Tag: deficit

Deficit Reduction Commission Says Military Spending Can and Must be Cut

President Obama’s Fiscal Commission’s report is out and they have wisely kept military spending on the table. Having not seen the accompanying list of specific cuts, it seems that rather than micromanage DoD’s decisions with respect to which weapons systems to cut or keep, the commissioners have laid down a different marker: find the cuts that make sense, but understand that the business-as-usual of the past decade is over.

The report fixes on a number of spending cuts and reforms that Benjamin Friedman and I call for in the Cato Policy Analysis “Budgetary Savings from Military Restraint” including cuts to the civilian workforce (see recommendation 1.10.4). They also hold fast to the proposition that all spending must be on the table, and reject out of hand the notion that military spending must be held sacrosanct. This is bad news for the “defending defense” crowd.

I am not going to comment on the Commission’s other proposals with respect to taxes, social security, health care, etc.  As for specific military spending cuts, this report is less detailed than the preliminary report issued a few weeks ago by Co-chairs Bowles and Simpson. It is appropriate, however, to task the Department of Defense with identifying additional savings (as they do in recommendation 1.11). Responsible cuts can be made if the Pentagon and the White House adopt a strategy of restraint, one that husbands American resources, focuses on a few core missions vital to U.S. national security, and requires other countries to take primary responsibility for their defense.

Mirror, Mirror, on the Wall, Which Nation Has the Most Debt of All?

The Economist has a fascinating webpage that allows readers to look at all the world’s nations and compare them based on various measures of government debt (and for various years).

The most economically relevant measure is public debt as a share of GDP, and you can see that the United States is not in great shape, though many nations have more accumulated red ink (especially Japan, where debt is much higher than it is even in Greece).  As faithful readers of this blog already understand, the real issue is the size of government, but this site is a good indicator of nations that finance their spending in a risky fashion.

By the way, keep in mind that these figures do not include unfunded liabilities. For those who worry about debt, those are the truly shocking numbers (at least for the United States and other nations with government-run pension and health schemes).

There Is No Libertarian or Conservative Argument for Higher Taxes

Eli Lehrer has an article on the FrumForum entitled “Five Revenue Raisers the GOP Should Back.” He argues it would be good to get rid of preferences such as the state and local tax deduction and the mortgage interest deduction, and he also asserts that there should be “user fees” for things such as transportation.

As an avid supporter of a flat tax and market pricing, I have no objection to these policies. Indeed, I would love to get rid of the state and local tax deduction so that taxpayers in Texas and Florida no longer have to subsidize the fiscal profligacy of politicians in California and New York.

But there is a giant difference between getting rid of certain tax preferences as part of revenue-neutral (or even better, tax-cutting) tax reform and getting rid of tax preferences in order to give politicians more revenue to spend.

The former is a noble goal. Who can argue, after all, with the idea of getting rid of the corrupt and punitive internal revenue code and replacing it with a simple and fair flat tax? Lots of loopholes are eliminated, so there are plenty of tax-raising provisions in tax reform. But every one of those provisions is offset by provisions that lower tax rates and get rid of double taxation of saving and investment.

The latter, by contrast, is an exercise in trying to lose with minimal damage – sort of the “French Army Theory” of taxation, surrender gracefully and hope that your new masters give you a few crumbs after their celebratory feast.

What is especially strange about this approach is that the Republicans who advocate higher taxes claim that they are political realists. Yet if we look at real-world evidence, the moment Republicans show their “realism” by putting taxes on the table, the entire debate shifts.

Instead of the debate being tax-hikes vs. no-tax-hikes, it becomes a debate over who-should-pay-more-tax. Republicans win the first debate. They get slaughtered in the second debate.

Remember when the first President Bush agreed to enter into tax-hike negotiations in 1990? He set out two conditions – that there should be a reduction in the capital gains tax and that there should be no increase in income tax rates. So what happened? As everyone with an IQ above room temperature predicted, the capital gains tax stayed the same and income tax rates increased.

Last but not least, this conversation only exists because some people have thrown in the towel, acquiescing to the idea that there is no way to balance the budget without higher taxes. Yet the Congressional Budget Office data shows that the budget can be balanced by 2020 simply by limiting annual spending growth to 2 percent.

Has ObamaCare’s Unpopularity Caused ‘Abject Panic at the White House’?

Politico has obtained and published a confidential messaging-strategy presentation that essentially admits ObamaCare supporters are losing the battle for public opinion.  The presentation was delivered to professional leftists by the left-wing Herndon Alliance, based on public opinion research by Democratic pollsters John Anzalone, Celinda Lake, and Stan Greenberg, in a forum organized by the left-wing group Families USA,  “one of the central groups in the push for the initial legislation.”  It is a stark admission that the public has not warmed to the new health care law, despite predictions that they would do so. 

Here’s how Politico describes the presentation and its implications:

Key White House allies are dramatically shifting their attempts to defend health care legislation, abandoning claims that it will reduce costs and deficit, and instead stressing a promise to “improve it.”

…The confidential presentation … suggests that Democrats are acknowledging the failure of their predictions that the health care legislation would grow more popular after its passage, as its benefits became clear and rhetoric cooled. Instead, the presentation is designed to win over a skeptical public, and to defend the legislation — and in particular the individual mandate — from a push for repeal…

The presentation concedes that groups typically supportive of Democratic causes — people under 40, non-college educated women, and Hispanic voters — have not been won over by the plan. Indeed, it stresses repeatedly, many are unaware that the legislation has passed, an astonishing shortcoming in the White House’s all-out communications effort.

“Straightforward ‘policy’ defenses fail to [move] voters’ opinions about the law,” says one slide. “Women in particular are concerned that health care law will mean less provider availability – scarcity an issue.”

The presentation also concedes that the fiscal and economic arguments that were the White House’s first and most aggressive sales pitch have essentially failed.

“Many don’t believe health care reform will help the economy,” says one slide.

The presentation’s final page of “Don’ts” counsels against claiming “the law will reduce costs and deficit.”

Reason magazine’s Peter Suderman notes that ObamaCare supporters are “backing down from core arguments about cost and deficit reductions in the new health care law… It’s a frank admission that the economic argument in favor of the law has basically failed amongst voters.”

These revelations come at the same time a CNN/Opinion Research poll shows ObamaCare’s individual mandate is increasingly unpopular.  Politico reports:

Just 44 percent favor the health care mandate… Fifty-six percent oppose the mandate, up 3 percentage points from when the bill passed.

Americans still support ObamaCare’s price controls — which force insurance companies to over-charge the healthy and under-charge the sick — by 58-42 percent.  But as President Obama has himself acknowledged, those price controls don’t work without the individual mandate.  Unless a majority also supports the mandate, you don’t have majority support for either.

The Washington Examiner’s David Freddoso speculates there is “abject panic at the White House” over the unpopularity of ObamaCare.

Investors: Fear the Process That Gave Us ObamaCare, Not Efforts to Repeal It

Ezra Klein writes:

So long as the political system is working reasonably well, we can get out from even quite a lot of debt. But the more it breaks down — the more the market sees things like the deficit commission rejected by its Republican sponsors in Congress, the more it hears threats to repeal the deficit reduction in health-care reform, the more it seems likely that Democrats will become just as unreasonably obstructionist when they become the minority — the more it has reason to worry.

I doubt that investors worry more when they hear threats to repeal ObamaCare or its Medicare cuts, which few took seriously in the first place. Given that the non-partisan Congressional Budget Office, the non-partisan chief actuary of the Medicare program, and even the International Monetary Fund have all expressed skepticism that those cuts will take effect, I expect investors have already discounted claims that ObamaCare will reduce the deficit.

More generally, the problem is not that the political system is breaking down.  That system is working pretty much the same way it always has and always will: it promotes irresponsibility.  Republicans and Democrats are merely responding to the incentives created by the system in which they operate.  (If they didn’t respond to those incentives, the political system would throw them out and replace them with people who do.)  If investors don’t already understand that, the sooner the better.

This is why responsible people want to take responsibility for our health care, etc., out of the hands of politicians.

Emergency Spending

A recent paper by Veronique de Rugy examines how policymakers use various budgeting gimmicks to increase spending and obscure liabilities. One particularly abusive mechanism is the designation of supplemental spending as an “emergency.” The emergency designation makes it easier for policymakers to skirt budgetary rules, particularly “pay-as-you-go” (PAYGO) requirements.

The following chart from the paper shows how supplemental spending, most of which was designated as “emergency,” has taken off in the last decade:

As the chart notes, much of the increase is attributable to supplemental appropriations for the wars in Iraq and Afghanistan. The Bush administration was rightly criticized by analysts across the ideological spectrum for funding the wars outside of the standard budget process.

However, with the Democrats in control, the emergency designation is now being abusively applied to domestic spending. Congressional Research Service data obtained by the office of Senator Tom Coburn (R-Okla.) finds that emergency spending has increased deficits by almost $1 trillion since the 111th Congress was seated in January 2009.

The biggest chunk came with passage of the $862 billion “emergency” stimulus bill in February 2009. The Obama administration insisted that the emergency spending legislation was necessary to jump-start the economy and keep unemployment below 8 percent. Oops.

Congress has since passed additional multi-billion dollar “emergency” bills to extend supposedly simulative activities like unemployment benefits. The latest “emergency” extender bill that is bogged down in the Senate would add another $57 billion in debt.

What is Congress allowed to designate as emergency spending? Keith Hennessey, a former economic advisor to George W. Bush, offers the best definition: “it’s whatever you can get away with labeling as an emergency.”

However, Hennessey points out that there was originally a test with a fairly high bar created by the Office of Management and Budget in 1991 under the first President Bush. According to Hennessey, all five of these conditions had to be met:

  1. Necessary; (essential or vital, not merely useful or beneficial)
  2. Sudden; (coming into being quickly, not building up over time)
  3. Urgent; (requiring immediate action)
  4. Unforeseen; and
  5. Not permanent.

Hennessey says the definition was included in congressional budget resolutions during Bush II’s administration and that the president proposed codifying it in law. But that doesn’t seem to be the policy that the Bush II administration actually followed. With perhaps the exception of initial hostilities, there was nothing “unforeseen” about Bush’s “emergency” war spending in Iraq and Afghanistan. It seems that Bush’s inability to abide by his own proposal is another sad reminder that his fiscally reckless tenure helped pave the road to Obama.

The Tweedle Dee and Tweedle Dum of Fiscal Policy

The fault line in American politics is often not between Republicans and Democrats, but rather between taxpayers and the Washington political elite. Here are two examples that symbolize why economic policy is such a mess:

First, we have President George W. Bush’s former top aide, Karl Rove, making the case in the Wall Street Journal that the Obama administration has been fiscally irresponsible. That’s certainly true, but as I’ve pointed out on previous occasions (here and here), Rove has zero credibility on these issues. In the excerpt below, Rove attacks Obama for earmarks, but this corrupt form of pork-barrel spending skyrocketed during the Bush years. Rove rips Obama for government-run healthcare, but Rove helped push through Congress a reckless new entitlement for prescription drugs. He attacks Obama for misusing TARP, but the Bush administration created that no-strings-attached bailout program.

Those are examples of hypocrisy, but Rove also is willing to prevaricate. He blames Obama for boosting the burden of government spending to 24 percent of GDP, but it was the Bush administration that boosted the federal government from 18.2 percent of GDP in 2001 to 24.7 percent of GDP in 2009. Obama is guilty of following similar policies and maintaining a bloated budget, but it was Bush (with Rove’s guidance) that drove the economy into a fiscal ditch.

Here’s some of Rove:

The president’s problem is largely a mess of his own making. Deficit spending did not begin when Mr. Obama took office. But he and his Democratic allies have supported, proposed, passed or signed and then spent every dime that’s gone out the door since Jan. 20, 2009. Voters know it is Mr. Obama and Democratic leaders who approved a $410 billion supplemental (complete with 8,500 earmarks) in the middle of the last fiscal year, and then passed a record-spending budget for this one. Mr. Obama and Democrats approved an $862 billion stimulus and a $1 trillion health-care overhaul, and they now are trying to add $266 billion in “temporary” stimulus spending to permanently raise the budget baseline. It is the president and Congressional allies who refuse to return the $447 billion unspent stimulus dollars and want to use repayments of TARP loans for more spending rather than reducing the deficit. It is the president who gave Fannie and Freddie carte blanche to draw hundreds of billions from the Treasury. It is the Democrats’ profligacy that raised the share of the GDP taken by the federal government to 24% this fiscal year. This is indeed the road to fiscal hell, and it’s been paved by the president and his party.

Second, we have Nancy Pelosi claiming that paying people to remain unemployed is a good way of creating jobs. She’s been appropriately mocked for this assertion, but keep in mind that she is accurately regurgitating standard Keynesian theory. It doesn’t matter that Keynesianism didn’t work for Hoover and Roosevelt in the 1930s, didn’t work for Japan in the 1990s, and didn’t work for Bush in 2008. Proponents of this approach have a childlike faith in the Keynesian model and its ability to generate very specific (albeit completely inaccurate) numbers.

Here are two videos that offer the policy-wonk version of a steel cage match. In one corner, we have the Speaker of the House arguing that subsidizing joblessness is a “stimulus” strategy. In the other corner, I explain why transferring money from the economy’s left pocket to the right pocket is not a recipe for growth.