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Tags: Despair

Default Is In Our Stars



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It’s not getting better:

 

Officials in Berlin told The Telegraph it is “more likely than not” that investors will suffer fresh losses on holdings of Greek debt, beyond the 21pc haircut agreed in July.

The exact level will depend on findings by the EU-IMF “Troika” in Athens.

“A lot has happened since July. Greece has fallen back on its commitments, so we have to assume that the 21pc cut is no longer enough,” said one source.

Finance minister Wolfgang Schäuble told the Frankfurter Allgemeine that the original haircuts were “probably” too low, saying banks must have “sufficient capital” to cover greater losses if need be. Estimates near 60pc have been circulating in Berlin.

The shift in German policy has ominous echoes of last year when Chancellor Angela Merkel first called for bondholder haircuts, setting off investor flight from Ireland and a fresh spasm in the EU debt crisis.

It’s not just the Europeans, of course. U.S. banks are sitting on tens of billions in Greek debt, but the whole thing is one big knot of pain: French banks hold a ton of Greek debt, and guess who holds a lot of French bank debt? U.S. banks, that’s who, with Morgan Stanley alone facing some $39 billion in exposure. As usual, Goldman Sachs is thought to be ahead of the curve — it helped to restructure the Greek debt, and apparently got good and scared by what it saw. 

But keep in mind: This isn’t Europe’s problem. This is your problem, Sunshine:

 

The latest round of American financial assistance came Thursday with a promise by the Federal Reserve to swap as many dollars for euros as European bankers need. In the short run, those transactions won’t have much impact because the central banks are simply swapping currencies of equal value. If the move helps avert a wider crisis, it could help spare the global economy from another recession.

But over the long term, consumers could feel the impact of central bankers flooding the financial system with cash, according to John Ryding, chief economist at RDQ Economics.

“This is a lender of last resort function,” he told CNBC. “With the dollar injections that the Fed has done, it’s like giving a patient medicine with really bad side effects.”  Ryding said the bad side effect in the U.S. has been inflation, which has picked up to 3.8 percent year over year.

The bailouts never end.

Tags: Debt , Deficits , Despair , Europeans

How Much Credibility Does the GOP Have on Taxes?



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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

Forbes and the Frauds



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

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

Mr. Benko responds:

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

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

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

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

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

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

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

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

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

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

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

Tags: Debt , Deficits , Despair

The Inflation Default



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The apocalyptic drumbeat continues:

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

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

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

Guan did not immediately respond to AFP requests for comment.

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

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

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

Tags: Debt , Default , Deficits , Despair , Doom , Inflation , Quantitative Easing , Rapidly Depreciating U.S. Dollars

Another Cheap, Short-Term Gimmick from Obama



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

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

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

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

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

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

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

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

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

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

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

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

Tags: Despair , Unemployment

Hope Is Not a Policy



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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



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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 Debt-Ceiling Panic that Wasn’t



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The Democrats would have you believe that the current fight over raising the debt ceiling is a game of Russian roulette with the economy at stake. But people with money on the line — Treasury bond investors — do not seem to think that a default is exactly at hand. Bond yields are in fact quite low. I do not expect that to last forever, but the idea that we are seriously at risk of defaulting as a consequence of the debt-ceiling fight is a bunch of sound and fury signifying nada, mostly intended to preempt debate and minimize Republicans’ ability to pry further spending concessions out of the Democrats.

Don’t believe the hype.

What’s Turbotax Timmy up to in the mean time? For one thing, he’s putting the ongoing bailout of state and local governments on ice. (No, it’s not an infrastructure project;  it’s a bailout.) That is a good in and of itself, and to be celebrated. Treasury has been issuing a whole lot of “State and Local Government Series Securities” (SLGS), which are kind of an interesting thing. Treasury created the SLGS in the 1970s to help state and local governments effectively break federal law. Congress passed a law that stops state and local governments from issuing tax-free bonds at one rate and then earning arbitrage profits by reinvesting the proceeds at a higher rate. Since the locals can’t do that with their own tax-free bonds, Treasury created special securities for precisely that purpose. (And you thought Congress made the laws!) State and local budgeteers are up to their green eyeshades in debt (not to mention enormous pension liabilities for ex-bureaucrats sunning themselves on retirement-community beaches), and Treasury is helping them avoid the consequences of their decisions.

Bailout Nation lives, and one of the main reasons that Washington wants to raise the debt ceiling is that it wants to continue to camouflage how bad the overall, coast-to-coast, comprehensive government-debt situation is.

Tags: Angst , Debt , Deficits , Despair

Bernanke’s Bet



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As expected, the biggest news out of Fed chairman Ben Bernanke’s press conferences was not anything that he said — it was the fact that the chairman of the Fed held a public press conference for the first time ever. Meet the kinder, gentler Federal Reserve. Bernanke may not be able to do much about all those fortysomethings who’ve been out of work for 18 months, but he wants them to know he cares.

The Fed is in a difficult political situation: Its loosey-goosey money policy has not produced the growth in employment that the administration (and Congress, and the electorate, and unemployed people and their families) desire to see; at the same time, the general rise in commodities prices and the significant spikes in food and energy prices suggest that tightening eventually must come. Bernanke hinted that rather than start by raising interest rates, the Fed might move to tightening by ceasing to reinvest the proceeds from the Treasuries and mortgage-backed securities it already is holding.

Bernanke was, in his quiet way, insistent that none of the inflationary signs on the horizon are the result of the Fed’s massive money creation. Rising food and energy prices, he said, were the result of “largely non-monetary factors,” prominent among them Mideast unrest and that favorite go-to, rising demand in China, India, and other developing countries. That’s probably not an entirely adequate explanation: Mideast tensions don’t explain record prices for things like cotton and gold, and the factors leading to increased demand in the developing world (rising incomes, population growth) have been  moving in a much more gradual way than commodities prices have been.

The indicators are not pretty. The Fed’s just-released forecast for economic growth was pared back to 3.1 percent to 3.3 percent, from an earlier estimate of 3.4 percent to 3.9 percent. Meanwhile, its inflation estimate was revised significantly in the other direction: to 2.8 percent from 2.1 percent.

Higher inflation, slower growth: bad news for people with dollars in the bank. Treasury’s Timmy Turbotax says the United States is pursuing a “strong-dollar policy,” which is not entirely consistent with Helicopter Ben’s recent program of creating dollars by the trillion through quantitative easing. The Fed has a dual mandate — stable prices and maximum employment — but the relationship between interest rates, inflation, and unemployment is not nearly so straightforward as most economists thought back when the Fed was created. As Milton Friedman put it:

Monetary growth, it is widely held, will tend to stimulate employment; monetary contraction, to retard employment. Why, then, cannot the monetary authority adopt a target for employment or unemployment — say, 3 per cent unemployment; be tight when unemployment is less than the target; be easy when unemployment is higher than the target; and in this way peg unemployment at, say, 3 per cent? The reason it cannot is precisely the same as for interest rates — the difference between the immediate and the delayed consequences of such a policy.

Alan Greenspan’s tenure made the Fed chief a totemic figure: The God of the Economy. But what can be accomplished through monetary policy alone is much more limited than many people think. And what can be accomplished through monetary policy as conducted by the Fed is even more limited: The central bank has limited tools (even when it’s giving itself new ones) and significant limitations. If we were designing an agency to implement monetary policy from scratch today, we probably would not design the Federal Reserve. (We’d probably design something much worse. Why, you ask? Just a hunch.)

Because the Fed’s plans have long been telegraphed, Bernanke predicted that the discontinuation of quantitative easing this summer would not have any effect on the financial markets. That declaration had, to my ear, the quality of a prayer. He also repeatedly said that the signs of inflation were the result of “transitory” factors. But when the government is borrowing 40 cents on the dollar to finance unprecedented deficits and the Fed is creating money to make that happen, inflation is baked into the cake. And there’s a danger of vicious-circle effect: Inflation hits, the Fed has to raise rates in response, economic growth slows or reverses into a new recession, and deficits widen, fanning the inflationary flames. Bernanke met the press to reassure the public, but it is far from clear that we should be reassured about anything.

Tags: Debt , Deficits , Despair , Inflation

Raising the Debt Ceiling



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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



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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

About Those Medicare Savings



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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

Non-Buyers’ Remorse



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As predicted, the recent budget deal and the Ryan plan have the Democrats wishing in the direst way they’d hopped on Simpson-Bowles. But among Democrats, Simpson-Bowles was dead on arrival: There simply is no plan that credibly controls spending that Democrats are inclined to accept. Now that Republicans have proposed something well beyond the Simpson-Bowles framework, Democrats are ready to celebrate a plan that they dismissed out of hand — “simply unacceptable,” the lady called it.

Ryan and the Republicans will accept the strongest deficit deal they can get; Obama and the Democrats will accept the strongest deficit deal they are forced to: That’s the basic dynamic that shapes this debate between now and November 2012. They have no credible budget plan — they didn’t even pass a budget last time around. Welcome to the Party of No, Mr. President; Mrs. Pelosi will show you the secret handshake.

The Democrats want 2012 to be about anything other than deficit-reduction. Expect an onslaught on the social-issues front, from abortion subsidies to gay marriage. Conservatives should not let them change the subject.

Tags: Debt , Deficit , Despair , Faint Glimmers of Hope

Yes, Entitlement Spending Must Be Cut



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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

Ben Bernanke and the Second Deficit



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Arguing that the Fed should embrace a more aggressive growth agenda, David Leonhardt writes in the New York Times:  

By any standard, joblessness is a bigger problem than inflation.  

Never mind those pesky Austrian-econ types and their argument that many of our economic problems are caused by artificially low interest rates (cheap money = boom built on sand = bust). That “by any standard” stuck in my head.  

As Rush Limbaugh says when he sees something interesting in the New York Times: I wonder if that’s true?  

Because inflation acts slowly and because its costs are dispersed, most people do not much notice it when the rate is very low. But inflation is a pernicious tax on savings and investment. How much does it cost us?  

Since inflation reduces both the value of savings and the value of debts (since you get to pay off your debts in devalued dollars, which seems to be the main attraction of inflation for Uncle Sam), you don’t consider inflation against present income, but against net worth. In 2010, , the net worth of the United States was about $70 trillion. That’s household wealth, savings, investments, non-farm non-financial businesses, tangible assets like real estate, etc., minus household debts, business debt, etc. A very low rate of inflation — say a measly 2 percent — therefore costs a big fat $1.4 trillion a year, i.e., it’s a second deficit. (I know that this is an imperfect measure for lots of reasons, but it gives a good idea of the scale  of the thing.)  

So, about that $1.4 trillion: Is that a smaller problem than unemployment “by any standard”?   In the most recent BLS report, Joe Government put the number of unemployed Americans at about 13.7 million.   Meaning that the cost of 2 percent inflation every year is, give or take a little, about equal to what we’d spend writing a check for $102,189.78 to every unemployed American. That’s a bunch of jack.  

I’m a poet, not an economist, but I find it hard to buy the argument that we must — must — devalue all of our savings every year (which is what inflation does) in the name of monetary stability. I think a trillion bucks is too much to pay for monetary stability, especially when it doesn’t offer all that much, you know, monetary stability.

Of course there are trade-offs from inflation: but practically all of the costs fall on savers and investors, and all of the benefits accrue to debtors and spenders. I do not much like those incentives.

Two percent inflation costs $1.4 trillion a year: Don’t forget the second deficit.

—  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: Anemic Fiat Dollars , Debt , Deficit , Despair , English-Major Math , Inflation

What 2 Percent in Cuts Looks Like



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“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

Reframing the Trillions



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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,” i.e. bamboozling 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 discourse is a discourse!) 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. But keep this in mind: Lots of really bright people with real money on the line (as opposed to political rhetoric, which is not cheap, but free) are betting their own that this does not work out well.

—  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 , Nutty Professors

Our Tax Code Is Corrupt



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What General Electric has in common with the guy who runs Obama’s IRS: not paying taxes. That New York Times report on G.E.’s remarkable ability to avoid paying U.S. taxes has been getting a lot of attention today, but there was one paragraph that reminded me of why I’m a flat-tax guy:

G.E.’s giant tax department, led by a bow-tied former Treasury official named John Samuels, is often referred to as the world’s best tax law firm. Indeed, the company’s slogan “Imagination at Work” fits this department well. The team includes former officials not just from the Treasury, but also from the I.R.S. and virtually all the tax-writing committees in Congress.

As government extends its reach over every aspect of the economy, this sort of corporatism will only become more deeply entrenched in fields like health care and energy. What G.E. has done with taxes, the insurance giants will do (and have done) with Obamacare. Everything looks  like ethanol.

But I’ll take a little bit of issue with Ezra Klein’s response:

So patriotic! It really explains why President Obama tapped Jeffrey Immelt, GE’s CEO, to lead the President’s Council on Jobs and Competitiveness. If this isn’t the sort of corporate behavior America needs more of, what is?

I’m sort of creeped out by this particular usage of the word “patriotic,” as though the alternative to the profit-maximizing corporation were the Great People’s Patriotic General Electric Corporation. (I also intensely dislike the proposition that paying taxes is an expression of patriotism, as though the state were the nation.) But I’ll say this: Yes, this is exactly the sort of corporate behavior America needs more of, inasmuch as our corporate-tax regime is kind of dumb, and also kind of corrupt, and one way of cleaning that up is to abolish it.

In spite of our having the second-highest nominal corporate-income tax rate in the developed world (Hello, Japan!), the rates actually paid by businesses vary wildly according to their political clout. Progressives look at that and see the evidence of businesses’ having undue influence on Washington; I look at that and see evidence of Washington’s undue influence on business. But it’s a two-way street, and the end product smells the same.

There are many arguments for a flat tax: Compliance costs are lower, it’s easier to understand, it doesn’t create a divide-and-conquer dynamic with regard to the tax brackets, it aligns taxpayers’ incentives, etc. But there’s a practical moral argument, too: The tax code is corrupt. Using the tax code as a cookie jar full of special favors for friends and supporters is corrupt. It does not matter that it’s legal, it is immoral. The purpose of taxes is to raise revenue for the government, not to repay political favors or to bribe voters with their own money. I do not think our tax system probably is really salvageable: Obamacare is not the only thing that should be repealed and replaced.

While everybody else was filling out their college-basketball brackets, I was working on my fantasy federal budget (I know, I know, I’m a lot of fun on dates), which is not yet complete, but which I will share when it is. (I’m planning a fantasy-budget reader contest.) My revenue side assumed a true flat tax on all forms of personal income — salaries, benefits, bonuses, dividends, inheritances, capital gains, etc. — and, once I’d trimmed the federal government back as small as I think we could realistically get it, figured that I could fund it with a flat rate of about 20 percent, and no corporate income tax. (I think this might be good for investment.)

The upside of the fiscal crisis that our country insists on marching toward is that it will give us the opportunity to enact radical reform of some of our most important institutions, and the tax code should be high on the list. A federal/state/local system that produces a $3.2 billion tax benefit for G.E. but taxes the pants off of poor people to fund useless schools that do their children very little good (and a great measure of harm, in many cases) is an unbearable burden. It has to go.

—  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 , Debt , Deficit , Despair , General Shenanigans , Tim Geithner

You Can’t Reframe $14.3 Trillion



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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

First PIMCO, Then OPEC, Then . . . ?



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This remind you of anything?

March 14 (Bloomberg) — Oil exporting countries are cutting holdings of U.S. government debt as energy prices rise, helping depress the dollar, the worst performing major currency of the past six months.

Treasuries owned by oil producers and institutions such as U.K. banks that are proxies for Middle East nations fell 9 percent in the second half of 2010 to $654.6 billion, the first decline in the final six months of a year since the Treasury Department began compiling the data in 2006. The sales may continue, if history is any guide, because Barclays Plc says Middle East petroleum exporting nations have traditionally placed only 25 percent of their savings in dollar-based assets.

PIMCO, OPEC: not buying what we’re selling.

And does anybody think that the No. 3 U.S. government debt buyer, Japan, is going to be in the market for a while?

Here’s a little piece of knowledge:

“I moved my clients out of any mutual funds that held Treasuries 12 to 18 months ago, including the Pimco Total Return Fund,” said Steven Tibbitts, owner of Tibbitts Financial Consulting, a $50 million advisory firm.

In place of Treasuries, he has moved clients into floating-rate-bank-loan funds and international bonds, including emerging-markets debt.

“It’s not a matter of whether rates rise, because they will, and when they do, it will be negative for longer-term bonds, especially longer-term government bonds,” Mr. Tibbitts said.

Question: Who thinks the U.S. government will still have a AAA rating in five years? Answer in the comments and tell me why/why not.

—  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: Anemic Fiat Dollars , Bonds , Debt , Deficits , Despair

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