I’m Willing to Go Along with President Obama’s ‘Balanced Approach’ to Deficit Reduction, but Only if We Use Honest Math
The President has issued an ultimatum that more tax revenue must be part of budget negotiations. Indeed, he endlessly repeats his desire for a “balanced approach,” implying that as much as 50 percent of the deficit reduction in any agreement should come from higher revenues.
Because I am a thoughtful, middle-of-the-road, pragmatic guy, I’m willing to accept the President’s ultimatum. I do have one tiny request, however, and that is for any such deal to be based on honest math.
What I mean by this is that I don’t want politicians to approve a budget that results in more spending, but then claim that they “cut spending” because the budget didn’t grow even faster. I want a spending cut to mean less spending (gee, what a novel idea).
And when they talk about new revenue, I want to see how much revenue the IRS is collecting this year, and measure revenue increases against that number. After all, the crowd in Washington should be happy to get more money, even if it is the result of benign factors such as more jobs being created, companies earning higher profits, and people getting more pay.
I assume these are reasonable requests. After all, this is how businesses and households operate their budgets, and I’m sure the political insiders wouldn’t want to use dishonest numbers to mislead voters (perish the thought!).
So what would a balanced approach look like, assuming we want to use honest math? The answer isn’t that complicated. I started with the latest estimates from the Congressional Budget Office for spending and revenues for this fiscal year (FY2011). I then assume, in the interest of a “balanced approach,” that spending should be cut by 5 percent each year and that revenues should climb by 5 percent each year.
The results, as illustrated by the graph, are remarkable. If we use a 50-50 deal of higher revenue and lower spending, we balance the budget in just five years. The President is right!
Obama Backtracks on Marijuana Policy
President Obama is backing away from his campaign pledge to not interfere with the states that choose to adopt medical marijuana reforms. Here’s an excerpt from the NORML blog on the new policy memorandum issued by the Department of Justice:
[T]he memorandum states that the recent flurry of intimidating US Attorney letters to state lawmakers are “entirely consistent” with the Obama administration’s position. In other words, the administration is now on record in support of claims made by US Attorneys in Rhode Island, Washington, and other states alleging that state employees could be targeted and federally prosecuted for simply registering and licensing medical cannabis patients or providers — a position that is even more extreme than that of the previous administration. (Notably to date, however, no state employee — or for that matter, no state sanctioned dispensary operator — has ever been prosecuted by the federal government.)
The memo goes on to state that the federal government distinguishes between individual medical cannabis patients and third party providers, indicating that it is a poor use of federal resources (rather than a poor use of judgment) to target the former, while indicating that the latter are fair game for federal prosecution.
Read the whole thing. Well, at least Obama has ended the wars and got the United States back on a sound financial footing.
For a recent drug policy debate at Cato that went far beyond medical marijuana reform and reduced sentences for crack offenders, go here.
Washington Post Grows Nostalgic for Big-Government Bush
E. J. Dionne Jr. has suddenly discovered the big-government George W. Bush, 12 years late, and he’s feeling nostalgic:
Perhaps I should thank the current crop of Republican presidential candidates for providing me with an experience I never, ever expected: During this week’s debate in New Hampshire, I had a moment of nostalgia for George W. Bush….
Unlike this crowd of Republicans, Bush acknowledged that the federal government can ease injustices and get useful things done.
Say what you will about his No Child Left Behind education-reform program. It accepted, correctly, that the federal government has to play an important part in reforming our public schools and held them accountable to a set of standards….
And while there are many problems with the way Bush chose to provide prescription drugs under Medicare, he was quite right to believe it had to be done….
Oh, yes, and I really do miss some of Bush’s early rhetoric. I cannot imagine a Republican today giving Bush’s 1999 speech in Indianapolis titled — shades of Barack Obama? — “The Duty of Hope.”
Bush criticized the view “that if government would only get out of our way, all our problems would be solved” as a “destructive mind-set.” He scorned this as an approach having “no higher goal, no nobler purpose, than ‘Leave us alone.’ ”
Stick with us, E. J. We could have told you this in 2007, when Michael Tanner published Leviathan on the Right; or in 2003, when I complained in the Washington Post about Bush’s spending, education program, and entitlement expansion; or in, ahem, 1999, when Ed Crane wrote in the New York Times:
Bill Clinton’s impact on the American polity was never more evident than in the major address that the Republican Presidential aspirant George W. Bush gave in Indianapolis last week. The speech was, well, Clintonesque [in its] assumption that virtually any problem confronting the American people is an excuse for action by the Federal Government.
E. J. likes that view better than we do, but at least readers of the Washington Post will now realize that Obama’s out-of-control spending, nationalizations, and health care interventions are an extension, not a reversal, of Bush’s policies.
Nobel Prize Winner Analyzes the Obama Growth Gap
I’ve explained before that one of the most damning pieces of evidence against Obamanomics is that the economy is suffering from sub-par growth, something that is particularly damning since normally one expects to see faster-than-average growth following an economic downturn.
In a recent presentation, Robert Lucas of the University of Chicago included a couple of graphs that illustrate this phenomenon. This first chart shows the history of U.S. economic growth over the past 140 years. As you can see, the growth rate was remarkably constant over time, and there were always periods of rapid growth following economic downturns.
Lucas, who won the Nobel Prize in economics in 1995, then looks at the data for the recent downturn and recovery. As you can see, we have been struggling to get back to average growth rates and we have not enjoyed any of the above-average growth that normally follows a recession.
The key question, of course, is why growth has been anemic, resulting in (what seems to be) a permanent loss of output. In his presentation, Lucas warns that bad government policy is playing a big role. He says that “the problem is government is doing too much,” and he specifically highlights the “likelihood of much higher taxes, focused on ‘the rich’” and a “large increase in the role of government” in the healthcare sector.
In his conclusion, Professor Lucas is not overly optimistic about recovering lost output. He doesn’t make any flamboyant claims, but he does note that “European economies have larger government role and 20-30% lower income level than US.”
The obvious connection, as I’ve pointed out on many occasions, is that America is becoming a European-style welfare state and it is unavoidable that we will suffer from European-style economic malaise.
P.S. It should be noted that America’s anemic economic performance in recent years is not solely Obama’s fault. As the White House repeatedly points out, he inherited a downturn. That is completely accurate. My complaint, however, is that Obama promised hope and change but instead has exacerbated the big government policies of his predecessor.
Heckuva Job on that Stimulus!
Based on this morning’s numbers, I’ve updated my chart showing what the Obama Administration said would happen with the so-called stimulus compared to what actually has happened. As you can see, the unemployment rate is about 2.5 percentage points higher than the White House claimed it would be at this point.
Since I just did an I-told-you-so post about Greece, I may as well pat myself on the back again (albeit for another completely obvious prediction). Here’s the video I narrated a couple of years ago on the Obama faux stimulus.
Presidents Should Obey the Law
In Star Wars III: Revenge of the Sith, when Chancellor Palpatine transforms the republic into an empire, Senator Amidala remarks:
So this is how liberty dies . . . with thunderous applause.
But it can also happen in silent acquiescence. For decades now, successive Congresses have evaded their responsibility to make decisions about the deployment of U.S. armed forces abroad. I write about the latest instance of this, in Libya, in today’s Britannica column:
Presidents have an obligation to obey the Constitution and the law. But one of the ways that separation of powers works is that each branch of government is supposed to jealously guard its prerogatives from usurpation by the other branches. Too often Congress ducks that responsibility, preferring to let presidents make decisions, make law, and make war without the involvement of Congress. As Arthur M. Schlesinger, Jr., explained in his book The Imperial Presidency, the expansion of presidential war-making power has been “as much a matter of congressional abdication as of presidential usurpation.”
The president is derelict in his duty to obey the Constitution and the War Powers Resolution. And Congress is derelict in its duty to assert its constitutional authority. And I’m still wondering what’s happened to the antiwar movement, which ought to be loudly protesting not just the continuing wars in Iraq and Afghanistan but the newborn war in Libya.
As George Will said last week, “even if you think the War Powers Resolution is an unwise law—it is a law.” And a former law professor who is now the president of the United States should obey the law. Will expanded on that point in his Sunday column, titled “Obama’s Illegal War,” in the old-fashioned print edition of the Washington Post.
Full Britannica column here.
A ‘Special’ Relationship?
When President Obama meets with British Prime Minister David Cameron in London, they should focus on the two wars that involve both the U.S. and British militaries (Afghanistan and Libya). But these discussions will take place in the context of diminishing British military capability.
At a time when the United States should be shedding some of the burdens of policing the globe, and encouraging other countries to step forward to defend themselves, the British are moving in the opposite direction. They are cutting their military, and tacitly becoming more dependent upon U.S. power. The end result will be a United Kingdom that is less able to assist us in the future.
The United States today spends far more on its military than does the United Kingdom, and the gap is likely to grow. This is sure to have an impact on the U.S.-UK relationship.
The number of British troops, ships and planes that are available for missions has dropped and will continue to if Cameron pushes through significant cuts in British military spending. He has proposed actual cuts, not the slowing in the rate of growth that Obama and Defense Secretary Gates have presided over so far.
The special relationship has been cemented by the numerous occasions in which British and American leaders have cooperated to address common security challenges. The most important of these involve U.S. and British troops fighting side by side.
But shrinking British defense spending could strain the relationship. The goodwill that has prevailed between the two countries could be in jeopardy, and Americans may find it harder to look upon the Brits as the “good” ally, the one that sticks by us through thick and thin. And if the American public grows disenchanted with British contributions to U.S.-led military missions, the British public may then hold less generally positive opinions of the United States.
A version of this post originally appeared in The National Interest Online.
Let Europe Be—and Defend—Europe
In the midst of difficult domestic political battles, Barack Obama begins a lengthy European trip today. He should encourage the continent to increase its defense capabilities and take on greater regional security responsibilities.
Presidential visits typically result in little of substance. President Obama’s latest trip will be no different if he reinforces the status quo. His policy mantra once was “change.” No where is “change” more necessary than in America’s foreign policy, especially towards Europe.
Despite obvious differences spanning the Atlantic, the U.S. and European relationship remains extraordinarily important. The administration should press for increased economic integration, with lower trade barriers and streamlined regulations to encourage growth.
At the same time, however, Washington should encourage development of a European-run NATO with which the U.S. can cooperate to promote shared interests to replace today’s America-dominated NATO which sacrifices American interests to defend Europe. Americans no longer can afford to defend the rest of the world. The Europeans no longer need to be defended.
Although World War II ended 66 years ago, the Europeans remain strangely dependent on America. Political integration through the European Union has halted; economic integration through the Euro is under sharp challenge; and military integration through any means is reversing.
Indeed, the purposeless war in Libya, instigated by Great Britain and France, has dramatically demonstrated Europe’s military weakness. Despite possessing a collective GDP and population greater than that of America, the continent’s largest powers are unable to dispatch a failed North African dictator.
President Barack Obama starts with visits to Ireland, the UK, and France. In the latter he will consult with the heads of the G8 nations, which include Germany and Italy.
His message should be clear: while America will remain politically and economically engaged in Europe, it will no longer take on responsibility for setting boundaries in the Balkans, policing North Africa, and otherwise defending prosperous industrial states from diminishing threats. Washington should expect the continent to become a full partner, which means promoting the security of its members and stability of its region.
The president should deliver a similar message when he continues on to Poland. Part of “New Europe,” which worries more about the possibility of revived Russian aggression, Warsaw has cause to spend more on its own defense and cooperate more closely with its similarly-minded neighbors on security issues.
In fact, Poland, Slovakia, Hungary, and the Czech Republic, members of the “Visegrad Group,” recently announced creation of a “battle group” separate from NATO command to emphasize regional defense. The president should welcome this willingness to take on added defense responsibilities.
New Job Numbers
The Labor Department released its latest job numbers today and they remind me of Clint Eastwood’s 1966 classic, The Good, the Bad, and the Ugly.
The good news is that the economy created 244,000 new jobs, the biggest gain in almost a year. And the jobs were in the productive sector of the economy rather than government, so the added employment means more taxpayers rather than more tax-consumers.
The bad news is that the jobless rate increased to 9.0 percent, up from 8.8 percent last month. This means that the number of people looking for work is increasing at a faster rate than the number of jobs being created.
The ugly news, at least from the perspective of the Obama administration, is that the latest data is yet another piece of evidence that the White House was grossly mistaken when it claimed that bigger government would translate into better economic performance.
The blue line in the chart below shows the administration’s prediction of what would happen to unemployment if the so-called stimulus was enacted. The dots represent the actual unemployment rate.
As you can see, the unemployment rate is easily more than two percentage points higher than the White House said it would be at this time.
Has President Obama Given up on Changing U.S. Foreign Policy?
Today in Politico I have an op-ed titled “How Washington changed Obama.” In the piece, I argue that the recent appointments of Leon Panetta as secretary of defense and Gen. David Petraeus as director of the CIA, combined with revelations in the recent New Yorker article by Ryan Lizza, suggest that President Obama has given up on changing U.S. foreign and defense policy:
Panetta is a dubious choice to fulfill Obama’s recent pledge to trim military spending. Any secretary charged with realizing that pledge would need extraordinary credibility with Capitol Hill Republicans, many of whom are determined to continue raining money on the Pentagon regardless of the nation’s parlous fiscal position. Despite having once been a Republican, Panetta ran for Congress as Democrat and has served prominently in Democratic administrations. He is unlikely to craft the pragmatic consensus needed to give the Pentagon a haircut.
Petraeus’s nomination poses a different problem. He has spent the past decade focused— at the behest of his commanders in chief — on what we used to call the “global war on terrorism.” But is U.S. nation-building in the Muslim world the most important national security and intelligence problem we face today?
[…]
The U.S. desperately needs to change its focus. We account for roughly half the world’s military spending, yet we feel terribly insecure. We infantilize our allies so that they won’t pay to defend themselves and instead allow us to do it for them. We stumble into small- and medium-sized foreign quagmires the way many people eat breakfast — frequently and without much thought.
Read the rest of the op-ed here.
White House to Propose 26 Percent Corporate Tax Rate?!? Look before You Leap
According to an article in the New York Times, the Obama Administration is seriously examining a proposal to reduce America’s anti-competitive 35 percent corporate tax rate.
The Obama administration is preparing to inject an unpredictable new variable into its economic policy clash with Republicans: a plan to overhaul corporate taxes. Economic advisers have nearly completed the process initiated in January by the Treasury secretary, Timothy F. Geithner, at President Obama’s behest. That process, intended to make the United States more competitive internationally, has explored the willingness of business leaders to sacrifice loopholes in return for lowering the top corporate tax rate, currently 35 percent. The approach officials are now discussing would drop the top rate as low as 26 percent, largely by curbing or eliminating tax breaks for depreciation and for domestic manufacturing.
This may be a worthwhile proposal, but this is an example where it would be wise to “look before you leap.” Or, for fans of Let’s Make a Deal, let’s see what’s behind Door Number 2.
To judge Obama’s plan, it is important to have the right benchmark. An ideal corporate tax system obviously should have a low tax rate. And it also should have no double taxation (tax corporate income at the business level or tax it at the individual level, but don’t tax it at both levels).
But it’s also important to have a simple and neutral system. The right definition of corporate income for any given year is (or should be) total revenue minus total costs. What’s left is income.
This may seem to be a statement of the obvious, but it’s not the way the corporate tax code works. The system has thousands of complicated provisions, some of which provide special loopholes (such as the corrupt ethanol credit) that allow firms to understate their income, and some of which impose discriminatory penalties by forcing companies to overstate their income.
Consider the case of depreciation. The vast majority of people understandably have no idea what this term means, but it sounds like a special tax break. After all, who wants big corporations to lower their tax bills by taking advantage of something that sounds so indecipherable.
In reality, though, depreciation simply refers to the tax treatment of investment costs. Let’s say a company buys a new machine (which would increase productivity and thus boost wages) for $10 million. Under a sensible and simple tax system, that company would include that $10 million when adding up all their costs, which then would be subtracted from total revenue to determine income.
But the corporate tax code doesn’t let companies properly recognize the cost of new investments. Instead, they are only allowed to deduct (depreciate) a fraction of the cost the first year, followed by more the next year, and so on and so on depending on the specific depreciation rules for different types of investments.
To keep the example simple, let’s say there is “10-year straight line depreciation” for the new machine. That means a company can only deduct $1 million each year and they have to wait an entire decade before getting to fully deduct the cost of the new machine.
Ultimately, the firm does deduct the full $10 million, but the delay (in some cases, about 40 years) means that a company, for all intents and purposes, is being taxed on a portion of its investment expenditures. This is because they lose the use of their money, and also because even low levels of inflation mean that deductions are worth significantly less in future years than they are today.
To put it in terms that are easy to understand, imagine if the government suddenly told you that you had to wait 10 years to deduct your personal exemption!
Let’s now circle back to President Obama’s proposal. With the information we now have, there is no way of determining whether this proposal is a net plus or a net minus. A lower rate is great, of course, but perhaps not if the government doesn’t let you accurately measure your expenses and therefore forces you to overstate your income.
I’ll hope for the best and prepare for the worst.
P.S. It’s also important to understand that a “deduction” in the business tax code does not imply loophole. If you remember the correct definition of business income (total revenue minus total costs), this means a business gets to “deduct” its expenses (such as wages paid to workers) from total revenue to determine taxable income. Some deductions are loopholes, of course, which is why a simple, fair, and honest system should be based on cash flow. Which is how business are treated under the flat tax.
No Profile in Courage Here, Either
Yesterday, speaking at Facebook headquarters, President Obama assessed the guts of Rep. Paul Ryan (R-Wisc.) and other congressional Republicans and concluded that their deficit reduction plan isn’t “particularly courageous.” That might be accurate – their plan lacks specificity and could target a lot more for elimination — but it’s pretty rich for the President to throw out such a conclusion. After all, his whole strategy appears to be the bankruptingly lame-but-safe crying of doom for cute kids and other supposedly defenseless people no matter what the size of the proposed cut to a social program or how ineffective the program has been. That, and the constant lamentation that “the rich” – a small and therefore electorally weak group of voters – don’t pay their fair share. (And the constitutionality of federal programs? That doesn’t even get a mention.)
Representative of this cowardly course is the President’s mantra about “investing” more in education-related programs despite blaring evidence that the programs don’t work or, as is the case with federal student aid, actually make the problem they’re supposed to solve much worse. But the President wants votes — like most politicians, he wants lots of people to think he’s giving them great stuff for free – so he’s not doing the mildly courageous thing and telling people “look, these programs don’t work, we have a titanic debt, and I’m going to cut things that might sound good but aren’t.” No, he’s doing things like going to community colleges and, in front of cheering groups of students, talking about mean Republicans and how he wants to protect students just like them by keeping the federal dollars flowing.
That’s no profile in courage, nor is it a responsible way to deal with the federal government’s gigantic problems.
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