Archives: 01/2012

There Was No Nomination of Cordray before the Senate…

Last week President Obama made the “recess” appointment of Richard Cordray to head the Consumer Financial Protection Bureau, created under the Dodd-Frank Act.  I’ve already discussed some of the various problems with this so-called recess appointment. 

Another, perhaps ultimately more critical, problem is that at the time of this action, January 4th, 2012, there was not a pending nomination of Richard Cordray before the Senate.  By the unanimous agreement of the Senate, his nomination was returned to the President on January 3rd, 2012, which for all purposes extinguishes said nomination.  Per Paragraph 6 of Senate Rule XXXI, the President would have to re-submit Cordray’s nomination in order for it to be considered by the Senate.   

But then I guess if one doesn’t really believe the Senate was in session on January 3rd, despite marking the beginning of a new session, then I guess one might also not believe the Senate could have conducted any business that day, such as returning nominations to the President.

Ironically enough, had the President made the appointment two days earlier, he would be on much stronger, if not still shaky ground.  The President’s own attempt at being clever, by trying to gain another year of service for his nominations, may be what ultimately dooms said nominations.

If indeed there was no pending Cordray nomination on January 4th, then following the decision of US District Court for DC in Olympic Federal Savings and Loan Association v. Director, Office of Thrift Supervision, it would seem pretty clear that Cordray’s appointment was unconstitutional.  But then I’m no lawyer, so we will see.

But Don’t We Really Need Government Research?

It’s a valuable public good, research is, isn’t it? Think of where we’d be without it! I mean, it was government research that came up with the Internet, for heaven sake.

That’s a response to the argument I made last week against government funding of scientific research. Moving away from public funding of scientific research would solve the problem of private companies capturing publication spoils from research that taxpayers funded.

The Defense Advanced Research Projects Agency did indeed come up with and popularize the protocol called TCP/IP, which the Internet uses. (Everyone’s use of the protocol really makes the Internet what it is, of course, but nevermind that.)

To take the Internet as proof that the government is a necessary producer of research and innovation, you have to reject the scientific method. Unfortunately, there are rarely controls in public policy. We can’t find out what would have happened if government policy had taken a different course, so we don’t know anything more about who should fund research from the fact that government-funded research has produced good things in the past.

But what would have happened if U.S. public policy had taken a different course? I’ve thought about the impossible-to-answer question of where we would have been without DARPA and other government influences on telecom. What most people don’t consider, I believe, is the restraining influence the government-granted AT&T monopoly had on telecommunications for most of the 20th century. AT&T developed a “Teletypewriter Exchange” system in 1931, for example, but had no need to develop it, there being little or no competitive pressure to do so. (Its patent on attaching devices to phone wires undoubtedly helped as well, preventing anyone using AT&T’s wires for modem service.)

Had there been competition, I suspect that someone would have come up with the idea of packet-switched networks—that’s what the Internet is—before Leonard Kleinrock did in 1962. Kleinrock was a student at MIT—he wasn’t at DARPA, which didn’t get into packet-switching until about 1966. (Then again, MIT was almost certainly awash in government money—specifically military money—so there you go. Maybe we owe all the good things we’ve got to war, but I doubt it.)

My guess—and it’s only that—is that we would have had the Internet some decades earlier if not for government interventions in telecommunications. We probably would have had multiple, competing “Internets,” actually, adopted more slowly than the Internet we got. (In a chapter of Privacy in America: Interdisciplinary Perspectives, I explored how government has accelerated the development of computing and communications, overpowering society’s capacity to adjust, with negative consequences for privacy.)

Support for government-funded research requires one to elide opportunity costs, the things foregone when one thing is chosen. As I said before, tradeoffs are ineluctable: Money spent on government research takes away from private research, or from other priorities such as reducing debt. In the absence of taxation to support research, the money would go to the public’s priorities as determined directly by the public in manifold spending and investing decision. Taxation and spending on government research is merely the substitution of centralized, political decision-making for a distributed, direct decision-making system. Its supporters are generally going to be beneficiaries of that system—elites, in short.

Even these beneficiaries of the status quo tend to agree that political decisions about funding for scientific research are warped. The solution to that problem, they’ll say, is fixing the political system—that is, creating a political system that is not so political.

Such a breakthrough is as unlikely as the invention of water that is not wet. Perhaps we can put DARPA on both projects.

Austan Goolsbee’s Budget Math Is Wrong - More than 100 Percent of Long-Term Fiscal Challenge Is Government Spending

Austan Goolsbee, the former Chairman of President Obama’s Council of Economic Advisers, had a column in the Wall Street Journal that argues government spending isn’t too high.

That’s obviously a silly assertion, as I explain here, here, and here, but I want to focus on what he wrote about tax revenues.

Here’s the relevant passage from his column.

The true fiscal challenge is 10, 20 and 30 years down the road. An aging population and rising health-care costs mean that spending will rise again and imply a larger size of government than we have ever had but with all the growth coming from entitlements—while projected federal revenues as a percentage of GDP after the rate cuts of the 2000s will likely remain below even historic levels of 18%.

He’s right that the main problem is in the future. As I’ve noted before, America is doomed to become Greece because of rising entitlement spending.

But he’s completely wrong when he implies that the problem is because taxes will stay below the long-run average of 18 percent of economic output. Here’s a chart I posted last year showing that tax receipts will soon rise above the long-tun average - even if the 2001 and 2003 tax cuts are made permanent. And these numbers are from the left-of-center Congressional Budget Office.

It’s rather shocking that a former Chairman of the Council of Economic Advisers isn’t aware of this CBO data. Or, if he is aware of the data, it’s unseemly that he would deliberately mislead readers.

But let’s set aside any discussion of why Goolsbee made such a fatuous claim about revenue. What really matters is that this is a debate about fiscal policy and the size of government.

The folks on the left want to convince us that inadequate revenue is causing deficits, both in the short run and long run.

We can see that they’re wrong in the short run.

But what’s especially remarkable is that they are wildly wrong about the future.  The long-run data from the Congressional Budget Office shows that the federal tax burden over the next 70-plus years will jump to more than 30 percent of GDP.

This CBO baseline data assumes the 2001 and 2003 tax cuts expire, so it exaggerates the increase in the future tax burden compared to current policy. But even if you correct for this assumption and reduce tax receipts by about 2-percentage points  of GDP (and presumably even more than that in the long run), it’s clear that the tax burden will be far above the historical average of 18 percent of GDP.

It’s easy to understand why Goolsbee ignores this data. After all, why report on information that completely debunks the left-wing argument about the supposed need to increase the tax burden.

But this isn’t the first time Goolsbee’s been wrong about tax policy. Let’s dig into the 2010 archives and share this video, which takes apart his arguments for class-warfare tax policy.

So what’s the bottom line? Well, we know Goolsbee and other leftists are being deceptive about taxation.

But my main takeaway is that I wish the left would be honest and admit that taxes already are projected to increase. And I’d like them to level with the American people and admit that they want the tax burden to climb even faster because they want government to get even bigger.

Don’t Forget Romneycare

I’ve been pretty critical of Rick Santorum lately, so it seems only fair to devote some attention to Mitt Romney. Take a look at this video Michael Cannon and I made last year:

And now for something not completely different, Tom Toles’s cartoon from Friday’s Washington Post:

Meanwhile, Dan Mitchell warns that Mitt Romney seems suspiciously liable to impose a value-added tax on the backs of American taxpayers.

Too Much Ado about the Pentagon’s New Strategy

There’s more to the Pentagon’s new strategy than the emperor’s new clothes, but barely. It’s hardly new and not particularly strategic.

The document justifies a minor defense budget cut. The Obama administration wants to grow military spending at a pace slightly less than projected inflation for a decade. If we assume that plan stays in place—and we shouldn’t given that plans change, and we may soon have a new president—that new spending trajectory will cut non-war Pentagon spending by about eight percent compared to 2011 spending. You can come up with bigger numbers for the cut by comparing the new plans with past Pentagon spending plans or by including declining war costs. But however you slice it, these are small cuts compared to past drawdowns.

Conventional wisdom is that the cuts ought to be made strategically—that it is bad policy to let deficit concerns drive the size of the defense budget, so revised numbers require revised strategy. This new strategy document is a response to that conventional wisdom. It lets the president and Pentagon say that they have a strategic rationale for their budget.

Meanwhile, the Pentagon is desperate to avoid the sequestration mechanism required by the Budget Control Act, which would roughly double the size of those cuts, and would start in January 2013. That would return military spending to where it was in 2006, more or less. Pentagon leaders complain about the suddenness and broadness of sequestration—the cuts are distributed across programs and departments, which prevents prioritization.

One function of this new strategy document is to help avoid additional cuts. By making minor changes seem like a big deal, the Pentagon is pushing back against real strategic change, which could save far bigger sums without sacrificing safety.

In an op-ed published Friday in World Politics Review, Veronique de Rugy and I argue that the size of the coming defense cuts has been grossly exaggerated. Here’s a chart from the op-ed showing military spending in current dollars with and without sequestration:

We note in the op-ed that under the Budget Control Act, the Pentagon can avoid sequestration without Congressional action by budgeting at the levels it would achieve.  That would allow it to avoid the most onerous aspects of the sequester. The Pentagon has thus far refused to do that, probably figuring that offering sensible cuts would encourage Congress to allow them. But far larger cuts are possible with real strategic change. Big cuts would encourage that sort of change.

The current U.S. defense strategy is basically primacy or global military dominance. It requires policing the seas, maintaining or strengthening current alliances, and preparing for all manner of military contingencies. Both parties’ foreign policy elites basically embrace that strategy. The documents that purport to make strategy—Quadrennial Defense Reviews and so forth—are basically sales pitches for primacy. Their standard blueprint is to mix geopolitical gobbledygook about uncertainty with vague threat inflation, assert the importance of U.S. global leadership to U.S. security without any clear theory, then list things we want our military to do, without any attempt to separate big threats from small ones and large interests from hopes, or to translate their analysis into budgetary guidance. They have no obvious effect on budgets.

This strategy offers only minor change in form and content. It embraces the strategy we have with at best a few minor tweaks. Like those past strategy documents, this effort insists that the world is getting more complex but makes no effort to demonstrate that assertion. It lists ten objectives without prioritization, although it identifies certain goals as those that drive the size of the force. It suggests a few minor shifts but gives no budgetary guidance.

The document suggests that we might shift forces from Europe and perhaps add some in Asia. No details are given. It sensibly suggests we might get by with fewer nuclear weapons but again avoids details. The most relevant bit of the document is the argument that we are less likely to fight occupational wars and thus can cut the size of the ground forces. That is a sound idea, one that should be taken further, but a reflection of current policy rather than a change. If we are really to avoid such wars, far greater cuts in the ground forces are possible.

So what we have here is a largely inconsequential defense of the status quo. It offers incremental changes to stave off the real strategic change and savings that our geopolitical fortune allows.

A Fed Bailout for Europe

I had an op-ed in the December 28th Wall Street Journal titled “The Federal Reserve’s Covert Bailout of Europe.” It generated a lot of discussion. Yesterday (January 5th), the Journal printed a letter from William C. Dudley, president of the New York Fed, responding to my piece.

In my op-ed, I focus on the currency swaps between the Fed and other central banks. The largest amount is with the European Central Bank (ECB). The Fed “swaps” dollars to the ECB and receives a like amount of euros in return as collateral. The ECB promises to return the dollars in the future at a fixed exchange rate. In the meantime, the ECB lends the dollars to European banks of its choosing. The Fed does not even know their identity.

Among other things, I point out that, thanks to prior Fed policy actions, there is no shortage of dollars in the world. The ECB could lend euros to their banks and the banks could then purchase however many dollars they needed on foreign-exchange markets.

I conclude that “the Fed is, working through the ECB, bailing out European banks and, indirectly, spendthrift European governments.” (The banks are major lenders to governments.)

President Dudley’s letter is non-responsive to the arguments of my op-ed. He never addresses my observation that there is no shortage of dollars in the world. He gives the game away in the following passage: “Banks with surplus dollars are more likely to lend to banks in need of dollars if they know that the borrowing bank will be able to obtain the dollars it needs to repay the loan, if necessary, from its central bank.”

Dudley is not describing a dollar shortage, but another reality. The reason one bank becomes reluctant to lend to another bank is that the potential lender has doubts about the solvency of the would-be borrower. The reality in Europe today is that banks have good reason to doubt the solvency of other banks because they know their own condition is none too strong.

By implication, Dudley’s letter acknowledges my main point: there is a Fed-financed bailout of European banks in progress. The Fed is implementing it through currency swaps because swaps obscure the nature of the transaction, which is in reality a loan. (The Greek government used currency swaps to hide the size of its fiscal deficits.)

It was widely reported that, in a December 14th meeting with Republican senators, Fed Chairman Ben Bernanke told them that he neither intended nor did he have the authority to bail out Europe. A reasonable person would see a conflict between the chairman’s words and those of the New York Fed president. Moreover, the swap arrangement is non-transparent and at odds with Bernanke’s promise of greater openness within the Fed. That is why I call for congressional hearings on it in my op-ed, and I repeat that call here.