Tag: budget deficit

British Military Cuts, Conservatives, and Neocons

Yesterday, Prime Minister David Cameron announced Britain’s biggest defense cuts since World War II. The cuts affect the British military across the board.

The Army will shed 7,000 troops; the Royal Navy and Royal Air Force will each lose 5,000 personnel; the total workforce in the Ministry of Defence, including civilians, will contract by 42,000. The Navy’s destroyer fleet will shrink from 23 to 19. Two aircraft carriers – already under construction – will be completed, but one of the two will be either mothballed or sold within a few years. Whether the one remaining flattop in the British fleet will actually deploy with an operational fixed-wing aircraft is an open question. They’ve decided to jettison their Harriers; a technological marvel when it was first introduced, it has a limited range and a poor safety record. In its place, the Brits still intend to purchase Joint Strike Fighters, but not the short take-off and vertical landing (STOVL) version.

And right on cue, Max Boot argues in today’s Wall Street Journal, following the Heritage Foundation’s James Carafano’s example, that fiscal conservatives should not use these cuts as an example of how to reign in deficits. According to Boot and Carafano, military spending is off-limits. Period.

But as I note at The Skeptics, most Americans do not buy into this argument:

In Boot’s telling, Cameron’s decision inevitably places a heavier burden on the shoulders of American taxpayers and American troops.

But why should Americans perform a function for other governments that they are obligated by tradition, law and reason to perform for themselves? Defense is, as Boot notes, “one of the core responsibilities of government.” I would go one better: defense is one of the only legitimate responsibilities for government. So why does Max Boot think that Americans should simply resign themselves to take on this burden, doing for others what they should do for themselves?

I suspect that he fears that most Americans are not comfortable with the role that he and his neoconservative allies have preached for nearly two decades, hence his preemptive shot across the bow of the incoming congressional class that will have been elected on a platform of reducing the burden of government. True, the public is easily swayed, and not inclined to vote on foreign policy matters, in general, but as I noted here on Monday, it seems unlikely that the same Tea Partiers who want the U.S. government to do less in the United States are anxious to do more everywhere else. And, indeed, such sentiments are not confined to conservatives and constitutionalists who are keenly aware of government’s inherent limitations. Recent surveys by the Chicago Council of on Global Affairs (.pdf) and the Pew Research Center (here) definitively demonstrate that the public writ large is anxious to shed the role of global policeman.

Click here to read the entire post.

Cut (Really Cut) Military Spending

Today ForeignPolicy.com has a feature article examining possible “Plan B’s for Obama,” with contributions coming from numerous experts. My contribution to the feature is titled “Cut (Really Cut) Military Spending.”

It is time for President Obama and the administration to finally notice the increasing calls—from across the political spectrum—that the Pentagon’s budget should not be off limits when reducing the deficit.  From the Foreign Policy article:

Despite all the hype about Defense Secretary Robert Gates and his cuts of big-ticket military projects, the Pentagon’s $680 billion budget is actually slated to increase in coming years. This is unconscionable at a time when taxpayers are under enormous stress and when the U.S. government must reduce spending across the board. Barack Obama can save big bucks without undermining U.S. security – but only if he refocuses the military on a few, core missions.

The hawks will scream, but America will be just fine. Obama can capitalize on the country’s unique advantages – wide oceans to the east and west, friendly neighbors to the north and south, a dearth of powerful enemies globally, and the wealth to adapt to dangers as they arise – by adopting a grand strategy of restraint. The United States could shed the burden of defending other countries that are able to defend themselves, abandon futile efforts to fix failed states, and focus on those security challenges that pose the greatest threat to America. A strategic shift of this magnitude will not only reduce conflict and make the United States safer, but it will enable Obama to reshape the military to suit this more modest set of objectives, at a price that’s far easier for taxpayers to swallow.

Click here to read the full article

Prof. Krugman Is Wrong, Again

Prof. Paul Krugman asserts in his New York Times column of May 31st that “Both textbook economics and experience say that slashing spending when you’re still suffering from high unemployment is a really bad idea – not only does it deepen the slump, but it does little to improve the budget outlook, because much of what governments save by spending less they lose as a weaker economy depresses tax receipts.”

While Prof. Krugman and most other fiscalists believe this to be self-evident, it is not.  Indeed, this fiscalist dogma fails to withstand the indignity of empirical verification.  Prof. Paul Krugman’s formulation fails to mention the state of confidence.  This is an important oversight.  As Keynes himself put it: “The state of confidence, as they term it, is a matter to which practical men pay the closest and most anxious attention.”

By ignoring the confidence factor, economic theory can lead to wildly incorrect conclusions and misguided policies.  Just consider naive Keynesian fiscal theory – the type presented (as Prof. Krugman notes) in textbooks and embraced by most policymakers and the general public.  According to Keynesian theory, an expansionary fiscal policy (an increase in government spending and/or a decrease in taxes) stimulates the economy, at least for a year or two after the fiscal stimulus.  To put the brakes on the economy, Keynesians counsel a fiscal contraction.

A positive fiscal multiplier is the keystone for Keynesian fiscal theory because it is through the multiplier that changes in the budget balance are transmitted to the economy.  With a positive multiplier, there is a positive relationship between changes in the fiscal deficit and economic growth: larger deficits stimulate growth and smaller ones slow things down.

So much for theory.  What about the real world?  Suppose a country has a very large budget deficit.  As a result, market participants might be worried that a further loosening of fiscal conditions would result in more inflation, higher risk premiums and much higher interest rates.  In such a situation, the fiscal multipliers may be negative.  Fiscal expansion would then dampen economic activity and a fiscal contraction would increase economic activity.  These results would be just the opposite of those predicted by naive Keynesian fiscal theory.

The possibility of a negative fiscal multiplier rests on the central role played by confidence and expectations about the course of future policy.  If, for example, a country with a very large budget deficit and high level of debt (estimated U.S. deficit and debt levels as a percentage of GDP for 2010 are 10.3% and 63.2%, respectively) makes a credible commitment to significantly reduce the deficit, a confidence shock will ensue and the economy will boom, as inflation expectations, risk premiums and long-term interest rates decline.

There have been many cases in which negative fiscal multipliers have been observed.  The Danish fiscal squeeze of 1983-86 and the Irish stabilization of 1987-89 are notable.  The fiscal deficits that preceded the Danish and Irish fiscal squeezes were clearly unsustainable, and risk premiums and interest rates were extremely high.  Confidence shocks accompanied the fiscal squeezes, and with negative multipliers in play, the Danish and Irish economies took off.  (Evidence from the U.S. is presented in an article by Professors Jason E. Taylor and Richard K. Vedder which appears in the current May/June 2010 issue of the Cato Policy Report.)

Margaret Thatcher also made a dash for confidence and growth via a fiscal squeeze.  To restart the economy in 1981, Thatcher instituted a fierce attack on the British deficit, coupled with an expansionary monetary policy.  Her moves were immediately condemned by 364 distinguished economists.  In a letter to the Times of London, they wrote a knee-jerk Keynesian (Prof. Krugman-type) response: “Present policies will deepen the depression, erode the industrial base of our economy and threaten its social and political stability.”  Thatcher was quickly vindicated.  No sooner had the 364 affixed their signatures than the economy boomed.  People had confidence in Britain again, and Thatcher was able to introduce a long series of deep free-market reforms.

While Prof. Krugman’s authority is weighty, his arguments and evidence are slender.

The Greek Model

It was a good idea to get science and democracy from the ancient Greeks. It’s not such a good idea to get fiscal policy from the modern Greeks.

But that’s the way we’re headed.

Greece has a budget deficit of 13.6 percent. We’re not in that league – ours is only 10.6 percent, the highest level since 1945.

Greece has a public debt of 113 percent of GDP. We’re not there yet. But the 2009 Social Security and Medicare Trustees Reports show the combined unfunded liability of these two programs has reached nearly $107 trillion.

Under President Obama’s budget, debt held by the public would grow from $7.5 trillion (53 percent of GDP) at the end of 2009 to $20.3 trillion (90 percent of GDP) at the end of 2020. It could rise to 215 percent of GDP in 30 years. Welcome to Greece.

Here’s a graphic presentation of the official debt and real net liabilities of various countries, including the United States and Greece at the right. (From the Telegraph, apparently based on Jagadeesh Gokhale’s report.)

offbalancesheet

And here’s a Heritage Foundation chart on where the national debt is headed in the coming decade:

Paul Krugman wrote, “My prediction is that politicians will eventually be tempted to resolve the [fiscal] crisis the way irresponsible governments usually do: by printing money, both to pay current bills and to inflate away debt. And as that temptation becomes obvious, interest rates will soar.” Now he was writing in 2003, when a different president was in office, but he was also warning about the possibility of a ten-year deficit of $3 trillion. Presumably the same warnings apply to today’s much larger deficit projections. And he was absolutely right to fear that government would turn to inflation as a supposed solution.

Furor over Government Employees

Concern about the pay, benefits, and performance of government employees seems to be growing. Chris Edwards’s articles on how government pay is outpacing private-sector pay have generated media attention, cartoons, and angry rebuttals from the head of the federal Office of Personnel Management. Steven Greenhut has a new book, Plunder! How Public Employee Unions Are Raiding Treasuries, Controlling Our Lives and Bankrupting the Nation, and is writing lots of newspaper articles on the high costs of government unions, also the topic of a recent Cato Policy Analysis. New Jersey unions are not finding much sympathy as they try to hold on to their raises, benefits, pensions, and work rules in the face of Gov. Chris Christie’s attempt to cut the budget. Liberal journalist Mickey Kaus is running for the U.S. Senate, trying to warn California’s voters and the Democratic Party about the excessive power and destructive influence of public employee unions.

And now Saturday Night Live. The zeitgeist-riding comedy show had a truly harsh sketch this weekend about the “Public Employee of the Year Awards.” It touched every element of popular resentment toward government workers: “people with government jobs are just like workers everywhere – except for the lifetime job security, guaranteed annual raises, early retirement on generous pensions, and full medical coverage with no deductibles, office visit fees, or copayments” – “retirement on full disability” by an obviously young and healthy worker – “Surliest and Least Cooperative State Employee” – “3200 hours [a year] on the job, all of it overtime” – New York school janitors living in Florida – employees with two current jobs and full disability – an entire workday at the DMV without serving a single customer – no-work contracts –  surprisingly early closings – and “he’s on break.”

Time for unions to start worrying?

Thursday Links

Tuesday Links

  • Price controls have failed in the past and there is no reason to think they will work now. So why is the president proposing price controls on health care? Michael Tanner: “Attempts to control prices by government fiat ignore basic economic laws – and the result could be disastrous for the American health-care system.”