Archive for September, 2011
President Obama’s $447 Billion Tax Increase
In his September 8 lecture to Congress, President Obama promised that “every proposal I’ve laid out tonight will be paid for.” How? By raising tax rates on “the wealthiest Americans and biggest corporations.” In other words, the President is proposing a $447 billion tax increase.
When the details are revealed on September 19, the President will be proposing large and permanent increases in the highest income tax rates − mainly to “pay for” a small and temporary cut in payroll taxes (which accounts for 54 percent of his $447 billion package). The plan is likely to contain elements of the September 7 proposal of Congressional Democrats to the super-committee — such as a draconian “super-Pease” phase-out and cap on itemized deductions, and a top marginal tax rate of 48.8 percent in 2013.
Temporary payroll tax cuts and extended unemployment benefits are bait the President set out to trap House Republicans with their own debt ceiling demands.
“The agreement we passed in July,” said the President, “will cut government spending by about $1 trillion over the next 10 years. It also charges this Congress to come up with an additional $1.5 trillion in savings by Christmas. Tonight, I am asking you to increase that amount so that it covers the full cost of the American Jobs Act.” But the $447 billion budgetary hit can’t be spread over 10 years without triggering another debt ceiling calamity. Either the debt ceiling has to be promptly raised by an extra $447 billion or tax receipts somehow raised by that amount in fiscal 2012-2013. Any “modest adjustments to health care” will be too distant and nebulous to help.
Using permanently higher tax rates on income to pay for temporarily lower tax rates on payrolls is no “stimulus” under either Keynesian or empirical economics. Neither is a tax-financed extension of unemployment benefits, which clearly raises the unemployment rate by 0.8 to 1.8 percentage points. Yet the one-year extension of payroll tax cuts and 99-week unemployment benefits is being held out as irresistible bait to gullible legislators.
By inviting House Republicans to stumble into this trap, the president is also hoping to preempt the congressional super-committee’s option of reducing deficits by trimming tax loopholes. President Obama is trying to lay claim to any potential revenues from cutting loopholes (or legitimate deductions) for his own pet projects, which include grants to hire more state and local government workers and extended unemployment benefits for the private sector.
This is no “jobs plan.” It’s a tax-and-spend plan, and a bad one.
Davis-Bacon Rules Damage D.C.
The Washington Post reports on a Labor Department decision that applies pro-union Davis-Bacon rules to the CityCenter development in Washington D.C. The ruling could push up costs on the project by $20 million by forcing firms to pay artificially high wages.
The paper says that “area real estate developers and construction executives who have partnered with the District say the ruling, if upheld, is likely to inflate costs on a wide range of projects by as much as 15 percent.” In turn, that could have “unprecedented, significant [and] adverse citywide cost impact upon every economic development project in the District’s portfolio,” said a deputy mayor of the city. So while Democrats in Congress are demanding government action to fix the nation’s supposedly crumbling infrastructure, here the Obama administration has thrown up a new hurdle to investment.
Davis-Bacon rules usually apply to federally funded construction, thus pushing up the costs of public projects. Nationwide, economists at the Beacon Hill Institute found that Davis-Bacon rules cost federal taxpayers about $9 billion annually. For example, repairs to National Park facilities cost more than they should, thus reducing the amount of maintenance the agency can do within its budget. However, the D.C. ruling stretches the Davis-Bacon rules even further because CityCenter is a privately funded project.
In an essay at www.DownsizingGovernment.org, economist Charles Baird notes that passage of Davis-Bacon in 1931 was motivated by the faulty economic idea that the government should try to keep wages high during an economic downturn. But Baird describes another reason why Davis-Bacon was misguided from the start—the racist intentions of the bill’s supporters:
Congress wanted to keep black workers from competing for jobs that had hitherto been done by white unionized labor. The racist motivation behind the legislation is plain when reading the Congressional Record of the debate in 1931.
Kinks in Obama’s Home Refinancing Plans
In the president’s electioneering lecture to Congress, Mr. Obama said, “To help responsible homeowners, we’re going to work with federal housing agencies to help more people refinance their mortgages at interest rates that are now near 4 percent. . . . I know you guys must be for this, because that’s a step that can put more than $2,000 a year in a family’s pocket, and give a lift to an economy still burdened by the drop in housing prices.”
Unfortunately, it is not quite that simple. Because using the leverage of Fannie Mae, Freddie Mac, or the Federal Housing Administration to promote riskier standards for refinancing would benefit only those homeowners who stay put in houses they already own, the unintended effect on sales of new or existing homes could be negative. Moreover, gains to borrowers would be offset by potentially larger losses to investors in mortgage-backed securities (MBSs) — the “toxic assets” that provoked so much financial mischief in 2008.
As it happens, the Congressional Budget Office just released an “An Evaluation of Large-Scale Mortgage Refinancing Programs” by two CBO staffers and Deborah Lucas, a first-rate economist on loan from M.I.T.
Here are some key points:
We analyze a stylized large-scale mortgage refinancing program that would relax current income and loan-to-value restrictions for borrowers who wish to refinance and whose mortgages are currently insured by Fannie Mae, Freddie Mac, or the Federal Housing Administration. The analysis relies on an estimate of the volume of incremental refinancing that would occur and an estimate of how future default and prepayment behavior would be affected by such refinancing. Relative to the status quo, the specific program analyzed here is estimated to cause an additional 2.9 million mortgages to be refinanced, resulting in 111,000 fewer defaults on those loans and estimated savings for the GSEs and FHA of $3.9 billion on their credit guarantee exposure, measured on a fair-value basis. Offsetting those savings, federal investors in MBSs, including the Federal Reserve, the GSEs, and the Treasury, would experience an estimated fair-value loss of $4.5 billion. . . .
We also discuss the impact of this program on various stakeholders, including homeowners, non-federal mortgage investors, mortgage lenders, mortgage service providers, private mortgage insurers, and subordinated mortgage holders. For example, non-federal investors would experience an estimated fair-value loss of $13 to $15 billion; most of that wealth would be transferred to borrowers. . . .
In aggregate, the fair-value loss to both federal and non-federal investors is equivalent to the gain experienced by borrowers from the decline in their interest payments. . . Nevertheless, because a significant share of investors is composed of foreigners and the U.S. government, and because private investors would be expected to reduce spending in response their losses by less than the increase in spending by borrowers in response to their lower interest payments as well as their lower mortgage principal payments, the net effect would be an economic stimulus . . . but it is likely to be small relative to GDP.
With respect to the housing market, the overall impact of the program is also small; the 111,000 homeowners saved from foreclosure by virtue of lower monthly mortgage payments will have a minor impact on the path of future home prices. Because this program is directed toward current homeowners, it would do little to alleviate the tighter underwriting standards and increased credit pricing for purchase loans. In addition, it would not create much demand for homes, because all of its participants would already have at least one property.
Do People Pay for These Forecasts?
The forecasting firm Macroeconomic Advisers said in a report that Obama’s plan — the American Jobs Act — would boost economic growth by 1.3 percentage points in 2012 and lead to 1.3 million new jobs….
Mark Zandi, an economist with Moody’s Analytics, was even more enthusiastic about the plan. He said the jobs package would increase economic growth by 2 percentage points in 2012 and add 1.9 million jobs.
–Washington Post, September 10, 2011
Obama’s program received generally favorable reviews from economists.
“Is it worth doing?” wrote Nigel Gault, an economist at IHS Global Insight. ”Yes, it is a bolder-than-expected attempt to inject fiscal stimulus to support an ailing recovery.”
–Washington Post, September 10, 2011
Here’s another view of the Obama proposal. Here’s a critique of these forecasts. And here’s a graph reminding us what happened after President Obama predicted that his first stimulus would actually stimulate the economy.
COINTELPRO II: Hunting Terrorists by Making Them
A new study from the RAND Corporation looks at the threat of homegrown terrorism and concludes that our so-called “lone wolves” look a lot more like “stray dogs”—and stray dogs with more bark than bite, at that:
The 82 cases [i.e., investigations culminating in prosecution for some form of support for jihadist terrorism] since 9/11 involved 32 plots. Few of these 32 got much beyond the discussion stage. Only 10 developed anything resembling an operational plan that identified a specific target, developed the means of attack, and offered a sequence of steps to carry out the planned action. Of these, six were Federal Bureau of Investigation (FBI) stings. Only two individuals actually attempted to build devices on their own. One was arrested while doing so, and the other’s device failed. The rest of the would-be terrorists only talked about bombs. In only two cases did jihadist terrorists actually succeed in killing someone, and both of these cases, which occurred in 2009, involved lone gunmen. [Emphasis added.]
That assessment dovetails with the portrait painted by an important package of feature stories in the latest issue of Mother Jones examining the FBI’s pursuit of the War on Terror, and in particular the way the Bureau has established a vast network of informants. In many recent high profile cases, the FBI or its “assets” appear to have gone beyond trying to detect terror plots to playing a substantial role in manufacturing them. In line with the findings of the the RAND report, Mother Jones’ survey of domestic War on Terror success stories shows that many of the highest-profile ones, including all but one of the supposed subway bomb plots “foiled” by the FBI, had first been orchestrated by FBI assets. While the targets of those operations were clearly boiling over with anger at the United States, it’s not clear how many of them would have translated their rage into violent action absent the government’s prodding.
The author of the Mother Jones article compares the contemporary hunt for “lone wolves” and domestic terror cells to another notorious FBI initiative: COINTELPRO, a series of covert projects, stretching over three decades during the Cold War, that targeted domestic “subversive” groups for infiltration. But the aggressive use of informants and infiltrators is not the only interesting parallel here. COINTELPRO projects like Operation Chaos targeted activist groups, especially anti-war groups, suspected of being controlled by foreign governments, consistently failing to turn up proof of foreign control. But Lyndon Johnson was convinced that the link had to be there—and the failure to uncover it only underscored how insidious and dangerous the adversary must be. Thus, over time, the bar for what counted as foreign “ties” was lowered, the program’s scope expanded to include civil rights and women’s liberation groups, and its methods grew more aggressive. Because the foreign communist control had to be there, failure to detect it was regarded as failure, period.
This Week in Government Failure
Over at Downsizing the Federal Government, we focused on the following issues this past week:
- The child tax credit started out as a Republican effort to distort the tax code in a socially conservative manner, and it has now morphed into a large welfare program. As for the earned income tax credit, any program that hands out one-quarter of its spending erroneously and fraudulently is grossly unfair to the taxpayers who are footing the bills.
- The electorate — and reporters covering the president’s “jobs plan” — should understand that subsidies to state and local government have gone through the roof since 2000.
- The wonderful thing about this newly discovered feature of ObamaCare is that states don’t have to wait for Congress to act. They can reduce federal spending simply by not creating a health insurance exchange.
- President Obama’s job speech was full of bad ideas.
- We should place fewer demands on our troops and recognize that our spending and our foreign policy discourage other countries from doing more. Declaring military spending off limits before the Supercommittee even begins its work reveals a shocking unwillingness to reconsider the roles and missions that drive military spending.
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Total State Spending Has Not Been Cut
Expressing his Keynesian view of the economy, Federal Reserve Board Chairman Ben Bernanke said this yesterday:
While the weakness of the housing sector and continued financial volatility are two key reasons for the frustratingly slow pace of the recovery, other factors also may restrain growth in coming quarters. For example, state and local governments continue to tighten their belts by cutting spending and reducing payrolls in the face of ongoing budgetary pressures…
Mr. Bernanke made a boo-boo. Overall state and local government spending has not been “cut” any year in the last decade. In recent years, spending has been flat at about $2.2 trillion, but it has not been cut.
I think the Keynesian formulation that government spending equals economic growth is bizarre. But even if true, Bernanke’s concern that state and local governments aren’t profligate enough is strange because spending is up about 60 percent over the last decade, as shown in the chart below. The chart shows “total expenditures” for state and local governments from BEA Table 3.3. The figure for 2011 is the 2nd quarter value, which is up 3.1 percent over 2nd quarter 2010. So, despite Benanke’s claim, spending is (unfortunately) growing again.
Note to Charles Krauthammer: Economic Growth Averaged 2.9% (not 5%) under Ike’s Military-Industrial Complex
In an effort to defend spending $1.3 trillion on wars in Iraq and Afghanistan, the Washington Post’s hawkish columnist Charles Krauthammer writes, “During the golden Eisenhower 1950s of robust economic growth averaging 5 percent annually, defense spending was 11 percent of GDP and 60 percent of the federal budget.”
In reality, economic growth averaged only 2.9 percent a year while Eisenhower was president from 1953 to 1961. Krauthammer is erroneously crediting Ike with the ephemeral Korean War boom of 1950-51 when defense spending was much smaller (7.6 percent of GDP), but consumers emptied the shelves due to fears that rationing would return.
Real GDP growth averaged 5.2 percent from 1962 to 1968, as President Kennedy’s plan to cut marginal tax rates by 23 percent was implemented. We then switched to a mix of high tax rates and easy money, starting with surtaxes in mid-1968, and annual growth slowed to 2.6 percent from 1969 to 1982. From 1983 to 1989, after President Reagan gradually cut marginal tax rates another 23 percent by mid-1983, economic growth averaged 4.3 percent a year.
A strong economy can afford a strong military, but foreign military adventures are nevertheless an economic burden.
Adler on the Glitch that Could Defund ObamaCare
Law professor Jonathan Adler — who first brought to my attention this latest glitch in ObamaCare — has his own take here.
Postal Service Running on Fumes
The Senate Homeland Security and Government Affairs Committee held a hearing this week on the U.S. Postal Service’s dire financial situation. The USPS is facing a $10 billion loss this year, is about to max out its $15 billion line of credit with the U.S. Treasury, and doesn’t have the money to make a required $5.5 billion payment for retiree health care benefits due at the end of the month. The USPS is projecting insolvency in 2012 if Congress doesn’t step in to provide relief.
Congress hasn’t been able to bring itself to allow the USPS to close 3,000 of its 30,000+ retail locations, so it’s hard to imagine that it will allow operations to come to a halt. Therefore, the important question is what sort of relief will Congress ultimately provide?
Let’s start with what it won’t do: consider privatization. “Consider privatization” means authorizing studies or a commission to examine what it would take to prepare the USPS for sale to the private sector. In its current form, it’s unlikely that anyone would touch the USPS with a 10-foot pole. The reluctance to even consider privatization is unfortunate, especially since European nations have been liberalizing their postal markets for two decades. Getting the privatization ball rolling would probably require leadership from the White House, and that won’t happen with this administration. (See this Cato essay on privatizing the USPS for more information.)
Interestingly, U.S. Postmaster General Patrick Donahoe is asking Congress to let the USPS operate more like a private business by allowing it to reopen collective bargaining agreements, eliminate Saturday mail delivery, manage its own employee benefit programs, and have more freedom to close down excess postal facilities. Donahoe understands what Congress either doesn’t or is unwilling to recognize: if the USPS is to operate solely on the revenues that it generates, then it needs the flexibility that comes with private ownership.
Based on several pieces of postal legislation that have already been introduced in Congress, the most likely scenarios are a band-aid and/or bailout.
Post-9/11 Visa Delays Hurting U.S. Exports and Jobs
The terrorist attacks of a decade ago left their mark on U.S. trade, travel, and immigration policy, as I contemplated in my modest contribution to the flood of 9/11 retrospectives this week (see “9/11 tested America’s openness to trade and immigration,” posted over at The Daily Caller).
In the wake of the attacks, it was necessary to tighten U.S. visa policy in a way that made it far more difficult for a terrorist to ever enter our country again in the disguise of a tourist or student (as in shutting down the “Visa Express” program for young men from Saudi Arabia).
One unintended consequence of the tightening, however, is that we have also kept away millions of potential visitors who pose no threat whatsoever to the security of our homeland. As the Wall Street Journal reports today, long waits for visas have discouraged potential tourists to the United States from emerging markets such as China, Brazil, and India. As the Journal reports:
The backlog especially has deterred tourists from emerging-market countries with fast-growing pools of people looking to travel overseas, travel executives say. Waiting periods for a Brazilian to get an in-person interview for a visa to enter the U.S., for instance, can exceed four months.
Those delays have imposed a real cost on the American economy. Between 2000 and 2010, according to the story, the number of overseas arrivals to the United States barely budged, from 26 million to 26.4 million. During that same period, global long-haul arrivals grew from 152 million to 213 million—an increase of more than 60 million fueled largely by the growth of the middle class in those emerging economies. But that also means all those new travelers went elsewhere, reducing the U.S. share of long-haul visitors from 17 percent to 12 percent.
That loss of market share means the loss of tens of billions of dollars in tourism service exports, and fewer jobs for Americans in the domestic tourism industry. If President Obama and Congress are serious about promoting economic growth and employment, they should find a way to make America more hospitable for peaceable foreign tourists who only want to come here to enjoy the best our wonderful country has to offer.
Waterboarding, Consent, and Rape
Former Vice President Dick Cheney appeared at AEI today to promote his book and again made the claim that waterboarding detainees is not torture because we use this technique on our own troops. As he put it:
“Another key point that needs to be made was that the techniques that we used were all previously used on Americans,” Cheney went on. “All of them were used in training for a lot of our own specialists in the military. So there wasn’t any technique that we used on any al Qaeda individual that hadn’t been used on our own troops first, just to give you some idea whether or not we were ‘torturing’ the people we captured.”
This isn’t a new argument. Plenty of other folks have argued that, because we subject members of the military to waterboarding in Survival, Evasion, Resistance, and Escape (SERE) School (the military’s POW prep course), waterboarding detainees is not mistreatment.
It’s also a nonsensical argument.
The difference is consent. What one person consents to in one set of conditions does not make the same treatment, without consent and in other conditions, somehow less invasive or less illegal under domestic and international law. I was not waterboarded when I attended SERE school, but I endured treatment I wouldn’t willingly accept in other circumstances. If you want to waterboard me, you’d best be ready for a fight.
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