Topic: Government and Politics

Jeb Bush Almost Criticizes His Spendthrift Brother, Again

In New Hampshire yesterday, Jeb Bush found something to disagree with his brother’s presidency—sort of:

“I think that, in Washington during my brother’s time, Republicans spent too much money,” Mr. Bush said Thursday when asked to describe where there was a “big space” between himself and his brother George W. Bush. “I think he could have used the veto power. He didn’t have line-item veto power, but he could have brought budget discipline to Washington, D.C.”

As Peter Suderman noted in Reason, there’s some weaseling in there—it’s “Republicans” who spent too much, not specifically the Republican president. And Jeb quickly went on to say that such criticism “seems kind of quaint right now given the fact that after he left, the budget and deficits and spending went up astronomically.” Suderman notes that George W. Bush in fact

presided over the most significant increase in federal spending since Lyndon B. Johnson was president in the 1960s… Federal spending under Obama has increased at a far slower rate than under President Bush. Obama took Bush’s baseline and built on it, but George W. Bush’s spending increases were a big part of what made Obama’s spending possible.

Jeb had said this before—in fact, during his brother’s presidency. At CPAC in 2007, he said, “If the promise of pork and more programs is the way Republicans think they’ll regain the majority, then they’ve got a problem.” He said then that he was talking about the Republicans in Congress. And I noted then

But who’s he kidding? President Bush sponsored most of those “more programs,” and in six years he hasn’t vetoed a single piece of pork or a bloated entitlement bill or a new spending program. And if Jeb thinks “we lost … because we rejected the conservative philosophy in this country,” he must realize that his brother has set the agenda for Republicans over the past six years almost as firmly as Putin has set Russia’s agenda. If Republicans turned their back on limited-government conservatism, it’s because the White House told them to. Not that congressional leaders were blameless—and on Social Security reform, they did decide to resist Bush’s one good idea—but it was President Bush and his White House staff who inspired, enticed, threatened, bullied, and bully-pulpited Republicans into passing the No Child Left Behind Act, the biggest expansion of entitlements in 40 years, and other big-government schemes.

I also pointed out then, as Peter Suderman does today:

Although Jeb seems to have convinced conservatives that he’s much more committed to spending restraint than W—and he did veto some $2 billion in spending over eight years [as Florida governor]—his real record is much more like his brother’s. According to the Cato Institute’s Fiscal Policy Report Card on America’s Governors (pdf), he presided over “explosive growth in state spending.” Indeed, in the latest report card, only 10 governors had worse ratings on spending restraint, though—again like his brother—Jeb scored much higher on tax cutting. Federal spending is up 50 percent in six years; Florida’s spending was up 52 percent in eight years, and Jeb wasn’t fighting two foreign wars.

Republicans like to promise spending restraint, to deplore past profligacy, and then to deliver more of the same. That’s what George W. did, and it looks like Jeb is starting down the same path.

Hunting Whales: The Problem with Prosecuting SIFIs

Yesterday, Attorney General Loretta Lynch made the unprecedented announcement that five of the world’s largest banks – JP Morgan, Citi, Barclays, RBS, and UBS – would be pleading guilty to criminal charges.  According to the allegations, traders and executives working at the banks’ foreign exchange (FOREX) desks colluded through the use of chat rooms to fix currency prices on a daily basis.   The fines are in the hundreds of millions, with Barclays total penalty (including those levied by US and UK authorities) at $2.4 billion topping the charts and Citigroup’s $925 million following behind.  According to Assistant Attorney General Leslie Caldwell, these guilty pleas “communicate loud and clear that we will hold financial institutions accountable for criminal misconduct.”

But do they?  Can they?  In the world of “too big to fail,” JP MorganChase and Citigroup are whales among whales.  Dodd-Frank, with its “living will” provision, was supposed to end too big to fail by requiring that systemically important financial institutions (SIFIs) create a plan for an orderly unwinding in the case of failure.  But this provision contains the seeds of its own destruction.  By designating firms as SIFIs, the government has made the too big to fail designation explicit when it was previously only implicit.

If a SIFI behaves badly, even very very badly (and there is no doubt that, if the allegations are true, the FOREX traders at these banks behaved badly indeed), how much can it be punished?  While corporations can be held criminally liable, you obviously cannot imprison a corporation.  Instead, criminal penalties for companies mean two things: (1) public censure and (2) fines.  The big banks are not very popular these days and it’s unlikely the taint of public censure will cause much additional pain. 

So that leaves the government with fines.  For a fine to be a punishment, it must be large enough to hurt.  These fines are not small.  Even for a bank as large as Citi, $925 million is a chunk of change.   But in imposing these fines, the government must walk a fine line.  If Citi is a SIFI, can the government risk imposing a fine large enough that it risks destabilizing the entire company?  Almost certainly not. 

Complicating the government’s position is the fact that three of the banks – RBS, Barclays, and UBS – are foreign (RBS and Barclays are British, and UBS is Swiss).  These banks have large footprints in the U.S. markets but, even if they were to falter, the government would be hard-pressed to offer a bailout even if it wanted to.  Consider what happened during the financial crisis.  Several large foreign banks were put at risk when AIG failed.  Because the U.S. government could not, for political reasons if for no other, directly bail out these banks (even though their failure would impact U.S. markets), it instead engineered the so-called “back door bailout” by which TARP funds injected into AIG wound up in the hands of foreign banks.  If the Department of Justice were to impose a heavy enough fine on RBS, Barclays, and UBS today that it really hurt those banks, that is, that it put any significant part of their business at risk, it could harm U.S. markets.

Secret price-fixing is bad.  It distorts markets and prevents them from performing one of their most essential functions: price discovery.  But having doubled-down on the too big to fail designation, the government has put itself into an impossible situation when it comes to reining in SIFIs’ bad behavior.

Fiscal Fights with Friends, Part I: Responding to Reihan Salam’s Argument against the Flat Tax

In my ultimate fantasy world, Washington wouldn’t need any sort of broad-based tax because we succeeded in shrinking the federal government back to the very limited size and scope envisioned by our Founding Fathers.

In my more realistic fantasy world, we might not be able to restore constitutional limits on Washington, but at least we could reform the tax code so that revenues were generated in a less destructive fashion.

That’s why I’m a big advocate of a simple and fair flat tax, which has several desirable features.

  • The rate is as low as possible, to minimize penalties on productive behavior.
  • There’s no double taxation, so no more bias against saving and investment.
  • And there are no distorting loopholes that bribe people into inefficient choices.

But not everyone is on board, The class-warfare crowd will never like a flat tax. And Washington insiders hate tax reform because it undermines their power.

But there are also sensible people who are hesitant to back fundamental reform.

Consider what Reihan Salam just wrote for National Review. He starts with a reasonably fair description of the proposal.

The original flat tax, championed by the economists Robert Hall and Alvin Rabushka, which formed the basis of Steve Forbes’s flat-tax proposal in 1996, is a single-rate tax on consumption, with a substantial exemption to make the tax progressive at the low end of the household-income distribution.

Though if I want to nit-pick, I could point out that the flat tax has effective progressivity across all incomes because the family-based exemption is available to everyone. As such, a poor household pays nothing. A middle-income household might have an effective tax rate of 12 percent. And the tax rate for Bill Gates would be asymptotically approaching 17 percent (or whatever the statutory rate is).

My far greater concerns arise when Reihan delves into economic analysis.

Privatize to Solve Government Cost Overruns

On large and complex government projects, costs will double from the original estimates. This tendency is called Edwards’ Law of Cost Doubling.   

The Wall Street Journal reports on the PATH rail station at the World Trade Center. Edwards’ Law was in effect:

… it has become a budgetary boondoggle, its cost doubling to nearly $4 billion, which gives it the unenviable distinction of the world’s most expensive train station.

Some people are blaming the project’s architect, Santiago Calatrava, for the problems. But, as I noted here, the real causes seem to have been political squabbling and mismanagement by the overgrown Port Authority of New York and New Jersey (PANYNJ). The WSJ notes:

But at the World Trade Center, Mr. Calatrava’s travails signal broader disharmony and discord at the country’s most recognizable construction project. The nearly 14-year effort—for which his firm has collected more than $80 million, according to a person familiar with the payments—has been marred by frequent public fighting between the governmental and private parties involved.

Bursting budgets throughout the 16-acre site have weighed heavily on the Port Authority of New York and New Jersey, the body that owns the site. The agency has delayed other projects like renovations of the region’s airports, and tolls on bridges and tunnels to New Jersey have more than doubled in recent years to raise revenue.

America’s NATO Liabilities

Washington’s collection of European security dependents (aka, the NATO allies) seek an even stronger U.S. commitment to their defense.  That desire has clearly been on the rise since Russia’s annexation of Crimea in 2014 and the subsequent escalation of the Ukraine crisis.  Not surprisingly, Moscow’s smaller neighbors, especially the three Baltic republics, worry about the Kremlin’s intentions and want to take cover behind the shield of America’s military power.  Their latest ploy is to seek the permanent deployment of a NATO brigade (some 3,000 to 5,000 troops) on their territory.  It is a safe bet that they will want U.S. forces to be part of that unit.  Indeed, the United States already keeps more than 150 troops (along with military aircraft) in those countries as part of a continuing rotation of forces.

It is not hard to understand why small, weak nations would seek maximum protection from a distant power against a large, powerful neighbor that has displayed worrisome intentions.  It is much harder to understand, though, why undertaking such a risk would be in the best interest of the United States.  Allies are only beneficial when they augment a nation’s strength, and the potential benefits of defending them significantly outweigh the potential costs and risks. The Baltic republics (and most NATO members, for that matter) spectacularly fail that basic test.  They do next to nothing to augment America’s already vast military power, while (being on bad terms with their powerful neighbor) they create the risk of a U.S.-Russia confrontation where none would otherwise exist.  In short, they are strategic liabilities, not strategic assets. 

Making matters even worse, the Baltic countries and the other European members of NATO don’t seem terribly serious about their own defense, even as they sound alarm bells about Russia’s behavior.  As I note in a new article in Aspenia Online, their defense spending continues to be woeful.  Despite a commitment following the 2006 NATO summit, only the United States, Britain, Greece, and Estonia currently spend at least two percent of annual GDP on defense.  What is especially frustrating is that several major NATO powers, including Germany, Italy, and Spain, have spending levels far below the two percent target.  By comparison, just the U.S. base military budget is more than four percent of a much larger GDP, and if overseas contingency spending for supposed emergency missions (like the ongoing wars in Iraq and Afghanistan) is included, Washington’s defense outlays reach nearly five percent. 

Put Harriet Tubman on the $20 Bill

Washington’s latest symbolic battle is looming. America’s money celebrates its early political leaders, all white males. There’s now a campaign to add a woman. A recent poll named antislavery activist Harriet Tubman the favorite, ahead of First Lady Eleanor Roosevelt.

Of course, it wouldn’t be the first time that a woman appeared on America’s money. Suffragette Susan B. Anthony and Native American Sacagawea graced ill-fated dollar coins which were little used and quickly forgotten.

President Barack Obama indicated his interest in showcasing more women. Republican legislators should take up the challenge and introduce a resolution urging the Treasury to add Tubman. There’s nothing sacred about the present currency line-up. After all, America was created by many more people than presidents and other politicians. Indeed, replacing Andrew Jackson makes a certain sense since he resolutely opposed a federal central bank.

Moreover, Tubman would be a great choice to replace him. She was born between 1820 and 1822 in Maryland to slave parents. Tubman was hired out and often beaten. After her owner’s death in 1849, which led his widow to begin selling their slaves, she escaped through the Underground Railroad to Philadelphia.

However, a year later she returned to Maryland to rescue her niece and the latter’s two children, beginning a career of leading slaves to freedom. She was daring and creative; her plans were sophisticated. Although she trusted God she also saw value in arming herself. She directed her last rescue in December 1860.

The IRS Folds, Returns 100% of Lyndon McLellan’s Money

Defying a demand from the federal government to stop publicizing his case, today Lyndon McLellan was told the IRS is abandoning its efforts to keep more than $107,000 it took from his bank account without ever charging him with a crime.

The case received national attention and outrage, including from a member of Congress, which led to this threatening message from an Assistant U.S. Attorney to McLellan’s lawyers:

Whoever made [the case file] public may serve their own interest but will not help this particular case. Your client needs to resolve this or litigate it. But publicity about it doesn’t help. It just ratchets up feelings in the agency. My offer is to return 50% of the money. 

So much for that; Mr. McLellan will be receiving 100% of his money back.