Taxes and Spending

A short history lesson - during the 1970s when we had very short business cycles between boom and bust, it was noticed that government would raise taxes during the bad times to make up for lost revenue. Once the economy picked up again and the tax base recovered, government would use the additional revenue to grow further. The cycle would repeat with each economic cycle leading to ever-expanding government. This lead conservatives to adopt "starve the beast" policies. Instead of having ever-expanding taxes and government, taxes would be cut forcing government cuts.

This began in California with a taxpayers revolt best remembered for passing Proposition 13 which rolled back property taxes.

When Reagan became president he implemented a version of Starve the Beast - tax cuts accompanied by spending cuts. At the time Democrats insisted that the cuts were excessive but they mainly cut increases in spending. Democrats were still deriding Republican budget cuts in the 2000 election which led to Bush (43)'s "compassionate conservatism" which amounted to tax cuts without accompanying spending cuts.

The deficit under Reagan grew during the middle of his presidency and was shrinking again by the end. Under Bush, the deficit always grew.

Government today is much larger than when Reagan took office leading some people to declare Starve the Beast a failure. Fromma Harrop recently wrote an interesting column in which she proposed shrinking government by raising taxes. Basically, she is proposing a pay-as-you-go government in which taxes would be high enough to cover all spending. This would cause voters to reevaluate government services since they would be paying for them directly instead of borrowing to pay for them.

There is a certain logic to this. Currently the federal government borrows $0.41 out of every dollar spent. If we gave people the choice between major cuts or raising taxes 67% there would be a lot of cuts.

Unfortunately, Harrop undercuts her argument in several places. The first is how she characterized the Reagan administration:

"Well, if you've got a kid that's extravagant, you can lecture him all you want to about his extravagance," Reagan said in his 1980 campaign. "Or you can cut his allowance and achieve the same end much quicker."

No one turned the starving-beast theory into baloney faster than Reagan, who followed his tax cuts with a spending binge fueled by massive borrowing. What he did, in effect, was cut the extravagant kid's allowance and then hand him 10 credit cards.

This totally misstates Reagan's record. Government spending in real terms spiked around 1983 when the Reagan cuts went into effect. They then declined through the rest of Reagan's presidency. See this chart based on numbers form the CBO.

Harrop also ignores the Democrats' role in spending. They controlled one or both houses of Congress continuously until 1995 (they won both houses in the 1994 election). During all of those years, spending was always higher than revenue although the two came close during the Ford administration. Harrop also ignores the fact that the biggest and fastest-growing outlays in the budget are for Medicare and Medicaid - two entitlements passed by Democrats.

Harrop totally undercuts her argument in a couple of other places.

Are Democrats equally to blame? No. Deficit spending is warranted during an economic crisis. (By the way, their new health-care initiative was fully paid for.) What worries fiscal conservatives most about Democrats is that they might lack the guts to do what must be done, which is raise taxes.

This only makes sense if the Democrats suddenly sprang to life in 2008 with no history behind them. She also blithely ignores the budget trickery that went into the "fully paid for" health care initiative.

That's one place where the "raise taxes to shrink government" argument breaks down. Congress used shameless trickery to produce numbers that made health care seem to be paid for. Even if their figures were honest and accurate, they still delayed implementation of the most expensive parts of health care for years in order to offset the cost. Other parts were pushed to the states and not accounted for in the federal budget.

Does anyone really think that Obama and the Democrats would be willing raise taxes but forgo further spending? Simply requiring that extended unemployment benefits should be paid for from repaid TARP funds instead of through debt was unacceptable to them.

Then there is the question of where these increased taxes should come from. Any tax that caused pressure to reduce government would need to cover most of the population. Right now, slightly less than half of the population pays income tax. You could double the income tax and half the population would be unaffected. More likely, the Democrats would choose some arbitrary point and say that everyone above that made too much and should shoulder the entire increased tax burden.

This leads to another iron law of economics - the higher the taxes, the more effort people spend in avoiding taxes. Prior to Reagan, tax shelters (investments that were either untaxed or taxed at a lower rate) were a big business but this collapsed after Reagan lowered the tax rate.

While it is interesting, the idea of raising taxes to shrink government could only happen with major institutional changes - possibly a balanced budget amendment. Without that, increasing taxes would only led to increased spending.

The Democrats' Contract on Republicans

In 1994, the Republicans issued their "Contract With America" - a list of issues that they would bring to vote within their first 100 days if they gained control of Congress. President Clinton, a bad loser, insisted on calling it their "Contract on America."

So far, the Republicans have not issued a coherent statement of goals. The Democrats filled this void by making up their own list. Labeled the "Republican Tea Party Contract on America" it tries to put the Republicans in the worst possible light.

Let's take a closer look.

First there is the name. There is no such organization as the Republican Tea Party. This construction allows the Democrats to graft ideas from the Tea party onto the Republican mainstream.

Now, here are the actual points:

1. Repeal the Affordable Care Act (Health Insurance Reform)
2. Privatize Social Security or phase it out altogether
3. End Medicare as it presently exists
4. Extend the Bush tax breaks for the wealthy and big oil
5. Repeal Wall Street Reform
6. Protect those responsible for the oil spill and future environmental catastrophes
7. Abolish the Department of Education
8. Abolish the Department of Energy
9. Abolish the Environmental Protection Agency
10. Repeal the 17th Amendment which provides for the direct election of senators

Points 1 and 5 are pretty straightforward and are part of the Republican mainstream. Republicans feel that both of these bills are fatally flawed and are worse than no bill. Notice that they did not give the official name for the financial reform or even clarify it as financial reform. Instead they framed it as helping "Wall Street".

Point 4 is misleading. Everyone who paid income taxes in 2001 was included in the Bush tax breaks, not just the wealthy and big oil. Obama campaigned on extending the tax breaks for some people but not others. Republicans want to extend them for everyone. Allowing them to expire amounts could push the economy into a second recession. Many Democrats will admit this privately but will not say so in public.

Points 2 and 3 are very ingenuous. Democrats know that Social Security and Medicare have to be changed. They are unsustainable as currently structured. Even Bill Clinton when he was president proposed privatizing Social Security. Because President Bush proposed actual specifics, it has turned into a Democratic talking point against Republicans. The Democrats are being dishonest to imply that they will not change Social Security or Medicare (as it presently exists). It is unavoidable but scoring cheap campaign points like this makes it harder and the inevitable changes more painful.

Number 6 is another cheap shot. Some Republicans have complained that the Obama administration should follow the law.

The final four points have been tossed around be various conservatives but are not serious Republican proposals. The final one would require a constitutional amendment which means that it could not happen without widespread support. The Democrats know that none of these will happen if the Republicans regain control and only included them to scare people.

An Independent Media?

A common complaint from the left is that Fox News acts as an unofficial arm of the Republican Party. Keith Olbermann has complained about this, often throwing in references to the "KKK". A long an overwrought column by Eric Alterman postulated that this alliance is a threat to democracy itself.

So, you would think that the left is free from such entanglements, right? Wrong.

Let's start with Keith Olbermann's complaints. First, if Fox acts as an unofficial arm of the Republican Party then Keith's network, MSNBC, acts as an arm of the Democratic Party. For example, Rachel Maddow, Keith's fellow employee at MSNBC, introduced President Obama's taped remarks at a recent progressive convention. Keith would have had a fit if a Fox employee introduced a Republican President.

Maybe Keith's real complaint is that people actually watch Fox. Keith's ratings are at a seasonally-adjusted two-year low.

But that really just amounts to squabbling between two basic-cable networks. For a better picture of journalism in general we need to look at the "Journolist". This is an invitation-only newsgroup with 400+ members. Its members include well-known figures from all of the major news publications as well as some academics. It also has at least two political operatives from the Obama 2008 campaign.

I have no idea what goes on most days on the Journolist but the day that Sarah Palin was chosen as McCain's running mate, the list was full of ideas on how to minimize her and help Obama. Did you get that? Journalists who are supposed to be trained in objective reporting were working with Obama operatives on how to shape campaign coverage to help Obama.

And Eric Alterman who sees Fox News as a threat and who has written a book denying any liberal bias in the press - he's on the list, also.

Conservatives always knew that the left had a well-disciplined message machine. As far back as the Clinton impeachment, the White House would put out a message of the day that would be included that night in the opening monologues of Jon Stewart and Bill Mahar. Until now, it was always assumed that liberals had to listen to each other. Now we know that they are shaping their message behind the scenes.

Two final thoughts:

1) Imagine the outcry if the right was caught with such a list.

2) The sheer hatred involved. One poster wished that she could see Rush Limbaugh drop dead at her feet. I read a lot of writings on both sides and the left usually wins the "I hate them personally" race but these are journalists.

The Bush Tax Cuts

Actually there are a couple of problems with the Bush tax cuts. The first one is that the Republicans made them temporary. They did this as part of a budgetary slight of hand. The CBO has to score bills as they are written and writing the tax cuts as temporary reduced the projected costs. Of course, they were not intended to be temporary. The Republicans intended on waiting until they were about to expire and either extending them or making them permanent. This is the sort of trickery that soured fiscal conservatives on Bush.

So, here we are with the tax cut about to expire and Democrats in charge.

The other big problem is lingering Bush Derangement Syndrome. After years of propaganda, the Democrats are not able to discuss the issue rationally. You could go up to a random group of Democrats and shout, "Bush tax cuts..." and they would reply "... For the rich."

The tax cuts were pretty much a 3% across-the-board reduction in marginal rates with a big cut at the bottom from 15% to 10%. Because the rich make more money, they got more benefit and because a large portion of the workforce (something like 40% at the time) wasn't paying any federal income tax already, they did not see any reduction.

It was a matter of faith among Democrats that as soon as they regained power they would undo the tax cuts. When they took Congress in 2006, they pointed out that they did not have enough of a majority to survive the inevitable veto so they would have to wait.

During the 2008 campaign, Obama said that he would keep some of the tax cuts - those for people making less than $200,000 per year. Many Democrats don't agree with this and want to repeal all of the tax cuts. Left-wing pundits such as Paul Krugman have attacked the Republicans for insisting that the entire tax cut package should be extended.

Krugman should know better. After eight years under the  "temporary" tax cuts, reinstating the original rates would amount to a tax increase - a big one. Krugman is the champion of putting more money into the economy. Granted he wants to see it as a controlled stimulus rather than an uncontrolled tax cut but the point is that he sees the need for the government to put more money into the economy.

So why, in heaven's name, does he want to take a big chunk of money out of the economy?

The Democrats have boxed themselves in. A tax increase, even one in the form of an expiring tax cut, is the last thing the economy needs right now. Limiting it to the undeserving rich who make $200,000 or more a year isn't much of a comfort. That's like saying that they will only break one of your knees instead of both.

Fear and uncertainty are keeping people from spending which, in turn, is crippling the recovery. Telling a group of people that their taxes are about to be raised because they are too rich is not going to induce them to spend.

In a recent report, one of Obama's economic advisers calculated that a tax increase equal to 1% GDP can reduce the economy by 3%. 

The Democrats need to get past their dislike of the rich and extend the tax cuts, at least until the economy recovers.

The Law of Unintended Consequences

The biggest argument against increasing government involvement is the Law of Unintended Consequences. Basically, it states that changes to a complex system may result in different results than originally desired. Sometimes the changes make things worse than they were in the beginning. This tends to happen more often with government for several reasons. One is that Congress likes to be seen responding to problems. Election cycles being what they are, it doesn't matter if the problem is actually solved or not. The important thing it to be seen doing something. Problems big enough to warrant Congressional scrutiny are seldom easy to understand so Congress allows their staff to write the actual bill. The people voting on the bill seldom bother to read them and probably could not understand them anyway (I'm getting this part straight from a recent quote from a committee chair). Finally, bills are seldom pure. Lobbyists exist to make legislation more favorable to their clients and Congress is happy to oblige. The result is that legislation to solve a problem often makes things worse.

A few examples:

Credit reform caused most people's interest rate to rise. That's because banks offered low rates but would raise them in case of late payments or other infractions. Unable to raise rates on offenders, they raised everyone's rate instead.

Last year's popular Cash for Clunkers program raised the cost of used cars. Hundreds of thousands of low-end cars in drivable condition were destroyed. Just try to find one now. The environmental gains are also debatable since it takes a lot more energy to make a new car than will be saved by trashing existing low-mileage cars.

The most recent addition to this list - the three hour rule for airlines. This said that airlines could not keep people in planes sitting on the tarmac for more than three hours. While this sounds reasonable, a new report says that, in order to spare 110,000 passengers an average 3.26 hour wait, 400,000 people will have their flights canceled. This will cause more disruption.

The increase wasn't due to bad weather or air traffic control issues, says Marks, but the new rule and the airlines' reaction to it. "Hundreds of flights were canceled directly because of the rule and indirectly as airlines pulled back flights after as little as 60 minutes on the tarmac out of fear of the fines."

Obama and the Election

President Obama must have finally taken a look at the polls and realized that joblessness and the economy are people's top priorities. It is probably a lost cause for several reasons. The biggest is that this realization is a year too late. The economy and jobs have been a top priority for Obama's entire administration but they fell off of his radar after the stimulus bill passed. Instead the Obama administration focused on health care reform. This goes beyond being tune-deaf. The Democrats were actively ignoring the polls in favor of advancing their own agenda. The President can talk about how joblessness keeps him up late at night but it did not affect his priorities when he was awake. I pointed this out several times in 2009.

A year and a half into his administration, Obama continues to blame President Bush for the nation's problems. In a recent interview he said,

This is going to be a choice between the policies that got us into this mess and my policies that are getting us out of this mess. And I think if you look at the vast majority of Americans, even those who are dissatisfied with the pace of progress, they'll say that the policies that got us into this mess we can't go back to… What I'm prepared is to be held accountable for the policies that I've put in place. But they Americans don't have selective memory. They're gonna remember the policies that got us into this mess as well. And they sure as heck don't wanna go back to those.

The Democrats have taken this line since the economy started collapsing at the end of 2007. It is an over-simplification and they know it. So do the voters. Obama failed to mention which specific policies caused the problems with reason. Some of them date back to the Clinton administration. Others were pushed by Democrats. The financial reform bill that is supposed to prevent future melt-downs has racial quotas which will inevitably lead to further problems.

At the same time, Obama failed to say what policies he changed prior to the financial reform bill. It is true that banks have clamped down on credit. People with good credit ratings are being turned down for loans. This will prevent future melt-downs but the Obama administration is not responsible for this. They have been trying to increase the flow of credit at the risk of future inflation.

This blame-Bush attitude hurts Obama and the Democrats in other ways. They promised to end the partisan bickering that has dominated DC politics for a generation. If anything, they made it worse. Ont he economy, Obama is not willing to say that mistakes were made and leave it at that. He has to point fingers.

Broken campaign promises continue to haunt Obama and the Democrats. Between 2004 and 2008 they told us that deficits were bad and that they would balance the budget once they were back in power. They took back Congress in 2006 but continued to blame Bush for increasing deficits. Now that they control both Congress and the White House they reversed themselves, committing the country to increasing deficits as far as the eye can see. Granted, Obama's original budget projection planned on halving the deficit but that was to only last for a year before it began increasing again.

Obama made many promises about foreign relations. He was going to engage our enemies while regaining the respect of our friends. Instead he has been ignored by our enemies and has alienated our friends. His major success has been Russia but the cost of this was abandoning several strong allies including Poland and Turkey.

He was going to have the troops out of Iraq by now out of a stabilized Afghanistan in the near future. Gitmo was to have been closed and rendition ended. The Patriot Act was supposed to have been repealed. The best that can be said of these goals is that some of them are in the works.

Mid-term elections are always a problem for the party in power. Everyone knew that this one would be especially brutal. Frustration with Bush hurt Republicans in 2006 and 2008. Obama's name at the top of the ticket brought in millions of new voters who are unlikely to vote in an off year. Democrats currently hold nearly every swing seat in the country. It would be hard to hold on to these in any circumstance. Add in high unemployment, the possibility of a double-dip recession, and a general disappointment with Obama and his policies and you have the makings of a disaster for the Democrats.

Obama had planned on spending the summer convincing people that we are in an economic recovery that he engineered. With bad news coming weekly, this plan has to be discarded. That leaves the Democrats with a two-pronged strategy. The first part is to blame Bush for everything bad that happened. The second part is to personalize every race by demonizing the Republican candidate. We will not hear a single issue from Democrats. Instead we will hear about any tenuous ties between the Republican challengers and Wall Street.

Which brings us back to the negative campaigning that the Democrats promised to end.

Where Do Libertarians Belong?

Reason Magazine in hosting this debate. They lead off with a piece by Brink Lindsey calling for a complete split with the Right.

There is no question that the last decade has been a bad one for Libertarians. George W. Bush was a big-government Republican. Prior to 9/11, his two significant accomplishments were No Child Left Behind and the Medicare drug benefit - both significant expansions of government. Bush's two wars, especially the war in Iraq, also alienated many Libertarians. The Bush administration was a poor champion of individual rights, especially broadcast speech. This lead Libertarians like Lindsey to propose an alignment with the Left back in 2006. The theory was that the Left was the true protector of individual rights and as good a fit for Libertarians as the Right.

The problem with that theory is that Lindsey was looking back at the Liberals of his youth instead of the Progressives who have taken over the party. While it is true that some Progressive goals mirror Libertarian ones - things like gay rights, drug legalization, and anti-war - these are not major goals of the Democrats and the Democrats who endorse these tend to be Progressive on most other issues. On most issues, Progressives are the polar opposites of Libertarians. Progressives hate free markets and want to insinuate the government into as many aspects of life as possible.

You might think that Lindsey would propose an alliance with the Tea Party movement. After all, they share more values with Libertarians than Progressives do. Lindsey will have none of it. He finds them "authoritarian and unpopular" plus he despises Tea Party darlings like Sarah Palin and Glen Beck. After several hundred words savaging the Right, he does manage to throw in one sentence acknowledging that aligning with the Left is equally unappealing. Instead he suggests heading for the center. He wants to lower the importance of free markets and raise the importance of individual freedoms.

All of this reminds me of why I stopped subscribing to Reason Magazine. They changed their focus. The new editorial staff moved to DC and the new editorial focus seemed to concentrate more on being cool than anything else.

The Tea Party agrees with Lindsey on many more issues than the Left did in 2006 when he proposed allying with them, so, why won't he associate with the likes of Palin or Beck? Because they are not cool enough. He wants to be able to hang out with Liberals without the shame of consorting with Conservatives. If the Conservatives suddenly rediscover free markets and small government then the Libertarians need to deemphasize it and start talking about individual liberties.

If Lindsey wasn't trying to cozy up to the Left he would notice that they have their own problems with individual liberty. Yes, they are pro-abortion and pro-pot but they invented speech codes and hate speech laws. They think that the FDA and the EPA have not gone far enough.

For the first time since the Reagan years, the Right is taking Libertarian ideas seriously. Lindsey needs to try to embrace this shift and guide it rather than recoil from it because it isn't as cerebral as he is.

It's Hot - So What?

It is inevitable - there is a heat wave and someone starts claiming global warming. This time it was Washington Post columnist Eugene Robinson. He writes:

It's odd how little we've heard lately from the skeptics who deny that climate change is real. What's the matter, people? Heat stroke?The Venus-like heat that much of the country has been suffering this summer is almost enough to make anybody a believer in global warming. Almost, but not quite: Honesty compels me to acknowledge that a few weeks of record-setting temperatures do not constitute proof of anything. Climate scientists have to analyze data covering decades and centuries to discern what's really going on.

Of course, the unusually heavy snowstorms that buried Washington and other East Coast cities this past winter didn't prove anything, either. But that didn't deter the climate skeptics from gloating. Sen. James Inhofe (R-Okla.) and his family went so far as to build an igloo on Capitol Hill and label it "Al Gore's New Home." Care to apologize to the Nobel laureate, senator?

Actually, it was more like a few days of heat than a few weeks. Also, if you start looking at the temperature records for the 1930s, you see what a real heat wave was like. Our local weatherman showed the number of days over 90 degrees for the last couple of years and in the 1930s. While we have had a handful of hot days now, most of the summer had 90+ days in the 1930s.

But what about that snowstorm? Did it prove anything? After all, it was just another weather event.

But, and I pointed it out at the time, that was different. While it was just an isolated weather event, it was one that Al Gore said would never happen again because of warming that already happened. In science, that is called a prediction. When a prediction is proved to be false then your theory (in this case, global warming) has to be reevaluated.

In contrast, no one has predicted that we would stop having heat waves so an isolated heat wave is not as significant as a cold wave.

He also mentions that a panel exonerated the British Climate Research Unit (CRU) but failed to mention that the panel did not investigate the underlying science, only allegations of scientific malpractice.

Robinson closes with an important question:

It's time to end the silly "argument" over whether climate change is real. Here's a better question: Would it be more appropriate for humanity to spend, say, $1 trillion reducing carbon emissions, and thus save thousands or millions of lives that could be lost to drought or sea-level rise or whatever at the end of this century or the next, or to spend that money providing clean water in places such as Congo or Bangladesh, saving thousands or millions of lives right now?

This cuts to the heart of why the debate on climate change is not silly. Gore and others are taking worst case projections and asking for a total change of civilization based on it. If Gore is wrong or overstated the potential harm then we will have wasted money that could have done real good, right now.

Obama and NASA

I was 14 when we landed on the moon. I consider this to be mankind's greatest achievement. The magnitude and complexity of it is incredible. Even more impressive is that we did it in so short a period.

Not only was the moon program a marvelous example of doing something because we could, it was also our nation's largest peace-time applied research project. The spin-offs from the moon program form all of the technologies that separate the 2010s from the 1960s.

But I'll tell you a secret - that isn't why Congress funded it or why three presidents supported it. The moon program existed so that we could show the world that a capitalist democracy is better than a communist dictatorship.

That's why we stopped going to the moon early and never returned. We showed that we could do it and the communists gave up. If they had announced that they were going to put a man on Mars, we would be there by now.

NASA's current head, Charles Bolden, caused a stir when he listed the priorities that President Obama gave him.

One, he wanted me to help re-inspire children to want to get into science and math; he wanted me to expand our international relationships; and third, and perhaps foremost, he wanted me to find a way to reach out to the Muslim world and engage much more with dominantly Muslim nations to help them feel good about their historic contribution to science and engineering -- science, math and engineering.

This sounds pretty dumb. What happened to manned spaceflight?

But, after thinking about it I realized that it does not matter. If inspiring Muslims helps fund NASA then that is fine. What matters is the funding.

Oops. NASA is already on an austerity budget. The space shuttle program is being retired after two more flights. Future flights have been outsourced. The return to the moon has been scrapped because we have already been there. The Mars program is underfunded and probably will never get off the ground. None of this is going to inspire anyone to do anything.

What's Wrong With the Economy?

The recovery continues to be weak. Why? Businesses have accumulated huge cash reserves, $1.8 trillion, but they refuse to spend them. What's going on?

Fareed Zakaria asked this question of a number of CEOs. While Zakaria did not come right out ans say it, there are some telling quotes in his column.

Economic uncertainty was the primary cause of their caution. "We've just been through a tsunami, and that produces caution," one said to me. But in addition to economics, they kept talking about politics, about the uncertainty surrounding regulations and taxes. Some have even begun to speak out publicly. Jeffrey Immelt, the CEO of General Electric, complained last Friday that government was not in sync with entrepreneurs. The Business Roundtable, which had supported the Obama administration, has begun to complain about the myriad new laws and regulations being cooked up in Washington.

One CEO said to me, "Almost every agency we deal with has announced some expansion of its authority, which naturally makes me concerned about what's in store for us for the future." Another pointed out that between the new health-care bill, financial reform, and possibly cap-and-trade, his company had lawyers working day and night trying to figure out the implications of all these new regulations. Lobbyists in Washington have been delighted by all this new activity. "[Obama] exaggerates our power, but he increases demand for our services," the superlobbyist Tony Podesta told The New York Times.

Most of the business leaders I spoke to had voted for Barack Obama. They still admired him. Those who had met him thought he was unusually smart. But they all thought he was, at his core, anti business. When I would ask them for specifics, they pointed to the fact that Obama had no businessmen or women in his cabinet, that he rarely consulted with CEOs (except for photo ops), that he had almost no private-sector experience, that he'd made clear that he thought government and nonprofit work was superior to work in the private sector. It all added up to a profound sense of distrust.

So there is the real problem - President Obama. Business leaders are afraid of his administration and the growth of government. Because of this, they refuse to invest their cash reserves.

Think about this. Here is a sum of money more than twice Obama's stimulus. It is not borrowed so it can be spent any way that seems profitable. There's your recovery but it is just sitting there, unused - a hedge against future government action.

This is exactly what President Reagan warned of. The more government expands its power the more it slows business growth. That phrase, "Almost every agency we deal with has announced some expansion of its authority..." shows how Obama's progressive attitudes have permeated his administration. The Progressives see government intervention is every aspect of life as a good thing but there is a cost. The more government intrudes itself, the more it costs everyone else.

No one in the Obama administration realizes this. He stocked his cabinet with professors and lawyers. They have never had to deal with the government from the other side. They are theorists, not realists.

As long as business leaders distrust Obama the economy will continue to limp along. No amount of stimulus spending can change this.

The Democrats and Wall Street

For the last several years, Democrats have raised more money from Wall Street thanthe Republicans have. This has been true regardless of the party in charge. In 2006, when the Republicans still controlled both houses, the Democrats still got twice as much money from Wall Street.

That suddenly changed. The Democrats have been cut off. What happened?

Any relationship between Democrats and hard-core capitalists has to have some strain. The two reasons for donating to a candidate are because you support his positions in issues or because you expect to gain future influence. The Democrats have moved to the anti-capitalist, progressive left so you would not expect them to share many values with the kings of capitalism. Certainly that are some rich men like George Soros who are willing to pour money into candidates who, by all rights, should hate them, but even Soros has made it clear that he expects a return on his dollar.

This part gets interesting. Many corporations are quite willing to support measures that seem anti-capitalist as long as there is an advantage for them. Walmart was in favor of health care reform because they already provided it and were hoping that it would hurt their competitors. BP is one of many energy producers who expect to benefit from cap and trade. Apparently these companies felt that they could do business with the Democrats.

Then a funny thing happened - the Progressives, led by President Obama, started demonizing Wall Street. Obama started using the now-cliched "Wall Street vs Main Street" during his 2008 campaign. Suddenly everything that Wall Street does is held to scrutiny and assumed to be inherently wrong, if not outright evil. As an example, in the Ohio governor's race, Democrat Ted Strickland's campaign centers around his opponent, John Kaisich, having worked in the Ohio branch of Lehman Brothers. You would think that there would be something in Kaisich's 18 years in the House of Republicans worth mentioning but that seems to be nothing compared to a Wall Street connection.

So, after a year and a half of having their every move questioned, why would Wall Street executives continue to support Democrats?

Do We Want To Be Like the Germans?

A recent column by Robyn Blumner proposes that most Americans would be better off in a European-style socialist country than in the US. Her source for this is an advance copy of a new book:

Were You Born On The Wrong Continent?, a new book (available in stores later next month) by Chicago labor lawyer Thomas Geoghegan, makes those comparisons, and they are truly eye-opening.

The fact that the book is by a labor lawyer tells you that he has biases. Blumner shows her own biases in her second paragraph when she described President Obama's agenda as "mildly progressive". Keeping these biases in mind, let's see how her version of utopia stands up to close scrutiny.

Most of the book, and Blumner's column, focus on Germany which is presented as a worker's paradise.

Since 2003, Germany and its 82 million people have either beaten China in export sales or about tied China for first place. The country is arguably the world's leading industrial power, even as its workers enjoy high wages, six-week vacations and other benefits that an American worker only dreams about.

Keep that six week vacation figure in mind. I will get back to it.

Blumner points out that Germany's unemployment rate is lower than the US's. This is correct. Germany's unemployment rate is currently 7% while the US's rate is 9.5%. She insists that Germany's industrial policies make up the difference but it this is much more complicated than she makes out. Many economists believe that stimulus spending hurts employment and Germany spent less on stimulus than the US. Further, the unemployment rate in the US has been much lower than in Germany for most of the last decade.

Most arguments against European-style socialism point out that the population as a whole is poorer and that the GDP is lower. Blumner's book has an answer for that:

Critics of Germany can still point to the fact that German per capita GDP is lower than that in the United States, which is true. But a fascinating part of the book suggests that what drives our economy and inflates our GDP actually makes our lives less comfortable.

Part of America's higher per capita GDP is due to our lack of land-use planning. Americans spend huge sums on sprawl and the inefficiency it spawns. Without sprawl, traffic and all the wasteful spending they engender, our GDP can't keep ahead of France, Geoghegan writes.

Blumner does not elaborate and the book is not out so I will have to guess what she is talking about here. From the context, I am guessing that the point here is that we spend money on large private houses in the suburbs and that, if you subtract that spending, our economy would be smaller. This is an indirect way of saying that we should all be bottled up in high-density housing in the cities. With smaller houses and without cars and yards then we wouldn't need as large an economy.

What about the high tax rate?

Our lower taxes boost per capita GDP but also mean that we are on our own for collective-type goods like college education, retirement, health care, transportation and child care — things that are efficiently bought with taxes for everyone in European social democracies.

She is really splitting hairs here. This is not a yes/no equation. The US already spends significant amounts of tax money on everything on her list and entire books could (and have been) written on the supposed efficiencies of tax funding. Let's just say that she is making a lot of questionable statements here.

The next part is really interesting.

Americans work hundreds more hours per year than their European counterparts, and so burdened, have to outsource duties of life. We eat out more, because who has time to make dinner. We hire outside help to clean, provide lawn care and care for children. To make ourselves more essential so as not to be laid off, we buy computers to work at home.

A number of studies have shown that Americans, in general, are wealthier than their European counterparts and are able to use this wealth to pay for services that Europeans have to do themselves. By the time you factor in the extra time the Germans spend on tasks that most people would classify as household drudgery, they lose that time that they do not put in at work.

This is a vice-to-virtue argument. Blumner is arguing that Germans are better-off because they spend more time cooking and washing. She does not get into it and I doubt that her source material mentions it either, but many devices that we consider standard are unavailable in Europe. Dishwashers and clothes-driers are at the top of this list.

So, Blumner's eye-opening book says that we would all be happier if we lived in crowded apartments and spent more time doing household chores and less time at work. I am sure that many people do prefer this but the choice is not as sweepingly obvious as she makes out. Worse, by painting an incomplete pictures, she is presenting a false choice.

Underwater House Values

I've seen several columns on Huffington saying that it is not your fault if you owe more on your house than it is worth, it is the fault of predatory banks who need regulating.

Let's go back several steps. Houses are durable. If you own a house, chances are, it will outlast you. What's more, the value of houses tends to go up faster than inflation. There are reasons for this. One is that the cost of new houses constantly rises due to rising labor costs. Another reason is competition for land. the old mantra: "Location! Location! Location!" is based on this. Growing cities and ones with legislation designed to slow or stop urban sprawl increase the competition for land and therefore prices.

Regardless, none of this constitutes a real bubble. That is when prices rise so fast that the price-rise starts becoming self-sustaining - people no longer care about the underlying item, they begin buying in order to profit from future price rises (think of flipping a house). Eventually the price increases become unsustainable and prices crash. Bubbles have been happening for centuries. In the 17th century in Holland, there was a tulip craze with the price for rare bulbs reaching astronomical heights. In the late 1990s, it was Beanie Babies. There is probably a bubble going on in gold prices right now.

The problem with the housing bubble is twofold. First, people can choose not to invest in Beanie Babies but they have to have someplace to live. The second problem is that the housing prices reached astronomical heights and the drop is more than many people can afford. Even though this was mainly limited to five states, it is still affecting the world economy.

But, back to the basic question - who is to blame?

Banks did a lot of things wrong but I have trouble assigning them primary blame. There are several reasons for this. A big one is that people paying inflated prices for houses should have known that they were paying too much. Let me give an example. Vancouver is in the middle of its own housing bubble. The price for modest houses is now over $1 million. Someone in Vancouver illustrated this by creating a quiz Crack Shack or Mansion? and its follow-up Crack Shack or Mansion II? None of these million-dollar mansions would be worth a fraction of that amount anywhere else. Eventually the prices on these over-priced houses will drop and pull down the value of all of the Vancouver properties.

So where should banks fit into this? Should they stop lending based on inflated prices? If so, who decides when a price becomes inflated? Keep in mind that this decision has its own costs. If banks stop accepting the appraised price on houses, that will hurt housing values all by itself, potentially cutting off all house sales.

One other factor is involved when looking at underwater house values - second mortgages. It is true that banks encouraged people to treat their house as a piggy bank and take out loans based on the increasing value. At the same time, the people who took them up on these loans acted as if they were getting something for nothing. that never works.

Obama and the World

Remember when electing Barrack Obama as President would restore America to it's natural place as a world leader? we did our part. Now, someone needs to remind the rest of the world to do theirs. Obama seems to be isolating us more than ever.

Prior to the G20 conference, President Obama sent the members a letter urging them to do more stimulus spending and leave deficit-cutting until later. They ignored him and pledged to cut their deficits in half in the next couple of years. Trying to save face, Obama remembered that he had projected a deficit reduction so he announced that they had an agreement, even if it was the opposite of the agreement he wanted.

Last week's foreign relations triumph was the official resetting of relations with Russia. In order to reach that point, the Obama Administration turned on allies like Poland and Turkey and gave up completely on human rights abuses. A few days later the FBI arrested ten Americans for spying on behalf of the Russians.

Our standing in the world is diminishing even as we watch. George W. Bush was able to put together coalitions with dozens of members to invade Afghanistan and Iraq. Does anyone think that Obama could put together a similar coalition?

One of President Bush's foreign accomplishments was increased ties with India. Most of Tony Blair's government personally disliked Bush but relations with Britain remained close during the Bush years. France changed governments and became a US supporter (at least for them).

Obama has pushed India and Britain away. He has been lectured on economics and foreign relations by the French.

Israel, closely supported by the Bush Administration, has almost been cut loose.

I've been complaining for years that the Progressives think that they are the smartest people who ever lived. This tendency is showing in foreign relations. Obama has abandoned successful policies, sure that he knows better. All of Europe has told him that defects matter and that stimulus packages don't work but he does not believe them.

A frequent charge about Bush was that he was incurious and arrogant. If that described Bush then how do we describe Obama?

Shakedown

Last week, President Obama met with BP executives. After the meeting, he announced that they were setting aside a $2 billion dollar fund to compensate victims. The next day, Representative Joe Barton apologized to BP executives for being subjected to a Chicago-style shakedown. He was immediately pressured by Republican leaders to reverse himself. Despite the retraction and the fact that no Republican leaders agreed with him, the Democrats plan on using this as a major campaign point and tarring all conservatives with it. This column by NYT columnist Eugene Robinson is typical of what we can expect:

Just to review: A group constituting roughly two-thirds of all Republicans in the House takes the position that President Obama was wrong to demand that BP set aside money to guarantee that those whose livelihoods are being ruined by the oil spill will be compensated. In other words, it's more important to kneel at the altar of radical conservative ideology than to feel any sense of compassion for one's fellow Americans. This, ladies and gentlemen, is how today's GOP rolls.

Two things should be made clear. The first is that no one is saying that BP should not pay. They are complaining about Obama's actions. The second is that the radical conservative ideology that Robinson complains about is the Constitution and the rule of law. The President cut a backroom deal - BP would put up a large fund but would be protected from future claims. Obama got a PR boost when he needed it. The fact that the President did not have the authority to do this didn't slow him down.

Normally I might complain about the precedent that this sets but Obama does this sort of stuff all the time. He used TARP money to and ignored bankruptcy laws to bail out GM and Chrysler. He has proposed using repaid TARP funds for other uses even though the law says that they will be repaid into the treasury. He set new mileage standards for cars and trucks by going through the EPA rather than waiting for Congress to amend the CAFE standards. He made the pharmaceuticals pay millions in ads supporting health care reform in exchange for not being included in the reform legislation. Two days ago a judge ruled that Obama exceeded his authority when he placed a six month freeze on deep water drilling.

Robinson sees this as a matter of helping people in need and it might be... this time. What about next time? Like most politicians, Obama has difficulty distinguishing between actions that help the country and ones that help him politically. Even his shake-down of BP helped his image.

I admit that the rule of law sometimes gets in the way of compassion. It can take years for things to work their way through the courts but there are reasons for this. The courts are supposed to act as a counter to corruption or mob rule. It is satisfying to take a suspect out and lynch him but it is not right. We are supposed to be better than that. We are supposed to be a nation of laws, not one ruled by a populist strongman.

Just to review, A group of liberals/progressives led by the President of the United States thinks that it is better to have the President force immediate action fro BP than to wait for the legal system. In other words, it is more important to kneel at the altar of progressive ideology than to follow the law and the Constitution. This, ladies and gentlemen is how today's Democrats roll.

UPDATE: After I posted it I realized that upholding the Constitution and the rule of law is no longer a priority for many progressives. Robinson's fellow NYT columnist Thomas Friedman has openly wished that our government could be like the Chinese government and just do things. Others such as auteur, Woody Allen, have openly wished that Obama would go ahead and become a dictator long enough to solve all of the world's problems.

Troops In Harm's Way

American policy about putting troops in harm's way has undergone a major policy shift over the years.

For all his hawkishness, Reagan seldom deployed troops. The two most notable instanced were Grenada and Lebanon. Grenada fell quickly. Lebanon, on the other hand, was a disaster. Suicide bombers ran a checkpoint and exploded two trucks filled with explosives, killing 299 American and French troops who were there as peacekeepers. The country quickly lost its appetite for peacekeeping and the peacekeepers were withdrawn.

The Gulf War (Operation Desert Freedom) under George H. W. Bush was the first example of the Powell Doctrine. The part that is relevant here was to attack with enough overwhelming force to keep casualties to a minimum.

Clinton learned his own lessons about troop casualties. Shortly before leaving office, Bush ordered troops into Somalia to stabilize the region. Under Clinton, the mission changed to nation-building. This soured after the events depicted in Black Hawk Down. The result was footage of dead soldiers being dragged through the streets. Clinton withdrew the troops shortly after that.

Clinton's take-away message from Somalia was that the American people would not support any action that involved the death of American servicemen (women were kept well away from combat). When the US intervened in Kosovo, the operation was designed to keep American's safe. The operation was conducted almost exclusively by high-altitude bombing. There were some complaints when bombs missed their targets and a general feeling that it was "unsporting" for Americans to bomb from untouchable heights.

September 11th changed everything. George W. Bush invaded Afghanistan. That operations was quick and nearly bloodless. Bush followed up with an invasion of Iraq which was also fairly quick but did have some casualties. Support for the war remained fairly high for the first year or so but the MSM (mainstream media) started playing up each casualty as the insurgency became organized. The constant drip, drip of bad news turned public opinion against the war. Eventually, Bush had to convince not only the American people, but Congress and his own generals, that the war was winnable at an acceptable cost. The cost was a sharp upswing in troop deaths as the Surge progressed. This was followed by a stunning drop in troop deaths and an admission that the Surge worked.

Obama came to office with a stabilized Iraq but an unstable Afghanistan. Bush had never pushed the new government's influence across the entire country and the Taliban was known to be taking refuge in Pakistan. Obama had campaigned on winning Afghanistan. He implemented his own version of the Surge. This included new rules of engagement. Under Bush, the rules of engagement had been tightened to minimize civilian casualties. This was tightened even more under Obama. The result has been a complete reversal of the Clinton-era priorities. Under Clinton, civilian casualties were acceptable if it kept the troops safe. Now, air  and artillery strikes that could save troops are only allowed if there is no chance of civilian casualties.

While this is a defensible counter-insurgency strategy, it is affecting troop moral and causing troops to question the wisdom of their leaders.

1937 or 1930?

Economists continue to debate the lessons of the Great Depression. This is important because, if they get it wrong, our economy will suffer for years. We could easily repeat Japan's "lost decade", which is also being debated.

The two economic theories come down to the role of the government. One side says that government spending is the only thing keeping us from falling over the abyss. The other side says that the government is interfering with the natural economic recovery and making it worse.

The pro-government spending side it championed by Paul Krugman and endorsed by President Obama. They believe in a simplified version of Keynes. There are several core beliefs that the neo-Keynesians have:

1. During economic downturns, the government has to increase spending in order to make up for the decreased private spending.
2. All spending is good. The usual example is to hire one person to dig holes and a second one to fill in the holes.
3. Government spending is more efficient than tax cuts or rebates since taxpayers might save some of the money or use it to pay down debt. Government spending can be targeted to do the most good and none of it will be "wasted".
4. There is a multiplier effect where a portion of each dollar spent is re-spent. President Obama expressed this at the ground-breaking for the 10,000th project when he said that lunch workers would benefit from the money spent by the road workers.
5. We should not worry about short term debt. The time to worry about the debt is after the crisis has passed.
6. The economy was recovering from the Great Depression until 1937 when FDR decided to do something about the growing national debt. The resulting cutbacks caused a new recession.
   

There are problems with many of these points. The biggest one is that it assumes that employers are stupid and will make long-term hiring decisions based on short-term stimulus projects. Take the example that President Obama gave of the lunch worker. If you owned a lunch counter near a construction site and your business increased because of the construction, would you assume that the increase was permanent and expand your facility or would you add temporary workers and assume that business will return to normal when the construction project ends?

Obama's example of the lunch counter worker has an additional problem - it assumes that the construction worker would not eat lunch without the stimulus. In this example, the stimulus moved where the lunch is eaten and may have increased the amount spent. There are better examples but real life intrudes. If the government gives a rebate to a worker, he may spend it or he may bank it. Having the government hire the same worker to dig holes is supposedly more efficient but that same worker may bank his hole-digging wages.

There is some evidence that government spending crowds out private spending rather that stimulating it. The money for this spending has to come from somewhere - either borrowing, new taxes, or high inflation.  Currently businesses are holding huge reserve funds. Collectively they worry that there will either be a double-dip downturn or that the government debt will affect them. Either way, this is affecting their spending.

The idea that government spending is targeted sounds good in principle but the actual stimulus bill that was passed had more to do with politics than efficiency. Spending was not targeted at areas with high unemployment. It was closer to old-fashioned pork-barrel spending except names were removed to make it harder to identify earmarks.

The idea of spend today, save tomorrow sounds good on paper but tomorrow never comes. Government spending increases in the bad times. When the good times come, the pressure to deal with the debt and the size of government is off. No one wants to make hard economic choices when times are good and economists like Krugman insist that it is harmful to cut when times are bad. The result is ever-expanding government and government debt. At some point the debt becomes so burdensome that it strangles the government. Greece is already at that point. Spain is making major cutbacks to avoid the same fate. Krugman thinks that their problems would be solved if they could devalue their currencies but that would raise the future cost of borrowing.

The opponents of the neo-Keynesians point out that the economy was recovering from the crash of 1929 until the government involved itself in 1930. That's when unemployment skyrocketed. There was a similar crash in the 1980s. The government did nothing and the stock market recovered without pulling the economy into a decade-long depression. The fear is that we will repeat the mistakes of the 1930s instead of the lessons learned in the 1980s.

The effects of government stimulus are debatable. Obama's economic advisers made their reputations saying that stimulus spending never worked (once they went to work for Obama then insisted that "This time is different"). There have even been studies that show that cutting government spending can cause an economic boost.

The neo-Keynesians, at heart, believe that the government knows better than the people how things should work. It is no coincidence that a president who took over health care believes that the economy cannot mend itself without government aid.

The impulse to help is deeply ingrained. Back when children grew up on farms they were taught not to help a hatching chick. If you helped it you inevitably injured it but a chick that hatched on its own was healthier. The same applies to an economy but the ivy-league lawyers running the government cannot believe this.

Why Aren't the Democrats Fired Up?

This piece echos one by E. J. Dionne in asking why Democrats aren't fired up and ready to go? It lists their accomplishments but fails to recognize an important point - their accomplishments are not popular. In fact, Obama was in Columbus today trying to convince people that his economic stimulus worked. A majority of the country dislikes health care. When the man at the top is still trying to sell his signature accomplishments, the people further down are in trouble.

Then there are other factors. The economic recovery is slowing. Unemployment is still the highest it has been in a generation with no sign of dropping in the next several years. The deficit is unsustainable. Everyone knows it but no one will admit to a plan to do something about it. The various bail-outs may have saved the economy but they gave the impression of rewarding bad behavior. The coming financial reform bill reinforces that impression.

Voters are in an anti-incumbent mood. Some long-time incumbents couldn't even make it past the primaries. Long-time Democratic allies (unions) have turned on moderate Democrats. Without Obama at the top of the ticket, Democrats from traditionally conservative districts can expect a tough fight which many will loose.

Given all of this, I can't imagine many Democrats looking forward to the coming election. How can they get fired up when they are already on the defensive?

What Kind of Capitalist is Obama

New York Times columnist, David Brooks, recently wrote a column about the two types of capitalism seen today.

On the one side are those who believe in democratic capitalism — ranging from the United States to Denmark to Japan. People in this camp generally believe that businesses are there to create wealth and raise living standards while governments are there to regulate when necessary and enforce a level playing field. Both government officials like President Obama and the private sector workers like the BP executives fall neatly into this camp.

On the other side are those that reject democratic capitalism, believing it leads to chaos, bubbles, exploitations and crashes. Instead, they embrace state capitalism. People in this camp run Russia, China, Saudi Arabia, Iran, Venezuela and many other countries.

My question is if President Obama falls as neatly into the first camp as Brooks thinks.

As president of the world's leading democratic capitalist nation, Obama is in that camp by definition but is that where his heart lies? After all, Brooks has mistaken Obama's motives before, projecting his own onto the President.

Obama has made several speeches against the current economy with its boom and bust cycles. He has vowed to make fundimental changes to eliminate these cycles. He and his fellow Democrats have blamed the Bush administration for allowing bubbles.

Progressives in general and Obama in particular are in favor of redistributionist policies. They are more concerned with the disparity between the rich and the poor than with rising living standards for everyone. Their view of the government goes far beyond ensuring a level paying field.

Quoting Ian Bremmer, Brooks continues:

Bremmer points out that under state capitalism, authoritarian governments use markets "to create wealth that can be directed as political officials see fit." The ultimate motive, he continues, "is not economic (maximizing growth) but political (maximizing the state's power and the leadership's chances of survival)." Under state capitalism, market enterprises exist to earn money to finance the ruling class.

That's pretty close to the Chicago way of politics - use of political power to reward supporters. There is a reason that Wall Street gives more to the Democrats than to the Republicans even though the Republicans are supposed to be their natural allies.

Brooks goes on to talk about large national energy companies. We do not have anything like that but we could. There has been a lot of pressure for Obama to seize BP. Obama has resisted that but he did take over GM last year, bypassing bankruptcy laws and splitting ownership between unions (heavy Obama supporters) and the government. He also let the banks know that he owned them for taking TARP funds, even if it was forced on them.

While Obama is a long was from exercising the type of control that Brooks describes, many of his supporters would be thrilled to see this happen. On several occasions, Thomas Friedman has openly wished that our government had the same power as China to implement policies. Woody Allen joined him in wishing that Obama could become a dictator long enough to solve our problems.

Countries like these look better from the outside than the inside. Outsiders see things happen and assume that it is all for the common good. Those on the inside see favoritism and corruption. One lesson from the Gulf oil spill is that the closer regulators get to the industry that they are supposed to monitor the less likely they will do their job properly.

Obama's Speech and the limits of the Presidency

Last Tuesday, President Obama gave his first Oval Office speech. While the subject was the Gulf oil spill, the real reason for the speech was to try to save his presidency. This effort was doomed from the start.

Obama's problem is that the country suffers from heightened expectations for what the government in general and the President in particular can do. The oil spill has been called Obama's Katrina but, in a way, he is a victim of Bush's Katrina.

After Hurricane Katrina, the federal government did as much as was possible as fast as it could be done. This wasn't enough for most people. Day after day the news anchors stood in front of flooded houses and reminded the country that New Orleans had not been fixed yet. Many people on the left spent enormous effort blaming the disaster on Bush - either because he allowed Global Warming which caused the hurricane or because he didn't spend enough money on the levees. Bush added to the expectations on his own. His White House never pointed out that they were not meant to be first responders or that the rescues began almost immediately after the storm ended.

Like Bush, Obama is a great believer in the power of government. Neither man would ever quote Reagan's joke about the scariest phrase in the English language, "I'm from the government and I'm here to help."

But there are some things that the government cannot do. It does not have the technology to stop an oil leak a mile underwater (not that BP's technology is doing such a great job). At the same time, there are things that the government could do. A 1990 law allows it to take over the clean-up effort but the Obama administration failed to do that. In fact, there have been several holes in the government's response. Obama's speech did not address any of those. He did not announce any new policy changes. His administration continues to outsource everything to BP while demonizing it and implying that it is not doing everything in its power to stop the oil.

That's why Obama's speech will be judged as a failure. It didn't change anything. The country still wants the leak stopped and that is still weeks in the future. Obama got BP to pledge $20 billion. That made today's headlines but it will be forgotten long before the oil stops leaking. Obama called for an energy bill - any bill - without giving any specifics. All of the pundits called him on his lack of anything concrete.

Without lowering expectations, Obama will continue to face the same problem daily for weeks - the oil continues to gush and the President has not done anything to stop it. A single speech cannot change that.