be the same.”

But, hey, everybody ran up their credit cards last Friday, and it some alternate universe that apparently is good news. Don’t worry: You’ll get to pay that Visa bill off in devalued dollars. Merry Christmas, suckers.

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

I am not at all convinced that congressional Republicans are serious about refusing to raise the debt ceiling, but I am pleased that Mike Lee and others are getting ready to make an almighty stink about it. As somebody famous once said, elections matter — and the Democrats, along with a few lukewarm Republicans, are about to get their first real experience of what Americans sent to Congress in November.

Advice to Republicans: You had better hold out for some real spending cuts.

You can already see the outlines of a deal shaping up in Washington, one in which Republicans give in on the debt ceiling in exchange for Democrats’ agreeing to extension of all the Bush tax cuts. That’s a bad deal for Republicans, and for anybody else who cares about fiscal discipline: It’s a bad deal for Republicans because, unless they do something stupid, they’re going to get their way on the Bush tax cuts, regardless. Nobody wants to raise taxes right now, and it is unlikely that freshly shellacked congressional Democrats will fight hard for a tax hike on their donors at just this moment. If the tax cuts are to be extended, then Republicans should insist that they be written into regular law  instead of coming up for renewal every few years, and then impose compensatory spending cuts to zero out the deficit impact. (My more enthusiastic supply-side friends will not be surprised that I do not think that the government should bother accounting for growth effects of  the lower tax rates; the effects are real, but they aren’t reliably predictable, and if we leave them out of the calculation then that extra revenue is gravy — and it can be put toward further deficit and debt reduction.)

My best guess is that the debt ceiling is going up. Nobody reasonably expects a Republican House to be able to prevail upon a Democratic Senate and President Obama to balance the budget today. But Republicans can — and must — insist on a real deficit-reduction program that is very largely focused  on spending cuts rather than tax hikes, one that has some real teeth on the enforcement end of things. The timeline doesn’t have to be tomorrow, but it had better not have a 20-year grace period, either: Real cuts should start kicking in right now, and the deficit should be significantly reduced within five years and radically reduced within ten.

Both politically and economically, I still think the Simpson-Bowles proposal is the best starting  point. House Republicans can and should remind voters every day that the deficit-commission chairmen appointed by President Obama have recommended an array of spending cuts, and then get to work. They can pass the cuts as a package or they can force them through one at a time, but get going now: The fact that these are Obama-appointed chairmen is politically powerful at this moment, but if the full panel waters down its recommendations, that will take away some of the fire. Now is the time to move the ball forward.

And, speaking of Simpson-Bowles and the Bush tax cuts, I much prefer a Simpson-Bowles tax system (no deductions, top rate of 23 percent) to the Bush tax regime (crazy complicated deductions, top rate 35 percent). So, House Republicans could say, “Hey, look, we’re offering you jokers a bipartisan olive branch: We’ll drop the whole argument about the Bush tax cuts if we can go straight to implementing the bipartisan Simpson-Bowles program, for which we thank the chairmen and President Obama, who appointed them.” No, Simpson-Bowles is not perfect: But passing it does not preclude passing additional spending cuts down the line or additional reforms of our tax system. And if you want to get something in exchange for raising the debt ceiling, a program that actually lowers the deficit would be appropriate. 

Why now? Why move so aggressively? Here is one reason: We are not out of the fiscal woods yet, by a long shot, and the Greco-Irish disease is going to make a showing in California, Illinois, New Jersey, and elsewhere. We had better have a real plan for controlling the national debt in place before we have to deal with the coming state meltdowns.

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

Ireland is headed for a massive international bailout, and it is no surprise that the national governments quickest to put up loan money — Britain and Sweden — are not members of the single currency. The euro-holdouts are to European finances what the United States is to world military order: the knuckle-dragging, unenlightened, anti-social misfits that everybody goes running to when real trouble hits.

Nobody is making much of a stink about bailing out Ireland, and there is something significant in that — but it isn’t Britain’s purported sentimental feelings for “a friend in need.” If Ireland had not been in the euro — if it had been in control of its own monetary policy — then a massive devaluation would have been its likely response to its untenable fiscal position. But that option has been foreclosed, which leaves either a bailout or a much nastier alternative: default.

The short-term reason that Britain and other major powers dread an Irish default is that their banks own a lot of Irish debt. Bondholder haircuts are nobody’s idea of a good time, and the Irish are positioned to put the high-and-tight on their former colonial oppressors but good.

But the long-term reason is narrow governmental self-interest: If Ireland defaults, that is going to make borrowing a lot more expensive for every government in the world. Even with the bailout on the way, borrowing costs are going up, for Ireland (obviously) but also for fellow PIIGS-club member Spain. Politicians fear lots of things — honest labor, easily understood and headline-friendly scandals, constituents who read Hayek — but above all they fear having their credit cards taken away. A government that cannot borrow cheaply is a government that cannot pawn off hard decisions on future generations; it is a government that has to govern, with prudence and thrift, rather than merely to enjoy the pleasures of exercising power. That’s a lot less fun than the current model of political life, and less lucrative in retirement, too.

No surprise that the parties most open to raining pain on bondholders are the Germans, who are in the habit of dealing with fiscal challenges like adults (or at least, as people who behave maturely by European standards.) The New York Times reports:

“Policy makers face the same dilemma as in any crisis with respect to haircutting bonds, and the real-life decisions are always extremely difficult,” said Robert E. Rubin, the former Treasury secretary, who faced just such a quandary in 1994, when he helped arrange a $47 billion rescue package for the Mexican government as it teetered on the verge of default.

“Holding bondholders harmless contributes to moral hazard and increases risks elsewhere,” Mr. Rubin added. “But imposing bond haircuts can make future market access expensive or impossible for an extended time and can create serious contagion effects elsewhere.”

… One signal that the policy pendulum may be swinging away from bondholders came earlier this month when the German chancellor, Angela Merkel, supported by President Nicolas Sarkozy of France, tried to persuade other European leaders that bondholders needed to accept some of the risk in future bailouts.

The move spurred a bond market rout, and Ms. Merkel had to retreat.

… Even so, any talk of default — or a debt restructuring, the term that bankers and technocrats prefer — remains anathema in capitals like Athens and Dublin. Their leaders fear that they would be put in a financial penalty box and denied fresh access to funds.

A similar problem probably will be played out in the United States as unsustainable pension obligations and general fiscal incontinence threaten to send dozens of U.S. states and scores of municipalities into insolvency. Municipal bonds and state debt have long been a preferred investment vehicle for millions of Americans and a great number of retirement funds, both because of the (alleged!) security of government debt and the tax-preferred status of munis. When Illinois, California, and New Jersey come knocking on Congress’s door looking for a bailout, they won’t be alone: Millions of Americans will be lined up behind them, because they stand to lose a great deal of their savings, including retirement savings, if U.S. states go into default — and a default by any U.S. state would probably send borrowing costs skyrocketing for every other state. Lot of elderly muni investors live in swing states such as Florida and Pennsylvania, which are our grayest states. Republican governors and legislatures will have a strong incentive to support Democratic governors and legislatures. (Not that Democratic states are the only ones that will need bailouts, but Republicans are notionally more opposed to state bailouts than Democrats are. I hope.)

In the U.S. as in the EU, saying no to bailouts won’t be easy.

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

I’ve been out for the last week helping National Review reduce its deficit (and adding marginally to my own). What have I missed?

Ireland is circling the drain.

Josh Barro is still a lot more persuasive than the guys at Americans for Tax Reform. ATR’s Ryan Ellis is still relying on a variant of the Appeal to Authority without being a very credible authority, basically saying: “If you disagree with me, you’re not really a conservative,” and pleading for National Review to stop publishing stuff that makes his poor head hurt.

The commodities markets are still going nuts trying to figure out which currency is crashing fastest and which economy is in the most trouble.

Sarah Palin is still more persuasive than some of the guys at The New Republic. Noam Scheiber writes: “Don’t get me wrong: I think criticizing the Fed is an entirely healthy thing,” but also calls Palin’s criticizing the fed “sinister.” Scheiber, falling into that weird Obama diction (Make no mistake, Let me be perfectly clear, etc.) writes:

Let’s be clear: Even with the help of what was presumably a pricey speechwriting team, Palin’s ignorance of monetary policy is difficult to repress. The recent path of food prices was hardly the only curious claim in her Phoenix speech. There was, for example, her discussion of quantitative easing as though it were sorcery. “And where, you may ask, are we getting the money to pay for all this? We’re printing it out of thin air,” she complained. True-ish. But, as Ben Bernanke explained shortly after the Fed announcement, that’s pretty much how all of monetary policy works.

Scheiber is kind of funny here: He treats Palin as though she’s a big doofus for arguing that food prices have risen, and he cites as evidence the fact that consumer prices for food haven’t risen all that much as of the last survey. But consumer prices are the end of the chain, and lots of farm commodities have been hitting record highs of late, or coming close to them. I’m no convicted insider-trading scofflaw George Soros, but I suspect that there is a directional connection between the price of food on the commodities markets and the price of food at the grocery store. Just a hunch.

And that last bit — “that’s pretty much how all of monetary policy works” — is not much of a defense; exnihilating money is the problem, particularly on a scale of nearly $1 trillion.

And, finally, the L.A. Times has a big scoop: “California public pensions underfunded.” Thanks for the Muppet News Flash, L.A. Times. I hear there’s pension trouble elsewhere, too.

Nihil novi sub sole, in other words.

A reader asks: “So an Obama commission proposes a $1 trillion-plus tax hike, and you, a managing editor at the flagship conservative publication, endorse it? Exactly how or why is this a conservative position?”

Answer: A conservative’s first duty is to deal with reality — not with the theoretical world we wish existed, not with ideology, and not with wishful thinking. We are running a deficit of 40 percent, and it is implausible to think that a government with a Republican House, a Democratic Senate, and Obama in the White House is going to balance the budget by cutting 40 percent of spending.

I think it is equally implausible that a government with a Republican House, a Republican Senate, and Ron Paul/Sarah Palin/Mitch Daniels/Rush Limbaugh/The Ghost of Ronald Reagan in the White House is going to balance the budget with spending cuts alone. Why should I rely on the performance of theoretical Republicans when I have the evidence of actual Republican Congresses and actual Republican administrations to inform me that radical spending cuts are unlikely under a unified Republican government?

The burden of taxation is not equal to what the government collects; it is equal to what the government spends. Deficit spending just greases the skids for ever-more-incontinent fiscal shenanigans — I’d rather the taxpayers bear the pain of government spending as the money is spent than evade it, kicking the taxes down the road to the next generation. We can either pay the taxes today or pay them in the future — with interest, trillions of dollars in interest. The Bowles-Simpson proposal is far from perfect, but it is three-and-a-half times better than anything I expected from a panel with any political proximity to Barack Obama. It’s a good start, and it’s politically viable. If the Republicans are smart, they’ll run with it and remind voters every five minutes that this is the proposal of the Obama deficit commission’s co-chairmen.

If I see a better plan with a real chance of being enacted, it will have my support. But given a choice between an ideologically pure program that never is enacted and a problematic one that gets the job done, albeit imperfectly, I’ll take real deficit reduction over theoretical deficit reduction every time.

Nancy Pelosi hates it. That’s a useful piece of evidence, too.

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

The reliably clueless Cynthia Tucker of the Atlanta Journal-Constitution checks in with some feckless deficit punditry, writing:

So, if the GOP wins the House, as expected, what will happen to the deficit? Here’s my prediction: Two years from now, the deficit will be no smaller. It may even be larger. Why? Because Republicans won’t do much to rein in spending. And if they cut taxes, there won’t be enough revenue to fund the budget. It’s simple elementary school math.

Egad, where to start. How about here: “And if they cut taxes, there won’t be enough revenue to fund the budget.” There’s already too little revenue to fund the budget — that’s why we have a deficit, no? Consult a dictionary, for the love of God: Too little revenue to fund spending is pretty much the definition of deficit. You write for a living, right, Tucker?

Abuses of English aside, there’s plenty of substance trouble here, too: “Republicans won’t do much to rein in spending.” The real question, I think, is whether Republicans send President Obama legislation that reins in spending — legislation he almost certainly will veto, unless Senate Democrats can maneuver to keep it from reaching his desk in the first place. That’s what 2012 is going to be about. A GOP House majority will have a lot of power, but not power to unilaterally reduce the deficit.

Then comes the string of banal talking points:

Republicans, aided by the rightwing communications machine, have persuaded voters of a couple of things that happen to be wrong. One is that President Obama has substantially increased spending on wasteful government programs. In fact, one-third of the stimulus was in the form of tax cuts. And the bank bail-out, which started under George W. Bush, has mostly been paid back — earning taxpayers a profit. The health insurance law will reduce the deficit over ten years, not add to it, according to the non-partisan Congressional Budget Office.

Tedious, but let us address them. 1. Right-wing communication machine? So long as NPR exists and receives taxpayer funding, no Democrat ought to be able to utter that stupid cliché without blushing. 2. Substantially increased spending on wasteful government programs: check.

3. “In fact, one-third of the stimulus was in the form of tax cuts.” Badly designed, ineffectual tax cuts. But you can’t excuse the stimulus shenanigans and their deficit effects by protesting that they were tax cuts and then write: “a huge tax cut for rich Americans will certainly make the deficit larger. That’s a fact.” Tax cuts add to the deficit no matter who receives them. And that’s a fact. 4. “And the bank bail-out, which started under George W. Bush, has mostly been paid back — earning taxpayers a profit.” Except for the parts most hotly lobbied for by Barack Obama and his colleagues: the mortgage-relief program, which is an enormous money-loser, the auto bailout, which is a money-loser, and the Fannie-Freddie shenanigans, the price tag of which recently has doubled. The Bush administration’s piece of the TARP seems to have worked reasonably well. The Obama administration’s bottomless line of credit at Treasury for Fannie and Freddie, less so. 5. “The health insurance law will reduce the deficit over ten years, not add to it, according to the non-partisan Congressional Budget Office.” True, assuming that the steep taxes on high-dollar union health-care plans actually kick in (they won’t) and that doctors’ Medicare payments are reduced by a fifth or more (they won’t). Hint: When government promises to save you a few billion dollars by spending a trillion dollars, you aren’t going to save anything.

The deficit-reduction benefits of Obamacare may be the least honest talking point in American politics at the moment. Who thinks that we really are going to cut doctors’ payments by 21 percent or more? Who really thinks that the Obama administration is going to savage the health-care plans of its most important constituency after Goldman Sachs?

Question: Is the Atlanta Journal-Constitution bankrupt yet? Because they could copy and paste these illiterate partisan talking points off of DailyKos or Keith Olbermann’s web site for free every day. Save a few bucks.

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

A couple of thoughts for a pre-election Friday afternoon:

1. The End of . . . Clintonism: The all-but-inevitable historic pounding that the Democrats are about to suffer is, of course, a repudiation of Obama’s overreach specifically, of the Obama-Reid-Pelosi model of unified Democratic government, Obamacare, stimulus, etc. It also, I think, spells the end of the Clinton economic aura. Since Carter, Democrats had had the worst sort of reputation when it came to the economy, and for good reason: Everybody remembered the gas lines, ridiculous stagflation, etc. And then along came Clinton. Amazing man, Bill Clinton: He inherited a recovery from George H. W. Bush, handed off a recession to George W. Bush, and somehow, in the middle, made himself look like an economic genius, claiming credit for the booming growth of the 1990s and the nominal budget surplus.

In retrospect, it’s pretty obvious that just as every investor looks like a genius while he’s riding up the bubble — and the dot-com stock market was a big one — every politician looks like a genius when the bulls are on the rampage. Clinton’s Big Government ambitions — see Hillarycare — got nipped in the bud well and early, and the Gingrich-Armey monkey-wrench gang kept the Clinton machinery in check. But subtract the bubble and the whole decade looks a lot less impressive, and the Democrats’ campaign paeans to the Clinton economy do not sound as impressive in 2010 as they did in 2000. Americans are starting to internalize the meaning of bubbles, and to re-evaluate.

2. Revenge of the Rubes: As of this morning, the DJIA is down 18.25 percent from where it was three years ago. NASDAQ is down 10.61 percent. Wall Street is a gloomier place. But: Commodities prices are hitting record highs, especially farm products. Cotton is at a record high. Wheat prices are up. Rice is rising so fast that the Chinese are enacting controls on futures trading. Part of this is regular old demand, particularly in China. Part of it is that the specter of the Fed engaging in more “quantitative easing” — debasing the dollar to prop up securities — is directing money from cash to commodities. (And: Guess which country in the world is a great big giant exporter of a lot of this stuff?) In other words, after a few years of bailouts and free-money economics for the benefit of Wall Street, brought to you by Barack Obama (D., Goldman Sachs) the result is likely to be a significant wealth-and-power shift from the financial world to the farming-and-mining world. (My cotton-growing friends in West Texas are a happy bunch just now.) Meaning that Lamborghini will sell fewer of these to second-year investment bankers and more of these to third-generation commodities producers.

That’s one possible outcome, anyway. The future is unknowable and is largely what we make of it — something to keep in mind Tuesday.

A very nice catch from J. P. Freire at the D.C. Examiner: Treasury is looking for FOIA help — to frustrate FOIA filers, specifically somebody schooled in the:

“Use of FOIA/PA exemptions to withhold information from release to the public.”

What are they up to over at Treasury?

Uncle Stupid is dumping $109 billion in new debt on the bond market this week. This week alone, taxpaying chumps. And everybody has his eye on the new issue of inflation-protected bonds, which hit the market at 1 p.m. today. And what an interesting development it is:

The government bond market this week will also have to contend with $109 billion in new debt. Auctions kick off at 1 p.m. Monday with a $10 billion sale of five-year Treasury Inflation-Protected Securities. The notes are likely to be auctioned at a negative yield, the first ever negative yield for the issue. TIPS yields have declined as buyers have stepped into the market on the belief that more QE could stoke inflation down the road. TIPS return real yield plus inflation, and provide protection from rising prices.

Inflation fears are now sufficient that investors are prepared to take a less-than-zero yield on government bonds, calculating that the inflation bonus will be more profitable than the next-to-nothing yields everything else is paying in our present loosey-goosey cheap-money environment. Inflation is a cruel and rapacious tax on the people who make the economy go — savers, who provide the capital for real investment. With an economy in dire need of a lot of new saving and investment, Washington is getting ready to put the screws to the people best positioned to help turn us around. To what end? More dubious stimulus? Fiscal stimulus is not working and monetary-policy stimulus is not working, because the problem is not lack of consumer appetite. The problem is a broken banking system, a trillion dollars or more in dead or devalued capital, and a national commitment to sustaining the ragged remains of the real-estate bubble that helped to cause this mess.

That sound you hear? That is the sound of future generations cursing us for the tax we are levying on them today.

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

Really, Harry? Really?

Tom Vilsack, secretary of agriculture, came out Thursday with an announcement sure to warm the cockles of progressive hearts all across the fruited plains: The Obama administration backs the indefinite extension of massive tax cuts for multinational oil corporations and protectionist trade measures to enrich U.S. corporate giants such as Archer Daniels Midland, Monsanto, and ConAgra.

Ethanol: Is there anything it can’t do? It won’t save the environment, slow global warming, or achieve the phantom of U.S. “energy independence,” but it has made the Obama administration come out in favor of tax cuts for the rich and politically connected oil companies. It’s sort of magical that way.

Critics of the massive corporate-welfare program known as U.S. ethanol policy have jokingly referred to Archer Daniels Midland as the “Exxon of ethanol.” But you know who the real Exxon of ethanol is? Exxon. Just as BP gets subsidized to the tune of some $600 million a year through the ethanol tax credit, Exxon and the other oil giants collect millions of dollars in taxpayer subsidies: 45 cents for every gallon of ethanol they blend into their gasoline. “It’s not just a reduction in somebody’s tax rate — it’s an actual check that’s made out to these oil companies,” says Marlo Lewis, who keeps an eye on ethanol shenanigans for the Competitive Enterprise Institute. “They get a check from the general fund of the Treasury — from us, the taxpayers.”

It’s a big stack of money, to be sure, but even Exxon does not think the program is a great idea. Exxon would just as soon forgo the subsidy, provided that its competitors didn’t collect it, either.

So, if even the suits at Big Oil are a little bit ashamed of a program that dumps hundreds of millions of dollars a year into their lap, who is in favor? “It’s the makers and the corn growers who are screaming that we have to keep doing this,” Mr. Lewis says. Only the blenders actually receive the refund checks, but corn growers and ethanol processors benefit because the demand for their products increases.

Vilsack said Thursday that the administration is in favor of a temporary and “fiscally responsible” continuation of the ethanol tax credit and the associated tariffs that keep cheaper, sugarcane-based ethanol off the market in the United States. When pressed by a reporter to define “temporary,” Vilsack demurred. When pressed by the same reporter to define “fiscally responsible,” he again declined to answer. Meaning: status quo ad infinitum. Vilsack, as Mr. Lewis points out, has been talking that same temporary-and-fiscally-responsible jive since he was a governor. (Either that, or he literally does not know what “fiscally responsible” means, which is possible.)

Two bills were floated in the last Congress to extend the tax credit and the tariff: one introduced by Sen. Chuck Grassley and one introduced by Rep. Earl Pomeroy. Neither made much progress. The danger is that while those bills have foundered, their essential provisions — extending the tariff and the tax credit — could be sneaked into a tax or energy bill during the lame-duck session. Look for some green-jobs camouflage to be attached to it, but keep in mind: If it quacks like corporate welfare, it’s corporate welfare.

But this is federal spending we’re talking about, so it could always be worse. “The good news,” Mr. Lewis says, “is that Vilsack did not call for a Marshall Plan for biofuels or a Manhattan Project for biofuels. And that’s what the ethanol lobby has been pushing for.” There’s a split in the ethanol lobby at the moment, with one camp focused on protecting the current basket of goodies and another arguing for a massive new federally subsidized infrastructure project, with 200,000 new ethanol pumps serving up E85, a sprawling new pipeline system to keep those pumps pumping, and a mandate that automakers deliver 120 million flex-fuel vehicles a year to the U.S. market. That’s not on the agenda — for now.

Keep ethanol in mind when Obama, Al Gore, and the Wall Street guys who are positioned to benefit from “green energy” programs talk about “temporary” measures to protect a fledgling start-up industry. The day never comes when these industries can stand on their own — because they never were economically viable in the first place. They’re selling a product nobody wants at a price nobody wants to pay. “We’re still waiting for Godot here,” Mr. Lewis says. “Ethanol will always be an ‘infant industry,’ no matter how big it gets. The U.S. industry is the biggest in the world by far — twice as big as Brazil’s. If it had to compete, it might actually become innovative. But it’s easier to have entitlements.”

The Obama administration is dead-set on raising the taxes of thousands of small-business owners, the so-called rich who benefited from the Bush tax cuts. And, at the same time, his administration is arguing for a massive tax cut for some of the most profitable multinational corporations in the world, some of which don’t even want it. Which is what you get when a president brought to you by Goldman Sachs promises to take on the fat cats.

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

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

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

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

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

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

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

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

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

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

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

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

Answer: Take our word for it.

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

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

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

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

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

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

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

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

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

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

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

Thank you, Commander Obvious:

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

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

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

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

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