Archives: 02/2011

To Fix the Budget, Bring Back Reagan…or Even Clinton

President Obama unveiled his fiscal year 2012 budget today, and there’s good news and bad news. The good news is that there’s no major initiative such as the so-called stimulus scheme or the government-run healthcare proposal. The bad news, though, is that government is far too big and Obama’s budget does nothing to address this problem.

But perhaps the folks on Capitol Hill will be more responsible and actually try to save America from becoming a big-government, European-style welfare state. The solution may not be easy, but it is simple. Lawmakers merely need to restrain the growth of government spending so that it grows slower than the private economy.

Actual spending cuts would be the best option, of course, but limiting the growth of spending is all that’s needed to slowly shrink the burden of government spending relative to gross domestic product.

Fortunately, we have two role models from recent history that show it is possible to control the federal budget. This video from the Center for Freedom and Prosperity uses data from the Historical Tables of the Budget to demonstrate the fiscal policy achievements of both Ronald Reagan and Bill Clinton.

Some people will want to argue about who gets credit for the good fiscal policy of the 1980s and 1990s.

Bill Clinton’s performance, for instance, may not have been so impressive if he had succeeded in pushing through his version of government-run healthcare or if he didn’t have to deal with a Republican Congress after the 1994 elections. But that’s a debate for partisans. All that matters is that the burden of government spending fell during Bill Clinton’s reign, and that was good for the budget and good for the economy. And there’s no question he did a much better job than George W. Bush.

Indeed, a major theme in this new video is that the past 10 years have been a fiscal disaster. Both Bush and Obama have dramatically boosted the burden of government spending – largely because of rapid increases in domestic spending.

This is one of the reasons why the economy is weak. For further information, this video looks at the theoretical case for small government and this video examines the empirical evidence against big government.

Another problem is that many people in Washington are fixated on deficits and debt, but that’s akin to focusing on symptoms and ignoring the underlying disease. To elaborate, this video explains that America’s fiscal problem is too much spending rather than too much debt.

Last but not least, this video reviews the theory and evidence for the “Rahn Curve,” which is the notion that there is a growth-maximizing level of government outlays. The bad news is that government already is far too big in the United States. This is undermining prosperity and reducing competitiveness.

Budget Follies

Today POLITICO Arena asks:

Is the Obama budget a serious stab at deficit reduction? And do congressional Republicans have any credibility in knocking the budget plan since, other than Sen. Rand Paul (Ky.), they have not detailed many cuts that would seriously slice the deficit?

My response:

It’s Valentine’s Day and love is in the air, especially on Capitol Hill where Congress anxiously awaits the 10:00 a.m. arrival of the president’s FY 2012 budget. It should be well shredded by noon.

And as it is, across the land we’ll be hearing the cries of “Not me, please, not my sinecure” – no more plaintively than from the minions of the Corporation for Public Broadcasting. How will the average Chicago Bears fan endure without the latest BBC soap – excuse me, Masterpiece Theatre production?

But if that should come to pass, woe be unto those CPB congressional supporters who survived the November shellacking, the very ones who brought us to this sorry state by failing, for the first time in our history, to pass a single spending bill. Hell hath no fury like that of an NPR patron scorned.

Austrian Economics in the News

The financial crisis of 2008 led to a lot of unfortunate Keynesian and corporatist policymaking, but also to a renewed interest in Austrian economics and particularly to the Austrian theory of the business cycle and the role of the Federal Reserve in creating bubbles and busts. Austrian ideas are most recently examined on BBC and in the Washington Post.

Sales of F. A. Hayek’s book The Road to Serfdom have soared in the past three years, actually hitting no. 1 on Amazon last summer. The New York Times complained that Tea Party activists had “reached back to dusty bookshelves for long-dormant ideas [in] once-obscure texts by dead writers” such as Hayek, even as its reporters continually urged policymakers to Read. More. Keynes. A rap video on the intellectual battle between Hayek and Keynes, created by economist Russell Roberts and filmmaker John Papola, has been viewed almost 2 million times. A YouTube cartoon video on “quantitative easing” has done even better, with more than 4 million views.

And now Rep. Ron Paul’s appointment as chairman of the House subcommittee on monetary policy has brought new attention to the Austrian critique of orthodox economics and economic policy. A long article on Paul’s ideas and his plans for the committee by Annie Lowrey filled a full page of the Sunday Washington Post:

But Paul’s adversary is not only the Federal Reserve. It is also mainstream monetary economics itself. As a devotee of the Austrian school, whose luminaries include Friedrich Hayek and Ludwig von Mises, Paul stands firmly outside policymaking and academic circles, a point he enthusiastically admits. (The Austrian economists also often quibble with other libertarians, such as those at Cato.) His beef is not with how central bankers do their jobs; it’s with central banking itself.

“The Fed, rightly so, criticizes Congress for spending too much - but they make the money available to us!” he said. “It buys debt, keeps interest rates low, and sticks it to the people who want to save and make money. It is so unfair. And I think it is the first time in the history of the Fed that people realize it is not their friend. It just gives us booms and busts.”

The line about Cato is a little misleading. At our 28 annual monetary conferences and in our publications, we’ve presented the ideas of many Austrian economists, from our 1979 publication of two classic manuscripts by Hayek, A Tiger by the Tail: The Keynesian Legacy of Inflation and Unemployment and Monetary Policy: Government as Generator of the “Business Cycle” and our first monetary conference in 1982 featuring Fritz Machlup and Gottfried Haberler, to a 1999 issue of the Cato Journal featuring studies of Hayek and Ludwig von Mises, to a new Working Paper, “Has the Fed Been a Failure?” by George Selgin, William Lastrapes, and Lawrence H. White.

And don’t miss a recent BBC program, “Radical Economics: Yo Hayek!” Jamie Whyte spends 30 thoughtful minutes looking at Austrian views of boom and bust, with such guests as White, Papola, Steven Horwitz, Robert Higgs, and Robert Skidelsky.

It took the biggest bubble and crash since 1929 to revive the interest in Austrian economics, but at least now more people are studying the real problems with central planning, government intervention, and money manipulation.

Obamacare Defenders Grasping at Straw Men

Last week saw a splash of publicity for defenders of Obamacare’s constitutionality.  First, Yale law prof Akhil Amar had a hyperbolic op-ed in the L.A. Times, prompting a thorough fisking by Tim Sandefur, Ilya Somin, and me (among others). Then Harvard law prof Larry Tribe (who has written for the Cato Supreme Court Reviewhad one in the New York Times.  Here’s an excerpt:

Since the New Deal, the court has consistently held that Congress has broad constitutional power to regulate interstate commerce. This includes authority over not just goods moving across state lines, but also the economic choices of individuals within states that have significant effects on interstate markets. By that standard, this law’s constitutionality is open and shut. Does anyone doubt that the multitrillion-dollar health insurance industry is an interstate market that Congress has the power to regulate?

Well, actually, Prof. Tribe, you’re asking and answering the wrong questions, as I say in my letter to the editor that appeared in the Sunday Times:

First, this is indeed a “novel” issue for the Supreme Court: Never before has the federal government asserted the power to require people to engage in economic activity under the guise of regulating commerce.

Second, those challenging the law do not question Congress’s power to regulate the “multitrillion-dollar health insurance industry,” but rather distinguish such regulation from a command for individuals to purchase that industry’s products.

Third, the difference between activity and inactivity is anything but “illusory”; if Congress can regulate mere decisions, then it can tell me, for example, that I shouldn’t spend time writing letters to the editor.

And finally, imagining that Justice Antonin Scalia would support the government here because he previously ratified prohibitions on the production and consumption of marijuana is to remove the very activity-inactivity distinction that he recognized in that earlier opinion.

Most recently, the Times itself editorialized against the views Randy Barnett presented to the Senate Judiciary Committee – and Randy replied here

Setting aside the issue of why Congress is only now getting around to holding hearings on the constitutionality of a fundamental piece of legislation it passed nearly a year ago, it’s clear now at least that the proponents of limitless, extra-constitutional government are running scared.  Obamacare delenda est.

The Federal Government’s Police Power

Last week, after I responded to Akhil Amar’s op-ed that defended, in an uncharacteristically unthoughtful and ad hominem way, the constitutionality of the individual mandate, a reader suggested that Amar’s argument – particularly that “breathing is an action” that Congress can regulate – reminded him of that Police classic, “Every Breath You Take.”  What’s ironic about this suggestion, perhaps inadvertently, is not only the invocation of “breathing” but that the whole Obamacare battle boils down to competing views of federal power:  Does the government have a general “police” power or is its authority limited to that finite set of powers listed in the Constitution?

And so, without further ado, here’s how the song would look updated for 2011’s favorite constitutional debate (with apologies to Gordon Sumner aka Sting):

Every breath you take
Every move you make, or
Decide not to take
Even when you flake
We’re mandating you

Every single day
Every word you say
Every game you play
Even if you stay
We’re coercing you

O don’t you fuss
You belong to us
How we regulate every step you take

Every move you make
Every vow you break
Every smile you fake
Every claim you stake
We’re mandating you

The Constitution’s lost without a trace
Since ‘37 we go every place
Limits on government you can’t replace
Got rid of those so we’re always in your face
We’re commanding you, no saying please

Every move you make
Every vow you break
Every smile you fake
Every claim you stake
We’re mandating you

Debunking the Myth of Oil Dependence

An article in today’s Boston Globe might help to debunk one of the more pervasive myths that distorts U.S. foreign policy: the belief that access to oil from the Middle East is a vital national security issue for the United States.

I discuss the issue in my book, The Power Problem (pp. 107-114). In addition, the Cato Institute and/or Cato scholars have published no fewer than five papers and articles over the past two decades documenting the many reasons why access to oil – or any other natural resource, for that matter – should not be cast as a national security threat. (See, e.g. here, here, here, here and here).

An article in the journal Security Studies expands on the last of these papers, published by Eugene Gholz, at the University of Texas, and Daryl Press, at Dartmouth College. (Justin Logan deserves credit for locating an early version of this paper, and working with Gholz and Press to publish the paper in Cato’s Policy Analysis series in 2007).

But the Gholz/Press plea that U.S. policy not fall victim to ”energy alarmism” isn’t particularly controversial. Or, at least, it shouldn’t be. Writes the Globe’s Jeremy Kahn:

Gholz and Press are hardly the only researchers who have concluded that we are far too worried about oil shocks. The economy also faced a large increase in prices in the mid-2000s, largely as the result of surging demand from emerging markets, with no ill effects. “If you take any economics textbook written before 2000, it would talk about what a calamitous effect a doubling in oil prices would have,” said Philip Auerswald, an associate professor at George Mason University’s School of Public Policy who has written about oil shocks and their implications for US foreign policy. “Well, we had a price quadrupling from 2003 and 2007 and nothing bad happened.” (The recession of 2008-9 was triggered by factors unrelated to oil prices.)

And yet, the idea that is rejected by most economists is almost universally believed by politicians, and hyped by interest groups who stand to gain by stoking public fears. Auerswald explains: 

“This argument is like the familiar old jeans of American politics,” he said. “They are nice and cozy and comfortable and everyone can wear them. Because of ethanol, the farm lobby loves it; for coal, well it’s their core argument; for the offshore drilling folks, they love it.” Even the environmental movement relies on it, he said, because they use it as bogeyman to scare Americans into taking renewable energy and energy conservation more seriously. As for the US military, “The US Navy is not interested in hearing that one of their two main theaters of operation has no justification for being,” Auerswald said.

Here’s hoping that Jeremy Kahn’s article will help to set the record straight.

Obama the Born-again Budget Cutter?!?

Chalk up another victory – at least on the rhetorical level – for the Tea Party.

President Obama will release his fiscal year 2012 budget tomorrow and he’s apparently become a born-again fiscal conservative. Here are some excerpts from a Washington Post story:

President Obama will respond to a Republican push for a drastic reduction in government spending by proposing sharp cuts of his own in a fiscal 2012 budget blueprint that aims to trim record federal deficits by $1.1 trillion over the next decade. …two-thirds of the savings would come from spending cuts that are draconian by Democratic standards… When it lands Monday on Capitol Hill, Obama’s plan will launch a bidding war with Republicans over how deeply and swiftly to cut, as the two parties seek a path to fiscal stability for a nation awash in red ink.

I’m skeptical of battlefield conversions, particularly when politicians utilize the dishonest Washington definition of a budget cutincreasing spending by less than previously planned. So the first thing I’ll do when the budget is released is to visit the Historical Tables of the Budget website and see what spending is projected to be in 2011 and what Obama is asking for in 2012.

Those numbers probably won’t be accurate since the Obama administration (like previous ones) will use best-case assumptions, but at least we’ll get a sense of whether:

a) spending actually is being cut (I’m not holding my breath for this miracle), or

b) spending is frozen at current levels (this approach would balance the budget by 2017, but it’s almost as unlikely at the first option), or

c) spending is being restrained (perhaps 2 percent growth, enough to keep pace with inflation), or

d) spending is growing far too fast (say 4 percent growth, pushing America quickly in the wrong direction), or

e) spending is continuing to explode (5 percent growth, 6 percent growth, or even more, meaning we’ll be Greece sooner than we think).

My guess, for what it’s worth, is that the Obama administration will claim (d) but will actually be proposing (e) if more realistic assumptions are used.

Needless to say, I hope I’m wrong. But other parts of the Washington Post story give me little reason for hope. The White House apparently is ignoring entitlements. Heck, the administration apparently isn’t even planning on meeting the President’s own deficit goal.

The blueprint ducks the harder task of tackling the biggest drivers of future deficits: Social Security, Medicare and Medicaid… Obama’s blueprint does not even hit the short-term goal he set for his commission - reducing deficits to 3 percent of the economy by 2015.

The White House also plans to play a shell game with certain parts of the budget. Supposed spending cuts in health care won’t generate taxpayer savings. Instead, they’ll be used to finance more spending on Medicare, enabling the President to cancel savings that were promised as part of Obamacare. The interest groups win and the taxpayers lose.

The Obama blueprint also seeks to eliminate two budget gimmicks that Congress has long used to mask the true depth of the red ink: His proposal would offset higher Medicare payments to doctors by cutting $62 billion from other areas of federal health spending. And it would adjust the alternative minimum tax through 2014 to prevent it from hitting middle-class taxpayers, covering the cost by limiting the value of itemized deductions such as charitable contributions and mortgage interest for wealthy households.

The same shell game takes place on the tax side of the fiscal ledger. The White House plans to cancel one future tax increase and “pay” for that change by imposing another future tax increase. Once again, taxpayers get the short end of the stick.

Unless the Washington Post story is completely inaccurate, the Obama administration is not changing course. There may not be any major initiatives to expand the burden of government, like the failed stimulus or the budget busting government-run healthcare scheme, but it certainly does not seem like there are any plans to reverse direction and shrink the burden of government.