The Return of Tax and Spend

President Reagan dismissed Democrats as Tax and Spend liberals. Those days are back again with a vengeance. President Obama's budget is spending unheard of amounts of money and projecting unheard of deficits. At the same time, he is proposing hundreds of billions of new taxes, many of them hidden.

O is most forward about taxing the "rich". The taxes is his new budget go beyond what he proposed on the campaign trail. There is a merciless logic to this. With his new tax cuts, less than half the country pays any income tax so it is easy to promise new government services without raising taxes on the majority. By classifying professionals and middle-tier executives as rich, O implies that these people don't deserve all of the money that they currently make so it is just for the government to redistribute it. This is questionable logic at the best of times. During a recession it is only likely to make the downturn worse.

But O has a lot of hidden taxes that will affect everyone, the poor more than the rich.

One of the tax increases on the rich is cutting the credit that they get for charitable contributions. This will hurt charities instead of the rich. If you take away the tax incentives to donate then people will simply stop donating.

O has a new charge for carbon emissions. The details of how this will be implemented have not been released but it does not matter. These new fees will be added to the cost of producing electricity along with some heavy industry like steel production. These fees will amount to hundreds of billions. The poor will feel this the hardest since a larger portion of their income goes to paying for utilities.

Your wireless phone plan will cost more, too. The mobile carries thought that they bought the rights to this spectrum but O wants to add a new levy on using them. This will start out at $50 million this year per company, $200 million next year, and top out at $550 million for a total of $5 billion over the next decade. This will be added to your monthly phone bill.

Even with these new taxes O only promises to cut the deficit in half in the next four years. Since he nearly doubled the deficit that Bush left him, that will still be an astounding trillion dollars a year for the foreseeable future. This is unsustainable spending. People are beginning to speculate on the US defaulting on its debt. So far this is not considered a huge risk but we are already rated as being a bigger risk than Japan or Germany. If this fear grows then we will be unable to sell treasury bills or have to sell them at a much higher interest rate. Either one will cause unimaginable trouble to the economy. If we cannot sell our bonds then we will have to print new money to pay our debts which will trigger inflation rates that we haven't seen since the 1970s. If our bonds go for a higher rate then we will see interest rates jump sky-high which will also trigger a round of inflation. Either way, people on adjustable-rate mortgages will see their payments jump and trigger a new round of foreclosures and bank problems.

Economists have been saying that it would be crazy to raise taxes during a recession. O seems to be banking on his stimulus to fix the economy so fast that new taxes are not a problem.

Obama is being audacious. Unfortunately, this is not a good quality in a president:

au·dac·i·ty
1. Fearless daring; intrepidity.

2. Bold or insolent heedlessness of restraints, as of those imposed by prudence, propriety, or convention.

3. An act or instance of intrepidity or insolent heedlessness:

Obamanomics

Obama, along with most other presidential candidates for the 2008 election, preferred to call himself a progressive rather than a liberal. There was a historic progressive movement which peaked decades ago and receded until only a few on the leftist fringe called themselves progressives. Now the term has made a major comeback. So, what does it mean?

Thomas Sowell defines that liberals are people who believe that people are naturally good while conservatives know that, alas, we are fundamentally bad. I will add my own definition for progressives - they are people who believe that they know more than anyone else who ever lived. Considering the way that the Obama administration is acting, it is hard to credit them with the slightest bit of humility.

There are six words that will not be heard as the Obama administration justifies its programs and policies, "This is what has worked before."

Take the stimulus. Various authorities including the CBO and Obama's own economic advisers say that stimulus spending has never worked in the past. It is late and targeted wrong. Instead of helping, it causes inflation and adds to the national debt. This has been true for small stimulus packages under Clinton and Bush as well as for massive ones such as the New Deal and Japan in the 1990s. Not one of them worked. So why did Obama insist that his stimulus would work when no other one has? The usual answer is we know what went wrong before and this time we will get it right. What is more, the process was so rushed that no one in Congress had a chance to read what they were voting on. Obama's people not only had to get it right for the first time ever, they insisted that it had to be done fast. No humility there.

When Obama took office the assumption was that a declining economy and massive budget deficits would make him wait at least a couple of years before trying to push universal health care and other reforms. His not-quite-a-state of the union speech proved that assumption wrong. He hasn't announced what he has in store for us but he is already budgeting for it.

The Obama administration is also planning on revamping and re-regulating our banking system, changing welfare, laying out a new national electric system, and restructuring the automotive industry. They are also planning to impose $80 billion a year carbon fees (taxes) on manufacturing and power generation.

Along with this we will see major redistribution of wealth. Salaries and bonuses are being capped. Taxes are being increased on some people and tax credits given to others in the interests of sharing the wealth.

Put it all together and you have a massive upheaval of society greater than the New Deal and the Great Society put together. And it's all being planned by a select group of progressives in back rooms (they've been holding secret meetings with Ted Kennedy's staff to plan health care for months).

Conservatives insist that major changes have to be approached slowly and carefully because of the problem of unintended consequences. The progressives scoff at that. They are so smart that they can reshape America and get everything right the first time. After all, they are the smartest people, ever.

Not everyone is buying this. Every time someone from the Obama administration announces a new policy the stock market has a historic drop. Wall Street has no faith in these guys. Do you?

Hard Times Ahead

Regardless of what happens with the economy, we are going to see some hard times ahead in science and technology as we hit hard limits in what can be done. Some of this has already happened.

People my age realize that the future didn't turn out like we expected. A TV ad that ran a couple of years ago asked, "Where's my flying car?" 2001 came and went without a permanent moon base, space clippers, orbiting space terminals, or even picture phones (the closest we have come are webcams).

An article written here points out that we have made no progress in the last 30 years on several important scientific fronts including important ones such as a vaccination for malaria.

There are several reasons that things didn't turn out as we expected but the biggest one is that we are running into limits in what can be done. A big reason that we do not have flying cars, jetpacks, or regular flights to the moon is that we have not discovered any new sources of energy nor have we discovered any new ways of storing it. Flight takes a lot of energy and we are still using the same fuels as a century ago. We are using them more efficiently but we reached efficiency limits a long time ago.

This is beginning to happen with computers, also. There has been an idea floating around for a few years that we will soon reach the Singularity when biology and technology merge. This is based on the expectation that Moore's Law will continue indefinitely. Moore's Law says that we will be able to double the complexity of computer chips every two years. For a long time this meant etching smaller and smaller lines in silicon chips and running the chips at ever-increasing speeds. We already hit the limits on that. Intel and its competitors have tried to keep up with Moore's Law by producing multi-core CPUs. These add computational power but they don't run any faster. The idea is that computing can be split into pieces to be processed separately. There are two problems here - one is that software has to be rewritten to take advantage of the multiple processors. The bigger problem is that this produces diminishing returns. If a task can only be split into a dozen parallel tasks then doubling the CPUs from 24 to 48 will not give any performance gain.

All of this means that we might soon hit the limits of high end computing. In the meantime, the requirements for low-end computing have not kept growing even as low-end computers got more powerful. The end result is that people are discovering that entry-level PCs can satisfy nearly everyone's computing needs. This is part of what is fueling the growth of the dirt-cheap netbooks.

The long-term implications of this are that the computer industry may stagnate over the next decade. The industry is built on the idea of constant growth.

This has happened in other industries. A century ago an automobile was a luxury item. The Model T changed that making cars affordable but the Model T-era car had huge drawbacks. Compare cars from 100 years ago with cars from 50 years ago. Cars are more sophisticated now than 50 years ago but these are evolutionary changes. This is even more true if you look at cars from 25 years ago. There are very few real changes. Safety features such as airbags and anti-lock brakes are standard now but they existed then and the general driving experience hasn't changed.

Airplanes followed the same track. 100 years ago the Wright Brothers were still flying an open biplane. Fifty years ago planes were pretty close to what we fly now with the airline industry about to switch completely from turboprop to jet. Flying in a 1950s 707 was pretty similar to flying in a more modern plane (in fact, 63 707s are still in use). Planes that were made 25 years ago are still flying. The big changes in the last few decades have been in fuel efficiency and noise. Again, just evolutionary changes.

So what does this mean? Microsoft is having problems convincing people to upgrade to its Vista operating system. Vista offers some security fixes and a different user interface but it does not offer increased functionality. Its successor, Windows 7, has been written so that it will run on low-end hardware. This is a big change for Microsoft where the next-generation operating system usually requires the next generation of hardware to run properly.

Microsoft was built on the model of constantly selling new, improved versions of its software. They already seem to have hit a plateau with both Windows and Office. Apple has been doing the same thing with computers and IPods. Intel has been doing it with chips. If we are reaching natural limits then these companies will have to change their business models.

A lot of the growth over the last 50 years has been technology-based. Major industries were created where nothing existed before. This could settle into a long decline like the auto industry has seen.

A lot of societies are based on consistency. Ours has been based on change to the point where constant change is the consistency. What will happen if change slows?

Washington's Birthday

Technically I just missed posting on Washington's actual birthday by an hour. Since Congress saw fit to combine Washington's and Lincoln's Birthdays into a moving Monday holiday that never actually hits Washington's Birthday, I think I can be forgiven.

This year the big emphasis in on Lincoln. In recent years it was on Adams and Jefferson. Teddy Roosevelt was big for a while, also. No one seems to pay attention to Washington anymore. He has receded to being just a guy with wooden teeth and a wig.

The historic figure is much more important. It is no exaggeration to say that the United States as we know it would not exist if not for Washington. What is more, he did three notable acts that created our country.

The first one is obvious - he was the general who won the Revolutionary War. He didn't win many battles but he kept his army together and built it up until it was able to defeat the British at Yorktown. This was not an insurgency, striking at civilians, it was an actual war and we won it against England at its height.

Then came Washington's second act. There was a lot of pressure for him to dissolve Congress and take personal command of the nation. He didn't. Instead he retired. Think about how rare an act like this has been in history. It is pretty much unheard of.

Of course, the original Articles of Confederation didn't work out. Washington chaired the Constitutional Convention which created our modern government.

These were his biggest accomplishments but he did others. One was leaving office after two terms. This set a precedence that lasted until FDR and was written into the Constitution after him. He set other precedents, man of them important.

Other presidents have struggled with major problems but our unborn nation was on the knife edge in the 18th century. With the slightest nudge, Washington could have created a completely different country - one that would certainly not have thrived.

"The" Cartoon

That's how it's being referred to - The Cartoon.

A chimp recently attacked someone and was shot by police. The New York Post quickly turned this into a political cartoon with the police looking at the slain chimp and saying that they will have to get someone else to write the stimulus bill. This is being taken as a horrible, racist attack on the president.

Two points:

1) The stimulus bill was written by Congress. This was one of the Republicans' big complaints - that Pelosi and company wrote a bloated spending bill disguised as a stimulus. The implication of the cartoon is that the bill was so badly written that a chimp must have done it. It makes to sense to say that the chimp represents President Obama since he was not shot.

2) For the last eight years, President Bush has been portrayed as a chimp, as Satan, and as a Nazi officer with blood dripping from his fangs. No one on the left ever complained about this. After all the cheap shots that have been taken at Bush, the left has no moral standing to complain about any depiction of Obama.

Note: There is a column about the cartoon on Huffington. One of the commenters says this:

If the cartoon is not racist " then there is no political or personal parody since there is no other connection between a rampaging chimp and the President or to the Recovery Bill " since the cartoon does make that connect, it is therefore racist and in addition suggests the RepoTalibans or the police assassinate the President if they disagree with his policies.

That is not parody or humor that is the direct encouragement to commit murder.

I don't agree with this statement for a moment but let's suppose that it is true. So what? How many plays, novels, and TV movies openly called for the assassination of President Bush? Who on the left complained? Again, the left has no moral standing to complain from.

Obama the Conservative?

I can't find a link to it but years ago, when far-left writer Eric Alterman was writing for MSNBC.COM, he ran across an observation that President Bush was far more moderate than he was given credit for. Part of the proof was his spending. Bush out-spent Clinton on nearly all social issues. Alterman, who sees Bush as being to the right of Reagan would have none of it. His explanation for Bush's spending was that he was playing the long game (my term, not his). Alterman speculated that Bush was spending so as to run up the national debt to the point where interest payments took up all available government money. At that point, future presidents would have to start cutting services.

So, what are we to make of President Obama's spending? In his first three weeks he nearly doubled federal discretionary spending and he is just getting started. He still hasn't explained how much federal money will go to the next round of bank bailouts. We've been given a figure of $3 trillion public/private money with no breakdown of how it will be split. He just proposed $75 billion for mortgage foreclosure relief (remember when $75 billion was a big number).

GM is seeking more than $16 billion in new bailout money. Chrysler is a bargain at $5 billion.

After complaining on the stump about how much money was being spent on Iraq, Obama is ramping up Afghanistan.

And we haven't started talking about universal medical coverage.

When Clinton came to office he was astounded to find that payments on the national debt were the largest item in the budget. By refinancing government bonds at a lower rate, Bush was able to keep debt payments from rising as fast as new spending but that was a one-time savings.

It took Bush eight years to raise the national debt from $5 trillion to $10 trillion. Obama is on track to do that in a much shorter period.

This money has to come from somewhere. Obama and the Democrats have been so busy authorizing new spending that they have not addressed how it will be repaid but the bill will come due sometime.

By spending so freely now, Obama may be fulfilling Alterman's prediction of assuring small government in the long-term by spending too freely in the short term. Does that make Obama a Conservative?

Government and Business

What caused the sub-prime credit crisis? Liberals say that it was a combination of predatory lenders and lax regulators enabled by President Bush's laisseze-faire policies. Conservatives say that the Community Reinvestment Act forced banks to issue loans to people who should never have been home-owners. A recent column in Forbes by Peter J. Wallison and Edward J. Pinto supports the conservatives' argument and supplies facts and figures to support their contention.

The point of the Community Reinvestment Act was to increase home ownership rates among minorities. Using this act as a base, the Clinton administration took action against several major banks. The banks were accused of redlining areas. The banks argued that they were not excluding minorities (this would be difficult since loan applications do not include race). The problem was that a disproportionate number of minority members didn't meet traditional standards for getting a loan. The government told the banks to change their standards. They also ordered Fannie Mae and Freddie Mac to start increasing the number of loans they serviced for these groups.

Sidebar - Fannie Mae and Freddie Mac were created during the Depression to free up bank resources. Banks issue mortgages then sell them to Fannie Mae and Freddie Mac. These entities are Government Sponsored Enterprises (GSEs) created by the government and are guaranteed lower-than market interest rates.

As ordered, the banks dropped most of the traditional restrictions on loans. Previously you had to have a substantial down payment and the amount you could borrow was based on your income. These restrictions were dropped and the bank regulators were instructed to be sure that the banks were sticking to the new standards. In other words, the problem wasn't that there were no regulators, the problem was that they were pushing the wrong regulations.

What about predatory lenders? Yes, they existed but they only amounted to 5% of all mortgages. The GSEs were a bigger problem since they were willing to buy low quality loans. Forbes points out that nearly 20% of Fannie Mae's loans in 2001 and 2002 were to people below the traditional minimum credit score.

The Bush administration bought into the Clinton-era policies that increasing home-ownership was always a good thing. Home-owner rates increased by 3.3% under Clinton and 1.7% under Bush. Even Barney Frank, a long-time supporter of affordable housing loans now admins that many of these people would have been better off renting.

Eventually the bubble burst. For decades the home ownership rates and the mortgage default rates had been stable. This new influx brought an unprecedented wave of defaults which dragged down house values which is leading to even more defaults.

The whole thing started with the government telling banks to alter their business practices in order to meet a social goal.

This is important because, under President Obama, the government is likely to be involved in an expanding number of businesses. Obama and the Democrats have already taken control of executive pay for banks and warned them that, from now on, conventions can only be held in boring cities.

In the next few days GM and Chrysler will be asking for more money. Democrats are anxious to take over their businesses, also. Many are suggesting that Detroit should be mandated to make smaller cars and/or hybrids. Again, the desire for social policy is likely to supersede good business.

Many Democrats believe that the current economic problems refute Reagan and the idea of small-government. A closer look at our problems shows that it was government interference in markets that brought us where we are now and that further tampering is likely to make things worse.

Mr. Obama's Bad Week

Let's see, how bad was last week for President Obama?

Two of his nominees had to bow out because of tax problems. One of them, Daschle, also turned out to be a lobbyist in all but name. His nominee for heading the CIA also turns out to have lobbying connections. So much for the most ethical administration in history.

Then there is the stimulus bill. Obama promised that it would be focused on infrastructure and totally transparent with no earmarks. Then he let the business-as-usual crowd in Congress write it. They treated it as a chance to hide everyone's pet projects. The earmarks are there but they are hidden a bit better than usual. On top of that, there is a clause about Buy American that has already drawn sharp responses from Canada and the European Union.

Obama's charm offensive on the Republicans was a total failure. They said afterward that he was charming but that he had been given a bad bill that they couldn't support. All of the Republicans and half of the Blue Dog Democrats (11) voted against the bill. So far the only bipartisan support has been for voting against the bill. Obama still got it through the House and it looks like he will get the Senate to pass it but it is an ugly win. So much for post-partisanship.

Then there was the gathering of Democrats in Williamsburg at the end of the week. After complaining about Wall Street executives using public funds for expensive retreats, the Democrats did the same thing. In addressing them, Obama seems to have lost his eloquence and resorted to the same fear-mongering that Democrats complained about President Bush using.

To top it all off, things got so bad mid-week that the Obamas had to get out of the White House so they visited a charter school and the President talked about Batman and Spider-Man. What will he do in a real crisis?

So, how bad is the damage? This writer at Slate thinks that Obama will emerge stronger. Because he can learn something from it and because a little humility is a good thing. This assumes that Obama does learn anything. Time will tell.

Regardless of any personal growth that Obama might gain from this week, he is weakened in several ways.

He is no longer the post-partisan president. Obama was supposed to convince the other side to adopt his positions without having to resort to the messy compromises that upset liberals during the Clinton years. We knew that no one could live up to that but we didn't know that he would disprove it so fast.

All claims to doing away with business as usual in Washington are also gone.

In his first major piece of legislation he knuckled under to Pelosi and the Congressional Democrats. This was supposed to be a bill about infrastructure but that was reduced to a tiny portion of the bill.

He enabled a Republican resurgence. Under Bush, Republicans spent so freely that the Democrats ran as the party of fiscal restraint in 2006. Now, Obama has introduced a bill nearly equal to all discretionary spending for a year. Republican excesses now look restrained. Just two weeks ago Republicans were irrelevant. Now they are united and relevant.

He pushed through a bill that the public doesn't want. Polls show that slightly over 50% of the population thinks the stimulus will hurt the economy. Several economists including three Nobel Prize winners and the Congressional Budget Office project that the bill will hurt the economy later on. Obama should have picked up on all of this and withdrawn the bill for reworking. This would have shown that he and not Pelosi is in charge, that he is post-partisan, and drawn the fangs of the Republicans. Instead he got angry. He pointed out several times that he won the election as if that made him king of the world instead of President of the United States.

In short, he diminished himself.

Several days ago I said that the president Obama most resembled was Bill Clinton. This week reminds me of the first couple of Clinton years when they had one blunder after another. Clinton eventually recovered but not before losing both houses of Congress. Clinton himself admitted that he was at best a B-level president. This may be the best that Obama can aspire to being.

Real Jobs and Government Jobs

In the middle of the argument over the stimulus bill a new sub-argument has erupted - can the government create jobs?

To many, there is no question. Newsweek dismisses any argument to the contrary.

These claims are so peculiar that it's hard to know where to begin. Contrary to Steele's assertion, in the history of mankind, the government has in fact created many, many jobs (including the one he held for a few years: lieutenant governor of Maryland). Today, government accounts for 22.5 million of the nation's 135.5 million payroll jobs, or 16.6 percent. Those numbers include people who work for the federal, state, and local governments—doctors and nurses in public hospitals and teachers at elementary schools and public universities. Government also has created—and continues to create—all sorts of private-sector jobs, for defense contractors, the aerospace industry, medical-device makers, real estate companies, and construction firms. The economy of the Washington, D.C., area has boomed in recent decades not so much because the federal government has expanded its payrolls massively but because private government contractors have been thriving. As the Bureau of Labor Statistics notes, in January, "the large areas with the lowest jobless rates in December were Oklahoma City, Okla., and Washington-Arlington-Alexandria, D.C.-Va.-Md.-W.Va."—a capital city, and the capital city.

Time similarly dismisses the argument.

Again, there has been an Alice in Wonderland quality to much of the criticism, as if Keynes were a fraud and government spending couldn't possibly create jobs — especially spending on biomedical research or education about STDs or any other programs that sound vaguely liberal and exotic. But biomedical research jobs are real jobs. So are jobs beautifying the Mall and warning teenagers about herpes. So are jobs building and engineering rail lines for Amtrak, regardless of the company's current profitability.

Obviously the government does employ people and it gives money to others who employ people. The thing is, this is only half of the equation. The problem is that the government does not create any wealth. It just redistributes it.

I'll offer my own job as an example since I work for local government. My job is paid for by a 2% income tax. That means that 1 of every $50 that a taxpayer earns go to pay for the city government. If we oversimplify, then, for every 50 workers, one of them works for the city. We have subtracted a worker from the private workforce and added him back in as a government worker.

This is why Republicans are saying that the government does not create jobs. The government redistributes jobs. You can make the case that this is an acceptable trade-off since the government does many things that private industry will or cannot do but you cannot escape the fact that these jobs eliminate other jobs elsewhere in the economy.

Obama and the Democrats are trying to hide this fact by borrowing the money to create the jobs. They are planning on either borrowing a trillion dollars (which will have to be paid back) or printing a trillion dollars in new money (which will eventually cause inflation until the current money supply is worth a trillion fewer dollars than before). Either way, we will have to pay for the stimulus in the future and any jobs created by the spending bill will only exist as long as the government pays for them.

This article in the Washington Times quotes a CBO report that indicates that the stimulus will be harmful over the long run.

CBO, the official scorekeepers for legislation, said the House and Senate bills will help in the short term but result in so much government debt that within a few years they would crowd out private investment, actually leading to a lower Gross Domestic Product over the next 10 years than if the government had done nothing.

A lower GDP means fewer jobs. That's why Republicans say that the government cannot create jobs.

Spinning Salaries

Two takes on the salaries that bank executives are getting:

The commonly reported one - banks that accepted government bail-out money are giving their executives huge bonuses giving the impression that they are using public funds to pay the bonuses. President Obama is outraged and plans to take action limiting executive pay until all of the money has been repaid.

The nuanced version - the Treasury was worried that giving TARP money to some banks and not others would identify the weak banks and cause a run on them. To prevent this, they forced healthy banks to accept TARP funds that they did not need. These healthy banks are doing what healthy businesses normally do when they are doing better than the competition, they are rewarding management.

This shows one of the big problems with government interference in private industry. We start running businesses according to moral outrage instead of sound business practices.

Obama and Business

Republicans have the reputation of being pro-business and Democrats as anti-business. Obama's actions in the first two weeks of his administration put him squarely in the anti-business category. Unfortunately, this also translates into being anti-job.

In a previous post I mentioned Obama's order to the EPA to allow states to make their own regulations. This is aimed directly at the auto industry. Several states decided that they were unhappy with federal response to global warming and tried to establish their own policies. This will create several problems. The first is the nightmare of dealing with 50 different policies. The second is that this will limit the number of high-margin vehicles that can be sold. Detroit depends on these sales to stay in business. It is also very possible that once this president has been set, the states will extend their policies to other industries.

With much fanfare, the first bill that Obama signed into law makes it easier for women to sue for pay discrimination that happened years before. While this may have been a good idea during a prosperous period, it is going to be a job-killer now. Businesses will have to spend money on legal battles that will have to be trimmed from other places. Many of the flood of suits that are likely to be filed will be unjustified. Note - I'm not justifying unequal pay. I am pointing out that passing this measure during a deep recession shows the Democrats' total disregard for jobs when ideology is at stake.

With much less fanfare, Obama also issues an executive directive making it harder to avoid using union labor when federal money is involved. Union labor is normally charged at a premium, in part because set-asides such as this distort the labor market.

All of these measures were done to please Obama's base - environmentalists, feminists, and unions. None of these groups have a record of caring about the average worker, especially environmentalists. Between this and the stimulus bill, Obama's message is that he only cares about jobs that he creates. When he has to choose between pleasing his special interest groups or saving jobs, he decides against jobs.