Archives: 02/2009

Obama Retreats from Third Rail

President Obama has stared the need for entitlement reform in the face – and immediately blinked.

For a brief moment it appeared that Obama was willing to take on one of his party’s most prized shibboleths: the idea that there is nothing wrong with Social Security and Medicare that repealing the Bush tax cuts won’t fix.  But faced with a rebellion by House Speaker Nancy Pelosi and the net-roots left, it is clear the president now plans to put off any serious effort to reform those programs.

But facts are stubborn things. The combined unfunded liabilities of Social Security and Medicare top $100 trillion.  Indeed, without reform, Social Security will begin running a deficit within eight years, by 2017.  And Medicare faces a deficit even sooner.   If current trends continue, Medicare and social Security, along with Medicaid, will consume 28 percent of GDP by mid-century.

Obama has the opportunity to show that he truly represents a change from Washington politics as usual.  If he retreats from obvious challenges so easily, he will fail.


How European Governments Hate Low Taxes

The European Union held a summit over the weekend at which the assembled politicoes announced a variety of steps to increase regulation of European financial markets.  But that isn’t all.

Reports the Daily Telegraph:

The EU communique also called for punitive action against tax havens. “A list of uncooperative jurisdictions and a toolbox of sanctions must be devised as soon as possible,” it said.

Ah, so now we see what is really important to European governments:  squeezing more money out of their peoples.

As Cato’s Dan Mitchell has oft pointed out, competition among taxing jurisdictions is good for everyone other than governments.  Tax havens, so-called, are an important tool for promoting such competition.  Similar efforts are underway in the U.S. with efforts to tax the internet, for instance.

The “Last Word on Fiscal Stimulus” Explained

Back in 1977 I gave a talk at the Tax Foundation which was quickly added to Campbell McConnell’s best selling Economics textbook.  At the back of each chapter, McConnell added just one select reading, called “The Last Word.”  He gave me the last word on fiscal policy.

I found out about it many years later when my daughter Melissa found her dad inside her college textbook (a much newer edition).  Apparently my old words had been confusing or enlightening the youth of America for well over a decade.

Because I failed to explain all that, my blog was edited in a way that makes it look as though I was inserting my old remarks to argue with McConnell.

On the contrary, that excerpt of mine was quoted directly from his book.   It still holds up fairly well, I imagine, as heresies go.

And now you know the rest of the story.

Are Higher Taxes the Solution to Bloated Government?

I normally enjoy reading Jonathan Rauch and Bruce Bartlett. Rauch has written extensively about the failure of govenrment, and Republicans might not be in such terrible shape if they had paid more attention to Bruce’s book exposing Bush’s fiscal profligacy. Yet even though both of them seem to understand that excessive government is bad, they want to throw in the towel. Rather than redouble efforts to reduce - or at least restrain - bloated government, they argue that conservatives (and presumably libertarians) now should focus on how best to raise taxes to finance the welfare state. Here are excerpts from Rauch’s article, which seems almost entirely based on an interview with Bartlett:

For decades, everyone pretended to have a profound ideological disagreement about the size of government, but the reality was a comfortable standoff between 21 percent liberalism and 18 percent conservatism. In the end, both sides got what they most wanted: 21 percent spending for liberals, 18 percent revenues for conservatives – at the politically tolerable cost of a deficit averaging 2 to 3 percent of GDP. This result was handy for politicians and acceptable to the public. …Conservatives…face a doctrinal crisis. …Many conservatives insist that structural reforms of entitlement programs – benefit cuts, means-testing, privatization, and so on – could keep spending at or even below 21 percent of GDP going forward. Dream on, Bartlett says. …The only really workable option, Bartlett argues, is a value-added tax or its equivalent: a broad-based tax on consumption. “It’s the only way of preserving incentives and keeping the economy alive.” Because it taxes spending rather than saving or investment and is inhospitable to market-distorting loopholes, this kind of tax raises a lot of money at relatively low economic cost. Reaganites hate the value-added tax precisely because it is such an efficient cash cow. But Reagan, Bartlett contends, would have known better. Reagan was a conservative who admired FDR, and what he conserved was FDR’s welfare state. He understood that the most practical way to make government less economically burdensome was to grow the economy. …as Bartlett wrote recently in Politico, “Conservatives would better spend their diminished political capital figuring out how to finance the welfare state at the least cost to the economy and individual liberty.”

In effect, Rauch and Bartlett assert that the American right should copy the European right: Make peace with big government and raise taxes in order to keep the budget balanced. In the real world, though, that is a recipe for ever-growing government. What inevitably happens is that the left increases the burden of government, which leads the supposed right to acquiesce to higher taxes. But, as Milton Friedman famously warned, governments will always spend whatever they collect in taxes plus whatever amount of borrowing they think is politically and economically feasible. So every time the right capitulates to a tax increase, the left has more leeway to increase spending - which is one reason why the burden of government in Europe is significantly higher than it is in the United States. If the American right listens to Rauch and Bartlett, they will be like Charlie Brown in this youtube clip. Last but not least, I must quibble with this line from the article about Bartlett’s book:

Conservatives mistrust him because in the 2000s he broke publicly with President Bush, in a book called Impostor: How George W. Bush Bankrupted America and Betrayed the Reagan Legacy.

That’s not true. Republicans distrust Bruce because of this book. Conservatives distrust Bruce because he wants to be the tax collector for the welfare state. I’ve been buddies with Bruce for years, so I will not give up trying to help him see the truth. Fighting excessive spending with higher taxes is akin to pouring gasoline on a fire.

The U.S. Didn’t Cause the World Recession

In the Washington Post, Ricardo Caballero of MIT has a novel and promising idea about “How to Lift a Falling Economy.”  Unfortunately, he echoes the mantra that all the world’s economic problems can be traced to the U.S. in general, and to big U.S. banks in particular.  “Already,” he says, “this illness has spread to the global economy.”

Already?  Industrial production in Japan began collapsing in November 2007, two months ahead of the U.S., and the Japanese industrial decline has been twice as fast.

Unlike the U.S., real GDP began falling in the second quarter of 2008 in Germany, France, Italy, Japan, Singapore and Hong Kong.  By no coincidence, that was when the price of oil rose as high as $145 a barrel.  Soaring oil prices raise the cost of production and distribution for many industries, and reduce real household incomes and therefore consumption.   Nine of the ten postwar U.S. recessions were preceded by a major spike in the price of oil.

In a piece for the Claremont Review of Books (written last November), I conclude , “This recession is not just a U.S. problem, not just about housing, and not just financial.”

Compare the decline in real GDP over the past 4 quarters (from The Economist):













Does it make sense to blame the largest declines in GDP on one country with the smallest decline?  If so, then we need some explanation of how some uniquely American “illness has spread” to so many innocent victims.

If the explanation is supposed to be falling U.S. imports, then the worst decline by far would have been in Canada and Mexico (where real GDP was rising even in the third quarter).  If the alleged causality is supposed to be because of some undefined links between financial centers, then Italy would not be among the hardest hit.

When it comes to trade, in fact, the shoe is mainly on the other foot: Collapsing foreign economies crushed U.S. exports.

In the second quarter of 2008, U.S. exports accounted for 1.54 percentage points of the 2.83% annualized rise in real GDP.  But falling exports subtracted 2.84 percentage points from fourth quarter GDP.  Falling exports, not falling consumption, were the biggest single contributor to the overall drop of 3.8%.

After looking at which economies fell first and fastest, it might be more accurate to say that some foreign  illness has spread to the U.S. economy than to assert or assume the causality ran only in the opposite direction.

Europeans Want Regulatory Harmonization at G20 Summit

Reuters has a very disturbing article about the wish list that Europeans have put together for the April G20 Summit in London. Rather than focus on the source of the financial crisis by calling for sound money and elimination of housing subsidies, the Europeans want to dramatically increase the size and power of international bureaucracies such as the International Monetary Fund. But if the IMF completely failed to predict the financial crisis, why would anyone think the bureaucrats should get more power and more tax dollars? Not surprisingly, the Europeans also want regulatory harmonization, with every jurisdiction required to impose onerous levels of red tape. Apparently, the private sector needs to be punished to atone for the mistakes of governments. Not surprisingly, the Europeans also want to regulate private-sector pay. But the most dangerous plank in their platform is the call for sanctions against jurisdictions that reject the regulatory cartel and instead maintain market-based financial systems. This panoply of bad ideas is a direct threat to American interests, so it will be interesting to see whether the U.S. delegation acquiesces to these bad ideas:

European leaders met in Berlin on Sunday to prepare a common stance on overhauling global financial rules ahead of a broader summit of G20 nations in London on April 2. Below are highlights from a “chair’s summary” of conclusions from the meeting that was seen by Reuters: …We propose that the International Monetary Fund (IMF) and the Financial Stability Forum (FSF) be charged with monitoring and promoting the implementation of the international recommendations on putting the Action Plan into practice. We have today underscored once again our conviction that all financial markets, products and participants must be subject to appropriate oversight or regulation, without exception and regardless of their country of domicile. This is especially true for those private pools of capital, including hedge funds… We also agreed that credit rating agencies should be subject to mandatory registration and oversight. …A list of uncooperative jurisdictions and a toolbox of sanctions must be devised as soon as possible. …We will strongly advocate (at the London summit)…the development of an effective early warning system by the IMF and FSF, working in close cooperation. We will strongly advocate (at the London summit)…the adoption of principles on compensation practices to prevent bonus payments that contribute to excessive risk-taking. …We have agreed today to support doubling the funds available to the IMF.

‘Tons of Jobs’ Opening Up in D.C.

Business Week reports that the national capital area is barely sensing the recession:

Washington is getting a boost from government spending to fight the recession and fix the financial system, as well as the ongoing expenses of fighting wars in Iraq and Afghanistan and promoting homeland security. While President Barack Obama pointedly left Washington for Denver to sign the $787 billion stimulus package on Feb. 17, locals expect the metro area to garner a big share of the dollars.

“Oversight alone will (mean) tons of new jobs,” enthuses Jill Landsman, a spokeswoman for the Northern Virginia Assn. of Realtors, who says the pace of home sales has picked up over the past year even as prices have continued to fall.

Cato analysts propose to slash jobs in Washington–at least 100 agencies and programs [pdf].  It’s no big mystery why tons of people in the capital oppose Cato proposals.