Archives: 11/2010

Obama’s Fiscal Commission: The Good and Bad

The co-chairs of President Obama’s National Commission on Fiscal Responsibility and Reform released a draft report yesterday on how to reduce federal budget deficits.

Despite the liberal savaging the report is taking as some sort of conservative plot, its proposals are really center-left in orientation. That said, there is some good stuff in the report, which will be useful for incoming Republicans looking to tackle the budget mess.

Good Ideas and Positive Directions

The report provides a menu of possible spending cuts for incoming Republican members of Congress to consider, particularly Tea Party members, who proposed to cut the budget during their campaigns.

The report proposes to reduce spending from 25 percent of GDP currently to 21 percent over the long run. That’s a good start, but we need to pursue deeper cuts, as discussed on www.downsizinggovernment.org. After all, federal spending was just 18 percent of GDP in President Clinton’s last two years in office.

I like that the report suggests a broad array of budget cuts, including defense, nondefense, and entitlement programs. Everything needs to be cut, including programs traditionally defended by both liberals and conservatives.

The report proposes to cut $200 billion from discretionary spending by 2015 from Obama’s proposed spending that year of $1,309 billion. That’s a 15 percent cut. However, the word “cut” needs to be qualified because discretionary outlays were $1,041 billion in the pre-stimulus year of 2007, and they were just $615 billion in the pre-Bush year of 2000.

The report recommends an array of Medicare and Social Security cuts. That’s great, but the report doesn’t include the fundamental structural reforms—such as Social Security individual accounts and Medicare vouchers—that are needed to reduce costs and provide benefits to the broader economy, such as boosting savings and improving health care quality.

The direction of the proposed tax reforms is positive. The co-chairs propose to reduce or repeal narrow deductions and other special tax benefits, while reducing marginal tax rates. The idea to treat capital gains and dividends as ordinary income, however, reveals a faulty understanding of the proper tax treatment of capital.

The report proposes to cut the corporate tax rate from 35 percent to 26 percent, while moving to territorial treatment for foreign investment. It suggests making “America the best place to start and run a business and create jobs.” That’s a laudable goal, but to fulfill it we need to bring the rate down to, say, 15 percent.

The report’s goal of reducing the damaging buildup of federal debt is laudable. Government overspending is the nation’s primary fiscal problem, but spending financed by debt creates an array of problems that are additionally troubling.

Bad Ideas and Shortcomings

The report proposes to raise taxes by $1 trillion over the next decade. But the federal budget crisis is caused by overspending not undertaxing. The election results showed that most Americans understand that, but the message hasn’t penetrated the beltway yet.

The report’s discretionary spending cuts are timid. For example, farm subsidies are cut by just $3 billion, just a fraction of their annual cost of about $20 billion. Farm prices and farm incomes are at high levels these days, so now would be a good time to repeal farm subsidies completely.

The report characterizes tax deductions and exemptions as “spending in the tax code.” That is becoming common parlance in Washington, but it is incorrect. Yes, the mortgage interest deduction and other narrow benefits distort the economy and ought to be abolished, but they also reduce the flow of revenues to Washington, which is a good thing.

The report makes faulty and naïve arguments often heard from centrists about government “investments.” While we need to cut spending, we also need to “invest in education, infrastructure, and high-value R&D” the report says. But why does the federal government need to be involved in education? Why can’t we privatize infrastructure investment? If certain R&D is so “high-value,” wouldn’t the private sector do it?

Along the same lines, the report calls for the creation of a “Cut-and-Invest Committee” to move spending from “outdated” programs to “high-priority long-term investments.” That’s just naïve. The government will never be an efficient allocator of resources, and that’s why we need to shrink it, not just make it run better.

Finally, the commission should have placed more emphasis on fundamental restructuring of government, and not just spending trims. This is true with the entitlement proposals. But also with areas such as infrastructure spending—we don’t need higher gas taxes and government spending for infrastructure, we need privatization.

Gary Johnson and Drug Policy

As governor of New Mexico, Gary Johnson succeeded in eliminating New Mexico’s budget deficit, cutting the rate of growth in state government in half, and privatizing half of the state prisons. During Johnson’s term, New Mexico experienced the longest period without a tax increase in the state’s history. He vetoed 750 bills in eight years, more than all other governors combined. The Economist dubbed him “America’s boldest governor” – and that was before he took on drug prohibition. He discussed drug policy and other issues at the Cato Institute November 1, 2010 at a Cato on Campus forum.

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Co-Chairmen of Obama’s Fiscal Commission Unveil Real Tax Increases and Fake Spending Cuts

I have many pet peeves, but one that causes me endless frustration is the Washington “spending cut” scam. This happens when politicians increase spending, but claim that they’re cutting spending because they previously had planned to make government even bigger.

The proposal unveiled yesterday by the Co-Chairman of President Obama’s Fiscal Commission is a good example. If you read through their report, it sounds like there are lots of spending cuts. But they never explain that these supposed cuts are really just reductions in previously-planned increases.

Here’s the bottom line. As shown in the graph, it is quite simple to balance the budget (and permanently extend all of the 2001 and 2003 tax cuts) if politicians simply limit spending growth. You can balance the budget within a few years with an overall cap on spending at current-year levels. But if you prefer a more moderate approach, you can let spending increase 2 percent each year and balance the budget by the end of the decade.

The proposal from the Fiscal Commission, incidentally, does not balance the budget - even though they have a big tax increase (which they assume will have zero negative impact on economic performance).

So what does this mean? Well, we know that the budget can be balanced (with the 2001 and 2003 tax cuts) if spending grows two percent each year. And we also know that the Fiscal Commission increases the tax burden, yet still doesn’t achieve fiscal balance. So this means that they must be letting spending grow much faster than 2 percent each year. I’m guessing 4-5 percent annual spending growth.

In other words, the Fiscal Commission is asking us to pay higher taxes so that government spending can grow at twice the rate of inflation. That’s not a good deal.

Moreover, that’s almost certainly a ridiculously naive best-case scenario. If past behavior is any indication (and it is), politicians will spend any additional tax revenue. Whenever there’s a budget summit, the folks who want higher taxes make all sorts of empty promises about spending discipline. And when the other side caves in on taxes, they grab the money and have a party.

Armistice Day

Today is Armistice Day. It marks the end of an era.

Before the First World War, the western understanding of warfare was that it made plain things noble. It allowed superior individuals to show their valor, to exercise a virtue that both transformed themselves and offered a shining example to those around them. To act in the face of danger was what men did, and for them to do it properly, you needed a war.

Yes, there were a few naysayers out there – Thoreau, Mark Twain, Moorfield Storey – but the consensus view held that war made weak things strong, boys into men, and good nations into great ones. Yes, war was horrible. No one doubted it. But to be sublime, a thing must, on some level, be horrible. So was war – a great, terrible proving ground for the man and the nation.

Industrialized war, the thinking often went, would do all of this on an even grander scale. Just as mechanization made shirts and steel faster and better, mechanization would make warfare faster and better, too. Men of valor could be, and would be, mass produced. This view of war can be found in thinkers from the great to the pitiful, from G. W. F. Hegel to Edward Mandell House. For them, not only was war great and sublime, but it was thought to be getting better and better.

World War I changed all that. From the early months of the conflict, thinking people realized that modern warfare would certainly be more productive, if “productive” was quite the right word for it. It would not, however, be more ennobling. Modern warfare would be capable of killing on a scale never before seen. Sure, there had been some hints of it – the U.S. Civil War, the Crimean War – but this was different, particularly to most Europeans.

Personal valor meant less, not more, in the era of mustard gas and the artillery barrage. To show valor, one has to face a danger and in some sense exert a force against it. To be placed in a hole and left to wonder helplessly about one’s fate, while everyone around you randomly falls dead, isn’t valorous. It’s horrid and nothing more.

I know I will get some pushback on this, but I will say it anyway – personal valor means even less in the face of nuclear war, in which one minute you are there, and the next you can be unmade. Few if any in the nineteenth century appreciated what industrialism would do to war, but this was it. As Ludwig von Mises put it, “[I]n the long run war and the preservation of the market economy are incompatible. Capitalism is essentially a scheme for peaceful nations… If the efficiency of capitalism is directed by governments toward the output of instruments of destruction, the ingenuity of private business turns out weapons which are powerful enough to destroy everything. What makes war and capitalism incompatible with one another is precisely the unparalleled efficiency of the capitalist mode of production.”

To have an industrial capitalism is to have the ability to wage war on a scale that obliterates all pretense of humanity. That is what we commemorate today – an appalling sacrifice, and an appalling responsibility that we can never again be free of.

A First Test for Republicans

Republicans’ hands have been strengthened by a wave of voter angst about big-spending and business-as-usual in Washington, D.C. But have they landed on their limited-government feet? The first test of that question comes next Tuesday.

That’s when Senate Republicans will likely vote on a proposal to bar themselves from requesting earmarks. Last year, House Republicans adopted that policy for themselves the day after House Democrats limited their earmarking to non-profits and government bodies.

The Senate Republican earmark ban is championed by Tea Party favorite Sen. Jim DeMint (R-S.C.). Its strongest opponent is Minority Leader Mitch McConnell (R-Ky.).

Senator McConnell may have won his race in 2008 thanks to bringing home the bacon, but politics seem to have changed since then. Earmarker extraordinaire Rep. James Oberstar (D-Minn.) was bounced out of his office despite larding his district and state with federal pork.

McConnell’s own state may have changed, too. Witness the election of Rand Paul (without McConnell’s help). Paul supports the earmark ban.

McConnell has framed his opposition to the earmark ban as an argument for preserving Congress’ “discretion”—that is, its authority over the spending of federal dollars. Without earmarks, the administration will decide where the money is spent. But there’s a pretty long list of things McConnell could work for if he wants to defend Congress’ prerogatives, such as:

- Forcing the administration to be transparent about the grants it doles out.

- Limiting  or eliminating the administration’s grant-making and spending discretion.

- Withdrawing all the other massive delegations of authority that Congress has given to the executive branch.

- Reducing spending and cutting taxes so that spending discretion is where it should be: with the taxpayers who earned the money in the first place.

Earmarks are not a huge part of the federal budget, but that does not militate against ending them. Senator Tom Coburn (R-Okla.) calls them a “gateway drug to federal spending addiction,” which is a folksy way of talking about the political science of “log-rolling.” Former member of Congress Joe Scarborough (R-Fla.), who has seen it first-hand, talks in this clip about how House and Senate leaders use earmarks to buy votes on legislation they want to get passed.

If earmarks go away as a tool for wheeling-and-dealing in Congress, members and senators will be less likely to sell out the country as a whole with bloated spending bills and Rube-Goldberg regulatory projects for the benefit of some local interest or campaign contributor.

I’ll be speaking next Monday at a Hill event on earmark transparency. The vote in the Senate Republican Conference is Tuesday. It’s a secret ballot, so any senator who doesn’t trumpet his or her support of the earmark ban almost certainly opposes it and supports the practice of earmarking.

“Dear Foreigners, You Do the Math” —USA

A brand new Harvard University study finds that American students perform very poorly in math compared to their peers in other nations.

What’s that? You’ve heard this all before? Not quite.

This study compares the percentages of students scoring at advanced levels across countries, and it controls for the confounding effects of differing populations of disadvantaged groups. When the researchers looked exclusively at white students and at students with at least one parent with a college degree, the results remained largely the same. Among white students, for instance, 8 percent of Americans scored “advanced” in math, landing us in 25th place among nations for which scores were available–behind nearly every other advanced industrialized nation on Earth. And the highest ranked U.S. state, Massachusetts, trails the overall averages of 14 nations.

This may come as a shock to those who imagined that America’s educational shortcomings were restricted to inner cities or disadvantaged populations, but it is entirely consistent with results reported more than a decade ago as part of the Third International Mathematics and Science Study, showing that U.S. students taking advanced mathematics and physics classes lagged their peers in other industrialized nations at the end of high school, often by wide margins.

So how, then, have we remained an economic superpower for so long if our school system is so bad? The answer is that we have historically enjoyed one of the freest economies on Earth, a relatively unfettered labor market, and comparatively low taxes–all of which have drawn to our shores many of the world’s best and brightest. Regrettably, our comparative advantage in those areas has eroded over the past several years.

Perhaps, instead of continuing to make our economy more like our failing centrally planned school monopoly, we should allow our education system to benefit from the freedoms and incentives of the marketplace that was always the engine of our prosperity….

The Shocking Truth: The Scientific American Poll on Climate Change

November’s Scientific American features a profile of Georgia Tech atmospheric scientist Judith Curry,  who has committed the mortal sin of  reaching out to other scientists who hypothesize that global warming isn’t the disaster it’s been cracked up to be.  I have personal experience with this, as she invited me to give a research seminar in Tech’s prestigious School of Earth and Atmospheric Sciences in 2008.  My lecture summarizing the reasons for doubting the apocalyptic synthesis of climate change was well-received by an overflow crowd.

Written by Michael Lemonick, who hails from the shrill blog Climate Central, the article isn’t devoid of the usual swipes, calling her a “heretic„ which is hardly at all true.  She’s simply another hardworking scientist who lets the data take her wherever it must, even if that leads her to question some of our more alarmist colleagues. 

But, as a make-up call for calling attention to Curry, Scientific American has run a poll of its readers on climate change.  Remember that SciAm has been shilling for the climate apocalypse for years, publishing a particularly vicious series of attacks on Denmark’s Bjorn Lomborg’s Skeptical Environmentalist.  The magazine also featured NASA’s James Hansen and his outlandish claims on sea-level rise. Hansen has stated, under oath in a deposition, that a twenty foot rise is quite possible within the next 89 years; oddly, he has failed to note that in 1988 he predicted that the West Side Highway in Manhattan would go permanently under water in twenty years.

SciAm probably expected a lot of people would agree with the key statement in their poll that the United Nations’ Intergovernmental Panel on Climate Change (IPCC) is “an effective group of government representatives and other experts.”

Hardly. As of this morning, only 16% of the 6655 respondents agreed.  84%—that is not a typo—described the IPCC as “a corrupt organization, prone to groupthink, with a political agenda.” 

The poll also asks “What should we do about climate change?” 69% say “nothing, we are powerless to stop it.” When asked about policy options, an astonishingly low 7% support cap-and-trade, which passed the U.S. House of Representatives in June, 2009, and cost approximately two dozen congressmen their seats.

The real killer is question “What is causing climate change?” For this one, multiple answers are allowed.  26% said greenhouse gases from human activity, 32% solar variation, and 78% “natural processes.” (In reality all three are causes of climate change.)

And finally, “How much would you be willing to pay to forestall the risk of catastrophic climate change?”  80% of the respondents said “nothing.”

Remember that this comes from what is hardly a random sample.  Scientific American is a reliably statist publication and therefore appeals to a readership that is skewed to the left of the political center.  This poll demonstrates that virtually everyone now acknowledges that the UN has corrupted climate science, that climate change is impossible to stop, and that futile attempts like cap-and-trade do nothing but waste money and burn political capital, things that Cato’s scholars have been saying for years.