Archive for November, 2011
It Goes Beyond the Supercommittee
Today Politico Arena asks:
Should Obama have led the supercommittee?
My response:
Whether or not Obama had led the supercommittee in its effort to trim a pittance from our federal deficits and debt, the effort was doomed from the start for the reasons committee co-chairman Jeb Hensarling stated in this morning’s Wall Street Journal: “Ultimately, the committee did not succeed because we could not bridge the gap between two dramatically competing visions of the role government should play in a free society, the proper purpose and design of the social safety net, and the fundamentals of job creation and economic growth.”
Obama has proven himself clueless about economics from the time he first entered public life, as evidenced by the economic disaster surrounding him and his party. Their vision was soundly rejected by the voters a year ago. If it is rejected again a year from now, we may start the slow climb out of the hole that they, as well as Republicans who share their vision, have put us in. But if the voters give us a mixed result, it’s only a matter of time before our creditors exact the price of our economic irresponsibility. These lessons, the subjects of children’s books and learned lectures, are as old as humanity itself. We have only to heed them.
American Politicians Should Copy Canada’s Leftist Government of the 1990s and Cap Spending
Since I’ve written before about Canada’s remarkable period of fiscal restraint during the 1990s, I was very pleased to see that the establishment press is finally giving some attention to what our northern neighbors did to reduce the burden of government spending.
Here are some key passages from a Reuters story.
“Everyone wants to know how we did it,” said political economist Brian Lee Crowley, head of the Ottawa-based think tank Macdonald-Laurier Institute, who has examined the lessons of the 1990s. But to win its budget wars, Canada first had to realize how dire its situation was and then dramatically shrink the size of government rather than just limit the pace of spending growth. It would eventually oversee the biggest reduction in Canadian government spending since demobilization after World War Two. …The turnaround began with Chretien’s arrival as prime minister in November 1993, when his Liberal Party – in some ways Canada’s equivalent of the Democrats in the U.S. – swept to victory with a strong majority. The new government took one look at the dreadful state of the books and decided to act. “I said to myself, I will do it. I might be prime minister for only one term, but I will do it,” said Chretien. …The Liberals thought their first, rushed budget – delivered in February 1994, three months after taking office, was tough. It reformed unemployment insurance entitlements, and cut defense and foreign aid… The upstart Reform Party, then the main national opposition party, had campaigned on “zero-in-three” – balance the budget in three years. “We were always trying to go faster,” said Reform’s leader at the time, Preston Manning. …The Liberals were stung by the criticism and, at first reluctantly but then with gusto, they got out the chain saws. …Cutting government spending programs went against the Liberal grain. Contrary to the Reform Party, the Liberals saw a more important role for government. Paul Martin now has a lasting reputation as the finance minister who slayed Canada’s deficit, but the conversion from spender to cutter was painful. His father, also called Paul, had helped create Medicare, Canada’s publicly funded health care system, and suddenly here was Paul Junior contemplating massive cuts.
This is a remarkable story. My only real quibble is that the fiscal restraint actually started the year before the Liberal Party took power, as the chart illustrates.
But the key thing to understand is that Canada enjoyed a five-year period when government spending increased by an average of only 1 percent each year.
There are more good passages in the story. Can anybody imagine Obama doing this?
At one 1994 cabinet meeting, Martin announced a spending freeze. A minister put forward a project that needed funding but Chretien cut him off, reminding him of Martin’s freeze. A second minister raised his hand to ask for funding, and a testy Chretien told the cabinet that the next minister to ask for new money would see his whole budget cut by 20 percent. …The ratio of spending cuts to tax hikes was seven-to-one. Asked why, Chretien said simply: “There was more need on one side than the other.” …Cuts ranged from five percent to 65 percent of departmental budgets.
By the way, while there were a few tax hikes implemented, they were trivial. Tax revenue as a share of GDP rose from 44.2 percent of GDP to 44.5 percent a GDP, an increase that probably was going to happen anyhow as Canada’s economy recovered.
So what were the results of Canada’s spending freeze?
The following passage has some numbers, but the second chart shows that the burden of government spending in Canada (right axis) fell from 53 percent of GDP to 44 percent of GDP in just five years. And red ink (left axis) completely disappeared.
The deficit disappeared by 1997 and the debt-to-GDP ratio began a rapid decline – it is now at about 34 percent. …After wrestling the deficit to the ground, Canada enjoyed what Crowley calls the payoff decade, outperforming the rest of the G7 on growth, job creation and inward investment. From 1997 to 2007, it averaged 3.3 percent economic growth. while U.S. growth averaged 2.9 percent.
The most important thing to understand is that Canada’s economy improved because the burden of government spending was reduced. Moreover, because the underlying disease was being treated, this meant two of the symptoms of excessive government – deficits and debt – also became less of a problem.
Last but not least, there are rewards for good policy. Just as Reagan enjoyed a landslide in 1984 after sticking to his guns, Canada’s Liberal Party also reaped the benefits of doing the right thing.
The final lesson is that you can impose painful spending cuts and still win elections. Chretien went on to win two more back-to-back to form majority governments, a rare feat. ,,,Drummond, who later moved to the private sector and is now an advisor helping the Ontario provincial government slash its deficit, noted that governments on the right and left in Saskatchewan, Alberta and Ontario won more voter support after their own budget cuts in the 1990s.
Here’s a video I narrated that looks at the Canadian experience, as well as similar good reforms in New Zealand, Ireland, and Slovakia.
Last but not least, let’s put all of this in context. As demonstrated here, the U.S. would enjoy a balanced budget in just eight years if politicians could be convinced to limit spending so that it increased by 1 percent each year.
What the Supercommittee’s Failure Says About U.S. Foreign Policy
The so-called supercommittee has failed to come to an agreement on a package of spending cuts and/or tax increases that would add up to $1.2 trillion over the next ten years. Some inveterate spenders have portrayed the faux cuts as draconian, painful, and irresponsible, but they would have been quite modest relative to expected spending over the next ten years. Remember, according to Washington’s unique math, spending is “cut” when it increases less than previously projected. Several of my colleagues have weighed in on the tax and domestic spending aspects. I have some thoughts as it pertains to military spending.
The reason why this particular method for reining in out-of-control spending failed was both predictable and predicted. The Sword of Damocles known as sequestration — supposedly automatic spending cuts divided between the Pentagon and the rest of the discretionary budget — proved a particularly dull weapon. It was intended to force Democrats and Republicans to compromise, but few people believed that the cuts would actually occur, and Republicans, in particular, were working to exempt the Pentagon before the ink from August’s debt ceiling deal had dried. As former McCain adviser Kori Schake observed last month, it is difficult to see “how either the math or the politics work to bring federal spending into line with receipts if conservatives rule defense out of bounds.”
The politics might actually be tougher than the budgetary arithmetic. Not all conservatives believe that the Pentagon’s budget is sacrosanct, but those who wish to stick with the status quo, or dramatically increase military spending (as Mitt Romney wishes to do), have a story for the upcoming election that they believe will play well with voters. They will accuse the Democrats of wanting to “gut defense,” cut off funds for troops in harm’s way, and otherwise undermine American security. They will expect the public to ignore that much of what we spend on military is completely irrelevant to keeping us all safe — it is intended, instead, to make other countries feel safe, and therefore disinclined to spend more on their own defense.
Americans are ignorant of such things because the political class likes it that way. As SAIS Professor Michael Mandelbaum, one of the leading advocates for our current foreign policy, explained several years ago, Americans were opposed to playing the role of the world’s policeman, while other countries free ride on our largesse. And this shouldn’t surprise. “To make sacrifices largely for the benefit of others counts as charity,” Mandelbaum explained, ”and for Americans, as for other people, charity begins at home.” The solution for sustaining this state of affairs is simple: keep the people in the dark: ”The American role in the world,” Mandelbaum concluded, “may depend in part on Americans not scrutinizing it too closely.” Observes Christopher Fettweis in a recent book, “Democracy at home can apparently be a handicap to those who would promote it most fiercely abroad.”
President Obama and the Democrats are poorly positioned to capitalize on this disconnect between the public and the elites because they share the blame for a system in which Americans spend far more money on our military than do people in other countries. Indeed, Republicans and Democrats alike have presided over a considerable expansion of U.S. global commitments since the end of the Cold War. And that pattern has actually accelerated as the U.S. fiscal crisis has grown more dire. The president has just returned from a trip to Asia in which he implied that U.S. security commitments to wealthy, stable allies in the region would expand in coming years.
In other words, the president expects that U.S. taxpayers will spend even more money to defend countries that can defend themselves, and that he will pay no serious political price for making such promises.
Given that his Republican challenger — whoever that might be – is likely to criticize him for not doing enough to “reassure” the countries in Asia, he is probably correct.
Education Philanthropist Ted Forstmann, RIP
Ted Forstmann passed away yesterday at the age of 71. Forstmann was most famous for his pioneering work in the business world, and he was for a time a board member of the Cato Institute, but many others knew him as one of the most generous and thoughtful education philanthropists of our time. I first met him in the late 1990′s, when he was planning the launch of the Children’s Scholarship Fund (CSF) with his friend John Walton. CSF is a non-profit K-12 scholarship organization that provides tuition assistance to low-income families wishing to send their children to private schools. Understanding that direct financial responsibility encourages parents to be more involved in their children’s education, Forstmann ensured that CSF grants required parents to make a co-payment out of their own pockets, based on what they could afford.
Critics argued that poor parents would be unwilling or unable to come up with even a small fraction of the cost of private school tuition to make these co-payments. But when CSF was launched in 1998, there were 1.25 million requests for the 40,000 scholarships initially available. The myth that poor, inner-city parents don’t care about their kids’ education was shattered. Since its inception, the program has raised nearly half a billion dollars and served 123,000 children.
The Children’s Scholarship Fund continues to operate today, and its website can be found here.
Ted Forstmann wanted all families to have access to a free and dynamic education marketplace. He didn’t live to see it, but he greatly advanced that cause. The fact that it is now within reach is in no small part due to his efforts. Scholarship programs like CSF are now operating around the country, many of them bolstered by education tax credit programs that allow donations to them to be written off, dollar for dollar, from state taxes. Such programs exist in Florida, Pennsylvania, Arizona and four other states, with a new program passed this year in Oklahoma and another under consideration in Ohio. By scaling-up these programs it would be possible to achieve the goal of universal access to the marketplace that Forstmann and many others have long pursued.
We’ll keep working toward that goal. And we’ll miss you, Ted.
Supercommittee Fails; Now Let’s Talk Specific Cuts
It looks like the congressional supercommittee has failed to agree on a deficit-reduction plan. That’s probably a good thing because it sets up an automatic sequester to trim spending by $1.2 trillion over 10 years.
If the supercommittee had agreed to a deal, it might have paired phony spending cuts with real tax increases. For example, while Republicans had offered to raise taxes by $400 billion, there had been talk of adopting smoke-and-mirrors savings of $700 billion for the withdrawal of troops from Iraq and Afghanistan.
Also, one of the tax increases that Republicans were apparently offering was to change the indexing of income tax brackets. That would have been the worst kind of tax hike, as it would have been a hidden way of steadily increasing marginal tax rates over time.
A sequester is far from the best way to cut spending, and spendthrift members of Congress will have until January 2013 to try and weasel out of cuts. However, it does help to put the big spenders on the defensive. If defense hawks such as Senator John McCain want to reverse the roughly $55 billion a year in defense savings, then they have the burden of coming up with alternative cuts that can gain broad agreement.
CBO has analyzed the sequester mechanism. In typical congressional style, the simple sequester idea of “across-the-board cuts” has morphed into complex procedures that only Washington lawyers would love. The sequester’s main effect will be to reduce the discretionary caps on defense and nondefense spending that are in place from the Budget Control Act passed earlier this year. The sequester will make only tiny cuts to so-called entitlement programs. Still, any cuts are good cuts.
What’s the next step for budget control? Conservative Republicans have focused nearly all of their energy this year on trying to impose overall limits on the budget. The Budget Control Act and likely sequester have established discretionary caps for the next decade. Meanwhile, an effort to pass a Balanced Budget Amendment has failed.
Now Republicans should do what most of them have been evading all year—start pushing cuts to particular programs in order to launch a discussion about the federal government’s proper role. How about ending federal subsidies for public housing, high-speed rail, urban transit, farm businesses, and energy? How about raising the Social Security retirement age, increasing Medicare deductibles, and block-granting Medicaid?
To his credit, Rep. Pompeo is showing the way with his push to eliminate the Economic Development Administration. The EDA is a relatively small program, but Pompeo did a nice job on Fox last week making the case for termination. We need every fiscal conservative in Congress to do some research and then target a handful of specific programs for repeal.
Enough of the “noncommittal gibberish” about cuts, as Robert Samuelson says today. The nation’s “adult discussion” on the budget will begin when policymakers start talking specifics.
Supercommittee Tax Fight Is About Increasing Spending, not Reducing Deficits
Some people have asked why I’m so agitated about the possibility that Republicans may acquiesce to tax increases as part of the Supercommittee negotiations.
Rather than get into a lengthy discourse about the proper role of the federal government or an analysis of how the Bush-Obama spending binge worsened America’s fiscal situation, I think this chart from a previous post says it all.
Republicans are considering a surrender on taxes because they are afraid that a deadlock will lead to a sequester, which would mean automatic budget savings. And the sequester, according to these politicians, would “cut” the budget too severely.
But as the chart illustrates, that is utter nonsense.
There are only budget cuts if you use dishonest Washington budget math, which magically turns spending increases into spending cuts simply because the burden of government isn’t expanding even faster.
If we use honest math, we can see what this debate is really about. Should we raise taxes so that government spending can grow by more than $2 trillion over the next 10 years?
Or should we have a sequester so that the burden of federal spending climbs by “only” $2 trillion?
The fact that this is even an issue tells us a lot about whether the GOP has purged itself of the big-government virus of the Bush years.
A few Republicans say that a sellout on tax hikes is necessary to protect the defense budget from being gutted, but this post shows that defense spending will climb by about $100 billion over the next 10 years under a sequester. And that doesn’t even count all the supplemental funding bills that doubtlessly will be enacted.
In other words, anyone who says we need to raise taxes instead of taking a sequester is really saying that we need to expand the burden of government spending.
So even though Ronald Reagan and Calvin Coolidge are two of my heroes, now you know why I don’t consider myself a Republican.
Adios Balanced Budget Amendment
The House failed to pass a particularly bad version of the Balanced Budget Amendment this afternoon. Good. Kudos to the four Republicans who voted against it (see vote breakdown here).
House Republicans wanted a vote on a BBA for political purposes. The GOP wanted to be able to present the Democratic “no” votes to voters as proof that those particular members aren’t serious about reining in the exploding federal debt. They probably aren’t, but Republicans who voted “yes” shouldn’t cite their vote as evidence that they’re serious about cutting spending unless they’re prepared to detail what all they would cut in order to bring the budget into balance.
This Week in Government Failure
Over at Downsizing the Federal Government, we focused on the following issues this past week:
- The Washington Post does a nice job describing how Solyndra is just one of many energy subsidy failures of recent decades.
- The cheerleaders for federal redistribution schemes would have the public believe that it’s all about “helping those in need” when in fact it’s really about fostering dependency on taxpayers.
- Chris Preble on cutting military spending and rethinking our grand strategy.
- U.S. policymakers should be asking: What have other countries privatized that we can privatize in this country?
- Chris Edwards on crumbling bridges and infrastructure fear-mongering.
- The “minibus” spending bill is largely business as usual.
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GOP National Security and Foreign Policy Debate: What to Ask the Candidates
The economy is likely to dominate next year’s presidential race, so it is surprising that Republicans would choose to conduct two debates focused on foreign policy in the span of 10 days. The first, co-hosted by CBS News and National Journal, was held last Saturday evening. (CBS apparently thought most people had better things to do; they preempted the final 30 minutes with an NCIS rerun.) CNN, no doubt, hopes that the sequel, to be held Tuesday, November 22, will draw a wider audience.
I wonder if the RNC hopes that it doesn’t. In fact, there are many reasons why GOP leaders would want to get the whole subject of foreign policy and national security out of the way well before next year. Let Michele Bachmann and Rick Santorum wax poetic about the wisdom of waterboarding, and let them do it after television viewers have stopped watching. Better to save the talk of joblessness and massive federal debt for the main event with President Obama, when tens of millions of Americans, including many independents and undecided voters, might actually rely on the debates to inform their choices. (Unlikely, I know, but hope springs eternal.)
Foreign policy blunders have cost the GOP votes in three of the last four elections. (It was a non-factor in 2010.) Once trusted by the electorate as the voice of prudence and reason when it came to diplomacy and the use of force, the Republican brand has been sullied by the war in Iraq and the quagmire in Afghanistan.
One might think that the party has learned its lessons, and that those aspiring to carry the GOP banner into next year’s elections would be determined to draw distinctions between themselves and the recent past.
Judging from last Saturday’s debate, they haven’t. The answers provided by the presumptive front-runner, Mitt Romney, and his leading challengers, Herman Cain and Newt Gingrich, reveal a reflexive commitment to the status quo and an unwillingness to revisit the rationales for war with Iraq or for nation-building in Afghanistan. They hinted at expanding the U.S. military’s roles and missions to include possible conflict with Iran. They continued to speak of a “war on terror.” And they struggled to draw distinctions between themselves and President Obama, at times criticizing him for doing too little, other times for doing too much.
In advance of last week’s debate, several bloggers suggested some questions. Some of these made it to prime time. However, two big sets of questions—one pertaining to the lessons of Iraq and Afghanistan, the other related to the costs of our foreign policies—remain unexplored. I hope that the questioners in next week’s debate, or perhaps the other candidates, would try to get some answers. Be sure to follow me on Twitter (@capreble) for a conversation during the debate. Justin Logan will also be live-blogging the event over at RealClearWorld.
In the meantime, here are some questions I would like answered:
Engineers for Big Government
The American Society of Civil Engineers does a flashy study every year called “America’s Infrastructure Report Card.” The wrench-turners give a grade of “D” to the mainly-government infrastructure they examine. Based on the low grade, they ask for taxpayers to cough up another $2.2 trillion so the engineers can fix the supposed mess.
There are two big problems with the ASCE report. The first is that it is devoid of economic thinking. Every infrastructure asset that is old and less than perfect is apparently a disgrace to the engineers. But economists would point out that to maximize our standard of living we generally want to wear out fixed assets pretty thoroughly before we buy new stuff.
Consider America’s automobile stock, which includes everything from brand-new cars to old clunkers. The engineers would probably give the nation’s automobile infrastructure a “D” because it includes many old cars like my wife’s 11-year-old Honda. But it would be hugely wasteful—both economically and environmentally—to throw out all the old cars and give everyone brand new Acuras.
Instead, it’s efficient if car owners compare the likely stream of benefits and costs of their current used cars with the likely stream of benefits and higher costs of possible new cars, and then make an optimal choice. That’s what my wife is doing, but the ASCE would probably give her a “D” grade, castigate her frugality, and insist she immediately blow her savings on a new Rolls Royce.
The other problem with the ASCE report is its naiveté regarding the efficacy of central planning. I’ve discussed federal infrastructure failures in this op-ed and this testimony, but the ASCE seems to believe that all-knowing visionary leaders in Washington can direct us to infrastructure salvation.
Australia: Watch What You Say About Taxes On Your Business
An agency of the Australian government has news for businesses that might be inclined to undercut intended official messaging about the country’s new carbon tax: we’re looking over your shoulder [Andrew Bolt, Melbourne Herald Sun via Coyote]:
[T]he Australian Competition and Consumer Commission … this week issued warnings to businesses that they will face whopping fines of up to $1.1m if they blame the carbon tax for price rises [at least if they do so in a way the commission considers "unsubstantiated" or "misleading"---see below].
It says it has been “directed by the Australian government to undertake a compliance and enforcement role in relation to claims made about the impact of a carbon price.”
…There will be 23 carbon cops roaming the streets doing snap audits of businesses that “choose to link your price increases to a carbon price.”
Instead, the ACCC suggests you tell customers you’ve raised prices because “the overall cost of running (your) business has increased.”
It should be noted that the ACCC in its guidance disclaims any intent to suppress discussion of the tax as such, so long as it can be “substantiated” to the commission’s satisfaction and is not exaggerated or misleading to consumers. But its examples make clear that it will regard as exaggeration what many others would consider difference of opinion, and in particular that businesses that blame a price rise on the tax face the prospect of burdensome “substantiation notices” and may well lose in court unless they can prove that the tax was entirely (not just mostly) responsible for a cited rise in costs.
Columnist Bolt, incidentally, knows a thing or two about the tendency of the advancing regulatory state to trample freedom of speech. And readers with longer memories will be aware that there was a time when our own Federal Trade Commission was interested in regulating corporate “issue” advertising in a very similar way, so that ads that explained a company’s position on, say, environmental controversies would become legally hazardous unless each assertion therein could be “substantiated” to the regulators’ satisfaction.
This Week at Libertarianism.org
This week at Libertarianism.org,
- George H. Smith published another in his Excursions series of original essays, this time looking at the question of whether Thomas Jefferson was a plagiarist.
- John Samples wrote about equality and political speech, particularly attempts to increase the former by restricting the latter. “Tax financing of campaigns is a lot like establishing a religion: citizens are forced to act contrary to their deepest convictions in service to some alleged greater good,” Samples wrote. “I assume that such compulsion has no place in a liberal society.”
- Jason Kuznicki blogged about NPR’s recent story on Ayn Rand, writing, “If you don’t like what you hear about Ayn Rand in this story, you probably won’t like her, either. If you do like what you hear, or if you just find it intriguing, then you should definitely read further.”
- Miles Pope continued his careful analysis of Jan Narveson’s social contract defense of a free society, The Libertarian Idea.
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